SCHEDULE 14A
Information Required in Proxy Statement
Reg.ss. 240.14a-101
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x] Filed by a Party other than the Registrant [ ] Check
the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14a-12
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
...............................................................................
(Name of Registrant as Specified in its Charter)
...............................................................................
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box): [ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ X ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
.........................................................................
2) Form, Schedule or Registration Statement No.:
.........................................................................
3) Filing Party:
.........................................................................
4) Date Filed:
.........................................................................
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FSA
Financial Security Assurance Holdings Ltd.
350 Park Avenue, New York, New York 10022
April 14, 2000
Dear Shareholder:
You are invited to attend the 2000 annual meeting of shareholders of
Financial Security Assurance Holdings Ltd. (the "Company"), which will be held
at 9:00 a.m. (New York City time) on Thursday, May 18, 2000. The meeting will
be held at our offices, which are located at 350 Park Avenue, 13th Floor, New
York, New York 10022.
As described in the accompanying proxy statement, at the annual
meeting you will be asked to consider and vote upon a proposal to approve an
Agreement and Plan of Merger among Dexia S.A., PAJY Inc. and the Company,
pursuant to which PAJY Inc. will be merged with and into the Company, and each
outstanding share of our common stock (other than treasury stock and shares
owned directly or indirectly by Dexia S.A.) will be converted into the right to
receive $76.00 in cash and each outstanding share of our preferred stock (other
than shares owned directly or indirectly by Dexia S.A.) will be converted into
the right to receive $46.35 in cash ($76 minus the conversion price for the
conversion of a share of preferred stock into a share of common stock), without
interest. In addition, at the annual meeting, you will be asked to vote on the
election of 13 directors and to approve our selection of independent auditors
for 2000.
Our board of directors has determined that the merger is in the best
interest of the Company and has approved the merger agreement and the merger by
a unanimous vote of the directors present. In connection with its evaluation of
the proposed merger, our board engaged Goldman, Sachs & Co. as its financial
advisor. Goldman Sachs has rendered its written opinion that, as of March 13,
2000, based upon and subject to the assumptions, limitations and qualifications
set forth in such opinion, the cash merger consideration of $76 per share of
common stock to be received in the merger is fair, from a financial point of
view, to our shareholders (other than Dexia and White Mountains Insurance
Group, Ltd.). Goldman Sachs has confirmed such opinion in writing as of the
date hereof. Such confirmation is attached as Appendix B to the attached proxy
statement and should be read carefully and in its entirety. Our board
unanimously recommends that you vote "FOR" approval of the merger agreement.
Our board also unanimously recommends that you vote "FOR" the election of all
nominees for director and "FOR" approval of PricewaterhouseCoopers LLP as our
independent auditors for 2000.
Consummation of the merger is subject to certain conditions,
including approval of the merger agreement by the affirmative vote of the
holders of two-thirds of the outstanding shares of our common and preferred
stock, voting together as a class, as well as approval of two-thirds of the
outstanding shares of our preferred stock, voting separately as a class.
Holders of approximately 47% of the total outstanding shares of common stock
and preferred stock, including White Mountains, which is also the holder of all
the shares of preferred stock, have entered into voting agreements with Dexia
pursuant to which they have agreed to vote their shares of our stock in favor
of the merger agreement. Election of the directors requires the approval of a
plurality, and approval of the selection of the independent auditors requires
the approval of a majority, of all shares of common stock and preferred stock
voting on such proposals, voting together as a class. Only holders of our stock
of record at the close of business on April 14, 2000, are entitled to notice of
and to vote at the annual meeting or any adjournments or postponements thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE
REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE PROXY CARD.
The accompanying proxy statement provides you with a summary of the
proposed merger and additional information about the parties involved and their
interests, as well as further information regarding the proposals to elect
directors and approve the selection of independent auditors.
Sincerely,
/s/ Robert P. Cochran
---------------------------------
Robert P. Cochran,
Chairman of the Board and
Chief Executive Officer
<PAGE>
350 Park Avenue
New York, New York 10022
April 14, 2000
Financial Security Assurance Holdings Ltd.
Notice of Annual Meeting of Shareholders
To the Shareholders of Financial Security Assurance Holdings Ltd.:
The annual meeting of shareholders of Financial Security Assurance
Holdings Ltd. (the "Company") will be held at the offices of the Company at 350
Park Avenue, 13th Floor, New York, New York 10022, on Thursday, May 18, 2000,
at 9:00 a.m., New York City time, for the following purposes:
o to approve an Agreement and Plan of Merger, providing for the
merger of PAJY Inc. with and into the Company, with the Company
being the surviving corporation. In the merger, each outstanding
share of Common Stock, $.01 par value per share, of the Company
(other than shares held directly or indirectly by Dexia S.A.)
will be converted into the right to receive $76 in cash, without
interest, and each outstanding share of Series A Convertible
Redeemable Preferred Stock, par value $.01 per share, of the
Company (other than shares owned directly or indirectly by Dexia
S.A.) will be converted into the right to receive $46.35 in cash
($76 minus the exercise price for the conversion of a share of
preferred stock into a share of common stock), without interest.
The merger agreement is more fully described in the accompanying
proxy statement and is attached as Appendix A to the proxy
statement;
o to elect 13 directors of the Company for terms expiring at the
2001 Annual Meeting;
o to approve the appointment by the Board of Directors of
PricewaterhouseCoopers LLP as independent auditors for the
Company for the year 2000; and
o to transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Shareholders of record at the close of business on April 14, 2000, will
be entitled to vote at the meeting, whether in person or by proxy.
The accompanying proxy statement describes the proposed merger, the
actions to be taken in connection with the merger and additional information
about the parties involved and their interests, as well as further information
regarding the proposals to elect directors and appoint the independent auditors
for the Company. Please give all this information your careful attention.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
MERGER AGREEMENT, "FOR" THE ELECTION OF ALL NOMINEES FOR DIRECTOR, AND "FOR"
APPROVAL OF THE SELECTION OF PRICEWATERHOUSECOOPERS AS INDEPENDENT AUDITORS OF
THE COMPANY FOR 2000.
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS
POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. YOU MAY
REVOKE THE PROXY AT ANY TIME PRIOR TO ITS EXERCISE IN THE MANNER DESCRIBED IN
THE ATTACHED PROXY STATEMENT. ANY SHAREHOLDER PRESENT AT THE ANNUAL MEETING,
INCLUDING ANY ADJOURNMENT OR POSTPONEMENT THEREOF, MAY REVOKE SUCH HOLDER'S
PROXY AND VOTE PERSONALLY ON THE MERGER AGREEMENT AND THE OTHER MATTERS TO BE
CONSIDERED AT THE ANNUAL MEETING. EXECUTED PROXIES WITH NO INSTRUCTIONS
INDICATED THEREON WILL BE VOTED "FOR" ALL THREE PROPOSALS.
PLEASE DO NOT SEND YOUR SHARE CERTIFICATES AT THIS TIME.
By order of the Board of Directors,
/s/ Bruce E. Stern
--------------------------------------
Bruce E. Stern,
Secretary
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 18, 2000
We are soliciting your vote at our upcoming annual meeting of
shareholders. If you complete, sign and return the enclosed proxy card, we will
vote your shares at the meeting, or any adjournment or postponement of the
meeting, in the manner that you have indicated or, if you have not specified
how you wish to vote your shares, we will vote them as recommended by our board
of directors. You may revoke your proxy at any time before it is used.
The record date for determining shareholders entitled to vote at the
meeting is April 14, 2000. We have two classes of outstanding voting
securities: Common Stock, par value $.01 per share, and Series A Convertible
Redeemable Preferred Stock, par value $.01 per share. On the record date,
33,517,995 shares of our common stock (including 511,031 shares owned by a
trust on our behalf but excluding 158,306 shares of treasury stock) and
2,000,000 shares of our preferred stock were outstanding. Each share is
entitled to one vote, with the holder of our preferred stock voting together as
a single class with the holders of our common stock on all proposals to be
voted upon at the meeting. In addition, the shares of preferred stock are
entitled to vote separately as a class on the proposed merger agreement.
The mailing address of our principal executive offices is 350 Park
Avenue, New York, New York 10022. We are mailing this proxy statement and the
accompanying notice of annual meeting of shareholders and proxy card, on or
about April 17, 2000, to shareholders of record at the close of business on the
record date.
At the annual meeting, our shareholders will consider and vote upon a
proposal to approve an Agreement and Plan of Merger providing for the
acquisition of the Company by Dexia S.A. A copy of the merger agreement is
attached to this proxy statement as Appendix A. Pursuant to the merger
agreement, PAJY Inc., a New York corporation owned by Dexia S.A., will be
merged with and into the Company. In the merger, each outstanding share of our
common stock (other than shares held directly or indirectly by Dexia) will be
canceled and converted automatically into the right to receive $76 in cash,
without interest, and each outstanding share of our preferred stock (other than
shares held directly or indirectly by Dexia) will be canceled and converted
automatically into the right to receive $46.35 in cash ($76 minus the
conversion price for the conversion of a share of preferred stock into a share
of common stock), without interest. As a result of the merger, our shareholders
will no longer own an equity interest in the Company and the Company will
become a privately held company wholly-owned by Dexia. Our current executive
officers have agreed to retain their positions with the surviving entity in the
merger. The aggregate consideration payable by Dexia in the merger (excluding
fees and expenses but including amounts payable to a subsidiary of White
Mountains Insurance Group Ltd. under a stock purchase and indemnity agreement
pursuant to which Dexia will purchase all our shares held by White Mountains
immediately prior to the merger for the merger consideration) is approximately
$2.64 billion.
The consummation of the merger is subject to a number of conditions
and, accordingly, there can be no assurance that the merger will be
consummated.
At the annual meeting, shareholders will also be asked to elect 13
directors and approve our selection of independent auditors for 2000.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE PROXY CARD. PLEASE DO NOT SEND IN SHARE CERTIFICATES NOW. IN THE
EVENT THE MERGER IS CONSUMMATED, YOU WILL BE SENT WRITTEN INSTRUCTIONS FOR
EXCHANGING YOUR CERTIFICATES FOR THE MERGER CONSIDERATION TO WHICH YOU ARE
ENTITLED.
YOU ARE URGED TO READ AND CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND TO CONSULT WITH YOUR PERSONAL FINANCIAL
AND TAX ADVISORS.
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC") NOR HAS THE SEC PASSED UPON THE FAIRNESS OR
MERITS OF THE MERGER NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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TABLE OF CONTENTS
Page
SUMMARY.......................................................................3
THE ANNUAL MEETING...........................................................10
Record date and quorum requirement...........................................10
Voting procedures; Required vote; Revocability of proxy......................11
Shares.......................................................................11
Certain Abbreviations........................................................11
PROPOSAL 1: APPROVAL OF THE MERGER AGREEMENT................................12
The Parties..................................................................12
Financial Security Assurance Holdings Ltd....................................12
Directors' biographies.......................................................13
Dexia........................................................................14
PAJY Inc.....................................................................14
Special Factors..............................................................14
Background of the merger.....................................................14
Opinion of Goldman Sachs.....................................................16
Recommendation of our Board of Directors; Purpose of and reasons for
the merger..................................................................24
Conflicts of interest........................................................24
Certain effects of the merger................................................25
Federal income tax consequences..............................................26
Approvals....................................................................26
Dissenters' rights...........................................................27
Source of funds..............................................................27
Fees and Expenses............................................................27
The Merger Agreement.........................................................27
The merger...................................................................27
Effective time of the merger.................................................27
Payment for shares...........................................................27
Representations and warranties...............................................28
Covenants....................................................................29
Termination..................................................................30
No solicitation of transactions..............................................31
Fiduciary out................................................................31
Break-up fee payable to Dexia................................................31
Break-up fee payable to us...................................................32
Employee benefits and compensation...........................................32
Regulatory filings and other matters.........................................33
Conditions to the merger.....................................................33
Expenses.....................................................................33
Amendment and waiver.........................................................33
PROPOSAL 2: ELECTION OF DIRECTORS............................................34
THE BOARD OF DIRECTORS AND ITS COMMITTEES....................................36
EXECUTIVE OFFICERS OF THE COMPANY............................................37
PROPOSAL 3: APPROVAL OF SELECTION OF INDEPENDENT AUDITORS....................37
OWNERSHIP OF THE COMPANY.....................................................38
EXECUTIVE COMPENSATION.......................................................40
LONG TERM INCENTIVE PLANS--AWARDS IN 1999....................................42
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE......................45
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION..................45
STOCK PRICE PERFORMANCE......................................................46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................47
OTHER MATTERS................................................................49
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS FOR THE 2001 ANNUAL
MEETING.....................................................................49
ADDITIONAL INFORMATION.......................................................50
WHERE YOU CAN FIND MORE INFORMATION..........................................50
APPENDIX A Merger agreement.................................................A-1
APPENDIX B Fairness opinion.................................................B-1
2
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SUMMARY
This summary highlights selected information from this proxy
statement relating to the proposed merger and may not contain all of the
information that may be important to you. To understand the merger and related
matters fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire proxy statement and the attached
documents. Where appropriate, items in this summary include a cross reference
directing you to a more complete description included elsewhere in this proxy
statement.
The Annual Meeting
Time and Place of the Annual Meeting.... The annual meeting of our
shareholders will be held on May 18,
2000, at 9:00 a.m., local time, at
our offices at 350 Park Avenue, 13th
Floor, New York, New York 10022.
Purpose of the Annual Meeting......... At the annual meeting, our
shareholders will consider and vote
on:
o a proposal to approve the merger
agreement which is attached to
this proxy statement as Appendix
A. Under the merger agreement,
PAJY Inc., a new corporation
organized and existing under the
laws of New York, will merge
with and into the Company, with
the Company as the surviving
corporation in the merger. Each
outstanding share of our common
stock, par value $.01 per share,
other than treasury stock and
stock held directly or
indirectly by Dexia S.A., will
be converted automatically into
the right to receive $76 in
cash, without interest. Each
outstanding share of our
preferred stock, par value $.01
per share, other than stock held
directly or indirectly by Dexia,
will be converted automatically
into the right to receive $46.35
in cash ($76 minus the
conversion price for the
conversion of a share of
preferred stock into a share of
common stock), without interest.
See "The Merger Agreement--The
merger" beginning on page 27;
o election of 13 directors for
terms expiring at the 2001
annual meeting; and
o approval of the appointment of
PricewaterhouseCoopers LLP as
our independent auditors for the
year 2000. Record Date and
Quorum................................ Our board of directors has fixed the
close of business on April 14, 2000,
as the record date for determining
shareholders entitled to notice of,
and to vote at, the annual meeting
and any adjournments or
postponements thereof. Each holder
of record of shares of our common
stock and preferred stock at the
close of business on the record date
is entitled to one vote for each
share then held on each matter
submitted to a vote of shareholders.
In addition, the holders of the
shares of our preferred stock as of
the close of business on the record
date are entitled to vote separately
on the merger agreement. At the
close of business on the record
date, 33,517,995 shares of our
common stock (including 511,031
shares owned by a trust on our
behalf but excluding 158,306 shares
of treasury stock) and 2,000,000
shares of our preferred stock were
outstanding. The holders of a
majority of the outstanding shares
of common and preferred stock must
be present in person or represented
by proxy to constitute a quorum for
the transaction of business. See
"THE ANNUAL MEETING--Record date and
quorum requirement" beginning on
page 10. Required Vote and
Proxies............................... The affirmative vote of the holders
of two-thirds of the outstanding
shares of our common and preferred
stock, voting together as a class,
is required to approve the merger
agreement. In addition, the
affirmative vote of two-thirds of
the outstanding shares of our
preferred stock, voting separately
as a class, is required to approve
the merger agreement. A failure to
vote or a vote to abstain will have
the same effect as a vote cast
against approval of the merger
agreement.
3
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Brokers who hold ordinary shares as
nominees will not have discretionary
authority to vote such shares in the
absence of instructions from the
beneficial owners and a broker
non-vote will have the same effect
as a vote against the merger
agreement.
White Mountains, MediaOne, Tokio
Marine and XL have signed voting
agreements with Dexia, pursuant to
which they have agreed to vote their
shares of our stock in favor of the
merger agreement, provided that the
merger agreement is not terminated.
These shareholders together hold
13,848,648 shares of our common
stock (approximately 41% of all
outstanding shares of our common
stock). White Mountains holds all
2,000,000 outstanding shares of our
preferred stock. These shareholders
together hold approximately 47% of
all outstanding shares of our common
stock and preferred stock.
Shareholders are requested to
promptly complete, date, sign and
return the accompanying proxy card.
A shareholder may revoke a proxy at
any time prior to its exercise. See
"THE ANNUAL MEETING-- Voting
procedures; Required vote;
Revocability of proxy" beginning on
page 11.
The Parties
The Company........................... The name of our Company is Financial
Security Assurance Holdings Ltd.
Through our wholly owned subsidiary,
Financial Security Assurance Inc.,
we are primarily engaged in the
business of providing financial
guaranty insurance on asset-backed
and municipal obligations. The
claims-paying ability of Financial
Security Assurance Inc. is rated
"triple-A" by the major securities
ratings agencies and obligations
insured by Financial Security
Assurance Inc. are generally awarded
"triple-A" ratings by reason of such
insurance.
Our principal executive offices are
located at 350 Park Avenue, New
York, New York 10022. Our telephone
number at that location is (212)
826-0100.
Dexia................................. Dexia S.A., a Belgian corporation,
conducts its business primarily
through its banking subsidiaries.
These subsidiaries are engaged in
government finance, public sector
project finance, retail and private
banking, asset management and fund
administration. Through its
subsidiaries, Dexia engages in
business throughout Europe and also
maintains offices in the Americas,
Asia and Australia. The senior
unsecured debt of Dexia's principal
operating subsidiaries (Dexia Credit
Local de France and Credit Communal
de Belgique) is rated AA+ by
Standard & Poor's Ratings Services
and Aa1 by Moody's Investors
Service, Inc. According to its 1999
Activity Report, Dexia had
approximately euro 244 billion of
consolidated assets and euro 6
billion of Tier 1 equity at December
31, 1999. Shares of Dexia are listed
on the Brussels, Paris and
Luxembourg stock exchanges, and are
included in two major stock market
indexes, the BEL20 and CAC40.
The principal executive offices of
Dexia are located at Boulevard
Pacheco 44, B-1000 Brussels,
Belgium. Dexia's telephone number at
that location is 011 (32) 2 222 11
11.
PAJY Inc.............................. PAJY Inc. is a newly-formed
corporation organized and existing
under the laws of New York. Dexia
indirectly owns all the shares of
PAJY Inc. PAJY Inc. was organized
solely for the purpose of entering
into the merger agreement with the
Company and completing the merger,
and has not conducted any business
operations. Special Factors
Recommendation of the Board........... On March 13, 2000, our board
approved the merger agreement and
recommended that our shareholders
approve the merger agreement by
unanimous vote of those directors
present. In connection with the
4
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foregoing, our board determined that
the merger is in the best interest
of the Company. In connection with
its recommendations, our board
relied upon, among other things, the
analyses and findings of our board's
financial advisor, Goldman, Sachs &
Co. See "Special Factors--
Recommendation of our Board of
Directors; Purpose of and reasons
for the merger" beginning on page
24, and "--Opinion of Goldman Sachs"
beginning on page 16.
OUR BOARD RECOMMENDS THAT OUR
SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE MERGER AGREEMENT.
Opinion of the Financial Advisor...... Goldman, Sachs & Co. provided its
opinion to our board that, as of the
date of such opinion, the merger
consideration was fair from a
financial point of view to our
shareholders (other than Dexia and
White Mountains). Goldman Sachs has
confirmed its opinion in writing as
of the date of this proxy statement.
The full text of the written
confirmation of Goldman Sachs'
opinion, which sets forth
assumptions made, matters considered
and limitations on the review
undertaken in connection with the
opinion, is attached as Appendix B
and incorporated by reference into
this proxy statement. The opinion of
Goldman Sachs does not constitute a
recommendation as to how you should
vote with respect to the merger
agreement. We urge you to read the
opinion in its entirety. See
"Special Factors--Opinion of Goldman
Sachs" beginning on page 16.
We have agreed to pay Goldman Sachs
a transaction fee equal to 0.625% of
the aggregate merger consideration.
If the merger is consummated at the
$76 per common share offer price,
Goldman Sach's fee will be
approximately $16 million for
services as financial advisor and
rendering its opinion to the board.
We have also agreed to indemnify
Goldman Sachs against certain
liabilities, including certain
liabilities under the federal
securities laws. See "Special
Factors-- Opinion of Goldman Sachs"
beginning on page 16.
Purpose of and Reasons for the
Merger............................... Dexia's purpose for engaging in the
transactions contemplated by the
merger agreement is to acquire 100%
of our ordinary shares. As a result
of the merger, Dexia will indirectly
own all the shares of the surviving
entity in the merger and the Company
will become a privately-held
company. See "Special Factors--
Recommendation of our Board
of Directors; Purpose of and reasons
for the merger" beginning on page
24.
Conflicts of Interest................. In considering the recommendation of
our board with respect to the merger
agreement, you should be aware that
some of our officers and directors
and affiliates of our officers and
directors have interests in
connection with the merger which may
present them with actual or
potential conflicts of interest,
which are described in more detail
under "Special Factors--Conflicts of
interest" beginning on page 24.
We expect to continue to employ the
current members of our management.
Robert P. Cochran, our Chairman and
Chief Executive Officer, Roger K.
Taylor, our President and Chief
Operating Officer, and Sean W.
McCarthy, our Executive Vice
President, have entered into
employment agreements with us,
conditioned upon the consummation of
the merger. The employment
agreements provide that these
executives will continue to be
employed for four years following
the merger, with compensation and
benefits at least comparable to
their current compensation and
benefits.
White Mountains has entered into a
stock purchase and indemnity
agreement with Dexia pursuant to
which Dexia has agreed to purchase
all the shares of a White Mountains
subsidiary that, in turn, owns
shares of our stock. The purchase
price paid to White Mountains per
Company share purchased will be
equal to the merger consideration
5
<PAGE>
for such share. By selling its
shares pursuant to the stock
purchase and indemnity agreement
rather than in the merger, White
Mountains expects to sell its
interest in the Company in a
tax-efficient manner.
Federal Income Tax Consequences....... The receipt of the cash merger
consideration by a holder of our
shares through the merger generally
will be a taxable transaction for
U.S. federal income tax purposes. We
urge you to consult your tax
advisors to determine the effect of
the merger under applicable federal,
state, local and foreign tax laws.
See "Special Factors--Federal income
tax consequences" beginning on page
26.
Rights of Dissenting Shareholders..... Under New York law, shareholders are
not entitled to any dissenter's
rights, rights of appraisal or
similar rights in connection with
the merger.
Regulatory Approvals.................. The obligation of each of Dexia and
the Company to consummate the merger
is conditioned upon the approval of
the change in control of our
insurance company subsidiaries by
insurance regulatory authorities in
New York, Oklahoma and the United
Kingdom, as well as determinations
by insurance regulatory authorities
in New York, Oklahoma, California
and Delaware of no foreign
government control following the
merger. We understand that, as of
the date of this proxy statement,
Dexia has filed all required
applications with New York, Oklahoma
and the United Kingdom, but such
approvals have not yet been
obtained. In addition, the
obligation of each of Dexia and the
Company to consummate the merger is
subject to the expiration or early
termination of the required waiting
period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976.
We also understand that Dexia will
require the prior approval of the
Federal Reserve to become a
"financial holding company" under
the recently enacted Gramm-Leach-
Bliley Act in order to acquire
control of the Company as Dexia's
bank subsidiaries operate a branch
and an agency in the U.S. See
"SPECIAL FACTORS--Approvals"
beginning on page 26.
The Merger Agreement
The Merger............................ The merger agreement provides that,
subject to satisfaction of certain
conditions, PAJY Inc. will be merged
with and into the Company and that,
following the merger, the separate
existence of PAJY Inc. will cease
and the Company will continue as the
surviving corporation. As of the
effective time of the merger, each
of our issued and outstanding shares
(other than treasury shares and
shares held directly or indirectly
by Dexia) will, by virtue of the
merger, be canceled and converted
into the right to receive $76 in
cash, in the case of shares of our
common stock, and $46.35 in cash
($76 minus the conversion price to
convert a share of preferred stock
into a share of common stock), in
the case of shares of our preferred
stock, in each case, without
interest. See "The Merger Agreement"
beginning on page 27.
Effective Time of the Merger
and Payment for Shares............... The effective time of the merger is
currently expected to occur six
business days after the satisfaction
or waiver of the conditions to the
merger contained in the merger
agreement. See "The Merger
Agreement--Conditions to the merger"
beginning on page 33. Detailed
instructions with regard to the
surrender of share certificates,
together with a letter of
transmittal, will be forwarded to
shareholders by the paying agent
promptly following the effective
time of the merger. Shareholders
should not submit their certificates
to the paying agent until they have
received such materials. The paying
agent will send payment of the
merger consideration to you as
promptly as practicable following
receipt by the paying agent of
certificates and other required
documents. No interest will be paid
or accrued on the cash payable upon
the surrender of certificates. See
"The Merger Agreement--Payment for
shares" beginning on page 27.
6
<PAGE>
You should not send any share
certificates to us at this time.
Conditions to the Merger.............. Each party's obligation to complete
the merger is subject to
satisfaction of a number of
conditions, including with respect
to one or both parties:
o the merger agreement shall have
been approved by holders of
two-thirds of the outstanding
shares of our common and
preferred stock voting together
as a class, and holders of two-
thirds of the outstanding shares
of our preferred stock, voting
separately as a class;
o the regulatory approvals and
determinations described above
shall have been received;
o the sale to Dexia of the White
Mountains subsidiary that holds
White Mountains' interest in the
Company shall have been
completed;
o at least two of Robert P.
Cochran, our Chairman and Chief
Executive Officer; Roger K.
Taylor, our President and Chief
Operating Officer; and Sean W.
McCarthy, our Executive Vice
President, shall continue to be
our employees and continue to be
parties to existing employment
agreements with the Company; and
o the representations and
warranties of the Company and
Dexia shall be true and correct
(subject, in most cases, to
certain materiality standards)
as of the effective time of the
merger.
Any or all of the conditions that
have not been satisfied may be
waived (other than conditions that
are required by law, such as
approval of the merger agreement by
our shareholders, certain regulatory
approvals and the absence of
injunctions enjoining the merger).
See "The Merger
Agreement--Conditions to the merger"
beginning on page 33. Even if our
shareholders approve the merger
agreement, we cannot assure you that
the merger will be consummated.
Termination........................... At any time prior to the effective
time of the merger, the merger
agreement may be terminated by
mutual written consent of the
parties.
The merger agreement may be
terminated by either Dexia or us if:
o the merger is not consummated by
January 1, 2001 unless the
merger is not consummated due to
the knowing action or inaction
of the party seeking to
terminate the merger agreement;
o any approval or determination of
any governmental authority
required for consummation of the
merger and the other
transactions contemplated by the
merger agreement is denied by a
final order or determination and
the party seeking to terminate
the merger agreement has used
its reasonable best efforts to
obtain such approval or
determination; or
o the approval of our shareholders
is not obtained at our
shareholders' meeting.
The merger agreement may be
terminated by Dexia if:
o we breach the merger agreement
and such breach cannot be cured
within 30 days and would result
in a condition to the closing
under the merger agreement not
being met; or
7
<PAGE>
o our board fails to recommend the
merger, withdraws such
recommendation or modifies or
changes such recommendation in a
manner adverse to the interests
of Dexia or approves or
recommends to our shareholders
an acquisition proposal other
than the merger.
The merger agreement may be
terminated by us:
o if Dexia breaches the merger
agreement and such breach cannot
be cured within 30 days and
would result in a condition to
the closing under the merger
agreement not being met; or
o at any time prior to the
approval of our shareholders in
accordance with our "fiduciary
out" described below.
See "The Merger Agreement--
Termination" beginning on page 30.
No Solicitation....................... Pursuant to the merger agreement, we
have agreed that we will not (nor
allow certain other people to),
directly or indirectly (i) solicit,
initiate or encourage (including by
way of furnishing information), or
knowingly take any other action
designed to facilitate, the making
of any inquiry, proposal or offer
for any business constituting more
than 20% of our and our
subsidiaries' combined net revenues,
net income or assets or 20% or more
of any class of our or any of our
subsidiaries' equity securities or
(ii) participate (including by way
of furnishing information) in any
discussions or negotiations
regarding any such proposal. See
"The Merger Agreement--No
solicitation of transactions"
beginning on page 31.
Fiduciary Out......................... If an unsolicited proposal for any
business constituting more than 50%
of our and our subsidiaries'
combined net revenues, net income or
assets or more than 50% of any class
of our equity securities and
Financial Security Assurance Inc.'s
equity securities, which our board
determines is reasonably capable of
being consummated and would be or is
reasonably likely to become more
favorable to us and our shareholders
than the merger, we may furnish
information to the person making
such proposal pursuant to a
confidentiality agreement and
participate in discussions or
negotiations regarding such
proposal. In response to any
proposal that is reasonably capable
of being consummated, that would be
more favorable to us and our
shareholders than the merger, and
that was not solicited by our board
after the date of the merger
agreement, our board may prior to
the time our shareholders approve
the merger but only to the extent
required by its fiduciary
obligations under applicable law:
o withdraw, modify or change, or
propose publicly to withdraw,
modify or change, the approval
or recommendation by our board
of the merger or the merger
agreement;
o approve or recommend, or propose
to approve or recommend, any
other proposal; or
o terminate the merger agreement
with respect to any superior
proposal.
See "The Merger Agreement--Fiduciary
out" beginning on page 31.
Break-up Fee Payable to Dexia......... We will pay Dexia a $78 million
break-up fee if the merger agreement
is terminated:
o by Dexia due to our board's
failure to recommend the merger
to our shareholders or our
board's approval or
recommendation of an acquisition
proposal other than the merger;
or
8
<PAGE>
o by us pursuant to our "fiduciary
out" described above.
In addition, if we agree to, or our
board recommends, an acquisition
transaction within 12 months after a
termination of the merger agreement,
we will pay the $78 million break-up
fee if the merger agreement was
terminated:
o by Dexia, because of our willful
breach of the merger agreement;
o by either Dexia or us, if the
merger agreement was terminated
(i) due to the failure of the
merger to close by January 1,
2001 (and no regulatory approval
was denied) and (ii) after a
bona fide acquisition proposal
has been made or an intention to
make such a proposal has been
publicly announced; or
o by either Dexia or us, if the
merger agreement was terminated
(i) due to the approval of our
shareholders not being obtained
and (ii) after a bona fide
acquisition proposal has been
made or an intention to make
such a proposal has been
publicly announced.
See "The Merger Agreement--Break-up
fee payable to Dexia" beginning on
page 31.
Break-up Fee Payable to Us............ Dexia will pay to us a fee in the
amount of $7.5 million if the merger
agreement is terminated due to:
o certain European regulatory
authorities' rejecting the
merger; or
o the failure of the closing of
the merger to occur by January
1, 2001 solely due to the
failure to obtain approval from
certain European regulatory
authorities.
See "The Merger Agreement--Break-up
fee payable to us" beginning on page
32.
Expenses.............................. All fees and expenses incurred in
connection with the merger will be
paid by the party incurring such
fees or expenses, except that Dexia
and we will each pay one-half of the
costs and expenses of filing,
printing and mailing this proxy
statement (including SEC filing
fees) and soliciting proxies.
Security Ownership of
Management and Certain
Beneficial Owners..................... At the close of business on the
record date, our directors and
executive officers beneficially
owned in the aggregate 381,424, or
approximately 1.1%, of the
outstanding shares of our common
stock. To our knowledge, all of our
directors and executive officers
intend to vote their beneficially
owned shares which are eligible to
be voted on the merger agreement
proposal in favor of approval of the
merger agreement. See "OWNERSHIP OF
THE COMPANY--Directors and Executive
Officers" beginning on page 38.
Market Prices of Common
Shares............................... Currently, our common shares are
listed for trading on the New York
Stock Exchange. As a result of the
merger, we will become a
privately-held company and our
shares will cease to trade in any
public trading market. The closing
price of our common shares on April
11, 2000, was $73.25.
On the record date, there were
approximately 100 holders of record
of our common shares and
approximately 4,200 persons or
entities holding our common shares
in nominee name.
9
<PAGE>
THE ANNUAL MEETING
General
This proxy statement is being delivered to you in connection with our
2000 annual meeting of shareholders to be held on May 18, 2000, at 9:00 a.m.,
local time, at the principal executive offices of Financial Security Assurance
Holdings Ltd. Each copy of this proxy statement is accompanied by a proxy card
furnished in connection with the solicitation of proxies by our board for use
at the annual meeting. All expenses incurred in connection with the filing,
printing and mailing of this proxy statement (including SEC fees) and
soliciting proxies will be equally shared by Dexia and us. We will initially
bear all other expenses incurred in connection with this proxy statement. Our
officers, directors and regular employees may provide services in connection
with the mailing of this proxy statement and the annual meeting but will
receive no additional compensation for such services. This proxy statement is
being mailed on or about April 17, 2000, to our shareholders of record on April
14, 2000.
Our board has determined that the merger and the merger agreement are
in the best interest of the Company and has approved the merger and the merger
agreement by unanimous vote of the directors present. ACCORDINGLY, OUR BOARD
RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT. See
"Special Factors -- Background of the merger" beginning on page 14 and " --
Recommendation of our Board of Directors; Purpose of and reasons for the
merger" beginning on page 24.
OUR BOARD ALSO RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL NOMINEES
FOR DIRECTOR AND "FOR" APPROVAL OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP
AS OUR INDEPENDENT AUDITORS FOR 2000.
SHAREHOLDERS ARE REQUESTED TO PROMPTLY COMPLETE, DATE, SIGN AND
RETURN THE ACCOMPANYING PROXY CARD. RETURN OF AN EXECUTED PROXY WITH NO
INSTRUCTIONS INDICATED THEREON WILL RESULT IN THE APPLICABLE SHARES BEING VOTED
"FOR" THE MERGER AGREEMENT, THE NOMINEES FOR DIRECTORS AND APPROVAL OF THE
SELECTION OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT AUDITORS FOR 2000.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE ANNUAL
MEETING WILL HAVE THE EFFECT OF A VOTE "AGAINST" THE MERGER AGREEMENT AND WILL
RESULT IN THE RELEVANT SHARES NOT BEING VOTED "FOR" OR "AGAINST" THE OTHER
PROPOSALS.
Record date and quorum requirement
The shares of our Common Stock, par value $.01 per share, and the
shares of our Series A Convertible Redeemable Preferred Stock, par value $.01
per share, are entitled to vote at the annual meeting. Our board of directors
has fixed the close of business on April 14, 2000, as the record date for the
determination of shareholders entitled to notice of, and to vote at, the annual
meeting. Each holder of record of common and preferred shares at the close of
business on the record date is entitled to one vote for each share then held on
each matter submitted to a vote of shareholders. In addition, the holders of
preferred shares are entitled to vote separately on the merger agreement, with
each preferred share entitled to one vote. At the close of business on the
record date, there were 33,517,995 shares of common stock issued and
outstanding held by 100 holders of record and by approximately 4,200 persons or
entities holding in nominee name. White Mountains holds all 2,000,000 of the
issued and outstanding shares of preferred stock.
