<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE ST. PAUL COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
MINNESOTA 6331 41-0518860
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
385 WASHINGTON STREET
ST. PAUL, MN 55102
(612) 310-7911
</TABLE>
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
BRUCE A. BACKBERG
THE ST. PAUL COMPANIES, INC.
385 WASHINGTON STREET
ST. PAUL, MN 55102
(612) 310-7911
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JOHN A. MACCOLL DONALD R. CRAWSHAW JOHN R. ETTINGER
USF&G CORPORATION SULLIVAN & CROMWELL DAVIS POLK & WARDWELL
6225 CENTENNIAL WAY 125 BROAD STREET 450 LEXINGTON AVENUE
BALTIMORE, MARYLAND 21209 NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10017
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
OFFERING PRICE PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO PER SHARE OF AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED COMMON STOCK OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, without par value ("Common
Stock"), together with attached rights to
purchase Series A Participating Preferred
Stock........................................ 39,223,280(1) N.A. $3,166,359,576(2) $309,823(3)
</TABLE>
(1) Represents the maximum number of shares of Common Stock estimated to be
issuable upon the consummation of the merger of SP Merger Corporation, a
Maryland corporation ("Merger Sub") and a wholly owned subsidiary of The St.
Paul Companies, Inc. ("St. Paul"), with and into USF&G Corporation ("USF&G")
based on an exchange ratio of 0.2973 of a share of Common Stock (the maximum
exchange ratio pursuant to the Agreement and Plan of Merger among USF&G, St.
Paul and Merger Sub, dated as of January 19, 1998) to be exchanged for each
share of common stock, par value $2.50 per share, of USF&G (the "USF&G
Common Stock").
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, as
amended (the "Securities Act"), and solely for the purpose of calculating
the registration fee, the proposed maximum aggregate offering price is equal
to the aggregate market value of the USF&G Common Stock to be canceled in
the Merger and is based upon $24.00, the average of the high and low sale
prices of the USF&G Common Stock on the New York Stock Exchange Composite
Tape on February 24, 1998.
(3) Computed in accordance with Rule 457(f) under the Securities Act to be
$934,077, which is equal to .000295 multiplied by the proposed maximum
aggregate offering price of $3,166,359,576, reduced by the fee of $624,254
paid by St. Paul pursuant to Rule 14a-6(i)(1) under the Securities Exchange
Act of 1934 upon the filing of its preliminary proxy materials on February
4, 1998 and to be credited against the registration fee payable in
connection with this filing.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
[LOGO]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of The St. Paul Companies, Inc. and USF&G
Corporation have agreed on a merger and are seeking your vote on this important
transaction. The merger will create one of the leading property and casualty
insurers in the United States and we think that it will result in significant
benefits to you in connection with your ownership of our stocks.
Subject to the adjustment described in the next sentence, if the merger is
completed, USF&G shareholders will receive a fraction of a share of St. Paul
common stock equal to $22.00 divided by the average of the average daily per
share high and low sales prices of the St. Paul common stock for each of the
twenty trading days ending on the third trading day prior to the meeting at
which USF&G shareholders will vote on the merger. However, if, at the time the
exchange ratio is calculated, the average price is less than $74, the exchange
ratio will be 0.2973 of a share of St. Paul common stock and if the average
price is greater than $78, the exchange ratio will be 0.2821 of a share of St.
Paul common stock. The number of shares of St. Paul common stock to be received
by USF&G shareholders at the effective time of the merger will be adjusted if
the two-for-one stock split currently contemplated by St. Paul occurs prior to
the effective date of the merger.
We estimate that approximately 33,004,995 shares of St. Paul common stock
will be issued to USF&G shareholders (assuming the exchange ratio is equal to
0.2821 shares of St. Paul common stock). These shares will represent
approximately 28.3% of the outstanding common stock of St. Paul after the
merger. Likewise, the shares of St. Paul common stock held by St. Paul
shareholders prior to the merger will represent approximately 71.7% of the
outstanding St. Paul common stock after the merger. St. Paul shareholders will
continue to own their existing shares after the merger. The contemplated St.
Paul stock split will not affect these percentages, even if it occurs prior to
the merger.
Shareholders of St. Paul and USF&G may call 1-800-356-4098, ext. 3700 at any
time between the date of this Joint Proxy Statement/Prospectus and the dates of
the St. Paul meeting and the USF&G meeting to hear a pre-recorded message
indicating the average price of the St. Paul common stock during the twenty
trading days ending on the third day prior to the call and the exchange ratio if
it were to be calculated on the date of the call.
The merger cannot be completed unless USF&G shareholders approve the merger
and St. Paul shareholders approve the issuance of shares of St. Paul common
stock pursuant to the Merger Agreement. We have scheduled meetings for you to
vote on these important matters. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend a meeting, please take the time to vote by
completing and mailing the enclosed proxy card to us. If you sign, date and mail
your proxy card without indicating how you want to vote, your proxy will be
counted as a vote in favor of the proposals submitted at your meeting. IF YOU
ARE A USF&G SHAREHOLDER AND FAIL TO RETURN YOUR PROXY CARD, THE EFFECT WILL BE
THE SAME AS A VOTE AGAINST THE MERGER UNLESS YOU APPEAR AT THE MEETING AND VOTE
IN FAVOR OF THE MERGER. If you are a St. Paul shareholder and fail to return
your proxy card, you will not be counted as being present or voting unless you
appear at the meeting in person. YOUR VOTE IS VERY IMPORTANT.
The dates, times and places of the meetings are as follows:
FOR USF&G SHAREHOLDERS:
April 7, 1998; 9:00 a.m., local time
Founders Building
USF&G Corporation
6225 Centennial Way
Baltimore, MD 21209
FOR ST. PAUL SHAREHOLDERS:
April 7, 1998; 10:00 a.m., local time
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, MN 55102
This Joint Proxy Statement/Prospectus provides you with detailed information
about the proposed merger In addition, you may obtain information about our
companies from documents that we have filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully.
<TABLE>
<S> <C>
[LOGO] [LOGO]
Douglas W. Leatherdale Norman P. Blake, Jr.
Chairman, President and Chief Executive Officer Chairman of the Board, President and
The St. Paul Companies, Inc. Chief Executive Officer
USF&G Corporation
</TABLE>
We urge USF&G shareholders to vote "FOR" the merger and St. Paul
shareholders to vote "FOR" the issuance of shares of St. Paul common stock in
connection with the merger.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE ST. PAUL COMMON STOCK TO BE ISSUED UNDER THIS
JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Joint Proxy Statement/Prospectus dated February 27, 1998, and first mailed to
shareholders on February 28, 1998
<PAGE>
[LOGO]
THE ST. PAUL COMPANIES, INC.
385 WASHINGTON STREET
ST. PAUL, MINNESOTA 55102
(612) 310-7911
--------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 7, 1998
--------------------------------------------------
To the Shareholders of The St. Paul Companies, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "St. Paul
Special Meeting") of The St. Paul Companies, Inc., a Minnesota corporation ("St.
Paul"), has been called by the Board of Directors of St. Paul (the "St. Paul
Board") and will be held at the offices of St. Paul, 385 Washington Street, St.
Paul, MN 55102 at 10:00 a.m., local time, on April 7, 1998, the purpose of which
will be to consider and vote upon the following proposal described in the
accompanying Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus"):
To approve the issuance of shares of Common Stock, no par
value, of St. Paul ("St. Paul Common Stock") pursuant to the
Agreement and Plan of Merger, dated as of January 19, 1998, as
amended (the "Merger Agreement"), among USF&G Corporation, a
Maryland corporation ("USF&G"), St. Paul and SP Merger
Corporation, a Maryland corporation and a wholly owned subsidiary
of St. Paul ("Merger Sub"), pursuant to which Merger Sub will be
merged with and into USF&G (the "Merger") and USF&G will become a
wholly owned subsidiary of St. Paul.
Except as set forth above, no other business will be transacted at the St.
Paul Special Meeting.
The St. Paul Board has fixed the close of business on February 25, 1998, as
the record date for the determination of shareholders entitled to notice of, and
to vote at, the St. Paul Special Meeting, and only shareholders of record at
such time will be entitled to notice of, and to vote at, the St. Paul Special
Meeting.
A majority of the votes present in person or by proxy at the St. Paul
Special Meeting must be voted in favor of the proposal to issue shares of St.
Paul Common Stock pursuant to the Merger Agreement in order for such proposal to
be approved.
We are supplying with and making a part of this notice a form of proxy and
the Joint Proxy Statement/ Prospectus (including the Merger Agreement)
containing more detailed information with respect to the proposal you will be
considering at the St. Paul Special Meeting.
Even if you plan to attend the St. Paul Special Meeting, please promptly
complete, sign, date and return the enclosed proxy card in the enclosed
addressed, postage prepaid envelope. Prior to the voting of the proxy at the St.
Paul Special Meeting, you have the power to revoke any proxy you have given by
written notice of revocation to the Corporate Secretary of St. Paul or by
providing a new written proxy or, if you attend the St. Paul Special Meeting and
want to vote in person, by taking either of these actions at the St. Paul
Special Meeting.
------------------------
<PAGE>
THE BOARD OF DIRECTORS OF ST. PAUL UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR
OF THE SHARE ISSUANCE PROPOSAL.
By Order of the Board of Directors
[SIG]
Bruce A. Backberg
Senior Vice President and Chief Legal
Counsel
ST. PAUL, MINNESOTA
FEBRUARY 27, 1998
The Proxy Solicitor For St. Paul is:
D.F. King & Co.
77 Water Street
New York, New York 10005
Call Toll Free: 1-800-714-3312
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE
AND RETURN YOUR PROXY
2
<PAGE>
[LOGO]
USF&G CORPORATION
6225 CENTENNIAL WAY
BALTIMORE, MARYLAND 21209
(410) 547-3000
--------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 7, 1998
--------------------------------------------------
To the Shareholders of USF&G Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "USF&G
Special Meeting") of USF&G Corporation, a Maryland corporation ("USF&G"), has
been called by the Board of Directors of USF&G (the "USF&G Board") and will be
held at Founders Building, USF&G Corporation, 6225 Centennial Way, Baltimore, MD
at 9:00 a.m., local time, on April 7, 1998, the purpose of which will be to
consider and vote upon the following proposal described in the accompanying
Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus"):
To approve the merger (the "Merger") of SP Merger Corporation,
a Maryland corporation ("Merger Sub") and a wholly owned
subsidiary of The St. Paul Companies, Inc., a Minnesota
corporation ("St. Paul"), with and into USF&G pursuant to the
terms and conditions of the Agreement and Plan of Merger, dated as
of January 19, 1998, as amended (the "Merger Agreement"), among
USF&G, St. Paul and Merger Sub, and to approve the transactions
contemplated by the Merger Agreement.
Except as set forth above, no other business will be transacted at the USF&G
Special Meeting.
The Board of Directors of USF&G has fixed the close of business on February
25, 1998, as the record date for the determination of shareholders entitled to
notice of, and to vote at, the USF&G Special Meeting, and only shareholders of
record at such time will be entitled to notice of, and to vote at, the USF&G
Special Meeting.
TWO-THIRDS OF ALL OF THE OUTSTANDING SHARES OF USF&G COMMON STOCK MUST BE
VOTED IN FAVOR OF THE MERGER IN ORDER FOR THE MERGER TO BE APPROVED. GIVEN THIS
SIGNIFICANT PERCENTAGE, THE USF&G BOARD CANNOT STRESS ENOUGH THE IMPORTANCE OF
YOUR VOTE "FOR" THE MERGER.
We are supplying with and making a part of this notice a form of proxy and
the Joint Proxy Statement/ Prospectus (including the Merger Agreement)
containing more detailed information with respect to the proposal you will be
considering at the USF&G Special Meeting.
Even if you plan to attend the USF&G Special Meeting, please promptly
complete, sign, date and return the enclosed proxy card in the enclosed
addressed, postage prepaid envelope. Prior to the voting of the proxy at the
USF&G Special Meeting, you have the power to revoke any proxy you have given by
written notice of revocation to the Corporate Secretary of USF&G or by providing
a new written proxy or, if you attend the USF&G Special Meeting and want to vote
in person, by taking either of these actions at the USF&G Special Meeting.
<PAGE>
THE BOARD OF DIRECTORS OF USF&G RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
MERGER.
By Order of the Board of Directors
[LOGO]
John F. Hoffen, Jr.
Secretary
BALTIMORE, MARYLAND
FEBRUARY 27, 1998
The Proxy Solicitor for USF&G Corporation is:
Georgeson & Company Inc.
Wall Street Plaza
New York, New York 10005
Banks and Brokers Call Collect: (212) 440-9800
All Other Call Toll-Free: (800) 223-2064
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE
AND RETURN YOUR PROXY
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Questions And Answers About The St. Paul/ USF&G 1
Merger...........................................
Summary............................................ 4
Selected Unaudited Historical And Pro Forma 10
Combined Financial Data..........................
The Merger......................................... 14
General........................................ 14
Background of the Merger....................... 15
Reasons for the Merger; Recommendations of the 16
Boards of Directors..........................
Opinions of Financial Advisors................. 19
Cautionary Statement Concerning Forward-Looking 34
Statements...................................
Accounting Treatment........................... 35
Certain Federal Income Tax Consequences of the 35
Merger.......................................
Certain Regulatory Matters..................... 36
No Appraisal Rights............................ 37
Resale of St. Paul Common Stock................ 37
Certain Pending Litigation..................... 38
Dividends After The Merger......................... 38
Comparative Stock Prices........................... 39
The Exchange Ratio................................. 40
The St. Paul Stock Split........................... 41
The Merger Agreement............................... 42
General........................................ 42
Terms of the Merger............................ 42
Effective Time................................. 42
Exchange of USF&G Certificates................. 43
Representations and Warranties................. 44
Operational Covenants.......................... 44
Acquisition Proposals.......................... 46
Shareholders Meetings.......................... 47
Filings; Other Actions; Notification........... 47
Taxation and Accounting........................ 48
Stock Exchange Listing......................... 48
Employee Benefits.............................. 48
Expenses....................................... 48
Indemnification; Directors' and Officers' 49
Insurance....................................
Election to St. Paul's Board of Directors...... 49
Conditions..................................... 49
Termination.................................... 51
Termination Fees............................... 52
Stock Option Agreement............................. 53
Interests of Certain Persons in The Merger......... 55
USF&G Directors Who Will Become Directors of 55
St. Paul at the Effective Time...............
Severance Arrangements......................... 55
<CAPTION>
PAGE
-----
<S> <C>
Blake Consulting Agreement..................... 57
Treatment of USF&G Stock Options............... 57
1993 Stock Plan for Non-Employee Directors..... 58
Ingrey Consulting and Stock Appreciation Rights 58
Agreements...................................
Employment of Certain USF&G Executive Officers 59
After the Merger.............................
Directors and Officers Insurance; Limitation of 59
Liability of USF&G Directors and Officers....
The Meetings....................................... 59
Date, Place, Time and Purpose.................. 59
Record Dates................................... 60
Votes Required; Shares Held by Certain 60
Persons......................................
Voting and Revocation of Proxies............... 61
Solicitation of Proxies........................ 62
Unaudited Pro Forma Condensed Combined Financial 63
Statements of St. Paul And USF&G.................
Description of St. Paul Capital Stock.............. 70
St. Paul Common Stock.......................... 70
Undesignated Shares............................ 70
Rights Agreement; Series A Preferred........... 70
Other Preferred Securities..................... 71
Comparison of Certain Rights of The Holders of St. 72
Paul Common Stock and USF&G Common Stock.........
General........................................ 72
Size and Classification of the Board of 72
Directors....................................
Indemnification of Directors and Officers...... 72
Limitation of Personal Liability of Directors 73
and Officers.................................
Special Meetings of Shareholders............... 74
Shareholder Proposals and Shareholder 74
Nominations of Directors.....................
Amendments of the Articles and Bylaws.......... 75
Appraisal and Dissenters' Rights............... 76
State Anti-Takeover Statutes................... 76
State Insurance Company Provisions Relating to 78
Takeovers....................................
Fair Price and Anti-Greenmail Provisions....... 79
Shareholders Rights Plans...................... 79
Conflict of Interest Transactions.............. 80
Experts............................................ 80
Legal Matters...................................... 81
Future Shareholder Proposals....................... 82
Where You Can Find More Information................ 82
Index of Terms Defined in this Joint Proxy 84
Statement/Prospectus.............................
</TABLE>
<TABLE>
<S> <C>
ANNEX A: Agreement and Plan of Merger, dated as of January 19, 1998, as amended through
February 26, 1998, among USF&G Corporation, The St. Paul Companies, Inc. and SP
Merger Corporation
ANNEX B: Stock Option Agreement, dated as of January 19, 1998, between The St. Paul
Companies, Inc. and USF&G Corporation.
ANNEX C: Opinion of Credit Suisse First Boston Corporation, dated January 19, 1998
ANNEX D: Opinion of Goldman, Sachs & Co., dated January 19, 1998
ANNEX E: Opinion of BT Alex. Brown Incorporated, dated January 18, 1998
</TABLE>
i
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE ST. PAUL/USF&G MERGER
Q. WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A. This merger will result in a company that is expected to be the nation's
eighth largest property and casualty insurer based on the combined 1996 net
written premiums of the two companies. Because of our complementary
businesses we believe that the combined company will be able to benefit from
significant operating synergies.
Q. WHAT DO I NEED TO DO NOW?
A. Please mail your signed proxy card in the enclosed postage prepaid return
envelope as soon as possible, so that your shares may be represented and
voted at the appropriate meeting, each of which is scheduled to take place
on April 7, 1998. Since two-thirds of the voting shares of USF&G must
approve the merger, it is especially important that USF&G shareholders
return their signed proxy cards. YOUR VOTE IS VERY IMPORTANT.
Q. WHAT DO I DO IF I WANT TO CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
A. There are three ways in which you may revoke your proxy. First, you may
submit a written notification stating that you would like to revoke your
proxy. Second, you may complete and submit a new proxy card. USF&G
shareholders choosing either of these methods should send their notice of
revocation or new proxy card to the person indicated on page 62. St. Paul
shareholders choosing either of these methods should send their notice of
revocation or new proxy card to the person indicated on page 61. As a third
method, you may attend the USF&G Special Meeting or St. Paul Special
Meeting, as appropriate, and vote in person. If you are a St. Paul
shareholder and wish to vote in person at the St. Paul Special Meeting after
you have submitted a proxy card (and have not revoked such proxy), you still
must provide a written notification stating that you would like to revoke
your proxy. If you hold your shares in "street name" of through a nominee or
broker, you must follow directions received from your broker to cast or
change your vote.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the merger is completed, we will send USF&G shareholders written
instructions for exchanging their share certificates. St. Paul shareholders
will keep their existing share certificates.
Q. WHAT WILL A USF&G SHAREHOLDER RECEIVE IN THE MERGER?
A. For each of your shares of USF&G common stock, you will receive a fraction of
a share of common stock of St. Paul equal to or greater than 0.2821 shares
of St. Paul common stock but in no event greater than 0.2973 shares of St.
Paul common stock depending upon the average price of St. Paul common stock
during a specified twenty-day period prior to the USF&G Special Meeting. If
the average price of St. Paul common stock is at least $74 and not more than
$78, then you will receive a fraction of a share of St. Paul common stock
determined by dividing $22 by the average St. Paul stock price during the
specified twenty-day period. If the average price of the St. Paul common
stock is less than $74, you will receive 0.2973 of a share of St. Paul
common stock. If the average price of St. Paul common stock is more than
$78, you will receive 0.2821 of a share of St. Paul common stock. If the
proposed St. Paul stock split occurs prior to the merger, the number of
shares of St. Paul common stock to be received by each USF&G shareholder and
the Exchange Ratio will be appropriately adjusted.
The average price of St. Paul common stock will be determined by averaging
the daily average high and low sales prices of St. Paul common stock as
reported on the New York Stock Exchange for the 20 trading days ending with
the third trading day prior to the USF&G Special Meeting. St. Paul will not
issue fractional shares of St. Paul common stock in the merger. Instead, an
exchange agent will sell all of the fractional shares of St. Paul common
stock and USF&G shareholders will be entitled to their proportionate
interest in the net proceeds of such sales. See "The Merger--General,"
"Exchange of Certificates," "The Exchange Ratio" and "The St. Paul Stock
Split."
1
<PAGE>
Q. WHAT IS THE "EXCHANGE RATIO?"
A. The Exchange Ratio is the fraction of a share of St. Paul common stock into
which each share of USF&G common stock will be converted upon consummation
of the merger. As described above, the Exchange Ratio will not be less than
0.2821 or greater than 0.2973 and when the average St. Paul stock price is
equal to or greater than $74, but less than or equal to $78, the Exchange
Ratio will be determined by dividing $22 by the average price of St. Paul
common stock.
Q. WHAT IS THE ST. PAUL STOCK SPLIT? HOW DOES IT AFFECT ME?
A. The St. Paul Board has announced its intention to approve a two-for-one stock
split (issuing one additional share of St. Paul common stock for each
outstanding share of St. Paul common stock) if the St. Paul shareholders
approve, at the St. Paul annual meeting to be held on May 5, 1998, a
proposal to increase the number of authorized shares of St. Paul common
stock. The St. Paul stock split will, therefore, not occur until after the
Exchange Ratio is determined. If the St. Paul stock split occurs before the
merger, the Exchange Ratio will be doubled to reflect the St. Paul stock
split and accordingly the number of shares of St. Paul common stock you
receive in the merger will be doubled.
Example: If (i) the Exchange Ratio is established at 0.2821, (ii) you own
10,000 shares of USF&G common stock and (iii) the St. Paul stock
split occurs prior to the merger, the Exchange Ratio would be
adjusted to equal 0.5642, and you would receive 5,642 shares of St.
Paul common stock in the merger.
If, however, in the above example, the St. Paul stock split occurs
after the merger, you would be entitled to receive 2,821 shares of
St. Paul common stock at the time of the merger and would receive
an additional 2,821 shares of St. Paul common stock at the time of
the St. Paul stock split (assuming that you retained the shares you
received at the time of the merger), resulting in the receipt of a
total of 5,642 shares of St. Paul common stock.
Q. WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A. Neither St. Paul nor USF&G expects to change its current dividend practices
before the merger. After the merger, we expect that St. Paul will continue
to pay cash dividends in accordance with its historic policies. During each
of the calendar quarters of 1997, St. Paul declared dividends of $0.47 per
share of St. Paul common stock, equal to an annual dividend in 1997 of $1.88
per share of St. Paul common stock. Assuming an Exchange Ratio of 0.2821 and
assuming that the merger was completed on January 1, 1997, a holder of one
share of USF&G common stock would have received a total cash dividend of
$0.53 from St. Paul during 1997. On February 3, 1998, the St. Paul Board
increased the regular quarterly dividend to $0.50 per share of St. Paul
common stock, equal to an annual dividend of $2.00 per share of St. Paul
common stock. The first dividend at the new rate is payable on April 17,
1998 to shareholders of record on March 31, 1998. Since July 31, 1997, USF&G
has paid a regular quarterly dividend of $0.07 per share of USF&G common
stock, equal to an annual dividend of $0.28 per share of USF&G common stock.
On February 10, 1998, the USF&G Board declared a dividend of $0.07 per share
of USF&G common stock, payable on April 30, 1998 to shareholders of record
on April 6, 1998.
Q. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A. If you are a USF&G shareholder, your broker is not permitted to vote your
shares of USF&G common stock on the USF&G merger proposal unless you provide
instructions on how to vote. If you are a St. Paul shareholder, your broker
is not permitted to vote your shares of St. Paul common stock on the
proposal to issue shares of St. Paul common stock pursuant to the merger
agreement unless you provide instructions on how to vote. All shareholders
of St. Paul and USF&G should instruct their brokers to vote their shares
following directions provided by their brokers.
2
<PAGE>
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. We are working towards quickly completing the merger. In addition to
shareholder approvals, we must also obtain numerous approvals from various
state insurance regulatory and foreign regulatory agencies. We hope to
complete the merger by mid-1998.
Q. WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO SHAREHOLDERS?
A. The exchange of shares by USF&G shareholders will be tax-free to USF&G
shareholders for federal income tax purposes, except for taxes on cash
received for fractional shares of St. Paul common stock. The merger will be
tax-free to St. Paul shareholders for federal income tax purposes. To review
the general tax consequences to shareholders in greater detail see "The
Merger-- Certain Federal Income Tax Consequences of the Merger."
Q. WHOM SHOULD SHAREHOLDERS CALL WITH QUESTIONS?
A. St. Paul shareholders who have questions about the merger should call D.F.
King & Co. at 1-800-714-3312.
USF&G shareholders who have questions about the merger should call Georgeson
& Company Inc. at 1-800-223-2064.
3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS TO
WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU CAN FIND MORE INFORMATION."
THE COMPANIES
THE ST. PAUL COMPANIES, INC.
385 Washington Street
St. Paul, Minnesota 55102
(612) 310-7911
St. Paul and its subsidiaries comprise one of the oldest insurance
organizations in the United States, dating back to 1853. St. Paul is a
management company principally engaged, through its subsidiaries, in property
and casualty insurance and reinsurance underwriting. St. Paul also has
operations in the asset management-investment banking industry through its
majority ownership of The John Nuveen Company. As a management company, St. Paul
oversees the operations of its subsidiaries and provides them with capital,
management and administrative services.
USF&G CORPORATION
6225 Centennial Way
Baltimore, Maryland 21209
(410) 547-3000
USF&G is a holding company with assets of $15.8 billion whose principal
subsidiaries are engaged in underwriting property and casualty insurance and
life insurance/annuities. Property and casualty insurance is written primarily
by USF&G Company, founded in 1896, and is sold principally through independent
agents supported by USF&G Company's underwriting, marketing, administrative and
claim services offices located throughout the United States. Life insurance and
annuities are written primarily by Fidelity and Guaranty Life Insurance Company,
founded in 1959, and are sold throughout the United States through independent
agents, managing general agents and regional and national brokerage firms.
OUR REASONS FOR THE MERGER (SEE PAGE 16)
The Boards of Directors of St. Paul and USF&G believe that the merger will
create a premier property and casualty insurance company that will be better
positioned to compete effectively in the increasingly competitive property and
casualty insurance industry. They believe that the merger will provide
opportunities to achieve substantial benefits that might not otherwise be
available for the shareholders and customers of the two companies. The combined
company will benefit from the combined financial resources, management and
personnel of St. Paul and USF&G and will be able to capitalize on growth
opportunities in the insurance industry, both domestically and internationally.
In addition, the merger will permit the combined company to derive significant
advantages from the more efficient utilization of the combined assets,
management and personnel of St. Paul and USF&G.
OUR RECOMMENDATIONS TO SHAREHOLDERS
TO ST. PAUL SHAREHOLDERS:
The St. Paul Board believes that the merger is in your best interest and
unanimously recommends that you vote FOR the proposal to approve the issuance of
shares of St. Paul common stock to USF&G shareholders in the merger.
TO USF&G SHAREHOLDERS:
The USF&G Board believes that the merger is in your best interest and
recommends that you vote FOR the proposal to approve the merger.
THE MERGER
THE MERGER AGREEMENT IS ATTACHED AS ANNEX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT AS IT IS THE
LEGAL DOCUMENT THAT GOVERNS THE MERGER.
RECORD DATE; VOTING POWER
ST. PAUL
You are entitled to vote at the special meeting of St. Paul shareholders if
you owned St. Paul common stock or St. Paul Series B convertible
4
<PAGE>
preferred stock as of the close of business on February 25, 1998, the St. Paul
Record Date.
On the St. Paul Record Date, there were 83,804,344 shares of St. Paul common
stock and 955,594 shares of St. Paul Series B convertible preferred stock
entitled to vote at the St. Paul special meeting. If all shares of St. Paul
common stock and St. Paul Series B convertible preferred stock are voted at the
St. Paul special meeting, at least 43,813,361 votes must be voted FOR the
issuance of St. Paul common stock in order for the issuance to be approved.
Holders of St. Paul common stock will have one vote at the St. Paul special
meeting for each share of St. Paul common stock they own on the St. Paul Record
Date and holders of St. Paul Series B convertible preferred stock will have four
votes for each share of St. Paul Series B convertible preferred stock they own
on the St. Paul Record Date.
USF&G
You are entitled to vote at the USF&G special meeting if you owned shares of
USF&G common stock as of the close of business on February 25, 1998, the USF&G
Record Date.
On the USF&G Record Date, there were 116,997,500 shares of USF&G common
stock entitled to vote at the USF&G special meeting. At least 77,998,334 shares
of USF&G common stock must vote FOR the merger in order for it to be approved.
USF&G shareholders will have one vote at the USF&G special meeting for each
share of USF&G common stock they own on the USF&G Record Date.
VOTES REQUIRED TO APPROVE THE MERGER
ST. PAUL
The favorable vote of the holders of at least a majority of the total number
of eligible votes cast at the St. Paul special meeting is required to approve
the issuance of shares of St. Paul common stock pursuant to the merger
agreement.
USF&G
The favorable vote of the holders of at least two-thirds of the outstanding
shares of USF&G common stock is required to approve the merger. YOUR FAILURE TO
VOTE YOUR SHARES OF USF&G COMMON STOCK WILL HAVE THE EFFECT OF A VOTE AGAINST
THE MERGER.
WHAT USF&G SHAREHOLDERS WILL RECEIVE (SEE PAGES
14 AND 40)
As a result of the merger, as illustrated in the table on page 40, USF&G
shareholders will receive, for each share of USF&G common stock, not less than
0.2821 or more than 0.2973 of a share of St. Paul common stock.
If the average price of St. Paul common stock, determined by averaging the
daily average of the high and low stock prices of St. Paul common stock for the
twenty trading days ending on the third trading day prior to the USF&G special
meeting, is not less than $74 or greater than $78, then for each of your shares
of USF&G common stock you will receive a fraction of a share of St. Paul common
stock determined by dividing $22 by the average price.
If the average price of St. Paul common stock is less than $74, you will
receive 0.2973 of a share of St. Paul common stock for each of your shares of
USF&G common stock.
If the average price of the St. Paul common stock is greater than $78, you
will receive 0.2821 of a share of St. Paul common stock for each of your shares
of USF&G common stock.
If the St. Paul stock split occurs prior to the merger, the number of shares
of St. Paul common stock to be received by each USF&G shareholder and the
Exchange Ratio will be appropriately adjusted. St. Paul will not issue
fractional shares of St. Paul common stock in the merger. Instead, the exchange
agent will sell all fractional shares of St. Paul common stock that would
otherwise exist as a result of the conversion of USF&G common stock into St.
Paul common stock in the merger, and you will be entitled to your proportionate
interest in the net proceeds of such sales.
St. Paul and USF&G shareholders may call 1-800-356-4098, ext. 3700 at any
time between the date of this Joint Proxy Statement/Prospectus and the dates of
the USF&G and St. Paul special meetings to hear a pre-recorded message
indicating the average price of the St. Paul common stock and the
5
<PAGE>
exchange ratio, each as if calculated as of the date of the call.
USF&G SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL INSTRUCTED TO DO SO AFTER THE MERGER IS COMPLETED. ST. PAUL SHAREHOLDERS
SHOULD NOT SEND IN THEIR STOCK CERTIFICATES IN CONNECTION WITH THE MERGER.
OWNERSHIP OF ST. PAUL FOLLOWING THE MERGER
The shares of St. Paul common stock that St. Paul will issue to USF&G
shareholders in the merger will constitute approximately 28.3% of the
outstanding St. Paul common stock after the merger based on the number of shares
of St. Paul and USF&G common stock outstanding on February 25, 1998 (assuming an
exchange ratio of 0.2821).
BOARD OF DIRECTORS OF ST. PAUL FOLLOWING THE MERGER
(SEE PAGE 49)
Promptly after the merger becomes effective, St. Paul has agreed to add Mr.
Norman P. Blake, Jr. and two other directors of USF&G to the St. Paul Board. The
two additional people will be selected by the board governance committee of the
St. Paul Board. In addition, St. Paul has also agreed to nominate two, or if the
effective time of the merger occurs on or after August 15, 1998, three, of such
directors for election to the St. Paul Board at its first annual meeting with a
mailing date after the effective time of the merger.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER (SEE
PAGE 55)
When considering the USF&G Board's recommendation that you vote in favor of
the merger you should be aware that certain officers and directors of USF&G have
agreements, retention incentives, stock options and other benefit plans that
provide them with interests in the merger that are different from, or in
addition to, yours as a USF&G shareholder.
The USF&G Board was aware of these interests with respect to its officers
and directors and considered them in approving the merger.
CONDITIONS TO THE MERGER (SEE PAGE 49)
Completion of the merger depends upon a number of conditions being
satisfied, including the following:
- approval of the merger by the shareholders of USF&G;
- approval of the issuance of the shares of St. Paul common stock pursuant
to the Merger Agreement by the shareholders of St. Paul;
- the receipt or making of all required consents, registrations, approvals,
permits and authorizations required to be received or made from any
governmental entity including certain state insurance commissioners and
expiration of certain waiting periods other than those that would not
reasonably be expected to result in an aggregate loss of $50 million or
more in annual net written premiums for the companies if they were not
obtained;
- no law, statute, ordinance, rule, regulation, judgment, decree, injunction
or other order being in effect that restrains, enjoins or otherwise
prohibits consummation of the merger;
- the receipt of consents to the merger of third parties, other than certain
specified consents, whose failure to consent would have a material adverse
effect on St. Paul or USF&G, or would prevent or materially impair the
ability of St. Paul or USF&G to consummate the merger;
- receipt of opinions from our respective tax counsel that the merger will
qualify as a tax-free reorganization for Federal income tax purposes; and
- receipt of favorable letters from each of KPMG Peat Marwick LLP (or its
successor) and Ernst & Young LLP (or its successor) regarding the
appropriateness of "pooling of interests" accounting treatment for the
merger.
Certain of these conditions may be waived by the company entitled to assert
the condition.
6
<PAGE>
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 51)
St. Paul and USF&G can agree in writing to terminate the Merger Agreement at
any time without completing the merger.
Either of us may terminate the Merger Agreement if:
- the merger has not been consummated by August 15, 1998, unless either of
us determines that additional time is necessary in connection with
obtaining any governmental consents, then we can extend this date to
December 15, 1998;
- the USF&G shareholders fail to approve the merger;
- the St. Paul shareholders fail to approve the issuance of the shares of
St. Paul common stock pursuant to the Merger Agreement;
- any law, statute, ordinance, rule, regulation, judgment, decree,
injunction or other order permanently restraining, enjoining or otherwise
prohibiting consummation of the merger has become final and
non-appealable; or
- either of us breaches its representations, warranties or obligations under
the Merger Agreement in a manner that would cause the conditions to the
Merger Agreement relating to representations, warranties and obligations
to not be satisfied and the breach cannot be cured.
In addition, USF&G may terminate the merger agreement if:
- the USF&G shareholders have not approved the merger and USF&G is
authorized by the USF&G Board to enter into a written agreement for a
transaction that the USF&G Board has determined is superior to the merger,
after St. Paul has been given an opportunity to match the superior
transaction;
In addition, St. Paul may terminate the Merger Agreement if:
- USF&G enters into a binding agreement with a third party for a transaction
that the USF&G Board has determined is superior to the merger; or
- the USF&G Board withdraws or adversely modifies its approval or
recommendation of the Merger Agreement or fails to reconfirm the
recommendation.
TERMINATION FEES (SEE PAGE 52)
The Merger Agreement requires USF&G to pay to St. Paul, in certain
circumstances, and St. Paul to pay to USF&G, in other circumstances, a
termination fee of $70 million and expenses of up to $5 million if, under
certain circumstances, the Merger Agreement is terminated.
STOCK OPTION AGREEMENT (SEE PAGE 53)
We have entered into a Stock Option Agreement which permits St. Paul under
certain circumstances to purchase shares of USF&G common stock representing
19.9% of the total number of outstanding shares of USF&G common stock at a price
of $22.00 per share. St. Paul's total profit from the termination fee and
related expense reimbursement payable pursuant to the Merger Agreement and its
profit under the Stock Option Agreement may not exceed $75 million.
REGULATORY APPROVALS (SEE PAGE 36)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
required us to furnish certain information and materials to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and
requires that a specified waiting period expire or be terminated before the
merger can be completed. On February 19, 1998, the waiting period under the
Hart-Scott-Rodino Act was terminated. Nevertheless, the Antitrust Division of
the Department of Justice and the Federal Trade Commission have the authority to
challenge the merger on antitrust grounds before or after the merger is
completed.
St. Paul is also required to obtain the approval of and provide information
and materials to the insurance departments in the States of California,
Illinois, Indiana, Iowa, Maryland, Michigan, Mississippi, New York, Ohio, Texas,
Vermont and Wisconsin because USF&G has insurance subsidiaries
7
<PAGE>
domiciled in each of these states. These governmental authorities could prohibit
us from completing our merger. It is also possible that some of these
governmental authorities may impose conditions on granting approval of or
declining to object to the merger.
St. Paul is also required to provide information to insurance departments in
numerous states where St. Paul's subsidiaries and USF&G's subsidiaries together
have sufficiently large market shares in particular insurance lines to require a
notification prior to a merger. Approval of the merger is not required in these
states, but the insurance departments could determine to impose certain
conditions upon the merger.
We cannot predict whether we will obtain the required regulatory approvals
within the time frame contemplated by the Merger Agreement or on conditions that
would not be detrimental to the combined company.
ACCOUNTING TREATMENT (SEE PAGE 35)
We expect the merger to qualify as a "pooling of interests," which means
that we will treat our companies as if they had always been combined for
accounting and financial reporting purposes.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGE 19)
In deciding to approve the merger, the Boards considered opinions from our
respective financial advisors as to the fairness of the exchange ratio from a
financial point of view. USF&G received the opinions of its financial advisors,
Goldman, Sachs & Co. and BT Alex. Brown Incorporated, and St. Paul received the
opinion of its financial advisor, Credit Suisse First Boston Corporation. These
opinions are attached as Annexes C, D and E to this Joint Proxy
Statement/Prospectus. We encourage you to read and consider these opinions.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE
PAGE 35)
We have structured the merger so that none of USF&G, St. Paul or our
respective shareholders will recognize gain or loss for federal income tax
purposes as a result of the merger, except for taxes payable on cash received by
USF&G shareholders instead of fractional shares. THE TAX CONSEQUENCES OF THE
MERGER TO SHAREHOLDERS OF USF&G WILL DEPEND ON THE FACTS OF EACH SHAREHOLDER'S
SITUATION. SHAREHOLDERS OF USF&G SHOULD CONSULT THEIR TAX ADVISORS FOR A FULL
UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO THEM.
NO APPRAISAL RIGHTS
Under Maryland law, USF&G shareholders have no right to an appraisal of the
value of their shares in connection with the merger. Under Minnesota law, St.
Paul shareholders have no right to an appraisal of the value of their shares in
connection with the merger.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
(SEE PAGE 39)
Shares of St. Paul and USF&G common stock are each listed on the New York
Stock Exchange and certain other stock exchanges. On January 16, 1998, the last
full trading day on the New York Stock Exchange prior to the public announcement
of the merger, USF&G common stock closed at $21 7/16 per share and St. Paul
common stock closed at $78 1/8 per share. On February 26, 1998, USF&G common
stock closed at $24 5/16 per share and St. Paul common stock closed at $88 1/8
per share. Assuming an exchange ratio of 0.2821, the equivalent of a share of
USF&G common stock was $24.86 on such date.
LISTING OF ST. PAUL COMMON STOCK (SEE PAGE 48)
St. Paul has agreed to list the shares of St. Paul common stock to be issued
in connection with the merger on the New York Stock Exchange.
FORWARD-LOOKING STATEMENTS
This document and documents that are incorporated herein by reference
include various forward-looking statements about St. Paul, USF&G and the
combined company that are subject to risks and uncertainties. Forward-looking
statements include the information concerning anticipated future results of
operations of St. Paul, USF&G and the combined company. Also, statements
including the words "expects," "anticipates," "intends," "plans," "believes,"
"estimates," or similar expressions are forward-looking statements. Shareholders
should note that many factors, some of which are discussed elsewhere in this
document
8
<PAGE>
and in the documents that are incorporated by reference, could cause the actual
results of the combined company to differ materially from the anticipated
results set forth in or contemplated by such forward-looking statements. You are
cautioned that such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of St. Paul and USF&G to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors may affect St. Paul's, USF&G's or the
combined company's operations, markets, products, services and prices. Such
factors include, among others, the following: general economic and business
conditions, including changes in interest rates, rates of inflation and the
performance of financial markets; changes in domestic and foreign laws,
regulations and taxes; social conditions; judicial decisions and rulings;
integration of the operations of St. Paul and USF&G, including the failure to
realize synergies from the merger; regulatory conditions to the merger;
competition; the loss of any significant customers; insurance claims based on
natural disasters; the frequency and severity of catastrophic events; a change
in the demand for, pricing of, or supply of reinsurance or insurance; losses due
to foreign currency exchange rate fluctuations; and changes in business strategy
or development plans.
9
<PAGE>
SELECTED UNAUDITED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following tables are being provided to assist you in your analysis of
the merger and present selected historical financial and operating data of St.
Paul and USF&G and selected unaudited pro forma combined financial and operating
data after giving effect to the merger as a "pooling of interests." St. Paul's
and USF&G's selected historical data for each of the five years in the period
ended December 31, 1997 have been derived from financial statements filed with
the Securities and Exchange Commission. You should be aware that the pro forma
combined financial data are presented for illustrative purposes only and are not
necessarily an indication of the financial position or operating results that
would have occurred if the merger had been completed at such times or that will
occur upon consummation of the merger. The pro forma combined financial data do
not give effect to any cost savings which may result from the integration of St.
Paul's and USF&G's operations, nor do they consider any reorganization costs
that are expected to occur as a result of the Merger. Additionally, the pro
forma combined income statement data do not include any transaction costs
relating to the Merger. The following selected financial data should be read in
conjunction with the related historical and pro forma combined financial
statements and notes thereto incorporated by reference or included herein. See
"Where You Can Find More Information" and "Unaudited Pro Forma Condensed
Combined Financial Statements of St. Paul and USF&G."
ST. PAUL
SELECTED UNAUDITED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums earned............................................... $ 4,616 $ 4,448 $ 3,971 $ 3,412 $ 3,178
Net investment income......................................... 886 807 741 673 640
Realized gains................................................ 408 219 85 42 58
Asset management-investment banking........................... 262 220 221 212 242
Other......................................................... 47 40 38 29 33
--------- --------- --------- --------- ---------
Total revenues from continuing operations................... 6,219 5,734 5,056 4,368 4,151
--------- --------- --------- --------- ---------
Insurance losses and loss adjustment expenses................. 3,345 3,318 2,864 2,462 2,304
Policy acquisition, operating and administrative expenses..... 1,855 1,717 1,523 1,333 1,312
Income tax expense............................................ 246 141 131 113 88
--------- --------- --------- --------- ---------
Income from continuing operations........................... $ 773 $ 558 $ 538 $ 460 $ 447
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income from continuing operations per common share(1)......... $ 8.39 $ 6.11 $ 5.88 $ 5.13 $ 4.96
Cash dividends declared per common share...................... $ 1.88 $ 1.76 $ 1.60 $ 1.50 $ 1.40
BALANCE SHEET DATA:
Total assets.................................................. $ 21,501 $ 20,681 $ 18,519 $ 16,142 $ 15,914
Total debt.................................................... 783 689 697 616 640
Company-obligated mandatorily redeemable preferred securities
of St. Paul Capital L.L.C................................... 207 207 207 0 0
Net change in unrealized gains on investments and foreign
currency.................................................... 59 9 617 (570) 473
Shareholders' equity.......................................... 4,627 4,004 3,730 2,737 3,004
Book value per common share................................... $ 55.06 $ 47.93 $ 44.29 $ 32.46 $ 35.47
Number of common shares outstanding........................... 83,727,800 83,198,411 83,975,864 84,202,417 84,714,676
PROPERTY/LIABILITY INSURANCE:
GAAP underwriting result...................................... $ (180) $ (216) $ (103) $ (113) $ (150)
Statutory combined ratio:(2)..................................
Loss and loss expense ratio................................. 72.5 74.6 72.1 72.1 72.5
Underwriting expense ratio.................................. 32.6 30.9 29.7 30.2 32.0
--------- --------- --------- --------- ---------
Combined ratio.............................................. 105.1 105.5 101.8 102.3 104.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Income from continuing operations per common share for all years presented
is calculated on a "diluted" basis in accordance with SFAS No. 128.
(2) The combined ratio is not derived from the GAAP financial statements.
10
<PAGE>
USF&G
SELECTED UNAUDITED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums earned........................................... $ 2,682 $ 2,731 $ 2,666 $ 2,508 $ 2,521
Net investment income..................................... 691 705 733 749 753
Realized gains............................................ 15 44 7 5 6
Other..................................................... 16 18 53 48 43
---------- ---------- ---------- ---------- ---------
Total revenues from continuing operations............... 3,404 3,498 3,459 3,310 3,323
---------- ---------- ---------- ---------- ---------
Insurance losses, loss adjustment expenses and policy
benefits................................................ 2,071 2,181 2,178 2,132 2,200
Policy acquisition, operating and administrative
expenses................................................ 1,062 1,058 1,086 1,221 1,020
Income tax expense (benefit).............................. 77 (2) (14) (280) (27)
---------- ---------- ---------- ---------- ---------
Income from continuing operations....................... $ 194 $ 261 $ 209 $ 237 $ 130
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Income from continuing operations per common share(1)..... $ 1.63 $ 1.95 $ 1.53 $ 1.76 $ 0.89
Cash dividends declared per common share.................. $ 0.26 $ 0.20 $ 0.20 $ 0.20 $ 0.20
BALANCE SHEET DATA:
Total assets.............................................. $ 15,819 $ 14,407 $ 14,651 $ 13,980 $ 14,481
Total debt................................................ 521 482 607 628 627
Company-obligated mandatorily redeemable preferred
securities
of USF&G Capital Trusts................................. 296 100 0 0 0
Net change in unrealized gains on investments and foreign
currency................................................ 105 (209) 418 (338) 220
Shareholders' equity...................................... 2,077 1,969 1,984 1,441 1,556
Book value per common share............................... $ 17.84 $ 15.48 $ 14.68 $ 9.96 $ 11.33
Number of common shares outstanding....................... 116,402,199 114,240,489 119,606,095 104,810,794 91,418,372
PROPERTY/LIABILITY INSURANCE:
GAAP underwriting result.................................. $ (99) $ (167) $ (156) $ (202) $ (229)
Statutory combined ratio: (2)
Loss and loss expense ratio............................. 70.5 72.1 72.4 73.1 75.3
Underwriting expense ratio.............................. 32.8 33.5 33.4 34.8 33.5
---------- ---------- ---------- ---------- ---------
Combined ratio.......................................... 103.3 105.6 105.8 107.9 108.8
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
- ------------------------
(1) Income from continuing operations per common share for all years presented
is calculated on a "diluted" basis in accordance with SFAS No. 128.
(2) The combined ratio is not derived from the GAAP financial statements.
11
<PAGE>
ST. PAUL AND USF&G
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT SHARE
DATA)
INCOME STATEMENT DATA:
Premiums earned......................................................... $ 7,298 $ 7,179 $ 6,637
Net investment income................................................... 1,577 1,512 1,474
Realized gains.......................................................... 423 267 92
Asset management-investment banking..................................... 262 220 221
Other................................................................... 63 58 91
----------- ----------- -----------
Total revenues from continuing operations........................... 9,623 9,236 8,515
----------- ----------- -----------
Insurance losses, loss adjustment expenses and policy
benefits.............................................................. 5,379 5,471 5,010
Policy acquisition, operating and administrative expenses............... 2,922 2,787 2,610
Income tax expense...................................................... 334 146 128
----------- ----------- -----------
Income from continuing operations................................... $ 988 $ 832 $ 767
----------- ----------- -----------
----------- ----------- -----------
Income from continuing operations per common share (1)(2)............... $ 7.85 $ 6.45 $ 5.91
Cash dividends declared per common share................................ $ 1.88 $ 1.76 $ 1.60
BALANCE SHEET DATA:
Total assets............................................................ $ 37,333 $ 35,128 $ 33,229
Total debt.............................................................. 1,304 1,171 1,304
Company-obligated mandatorily redeemable preferred securities of
Subsidiaries.......................................................... 503 307 207
Net change in unrealized gains on investments and foreign currency...... 164 (200) 1,035
Shareholders' equity.................................................... 6,554 5,830 5,558
Book value per common share (2)......................................... $ 56.08 $ 48.64 $ 45.31
Number of common shares outstanding (2)................................. 116,564,860 115,425,653 117,716,743
PROPERTY/LIABILITY INSURANCE:
GAAP underwriting result................................................ $ (247) $ (366) $ (229)
Statutory combined ratio: (3)
Loss and loss expense ratio........................................... 71.2 73.2 71.7
Underwriting expense ratio............................................ 32.7 32.0 31.1
----------- ----------- -----------
Combined ratio........................................................ 103.9 105.2 102.8
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Income from continuing operations per common share for all years presented
is calculated on a "diluted" basis in accordance with SFAS No. 128.
(2) Assumes an Exchange Ratio equal to 0.2821.
(3) The combined ratio is not derived from the GAAP financial statements.
12
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ST. PAUL AND USF&G
SUMMARY UNAUDITED HISTORICAL AND PRO FORMA COMBINED PER SHARE DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
ST. PAUL COMMON STOCK
Income from continuing operations per share (1)
Historical....................................................................... $ 8.39 $ 6.11 $ 5.88
Cash dividends declared per share
Historical....................................................................... $ 1.88 $ 1.76 $ 1.60
Book value per share (at end of period)
Historical....................................................................... $ 55.06 $ 47.93 $ 44.29
USF&G COMMON STOCK
Income from continuing operations per share (1)
Historical....................................................................... $ 1.63 $ 1.95 $ 1.53
Cash dividends declared per share
Historical....................................................................... $ 0.26 $ 0.20 $ 0.20
Book value per share (at end of period)
Historical....................................................................... $ 17.84 $ 15.48 $ 14.68
PRO FORMA COMBINED COMPANY (2)
Income from continuing operations per share (1)
Pro Forma........................................................................ $ 7.85 $ 6.45 $ 5.91
USF&G Equivalent Pro Forma....................................................... $ 2.21 $ 1.82 $ 1.67
Cash dividends declared per share
Pro forma........................................................................ $ 1.88 $ 1.76 $ 1.60
USF&G Equivalent Pro Forma....................................................... $ 0.53 $ 0.50 $ 0.45
Book value per share (at end of period)
Pro Forma........................................................................ $ 56.08 $ 48.64 $ 45.31
USF&G Equivalent Pro Forma....................................................... $ 15.82 $ 13.72 $ 12.78
</TABLE>
- ------------------------
(1) Income from continuing operations per share for all years presented is
calculated on a "diluted" basis in accordance with SFAS No. 128.
(2) Assumes an Exchange Ratio equal to 0.2821.
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THE MERGER
THE DISCUSSION IN THIS JOINT PROXY STATEMENT/PROSPECTUS (AS DEFINED BELOW)
OF THE MERGER (AS DEFINED BELOW) AND THE PRINCIPAL TERMS OF THE MERGER AGREEMENT
(AS DEFINED BELOW) IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO,
THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS OF ST. PAUL AND PROXY STATEMENT OF USF&G (THE "JOINT PROXY
STATEMENT/PROSPECTUS") AS ANNEX A, AND IS INCORPORATED HEREIN BY REFERENCE.
GENERAL
The St. Paul Companies, Inc., a Minnesota corporation ("St. Paul"), and
USF&G Corporation, a Maryland corporation ("USF&G"), are furnishing this Joint
Proxy Statement/Prospectus to holders of common stock, par value $2.50 per
share, of USF&G ("USF&G Common Stock") and holders of common stock, no par
value, of St. Paul ("St. Paul Common Stock") and holders of Series B Convertible
Preferred Stock, no par value, of St. Paul (the "Series B Shares" and, together
with the St. Paul Common Stock, the "St. Paul Voting Stock"), in connection with
the solicitation of proxies by the Board of Directors of USF&G (the "USF&G
Board") in connection with a special meeting of holders of USF&G Common Stock
(the "USF&G Special Meeting") and in connection with the solicitation of proxies
by the Board of Directors of St. Paul (the "St. Paul Board") in connection with
a special meeting of shareholders of St. Paul Voting Stock (the "St. Paul
Special Meeting", and together with the USF&G Special Meeting, the "Meetings")
each to be held on April 7, 1998, and at any adjournments or postponements of
the Meetings.
At the USF&G Special Meeting, holders of USF&G Common Stock will be asked to
vote upon a proposal to approve the Merger pursuant to the Agreement and Plan of
Merger, dated as of January 19, 1998, as amended (the "Merger Agreement"), among
USF&G, St. Paul and SP Merger Corporation, a Maryland corporation and a wholly
owned subsidiary of St. Paul ("Merger Sub"). As a result of the proposal to
approve the Merger, USF&G is deferring and not planning to hold its Annual
Meeting of Shareholders, at which USF&G's directors would stand for election and
other business would be conducted. If the Merger is not approved by the USF&G
shareholders, or is otherwise not consummated or is significantly delayed, USF&G
intends to hold its Annual Meeting of Shareholders later in 1998.
At the St. Paul Special Meeting, holders of St. Paul Voting Stock will be
asked to vote upon a proposal to issue shares of St. Paul Common Stock pursuant
to the Merger Agreement.
The Merger Agreement provides, on the terms and subject to the conditions
set forth therein, (i) for the merger of Merger Sub with and into USF&G (the
"Merger"), with USF&G surviving the Merger as a wholly owned subsidiary of St.
Paul, and (ii) that each share of USF&G Common Stock outstanding immediately
prior to the Effective Time (as defined under "The Merger Agreement -- Effective
Time") (other than shares of USF&G Common Stock owned by St. Paul or any direct
or indirect subsidiary of St. Paul or shares of USF&G Common Stock owned by
USF&G or any direct or indirect subsidiary of USF&G (except those held on behalf
of third parties) ("Excluded Shares")), will be converted into, and become
exchangeable for (the "Merger Consideration") that number of shares (the
"Exchange Ratio") of St. Paul Common Stock determined by dividing $22 by the
average of the average daily per share high and low sales prices of one share of
St. Paul Common Stock as reported on the New York Stock Exchange, Inc. (the
"NYSE") Composite Tape (as reported in the New York City edition of THE WALL
STREET JOURNAL or, if not reported therein, another authoritative source) for
each of the 20 trading days ending on the third trading day prior to the USF&G
Special Meeting rounded to the fourth decimal place (the "Average Stock Price");
provided, that, (i) if the Average Stock Price is less than $74 (the "Lower
Collar"), the Exchange Ratio will be 0.2973; and (ii) if the Average Stock Price
is greater than $78 (the "Upper Collar" and, together with the Lower Collar, the
"Collars"), the Exchange Ratio will be 0.2821. The Merger Agreement provides
that in the event that after the date of the Merger Agreement and prior to the
Effective Time (as defined below) USF&G changes the number of shares of USF&G
Common Stock or securities convertible or exchangeable into or exercisable for
shares of USF&G Common Stock, or St. Paul changes the number
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<PAGE>
of shares of St. Paul Common Stock or securities convertible or exchangeable
into or exercisable for shares of St. Paul Common Stock, issued and outstanding
prior to the Effective Time as a result of a reclassification, stock split
(including a reverse split), stock dividend or distribution, recapitalization,
merger, subdivision, issuer tender or exchange offer, or other similar
transaction, the Merger Consideration and the Collars will be equitably
adjusted.
The St. Paul Board has announced its intention to approve a two-for-one
split (the "St. Paul Stock Split") of the St. Paul Common Stock (issuing one
additional share of St. Paul Common Stock for each outstanding share of St. Paul
Common Stock) if the St. Paul shareholders approve at their upcoming annual
meeting (presently scheduled for May 5, 1998) a proposal to increase the number
of authorized shares of St. Paul Common Stock. If the St. Paul Stock Split
occurs prior to the Effective Time, the number of shares of St. Paul Common
Stock to be received by each USF&G shareholder and the Exchange Ratio will be
appropriately adjusted. The Effective Time is expected to occur as soon as
practicable after the satisfaction or waiver of the conditions precedent to the
Merger set forth in the Merger Agreement. It is currently anticipated that the
closing of the Merger will occur by mid-1998.
BACKGROUND OF THE MERGER
During 1996, the management of USF&G determined that it should explore the
possibility of a major strategic transaction in order to continue and build upon
the successful repositioning management had led USF&G through from 1991 to 1996.
In particular, management of USF&G believed that USF&G would benefit from
greater diversity in its specialty businesses or increased size in its commodity
businesses. In light of these conclusions, management of USF&G, under the
supervision of the USF&G Board, explored a variety of alternatives to effect a
strategic transaction that would enhance USF&G's long-term competitive position.
In furtherance of this strategy, USF&G made a number of small acquisitions and
explored the possibility of making larger acquisitions, selling to or merging
with a third party or selling in separate transactions certain of USF&G's
individual lines of business and spinning off or selling its commodity
businesses and continuing as an independent specialty property and casualty
insurer. In this regard, USF&G and its representatives made various contacts
with third parties to ascertain their level of interest in such strategic
transactions and to obtain indications of the potential value of these
transactions to USF&G shareholders.
USF&G contacted St. Paul in the spring of 1997 to determine if St. Paul
would be interested in combining with USF&G. USF&G provided St. Paul with a
limited amount of confidential information, but USF&G and St. Paul never
proceeded beyond preliminary discussions. In October 1997, St. Paul and USF&G
resumed discussions and agreed that it would be advisable for St. Paul to
conduct an extensive review of USF&G to be in a better position to determine
whether USF&G and St. Paul could agree upon the financial terms on which a
transaction might be effected.
St. Paul reviewed additional information concerning USF&G during late
October 1997, including information relating to USF&G's reserves, possible cost
savings and other business synergies and opportunities. Also at this time
representatives of St. Paul met with executive management of USF&G and certain
of its business units. USF&G also reviewed information concerning St. Paul. At
the conclusion of these reviews, USF&G and St. Paul were still unable to reach
mutually agreeable financial terms for a transaction.
During November and December 1997, there were occasional contacts between
representatives of St. Paul and representatives of USF&G, but no progress was
made toward a transaction. On January 8 and 9, 1998, representatives of USF&G
met with a representative of St. Paul and discussed certain issues relating to a
possible combination of the companies. On January 11, representatives of USF&G
and St. Paul met again and agreed, subject to completion of their reviews of
each other's business, negotiation of mutually agreeable merger transaction
documentation and approvals of their respective Boards of Directors, to certain
of the financial terms of the Merger. From January 12 through the signing of the
Merger
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<PAGE>
Agreement on January 19, representatives of St. Paul and USF&G negotiated the
Merger Agreement and the Stock Option Agreement. The Merger Agreement and Stock
Option Agreement were approved by the USF&G Board at a meeting held on January
18 and by the St. Paul Board at a meeting held on January 19. The Merger
Agreement was signed and announced on the evening of January 19, 1998.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Boards of Directors of St. Paul and USF&G believe that the Merger will
create a premier property and casualty insurance company that will be better
positioned to compete effectively in the increasingly competitive property and
casualty insurance industry. They believe that the Merger will provide
opportunities to achieve substantial benefits that might not otherwise be
available for the shareholders and customers of the two companies. The combined
company will benefit from the combined financial resources, management and
personnel of St. Paul and USF&G and will be able to better capitalize on growth
opportunities in the insurance industry both domestically and internationally.
In addition, the Merger will permit the combined company to derive significant
advantages from the more efficient utilization of the combined assets,
management and personnel of St. Paul and USF&G. In addition, the St. Paul Board
and the USF&G Board considered the factors set forth below.
ST. PAUL
The St. Paul Board determined by the unanimous vote of all directors present
at the meeting of the St. Paul Board on January 19, 1998 that the terms of the
Merger Agreement and the transactions contemplated thereby are in the best
interests of St. Paul and its shareholders. In reaching its determination, the
St. Paul Board considered that the Merger:
(i) will add scale and geographic diversification to St. Paul's existing
businesses;
(ii) will add USF&G's businesses, most of which are significantly
similar to St. Paul's existing businesses, thereby facilitating the
integration of the USF&G and St. Paul businesses;
(iii) should permit considerable cost savings as compared to operating
the two companies independently;
(iv) will make St. Paul the eighth largest property and casualty
insurance underwriter in the United States (based on the 1996 net written
premiums of the two companies), helping St. Paul to achieve its objective of
strategic growth;
(v) will enable St. Paul to add to its management individuals from USF&G
management who can help grow the combined businesses;
(vi) will substantially increase St. Paul's assets under management;
(vii) is conditioned upon receipt of favorable letters from independent
accountants regarding concurrence with St. Paul's management's conclusion as
to the appropriateness of pooling of interests accounting treatment for the
Merger under generally accepted accounting principles;
In addition, the St. Paul Board considered:
(viii) that based on the advice of its tax counsel, the Merger should
constitute a reorganization under the Code;
(ix) the current and historical trading prices and values of St. Paul
Common Stock and USF&G Common Stock and the current and historical trading
multiples of other comparable companies;
(x) the reports from the management of St. Paul on the results of their
due diligence investigation of USF&G and plans for combining the business of
St. Paul and USF&G; and
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<PAGE>
(xi) the opinion of Credit Suisse First Boston Corporation ("Credit
Suisse First Boston") to the effect that, as of the date of such opinion and
based upon, and subject to, certain matters stated therein, the Exchange
Ratio was fair from a financial point of view to St. Paul.
St. Paul weighed these advantages, opportunities and general considerations
against the following risks associated with the Merger:
(i) the challenges and costs (expected to result in a special charge to
1998 earnings of $300 to $500 million) inherent in the integration of a
business the size of USF&G into St. Paul's existing businesses, particularly
at a time when the marketplace is extraordinarily competitive, and the
management time and effort from both St. Paul and USF&G executives that will
be required to successfully achieve that integration;
(ii) the risk that USF&G's reserves will prove to be less adequate than
St. Paul believed based upon its due diligence investigation;
(iii) the risk that St. Paul will be unable to retain significant
amounts of USF&G's premium revenues; and
(iv) the risk that the Merger will not be consummated.
In view of the wide variety of factors considered by the St. Paul Board in
connection with its evaluation of the Merger and the complexity of such matters,
the St. Paul Board did not consider it practicable to, nor did it attempt to,
quantify, rank or otherwise assign relative weights to the specific factors it
considered in reaching its decision. The St. Paul Board relied on the experience
and expertise of its financial advisors for quantitative analysis of the
financial terms of the Merger. See "--Opinions of Financial Advisors--St. Paul."
In addition, the St. Paul Board did not undertake to make any specific
determination as to whether any particular factor (or any aspect of any
particular factor) was determinative to its ultimate determination or assign any
particular weight to any factor, but rather conducted a discussion of the
factors described above, including asking questions of St. Paul's management and
legal, financial and accounting advisors, and reached a general consensus that
the Merger was advisable and in the best interests of St. Paul and the St. Paul
shareholders. In considering the factors described above, individual members of
the St. Paul Board may have given different weight to different factors.
