<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
USF&G CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
MARYLAND 6331 52-1220567
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S.
Incorporation or Organization) Classification Code Number) Employer
Identification
Number)
</TABLE>
<TABLE>
<S> <C>
JOHN A. MACCOLL, ESQ.
EXECUTIVE VICE PRESIDENT -- GENERAL
COUNSEL
6225 CENTENNIAL WAY USF&G CORPORATION
BALTIMORE, MARYLAND 21209 6225 CENTENNIAL WAY
(410) 547-3000 BALTIMORE, MARYLAND 21209
(Address, Including Zip Code, and (410) 547-3000
Telephone (Name, Address, Including Zip Code,
Number, Including Area Code, of and Telephone
Registrant's Number, Including Area Code, of
Principal Executive Offices) Agent for Service)
</TABLE>
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
R.W. SMITH, JR., ESQ. MARK E. WATSON III, ESQ. EDWARD S. BEST, ESQ.
Piper & Marbury L.L.P. Titan Holdings, Inc. Mayer, Brown & Platt
36 South Charles Street 2700 N.E. Loop 410 190 South LaSalle Street
Baltimore, Maryland 21201 San Antonio, Texas 78217 Chicago, Illinois 60603
(410) 539-2530 (210) 527-2705 (312) 782-0600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the Merger of Titan Holdings, Inc. with and into United States
Fidelity and Guaranty Company, a wholly-owned subsidiary of USF&G Corporation,
(as described in the Proxy Statement/Prospectus) have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C>
Common Stock(1)................................................. $148,231,250 $44,919
</TABLE>
(1) Associated with the common stock, par value $2.50 per share ("USF&G Common
Stock"), are Preferred Share Purchase Rights that will not be exercisable or
evidenced separately from the USF&G Common Stock prior to the occurrence of
certain events.
(2) Estimated solely for the purpose of computing the registration fee
calculated in accordance with Rule 457(0) under the Securities Act of 1933,
as amended.
(3) Previously paid in connection with the filing of Schedule 14A.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TITAN HOLDINGS, INC.
PROXY STATEMENT
FOR THE SPECIAL MEETING OF STOCKHOLDERS
OF TITAN HOLDINGS, INC.
TO BE HELD ON DECEMBER 22, 1997
---------------------
USF&G CORPORATION
PROSPECTUS
RELATING TO THE OFFERING OF UP TO 7,400,000
SHARES OF USF&G COMMON STOCK,
PAR VALUE $2.50 PER SHARE
This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.01 per share (the "Titan Common Stock"), of Titan Holdings,
Inc., a Texas corporation ("Titan"), in connection with the solicitation of
proxies by the Board of Directors of Titan (the "Titan Board") for use at a
Special Meeting of Titan stockholders to be held on Monday, December 22, 1997 at
10:00 a.m. at its principal executive offices, located at 2700 N.E. Loop 410,
San Antonio, Texas 78217, and at any adjournment or postponement thereof (the
"Special Meeting").
At the Special Meeting, holders of Titan Common Stock will be asked to
consider and vote upon a proposal to approve the Agreement and Plan of Merger,
dated as of August 7, 1997, as amended (the "Merger Agreement"), among Titan,
USF&G Corporation ("USF&G"), a Maryland corporation, and United States Fidelity
and Guaranty Company ("USF&G Company"), a Maryland corporation and a
wholly-owned subsidiary of USF&G, and the transactions contemplated thereby
(such proposal being referred to herein as the "Merger Proposal"). A copy of the
Merger Agreement is attached hereto as Annex A.
Pursuant to the Merger Agreement, Titan will be merged (the "Merger") with
and into USF&G Company. The Merger Agreement provides that each outstanding
share of Titan Common Stock will be converted into the right to receive, at the
election of the holder and subject to the prorations and adjustments described
herein, (i) $11.60 in cash (the "Standard Cash Consideration") and 0.46516 (the
"Standard Exchange Ratio" and, together with the Standard Cash Consideration,
the "Standard Consideration") of a share of USF&G common stock, par value $2.50
per share (the "USF&G Common Stock"), (ii) $23.20 (two times the Standard Cash
Consideration) in cash (the "Cash Consideration"), or (iii) 0.93032 (two times
the Standard Exchange Ratio) of a share of USF&G Common Stock (the "Stock
Consideration"). The above exchange ratio is based on a value for USF&G Common
Stock of $24.9375 per share (the "Base Share Price") which was the closing price
of USF&G Common Stock on July 29, 1997, the day before USF&G made its original
offer to Titan. Holders of Titan Common Stock will receive the above-described
amounts only if the Average Stock Price is $24.9375. Otherwise, the
consideration to be received is adjustable, as described in the next paragraph.
The Merger is intended to qualify as a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and provide tax deferral to the
extent Titan stockholders receive shares of USF&G Common Stock in the Merger.
Each holder of Titan Common Stock will only be permitted to choose the Standard
Consideration, Cash Consideration or Stock Consideration for all shares held by
such holders.
The actual value of the consideration to be received by Titan stockholders
will be subject to adjustment based upon the average closing price (the "Average
Stock Price") of USF&G Common Stock for the ten consecutive New York Stock
Exchange trading days (the "Pricing Period") ending on the third New York Stock
Exchange trading day prior to the time the Merger becomes effective (the
"Effective Time"). If the Average Stock Price is not greater than $28.68 (15%
above the Base Share Price) or less than $21.20 (15% below the Base Share
Price), then (x) the value of the consideration will vary with
<PAGE>
changes in the stock price and (y) the allocation of the consideration between
stock and cash will be adjusted only to maintain a 50% stock and 50% cash
relationship. The adjustment will be made by adjusting the Standard Cash
Consideration to an amount equal to one-half of the product of (a) $23.20
multiplied by (b) 1 plus the product of (i) 0.50 multiplied by (ii) a fraction
the numerator of which is the Average Stock Price minus the Base Share Price and
the denominator of which is the Base Share Price and adjusting the Standard
Exchange Ratio to an amount equal to the quotient obtained by dividing (i) the
Standard Cash Consideration as so adjusted by (ii) the Average Stock Price. If
the Average Stock Price is less than $21.20 (but not less than $17.46) or
greater than $28.68, the value of the consideration will be fixed at $21.46 or
$24.94, respectively, the Standard Cash Consideration will be $10.73 or $12.47,
respectively, and the Standard Exchange Ratio will be adjusted to provide a
fraction of a share of USF&G Common Stock having a value of $10.73 or $12.47,
respectively, based upon the Average Stock Price. If the Average Stock Price is
less than $17.46 (30% below the Base Share Price), the Standard Cash
Consideration will be $10.73 and the Standard Exchange Ratio will be 0.61455
(subject to adjustment to maintain the 50% stock, 50% cash allocations,
described below). In addition, if the Average Stock Price is less than $17.46
(30% below the Base Share Price) or greater than $32.42 (30% above the Base
Share Price), each party has the right to terminate the Merger Agreement. See
"Summary--The Merger and Merger Consideration" for sample calculations of the
Merger Consideration and the components thereof for each share of Titan Common
Stock based upon different Average Stock Prices, assuming a Standard Election.
Had the Merger been consummated on November 17, 1997, the Average Stock
Price would have been $20.59, and holders of Titan Common Stock making the
Standard Election would have received an aggregate consideration worth $21.46
per share of Titan Common Stock, consisting of cash in the amount of $10.73 and
.52103 of a share of USF&G Common Stock. The foregoing assumes that no proration
would have been required with respect to the various elections in order to
maintain a 50% stock and a 50% cash relationship necessary for a tax-free
transaction.
The actual cash and stock distributed will depend on the total per share
consideration as calculated above and as adjusted to maintain a 50% stock, 50%
cash relationship to maintain the tax-free nature of the transaction. As a
result, holders of Titan Common Stock may be subject to proration in the event
the aggregate of all elections by such holders would require USF&G to (a) issue
shares of USF&G Common Stock in an amount greater than the product of the
Standard Exchange Ratio multiplied by the number of shares of Titan Common Stock
outstanding immediately prior to the Effective Time or (b) pay an amount of cash
(including cash to be paid for dissenting shares or in respect of Titan Common
Stock otherwise acquired by USF&G) greater than the product of the Standard Cash
Consideration multiplied by the number of shares of Titan Common Stock
outstanding immediately prior to the Effective Time. Outstanding options to
purchase Titan Common Stock ("Titan Options") will be canceled and replaced with
options to acquire USF&G Common Stock (each a "USF&G Option"), in accordance
with the applicable exchange ratio and on the terms and subject to the
conditions set forth in the Merger Agreement, as more fully described in this
Proxy Statement/Prospectus.
Holders of record of shares of Titan Common Stock at the close of business
on November 21, 1997, the Record Date for the Special Meeting, are entitled to
notice of and to vote at the Special Meeting. The consummation of the Merger is
subject to certain conditions including, among other things, the approval of the
Merger Proposal by the affirmative vote of the holders of at least two-thirds of
the outstanding shares of Titan Common Stock entitled to vote thereon, as well
as the approval of certain regulatory agencies. Mark E. Watson, Jr., the
Chairman, President and Chief Executive Officer of Titan, who in the aggregate
owns or controls approximately 25.6% of the outstanding shares of Titan Common
Stock, has agreed to vote his shares of Titan Common Stock for approval of the
Merger Proposal. See "The Merger Agreement--Voting and Support Agreement."
THE VALUE OF THE CONSIDERATION TO BE RECEIVED BY TITAN STOCKHOLDERS IN THE
MERGER IS BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR TO THE
DATE OF THE EFFECTIVE TIME. THE CONSIDERATION WILL DEPEND UPON THE AVERAGE STOCK
PRICE, WHICH ESTABLISHES THE STANDARD EXCHANGE
ii
<PAGE>
RATIO AND OTHER FACTORS. BECAUSE THE AVERAGE STOCK PRICE OF USF&G COMMON STOCK
AS OF THE EFFECTIVE TIME IS NOT DETERMINABLE AS OF THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN
EXCHANGE FOR THE OUTSTANDING TITAN COMMON STOCK IS NOT CURRENTLY DETERMINABLE.
IN ADDITION, BECAUSE THE EFFECTIVE TIME MAY OCCUR ON A DATE OTHER THAN THE DATE
OF THE SPECIAL MEETING, TITAN STOCKHOLDERS WILL NOT KNOW THE EXACT VALUE OF THE
CONSIDERATION THEY WILL RECEIVE IN THE MERGER AT THE TIME OF VOTING ON THE
MERGER. THE PRORATION PROVISIONS MAY ALSO CAUSE TITAN STOCKHOLDERS TO RECEIVE
CONSIDERATION IN THE MERGER THAT IS DIFFERENT FROM THE FORM OF CONSIDERATION
THEY ELECT TO RECEIVE.
As soon as practicable after the third New York Stock Exchange trading day
prior to the Special Meeting, Titan will issue a press release setting forth the
estimated aggregate consideration to be received for each share of Titan Common
Stock, assuming the Effective Time to be the same day as the Special Meeting.
Although Titan intends to issue the press release before the date of the Special
Meeting, Titan may issue the press release before or after the date of the
Special Meeting. The exact ratio of consideration (USF&G Common Stock to cash),
if any, to be received by Titan stockholders who elect the Standard
Consideration, the Cash Consideration or the Stock Consideration cannot be
determined until the Election Forms (as defined herein) are received, which will
occur after the Effective Time.
No fractional shares of USF&G Common Stock will be issued in the Merger. In
lieu of any such fractional shares, each holder of Titan Common Stock who
otherwise would be entitled to receive a fractional share of USF&G Common Stock
pursuant to the Merger will be paid an amount in cash equal to such fractional
interest multiplied by the Average Stock Price.
This Proxy Statement/Prospectus also constitutes the prospectus of USF&G,
with respect to up to 7,400,000 shares of USF&G Common Stock to be issued in
connection with the Merger. USF&G Common Stock is traded on the New York Stock
Exchange ("NYSE") under the symbol "FG." USF&G Common Stock is also listed on
the Pacific Stock Exchange, the London Stock Exchange and the Swiss Exchanges in
Basle, Geneva and Zurich, Switzerland. On November 14, 1997, the closing price
for USF&G Common Stock as reported on the NYSE--Composite Tape was $20.0625 per
share.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED CAREFULLY BY TITAN STOCKHOLDERS IN CONSIDERING WHETHER TO VOTE FOR
THE APPROVAL OF THE MERGER PROPOSAL.
All information contained in this Proxy Statement/Prospectus with respect to
Titan prior to the Merger has been provided by Titan. All information contained
in this Proxy Statement/Prospectus with respect to USF&G (and the operation of
Titan after the Merger) has been provided by USF&G.
This Proxy Statement/Prospectus is first being mailed to stockholders of
Titan on or about November 18, 1997.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 18, 1997.
iii
<PAGE>
AVAILABLE INFORMATION
Titan and USF&G are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Titan and USF&G with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission located at 7 World
Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such information also can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains an
Internet Web Site that contains reports and other information regarding
registrants' located at http://www.sec.gov. Titan Common Stock is listed on the
NYSE. Such reports, proxy statements and other information filed by Titan can
also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005. USF&G Common Stock is listed on the NYSE, the
Pacific Stock Exchange, the London Stock Exchange and the Swiss Exchanges in
Basle, Geneva and Zurich, Switzerland. Such reports, proxy statements and other
information filed by USF&G can also be inspected at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, and the Pacific
Stock Exchange, Inc., 301 Pine Street, San Francisco, California 94104 and 233
South Beaudry Avenue, Los Angeles, California 90012.
USF&G has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), of which this Proxy
Statement/Prospectus is a part, with respect to the shares of USF&G Common Stock
to be issued pursuant to the Merger Agreement. This Proxy Statement/Prospectus
does not contain all the information set forth in the Registration Statement.
Such additional information may be obtained from the Commission's principal
office in Washington, D.C. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or attached as an annex hereto or such
other document, each such statement being qualified in all respects by such
reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, UPON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO: (I) IN THE CASE OF
DOCUMENTS RELATING TO TITAN, TITAN HOLDINGS, INC., 2700 N.E. LOOP 410, SUITE
500, SAN ANTONIO, TEXAS 78217 (TELEPHONE NUMBER (210) 527-2705), ATTENTION: MARK
E. WATSON III, GENERAL COUNSEL, OR (II) IN THE CASE OF DOCUMENTS RELATING TO
USF&G, USF&G CORPORATION, 6225 CENTENNIAL WAY, BALTIMORE, MARYLAND 21209
(TELEPHONE NUMBER (410) 547-3000), ATTENTION: JOHN F. HOFFEN, JR., SECRETARY. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE REQUESTED DOCUMENTS PRIOR TO THE SPECIAL
MEETING, ANY REQUESTS SHOULD BE MADE PRIOR TO DECEMBER 2, 1997.
iv
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are
incorporated by reference in this Proxy Statement/Prospectus:
USF&G
1. Annual Report on Form 10-K for the year ended December 31, 1996 (File
No. 1-8233);
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997;
3. Current Reports on Form 8-K, dated January 10, 1997, March 13, 1997, and
March 26, 1997; and
4. The description of USF&G Common Stock and Rights Plan (defined below)
contained in USF&G's Registration Statements filed pursuant to Section 12
of the Exchange Act and any amendment or report filed for the purpose of
updating those descriptions.
TITAN
1. Annual Report on Form 10-K and Form 10-K/A for the year ended December
31, 1996 (File No. 0-22000);
2. Quarterly Reports on Form 10-Q and Form 10-Q/A for the quarters ended
March 31, 1997 and June 30, 1997 and Form 10-Q for the quarter ended
September 30, 1997; and
3. Current Report on Form 8-K, dated August 15, 1997.
All documents and reports filed by Titan and USF&G pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and to
be part hereof from the date of filing of each such document or report. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained herein
or in any other document subsequently filed with the Commission which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS
IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY TITAN, USF&G OR ANY OTHER PERSON.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF TITAN OR USF&G SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
v
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................................................... iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................... v
SUMMARY................................................................................................... 1
The Companies......................................................................................... 1
The Special Meeting................................................................................... 1
The Merger and the Merger Agreement................................................................... 2
Interests of Certain Persons in the Merger............................................................ 10
Risk Factors.......................................................................................... 12
Stockholder Rights.................................................................................... 12
Summary Consolidated Financial Information of USF&G................................................... 13
Summary Consolidated Financial Information of Titan................................................... 15
Comparative Per Share Data............................................................................ 17
Comparative Market Price Data......................................................................... 19
RISK FACTORS.............................................................................................. 20
Value and Composition of the Merger Consideration..................................................... 20
Uncertainty of the Merger Consideration............................................................... 20
Risks Related to USF&G's Operations................................................................... 20
Adequacy of Property-Casualty Loss Reserves........................................................... 21
Potential Losses from Catastrophes.................................................................... 21
Reinsurance Considerations............................................................................ 22
Cyclicality of Property-Casualty Insurance Industry................................................... 22
Holding Company Structure; Dividend Restrictions...................................................... 22
Regulation............................................................................................ 23
A.M. Best Company Ratings and Review.................................................................. 23
Legal Proceedings..................................................................................... 24
Competition........................................................................................... 24
THE SPECIAL MEETING....................................................................................... 24
General; Date and Place of the Special Meeting........................................................ 24
Purpose of the Special Meeting........................................................................ 25
Stockholders Entitled to Vote; Quorum; Requisite Approval............................................. 25
Proxies............................................................................................... 25
Appraisal Rights...................................................................................... 26
THE MERGER................................................................................................ 28
Background of the Merger.............................................................................. 28
Reasons of USF&G for the Merger; Approval of the USF&G Board.......................................... 33
Reasons of Titan for the Merger; Recommendation of the Titan Board.................................... 33
Opinion of Financial Advisor to the Titan Board....................................................... 35
Interests of Certain Persons in the Merger............................................................ 42
Employee Benefits..................................................................................... 45
Anticipated Accounting Treatment...................................................................... 45
Certain Federal Income Tax Consequences............................................................... 45
Regulatory Matters.................................................................................... 48
Resale of USF&G Stock; Affiliates..................................................................... 49
New York Stock Exchange Listing of USF&G Common Stock................................................. 49
Management and Operations of Titan after the Merger................................................... 49
THE MERGER AGREEMENT...................................................................................... 50
General............................................................................................... 50
Effective Time........................................................................................ 50
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
Terms of the Merger................................................................................... 50
<S> <C>
Merger Consideration.................................................................................. 50
Proration and Adjustment.............................................................................. 53
Dividends and Fractional Shares....................................................................... 56
Titan Options and Warrants............................................................................ 56
Surrender and Payment................................................................................. 57
Representations and Warranties........................................................................ 57
Conduct of Business of Titan Pending the Merger....................................................... 58
No Solicitation....................................................................................... 59
Directors' and Officers' Indemnification and Insurance................................................ 60
Conditions Precedent to the Merger.................................................................... 61
Fees and Expenses..................................................................................... 61
Termination........................................................................................... 62
Amendment and Waiver.................................................................................. 63
Voting and Support Agreement.......................................................................... 63
DESCRIPTION OF USF&G...................................................................................... 64
DESCRIPTION OF USF&G CAPITAL STOCK........................................................................ 65
Transfer Agent........................................................................................ 68
DESCRIPTION OF TITAN...................................................................................... 68
General............................................................................................... 68
Non-standard Private Passenger Automobile Insurance Industry.......................................... 68
Public Entity......................................................................................... 70
Premium Financing..................................................................................... 71
Other Lines........................................................................................... 72
Executive Officers.................................................................................... 72
Employees............................................................................................. 73
Legal Proceedings..................................................................................... 73
COMPARISON OF RIGHTS OF HOLDERS OF USF&G CAPITAL STOCK AND TITAN CAPITAL STOCK............................ 74
Business Combinations................................................................................. 74
Appraisal Rights...................................................................................... 74
USF&G Rights Plan..................................................................................... 75
Amendments to Charters................................................................................ 75
Amendments to Bylaws.................................................................................. 75
Preemptive Rights..................................................................................... 76
Stockholder Action.................................................................................... 76
Special Stockholder Meetings.......................................................................... 76
Cumulative Voting for Directors....................................................................... 77
Number, Classification and Election of Directors...................................................... 77
Removal of Directors.................................................................................. 77
Indemnification of Directors and Officers............................................................. 78
Limitation of Personal Liability of Directors and Officers............................................ 78
Dividends and Distributions........................................................................... 79
LEGAL MATTERS............................................................................................. 80
EXPERTS................................................................................................... 80
STOCKHOLDER PROPOSALS..................................................................................... 80
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
OTHER BUSINESS AT THE SPECIAL MEETING..................................................................... 80
<S> <C>
ANNEX A--Agreement and Plan of Merger..................................................................... A-1
ANNEX AA--Amendment to Agreement and Plan of Merger....................................................... AA-1
ANNEX B--Opinion of Furman Selz LLC....................................................................... B-1
ANNEX C--Texas Appraisal Statute.......................................................................... C-1
</TABLE>
viii
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS, IN THE ATTACHED ANNEXES AND IN THE DOCUMENTS
INCORPORATED BY REFERENCE. TITAN STOCKHOLDERS ARE URGED TO READ CAREFULLY THIS
PROXY STATEMENT/PROSPECTUS AND THE ATTACHED ANNEXES IN THEIR ENTIRETY.
THE COMPANIES
TITAN. Titan, through its wholly-owned property and casualty insurance
subsidiaries, underwrites non-standard private passenger automobile insurance
for individuals and property and casualty insurance for small to medium-sized
public entities nationwide. Non-standard automobile insurance is principally
provided to insureds who are unable to obtain standard insurance coverage
because of their driving record, other underwriting criteria or market
conditions for standard risks. Titan's public entity insurance programs offer
coverage to cities and counties against unexpected and unintended personal
injury and/or property damage as well as against losses arising out of civil
rights claims and workers' compensation coverage. Titan believes that its focus
on specialty niche property and casualty insurance combined with its
underwriting and claims handling expertise has enabled it to operate at an
underwriting profit. Through a subsidiary, Titan also offers premium financing
to third-party insureds and, to a lesser extent, public entities insured by
Titan.
Titan's operations are conducted primarily through three principal
subsidiaries: Titan Insurance Company, Titan Indemnity Company and Westchester
Premium Acceptance Corporation. Non-standard automobile insurance coverage is
underwritten by both Titan Insurance Company and Titan Indemnity Company, and
public entity insurance is underwritten by Titan Indemnity Company. Titan offers
premium financing to municipalities and other public entities through
Westchester Premium Acceptance Corporation and its subsidiary, which are
eligible to transact business in 37 states. Titan Indemnity Company is licensed
in 47 states and the District of Columbia and is rated "A-" by A.M. Best
Company. Titan Insurance Company is licensed in Michigan and Arizona and is also
rated "A-" by A.M. Best Company. See "Risk Factors--A.M. Best Company Ratings
and Review" for a discussion of A.M. Best Company ratings, the current review by
A.M. Best Company of Titan and certain related matters.
Titan is incorporated in Texas, its principal executive offices are located
at 2700 N.E. Loop 410, Suite 500, San Antonio, Texas 78217 and its telephone
number is (210) 527-2700. See "Description of Titan."
USF&G. USF&G is a holding company with assets of $14.9 billion, whose
principal subsidiaries are engaged in writing property-casualty insurance and
life insurance/annuities. Property-casualty insurance is written primarily by
USF&G Company, founded in 1896, and is sold through independent agents supported
by USF&G 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 ("F&G Life"),
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 Company is rated "A" by A.M. Best Company and F&G Life is rated
"A-" by A.M. Best Company. For a discussion of A.M. Best Company and its
ratings, see "Risk Factors--A.M. Best Company Ratings and Review." USF&G is
incorporated in Maryland, its principal executive offices are located at 6225
Centennial Way, Baltimore, Maryland 21209 and its telephone number is (410)
547-3000. See "Description of USF&G."
THE SPECIAL MEETING
PLACE, DATE AND TIME. The Special Meeting will be held on Monday, December
22, 1997 at 10:00 a.m. at Titan's principal executive offices, located at 2700
N.E. Loop 410, San Antonio, Texas 78217.
1
<PAGE>
PURPOSE OF THE SPECIAL MEETING. The purpose of the Special Meeting is to
consider and vote upon a proposal to approve the Merger Proposal. See "The
Special Meeting--Purpose of the Special Meeting."
STOCKHOLDERS ENTITLED TO VOTE; QUORUM; REQUISITE APPROVAL. Holders of
record of shares of Titan Common Stock at the close of business on November 21,
1997 (the "Record Date"), are entitled to notice of, and to vote at, the Special
Meeting. The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of Titan Common Stock entitled to vote
at the Special Meeting is necessary to constitute a quorum at the Special
Meeting. As of November 14, there were 10,075,370 shares of Titan Common Stock
outstanding, each of which will be entitled to one vote on each matter to be
acted upon at the Special Meeting. In addition, Titan expects an additional
27,825 shares of restricted Titan Common Stock granted on April 30, 1997 to be
outstanding and entitled to vote as of the date of the Special Meeting. The
affirmative vote of holders of two-thirds of the outstanding shares of Titan
Common Stock is required for the approval of the Merger Proposal. See "The
Special Meeting-- Stockholders Entitled to Vote; Quorum; Requisite Approval."
Mark E. Watson, Jr., the Chairman, President and Chief Executive Officer of
Titan, who in the aggregate owns or controls approximately 25.6% of the
outstanding shares of Titan Common Stock, has agreed to vote his shares of Titan
Common Stock for the approval of the Merger Proposal. See "The Merger
Agreement--Voting and Support Agreement." Titan's other officers and directors,
who in the aggregate beneficially own less than 1% of the outstanding shares of
Titan Common Stock, have not indicated how they intend to vote their shares of
Titan Common Stock. USF&G has purchased 650,000 shares or 6.45% of the
outstanding shares of Titan Common Stock which it intends to vote in favor of
the Merger Proposal.
APPRAISAL RIGHTS. Titan stockholders that have, as of the Effective Time,
complied with all the procedures necessary to assert appraisal rights in
accordance with the Texas Business Corporation Act shall be entitled to receive
payment of the fair value of their shares as determined pursuant to the Texas
Business Corporation Act. See "The Special Meeting--Appraisal Rights."
THE MERGER AND THE MERGER AGREEMENT
GENERAL. The Merger Agreement provides that, at the Effective Time, Titan
will be merged with and into USF&G Company. See "The Merger Agreement" and Annex
A for a copy of the Merger Agreement.
MERGER CONSIDERATION. The Merger Agreement provides that each outstanding
share of Titan Common Stock will be converted into the right to receive, at the
election of the holder and subject to the prorations and adjustments described
below, (i) $11.60 in cash (the "Standard Cash Consideration") and 0.46516 (the
"Standard Exchange Ratio" and, together with the Standard Cash Consideration,
the "Standard Consideration") of a share of USF&G Common Stock, (ii) $23.20 (two
times the Standard Cash Consideration) in cash (the "Cash Consideration"), or
(iii) 0.93032 (two times the Standard Exchange Ratio) of a share of USF&G Common
Stock (the "Stock Consideration"). The above exchange ratio is based on a value
for USF&G Common Stock of $24.9375 per share (the "Base Share Price") which was
the closing price of USF&G Common Stock on July 29, 1997, the day before USF&G
made its original offer to Titan. The Merger is intended to qualify as a
tax-free reorganization under the Internal Revenue Code of 1986, as amended, and
provide tax deferral to the extent Titan stockholders receive shares of USF&G
Common Stock in the Merger. Each person who, immediately prior to the Effective
Time, is a record holder of shares of Titan Common Stock will have the right to
submit an election form ("Election Form") specifying that such person desires to
have all of his or her shares of Titan Common Stock converted into the right to
receive either (i) the Standard Consideration ("Standard Election"), (ii) the
Stock Consideration ("Stock Election"), or (iii) the Cash Consideration ("Cash
Election").
The actual value of the consideration to be received by Titan stockholders
will be subject to adjustment based upon the average closing price of USF&G
Common Stock for the ten consecutive trading days ending on the third trading
day prior to the Effective Time (the "Average Stock Price"). If the Average
Stock Price is not greater than $28.68 (15% above the Base Share Price) or less
than $21.20 (15%
2
<PAGE>
below the Base Share Price), then (x) the value of the consideration will vary
with changes in the stock price and (y) the allocation of the consideration
between stock and cash will be adjusted only to maintain a 50% stock, 50% cash
relationship. The adjustments will be made by adjusting the Standard Cash
Consideration to an amount equal to one-half of the product of (a) $23.20
multiplied by (b) 1 plus the product of (i) 0.50 multiplied by (ii) a fraction
the numerator of which is the Average Stock Price minus the Base Share Price and
the denominator of which is the Base Share Price and adjusting the Standard
Exchange Ratio to an amount equal to the quotient obtained by dividing (i) the
Standard Cash Consideration as so adjusted by (ii) the Average Stock Price. If
the Average Stock Price is less than $21.20 (but not less than $17.46) or
greater than $28.68, the value of the consideration will be fixed at $21.46 or
$24.94, respectively, the Standard Cash Consideration will be $10.73 or $12.47,
respectively, and the Standard Exchange Ratio will be adjusted to provide a
fraction of a share of USF&G Common Stock having a value of $10.73 or $12.47,
respectively, based upon the Average Stock Price. If the Average Stock Price is
less than $17.46, the Standard Cash Consideration will be $10.73 and the
Standard Exchange Ratio will be 0.61455 (subject to adjustment to maintain the
50% stock, 50% cash allocation described below). If the Average Stock Price is
less than $17.46 (30% below the Base Share Price) or greater than $32.42 (30%
above the Base Share Price), each party has the right to terminate the Merger
Agreement. As a result of the foregoing, unless the Merger Agreement is
terminated by one of the parties, the value of the Merger Consideration per
share of Titan Common Stock will decrease below $21.46 if the Average Stock
Price decreases below $17.46, while the value of the Merger Consideration per
share of Titan Common Stock will be fixed at $24.94 even if the Average Stock
Price is greater than $32.42.
The following table sets forth sample calculations of the Merger
Consideration and the components thereof for each share of Titan Common Stock
based upon different Average Stock Prices, assuming a Standard Election.
<TABLE>
<CAPTION>
TOTAL VALUE
OF AGGREGATE
CONSIDERATION MERGER
PER CONSIDERATION
AVERAGE STOCK STANDARD CASH STANDARD SHARE OF TITAN (IN
PRICE CONSIDERATION EXCHANGE RATIO COMMON STOCK MILLIONS) (1)
- ------------- ------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
$ 16.50 $ 10.73 .61455 $ 20.87 $ 210.85
17.46 10.73 .61455 21.46 216.81
20.00 10.73 .53650 21.46 216.81
21.20 10.73 .50618 21.46 216.81
23.00 11.15 .48476 22.30 225.30
24.94 11.60 .46516 23.20 234.39
26.00 11.85 .45566 23.69 239.34
28.68 12.47 .43481 24.94 251.97
32.42 12.47 .38466 24.94 251.97
35.00 12.47 .38466 24.94 251.97
</TABLE>
(1) Does not include an aggregate of $14.1 million paid by USF&G to acquire
650,000 shares of Titan Common Stock prior to the Effective Time.
If the Average Stock Price is less than $17.46 or greater than $32.42, each
party has the right to terminate the Merger Agreement. In such event, the Titan
Board would consider whether to terminate the Merger Agreement based on its
judgment as to whether the stockholders of Titan would receive fair
consideration for their shares of Titan Common Stock and whether consummation of
the Merger would be in the best interests of the Titan stockholders. In making
such a decision, the Titan Board would do so consistent with its fiduciary
duties under applicable Texas law. In making its determination whether or not to
terminate the Merger Agreement, the Titan Board may focus on the following
considerations which, among others, may be material to such a decision: (i) how
far the Average Stock Price is above or below the range set forth in the Merger
Agreement, (ii) whether or not the Titan Board believes that the then current
value of the shares of Titan Common Stock is greater than the Merger
Consideration per share of Titan Common Stock, (iii) whether such value arises
from enhanced prospects for Titan operating as an
3
<PAGE>
independent entity and (iv) the possibility of a business combination with a
third party that offers greater value to the Titan stockholders. In making a
determination whether to resolicit the approval and adoption of the Merger
Agreement and the authorization of the Merger by Titan stockholders in the event
that the Titan Board elects not to terminate the Merger Agreement, the Titan
Board may consider the factors described above as well as (i) whether there is
any additional information available that could be material to a decision by the
Titan stockholders whether to approve and adopt the Merger Agreement and
authorize the Merger, and (ii) whether any delay in the closing of the Merger
that would be a result of any resolicitation could provide USF&G with a right to
terminate the Merger Agreement or otherwise adversely affect the prospects that
the Merger will be consummated. In the event that the Titan Board is required,
in the exercise of its fiduciary duty, to make any of the determinations
described above, the Titan Board intends to consult with its financial, legal
and other advisors.
Had the Merger been consummated on November 17, 1997, the Average Stock
Price would have been $20.59, and holders of Titan Common Stock making the
Standard Election would have received aggregate consideration worth $21.46 per
share of Titan Common Stock consisting of 0.52103 of a share of USF&G Common
Stock and $10.73 in cash. The foregoing assumes that no proration would have
been required with respect to the various elections in order to maintain a 50%
stock and 50% cash relationship necessary for a tax-free transaction.
The actual cash and stock distributed will depend on the total per-share
consideration as calculated above and as adjusted to maintain a 50% stock and
50% cash relationship to maintain the tax-free nature of the transaction. As a
result, holders of Titan Common Stock may be subject to proration in the event
the aggregate of all elections by such holders would require USF&G to (a) issue
shares of USF&G Common Stock in an amount greater than the product of the
Standard Exchange Ratio multiplied by the number of shares of Titan Common Stock
outstanding immediately prior to the Effective Time or (b) pay an amount of cash
(including for this purpose cash to be paid for dissenting shares or in respect
of Titan Common Stock otherwise acquired by USF&G) greater than the product of
the Standard Cash Consideration multiplied by the number of shares of Titan
Common Stock outstanding immediately prior to the Effective Time. As of November
14, 1997, USF&G owned 650,000 shares of Titan Common Stock, all of which were
acquired for cash in the open market or through block purchases after August 8,
1997.
The proration formulae are designed to produce the result that 50% of the
Titan Common Stock held by persons other than USF&G is converted into shares of
USF&G Common Stock, with the remaining shares of Titan Common Stock being
converted into cash, while altering the elective choices of the holders of Titan
Common Stock to the minimum extent possible. The formulae separately address the
case in which too much stock is elected and the case in which too much cash is
elected.
The following examples set forth sample calculations of the Excess Cash and
Excess Stock proration formulae based upon the assumptions that the Average
Stock Price of USF&G Common Stock is $24.9375, the Standard Exchange Ratio is
0.46516, 10,075,370 shares of Titan Common Stock are outstanding, there are no
dissenters or fractional shares paid in cash and USF&G has purchased for cash
650,000 shares of Common Stock for an average of $21.6493 per share prior to the
Effective Time. The examples also assume that the Maximum Number of USF&G shares
is 4,686,688 (the assumed number of Titan shares outstanding, 10,075,370,
multiplied by the Standard Exchange Ratio, 0.46516) and the Maximum Amount of
Cash is $101,794,292 (the assumed number of Titan shares outstanding,
10,075,370, multiplied by the Standard Cash Consideration, $11.60). The examples
do not attempt to predict or take into account the form of consideration that
Mark E. Watson, Jr., Titan's largest shareholder, may elect to receive. In all
cases the total amount of cash excludes shares of Titan Common Stock purchased
for cash by USF&G prior to the Effective Time and 27,825 shares of restricted
Titan Common Stock.
4
<PAGE>
Example 1 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Cash Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 1,500,000 0.93033 $ 23.20 $ 0.00 1,395,489 $ 0
Number of All Cash Elections 1,000,000 0.06977 $ 1.74 $ 21.46 69,774 $21,460,000
Number of Standard Elections 6,925,370 0.46516 $ 11.60 $ 11.60 3,301,177 $80,334,292
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 2 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Stock Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 5,000,000 0.71170 $ 17.75 $ 5.45 3,558,496 $27,260,000
Number of All Cash Elections 2,000,000 0.00000 $ 0.00 $ 23.20 0 $46,400,000
Number of Standard Elections 2,425,370 0.46516 $ 11.60 $ 11.60 1,128,192 $28,134,292
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 3 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Cash Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 3,000,000 0.93033 $ 23.20 $ 0.00 2,790,977 $ 0
Number of All Cash Elections 3,000,000 0.10079 $ 2.51 $ 20.69 302,356 $62,060,000
Number of Standard Elections 3,425,370 0.46516 $ 11.60 $ 11.60 1,593,355 $39,734,292
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 4 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Stock Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 9,425,370 0.49724 $ 12.40 $ 10.99 4,686,688 $101,794,292
Number of All Cash Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of Standard Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 5 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Cash Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of All Cash Elections 9,425,370 0.49724 $ 12.40 $ 10.80 4,686,688 $101,794,292
Number of Standard Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
5
<PAGE>
Example 6 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Standard Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of All Cash Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of Standard Elections 9,425,370 0.49724 $ 12.40 $ 10.80 4,686,688 $101,794,292
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
As soon as possible after the third day prior to the Special Meeting, Titan
will issue a press release setting forth the estimated aggregate consideration
to be received for each share of Titan Common Stock, assuming the Effective Time
to be the same day as the Special Meeting. Although Titan intends to issue the
press release before the date of the Special Meeting, Titan may issue the press
release before or after the date of the Special Meeting.
No fractional shares of USF&G Common Stock will be issued in the Merger. In
lieu of any such fractional shares, each holder of Titan Common Stock who
otherwise would be entitled to receive a fractional share of USF&G Common Stock
pursuant to the Merger will be paid an amount in cash equal to such fractional
interest multiplied by the Average Stock Price. See "The Merger
Agreement--Merger Consideration." In addition, the Merger Agreement provides
that each outstanding Titan Option will be canceled and replaced with a USF&G
Option, in accordance with the applicable exchange ratio and with the exercise
price adjusted accordingly. See "The Merger Agreement--Titan Warrants and
Options."
The value of the consideration to be received by Titan stockholders in the
Merger is based upon a formula and cannot precisely be determined prior to the
date of the Effective Time. The consideration will depend upon the Average Stock
Price, which establishes the Standard Exchange Ratio. Because the Average Stock
Price of USF&G Common Stock as of the Effective Time is not determinable as of
the date of this Proxy Statement/Prospectus, the exact consideration per share
to be received in exchange for the outstanding Titan Common Stock is not
currently determinable. In addition, because the Effective Time may occur on a
date other than the date of the Special Meeting, Titan stockholders will not
know the exact value of the consideration they will receive in the Merger at the
time of voting on the Merger. The proration provisions may also cause Titan
stockholders to receive consideration in the Merger that is different from the
consideration they elect to receive.
SURRENDER OF CERTIFICATES. As soon as reasonably practicable after the
Effective Time, The Bank of New York, as exchange agent (the "Exchange Agent"),
shall mail to each holder of record of Titan Common Stock immediately prior to
the Effective Time: (1) a letter of transmittal, (2) instructions for use in
effecting the surrender of the stock certificates in exchange for the Merger
Consideration, and (3) an Election Form providing for such holders to elect to
receive the Standard Consideration, the Cash Consideration or the Stock
Consideration. As of the Election Deadline (which will be set forth in the
Election Form) all holders of Titan Common Stock immediately prior to the
Effective Time (excluding any shares of Titan Common Stock which are canceled
pursuant to the terms of the Merger Agreement or are Dissenting Shares) who
shall not have properly submitted to the Exchange Agent, or who shall have
properly revoked, an effective and properly completed Election Form, shall be
deemed to have elected to receive the Standard Consideration. See "The Merger
Agreement--Surrender and Payment."
REASONS OF TITAN FOR THE MERGER; RECOMMENDATION OF THE TITAN BOARD. The
Titan Board has unanimously determined that the Merger is fair to, and in the
best interests of, Titan stockholders, has unanimously approved the Merger, the
Merger Agreement and the transactions contemplated thereby and unanimously
recommends that Titan stockholders vote FOR approval of the Merger Proposal.
After careful review, the Titan Board has unanimously determined that the Merger
will provide significant value to all Titan stockholders. In reaching its
decision to approve the Merger Proposal, the Titan Board
6
<PAGE>
considered several factors, including: (a) the market value of the USF&G Common
Stock and cash to be received by Titan stockholders ($23.20, based on the market
price of USF&G Common Stock on July 29, 1997, the day before USF&G made its
original offer to Titan) and the premium offered based on the historical trading
price of Titan Common Stock ($5.33 (or 30%) based on the thirty-day average
price of $17.866 for the thirty days preceding June 3, 1997, the day Titan
announced the retention of Furman Selz LLC ("Furman Selz"), and $6.45 (or 38.5%)
based on a twelve-month average price of $16.745 for the twelve months ended
August 7, 1997 (both the thirty-day and the twelve-month average price have been
restated to reflect Titan's stock dividends)); (b) the liquidity, active trading
market and dividend history of USF&G Common Stock; (c) the enhanced long-term
value to Titan of a strategic merger with a larger, more diversified insurance
company; (d) the opinion of Furman Selz to the effect that, as of August 7,
1997, the Merger Consideration was fair to Titan stockholders from a financial
point of view; (e) the present intention of USF&G to keep Titan's current
operations in San Antonio, Texas; and (f) the tax-advantaged nature of the
transaction. See "The Merger--Reasons of Titan for the Merger; Recommendation of
the Titan Board."
THE TITAN BOARD UNANIMOUSLY RECOMMENDS THAT TITAN STOCKHOLDERS VOTE "FOR"
THE APPROVAL OF THE MERGER PROPOSAL.
OPINION OF FINANCIAL ADVISOR TO THE TITAN BOARD. Furman Selz, which was
engaged by the Titan Board to serve as its financial advisor, delivered to the
Titan Board its oral opinion, confirmed by delivery of a written opinion dated
August 7, 1997, to the effect that, as of such date, and based upon and subject
to the various assumptions and considerations set forth in such opinion, the
consideration to be received by the holders of Titan Common Stock in the Merger
(the "Merger Consideration") was fair, from a financial point of view, to such
holders. Furman Selz's opinion does not address any other aspect of the Merger
or related transactions and does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the Special Meeting or as
to whether any stockholder should elect to receive the Standard Consideration,
the Cash Consideration or the Stock Consideration. The full text of the Furman
Selz opinion is attached to this Proxy Statement/Prospectus as Annex B and is
incorporated herein by reference. Titan's stockholders are urged to read such
opinion carefully and in its entirety. See "The Merger--Opinion of Financial
Advisor to the Titan Board."
REASONS OF USF&G FOR THE MERGER; APPROVAL OF THE USF&G BOARD. The Board of
Directors of USF&G (the "USF&G Board") believes that the Merger is in the best
interests of USF&G and USF&G stockholders because it represents an attractive
opportunity for USF&G to leverage its expertise in the higher return specialty
insurance areas by significantly increasing USF&G's presence in the public
entity and nonstandard automobile insurance markets. In addition, the Merger
increases USF&G's geographic diversification in these market areas.
CONDITIONS TO THE MERGER. Completion of the Merger is conditioned on the
approval of the Merger Agreement by the holders of two-thirds of the outstanding
shares of Titan Common Stock entitled to vote thereon, and the parties obtaining
certain regulatory approvals, including certain insurance regulatory approvals
and expiration of the relevant waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "HSR Act"). The parties were
notified on October 1, 1997 that early termination of the waiting period under
the HSR Act was granted. Subject to waiver, the Merger is also conditioned on
the representations and warranties made by the parties being correct in all
material respects both as of the date of the Merger Agreement and as of the
Effective Time. Further, the parties must perform all agreements and comply with
all covenants required by the Merger Agreement. For a full description of the
conditions to the Merger, see "The Merger Agreement--Conditions Precedent to the
Merger" and the Merger Agreement which is attached hereto as Annex A.
EFFECTIVE TIME. The Merger shall be consummated when Titan and USF&G
Company file properly executed articles of merger (the "Articles of Merger")
with the Secretary of State of the State of Texas and the Maryland Department of
Assessments and Taxation. The Merger shall become effective upon the
7
<PAGE>
acceptance for record of such filings or at such time thereafter as provided in
the Articles of Merger (the "Effective Time"). See "The Merger
Agreement--Effective Time."
VOTING AND SUPPORT AGREEMENT. Mark E. Watson, Jr., the MEW Family Limited
Partnership and The Mark and Kathleen Watson Charitable Foundation
(collectively, the "Watson Stockholders") and USF&G have entered into a Voting
and Support Agreement (the "Voting Agreement") with respect to the 2,579,295
shares of Titan Common Stock, legally and beneficially owned by the Watson
Stockholders and any shares subsequently acquired, (the "Watson Shares"), which
represents approximately 25.6% of the outstanding shares of Titan Common Stock.
Under the terms of the Voting Agreement, the Watson Stockholders have agreed,
for a period of one year, to vote or cause to be voted all of the Watson Shares
in favor of the Merger Proposal and against any proposal made in opposition to
the Merger. The Watson Stockholders have also agreed, for a period of one year,
not to solicit or encourage any inquiry or proposal from any person to acquire
the business, property or capital stock of Titan or its subsidiaries or to
furnish information or otherwise facilitate any of the foregoing; provided that
Mr. Watson, Jr. shall not be prohibited from taking any such actions as are
required to comply with his fiduciary duties as an officer and director of
Titan. In addition, subject to certain limited exceptions, the Watson
Stockholders have agreed not to sell, assign, dispose of, encumber or otherwise
transfer any Watson Shares other than in an exchange pursuant to the Merger.
NO SOLICITATION. The Merger Agreement provides that Titan will not take any
action to initiate, solicit or encourage any inquiries with respect to a merger,
consolidation, acquisition or other similar business combination including Titan
or its subsidiaries involving the purchase of (i) all or a significant portion
of assets of Titan and its subsidiaries taken as a whole, (ii) 15% or more of
Titan's outstanding Common Stock or (iii) 15% or more of the outstanding shares
of capital stock of any subsidiary (any such proposal or offer hereinafter
referred to as an "Acquisition Proposal"). Furthermore, Titan will not engage in
any negotiations concerning or provide any confidential information to any
parties relating to an Acquisition Proposal and will cease and immediately
terminate any existing activities, discussions or negotiations with any parties
respecting Acquisition Proposals. These restrictions on Titan's ability to
negotiate with other parties interested in pursuing a business combination with
Titan and to provide non-public information to such parties are subject to the
fiduciary duties of the Titan Board. See "The Merger Agreement--No
Solicitation."
EMPLOYEE BENEFITS. Under the Merger Agreement, USF&G has agreed, for a
period of one year from and after the Effective Time, to provide benefits to
employees of Titan that are substantially comparable to the benefits presently
offered by Titan. See "The Merger--Employee Benefits."
TERMINATION. The Merger Agreement may be terminated at any time prior to
the Effective Time by mutual written consent of USF&G and Titan. The Merger
Agreement may also be terminated by either USF&G or Titan if any permanent
injunction or other court order preventing the Merger shall become final and
non-appealable; if the Merger has not been consummated on or before December 31,
1997, provided that if the conditions precedent have not been satisfied as of
such date, the Merger Agreement may not be terminated until February 28, 1998,
if it can be reasonably anticipated that such conditions precedent will be
fulfilled by that date; if the holders of at least two-thirds of the outstanding
shares of Titan Common Stock have not approved the Merger, the Merger Agreement,
and the consummation of the transactions contemplated thereby; if the Titan
Board shall have failed to give or adversely modified in any material respect,
its approval and recommendation of the Merger and the Merger Agreement; if the
Titan Board shall have recommended or accepted an Acquisition Proposal; if the
other party breaches its representations or warranties or fails to comply in any
material respect with any of its covenants or agreements which causes certain
conditions to become incapable of being satisfied; or if the Average Stock Price
shall be greater than $32.42 or less than $17.46. Upon termination of the Merger
Agreement, the parties will continue to have certain continuing obligations with
respect to treatment of confidential
8
<PAGE>
information and payment of fees and expenses in certain circumstances. See
"Merger Agreement--Fees and Expenses" and "The Merger Agreement--Termination."
AMENDMENT AND WAIVER. The Merger Agreement may be amended, modified or
supplemented only by written agreement of Titan, USF&G and USF&G Company at any
time prior to the Effective Time of the Merger. However, after the Merger
Agreement is approved by Titan's stockholders, no such amendment shall (a)
reduce the amount or change the consideration to be delivered to a holder of
Titan Common Stock, (b) change the date by which the Merger is required to be
effected or (c) change the amounts payable with respect to Titan Options and
Titan Warrants. At any time prior to the Effective Time, Titan, USF&G and USF&G
Company, by action taken or authorized by their respective Boards of Directors,
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties; (b) waive any inaccuracies in the representations and
warranties contained in the Merger Agreement or in any documents delivered
pursuant thereto; and (c) waive compliance with any of the agreements or
conditions contained in the Merger Agreement. Any agreement to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of the waiving or extending party. In the event that Titan
waives a condition to, or otherwise agrees to a modification of, the Merger
Agreement which is material to a vote by the stockholders of Titan, Titan
stockholders would be resolicited in accordance with rules promulgated under the
Exchange Act governing the solicitation of the proxies. The failure of any party
to assert any of its rights shall not constitutes waiver of such rights. See
"The Merger Agreement--Amendment and Waiver."
FEES AND EXPENSES. The Merger Agreement provides that all costs and
expenses in connection with the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses. Titan
has agreed to pay to USF&G $7,500,000 if (a) the Merger Agreement is terminated
because two-thirds of the shares of Titan Common Stock have not approved the
Merger, the Merger Agreement and the consummation of the transactions
contemplated thereby, and Titan and any other person or group shall, within 90
days after such termination, consummate or enter into an agreement respecting an
Acquisition Proposal, or (b) the Merger Agreement is terminated because the
Titan Board has failed to give or has withdrawn approval or recommendation of or
has taken a public position materially inconsistent with, the Merger or the
Merger Agreement, or has recommended, accepted or entered into an agreement for
an Acquisition Proposal. See "The Merger Agreement--Fees and Expenses."
MANAGEMENT AND OPERATIONS OF TITAN AFTER THE MERGER. After the Merger, the
existing operating subsidiaries of Titan will be wholly-owned subsidiaries of
USF&G Company and will operate as part of USF&G's business units. USF&G
currently intends to retain Titan's current operations in San Antonio, Texas.
After the Merger, Titan will have access to resources generally available to
USF&G's other business units, will operate under the direction and guidance of
USF&G senior management and Board of Directors, and generally will be integrated
with USF&G business units engaged in activities comparable to those engaged in
by Titan.
ANTICIPATED ACCOUNTING TREATMENT. USF&G intends to account for the Merger
using the purchase method of accounting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to qualify
as a tax-free reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code"). A
holder of Titan Common Stock will not recognize taxable gain to the extent he or
she receives USF&G Common Stock in the Merger. A holder of Titan Common Stock
will recognize gain for tax purposes (i) to the extent that cash is received by
such stockholder in the Merger, or (ii) if the holder perfects his or her
appraisal rights. All Titan stockholders should read carefully the section of
this Proxy Statement/Prospectus entitled "The Merger--Certain Federal Income Tax
Consequences" for a discussion of the anticipated tax consequences of the
Merger.
9
<PAGE>
NYSE LISTING OF USF&G COMMON STOCK. USF&G has agreed to use its best
efforts to cause the USF&G Common Stock to be issued to Titan stockholders
pursuant to the Merger Agreement to be authorized for listing on the NYSE, upon
official notice of issuance. Such authorization for listing is a condition to
the obligations of USF&G, USF&G Company and Titan to consummate the Merger. See
"The Merger--New York Stock Exchange Listing of USF&G Common Stock."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL. In considering the recommendation of the Titan Board with respect
to the Merger Proposal, Titan stockholders should be aware that certain members
of the Titan Board and management have interests in the Merger that are in
addition to or different from the interests of Titan stockholders generally. In
connection with the Merger, USF&G has agreed to provide employment and severance
benefits to certain officers and employees of Titan in the manner described
below and to treat Titan Options and Titan Warrants in the manner described
below.
BENEFICIAL OWNERSHIP OF TITAN COMMON STOCK BY DIRECTORS AND OFFICERS OF
TITAN. As of November 14, 1997, directors and executive officers of Titan and
their affiliates may be deemed to be beneficial owners of approximately 32.3% of
the Titan Common Stock. Mark E. Watson, Jr. has entered into the Voting
Agreement. See "The Merger Agreement--Voting and Support Agreement." The
directors and executive officers of Titan will not receive any benefit with
respect to their shares of Titan Common Stock that differs from or is in
addition to the benefit received by all other stockholders of Titan Common
Stock.
MARK E. WATSON, JR. CONSULTING AGREEMENT. In connection with the Merger
Agreement, Mark E. Watson, Jr., Chairman, President and Chief Executive Officer
of Titan, Titan and USF&G Company entered into a consulting and noncompetition
agreement (the "Consulting Agreement"). Under the terms of the Consulting
Agreement, Mr. Watson, Jr. will provide consulting services to USF&G Company for
a period of eighteen months following the Effective Time and will not compete
with the business of Titan and its subsidiaries for a period of five years
following the Effective Time. Mr. Watson, Jr. will receive as compensation
$2,250,000 payable in eighteen equal installments. In consideration for entering
into the Consulting Agreement, Mr. Watson, Jr. has agreed to terminate his
current employment agreement (including any applicable change in control
provisions therein) with Titan. See "The Merger--Interests of Certain Persons in
the Merger."
THOMAS E. MANGOLD EMPLOYMENT AGREEMENT. In connection with the Merger
Agreement, Thomas E. Mangold, a director and Executive Vice President and Chief
Operating Officer of Titan, Titan Indemnity Company and USF&G Company entered
into an employment agreement (the "Mangold Employment Agreement"). Under the
terms of the Mangold Employment Agreement, Mr. Mangold will be employed for five
years following the Effective Time as an executive officer of Titan Indemnity
Company. Mr. Mangold will receive as compensation an annual salary of not less
than $250,000, plus certain stock grants and bonus arrangements as set forth
more fully under "The Merger--Interests of Certain Persons in the Merger." In
consideration for entering into the Mangold Employment Agreement, Mr. Mangold
has agreed to terminate his current employment agreement (including any
applicable change in control provisions therein) with Titan.
MARK E. WATSON III EMPLOYMENT AGREEMENT. In connection with the Merger
Agreement, Mark E. Watson III, a director and Executive Vice President, General
Counsel and Secretary of Titan, Titan Indemnity Company and USF&G Company
entered into an employment, consulting, legal services and non-competition
agreement (the "Watson III Employment Agreement"). Under the terms of the Watson
III Employment Agreement, Mr. Watson III will be employed for one year beginning
January 1, 1998 as a full time executive officer of Titan Indemnity Company. Mr.
Watson III will receive as compensation an annual salary of not less than
$175,000, plus a bonus for 1997 of $50,000. Mr. Watson III will receive a bonus
for 1998 equal to $50,000. Beginning January 1, 1999, Mr. Watson will provide
consulting and legal services for two years to Titan Indemnity Company and USF&G
Company and will receive annual compensation of $50,000. Pursuant to the Watson
III Employment Agreement, Mr. Watson III has also
10
<PAGE>
agreed to not compete with the business of Titan and its subsidiaries for a
period of two years following his employment term and will receive $75,000
annually in consideration of his agreement not to compete. In consideration for
entering into the Watson III Employment Agreement, Mr. Watson III has agreed to
terminate his current employment agreement (including any applicable change in
control provisions therein) with Titan. See "The Merger--Interests of Certain
Persons in the Merger."
STONEGATE SECURITIES INVESTMENT BANKING FEE. On December 11, 1989, Titan
entered into an agreement with the predecessor entity of Stonegate Securities,
Inc. ("Stonegate"), an investment banking firm owned by E. B. Lyon III, a
director of Titan, providing for Stonegate to provide investment banking
services to Titan and for Titan to pay Stonegate an investment banking fee to
Stonegate in the event of a sale of Titan or a subsidiary of Titan. Pursuant to
that agreement, Stonegate has from time to time brought to Titan acquisition
opportunities and has introduced Titan to potential strategic partners,
including the Strategic Buyer (as herein defined) and the Financial Buyer (as
herein defined). This agreement was reaffirmed on May 13, 1997. The agreement
provides that Stonegate will receive a fee equal to $1,000,000 upon the sale of
Titan. Stonegate also manages certain portfolio investment assets of Titan
pursuant to an investment management agreement for a fee of .1% of the market
value of the assets managed. USF&G has entered into a letter agreement with
Stonegate providing that Stonegate's current investment advisory relationship
with Titan will remain in effect through the later of the Effective Time or
December 31, 1997.
TREATMENT OF TITAN OPTIONS AND TITAN WARRANTS. Each of the Titan Options
outstanding as of the Effective Time will immediately vest and be converted
without any action on the part of the holder thereof into the right to purchase
USF&G Common Stock on the same terms and conditions as the existing options,
subject to adjustments in the exercise price and to reflect the conversion to a
right to purchase USF&G Common Stock.
Titan has agreed to use its reasonable best efforts to cause holders of all
then outstanding Titan Warrants to agree to surrender and receive, in exchange
for and in cancellation and settlement of each Titan Warrant, a number of shares
of USF&G Common Stock for each share of Titan Common Stock subject to such Titan
Warrant (subject to any applicable withholding tax) equal to the quotient of (i)
the product of (1) the number of shares of Titan Common Stock which the holder
would be entitled to receive if such Titan Warrant were exercised in full
immediately prior to the Effective Time multiplied by (2) the difference between
(x) the Cash Consideration and (y) the exercise price of such share of Titan
Common Stock under the Titan Warrant, to the extent such amount is a positive
number, divided by (ii) the Average Stock Price. USF&G has also agreed to pay
the Warrant Consideration in cash based upon the Average Stock Price, provided
the holder of Titan Warrants enters into a Warrant Cancellation Agreement on or
prior to the Effective Time. Pursuant to the agreements under which the Titan
Warrants were issued (the "Warrant Agreements"), and regardless of whether the
Warrant Consideration is paid in stock or cash, Titan would also pay such
holders an amount equal to accrued dividends on the Titan Common Stock
underlying the outstanding Titan Warrants, measured from the date the Titan
Warrants were first issued.
In the event that holders of the outstanding Titan Warrants do not properly
elect to receive the Warrant Consideration (in stock or cash) on or before the
Effective Time, then pursuant to the terms of the Warrant Agreements, such
holders would be entitled upon exercise of the Titan Warrants to receive the
Merger Consideration in lieu of Titan Common Stock, subject to the same
elections and proration adjustments as holders of Titan Common Stock. In the
event no election is made, then such holder would receive upon exercise of such
warrants the Standard Consideration. Shares of USF&G Common Stock issuable as
Merger Consideration upon exercise of the Titan Warrants after the Effective
Time would not be registered under the Securities Act and therefore would not be
transferable except upon subsequent registration under the Securities Act or
pursuant to an exemption therefrom. On or before the Effective Time, holders of
Titan Warrants may also exercise their right to receive Titan Common Stock
pursuant to and in accordance with the Warrant Agreements. See "The Merger
Agreement--Titan Options and Warrants."
INDEMNIFICATION. Pursuant to the terms of the Merger Agreement, from and
after the Effective Time, USF&G will indemnify, defend and hold harmless the
officers and directors of Titan against all losses, expenses, claims, damages or
liabilities based in whole or in part on the fact that such person is or was
such
11
<PAGE>
officer or director of Titan, to the fullest extent permitted or required under
applicable law. In addition, USF&G has agreed that all rights to indemnification
existing in favor of the directors, officers or employees of Titan as provided
in Titan's organizational documents shall survive the Merger for a period of not
less than six years and has agreed to maintain the current policies of
directors' and officers' liability insurance for a period of six years. See "The
Merger Agreement--Indemnification."
In connection with the foregoing, see generally "The Merger--Background of
the Merger," "--Interests of Certain Persons in the Merger" and "--Employee
Benefits."
RISK FACTORS
Titan stockholders should carefully consider matters discussed under "Risk
Factors." Factors to be considered, among other things, include the present
inability to precisely determine the value or allocation of the consideration to
be received by Titan stockholders in connection with the Merger, risks attendant
to USF&G's multiple lines of business conducted in all 50 states, and risks
generally associated with insurance related businesses such as reserve and
catastrophe risks, reinsurance risks, cyclicality in the insurance industry,
regulatory and litigation risks and competition in the insurance industry. See
"Risk Factors."
STOCKHOLDER RIGHTS
See "Comparison of Rights of Holders of USF&G Capital Stock and Titan
Capital Stock" for a summary of the material differences between the rights of
holders of Titan Common Stock and USF&G Common Stock.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF USF&G
The following table sets forth summary consolidated financial information
for each of the five years in the period ended December 31, 1996 which are
derived from the consolidated financial statements of USF&G, which have been
audited by Ernst & Young, LLP, independent auditors. The summary consolidated
financial information for the nine-month periods ended September 30, 1997 and
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.
The summary consolidated financial information for the nine months ended
September 30, 1997 and September 30, 1996 have been prepared on the same basis
as the audited financial statements of USF&G and, in the opinion of USF&G,
reflect all adjustments necessary for a fair presentation of such information.
The following information is not necessarily indicative of future operating
results or financial position.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Premiums Earned................................ $ 2,016 $ 2,028 $ 2,731 $ 2,666 $ 2,508 $ 2,521 $ 2,683
Net Investment Income.......................... 513 537 705 733 749 753 820
Other.......................................... 12 15 18 53 48 43 61
--------- --------- --------- --------- --------- --------- ---------
Revenues Before Realized Gains............... 2,541 2,580 3,454 3,452 3,305 3,317 3,564
Net Realized Gains on Investments.............. 4 16 44 7 5 6 148
--------- --------- --------- --------- --------- --------- ---------
Total Revenues............................... 2,545 2,596 3,498 3,459 3,310 3,323 3,712
--------- --------- --------- --------- --------- --------- ---------
Losses, Loss Expenses and Policy Benefits...... 1,571 1,640 2,181 2,178 2,132 2,200 2,497
Underwriting, Acquisition and Operating
Expenses..................................... 738 781 1,044 1,048 1,001 979 1,087
Interest Expense............................... 26 30 39 44 37 41 41
Restructuring Charges.......................... -- -- 17 -- -- -- 51
Facilities Exit Costs/(Sublease Income)........ -- (14) (42) (6) 183 -- --
--------- --------- --------- --------- --------- --------- ---------
Total Expenses............................... 2,335 2,437 3,239 3,264 3,353 3,220 3,676
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) From Continuing Operations Before
Income Taxes and Cumulative Effect of
Adopting New Accounting Standards............ 210 159 259 195 (43) 103 36
Provision for Income Taxes (Benefit)........... 61 -- (2) (14) (280) (27) --
Distributions on USF&G-Obligated Mandatorily
Redeemable Preferred Capital Securities of
Subsidiary Trusts Holding Solely Junior
Subordinated Deferrable Interest Debentures
of USF&G, Net of Taxes....................... 9 -- -- -- -- -- --
Income From Continuing Operations Before
Cumulative Effect of Adopting New Accounting
Standards.................................... 140 159 261 209 237 130 36
Loss From Discontinued Operations.............. -- -- -- -- -- -- (7)
Income From Cumulative Effect of Adopting New
Accounting Standards......................... -- -- -- -- -- 38 --
Net Income..................................... 140 159 261 209 237 168 29
Preferred Stock Dividend Requirements.......... 2 14 20 28 46 48 48
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Available to Common
Shareholders................................. $ 138 $ 145 $ 241 $ 181 $ 191 $ 120 $ (19)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Income (Loss) From Continuing Operations Before
Cumulative Effect of Adopting New Accounting
Standards.................................... $ 1.20 $ 1.21 $ 2.05 $ 1.63 $ 2.00 $ 0.90 $ (0.14)
Loss From Discontinued Operations.............. -- -- -- -- -- -- (0.08)
Income From Cumulative Effect of Adopting New
Accounting Standards......................... -- -- -- -- -- 0.42 --
Net Income (Loss).............................. 1.20 1.21 2.05 1.63 2.00 1.32 (0.22)
Dividends Declared............................. 0.19 0.15 0.20 0.20 0.20 0.20 0.20
<CAPTION>
AS OF SEPTEMBER 30,
AS OF DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF FINANCIAL POSITION:
Total Investments.............................. $ 10,459 $ 9,857 $ 10,076 $ 11,107 $ 10,561 $ 11,474 $ 11,417
Total Assets................................... 14,935 14,527 14,407 14,651 13,980 14,481 13,242
Unpaid Losses, Loss Expenses and Policy
Benefits..................................... 9,818 9,648 9,584 9,816 9,962 10,343 9,460
Unearned Premiums.............................. 1,173 1,189 1,113 1,055 968 950 797
Corporate Debt................................. 500 530 477 591 586 574 574
Total Liabilities.............................. 12,759 12,761 12,338 12,667 12,539 12,925 11,942
USF&G-obligated mandatorily redeemable
preferred capital securities of subsidiary
trusts holding solely junior subordinated
deferrable interest debentures of USF&G...... 296 -- 100 -- -- -- --
Total Shareholders' Equity..................... 1,880 1,766 1,969 1,984 1,441 1,556 1,300
Statutory Surplus (USF&G Company).............. 1,500 1,310 1,374 1,341 1,621 1,577 1,498
</TABLE>
14
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF TITAN
The following table sets forth summary consolidated financial information
for each of the five years in the period ended December 31, 1996 which are
derived from the consolidated financial statements of Titan which have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
summary consolidated financial information for the nine-month periods ended
September 30, 1997 and September 30, 1996 are derived from unaudited condensed
consolidated financial statements. The table should be read in conjunction with
the consolidated financial statements, related notes and other financial
information incorporated herein by reference. The summary consolidated financial
information for the nine months ended September 30, 1997 and September 30, 1996
have been prepared on the same basis as the audited consolidated financial
statements of Titan and, in the opinion of Titan, reflect all adjustments
necessary for a fair presentation of such information. The following information
is not necessarily indicative of future operating results or financial position.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Premiums Earned........................ $ 143,291 $ 111,515 $ 152,452 $ 118,219 $ 90,786 $ 69,407 $ 46,402
Net Investment Income.................. 12,575 9,401 12,866 10,161 7,576 5,470 4,421
Other.................................. 9,033 5,674 8,095 3,423 2,546 6,745 4,999
--------- --------- --------- --------- --------- --------- ---------
Revenues Before Realized Gains
(Losses)........................... 164,899 126,590 173,413 131,803 100,908 81,622 55,822
Net Realized Gains (Losses)............ 543 650 883 39 (247) 855 584
--------- --------- --------- --------- --------- --------- ---------
Total Revenues....................... 165,442 127,240 174,296 131,842 100,661 82,477 56,406
--------- --------- --------- --------- --------- --------- ---------
Losses and Loss Expenses............... 92,504 70,171 95,087 72,443 52,439 39,822 26,838
Underwriting, Acquisition and Operating
Expenses............................. 54,287 40,872 56,683 42,988 34,999 32,007 23,473
Interest Expense....................... 2,510 1,177 1,827 1,125 376 521 388
Non-recurring Expenses................. 2,000 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Expenses....................... 151,301 112,220 153,597 116,556 87,814 72,350 50,699
--------- --------- --------- --------- --------- --------- ---------
Income Before Income Taxes and
Cumulative Effect of Adopting New
Accounting Standard.................. 14,141 15,020 20,699 15,286 12,847 10,127 5,707
Provision for Income Taxes............. 4,250 4,718 6,518 4,716 3,784 3,341 1,666
--------- --------- --------- --------- --------- --------- ---------
Income Before Cumulative Effect of
Adopting New Accounting Standards.... 9,891 10,302 14,181 10,570 9,063 6,786 4,041
Cumulative Effect of Adopting New
Accounting Standard.................. -- -- -- -- -- (52) --
--------- --------- --------- --------- --------- --------- ---------
Net Income Available to Common
Shareholders......................... $ 9,891 $ 10,302 $ 14,181 $ 10,570 $ 9,063 $ 6,734 $ 4,041
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Income Before Cumulative Effect of
Adopting New Accounting Standard..... $ 0.95 $ 1.02 $ 1.40 $ 1.27 $ 1.11 $ 1.09 $ 0.75
Cumulative Effect of Adopting New
Accounting Standards................. -- -- -- -- -- (0.01) --
Net Income............................. 0.95 1.02 1.40 1.27 1.11 1.08 0.75
Cash Dividends Paid.................... 0.23 0.20 0.29 0.26 0.23 0.11 --
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION:
Total Investments...................... $ 259,977 $ 216,072 224,793 193,858 $ 132,479 $ 125,128 $ 98,214
Total Assets........................... 424,906 351,361 361,955 307,087 219,898 189,603 144,845
Unpaid Losses and Loss Expenses........ 161,975 141,291 141,871 122,811 98,405 76,514 60,717
Unearned Premiums...................... 67,432 53,967 55,333 45,178 35,219 32,255 27,428
Corporate Debt......................... 24,849 22,101 24,024 12,319 2,614 3,139 6,763
Premium Finance Debt................... 32,721 13,250 15,750 7,000 3,000 335 1,575
Total Liabilities...................... 303,519 243,431 250,087 206,603 153,343 123,549 115,012
Total Shareholders' Equity............. 121,387 107,930 111,868 100,484 66,555 66,054 29,833
Statutory Surplus
(Titan Indemnity Co.)................ 82,542 78,418 80,325 58,812 41,321 36,891 20,238
</TABLE>
16
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain income, dividend and book value per
share data for USF&G and Titan on historical and pro forma bases. The pro forma
income data give effect to the Merger using the purchase method of accounting.
The pro forma dividend payments assume dividend payments consistent with USF&G's
historical payments. Book value data for all pro forma presentations is based
upon the number of outstanding shares of USF&G Common Stock, adjusted to include
the shares of USF&G Common Stock to be issued in connection with the Merger. The
information set forth below should be read in conjunction with the historical
consolidated financial statements of USF&G and Titan, including the notes
thereto, incorporated by reference in this Proxy Statement/Prospectus.
The pro forma data do not reflect any cost savings and other synergies or
merger related expenses anticipated by USF&G management as a result of the
Merger.
HISTORICAL
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------------- ----------------------
USF&G TITAN USF&G TITAN
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Book Value Per Share.......................................................... $ 16.93 $ 12.05 $ 15.48 $ 11.19
Cash Dividends Declared Per Share............................................. 0.19 0.23 0.20 0.29
Income per share from continuing operations:
Primary..................................................................... 1.20 0.95 2.05 1.40
Fully Diluted............................................................... 1.16 0.95 1.93 1.40
</TABLE>
PRO FORMA
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------------------------------
$17.46 $21.20
$24.94
0.61458 0.50618
0.46516 TITAN TITAN
USF&G STOCK PRICE USF&G USF&G PRO FORMA USF&G PRO FORMA
PRO FORMA PRO FORMA COMBINED PRO FORMA COMBINED
EXCHANGE RATIO COMBINED(1) COMBINED(1) EQUIVALENT(2) COMBINED(1) EQUIVALENT(2)
------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Book Value Per Share....... $ 17.10 $ 7.95 $ 16.81 $ 10.33 $ 16.97 $ 8.59
Cash Dividends Declared Per
Share..................... 0.19 0.09 0.19 0.12 0.19 0.10
Income per share from
continuing operations:
Primary.................. 1.18 0.55 1.17 0.72 1.18 0.60
Fully Diluted............ 1.14 0.53 1.13 0.69 1.14 0.58
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------------------------------
$32.42 $20.59
$28.68
0.38466 0.52103
0.43481 TITAN TITAN
USF&G STOCK PRICE USF&G USF&G PRO FORMA USF&G PRO FORMA
PRO FORMA PRO FORMA COMBINED PRO FORMA COMBINED
EXCHANGE RATIO COMBINED(1) COMBINED(1) EQUIVALENT(2) COMBINED(1) EQUIVALENT(2)
------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Book Value Per Share....... $ 17.22 $ 7.49 $ 17.29 $ 6.65 $ 16.95 $ 8.83
Cash Dividends Declared Per
Share..................... 0.19 0.08 0.19 0.07 0.19 0.09
Income per share from
continuing operations:
Primary.................. 1.17 0.51 1.18 0.45 1.18 0.61
Fully Diluted............ 1.14 0.50 1.14 0.44 1.14 0.59
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------------------------
$17.46 $21.20
$24.94
0.61458 0.50618
0.46516 TITAN TITAN
USF&G STOCK PRICE USF&G USF&G PRO FORMA USF&G PRO FORMA
PRO FORMA PRO FORMA COMBINED PRO FORMA COMBINED
EXCHANGE RATIO COMBINED(1) COMBINED(1) EQUIVALENT(2) COMBINED(1) EQUIVALENT(2)
------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Book Value Per Share (3)... $ 15.26 $ 7.10 $ 15.01 $ 9.22 $ 15.14 $ 7.66
Cash Dividends Declared Per
Share..................... 0.20 0.09 0.20 0.12 0.20 0.10
Income per share from
continuing operations:
Primary.................. 2.01 0.93 1.99 1.22 2.01 1.02
Fully Diluted............ 1.90 0.88 1.88 1.16 1.89 0.96
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
$32.42 $20.59
$28.68
0.38466 0.52103
0.43481 TITAN TITAN
USF&G STOCK PRICE USF&G USF&G PRO FORMA USF&G PRO FORMA
PRO FORMA PRO FORMA COMBINED PRO FORMA COMBINED
EXCHANGE RATIO COMBINED(1) COMBINED(1) EQUIVALENT(2) COMBINED(1) EQUIVALENT(2)
------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Book Value Per Share (3)... $ 15.36 $ 6.68 $ 15.43 $ 5.94 $ 15.14 $ 7.66
Cash Dividends Declared Per
Share..................... 0.20 0.09 0.20 0.08 0.20 0.10
Income per share from
continuing operations:
Primary.................. 2.00 0.87 2.01 0.77 2.00 1.04
Fully Diluted............ 1.89 0.82 1.90 0.73 1.89 0.98
</TABLE>
- ------------------------------
(1) Exchange Ratios of 0.46516, 0.61458, 0.50618, 0.43481, 0.38466 and 0.52103
are assumed for purposes of determining the number of shares of USF&G Common
Stock outstanding on a pro forma basis. The assumed Exchange Ratios are
based on assumed Average Stock Prices of $24.94, $17.46, $21.20, $28.68,
$32.42 and $20.59, respectively. The actual Exchange Ratio and Average Stock
Price may be different from those assumed for these purposes and will be
determined based on the Average Stock Price of USF&G Common Stock on the
NYSE during the Pricing Period. The exchange ratios are based on the
intended consideration ratio of 50% cash and 50% USF&G Common Stock.
(2) Titan pro forma combined equivalents are determined by multiplying pro forma
combined per share amounts for book value, cash dividends and income (loss)
from continuing operations on a primary and fully diluted basis by the
assumed Exchange Ratio of 0.46516, 0.61458, 0.50618, 0.43481, 0.38466 and
0.52103 based on an Average Stock Prices of $24.94, $17.46, $21.20, $28.68,
$32.45 and $20.59, respectively.
(3) Book Value Per Share at December 31, 1996, was computed utilizing a pro
forma goodwill adjustment which was calcualted assuming the transaction was
consummated at September 30, 1997.
18
<PAGE>
COMPARATIVE MARKET PRICE DATA
USF&G Common Stock is listed on the NYSE under the symbol "FG." Titan Common
Stock is listed on the NYSE under the symbol "TH." The following table sets
forth, for the calendar quarters indicated, the reported high and low sale
prices of USF&G Common Stock and Titan Common Stock, as reported on the NYSE
Composite Transactions Tape, and the dividends declared per share on USF&G
Common Stock and Titan Common Stock. Titan Common Stock prices and dividends
declared have been restated to reflect stock dividends paid in 1995, 1996 and
1997.
<TABLE>
<CAPTION>
USF&G COMMON STOCK TITAN COMMON STOCK
-------------------------------- ------------------------------------
DIVIDENDS DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
-------- ---------- ------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter............... $ 16 1/8 $ 13 $0.05 $ 9 15/16 $ 8 3/32 $0.0540
Second Quarter.............. 14 11 11/16 0.05 8 41/64 6 29/32 0.0540
Third Quarter............... 14 12 1/8 0.05 8 13/64 7 15/64 0.0605
Fourth Quarter.............. 14 5/8 12 3/8 0.05 9 11/64 7 11/32 0.0605
1995
First Quarter............... 15 1/2 13 3/8 0.05 9 1/16 8 13/64 0.0605
Second Quarter.............. 17 1/4 13 3/4 0.05 11 7/64 8 17/32 0.0605
Third Quarter............... 19 1/2 15 0.05 14 9/32 10 49/64 0.0680
Fourth Quarter.............. 19 1/2 16 0.05 14 11/64 11 51/64 0.0680
1996
First Quarter............... 17 1/2 14 1/4 0.05 12 45/64 11 9/16 0.0680
Second Quarter.............. 16 5/8 15 0.05 15 19/32 12 1/8 0.0680
Third Quarter............... 18 5/8 15 0.05 14 17/32 12 31/32 0.0762
Fourth Quarter.............. 21 3/4 17 1/4 0.05 15 23/32 13 37/64 0.0762
1997
First Quarter............... 21 3/4 21 3/8 0.05 17 1/32 15 23/64 0.0762
Second Quarter.............. 24 1/8 23 3/4 0.07 24 1/4 15 23/32 0.0762
Third Quarter............... 25 3/16 21 15/16 0.07 25 21 1/8 0.0800
Fourth Quarter (through
November 14, 1997)........ 23 20 1/16 0.07 21 7/8 19 7/8 0.0800
</TABLE>
On July 29, 1997, the trading day prior to USF&G's initial offer to Titan,
the last reported sale prices of USF&G Common Stock and Titan Common Stock were
$24.9375 and $24, respectively, and the value of the consideration per share of
Titan Common Stock was $23.20.
On August 7, 1997, the last trading day prior to the public announcement of
the Merger, the last reported sale prices of USF&G Common Stock and Titan Common
Stock were $23.375 and $22.875, respectively, and the value of the consideration
per share of Titan Common Stock was $22.47.
On November 14, 1997, the last reported sale prices of USF&G Common Stock
and Titan Common Stock were $20.0625 and $20.9375, respectively, and the value
of the consideration per share of Titan Common Stock was $21.46.
On November 14, 1997, there were approximately 966 holders of record of
Titan Common Stock.
USF&G has paid cash dividends on the USF&G Common Stock in every quarter
since it was formed as a holding company in 1981. While USF&G intends to
continue to pay dividends, the decision to do so is made quarterly by the USF&G
Board and is dependent upon the earnings of USF&G, management's assessment of
future capital needs and other factors. As a holding company, USF&G's ability to
pay dividends to its stockholders is dependent upon dividends from its
subsidiaries. The ability of its principal subsidiary, USF&G Company, to
distribute dividends is subject to regulation under Maryland law. See "Risk
Factors--Holding Company Structure; Dividend Restrictions."
19
<PAGE>
RISK FACTORS
VALUE AND COMPOSITION OF THE MERGER CONSIDERATION
The consideration to be received by Titan stockholders in the Merger will be
based upon a formula and cannot be precisely determined prior to the Effective
Time. For purposes of determining the aggregate consideration to be received by
each Titan stockholder, the Standard Exchange Ratio will not change so long as
the Average Stock Price of USF&G Common Stock is neither greater than $28.68 nor
less than $21.20 during the Pricing Period and the value of the consideration
received therefore will vary with the price of USF&G Common Stock within these
price ranges (however, the Standard Exchange Ratio may change for purposes of
allocating equal amounts of cash and USF&G Common Stock). To the extent that the
Average Stock Price exceeds $28.68 or is less than $21.20 (but not less than
$17.46), the Standard Exchange Ratio will be adjusted and the number of shares
of USF&G Common Stock received by a person making a Standard Election or a Stock
Election will be adjusted. Further, changes in the price of USF&G Common Stock
will alter the allocation of the consideration between cash and stock to
maintain a 50% stock and 50% cash relationship. In order to maintain the 50%
stock and 50% cash relationship required by the Merger Agreement, persons making
Stock Elections may be prorated and not receive 100% stock consideration,
persons making Cash Elections may be prorated and may not receive 100% cash
consideration, and persons making Standard Elections may be prorated in a manner
that will result in their receiving more or less than 50% stock consideration.
Accordingly, the exact allocation and value of the consideration received in the
Merger will not be finally determined until after the Effective Time.
Due to the foregoing, although the value of the cash and stock consideration
to be provided by USF&G in connection with the Merger was $23.20 per share based
on the $24.9375 per share closing price of USF&G Common Stock on July 29, 1997,
the day before USF&G made its original offer to Titan, the actual value of the
consideration received is likely to vary from this number. Had the Merger been
consummated on November 17, 1997, the Average Stock Price would have been
$20.59, and stockholders would have received total consideration of $21.46 per
share, and stockholders making the Standard Election would have received $10.73
in cash and 0.52103 of a share of USF&G Common Stock per share of Titan Common
Stock. The foregoing assumes that no prorations were required in order to
maintain the 50% stock and 50% cash relationship required by the Merger
Agreement. Adjustments required as a result of any such proration will not alter
the total value of the consideration received by Titan shareholders, but could
alter the allocation of that consideration between stock and cash.
Furthermore, although the consideration to be received by holders of Titan
Common Stock will be based on the Average Stock Price of USF&G Common Stock over
the Pricing Period, the market price of USF&G Common Stock will fluctuate and,
on the date of the Effective Time, the date of receipt of shares of USF&G Common
Stock by holders of Titan Common Stock, and the date on which such shares of
USF&G Common Stock are eventually sold, such market price may be more or less
than the Average Stock Price of USF&G Common Stock over the Pricing Period.
UNCERTAINTY OF THE MERGER CONSIDERATION
Based on the "--Value and Composition of the Merger Consideration" discussed
immediately above, Titan stockholders will not know the amount or value of the
consideration they will receive in the Merger at the time they vote on the
Merger at the Special Meeting and will not know the allocation of the
consideration to be received until all Election Forms have been received.
RISKS RELATED TO USF&G'S OPERATIONS
Titan operates two specialty property-casualty insurance companies and a
premium finance company. USF&G and its subsidiaries write multiple lines of
business, including commercial and personal property, auto, inland marine,
workers' compensation, general and umbrella liability, fidelity/surety,
reinsurance, life and annuities. USF&G Company conducts business in all 50
states, the District of Columbia and outside of
20
<PAGE>
the United States. As a result, USF&G Company is subject to certain reserving,
catastrophe, reinsurance, rating, investment, regulatory and other risks which
are different from those to which Titan is subject. In addition, each USF&G
segment is subject to specific risks which may be different or broader than the
risks faced by Titan's specialized lines of business. For example, the
Commercial Insurance Group's focus on specialized market segments and excess &
surplus lines requires more specialized underwriting and entails greater risks
than other segments. The Commercial Insurance Group's ability to achieve premium
growth may be difficult in the near future given the intense price competition
in commercial lines and changes in its book of business, field structure and
distribution systems.
ADEQUACY OF PROPERTY-CASUALTY LOSS RESERVES
USF&G Company maintains property and casualty loss reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses with
respect to reported claims and claims incurred but not yet reported. The process
of estimating the liability for unpaid losses and loss expenses is inherently
judgmental and is influenced by factors which are subject to significant
variation. Possible sources of variation include changing rates of inflation as
well as changes in other economic conditions, the legal system and internal
claims settlement practices. In many cases, significant periods of time may
lapse between the occurrence of an insured event, the reporting of a claim to
USF&G Company, and USF&G Company's final settlement of the claim. While USF&G
Company reports a single amount as the estimate for unpaid loss and loss
expenses as of each valuation date, the reported reserves should be considered
the best estimate from a range of possible outcomes. It is unlikely that future
losses and loss expenses will develop exactly as projected and they may in fact
vary significantly from projections.
The level of loss reserves for both current and prior years' claims is
continually monitored and adjusted for changing economic, social, judicial and
legislative conditions, as well as for changes in historical trends as
information regarding such conditions and actual claims develops. Establishing
appropriate reserves, particularly with respect to environmental, asbestos and
other long-term exposure claims, is highly judgmental and an inherently
uncertain process. It is possible that, as conditions change and claims
experience develops, additional reserves may be required in the future. There
can be no assurance that such adjustments will not have a material adverse
effect on USF&G's financial condition or results of operations.
The inherent uncertainties of estimating insurance reserves are generally
greater for liability coverages (particularly workers' compensation,
environmental and product liability) than for property coverages, due to the
longer period of time that elapses before a definitive determination of ultimate
loss can be made. These estimating uncertainties are particularly significant
for mass tort claims, which include environmental, product liability, other
long-term exposures such as asbestos and other types of exposures where multiple
claims relate to a similar cause of loss. Although establishment of reserves for
nonstandard private passenger automobile and public entity insurers such as
Titan Auto is uncertain, establishing reserves for many of the liabilities
underwritten by multiline insurers such as USF&G Company generally involves more
judgmental factors and risks, since these liabilities may involve, among other
factors, multiple products, higher coverage limits, longer tails, and claims
arising from environmental, product liability, workers' compensation, and
general liability coverages which may be more difficult to estimate or resolve.