The holders of a majority of the outstanding shares entitled to vote
at the annual meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. Abstentions and shares
referred to as "broker or nominee non-votes" that are represented at the annual
meeting (shares held by brokers or nominees as to which instructions have not
been received from the beneficial owners or other persons entitled to vote and
for which the broker or nominee does not have discretionary voting power on a
particular matter) are counted for purposes of determining the presence or
absence of a quorum for the transaction of business. If less than a majority of
outstanding shares are represented at the annual meeting, the meeting will be
adjourned to a date designated by our management, at the same time and place.
The board is not aware of any matters other than that set forth in
the notice of annual meeting of shareholders that may be brought before the
annual meeting. If any other matters properly come before the annual meeting,
including a motion to adjourn the meeting for the purpose of soliciting
additional proxies, the persons named in the accompanying proxy will vote the
shares represented by all properly executed proxies on such matters in their
discretion, except that shares represented by proxies which have been voted
"against" the merger agreement will not be used to vote "for" adjournment of
the annual meeting for the purpose of allowing additional time for soliciting
additional votes "for" the merger agreement.
SHAREHOLDERS SHOULD NOT FORWARD ANY SHARE CERTIFICATES WITH THEIR
PROXY CARDS. IN THE EVENT THE MERGER IS CONSUMMATED, SHARE CERTIFICATES SHOULD
BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN A LETTER OF
TRANSMITTAL,
10
<PAGE>
WHICH WILL BE SENT TO SHAREHOLDERS BY THE PAYING AGENT, PROMPTLY AFTER THE
EFFECTIVE TIME OF THE MERGER.
Voting procedures; Required vote; Revocability of proxy
Approval of the merger agreement will require the affirmative vote of
the holders of two-thirds of the total outstanding common shares and preferred
shares, voting together as a class, as well as the affirmative vote of the
holder of two-thirds of the outstanding preferred shares, voting as a separate
class. Approval of the other proposals to be presented at the annual meeting
will require the affirmative vote of the holders of a plurality (in the case of
election of directors) and majority (in the case of approval of selection of
independent auditors) of the outstanding common shares and preferred shares
voting on such proposals at the annual meeting, voting together as a class. A
failure to vote or a vote to abstain will have the same effect as a vote cast
against approval of the merger agreement. Brokers and, in many cases, nominees
will not have discretionary power to vote on the merger proposal to be
presented at the annual meeting. Accordingly, beneficial owners of shares
should instruct their brokers or nominees on how to vote. A broker or nominee
non-vote will have the same effect as a vote against approval of the merger
agreement. If no instructions are indicated on a properly executed proxy, such
proxy will be voted as the proxy provides. A shareholder may revoke a proxy at
any time prior to its exercise.
Shares
At the close of business on the record date, White Mountains,
MediaOne, Tokio Marine and XL held 13,848,648 of our common shares
(approximately 41% of the outstanding common shares) and White Mountains held
all 2,000,000 of our outstanding preferred shares. These shareholders combined
hold approximately 47% of the total outstanding common shares and preferred
shares. White Mountains, MediaOne, Tokio Marine and XL have entered into voting
agreements with Dexia pursuant to which they have agreed to vote their common
and preferred shares in favor of the merger agreement, unless the merger
agreement is terminated.
A shareholder may revoke a proxy at any time prior to its exercise by
(i) delivering to the paying agent a written notice of revocation prior to the
annual meeting, (ii) delivering prior to the annual meeting a duly executed
proxy bearing a later date or (iii) attending the annual meeting and voting in
person. The presence of a shareholder at the annual meeting will not in and of
itself automatically revoke such shareholder's proxy.
CERTAIN ABBREVIATIONS
The following abbreviations are used in this proxy statement:
<TABLE>
<CAPTION>
Term Company
- ---- -------
<S> <C>
FSA Financial Security Assurance Inc., our principal operating subsidiary
CGC Capital Guaranty Corporation, which we acquired in December 1995
White Mountains White Mountains Insurance Group, Ltd., formerly known as Fund American
Enterprises Holdings, Inc.
WMH White Mountains Holdings, Inc., a subsidiary of White Mountains
Source One Source One Mortgage Services Corporation, a subsidiary of White Mountains
presently known as White Mountains Services Corporation
Fireman's Fund Fireman's Fund Insurance Company, formerly a subsidiary of White Mountains
MediaOne MediaOne Group, Inc., formerly known as U S WEST, Inc.
U S WEST U S WEST, Inc., now known as MediaOne Group, Inc.
MOCC MediaOne Capital Corporation, a MediaOne subsidiary, formerly known as
U S WEST Capital Corporation
USWCC U S WEST Capital Corporation, now known as MediaOne Capital Corporation
Tokio Marine The Tokio Marine and Fire Insurance Co., Ltd.
XL XL Capital Ltd, formerly known as EXEL Ltd.
Dexia Dexia S.A., a Belgian corporation
</TABLE>
White Mountains, Tokio Marine, XL and MOCC are the major shareholders
of the Company. White Mountains owns all our Preferred Stock. Further
information regarding share ownership and other arrangements among these
companies appears under "OWNERSHIP OF THE COMPANY" beginning on page 38,
"COMPENSATION
11
<PAGE>
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" on page 45 and "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" beginning on page 47.
PROPOSAL 1: APPROVAL OF THE MERGER AGREEMENT
The Parties
Financial Security Assurance Holdings Ltd.
We are Financial Security Assurance Holdings Ltd. In this proxy
statement, we refer to our company as the "Company", "we" or "us". We own 100%
of Financial Security Assurance Inc., which we refer to as "FSA". FSA primarily
provides financial guaranty insurance on asset-backed securities and municipal
bonds. FSA was the first insurance company organized to insure asset-backed
obligations. FSA has been a leading insurer of asset-backed obligations, based
on number of transactions insured, since its organization in 1985. In 1990, FSA
expanded the focus of its business to include writing financial guaranty
insurance of municipal obligations and has since become a major insurer of
municipal bonds.
FSA writes financial guaranty insurance that typically guarantees
scheduled payments on an issuer's obligations. In the case of a default on
these payments, FSA is generally required to pay the principal, interest or
other amounts due either in accordance with the original payment schedule or,
at FSA's option, on an accelerated basis. The underwriting policy of FSA is to
insure asset-backed and municipal obligations that would otherwise be
investment grade without the benefit of FSA's insurance. The asset-backed
obligations insured by FSA are generally issued in structured transactions
backed by pools of assets such as residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. The municipal obligations insured by FSA consist primarily of
general obligation bonds, supported by the issuers' taxing power, and special
revenue bonds and other special obligations of state and local governments,
supported by the issuer's ability to impose and collect fees and charges for
public services or specific projects.
Our business objective is to remain a leading insurer of asset-backed
and municipal obligations employing our transactional and financial skills to
generate strong premium volume at attractive returns. We believe that the
demand for our financial guaranty insurance will remain strong over the long
term as a result of the anticipated continuation of three trends:
o expansion of asset securitization by volume and asset type in
the U.S. markets;
o substantial volume of new domestic municipal bonds that are
insured, due, in part, to the use of municipal bonds to finance
repairs and improvements to the nation's infrastructure and
purchases of municipal bonds by individuals who generally
purchase insured obligations; and
o growing use of asset securitization and financial guaranty
insurance in non-U.S. markets, due, in part, to a trend towards
private finance initiatives for projects having an essential
public purpose and regulatory changes encouraging or
facilitating off-balance sheet financings.
We or our subsidiaries maintain offices in New York City, San
Francisco, Dallas, London, Paris, Sydney, Tokyo, Singapore and Bermuda. In
addition to our domestic business, we pursue international opportunities and
currently operate in the European and Pacific Rim markets. We were the first
financial guaranty insurance company to insure obligations in international
markets.
We expect to continue to emphasize a diversified insured portfolio
characterized by insurance of both asset- backed and municipal obligations,
with a broad geographic distribution and a variety of revenue sources and
transaction structures.
FSA's insurance financial strength is rated "Aaa" by Moody's
Investors Service, Inc. FSA's insurer financial strength is rated "AAA" by
Standard & Poor's Ratings Services and Standard and Poor's (Australia) Pty.
Ltd. FSA's claims-paying ability is rated "AAA" by Fitch IBCA, Inc. and Japan
Rating and Investment Information, Inc.
FSA is licensed to engage in the financial guaranty insurance
business in all 50 states, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands, and has licensed insurance company subsidiaries in the United
Kingdom and Bermuda.
Our principal executive offices are located at 350 Park Avenue, New
York, New York 10022. Our telephone number at that location is (212) 826-0100.
12
<PAGE>
The current directors of the Company are:
<TABLE>
<CAPTION>
Country of Director
Name Business Address Citizenship Since
- ---- ---------------- ----------- -----
<S> <C> <C> <C>>
Terry L. Baxter 80 South Main Street USA 1999
Retired Executive Vice President Hanover, NH 03755
White Mountains
Robert P. Cochran 350 Park Avenue USA 1990
Chairman and Chief Executive Officer New York, NY 10022
Financial Security Assurance Holding Ltd.
Robert N. Downey 85 Broad Street USA 1994
Senior Director 2nd Floor
Goldman Sachs & Co. New York, NY 10004
Anthony M. Frank One Maritime Plaza USA 1996
Founding Chairman Suite 825
Belvedere Capital Partners San Francisco, CA 94111
Fudeji Hama Otemachi First Square West Japan 1998
General Manager 1-5-1 Otemachi, Chiyoda-ku
Financial Services Department Tokyo, 100-0004
Tokio Marine Japan
K. Thomas Kemp 80 South Main Street USA 1994
Deputy Chairman Hanover, NH 03755
White Mountains
David O. Maxwell 5335 Wisconsin Avenue, N.W. USA 1994
Retired Chairman Suite 440
FNMA Washington, DC 20015
Sean W. McCarthy 350 Park Avenue USA 1999
Executive Vice President New York, NY 10022
Financial Security Assurance Holdings Ltd.
James M. Osterhoff 76 Glenmoor Drive USA 1992
Retired Executive Vice President Engelwood, CO 80110
and Chief Financial Officer
U S WEST
James H. Ozanne PO Box 975 USA 1990
Chairman Darien, CT 06820
Greenrange Partners
Richard A. Post 188 Inverness Drive West USA 1994
Executive Vice President and Chief Financial Suite 500
Officer Englewood, CO 80112
MediaOne
Robert K. Taylor 350 Park Avenue USA 1995
President and Chief Operating Officer New York, NY 10022
Financial Security Assurance Holdings Ltd.
Howard M. Zelikow 1800 Avenue of the Stars USA 1996
Member Los Angeles, CA 90067
Kayne Anderson Investment Management, Inc.
</TABLE>
Directors' biographies
Summary biographies of our directors appear under "PROPOSAL 2:
ELECTION OF DIRECTORS" beginning on page 34. To our knowledge, during the past
five years, none of our directors was convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or was a party to any
judicial or administrative proceeding (except for matters that were dismissed
without sanction or settlement) that resulted in a judgment, decree or final
order enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws.
13
<PAGE>
Dexia
Dexia S. A., a Belgian corporation, conducts its business primarily
through its banking subsidiaries. Subsidiaries of Dexia include Dexia Credit
Local de France, which specializes in lending to local authorities and public
sector project finance; Credit Communal de Belgique, a Belgian retail bank; and
Banque Internationale, a Luxembourg bank, active in asset management, private
banking and fund administration. Dexia also owns Dexia Hypothekenbank Berlin,
primarily engaged in local government finance in Germany; a 40% interest in
Banco de Credito Local, a participant in the Spanish public finance market; a
26.7 % interest in Kommunalkredit Austria, engaged in local government finance
in Austria; an 84% interest in CREDIOP, an Italian participant in government
finance; and a 20% interest in Credit du Nord, a French retail bank.
Dexia was founded in 1996 through a business alliance between Credit
Communal de Belgique and Credit Local de France. Dexia engages in business
throughout Europe, and also maintains offices in the Americas, Asia and
Australia. The senior unsecured debt of Dexia's principal operating
subsidiaries (Dexia Credit Local de France and Credit Communal de Belgique) is
rated AA+ by Standard & Poor's Ratings Services and Aa1 by Moody's Investors
Service, Inc. According to its 1999 Activity Report, Dexia had approximately
euro 244 billion of consolidated assets and euro 6 billion of Tier 1 equity at
December 31, 1999. Shares of Dexia are listed on the Brussels, Paris and
Luxembourg stock exchanges, and are included in two major stock market indexes,
the BEL20 and the CAC 40.
PAJY Inc.
PAJY Inc. is a newly-formed corporation organized and existing under
the laws of New York. Dexia indirectly owns all the outstanding shares of PAJY
Inc. PAJY Inc. was organized solely for the purpose of entering into the merger
agreement with the Company and completing the merger, and has not conducted any
business operations.
Special Factors
Background of the merger
The terms and conditions of the merger were determined through arm's
length negotiations between our senior management, advisors and counsel and the
senior management, advisors and counsel of Dexia. In determining the form of
the transaction and the form and amount of consideration, numerous factors were
reviewed by our board of directors. See "Recommendations of our Board of
Directors; Purpose of and reasons for the merger" beginning on page 24. The
following is a brief description of our negotiations and certain related
events.
Our discussions with Dexia date back to the spring of 1998, when Mr.
Hecht, Chairman of the Executive Board of Dexia Project and Public Finance
International Bank, arranged a meeting with Mr. Cochran, our Chairman and Chief
Executive Officer. At that meeting, Mr. Hecht expressed Dexia's interest in
acquiring a non-controlling equity position in our Company. Mr. Cochran
responded that we were not seeking to raise additional capital at that time,
and that the only avenue available for Dexia to acquire an interest in us at
that time would be from our existing shareholders.
In May 1999, Mr. Hecht arranged another meeting with Mr. Cochran. At
this meeting, Mr. Hecht expressed Dexia's interest in acquiring a controlling
interest in us for cash, stressing the strategic importance to Dexia of a
combination with us. Mr. Cochran responded that we were not for sale, but that
we would consider a compelling proposal if one were to be made. While there
were no direct negotiations of price at that time, the message conveyed by Mr.
Cochran was that a compelling proposal would include a price in excess of $80
per share. Following such meeting, we provided Dexia with certain publicly
available information regarding us. Several weeks later, Mr. Hecht contacted
Mr. Cochran to reiterate Dexia's interest in acquiring all our outstanding
shares for cash. In June 1999, Mr. Cochran met in Paris with representatives of
Dexia and Lazard, financial advisors to Dexia. Discussions covered our and
Dexia's business lines, risk exposures and opportunities. Shortly after the
meeting in Paris, Mr. Hecht contacted Mr. Cochran to advise him that Dexia was
prepared to make a compelling offer to acquire all our outstanding shares for
cash, but required assurances that our senior management would remain in place
following such acquisition and that material synergy values would justify a
compelling price. Some of our senior management thereafter met with
representatives of Dexia to discuss synergies that might arise from a business
combination of Dexia and us, and the timeframe that we would allow Dexia to
conduct its due diligence review of us as a prelude to a more definitive
proposal. We engaged Goldman, Sachs & Co. as our financial advisor, and engaged
Cravath, Swaine & Moore and LeBoeuf, Lamb, Greene & MacCrae as our outside
counsel in connection with the proposed combination. On June 25, 1999, we and
Dexia entered into a confidentiality agreement (the "Confidentiality
Agreement") pursuant to which we agreed to provide Dexia with certain
non-public information ("Evaluation Materials") regarding us. We and our
representatives thereafter provided Dexia with Evaluation Materials and met
with representatives of Dexia and their financial advisors to discuss the
Evaluation Materials.
In early August 1999, Mr. Hecht reported to Mr. Cochran that Dexia
needed to terminate discussions regarding a possible acquisition of our shares,
citing a variety of reasons, including the need for Dexia to complete a
corporate
14
<PAGE>
restructuring. While Mr. Hecht indicated that the prospect that Dexia would
seek to resume discussions to acquire our shares at a later date remained, Mr.
Cochran noted that no assurance could be given regarding our reception of any
further proposal. On August 6, 2000, we formally requested a return of
diligence materials from Dexia, and discussions between Dexia and us formally
terminated. The discussions with Dexia were discussed by our board of directors
at its regular meeting in August 1999.
In December 1999, Mr. Hecht contacted Mr. Cochran, indicating that
Dexia's corporate restructuring was progressing and that Dexia was interested
in resuming discussions with us following year-end. On January 4, 2000, members
of our senior management met with representatives of Dexia and their financial
advisors, Lazard, at the offices of Lazard in New York to discuss a resumption
of discussions and the timeframe of a potential transaction, including our
requirement that Dexia submit a concrete proposal within two weeks. We believed
that prolonged discussions and negotiations could be disruptive to our ongoing
business and we had no assurances at the time that Dexia's proposal to us would
be, in our view, sufficiently compelling to merit further consideration. On
January 6, 2000, we and Dexia renewed our Confidentiality Agreement. We once
again provided Evaluation Materials to Dexia, and "due diligence" sessions
commenced between our officers and advisors, on the one hand, and
representatives of Dexia and their advisors, on the other hand. On January 15,
2000, Dexia provided us with a letter dated January 11, 2000 (the "Offer
Letter") including a confidential non-binding proposal to acquire all our
outstanding common shares for $75 per share, subject to certain conditions, but
without any financing contingency. On or about January 16, 2000, Mr. Cochran
responded to the Offer Letter by advising Mr. Hecht that the $75 per share
price was lower than would be required, but that we were prepared to continue
the due diligence process if Dexia had the flexibility to offer a higher price.
Mr. Hecht responded that Dexia was then unwilling to raise the offered price
above $75 per share, and discussions between Dexia and us terminated for
approximately two weeks.
In early February 2000, discussions between us resumed with Mr. Hecht
indicating that Dexia had some flexibility to increase the offered price above
$75 per share and Mr. Cochran indicating that we, in turn, might be prepared to
lower our acceptable price below $80 per share. On this basis, the due
diligence process resumed with a view towards presenting a proposed transaction
to our board of directors and the board of directors of Dexia at meetings to be
scheduled on or about March 14, 2000. On February 16, 2000, we entered into a
formal engagement letter with Goldman Sachs, our financial advisor. On February
17, 2000, the proposed transaction was presented on a preliminary basis to our
board of directors at its regularly scheduled quarterly meeting. The
presentation included reports by Goldman Sachs, our financial advisors, and
Cravath, Swaine & Moore, our outside counsel. At its February 17, 2000 meeting,
our board of directors appointed a special advisory committee of the board (the
"Advisory Committee"), comprised of Messrs. Downey, Kemp, Maxwell and Ozanne,
to advise our management on the terms, conditions and advisability of a
transaction with Dexia.
In late February and early March 2000, Dexia completed its due
diligence review of us, and we and Dexia began negotiating a merger agreement
and related transaction documents.
As a condition to proceeding with the transaction, Dexia required
voting agreements from our principal shareholders, including our largest
shareholder, White Mountains. In order to proceed with the transaction, Dexia
effectively required the consent of White Mountains due to the shareholder
approval requirements applicable to merger transactions. By selling its shares
pursuant to the stock purchase agreement rather than in the merger, White
Mountains expects to sell its interests in the Company in a tax-efficient
manner. We understand that White Mountains was not willing to sign a voting
agreement in support of an acquisition of the Company that did not include this
indirect sale by White Mountains, and that Dexia was unwilling to pursue an
acquisition of us without a voting agreement from White Mountains.
As a further condition to proceeding with the transaction, Dexia
required that Messrs. Cochran, Taylor and McCarthy enter into employment and
non-competition agreements. These agreements were negotiated between Dexia and
Messrs. Cochran, Taylor and McCarthy simultaneously with the negotiations of
the other transaction documents.
In addition, we engaged Johnson Associates, Inc., compensation
consultants to our board of directors, to help develop a post-merger
compensation program, as well as to determine the effect of a change in control
arising from the merger upon our various benefit programs. The post-merger
compensation program developed by Johnson Associates, Inc. is described under
"The Merger Agreement--Employee benefits and compensation".
On March 1, 2000, our Advisory Committee first met, at which time our
management reported on the status of the due diligence process and
negotiations, and that White Mountains' willingness to sign a voting agreement
was conditioned on a purchase by Dexia (at a price reflecting the same price
per FSA share paid to our other shareholders by Dexia) of the White Mountains
subsidiary holding our shares.
On March 8, 2000, Mr. Hecht contacted Mr. Cochran to advise us that
Dexia's executive committee had approved an acquisition of all our shares at a
price of $76 per share in cash, subject, among other things, to receipt of
voting agreements from our significant shareholders requiring them both to vote
for the merger and to vote against any competing proposal for a year after
signing the voting agreements (a "Vote-Against Provision"). The Vote-Against
Provision would have prevented shareholder approval of another merger until its
expiration, even if our board of
15
<PAGE>
directors elected an earlier termination of the merger agreement with Dexia due
to receipt of a superior acquisition proposal.
On March 8, 2000, our Advisory Committee met to discuss the proposal
received from Dexia earlier that day. The Advisory Committee discussed, among
other things, valuation issues and the risks and rewards to our shareholders of
the proposed transaction and the willingness of our major shareholders to agree
to the Vote-Against Provision. The Advisory Committee and management concluded
that they were prepared to recommend to our board of directors either (i) a $76
per share offer without a Vote-Against Provision or (ii) a $77 per share offer
with a Vote-Against Provision. The Advisory Committee concluded that our senior
management should proceed to negotiate the matter further with Dexia. Mr.
Cochran contacted Mr. Hecht to discuss the conclusions of the Advisory
Committee, at which time Mr. Hecht responded that Dexia had no further
flexibility on price, but was prepared to proceed with an offer at $76 per
share without a Vote-Against Provision.
On March 9, 2000, the New York Stock Exchange halted trading in our
common stock following a sharp rise in share price. After consultation with
counsel, we issued a press release confirming that we were in discussions
regarding a possible sale of all our shares to a third party. Trading in our
common stock resumed following issuance of the press release.
Our senior management and advisors and Dexia's management and
advisors substantially completed negotiation of the transaction documents for
the merger over the weekend of March 11 and 12, 2000. During the same period,
White Mountains completed negotiation of the sale of its subsidiary to Dexia,
and members of our senior management completed negotiation of their post-merger
employment agreements. On the evening of March 13, 2000, our board of directors
convened a special meeting to consider the merger and related transactions. At
the meeting, (i) our senior management reported on the merger negotiations and
the effect of the merger upon our shareholders, our employees, our clients and
our ongoing business prospects, (ii) our outside counsel (Cravath, Swaine &
Moore) described the terms of the proposed transaction, as well as the
fiduciary and other obligations of directors in considering the proposed
transaction, (iii) our financial advisors (Goldman, Sachs & Co.) reported on
the financial aspects of the merger and delivered an oral opinion concerning
the fairness from a financial point of view of the merger consideration to our
shareholders (other than Dexia and White Mountains), (iv) our compensation
consultants (Johnson Associates, Inc.) reported on the effect of the merger on
our various employee benefit plans, our proposed post-merger compensation
program and the fairness of the post-merger employment agreements with Messrs.
Cochran, Taylor and McCarthy and (v) John J. Byrne, our Chairman Emeritus and
the Chairman and Chief Executive Officer of White Mountains, reported on White
Mountains' proposed sale to Dexia of White Mountains' subsidiary that holds our
shares, reiterating that White Mountains was not willing to sign a voting
agreement in support of an acquisition of the Company that did not include this
structure. Our directors who are affiliated with White Mountains (Messrs.
Baxter and Kemp) as well as Mr. Byrne left the meeting in order to allow our
independent directors an opportunity to discuss the proposed White Mountains
transaction and the conditions to the merger relating to the White Mountains
transaction. At the meeting, our management reported that (i) there had been
discussions between us and Dexia regarding the prospect of one or more of our
shareholders or strategic partners (including potentially White Mountains, XL
and Tokio Marine) purchasing shares of our new holding company following the
merger for a price equal to the merger consideration and (ii) the terms of any
such investment had not yet been negotiated and that it was difficult to assess
the likelihood of agreement being reached. Our board of directors concluded
that our management should cease discussions to facilitate any sale to third
parties of shares of our new holding company because those discussions might
delay consummation of the merger, which would be adverse to our other
shareholders. Late in the evening on March 13, 2000, our Board of Directors
(with one director absent) unanimously approved the merger and related
transactions (including the White Mountains transaction). On March 14, 2000,
Dexia's Board of Directors met and approved the merger. On the morning of March
14, 2000, the opening of trading in our shares on the NYSE was delayed pending
our announcement of the transaction. The merger agreement and related
agreements were executed and delivered, and the transaction was publicly
announced by us and by Dexia, on the morning of March 14, 2000.
Opinion of Goldman, Sachs & Co.
On March 13, 2000, Goldman, Sachs & Co. rendered to us its oral
opinion, which was subsequently confirmed in writing as of March 14, 2000 and
as of the date of this proxy agreement, to the effect that, based upon and
subject to the considerations set forth in such opinion, as of such date, the
$76.00 per common share in cash to be received by the holders of our common
shares (other than Dexia and White Mountains) pursuant to the merger agreement
was fair from a financial point of view to such holders.
We informed Goldman Sachs that, concurrently with the transactions
contemplated by the merger agreement, Dexia will acquire separately
approximately 6.9 million of our common shares and 2 million of our preferred
shares indirectly through the purchase of the outstanding capital stock of
White Mountains Holdings, Inc. from the stockholders thereof pursuant to the
stock purchase and indemnity agreement attached as Exhibit C to the merger
agreement. White Mountains Holdings, Inc. will acquire such shares as the
result of the distribution thereof from White Mountains Services Corporation
(such distribution and acquisition by Dexia being, collectively, the "White
Mountains Purchase"). Both White Mountains Holdings, Inc. and White Mountains
Services Corporation are wholly-owned subsidiaries of
16
<PAGE>
White Mountains. The Goldman Sachs opinion does not address the fairness to any
person of the White Mountains Purchase.
You should consider the following when reading the discussion of the
opinion of Goldman Sachs below:
o We urge you to read carefully the entire opinion of Goldman
Sachs, which is attached as appendix B to this proxy statement
and is incorporated by reference.
o The description of Goldman Sachs' opinion is qualified by
reference to the full opinion located in appendix B to this
proxy statement.
o Goldman Sachs' advisory service and opinion were provided to our
Board for its information in its consideration of the merger and
were directed only to the fairness from a financial point of
view to holders of our common shares (other than Dexia and White
Mountains) of the $76 per share offer price.
o Goldman Sachs' opinion does not address the merits of the
Company's underlying business decision to engage in the merger.
o Goldman Sachs' opinion does not address the fairness to any
person of the White Mountains Purchase.
o Goldman Sachs' opinion does not address the price or range of
prices at which the common shares may trade before the merger.
o Goldman Sachs' opinion was necessarily based upon conditions as
they existed and could be evaluated on March 13, 2000 and
Goldman Sachs assumed no responsibility to update or revise its
opinion based upon circumstances or events occurring after such
date.
o Goldman Sachs' opinion did not constitute a recommendation to
our board in connection with the merger, and does not constitute
a recommendation to any holder of shares as to how to vote on
the merger or any related matter.
In connection with its opinion, Goldman Sachs, among other things:
o reviewed the merger agreement;
o reviewed our annual reports to shareholders and annual reports
on Form 10-K for the five years ended December 31, 1998;
o reviewed certain of our interim reports to shareholders and
quarterly reports on Form 10-Q;
o reviewed statutory annual statements filed by our insurance
company subsidiaries with certain state insurance departments
for the five years ended December 31, 1999;
o reviewed certain other communications from us to our
shareholders;
o reviewed certain internal financial analyses and forecasts for
us prepared by our management;
o held discussions with members of our senior management regarding
their assessment of our past and current business operations,
financial conditions and future prospects;
o reviewed the reported price and trading activity for our common
shares, compared certain financial and stock market information
for the Company with similar information for certain other
companies the securities of which are publicly traded;
o reviewed the financial terms of certain recent business
combinations in the insurance industry specifically and in other
industries generally; and
o performed such other studies and analyses as it considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all the
financial and other information discussed with or reviewed by it and assumed
such accuracy and completeness for purposes of rendering its opinion. In that
regard, Goldman Sachs assumed that the internal forecasts for the Company
prepared by our management were reasonably prepared on a basis that reflected
the best currently available estimates and judgments of our management. Goldman
Sachs is not an actuary and its services did not include actuarial
determinations or evaluations or any attempt
17
<PAGE>
to evaluate actuarial assumptions. In addition, Goldman Sachs did not make an
independent evaluation or appraisal of the assets and liabilities (including
the loss and loss adjustment expense reserves) of the Company or any of its
subsidiaries and was not furnished with any such evaluation or appraisal. In
that regard, Goldman Sachs made no analysis of, and expressed no opinion as to,
the adequacy of the loss and loss adjustment expense reserves of the Company.
Goldman Sachs was not requested to and did not solicit from third parties
indications of interest in acquiring all or part of the Company or in engaging
in a business combination or any other strategic transaction with the Company,
except that, on the basis of an inquiry referred by us to Goldman Sachs,
Goldman Sachs held limited discussions with one such party regarding the
possibility of an alternative transaction.
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. Goldman
Sachs is familiar with the Company, having provided certain investment banking
services to us from time to time, including having acted as lead manager on our
$130 million Senior Quarterly Income Debt Securities ("QUIDS") offering in
September 1997 and lead manager on our $100 million QUIDS offering in November
1998, as well as having acted as our financial advisor in connection with, and
having participated in certain of the negotiations leading to, the merger
agreement. Robert N. Downey, a former partner and current Senior Director of
Goldman Sachs, is a director of the Company. Goldman Sachs has also from time
to time provided investment banking services to certain of our shareholders.
Goldman Sachs is a full service securities firm and in the course of its normal
trading activities may from time to time effect transactions and hold
securities, including derivative securities, of the Company and Dexia for its
own account and the accounts of customers.
We have agreed to pay Goldman Sachs, upon consummation of the merger,
a transaction fee equal to 0.625% of the aggregate consideration paid in the
transaction (exclusive of shares held in a rabbi trust or subject to forward
agreements with the Company), which, if the merger is consummated at the $76
per common share offer price, with an approximate aggregate consideration of
$2.64 billion, will be equal to approximately $16 million. We have also agreed
to indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the federal securities laws.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its opinion to the Company's Board
and does not purport to be a complete description of the analyses performed by
Goldman Sachs. The following quantitative information, to the extent it is
based on market data, is based on market data as it existed at or about March
13, 2000 and is not necessarily indicative of current market conditions. You
should understand that the order of analyses (and results thereof) described
does not represent relative importance or weight given to such analyses by
Goldman Sachs. The summary of financial analyses includes information presented
in tabular format. The tables should be read together with the text of such
summaries.
Implied Premium and Multiple Analysis. Goldman Sachs calculated that
the $76 per common share offered pursuant to the merger agreement represented a
premium of 70% to the $44.75 closing price per common share on March 8, 2000, a
premium of 30% to the $58.56 closing price per common share on March 9, 2000,
and a premium of 44% to the $52.88 closing price per common share on March 10,
2000.
Goldman Sachs also analyzed and calculated the following:
o the multiple of the transaction value to (1) actual Company
operating net income (net income before equity-based
compensation, performance share plan cost, goodwill
amortization, and capital gains) for 1999, (2) estimated Company
operating net income for 2000 (based upon Company management
base case estimates) and (3) estimated Company operating net
income for 2001 (based upon each of Company management's base
case and upside case estimates).
o the multiple of the transaction value to (1) Company adjusted
net income (net income excluding capital gains/losses) for 1999,
(2) estimated Company adjusted net income for 2000 (based upon
Company management base case estimates) and (3) estimated
Company adjusted net income for 2001 (based upon each of Company
management's base case and upside case estimates).
o the multiple of the transaction value to (1) the stated book
value of the Company, (2) the stated book value excluding the
adjustment pursuant to FASB Statement 115 ("Book Value ex-115")
of the Company and (3) the adjusted book value (book value plus
net deferred premium revenue plus the present value of future
net installment premiums and the change in the value of forward
shares less deferred acquisition costs less tax effect) of the
Company, each as of December 31, 1999.
18
<PAGE>
The following tables set forth the results of these analyses:
The multiple of the transaction value to:
1999A Operating Net Income................................ 16.7x
2000E Operating Net Income (Base Case).................... 14.2x
2001E Operating Net Income (Base Case).................... 12.4x
2001E Operating Net Income (Upside Case).................. 11.9x
The multiple of the transaction value to:
1999A Adjusted Net Income................................. 18.3x
2000E Adjusted Net Income (Base Case).................... 16.1x
2001E Adjusted Net Income (Base Case)..................... 13.6x
2001E Adjusted Net Income (Upside Case).................. 13.3x
The multiple of the transaction value to:
Stated book value......................................... 2.1x
Book Value ex-115......................................... 1.9x
Adjusted book value....................................... 1.4x
Goldman Sachs also noted that following the press release by the
Company on March 9, 2000, confirming that the Company was in discussions
regarding a possible sale of the Company, neither the Company nor Goldman Sachs
received any inquires from any interested third parties.
Comparison of Selected Financial Service Companies. Goldman Sachs
compared publicly available financial operating and stock market information,
and forecasted financial information, for the Company and selected other
publicly traded companies that operate in the financial services sector, either
as financial guarantors or mortgage insurers. All financial data analyzed was
as of or for the twelve-months ended December 31, 1999, and all per share
calculations were based upon diluted shares outstanding.
The selected financial guarantor comparable companies were:
o MBIA, Inc.
o Ambac Financial Group, Inc.
o Enhance Financial Services Group, Inc.
The selected mortgage insurer comparable companies were:
o MGIC Investment Corporation
o PMI Group, Inc.
o Radian Group Inc.
o Triad Guaranty Inc.
For the Company and each selected financial guarantor and mortgage
insurer, Goldman Sachs derived and compared, among other things:
o the ratio of each company's closing share price on March 10,
2000 to (1) its estimated earnings per share ("EPS") for 2000
and (2) its estimated EPS for 2001, in each case using estimates
from Institutional Brokers Estimates System ("IBES"; IBES is a
data service that monitors and publishes compilations of
earnings estimates by selected research analysts regarding
companies of interest to institutional investors);
19
<PAGE>
o the ratio of each company's closing share price on March 10, 2000
to (1) its Book Value ex-115 as of December 31, 1999, and (2) its
adjusted book value as of December 31, 1999; and
o the percentage represented by each company's closing share price
on March 10, 2000, relative to its 52 week high closing share
price.
With respect to the Company, Goldman Sachs performed the calculations
described above based upon (1) the closing price of the Company common stock as
of March 8, 2000 ($44.75) and the $76 per common share offered pursuant to the
merger agreement, and (2) base case operating net income estimates for 2000 and
2001 per management as of February 2000, and IBES estimates.