RECOMMENDATION OF THE ST. PAUL BOARD
THE ST. PAUL BOARD BELIEVES THAT THE TERMS OF THE MERGER ARE FAIR TO AND IN
THE BEST INTERESTS OF ST. PAUL AND ITS SHAREHOLDERS AND RECOMMENDS TO ITS
SHAREHOLDERS THAT THEY VOTE "FOR" THE ISSUANCE OF SHARES OF ST. PAUL COMMON
STOCK PURSUANT TO THE MERGER AGREEMENT.
USF&G
The USF&G Board made its determination after careful consideration of, and
based on, a number of factors including the material factors described below:
(i) all of the reasons described in the first paragraph under the
caption "--Reasons for the Merger; Recommendations of the Boards of
Directors";
(ii) the current industry, economic and market conditions, including in
particular the intensification of competition in many lines of USF&G's
business and the resulting downward pressure on pricing, together with the
recent consolidation trend within the insurance business;
(iii) the prospects of USF&G as a stand-alone company given the
increased dominance in various commodity insurance lines of business of
large insurance companies with significant scale and critical mass as well
as the risk to USF&G's specialty businesses if USF&G's financial strength
were to erode;
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<PAGE>
(iv) the extensive investigation of strategic alternatives by USF&G and
Goldman, Sachs & Co. ("Goldman Sachs"), including consideration of USF&G
merging with another large insurance company, USF&G continuing as an
independent company with growth through internal expansion and acquisitions,
USF&G spinning off or selling its commodity businesses and continuing as an
independent specialty property and casualty insurer, and a sale of USF&G
either as an entity or through the separate sales of its individual lines of
businesses;
(v) the strategic fit between USF&G and St. Paul, including the
possibility for significant synergies and cost savings, and the fact that
the Merger will create the eighth largest property and casualty insurer in
the United States (based on the 1996 net written premiums of the two
companies);
(vi) the fact that pursuant to the Merger Agreement USF&G shareholders
would, prior to the Effective Time, share in the appreciation in the value
of St. Paul Common Stock if the Average Stock Price were to be greater than
$78;
(vii) the current dividend paid on St. Paul Common Stock compared to the
current dividend paid on USF&G Common Stock;
(viii) the analyses prepared by Goldman Sachs and BT Alex. Brown
Incorporated ("BT Alex. Brown") and the opinion of each of them to the
effect that, as of the date of such opinions, the Exchange Ratio was fair,
from a financial point of view, to the USF&G shareholders;
(ix) the fact that the Merger is conditioned upon receipt of favorable
letters from independent accountants regarding concurrence with USF&G's
management's conclusion as to the appropriateness of pooling of interests
accounting treatment for the Merger under generally accepted accounting
principles;
(x) the ability to consummate the Merger as a reorganization under the
Code;
(xi) the provisions of the Merger Agreement that permit USF&G, under
certain circumstances, to furnish information to and participate in
substantive negotiations and discussions with third parties and to terminate
the Merger Agreement to enter into a definitive agreement with a third party
in connection with a Superior Proposal (as defined under the caption "The
Merger Agreement--Certain Covenants--Acquisition Proposals") upon the
payment of a $70 million termination fee plus up to $5 million in expense
reimbursement (see "The Merger Agreement--Termination");
(xii) the provision of the Merger Agreement that requires St. Paul to
pay USF&G a $70 million termination fee plus up to $5 million in expense
reimbursement if the St. Paul Board, in accordance with the terms of the
Merger Agreement, changes its recommendation that St. Paul's shareholders
approve the issuance of shares of St. Paul Common Stock in connection with
the Merger (see "The Merger Agreement--Termination");
(xiii) the expiration of Mr. Blake's employment contract in November
1998;
(xiv) the strength of the management team of St. Paul;
(xv) the fact that three current directors of USF&G, including Mr.
Blake, will become St. Paul directors upon consummation of the Merger (see
"The Merger Agreement--Certain Covenants-- Election to St. Paul's Board of
Directors");
(xvi) the current and historical trading prices and values of St. Paul
Common Stock and USF&G Common Stock and the current and historical trading
multiples of other comparable companies;
(xvii) the financial condition and business reputation of St. Paul;
(xviii) the impact of the Merger on USF&G's employees; and
(xix) the fact that St. Paul expects to continue to be an employer of
significance in Baltimore after the Merger notwithstanding that the
headquarters of the combined company will be located in St. Paul.
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The USF&G Board also considered (i) the risk that the benefits sought in the
Merger would not be obtained, (ii) the risk that the Merger would not be
consummated, (iii) the effect of the public announcement of the Merger on sales,
agent, broker, customer and supplier relationships, operating results and
ability to retain employees, and on the trading price of USF&G Common Stock,
(iv) the potentially substantial management time and effort that will be
required to consummate the Merger and integrate the operations of St. Paul and
USF&G, and (v) the possibility that the Stock Option Agreement and certain
provisions of the Merger Agreement might have the effect of discouraging other
persons potentially interested in merging with or acquiring USF&G. In the
judgment of the USF&G Board, the potential benefits of the Merger outweighed all
these considerations.
In view of the wide variety of factors considered by the USF&G Board in
connection with its evaluation of the Merger and the complexity of such matters,
the USF&G Board did not consider it practicable to, nor did it attempt to,
quantify, rank or otherwise assign relative weights to the specific factors it
considered in reaching its decision. The USF&G Board relied on the experience
and expertise of its financial advisors for quantitative analysis of the
financial terms of the Merger. See "--Opinions of Financial Advisors--USF&G." In
addition, the USF&G Board did not undertake to make any specific determination
as to whether any particular factor (or any aspect of any particular factor) was
determinative to its ultimate determination or assign any particular weight to
any factor, but rather conducted a discussion of the factors described above,
including asking questions of USF&G's management and legal, financial and
accounting advisors, and reached a general consensus that the Merger was
advisable and in the best interests of USF&G and the USF&G's shareholders. In
considering the factors described above, individual members of the USF&G Board
may have given different weight to different factors.
For information concerning certain interests of members of the USF&G Board
in the Merger, see "Interests of Certain Persons in the Merger."
RECOMMENDATION OF THE USF&G BOARD
THE USF&G BOARD BELIEVES THAT THE MERGER IS ADVISABLE AND IN THE BEST
INTERESTS OF THE HOLDERS OF USF&G COMMON STOCK AND RECOMMENDS TO ITS
SHAREHOLDERS THAT THEY VOTE "FOR" THE MERGER AND THE TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT.
OPINIONS OF FINANCIAL ADVISORS
ST. PAUL
St. Paul engaged Credit Suisse First Boston to act as its exclusive
financial advisor in connection with the proposed Merger. In connection with the
engagement, St. Paul requested that Credit Suisse First Boston evaluate the
fairness to St. Paul, from a financial point of view, of the Exchange Ratio. At
a meeting of the St. Paul Board on January 19, 1998, Credit Suisse First Boston
delivered to the St. Paul Board its oral opinion to the effect that, as of such
date and based upon and subject to certain matters stated in the opinion, the
Exchange Ratio was fair to St. Paul from a financial point of view. Credit
Suisse First Boston confirmed this oral opinion, delivering a written opinion to
the St. Paul Board dated January 19, 1998.
In arriving at its opinion, Credit Suisse First Boston reviewed certain
publicly available business and financial information relating to St. Paul and
USF&G, as well as the Merger Agreement. Credit Suisse First Boston also reviewed
certain other information, including financial forecasts, provided by St. Paul
and USF&G, and met with the respective managements of St. Paul and USF&G to
discuss the business and prospects of St. Paul and USF&G.
Credit Suisse First Boston also considered certain financial and stock
market data of St. Paul and USF&G, and Credit Suisse First Boston compared those
data for USF&G with similar data for other publicly held companies in businesses
similar to USF&G and considered, to the extent publicly available,
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<PAGE>
the financial terms of certain other business combinations and other
transactions which have recently been effected. Credit Suisse First Boston also
considered the results of certain discounted cash flow projections and actuarial
analysis and such other information, financial studies, analyses and
investigations and financial, economic and market criteria which Credit Suisse
First Boston deemed relevant. Credit Suisse First Boston also relied upon the
views of the respective managements of St. Paul and USF&G concerning the
business, operational and strategic benefits and implications of the Merger,
including financial forecasts provided to Credit Suisse First Boston by St. Paul
and USF&G relating to the synergistic values and operating cost savings expected
to be achieved through the combination of the operations of St. Paul and USF&G.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the foregoing information
and relied on its being complete and accurate in all material respects. With
respect to the financial forecasts, Credit Suisse First Boston assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the respective managements of St. Paul and USF&G as
to the future financial performance of St. Paul and USF&G and as to the cost
savings and other potential synergies (including the amount, timing and
achievability thereof) anticipated to result from the Merger. In addition,
Credit Suisse First Boston was not requested to make, and did not make, an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of St. Paul or USF&G. Credit Suisse First Boston assumed, with the
consent of the St. Paul Board, that the Merger would be accounted for as a
"pooling of interests" for financial accounting purposes. Credit Suisse First
Boston's opinion is necessarily based upon financial, economic, market and other
conditions as they existed and could be evaluated on the date of the opinion. No
other limitations were imposed by St. Paul on Credit Suisse First Boston with
respect to the investigations made or procedures followed by Credit Suisse First
Boston in rendering its opinion.
THE FULL TEXT OF CREDIT SUISSE FIRST BOSTON'S WRITTEN OPINION TO THE ST.
PAUL BOARD DATED JANUARY 19, 1998, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. ST. PAUL SHAREHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY AND IN
ITS ENTIRETY. CREDIT SUISSE FIRST BOSTON'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO ST. PAUL, DOES
NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR ANY RELATED TRANSACTION AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE AT THE ST. PAUL SPECIAL MEETING. THE SUMMARY OF THE OPINION OF
CREDIT SUISSE FIRST BOSTON SET FORTH IN THIS JOINT PROXY STATEMENT/ PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion for the St. Paul Board, Credit Suisse First Boston
performed a variety of financial and comparative analyses, including those
described below. The summary of Credit Suisse First Boston's analyses set forth
below does not purport to be a complete description of the analyses underlying
Credit Suisse First Boston's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. In arriving at its opinion,
Credit Suisse First Boston made qualitative judgments as to the significance and
relevance of each analysis and factor considered by it. Accordingly, Credit
Suisse First Boston believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, Credit
Suisse First Boston made numerous assumptions with respect to St. Paul, USF&G,
industry performance, regulatory, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
St. Paul and USF&G. No company, transaction or business used in such analyses as
a comparison is identical to St. Paul, USF&G or the Merger, nor is an evaluation
of the results of such analyses entirely mathematical; rather, it involves
complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition value,
public trading value or other values of the companies, their business segments
or the transactions being
20
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analyzed. The estimates contained in such analyses and the valuations resulting
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such estimates are inherently subject to substantial uncertainty.
As described above, Credit Suisse First Boston's opinion and financial analyses
were only one of many factors considered by the St. Paul Board in its evaluation
of the Merger.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in arriving at its oral opinion delivered on January
19, 1998 and its written opinion of the same date, but does not purport to be a
complete description of the analyses performed by Credit Suisse First Boston for
such purposes.
COMPARABLE PUBLIC COMPANY ANALYSIS. Credit Suisse First Boston reviewed and
compared certain actual and estimated financial, operating and stock market
information for USF&G with similar information for the following publicly traded
property and casualty insurance companies: American Financial Group, Inc., Ohio
Casualty Corporation, Old Republic International Corporation, Reliance Group
Holdings, Inc., SAFECO Corporation, St. Paul, TIG Holdings, Inc. and Travelers
Property Casualty Corp. (the "Credit Suisse First Boston Comparable Companies").
The Credit Suisse First Boston Comparable Companies were selected by Credit
Suisse First Boston because they are publicly traded companies that derive a
significant portion of their revenues from insurance lines of business similar
to USF&G's. Credit Suisse First Boston reviewed the Credit Suisse First Boston
Comparable Companies in terms of various historical financial measures and in
terms of various multiples. In particular, such analysis indicated that, as of
January 13, 1998, the per share market price of common stock of such companies
as a multiple of equity research analysts' consensus estimated earnings per
share ("EPS") for 1997 and estimated EPS for 1998 (in each case as reported by
First Call Corporation) and book value as of September 30, 1997, ranged from
11.2x to 15.7x, 11.1x to 14.1x, and 1.16x to 2.40x, respectively, for the Credit
Suisse First Boston Comparable Companies. Based on the Credit Suisse First
Boston Comparable Companies data, Credit Suisse First Boston selected a relevant
multiple range of 12.0x to 13.0x estimated 1997 EPS, 11.0x to 12.0x estimated
1998 EPS and 1.25x to 1.40x book value as of September 30, 1997, and applied
these multiples to USF&G's estimates of 1997 and 1998 EPS and book value as of
September 30, 1997 to estimate an unaffected stock price range for USF&G. Based
on the estimated EPS data and book value data for USF&G and the relevant
multiple ranges of such data, Credit Suisse First Boston calculated a valuation
range for the USF&G Common Stock (without a control premium) of $19.92 to $21.43
per share. To those results Credit Suisse First Boston added a representative
control premium of 30% giving a valuation range for the USF&G Common Stock of
$25.38 to $27.35 per share.
COMPARABLE ACQUISITIONS ANALYSIS. Credit Suisse First Boston analyzed
recent acquisitions of businesses similar to USF&G (the "Credit Suisse First
Boston Comparable Acquisitions"), and calculated the equity transaction value
and implied multiples of selected financial data for such acquisitions. The
Credit Suisse First Boston Comparable Acquisitions were selected by Credit
Suisse First Boston because they involved acquisitions of companies that derive
a significant portion of their revenues from insurance lines of business similar
to USF&G's. In its analysis, Credit Suisse First Boston reviewed information
relating to most of the acquisitions of U.S. property and casualty insurers
since 1990 involving consideration of $25 million or more, giving particular
emphasis to recent transactions, including: General Accident Plc's acquisition
of Canadian General Insurance Group, SAFECO Corporation's acquisition of
American States Financial Corp., St. Paul's acquisition of Northbrook Holdings
Inc. and Travelers Group Inc.'s acquisition of Aetna Life & Casualty's property
and casualty operations. From the Credit Suisse First Boston Comparable
Acquisitions, Credit Suisse First Boston derived a relevant multiple range of
15.0x to 17.0x latest twelve months net operating income and 1.4x to 1.7x book
value. Applying these multiples to USF&G's comparable financial data resulted in
a range of equity values for USF&G Common Stock of $22.19 to $26.75 per share.
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DISCOUNTED CASH FLOW ANALYSIS. Based upon assumptions provided by St. Paul,
Credit Suisse First Boston projected financial results for the U.S. property and
casualty operations of USF&G for a ten-year period, and discounted to present
value the distributable dividends in each year and the terminal value in the
final projection year employing discount rates ranging from 10.5% to 12.5%.
Terminal values were estimated by Credit Suisse First Boston based on multiples
of final year Generally Accepted Accounting Principles ("GAAP") net income
ranging from 10.0x to 16.0x and based on multiples of final year GAAP book value
ranging from 1.3x to 1.6x. To the resulting value for USF&G's U.S. property and
casualty operations, Credit Suisse First Boston added value ranges for the life
insurance operations of USF&G based on analyses similar to those described above
under the captions "--Comparable Public Company Analysis" and "Comparable
Acquisitions Analysis," and consultations with actuaries and value ranges for
the off-shore property and casualty operations of USF&G based on multiples of
their book values. Credit Suisse First Boston performed several sensitivity
analyses with respect to the assumptions regarding loss ratios, synergies,
reserve adequacy and growth prospects. Credit Suisse First Boston calculated a
range of discounted cash flow values for USF&G Common Stock of $18.41 to $21.51
per share.
BREAK-UP ANALYSIS. Credit Suisse First Boston separately analyzed each of
USF&G's segments: Property and Casualty Insurance/Corporate, F&G Re/Discover Re
and Fidelity and Guaranty Life. For each segment Credit Suisse First Boston
performed an analysis of recent acquisitions of businesses similar to those of
the segment and an analysis comparing certain actual and estimated financial and
operating information for the segment with similar information for public
companies deriving a significant portion of revenue from businesses similar to
those of the segment and then calculated an aggregate value range for the three
segments. Under the above described methodology, Credit Suisse First Boston
calculated a range of values for USF&G Common Stock of $22.95 to $27.50 per
share.
OTHER ANALYSES. Credit Suisse First Boston analyzed the impact on estimated
St. Paul EPS from the addition of the estimated USF&G earnings and issuance of
additional shares of St. Paul Common Stock in the Merger. Estimated St. Paul
earnings were provided by St. Paul and estimated USF&G earnings were based upon
assumptions provided by St. Paul. Credit Suisse First Boston also analyzed the
historical stock prices of St. Paul and USF&G, and the ratio of such prices, as
well as the relative contribution of St. Paul and USF&G to several financial and
operating measures of the pro forma combined company (based on historical
financial and operating data). In addition, Credit Suisse First Boston reviewed
and analyzed selected investment research reports on USF&G and the property and
casualty insurance industry and analyzed certain publicly available information
regarding the foregoing.
Credit Suisse First Boston has advised St. Paul that, in the ordinary course
of business, it and its affiliates may actively trade the securities of St. Paul
and USF&G for its and such affiliates' own account or for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Credit Suisse First Boston was selected by St. Paul as its financial advisor
based on its reputation, experience and expertise. Credit Suisse First Boston is
an internationally recognized investment banking firm that is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwriting, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Credit Suisse First Boston
is familiar with St. Paul, having provided advisory services over a period of
years, including acting as advisor for St. Paul for its acquisition of
Northbrook Holdings Inc. in July 1996. Credit Suisse First Boston has provided
investment banking services to USF&G from time to time, including acting as a
co-manager of a 1995 offering of debt securities of USF&G.
Pursuant to the terms of Credit Suisse First Boston's engagement, St. Paul
has agreed to pay Credit Suisse First Boston a transaction fee of $7,000,000
upon the Closing. St. Paul has also agreed to reimburse Credit Suisse First
Boston for all out-of-pocket expenses, including the fees and expenses of legal
counsel and any other advisor retained by Credit Suisse First Boston, and to
indemnify Credit Suisse First Boston
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and related persons against certain expenses and liabilities including
liabilities under the federal securities laws arising in connection with its
engagement.
USF&G
GOLDMAN SACHS. On January 18, 1998, Goldman Sachs delivered its oral opinion
to the board of directors of USF&G, which was subsequently confirmed in writing
in an opinion dated January 19, 1998, that, as of such dates and based upon and
subject to the factors and assumptions set forth in such written opinion, the
Exchange Ratio pursuant to the Merger Agreement was fair from a financial point
of view to the holders of USF&G Common Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED JANUARY 19,
1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND MATTERS
CONSIDERED IN, AND THE LIMITATIONS ON, THE REVIEW UNDERTAKEN IN CONNECTION WITH
SUCH OPINION, IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX D
AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF SHARES OF USF&G COMMON STOCK
ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY AND CONSIDER IT
CAREFULLY. THE SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. GOLDMAN SACHS' OPINION
WAS DIRECTED TO THE USF&G BOARD IN CONNECTION WITH, AND FOR THE PURPOSES OF, ITS
EVALUATION OF THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER OF USF&G AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
MERGER.
In connection with its opinion, Goldman Sachs reviewed, among other things,
the Merger Agreement; Annual Reports to Shareholders and Annual Reports on Form
10-K of USF&G and St. Paul for the five years ended December 31, 1996; certain
interim reports to shareholders and Quarterly Reports on Form 10-Q of USF&G and
St. Paul; certain other communications from USF&G and St. Paul to their
respective shareholders; certain internal financial analyses and forecasts for
USF&G and St. Paul prepared by their respective managements; and certain
projected cost savings and operating synergies resulting from the Merger
prepared by the management of St. Paul and reviewed by the management of USF&G.
Goldman Sachs also held discussions with members of the senior management of
USF&G and St. Paul regarding the strategic rationale for, and the potential
benefits of, the transaction contemplated by the Merger Agreement and the past
and current business operations, financial condition and future prospects of
their respective companies. In addition, Goldman Sachs reviewed the reported
price and trading activity for USF&G Common Stock and St. Paul Common Stock,
compared certain financial and stock market information for USF&G and St. Paul
with similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the insurance industry specifically and other industries
generally and performed such other studies and analyses as it considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. St. Paul did not make
available to Goldman Sachs in writing projections of expected future performance
beyond 1998. Accordingly, Goldman Sachs' review with respect to such information
was limited to discussions with senior managers of St. Paul and the earnings and
growth estimates of research analysts for such periods. Goldman Sachs assumed,
with the consent of the USF&G Board, that the projected cost savings and
operating synergies resulting from the Merger were reasonably prepared and
reflected the best currently available judgments and estimates of the
managements of St. Paul and USF&G and that such forecasts of cost savings and
operating synergies will be realized in the amounts and at the times
contemplated thereby. In addition, in rendering its opinion Goldman Sachs took
into account, with the consent of the USF&G Board, USF&G's management's views as
to the risks and uncertainties associated with USF&G achieving management's
projections in the amounts and at the times indicated therein. Also, Goldman
Sachs has not made an independent evaluation or appraisal of the assets and
liabilities (including the loss and loss adjustment expense reserves) of USF&G
or St. Paul or any of their subsidiaries. Goldman
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Sachs has assumed that the transactions contemplated by the Merger Agreement
will be accounted for as a "pooling of interests" for accounting purposes.
The following is a summary of the material financial analyses used by
Goldman Sachs in providing its written opinion and does not purport to be a
complete description of the analyses performed by Goldman Sachs.
SUMMARY OF TERMS OF PROPOSED TRANSACTION. Goldman Sachs reviewed the terms
of the proposed Merger, including the nominal value per share of USF&G Common
Stock (the "Nominal Value"), the aggregate consideration, the Exchange Ratio and
the expected method of accounting. Assuming an Average Stock Price of $78.13
(the closing price on the NYSE of St. Paul Common Stock on January 16, 1998) and
applying an Exchange Ratio equal to 0.2821, Goldman Sachs calculated a Nominal
Value of $22.04 per share of USF&G Common Stock, as compared to $21.44 per share
of USF&G Common Stock, the closing price on the NYSE on January 16, 1998.
CONTRIBUTION ANALYSIS. Goldman Sachs reviewed certain historical and
estimated operating and financial information and analyzed (i) the pro forma
ownership of the combined company by the USF&G and St. Paul shareholders and
(ii) the respective contributions of earnings and shareholder equity by USF&G
and St. Paul to the combined company on a pro forma basis before taking into
account any of the possible benefits that may be realized following the Merger.
The review was based on financial data and projections for USF&G and St. Paul
for 1997 and 1998 provided by their respective managements and by Institutional
Brokers Estimate Service ("IBES"). Goldman Sachs' analysis of pro forma
ownership assumed per share prices of St. Paul Common Stock of $74.00 and $78.00
and indicated that USF&G shareholders' pro forma ownership of the combined
company would range from 29% to 28%. Based on the closing prices of USF&G Common
Stock and St. Paul Common Stock on the NYSE on January 16, 1998, the equity
market capitalization of USF&G represented 27% of the aggregate equity market
capitalization of USF&G and St. Paul on such date. The earnings contribution
analysis indicated that USF&G would have contributed (i) 26% and 28% of the
combined company's earnings based on USF&G's and St. Paul's respective
management's earnings forecasts and (ii) 27% and 29% of the combined company's
earnings based on IBES earnings estimates, in the years ended December 31, 1997
and 1998, respectively. The contribution analysis also indicated that USF&G
would have contributed 32% of the combined company's common equity at December
31, 1997.
SUMMARY OF FINANCIAL IMPACT ON USF&G COMMON STOCK. Goldman Sachs prepared a
summary analysis of the pro forma financial impact of the Merger on USF&G Common
Stock. Using forecasts of 1998 and 1999 GAAP operating earnings accretion from
IBES of 6.6% and 13.7%, together with estimated synergies of $50 million in 1998
and an additional $100 million in 1999, and assuming an Exchange Ratio of 0.2821
with an implied Nominal Value per share of $22.04 and that St. Paul Common Stock
continues to trade at the same multiple of GAAP operating earnings as it did as
of January 18, 1998, Goldman Sachs reviewed the pro forma value of USF&G Common
Stock based on estimated earnings of the combined company. Goldman Sachs'
analysis indicated a value per share of USF&G Common Stock of $23.49 based on
forecasted 1998 GAAP operating earnings and $25.06 based on forecasted 1999 GAAP
operating earnings. Goldman Sachs also calculated multiples of Nominal Value to
GAAP operating earnings, which, based on a Nominal Value of $22.04, indicated
multiples of (i) 14.0x 1997 GAAP operating earnings and 13.4x 1998 GAAP
operating earnings based on estimates provided by USF&G management and (ii)
14.2x 1997 GAAP operating earnings and 11.9x 1998 GAAP operating earnings based
on IBES earnings estimates. The analysis also indicated that the pro forma
dividend per share of USF&G Common Stock would be $0.53, an 89.4% increase from
USF&G's current dividend rate. The analyses of Nominal Value to common equity
and statutory surplus indicated that the Nominal Value was 1.44x USF&G's GAAP
common equity (based on USF&G's estimate of December 31, 1997 GAAP common equity
of $1,910 million, calculated before adjustment for net unrealized gains
pursuant to SFAS 115 Accounting for Certain Investments In Debt and Equity
Securities) and 1.84x USF&G's statutory surplus (based on USF&G's September 30,
1997 statutory surplus of $1,500 million).
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DAILY EXCHANGE RATIO HISTORY. Goldman Sachs divided the daily price of
USF&G Common Stock by the daily price of St. Paul Common Stock (the "Daily
Exchange Ratio") for each day during the period from January 16, 1997 through
January 16, 1998, and reviewed the Daily Exchange Ratio for such period. During
this period the Daily Exchange Ratio ranged from 0.2290 to 0.3519. This review
also indicated that during the period from December 15, 1997 to January 15,
1998, the Daily Exchange Ratio ranged from 0.2551 to 0.2811. Goldman Sachs also
divided a Nominal Value of $22 per share by the daily price of St. Paul Common
Stock (the "Nominal Exchange Ratio") for each day during the period from
December 15, 1997 through January 15, 1998 and reviewed the Nominal Exchange
Ratio for such period. During this period, the Nominal Exchange Ratio ranged
from 0.2637 to 0.2907.
RELATIVE EXCHANGE RATIO AND COLLAR ANALYSIS. Goldman Sachs reviewed
pre-announcement historical trading prices for USF&G Common Stock and St. Paul
Common Stock for each of the following dates or periods: the closing price per
share on January 16, 1998 and the average closing prices per share for the prior
5 days, 10 days, 20 days and 30 days. For each of these periods, Goldman Sachs
compared the closing price per share or the average closing price of USF&G
Common Stock to the closing price per share or the average closing price of St.
Paul Common Stock and derived for each such period the following implied
exchange ratios: 0.2821 based on the January 16, 1998 closing price per share of
each of USF&G Common Stock and St. Paul Common Stock; 0.2722 based on the 5 day
average closing share price of each of USF&G Common Stock and St. Paul Common
Stock; 0.2723 based on the 10 day average closing share price of each of USF&G
Common Stock and St. Paul Common Stock; 0.2685 based on the 20 day average
closing share price of each of USF&G Common Stock and St. Paul Common Stock; and
0.2675 based on the 30 day average closing share price of each of USF&G Common
Stock and St. Paul Common Stock. Goldman Sachs reviewed and compared the
Exchange Ratio and share price of USF&G Common Stock which, in accordance with
the terms of the Merger Agreement, would be associated with different St. Paul
Common Stock prices per share and the implied 1998 price/earnings ratios for St.
Paul Common Stock associated with such prices. The analysis indicated that at a
price per share of St. Paul Common Stock of $65.00 and an implied 1998
price/earnings ratio of 10.7x, the Exchange Ratio would be equal to 0.2973 and
the per share price of USF&G Common Stock would be $19.32 and at a price per
share of St. Paul Common Stock of $90.00 and implied 1998 price earnings/ratio
of 14.9x, the Exchange Ratio would be 0.2821 and the share price of USF&G Common
Stock would be $25.38. Based on 1998 IBES earnings estimates for each company,
other than USF&G for which management forecasts were used, Goldman Sachs also
compared the 1998 price/earnings multiples of certain insurance companies, which
ranged from 11.5x to 16.4x, to the 1998 price earnings multiples of USF&G
(11.6x) and St. Paul (12.9x).
SELECTED COMPANIES ANALYSIS. Goldman Sachs reviewed and compared certain
financial information relating to the Company to corresponding financial
information, ratios and public market multiples for two groups of publicly
traded corporations: American Financial Group, Inc., Citizens Corporation,
Horace Mann Educators Corporation, Leucadia National Corporation ("Leucadia"),
Ohio Casualty Corporation, Old Republic International Corporation, Orion Capital
Corporation, Reliance Group Holdings, Inc., Selective Insurance Group, Inc., TIG
Holdings Inc. and W. R. Berkley Corporation (the "Mid-Cap Companies") and The
Allstate Corporation, American International Group, The Chubb Corp., CIGNA
Corporation, Cincinnati Financial Corp., CNA Financial Corp., General Re
Corporation, The Hartford Group, Inc., The Progressive Corporation, St. Paul,
SAFECO Corporation and Travelers Property Casualty Corp. (the "Large-Cap
Companies" and, together with the Mid-Cap Companies, the "Goldman Sachs Selected
Companies"). The Goldman Sachs Selected Companies were chosen because they are
publicly traded companies with operations that for purposes of analysis may be
considered similar to those of USF&G. Goldman Sachs calculated and compared
various financial multiples and ratios for USF&G with those of the Goldman Sachs
Selected Companies using the respective closing price per share for each of the
Selected Companies and USF&G on January 16, 1998, which in the case of USF&G was
$21.44 per share and in the case of St. Paul was $78.13 per share. The multiples
and ratios for USF&G, St. Paul and the Goldman Sachs Selected Companies were
based on the most recent publicly available information and
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from estimates provided by IBES. In addition, the analysis also included certain
multiples for USF&G based on earnings estimates provided by management of USF&G.
With respect to the Goldman Sachs Selected Companies, Goldman Sachs
considered, among other multiples and ratios, (a) the January 16, 1998 closing
price per share as a percentage of the 52 week high, (b) the price/earnings
multiple based on 1997, 1998 and 1999 IBES estimates, (c) the IBES estimate of
1997 to 1998 earnings per share growth rates ("1998 growth rates"), (d) the IBES
estimate of five year earnings per share growth rate ("five year growth rate"),
(e) the ratio of the 1997 price/earnings multiple to the five year growth rate,
(f) the market price to adjusted book value (common equity before adjustment for
net unrealized gains pursuant to FAS 115) multiple, (g) the return on average
common equity ("ROACE") based on latest twelve months ("LTM"), ended September
30, 1997, (h) the return on average assets ("ROAA") based on LTM ended September
30, 1997, (i) the dividend yield and (j) the debt to capital ratio. Because
ratios and multiples for Leucadia differed significantly from those of the other
Mid-Cap Companies, Leucadia was excluded from the calculation of all means for
the Mid-Cap Companies with respect to the ratios and multiples compared as part
of Goldman Sachs' Selected Companies analysis.
Goldman Sachs' analysis indicated that: (i) the January 16, 1998 closing
price as a percentage of the 52 week high ranged from 85.4% to 98.3% with a mean
of 91.2% for the Mid-Cap Companies, and from 85.0% to 99.2% with a mean of 94.3%
for Large Cap Companies, as compared with 84.1% for USF&G and 91.4% for St.
Paul; (ii) 1997 price/earnings multiples ranged from 12.3x to 36.8x with a mean
of 16.3x for the Mid-Cap Companies, and from 12.1x to 30.8x with a mean of 18.4x
for the Large Cap Companies, as compared to 13.8x and 13.9x for USF&G (based on
IBES and management estimates, respectively) and 13.9x for St. Paul; (iii) 1998
price/earnings multiples ranged from 11.1x to 33.8x with a mean of 14.4x for the
Mid-Cap Companies, and from 11.4x to 28.3x with a mean of 16.6x for the Large
Cap Companies, as compared to 11.6x and 13.0x for USF&G (based on IBES and
management estimates, respectively) and 12.9x for St. Paul; (iv) 1999
price/earnings multiples ranged from 10.3x to 30.5x with a mean of 13.2x for the
Mid-Cap Companies, and from 10.5x to 26.5x with a mean of 15.3x for the Large
Cap Companies, as compared to 10.7x and 11.6x for USF&G (based on IBES and
management estimates, respectively) and 11.7x for St. Paul; (v) 1998 growth
rates ranged from 7.8% to 28.9% with a mean of 14.1% for the Mid-Cap Companies,
and from 3.9% to 16.1% with a mean of 10.5% for the Large Cap Companies, as
compared to 19.4% for USF&G and 7.8% for St. Paul; (vi) five year growth rates
ranged from 8.0% to 14.5% with a mean of 11.7% for the Mid-Cap Companies, and
from 9.5% to 15.0% with a mean of 12.0% for the Large Cap Companies, as compared
to 12.0% for USF&G and 10.0% for St. Paul; (vii) the ratios of the 1997
price/earning multiple to the five year growth rate ranged from 0.93x to 3.35x
with a mean of 1.44x for the Mid-Cap Companies, and from 1.21x to 3.08x with a
mean of 1.55x for the Large Cap Companies, as compared to 1.15x for USF&G and
1.39x for St. Paul; (viii) the market price to adjusted book value multiple
ranged from 1.34x to 3.12x with a mean of 1.94x for the Mid-Cap Companies, and
from 1.17x to 4.31x with a mean of 2.70x for the Large Cap Companies, as
compared to 1.53x for USF&G and 1.73x for St. Paul; (ix) ROACE ranged from 0.0%
to 28.2% with a mean of 14.2% for the Mid-Cap Companies, and from 6.9% to 24.5%
with a mean of 13.9% for the Large Cap Companies, as compared to 10.3% for USF&G
and 11.4% for St. Paul; (x) ROAA ranged from 0.0% to 4.1% with a mean of 2.3%
for the Mid-Cap Companies, and from 0.9% to 5.0% with a mean of 2.2% for the
Large Cap Companies, as compared to 1.4% for USF&G and 2.2% for St. Paul; (xi)
dividend yield ranged from 0.7% to 4.1% with a mean of 2.0% for the Mid-Cap
Companies, and from 0.0% to 2.6% with a mean of 1.2% for the Large Cap
Companies, as compared to 1.3% for USF&G and 2.4% for St. Paul; and (xii) the
debt to capital ratio ranged from 0.0% to 53.7% with a mean of 24.2% for the
Mid-Cap Companies, and from 5.8% to 28.6% with a mean of 21.4% for the Large Cap
Companies, as compared to 25.6% for USF&G and 17.0% for St. Paul.
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PRO FORMA MERGER ANALYSIS. Goldman Sachs analyzed the impact of the Merger
on the combined company's earnings per share, based on IBES estimates and based
on management estimates. This analysis was performed using (i) 1998 and 1999
IBES earnings estimates for each of USF&G and St. Paul and (ii) in the case
USF&G, 1998 and 1999 earnings estimates provided by its management and, in the
case of St. Paul, 1998 earnings estimates provided by its management, which for
purposes of 1999, Goldman Sachs assumed would increase by 5%. For purposes of
this analysis, Goldman Sachs assumed that the Merger would produce pretax
synergies of $50 million in 1998 and an additional $100 million in 1999. Such
analysis indicated earnings per share accretion for 1998 and 1999. The analysis
also compared IBES estimates of St. Paul Common Stock earnings per share on a
stand alone basis to the pro forma earnings per share of the combined companies
giving effect to the Merger based on St. Paul's management's estimates. This
analysis indicated that, relative to IBES stand alone estimates, the impact of
the Merger on St. Paul Common Stock earnings per share would be slightly
dilutive in 1998 and accretive in 1999.
DISCOUNTED CASH FLOW ANALYSIS. Goldman Sachs prepared discounted cash flow
analyses for USF&G Common Stock on a stand alone basis (the "Stand Alone
Analysis") and giving effect to the Merger (the "Pro Forma Analysis") through
December 31, 2000. The analyses calculated the net present value of the December
31, 2000 stock price and of the quarterly dividends through the discounting
period and was performed using discount rates ranging from 10.0% to 17.5% and
price/earning multiples ranging from 9.0x to 15.0x in the Stand Alone Analysis
and 11.0x to 17.0x in the Pro Forma Analysis. The analysis was based on the
earnings estimates of USF&G management through 2000, assumed a 17% dividend
payout and 10% earnings growth in 2001 and was performed both with and without
giving effect to a proposed stock repurchase program. The Stand Alone Analysis,
with giving effect to the repurchase program, indicated present values per share
of USF&G Common Stock ranging from $15 to $29 and without giving effect to the
repurchase program ranging from $14 to $28.
The Pro Forma Analysis gave effect to the Merger using an Exchange Ratio of
0.282 and assumed pretax synergies of $50 million in 1998 and an additional $100
million in 1999. The Pro Forma Analysis used estimates from USF&G's and St.
Paul's management and was performed using earnings growth rate assumptions for
2001 of 10%, 12.5% and 15%. The Pro Forma Analysis indicated present values per
share of USF&G Common Stock ranging from $18 to $33 using either of the 10% or
12.5% growth rate assumptions for 2001 earnings and from $19 to $35 using the
15% growth rate assumption for 2001 earnings.
SELECTED TRANSACTION ANALYSIS. Goldman Sachs reviewed certain information
relating to selected transactions in the U.S. property and casualty insurance
industry involving aggregate consideration in excess of $30 million for the
period from February 14, 1989 to December 22, 1997. Such analysis indicated, to
the extent such information was available, (i) high, low, mean and median
multiples of aggregate consideration as a multiple of (a) LTM GAAP net income of
47.1x, 5.3x, 23.7x and 20.4x, respectively, (b) tangible GAAP book value of
8.34x, 0.55x, 1.92x and 1.36x, respectively, (c) prior year net income
calculated on a statutory basis of 70.0x, 6.2x, 20.7x and 16.7x, respectively,
(d) prior year surplus calculated on a statutory basis of 6.33x, 0.6x, 2.1x and
1.7x, respectively and (ii) high, low, mean and median percentages of the
premium of the aggregate consideration over market of 97.3%, 1.4%, 33.6% and
28.3%, respectively.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. USF&G selected Goldman
Sachs as its financial advisor because it is a nationally recognized investment
banking firm that has substantial experience in transactions similar to the
Merger. Goldman Sachs is familiar with USF&G, having provided certain investment
banking services for USF&G from time to time, including, without limitation,
having acted as lead managing underwriter for USF&G's offering in 1994 of its
Zero Coupon Convertible Subordinated Notes due 2009, its 8.50% Series A Capital
Securities in 1996 and its 8.312% Series C Capital Securities in 1997; having
acted as co-lead managing underwriter in 1993 for its 8.375% Senior Notes due
2001 and in
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1997 for its 8.47% Series B Capital Securities; and having acted as its
financial advisor in connection with, and having participated in certain of the
negotiations leading to, the Merger Agreement. Robert J. Hurst, a Managing
Director and Vice Chairman of Goldman Sachs, is a Director of USF&G. Goldman
Sachs has also provided certain investment banking services to St. Paul from
time to time, including, without limitation, having acted as St. Paul's
financial advisor in connection with its divestiture of its holdings in the
Minet Group and entry into certain interest rate and currency exchange
agreements in 1997 and in connection with St. Paul's reinsurance arrangements
with respect to George Town Re in 1996; having acted as co-placement agent in
1996 for St. Paul's $275 million Medium Term Notes and in 1995 for its $207
million offering of 6% Convertible Monthly Income Preferred Securities; and
Goldman Sachs may provide investment banking services to St. Paul or its
subsidiaries in the future.
Goldman Sachs provides a full range of financing, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of USF&G or St. Paul for its own account or the account of customers.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above, without considering the
analyses as a whole, could create an incomplete view of the processes underlying
Goldman Sachs' opinion. In arriving at its fairness determination, Goldman Sachs
considered the results of all such analyses and did not attribute any particular
weight to any analysis or factor considered by it; rather, Goldman Sachs made
its determination as to fairness on the basis of its experience and professional
judgment after considering the results of all such analyses. The analyses were
prepared for the purpose of Goldman Sachs providing its opinion to the USF&G
Board as to the fairness from a financial point of view to holders of shares of
USF&G Common Stock of the Exchange Ratio pursuant to the Merger Agreement, and
do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Because such analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their respective
advisors, none of USF&G, St. Paul, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those forecasted.
As described above, Goldman Sachs' opinion to the USF&G Board was one of many
factors taken into consideration by the USF&G Board in making its determination
to approve the merger Agreement.
Pursuant to a letter agreement, dated March 7, 1997, between Goldman Sachs
and USF&G, USF&G will pay Goldman Sachs upon the consummation of the Merger a
transaction fee based on the aggregate consideration (which amount includes
amounts paid to holders of convertible securities of USF&G) (the "Aggregate
Consideration"). The transaction fee will be (i) 0.49% of the Aggregate
Consideration paid for the first $30.00 per share of USF&G Common Stock and (ii)
1.75% of the Aggregate Consideration paid in excess of $30.00 per share of USF&G
Common Stock; provided, that the transaction fee shall not exceed 0.65% of the
Aggregate Consideration. In addition, USF&G has agreed to reimburse Goldman
Sachs for reasonable out-of-pocket expenses, including the fees and
disbursements of its counsel, plus any sales, use or similar taxes arising in
connection with its engagement and to indemnify Goldman Sachs against certain
liabilities relating to or arising out of its engagement, including liabilities
under the federal securities laws.
BT ALEX. BROWN USF&G retained BT Alex. Brown on October 31, 1997 to act as
financial advisor to the USF&G Board in connection with the Merger. At the
January 18, 1998 meeting of the USF&G Board, representatives of BT Alex. Brown
made a presentation with respect to the Merger and rendered to the USF&G Board
BT Alex. Brown's oral opinion, subsequently confirmed in writing as of the same
date, that, as of such date, and subject to the assumptions made, matters
considered and limitations set forth in such written opinion (the "BT Alex.
Brown Opinion") and summarized below, the Exchange Ratio was fair, from a
financial point of view, to the holders of USF&G Common Stock.
THE FULL TEXT OF THE BT ALEX. BROWN OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW
UNDERTAKEN, IS ATTACHED HERETO AS ANNEX E AND IS
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INCORPORATED HEREIN BY REFERENCE. USF&G'S SHAREHOLDERS ARE URGED TO READ THE BT
ALEX. BROWN OPINION IN ITS ENTIRETY. THE BT ALEX. BROWN OPINION ADDRESSES ONLY
THE FAIRNESS OF THE EXCHANGE RATIO TO THE HOLDERS OF USF&G COMMON STOCK FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY USF&G
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE USF&G SPECIAL MEETING.
THE OPINIONS OF BT ALEX. BROWN HAVE BEEN RENDERED TO THE USF&G BOARD IN
CONNECTION WITH ITS CONSIDERATION OF THE MERGER. THE DISCUSSION OF THE BT ALEX.
BROWN OPINION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE BT ALEX. BROWN OPINION.
In connection with rendering the BT Alex. Brown Opinion, BT Alex. Brown
reviewed certain publicly available financial information concerning USF&G and
St. Paul and certain internal analyses and other information furnished to BT
Alex. Brown by USF&G and St. Paul. BT Alex. Brown also held discussions with
members of the senior management of each of USF&G and St. Paul regarding the
businesses and prospects of their respective companies and the joint prospects
of a combined company. In addition, BT Alex. Brown (i) reviewed the reported
prices and trading activity for the USF&G Common Stock and the St. Paul Common
Stock, (ii) compared certain financial and stock market information for USF&G
and St. Paul with similar information for certain other companies whose
securities are publicly traded, (iii) reviewed the financial terms of certain
recent business combinations which BT Alex. Brown deemed comparable in whole or
in part to the Merger, (iv) reviewed the terms of the Merger Agreement and
certain related documents, and (v) performed such other studies and analyses and
considered such other factors as BT Alex. Brown deemed appropriate.
BT Alex. Brown did not independently verify, nor assume any responsibility
for verifying, the information described above and for purposes of the BT Alex.
Brown Opinion assumed the accuracy and completeness thereof. With respect to the
information relating to the prospects of USF&G and St. Paul and the proposed
combined company, BT Alex. Brown assumed that such information reflected the
best currently available judgments and estimates of the management of each of
USF&G and St. Paul as to the likely future financial performances of their
respective companies and of the proposed combined company. In addition, BT Alex.
Brown did not make an independent evaluation or appraisal of the assets or
liabilities of USF&G or St. Paul, nor has BT Alex. Brown been furnished with any
such evaluations or appraisals. BT Alex. Brown is not an actuary and BT Alex.
Brown's services did not include any actuarial determinations or evaluations or
an attempt to evaluate actuarial assumptions. The BT Alex. Brown Opinion is
based on market, economic and other conditions as they existed and could be
evaluated as of the date thereof.
In arriving at its opinion, BT Alex. Brown was not authorized to solicit,
and did not solicit, interest from any third party with respect to the
acquisition of USF&G or any of its assets. In addition, BT Alex. Brown did not
investigate alternative transactions that may have been available to the Company
or have any discussions or negotiations with any third parties in connection
with the Merger or any other transaction involving the Company. BT Alex. Brown,
however, did review with Goldman Sachs and management of USF&G the discussions
that Goldman Sachs and management of USF&G had with certain third parties with
respect to such third parties' potential interest in such a transaction.
The following is a summary of certain of the analyses performed and factors
considered by BT Alex. Brown in connection with the rendering of the BT Alex.
Brown Opinion.
HISTORICAL FINANCIAL POSITION. BT Alex. Brown reviewed and analyzed the
historical and current financial condition of USF&G and St. Paul, which review
and analysis included (i) an assessment of USF&G's and St. Paul's recent GAAP
and statutory financial statements; (ii) an analysis of USF&G's and St. Paul's
revenue and operating earnings trends; and (iii) an assessment of USF&G's and
St. Paul's capitalization, insurance underwriting performance and return on
equity.
HISTORICAL STOCK PRICE PERFORMANCE. BT Alex. Brown's analysis of the price
performance of USF&G and St. Paul consisted of an historical analysis of closing
prices and trading volumes for the four-year period ended January 16, 1998.
Additionally, BT Alex. Brown compared USF&G's and St. Paul's indexed price
performance during that same period to that of the Standard & Poor's Composite
Index of 500 stocks
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(the "S&P 500") and to the indexed stock price performance of selected peer
companies for the one-year period ended January 16, 1998. The peer companies
included the following selected property and casualty insurers with equity
market capitalizations below $5 billion: American Financial Group, Inc., W.R.
Berkley Corporation, Ohio Casualty Corporation, Old Republic International
Corporation, Reliance Group Holdings, Inc., Selective Insurance Group, Inc. and
TIG Holdings, Inc. (collectively, the "Mid-Cap Insurers"). The peer companies
also included the following selected property and casualty insurers with equity
market capitalizations in excess of $5 billion: The Chubb Corporation, CIGNA
Corporation, Cincinnati Financial Corporation, CNA Financial Corporation, The
Hartford Financial Services Group, Inc., SAFECO Corporation and Travelers
Property Casualty Corp. (collectively, the "Large-Cap Insurers," referred to
together with the Mid-Cap Insurers as the "Selected Insurers"). For the one-year
period ended January 16, 1998, BT Alex. Brown noted that, on a relative basis,
USF&G Common Stock underperformed each of the S&P 500 and the common equity of
the Selected Insurers and St. Paul Common Stock outperformed the S&P 500 and
marginally underperformed the common equity of the Selected Insurers.
DISCOUNTED CASH FLOW ANALYSIS. BT Alex. Brown performed a discounted cash
flow analysis to calculate the following: (i) the implied per share value of
USF&G Common Stock for USF&G as a stand-alone company, (ii) the implied per
share value of St. Paul Common Stock for St. Paul as a stand-alone company,
(iii) the implied per share value of USF&G Common Stock for the interest in the
combined company and (iv) the implied per share value of the combined company's
common stock. The discounted cash flow approach values a business based on the
present value of the sum of the future cash flow that the business will generate
through an assumed future date and the estimated terminal value of the business
at such future date. To establish a present value under this approach, future
cash flow must be estimated and an appropriate discount rate determined. To
estimate USF&G's financial performance, BT Alex. Brown used estimates of
financial performance for USF&G for the years 1998 through 2000 prepared by
members of USF&G's management. To estimate St. Paul's financial performance, BT
Alex. Brown used St. Paul's management's estimates of 1998 financial performance
for St. Paul and BT Alex. Brown estimated St. Paul's 1999 and 2000 financial
performance using IBES long term operating earnings growth rate estimates. To
estimate the combined company's financial performance, BT Alex. Brown assumed,
based on St. Paul's management's estimates, pre-tax synergies from the Merger of
$50 million in 1998 and an additional $100 million in 1999. In each case, BT
Alex. Brown aggregated the present value of the cash flows through 2000 with the
present value of a range of terminal values at December 31, 2000. From these
analyses, BT Alex. Brown derived reference ranges for the implied per share
value of USF&G Common Stock, St. Paul Common Stock, the USF&G shareholders'
interest in the combined company and the combined company's common stock.
BT Alex. Brown derived a reference range for the implied per share value of
the USF&G Common Stock for USF&G as a stand-alone company based on terminal
multiples of 12.0x, 13.0x and 14.0x GAAP net operating income for 2000 and
terminal multiples of 1.00x, 1.25x and 1.50x GAAP common equity, at discount
rates of 12.0%, 14.0% and 16.0%. BT Alex. Brown derived reference ranges for the
implied per share value of St. Paul Common Stock for St. Paul as a stand-alone
company, for USF&G Common Stock for the interest in the combined company
represented by each share of USF&G Common Stock and for the combined company's
common stock based on terminal multiples of 14.0x, 15.0x and 16.0x GAAP net
operating income for 2000 and terminal multiples of 1.25x, 1.50x and 1.75x GAAP
common equity, at discount rates of 10.0%, 12.0% and 14.0%. BT Alex. Brown
arrived at such discount rates based on its judgment of USF&G's, St. Paul's and
the Selected Insurers' cost of equity and arrived at such terminal values based
on its review of the trading characteristics of the common stock of the Selected
Insurers and the transaction multiples for the BT Alex. Brown Selected
Transactions.
Based on this analysis BT Alex. Brown derived the following reference
ranges: (i) for the implied per share value of the USF&G Common Stock for USF&G
as a stand-alone company, from $17.00 to $20.00, (ii) for the implied per share
value of the St. Paul Common Stock for St. Paul as a stand-alone company, from
$77.00 to $86.00, (iii) for the implied per share value of the USF&G Common
Stock for the interest in the combined company, from $22.50 to $26.00, and (iv)
for the implied per share value of the combined
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company's common stock, from $80.00 to $91.50. Based on the foregoing analysis,
BT Alex. Brown noted that the price of $22.00 upon which the Exchange Ratio was
based was greater than the greatest value in the range of implied per share
values of the USF&G Common Stock for USF&G as a stand-alone company. BT Alex.
Brown also noted that the closing price of St. Paul Common Stock on January 16,
1998 of $78.13 per share was within the range of implied per share values of St.
Paul Common Stock for St. Paul as a stand-alone company. BT Alex. Brown further
noted that the lowest value in the range of implied per share values of the
USF&G Common Stock for the interest represented by any such share in the
combined company was greater than the greatest value in the range for the
implied per share values of USF&G Common Stock for USF&G as a stand-alone entity
and greater than the closing price of USF&G Common Stock on January 16, 1998 of
$21.44 per share.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. This analysis examines a
company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies. BT Alex. Brown
compared certain financial information (based on the commonly used valuation
measurements described below) relating to USF&G and St. Paul to certain
corresponding information relating to the Mid-Cap Insurers and the Large-Cap
Insurers, respectively. Such financial information included, among other things:
(i) return on equity (defined as the ratio of LTM period ended September 30,
1997 Operating Earnings (as defined below) to average shareholders' equity);
(ii) estimated five-year growth rates; (iii) ratios of common equity market
prices per share ("Equity Value") to operating earnings (income from continuing
operations minus realized investment gains, tax effected at an effective tax
rate of 35% ("Operating Earnings")) per share on a fully-diluted basis; (iv)
ratios of Equity Value to book value per share (as of September 30, 1997); and
(v) ratios of enterprise value (equity market capitalization plus total debt,
preferred stock and minority interests) to LTM period ended September 30, 1997
earnings before interest and taxes ("EBIT"). The financial information used in
connection with the multiples provided below with respect to USF&G, St. Paul,
the Mid-Cap Insurers and the Large-Cap Insurers was based on LTM results as of
September 30, 1997 as derived from publicly available information and on EPS
estimates for 1997 and 1998 as reported by IBES (except as noted below with
respect to USF&G and St. Paul).
BT Alex. Brown noted that the multiple of Equity Value to LTM period ended
September 30, 1997 EPS was 13.4x for USF&G compared to a range of 12.3x to
15.6x, with a median of 13.7x, for the Mid-Cap Insurers; that the multiple of
Equity Value to 1997 estimated EPS was 13.7x for USF&G (using either IBES or
USF&G management estimates) compared to a range of 11.4x to 15.9x, with a median
of 14.0x, for the Mid-Cap Insurers; that the multiple of Equity Value to 1998
estimated EPS for USF&G was 11.5x (using IBES estimates) and 13.0x (using USF&G
management estimates) compared to a range of 11.2x to 13.5x, with a median of
11.6x, for the Mid-Cap Insurers; that the multiple of Equity Value to book value
per share was 1.27x for USF&G compared to a range of 1.17x to 1.78x, with a
median of 1.49x, for the Mid-Cap Insurers; and that the multiple of enterprise
value to LTM period ended September 30, 1997 EBIT was 9.3x for USF&G compared to
a range of 7.7x to 9.3x, with a median of 8.7x, for the Mid-Cap Insurers.
Additionally, BT Alex. Brown noted that the estimated five-year growth rate for
USF&G was 13.4% (using IBES estimates) and 11.7% (using USF&G management
estimates) compared to a range of 10.3% to 14.2%, with a median of 12.0%, for
the Mid-Cap Insurers; and that USF&G's LTM period ended September 30, 1997
return on equity was 11.8% compared to a range of 9.0% to 15.1%, with a median
of 10.8%, for the Mid-Cap Insurers. As a result of the foregoing procedures, BT
Alex. Brown noted that the multiple of Equity Value to 1998 EPS as estimated by
USF&G management and the multiple of enterprise value to LTM EBIT were greater
than the median for the Mid-Cap Insurers and that the five-year growth rate as
estimated by USF&G management was less than the median for the Mid-Cap Insurers.
BT Alex. Brown noted that the multiple of Equity Value to LTM period ended
September 30, 1997 EPS was 14.6x for St. Paul compared to a range of 12.1x to
30.9x, with a median of 16.5x, for the Large-Cap Insurers; that the multiple of
Equity Value to 1997 estimated EPS for St. Paul was 14.0x (using IBES estimates)
and 13.6x (using St. Paul management estimates) compared to a range of 12.1x to
30.6x, with a median of 16.1x, for the Large-Cap Insurers; that the multiple of
Equity Value to 1998 estimated EPS for
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St. Paul was 12.9x (using IBES estimates) and 13.6x (using St. Paul management
estimates) compared to a range of 11.4x to 28.3x, with a median of 14.1x, for
the Large-Cap Insurers; that the multiple of Equity Value to book value per
share was 1.47x for St. Paul compared to a range of 1.06x to 2.40x, with a
median of 1.81x, for the Large-Cap Insurers; and that the multiple of enterprise
value to LTM period ended September 30, 1997 EBIT was 7.8x for St. Paul compared
to a range of 6.9x to 19.6x, with a median of 10.9x, for the Large-Cap Insurers.
Additionally, BT Alex. Brown noted that the estimated five-year growth rate for
St. Paul was 10.7% compared to a range of 9.1% to 13.0%, with a median of 12.0%,
for the Large-Cap Insurers; and that St. Paul's LTM return on equity was 11.0%
compared to a range of 6.8% to 15.9%, with a median of 12.4%, for the Large-Cap
Insurers. As a result of these procedures, BT Alex. Brown noted that with
respect to each of the foregoing valuation measurements St. Paul was within the
range for the Large-Cap Insurers.
CONTRIBUTION ANALYSIS. BT Alex. Brown analyzed the relative contributions
of USF&G and St. Paul to the pro forma income statement of the combined company,
based on managements' projections for their respective companies, as compared to
USF&G's approximate relative ownership of between 27.5% and 28.6% of the
outstanding common stock of the combined company. This analysis showed that on a
pro forma combined basis (excluding (i) the effect of any synergies that may be
realized as a result of the Merger, and (ii) non-recurring expenses relating to
the Merger), at September 30, 1997 and based on the twelve-month period ended
September 30, 1997 for USF&G and St. Paul, USF&G and St. Paul would have
accounted for approximately 37.0% and 63.0%, respectively, of the combined
company's pro forma revenue, approximately 38.3% and 61.7%, respectively, of the
combined company's pro forma premiums earned, approximately 27.1% and 72.9%,
respectively, of the combined company's pro forma equity market capitalization,
approximately 27.8% and 72.2%, respectively, of the combined company's pro forma
operating income, and approximately 31.0% and 69.0%, respectively, of the
combined company's pro forma total common equity. Based on management
projections for 1998 and 1999, USF&G would account for approximately 29.0% and
29.1%, respectively, and St. Paul would account for approximately 71.0% and
70.9%, respectively, of the combined company's pro forma operating income for
1998 and 1999. Based on the foregoing analysis, BT Alex. Brown concluded that
the USF&G shareholders' relative ownership of the combined company will
approximate USF&G's contribution to the combined company's pro forma operating
income for the twelve-month period ended September 30, 1997 and pro forma
projected operating income for 1998 and 1999, excluding the effect of any
synergies that may be realized as a result of the Merger.
PRO FORMA POOLING MERGER ANALYSIS. BT Alex. Brown analyzed certain pro
forma effects of the Merger. In performing such analysis, BT Alex. Brown
excluded non-recurring costs related to the Merger and assumed, based on St.
Paul's management's estimates, that the Merger would result in pre-tax synergies
of $50 million in 1998 and an additional $100 million in 1999. Based on such
analysis, BT Alex. Brown noted that for a USF&G shareholder, assuming that the
Exchange Ratio is computed based on Average Stock Prices of $74.00, $76.00 and
$78.00 per share of St. Paul Common Stock, the Merger would be accretive to
estimated EPS for 1998 and for 1999. BT Alex. Brown noted that, assuming that
the Exchange Ratio is computed based on Average Stock Prices of $74.00, $76.00
and $78.00 per share of St. Paul Common Stock, the Merger would be accretive to
St. Paul's estimated EPS for 1998 and for 1999. BT Alex. Brown noted that,
assuming that the Exchange Ratio is computed based on Average Stock Prices of
$74.00, $76.00 and $78.00 per share of St. Paul Common Stock, the Merger would
be significantly dilutive to book value per share as of September 30, 1997 for a
USF&G shareholder and that the Merger would be slightly dilutive to St. Paul's
book value per share as of September 30, 1997 (assuming in each case an after-
tax restructuring charge of $325 million). BT Alex. Brown noted that there can
be no assurance that the combined company will be able to realize the synergies
assumed in this analysis of the Merger.
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS. BT Alex. Brown reviewed the
financial terms, to the extent publicly available, of five completed mergers and
acquisitions since January 1995 in the property and casualty insurance industry
(the "BT Alex. Brown Selected Transactions"). BT Alex. Brown noted,
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however, that the comparability of such transactions to the Merger was limited,
and that the available public information with respect to such transactions also
was limited.
BT Alex. Brown calculated various financial multiples based on available
public information for each of the Selected Transactions and compared them to
corresponding financial multiples relating to the Merger. The five transactions
reviewed, in reverse chronological order of public announcement, were
(acquiree/acquiror/announcement date): American States Financial
Corporation/Safeco Corp./June 1997, Anthem Casualty Insurance Group, Inc./Vesta
Insurance Group, Inc./April 1997, Coregis Insurance Group/General Electric
Capital Corporation/January 1997, Northbrook Holdings, Inc./St. Paul/May 1996
and the property and casualty business of Aetna Life & Casualty
Company/Travelers Group Inc./ January 1995. Each of these transactions involved
the acquisition of a property and casualty insurance company or business. BT
Alex. Brown noted that the multiple of the equity purchase price (defined as the
number of shares of USF&G Common Stock outstanding on a fully-diluted basis
multiplied by the per share price of St. Paul Common Stock multiplied by the
Exchange Ratio, assuming a per share price of the St. Paul Common Stock of
$78.00 and an Exchange Ratio of 0.2821) to LTM GAAP operating income was 13.6x
for the Merger as compared to 16.7x for the American States Financial/Safeco
Corp. transaction, which was the only BT Alex. Brown Selected Transaction for
which this information could be calculated. BT Alex. Brown further noted that
the multiple of the equity purchase price to GAAP book value was 1.3x for the
Merger as compared to 2.0x and 1.1x for the American States Financial/Safeco
Corp. and the Anthem Casualty Insurance Group/Vesta Insurance Group
transactions, respectively, and that the multiple of the equity purchase price
to statutory book value was 2.0x for the Merger as compared to a range of 0.9x
to 2.9x for the BT Alex. Brown Selected Transactions. All multiples for the BT
Alex. Brown Selected Transactions were based on public information available at
the time of the announcement of such transaction, without taking into account
differing market and other conditions during the three-year period during which
the BT Alex. Brown Selected Transactions occurred.
GENERAL. In rendering its opinion, BT Alex. Brown considered, among other
factors, the condition of the U.S. stock markets, particularly in the insurance
sector, and the current level of economic activity.
No company used in the analysis of selected publicly traded companies is
identical to USF&G or St. Paul; and no transaction used in the analysis of
selected precedent transactions is identical to the Merger. Accordingly, such
analyses must take into account differences in the financial and operating
characteristics of the Mid-Cap Insurers, the Large-Cap Insurers and the entities
involved in the BT Alex. Brown Selected Transactions and other factors that
would affect the public trading value of the Mid-Cap Insurers and the Large-Cap
Insurers and the acquisition value of the Selected Transactions.
While the foregoing summary describes the analyses and factors that BT Alex.
Brown deemed material in its presentation to the USF&G Board, it is not a
complete description of all analyses and factors considered by BT Alex. Brown.
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the applications of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. BT Alex. Brown believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, would create an incomplete
view of the evaluation process underlying the BT Alex. Brown Opinion. In
performing its analyses, BT Alex. Brown considered general economic, market and
financial conditions and other matters, many of which are beyond the control of
USF&G or St. Paul. The analyses performed by BT Alex. Brown are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
Additionally, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business may actually be sold.
Furthermore, no opinion is being expressed as to the prices at which shares of
USF&G Common Stock or St. Paul Common Stock may trade at any future time.
Pursuant to a letter agreement dated October 31, 1997 between USF&G and BT
Alex. Brown, BT Alex. Brown has received or is entitled to receive the following
fees: (i) $250,000 payable upon execution
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of such agreement, (ii) $1,000,000 payable at the time of delivery of its
initial opinion and (iii) $500,000 payable upon delivery of any additional
opinion in connection with any amended or revised offers. In addition, USF&G has
agreed to reimburse BT Alex. Brown for its reasonable out-of-pocket expenses
incurred in connection with rendering financial advisory services, including
reasonable fees and disbursements of its legal counsel. USF&G has agreed to
indemnify BT Alex. Brown and its controlling persons, directors, officers,
employees and agents, for certain claims, losses, damages, liabilities, costs
and expenses, including those under the federal securities laws, related to or
arising out of its rendering of services under its engagement as financial
advisor.
