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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
June 6, 1997
Date of Report (Date of earliest event reported)
SAFECO CORPORATION
(Exact name of registrant as specified in Charter)
WASHINGTON 1-6563 91-0742146
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
SAFECO Plaza, Seattle, Washington 98185
(Address of principal executive offices) (Zip Code)
(206) 545-5000
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
On June 6, 1997, SAFECO Corporation, a Washington corporation (the
"Company" or "SAFECO"), entered into an Agreement and Plan of Merger (the
"Merger Agreement"), by and among American States Financial Corporation, an
Indiana corporation ("ASFC"), SAFECO and ASFC Acquisition Co., an Indiana
corporation and a wholly owned subsidiary of SAFECO ("Merger Sub"). The
Merger Agreement provides for, among other things, the merger of Merger Sub
with and into ASFC (the "Merger"), with ASFC surviving the Merger as a wholly
owned subsidiary of SAFECO. Pursuant to the Merger Agreement and upon
consummation of the Merger, each outstanding share of common stock, no par
value (the "ASFC Common Stock"), of ASFC, will be converted into the right to
receive $47.00 in cash without interest thereon. In connection with the
Merger Agreement, SAFECO has agreed to pay approximately $100 million to
Lincoln National Corporation ("LNC"), an Indiana corporation and the holder
of approximately 83% of the outstanding AFSC Common Stock, in consideration
for LNC's agreement to release AFSC from certain debt obligations and to
repay a $200 million term loan from LNC.
Consummation of the Merger is subject to certain customary
conditions, including, among others, regulatory approval under applicable
state insurance laws and regulations and under the federal Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and the approval of the holders of ASFC
Common Stock. The foregoing description of the Merger Agreement is
qualified in its entirety by reference to the Merger Agreement which is filed
as Exhibit 2.1 to this Form 8-K and incorporated herein by reference.
In connection with the Merger Agreement, the Company and LNC have
also entered into a Voting, Support and Indemnification Agreement, dated June
6, 1997 (the "Voting Agreement"), pursuant to which LNC agreed, among other
things, (i) to vote all ASFC Common Stock held by it or any of its
subsidiaries in favor of the Merger, (ii) to grant SAFECO an irrevocable
proxy in all ASFC Common Stock held by it or any of its subsidiaries for
purposes of a vote of ASFC Common Stock held to consider the Merger, and
(iii) to allocate between LNC and SAFECO certain tax and benefits liabilities
and assets of ASFC. The foregoing description of the Voting Agreement is
qualified in its entirety by reference to the Voting Agreement which is filed
as Exhibit 2.2 to this Form 8-K and incorporated herein by reference.
SAFECO intends to finance the Merger and the repayment of AFSC's
obligations to LNC through a combination of (a) approximately $657 million in
bank debt, (b) the issuance of approximately (i) $200 million of 10-year
senior notes (the "Notes"), (ii) $990 million of 40-year Company-obligated,
mandatorily redeemable preferred securities (the "Capital Securities") that are
callable after 10 years (net of underwriting compensation), and (iii) $675
million of SAFECO common stock (net of underwriting compensation), and (c) a
$600 million special dividend from its property and casualty subsidiaries. The
Company expects to issue the Notes and the Capital Securities before the end of
its second quarter or shortly thereafter, but does not expect to issue the
common stock until shortly after the effective time of the Merger.
The Company's assumptions as to the terms of the financings
proposed to be entered into in connection with the Merger are subject to
change due to fluctuations in market conditions, prevailing interest rates
and other factors. Certain portions of the Company's financing plan are not
expected to be consummated until later in 1997. The Company may determine to
offer other securities or pursue other forms of financing in lieu of certain
of the offerings or borrowings described above, or to increase or decrease
the individual amounts of such offerings and borrowings. While any such
changes to the Company's plan of financing are not expected to be
significant to the pro forma financial results, there can be no assurance
that significant changes will not be made in the future.
Neither the Notes nor the Capital Securities will be registered under
the Securities Act of 1933, as amended, and neither may be offered or sold
absent registration or an applicable exemption.
This notice does not constitute an offer to sell or the
solicitation of an offer to buy the Notes, the Capital Securities or the common
stock, nor will there be any sale of these securities in any state in which
such an offer, solicitation or sale would be unlawful before registration or
qualification under the securities laws of such state.
CERTAIN FORWARD-LOOKING INFORMATION
The "Unaudited Pro Forma Combined Condensed Financial Statements"
filed as Exhibit 99.2 hereto contain certain forward-looking information.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking information to encourage companies to provide
prospective information about themselves so long as such information is
identified as forward-looking and is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the information. The Company
identifies the following important factors which could cause actual results
to differ materially from any such results which might be projected,
forecast, estimated or budgeted by the Company in forward-looking
information. All of such factors are difficult to predict and many are beyond
the control of the Company. Accordingly, while the Company believes that the
assumptions underlying the forward-looking information are reasonable, there
can be no assurance that such assumptions will approximate actual experience.
These important factors include: (i) general economic conditions, changes in
interest rates and the performance of securities markets, each of which may
impact the profitability of the combined company, the market value of the
combined company's investment portfolio, the credit quality of the combined
company's loan portfolio, the demand for property and casualty insurance
and the ability of the Company to effect without change its financing plan in
connection with the Merger; (ii) regulatory developments affecting financial
institutions, generally, and property and casualty and life insurance
companies, specifically; (iii) industry consolidation and increased
competition; (iv) the impact on the combined company's property and casualty
insurance subsidiaries of catastrophes or natural peril losses, such as
losses caused by wind, hail, water and earthquakes, in significant numbers or
of significant magnitude; (v) the combined company's ability to control costs
and realize estimated cost savings; (vi) the integration of the Company's and
ASFC's operations in a timely and cost effective manner; and (vii) the
possibility that the Merger might not be consummated. Investors are also
directed to consider other risks and uncertainties discussed in documents
filed by the Company and ASFC with the Securities and Exchange Commission. The
Company disclaims any obligation to update forward-looking information,
including information provided in the "Unaudited Pro Forma Combined Condensed
Financial Statements" filed as Exhibit 99.2 hereto.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) The following exhibits are filed as part of this Report:
2.1 Agreement and Plan of Merger dated as of June 6, 1997 by and
among American States Financial Corporation, SAFECO Corporation
and ASFC Acquisition Co.
2.2 Voting, Support, and Indemnification Agreement, dated June 6,
1997, by and among SAFECO Corporation and Lincoln National
Corporation (incorporated by reference to the Corporation's
Schedule 13D filed on June 16, 1997)
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1 Press Release issued by SAFECO Corporation on June 9, 1997
99.2 Unaudited Pro Forma Combined Condensed Financial Statements of
SAFECO Corporation reflecting the proposed acquisition of
American States Financial Corporation and certain related
financings
99.3 Consolidated Balance Sheets of American States 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 three years in the period ended December 31, 1996,
together with the notes thereto and the related report of
Independent Accountants (incorporated herein by reference to
pages 34 to 57 of the American States Annual Report on Form
10-K for the year ended December 31, 1996 (Commission File
Number 001-11733))
99.4 Consolidated Balance Sheets of American States and
Subsidiaries as of March 31, 1997 and December 31, 1996, and the
related Consolidated Statements of Income, Shareholders' Equity
and Cash Flows for the Three Months Ended March 31, 1997 and 1996
(unaudited), together with the notes thereto (incorporated herein
by reference to pages 1 to 9 of the American States Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997
(Commission File Number 001-11733))
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SAFECO CORPORATION
Dated: June 24, 1997 By:/s/ Rod A. Pierson
---------------------------
Rod A. Pierson
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibits.
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2.1 Agreement and Plan of Merger dated as of June 6, 1997 by and
among American States Financial Corporation, SAFECO Corporation
and ASFC Acquisition Co.
2.2 Voting, Support, and Indemnification Agreement, dated June 6,
1997, by and among SAFECO Corporation and Lincoln National
Corporation (incorporated by reference to the Corporation's
Schedule 13D filed on June 16, 1997)
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1 Press Release issued by SAFECO Corporation on June 9, 1997
99.2 Unaudited Pro Forma Combined Condensed Financial Statements of
SAFECO Corporation reflecting the proposed acquisition of
American States Financial Corporation and certain related
financings
99.3 Consolidated Balance Sheets of American States 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 three years in the period ended December 31, 1996,
together with the notes thereto and the related report of
Independent Accountants (incorporated herein by reference to
pages 34 to 57 of the American States Annual Report on Form
10-K for the year ended December 31, 1996 (Commission File
Number 001-11733))
99.4 Consolidated Balance Sheets of American States and
Subsidiaries as of March 31, 1997 and December 31, 1996, and the
related Consolidated Statements of Income, Shareholders' Equity
and Cash Flows for the Three Months Ended March 31, 1997 and 1996
(unaudited), together with the notes thereto (incorporated herein
by reference to pages 1 to 9 of the American States Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997
(Commission File Number 001-11733))
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AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 6, 1997
BY AND AMONG
AMERICAN STATES FINANCIAL CORPORATION,
SAFECO CORPORATION
AND
ASFC ACQUISITION CO.
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ARTICLE 1
DEFINITIONS
1.1 Definitions ........................................ 2
ARTICLE 2
THE MERGER
2.1 The Merger.......................................... 17
2.2 Effective Time of the Merger........................ 17
2.3 Terms of the Merger................................. 18
2.4 Effect of the Merger................................ 19
2.5 Conversion or Cancellation of Shares in the
Merger............................................ 19
2.6 Payment for Shares in the Merger.................... 20
2.7 Status of Options................................... 22
2.8 Closing of ASFC's Transfer Books.................... 23
2.9 No Further Ownership Rights in ASFC Common Stock.... 24
2.10 No Liability........................................ 24
2.11 Investment of Exchange Fund......................... 25
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ASFC
3.1 Corporate Existence and Power....................... 25
3.2 Corporate Authorization............................. 26
3.3 Governmental Authorization.......................... 26
3.4 Non-Contravention................................... 27
3.5 Capitalization...................................... 28
3.6 All Assets Necessary................................ 29
3.7 Subsidiaries........................................ 29
3.8 Financial Statements; SEC Reports................... 31
3.9 Absence of Certain Changes.......................... 33
3.10 Material Liabilities; Investments................... 36
3.11 Material Contracts.................................. 37
3.12 Non-Claims Litigation............................... 41
3.13 Compliance with Laws................................ 42
3.14 Properties.......................................... 42
3.15 Licenses and Permits; Policies; Regulatory
Matters........................................... 43
3.16 ERISA Representations............................... 44
3.17 Environmental Matters............................... 48
3.18 Intercompany Accounts............................... 48
3.19 No Representation with Respect to Reserves.......... 49
3.20 Intellectual Property; Software..................... 49
3.21 Labor Matters....................................... 50
3.22 Loans and Advances.................................. 51
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3.23 Proxy Statement..................................... 51
3.24 No Other Broker..................................... 52
3.25 Indiana Takeover Laws............................... 52
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
4.1 Corporate Existence and Power....................... 53
4.2 Corporate Authorization............................. 53
4.3 Governmental Authorization.......................... 54
4.4 Non-Contravention................................... 54
4.5 Financing........................................... 55
4.6 No Actions; Suits or Proceedings.................... 55
4.7 No Other Broker..................................... 55
4.8 Merger Subsidiary................................... 56
4.9 Reports and Financial Statements.................... 56
4.10 Proxy Statement..................................... 57
ARTICLE 5
COVENANTS OF ASFC
5.1 Conduct............................................. 58
5.2 Access to Information............................... 63
5.3 Notices of Certain Events........................... 65
5.4 No Solicitation..................................... 65
5.5 Voting Agreement.................................... 66
5.6 Confidentiality Agreements.......................... 66
5.7 Meeting of ASFC Shareholders........................ 66
5.8 Supplements or Amendments........................... 67
ARTICLE 6
COVENANTS OF BUYER
6.1 Confidentiality..................................... 68
6.2 Indemnification and Insurance....................... 68
6.3 Supplements or Amendments........................... 69
6.4 Prepayment of Debt.................................. 70
ARTICLE 7
COVENANTS OF BUYER AND ASFC
7.1 Reasonable Efforts.................................. 71
7.2 Public Announcements................................ 72
7.3 Trademarks; Trade Names............................. 73
7.4 Consents............................................ 73
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7.5 Proxy Statement..................................... 74
7.6 Updating Schedules.................................. 74
ARTICLE 8
TAX MATTERS
8.1 Tax Representations................................. 75
8.2 Tax Covenants....................................... 76
8.3 Termination of Existing Tax Sharing Agreements...... 77
8.4 Survival............................................ 78
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
9.1 Employees........................................... 78
9.2 Retirement Plans.................................... 79
9.3 Group Health Plans.................................. 80
9.4 Severance Arrangements.............................. 80
9.5 Nonqualified Plans.................................. 82
9.6 Other Benefit Plans................................. 82
9.7 Other Liabilities................................... 83
ARTICLE 10
CONDITIONS TO CLOSING
10.1 Conditions to Obligations of Buyer and ASFC......... 84
10.2 Conditions to Obligation of Buyer................... 85
10.3 Conditions to Obligation of ASFC.................... 87
ARTICLE 11
SURVIVAL
11.1 Survival............................................ 89
ARTICLE 12
TERMINATION
12.1 Grounds for Termination............................. 89
12.2 Effect of Termination............................... 89
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ARTICLE 13
MISCELLANEOUS
13.1 Notices............................................. 91
13.2 Amendments and Waivers.............................. 92
13.3 Expenses............................................ 92
13.4 Successors and Assigns.............................. 93
13.5 Governing Law....................................... 93
13.6 Jurisdiction........................................ 93
13.7 Counterparts........................................ 94
13.8 No Third Party Beneficiaries........................ 94
13.9 Entire Agreement.................................... 95
13.10 Construction........................................ 95
13.11 Specific Performance................................ 96
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EXHIBIT
Exhibit A Voting, Support and Indemnification Agree-
ment
SCHEDULES
Schedule 1.1(a) ASFC Options
Schedule 1.1(b) Incentive Letter Agreements
Schedule 1.1(c) Knowledge of ASFC
Schedule 1.1(d) Knowledge of Buyer
Schedule 3.3 Governmental Authorization
Schedule 3.4 Non-Contravention
Schedule 3.6 All Assets Necessary
Schedule 3.7 Subsidiaries
Schedule 3.9 Absence of Certain Changes
Schedule 3.9(x) Investment Policies
Schedule 3.10(a) Material Liabilities
Schedule 3.10(b) ASFC Investment Assets
Schedule 3.11 Material Contracts
Schedule 3.12 Non-Claims Litigation, Investigations and
Proceedings
Schedule 3.13 Compliance with Laws
Schedule 3.15 License and Permits; Policies; Regulatory
Matters
Schedule 3.16(a) Employee Plans
Schedule 3.16(c) Benefit Plan Compliance with Laws
Schedule 3.16(d) Benefit Arrangements
Schedule 3.16(g) Benefit Plan Funding; Penalties
Schedule 3.16(i) Accelerated Vesting; Prohibited Transac-
tions; "Deemed Severance"
Schedule 3.18 Intercompany Accounts
Schedule 3.20 Software Licenses
Schedule 3.22 Loans and Advances
Schedule 4.3 Governmental Authorization
Schedule 4.4 Non-Contravention
Schedule 5.1 Conduct of ASFC
Schedule 8.1 Tax Representations
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made and entered into as of
June 6, 1997, by and among American States Financial Corporation, an Indiana
corporation ("ASFC"), SAFECO Corporation, a Washington corporation
("Buyer"), and ASFC Acquisition Co., an Indiana corporation ("Buyer Sub").
RECITALS
WHEREAS, the respective boards of directors of ASFC, Buyer and
Buyer Sub have approved the taxable cash merger of Buyer Sub with and into
ASFC (the "Merger") upon the terms and subject to the conditions set forth
herein;
WHEREAS, ASFC, Buyer and Buyer Sub desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger; and
WHEREAS, simultaneously with the execution of this Agreement,
Lincoln National Corporation, an Indiana corporation ("LNC"), and Buyer have
entered into a Voting, Support and Indemnification Agreement in the form
attached hereto as Exhibit A (the "Voting Agreement")
NOW, THEREFORE, the parties hereto do hereby agree as follows:
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ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. The following terms, as used herein, have the
following meanings:
"ACQUISITION PROPOSAL" shall have the meaning specified in Section
5.4.
"AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control
with such Person; provided that none of the Subsidiaries of ASFC shall be
considered an Affiliate of ASFC.
"AGREEMENT" means this Agreement and Plan of Merger, including the
schedules and exhibit hereto.
"ANNUAL STATEMENTS" shall have the meaning specified in Section 3.8.
"ARTICLES OF INCORPORATION" means the Restated Articles of
Incorporation of ASFC as filed with the Secretary of State of the State of
Indiana on March 14, 1996.