The following tables set forth the results of these analyses:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
The Company
Comparable Companies The Company at March 8, at the $76
at March 10, 2000 Price 2000 Price Offer Price
--------------------------------- ----------------------------------- -------------------
IBES Management Management
Range Median estimates estimates estimates
Ratio of closing share price to:
Estimated EPS for 2000............... 8.6x 8.4x 14.2x
o Financial Guarantors.......... 4.4x - 8.2x 7.6x
o Mortgage Insurers............. 6.3x - 6.9x 6.4x
Estimated EPS for 2001 .............. 7.5x 7.3x 12.4x
o Financial Guarantors.......... 3.7x - 7.2x 6.9x
o Mortgage Insurers............. 5.6x - 6.2x 5.6x
The Company
Comparable Companies The Company at March 8, at the $76
at March 10, 2000 Price 2000 Price Offer Price
--------------------------------- ----------------------------------- -------------------
Range Median
Ratio of closing share price to:
Book Value ex-115................ 1.2x 1.9x
o Financial Guarantors.......... 0.7x - 1.4x 1.1x
o Mortgage Insurers............. 1.3x - 2.1x 1.4x
Adjusted book value.............. 0.85x 1.4x
o Financial Guarantors.......... 0.52x - 0.93x 0.75x
o Mortgage Insurers............. NA NA
Percentage of closing share
price to 52 week high: 74% 126%
o Financial Guarantors.......... 51% - 66% 55%
o Mortgage Insurers............. 53% - 67% 63%
</TABLE>
Goldman Sachs noted in particular that using the offer price of $76
per common share, the multiples and the premium derived for the Company, in each
case, were higher than the high-end multiples (other than with respect to the
Book Value ex-115 of the mortgage insurer comparable companies) and premium of
the selected financial guarantor comparable companies and the selected mortgage
insurer comparable companies.
Summary of Selected Acquisitions in the Financial Guaranty and
Mortgage Insurance Industries. Goldman Sachs reviewed publicly available
information for seven completed acquisitions in the financial guaranty and
mortgage insurance industries since April 1989. These precedent transactions
considered by Goldman Sachs were the following
20
<PAGE>
(in each case, the acquiror's name is listed first and the acquired company's
name is listed second): (1) CMAC Investment Corporation/Amerin Corporation; (2)
MBIA Inc./CapMAC Holdings Inc.; (3) Ambac Financial Group, Inc./Construction
Loan Insurance Corporation; (4) the Company/Capital Guaranty Corporation; (5) U
S WEST Capital Corporation/the Company; (6) MBIA Inc./Bond Investors Guaranty
Insurance Company; and (7) General Electric Capital Corporation/FGIC
Corporation.
For each selected transaction, Goldman Sachs derived the following:
o the ratio of the transaction value to (1) the stated book value
of the acquired company, (2) the net income of the acquired
company for the last twelve-month period prior to the
announcement of the transaction for which financial results were
available, and (3) the estimated net income of the acquired
company on a stand-alone basis for the fiscal year following the
announcement of the transaction; and
o the premium represented by the price paid in the transaction, to
the acquired company's market value one week prior to the deal
announcement.
With respect to certain financial information for the companies
involved in the selected acquisition transactions, Goldman Sachs relied on
information available in public documents, equity research reports published by
certain investment banks, and then current IBES estimates.
The following table sets forth the results of these analyses and
compares such analyses to similar Company ratios, provided that income estimates
for the Company are the Company management base case estimates, and the premium
is calculated based upon the closing price for the Company's common stock on
March 8, 2000 ($44.75):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>>
Comparable The Company at the
Transactions $76 Offer Price
-------------------------------------------- ---------------------------
Range Median
Range Median
Ratio of transaction value to:
Acquired company's stated
book value..................... 0.6x - 1.57x 1.27x 2.1x
Acquired company's net
income for last twelve-
month period prior to
announcement................... 8.9x - 17.2x 12.1x 19.5x
Acquired company's
estimated net income for the
fiscal year following the
announcement................... 8.5 - 13.2x 10.5x 18.8x
Premium of transaction value to
acquired company's market
value:
1 week prior to
announcement................... 12% - 32% 15% 70%
</TABLE>
Using the $76 per common share offer price, the ratios derived for the
Company were in each case higher than each of the high-end ratios and the
premium with respect to the comparable transactions.
Property and Casualty Public Insurance Merger Transactions Analysis.
Goldman Sachs reviewed certain financial, operating, stock market and other
publicly available information for 12 selected merger transactions, each with a
value in excess of $200 million, in the property and casualty public insurance
industry, announced since 1997 (in each case, the acquiror's name is listed
first and the acquired company's name is listed second): (1) Farmers Insurance
Exchanges (Zurich)/ Foremost Corporation of America; (2) Markel
Corporation/Terra Nova (Bermuda) Holdings, Ltd.; (3) Royal and Sun
Alliance/Orion Capital Corporation; (4) ACE Limited/Capital Re Corporation; (5)
Fortis, Inc./American Bankers Insurance Group, Inc.; (6) The Chubb
Corporation/Executive Risk Inc.; (7) Fairfax Financial Holdings Limited/TIG
Holdings, Inc.; (8) Nationwide Mutual Insurance Company/Allied Group, Inc.; (9)
The St. Paul Companies, Inc./USF&G Corporation; (10) USF&G Corporation/TITAN
Holdings, Inc.; (11) General Motors Acceptance Corporation/Integon Corporation;
and (12) SAFECO Corporation/American States Financial Corporation.
For each selected transaction, Goldman Sachs derived the following:
21
<PAGE>
o the ratio of the transaction value to (1) the net income of the
acquired company for the last twelve- month period prior to the
announcement of the transaction for which financial results were
available, (2) the operating income of the acquired company for
the last twelve-month period prior to the announcement of the
transaction for which financial results were available, (3) the
estimated operating income of the acquired company on a
stand-alone basis for the first fiscal year following the
announcement of the transaction, and (4) the estimated operating
income of the acquired company on a stand-alone basis for the
second fiscal year following the announcement of the transaction;
o the ratio of the share price of the acquired company based on the
transaction value, to the tangible book value (stated book value
less intangible assets) of the acquired company as of the last
completed fiscal quarter prior to the announcement of the
transaction; and
o the premium represented by the price paid in the transaction, to
the market value of the acquired company one day prior to the
announcement of the transaction.
With respect to certain financial information for the companies
involved in the selected transactions, Goldman Sachs relied on information
available in public documents, equity research reports published by certain
investment banks and then current IBES estimates.
The following table sets forth the results of these analyses and
compares such analyses to similar Company ratios, provided that (1) the
estimated Company operating income for each of the first (fiscal year 2000) and
second (fiscal year 2001) fiscal year following the announcement of the
transaction is based upon Company management base case estimates, (2) the ratio
of transaction value to tangible book value is calculated based upon Company
stated book value and (3) the premium is calculated based upon the closing price
for the Company's common shares on March 8, 2000 ($44.75):
<TABLE>
<CAPTION>
Comparable The Company at the
Transactions $76 Offer Price
-------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Range Median
Ratio of transaction value to:
Acquired company's net
income for last twelve-month
period prior to announcement...... 7.5x - 25.3x 17.1x 19.5x
Acquired company's operating
income for last twelve-month
period prior to announcement...... 12.1x - 23.5x 16.9x 16.7x
Acquired company's estimated
operating income for the first
fiscal year following the
transaction....................... 6.3x - 23.5x 14.8x 14.2x
Acquired company's estimated
operating income for the
second fiscal year following the
transaction....................... 10.3x - 21.6x 14.2x 12.4x
Ratio of transaction value to:
Acquired company's tangible
book value........................ 0.8x - 8.3x 2.5x 2.1x
Premium of transaction value to:
Acquired company's market
value one day prior to
announcement...................... (2.0)% - 69.4% 23.3% 70%
</TABLE>
Using the $76 per common share offer price, the premium derived for
the Company was in excess of the high- end premium with respect to the
comparable transactions, and the remainder of the ratios derived were, in each
case, within the range of, and similar to the median for, the comparable
transactions.
Present Value of Potential Future Public Share Price of the Company.
Goldman Sachs performed a net present value analysis through 2005, based upon
financial projections provided by the Company's management through 2004, with
growth in earnings to 2005 based upon management's estimated 2003 - 2004 growth
rate, to compare the present
22
<PAGE>
value of the sum of (1) the projected dividend stream over the next five years
and (2) the assumed common share price at the end of 2005 (the "Year 5 Share
Price"), with the current common share price. The analysis was performed using
two different management EPS estimates for 2000 through 2004: a base case and an
upside case. Goldman Sachs assumed dividends from 2000 through 2005 using
management EPS estimates and an assumed dividend payout ratio of 9% of such
estimates.
Goldman Sachs assumed a range of Year 5 Share Prices based on
price-to-earnings multiples ranging from 7.0x to 11.0x forward EPS. The assumed
future dividends and Year 5 Share Prices were discounted at rates ranging from
10% to 14%.
The following table sets forth the results of this analysis:
Base Case
Present Value per Share
Discount Rate Multiple of forward 2005 operating EPS
------------- --------------------------------------
7.0x 11.0x 15.0x
---- ----- -----
10.0% $45.86 $70.71 $95.56
12.0% $41.99 $64.70 $87.40
14.0% $38.50 $52.29 $80.07
Upside Case
Present Value per Share
Discount Rate Multiple of forward 2005 operating EPS
------------- --------------------------------------
7.0x 11.0x 15.0x
---- ----- -----
10.0% $49.23 $75.95 $102.66
12.0% $45.07 $69.49 $93.90
14.0% $41.33 $63.68 $86.02
Goldman Sachs noted that the $76 offer price exceeded all present
discounted share values, using management base case or management upside case
EPS estimates, where such reference value was calculated based upon between 7.0x
or 11.0x forward 2005 EPS with a discount rate ranging from 10% to 14%. Goldman
Sachs also noted, assuming the Year 5 Share Price would represent a forward
multiple of 8.6x forward EPS (the Company multiple as of March 8, 2000), the $76
offer price exceeded the assumed discounted Year 5 Share Price and dividend
assuming management base or upside case estimates and a discount rate ranging
from 10% to 14%.
* * *
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 application of these methods to the particular
circumstances and, therefore, is not necessarily susceptible to partial analysis
or summary description. Selecting portions of the analyses or of the summary set
forth above, without considering the analysis 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 factor or analysis
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. In addition, in performing the analyses, Goldman
Sachs made numerous assumptions with respect to industry performance, general
business, economic, market and financial conditions and other matters. No
company or transaction used in the above analyses is directly comparable to the
Company or the merger. The analyses were prepared solely for the purposes of
Goldman Sachs providing its opinion to the Company's board as to the fairness of
the consideration and do not purpose to be appraisals or necessarily reflect the
prices at which businesses or securities may actually be sold. Analyses based on
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 the Company, Goldman Sachs or any other
person assumes responsibility if future results are materially different from
those forecast. As described above, the opinion of Goldman Sachs to the
Company's board was among many factors taken into consideration by the Company's
board in making its determination to approve the merger agreement.
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Recommendation of our Board of Directors; Purpose of and reasons for the merger
Our board of directors believes that the terms of the merger are fair
to, and in the best interest of, our Company and our shareholders. Accordingly,
our board of directors (with one director absent from the meeting) has, by a
unanimous vote of those directors present, approved the merger agreement and the
transactions contemplated by the merger agreement and recommends that our
shareholders vote "FOR" approval of the merger agreement.
The purpose of the transaction, from our vantage point, is to offer
our shareholders the opportunity to dispose of their shares for cash at an
attractive premium to the pre-merger market price, while at the same time (i)
allowing our employees the opportunity of continued employment with the benefit
of business opportunities that might arise from our combination with Dexia, (ii)
maintaining the integrity of the "triple-A" ratings on bonds insured by our
subsidiaries and (iii) obtaining access to additional financial resources that
may be advantageous to the success of our business in the future.
The offer made by Dexia to acquire our shares was not solicited by our
management or by our board of directors. Nonetheless, our management believed
that it had a duty to present to our board of directors, and our board of
directors believed that it had a duty to seriously consider, a firm cash offer
at a substantial premium to then current market value from a well capitalized
and highly rated financial institution that appears to be a good strategic fit
with us.
In deciding to approve the merger and related transactions, our board
of directors considered a variety of factors, including (i) the opinion rendered
by Goldman Sachs regarding the fairness of the merger consideration, from a
financial point of view, to the holders of our common shares (other than Dexia
and White Mountains), (ii) the ability of our Board of Directors to terminate
the merger agreement pursuant to its "fiduciary out" in the event that a more
attractive competing proposal materializes, (iii) the premium that the merger
price per share represented to market value, adjusted book value and book value
per share, (iv) the range of alternative strategies or transactions which might
be available to us and the prices at which those transactions might be
implemented, (v) the absence of any financing condition to Dexia's obligations
to close the transaction, and the ability of Dexia to pay the merger
consideration in the event that its financing plan proves unsuccessful, (vi) the
likelihood of satisfying the regulatory and other conditions to closing the
transaction and (vii) potential synergies arising from our combination with
Dexia.
Our reasons for proceeding with the transaction include (i) the
trading value of our common shares in recent years as compared to the merger
price, (ii) our belief that the trading value for our shares was not likely to
exceed the merger price in the near term, (iii) our belief that the merger
consideration is at the high end of the range of prices that might be offered by
other third parties that might be interested in acquiring our shares, (iv) the
insulation afforded by a well-capitalized liquid parent like Dexia in the event
of an economic downturn that might result in credit losses in our insured
portfolio, (v) the benefits of the merger to our employees and customers and
(vi) concern that a combination of Dexia or another well-capitalized financial
institution with one or more of the other financial guarantors might leave us at
a competitive disadvantage.
In deciding to approve the merger and related transactions, our board
of directors considered the various factors discussed above. Our board of
directors did not, however, assign any relative or specific weights to those
factors, and individual directors may have given different weight to different
factors.
Conflicts of interest
When you consider the recommendations of our board of directors, you
should be aware that our officers and directors may have interests in the merger
that are different from, or in addition to, your interests. These interests may
create potential conflicts of interest. Our board of directors was aware of
these interests when it approved the merger.
o Employment agreements. Each of Robert P. Cochran, our Chairman
and Chief Executive Officer, Roger K. Taylor, our President and
Chief Operating Officer, and Sean W. McCarthy, our Executive Vice
President, have entered into employment agreements with us,
conditioned on the occurrence of the merger. Dexia required that
Messrs. Cochran, Taylor and McCarthy enter into employment
agreements with non-compete covenants as a condition to
proceeding with the merger. These employment agreements generally
guarantee continuation of current compensation and benefits for a
period of four years from the date of the merger and provide for
additional severance benefits in the event of termination of
employment.
o Indemnification of directors and officers. Following the merger,
Dexia will indemnify each of our and our subsidiaries' present
and former directors and officers from any and all costs and
expenses arising out of acts or omissions occurring at or before
the effective time of the merger to the fullest extent the
Company or its subsidiary, as applicable, is permitted to
indemnify its directors and officers under the laws of the
jurisdiction of its incorporation, its certificate of
incorporation or its bylaws (or comparable organizational
documents) as in effect on the date of the merger agreement.
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o Directors' and officers' insurance. For six years after the
effective time of the merger, Dexia will cause to be maintained a
directors' and officers' liability insurance policy for our and
our subsidiaries' present and former directors and officers for
acts and omissions occurring before the merger with coverage no
less favorable than the Company's existing directors' and
officers' liability insurance coverage (but Dexia will not be
required to pay an annual premium greater than 200% of the
current premium with respect to such insurance).
o White Mountains Stock Purchase Agreement. Certain of our
directors also serve as employees and directors of, or are former
employees of, White Mountains. In connection with the merger,
White Mountains and Dexia have entered into an agreement
providing for Dexia to acquire White Mountains' holdings in the
Company indirectly by purchasing a White Mountains subsidiary
that does not have any assets other than its interests in the
Company. The purchase price paid to White Mountains per Company
share purchased will be equal to the merger consideration of $76
per share in the case of common shares and $46.35 per share in
the case of preferred shares ($76 minus the conversion price for
the conversion of a share of preferred stock into a share of
common stock). White Mountains also agreed to indemnify Dexia
against liabilities that might result from this structure, and
Dexia will withhold a portion of White Mountains' proceeds for a
period of time to support this indemnity. The sale of the White
Mountains subsidiary immediately prior to the merger is a
condition to the merger for both us and Dexia. We cannot waive
this condition without White Mountains' consent. By selling its
shares pursuant to the stock purchase agreement rather than in
the merger, White Mountains expects to sell its interests in the
Company in a tax-efficient manner. We understand that White
Mountains was not willing to sign a voting agreement in support
of an acquisition of the Company that did not include this
indirect sale by White Mountains, and that Dexia was unwilling to
pursue an acquisition of us without a voting agreement from White
Mountains.
o Discussions between Dexia and certain shareholders. Prior to the
execution of the merger agreement, there had been discussions
between us and Dexia regarding the prospect of one or more of
our shareholders or strategic partners (including potentially
White Mountains, Tokio Marine and XL) purchasing shares of our
new holding company following the merger for a price equal to
the merger consideration. We have been informed that Dexia and
White Mountains also had preliminary discussions regarding the
possibility of such an investment by White Mountains. The terms
of any such investment were not negotiated and such investment
is not a condition to the merger. Our board of directors
concluded at its March 13, 2000 meeting that our management
should cease discussions to facilitate any sale to third parties
of shares of our new holding company because those discussions
might delay consummation of the merger, which would be adverse
to our other shareholders. We do not plan to participate in any
renewal of such discussions prior to the merger and White
Mountains has told us it will not pursue any discussions prior
to consummation of the merger even if Dexia desires such an
investment. Such discussions may, however, be renewed, and the
transactions contemplated thereby consummated after the
consummation of the merger. However, such discussions may be
resumed and such transactions may be consummated prior to the
consummation of the merger if our board of directors determines
that it is appropriate to do so.
o Continued Employee Benefits and Compensation. Dexia has agreed
to provide our continuing employees with employee benefit plans,
base salaries and annual bonuses consistent with current
practices through 2004. Our 1993 Equity Participation Plan for
outstanding performance shares held by continuing employees will
be continued after the merger and will provide that, for
purposes of payouts of performance shares, our common stock will
be valued at $76 per share plus interest at a rate of 8% per
annum from the effective date of the merger. Future performance
shares will be awarded in a manner consistent with current
practice but with senior management awards annualized. 1.4
million performance shares will be authorized and 1.2 million
performance shares will be committed over the next four years of
awards, with an agreed-upon performance objectives and share
valuation methodology. Our severance policies have been amended
to provide reimbursement (on a grossed-up basis) for any "golden
parachute" excise taxes payable upon termination of employment
following the merger.
Certain effects of the merger
As a result of the merger, our public shareholders will not have an
opportunity to continue their equity interest in the Company as an ongoing
corporation and therefore will not share in the future earnings and potential
growth of the Company. Upon consummation of the merger, our common shares will
no longer be traded on the New York Stock Exchange and the registration of the
common shares under the Securities Exchange Act of 1934 (the "Exchange Act")
will be terminated. We intend, however, to remain a reporting company under the
Exchange Act following the merger at least so long as our outstanding debt
securities remain listed on the New York Stock Exchange.
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The receipt of cash pursuant to the merger will be a taxable
transaction. See "-- Federal income tax consequences".
Federal income tax consequences
This section discusses the material United States federal income tax
consequences of the merger to our shareholders whose shares of our common stock
are surrendered in the merger in exchange for the right to receive cash
consideration of $76 per share. The discussion below applies only to
shareholders that hold our shares as capital assets at the time of the merger,
and the discussion may not apply to shareholders that are subject to special tax
rules, such as financial institutions, insurance companies, dealers in
securities, persons that mark-to-market their securities, persons that hold our
shares as part of a "straddle," "hedge" or "synthetic security transaction"
(including a "conversion" transaction), persons with a "functional currency"
other than the U.S. dollar, retirement plans and tax-exempt organizations,
shareholders who acquired our shares pursuant to the exercise of stock options,
pursuant to participation in an employee stock purchase plan or otherwise as
compensation, or shareholders that are nonresident alien individuals, foreign
corporations, foreign partnerships, foreign trusts or foreign estates. The
discussion below is based upon federal income tax laws as now in effect and
interpreted and does not take into account possible changes in these tax laws or
interpretations, any of which may be applied retroactively. The discussion does
not include any description of the tax laws of any state, local or foreign
government that may be applicable to our shareholders.
This section does not discuss all aspects of federal income taxation
that may be relevant to a specific shareholder in light of such shareholder's
particular circumstances and income tax situation. Each shareholder should
consult his, her or its own tax advisor as to the specific tax consequences of
the merger, including the application and effect of federal, state, local,
foreign and other tax laws or changes to those laws.
For federal income tax purposes, our shareholders generally will
recognize capital gain or capital loss equal to the difference between the cash
received by the shareholder pursuant to the merger and such shareholder's
adjusted tax basis in the shares surrendered pursuant to the merger. If, at the
time of the merger, a noncorporate shareholder's holding period for our shares
is more than one year, any gain recognized generally will be subject to federal
income tax at a maximum rate of 20%.
Consideration received by our shareholders in the merger may be
subject to backup withholding at a 31% rate. Backup withholding generally will
apply only if the shareholder fails to furnish a correct social security number
or other taxpayer identification number, or otherwise fails to comply with
applicable backup withholding rules and certification requirements. Corporations
generally are exempt from backup withholding. Any amounts withheld under the
backup withholding rules will be allowed as a credit against the shareholder's
federal income tax liability and may entitle the shareholder to a refund,
provided the shareholder furnishes specified required information to the
Internal Revenue Service.
Approvals
State insurance holding company laws and regulations applicable to us
and our insurance company subsidiaries generally provide that no person may
acquire control of us unless such person has provided certain required
information to, and such acquisition has been approved (or not disapproved) by,
the appropriate insurance regulatory authorities. Specifically, a change in
control of our company requires approval from the state insurance regulators in
New York and Oklahoma, the two states in which our domestic insurance company
subsidiaries are domiciled. In addition, in connection with the merger, Dexia
has sought determinations from state insurance regulators in New York, Oklahoma,
California and Delaware that, following the merger, our insurance company
subsidiaries will not be owned or controlled by any foreign government or
political subdivision or agency thereof. Certain states restrict or prohibit
ownership or control of insurance companies by foreign governmental entities and
may deny or revoke licenses to conduct the insurance business due to such
foreign governmental ownership or control. Dexia has sought these determinations
because certain minority shareholders of Dexia are owned or controlled by French
or Belgian governmental entities. The receipt of these determinations is a
condition to Dexia's obligation to close.
A change in control of our company also requires approval from the
United Kingdom Financial Services Authority because one of our insurance company
subsidiaries is domiciled in the United Kingdom. Lastly, a notice is required to
be filed with Bermuda regulators in connection with the transaction because one
of our insurance company subsidiaries is domiciled in Bermuda.
We have given or expect soon to give necessary notices to the U.S.
federal government under the Hart-Scott- Rodino Antitrust Improvements Act of
1976 and have requested or will request an early termination of the required
waiting period.
In addition, we understand that Dexia will require the prior approval
of the Federal Reserve to become a "financial holding company" under the
recently enacted Gramm-Leach-Bliley Act in order to acquire control of the
Company as Dexia's bank subsidiaries operate a branch and an agency in the U.S.
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Other than the matters described above, we are not aware of any
significant government or regulatory approvals that need to be obtained, or
waiting periods with which we need to comply, to complete the merger. If we
discover that other approvals or waiting periods are required, we will seek to
obtain or comply with them. If any approval or action is needed, however, we may
not be able to obtain it. Even if we could obtain the approval, conditions may
be placed on it that could cause us or Dexia to abandon the merger even if we
receive shareholder approval.
Dissenters' rights
Under New York law, shareholders are not entitled to dissenter's
rights, rights of appraisal or similar rights in connection with the merger.
Source of funds
Dexia has advised us that funds for the cash merger consideration and
merger expenses are expected to be furnished from its general corporate funds,
although it does expect to raise additional Tier 1 capital for regulatory
purposes to maintain its capital strength. Dexia's obligation to proceed with
the merger is not conditioned upon financing. The senior unsecured debt of
Dexia's principal operating subsidiaries (Dexia Credit Local de France and
Credit Communal de Belgique) is rated AA+ by Standard & Poor's Ratings Services
and Aa1 by Moody's Investors Service, Inc. According to its 1999 Activity
Report, Dexia had approximately euro 244 billion of consolidated assets and euro
6 billion of Tier 1 equity at December 31, 1999.
Fees and expenses
The merger agreement provides that all costs and expenses incurred in
connection with the merger agreement and the merger will be paid by the party
incurring the expenses, except that Dexia and the Company will each pay one-
half of the costs and expenses of filing, printing and mailing the Company's
proxy statement (including SEC filing fees) and soliciting proxies. See "The
Merger Agreement -- Expenses" beginning on page 33.
The Merger Agreement
This is a summary of the material provisions of the merger agreement,
a copy of which is attached as Appendix A to this proxy statement. You should
refer to the full text of the merger agreement for details of the merger and the
terms and conditions of the merger agreement.
The merger
When the merger occurs, PAJY Inc., an indirect wholly owned subsidiary
of Dexia, will be merged with and into the Company. The Company will survive the
merger and will be indirectly wholly owned by Dexia.
Dexia may change the method of acquiring the Company as long as such
change does not alter or change the merger consideration, adversely affect the
tax treatment of our shareholders, materially and adversely affect us and our
subsidiaries taken as a whole or materially impede or delay the merger.
In the merger, each share of our stock (except for treasury stock and
shares held by Dexia) outstanding immediately before the merger will be
converted into the right to receive $76 in cash in the case of shares of our
common stock and $46.35 in cash ($76 minus the conversion price for the
conversion of a share of preferred stock into a share of common stock) in the
case of shares of our preferred stock, in each case without interest. Each
holder of our stock (other than Dexia and its subsidiaries) will no longer have
any rights with respect to the shares of our stock, except for the right to
receive the merger consideration and any dividend or other distribution with
respect to such Company stock with a record date prior to the effective date of
the merger.
Effective time of the merger
The completion of the merger will take place on the sixth business day
following the date when the last of the conditions to the merger is satisfied or
waived, or at any other time and date to which Dexia and we mutually agree. On
the closing of the merger, we will cause a certificate of merger to be filed
with the New York Department of State. The merger will become effective upon the
filing of the certificate of merger or such later date or time as may be set
forth in the certificate of merger.
Payment for shares
As of the effective time of the merger, Dexia is required to deposit,
or cause to be deposited, with its paying agent the total merger consideration.
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As soon as practicable after the effectiveness of the merger, Dexia's
paying agent will mail to each holder of record of company stock a letter of
transmittal and instructions for the surrender of share certificates to the
paying agent for the merger consideration. After surrendering to the paying
agent for cancelation a share certificate together with a properly completed
letter of transmittal and evidence that any applicable stock transfer taxes have
been paid, the holder of such share certificate will be entitled to receive a
check in an amount equal to the merger consideration with respect to the shares
represented by such certificate. Each surrendered share will be canceled. No
interest will be paid or accrued on the merger consideration.
In the event of a transfer of ownership of any shares of our stock not
registered in the transfer records of the Company, a check for the merger
consideration may be issued to the transferee if the certificate representing
such stock is presented to the paying agent, accompanied by documents
sufficient, in the reasonable discretion of the paying agent, to evidence and
effect such transfer and to evidence that all applicable stock transfer taxes
have been paid.
You should not send in your share certificates until you receive a
letter of transmittal. All cash paid upon the surrender of share certificates in
accordance with the merger agreement will be deemed to have been paid in full
satisfaction of all rights pertaining to the shares.
If your stock certificate has been lost, stolen or destroyed, you will
be entitled to obtain payment only by signing an affidavit and, if required by
the paying agent, posting a bond in an amount sufficient to protect the paying
agent against claims related to your share certificate.
Representations and warranties
The merger agreement contains customary representations and warranties
by us relating to:
o our corporate organization and similar corporate matters;
o our capital structure, our subsidiaries and our equity
investments;
o authorization, execution, delivery, performance and
enforceability of, and required consents, approvals and
authorizations relating to, the merger agreement and related
matters;
o the accuracy of our reports and financial statements filed with
the SEC, and of our and our subsidiaries' books and records and
certain actuarial reports;
o the absence of certain changes since January 1, 2000;
o litigation and liabilities;
o compliance by us and our subsidiaries with laws and permits;
o regulatory matters affecting us and our subsidiaries and
compliance by us and our subsidiaries with laws and permits;
o our material contracts;
o our and our subsidiaries' employee benefit plans and the absence
of labor agreements, proceedings or disputes affecting us and our
subsidiaries;
o state takeover laws and dissenters' rights;
o environmental matters affecting us and our subsidiaries;
o our and our subsidiaries' tax returns and other tax matters;
o our and our subsidiaries' risk management arrangements;
o insurance issued by our subsidiaries, our subsidiaries'
reinsurance agreements and the rating of the insurance and
insurer financial strength of our lead insurance subsidiary by
Standard & Poor's Ratings Services and Moody's Investors Service,
Inc.;
o our reserves;
o our investment assets;
o insurance purchased by us; and
]
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o consents for the merger required to be obtained under our
registration rights and shareholders agreements.
The merger agreement also contains customary representations and
warranties by Dexia relating to:
o corporate organization and similar corporate matters;
o authorization, execution, delivery, performance and
enforceability of, and required consents, approvals and
authorizations relating to, the merger agreement and related
matters;
o availability of necessary funds to consummate the merger and pay
the merger consideration prior to the effectiveness of the
merger;
o fees payable by Dexia with respect to the merger;
o accuracy of information supplied; and
o lack of business activities of PAJY Inc.
Covenants
Dexia and we have agreed to use our reasonable best efforts to do all
things to permit consummation of the merger as promptly as practicable.
We have agreed that during the period from the date of the merger
agreement until the closing of the merger, we will, and will cause our
subsidiaries to:
o provide Dexia and its representatives access to our books,
research, property and personnel and provide such other
information as Dexia reasonably requests; and
o promptly advise Dexia of any material change or event.
We have also agreed that during the period from the date of the merger
agreement until the closing of the merger, we will not, and will cause our
subsidiaries not to, with certain exceptions:
o conduct our business other than in the ordinary course, or fail
to use commercially reasonable efforts to preserve intact our
business or take any action reasonably likely to have a material
adverse effect upon our ability to perform our material
obligations under the merger agreement;
o issue, sell or otherwise permit to become outstanding, or
authorize the creation of, any additional shares of our stock or
any rights with respect thereto, enter into any agreement with
respect to the foregoing, or permit any shares of our stock to
become subject to grants of employee or director stock options,
or other rights or similar stock-based employee rights;
o make, declare, pay or set aside for payment any dividend (other
than (A) quarterly cash dividends in an amount not to exceed
$0.12 per share (or, for dividends declared on or after August 1,
2000, $0.14 per share) with record and payment dates consistent
with past practice and (B) dividends declared and paid by our
subsidiaries) or declare or make any distribution with respect to
any shares of our stock or adjust, split, combine, redeem,
reclassify, purchase or otherwise acquire any shares of our
stock;
o enter into or amend or renew any employment, consulting,
severance or similar agreements or arrangements with any
director, officer or employee or grant any salary or wage
increase or increase any employee benefit;
o enter into or amend or renew any pension, retirement, stock
option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or
arrangement, or any trust agreement (or similar arrangement)
related thereto, or take any action to accelerate the vesting or
exercisability of equity bonuses, performance shares or other
compensation or benefits payable thereunder;
o sell, transfer, mortgage, encumber or otherwise dispose of or
discontinue any assets, deposits, business or properties except
in the ordinary course of business;
o acquire all or any portion of the assets, business, deposits or
properties of any other entity except in the ordinary course of
business and in a transaction that is not material to us and our
subsidiaries taken as a whole;
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o amend our certificate of incorporation or by-laws other than to
remove transfer restrictions on our preferred stock;
o take any action that is intended to or reasonably likely to
result in, or fail to take any action reasonably necessary to
prevent the occurrence of, the revocation or limitation of any
licence or authorization granted to us or our subsidiaries,
unless our management determines in good faith that such action
or inaction is in the best interests of the Company;
o take any action that is intended to or reasonably likely to
result in, or fail to take any action reasonably necessary to
prevent the occurrence of, an announcement by either Standard &
Poor's Ratings Services or Moody's Investors Service, Inc. that
it has decided to downgrade or has under surveillance or review
its rating of the financial strength or claims-paying ability of
our lead insurance subsidiary, unless our management determines
in good faith that such action or inaction is in the best
interests of the Company;
o implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by generally
accepted accounting principles or regulatory authorities;
o enter into any contract containing restrictions on our engaging
in business activities or, except in the ordinary course of
business, enter into or terminate any material contract or amend
or modify in any material respect any such contract or enter into
any contract, or amend any existing contract, between us or any
of our subsidiaries, on the one hand, and any of our
shareholders, on the other hand;
o except in the ordinary course of business, settle any claim,
action or proceeding, except for any claim, action or proceeding
involving solely money damages in an amount, individually or in
the aggregate for all such settlements, that is not material to
us and our subsidiaries taken as a whole;
o knowingly take any action that is intended or is reasonably
likely to result in (i) any of our representations and warranties
set forth in the merger agreement being or becoming untrue in any
material respect at any time at or prior to the effectiveness of
the merger, (ii) any of the conditions to the merger not being
satisfied or (iii) a material violation of any provision of the
merger agreement;
o incur any indebtedness for borrowed money other than in the
ordinary course of business; or
o authorize or make any capital expenditures other than in the
ordinary and usual course of business and, in any event, in
amounts not exceeding $4,000,000 in the aggregate.
Termination
The merger agreement may be terminated by mutual consent or as follows:
By Dexia or us if:
o the merger is not consummated by January 1, 2001;
o the approval or authorization of any governmental authority
required for consummation of the merger and the other
transactions contemplated by the merger agreement is denied by a
final order; or
o approval of our shareholders is not obtained at our shareholder's
meeting.
By Dexia if:
o we breach the merger agreement and such breach cannot be cured
within 30 days and would result in a condition to the closing
under the merger agreement not being met; or
o our board fails to recommend the merger, withdraws such
recommendation or modifies or changes such recommendation in a
manner adverse to the interests of Dexia or approves or
recommends to our shareholders an acquisition proposal other than
the merger.
By us if:
o Dexia breaches the merger agreement and such breach cannot be
cured within 30 days and would result in a condition to the
closing under the merger agreement not being met; or
o at any time prior to the approval of our shareholders, we
exercise our fiduciary out. See "--Fiduciary out" on page 31.
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No solicitation of transactions
We have agreed not to, nor to permit any of our subsidiaries to, nor
to authorize or permit any of our or our subsidiaries' directors, officers or
employees to, and to use commercially reasonable efforts to cause any investment
banker, financial advisor, attorney, accountant or other representative retained
by us or any of our subsidiaries not to, directly or indirectly through another
person, (i) solicit, initiate or encourage (including by way of furnishing
information), or knowingly take any other action designed to facilitate, the
making of any acquisition proposal or (ii) participate (including by way of
furnishing of information) in any discussions or negotiations regarding any
acquisition proposal; provided, however, that if, at any time prior to the
approval of the merger agreement by our shareholders, our board determines in
good faith, after consultation with its financial and legal advisors, that a
proposal that was not solicited by it after the date of the merger agreement is,
or is reasonably likely to result in, a superior proposal, and subject to
providing prior written notice of its decision to take such action to Dexia and
continuing notice requirements as to the status of such acquisition proposal, we
may (x) furnish information with respect to us and our subsidiaries to any
person making such proposal pursuant to a confidentiality agreement generally at
least as restrictive as the confidentiality agreement we have entered into with
Dexia and (y) participate in discussions or negotiations regarding such
proposal. We also have agreed to immediately cease and cause to be terminated
any activities, discussions or negotiations conducted prior to the date of the
merger agreement with any parties other than Dexia with respect to any of the
foregoing and to use our reasonable best efforts to enforce any confidentiality
or similar agreement relating to any acquisition proposal.