The USF&G Board retained BT Alex. Brown to act as its advisor based upon BT
Alex. Brown's qualifications, reputation, experience and expertise. BT Alex.
Brown, as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements and valuations for
estate, corporate and other purposes. BT Alex. Brown regularly publishes
research reports regarding the insurance industry and the businesses and
securities of USF&G, St. Paul and other publicly traded companies in the
insurance industry. In the ordinary course of business, BT Alex. Brown may
actively trade the securities of both USF&G and St. Paul for its own account and
the account of its customers and, accordingly, may at any time hold a long or
short position in such securities.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Joint Proxy Statement/Prospectus (and in
the documents incorporated by reference) contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements relate to anticipated financial performance,
management's plans and objectives for future operations, business prospects,
market conditions and other matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of that safe harbor, St. Paul and USF&G note that a
variety of factors could cause the actual results of the combined company to
differ materially from the anticipated results expressed in such forward-looking
statements. The following discussion is intended to identify certain factors
that could cause future outcomes to differ materially from those set forth in
the forward-looking statements contained in this Joint Proxy
Statement/Prospectus.
Forward-looking statements include the information concerning possible or
assumed future results of operations of St. Paul and USF&G set forth under
"--Opinions of Financial Advisors" and "--Reasons for the Merger;
Recommendations of the Boards of Directors." Also, statements including the
words "expects," "anticipates," "intends," "plans," "believes," "estimates," or
similar expressions are forward-looking statements. Shareholders should note
that many factors, some of which are discussed elsewhere in this document and in
the documents that are incorporated by reference, could cause the actual results
of the combined company to differ materially from the anticipated results set
forth or contemplated in such forward-looking statements. You are cautioned that
such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of St. Paul and USF&G to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors may affect St. Paul's, USF&G's or the combined
company's operations, markets, products, services and prices. Such factors
include, among others, the following: general economic and business conditions,
including changes in interest rates, rates of inflation and the performance of
financial markets; changes in domestic and foreign laws, regulations and taxes;
social conditions; judicial decisions and rulings; integration of the operations
of St. Paul and USF&G, including the failure to realize synergies from the
Merger; regulatory conditions to the Merger; the loss of any significant
customers; insurance claims based on natural disasters; the frequency and
severity of catastrophic events; a change in the demand for, pricing of, or
supply of reinsurance or insurance; losses due to foreign currency exchange rate
fluctuations; and changes in business strategy or development plans.
34
<PAGE>
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the receipt by each of USF&G
and St. Paul of a favorable letter from KPMG Peat Marwick LLP (or its successor)
and Ernst & Young LLP (or its successor) regarding the appropriateness of
"pooling of interests" accounting treatment for the Merger. See "The Merger
Agreement--Conditions."
The companies believe that the Merger will qualify as a "pooling of
interests" for accounting and financial reporting purposes. Under this method of
accounting, St. Paul will restate, at the Effective Time, its consolidated
financial statements to include the assets, liabilities, shareholders' equity
and results of operations of USF&G. It is anticipated that upon consummation of
the Merger, the fiscal year of the combined company will be the calendar year.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary discusses the material Federal income tax consequences
of the Merger. The summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), applicable Treasury Regulations thereunder and
administrative rulings and judicial authority as of the date hereof. All of the
foregoing are subject to change, possibly with retroactive effect, and any such
change could affect the continuing validity of the discussion. The discussion
assumes that persons holding shares of USF&G Common Stock hold such shares as a
capital asset and will continue to hold them as capital asssets through and
including the Effective Time. Further, this summary does not address the tax
consequences that may be relevant to a particular shareholder subject to special
treatment under certain Federal income tax laws, such as dealers in securities,
banks, insurance companies, tax-exempt organizations, non-United States persons,
shareholders who acquired shares of USF&G Common Stock through the exercise of
options or otherwise as compensation or through a tax-qualified retirement plan,
and holders of options granted under USF&G's benefit plans. This discussion does
not address any consequences arising under the laws of any state, locality or
foreign jurisdiction, nor does it address the effect of the Merger on St. Paul
or USF&G in respect of any asset as to which unrealized gain is required to be
recognized for U.S. Federal income tax purposes at the end of each taxable year
under a mark-to-market system.
Neither St. Paul nor USF&G requested a ruling from the Internal Revenue
Service ("IRS") with regard to any of the Federal income tax consequences of the
Merger, and the discussion as to such Federal income tax consequences set forth
below will not be binding on the IRS.
GENERAL
As of the date hereof, it is intended that the Merger will constitute a
"reorganization" pursuant to Section 368(a) of the Code and that for Federal
income tax purposes no gain or loss will be recognized by St. Paul, USF&G or
Merger Sub. The respective obligations of St. Paul and USF&G to consummate the
Merger are conditioned on (i) the receipt by St. Paul of an opinion of Sullivan
& Cromwell dated the date of the closing of the Merger ("Closing Date")
confirming that the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code and that St. Paul and USF&G will each be a party
to the reorganization within the meaning of Section 368(b) of the Code and (ii)
the receipt by USF&G of an opinion of Piper & Marbury L.L.P. dated the Closing
Date confirming that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code and that St. Paul and USF&G will each be a
party to the reorganization within the meaning of Section 368(b) of the Code.
Such opinions will be based upon, among other things, (i) representations that
St. Paul and USF&G will make and representations certain shareholders of USF&G
will make which are customarily given in transactions of this type and (ii) the
assumption that the Merger will be consummated in accordance with the terms of
the Merger Agreement.
The discussion below summarizes the material Federal income tax consequences
of the Merger, assuming that the Merger will qualify as a reorganization within
the meaning of Section 368(a) of the Code.
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<PAGE>
CONSEQUENCES TO USF&G SHAREHOLDERS
Under the reorganization provisions of the Code, no gain or loss will be
recognized by holders of USF&G Common Stock as a result of the surrender of
their shares of USF&G Common Stock in exchange for shares of St. Paul Common
Stock pursuant to the Merger Agreement (except as discussed below with respect
to cash received in lieu of fractional shares). The aggregate tax basis of the
shares of St. Paul Common Stock received in the Merger (including any fractional
shares of St. Paul Common Stock deemed received) will be the same as the
aggregate tax basis of the shares of USF&G Common Stock surrendered in exchange
for shares of St. Paul Common Stock in the Merger. The holding period of the
shares of St. Paul Common Stock received (including the holding period of
fractional shares of St. Paul Common Stock deemed received) will include the
holding period of shares of USF&G Common Stock surrendered in exchange therefor.
FRACTIONAL SHARES
A holder of shares of USF&G Common Stock who receives cash in the Merger in
lieu of a fractional share interest in St. Paul Common Stock will be treated for
federal income tax purposes as having received the fractional share interest and
then having received cash in exchange for such interest. Such a holder will
recognize gain or loss as of the Effective Time equal to the amount of cash
received reduced by the holder's tax basis in the shares of USF&G Common Stock
allocable to such fractional share interest. Any gain or loss generally will be
capital gain or loss and will be long-term capital gain or loss if the holding
period (determined as described above under " --Consequences to USF&G
Shareholders") for the fractional share interest deemed to be received and then
exchanged is more than one year. In the case of an individual, any such
long-term capital gain will generally be subject to a maximum tax rate of 28% if
the holding period for the fractional share interest is greater than one year.
The maximum tax rate is reduced to 20% in the case of an individual whose
holding period exceeds 18 months.
CONSEQUENCES TO USF&G, ST. PAUL, MERGER SUB AND HOLDERS OF ST. PAUL VOTING
STOCK
Holders of St. Paul Voting Stock will not recognize gain or loss as a result
of the Merger. In addition, USF&G, St. Paul and Merger Sub generally will not
recognize gain or loss as a result of the Merger.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS,
SHAREHOLDERS OF USF&G ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, AND OTHER
APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
CERTAIN REGULATORY MATTERS
Completion of the Merger is subject to the approvals of certain regulatory
agencies and certain filings with regulatory agencies.
HART-SCOTT-RODINO FILINGS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and the rules promulgated thereunder, certain transactions,
including the Merger, may not be consummated until Notification and Report Forms
pursuant to the HSR Act have been filed with the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the Federal Trade
Commission (the "FTC") and specified waiting period requirements have been
satisfied. On February 4, 1998, each of St. Paul and USF&G filed a Notification
and Report Form pursuant to the HSR Act with the Antitrust Division and the FTC.
The waiting period under the HSR Act was terminated on February 19, 1998. At any
time before or after the Effective Time, the FTC, the Antitrust Division or
others could take action under the antitrust laws with respect to the Merger,
including seeking to enjoin the consummation of the Merger, to rescind the
Merger or to require either St. Paul or USF&G to divest substantial assets.
There can be no assurance
36
<PAGE>
that a challenge to the Merger on antitrust grounds will not be made or, if such
a challenge is made, that it would not be successful.
STATE REGULATORY APPROVALS
The insurance laws and regulations of all U.S. jurisdictions generally
require that, prior to the acquisition of control of an insurance company doing
business in such jurisdiction through the acquisition of or merger with the
holding company of such insurance company, the surviving company obtain the
prior approval of, or file notification with and meet waiting period
requirements imposed by, such jurisdictions.
The completion of the Merger is subject to certain approvals of and/or
notices, to and the expiration of applicable waiting periods required by, the
insurance regulatory agencies of California, Illinois, Indiana, Iowa, Maryland,
Michigan, Mississippi, New York, Ohio, Texas, Vermont and Wisconsin and certain
other states in which the companies do business. St. Paul has filed applications
for approval with the insurance regulatory agencies of California, Illinois,
Indiana, Iowa, Maryland, Michigan, Mississippi, New York, Ohio, Texas, Vermont
and Wisconsin. Hearings on applications for approval of the Merger are mandatory
in some of these states and may be held by others. In addition, St. Paul has
made notice filings in certain other jurisdictions, including to insurance
departments in numerous states where St. Paul's subsidiaries and USF&G's
subsidiaries together have sufficiently large market shares in particular
insurance lines to require a notification prior to a merger. Approval of the
Merger is not required in these states, but the insurance departments could
determine to take action to prevent or impose conditions on the Merger.
FOREIGN APPROVALS
St. Paul and USF&G conduct operations in a number of foreign countries where
regulatory filings or approvals may be required in connection with the
consummation of the Merger. St. Paul and USF&G believe that all such material
filings and approvals have been or will be made or obtained.
NO APPRAISAL RIGHTS
Holders of St. Paul Voting Stock are not entitled to any dissenters' or
appraisal rights under the Minnesota Business Corporation Act ("MBCA") as a
result of the proposal to be voted upon at the St. Paul Special Meeting. Holders
of USF&G Common Stock also will not be entitled to any dissenters' or appraisal
rights under the Maryland General Corporation Law ("MGCL") as a result of the
proposal to be voted upon at the USF&G Special Meeting.
RESALE OF ST. PAUL COMMON STOCK
The shares of St. Paul Common Stock issuable to shareholders of USF&G in
connection with the Merger have been registered under the Securities Act of
1933, as amended (the "Securities Act"). Such shares may be traded freely and
without restriction by those shareholders not deemed to be "affiliates" of St.
Paul or USF&G as that term is defined in the rules under the Securities Act.
Shares of St. Paul Common Stock received by those shareholders of USF&G who are
deemed to be "affiliates" of USF&G at the time of the USF&G Special Meeting or
St. Paul after the Merger may be resold without registration as provided for by
Rule 144 or 145, or as otherwise permitted, under the Securities Act. This Joint
Proxy Statement/Prospectus does not cover any resales of St. Paul Common Stock
received by affiliates of USF&G.
Pursuant to the terms of the Merger Agreement, each of USF&G and St. Paul
have agreed to deliver to the other, at least 45 days prior to the Effective
Time, a list of names of those persons whom they believe to be "affiliates" of
their respective companies within the meaning of Rule 145 under the Securities
Act and for the purposes of applicable interpretations regarding the "pooling of
interests" method of accounting. Each of USF&G and St. Paul has agreed to use
its best efforts to cause each person who is identified as an "affiliate" in the
list referred to above to deliver to the other, at least 30 days prior to the
Effective Time, a letter (each an "Affiliate Letter") in the form attached to
the Merger Agreement providing that, in the case of USF&G affiliates, each such
person will agree not to sell, pledge, transfer or
37
<PAGE>
otherwise dispose of any shares of USF&G Common Stock or St. Paul Common Stock
that such person may own (including shares of St. Paul Common Stock to be
received by such person in the Merger) except in compliance with the applicable
provisions of the Securities Act and, in any event, until such time as financial
results covering at least 30 days of combined operations of St. Paul and USF&G
have been published and, in the case of St. Paul affiliates, each such person
will agree not to sell, pledge, transfer or otherwise dispose of any shares of
St. Paul Common Stock or USF&G Common Stock that such person may own until such
time as financial results covering at least 30 days of combined operations of
St. Paul and USF&G have been published.
CERTAIN PENDING LITIGATION
On January 23 and February 2, 1998, two shareholders of USF&G filed separate
suits in Maryland Circuit Court for Baltimore City against USF&G and individual
members of the USF&G Board. These actions allege that the Merger Agreement is
unfair and harmful to USF&G's shareholders and that the directors breached their
fiduciary duties of loyalty and due care to the holders of USF&G Common Stock by
failing to: (1) undertake an adequate evaluation of USF&G's worth as a potential
merger and acquisition candidate, resulting in the proposed Merger Consideration
being inadequate; (2) take appropriate steps to enhance USF&G's value as a
merger and acquisition candidate; (3) effectively expose USF&G to the
marketplace in order to create an open auction for USF&G and, in fact,
preventing such auction, in part, by agreeing to a $70 million termination fee
to be paid to St. Paul if USF&G accepts a superior third party bid; and (4) act
independently to protect the interest of USF&G's shareholders by employing
independent advisors and appointing a special committee of some or all of the
USF&G Board to review the Merger with St. Paul. St. Paul is accused of aiding
and abetting these alleged breaches of duty. The suits seek to have a plaintiff
class certified of all shareholders of USF&G and seek preliminary and permanent
injunctions against the Merger, rescission of the Merger if it is consummated,
an award of damages and any other relief the court finds appropriate. The
defendants believe that the allegations in the suits are without merit.
DIVIDENDS AFTER THE MERGER
On February 3, 1998, the St. Paul Board declared a dividend of $0.50 per
share of St. Paul Common Stock, payable on April 17, 1998, to shareholders of
record on March 31, 1998, and announced the establishment of a new annual
dividend rate of $2.00 per share of St. Paul Common Stock. During each of the
calendar quarters of 1997, St. Paul paid dividends of $0.47 per share of St.
Paul Common Stock, equal to an annual dividend in 1997 of $1.88 per share of St.
Paul Common Stock. The dividends paid by St. Paul will be adjusted in the future
to reflect the St. Paul Stock Split if the St. Paul Stock Split is implemented.
This dividend rate may be maintained or increased, subject to evaluation from
time to time by the St. Paul Board based on St. Paul's results of operations,
financial condition, capital requirements, future business prospects, regulatory
environment and such other considerations as the St. Paul Board deems relevant.
No assurance can be given that the dividend will not be decreased in the future.
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<PAGE>
COMPARATIVE STOCK PRICES
St. Paul Common Stock and USF&G Common Stock are each listed on the NYSE as
well as on certain other exchanges. St. Paul is listed under the symbol "SPC"
and USF&G is listed under the symbol "FG." The following table sets forth, for
the calendar quarters indicated, the high and low sale prices per share of St.
Paul Common Stock and USF&G Common Stock as reported on the NYSE Composite
Transactions Tape.
<TABLE>
<CAPTION>
ST. PAUL USF&G
COMMON STOCK COMMON STOCK
-------------------- --------------------
CALENDAR QUARTER HIGH LOW HIGH LOW
- ---------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1996
First Quarter............................................................. 60 1/2 53 1/2 17 1/2 14 1/4
Second Quarter............................................................ 56 1/4 50 7/8 16 5/8 15
Third Quarter............................................................. 55 7/8 50 5/8 18 5/8 15
Fourth Quarter............................................................ 60 3/4 53 1/2 21 3/4 17 3/4
1997
First Quarter............................................................. 72 5/8 57 5/8 23 1/8 20
Second Quarter............................................................ 80 1/4 63 25 18 1/4
Third Quarter............................................................. 82 13/16 72 9/16 25 1/2 21 1/2
Fourth Quarter............................................................ 85 1/2 77 1/2 23 1/2 17 5/8
1998
First Quarter (through February 26, 1998)................................. 89 1/8 74 5/8 24 7/16 20 5/16
</TABLE>
On January 16, 1998, the last trading day before the public announcement of
the Merger, the closing prices of St. Paul Common Stock and USF&G Common Stock
as reported on the NYSE Composite Transactions Tape were $78 1/8 per share and
$21 7/16 per share, respectively. Assuming an Exchange Ratio of 0.2821, the pro
forma equivalent per share value of USF&G Common Stock on January 16, 1998 was
$22.04 per share.
On February 26, 1998, the closing sale prices of St. Paul Common Stock and
USF&G Common Stock as reported on the NYSE Composite Transactions Tape were
$88 1/8 per share and $24 5/16 per share ($24.86 on a pro forma equivalent per
share basis based on an Exchange Ratio of 0.2821), respectively.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS PRIOR TO MAKING
ANY DECISION WITH RESPECT TO THE MERGER.
For information on the Exchange Ratio, see "The Exchange Ratio."
39
<PAGE>
THE EXCHANGE RATIO
The chart below sets forth a range of possible Average Stock Prices, the
corresponding Exchange Ratio and the equivalent market value per share of USF&G
Common Stock (assuming that a share of St. Paul Common Stock had a value equal
to the Average Stock Price). The Average Stock Prices set forth below are for
illustrative purposes and are not intended to be an exhaustive list of possible
Average Stock Prices. There can be no assurance that on the date a holder of
USF&G Common Stock receives shares of St. Paul Common Stock that the shares of
St. Paul Common Stock will have a value equal to, greater than or less than the
equivalent values set forth below.
AVERAGE STOCK PRICE, EXCHANGE RATIO AND EQUIVALENT VALUE
<TABLE>
<CAPTION>
EQUIVALENT
AVERAGE STOCK PRICE EXCHANGE RATIO VALUE
------------------- --------------- ---------------
<S> <C> <C> <C>
$ 61.00 0.2973 $ 18.14
63.00 0.2973 18.73
65.00 0.2973 19.32
67.00 0.2973 19.92
69.00 0.2973 20.51
71.00 0.2973 21.11
73.00 0.2973 21.70
- -------------------------------------------------------------------------------------------------------------
Fixed Price 74.00 0.2973 22.00
74.50 0.2953 22.00
75.00 0.2933 22.00
75.50 0.2914 22.00
76.00 0.2895 22.00
76.50 0.2876 22.00
77.00 0.2857 22.00
77.50 0.2839 22.00
Fixed Price 78.00 0.2821 22.00
- -------------------------------------------------------------------------------------------------------------
79.00 0.2821 22.29
81.00 0.2821 22.85
83.00 0.2821 23.41
85.00 0.2821 23.98
87.00 0.2821 24.54
89.00 0.2821 25.11
91.00 0.2821 25.67
</TABLE>
No assurance can be given as to the market prices of St. Paul Common Stock
or USF&G Common Stock at the Effective Time or during the period in which the
Average Stock Price is calculated. Because the Exchange Ratio is based on an
average of the average high and low prices of the St. Paul Common Stock for a
period prior to the Effective Time, the market price of the St. Paul Common
Stock at the Effective Time may be less than, equal to or greater than the
Average Stock Price. In addition, because the Exchange Ratio becomes fixed if
the Average Stock Price is less than $74 or greater than $78, the market value
of a share of St. Paul Common Stock multiplied by the Exchange Ratio even at the
time the Exchange Ratio is established may be more or less than $22.00. There
can be no assurance that the market value of the St. Paul Common Stock that
holders of USF&G Common Stock will receive upon consummation of the Merger will
not vary significantly from the market value of the shares of St. Paul Common
Stock that holders of USF&G Common Stock would receive if the Merger was
consummated and holders of USF&G Common Stock received shares of St. Paul Common
Stock on the date of this Joint Proxy Statement/Prospectus or on the date of the
Meetings.
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<PAGE>
If the St. Paul Stock Split occurs prior to the Merger, the number of shares
of St. Paul Common Stock to be received by each USF&G shareholder in the Merger
and the Exchange Ratio will be appropriately adjusted.
Holders of USF&G Common Stock and St. Paul Voting Stock may call
1-800-356-4098, ext. 3700 at any time between the date of this Joint Proxy
Statement/Prospectus and the date of the Meetings to hear a pre-recorded message
indicating the Average Stock Price and the Exchange Ratio if each were
calculated on the day of the call.
THE ST. PAUL STOCK SPLIT
The St. Paul Board has announced its intention to approve a two-for-one
stock split (issuing one additional share of St. Paul Common Stock for each
outstanding share of St. Paul Common Stock) if the St. Paul shareholders approve
at their upcoming annual meeting (presently scheduled for May 5, 1998) a
proposal to increase the number of authorized shares of St. Paul Common Stock.
If the St. Paul Stock Split occurs prior to the Effective Time, the number of
shares of St. Paul Common Stock to be received by each USF&G shareholder in the
Merger and the Exchange Ratio will be appropriately adjusted.
For example, if the Exchange Ratio is established at 0.2821 and the St. Paul
Stock Split occurs prior to the Effective Time, the Exchange Ratio will be
adjusted to equal 0.5642 and a USF&G shareholder that held 10,000 shares of
USF&G Common Stock prior to the Merger would receive 5,642 shares of St. Paul
Common Stock in the Merger. If, however, the St. Paul Stock Split occurs after
the Effective Time, the Exchange Ratio would be 0.2821 at the Effective Time and
the holder of the same 10,000 shares of USF&G Common Stock would receive 2,821
shares of St. Paul Common Stock at the Effective Time and (assuming such holder
retains such shares) an additional 2,821 shares of St. Paul Common Stock at the
time of the St. Paul Stock Split, also resulting in a total of 5,642 shares of
St. Paul Common Stock received.
41
<PAGE>
THE MERGER AGREEMENT
This section of the Joint Proxy Statement/Prospectus describes certain
aspects of the Merger Agreement. This section does not purport to be a complete
description of the Merger Agreement and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Annex A to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. All holders
of USF&G Common Stock and St. Paul Voting Stock are encouraged to read the
Merger Agreement in its entirety.
GENERAL
The Merger Agreement provides for a business combination between St. Paul
and USF&G in which, subject to the satisfaction of the conditions therein, the
Merger will be effected and the holders of USF&G Common Stock (other than
Excluded Shares) will be issued St. Paul Common Stock in a transaction intended
to qualify as a "pooling of interests" for accounting purposes and as a
"reorganization" within the meaning of Section 368(a) of the Code for Federal
income tax purposes. In the Merger, each outstanding share of USF&G Common Stock
(other than Excluded Shares) will be converted into and become exchangeable for
the Merger Consideration. Each outstanding share of St. Paul Common Stock will
remain outstanding following the Merger.
TERMS OF THE MERGER
At the Effective Time, St. Paul, Merger Sub and USF&G will consummate the
Merger. USF&G will be the surviving corporation, will be a wholly owned
subsidiary of St. Paul and will continue to be governed by the laws of Maryland.
The Merger Agreement provides that the charter of USF&G in effect immediately
prior to the Effective Time will remain the charter of the surviving
corporation, with certain amendments specified in the Merger Agreement. The
Merger Agreement provides that the bylaws of Merger Sub in effect at the
Effective Time shall be the bylaws of the surviving corporation following the
Merger.
At the Effective Time, each issued and outstanding share of USF&G Common
Stock (other than Excluded Shares) will be converted into and become
exchangeable for the Merger Consideration, and the right, if any, to receive
cash in lieu of any fractional share into which such shares of USF&G Common
Stock have been converted and any distribution or dividend with a record date
after the Effective Time, in each case without interest.
If at any time during the period between the date of the Merger Agreement
and the Effective Time there is a change in the number of shares of USF&G Common
Stock or St. Paul Common Stock or securities convertible or exchangeable into or
exercisable for shares of USF&G Common Stock or St. Paul Common Stock,
respectively, issued and outstanding as a result of a reclassification, stock
split, stock dividend or distribution, recapitalization, merger, subdivision,
issuer tender or exchange offer, or other similar transaction, the Merger
Consideration and the Collars will be equitably adjusted. See "The St. Paul
Stock Split."
No fractional shares of St. Paul Common Stock will be issued in the Merger.
Instead, the Merger Agreement provides that each holder of USF&G Common Stock
who would otherwise have been entitled to receive a fractional share of St. Paul
Common Stock will be entitled to receive, in lieu thereof, cash representing
such holder's proportionate interest in the net proceeds from the sale by the
Exchange Agent (as defined under the caption "--Exchange Agent") of the
aggregate fractional shares of St. Paul Common Stock that such holder otherwise
would be entitled to receive.
EFFECTIVE TIME
As soon as practicable after the closing of the Merger (the "Closing"), St.
Paul and USF&G will cause Articles of Merger (the "Articles of Merger") to be
executed, acknowledged and filed with and accepted
42
<PAGE>
for record by the State Department of Assessment and Taxation of the State of
Maryland (the "Department"). The Merger will become effective when the
Department accepts for record the Articles of Merger or at such later time
agreed by USF&G and St. Paul and established under the Articles of Merger, not
to exceed 30 days after the Articles of Merger are accepted for record by the
Department (the "Effective Time").
EXCHANGE OF USF&G CERTIFICATES
The Merger Agreement provides that promptly after the Effective Time, St.
Paul will deposit with an exchange agent (the "Exchange Agent") for the benefit
of the holders of USF&G Common Stock, certificates representing the shares of
St. Paul Common Stock and, after the Effective Time, if applicable, any cash,
dividends or other distributions with respect to St. Paul Common Stock to be
issued or paid pursuant to the terms of the Merger Agreement (including cash in
lieu of fractional shares) in exchange for shares of USF&G Common Stock
outstanding immediately prior to the Effective Time upon due surrender of the
certificates formerly representing USF&G Common Stock ("USF&G Certificates").
St. Paul will cause the Exchange Agent to mail to each holder of record of USF&G
Common Stock (other than holders of Excluded Shares) a letter of transmittal,
instructions concerning the exchange of USF&G Certificates for certificates
representing shares of St. Paul Common Stock ("St. Paul Certificates"), any
unpaid dividends, other distributions and cash in lieu of fractional shares to
which the holder of such USF&G Certificate would be entitled. Upon surrender of
USF&G Certificates for cancellation to the Exchange Agent together with a duly
executed letter of transmittal, the holder of such USF&G Certificates will be
entitled to receive a St. Paul Certificate representing that number of whole
shares of St. Paul Common Stock that such holder is entitled to receive pursuant
to the terms of the Merger Agreement and a check in the amount (after giving
effect to any required tax withholdings) of any cash in lieu of fractional
shares plus any unpaid dividends or other distributions that such holder has the
right to receive pursuant to the terms of the Merger Agreement.
The Merger Agreement further provides that whenever a dividend or other
distribution is declared by St. Paul in respect of St. Paul Common Stock, the
record date for which is at or after the Effective Time, that declaration will
include dividends or other distributions in respect of all shares issuable
pursuant to the Merger Agreement. No dividends or other distributions in respect
of the St. Paul Common Stock will be paid to any holder of any unsurrendered
USF&G Certificate until such USF&G Certificate is surrendered for exchange in
accordance with the Merger Agreement. Subject to the effect of applicable laws,
following surrender of any such USF&G Certificate, there will be issued and/or
paid to the holder of the St. Paul Certificates issued in exchange therefor,
without interest, (a) at the time of such surrender, the dividends or other
distributions with a record date after the Effective Time which are payable at
such time with respect to such whole shares of St. Paul Common Stock and which
have not been previously paid and (b) at the appropriate payment date, the
dividends or other distributions payable with respect to such whole shares of
St. Paul Common Stock with a record date after the Effective Time but with a
payment date subsequent to surrender.
In addition, pursuant to the Merger Agreement, holders of unsurrendered
USF&G Certificates who were the registered holders of the shares of USF&G Common
Stock underlying such USF&G Certificates at the Effective Time will be entitled
to vote at any meeting of St. Paul shareholders after the Effective Time the
number of whole shares of St. Paul Common Stock represented by their USF&G
Certificates, regardless of whether they have exchanged their USF&G
Certificates.
HOLDERS OF USF&G COMMON STOCK SHOULD NOT SEND THEIR USF&G CERTIFICATES TO THE
EXCHANGE AGENT UNTIL TRANSMITTAL MATERIALS ARE RECEIVED FROM THE EXCHANGE AGENT.
HOLDERS OF ST. PAUL VOTING STOCK WILL NOT EXCHANGE THEIR ST. PAUL CERTIFICATES.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
USF&G, St. Paul and Merger Sub, certain of which are qualified as to
materiality. Pursuant to the Merger Agreement, USF&G has made representations
and warranties to St. Paul and St. Paul has made representations to USF&G as to
the following matters, among others: (a) its and its Subsidiaries' (as defined
in the Merger Agreement) corporate existence, good standing and capitalization;
(b) the due licensing and authorization as an insurance company or reinsurer,
and the due authorization to write lines of business of its insurance
subsidiaries; (c) its corporate power and the authority to execute, deliver and
perform its obligations under the Merger Agreement and the Stock Option
Agreement between St. Paul and USF&G, dated as of January 19, 1998 (the "Stock
Option Agreement"), and to consummate the Merger; (d) consents, registrations,
approvals, permits or authorizations required from any governmental or
regulating authority, agency, commission, or body or other governmental entity
(each a "Governmental Entity") required in connection with the execution of the
Merger Agreement and the Stock Option Agreement and the consummation of the
Merger and the transactions contemplated by the Merger Agreement and the Stock
Option Agreement; (e) noncontravention of organizational documents, contracts,
laws or governmental or non-governmental permits or licenses to which it or any
of its Subsidiaries is subject; (f) its reports and financial statements; (g)
the statements of its insurance Subsidiaries filed with insurance regulatory
authorities; (h) the conduct of its and its Subsidiaries' business since
December 31, 1996; (i) the existence of any pending or threatened civil,
criminal or administrative actions, suits or proceedings and the existence of
any undisclosed liabilities or obligations; (j) its and its Subsidiaries' bonus,
deferred compensation, pension, retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock, stock
option, employment, termination, severance, change of control, compensation,
medical, health or other plan, agreement, policy or arrangement that covers
employees, directors, former employees or former directors of it and its
Subsidiaries (in the case of USF&G, the "USF&G Compensation and Benefit Plans"
and, in the case of St. Paul, the "St. Paul Compensation and Benefit Plans");
(k) its and its Subsidiaries' (including its insurance Subsidiaries') compliance
with laws and permits; (l) environmental matters; (m) the absence of any action
that would prevent the Merger from being a "pooling of interests" or prevent the
Merger from being a reorganization within the meaning of Section 368(a) of the
Code; (n) tax matters; (o) labor matters; (p) absence of any brokers and finders
fees; (q) insurance matters; and (r) insurance reserves.
In addition, USF&G has represented to St. Paul as to the following matters,
among others: (a) the inapplicability of any takeover statute to the Merger or
the transactions contemplated by the Merger Agreement and the Stock Option
Agreement; (b) that it has amended the USF&G Rights Agreement (as defined below
under "Comparison of Certain Rights of St. Paul Common Stock and USF&G Common
Stock--Shareholders Rights Plan -- USF&G") to provide that St. Paul will not be
deemed an Acquiring Person (as defined in the USF&G Rights Agreement), the
Distribution Date (as defined in the USF&G Rights Agreement) will not be deemed
to occur, and the rights issuable pursuant to the Rights Agreement will not
separate from the USF&G Common Stock, as a result the Merger; (c) ownership of
intellectual property by it and its subsidiaries and (d) certain investment
advisory related matters.
OPERATIONAL COVENANTS
USF&G
Pursuant to the Merger Agreement, during the period from the date of the
Merger Agreement until the Effective Time, except as otherwise contemplated by
the Merger Agreement, or unless St. Paul otherwise approves in writing, USF&G
has agreed, among other things, that: (a) it and its Subsidiaries will conduct
their businesses in the ordinary and usual course; (b) it and its Subsidiaries
will use reasonable best efforts to preserve its business organization intact
and maintain its existing relations and goodwill with customers, suppliers,
reinsurers, distributors, creditors, lessors, employees and business associates;
(c) it will not (i) issue, sell, pledge, dispose of or encumber any capital
stock owned by it in any of its
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Subsidiaries; (ii) amend its charter or by-laws or amend, modify or terminate
the USF&G Rights Agreement; (iii) split, combine or reclassify its outstanding
shares of stock; (iv) authorize, declare, set aside or pay any dividend payable
in cash, stock or property in respect of any capital stock other than dividends
from its direct or indirect wholly-owned Subsidiaries and other than regular
quarterly cash dividends paid by USF&G not in excess of $.07 per share; or (v)
repurchase, redeem or otherwise acquire, except in connection with USF&G's Stock
Incentive Plan of 1997, Amended and Restated 1993 Stock Plan for Non-Employee
Directors, 1992 Employee Stock Option Plan, the Stock Incentive Plan of 1991,
Stock Option Plan of 1990, Stock Option Plan of 1987, 1994 Stock Plan for
Employees of USF&G and Titan Stock Option Plans (the "USF&G Stock Plans"), or
permit any of its Subsidiaries to purchase or otherwise acquire, any shares of
its stock or any securities convertible into or exchangeable or exercisable for
any shares of its stock; (d) neither it nor any of its Subsidiaries will (i)
except as otherwise permitted by the Merger Agreement, issue, sell, pledge,
dispose of or encumber any shares of, or securities convertible into or
exchangeable or exercisable for, or options, warrants, calls, commitments or
rights of any kind to acquire, (x) any shares of its capital stock of any class,
or (y) securities convertible or exchangeable for any other property or assets
(other than shares of USF&G Common Stock issuable pursuant to options
outstanding on the date of the Merger Agreement under any of the USF&G Stock
Plans or upon conversion of USF&G's Zero Coupon Convertible Notes due 2009 (the
"Convertible Notes")); (ii) other than in the ordinary and usual course of
business, transfer, lease, license, guarantee, sell, mortgage, pledge, dispose
of or encumber any other material property or assets (including capital stock of
any of its Subsidiaries) or take any action to incur or modify any material
indebtedness or other material liability; or (iii) other than for information
systems, make or authorize or commit for any capital expenditures other than in
amounts less than $20.0 million individually and in the aggregate; (iv) make or
authorize or commit for any capital expenditures for information systems except
for amounts which, individually or in the aggregate, are less than $25.0
million, or (v) make any acquisition of, or investment in, the assets or stock
of any other person or entity (other than a Subsidiary) except for ordinary
course investment activities; (e) neither it nor any of its Subsidiaries will
terminate, establish, adopt, enter into, make any new grants or awards under,
amend or otherwise modify, any USF&G Compensation and Benefit Plans or increase
the salary, wage, bonus or other compensation of any employees except increases
for employees of USF&G occurring in the ordinary and usual course of business,
subject to certain exceptions, and except for the grant of new options
exercisable for no more than 3,300,000 shares of USF&G Common Stock; (f) neither
it nor any of its Subsidiaries will pay, discharge, settle or satisfy (i) any
insurance claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise) for amounts in excess of $2,500,000 or (ii)
any non-insurance claim, liability or obligation (including extra-contractual
obligations), other than (x) the payment, discharge or satisfaction of such
claims, liabilities or obligations in the ordinary and usual course of business
for amounts not in excess of $500,000, or (y) ordinary course repayment of
indebtedness or payment of contractual obligations when due; (g) neither it nor
any of its Subsidiaries will make or change any tax election, settle any
material audit, file any amended tax returns or permit any insurance policy
naming it as a beneficiary or loss-payable payee to be canceled or terminated
except in the ordinary and usual course of business; (h) neither it nor any of
its Subsidiaries will enter into any agreement containing any provision or
covenant limiting in any material respect the ability of USF&G or any Subsidiary
of USF&G or affiliate of USF&G to (i) sell any products or services of or to any
other person, (ii) engage in any line of business, or (iii) compete with or to
obtain products or services from any person or limiting the ability of any
person to provide products or services to USF&G or any of its Subsidiaries or
affiliates; (i) neither it nor any of its Subsidiaries will enter into (x) any
new quota share or reinsurance transaction pursuant to which $2,000,000 or more
in gross written premiums are ceded by USF&G's insurance company subsidiaries or
(y) renewal, extension or modification of an existing treaty or other program
pursuant to which $15,000,000 or more in annual ceded written premiums are ceded
by USF&G's insurance subsidiaries; and (j) neither it nor any of its
Subsidiaries will take any action that would cause any of its representations
and warranties contained in the Merger Agreement to become untrue in any
material respect.
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ST. PAUL
In addition, pursuant to the Merger Agreement, during the period from the
date of the Merger Agreement until the Effective Time, except as otherwise
contemplated by the Merger Agreement, or unless USF&G otherwise approves in
writing, St. Paul has agreed that: (a) it and its Subsidiaries will conduct
their business in the ordinary and usual course; (b) each of it and its
Subsidiaries will use their reasonable best efforts to preserve its business
organization intact and maintain its existing relations and goodwill with
customers, suppliers, reinsurers, distributors, creditors, lessors, employees
and business associates; (c) it will not (i) issue, sell, pledge, dispose of or
encumber any capital stock owned by it in any of its Significant Subsidiaries
(as defined in the Securities Exchange Act of 1934, as amended (the "Exchange
Act")); (ii) amend its charter; (iii) split, combine or reclassify its
outstanding shares of stock; (iv) authorize, declare, set aside or pay any
dividend payable in cash, stock or property in respect of any capital stock
other than dividends from its direct or indirect wholly-owned Subsidiaries and
other than regular quarterly cash dividends paid by St. Paul; or (v) repurchase,
redeem or otherwise acquire, except in connection with any of the St. Paul Stock
Plans, or permit any of its Subsidiaries to purchase or otherwise acquire, any
shares of its stock or any securities convertible into or exchangeable or
exercisable for any shares of its stock if such purchase, redemption or
acquisition would preclude St. Paul's accounting for the Merger as a "pooling of
interests;" (d) except for ordinary course investment activities, neither it nor
any of its Subsidiaries will make any acquisition of, or investment in, assets
or stock of any other person or entity (other than a Subsidiary) in excess of
$2.0 billion in the aggregate; (e) neither it nor any of its Subsidiaries will
take any action that would cause any of its representations and warranties
contained in the Merger Agreement to become untrue in any material respect. St.
Paul also has agreed that between the date of the Merger Agreement and the
Effective Time, it will not pay quarterly cash dividends in excess of $.60 per
share.
ACQUISITION PROPOSALS
The Merger Agreement provides that following the date of the Merger
Agreement until the termination thereof, USF&G will not, and will not permit or
cause any of its Subsidiaries or any of the executive officers and directors of
USF&G or its Subsidiaries to, and will direct and use its best efforts to cause
its and its Subsidiaries' employees, agents and representatives not to, directly
or indirectly, initiate, solicit, or knowingly encourage or otherwise
intentionally facilitate any inquiries or the making of any proposal or offer
(other than the Merger) with respect to a merger, reorganization, share
exchange, consolidation or similar transaction involving, or any purchase of all
or a substantial portion of the assets or any equity securities of it or any of
its Subsidiaries (any such proposal or offer being a "USF&G Acquisition
Proposal"). In addition, the Merger Agreement provides that USF&G will not, and
will not permit or cause any of its Subsidiaries or any of the officers and
directors of it or its Subsidiaries to and will direct and use its best efforts
to cause its and its Subsidiaries' employees, agents and representatives
(including, any investment banker, attorney or accountant retained by it or any
of its Subsidiaries) not to, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to a USF&G Acquisition Proposal, or
otherwise intentionally facilitate any effort or attempt to make or implement a
USF&G Acquisition Proposal. The terms of the Merger Agreement do not prevent
USF&G or the USF&G Board from complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a USF&G Acquisition Proposal, or at any time prior
to the time that the Merger is approved by the holders of USF&G Common Stock (a)
providing information in response to a request therefor by a person who has made
an unsolicited bona fide written USF&G Acquisition Proposal if the USF&G Board
receives from the person so requesting such information an executed
confidentiality agreement the terms of which are (i) no less favorable to USF&G
and (ii) no less restrictive on the person requesting such information than
those contained in the Confidentiality Agreement dated March 28, 1997 between
St. Paul and USF&G; (b) engaging in any negotiations or discussions with any
person who has made an unsolicited bona fide written USF&G Acquisition Proposal;
or (c) recommending such a USF&G Acquisition Proposal to the shareholders of
USF&G, if and only to
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the extent that, (i) in each such case referred to in clause (a), (b) or (c)
above, the USF&G Board determines in good faith after consultation with outside
legal counsel that such action is necessary in order for its directors to comply
with their respective fiduciary duties under applicable law and (ii) in each
case referred to in clause (b) or (c) above, the USF&G Board determines in good
faith (after consultation with its financial advisor) that such USF&G
Acquisition Proposal, if accepted is reasonably likely to be consummated, taking
into account all legal, financial and regulatory aspects of the proposal and the
person making the proposal, and would, if consummated, result in a transaction
more favorable to USF&G's shareholders from a financial point of view than the
Merger (any such more favorable USF&G Acquisition Proposal being a "Superior
Proposal"). USF&G has agreed to promptly notify St. Paul if any such inquiries,
proposals or offers are received by, any such information is requested from, or
any such discussions or negotiations are sought to be initiated or continued
with, any of its representatives, and thereafter will keep St. Paul informed, on
a current basis, of the status of any such proposals or offers and the status of
any such discussions or negotiations.
SHAREHOLDERS MEETINGS
Pursuant to the Merger Agreement, USF&G and St. Paul have agreed to take all
action necessary to convene their Meetings as promptly as practicable after the
Registration Statement (as defined under the caption "Where You Can Find More
Information") is declared effective. In addition, USF&G has agreed that the
USF&G Board, subject to its obligations under applicable law, will recommend
approval of the Merger, will not withdraw or modify such recommendation and will
take all lawful action to solicit such approval and St. Paul has agreed that the
St. Paul Board, subject to its fiduciary obligations under applicable law, will
recommend approval of the issuance of St. Paul Common Stock pursuant to the
Merger Agreement, will not withdraw or modify such recommendation, and will take
all lawful action to solicit such approval. The USF&G Board may modify or
withdraw such recommendation following receipt of a Superior Proposal.
FILINGS; OTHER ACTIONS; NOTIFICATION
The Merger Agreement provides that St. Paul and USF&G will promptly prepare
and file with the Securities and Exchange Commission (the "SEC") this Joint
Proxy Statement/Prospectus and that St. Paul will prepare and file with the SEC
the Registration Statement as promptly as practicable. St. Paul and USF&G have
agreed in the Merger Agreement to use their reasonable best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing, and promptly thereafter to mail this Joint
Proxy Statement/Prospectus to the respective shareholders of each of USF&G and
St. Paul.
In addition, pursuant to the Merger Agreement, USF&G and St. Paul each has
agreed to cooperate with the other and use (and to cause its Subsidiaries to
use) its reasonable best efforts to cause to be done all things, necessary,
proper or advisable on its part under the Merger Agreement, the Stock Option
Agreement and applicable Laws (as defined in the Merger Agreement) to consummate
and make effective the Merger and the other transactions contemplated by the
Merger Agreement and the Stock Option Agreement, including preparing and filing
all documentation to effect all necessary notices, reports and other filings and
to obtain as promptly as practicable all consents, registrations, approvals,
permits and authorizations necessary or advisable to be obtained from any third
party and/or any Governmental Entity in order to consummate the Merger or any of
the other transactions contemplated by the Merger Agreement and the Stock Option
Agreement. The Merger Agreement further provides that it does not and it should
not be construed to require St. Paul, in connection with the receipt of any
regulatory approval, to proffer to, or agree to (i) sell or hold separate and
agree to sell or to discontinue or limit, before or after the Effective Time,
any assets, businesses, or interest in any assets or businesses of St. Paul,
USF&G or any of their respective affiliates (or to consent to any sale, or
agreement to sell, or discontinuance or limitation by USF&G of any of its assets
or businesses) or (ii) agree to any conditions relating to, or changes or
restrictions in, the operations of any such asset or businesses which, in either
case
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would be reasonably expected to materially and adversely impact the economic or
business benefits to St. Paul of the transactions contemplated by the Merger
Agreement.
TAXATION AND ACCOUNTING
Pursuant to the Merger Agreement, both St. Paul and USF&G have agreed not to
take or cause to be taken any action that would disqualify the Merger as a
"pooling of interests" for accounting purposes or as a "reorganization" within
the meaning of Section 368(a) of the Code.
STOCK EXCHANGE LISTING
Pursuant to the Merger Agreement, St. Paul has agreed to use its best
efforts to cause the shares of St. Paul Common Stock to be issued in the Merger
to be approved for listing on the NYSE, subject to official notice of issuance,
prior to the Closing Date.
EMPLOYEE BENEFITS
STOCK OPTIONS
The Merger Agreement provides that at the Effective Time, each outstanding
option to purchase USF&G Common Stock under each of the USF&G Stock Plans (each
a "USF&G Option") will be deemed to constitute an option to acquire, on the same
terms and conditions as were applicable under such USF&G Option, a number of
shares of St. Paul Common Stock equivalent to (a) the number of shares of USF&G
Common Stock that could have been purchased immediately prior to the Effective
Time under such USF&G Option multiplied by (b) the Exchange Ratio, at a price
per share of St. Paul Common Stock equal to the aggregate exercise price for the
USF&G Common Stock otherwise purchasable pursuant to such USF&G Option divided
by the number of shares of St. Paul Common Stock equal to the product of (a) and
(b) above. The Merger Agreement provides that this provision is subject to such
adjustments as are necessary in order to satisfy the requirements of Section
424(a) of the Code with respect to any USF&G Option to which Section 422 of the
Code applies.
In addition, the Merger Agreement also provides that, at the Effective Time,
all vested stock units allocated to the account of directors of USF&G under
USF&G's Amended and Restated 1993 Stock Plan for Non-Employee Directors ("Vested
Stock Units") will be paid, on the same terms and conditions as are applicable
under such plan, in a number of shares of St. Paul Common Stock equal to the
number of Vested Stock Units allocated to the director's account in such plan
multiplied by the Exchange Ratio.
EMPLOYEE BENEFIT PLANS
Pursuant to the Merger Agreement, St. Paul has agreed that, during the
period commencing at the Effective Time and ending on the first anniversary of
the Effective Time, the employees of USF&G and its Subsidiaries will continue to
be provided with benefits under employee benefit plans (other than plans
involving the issuance of shares of USF&G Common Stock) that are no less
favorable in the aggregate than those benefits currently provided by USF&G and
its Subsidiaries to such employees and that St. Paul will provide certain
severance benefits to USF&G employees terminated during such period. Following
the Effective Time, St. Paul will honor all individual employment or severance
agreements in effect for employees of USF&G as of the date of the Merger
Agreement, subject to the right of St. Paul to amend or terminate such
agreements in accordance with their terms.
EXPENSES
Except as otherwise described under the caption "--Effect of Termination,"
and except as set forth below, whether or not the Merger is consummated, all
costs and expenses incurred in connection with the Merger Agreement, the Stock
Option Agreement, the Merger and the other transactions contemplated by the
Merger Agreement and the Stock Option Agreement will be paid by the party
incurring such expense,
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except that expenses incurred in connection with the filing fee for the
Registration Statement and printing and mailing this Joint Proxy
Statement/Prospectus and the Registration Statement will be shared equally by
St. Paul and USF&G.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
The Merger Agreement provides that from and after the Effective Time, St.
Paul will indemnify and hold harmless each present and former director and
officer of USF&G (determined as of the Effective Time) against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
amounts paid in settlement claims, damages or liabilities incurred in connection
with any claim, action, suit, proceeding or investigation arising in whole or in
part out of matters existing or occurring at or prior to the Effective Time, to
the fullest extent that USF&G would have been permitted under Maryland law and
its charter or by-laws in effect on the date of the Merger Agreement to
indemnify such person. In addition, St. Paul is obliged to advance expenses as
incurred to the fullest extent permitted under applicable law; PROVIDED the
person to whom expenses are advanced provides a written affirmation of his or
her good faith belief that the standard of conduct necessary for indemnification
has been met, and an undertaking to repay such advances if it is ultimately
determined that such person is not entitled to indemnification.
The Merger Agreement further provides that St. Paul will cause to be
maintained, for a period of not less than six years from the Effective Time,
USF&G's current directors' and officers' liability insurance policy to the
extent that it provides coverage for events occurring prior to the Effective
Time (the "D&O Insurance") for all present and former directors and officers of
USF&G or any Subsidiary, so long as the annual premium therefor would not be in
excess of 200% of the last annual premium paid for the D&O Insurance prior to
the date of the Merger Agreement (200% of such premium, the "Maximum Premium");
PROVIDED that St. Paul may, in lieu of maintaining such existing D&O Insurance
as provided above, cause no less favorable coverage to be provided under any
policy maintained for the benefit of the directors and officers of St. Paul or a
separate policy provided by the same insurer. If the existing D&O Insurance
expires, is terminated or canceled by the insurer or if the annual premium would
exceed the Maximum Premium during such six-year period, St. Paul has agreed to
obtain, in lieu of such D&O Insurance, such comparable directors' and officers'
liability insurance as can be obtained for the remainder of such period for an
annualized premium not in excess of the Maximum Premium and on terms and
conditions no less advantageous than the existing D&O Insurance.
ELECTION TO ST. PAUL'S BOARD OF DIRECTORS
St. Paul has agreed promptly after the Effective Time to increase the size
of the St. Paul Board and to cause Mr. Norman P. Blake, Jr., the Chairman,
President and Chief Executive Officer of USF&G, and two additional directors of
USF&G determined by the Board Governance Committee of the St. Paul Board to be
appointed to the St. Paul Board. In addition, subject to its fiduciary duties
under applicable law, St. Paul agreed pursuant to the Merger Agreement to
nominate two, or if the Effective Time occurs on or after August 15, 1998,
three, of such directors for election to the St. Paul Board at its first annual
meeting with a mailing date after the Effective Time.
CONDITIONS
The Merger Agreement provides that the respective obligations of each of
USF&G, St. Paul and Merger Sub to effect the Merger are subject to, among other
things, the satisfaction or waiver at or prior to the Effective Time of each of
the following conditions: (a) the Merger being duly approved by the holders of
USF&G Common Stock; (b) the issuance of St. Paul Common Stock pursuant to the
Merger Agreement being duly approved by the holders of St. Paul Voting Stock;
(c) the shares of St. Paul Common Stock issuable to USF&G shareholders pursuant
to the Merger Agreement being authorized for listing on the NYSE upon official
notice of issuance; (d) the waiting period applicable to the consummation of the
Merger under the HSR Act and applicable insurance laws having expired or been
terminated; (e) all other
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notices, reports and other filings required to be made prior to the Effective
Time by USF&G or St. Paul or any of their respective Subsidiaries having been
made, and all consents, registrations, approvals, permits and authorizations
required to be obtained prior to the Effective Time by USF&G or St. Paul or any
of their respective Subsidiaries from any Governmental Entity (collectively,
"Governmental Consents"), in connection with the execution and delivery of the
Merger Agreement and the consummation of the Merger and the other transactions
contemplated by the Merger Agreement and the Stock Option Agreement having been
made or obtained, except where the failure to make any such filing(s) or obtain
any such Governmental Consent would not reasonably be expected to result in an
aggregate loss of $50.0 million or more in annual net written premiums for St.
Paul, USF&G and their respective Subsidiaries in all jurisdictions requiring
such filing(s) or Governmental Consent(s) in the event such filing(s) is (are)
not made or such Governmental Consent(s) is (are) not obtained; (f) no court or
Governmental Entity of competent jurisdiction having enacted, issued,
promulgated, enforced or entered any law, statute, ordinance, rule, regulation,
judgment, decree, injunction or other order that is in effect and restrains,
enjoins or otherwise prohibits consummation of the Merger (collectively, an
"Order") and no Governmental Entity having instituted any proceeding seeking any
such Order; (g) the Registration Statement having become effective under the
Securities Act; and (h) no stop order suspending the effectiveness of the
Registration Statement having been issued, and no proceeding for that purpose
having been initiated or be threatened, by the SEC.
The Merger Agreement provides that the obligations of St. Paul and Merger
Sub to effect the Merger are also subject to the satisfaction or waiver by St.
Paul at or prior to the Effective Time of, among others, the following
conditions: (a) to the actual knowledge of the Responsible Executive Officers of
USF&G (as defined in the Merger Agreement), the representations and warranties
of USF&G set forth in the Merger Agreement not being untrue or incorrect in any
material respect as of the date of the Merger Agreement and the representations
and warranties of USF&G set forth in the Merger Agreement being true and correct
as of the Closing Date as though made on and as of the Closing Date (except to
the extent any such representation or warranty expressly speaks as of an earlier
date) except where the failure of such representations and warranties to be so
true and correct (without giving effect in such representations and warranties
to any qualifications as to "USF&G Material Adverse Effect" (as defined below),
"material" or similar qualifications) would not, individually or in the
aggregate, reasonably be expected to have a USF&G Material Adverse Effect; (b)
USF&G having performed in all material respects all obligations required to be
performed by it under the Merger Agreement and the Stock Option Agreement at or
prior to the Closing Date; (c) USF&G having obtained the consent or approval of
each person whose consent or approval will be required under any Contract (as
defined in the Merger Agreement) (subject to certain exceptions) to which USF&G
or any of its Subsidiaries is a party except those for which the failure to
obtain such consents or approvals, individually or in the aggregate, is not
reasonably likely to have a USF&G Material Adverse Effect or is not reasonably
likely to prevent or materially impair the ability of USF&G to consummate the
transactions contemplated by the Merger Agreement; (d) St. Paul having received
the opinion of Sullivan & Cromwell, counsel to St. Paul, dated the Closing Date,
to the effect that the Merger will be treated for federal income tax purposes as
a reorganization within the meaning of Section 368(a) of the Code; and (e) St.
Paul having received, in form and substance reasonably satisfactory to St. Paul,
from each of KPMG Peat Marwick LLP (or its successor) and Ernst & Young LLP (or
its successor) a favorable letter, dated the Closing Date, regarding the
appropriateness of "pooling of interests" accounting treatment for the Merger.
The term "USF&G Material Adverse Effect" is defined in the Merger Agreement as a
material adverse effect on the financial condition, properties, business or
results of the operations of USF&G and its Subsidiaries taken as a whole, other
than effects caused by changes in general economic or securities markets
conditions, changes that affect the insurance industry in general, changes
resulting from any event that is designated to be a "catastrophe" by the
Property Claims Services Division of the American Insurance Services Group,
Inc., or changes resulting from insurance exposures not known to any of the
Responsible Executive Officers of USF&G after due inquiry on or prior to the
date of the Merger Agreement or, if known, disclosed on or prior to the date of
the Merger Agreement to an employee of St. Paul having substantial
responsibility for due diligence in connection with
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the transactions contemplated by the Merger Agreement, and changes resulting
from the announcement or proposed consummation of the Merger Agreement and the
transactions contemplated thereby.
The Merger Agreement further provides that the obligation of USF&G to effect
the Merger is also subject to the satisfaction or waiver by USF&G at or prior to
the Effective Time of the following conditions: (a) to the actual knowledge of
the Responsible Executive Officers of St. Paul (as defined in the Merger
Agreement), the representations and warranties of St. Paul and Merger Sub set
forth in the Merger Agreement not being untrue or incorrect in any material
respect as of the date of the Merger Agreement and the representations and
warranties of St. Paul set forth in the Merger Agreement being true and correct
as of the Closing Date as though made on and as of the Closing Date (except to
the extent any such representation or warranty expressly speaks as of an earlier
date) except where the failure of such representations and warranties to be so
true and correct (without giving effect to any qualifications of such
representations and warranties as to "St. Paul Material Adverse Effect" (as
defined below), "material" or similar qualifications) would not, individually or
in the aggregate, reasonably be expected to have a St. Paul Material Adverse
Effect; (b) each of St. Paul and Merger Sub having performed in all material
respects all obligations required to be performed by it under the Merger
Agreement at or prior to the Closing Date; (c) St. Paul having obtained the
consent or approval of each person whose consent or approval will be required in
order to consummate the transactions contemplated by the Merger Agreement under
any material Contract to which St. Paul or any of its Subsidiaries is a party,
except those for which failure to obtain such consents and approvals,
individually or in the aggregate, is not reasonably likely to have a St. Paul
Material Adverse Effect or is not reasonably likely to prevent or to materially
burden or materially impair the ability of St. Paul to consummate the
transactions contemplated by the Merger Agreement; (d) USF&G having received the
opinion of Piper & Marbury L.L.P., counsel to USF&G, dated the Closing Date, to
the effect that the Merger will be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; and (e) USF&G
having received, in form and substance reasonably satisfactory to USF&G, from
each of KPMG Peat Marwick LLP (or its successor) and Ernst & Young LLP (or its
successor) a favorable letter, dated the Closing Date, regarding the
appropriateness for "pooling of interests" accounting treatment for the Merger.
The term "St. Paul Material Adverse Effect" is defined in the Merger Agreement
as a material adverse effect on the financial condition, properties, business or
results of the operations of St. Paul and its Subsidiaries taken as a whole,
other than effects caused by changes in general economic or securities markets
conditions, changes that affect the insurance industry in general, changes
resulting from any event that is designated to be a "catastrophe" by the
Property Claims Services Division of the American Insurance Services Group,
Inc., or changes resulting from insurance exposures not known to any of the
Responsible Executive Officers of St. Paul after due inquiry on or prior to the
date of the Merger Agreement or, if known, disclosed on or prior to the date of
the Merger Agreement to an employee of USF&G having substantial responsibility
for due diligence in connection with the transactions contemplated by the Merger
Agreement, and changes resulting from the announcement or proposed consummation
of the Merger Agreement and the transactions contemplated thereby.
TERMINATION
The Merger Agreement provides that it may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, whether before or after
the approval by shareholders of USF&G and St. Paul, by mutual written consent of
USF&G and St. Paul by action of their respective boards of directors.
The Merger Agreement further provides that it may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of the
St. Paul Board or the USF&G Board if (a) the Merger has not been consummated by
August 15, 1998 (the "Termination Date"); PROVIDED, HOWEVER, that (i) if either
St. Paul or USF&G determines that additional time is necessary in connection
with obtaining any Governmental Consents, the Termination Date may be extended
by St. Paul or USF&G from time to time by written notice to the other party to a
date not beyond December 15, 1998, and (ii) this right to terminate the Merger
Agreement will not be available to any party that has breached in any material
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respect its obligations under the Merger Agreement in any manner that will have
proximately contributed to the occurrence of the failure of the Merger to be
consummated; (b) the approval by USF&G's shareholders of the Merger has not been
obtained at the USF&G Special Meeting or the approval of St. Paul's shareholders
of the issuance of shares of St. Paul Common Stock pursuant to the Merger
Agreement has not been obtained at the St. Paul Special Meeting; or (c) any
Order permanently restraining, enjoining or otherwise prohibiting consummation
of the Merger becomes final and non-appealable.
In addition, the Merger Agreement provides that it may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by an action of
the USF&G Board (a) if (i) USF&G is not in material breach of its obligations
under the Merger Agreement relating to Acquisition Proposals; (ii) the Merger
has not been approved by the holders of USF&G Common Stock; (iii) the USF&G
Board authorizes USF&G to enter into a binding written agreement concerning a
transaction that constitutes a Superior Proposal and USF&G notifies St. Paul in
writing that it intends to enter into such an agreement, attaching the most
current version of such agreement to such notice; (iv) St. Paul does not make,
within five business days of receipt of USF&G's written notification of its
intention to enter into a binding agreement for a Superior Proposal, an offer
that the USF&G Board determines, in good faith after consultation with its
financial advisors, is at least as favorable, from a financial point of view, to
the shareholders of USF&G as the Superior Proposal; and (v) if so requested in
writing by St. Paul, USF&G prior to such termination pays to St. Paul in
immediately available funds the Termination Fee (as defined below under the
caption "--Termination Fee") and St. Paul's expenses (see "--Termination Fee");
or (b) if there is a breach by St. Paul or Merger Sub of any representation,
warranty, covenant or agreement contained in the Merger Agreement that cannot be
cured and would cause the condition relating to either St. Paul's or Merger
Sub's representations and warranties or obligations pursuant to the Merger
Agreement to be incapable of being satisfied.
The Merger Agreement further provides that it may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of the
St. Paul Board if (a) USF&G enters into a binding agreement for a Superior
Proposal or the USF&G Board withdraws or adversely modifies its approval or
recommendation of the Merger Agreement or the Merger, or fails to reconfirm its
recommendation of the Merger Agreement within five business days after a written
request by St. Paul to do so or (b) there is a breach by USF&G of any
representation, warranty, covenant or agreement contained in the Merger
Agreement that cannot be cured and would cause the condition relating to USF&G's
representations and warranties or obligations pursuant to the Merger Agreement
to be incapable of being satisfied.
TERMINATION FEES
The Merger Agreement provides that in the event that (a) a USF&G Acquisition
Proposal has been made to USF&G or any of its Subsidiaries or any of its
shareholders or any person has publicly announced an intention to make a USF&G
Acquisition Proposal with respect to USF&G or any of its Subsidiaries and
thereafter the Merger Agreement is terminated by either St. Paul or USF&G or (b)
the Merger Agreement is terminated (i) by USF&G if USF&G enters into an
agreement concerning a Superior Proposal or (ii) by St. Paul if USF&G enters
into an agreement for a Superior Proposal or if the USF&G Board withdraws or
modifies its recommendation of the Merger, then USF&G will promptly, but in no
event later than two days after the date St. Paul makes a written request for
payment, pay St. Paul a termination fee of $70,000,000 and an amount equal to
all of the charges and expenses incurred by St. Paul or Merger Sub in connection
with the Merger Agreement and the Stock Option Agreement and the transactions
contemplated by the Merger Agreement and the Stock Option Agreement up to a
maximum amount of $5,000,000.
The Merger Agreement further provides that in the event that, (a) a proposal
or offer with respect to a merger, reorganization, share exchange, consolidation
or similar transaction involving, or any purchase of all or a substantial
portion of the assets or equity securities of St. Paul or any of its
Subsidiaries (a "St. Paul Acquisition Proposal") has been made to St. Paul or
any of its Subsidiaries or any person has publicly
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<PAGE>
announced an intention to make a St. Paul Acquisition Proposal with respect to
St. Paul or any of its Subsidiaries or (b) St. Paul has withdrawn or modified in
a manner adverse to USF&G its recommendation that the holders of St. Paul Voting
Stock approve the issuance of St. Paul Common Stock in the Merger, and following
(a) or (b) above, the Merger Agreement is terminated by either St. Paul or USF&G
due to the failure to obtain the approval of the issuance of St. Paul Common
Stock in the Merger from St. Paul's shareholders, then St. Paul will promptly,
but in no event later than two days after the date USF&G makes a written request
for payment, pay USF&G a termination fee of $70,000,000 and an amount equal to
all of the charges and expenses incurred by USF&G in connection with the Merger
Agreement and the Stock Option Agreement and the transactions contemplated by
the Merger Agreement and the Stock Option Agreement up to a maximum amount of
$5,000,000.