"ARTICLES OF MERGER" shall have the meaning specified in Section
2.2.
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"ASFC COMMON STOCK" means the Common Stock, no par value, of ASFC.
"ASFC INVESTMENT ASSETS" means any investment assets (whether or
not required by GAAP or SAP to be reflected on a balance sheet) beneficially
owned (within the meaning of Rule 13d-3 under the Exchange Act) by ASFC or
any Subsidiary of ASFC, including but not limited to bonds, notes,
debentures, mortgage loans, collateral loans and all other instruments of
indebtedness, stocks, partnership or joint venture interests and all other
equity interests, certificates issued by or interests in trusts, derivatives
and all other assets acquired for investment purposes.
"ASFC OPTIONS" means the options identified on Schedule 1.1(a).
"ASFC PREFERRED STOCK" means the preferred stock, no par value, of
ASFC.
"ASFC SHAREHOLDERS' APPROVAL" shall have the meaning specified in
Section 5.7.
"ASFC SHAREHOLDERS' MEETING" shall have the meaning specified in
Section 5.7.
"ASFC SECURITIES" shall have the meaning specified in Section 3.5.
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"ASSUMED DEBT PREPAYMENT" shall have the meaning specified in
Section 6.4.
"BALANCE SHEET DATE" means March 31, 1997.
"BENEFIT ARRANGEMENT" means any employment, severance or similar
contract, arrangement or policy, or any plan or arrangement (whether or not
written) to provide benefits as compensation for services rendered,
including but not limited to severance benefits, insurance coverage
(including any selfinsured arrangements), workers' compensation, disability
benefits, supplemental unemployment benefits, vacation benefits, retirement
benefits, deferred compensation, profitsharing, bonuses, executive
compensation arrangements (including but not limited to stock options, stock
appreciation rights, restricted stock rights and performance unit awards and
other forms of incentive compensation) or post-retirement insurance,
compensation or benefits that (i) is not an Employee Plan, (ii) is entered
into or maintained, as the case may be, by ASFC or any of its ERISA
Affiliates and (iii) covers any present or former employee, director, agent
or independent contractor of ASFC or any of its Subsidiaries.
"BENEFIT PLAN" means any Employee Plan or Benefit Arrangement.
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"BENEFITS CONTINUATION DATE" shall have the meaning specified in
Section 9.5.
"BUSINESS DAY" means any day other than a Saturday, Sunday or any
other day on which commercial banks in Indianapolis, Indiana or New York,
New York are required or permitted to be closed.
"BUYER FINANCIAL STATEMENTS" shall have the meaning specified in
Section 4.9.
"BUYER SEC REPORTS" means all reports (including but not limited to
definitive proxy statements), forms, schedules, registration statements and
other documents together with all amendments and supplements thereto which
Buyer has been required to file with the SEC since January 1, 1996.
"CATASTROPHE" means any event that is designated to be a
"catastrophe" by the Property Claims Service Division of the American
Insurance Services Group, Inc.
"CERTIFICATES" means one or more certificates that immediately
prior to the Effective Time represented outstanding Shares.
"CLAIMS PROVISION" shall have the meaning specified in Section 3.19.
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"CLOSING" shall have the meaning specified in Section 2.2.
"CLOSING DATE" shall have the meaning specified in Section 2.2.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIALITY AGREEMENT" means that certain Confidentiality
Agreement dated March 13, 1997, between ASFC and Buyer.
"CONSOLIDATED GROUP" means (i), with respect to Federal Taxes, the
affiliated group of corporations (as defined in Section 1504(a) of the Code
with due regard to Section 1504(c) of the Code) of which LNC (or any
successor or predecessor of LNC or any such successor or predecessor) and
ASFC and its Subsidiaries are members and (ii), with respect to state or
local income or franchise Taxes, any consolidated, combined, unitary or
similar group of which LNC (or any successor or predecessor of LNC or any
such successor or predecessor) and ASFC and its Subsidiaries are members.
"CONSOLIDATED TAXES" means federal, state, local or foreign income
or franchise Taxes for which the Consolidated Group is liable for any
Pre-Closing Period (but in no event
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including any Taxes for which ASFC of any of ASFC's Subsidiaries may be
liable as "new T" (within the meaning of Treasury Regulation Section
1.338(h)(10) or any successor provision or any corresponding provision of
state or local law) as a consequence of any timely and irrevocable elections
jointly made by LNC and Buyer under Section 338(h)(10) of the Code and any
similar elections under any applicable state, local or foreign income tax
laws for ASFC and any domestic subsidiary of ASFC).
"CONSTITUENT CORPORATIONS" means each of ASFC and Buyer Sub.
"D&O INSURANCE" shall have the meaning specified in Section 6.2.
"EFFECTIVE TIME" shall have the meaning specified in Section 2.2.
"EMPLOYEE PLAN" means any "employee benefit plan," as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by ASFC or any of its ERISA
Affiliates and (iii) covers any employee or former employee of ASFC or any of
its Subsidiaries.
"ENVIRONMENTAL LAWS" means any and all foreign, federal, state or
local statutes, laws, regulations, ordinances, rules or codes now in effect
relating to the environment, to
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the effect of the environment on human health or safety or to the use,
generation, manufacturing, treatment, disposal, storage, discharge or
release of any toxic, radioactive, caustic or otherwise hazardous substance,
including petroleum and its derivatives and by-products, or any substance
having any constituent elements displaying any of the foregoing
characteristics, into the environment, including but not limited to ambient
air, surface water, groundwater or land, or the remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, and any regulation or rule issued thereunder.
"ERISA AFFILIATE" of any entity means any other entity which,
together with such entity, would be treated as a single employer under
Section 414 of the Code or Section 4001 of ERISA and any partnership of which
ASFC or any of its Subsidiaries is or has been a general partner.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" means a bank or trust company selected by Buyer,
and reasonably satisfactory to ASFC, to effectuate the payment for Shares in
the Merger.
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"EXCHANGE FUND" shall have the meaning specified in Section 2.6.
"FEDERAL TAX" means any Tax imposed under the Code.
"GAAP" means U.S. generally accepted accounting principles.
"GOVERNMENTAL BODY" means any federal, state, municipal, political
subdivision or other governmental legislature, court, tribunal, arbitrator,
authority, official, department, commission, board, bureau, agency or
instrumentality, whether domestic or foreign.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"IBCL" means the Indiana Business Corporation Law, as amended.
"INCENTIVE LETTER AGREEMENTS" means the separate letter agreements
dated April 1, 1997, between ASFC and each of the ASFC employees identified
on Schedule 1.1(b).
"INTELLECTUAL PROPERTY" shall mean: trademarks, service marks,
brand names, certification marks, trade dress, assumed names, trade names
and other indications of origin, the goodwill associated with the foregoing
and registrations in any
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jurisdiction of, and applications in any jurisdiction to register, the
foregoing, including any extension, modification or renewal of any such
registration or application; inventions, discoveries and ideas, whether
patentable or not in any jurisdiction; patents, applications for patents
(including but not limited to divisions, continuations, continuations in part
and renewal applications), and any renewals, extensions or reissues thereof,
in any jurisdiction; nonpublic information, trade secrets and confidential
information and rights in any jurisdiction to limit the use or disclosure
thereof by any Person; writings and other works, whether copyrightable or not
in any jurisdiction; registrations or applications for registration of
copyrights in any jurisdiction, and any renewals or extensions thereof, and
any similar intellectual property or proprietary rights; provided, that
"Intellectual Property" shall not include Software.
"KNOWLEDGE OF ASFC" means the actual knowledge of the individuals
named on Schedule 1.1 (c).
"KNOWLEDGE OF BUYER" means the actual knowledge of the individuals
named on Schedule 1.1 (d).
"LAW" means any statute, law, rule, regulation or ordinance of any
Governmental Body.
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"LIEN" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest, encumbrance or other adverse claim
of any kind in respect of such property or asset. For the purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any property or
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such property or asset.
"LNC" shall have the meaning specified in the Recitals.
"MATERIAL ADVERSE EFFECT" means, with respect to any Person or
Persons, a material adverse effect on the financial condition, results of
operations, business, assets or liabilities of such Person or Persons and
its or their Subsidiaries, taken as whole.
"MERGER" shall have the meaning specified in the Recitals.
"MERGER CONSIDERATION" shall have the meaning specified in Section 2.5.
"MULTIEMPLOYER PLAN" means each Employee Plan that is a
multiemployer plan, as defined in Section 3(37) of ERISA.
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"OPTION" means any subscriptions, options, warrants, rights
(including "phantom" stock rights), preemptive rights or other contracts,
commitments, understandings or arrangements, including any right of
conversion or exchange under any out-standing security, instrument or
agreement to issue or sell any shares of capital stock of a corporation, or
any securities exchangeable for or exercisable into any such shares.
"ORDER" means any judgment, decree, order, writ, per-mit or license
of any Governmental Body.
"PERMITS" shall have the meaning specified in Section 3.15.
"PERMITTED INVESTMENTS" means short-term U.S. government
obligations or interest-bearing money market accounts that invest solely in
such obligations.
"PERSON" means an individual, corporation, partnership,
association, trust, limited liability company or other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"PRE-CLOSING PERIOD" means any Tax period or portion thereof ending
on or before the Closing Date with respect to Consolidated Taxes.
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"PRE-MARCH 31 TAX PERIOD" means any Tax period ending on or before
March 31, 1997 and the portion of calendar year 1997 ending on and including
March 31, 1997.
"PROXY STATEMENT" shall have the meaning specified in Section 7.5.
"REGULATORS" shall have the meaning specified in Section 3.8.
"RETURNS" means all Tax returns, statements, reports, forms or
other documentation required to be filed with any Taxing Authority.
"SAP" means the accounting procedures and practices prescribed or
permitted from time to time by the National Association of Insurance
Commissioners and adopted, permitted or promulgated by the respective states
of incorporation of ASFC and its Subsidiaries and employed in a consistent
manner throughout the periods involved.
"SEC" means the United States Securities and Exchange Commission.
"SEC REPORTS" means all forms, reports and documents filed by ASFC
with the SEC since January 1, 1996 and prior to the date hereof.
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"SERVICES AGREEMENT" means that certain Services Agreement
effective as of May 22, 1996, between LNC and ASFC.
"SHARES" means shares of ASFC Common Stock issued and outstanding
immediately prior to the Effective Time, after giving effect to the exercise
or cancellation of each ASFC Option pursuant to Section 2.7.
"SIGNIFICANT AGREEMENTS" shall have the meaning specified in
Section 3.11.
"SIGNIFICANT SUBSIDIARY" has the meaning given to such term in Rule
1-02(w) of Regulation S-X promulgated by the SEC.
"SOFTWARE" shall mean all computer and telecommunication software
including source and object code and documentation and any other media
(including but not limited to manuals, journals and reference books).
"SUBSIDIARY" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect
50% or more of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person.
"SUBSIDIARY SECURITIES" shall have the meaning specified in
Section 3.7.
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"SURVIVING CORPORATION COMMON STOCK" shall have the meaning
specified in Section 2.5.
"TAX" means all taxes, charges, fees, levies or other assessments,
including but not limited to any net income tax or franchise tax based on net
income, any alternative or add-on minimum taxes, any gross income, gross
receipts, premium, sales, use, ad valorem, value added, transfer, profits,
li-cense, social security, Medicare, payroll, employment, excise, severance,
stamp, occupation, property, environmental or windfall profit tax, custom,
duty or other tax, governmental fee or other like assessment, together with
any interest, penalty, addition to tax or additional amount imposed by any
Taxing Authority.
"TAX BENEFIT" means any item of deduction, credit, amortization,
exclusion from income, loss or other tax attribute.
"TAX SHARING AGREEMENTS" means the separate Tax Sharing Agreements
between or among LNC and each of (i) ASFC, dated August 22, 1996, (ii)
American States Insurance Company and American States Lloyds Insurance
Company, dated November 22, 1996, (iii) American States Insurance Company and
Insurance Company of Illinois, dated October 9, 1996, (iv) American States
Insurance Company and American States Life Insurance
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Company, dated August 22, 1996, (v) American Economy Insurance Company and
American States Insurance Company of Texas, dated November 22, 1996, (vi)
American States Insurance Company and American States Preferred Insurance
Company, dated August 22, 1996, (vii) American States Insurance Company and
American Economy Insurance Company, dated August 22, 1996, (viii) ASFC and
American States Insurance Company, dated August 22, 1996, and (ix) American
States Insurance Company and City Insurance Agency, Inc., dated August 22,
1996, in each case applicable to the taxable year ending December 31, 1997
and all other periods specified therein (and applicable to any prior taxable
period or periods, to the extent still in effect), and the procedures and
practices employed pursuant thereto or reflected therein, including but not
limited to all procedures and practices with respect to alternative minimum
taxes.
"TAXING AUTHORITY" means any governmental authority (domestic or
foreign) responsible for the imposition of any Tax.
"TERM NOTE PREPAYMENT" shall have the meaning specified in Section
6.4.
"TRANSFERRED EMPLOYEES" shall have the meaning specified in
Section 9.1.
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"UNAUDITED MARCH BALANCE SHEET" shall have the meaning specified
in Section 3.8.
"VOTING AGREEMENT" shall have the meaning specified in the Recitals.
ARTICLE 2
THE MERGER
2.1 THE MERGER. Subject to the terms and conditions hereof, at
the Effective Time and in accordance with the provisions of this Agreement
and the applicable provisions of the IBCL, Buyer Sub shall be merged with and
into ASFC, and ASFC shall continue as the surviving corporation (the
"Surviving Corporation"). Thereupon the separate corporate existence of
Buyer Sub shall cease, and the Surviving Corporation shall continue in
existence under the laws of the State of Indiana.
2.2 EFFECTIVE TIME OF THE MERGER. On or prior to the Closing
Date, the Merger shall be consummated by filing with the Secretary of State
of the State of Indiana, as provided in Section 23-1-40-5 of the IBCL, the
articles of merger, in such form as is required by and executed in accordance
with Section 23-1-18-1 of the IBCL and satisfactory to the parties hereto
(the "Articles of Merger"), on behalf of the Constituent Corporations. The
Merger shall become effective at the time of
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filing or at such later time as shall be specified in the Articles of Merger
(the "Effective Time"). Prior to such filing, a closing (the "Closing")
shall be held at the offices of Sutherland, Asbill & Brennan, L.L.P., 1275
Pennsylvania Avenue, N.W., Washington, D.C. 20004, or such other place as the
parties may agree, on a date set by Buyer (the "Closing Date"), which date
shall be within ten Business Days following the later of (i) the date of the
ASFC Shareholders' Approval and (ii) the date upon which all conditions set
forth in Article 10 hereof have been satisfied or waived.
2.3 TERMS OF THE MERGER. (a) The Articles of Merger shall
provide that, upon the filing thereof, the Articles of Incorporation of ASFC
shall be the articles of incorporation of the Surviving Corporation.
(b) The bylaws of Buyer Sub in effect at the Effective Time shall
be the bylaws of the Surviving Corporation, until duly amended in accordance
with the terms thereof, of the articles of incorporation of the Surviving
Corporation and of the IBCL.
(c) The directors of Buyer Sub at the Effective Time shall, from
and after the Effective Time, be the directors of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier
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death, resignation or removal in accordance with the Surviving Corporation's
articles of incorporation and bylaws.
(d) The officers of ASFC 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.
2.4 EFFECT OF THE MERGER. Subject to the foregoing, the effects
of the Merger shall be as provided in the applicable provisions of the IBCL.
2.5 CONVERSION OR CANCELLATION OF SHARES IN THE MERGER. Subject
to the provisions of this Agreement, at the Effective Time, by virtue of the
Merger and without any action on the part of the holders thereof, the shares
of the Constituent Corporations shall be converted or cancelled, as the case
may be, in the following manner:
(a) Each Share shall be converted into the right to receive,
without interest thereon, from Buyer forty-seven dollars and no cents
($47.00) in cash (the "Merger Consideration").
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(b) Each share of common stock, no par value, of Buyer Sub issued
and outstanding immediately prior to the Effective Time shall remain
outstanding and be converted into one share of common stock, no par value, of
the Surviving Corporation ("Surviving Corporation Common stock").
2.6 PAYMENT FOR SHARES IN THE MERGER. The manner of making
payment for and conversion of Shares in the Merger shall be as follows:
(a) At the Effective Time, Buyer shall deposit, or shall cause to
be deposited (the "Exchange Fund"), with or for the account of the Exchange
Agent, for the benefit of those Persons who immediately prior to the
Effective Time were the holders of Shares, cash in immediately available
same-day funds payable as Merger Consideration. The Exchange Agent shall,
pursuant to irrevocable instructions, effect the payments of cash provided
for in Section 2.5 out of the Exchange Fund.