Under the merger agreement, "acquisition proposal" means any inquiry,
proposal or offer from any person relating to any direct or indirect acquisition
or purchase of a business that constitutes 20% or more of the net revenues, net
income or the assets of us and our subsidiaries, taken as a whole, or 20% or
more of any class of equity securities of us or any of our subsidiaries, any
tender offer or exchange offer that if consummated would result in any person
beneficially owning 20% or more of any class of equity securities of us or any
of our subsidiaries, or any merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving us
or any of our subsidiaries, other than the transactions contemplated by the
merger agreement.
Under the merger agreement, "superior proposal" means any written
acquisition proposal that our board determines in its good faith judgment
(following receipt of the advice of a financial advisor of nationally recognized
reputation and its legal advisors), if accepted, is reasonably capable of being
consummated, taking into account all legal, financial and regulatory aspects of
the proposal and would, if consummated, result in a transaction more favorable
to the Company and our shareholders than the transactions contemplated by the
merger agreement, except that the reference to "20%" in the definition of
"acquisition proposal" shall be deemed to be a reference to "50%" and
"acquisition proposal" shall only be deemed to refer to a transaction involving
the Company or its subsidiary, Financial Security Assurance Inc., or with
respect to assets (including the shares of any subsidiary), the Company and its
subsidiaries, taken as a whole.
We are not, however, prohibited from taking and disclosing to our
shareholders a position contemplated by Rule 14e-2(a) under the Exchange Act or
from making any disclosure to our shareholders if, in the good faith judgment of
our board, after consultation with outside counsel, failure so to disclose would
violate our obligations under applicable law.
Fiduciary out
Notwithstanding the restrictions set forth under "--No solicitation of
transactions", in response to an acquisition proposal that was not solicited by
it after the date of the merger agreement, our board is permitted, prior to
shareholder approval of the merger, but only to the extent required by its
fiduciary obligations under applicable law as determined in good faith by our
board after considering advice of outside counsel, to:
o withdraw, modify or change, or propose publicly to withdraw,
modify or change, the approval or recommendation by our board of
the merger or the merger agreement;
o approve or recommend, or propose to approve or recommend, any
acquisition proposal; or
o terminate the merger agreement with respect to any superior
proposal;
but, in each case, only if our board determines in good faith that such
acquisition proposal constitutes a superior proposal.
Break-up fee payable to Dexia
We have agreed to pay to Dexia a $78 million break-up fee if the
merger agreement is terminated:
]
31
<PAGE>
o by Dexia, due to our board's failure to recommend the merger to
our shareholders or our board's approval or recommendation of an
acquisition proposal other than the merger; or
o by us, due to the receipt of a superior proposal.
In addition, if we agree to, or our board recommends, an acquisition
transaction within 12 months after a termination of the merger agreement, we
have agreed to pay the $78 million break-up fee if the merger agreement was
terminated:
o by Dexia, because of our willful breach of the merger agreement;
o by Dexia or us, if the merger agreement was terminated (i) due to
the failure of the merger to occur by January 1, 2001 (and no
regulatory approval has been denied) and (ii) after a bona fide
acquisition proposal has been made or an intention to make such a
proposal has been publicly announced; or
o by either Dexia or us, if the merger agreement was terminated (i)
due to the approval of our shareholders not being obtained and
(ii) after a bona fide acquisition proposal has been made or an
intention to make such a proposal has been publicly announced.
For purposes of the break-up fee, the reference to "20%" in the
definition of "acquisition proposal" is deemed to be a reference to "50%" and
"acquisition proposal" only refers to a transaction involving the Company or
Financial Security Assurance Inc., or with respect to assets (including the
shares of any subsidiary), the Company and its subsidiaries, taken as whole.
Break-up fee payable to us
Dexia has agreed to pay to us a fee in the amount of $7.5 million if
the merger agreement is terminated due to:
o denial of any required approval of the merger from certain
European regulatory authorities; or
o the failure of the closing of the merger to occur by January 1,
2001, provided that, at the date of termination, all conditions
to the merger other than the regulatory approval condition shall
have been satisfied and the failure of the regulatory approval
condition shall have been solely due to the failure to obtain
approval from certain European regulatory authorities.
Employee benefits and compensation
o For a period until December 31, 2004, Dexia has agreed to provide
our continuing employees with employee benefit plans which, in
the aggregate, are substantially comparable to the benefits
currently provided by us and our subsidiaries.
o Dexia has agreed to determine employee base salaries and annual
bonuses in a manner consistent with current practice for the next
four calendar years.
o The Human Resources Committee of our board of directors has
determined that equity bonus awards will be paid following
closing of the merger except as otherwise required to be deferred
by the employment agreements of Messrs. Cochran and Taylor.
o The Human Resources Committee of our board of directors has voted
to continue our 1993 Equity Participation Plan for outstanding
performance shares held by continuing employees rather than allow
for an immediate payout of those performance shares; and has
provided that, for purposes of payouts of those performance
shares, our common stock will be valued at $76 per share plus
interest at a rate of 8% per annum from the effective date of the
merger.
o Dexia has agreed that performance shares will be awarded in the
future in a manner consistent with current practice but with
senior management awards annualized, and that 1.4 million
performance shares will be authorized and 1.2 million performance
shares will be committed over the next four years of awards, with
agreed-upon performance objectives and share valuation
methodology.
o We have entered into employment agreements with non-compete
provisions with Messrs. Cochran, Taylor and McCarthy. These
agreements provide minimum compensation levels, minimum
performance share awards and enhanced severance benefits as
consideration for the non-compete covenants.
32
<PAGE>
o Our severance policies have been amended to provide reimbursement
(on a grossed-up basis) for any "golden parachute" excise taxes
payable by our employees upon their termination of employment
following the merger.
o Dexia will honor our employee severance policies as currently in
effect.
Regulatory filings and other matters
The merger agreement provides that Dexia and we and our respective
subsidiaries will cooperate and use reasonable best efforts to prepare all
documentation, take all actions, effect all filings and obtain all permits,
consents, approvals, confirmations and authorizations of all third parties and
governmental authorities necessary or advisable to consummate the merger.
Conditions to the merger
In addition to (i) obtaining the required approvals of our
shareholders, (ii) accuracy of representations and warranties, (iii) compliance
by the parties with the terms of the merger agreement and (iv) the consummation
immediately prior to the merger of the sale to Dexia of the White Mountains
subsidiary that holds White Mountains' interest in us (which are conditions to
all parties' obligations to consummate the merger), each of the following are
conditions to Dexia's obligation to consummate the merger:
o all rights to receive Company common stock shall have been
converted into a right to receive cash merger consideration;
o the change in control of our insurance company subsidiaries shall
have been approved by insurance regulatory authorities in New
York, Oklahoma and the United Kingdom;
o Dexia shall have received confirmations from insurance regulatory
authorities in New York, Oklahoma, California and Delaware that,
following the consummation of the merger, our insurance company
subsidiaries will not be considered to be owned or controlled by
a foreign government or any political subdivision or agency
thereof;
o Dexia shall have received the prior approval of the Federal
Reserve to be a "financial holding company" under the recently
enacted Gramm-Leach-Bliley Act;
o at least two of Messrs. Cochran, Taylor and McCarthy shall be
employees of the Company and shall be parties to existing
employment agreements with the Company; and
o the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 shall have expired or been terminated.
The closing condition that the representations and warranties must be
true and correct as of the signing of the merger agreement and as of the closing
of the merger is subject, in most instances, to the qualification that a party
cannot assert a breach unless the effect of such breach, together with the
effects of all other breaches, has had or is reasonably likely to have a
material adverse effect on the relevant party.
Expenses
The merger agreement provides that all fees and expenses incurred in
connection with the merger will be paid by the party incurring such fees or
expenses, whether or not the merger is consummated, except that Dexia, on the
one hand, and we, on the other hand, will pay one-half of the costs and expenses
incurred in connection with the filing, printing and mailing of this proxy
statement (including SEC filing fees) and soliciting proxies.
Amendment and waiver
The merger agreement may be modified or amended only by written
agreement of the parties. Any party may waive its rights under the merger
agreement only in writing. Any such amendment or waiver may be made at any time
before the completion of the merger. After our shareholders approve the plan of
merger, however, no amendment or waiver that requires further approval of our
shareholders may be made without the further approval of our shareholders.
33
<PAGE>
PROPOSAL 2: ELECTION OF DIRECTORS
All our directors are elected at each annual meeting of shareholders.
At our 2000 annual meeting, the shareholders will elect 13 directors to serve
for a term expiring at our 2001 annual meeting. Information about the nominees
is set forth below and under "OWNERSHIP OF THE COMPANY - Directors and Executive
Officers" beginning on page 38.
If we receive your proxy, we will vote your shares for these nominees,
except to the extent that you withhold authority to do so on your proxy card. We
will vote all proxies received for the person, if any, designated by our Board
of Directors to replace any nominee who becomes unable or unwilling to serve (an
event not now anticipated).
In August 1999, the Board elected Terry Baxter a director of the
Company. Mr. Baxter was Executive Vice President of White Mountains from 1999
until February 2000. Mr. Baxter is standing for reelection.
The Board recommends a vote "FOR" the election of all nominees for
director.
Terry L. Baxter
Age 54............................ Director of the Company since August
1999. Mr. Baxter served as Executive
Vice President of White Mountains
from 1999 until February 2000 and as
President of WMH from 1997 to 1999.
Mr. Baxter was Chairman of the Board
of Source One from 1996 until 1997.
He was the Managing Director of the
National Transportation Safety Board
from 1990 to 1993, and before that
served as Assistant Director of the
United States Office of Management
and Budget (OMB) and Vice President
of GEICO. He is a director of
Folksamerica Reinsurance Holdings,
Inc., and Main Street America
Holdings, Inc.
Robert P. Cochran
Age 50....................... Chairman of the Board of Directors
of the Company since November 1997,
and Chief Executive Officer and a
Director of the Company since August
1990. Mr. Cochran served as
President of the Company and FSA
from August 1990 until November
1997. He has been Chief Executive
Officer of FSA since August 1990,
Chairman of FSA since July 1994, and
a director of FSA since July 1988.
Prior to joining the Company in
1985, Mr. Cochran was managing
partner of the Washington, D.C.
office of the Kutak Rock law firm.
Mr. Cochran is Chairman of the
Association of Financial Guaranty
Insurors, as well as a director of
XL Financial Assurance Ltd, White
Mountains and WMH.
Robert N. Downey
Age 64............................ Director of the Company since August
1994. Mr. Downey has been a senior
director of Goldman Sachs & Co.
since 1999. He was a limited partner
since 1990, and a general partner
from 1976 until 1990, of Goldman
Sachs & Co. At Goldman Sachs & Co.,
Mr. Downey served as head of the
Municipal Bond Department and Vice
Chairman of the Fixed Income
Division. Mr. Downey was a Director
of the Securities Industry
Association from 1987 through 1991
and served as its Chairman in 1990
and Vice Chairman in 1988 and 1989.
He was also formerly Chairman of the
Municipal Securities Division of the
Public Securities Association (known
today as the Bond Market
Association) and Vice Chairman of
the Municipal Securities Rulemaking
Board.
Anthony M. Frank
Age 68............................ Director of the Company since
February 1996. Mr. Frank was a
director of CGC from February 1994
until December 1995. He has been
Chairman and Founding Chairman of
Belvedere Capital Partners, General
Partner of the California Community
Financial Institutions Fund, since
1994. He was Postmaster General of
the United States from 1988 to 1992
and served as Chairman and Chief
Executive Officer of First
Nationwide Bank from 1971 to 1988.
Mr. Frank is a director of Charles
Schwab Inc.; Bedford Properties
Inc.; Irvine Apartment Communities,
Inc.; General American Investors,
Inc.; Temple-Inland, Inc.; Crescent
Real Estate Equities; Cotelligent
Group, Inc.; and MDC Communications,
Inc.
Fudeji Hama
Age 51............................ Director of the Company since August
1998. Mr. Hama has been General
Manager of the Financial Services
Department of Tokio Marine and
Director of First Chicago Tokio
Marine Financial Products Ltd. since
1998. He previously served Tokio
Marine as Deputy General Manager of
its Financial Planning Department
34
<PAGE>
and Deputy General Manager of its
Production Department. Mr. Hama was
Executive Vice President and Chief
Operating Officer of Tokio Marine MC
Asset Management Co., Ltd. from 1995
to 1998.
K. Thomas Kemp
Age 59............................ Director of the Company since August
1994. Mr. Kemp has served as Deputy
Chairman of White Mountains since
February 2000. He served as
President and Chief Executive
Officer of White Mountains from
October 1997 until February 2000,
and has served in other executive
capacities with White Mountains and
WMH since 1991. Mr. Kemp was Vice
President of Fireman's Fund from
1990 to January 1991. Prior to
joining Fireman's Fund, Mr. Kemp was
President of Resolute Reinsurance
Company. Mr. Kemp is a director of
White Mountains; Folksamerica
Reinsurance Holdings, Inc.; Eldorado
Bancshares, Inc.; and Amlin plc.
David O. Maxwell
Age 69............................ Director of the Company since August
1994. Mr. Maxwell was Chairman and
Chief Executive Officer of Fannie
Mae from 1981 until his retirement
in 1991. Mr. Maxwell is a director
of Potomac Electric Power Company
(PEPCO), and a member of the
advisory boards of Corporate
Partners, L.P., Centre Partners II,
L.P. and Centre Partners III, L.P.
Sean W. McCarthy
Age 41............................ Director of the Company since
February 1999. Mr. McCarthy has been
Executive Vice President of the
Company and Chief Operating Officer
of FSA since November 1997. He has
been a Managing Director of FSA
since March 1989, head of its
Financial Guaranty Department since
April 1993, Executive Vice President
of FSA since October 1999 and a
director of FSA since September
1993. Prior to joining FSA in 1988,
Mr. McCarthy was a Vice President of
PaineWebber Incorporated.
James M. Osterhoff
Age 63............................ Director of the Company since April
1992. Mr. Osterhoff was Executive
Vice President and Chief Financial
Officer of U S WEST from December
1991 until his retirement in
September 1995. Prior to joining U S
WEST, he was Vice President--
Finance and Chief Financial Officer
of Digital Equipment Corp., a
computer manufacturer. Mr. Osterhoff
is a director of GenCorp.
James H. Ozanne
Age 56............................ Vice Chairman of the Board of
Directors since February 1998 and a
Director of the Company since
January 1990. Mr. Ozanne is Chairman
of Greenrange Partners. He was
Chairman of Source One from March
1997 to May 1999, Vice Chairman of
Source One from August 1996 until
March 1997, and a director of Source
One from August 1996 to May 1999. He
was President of Fund American
Enterprises, Inc. from March 1997
until December 1999. He was Chairman
and Director of Nations Financial
Holdings Corporation from January
1994 to January 1996. He was
President and Chief Executive
Officer of USWCC from September 1989
until December 1993. Prior to
joining USWCC, Mr. Ozanne was
Executive Vice President of General
Electric Capital Corporation. He is
a director of Basis 100 Inc.
Richard A. Post
Age 41............................ Director of the Company since April
1994. Mr. Post has been Executive
Vice President of MediaOne since
June 1998, Chief Financial Officer
of MediaOne since January 1997 and
President of MOCC since August 1993.
Mr. Post had previously served U S
WEST in a number of other positions,
and has been a director of a number
of MediaOne-affiliated companies.
Roger K. Taylor
Age 48............................ Director of the Company since
February 1995. Mr. Taylor has been
President of the Company since
November 1997, and Chief Operating
Officer of the Company since May
1993. Mr. Taylor joined FSA in
January 1990, and has served FSA as
its President since November 1997, a
director since January 1992 and a
Managing Director since January
1991. Prior to joining FSA, Mr.
Taylor was Executive Vice President
of Financial Guaranty Insurance
Company, a financial guaranty
insurer.
35
<PAGE>
Mr. Taylor is a director of
Fairbanks Capital Holding Corp. and
Preferred Mortgages Limited.
Howard M. Zelikow
Age 65............................ Director of the Company since
February 1996. Mr. Zelikow was a
director of CGC from February 1994
until December 1995. Mr. Zelikow has
been a member of Kayne Anderson
Investment Management, Inc., an
investment management company, since
1988. Mr. Zelikow was Chief
Financial Officer and Executive Vice
President of The Progressive
Corporation from 1976 to 1987. Mr.
Zelikow is a director of The Right
Start, Inc.; The Navigators Group,
Inc.; and Queensway Financial
Holdings Limited.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended December 31, 1999, our Board of Directors met
four times. At present, our Board has four Committees, whose activities are
discussed below. The Board does not have a nominating committee. In addition, a
Special Committee was designated by our Board on August 12, 1999, for the
purpose of approving the terms of an equity sale by the Company. The Special
Committee met twice during 1999. Because we completed that sale during the
fourth quarter of 1999, the Special Committee will not meet in the future.
The Audit Committee is comprised entirely of directors who are not
officers or employees of the Company, any subsidiary of the Company, White
Mountains, Tokio Marine, XL or MediaOne. The Audit Committee, which at year end
consisted of Messrs. Osterhoff (Chairperson), Frank, Maxwell and Zelikow, met
three times during 1999. The Audit Committee recommends independent auditors for
approval by the Board of Directors and shareholders, reviews the independence of
such auditors, approves the scope of the annual audit activities of the
independent auditors and reviews audit results.
The Human Resources Committee is comprised entirely of directors who
are not officers or employees of the Company or any subsidiary of the Company.
The Human Resources Committee has authority to establish and approve
compensation payments and policies for executives and other employees, including
awards under the Company's incentive and benefit plans. The Human Resources
Committee, which at year end consisted of Messrs. Kemp (Chairperson), Downey,
Maxwell and Ozanne, met three times during 1999.
The Investment Committee, which at year end consisted of Messrs. Frank
(Chairperson), Cochran, Downey, Taylor and Zelikow, met three times during 1999.
The Investment Committee approves the general investment policies and objectives
of the Company and reviews investment activities and portfolio performance,
sources and uses of capital, periodic and annual financial statements, and
investment guidelines and practices of the Company.
The Underwriting Committee, which at year end consisted of Messrs.
Ozanne (Chairperson), Baxter, Cochran, Hama, Osterhoff and Post, met four times
during 1999. The Underwriting Committee monitors the underwriting process in
order to assure general compliance with underwriting guidelines and reviews
significant changes in underwriting guidelines and new product lines proposed by
management.
Each non-management director of the Company received an annual fee of
$30,000 for service as a director, and each chairperson of a Committee of the
Board of Directors received an additional annual fee of $5,000. Mr. Ozanne
received an additional fee of $50,000 in 1999 for his services as Vice Chairman
of the Board of Directors in lieu of his Committee chair fee. Directors also
received $2,000 for each Board meeting and regular Committee meeting attended
and reimbursement for expenses for any such meeting attended. Each director is
entitled to defer fees under the Company's Deferred Compensation Plan and was
also entitled to participate in our "forward share" programs described on page
41 of this proxy statement. Each director attended at least 75% of the aggregate
of (1) the total number of meetings of the Board and (2) the total number of
meetings of the Committees on which he served, for the period for which he
served, during 1999, except for Mr. Frank, who was absent from two committee
meetings and a Board meeting in the second quarter of 1999 following an accident
from which he has since recovered.
36
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
In addition to Messrs. Cochran, McCarthy and Taylor (who are described
above as nominees for director), the Company's other executive officers are
described below. Our executive officers include the permanent members of our
Management Committee and Mr. Joseph, our principal accounting officer.
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------- --------- ----------------------------------------------------------------------
<S> <C> <C>
Russell B. Brewer II 43 Managing Director, Chief Underwriting Officer and Director of FSA
John A. Harrison 56 Managing Director and Chief Financial Officer of the Company and FSA;
Director of FSA
Jeffrey S. Joseph 41 Managing Director and Controller of the Company and FSA
Bruce E. Stern 46 Managing Director, General Counsel and Secretary of the Company and
FSA; Director of FSA
</TABLE>
The present principal occupation and five-year employment history of
each of the above-named executive officers of the Company, as well as other
directorships of publicly held corporations currently held by each such person,
are set forth below:
Mr. Brewer has been a Managing Director of FSA since March 1989 and
the Chief Underwriting Officer of FSA since September 1990. He has been a
director of FSA since September 1993. From March 1989 to August 1990, Mr. Brewer
was Managing Director, Asset Finance Group, of FSA. Prior to joining FSA in
1986, Mr. Brewer was an Associate Director of Moody's Investors Service, Inc.
Mr. Harrison has been a Managing Director and the Chief Financial
Officer of FSA since August 1991 and the Chief Financial Officer of the Company
since February 1993. He has been a director of FSA since September 1993. From
April 1987 through August 1991, Mr. Harrison was Chief Financial Officer of
Citibank, N.A. -- U.S. Consumer Banking Group, and prior thereto was Managing
Director, Real Estate Finance Group, of Merrill Lynch & Co. Inc. Mr. Harrison
has been a director of Fairbanks Capital Holding Corp. and affiliated entities
since December 1998.
Mr. Joseph has been a Managing Director of the Company and FSA since
December 1993 and the Controller of FSA since February 1992 and of the Company
since April 1993. Prior to joining FSA in 1992, he was Vice President and
Controller of Capital Markets Assurance Corporation, a financial guaranty
insurer.
Mr. Stern has been a Managing Director, the Secretary and the General
Counsel of the Company since April 1993. Since April 1993, he has been the
Secretary of FSA, and since March 1989, he has been a Managing Director of FSA.
He has been a director of FSA since August 1990. Prior to joining FSA as General
Counsel in 1987, Mr. Stern was an attorney with Cravath, Swaine & Moore.
PROPOSAL 3: APPROVAL OF SELECTION OF INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP currently serve as the Company's
independent auditors. They (including their predecessor, Coopers & Lybrand
L.L.P.) have served in that capacity since January 1990. During 1999,
PricewaterhouseCoopers LLP examined the accounts of the Company and its
subsidiaries and also provided other services to the Company in connection with
SEC filings and in connection with the establishment of the Company's 1999
Forward Share Program. In February 2000, the Board appointed
PricewaterhouseCoopers LLP as the independent auditors of the Company for 2000.
The shareholders are asked to approve this action of the Board. Representatives
of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting
with an opportunity to make a statement if they so desire, and will be available
to answer appropriate questions.
The Board recommends a vote "FOR" approval of the selection of
PricewaterhouseCoopers LLP as independent auditors of the Company for 2000.
37
<PAGE>
OWNERSHIP OF THE COMPANY
5% Shareholders
The following table sets forth certain information regarding actual,
beneficial and voting ownership of the Company's equity at April 10, 2000 as to
each person known by the Company to beneficially own, within the meaning of the
Exchange Act, 5% or more of the outstanding shares of the Common Stock or
Preferred Stock.
<TABLE>
<CAPTION>
Number of Shares Owned(1)
-----------------------------------------------------------------------
Voting
5% Shareholders Actual Beneficial(2) Power
- ------------------------------------------------------------------- ------------------------------ ------------
Number Percent(3) Number Percent(3) Percent(4)
------------ -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>>
White Mountains Insurance Group, Ltd. .. 6,943,316 20.7% 8,943,316 25.2% 25.2%
Crawford House
23 Church Street
Hamilton, Bermuda(2)
The Tokio Marine and Fire Insurance
Co., Ltd............................. 2,629,000 7.8% 2,629,000 7.8% 7.4%
2-1, Marunouchi 1-Chome
Chiyoda-ku, Tokyo 100 Japan
XL Capital Ltd.......................... 2,555,133 7.6% 2,555,133 7.6% 7.2%
Cumberland House
1 Victoria Street
Hamilton HM11 Bermuda D2(5)
MediaOne Capital Corporation ........... 1,721,199 5.1% 1,721,199 5.1% 4.8%
c/o MediaOne Group
188 Inverness Drive West
Englewood, CO 80112(1)
</TABLE>
(1) Number of shares owned is based on Schedules 13D or 13G filed by such
entities with the SEC, except for MOCC, which confirmed to us on March
1, 2000, that it owns the number of shares set forth in the table.
(2) A person is deemed to have "beneficial ownership" as of a given date
of any shares which such person has the right to acquire within 60
days after such date or over which such person has voting or
investment power. In computing the percentage of outstanding shares
beneficially held by each shareholder listed above, any share of
Common Stock which such shareholder beneficially owns is deemed to be
outstanding for such shareholder, but is not deemed to be outstanding
for the purpose of computing the percentage ownership of any other
shareholder unless such share is actually outstanding. The only
shareholder listed above which is deemed to have beneficial ownership
of shares of Common Stock not actually owned by such shareholder is
White Mountains. On April 10, 2000, White Mountains or its
subsidiaries owned (subject to anti-dilutive adjustment) 2,000,000
shares of Preferred Stock, constituting all the outstanding Preferred
Stock, which are convertible into an equal number of shares of Common
Stock at the conversion price of $29.65 per share. Please see Note (3)
below for additional information regarding shares beneficially owned
by White Mountains.
(3) Ownership percentages are calculated based on 33,517,995 shares of
Common Stock outstanding at April 10, 2000, which (a) includes 511,031
shares purchased by a "rabbi trust" for purposes of funding in advance
the Company's obligations with respect to its 1993 Equity
Participation Plan, as amended, and excludes 158,306 shares of
treasury stock and (b) excludes 2,000,000 shares of Preferred Stock
outstanding at April 10, 2000, except that such Preferred Stock is
included for determining the beneficial ownership and voting power
percentages of White Mountains (which holds such Preferred Stock).
(4) Voting power percentages are calculated based on 35,517,995 shares of
Common Stock outstanding at April 10, 2000, which (a) includes 511,031
shares purchased by a "rabbi trust" for purposes of funding in advance
the Company's obligations with respect to its 1993 Equity
Participation Plan, as amended, and excludes 158,306 shares of
treasury stock and (b) includes 2,000,000 shares of Preferred Stock
outstanding at April 10, 2000.
(5) According to the amended Schedule 13G filed on January 24, 2000, by XL
with the SEC, the shares beneficially owned by XL are held by a Cayman
Islands affiliate of XL and were not acquired and are not held for the
purpose or effect of changing or influencing control of the Company.
38
<PAGE>
Directors and Executive Officers
The following table sets forth certain information regarding
beneficial ownership of the Company's equity at April 10, 2000 for (a) each
director and nominee for director of the Company, (b) each executive officer
named under "Executive Compensation -- Summary Compensation Table" and (c) all
such executive officers and directors of the Company as a group. The table also
provides information regarding economic ownership. Voting power is less than 1%
of voting shares outstanding for each executive officer and director listed,
individually and as a group.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of Shares Owned
-----------------------------------------------------------
Percent of
Economic
Directors and Executive Officers Beneficial(1) Economic(2) Ownership(3)
-------------------------------- ------------- ----------- ------------
Terry L. Baxter (4)....................... 1,000 21,397 *
Robert P. Cochran (2)..................... 145,225 789,286 2.3%
Robert N. Downey.......................... 75,000 114,079 *
Anthony M. Frank.......................... 2,671 39,918 *
Fudeji Hama............................... -- -- *
K. Thomas Kemp (4)........................ 1,600 41,124 *
David O. Maxwell.......................... 783 35,783 *
Sean W. McCarthy.......................... 67,284 363,819 1.1%
James M. Osterhoff........................ 1,000 39,474 *
James H. Ozanne........................... 15,800 58,715 *
Richard A. Post........................... 200 38,945 *
Roger K. Taylor........................... 454 466,295 1.4%
Howard M. Zelikow......................... 5,037 40,037 *
Russell B. Brewer II...................... 8,601 118,180 *
Bruce E. Stern (1)........................ 6,114 128,167 *
All executive officers and directors as 381,424 2,442,268 6.8%
a group (17 persons)......................
* denotes less than 1%
- ------------------
</TABLE>
(1) All beneficially owned shares are actually outstanding and directly
owned by the listed directors and executive officers, except that (a)
with respect to Mr. Cochran, 3,675 shares are held in trust for the
benefit of his children, and (b) with respect to Mr. Stern, all shares
are held in trust for the benefit of his children. At April 10, 2000,
shares actually and beneficially owned represented less than 1% of
total shares of Common Stock outstanding for each executive officer
and director listed individually, and as a group represented
approximately 1.1% of total shares of Common Stock outstanding.
(2) Shares economically owned by directors and executive officers include
(a) vested and unvested performance shares with each performance share
treated as one share of Common Stock, (b) equity bonus shares, (c)
deemed investments in Common Stock under the Company's plans ("Phantom
Shares") and (d) deemed investments in "Forward Shares" (defined below
under "Executive Compensation - Forward Shares"). Phantom Shares
represent voluntary investments in Common Stock by directors and
executive officers. All such shares (other than Forward Shares)
include accrued dividends. The table includes such shares economically
owned by the Chief Executive Officer and the other four most highly
compensated executive officers of the Company and its subsidiaries in
the following amounts:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Performance Equity Bonus Phantom Forward Shares
Officer Shares Shares Shares (1996) (1999)
------- ----------- ------------ ------- ------- --------
Robert P. Cochran 110,691 111,451 230,465 145,252 46,203
Roger K. Taylor 80,518 67,311 216,809 55,000 46,203
Sean W. McCarthy 95,749 45,927 33,254 29,200 92,406
Bruce E. Stern 30,218 16,460 65,375 -- 10,000
Russell B. Brewer II 30,218 12,579 56,782 5,000 5,000
All executive officers and 370,057 266,464 670,059 364,452 389,812
directors as a group
</TABLE>
To the extent that shares economically owned by any non-officer
director exceed those beneficially owned, such economic ownership is
attributable to (i) 15,000 1996 Forward Shares acquired by each
director, other than Messrs. Baxter and Hama, (ii) 20,000 1999 Forward
Shares acquired by each director, other than Mr. Hama, and (iii)
shares deemed invested under the Company's Deferred Compensation Plan
(together with accrued dividends). The table excludes fractional
shares attributable to participation in various benefit plans.
39
<PAGE>
(3) Ownership percentages are calculated based on 33,517,995 shares of
Common Stock outstanding at April 10, 2000, which (a) includes 511,031
shares purchased by a "rabbi trust" for purposes of funding in advance
the Company's obligations with respect to its 1993 Equity
Participation Plan, as amended, and excludes 158,306 shares of
treasury stock and (b) excludes 2,000,000 shares of Preferred Stock
outstanding at April 10, 2000. In addition, in computing the
percentage of shares economically owned by each person listed above,
any share which is economically owned by such person is deemed to be
an outstanding share of Common Stock for such person, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person (except with respect to the group as a
whole, for which all such shares are deemed to be outstanding).
(4) Mr. Kemp is Deputy Chairman of White Mountains, and Mr. Baxter was
Executive Vice President of White Mountains until February 2000. White
Mountains beneficially owns 25.2% of the Company, through its
ownership of Common Stock and Preferred Stock as described in Notes
(2) and (3) to the "5% Shareholders" table on page 38. Messrs. Kemp
and Baxter disclaim direct beneficial ownership of Common Stock and
Preferred Stock held by White Mountains or its subsidiaries.
EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth a summary of all compensation paid to the
chief executive officer of the Company and the other four most highly
compensated executive officers of the Company and its subsidiaries, in each case
for services rendered in all capacities to the Company and its subsidiaries for
the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Long-Term
Compensa-
Annual Compensation tion (1)
Name and Principal Other Annual LTIP All Other
Position Year Salary Bonus Compensation(2) Payouts(3) Compensation(4)
-------- ---- ------ ----- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Cochran 1999 $470,000 $ 69,402 $2,153,645 $5,897,323 $133,823
Chairman of the Board and 1998 440,000 560,000 1,164,706 4,737,911 113,834
Chief Executive Officer 1997 440,000 560,000 870,610 2,958,727 107,827
Roger Taylor 1999 310,000 413,617 1,395,745 4,106,640 116,609
President and 1998 290,000 710,000 694,118 2,979,302 103,326
Chief Operating Officer 1997 290,000 710,000 341,185 1,729,575 97,900
Sean W. McCarthy 1999 250,000 618,828 1,154,320 3,570,905 119,309
Executive Vice 1998 235,000 875,000 264,706 2,475,950 102,715
President 1997 235,000 700,000 235,300 1,201,983 81,156
Bruce E. Stern 1999 215,000 300,000 352,941 1,816,906 54,429
Managing Director, General 1998 200,000 365,000 88,235 1,316,755 46,694
Counsel and Secretary 1997 200,000 272,500 67,649 824,910 46,299
Russell B. Brewer II 1999 215,000 475,000 147,059 1,821,194 51,404
Managing Director and 1998 200,000 365,000 88,235 1,308,949 49,844
Chief Underwriting Officer 1997 200,000 280,000 70,590 804,971 49,505
</TABLE>
(1) No awards of restricted stock or options/SARs were made to any of the
executives named in the table during the period covered by the table.
(2) Figures represent the value of phantom stock granted as "equity bonus"
awards under the Company's 1993 Equity Participation Plan, as amended,
and deferred for a minimum of five years. Payment following the
deferral period will be in cash or Common Stock, at the Company's
option.
(3) Payouts were made to or deferred by each named executive in January
2000 with respect to performance shares for the three-year performance
cycle ending December 31, 1999. Payouts were made in shares of Common
Stock or cash. For purposes of this table, shares of Common Stock are
valued for 1999, 1998 and 1997 at $49.1875, $53.625 and $46.0625 per
share, respectively, the New York Stock Exchange closing price per
share on the day preceding approval of the payout by the Human
Resources Committee of the Board of Directors and the per share value
employed for those receiving cash payments.
40
<PAGE>
(4) All Other Compensation includes contributions by the Company to a
defined contribution pension plan ("Pension Plan") and supplemental
executive retirement plan ("SERP") as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Officer 1999 1998 1997
------- ---- ---- ----
Pension Plan SERP Pension Plan SERP Pension Plan SERP
------------ ---- ------------ ---- ------------ ----
Robert P. Cochran $14,400 $75,600 $14,400 $75,735 $14,400 $75,600
Roger K. Taylor 14,400 75,600 14,400 75,600 14,400 76,950
Sean W. McCarthy 14,400 75,600 14,400 75,600 14,400 53,100
Bruce E. Stern 14,400 33,300 14,400 30,600 14,400 30,600
Russell B. Brewer II 14,400 34,200 14,400 33,750 14,400 33,750
</TABLE>
All Other Compensation also includes amounts paid by the Company to
gross up employees for Medicare tax paid in respect of equity bonus
awards. In addition, the figure included in this column for Mr.
McCarthy includes $5,820.27 for 1999, $7,329 for 1998 and $8,838 for
1997, representing the benefit conveyed to him under a loan provided
to him by the Company at a below market interest rate in connection
with his relocation to New York. See "Executive Compensation--Other
Relationships."