For additional information regarding the Merger, see "The Merger."
STOCK OPTION AGREEMENT
In connection with the Merger Agreement, St. Paul and USF&G entered into the
Stock Option Agreement. The following description of the Stock Option Agreement
does not purport to be complete and is qualified in its entirety by reference to
the Stock Option Agreement, a copy of which is filed as Annex B to this Joint
Proxy Statement/Prospectus. Pursuant to the Stock Option Agreement, USF&G
granted St. Paul an irrevocable option (the "Option") to purchase up to
23,181,596 shares of USF&G Common Stock (the "USF&G Shares") at a cash purchase
price equal to $22.00 per share (the "Option Purchase Price"). The Option may be
exercised by St. Paul, in whole or in part, at any time, or from time to time,
following (but not prior to) the occurrence of one of the Triggering Events (as
defined below) and prior to the termination of the Option in accordance with the
terms of the Stock Option Agreement.
The Stock Option Agreement provides that in the event of any change in the
number of issued and outstanding shares of USF&G Common Stock by reason of any
stock dividend, stock split, split-up, recapitalization, merger or other change
in the corporate or capital structure of USF&G, the number of shares of USF&G
Shares subject to the Option and the purchase price per USF&G Share will be
appropriately adjusted to restore St. Paul to its rights, including its right to
purchase shares of USF&G Shares representing 19.9% of the capital stock of USF&G
entitled to vote generally for the election of the directors of USF&G which is
issued and outstanding immediately prior to the exercise of the Option.
A "Triggering Event" occurs when (a) any person (other than St. Paul or any
of its subsidiaries) has acquired beneficial ownership (as such term is defined
in Rule 13d-3 under the Exchange Act) or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under the Exchange Act)
has been formed which beneficially owns or has the right to acquire beneficial
ownership of, USF&G Common Stock (other than trust account shares) aggregating
15 percent or more of the then outstanding USF&G Common Stock; (b) a USF&G
Acquisition Proposal has been made to USF&G or any of its Subsidiaries or any of
its shareholders or any person has publicly announced an intention to make a
USF&G Acquisition Proposal with respect to USF&G or any of its Subsidiaries and
thereafter the Merger Agreement is terminated by either St. Paul or USF&G due to
the failure to obtain the approval of the Merger by USF&G's shareholders; (c)
the Merger Agreement is terminated by USF&G as a result of the provisions of the
Merger Agreement permitting USF&G to terminate the Merger Agreement to enter
into an agreement concerning a Superior Proposal; (d) the Merger Agreement is
terminated by St. Paul after USF&G enters into a binding agreement for a
Superior Proposal or withdraws or modifies its recommendation of the Merger; or
(e) USF&G notifies St. Paul in writing that it intends to enter into an
agreement for a Superior Proposal, and St. Paul notifies USF&G in writing that
it does not intend to match the Superior Proposal referred to in USF&G's
notification.
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Pursuant to the Stock Option Agreement, at any time the Option is
exercisable, St. Paul may elect, by sending a Cash Exercise Notice (as defined
in the Stock Option Agreement), in lieu of exercising the Option for shares of
USF&G Common Stock to have USF&G pay cash in an amount equal to the Spread (as
defined below) multiplied by all or such portion of the USF&G Shares subject to
the Option as St. Paul specifies. The term "Spread" is defined in the Stock
Option Agreement as the excess, if any, over the Option Purchase Price of the
higher of (i) if applicable, the highest price per share of the USF&G Common
Stock paid or proposed to be paid in cash or property by any person pursuant to
any USF&G Acquisition Proposal (the "Alternative Purchase Price") or (ii) the
closing price of the shares of USF&G Common Stock on the NYSE Composite Tape on
the last trading day immediately prior to the date of the Cash Exercise Notice
(the "Closing Price").
Pursuant to the terms of the Stock Option Agreement, USF&G's obligation to
deliver USF&G Shares upon exercise of the Option is subject only to the
conditions that: (a) no preliminary or permanent injunction or other order
issued by any federal or state court of competent jurisdiction in the United
States prohibiting the delivery of the USF&G Shares is in effect; (b) any
applicable waiting period under the HSR Act shall have expired or shall have
been terminated; (c) any approval required to be obtained or waiting period
required to be expired prior to the delivery of the USF&G Shares under the
insurance laws of any state or foreign jurisdiction shall have been obtained and
being in full force and effect; and (d) a Triggering Event shall have occurred.
The Stock Option Agreement provides that, if by the first anniversary of the
date the Merger Agreement was terminated pursuant to the terms thereof (the
"Merger Termination Date"), neither St. Paul nor any other person has acquired
more than fifty percent (excluding the USF&G Shares purchased pursuant to the
Option) of the outstanding USF&G Common Stock, then USF&G has the right to
purchase (the "Repurchase Right") all, but not less than all, of the USF&G
Shares acquired upon exercise of the Option at the greater of (a) the Option
Purchase Price or (b) the average of the last sales prices for shares of USF&G
Common Stock on the five trading days ending five days prior to the date USF&G
gives written notice of its intention to exercise the Repurchase Right. If USF&G
does not exercise the Repurchase Right within thirty days following the end of
the one-year period after the Merger Termination Date, the Repurchase Right
lapses.
The Stock Option Agreement also provides that at any time prior to the first
anniversary of the Merger Termination Date, St. Paul will have the right to sell
(the "Sale Right") to USF&G all, but not less than all, of the USF&G Shares
acquired upon exercise of the Option at the greater of (a) the Option Purchase
Price, or (b) the average of the last sales prices for shares of USF&G Common
Stock on the five trading days ending five days prior to the date St. Paul gives
written notice of its intention to exercise the Sale Right. If St. Paul does not
exercise the Sale Right prior to the first anniversary of the Merger Termination
Date, the Sale Right terminates.
The Stock Option Agreement provides that the right to exercise the Option
will terminate at the earliest of (a) the Effective Time, (b) the date 60 days
after the Option first becomes exercisable (if the Option is not previously
exercised) and (c) if not then exercisable, thirty days after termination of the
Merger Agreement in accordance with its terms (the "Option Termination Date").
The Stock Option Agreement provides that in no event will St. Paul's Total
Profit (as defined below) exceed $75 million and, if it otherwise would exceed
such amount, St. Paul will repay such excess amount to USF&G in cash (or the
purchase price of the Repurchase Right or the Sale Right, as applicable, will be
reduced) so that St. Paul's Total Profit will not exceed $75 million after
taking into account the foregoing actions.
The Stock Option Agreement further provides that the Option may not be
exercised for a number of USF&G Shares as would, as of the date of the Stock
Exercise Notice (as defined in the Stock Option Agreement), result in a Notional
Total Profit (as defined below) of more than $75 million and, if exercise of the
Option otherwise would exceed such amount, St. Paul, at its discretion, may
increase the Purchase
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Price for that number of shares of USF&G Common Stock set forth in the Stock
Exercise Notice so that the Notional Total Profit will not exceed $75 million.
The Stock Option Agreement provides that this restriction will not restrict any
exercise of the Option permitted on any subsequent date at the Purchase Price.
The term "Total Profit" is defined in the Stock Option Agreement as the
aggregate amount (before taxes) of the following: (a) (i) the amount of cash
received by St. Paul as the Termination Fee and the amount received by St. Paul
as cash in lieu of USF&G Shares upon exercise of the Option for cash (as
described above), less (ii) any repayment of such cash to USF&G, (b) (i) the
amount received by St. Paul pursuant to USF&G's repurchase of USF&G Shares (as
described above), less (ii) St. Paul's purchase price for such USF&G Shares, and
(c) (i) the net cash amounts received by St. Paul pursuant to the sale of USF&G
Shares (or any other securities into or for which such USF&G Shares are
converted or exchanged) to any unaffiliated party, less (ii) St. Paul's purchase
price for such USF&G Shares.
As used in the Stock Option Agreement the term "Notional Total Profit," with
respect to any number of USF&G Shares as to which St. Paul may propose to
exercise the Option, will be the Total Profit determined as of the date of the
Stock Exercise Notice assuming that the Option was exercised on such date for
such number of USF&G Shares and assuming that such USF&G Shares together with
all other USF&G Shares acquired upon exercise of the Option and held by St. Paul
and its affiliates as of such date, were sold for cash at the closing market
price for the USF&G Common Stock as of the close of business on the preceding
trading day.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Shareholders should be aware that certain members of USF&G's management and
the USF&G Board have interests in the Merger that are different from, or in
addition to, the interests of USF&G shareholders generally. The USF&G Board was
aware of these interests and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby. These interests
are summarized below.
USF&G DIRECTORS WHO WILL BECOME DIRECTORS OF ST. PAUL AT THE EFFECTIVE TIME
The Merger Agreement provides that promptly after the Effective Time, St.
Paul will cause Mr. Blake and two additional directors of USF&G selected by the
board governance committee of the St. Paul Board to be appointed to the St. Paul
Board. In addition, the Merger Agreement provides that, subject to its fiduciary
duties under applicable law, the St. Paul Board will nominate two, or if the
Effective Time does not occur prior to August 15, 1998, three, of such directors
for election to the St. Paul Board at its first annual meeting with a proxy
mailing date after the Effective Time.
SEVERANCE ARRANGEMENTS
In February 1997, the USF&G Board approved the execution of severance
agreements (the "USF&G Executive Severance Agreements") with Mr. Norman P.
Blake, Jr., Mr. Dan L. Hale, Executive Vice President--Chief Financial Officer
of USF&G, Mr. John C. Sweeney, Senior Vice President--Chief Investment Officer
of USF&G and Chairman--Falcon Asset Management, Inc. (a subsidiary of USF&G),
Mr. John A. MacColl, Executive Vice President--General Counsel and Vice
President--Human Resources of USF&G, and Mr. Harry N. Stout, Executive Vice
President--USF&G and President--F&G Life (a subsidiary of USF&G), and certain
other executive officers of USF&G (the "USF&G Executive Officers"). Under the
terms of the USF&G Executive Severance Agreements, a USF&G Executive Officer may
become entitled to receive (i) a cash severance payment equal to 1.5 to 3.0
times the sum of (A) and (B), where (A) equals such executive's base salary as
of his termination date and (B) equals the higher of the executive's target
annual bonus or actual annual bonus paid for the prior year and the executive's
target long-term incentive award or actual long-term incentive award paid for
the prior year, (ii) a cash
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payment equal to such executive's annual bonus and long-term incentive awards
(pro-rated based on the ratio of the number of whole months in the year or
relevant performance period to the number of whole months in the year or
relevant performance period such executive was employed) that would be payable
assuming all previously established targets for such awards had been met, (iii)
continued coverage under certain welfare benefit arrangements for a period not
to exceed three years and (iv) certain other benefits, including executive
outplacement services and, if applicable to the executive, acceleration of
certain non-qualified pension payments. In exchange for these payments, each
USF&G Executive Officer has agreed, among other things, not to solicit USF&G
employees, clients, customers, policyholders or agents for a period of 12 months
from the date of termination of such executive's employment.
USF&G's obligations under a USF&G Executive Severance Agreement are
triggered if, within two years after a change in control of USF&G, the USF&G
Executive Officer who is a party to such USF&G Executive Severance Agreement is
terminated without cause or if such USF&G Executive Officer resigns for good
reason, which includes relocation without consent, a material diminution in
duties or position or a reduction in compensation, or, in certain cases, if a
USF&G Executive Officer elects to leave within a 60-day period beginning on the
first anniversary of a change of control of USF&G. Pro rata payments with
respect to outstanding long-term incentive awards will be made when a change in
control occurs, without regard to termination of employment. The consummation of
the Merger will constitute a change in control for purposes of the USF&G
Executive Severance Agreements. Severance benefits payable under the USF&G
Executive Severance Agreements are in lieu of any severance which would
otherwise be payable to the USF&G Executive Officers who are parties to such
USF&G Executive Severance Agreements.
The following table sets forth the estimated cash severance amounts payable
to each of the Chief Executive Officer of USF&G and the next four most highly
compensated USF&G Executive Officers (each, a "USF&G Named Executive Officer")
and to the seven other USF&G Executive Officers as a group under each such
executive officer's USF&G Executive Severance Agreement, assuming USF&G's
obligations thereunder are triggered, based on such USF&G Executive Officer's
base salary in effect on February 25, 1998 and expected annual bonus and
long-term incentive award for the 1997 calendar year.
<TABLE>
<CAPTION>
ESTIMATED CASH SEVERANCE
NAME AMOUNT PAYABLE
- -------------------------------------------------------------------- ------------------------
<S> <C>
Norman P. Blake, Jr................................................. $ 11,188,843
Dan L. Hale......................................................... $ 3,775,551
John C. Sweeney..................................................... $ 1,099,259
John A. MacColl..................................................... $ 2,312,716
Harry N. Stout...................................................... $ 2,172,275
Seven other USF&G Executive Officers (as a group)................... $ 13,874,820
</TABLE>
Certain of the USF&G Executive Officers are entitled to receive an
additional tax "gross-up" payment which would put the recipients in the same
financial position after-tax, that they would have been in if the excise tax
imposed by Code Section 4999 did not apply to the payments made under their
USF&G Executive Severance Agreements. Based upon the estimated cash amounts
payable and benefits provided under the USF&G Executive Severance Agreements,
the estimated amount of the gross-up payment for each of the USF&G Named
Executive Officers would be as follows: Mr. Blake $9,601,951; Mr. Hale
$2,343,183; Mr. Sweeney $0; Mr. MacColl $1,381,321; Mr. Stout $1,329,793; and
the seven other USF&G Executive Officers as a group $8,675,314.
Assuming that the Effective Time occurs on April 30, 1998, and assuming an
Exchange Ratio of 0.2821 and a price per share of St. Paul Common Stock equal to
$87.375 (the closing price of the St. Paul Common Stock on the NYSE on February
25, 1998), the pro rata portion of the target amount of outstanding 1998 annual
bonus and long-term incentive awards payable to the USF&G Executive Officers, as
provided in the USF&G Executive Severance Agreements, would be as follows: Mr.
Blake $1,099,094;
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Mr. Hale $446,956; Mr. Sweeney $437,411; Mr. MacColl $259,995; Mr. Stout
$240,073; and the seven other USF&G Executive Officers as a group an aggregate
of $1,608,601.
USF&G entered into a Supplemental Executive Agreement with Mr. Blake (the
"Blake Retirement Agreement") on November 20, 1990, under which Mr. Blake is
entitled to receive supplemental retirement benefits payments for life
commencing upon termination of employment. Under his USF&G Executive Severance
Agreement, Mr. Blake is entitled to receive at the Effective Time the present
value of these benefits in a lump sum in lieu of his right to receive these
supplemental retirement benefits as an annuity. Pursuant to these provisions,
Mr. Blake will receive a lump sum payment of $15,325,358 (assuming a severance
date of June 30, 1998). In addition, the Blake Retirement Agreement was amended
effective November 10, 1993, to provide that, in exchange for Mr. Blake's
voluntary waiver of a portion of his base salary, he would receive a deferred
cash award of $1,950,000 plus earnings thereon tied to dividends paid on USF&G
Common Stock if he remained in the employ of USF&G through December 31, 1998.
Under his USF&G Executive Severance Agreement, Mr. Blake would receive this
deferred cash award at the Effective Time instead of at December 31, 1998. As of
February 25, 1998, the amount of the deferred cash award payable to Mr. Blake is
$2,117,753.
BLAKE CONSULTING AGREEMENT
St. Paul has agreed to enter into a consulting agreement (the "Blake
Consulting Agreement") with Mr. Blake, which will become effective at the
Effective Time. The Blake Consulting Agreement will provide that Mr. Blake will
make himself available to consult and cooperate with and advise senior
management of St. Paul, the St. Paul Board and certain persons designated by St.
Paul with respect to matters involving the business and affairs of USF&G. The
Blake Consulting Agreement will commence at the Effective Time and terminate on
December 31, 1998. For performing his services under the Blake Consulting
Agreement, Mr. Blake will receive a $725,000 consulting fee, a performance-based
incentive fee equal to a percentage of the consulting fee corresponding to the
ratio of the 1998 incentive award to 1998 base salary for the Chairman of the
Board of St. Paul and based on the same earnings per share measurement criteria
contained in the 1998 annual incentive plan for the Chairman of the Board of St.
Paul, 25,000 St. Paul stock appreciation rights with a term of four years from
the consummation of the Merger and an exercise price equal to the fair market
value on the date of consummation of the Merger and continued medical insurance
benefits. Mr. Blake will also receive the amount payable under his USF&G
Executive Severance Agreement.
TREATMENT OF USF&G STOCK OPTIONS
The provisions of the Merger Agreement relating to outstanding USF&G Options
as of the date of the Merger Agreement are described under "The Merger
Agreement--Employee Benefits--Stock Options." Pursuant to the terms of the
respective option agreements under the USF&G Stock Plans, vesting of the USF&G
Options granted before January 19, 1998 is accelerated upon a change of control.
Accordingly, following consummation of the Merger, each such USF&G Option
granted before January 19, 1998 will become immediately exercisable in full. The
following table sets forth with respect to each of the USF&G Named Executive
Officers and the remaining USF&G Executive Officers as a group (i) the number of
shares of USF&G Common Stock subject to USF&G Options held that will become
exercisable due to accelerated vesting upon the consummation of the Merger, (ii)
the weighted average exercise price for such exercisable USF&G Options and (iii)
the aggregate value of such exercisable USF&G Options based upon the application
of the provisions of the Merger Agreement in respect of such USF&G Options
(before deduction for applicable withholding taxes, but after subtracting the
exercise price of a USF&G
57
<PAGE>
Option), assuming an Exchange Ratio of 0.2821 and a price per share of St. Paul
Common Stock equal to $87.375.
<TABLE>
<CAPTION>
WEIGHTED
USF&G OPTIONS WHICH BECOME AVERAGE
EXERCISABLE DUE TO THE EXERCISE AGGREGATE VALUE
CONSUMMATION OF THE MERGER PRICE PER SHARE OF USF&G OPTIONS
----------------------------- --------------- -----------------
<S> <C> <C> <C>
Mr. Blake..................................... 464,370 $ 15.97 $ 4,029,535
Mr. Hale...................................... 33,700 $ 18.61 $ 203,414
Mr. Sweeney................................... 23,901 $ 20.03 $ 110,377
Mr. MacColl................................... 16,935 $ 18.59 $ 102,565
Mr. Stout..................................... 12,334 $ 19.28 $ 66,207
Seven other USF&G Executive Officers (as a
group)...................................... 121,605 $ 18.98 $ 689,542
</TABLE>
1993 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
All but one of the directors of USF&G who are not also employees of USF&G
have been granted stock units under USF&G's Amended and Restated 1993 Stock Plan
for Non-Employee Directors (the "USF&G Directors' Plan"). The Merger Agreement
provides that at the Effective Time, all Vested Stock Units allocated to each
director's account under the USF&G Directors' Plan, without any action on the
part of the director, will be paid, on the same terms and conditions as are
applicable under such plan, in a number of shares of St. Paul Common Stock equal
to the number of Vested Stock Units allocated to the director's account in such
plan multiplied by the Exchange Ratio (rounded down to the nearest whole
number). Unvested stock units are forfeited upon termination of service as a
director of USF&G.
As of February 25, 1998, the non-employee directors held in the aggregate
143,065 Vested Stock Units. Based on a price per share of St. Paul Common Stock
equal to $87.375, the estimated aggregate value of such Vested Stock Units to be
paid to the non-employee directors is approximately $12,500,304.
INGREY CONSULTING AND STOCK APPRECIATION RIGHTS AGREEMENTS
Effective January 1, 1997, USF&G entered into an Executive Consulting
Agreement (the "Ingrey Consulting Agreement") and Stock Appreciation Rights Plan
and Agreement (the "Ingrey Stock Appreciation Rights Agreement") with Paul
Ingrey, a director of USF&G. The term of the Ingrey Consulting Agreement (the
"Consulting Period") is five years unless earlier terminated by either party
upon not less than six months prior written notice, by written agreement of the
parties, by the death or disability of Mr. Ingrey or by USF&G for good cause or
upon violation of certain provisions of the agreement. Under the Ingrey
Consulting Agreement, Mr. Ingrey provides certain consulting services with
respect to reinsurance and other matters and agrees not to compete with or
solicit or hire any employees of USF&G during the Consulting Period and further
agrees to keep confidential certain trade secrets and other confidential and
proprietary information of USF&G. Under the Ingrey Stock Appreciation Rights
Agreement, Mr. Ingrey was granted 128,500 stock appreciation rights in
consideration of the cancellation of stock options previously granted to him as
an employee of USF&G. Each stock appreciation right entitles Mr. Ingrey to
receive a cash payment upon exercise equal to the difference between (i) the
closing price of one share of USF&G Common Stock on the NYSE for the last
business day immediately preceding the date of exercise and (ii) the price
specified in the Ingrey Stock Appreciation Rights Agreement. The specified price
ranges between $13.63 and $14.56. A total of approximately 18,200 stock
appreciation rights which would have become vested and exercisable on and after
March 8, 1999 will become vested upon the change in control resulting from the
Merger. The stock appreciation rights, once vested and exercisable, may be
exercised at any time during the Consulting Period and for a period of ninety
(90) days thereafter provided that Mr. Ingrey complies with the noncompetition,
nonsolicitation and confidentiality provisions of the Ingrey Consulting
Agreement.
58
<PAGE>
EMPLOYMENT OF CERTAIN USF&G EXECUTIVE OFFICERS AFTER THE MERGER
Subsequent to execution and delivery of the Merger Agreement, St. Paul
requested that a number of USF&G Executive Officers enter into agreements to
continue service as executive officers of St. Paul after the Effective Time,
subject to completion of the Merger. St. Paul is presently negotiating
employment agreements with Mr. MacColl, Mr. Stout, Kenneth E. Cihiy, Executive
Vice President--Claims of USF&G, Robert J. Lamendola, President--Surety Group of
USF&G and Steve Lilienthal, President--Commercial Insurance Group and Chief
Underwriting Officer of USF&G. Although no definitive agreements have been
reached, the terms of continued executive service after the Effective Time are
expected to include continued salary at the rate in effect at the Effective
Time, annual incentives that are generally consistent with those available to
similarly situated St. Paul executives and a retention bonus payable in
restricted shares of St. Paul Common Stock which would only vest and become
payable if the USF&G Executive Officer remained employed through the end of his
employment term. In addition, each of Mr. MacColl, Mr. Stout, Mr. Cihiy, Mr.
Lamendola and Mr. Lilienthal may receive the amounts payable under his USF&G
Executive Severance Agreement. See "Interests of Certain Persons in the
Merger--Severance Agreements." Any such employment arrangements, if entered
into, would not become effective until the Effective Time.
DIRECTORS AND OFFICERS INSURANCE; LIMITATION OF LIABILITY OF USF&G DIRECTORS AND
OFFICERS
See "The Merger Agreement--Indemnification; Directors' and Officers'
Insurance."
THE MEETINGS
DATE, PLACE, TIME AND PURPOSE
ST. PAUL
This Joint Proxy Statement/Prospectus is being furnished to holders of St.
Paul Voting Stock in connection with the solicitation of proxies by the St. Paul
Board for use at the St. Paul Special Meeting, to be held at the offices of St.
Paul, 385 Washington Street, St. Paul, MN 55102 on April 7, 1998 at 10:00 a.m.,
local time, and any adjournments or postponements thereof, to consider and vote
upon the approval of the issuance of St. Paul Common Stock pursuant to the
Merger Agreement.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of St.
Paul Voting Stock is accompanied by a form of proxy for use at the St. Paul
Special Meeting.
USF&G
This Joint Proxy Statement/Prospectus is also being furnished to holders of
USF&G Common Stock in connection with the solicitation of proxies by the USF&G
Board for use at the USF&G Special Meeting, to be held at the offices of USF&G,
Founders Building, 6225 Centennial Way, Baltimore, MD 21209 on April 7, 1998 at
9:00 a.m., local time, and any adjournments or postponements thereof, to
consider and vote upon the approval of the Merger and to transact such other
business as may properly come before the USF&G Special Meeting or any
adjournments or postponements thereof.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of
USF&G Common Stock is accompanied by a form of proxy for use at the USF&G
Special Meeting.
This Joint Proxy Statement/Prospectus is also furnished to shareholders of
USF&G as a prospectus in connection with the issuance by St. Paul of shares of
St. Paul Common Stock pursuant to the Merger Agreement.
59
<PAGE>
RECORD DATES
ST. PAUL
The St. Paul Board has fixed the close of business on February 25, 1998 as
the record date (the "St. Paul Record Date") for the determination of the
holders of St. Paul Voting Stock entitled to receive notice of and to vote at
the St. Paul Special Meeting and at any adjournments or postponements thereof.
USF&G
The USF&G Board has fixed the close of business on February 25, 1998 as the
record date (the "USF&G Record Date") for the determination of the holders of
USF&G Common Stock entitled to receive notice of and to vote at the USF&G
Special Meeting and at any adjournments or postponements thereof.
VOTES REQUIRED; SHARES HELD BY CERTAIN PERSONS
ST. PAUL
As of February 25, 1998, there were 83,804,344 shares of St. Paul Common
Stock outstanding and 955,594 Series B Shares outstanding. The holders of St.
Paul Voting Stock vote together as one class. Each share of St. Paul Common
Stock outstanding on the St. Paul Record Date is entitled to one vote upon the
matter to be submitted at the St. Paul Special Meeting and each Series B Share
outstanding on the St. Paul Record Date is entitled to four votes upon the
matter to be submitted at the St. Paul Special Meeting.
The presence, in person or by proxy, at the St. Paul Special Meeting of
holders of a majority of the votes represented by the St. Paul Voting Stock
outstanding on the St. Paul Record Date is necessary to constitute a quorum for
the transaction of business at the St. Paul Special Meeting. The affirmative
vote of a majority of the votes represented by the St. Paul Voting Stock present
and entitled to vote at the St. Paul Special Meeting is necessary to approve the
issuance of shares of St. Paul Common Stock pursuant to the Merger Agreement.
As of February 25, 1998, directors and executive officers of St. Paul and
their affiliates beneficially owned an aggregate of 1,648,478 shares of St. Paul
Common Stock (including shares which may be acquired within 60 days upon
exercise of employee stock options) or less than 2.0% of the votes to which the
St. Paul Voting Stock outstanding on such date are entitled. THE DIRECTORS AND
EXECUTIVE OFFICERS OF ST. PAUL HAVE INDICATED THEIR INTENTION TO VOTE THEIR
SHARES OF ST. PAUL COMMON STOCK IN FAVOR OF APPROVAL OF THE ISSUANCE OF THE
SHARES OF ST. PAUL COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
As of February 25, 1998, the directors and executive officers of USF&G did
not own any shares of St. Paul Common Stock.
USF&G
As of February 25, 1998, there were 116,997,500 shares of USF&G Common Stock
outstanding. Each share of USF&G Common Stock outstanding on the USF&G Record
Date is entitled to one vote upon each matter properly submitted at the USF&G
Special Meeting.
The presence, in person or by proxy, at the USF&G Special Meeting of holders
entitled to vote a majority of the outstanding shares of USF&G Common Stock is
necessary to constitute a quorum for the transaction of business at the USF&G
Special Meeting. The affirmative vote of two-thirds of the outstanding shares of
USF&G Common Stock is necessary for the approval of the Merger.
As of February 25, 1998, directors and executive officers of USF&G and their
affiliates beneficially owned an aggregate of 2,281,217 shares of USF&G Common
Stock (including shares which may be acquired within 60 days upon exercise of
employee stock options) or less than 2.0% of the shares of
60
<PAGE>
USF&G Common Stock outstanding on such date. THE DIRECTORS AND EXECUTIVE
OFFICERS OF USF&G HAVE INDICATED THEIR INTENTION TO VOTE THEIR SHARES OF USF&G
COMMON STOCK IN FAVOR OF APPROVAL OF THE MERGER AGREEMENT.
As of February 25, 1998, directors and executive officers of St. Paul did
not own any shares of USF&G Common Stock.
VOTING AND REVOCATION OF PROXIES
Shares of St. Paul Voting Stock and USF&G Common Stock represented by a
proxy properly signed and received at or prior to the appropriate Meeting, and
not revoked, will be voted in accordance with the instructions indicated in such
proxy. IF A PROXY IS SIGNED AND RETURNED WITHOUT INDICATING ANY VOTING
INSTRUCTIONS, SHARES OF ST. PAUL COMMON STOCK REPRESENTED BY THE PROXY WILL BE
VOTED FOR THE PROPOSAL TO APPROVE THE ISSUANCE OF SHARES OF ST. PAUL COMMON
STOCK PURSUANT TO THE MERGER AGREEMENT AND SHARES OF USF&G COMMON STOCK
REPRESENTED BY A PROXY PROPERLY SIGNED AND RECEIVED WILL BE VOTED FOR THE
PROPOSAL TO APPROVE THE MERGER AND TO APPROVE THE TRANSACTIONS CONTEMPLATED BY
THE MERGER AGREEMENT.
Abstentions may be specified on the proposals for both Meetings. A properly
executed proxy marked "ABSTAIN" with respect to either proposal will be counted
as present for purposes of determining whether there is a quorum and for
purposes of determining the aggregate voting power and number of shares
represented and entitled to vote at the applicable Meeting with respect to the
indicated proposal. Accordingly, since the affirmative votes described above are
required for approval by USF&G shareholders of the Merger and approval by St.
Paul shareholders of the proposal to issue shares of St. Paul Common Stock
pursuant to the Merger Agreement, a proxy marked "ABSTAIN" with respect to
either proposal will have the effect of a vote against such proposal. In
addition, the failure of a USF&G shareholder to return a proxy will have the
effect of a vote against the merger.
Under NYSE rules, brokers who hold shares in street name for customers are
precluded from exercising voting discretion with respect to the approval of
non-routine matters such as the proposal for the shareholders of USF&G to
approve the Merger and the proposal for the shareholders of St. Paul to approve
the issuance of shares of St. Paul Common Stock pursuant to the Merger
Agreement, and thus, absent specific instructions from the beneficial owners of
such shares, brokers are not empowered to vote such shares with respect to such
proposals (i.e., "broker non-votes"). Since the affirmative vote of two-thirds
of all outstanding shares of USF&G Common Stock is required for approval of the
Merger by holders of USF&G Common Stock, a broker non-vote with respect to such
proposal will have the effect of a vote against such proposal. However, a broker
non-vote with respect to the proposal to approve the issuance of shares of St.
Paul Common Stock pursuant to the Merger Agreement will not be counted as a vote
either for or against such proposal.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted by filing a duly executed
revocation with the Corporate Secretary of St. Paul, for shareholders of St.
Paul, or with the Corporate Secretary of USF&G, for shareholders of USF&G, prior
to or at the appropriate Meeting or by the execution of a subsequent proxy
(which must be filed with an officer of St. Paul, in the case of St. Paul). To
avoid confusion both as to how you want your shares voted or not voted, all
written notices of revocation and other communications with respect to
revocation of St. Paul proxies should be addressed as follows: The St. Paul
Companies, Inc., 385 Washington Street, St. Paul, Minnesota 55102, Attention:
Corporate Secretary. To avoid confusion both as to how you want your shares
voted or not voted, all written notices of revocation and other communications
with respect to revocation of USF&G proxies should be addressed as follows:
USF&G Corporation, 6225 Centennial Way, Baltimore, Maryland 21209, Attention:
Corporate Secretary.
Except for the proposal to issue shares of St. Paul Common Stock pursuant to
the Merger Agreement (at the St. Paul Special Meeting) and the proposal to
approve the Merger (at the USF&G Special Meeting), no other business will be
transacted at the Meetings. If, however, a motion is properly brought
61
<PAGE>
before either Meeting to adjourn such Meeting, the persons appointed as proxies
will have discretion to vote or act thereon according to their best judgment.
Any such adjournment may be for the purpose of soliciting additional proxies.
Shares represented by proxies voting against the issuance of shares of St. Paul
Common Stock pursuant to the Merger Agreement, in the case of St. Paul, and
against approval of the Merger, in the case of USF&G, will be voted against a
proposal to adjourn the applicable Meeting for the purpose of soliciting
additional proxies.
Holders of USF&G Common Stock will not be entitled to present any matter for
consideration at the USF&G Special Meeting nor will holders of St. Paul Voting
Stock be entitled to present any matter for consideration at the St. Paul
Special Meeting.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be paid by St. Paul for St. Paul
proxies and by USF&G for USF&G proxies. In addition to solicitation by mail,
arrangements will be made with brokerage houses and other custodians, nominees
and fiduciaries to send the proxy materials to beneficial owners; and St. Paul
or USF&G, as the case may be, will, upon request, reimburse such brokerage
houses and custodians for their reasonable expenses in so doing. St. Paul has
retained D.F. King & Co. and USF&G has retained Georgeson & Company Inc. to aid
in the solicitation of proxies and to verify certain records related to the
solicitations. The fees to be paid to D.F. King & Co. for such services are not
expected to exceed $10,000, plus $4.00 per telephone contact and reasonable out
of pocket expenses. The fees to be paid to Georgeson & Company Inc. for such
services are not expected to exceed $25,000, plus reasonable out of pocket
expenses. USF&G owns 50% of the outstanding shares of common stock and 100% of
the outstanding shares of preferred stock of Georgeson International, Inc., the
100% owner of Georgeson & Company Inc. To the extent necessary in order to
ensure sufficient representation at its Meeting, directors, officers and
employees of St. Paul and USF&G may request by telephone or telegram the return
of proxy cards. The extent to which this will be necessary depends entirely upon
how promptly proxy cards are returned. Shareholders are urged to send in their
proxies without delay.
It is the practice of USF&G to take reasonable steps to ensure that its
shareholders are afforded privacy in the proxy voting process. Proxies of USF&G
shareholders are tabulated by third parties who may not disclose the votes of
individual shareholders to any officer, director or employee of USF&G. This
policy is waived with respect to shareholders who provide written comments or
questions with their proxies or in the event of a proxy contest where
non-management groups have access to voting results.
SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF CERTIFICATES
FOR ST. PAUL COMMON STOCK WILL BE MAILED BY ST. PAUL TO HOLDERS OF CERTIFICATES
AS SOON AS PRACTICABLE AFTER THE CONSUMMATION OF THE MERGER.
62
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF ST. PAUL AND USF&G
The following unaudited pro forma financial information combines the
historical consolidated balance sheets and statements of income of St. Paul and
USF&G, including their respective subsidiaries, after giving effect to the
Merger. The unaudited pro forma condensed combined balance sheet at December 31,
1997, set forth below, gives effect to the Merger as if it had occurred at
December 31, 1997. The unaudited pro forma condensed combined statements of
income for each of the three years ended December 31, 1997, 1996 and 1995 give
effect to the Merger as if it had occurred on January 1, 1995. These statements
are prepared on the basis of accounting for the Merger as a "pooling of
interests" and are based on the assumptions set forth in the notes thereto.
The following pro forma financial information has been prepared from, and
should be read in conjunction with, the audited historical consolidated
financial statements and related notes thereto of St. Paul and USF&G,
incorporated by reference herein. The following information is not necessarily
indicative of the financial position or operating results that would have
occurred had the Merger been consummated on the date, or at the beginning of the
period for which the Merger is being given effect, nor is it necessarily
indicative of future financial position or operating results. See "Where You Can
Find More Information."
63
<PAGE>
ST. PAUL AND USF&G
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------- ------------------------
ST. PAUL USF&G ADJUSTMENTS COMBINED
---------- ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Investments............................................ $ 15,036 $ 10,944 $ 0 $ 25,980
Reinsurance recoverables............................... 1,963 2,355 (12)(6) 4,306
Receivables............................................ 1,798 878 0 2,676
Deferred income taxes.................................. 845 317 66(9) 1,228
Other assets........................................... 1,859 1,325 (41)(7) 3,143
---------- ----------- ----------- -----------
TOTAL ASSETS....................................... $ 21,501 $ 15,819 $ 13 $ 37,333
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
LIABILITIES
Insurance reserves:
Losses, loss adjustment expenses and policy
benefits........................................... $ 11,817 $ 10,017 $ 135(6) $ 21,969
Unearned premiums.................................... 2,380 1,148 0 3,528
---------- ----------- ----------- -----------
Total insurance reserves........................... 14,197 11,165 135 25,497
Debt................................................... 783 521 0 1,304
Other liabilities...................................... 1,687 1,760 28(8) 3,475
---------- ----------- ----------- -----------
TOTAL LIABILITIES.................................. 16,667 13,446 163 30,276
---------- ----------- ----------- -----------
Company-obligated mandatorily redeemable preferred
securities of subsidiary............................. 207 296 0 503
---------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
PREFERRED SHAREHOLDERS' EQUITY......................... 17 0 0 17
---------- ----------- ----------- -----------
COMMON:
Common stock........................................... 512 1,417 0 1,929
Retained earnings...................................... 3,451 493 (150) (9) 3,794
Other.................................................. 647 167 0 814
---------- ----------- ----------- -----------
TOTAL COMMON SHAREHOLDERS' EQUITY.................. 4,610 2,077 (150) 6,537
---------- ----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY......................... 4,627 2,077 (150) 6,554
---------- ----------- ----------- -----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED SECURITIES
AND SHAREHOLDERS' EQUITY........................... $ 21,501 $ 15,819 $ 13 $ 37,333
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Book value per common share............................ $ 55.06 $ 17.84 $ 56.08
Common shares outstanding.............................. 83,727,800 116,402,199 32,837,060(3) 116,564,860
</TABLE>
------------------------
The accompanying notes are an integral part of these pro forma condensed
combined financial statements.
64
<PAGE>
ST. PAUL AND USF&G
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- -----------------------
ST. PAUL USF&G ADJUSTMENTS COMBINED
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
REVENUES:
Premiums earned......................................... $ 4,616 $ 2,682 $ 0 $ 7,298
Net investment income................................... 886 691 0 1,577
Realized gains.......................................... 408 15 0 423
Asset management-investment banking..................... 262 0 0 262
Other................................................... 47 16 0 63
--------- ---------- ----------- ----------
Total revenues from continuing operations........... 6,219 3,404 0 9,623
--------- ---------- ----------- ----------
EXPENSES:
Insurance losses, loss adjustment expenses and policy
benefits.............................................. 3,345 2,071 (37) (7) 5,379
Policy acquisition expenses............................. 1,021 687 0 1,708
Operating and administrative............................ 834 375 5(7) 1,214
--------- ---------- ----------- ----------
Total expenses...................................... 5,200 3,133 (32) 8,301
--------- ---------- ----------- ----------
INCOME BEFORE INCOME TAXES.......................... 1,019 271 32 1,322
Income tax expense...................................... 246 77 11(9) 334
--------- ---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS................... $ 773 $ 194 $ 21 $ 988
--------- ---------- ----------- ----------
--------- ---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
Basic................................................... $ 9.10 $ 1.72 $ 8.46
Diluted................................................. $ 8.39 $ 1.63 $ 7.85
ADJUSTED AVERAGE COMMON SHARES OUTSTANDING:
Basic................................................... 83,572,000 111,688,000 31,507,000 115,079,000
Diluted................................................. 92,261,000 120,109,000 33,883,000 126,144,000
</TABLE>
------------------------
The accompanying notes are an integral part of these pro forma condensed
combined financial statements.
65
<PAGE>
ST. PAUL AND USF&G
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- -----------------------
ST. PAUL USF&G ADJUSTMENTS COMBINED
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
REVENUES:
Premiums earned...................................... $ 4,448 $ 2,731 $ 0 $ 7,179
Net investment income................................ 807 705 0 1,512
Realized gains....................................... 219 44 4(7) 267
Asset management-investment banking.................. 220 0 0 220
Other................................................ 40 18 0 58
--------- ---------- ----------- ----------
Total revenues from continuing operations........ 5,734 3,498 4 9,236
--------- ---------- ----------- ----------
EXPENSES:
Insurance losses, loss adjustment expenses and policy
benefits........................................... 3,318 2,181 (28) (7) 5,471
Policy acquisition expenses.......................... 975 707 0 1,682
Operating and administrative......................... 742 351 12(7) 1,105
--------- ---------- ----------- ----------
Total expenses................................... 5,035 3,239 (16) 8,258
--------- ---------- ----------- ----------
INCOME BEFORE INCOME TAXES....................... 699 259 20 978
Income tax expense (benefit)......................... 141 (2) 7(9) 146
--------- ---------- ----------- ----------
INCOME FROM CONTINUING
OPERATIONS..................................... $ 558 $ 261 $ 13 $ 832
--------- ---------- ----------- ----------
--------- ---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
Basic................................................ $ 6.57 $ 2.05 $ 6.87
Diluted.............................................. $ 6.11 $ 1.95 $ 6.45
ADJUSTED AVERAGE COMMON SHARES OUTSTANDING:
Basic................................................ 83,474,000 117,674,000 33,196,000(3) 116,670,000
Diluted.............................................. 91,897,000 127,734,000 36,034,000(3) 127,931,000
</TABLE>
------------------------
The accompanying notes are an integral part of these pro forma condensed
combined financial statements.
66
<PAGE>
ST. PAUL AND USF&G
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- -----------------------
ST. PAUL USF&G ADJUSTMENTS COMBINED
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
REVENUES:
Premiums earned......................................... $ 3,971 $ 2,666 $ 0 $ 6,637
Net investment income................................... 741 733 0 1,474
Realized gains.......................................... 85 7 0 92
Asset management-investment banking..................... 221 0 0 221
Other................................................... 38 53 0 91
--------- ---------- ----------- ----------
Total revenues from continuing operations........... 5,056 3,459 0 8,515
--------- ---------- ----------- ----------
EXPENSES:
Insurance losses, loss adjustment expenses and policy
benefits.............................................. 2,864 2,178 (32)(6) 5,010
Policy acquisition expenses............................. 857 714 0 1,571
Operating and administrative............................ 666 372 1(7) 1,039
--------- ---------- ----------- ----------
Total expenses...................................... 4,387 3,264 (31) 7,620
--------- ---------- ----------- ----------
INCOME BEFORE INCOME TAXES.......................... 669 195 31 895
Income tax expense (benefit)............................ 131 (14) 11(9) 128
--------- ---------- ----------- ----------
INCOME FROM CONTINUING
OPERATIONS........................................ $ 538 $ 209 $ 20 $ 767
--------- ---------- ----------- ----------
--------- ---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
Basic................................................... $ 6.26 $ 1.63 $ 6.29
Diluted................................................. $ 5.88 $ 1.53 $ 5.91
ADJUSTED AVERAGE COMMON SHARES OUTSTANDING:
Basic................................................... 84,385,000 111,474,000 31,447,000(3) 115,832,000
Diluted................................................. 91,637,000 130,064,000 36,691,000(3) 128,328,000
</TABLE>
------------------------
The accompanying notes are an integral part of these pro forma condensed
combined financial statements.
67
<PAGE>
ST. PAUL AND USF&G
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF TRANSACTIONS
The Merger Agreement provides that each share of USF&G Common Stock will be
converted into and become the right to receive a number of shares of St. Paul
Common Stock based upon the Exchange Ratio. For purposes of the unaudited pro
forma condensed combined financial statements, an Exchange Ratio of 0.2821 has
been assumed. If the maximum Exchange Ratio of 0.2973 were assumed, pro forma
combined diluted earnings per share for the years ended December 31, 1997, 1996
and 1995 would be $7.74, $6.35 and $5.82, respectively.
2. RECLASSIFICATIONS AND RESTATEMENTS
Certain items in USF&G's historical financial statements have been
reclassified to conform to St. Paul's presentation.
St. Paul sold its insurance brokerage operation, Minet, in May 1997. St.
Paul's historical financial data for all periods presented reflect Minet as a
discontinued operation.
3. PER COMMON SHARE DATA
The pro forma combined per common share data has been computed based on the
combined historical income from continuing operations as adjusted for
retroactive changes in certain accounting methods of both companies in order to
achieve conformity on the combined historical weighted average common shares
outstanding. For purposes of this calculation, USF&G's weighted average common
shares outstanding was multiplied by the assumed Exchange Ratio of 0.2821.
4. INTERCOMPANY TRANSACTIONS
Transactions between St. Paul and USF&G are not material in relation to the
pro forma condensed combined financial statements and therefore intercompany
balances have not been eliminated from the pro forma combined amounts.
5. RESTRUCTURING CHARGE
The pro forma condensed combined financial statements do not reflect a
planned Merger-related restructuring charge that is currently expected to be
between $300 million and $500 million, primarily for costs related to the
combination of headquarters, the integration of the information technology
systems of St. Paul and USF&G, headcount reduction and legal expenses, because
such restructuring charges are non-recurring. Although there can be no assurance
that the restructuring charge will fall within the range provided, this range
represents management's best estimate based upon the information currently
available.
6. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Liabilities for unpaid losses and loss adjustment expenses related to
workers' compensation coverages were discounted to present value in the
historical financial statements of USF&G. St. Paul did not discount workers'
compensation reserves. On a combined basis, St. Paul and USF&G will discount
certain workers' compensation reserves using an interest rate of up to four
percent. Accordingly, the pro forma income
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ST. PAUL AND USF&G
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES (CONTINUED)
statement adjustments for all periods presented include a reduction in insurance
losses and loss adjustment expenses to conform the accounting policies of both
companies. Those pro forma adjustments to the condensed combined statements of
income for the years ended December 31, 1997, 1996 and 1995 are $46 million, $33
million and $32 million, respectively.
7. SOFTWARE CAPITALIZATION
Included in USF&G's historical financial statements are capitalized costs
for internal use software. These costs were amortized over their useful lives.
St. Paul does not capitalize such expenditures. On a combined basis, St. Paul
and USF&G do not expect to capitalize development costs for internal use
software. Accordingly, the pro forma adjustments for all periods presented
conform the historical financial statements of USF&G to the combined
presentation. Those pro forma adjustments to the condensed combined statements
of income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Insurance losses and loss adjustment expenses................................................ $ 9 $ 5 $ 0
Operating and administrative expenses........................................................ 5 12 1
Realized loss................................................................................ 0 (4) 0
--
--- ---
Total.................................................................................... $ 14 $ 13 $ 1
--
--
--- ---
--- ---
</TABLE>
8. ADJUSTMENTS TO RECORD ANTICIPATED TRANSACTION COSTS
Transaction costs of the Merger, representing investment banker and other
professional fees, are expected to be approximately $28 million. The unaudited
pro forma condensed combined statements of income do not reflect these charges.
The unaudited pro forma condensed combined balance sheet reflects these charges.
It is anticipated that these charges will be incurred by St. Paul and USF&G and
expensed at the Effective Time, which is currently expected to be in mid-1998.
9. INCOME TAXES
The income tax effect of adjustments made to the unaudited pro forma
condensed combined financial statements was calculated using St. Paul's
statutory income tax rate of 35%.
10. STOCK SPLIT
Historical per share data for St. Paul has been adjusted to reflect a
two-for-one split of the St. Paul Common Stock which took place in 1994. All per
share amounts contained in the unaudited pro forma condensed combined financial
statements and the notes thereto reflect such stock split. This data does not
reflect the St. Paul Stock Split.
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DESCRIPTION OF ST. PAUL CAPITAL STOCK
The following description of certain terms of the capital stock of St. Paul
does not purport to be complete and is qualified in its entirety by reference to
the St. Paul Articles.
The authorized capital stock of St. Paul currently consists of 245,000,000
authorized shares of capital stock of which 240,000,000 are authorized as St.
Paul Common Stock and 5,000,000 are authorized as undesignated shares. As of
February 25, 1998, there were 83,804,344 shares of St. Paul Common Stock
outstanding and 955,594 Series B Shares outstanding. Giving effect to the St.
Paul Stock Split, there would be 167,608,688 shares of St. Paul Common Stock
outstanding as of such date (assuming the same number of shares are outstanding
at the time of the St. Paul Stock Split as are outstanding as of February 25,
1998). If the proposal to increase the number of authorized shares of St. Paul
Common Stock is approved at the 1998 annual meeting of St. Paul shareholders
there will be 480,000,000 shares of St. Paul Common Stock authorized for
issuance.
ST. PAUL COMMON STOCK
St. Paul is authorized to issue 240,000,000 shares of St. Paul Common Stock.
Each share of St. Paul Common Stock is entitled to participate PRO RATA in
distributions upon liquidation, subject to the rights of holders of undesignated
shares, and to one vote on all matters submitted to a vote of shareholders. The
holders of St. Paul Common Stock may receive cash dividends as declared by the
St. Paul Board out of funds legally available therefor, subject to the rights of
any holders of undesignated shares. The outstanding shares of St. Paul Common
Stock are, and the shares of St. Paul Common Stock offered by the Registration
Statement when issued will be, fully paid and nonassessable. Holders of St. Paul
Common Stock have no preemptive or similar equity preservation rights, and
cumulative voting of shares in the election of directors is prohibited.
TRANSFER AGENT
The transfer agent and registrar for St. Paul Common Stock is First Chicago
Trust Company of New York.
UNDESIGNATED SHARES
The St. Paul Board is authorized, without further action by the shareholders
of St. Paul, to establish from the 5,000,000 undesignated shares authorized by
the St. Paul Articles one or more classes and series, to designate each such
class and series, to fix the relative rights and preferences of each such class
and series and to issue such shares. Such rights and preferences may be superior
to the St. Paul Common Stock as to dividends, distributions of assets (upon
liquidation or otherwise) and voting rights. Undesignated shares may be
convertible into shares of any other series or class of stock, including St.
Paul Common Stock, if the St. Paul Board so determines.
RIGHTS AGREEMENT; SERIES A PREFERRED
The St. Paul Board adopted a Shareholder Protection Rights Agreement on
December 4, 1989 which was amended on March 9, 1990 and amended and restated as
of August 1, 1995 (as amended and restated, the "St. Paul Rights Agreement").
Each share of St. Paul Common Stock has attached to it one right (a "Right") to
purchase one two-thousandth of a share of Series A Junior Participating
Preferred Stock, without par value, of St. Paul (the "Series A Preferred") at an
exercise price of $92.50. 50,000 of the undesignated shares of St. Paul have
been authorized as Series A Preferred. One share of the Series A Preferred is
intended to represent by its terms to be the equivalent of 2000 shares of St.
Paul Common Stock.
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The Rights are and will be evidenced by the shares of St. Paul Common Stock
until the earlier of (i) the tenth day after it is publicly announced that a
person has acquired Beneficial Ownership (as defined in the Rights Agreement) of
15% or more of the outstanding shares of St. Paul Common Stock (any such Person,
being a "St. Paul Acquiring Person" and any such date, being a "Stock
Acquisition Date"), (ii) the tenth business day after the date of commencement
of, or first public announcement of the intent of any person to commence a
tender or exchange offer which, if consummated, would result in such person
becoming a St. Paul Acquiring Person and (iii) the tenth business day after St.
Paul determines that a Person is an Adverse Person (as defined in the Rights
Agreement) (the earlier of (i), (ii) and (iii) being the "Separation Date").
The Rights Agreement further provides that if a person becomes a St. Paul
Acquiring Person or a person is declared to be an Adverse Person, each Right
will become the right to receive a number of shares of St. Paul Common Stock
with a value equal to twice the exercise price of a Right upon exercise.
The Rights Agreement also provides that, in the event that St. Paul engages
in certain business combination or reorganization transactions with a St. Paul
Acquiring Person, each Right will become a right to purchase shares of capital
stock of the entity engaging in the transaction with St. Paul with a value equal
to twice the exercise price of a Right upon exercise.
In addition, the Rights Agreement provides that until ten days following a
Stock Acquisition Date, St. Paul may redeem the Rights at a price of $.005 per
Right, although under certain circumstances the decision to redeem may require
the concurrence of a majority of the Continuing Directors (as defined in the
Rights Agreement).
The Rights Agreement also provides that, other than those provisions
relating to the principal economic terms of the Right, the Rights Agreement may
be amended in any manner prior to the Separation Date. After the Separation
Date, the Rights Agreement may be amended in more limited respects.
The Rights will expire on the earlier of (i) December 19, 1999 or, if the
Separation Date occurs subsequent to December 19, 1996 but prior to December 19,
1999, the third anniversary of the Separation Date and (ii) the date on which
the Rights are redeemed.
The foregoing description of the Rights Agreement is qualified in its
entirety by the text of the Rights Agreement.
OTHER PREFERRED SECURITIES
St. Paul has also designated 1,450,000 shares as Series B Shares and 41,400
shares as Series C Cumulative Convertible Preferred Stock (the "Series C
Shares"). As of January 16, 1998, 955,594 Series B Shares and no Series C Shares
were outstanding. Each of the Series B Shares and Series C Shares may, in
accordance with its terms, be converted into St. Paul Common Stock. All of the
Series C Shares are reserved for issuance upon the exchange of St. Paul's 6%
Convertible Subordinated Debentures due 2005.
Pursuant to the St. Paul Articles, the affirmative vote of the holder or
holders of a least a majority of the votes entitled to be cast with respect to
the then outstanding Series B Shares, voting separately as one class, at a
meeting duly held for that purpose, are necessary to repeal, amend or otherwise
change any of the provisions of the St. Paul Articles in any manner which
materially and adversely affects the rights or preferences of the Series B
Shares; however, the increase (including the creation or authorization) or
decrease in the amount of authorized capital stock of any class or series
(excluding the Series B Shares) is not deemed to be an amendment which
materially and adversely affects the rights or preferences of the Series B
Shares.
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In addition, the St. Paul Articles provide that the holder or holders of
Series B Shares are entitled to vote on all matters submitted to a vote of the
holders of St. Paul Common Stock, voting together with the holders of St. Paul
Common Stock as if one class. Each Series B Share is in such case entitled to
four votes.
COMPARISON OF CERTAIN RIGHTS OF THE HOLDERS
OF ST. PAUL COMMON STOCK AND USF&G COMMON STOCK
GENERAL
As a result of the Merger, holders of USF&G Common Stock will become holders
of St. Paul Common Stock and the rights of all such former holders of USF&G
Common Stock will thereafter be governed by the Amended and Restated Articles of
Incorporation of St. Paul (the "St. Paul Articles"), the Bylaws of St. Paul (the
"St. Paul Bylaws") and the MBCA. The rights of the holders of USF&G Common Stock
are presently governed by the Articles of Incorporation of USF&G, as amended
(the "USF&G Articles"), the Bylaws of USF&G (the "USF&G Bylaws") and the MGCL.
The following is a summary of the material differences between the current
rights of holders of USF&G Common Stock and those that they will have as holders
of St. Paul Common Stock following the Merger. It does not purport to be
complete and is qualified in its entirety by reference to the relevant
provisions of the MBCA, the St. Paul Articles, the St. Paul Bylaws, the MGCL,
the USF&G Articles and the USF&G Bylaws. Copies of the St. Paul Articles, the
St. Paul Bylaws, the USF&G Articles and the USF&G Bylaws are incorporated by
reference in the Registration Statement and will be sent to holders of shares of
St. Paul Common Stock and USF&G Common Stock upon request. See "Where You Can
Find More Information."
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
ST. PAUL
Section 302A.203 of the MBCA provides that the board of directors of a
Minnesota corporation shall consist of one or more directors as fixed by or in
the manner provided in the articles or bylaws of the corporation. The St. Paul
Bylaws provide that the number of directors shall be at least 10 but not more
than 18, as determined from time to time by the St. Paul Board. The St. Paul
Board is currently composed of 14 directors. Promptly after the Merger becomes
effective, St. Paul has agreed to increase the size of the St. Paul Board and to
cause Mr. Norman P. Blake, Jr. and two other directors of USF&G to be added to
the St. Paul Board.
USF&G
Section 2-402 of the MGCL provides that every corporation shall have at
least three directors and that the precise number of directors shall be
specified in a corporation's charter until such number is changed by such
corporation's bylaws. The USF&G Articles provide that the number of directors
shall be three but may be increased or decreased from time to time pursuant to
the USF&G Bylaws. The USF&G Bylaws provide that the number of directors of USF&G
shall be set by the USF&G Board, but in no event will the USF&G Board be
composed of more than 25 members or less than three members. The USF&G Board
currently is composed of 13 directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
ST. PAUL
Section 302A.521 of the MBCA requires a corporation to indemnify its
directors, officers, employees and other persons by reason of acting in or
formerly acting in their official capacity if the indemnified person: (i) has
not been indemnified by another entity with respect to the same matter; (ii)
acted in good faith; (iii) received no improper personal benefit and was not
involved in unlawful related party transactions; (iv) in the case of criminal
proceedings, had no reasonable cause to believe the conduct was
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unlawful; and (v) reasonably believed that the conduct was, in certain cases, in
or, in other cases, not opposed to the best interests of the corporation. The
MBCA makes no distinction between third-party actions and stockholder derivative
suits and requires indemnification in either case if the relevant statutory
standard of conduct is met. The MBCA also requires a corporation to advance
reasonable expenses to a director or officer upon the corporation's receipt of
(a) a written affirmation by the director or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by the
corporation as authorized by the MBCA, and (b) a written undertaking by the
director or officer to repay the amount paid or reimbursed by the corporation if
it shall ultimately be determined that the standard of conduct was not met.
The St. Paul Articles and the St. Paul Bylaws provide that St. Paul will
indemnify any director, officer or employee (but not an agent) to the fullest
extent permitted or required by Section 302A.521 of the MBCA.
USF&G
Section 2-418 of the MGCL requires a corporation to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by reason of his service in that
capacity. Section 2-418 permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses (including attorney's fees) actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services, or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation may not indemnify for an adverse judgment
in a suit by or in the right of the corporation or in which the director was
found to have received an improper personal benefit, unless a court so orders
and then only for expenses.
In addition, the MGCL permits a corporation to advance reasonable expenses
to a director or officer upon the corporation's receipt of (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by the corporation, and
(b) a written undertaking by or on behalf of the director or officer to repay
the amount paid or reimbursed by the corporation if it shall ultimately be
determined that the standard of conduct was not met.
The USF&G Articles provide that USF&G will indemnify directors to the
fullest extent provided by law and officers to the same extent as directors.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
ST. PAUL
The St. Paul Articles provide that no director of St. Paul shall have
personal liability to St. Paul or its shareholders for monetary damages for
breach of fiduciary duty as a director, to the fullest extent permitted under
the MBCA.
Section 302A.251 of the MBCA provides that the personal liability of a
director may be eliminated or limited as provided in the articles of
incorporation, but that the articles may not limit or eliminate such liability
for (a) any breach of the director's duty of loyalty to the corporation or its
shareholders, (b) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (c) the payment of
unlawful distributions, (d) any transaction in which the director received an
improper personal benefit, (e) certain violations of the Minnesota securities
laws, and (f) any act or omission occurring prior to the date when the provision
in the articles eliminating or limiting liability becomes effective.
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USF&G
The USF&G Articles provide that no director or officer shall be personally
liable to USF&G or its shareholders for money damages, to the fullest extent
permitted under the MGCL.
Section 2-405.2 of the MGCL permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services, or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action.
SPECIAL MEETINGS OF SHAREHOLDERS
ST. PAUL
Section 302A.433 of the MBCA and the St. Paul Bylaws provide that a special
meeting of shareholders may be called at any time by the chief executive
officer, the chief financial officer, by two or more directors, by a person
authorized pursuant to the articles or bylaws of the corporation or by a
shareholder or shareholders holding 10% or more of the voting power of all
shares entitled to vote; except that a special meeting called by shareholders
for the purpose of considering any action to directly or indirectly facilitate
or effect a business combination must be called by 25% or more of the voting
power of all shares entitled to vote.
USF&G
Pursuant to Section 2-502 of the MGCL and the USF&G Bylaws, a special
meeting of shareholders may be called by the chairman of the board, the
president or by a majority of the board of directors, and must be called by
USF&G's Secretary at the written request of shareholders entitled to cast a
majority of all the votes entitled to be cast at the meeting.
SHAREHOLDER PROPOSALS AND SHAREHOLDER NOMINATIONS OF DIRECTORS
ST. PAUL
The St. Paul Bylaws provide that for a shareholder to properly bring
business before an annual meeting, the shareholder must have provided timely
notice thereof in writing to St. Paul's Corporate Secretary. To be timely, a
shareholder's notice must be delivered or mailed to and received at the
principal executive office of St. Paul not less than 60 days prior to the date
of the annual meeting; PROVIDED, HOWEVER, that in the event that less than 70
days' notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholders to be timely must be received
not later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. No shareholder proposal will be eligible for inclusion in
St. Paul's proxy materials or form of proxy for any annual meeting of
shareholders unless received by St. Paul's Corporate Secretary on or before the
first day of December next preceding the date of the annual meeting.
Section 302A.205 of the MBCA provides that the method of election of
directors may be imposed by or in the manner provided by the articles or bylaws.
The St. Paul Bylaws provide that shareholder nominations for election of
directors may be made at a meeting of shareholders at which directors are to be
elected only by timely notice in writing to the St. Paul's Corporate Secretary.
To be timely, a shareholder's notice must be delivered or mailed to and received
at the principal executive office of St. Paul in the manner described above.
Such shareholder's notice shall set forth (i) as to each person whom such
shareholder proposes to nominate for election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to the proxy rules under the Exchange Act (including such person's
written consent
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to being named in the proxy statement as a nominee and to serving as a director
if elected), and (ii) as to the shareholder giving the notice (a) the name and
address, as they appear on St. Paul's share register, of such shareholder and
(b) the class and number of shares of St. Paul's capital stock that are
beneficially owned by such shareholder, and shall be accompanied by the written
consent of each such person to serve as a director of the corporation, if
elected.
USF&G
The USF&G Bylaws provide that for any shareholder proposal to be presented
before an annual meeting of shareholders of USF&G, including any proposal
relating to the nomination of a director to be elected to the USF&G Board, the
shareholder must have given timely notice thereof in writing to USF&G's
Corporate Secretary. To be timely, a shareholder's notice shall be delivered to
USF&G's Secretary at the principal executive offices of USF&G not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting; PROVIDED, HOWEVER, that no notice other than the notice
required under the proxy rules of the Exchange Act will be required if a
shareholder's proposal is included in USF&G's proxy statement as a result of a
notice delivered in accordance with the Exchange Act; and PROVIDED FURTHER, that
in the event that the date of the annual meeting is advanced by more than 30
days or delayed by more than 60 days from such anniversary date, notice by the
shareholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made.
AMENDMENTS OF THE ARTICLES AND BYLAWS
ST. PAUL
Section 302A.135 of the MBCA provides that a resolution proposing an
amendment to a corporation's articles will be submitted to shareholders for
approval after either being approved by the affirmative vote of a majority of
the directors or being proposed by a shareholder or shareholders holding 3% or
more of the voting power of the shares entitled to vote thereon. Unless the
articles provide for a greater percentage, any such amendment must be approved
by the affirmative vote of a majority of the voting power entitled to vote
thereon. The St. Paul Articles reaffirm this by providing that the affirmative
vote of the holders of at least one-half of the voting power of all voting
shares of St. Paul is required to amend provisions of the St. Paul Articles,
except for the approval of certain business combinations and dissolution which
requires approval of at least two-thirds of the voting power of all voting
shares.