(b) Promptly after the Effective Time, the Exchange Agent shall
mail to each holder of record of a Certificate (i) a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificate shall pass, only upon proper delivery of
the Certificate to the Exchange Agent) and (ii) instructions for use in
surrendering the Certificate for payment therefor. Upon surrender of a
Certificate for cancellation to the Exchange
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Agent, together with such letter of transmittal duly executed and any other
required documents, the holder of such Certificate shall be entitled to
receive for each of the Shares represented by such Certificate the Merger
Consideration pursuant to this Article 2, and the Certificate so surrendered
shall forth-with be cancelled. The payment of the Merger Consideration shall
be made by corporate check mailed within three Business Days after the
surrender of such Certificate and the submission of such letter of
transmittal; provided, that any shareholder holding in excess of 20% of the
Shares shall be entitled to receive such payment by wire transfer of
immediately available funds not later than one Business Day after such
surrender and submission. Until so surrendered, the Certificate shall
represent solely the right to receive the cash with respect to each of the
Shares represented thereby. If any cash is to be paid to any Person other
than the Person to which the Certificate surrendered is registered, it shall
be a condition of such payment that the Certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the
Person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required by reason of the payment to a Person other than the
registered holder of the Certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
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(c) Any portion of the Exchange Fund which remains undistributed
to former shareholders of ASFC for 360 days after the Effective Time shall be
delivered to Buyer, upon demand of Buyer, and any former shareholders of ASFC
shall thereafter look only to Buyer for payment of their claim for the Merger
Consideration.
2.7 STATUS OF OPTIONS. Prior to the Closing Date, ASFC shall
cause the ASFC Options to be amended in the following respects: (i) each
ASFC Option, whether or not such ASFC Option is then exercisable, shall
become fully vested and exercisable as of the close of business on the
Business Day immediately preceding the Closing Date, (ii) each ASFC Option
shall terminate as of the Effective Time unless exercised prior to the
Effective Time, and (iii) each holder of an ASFC Option shall be deemed as of
the Business Day immediately prior to the Closing Date to have irrevocably
exercised in full such ASFC Option as of such Business Day by means of a
"cashless" exercise pursuant to which ASFC, when issuing shares of ASFC
Common Stock on exercise, will withhold from such issuance shares with an
aggregate value (when valued at $47.00 per share) equal to the sum of (i) the
aggregate exercise price payable upon such exercise, in lieu of the payment
by the holder of such exercise price in cash, and (ii) any applicable tax
withholding. The amendment of ASFC Options provided for in this Section 2.7
shall be conditional upon the consummation of the Merger such
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that, in the event the Merger is not consummated and this Agreement is
terminated, the ASFC Options shall in all respects revert to the terms in
effect prior to the Business Day immediately prior to the Closing Date and
all notices of exercise deemed given pursuant to this Section 2.7 shall be
null and void. Other than payment of the Merger Consideration with respect
to Shares received upon the deemed exercise of ASFC Options, no payment,
assumption or conversion shall occur in the Merger with respect to the ASFC
Options. All Shares issued upon exercise of ASFC Options pursuant to this
Section 2.7 shall be deemed issued and outstanding at the Effective Time for
purposes of the Merger.
2.8 CLOSING OF ASFC'S TRANSFER BOOKS. The stock transfer books of
ASFC shall be closed at the close of business on the Business Day immediately
preceding the date of the Effective Time. In the event of a transfer of
ownership of ASFC Common Stock which is not registered in the transfer
records of ASFC, the Merger Consideration to be distributed pursuant to this
Agreement may be delivered to a transferee, if a Certificate is presented to
the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and by payment of any applicable stock transfer taxes.
Buyer and the Exchange Agent shall be entitled to rely upon the stock
transfer books of ASFC to establish the identity of those persons entitled
to receive the Merger Consideration specified in this
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Agreement for their shares of ASFC Common Stock, which books shall be
conclusive with respect to the ownership of such shares. In the event of a
dispute with respect to the ownership of any such shares, the Surviving
Corporation and the Exchange Agent shall be entitled to deposit any Merger
Consideration represented thereby in escrow with an independent party and
thereafter be relieved with respect to any claims to such Merger
Consideration.
2.9 NO FURTHER OWNERSHIP RIGHTS IN ASFC COMMON STOCK. All Merger
Consideration issued upon surrender of a Certificate in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of ASFC Common Stock represented thereby,
and there shall be no further registration of transfers on the stock transfer
books of ASFC of shares of ASFC Common Stock outstanding immediately prior to
the Effective Time. If, after the Effective Time, Certificates are presented
to the Surviving Corporation for any reason, they shall be cancelled and
exchanged as provided in this Article 2.
2.10 NO LIABILITY. None of Buyer, the Surviving Corporation or
the Exchange Agent shall be liable to any person in respect of any cash from
the Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates shall not
have
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been surrendered prior to seven years after the Effective Time, any such
cash, dividends or distributions in respect of such Certificate shall, to the
extent permitted by Law or Order, become the property of Buyer, free and
clear of all claims or interest of any person previously entitled thereto.
2.11 INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest
any cash included in the Exchange Fund, as directed by Buyer, on a daily
basis in Permitted Investments. Any interest and other income resulting from
such investments shall be paid to Buyer upon termination of the Exchange Fund
pursuant to Section 2.6(c).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ASFC
ASFC represents and warrants to Buyer as of the date hereof and as
of the Closing Date (but as of no other dates unless expressly so stated)
that:
3.1 CORPORATE EXISTENCE AND POWER. ASFC (i) has been duly
incorporated and is validly existing as a corporation under the laws of the
State of Indiana, (ii) has all corporate powers required to carry on its
business as now conducted, (iii) has all material governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted and (iv) is duly qualified to do business
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as a foreign corporation and is in good standing in each jurisdiction where
such qualification is necessary, except for those jurisdictions where failure
to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect on ASFC. ASFC has heretofore delivered or made
available to Buyer true and complete copies of the respective articles of
incorporation and bylaws of ASFC and its Subsidiaries as in effect on the
date hereof. Neither ASFC nor any of its Subsidiaries is in violation of any
of the provisions of its articles of incorporation or bylaws.
3.2 CORPORATE AUTHORIZATION. The execution, delivery and,
subject to the receipt of the approvals referred to in Section 3.3,
performance by ASFC of this Agreement are within ASFC's corporate powers and
have been duly authorized by all necessary corporate action on the part of
ASFC. This Agreement constitutes a valid and legally binding agreement of
ASFC, enforceable against ASFC in accordance with its terms, subject to (i)
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and
other similar laws now or hereafter in effect relating to or affecting
creditors' rights generally and (ii) general principles of equity (regardless
of whether considered in a proceeding at law or in equity).
3.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by ASFC of this Agreement require no
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consent, approval or action of, filing with or notice to any Governmental
Body other than (i) compliance with any applicable requirements of the HSR
Act, (ii) approvals or filings under the insurance laws of the jurisdictions
set forth on Schedule 3.3, (iii) filings and notices not required to be made
or given until after the Closing Date, (iv) filings, at any time, of tax
returns, tax reports and tax information statements and (v) any such action
or filing as to which the failure to take or make such action or filing would
not, individually or in the aggregate, materially impair the ability of ASFC
and its Subsidiaries, taken as a whole, to conduct their businesses.
3.4 NON-CONTRAVENTION. Except as set forth in Schedule 3.4, the
execution, delivery and performance by ASFC of this Agreement do not and will
not (i) violate the articles of incorporation or bylaws of ASFC or any of its
Subsidiaries, (ii) assuming compliance with the matters referred to in
Section 3.3, violate any applicable Law or Order, (iii) to the Knowledge of
ASFC, require any consent or other action by any Person under, constitute a
default under, or give rise to any right of termination, cancellation or
acceleration of any right or obligation of ASFC or any of its Subsidiaries or
to a loss of any benefit to which ASFC or any of its Subsidiaries is
entitled under, any material agreement or other material instrument binding
upon ASFC or any of its Subsidiaries or any material license, franchise,
permit or other similar authorization
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held by ASFC or any of its Subsidiaries or (iv) to the Knowledge of ASFC,
result in the creation or imposition of any material Lien on any asset of
ASFC or any of its Subsidiaries.
3.5 CAPITALIZATION. (a) The authorized capital stock of ASFC
consists of two hundred million (200,000,000) shares, consisting of one
hundred ninety-five million (195,000,000) shares of ASFC Common Stock and
five million (5,000,000) shares of ASFC Preferred Stock. As of the date
hereof, (i) there are outstanding 60,050,515 shares of ASFC Common Stock,
(ii) no shares of ASFC Preferred Stock are outstanding, and (iii) no shares
of capital stock of ASFC are held in treasury.
(b) All outstanding shares of capital stock of ASFC have been duly
authorized and validly issued and are fully paid and non-assessable. Except
as set forth in Section 3.5(a) and except for the ASFC Options and unvested
options governed by the Incentive Letter Agreements, there are no outstanding
(i) shares of capital stock or voting securities of ASFC, (ii) securities of
ASFC convertible into or exchangeable for shares of capital stock or voting
securities of ASFC or (iii) options or other rights to acquire from ASFC, or
other obligations of ASFC to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of ASFC (the items in clauses (i), (ii) and (iii)
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being referred to collectively as the "ASFC Securities"). There are no
outstanding obligations of ASFC or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any ASFC Securities.
3.6 ALL ASSETS NECESSARY. Except as set forth in Schedule 3.6,
ASFC and its Subsidiaries own, lease or license all material property and
assets necessary to carry on their businesses and operations as presently
conducted, all such assets and properties (other than as Buyer and ASFC may
mutually agree) will be conveyed to Buyer at the Closing and will as of the
Closing permit Buyer to conduct such businesses and operations in the same
manner as such businesses and operations have been conducted prior to the
Closing.
3.7 SUBSIDIARIES. (a) Except as set forth in Schedule 3.7, each
Subsidiary of ASFC has been duly incorporated or organized and is validly
existing as a corporation, partnership or association in good standing under
the laws of its jurisdiction of incorporation or organization and has all
powers and all material governmental licenses, authorizations, permits,
consents and approvals required to carry on its business as now conducted.
Each Subsidiary of ASFC is duly qualified to do business as a foreign
corporation or organization and is in good standing in each jurisdiction
where such qualification is necessary, or is duly licensed to do business as
an
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insurer and is in good standing in each jurisdiction where such licensing is
necessary, as the case may be, except for those jurisdictions where failure
to be so qualified or licensed, as the case may be, would not, individually
or in the aggregate, have a Material Adverse Effect on ASFC. All
Subsidiaries of ASFC and their respective jurisdictions of incorporation or
organization are identified on Schedule 3.7.
(b) All outstanding shares of capital stock of each Subsidiary of
ASFC have been duly authorized and validly issued and are fully paid and
non-assessable. As of the Closing Date, except as set forth in Schedule 3.7,
all of the outstanding capital stock of, and other voting securities or
ownership interests in, each Subsidiary of ASFC will be owned by ASFC,
directly or indirectly, free and clear of any Lien. Except as set forth in
Schedule 3.7, there are no outstanding (i) securities of ASFC or any of its
Subsidiaries convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in any Subsidiary of ASFC or
(ii) options or other rights to acquire from ASFC or any of its
Subsidiaries, or other obligations of ASFC or any of its Subsidiaries to
issue, any capital stock or other voting securities or ownership interests
in, or any securities convertible into or exchangeable for any capital stock
or other voting securities or ownership interests in, any Subsidiary of ASFC
(the items in clauses (i) and (ii) being referred to collectively as
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the "Subsidiary Securities"). There are no outstanding obligations of ASFC
or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
outstanding Subsidiary Securities.
3.8 FINANCIAL STATEMENTS; SEC REPORTS. (a) The audited
consolidated balance sheet of ASFC and its Subsidiaries as of December 31,
1995 and December 31, 1996 and the related consolidated statements of income
and cash flows for each of the years ended December 31, 1995 and December 31,
1996 and the unaudited consolidated balance sheet of ASFC and its
Subsidiaries as of March 31, 1997 (the "Unaudited March Balance Sheet") and
the related consolidated statement of income for the three months ended March
31, 1997, respectively, previously delivered to Buyer, present fairly, in all
material respects, the consolidated financial position of ASFC and its
Subsidiaries as of the dates thereof and the consolidated results of
operations of ASFC and its Subsidiaries for the periods then ended in
conformity with GAAP consistently applied (subject to normal year-end
adjustments in the case of the unaudited interim financial statements).
(b) The audited balance sheets of ASFC and the Subsidiaries as of
December 31, 1996, and the related statements of operations and statements of
cash flows for the year then ended, and their respective annual statements
for the fiscal year ended December 31, 1996 (the "Annual Statements") filed
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with the insurance regulatory authorities in their respective jurisdictions
of domicile (collectively, the "Regulators"), copies of which have been
delivered to Buyer, fairly present in all material respects their respective
statutory financial conditions as of such date and the results of their
respective operations for the year then ended in conformity with SAP. The
other information contained in the Annual Statements fairly presents in all
material respects the information required to be contained therein in
conformity with SAP. The balance sheets of ASFC and its Subsidiaries in
respect of any period ending after December 31, 1996, and the related
statements of operations and statements of cash flows, which have been filed
with Regulators, copies of which have been delivered to Buyer, fairly present
in all material respects their respective statutory financial conditions as
of such date and the results of their respective operations for the period
then ended in conformity with SAP consistently applied.
(c) As of the date of the latest filing of an SEC Report, the SEC
Reports taken as a whole, including but not limited to any financial
statements or schedules included therein, did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not
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misleading, it being understood that for purposes of this sub-paragraph (c)
"material" is to be assessed in the context of ASFC and all of its
Subsidiaries taken as a whole.
3.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in Schedule
3.9, during the period from the Balance Sheet Date to the date hereof, the
business of ASFC and its Subsidiaries has been conducted in the ordinary
course consistent with past practices (including but not limited to with
regard to underwriting, pricing, actuarial and investment policies
generally) and there has not been:
(i) any event, occurrence, development or state of
circumstances or facts which has had or would reasonably be expected to have
a Material Adverse Effect on ASFC, other than (A) those affecting the
property and casualty insurance industry as a whole, (B) Catastrophes or (C)
changes in general economic conditions (including but not limited to changes
in interest rates);
(ii) a decline in ASFC's GAAP equity of more than 10%;
provided, that in determining whether the representation set forth in this
Section 3.9(ii) has been satisfied, changes in ASFC's GAAP equity after March
31, 1997 resulting from FAS 115 mark-to-market accounting shall be excluded
from the calculation of ASFC's GAAP equity on the date hereof;
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(iii) other than the declaration or payment of ASFC's regular
quarterly dividend in an amount not in excess of $0.21 per share, any
declaration, setting aside or payment of any dividend or other distribution
with respect to any shares of capital stock of ASFC, or any repurchase,
redemption or other acquisition by ASFC or any Subsidiary of ASFC of any
outstanding shares of capital stock or other securities of, or other
ownership interests in, ASFC or any Subsidiary of ASFC;
(iv) any incurrence, assumption or guarantee by ASFC or any
Subsidiary of ASFC of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with past
practices;
(v) any transaction or commitment made, or any contract or
agreement entered into, by ASFC or any Subsidiary of ASFC (including the
acquisition or disposition of any assets) or any relinquishment by ASFC or
any Subsidiary of ASFC of any contract or other right, other than
transactions and commitments in the ordinary course of business consistent
with past practices;
(vi) any change in any method of accounting or accounting
practice or policy (including but not limited to any reserving method,
practice or policy) by ASFC or any Subsidiary
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of ASFC, except for any such change (A) as a result of a concurrent change
in GAAP or SAP or (B) that is not material to ASFC and its Subsidiaries,
taken as a whole;
(vii) to the extent payable directly or indirectly by ASFC
or any Subsidiary of ASFC, other than the Incentive Letter Agreements, any
(A) employment, deferred compensation, severance, retirement or other
similar agreement entered into with any director, officer or employee of ASFC
(or any amendment to any such existing agreement), (B) grant of any severance
or termination pay to any director, officer or employee of ASFC other than
in the ordinary course of business, (C) change in compensation or other
benefits payable to any director, officer or employee of ASFC, other than
changes in base compensation and bonuses, and changes in benefits in
accordance with plans or arrangements in effect as of the Balance Sheet
Date, in the ordinary course of business consistent with past practice, or
(D) loans or advances to any directors, officers or employees, except in
connection with transfer or for ordinary travel and business expenses in the
ordinary course of business consistent with past practice;
(viii) to the Knowledge of ASFC, any transaction by ASFC or
any Subsidiary of ASFC involving ASFC Investment Assets other than in the
ordinary course of business consistent with past practice;
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(ix) (A) any entering into of any facultative reinsurance
contract, other than in the ordinary course of business consistent with past
practice, (B) any commutation of any facultative reinsurance contract, or (C)
any entering into or any commutation of any reinsurance treaty, purchased by
any Subsidiary of ASFC;
(x) any investment made in ASFC
Investment Assets other than in accordance with the investment policies of
ASFC or any Subsidiary of ASFC set forth in Schedule 3.9(x); or
(xi) any agreement or commitment (contingent or otherwise) by
ASFC or any Subsidiary of ASFC to do any of the foregoing.