Employment Agreements and Arrangements; Change in Control Provisions
We do not currently have employment agreements with any of our
executive officers except for the employment agreements with Messrs. Cochran,
Taylor and McCarthy entered into in connection with the proposed merger and
effective upon the closing of the merger. If we terminate any of the named
executive officers without cause prior to the merger, Messrs. Cochran and Taylor
would be entitled to 18 months of compensation and Messrs. McCarthy, Stern and
Brewer would be entitled to 12 months of compensation, in each case based upon
current compensation (or, in certain events, prior compensation if higher) in
accordance with our severance policy.
The Company's 1993 Equity Participation Plan, as amended (the "Equity
Plan"), provides for accelerated vesting and payment of equity bonus shares,
performance shares and stock options awarded thereunder upon the occurrence of
certain change in control transactions involving the Company. These provisions
are generally applicable to all participants in the Equity Plan. Each of the
named executive officers holds equity bonus shares and performance shares
awarded under the Equity Plan. In connection with the merger, the Human
Resources Committee of our Board of Directors has approved (i) a "plan
continuation" which results in non-acceleration of performance shares for
continuing employees and (ii) acceleration and payout of equity bonus shares
except as otherwise required by certain employment agreements.
Other Relationships
In February 1992, the Company provided a loan to Mr. McCarthy in
connection with his relocation to New York City. Mr. McCarthy is the Executive
Vice President and a director of the Company, and Executive Vice President and
Chief Operating Officer of FSA. The loan was amended in December 1993 to allow
for the repayment of the remaining principal balance over a ten-year period in
equal annual installments of $36,282 at an interest rate of 5.20% per annum. At
December 31, 1999, the outstanding principal balance was $145,131.
Forward Shares
The Company is party to forward arrangements with several financial
institutions. We entered into the first forward arrangement in May 1996, and
additional forward arrangements in December 1999. The financial institution
counterparties to the forward arrangements are generally obligated to hold
shares of our Common Stock ("Forward Shares") for a five-year term. Under the
forward arrangements, the Company has the obligation before the end of the term
to either (a) purchase the Forward Shares from the counterparties for a
specified price per share (the "Purchase Price") plus carrying costs (less
dividends paid on the Common Stock) or (b) direct the counterparties to sell the
Forward Shares, receiving any excess of the sale proceeds over the Purchase
Price (or making up any shortfall) in cash or additional shares, at its option.
The Purchase Price is $26.50 and $53.50 under the 1996 and 1999 forward
arrangements, respectively.
At the time the Company entered into each forward arrangement, it made
the economic benefits of the forward shares available under a subscription
program to the Company's management and directors, who have parallel investments
in phantom Forward Shares under the Company's Deferred Compensation Plan or
SERP. All 750,000 shares covered by the 1999 program were made available under
the subscription program, and continue to be outstanding. Of the initial
1,750,000 shares covered by the 1996 program, 750,000 were made available under
the subscription program. When an individual participant exercises Forward
Shares under the subscription program, the Company settles with the participant
but does not necessarily close out the corresponding forward share position with
the counterparties. As a result of the repurchase of Forward Shares from
management and directors participating in the 1996 forward share subscription
program, 33,078 shares were held for the benefit of the Company and 529,122
shares continued to be held for the benefit of the participants on December 31,
1999.
41
<PAGE>
Performance Shares
Performance shares are awarded under the Equity Plan. The Equity Plan
authorizes the discretionary grant of performance shares by the committee
administering the Equity Plan (the Human Resources Committee) to key employees
of the Company and its subsidiaries. Each performance share potentially
represents the economic value of up to two shares of Common Stock, and not just
appreciation, as is the case with a stock option. The number of shares of Common
Stock actually earned for each performance share depends upon the attainment by
the Company and its subsidiaries (on a consolidated basis) of "performance
objectives" during the time period specified by the Committee at the time an
award of performance shares is made.
The following table sets forth (a) a summary of performance shares
awarded to each of the named executive officers for the year ended December 31,
1999 (which awards were made in January 2000), (b) the applicable performance
period until payout and (c) the related estimated future payouts at the stated
assumed annual rates of adjusted book value per share and stock price
appreciation.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
LONG-TERM INCENTIVE PLANS - AWARDS IN 1999(1)
Estimated Future Payouts (3)
----------------------------
Performance Performance
Shares Period Until Threshold Target Maximum
Name Granted Payout (no. of shares) (no. of shares) (no. of shares)
---- --------- ------- --------------- --------------- ---------------
Robert P. Cochran...... 70,000 (2) 0 70,000 140,000
Roger K. Taylor........ 50,000 (2) 0 50,000 100,000
Sean W. McCarthy....... 50,000 (2) 0 50,000 100,000
Bruce E. Stern......... 15,000 (2) 0 15,000 30,000
Russell B. Brewer II... 15,000 (2) 0 15,000 30,000
</TABLE>
(1) These performance shares were awarded under the Equity Plan in January
2000 for the year ended December 31, 1999. The table excludes
performance shares awarded in January 1999 for the year ended December
31, 1998, which are set forth in a table in the prior year's proxy
statement.
(2) One-third of each award relates to the three-year performance cycle
ending December 31, 2002; and two-thirds of each award relates to the
three-year performance cycle ending December 31, 2003. Awards are
payable shortly following completion of the applicable performance
cycle, subject to earlier payment in certain circumstances or to
deferral. Such performance shares vest at the completion of the
applicable performance cycle, subject to rules pertaining to the
recipient's death, disability, retirement or termination of
employment, or change-in-control transactions.
(3) The actual dollar value received by a holder of performance shares, in
general, varies in accordance with the annual rate of growth in
adjusted book value per share ("ROE") of Common Stock during an
applicable "performance cycle" and the market price of Common Stock at
the time of payout of such performance shares. At the election of the
holder at the time of the award, ROE may be determined including or
excluding realized and unrealized gains and losses in the Company's
investment portfolio. With respect to the performance shares described
in the table above, if ROE is 7% or less per annum for any performance
cycle, no shares of Common Stock will be earned for the performance
cycle; if ROE is 13% per annum for any performance cycle, a number of
shares of Common Stock equal to 100% of the number of performance
shares will be earned for that performance cycle; and if ROE is 19%
per annum or higher for any performance cycle, a number of shares of
Common Stock equal to 200% of the number of performance shares will be
earned for that performance cycle. If ROE is between 7% and 19%, the
payout percentage will be interpolated. Recipients of performance
share awards may elect to receive cash in lieu of shares of Common
Stock in an amount equal to the product of (i) the number of shares of
Common Stock that would be distributed absent an election to receive
cash, multiplied by (ii) the New York Stock Exchange closing price per
share of Common Stock on the trading day prior to the date that the
Human Resources Committee approves the payout percentage for the
applicable performance cycle. However, notwithstanding an election to
receive cash, the Company may deliver shares of Common Stock if
available under the Equity Plan. Following the merger, shares of our
Common Stock will be valued at $76 per share (plus interest at 8% per
annum from the date of merger) for purposes of determining cash payout
amounts for currently outstanding performance shares.
42
<PAGE>
Report of
The Human Resources Committee of The Board of Directors
of Financial Security Assurance Holdings Ltd.
February 17, 2000
The Human Resources Committee of the Board of Directors (the
"Committee") determines the compensation of the Chief Executive Officer, the
Chief Operating Officer and the Executive Vice President of the Company, and
reviews and approves management's compensation recommendations for other
employees of the Company. The Committee is comprised entirely of independent
directors.
Compensation of executive officers of the Company is comprised
primarily of salary, cash bonus, equity bonus awards and performance share
awards, as well as employee benefits such as retirement and health benefits. The
Committee adheres to a compensation philosophy aimed at aligning the interests
of management with those of the owners, reflected by an emphasis on equity-based
rather than cash-based compensation.
In 1999, the Committee engaged Johnson Associates, Inc., professional
compensation consultants, to review the market compensation environment and to
evaluate the Company's performance share strategy. Johnson Associates, Inc.
prepared a report reviewed by the Committee in November 1999. The report was
intended as a background for review prior to approval of 1999 bonuses, 2000
salaries and 2000 performance share awards under the Company's 1993 Equity
Participation Plan (the "Equity Plan") at the Committee's January 2000 meeting.
On the subject of cash compensation, the report concluded, among other things,
that:
o the Company expected strong results and an increased bonus pool
based on agreed upon performance measures,
o 1999 compensation levels for the financial services industry were
expected to surpass 1998's high levels due to strong industry
performance, and
o the Company needed to address competitive alternatives available
to key professionals.
On the subject of the Company's performance share strategy, the report
concluded, among other things, that:
o management's performance share strategy appeared to be thoughtful
and directionally appropriate given market factors,
o the proposed strategy is competitive at the 75th percentile of
market comparables and continues to make up a significant portion
of the Company's executive compensation,
o the approach to performance share awards helps to maintain
competitive long-term compensation delivery and significant
ownership/at-risk compensation, and
o overall, the philosophy and structure of the Equity Plan
continues to be competitive and effective for motivating and
retaining the Company's senior professionals.
The report reinforced the Committee's belief that its compensation philosophy
and practices were accomplishing the results intended by the Committee, on both
an absolute and comparative basis.
Salaries. Generally, salaries of executive officers are reviewed by
the Committee every other year. Salaries of the five most highly compensated
executive officers were last reviewed for 1999 and, accordingly, were not
reviewed again for 2000 and thus remained unchanged from the prior year. The
Company, like other participants in the financial services sector, allocates
most of executive officer compensation to year-end bonuses rather than salaries,
with annual bonuses (including equity bonuses) exceeding annual salaries for
each of the five most highly compensated executive officers of the Company.
Cash Bonuses. At its February 1999 meeting, the Committee determined
the guidelines to be applied in determining the potential 1999 bonus pool
available for Company employees. The Committee, however, retained discretion
regarding the size of the actual 1999 bonus pool and the allocation of bonus
amounts to particular employees.
43
<PAGE>
As in the prior year, the Committee established a target bonus pool
equal to approximately 7% of the after tax growth in adjusted book value ("ABV")
for the year, subject to adjustment based upon the quality of return of capital
deployed. Growth in ABV was determined after all operating expenses, including
the cost of the bonus pool itself. The quality of return adjustment was intended
to motivate management to use the Company's capital prudently in building
adjusted book value per share. Under this guideline, the bonus pool would be
unchanged so long as transactions insured by the Company's subsidiaries had a
weighted average return on equity under the Company's return on equity model
("Transaction ROE") equal to a specified target Transaction ROE (the "Target
ROE"), provided that a Transaction ROE 2% or more above such target would result
in a 2% increase in ABV per share, while a Transaction ROE 2% or more below such
target would result in a 2% decrease in ABV per share, with Transaction ROE's
within such range interpolated on a straight-line basis.
The effect of the 1999 target bonus pool was to require a substantial
increase in ABV growth and/or Transaction ROE from prior year performance to
maintain the bonus pool at the level paid in the prior year. If the Company
performed in accordance with its 1999 financial plan at the Target ROE, then the
bonus pool for 1999 would have been approximately $18 million. A 1999 bonus pool
of $18 million would have been less than the actual 1998 bonus pool accrual of
$24 million, of which approximately $22 million was distributed. In establishing
these guidelines, the Committee recognized that non-distributed bonus pool
amounts from prior years may be carried over into future years. The Committee
also recognized that compensation matters in connection with new ventures would
be arranged outside the bonus pool, and that adjustments to the target bonus
pool may be recommended by management, subject to approval of the Committee, to
reflect changes in circumstances. No such arrangements or adjustments were
implemented in 1999.
The Company experienced record PV premium growth in 1999, coupled with
record Transaction ROE, resulting in a 1999 bonus pool of approximately $30.4
million under the guidelines described above. Of this amount, approximately $27
million was paid for 1999, with the balance carried over into future years. By
comparison, the actual bonus pool for 1998 was approximately $24 million, of
which approximately $22 million was distributed, with the balance carried over
to the subsequent year. The 1999 bonus (including equity bonus) for the Chief
Executive Officer increased approximately 27% from 1998. The Committee found
this bonus amount to be warranted in view of the record level of premium
production at well above the Target ROE and other accomplishments which
contributed substantially to shareholder value in 1999.
Equity Bonuses. 1999 was the sixth year that bonuses were paid part in
cash and part as equity bonus awards under the Equity Plan. Equity bonuses
represent "phantom shares" of the Company's common stock. Each bonus is
determined as discussed above under the caption "Cash Bonuses", and a specified
percentage of such bonus is paid in the form of an equity bonus in lieu of cash.
Equity bonus awards are deemed invested in the Company's common stock at 85% of
fair market value, and payment of such awards is deferred for a minimum of five
years. For 1999, as in the prior year, each employee had the option, exercisable
approximately six months prior to year-end, to increase his or her equity bonus
percentage to up to 50% of his or her total bonus, subject to Committee
approval. The Committee also determined that bonuses to executive officers would
be paid as equity bonuses to the extent that such bonuses, if paid in cash,
would result in the loss of a material federal income tax deduction under
Section 162(m) of the Internal Revenue Code of 1986. The Equity Plan also
provides for mandatory deferral of equity bonus award payouts to the extent that
such payouts, if made, would not be deductible by the Company due to the
limitation imposed by Section 162(m). The amount of the Chief Executive
Officer's bonus paid in the form of an equity bonus for 1999 was $1,830,598,
representing approximately 96% of his total bonus.
The minimum equity bonus percentages employed in 1999 (unchanged from
1998) are set forth below:
Equity Bonus Award as a Percentage of Total Bonus
Total Bonus Marginal Rate
$0 to $50,000 10% (optional for bonuses below $50,000)
$50,001 to $150,000 15%
$150,001 to $300,000 20%
Over $300,000 25%
Performance Shares. The Equity Plan provides for the award of
performance shares. Each performance share represents a right to receive up to
two shares of the Company's common stock, with the actual number of common
shares receivable determined on the basis of the increase in adjusted book value
per share over a specified performance cycle. The performance shares were
designed to provide less compensation to participants than stock options if the
Company performs poorly and more compensation to participants if the Company
performs well. In particular, the performance shares were designed to have no
value if the Company fails to generate a return on equity in excess of 7%, which
at the time was a proxy for the risk-free yield on treasury securities. Holders
of performance shares are entitled
44
<PAGE>
at the time of grant to elect to have their performance shares valued at the
time of payout either including or excluding realized and unrealized gains and
losses on the Company's investment portfolio. The Committee's approach generally
has been to refrain from awarding performance shares to the same individuals in
successive years. 2000 performance share awards were allocated 1/3 to a
2000/2001/2002 performance cycle and 2/3 to a 2001/2002/2003 performance cycle.
The Company has implemented a program of share purchases through a "rabbi trust"
for the purpose of funding in advance its obligations in respect of outstanding
performance shares. The Chief Executive Officer, who last received an award of
performance shares in January 1998, received an award of 70,000 performance
shares in January 2000. In January 2000, the Committee also approved performance
share payouts for the three-year performance share award cycle ended December
31, 1999 based upon growth in ABV per share during the cycle. The Committee
determined that each performance share for such award cycle was equal to 153.36%
(including portfolio gains and losses) or 169.65% (excluding portfolio gains and
losses) of a common share of the Company. Performance shares were paid in
Company common shares or cash, or such amounts were deferred, in accordance with
the provisions of the Equity Plan and the Company's Deferred Compensation Plan.
Stock Ownership Guidelines. The Committee has implemented stock
ownership guidelines for senior executives, including the five most highly
compensated executive officers, of the Company. The guidelines establish share
ownership objectives for senior executives, with the expectation that senior
executives would retain at least 50% of the net after-tax shares from Company
compensation plans until the objective has been met (absent any hardship
situation). The share ownership objective calls for ownership of Company shares
having a market value, (i) in the case of the Chief Executive Officer and Chief
Operating Officer, equal to the sum of three times annual compensation up to
$500,000 and four times additional compensation and (ii) in the case of other
senior executives, equal to the sum of two times annual compensation up to
$300,000 and three times additional compensation. For purposes of the
guidelines, share ownership (i) includes common stock owned, vested equity bonus
shares, and common stock deferred and phantom common stock investments under the
Company's benefit plans and (ii) excludes outstanding performance shares or
stock options.
The Committee reviewed compliance with Section 162(m) of the Internal
Revenue Code of 1986, relating to the deductibility of compensation paid to the
Chief Executive Officer and the other most highly compensated officers of the
Company. Performance share awards under the Equity Plan were designed, on advice
of counsel, to comply with the requirements of Section 162(m). Given the
Committee's intention to continue employment of deferred equity bonus awards in
lieu of a portion of cash bonuses in determining 2000 compensation for the
Company's senior management or to develop an alternative approach to maintain
the availability of federal income tax deductions for executive compensation,
the Committee has determined that it is unlikely that the Company will pay
compensation in 2000 that would result in the loss of any material federal
income tax deduction under Section 162(m) and has not recommended that any other
action be taken as a consequence of such provision.
Human Resources Committee K.
Thomas Kemp (Chairperson)
Robert N. Downey
David O. Maxwell
James H. Ozanne
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director and executive officer of the Company, and each
beneficial owner of more than 10% of the Common Stock and Preferred Stock, is
required under Section 16 of the Exchange Act to report to the SEC, the New York
Stock Exchange (the "NYSE") and the Company, by a specified date, all
transactions in the Company's equity securities. Based solely upon a review of
the reports furnished to it pursuant to Section 16, the Company believes that
all of its directors, executive officers and greater than 10% equity security
holders complied with the filing requirements applicable to them with respect to
transactions occurring during 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Human Resources Committee consisted of Messrs. Kemp, Downey,
Maxwell and Ozanne throughout 1999. None of such persons is currently or has
ever been an officer or employee of the Company or any subsidiary of the
Company. Mr. Kemp is Deputy Chairman of White Mountains, and was President and
Chief Executive Officer of White Mountains and Chairman and Chief Executive
Officer of WMH during 1999. Mr. Cochran, Chairman and Chief Executive Officer of
the Company, is a director of White Mountains and WMH, and a member of the
compensation committee of White Mountains. Mr. Taylor, President and Chief
Operating Officer of the Company, was a director and member of the compensation
committee of Source One, a subsidiary of White Mountains, until May 1999. Mr.
Ozanne was Chairman of Source One until May 1999.
45
<PAGE>
STOCK PRICE PERFORMANCE
The following graph compares the cumulative total return for an
investment of $100 on May 6, 1994 (the effective date of registration of the
Company's Common Stock) through December 31, 1999 in (i) the Company's Common
Stock, (ii) Standard & Poor's 500 Composite Index and (iii) the NYSE Financials
Index. The graph assumes that all dividends were reinvested (except for NYSE
Financials Index).
Cumulative Total Return on Common Stock compared to
Standard & Poor's 500 Composite Index and NYSE Financials Index
(May 6, 1994 to December 31, 1999)
390
360
330
300
270
[GRAPHIC OMITTED]
240
210
180
150
120
90
1994 1995 1996 1997 1998 1999
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1999 Equity Sale
The Company sold to three of our major shareholders shares of Common
Stock at a price of $54.20 per share pursuant to agreements entered into in late
October and early November 1999. The purchase price represented 97.5% of the
average of the high and low sale price of our common stock on the NYSE on
October 29, 1999, the date on which a Special Committee of the Board approved
the sale as part of a plan to raise approximately $140 million through sales of
the Company's Common Stock. The table below sets forth the number of shares
purchased and aggregate purchase price for each of the three shareholders,
individually and in the aggregate. The remaining approximately $27.1 million of
shares were purchased by the counterparties under the forward arrangements that
we entered into in 1999, described on page 41 of this proxy statement under the
caption "EXECUTIVE COMPENSATION -- Forward Shares".
<TABLE>
<CAPTION>
Shareholder Number of Shares Purchased Aggregate Purchase Price
----------- -------------------------- ------------------------
<S> <C> <C> <C>>
White Mountains 922,509 $ 50,000,000
Tokio Marine 700,000 37,940,000
XL 461,255 25,000,000
----------- --------------
Total 2,083,764 $112,940,000
</TABLE>
White Mountains, MediaOne and Company Relationships
In connection with its initial investment in the Company in 1994,
White Mountains:
o acquired 2,000,000 shares of the Series A Convertible Redeemable
Preferred Stock of the Company (the "Preferred Stock") from the
Company; the shares of Preferred Stock are convertible into an
equal number of shares of Common Stock at a price of $29.65 per
share (subject to anti-dilutive adjustment) until their
redemption date of May 13, 2004; the Preferred Stock remains
outstanding and its terms have not been amended since they were
issued;
o acquired an option to acquire 666,667 shares of Common Stock from
MOCC at an exercise price of $23.50 per share until May 13, 1999,
which was exercised in May 1999;
o acquired an option to acquire 1,893,940 shares of Common Stock
from MOCC at an exercise price of $26.40 per share until
September 2, 2004, which was exercised in September 1999;
o entered into a Registration Rights Agreement with MOCC and the
Company; and
o entered into a Voting Trust Agreement with MOCC and The First
National Bank of Chicago, as voting trustee, which related to the
voting of the 1,893,940 shares subject to the option described
above and which terminated upon the exercise by White Mountains
of that option.
Under the Registration Rights Agreement, at any time prior to May 13,
2004, each of White Mountains and MOCC is entitled to four demand registrations,
and the right to register certain shares on a "piggyback" basis on an unlimited
number of occasions if the Company proposes to have a public offering of Common
Stock. The Company has agreed to indemnify White Mountains and MOCC for certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments White Mountains or MOCC may be required to make in
respect thereof, in connection with sales by such person of Common Stock in a
registration statement prepared by the Company under the Registration Rights
Agreement.
White Mountains and Company Relationships
In March 1999, FSA Portfolio Management Inc. ("FSA Portfolio
Management"), a wholly owned subsidiary of the Company, terminated its
investment management services agreements with affiliates of White Mountains. No
services were provided and no fees were paid under those agreements during 1999.
In addition, as described on page 45 of this proxy statement under
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," certain directors
and executive officers of the Company are directors of White Mountains or its
subsidiaries, and certain present and former executive officers of White
Mountains and its subsidiaries are directors of the Company.
47
<PAGE>
Tokio Marine and Company Relationships
Cooperation Agreement and Reinsurance
Tokio Marine, the Company and FSA entered into a Cooperation Agreement
dated as of December 27, 1990 (the "Cooperation Agreement") in connection with
Tokio Marine's investment in the Company. The Cooperation Agreement contains
reinsurance provisions (discussed below) and reciprocal marketing provisions.
The Cooperation Agreement also entitles Tokio Marine to select one director of
the Company and of FSA and to place up to three of its employees in FSA's New
York offices and permits FSA to open a representative office on the premises of
Tokio Marine in Tokyo, Japan. The term of the Cooperation Agreement is
automatically renewed, but is subject to termination by one party upon default
by the other or upon 90 days' prior written notice by one party to the other.
Pursuant to the Cooperation Agreement, FSA has entered into a Master Reinsurance
Placement Memorandum (the "Memorandum") by which FSA has agreed to cede and
Tokio Marine has agreed to accept reinsurance equal to a specified percentage of
the principal amount of new business written by FSA in each calendar year, with
the cessions to be composed of treaty participations and facultative cessions,
including an automatic facility by which FSA at its option may make quota share
cessions, subject to certain conditions. Pursuant to the Memorandum, Tokio
Marine participates in FSA's non- municipal and municipal treaties and has
provided facultative reinsurance to FSA. The Company ceded premiums of $28.4
million, $23.8 million and $21.2 million to Tokio Marine for the years ended
December 31, 1999, 1998 and 1997, respectively. In the opinion of the management
of the Company and FSA, the terms of the Cooperation Agreement and reinsurance
with Tokio Marine are no less favorable to FSA than the terms that could be
obtained from unaffiliated parties. In anticipation of increased business
opportunities with Japanese sponsors, Tokio Marine and FSA entered into a
Memorandum of Understanding dated June 5, 1998 concerning the insurance and
reinsurance of transactions involving Japanese assets and obligors, and FSA
opened a representative office in Tokyo. During 1999, Tokio Marine agreed to
cede premiums to FSA in the aggregate amount of approximately $0.2 million (net
of ceding commissions).
Tokio Marine Stockholders Agreement
Under a Stockholders Agreement dated December 27, 1990, as amended
(the "Tokio Marine Stockholders Agreement"), among Tokio Marine, the Company and
MOCC, MOCC has agreed to vote all stock in the Company owned by it to nominate
and to elect a senior employee of Tokio Marine designated by Tokio Marine to the
Board of Directors of the Company so long as Tokio Marine owns at least 5% (9.9%
in the event the Cooperation Agreement is terminated as a result of a breach by
Tokio Marine) of the outstanding Common Stock or the Cooperation Agreement is in
effect. As long as such conditions are met, to the extent permitted by law, the
Company has agreed to cause a senior employee of Tokio Marine to be nominated as
a director of the Company. So long as Tokio Marine owns any Common Stock, MOCC
has agreed to use commercially reasonable efforts to cause the maximum cash
dividends to be paid each year with respect to the Common Stock to the extent
payable without violating applicable law, causing the rating agencies to lower
or consider lowering the triple-A claims-paying ability ratings of FSA or
reducing the cash of the Company and its subsidiaries below the amount needed to
satisfy their reasonably anticipated business needs.
The Tokio Marine Stockholders Agreement contains certain restrictions
on the ability of Tokio Marine, MOCC and the Company to sell or otherwise
transfer any stock of the Company or any subsidiary of the Company (and, under
certain circumstances, the stock of MOCC), or all or substantially all the
assets of the Company or FSA. Certain of the rights granted to Tokio Marine
under the Tokio Marine Stockholders Agreement may make it more difficult for
MOCC to sell additional shares of Common Stock or for the Company to dispose of
certain assets or raise funds from the sale of Common Stock and therefore might
be deemed to restrict a change in control of the Company.
Registration Rights
In May 1996, the Company, MOCC and White Mountains entered into a
letter agreement in order to provide that Tokio Marine has the rights to
register the shares of Common Stock then held by Tokio Marine as if Tokio Marine
were a party to the Registration Rights Agreement among the Company, MOCC and
White Mountains.
XL and Company Relationships
Joint Venture
In November 1998, the Company and XL entered into a joint venture to
establish two new Bermuda-based financial guaranty insurance companies. One
company, Financial Security Assurance International Ltd. ("FSA International"),
is an indirect subsidiary of FSA and the other company, XL Financial Assurance
Ltd ("XLFA"), is a subsidiary of XL. The Company has a minority interest in XLFA
and XL has a minority interest in FSA International.
Registration Rights
In connection with the joint venture formation in November 1998, the
Company entered into a Registration Rights Agreement with XL. Under the
Registration Rights Agreement, at any time prior to the sale by XL of all Common
Stock of the Company that it owns or termination of the shareholders agreement
entered into by the Company and XL in respect of FSA International, XL is
entitled to three (or, under certain circumstances, four) demand registrations,
and the right to register certain shares on a "piggyback" basis on an unlimited
number of occasions if the
48
<PAGE>
Company proposes to have a public offering of Common Stock. The Company has
agreed to indemnify XL for certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments XL may be required to make
in respect thereof, in connection with sales by such person of Common Stock in a
registration statement prepared by the Company under the Registration Rights
Agreement.
Reinsurance
XL Insurance Ltd ("XLI"), the principal operating subsidiary of XL,
and XLFA participated in four first loss treaties in 1999, under which FSA ceded
a portion of its first loss exposure under specified asset-backed transactions.
In 1999, XLI also participated in a quota share and aggregate excess of loss
treaty covering specified emerging market collateralized debt obligations. In
1999, FSA also made facultative quota share and first loss reinsurance cessions
to XLI of selected transactions. The Company ceded to XLI and XLFA premiums of
$19.8 million, $7.3 million and $15,000 for the years ended December 31, 1999,
1998 and 1997, respectively. In the opinion of the management of the Company,
the terms of the existing reinsurance agreements with XLI and XLFA are no less
favorable to FSA and its subsidiaries than the terms that could be obtained from
unaffiliated parties.
MediaOne and Company Relationships
In December 1993, the Company completed a restructuring (the
"Restructuring") which significantly reduced its risk of loss from its insured
portfolio of obligations backed by commercial mortgage loans (the "Commercial
Mortgage Portfolio"). As part of the Restructuring, FSA obtained reinsurance
from Commercial Reinsurance Company ("Commercial Re") in respect of the
Commercial Mortgage Portfolio. Commercial Re is an insurance company organized
for the purpose of the Restructuring that is owned approximately 91.6% by MOCC
and 8.4% by Tokio Marine. Various agreements were entered into among the Company
and its subsidiaries, Commercial Re and MediaOne in connection with the
Restructuring, all of which remain in force and have not since been amended.
These agreements include (i) a quota share reinsurance agreement, (ii) an
investment management agreement providing for the management by FSA Portfolio
Management of Commercial Re's investment portfolio and other matters in exchange
for a fee initially ranging from 15 to 30 basis points per annum on the market
value of Commercial Re's investment portfolio and (iii) a management agreement
pursuant to which the Company provides management services to Commercial Re,
including regulatory compliance and accounting services, for a fixed fee of
$100,000 per annum.
The Company ceded to Commercial Re premiums of $0.1 million, $0.2
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. In the opinion of the management of the Company, the terms of the
existing reinsurance agreements with the MediaOne affiliates are no less
favorable to FSA and its subsidiaries than the terms that could be obtained from
unaffiliated parties.
Other Relationships
Mr. Downey, a director of the Company, is a Senior Director of
Goldman, Sachs & Co. Goldman Sachs served as our financial advisor in connection
with the merger and will be paid a substantial fee if the merger is consummated.
See "Special Factors--Fees and expenses" on page 27.
OTHER MATTERS
We know of no other business to be brought before the annual meeting
other than as set forth above. The persons named in the enclosed proxy card
intend to vote on any other matter which properly comes before the Annual
Meeting in accordance with their best judgment.
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
FOR THE 2001 ANNUAL MEETING
Shareholder proposals for inclusion in our proxy statement and form of
proxy for our 2001 annual meeting of shareholders must be received no later than
December 1, 2000 at our principal executive offices, 350 Park Avenue, New York,
New York 10022, Attention: General Counsel.
In connection with the 2001 annual meeting of shareholders, if we do
not receive notice of a matter or proposal to be considered by February 15,
2001, then the persons appointed by the Board to act as the proxies for such
annual meeting will be allowed to use their discretionary voting authority with
respect to any such matter or proposal at such annual meeting, if such matter or
proposal is raised at such annual meeting.
49
<PAGE>
ADDITIONAL INFORMATION
Solicitation of Proxies/Costs
The Company is making this proxy solicitation. We may solicit proxies
by mail, electronic mail, telephone, telecopy or in person, and will pay all
costs of preparing and mailing these proxy materials and all solicitation costs,
except that Dexia will pay half of all expenses incurred in connection with the
filing, printing or mailing of this proxy statement (including SEC fees) and
soliciting proxies. Directors, officers and regular employees of the Company may
solicit proxies by such methods without additional compensation. Banks,
brokerage houses and other institutions, nominees and fiduciaries will be
requested to forward the soliciting material to their principals and to obtain
authorizations for the execution of proxy cards. Upon request, we will reimburse
them for their reasonable expenses.
Voting Procedures
The shares represented by all valid proxies received will be voted as
specified in the proxies. Where specific choices are not indicated, the shares
represented by all valid proxies received will be voted as recommended by the
Board as follows: (a) "FOR" the approval of the merger agreement, (b) "FOR" the
election of all nominees for director; and (c) "FOR" ratification of the
selection of independent auditors for 2000. A failure to vote or a vote to
abstain will have the same effect as a vote cast "AGAINST" approval of the
merger agreement. In addition, brokers who hold ordinary shares as nominees will
not have discretionary authority to vote such shares in the absence of
instructions from the beneficial owners and a broker non-vote will have the same
effect as not voting for or a vote "AGAINST" the merger agreement.
Vote Required
Under New York law, any corporate action to be taken at a
shareholders' meeting (other than election of directors) must be authorized by a
majority of votes cast (or two-thirds of all common shares and preferred shares
entitled to vote, voting together as a class, and two-thirds of all preferred
shares entitled to vote, voting separately as a class, in the case of the
merger). "Votes cast" means the votes actually cast for or against a resolution.
An abstention does not count as a vote cast.
Proposal 1: The Merger Agreement. The affirmative vote of the holders
of two-thirds of the total outstanding shares of our common stock and preferred
stock voting together as a single class, and the affirmative vote of the holder
of two-thirds of the outstanding shares of our preferred stock, voting
separately, at the annual meeting in person or by proxy is required in order to
approve the merger agreement.
Proposal 2: Election of Directors. A plurality of the votes cast at
the annual meeting in person or by proxy is required to elect each director.
Shares present in person at the meeting that are not voted for a particular
nominee, and shares represented by proxy as to which authority to vote for such
nominee is properly "withheld," will not be counted either "for" or "against" in
determining a plurality for such nominee.
Proposal 3: Approval of the Selection of Independent Auditors. We are
submitting to our shareholders the approval of the selection of
PricewaterhouseCoopers LLP as independent auditors of the Company because we
believe that such action follows sound corporate practice and is in the best
interest of the Company and our shareholders. If our shareholders do not approve
the selection by the affirmative vote of a majority of the votes cast at the
annual meeting in person or by proxy, our board will reconsider the selection of
independent auditors. If our shareholders approve the selection, our board, in
its discretion, may still direct the appointment of new independent auditors at
any time during the year if our board believes that such a change would be in
the best interest of the Company and our shareholders.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC
under the Exchange Act. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. You may read and copy this
information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. The SEC also maintains an Internet world wide
web site that contains reports, proxy statements and other information about
issuers, including SIHL, who file electronically with the SEC. The address of
that site is http://www.sec.gov. You can also inspect reports, proxy
50
<PAGE>
statements and other information about us at the offices of The New York Stock
Exchange, 111 Wall Street, New York, NY 10005.
The SEC allows us to "incorporate by reference" information into this
document. This means that the companies can disclose important information to
you by referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
document, except for any information that is superseded by information that is
included directly in this document.
This document incorporates by reference the document listed below that
we have previously filed with the SEC. It contains important information about
the Company and its financial condition.
SEC Filing Period
----------
Annual Report on Form 10-K................Year ended December 30, 1999
We incorporate by reference additional documents that we may file with
the SEC between the date of this document and the date of the annual meeting.
These documents include periodic reports, including quarterly reports on Form
10-Q.
You can obtain any of the documents incorporated by reference in this
document through us or from the SEC through the SEC's web site at the address
provided above. Documents incorporated by reference are available from us
without charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference into those documents. You can obtain
documents incorporated by reference in this document from our website at
www.FSA.com or by requesting them in writing to:
Robert Tucker
Director, Investor Relations
Financial Security Assurance Holdings Ltd.
350 Park Avenue
New York, New York 10022
If you would like to request documents, please do so by May 4, 2000 to
receive them before the annual meeting. If you request any incorporated
documents from us, we will mail them to you by first class mail, or another
equally prompt means, after we receive your request.