Under Section 302A.181 of the MBCA, unless reserved by the articles of
incorporation to shareholders, the power to adopt, amend, or repeal a
corporation's bylaws is vested in the board (the St. Paul Articles do not
provide otherwise). The power of the board is subject to the right of
shareholders holding 3% or more of the voting power of the outstanding shares to
propose a resolution to adopt, amend or repeal the bylaws, which resolution must
be approved by the affirmative vote of the holders of a majority of the shares
entitled to vote thereon, unless the articles require a greater percentage. In
addition, the St. Paul Board may not adopt, amend or repeal bylaws fixing a
quorum for meetings of shareholders, prescribing procedures for removing
directors or filling vacancies in the board, or fixing the number of directors
or their classifications, qualifications or terms of office.
USF&G
Under section 2-604 of the MGCL, an amendment of a corporate charter
requires a resolution by the board of directors setting forth the proposed
amendment and declaring it advisable, and approval by the shareholders of the
corporation by the affirmative vote of two-thirds of all votes entitled to vote
on the matter unless the charter provides otherwise. The USF&G Articles provide
that any change to the terms of
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any contracts, rights or outstanding stock which are expressly set forth in the
USF&G Articles will be valid only if approved by a majority of the aggregate
number of the votes entitled to be cast thereon.
Section 2-109 of the MGCL provides that the power to adopt, alter and repeal
a corporation's bylaws shall be vested in the shareholders, except to the extent
that a corporation's charter or bylaws confers this power on the corporation's
board of directors. The USF&G Bylaws provide that a majority of USF&G
shareholders or of the USF&G Board has the power to alter or repeal the USF&G
Bylaws.
APPRAISAL AND DISSENTERS' RIGHTS
ST. PAUL
Under Section 302A.471 of the MBCA, a shareholder of a corporation may
dissent from and obtain payment of the fair value of such shareholder's rights
in connection with the following transactions: an amendment to the articles of
incorporation which materially and adversely affects the rights or preferences
of shares held by the dissenting shareholder, most dispositions of all or
substantially all of the corporation's property and assets, a plan of merger in
which the shareholders may vote, a plan of exchange involving the acquisition of
the corporation's shares if the shareholders are entitled to vote on the plan,
or a resolution approved by the board of directors that dissenting shareholders
may obtain payment for their shares.
USF&G
Under Section 3-202 of the MGCL, a shareholder of a Maryland corporation
has, subject to certain limitations, the right to demand and receive the fair
value of such shareholder's stock from the corporation if: (i) the corporation
consolidates or merges with another corporation; (ii) the shareholder's stock is
acquired in a share exchange; (iii) the corporation transfers all or
substantially all of its assets in a manner that requires corporate action under
Section 3-105 of the MGCL (relating to mergers, consolidations, transfers of
assets and share exchanges); (iv) unless permitted to do so by its charter
(which the USF&G Articles do permit), the corporation amends its charter so as
to alter the contract rights, as expressly set forth in the charter, of
outstanding stock and substantially adversely affects the shareholder's rights;
or (v) the transaction involves a business combination between the corporation
and an interested shareholder (defined generally in the MGCL as any person that
is the beneficial owner, directly or indirectly, of 10% percent or more of the
voting power of the outstanding voting stock of the corporation). Unless the
transaction involves a business combination between the corporation and an
interested shareholder, the right to receive fair value does not exist (A) if
the stock is listed on a national securities exchange or is designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or (B) if such stock is that
of a successor in a merger, unless, among other things, (i) the merger alters
the contract rights of the stock as expressly set forth in the corporation's
charter, without such charter reserving the right to do so, or (ii) the stock is
to be changed or converted into something other than either the stock in the
successor or cash, scrip, or other rights or interests arising out of provisions
for the treatment of fractional shares of stock in the successor.
STATE ANTI-TAKEOVER STATUTES
ST. PAUL
Section 302A.673 of the MBCA prohibits business combination transactions
with a shareholder for four years after such shareholder has acquired 10% of the
voting power of a publicly traded corporation (generally defined as an
interested shareholder) unless the business combination or acquisition of shares
is approved by a committee of all the disinterested directors of the corporation
prior to the acquisition.
A corporation may opt out of this business combination moratorium statute by
an amendment to its articles or bylaws which has been approved by shareholders
holding a majority of the shares entitled to vote thereon, excluding the shares
of the interested shareholder. St. Paul has not done so.
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Section 302A.671 of the MBCA (the "Minnesota Control Share Acquisition
Statute") provides that shares of capital stock acquired in a "control share
acquisition" (i) are denied voting rights, and (ii) may be redeemed in whole by
the issuing public corporation at any time in accordance with the terms of
Section 302A.671 of the MBCA. A "control share acquisition" is one in which the
acquiror acquires shares which, when added to all other shares of the
corporation beneficially owned by the acquiror, have (i) at least 20 percent of
the voting power of the corporation, (ii) at least 33 1/3% but less than or
equal to 50 percent of the voting power of the corporation and (iii) over 50
percent of the voting power of the corporation. If a proposed acquisition of
control shares is approved by the affirmative vote of the holders of a majority
of the corporation's voting power (and by the affirmative vote of the holders of
a majority of the corporation's voting power which are not beneficially owned by
the acquirer of such control shares), the restrictions do not apply to the
shares acquired. St. Paul has not opted out of the Minnesota Control Share
Acquisition Statute.
USF&G
Under Sections 3-601 to 3-603, inclusive, of the MGCL, certain "business
combinations" (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person (other than the
corporation or a subsidiary of the corporation) who beneficially owns 10% or
more of the voting power of the corporation's shares or an affiliate or
associate of the corporation who, at any time within the two-year period prior
to the date in question, was the beneficial owner of 10% or more of the voting
power of the then-outstanding voting stock of the corporation (an "MGCL
Interested Shareholder") or an affiliate of such an MGCL Interested Shareholder
are prohibited for five years after the most recent date on which the MGCL
Interested Shareholder becomes an MGCL Interested Shareholder. Thereafter, any
such business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
the corporation, voting together as a single voting group, and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the MGCL Interested Shareholder who will (or whose
affiliate will) be a party to the business combination or by an affiliate or
associate of the MGCL Interested Shareholder, voting together as a single voting
group, unless, among other conditions, the corporation's common shareholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
MGCL Interested Shareholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the MGCL Interested
Shareholder becomes an MGCL Interested Shareholder. The USF&G Board exempted the
Stock Option Agreement and the issuance of shares of USF&G Common Stock pursuant
thereto from Section 3-602 and determined that the issuance of shares pursuant
to the Stock Option Agreement will not subject the Merger to the provisions of
Section 3-602 of the MGCL.
Under Sections 3-701 ET SEQ. of the MGCL, "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of stock owned by the acquirer, by
officers or by directors who are employees of the corporation. "Control shares"
are voting shares of stock which, if aggregated with all other such shares of
stock previously acquired by the acquirer or in respect of which the acquirer is
able to exercise or direct the exercise of voting power (except solely by virtue
of a revocable proxy), would entitle the acquirer to exercise voting power in
electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less that one-third, (ii) one third or more but less than
a majority, or (iii) a majority or more of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
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A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of shareholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any shareholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquirer or of any meeting of shareholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a shareholders meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statue does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation PROVIDED, HOWEVER, that the charter or bylaw provision
was adopted before the acquisition of the shares.
Neither the USF&G Articles nor the USF&G Bylaws contain a provision
exempting from the control share acquisition statute any acquisitions by any
person of shares of stock of USF&G.
STATE INSURANCE COMPANY PROVISIONS RELATING TO TAKEOVERS
ST. PAUL
St. Paul's insurance subsidiaries are subject to the insurance statutes of
the states in which they are incorporated, the states where they are licensed,
and the insurance holding company acts in those states. These statutes generally
require prior approval for persons acquiring control of insurance companies
domiciled or commercially domiciled in the state whether directly or indirectly,
through merger or acquisition or otherwise. Control is presumed upon the direct
or indirect acquisition of voting securities of the insurance company in excess
of specified statutory limits. Each of the states in which such insurance
company subsidiary is domiciled or commercially domiciled will have approval
power over such a transaction. St. Paul currently has insurance company
subsidiaries domiciled in the States of California, Minnesota, Illinois, New
York, Delaware, Indiana, Nebraska, Texas and North Dakota. Following the Merger,
St. Paul will also have insurance company subsidiaries domiciled or commercially
domiciled in those states in which USF&G's insurance subsidiaries are domiciled
or commercially domiciled. As described below, USF&G has insurance company
subsidiaries domiciled or commercially domiciled in the States of California,
Illinois, Indiana, Iowa, Maryland, Michigan, Mississippi, New York, Ohio, Texas,
Vermont and Wisconsin.
USF&G
USF&G's insurance subsidiaries are also subject to the insurance statutes of
the states in which they are domiciled, commercially domiciled or licensed to do
business, including the insurance holding company statutes of such states. These
statutes also contain prohibitions on persons acquiring control of insurance
companies domiciled or commercially domiciled in such state, whether through
merger, acquisition or otherwise. Each of these states will have approval power
over such a transaction. See "The Merger--Certain Regulatory Matters." USF&G has
insurance company subsidiaries domiciled or commercially domiciled in the States
of California, Illinois, Indiana, Iowa, Maryland, Michigan, Mississippi, New
York, Ohio, Texas, Vermont and Wisconsin.
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FAIR PRICE AND ANTI-GREENMAIL PROVISIONS
ST. PAUL
Pursuant to Section 302A.675 of the MBCA, a person who has made a takeover
offer (generally defined to be an offer to acquire shares pursuant to a tender
offer which results in the offeror becoming the beneficial owner of more than
10% of the class of stock sought where the offeror owned 10% or less prior to
the offer or increasing his ownership in that class by more than 10% where the
offeror owned 10% or more prior to the offer) may not acquire shares of a
publicly held corporation within two years following the last purchase of shares
pursuant to a takeover offer with respect to the class of securities acquired,
including, but not limited to, acquisitions made by purchase, exchange, merger,
consolidation, partial or complete liquidation, redemption, reverse stock split,
recapitalization, reorganization, or any other similar transaction, unless the
shareholders are afforded, at the time of the proposed acquisition, a reasonable
opportunity to dispose of the shares to the offeror upon substantially
equivalent terms as those provided in the earlier takeover offer. This rule does
not apply if the proposed acquisition of shares is approved by a committee of
the board's disinterested directors before the purchase of any shares by the
offeror pursuant to the earlier takeover offer.
Section 302A.553 of the MBCA provides that a publicly held Minnesota
corporation is prohibited from purchasing any voting shares owned for less than
two years from a greater than 5% shareholder for more than the market value
unless the transaction has been approved by the affirmative vote of the holders
of a majority of the voting power of all shares entitled to vote or unless the
Minnesota corporation makes an offer of at least equal value per share to all
holders of shares of the class or series of stock held by the greater than 5%
shareholder and to all holders of any class or series into which such securities
may be converted.
USF&G
Other than the conditions for business combination with an MGCL Interested
Shareholder (as described under "--State Anti-Takeover Statutes"), neither the
MGCL nor the USF&G Articles contain any "Anti-Greenmail" or "Fair Price"
provisions which would, respectively, prevent USF&G from repurchasing shares of
USF&G from a potential acquirer of USF&G, and paying a premium for those shares,
in order to prevent an acquisition of USF&G by such potential acquirer, and
require that transactions with specified shareholders meet certain price
criteria.
SHAREHOLDERS RIGHTS PLANS
ST. PAUL
The St. Paul Rights Agreement is described above under the caption
"Description of St. Paul Capital Stock--Rights Agreement; Series A Preferred."
USF&G
Under the Amended and Restated Rights Agreement, dated as of March 11, 1997
between USF&G and The Bank of New York (the "USF&G Rights Agreement"), each
outstanding share of USF&G's Common Stock has attached to it and trading with it
one right (a "USF&G Right") to purchase Junior Participating Preferred Stock,
$50 par value, of USF&G ("Junior Preferred"). Each USF&G Right entitles the
holder to purchase when exercisable one one-hundredth of a share of Junior
Preferred for $105. The USF&G Rights cannot be exercised unless certain events
occur, including the acquisition by a person of 15% or more of the USF&G Common
Stock. At most times when exercisable, the USF&G Rights may be exercised for
USF&G Common Stock or the stock of an acquiring company having a value of twice
the exercise price. The USF&G Rights and the USF&G Rights Agreement will expire
on October 14, 2007. The USF&G Rights Agreement was amended to provide that St.
Paul will not be deemed an Acquiring
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Person (as defined in the USF&G Rights Agreement), the Distribution Date (as
defined in the USF&G Rights Agreement) will not be deemed to occur and the USF&G
Rights will not separate from the USF&G Common Stock as a result of entering
into the Merger Agreement and/or the Stock Option Agreement or consummating the
Merger and/or the transactions contemplated thereby.
CONFLICT OF INTEREST TRANSACTIONS
ST. PAUL
Pursuant to Section 302A.255 of the MBCA, a contract or transaction between
(i) a corporation and any of its directors, or (ii) a corporation and any other
entity in which any of its directors, officers, or legal representatives has a
material financial interest, is not void or voidable solely because the director
or other entity is a party or because of the presence of the director at the
meeting of the board or a committee of the board that authorizes the contract or
transaction, if: (i) the contract or transaction was fair and reasonable as to
the corporation at the time it was authorized; or (ii) the material facts as to
the contract or transaction and as to the director's interest are fully
disclosed and the transaction is approved in good faith by either (A) the
holders of two-thirds of the voting power of the shares entitled to vote which
are owned by persons other than the interested director, or (B) the unanimous
affirmative vote of the holders of all outstanding shares, whether or not
entitled to vote, or (C) by a majority of disinterested directors of the board
or a committee of the board.
USF&G
Under Section 2-419 of the MGCL and the USF&G Articles, a contract or
transaction between (i) a corporation and any of its directors, or (ii) a
corporation and any other entity in which any of its directors has a material
financial interest, is not void or voidable solely because of a common
directorship or interest, the presence of the director at the meeting of the
board or a committee of the board that authorizes the contract or transaction or
the counting of the vote of the director for the authorization, if (i) the fact
of the common directorship or interest is known or disclosed and either (A) a
majority of the disinterested directors on the board or committee approve the
contract or transactions, or (B) the majority of the shares entitled to vote,
other than those owned of record or beneficially owned by the interested
director, approve the contract or transaction, or (ii) the contract or
transaction is fair and reasonable to the corporation.
EXPERTS
The consolidated financial statements of St. Paul as of December 31, 1997
and 1996, and for each of the years in the three year period ended December 31,
1997 included in St. Paul's Current Report on Form 8-K dated February 26, 1998
and the consolidated financial statements and schedules of St. Paul as of
December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996 included in St. Paul's Annual Report on Form 10-K for
the year ended December 31, 1996 are incorporated by reference in this Joint
Proxy Statement/Prospectus and the Registration Statement in reliance on the
reports of KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their reports thereon, which are incorporated herein by reference
and are given upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of USF&G as of December 31, 1997 and
1996, and for each of the years in the three year period ended December 31,
1997, included in USF&G's Current Report on Form 8-K dated February 26, 1998,
and the consolidated financial statements and schedules of USF&G as of December
31, 1996, 1995 and 1994 and for each of the years in the three year period ended
December 31, 1996, included in USF&G's Annual Report on Form 10-K for the year
ended December 31, 1996, which are incorporated by reference in this Joint Proxy
Statement/Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors as set forth in their reports
80
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thereon and are incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information of USF&G for the three month periods ended March 31, 1997 and 1996,
and the three and six month periods ended June 30, 1997 and 1996, and the three
and nine month periods ended September 30, 1997 and 1996, incorporated by
reference in this Joint Proxy Statment/Prospectus, the independent auditors have
reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
reports included in USF&G's quarterly reports on Form 10-Q for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997, and incorporated by
reference herein, state that they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their reports on such information should be limited in light of the
limited nature of the review procedures applied. Ernst & Young LLP is not
subject to the liability provisions of Section 11 of the Securities Act for
their reports on the unaudited interim financial information because these
reports are not "reports" or a "part" of the Joint Proxy Statement/Prospectus
prepared or certified by the auditors within the meaning of Sections 7 and 11 of
The Securities Act.
LEGAL MATTERS
The validity of the St. Paul Common Stock to be issued pursuant to the
Merger will be passed upon for St. Paul by Oppenheimer, Wolff & Donnelly LLP. It
is a condition to the consummation of the Merger that St. Paul and USF&G receive
opinions from Sullivan & Cromwell and Piper & Marbury LLP, respectively, with
respect to the tax treatment of the Merger. Mr. L.P. Scriggins, a Director of
USF&G, is a partner of Piper & Marbury L.L.P.
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FUTURE SHAREHOLDER PROPOSALS
Any St. Paul shareholder who intended to submit a proposal for inclusion in
the proxy materials for the 1998 annual meeting of St. Paul shareholders was
required to have submitted such proposal to the Corporate Secretary of St. Paul
by November 26, 1997. Any USF&G shareholder who intended to submit a proposal
for inclusion in the proxy materials for the 1998 annual meeting of USF&G was
required to submit such proposal to the Secretary of USF&G by November 29, 1997.
USF&G will not hold an annual meeting of its shareholders in 1998 if the Merger
is consummated.
The rules of the SEC set forth standards as to what shareholder proposals
are required to be included in a proxy statement for an annual meeting.
WHERE YOU CAN FIND MORE INFORMATION
St. Paul and USF&G file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov." You can also find out information about St. Paul and USF&G
from the exchanges on which our common stocks are listed. Both the St. Paul
Common Stock and the USF&G Common Stock are listed on the NYSE. In addition, the
USF&G Common Stock is listed on the Pacific Exchange. Information filed by St.
Paul and USF&G with such exchanges may be inspected at such exchange.
St. Paul has filed the Registration Statement on Form S-4 (the "Registration
Statement") to register with the SEC the St. Paul Common Stock to be issued in
the Merger. This Joint Proxy Statement/ Prospectus is a part of that
Registration Statement and constitutes a prospectus of St. Paul in addition to
being a proxy statement of St. Paul and USF&G for the Meetings. As allowed by
SEC rules, this Joint Proxy Statement/Prospectus does not contain all the
information you can find in the Registration Statement or the exhibits to the
Registration Statement.
The SEC allows us to "incorporate by reference" information into this Joint
Proxy Statement/ Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Joint Proxy Statement/Prospectus, except for any information superseded by
information in this Joint Proxy Statement/Prospectus. This Joint Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that we have previously filed with the SEC. These documents contain important
information about our companies and their finances.
<TABLE>
<CAPTION>
ST. PAUL SEC FILINGS (FILE NO. 0-3021) PERIOD OR DATE FILED
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1996
Quarterly Reports on Form 10-Q Quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997
Current Reports on Form 8-K Filed on April 28, 1997, July 28, 1997,
October 27, 1997, January 21, 1998, January 27,
1998 and February 26, 1998
Description of St. Paul Common Stock from Filed on October 17, 1991
Registration Statement on Form 8-A
Description of rights to purchase Series A Filed on December 8, 1989
Preferred from Registration Statement on
Form 8-A
</TABLE>
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<TABLE>
<CAPTION>
USF&G SEC FILINGS (FILE NO. 1-8233) PERIOD OR DATE FILED
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1996
Quarterly Reports on Form 10-Q Quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997
Current Reports on Form 8-K Filed on January 10, 1997,
March 13, 1997, March 26, 1997, January 21, 1998,
January 22, 1998 and February 26, 1998
Description of USF&G Common Stock from Filed on May 7, 1987
Registration Statement on Form 8-A
Description of rights to purchase Junior Filed on September 21, 1987, as amended on March 14,
Preferred Stock from Registration Statement 1997 and February 25, 1998
on Form 8-A
</TABLE>
We are also incorporating by reference additional documents that we file
with the SEC between the date of this Joint Proxy Statement/Prospectus and the
dates of the Meetings of our shareholders.
St. Paul has supplied all information contained or incorporated by reference
in this Joint Proxy Statement/Prospectus relating to St. Paul, and USF&G has
supplied all such information relating to USF&G.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us or the SEC.
Documents incorporated by reference are available from us without charge,
excluding all exhibits unless we have specifically incorporated by reference an
exhibit in this Joint Proxy Statement/Prospectus. Shareholders may obtain
documents incorporated by reference in this Joint Proxy Statement/Prospectus by
requesting them in writing or by telephone from the appropriate party at the
following addresses:
<TABLE>
<S> <C>
The St. Paul Companies, Inc. USF&G Corporation
Bruce A. Backberg John F. Hoffen, Jr.
Senior Vice President and Chief Corporate Secretary
Legal Counsel 6225 Centennial Way
385 Washington Street Baltimore, MD 21209
St. Paul, MN 55102 (410) 547-3000
(612) 310-7911
</TABLE>
If you would like to request documents from us, please do so by March 31,
1998 to receive them before the Meetings.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON THE PROPOSALS SET
FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED
FEBRUARY 27, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE
JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH
DATE, AND NEITHER THE MAILING OF THE JOINT PROXY STATEMENT/PROSPECTUS TO
SHAREHOLDERS NOR THE ISSUANCE OF ST. PAUL COMMON STOCK IN THE MERGER SHALL BE
DEEMED TO CREATE ANY IMPLICATION TO THE CONTRARY.
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INDEX OF TERMS DEFINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
<TABLE>
<CAPTION>
DEFINED TERM PAGE NO.
- ------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Affiliate Letter....................................................................................... 37
Aggregate Consideration................................................................................ 28
Alternative Purchase Price............................................................................. 54
Antitrust Division..................................................................................... 36
Articles of Merger..................................................................................... 42
Average Stock Price.................................................................................... 14
Blake Consulting Agreement............................................................................. 57
BT Alex. Brown......................................................................................... 18
BT Alex. Brown Opinion................................................................................. 28
BT Alex. Brown Selected Transactions................................................................... 32
Closing................................................................................................ 42
Closing Date........................................................................................... 35
Closing Price.......................................................................................... 54
Code................................................................................................... 35
Collars................................................................................................ 14
Consulting Period...................................................................................... 58
Convertible Notes...................................................................................... 45
Credit Suisse First Boston............................................................................. 17
Credit Suisse First Boston Comparable Acquisitions..................................................... 21
Credit Suisse First Boston Comparable Companies........................................................ 21
Daily Exchange Ratio................................................................................... 25
Department............................................................................................. 43
D&O Insurance.......................................................................................... 49
EBIT................................................................................................... 31
Effective Time......................................................................................... 43
EPS.................................................................................................... 21
Equity Value........................................................................................... 31
Exchange Act........................................................................................... 46
Exchange Agent......................................................................................... 43
Exchange Ratio......................................................................................... 14
Excluded Shares........................................................................................ 14
FTC.................................................................................................... 36
five year growth rate.................................................................................. 26
GAAP................................................................................................... 22
Goldman Sachs.......................................................................................... 18
Goldman Sachs Selected Companies....................................................................... 25
Governmental Consents.................................................................................. 50
Governmental Entity.................................................................................... 44
HSR Act................................................................................................ 36
IBES................................................................................................... 24
Ingrey Consulting Agreement............................................................................ 58
Ingrey Stock Appreciation Rights Agreement............................................................. 58
IRS.................................................................................................... 35
Joint Proxy Statement/Prospectus....................................................................... 14
Junior Preferred....................................................................................... 79
Large-Cap Companies.................................................................................... 25
Large-Cap Insurers..................................................................................... 30
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM PAGE NO.
- ------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Leucadia............................................................................................... 25
Lower Collar........................................................................................... 14
LTM.................................................................................................... 26
Maximum Premium........................................................................................ 49
MBCA................................................................................................... 37
Meetings............................................................................................... 14
Merger................................................................................................. 14
Merger Agreement....................................................................................... 14
Merger Consideration................................................................................... 14
Merger Sub............................................................................................. 14
Merger Termination Date................................................................................ 54
MGCL................................................................................................... 37
MGCL Interested Shareholder............................................................................ 77
Mid-Cap Companies...................................................................................... 25
Mid-Cap Insurers....................................................................................... 30
Minnesota Control Share Acquisition Statute............................................................ 77
1998 growth rates...................................................................................... 26
Nominal Exchange Ratio................................................................................. 25
Nominal Value.......................................................................................... 24
Notional Total Profit.................................................................................. 55
NYSE................................................................................................... 14
Operating Earnings..................................................................................... 31
Option................................................................................................. 53
Option Purchase Price.................................................................................. 53
Option Termination Date................................................................................ 54
Order.................................................................................................. 50
Pro Forma Analysis..................................................................................... 27
Registration Statement................................................................................. 82
Repurchase Right....................................................................................... 54
Right.................................................................................................. 70
ROAA................................................................................................... 26
ROACE.................................................................................................. 26
S&P 500................................................................................................ 30
Sale Right............................................................................................. 54
SEC.................................................................................................... 47
Securities Act......................................................................................... 37
Selected Insurers...................................................................................... 30
Separation Date........................................................................................ 71
Series A Preferred..................................................................................... 70
Series B Shares........................................................................................ 14
Series C Shares........................................................................................ 71
St. Paul............................................................................................... 14
St. Paul Acquiring Person.............................................................................. 71
St. Paul Acquisition Proposal.......................................................................... 52
St. Paul Articles...................................................................................... 72
St. Paul Board......................................................................................... 14
St. Paul Bylaws........................................................................................ 72
St. Paul Certificates.................................................................................. 43
St. Paul Common Stock.................................................................................. 14
St. Paul Compensation and Benefit Plans................................................................ 44
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM PAGE NO.
- ------------------------------------------------------------------------------------------------------- ---------
<S> <C>
St. Paul Material Adverse Effect....................................................................... 51
St. Paul Record Date................................................................................... 60
St. Paul Rights Agreement.............................................................................. 70
St. Paul Special Meeting............................................................................... 14
St. Paul Stock Split................................................................................... 15
St. Paul Voting Stock.................................................................................. 14
Stand Alone Analysis................................................................................... 27
Stock Acquisition Date................................................................................. 71
Stock Option Agreement................................................................................. 44
Superior Proposal...................................................................................... 47
Termination Date....................................................................................... 51
Total Profit........................................................................................... 55
Triggering Event....................................................................................... 53
Upper Collar........................................................................................... 14
USF&G.................................................................................................. 14
USF&G Acquisition Proposal............................................................................. 46
USF&G Articles......................................................................................... 72
USF&G Board............................................................................................ 14
USF&G Bylaws........................................................................................... 72
USF&G Certificates..................................................................................... 43
USF&G Common Stock..................................................................................... 14
USF&G Compensation and Benefit Plans................................................................... 44
USF&G Directors' Plan.................................................................................. 58
USF&G Executive Officers............................................................................... 55
USF&G Executive Severance Agreements................................................................... 55
USF&G Material Adverse Effect.......................................................................... 50
USF&G Named Executive Officer.......................................................................... 56
USF&G Option........................................................................................... 48
USF&G Plans............................................................................................ 44
USF&G Record Date...................................................................................... 60
USF&G Right............................................................................................ 79
USF&G Rights Agreement................................................................................. 79
USF&G Shares........................................................................................... 53
USF&G Special Meeting.................................................................................. 14
USF&G Stock Plans...................................................................................... 45
Vested Stock Units..................................................................................... 48
</TABLE>
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ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
USF&G CORPORATION,
THE ST. PAUL COMPANIES, INC.
AND
SP MERGER CORPORATION
DATED AS OF JANUARY 19, 1998
(AS AMENDED THROUGH FEBRUARY 26, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
RECITALS
ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. The Merger................................................................................................ A-1
1.2. Closing................................................................................................... A-1
1.3. Effective Time............................................................................................ A-1
ARTICLE II
CHARTER AND BYLAWS
OF THE SURVIVING CORPORATION
2.1. The Charter............................................................................................... A-2
2.2. The Bylaws................................................................................................ A-2
ARTICLE III
OFFICERS AND DIRECTORS
OF THE SURVIVING CORPORATION
3.1. Directors................................................................................................. A-2
3.2. Officers.................................................................................................. A-2
ARTICLE IV
EFFECT OF THE MERGER ON STOCK;
EXCHANGE OF CERTIFICATES
4.1. Effect on Stock........................................................................................... A-2
(a) Merger Consideration........................................................................... A-3
(b) Cancellation of Shares......................................................................... A-3
(c) Merger Subsidiary.............................................................................. A-3
4.2. Exchange of Certificates for Shares....................................................................... A-3
(a) Exchange Agent................................................................................. A-3
(b) Exchange Procedures............................................................................ A-3
(c) Distributions with Respect to Unexchanged Shares; Voting....................................... A-4
(d) Transfers...................................................................................... A-4
(e) Fractional Shares.............................................................................. A-4
(f) Termination of Exchange Fund................................................................... A-5
(g) Lost, Stolen or Destroyed Certificates......................................................... A-5
(h) Affiliates..................................................................................... A-5
4.3. Dissenters' Rights........................................................................................ A-5
4.4. Adjustments to Prevent Dilution........................................................................... A-5
4.5. Treatment of the Convertible Notes........................................................................ A-5
</TABLE>
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of the Company............................................................. A-5
(a) Organization, Good Standing and Qualification.................................................. A-5
(b) Capital Structure.............................................................................. A-6
(c) Corporate Authority; Approval and Fairness..................................................... A-7
(d) Governmental Filings; No Violations............................................................ A-7
(e) Company Reports; Financial Statements.......................................................... A-8
(f) Absence of Certain Changes..................................................................... A-9
(g) Litigation and Liabilities..................................................................... A-9
(h) Employee Benefits.............................................................................. A-10
(i) Compliance with Laws; Permits.................................................................. A-11
(j) Takeover Statutes.............................................................................. A-12
(k) Environmental Matters.......................................................................... A-12
(l) Accounting and Tax Matters..................................................................... A-13
(m) Taxes.......................................................................................... A-13
(n) Labor Matters.................................................................................. A-14
(o) Intellectual Property.......................................................................... A-14
(p) Material Contracts............................................................................. A-15
(q) Rights Plan.................................................................................... A-15
(r) Brokers and Finders............................................................................ A-15
(s) Insurance Matters.............................................................................. A-16
(t) Liabilities and Reserves....................................................................... A-17
(u) Investment Advisory Matters.................................................................... A-18
5.2. Representations and Warranties of Parent and Merger Subsidiary............................................ A-18
(a) Capitalization of Merger Subsidiary............................................................ A-18
(b) Organization, Good Standing and Qualification.................................................. A-18
(c) Capital Structure.............................................................................. A-19
(d) Corporate Authority; Fairness.................................................................. A-20
(e) Governmental Filings; No Violations............................................................ A-20
(f) Parent Reports; Financial Statements........................................................... A-21
(g) Absence of Certain Changes..................................................................... A-22
(h) Litigation and Liabilities..................................................................... A-22
(i) Employee Benefits.............................................................................. A-22
(j) Compliance with Laws; Permits.................................................................. A-23
(k) Environmental Matters.......................................................................... A-24
(l) Accounting and Tax Matters..................................................................... A-25
(m) Taxes.......................................................................................... A-25
(n) Labor Matters.................................................................................. A-25
(o) Material Contracts............................................................................. A-25
(p) Ownership of Shares............................................................................ A-25
(q) Brokers and Finders............................................................................ A-26
(r) Insurance Matters.............................................................................. A-26
(s) Liabilities and Reserves....................................................................... A-26
</TABLE>
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ARTICLE VI
COVENANTS
6.1. (a) Interim Operations of the Company.............................................................. A-27
6.1. (b) Interim Operations of Parent................................................................... A-29
6.2. Company Acquisition Proposals............................................................................. A-29
6.3. Information Supplied...................................................................................... A-30
6.4. Stockholders Meetings..................................................................................... A-31
6.5. Filings; Other Actions; Notification...................................................................... A-31
6.6. Taxation and Accounting................................................................................... A-32
6.7. Access.................................................................................................... A-32
6.8. Affiliates................................................................................................ A-32
6.9. Stock Exchange Listing.................................................................................... A-33
6.10. Publicity................................................................................................. A-33
6.11. Benefits.................................................................................................. A-33
(a) Stock Options.................................................................................. A-33
(b) Employee Benefits.............................................................................. A-34
6.12. Expenses.................................................................................................. A-34
6.13. Indemnification; Directors' and Officers' Insurance....................................................... A-34
6.14. Election to Parent's Board of Directors................................................................... A-35
6.15. Convertible Notes......................................................................................... A-35
6.16. Satisfaction of Section 15 of the 1940 Act................................................................ A-35
6.17. Advisory Contract Consents................................................................................ A-36
6.18. Other Actions by the Company and Parent................................................................... A-36
(a) Rights......................................................................................... A-36
(b) Takeover Statute............................................................................... A-36
(c) Dividends...................................................................................... A-36
ARTICLE VII
CONDITIONS
7.1. Conditions to Each Party's Obligation to Effect the Merger................................................ A-36
(a) Stockholder Approval........................................................................... A-36
(b) NYSE Listing................................................................................... A-36
(c) Regulatory Consents............................................................................ A-37
(d) Litigation..................................................................................... A-37
(e) S-4............................................................................................ A-37
7.2. Conditions to Obligations of Parent and Merger Subsidiary................................................. A-37
(a) Representations and Warranties................................................................. A-37
(b) Performance of Obligations of the Company...................................................... A-37
(c) Consents....................................................................................... A-37
(d) Tax Opinion.................................................................................... A-38
(e) Accountant Letters............................................................................. A-38
7.3. Conditions to Obligation of the Company................................................................... A-38
(a) Representations and Warranties................................................................. A-38
(b) Performance of Obligations of Parent and Merger Subsidiary..................................... A-38
(c) Consents Under Agreements...................................................................... A-38
(d) Tax Opinion.................................................................................... A-38
(e) Accountant Letters............................................................................. A-39
</TABLE>
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ARTICLE VIII
TERMINATION
8.1. Termination by Mutual Consent............................................................................. A-39
8.2. Termination by Either Parent or the Company............................................................... A-39
8.3. Termination by the Company................................................................................ A-39
8.4. Termination by Parent..................................................................................... A-40
8.5. Effect of Termination and Abandonment..................................................................... A-40
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. Survival.................................................................................................. A-41
9.2. Modification or Amendment................................................................................. A-41
9.3. Waiver of Conditions...................................................................................... A-41
9.4. Counterparts.............................................................................................. A-41
9.5. GOVERNING LAW; WAIVER OF JURY TRIAL....................................................................... A-41
9.6. Notices................................................................................................... A-42
9.7. Entire Agreement; No Other Representations................................................................ A-42
9.8. No Third Party Beneficiaries.............................................................................. A-43
9.9. Obligations of Parent and of the Company.................................................................. A-43
9.10. Severability.............................................................................................. A-43
9.11. Interpretation............................................................................................ A-43
9.12. Assignment................................................................................................ A-43
9.13. Location of Certain Definitions........................................................................... A-44
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "AGREEMENT"), dated as
of January 19, 1998, as amended through February 26, 1998, among USF&G
Corporation, a Maryland corporation (the "COMPANY"), The St. Paul Companies,
Inc., a Minnesota corporation ("PARENT"), and SP Merger Corporation, a Maryland
corporation and a wholly-owned subsidiary of Parent ("MERGER SUBSIDIARY," the
Company and Merger Subsidiary sometimes being hereinafter collectively referred
to as the "CONSTITUENT CORPORATIONS").
RECITALS
WHEREAS, the respective boards of directors of each of Parent, Merger
Subsidiary and the Company have determined that the merger of Merger Subsidiary
with and into the Company (the "MERGER") upon the terms and subject to the
conditions set forth in this Agreement is advisable and have approved the
Merger;
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, as a condition and inducement to Parent's and Merger Subsidiary's
willingness to enter into this Agreement, the Company is entering into a stock
option agreement with Parent (the "STOCK OPTION AGREEMENT"), pursuant to which
the Company has granted to Parent an option to purchase Shares (as defined in
Section 4.1(a)) under the terms and conditions set forth in the Stock Option
Agreement;
WHEREAS, it is intended that, for federal income tax purposes, the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "CODE");
WHEREAS, for financial accounting purposes, it is intended that the Merger
shall be accounted for as a "pooling-of-interests;" and
WHEREAS, the Company, Parent and Merger Subsidiary desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. THE MERGER. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time (as defined in Section 1.3) Merger
Subsidiary shall be merged with and into the Company and the separate corporate
existence of Merger Subsidiary shall thereupon cease. The Company shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"SURVIVING CORPORATION"), and the separate corporate existence of the Company
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger, except as set forth in Article III. The
Merger shall have the effects specified in the Maryland General Corporation Law,
as amended (the "MGCL").
1.2. CLOSING. The closing of the Merger (the "CLOSING") shall take place (i)
at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York at
9:00 A.M. on the first business day after the day on which the last to be
fulfilled or waived of the conditions set forth in Article VII (other than those
conditions that by their nature are to be satisfied at the Closing, but subject
to the fulfillment or waiver of those conditions) shall be satisfied or waived
in accordance with this Agreement or (ii) at such other place and time and/or on
such other date as the Company and Parent may agree in writing (the "CLOSING
DATE").
1.3. EFFECTIVE TIME. As soon as practicable following the Closing, the
Company and Parent will cause Articles of Merger (the "MARYLAND ARTICLES OF
MERGER") to be executed, acknowledged and filed with and
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accepted for record by the State Department of Assessments and Taxation of
Maryland (the "DEPARTMENT") as provided in Section 3-107 of the MGCL. The Merger
shall become effective at the time the Department accepts for record the
Maryland Articles of Merger or at such later time agreed by the Company and
Parent and established under the Maryland Articles of Merger, not to exceed 30
days after the Maryland Articles of Merger are accepted for record by the
Department (the "EFFECTIVE TIME").
ARTICLE II
CHARTER AND BYLAWS
OF THE SURVIVING CORPORATION
2.1. THE CHARTER. The charter of the Company as in effect immediately prior
to the Effective Time shall be the Charter of the Surviving Corporation (the
"CHARTER"), until duly amended as provided therein or by applicable law, except
that (i) Article Fifth of the Charter shall be amended to read in its entirety
as follows: "The name and address of the resident agent of the Corporation in
this state are James J. Hanks, Jr., 300 East Lombard Street, Baltimore, Maryland
21202, (ii) Article Sixth of the Charter shall be amended to read in its
entirety as follows: "The aggregate number of shares that the Corporation shall
have the authority to issue is 1,000 shares of Common Stock, par value $1.00 per
share", and (iii) Article Seventh shall be deleted in its entirety with all
subsequent Articles renumbered accordingly.
2.2. THE BYLAWS. The bylaws of Merger Subsidiary in effect at the Effective
Time shall be the bylaws of the Surviving Corporation (the "BYLAWS"), until
thereafter amended as provided therein or by applicable law.
ARTICLE III
OFFICERS AND DIRECTORS
OF THE SURVIVING CORPORATION
3.1. DIRECTORS. The directors of Merger Subsidiary 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 death, resignation or removal in accordance
with the Charter and the Bylaws.
3.2. OFFICERS. The officers of the Company 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 Charter and
the Bylaws.
ARTICLE IV
EFFECT OF THE MERGER ON STOCK;
EXCHANGE OF CERTIFICATES
4.1. EFFECT ON STOCK. At the Effective Time, as a result of the Merger and
without any action on the part of the holder of any stock of the Company:
(a) MERGER CONSIDERATION. Each share of common stock, par value $2.50 per
share, of the Company (each a "Share" or, collectively, the "SHARES") issued and
outstanding immediately prior to the Effective Time (other than Shares owned by
Parent or any direct or indirect Subsidiary of Parent (collectively, the "PARENT
COMPANIES") or Shares that are owned by the Company or any direct or indirect
Subsidiary of the Company (and in each case not held on behalf of third parties)
("EXCLUDED SHARES")) shall be converted into, and become exchangeable for the
right to receive (the "MERGER CONSIDERATION") that number of shares (the
"EXCHANGE RATIO") of common stock, no par value ("PARENT COMMON STOCK"), of
Parent determined by dividing $22 by the average of the daily average per share
high and low sales prices of one share of Parent Common Stock as reported on the
New York Stock Exchange, Inc. (the "NYSE") composite transactions
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reporting system (as reported in the New York City edition of The Wall Street
Journal or, if not reported thereby, another authoritative source) for each of
the 20 trading days ending on the third trading day prior to the Stockholders
Meeting (as defined in Section 6.4 hereof) rounded to the fourth decimal place
(the "AVERAGE PARENT PRICE"), provided, that, (i) if the Average Parent Price is
less than $74 (the "LOWER COLLAR"), the Exchange Ratio shall be 0.2973; and (ii)
if the Average Parent Price is greater than $78 (the "UPPER COLLAR" and,
together with the Lower Collar, the "COLLARS"), the Exchange Ratio shall be
0.2821. At the Effective Time, all Shares shall no longer be outstanding and
shall be canceled and retired and shall cease to exist, and each certificate (a
"CERTIFICATE") formerly representing any of such Shares (other than Excluded
Shares) shall thereafter represent only the right to receive the Merger
Consideration, cash in lieu of fractional shares pursuant to Section 4.2(e), if
any, and any distribution or dividend pursuant to Section 4.2(c).
(b) CANCELLATION OF SHARES. Each Share issued and outstanding immediately
prior to the Effective Time and owned by any of the Parent Companies or owned by
the Company or any direct or indirect Subsidiary of the Company (in each case
other than Shares that are owned on behalf of third parties), shall, by virtue
of the Merger and without any action on the part of the holder thereof, cease to
be outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(c) MERGER SUBSIDIARY. At the Effective Time, each share of Common Stock,
par value $1.00 per share, of Merger Subsidiary issued and outstanding
immediately prior to the Effective Time shall be converted into one share of
common stock of the Surviving Corporation.
4.2. EXCHANGE OF CERTIFICATES FOR SHARES.
(a) EXCHANGE AGENT. Promptly after the Effective Time, Parent shall deposit,
or shall cause to be deposited, with an exchange agent selected by Parent prior
to the Effective Time with the Company's prior approval, which shall not be
unreasonably withheld (the "EXCHANGE AGENT"), for the benefit of the holders of
Shares, certificates representing the shares of Parent Common Stock and, after
the Effective Time, if applicable, any cash, dividends or other distributions
with respect to the Parent Common Stock to be issued or paid pursuant to the
last sentence of Section 4.1(a) (including cash in lieu of fractional Shares) in
exchange for Shares outstanding immediately prior to the Effective Time upon due
surrender of the Certificates (or affidavits of loss in lieu thereof) pursuant
to the provisions of this Article IV (such certificates for shares of Parent
Common Stock, together with the amount of any dividends or other distributions
payable with respect thereto and any cash in lieu of fractional Shares, being
hereinafter referred to as the "EXCHANGE FUND").
(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, Parent and the
Surviving Corporation shall cause the Exchange Agent to mail to each holder of
record of Shares (other than holders of Excluded Shares) (i) a letter of
transmittal specifying that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the Certificates (or
affidavits of loss in lieu thereof) to the Exchange Agent, such letter of
transmittal to be in such form and have such other provisions as Parent and the
Company may reasonably agree prior to the Effective Time, and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for (A)
certificates representing shares of Parent Common Stock and (B) any unpaid
dividends and other distributions and cash in lieu of fractional shares. Subject
to Section 4.2(h), upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor (x)
a certificate representing that number of whole shares of Parent Common Stock
that such holder is entitled to receive pursuant to this Article IV, (y) a check
in the amount (after giving effect to any required tax withholdings) of (A) any
cash in lieu of fractional shares plus (B) any unpaid dividends or other
distributions that such holder has the right to receive pursuant to the
provisions of this Article IV, and the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on any amount payable
upon due surrender of the Certificates. In the event of a transfer of ownership
of Shares that is not registered in the transfer records of the Company, a
certificate representing the proper number
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of shares of Parent Common Stock, together with a check for any cash to be paid
upon due surrender of the Certificate and any other dividends or distributions
in respect thereof, may be issued and/or paid to such a transferee if the
Certificate formerly representing such Shares is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid. If any certificate for shares of Parent Common Stock is to be issued in a
name other than that in which the Certificate surrendered in exchange therefor
is registered, it shall be a condition of such exchange that the Person (as
defined below) requesting such exchange shall pay any transfer or other taxes
required by reason of the issuance of certificates for shares of Parent Common
Stock in a name other than that of the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of Parent or the Exchange
Agent that such tax has been paid or is not applicable.
For the purposes of this Agreement, the term "Person" shall mean any
individual, corporation (including not-for-profit), general or limited
partnership, limited liability company, joint venture, estate, trust,
association, organization, Governmental Entity (as defined in Section 5.1(d)) or
other entity of any kind or nature.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES; VOTING.
(i) All shares of Parent Common Stock to be issued pursuant to the
Merger shall be deemed issued and outstanding as of the Effective Time and
whenever a dividend or other distribution is declared by Parent in respect
of the Parent Common Stock, the record date for which is at or after the
Effective Time, that declaration shall include dividends or other
distributions in respect of all shares issuable pursuant to this Agreement.
No dividends or other distributions in respect of the Parent Common Stock
shall be paid to any holder of any unsurrendered Certificate until such
Certificate is surrendered for exchange in accordance with this Article IV.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be issued and/or paid to the holder of the
certificates representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, (A) at the time of such surrender, the
dividends or other distributions with a record date after the Effective Time
and a payment date on or prior to such time of surrender payable with
respect to such whole shares of Parent Common Stock and not paid and (B) at
the appropriate payment date, the dividends or other distributions payable
with respect to such whole shares of Parent Common Stock with a record date
after the Effective Time but with a payment date subsequent to surrender.
(ii) Holders of unsurrendered Certificates who were the registered
holders at the Effective Time shall be entitled to vote after the Effective
Time at any meeting of Parent stockholders (or consent in connection with
any consent in lieu of meeting) the number of whole shares of Parent Common
Stock represented by such Certificates, regardless of whether such holders
have exchanged their Certificates.
(d) TRANSFERS. After the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the Shares that were outstanding
immediately prior to the Effective Time.
(e) FRACTIONAL SHARES. Notwithstanding any other provision of this
Agreement, no fractional shares of Parent Common Stock will be issued and any
holder of Shares entitled to receive a fractional share of Parent Common Stock
but for this Section 4.2(e) shall be entitled to receive a cash payment in lieu
thereof, which payment shall represent such holder's proportionate interest in
the net proceeds from the sale by the Exchange Agent on behalf of such holder of
the aggregate fractional shares of Parent Common Stock that such holder
otherwise would be entitled to receive. Any such sale shall be made by the
Exchange Agent within five business days after the date upon which the
Certificate(s) (or affidavit(s) of loss in lieu thereof) that would otherwise
result in the issuance of such fractional shares of Parent Common Stock have
been received by the Exchange Agent.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Parent Common Stock)
that remains unclaimed by the stockholders of the Company for 180 days after the
Effective Time shall be paid to Parent. Any stockholders of the Company
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who have not theretofore complied with this Article IV shall thereafter look
only to Parent for payment of their shares of Parent Common Stock and any cash,
dividends and other distributions in respect thereof payable and/or issuable
pursuant to Section 4.1 and Section 4.2(c) upon due surrender of their
Certificates (or affidavits of loss in lieu thereof), in each case, without any
interest thereon. Notwithstanding the foregoing, none of Parent, the Surviving
Corporation, the Exchange Agent or any other Person shall be liable to any
former holder of Shares for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Certificate to be lost, stolen or
destroyed and, if required by Parent, the posting by such Person of a bond in
customary amount as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the shares of Parent Common Stock and any
cash payable and any unpaid dividends or other distributions in respect thereof
pursuant to Section 4.2(c) upon due surrender of and deliverable in respect of
the Shares represented by such Certificate pursuant to this Agreement.
(h) AFFILIATES. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any "AFFILIATE" (defined to mean, with
respect to any Person, any Person that, directly or indirectly, controls or is
controlled by or is under common control with such Person) (as determined
pursuant to Section 6.8) of the Company shall not be exchanged until Parent has
received a written agreement from such Person as provided in Section 6.8 hereof.
4.3. DISSENTERS' RIGHTS. In accordance with Section 3-202 of the MGCL, no
appraisal rights shall be available to holders of Shares in connection with the
Merger.
4.4. ADJUSTMENTS TO PREVENT DILUTION. In the event that after the date
hereof and prior to the Effective Time the Company changes the number of Shares
or securities convertible or exchangeable into or exercisable for Shares, or
Parent changes the number of shares of Parent Common Stock or securities
convertible or exchangeable into or exercisable for shares of Parent Common
Stock, issued and outstanding prior to the Effective Time as a result of a
reclassification, stock split (including a reverse split), stock dividend or
distribution, recapitalization, merger, subdivision, issuer tender or exchange
offer, or other similar transaction, the Merger Consideration and the Collars
shall be equitably adjusted.
4.5. TREATMENT OF THE CONVERTIBLE NOTES. The Convertible Notes (as defined
in Section 5.1(b)) shall be treated as set forth in Section 6.15.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in
the corresponding sections or subsections of the disclosure letter delivered to
Parent by the Company on or prior to entering into this Agreement (the "COMPANY
DISCLOSURE LETTER"), the Company hereby represents and warrants to Parent and
Merger Subsidiary that:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Maryland and each of its Subsidiaries is a corporation or other
entity duly organized, validly existing and in good standing under the laws of
its respective jurisdiction of organization and each of the Company and each of
its Subsidiaries has all requisite corporate or similar power and authority to
own and operate its properties and assets and to carry on its business as
presently conducted and is qualified to do business and is in good standing in
each jurisdiction where the ownership or operation of its properties or conduct
of its business requires such qualification, except where the failure to be so
qualified or in such good standing, when taken together with all other such
failures, is not reasonably likely to have a Company Material Adverse Effect (as
defined below). The Company has made available to Parent a complete and correct
copy of the Company's and its
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Subsidiaries' charter and by-laws or other organizational documents, each as
amended to the date hereof. The Company's and its Subsidiaries' charter and
by-laws or other organizational documents so made available are in full force
and effect.
As used in this Agreement, the term (i) "SUBSIDIARY" means, with respect to
the Company, Parent or Merger Subsidiary, as the case may be, any entity,
whether incorporated or unincorporated, of which at least a majority of the
securities or ownership interests having by their terms ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions is directly or indirectly owned or controlled by such party or by one
or more of its respective Subsidiaries or by such party and any one or more of
its respective Subsidiaries and (ii) "COMPANY MATERIAL ADVERSE EFFECT" means a
material adverse effect on the financial condition, properties, business or
results of the operations of the Company and its Subsidiaries taken as a whole,
other than effects caused by changes in general economic or securities markets
conditions, changes that affect the insurance industry in general, changes
resulting from any event that is designated to be a "catastrophe" by the
Property Claims Services Division of the American Insurance Services Group,
Inc., changes resulting from insurance exposures not known to any of the
Responsible Executive Officers of the Company after due inquiry on or prior to
the date of this Agreement or, if known, disclosed on or prior to the date of
this Agreement to an employee of Parent having substantial responsibility for
due diligence in connection with the transactions contemplated by this
Agreement, and changes resulting from the announcement or proposed consummation
of this Agreement and the transactions contemplated hereby.
For purposes of this Agreement, the term "RESPONSIBLE EXECUTIVE OFFICERS OF
THE COMPANY" shall mean the persons designated as such in Section 5.1(a) of the
Company Disclosure Letter.
The Company conducts its insurance operations through the Subsidiaries
listed in Section 5.1(a) of the Company Disclosure Letter (collectively, the
"COMPANY INSURANCE SUBSIDIARIES"). Each of the Company Insurance Subsidiaries
is, where required, (i) duly licensed or authorized as an insurance company or
reinsurer in its jurisdiction of incorporation, (ii) duly licensed or authorized
as an insurance company and, where applicable, a reinsurer in each other
jurisdiction where it is required to be so licensed or authorized, and (iii)
duly authorized in its jurisdiction of incorporation and each other applicable
jurisdiction to write each line of business reported as being written in the
Company SAP Statements (as hereinafter defined), except, in any such case, where
the failure to be so licensed or authorized is not reasonably likely to result
in a Company Material Adverse Effect. The Company has made all required filings
under applicable insurance holding company statutes except where the failure to
file is not reasonably likely to have a Company Material Adverse Effect.
Except for the Company Insurance Subsidiaries, the Company does not directly
or indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity
that directly or indirectly conducts any activity which is material to the
Company or the ownership of which would require Parent to file a notification
form under or observe applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT").
(b) CAPITAL STRUCTURE. The authorized stock of the Company consists of
240,000,000 Shares, of which 116,470,432 Shares were outstanding as of the close
of business on January 15, 1998, and 12,000,000 shares of Preferred Stock, par
value $50.00 per share (the "PREFERRED SHARES"), of which no shares were
outstanding as of the close of business on January 15, 1998. All of the
outstanding Shares have been duly authorized and are validly issued, fully paid
and nonassessable. Other than Shares reserved for issuance under the Stock
Option Agreement, the Company has no commitments to issue or deliver Shares or
Preferred Shares, except that, as of January 15, 1998, there were 10,116,531
Shares subject to issuance pursuant to the Company's Stock Incentive Plan of
1997, Amended and Restated 1993 Stock Plan for Non-Employee Directors, the 1992
Employee Stock Option Plan, Stock Incentive Plan of 1991, Stock Option Plan of
1990, Stock Option Plan of 1987, 1994 Stock Plan for Employees of the Company
and Titan Stock Option Plans (the "COMPANY STOCK PLANS"), 2,400,000 Preferred
Shares subject to issuance pursuant to the
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Amended and Restated Rights Agreement, dated as of March 11, 1997, between the
Company and The Bank of New York, as Rights Agent (the "RIGHTS AGREEMENT"), and
5,181,588 Shares subject to issuance pursuant to the Company's Zero Coupon
Convertible Notes due 2009 (the "CONVERTIBLE NOTES"). The Company Disclosure
Letter contains a list, which is complete and accurate in all material respects
as of the date specified therein, of each outstanding option to purchase or
acquire Shares under each of the Company Stock Plans (each a "COMPANY OPTION"),
including the plan, the holder, date of grant, exercise price and number of
Shares subject thereto. Each of the outstanding shares of capital stock or other
securities of each of the Company's Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable and owned by the Company or a direct or
indirect wholly-owned subsidiary of the Company, free and clear of any lien,
pledge, security interest, claim or other encumbrance. Except as described
above, there are no preemptive or other outstanding rights, options, warrants,
conversion rights, stock appreciation rights, redemption rights, repurchase
rights, agreements, arrangements or commitments to issue or sell any shares of
capital stock or other securities of the Company or any of its Subsidiaries or
any securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire, any securities of
the Company or any of its Subsidiaries, and no securities or obligations
evidencing such rights are authorized, issued or outstanding. The Company does
not have outstanding any bonds, debentures, notes or other obligations the
holders of which have the right to vote (or, except as referred to in this
subsection (b), convertible into or exercisable for securities having the right
to vote) with the stockholders of the Company on any matter.
(c) CORPORATE AUTHORITY; APPROVAL AND FAIRNESS.
(i) The Company has all requisite corporate power and authority and has
taken all corporate action necessary in order to execute, deliver and
perform its obligations under this Agreement and the Stock Option Agreement
and to consummate, subject only to approval of the Merger by the holders of
at least two-thirds of the outstanding Shares (the "COMPANY REQUISITE
VOTE"), the Merger. This Agreement and the Stock Option Agreement are valid
and binding agreements of the Company enforceable against the Company in
accordance with their respective terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles (the "BANKRUPTCY AND EQUITY EXCEPTION").
(ii) The board of directors of the Company (A) has approved this
Agreement, the Stock Option Agreement and the Merger and the other
transactions contemplated hereby and thereby, (B) has declared that the
Merger and the other transactions contemplated by this Agreement are
advisable and (C) has received the opinions of each of its financial
advisors, Goldman, Sachs & Co. and BT Alex. Brown Incorporated, to the
effect that, as of the dates of such opinions, the Exchange Ratio is fair
from a financial point of view to the holders of Shares.
(d) GOVERNMENTAL FILINGS; NO VIOLATIONS.
(i) Other than the filings and/or notices (A) pursuant to Section 1.3
hereof, (B) under the HSR Act, the Securities Exchange Act of 1934 (the
"SECURITIES EXCHANGE ACT") and the Securities Act of 1933, as amended (the
"SECURITIES ACT"), (C) to comply with state securities or "blue-sky" laws,
(D) required to be made with the NYSE, the Pacific Stock Exchange, the
London Stock Exchange or the Swiss Stock Exchange and (E) of appropriate
documents with, and approval of, the respective Commissioners of Insurance
of the states of Maryland, Illinois, Indiana, Iowa, Michigan, Mississippi,
New York, Ohio, Texas, Vermont and Wisconsin and such notices and consents
as may be required under the insurance laws of any jurisdiction in which the
Company, Parent or any of their respective subsidiaries is domiciled or does
business or is licensed or authorized as an insurance company, no notices,
reports or other filings are required to be made by the Company with, nor
are any consents, registrations, approvals, permits or authorizations
required to be obtained by the Company from, any governmental or regulatory
authority, agency, commission, body or other governmental entity
("GOVERNMENTAL ENTITY"), in connection with the execution and delivery of
this Agreement and the Stock
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<PAGE>
Option Agreement by the Company and the consummation by the Company of the
Merger and the other transactions contemplated hereby and thereby, except
those that the failure to make or obtain are not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect or
prevent, materially delay or materially impair the ability of the Company to
consummate transactions contemplated by this Agreement and the Stock Option
Agreement.
(ii) The execution, delivery and performance of this Agreement and the
Stock Option Agreement by the Company do not, and the consummation by the
Company of the Merger and the other transactions contemplated hereby and
thereby will not, constitute or result in (A) a breach or violation of, or a
default under, the charter or by-laws of the Company or the comparable
governing instruments of any of its Subsidiaries, (B) a breach or violation
of, or a default under, the acceleration of any obligations or the creation
of a lien, pledge, security interest or other encumbrance on the assets of
the Company or any of its Subsidiaries (with or without notice, lapse of
time or both) pursuant to, any agreement, lease, contract, note, mortgage,
indenture, arrangement or other obligation ("CONTRACTS") binding upon the
Company or any of its Subsidiaries or (provided, as to consummation, the
filings and notices are made, and approvals are obtained, as referred to in
Section 5.1(d)(i)) any Law (as defined in Section 5.1(i)) or governmental or
non-governmental permit or license to which the Company or any of its
Subsidiaries is subject or (C) any change in the rights or obligations of
any party under any of the Contracts, except, in the case of clause (B) or
(C) above, for any breach, violation, default, acceleration, creation or
change that, individually or in the aggregate, is not reasonably likely to
have a Company Material Adverse Effect or prevent, materially delay or
materially impair the ability of the Company to consummate the transactions
contemplated by this Agreement and the Stock Option Agreement. Section
5.1(d)(ii) of the Company Disclosure Letter sets forth, to the knowledge of
the executive officers of the Company, a good faith list of contracts (by
category and type, where applicable) material to the Company and its
Subsidiaries, taken as a whole, pursuant to which consents or waivers are or
may be required prior to consummation of the transactions contemplated by
this Agreement and the Stock Option Agreement (whether or not subject to the
exception set forth with respect to clauses (B) and (C) above).
(e) COMPANY REPORTS; FINANCIAL STATEMENTS. The Company has delivered or made
available to Parent each registration statement, report, proxy statement or
information statement prepared by it since December 31, 1996 (the "AUDIT DATE"),
including (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and (ii) the Company's Quarterly Reports on Form 10-Q for the
periods ended March 31, 1997, June 30, 1997 and September 30, 1997, each in the
form (including exhibits, annexes and any amendments thereto) filed with the
Securities and Exchange Commission (the "SEC") (collectively, including any such
reports filed subsequent to the date hereof, the "COMPANY REPORTS"). As of their
respective dates, the Company Reports did not, and any Company Reports filed
with the SEC subsequent to the date hereof will 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 made therein, in light of the
circumstances in which they were made, not misleading. Each of the consolidated
balance sheets included in or incorporated by reference into the Company Reports
(including the related notes and schedules) fairly presents, or will fairly
present, the consolidated financial position of the Company and its Subsidiaries
as of its date and each of the consolidated statements of income and of changes
in financial position included in or incorporated by reference into the Company
Reports (including any related notes and schedules) fairly presents, or will
fairly present, the consolidated results of operations, retained earnings and
changes in financial position, as the case may be, of the Company and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to notes and normal year-end audit adjustments that will
not be material in amount or effect), in each case in accordance with generally
accepted accounting principles ("GAAP") consistently applied during the periods
involved, except as may be noted therein.
The Company has delivered or made available to Parent true and complete
copies of the annual and quarterly statements of each of the Company Insurance
Subsidiaries as filed with the applicable insurance
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<PAGE>
regulatory authorities for the years ended December 31, 1994, 1995 and 1996 and
the quarterly periods ended March 31, 1997, June 30, 1997 and September 30,
1997, including all exhibits, interrogatories, notes, schedules and any
actuarial opinions, affirmations or certifications or other supporting documents
filed in connection therewith (collectively, the "COMPANY SAP STATEMENTS"). The
Company SAP Statements were prepared in conformity with statutory accounting
practices prescribed or permitted by the applicable insurance regulatory
authority consistently applied for the periods covered thereby and present
fairly the statutory financial position of such Company Insurance Subsidiaries
as at the respective dates thereof and the results of operations of such
Subsidiaries for the respective periods then ended. The Company SAP Statements
complied in all material respects with all applicable laws, rules and
regulations when filed, and no material deficiency has been asserted with
respect to any Company SAP Statements by the applicable insurance regulatory
body or any other governmental agency or body. The annual statutory balance
sheets and income statements included in the Company SAP Statements have been
audited by Ernst & Young LLP, and the Company has delivered or made available to
Parent true and complete copies of all audit opinions related thereto. The
Company has delivered or made available to Parent true and complete copies of
all examination reports of insurance departments and any insurance regulatory
agencies since January 1, 1994 relating to the Company Insurance Subsidiaries.
(f) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Company Reports
filed prior to the date hereof, since the Audit Date, the Company and its
Subsidiaries have conducted their respective businesses only in, and have not
engaged in any material transaction other than according to, the ordinary and
usual course of such businesses and there has not been (i) any change in the
financial condition, properties, business or results of operations of the
Company and its Subsidiaries or any development or combination of developments
of which any executive officer of the Company has knowledge that, individually
or in the aggregate, has had or is reasonably likely to result in a Company
Material Adverse Effect; (ii) any material damage, destruction or other casualty
loss with respect to any material asset or property owned, leased or otherwise
used by the Company or any of its Subsidiaries, whether or not covered by
insurance; (iii) any authorization, declaration, setting aside or payment of any
dividend or other distribution in respect of the stock of the Company, except as
permitted by Section 6.1(a) hereof; (iv) any change by the Company in accounting
principles, practices or methods other than as required by changes in applicable
GAAP or statutory accounting principles; (v) any material addition to the
Company's consolidated reserves for future policy benefits or other policy
claims and benefits prior to the date of this Agreement; or (vi) any material
change in the accounting, actuarial, investment, reserving, underwriting or
claims administration policies, practices, procedures, methods, assumptions or
principles of any Company Insurance Subsidiary. Since June 30, 1997, except as
provided for herein or as disclosed in the Company Reports filed prior to the
date hereof, there has not been any increase in the compensation payable or that
could become payable by the Company or any of its Subsidiaries to officers at
the senior vice president level or above or any amendment of any of the
Compensation and Benefit Plans other than increases or amendments in the
ordinary course.