3.10 MATERIAL LIABILITIES; INVESTMENTS. (a) To the Knowledge of
ASFC, there are no liabilities of ASFC or any Subsidiary of ASFC of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise, other than:
(i) liabilities provided for in the Unaudited March
Balance Sheet;
(ii) liabilities disclosed on Schedule 3.10(a);
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(iii) liabilities incurred since the Balance Sheet Date in the
ordinary course of business consistent with past practice and in
amounts and on terms consistent with past practice; and
(iv) other undisclosed liabilities that are not individually or in the
aggregate material to ASFC and its Subsidiaries, taken as a
whole.
(b) Schedule 3.10(b) describes in reasonable detail all ASFC
Investment Assets as of the Balance Sheet Date.
3.11 MATERIAL CONTRACTS. (a) Except as disclosed in Schedule
3.11, as of the date hereof, neither ASFC nor any of its Subsidiaries is a
party to or bound by:
(i) any lease of real property where any of ASFC or its
Subsidiaries are tenants (A) providing for annual base rentals of $1,000,000
or more, (B) expiring after December 31, 2002 or (C) where ASFC or any of
its Affiliates holds an equity interest in such real property;
(ii) any agreement for the purchase of materials, supplies,
goods, services, equipment or other assets, including any license for
Software, that provides for either (A) annual payments by ASFC or any
Subsidiary of ASFC of $1,000,000 or more or (B) aggregate required payments
by ASFC or any Subsidiary of ASFC of $5,000,000 or more;
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(iii) any limited partnership, joint venture or other
unincorporated business organization or similar arrangement or agreement in
which ASFC or any Subsidiary of ASFC serves as a general partner or otherwise
has unlimited liability;
(iv) any agreement relating to the acquisition or disposition
of any business (whether by merger, sale of stock, sale of assets or
otherwise);
(v) any agreement relating to indebtedness for borrowed money
or any guarantee or similar agreement or arrangement relating thereto, other
than (A) any guarantees issued in the ordinary course of the surety business
of ASFC and its Subsidiaries consistent with past practice and (B) any such
agreement with, or relating to, an aggregate outstanding principal amount or
guaranteed obligation not exceeding $10,000,000;
(vi) any license, franchise or similar agreement material to
ASFC and its Subsidiaries, taken as a whole;
(vii) any agency, dealer, sales representative, marketing or
other similar agreement material to ASFC and its Subsidiaries, taken as a
whole;
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(viii) any agreement that restricts or prohibits ASFC or any
Subsidiary of ASFC from competing with any Person in any line of business or
from competing in, engaging in or entering into any line of business in any
area and which would so restrict or prohibit ASFC or any Subsidiary of ASFC
after the Closing Date;
(ix) any reinsurance treaty or any facultative reinsurance
contract (in each case applicable to insurance in force), other than any such
treaty or contract entered into in the ordinary course of business consistent
with past practice;
(x) any material agreement containing "change in control" or
similar provisions relating to change in control of ASFC or any of its
Subsidiaries;
(xi) any "stop loss" agreements, other than those entered
into in the ordinary course of business consistent with past practice;
(xii) any agreements (other than insurance policies or other
similar agreements issued by any Subsidiary of ASFC in the ordinary course of
its business) material to ASFC and its Subsidiaries taken as a whole pursuant
to which ASFC or any Subsidiary of ASFC is obligated to indemnify any other
Person; or
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(xiii) any agreement with ASFC or any of its Affiliates.
(b) ASFC has heretofore furnished or made available to Buyer
complete and correct copies of the contracts, agreements and instruments
listed on Schedule 3.11, each as amended or modified to the date hereof,
including any waivers with respect thereto (the "Significant Agreements").
Except as specifically disclosed on Schedule 3.11, and except to the extent
not material to ASFC and its Subsidiaries taken as a whole: (i) each of the
Significant Agreements is in full force and effect and enforceable in
accordance with its terms, subject to (A) bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium and other similar laws now
or hereafter in effect relating to or affecting creditors' rights generally
and the rights of creditors of insurance companies generally and (B) general
principles of equity (regardless of whether considered in a proceeding at
law or in equity); (ii) neither ASFC nor any of its Subsidiaries has received
any notice (written or oral) of cancellation or termination of, or any
expression or indication of an intention or desire to cancel or terminate,
any of the Significant Agreements; (iii) no Significant Agreement is the
subject of, or, to the Knowledge of ASFC, has been threatened to be made the
subject of, any arbitration, suit or other legal proceeding; and (iv) there
exists no material event of default or occurrence, condition or act on the
part of ASFC
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or any Subsidiary of ASFC which constitutes or would constitute (with notice
or lapse of time or both) a material breach of or material default under any
of the Significant Agreements.
3.12 NON-CLAIMS LITIGATION. Except as set forth on Schedule 3.12
and except for any action, suit, investigation or proceeding that involves a
claim under any insurance, reinsurance or indemnity policy, fidelity bond,
surety bond or similar contract or undertaking issued or entered into by ASFC
or any Subsidiary of ASFC, there is no action, suit, investigation or
proceeding pending against, or, to the Knowledge of ASFC, threatened against,
or affecting the properties of, ASFC or any Subsidiary of ASFC or any of
their respective properties before any Governmental Body, and to the
Knowledge of ASFC, there is no reasonable basis for any such claim in which
the actual damages alleged or sought exceeds $1,000,000. As of the date
hereof and as of no other date, there is no action, suit, investigation or
proceeding pending against, or, to the Knowledge of ASFC, threatened against,
or affecting the properties of, ASFC or any Subsidiary of ASFC or any of
their respective properties before any Governmental Body which challenges or
seeks to prevent the transactions contemplated hereby. Except as disclosed
in Schedule 3.12, neither ASFC nor any Subsidiary of ASFC nor any of their
respective properties is subject to any material Order which would prevent or
delay the consummation of the transactions contemplated hereby.
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3.13 COMPLIANCE WITH LAWS. Except as set forth in Schedule 3.13,
ASFC and its Subsidiaries are and have at all times since January 1, 1996
been in compliance in all material respects with all applicable material Laws.
3.14 PROPERTIES. ASFC and its Subsidiaries have good title to, or
in the case of leased property have valid leasehold interests in, all of
their respective properties and assets (whether real or personal, tangible or
intangible) except for imperfections in title or invalidities in leasehold
interests that do not, individually or in the aggregate, materially detract
from the value reflected on the Unaudited March Balance Sheet. None of such
properties or assets is subject to any Liens, except:
(i) Liens reflected on the Unaudited March Balance Sheet;
(ii) Liens for taxes not yet due or being contested in good
faith (and for which adequate accruals or reserves have been established on
the Unaudited March Balance Sheet; and
(iii) Liens which do not, individually or in the aggregate,
materially detract from the value reflected on the Unaudited March Balance
Sheet or materially interfere with any present or intended use of any material
properties or assets.
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3.15 LICENSES AND PERMITS; POLICIES; REGULATORY MATTERS. Except
as set forth on Schedule 3.15, ASFC and its Subsidiaries hold all material
licenses, franchises, permits or other similar authorizations (the "Permits")
necessary for the ownership and conduct of the respective businesses of ASFC
and its Subsidiaries in each of the jurisdictions in which ASFC and its
Subsidiaries conduct or operate their respective businesses in the manner now
conducted, and such Permits are in full force and effect except where any
failure to hold any Permit or any failure of any Permit to be in full force
and effect would not, individually or in the aggregate, materially impair the
ability of ASFC and its Subsidiaries, taken as a whole, to conduct their
businesses. No material violations exist in respect of any material Permit
of ASFC and its Subsidiaries, and no proceeding or investigation is pending
or, to the Knowledge of ASFC, threatened, that would be reasonably likely to
result in the suspension, revocation or material limitation or restriction
of any material Permit and, to the Knowledge of ASFC, there is no reasonable
basis for the assertion of any such violation or the institution of any such
proceeding. All insurance policies issued by any Subsidiary of ASFC, as now
in force are, to the extent required under applicable law, in a form
acceptable to applicable regulatory authorities to the Knowledge of ASFC, or
have been filed with and not objected to by such authorities within the
period provided for such objection.
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ASFC and each Subsidiary of ASFC has filed, all material reports,
statements, documents, registrations, filings or submissions required to be
filed by ASFC or any Subsidiary of ASFC, respectively, with any applicable
federal, state or local regulatory authorities, including but not limited to
state insurance regulatory authorities. All such reports, statements,
documents, registrations, filings and submissions complied in all material
respects with applicable law in effect when filed and, except as set forth on
Schedule 3.15, no material deficiencies have been asserted by any such
regulatory authority with respect to such reports, statements, documents,
registrations, filings or submissions that have not been satisfied. Except
as set forth on Schedule 3.15, all premium rates, rating plans and policy
forms established or used by any Subsidiary of ASFC that are required to be
filed with or approved by insurance regulatory authorities have been so
filed or approved, the premiums charged conform in all material respects to
the premiums so filed or approved and comply in all material respects with
the insurance laws applicable thereto.
3.16 ERISA REPRESENTATIONS. (a) Schedule 3.16(a) identifies each
Employee Plan. ASFC has furnished or made available to Buyer copies of the
Employee Plans, summary plan descriptions and, if applicable, related trust
agreements, and all amendments thereto, together with (i) the most recent
annual report prepared in connection with any Employee Plan (Form
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5500 including, if applicable, Schedule B thereto) and (ii) the most recent
actuarial valuation report prepared in connection with any Employee Plan.
(b) There is no accumulated funding deficiency, whether or not
waived, within the meaning of Section 302 of ERISA or Section 412 of the
Code, with respect to any pension plan of ASFC or any ERISA Affiliate of
ASFC. Neither ASFC nor any ERISA Affiliate of ASFC has incurred, or
reasonably expects to incur prior to the Closing Date, any liability under
Title IV of ERISA (other than a liability for premiums under Section 4007 of
ERISA) that will not be satisfied in full as of the Closing Date. No
Employee Plan is a Multiemployer Plan.
(c) Except as described in Schedule 3.16(c), each Employee Plan
has been maintained in material compliance with its terms and with the
requirements prescribed by any and all applicable Laws, including but not
limited to ERISA and the Code.
(d) Schedule 3.16(d) identifies each Benefit Arrangement. ASFC
has furnished or made available to Buyer copies or descriptions of each
Benefit Arrangement. Each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all applicable Laws.
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(e) Each Employee Plan that is a "group health plan" (as defined
in Section 4980B of the Code) has been operated in material compliance with
Section 4980B of the Code at all times.
(f) With respect to any Employee Plan that provides disability
benefits, the amounts accrued on the March Unaudited Balance Sheets in
accordance with FAS 112 are reasonably expected to be sufficient to pay all
future obligations to the Transferred Employees who are disabled as of the
Balance Sheet Date.
(g) Except as disclosed in Schedule 3.16(g), (i) ASFC and each of
its Subsidiaries has made full and timely payment of all amounts required to
be contributed under the terms of each Benefit Plan and applicable law, or
required to be paid as expenses under such Benefit Plan, and (ii) no excise
or penalty taxes are assessable as a result of a nondeductible or other
contribution made or not made to any Benefit Plan.
(h) Other than claims for benefits arising in the ordinary course
of the administration and operation of the Benefit Plans, no claims,
investigations, or arbitrations are pending or threatened against any Benefit
Plan, or ASFC, any Subsidiary of ASFC, any trustee, fiduciary, custodian,
administrator, or other person or entity holding or controlling assets
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of any Benefit Plan in connection with such Benefit Plan, and no basis to
anticipate any such claim or claims exists.
(i) Except as disclosed in Schedule 3.16(i) and as expressly
provided in Section 2.7, neither the execution of this Agreement nor the
consummation of the transactions contemplated by this Agreement will (i)
accelerate the time of payment or vesting, or increase the amount, of
compensation or benefits due under any Benefit Plan, (ii) constitute or
result in a prohibited transaction with respect to any Benefit Plan under
Section 4975 of the Code or Section 406 or 407 of ERISA for which an
exemption is not available, or (iii) Constitute a "deemed severance" or
"deemed termination" under any Benefit Plan or with respect to any Benefit
Plan under any applicable Law.
(j) Under each Employee Plan subject to Title IV of ERISA, as of
the last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities," within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions in such Employee Plan's most recent actuarial
valuation), did not exceed the then-current value of the assets of such
Employee Plan.
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3.17 ENVIRONMENTAL MATTERS. Except as would not, individually or
in the aggregate, have a Material Adverse Effect on ASFC: (i) ASFC and its
Subsidiaries are each in compliance with all applicable Environmental Laws;
(ii) ASFC and its Subsidiaries have all permits, authorizations and approvals
required under any applicable Environmental Laws and are each in compliance
with their respective requirements; (iii) to the Knowledge of ASFC, there are
no pending or overtly threatened claims against ASFC or any of its
Subsidiaries alleging a violation of Environmental Laws; and (iv) to the
knowledge of ASFC, under applicable law, there are no circumstances with
respect to any property or operations of ASFC or any of its Subsidiaries that
are reasonably likely to form the basis of a claim against ASFC or any of its
Subsidiaries alleging a material violation of Environmental Laws. No
representation in this Section 3.17 is intended to imply any representation
as to any obligation or liability that ASFC or any of its Subsidiaries has
or may have in connection with, as a result of or arising out of any
insurance or reinsurance or indemnity policy, surety bond or similar contract
or undertaking issued or entered into by ASFC or any Subsidiary of ASFC in
the ordinary course of business.
3.18 INTERCOMPANY ACCOUNTS. Schedule 3.18 contains a complete
list of all intercompany balances as of the Balance Sheet Date between any
Affiliate of ASFC, on the one hand, and
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ASFC or any Subsidiary of ASFC, on the other hand. Except as disclosed on
Schedule 3.18, since the Balance Sheet Date, there has not been any
incurrence or accrual of liability (as a result of allocations or otherwise)
by ASFC or any Subsidiary of ASFC to any Affiliate of ASFC or other
transaction between ASFC or any Subsidiary of ASFC and any Affiliate of ASFC,
except (i) in the ordinary course of business in accordance with past
practice or (ii) as contemplated by this Agreement.
3.19 NO REPRESENTATION WITH RESPECT TO RESERVES. Buyer
acknowledges that ASFC makes no representation or warranty hereunder that
the liabilities for unpaid claims and claim expenses, whether reported or
incurred but not reported, of ASFC and its Subsidiaries (the "Claims
Provision") are adequate or sufficient.
3.20 INTELLECTUAL PROPERTY; SOFTWARE. (a) ASFC and its
Subsidiaries own or otherwise have rights to use (in each case, free and
clear of any material Liens or other material limitations or restrictions)
all Intellectual Property used in their respective businesses as currently
conducted; the use of any Intellectual Property by ASFC and its Subsidiaries
does not infringe on or otherwise violate the rights of any Person; and, to
the Knowledge of ASFC, no person is challenging, infringing on or otherwise
violating any right of ASFC or any Subsidiary
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of ASFC with respect to any Intellectual Property owned by and/ or licensed
to ASFC and its Subsidiaries.
(b) Except as set forth in Schedule 3.20, (i) ASFC and its
Subsidiaries own or have valid and enforceable licenses or other rights to
use (in each case, free and clear of any material Liens or other material
limitations or restrictions) all Software used in the conduct of their
respective businesses as currently conducted, (ii) the use of the Software by
ASFC and its Subsidiaries does not infringe on or otherwise violate the
rights of any person, and (iii) to the Knowledge of ASFC, no person is
challenging, infringing on or otherwise violating any right of ASFC or any
Subsidiary of ASFC with respect to any Software used by ASFC and its
Subsidiaries.
3.21 LABOR MATTERS. Neither ASFC nor any Subsidiary of ASFC is a
party to any collective bargaining or other labor union contract, and no
collective bargaining agreement is being negotiated by ASFC or any Subsidiary
of ASFC. To the Knowledge of ASFC, there are no material activities or
proceedings of any labor union to organize any employees of ASFC or any
Subsidiary of ASFC. There is no material labor dispute, strike or work
stoppage against ASFC or any Subsidiary of ASFC pending or, to the Knowledge
of ASFC, threatened which may interfere with the respective business
activities of ASFC or any of its Subsidiaries.
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3.22 LOANS AND ADVANCES. Except as set forth in Schedule 3.22,
other than in the ordinary course of its portfolio investment activities,
neither ASFC nor any of its Subsidiaries has any contractual commitment to
make any loan, advance or capital contribution to, or investment in, any
other Person in excess of $250,000.