POTENTIAL LOSSES FROM CATASTROPHES
Property-casualty insurers are subject to claims arising out of
catastrophes, which may have a significant impact on their results of operations
and financial condition. USF&G Company has experienced, and can be expected in
the future to experience, material catastrophe losses. Catastrophes can be
caused by various events including hurricanes, windstorms, earthquakes, floods,
hail, winter storms, explosions, fires and civil disorders, and the incidence
and severity of catastrophes are inherently unpredictable. The extent of losses
from a catastrophe is a function of both the total amount of insured
21
<PAGE>
exposure in the area affected by the event and the severity of the event. Many
catastrophes are restricted to relatively small geographical areas; however,
earthquakes, hurricanes and other storms, in particular, may produce significant
damage in large, heavily populated areas. Applicable accounting principles do
not permit an insurer to establish reserves for catastrophes or other losses
before they actually occur. The multiple lines of business written by USF&G
Company, particularly property and excess & surplus insurance and reinsurance
coverage both in and outside of the United States, make USF&G Company more
subject to claims arising out of catastrophes than a specialty insurer such as
Titan.
REINSURANCE CONSIDERATIONS
Reinsurance is used to limit the amount of risk retained under policies
written. The availability and cost of reinsurance are subject to prevailing
market conditions, both in terms of price and available capacity, which can
affect USF&G's business volume and profitability. USF&G also is subject to
credit risk with respect to its ability to recover amounts due from its
reinsurers, since the ceding of risk to its reinsurers does not relieve USF&G of
liability to its insureds. There can be no assurance that USF&G's reinsurance
programs will effectively limit its overall exposure for policy claims.
CYCLICALITY OF PROPERTY-CASUALTY INSURANCE INDUSTRY
Historically, the property-casualty insurance industry has been cyclical,
generally characterized by extended periods of overcapacity that adversely
affect premium rates, followed by periods of undercapacity resulting in higher
rates. Premium rate levels are affected by the availability of insurance
coverage which is generally affected by the level of surplus in the industry.
Increases in surplus have generally been accompanied by increased price
competition among property-casualty insurers. The industry's profitability can
be affected significantly by volatile and unpredictable developments, including
catastrophes, interest rate fluctuations and other changes in the investment
environment which affect market prices of and income from insurance company
investments, inflationary pressures that affect the size of losses, and judicial
decisions affecting insurers' liabilities. The demand for property-casualty
insurance can also vary significantly, generally rising as the overall level of
economic activity increases and falling as such activity decreases. USF&G cannot
predict if or when the general market conditions for the property-casualty
industry will change. The property/casualty industry, particularly with respect
to commercial insurance, has been subject to an extended period of intense price
competition.
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
Both USF&G and Titan are defined, for purposes of state laws, as "insurance
holding companies" and they are dependent upon the ability of their insurance
subsidiaries to pay dividends to them (or to intermediate parents within the
holding company structure of which they are a part) to meet their obligations
and cover their expenses. Insurance companies are limited by law to the payment
of dividends out of surplus earnings above a specified level, generally the
greater of ten percent of the insurer's surplus as regards its policyholders or,
under certain conditions, the prior year's statutory net income. Under the
Maryland Insurance Code, Maryland insurance subsidiaries, such as USF&G Company
and F&G Life, must provide the Maryland Insurance Commissioner (the "Insurance
Commissioner") with not less than thirty days' prior written notice before
payment of an "extraordinary dividend" to its holding company. "Extraordinary
dividends" are dividends which, together with any dividends paid during the
immediately preceding twelve-month period, would be in excess of ten percent of
the subsidiary's statutory policyholders' surplus as of the prior calendar year
end. Extraordinary dividends may not be paid until either such thirty-day period
has expired and the Insurance Commissioner has not disapproved the payment or
the Insurance Commissioner has approved the payment within such period. In
addition, ten days' prior notice of any other dividend must be given to the
Insurance Commissioner prior to payment, and the Insurance Commissioner has the
right to prevent payment of such dividend if it determines that such payment
could
22
<PAGE>
impair the insurer's surplus or financial condition. Dividends of up to $137
million are available for payment from USF&G Company to USF&G during 1997
without being deemed extraordinary dividends.
REGULATION
USF&G's insurance subsidiaries are subject to extensive regulatory oversight
in the jurisdictions where they do business. This regulatory structure, which
generally operates through state insurance departments, involves the licensing
of insurance companies and agents, limitations on the nature and amount of
certain investments, restrictions on the amount of single insured risks,
approval of policy forms and rates, setting of capital and deposit requirements,
limitations on dividends, limitations on the ability to withdraw from certain
lines of business such as personal lines and workers' compensation, and other
matters. State insurance departments routinely conduct financial and market
conduct examinations and assess fines for violations of the myriad state
regulations affecting the conduct of the insurance business.
Some state regulations have the effect of restricting the ability of
insurance companies to change their operations or causing insurance companies to
engage in certain business practices that are no longer profitable. For example,
most states require insurers to provide coverage for less desirable risks
through participation in mandatory programs. USF&G's participation in assigned
risk pools and similar plans, mandated now or in the future, creates and is
expected to create downward pressure on earnings. In addition, some states have
adopted legislation or regulations restricting or otherwise limiting an
insurer's ability to withdraw from certain lines of business. Such restrictions
are most often found in personal lines and workers' compensation insurance. They
include prohibitions on mid-term cancellations and limiting reasons based upon
which an insurer may nonrenew policies, requirements for amendment to
underwriting standards, rates and policy forms to be approved by state
regulators, specifications of a maximum percentage of a book of business which
may be nonrenewed within the state within any twelve-month period, and
prohibitions on exiting a single line of business within a state (thus requiring
an insurer to either continue an unprofitable line or give up all lines of
business and withdraw from a state entirely). Such restrictions limit USF&G's
ability to manage its exposure to unprofitable lines and adversely affects
earnings to the extent USF&G is required to continue writing unprofitable
business.
From time to time the insurance regulatory framework has been the subject of
increased scrutiny. At any one time there may be numerous initiatives within
state legislatures or state insurance departments to alter and, in many cases,
increase state authority to regulate insurance companies and their businesses.
It is not possible to predict the future impact of increasing regulation on
USF&G's operations. In addition, various proposals have been considered on the
national level affecting the regulation of insurance companies. No reliable
prediction can be made at this time as to the outcome of any of these proposals
or the effect they may have on USF&G.
A.M. BEST COMPANY RATINGS AND REVIEW
Insurance ratings are important to certain consumers of property/casualty
coverages, particularly in surety, fidelity and certain specialty and
reinsurance operations. A.M. Best Company's ratings express an overall opinion
of an insurance company's ability to meet its obligations to policyholders. A.M.
Best Company's ratings are divided into "secure" and "vulnerable" categories.
Ratings in the secure category range from A++ to B+ and ratings in the
vulnerable category range from B to F and S for rating suspended. A and A-
ratings are assigned to companies which have excellent financial strength,
operating performance and market profile and indicate that a company has a very
strong ability to meet its ongoing obligations to policy holders, although the
ratings are not intended and should not be construed as an indication of the
attractiveness, stability or performance of a company's equity securities. As a
matter of practice, A.M. Best Company places companies which are being acquired
on review status whenever an acquisition is announced. Such rating reviews
reflect the uncertainty created when an acquisition is announced and normally
are not lifted until the acquisition is completed. In accordance with this
practice A.M. Best Company has placed its A- ratings of Titan Indemnity and
Titan Insurance under review in
23
<PAGE>
connection with the Merger. Neither Titan nor USF&G has any reason to believe
that such ratings will change as a result of the Merger. There can be no
assurance that Titan and USF&G will maintain their current ratings.
LEGAL PROCEEDINGS
USF&G's insurance subsidiaries are routinely engaged in litigation in the
normal course of their business, including defending claims for punitive
damages. As insurers, they defend third-party claims brought against their
insureds, as well as defending themselves against first-party and coverage
claims. Additionally, contingencies may arise from insurance regulatory matters
and regulatory litigation matters.
In the opinion of management of USF&G, such litigation and the litigation
described in Note 14, "Legal Contingencies" of the Notes to USF&G's Consolidated
Financial Statements incorporated herein by reference, is not expected to have a
material adverse effect on USF&G's consolidated financial position, although it
is possible that the results of operations in a particular quarter or annual
period would be materially affected by an unfavorable outcome.
COMPETITION
Property-casualty insurance: The property-casualty insurance industry is
highly competitive with over 2,400 companies nationwide. These insurers are not
only stock companies, but also mutual companies and other underwriting
organizations. USF&G Company competes with other property-casualty insurance
companies whose products are distributed through national, regional and local
independent agencies, direct sales and brokers. Consumers may also use
self-insurance, which includes captive insurance subsidiaries. Pricing is a
primary means of competition in the property/casualty industry. The industry is
currently in a period of significant price competition, which adversely affects
USF&G Company's profitability. Availability and quality of products, quality and
speed of service (including claims service), financial strength, distribution
systems and technical expertise are also important elements of competition. In
personal and other lines offered by USF&G Company, significant price competition
is experienced from direct-writing companies that do not use independent agents
and generally have lower policy acquisition costs.
Life Insurance: USF&G's life insurance subsidiaries operate in a competitive
environment, with approximately 1,200 companies nationwide in the industry
including stock and mutual companies. In the life insurance industry, interest
crediting rates, underwriting philosophy, policy features, financial stability
and service quality are important competitive factors. F&G Life's products
compete not only with those offered by other life insurance companies, but also
with other income accumulation-oriented products offered by other financial
institutions. The life insurance industry has experienced considerable
competitive pressure in recent periods as a result of fluctuating interest
rates.
THE SPECIAL MEETING
GENERAL; DATE AND PLACE OF THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to holders of Titan
Common Stock in connection with the solicitation of proxies by the Titan Board
for use at the Special Meeting to be held at its principal executive offices,
located at 2700 N.E. Loop 410, San Antonio, Texas 78217 at 10:00 a.m. on Monday,
December 22, 1997 and at any adjournment or postponement thereof.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of Titan on or about November 18, 1997.
24
<PAGE>
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, holders of Titan Common Stock will consider and vote
upon a proposal to approve the Merger Proposal.
The Titan Board has unanimously determined that the Merger is fair to, and
in the best interests of, Titan stockholders, has unanimously approved the
Merger Proposal, and unanimously recommends that Titan's stockholders vote FOR
the approval of the Merger Proposal. See "The Merger--Reasons of Titan for the
Merger; Recommendation of the Titan Board."
STOCKHOLDERS ENTITLED TO VOTE; QUORUM; REQUISITE APPROVAL
The Titan Board has fixed November 21, 1997 as the Record Date for the
determination of the Titan stockholders entitled to notice of, and to vote at,
the Special Meeting. Accordingly, only holders of record of Titan Common Stock
on the Record Date will be entitled to notice of, and to vote at, the Special
Meeting. As of November 14, 1997, there were 10,075,370 shares of Titan Common
Stock outstanding and entitled to vote, which shares were held by approximately
966 holders of record. Each holder of record of Titan Common Stock on the Record
Date is entitled to cast one vote per share, exercisable in person or by
properly executed proxy, at the Special Meeting. In addition, Titan expects an
additional 27,825 shares of restricted Titan Common Stock granted on April 30,
1997 to be outstanding and entitled to vote as of the date of the Special
Meeting. The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of Titan Common Stock entitled to vote
at the Special Meeting is necessary to constitute a quorum at the Special
Meeting.
The consummation of the Merger is subject to certain conditions including,
among other things, the approval by the affirmative vote of at least two-thirds
of the outstanding shares of Titan Common Stock entitled to vote, as well as the
approval of certain regulatory agencies. Mark E. Watson, Jr., the Chairman,
President and Chief Executive Officer of Titan, who owns or controls
approximately 25.6% of the outstanding shares of Titan Common Stock, has agreed
to vote his shares of Titan Common Stock for approval of the Merger Proposal.
Titan's other officers and directors, who in the aggregate beneficially own less
than 1% of the outstanding shares of Titan Common Stock, have not indicated how
they intend to vote their shares of Titan Common Stock. USF&G has purchased
650,000 shares or 6.45% of the outstanding shares of Titan Common Stock which it
intends to vote in favor of the Merger Proposal.
AT THE SPECIAL MEETING, ALTHOUGH ABSTENTIONS AND BROKER NON-VOTES WILL NOT
BE COUNTED FOR PURPOSES OF DETERMINING THE PRESENCE OF A QUORUM, ABSTENTIONS AND
BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER PROPOSAL
WITH RESPECT TO DETERMINING WHETHER THE PROPOSAL TO APPROVE THE MERGER PROPOSAL
HAS RECEIVED THE REQUISITE NUMBER OF AFFIRMATIVE VOTES.
PROXIES
This Proxy Statement/Prospectus is being furnished to Titan stockholders in
connection with the solicitation of proxies by and on behalf of the Titan Board
for use at the Special Meeting.
All shares of Titan Common Stock which are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not revoked, will be voted at the Special
Meeting in accordance with the instructions indicated on such proxies. IF NO
INSTRUCTIONS ARE INDICATED (OTHER THAN IN THE CASE OF BROKER NON-VOTES), SUCH
PROXIES WILL BE VOTED "FOR" APPROVAL OF THE MERGER PROPOSAL. The grant of a
proxy will also confer discretionary authority on the persons named in the proxy
to vote on matters incidental to the conduct of the Special Meeting.
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If a motion to adjourn the Special Meeting to another time and/or place
(including, without limitation, for the purpose of soliciting additional
proxies) is properly presented for consideration at the Special Meeting, the
persons named in the enclosed forms of proxy and acting thereunder will have
discretion to vote on such matter in accordance with their best judgment. Shares
represented by proxies which direct a vote against the approval of the Merger
Proposal will not be voted by such persons in favor of adjourning the Special
Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (a) filing
with the Secretary of Titan at or before the taking of the vote at the Special
Meeting a written notice of revocation bearing a later date than the proxy, (b)
duly executing a later dated proxy relating to the same shares and delivering it
to the Secretary of Titan before the taking of the vote at the Special Meeting,
or (c) attending the Special Meeting and voting in person (although attendance
at the Special Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Titan Holdings, Inc., 2700 N.E. Loop 410, Suite 500, San
Antonio, Texas 78217, Attention: Secretary, or hand delivered to the Secretary
of Titan, at or before the taking of the vote of the Special Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement/ Prospectus, will be borne by Titan; provided that
USF&G has agreed to pay one-half of the printing expenses incurred in connection
with this Proxy Statement/Prospectus. In addition to solicitation by use of the
mails, proxies may be solicited by directors, officers and employees of Titan in
person or by telephone, telegram, facsimile or other means of communication.
Such directors, officers and employees will not be additionally compensated for,
but may be reimbursed for reasonable out-of-pocket expenses in connection with,
such solicitation. Titan has retained MacKenzie Partners, Inc., a proxy
solicitation firm, for assistance in connection with the Special Meeting at a
cost of approximately $5,000 plus reasonable out-of-pocket expenses.
Arrangements will be made with custodians, nominees and fiduciaries for the
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and Titan will reimburse
such custodians, nominees and fiduciaries for their reasonable expenses incurred
in connection therewith.
TITAN STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
APPRAISAL RIGHTS
The following provides a discussion of the material provisions of the law
pertaining to appraisal rights under the Texas Business Corporation Act
("TBCA"). Holders of Titan Common Stock have the right to dissent from the
Merger and to receive payment of the fair value for their shares as set forth in
Sections 5.11 and 5.12 of the TBCA (the "Appraisal Statute"). This discussion is
not a complete statement of the law and is qualified in its entirety by the full
text of the Appraisal Statute which is presented in its entirety as Annex C to
this Proxy Statement/Prospectus.
A holder of Titan Common Stock who desires to dissent and who intends to do
so must file a written objection to the proposed Merger, setting out the
stockholder's right to dissent and the stockholder's address should the Merger
be effective. Such objection must be filed prior to the Special Meeting. If the
proposed Merger is approved by the requisite vote and if such stockholder does
not vote, either in person or by proxy, in favor of the Merger, and has so filed
the written objection, then within ten days of the Effective Time the
corporation surviving the Merger (the "Surviving Corporation") will deliver or
mail to the stockholder a written notice that the Merger was effected (the
"Merger Notice"). The stockholder may then demand payment for the fair value of
his or her shares as of the day prior to the date on which the vote was taken
approving the Merger (the "Stockholder's Demand"). Such Stockholder's Demand
must be in writing, must specify the number of shares of Titan Common Stock
owned by such stockholder, the stockholder's estimate of the fair value of the
Titan Common Stock owned by the stockholder and must be
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filed with the Surviving Corporation within ten days from the delivery or
mailing of the Merger Notice. Any otherwise dissenting stockholder who fails to
make such demand within such period or who votes for the Merger shall be
conclusively presumed to have consented to the Merger and shall be bound by the
terms thereof.
A PROXY MARKED "AGAINST" THE MERGER PROPOSAL WILL NOT BE DEEMED WRITTEN
NOTICE OF OBJECTION TO THE MERGER. A STOCKHOLDER WHO WISHES TO DISSENT FROM THE
MERGER MUST PROVIDE A SEPARATE WRITTEN NOTICE OF OBJECTION PRIOR TO THE SPECIAL
MEETING, MUST NOT VOTE "FOR" THE MERGER PROPOSAL, AND MUST MAKE WRITTEN DEMAND
FOR PAYMENT OF THE FAIR VALUE OF HIS OTHER SHARES WITHIN TEN DAYS AFTER
RECEIVING THE MERGER NOTICE. A PROXY MARKED "AGAINST" OR "ABSTAIN" OR A
STOCKHOLDER'S FAILURE TO VOTE WITH RESPECT TO THE MERGER PROPOSAL WILL SUFFICE
AS NOT VOTING IN FAVOR OF THE MERGER PROPOSAL.
Within twenty days of receiving the Stockholder's Demand, the Surviving
Corporation will deliver or mail a written notice to the stockholder either (i)
agreeing to pay the amount set forth in the Stockholder's Demand within ninety
days after the Effective Time of the Merger upon surrender of the certificate or
certificates representing such shares or (ii) offering to pay the Surviving
Corporation's estimate of the fair value of the stockholder's shares within
ninety days after the Effective Time of the Merger upon surrender of the
certificate or certificates representing such shares.
If within sixty days after the Effective Time, agreement as to the fair
value of said shares is not reached between the dissenting stockholder and the
Surviving Corporation, then the dissenting stockholder or the Surviving
Corporation may, within an additional sixty days after the expiration of such
sixty-day period, file a petition in any court of competent jurisdiction within
the County of Bexar, Texas, asking for a finding and determination of the fair
value of such shares, together with interest thereon beginning ninety-one days
after the Effective Time until the date of such judgment. The judgment shall be
payable only upon and simultaneously with the surrender to the Surviving
Corporation of the certificate or certificates representing said shares. Upon
the payment of the agreed-upon fair value or the judgment, the dissenting
stockholder shall cease to have any interest in such shares.
Unless the dissenting stockholder shall file such petition within said
sixty-day period, such stockholder and all persons claiming under him shall be
conclusively presumed to have approved and ratified the Merger and shall be
bound by the terms thereof. Should a dissenting stockholder fail to comply with
any of the requirements of the Appraisal Statute, the stockholder will be deemed
to have elected the Cash Consideration which will be paid upon surrender to the
Surviving Corporation of the certificate or certificates representing said
shares.
The foregoing does not purport to be a complete statement of the procedures
to be followed by stockholders desiring to exercise appraisal rights and, in
view of the fact that exercise of such rights requires strict adherence to the
relevant provisions of the TBCA, stockholders who desire to exercise appraisal
rights are advised to review with care all applicable provisions of law and to
obtain legal counsel concerning proper compliance therewith.
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THE MERGER
BACKGROUND OF THE MERGER
Since Titan's initial public offering in July 1993, Titan's management has
regularly reviewed Titan's business strategy and prospects. In the course of
doing so, it has considered possible alliances, business combinations and
transactions with various industry participants, including companies both
smaller and larger than Titan. Titan's management has reported on such matters
from time to time at meetings of Titan's Board. Mark E. Watson, Jr., Titan's
Chairman, President and Chief Executive Officer, and E. B. Lyon III, a director
of and financial advisor to Titan, have, individually and together, met from
time to time with various individuals and entities regarding possible
transactions. No agreements with respect to any such transactions were ever
reached. In addition, Mr. Watson, Jr. has from time to time explored
opportunities to sell all or a portion of his shares of Titan Common Stock.
On March 3, 1997, Mr. Watson, Jr. and Mr. Lyon met with representatives of a
subsidiary of a Fortune 50 company (the "Strategic Buyer") with which Titan had
a pre-existing business relationship. At that meeting, the Strategic Buyer
expressed a possible interest in Titan's public entity business. Also on March
3, 1997, Mr. Watson, Jr. and Mr. Lyon met with representatives of a major
national investment bank with whom Mr. Watson, Jr. had recently had discussions
regarding the sale of a portion of his shares of Titan Common Stock. At that
meeting, the representatives asked Titan to consider the feasibility of a sale
of Titan to a merchant banking fund (the "Financial Buyer") sponsored by the
investment bank that might have an interest in acquiring Titan in an all-cash or
predominantly-cash transaction.
In order to further the initial expressions of interest from the Strategic
Buyer, on March 13, 1997, Titan executed a confidentiality letter with the
Strategic Buyer and shortly thereafter provided certain financial and operating
data solely with respect to Titan's public entity business.
On April 3, 1997, Messrs. Watson, Jr. and Lyon met again with
representatives of the Strategic Buyer and Financial Buyer. Such buyers
reiterated their separate interests in pursuing transactions with Titan,
although no material terms were discussed. Mr. Watson, Jr., as Titan's Chairman
and Chief Executive Officer, and Mr. Lyon, as an investment banking advisor and
director of Titan, met with the Strategic Buyer and the Financial Buyer in
furtherance of Titan's policy of evaluating possible alliances, business
combinations and other transactions and opportunities which present themselves
from time to time. On April 3, 1997, Titan executed a confidentiality agreement
with the Financial Buyer.
On April 14, 1997 and April 28, 1997, officers of Titan met with
representatives of the Financial Buyer to discuss a possible business
combination involving Titan. The discussions remained preliminary in nature and
no significant terms, including terms relating to price, were discussed. After
the April 14, 1997 meeting, the Financial Buyer and its representatives were
provided with certain financial and other information regarding Titan.
At the May 1, 1997 regularly scheduled Titan Board meeting, Mr. Watson, Jr.
informed the Titan Board for the first time that certain preliminary expressions
of interest had been received from both the Strategic Buyer and the Financial
Buyer and that members of management had had initial discussions with
representatives of the Financial Buyer concerning a possible business
combination. Mr. Watson, Jr. further informed the Titan Board that Titan had
entered into confidentiality agreements with the Strategic Buyer and the
Financial Buyer and that Titan had provided certain financial and other
information to both buyers. The Titan Board discussed these preliminary
expressions of interest and advised management to continue discussions with both
potential buyers.
Between May 1, 1997 and May 20, 1997, the Financial Buyer and its
representatives conducted a due diligence investigation with respect to Titan's
business and operations. On May 20, 1997, the Financial Buyer delivered a letter
to Titan proposing preliminary terms for a business combination and requesting a
period of exclusivity to negotiate a definitive acquisition agreement. The
Financial Buyer's proposal contemplated a recapitalization transaction in which
the Financial Buyer would acquire approximately
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85% of Titan's outstanding shares at a proposed purchase price of $20.00 per
share in cash and certain members of Titan's management, including Mr. Watson,
Jr., would retain some of their shares of Titan Common Stock.
On May 13, 1997, Titan executed a new confidentiality agreement with the
Strategic Buyer, pursuant to which the Strategic Buyer was for the first time
permitted access to information pertaining to all of Titan's business and
operations. On May 20 and 21, 1997, the Strategic Buyer conducted a due
diligence investigation with respect to all of Titan's businesses.
On May 21, 1997, the Titan Board met informally by telephone to discuss the
possible strategic alternatives separately proposed by the Strategic Buyer and
the Financial Buyer. These alternatives included a recapitalization transaction
in which the Financial Buyer would acquire 85% of Titan's outstanding shares, a
sale of a portion of Titan's business to either the Strategic Buyer or the
Financial Buyer or a sale of the entire business. The terms of the Financial
Buyer's preliminary proposal were discussed. Thereafter, Titan's management
initiated contact with Furman Selz, an investment banking firm with which Titan
had a relationship, to discuss Titan's strategic alternatives.
On May 30, 1997, the Strategic Buyer delivered a letter to Titan expressing
an interest in purchasing only Titan's public entity business, subject to a
number of conditions, including completion of due diligence. On May 30, 1997,
four of Titan's outside directors met with legal counsel to discuss directors'
fiduciary duties in the context of a sale of all or a portion of Titan's
business and the recapitalization plan proposed by the Financial Buyer. On May
30, 1997, prior to the Titan Board meeting, representatives of the Financial
Buyer made a presentation to the members of the Titan Board in which they
briefly reviewed the terms of their proposal. The opportunity to make a
presentation to the Titan Board was not requested by the Strategic Buyer.
On May 30, 1997, the Titan Board held a meeting. At that meeting, the Titan
Board formally engaged Furman Selz to represent Titan with respect to the
proposed transactions as well as other possible business combinations. Titan's
outside counsel reviewed with the Titan Board its fiduciary duties in the
context of a sale of all or a portion of Titan's business and the
recapitalization plan proposed by the Financial Buyer. Furman Selz then reviewed
the proposals made by the Strategic Buyer and the Financial Buyer. Furman Selz
indicated to the Titan Board that, in the event the Titan Board wished to
continue exploring alternatives leading to the sale of Titan, it could, among
other things: (i) continue discussions with the Financial Buyer and Strategic
Buyer in the hope that one or both of them, in an effort to avoid a lengthy
auction process, would offer a premium price and move quickly to consummate a
transaction, (ii) conduct a "controlled auction" with a larger group of
potential buyers, or (iii) conduct a full-scale, publicly-disclosed auction of
Titan.
The Titan Board discussed extensively and evaluated the advantages and
disadvantages of each option. The sale of Titan's public entity business would
enable Titan's management to focus on the higher growth non-standard automobile
business and provide additional capital to grow that business and reduce
long-term indebtedness. However, the tax on the sale of the public entity
business would substantially reduce the benefits of such a transaction. The
advantages of the Financial Buyer's offer were that it would enable virtually
all stockholders an opportunity to sell their Titan shares and would avoid the
tax problems from the sale of only a portion of Titan's business. The
disadvantages of the offer included the value of the offer ($20.00 per share in
cash) and the possibility that all Titan stockholders would retain an illiquid
de minimis interest in Titan. After such discussions, the Titan Board determined
that it would primarily consider only offers involving a business combination
and not a sale of one portion of Titan's business. The Titan Board directed
Titan's management to enter into non-exclusive negotiations with the Financial
Buyer and to continue discussions with the Strategic Buyer with respect to a
business combination involving all of Titan. The Titan Board also directed
Titan's management to issue a press release stating that Titan had retained
Furman Selz to review expressions of interest it had received regarding a
potential sale of some or all of its businesses. The Titan Board further
directed Furman Selz to accept indications of
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interest from any bona-fide potential buyers who contacted Furman Selz or
Titan's management expressing an interest in Titan.
In light of Titan's intention to issue the aforementioned press release and
thus actively encourage interest from other parties, on May 31 and June 1, 1997,
the Financial Buyer expressed its reluctance to proceed on a non-exclusive basis
without some assurance of Titan's good faith (ultimately agreed to be a
$1,000,000 expense reimbursement fee in the event Titan entered into an
agreement with respect to a business combination with another company prior to
September 16, 1997).
On June 2, 1997, the Titan Board met by telephone to discuss the status of
the proposed transactions and the Financial Buyer's requirement that it receive
the right to negotiate on an exclusive basis or otherwise receive assurance of
Titan's good faith. The Titan Board determined that the status of the
discussions with the Financial Buyer was promising, but was reluctant to
foreclose other, potentially more beneficial transactions and authorized
management to agree to the expense reimbursement, which it believed to be a
reasonable inducement to keep negotiations with the Financial Buyer on a
non-exclusive basis.
On June 3, 1997, Titan publicly announced that it had retained Furman Selz
to help it evaluate expressions of interest it had received regarding a
potential sale of part or all of its business. Also on June 3, 1997, Titan
received a draft acquisition agreement from the Financial Buyer.
In early June 1997, Titan and Furman Selz assembled documents relating to
Titan's business and operations in order to facilitate access by other
potentially interested parties (the "Data Room").
On June 5, 1997, Titan received a letter from the Strategic Buyer stating
that it was no longer interested in pursuing a transaction for the purchase of
Titan's public entity business. During the balance of the month of June,
representatives of Titan and the Financial Buyer negotiated the terms of a
definitive acquisition agreement providing for a recapitalization in which
shareholders of Titan who sold their Titan Common Stock would receive $21.25 per
share in cash. Those negotiations concluded with a number of issues unresolved,
including the value of the transaction, the termination fee and certain closing
conditions.
In early June 1997, a director of Titan had informal discussions with a
business acquaintance at USF&G regarding possible interest on USF&G's part in a
transaction with Titan.
On June 13, 1997, the Titan Board met and discussed the status of the
ongoing negotiations with the Financial Buyer. Furman Selz also made a
presentation to the Titan Board with respect to the status of its discussions
with other potentially interested parties as a result of the June 3, 1997 press
release. Furman Selz indicated that eleven potential buyers, including USF&G,
had expressed an interest in a business combination with Titan, and that Furman
Selz was in the process of sending a preliminary package of publicly available
information to each party. After extensive discussion, the Titan Board directed
Furman Selz to continue exploring opportunities with the new potential buyers.
In light of the extensive publicity and the resulting level of interest in a
potential business combination with Titan, neither Titan nor Furman Selz
actively solicited other potentially interested partners. Furman Selz did,
however, actively follow up the several unsolicited indications of interest
referred to above.
The Titan Board also directed management and Furman Selz to continue
negotiations with the Financial Buyer.
On June 15 and 16, 1997, representatives of USF&G discussed with Furman Selz
USF&G's possible interest in Titan. On June 17, 1997, USF&G confirmed in writing
its interest in a proposed transaction with Titan without proposing any specific
terms. On June 26, 1997, USF&G signed a confidentiality agreement with Titan and
on June 26 and June 27, 1997 representatives of USF&G visited the Data Room.
During the month of June, Furman Selz received a number of other expressions
of interest from third parties. Seven parties, including USF&G, were considered
sufficiently serious that confidentiality agreements were executed and access
permitted to the Data Room.
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On July 2, 1997, management of USF&G and Titan, together with their
financial advisors met in Baltimore to discuss the possible acquisition of Titan
and to review Titan's business, strategy, projections and operations.
On July 11, 1997, USF&G delivered a letter to Titan reiterating its interest
in entering into a transaction with Titan, indicating a preliminary price range
of $22.00 to $24.00 per share of Titan Common Stock and requesting the
opportunity to conduct further due diligence.
On July 12, 13 and 14, 1997, representatives of USF&G and its financial
advisor conducted additional due diligence and held discussions with Titan's
management relating to Titan's lines of business, historic and projected
financial results and expenses. USF&G conducted additional due diligence from
July 16 through July 18, 1997.
On July 14, 1997, the Titan Board met to review the status of negotiations
with the Financial Buyer and the status of discussions with USF&G and other
potentially interested parties. Furman Selz made a presentation to the Titan
Board regarding the status of the negotiations with the Financial Buyer and of
the discussions with USF&G and the financial aspects of the two proposed
transactions. Furman Selz also made a presentation regarding the status of the
discussions with the ten other potentially interested parties. Furman Selz
reported that five of these parties engaged in preliminary due diligence
activities and that Titan management had made itself and information regarding
Titan available to such parties, but that no written proposals had been received
from any of those ten potentially interested parties. At this meeting, the Titan
Board asked specific questions about various potential buyers as well as the
business and tax implications of pursuing the separate sale of subsidiaries or
parts of the business rather than the company as a whole.
The Titan Board directed Titan's management to continue negotiating with the
Financial Buyer, continue discussions with USF&G and to determine whether any of
the other potentially interested parties were in a position to propose a
transaction with Titan.
In order to induce USF&G to continue discussions, on July 15, 1997, Titan
agreed with USF&G that for a period of three weeks it would provide information
to and negotiate only with those parties that had met with Titan's management or
visited the Data Room during the prior two months.
On July 17, 1997, Titan's outside counsel provided a draft acquisition
agreement to USF&G's counsel.
On July 22 and 23, 1997, the USF&G Board met and discussed the possible
acquisition of Titan based on USF&G's review and due diligence investigations of
Titan's business and operations. Based on the presentations given and after
discussion of the benefits to USF&G of an acquisition of Titan, the USF&G Board
authorized the acquisition of Titan subject to satisfactory completion of due
diligence and negotiation of a final acquisition agreement. On July 23, 1997,
Mr. Watson, Jr., and Norman P. Blake, Jr., Chairman, President and Chief
Executive Officer of USF&G, discussed the potential transaction. Mr. Blake
agreed to prepare a report on USF&G for presentation to the Titan Board at the
Titan Board meeting set for July 31, 1997.
On July 27, 1997, Mr. Blake met with Messrs. Watson, Jr., Mangold and Watson
III to discuss the role of Titan management on a going-forward basis.
On July 28, 1997, legal counsel for USF&G sent a mark-up of the previously
provided draft acquisition agreement and a letter setting forth a number of open
issues relating to the proposed transaction.
On July 29, 1997, John A. MacColl, USF&G's Executive Vice President-Human
Resources and General Counsel, met with Messrs. Watson, Jr., Mangold and Watson
III to discuss individual employment contracts. On July 30, 1997, USF&G sent a
letter (the "USF&G Proposal") to Titan outlining the terms of USF&G's proposed
acquisition of Titan. The USF&G Proposal provided for a merger of Titan into
USF&G Company in which Titan stockholders would receive a combination of cash
and USF&G Common
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Stock valued at $23.00 based upon the closing price of the USF&G Common Stock on
July 29, 1997. On that same day, USF&G and Titan executed a confidentiality
agreement relating to Titan's due diligence investigation of USF&G's business
and operations.
On July 30, 1997, representatives of Titan and USF&G began negotiating the
terms of the definitive agreement and USF&G delivered to Titan a form of voting
and support agreement.
On July 31, 1997, the Financial Buyer indicated to Furman Selz that its
previous offer to acquire Titan would expire unless accepted by the Titan Board
by noon on August 1, 1997.
At its regularly scheduled board meeting on July 31, 1997, the Titan Board
discussed the status of negotiations with the Financial Buyer, the USF&G
Proposal, and the status of discussions with other potentially interested
parties. The Titan Board also noted that as of the date of the meeting, no other
potential bidder had made a written or verbal offer for the purchase of Titan or
a portion of its business. The Titan Board inquired as to the various tax
implications of the Financial Buyer's all-cash $21.25 per share of Titan Common
Stock offer versus USF&G's part-cash/part-stock offer, valued at $23.00 per
share of Titan Common Stock, and Furman Selz made a presentation as to the
consideration to be received by Titan stockholders under the USF&G Proposal. The
Titan Board considered that a part-stock/part-cash transaction would enable a
Titan stockholder to defer gain to the extent that such Titan stockholder
receives stock; whereas no such deferral would be available in an all-cash
transaction. Members of USF&G's senior management gave a presentation to the
Titan Board relating to USF&G's business and operations. The Titan Board met
again to discuss the presentation by USF&G senior management and the USF&G
Proposal. In light of the higher value and tax-advantaged nature of the USF&G
Proposal, the Titan Board voted to continue negotiating with USF&G based upon
the terms discussed during the meeting. This action resulted in the expiration
of the Financial Buyer's offer. The Titan Board also directed Furman Selz to
determine if any of the other serious potential bidders intended to make a
written offer for Titan.
On August 1, 1997, the Strategic Buyer stated that it would not make another
proposal for Titan.
On August 1 and 2, 1997, financial and legal representatives of Titan
conducted a due diligence investigation of USF&G's business and operations.
After discussions between Furman Selz and USF&G, the proposed merger
consideration was increased from $23.00 to $23.20 per share of Titan Common
Stock, subject to adjustment based upon the market price of USF&G Common Stock.
Between August 4 and August 6, 1997, representatives of USF&G and Titan
engaged in numerous discussions and correspondence relating to remaining open
issues regarding the proposed acquisition of Titan by USF&G, including
finalization of arrangements with Messrs. Watson, Jr., Mangold and Watson III.
On August 7, 1997, the Titan Board met by telephone and reviewed the terms
of the final form of Merger Agreement. Titan's outside legal counsel reviewed
the terms of the Merger Agreement, Voting Agreement and arrangements with
Messrs. Watson, Jr., Mangold and Watson III and answered questions from
directors. The Titan Board also took note of the requirement to pay the
Financial Buyer the agreed upon $1 million expense reimbursement fee. Furman
Selz then presented its analysis of the Merger Consideration, responded to
questions from the Titan Board and delivered its oral opinion to the effect
that, as of such date, the Merger Consideration, as set forth in the proposed
form of Merger Agreement, was fair to the holders of Titan Common Stock from a
financial point of view. Following these presentations, the Titan Board
discussed the terms of the proposed Merger and unanimously approved the
execution and delivery of the Merger Agreement and the transactions contemplated
thereby and the recommendation to Titan's stockholders to approve the Merger
Proposal.
On August 7, 1997, USF&G and Titan executed the Merger Agreement and the
Watson Stockholders executed the Voting Agreement.
On August 8, 1997, USF&G and Titan issued press releases announcing the
Merger.
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REASONS OF USF&G FOR THE MERGER; APPROVAL OF THE USF&G BOARD
The USF&G Board believes that the Merger is in the best interests of USF&G
and USF&G stockholders because it represents an attractive opportunity for USF&G
to leverage its expertise in the higher return specialty insurance areas by
significantly increasing USF&G's presence in the public entity and nonstandard
automobile insurance markets. In addition, the Merger increases USF&G's
geographic diversification in these market areas.
In view of the variety of factors considered in connection with its
evaluation of the merger, the USF&G Board did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination.
REASONS OF TITAN FOR THE MERGER; RECOMMENDATION OF THE TITAN BOARD
The Titan Board has unanimously determined that the Merger is fair to, and
in the best interests of, Titan stockholders, has unanimously approved the
Merger, the Merger Agreement and the transactions contemplated thereby and
unanimously recommends that Titan stockholders vote FOR approval of the Merger
Proposal.
Since Titan's initial public offering in July 1993, Titan's management has
regularly reviewed Titan's business strategy and prospects. In the course of
doing so, it has considered possible alliances, business combinations and
transactions with various industry participants, including companies both
smaller and larger than Titan. Its acquisitions in February 1997 of Elite
Premium Services, Inc. and in July 1995 of Arlans Agency, Inc. were the result
of such a review and the identification of opportunities to expand the
operations and business of Titan. Titan's management has reported on such
matters from time to time at meetings of Titan's Board.
Titan's management believes that the Merger presents a significant
opportunity for Titan stockholders to enhance the value of their investment in
Titan. The terms of the Merger and the Merger Agreement, including the Merger
Consideration, were the result of arm's-length negotiations between Titan and
USF&G and their respective representatives. The Titan Board consulted with its
legal and financial advisors and management of Titan. After careful review and
consideration, the Titan Board has unanimously determined that the Merger will
provide significant value to all Titan stockholders in comparison to the
historic trading range of Titan's Common Stock.
In reaching its decision to approve the Merger Proposal, the Titan Board
considered several factors, including the benefits of remaining independent,
and, without assigning any relative or specific weights, the Board deemed the
following factors to be persuasive:
(a) The Titan Board considered the market value of the USF&G Common Stock
and cash to be received by Titan stockholders ($23.20, based on the
market price of USF&G Common Stock on July 29, 1997, the day before USF&G
made its original offer to Titan) and the premium it reflected based on
the historical trading price of Titan Common Stock: $5.33 (or 30%) based
on the thirty-day average price of $17.866 for the thirty days ended June
3, 1997, the day Titan announced the retention of Furman Selz, and $6.45
(or 38.5%) based on a twelve-month average price of $16.745 for the
twelve months ended August 7, 1997 (both the thirty-day and the twelve-
month average price have been restated to reflect Titan's stock
dividends).
(b) The Titan Board considered the financial strength of USF&G and of the
pro forma combined company. The structure of the Merger Agreement, which
would permit Titan stockholders to exchange their Titan Common Stock, in
whole or in part, for USF&G Common Stock, was deemed by the Titan Board
to be a desirable outcome for Titan stockholders, in particular since it
would allow Titan stockholders to elect to continue their investment in
the combined entity on a tax-deferred basis as well as provide enhanced
current and future liquidity because of the cash
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option in the Merger and the active trading market and dividend history
of USF&G Common Stock.
(c) The Titan Board considered current conditions in the property-casualty
market in general and the public entity market, particularly noting the
increase in competition and reduced premium levels in the marketplace and
its effects on Titan's prospects. In light of these factors, the Titan
Board concluded that a strategic merger with a large insurance company,
with an established base of agency relationships and diverse product
offerings, could provide significant long-term value to Titan.
(d) The Titan Board also considered the strategic growth opportunities that
might be available to Titan absent a strategic business combination.
Based on their review of such possible strategic growth opportunities as
an independent company, the Titan Board believed that the Titan
stockholders would benefit more from the potential business combination
with USF&G than from remaining independent.
(e) The Titan Board noted the complementary nature of the services and
products of Titan and USF&G. USF&G's business units offer both public
entity and non-standard auto insurance, the primary lines of insurance
offered by the Company. The Titan Board believed that this factor made a
business combination with USF&G generally more attractive than other
possible business combinations.
(f) The Titan Board also considered the effects of the transaction on
Titan's officers, employees and other interested parties. In this regard,
the Titan Board particularly noted USF&G's acknowledgment of its present
intention to keep Titan's operations in San Antonio, Texas.
(g) The Titan Board also reviewed the terms of the arrangements between
USF&G and Messrs. Watson, Jr., Mangold and Watson III. The Titan Board
did not believe that the terms of these arrangements raised any material
conflicts of interest or otherwise adversely affected their opinion as to
the fairness of the transaction to Titan's stockholders.
(h) The Titan Board also received and evaluated the reports and conclusions
of the financial, actuarial and legal investigations of USF&G conducted
by outside advisors to Titan.
(i) The Titan Board considered the presentation of Titan's financial
advisor, Furman Selz, and the opinion of Furman Selz to the effect that,
based upon and subject to the various assumptions and considerations set
forth therein, as of August 7, 1997, the Merger Consideration was fair
from a financial point of view to holders of Titan Common Stock. See
"--Opinion of Financial Advisor to the Titan Board."
(j) Having reviewed and considered the conditions, including regulatory
approvals, to the Merger Agreement, as well as the risks, uncertainties
and possible delays associated with the consummation of the Merger
Agreement, and the estimated length of time and costs associated with
such consummation, the Titan Board concluded that such conditions and
risks would not be unusual or unduly burdensome for Titan or Titan
stockholders as compared to conditions inherent in other transactions
that might provide comparable benefits to Titan stockholders.
Certain of these factors were reviewed in detail with Titan's legal and
financial advisors. In particular, the Titan Board believes that the terms of
the Merger and the amount and form of consideration to be received in the Merger
result in the consideration to be received in the Merger being fair to Titan's
stockholders. Such belief is supported by Furman Selz's fairness opinion. See
"--Opinion of Financial Advisor to the Titan Board."
The foregoing discussion of the information and factors considered by the
Titan Board is not intended to be exhaustive, but is believed to include all
material factors considered by the Titan Board.
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THE TITAN BOARD UNANIMOUSLY RECOMMENDS THAT TITAN STOCKHOLDERS VOTE "FOR"
THE APPROVAL OF THE MERGER PROPOSAL.
OPINION OF FINANCIAL ADVISOR TO THE TITAN BOARD
The Titan Board of Directors retained Furman Selz to render an opinion as to
whether the Merger Consideration to be received by the holders of Titan Common
Stock in the Merger is fair, from a financial point of view, to such holders.
ON AUGUST 7, 1997 FURMAN SELZ DELIVERED TO THE BOARD OF DIRECTORS OF TITAN
ITS ORAL OPINION (WHICH OPINION WAS SUBSEQUENTLY CONFIRMED BY DELIVERY OF A
WRITTEN OPINION, DATED AUGUST 7, 1997) TO THE EFFECT THAT, AS OF SUCH DATE, AND
BASED UPON AND SUBJECT TO THE VARIOUS ASSUMPTIONS AND CONSIDERATIONS SET FORTH
IN SUCH OPINION, THE MERGER CONSIDERATION OFFERED TO THE HOLDERS OF TITAN COMMON
STOCK WAS FAIR, FROM A FINANCIAL POINT OF VIEW, TO SUCH HOLDERS. THE FULL TEXT
OF THE FURMAN SELZ OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND SCOPE AND LIMITATIONS OF THE REVIEW UNDERTAKEN AND PROCEDURES
FOLLOWED BY FURMAN SELZ IN RENDERING ITS OPINION, IS ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS ANNEX B AND IS INCORPORATED HEREIN BY REFERENCE. THE
FOLLOWING DESCRIPTION OF THE FURMAN SELZ OPINION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION. TITAN'S STOCKHOLDERS ARE URGED TO
READ CAREFULLY THE OPINION OF FURMAN SELZ IN ITS ENTIRETY.
Furman Selz's opinion is for the information of the Titan Board only in
addressing, as of August 7, 1997, the fairness, from a financial point of view,
to Titan's stockholders of the Merger Consideration offered to such holders.
Such opinion does not address any other aspect of the Merger and does not
constitute a recommendation to any Titan stockholder as to how such stockholder
should vote at the Special Meeting or as to whether any stockholder should elect
to receive the Standard Consideration, the Cash Consideration, or the Stock
Consideration. Furman Selz was not requested to opine as to, and its opinion
does not in any manner address, Titan's underlying business decision to proceed
with or effect the Merger or the relative merits of the Merger as compared with
any alternative business strategies which might exist for Titan. Furman Selz's
position is that because it has no obligation to render an opinion to anyone
other than the Titan Board, rendered its opinion to assist the Titan Board in
exercising its business judgment, and addressed the opinion solely to the Titan
Board, Titan's stockholders cannot rely on the opinion to support any claims
against Furman Selz arising under applicable state law. The issue of whether
Titan's stockholders can rely on Furman Selz's opinion turns on matters of state
law that can only be resolved by a court of competent jurisdiction. Resolution
of this question will have no effect on the rights and responsibilities of the
Titan Board under applicable state law or the rights and responsibilities of
Furman Selz or the Titan Board under the federal securities laws.
In conducting its analysis and arriving at its opinion, Furman Selz reviewed
and analyzed, among other things, the following: (i) Titan's and USF&G's Annual
Reports on Form 10-K for each of the fiscal years in the three-year period ended
December 31, 1996, their Quarterly Reports on Form 10-Q for the fiscal quarter
ended March 31, 1997, Titan's press release dated July 31, 1997, internal
financial statements for the fiscal quarter ended June 30, 1997 and USF&G's
Analyst Supplement for the fiscal quarter ended June 30, 1997; (ii) certain
other publicly available information concerning Titan and USF&G and the trading
market for the Titan Common Stock and the USF&G Common Stock; (iii) certain
internal information relating to Titan and USF&G, including forecasts and
projections (which, with respect to USF&G, were limited and do not cover any
period subsequent to 1999), provided to Furman Selz by the respective
managements of Titan and USF&G; (iv) certain publicly available information
concerning certain other companies engaged in businesses which Furman Selz
believes to be comparable to Titan or USF&G and the trading markets for certain
of such other companies' securities; (v) the terms of certain recent business
combinations which Furman Selz believes to be relevant; and (vi) a draft of the
Merger Agreement dated as of August 7, 1997.
Furman Selz also held discussions with certain officers and employees of
Titan and USF&G concerning their respective businesses and operations, assets,
present condition and future prospects, and performed or reviewed such other
studies, analyses and investigations as it deemed appropriate.
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The following are the material financial and other factors considered by
Furman Selz in arriving at its opinion: (i) the current and historical financial
position and results of operations of Titan and USF&G, including revenues,
earnings, profit margins, dividend record, net worth, return on investment and
capitalization; (ii) the financial and business prospects for Titan and USF&G
and the industry segments in which they operate; (iii) the current and
historical trading markets for the Titan Common Stock and the USF&G Common
Stock, including prices and price-earnings ratios, and for the equity securities
of certain companies that Furman Selz believes to be comparable to Titan or
USF&G; (iv) the terms of certain other business combinations that Furman Selz
believes to be relevant; and (v) the terms and conditions of other acquisition
proposals and indications of interest received. Furman Selz also took into
account its assessment of general economic, market and financial conditions and
its experience in similar transactions, as well as its experience in securities
valuation in general. Furman Selz's opinion necessarily is based upon the
foregoing and other conditions as they existed and could be evaluated on the
date of the opinion and on the information made available to it as of such date.
For purposes of rendering its opinion, Furman Selz assumed, in all respects
material to its analysis, that the final form of the Merger Agreement does not
vary from the draft it had reviewed, that the representations and warranties of
each party contained in the Merger Agreement and all related documents and
instruments (collectively, the "Documents") are true and correct, that each
party will perform all of the covenants and agreements required to be performed
by it under such documents and that all conditions to the consummation of the
Merger will be satisfied without waiver thereof. Furman Selz also assumed that
all material governmental, regulatory or other consents and approvals will be
obtained and that in the course of obtaining any necessary governmental,
regulatory or other consents and approvals, or any amendments, modifications or
waivers to any documents to which any of Titan, USF&G or USF&G Company is a
party, no restrictions will be imposed or amendments, modifications or waivers
made that would have any material adverse effect on the contemplated benefits to
Titan and USF&G of the Merger.
In arriving at its opinion, Furman Selz did not conduct a physical
inspection of the properties and facilities of Titan, USF&G or USF&G Company,
nor did it make, obtain or assume any responsibility for any independent
evaluation or appraisal of such properties and facilities. Furman Selz assumed
and relied upon the accuracy and completeness of the financial and other
information used by it in arriving at its opinion and did not attempt
independently to verify, or undertake any obligation to verify, such information
and was not furnished with any independent appraisal or evaluation of Titan's,
USF&G's or USF&G Company's assets or liabilities (other than certain actuarial
reports supplied by the respective managements of Titan and USF&G). Furman Selz
further relied upon the assurances of the respective managements of Titan and
USF&G that they were not aware of any facts that would make such information
inaccurate or misleading with respect to the financial forecasts of Titan and
USF&G. In addition, Furman Selz assumed that the forecasts and projections of
Titan and USF&G provided to it represented the best current judgment of Titan's
and USF&G's management as to the future financial condition and results of
operations of Titan and USF&G, respectively, and assumed that the projections
were reasonably prepared based on such current judgment, and that Titan and
USF&G, as applicable, will perform in accordance with such forecasts and
projections. Furman Selz assumes no responsibility for and expresses no view as
to such forecasts and projections or the assumptions on which they are based,
and Furman Selz did not review any forecasts or projections with respect to
USF&G other than limited forecasts and projections for the years 1997 through
1999.
Furman Selz did not and is not expressing any opinion as to what the value
of the USF&G Common Stock actually will be when issued to the holders of the
Titan Common Stock pursuant to the Merger or the prices at which such USF&G
Common Stock will trade subsequent to the Merger.
Furman Selz made qualitative judgments as to the significance and relevance
of each analysis and factor considered as a whole. Furman Selz believes that its
analyses must be considered in the aggregate, and that selecting portions of its
analyses or the factors considered by it, without considering all factors and
analyses, could create a misleading or incomplete view of the process underlying
its opinion. The
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preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analyses or summary description.
In arriving at its fairness opinion, Furman Selz did not attribute any
particular weight to any analysis or factor considered by it. No company or
transaction used in the above analyses as a comparison is directly comparable to
Titan, USF&G, or the contemplated transaction. In performing its analyses,
Furman Selz made numerous assumptions with respect to forecasts of future
results, industry performance, market and financial considerations and other
matters. Analyses based-upon such forecasts are not necessarily indicative of
actual future results, which may be significantly more or less favorable than
those suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Furman Selz's
presentation to the Titan Board was only one of many factors taken into
consideration by the Titan Board in making its determination to approve the
Merger and related transactions.
The following is a brief summary of the material financial analyses utilized
by Furman Selz in rendering its opinion. Such summary does not purport to be a
complete description of all of the analyses performed by Furman Selz in
connection with its opinion.
ANALYSES RELATING TO TITAN
Selected Merger and Acquisition Transactions Analysis
Using publicly available information, Furman Selz evaluated selected
acquisitions currently pending or completed of non-standard auto companies (the
"Non-Standard Auto Companies"). Each of the Non-Standard Auto Companies is
distinguishable from Titan in certain respects, including, without limitation,
the fact that Titan's business is comprised of both non-standard auto and public
entity insurance. The acquisitions used in Furman Selz's analysis were
(acquiror/target) GE Capital Corp./Colonial Penn P&C Group, General Motors
Acceptance Corp./Integon Corp., Progressive Corporation/Midland Financial Group,
Inc., Guaranty National Corp./Viking Insurance Holdings, Inc., USF&G
Corporation/Victoria Financial Corp., Integon Corp./Bankers and Shippers
Insurance Co., Penn Central Corp./Leader National Corp. and Selective Insurance
Group/Niagara Exchange Group.
Furman Selz calculated a range of multiples based on the ratio of (i) the
implied equity value to net operating income excluding realized capital gains
and losses ("Net Operating Income") for the latest twelve months reported prior
to the announcement of the selected transaction, (ii) the implied equity value
to the latest reported stated book value prior to the announcement of the
selected transaction, and (iii) the implied equity value plus total debt ("Firm
Value") to premiums earned and to statutory surplus, in both cases for the
latest fiscal year end prior to the announcement of the selected transaction.
Multiples of implied equity value to Net Operating Income ranged from 11.4x to
28.9x with a median of 15.0x and multiples of implied equity value to latest
reported stated book value ranged from 1.00x to 3.18x with a median of 1.38x.
Assuming the Merger Consideration of $21.46 per share (minimum per the collar)
to $24.94 per share (maximum per the collar) (the "Merger Consideration within
the collar"), implied multiples for Titan of latest twelve months Net Operating
Income ending June 30, 1997 and of book value as of that date were 16.0x to
18.8x and 1.94x to 2.27x, respectively, which were within the range of multiples
of the Non-Standard Auto Companies and above the medians. Multiples of Firm
Value to premiums earned ranged from 0.47x to 1.91x with a median of 0.93x.
Multiples of Firm Value to statutory surplus ranged from 1.21x to 3.30x with a
median of 2.60x. Assuming the Merger Consideration within the collar, the
implied multiples of premiums earned and of statutory surplus were 1.83x to
2.09x and 3.48x to 3.98x, respectively, which were within or above the
applicable ranges and above the medians of the multiples of the Non-Standard
Auto Companies.
Using publicly available information, Furman Selz also evaluated selected
acquisitions currently pending or completed of other property and casualty
companies involved in public entity insurance (the "Other Property and Casualty
Companies"). Each of the Other Property and Casualty Companies is
distinguishable from Titan in certain respects, including, without limitation,
the fact that Titan's business is
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comprised of both non-standard auto and public entity insurance. The
acquisitions used in Furman Selz's analysis were (acquiror/target) General
Electric Capital Co./Coregis Group Inc., Meridian Insurance Group/Citizens
Security Group, Unitrin, Inc./Milwaukee Insurance Group, St. Paul
Companies/Economy Fire & Casualty and Winterthur Swiss Insurance Co./General
Casualty Cos.
Furman Selz calculated a range of multiples based on the ratio of (i) the
implied equity value to Net Operating Income for the latest twelve months prior
to the announcement of the selected transaction, (ii) the implied equity value
to the latest reported stated book value prior to the announcement of the
selected transaction and (iii) the implied Firm Value to premiums earned and to
statutory surplus, in both cases for the latest fiscal year end prior to the
announcement of the selected transaction. Multiples of implied equity value to
Net Operating Income ranged from 9.6x to 20.8x with a median of 17.9x and
multiples of implied equity value to latest reported stated book value ranged
from 1.17x to 2.52x with a median of 1.84x. Assuming the Merger Consideration
within the collar, implied multiples for Titan of latest twelve months Net
Operating Income ending June 30, 1997 and book value as of that date were 16.0x
to 18.8x and 1.94x to 2.27x, respectively, which were within the range of
multiples of the Other Property and Casualty Companies, above the median at the
high end of the collar with respect to Net Operating Income and above the median
with respect to book value. Multiples of Firm Value to premiums earned ranged
from 0.93x to 1.06x with a median of 1.03x. Multiples of Firm Value to statutory
surplus ranged from 1.66x to 2.43x with a median of 1.92x. Assuming the Merger
Consideration within the collar, the implied multiples of premiums earned and of
statutory surplus were 1.83x to 2.09x and 3.48x to 3.98x, respectively, which
were within or above the applicable ranges and above the medians of the
multiples of the Other Property and Casualty Companies.
Comparable Company Analysis
In its comparable company analysis of Titan, Furman Selz compared selected
historical, current and projected financial and operating results of Titan with
the financial and operating results of selected publicly traded non-standard
auto companies (the "Non-Standard Auto Comparable Companies"). The Non-Standard
Auto Comparable Companies were chosen by Furman Selz as companies whose general
business, operating and financial characteristics, in Furman Selz's judgment,
are representative of companies in the non-standard auto segment of the
insurance industry in which Titan operates, although Furman Selz recognized that
each of the Non-Standard Auto Comparable Companies is distinguishable from Titan
in certain respects, including, without limitation, the fact that Titan's
business is comprised of both non-standard auto and public entity insurance. The
Non-Standard Auto Comparable Companies were Guaranty National Corporation,
Mercury General Corporation, Omni Insurance Group, Inc., Progressive Corporation
and Symons International Group, Inc. Although Mercury General Corporation and
Progressive Corporation were included in the range of multiples for the
Non-Standard Auto Comparable Companies, they were excluded from the calculation
of the median multiples because they have much larger market capitalizations and
higher returns on average equity than Titan and the other Non-Standard Auto
Comparable Companies.
Furman Selz calculated a range of multiples for the Non-Standard Auto
Comparable Companies by dividing each of the Non-Standard Auto Comparable
Companies' equity market capitalizations by each such company's latest twelve
months net operating income excluding realized capital gains and losses and
extraordinary catastrophe losses ("LTM Adjusted Net Operating Income"), by its
estimated 1997 Net Operating Income, by its estimated 1998 Net Operating Income,
and by its book value. Multiples of equity market capitalization to LTM Adjusted
Net Operating Income ranged from 9.2x to 24.6x with a median of 13.9x. Assuming
the Merger Consideration within the collar, the implied multiples for Titan of
the LTM Adjusted Net Operating Income were 16.0x to 18.8x, which were within the
range of multiples of the Non-Standard Auto Comparable Companies and above the
median. Multiples of equity market capitalization to estimated 1997 Net
Operating Income ranged from 10.2x to 24.3x with a median of 12.9x. Assuming the
Merger Consideration within the collar, the implied multiples for Titan of
estimated 1997 Net Operating Income were 14.6x to 17.lx, which were within the
range of multiples of the Non-Standard Auto Comparable Companies and above the
median. Multiples of equity market capitalization to estimated
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1998 Net Operating Income ranged from 8.lx to 21.2x with a median of 11.5x.
Assuming the Merger Consideration within the collar, implied multiples for Titan
of estimated 1998 Net Operating Income were 10.4x to 12.3x, which were within
the range of multiples of the Non-Standard Auto Comparable Companies and above
the median at the high end of the collar. Multiples of equity market
capitalization to book value ranged from 1.49x to 4.51x with a median of 1.58x.
Assuming the Merger Consideration within the collar, implied multiples for Titan
of book value were 1.94x to 2.27x, which were within the range of multiples of
the Non-Standard Auto Comparable Companies and above the median. Furman Selz
also looked at "Total Capitalization" (equity market capitalization plus total
debt) to premiums earned and to statutory surplus for the latest fiscal year for
the Non-Standard Auto Comparable Companies. Multiples of Total Capitalization to
premiums earned ranged from 0.95x to 3.28x with a median of 1.07x. Assuming the
Merger Consideration within the collar, the implied multiples for Titan of Total
Capitalization to premiums earned were 1.83x to 2.09x, which were within the
range of multiples of the Non-Standard Auto Comparable Companies and above the
median. Multiples of Total Capitalization to statutory surplus ranged from 2.34x
to 6.68x with a median of 2.61x. Assuming the Merger Consideration within the
collar, the implied multiples for Titan of Total Capitalization to statutory
surplus were 3.48x to 3.98x, which were within the range of multiples of the
Non-Standard Auto Comparable Companies and above the median.
In its comparable company analysis of Titan, Furman Selz also compared
selected historical, current and projected financial and operating results of
Titan with the financial and operating results of selected publicly traded
public entity insurance companies (the "Public Entity Comparable Companies").
The Public Entity Comparable Companies were chosen by Furman Selz as companies
whose general business, operating and financial characteristics, in Furman
Selz's judgment, are representative of companies in the public entity segment of
the insurance industry in which Titan operates, although Furman Selz recognized
that each of the Public Entity Comparable Companies is distinguishable from
Titan in certain respects, including, without limitation, the fact that Titan's
business is comprised of both non-standard auto and public entity insurance. The
Public Entity Comparable Companies were Markel Corporation, Meadowbrook
Insurance Group, Inc. and Selective Insurance Group, Inc.
Furman Selz calculated a range of multiples for the Public Entity Comparable
Companies by dividing each of the Public Entity Comparable Companies' equity
market capitalizations by each such company's LTM Adjusted Net Operating Income,
by its estimated 1997 Net Operating Income, by its estimated 1998 Net Operating
Income, and by its book value. Multiples of equity market capitalization to LTM
Adjusted Net Operating Income ranged from 13.1 x to 26.9x with a median of
22.3x. Assuming the Merger Consideration within the collar, the implied
multiples for Titan of the LTM Adjusted Net Operating Income were 16.0x to
18.8x, which were within the range of multiples of the Public Entity Comparable
Companies but below the median. Multiples of equity market capitalization to
estimated 1997 Net Operating Income ranged from 12.3x to 21.4x with a median of
16.5x. Assuming the Merger Consideration within the collar, the implied
multiples for Titan of estimated 1997 Net Operating Income were 14.6x to 17.lx,
which were within the range of multiples of the Public Entity Comparable
Companies and above the median at the high end of the collar. Multiples of
equity market capitalization to estimated 1998 Net Operating Income ranged from
11.1x to 18.4x with a median of 13.9x. Assuming the Merger Consideration within
the collar, implied multiples for Titan of estimated 1998 Net Operating Income
were 10.4x to 12.3x, which were outside the range of multiples of the Public
Entity Comparable Companies at the low end of the collar and within the range of
multiples at the high end of the collar but below the median. Multiples of
equity market capitalization to book value ranged from 1.66x to 5.02x with a
median of 2.21x. Assuming the Merger Consideration within the collar, implied
multiples for Titan of book value were 1.94x to 2.27x, which were within the
range of multiples of the Public Entity Comparable Companies and above the
median at the high end of the collar. Furman Selz also looked at Total
Capitalization to premiums earned and to statutory surplus for the latest fiscal
year for the Public Entity Comparable Companies. Multiples of Total
Capitalization to premiums earned ranged from 1.35x to 3.39x with a median of
2.71x. Assuming the Merger Consideration within the collar, the implied
multiples for Titan of Total Capitalization to premiums earned were 1.83x to
2.09x, which were within the range of multiples of the Public Entity
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Comparable Companies but below the median. Multiples of Total Capitalization to
statutory surplus ranged from 2.25x to 3.68x with a median of 3.55x. Assuming
the Merger Consideration within the collar, the implied multiples for Titan of
Total Capitalization to statutory surplus were 3.48x to 3.98x, which were
outside the range of multiples of the Public Entity Comparable Companies at the
high end of the collar and within the range of multiples at the low end of the
collar but below the median.
The multiples and ratios for the Non-Standard Auto Comparable Companies and
the Public Entity Comparable Companies were based on the most recent publicly
available information. The multiples and ratios for Titan were also based on the
most recent publicly available information or, in the case of 1997 and 1998
earnings, estimates of Titan's management.
Stock Trading History
Furman Selz reviewed the stock price performance of Titan, and compared the
indexed price of Titan Common Stock with that of each of the "Comparable
Companies" (the companies included in the Non-Standard Auto and Public Entity
Comparable Companies Analyses) from March 1997 through the end of July 1997.
Furman Selz noted that the Titan index was above the indexes of the other
Comparable Companies for most of the time during this period, indicating
potential speculation regarding a transaction. Furman Selz also noted that the
Titan stock price 30 days prior to the June 3, 1997 press release was $16.31 per
share. The Merger Consideration within the collar ranges from a 32% to 53%
premium over Titan's stock price 30 days prior to the June 3, 1997 press
release.
Discounted Cash Flow Analysis
Furman Selz performed a discounted cash flow analysis of Titan based on
Titan's projections. In conducting this analysis, Furman Selz discounted the
projected unleveraged after-tax cash flows generated by Titan through the year
2005. These cash flows were discounted to present value using discount rates
ranging from 9.0% to 14.0%. In addition, Furman Selz derived the value, at the
end of the year 2005, of Titan's cash flow into perpetuity by capitalizing the
year 2005 cash flow at the same rates as the discount rates. These terminal
values, were discounted to present value using the same discount rates, then
added to the present values (at the corresponding discount rates) of the cash
flows for 1997 through 2005. Based on this analysis, Furman Selz derived an
implied range of equity values per Titan share of $7.10 to $16.64 assuming
management's projection of five acquisitions of non-standard auto agencies a
year. Furman Selz modified management's estimate of the number of agency
acquisitions a year to three and derived an implied range of values of $9.67 to
$20.27 per share. The Merger Consideration within the collar falls above such
ranges.
ANALYSES RELATING TO USF&G CORPORATION
Comparable Company Analysis
In its comparable company analysis of USF&G, Furman Selz compared selected
historical, current and projected financial and operating results of USF&G with
the financial and operating results of selected publicly traded property and
casualty companies (the "USF&G Property and Casualty Comparable Companies"). The
USF&G Property and Casualty Comparable Companies were chosen by Furman Selz as
companies whose general business, operating and financial characteristics are,
in Furman Selz's judgment, representative of companies in the property and
casualty segment of the insurance industry in which USF&G operates, although
Furman Selz recognized that each of the USF&G Property and Casualty Comparable
Companies is distinguishable from USF&G in certain respects. The USF&G Property
and Casualty Comparable Companies were American Financial Group, Inc., Chubb
Corporation, Cincinnati Financial, Ohio Casualty, Orion Capital, St. Paul
Companies, TIG Holdings and W.R. Berkley Corporation.
Furman Selz calculated a range of multiples for the USF&G Property and
Casualty Comparable Companies by dividing each such company's equity market
capitalization by its LTM Adjusted Net
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Operating Income, by its estimated 1997 Net Operating Income, by its estimated
1998 Net Operating Income, and by its book value. Multiples of equity market
capitalization to LTM Adjusted Net Operating Income ranged from 12.5x to 20.3x
with a median of 14.7x. Assuming the USF&G stock price at the close of the
market on July 29, 1997 (the "USF&G Stock Price"), the implied multiple for
USF&G of the LTM Adjusted Net Operating Income was 16.3x, which was within the
range of multiples of the USF&G Property and Casualty Comparable Companies but
above the median. Multiples of equity market capitalization to estimated 1997
Net Operating Income ranged from 12.lx to 19.2x with a median of 14.lx. Assuming
the USF&G Stock Price, the implied multiple for USF&G of estimated 1997 Net
Operating Income was 15.9x, which was within the range of multiples of the USF&G
Property and Casualty Comparable Companies but above the median. Multiples of
equity market capitalization to estimated 1998 Net Operating Income ranged from
11.0x to 17.8x with a median of 12.8x. Assuming the USF&G Stock Price, the
implied multiple for USF&G of estimated 1998 Net Operating Income was 13.2x,
which was within the range of multiples of the USF&G Property and Casualty
Comparable Companies but above the median. Multiples of equity market
capitalization to book value ranged from 1.34x to 2.21x with a median of 1.62x.
Assuming the USF&G Stock Price, the implied multiple for USF&G of book value was
1.61x, which was within the range of multiples of the USF&G Property and
Casualty Comparable Companies and below the median. Furman Selz also looked at
Total Capitalization to premiums earned and to statutory surplus for the latest
fiscal year for the USF&G Property and Casualty Comparable Companies. Multiples
of Total Capitalization to premiums earned ranged from 1.24x to 3.49x with a
median of 1.57x. Assuming the USF&G Stock Price, the implied multiple for USF&G
of Total Capitalization to premiums earned was 1.33x, which was within the range
of multiples of the USF&G Property and Casualty Comparable Companies and below
the median. Multiples of Total Capitalization to statutory surplus ranged from
1.75x to 5.23x with a median of 2.36x. Assuming the USF&G Stock Price, the
implied multiple for USF&G of Total Capitalization to statutory surplus was
2.64x, which was within the range of multiples of the USF&G Property and
Casualty Comparable Companies but above the median.
The multiples and ratios for the USF&G Property and Casualty Comparable
Companies were based on the most recent publicly available information. The
multiples and ratios for USF&G were also based on the most recent publicly
available information or, in the case of 1997 and 1998 earnings, earnings per
share estimates from IBES.
Selected Merger and Acquisition Transactions Analysis
Using publicly available information, Furman Selz evaluated acquisitions
currently pending or completed of selected property and casualty companies (the
"USF&G Property and Casualty Companies"). None of such acquisitions took place
under market conditions or competitive conditions or circumstances that are
directly comparable to the Merger, and each of the USF&G Property and Casualty
Companies is distinguishable from USF&G in certain respects. The acquisitions
used in Furman Selz's analysis were (acquiror/target) MMI Companies,
Inc./Unionamerica Holdings PLC, Safeco Corp./American States Financial Corp.,
HCC Insurance Holdings, Inc./Avemco Corp., Allmerica Financial Corp./Allmerica
Property & Casualty, Munich Reinsurance/American Re Corp., General Re
Corp./National Re Corp., Unitrin, Inc./Milwaukee Insurance Group, PXRE
Corp./Transnational Re. Corp., Frontier Insurance Group/United Capital Holdings
and Meridian Insurance Group/Citizens Security Group.
Furman Selz calculated a range of multiples based on the ratio of (i) the
implied equity value to Net Operating Income for the latest twelve months prior
to the announcement of the selected transaction, (ii) the implied equity value
to the latest reported stated book value prior to the announcement of the
selected transaction, and (iii) the implied Firm Value to premiums earned and to
statutory surplus, in both cases for the latest fiscal year end prior to the
announcement of the selected transaction. Multiples of implied equity value to
Net Operating Income ranged from 3.2.x to 20.8x with a median of 15.5x and
multiples of implied equity value to latest reported stated book value ranged
from 0.40x to 3.96x with a median of 1.99x. Assuming the USF&G Stock Price, the
implied multiples for USF&G of latest twelve months Net Operating Income ending
June 30, 1997 and book value as of that date were 16.3x and 1.61x,
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respectively, which were within the range of multiples of the USF&G Property and
Casualty Companies, above the median with respect to the multiple of Net
Operating Income and below the median with respect to the multiple of book
value. Multiples of Firm Value to premiums earned ranged from 0.93x to 3.56x
with a median of 2.14x. Multiples of Firm Value to statutory surplus ranged from
0.45x to 3.55x with a median of 2.43x. Assuming the USF&G Stock Price, the
implied multiples of premiums earned and of statutory surplus were 1.33x and
2.64x, respectively, which were within the applicable ranges, below the median
with respect to premiums earned but above the median with respect to statutory
surplus.
Stock Trading History
Furman Selz reviewed the stock price performance of USF&G, and compared the
indexed price of USF&G Common Stock with that of each of the USF&G Property and
Casualty Comparable Companies over the past five years. Furman Selz noted that
the USF&G index was below the indexes of the USF&G Property and Casualty
Comparable Companies for most of the recent past. Furman Selz also noted that
although the USF&G Stock Price represents close to a 52-week high, most of the
USF&G Property and Casualty Comparable Companies are also trading at close to a
52-week high.
Furman Selz is a nationally-recognized investment banking firm engaged in,
among other things, the valuation of businesses and securities in connection
with mergers, acquisitions, underwriting, sales and distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. Furman Selz has substantial experience in merger and acquisition
transactions and is familiar with Titan, having acted as its financial advisor
in connection with the Merger and having acted as underwriter to Titan in its
November 1995 public offering of common stock. The Titan Board selected Furman
Selz because of such experience, its familiarity with Titan and its familiarity
with the insurance industry. In the ordinary course of its business, Furman Selz
actively trades in the securities of Titan for its own account and the accounts
of its customers and certain officers of Furman Selz and, accordingly, may at
any time hold a long or short position in such securities. Furman Selz may
provide investment banking services to Titan, USF&G or their respective
subsidiaries in the future.
Pursuant to a letter agreement dated June 2, 1997 between Titan and Furman
Selz, Furman Selz received a retainer fee of $75,000 and will receive an
additional fee of approximately $2.92 million which is contingent upon
consummation of the Merger. In addition, Titan has agreed to reimburse Furman
Selz for its reasonable costs and expenses (including legal fees and
disbursements) incurred in connection with rendering financial advisory
services. Titan has agreed to indemnify Furman Selz for certain costs, expenses,
losses, claims, damages and liabilities, including those under federal
securities laws, related to or arising out of its rendering of services under
its engagement as financial advisor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL. In considering the recommendation of the Titan Board with respect
to the Merger Proposal, Titan stockholders should be aware that certain members
of the Titan Board and management have interests in the Merger that are in
addition to or different from the interests of Titan stockholders generally. In
connection with the Merger, USF&G has agreed to provide employment and severance
benefits to certain officers and employees of Titan in the manner described
below and to treat Titan Options and outstanding Titan Warrants in the manner
described below.
BENEFICIAL OWNERSHIP OF TITAN COMMON STOCK BY DIRECTORS AND OFFICERS OF
TITAN. As of November 14, 1997, directors and executive officers of Titan and
their affiliates may be deemed to be beneficial owners of approximately 32.3% of
the outstanding Titan Common Stock. Mark E. Watson, Jr. has entered into the
Voting Agreement. See "The Merger Agreement--Voting and Support Agreement." The
directors and executive officers of Titan will not receive any benefit in their
capacities as holders of Titan Common Stock that differs from or is in addition
to the benefit received by all other holders of Titan Common Stock.
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MARK E. WATSON, JR. CONSULTING AGREEMENT. In connection with the Merger
Agreement, Mark E. Watson, Jr., Chairman, President and Chief Executive Officer
of Titan, and USF&G Company entered into the Consulting Agreement. Under the
terms of the Consulting Agreement, Mr. Watson, Jr. will provide consulting
services to USF&G Company for a period of eighteen months following the
Effective Time and will not compete with the business of Titan and its
subsidiaries for a period of five years following the Effective Time. As
compensation for his consulting services and agreement not to compete with the
business of Titan and its subsidiaries, Mr. Watson, Jr. will receive $2,250,000
in eighteen equal installments payable over the eighteen-month period and
certain insurance and medical benefits for five years following the Effective
Time. Mr. Watson, Jr. will also receive title to three vehicles currently owned
by Titan. In consideration for entering into the Consulting Agreement, Mr.
Watson Jr. has agreed to terminate his current employment agreement with Titan,
which contains a fixed-term provision.
THOMAS E. MANGOLD EMPLOYMENT AGREEMENT. In connection with the Merger
Agreement, Thomas E. Mangold, Executive Vice President and Chief Operating
Officer of Titan, and USF&G Company entered into the Mangold Employment
Agreement with USF&G Company. Under the terms of the Mangold Employment
Agreement, Mr. Mangold will be employed for five years following the Effective
Time as an executive officer of Titan Indemnity Company. Mr. Mangold will
receive as compensation an annual salary of not less than $250,000, plus an
initial annual bonus of $150,000 for 1997 and $125,000 for 1998. Subsequent
annual bonuses will be performance based with a targeted range between 30% and
60% of Mr. Mangold's annual salary. Mr. Mangold will receive at the Effective
Time an initial restricted stock grant equal to the quotient of $500,000 divided
by the Average Stock Price and an option for 20,000 shares of USF&G Common
Stock. Such shares will vest in one-third increments on the third, fourth and
fifth anniversaries of the Effective Time. The stock options granted to Mr.
Mangold will have an exercise price equal to the average of the high and the low
sales price of USF&G Common Stock on the day of the Effective Time. Four
thousand of the options granted to Mr. Mangold will be exercisable after each of
the first five anniversaries of the Effective Time. The restricted stock and
options may vest earlier under certain circumstances. Mr. Mangold will also
participate in the USF&G Long-Term Incentive Plan, USF&G's stock option program
for key executives and the USF&G Key Executive Severance Plan and will receive
certain protection on the sale of his home in the event of a relocation outside
of San Antonio, Texas. Pursuant to the Mangold Employment Agreement, Mr. Mangold
has also agreed not to compete in the nonstandard automobile insurance business
for a period of twelve to twenty-four months after any termination of Mr.
Mangold's employment, depending on the nature of such termination. In
consideration for entering into the Mangold Employment Agreement, Mr. Mangold
has agreed to terminate his current employment agreement (including any
applicable change in control provisions therein) with Titan.
MARK E. WATSON III EMPLOYMENT AGREEMENT. In connection with the Merger
Agreement, Mark E. Watson III, Executive Vice President, General Counsel and
Secretary of Titan, Titan Indemnity Company and USF&G Company entered into the
Watson III Employment Agreement. Under the terms of the Watson III Employment
Agreement, Mr. Watson III will be employed until December 31, 1998 as an
executive officer of Titan Indemnity Company. Mr. Watson III will receive as
compensation an annual salary of not less than $175,000, plus bonuses for 1997
and 1998 of $50,000. Beginning January 1, 1999, Mr. Watson will provide
consulting and legal services for two years to Titan Indemnity Company and USF&G
Company and will receive annual compensation of $50,000. Pursuant to the Watson
III Employment Agreement, Mr. Watson III has also agreed to not compete with the
business of Titan and its subsidiaries prior to January 1, 2001 and will receive
$75,000 annually in consideration of his agreement not to compete. Mr. Watson
III's outstanding unvested Titan Options as of December 31, 1997 will be
converted to USF&G Options as provided in the Merger Agreement and those options
will vest over the three year period of the Watson III Employment Agreement. Mr.
Watson III's 26,250 restricted shares of Titan Common Stock will be replaced
with shares of USF&G Common Stock based upon the Standard Exchange Ratio. The
unvested shares of restricted stock will vest at a rate of 25% per year
beginning April 1, 1998. The options and restricted stock may vest earlier in
certain circumstances. Mr. Watson will also receive title to a vehicle currently
owned by Titan for $5,000. In consideration for entering into the
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Watson III Employment Agreement, Mr. Watson III has agreed to terminate his
current employment agreement (including any applicable change in control
provisions) with Titan, which contains a fixed-term provision.
STONEGATE SECURITIES INVESTMENT BANKING FEE. On December 11, 1989, Titan
entered into an agreement with the predecessor entity of Stonegate, an
investment banking firm owned by E. B. Lyon III, a director of Titan, providing
for Stonegate to provide investment banking services to Titan and the payment of
an investment banking fee to Stonegate in the event of a sale of Titan or a
subsidiary of Titan. Pursuant to that agreement, Stonegate has from time to time
brought to Titan acquisition opportunities and has introduced Titan to potential
strategic partners, including the Strategic Buyer and the Financial Buyer. This
agreement was reaffirmed on May 13, 1997. The agreement provides that Stonegate
will receive a fee equal to 1% of the purchase price upon the sale of a
subsidiary of Titan or substantially all of the assets of a subsidiary of Titan.
The agreement further provides that Stonegate will receive a fee equal to
$1,000,000 upon the sale of Titan. Stonegate also manages certain portfolio
investment assets of Titan pursuant to an Investment Management Agreement for a
fee of .1% of the market value of the assets managed. USF&G has entered into a
letter agreement with Stonegate providing that Stonegate's current investment
advisory relationship with Titan will remain in effect through the later of the
Effective Time and December 31, 1997.
TREATMENT OF TITAN OPTIONS AND TITAN WARRANTS. Each of the Titan Options
outstanding as of the Effective Time, whether vested or unvested, will
immediately vest and be converted without any action on the part of the holder
thereof into the right to purchase USF&G Common Stock on the same terms and
conditions as the existing options, subject to adjustments in the price and to
reflect the conversion to a right to purchase USF&G Common Stock. At or prior to
the Effective Time, Titan will use its reasonable best efforts to cause holders
of all then outstanding warrants to purchase Titan Common Stock (each a "Titan
Warrant") whether or not then exercisable in whole or in part, to agree to
surrender and receive, in exchange for cancellation and in settlement thereof a
number of shares of USF&G Common Stock for each share of Titan Common Stock
subject to such Titan Warrant (subject to any applicable withholding tax) equal
to the quotient of (i) the product of (1) the number of shares of Titan Common
Stock which the holder would be entitled to receive if such Titan Warrant were
exercised in full immediately prior to the Effective Time multiplied by (2) the
difference between (x) the Cash Consideration and (y) the exercise price of such
share of Titan Common Stock under the Titan Warrant, to the extent such amount
is a positive number divided by (ii) the Average Stock Price. Titan is currently
in discussions for the surrender of the outstanding Titan Warrants. See "The
Merger Agreement--Conditions Precedent to the Merger."
INDEMNIFICATION. Pursuant to the terms of the Merger Agreement, from and
after the Effective Time, USF&G will indemnify, defend and hold harmless the
officers and directors of Titan, against all losses, expenses, claims, damages
or liabilities based in whole or in part on the fact that such person is or was
such officer or director of Titan, to the fullest extent permitted or required
under applicable law. In addition, USF&G has agreed that all rights to
indemnification existing in favor of the directors, officers or employees of
Titan as provided in Titan's organizational documents shall survive the Merger
for a period of not less than six years and has agreed to maintain the current
policies of directors' and officers' liability insurance for a period of six
years. See "The Merger Agreement--Indemnification."
In connection with the foregoing, see generally "The Merger--Background of
the Merger" and "--Employee Benefits."
EMPLOYEE BENEFITS
USF&G has agreed under the Merger Agreement that for employees who are
employees of Titan as of the Effective Time and who continue to be employed by
Titan, USF&G shall cause USF&G Company to provide employee benefits which are
substantially comparable in the aggregate to the benefits provided under Titan's
benefit plans until the first anniversary of the Effective Time.
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ANTICIPATED ACCOUNTING TREATMENT
USF&G anticipates that the merger will be accounted for using the purchase
method of accounting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income tax
consequences of the Merger. To the extent this summary discusses matters of law,
it is based upon the opinions of Mayer, Brown & Platt and Piper & Marbury L.L.P.
This summary is based upon the current provisions of the Code, its legislative
history, administrative pronouncements, judicial decisions and Treasury
regulations, all of which are subject to change, possibly with retroactive
effect. This summary does not purport to be a complete discussion of all U.S.
federal income tax considerations relating to the Merger. This summary does not
address the tax consequences of the Merger under state, local or non-U.S. tax
laws. In addition, this summary may not apply, in whole or in part, to
particular categories of holders of Titan Common Stock, such as financial
institutions, broker-dealers, life insurance companies, tax-exempt
organizations, investment companies, foreign taxpayers, holders which, at the
Effective Time of the Merger, already own some USF&G Common Stock, individuals
who acquired Titan Common Stock pursuant to employee stock options, and other
special status taxpayers. This summary does not address the tax consequences of
the conversion of the Titan Options into options to purchase USF&G Common Stock
and the surrender of the Titan Warrants. Moreover, holders should be aware that
the federal income tax rate for individuals on long-term and mid-term capital
gains may be significantly lower than the rate imposed on ordinary income or
short-term capital gains. Finally, a tax ruling from the Internal Revenue
Service (the "IRS") has not been requested. THIS SUMMARY IS INCLUDED FOR GENERAL
INFORMATION ONLY. ALL HOLDERS OF TITAN COMMON STOCK ARE URGED TO CONSULT THEIR
TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING
ANY STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES.
GENERAL. In the opinion of each of Mayer, Brown & Platt and Piper & Marbury
L.L.P. the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code. The discussion below assumes that the Merger will be treated as a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code.
TAX TREATMENT TO USF&G, USF&G COMPANY AND TITAN. In the opinion of each of
Mayer, Brown & Platt and Piper & Marbury L.L.P., no gain or loss will be
recognized by USF&G, USF&G Company and Titan as a result of the Merger.