(g) LITIGATION AND LIABILITIES. Except as disclosed in the Company Reports
filed prior to the date hereof, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of any executive officer of the Company, threatened
against the Company or any of its affiliates or (ii) obligations or liabilities
of any nature, whether or not accrued, contingent or otherwise and whether or
not required to be disclosed, including those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which any executive officer of the Company has knowledge that could reasonably
be expected to result in any claims against, or obligations or liabilities of,
the Company or any of its affiliates, except for insurance claims litigation
arising in the ordinary course for which claims reserves have been established
and except for such actions, suits, claims, hearings, investigations,
proceedings, obligations and liabilities as are not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect or
prevent or materially impair the ability of the Company to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
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<PAGE>
(h) EMPLOYEE BENEFITS.
(i) A copy of each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock, stock option, employment, termination,
severance, change of control, compensation, medical, health or other plan,
agreement, policy or arrangement that covers employees, directors, former
employees or former directors of the Company and its Subsidiaries (the
"COMPENSATION AND BENEFIT PLANS") and any trust agreement or insurance
contract forming a part of such Compensation and Benefit Plans has been made
available to Parent prior to the date hereof. The Compensation and Benefit
Plans are listed in Section 5.1(h) of the Company Disclosure Letter and any
"change of control" or similar provisions therein are specifically
identified in Section 5.1(h) of the Company Disclosure Letter.
(ii) All Compensation and Benefit Plans are in substantial compliance
with all applicable law, including, to the extent applicable, the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Each Compensation and Benefit Plan that is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA (a "PENSION PLAN") and
that is intended to be qualified under Section 401(a) of the Code has
received a favorable determination letter from the Internal Revenue Service
(the "IRS"), and the Company is not aware of any circumstances likely to
result in revocation of any such favorable determination letter. There is no
pending or, to the knowledge of the executive officers of the Company,
threatened material litigation relating to the Compensation and Benefit
Plans. Neither the Company nor any of its Subsidiaries has engaged in a
transaction with respect to any Compensation and Benefit Plan that, assuming
the taxable period of such transaction expired as of the date hereof, would
subject the Company or any of its Subsidiaries to a material tax or penalty
imposed by either Section 4975 of the Code or Section 502 of ERISA.
(iii) As of the date hereof, no liability under Subtitle C or D of Title
IV of ERISA has been or is expected to be incurred by the Company or any of
its Subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan", within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of them, or the single-employer plan
of any entity which is considered one employer with the Company under
Section 4001 of ERISA or Section 414 of the Code (an "ERISA AFFILIATE"). The
Company and its Subsidiaries have not incurred and do not expect to incur
any withdrawal liability with respect to a multiemployer plan under Subtitle
E to Title IV of ERISA. The Company and its Subsidiaries have not
contributed, or been obligated to contribute, to a multiemployer plan under
Subtitle E of Title IV of ERISA at any time since September 26, 1980. No
notice of a "reportable event", within the meaning of Section 4043 of ERISA
for which the 30-day reporting requirement has not been waived, has been
required to be filed for any Pension Plan or by any ERISA Affiliate within
the 12-month period ending on the date hereof or will be required to be
filed in connection with the transactions contemplated by this Agreement and
the Stock Option Agreement.
(iv) All contributions required to be made under the terms of any
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Company Reports prior to the date hereof.
Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate
has an "accumulated funding deficiency" (whether or not waived) within the
meaning of Section 412 of the Code or Section 302 of ERISA. Neither the
Company nor its Subsidiaries has provided, or is required to provide,
security to any Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code.
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<PAGE>
(v) Under each Pension Plan which is a single-employer plan, 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 contained in the Pension Plan's most recent
actuarial valuation), did not exceed the then current value of the assets of
such Pension Plan, and there has been no material change in the financial
condition of such Pension Plan since the last day of the most recent plan
year.
(vi) Neither the Company nor its Subsidiaries have any obligations for
retiree health and life benefits under any Compensation and Benefit Plan,
except as set forth in the Company Disclosure Letter. The Company or its
Subsidiaries may amend or terminate any such plan under the terms of such
plan at any time without incurring any material liability thereunder.
(vii) The change in control contemplated by the Merger will not (x)
entitle any employees of the Company or its Subsidiaries to severance pay,
(y) accelerate the time of payment or vesting or trigger any payment of
compensation or benefits under, increase the amount payable or trigger any
other material obligation pursuant to, any of the Compensation and Benefit
Plans or (z) result in any breach or violation of, or a default under, any
of the Compensation and Benefit Plans.
(viii) All Compensation and Benefit Plans covering current or former
non-U.S. employees of the Company and its Subsidiaries comply in all
material respects with applicable local law. The Company and its
Subsidiaries have no material unfunded liabilities with respect to any
Pension Plan that covers such non-U.S. employees.
(ix) The number of individuals who perform services for the Company or
any of its Subsidiaries on a full-time basis but who are not employees of
the Company or any of its Subsidiaries does not exceed 10% of the workforce
of the Company and its Subsidiaries.
(x) Any amount that could be received (whether in cash or property or
the vesting of property) as a result of any of the transactions contemplated
by this Agreement by any employee, officer, director or independent
contractor of the Company who is a "disqualified individual" (as such term
is defined in proposed Treasury Regulation Section 1.280G-1) under any
employment arrangement would not be characterized as an "EXCESS PARACHUTE
PAYMENT" (as such term is defined in Section 280G(b)(1) of the Code).
(i) COMPLIANCE WITH LAWS; PERMITS.
(i) The business and operations of the Company and the Company Insurance
Subsidiaries have been conducted in compliance with all applicable statutes
and regulations regulating the business of insurance and all applicable
orders and directives of insurance regulatory authorities (including federal
authorities with respect to variable insurance and annuity products) and
market conduct recommendations resulting from market conduct examinations of
insurance regulatory authorities (including federal authorities with respect
to variable insurance and annuity products) (collectively, "INSURANCE
LAWS"), except where the failure to so conduct such business and operations
would not, individually or in the aggregate, be reasonably likely to have a
Company Material Adverse Effect. Notwithstanding the generality of the
foregoing, except where the failure to do so would not, individually or in
the aggregate, be reasonably likely to have a Company Material Adverse
Effect, each Company Insurance Subsidiary and, to the knowledge of the
executive officers of the Company its agents have marketed, sold and issued
insurance products in compliance, in all material respects, with Insurance
Laws applicable to the business of such Company Insurance Subsidiary and in
the respective jurisdictions in which such products have been sold,
including, without limitation, in compliance with (a) all applicable
prohibitions against "redlining" or withdrawal of business lines, (b) all
applicable requirements relating to the disclosure of the nature of
insurance products as policies of insurance and (c) all applicable
requirements relating to insurance product projections and illustrations. In
addition, (i) there is no pending or, to the knowledge of the executive
officers of the
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Company, threatened charge by any insurance regulatory authority that any of
the Company Insurance Subsidiaries has violated, nor any pending or, to the
knowledge of the executive officers of the Company, threatened investigation
by any insurance regulatory authority with respect to possible violations
of, any applicable Insurance Laws where such violations would, individually
or in the aggregate, be reasonably likely to have a Company Material Adverse
Effect; (ii) none of the Company Insurance Subsidiaries is subject to any
order or decree of any insurance regulatory authority relating specifically
to such Company Insurance Subsidiary (as opposed to insurance companies
generally) which would, individually or in the aggregate, be reasonably
likely to have a Company Material Adverse Effect; and (iii) the Company
Insurance Subsidiaries have filed all reports required to be filed with any
insurance regulatory authority on or before the date hereof as to which the
failure to file such reports would individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect.
(ii) In addition to Insurance Laws, except as set forth in the Company
Reports filed prior to the date hereof, the businesses of each of the
Company and its Subsidiaries have not been, and are not being, conducted in
violation of any federal, state, local or foreign law, statute, ordinance,
rule, regulation, judgment, order, injunction, decree, arbitration award,
agency requirement, license or permit of any Governmental Entity
(collectively with Insurance Laws, "LAWS"), except for violations or
possible violations that, individually or in the aggregate, are not
reasonably likely to have a Company Material Adverse Effect or prevent or
materially impair the ability of the Company to consummate the transactions
contemplated by this Agreement and the Stock Option Agreement. Except as set
forth in the Company Reports filed prior to the date hereof, no
investigation or review by any Governmental Entity with respect to the
Company or any of its Subsidiaries is pending or, to the knowledge of the
executive officers of the Company, threatened, nor has any Governmental
Entity indicated an intention to conduct the same, except for those the
outcome of which are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect or prevent or materially
burden or materially impair the ability of the Company to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
To the knowledge of the executive officers of the Company, no material
change is required in the Company's or any of its Subsidiaries' processes,
properties or procedures in connection with any such Laws, and the Company
has not received any notice or communication of any material noncompliance
with any such Laws that has not been cured as of the date hereof. The
Company and its Subsidiaries each has all permits, licenses, trademarks,
patents, trade names, copyrights, service marks, franchises, variances,
exemptions, orders and other governmental authorizations, consents and
approvals necessary to conduct its business as presently conducted except
those the absence of which are not, individually or in the aggregate,
reasonably likely to have a Company Material Adverse Effect or prevent or
materially burden or materially impair the ability of the Company to
consummate the Merger and the other transactions contemplated by this
Agreement and the Stock Option Agreement.
(j) TAKEOVER STATUTES. No restrictive provision of any "fair price,"
"moratorium," "control share acquisition" or other similar anti-takeover statute
or regulation (including Section 3-602 of the MGCL) (each a "TAKEOVER STATUTE")
or restrictive provision of any applicable anti-takeover provision in the
charter or by-laws of the Company is, or at the Effective Time will be,
applicable to the Company, the Shares, the Merger or any other transaction
contemplated by this Agreement or the Stock Option Agreement.
(k) ENVIRONMENTAL MATTERS. Except as disclosed in the Company Reports filed
prior to the date hereof and except for such matters that, alone or in the
aggregate, are not reasonably likely to have a Company Material Adverse Effect:
(i) the Company and its Subsidiaries have complied with all applicable
Environmental Laws; (ii) the properties currently owned or operated by the
Company (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances; (iii) the
properties formerly owned or operated by the Company or any of its Subsidiaries
were not contaminated with Hazardous Substances during the period of ownership
or operation by the Company or
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<PAGE>
any of its Subsidiaries; (iv) neither the Company nor any of its Subsidiaries is
subject to liability for any Hazardous Substance disposal or contamination on
any third party property (excluding policies written in connection with the
insurance business); (v) no Hazardous Substance has been transported from any of
the properties owned or operated by the Company or any of its Subsidiaries other
than as permitted under applicable Environmental Law; (vi) neither the Company
nor any of its Subsidiaries has received any written notice, demand, letter,
claim or request for information from any Governmental Entity or third party
indicating that the Company or any of its Subsidiaries may be in violation of or
liable under any Environmental Law; (vii) the Company and its Subsidiaries are
not subject to any court order, administrative order or decree arising under any
Environmental Law and are not subject to any indemnity or other agreement with
any third party relating to liability under any Environmental Law or relating to
Hazardous Substances (excluding policies written in connection with the
insurance business); and (viii) there are no circumstances or conditions
involving the Company or any of its Subsidiaries that could reasonably be
expected to result in any claims, liability, investigations, costs or
restrictions on the ownership, use, or transfer of any property of the Company
pursuant to any Environmental Law.
As used herein, the term "ENVIRONMENTAL LAW" means any federal, state, local
or foreign law, statute, ordinance, regulation, judgment, order, decree,
arbitration award, agency requirement, license, permit, authorization or
opinion, relating to: (A) the protection, investigation or restoration of the
environment, health and safety, or natural resources, (B) the handling, use,
presence, disposal, release or threatened release of any Hazardous Substance or
(C) noise, odor, wetlands, pollution, contamination or any injury or threat of
injury to persons or property.
As used herein, the term "HAZARDOUS SUBSTANCE" means any substance that is:
(A) listed, classified or regulated pursuant to any Environmental Law; (B) any
petroleum product or by-product, asbestos-containing material, lead-containing
paint or plumbing, polychlorinated biphenyls, radioactive materials or radon; or
(C) any other substance which may be the subject of regulatory action by any
Government Authority pursuant to any Environmental Law.
(l) ACCOUNTING AND TAX MATTERS. As of the date hereof, neither the Company
nor any of its affiliates has taken or agreed to take any action, nor do the
executive officers of the Company have any knowledge of any fact or
circumstance, that would prevent Parent from accounting for the business
combination to be effected by the Merger as a "pooling-of-interests" or prevent
the Merger and the other transactions contemplated by this Agreement from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code.
(m) TAXES. Except as provided in Section 5.1(m) of the Company Disclosure
Letter:
(i) the Company and each of its Subsidiaries have filed completely and
correctly in all material respects all Tax Returns (as defined below) which
are required by all applicable laws to be filed by them, and have paid, or
made adequate provision for the payment of, all material Taxes (as defined
below) which have or may become due and payable pursuant to said Tax Returns
and all other Taxes, governmental charges and assessments received to date
other than those Taxes being contested in good faith for which adequate
provision has been made on the most recent balance sheet included in the
Company Reports. The Tax Returns of the Company and its Subsidiaries have
been prepared, in all material respects, in accordance with all applicable
laws consistently applied;
(ii) all material Taxes which the Company and its Subsidiaries are
required by law to withhold and collect have been duly withheld and
collected, and have been paid over, in a timely manner, to the proper Taxing
Authorities (as defined below) to the extent due and payable;
(iii) no liens for a material amount of Taxes exist with respect to any
of the assets or properties of the Company or its Subsidiaries, except for
statutory liens for Taxes not yet due or payable or that are being contested
in good faith;
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<PAGE>
(iv) all of the U.S. Federal income Tax Returns filed by or on behalf of
each of the Company and its Subsidiaries have been examined by and settled
with the Internal Revenue Service, or the statute of limitations with
respect to the relevant Tax liability expired, for all taxable periods
through and including the period ending on the date on which the Effective
Time occurs; and
(v) there is no audit, examination, deficiency, or refund litigation
pending with respect to any material amount of Taxes and during the past
three years no Taxing Authority has given written notice of the commencement
of any audit, examination, deficiency or refund litigation, with respect to
any material amount of Taxes;
As used in this Agreement, (i) the term "Tax" (including, with correlative
meaning, the terms "TAXES" and "TAXABLE") shall mean, with respect to any
Person, (a) all taxes, domestic or foreign, including without limitation any
income (net, gross or other, including recapture of any tax items such as
investment tax credits), alternative or add-on minimum tax, gross income, gross
receipts, gains, sales, use, leasing, lease, user, ad valorem, transfer,
recording, franchise, profits, property (real or personal, tangible or
intangible), fuel, license, withholding on amounts paid to or by such Person,
payroll, employment, unemployment, social security, excise, severance, stamp,
occupation, premium, environmental or windfall profit tax, custom, duty or other
tax, or other like assessment or charge of any kind whatsoever, together with
any interest, levies, assessments, charges, penalties, additions to tax or
additional amounts imposed by any Taxing Authority, (b) any joint or several
liability of such Person with any other Person for the payment of any amounts of
the type described in (a) of this definition and (c) any liability of such
Person for the payment of any amounts of the type described in (a) as a result
of any express or implied obligation to indemnify any other Person; (ii) the
term "TAX RETURN(S)" shall mean all returns, consolidated or otherwise
(including without limitation informational returns), required to be filed with
any Taxing Authority; and (iii) the term "TAXING AUTHORITY" shall mean any
authority responsible for the imposition of any Tax.
(n) LABOR MATTERS. Neither the Company nor any of its Subsidiaries is a
party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization.
(o) INTELLECTUAL PROPERTY.
(i) The Company and/or each of its Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use all patents,
trademarks, trade names, service marks, copyrights, and any applications
therefor, technology, know-how, computer software programs or applications,
and tangible or intangible proprietary information or materials that are
used in the business of the Company and its Subsidiaries as currently
conducted, except for any such failures to own, be licensed or possess that,
individually or in the aggregate, are not reasonably likely to have a
Company Material Adverse Effect, and to the knowledge of the executive
officers of the Company all patents, trademarks, trade names, service marks
and copyrights held by the Company and/or its Subsidiaries are valid and
subsisting.
(ii) Except as disclosed in Company Reports filed prior to the date
hereof or as is not reasonably likely to have a Company Material Adverse
Effect:
(A) the Company is not, nor will it be as a result of the execution
and delivery of this Agreement or the performance of its obligations
hereunder, in violation of any licenses, sublicenses and other agreements
as to which the Company is a party and pursuant to which the Company is
authorized to use any third-party patents, trademarks, service marks, and
copyrights ("THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS");
(B) no claims with respect to (I) the patents, registered and
material unregistered trademarks and service marks, registered
copyrights, trade names, and any applications therefor owned by the
Company or any its Subsidiaries (the "Company Intellectual Property
Rights"); (II) any trade secret material to the Company; or (III)
Third-Party Intellectual Property Rights are
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currently pending or, to the knowledge of the executive officers of the
Company, are threatened by any Person;
(C) the executive officers of the Company do not know of any valid
grounds for any bona fide claims (I) to the effect that the sale,
licensing or use of any product as now used, sold or licensed or proposed
for use, sale or license by the Company or any of its Subsidiaries,
infringes on any copyright, patent, trademark, service mark or trade
secret; (II) against the use by the Company or any of its Subsidiaries,
of any trademarks, trade names, trade secrets, copyrights, patents,
technology, know-how or computer software programs and applications used
in the business of the Company or any of its Subsidiaries as currently
conducted or as proposed to be conducted; (III) challenging the
ownership, validity or effectiveness of any of the Company Intellectual
Property Rights or other trade secret material to the Company; or (IV)
challenging the license or legally enforceable right to use of the
Third-Party Intellectual Rights by the Company or any of its
Subsidiaries; and
(D) to the knowledge of the executive officers of the Company, there
is no unauthorized use, infringement or misappropriation of any of the
Company Intellectual Property Rights by any third party, including any
employee or former employee of the Company or any of its Subsidiaries.
(p) MATERIAL CONTRACTS. All of the material contracts of the Company and its
Subsidiaries that are required to be described in the Company Reports or to be
filed as exhibits thereto are described in the Company Reports or filed as
exhibits thereto and are in full force and effect. True and complete copies of
all such material contracts have been delivered or have been made available by
the Company to Parent. Neither the Company nor any of its Subsidiaries nor any
other party is in breach of or in default under any such contract except for
such breaches and defaults as individually or in the aggregate have not had and
are not reasonably likely to have a Company Material Adverse Effect. Neither the
Company nor any of its Subsidiaries is party to any agreement containing any
provision or covenant limiting in any material respect the ability of the
Company or any of its Subsidiaries to (A) sell any products or services of or to
any other person, (B) engage in any line of business or (C) compete with or to
obtain products or services from any person or limiting the ability of any
person to provide products or services to the Company or any of its
Subsidiaries.
(q) RIGHTS PLAN.
(i) The Company has amended the Rights Agreement to provide that
Parent shall not be deemed an Acquiring Person, the Distribution Date
(each as defined in the Rights Agreement) shall not be deemed to occur
and the rights issuable pursuant to the Rights Agreement (the "RIGHTS")
will not separate from the Shares, as a result of entering into this
Agreement and/or the Stock Option Agreement or consummating the Merger
and/or the other transactions contemplated hereby and/or thereby.
(ii) The Company has taken all necessary action with respect to all
of the outstanding Rights so that, as of immediately prior to the
Effective Time, (A) neither the Company nor Parent will have any
obligations under the Rights or the Rights Agreement and (B) the holders
of the Rights will have no rights under the Rights or the Rights
Agreement.
(r) BROKERS AND FINDERS. Neither the Company nor any of its executive
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders fees in connection
with the Merger or the other transactions contemplated in this Agreement or the
Stock Option Agreement, except that the Company has employed Goldman, Sachs &
Co. and BT Alex. Brown Incorporated as its financial advisors, the arrangements
with which have been disclosed to Parent prior to the date hereof.
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(s) INSURANCE MATTERS.
(i) Except as otherwise would not, individually or in the aggregate,
be reasonably likely to have a Company Material Adverse Effect, all
policies, binders, slips, certificates, annuity contracts and
participation agreements and other agreements of insurance, whether
individual or group, in effect as of the date hereof (including all
applications, supplements, endorsements, riders and ancillary agreements
in connection therewith) that are issued by the Company Insurance
Subsidiaries (the "COMPANY INSURANCE CONTRACTS") and any and all
marketing materials, are, to the extent required under applicable law, on
forms approved by applicable insurance regulatory authorities or which
have been filed and not objected to by such authorities within the period
provided for objection, and such forms comply in all material respects
with the insurance statutes, regulations and rules applicable thereto
and, as to premium rates established by the Company or any Company
Insurance Subsidiary which are required to be filed with or approved by
insurance regulatory authorities, the rates have been so filed or
approved, the premiums charged conform thereto in all material respects,
and such premiums comply in all material respects with the insurance
statutes, regulations and rules applicable thereto.
(ii) All reinsurance and coinsurance treaties or agreements,
including retrocessional agreements, to which the Company or any Company
Insurance Subsidiary is a party or under which the Company or any Company
Insurance Subsidiary has any existing rights, obligations or liabilities
are in full force and effect except for such treaties or agreements the
failure to be in full force and effect as individually or in the
aggregate are not reasonably likely to have a Company Material Adverse
Effect. Neither the Company nor any Company Insurance Subsidiary, nor, to
the knowledge of the Company, any other party to a reinsurance or
coinsurance treaty or agreement to which the Company or any Company
Insurance Subsidiary is a party, is in default in any material respect as
to any provision thereof, and no such agreement contains any provision
providing that the other party thereto may terminate such agreement by
reason of the transactions contemplated by this Agreement. The Company
has not received any notice to the effect that the financial condition of
any other party to any such agreement is impaired with the result that a
default thereunder may reasonably be anticipated, whether or not such
default may be cured by the operation of any offset clause in such
agreement. No insurer or reinsurer or group of affiliated insurers or
reinsurers accounted for the direction to the Company and the Company
Insurance Subsidiaries or the ceding by the Company and the Company
Insurance Subsidiaries of insurance or reinsurance business in an
aggregate amount equal to two percent or more of the consolidated gross
premium income of the Company and the Company Insurance Subsidiaries for
the year ended December 31, 1996.
(iii) Prior to the date hereof, the Company has delivered or made
available to Parent a true and complete copy of any actuarial reports
prepared by actuaries, independent or otherwise, with respect to the
Company or any Company Insurance Subsidiary since December 31, 1994, and
all attachments, addenda, supplements and modifications thereto (the
"COMPANY ACTUARIAL ANALYSES"). To the knowledge of the executive officers
of the Company, the information and data furnished by the Company or any
Company Insurance Subsidiary to its independent actuaries in connection
with the preparation of the Company Actuarial Analyses were accurate in
all material respects. Furthermore, to the knowledge of the executive
officers of the Company, each Company Actuarial Analysis was based upon
an accurate inventory of policies in force for the Company and the
Company Insurance Subsidiaries, as the case may be, at the relevant time
of preparation, was prepared using appropriate modeling procedures
accurately applied and in conformity with generally accepted actuarial
standards consistently applied, and the projections contained therein
were properly prepared in accordance with the assumptions stated therein.
(iv) As of the date hereof, the Company has no reason to believe
that any rating presently held by the Company Insurance Subsidiaries is
likely to be modified, qualified, lowered or placed
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under surveillance for a possible downgrade for any reason other than as
a result of the transactions contemplated hereby.
(v) Except as would not reasonably be expected to have a Company
Material Adverse Effect, all annuity contracts and life insurance
policies issued by each Company Insurance Subsidiary meet all
definitional or other requirements for qualification under the Code
section applicable (or intended to be applicable) to such annuity
contracts or life insurance policies, including, without limitation, the
following: (A) each life insurance policy meets the requirements of
sections 101(f), 817(h) or 7702 of the Code, as applicable; (B) no life
insurance contract issued by any Company Insurance Company is a "modified
endowment contract" within the meaning of section 7702A of the Code
unless and to the extent that the holders of the policies have been
notified of their classification; (C) each annuity contract issued,
entered into or sold by any Company Insurance Subsidiary qualifies as an
annuity under federal tax law; (D) each annuity contract meets the
requirements of, and has been administered consistent with section 817(h)
and 72 of the Code including but not limited to section 72(s) of the Code
(except for those contracts specifically excluded from such requirement
pursuant to section 72(s)(5) of the Code); (E) each annuity contract
intended to qualify under sections 130, 403(a), 403(b) or 408(b) of the
Code contains all provisions required for qualification under such
sections of the Code; (F) each annuity contract marketed as, or in
connection with, plans that are intended to qualify under section 401,
403, 408 or 457 of the Code complies with the requirements of such
section; and (G) none of the Company Insurance Subsidiaries have entered
into any agreement or are involved in any discussions or negotiations and
there are no audits, examinations, investigations or other proceedings
with the IRS with respect to the failure of any life insurance policy
under section 7702 or 817(h) of the Code or the failure of any annuity
contract to meet the requirements of section 72(s) of the Code. There are
no "HOLD HARMLESS" indemnification agreements respecting the tax
qualification or treatment of any product or plan sold, issued, entered
into or administered by the Company Insurance Subsidiaries, and there
have been no claims asserted by any Person under such "HOLD HARMLESS"
indemnification agreements so set forth.
(t) LIABILITIES AND RESERVES.
(i) The reserves carried on the Company SAP Statements of each Company
Insurance Subsidiary for the year ended December 31, 1996 for future
insurance policy benefits, losses, claims and similar purposes (including
claims litigation) are in compliance in all material respects with the
requirements for reserves established by the insurance departments of the
state of domicile of such Company Insurance Subsidiary, were determined in
all material respects in accordance with generally accepted actuarial
standards and principles consistently applied, and are fairly stated in all
material respects in accordance with sound actuarial and statutory
accounting principles. Such reserves were adequate in the aggregate to cover
the total amount of all reasonably anticipated liabilities of the Company
and each Company Insurance Subsidiary under all outstanding insurance,
reinsurance and other applicable agreements as of the respective dates of
such Company SAP Statements. The admitted assets of the Company and each
Company Insurance Subsidiary as determined under applicable Laws are in an
amount at least equal to the minimum amounts required by applicable Laws.
(ii) Except for regular periodic assessments in the ordinary course of
business or assessments based on developments which are publicly known
within the insurance industry, to the knowledge of the executive officers of
the Company, no claim or assessment is pending or threatened against any
Company Insurance Subsidiary which is peculiar or unique to such Company
Insurance Subsidiary by any state insurance guaranty associations in
connection with such association's fund relating to insolvent insurers which
if determined adversely would, individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect.
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(u) INVESTMENT ADVISORY MATTERS.
(i) No Company Insurance Subsidiary maintains any separate account or
accounts.
(ii) Each of the Company Insurance Subsidiaries is treated for federal
tax purposes as the owner of the assets underlying the respective life
insurance policies and annuity contracts issued, entered into or sold by it.
(iii) Neither the Company nor any of its Subsidiaries conducts activities
of or is otherwise deemed under applicable law to control an "investment
adviser," as such term is defined in Section 2(a)(20) of the Investment
Company Act of 1940 (the "1940 ACT"), whether or not registered under the
Investment Advisers Act of 1940, as amended, of any Person required to be
registered under the 1940 Act, except that the Company has an indirect 50%
general partnership interest in Pacholder & Company ("PACHOLDER"), which
advises one registered investment company. Neither the Company nor any of
its Subsidiaries is an "INVESTMENT COMPANY" as defined in the 1940 Act, and
neither the Company nor any of its Subsidiaries is a promoter (as such term
is defined in Section 2(a)(30) of the 1940 Act) of any Person that is such
an investment company.
(iv) Neither the Company nor any of its Subsidiaries conducts activities
of, controls, owns more than a 20% interest in, or is deemed under
applicable law to control any Person that is, an investment adviser as
defined in the Investment Advisers Act of 1940, as amended (whether or not
registered under such Act), other than Pacholder (which has no clients other
than Pacholder Fund, Inc.), Pacholder Associates, Inc., Falcon Asset
Management Inc. and USF&G Realty Advisers, Inc. (together, the "ASSET
MANAGEMENT SUBSIDIARIES").
5.2. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUBSIDIARY. Except
as set forth in the corresponding sections or subsections of the disclosure
letter delivered to the Company by Parent on or prior to entering into this
Agreement (the "PARENT DISCLOSURE LETTER"), Parent and Merger Subsidiary each
hereby represent and warrant to the Company that:
(a) CAPITALIZATION OF MERGER SUBSIDIARY. The authorized stock of Merger
Subsidiary consists of 1,000 shares of Common Stock, par value $1.00 per share,
all of which are validly issued and outstanding. All of the issued and
outstanding stock of Merger Subsidiary is, and at the Effective Time will be,
owned by Parent, and there are (i) no other shares of stock or voting securities
of Merger Subsidiary, (ii) no securities of Merger Subsidiary convertible into
or exchangeable for shares of stock or voting securities of Merger Subsidiary
and (iii) no options or other rights to acquire from Merger Subsidiary, and no
obligations of Merger Subsidiary to issue or deliver, any stock, voting
securities or securities convertible into or exchangeable for stock or voting
securities of Merger Subsidiary. Merger Subsidiary has not conducted any
business prior to the date hereof and has no, and prior to the Effective Time
will have no, assets, liabilities or obligations of any nature other than those
incident to its formation and pursuant to this Agreement and the Merger and the
other transactions contemplated by this Agreement.
(b) ORGANIZATION, GOOD STANDING AND QUALIFICATION. Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota and each of its Subsidiaries is a corporation or other entity
duly organized, validly existing and in good standing under the laws of its
respective jurisdiction of organization and each of Parent and each of its
Subsidiaries has all requisite corporate or similar power and authority to own
and operate its properties and assets and to carry on its business as presently
conducted and is qualified to do business and is in good standing in each
jurisdiction where the ownership or operation of its properties or conduct of
its business requires such qualification, except where the failure to be so
qualified or in such good standing, when taken together with all other such
failures, is not reasonably likely to have a Parent Material Adverse Effect (as
defined below). Parent has made available to the Company a complete and correct
copy of Parent's and its Subsidiaries' charter and by-laws or other
organizational documents, each as amended to the date hereof. Parent's and its
Subsidiaries' charter and by-laws or other organizational documents so made
available are in full force and effect.
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As used in this Agreement, the term "PARENT MATERIAL ADVERSE EFFECT" means a
material adverse effect on the financial condition, properties, business or
results of the operations of Parent and its Subsidiaries taken as a whole, other
than effects caused by changes in general economic or securities markets
conditions, changes that affect the insurance industry in general, changes
resulting from any event that is designated to be a "CATASTROPHE" by the
Property Claims Services Division of the American Insurance Services Group,
Inc., changes resulting from insurance exposures not known to any of the
Responsible Executive Officers of Parent after due inquiry on or prior to the
date of this Agreement or, if known, disclosed on or prior to the date of this
Agreement to an employee of the Company having substantial responsibility for
due diligence in connection with the transactions contemplated by this
Agreement, and changes resulting from the announcement or proposed consummation
of this Agreement and the transactions contemplated hereby.
For purposes of this Agreement, the term "RESPONSIBLE EXECUTIVE OFFICERS OF
PARENT" shall mean the persons designated as such in Section 5.2(b) of the
Parent Disclosure Letter.
Parent conducts its insurance operations through the Subsidiaries listed in
Section 5.2(b) of the Parent Disclosure Letter (collectively, the "PARENT
INSURANCE SUBSIDIARIES"). Each of the Parent Insurance Subsidiaries is, where
required, (i) duly licensed or authorized as an insurance company or a reinsurer
in its jurisdiction of incorporation, (ii) duly licensed or authorized as an
insurance company and, where applicable, a reinsurer in each other jurisdiction
where it is required to be so licensed or authorized, and (iii) duly authorized
in its jurisdiction of incorporation and each other applicable jurisdiction to
write each line of business reported as being written in the Parent SAP
Statements (as hereinafter defined), except, in any such case, where the failure
to be so licensed or authorized is not reasonably likely to result in a Parent
Material Adverse Effect. Parent has made all required filings under applicable
insurance holding company statutes except where the failure to file is not
reasonably likely to have a Parent Material Adverse Effect.
Except for the Parent Insurance Subsidiaries, Parent does not directly or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity
that directly or indirectly conducts any activity which is material to Parent.
(c) CAPITAL STRUCTURE. The authorized capital stock of Parent consists of
240,000,000 shares of Parent Common Stock, of which 83,733,652 shares were
outstanding as of the close of business on January 16, 1998, and 5,000,000
undesignated shares, of which 50,000 shares have been designated as Series A
Junior Participating Preferred Stock (the "PARENT SERIES A PREFERRED STOCK"),
1,450,000 shares have been designated as Series B Convertible Preferred Stock
(the "PARENT SERIES B PREFERRED STOCK") and 41,400 shares have been designated
as Series C Cumulative Convertible Preferred Stock (the "PARENT SERIES C
PREFERRED STOCK" and, collectively with the Parent Series A Preferred Stock and
the Parent Series B Preferred Stock, the "PARENT PREFERRED SHARES"). As of the
close of business on January 16, 1998, there were no shares of Parent Series A
Preferred Stock outstanding, 955,594 shares of Parent Series B Stock outstanding
and no shares of Parent Series C Preferred Stock outstanding. All of the
outstanding Parent Common Stock and Parent Preferred Shares have been duly
authorized and are validly issued, fully paid and nonassessable. Parent has no
commitments to issue or deliver Common Stock or Parent Preferred Shares, except
that, as of January 16, 1998, there were 5,651,858 shares of Parent Common Stock
reserved for issuance pursuant to the Parent stock option and other plans listed
on Section 5.2(c) of the Parent Disclosure Letter (the "PARENT STOCK PLANS"),
7,331,026 shares of Parent Common Stock subject to issuance upon conversion of
shares of Parent Series B Preferred Stock and Parent Series C Preferred Stock or
Parent's 6% Convertible Subordinated Debentures due 2025, 41,400 shares of
Parent Series C Preferred Stock reserved for issuance upon the exchange of
Parent's 6% Convertible Subordinated Debentures due 2025 and 50,000 shares of
Parent Series A Preferred Stock reserved for issuance pursuant to the Amended
and Restated Shareholder Protection Rights Agreement, dated as of December 4,
1989, as amended as of March 9, 1990 and as amended and restated as of August 1,
1995, between Parent and First Chicago Trust Company of New York (the "PARENT
RIGHTS AGREEMENT"). Each of the outstanding shares of capital stock of each of
Parent's
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Subsidiaries is duly authorized, validly issued, fully paid and nonassessable
and, except for directors' qualifying shares, owned by Parent or a direct or
indirect wholly-owned subsidiary of Parent, free and clear of any lien, pledge,
security interest, claim or other encumbrance. Except as described above, there
are no preemptive or other outstanding rights, options, warrants, conversion
rights, stock appreciation rights, redemption rights, repurchase rights,
agreements, arrangements or commitments to issue or sell any shares of capital
stock or other securities of Parent or any of its Subsidiaries or any securities
or obligations convertible or exchangeable into or exercisable for, or giving
any Person a right to subscribe for or acquire, any securities of the Company or
any of its Subsidiaries, and no securities or obligations, evidencing such
rights are authorized, issued or outstanding. Parent does not have outstanding
any bonds, debentures, notes or other obligations the holders of which have the
right to vote (or, except as referred to in this subsection (c), convertible
into or exercisable for securities having the right to vote) with the
stockholders of Parent on any matter.
(d) CORPORATE AUTHORITY; FAIRNESS.
(i) Each of the Parent and Merger Subsidiary has all requisite corporate
power and authority and has taken all corporate action necessary in order to
execute, deliver and perform its obligations under this Agreement and, with
respect to Parent, under the Stock Option Agreement, and to consummate,
subject only to approval at a meeting of stockholders of the issuance of the
shares of Parent Common Stock required to be issued pursuant to Article IV
hereof by the holders of shares of Parent Common Stock and Parent Series B
Preferred Stock representing a majority of the votes represented by the
outstanding shares of Parent Common Stock and Parent Series B Preferred
Stock present and voting at the meeting (the "PARENT REQUISITE VOTE"), the
Merger. This Agreement is a valid and binding agreement of Parent and Merger
Subsidiary, enforceable against each of Parent and Merger Subsidiary in
accordance with its terms, subject to the Bankruptcy and Equity Exception.
The Stock Option Agreement is a valid and binding agreement of Parent,
enforceable against Parent in accordance with its terms, subject to the
Bankruptcy and Equity Exception.
(ii) Prior to the Effective Time, Parent will have taken all necessary
action to permit it to issue the number of shares of Parent Common Stock
required to be issued pursuant to Article IV. The Parent Common Stock, when
issued, will be validly issued, fully paid and nonassessable, and no
stockholder of Parent will have any preemptive right of subscription or
purchase in respect thereof. The Parent Common Stock, when issued, will be
registered under the Securities Act and Exchange Act and registered or
exempt from registration under any applicable state securities or "blue sky"
laws.
(iii) The board of directors of Parent has received the opinion of its
financial advisors, Credit Suisse First Boston Corporation, to the effect
that as of the date hereof the Exchange Ratio is fair to Parent from a
financial point of view.
(e) GOVERNMENTAL FILINGS; NO VIOLATIONS.
(i) Other than the filings and/or notices (A) pursuant to Section 1.3
hereof, (B) under the HSR Act, the Securities Exchange Act and the
Securities Act, (C) to comply with state securities or "blue sky" laws, (D)
required to be made with the NYSE or the London Stock Exchange and (E) of
appropriate documents with, and approval of, the respective Commissioners of
Insurance of the states of Maryland, Illinois, Indiana, Iowa, Michigan,
Mississippi, New York, Ohio, Texas, Vermont and Wisconsin and such notices
and consents as may be required under the insurance laws of any jurisdiction
in which the Company, Parent or any of their respective subsidiaries is
domiciled or does business or is licensed or authorized as an insurance
company, no notices, reports or other filings are required to be made by
Parent or Merger Subsidiary with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by Parent or
Merger Subsidiary from, any Governmental Entity, in connection with the
execution and delivery of this Agreement by Parent and Merger Subsidiary and
of the Stock Option Agreement by Parent and the consummation by
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Parent and Merger Subsidiary of the Merger and the other transactions
contemplated hereby and thereby, except those that the failure to make or
obtain are not, individually or in the aggregate, reasonably likely to have
a Parent Material Adverse Effect or prevent, materially delay or materially
impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
(ii) The execution, delivery and performance of this Agreement by Parent
and Merger Subsidiary and of the Stock Option Agreement by Parent do not,
and the consummation by Parent and Merger Subsidiary of the Merger and the
other transactions contemplated hereby and thereby will not, constitute or
result in (A) a breach or violation of, or a default under, the charter or
by-laws of Parent and Merger Subsidiary or the comparable governing
instruments of any of its Subsidiaries, (B) a breach or violation of, or a
default under, the acceleration of any obligations or the creation of a
lien, pledge, security interest or other encumbrance on the assets of Parent
or any of its Subsidiaries (with or without notice, lapse of time or both)
pursuant to, any Contracts binding upon Parent or any of its Subsidiaries or
(provided, as to consummation, the filings and notices are made, and
approvals are obtained, as referred to in Section 5.2(e)(i)) any Law or
governmental or non-governmental permit or license to which Parent or any of
its Subsidiaries is subject or (C) any change in the rights or obligations
of any party under any of the Contracts, except, in the case of clause (B)
or (C) above, for any breach, violation, default, acceleration, creation or
change that, individually or in the aggregate, is not reasonably likely to
have a Parent Material Adverse Effect or prevent, materially delay or
materially impair the ability of Parent or Merger Subsidiary to consummate
the transactions contemplated by this Agreement and the Stock Option
Agreement.
(f) PARENT REPORTS; FINANCIAL STATEMENTS. Parent has delivered or made
available to the Company each registration statement, report, proxy statement or
information statement prepared by it since December 31, 1996 (the "PARENT AUDIT
DATE"), including (i) Parent's Annual Report on Form 10-K for the year ended
December 31, 1996 and (ii) Parent's Quarterly Reports on Form 10-Q for the
periods ended March 31, 1997, June 30, 1997 and September 30, 1997, each in the
form (including exhibits, annexes and any amendments thereto) filed with the SEC
(collectively, including any such reports filed subsequent to the date hereof,
the "PARENT REPORTS"). As of their respective dates, the Parent Reports did not,
and any Parent Reports filed with the SEC subsequent to the date hereof will
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 made
therein, in light of the circumstances in which they were made, not misleading.
Each of the consolidated balance sheets included in or incorporated by reference
into the Parent Reports (including the related notes and schedules) fairly
presents, or will fairly present, the consolidated financial position of Parent
and its Subsidiaries as of its date and each of the consolidated statements of
income and cash flows included in or incorporated by reference into the Parent
Reports (including any related notes and schedules) fairly presents, or will
fairly present, the consolidated results of operations and cash flows as the
case may be, of Parent and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to notes and normal year-end
audit adjustments that will not be material in amount or effect), in each case
in accordance with GAAP consistently applied during the periods involved, except
as may be noted therein.
Parent has delivered or made available to the Company true and complete
copies of the annual and quarterly statements of each of the Parent Insurance
Subsidiaries as filed with the applicable insurance regulatory authorities for
the years ended December 31, 1994, 1995 and 1996 and the quarterly periods ended
March 31, 1997, June 30, 1997 and September 30, 1997, including all exhibits,
interrogatories, notes, schedules and any actuarial opinions, affirmations or
certifications or other supporting documents filed in connection therewith
(collectively, the "PARENT SAP STATEMENTS"). The Parent SAP Statements were
prepared in conformity with statutory accounting practices prescribed or
permitted by the applicable insurance regulatory authority consistently applied
for the periods covered thereby and present fairly the statutory financial
position of such Parent Insurance Subsidiaries as at the respective dates
thereof and the
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results of operations of such Subsidiaries for the respective periods then
ended. The Parent SAP Statements complied in all material respects with all
applicable laws, rules and regulations when filed, and no material deficiency
has been asserted with respect to any Parent SAP Statements by the applicable
insurance regulatory body or any other governmental agency or body. The
statutory financial statements of certain Parent Insurance Subsidiaries have
been audited by KPMG Peat Marwick LLP, and Parent has delivered to the Company
true and complete copies of such audited statutory financial statements and the
audit opinions relating thereto. Parent has delivered or made available to the
Company true and complete copies of all examination reports of insurance
departments and any insurance regulatory agencies since January 1, 1994 relating
to the Parent Insurance Subsidiaries.
(g) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Parent Reports
filed prior to the date hereof, since the Parent Audit Date, Parent and its
Subsidiaries have conducted their respective businesses only in, and have not
engaged in any material transaction other than according to, the ordinary and
usual course of such businesses and there has not been (i) any change in the
financial condition, properties, business or results of operations of Parent and
its Subsidiaries or any development or combination of developments of which any
executive officer of Parent has knowledge that, individually or in the
aggregate, has had or is reasonably likely to result in a Parent Material
Adverse Effect; (ii) any material damage, destruction or other casualty loss
with respect to any material asset or property owned, leased or otherwise used
by Parent or any of its Subsidiaries, whether or not covered by insurance; (iii)
any declaration, setting aside or payment of any dividend or other distribution
in respect of the stock of Parent except as permitted by Section 6.1(b) hereof;
(iv) any change by Parent in accounting principles, practices or methods other
than as required by changes in applicable GAAP or statutory accounting
principles; (v) any material addition to Parent's consolidated loss reserves or
other policy claims and benefits prior to the date of this Agreement; or (vi)
any material change in the accounting, actuarial, investment, reserving,
underwriting or claims administration policies, practices, procedures, methods,
assumptions or principles of any Parent Insurance Subsidiary.
(h) LITIGATION AND LIABILITIES. Except as disclosed in the Parent Reports
filed prior to the date hereof, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of any executive officer of Parent, threatened
against Parent or any of its affiliates or (ii) obligations or liabilities of
any nature, whether or not accrued, contingent or otherwise and whether or not
required to be disclosed, including those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which any executive officer of Parent has knowledge that could reasonably be
expected to result in any claims against, or obligations or liabilities of,
Parent or any of its affiliates, except for insurance claims litigation arising
in the ordinary course for which claims reserves have been established and
except for such actions, suits, claims, hearings, investigations, proceedings,
obligations and liabilities as are not, individually or in the aggregate,
reasonably likely to have a Parent Material Adverse Effect or prevent or
materially impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
(i) EMPLOYEE BENEFITS.
(i) Each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock, stock option, employment, termination,
severance, change of control, compensation, medical, health or other plan,
agreement, policy or arrangement that covers employees, directors, former
employees or former directors of Parent and its Subsidiaries (the "PARENT
COMPENSATION AND BENEFIT PLANS") is in substantial compliance with all
applicable law, including the Code and ERISA. Each Parent Compensation and
Benefit Plan that is an "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA (a "PARENT PENSION PLAN") and that is intended to
be qualified under Section 401(a) of the Code has received a favorable
determination letter from the IRS, and Parent is not aware of any
circumstances likely to result in revocation of any such favorable
determination letter. There is no pending or, to the knowledge of the
executive officers of Parent, threatened material litigation relating to the
Parent
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Compensation and Benefit Plans. Neither Parent nor any of its Subsidiaries
has engaged in a transaction with respect to any Parent Compensation and
Benefit Plan that, assuming the taxable period of such transaction expired
as of the date hereof, would subject Parent or any of its Subsidiaries to a
material tax or penalty imposed by either Section 4975 of the Code or
Section 502 of ERISA.
(ii) As of the date hereof, no liability under Subtitle C or D of Title
IV of ERISA has been or is expected to be incurred by Parent or any of its
Subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of them, or the single-employer plan
of an entity which is considered one employer with Parent under Section 4001
of ERISA or Section 414 of the Code (a "PARENT ERISA AFFILIATE"). Parent and
its Subsidiaries have not incurred and do not expect to incur any withdrawal
liability with respect to a multiemployer plan under Subtitle E to Title IV
of ERISA. No notice of a "reportable event," within the meaning of Section
4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Parent Pension Plan or by any
Parent ERISA Affiliate within the 12-month period ending on the date hereof
or will be required to be filed in connection with the transactions
contemplated by this Agreement.
(iii) All contributions required to be made under the terms of any Parent
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Parent Reports prior to the date hereof.
Neither any Parent Pension Plan nor any single-employer plan of a Parent
ERISA Affiliate has an "accumulated funding deficiency" (whether or not
waived) within the meaning of Section 412 of the Code or Section 302 of
ERISA. Neither Parent nor its Subsidiaries has provided, or is required to
provide, security to any Parent Pension Plan or to any single-employer plan
of a Parent ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(iv) Under each Parent Pension Plan which is a single-employer plan, 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 contained in the Parent Pension Plan's
most recent actuarial valuation), did not exceed the then current value of
the assets of such Parent Pension Plan, and there has been no material
change in the financial condition of such Parent Pension Plan since the last
day of the most recent plan year.
(v) All Parent Compensation and Benefit Plans covering current or former
non-U.S. employees or former employees of Parent and its Subsidiaries comply
in all material respects with applicable local law. Parent and its
Subsidiaries have no material unfunded liabilities with respect to any
Parent Pension Plan that covers such non-U.S. employees.
(j) COMPLIANCE WITH LAWS; PERMITS.
(i) The business and operations of Parent and the Parent Insurance
Subsidiaries have been conducted in compliance with all applicable Insurance
Laws, except where the failure to so conduct such business and operations
would not, individually or in the aggregate, be reasonably likely to have a
Parent Material Adverse Effect. Notwithstanding the generality of the
foregoing, except where the failure to do so would not, individually or in
the aggregate, be reasonably likely to have a Parent Material Adverse
Effect, each Parent Insurance Subsidiary and, to the knowledge of the
executive officers of Parent, its agents have marketed, sold and issued
insurance products in compliance, in all material respects, with Insurance
Laws applicable to the business of such Parent Insurance Subsidiary and in
the respective jurisdictions in which such products have been sold,
including, without limitation, in compliance with (a) all applicable
prohibitions against "redlining" or withdrawal of business lines, (b) all
applicable requirements relating to the disclosure of the nature of
insurance products as policies of insurance and (c) all applicable
requirements relating to insurance product projections and illustrations. In
addition, (i) there is no pending or, to the knowledge of the executive
officers of
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Parent, threatened charge by any insurance regulatory authority that any of
the Parent Insurance Subsidiaries has violated, nor any pending or, to the
knowledge of the executive officers of Parent, threatened investigation by
any insurance regulatory authority with respect to possible violations of,
any applicable Insurance Laws where such violations would, individually or
in the aggregate, be reasonably likely to have a Parent Material Adverse
Effect; (ii) none of the Parent Insurance Subsidiaries is subject to any
order or decree of any insurance regulatory authority relating specifically
to such Parent Insurance Subsidiary (as opposed to insurance companies
generally) which would, individually or in the aggregate, be reasonably
likely to have a Parent Material Adverse Effect; and (iii) the Parent
Insurance Subsidiaries have filed all reports required to be filed with any
insurance regulatory authority on or before the date hereof as to which the
failure to file such reports would, individually or in the aggregate, be
reasonably likely to have a Parent Material Adverse Effect.
(ii) In addition to Insurance Laws, except as set forth in the Parent
Reports filed prior to the date hereof, the businesses of each of Parent and
its Subsidiaries have not been, and are not being, conducted in violation of
any Laws, except for violations or possible violations that, individually or
in the aggregate, are not reasonably likely to have a Parent Material
Adverse Effect or prevent or materially impair the ability of Parent or
Merger Subsidiary to consummate the transactions contemplated by this
Agreement and the Stock Option Agreement. Except as set forth in the Parent
Reports filed prior to the date hereof, no investigation or review by any
Governmental Entity with respect to Parent or any of its Subsidiaries is
pending or, to the knowledge of the executive officers of Parent,
threatened, nor has any Governmental Entity indicated an intention to
conduct the same, except for those the outcome of which are not,
individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect or prevent or materially burden or materially impair
the ability of Parent or Merger Subsidiary to consummate the transactions
contemplated by this Agreement and the Stock Option Agreement. To the
knowledge of the executive officers of Parent, no material change is
required in Parent's or any of its Subsidiaries' processes, properties or
procedures in connection with any such Laws, and Parent has not received any
notice or communication of any material noncompliance with any such Laws
that has not been cured as of the date hereof. Parent and its Subsidiaries
each has all permits, licenses, trademarks, patents, trade names,
copyrights, service marks, franchises, variances, exemptions, orders and
other governmental authorizations, consents and approvals necessary to
conduct its business as presently conducted except those the absence of
which are not, individually or in the aggregate, reasonably likely to have a
Parent Material Adverse Effect or prevent or materially burden or materially
impair the ability of Parent or Merger Subsidiary to consummate the Merger
and the other transactions contemplated by this Agreement and the Stock
Option Agreement.
(k) ENVIRONMENTAL MATTERS. Except as disclosed in the Parent Reports filed
prior to the date hereof and except for such matters that, alone or in the
aggregate, are not reasonably likely to have a Parent Material Adverse Effect:
(i) Parent and its Subsidiaries are in substantial compliance with all
applicable Environmental Laws; (ii) the properties currently owned or operated
by Parent (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances; (iii) the
properties formerly owned or operated by Parent or any of its Subsidiaries were
not contaminated with Hazardous Substances during the period of ownership or
operation by Parent or any of its Subsidiaries; (iv) neither Parent nor any of
its Subsidiaries is subject to liability for any Hazardous Substance disposal or
contamination on any third party property (excluding policies written in
connection with the insurance business); (v) no Hazardous Substance has been
transported from any of the properties owned or operated by Parent or any of its
Subsidiaries other than as permitted under applicable Environmental Law; (vi)
neither Parent nor any of its Subsidiaries has received any written notice,
demand, letter, claim or request for information from any Governmental Entity or
third party indicating that Parent or any of its Subsidiaries may be in
violation of or liable under any Environmental Law; (vii) Parent and its
Subsidiaries are not subject to any court order, administrative order or decree
arising under any Environmental Law and are not subject to any indemnity or
other agreement with any third party relating to liability under any
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Environmental Law or relating to Hazardous Substances (excluding policies
written in connection with the insurance business); and (viii) there are no
circumstances or conditions involving Parent or any of its Subsidiaries that
could reasonably be expected to result in any claims, liability, investigations,
costs or restrictions on the ownership, use, or transfer of any property of
Parent pursuant to any Environmental Law.
(l) ACCOUNTING AND TAX MATTERS. As of the date hereof, neither Parent nor
any of its affiliates has taken or agreed to take any action, nor do the
executive officers of Parent have any knowledge of any fact or circumstance,
that would prevent Parent from accounting for the business combination to be
effected by the Merger as a "pooling-of-interests" or prevent the Merger and the
other transactions contemplated by this Agreement from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
(m) TAXES. Except as provided in Section 5.2(m) of the Parent Disclosure
Letter:
(i) Parent and each of its Subsidiaries have filed completely and
correctly in all material respects all Tax Returns which are required by all
applicable laws to be filed by them, and have paid, or made adequate
provision for the payment of, all material Taxes which have or may become
due and payable pursuant to said Tax Returns and all other Taxes,
governmental charges and assessments received to date other than those Taxes
being contested in good faith for which adequate provision has been made on
the most recent balance sheet included in the Parent Reports. The Tax
Returns of Parent and its Subsidiaries have been prepared, in all material
respects, in accordance with all applicable laws consistently applied;
(ii) all material Taxes which Parent and its Subsidiaries are required
by law to withhold and collect have been duly withheld and collected, and
have been paid over, in a timely manner, to the proper Taxing Authorities to
the extent due and payable;
(iii) no liens for a material amount of Taxes exist with respect to any
of the assets or properties of Parent or its Subsidiaries, except for
statutory liens for Taxes not yet due or payable or that are being contested
in good faith;
(iv) all of the U.S. Federal income Tax Returns filed by or on behalf of
each of Parent and its Subsidiaries have been examined by and settled with
the Internal Revenue Service, or the statute of limitations with respect to
the relevant Tax liability expired, for all taxable periods through and
including the period ending on the date on which the Effective Time occurs;
and
(v) there is no audit, examination, deficiency, or refund litigation
pending with respect to any material amount of Taxes and during the past
three years no Taxing Authority has given written notice of the commencement
of any audit, examination, deficiency or refund litigation, with respect to
any material amount of Taxes.
(n) LABOR MATTERS. Neither Parent nor any of its Subsidiaries is a party to
or otherwise bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization.
(o) MATERIAL CONTRACTS. All of the material contracts of Parent and its
Subsidiaries that are required to be described in the Parent Reports or to be
filed as exhibits thereto are described in the Parent Reports or filed as
exhibits thereto and are in full force and effect. Neither Parent nor any of its
Subsidiaries nor any other party is in breach of or in default under any such
contract except for such breaches and defaults as individually or in the
aggregate have not had and are not reasonably likely to have a Parent Material
Adverse Effect.
(p) OWNERSHIP OF SHARES. Neither Parent nor any of its Subsidiaries
"Beneficially Owns" or is the "Beneficial Owner" of (as such terms are defined
in the Rights Agreement, as amended, or for purposes of Section 3-601 of the
MGCL) 10% of more of the outstanding Shares.
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(q) BROKERS AND FINDERS. Neither Parent nor any of its executive officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders fees in connection with
the Merger or the other transactions contemplated by this Agreement or the Stock
Option Agreement, except that Parent has employed Credit Suisse First Boston
Corporation as its financial advisor, the arrangements with which have been
disclosed to the Company prior to the date hereof.
(r) INSURANCE MATTERS.
(i) Except as otherwise would not, individually or in the aggregate, be
reasonably likely to have a Parent Material Adverse Effect, all policies,
binders, slips, certificates, annuity contracts and participation agreements
and other agreements of insurance, whether individual or group, in effect as
of the date hereof (including all applications, supplements, endorsements,
riders and ancillary agreements in connection therewith) that are issued by
the Parent Insurance Subsidiaries (the "PARENT INSURANCE CONTRACTS") and any
and all marketing materials, are, to the extent required under applicable
law, on forms approved by applicable insurance regulatory authorities or
which have been filed and not objected to by such authorities within the
period provided for objection, and such forms comply in all material
respects with the insurance statutes, regulations and rules applicable
thereto and, as to premium rates established by Parent or any Parent
Insurance Subsidiary which are required to be filed with or approved by
insurance regulatory authorities, the rates have been so filed or approved,
the premiums charged conform thereto in all material respects, and such
premiums comply in all material respects with the insurance statutes,
regulations and rules applicable thereto.
(ii) All reinsurance and coinsurance treaties or agreements, including
retrocessional agreements, to which Parent or any Parent Insurance
Subsidiary is a party or under which Parent or any Parent Insurance
Subsidiary has any existing rights, obligations or liabilities are in full
force and effect except for such treaties or agreements the failure to be in
full force and effect as individually or in the aggregate are not reasonably
likely to have a Parent Material Adverse Effect.
(iii) Prior to the date hereof, Parent has delivered or made available to
the Company a true and complete copy of any actuarial reports prepared by
actuaries, independent or otherwise, with respect to Parent or any Parent
Insurance Subsidiary since December 31, 1994, and all attachments, addenda,
supplements and modifications thereto (the "PARENT ACTUARIAL ANALYSES"). To
the knowledge of the executive officers of Parent, the information and data
furnished by Parent or any Parent Insurance Subsidiary to its independent
actuaries in connection with the preparation of the Parent Actuarial
Analyses were accurate in all material respects. Furthermore, to the
knowledge of the executive officers of Parent, each Parent Actuarial
Analysis was based upon an accurate inventory of policies in force for
Parent and the Parent Insurance Subsidiaries, as the case may be, at the
relevant time of preparation, was prepared using appropriate modeling
procedures accurately applied and in conformity with generally accepted
actuarial standards consistently applied, and the projections contained
therein were properly prepared in accordance with the assumptions stated
therein.
(iv) As of the date hereof, Parent has no reason to believe that any
rating presently held by the Parent Insurance Subsidiaries is likely to be
modified, qualified, lowered or placed under surveillance for a possible
downgrade for any reason other than as a result of the transactions
contemplated hereby.
(s) LIABILITIES AND RESERVES.
(i) The reserves carried on the Parent SAP Statements of each Parent
Insurance Subsidiary for the year ended December 31, 1996 for losses, claims
and similar purposes (including claims litigation) are in compliance in all
material respects with the requirements for reserves established by the
insurance departments of the state of domicile of such Company Insurance
Subsidiary, were determined in all material respects in accordance with
generally accepted actuarial standards and principles
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consistently applied, and are fairly stated in all material respects in
accordance with sound actuarial and statutory accounting principles. Such
reserves were adequate in the aggregate to cover the total amount of all
reasonably anticipated liabilities of Parent and each Parent Insurance
Subsidiary under all outstanding insurance, reinsurance and other applicable
agreements as of the respective dates of such Parent SAP Statements. The
admitted assets of Parent and each Parent Insurance Subsidiary as determined
under applicable Laws are in an amount at least equal to the minimum amounts
required by applicable Laws.
(ii) Except for regular periodic assessments in the ordinary course of
business or assessments based on developments which are publicly known
within the insurance industry, to the knowledge of the executive officers of
Parent, no claim or assessment is pending or threatened against any Parent
Insurance Subsidiary which is peculiar or unique to such Parent Insurance
Subsidiary by any state insurance guaranty associations in connection with
such association's fund relating to insolvent insurers which if determined
adversely, would, individually or in the aggregate, be reasonably likely to
have a Parent Material Adverse Effect.
ARTICLE VI
COVENANTS
6.1.(a) INTERIM OPERATIONS OF THE COMPANY. The Company covenants and
agrees as to itself and its Subsidiaries that, after the date hereof and
prior to the Effective Time (except as otherwise expressly contemplated by
this Agreement or the Stock Option Agreement or set forth in Section 6.1(a)
of the Company Disclosure Letter), without the prior written consent of
Parent, which consent shall not be unreasonably withheld or delayed:
(i) its and its Subsidiaries' businesses shall be conducted in all
material respects in the ordinary and usual course (it being understood and
agreed that nothing contained herein shall permit the Company to enter into
or engage (through acquisition, product extension or otherwise), in any
material respect, in any new line of business);
(ii) to the extent consistent with (a) above it and its Subsidiaries
shall use their reasonable best efforts to preserve its business
organization intact and maintain its existing relations and goodwill with
customers, suppliers, reinsurers, distributors, creditors, lessors,
employees and business associates;
(iii) it shall not (i) issue, sell, pledge, dispose of or encumber any
capital stock owned by it in any of its Subsidiaries; (ii) amend its charter
or by-laws or amend, modify or terminate the Rights Agreement; (iii) split,
combine or reclassify its outstanding shares of stock; (iv) authorize,
declare, set aside or pay any dividend payable in cash, stock or property in
respect of any capital stock other than dividends from its direct or
indirect wholly-owned Subsidiaries and other than regular quarterly cash
dividends paid by the Company not in excess of $.07 per share; or (v)
repurchase, redeem or otherwise acquire, except in connection with any of
the Company Stock Plans, or permit any of its Subsidiaries to purchase or
otherwise acquire, any shares of its stock or any securities convertible
into or exchangeable or exercisable for any shares of its stock;
(iv) neither it nor any of its Subsidiaries shall (i) except as
permitted under clause (v), issue, sell, pledge, dispose of or encumber any
(x) shares of, or securities convertible into or exchangeable or exercisable
for, or options, warrants, calls, commitments or rights of any kind to
acquire any shares of, its capital stock of any class or (y) securities
convertible into or exchangeable for any other property or assets (other
than Shares issuable pursuant to options outstanding on the date hereof
under any of the Company Stock Plans or upon conversion of the Convertible
Notes); (ii) other than in the ordinary and usual course of business,
transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of or
encumber any other material property or assets (including capital stock of
any of its Subsidiaries) or take any action to incur or modify any material
indebtedness or other material liability; (iii) other than
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for information systems, make or authorize or commit for any capital
expenditures other than in amounts less than $20.0 million individually and
$20.0 million in the aggregate; or (iv) make or authorize or commit for any
capital expenditures for information systems except for amounts which,
individually or in the aggregate, are less than $25.0 million; or (v) make
any acquisition of, or investment in, the assets or stock of any other
Person or entity (other than a Subsidiary) except for ordinary course
investment activities or as otherwise permitted by Section 6.1(a);
(v) neither it nor any of its Subsidiaries shall terminate, establish,
adopt, enter into, make any new grants or awards under, amend or otherwise
modify, any Compensation and Benefit Plans or increase the salary, wage,
bonus or other compensation of any employees except increases for employees
of the Company occurring in the ordinary and usual course of business (which
shall include, but not be limited to, (i) regular annual grants of options
under the Company Stock Plans, the number of Company Options subject to and
the recipient of each such grant to be determined in consultation with
Parent; PROVIDED that the vesting of such options shall not accelerate as a
result of the change in control contemplated by the Merger and PROVIDED,
FURTHER, that the maximum number of Shares issuable pursuant to such options
shall be calculated in accordance with past practice and the terms of the
Company Stock Plans and shall not exceed 3,300,000 Shares (each such option,
when granted, shall be a Company Option), (ii) grants and payment of awards
under the Company's Management Incentive Plan and Long-Term Incentive Plan
in accordance with the terms of such plans and (iii) salary increases for
those employees who have a rank of vice president or higher in accordance
with the Company's normal salary guidelines and annual salary pool which, in
the aggregate, do not exceed 4% of their aggregate current salaries, and
salary increases for other employees which do not exceed, in the aggregate,
3.5% of their aggregate current salaries) and except reasonable retention
arrangements which are necessary for the operation of the Company entered
into with the prior written consent of Parent, which consent shall not be
unreasonably withheld.