3.23 PROXY STATEMENT. (a) Neither the Proxy Statement as
amended or supplemented from time to time nor any other document to be filed
by ASFC with the SEC or any self regulatory organization in connection with
the Merger will, on the date of its filing, at the time it is mailed to
shareholders, at the time of the ASFC Shareholders' Meeting or at the
Effective Time, 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 insofar as the information therein relates
circumstances to ASFC.
(b) Neither the information supplied or to be supplied by or on
behalf of ASFC for inclusion, nor the information incorporated by reference
from documents filed by ASFC with the SEC, in any document to be filed by
Buyer with the SEC or any self-regulatory organization in connection with the
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Merger will, on the date of its filing or effectiveness, 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.
3.24 NO OTHER BROKER. Other than Goldman, Sachs & Co., no broker,
finder or similar intermediary has acted for or on behalf of ASFC in
connection with this Agreement or the transactions contemplated hereby, and
no other broker, finder, agent or similar intermediary is entitled to any
brokers', finders' or similar fee or other commission in connection therewith
based on any agreement, arrangement or understanding with ASFC or any action
taken by ASFC.
3.25 INDIANA TAKEOVER LAWS. ASFC has taken all steps necessary to
exempt irrevocably (i) the execution of this Agreement and the Voting
Agreement, (ii) the Merger and (iii) the transactions contemplated hereby
from (y) any statute of the State of Indiana that purports to limit or
restrict business combinations or the ability to acquire or to vote shares
and (z) any applicable charter or contractual provision containing change of
control or anti-takeover provisions.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer and Buyer Sub represent and warrant to ASFC as of the date
hereof and as of the Closing Date (but as of no other dates unless expressly
so stated) that:
4.1 CORPORATE EXISTENCE AND POWER. Buyer has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of Washington and has all corporate powers and all material
governmental licenses, authorizations, permits, consents and approvals
required to carry on its business as now conducted. Buyer Sub has been duly
incorporated and is validly existing as a corporation under the laws of
Indiana. Buyer and Buyer Sub have heretofore delivered or will deliver to
ASFC true and complete copies of their respective articles of incorporation
and bylaws as in effect on the date hereof.
4.2 CORPORATE AUTHORIZATION. The execution, delivery and,
subject to the receipt of the approvals referred to in Section 4.3,
performance by each of Buyer and Buyer Sub of this Agreement are within the
corporate powers of Buyer and Buyer Sub and have been duly authorized by all
necessary corporate action on the part of Buyer and Buyer Sub. This
Agreement constitutes a valid and legally binding agreement of Buyer and
Buyer Sub, enforceable against Buyer or Buyer Sub in accordance
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with its terms, subject to (i) bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws now or hereafter in
effect relating to or affecting creditors' rights generally and (ii) general
principles of equity (regardless of whether considered in a proceeding at law
or in equity).
4.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Buyer and Buyer Sub of this Agreement require no consent,
approval or action of, filing with or notice to any Governmental Body other
than (i) compliance with any applicable requirements of the HSR Act, (ii)
approvals or filings under the insurance laws of the jurisdictions set forth
in Schedule 4.3, (iii) filings and notices not required to be made or given
until after the Closing Date and (iv) filings, at any time, of tax returns,
tax reports and tax information statements.
4.4 NON-CONTRAVENTION. Except as set forth in Schedule 4.4, the
execution, delivery and performance by Buyer and Buyer Sub of this Agreement
do not and will not (i) violate the articles of incorporation or bylaws of
Buyer or Buyer Sub, (ii) assuming compliance with the matters referred to in
Section 4.3, violate any applicable Law or Order, (iii) to the Knowledge of
Buyer, require any consent or other action by any Person under, constitute a
default under, or give rise to any
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right of termination, cancellation or acceleration of any right or obligation
of Buyer or Buyer Sub or to a loss of any benefit to which Buyer or Buyer Sub
is entitled under, any material agreement or other instrument binding upon
Buyer or Buyer Sub or any material license, franchise, permit or other
similar authorization held by Buyer or Buyer Sub or (iv) to the Knowledge of
Buyer, result in the creation or imposition of any material Lien on any
asset of Buyer or Buyer Sub.
4.5 FINANCING. Buyer has, or will have prior to the Closing,
sufficient cash, available lines of credit or other sources of immediately
available funds to enable it to make payment of the Merger Consideration, the
Assumed Debt Prepayment, the Term Note Prepayment and any other amounts to
be paid by it hereunder.
4.6 NO ACTIONS; SUITS OR PROCEEDINGS. There is no pending action,
suit or proceeding, nor, to the Knowledge of Buyer, has any litigation been
overtly threatened in writing or, if probable of assertion, orally, against
Buyer or Buyer Sub before any Governmental Body which questions the validity
or legality of this Agreement or of the transactions contemplated hereby, or
which seeks to prevent the consummation of the transactions contemplated
hereby, including the Merger.
4.7 NO OTHER BROKER. Other than Smith Barney Inc., no broker,
finder or similar intermediary has acted for or on
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behalf of Buyer or Buyer Sub in connection with this Agreement or the
transactions contemplated hereby, and no other broker, finder, agent or
similar intermediary is entitled to any brokers', finders' or similar fee or
other commission in connection therewith based on any agreement, arrangement
or understanding with Buyer or Buyer Sub or any action taken by Buyer or
Buyer Sub.
4.8 MERGER SUBSIDIARY. Buyer Sub has engaged and until the
Effective Time will engage in no business and has, and at the Effective Time
will have, no liabilities, in each case, other than by reason of this
Agreement.
4.9 REPORTS AND FINANCIAL STATEMENTS. Buyer has filed with the
SEC all Buyer SEC Reports and has made available to ASFC true and complete
copies of all Buyer SEC Reports. As of their respective dates, the Buyer SEC
Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim consolidated financial statements (including, in each case,
the notes, if any, thereto) included in the Buyer SEC Reports (the "Buyer
Financial Statements") fairly present (subject, in the case of
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the unaudited interim financial statements, to normal, recurring year-end
audit adjustments which are not expected, individually or in the aggregate,
to be material or to result in a Material Adverse Effect on Buyer) the
consolidated financial position of Buyer and its consolidated subsidiaries as
of the respective dates thereof and the consolidated results of their
operations and cash flows for the respective periods then ended, in each
case, in accordance with GAAP consistently applied. Each Significant
Subsidiary of Buyer is treated as a consolidated subsidiary of Buyer in the
Buyer Financial Statements for all periods covered thereby.
4.10 PROXY STATEMENT. Neither the information supplied or to be
supplied by or on behalf of Buyer for inclusion, nor the information
incorporated by reference from documents filed by Buyer with the SEC, in the
Proxy Statement or any other document to be filed by ASFC with the SEC or any
self-regulatory organization in connection with the Merger will, on the date
of its filing or effectiveness, at the time it is mailed to shareholders, at
the time of the ASFC Shareholders' Meeting or at the Effective Time, 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.
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ARTICLE 5
COVENANTS OF ASFC
ASFC agrees that:
5.1 CONDUCT. Except as otherwise expressly provided in this
Agreement, during the period from the date hereof to the Closing, ASFC will,
and will cause its Subsidiaries to: (i) conduct their respective operations
according to their ordinary course of business consistent with past practice
(including but not limited to with regard to underwriting, pricing,
actuarial and investment policies generally); (ii) use commercially
reasonable efforts to preserve intact their respective business
organizations; (iii) generally keep available the services of their
respective officers and employees; and (iv) generally maintain existing
relationships with agents, licensors, licensees, suppliers, contractors,
distributors, customers and others having business relationships with them.
Without limiting the generality of the foregoing, and except as otherwise
expressly provided in this Agreement or as set forth in Schedule 5.1, ASFC
will not, and will cause each Subsidiary of ASFC not to, without the prior
written consent of Buyer:
(i) amend its articles of incorporation or by-laws;
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(ii) except for any employer contribution made pursuant to
the American States Financial Corporation Employees' Savings and
Profit-Sharing Plan, authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting
of options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities or equity
equivalents (including but not limited to stock appreciation rights), or
amend any of the terms of any such securities or agreements outstanding as
of the date hereof;
(iii) (A) split, combine or reclassify any shares of its
capital stock, (B) other than the declaration or payment of ASFC's regular
quarterly dividend in an amount not in excess of $0.21 per share, declare,
set aside or pay any dividend or other distribution (whether in cash, stock
or property or any combination thereof) in respect of its capital stock, or
(C) redeem, repurchase or otherwise acquire any of its securities;
(iv) (A) incur any indebtedness for borrowed money (except
for short-term indebtedness incurred in the ordinary course of business
consistent with past practice pursuant to existing lines of credit or
extensions or renewals thereof) or issue any debt securities or, except in
the ordinary course of business consistent with past practice, assume,
guarantee or
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endorse the obligations of any other Person; (B) make any loans, advances or
capital contributions to, or investments in, any other Person, in excess of
$250,000 (other than (w) investments made to replace investments governed by
a participation agreement between ASFC or any Subsidiary of ASFC, on the one
hand, and any Affiliate of ASFC, on the other hand, (x) to wholly owned
Subsidiaries of ASFC, (y) investments in the ordinary course of business
consistent with past practice or (z) loans to agents in the ordinary course
of business consistent with past practice not exceeding $250,000 aggregate
principal amount to any one agent or $1,000,000 aggregate principal amount to
all agents); (C) pledge or otherwise encumber shares of its capital stock;
(D) enter into or invest in any derivative financial instruments except in
the ordinary course of business consistent with current investment and risk
management policies; or (E) except in the ordinary course of business
consistent with past practice, mortgage or pledge any of its assets,
tangible or intangible, or create or suffer to exist any Lien thereupon;
(v) to the extent payable directly or indirectly by ASFC or
any Subsidiary of ASFC: enter into, adopt or (except as may be required by
law or the terms of any such arrangement) terminate any bonus, profit
sharing, compensation, severance, termination, stock option, stock
appreciation right, restricted stock, performance unit, stock equivalent,
stock
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purchase agreement, pension, retirement, deferred compensation, employment,
severance or other employee benefit agreement, trust, plan, fund or other
arrangement for the benefit or welfare of any director, officer or employee
of ASFC, amend any such arrangement as it relates to such directors, officers
or employees or (except for changes in base compensation and bonuses, and
changes in benefits in accordance with plans or arrangements in effect as of
the date hereof, in the ordinary course of business consistent with past
practice) change in any manner the compensation or other benefits payable to
any director, officer or employee of ASFC; provided that Buyer agrees it
will not unreasonably withhold its consent, if requested by ASFC, to
transactions governed by this paragraph (v);
(vi) acquire, sell, lease or dispose of any assets outside
the ordinary course of business or any assets which in the aggregate are
material to ASFC and its Subsidiaries, taken as a whole, or enter into any
contract, agreement, commitment or transaction with respect thereto outside
the ordinary course of business consistent with past practice;
(vii) change any of the accounting principles, practices,
methods or policies (including but not limited to any reserving methods,
practices or policies) used by it, except as may be required as a result of
a change in law, SEC guidelines, GAAP or SAP;
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(viii) change the method of determining the GAAP reserves for
any guaranty fund assessment, second injury fund assessment, special
insurance assessment or similar assessment or tax;
(ix) (A) acquire (by merger, consolidation or acquisition of
stock or assets, but excluding foreclosure) any corporation, partnership or
other business organization or division thereof; (B) authorize any new
capital expenditures which, in the aggregate, are in excess of $5,000,000; or
(C) enter into or amend any contract, agreement, commitment or arrangement
with respect to any of the foregoing;
(x) pay, discharge or satisfy any material 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
the consolidated financial statements (or the notes thereto) of ASFC and its
Subsidiaries or incurred in the ordinary course of business consistent with
past practice;
(xi) terminate, or in any manner material thereto modify,
amend or waive compliance with, any provision of any of the Significant
Agreements;
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(xii) (A) enter into any facultative reinsurance contract,
other than in the ordinary course of business consistent with past practice;
(B) commute any facultative reinsurance contract (provided that Buyer will
not unreasonably withhold its consent to any of the transactions specified in
the foregoing clauses (A) and (B)); or (C) without giving Buyer at least ten
Business Days' prior written notice thereof, enter into or commute any
reinsurance treaty, purchased by any subsidiary of ASFC;
(xiii) make any investment in ASFC Investment Assets other
than in accordance with ASFC's current investment policies;
(xiv) except to the extent permitted by paragraphs (i)
through (xiii) above, enter into any agreement of the type described in
Section 3.11(a)(i), (ii), (iii), (vi), (vii), (viii), (x), (xi) or (xii); or
(xv) take, or agree in writing or otherwise to take, any of
the actions described above in this Section 5.1.
5.2 ACCESS TO INFORMATION. From the date hereof until the Closing
Date, subject to the terms of the Confidentiality Agreement, any applicable
contractual restrictions and applicable legal privileges, and to the extent
applicable law would not thereby be violated, ASFC will (i) give, and will
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cause its Subsidiaries to give, to Buyer and its counsel, financial
advisors, auditors and other authorized representatives full access, upon
reasonable prior notice and during normal business hours, to the offices,
properties, books and records of ASFC and each of its Subsidiaries, (ii)
furnish, and will cause its Subsidiaries to furnish, to Buyer and its
counsel, financial advisors, auditors and other authorized representatives
such financial and operating data and other information relating to ASFC or
any of its Subsidiaries as such Persons may reasonably request and (iii)
instruct the employees, counsel and financial advisors of ASFC or any of its
Subsidiaries to cooperate with Buyer in its investigation of ASFC or any of
its Subsidiaries; provided that this Section 5.2 shall not obligate ASFC to
provide or make available to Buyer any employee medical records; provided,
further, that to the extent contractual restrictions limit ASFC's ability to
take any of the actions set forth in this Section 5.2, ASFC shall use
commercially reasonable efforts to obtain any necessary contractual consent
or accommodate any reasonable request by Buyer with respect to such action by
alternative means; and provided, further, that to the extent applicable legal
privileges or applicable laws limit ASFC's ability to take any of the actions
set forth in this Section 5.2, ASFC shall use commercially reasonable
efforts to accommodate any reasonable request by Buyer with respect to such
action by alternative means.
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5.3 NOTICES OF CERTAIN EVENTS. ASFC shall promptly notify Buyer
of any actions, suits, claims, investigations or proceedings commenced or, to
the Knowledge of ASFC, threatened against, relating to or involving or
otherwise affecting ASFC or any Subsidiary of ASFC that, if pending on the
date of this Agreement, would have been required to have been disclosed
pursuant to Section 3.12 or that relate to the consummation of the
transactions contemplated by this Agreement.
5.4 NO SOLICITATION. ASFC will immediately cease any existing
discussions or negotiations with any third parties conducted prior to the
date hereof with respect to any Acquisition Proposal (as defined below).
ASFC shall not, directly or indirectly, through any officer, director,
employee, representative or agent or any of its Subsidiaries, (i) solicit,
initiate or encourage a inquiries or proposals that constitute, or would
lead to, a proposal or offer for a merger, consolidation, business
combination, sale of substantial assets, sale of a substantial percentage of
shares of capital stock or similar transactions involving ASFC or any of its
Subsidiaries, other than the transactions contemplated by this Agreement (any
of the foregoing inquiries or proposals being referred to in this Agreement
as an "Acquisition Proposal"), (ii) subject to proper exercise of fiduciary
duties, engage in negotiations or discussions concerning or provide any
nonpublic information to any
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person or entity relating to, any Acquisition Proposal or (iii) agree to or
approve any Acquisition Proposal.
5.5 VOTING AGREEMENT. ASFC shall take no action which will result
in termination, amendment, waiver or modification of any provision of or
otherwise interfere with or frustrate the purpose of the Voting Agreement.
5.6 CONFIDENTIALITY AGREEMENTS. ASFC agrees that, without Buyer's
consent, after the date hereof and until the expiration of such agreements,
it will not terminate, amend, waive or modify any provision of any
confidentiality agreement pursuant to which information was provided to any
Person (other than Buyer) with respect to ASFC or its Subsidiaries or their
respective businesses and operations. ASFC shall, at Buyer's expense, take
all action reasonably requested by Buyer to enforce the terms of each such
confidentiality agreement.
5.7 MEETING OF ASFC SHAREHOLDERS. ASFC agrees that (i) ASFC will
take all action necessary in accordance with applicable law and its Articles
of Incorporation and bylaws to convene a meeting of its shareholders (the
"ASFC Shareholders' Meeting") as promptly as practicable to consider and vote
upon the approval of the Merger and the other transactions contemplated
hereby (the "ASFC Shareholders' Approval"), (ii) subject to proper exercise
of the board's fiduciary duties, the board of directors of ASFC shall
recommend and declare advisable such
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approval and shall not modify or revoke such recommendation and declaration,
and (iii) subject to proper exercise by the board of its fiduciary duties,
ASFC shall take all lawful action to solicit, and use all reasonable efforts
to obtain, such approval.