RECEIPT OF USF&G COMMON STOCK IN EXCHANGE FOR TITAN COMMON STOCK. In the
opinion of each of Mayer, Brown & Platt and Piper & Marbury L.L.P., no gain or
loss will be recognized by a holder who receives solely shares of USF&G Common
Stock (except for cash received in lieu of fractional shares, as discussed
below) in exchange for all of his or her shares of Titan Common Stock. The tax
basis of the shares of USF&G Common Stock received by a holder in such exchange
will be equal (except for the basis attributable to any fractional shares of
USF&G Common Stock, as discussed below) to the basis of the Titan Common Stock
surrendered in exchange therefor. The holding period of the USF&G Common Stock
received will include the holding period of shares of Titan Common Stock
surrendered in exchange therefor, provided that such shares were held as capital
assets of the holder at the Effective Time of the Merger.
RECEIPT OF CASH IN EXCHANGE FOR TITAN COMMON STOCK. In the opinion of each
of Mayer, Brown & Platt and Piper & Marbury L.L.P., a holder who receives solely
cash in exchange for all of his or her shares of Titan Common Stock (and, unless
such shares are also exchanged solely for cash, does not own any Titan Common
Stock constructively under the circumstances referred to below under "--Possible
Dividend Treatment") will recognize gain or loss for federal income tax purposes
equal to the difference between the cash received and such holder's tax basis in
the Titan Common Stock surrendered in exchange
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therefor. Such gain or loss will be a capital gain or loss, provided that such
shares were held as capital assets of the holder at the Effective Time of the
Merger. Such gain or loss will be a long-term capital gain or loss (subject to a
maximum tax rate of 20 percent) if the holder's holding period is more than
eighteen months at the Effective Time of the Merger, and such gain or loss will
be a mid-term capital gain or loss (subject to a maximum tax rate of 28 percent)
if the holder's holding period is more than one year but not more than 18 months
at the Effective Time of the Merger. The Code contains limitations on the extent
to which a holder may deduct capital losses from ordinary income. It is not
clear whether or not the above treatment would apply to a holder who receives
solely cash for his or her shares, but who owns constructively shares of Titan
Common Stock which are not exchanged solely for cash, or whether instead the
treatment referred to below under "--Possible Dividend Treatment" would apply. A
holder in this situation is urged to consult his or her own tax advisor
regarding the tax consequences to the holder.
RECEIPT OF USF&G COMMON STOCK AND CASH IN EXCHANGE FOR TITAN COMMON
STOCK. In the opinion of each of Mayer, Brown & Platt and Piper & Marbury
L.L.P., a holder who receives a combination of USF&G Common Stock and cash in
exchange for his or her Titan Common Stock will not be permitted to recognize
any loss for federal income tax purposes. Such a holder will recognize gain, if
any, equal to the lesser of (i) the amount of cash received or (ii) the amount
of gain "realized" in the transaction. The amount of gain a holder "realizes"
will equal the amount by which (a) the cash plus the fair market value at the
Effective Time of the Merger of the USF&G Common Stock received exceeds (b) the
holders' basis in the Titan Common Stock to be surrendered in the exchange
therefor. Any recognized gain could be taxed as a capital gain or dividend, as
described below. The tax basis of the shares of USF&G Common Stock received by
such holder will be the same as the basis of the shares of Titan Common Stock
surrendered in exchange therefor, increased by the amount of gain recognized in
the Merger and decreased by the amount of cash received in the Merger. The
holding period for shares of USF&G Common Stock received by such holder will
include such holder's holding period for the Titan Common Stock surrendered in
exchange therefor, provided that such shares were held as capital assets of the
holder at the Effective Time of the Merger.
A holder's federal income tax consequences will also depend on whether his
or her shares of Titan Common Stock were purchased at different times at
different prices. If they were, the holder could realize gain with respect to
some of the shares of Titan Common Stock and loss with respect to other shares.
Such holder would have to recognize such gain to the extent such holder receives
cash with respect to those shares in which the holder's adjusted tax basis is
less than the amount of cash plus the fair market value at the Effective Time of
the Merger of the USF&G Common Stock received, but could not recognize loss with
respect to those shares in which the holder's adjusted tax basis is greater than
the amount of cash plus the fair market value at the Effective Time of the
Merger of the USF&G Common Stock received. Any disallowed loss would be included
in the adjusted basis of the USF&G Common Stock. Such a holder is urged to
consult his or her own tax advisor respecting the tax consequences of the Merger
on that holder.
POSSIBLE DIVIDEND TREATMENT. In general, the determination whether a holder
who exchanges Titan Common Stock for cash (including a holder who receives both
cash in the Merger and cash in lieu of a fractional share interest) and USF&G
Common Stock recognizes capital gain or dividend income is made by reference to
the rules of Sections 356(a)(2) and 302 of the Code. Under Section 356(a)(2) of
the Code, each holder of Titan Common Stock will be treated for tax purposes as
if such holder had received only USF&G Common Stock in the Merger, and
immediately thereafter USF&G had redeemed appropriate portions of such USF&G
Common Stock in exchange for the cash actually distributed to such holder in the
Merger. Under Section 302 of the Code, all of the cash representing gain
recognized by a holder on the exchange will be taxed as capital gain if the
deemed redemption from such holder (i) is a "substantially disproportionate
redemption" of stock with respect to such holder or (ii) is "not essentially
equivalent to a dividend" (taking into account, in either case, certain
constructive ownership rules described below and all other actual and deemed
redemptions from such holder and other holders of USF&G Common Stock undertaken
as part of the plan of reorganization). Under Section 318 of the Code, a holder
may be
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considered to constructively own, after the Merger, USF&G Common Stock owned
(and in some cases constructively owned) by certain members of the holder's
family or certain entities in which the holder has an ownership or beneficial
interest and USF&G Common Stock which the holder (or such individuals or
entities) has the right to acquire upon the exercise of options. Such gain or
loss will be a long-term capital gain or loss (subject to a maximum tax rate of
20 percent) if the holder's holding period is more than eighteen months at the
Effective Time of the Merger, and such gain or loss will be a mid-term capital
gain or loss (subject to a maximum tax rate of 28 percent) if the holder's
holding period is more than one year but not more than 18 months at the
Effective Time of the Merger.
The deemed redemption of a holder's USF&G Common Stock will be a
"substantially disproportionate redemption" if, as a result of the deemed
redemption, there is a greater than 20% reduction in (1) the percentage of all
then outstanding shares of USF&G Common Stock then owned by the holder and (2)
the percentage of the voting power of all then-outstanding USF&G Common Stock
represented by all USF&G Common Stock then owned by the holder.
The deemed redemption of a holder's USF&G Common Stock will be "not
essentially equivalent to a dividend" if the holder experiences a "meaningful
reduction" in his proportionate equity interest in USF&G by reason of the deemed
redemption. In general, there are no fixed rules for determining when a
"meaningful reduction" has occurred. However, based upon a published ruling of
the IRS, the receipt of cash in the Merger would not be characterized as a
dividend if the holder's percentage stock ownership interest in USF&G and Titan
prior to the Merger is minimal, the holder exercises no control over the affairs
of USF&G or Titan, and the holder's percentage equity interest in USF&G is
reduced in the deemed redemption to any extent. Accordingly, a holder who elects
all cash maximizes his chances of receiving capital gain treatment on the cash
received, even if he receives some USF&G Common Stock as a result of proration.
See "The Merger Agreement--Proration and Adjustment" below. However, there can
be no assurance of such treatment.
If neither of the redemption tests described above is satisfied, a holder
will be treated as having received a dividend equal to the amount of such
holder's recognized gain (as described above), assuming that such holder's
ratable share of the accumulated earnings and profits of Titan (or possibly the
total earnings and profits of Titan and USF&G) equals or exceeds such recognized
gain.
CASH IN LIEU OF FRACTIONAL SHARES. In the opinion of each of Mayer, Brown &
Platt and Piper & Marbury L.L.P., a holder who holds Titan Common Stock as a
capital asset and who receives in the Merger, in exchange for such stock, solely
USF&G Common Stock and cash in lieu of a fractional share interest in USF&G
Common Stock will be treated as having received such fractional share of USF&G
Common Stock and then as having received cash in redemption by USF&G of the
fractional share interest. Under the IRS's present advance ruling position,
since the cash is being distributed in lieu of fractional shares solely for the
purpose of saving USF&G the expense and inconvenience of issuing and
transferring fractional shares, and is not separately bargained-for
consideration, the cash received will be treated as having been received in part
or full payment in exchange for the fractional share of stock redeemed.
Accordingly, a holder will recognize capital gain or loss equal to the
difference between the basis of the fractional share of USF&G Common Stock and
the cash received in the deemed redemption by USF&G of such share. In the case
of a holder who receives cash in the Merger and also receives cash in lieu of a
fractional share interest, see "Possible Dividend Treatment" above.
EXERCISE OF DISSENTERS' RIGHTS. In the opinion of each of Mayer, Brown &
Platt and Piper & Marbury L.L.P., the transaction will be a taxable event for a
holder who perfects his or her appraisal rights under Texas law and receives
solely cash in exchange for his or her shares. Such a holder should generally
recognize capital gain or loss, provided that such shares were held by such
holder as capital assets at the Effective Time of the Merger, equal to the
difference between the amount of cash received and the holder's tax basis in the
shares surrendered.
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BACKUP WITHHOLDING; INFORMATION REPORTING. In the opinion of each of Mayer,
Brown & Platt and Piper & Marbury L.L.P., the cash payments due a holder upon
the exchange of such Titan Common Stock pursuant to the Merger (other than
certain exempt persons or entities) will be subject to "backup withholding" for
federal income tax purposes unless certain requirements are met. USF&G or a
third-party paying agent, as the case may be, must withhold 31% of the cash
payments to a holder, unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides USF&G or a third-party paying agent, as the case may be, with his
or her taxpayer identification number and completes a form in which he or she
certifies that he or she has not been notified by the IRS that he or she is
subject to backup withholding as a result of a failure to report interest and
dividends. The taxpayer identification number of an individual is his or her
Social Security number. Any amount paid as backup withholding will be credited
against the holder's federal income tax liability. Holders who receive USF&G
Common Stock must also comply with the information reporting requirements of the
Treasury regulations under Section 368 of the Code. Appropriate documentation
for the foregoing purposes will be provided to holders with the Election Forms
that will be sent to them by the Exchange Agent.
The tax opinions may be based in part upon certain factual representations
made by USF&G, USF&G Company and Titan which Mayer, Brown & Platt and Piper &
Marbury L.L.P. will assume to be true, correct and complete. In addition, the
tax opinions may be based in part upon factual representations made by certain
holders of Titan Common Stock regarding their intention to retain the USF&G
Common Stock received in the Merger, if any, which Mayer, Brown & Platt and
Piper & Marbury L.L.P. will assume to be true, correct and complete. If such
representations are inaccurate, the tax opinions could be adversely affected.
The tax opinions will not be binding upon the IRS, and there can be no assurance
that the IRS will not contest the conclusions expressed therein. If the tax
opinions are not obtainable but USF&G and Titan nonetheless determine to
consummate the Merger, a resolicitation of stockholders will be required to
inform stockholders of the federal income tax consequences of the transaction.
All of the foregoing are subject to change and any such change could affect
the continuing validity of this discussion. Since the federal income tax
consequences of the Merger to a holder of Titan Common Stock depend to a great
extent on whether he or she receives USF&G Common Stock or cash, it is important
that each holder of Titan Common Stock promptly return the Election Form.
REGULATORY MATTERS
Under the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
applicable waiting period requirements have been satisfied. A request for early
termination of the required waiting period under the HSR Act was granted
effective October 1, 1997. At any time before or after the Effective Time of the
Merger, notwithstanding that the waiting period under the HSR Act has been
terminated, the Antitrust Division, the FTC or any state could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of substantial assets or businesses of Titan or
USF&G. Private parties may also seek to take legal action under the antitrust
laws under certain circumstances.
The Merger is subject to regulatory approval by the respective Commissioners
of Insurance of Texas and Michigan under both Article 21.49-1 of the Texas
Insurance Code and Chapter 13 of the Michigan Insurance Code (the "Insurance
Codes"). In order to obtain such approval, USF&G must file with the Commissioner
of each state a statement containing certain information about the acquiring
party, the terms of the proposed transaction and other related information.
USF&G filed the required statements on September 2, 1997 in Texas and on
September 4, 1997 in Michigan, and has filed all other required information with
the respective Insurance Departments of each state. In addition, as a condition
to filing
48
<PAGE>
the Articles of Merger with the Maryland State Department of Assessments and
Taxation on the Effective Date, the Articles of Merger must first be examined
and approved by the Maryland Insurance Administration. Obtaining approval by the
Commissioners and of the Articles of Merger are conditions to the consummation
of the Merger. See "The Merger Agreement--Conditions Precedent to the Merger."
Each party has agreed to use reasonable best efforts to consummate and make
effective the transactions contemplated by the Merger Agreement and to lift any
injunction or other legal bar to the Merger.
RESALE OF USF&G STOCK; AFFILIATES
All shares of USF&G Common Stock received by holders of Titan Common Stock
in the Merger will be freely transferable, except that USF&G Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of USF&G or Titan prior to the Merger may be resold by
them only in transactions permitted by the resale provisions of Rule 145 under
the Securities Act with respect to affiliates of Titan, or Rule 144 under the
Securities Act with respect to persons who are or become affiliates of USF&G, or
as otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of USF&G, or Titan generally include individuals or entities that
control, are controlled by, or are under common control with, Titan, and may
include certain officers and directors of such party as well as principal
stockholders of such party.
Titan has agreed to deliver to USF&G a letter identifying all persons who
Titan believes may be deemed "affiliates" of Titan as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act (the "Affiliates").
Titan has also agreed to deliver to USF&G agreements from all Affiliates that
they will not offer to sell, sell or otherwise dispose of any of the USF&G
Common Stock issued to them pursuant to the Merger, except in compliance with
Rule 145 or another exemption from the registration requirements of the
Securities Act.
NEW YORK STOCK EXCHANGE LISTING OF USF&G COMMON STOCK
USF&G has agreed to use its best efforts to cause the USF&G Common Stock to
be issued to Titan stockholders pursuant to the Merger Agreement to be
authorized for listing on the NYSE, upon official notice of issuance. Such
authorization for listing is a condition to the obligations of USF&G, USF&G
Company and Titan to consummate the Merger.
MANAGEMENT AND OPERATIONS OF TITAN AFTER THE MERGER
After the Merger, the existing operating subsidiaries of Titan will be
subsidiaries of USF&G Company and will operate as part of USF&G's business
units. USF&G currently intends to retain Titan's current operations in San
Antonio, Texas. After the Merger, Titan will have access to resources generally
available to USF&G's other business units, will operate under the direction and
guidance of USF&G's senior management and the USF&G Board, and generally will be
integrated with USF&G business units engaged in activities comparable to those
engaged in by Titan.
49
<PAGE>
THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT, WHICH IS ATTACHED AS ANNEX A TO THIS PROXY STATEMENT/PROSPECTUS AND
IS INCORPORATED BY REFERENCE. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MERGER AGREEMENT.
GENERAL
On August 7, 1997, Titan, USF&G and USF&G Company entered into an Agreement
and Plan of Merger pursuant to which, among other things, Titan will merge with
and into USF&G Company. The Merger will be effected through a conversion of
issued and outstanding shares of Titan Common Stock (other than shares held by
Titan, USF&G or any of their subsidiaries). For each share of Titan Common
Stock, Titan stockholders may elect to receive cash, shares of USF&G Common
Stock or a combination of cash and USF&G Common Stock. See "--Merger
Consideration."
The consummation of the Merger is subject to certain conditions including,
among other things, the approval by an affirmative vote of at least two-thirds
of the outstanding shares of Titan Common Stock entitled to vote, as well as the
approval of certain regulatory agencies.
EFFECTIVE TIME
The Merger shall be consummated when Titan and USF&G Company file properly
executed articles of merger (the "Articles of Merger") with the Secretary of
State of the State of Texas and the Maryland Department of Assessments and
Taxation. The Merger shall become effective upon the acceptance of record of
such filings or at such time thereafter as provided in the Articles of Merger.
TERMS OF THE MERGER
Upon consummation of the Merger, each issued and outstanding share of Titan
Common Stock will be converted, at the election of the holder, into the right to
receive (1) shares of USF&G Common Stock and cash, or (2) all USF&G Common
Stock, or (3) all cash. Each holder of Titan Common Stock will only be permitted
to choose one form of consideration. The value of the consideration and form is
subject to adjustment according to the equations described below in "--Merger
Consideration." Excluded from this conversion shall be shares of Titan Common
Stock held by Titan, USF&G or any of their subsidiaries, which shall be canceled
and retired without consideration.
Following the Merger, USF&G Company shall continue to operate under its
Articles of Incorporation and Bylaws, subject to amendment in accordance with
their terms and Maryland law. The directors and officers of USF&G Company
immediately prior to the Effective Time shall continue in those roles until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation, or removal in accordance with the Articles of
Incorporation and Bylaws.
MERGER CONSIDERATION
The Merger Agreement provides that each outstanding share of Titan Common
Stock will be converted into the right to receive, at the election of the holder
and subject to the prorations and adjustments described below, (i) $11.60 in
cash (the "Standard Cash Consideration") and 0.46516 (the "Standard Exchange
Ratio" and, together with the Standard Cash Consideration, the "Standard
Consideration") of a share of USF&G Common Stock (the "Standard Election"), (ii)
$23.20 (two times the Standard Cash Consideration) in cash (the "Cash
Election"), or (iii) 0.93032 (two times the Standard Exchange Ratio or the
"Stock Consideration") of a share of USF&G Common Stock (the "Stock Election").
The above exchange ratio is based on a value for the USF&G Common Stock of
$24.9375 per share (the "Base Share Price"), which was the closing price of the
USF&G Common Stock on July 29, 1997, the day before USF&G made its original
offer to Titan. Titan Stockholders who have failed to timely submit a properly
completed Election Form to the Exchange Agent or who have properly revoked an
50
<PAGE>
effective and properly completed Election Form shall be deemed to have made a
Standard Election (each a "Deemed Standard Election"). The Merger is intended to
qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended, and provide tax deferral to the extent Titan shareholders receive
shares of USF&G Common Stock in the Merger.
The actual value of the consideration to be received by Titan Stockholders
will be subject to adjustment based upon the Average Stock Price of USF&G Common
Stock during the Pricing Period. If the Average Stock Price is not greater than
$28.68 (15% above the Base Share Price) or less than $21.20 (15% below the Base
Share Price), then (x) the value of the consideration will vary with changes in
the stock price and (y) the allocation of the consideration between stock and
cash will be adjusted only to maintain a 50% stock, 50% cash relationship which
will be accomplished by adjusting the Standard Cash Consideration to an amount
equal to one-half of the product of (a) $23.20 multiplied by (b) 1 plus the
product of (i) 0.50 multiplied by (ii) a fraction the numerator of which is the
Average Stock Price minus the Base Share Price and the denominator of which is
the Base Share Price and adjusting the Standard Exchange Ratio to an amount
equal to the quotient obtained by dividing (i) the Standard Cash Consideration
as so adjusted by (ii) the Average Stock Price. If the Average Stock Price is
less than $21.20 (but not less than $17.46) or greater than $28.68, the value of
the consideration will be fixed at $21.46 or $24.94, respectively, the Standard
Cash Consideration will be $10.73 or $12.47, respectively, and the Standard
Exchange Ratio will be adjusted to provide a fraction of a share of USF&G Common
Stock having a value of $10.73 or $12.47, respectively, based upon the Average
Stock Price. If the Average Stock Price is less than $17.46, the Standard Cash
Consideration will be $10.73 and the Standard Exchange Ratio will be 0.61455;
however, in these circumstances, the parties may adjust the Merger Consideration
to maintain the 50% stock, 50% cash allocation. If the Average Stock Price is
less than $17.46 (30% below the base share price) or greater than $32.42 (30%
above the Base Share Price), each party has the right to terminate the Merger
Agreement. As a result of the foregoing, unless the Merger Agreement is
terminated by one of the parties, the value of the Merger Consideration per
share of Titan Common Stock will decrease below $21.46 if the Average Stock
Price decreases below $17.46, while the values of the Merger Consideration per
share of Titan Common Stock will be fixed at $24.94 even if the Average Stock
Price is greater than $32.42.
The following table sets forth sample calculations of the Merger
Consideration and the components thereof for each share of Titan Common Stock
based upon different Average Stock Prices, assuming a Standard Election.
<TABLE>
<CAPTION>
AGGREGATE
TOTAL VALUE OF MERGER
CONSIDERATION PER CONSIDERATION
AVERAGE STOCK STANDARD CASH STANDARD SHARE OF TITAN COMMON (IN
PRICE CONSIDERATION EXCHANGE RATIO STOCK MILLIONS) (1)
- ------------- ------------- -------------- --------------------- ---------------
<S> <C> <C> <C> <C>
$ 16.50 $ 10.73 .61455 $ 20.87 $ 210.85
17.46 10.73 .61455 21.46 216.81
20.00 10.73 .53650 21.46 216.81
21.20 10.73 .50618 21.46 216.81
23.00 11.15 .48476 22.30 225.30
24.94 11.60 .46516 23.20 234.39
26.00 11.85 .45566 23.69 239.34
28.68 12.47 .43481 24.94 251.97
32.42 12.47 .38466 24.94 251.97
35.00 12.47 .38466 24.94 251.97
</TABLE>
(1) Does not include an aggregate of $14.1 million paid by USF&G to acquire
650,000 shares of Titan Common Stock prior to the Effective Time.
If the Average Stock Price is less than $17.46 or greater than $32.42, each
party has the right to terminate the Merger Agreement. In such event, the Titan
Board would consider whether to terminate the Merger Agreement based on its
judgment as to whether the stockholders of Titan would receive fair
51
<PAGE>
consideration for their shares of Titan Common Stock and whether consummation of
the Merger would be in the best interests of the Titan stockholders. In making
such a decision, the Titan Board would do so consistent with its fiduciary
duties under applicable Texas law. In making its determination whether or not to
terminate the Merger Agreement, the Titan Board may focus on the following
considerations which, among others, may be material to such a decision: (i) how
far the Average Stock Price is above or below the range set forth in the Merger
Agreement, (ii) whether or not the Titan Board believes that the then current
value of the shares of Titan Common Stock is greater than the Merger
Consideration per share of Titan Common Stock, (iii) whether such value arises
from enhanced prospects for Titan operating as an independent entity and (iv)
the possibility of a business combination with a third party that offers greater
value to the Titan stockholders. In making a determination whether to resolicit
the approval and adoption of the Merger Agreement and the authorization of the
Merger by Titan stockholders in the event that the Titan Board elects not to
terminate the Merger Agreement, the Titan Board may consider the factors
described above as well as (i) whether there is any additional information
available that could be material to a decision by the Titan stockholders whether
to approve and adopt the Merger Agreement and authorize the Merger, and (ii)
whether any delay in the closing of the Merger that would be a result of any
resolicitation could provide USF&G with a right to terminate the Merger
Agreement or otherwise adversely affect the prospects that the Merger will be
consummated. In the event that the Titan Board is required, in the exercise of
its fiduciary duty, to make any of the determinations described above, the Titan
Board intends to consult with its financial, legal and other advisors.
Had the Merger been consummated on November 17, 1997, the Average Stock
Price would have been $20.59, and holders of Titan Common Stock making the
Standard Election would have received aggregate consideration worth $21.46 per
share of Titan Common Stock consisting of 0.52103 of a share of USF&G Common
Stock and $10.73 in cash. The foregoing assumes that no proration would have
been required with respect to the various elections in order to maintain a 50%
stock and 50% cash relationship necessary for a tax-free transaction.
The actual cash and stock distributed will depend on the total per share
consideration as calculated above and as adjusted to maintain a 50% stock, 50%
cash relationship to maintain the tax-free nature of the transaction. As a
result, holders of Titan Common Stock may be subject to proration in the event
the aggregate of all elections by such holders would require USF&G to (a) issue
shares of USF&G Common Stock in an amount greater than the product of the
Standard Exchange Ratio multiplied by the number of shares of Titan Common Stock
outstanding immediately prior to the Effective Time or (b) pay an amount of cash
(including cash to be paid for dissenting shares or in respect of Titan Common
Stock otherwise acquired by USF&G) greater than the product of the Standard Cash
Consideration multiplied by the number of shares of Titan Common Stock
outstanding immediately prior to the Effective Time. Outstanding Titan Options
will be converted into the right to receive shares of USF&G Common Stock, on the
terms and subject to the conditions set forth in the Merger Agreement, as more
fully described in this Proxy Statement/Prospectus. As of November 14, USF&G
owned 650,000 shares of Titan Common Stock, all of which were acquired for cash
in the open market or block purchases after August 8, 1997.
THE VALUE OF THE CONSIDERATION TO BE RECEIVED BY TITAN STOCKHOLDERS IN THE
MERGER IS BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR TO THE
DATE OF THE EFFECTIVE TIME. THE CONSIDERATION WILL DEPEND UPON THE AVERAGE STOCK
PRICE, WHICH ESTABLISHES THE STANDARD EXCHANGE RATIO. BECAUSE THE AVERAGE STOCK
PRICE AS OF THE EFFECTIVE TIME IS NOT DETERMINABLE AS OF THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL MEETING, THE EXACT
CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE FOR THE OUTSTANDING TITAN
COMMON STOCK IS NOT CURRENTLY DETERMINABLE. IN ADDITION, BECAUSE THE EFFECTIVE
TIME MAY OCCUR ON A DATE OTHER THAN THE DATE OF THE SPECIAL MEETING, TITAN
STOCKHOLDERS WILL NOT KNOW THE EXACT VALUE OF THE CONSIDERATION THEY WILL
RECEIVE IN THE MERGER AT THE TIME OF VOTING ON THE MERGER. THE PRORATION
PROVISIONS
52
<PAGE>
MAY ALSO CAUSE TITAN STOCKHOLDERS TO RECEIVE CONSIDERATION IN THE MERGER THAT IS
DIFFERENT FROM THE CONSIDERATION THEY ELECT TO RECEIVE.
Holders of Titan Common Stock that have, as of the Effective Time, complied
with all procedures necessary to assert appraisal rights in accordance with the
TBCA, if applicable, shall have such rights, if any, as provided in Section 5.12
of the TBCA. The Titan Common Stock of dissenting stockholders shall not be
converted or exchangeable as provided above. Instead, such holders shall be
entitled to receive such payments as may be determined to be due to such holders
pursuant to the TBCA. If a Titan stockholder shall have failed to perfect or
shall have effectively withdrawn or lost his right to appraisal and payment
under the TBCA, such stockholder's Titan Common Stock shall be converted and
become exchangeable, as of the Effective Time, into the Standard Consideration.
Titan shall give prompt notice to USF&G of any demands for appraisal received by
Titan and shall not settle or offer to settle any such demand for appraisal
rights without prior written consent from USF&G.
PRORATION AND ADJUSTMENT
In order to maintain a 50% stock, 50% cash relationship and thereby maintain
the tax exempt status of the Merger, the Merger Consideration is subject to
proration and adjustment as set forth below:
EXCESS STOCK. The maximum number of shares of USF&G Common Stock issuable
to holders of Titan Common Stock (the "Maximum Number of USF&G Shares") shall
not exceed the product of (x) the Standard Exchange Ratio and (y) the number of
shares of Titan Common Stock outstanding immediately prior to the Effective
Time. In the event that the aggregate number of shares of USF&G Common Stock
issuable pursuant to the Stock Elections exceeds the Maximum Number of USF&G
Shares minus the number of shares of USF&G Common Stock issuable pursuant to
Standard Elections and Deemed Standard Elections (such difference, the
"Remaining USF&G Shares"), each holder making a Stock Election shall receive,
for each share of Titan Common Stock held by such holder (x) a number of shares
of USF&G Common Stock equal to the quotient obtained by dividing the Remaining
USF&G Shares by the aggregate number of shares of Titan Common Stock making
Stock Elections (the "Stock Election Titan Shares") plus (y) cash in an amount
equal to the quotient obtained by dividing the Remaining Stock Election Cash
Amount (as defined below) by the Stock Election Titan Shares. Remaining Stock
Election Cash Amount shall be equal to the Maximum Cash Amount (as defined
below) minus the sum of the aggregate amount of cash payable pursuant to
Standard Elections, Deemed Standard Elections, Cash Elections, Dissenting Shares
and fractional shares and the aggregate amount of consideration transferred by
USF&G in acquiring shares ("USF&G Shares") of Titan Common Stock prior to the
Effective Time.
EXCESS CASH. The maximum amount of cash to be paid to holders of Titan
Common Stock (the "Maximum Cash Amount") will be equal to the product of the
Standard Cash Consideration, as adjusted, and the number of shares of Titan
Common Stock outstanding immediately prior to the Effective Time. In the event
that the aggregate amount of cash payable pursuant to Standard Elections, Deemed
Standard Elections and Cash Elections received by the Exchange Agent exceeds the
Maximum Cash Amount reduced by the sum of (i) the aggregate amount of cash
payable with respect to the Dissenting Shares and fractional shares and (ii) the
aggregate amount of cash payable by USF&G in acquiring the USF&G Shares (such
excess being hereafter referred to as the "Excess Cash"), the following
adjustments shall be made:
(1) If the Excess Cash is less than or equal to one-half of the
aggregate amount of cash payable pursuant to Cash Elections, each holder
making a Cash Election shall receive, for each share of Titan Common Stock
held by such holder,
(x) cash in an amount equal to (i) the aggregate amount of cash that
otherwise would be payable pursuant to Cash Elections reduced by the
Excess Cash, divided by (ii) the aggregate number of shares of Titan
Common Stock held by holders making Cash Elections (the "Cash Election
Titan Shares"), plus
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<PAGE>
(y) a number of shares of USF&G Common Stock equal to (i) the Excess
Cash divided by (ii) the Average Stock Price (or the Closing Stock Price
if adjustments are required under Section 2.4 of the Merger Agreement)
divided by (iii) the Cash Election Titan Shares.
(2) If the Excess Cash is greater than one-half of the aggregate amount
of cash payable pursuant to Cash Elections, each holder making a Standard
Election, Deemed Standard Election or Cash Election shall receive, for each
share of Titan Common Stock held by such holder,
(x) cash in an amount equal to (i) the Maximum Cash Amount reduced by
the aggregate amount of cash payable with respect to Dissenting Shares,
USF&G Shares and fractional shares, divided by (ii) the aggregate number
of shares of Titan Common Stock held by holders making Standard
Elections, Deemed Standard Elections or Cash Elections (the
"Cash/Standard Election Titan Shares"), plus
(y) a number of shares of USF&G Common Stock equal to (i) the
Remaining Cash/ Standard Election USF&G Shares (as defined below) divided
by (ii) the Cash/Standard Election Titan Shares. The "Remaining
Cash/Standard Election USF&G Shares" shall be the Maximum Number of USF&G
Shares minus the number of shares of USF&G Common Stock issuable pursuant
to Stock Elections (including any fractional shares of USF&G Common Stock
for which a cash adjustment shall be paid pursuant to Section 2.5(c) of
the Merger Agreement in respect of such Stock Elections).
In addition, in the event that the allocation of the consideration between
stock and cash is not 50% stock and 50% cash, appropriate adjustment shall be
made to the extent required to cause the Merger Consideration allocation between
cash and stock to satisfy the continuity of interest requirements for purposes
of causing the transaction to qualify as a tax-free reorganization. In no event,
however, will the total value of the Merger Consideration, based on the Average
Stock Price, be increased as a result of such adjustment. Also, the Merger
Consideration will be adjusted to reflect changes, if any, in the number of
shares of Titan Common Stock outstanding.
The following examples set forth sample calculations of the Excess Cash and
Excess Stock proration formulae based upon the assumptions that the Average
Stock Price of USF&G Common Stock is $24.9375, the Standard Exchange Ratio is
0.46516, 10,075,370 shares of Titan Common Stock are outstanding, there are no
dissenters or fractional shares paid in cash and USF&G has purchased for cash
650,000 shares of Common Stock for an average of $21.65 per share prior to the
Effective Time. The examples also assume that the Maximum Number of USF&G shares
is 4,686,688 (the assumed number of Titan shares outstanding, 10,075,370
multiplied by the Standard Exchange Ratio, 0.46516) and the Maximum Amount of
Cash is $117,182,214 (the assumed number of Titan shares outstanding,
10,075,370, multiplied by the Standard Cash Consideration, $11.60). The examples
do not attempt to predict or take into account the form of consideration that
Mark E. Watson, Jr., Titan's largest shareholder, may elect to receive. In all
cases the Total Amount of Cash column excludes shares of Titan Common Stock
purchased for cash by USF&G prior to the Effective Time and 27,825 shares of
restricted Titan Common Stock.
Example 1 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Cash Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections.................. 1,500,000 0.93033 $ 23.20 $ 0.00 1,395,489 $ 0
Number of All Cash Elections 1,000,000 0.06977 $ 1.74 $ 21.46 69,774 $21,460,000
Number of Standard Elections 6,925,370 0.46516 $ 11.60 $ 11.60 3,221,425 $80,334,292
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
54
<PAGE>
Example 2 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Stock Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 5,000,000 0.71170 $ 17.75 $ 5.45 3,558,496 $28,940,889
Number of All Cash Elections 2,000,000 0.00000 $ 0.00 $ 23.20 0 $46,400,000
Number of Standard Elections 2,425,370 0.46516 $ 11.60 $ 11.60 1,128,192 $30,123,103
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 3 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Cash Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 3,000,000 0.93033 $ 23.20 $ 0.00 2,790,977 $ 0
Number of All Cash Elections 3,000,000 0.10079 $ 2.51 $ 20.69 302,356 $62,060,000
Number of Standard Elections 3,596,819 0.46516 $ 11.60 $ 11.60 1,593,355 $39,734,292
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 4 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Stock Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 9,425,370 0.49724 $ 12.40 $ 10.80 4,686,688 $101,794,292
Number of All Cash Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of Standard Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 5 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Cash Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of All Cash Elections 9,425,370 0.49724 $ 12.40 $ 10.80 4,686,688 $101,794,292
Number of Standard Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
Example 6 -- Stock, Cash and Standard Elections Are Made in Amounts Indicated
(Standard Election is Pro Rated)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF AMOUNT TOTAL TOTAL
TITAN USF&G SHARES USF&G SHARES OF CASH NUMBER OF AMOUNT
SHARES PER SHARE PER SHARE PER SHARE USF&G SHARES OF CASH
--------- --------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of All Stock
Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of All Cash Elections 0 0.00000 $ 0.00 $ 0.00 0 $ 0
Number of Standard Elections 9,425,370 0.49724 $ 12.40 $ 10.80 4,686,688 $101,794,292
--------- -------------- -----------
9,425,370 4,686,688 $101,794,292
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
55
<PAGE>
DIVIDENDS AND FRACTIONAL SHARES
No dividends or other distributions declared after the Effective Time on
USF&G Common Stock shall be paid with respect to any shares of Titan Common
Stock represented by a Titan certificate until such Titan certificate is
surrendered for exchange. Following surrender of any Titan certificate, there
shall be paid to holders of USF&G certificates issued in exchange therefor,
without interest, (a) at the time of surrender, the amount of dividends and
other distributions with a Record Date after the Effective Time, payable with
respect to whole shares of USF&G Common Stock, and not paid, minus any required
tax withholding, and (b) at the appropriate payment date, the amount of
dividends and other distributions with a Record Date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable with
respect to whole shares of USF&G Common Stock, and not paid, minus any required
tax withholding.
No fractional shares of USF&G Common Stock shall be issued pursuant to the
Merger. In lieu of the issuance of fractional shares of USF&G Common Stock, cash
adjustments shall be paid to holders in respect of any fractional shares of
USF&G Common Stock that would otherwise be issuable. The amount of such cash
adjustment shall equal the product of such fractional amount and the Average
Stock Price.
TITAN OPTIONS AND WARRANTS
At the Effective Time, each Titan Option shall immediately become fully
vested and shall be converted into an option to purchase shares of USF&G Common
Stock. Following the Effective Time, each Titan Option shall be exercisable upon
the same terms and conditions as are then applicable to such Titan Option,
except that (i) each Titan Option shall be exercisable for that number of shares
of USF&G Common Stock equal to the product of (x) the number of shares of Titan
Common Stock for which such Titan Option was exercisable immediately prior to
the Effective Time and (y) the Standard Exchange Ratio and (ii) the exercise
price of such option shall be equal to the quotient obtained by dividing the
exercise price per share of such Titan Option by the Standard Exchange Ratio.
From and after the date of the Merger Agreement, no further Titan Options shall
be granted under the 1993 Stock Option Plan, as amended, or the 1993 Directors'
Stock Option Plan or otherwise. At or soon after the Effective Time, USF&G shall
issue to each holder of a Titan Option that is canceled an agreement that
reflects the terms of the USF&G Option to be substituted therefor.
The Merger Agreement provides that Titan shall use its reasonable best
efforts to cause holders of all outstanding Titan Warrants to purchase Titan
Common Stock to agree to surrender their warrants and receive in exchange for
cancellation and in settlement thereof a number of shares of USF&G Common Stock
(and cash in lieu of fractional shares) for each share of Titan Common Stock
subject to the Titan Warrant equal to the quotient of: (a) the product of (1)
the number of shares of Titan Common Stock which the holder would receive if
such Titan Warrant were exercised in full immediately prior to the Effective
Time multiplied by (2) the difference between (x) the Cash Consideration and (y)
the exercise price of such share of Titan Common Stock under the Titan Warrant
to the extent such amount is a positive number divided by (b) the Average Stock
Price ("Warrant Consideration"). Upon receipt of the Warrant Consideration, the
Titan Warrant shall be canceled and the holder of the Titan Warrant shall
release any and all rights the holder had with respect to such Titan Warrant.
USF&G subsequently agreed with Titan that it will also offer to pay the Warrant
Consideration in cash based upon the Average Stock Price, provided that holders
of the Titan Warrants make such election on or before the Effective Time.
Pursuant to the agreements under which the Titan Warrants were issued (the
"Warrant Agreements"), and regardless of whether the Warrant Consideration is
paid in stock or cash, Titan would also pay such holders an amount equal to
accrued dividends on the Titan Common Stock underlying the outstanding Titan
Warrants, measured from the date the Titan Warrants were first issued. Such
holders may elect to receive the Warrant Consideration by executing and
returning a Warrant Cancellation Agreement, which will contain certain
representations, warranties and indemnities relating to, among other things,
good title to the Titan Warrants.
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<PAGE>
In the event that the holders of the outstanding Titan Warrants do not
properly elect to receive the Warrant Consideration (in stock or cash) on or
before the Effective Time, then pursuant to the terms of the Warrant Agreements,
such holders would be entitled upon exercise of the Titan Warrants to receive
the Merger Consideration in lieu of Titan Common Stock. Holders of the Titan
Warrants will be given the opportunity to elect the form of consideration (the
Standard Consideration, the Cash Consideration or the Stock Consideration)
payable upon later exercise at the same time as holders of Titan Common Stock,
and such elections would be subject to the effect of the proration adjustments
described above under "The Merger Agreement--Proration and Adjustment" (although
such elections will not be included when calculating the required proration
adjustment). At the time of exercise of the Titan Warrants, such holders will
receive the Merger Consideration in lieu of each share of Titan Common Stock
which would otherwise be issuable and the form of consideration will be as
previously selected, subject to proration and adjustment as described above. In
the event no election is made, then such holder would receive the Standard
Consideration. Shares of USF&G Common Stock issuable as Merger Consideration
upon exercise of the Titan Warrants after the Effective Time would not be
registered under the Securities Act and therefore would not be transferable
except upon subsequent registration under the Securities Act or pursuant to an
exemption therefrom. On or before the Effective Time, holders of Titan Warrants
may also exercise their right to receive Titan Common Stock pursuant to and in
accordance with the Warrant Agreements.
USF&G has also agreed to waive the condition to Closing that holders of
Titan Warrants representing the right to purchase 75% of the shares of Titan
Common Stock underlying the outstanding Titan Warrants surrender their warrants
in exchange for the Warrant Consideration payable in USF&G Common Stock.
SURRENDER AND PAYMENT
Promptly after the Effective Time the Exchange Agent will mail a letter of
transmittal, exchange instructions and an Election Form to each holder of record
of Titan Common Stock immediately prior to the Effective Time and to holders of
Titan Options. The holders shall make the Standard Election, Stock Election, or
Cash Election by following the instruction to complete and return the form.
Excluding any shares of Titan Common Stock that are canceled or held by
dissenting Stockholders, all holders of Titan Common Stock immediately prior to
the Effective Time must submit to the Exchange Agent a properly complete form by
the election deadline mutually agreed upon by Titan and USF&G or else be deemed
to have made the Standard Election. TITAN STOCKHOLDERS ARE REQUESTED NOT TO
SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL SUCH TRANSMITTAL FORM AND
INSTRUCTIONS ARE RECEIVED.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties, respectively, relating to, among other things: (a) the due
organization, valid existence and good standing of Titan, USF&G and USF&G
Company and the corporate powers of such subsidiaries to operate their
respective businesses; (b) the capital structure of each of Titan, USF&G and
USF&G Company; (c) the due organization, valid existence and good standing of
each of Titan's subsidiaries and the corporate powers of such subsidiaries to
operate their respective businesses; (d) the authorization, execution, delivery
and enforceability of the Merger Agreement and, subject to Titan stockholder
approval, the consummation of the transactions contemplated by the Merger
Agreement by Titan, USF&G and USF&G Company not being in violation of their
respective organizational documents, material contracts and agreements, and the
law; (e) Titan and USF&G have filed all required documents with the SEC,
insurance regulators, and other appropriate regulatory authorities; (f) the
information supplied by Titan or USF&G for inclusion in the S-4 does not contain
untrue statements of material fact or omissions of material fact necessary to
make the statements therein not misleading; (g) Titan and its subsidiaries
comply with all applicable laws and hold all necessary licenses and maintain
required loss reserves and statutory capital; (h) the approval, to the extent
required by applicable law, of insurance policies and contracts entered into by
Titan or its
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<PAGE>
subsidiaries by insurance regulatory authorities and the payment or process of
settlement of all policy benefits payable except those for which there is a
reasonable basis for contesting; (i) the absence of any indication that a rating
agency may downgrade the rating of a Titan subsidiary that is an insurance
company; (j) the absence of certain material adverse changes or events for
Titan, USF&G and their subsidiaries; (k) the absence of undisclosed liabilities
for Titan, USF&G and their subsidiaries; (l) pending claims against Titan, USF&G
and their subsidiaries; (m) taxes, tax returns and audits of Titan and its
subsidiaries; (n) pensions and employee benefit plans of Titan and its
subsidiaries and compliance with the Employee Retirement Income Security Act of
1974, as amended; (o) the absence of any labor or collective bargaining
agreements and employees represented by labor unions; (p) compliance of Titan
with environmental laws and regulations; (q) good and marketable title to real
property and the absence of non-delinquent liens; (r) the full force and effect
and binding obligation of certain material agreements, contracts, and
commitments of Titan and its subsidiaries; (s) the absence of director, officer,
or key employee borrowing from or competition with Titan or its subsidiaries;
(t) certain loan agreements with Dresdner Bank are repayable without penalty;
(u) liens, pledges or mortgages against assets of Titan and its subsidiaries;
(v) the liability, property, workers compensation, directors and officers
liability and other similar insurance policies of Titan; (w) opinion of Furman
Selz LLC, as of August 7, 1997, to the effect that the Merger Consideration is
fair to Titan Stockholders; (x) the unanimous vote by the Boards of Directors of
Titan and USF&G Company to approve the Merger Agreement and recommend
Stockholder approval; (y) the affirmative vote of two-thirds of the outstanding
shares of Titan Common Stock is sufficient to approve the Merger and no other
Titan Stockholder approval is required; (z) the affirmative vote of USF&G, as
sole stockholder of USF&G Company, is sufficient to approve the Merger and no
other approval is required of USF&G or USF&G Company stockholders is required;
(aa) except for E. B. Lyon, III and/or Stonegate Securities Inc. and Furman Selz
LLC, Titan and its subsidiaries will not pay a broker, agent or advisor fee;
(bb) except for Merrill Lynch & Co., Merrill Lynch Pierce Fenner & Smith
Incorporated, USF&G, USF&G Company and their subsidiaries will not pay a broker,
agent or advisor fee; (cc) the name, location, and description of each account
of Titan and its subsidiaries with financial institutions; (dd) the accuracy of
the premium balances receivable of Titan and its subsidiaries; (ee) the
investment portfolio of Titan and its subsidiaries; (ff) the absence of any
known illegal gifts or payments made by people associated with or acting on
behalf of Titan or its subsidiaries; (gg) reinsurance contracts applicable to
Titan and its subsidiaries; and (hh) the corporate standing and capital
structure of Quick-Sure Auto Agency, Inc. and Tri-West of New Mexico, LLC, and
their relationship to Titan and its subsidiaries.
CONDUCT OF BUSINESS OF TITAN PENDING THE MERGER
Pursuant to the Merger Agreement, Titan has agreed that, during the period
from the date of the Merger Agreement until the earlier of the Effective Time
and termination of the Merger Agreement, except as otherwise consented to in
writing by USF&G or as required by applicable law, Titan will and will cause
each of its subsidiaries to conduct their respective businesses only in the
ordinary course and consistent with past practice. Titan will use reasonable
best efforts to (a) maintain in full force and effect all material contracts
except those expiring in accordance with their terms; (b) maintain all Titan
licenses, qualifications and authorizations to conduct business; (c) maintain
the rating for all subsidiary insurance companies with certain exceptions; (d)
maintain all its assets and property in good working order and condition; (e)
continue all current marketing and selling activities relating to its business
and operations; (f) maintain its books and records in the usual manner
consistent with past practices; (g) prepare and file duly and validly all tax
returns and pay duly and fully all taxes; (h) cause all statutory reserves and
other similar amounts with respect to losses, benefits, claims and expenses with
respect to subsidiary insurance business to be adequate in all respects; (i) use
reasonable best efforts to maintain its level of insurance coverage; (j) refrain
from entering into a new treaty of reinsurance, coinsurance or similar contract;
(k) continue to comply in all material respects with all applicable laws; (l)
not incur capital expenses in excess of $75,000, individually or in aggregate;
(m) not grant an increase in compensation of any of its officers, directors, or
key employees; (n) pay or agree to pay any pension, retirement allowance or
other
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<PAGE>
employee benefit not required to be paid before the Effective Time; (o) enter
into a new employment, retention, severance or termination agreement with any
director, officer or employee, or modify or grant any consent with respect to
the same; (p) become obligated under any new benefit plan or employee
arrangement not in existence on August 7, 1997 or amend any existing plan such
that the benefits provided are enhanced; (q) other than drawdowns in the
ordinary course of business, not assume or incur any indebtedness for borrowed
money or guarantee such indebtedness; and (r) not pay discharge, settle or
satisfy any claims, liabilities or obligations other than in the ordinary
course. Titan has also agreed to restrict its investments and its subsidiaries'
investments to money market instruments, publicly traded investment grade debt
securities and exchange or National Market System traded equity-related
securities, the latter not exceeding nine percent of total investment.
In addition, Titan has agreed that Titan and its subsidiaries will not (a)
declare or pay any dividend on its capital stock except with respect to Titan,
regular cash dividends paid on a quarterly basis; (b) split, combine or
reclassify any of its capital stock; (c) issue any shares of capital stock
except pursuant to currently outstanding Titan Options and Titan Warrants; (d)
repurchase or otherwise acquire shares of its capital stock except as required
under the terms of any employee benefit plan; (e) grant, amend the terms of or
reprice any options, warrants or rights to purchase Titan stock; (f) issue,
deliver or sell, or pledge or otherwise encumber any shares of its capital
stock, any Titan voting debt or any securities convertible into any such shares
(other than Titan Common Stock issued upon the exercise of warrants or options
outstanding as of August 7, 1997); (g) merge or consolidate with or acquire an
equity interest in any corporation, partnership or other business organization
and acquire assets of any corporation, partnership or other business
organization; (h) sell, lease or otherwise dispose of any of their properties;
(i) authorize, recommend, announce or propose a plan of partial or total
liquidation or dissolution of Titan or its subsidiaries; or (j) take any action
that is reasonably likely to result in any of the representations or warranties
being untrue in any material respect or any of the covenants or conditions to
the Merger not being satisfied. Titan also agreed to ensure that all of the
capital stock of Quick-Sure transfers to USF&G for nominal consideration and
that, at the Effective Time, Quick-Sure's relationships with Home State, County
Mutual Insurance, Titan and Titan's subsidiaries inure to the benefit of USF&G.
NO SOLICITATION
The Merger Agreement provides that Titan will not, nor will any of its
subsidiaries, directly or indirectly, take (or authorize or permit any of their
respective officers, directors, employees, representatives, investment bankers,
attorneys, accountants or other agents or affiliates to take) any action to
initiate, solicit or encourage any inquiries or the making or implementation of
any proposal with respect to a merger, consolidation or other business
combination including Titan or its subsidiaries or any acquisition or similar
transaction involving the purchase of (i) all or a significant portion of assets
of Titan and its subsidiaries taken as a whole, (ii) 15% or more of Titan's
outstanding Common Stock or (iii) 15% or more of the outstanding shares of
capital stock of any subsidiary (any such proposal or offer hereinafter referred
to as an "Acquisition Proposal"). Furthermore, Titan shall not engage in any
negotiations concerning or provide any confidential information to or have any
discussions with, any person or group relating to an Acquisition Proposal. Titan
will cease and immediately terminate any existing activities, discussions or
negotiations with any parties respecting Acquisitions Proposals and will require
each party who has signed a confidentiality agreement to honor the restrictions
of such agreement and return or destroy all confidential information of Titan.
Titan will notify USF&G immediately if any such inquiries, proposals or offers
are received by, any such information is requested from, or any such
negotiations or discussion are sought to be initiated or continued with it.
Notwithstanding the above, Titan may provide non-public information to any
person or group if (a) such group has expressed a written interest in making an
Acquisition Proposal providing greater aggregate value to Titan and/or Titan
shareholders than the transactions contemplated by the Merger Agreement; (b)
Titan reasonably believes that such person or group has the financial ability to
consummate the Acquisition Proposal; (c) such group or person executes a
confidentiality letter no less favorable
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<PAGE>
to Titan than the USF&G Confidentiality Letter; (d) the Titan Board on the
advise of outside counsel, determines in good faith that it is necessary, in
order to comply with the Board's fiduciary duties, to provide such information
requested; and (e) Titan provides notice to USF&G of the identity of the person
or group at or before the time such information is given and provides a copy of
the same to USF&G. Titan may also enter into discussions or negotiate with any
person or group that makes a wholly unsolicited bona fide Acquisition Proposal
providing greater aggregate value to Titan and/or Titan stockholders than the
transactions contemplated by the Merger Agreement if (i) the Titan Board, on the
advise of outside counsel, determines in good faith that such action is
necessary in order to comply with the Titan Board's fiduciary duties; (ii) prior
to entering into such discussions with such person or group, Titan provides
written notice to USF&G to the effect that it will enter into discussions with
such person or group; and (iii) Titan keeps USF&G informed of the status and all
material information with respect to any such discussions to the extent such
disclosure does not violate applicable law or confidentiality agreements. Titan
may also comply, to the extent required, with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal.
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that, from and after the Effective Time, Titan
(or USF&G Company, if after the Effective Time) shall indemnify, defend and hold
harmless the officers and directors of Titan (the "Indemnified Parties") against
all losses, claims, damages, costs, expenses, liabilities or judgments or
amounts paid in settlement ("Claims") based in whole or in part on the fact that
such person is or was such officer or director of Titan (including Claims
pertaining to any matter occurring at or before the Effective Time and Claims
arising out of the transactions contemplated by the Merger Agreement) to the
fullest extent permitted or required under applicable law. In the event Claims
are brought against any Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and Titan (or USF&G Company, if after the
Effective Time) shall pay all reasonable fees and expenses of such counsel.
Titan (or USF&G Company, if after the Effective Time) will use reasonable best
efforts to assist the defense, provided that Titan (or USF&G Company, if after
the Effective Time) shall not be liable for any settlement effected without its
prior written consent.
Any Indemnified Party wishing to claim indemnification shall, upon learning
of a Claim, notify Titan (or USF&G Company, if after the Effective Time). The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is a conflict on any significant
issue between the positions of two or more Indemnified Parties. The rights to
indemnification shall survive the Merger and continue in full force and effect
for a period not less than six years from the Effective Time; provided, however,
that all rights of indemnification for any Indemnified Party asserted within
such period shall continue until the disposition of such liabilities. USF&G
Company shall not amend its bylaws with respect to indemnification during the
six-year period if such amendment would materially and adversely affect the
rights of the Indemnified Parties.
For a period of six years following the Effective Time, USF&G Company shall
cause Titan's current directors' and officers' liability insurance policies to
remain in effect or substitute comparable directors' and officers' liability
policies with respect to matters arising before the Effective Time, provided
that USF&G Company shall not be required to pay an annual premium for such
insurance in excess of 200% of the last annual premium paid by Titan. In such
case, USF&G Company shall purchase as much coverage as possible for such amount.
CONDITIONS PRECEDENT TO THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective
obligations of Titan and USF&G to effect the Merger are subject to certain
conditions, including: (a) the approval of the Merger Agreement by two-thirds of
the outstanding shares of Titan Common Stock; (b) all necessary governmental and
regulatory filings and approvals have been made and obtained; (c) the waiting
period for the Hart-
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<PAGE>
Scott-Rodino Act shall have been terminated or shall have expired and no
restrictive order shall have been placed on Titan, USF&G or USF&G Company; (d)
the absence of any preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission, nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental entity
shall be in effect, which prevents the consummation of the Merger; (e) the Form
S-4 shall have become effective and shall not be the subject of any stop order;
and (f) the shares of USF&G Common Stock issued to Titan stockholders upon
consummation of the Merger shall have been authorized for listing on the New
York Stock Exchange.
The obligations of USF&G and USF&G Company to effect the Merger are subject
to additional conditions (unless waived by USF&G), including: (a) the
representations and warranties of Titan set forth in the Merger Agreement shall
be true and correct as of the date of the Merger Agreement and as of the
Effective Time other than failures to be true and correct which individually or
in the aggregate do not have a material adverse effect on Titan; (b) Titan shall
have performed and complied in all material respects with all agreements and
covenants required to be performed or complied with under the Merger Agreement
prior to Closing; (c) an event, change, condition, fact or effect which has or
could reasonably be expected to have a material adverse effect on (i) the
business, results of operations, or financial condition of Titan and its
subsidiaries taken as a whole or (ii) the ability of Titan to consummate the
transactions contemplated by the Merger Agreement has not occurred with respect
to Titan or its subsidiaries; (d) the lack of litigation pending or, to Titan's
or USF&G's knowledge, threatened by any governmental entity to restrain or
prevent the Merger; (e) the receipt of written agreements from Titan affiliates;
(f) USF&G shall have received a tax opinion from a nationally-recognized law
firm to the effect that the Merger will be treated as a tax-free reorganization;
and (g) Titan shall have delivered to USF&G evidence that all requisite action
necessary for the due authorization of the Merger Agreement and the performance
and consummation of all necessary transactions contemplated thereby. USF&G and
USF&G Company have agreed to waive the condition set forth in the Merger
Agreement that Titan complete certain actions necessary to effect the surrender
of outstanding Titan Warrants in exchange for USF&G Common Stock.
The obligation of Titan to effect the Merger is subject to additional
conditions (unless waived by Titan), including: (a) the representations and
warranties of USF&G and USF&G Company set forth in the Merger Agreement shall be
true and correct as of the date of the Merger Agreement and as of the Effective
Time; (b) USF&G and USF&G Company shall have performed and complied in all
material respects with all agreements and covenants required to be performed or
complied with under the Merger Agreement prior to Closing; (c) Titan shall have
received a tax opinion from a nationally recognized law firm to the effect that
the Merger will be treated as a tax-free reorganization; (d) except as publicly
disclosed in documents filed under the Exchange Act, there has been no material
adverse change in the business, results of operations or financial condition of
USF&G between March 31, 1997 and the Effective Time; and (e) USF&G shall have
delivered to Titan evidence that all requisite action necessary for the due
authorization of the Merger Agreement and the performance and consummation of
all necessary transactions contemplated thereby.
FEES AND EXPENSES
The Merger Agreement provides that all costs and expenses in connection with
the Merger Agreement and the transactions contemplated thereby will be paid by
the party incurring such expenses. Titan agrees to pay a fee of $7,500,000 in
immediately available funds if (a) the Merger Agreement is terminated because
two-thirds of the shares of Titan Common Stock have not approved the Merger, the
Merger Agreement and the consummation of the transactions contemplated thereby,
and any person or group shall, within 90 days after such termination, consummate
or enter into an agreement respecting an Acquisition Proposal, or (b) the Merger
Agreement is terminated because the Titan Board has failed to
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<PAGE>
give or shall have withdrawn approval or recommendation or taken a public
position materially inconsistent with, the Merger or the Merger Agreement or has
recommended, accepted or entered into an agreement for an Acquisition Proposal.
Such fee shall be paid within one business day of the entry into any
agreement respecting an Acquisition Proposal or within one business day of the
Titan Board's failure to give or withdrawal of approval or recommendation of the
Merger or the Merger Agreement, or recommendation or acceptance of an
Acquisition Proposal. Any amounts that are not paid when due shall bear interest
at a rate of 9% per annum from the date due through and including the date paid.
The $7,500,000 fee shall be the exclusive remedy of USF&G, USF&G Company and
their affiliates relating to the Merger Agreement or the transactions
contemplated thereunder in the event of a termination giving rise to its payment
and, upon payment of the fee, USF&G, USF&G Company and their affiliates shall
have no rights in tort, contract or otherwise arising from or relating to the
Merger Agreement or the transactions contemplated hereunder except for the
Confidentiality Agreements.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the shareholders of Titan or USF&G:
(a) by mutual written consent of USF&G and Titan;
(b) by either USF&G or Titan if any permanent injunction or other court
order preventing the Merger shall become final and non-appealable;
(c) by either USF&G or Titan if the Merger has not been consummated on or
before December 31, 1997, provided that if the conditions precedent have
not been satisfied as of such date, the Merger Agreement may not be
terminated until February 28, 1998, if it can be anticipated that such
conditions precedent will be fulfilled by that date, and that the right
to terminate the Merger Agreement shall not be available to any party
whose failure to fulfill an obligation under the Merger Agreement has
been the cause or resulted in the failure of the Merger to occur before
the Termination Date;
(d) by either USF&G or Titan if, at the duly held meeting of Titan
stockholders held for the purpose of voting on the Merger, the Merger
Agreement, and the consummation of the transactions contemplated thereby,
the holders of at least two-thirds of the shares of outstanding Titan
Common Stock have not approved the Merger, the Merger Agreement, and the
consummation of the transactions contemplated thereby;
(e) by either USF&G or Titan if, prior to the consummation of the Merger,
the Titan Board shall have failed to give or shall have withdrawn or
adversely modified in any material respect, or taken a public position
materially inconsistent with its approval and recommendation of the
Merger and the Merger Agreement, or an Acquisition Proposal shall have
been recommended or accepted by Titan or Titan shall have entered into an
agreement with respect to an Acquisition Proposal;
(f) by USF&G, upon a breach of any representation or warranty of Titan, or
in the event that Titan fails to comply in any material respect with any
of its covenants or agreements, or, if any representation or warranty of
Titan shall be or become untrue, in each case where such breach, failure
to so comply or untruth would cause Titan to be incapable of satisfying
its obligation to obtain the approval of two-thirds of the shares of
Titan Common Stock and the necessary governmental and regulatory consents
and to comply with representations and warranties of the Merger Agreement
and perform its obligations under the Merger Agreement within ten days
after the occurrence of the change, provided that a willful breach by
Titan shall be deemed to cause such condition to be incapable of being
satisfied by such date;
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(g) by Titan upon a breach of any representation or warranty of USF&G or
USF&G Company, or in the event USF&G or USF&G Company fail to comply in
any material respect with any of its covenants or agreements, or if any
representation or warranty of USF&G or USF&G Company shall be or become
untrue, in each case where such breach, failure to so comply or untruth
would cause Titan to be incapable of satisfying its obligation to obtain
the approval of two-thirds of the shares of Titan Common Stock, the
necessary governmental and regulatory consents, and to comply with
representations and warranties of the Merger Agreement and to perform its
obligations under the Merger Agreement within ten days after the
occurrence of the change, provided that a willful breach by USF&G and
USF&G Company shall be deemed to cause such condition to be incapable of
being satisfied by such date; and
(h) by either USF&G or Titan within two days of determining the Average
Stock Price if the Average Stock Price shall be greater than $32.42 or
less than $17.46.
If the Merger Agreement is validly terminated by either party, the Merger
Agreement will become null and void and there will be no liability or obligation
on the part of Titan or USF&G (or any of their subsidiaries) except those fees
and expenses described above and those obligations imposed by the Titan
confidentiality agreement and the USF&G confidentiality agreement, which will
remain in effect. Nothing relieves any party from liability for willful breach
of its representations, warranties, covenants or agreements contained in the
Merger Agreement.
AMENDMENT AND WAIVER
The Merger Agreement may be amended, modified or supplemented only by
written agreement of Titan, USF&G and USF&G Company at any time prior to the
Effective Time of the Merger. However, after the Merger Agreement is approved by
Titan's stockholders, no such amendment shall (a) reduce the amount or change
the consideration to be delivered to the holders of Titan Common Stock, (b)
change the date by which the Merger is required to be effected, or (c) change
the amounts payable with respect to Titan Options and Titan Warrants.
At any time prior to the Effective time, Titan, USF&G and USF&G Company, by
action taken or authorized by their respective Boards of Directors, may (a)
extend the time for the performance of any of the obligations or other acts of
the other parties; (b) waive any inaccuracies in the representations and
warranties contained in the Merger Agreement or in any documents delivered
pursuant thereto; and (c) waive compliance with any of the agreements or
conditions contained in the Merger Agreement. Any agreement to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of the waving or extending party. In the event that Titan
waives a condition to, or otherwise agrees to a modification of, the Merger
Agreement which is material to a vote by the stockholders of Titan, Titan
stockholders would be resolicited in accordance with rules promulgated under the
Exchange Act governing the solicitiation of the proxies. The failure of any
party to assert any of its rights shall not constitute waiver of such rights.
VOTING AND SUPPORT AGREEMENT
Mark E. Watson, Jr., the MEW Family Limited Partnership and The Mark and
Kathleen Watson Charitable Foundation (collectively, the "Watson Stockholders")
and USF&G have entered into the Voting Agreement with respect to the 2,579,295
shares of Titan Common Stock, legally and beneficially owned by the Watson
Stockholders and any shares subsequently acquired, (the "Watson Shares"), which
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represents approximately 25.6% of the outstanding shares of Titan Common Stock.
Under the terms of the Voting Agreement, the Watson Stockholders have agreed,
for a period of one year, to vote or cause to be voted all of the Watson Shares
in favor of the Merger Proposal and against any proposal made in opposition to
the Merger. The Watson Stockholders have also agreed, for a period of one year,
not to solicit or encourage any inquiry or proposal from any person to acquire
the business, property or capital stock of Titan or its subsidiaries or to
furnish information or otherwise facilitate any of the foregoing; provided that
Mr. Watson, Jr. shall not be prohibited from taking any such actions as are
required to comply with his fiduciary duties as an officer and director of
Titan. In addition, subject to certain limited exceptions, the Watson
Stockholders have agreed not to sell, assign, dispose of or encumber or
otherwise transfer any of the Watson Shares other than in an exchange pursuant
to the Merger.
DESCRIPTION OF USF&G
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 USF&G Company, and is sold
through independent agents supported by USF&G's underwriting, marketing,
administrative and claim services offices located throughout the United States.
Life insurance and annuities are written primarily by F&G Life, and are sold
throughout the United States through independent agents, managing general agents
and regional and national brokerage firms. USF&G Company is rated "A" by A.M.
Best Company and F&G Life is rated "A-" by A.M. Best Company. For a discussion
of A.M. Best Company and its ratings, see "Risk Factors--A.M. Best Company
Ratings and Review."
PROPERTY & CASUALTY. USF&G Company currently underwrites most forms of
property/casualty insurance. USF&G Company's property/casualty operations are
grouped into the following portfolio of strategic businesses: the Commercial
Insurance Group ("CIG"), the Family and Business Insurance Group ("FBIG"), and
Specialty Businesses, which include alternative risk transfer through Discover
Re Managers, Inc., ("Discover Re"), assumed reinsurance through F&G Re, Inc.
("F&G Re") and the Surety Group. The property/casualty segment accounted for 88
percent of USF&G's revenues before net realized gains for the year ended
December 31, 1996 and 70 percent of its total assets at December 31, 1996.
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, 1996, coverages provided by CIG
accounted for 37 percent of total premiums written.
FBIG provides homeowners insurance and standard and non-standard automobile
insurance, which include aspects of property loss and liability risks, as well
as small-size account commercial business. Homeowners policies protect against
loss of dwellings and contents arising from a variety of perils, as well as
liability arising from ownership or occupancy. 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. Small-size account commercial business includes property
loss, liability, claims and workers' compensation, as well as automobile and
other coverages. FBIG also provides non-standard automobile insurance through
Victoria Fire & Casualty Company and its subsidiaries ("Victoria"). Victoria was
acquired by USF&G in 1995. For the year ended December 31, 1996, coverages
provided by FBIG accounted for 37 percent of total premiums written.
Discover Re provides insurance, reinsurance and related services to the
alternative risk transfer market, primarily in the municipalities,
transportation, education and retail markets. Through alternative risk transfer,
a company self-insures the predictable frequency portion of its own losses and
purchases
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insurance for the less predictable, high-severity losses that could have a major
financial impact on the company. For the year ended December 31, 1996,
alternative risk transfer accounted for 1 percent of total premiums written.
F&G Re is the lead company in USF&G Company's separate reinsurance division
which underwrites treaty and more recently facultative reinsurance and is
composed of various wholly-owned subsidiaries. F&G Re acts as the reinsurance
underwriting manager and solicits and services assumed reinsurance for USF&G
Company. F&G Re markets reinsurance in North America and in specific foreign
countries (mainly in Western Europe and Japan). F&G Re recently established an
office in Hong Kong and expanded its presence in the Lloyd's of London markets
through the acquisition of Ashley Palmer, Ltd., a managing general agency.
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 ended December 31,
1996, reinsurance accounted for 19 percent of 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, 1996, surety bonds accounted for 6 percent of total premiums
written.
USF&G Company's products have been sold primarily by independent agents,
which generally represent multiple insurance companies, since its founding in
1896. USF&G Company's products are sold through approximately 3,400 independent
agencies in the United States on a commission basis. In 1996, USF&G expanded its
distribution channels to include retail, wholesale and surplus lines brokers and
agents.
As of December 31, 1996, USF&G Company maintained 43 production offices,
located throughout the United States, to serve its agents and policyholders.
These offices support the administration of underwriting standards and the
delivery of policies, primarily for CIG. In 1996, USF&G Company opened three
Centers for Agency Services dedicated to underwriting and policy processing for
FBIG. USF&G Company also opened a centralized Claims Reception Center which
provides 24-hour, seven-days-a-week claim reporting service to customers and
agents throughout the United States. In December 1996, USF&G acquired
Aflanzadora Insurgentes, S.A. de C.V., the largest surety company in Mexico,
with 38 branch offices and a sales force of over 1,200 agents.
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 ("TSAs"), single premium immediate
annuities and universal life and term life insurance. For the year ended
December 31, 1996, the life insurance segment accounted for 12 percent of
USF&G's revenues before net realized gains and 29 percent of its total assets at
December 31, 1996.
SPDAs are sold primarily through independent agents and insurance brokers.
TSAs are sold through a national wholesaler. Structured settlements are
annuities sold predominantly through the property/casualty company in settlement
of certain of its insurance claims.
DESCRIPTION OF USF&G CAPITAL STOCK
USF&G is authorized to issue 12 million shares of $50 par value preferred
stock and 240 million shares of $2.50 par value common stock. As of September
30, 1997, there were 111,035,030 shares of USF&G Common Stock outstanding.
COMMON STOCK. Each holder of the USF&G Common Stock is entitled to one vote
for each share of USF&G Common Stock held. Cumulative voting for the election of
directors is not provided for in the USF&G Articles of Incorporation or the
USF&G Bylaws, as amended. Subject to the prior rights of preferred stock which
may be classified and issued, the holders of the USF&G Common Stock are entitled
to receive, pro-rata, such dividends as may be declared by the USF&G Board out
of funds legally available
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therefor, and are also entitled to share, pro-rata, in any other distribution to
shareholders. There are no redemption or sinking fund provisions and no direct
limitations in any indenture or agreement on the payment of dividends. Payment
of dividends to USF&G by its insurance subsidiaries is subject to certain
restrictions under the Maryland Insurance Code. In addition, payment of
dividends to USF&G by its insurance subsidiaries is subject to certain
restrictions under Maryland and other state insurance laws. Such restrictions as
well as other contractual restrictions may limit the amount of dividends that
may be paid by USF&G. All shares of USF&G Common Stock to be issued pursuant to
the Merger Agreement will be fully paid and non-assessable.
PREFERRED STOCK. Under the USF&G Charter, USF&G is authorized to issue
12,000,000 shares of USF&G Preferred Stock, in one or more series. The USF&G
Board is authorized to fix and determine the terms, limitations and relative
rights and preferences of any of the series of the USF&G Preferred Stock in
series, and to fix and determine the variations among series to the extent
permitted by law. USF&G may amend from time to time the USF&G Charter to
increase the number of authorized shares of USF&G Preferred Stock.
STOCKHOLDERS RIGHTS PLAN. USF&G has a stockholder rights plan (the "Plan")
to deter coercive or unfair takeover tactics and to prevent a potential
purchaser from gaining control of USF&G without offering a fair price to all of
USF&G's stockholders. Under the Plan, each outstanding share of USF&G Common
Stock has one preferred share purchase right (a "Right") expiring in 2007. Each
right entitles the registered holder to purchase 1/100 of a share of a new class
of junior preferred stock for $105. The Rights cannot be exercised unless
certain events occur that might lead to a concentration in ownership of USF&G
Common Stock or unless certain other events relating to a change in control take
place, including the acquisition by any person of 15% or more of the outstanding
USF&G Common Stock. At that time, each Right may be converted into rights to
acquire USF&G Common Stock having a value of twice the $105 exercise price. In
certain circumstances, the Plan also provides that the Rights can be exchanged
for USF&G Common Stock without payment of the purchase price. Rights held by
holders of 15 percent or more of USF&G Common Stock, or their associates, may be
null and void. Under certain conditions, the Rights also become convertible into
rights to acquire shares of common stock of an acquiror having a value of twice
the exercise price. USF&G will generally be entitled to redeem the Rights, at
$.01 per Right, any time before the tenth day (subject to further deferral)
after a person acquires 15 percent of the outstanding USF&G Common Stock.
BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITION PROVISIONS OF MARYLAND
LAW. Under the General Corporation Law of the State of Maryland (the "MGCL"),
the vote of the holders of two-thirds of all outstanding shares of stock of a
Maryland corporation entitled to vote thereon is required to approve a merger,
consolidation, share exchange or transfer of all or substantially all of the
corporation's assets, subject to certain exceptions. The USF&G Charter does not
contain any specific provisions related to stockholder approval of business
combinations.
The MGCL establishes special requirements with respect to "business
combinations" between Maryland corporations and "interested stockholder," unless
exemptions are applicable. "Interested stockholders" are all persons owning
beneficially, directly or indirectly, 10% or more of the outstanding voting
stock of a Maryland corporation. "Business combinations" include any merger or
similar transaction subject to a statutory vote and additional transactions
involving transfers of assets or securities in specified amounts to interested
stockholders or their affiliates. Unless an exemption is available, a Maryland
corporation may not engage in certain business combinations with any interested
stockholder (or its affiliates) for a period of five years after the most recent
date on which the stockholder became an interested stockholder. After such
five-year period, business combinations with interested stockholders must be
recommended by the board of directors and approved by (i) the affirmative vote
of at least 80% of the votes entitled to be cast by all holders of outstanding
shares of voting stock and (ii) at least two-thirds of the votes entitled to be
cast by all holders of outstanding shares of voting stock other than the
interested stockholder. A business
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combination with an interested stockholder which is approved by the board of
directors of a Maryland corporation at any time before an interested stockholder
first becomes an interest stockholder is not subject to the special voting
requirements. An amendment to a Maryland corporation's charter electing not
to be subject to the foregoing requirements must be approved by the affirmative
vote of at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and at least two-thirds of the votes entitled
to be cast by holders of outstanding shares of voting stock who are not
interested stockholders. Any such amendment is not effective until 18 months
after the vote of stockholders and does not apply to any business combination of
a corporation with a stockholder who was an interested stockholder on the date
of the stockholder vote. The USF&G stockholders have not adopted any such
amendment to the USF&G Charter or Bylaws that have the effect of altering the
default provisions of the MGCL with respect to "business combinations" with
"interested stockholders."
Maryland law imposes limitations on the voting rights of "control shares"
acquired in a "control share acquisition." The MGCL provides that "control
shares" of a Maryland corporation acquired in a "control share acquisition" have
no voting rights except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
shares of stock previously acquired by such a person, would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) 20% or more but less than 33 1/3%; (ii) 33 1/3% or
more but less than a majority; or (iii) a majority of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A "control share
acquisition" means, subject to certain exceptions, the acquisition of, ownership
of, or the power to direct the exercise of voting power with respect to, control
shares. The statute also requires Maryland corporations to hold a special
meeting at the request of an actual or proposed control share acquiror generally
within 50 days after a request is made with the submission of an "acquiring
person statement," of such special meeting (and, if requested by the board of
directors, a bond to secure such undertaking). In addition, unless the charter
or bylaws provide otherwise, the statute gives the Maryland corporation, subject
to certain conditions and limitations, various redemption rights if there is a
stockholder vote on the issue and the grant of voting rights is not approved, or
if an "acquiring person statement" is not delivered to the target within 10 days
following a control share acquisition. Moreover, unless the articles of
incorporation or bylaws provide otherwise, the statute provides that if, before
a control share acquisition occurs, voting rights are accorded to control shares
at a special meeting of stockholders that results in the acquiring person having
majority voting power, then minority stockholders have appraisal rights. An
acquisition of shares may be exempted from the control share statute, provided
that an articles of incorporation or bylaw provision is adopted for such purpose
prior to the control share acquisition. There are no provisions in the USF&G
Charter or Bylaws which have the effect of altering the default provisions of
the MGCL with respect to "control share acquisitions."
Under the Maryland Insurance Code, unless certain filings are made with the
Maryland Insurance Commissioner, no person may acquire any voting security or
security convertible into a voting security of an insurance holding company,
such as USF&G, which controls one or more Maryland insurance companies if, as a
result of such acquisition, such person would "control" such insurance holding
company. The acquisition may not proceed unless it has been approved by the
Maryland Insurance Commissioner within 60 days after such filings have been
submitted. "Control" is presumed to exist if a person, directly or indirectly,
owns or controls 10% or more of the voting securities of another person. This
presumption may be rebutted by establishing by a preponderance of evidence that
control does not exist in fact. USF&G Company owns insurance subsidiaries which
are domesticated in several different states, all of which impose substantially
similar restrictions relating to changes in direct or indirect control of such
subsidiaries.
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TRANSFER AGENT
The Bank of New York is the transfer agent, registrar and dividend
disbursing agent for USF&G Common Stock.
DESCRIPTION OF TITAN
GENERAL
Titan, through its wholly owned property and casualty insurance
subsidiaries, underwrites non-standard private passenger automobile insurance
for individuals (referred to herein as "Titan Auto") and property and casualty
insurance for small to medium-sized public entities nationwide (referred to
herein as "Titan Public Entity"). Non-standard automobile insurance is
principally provided to insureds who are unable to obtain standard insurance
coverage because of their driving records, other underwriting criteria or market
conditions for standard risks. Titan's public entity insurance program offers
coverage to cities and counties against unexpected and unintended personal
injury and/or property damage, as well as against losses arising out of civil
rights claims and workers' compensation coverage. Titan believes that its focus
on specialty niche property and casualty insurance, combined with its
underwriting and claims handling expertise has enabled it to operate at an
underwriting profit. Through a subsidiary, Titan also offers premium financing
to third-party insureds and, to a lesser extent, public entities insured by
Titan.
Titan's operations are conducted primarily through three principal
subsidiaries. Non-standard automobile insurance coverage is underwritten by both
Titan Insurance Company and Titan Indemnity Company, and public entity insurance
is underwritten by Titan Indemnity Company. Titan Indemnity Company is licensed
in 47 states and the District of Columbia and is rated "A-" by A.M. Best
Company. Titan Insurance Company is licensed in Michigan and Arizona and is also
rated "A-" by A.M. Best Company. Titan offers premium financing through
Westchester Premium Acceptance Corporation and its subsidiary, which are
eligible to transact business in 37 states.
For the nine months ended September 30, 1997, Titan Auto and Titan Public
Entity accounted for 66.7% and 30.3%, respectively, of Titan's total premiums
written. Other lines accounted for the remaining 3.0%. For the year ended
December 31, 1996, these figures were 61.6%, 35.4% and 3.0%, respectively. Also
for the nine months ended September 30, 1997, Titan Auto accounted for 67.7% of
Titan's total revenues, Titan Public Entity accounted for 29.5% of Titan's total
revenues and Titan's premium financing business accounted for 2.2% of Titan's
total revenues. Other lines accounted for the remaining 0.6% of Titan's total
revenues. For the year ended December 31, 1996, these figures were 61.0%, 35.1%,
1.3% and 2.6%, respectively.
NON-STANDARD PRIVATE PASSENGER AUTOMOBILE INSURANCE INDUSTRY
Non-standard automobile insurance, or "Titan Auto," is written by both Titan
Insurance Company and Titan Indemnity Company.
In April 1992, Titan acquired Imperial Midwest Insurance Company ("Imperial
Midwest") to diversify its business. Imperial Midwest was originally formed in
1990 to assume the non-standard private passenger automobile insurance business
of the Cadillac Insurance Company, Michigan's largest voluntary underwriter of
such insurance. Titan Auto distributed its product through independent agents at
that time.
In order to diversify, in terms of both geography and method of
distribution, and as a result of its experience gained in the non-standard
automobile business in Michigan, Titan Auto acquired an existing five-location
insurance agency in September 1994 in Phoenix, Arizona and began distributing
non-standard automobile insurance through these locations, operating them as
direct response centers ("DRCs"). DRC's are operated from centralized call
centers or local retail locations and generate business through media and yellow
page advertising and direct sales calls.
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In July 1995, Titan Auto acquired Arlans Agency, Inc. ("Arlans"), Titan's
largest-producing agency in Michigan, which produced approximately $3.9 million,
or 7% of Titan Auto's total Michigan non-standard premiums written in 1994. At
the time of the acquisition, Arlans had in excess of 30 selling locations. Titan
has since reduced the operation to twelve locations through consolidation or
closure of less profitable stores. Titan Auto now operates these locations as
DRCs.
During 1996, Titan Auto expanded its non-standard auto program to three new
states. Non-standard auto agencies were acquired in Nevada, Colorado and Texas.
Additionally, new DRC locations were added to existing Titan Auto DRC
operations, and new "start-up" DRC operations were commenced in San Antonio and
several smaller Texas cities.
During the nine months ended September 30, 1997, Titan Auto began
distributing its product in New Mexico and Indiana through Tri-West Holdings,
LLC, a strategic partner of Titan which distributed non-standard automobile
insurance exclusively for Titan Auto and operated its agencies as DRCs through
management agreements with Titan.
In Michigan, Titan Auto's independent agent and strategic alliance business
(business produced through captive standard and preferred automobile insurance
agencies) is written through approximately 1,600 insurance agencies with
approximately 2,600 locations throughout the state. For the nine months ended
September 30, 1997, the ten largest insurance agencies were responsible for 36%
of total Michigan premiums written by Titan Auto, and one strategic alliance
relationship and two agencies individually accounted for more than 5% of such
premiums (12.8%, 6.2% and 5.3%, respectively). In Arizona, Titan's independent
agent business is written through roughly 70 insurance agencies. None of Titan's
Arizona independent agents produces in excess of 5% of total Arizona premiums.
In Michigan and Arizona, Titan Auto employs field marketing representatives who
are responsible for soliciting, training, reviewing and auditing business
produced through independent agents and strategic alliances. No material
business is produced through independent agents or strategic alliances outside
of Michigan and Arizona.
Non-standard risks generally involve the potential for above-average loss
frequency. Exposure for underwriting losses, however, is lessened because
premiums usually are at higher rates than those charged for standard insurance
coverage. Although there are currently no policy limits for Michigan no-fault
personal injury protection, Michigan insurers are reinsured for losses in excess
of $250,000 by the Michigan Catastrophic Claims Association (the "MCCA"), a
state-mandated reinsurance association. Limits for Michigan no-fault personal
property protection are $1,000,000. Optional limits for bodily injury are
$100,000 per individual and $300,000 per accident, although 84% of Titan Auto's
policies in Michigan are issued at minimum bodily injury limits of $20,000 per
individual and $40,000 per accident. In states other than Michigan, Titan Auto
principally offers the minimum statutory policy limits which range from $15,000
to $25,000 per individual and $30,000 to $50,000 per accident. During 1996,
Titan Auto maintained reinsurance through a commercial reinsurer for losses in
any state in excess of $300,000 per accident for the sum of all personal injury
protection, personal property protection, bodily injury and uninsured motorist
claims. This retention was increased to $500,000, effective January 1, 1997.
Titan Auto is also at risk for physical damage losses, which typically do not
exceed $40,000 and, on a small number of Michigan and Arizona policies, for an
additional $100,000 per accident for out-of-state personal property damage.
Titan Auto emphasizes service, rate adequacy, strong claims controls and the
ability to respond quickly with needed rate changes. Rate adjustment approvals
in each state in which Titan writes non-standard automobile insurance can be
obtained at least every six months. Titan Auto generally adjusts its rates every
9 to 12 months in each market.
Due to the purchasing habits of non-standard automobile insureds (for
example, insureds seeking the least expensive insurance which satisfies the
requirements of state laws to register a vehicle), policy renewal rates tend to
be low. The success of Titan's non-standard automobile insurance program,
therefore, depends in part on its ability to replace non-renewing insureds with
new policyholders through
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aggressive advertising and marketing efforts. Titan Auto's experience has been
that a significant number of existing policyholders allow their policies to
lapse and then reapply for insurance as new policyholders.
Since Titan Auto's inception in 1990, there has been limited competition in
the Michigan private passenger non-standard automobile market. Currently, Titan
believes that Titan Auto is Michigan's largest non-standard insurer in the
voluntary market, and Titan believes that, although several for-profit insurers
entered the market on a limited basis during 1996, the Michigan Auto Insurance
Placement Facility (the "Facility") is a prospective insured's most likely
alternative. The Facility is the State of Michigan's provider of non-voluntary
private passenger automobile insurance and is, Titan believes, the largest
underwriter for non-standard automobile insurance in Michigan. It is structured
as a joint underwriting association which provides insurance coverage to all
drivers who have been unable to obtain insurance in the voluntary market. The
financial results of the Facility are allocated to all underwriters of
automobile insurance in Michigan based upon premiums written. The Facility's
policy administration and claims adjustment services are currently provided by
five of Michigan's seven largest automobile insurance underwriters. According to
information obtained from the Automobile Insurance Plan Service Office
("AIPSO"), the Facility's private passenger non-standard automobile premiums
written were $179 million for its fiscal year ended September 30, 1996. Titan
believes that Titan Insurance Company competes effectively with the Facility by
offering a higher level of service, streamlining procedures, paying higher
commissions to its agents and offering more attractive payment plans.
PUBLIC ENTITY
Titan's Public Entity business is written by Titan Indemnity Company.
Since 1984, Titan Public Entity has offered a program to insure public
entities, including municipalities, counties, school districts, housing
authorities, state-run utilities and other governmental entities. Types of
public entity liability insurance coverage provided by Titan Public Entity
include general liability, automobile, law enforcement liability and public
officials errors and omissions. Titan Public Entity also writes automobile
physical damage and property insurance coverages. During 1996, Titan began
offering private school and fire district insurance programs and introduced a
workers' compensation program for its public entity insureds in Pennsylvania.
Also during 1996, Titan introduced its Horizon program, which simplifies the
insurance policy for insureds and streamlines the underwriting and policy
issuance processes. The primary competition for the public entity program
consists of managed pools, which combine several municipalities under one risk
management and insurance program, and other commercial underwriters who have
programs for public entities.
Titan Public Entity has had a renewal rate of 83% or better since 1992.
Titan attributes its high renewal rates to the level and quality of its customer
service and the specialized claims handling it provides to its insureds.
Additionally, Titan believes that its focus on the smaller rural and more
geographically dispersed insureds and its high level of service makes its public
entity insurance program less sensitive to price than the public entity business
of many of its competitors.