(vi) neither it nor any of its Subsidiaries shall pay, discharge, settle
or satisfy (x) any insurance claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise) for amounts in
excess of $2,500,000 or (y) any non-insurance claim, liability or obligation
(including extra-contractual obligations), other than (I) the payment,
discharge or satisfaction of such claims, liabilities or obligations in the
ordinary and usual course of business for amounts not in excess of $500,000
or (II) ordinary course repayment of indebtedness or payment of contractual
obligations when due;
(vii) neither it nor any of its Subsidiaries shall make or change any Tax
election, settle any material audit, file any amended tax returns or permit
any insurance policy naming it as a beneficiary or loss-payable payee to be
canceled or terminated except in the ordinary and usual course of business;
(viii) neither it nor any of its Subsidiaries shall enter into any
agreement containing any provision or covenant limiting in any material
respect the ability of the Company or any Subsidiary or affiliate to (A)
sell any products or services of or to any other person, (B) engage in any
line of business or (C) compete with or to obtain products or services from
any person or limiting the ability of any person to provide products or
services to the Company or any of its Subsidiaries or affiliates;
(ix) neither it nor any of its Subsidiaries shall enter into any (x) new
quota share or reinsurance transaction pursuant to which $2,000,000 or more
in annualceded written premiums are ceded by the Company Insurance
Subsidiaries or (y) renewal, extension or modification of an existing treaty
or other program pursuant to which $15,000,000 or more in annual ceded
written premiums are ceded by the Company Insurance Subsidiaries;
(x) neither it nor any of its Subsidiaries shall take any action that
would cause any of its representations and warranties herein to become
untrue in any material respect; and
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(xi) neither it nor any of its Subsidiaries will authorize or enter into
an agreement to do any of the foregoing.
6.1.(b) INTERIM OPERATIONS OF PARENT. Parent covenants and agrees as to
itself and its Subsidiaries that, after the date hereof and prior to the
Effective Time (except as otherwise expressly contemplated by this Agreement or
the Stock Option Agreement or as set forth in Section 6.1(b) of the Parent
Disclosure Letter), without the prior written consent of the Company, which
consent shall not be unreasonably withheld or delayed:
(i) its and its Subsidiaries' businesses shall be conducted in the
ordinary and usual course;
(ii) to the extent consistent with (i) above, each of it and its
Subsidiaries shall use their reasonable best efforts to preserve its
business organization intact and maintain its existing relations and
goodwill with customers, suppliers, reinsurers, distributors, creditors,
lessors, employees and business associates;
(iii) it shall not (v) issue, sell, pledge, dispose of or encumber any
capital stock owned by it in any of its Significant Subsidiaries (as defined
in Regulation S-X under the Securities Exchange Act); (w) amend its charter;
(x) split, combine or reclassify its outstanding shares of stock; (y)
authorize, declare, set aside or pay any dividend payable in cash, stock or
property in respect of any capital stock other than dividends from its
direct or indirect wholly-owned Subsidiaries and other than regular
quarterly cash dividends paid by Parent not in excess of $0.47 per share; or
(z) repurchase, redeem or otherwise acquire, except in connection with any
of the Parent Stock Plans, or permit any of its Subsidiaries to purchase or
otherwise acquire, any shares of its stock or any securities convertible
into or exchangeable or exercisable for any shares of its stock if such
purchase, redemption or acquisition would preclude Parent's accounting for
the Merger as a pooling-of-interests;
(iv) except for ordinary course investment activities, neither it nor
any of its Subsidiaries shall make any acquisition of, or investment in,
assets or stock of any other Person or entity (other than a Subsidiary) in
excess of $2.0 billion in the aggregate;
(v) neither it nor any of its Subsidiaries shall take any action that
would cause any of its representations and warranties herein to become
untrue in any material respect; and
(vi) neither it nor any of its Subsidiaries will authorize or enter into
an agreement to do any of the foregoing.
6.2. COMPANY ACQUISITION PROPOSALS. From the date hereof until the
termination hereof and except as expressly permitted by the following provisions
of this Section 6.2, the Company will not, and will not permit or cause any of
its Subsidiaries or any of the executive officers and directors of it or its
Subsidiaries to, and shall direct and use its best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, directly or indirectly, initiate, solicit, or knowingly encourage or
otherwise intentionally facilitate any inquiries or the making of any proposal
or offer (other than the Merger) with respect to a merger, reorganization, share
exchange, consolidation or similar transaction involving, or any purchase of all
or a substantial portion of the assets or any equity securities of, it or any of
its Subsidiaries (any such proposal or offer being hereinafter referred to as a
"COMPANY ACQUISITION PROPOSAL"). The Company will not, and will not permit or
cause any of its Subsidiaries or any of the officers and directors of it or its
Subsidiaries to and shall direct and use its best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, directly or indirectly, engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
Person relating to a Company Acquisition Proposal, whether made before or after
the date of this Agreement, or otherwise intentionally facilitate any effort or
attempt to make or implement a Company Acquisition Proposal (including, without
limitation, by means of an amendment to the Rights Agreement); PROVIDED,
HOWEVER, that nothing
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contained in this Agreement shall prevent the Company or its Board of Directors
from complying with Rule 14e-2 promulgated under the Exchange Act with regard to
a Company Acquisition Proposal or at any time prior to the time that the Merger
shall have been approved by the Company Requisite Vote (A) providing information
in response to a request therefor by a Person who has made an unsolicited bona
fide written Company Acquisition Proposal if the Board of Directors receives
from the Person so requesting such information an executed confidentiality
agreement the terms of which are (without regard to the terms of the Company
Acquisition Proposal) (x) no less favorable to the Company and (y) no less
restrictive on the Person requesting such information than those contained in
the Company Confidentiality Letter (as defined in Section 9.7); (B) engaging in
any negotiations or discussions with any Person who has made an unsolicited bona
fide written Company Acquisition Proposal; or (C) recommending such a Company
Acquisition Proposal to the stockholders of the Company, if and only to the
extent that, (i) in each such case referred to in clause (A), (B) or (C) above,
the Board of Directors of the Company determines in good faith after
consultation with outside legal counsel that such action is necessary in order
for its directors to comply with their respective fiduciary duties under
applicable law and (ii) in each case referred to in clause (B) or (C) above, the
Board of Directors of the Company determines in good faith (after consultation
with its financial advisor) that such Company Acquisition Proposal, if accepted,
is reasonably likely to be consummated, taking into account all legal, financial
and regulatory aspects of the proposal and the Person making the proposal and
would, if consummated, result in a transaction more favorable to the Company's
stockholders from a financial point of view than the transaction contemplated by
this Agreement (any such more favorable Company Acquisition Proposal being
referred to in this Agreement as a "SUPERIOR PROPOSAL"). The Company will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. The Company agrees that it will take the necessary
steps to promptly inform the individuals or entities referred to in the first
sentence hereof of the obligations undertaken in this Section 6.2 and in the
Confidentiality Agreements (as defined in Section 9.7). The Company will
promptly notify Parent if after the date hereof any such inquiries, proposals or
offers are received by, any such information is requested from, or any such
discussions or negotiations are sought to be initiated or continued with, any of
its representatives indicating, in connection with such notice, the name of such
Person and the material terms and conditions of any proposals or offers and
thereafter shall keep Parent informed, on a current basis, on the status and
terms of any such proposals or offers and the status of any such negotiations or
discussions. The Company also will promptly request each Person that has
heretofore executed a confidentiality agreement in connection with its
consideration of a Company Acquisition Proposal to return or destroy all
confidential information heretofore furnished to such Person by or on behalf of
it or any of its Subsidiaries. Notwithstanding the foregoing, nothing in this
Section 6.2 shall be deemed to prevent the Company from selling or disposing of
the capital stock or assets of any Subsidiary (or any actions in preparation or
contemplation thereof) to the extent such sale or disposition is permitted by
Section 6.1(a).
6.3. INFORMATION SUPPLIED. The Company and Parent each agrees, as to itself
and its Subsidiaries, that none of the information supplied or to be supplied by
it or its Subsidiaries for inclusion or incorporation by reference in (i) the
Registration Statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger
(including the joint proxy statement and prospectus (the "PROSPECTUS/PROXY
STATEMENT") constituting a part thereof) (the "S-4 REGISTRATION STATEMENT")
will, at the time the S-4 Registration Statement becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and (ii) the Prospectus/Proxy Statement and any amendment or
supplement thereto will, at the date of mailing to stockholders and at the times
of the meetings of stockholders of the Company and Parent to be held in
connection with the Merger, 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 were made, not misleading.
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6.4. STOCKHOLDERS MEETINGS. The Company will take, in accordance with its
charter and bylaws, all action necessary to convene a meeting of holders of
Shares (the "STOCKHOLDERS MEETING") as promptly as practicable after the S-4
Registration Statement is declared effective to consider and vote upon the
approval of the Merger, and the Company's board of directors, subject to
fiduciary obligations under applicable law, will recommend such approval by its
stockholders, will not withdraw or modify such recommendation and shall take all
lawful action to solicit such approval; PROVIDED that the Company's board of
directors may modify or withdraw such recommendation following receipt of a
Superior Proposal. Parent will take, in accordance with its charter and by-laws,
all action necessary to convene a meeting of holders of Parent Common Stock (the
"PARENT STOCKHOLDERS MEETING") as promptly as practicable after the S-4
Registration Statement is declared effective to consider and vote upon the
approval of the issuance of Parent Common Stock in the Merger, and Parent's
board of directors, subject to fiduciary obligations under applicable law, will
recommend such approval by its stockholders, will not withdraw or modify such
recommendation and will take all lawful action to solicit such approval. Prior
to the Parent Stockholders Meeting, Parent shall not enter into any agreement
relating to a Parent Acquisition Proposal that is conditioned upon the Merger
not being consummated (it being understood the Parent shall remain obligated
both before and after the date of the Parent Stockholders Meeting to perform the
covenants set forth in Section 6.5(c) in accordance with the provisions
thereof).
6.5. FILINGS; OTHER ACTIONS; NOTIFICATION. (a) Parent and the Company shall
promptly prepare and file with the SEC the Prospectus/Proxy Statement, and
Parent shall prepare and file with the SEC the S-4 Registration Statement as
promptly as practicable. Parent and the Company each shall use its reasonable
best efforts to have the S-4 Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing, and promptly
thereafter mail the Prospectus/Proxy Statement to the respective stockholders of
each of the Company and Parent. Parent shall also use its reasonable best
efforts to obtain prior to the effective date of the S-4 Registration Statement
all necessary state securities law or "blue sky" permits and approvals required
in connection with the Merger and to consummate the other transactions
contemplated by this Agreement and the Stock Option Agreement and will pay all
expenses incident thereto.
(b) The Company and Parent each shall use all reasonable efforts to cause to
be delivered to the other party and its directors a letter of its independent
auditors, dated (i) the date on which the S-4 Registration Statement shall
become effective and (ii) the Closing Date, and addressed to the other party and
its directors, in form and substance customary for "comfort" letters delivered
by independent public accountants in connection with registration statements
similar to the S-4 Registration Statement.
(c) The Company and Parent each shall from the date hereof until the
Effective Time cooperate with the other and use (and shall cause their
respective Subsidiaries to use) its reasonable best efforts to cause to be done
all things, necessary, proper or advisable on its part under this Agreement, the
Stock Option Agreement and applicable Laws to consummate and make effective the
Merger and the other transactions contemplated by this Agreement and the Stock
Option Agreement as soon as practicable, including preparing and filing as
promptly as practicable all documentation to effect all necessary notices,
reports and other filings and to obtain as promptly as practicable all consents,
registrations, approvals, permits and authorizations necessary or advisable to
be obtained from any third party and/or any Governmental Entity in order to
consummate the Merger or any of the other transactions contemplated by this
Agreement and the Stock Option Agreement; PROVIDED, HOWEVER, that nothing in
this Section 6.5 shall require, or be construed to require, Parent, in
connection with the receipt of any regulatory approval, to proffer to, or agree
to (i) sell or hold separate and agree to sell or to discontinue or limit,
before or after the Effective Time, any assets, businesses, or interest in any
assets or businesses of Parent, the Company or any of their respective
affiliates (or to consent to any sale, or agreement to sell, or discontinuance
or limitation by the Company of any of its assets or businesses) or (ii) agree
to any conditions relating to, or changes or restriction in, the operations of
any such asset or businesses which, in either case would be reasonably expected
to materially and adversely impact the economic or business benefits to Parent
of the transactions contemplated by this Agreement. Subject to applicable laws
relating to the exchange of information,
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Parent and the Company shall have the right to review in advance, and to the
extent practicable each will consult the other on, all the information relating
to Parent or the Company, as the case may be, and any of their respective
Subsidiaries, that appear in any filing made with, or written materials
submitted to, any third party and/or any Governmental Entity in connection with
the Merger and the other transactions contemplated by this Agreement and the
Stock Option Agreement. In exercising the foregoing right, each of the Company
and Parent shall act reasonably and as promptly as practicable.
(d) The Company and Parent each shall, upon request by the other, furnish
the other with all information concerning itself, its Subsidiaries, directors,
executive officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Prospectus/Proxy Statement, the
S-4 Registration Statement or any other statement, filing, notice or application
made by or on behalf of Parent, the Company or any of their respective
Subsidiaries to any third party and/or any Governmental Entity in connection
with the Merger and the transactions contemplated by this Agreement and the
Stock Option Agreement.
(e) The Company and Parent each shall keep the other apprised of the status
of matters relating to completion of the transactions contemplated hereby,
including promptly furnishing the other with copies of notice or other
communications received by Parent or the Company, as the case may be, or any of
its Subsidiaries, from any third party and/or any Governmental Entity with
respect to the Merger and the other transactions contemplated by this Agreement
and the Stock Option Agreement. The Company and Parent each shall give prompt
notice to the other of any change that is reasonably likely to result in a
Company Material Adverse Effect or Parent Material Adverse Effect, respectively.
6.6. TAXATION AND ACCOUNTING. Subject to Section 6.2 and Parent's rights
under the Stock Option Agreement, neither Parent nor the Company shall take or
cause to be taken any action, whether before or after the Effective Time, that
would disqualify the Merger as a "pooling of interests" for accounting purposes
or as a "reorganization" within the meaning of Section 368(a) of the Code. Each
of Parent and the Company agrees to use its reasonable best efforts to cure any
impediment to the qualification of the Merger as a "pooling of interests" for
accounting purposes or as a "reorganization" within the meaning of Section
368(a) of the Code.
6.7. ACCESS. Upon reasonable notice, and except as may otherwise be required
by applicable law, the Company and Parent each shall (and shall cause its
Subsidiaries to) afford the other's executive officers, employees, counsel,
accountants and other authorized representatives ("REPRESENTATIVES") access,
during normal business hours throughout the period prior to the Effective Time,
to its properties, books, contracts and records and, during such period, each
shall (and shall cause its Subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as may reasonably
be requested, PROVIDED that no investigation pursuant to this Section shall
affect or be deemed to modify any representation or warranty made by the
Company, Parent or Merger Subsidiary, and PROVIDED, FURTHER, that the foregoing
shall not require the Company or Parent to permit any inspection, or to disclose
any information, that (i) in the reasonable judgment of the Company or Parent,
as the case may be, would result in the disclosure of any trade secrets of third
parties or violate any of its obligations with respect to confidentiality if the
Company or Parent, as the case may be, shall have used all reasonable efforts to
obtain the consent of such third party to such inspection or disclosure or (ii)
would violate any attorney-client privilege of the Company or Parent, as the
case may be. All requests for information made pursuant to this Section shall be
directed to an executive officer of the Company or Parent, as the case may be,
or such Person as may be designated by either of its executive officers, as the
case may be. All such information shall be governed by the terms of the
Confidentiality Agreements (as hereinafter defined).
6.8. AFFILIATES.
(i) At least 45 days prior to the Effective Time, the Company shall
deliver to Parent a list of names and addresses of those Persons who will
be, in the opinion of the Company, "affiliates" of the Company within the
meaning of Rule 145 under the Securities Act and for the purposes of
applicable
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interpretations regarding the pooling-of-interests method of accounting. The
Company shall exercise its best efforts to deliver or cause to be delivered
to Parent, at least 30 days prior to the Effective Time, from each affiliate
of the Company identified in the foregoing list, a letter in the form
attached as Exhibit A-1 (the "COMPANY AFFILIATES LETTER"). The certificates
representing Parent Common Stock received by such affiliates shall bear a
customary legend regarding applicable Securities Act restrictions and
"pooling restrictions."
(ii) At the election of an affiliate of the Company who is an employee
of the Company at the Effective Time and who is required to and so provides
a letter in the form attached as Exhibit A-1, Parent shall employ, or shall
cause the Surviving Corporation to employ, such affiliate of the Company
until the date of publication of results covering at least 30 days of
combined operations of the Company and Parent in the form of a quarterly
earnings report, an effective registration statement filed with the
Commission, a report on Form 8-K or any other public filing or announcement
which includes such combined results of operations.
(iii) At least 45 days prior to the Effective Time, Parent shall deliver
to the Company a list of names and addresses of those Persons who will be,
in the opinion of the Parent, "affiliates" of Parent for the purposes of
applicable interpretations regarding the pooling-of-interests method of
accounting. Parent shall exercise its best efforts to deliver or cause to be
delivered to the Company, at least 30 days prior to the Effective Time, from
each of such affiliates of Parent identified in the foregoing list, a letter
in the form attached as Exhibit A-2 (the "PARENT AFFILIATES LETTER").
6.9. STOCK EXCHANGE LISTING. Parent shall use its best efforts to cause the
shares of Parent Common Stock to be issued in the Merger to be approved for
listing on the NYSE subject to official notice of issuance, prior to the Closing
Date.
6.10. PUBLICITY. The initial press release shall be a joint press release in
the form previously agreed upon by the Company and Parent and thereafter the
Company and Parent shall consult with each other prior to issuing, and will
provide each other with a meaningful opportunity to review, comment upon and
concur with, any press releases or otherwise making public announcements with
respect to the Merger and the other transactions contemplated by this Agreement
and the Stock Option Agreement and prior to making any filings with any third
party and/or any Governmental Entity (including any national securities
exchange) with respect thereto, except as may be required by law, court process
or by obligations pursuant to any listing agreement with or rules of any
national securities exchange interdealer quotation service.
6.11. BENEFITS. (a) STOCK OPTIONS.
(i) At the Effective Time, each Company Option whether vested or
unvested, without any action on the part of the holder, shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Option, a number of shares of Parent Common
Stock equivalent to (x) the number of Shares that could have been purchased
immediately prior to the Effective Time under such Company Option multiplied
by (y) the Exchange Ratio (rounded down to the nearest whole number), at a
price per share of Parent Common Stock (rounded up to the nearest whole
cent) equal to the aggregate exercise price for the Shares otherwise
purchasable pursuant to such Company Option divided by the number of shares
of Parent Common Stock determined above; PROVIDED, HOWEVER, that the
foregoing provisions shall be subject to such adjustments as are necessary
in order to satisfy the requirements of Section 424(a) of the Code in the
case of any Company Option to which Section 422 of the Code applies. At or
prior to the Effective Time, the Company shall make all necessary
arrangements with respect to the Company Stock Plans to permit the
assumption of the unexercised Company Options by Parent pursuant to this
Section.
(ii) Effective at the Effective Time, Parent shall assume each Company
Option in accordance with the terms of the relevant Company Stock Plan under
which it was issued and the stock option agreement by which it is evidenced.
At or prior to the Effective Time, Parent shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of Parent
Common Stock for
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delivery upon exercise of Company Options and payment of Vested Stock Units
(as defined below) assumed by it in accordance with this Section. At the
Effective Time, all vested stock units allocated to each director's account
under the Company's Amended and Restated 1993 Stock Plan for Non-Employee
Directors ("VESTED STOCK UNITS"), without any action on the part of the
director, shall be paid, on the same terms and conditions as are applicable
under such plan, in a number of shares of Parent Common Stock equal to the
number of Vested Stock Units allocated to the director's account in such
plan multiplied by the Exchange Ratio (rounded down to the nearest whole
number). As soon as practicable, and in no event later than 10 days after
the Effective Time, Parent shall file a registration statement on Form S-3
or Form S-8, as the case may be (or any successor or other appropriate
forms), or another appropriate form (or shall cause such Company Option or
Vested Stock Unit to be deemed to be issued pursuant to a Parent Stock Plan
for which shares of Parent Common Stock have previously been registered
pursuant to an appropriate registration form) with respect to the Parent
Common Stock subject to such Company Options or payable pursuant to such
Vested Stock Unit, and shall use its best efforts to maintain the
effectiveness of such registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as
such Company Options remain outstanding.
(b) EMPLOYEE BENEFITS. Parent agrees that, during the period commencing at
the Effective Time and ending on the first anniversary thereof, the employees of
the Company and its Subsidiaries will continue to be provided with benefits
under employee benefit plans (other than plans involving the issuance of Shares)
that are no less favorable in the aggregate than those benefits currently
provided by the Company and its Subsidiaries to such employees. For a period of
one year following the Effective Time, Parent shall provide, or cause the
Surviving Corporation to provide, severance benefits for Company employees whose
employment is terminated during such period which are at least equal to the
severance benefits provided on Section 6.11(b) of the Company Disclosure Letter.
Following the Effective Time, Parent shall honor, or shall cause the Surviving
Corporation to honor, all individual employment or severance agreements in
effect for employees (or former employees) of the Company as of the date hereof
to the extent that such individual agreements are listed in Section 6.11(b) of
the Company Disclosure Letter; PROVIDED, HOWEVER, that nothing contained herein
shall prevent Parent from amending or terminating any such agreement in
accordance with its terms.
6.12. EXPENSES. The Surviving Corporation shall pay all charges and
expenses, including those of the Exchange Agent, in connection with the
transactions contemplated in Article IV, and Parent shall reimburse the
Surviving Corporation for such charges and expenses. Except as otherwise
provided in Sections 8.5(b) and 8.5(c), whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement,
the Stock Option Agreement and the Merger and the other transactions
contemplated by this Agreement and the Stock Option Agreement shall be paid by
the party incurring such expense, except that expenses incurred in connection
with the filing fee for the S-4 Registration Statement and printing and mailing
the Prospectus/Proxy Statement and the S-4 Registration Statement shall be
shared equally by Parent and the Company.
6.13. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. (a) From and
after the Effective Time, Parent agrees that it will indemnify and hold harmless
each present and former director and officer of the Company, (when acting in
such capacity) determined as of the Effective Time (each, an Indemnified Party
and, collectively, the "INDEMNIFIED PARTIES"), against any costs or expenses
(including reasonable attorneys' fees and expenses), judgments, fines, losses,
amounts paid in settlement claims, damages or liabilities (collectively,
"COSTS") incurred in connection with any claim, action, suit, proceeding or
investigation, actual or threatened, whether civil, criminal, administrative or
investigative, in whole or in part based on or arising in whole or in part out
of matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent that the Company would have been permitted under Maryland law and its
charter or by-laws in effect on the date hereof to indemnify such Person (and
Parent shall also advance expenses as incurred to the fullest extent permitted
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under applicable law PROVIDED the Person to whom expenses are advanced provides
(x) a written affirmation of his or her good faith belief that the standard of
conduct necessary for indemnification has been met, and (y) an undertaking to
repay such advances if it is ultimately determined that such Person is not
entitled to indemnification).
(b) Parent shall cause to be maintained, for a period of not less than six
years from the Effective Time, the Company's current directors' and officers'
liability insurance policy to the extent that it provides coverage for events
occurring prior to the Effective Time (the "D&O INSURANCE") for all present and
former directors and officers of the Company or any subsidiary thereof, so long
as the annual premium therefor would not be in excess of 200% of the last annual
premium paid for the D&O Insurance prior to the date of this Agreement (200% of
such premium, the "MAXIMUM PREMIUM"); PROVIDED that Parent may, in lieu of
maintaining such existing D&O Insurance as provided above, cause no less
favorable coverage to be provided under any policy maintained for the benefit of
the directors and officers of Parent or a separate policy provided by the same
insurer. If the existing D&O Insurance expires, is terminated or canceled by the
insurer or if the annual premium would exceed the Maximum Premium during such
six-year period, Parent shall obtain, in lieu of such D&O Insurance, such
comparable directors' and officers' liability insurance as can be obtained for
the remainder of such period for an annualized premium not in excess of the
Maximum Premium and on terms and conditions no less advantageous than the
existing D&O Insurance.
(c) The provisions of this Section are in addition to the rights that an
Indemnified Party may have under the certificate of incorporation, bylaws or
agreements of or with the Company or any of its Subsidiaries or under applicable
law. Parent agrees to pay all costs and expenses (including fees and expenses of
counsel) that may be incurred by any Indemnified Party in successfully enforcing
the indemnity or other obligations under this Section. The provisions of this
Section shall survive the Merger and are intended to be for the benefit of, and
shall be enforceable by, each of the Indemnified Parties, their heirs and their
representatives.
6.14. ELECTION TO PARENT'S BOARD OF DIRECTORS. Promptly after the Effective
Time of the Merger, Parent shall increase the size of its Board of Directors and
shall cause Mr. Norman P. Blake, Jr. and two additional directors of the Company
determined by the Board Governance Committee of Parent to be appointed to
Parent's board of directors (such directors to be appointed to such committees
of the Board of Directors as the Board Governance Committee of the Board of
Directors of Parent shall determine). In addition, subject to its fiduciary
duties under applicable law, Parent agrees to nominate two, or if the Effective
Time occurs on or after August 15, 1998, three, of such directors for election
to Parent's Board of Directors at its first annual meeting with a mailing date
after the Effective Time.
6.15. CONVERTIBLE NOTES. The Company shall take all necessary action to
enter into a supplemental indenture prior to the Effective Time with the Trustee
(as defined in the Convertible Notes) pursuant to the indenture under which the
Convertible Notes were issued to provide, among other things, that on and after
the Effective Time the Convertible Notes will be convertible only into the
Merger Consideration.
6.16. SATISFACTION OF SECTION 15 OF THE 1940 ACT.
(a) The Company shall use commercially reasonable efforts to cause Pacholder
to use commercially reasonable efforts to cause the board of directors of
Pacholder Fund, Inc. ("PACHOLDER FUND") to approve, and to solicit the
shareholders of Pacholder Fund as promptly as practicable with regard to the
approval of, a new investment advisory agreement with Pacholder, to be effective
on or as promptly as practicable after the Effective Time, pursuant to the
provisions of Section 15 of the 1940 Act, and consistent with all requirements
of the 1940 Act applicable thereto, provided that such agreement is identical in
all respects to the existing agreement other than the term of the agreement.
(b) The Company shall use commercially reasonable efforts to cause Pacholder
to use commercially reasonable efforts to secure the satisfaction of the
conditions set forth in Section 15(f)(1) of the 1940 Act with respect to
Pacholder Fund.
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(c) In the alternative, the covenant contained in this Section 6.16 shall be
deemed to be complied with if Parent and Merger Subsidiary shall have received
an opinion from counsel reasonably acceptable to Parent and Merger Subsidiary in
form and substance satisfactory to such Persons and dated the Closing Date, to
the effect that consummation of the Merger will not result in an "assignment"
(within the meaning of the 1940 Act) of the investment advisory agreement
between Pacholder and Pacholder Fund.
6.17. ADVISORY CONTRACT CONSENTS. As promptly as practicable, the Company
shall cause the non-registered investment company advisory clients of the Asset
Management Subsidiaries to be informed of the transactions contemplated by this
Agreement and shall give such clients an opportunity to terminate their advisory
contracts with such Asset Management Subsidiaries or any of their affiliates.
Unless written consent is required by the terms of such advisory contracts, the
Company shall satisfy this obligation to the extent that applicable law permits
insofar as it relates to non-registered investment company advisory clients by
providing them with the notice contemplated by the first sentence of this
Section and obtaining such clients' consent in the form of actual or implied
consent by way of informing such clients of the Asset Management Subsidiaries'
intention to continue the advisory services, pursuant to the Asset Management
Subsidiaries' existing contracts with such clients, subject to such clients'
right to terminate such contracts within sixty (60) days of receipt of such
notice, and that each such client's consent will be implied if it continues to
accept the services without rejection during such specified sixty-day period.
6.18. OTHER ACTIONS BY THE COMPANY AND PARENT.
(a) RIGHTS. The Company shall take all necessary action with respect to all
of the outstanding Rights so that, immediately prior to the Effective Time, (x)
neither the Company nor Parent will have any obligations under the Rights or the
Rights Agreement and (y) the holders of the Rights will have no rights under the
Rights or the Rights Agreement.
(b) TAKEOVER STATUTE. If any Takeover Statute is or may become applicable to
the Merger or the other transactions contemplated by this Agreement or the Stock
Option Agreement, each of Parent and the Company and its board of directors
shall grant such approvals and take such actions as are necessary so that such
transactions may be consummated as promptly as practicable on the terms
contemplated by this Agreement or by the Stock Option Agreement, as the case may
be, or by the Merger and otherwise act to eliminate or minimize the effects of
such statute or regulation on such transactions.
(c) DIVIDENDS. The Company shall coordinate with Parent the declaration,
setting of record dates and payment dates of dividends on Shares so that holders
of Shares do not receive dividends on both Shares and Parent Common Stock
received in the Merger in respect of any calendar quarter or portion thereof or
fail to receive a dividend on either Shares or Parent Common Stock received in
the Merger in respect of any calendar quarter.
ARTICLE VII
CONDITIONS
7.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) STOCKHOLDER APPROVAL. The Merger shall have been duly approved by
holders of Shares constituting the Company Requisite Vote and shall have been
duly approved by the sole stockholder of Merger Subsidiary in accordance with
applicable law, and the issuance of Parent Common Stock pursuant to the Merger
shall have been duly approved by the holders of Parent Common Stock and Parent
Series B Preferred Stock constituting the Parent Requisite Vote.
(b) NYSE LISTING. The shares of Parent Common Stock issuable to the Company
stockholders pursuant to this Agreement shall have been authorized for listing
on the NYSE upon official notice of issuance.
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(c) REGULATORY CONSENTS. The waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated. Other
than the filing provided for in Section 1.3, all other notices, reports and
other filings required to be made prior to the Effective Time by the Company or
Parent or any of their respective Subsidiaries with, and all consents,
registrations, approvals, permits and authorizations required to be obtained
prior to the Effective Time by the Company or Parent or any of their respective
Subsidiaries from, any Governmental Entity (collectively, "GOVERNMENTAL
CONSENTS"), in connection with the execution and delivery of this Agreement and
the consummation of the Merger and the other transactions contemplated by this
Agreement or by the Stock Option Agreement shall have been made or obtained (as
the case may be), except where the failure to make any such filing(s) or obtain
any such Governmental Consent(s) would not reasonably be expected to result in
an aggregate loss of $50.0 million or more in annual net written premiums for
Parent, the Company and their respective Subsidiaries in all jurisdictions
requiring such filing(s) or Governmental Consent(s) in the event such filing(s)
is (are) not made or such Consent(s) is (are) not obtained.
(d) LITIGATION. No court or Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any law, statute,
ordinance, rule, regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) that is in effect and restrains,
enjoins or otherwise prohibits consummation of the Merger (collectively, an
"ORDER") and no Governmental Entity shall have instituted any proceeding which
continues to be pending seeking any such Order.
(e) S-4. The S-4 Registration Statement shall have become effective under
the Securities Act. No stop order suspending the effectiveness of the S-4
Registration Statement shall have been issued, and no proceeding for that
purpose shall have been initiated or be threatened, by the SEC. 7.2. Conditions
to Obligations of Parent and Merger Subsidiary. The obligations of Parent and
Merger Subsidiary to effect the Merger are also subject to the satisfaction or
waiver by Parent at or prior to the Effective Time of the following conditions:
7.2. CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUBSIDIARY. The
obligations of Parent and Merger Subsidiary to effect the Merger are also
subject to the satisfaction or waiver by Parent at or prior to the Effective
Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. (i) To the actual knowledge of the
Responsible Executive Officers of the Company on the date of this Agreement, the
representations and warranties of the Company set forth in this Agreement shall
not have been untrue or incorrect in any material respect as of the date of this
Agreement; and (ii) the representations and warranties of the Company set forth
in this Agreement shall be true and correct as of the Closing Date as though
made on and as of the Closing Date (except to the extent any such representation
or warranty expressly speaks as of an earlier date) except where the failure of
such representations and warranties to be so true and correct (without giving
effect to any qualifications as to "Company Material Adverse Effect", "material"
or similar qualifications) would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect; and Parent
shall have received a certificate signed on behalf of the Company by an
executive officer of the Company to the effect stated in the foregoing clauses
(i) and (ii).
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement and the Stock Option Agreement at or prior to the
Closing Date, and Parent shall have received a certificate signed on behalf of
the Company by an executive officer of the Company to such effect.
(c) CONSENTS. The Company shall have obtained the consent or approval of
each Person whose consent or approval shall be required under any Contract
(other than as set forth on Section 7.2(c) of the Company Disclosure Letter) to
which the Company or any of its Subsidiaries is a party, except those for which
the failure to obtain such consents or approvals, individually or in the
aggregate, is not reasonably likely to have a Company Material Adverse Effect or
is not reasonably likely to prevent or materially impair the ability of the
Company to consummate the transactions contemplated by this Agreement.
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<PAGE>
(d) TAX OPINION. Parent shall have received the opinion of Sullivan &
Cromwell, counsel to Parent, dated the Closing Date, to the effect that the
Merger will be treated for Federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that each of Parent and
the Company will be a party to that reorganization within the meaning of Section
368(b) of the Code. In rendering such opinion, Sullivan & Cromwell shall require
delivery of and rely upon the representations letters delivered by Parent,
Merger Subsidiary and the Company substantially in the forms of Section
7.3(d)(1) and Section 7.3(d)(2) of the Company Disclosure Letter prior to the
Closing Date.
(e) ACCOUNTANT LETTERS. Parent shall have received, in form and substance
reasonably satisfactory to Parent, from each of KPMG Peat Marwick LLP (or its
successor) and Ernst & Young (or its successor) a favorable letter, dated the
Closing Date, regarding the appropriateness of "pooling-of-interests" accounting
treatment for the Merger.
7.3. CONDITIONS TO OBLIGATION OF THE COMPANY.The obligation of the Company
to effect the Merger is also subject to the satisfaction or waiver by the
Company at or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. (i) To the actual knowledge of the
Responsible Executive Officers of Parent on the date of this Agreement, the
representations and warranties of Parent and Merger Subsidiary set forth in this
Agreement shall not have been untrue or incorrect in any material respect as of
the date of this Agreement; and (ii) the representations and warranties of
Parent and Merger Subsidiary set forth in this Agreement shall be true and
correct as of the Closing Date as though made on and as of the Closing Date
(except to the extent any such representation or warranty expressly speaks as of
an earlier date) except where the failure of such representations and warranties
to be so true and correct (without giving effect to any qualifications as to
"Parent Material Adverse Effect," "material" or similar qualifications) would
not, individually or in the aggregate, reasonably be expected to have a Parent
Material Adverse Effect; and the Company shall have received a certificate
signed on behalf of Parent by an executive officer of Parent and on behalf of
Merger Subsidiary by an executive officer of Merger Subsidiary to the effect
stated in the foregoing clauses (i) and (ii).
(b) PERFORMANCE OF OBLIGATIONS OF PARENT AND MERGER SUBSIDIARY. Each of
Parent and Merger Subsidiary shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and the Company shall have received a certificate signed on
behalf of Parent by an executive officer of Parent and on behalf of Merger
Subsidiary by an executive officer of Merger Subsidiary to such effect.
(c) CONSENTS UNDER AGREEMENTS. Parent shall have obtained the consent or
approval of each Person whose consent or approval shall be required in order to
consummate the transactions contemplated by this Agreement under any Contract to
which Parent or any of its Subsidiaries is a party, except those for which
failure to obtain such consents and approvals, individually or in the aggregate,
is not reasonably likely to have a Parent Material Adverse Effect or is not
reasonably likely to prevent or to materially burden or materially impair the
ability of Parent to consummate the transactions contemplated by this Agreement.
(d) TAX OPINION. The Company shall have received the opinion of Piper &
Marbury L.L.P., counsel to the Company, dated the Closing Date, to the effect
that the Merger will be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and that each
of Parent and the Company will be a party to that reorganization within the
meaning of Section 368(b) of the Code. In rendering such opinion, Piper &
Marbury L.L.P. shall require delivery of and rely upon the representations
letters delivered by Parent, Merger Subsidiary and the Company substantially in
the forms of Section 7.3(d)(1) and Section 7.3(d)(2) of the Company Disclosure
Letter prior to the Closing Date.
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<PAGE>
(e) ACCOUNTANT LETTERS. The Company shall have received, in form and
substance reasonably satisfactory to the Company, from each of KPMG Peat Marwick
LLP (or its successor) and Ernst & Young (or its successor) a favorable letter,
dated the Closing Date, regarding the appropriateness of "pooling-of-interests"
accounting treatment for the Merger.
ARTICLE VIII
TERMINATION
8.1. TERMINATION BY MUTUAL CONSENT.This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval by stockholders of the Company and Parent referred to in
Section 7.1(a), by mutual written consent of the Company and Parent by action of
their respective Boards of Directors.
8.2. TERMINATION BY EITHER PARENT OR THE COMPANY. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of either Parent or the Company if (i)
the Merger shall not have been consummated by August 15, 1998, whether such date
is before or after the date of approval by the stockholders of the Company or
Parent (the "TERMINATION DATE"); PROVIDED, HOWEVER, that if either Parent or the
Company determines that additional time is necessary in connection with
obtaining any Governmental Consents, the Termination Date may be extended by
Parent or the Company from time to time by written notice to the other party to
a date not beyond December 15, 1998, (ii) the approval of the Company's
stockholders required by Section 7.1(a) shall not have been obtained at a
meeting duly convened therefor or at any adjournment or postponement thereof,
(iii) the approval of Parent's stockholders as required by Section 7.1(a) shall
not have been obtained at a meeting duly convened therefor or at any adjournment
or postponement thereof or (iv) any Order permanently restraining, enjoining or
otherwise prohibiting consummation of the Merger shall become final and
non-appealable (whether before or after the approval by the stockholders of the
Company or Parent); PROVIDED, that the right to terminate this Agreement
pursuant to clause (i) above shall not be available to any party that has
breached in any material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the occurrence of the failure
of the Merger to be consummated.
8.3. TERMINATION BY THE COMPANY. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval by stockholders of the Company referred to in Section
7.1(a), by action of the Board of Directors of the Company:
(a) if (i) the Company is not in material breach of Section 6.2, (ii) the
Merger shall not have been approved by the Company Requisite Vote, (iii) the
Board of Directors of the Company authorizes the Company, subject to complying
with the terms of this Agreement, to enter into a binding written agreement
concerning a transaction that constitutes a Superior Proposal and the Company
notifies Parent in writing that it intends to enter into such an agreement,
attaching the most current version of such agreement to such notice, (iv) Parent
does not make, within five business days of receipt of the Company's written
notification of its intention to enter into a binding agreement for a Superior
Proposal, an offer that the Board of Directors of the Company determines, in
good faith after consultation with its financial advisors, is at least as
favorable, from a financial point of view, to the stockholders of the Company as
the Superior Proposal and (v) if so requested in writing by Parent prior to the
Company's termination pursuant to this Section 8.3(a), the Company prior to such
termination pays to Parent in immediately available funds the fees required to
be paid pursuant to Section 8.5. The Company agrees (x) that it will not enter
into a binding agreement referred to in clause (iii) above until at least the
sixth business day after it has provided the notice to Parent required thereby
and (y) to notify Parent promptly if its intention to enter into a written
agreement referred to in its notification shall change at any time after giving
such notification.
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<PAGE>
(b) if there is a breach by Parent or Merger Subsidiary of any
representation, warranty, covenant or agreement contained in this Agreement that
cannot be cured and would cause a condition set forth in Section 7.3(a) or
7.3(b) to be incapable of being satisfied.
8.4. TERMINATION BY PARENT. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after the approval by the stockholders of Parent referred to in Section 7.1(a),
by action of the Board of Directors of Parent if (a) the Company enters into a
binding agreement for a Superior Proposal or the Board of Directors of the
Company shall have withdrawn or adversely modified its approval or
recommendation of this Agreement or the Merger or failed to reconfirm its
recommendation of this Agreement or the Merger within five business days after a
written request by Parent to do so or (b) there is a breach by the Company of
any representation, warranty, covenant or agreement contained in this Agreement
that cannot be cured and would cause a condition set forth in Section 7.2(a) or
7.2(b) to be incapable of being satisfied.
8.5. EFFECT OF TERMINATION AND ABANDONMENT. (a) In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article
VIII, this Agreement (other than as set forth in Section 9.1) shall become void
and of no effect with no liability on the part of any party hereto (or of any of
its directors, officers, employees, agents, legal and financial advisors or
other representatives); PROVIDED, HOWEVER, except as otherwise provided herein,
no such termination shall relieve any party hereto of any liability or damages
resulting from any willful or grossly negligent breach of this Agreement.
(b) In the event that (i) a Company Acquisition Proposal shall have been
made to the Company or any of its Subsidiaries or any of its stockholders or any
Person shall have publicly announced an intention (whether or not conditional)
to make a Company Acquisition Proposal with respect to the Company or any of its
Subsidiaries and thereafter this Agreement is terminated by either Parent or the
Company pursuant to Section 8.2(ii) or (ii) this Agreement is terminated (x) by
the Company pursuant to Section 8.3(a) or (y) by Parent pursuant to Section 8.4
(a), then the Company shall promptly, but in no event later than two days after
the date Parent makes a written request for payment, pay Parent a termination
fee of $70,000,000 and shall promptly, but in no event later than two days after
being notified of such by Parent, pay to Parent an amount equal to all of the
charges and expenses incurred by Parent or Merger Subsidiary in connection with
this Agreement and the Stock Option Agreement and the transactions contemplated
by this Agreement and the Stock Option Agreement up to a maximum amount of
$5,000,000, in each case payable by wire transfer of same day funds.
(c) In the event that (i) a proposal or offer with respect to a merger,
reorganization, share exchange, consolidation or similar transaction involving,
or any purchase of all or a substantial portion of the assets or equity
securities of, Parent or any of its Subsidiaries (a "PARENT ACQUISITION
PROPOSAL") shall have been made to Parent or any of its Subsidiaries or any
Person shall have publicly announced an intention (whether or not conditional)
to make a Parent Acquisition Proposal with respect to Parent or any of its
Subsidiaries and thereafter this Agreement is terminated by either Parent or the
Company pursuant to Section 8.2(iii) or (ii) Parent has withdrawn or modified in
a manner adverse to the Company its recommendation contemplated by Section 6.4
and thereafter this Agreement is terminated by either Parent or the Company
pursuant to Section 8.2(iii), then Parent shall promptly, but in no event later
than two days after the date the Company makes a written request for payment,
pay the Company a termination fee of $70,000,000 and shall promptly, but in no
event later than two days after being notified of such by the Company, pay to
the Company an amount equal to all of the charges and expenses incurred by the
Company in connection with this Agreement and the Stock Option Agreement and the
transactions contemplated by this Agreement and the Stock Option Agreement up to
a maximum amount of $5,000,000, in each case payable by wire transfer of same
day funds.
(d) The Company and Parent each acknowledge that the agreements contained in
Sections 8.5(b) and (c) are an integral part of the transactions contemplated by
this Agreement, and that, without these
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<PAGE>
agreements, the Company, Parent and Merger Subsidiary would not enter into this
Agreement; accordingly, if the Company fails to promptly pay the amount due
pursuant to Section 8.5(b), or Parent fails to promptly pay the amount due
pursuant to Section 8.5(c), and, in order to obtain such payment, Parent or the
Company, as the case may be, commences a suit which results in a judgment
against Parent or the Company, as the case may be, for the fee set forth in this
Section 8.5, the Company shall pay to Parent or Parent shall pay to the Company,
as the case may be, its costs and expenses (including attorneys' fees) in
connection with such suit, together with interest from the date of termination
of this Agreement on the amounts owed at the prime rate of Chemical Bank in
effect from time to time during such period plus two percent.
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. SURVIVAL. This Article IX and the agreements of the Company, Parent and
Merger Subsidiary contained in Section 6.6 (Taxation and Accounting), Section
6.11 (Benefits), Section 6.13 (Indemnification; Directors' and Officers'
Insurance) and Section 6.14 (Election to Parent's Board of Directors) shall
survive the consummation of the Merger. This Article IX, the agreements of the
Company, Parent and Merger Subsidiary contained in Section 6.12 (Expenses) and
Section 8.5 (Effect of Termination and Abandonment) shall survive the
termination of this Agreement. All other representations, warranties, covenants
and agreements in this Agreement shall not survive the consummation of the
Merger or the termination of this Agreement.
9.2. MODIFICATION OR AMENDMENT. Subject to the provisions of the applicable
law, at any time prior to the Effective Time, the parties hereto may modify or
amend this Agreement, by written agreement executed and delivered by duly
authorized officers of the respective parties.
9.3. WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.4. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5. GOVERNING LAW; WAIVER OF JURY TRIAL. (A) THIS AGREEMENT SHALL BE DEEMED
TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED
BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF MARYLAND WITHOUT REGARD TO THE
CONFLICT OF LAW PRINCIPLES THEREOF.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT OR THE STOCK OPTION AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE STOCK OPTION AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT OR THE STOCK OPTION AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED
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<PAGE>
TO ENTER INTO THIS AGREEMENT AND THE STOCK OPTION AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.5.
9.6. NOTICES. Any notice, request, instruction or other document to be given
hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
IF TO PARENT OR MERGER SUBSIDIARY
The St. Paul Companies, Inc.
385 Washington Street
Saint Paul, Minnesota 55102
Attention: President
fax: (612) 310-3378
(with a copy to Joseph B. Frumkin, Esq.,
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
fax: (212) 558-3588)
IF TO THE COMPANY
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209
Attention: President
fax: (410) 205-6802
(with a copy to John R. Ettinger, Esq.,
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
fax: (212) 450-4800
and a copy to
R.W. Smith Jr., Esq.
Piper & Marbury L.L.P.
36 S. Charles Street
Baltimore, MD 21201)
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7. ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. This Agreement (including
any exhibits hereto), the Company Disclosure Letter, the Parent Disclosure
Letter, the Stock Option Agreement and the Confidentiality Agreement, dated
March 28, 1997 (the "COMPANY CONFIDENTIALITY LETTER"), and October 28, 1997 (the
"PARENT CONFIDENTIALITY LETTER"), between Parent and the Company (the
"CONFIDENTIALITY AGREEMENTS") constitute the entire agreement, and supersede all
other prior agreements, understandings, representations and warranties both
written and oral, among the parties, with respect to the subject matter hereof.
The parties hereto agree that the Confidentiality Agreements shall be hereby
amended to provide that any provision therein which in any manner would be
inconsistent with this Agreement, the Stock Option Agreement or the transactions
contemplated hereby or thereby shall terminate as of the date hereof; PROVIDED,
HOWEVER, that such provisions of the Confidentiality Agreements shall be
reinstated in the event of any termination of this Agreement.
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<PAGE>
9.8. NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.13
(Indemnification; Directors' and Officers' Insurance) and Section 6.14 (Election
to Parent's Board of Directors), this Agreement is not intended to confer upon
any Person other than the parties hereto any rights or remedies hereunder.
9.9. OBLIGATIONS OF PARENT AND OF THE COMPANY. Whenever this Agreement
requires a Subsidiary of Parent to take any action, such requirement shall be
deemed to include an undertaking on the part of Parent to cause such Subsidiary
to take such action. Whenever this Agreement requires a Subsidiary of the
Company to take any action, such requirement shall be deemed to include an
undertaking on the part of the Company to cause such Subsidiary to take such
action and, after the Effective Time, on the part of the Surviving Corporation
to cause such Subsidiary to take such action.
9.10. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11. INTERPRETATION. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Exhibit, such
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
9.12. ASSIGNMENT. This Agreement shall not be assignable by operation of law
or otherwise; provided, however, that Parent may designate, by written notice to
the Company, another wholly-owned direct or indirect Subsidiary to be a
Constituent Corporation in lieu of Merger Subsidiary, in which event all
references herein to Merger Subsidiary shall be deemed references to such other
Subsidiary, except that all representations and warranties made herein with
respect to Merger Subsidiary as of the date of this Agreement shall be deemed
representations and warranties made with respect to such other Subsidiary as of
the date of such designation.
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<PAGE>
9.13. LOCATION OF CERTAIN DEFINITIONS.
<TABLE>
<CAPTION>
SECTION
--------------
<S> <C>
affiliate......................................................................................... 4.2(e)
Agreement......................................................................................... Preamble
Asset Management Subsidiaries..................................................................... 5.1(u)(iv)
Audit Date........................................................................................ 5.1(e)
Average Parent Price.............................................................................. 4.1(a)
Bankruptcy and Equity Exception................................................................... 5.1(c)(i)
Beneficially Owns................................................................................. 5.2(p)
Beneficial Owner.................................................................................. 5.2(p)
Bylaws............................................................................................ 2.2
Certificate....................................................................................... 4.1(a)
Charter........................................................................................... 2.1
Closing........................................................................................... 1.2
Closing Date...................................................................................... 1.2
Code.............................................................................................. Recitals
Collars........................................................................................... 4.1(a)
Company........................................................................................... Preamble
Company Acquisition Proposal...................................................................... 6.2
Company Actuarial Analyses........................................................................ 5.1(s)(iii)
Company Affiliates Letter......................................................................... 6.8(i)
Company Confidentiality Letter.................................................................... 9.7
Company Disclosure Letter......................................................................... 5.1
Company Insurance Contracts....................................................................... 5.1(s)(i)
Company Insurance Subsidiaries.................................................................... 5.1(a)
Company Intellectual Property Rights.............................................................. 5.1(o)(ii)(B)
Company Material Adverse Effect................................................................... 5.1(a)
Company Option.................................................................................... 5.1(b)
Company Reports................................................................................... 5.1(e)
Company Requisite Vote............................................................................ 5.1(c)(i)
Company SAP Statements............................................................................ 5.1(e)
Company Stock Plans............................................................................... 5.1(b)
Compensation and Benefit Plans.................................................................... 5.1(h)(i)
Confidentiality Agreements........................................................................ 9.7
Constituent Corporations.......................................................................... Preamble
Convertible Notes................................................................................. 5.1(b)
Contracts......................................................................................... 5.1(d)(ii)
Costs............................................................................................. 6.13(a)
D&O Insurance..................................................................................... 6.13(b)
Department........................................................................................ 1.3
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SECTION
--------------
<S> <C>
Effective Time.................................................................................... 1.3
Environmental Law................................................................................. 5.1(k)
ERISA............................................................................................. 5.1(h)(ii)
ERISA Affiliate................................................................................... 5.1(h)(iii)
Exchange Agent.................................................................................... 4.2(a)
Exchange Fund..................................................................................... 4.2(a)
Exchange Ratio.................................................................................... 4.1(a)
Excluded Shares................................................................................... 4.1(a)
GAAP.............................................................................................. 5.1(e)
Governmental Consents............................................................................. 7.1(c)
Governmental Entity............................................................................... 5.1(d)(i)
Hazardous Substance............................................................................... 5.1(k)
HSR Act........................................................................................... 5.1(a)
Indemnified Parties............................................................................... 6.13(a)
Insurance Laws.................................................................................... 5.1(i)(i)
IRS............................................................................................... 5.1(h)(ii)
Laws.............................................................................................. 5.1(i)(ii)
Lower Collar...................................................................................... 4.1(a)
Maryland Articles of Merger....................................................................... 1.3
Maximum Premium................................................................................... 6.13(b)
Merger............................................................................................ Recitals
Merger Consideration.............................................................................. 4.1(a)
Merger Subsidiary................................................................................. Preamble
MGCL.............................................................................................. 1.1
NYSE.............................................................................................. 4.1(a)
Order............................................................................................. 7.1(d)
Pacholder......................................................................................... 5.1(u)(iii)
Pacholder Fund.................................................................................... 6.16(a)
Parent............................................................................................ Preamble
Parent Acquisition Proposal....................................................................... 8.5(c)
Parent Actuarial Analyses......................................................................... 5.2(r)(iii)
Parent Affiliates Letter.......................................................................... 6.8(iii)
Parent Audit Date................................................................................. 5.2(f)
Parent Common Stock............................................................................... 4.1(a)
Parent Companies.................................................................................. 4.1(a)
Parent Compensation and Benefits Plans............................................................ 5.2(i)(i)
Parent Confidentiality Letter..................................................................... 9.7
Parent Disclosure Letter.......................................................................... 5.2
Parent ERISA Affiliate............................................................................ 5.2(i)(ii)
Parent Insurance Contracts........................................................................ 5.2(r)(i)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SECTION
--------------
<S> <C>
Parent Insurance Subsidiaries..................................................................... 5.2(b)
Parent Material Adverse Effect.................................................................... 5.2(b)
Parent Pension Plan............................................................................... 5.2(i)(i)
Parent Preferred Shares........................................................................... 5.2(c)
Parent Reports.................................................................................... 5.2(f)
Parent Requisite Vote............................................................................. 5.2(d)(i)
Parent Rights Agreement........................................................................... 5.2(c)
Parent SAP Statements............................................................................. 5.2(f)
Parent Series A Preferred Stock................................................................... 5.2(c)
Parent Series B Preferred Stock................................................................... 5.2(c)
Parent Series C Preferred Stock................................................................... 5.2(c)
Parent Stockholder Meeting........................................................................ 6.4
Parent Stock Plans................................................................................ 5.2(c)
Pension Plan...................................................................................... 5.1(h)(ii)
Person............................................................................................ 4.2(b)
Preferred Shares.................................................................................. 5.1(b)
Prospectus/ Proxy Statement....................................................................... 6.3
Representatives................................................................................... 6.7
Responsible Executive Officers of Parent.......................................................... 5.2(b)
Responsible Executive Officers of the Company..................................................... 5.1(a)
Rights............................................................................................ 5.1(q)(i)
Rights Agreement.................................................................................. 5.1(b)
S-4 Registration Statement........................................................................ 6.3
SEC............................................................................................... 5.1(e)
Securities Act.................................................................................... 5.1(d)(i)
Securities Exchange Act........................................................................... 5.1(d)(i)
Share, Shares..................................................................................... 4.1(a)
Stockholders Meeting.............................................................................. 6.4
Stock Option Agreement............................................................................ Recitals
Subsidiary........................................................................................ 5.1(a)
Superior Proposal................................................................................. 6.2
Surviving Corporation............................................................................. 1.1
Takeover Statute.................................................................................. 5.1(j)
Tax, Taxes, Taxable............................................................................... 5.1(m)
Taxing Authority.................................................................................. 5.1(m)
Tax Return(s)..................................................................................... 5.1(m)
Termination Date.................................................................................. 8.2
Third-Party Intellectual Property Rights.......................................................... 5.1(o)(ii)(A)
Vested Stock Units................................................................................ 6.11(a)(ii)
Upper Collar...................................................................................... 4.1(a)
1940 Act.......................................................................................... 5.1(u)(iii)
</TABLE>
A-46
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
<TABLE>
<S> <C>
USF&G CORPORATION
By: /s/ Norman P. Blake, Jr.
---------------------------------------
Name: Norman P. Blake, Jr.
Title: Chairman of the Board, President
and Chief Executive Officer
THE ST. PAUL COMPANIES, INC.
By: /s/ Douglas W. Leatherdale
---------------------------------------
Name: Douglas W. Leatherdale
Title: Chairman of the Board, President
and Chief Executive Officer
SP MERGER CORPORATION
By: /s/ Douglas W. Leatherdale
---------------------------------------
Name: Douglas W. Leatherdale
Title: Chairman of the Board, President
and Chief Executive Officer
</TABLE>
A-47
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of January 19, 1998 (the "Agreement"),
between The St. Paul Companies, Inc., a Minnesota corporation (the "Grantee"),
and USF&G Corporation, a Maryland corporation (the "Grantor").
WHEREAS, the Grantee, SP Merger Corporation, a Maryland corporation and a
wholly owned subsidiary of the Grantee ("Newco"), and the Grantor are entering
into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), which provides, among other things, for the merger of the Newco
with and into Grantor (the "Merger");
WHEREAS, as a condition and inducement to Grantee's and Newco's willingness
to enter into the Merger Agreement, the Grantee and Newco have requested that
the Grantor grant to the Grantee an option to purchase up to 23,181,596 shares
of Common Stock, par value $2.50 per share, of the Grantor (the "Common Stock"),
upon the terms and subject to the conditions hereof; and
WHEREAS, in order to induce the Grantee and Newco to enter into the Merger
Agreement, the Grantor is willing to grant the Grantee the requested option.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
1. THE OPTION; EXERCISE; ADJUSTMENTS; PAYMENT OF SPREAD. (a)
Contemporaneously herewith the Grantee, Newco and the Grantor are entering into
the Merger Agreement. Subject to the other terms and conditions set forth
herein, the Grantor hereby grants to the Grantee an irrevocable option (the
"Option") to purchase up to 23,181,596 shares of Common Stock (the "Shares") at
a cash purchase price equal to $22.00 per share (the "Purchase Price"). The
Option may be exercised by the Grantee, in whole or in part, at any time, or
from time to time, following (but not prior to) the occurrence of one of the
events set forth in Section 2(d) hereof, and prior to the termination of the
Option in accordance with the terms of this Agreement.
(b) In the event the Grantee wishes to exercise the Option, the Grantee
shall send a written notice to the Grantor (the "Stock Exercise Notice")
specifying a date (subject to the HSR Act (as defined below) and applicable
insurance regulatory approvals) not later than 10 business days and not earlier
than three business days following the date such notice is given for the closing
of such purchase. In the event of any change in the number of issued and
outstanding shares of Common Stock by reason of any stock dividend, stock split,
split-up, recapitalization, merger or other change in the corporate or capital
structure of the Grantor, the number of Shares subject to this Option and the
purchase price per Share shall be appropriately adjusted to restore the Grantee
to its rights hereunder, including its right to purchase Shares representing
19.9% of the capital stock of the Grantor entitled to vote generally for the
election of the directors of the Grantor which is issued and outstanding
immediately prior to the exercise of the Option.
(c) If at any time the Option is then exercisable pursuant to the terms of
Section 1(a) hereof, the Grantee may elect, in lieu of exercising the Option to
purchase Shares provided in Section 1(a) hereof, to send a written notice to the
Grantor (the "Cash Exercise Notice") specifying a date not later than 20
business days and not earlier than 10 business days following the date such
notice is given on which date the Grantor shall pay to the Grantee an amount in
cash equal to the Spread (as hereinafter defined) multiplied by all or such
portion of the Shares subject to the Option as Grantee shall specify. As used
herein "Spread" shall mean the excess, if any, over the Purchase Price of the
higher of (x) if applicable, the highest price per share of Common Stock
(including any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid or proposed to be paid by any person pursuant to any Company
Acquisition Proposal (as defined in the Merger Agreement) (the "Alternative
Purchase Price") or (y) the closing price of the shares of Common Stock on the
NYSE Composite Tape on the last trading day immediately prior to
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<PAGE>
the date of the Cash Exercise Notice (the "Closing Price"). If the Alternative
Purchase Price includes any property other than cash, the Alternative Purchase
Price shall be the sum of (i) the fixed cash amount, if any, included in the
Alternative Purchase Price plus (ii) the fair market value of such other
property. If such other property consists of securities with an existing public
trading market, the average of the closing prices (or the average of the closing
bid and asked prices if closing prices are unavailable) for such securities in
their principal public trading market on the five trading days ending five days
prior to the date of the Cash Exercise Notice shall be deemed to equal the fair
market value of such property. If such other property consists of something
other than cash or securities with an existing public trading market and, as of
the payment date for the Spread, agreement on the value of such other property
has not been reached, the Alternative Purchase Price shall be deemed to equal
the Closing Price. Upon exercise of its right to receive cash pursuant to this
Section 1(c), the obligations of the Grantor to deliver Shares pursuant to
Section 3 shall be terminated with respect to such number of Shares for which
the Grantee shall have elected to be paid the Spread.
2. CONDITIONS TO DELIVERY OF SHARES. The Grantor's obligation to deliver
Shares upon exercise of the Option is subject only to the conditions that:
(a) No preliminary or permanent injunction or other order issued by any
federal or state court of competent jurisdiction in the United States
prohibiting the delivery of the Shares shall be in
effect; and
(b) Any applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") shall have expired or been
terminated; and
(c) Any approval required to be obtained prior to the delivery of the
Shares under the insurance laws of any state or foreign jurisdiction shall
have been obtained and be in full force and effect; and
(d) (i) any person (other than Grantee or any of its subsidiaries) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership of, or
any "group" (as such term is defined under the Exchange Act) shall have been
formed which beneficially owns or has the right to acquire beneficial
ownership of, shares of Common Stock (other than trust account shares)
aggregating 15 percent or more of the then outstanding Common Stock; (ii) in
the event a Company Acquisition Proposal shall have been made to Grantor or
any of its Subsidiaries or any of its stockholders or any person shall have
publicly announced an intention (whether or not conditional) to make a
Company Acquisition Proposal with respect to Grantor or any of its
Subsidiaries and thereafter the Merger Agreement is terminated by either
Grantor or Grantee pursuant to Section 8.2 (ii) of the Merger Agreement;
(iii) the Merger Agreement is terminated by Grantor pursuant to Section
8.3(a) of the Merger Agreement; (iv) the Merger Agreement is terminated by
Grantee pursuant to Section 8.4(a) of the Merger Agreement; or (v) Grantor
shall have delivered to Grantee the written notification pursuant to Section
8.3(a) (iii) of the Merger Agreement and Grantee shall have notified Grantor
in writing that Grantee does not intend to match the Superior Proposal (as
defined in the Merger Agreement) referred to in such notification. As used
in this Agreement, "person" shall have the meaning specified in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.
3. THE CLOSING. (a) Any closing hereunder shall take place on the date
specified by the Grantee in its Stock Exercise Notice or Cash Exercise Notice,
as the case may be, at 9:00 A.M., local time, at the offices of Sullivan &
Cromwell, 125 Broad Street, New York, New York, or, if the conditions set forth
in Section 2(a), (b) or (c) have not then been satisfied, on the second business
day following the satisfaction of such conditions, or at such other time and
place as the parties hereto may agree (the "Closing Date"). On the Closing Date,
(i) in the event of a closing pursuant to Section 1(b) hereof, the Grantor will
deliver to the Grantee a certificate or certificates, representing the Shares in
the denominations designated by the Grantee in its Stock Exercise Notice and the
Grantee will purchase such Shares from the Grantor at the price per Share equal
to the Purchase Price or (ii) in the event of a closing pursuant to Section 1(c)
hereof,
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<PAGE>
the Grantor will deliver to the Grantee cash in an amount determined pursuant to
Section 1(c) hereof. Any payment made by the Grantee to the Grantor, or by the
Grantor to the Grantee, pursuant to this Agreement shall be made by certified or
official bank check or by wire transfer of federal funds to a bank designated by
the party receiving such funds.