By Order of the Board of Directors,
/s/ Bruce E. Stern
-------------------------------
Bruce E. Stern,
Secretary
51
<PAGE>
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
dated as of March 14, 2000
by and among
THE ACQUISITION PARTY NAMED HEREIN
and
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
RECITALS......................................................................1
ARTICLE I
Certain Definitions
1.01 Certain Definitions.....................................................2
ARTICLE II
The Merger
2.01 The Merger..............................................................7
2.02 Effective Date and Effective Time.......................................8
ARTICLE III
Consideration; Exchange Procedures
3.01 Merger Consideration....................................................8
3.02 Rights as Shareholders..................................................9
3.03 Exchange Procedures.....................................................9
3.04 Options................................................................11
3.05 Plan Continuation......................................................11
ARTICLE IV
Forbearances of the Company
4.01 Forbearances of the Company............................................11
ARTICLE V
Representations and Warranties
5.01 Disclosure Schedules...................................................14
5.02 Standard...............................................................14
5.03 Representations and Warranties of the Company..........................15
5.04 Representations and Warranties of the Acquisition Party................28
ARTICLE VI
Covenants
6.01 Reasonable Best Efforts................................................30
6.02 Proxy Statement........................................................31
6.03 Shareholder Approvals..................................................31
6.04 Press Releases.........................................................31
6.05 Access; Information....................................................32
6.06 Acquisition Proposals..................................................32
6.07 Takeover Laws..........................................................34
6.08 Regulatory Submissions.................................................34
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<PAGE>
Page
6.09 Indemnification........................................................35
6.10 Employee Matters.......................................................36
6.11 Notification of Certain Matters........................................36
ARTICLE VII
Conditions to Consummation of the Merger
7.01 Conditions to Each Party's Obligation to Effect the Merger..............36
7.02 Conditions to Obligation of the Company................................37
7.03 Conditions to Obligation of the Acquisition Party......................38
ARTICLE VIII
Termination
8.01 Termination.............................................................39
8.02 Effect of Termination and Abandonment..................................40
8.03 Fee....................................................................40
8.04 Other Fees.............................................................41
ARTICLE IX
Miscellaneous
9.01 Survival................................................................42
9.02 Waiver; Amendment......................................................42
9.03 Counterparts...........................................................43
9.04 Governing Law..........................................................43
9.05 Waiver of Jury Trial...................................................43
9.06 Expenses...............................................................43
9.07 Notices................................................................43
9.08 Entire Understanding; No Third Party Beneficiaries.....................45
9.09 Interpretation; Effect.................................................45
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Page
EXHIBIT A Form of Voting Agreement
EXHIBIT B Form of Non-Competition and Employment Agreement
EXHIBIT C Form of Holdings Purchase Agreement
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of March 14, 2000 (this "Agreement")
by and among Dexia S.A. (the "Acquisition Party" or "Dexia") and PAJY Inc. (the
"Merger Sub") and Financial Security Assurance Holdings Ltd. (the "Company").
RECITALS
A. The Acquisition Party. Dexia is a corporation organized under the laws
of Belgium, having its principal place of business in Brussels. Dexia Credit
local de France S.A. ("CLF") is a corporation organized under the laws of
France, having its principal place of business in Paris. Merger Sub is a New
York corporation, having its principal place of business in New York, New York.
B. The Company. The Company is a New York corporation, having its principal
place of business in New York, New York.
C. Voting Agreements. As a further condition and an inducement to the
Acquisition Party entering into this Agreement, certain shareholders of the
Company (White Mountains Insurance Group, Ltd. ("WM"), MediaOne Capital
Corporation, and XL Capital Ltd), simultaneously with the execution and delivery
of this Agreement, have entered into agreements (the "Voting Agreements") with
Dexia, substantially in the form of Exhibit A hereto, providing that such
shareholders will vote or cause all shares of Company Stock controlled by them
to be voted in favor of the Merger and this Agreement.
D. Non-Competition and Employment Agreements. As a further condition and an
inducement to the Acquisition Party entering into this Agreement, certain
employees of the Company and its Subsidiaries have executed and delivered
non-competition and employment agreements (the "Employment Agreements") with the
Company (such agreements to become effective at the Effective Time), each
substantially in the form of Exhibit B.
E. Holdings Purchase. As a further condition and inducement to the
Acquisition Party entering into this Agreement, the Acquisition Party has
entered into a purchase agreement with WM and White Mountains Holdings
(Barbados) SRL providing for the purchase by Dexia of White Mountains Holdings,
Inc.'s indirect equity interest in the Company, substantially in the form of
Exhibit C.
F. Board Action. The respective Boards of Directors of the Company and of
the Acquisition Party have determined that it is in the best interests of their
respective companies and their shareholders to consummate the strategic business
combination transaction provided for herein.
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
ARTICLE I
Certain Definitions
1.01 Certain Definitions. The following terms are used in this Agreement
with the meanings set forth below:
"Acquisition Party" has the meaning set forth in the preamble to this
Agreement.
"Acquisition Proposal" has the meaning set forth in Section 6.06(a).
"Acquisition Transaction" has the meaning set forth in Section 6.06(a).
"Agreement" means this Agreement, as amended or modified from time to time
in accordance with Section 9.02.
"Applicable Period" has the meaning set forth in Section 6.06(a).
"Benefit Plan" has the meaning set forth in Section 5.03(n)(i).
"Certificate" has the meaning set forth in Section 3.03(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the preamble to this Agreement.
"Company Actuarial Analyses" has the meaning set forth in Section 5.03(w).
"Company Board" means the Board of Directors of Company.
"Company By-Laws" has the meaning set forth in Section 5.03(a).
"Company Certificate" has the meaning set forth in Section 5.03(a).
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"Company Common Stock" means the common stock, par value $.01 per share, of
Company.
"Company Insurance Subsidiaries" has the meaning set forth in Section
5.03(c)(iii).
"Company Investment Assets" has the meaning set forth in Section 5.03(z).
"Company Lead Insurance Subsidiary" means Financial Security Assurance Inc.
"Company Meeting" has the meaning set forth in Section 6.03.
"Company Option" has the meaning set forth in Section 3.04.
"Company Preferred Stock" means the Series A Convertible Redeemable
Preferred stock, par value $.01 per share, of the Company.
"Company Registration Rights Agreements" has the meaning set forth in
Section 5.03(bb).
"Company SAP Statements" has the meaning set forth in Section 5.03(g)(ii).
"Company Shareholders' Agreements" has the meaning set forth in Section
5.03(bb).
"Company Shareholder Approval" has the meaning set forth in Section
5.03(e).
"Company Stock" means, collectively, the Company Common Stock and the
Company Preferred Stock.
"Contingency Reserve" has the meaning set forth in Section 5.03(h)(ii).
"Contract" means any agreement, license, lease, understanding, contract,
loan, note, mortgage, indenture, promise, undertaking or other commitment or
obligation (whether written or oral and express or implied).
"Costs" has the meaning set forth in Section 6.09(a).
"CLF" has the meaning set forth in the preamble to this Agreement.
"Department of State" has the meaning set forth in Section 2.01(d).
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<PAGE>
"Designated Employees" has the meaning set forth in Section 7.03(d).
"Designated State Insurance Approvals" has the meaning set forth in Section
5.03(f)(i).
"Dexia" has the meaning set forth in the preamble to this Agreement.
"Drafts" has the meaning set forth in Section 5.03(g)(ii). "Disclosure
Schedule" has the meaning set forth in Section 5.01.
"Effective Date" means the date on which the Effective Time occurs.
"Effective Time" means the effective time of the Merger, as provided for in
Section 2.02.
"Employees" has the meaning set forth in Section 5.03(n)(i).
"Employment Agreement" has the meaning set forth in Recital D.
"Environmental Laws" means all applicable local, state and federal
environmental, health and safety laws and regulations, including, without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the Clean Water Act,
the Federal Clean Air Act, and the Occupational Safety and Health Act, each as
amended, regulations promulgated thereunder, and state counterparts.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 5.03(n)(iii).
"European Approval" has the meaning set forth in Section 8.04(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" has the meaning set forth in Section 3.03(b).
"Fee" has the meaning set forth in Section 8.03(a).
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<PAGE>
"Fee Event" has the meaning set forth in Section 8.03(b).
"Filed SEC Documents" means the SEC Documents of the Company filed prior to
the date of this Agreement.
"Foreign Approvals" has the meaning set forth in Section 5.03(f)(i).
"Governmental Authority" means any court, administrative agency or
commission or other federal, state or local governmental authority or
instrumentality.
"Holdings Purchase" means the transactions contemplated by the Holdings
Purchase Agreement.
"Holdings Purchase Agreement" means the purchase agreement dated the date
hereof among WM, White Mountains Holdings, (Barbados) SRL and Dexia.
"HSR Act" has the meaning set forth in Section 5.03(f).
"Indemnified Party" has the meaning set forth in Section 6.09(a).
"Insurance Amount" has the meaning set forth in Section 6.09(b).
"Insurance Approvals" has the meaning set forth in Section 5.03(f)(i).
"Insurance Policies" has the meaning set forth in Section 5.03(aa).
"Laws" has the meaning set forth in Section 5.03(k)(i).
"Lien" means any charge, mortgage, pledge, security interest, restriction,
claim, lien, or encumbrance.
"Material Adverse Effect" means, with respect to the Company, the
Acquisition Party or the Surviving Corporation, as the case may be, any effect
that (a) is material and adverse to the financial position, results of
operations or business of Company and its Subsidiaries taken as a whole, the
Acquisition Party and its Subsidiaries taken as a whole or the Surviving
Corporation and its Subsidiaries taken as a whole, as the case may be, or (b)
would materially impair the ability of either the Company or the Acquisition
Party to perform their obligations under this Agreement, other than in either
case an effect resulting from (x) changes in general economic or equity or debt
market conditions, (y) general changes or developments in the
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<PAGE>
industries in which the Company and its Subsidiaries, the Acquisition Party and
its Subsidiaries or the Surviving Corporation and its Subsidiaries, as the case
may be, operate and not specifically relating to the Company or its
Subsidiaries, the Acquisition Party or its Subsidiaries or the Surviving
Corporation or its Subsidiaries, as the case may be, or (z) any developments in
connection with the Massachusetts Health and Education Facility Revenue Bonds,
Harvard Pilgrim Health Care issue.
"Merger" has the meaning set forth in Section 2.01(b).
"Merger Consideration" has the meaning set forth in Section 3.01(a).
"Merger Sub" has the meaning set forth in the preamble to this Agreement.
"NYBCL" means the New York Business Corporation Law.
"NYSE" means the New York Stock Exchange, Inc.
"Other Fee" has the meaning set forth in Section 8.04.
"Pension Plan" has the meaning set forth in Section 5.03(n)(ii).
"Person" means any individual, bank, corporation, partnership, association,
joint-stock, business trust or unincorporated organization.
"Plans" has the meaning set forth in Section 5.03(n)(ii).
"Preferred Merger Consideration" has the meaning set forth in Section
3.01(a)(ii).
"Previously Disclosed" by a party shall mean information set forth in its
Disclosure Schedule or in its Filed SEC Documents.
"Proxy Statement" has the meaning set forth in Section 6.02.
"Rabbi Trust" means the trust agreement dated as of November 10, 1994
between Financial Security Assurance Holdings Ltd. and The Bank of New York, as
Trustee.
"Rating Agency" or "Rating Agencies" has the meaning set forth in Section
4.01(j).
"Regulatory Authority" has the meaning set forth in Section 5.03(j).
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"Representatives" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"Rights" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any Person any
right to subscribe for or acquire, or any options, calls or commitments relating
to, or any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such Person.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning set forth in Section 5.03(g).
"Section 6.06 Notice" has the meaning set forth in Section 6.06(a).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
them in Rule 1-02 of Regulation S-X of the SEC.
"Superior Proposal" has the meaning set forth in Section 6.06(b).
"Surviving Corporation" has the meaning set forth in Section 2.01(b).
"Surviving Corporation Common Stock" has the meaning set forth in Section
3.01(b).
"Takeover Laws" has the meaning set forth in Section 5.03 (p).
"Tax" and "Taxes" mean all federal, state, local or foreign taxes, charges,
fees, levies or other assessments, however denominated, including, without
limitation, all net income, gross income, gross receipts, gains, sales, use, ad
valorem, goods and services, capital, production, transfer, franchise, windfall
profits, license, withholding, payroll, employment, disability, employer health,
excise, estimated, severance, stamp, occupation, property, environmental,
unemployment or other taxes, custom duties, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions to tax
or
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additional amounts imposed by any taxing authority whether arising before, on or
after the Effective Date.
"Tax Returns" means any return, amended return or other report (including
elections, declarations, disclosures, schedules, estimates and information
returns) required to be filed with respect to any Tax.
"Treasury Stock" has the meaning set forth in Section 5.03(b).
"Voting Agreements" has the meaning set forth in Recital C.
"WM" has the meaning set forth in Recital C.
ARTICLE II
The Merger
2.01 The Merger. (a) Prior to the Effective Time, the Acquisition
Party shall take any and all action necessary to cause Merger Sub to take all
actions necessary or proper to comply with the obligations of the Acquisition
Party and Merger Sub to consummate the transactions contemplated hereby.
(b) At the Effective Time, Merger Sub shall merge with and into the
Company (the "Merger"), the separate corporate existence of Merger Sub shall
cease and the Company shall survive and continue to exist as a New York
corporation (the Company, as the surviving corporation in the Merger, sometimes
being referred to herein as the "Surviving Corporation"). The Surviving
Corporation shall continue to be governed by the NYBCL and its separate
corporate existence with all of its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger.
(c) The Acquisition Party may at any time prior to the Effective Time
change the method of effecting the combination with the Company (including,
without limitation, the provisions of this Article II) if and to the extent the
Acquisition Party deems such change to be necessary, appropriate or desirable;
provided, however, that no such change shall (i) alter or change the Merger
Consideration, (ii) adversely affect the tax treatment of the Company's
shareholders as a result of receiving the Merger Consideration or otherwise
materially and adversely affect the Company and its Subsidiaries taken as a
whole or (iii) materially impede or delay consummation of the transactions
contemplated by this Agreement; and provided further, that Dexia shall provide
the Company with written notice of such change.
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(d) Subject to the satisfaction or waiver of the conditions set forth
in Article VII, the Merger shall become effective upon the filing in the office
of the New York Department of State (the "Department of State") of a certificate
of merger in accordance with Section 904 of the NYBCL or such later date and
time as may be set forth in such certificate. The Merger shall have the effects
prescribed in the NYBCL.
(e) Articles of Incorporation and By-Laws. The certificate of
incorporation and by-laws of the Surviving Corporation immediately after the
Merger shall be the certificate of incorporation of the Company and the by-laws
of the Company, each as in effect immediately prior to the Effective Time.
2.02 Effective Date and Effective Time. Subject to the satisfaction or
waiver of the conditions set forth in Article VII, the parties shall cause the
effective date of the Merger (the "Effective Date") to occur on (a) the sixth
business day to occur after the last of the conditions set forth in Article VII
shall have been satisfied or waived in accordance with the terms of this
Agreement or (b) such other date to which the parties may agree in writing. The
time on the Effective Date when the Merger shall become effective is referred to
as the "Effective Time".
ARTICLE III
Consideration; Exchange Procedures
3.01 Merger Consideration. Subject to the provisions of this
Agreement, at the Effective Time, automatically by virtue of the Merger and
without any action on the part of any Person:
(a) Outstanding Company Stock. At the Effective Time, automatically
and without any action on the part of any holder thereof, each share of (i)
Company Common Stock issued and outstanding at the Effective Time (other
than Treasury Stock and shares of Company Common Stock owned, directly or
indirectly, by Dexia) shall be converted into the right to receive US$76.00
in cash, without interest (the "Merger Consideration") and (ii) each share
of Company Preferred Stock issued and outstanding at the Effective Time
(other than shares of Company Preferred Stock owned, directly or
indirectly, by Dexia) shall be converted into the right to receive US$46.35
in cash, without interest (the "Preferred Merger Consideration").
(b) At the Effective Time, the shares of common stock of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into a number of fully
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paid and nonassessable shares of common stock, par value $.01 per share, of
the Surviving Corporation ("Surviving Corporation Common Stock") such that
immediately after the Effective Time the aggregate number of shares of
Surviving Corporation Common Stock outstanding in respect of such
conversion shall be equal to the number of shares of Company Stock
converted under Section 3.01(a).
(c) Treasury Shares. Each share of Company Stock held as Treasury
Stock immediately prior to the Effective Time, shall be canceled and
retired at the Effective Time and no consideration shall be issued in
exchange therefor.
(d) At the Effective Time, (i) each share of Company Common Stock
owned, directly or indirectly, by Dexia immediately prior to the Effective
Time shall remain outstanding and shall continue as one fully paid and
nonassessable share of Surviving Corporation Common Stock and (ii) each
share of Company Preferred Stock owned, directly or indirectly, by Dexia
immediately prior to the Effective Time shall remain outstanding and shall
continue as one fully paid and nonassessable share of preferred stock, par
value $.01 per share, of the Surviving Corporation.
3.02 Rights as Shareholders. At the Effective Time, holders of Company
Stock other than Dexia and its Subsidiaries shall cease to be, and shall have no
rights as, shareholders of the Company, other than to receive any dividend or
other distribution with respect to such Company Stock with a record date
occurring prior to the Effective Time and the consideration provided under this
Article III.
3.03 Exchange Procedures. (a) At and after the Effective Time, each
certificate (other than certificates held, directly or indirectly, by Dexia)
theretofore representing shares of Company Stock (each, a "Certificate") shall
represent only the right to receive the Merger Consideration or the Preferred
Merger Consideration, as applicable, in cash without interest.
(b) As of the Effective Time, the Acquisition Party, shall deposit, or
shall cause to be deposited, with such bank or trust company as the Acquisition
Party shall elect (which shall be reasonably acceptable to the Company) (the
"Exchange Agent"), for the benefit of the holders of shares of Company Stock,
for exchange in accordance with this Article III, the Merger Consideration and
the Preferred Merger Consideration to be paid pursuant to Section 3.01 and
deposited pursuant to this Section 3.03 in exchange for outstanding shares of
Company Stock.
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(c) As soon as practicable after the Effective Time, the Acquisition
Party shall cause the Exchange Agent to mail to each holder of record of a
Certificate or Certificates the following: (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 to the Exchange
Agent, which shall be in a form and contain any other customary provisions as
the Acquisition Party and the Company may reasonably determine; and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for the Merger Consideration or the Preferred Merger Consideration, as
applicable. Upon the proper surrender of a Certificate to the Exchange Agent,
together with a properly completed and duly executed letter of transmittal and
evidence that any applicable stock transfer taxes have been paid, the holder of
such Certificate shall receive in exchange therefor a check representing the
Merger Consideration or the Preferred Merger Consideration, as applicable, which
such holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions hereof, and the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the Merger
Consideration or the Preferred Merger Consideration, as applicable. In the event
of a transfer of ownership of any shares of Company Stock not registered in the
transfer records of the Company, a check for the Merger Consideration or the
Preferred Merger Consideration, as applicable, may be issued to the transferee
if the Certificate representing such Company Stock is presented to the Exchange
Agent, accompanied by documents sufficient, in the reasonable discretion of the
Acquisition Party and the Exchange Agent, (i) to evidence and effect such
transfer and (ii) to evidence that all applicable stock transfer taxes have been
paid.
(d) From and after the Effective Time, there shall be no registration
of transfers on the stock transfer records of the Company of any shares of
Company Stock that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Acquisition Party or
the Surviving Corporation for any reason, they shall be canceled and exchanged
for the Merger Consideration or the Preferred Merger Consideration, as
applicable, deliverable in respect thereof pursuant to this Agreement in
accordance with the procedures set forth in this Section 3.03.
(e) Any portion of the aggregate Merger Consideration or the Preferred
Merger Consideration, as applicable, that remains unclaimed by the shareholders
of the Company for six months after the Effective Time and the proceeds of any
investments thereof shall be repaid by the Exchange Agent to the Acquisition
Party. Any shareholder of the Company who has not
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theretofore complied with this Section 3.03 shall thereafter be entitled to look
only to the Acquisition Party for payment of the Merger Consideration or the
Preferred Merger Consideration, as applicable, deliverable in respect of each
share of Company Stock held by such shareholder without any interest thereon. If
outstanding Certificates are not surrendered or the payment for them is not
claimed prior to the date on which such payments would otherwise escheat to or
become the property of any governmental unit or agency, the unclaimed items
shall, to the extent permitted by abandoned property and any other applicable
law, become the property of the Acquisition Party (and to the extent not in its
possession shall be paid over to the Acquisition Party), free and clear of all
claims or interest of any Person previously entitled to such claims.
Notwithstanding the foregoing, none of the Acquisition Party, Merger Sub, the
Surviving Corporation, the Exchange Agent or any other Person shall be liable to
any former holder of Company Stock for any amount delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(f) 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 the
Exchange Agent, the posting by such Person of a bond in such amount as the
Exchange Agent may direct 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 a check for the Merger
Consideration or the Preferred Merger Consideration, as applicable, deliverable
in exchange therefor.
3.04 Options. Immediately prior to the Effective Time, each
outstanding stock option under the Company's 1993 Equity Participation Plan
(each, a "Company Option") shall be canceled and only entitle the holder thereof
to receive for each share of Company Stock with respect to such Company Option
an amount in cash equal to the excess, if any, of (i) the Merger Consideration
over (ii) the per share exercise price under such Company Option. Prior to the
Effective Time, the Company shall use its reasonable best efforts to take all
necessary action with respect to such cancellation, including obtaining any
necessary consents from the holders of such Company Options.
3.05 Plan Continuation. Prior to the Effective Time, (i) the Company
Board has elected pursuant to Section 8(e) of the Company's 1993 Equity
Participation Plan to continue the Plan as provided in the resolution included
in Section 3.04 of the Disclosure Schedule, and (ii) the Company will cause the
determinations with respect to the 1993 Equity Participation Plan set forth in
Section 3.04 of the Disclosure Schedule to be made
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in accordance with the methodology set forth in Section 3.04 of the Disclosure
Disclosure. Prior to the Effective Time, the Company shall use its reasonable
best efforts to take all necessary action with respect to such action, including
obtaining any necessary consents from the holders of such awards.
ARTICLE IV
Forbearances of the Company
4.01 Forbearances of the Company. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement or as
specifically set forth in the Company Disclosure Schedule, without the prior
written consent of the Acquisition Party, the Company will not, and will cause
each of its Subsidiaries not to:
(a) Ordinary Course. Conduct the business of the Company and its
Subsidiaries, including, without limitation, in respect of its reinsurance
and risk-management practices, risk profile, risk exposure and pricing
policies, asset investment practices, reserving and underwriting practices,
other than in the ordinary course or fail to use commercially reasonable
efforts to preserve intact their business organizations and assets and
maintain their rights, franchises and existing relations with customers,
suppliers, agents, brokers, reinsurers, employees and business associates,
or take any action reasonably likely to have a material adverse effect upon
the Company's ability to perform any of its material obligations under this
Agreement.
(b) Capital Stock. Other than pursuant to Rights Previously Disclosed,
(i) issue, sell or otherwise permit to become outstanding, or authorize the
creation of, any additional shares of Company Stock or any Rights, (ii)
enter into any agreement with respect to the foregoing, or (iii) permit any
shares of Company Stock to become subject to grants of employee or director
stock options, other Rights or similar stock-based employee rights.
(c) Dividends, Etc. (i) Make, declare, pay or set aside for payment
any dividend (other than (A) quarterly cash dividends on Company Stock in
an amount not to exceed $0.12 per share (or, for dividends declared on or
after August 1, 2000, $0.14 per share) with record and payment dates
consistent with past practice and (B) dividends declared and paid by any
Subsidiary of the Company) on or in respect of, or declare or make any
distribution on any
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shares of, Company Stock or (ii) directly or indirectly adjust, split,
combine, redeem, reclassify, purchase (other than shares of Company Common
Stock held by the Rabbi Trust or pursuant to existing agreements Previously
Disclosed in Section 4.01(c) of the Company's Disclosure Schedule) or
otherwise acquire, any shares of Company stock.
(d) Compensation; Employment Agreements; Etc. Enter into or amend or
renew any employment, consulting, severance or similar agreements or
arrangements with any director, officer or employee of the Company or its
Subsidiaries or grant any salary or wage increase or increase any employee
benefit (including incentive or bonus payments), except (i) for changes
that are required by applicable law, (ii) to satisfy Previously Disclosed
contractual obligations existing as of the date hereof, (iii) as Previously
Disclosed or (iv) except for agreements or arrangements (other than with
directors or management committee members) or increases in the ordinary
course of business consistent with past practice that, in the aggregate, do
not materially increase benefits or compensation expenses of the Company or
its Subsidiaries.
(e) Benefit Plans. Enter into, establish, adopt or amend (except (i)
as may be required by applicable law, (ii) as specifically contemplated
hereby, or (iii) to satisfy Previously Disclosed contractual obligations
existing as of the date hereof) any pension, retirement, stock option,
stock purchase, savings, profit sharing, deferred compensation, consulting,
bonus, group insurance or other employee benefit, incentive or welfare
contract, plan or arrangement, or any trust agreement (or similar
arrangement) related thereto, in respect of any director, officer, agent or
employee of the Company or its Subsidiaries, or take any action to
accelerate the vesting or exercisability of equity bonuses, performance
shares or other compensation or benefits payable thereunder.
(f) Dispositions. Except as Previously Disclosed, sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any of its
assets, deposits, business or properties except in the ordinary course of
business.
(g) Acquisitions. Except as Previously Disclosed, acquire all or any
portion of, the assets, business, deposits or properties of any other
entity except in the ordinary course of business and in a transaction that
is not material to the Company and its Subsidiaries taken as a whole.
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(h) Governing Documents. Amend the Company Certificate or the Company
By-laws other than the amendment to the Company Certificate to remove the
transfer restrictions on the Company Preferred Stock.
(i) Licences and Regulatory Authorizations. Take any action that is
intended to or reasonably likely to result in, or fail to take any action
reasonably necessary to prevent the occurrence of, the revocation or
limitation of any licence or authorization granted to the Company of any of
its Subsidiaries, including, without limitation, the licences and
authorizations referred to in Section 5.03(c)(iii), unless management of
the Company determines in good faith that such action or inaction is in the
best interests of the Company.
(j) Ratings. Take any action that is intended to or reasonably likely
to result in, or fail to take any action reasonably necessary to prevent
the occurrence of, an announcement by either Standard & Poor's Ratings
Service or Moody's Investors Service, Inc. (each, a "Rating Agency, and,
collectively, the "Rating Agencies") that such Rating Agency has decided to
downgrade, have under surveillance or review its rating of the financial
strength or claims-paying ability of the Company Lead Insurance Subsidiary,
unless management of the Company determines in good faith that such action
or inaction is in the best interests of the Company.
(k) Accounting Methods. Except as Previously Disclosed, implement or
adopt any change in its accounting principles, practices or methods, other
than as may be required by generally accepted accounting principles or
regulatory authorities.
(l) Contracts. (i) Enter into any contract of a type referred to in
Section 5.03(l)(ii), or (ii) except in the ordinary course of business, (x)
enter into or terminate any contract of a type referred to in Section
5.03(l)(i) or amend or modify in any material respect any such contract or
(y) enter into any contract, or amend any existing contract, between the
Company or any of its Subsidiaries, on the one hand, and any shareholder of
the Company, on the other hand.
(m) Claims. Except in the ordinary course of business, settle any
claim, action or proceeding, except for any claim, action or proceeding
involving solely money damages in an amount, individually or in the
aggregate for all such settlements, that is not material to the Company and
its Subsidiaries taken as a whole.
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(n) Adverse Actions. Knowingly take any action that is intended or is
reasonably likely to result in (i) any of its representations and
warranties set forth in this Agreement being or becoming untrue in any
material respect at any time at or prior to the Effective Time, (ii) any of
the conditions to the Merger set forth in Article VII not being satisfied
or (iii) a material violation of any provision of this Agreement.
(o) Indebtedness. Incur any indebtedness for borrowed money other than
in the ordinary course of business.
(p) Capital Expenditures. Authorize or make any capital expenditures
other than in the ordinary and usual course of business and, in any event,
in amounts not exceeding $4,000,000 in the aggregate.
(q) Commitments. Agree or commit to do any of the foregoing.
ARTICLE V
Representations and Warranties
5.01 Disclosure Schedules. On or prior to the date hereof, the
Acquisition Party has delivered to the Company a schedule, and the Company has
delivered to the Acquisition Party a schedule (respectively, their or its
"Disclosure Schedule") setting forth, among other things, items the disclosure
of which is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in Section 5.03 or 5.04 or to one or
more of its covenants contained in Article IV; provided that (a) no such item is
required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence would not be reasonably likely to
result in the related representation or warranty being deemed untrue or
incorrect under the standard established by Section 5.02, and (b) the mere
inclusion of an item in a Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that such
item is reasonably likely to result in a Material Adverse Effect on the relevant
party.
5.02 Standard. No representation or warranty of the Company or the
Acquisition Party contained in Section 5.03 (other than (X) those contained in
Section 5.03(a) (with the exception of the second sentence thereof ), (b),
(c)(i), (c)(ii), (c)(iii)
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(with the exception of the third and fourth sentences thereof), and (n)(i) and
other than (Y) those contained in Section 5.03(d), (e), (f)(i), (g), (i)(i),
(k)(ii) (A), (k)(ii)(B) and (k)(ii)(C), which in the case of (Y) shall not be
deemed untrue or incorrect unless they are not true and correct in all material
respects) or 5.04 (other than (X) those contained in Section 5.04(a)(i)(A) and
other than (Y) those contained in Section 5.04(b), (c) and (d)(i), which in the
case of (Y) shall not be deemed untrue or incorrect unless they are not true and
correct in all material respects) shall be deemed untrue or incorrect, and no
party hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, event or circumstance unless such
fact, circumstance or event, individually or taken together with all other
facts, events or circumstances inconsistent with any representation or warranty
contained in Section 5.03 or 5.04, has had or is reasonably likely to have a
Material Adverse Effect on the relevant party.
5.03 Representations and Warranties of the Company. Subject to
Sections 5.01 and 5.02 and except as Previously Disclosed in a paragraph of its
Disclosure Schedule corresponding to the relevant paragraph below, the Company
hereby represents and warrants to the Acquisition Party:
(a) Organization, Standing and Authority. The Company is a corporation
duly organized and validly existing under the laws of the State of New
York. The Company is duly qualified or licensed to do business in the
states of the United States and any foreign jurisdictions where its
ownership or leasing of property or assets or the conduct of its business
requires it to be so qualified or licensed. The Company has made available
to the Acquisition Party prior to the date hereof complete and correct
copies of its Restated Certificate of Incorporation (the "Company
Certificate") and its Amended and Restated By-laws (the "Company By-Laws")
and the certificates of incorporation and by-laws of its Subsidiaries, in
each case as amended to the date hereof.
(b) Company Stock. As of the date hereof, the authorized capital stock
of the Company consists solely of (i) 220,000,000 shares of the Company
Common Stock, of which 33,518,017 shares were outstanding as of the date
hereof (including 508,064 shares held by the Rabbi Trust) and (ii)
20,000,000 shares of the Company Preferred Stock, of which 2,000,000 shares
were outstanding as of the date hereof. As of the date hereof, 158,306
shares of the Company Common Stock and no shares of the Company Preferred
Stock were held in treasury (which for purposes of this Agreement shall not
include shares held by the Rabbi Trust, the "Treasury
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Stock"). The outstanding shares of Company Stock have been duly authorized
and are validly issued and outstanding, fully paid and nonassessable, and,
except as Previously Disclosed, subject to no preemptive rights (and were
not issued in violation of any preemptive rights). Each share of Company
Preferred Stock is convertible into one share of Company Common Stock upon
surrender of such share and the payment of a conversion price of $29.65. As
of the date hereof, except pursuant to the Company's 1993 Equity
Participation Plan or as Previously Disclosed in its Disclosure Schedule,
there are no shares of Company Stock authorized and reserved for issuance,
the Company does not have any Rights issued or outstanding with respect to
Company Stock, and the Company does not have any commitment to authorize,
issue or sell any Company Stock or Rights, except pursuant to this
Agreement. The number of shares of the Company Common Stock which are
issuable and reserved for issuance pursuant to the Company's 1993 Equity
Participation Plan and other plans as of the date hereof are Previously
Disclosed in the Company's Disclosure Schedule.
(c) Subsidiaries. (i)(A) The Company has Previously Disclosed a list
of all of its Subsidiaries together with the jurisdiction of organization
of each such Subsidiary, (B) except as Previously Disclosed and except for
directors' qualifying shares, the Company owns, directly or indirectly, all
the issued and outstanding equity securities of each of its Subsidiaries,
(C) except as Previously Disclosed, no equity securities of any of its
Subsidiaries are or may become required to be issued (other than to the
Company or its wholly-owned Subsidiaries) by reason of any Right or
otherwise, (D) except as Previously Disclosed, there are no contracts,
commitments, understandings or arrangements by which any of such
Subsidiaries is or may be bound to sell or otherwise transfer any equity
securities of any such Subsidiaries (other than to the Company or its
wholly-owned Subsidiaries), (E) except as Previously Disclosed, there are
no contracts, commitments, understandings, or arrangements relating to its
rights to vote or to dispose of such securities and (F) except as
Previously Disclosed, all the equity securities of each Subsidiary held by
the Company or its Subsidiaries are fully paid and nonassessable and are
owned by the Company or its Subsidiaries free and clear of any Liens.
(ii) The Company does not own beneficially, directly or indirectly,
any equity securities or similar interests of any Person, or any interest
in a partnership, joint venture or other entity of any kind, other than its
Subsidiaries or
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as Previously Disclosed or equity securities or other interests acquired in
compliance with Section 4.01.
(iii) The Company conducts its insurance operations through the
Subsidiaries listed in Section 5.03(c)(iii) of its Disclosure Schedule
(collectively, the "Company Insurance Subsidiaries"). The Company's
Disclosure Schedule sets forth the states or jurisdictions where the
Company Insurance Subsidiaries are domiciled or "commercially domiciled"
for insurance regulatory purposes and such other states where the
transactions contemplated by this Agreement will require the Acquisition
Party to obtain "change in control" approvals from state insurance
regulators. The Company and each of the Company Insurance Subsidiaries is,
where required, (A) duly licensed or authorized as an insurance company or
reinsurer in its jurisdiction of incorporation, (B) 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 (C) 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). The Company has made all required filings under applicable
insurance holding company statutes.
(iv) (A) Each of the Company's other Subsidiaries has been duly
organized and is validly existing under the laws of the jurisdiction of its
organization, and (B) is duly qualified or licensed to do business in the
jurisdictions where its ownership or leasing of property or the conduct of
its business requires it to be so qualified.
(d) Corporate Power. The Company and each of its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and the Company has the
corporate power and authority to execute, deliver and perform its
obligations under this Agreement.
(e) Corporate Authority, Approval and Fairness. Subject (A) in the
case of this Agreement, to receipt of the requisite approval of the plan of
merger set forth in this Agreement by (i) the holders of at least
two-thirds of all outstanding shares of Company Stock entitled to vote
thereon, including the holders of Company Preferred Stock voting as a
single class with the holders of Company Common Stock, and (ii) the holders
of at least two-thirds of the outstanding shares of Company Preferred
Stock, voting separately (which are the only shareholder votes required
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thereon) (collectively, the "Company Shareholder Approval"), and (B) in the
case of the Holdings Purchase Agreement, to an amendment to the Company
Certificate to remove the transfer restrictions on the Company Preferred
Stock, this Agreement, the Voting Agreements, the Holdings Purchase
Agreement and the transactions contemplated hereby and thereby have been
authorized by all necessary corporate action of the Company and the Company
Board, and approved by the Company Board by unanimous vote of all members
prior to the date hereof. Assuming the due authorization, execution and
delivery of this Agreement by the other parties hereto, this Agreement is a
valid and legally binding obligation of the Company, enforceable in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles). The Company
Board has received the written opinion of Goldman, Sachs & Co. to the
effect that, as of the date hereof, the Merger Consideration is fair to the
holders of the Company Common Stock from a financial point of view.