Titan Public Entity employs 25 state managers who serve as field marketing
representatives and contract with over 1,200 local independent insurance agents
representing public entities. Typically, an independent agent represents only a
single city--the one in which the agent is located.
While cities with populations under 10,000 have historically represented the
majority of the public entities insured by Titan, the upgrade of Titan Indemnity
Company's A.M. Best rating to "A-" (Excellent) in November 1993 has allowed
Titan to attract more cities with populations of between 10,000 and 25,000
people. Titan also focuses on smaller counties (between 25,000 and 100,000
people), which have historically represented a large portion of Titan's public
entity program. Titan's public entity insureds also include some larger cities,
as well as schools, utility authorities and other miscellaneous public entities.
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During the nine months ended September 30, 1997, Titan underwrote public
entity insurance in 33 states. Titan Public Entity's strategy has been to follow
a practice of selective underwriting during periods of intense competition.
Titan believes that there are few insurers which specialize in offering public
entity programs, especially with respect to small public entities. Titan
believes that its experience in public entity underwriting and claims adjustment
enables it to reduce its losses and loss adjustment expenses ("LAE") and gives
it a competitive advantage over companies that may decide to enter this market.
Titan also seeks to reduce underwriting losses by adherence to certain
underwriting standards. For example, Titan reduces its exposure to hurricanes
and similar risks by limiting total exposures by territory for any public entity
located within 50 miles of any coastline. All public entity policies
underwritten by Titan also include a pollution exclusion. Additionally, Titan
uses deductibles and reinsurance to help control its loss exposure.
Titan Public Entity offers primary liability policy limits up to $2,000,000
per occurrence, and excess aggregate limits of an additional $5,000,000 are
available. Most policies are underwritten at limits of either $500,000 or
$1,000,000, and the amount of excess aggregate limit policies underwritten has
not been significant. During 1996, Titan was reinsured for 50% of casualty
losses in excess of $500,000 per occurrence up to $1 million and for 97.5% of
losses in excess of $1 million, up to issued policy limits. Effective January 1,
1997, Titan increased its retention on losses in excess of $1 million to 20%,
for such losses occurring under primary $2 million limit policies, with 100%
reinsurance coverage for casualty losses in excess of $2 million, up to issued
policy limits. Titan Public Entity retains the first $500,000 per occurrence on
property insurance coverages. Titan's workers' compensation program is reinsured
under both quota share and excess of loss reinsurance contracts, resulting in a
net retention of $300,000 per occurrence.
PREMIUM FINANCING
Westchester Premium Acceptance Corporation ("WPAC") has provided premium
financing to Titan Indemnity Company's public entity insureds since 1987 and to
third-party commercial insureds since 1991. WPAC has grown through acquisition
and by establishing relationships with over 850 agencies around the country,
although approximately 23% of the business for the nine months ended September
30, 1997 came from eight agencies. The majority of premiums financed for
third-party insureds represent Texas business. Lending operations are supported
by WPAC's own capital base and are currently leveraged through a $50 million
bank revolving line of credit.
In February 1997, WPAC acquired Elite Premium Services, Inc. ("Elite") for
approximately $400,000 in cash and additional consideration to be determined as
a function of future amounts financed through sources provided by Elite. Elite
financed approximately $40 million in commercial premiums in 1996.
Premiums for property and casualty insurance are typically payable at the
time a policy is placed in force or renewed. WPAC's premium finance services
allow the insured to pay a portion of the premium when the policy is placed in
force and the balance in monthly installments over the life of the policy. WPAC
retains a contractual right to cancel the insurance policy and to receive the
unearned premium if a premium installment is not paid when due. In the event of
such cancellation, WPAC applies the unearned premium toward the payment
obligation of the insured. As part of its premium financing offered to
commercial third-party insureds, WPAC may advance funds for financed premiums to
independent insurance agencies who represent third-party insurers. If remittance
is not made by the agency to the third-party insurer, advances made by WPAC may
only be recoverable to the extent that the agency's receipt of such advances is
deemed to be received by the third-party insurer. Premium financing, which Titan
offers to its own public entity insureds, does not involve any credit risk since
no funds are advanced to outside parties and WPAC is entitled to receive the
unearned premiums on the financed policies.
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OTHER LINES
Since September 1993 and until January 1, 1997, Titan Indemnity Company
offered a program of preferred personal lines of automobile insurance to
educational employees in Minnesota. Under this program, Titan Indemnity Company
utilized educators to sell its insurance products to other educational
employees. Premiums written for the years ended December 31, 1996, 1995 and 1994
were $5.1 million, $3.2 million and $1.2 million, respectively. Effective
January 1, 1997, Titan transferred existing loss reserves and unearned premiums
and ceded 100% of future business to a reinsurer of its preferred automobile
insurance program and realized ceding commission income of approximately
$400,000.
Titan Indemnity Company also had programs for surety and aviation insurance
which were discontinued in 1995 and 1993, respectively.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Mark E. Watson, Jr............................ 62 Chairman, President and Chief Executive Officer
Thomas E. Mangold............................. 42 Executive Vice President, Chief Operating Officer and
Director
Mark E. Watson III............................ 33 Executive Vice President, General Counsel, Secretary and
Director
Michael W. Grandstaff......................... 37 Senior Vice President, Treasurer and Chief Financial Officer
Michael Arledge............................... 45 Senior Vice President, Titan Indemnity Company
Merle Harris.................................. 36 Vice President, Westchester Premium Acceptance Corporation
B.G. Porter................................... 32 Vice President of Planning & Development
</TABLE>
Mark E. Watson, Jr. founded Titan in 1983 and has served as Chairman of the
Board of Directors, Chief Executive Officer and President of Titan since that
time. Mr. Watson received his Bachelor of Science degree in Finance from the
University of Notre Dame.
Thomas E. Mangold has served as a Director of Titan since 1992. He has
served as President of Titan Insurance Company (formerly known as Imperial
Midwest Insurance Company) since its formation in 1990 and Executive Vice
President and Chief Operating Officer of Titan Holdings since 1996. From 1987 to
1989, Mr. Mangold served as President of First Security Insurance Group and from
1981 to 1986 as Vice President of Delaney Intermediaries, a reinsurance
intermediary. Mr. Mangold received his Bachelor of Science degree and commission
in the U.S. Naval Reserves from the United States Merchant Marine Academy.
Mark E. Watson III has served as Executive Vice President of Titan since May
1997, as Senior Vice President of Titan since 1995 and as a Vice President of
Titan from 1991 to 1995. He was elected to the Titan Board in February 1997. He
has served as General Counsel and Secretary of Titan since 1993. From 1989 to
1991, Mr. Watson was an associate with the law firm of Kroll & Tract, New York,
New York. Mr. Watson received his Bachelor of Business Administration degree in
finance from Southern Methodist University and his Juris Doctor degree from the
University of Texas, School of Law. Mr. Watson is the son of Mark E. Watson, Jr.
Michael W. Grandstaff has served as Senior Vice President and Chief
Financial Officer of Titan since 1996 and Treasurer of Titan Insurance Company
since 1992. He was Chief Accounting Officer of Titan from 1995 to 1996. From
1983 to 1990, Mr. Grandstaff, a Certified Public Accountant, served in various
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finance-related capacities in both public accounting and the insurance industry.
Mr. Grandstaff received both his Bachelor of Business Administration in
Accounting and Master of Business Administration degrees from Michigan State
University.
Michael Arledge has served as Senior Vice President since 1995 and as Vice
President of Titan Indemnity Company since 1991. From 1989 to 1991, Mr. Arledge
was Vice President of Public Entity National Company (PENCO). From 1984 to 1989
Mr. Arledge was Vice President--Underwriting and Marketing for Titan. Mr.
Arledge received his Bachelor of Science degree in Business Administration from
the University of Texas at San Antonio.
Merle Harris has served as Vice President of Westchester Premium Acceptance
Corporation since 1994. From 1992 to 1994, Mr. Harris served as Premium Finance
Manager of Elton George & Co. and from 1990 to 1992 as Premium Finance Manager
for an affiliate of GAINSCO, Inc. Mr. Harris attended Dallas Baptist University.
B.G. Porter has served as Vice President of Planning and Development since
joining Titan in 1995. Prior to that time, Mr. Porter was an associate in the
Texas office of McKinsey and Company, Inc., an international management
consulting firm. Mr. Porter received his Bachelor of Arts degree with Honors in
Political Science from Stanford University. He received his Master of Business
Administration degree from Harvard Business School.
EMPLOYEES
As of September 30, 1997 Titan and its subsidiaries had approximately 800
employees which included seven executive officers. Titan is not a party to any
collective bargaining agreement and has not experienced work stoppages or
strikes as a result of labor disputes. Titan considers relations with its
employees to be good.
LEGAL PROCEEDINGS
The liquidator of the estate of Millers National Insurance Company filed a
lawsuit against Titan arising out of a 1992 stock purchase agreement under which
Titan purchased 853,042 shares (restated for a stock split and three stock
dividends) of its own Common Stock, then held by the liquidator, from the
liquidator for $3.7 million. The liquidator claimed that Titan intended to make
a public offering of its Common Stock and misled the liquidator into thinking
that no such offer was under consideration; and that if the liquidator knew that
a public offering was intended, the liquidator would have negotiated a more
favorable selling price for the Common Stock in question.
On August 7, 1997 the Chancery Court of Cook County, Illinois, the court
responsible for the oversight of the liquidation of the estate of Millers
National Insurance Company, approved the settlement of the lawsuit filed by the
liquidator against Titan in consideration of the payment of $1.0 million to the
estate.
Titan is party to numerous lawsuits arising in the normal course of
business. All such lawsuits involve claims under insurance policies underwritten
by Titan, which management believes have been adequately included in its
established reserves for unpaid losses and LAE.
Titan believes the resolution of the above claims and lawsuits will not have
a material adverse effect on its financial condition or results of operations.
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COMPARISON OF RIGHTS OF HOLDERS OF USF&G CAPITAL
STOCK AND TITAN CAPITAL STOCK
If the Merger is consummated, holders of Titan Common Stock will become
holders of USF&G Common Stock and the rights of the former Titan stockholders
will be governed by the laws of the State of Maryland and by the USF&G Charter,
the USF&G By-laws and the Rights Plan. The rights of USF&G stockholders differ
in certain respects from the rights of Titan stockholders. Certain of the
differences are summarized below. This summary is qualified in its entirety by
reference to the full text of such documents. For information regarding
documents incorporated by reference and how they may be obtained, see "Available
Information" and "Incorporation of Certain Documents by Reference."
BUSINESS COMBINATIONS
USF&G. The MGCL establishes special requirements with respect to "business
combinations" between Maryland corporations and "interested stockholders" unless
exemptions are applicable. In addition, Maryland law imposes limitations on the
voting rights of "control shares" acquired in a "control share acquisition."
Mergers and other similar transactions not subject to the special business
combination statute generally require approval by the holders of two-thirds of
the outstanding shares entitled to vote thereon. See "Description of
USF&G--Business Combinations and Control Share Acquisition Provisions of
Maryland Law."
TITAN. The TBCA has no anti-takeover provisions similar to the Maryland
statutes described above. The TBCA requires certain mergers to be approved by
holders of at least two-thirds of the outstanding shares entitled to vote
thereon, unless there is a class of stock that is entitled to vote as a class,
in which event the merger must be approved by the holders of two-thirds of the
outstanding shares of each class of stock entitled to vote as a class and by the
holders of two-thirds of the outstanding shares otherwise entitled to vote;
provided that the articles of incorporation may require a vote of a different
number, not less than a majority, of the shares outstanding. The Titan Articles
do not provide for a different number. While the Titan Articles do provide for a
class of preferred stock, there are no such shares issued and outstanding. For
that reason, the affirmative vote of holders of at least two-thirds of the Titan
Common Stock is required for the Merger. The TBCA similarly requires that a sale
of all or substantially all of the assets of Titan not made in the ordinary
course of business be approved by the affirmative vote of holders of at least
two-thirds of the Titan Common Stock.
APPRAISAL RIGHTS
USF&G. Stockholders of a Maryland corporation have the right to demand and
receive payment of the fair value of their stock in the event of certain
mergers, consolidations, share exchanges or transfers of assets or if the
corporation amends its charter in a way that substantially adversely affects the
stockholder's rights unless the right to do so is reserved in the corporation's
charter, subject to certain exceptions. However, except as otherwise provided by
the MGCL, stockholders do not have appraisal rights if, among other things, (i)
such stockholder's stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) such
stockholder's stock is that of the surviving corporation in the merger unless
the merger alters the contract rights of the stock as expressly set forth in the
charter, and the charter does not reserve the right to do so, or the stock is to
be changed or converted in whole or in part in the merger into something other
than either stock in the successor or cash, scrip, or other rights or interests,
arising out of provisions for the treatment of fractional shares of stock in the
successor. The USF&G Charter reserves the right to alter the contract rights of
outstanding stock, provided that not less than a majority of the aggregate
number of the votes entitled to be cast thereon so approve.
TITAN. Stockholders of Texas corporations are entitled to exercise certain
dissenters' appraisal rights in the event of a sale, lease, exchange or other
disposition of all, or substantially all, of the property and
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assets of the corporation not made in the ordinary course of business or, with
the exception discussed below, a merger or consolidation. Under Article 5.11B of
the TBCA, however, stockholders do not have dissenters' rights if, in connection
with a merger, the stock of the corporation held by the stockholders is either
listed on a national securities exchange or is held of record by not less than
2,000 stockholders and, pursuant to the plan of merger, such stockholder is not
required to accept for his or her shares any consideration other than (a) shares
of stock of a corporation that, immediately after the effective date of the
merger, (i) are listed on a national securities exchange or (ii) are held of
record by not less than 2,000 stockholders and (b) cash in lieu of fractional
shares otherwise entitled to be received. Because stockholders of Titan will
receive merger consideration that does not satisfy the provisions of TBCA
Article 5.11B described in subparagraphs (a) and (b) above, dissenters'
appraisal rights will be available to Titan stockholders. See "The Special
Meeting--Appraisal Rights."
USF&G RIGHTS PLAN
USF&G. USF&G has a stockholder rights plan to deter coercive or unfair
takeover tactics and to prevent a potential purchaser from gaining control of
USF&G without offering a fair price to all of USF&G's stockholders. Under the
Plan, each outstanding share of USF&G Common Stock has one preferred share
purchase right expiring in 2007. Each right entitles the registered holder to
purchase 1/100 of a share of a new class of junior preferred stock for $105. The
Rights cannot be exercised unless certain events occur that might lead to a
concentration in ownership of USF&G Common Stock or unless certain other events
relating to a change in control take place, including the acquisition by any
person of 15% or more of the outstanding USF&G Common Stock. At that time, each
Right may be converted into rights to acquire USF&G Common Stock having a value
of twice the $105 exercise price. In certain circumstances, the Plan also
provides that the Rights can be exchanged for USF&G Common Stock without payment
of the purchase price. Rights held by holders of 15 percent or more of USF&G
Common Stock, or their associates, may be null and void. Under certain
conditions, the Rights also become convertible into rights to acquire shares of
common stock of an acquiror having a value of twice the exercise price. USF&G
will generally be entitled to redeem the Rights, at $.01 per Right, any time
before the tenth day (subject to further deferral) after a person acquires 15
percent of the outstanding USF&G Common Stock.
TITAN. Holders of Titan Common Stock do not have any purchase rights
similar to holders of USF&G Common Stock. No plan similar to the USF&G Rights
Plan exists.
AMENDMENTS TO CHARTERS
USF&G. Under the MGCL, a vote of two-thirds of all votes entitled to be
cast on the matter is required to approve any amendment to a Maryland charter.
However, the MGCL provides that the required vote may be increased or decreased
(but not to less than a majority) by a provision in a corporation's charter.
Subject to the voting rights of the holders of USF&G Preferred Stock, the USF&G
Charter provides that USF&G may from time to time make any amendments to the
USF&G Charter that may now or hereafter be authorized by law, including any
amendments changing the terms or contract rights, as expressly set forth in the
USF&G Charter, of any of its outstanding stock by classification,
reclassification or otherwise upon approval by not less than a majority of the
aggregate number of the votes entitled to be cast thereon at any meeting at
which a quorum is present.
TITAN. Under the TBCA, amendments to the Titan Articles require approval of
a majority of the Titan Board and the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Titan Common Stock.
AMENDMENTS TO BYLAWS
USF&G. Under the MGCL, the power to adopt, alter and repeal the bylaws is
vested in the stockholders, except to the extent the charter or bylaws vest it
in the board of directors. The USF&G
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Bylaws provide that any or all of the USF&G Bylaws may be altered, amended,
repealed or added to by a majority vote of a quorum at any regular or special
meeting of the stockholders or of the USF&G Board.
TITAN. The Titan Bylaws may be amended by either a majority of the whole
Board of Directors at any regular or special meeting or the affirmative vote of
the holders of not less than 80% of the voting power represented by all the
shares of Titan Common Stock outstanding and entitled to vote for the election
of directors, given at a duly called annual or special meeting of stockholders.
PREEMPTIVE RIGHTS
USF&G. Under Maryland law, stockholders do not have preemptive rights
unless such rights are specifically granted in the charter. The USF&G Charter
provides that no holder of any stock of USF&G shall have any preemptive right to
subscribe for stock of USF&G other than such as the USF&G Board, in its sole
discretion, may determine.
TITAN. The TBCA permits stockholders certain preemptive rights to acquire
additional shares of capital stock of a corporation unless the articles of
incorporation of the corporation provide otherwise. Titan's Articles provide
that the stockholders of Titan do not have any preemptive rights to acquire
unissued shares of its capital stock.
STOCKHOLDER ACTION
USF&G. Under the MGCL, any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting only if a unanimous
written consent is signed by each stockholder entitled to vote on the matter and
a written waiver of any right to dissent is signed by each stockholder who would
have been entitled to notice of, but not to vote at, such stockholder meeting.
TITAN. Under the TBCA, stockholders may act without a meeting if a consent
in writing to such action is signed by all stockholders. The TBCA also permits a
corporation's articles of incorporation to provide that any action required or
permitted to be taken at a stockholders' meeting may be taken without a meeting
pursuant to the written consent of the holders of the number of shares that
would have been required to effect the action at an actual meeting of the
stockholders. Titan's Articles do not provide for stockholder action without a
meeting by less than unanimous consent of its stockholders.
SPECIAL STOCKHOLDER MEETINGS
USF&G. The MGCL provides that a special meeting of stockholders may be
called by the president, the board of directors, or any other person specified
in the charter or the bylaws. The MGCL further provides that the secretary of a
corporation shall call a special meeting of stockholders on the written request
of stockholders entitled to cast at least twenty-five percent (25%) of all the
votes entitled to be cast at the meeting, provided that the bylaws of a
corporation may provide that the written request of stockholders entitled to
cast a greater or lesser percentage of all votes entitled to be cast at the
meeting is required in order to call a special meeting of the stockholders
though such percentage may not be greater than a majority of all the votes
entitled to be cast at the meeting. The USF&G Bylaws provide that a special
meeting of stockholders may be called by the Chairman of the Board, the
President, by a majority of the USF&G Board or by stockholders entitled to cast
a majority of all votes entitled to be cast at the meeting.
TITAN. Under the TBCA, a special meeting of stockholders of a Texas
corporation may be called by either (a) the president, the board of directors,
or such other person or persons as authorized by the articles of incorporation
or the bylaws, or (b) the holders of shares entitled to cast not less than ten
percent (10%) of all shares entitled to vote at the meeting, unless a different
percentage, not to exceed fifty percent (50%), is provided for in the articles
of incorporation. The Titan Articles and the Titan Bylaws provide that special
meetings may be called by the president, a majority of the Titan Board or
holders of 10% or more
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of the Titan Common Stock. The Titan Articles and the Titan Bylaws do not
otherwise expand the above provisions of the TBCA regarding the calling of
special meetings.
CUMULATIVE VOTING FOR DIRECTORS
USF&G. The MGCL permits cumulative voting, but cumulative voting is not
provided for in the USF&G Charter or Bylaws. The USF&G Bylaws provide that in
all elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted.
TITAN. The TBCA permits stockholders to cumulate their votes for directors
unless the articles of incorporation of the corporation provide otherwise.
Titan's Articles provide that the stockholders of Titan do not have any rights
to cumulate votes with respect to the election of directors.
NUMBER, CLASSIFICATION AND ELECTION OF DIRECTORS
USF&G. The MGCL provides that any corporation with outstanding stock and
three or more stockholders shall have at least three directors at all times. The
USF&G Charter provides that the number of directors of USF&G shall be three,
which number may be increased or decreased pursuant to the USF&G Bylaws, but
shall never be less than the minimum number permitted by Maryland law. The USF&G
Bylaws provide that USF&G shall have at least three directors at all times,
provided that (i) if there is no stock outstanding, the number of directors may
be less than three but not less than one and (ii) if there is stock outstanding
and so long as there are less than three stockholders, the number of directors
may be less than three but not less than the number of stockholders. The USF&G
Bylaws further provide that a majority of the entire USF&G Board may alter the
number of directors set by the USF&G Charter to a number not exceeding
twenty-five nor less than the minimum number permitted in the USF&G Bylaws, but
the action may not affect the tenure of office of any director.
The MGCL permits a corporation to have a classified board of directors. If
the directors are divided into classes, the term of office of at least one class
must expire each year. USF&G does not have a classified board of directors.
The MGCL provides that directors are elected to hold office until the next
annual meeting of stockholders and until their successors are elected and
qualify. Unless the charter or bylaws of a corporation provide otherwise, a
plurality of all the votes cast at a meeting at which a quorum is present is
sufficient to elect a director.
TITAN. The Titan Board consists of nine directors, which is subject to
change by action of the Titan Board, provided that, pursuant to the Titan
Bylaws, the Titan Board shall consist of at least one member. The Titan Board is
divided into three classes of members that are as nearly equal in number as
possible, with members serving staggered three-year terms. Members of the Board
of Directors of Titan whose three-year term expires in any given year are
elected at the next annual meeting of stockholders.
REMOVAL OF DIRECTORS
USF&G. Under the MGCL and the USF&G Bylaws, the stockholders of USF&G may
remove any director, with or without cause, by the affirmative vote of a
majority of all the votes entitled to be cast for the election of directors.
TITAN. The Titan Bylaws provide that any director elected by the
stockholders, or by the Board of Directors to fill a vacancy, may be removed
only for cause by the affirmative vote of the holders of not less than 80% of
the voting power represented by all the shares of Titan Common Stock outstanding
and entitled to vote for the election of directors, given at a duly called
annual or special meeting of stockholders.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
USF&G. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be a party by reason of their services in those
or other capacities, unless it is established that (a) the act or omission of
the director or officer was material to the matter giving rise to the proceeding
and was committed in bad faith or was the result of active and deliberate
dishonesty, or (b) the director or officer actually received an improper
personal benefit in money, property or services, or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. In addition, the MGCL requires a
corporation, as a condition to advancing expenses, to obtain (i) a written
affirmation by the director or officer of such director's or officer's good
faith belief that such director or officer has met the standard of conduct
necessary for indemnification by the corporation as authorized by the MGCL, the
corporation's charter and bylaws and (ii) a written statement by or on the
director or officer's behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. The USF&G Charter requires USF&G to indemnify its officers and
directors and to pay or reimburse expenses in advance of the final disposition
of any proceeding to the full extent provided from time to time by Maryland law.
Under the MGCL, USF&G is permitted to purchase and maintain, and USF&G has
purchased and maintains, insurance on behalf if its directors and officers
against any liability asserted against such directors and officers in their
capacities as such, whether or not USF&G would have the power to indemnify such
persons under the provisions of Maryland law governing indemnification.
TITAN. The TBCA provides that a corporation may indemnify an individual if
the individual (a) acted in good faith, (b) in a manner he reasonably believed,
in the case of conduct in his official capacity, was in the corporation's best
interests and, in all other cases, that his conduct was at least not opposed to
the corporation's interests, and (c) in the case of any criminal proceeding, had
no reasonable cause to believe that his conduct was unlawful. The Titan Bylaws
generally provide that directors and officers shall be indemnified against any
costs, expenses and liabilities imposed upon the director or officer in
connection with any proceeding in which the officer or director is named as a
defendant by reason of having been an officer or director of Titan or having
served at the request of Titan as a director, officer or other manner of agent
for another enterprise. In addition, the Titan Bylaws provide that any repeal or
amendment of the foregoing indemnity provisions by the stockholders of Titan
shall be prospective only and shall not adversely affect any indemnity
obligation of Titan existing at the time of amendment or repeal. The Titan
Bylaws also provide that directors and officers shall be additionally
indemnified to the fullest extent permitted by any provisions of the statutes of
Texas later enacted or amended that further permit the indemnification of a
director or officer.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
USF&G. Under the MGCL, a corporation's charter may, with certain
exceptions, include any provision expanding or limiting the liability of its
directors and officers to the corporation or its stockholders for money damages
but may not include any provision that restricts or limits the liability of its
directors or officers to the corporation or its stockholders to the extent that
(i) it is proved that the person actually received an improper benefit or profit
in money, property, or services for the amount of the benefit or profit in
money, property, or services actually received, or (ii) a judgment or other
final adjudication adverse to the person is entered in a proceeding based on a
finding in the proceeding that the person's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. The USF&G Charter contains a provision
limiting the personal liability of officers and directors to USF&G and its
stockholders to the fullest extent permitted under Maryland law.
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TITAN. The Titan Articles, in accordance with the Texas Miscellaneous
Corporation Laws Act, provide that a director of Titan shall not be liable to
Titan or its stockholders for monetary damages for an act or omission in the
director's capacity as a director, except to the extent the director is found
liable for (i) a breach of the director's duty or loyalty to Titan or its
stockholders; (ii) an act or omission not in good faith that constitutes a
breach of duty of the director to Titan or that involves intentional misconduct
or a knowing violation of the law; (iii) a transaction from which the director
received an improper benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office; or (iv) an act or omission for
which the liability of a director is expressly provided by. In addition, the
Titan Articles provide that any repeal or amendment of the foregoing provisions
by the stockholders of Titan shall be prospective only and shall not adversely
affect any limitation on the liability of a director of Titan existing at the
time of such repeal or amendment and that, in addition to the circumstances in
which the director of Titan is not liable as set forth in the preceding
sentence, the director shall not be liable to the fullest extent permitted by
any later amendments of the statutes of Texas that further limit the liability
of a director.
DIVIDENDS AND DISTRIBUTIONS
USF&G. Under the MGCL, a board of directors may authorize a distribution or
the purchase or redemption of its own shares unless, after giving effect to such
distribution, (i) the corporation would not be able to pay its indebtedness as
such indebtedness becomes due in the usual course of business, or (ii) the
corporation's total assets would be less than total liabilities plus, unless the
charter provides otherwise, the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
on dissolution are superior to those receiving the distribution. Neither the
USF&G Charter nor the USF&G Bylaws contains any provision relating to the
redemption of USF&G capital stock.
TITAN. Under the TBCA and subject to any restrictions in a corporation's
articles of incorporation, the board of directors of a corporation may authorize
and the corporation may make distributions, provided that a distribution may not
be made if (i) after giving effect to the distribution, the corporation would be
insolvent or (ii) the distribution exceeds the surplus of the corporation.
Notwithstanding the limitations on distributions set forth in clause (ii) above,
a corporation may make a distribution involving a purchase or redemption of any
of its own shares as long as the net assets of the corporation equal or exceed
the amount of the proposed distribution and the purchase or redemption is made
by the corporation to: (a) eliminate fractional shares, (b) collect or
compromise indebtedness owed by or to the corporation, (c) pay dissenting
stockholders entitled to payment for their shares under the TBCA or (d) effect
the purchase or redemption of redeemable shares in accordance with the TBCA.
Holders of Titan Common Stock are entitled to receive dividends when, as and if
declared by the Titan Board out of any funds legally available therefor, and are
entitled upon liquidation, after claims of creditors and preferences of any
series of Titan Preferred Stock, to receive pro rata the net assets of Titan.
Both USF&G and Titan are primarily holding companies owning, directly or
indirectly, the capital stock of insurance company subsidiaries and other
subsidiaries. The laws of the domiciliary states of the insurance company
subsidiaries place legal limitations on the extent to which the insurance
company subsidiaries may pay dividends or lend or otherwise supply funds to
their parent companies. See "Risk Factors--Holding Company Structure; Dividend
Restrictions."
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LEGAL MATTERS
Certain legal matters in connection with the Merger will be passed upon for
USF&G by Piper & Marbury L.L.P., Baltimore, Maryland and for Titan by Mayer,
Brown & Platt, Chicago, Illinois. L.P. Scriggins, a director of USF&G, is a
partner of Piper & Marbury L.L.P. As of October 31, 1997, lawyers in the firm
Piper & Marbury L.L.P. beneficially owned, in the aggregate, approximately
30,000 shares of USF&G Common Stock or equivalents.
EXPERTS
The consolidated financial statements of USF&G Corporation as of December
31, 1996, 1995, and 1994, and for each of the years in the three-year period
ended December 31, 1996, (incorporated by reference in its Annual Report (Form
10-K) for the year ended December 31, 1996), have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included (or
incorporated by reference) therein and incorporated herein by reference. 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, 1997 and March 31, 1996,
and the three and six month periods ended June 30, 1997 and 1996 and the three
and nine month periods ended September 30, 1997, 1996 and 1995, incorporated by
reference in the Prospectus, Ernst & Young LLP 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
Corporation's Quarterly Reports on Forms 10-Q for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997, 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 report on
such information should be restricted considering the limited nature of the
review procedures applied. The independent auditors are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 (the "Act") for
their report on the unaudited interim financial information because that report
is not a "report" or "part" of the Registration Statement prepared or certified
by the auditors within the meaning of Sections 7 and 11 of the Act.
The consolidated financial statements of Titan as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996,
incorporated by reference from Titan's Annual Report on Form 10-K for the year
ended December 31, 1996, have been incorporated herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated herein by reference and upon the authority of said firm as experts
in accounting and auditing.
STOCKHOLDER PROPOSALS
Any proposals of stockholders intended to be presented at the 1998 Annual
Meeting of Stockholders of Titan (if such meeting is required) must be received
by Titan for inclusion in Titan's proxy statement no later than November 25,
1997.
OTHER BUSINESS AT THE SPECIAL MEETING
The Titan Board of Directors is not aware of any other business to be
presented at the Special Meeting other than the matters described in this Proxy
Statement/Prospectus. If any other matter should properly come before the
Special Meeting, the persons named as proxies on the applicable accompanying
proxy cards will have the discretionary authority to vote the shares represented
by proxy in accordance with the discretion and judgment of the person or persons
voting the proxies as to the best interests of Titan and its stockholders.
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ANNEX A
AGREEMENT AND
PLAN OF MERGER
AMONG
USF&G CORPORATION,
UNITED STATES FIDELITY AND GUARANTY COMPANY,
AND
TITAN HOLDINGS, INC.
DATED AS OF AUGUST 7, 1997
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TABLE OF CONTENTS
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ARTICLE I
THE MERGER
1.1 The Merger.......................................................................................... 1
1.2 Closing............................................................................................. 1
1.3 Effective Time...................................................................................... 2
1.4 Effects of the Merger............................................................................... 2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; MERGER CONSIDERATION;
EXCHANGE OF CERTIFICATES; WARRANTS AND OPTIONS
2.1 Effect on Capital Stock............................................................................. 2
2.2 Company Common Stock Elections...................................................................... 4
2.3 Proration........................................................................................... 6
2.4 Tax Adjustment...................................................................................... 7
2.5 Dividends, Fractional Shares, Etc................................................................... 7
2.6 Warrants............................................................................................ 8
2.7 Stock Options....................................................................................... 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company....................................................... 9
3.2 Representations and Warranties of Parent and USF&G.................................................. 32
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of the Company............................................................................ 36
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Form S-4 and Proxy Statement; Shareholder Meeting; Comfort Letters................... 41
5.2 Contract and Regulatory Approvals................................................................... 42
5.3 HSR Filings......................................................................................... 43
5.4 Access to Information; Confidentiality.............................................................. 43
5.5 Fees and Expenses................................................................................... 43
5.6 Indemnification..................................................................................... 44
5.7 Reasonable Best Efforts............................................................................. 45
5.8 Public Announcements................................................................................ 46
5.9 Environmental Studies............................................................................... 46
5.10 Affiliates.......................................................................................... 46
5.11 Support Agreement................................................................................... 46
5.12 Cooperation......................................................................................... 46
5.13 NYSE Listing........................................................................................ 46
5.14 Benefit Plans and Employee Arrangements............................................................. 46
5.15 Tax-Free Reorganization............................................................................. 47
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5.16 Tri-West............................................................................................ 47
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger.......................................... 47
6.2 Conditions to Obligations of Parent and USF&G....................................................... 48
6.3 Conditions to Obligation of the Company............................................................. 48
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination......................................................................................... 49
7.2 Effect of Termination............................................................................... 50
7.3 Amendment........................................................................................... 50
7.4 Extension; Waiver................................................................................... 51
ARTICLE VIII
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and Agreements........................................... 51
8.2 Notices............................................................................................. 51
8.3 Interpretation...................................................................................... 52
8.4 Counterparts........................................................................................ 52
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership................................. 52
8.6 Governing Law....................................................................................... 52
8.7 Assignment.......................................................................................... 52
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of August 7, 1997 (the
"AGREEMENT"), is made and entered into by and among USF&G Corporation, a
Maryland corporation ("PARENT"), United States Fidelity and Guaranty Company, a
Maryland corporation and a wholly owned subsidiary of Parent ("USF&G"), and
Titan Holdings, Inc., a Texas corporation (the "COMPANY").
WHEREAS, the respective Boards of Directors of the Company, Parent and USF&G
have determined that the merger of the Company with and into USF&G (the
"MERGER"), upon the terms and subject to the conditions set forth in this
Agreement, would be fair to and in the best interests of their respective
shareholders, and such Boards of Directors have approved the Merger, pursuant to
which each share of common stock, par value $0.01 per share, of the Company (the
"COMPANY COMMON STOCK") issued and outstanding immediately prior to the
Effective Time (as defined in Section 1.3) (other than (a) shares of Company
Common Stock owned, directly or indirectly, by the Company, any Subsidiary (as
defined in Section 3.1(c)) of the Company, Parent or USF&G or any Subsidiary of
USF&G or Parent and (b) Dissenting Shares (as defined in Section 2.1(e))) will
be converted into, subject to the terms hereof, the right to receive the Merger
Consideration (as defined in Section 2.1(c));
WHEREAS, the Merger requires, for the approval thereof, the affirmative vote
of two-thirds of each of (a) the outstanding shares of the Company Common Stock
(the "Company Shareholder Approval") and (b) the outstanding shares of USF&G's
common stock, par value $2.50 per share (the "USF&G COMMON STOCK");
WHEREAS, Parent and USF&G are unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, Mark E.
Watson, Jr., in his capacity as a shareholder of the Company, enters into a
voting and support agreement with Parent and USF&G, the form of which is
attached hereto as Exhibit A (the "SUPPORT AGREEMENT");
WHEREAS, Parent, USF&G and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, it is intended that the Merger constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "CODE"), and that this Agreement shall constitute a "plan of
reorganization" for purposes of the Code.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the Texas Business Corporation Act
("TBCA") and the Maryland General Corporation Law ("MGCL"), the Company
shall be merged with and into USF&G at the Effective Time. At the Effective
Time, the separate corporate existence of the Company shall cease and USF&G
shall continue as the surviving corporation (USF&G and the Company are
sometimes hereinafter referred to as "CONSTITUENT CORPORATIONS" and, as the
context requires, USF&G is sometimes hereinafter referred to as the
"SURVIVING CORPORATION"). The name of the Surviving Corporation shall be
United States Fidelity and Guaranty Company.
1.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "CLOSING") shall take
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place at 10:00 a.m., Chicago, Illinois time, on the second business day
after satisfaction and/or waiver of all of the conditions set forth in
Article VI (the "CLOSING DATE"), at the offices of Mayer, Brown & Platt, 190
South LaSalle Street, Chicago, Illinois 60603, unless another date, time or
place is agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME. Subject to the provisions of this Agreement, the
parties hereto shall cause the Merger to be consummated by filing articles
of merger (the "ARTICLES OF MERGER") with the Secretary of State of the
State of Texas, as provided in the TBCA, and the Maryland State Department
of Assessments and Taxation, as provided in the MGCL, as soon as practicable
on or after the Closing Date. The Merger shall become effective upon the
acceptance for record of such filings or at such time thereafter as is
provided in the Articles of Merger (the "EFFECTIVE TIME").
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects as set
forth in the applicable provisions of the TBCA and MGCL.
(a) The Articles of Incorporation of USF&G shall be the Articles of
Incorporation of the Surviving Corporation until duly amended in
accordance with the terms thereof and the MGCL.
(b) The Bylaws of USF&G (the "USF&G BYLAWS") shall be the Bylaws of
the Surviving Corporation until thereafter amended as provided by
applicable law, the Surviving Corporation's Articles of Incorporation or
the Bylaws.
(c) The directors of USF&G immediately prior to the Effective Time
shall be the directors of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
(d) The officers of USF&G at the Effective Time shall, from and after
the Effective Time, be the officers of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; MERGER CONSIDERATION;
EXCHANGE OF CERTIFICATES; WARRANTS AND OPTIONS
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any further action on the part of the holder of any
shares of Company Common Stock or the holder of any shares of USF&G Common
Stock:
(a) CAPITAL STOCK OF USF&G. Each share of USF&G Common Stock issued
and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of
common stock, par value $2.50 per share of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND COMPANY COMMON STOCK OWNED BY
USF&G OR PARENT. Each share of Company Common Stock that is owned by the
Company, any Subsidiary of the Company, Parent or USF&G or any Subsidiary
of Parent or USF&G shall automatically be canceled and retired and shall
cease to exist, and no stock of Parent or other consideration shall be
delivered or deliverable in exchange therefor.
(c) MERGER CONSIDERATION. Subject to Sections 2.1(b) and (e) and
Section 2.3, at the Effective Time each issued and outstanding share of
Company Common Stock shall be converted
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into, at the election of the holder thereof, one of the following (as
adjusted pursuant to this Article II), (the "Merger Consideration"):
(i) for each such share of Company Common Stock (other than shares as to
which a Stock Election or Cash Election (each as defined below) has
been made), the right to receive (x) 0.46516 (the "STANDARD EXCHANGE
RATIO") of a share of the Common Stock, $2.50 par value per share
(including the associated Parent Rights (as defined below), "PARENT
COMMON STOCK"), of Parent (the "Standard Stock Consideration") and
(y) an amount in cash, without interest, equal to $11.60 (the
"STANDARD CASH CONSIDERATION" and, together with the Standard Stock
Consideration, the "STANDARD CONSIDERATION"); provided, however,
that
(1) in the event the Average Stock Price is greater or less than
$24.94 but not greater than $28.68 or less than $21.20, the
allocation of the consideration between stock and cash will be
adjusted to maintain a 50% stock, 50% cash relationship by
adjusting the Standard Cash Consideration to an amount equal to
0.50 times the product of (a) $23.20 times (b) 1 plus the product
of (i) 0.50 times (ii) a fraction the numerator of which is the
Average Stock Price minus $24.94 and the denominator of which is
$24.94 and adjusting the Standard Exchange Ratio to an amount
equal to the quotient obtained by dividing the Standard Cash
Consideration as so adjusted by the Average Stock Price; and
(2) in the event the Average Stock Price is greater than $28.68, the
Standard Cash Consideration shall be an amount equal to $12.47
and the Standard Exchange Ratio shall be equal to the quotient
obtained by dividing $12.47 by the Average Stock Price; and
(3) in the event the Average Stock Price is less than $21.20, the
Standard Cash Consideration shall be an amount equal to $10.73
and the Standard Exchange Ratio shall be equal to the quotient
obtained by dividing $10.73 by the Average Stock Price.
(ii) for each such share of Company Common Stock with respect to which
an election to receive solely Parent Common Stock has been
effectively made and not revoked or lost pursuant to Sections
2.2(c), (d) or (e), the right to receive 2.0 times the Standard
Exchange Ratio as determined by (c)(i) above (the "STOCK EXCHANGE
RATIO") of a share of Parent Common Stock (the "STOCK
CONSIDERATION"); or
(iii) for each such share of Company Common Stock with respect to which
an election to receive solely cash has been effectively made and
not revoked or lost pursuant to Section 2.2(c), (d) or (e), the
right to receive in cash, without interest, in an amount equal to
2.0 times the Standard Cash Consideration as determined pursuant to
(i) above (the "CASH CONSIDERATION"); provided, however, that (1)
in the event the Average Stock Price is less than $21.20, the Cash
Consideration shall be equal to $21.46 and (2) in the event the
Average Stock Price is more than $28.68, the Cash Consideration
shall be equal to $24.94.
"AVERAGE STOCK PRICE" means the average of the Closing Market Prices (as
hereinafter defined) for the ten consecutive trading days ending on the third
trading day prior to the Effective Time; PROVIDED, HOWEVER, that the Average
Stock Price used for purposes of the calculations in this Article II shall not
in any event be less than $17.46. The "CLOSING MARKET PRICES" for any trading
day means the closing sales price of Parent Common Stock as reported in the New
York Stock Exchange Composite Tape for that day.
(d) CANCELLATION AND RETIREMENT OF COMPANY COMMON STOCK. As a
result of the Merger and without any action on the part of the holder
thereof, at the Effective Time and except as provided in Sections 2.1(b)
and (e), all shares of Company Common Stock shall cease to be outstanding
and shall be canceled and retired and shall cease to exist, and each
holder of such shares of Company Common Stock shall thereafter cease to
have any rights with respect to such
3 A-6
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shares of Company Common Stock, except the right to receive, without
interest, the Merger Consideration and cash for fractional shares of
Parent Common Stock in accordance with Section 2.5(c) upon the surrender
of a certificate representing such shares of Company Common Stock (a
"COMPANY CERTIFICATE").
(e) DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, holders of Company Common Stock that have, as of the
Effective Time, complied with all procedures necessary to assert
appraisal rights in accordance with the TBCA, if applicable, shall have
such rights, if any, as they may have pursuant to Section 5.12 of the
TBCA and such Company Common Stock shall not be converted or be
exchangeable as provided in this Section 2.1, but such holders shall be
entitled to receive such payment as may be determined to be due to such
holders pursuant to the TBCA; PROVIDED, HOWEVER, that if such holder
shall have failed to perfect or shall have effectively withdrawn or lost
his right to appraisal and payment under the TBCA, such holder's Company
Common Stock shall thereupon be deemed to have been converted and to have
become exchangeable, as of the Effective Time, into the Standard
Consideration. The Company Common Stock described in this Section 2.1(e)
held by holders who exercise and perfect appraisal rights are referred to
herein as "DISSENTING SHARES." The Company shall give Parent prompt
notice of any demands for appraisal of shares received by the Company
(and shall also give Parent prompt notice of any withdrawals of such
demands for appraisal rights) and Parent shall have the opportunity and
right to participate in and direct all negotiations with respect to such
demands. The Company shall not, except with the prior written consent of
Parent, make any payment with respect to, settle or otherwise negotiate
or offer to settle any such demand for appraisal rights. Parent agrees
that it shall make all payments with respect to appraisal rights and that
the funds therefor shall not come, directly or indirectly, from the
Company.
2.2 COMPANY COMMON STOCK ELECTIONS
(a) ELECTIONS. Each person who, at the Effective Time, is a record
holder of shares of Company Common Stock (other than holders of shares of
Company Common Stock to be canceled as set forth in Section 2.1(b) or of
Dissenting Shares) shall have the right to submit an Election Form (as
defined in Section 2.2(c)) specifying that such person desires to have
all of the shares of Company Common Stock owned by such person converted
into the right to receive either (i) the Standard Consideration (a
"STANDARD ELECTION") (ii) the Stock Consideration (a "STOCK ELECTION"),
or (iii) the Cash Consideration (a "CASH ELECTION").
(b) DEPOSIT OF EXCHANGE FUND. Promptly after the Allocation
Determination (as defined in Section 2.2(d)), Parent shall deposit (or
cause to be deposited) with a bank or trust company to be designated by
Parent and reasonably acceptable to the Company (the "EXCHANGE AGENT"),
for the benefit of the holders of shares of Company Common Stock, for
exchange in accordance with this Article II, (i) cash in an amount
sufficient to pay the aggregate cash portion of the Merger Consideration
in accordance with this Article II and (ii) certificates representing
shares of Parent Common Stock ("PARENT CERTIFICATES") for exchange in
accordance with this Article II (the cash and certificates deposited
pursuant to clauses (i) and (ii) being hereinafter referred to as the
"EXCHANGE FUND").
(c) METHOD OF ELECTION; DEEMED STANDARD ELECTION. As soon as
reasonably practicable after the Effective Time, the Exchange Agent shall
mail to each holder of record of Company Common Stock immediately prior
to the Effective Time (excluding any shares of Company Common Stock which
(i) are canceled pursuant to Section 2.1(b), or (ii) are Dissenting
Shares) (A) a letter of transmittal (the "COMPANY LETTER OF TRANSMITTAL")
(which shall specify that delivery shall be effected, and risk of loss
and title to the Company Certificates shall pass, only upon delivery of
such Company Certificates to the Exchange Agent and shall be in such form
and have such other provisions as Parent shall specify), (B) instructions
for use in effecting the surrender of
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the Company Certificates in exchange for the Merger Consideration with
respect to the shares of Company Common Stock formerly represented
thereby, and (C) an election form (the "ELECTION FORM") providing for
such holders to make the Standard Election, the Cash Election or the
Stock Election. As of the Election Deadline (as defined in Section
2.2(d)) all holders of Company Common Stock immediately prior to the
Effective Time (excluding any shares of Company Common Stock that (i) are
canceled pursuant to Section 2.1(b) or (ii) are Dissenting Shares) that
shall not have properly submitted to the Exchange Agent, or that shall
have properly revoked, an effective and properly completed Election Form
shall be deemed to have made a Standard Election (each a "DEEMED STANDARD
ELECTION").
(d) ELECTION DEADLINE. Any Cash Election, Standard Election, or
Stock Election shall have been validly made only if the Exchange Agent
shall have received by 5:00 p.m. New York City time on a date (the
"ELECTION DEADLINE") to be mutually agreed upon by Parent and the Company
(which date shall not be later than the twentieth business day after the
Effective Time), an Election Form properly completed and executed (with
the signature or signatures thereof guaranteed to the extent required by
the Election Form) by such holder accompanied by such holder's Company
Certificates, or by an appropriate guarantee of delivery of such Company
Certificates from a member of any registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company in the United States as set forth in
such Election Form. Any holder of Company Common Stock that has made an
election by submitting an Election Form to the Exchange Agent may at any
time prior to the Election Deadline change such holder's election by
submitting a revised Election Form, properly completed and signed that is
received by the Exchange Agent prior to the Election Deadline. Any holder
of Company Common Stock may at any time prior to the Election Deadline
revoke such holder's election and withdraw such holder's Company
Certificate deposited with the Exchange Agent by written notice to the
Exchange Agent received by the close of business on the day prior to the
Election Deadline. As soon as practicable after the Election Deadline
(but in no event later than ten business days after the Election
Deadline), the Exchange Agent shall determine the allocation of the cash
portion and stock portion of the Merger Consideration and shall notify
Parent of its determined allocation (the "ALLOCATION DETERMINATION").
(e) NO FURTHER OWNERSHIP RIGHTS IN COMPANY. From and after the
Effective Time, each holder of a certificate that immediately prior to
the Effective Time represented outstanding shares of Company Common
Stock, shall, upon surrender of such certificate for cancellation to the
Exchange Agent, together with the Company Letter of Transmittal, duly
executed, and such other documents as Parent or the Exchange Agent shall
reasonably request, be entitled to receive promptly after the Election
Deadline in exchange therefor (A) a check in the amount equal to the
cash, if any, which such holder has the right to receive pursuant to the
provisions of this Article II (including any cash in lieu of fractional
shares of Parent Common Stock), and (B) a Parent Certificate representing
that number of shares of Parent Common Stock, if any, which such holder
has the right to receive pursuant to this Article II (in each case less
the amount of any required withholding taxes), and the Company
Certificate so surrendered shall forthwith be canceled. Until surrendered
as contemplated by this Section 2.2(e), each Company Certificate shall be
deemed at any time after the Effective Time to represent only the right
to receive the Merger Consideration with respect to the shares of Company
Common Stock formerly represented thereby. If any certificate for shares
of Parent Common Stock to be issued in the Merger is to be issued in a
name other than that in which the certificate for shares of Company
Common Stock surrendered in exchange therefor is registered, it shall be
a condition of such issuance that the person requesting such issuance
shall pay any transfer or other tax required by reason of the issuance of
certificates for such shares of Parent Common Stock in a name other than
that of the registered holder of the certificate surrendered, or shall
establish to the satisfaction of Parent or its agent that such tax has
been paid or is not applicable.
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(f) RULES GOVERNING ELECTIONS. Parent shall have the right to make
rules, not inconsistent with the terms of this Agreement, governing the
validity of the Election Forms, the manner and extent to which Standard
Elections, Cash Elections or Stock Elections are to be taken into account
in making the determinations prescribed by Section 2.3, the issuance and
delivery of certificates for Parent Common Stock into which shares of
Company Common Stock are converted in the Merger, and the payment of cash
for shares of Company Common Stock converted into the right to receive
cash in the Merger.
2.3 PRORATION.
(a) As is more fully set forth below, the maximum number of shares of
Parent Common Stock issuable to holders of Company Common Stock (the
"MAXIMUM NUMBER OF PARENT SHARES") shall not exceed the product of (x)
the Standard Exchange Ratio and (y) the number of Outstanding Company
Shares (as defined below).
(b) As is more fully set forth below, the aggregate amount of cash to
be paid to holders of Outstanding Company Shares (as defined below) (the
"Maximum Cash Amount") shall not exceed the product of (x) the Standard
Cash Consideration and (y) the number of Outstanding Company Shares.
"OUTSTANDING COMPANY SHARES" shall mean those shares of Company Common
Stock outstanding immediately prior to the Effective Time.
(c) In the event that the aggregate number of shares of Parent Common
Stock issuable pursuant to the Stock Elections received by the Exchange
Agent exceeds an amount equal to the Maximum Number of Parent Shares
minus the number of shares of Parent Common Stock issuable pursuant to
Standard Elections and Deemed Standard Elections, including any
fractional shares of Parent Common Stock for which a cash adjustment
shall be paid pursuant to Section 2.5(c) (such difference, the "REMAINING
PARENT SHARES"), each holder making a Stock Election shall receive, for
each share of Company Common Stock held by such holder, (x) a number of
shares of Parent Common Stock equal to the quotient obtained by dividing
(i) the Remaining Parent Shares by (ii) the aggregate number of shares of
Company Common Stock held by holders making Stock Elections (the "STOCK
ELECTION COMPANY SHARES"), plus (y) cash in an amount equal to the
quotient obtained by dividing (iii) the Remaining Stock Election Cash
Amount (as defined below) by (iv) the Stock Election Company Shares. The
"REMAINING STOCK ELECTION CASH AMOUNT" shall be equal to the Maximum Cash
Amount minus the sum of (i) the aggregate amount of cash payable pursuant
to, or with respect to, Standard Elections, Deemed Standard Elections,
Cash Elections, Dissenting Shares and fractional shares and (ii) the
aggregate amount of consideration transferred by Parent in acquiring the
Parent Shares (as defined below). "PARENT SHARES" means any and all
shares of Company Common Stock that are (i) owned by Parent or USF&G and
(ii) canceled and retired at the Effective Time pursuant to Section
2.1(b). For purposes of this paragraph and the following paragraph, the
aggregate amount of cash payable with respect to Dissenting Shares shall
be deemed to be the product of (x) the number of Dissenting Shares times
(y) the sum of (i) the Standard Cash Consideration and (ii) the product
of the Standard Exchange Ratio times the Average Stock Price.
(d) In the event that the aggregate amount of cash payable pursuant
to Cash Elections received by the Exchange Agent exceeds the Maximum Cash
Amount minus the sum of (i) the aggregate amount of cash payable pursuant
to Standard Elections and Deemed Standard Elections, (ii) the aggregate
amount of cash payable with respect to the Dissenting Shares and
fractional shares and (iii) the aggregate amount of consideration
transferred by Parent in acquiring the Parent Shares (such difference,
the "REMAINING CASH"), each holder making a Cash Election shall receive,
for each share of Company Common Stock held by such holder, (x) cash in
an amount equal to the quotient obtained by dividing the (i) Remaining
Cash by (ii) the aggregate number of shares of Company Common Stock held
by holders making Cash Elections (the "CASH ELECTION COMPANY SHARES"),
plus (y) a number of shares of Parent Common Stock
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equal to the quotient obtained by dividing (iii) the Remaining Cash
Election Parent Shares (as defined below) by (iv) the Cash Election
Company Shares. The "REMAINING CASH ELECTION PARENT SHARES" shall be the
Maximum Number of Parent Shares minus the number of shares of Parent
Common Stock issuable pursuant to Standard Elections, Deemed Standard
Elections and Stock Elections (including any fractional shares of Parent
Common Stock for which a cash adjustment shall be paid pursuant to
Section 2.5(c) in respect of such Standard Elections, Deemed Standard
Elections and Stock Elections).
2.4 TAX ADJUSTMENT.
In the event that the Closing Stock Price (as defined below) is less
than the Average Stock Price such that the allocation of the consideration
between stock and cash based on the Closing Stock Price is not 50% stock and
50% cash, appropriate adjustment will be made, as determined by Parent and
the Company upon advice of counsel, to the extent if any, as may be required
to cause the Merger Consideration allocation between cash and stock to
satisfy the continuity of interest requirements for purposes of causing the
transaction to qualify as a tax-free reorganization, provided that the total
value of the Merger Consideration to be delivered by Parent, based upon the
Average Stock Price, shall not increase. For purposes of this Section 2.4,
the "CLOSING STOCK PRICE" shall mean the mean between the highest and lowest
quoted selling prices of the Parent Common Stock as reported on the New York
Stock Exchange Composite Tape on the day of the Effective Time of the
Merger. In the event that an adjustment is made under this Section 2.4, any
adjustments necessary or appropriate to reflect such adjustment shall be
made to the other provisions of this Article II.
2.5 DIVIDENDS, FRACTIONAL SHARES, ETC.
(a) DIVIDENDS ON PARENT COMMON STOCK. Notwithstanding any other
provisions of this Agreement, no dividends or other distributions
declared after the Effective Time on Parent Common Stock shall be paid
with respect to any shares of Company Common Stock represented by a
Company Certificate, until such Company Certificate is surrendered for
exchange as provided herein. Subject to the effect of applicable laws,
following surrender of any such Company Certificate, there shall be paid
to the holder of Parent Certificates issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Parent Common
Stock and not paid, less the amount of any withholding taxes that may be
required thereon, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective
Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of Parent Common Stock, less
the amount of any withholding taxes that may be required thereon.
(b) NO TRANSFERS; CLOSING OF STOCK TRANSFER BOOK. At or after the
Effective Time, there shall be no transfer on the stock transfer books of
the Company of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
certificates representing any such shares are presented to the Surviving
Corporation, they shall be canceled and exchanged for the Merger
Consideration, if any, deliverable in respect thereof pursuant to this
Agreement.
(c) NO FRACTIONAL SHARES. No fractional shares of Parent Common
Stock shall be issued pursuant to the Merger. In lieu of the issuance of
any fractional share of Parent Common Stock pursuant to the Merger, cash
adjustments shall be paid to holders in respect of any fractional share
of Parent Common Stock that would otherwise be issuable, and the amount
of such cash adjustment shall be equal to the product of such fractional
amount and the Average Stock Price.
(d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any shares of
Parent Common Stock) that remains unclaimed by the former stockholders of
the Company two years after the Effective Time shall be
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delivered to Parent. Any former stockholder of the Company who has not
theretofore complied with this Article II shall thereafter look only to
the Surviving Corporation and Parent for payment of the applicable Merger
Consideration, cash in lieu of fractional shares and unpaid dividends and
distributions on Parent Common Stock deliverable in respect of each share
of Company Common Stock such stockholder holds as determined pursuant to
this Agreement, in each case without any interest thereon.
(e) None of Parent, the Company, USF&G, the Surviving Corporation,
the Exchange Agent or any other person shall be liable to any former
holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to applicable or unclaimed
property, escheat or similar laws.
(f) In the event that any Company Certificate shall have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the
person claiming such Company Certificate to be lost, stolen or destroyed
and, if required by Parent, the posting by such person of a bond in such
reasonable amount as Parent may direct as indemnity against any claim
that may be made against it with respect to such Company Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Company Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of
Parent Common Stock, as provided in this Section 2.5, deliverable in
respect thereof pursuant to this Agreement.
(g) In the event of any change in Parent Common Stock between the
date of this Agreement and the Effective Time by reason of any stock
split, stock dividend, subdivision, reclassification, combination,
exchange of Parent Common Stock or the like, the Merger Consideration and
other terms set forth in this Agreement shall be appropriately adjusted.
(h) The pricing terms set forth herein are based on the information
disclosed in Section 3.1(b) hereof. If the number of such shares and
share equivalents outstanding is greater than the foregoing, the Merger
Consideration shall be appropriately adjusted.
2.6 WARRANTS. The Company shall use its reasonable best efforts to
cause holders of all then outstanding warrants to purchase Company Common
Stock (each a "COMPANY WARRANT") whether or not then exercisable in whole or
in part, to agree to surrender and receive, in exchange for cancellation and
in settlement thereof a number of shares of Parent Common Stock for each
share of Company Common Stock subject to such Company Warrant (subject to
any applicable withholding tax) equal to the quotient of (i) the product of
(1) the number of shares of Company Common Stock which the holder would be
entitled to receive if such Company Warrant were exercised in full
immediately prior to the Effective Time MULTIPLIED BY (2) the difference
between (x) the Cash Consideration and (y) the exercise price of such share
of Company Common Stock under the Company Warrant, to the extent such amount
is a positive number DIVIDED BY (ii) the Average Closing Price (such amount
being hereinafter referred to as the "WARRANT CONSIDERATION"); PROVIDED,
HOWEVER, that with respect to any person subject to Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), any such
amount shall be paid as soon as practicable after the first date payment can
be made without liability to such person under Section 16(b) of the Exchange
Act. Upon receipt of the Warrant Consideration, the Company Warrant shall be
canceled. The surrender of a Company Warrant to the Company in exchange for
the Warrant Consideration shall be deemed a release of any and all rights
the holder had or may have had in respect of such Company Warrant. With
respect to the Company Warrants that are not surrendered prior to the
Effective Time, after the Effective Time, the Surviving Corporation shall
comply with all applicable terms of such unsurrendered Company Warrants.
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2.7 STOCK OPTIONS. Each stock option issued and outstanding under the
1993 Stock Option Plan, as amended, of the Company (the "STOCK OPTION PLAN")
is referred to herein as an "EMPLOYEE/ DIRECTOR STOCK OPTION" and all such
options are referred to herein, collectively, as the "EMPLOYEE/ DIRECTOR
STOCK OPTIONS." Each stock option issued and outstanding under the 1993
Directors' Stock Option Plan (the "DIRECTORS' STOCK OPTION PLAN") is
referred to herein as a "DIRECTOR'S OPTION" and all such options are
referred to herein, collectively, as the "DIRECTORS' OPTIONS." The
Employee/Director Stock Options and the Directors' Options are referred to
herein, collectively, as the "COMPANY OPTIONS" and, individually, as a
"COMPANY OPTION." At the Effective Time, each Company Option shall become
immediately fully vested and shall be converted into an option to purchase
shares of Parent Common Stock, as provided below. Following the Effective
Time, each such Company Option shall be exercisable upon the same terms and
conditions as then are applicable to such Company Option, except that (i)
each such Company Option shall be exercisable for that number of shares of
Parent Common Stock equal to the product of (x) the number of shares of
Company Common Stock for which such Company Option was exercisable
immediately prior to the Effective Date and (y) the Stock Exchange Ratio and
(ii) the exercise price of such option shall be equal to the quotient
obtained by dividing the exercise price per share of such Company Option by
the Stock Exchange Ratio. From and after the date of this Agreement, no
additional options to purchase shares of Company Common Stock shall be
granted under the Company Stock Option Plan, Directors' Stock Option Plan or
otherwise. Except as otherwise agreed to by the parties, no person shall
have any right under any stock option plan (or any option granted
thereunder) or other plan, program or arrangement of the Company with
respect to, including any right to acquire, equity securities of the Company
following the Effective Time. At or as soon as practicable after the
Effective Time, Parent shall issue to each holder of a Company Option that
is canceled an agreement that accurately reflects the terms of the Parent
Option substituted therefore as contemplated by this Section 2.7. Parent
shall (i) take all corporate actions necessary to reserve for issuance such
number of shares of Parent Common Stock as will be necessary to satisfy
exercises in full of all Parent Options after the Effective Time, (ii) use
its reasonable best efforts to ensure that an effective Registration
Statement on Form S-8 is on file with the Securities and Exchange Commission
(the "SEC") with respect to such Parent Common Stock, and (iii) use its
reasonable best efforts to have such shares admitted to trading upon
exercises of Parent Options.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as disclosed
in (i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, (ii) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997, or (iii) the disclosure memorandum (the
"DISCLOSURE MEMORANDUM") delivered at or prior to the date of this Agreement
(it being understood that each section of the Disclosure Memorandum shall
list all items applicable to such section, although the inadvertent omission
of an item from one section shall not be a breach of this Agreement if such
item and an explanation of the nature of such item is clearly disclosed in
another section of the Disclosure Memorandum) the Company represents and
warrants to Parent and USF&G as follows:
(a) ORGANIZATION, STANDING AND POWER. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it is incorporated, has all requisite corporate
power and authority to own, lease and operate its properties and to carry
on its business as now being conducted and is duly qualified or licensed
to do business as a foreign corporation and in good standing to conduct
business in each jurisdiction in which the business it is conducting, or
the operation, ownership or leasing of its properties, makes such
qualification or license necessary, other than such jurisdictions where
the failure so to qualify or become so licensed would not individually or
in the aggregate adversely affect the Company and
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its Subsidiaries taken as a whole in any material respect. The Company
has heretofore made available to Parent complete and correct copies of
its Amended and Restated Articles of Incorporation, as currently in
effect as of the date of this Agreement (the "COMPANY ARTICLES OF
INCORPORATION"), and the Bylaws. As used in this Agreement, a "MATERIAL
ADVERSE EFFECT" shall mean, with respect to any specified party to this
Agreement, any event, change, condition, fact or effect which has or
could reasonably be expected to have a material adverse effect on (i) the
business, results of operations, or financial condition of such party and
its Subsidiaries taken as a whole or (ii) the ability of such party to
consummate the transactions contemplated by this Agreement.
(b) CAPITAL STRUCTURE. As of the date of this Agreement, the
authorized capital stock of the Company consists of 45,000,000 shares,
divided into the following: (i) 5,000,000 shares of preferred stock, par
value $0.01 per share (the "COMPANY PREFERRED STOCK"); and (ii)
40,000,000 shares of Company Common Stock. At the close of business on
August 1, 1997: (i) 10,101,915 shares of Company Common Stock were issued
and outstanding, 27,825 of which are restricted shares; (ii) 815,902
shares of Company Common Stock were reserved for issuance in connection
with the Stock Option Plan; (iii) 122,457 shares of Company Common Stock
were reserved for issuance in connection with the Directors' Stock Option
Plan; (iv) 491,222 shares of Company Common Stock were reserved for
issuance upon exercise of outstanding Company Warrants; (v) no shares of
Company Common Stock were held in treasury; (vi) no shares of Company
Preferred Stock were issued and outstanding or held by the Company or any
Subsidiary of the Company; and (vii) no bonds, debentures, notes or other
instruments or evidence of indebtedness having the right to vote (or
convertible into, or exercisable or exchangeable for securities having
the right to vote) on any matters on which the Company shareholders may
vote ("COMPANY VOTING DEBT") were issued or outstanding. All outstanding
shares of Company Common Stock are validly issued, fully paid and
nonassessable and are not subject to preemptive or other similar rights.
Except as set forth in Section 3.1(b) of the Disclosure Memorandum, there
are outstanding: (i) no securities of the Company convertible into or
exchangeable or exercisable for shares of capital stock, Company Voting
Debt or other voting securities of the Company; and (ii) no stock awards,
options, warrants, calls, rights (including stock purchase or preemptive
rights), commitments or agreements to which the Company is a party or by
which it is bound, in any case obligating the Company to issue, deliver,
sell, purchase, redeem or acquire, or cause to be issued, delivered,
sold, purchased, redeemed or acquired, additional shares of its capital
stock, any Company Voting Debt or other voting securities or securities
convertible into or exchangeable or exercisable for voting securities of
the Company, or obligating the Company to grant, extend or enter into any
such option, warrant, call, right, commitment or agreement. Except as set
forth in Section 3.1(b) of the Disclosure Memorandum, since December 31,
1996, the Company has not (i) granted any options, warrants or rights to
purchase shares of Company Common Stock or (ii) amended or repriced, as
applicable, any Company Option, any Company Warrant, the Stock Option
Plan or the Directors' Stock Option Plan. Section 3.1(b) of the
Disclosure Memorandum sets forth the following information with respect
to each Company Option and Company Warrant outstanding on the date of
this Agreement: (A) the name of the optionee or warrantholder, (B) the
number of shares of Company Common Stock subject to such Company Option
or Company Warrant, and (C) the exercise price of such Company Option or
Company Warrant. None of the Company Options are "incentive stock
options" (within the meaning of Section 422 of the Code). There are not
as of the date of this Agreement and there will not be on the date of the
Shareholders' Meeting any shareholder agreements, voting trusts or other
agreements or understandings to which the Company is a party or by which
it is bound relating to the voting of any shares of the capital stock of
the Company which will limit in any way the solicitation of proxies by or
on behalf of the Company from, or the casting of votes by, the
shareholders of the Company with respect to the Merger. True and correct
copies of all agreements relating to the
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Company Warrants and the Company Options and the issuance of any
restricted stock have previously been provided or made available to
Parent.
(c) SUBSIDIARIES; INVESTMENTS. Section 3.1(c) of the Disclosure
Memorandum sets forth the name of each Subsidiary of the Company, the
jurisdiction of its incorporation or organization and whether it is an
insurance company. Each Subsidiary is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has the power and authority and all
necessary government approvals to own, lease and operate its properties
and to carry on its business as now being conducted. Each Subsidiary of
the Company is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary. The Company has heretofore made
available to USF&G complete and correct copies of the articles of
incorporation (or other organizational documents) and bylaws of each of
its Subsidiaries. Section 3.1(c) of the Disclosure Memorandum sets forth,
as to each Subsidiary of the Company, its authorized capital stock and
the number of issued and outstanding shares of capital stock (or similar
information with respect to any Subsidiary not organized as a corporate
entity). All outstanding shares of the capital stock of the Subsidiaries
of the Company are validly issued, fully paid and nonassessable and are
not subject to preemptive or other similar rights; neither the Company
nor any Subsidiary of the Company has any call obligations or similar
liabilities with respect to partnerships or other Subsidiaries not
organized as corporate entities. Except as set forth in Section 3.1(c) of
the Disclosure Memorandum, the Company is, directly or indirectly, the
record and beneficial owner of all of the outstanding shares of capital
stock (or other interests, with respect to Subsidiaries not organized as
corporate entities) of each of its Subsidiaries free and clear of all
Liens and other restrictions with respect to the transferability or
assignability thereof (other than restrictions on transfer imposed by
federal or state securities laws) and no capital stock (or other
interests, with respect to Subsidiaries not organized as corporate
entities) of any of its Subsidiaries is or may become required to be
issued by reason of any options, warrants, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable or exercisable for, shares of
capital stock (or other interests, with respect to Subsidiaries not
organized as corporate entities) of any of its Subsidiaries and there are
no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may be bound to issue, redeem,
purchase or sell shares of Subsidiary capital stock (or other interests,
with respect to Subsidiaries not organized as corporate entities) or
securities convertible into or exchangeable or exercisable for any such
shares or interests. Except for the ownership interests set forth in
Section 3.1(c) of the Disclosure Memorandum, neither the Company nor any
of its Subsidiaries owns, directly or indirectly, any capital stock or
other ownership interest in any corporation, partnership, business
association, joint venture or other entity, except for portfolio
investments made in the ordinary course of business. As used in this
Agreement, the word "SUBSIDIARY," with respect to any party to this
Agreement, means any corporation, partnership, joint venture or other
organization, whether incorporated or unincorporated, of which: (i) such
party or any other Subsidiary of such party is a general partner; (ii)
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation,
partnership, joint venture or other organization is held by such party or
by any one or more of its Subsidiaries, or by such party and any one or
more of its Subsidiaries; or (iii) at least 10% of the equity, other
securities or other interests is, directly or indirectly, owned or
controlled by such party or by any one or more of its Subsidiaries or by
such party and any one or more of its Subsidiaries.
(d) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) The Company has all requisite corporate power and authority to
enter into this Agreement and, subject to the Company
Shareholder Approval, to consummate the transactions
contemplated hereby. The execution and delivery of this
Agreement and
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the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the
part of the Company, subject, in the case of the Merger, to the
Company Shareholder Approval. This Agreement has been duly
executed and delivered by the Company and, subject, in the case
of the Merger, to the Company Shareholder Approval, and assuming
that this Agreement constitutes the valid and binding agreement
of Parent and USF&G, constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms and
conditions except that the enforcement hereof may be limited by
(A) applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws now or
hereafter in effect relating to creditors' rights generally and
(B) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in
equity) and (C) any ruling or action of any Governmental Entity
as set forth in Section 3.1(d)(iii).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by the
Company will not conflict with, or result in any violation of,
or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or
acceleration (including pursuant to any put right) of any
obligation or the loss of a material benefit under, or the
creation of a Lien on assets or property, or right of first
refusal with respect to any asset or property or change any
other rights, benefits, liabilities or obligations (any such
conflict, violation, default, right of termination,
cancellation or acceleration, loss, creation or right of first
refusal, or change, a "VIOLATION"), pursuant to, (A) any
provision of the Articles of Incorporation or Bylaws of the
Company or the comparable documents of any of its Subsidiaries
or (B) except as to which requisite waivers or consents have
been obtained and specifically identified in Section 3.1(d) of
the Disclosure Memorandum and assuming the consents, approvals,
authorizations or permits and filings or notifications referred
to in paragraph (iii) of this Section 3.1(d) are duly and
timely obtained or made and, in the case of the Merger, the
Company Shareholder Approval has been obtained, any loan or
credit agreement, note, mortgage, deed of trust, indenture,
lease, Company License (as defined in Section 3.1(g)), Company
Benefit Plan (as defined in Section 3.1(n)), Company Material
Contract (as defined in Section 3.1(r)), or any other
agreement, obligation, instrument, concession or license or any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company, any of its Subsidiaries
or any of their respective properties or assets except for such
Violations which would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit
from any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign
(a "GOVERNMENTAL ENTITY"), is required by or with respect to
the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by the Company or the
consummation by the Company of the transactions contemplated
hereby, except for: (A) any actions and approval that may be
required under the insurance laws and regulations of the
jurisdictions in which the Subsidiaries of the Company that are
insurance companies are domiciled or licensed, each of which is
listed in Section 3.1(d)(iii)(A) of the Disclosure Memorandum;
(B) the filing of a pre-merger notification and report form by
the Company under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR ACT"), and the expiration or
termination of the applicable waiting period thereunder; (C)
the filing with the SEC of (x) a proxy statement in definitive
form relating to the approval by the holders of Company
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Common Stock of the Merger (such proxy statement as amended or
supplemented from time to time being hereinafter referred to as
the "PROXY STATEMENT"), (y) the registration statement on Form
S-4 to be filed with the SEC by Parent pursuant to which Shares
of Parent Common Stock issuable in the Merger will be
registered with the SEC (the "FORM S-4"), and (z) such reports
under and such other compliance with the Exchange Act and the
rules and regulations thereunder as may be required in
connection with this Agreement and the transactions
contemplated hereby; (D) the filing of the Articles of Merger
with the Secretary of State of the State of Texas and the
Maryland State Department of Assessments and Taxation; (E) such
filings and approvals as may be required by any applicable
state securities, "blue sky" or takeover laws; (F) the Company
Shareholder Approval; and (G) where the failure to obtain
consent, approval, order, or authorization of, or registration,
declaration or filing with, notice to, or permit from a
Government Entity would not adversely effect the Company and
its Subsidiaries taken as a whole in any material respect.
(e) GOVERNMENT FILINGS. The Company has made available to USF&G a
true and complete copy of each report, schedule, registration statement
and definitive proxy statement filed by the Company with the SEC since
December 31, 1994 and prior to the date of this Agreement (the "FILED
COMPANY SEC DOCUMENTS"), which are all the documents (other than
preliminary material) that the Company was required to file with the SEC
since such date. As of their respective dates, the Filed Company SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or the
Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such Filed Company SEC
Documents, and none of the Filed Company SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The consolidated financial statements of the Company included
in the Filed Company SEC Documents comply as to form in all material
respects with the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Rule 10-01 of
Regulation S-X of the SEC) and fairly present in accordance with
applicable requirements of GAAP the consolidated financial position of
the Company and its consolidated subsidiaries as of the dates therein and
the consolidated results of their operations and cash flows for the
periods presented therein (subject, in the case of unaudited interim
financial statements, to normal recurring adjustments none of which are
material). Section 3.1(e) of the Disclosure Memorandum lists with respect
to the Company Common Stock for the period since December 31, 1996 and
prior to the date of this Agreement each: (i) Schedule 13D filed with the
SEC and (ii) application for change in control filed under the insurance
holding company laws of any state or other jurisdiction. No Subsidiary of
the Company has been or is required to or has filed any documents with
the SEC. Section 3.1(e) of the Disclosure Memorandum includes the
Company's reported results for the six-month period ended June 30, 1997
and such reported results fairly present in summary fashion and in
accordance with applicable requirements of GAAP the consolidated
financial position of the Company and its consolidated subsidiaries as of
the dates therein and the consolidated results of their operations for
the periods presented therein (subject to normal recurring adjustments
none of which are material).
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in
(i) the Form S-4 will, at the time the Form S-4 is filed with the SEC,
and at any time it is amended or supplemented or at the time it becomes
effective under the Securities Act, contain any untrue statement of a
material fact or
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omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they are made, not misleading, and (ii) the Proxy Statement
will, on the date it is first mailed to the holders of the Company Common
Stock or at the time of the Shareholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation is made
by the Company with respect to statements made or incorporated by
reference therein based on information supplied in writing by Parent or
USF&G specifically for inclusion therein. If, at any time prior to the
Shareholders' Meeting, any event with respect to the Company, or with
respect to other information supplied by the Company for inclusion in the
Proxy Statement, shall occur which is required to be described in an
amendment of, or a supplement to, any of such documents, such event shall
be so described, and such amendment or supplement shall be promptly filed
with the SEC and, as required by law, disseminated to the shareholders of
the Company.
(g) COMPLIANCE WITH APPLICABLE LAWS.
(i) Except as disclosed in Section 3.1(g)(i) of the Disclosure
Memorandum, the business of the Company and each of its
Subsidiaries is being, in all material respects, conducted in
compliance with all applicable laws, including, without
limitation, all insurance laws, ordinances, rules and
regulations, decrees and orders of any Governmental Entity, and
all notices, reports, documents and other information required
to be filed thereunder within the last three years were properly
filed and were in compliance in all respects with such laws.
(ii) (A) INSURANCE LICENSES. Section 3.1(g)(ii)(A) of the
Disclosure Memorandum contains a true and complete list of all
jurisdictions in which each of the Subsidiaries of the Company
is licensed to transact insurance business. Except as disclosed
in Section 3.1(g)(ii)(B) of the Disclosure Memorandum, each of
the Subsidiaries of the Company has all the licenses necessary
to conduct the lines of insurance business which such
Subsidiary is currently conducting in each of the states set
forth in Section 3.1(g)(ii)(A) of the Disclosure Memorandum,
which are all of the states in which the Company is currently
conducting business or in the process of commencing conducting
business. The Subsidiaries of the Company own or validly hold
the insurance licenses referred to in Section 3.1(g)(ii)(A) of
the Disclosure Memorandum, all of which licenses are valid and
in full force and effect. Except as set forth in Section
3.1(g)(ii)(A) of the Disclosure Memorandum, there is no
proceeding or investigation pending or, to the knowledge (as
defined below) of the Company, threatened which would
reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, suspension or restriction of any
such license to transact insurance business. As used in this
Agreement, "knowledge" means the actual knowledge, after
reasonable inquiry, of, in the case of the Company, the
management of the Company, and, in the case of Parent, the
management of Parent.
(B) OTHER LICENSES. The Company and each of its Subsidiaries
owns or validly holds all licenses, franchises, permits,
approvals, authorizations, exemptions, classifications,
registrations, rights and similar documents (other than licenses
to transact insurance business) which are necessary for it to
own, lease or operate its properties and assets and to conduct
its business as now conducted, except for such licenses the
failure to hold which would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect. The business of the Company and
14 A-17
<PAGE>
each of its Subsidiaries has been and is being conducted in
compliance in all material respects with all such licenses. All
such licenses are in full force and effect, and there is no
proceeding or investigation pending or, to the knowledge of the
Company, threatened which would reasonably be expected to lead to
the revocation, amendment, failure to renew, limitation,
suspension or restriction of any such license.
(C) The licenses referred to in subparagraphs (A) and (B) are
collectively referred to herein as the "COMPANY LICENSES."
(iii) Each Subsidiary of the Company that is an insurance company has
filed all annual and quarterly statements, together with all
exhibits and schedules thereto, required to be filed with or
submitted to the appropriate regulatory authorities of the
jurisdiction in which it is domiciled and to any other
jurisdiction where required on forms prescribed or permitted by
such authority. Each Annual Statement filed by any Subsidiary
of the Company that is an insurance company with the insurance
regulator in its state of domicile for the three years ended
December 31, 1996 (each a "COMPANY ANNUAL STATEMENT"), together
with all exhibits and schedules thereto, financial statements
relating thereto and any actuarial opinion, affirmation or
certification filed in connection therewith and each Quarterly
Statement so filed for the quarterly periods ended after
January 1, 1997 (each a "COMPANY QUARTERLY STATEMENT") were
prepared in conformity with the statutory accounting practices
prescribed or permitted by the insurance regulatory authorities
of the applicable state of domicile applied on a consistent
basis ("SAP"), present fairly, in all material respects, to the
extent required by and in conformity with SAP, the statutory
financial condition of such Subsidiary at their respective
dates and the results of operations, changes in capital and
surplus and cash flow of such Subsidiary for each of the
periods then ended, and were correct when filed and there were
no omissions therefrom when filed. No deficiencies or
violations have been asserted in writing (or, to the knowledge
of the Company, orally) by any insurance regulator with respect
to the foregoing financial statements which have not been cured
or otherwise resolved to the satisfaction of such insurance
regulator and which have not been disclosed in writing to USF&G
prior to the date of this Agreement. Set forth in Section
3.1(g)(iii) of the Disclosure Memorandum is a list of permitted
practices under SAP which are utilized in any of the Company's
Annual or Quarterly Statements.
(iv) All statutory reserves as established or reflected in the
Company Annual Statements and Company Quarterly Statements were
determined in accordance with SAP and generally accepted
actuarial assumptions and met the requirements of the insurance
laws of each applicable jurisdiction as of the respective dates
of such statements. The statutory reserves set forth in the
Company Annual Statement and Company Quarterly Statements meet
in all material respects the requirements of the insurance laws
of the jurisdictions in which such Subsidiaries do business and
reflect a reasonable provision for unpaid policy losses and
loss adjustment expenses as of such date. The reserves of the
Subsidiaries of the Company including, but not limited to, the
reserves for incurred losses, incurred loss adjustment
expenses, incurred but not reported losses and loss adjustment
expenses for incurred but not reported losses (the "LOSS
RESERVES") as set forth in the audited consolidated financial
statements and unaudited interim financial statements of such
Subsidiaries included in the Filed Company SEC Documents were
determined in good faith by the Company and such Subsidiaries
in accordance with generally accepted accounting principles and
were believed by the Company and such Subsidiaries to be
reasonable when made. The Loss Reserves established or
reflected in the Company Annual Statements and the Company
Quarterly Statements were determined in accordance with
generally accepted actuarial standards consistently applied
15 A-18
<PAGE>
and are in compliance in all material respects with the
insurance laws, rules and regulations of their respective
states of domicile as well as those of any other applicable
jurisdictions. The Company has delivered or made available to
Parent true and complete copies of all actuarial reports and
actuarial certificates in the possession or control of the
Company, any of the Subsidiaries or any other affiliates of the
Company relating to the adequacy of the Loss Reserves (or any
portion thereof) of the Company or any of its Subsidiaries for
any period ended on or after December 31, 1996.
(v) Except as set forth in Section 3.1(g)(v) of the Disclosure
Memorandum, from January 1, 1997 through the date of this
Agreement, none of the Company's Subsidiaries have paid any
dividend or made any other distribution in respect of its
capital stock.
(h) INSURANCE ISSUED. Except (i) as set forth in Section 3.1(h) of
the Disclosure Memorandum and (ii) where noncompliance would not
individually or in the aggregate adversely affect the Company and its
Subsidiaries taken as a whole in any material respect, with respect to
all insurance issued:
(i) All insurance policies issued, reinsured or underwritten by the
Subsidiaries of the Company are, to the extent required by
applicable law, and in all material respects on forms approved
by the insurance regulatory authority of the jurisdiction where
issued or delivered or have been filed with and not objected to
by such authority within the period prescribed for such
objection, and utilize premium rates which if required to be
filed with or approved by insurance regulatory authorities have
been so filed or approved and the premiums charged conform
thereto.
(ii) All insurance policy benefits payable by any Subsidiary of the
Company and, to the knowledge of the Company, by any other
person that is a party to or bound by any reinsurance,
coinsurance or other similar agreement with any Subsidiary of
the Company, have in all material respects been paid or are in
the course of settlement in accordance with the terms and
within the limits of the insurance policies and other contracts
under which they arose, except for such benefits for which
there is a reasonable basis to contest payment and which are
being or have been contested by appropriate proceedings and in
accordance with applicable law.
(iii) The Company has not received any information which would
reasonably cause it to believe that the financial condition of
any other party to any reinsurance, coinsurance or other
similar agreement with any of its Subsidiaries is so impaired
as to result in a default thereunder.
(iv) All advertising, promotional, sales and solicitation materials
and product illustrations used by any Subsidiaries of the
Company or any agent of any of its Subsidiaries have complied
and are in compliance, in all material respects, with all
applicable laws.
(v) To the knowledge of the Company, each insurance agent, at the
time such agent wrote, sold or produced business for any
Subsidiary of the Company since January 1, 1993 was duly
licensed as an insurance agent (for the type of business
written, sold or produced by such insurance agent) in the
particular jurisdiction in which such agent wrote, sold or
produced such business and was properly appointed by such
Subsidiary. All written contracts and agreements between any
such agent, on the one hand, and the Company or any of its
Subsidiaries, on the other hand, are in material compliance with
all applicable laws and regulations. To the knowledge of the
Company and its Subsidiaries, no such agent is the subject of,
or party to, any disciplinary action or proceeding under
16 A-19
<PAGE>
applicable law. As of the date hereof, to the Company's
knowledge, the Company has not been advised that any insurance
agent intends to terminate or materially change its relationship
with the Company or its Subsidiaries as a result of the Merger
or the contemplated operations of the Company and its
Subsidiaries after the Merger is consummated.
(vi) Except as set forth in Section 3.1(h)(vi) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries is
a party to any fronting agreement or places or sells
reinsurance whether for its own account or for any reinsurance
company.
(vii) There are (A) to the knowledge of the Company or its
Subsidiaries, no claims asserted, (B) no actions, suits,
investigations or proceedings by or before any court or other
Governmental Entity, and (C) no investigations by or on behalf
of any of the Company or its Subsidiaries ((A), (B) and (C)
being collectively referred to as "ACTIONS") pending or, to the
knowledge of the Company or its Subsidiaries, threatened,
against or involving any of the Company or its Subsidiaries, or
any of their agents that include allegations that any of the
Company or its Subsidiaries or any of the agents of the Company
or its Subsidiaries were in violation of or failed to comply
with any law, statute, ordinance, rule, regulation, code, writ,
judgement, injunction decree, determination or award applicable
to the Company or its Subsidiaries in the respective
jurisdictions in which their products have been sold, and, to
the knowledge of the Company or the Subsidiary, no facts exist
which would reasonably be expected to result in the filing or
commencement of any such Action.