(b) The certificates representing the Shares shall bear an appropriate
legend relating to the fact that such Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act").
4. REPRESENTATIONS AND WARRANTIES OF THE GRANTOR. The Grantor represents
and warrants to the Grantee that (a) the Grantor is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has the requisite corporate power and authority to enter into and
perform this Agreement; (b) the execution and delivery of this Agreement by the
Grantor and the consummation by it of the transactions contemplated hereby have
been duly authorized by the Board of Directors of the Grantor and this Agreement
has been duly executed and delivered by a duly authorized officer of the Grantor
and constitutes a valid and binding obligation of the Grantor, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles; (c)
the Grantor has taken all necessary corporate action to authorize and reserve
the Shares issuable upon exercise of the Option and the Shares, when issued and
delivered by the Grantor upon exercise of the Option and paid for by Grantee as
contemplated hereby, will be duly authorized, validly issued, fully paid and
non-assessable and free of preemptive rights; (d) except as otherwise required
by the HSR Act and applicable insurance laws, the execution and delivery of this
Agreement by the Grantor and the consummation by it of the transactions
contemplated hereby do not require the consent, waiver, approval or
authorization of or any filing with any person or public authority and will not
violate, result in a breach of or the acceleration of any obligation under, or
constitute a default under, any provision of Grantor's charter or by-laws, or
any material indenture, mortgage, lien, lease, agreement, contract, instrument,
order, law, rule, regulation, judgment, ordinance, or decree, or restriction by
which the Grantor or any of its subsidiaries or any of their respective
properties or assets is bound; (e) no "fair price", "moratorium", "control share
acquisition," "interested shareholder" or other form of antitakeover statute or
regulation, including without limitation, Section 3-602 of the Maryland General
Corporation Law, or similar provision contained in the charter or by-laws of
Grantor, is or shall be applicable to the acquisition of Shares pursuant to this
Agreement; and (f) the Grantor has taken all corporate action necessary so that
any Shares acquired pursuant to this Agreement shall not be counted for purposes
of determining the number of shares of Common Stock beneficially owned by the
Grantee or any of its Affiliates or Associates (as such terms are defined in the
Rights Agreement) pursuant to the Amended and Restated Rights Agreement, dated
as of March 11, 1997, between Grantor and The Bank of New York, as Rights Agent
(the "Rights Agreement").
5. REPRESENTATIONS AND WARRANTIES OF THE GRANTEE. The Grantee represents
and warrants to the Grantor that (a) the execution and delivery of this
Agreement by the Grantee and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Grantee and this Agreement has been duly executed and
delivered by a duly authorized officer of the Grantee and constitutes a valid
and binding obligation of Grantee; and (b) the Grantee is acquiring the Option
and, if and when it exercises the Option, will be acquiring the Shares issuable
upon the exercise thereof for its own account and not with a view to
distribution or resale in any manner which would be in violation of the
Securities Act.
6. LISTING OF SHARES; FILINGS; GOVERNMENTAL CONSENTS. Subject to
applicable law and the rules and regulations of the New York Stock Exchange,
Inc. (the "NYSE"), after the Option becomes exercisable hereunder, the Grantor
will promptly file an application to list the Shares on the NYSE and will use
its reasonable best efforts to obtain approval of such listing and to effect all
necessary filings by the Grantor under the HSR Act and the applicable insurance
laws of each state and foreign jurisdiction; PROVIDED, HOWEVER, that if the
Grantor is unable to effect such listing on the NYSE by the Closing Date, the
Grantor
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<PAGE>
will nevertheless be obligated to deliver the Shares upon the Closing Date. Each
of the parties hereto will use its reasonable best efforts to obtain consents of
all third parties and governmental authorities, if any, necessary to the
consummation of the transactions contemplated.
7. REPURCHASE OF SHARES. If by the date that is the first anniversary of
the date the Merger Agreement was terminated pursuant to the terms thereof (the
"Merger Termination Date"), neither the Grantee nor any other Person has
acquired more than fifty percent (excluding the Shares) of the shares of
outstanding Common Stock, then the Grantor has the right to purchase (the
"Repurchase Right") all, but not less than all, of the Shares acquired upon
exercise of this Option at the greater of (i) the Purchase Price or (ii) the
average of the last sales prices for shares of Common Stock on the five trading
days ending five days prior to the date the Grantor gives written notice of its
intention to exercise the Repurchase Right. If the Grantor does not exercise the
Repurchase Right within thirty days following the end of the one year period
after the Merger Termination Date, the Repurchase Right lapses. In the event the
Grantor wishes to exercise the Repurchase Right, the Grantor shall send a
written notice to the Grantee specifying a date (not later than 20 business days
and not earlier than 10 business days following the date such notice is given)
for the closing of such purchase.
8. SALE OF SHARES. At any time prior to the first anniversary of the
Merger Termination Date, the Grantee shall have the right to sell (the "Sale
Right") to the Grantor all, but not less than all, of the Shares acquired upon
exercise of this Option at the greater of (i) the Purchase Price, or (ii) the
average of the last sales prices for shares of Common Stock on the five trading
days ending five days prior to the date the Grantee gives written notice of its
intention to exercise the Sale Right. If the Grantee does not exercise the Sale
Right prior to the first anniversary of the Merger Termination Date, the Sale
Right terminates. In the event the Grantee wishes to exercise the Sale Right,
the Grantee shall send a written notice to the Grantor specifying a date not
later than 20 business days and not earlier than 10 business days following the
date such notice is given for the closing of such sale.
9. REGISTRATION RIGHTS. (a) In the event that the Grantee shall desire to
sell any of the Shares within three years after the purchase of such Shares
pursuant hereto, and such sale requires, in the opinion of counsel to the
Grantee, which opinion shall be reasonably satisfactory to the Grantor and its
counsel, registration of such Shares under the Securities Act, the Grantor will
cooperate with the Grantee and any underwriters in registering such Shares for
resale, including, without limitation, promptly filing a registration statement
which complies with the requirements of applicable federal and state securities
laws, and entering into an underwriting agreement with such underwriters upon
such terms and conditions as are customarily contained in underwriting
agreements with respect to secondary distributions; provided that the Grantor
shall not be required to have declared effective more than two registration
statements hereunder and shall be entitled to delay the filing or effectiveness
of any registration statement for up to 120 days if the offering would, in the
judgment of the Board of Directors of the Grantor, require premature disclosure
of any material corporate development or material transaction involving the
Grantor or interfere with any previously planned securities offering by the
Company.
(b) If the Common Stock is registered pursuant to the provisions of this
Section 9, the Grantor agrees (i) to furnish copies of the registration
statement and the prospectus relating to the Shares covered thereby in such
numbers as the Grantee may from time to time reasonably request and (ii) if any
event shall occur as a result of which it becomes necessary to amend or
supplement any registration statement or prospectus, to prepare and file under
the applicable securities laws such amendments and supplements as may be
necessary to keep available for at least 45 days a prospectus covering the
Common Stock meeting the requirements of such securities laws, and to furnish
the Grantee such numbers of copies of the registration statement and prospectus
as amended or supplemented as may reasonably be requested. The Grantor shall
bear the cost of the registration, including, but not limited to, all
registration and filing fees, printing expenses, and fees and disbursements of
counsel and accountants for the Grantor, except that the Grantee shall pay the
fees and disbursements of its counsel, and the underwriting fees and selling
commissions applicable to the shares of Common Stock sold by the Grantee. The
Grantor shall indemnify and hold
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<PAGE>
harmless (i) Grantee, its affiliates and its officers and directors and (ii)
each underwriter and each person who controls any underwriter within the meaning
of the Securities Act or the Securities Exchange Act of 1934, as amended
(collectively, the "Underwriters") ((i) and (ii) being referred to as
"Indemnified Parties") against any losses, claims, damages, liabilities or
expenses, to which the Indemnified Parties may become subject, insofar as such
losses, claims, damages, liabilities (or actions in respect thereof) and
expenses arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained or incorporated by reference in any
registration statement filed pursuant to this paragraph, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; PROVIDED, HOWEVER, that the Grantor will not be liable in any such
case to the extent that any such loss, liability, claim, damage or expense
arises out of or is based upon an untrue statement or alleged untrue statement
in or omission or alleged omission from any such documents in reliance upon and
in conformity with written information furnished to the Grantor by the
Indemnified Parties expressly for use or incorporation by reference therein.
(c) The Grantee and the Underwriters shall indemnify and hold harmless the
Grantor, its affiliates and its officers and directors against any losses,
claims, damages, liabilities or expenses to which the Grantor, its affiliates
and its officers and directors may become subject, insofar as such losses,
claims, damages, liabilities (or actions in respect thereof) and expenses arise
out of or are based upon any untrue statement of any material fact contained or
incorporated by reference in any registration statement filed pursuant to this
paragraph, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Grantor by the Grantee or the Underwriters, as
applicable, specifically for use or incorporation by reference therein.
10. EXPENSES. Each party hereto shall pay its own expenses incurred in
connection with this Agreement, except as otherwise specifically provided
herein.
11. SPECIFIC PERFORMANCE. The Grantor acknowledges that if the Grantor
fails to perform any of its obligations under this Agreement immediate and
irreparable harm or injury would be caused to the Grantee for which money
damages would not be an adequate remedy. In such event, the Grantor agrees that
the Grantee shall have the right, in addition to any other rights it may have,
to specific performance of this Agreement. Accordingly, if the Grantee should
institute an action or proceeding seeking specific enforcement of the provisions
hereof, the Grantor hereby waives the claim or defense that the Grantee has an
adequate remedy at law and hereby agrees not to assert in any such action or
proceeding the claim or defense that such a remedy at law exists. The Grantor
further agrees to waive any requirements for the securing or posting of any bond
in connection with obtaining any such equitable relief.
12. NOTICE. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given and made if in writing and if
served by personal delivery upon the party for whom it is intended or delivered
by registered or certified mail, return receipt requested, or if sent by
facsimile transmission, upon receipt of oral confirmation that such transmission
has been received, to the person at the address set forth below, or such other
address as may be designated in writing hereafter, in the same manner, by such
person:
If to the Grantee:
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, MN 55102
Attn: Chief Executive Officer
Telecopy: (612) 310-3378
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<PAGE>
With a copy to:
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Attn: Joseph B. Frumkin, Esq.
Telecopy: (212) 558-3588
If to the Grantor:
USF&G Corporation
6225 Centennial Way
Baltimore, MD 21208
Attn: Chief Executive Officer
Telecopy: (410) 205-6802
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attn: John R. Ettinger, Esq.
Telecopy: (212) 450-4800
13. PARTIES IN INTEREST. This Agreement shall inure to the benefit of and
be binding upon the parties named herein and their respective successors and
assigns; PROVIDED, HOWEVER, that such successor in interest or assigns shall
agree to be bound by the provisions of this Agreement. Nothing in this
Agreement, express or implied, is intended to confer upon any person other than
the Grantor or the Grantee, or their successors or assigns, any rights or
remedies under or by reason of this Agreement.
14. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Merger
Agreement and the other documents referred to therein, contains the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings, oral
or written, with respect to such transactions. This Agreement may not be
changed, amended or modified orally, but may be changed only by an agreement in
writing signed by the party against whom any waiver, change, amendment,
modification or discharge may be sought.
15. ASSIGNMENT. No party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
party hereto, except that the Grantee may assign its rights and obligations
hereunder to any of its direct or indirect wholly owned subsidiaries (including
Newco), but no such transfer shall relieve the Grantee of its obligations
hereunder if such transferee does not perform such obligations.
16. HEADINGS. The section headings herein are for convenience only and
shall not affect the construction of this Agreement.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall constitute one and the same document.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland (regardless of the laws that
might otherwise govern under applicable Maryland principles of conflicts of
law).
19. TERMINATION. The right to exercise the Option granted pursuant to this
Agreement shall terminate at the earliest of (i) the Effective Time (as defined
in the Merger Agreement) (ii) if the Option is not exercised within 60 days
after first becoming exercisable and (iii) if not then exercisable, thirty days
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<PAGE>
after termination of the Merger Agreement in accordance with its terms (the
dates referred to in clause (ii) and (iii) being hereinafter referred to as the
"Termination Date"); provided that, if the Option cannot be exercised or the
Shares cannot be delivered to Grantee upon such exercise because the conditions
set forth in Section 2(a), (b) or (c) hereof have not yet been satisfied, the
Termination Date shall be extended until thirty days after such impediment to
exercise or delivery has been removed.
All representations and warranties contained in this Agreement shall survive
delivery of and payment for the Shares.
20. PROFIT LIMITATION. (a) Notwithstanding any other provision of this
Agreement or the Merger Agreement, in no event shall the Grantee's Total Profit
(as hereinafter defined) exceed $75 million and, if it otherwise would exceed
such amount, the Grantee shall repay such excess amount to Grantor in cash (or
the purchase price for purposes of Section 7 or 8, as applicable, shall be
reduced) so that Grantee's Total Profit shall not exceed $75 million after
taking into account the foregoing actions.
Notwithstanding any other provision of this Agreement, this Option may not
be exercised for a number of Shares as would, as of the date of the Stock
Exercise Notice, result in a Notional Total Profit (as defined below) of more
than $75 million and, if exercise of the Option otherwise would exceed such
amount, the Grantee, at its discretion, may increase the Purchase Price for that
number of Shares set forth in the Stock Exercise Notice so that the Notional
Total Profit shall not exceed $75 million; provided, that nothing in this
sentence shall restrict any exercise of the Option permitted hereby on any
subsequent date at the Purchase Price set forth in Section 1(a) hereof.
As used herein, the term "Total Profit" shall mean the aggregate amount
(before taxes) of the following: (i) (x) the amount of cash received by Grantee
pursuant to Section 8.5 of the Merger Agreement and Section 1(c) hereof, less
(y) any repayment of such cash to Grantor, (ii) (x) the amount received by
Grantee pursuant to the Grantor's repurchase of Shares pursuant to Sections 7 or
8 hereof, less (y) the Grantee's purchase price for such Shares, and (iii) (x)
the net cash amounts received by Grantee pursuant to the sale of Shares (or any
other securities into or for which such Shares are converted or exchanged) to
any unaffiliated party, less (y) the Grantee's purchase price for such Shares.
As used herein, the term "Notional Total Profit" with respect to any number
of Shares as to which Grantee may propose to exercise this Option shall be the
Total Profit determined as of the date of the Stock Exercise Notice assuming
that this Option were exercised on such date for such number of Shares and
assuming that such Shares, together with all other Shares acquired upon exercise
of the Option and held by Grantee and its affiliates as of such date, were sold
for cash at the closing market price for the Common Stock as of the close of
business on the preceding trading day (less customary brokerage commissions).
21. SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
22. PUBLIC ANNOUNCEMENT. The initial press release referring to this
Option shall be a joint press release in the form previously agreed by Grantor
and Grantee and thereafter the Grantee and the Grantor shall consult with each
other prior to issuing, and will provide each other with a meaningful
opportunity to review, comment upon and concur with, any press releases or
otherwise making public announcements with respect to the Option and prior to
making any filings with any third party and/or Governmental Entity (as defined
in the Merger Agreement) (including any national securities exchange) with
respect thereto, except as may be required by law, court process or by
obligations pursuant to any listing agreement with or rules of any national
securities exchange or interdealer quotation system.
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<PAGE>
IN WITNESS WHEREOF, the Grantee and the Grantor have caused this Agreement
to be duly executed and delivered on the day and year first above written.
<TABLE>
<S> <C> <C>
USF&G CORPORATION
By: /s/ NORMAN P. BLAKE, JR.
------------------------------------------
Name: Norman P. Blake, Jr.
Title: Chairman of the Board, President and
Chief Executive Officer
THE ST. PAUL COMPANIES, INC.
BY: /S/ DOUGLAS W. LEATHERDALE
------------------------------------------
Name: Douglas W. Leatherdale
Title: Chairman of the Board, President and
Chief Executive Officer
</TABLE>
B-8
<PAGE>
ANNEX C
[LETTERHEAD OF CREDIT SUISSE/FIRST BOSTON]
January 19, 1998
Board of Directors
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102-1396
Members of the Board:
You have asked us to advise you with respect to the fairness to The St. Paul
Companies, Inc. ("St. Paul") from a financial point of view of the consideration
proposed to be paid by St. Paul pursuant to the terms of the Merger Agreement,
dated as of January 19, 1998 (the "Merger Agreement"), among USF&G Corporation
("USF&G"), St. Paul and SP Merger Corporation, a wholly owned subsidiary of St.
Paul (the "Sub"). The Merger Agreement provides for the merger (the "Merger")
of USF&G with the Sub pursuant to which USF&G will become a wholly owned
subsidiary of St. Paul and each outstanding share of common stock, par value
$2.50 per share, of USF&G shall be converted into, and become exchangeable for
that number of shares (the "Exchange Ratio") of common stock, no par value, of
St. Paul ("St. Paul Common Stock") determined by dividing $22 by the average of
the per share high and low sales prices of one share of St. Paul Common Stock
for each of the 20 trading days ending on the third trading day prior to the
meeting of the USF&G stockholders to approve the Merger (the "Average St. Paul
Price"), provided, that, (i) if the Average St. Paul Price is less than $74 the
Exchange Ratio shall be 0.2973; and (ii) if the Average St. Paul Price is
greater than $78, the Exchange Ratio shall be 0.2821.
In arriving at our opinion, we have reviewed certain publicly available business
and financial information relating to St. Paul and USF&G, as well as the Merger
Agreement. We have also reviewed certain other information, including financial
forecasts, provided to us by St. Paul and USF&G, and have met with the
respective managements of St. Paul and USF&G to discuss the business and
prospects of St. Paul and USF&G.
We have also considered certain financial and stock market data of St. Paul and
USF&G, and we have compared those data for USF&G with similar data for other
publicly held companies in businesses similar to USF&G and we have considered,
to the extent publicly available, the financial terms of certain other business
combinations and other transactions which have recently been effected. We have
also considered the results of certain discounted cash flow projections and
actuarial analyses and such
<PAGE>
Board of Directors
The St. Paul Companies, Inc.
Page 2
other information, financial studies, analyses and investigations and financial,
economic and market criteria which we deemed relevant. We have also relied upon
the views of the respective managements of St. Paul and USF&G concerning the
business, operational and strategic benefits and implications of the Merger,
including financial forecasts provided to us by St. Paul and USF&G relating to
the synergistic values and operating cost savings expected to be achieved
through the combination of the operations of St. Paul and USF&G.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of St. Paul and USF&G as to the future financial
performance of St. Paul and USF&G and as to the cost savings and other potential
synergies (including the amount, timing and achievability thereof) anticipated
to result from the Merger. In addition, we have not been requested to make, and
have not made, an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of St. Paul or USF&G. We have assumed,
with your consent, that the Merger will be accounted for as a "pooling-of-
interests" for financial accounting purposes. Our opinion is necessarily based
upon financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof.
We have acted as financial advisor to St. Paul in connection with the Merger and
will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger.
In the past, Credit Suisse First Boston has performed investment banking
services for St. Paul and has received customary fees for such services.
In the ordinary course of our business, we and our affiliates may actively trade
the debt and equity securities of both St. Paul and USF&G for our and such
affiliates' own accounts and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of St. Paul in connection with its consideration of the Merger and is
not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without our prior written consent.
<PAGE>
Board of Directors
The St. Paul Companies, Inc.
Page 3
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the proposed Exchange Ratio is fair to St. Paul from a financial point
of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
<PAGE>
ANNEX D
[LETTERHEAD OF GOLDMAN, SACHS]
PERSONAL AND CONFIDENTIAL
January 19, 1998
Board of Directors
USF&G Corporation
6225 Smith Avenue
Baltimore, MD 21209
Gentlemen and Mesdame:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of Common Stock, par value $2.50 per
share (the "Shares"), of USF&G Corporation (the "Company") of the Exchange Ratio
(as defined below) pursuant to the Agreement and Plan of Merger, dated as of
January 19, 1998, among The St. Paul Companies, Inc. ("St. Paul"), SP Merger
Corporation, a wholly-owned subsidiary of St. Paul ("Merger Subsidiary"), and
the Company (the "Agreement"). Pursuant to the Agreement, Merger Subsidiary
shall be merged with and into the Company and each outstanding Share will be
converted into the right to receive a fraction (the "Exchange Ratio") of a share
of Common Stock, without par value, of St. Paul ("St. Paul Common Stock"),
determined by dividing $22.00 by the Average Parent Price (as defined in the
Agreement); PROVIDED, HOWEVER, that the Exchange Ratio shall not exceed 0.2973
nor be less than 0.2821.
Goldman, Sachs & Co., as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We are familiar with
the Company, having provided certain investment banking services for the Company
from time to time, including, without limitation, having acted as lead managing
underwriter for the Company's offering of Zero Coupon Convertible Subordinated
Notes due 2009 in 1994, its 8.50% Series A Capital Securities in 1996 and its
8.312% Series C Capital Securities in 1997; having acted as co-lead managing
underwriter for its 8.375% Senior Notes due 2001 in 1993 and its 8.47% Series B
Capital Securities in 1997; and having acted as its financial advisor in
connection with, and having participated in certain of the negotiations leading
to, the Agreement. Robert J. Hurst, a Managing Director and Vice Chairman of
Goldman, Sachs & Co., is a Director of the Company. We have also provided
certain investment banking services to St. Paul from time to time, including,
without limitation, having acted as St. Paul's financial advisor in connection
with its divestiture of its holdings in Minet Group and entry into certain
interest rate and currency exchange agreements in 1997 and in connection with
St. Paul's reinsurance arrangements with respect to George Town Re in 1996;
having acted as lead managing underwriter for St. Paul's $275 million Medium
Term Notes in 1996 and its $180 million offering of 6.00% Convertible Monthly
Income Preferred Securities in 1995; and
<PAGE>
USF&G Corporation
January 19, 1998
Page Two
we may provide investment banking services to St. Paul or its subsidiaries in
the future. In addition, Goldman, Sachs & Co. is a full service securities firm
and in the course of its trading activities it may from time to time effect
transactions, for its own account or the account of customers, and hold
positions in the securities or options on securities of the Company or St. Paul.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company and St. Paul for the five years ended December 31, 1996; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of the Company and
St. Paul; certain other communications from the Company and St. Paul to their
respective stockholders; certain internal financial analyses and forecasts for
the Company and St. Paul prepared by their respective managements; and certain
projected cost savings and operating synergies resulting from the Merger
prepared by the management of St. Paul and reviewed by the management of the
Company. We also have held discussions with members of the senior management of
the Company and St. Paul regarding the strategic rationale for, and the
potential benefits of, the transaction contemplated by the Agreement and the
past and current business operations, financial condition and future prospects
of their respective companies. In addition, we have reviewed the reported price
and trading activity for the Shares and the St. Paul Common Stock, compared
certain financial and stock market information for the Company and St. Paul with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the insurance industry specifically and other industries
generally and performed such other studies and analyses as we considered
appropriate.
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this opinion. As you are aware, St. Paul did not make
available to us in writing its forecasts of expected future performance beyond
fiscal 1998. Accordingly, our review with respect to such information was
limited to discussions with senior managers of St. Paul and the earnings and
growth estimates of research analysts for such periods. We have assumed, with
your consent, that the forecasted cost savings and operating synergies resulting
from the Merger have been reasonably prepared and reflect the best currently
available judgments and estimates of the managements of St. Paul and the Company
and that such forecasts of cost savings and operating synergies will be realized
in the amounts and at the times contemplated thereby. In addition, in rendering
our opinion we took into account, with your consent, the Company's management's
views as to the risks and uncertainties associated with the achieving the
Company forecasts in the amounts and at the times indicated therein. Finally,
we have not made an independent evaluation or appraisal of the assets and
liabilities (including the loss and loss adjustment expense reserves) of the
Company or St. Paul or any of their subsidiaries. We have assumed that the
transaction contemplated by the Agreement will be accounted for as a pooling of
interests for accounting purposes.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the
<PAGE>
USF&G Corporation
January 19, 1998
Page Three
transaction contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of the Shares should vote on such
transaction.
Based upon and subject to the foregoing, and based upon such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the Exchange
Ratio pursuant to the Agreement is fair from a financial point of view to
holders of Shares.
Very truly yours,
/s/ Goldman, Sachs & Co.
- --------------------------------
(GOLDMAN, SACHS & CO.)
<PAGE>
ANNEX E
[BT ALEX. BROWN LETTERHEAD]
January 18, 1998
Board of Directors
USF&G Corporation
6225 Centennial Way
Baltimore, MD 21209
Attention: Mr. Norman P. Blake, Jr.
Chairman & CEO
Dear Sirs and Madame:
We understand that USF&G Corporation, a Maryland corporation ("USF&G" or
the "Company"), intends to enter into an Agreement and Plan of Merger dated as
of January 19, 1998 (the "Agreement"), with The St. Paul Companies, Inc., a
Minnesota corporation ("St. Paul"), and SP Merger Corporation, a Maryland
corporation and wholly owned subsidiary of St. Paul (the "Merger Sub"). As more
specifically set forth in the Agreement, and subject to the terms and conditions
thereof (including approval by the stockholders of USF&G), Merger Sub will be
merged with and into USF&G (the "Merger"), and each share then outstanding of
common stock, par value $2.50 per share, of USF&G ("USF&G Common Stock"), other
than shares held directly or indirectly by any subsidiary of USF&G, St. Paul or
any subsidiary of St. Paul, will be converted into the right to receive the
number of shares (the "Exchange Ratio") of common stock, without par value, of
St. Paul ("St. Paul Common Stock") determined by dividing $22.00 by the average
of the reported daily high and low sale prices of one share of St. Paul Common
Stock averaged over the 20 consecutive trading days ending on the third trading
day prior to the Company's stockholders' meeting held in connection with the
Merger (the "Average Market Price"); PROVIDED, that (a) if the Average Market
Price exceeds $78.00, the Exchange Ratio shall be 0.2821 and (b) if the Average
Market Price is less than $74.00, the Exchange Ratio shall be 0.2973. We have
assumed, with your consent, that the Merger will qualify for pooling-of-interest
accounting treatment and as a tax free reorganization under Section 368(a) of
the Internal Revenue Code for federal income tax purposes. You have requested
our opinion as to whether the Exchange Ratio is fair, from a financial point of
view, to the holders of USF&G Common Stock.
BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of
<PAGE>
USF&G Corporation
January 18, 1998
Page 2
USF&G in connection with the transaction described above and will receive a fee
for our services, a substantial portion of which is payable upon delivery of
this opinion. BT Alex. Brown regularly publishes research reports regarding the
insurance industry and the businesses and securities of the Company, St. Paul
and other publicly traded companies in the insurance industry. In the ordinary
course of business, BT Alex. Brown may actively trade the securities of both
USF&G and St. Paul for our own account and the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning USF&G and St.
Paul and certain internal analyses and other information furnished to us by
USF&G and St. Paul. We have also held discussions with the members of the
senior managements of USF&G and St. Paul regarding the businesses and prospects
of their respective companies and the joint prospects of a combined entity. In
addition, we have (i) reviewed the reported prices and trading activity for the
common stock of both USF&G and St. Paul, (ii) compared certain financial and
stock market information for USF&G and St. Paul with similar information for
certain other companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain recent business combinations which we deemed
comparable in whole or in part to the Merger, (iv) reviewed the terms of the
January 16, 1998 draft of the Agreement and certain related documents, and (v)
performed such other studies and analyses and considered such other factors as
we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy and completeness thereof.
With respect to the information relating to the prospects of USF&G and St. Paul
and a combined company, we have assumed that such information reflects the best
currently available judgments and estimates of the managements of USF&G and St.
Paul as to the likely future financial performances of their respective
companies and of a combined entity. In addition, we have not made nor been
provided with an independent evaluation or appraisal of the assets or
liabilities of USF&G and St. Paul, nor have we been furnished with any such
evaluations or appraisals. We are not actuaries and our services did not
include any actuarial determinations or evaluations by us or an attempt to
evaluate actuarial assumptions. Our opinion is based on market, economic and
other conditions as they exist and can be evaluated as of the date of this
letter.
<PAGE>
USF&G Corporation
January 18, 1998
Page 3
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets, nor did we have discussions or negotiate with any parties
in connection with the Merger. We did, however, discuss with management of
USF&G and USF&G's other financial advisor the discussions that they held with
certain third parties with respect to their potential interest in such an
acquisition or other transaction with the Company.
We have been retained by the Board of Directors of the Company as financial
advisor solely for the purpose of rendering this opinion and accordingly, we
have not been requested to and have not provided any other services in
connection with the Merger.
Our opinion expressed herein was prepared for the use of the Board of
Directors of USF&G and does not constitute a recommendation to USF&G's
stockholders as to how they should vote at the stockholders' meeting in
connection with the Merger. We hereby consent, however, to the inclusion of
this opinion in its entirety as an exhibit to any proxy or registration
statement distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of view,
to the holders of USF&G Common Stock.
Very truly yours,
BT ALEX. BROWN INCORPORATED
/s/ BT Alex. Brown Incorporated
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
St. Paul is subject to Minnesota Statutes, Chapter 302A. Minnesota Statutes,
Section 302A.521 provides that a corporation shall indemnify any person made or
threatened to be made a party to a proceeding by reason of the former or present
official capacity (as defined) of such person against judgments, penalties,
fines, including, without limitation, excise taxes assessed against such person
with respect to an employee benefit plan, settlements and reasonable expenses,
including attorneys' fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person (1) has not been
indemnified therefor by another organization or employee benefit plan; (2) acted
in good faith; (3) received no improper personal benefit and Section 302A.255
(with respect to director conflicts of interest), if applicable, has been
satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and (5) reasonably believed that the conduct
was in the best interests of the corporation in the case of acts or omissions in
such person's official capacity for the corporation, or, in the case of acts or
omissions in such person's official capacity for other affiliated organizations,
reasonably believed that the conduct was not opposed to the best interests of
the corporation.
The Bylaws of St. Paul provide that, subject to the limitations set forth in
the next sentence, it will indemnify and make permitted advances to a person
made or threatened to be made a party to a proceeding by reason of his former or
present official capacity against judgments, penalties, fines (including without
limitation excise taxes assessed against the person with respect to an employee
benefit plan), settlements and reasonable expenses (including without limitation
attorneys' fees and disbursements) incurred by him in connection with the
proceeding in the manner and to the fullest extent permitted or required by
Section 302A.521. Notwithstanding the foregoing, St. Paul will neither indemnify
nor make advances under Section 302A.521 to any person who at the time of the
occurrence or omission claimed to have given rise to the matter which is the
subject to the proceeding only had an agency relationship to St. Paul and was
not at that time an officer, director or employee thereof unless such person and
St. Paul were at that time parties to a written contract for indemnification or
advances with respect to such matter or unless the board specifically authorizes
such indemnification or advances.
St. Paul has directors' and officers' liability insurance policies, with
coverage of up to $125 million, subject to various deductibles and exclusions
from coverage.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of St.
Paul pursuant to the foregoing provisions or otherwise, St. Paul has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by St. Paul of expenses incurred or
paid by a director, officer or controlling person of St. Paul in the successful
defense of any action, suit or proceeding) is asserted against St. Paul by such
director, officer or controlling person in connection with the securities being
registered, St. Paul will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by them is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C>
2 Agreement and Plan of Merger, dated as of January 19, 1998, as amended, among USF&G, St. Paul and Merger
Sub (included as Annex A to the Joint Proxy Statement/Prospectus)
3-a St. Paul Articles (incorporated by reference to St. Paul's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995)
3-b St. Paul Bylaws (incorporated by reference to St. Paul's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1994)
4 Amended and Restated Shareholder Protection Rights Agreement (incorporated by reference to St. Paul's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995)
5 Opinion of Oppenheimer, Wolff & Donnelly LLP regarding validity of securities being registered
8-a Opinion of Sullivan & Cromwell regarding certain federal income tax matters
8-b Opinion of Piper & Marbury L.L.P. regarding certain federal income tax matters
15 Letter from Ernst & Young LLP regarding unaudited Interim Financial Information of USF&G Corporation
23-a Consent of KPMG Peat Marwick LLP
23-b Consent of Ernst & Young LLP
23-c Consent of Oppenheimer, Wolff & Donnelly LLP (included in the opinion filed as Exhibit 5 to this
Registration Statement)
23-d Consent of Sullivan & Cromwell (included in the opinion filed as Exhibit 8-a to this Registration
Statement)
23-e Consent of Piper & Marbury L.L.P. (included in the opinion filed as Exhibit 8-b to this Registration
Statement)
23-f Consent of Credit Suisse First Boston Corporation
23-g Consent of Goldman, Sachs & Co.
23-h Consent of BT Alex. Brown Incorporated
23-i Consent of Norman P. Blake, Jr., as Person Named as About to Become a Director
24 Power of Attorney for Directors
99-a Form of Proxy Card of St. Paul
99-b Form of Proxy Card of USF&G
99-c Stock Option Agreement, dated as of January 19, 1998, between St. Paul and USF&G (included as Annex B to
the Joint Proxy Statement/Prospectus)
99-d Letter to Participants in Certain Employee Plans of The St. Paul Companies, Inc.
</TABLE>
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933,
(ii) To reflect in the prospectus any facts or events arising after
the Effective Time of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) The undersigned Registrant hereby undertakes that, for the purpose
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(3) The undersigned Registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities
which remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(c)(1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant hereby undertakes that every prospectus (i)
that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission
II-3
<PAGE>
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the Effective Time of the registration statement through the date
of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Paul, State of
Minnesota, on the 27th of February, 1998.
<TABLE>
<S> <C> <C>
THE ST. PAUL COMPANIES, INC.
By: /s/ BRUCE A. BACKBERG
-----------------------------------------
Name: Bruce A. Backberg
Title: Senior Vice President and Chief
Legal Counsel
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<S> <C> <C> <C>
Date February 27, 1998 By /s/ DOUGLAS W. LEATHERDALE
-------------------------------------------
Douglas W. Leatherdale, Director, Chairman
of the Board, President and Chief Executive
Officer
Date February 27, 1998 By /s/ PATRICK A. THIELE
-------------------------------------------
Patrick A. Thiele, Director, Executive Vice
President, President and Chief Executive
Officer--Worldwide Insurance Operations
Date February 27, 1998 By /s/ PAUL J. LISKA
-------------------------------------------
Paul J. Liska, Executive Vice President
and Chief Financial Officer
Date February 27, 1998 By /s/ HOWARD E. DALTON
-------------------------------------------
Howard E. Dalton, Senior Vice President
and Chief Accounting Officer
Date February 27, 1998 By *
-------------------------------------------
Michael R. Bonsignore, Director
Date February 27, 1998 By *
-------------------------------------------
John H. Dasburg, Director
Date February 27, 1998 By *
-------------------------------------------
W. John Driscoll, Director
Date February 27, 1998 By *
-------------------------------------------
Pierson M. Grieve, Director
Date February 27, 1998 By *
-------------------------------------------
Thomas R. Hodgson, Director
Date February 27, 1998 By *
-------------------------------------------
Ronald James, Director
Date February 27, 1998 By *
-------------------------------------------
David G. John, Director
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C> <C>
Date February 27, 1998 By *
-------------------------------------------
William H. Kling, Director
Date February 27, 1998 By *
-------------------------------------------
Bruce K. MacLaury, Director
Date February 27, 1998 By *
-------------------------------------------
Glen D. Nelson, Director
Date February 27, 1998 By *
-------------------------------------------
Anita M. Pampusch, Director
Date February 27, 1998 By *
-------------------------------------------
Gordon M. Sprenger, Director
</TABLE>
* By Power of Attorney
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
2 Agreement and Plan of Merger, dated as of January 19, 1998, as amended, among USF&G, St. Paul and Merger
Sub (included as Annex A to the Joint Proxy Statement/Prospectus)
3-a St. Paul Articles (incorporated by reference to St. Paul's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995)
3-b St. Paul Bylaws (incorporated by reference to St. Paul's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1994)
4 Amended and Restated Shareholder Protection Rights Agreement (incorporated by reference to St. Paul's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995)
5 Opinion of Oppenheimer, Wolff & Donnelly LLP regarding validity of securities being registered
8-a Opinion of Sullivan & Cromwell regarding certain federal income tax matters
8-b Opinion of Piper & Marbury L.L.P. regarding certain federal income tax matters
15 Letter from Ernst & Young LLP regarding unaudited Interim Financial Information of USF&G Corporation
23-a Consent of KPMG Peat Marwick LLP
23-b Consent of Ernst & Young LLP
23-c Consent of Oppenheimer, Wolff & Donnelly LLP (included in the opinion filed as Exhibit 5 to this
Registration Statement)
23-d Consent of Sullivan & Cromwell (included in the opinion filed as Exhibit 8-a to this Registration
Statement)
23-e Consent of Piper & Marbury L.L.P. (included in the opinion filed as Exhibit 8-b to this Registration
Statement)
23-f Consent of Credit Suisse First Boston Corporation
23-g Consent of Goldman, Sachs & Co.
23-h Consent of BT Alex. Brown Incorporated
23-i Consent of Norman P. Blake, Jr., as Person Named as About to Become a Director
24 Power of Attorney for Directors
99-a Form of Proxy Card of St. Paul
99-b Form of Proxy Card of USF&G
99-c Stock Option Agreement, dated as of January 19, 1998, between St. Paul and USF&G (included as Annex B to
the Joint Proxy Statement/Prospectus)
99-d Letter to Participants in Certain Employee Plans of The St. Paul Companies, Inc.
</TABLE>
<PAGE>
EXHIBIT 5
OPINION OF OPPENHEIMER, WOLFF & DONNELLY LLP
February 27, 1998
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, MN 55102
Re: Registration Statement on Form S-4
Gentlemen:
We have acted as special counsel for The St. Paul Companies, Inc., a Minnesota
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933 (the "Act") by the Company of 39,223,280 shares of common
stock, no par value, of the Company (the "Shares"), together with 39,223,280
rights, attached to the Shares, to purchase Series A Junior Participating
Preferred Stock, without par value, of the Company (the "Rights"), pursuant to
the Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on February 27, 1998 (the "Registration Statement"). The
Shares and the Rights are to be issued to holders of common stock, par value
$2.50 per share, of USF&G (as defined below) in connection with the merger of SP
Merger Corporation, a Maryland corporation and a wholly-owned subsidiary of the
Company ("Merger Sub"), with and into USF&G Corporation, a Maryland corporation
("USF&G"), pursuant to the Agreement and Plan of Merger, dated as of January 19,
1998, as amended, among USF&G, the Company and Merger Sub (the "Merger
Agreement").
In connection with rendering this opinion, we have examined and relied upon
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, and other instruments, certificates of
officers, certificates of public officials and other documents as we have deemed
necessary or appropriate as a basis for the opinion expressed herein.
In connection with our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents tendered to us as originals, the
legal capacity of all natural persons and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.
Based on the foregoing, it is our opinion that when the Registration Statement
has become effective under the Act, and the Shares and Rights are issued and
delivered in accordance with the terms of the Merger Agreement, the Shares and
Rights will be validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the Federal laws of the United States and
the laws of the State of Minnesota, and we are expressing no opinion as to the
effect of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5 to the Registration
Statement, to its use as a part of the Registration Statement and to the use of
our name under the caption "Legal Matters" in the Joint Proxy
Statement/Prospectus constituting a part of the Registration Statement. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Oppenheimer Wolff & Donnelly LLP
<PAGE>
EXHIBIT 8-A
OPINION OF SULLIVAN & CROMWELL
February 27, 1998
The St. Paul Companies, Inc.,
385 Washington Street,
St. Paul, Minnesota 55102.
Gentlemen:
We have acted as counsel to The St. Paul Companies, Inc., a Minnesota
corporation ("St. Paul"), in connection with the merger of SP Merger
Corporation, a Maryland corporation and a wholly-owned subsidiary of St. Paul
("Merger Sub"), with and into USF&G Corporation, a Maryland corporation
("USF&G"), as contemplated by the Agreement and Plan of Merger among USF&G, St.
Paul and Merger Sub dated as of January 19, 1998, as amended (the "Merger
Agreement"), and we render this opinion to you pursuant to Section 7.2(d) of the
Merger Agreement. Capitalized terms not defined herein have the meanings
assigned to them in the Merger Agreement.
For purposes of the opinion set forth below, we have examined (1) the Merger
Agreement, (2) representations made to us by St. Paul and USF&G and (3) such
other matters as we have deemed necessary or appropriate for purposes of
rendering this opinion.
In connection with this opinion and with your consent, we have assumed and
have not attempted to verify independently that:
(1) the Merger will be effected in accordance with the terms of the Merger
Agreement and all of the provisions of the Merger Agreement will be performed in
accordance with their terms;
(2) the representations made to us in letters from St. Paul and USF&G are
true and complete and will continue to be true and complete between the date of
this opinion and the Effective Time; and
(3) there will be no change in any of the facts or applicable law material
to this opinion between the date of this opinion and the Effective Time.
On the basis of the foregoing, we advise you that, in our opinion, for U.S.
federal income tax purposes, the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code, and St. Paul and USF&G will each be a
party to the reorganization within the meaning of Section 368(b) of the Code.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement on Form S-4 of St. Paul filed with the Securities and
Exchange Commission on February 27, 1998 and the references to us under the
headings "Certain Federal Income Tax Consequences of the Merger" and "Legal
Matters." In giving such consent, we do not thereby admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
/s/ Sullivan & Cromwell
<PAGE>
EXHIBIT 8-B
OPINION OF PIPER & MARBURY L.L.P.
February 27, 1998
USF&G Corporation
6225 Centennial Way
Baltimore, Maryland 21209
Merger of SP Merger Corporation, a wholly-owned subsidiary of The St. Paul
Companies, Inc., with and into USF&G Corporation
Ladies and Gentlemen:
We have acted as special counsel to USF&G Corporation ("Company") in
connection with the transactions contemplated by the Agreement and Plan of
Merger, dated as of January 19, 1998, as amended (the "Merger Agreement"), by
and among The St. Paul Companies, Inc. ("Parent"), SP Merger Corporation, a
wholly-owned subsidiary of Parent ("Merger Sub") and Company. This opinion is
delivered on the effective date of a Registration Statement on Form S-4 (the
"Registration Statement"), which includes the definitive Joint Proxy
Statement/Prospectus of Parent and Company dated February 27, 1998 (the "Proxy
Statement/Prospectus"), with respect to the transactions contemplated by the
Merger Agreement. The delivery of a letter expressing opinions in substantially
the form hereof, and the reconfirmation of such opinions on and as of the
Effective Time, are conditions to the obligations of Company to consummate the
Merger pursuant to section 7.3(d) of the Merger Agreement. All capitalized terms
used herein, unless otherwise specified, shall have the meanings ascribed to
them in the Merger Agreement.
In rendering our opinions, we have examined and relied upon the accuracy and
completeness of the facts, information, covenants and representations contained
in originals or copies, certified or otherwise identified to our satisfaction,
of the Merger Agreement, the Proxy Statement/Prospectus and such other documents
as we have deemed necessary or appropriate as a basis for the opinions set forth
below. Our opinions assume, among other things, the accuracy as of the date
hereof, and the accuracy as of the Effective Time, of such facts, information,
covenants, statements and representations, as well as an absence of any change
in the foregoing that are material to such opinions between the date hereof and
the Effective Time.
We have assumed the genuineness of all signatures, the legal capacity of all
natural persons, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of such
documents. We have also assumed that the transactions related to the Merger or
contemplated by the Merger Agreement that are to be consummated at the Effective
Time will be consummated at the Effective Time in accordance with the Merger
Agreement and as described in the Proxy Statement/ Prospectus. In addition, our
opinions are expressly conditioned on, among other things, the accuracy as of
the date hereof, and the accuracy as of the Effective Time, of statements and
representations contained in certificates executed by officers of Parent and
Company as to certain facts relating to, and knowledge and intentions of, Parent
and Company, and certain facts relating to the Merger. We have assumed that such
statements and representations will be reconfirmed as of the Effective Time.
In rendering our opinion, we have considered the applicable provisions of
the U.S. Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations promulgated thereunder by the Treasury Department (the
"Regulations"), pertinent judicial authorities, rulings of the U.S. Internal
Revenue Service and such other authorities as we have considered relevant. It
should be noted that the Code, the Regulations, judicial decisions,
administrative interpretations and such other authorities are subject to change
at any time and, in some circumstances, with retroactive effect. A material
change in any of the authorities upon which our opinions are based could affect
our conclusions stated herein. In addition, there can be no assurance that the
Internal Revenue Service would not take a position contrary to that which is
stated in this opinion letter.
<PAGE>
USF&G Corporation
February 27, 1998
Page 2
Based upon and subject to the foregoing, we are of the opinion that, for
United States federal income tax purposes:
1. the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and Company and Parent will each be a party to such
reorganization within the meaning of Section 368(b) of the Code; and
2. the summaries of Federal income tax consequences set forth in the Proxy
Statement/Prospectus under the headings "Questions and Answers about the St.
Paul/USF&G Merger--What are the tax consequences of the merger to shareholders",
"Summary--The Merger--Certain U.S. Federal Income Tax Consequences" and "The
Merger--Certain Federal Income Tax Consequences of the Merger" are accurate in
all material respects as to matters of law and legal conclusions.
Except as set forth above, we express no opinion to any party as to any
consequences of the Merger or any transactions related thereto. We are
furnishing this opinion to you solely in connection with the effectiveness of
the Registration Statement, and it is not to be used, relied upon, circulated,
quoted or otherwise referred to by any other person for any other purpose
without our prior written consent. In accordance with the requirements of Item
601(b)(23) of Regulation S-K under the Securities Act, we hereby consent to the
use of our name in the Proxy Statement/Prospectus and to the filing of this
opinion as an Exhibit to the Registration Statement. In giving this consent, we
do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Securities Exchange Commission thereunder. This opinion is expressed as of
the date hereof, and we disclaim any undertaking to advise you of any subsequent
changes of the matters stated, represented or assumed herein or any subsequent
changes in applicable law.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
EXHIBIT 15
LETTER FROM ERNST & YOUNG LLP REGARDING
UNAUDITED INTERIM FINANCIAL INFORMATION
We are aware of the incorporation by reference in the Registration Statement
on Form S-4 of The St. Paul Companies, Inc. ("St. Paul") and the related
Prospectus of St. Paul for the registration of common stock of St. Paul in
connection with the merger of SP Merger Corporation, a wholly owned subsidiary
of St. Paul, with and into USF&G Corporation of our reports dated May 14, 1997,
August 8, 1997 and November 11, 1997, relating to the unaudited condensed
consolidated interim financial statements of USF&G Corporation that are included
in USF&G Corporation's Forms 10-Q for the quarters ended March 31, 1997, June
30, 1997 and September 30, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not
part of the registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 27, 1998
<PAGE>
EXHIBIT 23-A
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
The St. Paul Companies, Inc.:
We consent to the use of our reports incorporated by reference in the
Registration Statement on Form S-4 of The St. Paul Companies, Inc. and the
related Joint Proxy Statement/Prospectus and to the reference to our firm under
the heading "Experts" in such Joint Proxy Statement/Prospectus.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 27, 1998
<PAGE>
EXHIBIT 23-B
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-4 of the St. Paul Companies, Inc. ("St. Paul")
and the related Prospectus of St. Paul for the registration of common stock of
St. Paul in connection with the merger of SP Merger Corporation, a wholly owned
subsidiary of St. Paul, with and into USF&G Corporation and to the incorporation
by reference therein of our report dated February 20, 1998, with respect to the
consolidated financial statements of USF&G Corporation for the year ended
December 31, 1997, included in its Current Report on Form 8-K, dated February
26, 1998 and our report dated February 21, 1997, with respect to the
consolidated financial statements and schedules of USF&G Corporation included or
incorporated by reference in its Annual Report (Form 10-K) for the year ended
December 31, 1996, both filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 27, 1998
<PAGE>
EXHIBIT 23-F
CONSENT OF CREDIT SUISSE FIRST BOSTON CORPORATION
We hereby consent to the inclusion of our opinion letter, dated January 19,
1998, to the Board of Directors of The St. Paul Companies, Inc. (the "Company")
as Annex C to the Joint Proxy Statement/ Prospectus of the Company and USF&G
Corporation which is part of the Registration Statement of the Company on Form
S-4 (the "Registration Statement") relating to the proposed merger involving the
Company, SP Merger Corporation, a wholly owned subsidiary of the Company, and
USF&G Corporation and references made to such opinion under the captions
"Summary--The Merger--Opinions of Financial Advisors," "The Merger--Reasons for
the Merger; Recommendations of the Boards of Directors" and "The
Merger--Opinions of Financial Advisors" in the Registration Statement. In giving
such consent, we do not admit that we come within the category of persons whose
consent is required under, nor do we admit that we are "experts" for the
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ WILLIAM J. EGAN
- -------------------------------------------
Name: William J. Egan
Title: Managing Director
February 26, 1998
<PAGE>
EXHIBIT 23-G
CONSENT OF GOLDMAN, SACHS & CO.
PERSONAL AND CONFIDENTIAL
February 27, 1998
Board of Directors
USF&G Corporation
6225 Smith Avenue
Baltimore, MD 21209
Re: Registration Statement of The St. Paul Companies, Inc.
on Form S-4
Gentlemen and Mesdame:
Reference is made to our opinion letter dated January 19, 1998 with respect to
the fairness from a financial point of view to the holders of the outstanding
shares of Common Stock, par value $2.50 per share (the "Shares"), of USF&G
Corporation (the "Company") of the Exchange Ratio (as defined below) pursuant to
the Agreement and Plan of Merger, dated as of January 19, 1998, among The St.
Paul Companies, Inc. ("St. Paul"), SP Merger Corporation, a wholly-owned
subsidiary of St. Paul ("Merger Subsidiary"), and the Company (the "Agreement").
Pursuant to the Agreement, as amended, Merger Subsidiary shall be merged with
and into the Company and each outstanding Share will be converted into the right
to receive a fraction (the "Exchange Ratio") of a share of Common Stock, without
par value, of St. Paul, determined by dividing $22.00 by the Average Parent
Price (as defined in the Agreement); PROVIDED, HOWEVER, that the Exchange Ratio
shall not exceed 0.2973 nor be less than 0.2821.
The aforementioned opinion letter is provided for the information and assistance
of the Board of Directors of the Company in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that St. Paul has determined to include our
opinion in the above-referenced Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our Firm
under the captions "Summary--The Merger--Opinions of Financial Advisor," "The
Merger--Reasons for the Merger; Recommendations of the Board of
Directors--USF&G" and "The Merger--Opinions of Financial
Advisors--USF&G--Goldman Sachs" and to the inclusion of the aforementioned
opinion in the Joint Proxy Statement/Prospectus included in the above-mentioned
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
- ---------------------------------------------
(GOLDMAN, SACHS & CO.)
<PAGE>
EXHIBIT 23-H
CONSENT OF BT ALEX. BROWN INCORPORATED
We hereby consent to the use of our name and to the description of our
opinion letter, dated January 18, 1998, to the Board of Directors of USF&G
Corporation (the "Company") under the captions "Summary--The Merger--Opinions of
Financial Advisors," "The Merger--Reasons for the Merger; Recommendations of the
Board of Directors--USF&G" and "The Merger--Opinions of Financial
Advisors--USF&G" in, and to the inclusion of such opinion letter (in whole but
not in part) as Annex E to, the Joint Proxy Statement/Prospectus of the Company
and The St. Paul Companies, Inc. ("St. Paul"), which is part of the Registration
Statement of St. Paul on Form S-4 (the "Registration Statement"). In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
BT ALEX. BROWN INCORPORATED
/s/ BT ALEX. BROWN INCORPORATED
February 27, 1998
<PAGE>
EXHIBIT 23-I
CONSENT OF NORMAN P. BLAKE, JR.
February 12, 1998
I hereby consent to being nominated as a director of The St. Paul Companies,
Inc. ("St. Paul") as contemplated by and pursuant to the Agreement and Plan of
Merger dated as of January 19, 1998 (as amended, the "Merger Agreement") by and
among USF&G Corporation, St. Paul and SP Merger Corporation. I agree to serve in
such capacity upon my nomination and election thereto, and consent to reference
to such matters in the Joint Proxy Statement/Prospectus of St. Paul and USF&G
Corporation or any other Proxy Statement of St. Paul.
<TABLE>
<S> <C> <C>
/s/ NORMAN P. BLAKE, JR.
-----------------------------------------
Norman P. Blake, Jr.
</TABLE>
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned (i) directors or (ii) directors and officers of The
St. Paul Companies, Inc. ("St. Paul"), hereby severally constitutes and appoints
Bruce A. Backberg and Edward M. Gerber, or either of them (with full power of
each of them to act alone), his or her true and lawful attorney-in-fact, with
full power of substitution and resubstitution, to execute on behalf of each of
the undersigned the Registration Statement on Form S-4 relating to the common
stock of St. Paul, to be issued in connection with the proposed merger of a
wholly owned subsidiary of St. Paul, and USF&G Corporation, and any and all
amendments (including post-effective amendments) to such Registration Statement,
and to file the same, with all exhibits and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorneys-in-fact and agents full power and authority to perform each and every
act necessary to be done as fully to all intents and purposes as he or she could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, of their substitutes, may lawfully do or cause to be
done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ -------------------
<C> <S> <C>
/s/ MICHAEL R. BONSIGNORE
- ------------------------------ Director February 3, 1998
Michael R. Bonsignore
/s/ JOHN H. DASBURG
- ------------------------------ Director February 3, 1998
John H. Dasburg
/s/ W. JOHN DRISCOLL
- ------------------------------ Director February 3, 1998
W. John Driscoll
/s/ PIERSON M. GRIEVE
- ------------------------------ Director February 3, 1998
Pierson M. Grieve
/s/ THOMAS R. HODGSON
- ------------------------------ Director February 3, 1998
Thomas R. Hodgson
/s/ RONALD JAMES
- ------------------------------ Director February 3, 1998
Ronald James
/s/ DAVID G. JOHN
- ------------------------------ Director February 3, 1998
David G. John
/s/ WILLIAM H. KLING
- ------------------------------ Director February 3, 1998
William H. Kling
/s/ DOUGLAS W. LEATHERDALE Chairman, President, Chief
- ------------------------------ Executive Officer and February 3, 1998
Douglas W. Leatherdale Director
/s/ BRUCE K. MACLAURY
- ------------------------------ Director February 3, 1998
Bruce K. MacLaury
/s/ GLEN D. NELSON
- ------------------------------ Director February 6, 1998
Glen D. Nelson
/s/ ANITA M. PAMPUSCH, PH.D.
- ------------------------------ Director February 3, 1998
Anita M. Pampusch, Ph.D.
/s/ GORDON M. SPRENGER
- ------------------------------ Director February 3, 1998
Gordon M. Sprenger
/s/ PATRICK A. THIELE
- ------------------------------ Executive Vice President and February 3, 1998
Patrick A. Thiele Director
</TABLE>
<PAGE>
EXHIBIT 99(a)
THE ST. PAUL COMPANIES, INC.
FOR SPECIAL MEETING OF SHAREHOLDERS--APRIL 7, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
P
The undersigned hereby appoints Douglas W. Leatherdale and Bruce A. Backberg,
R or any one or both of them, with power of substitution, attorneys and proxies
to represent the undersigned at the Special Meeting of Shareholders (the
O "Special Meeting") of The St. Paul Companies, Inc., a Minnesota
corporation ("St. Paul"), to be held on April 7, 1998 at 10:00 a.m.
X (Central Daylight Time) at the office of St. Paul, 385 Washington
Street, St. Paul, Minnesota, and any postponements or adjournments
Y thereof, with all power which the undersigned would possess if
personally present, and to vote all shares of capital stock of St. Paul
which the undersigned may be entitled to vote at said meeting as indicated in
this proxy and, at the discretion of the proxies on any other business
(including a motion to adjourn) that may properly come before the Special
Meeting or any adjournments or postponements thereof. Any proxy voted against
the proposal set forth on the reverse side will be voted against a proposal to
adjourn the Special Meeting.
(IN ADDITION TO THE SHARES HELD IN THE NAME OF THE SHAREHOLDERS(S), THE
NUMBER OF SHARES SHOWN ON THE REVERSE SIDE HEREOF WILL INCLUDE ANY SHARES
PURCHASED FOR THE SHAREHOLDERS(S) IN ST. PAUL'S DIVIDEND REINVESTMENT PLAN
AND HELD BY FIRST CHICAGO TRUST COMPANY OF NEW YORK UNDER THE PLAN.)
SEE REVERSE
SIDE
<PAGE>
/X/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
THE PROXIES ARE INSTRUCTED TO VOTE MY SHARES AS FOLLOWS: SHARES WILL BE VOTED
AS INSTRUCTED, BUT IF NO INSTRUCTION IS GIVEN, SHARES WILL BE VOTED FOR THE
PROPOSAL DESCRIBED IN THE PROXY STATEMENT.
<TABLE>
<S> <C>
Proposal to issue shares of Common Stock, no par value, of St. Paul pursuant
to the Agreement and Plan of Merger, dated as of January 19, 1998, as FOR AGAINST ABSTAIN
amended, among USF&G Corporation, a Maryland corporation ("USF&G"), St. Paul
and SP Merger Corporation, a Maryland corporation and a wholly owned / / / / / /
subsidiary of St. Paul ("Merger Sub"), pursuant to which Merger Sub will be
merged with and into USF&G and USF&G will become a wholly owned subsidiary of
St. Paul.
</TABLE>
The Undersigned Hereby Acknowledges Receipt of the Notice of Special Meeting
of Shareholders and Proxy Statement, Both Dated February ______, 1998
SIGNATURE(S)_________________________________________________ DATED:_____1998
Note: Please sign name(s) exactly as registered.
<PAGE>
EXHIBIT 99(b)
USF&G CORPORATION
THIS PROXY IS SOLICIATED ON BEHALF OF THE BOARD OF DIRECTORS OF
USF&G CORPORATION
6225 CENTENNIAL WAY
BALTIMORE, MARYLAND 21209
P
The undersigned hereby (1) acknowledges receipt of the Notice of
R Special Meeting of Shareholders of USF&G Corporation ("USF&G"), a Maryland
corporation, to be held at the offices of USF&G, Founders Building, 6225
O Centennial Way, Baltimore, MD at 9:00 a.m., local time, on April 7, 1998 (the
"Meeting"), and at any adjournments or postponements thereof, and the Joint
X Proxy Statement/Prospectus furnished in connection therewith, and (2)
appoints Norman P. Blake, Jr., Dan L. Hale and John A. MacColl, and each of
Y them, as his or her proxies (with full power of substitution) of and in the
name, place, and stead of the undersigned, to represent the undersigned at
the Meeting and to vote upon and act with respect to all of the shares of
Common Stock, par value $2.50 per share, of USF&G (the "USF&G Common Stock"),
standing in the name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at the Meeting and at any
adjournments or postponements thereof and, at the discretion of the proxies
on any other business (including a motion to adjourn) that may properly come
before the Meeting or any adjourments or postponements thereof. Any proxy
voted against the proposal set forth on the reverse side will be voted
against a proposal to adjourn the Meeting.
<PAGE>
/X/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
The undersigned directs that this proxy be voted as specified below:
<TABLE>
<S> <C>
To approve the merger (the "Merger") of SP Merger Corporation ("Merger Sub"),
a Maryland corporation and a wholly owned subsidiary of the St. Paul FOR AGAINST ABSTAIN
Companies, Inc. ("St. Paul"), a Minnesota corporation, with and into USF&G, / / / / / /
pursuant to the terms and conditions of the Agreement and Plan of Merger,
dated as of January 19, 1998, as amended, among USF&G, St. Paul and Merger
Sub (the "Merger Agreement").
THIS PROXY, WHEN PROPERLY EXECUTED AND DELIVERED, WILL
BE VOTED AS SPECIFIED ABOVE. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED FOR THE PROPOSAL. THE PROXIES CANNOT
VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
Notwithstanding shareholder approval of the Merger, USF&G reserves the
right to terminate the Merger Agreement and abandon the Merger at any time
prior to the consummation of the Merger, subject to the terms and conditions of
the Merger Agreement.
The undersigned hereby revokes any proxy heretofore given to vote or act
with respect to the USF&G Common Stock and hereby ratifies and confirms all
that the proxies named above, their substitutes, or any of them may lawfully do
by virtue hereof.
</TABLE>
PLEASE PROMPTLY MARK, SIGN, DATE, AND RETURN THIS PROXY IN THE ENCLOSED
ENVELOPED, NO POSTAGE IS REQUIRED.
<TABLE>
<S> <C>
Signature(s) of Shareholder(s)______________________ (if jointly held)________________ Date:__________, 1998
PLEASE DATED THIS PROXY AND SIGN YOUR NAME EXACTLY AS IT APPEARS HEREON.
WHERE THERE IS MORE THAN ONE OWNER, EACH SHOULD SIGN. WHEN SIGNING AS AN
ATTORNEY, ADMINISTRATOR, EXECUTOR, GUARDIAN, OR TRUSTEE, PLEASE ADD YOUR
TITLE AS SUCH. IF EXECUTED BY A CORPORATION. THE PROXY SHOULD BE SIGNED BY A
DULY AUTHORIZED OFFICER AND STATE THE FULL NAME OF THE CORPORATION.
</TABLE>
<PAGE>
EXHIBIT 99-D
LETTER TO PARTICIPANTS IN
CERTAIN EMPLOYEE PLANS OF
THE ST. PAUL COMPANIES, INC.
Dear Participant,
As a participant in The St. Paul Companies, Inc. Savings Plus Plan and/or The
St. Paul Companies, Inc. Stock Ownership Plan (which consists of the Employee
Stock Ownership Plan ("ESOP"), accounts and the Savings Plus Preferred Stock
Ownership Plan ("PSOP") accounts), you have the right to direct Fidelity
Management Trust Company ("Fidelity") as trustee of Savings Plus and the PSOP
accounts, and First Trust N.A. ("First Trust"), as trustee of the ESOP accounts,
on how to vote the shares of St. Paul common stock credited to your account
under the plans.
The enclosed proxy card will also serve as a trustee instruction card that you
may use to give voting instructions to Fidelity and First Trust. Your directions
to the trustees will be kept confidential.
If First Chicago Trust Company of New York, which is acting as the tabulating
agent, does not receive your instruction card by April 1, 1998, Fidelity will
(1) not vote the shares of common stock credited to your account under The St.
Paul Companies, Inc. Savings Plus Plan and (2) vote in its sole discretion the
shares of preferred stock credited to your PSOP account under The St. Paul
Companies, Inc. Stock Ownership Plan. Fidelity will also vote in its sole
discretion the shares of preferred stock not credited to participants' accounts
under The St. Paul Companies, Inc. Stock Ownership Plan.
If First Chicago Trust Company of New York receives your proxy card by April 1,
1998, First Trust will vote all ESOP shares credited to participants' accounts
under The St. Paul Companies, Inc. Stock Ownership Plan as instructed.