(f) Regulatory Filings; No Defaults. (i) No consents or approvals of,
or filings or registrations with (other than informational filings), any
Governmental Authority are required to be made or obtained by the Company
or any of its Subsidiaries in connection with the execution, delivery or
performance by the Company of this Agreement, the Holdings Purchase
Agreement or the Voting Agreements or to consummate the Merger except for
(A) the filing of a notice or applications, and related approvals and
clearances, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act"), (B) filings with the SEC and state securities authorities,
(C) the filing of a certificate of merger with the Department of State of
the State of New York pursuant to the NYBCL, (D) filings in respect of, and
approvals and authorizations of, and, as applicable, the expiration of
applicable waiting periods of, the respective Commissioners of Insurance of
the States listed in Section 5.03(f)(D) of the Company's Disclosure
Schedule (the "Designated State Insurance Approvals") and (E) such other
filings in respect of, and to the extent necessary, approvals and
authorizations of, or notifications to, similar foreign regulatory
authorities to satisfy the requirements of applicable foreign laws (the
"Foreign Approvals", and together with the Designated State Insurance
Approvals, the "Insurance Approvals").
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<PAGE>
(ii) Subject to receipt of the regulatory approvals and the making of
filings referred to in the preceding paragraph, and expiration of related
waiting periods, and required filings under federal and state securities
laws, and the receipt of Company Shareholder Approval, the execution,
delivery and performance of this Agreement, the Holdings Purchase Agreement
and the Voting Agreements (to the extent that the Company must take action
to render effective the rights conferred by the Holdings Purchase
Agreements and the Voting Agreements), and the consummation of the
transactions contemplated hereby and thereby do not and will not (A) except
as Previously Disclosed, constitute a breach or violation of, or a default
under, or give rise to any Lien, any acceleration of remedies, or any right
of termination under, any law, rule or regulation or any judgment, decree,
order, governmental permit or license, or agreement, indenture or
instrument of the Company or of any of its Subsidiaries or to which the
Company or any of its Subsidiaries or properties is subject or bound, (B)
constitute a breach or violation of, or a default under, the Company
Certificate or the Company By-Laws, or (C) require any consent or approval
under any such law, rule, regulation, judgment, decree, order, governmental
permit or license, agreement, indenture or instrument.
(g) Financial Reports, SEC Documents and SAP Statements. (i) The
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, the Company's amended Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1998 and the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 in draft form disclosed in
Section 5.03(g) of the Company's Disclosure Schedule and (except for the
inclusion of information typically included in the proxy statement) in
substantially the form to be filed, and all other reports, registration
statements, definitive proxy statements or information statements filed or
to be filed by it or any of its Subsidiaries subsequent to December 31,
1999 under the Securities Act, or under Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act, in the form filed or to be filed (collectively, the
Company's "SEC Documents") with the SEC, as of the date filed, (A) complied
or will comply in all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may
be, and (B) did not and 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 therein, in the light of the circumstances
under which they were made, not misleading; and each of the balance sheets
contained in or incorporated
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by reference into any such SEC Document (including the related notes and
schedules thereto) fairly presents, or will fairly present, the financial
position of the Company and its Subsidiaries as of its date, and each of
the statements of income and changes in shareholders' equity and cash flows
or equivalent statements in such SEC Documents (including any related notes
and schedules thereto) fairly presents, or will fairly present, the results
of operations, changes in shareholders' equity and changes in cash flows,
as the case may be, of the Company and its Subsidiaries for the periods to
which they relate, in each case in accordance with generally accepted
accounting principles consistently applied during the periods involved,
except in each case as may be noted therein and subject to normal year-end
audit adjustments.
(ii) The Company has delivered or made available to the Acquisition
Party Representative true and complete copies of the annual statements of
each of the Company Insurance Subsidiaries as filed with the applicable
insurance regulatory authorities for the years ended December 31, 1996,
1997, 1998, the quarterly statements for the periods ended March 31, 1999,
June 30, 1999 and September 30, 1999, including all exhibits,
interrogatories, notes, schedules and any actuarial opinions, affirmations
or certifications or other supporting documents filed in connection
therewith and the most recent drafts (the "Drafts") of the annual
statements of each of the Company Insurance Subsidiaries to be filed with
the applicable insurance regulatory authorities for the year ended December
31, 1999 (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 except, in each case,
as may be noted therein, and present fairly the statutory financial
position of the Company and 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 other than the
Drafts have been audited by PricewaterhouseCoopers LLP, and the Company has
delivered or made available to the Acquisition Party true and complete
copies of all audit opinions related
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<PAGE>
thereto. The Company has delivered or made available to the Acquisition
Party true and complete copies of all examination reports of insurance
departments and any insurance regulatory agencies since January 1, 1996
relating to the Company or the Company Insurance Subsidiaries.
(h) Absence of Certain Changes. Except as Previously Disclosed, since
January 1, 2000:
(i) to the date of this Agreement, the Company and its Subsidiaries
(A) have not incurred any liability other than in the ordinary course of
business and (B) have conducted their respective businesses in the ordinary
course;
(ii) to the date of this Agreement, there has not been (A) any
declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of the Company, except for
dividends or other distributions on its capital stock publicly announced
prior to the date hereof; (B) any material addition, or any development
involving a prospective material addition, to the Company's consolidated
reserves, including the contingency reserve maintained pursuant to Article
69 of the New York Financial Guaranty Insurance Law (the Company's
"Contingency Reserve"); (C) any material change in the accounting,
actuarial, investment, reserving, underwriting or claims administration
policies, practices or principles of the Company or any of the Company
Insurance Subsidiaries; and
(iii) there has not been any event or circumstance that, individually
or taken together with all other facts, circumstances and events (described
in any paragraph of Section 5.03 or otherwise), has had or is reasonably
likely to have a Material Adverse Effect with respect to the Company.
(i) Litigation and Liabilities. As of the date of this Agreement,
except as Previously Disclosed, (i) no litigation, claim or other
proceeding before any court or governmental agency is pending against the
Company or any of its Subsidiaries and, to the Company's knowledge, no such
litigation, claim or other proceeding has been threatened.
(ii) There are no obligations or liabilities, whether or not accrued,
contingent or otherwise, including those relating to matters involving any
Environmental Laws and occupational safety and health matters, required by
generally accepted accounting principles to be set forth on a consolidated
balance sheet of the Company that are reasonably likely to result in a
Material Adverse Effect.
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<PAGE>
(j) Regulatory Matters. Except as Previously Disclosed, (i) neither
the Company nor any of its Subsidiaries or properties is a party to or is
subject to any order, decree, supervisory agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or
similar submission to, or extraordinary supervisory letter from, any
foreign, federal or state governmental agency or authority charged with the
supervision or regulation of insurance companies or issuers of securities
or the supervision or regulation of it or any of its Subsidiaries
(collectively, the "Regulatory Authorities").
(ii) Neither the Company nor any of its Subsidiaries has been advised
by any Regulatory Authority that such Regulatory Authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, supervisory agreement, memorandum of
understanding, commitment letter, supervisory letter or similar submission.
(k) Compliance with Laws; Permits. (i) Except as Previously Disclosed,
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 Authority (collectively, "Laws"). Except as
Previously Disclosed, no investigation, examination or review other than in
the ordinary course by any Governmental Authority with respect to the
Company or any of its Subsidiaries is pending or, to the knowledge of the
Company, has any Governmental Authority indicated an intention to conduct
the same. The Company and each of its Subsidiaries each has all permits,
licenses, franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct its business as
presently conducted.
(ii) Prior to the Effective Time, (A) the Company and its Insurance
Subsidiaries do not receive a subsidy or other competitive advantage, as a
result of any indirect control by a political subdivision of a foreign
government, (B) the Company and its Insurance Subsidiaries are not entitled
to claim sovereign immunity as result of such control, or will waive such
sovereign immunity, (C) the use of the Company and its Insurance
Subsidiaries as insurer is not detrimental to the interests of the people
of the State of New York or any other state in which such entities conduct
business and (D) each of the Company and its Insurance Subsidiaries
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<PAGE>
otherwise satisfies all applicable requirements for the renewal of its
licence to transact insurance business in each jurisdiction in which it is
currently authorized to transact on insurance business.
(l) Material Contracts; Defaults. Except as Previously Disclosed,
neither the Company nor any of its Subsidiaries is a party to, bound by or
subject to any agreement, contract, arrangement, commitment or
understanding (whether written or oral) (i) that is a "material contract"
within the meaning of Item 601(b)(10) of the SEC's Regulation S-K, (ii)
that prohibits or restricts the Company or any of its Subsidiaries from
engaging in any business activity in any geographic area, line of business
or otherwise in competition with any other Person or (iii) that provides
for the management of any assets, other than investment securities, of the
Company or any of its Subsidiaries by a party not majority owned by the
Company. Except as Previously Disclosed, neither the Company nor any of its
Subsidiaries is in default under any contract, agreement, commitment,
arrangement, lease, insurance policy or other instrument to which it is a
party, by which its respective assets, business, or operations may be bound
or affected, or under which it or its respective assets, business, or
operations receives benefits, and there has not occurred any event that,
with the lapse of time or the giving of notice or both, would constitute
such a default.
(m) No Brokers. No action has been taken by the Company that would
give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the
transactions contemplated by this Agreement, except as may be payable
pursuant to a Previously Disclosed engagement letter with Goldman, Sachs &
Co.
(n) Employee Benefit Plans. (i) All benefit and compensation plans,
contracts, policies or arrangements covering current or former employees of
the Company and its Subsidiaries (the "Employees") and current or former
directors of the Company, including, but not limited to, "employee benefit
plans" within the meaning of Section 3(3) of ERISA, and deferred
compensation, stock option, stock purchase, stock appreciation rights,
stock based, incentive and bonus plans (the "Benefit Plans"), are listed in
Schedule 5.03(n). True and complete copies of all Benefit Plans, including,
but not limited to, any trust instruments and insurance contracts forming a
part of any Benefit Plans, and all amendments thereto have been provided or
made available to the Acquisition Party.
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<PAGE>
(ii) All employee benefit plans covering Employees (the "Plans"), to
the extent subject to ERISA, are in substantial compliance with ERISA. Each
Plan which is an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA ("Pension Plan") and which is intended to be
qualified under Section 401(a) of the Code, has received a favorable
determination letter from the Internal Revenue Service with respect to
"TRA" (as defined in Section 1 of Rev. Proc. 93- 39), and the Company is
not aware of any circumstances likely to result in revocation of any such
favorable determination letter. There is no material pending or, to the
knowledge of the Company threatened, litigation relating to the Plans.
Neither the Company nor any of its Subsidiaries has engaged in a
transaction with respect to any Plan that, assuming the taxable period of
such transaction expired as of the date hereof, could subject the Company
or any Subsidiary to a tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA in an amount which would be material.
(iii) 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"). Neither the Company, any of
its Subsidiaries nor an ERISA Affiliate has contributed to a "multiemployer
plan", within the meaning of Section 3(37) of ERISA, at any time on or
after 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.
(iv) All contributions required to be made under the terms of any
Benefit Plan have been timely made or have been reflected on the Audited
Financial Statements or the Preliminary Financial Statements. 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 and no ERISA Affiliate
has an outstanding funding waiver. Neither the Company nor any of its
Subsidiaries has provided, or is required to provide, security to any
Pension
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Plan or to any single-employer plan of an ERISA Affiliate pursuant to
Section 401(a)(29) of the Code.
(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 Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such
Plan, and there has been no material change in the financial condition of
such Plan since the last day of the most recent plan year.
(vi) Neither the Company nor any of its Subsidiaries has any
obligations for retiree health and life benefits under any Benefit Plan,
except as set forth on Schedule 5.03(n). The Company or the Subsidiaries
may amend or terminate any such Benefit Plan at any time without incurring
any liability thereunder.
(vii) Except as contemplated by the 1993 Equity Participation Plan, in
and of itself, the consummation of the transactions contemplated by this
Agreement will not (x) entitle any employees of the Company or any of the
Subsidiaries to severance pay, (y) accelerate the time of payment or
vesting or trigger any payment or funding (through a grantor trust or
otherwise) of compensation or benefits under, increase the amount payable
or trigger any other material obligation pursuant to, any of the Benefit
Plans or (z) result in any payments under, any of the Benefit Plans which
would not be deductible under Section 162(m) or Section 280G of the Code.
(o) Labor Matters. Neither the Company nor any of its Subsidiaries is
a party to or is bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization,
nor is the Company or any of its Subsidiaries the subject of a proceeding
asserting that it or any such Subsidiary has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or
seeking to compel the Company or any such Subsidiary to bargain with any
labor organization as to wages or conditions of employment, nor is there
any strike or other labor dispute involving it or any of its Subsidiaries
pending or threatened, nor is the Company aware of any activity involving
its or any of its Subsidiaries' employees seeking to certify a collective
bargaining unit or engaging in other organizational activity.
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<PAGE>
(p) Takeover Laws; Dissenters' Rights. The Company has taken all
action required to be taken by it in order to exempt this Agreement, the
Holdings Purchase Agreement and the Voting Agreements and the transactions
contemplated hereby and thereby from, and this Agreement, the Holdings
Purchase Agreement and the Voting Agreements and the transactions
contemplated hereby and thereby are exempt from, the requirements of any
"moratorium", "control share", "fair price", "affiliate transaction",
"business combination" or other antitakeover laws and regulations
(including Section 912 of the NYBCL) of any state (collectively, "Takeover
Laws"), including, without limitation, the State of New York. Holders of
Company Common Stock and holders of Company Preferred Stock do not have
dissenters' rights in connection with the Merger.
(q) Environmental Matters. Except as Previously Disclosed, neither the
conduct nor operation of the Company or its Subsidiaries nor any condition
of any property presently or previously owned, leased or operated by any of
them (including, without limitation, in a fiduciary or agency capacity), or
on which any of them holds a Lien, violates or violated Environmental Laws
and no condition has existed or event has occurred with respect to any of
them or any such property that, with notice or the passage of time, or
both, is reasonably likely to result in liability to the Company or its
Subsidiaries under Environmental Laws. Except as Previously Disclosed,
neither the Company nor any of its Subsidiaries has received any notice
from any Person or entity that the Company or its Subsidiaries or the
operation or condition of any property ever owned, leased, operated, or
held as collateral or in a fiduciary capacity by any of them are or were in
violation of or otherwise are alleged to have liability under any
Environmental Law, including, but not limited to, responsibility (or
potential responsibility) for the cleanup or other remediation of any
pollutants, contaminants, or hazardous or toxic wastes, substances or
materials at, on, beneath, or originating from any such property.
(r) Tax Matters. Except as Previously Disclosed, (i) all Tax Returns
that are required to be filed by or with respect to the Company and its
Subsidiaries for the periods ending on or prior to the Effective Date have
been duly filed, or, in the case of Tax returns that are required to be
filed by or with respect to the Company and its Subsidiaries for periods
ending after the date of this Agreement but on or before the Effective
Date, will be duly filed, and such Tax Returns were or will be true and
complete in all respects, (ii) all Taxes shown to be due on
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the Tax Returns referred to in clause (i) have been or will be paid in
full, (iii) the Federal Income Tax Returns referred to in clause (i) have
been examined by the Internal Revenue Service for the years through 1996,
(iv) all deficiencies asserted or assessments made as a result of any
examination by any taxing authority (Federal, state, local or foreign) have
been paid in full, (v) no issues that have been raised by the relevant
taxing authority in connection with the examination of any of the Tax
Returns referred to in clause (i) are currently pending, (vi) no waivers of
statutes of limitation have been given by or requested with respect to any
Taxes of the Company or its Subsidiaries, (vii) neither the Company nor any
of its Subsidiaries will be required, as a result of (A) a change in
accounting method for a Tax period beginning on or before the Closing, to
include any adjustment under Section 481(c) of the Code (or any similar
provision of state, local or foreign law) in taxable income for any Tax
period beginning on or after the Closing Date (except as a result of
regulations that became effective on January 1, 2000, under Section 832 of
the Code), or (B) any "closing agreement" as described in Section 7121 of
the Code (or any similar provision of state, local or foreign Tax law), to
include any item of income in or exclude any item of deduction from any Tax
period beginning on or after the Closing, (viii) no closing agreements,
private letter rulings, technical advance memoranda or similar agreement or
rulings have been entered into or issued by any taxing authority with
respect to the Company or any of its Subsidiaries, (ix) neither the Company
nor any of its Subsidiaries has ever been a member of an affiliated,
combined, consolidated or unitary Tax group for purposes of filing any Tax
Return, other than, for purposes of filing consolidated U.S. Federal income
tax returns, a group of which the Company was the common parent, except
with MediaOne Capital Corporation, (x) neither the Company nor any of its
Subsidiaries has any liability for Taxes of any other corporation (other
than the Company or its Subsidiaries) as a result of transferee liability,
Treasury Regulations Section 1.1502-6 or otherwise, (xi) other than with
MediaOne Capital Corporation and Capital Re Corporation, neither the
Company nor any of its Subsidiaries is a party to any tax allocation,
sharing or indemnification agreement (other than an agreement the parties
to which consist solely of the Company and its Subsidiaries), (xii) there
are no Liens on any of the assets of the Company or its Subsidiaries that
arose in connection with any failure (or alleged failure) to pay any Tax,
(xiii) neither the Company nor any of its Subsidiaries has in the past two
years made a distribution that qualified under Section 355 of the Code and
(xiv) no tax is required to be withheld
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pursuant to Section 1445 of the Code as a result of the transfer
contemplated by this Agreement. The Company has made available to the
Acquisition Party true and correct copies of the United States federal
income Tax Returns filed by the Company and its Subsidiaries for each of
the three most recent fiscal years ended on or before December 31, 1998.
Neither the Company nor any of its Subsidiaries has any liability with
respect to income, franchise or similar Taxes that accrued on or before the
end of the most recent period covered by the Company's Filed SEC Documents
in excess of the amounts accrued with respect thereto as reported on such
Filed SEC Documents.
(s) Risk Management Instruments. All interest rate swaps, caps,
floors, option agreements, futures and forward contracts and other similar
risk management arrangements, whether entered into for the Company's own
account, or for the account of one or more of the Company's Subsidiaries,
were entered into (i) in accordance with the Company's regular business
practices and all applicable laws, rules, regulations and regulatory
policies and (ii) with counterparties believed to be financially
responsible at the time; and each of them constitutes the valid and legally
binding obligation of the Company or one of its Subsidiaries, enforceable
in accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles), and are in full force
and effect. Neither the Company nor its Subsidiaries, nor to the Company's
knowledge any other party thereto, is in breach of any of its obligations
under any such agreement or arrangement.
(t) Books and Records. The books and records of the Company and its
Subsidiaries have been fully, properly and accurately maintained in all
material respects, and there are no material inaccuracies or discrepancies
of any kind contained or reflected therein.
(u) Insurance Issued by the Company and the Company Insurance
Subsidiaries. Except as Previously Disclosed:
(i) All benefits claimed by any Person under any insurance Contract
issued by the Company or any Company Insurance Subsidiary have in all
material respects been paid (or provision for payment thereof has been made
or such amounts are being contested in good faith) in accordance with the
terms of the Contracts under which they arose, such
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payments were not materially delinquent and were paid (or will be paid)
without fines or penalties.
(ii) The underwriting standards utilized and ratings applied by the
Company and each Company Insurance Subsidiary with respect to insurance
Contracts outstanding as of the date hereof have been Previously Disclosed
or made available to the Acquisition Party and, with respect to any such
Contract reinsured in whole or in part, conform in all material respects to
the standards and ratings required pursuant to the terms of the related
reinsurance, coinsurance or other similar Contracts.
(v) Reinsurance and Coinsurance. The Company has made available to the
Acquisition Party information regarding all reinsurance or 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. As of the date hereof, all such treaties or
agreements are in full force and effect. Except as set forth in Section
5.03(v) of the Company's Disclosure Schedule, neither the Company nor any
Company Subsidiary, nor, 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
material 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 and the Voting
Agreements. Except as set forth in Section 5.03(v) of the Company's
Disclosure Schedule, as of the date hereof, there is no reason to believe
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, and the Company has no reason to
believe that any material amounts recoverable under reinsurance,
coinsurance or other similar Contracts to which the Company or any Company
Insurance Subsidiary is a party (including, but not limited to, amounts
based on paid and unpaid losses) are not fully collectible. As of the date
hereof, the Company and each Company Insurance Subsidiary are entitled to
take full credit in their respective SAP Statements (to the extent credit
has been taken in such SAP Statements) pursuant to applicable Laws for all
reinsurance and coinsurance ceded pursuant to any reinsurance or
coinsurance treaty or agreement to which the Company or any Company
Insurance Subsidiary is party.
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(w) Actuarial Reports. The Company has delivered or made available to
the Acquisition Party 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 in the twelve (12) months prior
to the date of this Agreement, and all attachments, addenda, supplements
and modifications thereto (the "Company Actuarial Analyses"). To the
knowledge of the Company, the information and data furnished by the Company
to its independent actuaries in connection with the preparation of the
Company Actuarial Analyses were accurate in all material respects.
(x) Ratings. (i) The insurance and insurer financial strength of the
Company Lead Insurance Subsidiary is rated AAA by Standard & Poor's Ratings
Service, Aaa by Moody's Investors Service, Inc. and; (ii) no rating
organization named in clause (i) above has announced that it has under
surveillance or review its rating of the insurance and insurer financial
strength of the Company Lead Insurance Subsidiary; and (iii) the Company
has no reason to believe that any rating specified in clause (i) above is
likely to be modified, qualified, lowered or placed under such surveillance
or review for any reason, including as a result of the transactions
contemplated hereby.
(y) Reserves. The Company SAP Statements include all reserves required
by statutory accounting practices and the financial statements contained in
the SEC Documents include or will include all reserves required by
generally accepted accounting principles. 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.
(z) Company Investment Assets. The Company has made available to the
Acquisition Party a true and complete list of all Company Investment Assets
(as defined below) as of December 31, 1999, with information included
therein as to the cost of each such Company Investment Asset and the market
value thereof as of December 31, 1999. Except as set forth in Section
5.03(z) of the Company's Disclosure Schedule, the Company or a Subsidiary
of the Company has good and marketable title to all Company Investment
Assets, in the case of marketable securities, free and clear, in the case
of marketable securities, of any Lien. Except as set forth in Section
5.03(z) of the Company's Disclosure Schedule, none of the Company
Investment Assets is in default in the payment of principal or interest or
dividends or, to the knowledge of the Company, permanently impaired to
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any extent. For purposes of this Agreement, "Company Investment Assets"
means any investment assets (whether or not required by GAAP or SAP to be
reflected on a balance sheet) beneficially owned (within the meaning of
Rule 13d-3 under the Exchange Act), by the Company or any Subsidiary of the
Company, including, without limitation, bonds, notes, debentures, mortgage
loans, real estate, collateral loans and all other instruments of
indebtedness, stocks, partnership or joint venture interests and all other
equity interests, certificates issued by or interests in trusts,
derivatives and all other assets acquired for investment purposes.
(aa) Insurance Purchased by the Company. The Company has made
available to the Acquisition Party all material insurance policies,
binders, or bonds maintained by the Company or its Subsidiaries ("Insurance
Policies"). The Company and its Subsidiaries are insured with reputable
insurers against such risks and in such amounts as the management of the
Company reasonably has determined to be prudent in accordance with industry
practices. All the Insurance Policies are in full force and effect; the
Company and its Subsidiaries are not in material default thereunder; and
all material claims thereunder have been filed in due and timely fashion.
(bb) Certain Agreements. Section 5.03(bb) of the Company's Disclosure
Schedule sets forth a complete list of all registration right agreements
(the "Company Registration Rights Agreements") and all shareholder
agreements (the "Company Shareholders' Agreements") relating to Company
Stock. In connection with the entering into of this Agreement, the Company
has obtained all consents or waivers and has taken all other action
necessary, under the Company Registration Rights Agreements and the Company
Shareholders' Agreements, to permit the transactions contemplated hereby.
(cc) Employment Agreements. The Company has entered into
non-competition and employment agreements with each of Robert Cochran,
Roger Taylor and Sean McCarthy.
5.04 Representations and Warranties of the Acquisition Party. Subject
to Sections 5.01 and 5.02 and except as Previously Disclosed in a paragraph of
its Disclosure Schedule corresponding to the relevant paragraph below, the
Acquisition Party hereby represents and warrants to the Company as follows:
(a) Organization, Standing and Authority. (i) Each of Dexia, CLF and
Merger Sub (A) is a corporation duly organized and validly existing under
the laws of its
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jurisdiction of incorporation, (B) is duly qualified or licensed to do
business in each jurisdiction where its ownership or leasing of property or
assets or the conduct of its business requires it to be so qualified or
licensed and (C) has in effect all governmental or administrative
authorizations necessary for it to own or lease its properties and assets
and to carry on its business as it is now conducted.
(b) Corporate Power. The Acquisition Party, each of its Significant
Subsidiaries and the Merger Sub has the corporate power and authority to
carry on its business as it is now being conducted and to own all its
properties and assets; and each Acquisition Party and the Merger Sub has
the corporate power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions
contemplated hereby.
(c) Corporate Authority and Approval. This Agreement and the Voting
Agreements and the transactions contemplated hereby and thereby have been
authorized by all necessary corporate action of the Acquisition Party and
the Merger Sub and each of their respective Boards of Directors and does
not require any vote of shareholders. This Agreement is a valid and legally
binding agreements of the Acquisition Party and the Merger Sub enforceable
in accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles).
(d) Regulatory Filings; No Defaults. (i) No consents or approvals of,
or filings or registrations with, any Governmental Authority or with any
third party are required to be made or obtained by the Acquisition Party or
any of its Subsidiaries in connection with the execution, delivery or
performance by the Acquisition Party of this Agreement and the Voting
Agreements or to consummate the Merger except for (A) the filing of a
notice or applications, and related approvals and clearances, under the HSR
Act and under applicable European Union antitrust laws and as listed in
Schedule 5.04(d) of the Acquisition Party's Disclosure Schedule, (B) the
filing of applications and notices, as applicable, with the foreign
governmental, federal and state Governmental Authorities governing banking
and insurance in the jurisdictions or states where the Acquisition Party
operates its business which are listed in Schedule 5.04(d) of the
Acquisition Party's Disclosure Schedule, and the approval of such
applications or the grant of required
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licenses by such Governmental Authorities as listed in Schedule 5.04(d) of
the Acquisition Party's Disclosure Schedule, (C) the filing of articles of
merger with the Department of State of the State of New York pursuant to
the NYBCL, (D) filings in respect of, and approvals and authorizations of,
and, as applicable, the expiration of applicable waiting periods of, the
Designated State Insurance Approvals and (E) filings and notifications in
respect of, and, to the extent necessary, approvals and authorizations in
respect of, Foreign Approvals.
(ii) Subject to receipt of the regulatory approvals, filings and
notifications referred to in the preceding paragraph and expiration of the
related waiting periods, and required filings under federal and state
securities laws, the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby do not and
will not (A) constitute a breach or violation of, or a default under, or
give rise to any Lien, any acceleration of remedies or any right of
termination under, any law, rule or regulation or any judgment, decree,
order, governmental permit or license, or agreement, indenture or
instrument of each Acquisition Party or of any of its Subsidiaries or to
which each Acquisition Party or any of its Subsidiaries or properties is
subject or bound, (B) constitute a breach or violation of, or a default
under, the certificate of incorporation or by-laws (or similar governing
documents) of each Acquisition Party or any of its Subsidiaries, or (C)
require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement,
indenture or instrument.
(e) Access to Funds. Prior to the Effective Time, the Acquisition
Party shall have all funds necessary to consummate the Merger and pay the
aggregate Merger Consideration.
(f) No Brokers. No action has been taken by any Acquisition Party that
would give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the
transactions contemplated by this Agreement, excluding a fee to be paid to
Lazard Freres & Cie.
(g) Information Supplied. None of the information supplied or to be
supplied by the Acquisition Party or Merger Sub for inclusion in the Proxy
Statement and any amendment or supplement thereto (including any material
incorporated by reference), at the date of mailing to
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shareholders of the Company and the date of the meeting of the Company's
shareholders to be held in connection with the Merger, will 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.
(h) Interim Operations of Merger Sub. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated hereby, has
engaged in no other business activities and has conducted its operations
only as contemplated hereby.
ARTICLE VI
Covenants
6.01 Reasonable Best Efforts. Subject to the terms and conditions of
this Agreement, the Company and the Acquisition Party agree to use their
reasonable best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
desirable, or advisable under applicable laws, so as to permit consummation of
the Merger as promptly as practicable and otherwise to enable consummation of
the transactions contemplated hereby and shall cooperate fully with the other
party hereto to that end.
6.02 Proxy Statement. As soon as practicable after the date hereof,
the Company shall prepare a proxy statement to take shareholder action on the
Merger (the "Proxy Statement"), file the Proxy Statement with the SEC, respond
to comments of the staff of the SEC and promptly thereafter mail the Proxy
Statement to all holders of record (as of the applicable record date) of shares
of the Company's Stock. The Company represents and covenants that the Proxy
Statement and any amendment or supplement thereto (including any material
incorporated by reference), at the date of mailing to shareholders of the
Company and the date of the meeting of the Company's shareholders to be held in
connection with the Merger, will conform in all material respects to the
requirements of the Exchange Act and all relevant rules and regulations of the
SEC, and will not 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, except that no representation or warranty is made by the
Company with respect to statements made or incorporated by reference therein
based on information supplied by an Acquisition Party specifically for inclusion
or
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incorporation by reference in the Proxy Statement. The Acquisition Party and the
Company shall cooperate with each other in the preparation of the Proxy
Statement. The Company will promptly supply the Acquisition Party with all
correspondence between the Company or its Representatives, on the one hand, and
the SEC or its staff, on the other, after the date hereof. If requested by the
Acquisition Party, the Company shall, at its expense, employ professional proxy
solicitors to assist it in contacting shareholders in connection with the vote
on the Merger. The Company will not mail any Proxy Statement, or make any
amendment or supplement thereto, to which the Acquisition Party reasonably
objects.
6.03 Shareholder Approvals. The Company agrees to take, in accordance
with applicable law or NYSE rules and the Company Certificate and the Company
By-Laws, all action necessary to convene an appropriate meeting of shareholders
of the Company to consider and vote upon the approval and adoption of this
Agreement and any other matters required to be approved by the Company's
shareholders for consummation of the Merger and the transactions contemplated
hereby (including any adjournment or postponement, the "Company Meeting") as
promptly as practicable, subject to the Company's right to terminate this
Agreement pursuant to Section 6.06(b) and 8.01(f). The Company Board shall
recommend such approval, and the Company shall take all reasonable, lawful
action to solicit such approval by its shareholders, in each case subject to the
right of the Company Board to withdraw, modify or change its approval or
recommendation of the Merger and this Agreement as set forth in Section 6.06(b).
Prior to the Effective Time and in order to permit the Holdings Purchase, the
Company shall take all action necessary to amend the Company Certificate to
remove the transfer restrictions on the Company Preferred Stock.
6.04 Press Releases. The Company and the Acquisition Party agree that
they will not, without the prior approval of the other party, issue any press
release or written statement for general circulation relating to the
transactions contemplated hereby, except as otherwise required by applicable law
or regulation or NYSE rules.
6.05 Access; Information. (a) The Company agrees that upon reasonable
notice and subject to applicable laws relating to the exchange of information,
it shall afford the Acquisition Party and its officers, employees, counsel,
accountants and other authorized Representatives, reasonable access during
normal business hours throughout the period prior to the Effective Time to the
books, records (including, without limitation, tax returns and work papers of
independent auditors), properties, personnel and to such other information as
any party may reasonably request
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and, during such period, it shall furnish promptly to the Acquisition Party (i)
a copy of each material report, schedule and other document filed by it pursuant
to the requirements of federal or state securities or insurance laws, and (ii)
all other information concerning the business, properties and personnel of it as
the Acquisition Party may reasonably request.
(b) Each party agrees that it will not, and will cause its
Representatives not to, use any information obtained pursuant to this Section
6.05 (as well as any other information obtained prior to the date hereof in
connection with the entering into of this Agreement) for any purpose unrelated
to the consummation of the transactions contemplated by this Agreement. Each
party will keep confidential, and will cause its Representatives to keep
confidential, all information and documents obtained pursuant to this Section
6.05 (as well as any other information obtained prior to the date hereof in
connection with the entering into of this Agreement) unless such information (i)
was already known to such party, (ii) becomes available to such party on a non-
confidential basis from other sources not known by such party to be bound by a
confidentiality obligation, (iii) is disclosed with the prior written approval
of the party to which such information pertains, (iv) is or becomes readily
ascertainable from published information or trade sources other than as a result
of a disclosure by such party or its Representatives or (v) must, in the opinion
of such party, upon advice of counsel, be disclosed in order to avoid violating
any applicable law. In the event that this Agreement is terminated or the
transactions contemplated by this Agreement shall otherwise fail to be
consummated, each party shall promptly cause all copies of documents or extracts
thereof containing information and data as to another party hereto to be
returned to the party which furnished the same or to be destroyed. No
investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant or
agreement in this Agreement, or the conditions to either party's obligation to
consummate the transactions contemplated by this Agreement.
6.06 Acquisition Proposals. (a) The Company shall not, nor shall it
permit any of its Subsidiaries to, nor shall it authorize or permit any of its
or its Subsidiaries' directors, officers or employees to, and shall use
commercially reasonable efforts to cause any investment banker, financial
advisor, attorney, accountant or other representative retained by it or any of
its Subsidiaries not to, directly or indirectly through another person, (i)
solicit, initiate or encourage (including by way of furnishing information), or
knowingly take any other action designed to facilitate, the making of any
proposal which constitutes an Acquisition Proposal or (ii) participate
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(including by way of furnishing of information) in any discussions or
negotiations regarding any Acquisition Proposal; provided, however, that if, at
any time prior to the date of receipt of the Company Shareholder Approval (the
"Applicable Period"), the Company Board determines in good faith, after
consultation with its financial and legal advisors, that a proposal that was not
solicited by it after the date of this Agreement is, or is reasonably likely to
result in, a Superior Proposal (as defined in Section 6.06(b)), and subject to
providing prior written notice of its decision to take such action to the
Acquisition Party (a "Section 6.06 Notice") and compliance with Section 6.06(c),
the Company may (x) furnish information with respect to the Company and its
Subsidiaries to any person making such proposal pursuant to a confidentiality
agreement generally at least as restrictive as the confidentiality agreement to
which the Acquisition Party or an affiliate of the Acquisition Party was a party
and (y) participate in discussions or negotiations regarding such proposal. For
purposes of this Agreement, "Acquisition Proposal" means any inquiry, proposal
or offer from any person relating to any direct or indirect acquisition or
purchase of a business that constitutes 20% or more of the net revenues, net
income or the assets of the Company and its Subsidiaries, taken as a whole, or
20% or more of any class of equity securities of the Company or any of its
Subsidiaries, any tender offer or exchange offer that if consummated would
result in any person beneficially owning 20% or more of any class of equity
securities of the Company or any of its Subsidiaries, or any merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving the Company or any of its Subsidiaries, other
than the transactions contemplated by this Agreement. Any such transaction is
referred to herein as an "Acquisition Transaction".