(i) RATING AGENCIES. Except as disclosed in Section 3.1(i) of the
Disclosure Memorandum, since December 31, 1996, no rating agency has
imposed conditions (financial or otherwise) on retaining any currently
held rating assigned to any Subsidiary of the Company that is an
insurance company or indicated to the Company that it is considering the
downgrade of any rating assigned to any Subsidiary of the Company that is
an insurance company. As of the date of this Agreement, each Subsidiary
of the Company that is an insurance company has the A.M. Best rating set
forth in Section 3.1(i) of the Disclosure Memorandum. Notwithstanding
anything to the contrary, the imposition of conditions (financial or
otherwise) on retaining any currently held rating assigned to any
Subsidiary of the Company that is an insurance company or downgrade of
any rating assigned to any subsidiary of the Company that is an insurance
company primarily as a result of the transactions contemplated by this
Agreement shall not be a breach of this representation and warranty.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1996,
there has not been, occurred, or arisen any change, event (including
without limitation any damage, destruction, or loss whether or not
covered by insurance), condition, or state of facts of any character with
respect to the business or financial condition of the Company or any of
its Subsidiaries, except (i) as disclosed in Section 3.1(j) of the
Disclosure Memorandum or in the Filed Company SEC Documents, (ii) the
imposition of conditions (financial or otherwise) on retaining any
currently held rating assigned to any Subsidiary of the Company that is
an insurance company or downgrade of any rating assigned to any
Subsidiary of the Company that is an insurance company primarily as a
result of the transactions contemplated by this Agreement, and (iii) for
events in the ordinary course of business consistent with past practice
that would not, individually or in the aggregate, result in a Material
Adverse Effect on the Company. Except as disclosed in Section 3.1(j) of
the Disclosure Memorandum or in the Filed Company SEC Documents, since
December 31, 1996, the Company and each of its Subsidiaries has operated
only in the ordinary course of business consistent with past practice and
(without limiting the generality of the foregoing) there has not been,
occurred, or arisen:
17 A-20
<PAGE>
(i) any declaration, setting aside, or payment of any dividend or
other distribution in respect of the capital stock of the
Company (other than as expressly permitted by this Agreement) or
any direct or (other than any retirement of Options or Warrants
contemplated pursuant to this Agreement) indirect redemption,
purchase, or other acquisition by the Company of any such stock
or of any interest in or right to acquire any such stock;
(ii) any split, combination or reclassification of any of its
outstanding capital stock or any issuance or the authorization
of any issuance of any other securities in respect of, in lieu
of or in substitution for shares of the Company's or any of its
Subsidiary's outstanding capital stock;
(iii) (A) any granting by the Company or any of its Subsidiaries to
any director, officer or other employee of the Company or any
of its Subsidiaries of any increase in compensation (including
perquisites), except, with respect to employees other than Key
Employees (as defined below), grants in the ordinary course of
business consistent with prior practice, (B) any granting by
the Company or any of its Subsidiaries to any such director,
officer or other employee of any increase in severance or
termination pay, or (C) any entry into, modification,
amendment, waiver or consent by the Company or any of its
Subsidiaries with respect to any employment, severance, change
of control, termination or similar agreement, arrangement or
plan (oral or otherwise) with any officer, director or other
employee;
(iv) any change in the method of accounting or policy used by the
Company or any of its Subsidiaries other than as disclosed in
the financial statements included in the Filed Company SEC
Documents or in the Company Annual Statement or the Company
Quarterly Statement most recently filed and publicly available
prior to the date hereof or which were required by GAAP or SAP;
(v) made any material amendment to the insurance policies in force
of any Subsidiary of the Company or made any change in the
methodology used in the determination of the reserve liabilities
of the Subsidiaries of the Company or any reserves contained in
the financial statements included in the Filed Company SEC
Documents or in the Company Annual Statement or the Company
Quarterly Statements;
(vi) any termination, amendment or entrance into as ceding or
assuming insurer any reinsurance, coinsurance or other similar
agreement or any trust agreement or security agreement relating
thereto, other than (A) facultative reinsurance contracts
related to the Company's public entity business only that have
been entered into in the ordinary course of business consistent
with past practice, and (B) renewals for periods of one year or
less on substantially the same terms, in the ordinary course of
business;
(vii) any introduction of any insurance policy or any changes made in
its customary marketing, pricing, underwriting, investing or
actuarial practices and policies, except in the ordinary course
of business consistent with past practice;
(viii) any Lien created or assumed on any of the assets or properties
of the Company or any of its Subsidiaries;
(ix) any liability involving the borrowing of money by the Company
or any of its Subsidiaries or the incurrence by the Company or
any of its Subsidiaries of any deferred purchase price
obligation (other than trade credit incurred in the ordinary
course of business and consistent with past practice);
18 A-21
<PAGE>
(x) any cancellation of any liability owed to the Company or any of
its Subsidiaries by any other person or entity other than
immaterial amounts owed by a person or entity who is not a
Related Party (as defined in Section 3.1(s));
(xi) any write-off or write-down of, or any determination to
write-off or write-down, the assets or properties (other than
any statutory write-down of investment assets which is not
related to a permanent impairment of value) of the Company of
any of its Subsidiaries or any portion thereof;
(xii) any expenditure or commitment for additions to property, plant,
equipment, or other tangible or intangible capital assets or
properties of the Company or any of its Subsidiaries which
exceeds $75,000 individually or in the aggregate;
(xiii) any material change in any marketing relationship between the
Company or any of its Subsidiaries and any person or entity
through which the Company sells insurance Contracts; or
(xiv) any Contract to take any of the actions prohibited in this
Section 3.1(j).
(k) ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in
Section 3.1(k) of the Disclosure Memorandum, as of December 31, 1996,
neither the Company nor any of its Subsidiaries had any liabilities,
absolute, accrued, contingent or otherwise, whether due or to become due
(and there was no basis for any such liability), which were not shown or
provided for in the audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
and which should have been so shown or provided for under generally
accepted accounting principles. Since December 31, 1996, neither the
Company nor any of its Subsidiaries has incurred any liabilities,
absolute, accrued, contingent or otherwise, whether due or to become due
(and there is no basis for such liabilities) except: (i) liabilities
arising in the ordinary course of business consistent with past practice,
which would not individually or in the aggregate adversely affect the
Company and its Subsidiaries taken as a whole in any material respect;
(ii) as specifically and individually reflected in Section 3.1(k) of the
Disclosure Memorandum or Filed Company SEC Documents, or (iii) other
liabilities which, individually or in the aggregate, together with those
liabilities referenced in subparagraphs (i) and (ii), would not adversely
affect the Company and its Subsidiaries taken as a whole in any material
respect. Except for regular periodic assessments in the ordinary course
of business, no claim or assessment is pending or, to the knowledge of
the Company, threatened, against the Company or any of its Subsidiaries
by any state insurance guaranty association in connection with such
association's fund relating to insolvent insurers.
(l) LITIGATION. Except as set forth in Section 3.1(1) of the
Disclosure Memorandum and except for claims arising under insurance
policies in (i) an amount no greater than the limits set forth in such
policies and/or (ii) not involving punitive, extra-contractual or
extraordinary damages, (A) there is no suit, action, investigation,
arbitration or proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries,
at law or in equity, before any person and (B) there is no writ judgment,
decree, injunction, rule or similar order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries.
(m) TAXES. Except as set forth in Section 3.1(m) of the Disclosure
Memorandum:
(i) The Company and its Subsidiaries have (x) duly and timely filed
(or there have been filed on their behalf) with the appropriate
taxing authorities all Tax Returns required to be filed by them,
and all such Tax Returns are true, correct and complete in all
material respects and (y) timely paid or there have been paid on
their behalf all Taxes due or claimed to be due from them by any
taxing authority.
19 A-22
<PAGE>
(ii) The Company and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes and have,
within the time and manner prescribed by law, withheld and paid
over to the proper governmental authorities all amounts
required to be withheld and paid over under all applicable
laws.
(iii) There are no liens for Taxes upon the assets or properties of
the Company or any of its Subsidiaries except for statutory
liens for current Taxes not yet due.
(iv) Neither the Company nor any of its Subsidiaries has requested
any extension of time within which to file any Tax Return in
respect of any taxable year which has not since been filed.
(v) Based upon the Company's knowledge, no federal, state, local or
foreign audits or other administrative proceedings or court
proceedings ("AUDITS") exist with regard to any Taxes or Tax
Returns of the Company or any of its Subsidiaries and there has
not been received any written notice that such an Audit is
pending or threatened with respect to any Taxes due from or with
respect to the Company or any of its Subsidiaries or any Tax
Return filed by or with respect to the Company or any of its
Subsidiaries.
(vi) Neither the Company nor any of its Subsidiaries has requested
or received a ruling from any taxing authority or signed a
closing or other agreement with any taxing authority which
would affect any taxable period after the Closing Date.
(vii) The federal and state income Tax Returns of the Company and its
Subsidiaries have been examined by the appropriate taxing
authorities (or the applicable statute of limitations for the
assessment of Taxes for such periods have expired) for all
periods through December 31, 1992 and a list of all Audits
commenced or completed with respect to the Company and its
Subsidiaries for all taxable periods not yet closed by the
statute of limitations is set forth in Section 3.1(m) of the
Disclosure Memorandum.
(viii) All material Tax deficiencies which have been claimed, proposed
or asserted in writing against the Company or any of its
Subsidiaries have been fully paid or finally settled, and no
issue has been raised in writing in any examination which, by
application of similar principles, could be expected to result
in the proposal or assertion of a material Tax deficiency for
any other year not so examined.
(ix) Neither the Company nor any of its Subsidiaries is required to
include in income any adjustment pursuant to Section 481(a) of
the Code, for any period after the Closing Date, by reason of
any voluntary or involuntary change in accounting method (nor
has any taxing authority proposed in writing any such
adjustment or change of accounting method).
(x) Neither the Company nor any of its Subsidiaries is a party to,
is bound by, nor has any obligation under, any Tax sharing
agreement, Tax indemnification agreement or similar contract or
arrangement.
(xi) No power of attorney has been granted by or with respect to the
Company or any of its Subsidiaries with respect to any matter
relating to Taxes, which is currently effective.
(xii) Neither the Company nor any of its Subsidiaries has filed a
consent pursuant to Section 341(f) of the Code (or any
predecessor provision) or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as
such term is defined in Section 341(f)(4) of the Code) owned by
the Company or any of its Subsidiaries.
20 A-23
<PAGE>
(xiii) Since the date of the December 31, 1996 consolidated financial
statements of the Company, neither the Company nor any of its
Subsidiaries has incurred any liability for Taxes other than in
the ordinary course of business.
(xiv) Neither the Company nor any of its Subsidiaries has or could
have any liability for Taxes of any person other than itself or
the Company or any of its Subsidiaries under Treasury
Regulation Section 1.1502-6 (or any similar provision of state,
local or foreign law).
(xv) Neither the Company nor any of its Subsidiaries has any
intercompany items or corresponding items that have not been
taken into account under Treasury Regulation Section 1.1502-13
(or any similar provision under state, local or foreign law).
(xvi) Neither the Company nor any of its Subsidiaries has made any
tax election that would result in deferring any income or gain
from a tax period ending on or before the Closing Date to a tax
period ending after the Closing Date without a corresponding
receipt of cash and/or property or would result in accelerating
any loss or deduction from a tax period ending after the
Closing Date to a tax period ending on or before the Closing
Date.
(xvii) Neither the Company nor any of its Subsidiaries is a party to
any contract, agreement or other arrangement(s) which could
result in the payment of amounts that could be nondeductible by
reason of Section 280G or 162(m) of the Code.
For purposes of this Agreement, (i) "TAXES" (including, with correlative
meaning, the term "TAX") shall mean all taxes, charges, fees, levies, penalties
or other assessments imposed by any federal, state, local or foreign taxing
authority, including, but not limited to, income, gross receipts, excise,
property, sales, transfer, franchise, payroll, withholding, social security and
other taxes, and shall include any interest, penalties or additions attributable
thereto and (ii) "TAX RETURN" shall mean any return, report, information return
or other document (including any related or supporting information) required to
be prepared with respect to Taxes.
(n) PENSION AND BENEFIT PLANS; ERISA.
(i) Section 3.1(n)(i) of the Disclosure Memorandum sets forth a
complete and correct list of:
(A) all "employee benefit plans," as defined in Sections 3(3)
and 4(b)(4) of ERISA, under which Company or any of its
Subsidiaries maintains or has any obligation or liability,
contingent or otherwise ("COMPANY BENEFIT PLANS"); and
(B) all employment or consulting agreements and all bonus or
other incentive compensation, deferred compensation, salary
continuation, severance, perquisites or other special or fringe
benefit agreements (including mortgage financings and tuition
reimbursements), policies or arrangements which the Company or
any of its Subsidiaries maintains or has any obligation or
liability (contingent or otherwise) in each case, written or
oral, with respect to any current or former officer, director or
employee of the Company or any of its Subsidiaries and which
individually (or in the aggregate with respect to a single
individual) has a cost to the Company or any of its Subsidiaries
in excess of $10,000 per year (the "COMPANY EMPLOYEE
ARRANGEMENTS").
(ii) With respect to each Company Benefit Plan and Company Employee
Arrangement, a complete and correct copy of each of the
following documents (if applicable) has been provided or made
available to Parent: (A) the most recent plan and related trust
documents, and all amendments thereto; (B) the most recent
summary plan description, and all related summaries of material
modifications thereto; (C) the most recent Form 5500 (including
schedules and attachments); (D) the most recent IRS
determination
21 A-24
<PAGE>
letter or request therefor; (E) the most recent actuarial
reports (including for purposes of Financial Accounting
Standards Board report no. 87, 106 and 112), if any; and (F) to
the extent not provided pursuant to (A) and (B) above, all
documents that set forth the terms of the Company Employee
Arrangements.
(iii) Except as set forth in Section 3.1(n)(iii) of the Disclosure
Memorandum, the Company Benefit Plans and their related trusts
intended to qualify under Sections 401(a) and 501(a) of the
Code, respectively, have received favorable determination
letters from the Internal Revenue Service and the Company is
not aware of any event or circumstance that could reasonably be
expected to result in the failure of such Company Benefit Plans
or their related trusts to be so qualified.
(iv) Except as set forth in Section 3.1(n)(iv) of the Disclosure
Memorandum, all contributions or other payments required to
have been made by the Company or any of its Subsidiaries to or
under any Company Benefit Plan or Company Employee Arrangement
by applicable law or the terms of such Company Benefit Plan or
Company Employee Arrangement (or any agreement relating
thereto) have been timely and properly made.
(v) Except as set forth in Section 3.1(n)(v) of the Disclosure
Memorandum, the Company Benefit Plans and Company Employee
Arrangements have been maintained and administered in all
respects in accordance with their terms and applicable laws.
(vi) Except as disclosed in Section 3.1(n)(vi) of the Disclosure
Memorandum, there are no pending or, to the knowledge of the
Company, threatened actions, claims or proceedings against or
relating to any Company Benefit Plan or Company Employee
Arrangement other than routine benefit claims by persons
entitled to benefits thereunder.
(vii) Except as set forth in Section 3.1(n)(vii) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries
maintains or has an obligation to contribute to retiree life or
retiree health plans which provide for continuing benefits or
coverage for current or former officers, directors or employees
of the Company or any of its Subsidiaries except (A) as may be
required under Part 6 of Title I of ERISA and at the sole
expense of the participant or the participant's beneficiary or
(B) a medical expense reimbursement account plan pursuant to
Section 125 of the Code.
(viii) Except as disclosed in Section 3.1(n)(viii) of the Disclosure
Memorandum, none of the assets of any Company Benefit Plan is
stock of the Company or any of its affiliates, or property
leased to or jointly owned by the Company or any of its
affiliates.
(ix) Except as disclosed in Section 3.1(n)(ix) of the Disclosure
Memorandum and as otherwise provided in Sections 2.6 and 2.7,
neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (A)
result in any payment becoming due to any employee (current,
former or retired) of Company, (B) increase any benefits under
any Company Benefit Plan or Company Employee Arrangement, or
(C) result in the acceleration of the time of payment of,
vesting of or other rights with respect to any such benefits.
(x) Neither the Company nor any of its Subsidiaries has any
obligation (or prior obligation) to make contributions to any
benefit plan described in Sections 3(37), 4063 or 4064 of ERISA.
(xi) Neither the Company nor any of its Subsidiaries is acting on
behalf of an employee benefit plan subject to ERISA, or acting
on behalf of or using (A) assets which are or which are deemed
under ERISA to be assets of an employee benefit plan subject to
22 A-25
<PAGE>
ERISA, (B) assets of a foreign, church or governmental employee
benefit plan, or (C) assets of individual retirement accounts.
(xii) No prohibited transaction under Section 406 of ERISA or Section
4975 of the Code has occurred with respect to a Company Benefit
Plan.
(xiii) Each Company Benefit Plan (including, without limitation, a
Company Benefit Plan covering retirees or the beneficiaries of
such retirees) may be terminated or amended by the plan sponsor
at any time without the consent of any person covered
thereunder, and may be terminated without liability for
benefits accruing after the date of such termination.
(xiv) The Company has no knowledge of any oral or written statement
made by or on behalf of the Company or a Subsidiary regarding a
Company Benefit Plan or Company Employee Arrangement that was
not in accordance with the Company Benefit Plan or Company
Employee Arrangement.
(xv) There are no trusts or other arrangements under any Company
Benefit Plan which are intended to qualify as a voluntary
employees' beneficiary association under Section 501(c)(9) of
the Code.
(o) LABOR MATTERS.
(i) Except as set forth in Section 3.1(o) of the Disclosure
Memorandum, (A) neither the Company nor any of its Subsidiaries
is a party to any labor or collective bargaining agreement and
no employees of the Company or any of its Subsidiaries are
represented by any labor organization; (B) within the preceding
three years, there have been no representation or certification
proceedings, or petitions seeking a representation proceeding,
pending or, to the knowledge of the Company, threatened in
writing to be brought or filed with the National Labor Relations
Board or any other labor relations tribunal or authority; and
(C) within the preceding three years, to the knowledge of the
Company, there have been no organizing activities involving the
Company or any of its Subsidiaries with respect to any group of
employees of the Company or any of its Subsidiaries.
(ii) There are no strikes, work stoppages, slowdowns, lockouts,
material arbitrations or material grievances or other material
labor disputes pending or threatened in writing against or
involving the Company or any of its Subsidiaries. There are no
unfair labor practice charges, grievances or complaints pending
or, to the knowledge of the Company, threatened in writing by
or on behalf of any employee or group of employees of the
Company or any of its Subsidiaries.
(iii) Except as set forth in Section 3.1(o) of the Disclosure
Memorandum, there are no complaints, charges or claims against
the Company or any of its Subsidiaries pending or, to the
knowledge of the Company, threatened to be brought or filed
with any governmental authority, arbitrator or court based on,
arising out of, in connection with, or otherwise relating to
the employment or termination of employment of any individual
by the Company or any of its Subsidiaries.
(iv) The Company and each of its Subsidiaries is in compliance with
all laws, regulations and orders relating to the employment of
labor, including all such laws, regulations and orders relating
to wages, hours, Worker Adjustment Retraining and Notification
Act of 1988, as amended ("WARN ACT"), collective bargaining,
discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding
and/or social security taxes and any similar tax, except where
non compliance would
23 A-26
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not individually or in the aggregate adversely affect the
Company and its Subsidiaries taken as a whole in any material
respect.
(v) Since December 31, 1993, there has been no "mass layoff" or
"plant closing" (as deemed by the WARN Act) with respect to the
Company or any of its Subsidiaries.
(p) ENVIRONMENTAL MATTERS.
(i) For purposes of this Agreement:
(A) "ENVIRONMENTAL LAW" means any applicable law regulating or
prohibiting Releases of Hazardous Materials into any part of the
natural environment, or pertaining to the protection of natural
resources, the environment, and public and employee health and
safety from Hazardous Materials including, without limitation,
the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") (42 U.S.C. Section 9601 ET SEQ.), the
Hazardous Materials Transportation Act (49 U.S.C. Section 1801 ET
SEQ.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 ET SEQ.), the Clean Water Act (33 U.S.C. Section
1251 ET SEQ.), the Clean Air Act (33 U.S.C. Section 7401 ET
SEQ.), the Toxic Substances Control Act (15 U.S.C. Section 7401
ET SEQ.), the Federal Insecticide, Fungicide, and Rodenticide Act
(7 U.S.C. Section 136 ET SEQ.), and the Occupational Safety and
Health Act (29 U.S.C. Section 651 ET SEQ.) ("OSHA") (to the
extent OSHA regulates occupational exposure to Hazardous
Materials) and the regulations promulgated pursuant thereto, and
any such applicable state or local statutes, and the regulations
promulgated pursuant thereto, as such laws have been and may be
amended or supplemented through the Closing Date;
(B) "HAZARDOUS MATERIAL" means any substance, material or waste
which is regulated as hazardous or toxic by any public or
governmental authority in the jurisdictions in which the
applicable party or its Subsidiaries conducts business, or the
United States, including, without limitation, any material or
substance which is defined as a "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste" or
"restricted hazardous waste," "contaminant," "toxic waste" or
"toxic substance" under any provision of Environmental Law and
shall also include, without limitation, petroleum, petroleum
products, asbestos, polychlorinated biphenyls and radioactive
materials;
(C) "RELEASE" means any release, spill, effluence, emission,
leaking, pumping, injection, deposit, disposal, discharge,
dispersal, leaching, or migration of Hazardous Material into the
environment; and
(D) "REMEDIAL ACTION" means all actions, including, without
limitation, those involving any capital expenditures, required by
a governmental entity or required under any Environmental Law, or
voluntarily undertaken to (w) clean up, remove, treat, or in any
other way mitigate the adverse effects of any Hazardous Materials
Released in the environment; (x) prevent the Release or threat of
Release, or minimize the further Release of any Hazardous
Material so it does not endanger or threaten to endanger the
public health or welfare or the environment; (y) perform
preremedial studies and investigations or postremedial monitoring
and care pertaining or relating to a Release or threat of
Release; or (z) bring the applicable party into compliance with
any Environmental Law.
(ii) Except as set forth in Section 3.1(p) of the Disclosure
Memorandum:
(A) The operations of the Company and each of its Subsidiaries
have been and, as of the Closing Date, will be, in compliance
with all Environmental Laws, except for such
24 A-27
<PAGE>
noncompliance which would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect;
(B) The Company and each of its Subsidiaries have obtained and
will, as of the Closing Date, maintain all permits required under
applicable Environmental Laws for the continued operations of
their respective businesses, except where the failure to so
obtain or maintain would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect;
(C) Neither the Company nor any of its Subsidiaries is subject
to any outstanding orders from, or agreements with, any
Governmental Entity or other person respecting (x) Environmental
Laws, (y) Remedial Action or (z) any Release or threatened
Release of a Hazardous Material;
(D) Neither the Company nor any of its Subsidiaries has received
any written communication alleging, with respect to any such
party, the violation of or potential liability under any
Environmental Law;
(E) Neither the Company nor any of its Subsidiaries has
contingent liability in connection with the Release of any
Hazardous Material into the environment (whether on-site or
off-site);
(F) Neither the operations of the Company nor any of its
Subsidiaries involve the generation, transportation, treatment,
storage or disposal of hazardous waste as defined and regulated
under 40 C.F.R. Parts 260-270 (in effect as of the date of this
Agreement) or any state equivalent;
(G) There is not now, nor, to the knowledge of the Company, has
there been in the past, on or in any property of the Company or
any of its Subsidiaries any of the following: (w) any underground
storage tanks; (x) surface impoundments; (y) any polychlorinated
biphenyls; or (z) any asbestos-containing materials;
(H) No judicial or administrative proceedings or governmental
investigations are pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries
alleging the violation of or seeking to impose liability pursuant
to any Environmental Law;
(I) The Company has made available to Parent copies of all
environmental investigations, studies, audits, tests, reviews and
other analyses, including soil and/or groundwater analyses,
conducted by or on behalf of, or that are in the possession,
custody or control of the Company or any of its Subsidiaries, in
relation to any site or facility owned, operated, leased or used,
at any time, by the Company or any of its Subsidiaries or any of
their respective predecessors;
(J) Neither the Company nor any of its Subsidiaries has caused
or suffered to occur any Release at, under, above or within any
real property, owned, operated, used or leased by the Company or
any of its Subsidiaries;
(K) No environmental approvals, clearances or consents are
required under applicable law from any governmental entity or
authority in order to consummate the transactions contemplated
herein; and
25 A-28
<PAGE>
(L) Neither the Company nor any of its Subsidiaries has any
fixed or contingent liability in connection with environmental
conditions at or associated with any vessel or facility in which
the Company or any of its Subsidiaries owns or previously owned
or holds or previously held a mortgage or other security
interest, and neither the Company nor any of its Subsidiaries has
participated in the management of any such vessel or facility.
(iii) This Section 3.1(p) sets forth the sole representations and
warranties of the Company with respect to Environmental Laws.
(q) PROPERTY AND ASSETS.
(i) Section 3.1(q)(i) of the Disclosure Memorandum sets forth all of
the real property owned in fee by the Company and its
Subsidiaries. The Company or its Subsidiaries have good and
marketable title to each parcel of real property owned by them
free and clear of all Liens, except (A) those reflected or
reserved against in the consolidated balance sheet of the
Company dated as of December 31, 1996, (B) taxes and general and
special assessments not in default and payable without penalty
and interest for which reasonable reserves have been
established, (C) mechanics and similar statutory liens arising
or incurred in the ordinary course of business for amounts that
are not delinquent, (D) any zoning, building, and land use
regulation imposed by any Governmental Entity, and (E) any
covenant, restriction, or easement expressly set forth in the
title documents governing such real property filed with the
appropriate Governmental Entity. There are no (A) zoning,
building or land use regulations imposed by any Governmental
Entities or (B) any covenant, restriction or easement filed and
expressly set forth in the title documents governing such real
property which in any case materially interfere with the current
and intended use of such property or materially impair the value
of such property as reflected on the books of the Company.
(ii) Each lease, sublease or other agreement (collectively, the
"REAL PROPERTY LEASES") under which the Company or any of its
Subsidiaries uses or occupies or has the right to use or
occupy, now or in the future, any real property is valid,
binding and in full force and effect, all rent and other sums
and charges payable by the Company or any of its Subsidiaries
as a tenant thereunder are current, and no termination event or
condition or uncured default of a material nature on the part
of the Company or any of its Subsidiaries or, to the Company's
knowledge, the landlord, exists under any Real Property Lease.
The Company and its Subsidiaries have a good and valid
leasehold interest in each parcel of real property leased by
them free and clear of all Liens, except those reflected or
reserved against in the consolidated balance sheet of the
Company dated as of December 31, 1996.
(iii) Section 3.1(q)(iii) of the Disclosure Memorandum contains a
list of all purchases or acquisitions, sales or dispositions of
all investment assets of the Company and its Subsidiaries since
December 31, 1996 and prior to the date of this Agreement. The
Company and its Subsidiaries have good and marketable title to
such investment assets owned by them free and clear of all
Liens.
(iv) Except as set forth in Section 3.1(q)(iv) of the Disclosure
Memorandum, the Company and its Subsidiaries own good and
indefeasible title to, or have a valid leasehold interest in or
a valid right under contract to use, all tangible personal
property that is used in the conduct of their business, free
and clear of any Liens, except for any mechanics or similar
statutory liens arising in the ordinary course of business. All
such tangible personal property is in good operating condition
and repair (normal wear and tear) and is suitable for its
current uses.
26 A-29
<PAGE>
(v) Except as set forth in Section 3.1(q)(v) of the Disclosure
Memorandum, the Company and its Subsidiaries own or have a right
to use each trademark, trade name, patent, service mark, brand
mark, brand name, database, copyright and other intellectual
property owned or used in connection with the operation of the
business of the Company and its Subsidiaries, including any
registrations thereof, and each license or other contract
relating thereto (collectively, the "COMPANY INTANGIBLE
PROPERTY"), free and clear of any and all Liens. Section
3.1(q)(v) of the Disclosure Memorandum sets forth a complete
list of the Company Intangible Property. The use of the Company
Intangible Property by the Company and its Subsidiaries does not
conflict with, infringe upon, violate or interfere with or
constitute an appropriation of any right, title, interest or
goodwill, including, without limitation, any intellectual
property right, trademark, trade name, patent, service mark,
brand mark, brand name, database or copyright of any other
person. Except as set forth in Section 3.1(q)(v) of the
Disclosure Memorandum, the Company and its Subsidiaries own or
have valid and enforceable licenses or other rights to use, free
and clear of any and all Liens, all software used in connection
with the operation of the business of the Company and its
Subsidiaries, the use of such software by the Company and its
Subsidiaries does not infringe on or otherwise violate the
rights of any person, and, to the knowledge of the Company, no
person is challenging, infringing on or otherwise violating the
right of the Company or any Subsidiary with respect to any such
software used by the Company and its Subsidiaries.
(vi) The Company and its Subsidiaries own or have the rights to use
all assets required for the conduct of the business of the
Company and its Subsidiaries as it is now conducted.
(r) MATERIAL CONTRACTS. Section 3.1(r) of the Disclosure Memorandum
contains a true and complete list of each of the following Contracts in
effect as of the date of this Agreement (true and complete copies of
which have been made available to Parent) to which the Company or any of
its Subsidiaries is a party or by which any of their respective assets or
properties is or may be bound (each of which is a "COMPANY MATERIAL
CONTRACT"):
(i) all employment, agency (other than insurance agency),
consultation, or representation Contracts or other Contracts of
any type (including without limitation loans or advances) with
any present officer, director, Key Employee (as defined below),
agent (other than an insurance agent), consultant, or other
similar representative of the Company or any of its Subsidiaries
(or former officer, director, Key Employee, agent (other than an
insurance agent), consultant or similar representative of the
Company or any of its Subsidiaries if there exists any present
or future liability with respect to such Contract);
(ii) a specimen form insurance agent Contract (the "Producer
Agreements") and any insurance agent Contract having terms
different in any material respect than the terms contained in
the specimen form agent Contract;
(iii) all Contracts with any person or entity containing any
provision or covenant (A) limiting the ability of the Company
to (x) sell any products or services, (y) engage in any line of
business, or (z) compete with or obtain products or services
from any person or entity or (B) limiting the ability of any
person or entity to compete with or to provide products or
services to the Company;
(iv) all Contracts relating to the borrowing of money by the
Company, relating to the deferred purchase price for property
or services, or relating to the direct or indirect guarantee by
the Company or any of its Subsidiaries of any liability;
(v) all Contracts (other than Contracts of insurance or reinsurance
entered into in the ordinary course of business) pursuant to
which the Company or any of its Subsidiaries
27 A-30
<PAGE>
has agreed to indemnify or hold harmless any person or entity
(other than indemnifications or hold harmless covenants in the
ordinary course of business and consistent with past practice);
(vi) all leases or subleases of real property used in the business,
operations, or affairs of the Company or any of its
Subsidiaries;
(vii) all Contracts or arrangements (including without limitation
those relating to allocations of expenses, personnel, services,
or facilities) between the Company and any of its Subsidiaries
or among the Subsidiaries of the Company;
(viii) all leases of automobiles used in the business, operations, or
affairs of the Company or any of its Subsidiaries;
(ix) all reinsurance (whether as assuming or ceding insurer or
otherwise), coinsurance or other similar Contracts;
(x) all other Contracts (other than insurance Contracts issued,
reinsured, or underwritten by the Company) that involve the
payment or potential payment, pursuant to the terms of such
Contracts, by or to the Company of more than $75,000 or that are
otherwise material to the business or condition of the Company;
and
(xi) any commitments or other obligations to enter into any of the
foregoing.
Each Contract disclosed or required to be disclosed in Section 3.1(r)
of the Disclosure Memorandum is in full force and effect and constitutes
a legal, valid and binding obligation of the Company or any of its
Subsidiaries to the extent any such entity is a party thereto and, to the
knowledge of Company, each other party thereto. Neither the Company nor
any of its Subsidiaries has received from any other party to such
Contract any written notice of termination or intention to terminate or
not to honor the terms of such Contract, or to the knowledge of the
Company, any oral notice of termination or intention to terminate or not
to honor the terms of such Contract. Except as set forth in Section
3.1(r) of the Disclosure Memorandum, neither the Company nor any of its
Subsidiaries nor, to the knowledge of the Company, any other party to
such Contract is in violation or breach of or default under any such
Contract (or with or without notice or lapse of time or both, would be in
violation or breach of or default under any such Contract), which
violations, breach or default would individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a whole in any
material respect. As used in this Agreement, the word "CONTRACT" shall
mean any agreement, arrangement, undertaking, lease, sublease, license,
sublicense, promissory note, evidence of indebtedness or other binding
contract, in each case, whether or not reduced to writing. As used in
this Agreement "Key Employee" shall mean employees of the Company or
Parent, as the case may be, having a salary of $90,000 or more per year.
(s) RELATED PARTY TRANSACTIONS. Except as set forth in Section
3.1(s) of the Disclosure Memorandum, no director, officer, Key Employee,
"affiliate" or "associate" (as such terms are defined in Rule 12b-2 under
the Exchange Act) of the Company (each a "RELATED PARTY") (i) has
borrowed any monies from or has outstanding any indebtedness, liabilities
or other similar obligations to the Company or any of its Subsidiaries;
(ii) owns any direct or indirect interest of any kind in, or is a
director, officer, employee, partner, affiliate or associate of, or
consultant or lender to, or borrower from, or has the right to
participate in the management, operations or profits of, any person or
entity which is (A) a competitor, supplier, customer, distributor,
lessor, tenant, creditor or debtor of the Company or any of its
Subsidiaries, (B) engaged in a business related to the business of the
Company or any of its Subsidiaries, or (C) participating in any
transaction to which the Company or any of its Subsidiaries is a party;
or (iii) is otherwise a party to any contract, arrangement or
understanding with the Company or any of its Subsidiaries.
28 A-31
<PAGE>
(t) PREPAYMENT OF CREDIT FACILITIES. The Loan Agreement, dated July
30, 1996, among the Company, Dresdner Bank AG, New York Branch, as Agent,
and the lenders party thereto and the Loan Agreement, dated July 30, 1996
and amended as of February 14, 1997, among Westchester Premium Acceptance
Corporation, Dresdner Bank AG, New York Branch, as Agent, and the lenders
party thereto (collectively referred to herein as the "COMPANY CREDIT
FACILITIES") are prepayable without the payment of any premium or
penalties.
(u) LIENS. Except as set forth in Section 3.1(u) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries has granted,
created, or suffered to exist with respect to any of its assets, any
mortgage, pledge, charge, hypothecation, collateral assignment, lien
(statutory or otherwise), encumbrance or security agreement of any kind
or nature whatsoever (collectively, the "LIENS").
(v) OPERATIONS INSURANCE. Section 3.1(v) of the Disclosure
Memorandum contains a true and complete list and description of all
liability, property, workers compensation, directors and officers
liability, and other similar insurance policies or agreements that insure
the business, operations, or affairs of the Company and its Subsidiaries
or affect or relate to the ownership, use, or operations of any of the
assets or properties of the Company and its Subsidiaries. Excluding
insurance policies that have expired and been replaced in the ordinary
course of business, no insurance policy has been canceled within the last
year except as disclosed in Section 3.1(v) of the Disclosure Memorandum,
and, to the knowledge of the Company or its Subsidiaries, no threat has
been made to cancel any insurance policy of any of the Company or its
Subsidiaries during such period. Except as disclosed in Section 3.1(v) of
the Disclosure Memorandum, all such insurance will remain in full force
and effect with respect to periods before the Closing without the payment
of additional premiums. No event has occurred, including, without
limitation, the failure by any of the Company or its Subsidiaries to give
any notice or information or any of the Company or its Subsidiaries
giving any inaccurate or erroneous notice or information, which limits or
impairs the rights of such Company or Subsidiary under any such insurance
policies.
(w) OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of Furman Selz LLC (the "FINANCIAL ADVISOR") dated August 7, 1997
(the "FS OPINION"), to the effect that, as of the date thereof, the
Merger Consideration to be received by the holders of Company Common
Stock in the Merger is fair from a financial point of view to such
holders. A signed, true and complete copy of the FS Opinion has been
delivered to Parent, and the FS Opinion has not been withdrawn or
modified. True and complete copies of all agreements and understandings
between the Company or any of its affiliates and the Financial Advisor
relating to the transactions contemplated by this Agreement are attached
hereto as Section 3.1(w) of the Disclosure Memorandum.
(x) BOARD RECOMMENDATION. The Board of Directors of the Company, at
a meeting duly called and held, has by the unanimous vote of those
directors present (who constituted all of the directors then in office)
(i) determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of the shareholders of the
Company and has approved the same, (ii) resolved to recommend, subject to
the board's fiduciary duties, that the holders of the shares of Company
Common Stock approve this Agreement and the transactions contemplated
herein, and (iii) resolved to call a special meeting of the shareholders
of the Company to approve the Merger.
(y) VOTE REQUIRED. The affirmative vote of the holders of
two-thirds of the outstanding shares of Company Common Stock is the only
vote of the holders of any class or series of the Company's capital stock
necessary (under applicable law or otherwise) to approve the Merger and
the transactions contemplated hereby.
29 A-32
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(z) BROKERS. The Company represents, as to itself and its
affiliates, that no agent, broker, investment broker, financial advisor
or other firm or person is or will be entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement, except for E. B. Lyon,
III and/or Stonegate Securities Inc. (in either case, pursuant to the
letter agreement with the Company dated May 13, 1997) and the Financial
Advisor, whose fees and expenses shall be paid by the Company in
accordance with the Company's agreements with such individual and/or
firm(s) (copies of which have been delivered by the Company to USF&G
prior to the date of this Agreement).
(aa) BANK ACCOUNTS. Section 3.1(aa) of the Disclosure Memorandum
contains (i) a true and complete list of the names and locations of all
banks, trust companies, securities brokers, and other financial
institutions at which the Company and each of its Subsidiaries has an
account or safe deposit box or maintains a banking, custodial, trading,
trust, or other similar relationship, (ii) a true and complete list and
description of each such account, box, and relationship, and (iii) a list
of all signatories for each such account and box.
(bb) PREMIUM BALANCES RECEIVABLE. The premium balances receivable
of the Company and its Subsidiaries as reflected in the Company's
financial statements for the quarter ended March 31, 1997, to the extent
uncollected on the date hereof, and the premium balances receivable
reflected on the books of the Company and its Subsidiaries as of the date
hereof, are valid and existing and represent monies due, and the Company
and its Subsidiaries have made reserves reasonably considered adequate
for receivables not collectible in the ordinary course of business, and
(subject to the aforesaid reserves) are subject to no refunds or other
adjustments and to no defenses, rights of setoff, assignments,
restrictions, encumbrances or conditions enforceable by third parties or
affecting any material amount thereof.
(cc) INVESTMENT PORTFOLIO AND OTHER ASSETS. The Company and its
Subsidiaries own an investment portfolio acquired in the ordinary course
of business, and a true and complete list of the securities and other
investments in such investment portfolio, as of June 23, 1997 with
respect to mortgage loans and May 30, 1997 with respect to debt and
equity securities and other investments, with true and correct
information included thereon as to the cost of each such investment and
the market value thereof as of such date, is listed in Section 3.1(cc) of
the Disclosure Memorandum. Except as otherwise set forth in Section
3.1(cc) of the Disclosure Memorandum, (i) none of the investments
included in such investment portfolio is in default in the payment of
principal or interest or dividends or impaired to any extent, (ii) all
investments included in such investment portfolio comply (x) with all
insurance laws and regulations of each of the states to which the Company
and its Subsidiaries is subject relating thereto and (y) with all federal
and state securities laws, and (iii) such investments constitute all of
the investments or holdings (including loans to agencies) of the Company
and its Subsidiaries other than any disclosed in Sections 3.1(c),
3.1(q)(i) or 3.1(q)(iii) of the Disclosure Memorandum
(dd) QUESTIONABLE PAYMENTS. To the knowledge of the Company,
neither the Company nor any of its Subsidiaries nor any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or any Subsidiary has used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity, or made any direct or indirect unlawful
payments to government officials or employees or agents from corporate
funds, or established or maintained any unlawful or unrecorded funds.
(ee) REINSURANCE AGREEMENTS. Section 3.1(ee) of the Disclosure
Memorandum is a true and complete list of all reinsurance treaties and
contracts applicable to the Company (whether as ceding insurer or
assuming reinsurer) or the Subsidiaries (individually, a "REINSURANCE
AGREEMENT" and collectively, the "REINSURANCE AGREEMENTS"), copies of
which have been delivered or made available to Parent. Each of the
Reinsurance Agreements is valid and binding in all material respects in
accordance with its terms and is in full force and effect. None of the
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Reinsurance Agreements will terminate because of a change in control of
the Company or any of the Subsidiaries. No other party to any Reinsurance
Agreement has given notice to the Company or any of its Subsidiaries that
intends to terminate or cancel any such Reinsurance Agreement as a result
of the Merger or the contemplated operations of the Company or its
Subsidiaries after the Merger is consummated, which termination or change
would have a Material Adverse Effect on the Company. Any Subsidiary of
the Company that has ceded reinsurance pursuant to any such Reinsurance
Agreement is entitled to take full credit in its financial statements for
all amounts recoverable (net of any reserve for collectibility under such
Reinsurance Agreement) with such credit accounted for (i) pursuant to
SAP, as a reduction of such Company's loss reserves, and (ii) pursuant to
GAAP, as a reinsurance recoverable asset.
(ff) QUICK-SURE AUTO AGENCY, INC. Quick-Sure Auto Agency, Inc.
("QUICK-SURE") is a Texas corporation owned 99% by Mark E. Watson, Jr.
("WATSON") and 1% by Dennis Walsh ("Walsh"). There are outstanding (i) no
shares of capital stock of Quick-Sure other than those shares held by
Watson and Walsh; (ii) no securities of Quick-Sure convertible into or
exchangeable for shares of capital stock of Quick-Sure or any other
voting securities of Quick Sure; and (iii) no stock awards, options,
warrants, calls, rights (including stock purchase or preemptive rights)
commitments or agreements to which Quick-Sure is bound, in any case
obligating Quick-Sure to issue, deliver, sell, purchase, redeem or
acquire or cause to be issued, delivered, sold, purchased, redeemed or
acquired, additional shares of its capital stock, any other voting
securities or securities convertible into or exchangeable or exercisable
for voting securities of Quick-Sure, or obligating Quick-Sure to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. Quick-Sure has appointed under a Local Recording Agent
Agreement (the "LRA AGREEMENT") with Titan Insurance Services, Inc.
("TIS"), a subsidiary of Whitehall Insurance Agency of Texas, Inc. (a
wholly owned subsidiary of the Company), to write insurance on behalf of
TIS, and a true and correct copy of the LRA Agreement, including any
amendments thereto, has been provided to the Parent. The LRA Agreement is
terminable by TIS at any time in its sole discretion without any further
liability or obligation to Quick-Sure. Except as set forth in Section
3.1(hh) of the Disclosure Memorandum, Quick-Sure does not engage in any
business other than the writing of insurance policies on behalf of TIS
and is not obligated by any material agreement or other obligation. TIS
has an exclusive right to any renewals of policies written by Quick-Sure,
and nothing in any producer agreement or other agreement to which
Quick-Sure, the Company or any of the Company's Subsidiaries is a party
provides to the contrary. The insurance written by Quick-Sure is placed
with Home State County Mutual Insurance ("HOME STATE") pursuant to a
Managing General Agent Agreement between Home State and TIS (the "MGA
AGREEMENT"), and a true and correct copy of the MGA Agreement, including
any amendments thereto, has been provided to the Parent. All operations
of Quick-Sure have been conducted in accordance with the terms of the LRA
Agreement and the MGA Agreement. All arrangements between Home State,
Quick-Sure, and the Company and/or any of its Subsidiaries are in
compliance with all applicable laws and have received all necessary
consents, approvals and authorizations from any required regulatory
authorities or third parties.
(gg) Tri-West of New Mexico, LLC, a New Mexico limited liability
company, Tri-West of Indianapolis, LLC, an Indiana limited liability
company, and Tri-West of Florida, LLC, a Florida limited liability
company (collectively, the "TRI-WEST AGENCIES") are each owned one-third
by each of E.B. Lyon, III, Michael J. Claypool and Michael J. Bodayle.
There are outstanding (i) no membership or other equity or voting
interests of Tri-West Holdings, LLC ("TRI-WEST") or any Tri-West Agency,
other than as set forth above; (ii) no securities of Tri-West Holdings or
any Tri-West Agency convertible into or exchangeable for membership or
other equity or voting interests; and (iii) no stock awards, options,
warrants, calls, rights (including stock purchase or preemptive rights),
commitments or agreements to which Tri-West Holdings or any Tri-West
Agency is bound, in any case obligating Tri-West Holdings or any Tri-West
Agency to issue, deliver, sell, purchase,
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redeem or acquire or cause to be issued, delivered, sold, purchased,
redeemed or acquired additional membership or other equity or voting
interests or securities convertible into or exchangeable or exercisable
for membership, equity or other voting interests of Tri-West Holdings or
any Tri-West Agency, or obligating Tri-West Holdings or any Tri-West
Agency to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement. Each of the Tri-West Agencies has entered
into a producer agreement with Titan Indemnity Company ("INDEMNITY") in
the form set forth in Section 3.1(gg) of the Disclosure Memorandum.
Tri-West of New Mexico, LLC has entered into a Direct Response Center
Agreement dated November 30, 1996 (together with the producer agreements
referenced in the immediately preceding sentence, the "TRI-WEST
AGREEMENTS"). To the knowledge of the Company, none of the Tri-West
Agencies engage in any business other than the writing of insurance
policies on behalf of Indemnity and none of the Tri-West Agencies is
obligated by any material agreement or other obligation other than
employment agreements entered into in connection with the acquisition of
such Tri-West agency. Each of the Tri-West Agencies has an exclusive
right to any renewals of policies written by such Tri-West Agency, and,
to the knowledge of the Company, nothing in any producer agreement nor
other agreement to which Tri-West Holdings or any Tri-West Agency is a
party provides to the contrary. To the knowledge of the Company, all
operations of the Tri-West Agencies have been conducted in accordance
with the terms of the Tri-West Agreements. All arrangements between
Tri-West Holdings or any Tri-West Agency, on the one hand, and the
Company and/or any of its Subsidiaries, on the other hand, are in
compliance with all applicable laws and have received all necessary
consents, approvals and authorizations from any required regulatory
authorities or third parties.
3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND USF&G. Except as
disclosed in (i) Parent's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, (ii) Parent's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997 (collectively such Form 10-K and Form
10-Q, the "PARENT SEC REPORTS"), or (iii) the Disclosure Memorandum
delivered at or prior to the date of this Agreement (it being understood
that each section of the Disclosure Memorandum shall list all items
applicable to such section, although the inadvertent omission of an item
from one section shall not be a breach of this Agreement if such item and an
explanation of the nature of such item is clearly disclosed in another
section of the Disclosure Memorandum), Parent and USF&G represent and
warrant to the Company as follows:
(a) ORGANIZATION, STANDING AND POWER. Each of Parent and USF&G is a
corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is incorporated, has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted and is
duly qualified or licensed to do business as a foreign corporation and in
good standing to conduct business in each jurisdiction in which the
business it is conducting, or the operation, ownership or leasing of its
properties, makes such qualification or license necessary, other than
such jurisdictions where the failure so to qualify or become so licensed
would not, individually or in the aggregate, adversely affect Parent and
its Subsidiaries taken as a whole in any material respect. Parent has
heretofore made available to the Company complete and correct copies of
its Articles of Incorporation, as currently in effect as of the date of
this Agreement (the "PARENT ARTICLES OF INCORPORATION"), and its Bylaws,
as currently in effect as of the date of this Agreement (the "PARENT
BYLAWS").
(b) CAPITAL STRUCTURE. As of June 30, 1997, the authorized capital
stock of Parent consists of 240,000,000 shares of Parent Common Stock and
12,000,000 shares of Preferred Stock, $50.00 par value. As of the close
of business on June 30, 1997, there were 110,691,498 shares of Parent
Common Stock validly issued and outstanding (all of which are fully paid
and nonassessable). As of such date, except for (i) options to purchase
or other obligations to issue 11,531,342 shares of Parent Common Stock,
(ii) $175,653,000 principal amount at maturity of Zero Coupon Convertible
Subordinated Notes due March 3, 2009 issued by Parent, and (iii) the
Preferred Share
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Purchase Rights issued pursuant to the Amended and Restated Rights
Agreement dated March 11, 1997, between Parent and The Bank of New York
("PARENT RIGHTS"), there are no options, warrants, calls or other rights,
agreements or commitments presently outstanding obligating Parent to
issue, deliver or sell shares of its capital stock, or obligating Parent
to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment. Parent has not issued any securities
in violation of any preemptive or similar rights.
(c) As of June 30, 1997, the authorized capital stock of USF&G
consists of 40,000,000 shares of USF&G Common Stock, 28,231,715 shares of
which are validly issued and outstanding, fully paid and nonassessable,
and 4,000,000 shares of Preference Stock, par value $50.00 per share,
none of which are issued and outstanding. USF&G has not issued any
securities in violation of any preemptive or similar rights, and there
are no options, warrants, calls, rights or other securities, agreements
or commitments of any character obligating USF&G to issue capital stock.
(d) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) Parent and USF&G have all requisite corporate power and
authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and USF&G. This Agreement
has been duly executed and delivered by Parent and USF&G and
assuming that this Agreement constitutes the valid and binding
agreement of the Company, constitutes a valid and binding
obligation of Parent and USF&G enforceable in accordance with
its terms and conditions except that the enforcement hereof may
be limited by (A) applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other
similar laws now or hereafter in effect relating to creditors'
rights generally and (B) general principles of equity
(regardless of whether enforceability is considered in a
proceeding at law or in equity) and (c) any ruling or action of
any Governmental Entity as set forth in Section 3.2(d)(iii).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by Parent
and USF&G will not result in a violation pursuant to (A) any
provision of the Parent Articles of Incorporation or Parent
Bylaws or the comparable documents of any of its Subsidiaries
or (B) except as to which requisite waivers or consents have
been obtained as specifically identified in Section 3.2(d) of
the Disclosure Memorandum and assuming the consents, approvals,
authorizations or permits and filings or notifications referred
to in paragraph (iii) of this Section 3.2(d) are duly and
timely obtained or made, any loan or credit agreement, note,
mortgage, deed of trust, indenture, lease, or any other
agreement, obligation, instrument, concession or license or any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent, USF&G or any of their
respective properties or assets, except for such Violations
which would not, individually or in the aggregate, adversely
affect Parent and its Subsidiaries taken as a whole in any
material respect.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit
from a Governmental Entity is required by or with respect to
Parent or USF&G or any of their respective Subsidiaries in
connection with the execution and delivery of this Agreement by
Parent or USF&G or the consummation by Parent or USF&G of the
transactions contemplated hereby, except for: (A) any actions,
consents, approvals, filings and/or notices that may be
required under the insurance laws and regulations of the
jurisdictions in which the Subsidiaries of Parent that are
insurance companies are domiciled or licensed, each of which is
listed in Section 3.2(d)(iii) of the Disclosure Memorandum; (B)
the filing of a pre-merger notification
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and report form by Parent under the HSR Act, and the expiration
or termination of the applicable waiting period thereunder; (C)
the filing with the SEC of (x) the Proxy Statement, (y) the Form
S-4, and (z) such reports under and such other compliance with
the Exchange Act and the rules and regulations thereunder as may
be required in connection with this Agreement and the
transactions contemplated hereby; (D) the filing of the Articles
of Merger with the Secretary of State of the State of Texas and
the Maryland State Department of Assessments and Taxation; and
(E) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws.
(e) GOVERNMENT FILINGS. Parent has made available to the Company a
true and complete copy of each report, schedule and definitive proxy
statement filed by Parent with the SEC pursuant to the Exchange Act and
the Rules and Regulations promulgated thereunder since December 31, 1994
and prior to the date of this Agreement other than reports on Form 11-K
relating to employee benefit plans, which are all the documents (other
than preliminary material) that Parent was required to file with the SEC
under the Exchange Act since such date. As of their respective dates, the
Parent SEC Reports complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to such Parent SEC Reports, and none of
the Parent SEC Reports contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The consolidated financial
statements of Parent included in the Parent SEC Reports comply as to form
in all material respects with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and
fairly present in accordance with applicable requirements of GAAP the
consolidated financial position of Parent and its consolidated
subsidiaries as of the dates therein and the consolidated results of
their operations and cash flows for the periods presented therein
(subject, in the case of unaudited interim financial statements, to
normal recurring adjustments none of which are material). Section 3.2(e)
of the Disclosure Memorandum lists with respect to the Parent Common
Stock for the period since December 31, 1996 and prior to the date of
this Agreement each: (i) Schedule 13D filed with the SEC and (ii)
application for change in control filed under the insurance holding
company laws of any state or other jurisdiction.
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Parent (including information concerning USF&G) for inclusion
or incorporation by reference in (i) the Form S-4 will, at the time the
Form S-4 is filed with the SEC, and at any time it is amended or
supplemented or at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading, and (ii) the Proxy Statement will, on the date it
is first mailed to the holders of Company Common Stock or at the time of
the Shareholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4
will, as of its effective date, and the prospectus contained therein
will, as of its date, comply as to form in all material respects with the
requirements of the Securities Act and the rules and regulations
promulgated thereunder, except that no representation is made by Parent
with respect to statements made or incorporated by reference therein
based on information supplied in writing by the Company specifically for
inclusion therein. If, at any time prior to the Shareholders' Meeting,
any event with respect to Parent, or with respect to other information
supplied by Parent for inclusion in the Proxy
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Statement, shall occur which is required to be described in an amendment
of, or a supplement to, any of such documents, such event shall be so
described, and such amendment or supplement shall be promptly filed with
the SEC and, as required by law, disseminated to the shareholders of
Parent.
(g) COMPLIANCE WITH APPLICABLE LAWS.
(i) Except as disclosed in Section 3.2(g)(i) of the Disclosure
Memorandum, the business of Parent and each of its Subsidiaries
is being conducted in compliance in all material respects with
all applicable laws, including, without limitation, all
insurance laws, ordinances, rules and regulations, decrees and
orders of any Governmental Entity, and all notices, reports,
documents and other information required to be filed thereunder
within the last three years were properly filed and were in
compliance in all respects with such laws.
(ii) OTHER LICENSES. Parent and each of its Subsidiaries owns or
validly holds all licenses, franchises, permits, approvals,
authorizations, exemptions, classifications, registrations,
rights and similar documents which are necessary for it to own,
lease or operate its properties and assets and to conduct its
business as now conducted, except for such licenses the failure
to hold which would not individually or in the aggregate
adversely affect Parent and its Subsidiaries taken as a whole
in any material respect. The business of Parent and each of its
Subsidiaries has been and is being conducted in compliance in
all material respects with all such licenses. All such licenses
are in full force and effect, and there is no proceeding or
investigation pending or, to the knowledge of Parent,
threatened which would reasonably be expected to lead to the
revocation, amendment, failure to renew, limitation, suspension
or restriction of any such license.
(h) ABSENCE OF UNDISCLOSED LIABILITIES. Since December 31, 1996,
neither Parent nor any of its Subsidiaries has incurred any liabilities,
except: (i) liabilities arising in the ordinary course of business
consistent with past practice, which individually or in the aggregate
would not adversely affect Parent and its Subsidiaries taken as a whole
in any material respect; (ii) as specifically and individually reflected
in Section 3.2(h) of the Disclosure Memorandum or Parent SEC Reports; or
(iii) other liabilities, which, individually or in the aggregate,
together with those liabilities referenced in subparagraphs (i) and (ii),
would not adversely affect Parent and its Subsidiaries taken as a whole
in any material respect.
(i) LITIGATION. Except as set forth on Section 3.2(i) of the
Disclosure Memorandum and except for claims arising in the ordinary
course of business, (A) there is no suit, action, investigation,
arbitration or proceeding pending or, to the knowledge of Parent,
threatened against or affecting Parent or any of its Subsidiaries, at law
or in equity, before any person and (B) there is no writ judgment,
decree, injunction, rule or similar order of any Governmental Entity or
arbitrator outstanding against Parent or any of its Subsidiaries, which,
individually or in the aggregate, would adversely affect Parent and its
Subsidiaries taken as a whole in any material respect.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Parent SEC Reports, since March 31, 1997, there has not been (i) any
transaction, commitment, dispute or other event or condition of any
character (whether or not in the ordinary course of business) which
would, individually or in the aggregate, have a Material Adverse Effect
on Parent; or (ii) any damage, destruction or loss, whether or not
covered by insurance, which, insofar as reasonably can be foreseen, in
the future would, individually or in the aggregate, have a Material
Adverse Effect on Parent.
(k) BOARD RECOMMENDATION. The Board of Directors of Parent and
USF&G, at a meeting duly called and held or by unanimous written consent,
has by the requisite vote of directors
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determined that this Agreement and the transactions contemplated hereby
are fair to and in the best interests of the shareholders of Parent and
USF&G, as the case may be and has approved the same, and in the case of
USF&G resolved to recommend that Parent approve this Agreement and the
transactions contemplated herein.
(l) VOTE REQUIRED. The affirmative vote of Parent, as the sole
stockholder of USF&G, is sufficient, and no further vote or consent of
any class or series of capital stock of Parent or USF&G is necessary
under applicable law or otherwise, to approve the Merger and the other
transactions contemplated hereby on the part of Parent or USF&G.
(m) BROKERS. Parent and USF&G represent, as to themselves and their
affiliates, that no agent, broker, investment broker, financial advisor
or other firm or person is or will be entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement, except for Merrill Lynch
& Co., Merrill Lynch Pierce Fenner & Smith Incorporated, whose fees and
expenses shall be paid by Parent.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the earlier of (i) the Effective Time and
(ii) the termination of this Agreement pursuant to Article VII, the Company
agrees (and has caused its Subsidiaries to agree) that (except to the extent
that Parent shall consent in writing, which consent shall not be
unreasonably withheld or delayed):
(a) ORDINARY COURSE. The Company will (and will cause each of its
Subsidiaries to) conduct its business only in the ordinary course and
consistent with past practice. Without limiting the generality of the
foregoing and except as expressly provided herein or in Section 4.1(a) of
the Disclosure Memorandum:
(i) The Company will use (and will cause each of its Subsidiaries to
use) reasonable best efforts to (A) maintain in full force and
effect all Company Material Contracts, except those which expire
in accordance with their terms, (B) maintain all Company
Licenses, qualifications, and authorizations of the Company to
do business in each jurisdiction in which it is so licensed,
qualified, or authorized, and (C) maintain each rating
classification assigned to the Subsidiaries of the Company that
are insurance companies by all rating agencies as of the date of
this Agreement, except in the case of (A) and (B) above where
the Company's Board of Directors determines in good faith that
the maintenance of any such Company Material Contract or Company
License, qualification or authorization is no longer necessary
or advisable for the conduct of the Company as presently
conducted or as proposed to be conducted after the Effective
Time, if appropriate after consultation with USF&G pursuant to
Section 5.12.
(ii) The Company will (and will cause each of its Subsidiaries to)
in all material respects (A) maintain all its assets and
properties in good working order and condition (ordinary wear
and tear excepted), and (B) continue all current marketing and
selling activities relating to its business, operations and
affairs, except where the Company's Board of Directors
determines in good faith that such assets, properties or
marketing or selling activities are no longer necessary or
advisable for the conduct of the Company as presently conducted
or as proposed to be conducted after the Effective Time, if
appropriate after consultation with USF&G pursuant to Section
5.12.
(iii) The Company will (and will cause each of its Subsidiaries to)
maintain its books and records in the usual manner and
consistent with past practice and will not permit a material
change in any underwriting, investment, actuarial, financial
reporting, tax, or
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accounting practice or policy or in any assumption underlying
such a practice or policy, or in any method of calculating any
bad debt, contingency, insurance, or other reserve for
financial reporting purposes or for other accounting purposes
(including any practice, policy, assumption, or method relating
to or affecting the determination of its insurance in force,
premium or investment income, reserves or other similar
amounts, or operating ratios with respect to expenses, losses
or lapses).
(iv) The Company will (and will cause each of its Subsidiaries to)
(A) prepare properly and to file duly and validly all Tax
Returns required to be filed prior to the Closing Date with the
appropriate taxing authority, (B) pay duly and fully all Taxes
which are due with respect to the periods covered by such Tax
Returns or otherwise levied or assessed upon such entity or any
of its assets or properties, and to withhold or collect and pay
to the proper taxing authorities all Taxes that such entity is
required to so withhold or collect and pay, unless such taxes
are being contested in good faith and, if appropriate,
reasonable reserves therefore have been established and
reflected in the books and records of such entity and in
accordance with SAP and (C) provide Parent with copies of all
federal income tax returns and all material state income tax
returns as soon as practicable after the preparation, but prior
to the filing, thereof. The Company will not make (and will
prohibit its Subsidiaries from making) any tax election or
settle or compromise any income tax liability that may
reasonably be expected to be material to the Company and its
Subsidiaries taken as a whole.
(v) The Company will (and will cause each of its Subsidiaries to)
cause all statutory reserves and other similar amounts with
respect to losses, benefits, claims, and expenses in respect of
the Subsidiary's insurance business to be (A) determined in
accordance with SAP and generally accepted actuarial
assumptions, (B) determined in accordance with the benefits
specified in the related insurance or reinsurance Contracts in
all material respects, (C) calculated, established and reflected
on a basis consistent in all material respects with those
reserves and other similar amounts and reserving methods
followed at December 31, 1996, (D) determined in conformity with
the requirements of the insurance laws of each applicable
jurisdiction in all material respects and (E) adequate, in all
material respects, based upon then current information and
assumptions to cover the total amount of all matured and
reasonably anticipated unmatured benefits, dividends, losses,
claims, expenses, and other liabilities of the Subsidiary under
all insurance or reinsurance Contracts which the Subsidiary has
or will have any liability. The Company will (and will cause
each of its Subsidiaries to) continue to own assets and
properties that qualify as legal reserve assets under all
applicable insurance laws in an amount at least equal to all
required reserves and other similar amounts.
(vi) The Company will (and will cause each of its Subsidiaries to)
use reasonable best efforts to maintain in full force and
effect substantially the same levels of coverage as the
insurance afforded under the insurance coverage described in
Section 3.1(v) of the Disclosure Memorandum.
(vii) The Company will (and will cause each of its Subsidiaries to)
refrain from entering into any new treaty of reinsurance,
coinsurance, or other similar Contract, whether as reinsurer or
reinsured.
(viii) The Company will (and will cause each of its Subsidiaries to)
continue to comply in all material respects with all laws
applicable to its business, operations or affairs.
(ix) The Company shall not incur (and shall prohibit each of its
Subsidiaries from incurring) any capital expenditure in excess
of $75,000, individually or in the aggregate.
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(x) Subject to Sections 2.6 and 2.7, the Company shall not (and
shall cause each of its Subsidiaries to not): (A) grant any
increases in the compensation of any of its directors, officers
or Key Employees; (B) pay or agree to pay any pension,
retirement allowance or other employee benefit not required to
be paid prior to the Effective Time by any of the existing
Company Benefit Plans or Company Employee Arrangements as in
effect on the date hereof to any such director, officer or
employee, whether past or present; (C) enter into any new, or
amend, modify or grant any consent or waiver with respect to any
existing, employment, retention or severance or termination
agreement with any director, officer or employee; or (D) become
obligated under any new Benefit Plan or Employee Arrangement,
which was not in existence on the date hereof, or amend any such
plan or arrangement in existence on the date hereof if such
amendment would have the effect of enhancing any benefits
thereunder.
(xi) Other than with respect to drawdowns in the ordinary course of
business with respect to the Company Credit Facilities, the
Company shall not (and shall cause each of its Subsidiaries to
not) assume or incur (which shall not be deemed to include
entering into credit agreements, lines of credit or similar
arrangements until borrowings are made under such arrangements)
any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt securities of the Company or any
of its Subsidiaries or guarantee any debt securities of others
or enter into any lease (whether such lease is an operating or
capital lease) or create any Liens on the property of the
Company or any of its Subsidiaries in connection with any
indebtedness thereof, or enter into any "keep well" or other
agreement or arrangement to maintain the financial condition of
another person.
(xii) The Company shall not (and shall cause each of its Subsidiaries
to not) pay, discharge, settle or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms
of liabilities reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the
notes thereto) of the Company dated included in the Filed
Company SEC Documents, or incurred since the date of such
financial statements in the ordinary course of business
consistent with past practice. Except in the ordinary course of
business consistent with past practice, the Company shall not
effect (and shall prohibit each of its Subsidiaries from
effecting) any settlements of any legal proceedings without the
prior written consent (such consent not to be unreasonably
withheld) of Parent.
The Company shall, from the date of this Agreement through the Effective
Time or earlier termination of this Agreement pursuant to Article VII, cause its
management and that of its Subsidiaries to consult on a regular basis and in
good faith with the employees and representatives of Parent concerning the
management of the Company's and its Subsidiaries' businesses.
(b) DIVIDENDS; CHANGES IN STOCK. Neither the Company nor any of its
Subsidiaries shall (i) declare or pay any dividends on or make other
distributions in respect of any of its capital stock (other than, with
respect to the Company, regular cash dividends on Company Common Stock
not in excess of $0.08 per share of Company Common Stock which shall be
paid on a quarterly basis, with identical record and payment dates as the
quarterly dividends paid by Parent on Parent Common Stock), (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, (iii) issue any shares
of capital stock (except pursuant to and in accordance with the terms of
currently outstanding Company Options and Company Warrants),
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or (iv) repurchase or otherwise acquire any shares of its capital stock,
except as required by the terms of any employee benefit plan as in effect
on the date of this Agreement.
(c) ISSUANCE OF SECURITIES. Neither the Company nor any of its
Subsidiaries shall (i) grant any options, warrants or rights, to purchase
shares of its capital stock, (ii) amend the terms of or reprice any
Company Warrant or Company Option or amend the terms of the Stock Option
Plan or the Directors' Stock Option Plan, or (iii) issue, deliver or
sell, or pledge or otherwise encumber any shares of its capital stock, or
authorize or propose to issue, deliver or sell, any shares of its capital
stock, any Company Voting Debt or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, Company Voting
Debt or convertible securities, or agree to do any of the foregoing,
other than: (A) issue shares of Company Common Stock upon the exercise of
Options that are outstanding on the date of this Agreement or (B) issue
shares of Company Common Stock upon the exercise of Warrants that are
outstanding on the date of this Agreement.
(d) NO SOLICITATION. Prior to the Effective Time, the Company
agrees (a) that neither it nor any of its affiliates or Subsidiaries
shall, and it shall not authorize or permit its officers, directors,
employees, representatives, investment bankers, attorneys, accountants or
other agents to, initiate, solicit or encourage (including by way of
furnishing information), directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a
merger, consolidation or other business combination including the Company
or any of its Subsidiaries or any acquisition or similar transaction
(including, without limitation, a tender or exchange offer) involving the
purchase of (i) all or any significant portion of the assets of the
Company and its Subsidiaries taken as a whole, (ii) 15% or more of the
outstanding shares of Company Common Stock or (iii) 15% or more of the
outstanding shares of the capital stock of any Subsidiary of the Company
(any such proposal or offer being hereinafter referred to as an
"ACQUISITION PROPOSAL"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions
with, any person or group relating to an Acquisition Proposal (excluding
the transactions contemplated by this Agreement), or otherwise facilitate
any effort or attempt to make or implement an Acquisition Proposal; (b)
that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties with respect to
any of the foregoing, and it will take the necessary steps to inform such
parties of its obligations under this Section 4.1(d) and will require
each such party who has signed a confidentiality agreement to honor the
restrictions therein with respect to open market purchases of Company
Common Stock and to return or destroy all confidential information of the
Company previously provided by it; and (c) that it will notify Parent
immediately (orally followed by written confirmation) if any such
inquiries, proposals or offers are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it or any of such persons. Notwithstanding
the above, (A) the Company may provide non-public information to any
person or group if (i) such person or group has expressed a written
interest in (which, unless such person previously has been provided
confidential information, need not constitute a proposal for) making an
Acquisition Proposal providing greater aggregate value to the Company
and/or the Company's shareholders than the transactions contemplated by
this Agreement; (ii) the Company reasonably believes such person or group
has the financial ability to consummate an Acquisition Proposal; (iii)
such person or group executes a confidentiality letter no less favorable
to the Company than the Parent Confidentiality Letter (as defined below);
(iv) the Board of Directors of the Company, based upon the advice of
outside counsel, determines in good faith that it is necessary, in order
to comply with the Board's fiduciary duties under applicable law, to
provide such requested information; and (v) the Company provides notice
to Parent of the identity of the person or group to whom the non-public
information is being given at or before the time such information is
given and the Company delivers to Parent a copy of all such
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information concurrently with its delivery to the requesting party and
(B) the Company may (I) enter into discussions or negotiate with any
person or group that makes a wholly unsolicited BONA FIDE Acquisition
Proposal providing greater aggregate value to the Company and/or the
Company's shareholders than the transactions contemplated by this
Agreement, if, and only to the extent that, (1) the Board of Directors of
the Company, based upon the advice of outside counsel, determines in good
faith that such action is required for the Board of Directors to comply
with its fiduciary duties to stockholders imposed by law, (2) prior to
entering into discussions or negotiations with such person or group, the
Company provides written notice (the "ACQUISITION PROPOSAL NOTICE") to
Parent to the effect that it is entering into discussions or negotiations
with such person or group, and (3) the Company keeps Parent informed of
the status and all material information including the identity of such
person or group with respect to any such discussions or negotiations to
the extent such disclosure would not constitute a violation of any
applicable law or any confidentiality agreement with such person or
group; and (II) to the extent required, comply with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition
Proposal.
(e) NO ACQUISITIONS; NO SUBSIDIARIES. Except as permitted by
Section 4.1(d), neither the Company nor any Subsidiary of the Company
shall merge or consolidate with, or acquire any equity interest in, any
corporation, partnership, association or other business organization, or
enter into an agreement with respect thereto. Neither the Company nor any
Subsidiary of the Company shall (i) acquire or agree to acquire any
assets of any corporation, partnership, association or other business
organization or division thereof, except for the purchase of inventory
and supplies in the ordinary course of business or (ii) create any
Subsidiary.
(f) NO DISPOSITIONS. Other than dispositions set forth in Section
4.1(f) of the Disclosure Memorandum and dispositions in the ordinary
course of business consistent with past practice which are not material,
individually or in the aggregate, to such party, and neither the Company
nor any Subsidiary of the Company shall sell, lease, encumber or
otherwise dispose of, or agree to sell, lease (whether such lease is an
operating or capital lease), reinsure, mortgage or otherwise encumber or
subject to any lien, encumber or otherwise dispose of, any of its
properties.
(g) NO DISSOLUTION, ETC. Except as otherwise permitted or
contemplated by this Agreement, neither the Company nor any of its
Subsidiaries shall authorize, recommend, propose or announce an intention
to adopt a plan of complete or partial liquidation or dissolution of such
entity.
(h) INVESTMENTS. Neither the Company nor any Subsidiary of the
Company shall make any investment other than (A) money market
instruments, A-1/P-1 commercial paper, treasury bills or other cash
equivalents, (B) investment grade publicly traded debt securities or (C)
exchange traded or Nasdaq National Market System traded equity-related
securities which in the aggregate, when combined with any other
equity-related securities holdings (which shall include preferred stock),
do not exceed nine percent (9%) of the total investments (excluding cash)
of the Company and its Subsidiaries, taken as a whole, in each case which
are made in accordance with the Company's Investment Policy Guidelines
(effective January 1, 1995) (the "INVESTMENT GUIDELINES") and otherwise
in accordance with past practice. Neither the Company nor any Subsidiary
of the Company shall make any portfolio investments except in the
ordinary course of business.
(i) OTHER ACTIONS. Except as contemplated or permitted by this
Agreement, neither Parent nor the Company shall authorize, take or agree
or commit to (and shall cause each of its respective Subsidiaries to take
or commit or agree to) take any action that is reasonably likely to
result in any of the representations or warranties hereunder being untrue
in any material respect or in any of the covenants hereunder or any of
the conditions to the Merger not being satisfied in all material
respects.
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(j) QUICK-SURE. The Company will take commercially reasonable
actions necessary to cause all of the outstanding capital stock of
Quick-Sure to be transferred to USF&G or its designee for a nominal price
per share and to take whatever other actions are reasonably necessary to
ensure that upon Closing, the material benefits of Quick-Sure's
relationships with Home State, the Company and the Company's Subsidiaries
inure to the benefit of USF&G or its designee. Without limiting the
generality of the foregoing, the Company agrees to use commercially
reasonable efforts to cause Quick-Sure to assign any leases to which
Quick-Sure is a party to USF&G or its designee if so requested by the
Parent.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PREPARATION OF FORM S-4 AND PROXY STATEMENT; SHAREHOLDER MEETING;
COMFORT LETTERS.
(a) Promptly following the date of this Agreement, the Company shall
prepare the Proxy Statement, and Parent shall prepare and file with the
SEC the Form S-4, in which the Proxy Statement will be included. Parent
will cooperate with the Company in connection with the preparation of the
Proxy Statement including, but not limited to, furnishing to the Company
any and all information regarding Parent as may be required to be
disclosed therein. Parent shall use reasonable best efforts to have the
Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing. The Company will use reasonable best
efforts to cause the Proxy Statement to be mailed to the Company's
shareholders as promptly as practicable after the Form S-4 is declared
effective under the Securities Act. Parent shall also take any action
required to be taken under any applicable state securities laws in
connection with the issuance of Parent Common Stock following the Merger.
The information provided and to be provided by Parent and the Company,
respectively, for use in the Form S-4 shall, at the time the Form S-4
becomes effective and on the date of the Shareholders' Meeting referred
to below, be true and correct in all material respects and shall not omit
to state any material fact required to be stated therein or necessary in
order to make such information not misleading, and the Company and Parent
each agree to correct any information provided by it for use in the Form
S-4 which shall have become false or misleading.
(b) Parent will as promptly as practicable notify the Company of (i)
the effectiveness of the Form S-4, (ii) the receipt of any comments from
the SEC, and (iii) any request by the SEC for any amendment to the Form
S-4 for additional information. All filings with the SEC, including the
Form S-4 and any amendment thereto, and all mailings to the Company's
shareholders in connection with the Merger, including the Proxy
Statement, shall be subject to the prior review, comment and approval of
Parent or the Company, as the case may be (such approval not to be
unreasonably withheld or delayed).
(c) The Company will, as promptly as practicable following the date
of this Agreement and in consultation with Parent, duly call and give
notice of, and, provided that this Agreement has not been terminated,
convene and hold the Shareholders' Meeting for the purpose of approving
this Agreement and the transactions contemplated by this Agreement to the
extent required by the TBCA. Except as provided below, the Company will,
through its Board of Directors, recommend to its shareholders approval of
the foregoing matters, as set forth in Section 3.1(x); provided, however,
that the Board of Directors of the Company may fail to make or may
withdraw or modify such recommendation, but only to the extent that the
Board of Directors of the Company shall have concluded in good faith
after receiving the advice of outside counsel that such action is
required to prevent the Board of Directors of the Company from breaching
its fiduciary duties to the Company or the shareholders of the Company
under applicable law. Any such recommendation, together with a copy of
the opinion referred to in Section 3.1(w), shall be
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included in the Proxy Statement. The Company will use reasonable best
efforts to hold such meeting as soon as practicable after the date
hereof.
(d) Parent shall use reasonable best efforts to cause to be delivered
to the Company a letter of Ernst & Young LLP, Parent's independent public
accountants, dated a date within two business days before the date on
which the Form S-4 shall become effective and a letter of Ernst & Young
LLP dated a date within two business days before the date of the
Shareholders' Meeting, addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and
substance for letters delivered by independent public accountants in
connection with registration statements similar to the Form S-4.
(e) The Company shall use reasonable best efforts to cause to be
delivered to Parent a letter of KPMG Peat Marwick LLP, the Company's
independent public accountants, dated a date within two business days
before the date on which the Form S-4 shall become effective and a letter
of KPMG Peat Marwick LLP dated a date within two business days before the
Shareholders' Meeting, addressed to Parent, in form and substance
reasonably satisfactory to Parent and customary in scope and substance
for letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
5.2 CONTRACT AND REGULATORY APPROVALS. USF&G, Parent and the Company
will use (and will cause each of its Subsidiaries to use) reasonable best
efforts to obtain as promptly as practicable (a) all approvals and consents
required of any person or entity under all Contracts to which the Company or
any of its Subsidiaries is a party to consummate the transactions
contemplated hereby, and (b) all approvals, authorizations, and clearances
of Governmental Entities required of the Company and each of its
Subsidiaries to consummate the transactions contemplated hereby. The Company
will, and will cause each of its Subsidiaries to, (i) provide such other
information and communications to such Governmental Entities as USF&G,
Parent or such authorities may reasonably request, and (ii) cooperate with
USF&G or Parent in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities and
other persons or entities required of USF&G or Parent to consummate the
transactions contemplated hereby. Each of USF&G and the Parent will (i)
provide such information and communications to such Governmental Entities as
the Company or such authorities may reasonably request, and (ii) cooperate
with the Company in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities and
other persons or entities required of the Company to consummate the
transactions contemplated hereby. Parent and USF&G shall use their
reasonable best efforts to take or cause to be taken all actions necessary,
proper or advisable to obtain any consent, waiver, approval or authorization
relating to any federal, state or local statutes, rules, regulations,
orders, decrees, administrative and judicial doctrines and other laws that
are designed or intended to prohibit, restrict or regulate actions having
the purpose or effect of monopolization, lessening of competition or
restraint of trade and includes the HSR Act that is required for
consummation of the transactions contemplated by this Agreement; provided,
however, that the foregoing shall not obligate Parent or USF&G to agree to
take any action which would have a material adverse effect on the expected
benefits to Parent of the transactions contemplated hereby.
5.3 HSR FILINGS. The Company will (a) take all actions necessary to
make the filings required of it or its affiliates under the HSR Act with
respect to the transactions contemplated by this Agreement, (b) comply with
any request for additional information received by the Company or its
affiliates from the Federal Trade Commission or Antitrust Division of the
Department of Justice pursuant to the HSR Act, (c) cooperate with Parent in
connection with Parent's filings under the HSR Act, and (d) request early
termination of the applicable waiting period.
5.4 ACCESS TO INFORMATION; CONFIDENTIALITY.
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(a) Upon reasonable notice, the Company shall (and shall cause each
of its Subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of Parent or USF&G, access, during
normal business hours during the period prior to the Effective Time, to
all its properties, books, contracts, commitments, employees, auditors,
agents, representatives and records and, during such period, the Company
shall (and shall cause each of its Subsidiaries to) furnish promptly to
Parent, (i) each SAP Annual Statement and SAP Quarterly Statement filed
by the Company's Subsidiaries during such period pursuant to the
requirements of any applicable law; (ii) a copy of each report, schedule,
registration statement and other document filed or received by it during
such period pursuant to SEC requirements; (iii) all correspondence or
written communication with A.M. Best and Company or any of its
Subsidiaries, Standard & Poor's Corporation, Moody's Investor Services,
Inc., and with any Governmental Entity or insurance regulatory
authorities which relates to the transactions contemplated hereby or
which is otherwise material to the financial condition or operation of
the Company and its Subsidiaries taken as a whole; and (iv) all other
information concerning its business, properties and personnel as the
other party may reasonably request.
(b) Upon reasonable notice, Parent shall (and shall cause each of its
Subsidiaries to) afford to the officers, employees, accountants, counsel
and other representatives of the Company, access, during normal business
hours during the period prior to the Effective Time, to the books,
records, officers and employees of Parent and its Subsidiaries reasonably
necessary to perform a "due diligence" review with respect to (i)
material matters, conditions or events arising after the date hereof or
(ii) matters, conditions or events which the Company has a reasonable
basis for believing make any of the representations or warranties of
Parent contained herein not true in any material respect and, during such
period, Parent shall (and shall cause each of its Subsidiaries to)
furnish promptly to the Company, (a) each SAP Annual Statement and SAP
Quarterly Statement filed by such party's Subsidiaries during such period
pursuant to the requirements of any applicable law; (b) a copy of each
report filed by Parent with the SEC during such period pursuant to SEC
requirements; and (c) all correspondence or written communication with
A.M. Best and Company or any of its Subsidiaries, Standard & Poor's
Corporation, Moody's Investor Services, Inc., and with any Governmental
Entity or insurance regulatory authorities which primarily relates to the
transactions contemplated hereby.
(c) The Confidentiality Agreement dated June 26, 1997 (the "PARENT
CONFIDENTIALITY AGREEMENT"), between Parent and the Company and the
confidentiality agreement dated July 30, 1997 (the "COMPANY
CONFIDENTIALITY AGREEMENT"), between the Company and Parent shall apply
with respect to information furnished thereunder or hereunder and any
other activities contemplated thereby.
5.5 FEES AND EXPENSES.
(a) Except as otherwise provided in this Section 5.5 and except with
respect to claims for damages incurred as a result of the breach of this
Agreement (it being understood that such claims by Parent, USF&G or their
affiliates shall be precluded under Section 5.5(d) by the payment of the
amount set forth in Section 5.5(b) when Section 5.5(b) is applicable),
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring
such expense.
(b) The Company agrees to pay Parent a fee in immediately available
funds equal to $7,500,000 if (i) this Agreement is terminated pursuant to
Section 7.1(d) hereof and any person or group of persons shall, within 90
days after the date of such termination, consummate an Acquisition
Proposal or enter into an agreement with respect to an Acquisition
Proposal or (ii) this Agreement is terminated pursuant to Section 7.1(e)
hereof. Such fee shall be paid within one business day of any termination
of this Agreement pursuant to Section 7.1(e) hereof or within one
business day of the consummation of an Acquisition Proposal or the entry
into of any
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agreement with respect to an Acquisition Proposal, in either case during
the 90-day period after any termination of this Agreement pursuant to
Section 7.1(d) hereof.
(c) Any amounts due under this Section 5.5 that are not paid when due
shall bear interest at the rate of 9% per annum from the date due through
and including the date paid.
(d) Upon the payment of any fee pursuant to Section 5.5(b) above
(regardless of whether a transaction pursuant to an Acquisition Proposal
is consummated), such fee shall be the exclusive remedy of Parent, USF&G
and their affiliates relating to this Agreement or the transactions
contemplated thereunder, and upon payment of any such fee, Parent, USF&G
and their affiliates shall have no rights, in tort, contract or
otherwise, arising under or relating to this Agreement or the
transactions contemplated thereunder, except for rights under the second
sentence of Section 5.4 hereof.
(e) The fee set forth in Section 5.5(b) shall be payable solely under
the circumstances set forth in Section 5.5(b) and shall not be payable
under any other circumstances.
5.6 INDEMNIFICATION.
(a) The Company shall, and from and after the Effective Time the
Surviving Corporation shall, indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date hereof or
who becomes prior to the Effective Time, an officer or director of the
Company (the "INDEMNIFIED PARTIES") against all losses, claims, damages,
costs, expenses (including attorneys' fees and expenses), liabilities or
judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be unreasonably withheld) of
or in connection with any threatened or actual claim, action, suit,
proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director or
officer of the Company whether pertaining to any matter existing or
occurring at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective Time ("INDEMNIFIED
LIABILITIES"), including all Indemnified Liabilities based in whole or in
part on, or arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, in each case to the
full extent a corporation is permitted under applicable law to indemnify
its own directors or officers as the case may be (and the Company and the
Surviving Corporation, as the case may be, will pay expenses in advance
of the final disposition of any such action or proceeding to each
Indemnified Party to the full extent permitted by law). Without limiting
the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Parties (whether arising
before or after the Effective Time), (i) the Indemnified Parties may
retain counsel satisfactory to them and the Company (or them and the
Surviving Corporation after the Effective Time) and the Company (or after
the Effective Time, the Surviving Corporation) shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received; and (ii) the Company (or after the
Effective Time, the Surviving Corporation) will use reasonable best
efforts to assist in the defense of any such matter, provided that
neither the Company nor the Surviving Corporation shall be liable for any
settlement effected without its prior written consent which consent shall
not unreasonably be withheld. Any Indemnified Party wishing to claim
indemnification under this Section 5.6, upon learning of any such claim,
action, suit, proceeding or investigation, shall notify the Company (or
after the Effective Time, the Surviving Corporation) (but the failure so
to notify shall not relieve a party from any liability which it may have
under this Section 5.6 except to the extent such failure prejudices such
party). The Indemnified Parties as a group may retain only one law firm
to represent them with respect to each such matter unless there is, under
applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified
Parties. The Company and Parent agree that the foregoing rights to
indemnification, including provisions relating to advances of expenses
incurred in defense of any action or suit, existing in favor of the
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Indemnified Parties with respect to matters occurring through the
Effective Time, shall survive the Merger and shall continue in full force
and effect for a period of not less than six years from the Effective
Time; provided, however, that all rights to indemnification in respect of
any Indemnified Liabilities asserted or made within such period shall
continue until the disposition of such Indemnified Liabilities.