5.8 SUPPLEMENTS OR AMENDMENTS. If, at any time prior to the ASFC
Shareholders' Meeting, any event with respect to ASFC or any of its
Subsidiaries or any of their respective officers and directors should occur
which is required to be described in an amendment of, or a supplement to, the
Proxy Statement, ASFC shall notify Buyer thereof by reference to this Section
5.8 and 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
shareholders of ASFC. Such amendment or supplement shall comply with all
provisions of applicable law. If, at any time prior to the Effective Time,
ASFC or any of its Subsidiaries or any of their respective officers or
directors becomes aware of any fact or condition that would cause any
material statement in the Proxy Statement to have been untrue or would cause
the Proxy Statement to omit to state a material fact required to have been
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, ASFC shall
promptly notify Buyer in writing of such fact or condition.
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ARTICLE 6
COVENANTS OF BUYER
Buyer agrees that:
6.1 CONFIDENTIALITY. All information provided to Buyer or any of
the Persons referred to in Section 5.2 will be treated as if provided under
the Confidentiality Agreement.
6.2 INDEMNIFICATION AND INSURANCE. (a) Buyer and Buyer Sub agree
that all rights to indemnification and exculpation from liability for acts
or omissions occurring prior to the Effective Time now existing in favor of
the current or former directors, officers or employees of ASFC and its
Subsidiaries, as provided in their respective articles of incorporation or
bylaws or in indemnification agreements to which any of them is a party and
which have been made available to Buyer prior to the date hereof, shall
survive the Effective Time and shall continue in full force and effect in
accordance with their respective terms for a period of not less than six (6)
years after the Effective Time. As of the Effective Time, Buyer shall,
without any further action, be liable for all obligations of ASFC and its
Subsidiaries with respect to such indemnification and exculpation from
liability as are provided for in this Section 6.2.
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(b) Buyer shall cause to be maintained, for a period of not less
than six (6) years after the Effective Time, all of ASFC's and its
Subsidiaries' current directors' and officers' insurance and indemnification
policies to the extent that such policies provide coverage for events
occurring prior to the Effective Time (collectively, the "D&O Insurance") for
all current or former directors, officers or employees of ASFC or its
Subsidiaries; PROVIDED, HOWEVER, that Buyer may, in lieu of maintaining such
existing D&O Insurance as provided above, and shall, if the existing D&O
Insurance expires or is terminated or cancelled during such six (6) year
period, cause comparable coverage to be provided under any policy maintained
for the benefit of the directors, officers and employees of Buyer or any of
its Subsidiaries; and PROVIDED, FURTHER, that (i) the to the issuer of the
existing D&O Insurance; and (ii) the terms thereof shall be no less
advantageous to the directors, officers and employees of ASFC and its
Subsidiaries than the existing D&O Insurance.
6.3 SUPPLEMENTS OR AMENDMENTS. If, at any time prior to the ASFC
Shareholders' Meeting, any event with respect to Buyer or any of its
Subsidiaries or any of their respective officers and directors should occur
which is required to be described in an amendment of, or a supplement to, the
Proxy Statement, Buyer shall notify ASFC thereof by reference to this Section
6.3 and such event shall be so described, and such
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amendment or supplement shall be promptly filed with the SEC and, as required
by law, disseminated to shareholders of ASFC. Such amendment or supplement
shall comply with all provisions of applicable law. If, at any time prior to
the Effective Time, Buyer or any of its Subsidiaries or any of their
respective officers or directors becomes aware of any fact or condition
that would cause any material statement in the Proxy Statement to have been
untrue or would cause the Proxy Statement to omit to state a material fact
required to have been stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, Buyer shall promptly notify ASFC in writing of such fact or
condition.
6.4 PREPAYMENT OF DEBT. Subject to the provisions of this
Agreement, at the Effective Time, (i) Buyer shall pay $100 million plus an
amount equal to the accrued but unpaid interest on the outstanding 7 1/8%
notes due July 15, 1999, originally issued to the public by LNC on July 15,
1992 (the "Assumed Debt Prepayment"), to LNC in consideration of the
termination by LNC of that certain Assumption Agreement dated May 16, 1996,
between LNC and ASFC, and (ii) Buyer shall pay the outstanding principal
balance of, plus accrued but unpaid interest on, that certain Term Note due
August 15, 1999, issued by ASFC to LNC on May 16, 1996 (the "Term Note
Prepayment"), to
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LNC in consideration of the surrender of such Term Note by LNC to ASFC for
cancellation.
ARTICLE 7
COVENANTS OF BUYER AND ASFC
Buyer and ASFC agree that:
7.1 REASONABLE EFFORTS. Subject to the terms and conditions of
this Agreement, Buyer and ASFC will use their reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
reasonably necessary or desirable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement. Buyer and ASFC
will promptly, and in any event within 30 days of the date hereof, prepare
and file all applications, notices, consents and other documents necessary
or advisable to obtain the regulatory approvals specified in Schedule 4.3 and
Schedule 3.3, respectively, promptly file all supplements or amendments
thereto and use reasonable efforts to obtain the regulatory approvals
specified in Schedule 4.3 and Schedule 3.3 as promptly as practicable.
Buyer and ASFC will provide each other and their counsel the opportunity to
review in advance and comment on all such filings. Buyer and ASFC will keep
each other informed of the status of matters relating to obtaining the
regulatory approvals specified in Schedule 4.3 and Schedule 3.3.
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ASFC and Buyer agree to execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to consummate or implement
expeditiously the transactions contemplated by this Agreement. In addition
to and not in limitation of the foregoing, each of the parties will (i)
promptly take all actions necessary to make the filings required of Buyer and
ASFC or their respective Affiliates or Subsidiaries under the HSR Act, (ii)
comply at the earliest practicable date with any request for additional
information received by such party or its Affiliates or Subsidiaries from the
Federal Trade Commission (the "FTC") or the Antitrust Division of the
Department of Justice (the "Antitrust Division") pursuant to the HSR Act,
(iii) cooperate with the other party in connection with such party's filings
under the HSR Act and in connection with resolving any investigation or
other inquiry concerning the Merger or the other matters contemplated by
this Agreement commenced by either the FTC or the Antitrust Division or
state attorneys general and (iv) request early termination of the waiting
period under the HSR Act.
7.2 PUBLIC ANNOUNCEMENTS. The parties agree to consult with each
other before issuing any press release or making any public statement with
respect to this Agreement or the transactions contemplated hereby and, except
as may be required by applicable law or any listing agreement with any
national
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securities exchange, will not issue any such press release or make any such
public statement prior to such consultation.
7.3 TRADEMARKS; TRADE NAMES. Following the Closing, except as
provided in the Services Agreement, the Surviving Corporation shall
immediately cease to use signs, labels, containers, stationery, forms
(including policy forms) and other printed material or matter which are
included as of the Closing in the assets or inventory of ASFC or any
Subsidiary of ASFC containing or bearing the trademarks, trade names or
service marks of LNC.
7.4 CONSENTS. Between the date hereof and the Closing Date, ASFC
and Buyer shall use their respective best efforts, without payment of any
consideration to the persons from whom or which consents or agreements are
required, to obtain at the earliest practicable date, and prior to the
Closing Date, all consents and agreements of third parties necessary for the
performance by ASFC and Buyer of their respective obligations under this
Agreement or any agreement referred to herein or contemplated hereby or to
the consummation of the transactions contemplated hereby or thereby except
for those consents and agreements which, if not obtained, would not have a
Material Adverse Effect on ASFC or Buyer. No consideration, whether such
consideration shall consist of the payment of money or shall take any other
form, for any such consent or agreement
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necessary to the consummation of the transactions contemplated hereby shall
be given or promised by either ASFC or Buyer or any of their respective
Subsidiaries without the prior written approval of the other party.
7.5 PROXY STATEMENT. ASFC and Buyer will, as promptly as
practicable, cooperate to prepare and file with the SEC a proxy statement in
connection with the Merger and the vote of ASFC's shareholders with respect
to the transactions contemplated by this Agreement (such proxy statement,
together with any amendments thereof or supplements thereto, in each case in
the form or forms mailed to ASFC's shareholders, is herein called the "Proxy
Statement"). ASFC and Buyer will use all reasonable efforts to have or cause
the Proxy Statement to become definitive as promptly as practicable following
the clearance of the Proxy Statement by the SEC. ASFC and Buyer also will
take any other related action required to be taken under federal or state
securities laws, and ASFC will use all reasonable efforts to cause the Proxy
Statement to be mailed to shareholders of ASFC at the earliest practicable
date.
7.6 UPDATING SCHEDULES. In connection with the Closing, ASFC and
Buyer will promptly supplement or amend the various Schedules to this
Agreement to reflect any matter which, if existing, occurring or known on the
date of this
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Agreement, would have been required to be set forth or described in such
Schedules or which is necessary to correct any information in such Schedules
which was or has been rendered inaccurate thereby. No such supplement or
amendment to the Schedules shall have any effect for the purpose of
determining satisfaction of the conditions set forth in Article 5, 6, 7 or 10
hereof, or the compliance by any party hereto with its covenants and
agreements set forth herein.
ARTICLE 8
TAX MATTERS
8.1 TAX REPRESENTATIONS. ASFC represents and warrants to Buyer
as of the date hereof that:
(i) except as set forth on Schedule 8.1, all material Returns
required to be filed by or with respect to ASFC or any of its Subsidiaries on
or before the Closing Date have been filed or will be timely filed on or
before the Closing Date in accordance with all applicable laws, and all such
Returns are true, correct and complete in all material respects;
(ii) ASFC and its Subsidiaries have timely paid (or there
have been timely paid on their behalf) all Taxes shown to be due on such
Returns;
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(iii) ASFC and its Subsidiaries have made adequate provision
on the Unaudited March Balance Sheet for all Taxes payable by ASFC and its
Subsidiaries for any Pre-March 31 Tax Period for which no Return has yet been
filed or for which Returns have been filed but payment of the Tax shown to be
due thereon is not yet due;
(iv) except as set forth on Schedule 8.1, there is no action,
suit, proceeding, investigation, assessment, adjustment, audit or claim now
proposed or pending against or with respect to ASFC or its Subsidiaries in
respect of any Tax;
(v) except as set forth on Schedule 8.1, there are no
outstanding waivers or other agreements extending any statutory periods of
limitation for the assessment of Taxes of ASFC and its Subsidiaries; and
(vi) on or prior to the date hereof, ASFC has provided Buyer
with copies of all record retention agreements currently in effect between
the Consolidated Group and any Taxing Authority, and no such record
retention agreements have been entered into or modified since March 31, 1997.
8.2 TAX COVENANTS. Except as otherwise required by law or
permitted by the Voting Agreement, Buyer covenants that it will not cause or
permit ASFC, its Subsidiaries, Buyer or any Affiliate of Buyer (i) to take
any action on the Closing
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Date, other than in the ordinary course of business or except as agreed in
writing between the parties (including, but not limited to, the distribution
of any dividend or the effectuation of any redemption) that could give rise
to any Tax liability or loss of the Consolidated Group under this Agreement,
(ii) to make any election or deemed election under Section 338 of the Code
with respect to the Merger or (iii) to amend any Return, file a claim for
refund, make or change any Tax election, change an annual Tax accounting
period, adopt or change any method of Tax accounting, adjust any reserve or
make any other change with respect to any Tax position of ASFC or any of its
Subsidiaries that results or will result in any materially increased Tax
liability to, or material reduction of any Tax Benefit of, the Consolidated
Group, ASFC or any Affiliate of ASFC for any Pre-Closing Period.
8.3 TERMINATION OF EXISTING TAX SHARING AGREEMENTS. (a) Subject
to Section 8.3(b) hereof, the Tax Sharing Agreements and any other Tax
allocation or sharing agreement or arrangement, whether or not written, that
may have been entered into by LNC or any member of the Consolidated Group and
ASFC or any Subsidiary of ASFC shall be terminated as of the Closing Date for
all periods, and all amounts then due from or to ASFC or any Subsidiary of
ASFC under any such Tax Sharing Agreements or other tax sharing agreement or
arrangement shall be paid on or prior to the Closing Date.
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(b) Notwithstanding Section 8.3(a) hereof, as soon as practicable
after the Closing Date (but in any event within seventy-five (75) days of
such date), ASFC shall prepare and deliver to LNC accurate and complete
separate income and franchise Tax Returns for any Tax period of ASFC and its
Subsidiaries for any Tax period of ASFC or its Subsidiaries beginning
January 1, 1997 and ending on the Closing Date, and payment shall be made
within ten (10) days of such delivery to or by LNC, as the case may be, of
the difference, if any, between (i) the Separate Tax Liability of the ASFC
Group (each as defined in the Tax Sharing Agreements) for such period and
(ii) the sum of all amounts previously paid to LNC by ASFC for such period
pursuant to the Tax Sharing Agreements.
8.4 SURVIVAL. The covenants contained in this Article 8 (Tax
Matters) (including the provisions of Section 8.3 hereof) shall survive the
consummation of the Merger and shall not expire.
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
9.1 EMPLOYEES. With respect to each employee who, as of the
Closing Date, is employed by ASFC or any Subsidiary of ASFC (including any
such employee absent as of such date from active service for any reason,
including but not limited
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to disability or leave of absence but excluding any terminated employee
receiving severance) ("Transferred Employees"), subject to any employment
contract between ASFC and any such employee, Buyer shall cause each
Transferred Employee's employer to continue to employ such Transferred
Employee in a position that is substantially similar to that held with the
Business as of the Closing Date, at a salary (and with commissions, where
applicable) substantially equivalent to that provided as of such date;
provided, however, that nothing herein is intended to, or shall, require such
employer to employ any such employee (other than any such employee who is a
party to an employment contract) on any other basis than as an
employee-at-will.
9.2 RETIREMENT PLANS. Effective as of the Closing Date, Buyer
shall either (i) cause ASFC to continue to maintain the American States
Insurance Company Employees' Retirement Plan and the American States
Financial Corporation Employees' Savings and Profit-Sharing Plan, (ii) create
and maintain new Benefits Plans that are at least as favorable in the
aggregate to Transferred Employees as the American States Insurance Company
Employees' Retirement Plan and the American States Financial Corporation
Employees' Savings and Profit-Sharing Plan or (iii) allow Transferred
Employees to participate in comparable existing Benefit Plans of Buyer that
are at least as favorable in the aggregate to Transferred Employees as the
American States Insurance Company Employees' Retirement Plan and the
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American States Financial Corporation Employees' Savings and Profit-Sharing
Plan, in each case until at least December 31, 1998.
9.3 GROUP HEALTH PLANS. Effective as of the Closing Date, Buyer
shall maintain, cause an ERISA Affiliate of Buyer to maintain, or cause ASFC
to continue to maintain, for the benefit of all Transferred Employees and
their dependents, any group health plan maintained by ASFC and any of ASFC's
Subsidiaries or a group health plan that either (i) provides coverage under
the same terms and conditions (within the meaning of proposed Treasury
regulation section 1.162-26, Q&A 18) as were applicable to the Transferred
Employees immediately before the Closing Date or (ii) satisfies the
requirements of Code section 498OB(f)(2)(B)(iv), until at least December 31,
1998. To the extent that Buyer or any of its affiliates has the power and
authority to do so without unreasonable cost, Buyer or its affiliates shall
cause any waiting period, preexisting condition exclusion, or
evidence-of-insurability requirement under any plan, program or arrangement
maintained or contributed to by Buyer and providing health, life insurance or
disability coverage to be waived with respect to any Transferred Employee
who accepts employment with the Buyer.
9.4 SEVERANCE ARRANGEMENTS. Until December 31, 1998, Buyer shall
cause ASFC, effective as of the Closing Date,
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to continue to maintain ASFC's severance plan and other similar severance
arrangements listed in Schedule 3.16(a) or 3.16(d) (other than the Incentive
Letter Agreements) to the extent that they apply to Transferred Employees,
and will take all steps necessary to ensure that all severance and other
payments called for thereunder as of any date are made to any Transferred
Employee who voluntarily or involuntarily terminates employment at any time
and under any circumstances that would entitle the Transferred Employee to
receive severance and other benefits under such plans and arrangements.
Without limiting the foregoing, Buyer shall be responsible and assume all
liability for all salary and benefit continuation and/or severance payments
relating to any Transferred Employee that may be payable as a result of any
termination of employment of any such Transferred Employee or the
transactions contemplated by this Agreement, and for all notices, payments,
fines or assessments due to any government authority pursuant to any
applicable foreign, federal, state or local law, common law, statute, rule
or regulation with respect to the employment, discharge or layoff of
employees, including but not limited to the Worker Adjustment and Retraining
Notification Act and any rules or regulations that have been issued in
connection with any of the foregoing. Buyer shall cause ASFC to comply with
the Incentive Letter Agreements in accordance with their terms.