Furthermore, the provisions with respect to indemnification set forth in
the articles of incorporation or bylaws of the Surviving Corporation
shall not be amended for a period of six years following the Effective
Time if such amendment would materially and adversely affect the rights
thereunder of individuals who at any time prior to the Effective Time
were directors or officers of the Company in respect of actions or
omissions occurring at or prior to the Effective Time.
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies
of directors' and officers' liability insurance maintained by the Company
(provided that Parent may substitute therefor (i) policies of at least
the same coverage and amounts containing terms and conditions which are
no less advantageous in any material respect to the Indemnified Parties
and (ii) coverage under Parent's directors' and officers' liability
insurance coverage if such substitution is approved by those persons, in
their sole discretion, who at the Effective Time constitute or
constituted a majority of the Company's Board of Directors) with respect
to matters arising before the Effective Time, provided that the Surviving
Corporation shall not be required to pay an annual premium for such
insurance in excess of 200% of the last annual premium paid by the
Company prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount. The last annual premium paid by the
Company was $130,000.
(c) The provisions of this Section 5.6 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his
heirs and his personal representatives and shall be binding on all
successors and assigns of the Company and the Surviving Corporation.
(d) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any person, then, and
in each case, to the extent necessary to effectuate the purpose of this
Section 5.6, proper provision shall be made so that the successors and
assigns of the Surviving Corporation shall succeed to the obligations set
forth in this Section 5.6 and none of the actions described in clauses
(i) or (ii) shall be taken until such provision is made.
5.7 REASONABLE BEST EFFORTS. Subject to the terms and conditions of
this Agreement, except as otherwise expressly contemplated hereby, each of
the parties hereto agrees to use all reasonable best efforts to take, or
cause to be taken, all action and to do, or cause to be done as promptly as
practicable, all things necessary, proper or advisable, under applicable
laws and regulations or otherwise, to consummate and make effective the
Merger and the other transactions contemplated by this Agreement, subject,
as applicable, to the Company Shareholder Approval.
5.8 PUBLIC ANNOUNCEMENTS. The parties hereto will consult with each
other regarding any press release or public announcement pertaining to the
Merger and shall not issue any such press release or make any such public
announcement prior to such consultation, except as may be required by
applicable law, court process or obligations pursuant to any listing
agreement with any national securities exchange, in which case the party
proposing to issue such press release or make such public announcement shall
use reasonable efforts to consult in good faith with the other party before
issuing any such press release or making any such public announcement. The
parties hereto shall also consult with each other before engaging in any
communications with A.M. Best and Company with respect to this Agreement or
the transactions contemplated hereby.
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5.9 ENVIRONMENTAL STUDIES. Within thirty (30) days of this Agreement,
the Company shall deliver to Parent a report of a Phase I Environmental Site
Assessment, which shall be conducted in accordance with and presented in the
form prescribed by the most recent edition of the ASTM Standard for Phase I
environmental site assessments and a report of an environmental compliance
audit conducted in substantial accordance with the ASTM Standard for
environmental compliance audits, on the real property located at NBC Plaza,
2700 NE Loop 410, San Antonio, TX, and the Village at NBC Plaza, 8200 Perrin
Beitel Rd., San Antonio, TX (including the undeveloped real property owned
by the Company in the vicinity thereof) ("ENVIRONMENTAL REPORTS"), prepared
by an environmental consultant, engineer or environmental consulting or
engineering firm reasonably satisfactory to Parent. The cost of preparing
the reports contemplated by this Section 509 shall be borne by the Company.
5.10 AFFILIATES. Prior to the Closing Date, the Company shall deliver
to Parent a letter identifying all persons who are, at the time this
Agreement is submitted for approval to the shareholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities
Act. The Company shall cause each such person to deliver to Parent on or
prior to the Closing Date a written agreement substantially in the form
attached as Exhibit B hereto.
5.11 SUPPORT AGREEMENT. The Support Agreement shall be executed
contemporaneously with this Agreement.
5.12 COOPERATION. From the date hereof until the Effective Time, the
parties agree to work together to coordinate all aspects of transition
planning and the integration of the Public Entity and Nonstandard Businesses
of Parent and its Subsidiaries with the businesses of the Company and its
Subsidiaries from and after the Effective Time. In this regard, the parties
agree, among other things, (i) to create a dedicated transition team,
including consultation between the parties to identify the appropriate
officers and employees of each of the Company and Parent who will be members
of such team, to plan and prepare for the integration of the business and
other matters following the Merger and preparing for the execution of any
such plans, (ii) to jointly develop any employee, agent, policyholder or
other communications relating to such plans and the Merger, (iii) to discuss
and consult with respect to investment management activities, (iv) to
jointly consider information processing systems updates and technology
integration issues and to plan and prepare for an agreed-upon resolution of
such issues following the Merger and (v) to take such actions as are
necessary or appropriate to promote and implement the integration plan,
subject to applicable law.
5.13 NYSE LISTING. Parent shall use its best efforts to cause the
shares of Parent Common Stock to be issued in the Merger to be approved for
listing on the New York Stock Exchange (the "NYSE"), subject to official
notice of issuance, prior to the Effective Time
5.14 BENEFIT PLANS AND EMPLOYEE ARRANGEMENTS. For employees who are
employees of the Company as of the Effective Time and who continue to be
employed by the Company, Parent shall cause the Surviving Corporation to
provide employee benefits which are substantially comparable in the
aggregate to the benefits provided under the Company Benefit Plans until the
first anniversary of the Effective Time.
5.15 TAX-FREE REORGANIZATION. Parent and the Company shall each use
its best efforts to cause the Merger to be treated as a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
Parent shall own all of the issued and outstanding shares of USF&G
immediately prior to the Merger. Parent shall not, nor shall Parent permit
any of its affiliates to, take any action which would cause the Merger to
fail to qualify as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code.
5.16 TRI-WEST. The Company will use its reasonable best efforts to
cause each of E.B. Lyon, III, Michael J. Claypool and Michael J. Bodayle to
enter into an agreement with the Company granting the Company the right to
purchase, on terms reasonably acceptable to Parent, the outstanding
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membership, equity and voting interests of Tri-West of New Mexico, LLC,
Tri-West of Indianapolis, LLC, Tri-West of Florida, LLC, and any other
agency owned by any of them which has entered into a producer agreement with
any Subsidiary of the Company.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) COMPANY SHAREHOLDER APPROVAL. The Merger shall have been
approved and adopted by the affirmative vote or written consent of the
holders of two-thirds of the outstanding shares of Company Common Stock
entitled to vote thereon.
(b) GOVERNMENTAL AND REGULATORY CONSENTS. All actions, consents,
approvals, filings and notices listed in Sections 3.1(d)(ii)(A) and
3.2(d)(iii)(A) of the Disclosure Memorandum shall have been taken, made
or obtained; provided, however, that such consents or approvals shall be
in full force and effect at the Effective Time and shall not obligate
Parent or USF&G to agree to take any action which would have a material
adverse effect on the expected benefits to Parent of the transactions
contemplated hereby.
(c) HSR ACT. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired, and no restrictive order or other requirements shall
have been placed on the Company, Parent or the Surviving Corporation in
connection therewith.
(d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however,
that prior to invoking this condition, each party shall use reasonable
best efforts to have any such decree, ruling, injunction or order
vacated.
(e) FORM S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material "blue sky" and other
state securities laws applicable to the registration and qualification of
the Parent Common Stock following the Merger shall have been complied
with.
(f) NYSE LISTING. The shares of Parent Common Stock which shall be
issued to the stockholders of the Company upon consummation of the Merger
shall have been authorized for listing on the NYSE, subject to official
notice of issuance.
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND USF&G. The obligations of
Parent and USF&G to effect the Merger are further subject to the
satisfaction or waiver following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct (without regard to any materiality qualifiers contained therein)
in each case as of the date of this Agreement and (except to the extent
such representations and warranties speak as of a particular date) as of
the Closing as though made on and as of the Closing, except where the
failure of one or more representations or warranties to be true and
correct, individually or in the aggregate, would not result in a Material
Adverse Effect on the Company. Parent shall have received a certificate
signed on behalf of the Company by the chief executive officer and the
chief financial officer of the Company to the effect set forth in this
paragraph.
47 A-50
<PAGE>
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall
have performed and complied with, in all material respects, all
agreements and covenants required to be performed and complied with by
the Company under this Agreement at or prior to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE. There shall not have occurred or
arisen after March 31, 1997 and prior to the Effective Time any change,
event (including without limitation any damage, destruction or loss,
whether or not covered by insurance), condition (financial or otherwise),
or state of facts with respect to the Company or any of its Subsidiaries
which would constitute a Material Adverse Effect on the Company.
(d) NO LITIGATION. There shall not be pending or, to the Company's
or Parent's knowledge threatened, any action, suit, investigation, or
other proceeding by any Governmental Entity to restrain, enjoin, or
otherwise prevent consummation of any of the transactions contemplated by
this Agreement.
(e) AFFILIATE LETTERS. A duly executed copy of each of the
agreements referred to in Section 5.10 shall have been received by
Parent.
(f) OPTION AGREEMENTS AND WARRANTS. The Company shall have (i)
taken all actions required to enable the consummation of the transactions
contemplated by Section 2.6 and (ii) received agreements in the form of
Exhibit C attached hereto from holders of Company Warrants representing
the right to purchase 75% of the shares of Company Common Stock
underlying all outstanding Company Warrants as of the date of this
Agreement, whether or not then exercisable in whole or in part.
(g) TAX OPINION. Parent shall have received an opinion of Piper &
Marbury L.L.P. (or another nationally recognized law firm) to the effect
that the Merger will be treated for federal income tax purposes as a
tax-free reorganization within the meaning of Section 368(a)(1)(A) and
368(a)(2)(D) of the Code.
(h) AUTHORIZATION. The Company shall have delivered to Parent
evidence reasonably satisfactory to Parent that all requisite action on
the part of the Company necessary for the due authorization of this
Agreement and the performance and consummation of the transactions
contemplated hereby has been taken.
6.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the
Company to effect the Merger is further subject to the satisfaction or
waiver of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Parent and USF&G set forth in this Agreement shall be true
and correct (without regard to any materiality qualifiers contained
therein), in each case as of the date of this Agreement and (except to
the extent such representations and warranties speak as of a particular
date) as of the Closing Date as though made on and as of the Closing
Date, except where the failure of one or more representations or
warranties to be true and correct, individually or in the aggregate,
would not result in a Material Adverse Effect on Parent. The Company
shall have received certificates signed on behalf of Parent by the chief
executive officer and chief financial officer of Parent to the effect set
forth in this paragraph.
(b) PERFORMANCE OF OBLIGATIONS OF USF&G. Parent and USF&G shall
have performed and complied with, in all material respects, all
agreements and covenants required to be performed and complied with by
Parent and USF&G under this Agreement at or prior to the Closing Date.
(c) FEDERAL TAX OPINION. The Company shall have received an opinion
of Mayer, Brown & Platt (or another nationally recognized law firm) to
the effect that the Merger will be treated for federal income tax
purposes as a tax-free reorganization within the meaning of Section
368(a)(1)(A) and 368(a)(2)(D) of the Code.
48 A-51
<PAGE>
(d) NO MATERIAL ADVERSE CHANGE. Except as publicly disclosed in a
document filed by Parent under the Exchange Act, there shall not have
been any change in the business, results of operation or financial
condition of the Parent and its Subsidiaries taken as a whole at any time
between March 31, 1997 and the Effective Time which would have a Material
Adverse Effect on the Parent.
(e) AUTHORIZATION. Parent shall have delivered to the Company
evidence reasonably satisfactory to the Company that all requisite action
on the part of Parent necessary for the due authorization of this
Agreement and the performance and consummation of the transactions
contemplated hereby has been taken.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of the Company or Parent:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent if any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and non-appealable;
(c) by either the Company or Parent, if the Merger shall not have
been consummated on or before December 31, 1997; provided that if the
conditions set forth in Article VI have not been satisfied as of such
date, this Agreement may not be terminated until February 28, 1998 if it
can reasonably be anticipated that such conditions can be satisfied by
February 28, 1998 (such December 31, 1997 or February 28, 1998, the
"TERMINATION DATE"); and provided further that the right to terminate
this Agreement under this Section 7.1(c) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has
been the cause of or resulted in the failure of the Merger to occur on or
before such date;
(d) by either Parent or the Company if at the duly held meeting of
the shareholders of the Company (including any adjournment thereof) held
for the purpose of voting on the Merger, this Agreement and the
consummation of the transactions contemplated hereby, the holders of at
least two-thirds of the outstanding shares of Company Common Stock shall
not have approved the Merger, this Agreement and the consummation of the
transactions contemplated hereby;
(e) by Parent or the Company, in the event that a Trigger Event has
occurred prior to the consummation of the Merger (for purposes of this
Section 7.1(e), "TRIGGER EVENT" shall mean: (i) the Board of Directors of
the Company shall have failed to give or shall have withdrawn or
adversely modified in any material respect, or taken a public position
materially inconsistent with, its approval or recommendation of the
Merger or this Agreement; or (ii) an Acquisition Proposal shall have been
recommended or accepted by the Company or the Company shall have entered
into an agreement with respect to an Acquisition Proposal with any person
or entity other than Parent or an affiliate thereof);
(f) by Parent, upon a breach of any representation or warranty of the
Company, or in the event the Company fails to comply in any respect with
any of its covenants and agreements, or if any representation or warranty
of the Company shall be or become untrue, in each case, where such
breach, failure to so comply or untruth (either individually or in the
aggregate with all other such breaches, failures to comply or untruths)
would cause one or more of the conditions set forth in Sections 6.1(a),
6.1(b), 6.2(a) or 6.2(b) to be incapable of being satisfied as of a date
49 A-52
<PAGE>
within ten days after the occurrence thereof, provided that a willful
breach by the Company shall be deemed to cause such conditions to be
incapable of being satisfied by such date;
(g) by the Company, upon a breach of any representation or warranty
of Parent or USF&G, or in the event Parent or USF&G fails to comply in
any respect with any of its covenants or agreements, or if any
representation or warranty of Parent or USF&G shall be or become untrue,
in each case, where such breach, failure to so comply or untruth (either
individually or in the aggregate with all other such breaches, failures
to comply or untruths) would cause one or more of the conditions set
forth in Sections 6.1(a), 6.1(b), 6.3(a) or 6.3(b) to be incapable of
being satisfied as of a date within ten days after the occurrence
thereof, provided that a willful breach by Parent or USF&G shall be
deemed to cause such conditions to be incapable of being satisfied by
such date; or
(h) by either Parent or the Company within two days of the
determination of the Average Stock Price if the Average Stock Price shall
be greater than $32.42 or less than $17.46.
7.2 EFFECT OF TERMINATION. If this Agreement is validly terminated by
either the Company or Parent pursuant to Section 7.1, this Agreement will
forthwith become null and void and there will be no liability or obligation
on the part of either the Company or Parent (or any of their respective
Subsidiaries or affiliates), except (i) that the provisions of Section
5.4(c), Section 5.5 and this Section 7.2 will continue to apply following
any such termination, (ii) such termination shall not in any case affect the
obligations of the Company under the Parent Confidentiality Agreement and
the Company Confidentiality Agreement and (iii) that nothing contained
herein shall relieve any party hereto from liability for willful breach of
its representations, warranties, covenants or agreements contained in this
Agreement. The effectiveness of any termination under this Agreement shall
be subject to the payments required to be made pursuant to Section 5.5 being
so made, if applicable.
7.3 AMENDMENT. Subject to applicable law, this Agreement may be
amended, modified or supplemented only by written agreement of Parent, USF&G
and the Company at any time prior to the Effective Date of the Merger with
respect to any of the terms contained herein; provided, however, that, after
this Agreement is approved by the Company's shareholders, no such amendment
or modification shall (a) reduce the amount or change the form of
consideration to be delivered to the holders of shares of Company Common
Stock, (b) change the date by which the Merger is required to be effected,
or (c) change the amounts payable in respect of the Options or Warrants.
7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (a) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto; (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto; and (c) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party. The failure of any party hereto to assert any of its rights
hereunder shall not constitute a waiver of such rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time; provided, however, that Article II, Sections 5.6 and 5.14, the Parent
Confidentiality Agreement and the Company Confidentiality Agreement (with
respect to directors, officers, advisors and representatives of Parent and
the Company) shall survive the Effective Time.
50 A-53
<PAGE>
8.2 NOTICES. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, telegraphed
or telecopied or sent by certified or registered mail, postage prepaid, and
shall be deemed to be given, dated and received upon receipt. Any such
notice or communication shall be provided to the following address or
telecopy number, or to such other address or addresses as such person may
subsequently designate by notice given hereunder:
<TABLE>
<S> <C>
(a) if to USF&G or Parent, to:
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209-3653
Attn: Andrew A. Stern, Mail Stop LA-0300
Telecopy: (410) 205-6802
with a copy to:
Piper & Marbury L.L.P.
36 South Charles Street
Baltimore, Maryland 21201
Attn: R.W. Smith, Jr.
Telecopy: (410) 576-5052
(b) if to the Company, to:
Titan Holdings, Inc.
2700 N.E. Loop 410, Suite 500
San Antonio, Texas 78217
Attn: Mark E. Watson, III
Telecopy: (210) 527-2936
with a copy to:
Mayer, Brown & Platt
190 S. LaSalle Street
Chicago, Illinois 60603
Attn: Edward S. Best
Telecopy: (312) 701-7711
</TABLE>
8.3 INTERPRETATION. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, glossary of defined terms and
headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the word "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that
the information referred to has been made available if requested by the
party to whom such information is to be made available.
8.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood
that all parties need not sign the same counterpart.
8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement together with the Parent Confidentiality
Agreement and the Company Confidentiality Agreement (and any other documents
and instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings including that certain
Letter Agreement, dated July 15, 1997 between Parent and the Company, both
written and oral, among the parties with respect
51 A-54
<PAGE>
to the subject matter hereof and, except as provided in Article II, Sections
5.6 and 5.14, is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder. Anything to the contrary
notwithstanding, paragraph 6 of the Parent Confidentiality Agreement and
paragraph 6 of the Company Confidentiality Agreement shall terminate after
the date of this Agreement.
8.6 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas, without giving effect to the
principles of conflicts of law thereof.
8.7 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, such consent not to be unreasonably withheld
and any such assignment that is not consented to shall be null and void;
PROVIDED, HOWEVER, that Parent may assign this Agreement to an affiliate
without the consent of the Company. Any such assignment shall not affect
Parent's or USF&G's liability hereunder, including its obligations to
deliver the Merger Consideration. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
[The remainder of this page intentionally left blank.]
52 A-55
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
<TABLE>
<S> <C> <C>
USF&G:
UNITED STATES FIDELITY AND
GUARANTY COMPANY
By: /s/ ANDREW A. STERN
--------------------------------------
Name: Andrew A. Stern
--------------------------------------
Title: Executive Vice President--Strategic
Planning and Reinsurance Operations
--------------------------------------
PARENT:
USF&G CORPORATION
By: /s/ ANDREW A. STERN
--------------------------------------
Name: Andrew A. Stern
--------------------------------------
Title: Executive Vice President--Strategic
Planning and Reinsurance Operations
--------------------------------------
COMPANY:
TITAN HOLDINGS, INC.
By: /s/ MARK E. WATSON, JR.
--------------------------------------
Name: Mark E. Watson, Jr.
--------------------------------------
Title: President
--------------------------------------
</TABLE>
53 A-56
<PAGE>
EXHIBIT A TO
MERGER AGREEMENT
[FORM OF VOTING AND SUPPORT AGREEMENT]
Agreement dated as of August 7, 1997 between the shareholder identified on
Exhibit A hereto (the "Shareholder") and USF&G Corporation, a Maryland
corporation ("Parent"). Capitalized terms used but not defined herein shall have
the meanings ascribed to such terms in the Merger Agreement (as defined below).
In consideration of the execution by Parent of the Agreement and Plan of
Merger dated as of August 7, 1997 (the "Merger Agreement") among Parent, United
States Fidelity and Guaranty Company, a Maryland corporation, and Titan
Holdings, Inc., a Texas corporation ("Company"), and other good and valuable
consideration, receipt of which is hereby acknowledged, the Shareholder and
Parent hereby agree as follows:
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SHAREHOLDER. The
Shareholder hereby represents and warrants to, and agrees with, Parent as
follows:
(a) TITLE. As of the date hereof, the Shareholder is the beneficial
and registered owner of 2,579,295 shares (the "Shares") of common stock,
$.01 par value per share ("Common Stock"), of Company. As of the date
hereof, except as set forth on Exhibit A hereto, the Shareholder does not
(i) beneficially own any shares of any class or series of capital stock
of Company (other than the Shares) or any securities convertible into or
exercisable for shares of any class or series of Company's capital stock
or (ii) have any options or other rights to acquire any shares of any
class or series of capital stock of Company or any securities convertible
into or exercisable for shares of any class of Company's capital stock.
Except as set forth in Exhibit B hereto, the Shareholder owns the Shares
free and clear of any lien, mortgage, pledge, charge, security interest
or any other encumbrance of any kind. The Shareholder covenants and
agrees to comply with the pledge agreements and other loan documents
relating to the pledges of certain of the Shares identified on Exhibit B
and to otherwise take any action necessary to insure that the Shareholder
can carry out the terms of this Agreement. Each pledgee of the Shares has
consented to this Agreement and to the Shareholder's fulfillment of the
terms thereof.
(b) RIGHT TO VOTE AND TO TRANSFER SHARES. The Shareholder has full
legal power, authority and right to vote all of the Shares in favor of
approval and adoption of the Merger Agreement without the consent or
approval of, or any other action on the part of, any other person or
entity. Without limiting the generality of the foregoing, except for this
Agreement, Shareholder has not entered into any voting agreement or any
other agreement with any person or entity with respect to any of the
Shares, granted any person or entity any proxy (revocable or irrevocable)
or power of attorney with respect to any of the Shares, deposited any of
the Shares in a voting trust or entered into any arrangement or agreement
with any person or entity limiting or affecting the Shareholder's ability
to enter into this Agreement or legal power, authority or right to vote
the Shares in favor of the approval and adoption of the Merger Agreement
or any of the transactions contemplated by the Merger Agreement, and
Shareholder will not take any such action after the date of this
Agreement and prior to the Company shareholders meeting to vote on
approval and adoption of the Merger Agreement, including any adjournment
or postponement thereof (the "Company Shareholders Meeting"). This
Agreement has been duly executed and delivered by the Shareholder and
constitutes a valid and binding agreement of the Shareholder.
2. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent hereby represents
and warrants to the Shareholder that this Agreement (i) has been duly
authorized by all necessary corporate action,
A-57
<PAGE>
(iii) has been duly executed and delivered by Parent and (iii) is a valid
and binding agreement of Parent.
3. RESTRICTION ON TRANSFER. The Shareholder agrees that (other than
pursuant to the Merger Agreement) it will not, and will not agree to, sell,
assign, dispose of, encumber, mortgage, hypothecate or otherwise transfer or
encumber (collectively, "Transfer") any of the Shares to any person or
entity; provided, however, that the Shareholder may enter into pledge
agreements pledging any of the Shares as collateral security under loan
agreements, provided that (i) the lender under each such loan agreement
consents to this Agreement and fulfillment of the terms thereof and (ii) the
Shareholder covenants and agrees to comply with each pledge agreement and
other loan documents relating to pledges of Shares thereunder and to
otherwise take all action necessary to insure that the Shareholder can carry
out the terms of this Agreement.
4. AGREEMENT TO VOTE OF SHAREHOLDER. The Shareholder, in his
individual capacity as a shareholder of the Company only, hereby irrevocably
and unconditionally agrees to vote or to cause to be voted all of the Shares
at the Company Shareholders' Meeting and at any other annual or special
meeting of shareholders of Company where such matters arise (a) in favor of
the approval and adoption of the Merger Agreement and (b) against (i)
approval of any proposal made in opposition to or in competition with the
Merger or any of the other transactions contemplated by the Merger
Agreement, (ii) any merger, consolidation, sale of assets, business
combination, share exchange, reorganization or recapitalization of Company
or any of its subsidiaries, with or involving any party other than Parent or
one of its subsidiaries, (iii) any liquidation, dissolution or winding up of
Company, (iv) any extraordinary dividend by Company, (v) any change in the
capital structure of Company (other than pursuant to the Merger Agreement)
and (vi) any other action that may reasonably be expected to impede,
interfere with, delay, postpone or attempt to discourage the Merger or the
other transactions contemplated by the Merger Agreement or this Agreement or
result in a breach of any of the covenants, representations, warranties or
other obligations or agreements of Company under the Merger Agreement which
would materially and adversely affect Company or its ability to consummate
the transactions contemplated by the Merger Agreement. The Stockholder
further agrees not to take or commit or agree to take any action
inconsistent with the foregoing.
5. ACTION IN SHAREHOLDER CAPACITY ONLY. The Shareholder signs solely
in the Shareholder's capacity as a record and beneficial owner of the
Shares, and nothing herein shall prohibit, prevent or preclude the
Shareholder from fulfilling his fiduciary duties as a director of Company,
including without limitation, voting or consenting as a director in favor of
an Acquisition Proposal (as defined in the Merger Agreement) or negotiating
with respect to an Acquisition Proposal in his capacity as an officer or
director of the Company.
6. NO SHOPPING. The Shareholder, in his individual capacity as a
shareholder of the Company only, agrees not to, directly or indirectly, (i)
solicit, initiate or encourage (or authorize any person to solicit, initiate
or encourage) any inquiry, proposal or offer from any person to acquire the
business, property or capital stock of Company or any direct or indirect
subsidiary thereof, or any acquisition of a substantial equity interest in,
or a substantial amount of the assets of, Company or any direct or indirect
subsidiary thereof, whether by merger, purchase of assets, tender offer or
other transaction or (ii) participate in any discussion or negotiations
regarding, or furnish to any other person any information with respect to,
or otherwise cooperate in any way with, or participate in, facilitate or
encourage any effort or attempt by any other person to do or seek any of the
foregoing; PROVIDED that, notwithstanding the foregoing, the Shareholder
shall not be prohibited from taking any such actions as are required, based
upon advice of counsel, to comply with his fiduciary duties as an officer
and director of the Company to the extent such actions are permitted under
the Merger Agreement.
7. INVALID PROVISIONS. If any provision of this Agreement shall be
invalid or unenforceable under applicable law, such provision shall be
ineffective to the extent of such invalidity or unenforceability only,
without it affecting the remaining provisions of this Agreement.
Exhibit A, Page 2 A-58
<PAGE>
8. EXECUTED IN COUNTERPARTS. This Agreement may be executed in
counterparts each of which shall be an original with the same effect as if
the signatures hereto and thereto were upon the same instrument.
9. SPECIFIC PERFORMANCE. The parties hereto agree that if for any
reason the Shareholder fails to perform any of his agreements or obligations
under this Agreement irreparable harm or injury to Parent would be caused
for which money damages would not be an adequate remedy. Accordingly, the
Shareholder agrees that, in seeking to enforce this Agreement against the
Shareholder, Parent shall be entitled to specific performance and injunctive
and other equitable relief in addition and without prejudice to any other
rights or remedies, whether at law or in equity, that Parent may have
against the Shareholder for any failure to perform any of its agreements or
obligations under this Agreement.
10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas without giving effect to
the principles of conflicts of laws thereof.
11. AMENDMENTS; TERMINATION.
(a) This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
(b) The provisions of this Agreement shall terminate upon the
earliest to occur of (i) the consummation of the Merger, (ii) the date
which is 12 months after the date hereof, (iii) the termination of the
Merger Agreement pursuant to Section 7.1(a) or (g) thereof, or (iv) the
termination of the Merger Agreement pursuant to Section 7.1 (b) or (c)
thereof if, but only if, the Merger Agreement is terminated pursuant to
such subsection (b) or (c) solely for reasons that are not directly or
indirectly related to the commencement of, or any person's or entity's
direct or indirect indication of interest in making, an Acquisition
Proposal with respect to the Company.
(c) For purposes of this Agreement, the term "Merger Agreement"
includes the Merger Agreement, as the same may be modified or amended
from time to time.
12. ADDITIONAL SHARES. If, after the date hereof the Shareholder
acquires beneficial ownership of any shares of the capital stock of Company
(any such shares, "Additional Shares"), including, without limitation, upon
exercise of any option, warrant or right to acquire shares of capital stock
or through any stock dividend or stock split, the provisions of this
Agreement (other than those set forth in Section 1 (a)) applicable to the
Shares shall be applicable to such Additional Shares as if such Additional
Shares had been Shares as of the date hereof. The provisions of the
immediately preceding sentence shall be effective with respect to Additional
Shares without action by any person or entity immediately upon the
acquisition by the Shareholder of beneficial ownership of such Additional
Shares.
13. ACTION BY WRITTEN CONSENT. If, in lieu of the Company Shareholders
Meeting, shareholder action in respect of the Merger Agreement or any of the
transactions contemplated by the Merger Agreement is taken by written
consent, the provisions of this Agreement imposing obligations in respect of
or in connection with the Company Shareholders Meeting shall apply MUTATIS
MUTANDIS to such action by written consent.
14. SHAREHOLDER CERTIFICATE. Shareholder agrees to execute and deliver
a certificate containing such representations as are reasonably necessary
and customary for tax counsel to Parent on the one hand, and Company on the
other hand, to render an opinion to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986 and that no gain or loss will be recognized by
the shareholders of Company to the extent they receive Parent Common Stock
solely in exchange for shares of Company Common Stock, such certificate to
be in the form attached hereto as Exhibit C.
Exhibit A, Page 3 A-59
<PAGE>
15. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective legal successors and permitted assigns; PROVIDED that no party
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the consent of Parent (in the case of the
Shareholder or any of its permitted assigns) or the Shareholder (in the case
of Parent or any of its permitted assigns).
16. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by facsimile, or by registered or certified mail
(postage prepaid, return receipt requested) to such party at its address set
forth on the signature page hereto.
[The remainder of this page intentionally left blank.]
Exhibit A, Page 4 A-60
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
<TABLE>
<S> <C> <C>
Mark E. Watson, Jr.
Address:
-------------------------------------
MEW FAMILY LIMITED PARTNERSHIP
By:
-------------------------------------
Mark E. Watson, Jr., General Partner
By:
-------------------------------------
Kathleen Watson, General Partner
Address:
-------------------------------------
THE MARK AND KATHLEEN WATSON
CHARITABLE FOUNDATION
By:
-------------------------------------
Mark E. Watson, Jr., Trustee
By:
-------------------------------------
Kathleen E. Watson, Trustee
By:
-------------------------------------
E.B. Lyon, III, Trustee
Address:
-------------------------------------
USF&G CORPORATION
By:
-------------------------------------
Address:
-------------------------------------
</TABLE>
Exhibit A, Page 5 A-61
<PAGE>
EXHIBIT B TO
MERGER AGREEMENT
[FORM OF AFFILIATE LETTER]
, 1997
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Titan Holdings, Inc., a Texas corporation ("Titan"), as the
term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule
145 of the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), and/or (ii) used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the Commission. I have been further advised
that pursuant to the terms of the Agreement and Plan of Merger dated as of
August , 1997 (the "Agreement"), between Titan, USF&G Corporation ("USF&G")
and United States Fidelity and Guaranty Company, a Maryland corporation (the
"Subsidiary"), Titan will be merged with and into the Subsidiary (the "Merger")
and I will receive shares of Common Stock, par value $2.50 per share, of USF&G
(the "USF&G Common Stock") in exchange for shares of Common Stock, par value
$0.01 per share, of Titan owned by me.
I represent, warrant and covenant to USF&G that in the event I receive any
USF&G Common Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the USF&G
Common Stock in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed
the requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of the USF&G Common Stock to
the extent I believe necessary, with my counsel or counsel for Titan.
C. I have been advised that the issuance of USF&G Common Stock to me
pursuant to the Merger has been registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger was submitted for a vote of the
stockholders of Titan, I may be deemed to have been an affiliate of Titan
and the distribution by me of the USF&G Common Stock has not been registered
under the Act, and that I may not sell, transfer or otherwise dispose of the
USF&G Common Stock issued to me in the Merger unless (i) such sale, transfer
or other disposition has been registered under the Act, (ii) such sale,
transfer or other disposition is made in conformity with Rule 145
promulgated by the Commission under the Act, or (iii) in the opinion of
counsel reasonably acceptable to USF&G, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
D. I understand that USF&G is under no obligation to register the sale,
transfer or other disposition of the USF&G Common Stock by me or on my
behalf under the Act or, to take any other action necessary in order to make
compliance with an exemption from such registration available.
E. I also understand that, in the event USF&G or USF&G's transfer agent
determines that I beneficially own one percent (1%) or more of the USF&G
Common Stock outstanding, stop transfer instructions will be given to
USF&G's transfer agents with respect to the USF&G Common Stock and
A-62
<PAGE>
that there will be placed on the certificates for the USF&G Common Stock
issued to me, or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES
MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN COMPLIANCE WITH THE
REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION STATEMENT UNDER
SAID ACT OF AN EXEMPTION FROM SUCH REGISTRATION."
F. I also understand that, in the event USF&G or USF&G's transfer agent
determines that I beneficially own one percent (1%) or more of the USF&G
Common Stock outstanding, unless the transfer by me of my USF&G Common Stock
has been registered under the Act or is a sale made in conformity with the
provisions of Rule 145, USF&G reserves the right to put the following legend
on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER
THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE
HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE
WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933."
It is understood and agreed that the legend set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this Agreement.
It is understood and agreed that such legends and the stop orders referred to
above will be removed if (i) one year shall have elapsed from the date the
undersigned acquired the USF&G Common Stock received in the Merger and the
provisions of Rule 145(d)(2) are then available to the undersigned, (ii) two
years shall have elapsed from the date the undersigned acquired the USF&G Common
Stock received in the Merger and the provisions of Rule 145(d)(3) are then
applicable to the undersigned, or (iii) USF&G has received either an opinion of
counsel, which opinion and counsel shall be reasonably satisfactory to USF&G, or
a "no action" letter obtained by the undersigned from the staff of the
Commission, to the effect that the restrictions imposed by Rule 145 under the
Act no longer apply to the undersigned.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Titan as described in the first paragraph of this
letter or as a waiver of any rights I may have to object to any claim that I am
such an affiliate on or after the date of this letter.
<TABLE>
<S> <C>
Very truly yours,
----------------------------------------------
[Name]
</TABLE>
Accepted this day of , 199 .
USF&G CORPORATION
By:
- -------------------------------------------
Name:
Title:
Exhibit B, Page 2 A-63
<PAGE>
EXHIBIT C TO
MERGER AGREEMENT
[FORM OF WARRANT CANCELLATION AGREEMENT]
THIS AGREEMENT, dated as of , 1997, by and between Titan Holdings,
Inc., a Texas corporation (the "Company"), USF&G Corporation, a Maryland
corporation ("Parent") and (the "Holder").
WHEREAS, the Holder is the record owner of warrants (the "Warrants")
outstanding under the Warrant Agreement (the "Warrant Agreement"); and
WHEREAS, the Company, Parent and the Holder have agreed that it is now
desirable that the Warrants be cancelled and that the Parent shall pay the
Holder the Warrant Consideration, as such term is defined in the Agreement and
Plan of Merger, dated as of August 7, 1997, by and among Parent, United States
Fidelity and Guaranty Company and the Company (the "Merger Agreement"), in
consideration for such cancellation;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter
set forth, IT IS HEREBY AGREED by the parties hereto as follows:
1. The Company, Parent and the Holder hereby agree that the Warrants
will be cancelled immediately prior to the Effective Time (as such term is
defined in the Merger Agreement) and that the Holder will have no further
rights under the Warrant Agreement with respect to the Warrants; provided,
however, that such cancellations will be of no force and effect if the
Merger does not occur.
2. In consideration for the cancellation of the Warrants, Parent shall
pay to the Holder the Warrant Consideration, which amount shall be paid to
the Holder no later than ten days after the Effective Time.
3. The Holder hereby agrees to forever relinquish its rights to the
Warrants and any rights that it may have with respect to the Warrants under
the Warrant Agreement.
4. If the Merger does not occur, this Agreement shall be of no force
and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
<TABLE>
<S> <C>
USF&G CORPORATION [HOLDER]
By: ---------------------------------------- By: ----------------------------------------
Title: Title:
TITAN HOLDINGS, INC.
By: ----------------------------------------
Title:
</TABLE>
Exhibit B, Page 3 A-64
<PAGE>
ANNEX AA
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment"), dated as
of August 26, 1997, is made and entered into by and among USF&G Corporation, a
Maryland corporation ("Parent"), United States Fidelity and Guaranty Company, a
Maryland corporation and wholly-owned subsidiary of Parent ("USF&G"), and Titan
Holdings, Inc., a Texas corporation ("Titan").
WHEREAS, on August 7, 1997, Parent, USF&G and Titan entered into that
certain Agreement and Plan of Merger (the "Merger Agreement") pursuant to which,
among other things, the parties agreed that Titan would be merged with and into
USF&G, with USF&G to survive the merger; and
WHEREAS, the parties hereto now wish to amend the Merger Agreement to
clarify certain terms related to the merger consideration and elections and
prorations in connection therewith.
NOW THEREFORE, in consideration of the foregoing and various other
considerations, the receipt and sufficiency of which the parties hereby
acknowledge, the parties hereto hereby agree that the Merger Agreement shall be
amended as follows:
1. The last two sentences of Subsection (c) of Section 2.3 of the Merger
Agreement are hereby deleted and amended in their entirety to read as follows:
The "Remaining Stock Election Cash Amount" shall be equal to the Maximum
Cash Amount minus the aggregate amount of cash payable pursuant to, or
with respect to, Standard Elections, Deemed Standard Elections, Cash
Elections, Dissenting Shares, Parent Shares (as defined below) and
fractional shares. "Parent Shares" means any and all shares of Company
Common Stock that are (i) owned by Parent or USF&G and (ii) canceled and
retired at the Effective Time pursuant to Section 2.1(b). For purposes of
this paragraph and the following paragraph, the aggregate amount of cash
payable with respect to Dissenting Shares or Parent Shares shall be
deemed to be the product of (x) the number of Dissenting Shares or Parent
Shares, as the case may be, times (y) 2.0 times the Standard Cash
Consideration.
2. Subsection (d) of Section 2.3 of the Merger Agreement is hereby deleted
and amended in its entirety to read as follows:
(d) In the event that the aggregate amount of cash payable pursuant
to Standard Elections, Deemed Standard Elections and Cash Elections
received by the Exchange Agent exceeds the Maximum Cash Amount reduced by
the sum of (i) the aggregate amount of cash payable with respect to the
Dissenting Shares and fractional shares and (ii) the aggregate amount of
cash payable by Parent in acquiring the Parent Shares (such excess being
hereafter referred to as the "Excess Cash"), the following adjustments
shall be made:
(1) If the Excess Cash is less than or equal to one-half of the
aggregate amount of cash payable pursuant to Cash Elections, each
holder making a Cash Election shall receive, for each share of Company
Common Stock held by such holder, (x) cash in an amount equal to the
quotient obtained by dividing the (i) the excess of (A) the aggregate
amount of cash that otherwise would be payable pursuant to Cash
Elections over (B) the Excess Cash by (ii) the aggregate number of
shares of Company Common Stock held by holders making Cash Elections
(the "Cash Election Company Shares"), plus (y) a number of shares of
Parent Common Stock equal to the quotient obtained by dividing (iii)
the quotient obtained by dividing (C) the Excess Cash by (D) the
Average Stock Price (or the Closing Stock Price if adjustments are
required under Section 2.4) by (iv) the Cash Election Company Shares.
(2) If the Excess Cash is greater than one-half of the aggregate
amount of cash payable pursuant to Cash Elections, each holder making
a Standard Election, Deemed Standard Election or Cash Election shall
receive, for each share of Company Common Stock held by such holder,
(x) cash in an amount equal to the quotient obtained by dividing (i)
the excess of (A) the Maximum Cash Amount over (B) the aggregate
amount of cash payable with respect to Dissenting Shares, Parent
Shares and fractional shares by (ii) the aggregate number of shares of
Company Common
AA-1
<PAGE>
Stock held by holders making Standard Elections, Deemed Standard
Elections or Cash Elections (the "Cash/Standard Election Company
Shares"), plus (y) a number of shares of Parent Common Stock equal to
the quotient obtained by dividing (iii) the Remaining Cash/Standard
Election Parent Shares (as defined below) by (iv) the Cash/Standard
Election Company Shares. The "Remaining Cash/Standard Election Parent
Shares" shall be the Maximum Number of Parent Shares minus the number
of shares of Parent Common Stock issuable pursuant to Stock Elections
(including any fractional shares of Parent Common Stock for which a
cash adjustment shall be paid pursuant to Section 2.5(c) in respect of
such Stock Elections).
3. Section 2.4 of the Merger Agreement is hereby deleted and amended in its
entirety to read as follows:
2.4 Tax Adjustment.
Notwithstanding any other provision of this Article II, in the event
that the allocation of the consideration between stock and cash is not
50% stock and 50% cash for any reason (including the Closing Stock Price
(as defined below) being less than the Average Stock Price and the
aggregate amount of consideration transferred by Parent in acquiring
Parent Shares being greater than the amount assumed under Section
2.3(c)), appropriate adjustment will be made, as determined by Parent and
the Company upon advice of counsel, to the extent if any, as may be
required to cause the Merger Consideration allocation between cash and
stock to satisfy the continuity of interest requirements for purposes of
causing the transaction to qualify as a tax-free reorganization, provided
that the total value of the Merger Consideration to be delivered by
Parent, based upon the Average Stock Price, shall not increase. For
purposes of this Section 2.4, the "Closing Stock Price" shall mean the
mean between the highest and lowest quoted selling prices of the Parent
Common Stock as reported on the New York Stock Exchange Composite Tape on
the day of the Effective Time of the Merger. In the event that an
adjustment is made under this Section 2.4, any adjustments necessary or
appropriate to reflect such adjustment shall be made to the other
provisions of this Article II.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
<TABLE>
<S> <C>
USF&G:
UNITED STATES FIDELITY
AND GUARANTY COMPANY
By:/s/ ANDREW A. STERN
-------------------------------------------------
Name: Andrew A. Stern
Title: Executive Vice President
Parent:
USF&G CORPORATION
By:/s/ ANDREW A. STERN
-------------------------------------------------
Name: Andrew A. Stern
Title: Executive Vice President
Company:
TITAN HOLDINGS, INC.
By:/s/ MARK E. WATSON, JR.
-------------------------------------------------
Name: Mark E. Watson, Jr.
Title: President
</TABLE>
AA-2
<PAGE>
ANNEX B
FURMAN SELZ LLC
230 Park Avenue
New York, NY 10169
212-309-8200
August 7, 1997
Board of Directors
Titan Holdings, Inc.
2700 N.E. Loop 410
Suite 500
San Antonio, Texas 78217-4829
Gentlemen:
We understand that USF&G Corporation ("Parent"), United States Fidelity and
Guaranty Company, a wholly owned subsidiary of Parent ("USF&G") and Titan
Holdings, Inc. (the "Company") propose to enter into an Agreement and Plan of
Merger (the "Agreement") providing for, among other things, the merger of the
Company with and into USF&G (the "Merger"). Pursuant to the Agreement, at the
effective time of the Merger, each outstanding share of the Company's Common
Stock (other than those owned, directly or indirectly, by the Company, Parent,
USF&G or any of their respective subsidiaries), par value $0.01 per share (the
"Common Stock") will be converted into the right to receive, subject to the
election and allocation procedures set forth in the Agreement, one of the
following (the "Merger Consideration"): (a) $11.60 in cash, subject to
adjustment as described in the Agreement (the "Standard Cash Consideration")
plus 0.46516 shares of common stock ("Parent Stock"), par value $2.50, of
Parent, subject to adjustment as described in the Agreement (the "Standard
Exchange Ratio"), (b) two times the Standard Exchange Ratio of a share of Parent
Stock or (c) two times the Standard Cash Consideration.
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, to the holders of the Common Stock of the Merger
Consideration.
In conducting our analysis and arriving at our opinion as expressed herein,
we have reviewed and analyzed, among other things, the following:
(i) the Company's and Parent's Annual Reports on Form 10-K for each of
the fiscal years in the three year period ended December 31, 1996, their
Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31, 1997,
the Company's press release dated July 31, 1997 and internal financials for
the fiscal quarter ended June 30, 1997 and Parent's Analyst Supplement for
the fiscal quarter ended June 30, 1997;
(ii) certain other publicly available information concerning the Company
and Parent and the trading market for the Common Stock and the Parent Stock;
(iii) certain internal information relating to the Company and Parent,
including forecasts and projections (which, with respect to Parent, were
limited and do not cover any period subsequent to 1999), provided to us by
the respective managements of the Company and Parent;
B-1
<PAGE>
(iv) certain publicly available information concerning certain other
companies engaged in businesses which we believe to be comparable to the
Company or Parent and the trading markets for certain of such other
companies' securities;
(v) the terms of certain recent business combinations which we believe
to be relevant; and
(vi) a draft of the Agreement dated August 7, 1997.
We have also held discussions with certain officers and employees of the Company
and Parent concerning their respective businesses and operations, assets,
present condition and future prospects, and performed or reviewed such other
studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion as expressed herein, we have considered such
financial and other factors as we have deemed appropriate and feasible in the
circumstances including, among others, the following; (i) the current and
historical financial position and results of operations of the Company and
Parent, including revenues, earnings, profit margins, dividend record, net
worth, return on investment and capitalization; (ii) the financial and business
prospects for the Company and Parent and the industry segments in which they
operate; (iii) the current and historical trading markets for the Common Stock
and the Parent Stock, including prices and price-earnings ratios, and for the
equity securities of certain companies that we believe to be comparable to the
Company or Parent; (iv) the terms of certain other business combinations that we
believe to be relevant and (v) the terms and conditions of other acquisition
proposals and indications of interest received. We have also taken into account
our assessment of general economic, market and financial conditions and our
experience in similar transactions, as well as our experience in securities
valuation in general. Our opinion necessarily is based upon the foregoing and
other conditions as they exist and can be evaluated on the date hereof.
For purposes of rendering our opinion we have assumed, in all respects
material to our analysis, that the final form of the Agreement will not vary
from the draft we have reviewed, that the representations and warranties of each
party contained in the Agreement and all related documents and instruments
(collectively, the "Documents") are true and correct, that each party will
perform all of the covenants and agreements required to be performed by it under
such Documents and that all conditions to the consummation of the Merger will be
satisfied without waiver thereof. We have also assumed that all material
governmental, regulatory or other consents and approvals will be obtained and
that in the course of obtaining any necessary governmental, regulatory or other
consents and approvals, or any amendments, modifications or waivers to any
documents to which any of the Company, Parent or USF&G are party, no
restrictions will be imposed or amendments, modifications or waivers made that
would have any material adverse effect on the contemplated benefits to the
Company and Parent of the Merger.
In arriving at our opinion, we have not conducted a physical inspection of
the properties and facilities of the Company, Parent or USF&G, nor have we made,
obtained or assumed any responsibility for any independent evaluation or
appraisal of such properties and facilities. We have, with your consent, assumed
and relied upon the accuracy and completeness of the financial and other
information used by us in arriving at our opinion and have not attempted
independently to verify, or undertaken any obligation to verify, such
information or been furnished with any independent appraisal or evaluation of
the Company's, Parent's or USF&G's assets or liabilities (other than certain
actuarial reports supplied by the respective managements of the Company and
Parent). We have further relied upon the assurances of the respective
managements of the Company and Parent that they are not aware of any facts that
would make such information inaccurate or misleading with respect to the
financial forecasts of the Company and Parent. In addition, we have assumed that
the forecasts and projections of the Company and Parent provided to us represent
the best current judgment of the Company's and Parent's management as to the
future financial condition and results of operations of the Company and Parent,
respectively, and have assumed that the projections have been reasonably
prepared based on such current judgment, and that the Company and Parent, as
applicable, will perform in accordance with such forecasts and projections. We
assume no responsibility for and express no view as to such forecasts and
projections or the assumptions on which they
B-2
<PAGE>
are based, and we have not reviewed any forecasts or projections with respect to
Parent other than limited forecasts and projections for the years 1997 through
1999.
We are not expressing any opinion as to what the value of the Parent Stock
actually will be when issued to the holders of the Common Stock pursuant to the
Merger or the prices at which such Parent Stock will trade subsequent to the
Merger. We have not been requested to opine as to, and our opinion does not in
any manner address, the Company's underlying business decision to effect the
Merger.
As you are aware, we have acted as a financial advisor to the Company in
connection with the Merger and will receive a fee from the Company for our
services. In addition, Furman Selz LLC acted as an underwriter in the sale of
Common Stock by the Company in November 1995. In the ordinary course of
business, Furman Selz LLC may trade the securities of the Company or Parent for
its own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities.
This opinion is for the information of the Board of Directors of the Company
only in connection with its consideration of the Merger, does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger or any matter related thereto, and is not to be quoted or
referred to, in whole or in part, or disclosed in any document nor shall this
letter be used for any other purpose, without Furman Selz LLC's prior written
consent. We hereby consent, however, to the inclusion of this opinion as an
exhibit to any proxy statement distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the Merger Consideration to be received by
the holders of the Common Stock in the Merger is fair, from a financial point of
view, to such holders.
Very truly yours,
/s/ FURMAN SELZ LLC
------------------------------------
FURMAN SELZ LLC
B-3
<PAGE>
ANNEX C
TEXAS APPRAISAL STATUTE
(TBCA Section Section 5.11 and 5.12)
5.11 RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS.
A. Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided
in the articles of incorporation) of all, or substantially all, the property
and assets, with or without good will, of a corporation if special
authorization of the shareholders is required by this Act and the
shareholders hold shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the shareholder
are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:
(1) the shares held by the shareholder are part of a class or series,
shares of which are on the record dated fixed to determine the shareholders
entitled to vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation system)
or designated as a national market security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or
successor entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger
or plan of exchange to accept for the shareholder's shares any consideration
that is different than the consideration (other than cash in lieu of
fractional shares that the shareholder would otherwise be entitled to
receive) to be provided to any other holder of shares of the same class or
series of shares held by such shareholder; and
(3) the shareholder is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any
consideration other than:
(a) shares of a domestic or foreign corporation that, immediately
after the effective time of the merger or exchange, will be part of a
class or series, shares of which are:
(i) listed, or authorized for listing upon official notice of
issuance, on a national securities exchange; or
(ii) approved for quotation as a national market security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc., or successor entity; or
C-1
<PAGE>
(iii) held of record by not less than 2,000 holders;
(b) cash in lieu of fractional shares otherwise entitled to be
received; or
(c) any combination of the securities and cash described in
Subdivisions (a) and (b) of this subsection.
5.12 PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTION.
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if the
action is effective and giving the shareholder's address, to which notice
thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the surviving
or new corporation (foreign or domestic) or other entity that is liable to
discharge the shareholder's right of dissent, in the case of a merger,
shall, within ten (10) days after the action is effected, deliver or mail to
the shareholder written notice that the action has been effected, deliver or
mail to the shareholder written notice that the action has been effected,
and the shareholder may, within ten (10) days from the delivery of mailing
of the notice, make written demand on the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, for
payment of the fair value of the shareholder's shares. The fair value of the
shares shall be the value thereof as of the day immediately preceding the
meeting, excluding any appreciation or depreciation in anticipation of the
proposed action. The demand shall state the number and class of the shares
owned by the shareholder and the fair value of the shares as estimated by
the shareholder. Any shareholder failing to make demand within the ten (10)
day period shall be bound by the action.
(b) With respect to the proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder of
record as of the effective date of the action notice of the fact and date of
the action and that the shareholder may exercise the shareholder's right to
dissent from the action. The notice shall be accompanied by a copy of this
Article and any articles or documents filed by the corporation with the
Secretary of Sate to effect the action. If the shareholder shall not have
consented to the taking of the action, the shareholder may, within twenty
(20) days after the mailing of the notice, make written demand on the
existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be,
of a demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or
other entity shall deliver or mail to the shareholder a written notice that
shall either set out that the corporation (foreign or domestic) or other
entity accepts the amount claimed in the demand and agrees to pay that
amount within ninety (90) days after the date on which the action was
effected, and,
C-2
<PAGE>
in the case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares,
together with an offer to pay the amount of that estimate within ninety (90)
days after the date on which the action was effected, upon receipt of notice
within sixty (60) days after that date from the shareholder that the
shareholder agrees to accept that amount and, in the case of shares
represented by certificates, upon the surrender of the certificates duly
endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demand
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment
C-3
<PAGE>
of the judgment, the dissenting shareholders shall cease to have any interest in
those shares or in the corporation. The court shall allow the appraisers a
reasonable fee as court costs, and all court costs, shall be allotted between
the parties in the manner that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
C-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION
The Charter of the Registrant provides for indemnification and limitation of
liability of directors and officers of the Registrant as follows:
The Corporation shall indemnify (a) its directors to the full extent
provided by the General Corporation Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the
procedures provided by such laws; (b) its officers to the same extent it
shall indemnify its directors; and (c) its officers who are not
directors to such further extent as shall be authorized by the Board of
Directors and be consistent with law. The foregoing shall not limit the
authority of the Corporation to indemnify other employees and agents
consistent with law.
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of this
Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate
the benefits provided to directors and officers under this provision
with respect to any act or omission which occured prior to such
amendment or repeal.
The Maryland General Corporation Law provides that a corporation may
indemnify any director made a party to a proceeding by reason of service in that
capacity unless it is established that: (1) that act or omission of the director
was material to the matter giving rise to the proceeding and (a) was committed
in bad faith or (b) was the result of active and deliberate dishonesty, or (2)
the director actually received an improper personal benefit in money, property
or services, or (3) in the case of any criminal proceeding, the director had
reasonable cause to believe that the act or omission was unlawful. To the extent
that a director has been successful in defense of any proceeding, the Maryland
General Corporation Law provides that the director shall be indemnified against
reasonable expenses incurred in connection therewith. A Maryland corporation may
indemnify its officers to the same extent as its directors and to such further
extent as is consistent with law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
2.1 Agreement and Plan of Merger among USF&G Corporation, United States
Fidelity and Guaranty Company and Titan Holdings, Inc. dated August 7,
1997, and as amended August 26, 1997. The Registrant agrees to furnish
supplementally a copy of any omitted exhibit or schedule to the
Commission upon request
4.1 Amended and Restated Rights Agreement dated as of March 11, 1997 between
USF&G Corporation and The Bank of New York. Incorporated by reference to
the Registrant's Form 8-K dated March 13, 1997, File No 1-8233
4.2 Indenture dated January 28, 1994 between USF&G Corporation and Chemical
Bank. Incorporated by reference to Exhibit 4E to the Registrant's Form
10-K for the year ended December 31, 1993, File No. 1-8233
4.3 Indenture dated January 28, 1994 between USF&G Corporation and Signet
Bank. Incorporated by reference to Exhibit 4D to the Registrant's Form
10-K for the year ended December 31, 1994. File No. 1-8233.
4.4 Form of Note dated March 3, 1994 for Zero Coupon Convertible Subordinated
Notes due 2009. Incorporated by reference to Exhibit 4 to the
Registrant's Form 8-K dated March 3, 1994. File No. 1-8233.
4.5 Form of Note dated June 30, 1994 for 8 3/8% Senior Notes due 2001.
Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K
dated June 30, 1994, File No. 1-8233.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
4.6 Credit and Reimbursement Agreement dated as of March 29, 1996 among USF&G
Corporation and Morgan Guaranty Trust Company of New York as agent.
Incorporated by reference to Exhibit 4-A to the Registrant's Form 10-Q
for the quarter ended March 31, 1996, File No. 1-8233.
4.7 Credit Agreement dated as of March 29, 1996 among USF&G Corporation and
Deutsche Bank AG, as agent. Incorporated by reference to Exhibit 4B to
the Registrant's Form 10-Q for the quarter ended March 31, 1996, File
No. 1-8233.
4.8 Letter of Credit Agreement dated as of October 25, 1994 among USF&G
Corporation and The Bank of New York, as agent. Incorporation by
reference to Exhibit 4I to the Registrant's Form 10-K for the year ended
December 31, 1994, file No. 1-8233.
4.9 Form of 7% Senior Notes due 1998. Incorporated by reference to Exhibit 4.1
to the Registrant's Form 10-Q for the quarter ended June 30, 1995, File
No. 1-8233.
4.10 Form of 7 1/8% Senior Notes due 2005. Incorporated by reference to Exhibit
4B to the Registrant's Form 10-Q for the quarter ended June 30, 1995,
File No. 1-8233.
4.11 Documents related to USF&G Capital I:
Amended and Restated Trust Agreement dated as of December 24, 1996 among
USF&G Corporation, The Bank of New York, The Bank of New York
(Delaware), the Administrators and the Holders. Incorporated by
reference to Exhibit 4K to the Registrant's Form 10-K for the year ended
December 31, 1996. File No. 1-8233.
Junior Subordinated Indenture dated as of December 24, 1996 between USF&G
Corporation and The Bank of New York. Incorporated by reference to
Exhibit 4K to the Registrant's Form 10-K for the year ended December 31,
1996, File No. 1-8233.
Guarantee Agreement Between USF&G Corporation and The Bank of New York
dated as of December 24, 1996. Incorporated by reference to Exhibit 4K
to the Registrant's Form 10-K for the year ended December 31, 1996. File
No. 1-8233.
Form of Global Certificate Evidencing Capital Securities of USF&G Capital
I. Incorporated by reference to Exhibit 4K to the Registrant's Form 10-K
for the year ended December 31, 1996. File No. 1-8233.
Agreement as to Expenses and Liabilities dated as of December 24, 1996
between USF&G Corporation and USF&G Capital I. Incorporated by reference
to Exhibit 4K to the Registrant's Form 10-K for the year ended December
31, 1996, File No. 1-8233.
USF&G Corporation 8 1/2% Deferrable Interest Junior Subordinated
Debenture. $103,093,000. Incorporated by reference to Exhibit 4K to the
Registrant's Form 10-K for the year ended December 31, 1996. File No.
1-8233.
4.12 Documents related to USFAG Capital II:
Amended and Restated Trust Agreement dated as of January 10,1 997 among
USF&G Corporation, The Bank of New York, The Bank of New York
(Delaware), the Administrators and the Holders. Incorporated by
reference to Exhibit 4L to the Registrant's Form 10-K for the year ended
December 31, 1996. File No. 1-8233.
Indenture dated as of January 10, 1997 between USF&G Corporation and The
Bank of New York. Incorporated by reference to Exhibit 4L to the
Registrant's Form 10-K for the year ended December 31, 1996, File No.
1-8233.
Guarantee Agreement dated as of January 10, 1997 by USF&G Corporation and
The Bank of New York. Incorporated by reference to Exhibit 4L to the
Registrant's Form 10-K for the year ended December 31, 1996. File No.
1-8233
Form of Global Certificate Evidencing Capital Securities f USF&G Capital
II, Incorporated by reference to Exhibit 4L to the Registrant's Form
10-K for the year ended December 31, 1996. File No. 1-8233.
Agreement as to Expenses and Liabilities dated as of January 10, 1997
between USF&G Corporation and USF&G Capital II, Incorporated by
reference to Exhibit 4L to the Registrant's Form 10-K for the year ended
December 31, 1996, File No. 1-8233.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
USF&G Corporation 8.47% Deferrable Interest Junior Subordinated Debenture.
$103,093,000. Incorporated by reference to Exhibit 4L to the
Registrant's Form 10-K for the year ended December 31, 1996. File No.
1-8233.
4.13 Documents related to USF&G Capital III:
Amended and Restated Trust Agreement dated as of July 8, 1997 among USF&G
Corporation, The Bank of New York, The Bank of New York (Delaware), the
Administrators and the Holders. Incorporated by reference to Exhibit 4
to the Registrant's Form 10-Q for the quarter ended June 30, 1997. File
No. 1-8233.
Junior Subordinated Indenture dated as of July 8, 1997 between USF&G
Corporation and The Bank of New York. Incorporated by reference to
Exhibit 4 to the Registrant's Form 10-Q for the quarter ended June 30,
1997. File No. 1-8233.
Guarantee Agreement Between USF&G Corporation and The Bank of New York
dated as of July 8, 1997. Incorporated by reference to Exhibit 4 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997, File No.
1-8233
Form of Global Certificate Evidencing Capital Securities of USF&G Capital
III. Incorporated by reference to Exhibit 4 to the Registrant's Form
10-Q for the quarter ended June 30, 1997, File No. 1-8233.
Agreement as to Expenses and Liabilities dated as of July 8, 1997 between
USF&G Corporation and USF&G Capital III. Incorporated by reference to
Exhibit 4 to the Registrant's Form 10-Q for the quarter ended June 30,
1997. File No. 1-8233.
USF&G Corporation 8 1/2% Deferrable Interest Junior Subordinated
Debenture. $103,093,000. Incorporated by reference to Exhibit 4 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997, File No.
1-8233.
5.1 Opinion of Piper & Marbury L.L.P. regarding the legality of the securities
being registered hereby
8.1 Opinion of Mayer, Brown & Platt regarding certain tax matters
8.2 Opinion of Piper & Marbury L.L.P. regarding certain tax matters
23.1 Consent of Ernst & Young LLP relating to the financial statements of USF&G
23.2 Consent of KPMG Peat Marwick LLP relating to the financial statements of
Titan
23.3 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.1 and Exhibit
8.2)
23.4 Consent of Mayer, Brown & Platt (included in Exhibit 8.1)
24.1 Power of Attorney (included in the signature page to the Registration
Statement)
</TABLE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows (1) To respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in the volume of securities offered (if the
total dollar amount of securities offered would not
<PAGE>
exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution previously disclosed in the registration statement or
any material change to such information in the registration
statement.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of the
offering.
(6) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(7) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(8) Every prospectus: (i) that is filed pursuant to paragraph (7)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(9) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the county of Baltimore, state of
Maryland, on November 17, 1997.
<TABLE>
<S> <C> <C>
USF&G CORPORATION
By: /s/ NORMAN P. BLAKE, JR.
-----------------------------------------
Norman P. Blake, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
The undersigned Officers and Directors of USF&G Corporation, a Maryland
corporation (the "Corporation"), hereby constitute and appoint Norman P. Blake,
Jr., Dan L. Hale and John A. MacColl of Baltimore County, Maryland, and each of
them, the true and lawful agents and attorneys-in-fact of the undersigned with
full power and authority in said agents and attorneys-in-fact, and in any one or
more of them, to sign for the undersigned and in their respective names as
Officers and as Directors of the Corporation, this Registration Statement on
Form S-4 (or any and all amendments, including post-effective amendments, to
such Registration Statement) and file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, and with full power of substitution, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 17, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ ---------------------------------------------
<C> <S>
/s/ NORMAN P. BLAKE, JR.
- ------------------------------ Director, Chairman of the Board, President
Norman P. Blake, Jr. and Chief Executive Officer
/s/ DAN L. HALE
- ------------------------------ Executive Vice President, Chief Financial
Dan L. Hale Officer and Principal Accounting Officer
/s/ H. FURLONG BALDWIN
- ------------------------------ Director
H. Furlong Baldwin
/s/ MICHAEL J. BIRCK
- ------------------------------ Director
Michael J. Birck
/s/ GEORGE L. BUNTING, JR.
- ------------------------------ Director
George L. Bunting, Jr.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ ---------------------------------------------
<C> <S>
/s/ ROBERT E. DAVIS
- ------------------------------ Director
Robert E. Davis
/s/ KENNETH M. DUBERSTEIN
- ------------------------------ Director
Kenneth M. Duberstein
/s/ DALE F. FREY
- ------------------------------ Director
Dale F. Frey
/s/ ROBERT E. GREGORY, JR.
- ------------------------------ Director
Robert E. Gregory, Jr.
/s/ ROBERT J. HURST
- ------------------------------ Director
Robert J. Hurst
/s/ PAUL B. INGREY
- ------------------------------ Director
Paul B. Ingrey
/s/ WILBUR G. LEWELLEN
- ------------------------------ Director
Wilbur G. Lewellen
/s/ LARRY P. SCRIGGINS
- ------------------------------ Director
Larry P. Scriggins
/s/ ANNE MARIE WHITTEMORE
- ------------------------------ Director
Anne Marie Whittemore
/s/ R. JAMES WOOLSEY
- ------------------------------ Director
R. James Woolsey
</TABLE>
<PAGE>
EXHIBIT 2.1
AGREEMENT AND
PLAN OF MERGER
AMONG
USF&G CORPORATION,
UNITED STATES FIDELITY AND GUARANTY COMPANY,
AND
TITAN HOLDINGS, INC.
DATED AS OF AUGUST 7, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I
THE MERGER
1.1 The Merger.......................................................................................... 1
1.2 Closing............................................................................................. 1
1.3 Effective Time...................................................................................... 2
1.4 Effects of the Merger............................................................................... 2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; MERGER CONSIDERATION;
EXCHANGE OF CERTIFICATES; WARRANTS AND OPTIONS
2.1 Effect on Capital Stock............................................................................. 2
2.2 Company Common Stock Elections...................................................................... 4
2.3 Proration........................................................................................... 6
2.4 Tax Adjustment...................................................................................... 7
2.5 Dividends, Fractional Shares, Etc................................................................... 7
2.6 Warrants............................................................................................ 8
2.7 Stock Options....................................................................................... 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company....................................................... 9
3.2 Representations and Warranties of Parent and USF&G.................................................. 32
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of the Company............................................................................ 36
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Form S-4 and Proxy Statement; Shareholder Meeting; Comfort Letters................... 41
5.2 Contract and Regulatory Approvals................................................................... 42
5.3 HSR Filings......................................................................................... 43
5.4 Access to Information; Confidentiality.............................................................. 43
5.5 Fees and Expenses................................................................................... 44
5.6 Indemnification..................................................................................... 44
5.7 Reasonable Best Efforts............................................................................. 46
5.8 Public Announcements................................................................................ 46
5.9 Environmental Studies............................................................................... 46
5.10 Affiliates.......................................................................................... 46
5.11 Support Agreement................................................................................... 46
5.12 Cooperation......................................................................................... 46
5.13 NYSE Listing........................................................................................ 47
5.14 Benefit Plans and Employee Arrangements............................................................. 47
5.15 Tax-Free Reorganization............................................................................. 47
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
5.16 Tri-West............................................................................................ 47
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger.......................................... 47
6.2 Conditions to Obligations of Parent and USF&G....................................................... 48
6.3 Conditions to Obligation of the Company............................................................. 49
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination......................................................................................... 49
7.2 Effect of Termination............................................................................... 50
7.3 Amendment........................................................................................... 50
7.4 Extension; Waiver................................................................................... 51
ARTICLE VIII
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and Agreements........................................... 51
8.2 Notices............................................................................................. 51
8.3 Interpretation...................................................................................... 52
8.4 Counterparts........................................................................................ 52
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership................................. 52
8.6 Governing Law....................................................................................... 52
8.7 Assignment.......................................................................................... 52
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of August 7, 1997 (the
"AGREEMENT"), is made and entered into by and among USF&G Corporation, a
Maryland corporation ("PARENT"), United States Fidelity and Guaranty Company, a
Maryland corporation and a wholly owned subsidiary of Parent ("USF&G"), and
Titan Holdings, Inc., a Texas corporation (the "COMPANY").
WHEREAS, the respective Boards of Directors of the Company, Parent and USF&G
have determined that the merger of the Company with and into USF&G (the
"MERGER"), upon the terms and subject to the conditions set forth in this
Agreement, would be fair to and in the best interests of their respective
shareholders, and such Boards of Directors have approved the Merger, pursuant to
which each share of common stock, par value $0.01 per share, of the Company (the
"COMPANY COMMON STOCK") issued and outstanding immediately prior to the
Effective Time (as defined in Section 1.3) (other than (a) shares of Company
Common Stock owned, directly or indirectly, by the Company, any Subsidiary (as
defined in Section 3.1(c)) of the Company, Parent or USF&G or any Subsidiary of
USF&G or Parent and (b) Dissenting Shares (as defined in Section 2.1(e))) will
be converted into, subject to the terms hereof, the right to receive the Merger
Consideration (as defined in Section 2.1(c));
WHEREAS, the Merger requires, for the approval thereof, the affirmative vote
of two-thirds of each of (a) the outstanding shares of the Company Common Stock
(the "Company Shareholder Approval") and (b) the outstanding shares of USF&G's
common stock, par value $2.50 per share (the "USF&G COMMON STOCK");
WHEREAS, Parent and USF&G are unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, Mark E.
Watson, Jr., in his capacity as a shareholder of the Company, enters into a
voting and support agreement with Parent and USF&G, the form of which is
attached hereto as Exhibit A (the "SUPPORT AGREEMENT");
WHEREAS, Parent, USF&G and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, it is intended that the Merger constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "CODE"), and that this Agreement shall constitute a "plan of
reorganization" for purposes of the Code.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the Texas Business Corporation Act
("TBCA") and the Maryland General Corporation Law ("MGCL"), the Company
shall be merged with and into USF&G at the Effective Time. At the Effective
Time, the separate corporate existence of the Company shall cease and USF&G
shall continue as the surviving corporation (USF&G and the Company are
sometimes hereinafter referred to as "CONSTITUENT CORPORATIONS" and, as the
context requires, USF&G is sometimes hereinafter referred to as the
"SURVIVING CORPORATION"). The name of the Surviving Corporation shall be
United States Fidelity and Guaranty Company.
1.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "CLOSING") shall take
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place at 10:00 a.m., Chicago, Illinois time, on the second business day
after satisfaction and/or waiver of all of the conditions set forth in
Article VI (the "CLOSING DATE"), at the offices of Mayer, Brown & Platt, 190
South LaSalle Street, Chicago, Illinois 60603, unless another date, time or
place is agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME. Subject to the provisions of this Agreement, the
parties hereto shall cause the Merger to be consummated by filing articles
of merger (the "ARTICLES OF MERGER") with the Secretary of State of the
State of Texas, as provided in the TBCA, and the Maryland State Department
of Assessments and Taxation, as provided in the MGCL, as soon as practicable
on or after the Closing Date. The Merger shall become effective upon the
acceptance for record of such filings or at such time thereafter as is
provided in the Articles of Merger (the "EFFECTIVE TIME").
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects as set
forth in the applicable provisions of the TBCA and MGCL.
(a) The Articles of Incorporation of USF&G shall be the Articles of
Incorporation of the Surviving Corporation until duly amended in
accordance with the terms thereof and the MGCL.
(b) The Bylaws of USF&G (the "USF&G BYLAWS") shall be the Bylaws of
the Surviving Corporation until thereafter amended as provided by
applicable law, the Surviving Corporation's Articles of Incorporation or
the Bylaws.
(c) The directors of USF&G immediately prior to the Effective Time
shall be the directors of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
(d) The officers of USF&G at the Effective Time shall, from and after
the Effective Time, be the officers of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; MERGER CONSIDERATION;
EXCHANGE OF CERTIFICATES; WARRANTS AND OPTIONS
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any further action on the part of the holder of any
shares of Company Common Stock or the holder of any shares of USF&G Common
Stock:
(a) CAPITAL STOCK OF USF&G. Each share of USF&G Common Stock issued
and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of
common stock, par value $2.50 per share of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND COMPANY COMMON STOCK OWNED BY
USF&G OR PARENT. Each share of Company Common Stock that is owned by the
Company, any Subsidiary of the Company, Parent or USF&G or any Subsidiary
of Parent or USF&G shall automatically be canceled and retired and shall
cease to exist, and no stock of Parent or other consideration shall be
delivered or deliverable in exchange therefor.
(c) MERGER CONSIDERATION. Subject to Sections 2.1(b) and (e) and
Section 2.3, at the Effective Time each issued and outstanding share of
Company Common Stock shall be converted
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into, at the election of the holder thereof, one of the following (as
adjusted pursuant to this Article II), (the "Merger Consideration"):
(i) for each such share of Company Common Stock (other than shares as to
which a Stock Election or Cash Election (each as defined below) has
been made), the right to receive (x) 0.46516 (the "STANDARD EXCHANGE
RATIO") of a share of the Common Stock, $2.50 par value per share
(including the associated Parent Rights (as defined below), "PARENT
COMMON STOCK"), of Parent (the "Standard Stock Consideration") and
(y) an amount in cash, without interest, equal to $11.60 (the
"STANDARD CASH CONSIDERATION" and, together with the Standard Stock
Consideration, the "STANDARD CONSIDERATION"); provided, however,
that
(1) in the event the Average Stock Price is greater or less than
$24.94 but not greater than $28.68 or less than $21.20, the
allocation of the consideration between stock and cash will be
adjusted to maintain a 50% stock, 50% cash relationship by
adjusting the Standard Cash Consideration to an amount equal to
0.50 times the product of (a) $23.20 times (b) 1 plus the product
of (i) 0.50 times (ii) a fraction the numerator of which is the
Average Stock Price minus $24.94 and the denominator of which is
$24.94 and adjusting the Standard Exchange Ratio to an amount
equal to the quotient obtained by dividing the Standard Cash
Consideration as so adjusted by the Average Stock Price; and
(2) in the event the Average Stock Price is greater than $28.68, the
Standard Cash Consideration shall be an amount equal to $12.47
and the Standard Exchange Ratio shall be equal to the quotient
obtained by dividing $12.47 by the Average Stock Price; and
(3) in the event the Average Stock Price is less than $21.20, the
Standard Cash Consideration shall be an amount equal to $10.73
and the Standard Exchange Ratio shall be equal to the quotient
obtained by dividing $10.73 by the Average Stock Price.
(ii) for each such share of Company Common Stock with respect to which
an election to receive solely Parent Common Stock has been
effectively made and not revoked or lost pursuant to Sections
2.2(c), (d) or (e), the right to receive 2.0 times the Standard
Exchange Ratio as determined by (c)(i) above (the "STOCK EXCHANGE
RATIO") of a share of Parent Common Stock (the "STOCK
CONSIDERATION"); or
(iii) for each such share of Company Common Stock with respect to which
an election to receive solely cash has been effectively made and
not revoked or lost pursuant to Section 2.2(c), (d) or (e), the
right to receive in cash, without interest, in an amount equal to
2.0 times the Standard Cash Consideration as determined pursuant to
(i) above (the "CASH CONSIDERATION"); provided, however, that (1)
in the event the Average Stock Price is less than $21.20, the Cash
Consideration shall be equal to $21.46 and (2) in the event the
Average Stock Price is more than $28.68, the Cash Consideration
shall be equal to $24.94.
"AVERAGE STOCK PRICE" means the average of the Closing Market Prices (as
hereinafter defined) for the ten consecutive trading days ending on the third
trading day prior to the Effective Time; PROVIDED, HOWEVER, that the Average
Stock Price used for purposes of the calculations in this Article II shall not
in any event be less than $17.46. The "CLOSING MARKET PRICES" for any trading
day means the closing sales price of Parent Common Stock as reported in the New
York Stock Exchange Composite Tape for that day.
(d) CANCELLATION AND RETIREMENT OF COMPANY COMMON STOCK. As a
result of the Merger and without any action on the part of the holder
thereof, at the Effective Time and except as provided in Sections 2.1(b)
and (e), all shares of Company Common Stock shall cease to be outstanding
and shall be canceled and retired and shall cease to exist, and each
holder of such shares of Company Common Stock shall thereafter cease to
have any rights with respect to such
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shares of Company Common Stock, except the right to receive, without
interest, the Merger Consideration and cash for fractional shares of
Parent Common Stock in accordance with Section 2.5(c) upon the surrender
of a certificate representing such shares of Company Common Stock (a
"COMPANY CERTIFICATE").
(e) DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, holders of Company Common Stock that have, as of the
Effective Time, complied with all procedures necessary to assert
appraisal rights in accordance with the TBCA, if applicable, shall have
such rights, if any, as they may have pursuant to Section 5.12 of the
TBCA and such Company Common Stock shall not be converted or be
exchangeable as provided in this Section 2.1, but such holders shall be
entitled to receive such payment as may be determined to be due to such
holders pursuant to the TBCA; PROVIDED, HOWEVER, that if such holder
shall have failed to perfect or shall have effectively withdrawn or lost
his right to appraisal and payment under the TBCA, such holder's Company
Common Stock shall thereupon be deemed to have been converted and to have
become exchangeable, as of the Effective Time, into the Standard
Consideration. The Company Common Stock described in this Section 2.1(e)
held by holders who exercise and perfect appraisal rights are referred to
herein as "DISSENTING SHARES." The Company shall give Parent prompt
notice of any demands for appraisal of shares received by the Company
(and shall also give Parent prompt notice of any withdrawals of such
demands for appraisal rights) and Parent shall have the opportunity and
right to participate in and direct all negotiations with respect to such
demands. The Company shall not, except with the prior written consent of
Parent, make any payment with respect to, settle or otherwise negotiate
or offer to settle any such demand for appraisal rights. Parent agrees
that it shall make all payments with respect to appraisal rights and that
the funds therefor shall not come, directly or indirectly, from the
Company.
2.2 COMPANY COMMON STOCK ELECTIONS
(a) ELECTIONS. Each person who, at the Effective Time, is a record
holder of shares of Company Common Stock (other than holders of shares of
Company Common Stock to be canceled as set forth in Section 2.1(b) or of
Dissenting Shares) shall have the right to submit an Election Form (as
defined in Section 2.2(c)) specifying that such person desires to have
all of the shares of Company Common Stock owned by such person converted
into the right to receive either (i) the Standard Consideration (a
"STANDARD ELECTION") (ii) the Stock Consideration (a "STOCK ELECTION"),
or (iii) the Cash Consideration (a "CASH ELECTION").
(b) DEPOSIT OF EXCHANGE FUND. Promptly after the Allocation
Determination (as defined in Section 2.2(d)), Parent shall deposit (or
cause to be deposited) with a bank or trust company to be designated by
Parent and reasonably acceptable to the Company (the "EXCHANGE AGENT"),
for the benefit of the holders of shares of Company Common Stock, for
exchange in accordance with this Article II, (i) cash in an amount
sufficient to pay the aggregate cash portion of the Merger Consideration
in accordance with this Article II and (ii) certificates representing
shares of Parent Common Stock ("PARENT CERTIFICATES") for exchange in
accordance with this Article II (the cash and certificates deposited
pursuant to clauses (i) and (ii) being hereinafter referred to as the
"EXCHANGE FUND").
(c) METHOD OF ELECTION; DEEMED STANDARD ELECTION. As soon as
reasonably practicable after the Effective Time, the Exchange Agent shall
mail to each holder of record of Company Common Stock immediately prior
to the Effective Time (excluding any shares of Company Common Stock which
(i) are canceled pursuant to Section 2.1(b), or (ii) are Dissenting
Shares) (A) a letter of transmittal (the "COMPANY LETTER OF TRANSMITTAL")
(which shall specify that delivery shall be effected, and risk of loss
and title to the Company Certificates shall pass, only upon delivery of
such Company Certificates to the Exchange Agent and shall be in such form
and have
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such other provisions as Parent shall specify), (B) instructions for use
in effecting the surrender of the Company Certificates in exchange for
the Merger Consideration with respect to the shares of Company Common
Stock formerly represented thereby, and (C) an election form (the
"ELECTION FORM") providing for such holders to make the Standard
Election, the Cash Election or the Stock Election. As of the Election
Deadline (as defined in Section 2.2(d)) all holders of Company Common
Stock immediately prior to the Effective Time (excluding any shares of
Company Common Stock that (i) are canceled pursuant to Section 2.1(b) or
(ii) are Dissenting Shares) that shall not have properly submitted to the
Exchange Agent, or that shall have properly revoked, an effective and
properly completed Election Form shall be deemed to have made a Standard
Election (each a "DEEMED STANDARD ELECTION").
(d) ELECTION DEADLINE. Any Cash Election, Standard Election, or
Stock Election shall have been validly made only if the Exchange Agent
shall have received by 5:00 p.m. New York City time on a date (the
"ELECTION DEADLINE") to be mutually agreed upon by Parent and the Company
(which date shall not be later than the twentieth business day after the
Effective Time), an Election Form properly completed and executed (with
the signature or signatures thereof guaranteed to the extent required by
the Election Form) by such holder accompanied by such holder's Company
Certificates, or by an appropriate guarantee of delivery of such Company
Certificates from a member of any registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company in the United States as set forth in
such Election Form. Any holder of Company Common Stock that has made an
election by submitting an Election Form to the Exchange Agent may at any
time prior to the Election Deadline change such holder's election by
submitting a revised Election Form, properly completed and signed that is
received by the Exchange Agent prior to the Election Deadline. Any holder
of Company Common Stock may at any time prior to the Election Deadline
revoke such holder's election and withdraw such holder's Company
Certificate deposited with the Exchange Agent by written notice to the
Exchange Agent received by the close of business on the day prior to the
Election Deadline. As soon as practicable after the Election Deadline
(but in no event later than ten business days after the Election
Deadline), the Exchange Agent shall determine the allocation of the cash
portion and stock portion of the Merger Consideration and shall notify
Parent of its determined allocation (the "ALLOCATION DETERMINATION").
(e) NO FURTHER OWNERSHIP RIGHTS IN COMPANY. From and after the
Effective Time, each holder of a certificate that immediately prior to
the Effective Time represented outstanding shares of Company Common
Stock, shall, upon surrender of such certificate for cancellation to the
Exchange Agent, together with the Company Letter of Transmittal, duly
executed, and such other documents as Parent or the Exchange Agent shall
reasonably request, be entitled to receive promptly after the Election
Deadline in exchange therefor (A) a check in the amount equal to the
cash, if any, which such holder has the right to receive pursuant to the
provisions of this Article II (including any cash in lieu of fractional
shares of Parent Common Stock), and (B) a Parent Certificate representing
that number of shares of Parent Common Stock, if any, which such holder
has the right to receive pursuant to this Article II (in each case less
the amount of any required withholding taxes), and the Company
Certificate so surrendered shall forthwith be canceled. Until surrendered
as contemplated by this Section 2.2(e), each Company Certificate shall be
deemed at any time after the Effective Time to represent only the right
to receive the Merger Consideration with respect to the shares of Company
Common Stock formerly represented thereby. If any certificate for shares
of Parent Common Stock to be issued in the Merger is to be issued in a
name other than that in which the certificate for shares of Company
Common Stock surrendered in exchange therefor is registered, it shall be
a condition of such issuance that the person requesting such issuance
shall pay any transfer or other tax required by reason of the issuance of
certificates for such shares of Parent Common Stock in a name other than
that of the
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registered holder of the certificate surrendered, or shall establish to
the satisfaction of Parent or its agent that such tax has been paid or is
not applicable.
(f) RULES GOVERNING ELECTIONS. Parent shall have the right to make
rules, not inconsistent with the terms of this Agreement, governing the
validity of the Election Forms, the manner and extent to which Standard
Elections, Cash Elections or Stock Elections are to be taken into account
in making the determinations prescribed by Section 2.3, the issuance and
delivery of certificates for Parent Common Stock into which shares of
Company Common Stock are converted in the Merger, and the payment of cash
for shares of Company Common Stock converted into the right to receive
cash in the Merger.
2.3 PRORATION.
(a) As is more fully set forth below, the maximum number of shares of
Parent Common Stock issuable to holders of Company Common Stock (the
"MAXIMUM NUMBER OF PARENT SHARES") shall not exceed the product of (x)
the Standard Exchange Ratio and (y) the number of Outstanding Company
Shares (as defined below).
(b) As is more fully set forth below, the aggregate amount of cash to
be paid to holders of Outstanding Company Shares (as defined below) (the
"Maximum Cash Amount") shall not exceed the product of (x) the Standard
Cash Consideration and (y) the number of Outstanding Company Shares.
"OUTSTANDING COMPANY SHARES" shall mean those shares of Company Common
Stock outstanding immediately prior to the Effective Time.
(c) In the event that the aggregate number of shares of Parent Common
Stock issuable pursuant to the Stock Elections received by the Exchange
Agent exceeds an amount equal to the Maximum Number of Parent Shares
minus the number of shares of Parent Common Stock issuable pursuant to
Standard Elections and Deemed Standard Elections, including any
fractional shares of Parent Common Stock for which a cash adjustment
shall be paid pursuant to Section 2.5(c) (such difference, the "REMAINING
PARENT SHARES"), each holder making a Stock Election shall receive, for
each share of Company Common Stock held by such holder, (x) a number of
shares of Parent Common Stock equal to the quotient obtained by dividing
(i) the Remaining Parent Shares by (ii) the aggregate number of shares of
Company Common Stock held by holders making Stock Elections (the "STOCK
ELECTION COMPANY SHARES"), plus (y) cash in an amount equal to the
quotient obtained by dividing (iii) the Remaining Stock Election Cash
Amount (as defined below) by (iv) the Stock Election Company Shares. The
"REMAINING STOCK ELECTION CASH AMOUNT" shall be equal to the Maximum Cash
Amount minus the sum of (i) the aggregate amount of cash payable pursuant
to, or with respect to, Standard Elections, Deemed Standard Elections,
Cash Elections, Dissenting Shares and fractional shares and (ii) the
aggregate amount of consideration transferred by Parent in acquiring the
Parent Shares (as defined below). "PARENT SHARES" means any and all
shares of Company Common Stock that are (i) owned by Parent or USF&G and
(ii) canceled and retired at the Effective Time pursuant to Section
2.1(b). For purposes of this paragraph and the following paragraph, the
aggregate amount of cash payable with respect to Dissenting Shares shall
be deemed to be the product of (x) the number of Dissenting Shares times
(y) the sum of (i) the Standard Cash Consideration and (ii) the product
of the Standard Exchange Ratio times the Average Stock Price.