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9.5 NONQUALIFIED PLANS. Effective as of the Closing Date, Buyer
shall cause ASFC to continue to maintain the ASFC Executives' Excess
Compensation Pension Benefit Plan (or Benefit Plans of Buyer or ASFC that
either are substantially equivalent or are at least as favorable in the
aggregate to the ASFC Executives) and the ASFC Employees' Supplemental
Pension Benefit Plan until at least the last day of the month that is 12
months after the month in which the Closing Date falls (the "Benefits
Continuation Date"). Buyer shall cause ASFC to continue to be responsible
for any liabilities to Transferred Employees, and any former employees of
ASFC or any of ASFC's Subsidiaries, under the LNC Executive Deferred
Compensation Plan for Employees as of the Closing Date and shall either (i)
provide for the payment of such liabilities under a deferred compensation
plan maintained by Buyer for Buyer's employees or (ii) cause ASFC to
establish a deferred compensation plan on terms substantially similar to a
plan maintained by Buyer for Buyer's employees or the LNC Executive Deferred
Compensation Plan for Employees and continue to maintain such plan until at
least the Benefits Continuation Date.
9.6 OTHER BENEFIT PLANS. Except as otherwise provided in this
Article 9, Buyer shall, effective as of the Closing Date, cause ASFC to
continue to maintain any and all Benefit Plans maintained by ASFC or any of
its Subsidiaries covering Transferred Employees until at least December 31,
1998 and
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to continue to be responsible for any liability to provide benefits under
such Benefit Plans that exist on the Closing Date. Buyer will permit any
elections made under the Customized Security Flexible Benefits Plan to
continue in effect to the remainder of the plan year that includes the
Closing Date. Until at least December 31, 1998, Buyer shall not make any
change to ASFC's accounting or reserving practices or take any other action
that would adversely affect the computation of amounts payable to Transferred
Employees under any incentive compensation or bonus plan of ASFC without
making such equitable adjustments to the performance measures under the
affected plans as may be appropriate to ensure that the Transferred Employees
receive substantially the same bonuses or other benefit payments under the
affected plans as they would have received in the absence of such change or
other action for any performance cycle for which the targets or goals have
been established as of the date hereof
9.7 OTHER LIABILITIES. Buyer shall assume, and shall indemnify
and hold harmless ASFC and any of its Subsidiaries from and against, any and
all damages, loss, liability and expense (including but not limited to
reasonable expenses of investigation and reasonable attorneys' fees) relating
to or arising out of any workers' compensation claims of, or violations of
any Law, including but not limited to, the Age Discrimination in Employment
Act, the Family and Medical Leave
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Act, the Americans with Disabilities Act and Title VII of the Civil Rights
Act, with respect to, Transferred Employees pending as of the Closing Date
or asserted after the Closing Date but relating to events occurring on or
before the Closing Date.
ARTICLE 10
CONDITIONS TO CLOSING
10.1 CONDITIONS TO OBLIGATIONS OF BUYER AND ASFC. The obligations
of Buyer and ASFC to consummate the Closing are subject to the satisfaction
of the following conditions:
(a) Any applicable waiting period under the HSR Act relating to
the transactions contemplated hereby shall have expired or been terminated.
(b) All other regulatory consents, approvals or clearances
necessary for the consummation of the Closing shall have been obtained, and
no provision of any applicable law or regulation shall prohibit the
consummation of the Closing.
(c) All material consents, approvals or waivers of all
non-governmental Persons necessary for the consummation of the Closing shall
have been obtained.
(d) There shall not be in effect any temporary restraining order,
preliminary injunction or permanent injunction or other order issued by any
court of competent jurisdiction
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<PAGE>
preventing the consummation of the transactions contemplated hereby; provided
that the party invoking this condition shall have used its reasonable best
efforts to have such order or injunction vacated.
(e) ASFC shall have obtained the ASFC Shareholders' Approval from
the requisite holders of Shares in accordance with applicable law and the
Articles of Incorporation and by-laws of ASFC.
10.2 CONDITIONS TO OBLIGATION OF BUYER. The obligation of Buyer
to consummate the Closing is subject to the satisfaction of the following
further conditions:
(a) (i) ASFC shall have performed in all material respects all of
its obligations hereunder required to be performed by it on or prior to the
Closing Date, (ii) the representations and warranties of ASFC contained in
this Agreement shall be true at and as of the Closing Date, as if made at and
as of such date (without giving effect to any materiality qualifications or
exceptions contained therein), except for those representations and
warranties made as of a specified date, which shall be true and correct as of
the date specified (without giving effect to any materiality qualifications
or materiality exceptions contained therein); provided, that this condition
(ii) shall be deemed satisfied if any inaccuracies in any
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<PAGE>
of such representations and warranties at and as of the applicable date
(without giving effect to any materiality qualifications or materiality
exceptions contained therein) would not, individually or in the aggregate,
have or reasonably be expected to have a Material Adverse Effect on ASFC,
other than those resulting from (A) any event, occurrence, development or
state of circumstances or facts affecting the property and casualty
insurance industry as a whole, any Catastrophe or any change in general
economic conditions (including but not limited to a change in interest
rates) or (B) any obligation or liability that ASFC or any of its
subsidiaries has or may have in connection with, as a result of or arising
out of any insurance or reinsurance or indemnity policy, surety bond or
similar contract or undertaking issued or entered into by ASFC or any
Subsidiary of ASFC in the ordinary course of business, and (iii) Buyer shall
have received a certificate signed by the chief financial officer of ASFC to
the effect that the foregoing conditions have been satisfied.
(b) ASFC shall have GAAP equity immediately prior to the Effective
Time equal to at least 90% of ASFC's GAAP equity as of March 31, 1997;
provided, that in determining whether the condition set forth in this Section
10.2(b) has been satisfied, changes in ASFC's GAAP equity after March 31,
1997 resulting from FAS 115 5 mark-to-market accounting shall be excluded
from the calculation of ASFC's GAAP equity on the date in question.
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<PAGE>
(c) Buyer shall have received a certificate, dated as of the
Effective Time, from the secretary or assistant secretary of ASFC certifying
as to the accuracy and completeness of the attached Articles of Incorporation
and bylaws, and resolutions, consents and authorizations with respect to the
execution and delivery of this Agreement and the transactions contemplated
hereby.
(d) No Governmental Body shall have commenced any proceeding
seeking a temporary restraining order, preliminary or permanent injunction or
other order preventing the consummation of the transactions contemplated
hereby, other than any such proceeding which, in the reasonable judgment of
Buyer, would not be reasonably likely, assuming such consummation occurs, to
have a Material Adverse Effect on ASFC or Buyer; provided that Buyer shall
have used its reasonable best efforts to have such proceeding dismissed or
terminated.
10.3 CONDITIONS TO OBLIGATION OF ASFC. The obligation of ASFC to
consummate the Closing is subject to the satisfaction of the following
further conditions:
(a) (i) Buyer shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Closing Date, (ii) the representations and warranties of Buyer contained in
this Agreement
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<PAGE>
shall be true at and as of the Closing Date, as if made at and as of such
date (without giving effect to any materiality qualifications and
materiality exceptions contained therein), except for those representations
and warranties made as of a specified date, which shall be true and correct
as of the date specified (without giving effect to any materiality
qualifications or materiality exceptions contained therein); PROVIDED, that
this condition (ii) shall be deemed satisfied if any inaccuracies in any
such representations and warranties at and as of the applicable date (without
giving effect to any materiality qualifications or materiality exceptions
contained therein) would not, individually or in the aggregate, have or
reasonably be expected to adversely affect the consummation of the Merger,
and (iii) ASFC shall have received a certificate signed by the chief
financial officer of Buyer to the effect that the foregoing conditions have
been satisfied.
(b) ASFC shall have received a certificate, dated as of the
Effective Time, from the secretary or assistant secretary of Buyer and Buyer
Sub, respectively, certifying as to the accuracy and completeness of the
attached articles of incorporation and bylaws, and resolutions, consents and
authorizations with respect to the execution and delivery of this Agreement
and the transactions contemplated hereby.
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<PAGE>
ARTICLE 11
SURVIVAL
11.1 SURVIVAL. Except as provided in Section 8.4, the covenants,
agreements, representations and warranties of the parties hereto contained in
this Agreement shall not survive the Closing; PROVIDED that the covenants
and agreements that, by their terms, are to have effect or be performed after
the Closing Date shall survive in accordance with their terms.
ARTICLE 12
TERMINATION
12.1 GROUNDS FOR TERMINATION. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Closing:
(i) by mutual written agreement of ASFC and Buyer;
(ii) by either ASFC or Buyer upon written notice to the
other party if the Merger shall not have been consummated on or before
December 31, 1997; provided that the right to terminate this Agreement under
this clause (ii) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or has resulted
in the failure of the Merger to occur on or before such date; or
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<PAGE>
(iii) any court of competent jurisdiction in the United
States or any other Governmental Body in the United States shall have issued
an Order or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Merger and such Order or other action shall have
become final and nonappealable.
12.2 EFFECT OF TERMINATION. If this Agreement is terminated as
permitted by Section 12.1, termination shall be without liability of any
party (or any shareholder, director, officer, employee, agent, consultant or
representative of such party) to any other party to this Agreement, except
for payment of costs and expenses in accordance with Section 13.3 and except
that no such termination shall relieve Buyer of its obligations under
Section 6.1; and PROVIDED that if such termination shall result from the
willful failure of any party to fulfill a condition to the performance of
the obligations of any other party or to perform a covenant of this Agreement
or from a willful breach by any party to this Agreement, such party shall be
fully liable for any and all damage, loss, liability and expense (including
but not limited to reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any action, suit or
proceeding) incurred or suffered by the other party as a result of such
failure or breach. The provisions of this Section 12.2, Section 13.3 and
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Section 13.5 shall survive any termination hereof pursuant to Section 12.1.
ARTICLE 13
MISCELLANEOUS
13.1 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered by hand, or when sent by facsimile transmission
(with receipt confirmed by an electronically generated written confirmation),
addressed as follows (or to such other address as a party may designate by
notice to the others):
if to Buyer or Buyer Sub, to:
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
Attention: James W. Ruddy, Esq.
Fax: (206) 545-5559
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Edward D. Herlihy, Esq.
Craig M. Wasserman, Esq.
Fax: (212) 403-2000
if to ASFC, to:
American States Financial Corporation
500 North Meridian Street
Indianapolis, Indiana 46204
Attention: Thomas M. Ober, Esq.
Fax: (317) 262-7157
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<PAGE>
with copies to:
Lincoln National Corporation
200 East Berry Street
Fort Wayne, Indiana 46802
Attention: Jack D. Hunter, Esq.
Fax: (219) 455-5403
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attention: David A. Massey, Esq.
Fax: (202) 637-3593
13.2 AMENDMENTS AND WAIVERS. (a) Any provision of this Agreement
may be amended or waived if, but only if, such amendment or waiver is
explicit and in writing and is signed, in the case of an amendment, by each
party to this Agreement, or in the case of a waiver, by the party against
whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. Other than
as provided herein, the rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
13.3 EXPENSES. Except as otherwise expressly provided herein,
the fee for filing an application pursuant to the
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HSR Act shall be paid by Buyer, and all other costs and expenses incurred in
connection with this Agreement, including all brokers', finders', investment
advisory or similar fees, shall be paid by the party incurring or responsible
for incurring such cost or expense.
13.4 SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns; PROVIDED, that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of each other party hereto.
13.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana without regard
to any laws that might otherwise govern under applicable principles of
conflicts of laws.
13.6 JURISDICTION. Except as otherwise expressly provided in this
Agreement, any suit, action or proceeding seeking to enforce any provision
of, or based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated hereby shall be brought only in
the United States District Court for the Southern District of Indiana or any
Indiana State court sitting in Indianapolis, and each of the parties hereby
consents to the jurisdiction of such courts (and of the appropriate appellate
courts therefrom) in
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<PAGE>
any such suit, action or proceeding and irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to
the laying of the venue of any such suit, action or proceeding in any such
court or that any such suit, action or proceeding which is brought in any
such court has been brought in an inconvenient forum. Process in any such
suit, action or proceeding may be served on any party anywhere in the world,
whether within or without the jurisdiction of any such court. Without
limiting the foregoing, each party agrees that service of process on such
party as provided in this Section 13.6 shall be deemed effective service of
process on such party.
13.7 COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. Each counterpart may consist of a number of
copies each signed by less than all, but together signed by all, the parties
hereto.
13.8 NO THIRD PARTY BENEFICIARIES. No provision of this Agreement
is intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder, except for the indemnification and insurance
provisions contained in Section 6.2, which provisions may be enforced by the
parties to be indemnified or insured thereunder.
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<PAGE>
13.9 ENTIRE AGREEMENT. Except for the Confidentiality Agreement,
this Agreement constitutes the entire agreement among the parties with
respect to the subject matter of this Agreement and supersedes all prior
agreements and understandings, both oral and written, among the parties with
respect to such subject matter. No representation, inducement, promise,
understanding, condition or warranty not set forth herein has been made or
relied upon by any party hereto.
13.10 CONSTRUCTION. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa. The name assigned this Agreement
and the section captions used herein are for convenience of reference only
and shall not affect the interpretation and construction hereof. Unless
otherwise specified, (i) the terms "hereof," "herein" and similar terms refer
to this Agreement as a whole and (ii) references herein to Articles or
Sections refer to articles or sections of this Agreement. This Agreement is
the result of arms-length negotiations between the parties hereto and has
been prepared jointly by the parties. In applying and interpreting the
provisions of this Agreement, there shall be no presumption that the
Agreement was prepared by any one party
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<PAGE>
or that the Agreement shall be construed in favor of or against any one party.
13.11 SPECIFIC PERFORMANCE. The parties acknowledge that money
damages are not an adequate remedy for violations of this Agreement and that
any party may, in its sole discretion, apply to a court of competent
jurisdiction for specific performance or injunctive or such other relief as
such court may deem just and proper in order to enforce this Agreement or
prevent any violation hereof and, to the extent permitted by applicable law,
each party waives any objection to the imposition of such relief.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their respective authorized officers as of the date
first above written.
AMERICAN STATES FINANCIAL CORPORATION
By: /s/ Robert A. Anker
---------------------------------
Name: Robert A. Anker
--------------------------------
Title: Chief Executive Officer
-------------------------------
SAFECO CORPORATION
By: /s/ R.H. Eigsti
---------------------------------
Name: R. H. Eigsti
--------------------------------
Title: Chairman and Chief Executive
-------------------------------
Officer
-----------------------------
ASFC ACQUISITION CO.
By: /s/ B. A. Dickey
---------------------------------
Name: B. A. Dickey
-------------------------------
Title: President
------------------------------
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<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8) pertaining to the SAFECO Incentive Plan of 1987 and the SAFECO
Long-term Incentive Plan of 1997 of SAFECO Corporation of our report dated
January 28, 1997, with respect to the consolidated financial statements and
schedules of American States Financial Corporation included in the Annual
Report (Form 10-K) of American States Financial Corporation for the year
ended December 31, 1996 and incorporated by reference in this Current Report
on Form 8-K of SAFECO Corporation.
ERNST & YOUNG LLP
Indianapolis, Indiana
June 20, 1997
<PAGE>
COMPANY PRESS RELEASE
SAFECO CORPORATION TO ACQUIRE AMERICAN STATES FINANCIAL CORPORATION
SEATTLE -- (BUSINESS WIRE) -- June 9, 1997 -- SAFECO CORPORATION
(NASDAQ:SAFC) and AMERICAN STATES FINANCIAL CORPORATION (NYSE:ASX) announced
today that they have signed a definitive agreement for SAFECO to acquire
American States for $47.00 per share or approximately $2.8 billion. The
combination will create the 12th largest property and casualty insurance
company in the United States with combined 1996 revenues of $5.9 billion.
The combination will enhance the product mix, geographic reach and network
of independent agents of both operations.
The definitive agreement was approved by the Boards of Directors of both
companies. Lincoln National Corporation, which currently owns 83.3 percent
of American States' outstanding common stock, has agreed to support the
transaction.
"The combination of two of the finest agency companies will significantly
enhance SAFECO's growth objectives," said Roger Eigsti, Chairman and Chief
Executive Officer of SAFECO. "American States' small business and commercial
expertise will complement our personal lines expertise. We are excited about
the opportunities this combination creates for our shareholders, customers,
employees and agents."
"SAFECO is a company we at American States have always respected, admired
and, in many ways, have tried to emulate," said Robert A. Anker, Chairman and
Chief Executive Officer of American States Financial Corporation.
Upon completion of the transaction, the combined enterprise will nearly
double the number of independent agents that either organization currently
works with. The acquisition will accelerate SAFECO's growth east of the
Rocky Mountains and enhance its position in eight core Midwestern and
Pacific Northwest states (Illinois, Indiana, Missouri, Ohio, Michigan,
Kansas, Washington and Oregon).
Importantly, American States is one of the largest writers of property and
casualty insurance in the small business sector, a rapidly growing market for
insurance. American States is recognized as the second largest writer of
property and casualty insurance through independent agencies for businesses
with fewer than 50 employees.