(d) In the event that the aggregate amount of cash payable pursuant
to Cash Elections received by the Exchange Agent exceeds the Maximum Cash
Amount minus the sum of (i) the aggregate amount of cash payable pursuant
to Standard Elections and Deemed Standard Elections, (ii) the aggregate
amount of cash payable with respect to the Dissenting Shares and
fractional shares and (iii) the aggregate amount of consideration
transferred by Parent in acquiring the Parent Shares (such difference,
the "REMAINING CASH"), each holder making a Cash Election shall receive,
for each share of Company Common Stock held by such holder, (x) cash in
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an amount equal to the quotient obtained by dividing the (i) Remaining
Cash by (ii) the aggregate number of shares of Company Common Stock held
by holders making Cash Elections (the "CASH ELECTION COMPANY SHARES"),
plus (y) a number of shares of Parent Common Stock equal to the quotient
obtained by dividing (iii) the Remaining Cash Election Parent Shares (as
defined below) by (iv) the Cash Election Company Shares. The "REMAINING
CASH ELECTION PARENT SHARES" shall be the Maximum Number of Parent Shares
minus the number of shares of Parent Common Stock issuable pursuant to
Standard Elections, Deemed Standard Elections and Stock Elections
(including any fractional shares of Parent Common Stock for which a cash
adjustment shall be paid pursuant to Section 2.5(c) in respect of such
Standard Elections, Deemed Standard Elections and Stock Elections).
2.4 TAX ADJUSTMENT.
In the event that the Closing Stock Price (as defined below) is less
than the Average Stock Price such that the allocation of the consideration
between stock and cash based on the Closing Stock Price is not 50% stock and
50% cash, appropriate adjustment will be made, as determined by Parent and
the Company upon advice of counsel, to the extent if any, as may be required
to cause the Merger Consideration allocation between cash and stock to
satisfy the continuity of interest requirements for purposes of causing the
transaction to qualify as a tax-free reorganization, provided that the total
value of the Merger Consideration to be delivered by Parent, based upon the
Average Stock Price, shall not increase. For purposes of this Section 2.4,
the "CLOSING STOCK PRICE" shall mean the mean between the highest and lowest
quoted selling prices of the Parent Common Stock as reported on the New York
Stock Exchange Composite Tape on the day of the Effective Time of the
Merger. In the event that an adjustment is made under this Section 2.4, any
adjustments necessary or appropriate to reflect such adjustment shall be
made to the other provisions of this Article II.
2.5 DIVIDENDS, FRACTIONAL SHARES, ETC.
(a) DIVIDENDS ON PARENT COMMON STOCK. Notwithstanding any other
provisions of this Agreement, no dividends or other distributions
declared after the Effective Time on Parent Common Stock shall be paid
with respect to any shares of Company Common Stock represented by a
Company Certificate, until such Company Certificate is surrendered for
exchange as provided herein. Subject to the effect of applicable laws,
following surrender of any such Company Certificate, there shall be paid
to the holder of Parent Certificates issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Parent Common
Stock and not paid, less the amount of any withholding taxes that may be
required thereon, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective
Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of Parent Common Stock, less
the amount of any withholding taxes that may be required thereon.
(b) NO TRANSFERS; CLOSING OF STOCK TRANSFER BOOK. At or after the
Effective Time, there shall be no transfer on the stock transfer books of
the Company of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
certificates representing any such shares are presented to the Surviving
Corporation, they shall be canceled and exchanged for the Merger
Consideration, if any, deliverable in respect thereof pursuant to this
Agreement.
(c) NO FRACTIONAL SHARES. No fractional shares of Parent Common
Stock shall be issued pursuant to the Merger. In lieu of the issuance of
any fractional share of Parent Common Stock pursuant to the Merger, cash
adjustments shall be paid to holders in respect of any fractional share
of Parent Common Stock that would otherwise be issuable, and the amount
of such cash adjustment shall be equal to the product of such fractional
amount and the Average Stock Price.
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(d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any shares of
Parent Common Stock) that remains unclaimed by the former stockholders of
the Company two years after the Effective Time shall be delivered to
Parent. Any former stockholder of the Company who has not theretofore
complied with this Article II shall thereafter look only to the Surviving
Corporation and Parent for payment of the applicable Merger
Consideration, cash in lieu of fractional shares and unpaid dividends and
distributions on Parent Common Stock deliverable in respect of each share
of Company Common Stock such stockholder holds as determined pursuant to
this Agreement, in each case without any interest thereon.
(e) None of Parent, the Company, USF&G, the Surviving Corporation,
the Exchange Agent or any other person shall be liable to any former
holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to applicable or unclaimed
property, escheat or similar laws.
(f) In the event that any Company Certificate shall have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the
person claiming such Company Certificate to be lost, stolen or destroyed
and, if required by Parent, the posting by such person of a bond in such
reasonable amount as Parent may direct as indemnity against any claim
that may be made against it with respect to such Company Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Company Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of
Parent Common Stock, as provided in this Section 2.5, deliverable in
respect thereof pursuant to this Agreement.
(g) In the event of any change in Parent Common Stock between the
date of this Agreement and the Effective Time by reason of any stock
split, stock dividend, subdivision, reclassification, combination,
exchange of Parent Common Stock or the like, the Merger Consideration and
other terms set forth in this Agreement shall be appropriately adjusted.
(h) The pricing terms set forth herein are based on the information
disclosed in Section 3.1(b) hereof. If the number of such shares and
share equivalents outstanding is greater than the foregoing, the Merger
Consideration shall be appropriately adjusted.
2.6 WARRANTS. The Company shall use its reasonable best efforts to
cause holders of all then outstanding warrants to purchase Company Common
Stock (each a "COMPANY WARRANT") whether or not then exercisable in whole or
in part, to agree to surrender and receive, in exchange for cancellation and
in settlement thereof a number of shares of Parent Common Stock for each
share of Company Common Stock subject to such Company Warrant (subject to
any applicable withholding tax) equal to the quotient of (i) the product of
(1) the number of shares of Company Common Stock which the holder would be
entitled to receive if such Company Warrant were exercised in full
immediately prior to the Effective Time MULTIPLIED BY (2) the difference
between (x) the Cash Consideration and (y) the exercise price of such share
of Company Common Stock under the Company Warrant, to the extent such amount
is a positive number DIVIDED BY (ii) the Average Closing Price (such amount
being hereinafter referred to as the "WARRANT CONSIDERATION"); PROVIDED,
HOWEVER, that with respect to any person subject to Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), any such
amount shall be paid as soon as practicable after the first date payment can
be made without liability to such person under Section 16(b) of the Exchange
Act. Upon receipt of the Warrant Consideration, the Company Warrant shall be
canceled. The surrender of a Company Warrant to the Company in exchange for
the Warrant Consideration shall be deemed a release of any and all rights
the holder had or may have had in respect of such Company Warrant. With
respect to the Company Warrants that are not surrendered prior to the
Effective Time, after the Effective Time, the Surviving Corporation shall
comply with all applicable terms of such unsurrendered Company Warrants.
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2.7 STOCK OPTIONS. Each stock option issued and outstanding under the
1993 Stock Option Plan, as amended, of the Company (the "STOCK OPTION PLAN")
is referred to herein as an "EMPLOYEE/ DIRECTOR STOCK OPTION" and all such
options are referred to herein, collectively, as the "EMPLOYEE/ DIRECTOR
STOCK OPTIONS." Each stock option issued and outstanding under the 1993
Directors' Stock Option Plan (the "DIRECTORS' STOCK OPTION PLAN") is
referred to herein as a "DIRECTOR'S OPTION" and all such options are
referred to herein, collectively, as the "DIRECTORS' OPTIONS." The
Employee/Director Stock Options and the Directors' Options are referred to
herein, collectively, as the "COMPANY OPTIONS" and, individually, as a
"COMPANY OPTION." At the Effective Time, each Company Option shall become
immediately fully vested and shall be converted into an option to purchase
shares of Parent Common Stock, as provided below. Following the Effective
Time, each such Company Option shall be exercisable upon the same terms and
conditions as then are applicable to such Company Option, except that (i)
each such Company Option shall be exercisable for that number of shares of
Parent Common Stock equal to the product of (x) the number of shares of
Company Common Stock for which such Company Option was exercisable
immediately prior to the Effective Date and (y) the Stock Exchange Ratio and
(ii) the exercise price of such option shall be equal to the quotient
obtained by dividing the exercise price per share of such Company Option by
the Stock Exchange Ratio. From and after the date of this Agreement, no
additional options to purchase shares of Company Common Stock shall be
granted under the Company Stock Option Plan, Directors' Stock Option Plan or
otherwise. Except as otherwise agreed to by the parties, no person shall
have any right under any stock option plan (or any option granted
thereunder) or other plan, program or arrangement of the Company with
respect to, including any right to acquire, equity securities of the Company
following the Effective Time. At or as soon as practicable after the
Effective Time, Parent shall issue to each holder of a Company Option that
is canceled an agreement that accurately reflects the terms of the Parent
Option substituted therefore as contemplated by this Section 2.7. Parent
shall (i) take all corporate actions necessary to reserve for issuance such
number of shares of Parent Common Stock as will be necessary to satisfy
exercises in full of all Parent Options after the Effective Time, (ii) use
its reasonable best efforts to ensure that an effective Registration
Statement on Form S-8 is on file with the Securities and Exchange Commission
(the "SEC") with respect to such Parent Common Stock, and (iii) use its
reasonable best efforts to have such shares admitted to trading upon
exercises of Parent Options.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as disclosed
in (i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, (ii) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997, or (iii) the disclosure memorandum (the
"DISCLOSURE MEMORANDUM") delivered at or prior to the date of this Agreement
(it being understood that each section of the Disclosure Memorandum shall
list all items applicable to such section, although the inadvertent omission
of an item from one section shall not be a breach of this Agreement if such
item and an explanation of the nature of such item is clearly disclosed in
another section of the Disclosure Memorandum) the Company represents and
warrants to Parent and USF&G as follows:
(a) ORGANIZATION, STANDING AND POWER. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it is incorporated, has all requisite corporate
power and authority to own, lease and operate its properties and to carry
on its business as now being conducted and is duly qualified or licensed
to do business as a foreign corporation and in good standing to conduct
business in each jurisdiction in which the business it is conducting, or
the operation, ownership or leasing of its properties, makes such
qualification or license necessary, other than such jurisdictions where
the failure so to qualify or become so licensed would not individually or
in the aggregate adversely affect the Company and
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its Subsidiaries taken as a whole in any material respect. The Company
has heretofore made available to Parent complete and correct copies of
its Amended and Restated Articles of Incorporation, as currently in
effect as of the date of this Agreement (the "COMPANY ARTICLES OF
INCORPORATION"), and the Bylaws. As used in this Agreement, a "MATERIAL
ADVERSE EFFECT" shall mean, with respect to any specified party to this
Agreement, any event, change, condition, fact or effect which has or
could reasonably be expected to have a material adverse effect on (i) the
business, results of operations, or financial condition of such party and
its Subsidiaries taken as a whole or (ii) the ability of such party to
consummate the transactions contemplated by this Agreement.
(b) CAPITAL STRUCTURE. As of the date of this Agreement, the
authorized capital stock of the Company consists of 45,000,000 shares,
divided into the following: (i) 5,000,000 shares of preferred stock, par
value $0.01 per share (the "COMPANY PREFERRED STOCK"); and (ii)
40,000,000 shares of Company Common Stock. At the close of business on
August 1, 1997: (i) 10,101,915 shares of Company Common Stock were issued
and outstanding, 27,825 of which are restricted shares; (ii) 815,902
shares of Company Common Stock were reserved for issuance in connection
with the Stock Option Plan; (iii) 122,457 shares of Company Common Stock
were reserved for issuance in connection with the Directors' Stock Option
Plan; (iv) 491,222 shares of Company Common Stock were reserved for
issuance upon exercise of outstanding Company Warrants; (v) no shares of
Company Common Stock were held in treasury; (vi) no shares of Company
Preferred Stock were issued and outstanding or held by the Company or any
Subsidiary of the Company; and (vii) no bonds, debentures, notes or other
instruments or evidence of indebtedness having the right to vote (or
convertible into, or exercisable or exchangeable for securities having
the right to vote) on any matters on which the Company shareholders may
vote ("COMPANY VOTING DEBT") were issued or outstanding. All outstanding
shares of Company Common Stock are validly issued, fully paid and
nonassessable and are not subject to preemptive or other similar rights.
Except as set forth in Section 3.1(b) of the Disclosure Memorandum, there
are outstanding: (i) no securities of the Company convertible into or
exchangeable or exercisable for shares of capital stock, Company Voting
Debt or other voting securities of the Company; and (ii) no stock awards,
options, warrants, calls, rights (including stock purchase or preemptive
rights), commitments or agreements to which the Company is a party or by
which it is bound, in any case obligating the Company to issue, deliver,
sell, purchase, redeem or acquire, or cause to be issued, delivered,
sold, purchased, redeemed or acquired, additional shares of its capital
stock, any Company Voting Debt or other voting securities or securities
convertible into or exchangeable or exercisable for voting securities of
the Company, or obligating the Company to grant, extend or enter into any
such option, warrant, call, right, commitment or agreement. Except as set
forth in Section 3.1(b) of the Disclosure Memorandum, since December 31,
1996, the Company has not (i) granted any options, warrants or rights to
purchase shares of Company Common Stock or (ii) amended or repriced, as
applicable, any Company Option, any Company Warrant, the Stock Option
Plan or the Directors' Stock Option Plan. Section 3.1(b) of the
Disclosure Memorandum sets forth the following information with respect
to each Company Option and Company Warrant outstanding on the date of
this Agreement: (A) the name of the optionee or warrantholder, (B) the
number of shares of Company Common Stock subject to such Company Option
or Company Warrant, and (C) the exercise price of such Company Option or
Company Warrant. None of the Company Options are "incentive stock
options" (within the meaning of Section 422 of the Code). There are not
as of the date of this Agreement and there will not be on the date of the
Shareholders' Meeting any shareholder agreements, voting trusts or other
agreements or understandings to which the Company is a party or by which
it is bound relating to the voting of any shares of the capital stock of
the Company which will limit in any way the solicitation of proxies by or
on behalf of the Company from, or the casting of votes by, the
shareholders of the Company with respect to the Merger. True and correct
copies of all agreements relating to the
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Company Warrants and the Company Options and the issuance of any
restricted stock have previously been provided or made available to
Parent.
(c) SUBSIDIARIES; INVESTMENTS. Section 3.1(c) of the Disclosure
Memorandum sets forth the name of each Subsidiary of the Company, the
jurisdiction of its incorporation or organization and whether it is an
insurance company. Each Subsidiary is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has the power and authority and all
necessary government approvals to own, lease and operate its properties
and to carry on its business as now being conducted. Each Subsidiary of
the Company is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary. The Company has heretofore made
available to USF&G complete and correct copies of the articles of
incorporation (or other organizational documents) and bylaws of each of
its Subsidiaries. Section 3.1(c) of the Disclosure Memorandum sets forth,
as to each Subsidiary of the Company, its authorized capital stock and
the number of issued and outstanding shares of capital stock (or similar
information with respect to any Subsidiary not organized as a corporate
entity). All outstanding shares of the capital stock of the Subsidiaries
of the Company are validly issued, fully paid and nonassessable and are
not subject to preemptive or other similar rights; neither the Company
nor any Subsidiary of the Company has any call obligations or similar
liabilities with respect to partnerships or other Subsidiaries not
organized as corporate entities. Except as set forth in Section 3.1(c) of
the Disclosure Memorandum, the Company is, directly or indirectly, the
record and beneficial owner of all of the outstanding shares of capital
stock (or other interests, with respect to Subsidiaries not organized as
corporate entities) of each of its Subsidiaries free and clear of all
Liens and other restrictions with respect to the transferability or
assignability thereof (other than restrictions on transfer imposed by
federal or state securities laws) and no capital stock (or other
interests, with respect to Subsidiaries not organized as corporate
entities) of any of its Subsidiaries is or may become required to be
issued by reason of any options, warrants, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable or exercisable for, shares of
capital stock (or other interests, with respect to Subsidiaries not
organized as corporate entities) of any of its Subsidiaries and there are
no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may be bound to issue, redeem,
purchase or sell shares of Subsidiary capital stock (or other interests,
with respect to Subsidiaries not organized as corporate entities) or
securities convertible into or exchangeable or exercisable for any such
shares or interests. Except for the ownership interests set forth in
Section 3.1(c) of the Disclosure Memorandum, neither the Company nor any
of its Subsidiaries owns, directly or indirectly, any capital stock or
other ownership interest in any corporation, partnership, business
association, joint venture or other entity, except for portfolio
investments made in the ordinary course of business. As used in this
Agreement, the word "SUBSIDIARY," with respect to any party to this
Agreement, means any corporation, partnership, joint venture or other
organization, whether incorporated or unincorporated, of which: (i) such
party or any other Subsidiary of such party is a general partner; (ii)
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation,
partnership, joint venture or other organization is held by such party or
by any one or more of its Subsidiaries, or by such party and any one or
more of its Subsidiaries; or (iii) at least 10% of the equity, other
securities or other interests is, directly or indirectly, owned or
controlled by such party or by any one or more of its Subsidiaries or by
such party and any one or more of its Subsidiaries.
(d) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) The Company has all requisite corporate power and authority to
enter into this Agreement and, subject to the Company
Shareholder Approval, to consummate the
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transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject, in the
case of the Merger, to the Company Shareholder Approval. This
Agreement has been duly executed and delivered by the Company
and, subject, in the case of the Merger, to the Company
Shareholder Approval, and assuming that this Agreement
constitutes the valid and binding agreement of Parent and USF&G,
constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms and conditions except
that the enforcement hereof may be limited by (A) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally and (B) general
principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity) and (C) any
ruling or action of any Governmental Entity as set forth in
Section 3.1(d)(iii).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by the
Company will not conflict with, or result in any violation of,
or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or
acceleration (including pursuant to any put right) of any
obligation or the loss of a material benefit under, or the
creation of a Lien on assets or property, or right of first
refusal with respect to any asset or property or change any
other rights, benefits, liabilities or obligations (any such
conflict, violation, default, right of termination,
cancellation or acceleration, loss, creation or right of first
refusal, or change, a "VIOLATION"), pursuant to, (A) any
provision of the Articles of Incorporation or Bylaws of the
Company or the comparable documents of any of its Subsidiaries
or (B) except as to which requisite waivers or consents have
been obtained and specifically identified in Section 3.1(d) of
the Disclosure Memorandum and assuming the consents, approvals,
authorizations or permits and filings or notifications referred
to in paragraph (iii) of this Section 3.1(d) are duly and
timely obtained or made and, in the case of the Merger, the
Company Shareholder Approval has been obtained, any loan or
credit agreement, note, mortgage, deed of trust, indenture,
lease, Company License (as defined in Section 3.1(g)), Company
Benefit Plan (as defined in Section 3.1(n)), Company Material
Contract (as defined in Section 3.1(r)), or any other
agreement, obligation, instrument, concession or license or any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company, any of its Subsidiaries
or any of their respective properties or assets except for such
Violations which would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit
from any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign
(a "GOVERNMENTAL ENTITY"), is required by or with respect to
the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by the Company or the
consummation by the Company of the transactions contemplated
hereby, except for: (A) any actions and approval that may be
required under the insurance laws and regulations of the
jurisdictions in which the Subsidiaries of the Company that are
insurance companies are domiciled or licensed, each of which is
listed in Section 3.1(d)(iii)(A) of the Disclosure Memorandum;
(B) the filing of a pre-merger notification and report form by
the Company under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR ACT"), and the expiration or
termination of the applicable waiting period thereunder; (C)
the filing with the SEC of (x) a proxy
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statement in definitive form relating to the approval by the
holders of Company Common Stock of the Merger (such proxy
statement as amended or supplemented from time to time being
hereinafter referred to as the "PROXY STATEMENT"), (y) the
registration statement on Form S-4 to be filed with the SEC by
Parent pursuant to which Shares of Parent Common Stock issuable
in the Merger will be registered with the SEC (the "FORM S-4"),
and (z) such reports under and such other compliance with the
Exchange Act and the rules and regulations thereunder as may be
required in connection with this Agreement and the transactions
contemplated hereby; (D) the filing of the Articles of Merger
with the Secretary of State of the State of Texas and the
Maryland State Department of Assessments and Taxation; (E) such
filings and approvals as may be required by any applicable
state securities, "blue sky" or takeover laws; (F) the Company
Shareholder Approval; and (G) where the failure to obtain
consent, approval, order, or authorization of, or registration,
declaration or filing with, notice to, or permit from a
Government Entity would not adversely effect the Company and
its Subsidiaries taken as a whole in any material respect.
(e) GOVERNMENT FILINGS. The Company has made available to USF&G a
true and complete copy of each report, schedule, registration statement
and definitive proxy statement filed by the Company with the SEC since
December 31, 1994 and prior to the date of this Agreement (the "FILED
COMPANY SEC DOCUMENTS"), which are all the documents (other than
preliminary material) that the Company was required to file with the SEC
since such date. As of their respective dates, the Filed Company SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or the
Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such Filed Company SEC
Documents, and none of the Filed Company SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The consolidated financial statements of the Company included
in the Filed Company SEC Documents comply as to form in all material
respects with the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Rule 10-01 of
Regulation S-X of the SEC) and fairly present in accordance with
applicable requirements of GAAP the consolidated financial position of
the Company and its consolidated subsidiaries as of the dates therein and
the consolidated results of their operations and cash flows for the
periods presented therein (subject, in the case of unaudited interim
financial statements, to normal recurring adjustments none of which are
material). Section 3.1(e) of the Disclosure Memorandum lists with respect
to the Company Common Stock for the period since December 31, 1996 and
prior to the date of this Agreement each: (i) Schedule 13D filed with the
SEC and (ii) application for change in control filed under the insurance
holding company laws of any state or other jurisdiction. No Subsidiary of
the Company has been or is required to or has filed any documents with
the SEC. Section 3.1(e) of the Disclosure Memorandum includes the
Company's reported results for the six-month period ended June 30, 1997
and such reported results fairly present in summary fashion and in
accordance with applicable requirements of GAAP the consolidated
financial position of the Company and its consolidated subsidiaries as of
the dates therein and the consolidated results of their operations for
the periods presented therein (subject to normal recurring adjustments
none of which are material).
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in
(i) the Form S-4 will, at the time the Form S-4 is filed with the SEC,
and at any time it is amended or supplemented or at the time it
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becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading, and (ii) the
Proxy Statement will, on the date it is first mailed to the holders of
the Company Common Stock or at the time of the Shareholders' Meeting,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they
are made, not misleading. The Proxy Statement will comply as to form in
all material respects with the requirements of the Exchange Act and the
rules and regulations promulgated thereunder, except that no
representation is made by the Company with respect to statements made or
incorporated by reference therein based on information supplied in
writing by Parent or USF&G specifically for inclusion therein. If, at any
time prior to the Shareholders' Meeting, any event with respect to the
Company, or with respect to other information supplied by the Company for
inclusion in the Proxy Statement, shall occur which is required to be
described in an amendment of, or a supplement to, any of such documents,
such event shall be so described, and such amendment or supplement shall
be promptly filed with the SEC and, as required by law, disseminated to
the shareholders of the Company.
(g) COMPLIANCE WITH APPLICABLE LAWS.
(i) Except as disclosed in Section 3.1(g)(i) of the Disclosure
Memorandum, the business of the Company and each of its
Subsidiaries is being, in all material respects, conducted in
compliance with all applicable laws, including, without
limitation, all insurance laws, ordinances, rules and
regulations, decrees and orders of any Governmental Entity, and
all notices, reports, documents and other information required
to be filed thereunder within the last three years were properly
filed and were in compliance in all respects with such laws.
(ii) (A) INSURANCE LICENSES. Section 3.1(g)(ii)(A) of the
Disclosure Memorandum contains a true and complete list of all
jurisdictions in which each of the Subsidiaries of the Company
is licensed to transact insurance business. Except as disclosed
in Section 3.1(g)(ii)(B) of the Disclosure Memorandum, each of
the Subsidiaries of the Company has all the licenses necessary
to conduct the lines of insurance business which such
Subsidiary is currently conducting in each of the states set
forth in Section 3.1(g)(ii)(A) of the Disclosure Memorandum,
which are all of the states in which the Company is currently
conducting business or in the process of commencing conducting
business. The Subsidiaries of the Company own or validly hold
the insurance licenses referred to in Section 3.1(g)(ii)(A) of
the Disclosure Memorandum, all of which licenses are valid and
in full force and effect. Except as set forth in Section
3.1(g)(ii)(A) of the Disclosure Memorandum, there is no
proceeding or investigation pending or, to the knowledge (as
defined below) of the Company, threatened which would
reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, suspension or restriction of any
such license to transact insurance business. As used in this
Agreement, "knowledge" means the actual knowledge, after
reasonable inquiry, of, in the case of the Company, the
management of the Company, and, in the case of Parent, the
management of Parent.
(B) OTHER LICENSES. The Company and each of its Subsidiaries
owns or validly holds all licenses, franchises, permits,
approvals, authorizations, exemptions, classifications,
registrations, rights and similar documents (other than licenses
to transact insurance business) which are necessary for it to
own, lease or operate its properties and assets and to conduct
its business as now conducted, except for such licenses the
failure to hold which would not individually or in the aggregate
adversely affect the Company and its
14
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Subsidiaries taken as a whole in any material respect. The
business of the Company and each of its Subsidiaries has been and
is being conducted in compliance in all material respects with
all such licenses. All such licenses are in full force and
effect, and there is no proceeding or investigation pending or,
to the knowledge of the Company, threatened which would
reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, suspension or restriction of any
such license.
(C) The licenses referred to in subparagraphs (A) and (B) are
collectively referred to herein as the "COMPANY LICENSES."
(iii) Each Subsidiary of the Company that is an insurance company has
filed all annual and quarterly statements, together with all
exhibits and schedules thereto, required to be filed with or
submitted to the appropriate regulatory authorities of the
jurisdiction in which it is domiciled and to any other
jurisdiction where required on forms prescribed or permitted by
such authority. Each Annual Statement filed by any Subsidiary
of the Company that is an insurance company with the insurance
regulator in its state of domicile for the three years ended
December 31, 1996 (each a "COMPANY ANNUAL STATEMENT"), together
with all exhibits and schedules thereto, financial statements
relating thereto and any actuarial opinion, affirmation or
certification filed in connection therewith and each Quarterly
Statement so filed for the quarterly periods ended after
January 1, 1997 (each a "COMPANY QUARTERLY STATEMENT") were
prepared in conformity with the statutory accounting practices
prescribed or permitted by the insurance regulatory authorities
of the applicable state of domicile applied on a consistent
basis ("SAP"), present fairly, in all material respects, to the
extent required by and in conformity with SAP, the statutory
financial condition of such Subsidiary at their respective
dates and the results of operations, changes in capital and
surplus and cash flow of such Subsidiary for each of the
periods then ended, and were correct when filed and there were
no omissions therefrom when filed. No deficiencies or
violations have been asserted in writing (or, to the knowledge
of the Company, orally) by any insurance regulator with respect
to the foregoing financial statements which have not been cured
or otherwise resolved to the satisfaction of such insurance
regulator and which have not been disclosed in writing to USF&G
prior to the date of this Agreement. Set forth in Section
3.1(g)(iii) of the Disclosure Memorandum is a list of permitted
practices under SAP which are utilized in any of the Company's
Annual or Quarterly Statements.
(iv) All statutory reserves as established or reflected in the
Company Annual Statements and Company Quarterly Statements were
determined in accordance with SAP and generally accepted
actuarial assumptions and met the requirements of the insurance
laws of each applicable jurisdiction as of the respective dates
of such statements. The statutory reserves set forth in the
Company Annual Statement and Company Quarterly Statements meet
in all material respects the requirements of the insurance laws
of the jurisdictions in which such Subsidiaries do business and
reflect a reasonable provision for unpaid policy losses and
loss adjustment expenses as of such date. The reserves of the
Subsidiaries of the Company including, but not limited to, the
reserves for incurred losses, incurred loss adjustment
expenses, incurred but not reported losses and loss adjustment
expenses for incurred but not reported losses (the "LOSS
RESERVES") as set forth in the audited consolidated financial
statements and unaudited interim financial statements of such
Subsidiaries included in the Filed Company SEC Documents were
determined in good faith by the Company and such Subsidiaries
in accordance with generally accepted accounting principles and
were believed by the Company and such Subsidiaries to be
reasonable when made. The Loss Reserves established or
reflected in
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the Company Annual Statements and the Company Quarterly
Statements were determined in accordance with generally
accepted actuarial standards consistently applied and are in
compliance in all material respects with the insurance laws,
rules and regulations of their respective states of domicile as
well as those of any other applicable jurisdictions. The
Company has delivered or made available to Parent true and
complete copies of all actuarial reports and actuarial
certificates in the possession or control of the Company, any
of the Subsidiaries or any other affiliates of the Company
relating to the adequacy of the Loss Reserves (or any portion
thereof) of the Company or any of its Subsidiaries for any
period ended on or after December 31, 1996.
(v) Except as set forth in Section 3.1(g)(v) of the Disclosure
Memorandum, from January 1, 1997 through the date of this
Agreement, none of the Company's Subsidiaries have paid any
dividend or made any other distribution in respect of its
capital stock.
(h) INSURANCE ISSUED. Except (i) as set forth in Section 3.1(h) of
the Disclosure Memorandum and (ii) where noncompliance would not
individually or in the aggregate adversely affect the Company and its
Subsidiaries taken as a whole in any material respect, with respect to
all insurance issued:
(i) All insurance policies issued, reinsured or underwritten by the
Subsidiaries of the Company are, to the extent required by
applicable law, and in all material respects on forms approved
by the insurance regulatory authority of the jurisdiction where
issued or delivered or have been filed with and not objected to
by such authority within the period prescribed for such
objection, and utilize premium rates which if required to be
filed with or approved by insurance regulatory authorities have
been so filed or approved and the premiums charged conform
thereto.
(ii) All insurance policy benefits payable by any Subsidiary of the
Company and, to the knowledge of the Company, by any other
person that is a party to or bound by any reinsurance,
coinsurance or other similar agreement with any Subsidiary of
the Company, have in all material respects been paid or are in
the course of settlement in accordance with the terms and
within the limits of the insurance policies and other contracts
under which they arose, except for such benefits for which
there is a reasonable basis to contest payment and which are
being or have been contested by appropriate proceedings and in
accordance with applicable law.
(iii) The Company has not received any information which would
reasonably cause it to believe that the financial condition of
any other party to any reinsurance, coinsurance or other
similar agreement with any of its Subsidiaries is so impaired
as to result in a default thereunder.
(iv) All advertising, promotional, sales and solicitation materials
and product illustrations used by any Subsidiaries of the
Company or any agent of any of its Subsidiaries have complied
and are in compliance, in all material respects, with all
applicable laws.
(v) To the knowledge of the Company, each insurance agent, at the
time such agent wrote, sold or produced business for any
Subsidiary of the Company since January 1, 1993 was duly
licensed as an insurance agent (for the type of business
written, sold or produced by such insurance agent) in the
particular jurisdiction in which such agent wrote, sold or
produced such business and was properly appointed by such
Subsidiary. All written contracts and agreements between any
such agent, on the one hand, and the Company or any of its
Subsidiaries, on the other hand, are in material compliance with
all applicable laws and regulations. To the knowledge of the
Company and its Subsidiaries, no such agent is the subject of,
or party to, any disciplinary action or proceeding under
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applicable law. As of the date hereof, to the Company's
knowledge, the Company has not been advised that any insurance
agent intends to terminate or materially change its relationship
with the Company or its Subsidiaries as a result of the Merger
or the contemplated operations of the Company and its
Subsidiaries after the Merger is consummated.
(vi) Except as set forth in Section 3.1(h)(vi) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries is
a party to any fronting agreement or places or sells
reinsurance whether for its own account or for any reinsurance
company.
(vii) There are (A) to the knowledge of the Company or its
Subsidiaries, no claims asserted, (B) no actions, suits,
investigations or proceedings by or before any court or other
Governmental Entity, and (C) no investigations by or on behalf
of any of the Company or its Subsidiaries ((A), (B) and (C)
being collectively referred to as "ACTIONS") pending or, to the
knowledge of the Company or its Subsidiaries, threatened,
against or involving any of the Company or its Subsidiaries, or
any of their agents that include allegations that any of the
Company or its Subsidiaries or any of the agents of the Company
or its Subsidiaries were in violation of or failed to comply
with any law, statute, ordinance, rule, regulation, code, writ,
judgement, injunction decree, determination or award applicable
to the Company or its Subsidiaries in the respective
jurisdictions in which their products have been sold, and, to
the knowledge of the Company or the Subsidiary, no facts exist
which would reasonably be expected to result in the filing or
commencement of any such Action.
(i) RATING AGENCIES. Except as disclosed in Section 3.1(i) of the
Disclosure Memorandum, since December 31, 1996, no rating agency has
imposed conditions (financial or otherwise) on retaining any currently
held rating assigned to any Subsidiary of the Company that is an
insurance company or indicated to the Company that it is considering the
downgrade of any rating assigned to any Subsidiary of the Company that is
an insurance company. As of the date of this Agreement, each Subsidiary
of the Company that is an insurance company has the A.M. Best rating set
forth in Section 3.1(i) of the Disclosure Memorandum. Notwithstanding
anything to the contrary, the imposition of conditions (financial or
otherwise) on retaining any currently held rating assigned to any
Subsidiary of the Company that is an insurance company or downgrade of
any rating assigned to any subsidiary of the Company that is an insurance
company primarily as a result of the transactions contemplated by this
Agreement shall not be a breach of this representation and warranty.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1996,
there has not been, occurred, or arisen any change, event (including
without limitation any damage, destruction, or loss whether or not
covered by insurance), condition, or state of facts of any character with
respect to the business or financial condition of the Company or any of
its Subsidiaries, except (i) as disclosed in Section 3.1(j) of the
Disclosure Memorandum or in the Filed Company SEC Documents, (ii) the
imposition of conditions (financial or otherwise) on retaining any
currently held rating assigned to any Subsidiary of the Company that is
an insurance company or downgrade of any rating assigned to any
Subsidiary of the Company that is an insurance company primarily as a
result of the transactions contemplated by this Agreement, and (iii) for
events in the ordinary course of business consistent with past practice
that would not, individually or in the aggregate, result in a Material
Adverse Effect on the Company. Except as disclosed in Section 3.1(j) of
the Disclosure Memorandum or in the Filed Company SEC Documents, since
December 31, 1996, the Company and each of its Subsidiaries has operated
only in the ordinary course of business consistent with past practice and
(without limiting the generality of the foregoing) there has not been,
occurred, or arisen:
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(i) any declaration, setting aside, or payment of any dividend or
other distribution in respect of the capital stock of the
Company (other than as expressly permitted by this Agreement) or
any direct or (other than any retirement of Options or Warrants
contemplated pursuant to this Agreement) indirect redemption,
purchase, or other acquisition by the Company of any such stock
or of any interest in or right to acquire any such stock;
(ii) any split, combination or reclassification of any of its
outstanding capital stock or any issuance or the authorization
of any issuance of any other securities in respect of, in lieu
of or in substitution for shares of the Company's or any of its
Subsidiary's outstanding capital stock;
(iii) (A) any granting by the Company or any of its Subsidiaries to
any director, officer or other employee of the Company or any
of its Subsidiaries of any increase in compensation (including
perquisites), except, with respect to employees other than Key
Employees (as defined below), grants in the ordinary course of
business consistent with prior practice, (B) any granting by
the Company or any of its Subsidiaries to any such director,
officer or other employee of any increase in severance or
termination pay, or (C) any entry into, modification,
amendment, waiver or consent by the Company or any of its
Subsidiaries with respect to any employment, severance, change
of control, termination or similar agreement, arrangement or
plan (oral or otherwise) with any officer, director or other
employee;
(iv) any change in the method of accounting or policy used by the
Company or any of its Subsidiaries other than as disclosed in
the financial statements included in the Filed Company SEC
Documents or in the Company Annual Statement or the Company
Quarterly Statement most recently filed and publicly available
prior to the date hereof or which were required by GAAP or SAP;
(v) made any material amendment to the insurance policies in force
of any Subsidiary of the Company or made any change in the
methodology used in the determination of the reserve liabilities
of the Subsidiaries of the Company or any reserves contained in
the financial statements included in the Filed Company SEC
Documents or in the Company Annual Statement or the Company
Quarterly Statements;
(vi) any termination, amendment or entrance into as ceding or
assuming insurer any reinsurance, coinsurance or other similar
agreement or any trust agreement or security agreement relating
thereto, other than (A) facultative reinsurance contracts
related to the Company's public entity business only that have
been entered into in the ordinary course of business consistent
with past practice, and (B) renewals for periods of one year or
less on substantially the same terms, in the ordinary course of
business;
(vii) any introduction of any insurance policy or any changes made in
its customary marketing, pricing, underwriting, investing or
actuarial practices and policies, except in the ordinary course
of business consistent with past practice;
(viii) any Lien created or assumed on any of the assets or properties
of the Company or any of its Subsidiaries;
(ix) any liability involving the borrowing of money by the Company
or any of its Subsidiaries or the incurrence by the Company or
any of its Subsidiaries of any deferred purchase price
obligation (other than trade credit incurred in the ordinary
course of business and consistent with past practice);
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(x) any cancellation of any liability owed to the Company or any of
its Subsidiaries by any other person or entity other than
immaterial amounts owed by a person or entity who is not a
Related Party (as defined in Section 3.1(s));
(xi) any write-off or write-down of, or any determination to
write-off or write-down, the assets or properties (other than
any statutory write-down of investment assets which is not
related to a permanent impairment of value) of the Company of
any of its Subsidiaries or any portion thereof;
(xii) any expenditure or commitment for additions to property, plant,
equipment, or other tangible or intangible capital assets or
properties of the Company or any of its Subsidiaries which
exceeds $75,000 individually or in the aggregate;
(xiii) any material change in any marketing relationship between the
Company or any of its Subsidiaries and any person or entity
through which the Company sells insurance Contracts; or
(xiv) any Contract to take any of the actions prohibited in this
Section 3.1(j).
(k) ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in
Section 3.1(k) of the Disclosure Memorandum, as of December 31, 1996,
neither the Company nor any of its Subsidiaries had any liabilities,
absolute, accrued, contingent or otherwise, whether due or to become due
(and there was no basis for any such liability), which were not shown or
provided for in the audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
and which should have been so shown or provided for under generally
accepted accounting principles. Since December 31, 1996, neither the
Company nor any of its Subsidiaries has incurred any liabilities,
absolute, accrued, contingent or otherwise, whether due or to become due
(and there is no basis for such liabilities) except: (i) liabilities
arising in the ordinary course of business consistent with past practice,
which would not individually or in the aggregate adversely affect the
Company and its Subsidiaries taken as a whole in any material respect;
(ii) as specifically and individually reflected in Section 3.1(k) of the
Disclosure Memorandum or Filed Company SEC Documents, or (iii) other
liabilities which, individually or in the aggregate, together with those
liabilities referenced in subparagraphs (i) and (ii), would not adversely
affect the Company and its Subsidiaries taken as a whole in any material
respect. Except for regular periodic assessments in the ordinary course
of business, no claim or assessment is pending or, to the knowledge of
the Company, threatened, against the Company or any of its Subsidiaries
by any state insurance guaranty association in connection with such
association's fund relating to insolvent insurers.
(l) LITIGATION. Except as set forth in Section 3.1(1) of the
Disclosure Memorandum and except for claims arising under insurance
policies in (i) an amount no greater than the limits set forth in such
policies and/or (ii) not involving punitive, extra-contractual or
extraordinary damages, (A) there is no suit, action, investigation,
arbitration or proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries,
at law or in equity, before any person and (B) there is no writ judgment,
decree, injunction, rule or similar order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries.
(m) TAXES. Except as set forth in Section 3.1(m) of the Disclosure
Memorandum:
(i) The Company and its Subsidiaries have (x) duly and timely filed
(or there have been filed on their behalf) with the appropriate
taxing authorities all Tax Returns required to be filed by them,
and all such Tax Returns are true, correct and complete in all
material respects and (y) timely paid or there have been paid on
their behalf all Taxes due or claimed to be due from them by any
taxing authority.
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(ii) The Company and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes and have,
within the time and manner prescribed by law, withheld and paid
over to the proper governmental authorities all amounts
required to be withheld and paid over under all applicable
laws.
(iii) There are no liens for Taxes upon the assets or properties of
the Company or any of its Subsidiaries except for statutory
liens for current Taxes not yet due.
(iv) Neither the Company nor any of its Subsidiaries has requested
any extension of time within which to file any Tax Return in
respect of any taxable year which has not since been filed.
(v) Based upon the Company's knowledge, no federal, state, local or
foreign audits or other administrative proceedings or court
proceedings ("AUDITS") exist with regard to any Taxes or Tax
Returns of the Company or any of its Subsidiaries and there has
not been received any written notice that such an Audit is
pending or threatened with respect to any Taxes due from or with
respect to the Company or any of its Subsidiaries or any Tax
Return filed by or with respect to the Company or any of its
Subsidiaries.
(vi) Neither the Company nor any of its Subsidiaries has requested
or received a ruling from any taxing authority or signed a
closing or other agreement with any taxing authority which
would affect any taxable period after the Closing Date.
(vii) The federal and state income Tax Returns of the Company and its
Subsidiaries have been examined by the appropriate taxing
authorities (or the applicable statute of limitations for the
assessment of Taxes for such periods have expired) for all
periods through December 31, 1992 and a list of all Audits
commenced or completed with respect to the Company and its
Subsidiaries for all taxable periods not yet closed by the
statute of limitations is set forth in Section 3.1(m) of the
Disclosure Memorandum.
(viii) All material Tax deficiencies which have been claimed, proposed
or asserted in writing against the Company or any of its
Subsidiaries have been fully paid or finally settled, and no
issue has been raised in writing in any examination which, by
application of similar principles, could be expected to result
in the proposal or assertion of a material Tax deficiency for
any other year not so examined.
(ix) Neither the Company nor any of its Subsidiaries is required to
include in income any adjustment pursuant to Section 481(a) of
the Code, for any period after the Closing Date, by reason of
any voluntary or involuntary change in accounting method (nor
has any taxing authority proposed in writing any such
adjustment or change of accounting method).
(x) Neither the Company nor any of its Subsidiaries is a party to,
is bound by, nor has any obligation under, any Tax sharing
agreement, Tax indemnification agreement or similar contract or
arrangement.
(xi) No power of attorney has been granted by or with respect to the
Company or any of its Subsidiaries with respect to any matter
relating to Taxes, which is currently effective.
(xii) Neither the Company nor any of its Subsidiaries has filed a
consent pursuant to Section 341(f) of the Code (or any
predecessor provision) or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as
such term is defined in Section 341(f)(4) of the Code) owned by
the Company or any of its Subsidiaries.
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(xiii) Since the date of the December 31, 1996 consolidated financial
statements of the Company, neither the Company nor any of its
Subsidiaries has incurred any liability for Taxes other than in
the ordinary course of business.
(xiv) Neither the Company nor any of its Subsidiaries has or could
have any liability for Taxes of any person other than itself or
the Company or any of its Subsidiaries under Treasury
Regulation Section 1.1502-6 (or any similar provision of state,
local or foreign law).
(xv) Neither the Company nor any of its Subsidiaries has any
intercompany items or corresponding items that have not been
taken into account under Treasury Regulation Section 1.1502-13
(or any similar provision under state, local or foreign law).
(xvi) Neither the Company nor any of its Subsidiaries has made any
tax election that would result in deferring any income or gain
from a tax period ending on or before the Closing Date to a tax
period ending after the Closing Date without a corresponding
receipt of cash and/or property or would result in accelerating
any loss or deduction from a tax period ending after the
Closing Date to a tax period ending on or before the Closing
Date.
(xvii) Neither the Company nor any of its Subsidiaries is a party to
any contract, agreement or other arrangement(s) which could
result in the payment of amounts that could be nondeductible by
reason of Section 280G or 162(m) of the Code.
For purposes of this Agreement, (i) "TAXES" (including, with correlative
meaning, the term "TAX") shall mean all taxes, charges, fees, levies, penalties
or other assessments imposed by any federal, state, local or foreign taxing
authority, including, but not limited to, income, gross receipts, excise,
property, sales, transfer, franchise, payroll, withholding, social security and
other taxes, and shall include any interest, penalties or additions attributable
thereto and (ii) "TAX RETURN" shall mean any return, report, information return
or other document (including any related or supporting information) required to
be prepared with respect to Taxes.
(n) PENSION AND BENEFIT PLANS; ERISA.
(i) Section 3.1(n)(i) of the Disclosure Memorandum sets forth a
complete and correct list of:
(A) all "employee benefit plans," as defined in Sections 3(3)
and 4(b)(4) of ERISA, under which Company or any of its
Subsidiaries maintains or has any obligation or liability,
contingent or otherwise ("COMPANY BENEFIT PLANS"); and
(B) all employment or consulting agreements and all bonus or
other incentive compensation, deferred compensation, salary
continuation, severance, perquisites or other special or fringe
benefit agreements (including mortgage financings and tuition
reimbursements), policies or arrangements which the Company or
any of its Subsidiaries maintains or has any obligation or
liability (contingent or otherwise) in each case, written or
oral, with respect to any current or former officer, director or
employee of the Company or any of its Subsidiaries and which
individually (or in the aggregate with respect to a single
individual) has a cost to the Company or any of its Subsidiaries
in excess of $10,000 per year (the "COMPANY EMPLOYEE
ARRANGEMENTS").
(ii) With respect to each Company Benefit Plan and Company Employee
Arrangement, a complete and correct copy of each of the
following documents (if applicable) has been provided or made
available to Parent: (A) the most recent plan and related trust
documents, and all amendments thereto; (B) the most recent
summary plan description, and all related summaries of material
modifications thereto; (C) the most recent Form 5500 (including
schedules and attachments); (D) the most recent IRS
determination
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letter or request therefor; (E) the most recent actuarial
reports (including for purposes of Financial Accounting
Standards Board report no. 87, 106 and 112), if any; and (F) to
the extent not provided pursuant to (A) and (B) above, all
documents that set forth the terms of the Company Employee
Arrangements.
(iii) Except as set forth in Section 3.1(n)(iii) of the Disclosure
Memorandum, the Company Benefit Plans and their related trusts
intended to qualify under Sections 401(a) and 501(a) of the
Code, respectively, have received favorable determination
letters from the Internal Revenue Service and the Company is
not aware of any event or circumstance that could reasonably be
expected to result in the failure of such Company Benefit Plans
or their related trusts to be so qualified.
(iv) Except as set forth in Section 3.1(n)(iv) of the Disclosure
Memorandum, all contributions or other payments required to
have been made by the Company or any of its Subsidiaries to or
under any Company Benefit Plan or Company Employee Arrangement
by applicable law or the terms of such Company Benefit Plan or
Company Employee Arrangement (or any agreement relating
thereto) have been timely and properly made.
(v) Except as set forth in Section 3.1(n)(v) of the Disclosure
Memorandum, the Company Benefit Plans and Company Employee
Arrangements have been maintained and administered in all
respects in accordance with their terms and applicable laws.
(vi) Except as disclosed in Section 3.1(n)(vi) of the Disclosure
Memorandum, there are no pending or, to the knowledge of the
Company, threatened actions, claims or proceedings against or
relating to any Company Benefit Plan or Company Employee
Arrangement other than routine benefit claims by persons
entitled to benefits thereunder.
(vii) Except as set forth in Section 3.1(n)(vii) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries
maintains or has an obligation to contribute to retiree life or
retiree health plans which provide for continuing benefits or
coverage for current or former officers, directors or employees
of the Company or any of its Subsidiaries except (A) as may be
required under Part 6 of Title I of ERISA and at the sole
expense of the participant or the participant's beneficiary or
(B) a medical expense reimbursement account plan pursuant to
Section 125 of the Code.
(viii) Except as disclosed in Section 3.1(n)(viii) of the Disclosure
Memorandum, none of the assets of any Company Benefit Plan is
stock of the Company or any of its affiliates, or property
leased to or jointly owned by the Company or any of its
affiliates.
(ix) Except as disclosed in Section 3.1(n)(ix) of the Disclosure
Memorandum and as otherwise provided in Sections 2.6 and 2.7,
neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (A)
result in any payment becoming due to any employee (current,
former or retired) of Company, (B) increase any benefits under
any Company Benefit Plan or Company Employee Arrangement, or
(C) result in the acceleration of the time of payment of,
vesting of or other rights with respect to any such benefits.
(x) Neither the Company nor any of its Subsidiaries has any
obligation (or prior obligation) to make contributions to any
benefit plan described in Sections 3(37), 4063 or 4064 of ERISA.
(xi) Neither the Company nor any of its Subsidiaries is acting on
behalf of an employee benefit plan subject to ERISA, or acting
on behalf of or using (A) assets which are or which are deemed
under ERISA to be assets of an employee benefit plan subject to
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ERISA, (B) assets of a foreign, church or governmental employee
benefit plan, or (C) assets of individual retirement accounts.
(xii) No prohibited transaction under Section 406 of ERISA or Section
4975 of the Code has occurred with respect to a Company Benefit
Plan.
(xiii) Each Company Benefit Plan (including, without limitation, a
Company Benefit Plan covering retirees or the beneficiaries of
such retirees) may be terminated or amended by the plan sponsor
at any time without the consent of any person covered
thereunder, and may be terminated without liability for
benefits accruing after the date of such termination.
(xiv) The Company has no knowledge of any oral or written statement
made by or on behalf of the Company or a Subsidiary regarding a
Company Benefit Plan or Company Employee Arrangement that was
not in accordance with the Company Benefit Plan or Company
Employee Arrangement.
(xv) There are no trusts or other arrangements under any Company
Benefit Plan which are intended to qualify as a voluntary
employees' beneficiary association under Section 501(c)(9) of
the Code.
(o) LABOR MATTERS.
(i) Except as set forth in Section 3.1(o) of the Disclosure
Memorandum, (A) neither the Company nor any of its Subsidiaries
is a party to any labor or collective bargaining agreement and
no employees of the Company or any of its Subsidiaries are
represented by any labor organization; (B) within the preceding
three years, there have been no representation or certification
proceedings, or petitions seeking a representation proceeding,
pending or, to the knowledge of the Company, threatened in
writing to be brought or filed with the National Labor Relations
Board or any other labor relations tribunal or authority; and
(C) within the preceding three years, to the knowledge of the
Company, there have been no organizing activities involving the
Company or any of its Subsidiaries with respect to any group of
employees of the Company or any of its Subsidiaries.
(ii) There are no strikes, work stoppages, slowdowns, lockouts,
material arbitrations or material grievances or other material
labor disputes pending or threatened in writing against or
involving the Company or any of its Subsidiaries. There are no
unfair labor practice charges, grievances or complaints pending
or, to the knowledge of the Company, threatened in writing by
or on behalf of any employee or group of employees of the
Company or any of its Subsidiaries.
(iii) Except as set forth in Section 3.1(o) of the Disclosure
Memorandum, there are no complaints, charges or claims against
the Company or any of its Subsidiaries pending or, to the
knowledge of the Company, threatened to be brought or filed
with any governmental authority, arbitrator or court based on,
arising out of, in connection with, or otherwise relating to
the employment or termination of employment of any individual
by the Company or any of its Subsidiaries.
(iv) The Company and each of its Subsidiaries is in compliance with
all laws, regulations and orders relating to the employment of
labor, including all such laws, regulations and orders relating
to wages, hours, Worker Adjustment Retraining and Notification
Act of 1988, as amended ("WARN ACT"), collective bargaining,
discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding
and/or social security taxes and any similar tax, except where
non compliance would
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not individually or in the aggregate adversely affect the
Company and its Subsidiaries taken as a whole in any material
respect.
(v) Since December 31, 1993, there has been no "mass layoff" or
"plant closing" (as deemed by the WARN Act) with respect to the
Company or any of its Subsidiaries.
(p) ENVIRONMENTAL MATTERS.
(i) For purposes of this Agreement:
(A) "ENVIRONMENTAL LAW" means any applicable law regulating or
prohibiting Releases of Hazardous Materials into any part of the
natural environment, or pertaining to the protection of natural
resources, the environment, and public and employee health and
safety from Hazardous Materials including, without limitation,
the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") (42 U.S.C. Section 9601 ET SEQ.), the
Hazardous Materials Transportation Act (49 U.S.C. Section 1801 ET
SEQ.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 ET SEQ.), the Clean Water Act (33 U.S.C. Section
1251 ET SEQ.), the Clean Air Act (33 U.S.C. Section 7401 ET
SEQ.), the Toxic Substances Control Act (15 U.S.C. Section 7401
ET SEQ.), the Federal Insecticide, Fungicide, and Rodenticide Act
(7 U.S.C. Section 136 ET SEQ.), and the Occupational Safety and
Health Act (29 U.S.C. Section 651 ET SEQ.) ("OSHA") (to the
extent OSHA regulates occupational exposure to Hazardous
Materials) and the regulations promulgated pursuant thereto, and
any such applicable state or local statutes, and the regulations
promulgated pursuant thereto, as such laws have been and may be
amended or supplemented through the Closing Date;
(B) "HAZARDOUS MATERIAL" means any substance, material or waste
which is regulated as hazardous or toxic by any public or
governmental authority in the jurisdictions in which the
applicable party or its Subsidiaries conducts business, or the
United States, including, without limitation, any material or
substance which is defined as a "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste" or
"restricted hazardous waste," "contaminant," "toxic waste" or
"toxic substance" under any provision of Environmental Law and
shall also include, without limitation, petroleum, petroleum
products, asbestos, polychlorinated biphenyls and radioactive
materials;
(C) "RELEASE" means any release, spill, effluence, emission,
leaking, pumping, injection, deposit, disposal, discharge,
dispersal, leaching, or migration of Hazardous Material into the
environment; and
(D) "REMEDIAL ACTION" means all actions, including, without
limitation, those involving any capital expenditures, required by
a governmental entity or required under any Environmental Law, or
voluntarily undertaken to (w) clean up, remove, treat, or in any
other way mitigate the adverse effects of any Hazardous Materials
Released in the environment; (x) prevent the Release or threat of
Release, or minimize the further Release of any Hazardous
Material so it does not endanger or threaten to endanger the
public health or welfare or the environment; (y) perform
preremedial studies and investigations or postremedial monitoring
and care pertaining or relating to a Release or threat of
Release; or (z) bring the applicable party into compliance with
any Environmental Law.
(ii) Except as set forth in Section 3.1(p) of the Disclosure
Memorandum:
(A) The operations of the Company and each of its Subsidiaries
have been and, as of the Closing Date, will be, in compliance
with all Environmental Laws, except for such
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<PAGE>
noncompliance which would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect;
(B) The Company and each of its Subsidiaries have obtained and
will, as of the Closing Date, maintain all permits required under
applicable Environmental Laws for the continued operations of
their respective businesses, except where the failure to so
obtain or maintain would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect;
(C) Neither the Company nor any of its Subsidiaries is subject
to any outstanding orders from, or agreements with, any
Governmental Entity or other person respecting (x) Environmental
Laws, (y) Remedial Action or (z) any Release or threatened
Release of a Hazardous Material;
(D) Neither the Company nor any of its Subsidiaries has received
any written communication alleging, with respect to any such
party, the violation of or potential liability under any
Environmental Law;
(E) Neither the Company nor any of its Subsidiaries has
contingent liability in connection with the Release of any
Hazardous Material into the environment (whether on-site or
off-site);
(F) Neither the operations of the Company nor any of its
Subsidiaries involve the generation, transportation, treatment,
storage or disposal of hazardous waste as defined and regulated
under 40 C.F.R. Parts 260-270 (in effect as of the date of this
Agreement) or any state equivalent;
(G) There is not now, nor, to the knowledge of the Company, has
there been in the past, on or in any property of the Company or
any of its Subsidiaries any of the following: (w) any underground
storage tanks; (x) surface impoundments; (y) any polychlorinated
biphenyls; or (z) any asbestos-containing materials;
(H) No judicial or administrative proceedings or governmental
investigations are pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries
alleging the violation of or seeking to impose liability pursuant
to any Environmental Law;
(I) The Company has made available to Parent copies of all
environmental investigations, studies, audits, tests, reviews and
other analyses, including soil and/or groundwater analyses,
conducted by or on behalf of, or that are in the possession,
custody or control of the Company or any of its Subsidiaries, in
relation to any site or facility owned, operated, leased or used,
at any time, by the Company or any of its Subsidiaries or any of
their respective predecessors;
(J) Neither the Company nor any of its Subsidiaries has caused
or suffered to occur any Release at, under, above or within any
real property, owned, operated, used or leased by the Company or
any of its Subsidiaries;
(K) No environmental approvals, clearances or consents are
required under applicable law from any governmental entity or
authority in order to consummate the transactions contemplated
herein; and
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(L) Neither the Company nor any of its Subsidiaries has any
fixed or contingent liability in connection with environmental
conditions at or associated with any vessel or facility in which
the Company or any of its Subsidiaries owns or previously owned
or holds or previously held a mortgage or other security
interest, and neither the Company nor any of its Subsidiaries has
participated in the management of any such vessel or facility.
(iii) This Section 3.1(p) sets forth the sole representations and
warranties of the Company with respect to Environmental Laws.
(q) PROPERTY AND ASSETS.
(i) Section 3.1(q)(i) of the Disclosure Memorandum sets forth all of
the real property owned in fee by the Company and its
Subsidiaries. The Company or its Subsidiaries have good and
marketable title to each parcel of real property owned by them
free and clear of all Liens, except (A) those reflected or
reserved against in the consolidated balance sheet of the
Company dated as of December 31, 1996, (B) taxes and general and
special assessments not in default and payable without penalty
and interest for which reasonable reserves have been
established, (C) mechanics and similar statutory liens arising
or incurred in the ordinary course of business for amounts that
are not delinquent, (D) any zoning, building, and land use
regulation imposed by any Governmental Entity, and (E) any
covenant, restriction, or easement expressly set forth in the
title documents governing such real property filed with the
appropriate Governmental Entity. There are no (A) zoning,
building or land use regulations imposed by any Governmental
Entities or (B) any covenant, restriction or easement filed and
expressly set forth in the title documents governing such real
property which in any case materially interfere with the current
and intended use of such property or materially impair the value
of such property as reflected on the books of the Company.
(ii) Each lease, sublease or other agreement (collectively, the
"REAL PROPERTY LEASES") under which the Company or any of its
Subsidiaries uses or occupies or has the right to use or
occupy, now or in the future, any real property is valid,
binding and in full force and effect, all rent and other sums
and charges payable by the Company or any of its Subsidiaries
as a tenant thereunder are current, and no termination event or
condition or uncured default of a material nature on the part
of the Company or any of its Subsidiaries or, to the Company's
knowledge, the landlord, exists under any Real Property Lease.
The Company and its Subsidiaries have a good and valid
leasehold interest in each parcel of real property leased by
them free and clear of all Liens, except those reflected or
reserved against in the consolidated balance sheet of the
Company dated as of December 31, 1996.
(iii) Section 3.1(q)(iii) of the Disclosure Memorandum contains a
list of all purchases or acquisitions, sales or dispositions of
all investment assets of the Company and its Subsidiaries since
December 31, 1996 and prior to the date of this Agreement. The
Company and its Subsidiaries have good and marketable title to
such investment assets owned by them free and clear of all
Liens.
(iv) Except as set forth in Section 3.1(q)(iv) of the Disclosure
Memorandum, the Company and its Subsidiaries own good and
indefeasible title to, or have a valid leasehold interest in or
a valid right under contract to use, all tangible personal
property that is used in the conduct of their business, free
and clear of any Liens, except for any mechanics or similar
statutory liens arising in the ordinary course of business. All
such tangible personal property is in good operating condition
and repair (normal wear and tear) and is suitable for its
current uses.
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(v) Except as set forth in Section 3.1(q)(v) of the Disclosure
Memorandum, the Company and its Subsidiaries own or have a right
to use each trademark, trade name, patent, service mark, brand
mark, brand name, database, copyright and other intellectual
property owned or used in connection with the operation of the
business of the Company and its Subsidiaries, including any
registrations thereof, and each license or other contract
relating thereto (collectively, the "COMPANY INTANGIBLE
PROPERTY"), free and clear of any and all Liens. Section
3.1(q)(v) of the Disclosure Memorandum sets forth a complete
list of the Company Intangible Property. The use of the Company
Intangible Property by the Company and its Subsidiaries does not
conflict with, infringe upon, violate or interfere with or
constitute an appropriation of any right, title, interest or
goodwill, including, without limitation, any intellectual
property right, trademark, trade name, patent, service mark,
brand mark, brand name, database or copyright of any other
person. Except as set forth in Section 3.1(q)(v) of the
Disclosure Memorandum, the Company and its Subsidiaries own or
have valid and enforceable licenses or other rights to use, free
and clear of any and all Liens, all software used in connection
with the operation of the business of the Company and its
Subsidiaries, the use of such software by the Company and its
Subsidiaries does not infringe on or otherwise violate the
rights of any person, and, to the knowledge of the Company, no
person is challenging, infringing on or otherwise violating the
right of the Company or any Subsidiary with respect to any such
software used by the Company and its Subsidiaries.
(vi) The Company and its Subsidiaries own or have the rights to use
all assets required for the conduct of the business of the
Company and its Subsidiaries as it is now conducted.
(r) MATERIAL CONTRACTS. Section 3.1(r) of the Disclosure Memorandum
contains a true and complete list of each of the following Contracts in
effect as of the date of this Agreement (true and complete copies of
which have been made available to Parent) to which the Company or any of
its Subsidiaries is a party or by which any of their respective assets or
properties is or may be bound (each of which is a "COMPANY MATERIAL
CONTRACT"):
(i) all employment, agency (other than insurance agency),
consultation, or representation Contracts or other Contracts of
any type (including without limitation loans or advances) with
any present officer, director, Key Employee (as defined below),
agent (other than an insurance agent), consultant, or other
similar representative of the Company or any of its Subsidiaries
(or former officer, director, Key Employee, agent (other than an
insurance agent), consultant or similar representative of the
Company or any of its Subsidiaries if there exists any present
or future liability with respect to such Contract);
(ii) a specimen form insurance agent Contract (the "Producer
Agreements") and any insurance agent Contract having terms
different in any material respect than the terms contained in
the specimen form agent Contract;
(iii) all Contracts with any person or entity containing any
provision or covenant (A) limiting the ability of the Company
to (x) sell any products or services, (y) engage in any line of
business, or (z) compete with or obtain products or services
from any person or entity or (B) limiting the ability of any
person or entity to compete with or to provide products or
services to the Company;
(iv) all Contracts relating to the borrowing of money by the
Company, relating to the deferred purchase price for property
or services, or relating to the direct or indirect guarantee by
the Company or any of its Subsidiaries of any liability;
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(v) all Contracts (other than Contracts of insurance or reinsurance
entered into in the ordinary course of business) pursuant to
which the Company or any of its Subsidiaries has agreed to
indemnify or hold harmless any person or entity (other than
indemnifications or hold harmless covenants in the ordinary
course of business and consistent with past practice);
(vi) all leases or subleases of real property used in the business,
operations, or affairs of the Company or any of its
Subsidiaries;
(vii) all Contracts or arrangements (including without limitation
those relating to allocations of expenses, personnel, services,
or facilities) between the Company and any of its Subsidiaries
or among the Subsidiaries of the Company;
(viii) all leases of automobiles used in the business, operations, or
affairs of the Company or any of its Subsidiaries;
(ix) all reinsurance (whether as assuming or ceding insurer or
otherwise), coinsurance or other similar Contracts;
(x) all other Contracts (other than insurance Contracts issued,
reinsured, or underwritten by the Company) that involve the
payment or potential payment, pursuant to the terms of such
Contracts, by or to the Company of more than $75,000 or that are
otherwise material to the business or condition of the Company;
and
(xi) any commitments or other obligations to enter into any of the
foregoing.
Each Contract disclosed or required to be disclosed in Section 3.1(r)
of the Disclosure Memorandum is in full force and effect and constitutes
a legal, valid and binding obligation of the Company or any of its
Subsidiaries to the extent any such entity is a party thereto and, to the
knowledge of Company, each other party thereto. Neither the Company nor
any of its Subsidiaries has received from any other party to such
Contract any written notice of termination or intention to terminate or
not to honor the terms of such Contract, or to the knowledge of the
Company, any oral notice of termination or intention to terminate or not
to honor the terms of such Contract. Except as set forth in Section
3.1(r) of the Disclosure Memorandum, neither the Company nor any of its
Subsidiaries nor, to the knowledge of the Company, any other party to
such Contract is in violation or breach of or default under any such
Contract (or with or without notice or lapse of time or both, would be in
violation or breach of or default under any such Contract), which
violations, breach or default would individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a whole in any
material respect. As used in this Agreement, the word "CONTRACT" shall
mean any agreement, arrangement, undertaking, lease, sublease, license,
sublicense, promissory note, evidence of indebtedness or other binding
contract, in each case, whether or not reduced to writing. As used in
this Agreement "Key Employee" shall mean employees of the Company or
Parent, as the case may be, having a salary of $90,000 or more per year.
(s) RELATED PARTY TRANSACTIONS. Except as set forth in Section
3.1(s) of the Disclosure Memorandum, no director, officer, Key Employee,
"affiliate" or "associate" (as such terms are defined in Rule 12b-2 under
the Exchange Act) of the Company (each a "RELATED PARTY") (i) has
borrowed any monies from or has outstanding any indebtedness, liabilities
or other similar obligations to the Company or any of its Subsidiaries;
(ii) owns any direct or indirect interest of any kind in, or is a
director, officer, employee, partner, affiliate or associate of, or
consultant or lender to, or borrower from, or has the right to
participate in the management, operations or profits of, any person or
entity which is (A) a competitor, supplier, customer, distributor,
lessor, tenant, creditor or debtor of the Company or any of its
Subsidiaries, (B) engaged in a business related to the business of the
Company or any of its Subsidiaries, or (C) participating in any
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transaction to which the Company or any of its Subsidiaries is a party;
or (iii) is otherwise a party to any contract, arrangement or
understanding with the Company or any of its Subsidiaries.
(t) PREPAYMENT OF CREDIT FACILITIES. The Loan Agreement, dated July
30, 1996, among the Company, Dresdner Bank AG, New York Branch, as Agent,
and the lenders party thereto and the Loan Agreement, dated July 30, 1996
and amended as of February 14, 1997, among Westchester Premium Acceptance
Corporation, Dresdner Bank AG, New York Branch, as Agent, and the lenders
party thereto (collectively referred to herein as the "COMPANY CREDIT
FACILITIES") are prepayable without the payment of any premium or
penalties.
(u) LIENS. Except as set forth in Section 3.1(u) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries has granted,
created, or suffered to exist with respect to any of its assets, any
mortgage, pledge, charge, hypothecation, collateral assignment, lien
(statutory or otherwise), encumbrance or security agreement of any kind
or nature whatsoever (collectively, the "LIENS").
(v) OPERATIONS INSURANCE. Section 3.1(v) of the Disclosure
Memorandum contains a true and complete list and description of all
liability, property, workers compensation, directors and officers
liability, and other similar insurance policies or agreements that insure
the business, operations, or affairs of the Company and its Subsidiaries
or affect or relate to the ownership, use, or operations of any of the
assets or properties of the Company and its Subsidiaries. Excluding
insurance policies that have expired and been replaced in the ordinary
course of business, no insurance policy has been canceled within the last
year except as disclosed in Section 3.1(v) of the Disclosure Memorandum,
and, to the knowledge of the Company or its Subsidiaries, no threat has
been made to cancel any insurance policy of any of the Company or its
Subsidiaries during such period. Except as disclosed in Section 3.1(v) of
the Disclosure Memorandum, all such insurance will remain in full force
and effect with respect to periods before the Closing without the payment
of additional premiums. No event has occurred, including, without
limitation, the failure by any of the Company or its Subsidiaries to give
any notice or information or any of the Company or its Subsidiaries
giving any inaccurate or erroneous notice or information, which limits or
impairs the rights of such Company or Subsidiary under any such insurance
policies.
(w) OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of Furman Selz LLC (the "FINANCIAL ADVISOR") dated August 7, 1997
(the "FS OPINION"), to the effect that, as of the date thereof, the
Merger Consideration to be received by the holders of Company Common
Stock in the Merger is fair from a financial point of view to such
holders. A signed, true and complete copy of the FS Opinion has been
delivered to Parent, and the FS Opinion has not been withdrawn or
modified. True and complete copies of all agreements and understandings
between the Company or any of its affiliates and the Financial Advisor
relating to the transactions contemplated by this Agreement are attached
hereto as Section 3.1(w) of the Disclosure Memorandum.
(x) BOARD RECOMMENDATION. The Board of Directors of the Company, at
a meeting duly called and held, has by the unanimous vote of those
directors present (who constituted all of the directors then in office)
(i) determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of the shareholders of the
Company and has approved the same, (ii) resolved to recommend, subject to
the board's fiduciary duties, that the holders of the shares of Company
Common Stock approve this Agreement and the transactions contemplated
herein, and (iii) resolved to call a special meeting of the shareholders
of the Company to approve the Merger.
(y) VOTE REQUIRED. The affirmative vote of the holders of
two-thirds of the outstanding shares of Company Common Stock is the only
vote of the holders of any class or series of the
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Company's capital stock necessary (under applicable law or otherwise) to
approve the Merger and the transactions contemplated hereby.
(z) BROKERS. The Company represents, as to itself and its
affiliates, that no agent, broker, investment broker, financial advisor
or other firm or person is or will be entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement, except for E. B. Lyon,
III and/or Stonegate Securities Inc. (in either case, pursuant to the
letter agreement with the Company dated May 13, 1997) and the Financial
Advisor, whose fees and expenses shall be paid by the Company in
accordance with the Company's agreements with such individual and/or
firm(s) (copies of which have been delivered by the Company to USF&G
prior to the date of this Agreement).
(aa) BANK ACCOUNTS. Section 3.1(aa) of the Disclosure Memorandum
contains (i) a true and complete list of the names and locations of all
banks, trust companies, securities brokers, and other financial
institutions at which the Company and each of its Subsidiaries has an
account or safe deposit box or maintains a banking, custodial, trading,
trust, or other similar relationship, (ii) a true and complete list and
description of each such account, box, and relationship, and (iii) a list
of all signatories for each such account and box.
(bb) PREMIUM BALANCES RECEIVABLE. The premium balances receivable
of the Company and its Subsidiaries as reflected in the Company's
financial statements for the quarter ended March 31, 1997, to the extent
uncollected on the date hereof, and the premium balances receivable
reflected on the books of the Company and its Subsidiaries as of the date
hereof, are valid and existing and represent monies due, and the Company
and its Subsidiaries have made reserves reasonably considered adequate
for receivables not collectible in the ordinary course of business, and
(subject to the aforesaid reserves) are subject to no refunds or other
adjustments and to no defenses, rights of setoff, assignments,
restrictions, encumbrances or conditions enforceable by third parties or
affecting any material amount thereof.
(cc) INVESTMENT PORTFOLIO AND OTHER ASSETS. The Company and its
Subsidiaries own an investment portfolio acquired in the ordinary course
of business, and a true and complete list of the securities and other
investments in such investment portfolio, as of June 23, 1997 with
respect to mortgage loans and May 30, 1997 with respect to debt and
equity securities and other investments, with true and correct
information included thereon as to the cost of each such investment and
the market value thereof as of such date, is listed in Section 3.1(cc) of
the Disclosure Memorandum. Except as otherwise set forth in Section
3.1(cc) of the Disclosure Memorandum, (i) none of the investments
included in such investment portfolio is in default in the payment of
principal or interest or dividends or impaired to any extent, (ii) all
investments included in such investment portfolio comply (x) with all
insurance laws and regulations of each of the states to which the Company
and its Subsidiaries is subject relating thereto and (y) with all federal
and state securities laws, and (iii) such investments constitute all of
the investments or holdings (including loans to agencies) of the Company
and its Subsidiaries other than any disclosed in Sections 3.1(c),
3.1(q)(i) or 3.1(q)(iii) of the Disclosure Memorandum
(dd) QUESTIONABLE PAYMENTS. To the knowledge of the Company,
neither the Company nor any of its Subsidiaries nor any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or any Subsidiary has used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity, or made any direct or indirect unlawful
payments to government officials or employees or agents from corporate
funds, or established or maintained any unlawful or unrecorded funds.
(ee) REINSURANCE AGREEMENTS. Section 3.1(ee) of the Disclosure
Memorandum is a true and complete list of all reinsurance treaties and
contracts applicable to the Company (whether as
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ceding insurer or assuming reinsurer) or the Subsidiaries (individually,
a "REINSURANCE AGREEMENT" and collectively, the "REINSURANCE
AGREEMENTS"), copies of which have been delivered or made available to
Parent. Each of the Reinsurance Agreements is valid and binding in all
material respects in accordance with its terms and is in full force and
effect. None of the Reinsurance Agreements will terminate because of a
change in control of the Company or any of the Subsidiaries. No other
party to any Reinsurance Agreement has given notice to the Company or any
of its Subsidiaries that intends to terminate or cancel any such
Reinsurance Agreement as a result of the Merger or the contemplated
operations of the Company or its Subsidiaries after the Merger is
consummated, which termination or change would have a Material Adverse
Effect on the Company. Any Subsidiary of the Company that has ceded
reinsurance pursuant to any such Reinsurance Agreement is entitled to
take full credit in its financial statements for all amounts recoverable
(net of any reserve for collectibility under such Reinsurance Agreement)
with such credit accounted for (i) pursuant to SAP, as a reduction of
such Company's loss reserves, and (ii) pursuant to GAAP, as a reinsurance
recoverable asset.
(ff) QUICK-SURE AUTO AGENCY, INC. Quick-Sure Auto Agency, Inc.
("QUICK-SURE") is a Texas corporation owned 99% by Mark E. Watson, Jr.
("WATSON") and 1% by Dennis Walsh ("Walsh"). There are outstanding (i) no
shares of capital stock of Quick-Sure other than those shares held by
Watson and Walsh; (ii) no securities of Quick-Sure convertible into or
exchangeable for shares of capital stock of Quick-Sure or any other
voting securities of Quick Sure; and (iii) no stock awards, options,
warrants, calls, rights (including stock purchase or preemptive rights)
commitments or agreements to which Quick-Sure is bound, in any case
obligating Quick-Sure to issue, deliver, sell, purchase, redeem or
acquire or cause to be issued, delivered, sold, purchased, redeemed or
acquired, additional shares of its capital stock, any other voting
securities or securities convertible into or exchangeable or exercisable
for voting securities of Quick-Sure, or obligating Quick-Sure to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. Quick-Sure has appointed under a Local Recording Agent
Agreement (the "LRA AGREEMENT") with Titan Insurance Services, Inc.
("TIS"), a subsidiary of Whitehall Insurance Agency of Texas, Inc. (a
wholly owned subsidiary of the Company), to write insurance on behalf of
TIS, and a true and correct copy of the LRA Agreement, including any
amendments thereto, has been provided to the Parent. The LRA Agreement is
terminable by TIS at any time in its sole discretion without any further
liability or obligation to Quick-Sure. Except as set forth in Section
3.1(hh) of the Disclosure Memorandum, Quick-Sure does not engage in any
business other than the writing of insurance policies on behalf of TIS
and is not obligated by any material agreement or other obligation. TIS
has an exclusive right to any renewals of policies written by Quick-Sure,
and nothing in any producer agreement or other agreement to which
Quick-Sure, the Company or any of the Company's Subsidiaries is a party
provides to the contrary. The insurance written by Quick-Sure is placed
with Home State County Mutual Insurance ("HOME STATE") pursuant to a
Managing General Agent Agreement between Home State and TIS (the "MGA
AGREEMENT"), and a true and correct copy of the MGA Agreement, including
any amendments thereto, has been provided to the Parent. All operations
of Quick-Sure have been conducted in accordance with the terms of the LRA
Agreement and the MGA Agreement. All arrangements between Home State,
Quick-Sure, and the Company and/or any of its Subsidiaries are in
compliance with all applicable laws and have received all necessary
consents, approvals and authorizations from any required regulatory
authorities or third parties.
(gg) Tri-West of New Mexico, LLC, a New Mexico limited liability
company, Tri-West of Indianapolis, LLC, an Indiana limited liability
company, and Tri-West of Florida, LLC, a Florida limited liability
company (collectively, the "TRI-WEST AGENCIES") are each owned one-third
by each of E.B. Lyon, III, Michael J. Claypool and Michael J. Bodayle.
There are outstanding (i) no membership or other equity or voting
interests of Tri-West Holdings, LLC ("TRI-WEST") or any Tri-West Agency,
other than as set forth above; (ii) no securities of Tri-West Holdings or
any Tri-West
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Agency convertible into or exchangeable for membership or other equity or
voting interests; and (iii) no stock awards, options, warrants, calls,
rights (including stock purchase or preemptive rights), commitments or
agreements to which Tri-West Holdings or any Tri-West Agency is bound, in
any case obligating Tri-West Holdings or any Tri-West Agency to issue,
deliver, sell, purchase, redeem or acquire or cause to be issued,
delivered, sold, purchased, redeemed or acquired additional membership or
other equity or voting interests or securities convertible into or
exchangeable or exercisable for membership, equity or other voting
interests of Tri-West Holdings or any Tri-West Agency, or obligating
Tri-West Holdings or any Tri-West Agency to grant, extend or enter into
any such option, warrant, call, right, commitment or agreement. Each of
the Tri-West Agencies has entered into a producer agreement with Titan
Indemnity Company ("INDEMNITY") in the form set forth in Section 3.1(gg)
of the Disclosure Memorandum. Tri-West of New Mexico, LLC has entered
into a Direct Response Center Agreement dated November 30, 1996 (together
with the producer agreements referenced in the immediately preceding
sentence, the "TRI-WEST AGREEMENTS"). To the knowledge of the Company,
none of the Tri-West Agencies engage in any business other than the
writing of insurance policies on behalf of Indemnity and none of the
Tri-West Agencies is obligated by any material agreement or other
obligation other than employment agreements entered into in connection
with the acquisition of such Tri-West agency. Each of the Tri-West
Agencies has an exclusive right to any renewals of policies written by
such Tri-West Agency, and, to the knowledge of the Company, nothing in
any producer agreement nor other agreement to which Tri-West Holdings or
any Tri-West Agency is a party provides to the contrary. To the knowledge
of the Company, all operations of the Tri-West Agencies have been
conducted in accordance with the terms of the Tri-West Agreements. All
arrangements between Tri-West Holdings or any Tri-West Agency, on the one
hand, and the Company and/or any of its Subsidiaries, on the other hand,
are in compliance with all applicable laws and have received all
necessary consents, approvals and authorizations from any required
regulatory authorities or third parties.
3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND USF&G. Except as
disclosed in (i) Parent's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, (ii) Parent's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997 (collectively such Form 10-K and Form
10-Q, the "PARENT SEC REPORTS"), or (iii) the Disclosure Memorandum
delivered at or prior to the date of this Agreement (it being understood
that each section of the Disclosure Memorandum shall list all items
applicable to such section, although the inadvertent omission of an item
from one section shall not be a breach of this Agreement if such item and an
explanation of the nature of such item is clearly disclosed in another
section of the Disclosure Memorandum), Parent and USF&G represent and
warrant to the Company as follows:
(a) ORGANIZATION, STANDING AND POWER. Each of Parent and USF&G is a
corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is incorporated, has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted and is
duly qualified or licensed to do business as a foreign corporation and in
good standing to conduct business in each jurisdiction in which the
business it is conducting, or the operation, ownership or leasing of its
properties, makes such qualification or license necessary, other than
such jurisdictions where the failure so to qualify or become so licensed
would not, individually or in the aggregate, adversely affect Parent and
its Subsidiaries taken as a whole in any material respect. Parent has
heretofore made available to the Company complete and correct copies of
its Articles of Incorporation, as currently in effect as of the date of
this Agreement (the "PARENT ARTICLES OF INCORPORATION"), and its Bylaws,
as currently in effect as of the date of this Agreement (the "PARENT
BYLAWS").
(b) CAPITAL STRUCTURE. As of June 30, 1997, the authorized capital
stock of Parent consists of 240,000,000 shares of Parent Common Stock and
12,000,000 shares of Preferred Stock, $50.00
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par value. As of the close of business on June 30, 1997, there were
110,691,498 shares of Parent Common Stock validly issued and outstanding
(all of which are fully paid and nonassessable). As of such date, except
for (i) options to purchase or other obligations to issue 11,531,342
shares of Parent Common Stock, (ii) $175,653,000 principal amount at
maturity of Zero Coupon Convertible Subordinated Notes due March 3, 2009
issued by Parent, and (iii) the Preferred Share Purchase Rights issued
pursuant to the Amended and Restated Rights Agreement dated March 11,
1997, between Parent and The Bank of New York ("PARENT RIGHTS"), there
are no options, warrants, calls or other rights, agreements or
commitments presently outstanding obligating Parent to issue, deliver or
sell shares of its capital stock, or obligating Parent to grant, extend
or enter into any such option, warrant, call or other such right,
agreement or commitment. Parent has not issued any securities in
violation of any preemptive or similar rights.
(c) As of June 30, 1997, the authorized capital stock of USF&G
consists of 40,000,000 shares of USF&G Common Stock, 28,231,715 shares of
which are validly issued and outstanding, fully paid and nonassessable,
and 4,000,000 shares of Preference Stock, par value $50.00 per share,
none of which are issued and outstanding. USF&G has not issued any
securities in violation of any preemptive or similar rights, and there
are no options, warrants, calls, rights or other securities, agreements
or commitments of any character obligating USF&G to issue capital stock.
(d) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) Parent and USF&G have all requisite corporate power and
authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and USF&G. This Agreement
has been duly executed and delivered by Parent and USF&G and
assuming that this Agreement constitutes the valid and binding
agreement of the Company, constitutes a valid and binding
obligation of Parent and USF&G enforceable in accordance with
its terms and conditions except that the enforcement hereof may
be limited by (A) applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other
similar laws now or hereafter in effect relating to creditors'
rights generally and (B) general principles of equity
(regardless of whether enforceability is considered in a
proceeding at law or in equity) and (c) any ruling or action of
any Governmental Entity as set forth in Section 3.2(d)(iii).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by Parent
and USF&G will not result in a violation pursuant to (A) any
provision of the Parent Articles of Incorporation or Parent
Bylaws or the comparable documents of any of its Subsidiaries
or (B) except as to which requisite waivers or consents have
been obtained as specifically identified in Section 3.2(d) of
the Disclosure Memorandum and assuming the consents, approvals,
authorizations or permits and filings or notifications referred
to in paragraph (iii) of this Section 3.2(d) are duly and
timely obtained or made, any loan or credit agreement, note,
mortgage, deed of trust, indenture, lease, or any other
agreement, obligation, instrument, concession or license or any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent, USF&G or any of their
respective properties or assets, except for such Violations
which would not, individually or in the aggregate, adversely
affect Parent and its Subsidiaries taken as a whole in any
material respect.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit
from a Governmental Entity is required by or with respect to
Parent or USF&G or any of their respective Subsidiaries in
connection with the
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execution and delivery of this Agreement by Parent or USF&G or
the consummation by Parent or USF&G of the transactions
contemplated hereby, except for: (A) any actions, consents,
approvals, filings and/or notices that may be required under the
insurance laws and regulations of the jurisdictions in which the
Subsidiaries of Parent that are insurance companies are
domiciled or licensed, each of which is listed in Section
3.2(d)(iii) of the Disclosure Memorandum; (B) the filing of a
pre-merger notification and report form by Parent under the HSR
Act, and the expiration or termination of the applicable waiting
period thereunder; (C) the filing with the SEC of (x) the Proxy
Statement, (y) the Form S-4, and (z) such reports under and such
other compliance with the Exchange Act and the rules and
regulations thereunder as may be required in connection with
this Agreement and the transactions contemplated hereby; (D) the
filing of the Articles of Merger with the Secretary of State of
the State of Texas and the Maryland State Department of
Assessments and Taxation; and (E) such filings and approvals as
may be required by any applicable state securities, "blue sky"
or takeover laws.
(e) GOVERNMENT FILINGS. Parent has made available to the Company a
true and complete copy of each report, schedule and definitive proxy
statement filed by Parent with the SEC pursuant to the Exchange Act and
the Rules and Regulations promulgated thereunder since December 31, 1994
and prior to the date of this Agreement other than reports on Form 11-K
relating to employee benefit plans, which are all the documents (other
than preliminary material) that Parent was required to file with the SEC
under the Exchange Act since such date. As of their respective dates, the
Parent SEC Reports complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to such Parent SEC Reports, and none of
the Parent SEC Reports contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The consolidated financial
statements of Parent included in the Parent SEC Reports comply as to form
in all material respects with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and
fairly present in accordance with applicable requirements of GAAP the
consolidated financial position of Parent and its consolidated
subsidiaries as of the dates therein and the consolidated results of
their operations and cash flows for the periods presented therein
(subject, in the case of unaudited interim financial statements, to
normal recurring adjustments none of which are material). Section 3.2(e)
of the Disclosure Memorandum lists with respect to the Parent Common
Stock for the period since December 31, 1996 and prior to the date of
this Agreement each: (i) Schedule 13D filed with the SEC and (ii)
application for change in control filed under the insurance holding
company laws of any state or other jurisdiction.
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Parent (including information concerning USF&G) for inclusion
or incorporation by reference in (i) the Form S-4 will, at the time the
Form S-4 is filed with the SEC, and at any time it is amended or
supplemented or at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading, and (ii) the Proxy Statement will, on the date it
is first mailed to the holders of Company Common Stock or at the time of
the Shareholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4
will, as of its effective date, and the prospectus
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contained therein will, as of its date, comply as to form in all material
respects with the requirements of the Securities Act and the rules and
regulations promulgated thereunder, except that no representation is made
by Parent with respect to statements made or incorporated by reference
therein based on information supplied in writing by the Company
specifically for inclusion therein. If, at any time prior to the
Shareholders' Meeting, any event with respect to Parent, or with respect
to other information supplied by Parent for inclusion in the Proxy
Statement, shall occur which is required to be described in an amendment
of, or a supplement to, any of such documents, such event shall be so
described, and such amendment or supplement shall be promptly filed with
the SEC and, as required by law, disseminated to the shareholders of
Parent.
(g) COMPLIANCE WITH APPLICABLE LAWS.
(i) Except as disclosed in Section 3.2(g)(i) of the Disclosure
Memorandum, the business of Parent and each of its Subsidiaries
is being conducted in compliance in all material respects with
all applicable laws, including, without limitation, all
insurance laws, ordinances, rules and regulations, decrees and
orders of any Governmental Entity, and all notices, reports,
documents and other information required to be filed thereunder
within the last three years were properly filed and were in
compliance in all respects with such laws.
(ii) OTHER LICENSES. Parent and each of its Subsidiaries owns or
validly holds all licenses, franchises, permits, approvals,
authorizations, exemptions, classifications, registrations,
rights and similar documents which are necessary for it to own,
lease or operate its properties and assets and to conduct its
business as now conducted, except for such licenses the failure
to hold which would not individually or in the aggregate
adversely affect Parent and its Subsidiaries taken as a whole
in any material respect. The business of Parent and each of its
Subsidiaries has been and is being conducted in compliance in
all material respects with all such licenses. All such licenses
are in full force and effect, and there is no proceeding or
investigation pending or, to the knowledge of Parent,
threatened which would reasonably be expected to lead to the
revocation, amendment, failure to renew, limitation, suspension
or restriction of any such license.
(h) ABSENCE OF UNDISCLOSED LIABILITIES. Since December 31, 1996,
neither Parent nor any of its Subsidiaries has incurred any liabilities,
except: (i) liabilities arising in the ordinary course of business
consistent with past practice, which individually or in the aggregate
would not adversely affect Parent and its Subsidiaries taken as a whole
in any material respect; (ii) as specifically and individually reflected
in Section 3.2(h) of the Disclosure Memorandum or Parent SEC Reports; or
(iii) other liabilities, which, individually or in the aggregate,
together with those liabilities referenced in subparagraphs (i) and (ii),
would not adversely affect Parent and its Subsidiaries taken as a whole
in any material respect.
(i) LITIGATION. Except as set forth on Section 3.2(i) of the
Disclosure Memorandum and except for claims arising in the ordinary
course of business, (A) there is no suit, action, investigation,
arbitration or proceeding pending or, to the knowledge of Parent,
threatened against or affecting Parent or any of its Subsidiaries, at law
or in equity, before any person and (B) there is no writ judgment,
decree, injunction, rule or similar order of any Governmental Entity or
arbitrator outstanding against Parent or any of its Subsidiaries, which,
individually or in the aggregate, would adversely affect Parent and its
Subsidiaries taken as a whole in any material respect.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Parent SEC Reports, since March 31, 1997, there has not been (i) any
transaction, commitment, dispute or other event or condition of any
character (whether or not in the ordinary course of business) which
would,
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individually or in the aggregate, have a Material Adverse Effect on
Parent; or (ii) any damage, destruction or loss, whether or not covered
by insurance, which, insofar as reasonably can be foreseen, in the future
would, individually or in the aggregate, have a Material Adverse Effect
on Parent.
(k) BOARD RECOMMENDATION. The Board of Directors of Parent and
USF&G, at a meeting duly called and held or by unanimous written consent,
has by the requisite vote of directors determined that this Agreement and
the transactions contemplated hereby are fair to and in the best
interests of the shareholders of Parent and USF&G, as the case may be and
has approved the same, and in the case of USF&G resolved to recommend
that Parent approve this Agreement and the transactions contemplated
herein.
(l) VOTE REQUIRED. The affirmative vote of Parent, as the sole
stockholder of USF&G, is sufficient, and no further vote or consent of
any class or series of capital stock of Parent or USF&G is necessary
under applicable law or otherwise, to approve the Merger and the other
transactions contemplated hereby on the part of Parent or USF&G.
(m) BROKERS. Parent and USF&G represent, as to themselves and their
affiliates, that no agent, broker, investment broker, financial advisor
or other firm or person is or will be entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement, except for Merrill Lynch
& Co., Merrill Lynch Pierce Fenner & Smith Incorporated, whose fees and
expenses shall be paid by Parent.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the earlier of (i) the Effective Time and
(ii) the termination of this Agreement pursuant to Article VII, the Company
agrees (and has caused its Subsidiaries to agree) that (except to the extent
that Parent shall consent in writing, which consent shall not be
unreasonably withheld or delayed):
(a) ORDINARY COURSE. The Company will (and will cause each of its
Subsidiaries to) conduct its business only in the ordinary course and
consistent with past practice. Without limiting the generality of the
foregoing and except as expressly provided herein or in Section 4.1(a) of
the Disclosure Memorandum:
(i) The Company will use (and will cause each of its Subsidiaries to
use) reasonable best efforts to (A) maintain in full force and
effect all Company Material Contracts, except those which expire
in accordance with their terms, (B) maintain all Company
Licenses, qualifications, and authorizations of the Company to
do business in each jurisdiction in which it is so licensed,
qualified, or authorized, and (C) maintain each rating
classification assigned to the Subsidiaries of the Company that
are insurance companies by all rating agencies as of the date of
this Agreement, except in the case of (A) and (B) above where
the Company's Board of Directors determines in good faith that
the maintenance of any such Company Material Contract or Company
License, qualification or authorization is no longer necessary
or advisable for the conduct of the Company as presently
conducted or as proposed to be conducted after the Effective
Time, if appropriate after consultation with USF&G pursuant to
Section 5.12.
(ii) The Company will (and will cause each of its Subsidiaries to)
in all material respects (A) maintain all its assets and
properties in good working order and condition (ordinary wear
and tear excepted), and (B) continue all current marketing and
selling activities relating to its business, operations and
affairs, except where the Company's Board of
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Directors determines in good faith that such assets, properties
or marketing or selling activities are no longer necessary or
advisable for the conduct of the Company as presently conducted
or as proposed to be conducted after the Effective Time, if
appropriate after consultation with USF&G pursuant to Section
5.12.
(iii) The Company will (and will cause each of its Subsidiaries to)
maintain its books and records in the usual manner and
consistent with past practice and will not permit a material
change in any underwriting, investment, actuarial, financial
reporting, tax, or accounting practice or policy or in any
assumption underlying such a practice or policy, or in any
method of calculating any bad debt, contingency, insurance, or
other reserve for financial reporting purposes or for other
accounting purposes (including any practice, policy,
assumption, or method relating to or affecting the
determination of its insurance in force, premium or investment
income, reserves or other similar amounts, or operating ratios
with respect to expenses, losses or lapses).
(iv) The Company will (and will cause each of its Subsidiaries to)
(A) prepare properly and to file duly and validly all Tax
Returns required to be filed prior to the Closing Date with the
appropriate taxing authority, (B) pay duly and fully all Taxes
which are due with respect to the periods covered by such Tax
Returns or otherwise levied or assessed upon such entity or any
of its assets or properties, and to withhold or collect and pay
to the proper taxing authorities all Taxes that such entity is
required to so withhold or collect and pay, unless such taxes
are being contested in good faith and, if appropriate,
reasonable reserves therefore have been established and
reflected in the books and records of such entity and in
accordance with SAP and (C) provide Parent with copies of all
federal income tax returns and all material state income tax
returns as soon as practicable after the preparation, but prior
to the filing, thereof. The Company will not make (and will
prohibit its Subsidiaries from making) any tax election or
settle or compromise any income tax liability that may
reasonably be expected to be material to the Company and its
Subsidiaries taken as a whole.
(v) The Company will (and will cause each of its Subsidiaries to)
cause all statutory reserves and other similar amounts with
respect to losses, benefits, claims, and expenses in respect of
the Subsidiary's insurance business to be (A) determined in
accordance with SAP and generally accepted actuarial
assumptions, (B) determined in accordance with the benefits
specified in the related insurance or reinsurance Contracts in
all material respects, (C) calculated, established and reflected
on a basis consistent in all material respects with those
reserves and other similar amounts and reserving methods
followed at December 31, 1996, (D) determined in conformity with
the requirements of the insurance laws of each applicable
jurisdiction in all material respects and (E) adequate, in all
material respects, based upon then current information and
assumptions to cover the total amount of all matured and
reasonably anticipated unmatured benefits, dividends, losses,
claims, expenses, and other liabilities of the Subsidiary under
all insurance or reinsurance Contracts which the Subsidiary has
or will have any liability. The Company will (and will cause
each of its Subsidiaries to) continue to own assets and
properties that qualify as legal reserve assets under all
applicable insurance laws in an amount at least equal to all
required reserves and other similar amounts.
(vi) The Company will (and will cause each of its Subsidiaries to)
use reasonable best efforts to maintain in full force and
effect substantially the same levels of coverage as the
insurance afforded under the insurance coverage described in
Section 3.1(v) of the Disclosure Memorandum.
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(vii) The Company will (and will cause each of its Subsidiaries to)
refrain from entering into any new treaty of reinsurance,
coinsurance, or other similar Contract, whether as reinsurer or
reinsured.
(viii) The Company will (and will cause each of its Subsidiaries to)
continue to comply in all material respects with all laws
applicable to its business, operations or affairs.
(ix) The Company shall not incur (and shall prohibit each of its
Subsidiaries from incurring) any capital expenditure in excess
of $75,000, individually or in the aggregate.
(x) Subject to Sections 2.6 and 2.7, the Company shall not (and
shall cause each of its Subsidiaries to not): (A) grant any
increases in the compensation of any of its directors, officers
or Key Employees; (B) pay or agree to pay any pension,
retirement allowance or other employee benefit not required to
be paid prior to the Effective Time by any of the existing
Company Benefit Plans or Company Employee Arrangements as in
effect on the date hereof to any such director, officer or
employee, whether past or present; (C) enter into any new, or
amend, modify or grant any consent or waiver with respect to any
existing, employment, retention or severance or termination
agreement with any director, officer or employee; or (D) become
obligated under any new Benefit Plan or Employee Arrangement,
which was not in existence on the date hereof, or amend any such
plan or arrangement in existence on the date hereof if such
amendment would have the effect of enhancing any benefits
thereunder.
(xi) Other than with respect to drawdowns in the ordinary course of
business with respect to the Company Credit Facilities, the
Company shall not (and shall cause each of its Subsidiaries to
not) assume or incur (which shall not be deemed to include
entering into credit agreements, lines of credit or similar
arrangements until borrowings are made under such arrangements)
any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt securities of the Company or any
of its Subsidiaries or guarantee any debt securities of others
or enter into any lease (whether such lease is an operating or
capital lease) or create any Liens on the property of the
Company or any of its Subsidiaries in connection with any
indebtedness thereof, or enter into any "keep well" or other
agreement or arrangement to maintain the financial condition of
another person.
(xii) The Company shall not (and shall cause each of its Subsidiaries
to not) pay, discharge, settle or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms
of liabilities reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the
notes thereto) of the Company dated included in the Filed
Company SEC Documents, or incurred since the date of such
financial statements in the ordinary course of business
consistent with past practice. Except in the ordinary course of
business consistent with past practice, the Company shall not
effect (and shall prohibit each of its Subsidiaries from
effecting) any settlements of any legal proceedings without the
prior written consent (such consent not to be unreasonably
withheld) of Parent.
The Company shall, from the date of this Agreement through the Effective
Time or earlier termination of this Agreement pursuant to Article VII, cause its
management and that of its Subsidiaries to consult on a regular basis and in
good faith with the employees and representatives of Parent concerning the
management of the Company's and its Subsidiaries' businesses.
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(b) DIVIDENDS; CHANGES IN STOCK. Neither the Company nor any of its
Subsidiaries shall (i) declare or pay any dividends on or make other
distributions in respect of any of its capital stock (other than, with
respect to the Company, regular cash dividends on Company Common Stock
not in excess of $0.08 per share of Company Common Stock which shall be
paid on a quarterly basis, with identical record and payment dates as the
quarterly dividends paid by Parent on Parent Common Stock), (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, (iii) issue any shares
of capital stock (except pursuant to and in accordance with the terms of
currently outstanding Company Options and Company Warrants), or (iv)
repurchase or otherwise acquire any shares of its capital stock, except
as required by the terms of any employee benefit plan as in effect on the
date of this Agreement.
(c) ISSUANCE OF SECURITIES. Neither the Company nor any of its
Subsidiaries shall (i) grant any options, warrants or rights, to purchase
shares of its capital stock, (ii) amend the terms of or reprice any
Company Warrant or Company Option or amend the terms of the Stock Option
Plan or the Directors' Stock Option Plan, or (iii) issue, deliver or
sell, or pledge or otherwise encumber any shares of its capital stock, or
authorize or propose to issue, deliver or sell, any shares of its capital
stock, any Company Voting Debt or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, Company Voting
Debt or convertible securities, or agree to do any of the foregoing,
other than: (A) issue shares of Company Common Stock upon the exercise of
Options that are outstanding on the date of this Agreement or (B) issue
shares of Company Common Stock upon the exercise of Warrants that are
outstanding on the date of this Agreement.
(d) NO SOLICITATION. Prior to the Effective Time, the Company
agrees (a) that neither it nor any of its affiliates or Subsidiaries
shall, and it shall not authorize or permit its officers, directors,
employees, representatives, investment bankers, attorneys, accountants or
other agents to, initiate, solicit or encourage (including by way of
furnishing information), directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a
merger, consolidation or other business combination including the Company
or any of its Subsidiaries or any acquisition or similar transaction
(including, without limitation, a tender or exchange offer) involving the
purchase of (i) all or any significant portion of the assets of the
Company and its Subsidiaries taken as a whole, (ii) 15% or more of the
outstanding shares of Company Common Stock or (iii) 15% or more of the
outstanding shares of the capital stock of any Subsidiary of the Company
(any such proposal or offer being hereinafter referred to as an
"ACQUISITION PROPOSAL"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions
with, any person or group relating to an Acquisition Proposal (excluding
the transactions contemplated by this Agreement), or otherwise facilitate
any effort or attempt to make or implement an Acquisition Proposal; (b)
that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties with respect to
any of the foregoing, and it will take the necessary steps to inform such
parties of its obligations under this Section 4.1(d) and will require
each such party who has signed a confidentiality agreement to honor the
restrictions therein with respect to open market purchases of Company
Common Stock and to return or destroy all confidential information of the
Company previously provided by it; and (c) that it will notify Parent
immediately (orally followed by written confirmation) if any such
inquiries, proposals or offers are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it or any of such persons. Notwithstanding
the above, (A) the Company may provide non-public information to any
person or group if (i) such person or group has expressed a written
interest in (which, unless such person previously has been provided
confidential information, need not constitute a proposal for) making an
Acquisition Proposal providing greater aggregate value to the Company
and/or the
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Company's shareholders than the transactions contemplated by this
Agreement; (ii) the Company reasonably believes such person or group has
the financial ability to consummate an Acquisition Proposal; (iii) such
person or group executes a confidentiality letter no less favorable to
the Company than the Parent Confidentiality Letter (as defined below);
(iv) the Board of Directors of the Company, based upon the advice of
outside counsel, determines in good faith that it is necessary, in order
to comply with the Board's fiduciary duties under applicable law, to
provide such requested information; and (v) the Company provides notice
to Parent of the identity of the person or group to whom the non-public
information is being given at or before the time such information is
given and the Company delivers to Parent a copy of all such information
concurrently with its delivery to the requesting party and (B) the
Company may (I) enter into discussions or negotiate with any person or
group that makes a wholly unsolicited BONA FIDE Acquisition Proposal
providing greater aggregate value to the Company and/or the Company's
shareholders than the transactions contemplated by this Agreement, if,
and only to the extent that, (1) the Board of Directors of the Company,
based upon the advice of outside counsel, determines in good faith that
such action is required for the Board of Directors to comply with its
fiduciary duties to stockholders imposed by law, (2) prior to entering
into discussions or negotiations with such person or group, the Company
provides written notice (the "ACQUISITION PROPOSAL NOTICE") to Parent to
the effect that it is entering into discussions or negotiations with such
person or group, and (3) the Company keeps Parent informed of the status
and all material information including the identity of such person or
group with respect to any such discussions or negotiations to the extent
such disclosure would not constitute a violation of any applicable law or
any confidentiality agreement with such person or group; and (II) to the
extent required, comply with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
(e) NO ACQUISITIONS; NO SUBSIDIARIES. Except as permitted by
Section 4.1(d), neither the Company nor any Subsidiary of the Company
shall merge or consolidate with, or acquire any equity interest in, any
corporation, partnership, association or other business organization, or
enter into an agreement with respect thereto. Neither the Company nor any
Subsidiary of the Company shall (i) acquire or agree to acquire any
assets of any corporation, partnership, association or other business
organization or division thereof, except for the purchase of inventory
and supplies in the ordinary course of business or (ii) create any
Subsidiary.
(f) NO DISPOSITIONS. Other than dispositions set forth in Section
4.1(f) of the Disclosure Memorandum and dispositions in the ordinary
course of business consistent with past practice which are not material,
individually or in the aggregate, to such party, and neither the Company
nor any Subsidiary of the Company shall sell, lease, encumber or
otherwise dispose of, or agree to sell, lease (whether such lease is an
operating or capital lease), reinsure, mortgage or otherwise encumber or
subject to any lien, encumber or otherwise dispose of, any of its
properties.
(g) NO DISSOLUTION, ETC. Except as otherwise permitted or
contemplated by this Agreement, neither the Company nor any of its
Subsidiaries shall authorize, recommend, propose or announce an intention
to adopt a plan of complete or partial liquidation or dissolution of such
entity.
(h) INVESTMENTS. Neither the Company nor any Subsidiary of the
Company shall make any investment other than (A) money market
instruments, A-1/P-1 commercial paper, treasury bills or other cash
equivalents, (B) investment grade publicly traded debt securities or (C)
exchange traded or Nasdaq National Market System traded equity-related
securities which in the aggregate, when combined with any other
equity-related securities holdings (which shall include preferred stock),
do not exceed nine percent (9%) of the total investments (excluding cash)
of the Company and its Subsidiaries, taken as a whole, in each case which
are made in accordance with
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the Company's Investment Policy Guidelines (effective January 1, 1995)
(the "INVESTMENT GUIDELINES") and otherwise in accordance with past
practice. Neither the Company nor any Subsidiary of the Company shall
make any portfolio investments except in the ordinary course of business.
(i) OTHER ACTIONS. Except as contemplated or permitted by this
Agreement, neither Parent nor the Company shall authorize, take or agree
or commit to (and shall cause each of its respective Subsidiaries to take
or commit or agree to) take any action that is reasonably likely to
result in any of the representations or warranties hereunder being untrue
in any material respect or in any of the covenants hereunder or any of
the conditions to the Merger not being satisfied in all material
respects.
(j) QUICK-SURE. The Company will take commercially reasonable
actions necessary to cause all of the outstanding capital stock of
Quick-Sure to be transferred to USF&G or its designee for a nominal price
per share and to take whatever other actions are reasonably necessary to
ensure that upon Closing, the material benefits of Quick-Sure's
relationships with Home State, the Company and the Company's Subsidiaries
inure to the benefit of USF&G or its designee. Without limiting the
generality of the foregoing, the Company agrees to use commercially
reasonable efforts to cause Quick-Sure to assign any leases to which
Quick-Sure is a party to USF&G or its designee if so requested by the
Parent.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PREPARATION OF FORM S-4 AND PROXY STATEMENT; SHAREHOLDER MEETING;
COMFORT LETTERS.
(a) Promptly following the date of this Agreement, the Company shall
prepare the Proxy Statement, and Parent shall prepare and file with the
SEC the Form S-4, in which the Proxy Statement will be included. Parent
will cooperate with the Company in connection with the preparation of the
Proxy Statement including, but not limited to, furnishing to the Company
any and all information regarding Parent as may be required to be
disclosed therein. Parent shall use reasonable best efforts to have the
Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing. The Company will use reasonable best
efforts to cause the Proxy Statement to be mailed to the Company's
shareholders as promptly as practicable after the Form S-4 is declared
effective under the Securities Act. Parent shall also take any action
required to be taken under any applicable state securities laws in
connection with the issuance of Parent Common Stock following the Merger.
The information provided and to be provided by Parent and the Company,
respectively, for use in the Form S-4 shall, at the time the Form S-4
becomes effective and on the date of the Shareholders' Meeting referred
to below, be true and correct in all material respects and shall not omit
to state any material fact required to be stated therein or necessary in
order to make such information not misleading, and the Company and Parent
each agree to correct any information provided by it for use in the Form
S-4 which shall have become false or misleading.
(b) Parent will as promptly as practicable notify the Company of (i)
the effectiveness of the Form S-4, (ii) the receipt of any comments from
the SEC, and (iii) any request by the SEC for any amendment to the Form
S-4 for additional information. All filings with the SEC, including the
Form S-4 and any amendment thereto, and all mailings to the Company's
shareholders in connection with the Merger, including the Proxy
Statement, shall be subject to the prior review, comment and approval of
Parent or the Company, as the case may be (such approval not to be
unreasonably withheld or delayed).
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(c) The Company will, as promptly as practicable following the date
of this Agreement and in consultation with Parent, duly call and give
notice of, and, provided that this Agreement has not been terminated,
convene and hold the Shareholders' Meeting for the purpose of approving
this Agreement and the transactions contemplated by this Agreement to the
extent required by the TBCA. Except as provided below, the Company will,
through its Board of Directors, recommend to its shareholders approval of
the foregoing matters, as set forth in Section 3.1(x); provided, however,
that the Board of Directors of the Company may fail to make or may
withdraw or modify such recommendation, but only to the extent that the
Board of Directors of the Company shall have concluded in good faith
after receiving the advice of outside counsel that such action is
required to prevent the Board of Directors of the Company from breaching
its fiduciary duties to the Company or the shareholders of the Company
under applicable law. Any such recommendation, together with a copy of
the opinion referred to in Section 3.1(w), shall be included in the Proxy
Statement. The Company will use reasonable best efforts to hold such
meeting as soon as practicable after the date hereof.
(d) Parent shall use reasonable best efforts to cause to be delivered
to the Company a letter of Ernst & Young LLP, Parent's independent public
accountants, dated a date within two business days before the date on
which the Form S-4 shall become effective and a letter of Ernst & Young
LLP dated a date within two business days before the date of the
Shareholders' Meeting, addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and
substance for letters delivered by independent public accountants in
connection with registration statements similar to the Form S-4.
(e) The Company shall use reasonable best efforts to cause to be
delivered to Parent a letter of KPMG Peat Marwick LLP, the Company's
independent public accountants, dated a date within two business days
before the date on which the Form S-4 shall become effective and a letter
of KPMG Peat Marwick LLP dated a date within two business days before the
Shareholders' Meeting, addressed to Parent, in form and substance
reasonably satisfactory to Parent and customary in scope and substance
for letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
5.2 CONTRACT AND REGULATORY APPROVALS. USF&G, Parent and the Company
will use (and will cause each of its Subsidiaries to use) reasonable best
efforts to obtain as promptly as practicable (a) all approvals and consents
required of any person or entity under all Contracts to which the Company or
any of its Subsidiaries is a party to consummate the transactions
contemplated hereby, and (b) all approvals, authorizations, and clearances
of Governmental Entities required of the Company and each of its
Subsidiaries to consummate the transactions contemplated hereby. The Company
will, and will cause each of its Subsidiaries to, (i) provide such other
information and communications to such Governmental Entities as USF&G,
Parent or such authorities may reasonably request, and (ii) cooperate with
USF&G or Parent in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities and
other persons or entities required of USF&G or Parent to consummate the
transactions contemplated hereby. Each of USF&G and the Parent will (i)
provide such information and communications to such Governmental Entities as
the Company or such authorities may reasonably request, and (ii) cooperate
with the Company in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities and
other persons or entities required of the Company to consummate the
transactions contemplated hereby. Parent and USF&G shall use their
reasonable best efforts to take or cause to be taken all actions necessary,
proper or advisable to obtain any consent, waiver, approval or authorization
relating to any federal, state or local statutes, rules, regulations,
orders, decrees, administrative and judicial doctrines and other laws that
are designed or intended to prohibit, restrict or regulate actions having
the purpose or effect of monopolization, lessening of competition or
restraint of trade and includes the HSR Act that is required for
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consummation of the transactions contemplated by this Agreement; provided,
however, that the foregoing shall not obligate Parent or USF&G to agree to
take any action which would have a material adverse effect on the expected
benefits to Parent of the transactions contemplated hereby.
5.3 HSR FILINGS. The Company will (a) take all actions necessary to
make the filings required of it or its affiliates under the HSR Act with
respect to the transactions contemplated by this Agreement, (b) comply with
any request for additional information received by the Company or its
affiliates from the Federal Trade Commission or Antitrust Division of the
Department of Justice pursuant to the HSR Act, (c) cooperate with Parent in
connection with Parent's filings under the HSR Act, and (d) request early
termination of the applicable waiting period.
5.4 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Upon reasonable notice, the Company shall (and shall cause each
of its Subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of Parent or USF&G, access, during
normal business hours during the period prior to the Effective Time, to
all its properties, books, contracts, commitments, employees, auditors,
agents, representatives and records and, during such period, the Company
shall (and shall cause each of its Subsidiaries to) furnish promptly to
Parent, (i) each SAP Annual Statement and SAP Quarterly Statement filed
by the Company's Subsidiaries during such period pursuant to the
requirements of any applicable law; (ii) a copy of each report, schedule,
registration statement and other document filed or received by it during
such period pursuant to SEC requirements; (iii) all correspondence or
written communication with A.M. Best and Company or any of its
Subsidiaries, Standard & Poor's Corporation, Moody's Investor Services,
Inc., and with any Governmental Entity or insurance regulatory
authorities which relates to the transactions contemplated hereby or
which is otherwise material to the financial condition or operation of
the Company and its Subsidiaries taken as a whole; and (iv) all other
information concerning its business, properties and personnel as the
other party may reasonably request.
(b) Upon reasonable notice, Parent shall (and shall cause each of its
Subsidiaries to) afford to the officers, employees, accountants, counsel
and other representatives of the Company, access, during normal business
hours during the period prior to the Effective Time, to the books,
records, officers and employees of Parent and its Subsidiaries reasonably
necessary to perform a "due diligence" review with respect to (i)
material matters, conditions or events arising after the date hereof or
(ii) matters, conditions or events which the Company has a reasonable
basis for believing make any of the representations or warranties of
Parent contained herein not true in any material respect and, during such
period, Parent shall (and shall cause each of its Subsidiaries to)
furnish promptly to the Company, (a) each SAP Annual Statement and SAP
Quarterly Statement filed by such party's Subsidiaries during such period
pursuant to the requirements of any applicable law; (b) a copy of each
report filed by Parent with the SEC during such period pursuant to SEC
requirements; and (c) all correspondence or written communication with
A.M. Best and Company or any of its Subsidiaries, Standard & Poor's
Corporation, Moody's Investor Services, Inc., and with any Governmental
Entity or insurance regulatory authorities which primarily relates to the
transactions contemplated hereby.
(c) The Confidentiality Agreement dated June 26, 1997 (the "PARENT
CONFIDENTIALITY AGREEMENT"), between Parent and the Company and the
confidentiality agreement dated July 30, 1997 (the "COMPANY
CONFIDENTIALITY AGREEMENT"), between the Company and Parent shall apply
with respect to information furnished thereunder or hereunder and any
other activities contemplated thereby.
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5.5 FEES AND EXPENSES.
(a) Except as otherwise provided in this Section 5.5 and except with
respect to claims for damages incurred as a result of the breach of this
Agreement (it being understood that such claims by Parent, USF&G or their
affiliates shall be precluded under Section 5.5(d) by the payment of the
amount set forth in Section 5.5(b) when Section 5.5(b) is applicable),
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring
such expense.
(b) The Company agrees to pay Parent a fee in immediately available
funds equal to $7,500,000 if (i) this Agreement is terminated pursuant to
Section 7.1(d) hereof and any person or group of persons shall, within 90
days after the date of such termination, consummate an Acquisition
Proposal or enter into an agreement with respect to an Acquisition
Proposal or (ii) this Agreement is terminated pursuant to Section 7.1(e)
hereof. Such fee shall be paid within one business day of any termination
of this Agreement pursuant to Section 7.1(e) hereof or within one
business day of the consummation of an Acquisition Proposal or the entry
into of any agreement with respect to an Acquisition Proposal, in either
case during the 90-day period after any termination of this Agreement
pursuant to Section 7.1(d) hereof.
(c) Any amounts due under this Section 5.5 that are not paid when due
shall bear interest at the rate of 9% per annum from the date due through
and including the date paid.
(d) Upon the payment of any fee pursuant to Section 5.5(b) above
(regardless of whether a transaction pursuant to an Acquisition Proposal
is consummated), such fee shall be the exclusive remedy of Parent, USF&G
and their affiliates relating to this Agreement or the transactions
contemplated thereunder, and upon payment of any such fee, Parent, USF&G
and their affiliates shall have no rights, in tort, contract or
otherwise, arising under or relating to this Agreement or the
transactions contemplated thereunder, except for rights under the second
sentence of Section 5.4 hereof.
(e) The fee set forth in Section 5.5(b) shall be payable solely under
the circumstances set forth in Section 5.5(b) and shall not be payable
under any other circumstances.
5.6 INDEMNIFICATION.
(a) The Company shall, and from and after the Effective Time the
Surviving Corporation shall, indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date hereof or
who becomes prior to the Effective Time, an officer or director of the
Company (the "INDEMNIFIED PARTIES") against all losses, claims, damages,
costs, expenses (including attorneys' fees and expenses), liabilities or
judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be unreasonably withheld) of
or in connection with any threatened or actual claim, action, suit,
proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director or
officer of the Company whether pertaining to any matter existing or
occurring at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective Time ("INDEMNIFIED
LIABILITIES"), including all Indemnified Liabilities based in whole or in
part on, or arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, in each case to the
full extent a corporation is permitted under applicable law to indemnify
its own directors or officers as the case may be (and the Company and the
Surviving Corporation, as the case may be, will pay expenses in advance
of the final disposition of any such action or proceeding to each
Indemnified Party to the full extent permitted by law). Without limiting
the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Parties (whether arising
before or after the Effective Time), (i) the Indemnified Parties may
retain counsel satisfactory to them and
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the Company (or them and the Surviving Corporation after the Effective
Time) and the Company (or after the Effective Time, the Surviving
Corporation) shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefor are received;
and (ii) the Company (or after the Effective Time, the Surviving
Corporation) will use reasonable best efforts to assist in the defense of
any such matter, provided that neither the Company nor the Surviving
Corporation shall be liable for any settlement effected without its prior
written consent which consent shall not unreasonably be withheld. Any
Indemnified Party wishing to claim indemnification under this Section
5.6, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify the Company (or after the Effective Time, the
Surviving Corporation) (but the failure so to notify shall not relieve a
party from any liability which it may have under this Section 5.6 except
to the extent such failure prejudices such party). The Indemnified
Parties as a group may retain only one law firm to represent them with
respect to each such matter unless there is, under applicable standards
of professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnified Parties. The Company and Parent
agree that the foregoing rights to indemnification, including provisions
relating to advances of expenses incurred in defense of any action or
suit, existing in favor of the Indemnified Parties with respect to
matters occurring through the Effective Time, shall survive the Merger
and shall continue in full force and effect for a period of not less than
six years from the Effective Time; provided, however, that all rights to
indemnification in respect of any Indemnified Liabilities asserted or
made within such period shall continue until the disposition of such
Indemnified Liabilities. Furthermore, the provisions with respect to
indemnification set forth in the articles of incorporation or bylaws of
the Surviving Corporation shall not be amended for a period of six years
following the Effective Time if such amendment would materially and
adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of the Company in
respect of actions or omissions occurring at or prior to the Effective
Time.
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies
of directors' and officers' liability insurance maintained by the Company
(provided that Parent may substitute therefor (i) policies of at least
the same coverage and amounts containing terms and conditions which are
no less advantageous in any material respect to the Indemnified Parties
and (ii) coverage under Parent's directors' and officers' liability
insurance coverage if such substitution is approved by those persons, in
their sole discretion, who at the Effective Time constitute or
constituted a majority of the Company's Board of Directors) with respect
to matters arising before the Effective Time, provided that the Surviving
Corporation shall not be required to pay an annual premium for such
insurance in excess of 200% of the last annual premium paid by the
Company prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount. The last annual premium paid by the
Company was $130,000.
(c) The provisions of this Section 5.6 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his
heirs and his personal representatives and shall be binding on all
successors and assigns of the Company and the Surviving Corporation.
(d) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any person, then, and
in each case, to the extent necessary to effectuate the purpose of this
Section 5.6, proper provision shall be made so that the successors and
assigns of the Surviving Corporation shall succeed to the obligations set
forth in this Section 5.6 and none of the actions described in clauses
(i) or (ii) shall be taken until such provision is made.
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5.7 REASONABLE BEST EFFORTS. Subject to the terms and conditions of
this Agreement, except as otherwise expressly contemplated hereby, each of
the parties hereto agrees to use all reasonable best efforts to take, or
cause to be taken, all action and to do, or cause to be done as promptly as
practicable, all things necessary, proper or advisable, under applicable
laws and regulations or otherwise, to consummate and make effective the
Merger and the other transactions contemplated by this Agreement, subject,
as applicable, to the Company Shareholder Approval.
5.8 PUBLIC ANNOUNCEMENTS. The parties hereto will consult with each
other regarding any press release or public announcement pertaining to the
Merger and shall not issue any such press release or make any such public
announcement prior to such consultation, except as may be required by
applicable law, court process or obligations pursuant to any listing
agreement with any national securities exchange, in which case the party
proposing to issue such press release or make such public announcement shall
use reasonable efforts to consult in good faith with the other party before
issuing any such press release or making any such public announcement. The
parties hereto shall also consult with each other before engaging in any
communications with A.M. Best and Company with respect to this Agreement or
the transactions contemplated hereby.
5.9 ENVIRONMENTAL STUDIES. Within thirty (30) days of this Agreement,
the Company shall deliver to Parent a report of a Phase I Environmental Site
Assessment, which shall be conducted in accordance with and presented in the
form prescribed by the most recent edition of the ASTM Standard for Phase I
environmental site assessments and a report of an environmental compliance
audit conducted in substantial accordance with the ASTM Standard for
environmental compliance audits, on the real property located at NBC Plaza,
2700 NE Loop 410, San Antonio, TX, and the Village at NBC Plaza, 8200 Perrin
Beitel Rd., San Antonio, TX (including the undeveloped real property owned
by the Company in the vicinity thereof) ("ENVIRONMENTAL REPORTS"), prepared
by an environmental consultant, engineer or environmental consulting or
engineering firm reasonably satisfactory to Parent. The cost of preparing
the reports contemplated by this Section 509 shall be borne by the Company.
5.10 AFFILIATES. Prior to the Closing Date, the Company shall deliver
to Parent a letter identifying all persons who are, at the time this
Agreement is submitted for approval to the shareholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities
Act. The Company shall cause each such person to deliver to Parent on or
prior to the Closing Date a written agreement substantially in the form
attached as Exhibit B hereto.
5.11 SUPPORT AGREEMENT. The Support Agreement shall be executed
contemporaneously with this Agreement.
5.12 COOPERATION. From the date hereof until the Effective Time, the
parties agree to work together to coordinate all aspects of transition
planning and the integration of the Public Entity and Nonstandard Businesses
of Parent and its Subsidiaries with the businesses of the Company and its
Subsidiaries from and after the Effective Time. In this regard, the parties
agree, among other things, (i) to create a dedicated transition team,
including consultation between the parties to identify the appropriate
officers and employees of each of the Company and Parent who will be members
of such team, to plan and prepare for the integration of the business and
other matters following the Merger and preparing for the execution of any
such plans, (ii) to jointly develop any employee, agent, policyholder or
other communications relating to such plans and the Merger, (iii) to discuss
and consult with respect to investment management activities, (iv) to
jointly consider information processing systems updates and technology
integration issues and to plan and prepare for an agreed-upon resolution of
such issues following the Merger and (v) to take such actions as are
necessary or appropriate to promote and implement the integration plan,
subject to applicable law.
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5.13 NYSE LISTING. Parent shall use its best efforts to cause the
shares of Parent Common Stock to be issued in the Merger to be approved for
listing on the New York Stock Exchange (the "NYSE"), subject to official
notice of issuance, prior to the Effective Time
5.14 BENEFIT PLANS AND EMPLOYEE ARRANGEMENTS. For employees who are
employees of the Company as of the Effective Time and who continue to be
employed by the Company, Parent shall cause the Surviving Corporation to
provide employee benefits which are substantially comparable in the
aggregate to the benefits provided under the Company Benefit Plans until the
first anniversary of the Effective Time.
5.15 TAX-FREE REORGANIZATION. Parent and the Company shall each use
its best efforts to cause the Merger to be treated as a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
Parent shall own all of the issued and outstanding shares of USF&G
immediately prior to the Merger. Parent shall not, nor shall Parent permit
any of its affiliates to, take any action which would cause the Merger to
fail to qualify as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code.
5.16 TRI-WEST. The Company will use its reasonable best efforts to
cause each of E.B. Lyon, III, Michael J. Claypool and Michael J. Bodayle to
enter into an agreement with the Company granting the Company the right to
purchase, on terms reasonably acceptable to Parent, the outstanding
membership, equity and voting interests of Tri-West of New Mexico, LLC,
Tri-West of Indianapolis, LLC, Tri-West of Florida, LLC, and any other
agency owned by any of them which has entered into a producer agreement with
any Subsidiary of the Company.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) COMPANY SHAREHOLDER APPROVAL. The Merger shall have been
approved and adopted by the affirmative vote or written consent of the
holders of two-thirds of the outstanding shares of Company Common Stock
entitled to vote thereon.
(b) GOVERNMENTAL AND REGULATORY CONSENTS. All actions, consents,
approvals, filings and notices listed in Sections 3.1(d)(ii)(A) and
3.2(d)(iii)(A) of the Disclosure Memorandum shall have been taken, made
or obtained; provided, however, that such consents or approvals shall be
in full force and effect at the Effective Time and shall not obligate
Parent or USF&G to agree to take any action which would have a material
adverse effect on the expected benefits to Parent of the transactions
contemplated hereby.
(c) HSR ACT. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired, and no restrictive order or other requirements shall
have been placed on the Company, Parent or the Surviving Corporation in
connection therewith.
(d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however,
that prior to invoking this condition, each party shall use reasonable
best efforts to have any such decree, ruling, injunction or order
vacated.
(e) FORM S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material
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"blue sky" and other state securities laws applicable to the registration
and qualification of the Parent Common Stock following the Merger shall
have been complied with.
(f) NYSE LISTING. The shares of Parent Common Stock which shall be
issued to the stockholders of the Company upon consummation of the Merger
shall have been authorized for listing on the NYSE, subject to official
notice of issuance.
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND USF&G. The obligations of
Parent and USF&G to effect the Merger are further subject to the
satisfaction or waiver following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct (without regard to any materiality qualifiers contained therein)
in each case as of the date of this Agreement and (except to the extent
such representations and warranties speak as of a particular date) as of
the Closing as though made on and as of the Closing, except where the
failure of one or more representations or warranties to be true and
correct, individually or in the aggregate, would not result in a Material
Adverse Effect on the Company. Parent shall have received a certificate
signed on behalf of the Company by the chief executive officer and the
chief financial officer of the Company to the effect set forth in this
paragraph.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall
have performed and complied with, in all material respects, all
agreements and covenants required to be performed and complied with by
the Company under this Agreement at or prior to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE. There shall not have occurred or
arisen after March 31, 1997 and prior to the Effective Time any change,
event (including without limitation any damage, destruction or loss,
whether or not covered by insurance), condition (financial or otherwise),
or state of facts with respect to the Company or any of its Subsidiaries
which would constitute a Material Adverse Effect on the Company.
(d) NO LITIGATION. There shall not be pending or, to the Company's
or Parent's knowledge threatened, any action, suit, investigation, or
other proceeding by any Governmental Entity to restrain, enjoin, or
otherwise prevent consummation of any of the transactions contemplated by
this Agreement.
(e) AFFILIATE LETTERS. A duly executed copy of each of the
agreements referred to in Section 5.10 shall have been received by
Parent.
(f) OPTION AGREEMENTS AND WARRANTS. The Company shall have (i)
taken all actions required to enable the consummation of the transactions
contemplated by Section 2.6 and (ii) received agreements in the form of
Exhibit C attached hereto from holders of Company Warrants representing
the right to purchase 75% of the shares of Company Common Stock
underlying all outstanding Company Warrants as of the date of this
Agreement, whether or not then exercisable in whole or in part.
(g) TAX OPINION. Parent shall have received an opinion of Piper &
Marbury L.L.P. (or another nationally recognized law firm) to the effect
that the Merger will be treated for federal income tax purposes as a
tax-free reorganization within the meaning of Section 368(a)(1)(A) and
368(a)(2)(D) of the Code.
(h) AUTHORIZATION. The Company shall have delivered to Parent
evidence reasonably satisfactory to Parent that all requisite action on
the part of the Company necessary for the due authorization of this
Agreement and the performance and consummation of the transactions
contemplated hereby has been taken.
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6.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the
Company to effect the Merger is further subject to the satisfaction or
waiver of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Parent and USF&G set forth in this Agreement shall be true
and correct (without regard to any materiality qualifiers contained
therein), in each case as of the date of this Agreement and (except to
the extent such representations and warranties speak as of a particular
date) as of the Closing Date as though made on and as of the Closing
Date, except where the failure of one or more representations or
warranties to be true and correct, individually or in the aggregate,
would not result in a Material Adverse Effect on Parent. The Company
shall have received certificates signed on behalf of Parent by the chief
executive officer and chief financial officer of Parent to the effect set
forth in this paragraph.
(b) PERFORMANCE OF OBLIGATIONS OF USF&G. Parent and USF&G shall
have performed and complied with, in all material respects, all
agreements and covenants required to be performed and complied with by
Parent and USF&G under this Agreement at or prior to the Closing Date.
(c) FEDERAL TAX OPINION. The Company shall have received an opinion
of Mayer, Brown & Platt (or another nationally recognized law firm) to
the effect that the Merger will be treated for federal income tax
purposes as a tax-free reorganization within the meaning of Section
368(a)(1)(A) and 368(a)(2)(D) of the Code.
(d) NO MATERIAL ADVERSE CHANGE. Except as publicly disclosed in a
document filed by Parent under the Exchange Act, there shall not have
been any change in the business, results of operation or financial
condition of the Parent and its Subsidiaries taken as a whole at any time
between March 31, 1997 and the Effective Time which would have a Material
Adverse Effect on the Parent.
(e) AUTHORIZATION. Parent shall have delivered to the Company
evidence reasonably satisfactory to the Company that all requisite action
on the part of Parent necessary for the due authorization of this
Agreement and the performance and consummation of the transactions
contemplated hereby has been taken.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of the Company or Parent:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent if any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and non-appealable;
(c) by either the Company or Parent, if the Merger shall not have
been consummated on or before December 31, 1997; provided that if the
conditions set forth in Article VI have not been satisfied as of such
date, this Agreement may not be terminated until February 28, 1998 if it
can reasonably be anticipated that such conditions can be satisfied by
February 28, 1998 (such December 31, 1997 or February 28, 1998, the
"TERMINATION DATE"); and provided further that the right to terminate
this Agreement under this Section 7.1(c) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has
been the cause of or resulted in the failure of the Merger to occur on or
before such date;
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(d) by either Parent or the Company if at the duly held meeting of
the shareholders of the Company (including any adjournment thereof) held
for the purpose of voting on the Merger, this Agreement and the
consummation of the transactions contemplated hereby, the holders of at
least two-thirds of the outstanding shares of Company Common Stock shall
not have approved the Merger, this Agreement and the consummation of the
transactions contemplated hereby;
(e) by Parent or the Company, in the event that a Trigger Event has
occurred prior to the consummation of the Merger (for purposes of this
Section 7.1(e), "TRIGGER EVENT" shall mean: (i) the Board of Directors of
the Company shall have failed to give or shall have withdrawn or
adversely modified in any material respect, or taken a public position
materially inconsistent with, its approval or recommendation of the
Merger or this Agreement; or (ii) an Acquisition Proposal shall have been
recommended or accepted by the Company or the Company shall have entered
into an agreement with respect to an Acquisition Proposal with any person
or entity other than Parent or an affiliate thereof);
(f) by Parent, upon a breach of any representation or warranty of the
Company, or in the event the Company fails to comply in any respect with
any of its covenants and agreements, or if any representation or warranty
of the Company shall be or become untrue, in each case, where such
breach, failure to so comply or untruth (either individually or in the
aggregate with all other such breaches, failures to comply or untruths)
would cause one or more of the conditions set forth in Sections 6.1(a),
6.1(b), 6.2(a) or 6.2(b) to be incapable of being satisfied as of a date
within ten days after the occurrence thereof, provided that a willful
breach by the Company shall be deemed to cause such conditions to be
incapable of being satisfied by such date;
(g) by the Company, upon a breach of any representation or warranty
of Parent or USF&G, or in the event Parent or USF&G fails to comply in
any respect with any of its covenants or agreements, or if any
representation or warranty of Parent or USF&G shall be or become untrue,
in each case, where such breach, failure to so comply or untruth (either
individually or in the aggregate with all other such breaches, failures
to comply or untruths) would cause one or more of the conditions set
forth in Sections 6.1(a), 6.1(b), 6.3(a) or 6.3(b) to be incapable of
being satisfied as of a date within ten days after the occurrence
thereof, provided that a willful breach by Parent or USF&G shall be
deemed to cause such conditions to be incapable of being satisfied by
such date; or
(h) by either Parent or the Company within two days of the
determination of the Average Stock Price if the Average Stock Price shall
be greater than $32.42 or less than $17.46.
7.2 EFFECT OF TERMINATION. If this Agreement is validly terminated by
either the Company or Parent pursuant to Section 7.1, this Agreement will
forthwith become null and void and there will be no liability or obligation
on the part of either the Company or Parent (or any of their respective
Subsidiaries or affiliates), except (i) that the provisions of Section
5.4(c), Section 5.5 and this Section 7.2 will continue to apply following
any such termination, (ii) such termination shall not in any case affect the
obligations of the Company under the Parent Confidentiality Agreement and
the Company Confidentiality Agreement and (iii) that nothing contained
herein shall relieve any party hereto from liability for willful breach of
its representations, warranties, covenants or agreements contained in this
Agreement. The effectiveness of any termination under this Agreement shall
be subject to the payments required to be made pursuant to Section 5.5 being
so made, if applicable.
7.3 AMENDMENT. Subject to applicable law, this Agreement may be
amended, modified or supplemented only by written agreement of Parent, USF&G
and the Company at any time prior to the Effective Date of the Merger with
respect to any of the terms contained herein; provided, however, that, after
this Agreement is approved by the Company's shareholders, no such amendment
or modification shall (a) reduce the amount or change the form of
consideration to be delivered to the
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<PAGE>
holders of shares of Company Common Stock, (b) change the date by which the
Merger is required to be effected, or (c) change the amounts payable in
respect of the Options or Warrants.
7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (a) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto; (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto; and (c) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party. The failure of any party hereto to assert any of its rights
hereunder shall not constitute a waiver of such rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time; provided, however, that Article II, Sections 5.6 and 5.14, the Parent
Confidentiality Agreement and the Company Confidentiality Agreement (with
respect to directors, officers, advisors and representatives of Parent and
the Company) shall survive the Effective Time.
8.2 NOTICES. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, telegraphed
or telecopied or sent by certified or registered mail, postage prepaid, and
shall be deemed to be given, dated and received upon receipt. Any such
notice or communication shall be provided to the following address or
telecopy number, or to such other address or addresses as such person may
subsequently designate by notice given hereunder:
<TABLE>
<S> <C>
(a) if to USF&G or Parent, to:
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209-3653
Attn: Andrew A. Stern, Mail Stop LA-0300
Telecopy: (410) 205-6802
with a copy to:
Piper & Marbury L.L.P.
36 South Charles Street
Baltimore, Maryland 21201
Attn: R.W. Smith, Jr.
Telecopy: (410) 576-5052
(b) if to the Company, to:
Titan Holdings, Inc.
2700 N.E. Loop 410, Suite 500
San Antonio, Texas 78217
Attn: Mark E. Watson, III
Telecopy: (210) 527-2936
</TABLE>
51
<PAGE>
<TABLE>
<S> <C>
with a copy to:
Mayer, Brown & Platt
190 S. LaSalle Street
Chicago, Illinois 60603
Attn: Edward S. Best
Telecopy: (312) 701-7711
</TABLE>
8.3 INTERPRETATION. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, glossary of defined terms and
headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the word "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that
the information referred to has been made available if requested by the
party to whom such information is to be made available.
8.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood
that all parties need not sign the same counterpart.
8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement together with the Parent Confidentiality
Agreement and the Company Confidentiality Agreement (and any other documents
and instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings including that certain
Letter Agreement, dated July 15, 1997 between Parent and the Company, both
written and oral, among the parties with respect to the subject matter
hereof and, except as provided in Article II, Sections 5.6 and 5.14, is not
intended to confer upon any person other than the parties hereto any rights
or remedies hereunder. Anything to the contrary notwithstanding, paragraph 6
of the Parent Confidentiality Agreement and paragraph 6 of the Company
Confidentiality Agreement shall terminate after the date of this Agreement.
8.6 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas, without giving effect to the
principles of conflicts of law thereof.
8.7 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, such consent not to be unreasonably withheld
and any such assignment that is not consented to shall be null and void;
PROVIDED, HOWEVER, that Parent may assign this Agreement to an affiliate
without the consent of the Company. Any such assignment shall not affect
Parent's or USF&G's liability hereunder, including its obligations to
deliver the Merger Consideration. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
[The remainder of this page intentionally left blank.]
52
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
<TABLE>
<S> <C> <C>
USF&G:
UNITED STATES FIDELITY AND
GUARANTY COMPANY
By: /s/ ANDREW A. STERN
--------------------------------------
Name: Andrew A. Stern
--------------------------------------
Title: Executive Vice President--Strategic
Planning & Reinsurance Operations
--------------------------------------
PARENT:
USF&G CORPORATION
By: /s/ ANDREW A. STERN
--------------------------------------
Name: Andrew A. Stern
--------------------------------------
Title: Executive Vice President--Strategic
Reinsurance Operations
--------------------------------------
COMPANY:
TITAN HOLDINGS, INC.
By: /s/ MARK E. WATSON, JR.
--------------------------------------
Name: Mark E. Watson, Jr.
--------------------------------------
Title: President
--------------------------------------
</TABLE>
53
<PAGE>
EXHIBIT A TO
MERGER AGREEMENT
[FORM OF VOTING AND SUPPORT AGREEMENT]
Agreement dated as of August 7, 1997 between the shareholder identified on
Exhibit A hereto (the "Shareholder") and USF&G Corporation, a Maryland
corporation ("Parent"). Capitalized terms used but not defined herein shall have
the meanings ascribed to such terms in the Merger Agreement (as defined below).
In consideration of the execution by Parent of the Agreement and Plan of
Merger dated as of August 7, 1997 (the "Merger Agreement") among Parent, United
States Fidelity and Guaranty Company, a Maryland corporation, and Titan
Holdings, Inc., a Texas corporation ("Company"), and other good and valuable
consideration, receipt of which is hereby acknowledged, the Shareholder and
Parent hereby agree as follows:
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SHAREHOLDER. The
Shareholder hereby represents and warrants to, and agrees with, Parent as
follows:
(a) TITLE. As of the date hereof, the Shareholder is the beneficial
and registered owner of 2,579,295 shares (the "Shares") of common stock,
$.01 par value per share ("Common Stock"), of Company. As of the date
hereof, except as set forth on Exhibit A hereto, the Shareholder does not
(i) beneficially own any shares of any class or series of capital stock
of Company (other than the Shares) or any securities convertible into or
exercisable for shares of any class or series of Company's capital stock
or (ii) have any options or other rights to acquire any shares of any
class or series of capital stock of Company or any securities convertible
into or exercisable for shares of any class of Company's capital stock.
Except as set forth in Exhibit B hereto, the Shareholder owns the Shares
free and clear of any lien, mortgage, pledge, charge, security interest
or any other encumbrance of any kind. The Shareholder covenants and
agrees to comply with the pledge agreements and other loan documents
relating to the pledges of certain of the Shares identified on Exhibit B
and to otherwise take any action necessary to insure that the Shareholder
can carry out the terms of this Agreement. Each pledgee of the Shares has
consented to this Agreement and to the Shareholder's fulfillment of the
terms thereof.
(b) RIGHT TO VOTE AND TO TRANSFER SHARES. The Shareholder has full
legal power, authority and right to vote all of the Shares in favor of
approval and adoption of the Merger Agreement without the consent or
approval of, or any other action on the part of, any other person or
entity. Without limiting the generality of the foregoing, except for this
Agreement, Shareholder has not entered into any voting agreement or any
other agreement with any person or entity with respect to any of the
Shares, granted any person or entity any proxy (revocable or irrevocable)
or power of attorney with respect to any of the Shares, deposited any of
the Shares in a voting trust or entered into any arrangement or agreement
with any person or entity limiting or affecting the Shareholder's ability
to enter into this Agreement or legal power, authority or right to vote
the Shares in favor of the approval and adoption of the Merger Agreement
or any of the transactions contemplated by the Merger Agreement, and
Shareholder will not take any such action after the date of this
Agreement and prior to the Company shareholders meeting to vote on
approval and adoption of the Merger Agreement, including any adjournment
or postponement thereof (the "Company Shareholders Meeting"). This
Agreement has been duly executed and delivered by the Shareholder and
constitutes a valid and binding agreement of the Shareholder.
2. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent hereby represents
and warrants to the Shareholder that this Agreement (i) has been duly
authorized by all necessary corporate action,
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<PAGE>
(iii) has been duly executed and delivered by Parent and (iii) is a valid
and binding agreement of Parent.
3. RESTRICTION ON TRANSFER. The Shareholder agrees that (other than
pursuant to the Merger Agreement) it will not, and will not agree to, sell,
assign, dispose of, encumber, mortgage, hypothecate or otherwise transfer or
encumber (collectively, "Transfer") any of the Shares to any person or
entity; provided, however, that the Shareholder may enter into pledge
agreements pledging any of the Shares as collateral security under loan
agreements, provided that (i) the lender under each such loan agreement
consents to this Agreement and fulfillment of the terms thereof and (ii) the
Shareholder covenants and agrees to comply with each pledge agreement and
other loan documents relating to pledges of Shares thereunder and to
otherwise take all action necessary to insure that the Shareholder can carry
out the terms of this Agreement.
4. AGREEMENT TO VOTE OF SHAREHOLDER. The Shareholder, in his
individual capacity as a shareholder of the Company only, hereby irrevocably
and unconditionally agrees to vote or to cause to be voted all of the Shares
at the Company Shareholders' Meeting and at any other annual or special
meeting of shareholders of Company where such matters arise (a) in favor of
the approval and adoption of the Merger Agreement and (b) against (i)
approval of any proposal made in opposition to or in competition with the
Merger or any of the other transactions contemplated by the Merger
Agreement, (ii) any merger, consolidation, sale of assets, business
combination, share exchange, reorganization or recapitalization of Company
or any of its subsidiaries, with or involving any party other than Parent or
one of its subsidiaries, (iii) any liquidation, dissolution or winding up of
Company, (iv) any extraordinary dividend by Company, (v) any change in the
capital structure of Company (other than pursuant to the Merger Agreement)
and (vi) any other action that may reasonably be expected to impede,
interfere with, delay, postpone or attempt to discourage the Merger or the
other transactions contemplated by the Merger Agreement or this Agreement or
result in a breach of any of the covenants, representations, warranties or
other obligations or agreements of Company under the Merger Agreement which
would materially and adversely affect Company or its ability to consummate
the transactions contemplated by the Merger Agreement. The Stockholder
further agrees not to take or commit or agree to take any action
inconsistent with the foregoing.
5. ACTION IN SHAREHOLDER CAPACITY ONLY. The Shareholder signs solely
in the Shareholder's capacity as a record and beneficial owner of the
Shares, and nothing herein shall prohibit, prevent or preclude the
Shareholder from fulfilling his fiduciary duties as a director of Company,
including without limitation, voting or consenting as a director in favor of
an Acquisition Proposal (as defined in the Merger Agreement) or negotiating
with respect to an Acquisition Proposal in his capacity as an officer or
director of the Company.
6. NO SHOPPING. The Shareholder, in his individual capacity as a
shareholder of the Company only, agrees not to, directly or indirectly, (i)
solicit, initiate or encourage (or authorize any person to solicit, initiate
or encourage) any inquiry, proposal or offer from any person to acquire the
business, property or capital stock of Company or any direct or indirect
subsidiary thereof, or any acquisition of a substantial equity interest in,
or a substantial amount of the assets of, Company or any direct or indirect
subsidiary thereof, whether by merger, purchase of assets, tender offer or
other transaction or (ii) participate in any discussion or negotiations
regarding, or furnish to any other person any information with respect to,
or otherwise cooperate in any way with, or participate in, facilitate or
encourage any effort or attempt by any other person to do or seek any of the
foregoing; PROVIDED that, notwithstanding the foregoing, the Shareholder
shall not be prohibited from taking any such actions as are required, based
upon advice of counsel, to comply with his fiduciary duties as an officer
and director of the Company to the extent such actions are permitted under
the Merger Agreement.
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<PAGE>
7. INVALID PROVISIONS. If any provision of this Agreement shall be
invalid or unenforceable under applicable law, such provision shall be
ineffective to the extent of such invalidity or unenforceability only,
without it affecting the remaining provisions of this Agreement.
8. EXECUTED IN COUNTERPARTS. This Agreement may be executed in
counterparts each of which shall be an original with the same effect as if
the signatures hereto and thereto were upon the same instrument.
9. SPECIFIC PERFORMANCE. The parties hereto agree that if for any
reason the Shareholder fails to perform any of his agreements or obligations
under this Agreement irreparable harm or injury to Parent would be caused
for which money damages would not be an adequate remedy. Accordingly, the
Shareholder agrees that, in seeking to enforce this Agreement against the
Shareholder, Parent shall be entitled to specific performance and injunctive
and other equitable relief in addition and without prejudice to any other
rights or remedies, whether at law or in equity, that Parent may have
against the Shareholder for any failure to perform any of its agreements or
obligations under this Agreement.
10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas without giving effect to
the principles of conflicts of laws thereof.
11. AMENDMENTS; TERMINATION.
(a) This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
(b) The provisions of this Agreement shall terminate upon the
earliest to occur of (i) the consummation of the Merger, (ii) the date
which is 12 months after the date hereof, (iii) the termination of the
Merger Agreement pursuant to Section 7.1(a) or (g) thereof, or (iv) the
termination of the Merger Agreement pursuant to Section 7.1 (b) or (c)
thereof if, but only if, the Merger Agreement is terminated pursuant to
such subsection (b) or (c) solely for reasons that are not directly or
indirectly related to the commencement of, or any person's or entity's
direct or indirect indication of interest in making, an Acquisition
Proposal with respect to the Company.
(c) For purposes of this Agreement, the term "Merger Agreement"
includes the Merger Agreement, as the same may be modified or amended
from time to time.
12. ADDITIONAL SHARES. If, after the date hereof the Shareholder
acquires beneficial ownership of any shares of the capital stock of Company
(any such shares, "Additional Shares"), including, without limitation, upon
exercise of any option, warrant or right to acquire shares of capital stock
or through any stock dividend or stock split, the provisions of this
Agreement (other than those set forth in Section 1 (a)) applicable to the
Shares shall be applicable to such Additional Shares as if such Additional
Shares had been Shares as of the date hereof. The provisions of the
immediately preceding sentence shall be effective with respect to Additional
Shares without action by any person or entity immediately upon the
acquisition by the Shareholder of beneficial ownership of such Additional
Shares.
13. ACTION BY WRITTEN CONSENT. If, in lieu of the Company Shareholders
Meeting, shareholder action in respect of the Merger Agreement or any of the
transactions contemplated by the Merger Agreement is taken by written
consent, the provisions of this Agreement imposing obligations in respect of
or in connection with the Company Shareholders Meeting shall apply MUTATIS
MUTANDIS to such action by written consent.
14. SHAREHOLDER CERTIFICATE. Shareholder agrees to execute and deliver
a certificate containing such representations as are reasonably necessary
and customary for tax counsel to Parent on the one hand, and Company on the
other hand, to render an opinion to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986 and that no gain or loss will be recognized by
the shareholders of Company to the extent they receive
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<PAGE>
Parent Common Stock solely in exchange for shares of Company Common Stock,
such certificate to be in the form attached hereto as Exhibit C.
15. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective legal successors and permitted assigns; PROVIDED that no party
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the consent of Parent (in the case of the
Shareholder or any of its permitted assigns) or the Shareholder (in the case
of Parent or any of its permitted assigns).
16. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by facsimile, or by registered or certified mail
(postage prepaid, return receipt requested) to such party at its address set
forth on the signature page hereto.
[The remainder of this page intentionally left blank.]
57
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
<TABLE>
<S> <C> <C>
Mark E. Watson, Jr.
Address:
-------------------------------------
MEW FAMILY LIMITED PARTNERSHIP
By:
-------------------------------------
Mark E. Watson, Jr., General Partner
By:
-------------------------------------
Kathleen Watson, General Partner
Address:
-------------------------------------
THE MARK AND KATHLEEN WATSON
CHARITABLE FOUNDATION
By:
-------------------------------------
Mark E. Watson, Jr., Trustee
By:
-------------------------------------
Kathleen E. Watson, Trustee
By:
-------------------------------------
E.B. Lyon, III, Trustee
Address:
-------------------------------------
USF&G CORPORATION
By:
-------------------------------------
Address:
-------------------------------------
</TABLE>
58
<PAGE>
EXHIBIT B TO
MERGER AGREEMENT
[FORM OF AFFILIATE LETTER]
, 1997
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Titan Holdings, Inc., a Texas corporation ("Titan"), as the
term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule
145 of the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), and/or (ii) used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the Commission. I have been further advised
that pursuant to the terms of the Agreement and Plan of Merger dated as of
August , 1997 (the "Agreement"), between Titan, USF&G Corporation ("USF&G")
and United States Fidelity and Guaranty Company, a Maryland corporation (the
"Subsidiary"), Titan will be merged with and into the Subsidiary (the "Merger")
and I will receive shares of Common Stock, par value $2.50 per share, of USF&G
(the "USF&G Common Stock") in exchange for shares of Common Stock, par value
$0.01 per share, of Titan owned by me.
I represent, warrant and covenant to USF&G that in the event I receive any
USF&G Common Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the USF&G
Common Stock in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed
the requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of the USF&G Common Stock to
the extent I believe necessary, with my counsel or counsel for Titan.
C. I have been advised that the issuance of USF&G Common Stock to me
pursuant to the Merger has been registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger was submitted for a vote of the
stockholders of Titan, I may be deemed to have been an affiliate of Titan
and the distribution by me of the USF&G Common Stock has not been registered
under the Act, and that I may not sell, transfer or otherwise dispose of the
USF&G Common Stock issued to me in the Merger unless (i) such sale, transfer
or other disposition has been registered under the Act, (ii) such sale,
transfer or other disposition is made in conformity with Rule 145
promulgated by the Commission under the Act, or (iii) in the opinion of
counsel reasonably acceptable to USF&G, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
D. I understand that USF&G is under no obligation to register the sale,
transfer or other disposition of the USF&G Common Stock by me or on my
behalf under the Act or, to take any other action necessary in order to make
compliance with an exemption from such registration available.
E. I also understand that, in the event USF&G or USF&G's transfer agent
determines that I beneficially own one percent (1%) or more of the USF&G
Common Stock outstanding, stop transfer instructions will be given to
USF&G's transfer agents with respect to the USF&G Common Stock and
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<PAGE>
that there will be placed on the certificates for the USF&G Common Stock
issued to me, or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES
MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN COMPLIANCE WITH THE
REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION STATEMENT UNDER
SAID ACT OF AN EXEMPTION FROM SUCH REGISTRATION."
F. I also understand that, in the event USF&G or USF&G's transfer agent
determines that I beneficially own one percent (1%) or more of the USF&G
Common Stock outstanding, unless the transfer by me of my USF&G Common Stock
has been registered under the Act or is a sale made in conformity with the
provisions of Rule 145, USF&G reserves the right to put the following legend
on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER
THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE
HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE
WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933."
It is understood and agreed that the legend set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this Agreement.
It is understood and agreed that such legends and the stop orders referred to
above will be removed if (i) one year shall have elapsed from the date the
undersigned acquired the USF&G Common Stock received in the Merger and the
provisions of Rule 145(d)(2) are then available to the undersigned, (ii) two
years shall have elapsed from the date the undersigned acquired the USF&G Common
Stock received in the Merger and the provisions of Rule 145(d)(3) are then
applicable to the undersigned, or (iii) USF&G has received either an opinion of
counsel, which opinion and counsel shall be reasonably satisfactory to USF&G, or
a "no action" letter obtained by the undersigned from the staff of the
Commission, to the effect that the restrictions imposed by Rule 145 under the
Act no longer apply to the undersigned.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Titan as described in the first paragraph of this
letter or as a waiver of any rights I may have to object to any claim that I am
such an affiliate on or after the date of this letter.
<TABLE>
<S> <C>
Very truly yours,
----------------------------------------------
[Name]
</TABLE>
Accepted this day of , 199 .
USF&G CORPORATION
By:
- -------------------------------------------
Name:
Title:
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<PAGE>
EXHIBIT C TO
MERGER AGREEMENT
[FORM OF WARRANT CANCELLATION AGREEMENT]
THIS AGREEMENT, dated as of , 1997, by and between Titan Holdings,
Inc., a Texas corporation (the "Company"), USF&G Corporation, a Maryland
corporation ("Parent") and (the "Holder").
WHEREAS, the Holder is the record owner of warrants (the "Warrants")
outstanding under the Warrant Agreement (the "Warrant Agreement"); and
WHEREAS, the Company, Parent and the Holder have agreed that it is now
desirable that the Warrants be cancelled and that the Parent shall pay the
Holder the Warrant Consideration, as such term is defined in the Agreement and
Plan of Merger, dated as of August 7, 1997, by and among Parent, United States
Fidelity and Guaranty Company and the Company (the "Merger Agreement"), in
consideration for such cancellation;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter
set forth, IT IS HEREBY AGREED by the parties hereto as follows:
1. The Company, Parent and the Holder hereby agree that the Warrants
will be cancelled immediately prior to the Effective Time (as such term is
defined in the Merger Agreement) and that the Holder will have no further
rights under the Warrant Agreement with respect to the Warrants; provided,
however, that such cancellations will be of no force and effect if the
Merger does not occur.
2. In consideration for the cancellation of the Warrants, Parent shall
pay to the Holder the Warrant Consideration, which amount shall be paid to
the Holder no later than ten days after the Effective Time.
3. The Holder hereby agrees to forever relinquish its rights to the
Warrants and any rights that it may have with respect to the Warrants under
the Warrant Agreement.
4. If the Merger does not occur, this Agreement shall be of no force
and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
<TABLE>
<S> <C>
USF&G CORPORATION [HOLDER]
By: ---------------------------------------- By: ----------------------------------------
Title: Title:
TITAN HOLDINGS, INC.
By: ----------------------------------------
Title:
</TABLE>
61
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment"), dated as
of August 26, 1997, is made and entered into by and among USF&G Corporation, a
Maryland corporation ("Parent"), United States Fidelity and Guaranty Company, a
Maryland corporation and wholly-owned subsidiary of Parent ("USF&G"), and Titan
Holdings, Inc., a Texas corporation ("Titan").
WHEREAS, on August 7, 1997, Parent, USF&G and Titan entered into that
certain Agreement and Plan of Merger (the "Merger Agreement") pursuant to which,
among other things, the parties agreed that Titan would be merged with and into
USF&G, with USF&G to survive the merger; and
WHEREAS, the parties hereto now wish to amend the Merger Agreement to
clarify certain terms related to the merger consideration and elections and
prorations in connection therewith.
NOW THEREFORE, in consideration of the foregoing and various other
considerations, the receipt and sufficiency of which the parties hereby
acknowledge, the parties hereto hereby agree that the Merger Agreement shall be
amended as follows:
1. The last two sentences of Subsection (c) of Section 2.3 of the Merger
Agreement are hereby deleted and amended in their entirety to read as follows:
The "Remaining Stock Election Cash Amount" shall be equal to the Maximum
Cash Amount minus the aggregate amount of cash payable pursuant to, or
with respect to, Standard Elections, Deemed Standard Elections, Cash
Elections, Dissenting Shares, Parent Shares (as defined below) and
fractional shares. "Parent Shares" means any and all shares of Company
Common Stock that are (i) owned by Parent or USF&G and (ii) canceled and
retired at the Effective Time pursuant to Section 2.1(b). For purposes of
this paragraph and the following paragraph, the aggregate amount of cash
payable with respect to Dissenting Shares or Parent Shares shall be
deemed to be the product of (x) the number of Dissenting Shares or Parent
Shares, as the case may be, times (y) 2.0 times the Standard Cash
Consideration.
2. Subsection (d) of Section 2.3 of the Merger Agreement is hereby deleted
and amended in its entirety to read as follows:
(d) In the event that the aggregate amount of cash payable pursuant
to Standard Elections, Deemed Standard Elections and Cash Elections
received by the Exchange Agent exceeds the Maximum Cash Amount reduced by
the sum of (i) the aggregate amount of cash payable with respect to the
Dissenting Shares and fractional shares and (ii) the aggregate amount of
cash payable by Parent in acquiring the Parent Shares (such excess being
hereafter referred to as the "Excess Cash"), the following adjustments
shall be made:
(1) If the Excess Cash is less than or equal to one-half of the
aggregate amount of cash payable pursuant to Cash Elections, each
holder making a Cash Election shall receive, for each share of Company
Common Stock held by such holder, (x) cash in an amount equal to the
quotient obtained by dividing the (i) the excess of (A) the aggregate
amount of cash that otherwise would be payable pursuant to Cash
Elections over (B) the Excess Cash by (ii) the aggregate number of
shares of Company Common Stock held by holders making Cash Elections
(the "Cash Election Company Shares"), plus (y) a number of shares of
Parent Common Stock equal to the quotient obtained by dividing (iii)
the quotient obtained by dividing (C) the Excess Cash by (D) the
Average Stock Price (or the Closing Stock Price if adjustments are
required under Section 2.4) by (iv) the Cash Election Company Shares.
(2) If the Excess Cash is greater than one-half of the aggregate
amount of cash payable pursuant to Cash Elections, each holder making
a Standard Election, Deemed Standard Election or Cash Election shall
receive, for each share of Company Common Stock held by such holder,
(x) cash in an amount equal to the quotient obtained by dividing (i)
the excess of (A) the Maximum Cash Amount over (B) the aggregate
amount of cash payable with respect to Dissenting Shares, Parent
Shares and fractional shares by (ii) the aggregate number of shares of
Company Common Stock held by holders making Standard Elections, Deemed
Standard Elections or Cash Elections (the "Cash/Standard Election
Company Shares"), plus (y) a number of shares of Parent Common Stock
equal to the quotient obtained by dividing (iii) the Remaining
Cash/Standard Election Parent Shares (as defined below) by (iv) the
Cash/Standard Election Company Shares. The
62
<PAGE>
"Remaining Cash/Standard Election Parent Shares" shall be the Maximum
Number of Parent Shares minus the number of shares of Parent Common
Stock issuable pursuant to Stock Elections (including any fractional
shares of Parent Common Stock for which a cash adjustment shall be
paid pursuant to Section 2.5(c) in respect of such Stock Elections).
3. Section 2.4 of the Merger Agreement is hereby deleted and amended in its
entirety to read as follows:
2.4 Tax Adjustment.
Notwithstanding any other provision of this Article II, in the event
that the allocation of the consideration between stock and cash is not
50% stock and 50% cash for any reason (including the Closing Stock Price
(as defined below) being less than the Average Stock Price and the
aggregate amount of consideration transferred by Parent in acquiring
Parent Shares being greater than the amount assumed under Section
2.3(c)), appropriate adjustment will be made, as determined by Parent and
the Company upon advice of counsel, to the extent if any, as may be
required to cause the Merger Consideration allocation between cash and
stock to satisfy the continuity of interest requirements for purposes of
causing the transaction to qualify as a tax-free reorganization, provided
that the total value of the Merger Consideration to be delivered by
Parent, based upon the Average Stock Price, shall not increase. For
purposes of this Section 2.4, the "Closing Stock Price" shall mean the
mean between the highest and lowest quoted selling prices of the Parent
Common Stock as reported on the New York Stock Exchange Composite Tape on
the day of the Effective Time of the Merger. In the event that an
adjustment is made under this Section 2.4, any adjustments necessary or
appropriate to reflect such adjustment shall be made to the other
provisions of this Article II.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
<TABLE>
<S> <C>
USF&G:
UNITED STATES FIDELITY
AND GUARANTY COMPANY
By:/s/ ANDREW A. STERN
-------------------------------------------------
Name: Andrew A. Stern
Title: Executive Vice President
Parent:
USF&G CORPORATION
By:/s/ ANDREW A. STERN
-------------------------------------------------
Name: Andrew A. Stern
Title: Executive Vice President
Company:
TITAN HOLDINGS, INC.
By:/s/ MARK E. WATSON, JR.
-------------------------------------------------
Name: Mark E. Watson, Jr.
Title: President
</TABLE>
63
<PAGE>
EXHIBIT 5.1
[PIPER & MARBURY LETTERHEAD]
November 17, 1997
USF&G Corporation
6225 Centennial Way
Baltimore, Maryland 21209
Re: Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to USF&G Corporation (the "Company") in
connection with the registration on Form S-4 (the "Registration Statement")
of up to 7,400,000 Shares of common stock, par value $2.50, of the Company
(the "Shares") to be issued in connection with the merger between United
States Fidelity and Guaranty Company, a wholly-owned subsidiary of the
Company, and Titan Holdings, Inc.
We have examined the Registration Statement, the Charter and By-Laws of
the Company, minutes of the proceedings of the Company's Board of Directors
authorizing the issuance of the Shares, and such other documents as we have
considered necessary. We have also examined the certificate of the secretary
of the Company dated the date hereof (the "Certificate"). In rendering our
opinion, we are relying as to factual matters on the Certificate and have
made no independent investigation or inquiries as to the matters set forth
therein. We have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of
the originals of such documents.
Based upon the foregoing, we are of the opinion and so advise you that,
upon issuance and delivery of the Shares upon the terms set forth in the
Registration Statement, the Shares will have been duly and validly authorized
and will be legally issued and fully-paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus/Proxy Statement included in the Registration
Statement.
Very truly yours,
PIPER & MARBURY L.L.P.
<PAGE>
EXHIBIT 8.1
MAYER, BROWN & PLATT
190 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60603-3441
November 17, 1997
Titan Holding, Inc.
2700 N.E. Loop 410
San Antonio, Texas 78217
Re: Certain Federal Income Tax Consequences of the Merger
Dear Ladies and Gentlemen:
We have acted as counsel to Titan Holding, Inc. ("Titan") in connection
with the merger (the "Merger") of Titan with and into United States Fidelity
and Guaranty Company ("USF&G Company"), a wholly owned subsidiary of USF&G
Corporation ("USF&G"), pursuant to the Agreement and Plan of Merger dated as
of August 7, 1997, as amended, (the "Merger Agreement") among USF&G, USF&G
Company and Titan. You have requested that we provide an opinion regarding
the treatment of the Merger under the Internal Revenue Code of 1986, as amend
(the "Code"), and the accuracy of the tax disclosures in the proxy
statement/prospectus (the "Proxy Statement/Prospectus") on Schedule 14A (file
no. 1-12906).
In providing this opinion, we have relied on (i) the description of the
transaction as set forth in the Merger Agreement and the exhibits thereto,
(ii) the description of the transaction as set forth in the Proxy
Statement/Prospectus and the exhibits thereto, (iii) covenants made by USF&G
in the Merger Agreement, (iv) representations provided by Titan, USF&G and
USF&G Company concerning certain facts underlying and relating to the Merger,
and (v) representations provided by certain shareholders of Titan regarding
their intention to retain the common stock of USF&G received in the Merger.
Based upon and subject to the foregoing, it is our opinion that:
(i) the summaries of Federal income tax consequences set forth in
the Proxy Statement/Prospectus under the headings "Summary -- Certain
Federal Income Tax Consequences" and "The Merger -- Certain Federal
Income Tax Consequences" are accurate in all material respects as to
matters of law and legal conclusions, and
(ii) the Merger will be treated for federal income tax purposes as
a reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(D) of the Code.
This opinion is based on current provisions of the Code, the Treasury
regulations promulgated thereunder, and the interpretation of the Code and
such regulations by the courts
<PAGE>
MAYER, BROWN & PLATT
and the Internal Revenue Service, as they are in effect and exist at the date
of this opinion. It should be noted that statutes, regulations, judicial
decisions and administrative interpretations are subject to change at any
time and, in some circumstances, with retroactive effect. A material change
that is made after the date hereof in any of the foregoing bases for our
opinion could adversely affect our conclusion.
We hereby consent to the filing of this opinion as an exhibit to the
Proxy Statement/Prospectus and to all references to this firm under the
headings "Summary -- Certain Federal Income Tax Consequences" and "The Merger
- -- Certain Federal Income Tax Consequences" in the Proxy Statement/Prospectus.
Sincerely,
MAYER, BROWN & PLATT
GAL
<PAGE>
EXHIBIT 8.2
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET
BALTIMORE, MARYLAND 21201-3018
410-539-2530
FAX: 410-539-0489
November 18, 1997
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209-3653
Merger of Titan Holdings, Inc. with and into United States Fidelity
and Guaranty Company, a wholly-owned subsidiary of USF&G Corporation
Ladies and Gentlemen:
We have acted as special counsel to USF&G Corporation ("Parent")
in connection with the transactions contemplated by the Agreement and Plan of
Merger, dated as of August 7, 1997 (the "Merger Agreement"), by and among
Parent, United States Fidelity and Guaranty Company, a wholly-owned
subsidiary of Parent ("Subsidiary") and Titan Holdings, Inc. ("Company").
This opinion is delivered on the effective date of a Registration Statement
on Form S-4 (the "Registration Statement"), which includes the definitive
Joint Proxy Statement/Prospectus of Parent and Company dated November 18,
1997 (the "Proxy Statement/Prospectus"), with respect to the transaction
contemplated by the Merger Agreement. The delivery of a letter expressing
opinions in substantially the form hereof (and the reconfirmation of such
opinions on and as of the Effective Time) are conditions to the obligations
of Parent to consummate the Merger pursuant to section 6.2(g) of the Merger
Agreement. All capitalized terms used herein, unless otherwise specified,
shall have the meanings ascribed to them in the Merger Agreement.
In rendering our opinions, we have examined and relied upon the
accuracy and completeness of the facts, information, covenants and
representations contained in originals or copies, certified or otherwise
identified to our satisfaction, of the Merger Agreement, the Proxy
Statement/Prospectus and such other documents as we have deemed necessary or
appropriate as a basis for the opinions set forth below. Our opinions
assume, among other things, the accuracy as of the date hereof, and
continuing accuracy as of the Effective Time, of such facts, information,
covenants, statements and
<PAGE>
USF&G
November 18, 1997
Page 2
representations, as well as an absence of any change in the foregoing that
are material to such opinions between the date hereof and the Effective Time.
We have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of
the originals of such documents. We have also assumed that the transactions
related to the Merger or contemplated by the Merger Agreement will be
consummated at the Effective Time in accordance with the Merger Agreement and
as described in the Proxy Statement/Prospectus. In addition, our opinion is
expressly conditioned on, among other things, the accuracy as of the date
hereof, and continuing accuracy as of the Effective Time, of statements and
representations contained in certificates executed by officers of Parent and
Company as to certain facts relating to, and knowledge and intentions of,
Parent and Company, and certain facts relating to the Merger. We have
assumed that such statements and representations will be reconfirmed as of
the Effective Time.
In rendering our opinion, we have considered the applicable
provisions of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations promulgated thereunder by the Treasury
Department (the "Regulations"), pertinent judicial authorities, rulings of
the U.S. Internal Revenue Service and such other authorities as we have
considered relevant. It should be noted that such Code, Regulations,
judicial decisions, administrative interpretations and such other authorities
are subject to change at any time and, in some circumstances, with
retroactive effect. A material change in any of the authorities upon which
our opinion is based could affect our conclusions stated herein. In
addition, there can be no assurance that the Internal Revenue Service would
not take a position contrary to that which is stated in this opinion.
Based upon and subject to the foregoing, we are of the opinion
that, for United States federal income tax purposes:
1. The Merger will constitute a "reorganization" within the meaning of
Section 368(a)(1)(A) and (a)(2)(D) of the Code.
2. The summaries of Federal income tax consequences set forth in the
Proxy Statement/Prospectus under the headings "Summary -- Certain Federal
Income Tax Consequences" and "The Merger -- Certain Federal Income Tax
Consequences" are accurate in all material respects as to matters of law and
legal conclusions.
<PAGE>
USF&G
November 18, 1997
Page 3
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Securities Act, we hereby consent to the use of our name in the
Proxy Statement/Prospectus and to the filing of this opinion as an Exhibit to
the Registration Statement. In giving this consent, we do not admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act or the rules and regulations of the Securities Exchange
Commission thereunder.
Very truly yours,
Piper & Marbury L.L.P.
<PAGE>
EXHIBIT 23.1
We consent to the reference to our firm under the captions "Summary
Consolidated Financial Information of USF&G" and "Experts" in the
Registration Statement (Form S-4) of USF&G Corporation for the registration
of its common stock in connection with the acquisition of Titan Holdings,
Inc. pursuant to the Agreement and Plan of Merger dated August 7, 1997, as
amended and to the incorporation by reference therein of our reports dated
February 21, 1996, with respect to the consolidated financial statements of
USF&G Corporation incorporated by reference in USF&G Corporation's Annual
Report (Form 10-K) for the year ended December 31, 1996 and the related
financial statement schedules included therein, filed with the Securities
and Exchange Commission.
Ernst & Young LLP
Baltimore, Maryland
November 17, 1997
<PAGE>
EXHIBIT 23.2
Independent Accountants' Consent
The Board of Directors and Shareholders of
Titan Holdings, Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-4 of USF&G Corporation of our report dated February 13, 1997 with
respect to the consolidated balance sheets of Titan Holdings, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
years in the three year period ended December 31, 1996. Additionally, we
consent to the reference to our firm under the headings "Experts" and "Titan
Historical Consolidated Financial Information" in the registration statement.
KPMG Peat Marwick LLP
San Antonio, Texas
November 17, 1997