"American States has the three key elements we sought in an acquisition
candidate -- strength in small business commercial lines, a Midwestern
geographic focus and a strong independent agency network," said Boh Dickey,
President and Chief Operating Officer of SAFECO. "In addition, it offered
two other advantages -- a highly skilled workforce and a strong cultural fit
with SAFECO."
<PAGE>
American States, with assets of more than $5.5 billion, operates in more
than 40 states through 4,800 independent agents. In addition to property and
casualty insurance, the company also offers life insurance and surety. The
company employs 3,200 people with major offices in Indiana, Kansas and
Washington.
"The addition of American States to SAFECO will result in approximately
4,000 new agents. This is a key component of our growth strategy. With
superior agents representing us in more communities across the country, we
can focus on developing the financial services products our customers need
and refining the excellent service they associate with SAFECO," said Randy
Stoddard, senior vice president of SAFECO Property/Casualty Insurance
Companies, who will become president of the property and casualty operations
on July 1.
Founded in 1923 as the General Insurance Company of America, SAFECO today is
one of the largest diversified financial corporations in the country with
more than $20 billion in assets. Property and casualty insurance was SAFECO's
original business and remains its largest operation. In addition, SAFECO
today engages in life and health insurance, surety, real estate investment
and management, commercial credit and asset management. SAFECO is
headquartered in Seattle, with regional offices in Redmond, Wash., Atlanta,
St. Louis, Denver and Fountain Valley, Calif.
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following pro forma combined condensed financial statements reflect
the proposed acquisition by SAFECO Corporation (the "Corporation") of
American States Financial Corporation ("American States") through the merger
of American States with and into a subsidiary of the Corporation (the
"Merger") and the consummation of the financings proposed by the Corporation
in connection with funding a portion of the purchase price of such
acquisition. The Merger will be accounted for by the Corporation using the
purchase method of accounting. In connection therewith, the purchase price
will be allocated to the assets and liabilities of American States as of the
effective time of the Merger (the "Effective Time"), and the results of
operations of American States will be included in the Corporation's
consolidated results of operations thereafter.
The Corporation's preliminary allocation of the purchase price was based
upon the estimated fair value of the assets acquired and liabilities assumed
and, in some instances, the effects of conforming American States' accounting
practices to those of the Corporation. The actual allocation will be based on
further studies and valuations as of the Effective Time and will be primarily
affected by the impact of market interest rates as of the Effective Time upon
the valuation of assets and liabilities of American States and any revision at
the Effective Time of estimated costs to eliminate duplicative facilities and
equipment and to record the estimated liability for severance and other employee
termination costs. The actual adjustments (other than those related to the
accruals of certain costs at the Effective Time described above) are not, at the
present time, expected to be significantly different; however, there can be no
assurance that significant differences will not arise.
The pro forma combined condensed financial statements do not include all
adjustments to conform the accounting policies of American States to those
followed by the Corporation. The nature and extent of such adjustments, if any,
will be based upon further study and analysis. Although any such adjustments are
not currently expected to be significant to the pro forma financial results,
there can be no assurance that significant adjustments will not be determined to
be necessary as additional information becomes available.
The pro forma combined condensed financial statements are unaudited and
combine the operations of the Corporation and American States for the three
months ended March 31, 1997 and for the year ended December 31, 1996 on a
consolidated basis. The pro forma balance sheet assumes that the Merger will
be accounted for as a "purchase" of American States by the Corporation under
generally accepted accounting principles. The pro forma balance sheet assumes
that the Merger occurred at March 31, 1997. The pro forma statements of
income assume that the Merger occurred on January 1, 1996. The consummation
of the Merger is subject to certain conditions, and there can be no assurance
that the Merger will be consummated. The pro forma combined condensed
financial statements have not been compiled, reviewed or audited by
independent accountants. See Item 5 of the Corporation's Current Report on
Form 8-K to which these Unaudited Pro Forma Combined Condensed Financial
Statements are an exhibit.
The Corporation's assumptions as to the terms of the financings proposed
to be entered into in connection with the Merger are subject to change due to
fluctuations in market conditions, prevailing interest rates and other
factors. Certain portions of the Corporation's financing plan are not
expected to be consummated until later in 1997. The Corporation may determine
to offer other securities or pursue other forms of financing in lieu of
certain of the offerings or borrowings described in the accompanying notes,
or to increase or decrease the individual amounts of such offerings and
borrowings. While any such changes to the Corporation's plan of financing are
not expected to be significant to the pro forma financial results, there can
be no assurance that significant changes will not be made in the future.
The unaudited pro forma combined condensed financial statements have been
included for information purposes only and were prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. As further
discussed in the accompanying notes, the pro forma combined condensed
financial statements do not purport to be indicative of the financial
position or operating results that would have been achieved had the Merger
been consummated as of the dates indicated and should not be construed as
representative of the combined company's future financial position or
operating results.
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1997
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments
Fixed Maturities Available-for-Sale, at
Market Value............................... $11,825.5 $ 3,689.2 $ (600.0) (a) $14,914.7
Fixed Maturities Held-to-Maturity, at
Amortized Cost............................. 2,595.7 2,595.7
Marketable Equity Securities, at Market
Value...................................... 1,311.3 427.8 1,739.1
Mortgage Loans............................... 445.7 22.6 468.3
Real Estate.................................. 581.7 581.7
Short-Term Investments....................... 83.9 75.5 159.4
Other Invested Assets........................ 58.0 39.0 97.0
----------- ----------- ----------- -----------
Total Investments.......................... 16,901.8 4,254.1 (600.0) 20,555.9
Cash........................................... 48.8 15.8 (41.0) (b) 23.6
Accrued Investment Income...................... 251.0 58.6 309.6
Finance Receivables............................ 870.7 870.7
Premiums and Other Service Fees Receivable..... 468.5 447.9 916.4
Reinsurance Recoverables....................... 149.3 178.3 327.6
Deferred Policy Acquisition Costs.............. 411.1 210.0 (55.0) (c) 566.1
Deferred Federal Income Taxes Recoverable...... 154.9 89.2 (d) 0.0
(244.1) (e)
Land, Buildings and Equipment for Company
Use.......................................... 172.0 31.9 203.9
Cost in Excess of Net Assets of Acquired
Subsidiaries................................. 36.6 96.9 (96.9) (f) 1,699.3
1,662.7 (g)
Other Assets................................... 218.4 65.9 284.3
Separate Account Assets........................ 541.1 541.1
----------- ----------- ----------- -----------
Total Assets............................... $20,069.3 $ 5,514.3 $ 714.9 $26,298.5
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1997 (CONTINUED)
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses, Adjustment Expense and Future Policy
Benefits..................................... $ 2,175.5 $ 2,862.2 (h) $ 5,037.7
Unearned Premiums.............................. 947.1 728.2 1,675.3
Funds Held Under Deposit Contracts............. 10,047.3 10,047.3
Short-Term Debt................................ 863.5(1) 66.7 $ (66.7) (a) 863.5(1)
Long-Term Debt................................. 439.3(2) 232.9 (232.9) (a) 1,296.3(2)
857.0 (a)
Other Liabilities.............................. 690.4 280.5 30.0 (i) 1,035.5
41.6 (j)
9.6 (k)
(16.6) (l)
(m)
Current Federal Income Taxes Payable........... 28.2 15.8 44.0
Deferred Federal Income Taxes Payable.......... 327.3 (244.1) (e) 83.2
Separate Account Liabilities................... 541.1 541.1
----------- ----------- ----------- -----------
Total Liabilities.......................... 16,059.7 4,186.3 377.9 20,623.9
----------- ----------- ----------- -----------
Corporation-Obligated, Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures 1,000.0 (a) 990.0
of the Corporation........................... (10.0) (a)
----------- ----------- ----------- -----------
Common Stock................................... 227.2 304.5 (304.5) (n) 902.2
700.0 (a)
(25.0) (a)
Retained Earnings.............................. 3,113.8 909.4 (909.4) (n) 3,113.8
Unrealized Appreciation of Investment
Securities, Net of Tax....................... 672.6 114.1 (114.1) (n) 672.6
Unrealized Loss from Foreign Currency
Translation, Net of Tax...................... (4.0) (4.0)
----------- ----------- ----------- -----------
Total Stockholders' Equity................. 4,009.6 1,328.0 (653.0) 4,684.6
----------- ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity................................... $20,069.3 $ 5,514.3 $ 714.9 $26,298.5
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- --------------------------
(1) Includes $820.4 million of SAFECO Credit Company, Inc. short-term
borrowings.
(2) Includes $44.9 million of SAFECO Credit Company, Inc. long-term borrowings.
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums........ $ 2,275.4 $ 1,617.2 $ 3,892.6
Life and Health Premiums and Other
Revenues................................... 265.9 56.9 322.8
----------- ----------- ----------- -----------
Total...................................... 2,541.3 1,674.1 4,215.4
Real Estate.................................... 79.9 79.9
Finance........................................ 75.7 75.7
Asset Management............................... 23.2 23.2
Other.......................................... 38.5 38.5
Net Investment Income.......................... 1,116.7 274.3 $ (36.0) (o) 1,355.0
Realized Investment Gain....................... 90.1 35.6 125.7
----------- ----------- ----------- -----------
Total Revenues............................. 3,965.4 1,984.0 (36.0) 5,913.4
----------- ----------- ----------- -----------
EXPENSES
Losses, Adjustment Expense and Policy
Benefits..................................... 2,362.7 1,248.9 3,611.6
Commissions.................................... 415.7 283.0 698.7
Interest....................................... 72.4 12.4 33.9 (o) 118.7
Other.......................................... 552.6 243.8 66.5 (p) 860.4
(2.5) (i)
Amortization of Deferred Policy Acquisition
Costs........................................ 426.9 338.0 764.9
Deferral of Policy Acquisition Costs........... (443.4) (337.8) (781.2)
----------- ----------- ----------- -----------
Total Expenses............................. 3,386.9 1,788.3 97.9 5,273.1
----------- ----------- ----------- -----------
Income before Income Taxes....................... 578.5 195.7 (133.9) 640.3
Provision (Benefit) for Federal Income Taxes..... 139.5 26.0 (29.8) (q) 135.7
----------- ----------- ----------- -----------
Income before Dividends on Capital Securities.... 439.0 169.7 (104.1) 504.6
Dividends on Capital Securities, Net of Tax...... -- -- 54.3 (o) 54.3
----------- ----------- ----------- -----------
Net Income Available to Common Shareholders...... $ 439.0 $ 169.7 $ (158.4) $ 450.3
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings Per Share of Common Stock............... $ 3.48 $ 3.03 NA (r) $ 3.18
Weighted Average Shares Outstanding.............. 126.1 56.0 NA (r) 141.7
</TABLE>
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ------------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums........ $ 581.5 $ 408.7 $ 990.2
Life and Health Premiums and Other
Revenues................................... 66.6 14.6 81.2
----------- ------ ------ -----------
Total...................................... 648.1 423.3 1,071.4
Real Estate.................................... 16.3 16.3
Finance........................................ 19.6 19.6
Asset Management............................... 5.7 5.7
Other.......................................... 12.6 2.4 15.0
Net Investment Income.......................... 291.0 66.5 $ (9.0) (o) 348.5
Realized Investment Gain....................... 21.7 9.7 31.4
----------- ------ ------ -----------
Total Revenues............................. 1,015.0 501.9 (9.0) 1,507.9
----------- ------ ------ -----------
EXPENSES
Losses, Adjustment Expense and Policy
Benefits..................................... 605.6 297.5 903.1
Commissions.................................... 109.1 72.9 182.0
Interest....................................... 18.5 5.2 8.5 (o) 32.2
Other.......................................... 138.6 63.7 16.7 (p) 218.4
(0.6) (i)
Amortization of Deferred Policy Acquisition
Costs........................................ 110.4 82.8 193.2
Deferral of Policy Acquisition Costs........... (111.8) (87.5) (199.3)
----------- ------ ------ -----------
Total Expenses............................. 870.4 434.6 24.6 1,329.6
----------- ------ ------ -----------
Income before Income Taxes....................... 144.6 67.3 (33.6) 178.3
Provision (Benefit) for Federal Income Taxes..... 33.1 13.3 (7.4) (q) 39.0
----------- ------ ------ -----------
Income before Dividends on Capital Securities.... 111.5 54.0 (26.2) 139.3
Dividends on Capital Securities, Net of Tax...... -- -- 13.6 (o) 13.6
----------- ------ ------ -----------
Net Income Available to Common Shareholders...... $ 111.5 $ 54.0 $ (39.8) $ 125.7
----------- ------ ------ -----------
----------- ------ ------ -----------
Earnings Per Share of Common Stock............... $ 0.88 $ 0.90 NA (r) $ 0.89
Weighted Average Shares Outstanding.............. 126.3 60.1 NA (r) 141.9
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The pro forma combined condensed financial statements assume all shares of
common stock of American States are converted, pursuant to the Merger, into cash
in the amount of $47.00 per share of American States common stock.
The following describes the pro forma adjustments reflected in the
accompanying unaudited pro forma combined condensed financial statements:
PRO FORMA ADJUSTMENTS:
(in millions, except share amounts)
(a) The following adjustments reflect the funding of the acquisition of American
States:
<TABLE>
<CAPTION>
<S> <C>
SOURCES:
Bank debt............................................................................................ $ 657.0
Proceeds from issuance of notes due 2007............................................................. 200.0
Proceeds from issuance of Corporation-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Corporation, and other
capital securities.................................................................................. 1,000.0
Less underwriting compensation.................................................................... (10.0)
Proceeds from issuance of the Corporation's common stock............................................. 700.0
Less underwriting compensation.................................................................... (25.0)
Special dividend from the Corporation's property and casualty subsidiaries........................... 600.0
---------
Total............................................................................................ $ 3,122.0
---------
---------
USES:
Purchase price of outstanding shares of common stock of American States
(60,050,515 shares x $47).......................................................................... $ 2,822.4
Retire American States debt.......................................................................... 299.6
---------
Total............................................................................................ $ 3,122.0
---------
---------
</TABLE>
(b) To record the direct out-of-pocket costs of the acquisition.
(c) To adjust deferred acquisition costs to reflect the Corporation's deferral
policies.
(d) Deferred tax adjustment arising from allocation of purchase price to the
fair value of American States' assets and liabilities.
(e) To net American States' deferred tax asset against the Corporation's
deferred tax liability.
(f) To eliminate American States' goodwill.
(g) To record the excess of the cost to acquire American States over the fair
value of net assets acquired (goodwill).
(h) Adjustments of unpaid loss and adjustment expense resulting from the
Corporation's evaluation of American States' reserves will be recorded in
operations in the period determined. The Corporation expects to record $40.0
of additional reserves in the fourth quarter of 1997, which will result in
an after-tax charge of $26.0.
(i) To record lease-related fair value adjustments and related amortization.
(j) To record the estimated liability for severance and other costs for certain
executive officers and employees of American States.
(k) To increase other liabilities for pension obligations.
(l) To reduce other liabilities for postretirement obligations.
<PAGE>
(m) The Corporation expects to accrue in the fourth quarter of 1997 an
estimated liability of $23.0 ($15.0 after-tax) for first-year incentive
commissions on American States' personal lines premiums.
(n) To eliminate American States' equity:
<TABLE>
<CAPTION>
<S> <C>
Common stock...................................................................................... $ (304.5)
Retained earnings................................................................................. (909.4)
Unrealized gain................................................................................... (114.1)
</TABLE>
(o) The following adjustments reflect the financing effects of the acquisition:
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Loss of investment income due to special dividend from the Corporation's property and casualty
subsidiaries ($600.0 at 6.0%, rate based on current market yields for tax-exempt securities)...... $ (36.0)
INTEREST EXPENSE:
Retire existing American States debt ($100.0 at 7 1/8%, $200.0 at 6.7%).............................. $ (20.5)
Bank debt interest expense ($657.0 at 6.0%).......................................................... 39.4
Notes due 2007 interest expense ($200.0 at 7.5%)..................................................... 15.0
---------
Total interest expense effect.................................................................... $ 33.9
---------
---------
DIVIDENDS ON CAPITAL SECURITIES:
Corporation-obligated, mandatorily redeemable preferred securities of subsidiary trust holding
solely junior subordinated debentures of the Corporation ($1,000 x 8.36%)........................ $ 83.6
(interest rates on bank debt, notes due 2007 and dividends on capital securities based on
expected yields for these securities when issued)
</TABLE>
(p) To record the amortization of goodwill over 25 years.
(q) To record income tax expense (benefit) of the pro forma adjustments.
(r) Pro forma earnings per share has been determined by adding the additional
shares of common stock to be issued by the Corporation to finance the
acquisition. At an assumed offering price of $45 per share, outstanding
shares increase by 15,555,556 ($700.0/$45 per share).