(b) Notwithstanding anything in this Agreement to the contrary, in
response to an Acquisition Proposal that was not solicited by it after the date
of this Agreement, the Company Board shall be permitted during the Applicable
Period, but only to the extent required by its fiduciary obligations under
applicable law as determined in good faith by the Company Board after
considering advice of outside counsel, to (i) withdraw, modify or change, or
propose publicly to withdraw, modify or change, the approval or recommendation
by such Board of the Merger or this Agreement, (ii) approve or recommend, or
propose to approve or recommend, any Acquisition Proposal, or (iii) terminate
this Agreement pursuant to Section 8.01(f) with respect to any Superior
Proposal, but only if, in the case of each of clauses, (i), (ii) or (iii), the
Company Board determines in good faith that such Acquisition Proposal
constitutes a Superior Proposal. For purposes of this Agreement, a "Superior
Proposal"
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means any written Acquisition Proposal that the Company Board determines in its
good faith judgment (following receipt of the advice of a financial advisor of
nationally recognized reputation and its legal advisors), if accepted, is
reasonably capable of being consummated, taking into account all legal,
financial and regulatory aspects of the proposal and would, if consummated,
result in a transaction more favorable to the Company and its shareholders than
the transactions contemplated by this Agreement, except that the reference to
"20%" in the definition of "Acquisition Proposal" in Section 6.06(a) shall be
deemed to be a reference to "50%" and "Acquisition Proposal" shall only be
deemed to refer to a transaction involving the Company or the Company Lead
Insurance Subsidiary, or with respect to assets (including the shares of any
Subsidiary), the Company and its Subsidiaries, taken as a whole.
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 6.06, (i) the Company shall immediately
cease and cause to be terminated any activities, discussions or negotiations
conducted prior to the date of this Agreement with any parties other than the
Acquisition Party with respect to any of the foregoing and shall use its
reasonable best efforts to enforce any confidentiality or similar agreement
relating to an Acquisition Proposal; (ii) the Company shall immediately advise
the Acquisition Party orally and in writing of any request for information or of
any Acquisition Proposal, the material terms and conditions of such request or
Acquisition Proposal and the identity of the person making such request or
Acquisition Proposal; and (iii) the Company will keep the Acquisition Party
informed of the status and details (including amendments or proposed amendments)
of any such request or Acquisition Proposal.
(d) Nothing contained in this Section 6.06 shall prohibit the Company
from taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's shareholders if, in the good faith judgment of the Company Board,
after consultation with outside counsel, failure so to disclose would violate
its obligations under applicable law.
6.07 Takeover Laws. No party hereto shall take any action that would
cause the transactions contemplated by this Agreement, the Holdings Purchase
Agreement or the Voting Agreements to be subject to requirements imposed by any
Takeover Law and each of them shall take all necessary and reasonable steps
within its control to exempt (or ensure the continued exemption of) the
transactions contemplated by this Agreement, the Holdings Purchase Agreement or
the Voting Agreements from, or
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if necessary challenge the validity or applicability of, any applicable Takeover
Law, as now or hereafter in effect.
6.08 Regulatory Submissions. (a) The Acquisition Party and the Company
and their respective Subsidiaries shall cooperate and use their respective
reasonable best efforts to prepare all documentation, to take all actions, to
effect all filings and to obtain all permits, consents, approvals, confirmations
and authorizations of all third parties and Governmental Authorities necessary
or advisable to consummate the transactions contemplated by this Agreement. The
Acquisition Party and the Company shall have the right to review in advance,
subject to applicable laws relating to the exchange of information, with respect
to all material written information submitted to any third party or any
Governmental Authority in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto agrees
to act reasonably and as promptly as practicable. Each party hereto agrees that
it will consult with the other party hereto with respect to the obtaining of all
material permits, consents, approvals, confirmations and authorizations of all
third parties and Governmental Authorities necessary or advisable to consummate
the transactions contemplated by this Agreement and each party will keep the
other party appraised of the status of material matters relating to completion
of the transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party with
all information concerning itself, its Subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its Subsidiaries to any third party or Governmental
Authority.
6.09 Indemnification. (a) The Acquisition Party shall indemnify,
defend and hold harmless the present and former directors and officers of the
Company and its Subsidiaries (each, an "Indemnified Party") against all costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages or liabilities (collectively, "Costs") incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of actions or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement) to the fullest extent that the
Company or such Subsidiary is permitted to indemnify (and advance expenses to)
its directors and officers under the laws of the jurisdiction of its
incorporation, its certificate of incorporation or its by-laws (or comparable
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organizational documents) as in effect on the date hereof. The Acquisition Party
acknowledges and agrees that, without any further action, the indemnification
agreements of the Company Previously Disclosed shall continue in full force and
effect in accordance with their terms as in effect prior to the Effective Time.
(b) For a period of six years from the Effective Time, the Acquisition
Party shall maintain in effect the Company's current of directors' and officers'
liability insurance that serves to reimburse the present and former officers and
directors of the Company or any of its Subsidiaries (determined as of the
Effective Time) (as opposed to the Company) with respect to claims against such
directors and officers arising from facts or events which occurred before the
Effective Time, which insurance shall contain at least the same coverage and
amounts, and contain terms and conditions no less advantageous, as that coverage
currently provided by the Company; provided, however, that in no event shall the
Acquisition Party be required to expend more than 200 percent of the current
amount expended by the Company (the "Insurance Amount") to maintain or procure
such directors and officers insurance coverage; provided, further, that if the
Acquisition Party is unable to maintain or obtain the insurance called for by
this Section 6.09(b), the Acquisition Party shall obtain as much comparable
insurance as is available for the Insurance Amount; provided, further, that
officers and directors of the Company or any Subsidiary may be required to make
application and provide customary representations and warranties to the
Acquisition Party's insurance carrier for the purpose of obtaining such
insurance.
(c) Any Indemnified Party wishing to claim indemnification under
Section 6.09(a), upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify the Acquisition Party
thereof; provided that the failure so to notify shall not affect the obligations
of the Acquisition Party under Section 6.09(a) unless and to the extent that the
Acquisition Party is actually and materially prejudiced as a result of such
failure.
(d) If the Acquisition Party or any of its successors or assigns shall
consolidate with or merge into any other entity and shall not be the continuing
or surviving entity of such consolidation or merger or shall transfer all or
substantially all of its assets to any entity, then and in each case, proper
provision shall be made so that the successors and assigns of the Acquisition
Party shall assume the obligations set forth in this Section 6.09.
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(e) The provisions of this Section 6.09 (i) are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her heirs
and his or her representatives and (ii) are in addition to, and not in
substitution for, any other rights to indemnification or contribution that any
such person may have by contract or otherwise.
6.10 Employee Matters. (a) The agreement of the parties with respect
to employee matters is set forth in the memorandum dated March 13, 2000 prepared
by Johnson Associates, Inc. included in the Disclosure Schedule.
(b) The Acquisition Party will honor, and cause the Surviving
Corporation to honor, pursuant to their terms, all employee severance plans (as
amended or contemplated herein) and employment or severance agreements of the
Company or its Subsidiaries that are specifically identified in the Company's
Disclosure Schedule (including any amendments described in the Disclosure
Schedule).
(c) The Company shall not amend or waive any right under the
non-competition and employment agreements with Robert Cochran, Roger Taylor and
Sean McCarthy.
6.11 Notification of Certain Matters. The Company and the Acquisition
Party shall give prompt notice to the other of any fact, event or circumstance
known to it that (i) is reasonably likely, individually or taken together with
all other facts, events and circumstances known to it, to result in any Material
Adverse Effect with respect to it or (ii) would cause or constitute a material
breach of any of its representations, warranties, covenants or agreements
contained herein.
ARTICLE VII
Conditions to Consummation of the Merger
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of the Acquisition Party and the Company to consummate
the Merger is subject to the fulfillment or written waiver by the Acquisition
Party and the Company prior to the Effective Time of each of the following
conditions:
(a) Shareholder Approval. The Company Shareholder Approval shall have
been obtained.
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(b) Regulatory Approvals. All regulatory approvals, notifications and
filings required to consummate the Holdings Purchase and the Merger
(including the acquisition by the Acquisition Party of all of the capital
stock of the Company by virtue of the Merger), including, without
limitation, the Designated State Insurance Approvals, shall have been
obtained or made and shall remain in full force and effect and all
statutory waiting periods in respect thereof shall have expired and no such
approvals shall contain any conditions, restrictions or requirements which
would have, or are reasonably likely to have, a Material Adverse Effect on
the Surviving Corporation and its Subsidiaries taken as a whole or a
Material Adverse Effect on the Acquisition Party and its Subsidiaries taken
as a whole.
(c) No Injunction. No Governmental Authority of competent jurisdiction
shall have:
(A) enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in
effect and prohibits consummation of the Holdings Purchase and
the Merger (including the acquisition by the Acquisition Party of
all of the capital stock of the Company by virtue of the Merger);
or
(B) indicated that the Holdings Purchase and the Merger
(including the acquisition by the Acquisition Party of all of the
capital stock of the Company by virtue of the Merger) would
adversely affect the licenses necessary to carry on the insurance
business of any of the Company's Insurance Subsidiaries (X) in a
manner that would have, or is reasonably likely to have, a
Material Adverse Effect on the Surviving Corporation and its
Subsidiaries taken as a whole or a Material Adverse Effect on the
Acquisition Party and its Subsidiaries taken as a whole or (Y) in
a material way in states representing in the aggregate net
municipal par amounts outstanding at December 31, 1999 in excess
of 12.5% of the Company's total net municipal par amount
outstanding at December 31, 1999.
7.02 Conditions to Obligation of the Company. The obligation of the
Company to consummate the Merger is also
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subject to the fulfillment or written waiver by the Company prior to the
Effective Time of each of the following conditions:
(a) Representations and Warranties. Subject to the standard set forth
in Section 5.02, the representations and warranties of the Acquisition
Party set forth in this Agreement shall be true and correct as of the date
of this Agreement and as of the Effective Date as though made on and as of
the Effective Date (except that representations and warranties that by
their terms speak as of the date of this Agreement or some other date shall
be true and correct as of such date), and the Company shall have received a
certificate, dated the Effective Date, signed on behalf of the Acquisition
Party by the Chief Executive Officer and the Chief Financial Officer of the
Acquisition Party to such effect.
(b) Performance of Obligations of the Acquisition Party. The
Acquisition Party shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Effective Time, and the Company shall have received a certificate,
dated the Effective Date, signed on behalf of the Acquisition Party by the
Chief Executive Officer and the Chief Financial Officer of the Acquisition
Party to such effect.
(c) Holdings Purchase. The Holdings Purchase shall have been
consummated.
7.03 Conditions to Obligation of the Acquisition Party. The obligation
of the Acquisition Party to consummate the Merger is also subject to the
fulfillment or written waiver by the Company prior to the Effective Time of each
of the following conditions:
(a) Representations and Warranties. Subject to the standard set forth
in Section 5.02, the representations and warranties of the Company set
forth in this Agreement shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on and as of the
Effective Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other date shall be
true and correct as of such date) and the Acquisition Party shall have
received a certificate, dated the Effective Date, signed on behalf of the
Company by the Chief Executive Officer and the Chief Financial Officer of
the Company to such effect.
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(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 at or prior to the Effective Time, and the
Acquisition Party shall have received a certificate, dated the Effective
Date, signed on behalf of the Company by the Chief Executive Officer and
the Chief Financial Officer of the Company to such effect.
(c) Conversion of Rights. At the Effective Time, any Right to Company
Common Stock shall be converted into a right to receive the Merger
Consideration.
(d) Continual Employment. At the Effective Time, (i) at least two of
the Designated Employees shall be employees of the Company with the same
executive responsibilities held as of the date of this Agreement and (ii)
the Employment Agreements entered into with each of such Designated
Employees employed by the Company at the Effective Time shall be in full
force and shall not have been amended or modified. "Designated Employees"
means Robert Cochran, Roger Taylor and Sean McCarthy.
(e) Non-Control Determinations. The Acquisition Party shall have
received the confirmations in a form reasonably satisfactory to the
Acquisition Party from the insurance regulatory authorities, as specified
in Disclosure Schedule 7.03(e).
(f) Holdings Purchase. The Holdings Purchase shall have been
consummated (provided that this condition shall be deemed to be waived if
the Acquisition Party would otherwise acquire all of the capital stock of
the Company by virtue of the Merger).
ARTICLE VIII
Termination
8.01 Termination. This Agreement may be terminated, and the Merger may
be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of the Company and the Acquisition Party.
(b) Breach. At any time prior to the Effective Time, by the Company or
the Acquisition Party, in the event of
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either: (i) a breach by the other party of any representation or warranty
contained herein (subject to the standard set forth in Section 5.02), which
breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach, and provided such
breach would result in a failure to satisfy Section 7.02(a) or 7.03(a), as
the case may be; or (ii) a breach by the other party of any of the
covenants or agreements contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written notice to the
breaching party of such breach, and provided such breach would result in a
failure to satisfy Section 7.02(b) or 7.03(b), as the case may be.
(c) Delay. At any time prior to the Effective Time, by the Company or
the Acquisition Party, in the event that the Merger is not consummated by
January 1, 2001, except to the extent that the failure of the Merger then
to be consummated arises out of or results from the knowing action or
inaction of the party seeking to terminate pursuant to this Section
8.01(c).
(d) No Approval. By the Company, or the Acquisition Party, in the
event (i) the approval or action of any Governmental Authority required for
consummation of the Merger shall have been denied by final nonappealable
action of such Governmental Authority, provided that the right to terminate
this Agreement under this Section 8.01(d)(i) shall not be available to any
party whose failure to comply with Section 6.01 has resulted in such action
or inaction or (ii) the Company Shareholder Approval is not obtained at the
Company Meeting.
(e) Failure to Recommend, Etc. At any time prior to the Company
Meeting, by the Acquisition Party if the Company Board shall have failed to
make its recommendation referred to in Section 6.03 (or, if requested by
the Acquisition Party, failed to indicate that it will make such
indication), withdrawn such recommendation or modified or changed such
recommendation in a manner adverse in any respect to the interests of the
Acquisition Party or shall have approved or recommended to its shareholders
an Acquisition Proposal other than the Merger (it being understood that
taking actions permitted under Section 6.06(a) shall not be deemed to be a
failure to make, a withdrawal of or a modification or change in such
recommendation).
(f) Superior Proposal. At any time prior to the receipt of the Company
Shareholder Approval, by the Company,
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in accordance with Section 6.06(b)(iii), provided that, in order for the
termination of this Agreement pursuant to this paragraph (f) to be deemed
effective, the Company shall have complied with all provisions of Section
6.06, including the notice provisions therein and the Fee contemplated by
Section 8.03 shall have been paid.
8.02 Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, no party to this Agreement shall have any liability or further
obligation to any other party hereunder except (a) as set forth in Section 6.12,
this Section 8.02, Section 8.03 and Article IX and (b) that termination will not
relieve a breaching party from liability for any willful breach of this
Agreement giving rise to such termination.
8.03 Fee.
(a) Upon the occurrence of a Fee Event, the Company shall pay the
Acquisition Party, and the Acquisition Party shall be entitled to payment
of, a fee of US$78 million (the "Fee"). The payment of the Fee shall be
made to the Acquisition Party in immediately available funds upon the
occurrence of the Fee Event.
(b) The term "Fee Event" shall mean any of the following events or
transactions occurring on or after the date hereof: (i) this Agreement is
terminated by the Acquisition Party pursuant to Section 8.01(e) or by the
Company pursuant to Section 8.01(f); (ii) this Agreement is terminated by
the Acquisition Party pursuant to Section 8.01(b) as a result of a willful
breach by the Company and, within 12 months after such termination, the
Company or any Subsidiary shall have entered into an agreement to engage in
a transaction that constitutes an Acquisition Transaction with any Person
or the Company Board shall have recommended that the shareholders of the
Company approve or accept any Acquisition Transaction; or (iii) this
Agreement is terminated by either the Acquisition Party or the Company
pursuant to Section 8.01(c) (provided that no approval or action of a
Governmental Authority required to be obtained for the consummation of the
Merger shall have been denied by action of such Governmental Authority and
such denial did not result from the Company's failure to comply with
Section 6.01) or 8.01(d)(ii) after a bona fide Acquisition Proposal shall
have been made or any Person shall have publicly announced an intention
(whether or not conditional) to make an Acquisition Proposal and, within 12
months thereof, the Company or any Subsidiary shall have entered into an
agreement to engage in a transaction that constitutes an
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Acquisition Transaction with any Person or the Company Board shall have
recommended that the shareholders of the Company approve or accept any
Acquisition Transaction.
For purposes of this Section 8.03(b), the definitions of Acquisition
Transaction and Acquisition Proposal shall be deemed to utilize 50% as
opposed to 20% and shall only be deemed to refer to a transaction involving
the Company or the Company Lead Insurance Subsidiary, or with respect to
assets (including the shares of any Subsidiary), the Company and its
Subsidiaries, taken as a whole.
(c) The Company shall notify the Acquisition Party promptly in writing
of the occurrence of any Fee Event.
(d) If the Company fails to promptly pay when due the amounts that
become payable pursuant to this Section 8.03, and, in order to obtain any
such payment, the Acquisition Party commences a suit which results in a
judgment against the Company for the Fee, the Company shall pay to the
Acquisition Party its costs and expenses (including attorneys' fees) in
connection with such suit, together with interest on the amount of the Fee
at the prime rate of Citibank, N.A. in effect on the date such payment was
required to be made.
8.04 Other Fees.
(a) (X) In the event that this Agreement is terminated by either the
Acquisition Party or the Company pursuant to Section 8.01(d)
solely due to the denial by a final non-appealable action of an
approval or action required of a Governmental Authority of a
European nation (excluding Bermuda, if applicable, and the United
Kingdom, a "European Approval") required to be obtained by the
Acquisition Party for the consummation of the Merger and the
other transactions contemplated by this Agreement (provided that
the cause of such denial is not the Company's breach of Section
6.01); or
(Y) (i) this Agreement is terminated by either the Acquisition
Party or the Company pursuant to Section 8.03(c) and (ii) at the
time of any such termination all conditions to the consummation
of the Merger other than Section 7.01(b) and Section 7.01(c)(A)
shall have been satisfied or waived (or were capable of being
satisfied had the Effective Time occurred on the date of such
termination) and
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Section 7.01(b) and Section 7.01(c)(A) shall not have been
satisfied solely as a result of (x) the failure to obtain a
European Approval (provided that the cause of such failure is not
the Company's breach of Section 6.01) or (y) an injunction issued
by a Governmental Authority of a European nation (excluding
Bermuda, if applicable, and the United Kingdom) (provided that
the cause of such injunction is not a breach by the Company of
this Agreement),
then the Acquisition Party shall promptly pay, but in no event later than
the date of such termination, the Company a fee of $7.5 million (the "Other
Fee"), payable by wire transfer of same day funds.
(b) If the Acquisition Party fails to promptly pay when due the
amounts that become payable pursuant to this Section 8.04, and, in order to
obtain any such payment, the Company commences a suit which results in a
judgment against the Acquisition Party for the Fee, the Acquisition Party
shall pay to the Company its costs and expenses (including attorneys' fees)
in connection with such suit, together with interest on the amount of the
Other Fee at the prime rate of Citibank, N.A. in effect on the date such
payment was required to be made.
ARTICLE IX
Miscellaneous
9.01 Survival. No representations, warranties, agreements and
covenants contained in this Agreement shall survive the Effective Time (other
than Section 6.09 and this Article IX which shall survive the Effective Time) or
the termination of this Agreement if this Agreement is terminated prior to the
Effective Time (other than Sections 6.05(b), 8.02, 8.03, 8.04 and this Article
IX which shall survive such termination).
9.02 Waiver; Amendment. Prior to the Effective Time, any provision of
this Agreement may be (a) waived by the party benefitted by the provision (other
than the condition set forth in Section 7.02(c), which may not be waived without
the consent of WM) or (b) amended or modified at any time, by an agreement in
writing between the parties hereto executed in the same manner as this
Agreement, except that, after the Company Meeting, this Agreement may not be
amended if it would violate the NYBCL.
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9.03 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04 Governing Law. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of New York applicable to
contracts made and to be performed entirely within such State.
9.05 Waiver of Jury Trial. Each party hereto acknowledges and agrees
that any controversy which may arise under this 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 transactions contemplated by this Agreement.
Each party certifies and acknowledges that (a) 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, (b) each party understands and has considered the implications of this
waiver, (c) each party makes this waiver voluntarily, and (d) each party has
been induced to enter into this agreement by, among other things, the mutual
waivers and certifications in this Section 9.05.
9.06 Expenses. Except as otherwise set forth herein, all fees and
expenses incurred in connection with the Merger, this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such fees
or expenses, whether or not the Merger is consummated, except that the
Acquisition Party, on the one hand, and the Company, on the other hand, shall
bear and pay one-half of the costs and expenses incurred in connection with the
filing, printing and mailing of and the Company Proxy Statement (including SEC
filing fees) and soliciting proxies.
9.07 Notices. All notices, requests and other communications hereunder
to a party shall be in writing and shall be deemed given if personally
delivered, telecopied (with confirmation) or mailed by registered or certified
mail (return receipt requested) to such party at its address set forth below or
such other address as such party may specify by notice to the parties hereto.
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If to the Company, to:
Financial Security Assurance Holdings Ltd.
350 Park Avenue
New York, New York 10022
Attention: Bruce E. Stern, Esq.
Telephone: (212) 826-0100
Facsimile: (212) 688-3107
With a copy (which shall not constitute notice) to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attention: Philip A. Gelston, Esq.
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
If to the Acquisition Party, to:
Dexia S.A.
7 a 11 quai Andre Citroen BP-1002
75 901 Paris Cedex 15
Attention: Jean-Paul Gauzes
Telephone: 331 43 92 81 64
Facsimile: 331 43 92 81 50
With a copy to:
Dexia Credit local de France 7 a 11 quai Andre Citroen BP-1002 75 901
Paris Cedex 15
Attention: Jean-Paul Gauzes
Telephone: 331 43 92 81 64
Facsimile: 331 43 92 81 50
Dexia Credit local de France, New York Agency
445 Park Avenue
New York, New York 10022
Attention: Agency Manager
Telephone: (212) 515-7000
Facsimile: (212) 753-5522
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With a copy (which shall not constitute notice) to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004-2498
Attention: Mark J. Menting, Esq.
Telephone: (212) 558-4000
Facsimile: (212) 558-3588
9.08 Entire Understanding; No Third Party Beneficiaries. This
Agreement represents the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and thereby and this Agreement
supersedes any and all other oral or written agreements heretofore made (other
than the Voting Agreements and the Holdings Purchase Agreement). Except for
Sections 3.04, 3.05, 6.09 and 9.02, nothing in this Agreement expressed or
implied, is intended to confer upon any Person, other than the parties hereto or
their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
9.09 Interpretation; Effect. When a reference is made in this
Agreement to Sections, Exhibits or Schedules, such reference shall be to a
Section of, or Exhibit or Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and are not part of this Agreement. Whenever the
words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". All references
herein to "$" shall be to U.S. dollars.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
FINANCIAL SECURITY ASSURANCE
HOLDINGS LTD.
By:
----------------------------------
Name:
Title:
DEXIA S.A.
By:
----------------------------------
Name:
Title:
PAJY Inc.
By:
----------------------------------
Name:
Title:
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EXHIBIT A
FORM OF VOTING AGREEMENT
VOTING AGREEMENT, dated as of March 14, 2000 (this "Agreement"), by
and between Dexia S.A. (the "Acquiring Party") and the shareholder of
Financial Security Assurance Holdings Ltd. (the "Company") identified as the
signatory hereto (the "Shareholder").
WHEREAS, the Acquiring Party is prepared to enter into an agreement
and plan of merger dated as of March 14, 2000 with the Company (the "Merger
Agreement") simultaneously with the execution of this Agreement;
WHEREAS, the Acquiring Party would not enter into the Merger
Agreement unless the Shareholder enters into this Agreement;
WHEREAS, the Shareholder will benefit directly and substantially
from the Merger Agreement; and
WHEREAS, the Shareholder has, after consultation with the Company as
to the process (and the results thereof) the Company has undertaken regarding
a possible sale of the Company and the nature of the Acquiring Party's
proposal, advised the Board of Directors of the Company that it desires that
the Company and the Board of Directors accept the Acquiring Party's proposal
embodied in the Merger Agreement, terminate any further activities with third
parties regarding a sale of the Company and approve and adopt the Merger
Agreement and authorize the execution and delivery thereof.
NOW, THEREFORE, in consideration of the Acquiring Party's entry into
the Merger Agreement, the Shareholder agrees with the Acquiring Party as
follows:
1. The Shareholder represents and warrants that (i) it owns (of
record and beneficially) and controls, or controls with exclusive power to
vote, the number and class of shares of the Company set forth on the signature
page hereof (including any shares acquired on the conversion of any other
shares, the "Owned Shares") free from any lien, encumbrance or restriction
whatsoever and with full power to vote the Owned Shares without the consent or
approval of any other person, (ii) this Agreement has been duly authorized,
executed and delivered by it and constitutes the legally binding obligation of
the Shareholder, enforceable in accordance with its terms, and (iii) the
execution, delivery and performance by the Shareholder of this Agreement does
not and will not (a) conflict with any provision of its certificate or
articles of incorporation or by-laws or
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any similar corporate document, or any agreement, indenture or instrument to
which it is a party or (b) require the consent or approval of any governmental
authority having jurisdiction over it or of any third party. For all purposes
of this Agreement, Owned Shares shall include any shares of the Company as to
which beneficial ownership is acquired after the execution hereof.
2. The Shareholder represents and warrants that the agreements
listed in Appendix I to this Agreement are the only written agreements or
arrangements between the Shareholder (or any subsidiary of the Shareholder)
and the Company (or any subsidiary of the Company) relating to any capital
stock of the Company (or any Subsidiary of the Company) (the "Covered
Agreements").
3. The Shareholder irrevocably and unconditionally agrees that it
will (a) vote all of the Owned Shares in favor of the Merger Agreement and the
merger provided for therein (the "Merger") at any meeting or meetings of the
Company's shareholders called to vote upon the Merger Agreement and the Merger
and (b) will not vote such shares (or otherwise provide a proxy, consent,
voting agreement or similar arrangement with respect thereto) in favor of any
other Acquisition Proposal as defined below, provided that, in the case of
each of clauses (a) and (b), the terms of the Merger Agreement shall not have
been amended in a manner that adversely affects the Shareholder in a material
way (with a change in the amount of the merger consideration being material).
4. The Shareholder agrees that it will not (a) directly or
indirectly, sell, transfer, pledge, assign or otherwise dispose of (other than
by exercising any conversion right), or enter into any contract, option,
commitment or other arrangement or understanding with respect to the sale,
transfer, pledge, assignment or other disposition of, any of the Owned Shares,
unless it receives (i) a proxy, in form and substance substantially similar to
the provisions of Section 3 hereof, irrevocable so long as this Agreement is
effective, to vote or not to vote such Owned Shares as provided in Section 3
of this Agreement, and the Shareholder will so vote or not vote such Owned
Shares and (ii) an agreement identical in all material respects to this
Agreement executed by the buyer of the Owned Shares the subject thereof; (b)
exercise any appraisal rights available to such Shareholder pursuant to
Section 910 of the New York Business Corporation Law in connection with the
Merger; and (c) take any action or omit to take any action which would
prohibit, prevent or preclude Shareholder from performing its obligations
under this Agreement.
5. The Shareholder agrees, at the request of the Acquiring Party,
(i) to terminate, or cause the termination of, any or all Covered Agreements
(other than the rights of the holders of any shares of preferred stock under
the Company's certificate of
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incorporation) designated by the Acquiring Party immediately prior to, and
subject to, the effectiveness of the Merger and (ii) to execute, or cause the
execution of, any other documents or instruments necessary to effect the
foregoing termination. In addition, effective upon consummation of the Merger,
the Shareholder, for itself and on behalf of any subsidiary, hereby releases
the Company and any of its subsidiaries from any obligations they may have
under any Covered Agreement and any claims the Shareholder or any of its
subsidiaries may have with respect to the Covered Agreements.
6. The Shareholder agrees to take all reasonable actions and make
such reasonable efforts to consummate the Merger and effect the other
transactions contemplated by the Merger Agreement, provided that the terms of
the Merger Agreement shall not have been amended in a manner that adversely
affects the Shareholder in a material way (with a change in the amount of the
merger consideration being material).
7. The Shareholder agrees to waive any pre-emptive right that it may
have with respect to capital stock of the Company pursuant to any of the
transactions contemplated by the Merger Agreement or any voting agreement
similar to this Agreement and consents to the transactions contemplated hereby
and thereby.
8. The Shareholder shall not, nor shall it permit any of its
subsidiaries to, nor shall it permit any of its or its Subsidiaries' directors
or officers to, and shall use its commercially reasonable efforts to cause its
employees, agents and representatives (including, without limitation, any
investment banker, financial advisor, attorney or accountant retained by it or
any of its subsidiaries or affiliates) not to (i) solicit, initiate or
encourage (including by way of furnishing information), or knowingly take any
other action designed to facilitate, the making of any proposal which
constitutes an Acquisition Proposal (as defined in the Merger Agreement) or
(ii) participate in any discussions or negotiations (including by way of
furnishing information) regarding any Acquisition Proposal; provided, however,
that this Section 8 shall not be deemed to prohibit any person acting in such
person's capacity as a director or officer of the Company from engaging in any
such activities to the extent the Company may so engage without violating the
Merger Agreement.
9. The Shareholder agrees that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed by it in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the Acquiring Party shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement by the Shareholder to
enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which it is entitled at law or in equity and that
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the Shareholder waives the posting of any bond or security in connection with
any proceeding related thereto.
10. This Agreement may be executed in one or more counterparts, each
of which shall be deemed to constitute an original. This Agreement shall
become effective when one counterpart signature page has been signed by each
party hereto and delivered to the other party (which delivery may be by
facsimile).
11. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as it is enforceable.
12. The Shareholder agrees to execute and deliver all such further
documents, certificates and instruments and take all such further reasonable
action as may be necessary or appropriate, in order to consummate the
transactions contemplated hereby.
13. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York (without regard to principles of
conflict of laws), except to the extent that the Federal laws of the United
States govern the matters set forth herein.
14. To the extent that the Shareholder is ultimately controlled by
another entity, such entity is identified below and, by its duly authorized
execution and delivery of this Agreement in the space provided for below,
hereby agrees (a) to be bound by this Agreement as if it were the Shareholder
and (b) to cause the Shareholder to perform its obligations hereunder.
15. The Shareholder agrees not to exercise any registration rights
or similar rights regarding the Company's shares.
16. This Agreement shall terminate upon the earlier to occur of (a)
the date of termination of the Merger Agreement and (b) the effective time of
the Merger, provided that termination shall not relieve a breaching party of
liability for any breach prior to the termination.
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17. This Agreement may be executed in one or more counterparts, each
of which shall be deemed to constitute an original.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
DEXIA S.A.
By:___________________________
Name:
Title:
[PARENT]
By:___________________________
Name:
Title:
[SUBSIDIARY]
By:___________________________
Name:
Title:
Number of "Owned Shares" of Common Stock of the Company:
Number of "Owned Shares" of Preferred Stock of the Company:
<PAGE>
EXHIBIT B
FORM OF EMPLOYMENT AGREEMENT
AGREEMENT, dated as of March 14, 2000 by and between Financial
Security Assurance Holdings Ltd., a New York corporation ("Company"), and
___________ ("Employee").
WHEREAS, Dexia S.A. ("Dexia") and Company are entering into an
Agreement and Plan of Merger dated as of March 14, 2000 (the "Merger
Agreement"), whereby Company will become a wholly-owned subsidiary of Dexia;
and
WHEREAS, Company desires to employ Employee and Employee is willing
to serve as an employee of Company, subject to the terms and conditions of
this Agreement;
NOW, THEREFORE, IN CONSIDERATION OF the mutual covenants herein
contained, and other good and valuable consideration, the parties hereto agree
as follows:
1. Employment.
Company hereby employs Employee, and Employee agrees to serve as an
employee of Company, on the terms and conditions set forth in this Agreement.
2. Term.
Employee's employment shall commence at the Effective Time (as
defined in the Merger Agreement) and end on the fourth anniversary of the
Effective Time (the "Term").
3. Duties During Employment.
During Employee's employment with Company, Employee shall serve as
[current title] of Company and shall have such duties and responsibilities as
are assigned to him by the Board of Directors of Company (the "Board") and as
are consistent with the magnitude and scope of his duties and responsibilities
as of the Effective Time. The Employee shall report directly to the [Board ]
[Chairman and Chief Executive Officer of Company].
<PAGE>
Employee shall devote Employee's full business time and attention
and best efforts to the affairs of Company during his period of employment,
provided, however, that Employee may continue to engage in other activities,
such as activities involving professional, charitable, educational, religious
and similar types of organizations, speaking engagements, membership on the
board of directors of such other organizations, provided that such activities
do not interfere with the performance of his duties for Company.
4. Current Cash Compensation.
(a) Base Salary.
As compensation for his services hereunder, Company will pay to
Employee during the period of his employment a base salary at the annual rate
in effect immediately prior to the Effective Time, payable in accordance with
Company's payroll practices for senior executives. Company shall review the
base salary bi-annually (with the next review to take place January 2001) and
in light of such review may, in the discretion of the Board (but shall not be
obligated to), increase such base salary taking into account any change in
Employee's then responsibilities, performance by Employee, and other pertinent
factors.
(b) Annual Bonus. Company shall maintain a bonus pool (the "Bonus
Pool") for the benefit of Company employees equal to seven percent (7%) of the
after-tax growth in adjusted book value, excluding realized and unrealized
gains/losses on investments and including a return on equity ("ROE") modifier
that is consistent with the Company's practice as of the date hereof. The
Company shall also maintain a reserve bonus pool (the "Reserve Pool") made up
of previously earned but undistributed Bonus Pool allocations from prior
years, equal to approximately $7 million, which shall be distributable at the
discretion of the management of the Company in consultation with Dexia.
Employee shall receive an annual cash bonus equal to at least [ %] of each of
the
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Bonus Pool and the Reserve Pool, if applicable. An additional 2.9% of the
Bonus Pool and Reserve Pool, if applicable, shall be allocated among Employee,
Mr.[ ]and Mr. [ ] as determined by Company's Human Resources Committee;
provided, however, that such percentage shall be reduced to (i) 1.75% in the
event Mr. [ ] is no longer employed by the Company and (ii) 2.02% in the event
either Mr. [ ] or Mr. [ ]is no longer employed by Company. It should be noted
that the above described percentages are minimum percentages and that it is
anticipated that the actual percentages of each of the Bonus Pool and Reserve
Pool to be allocated among Employee, Mr. [ ] and Mr.[ ]will be in the range of
17% to 20%, based on each employee's individual performance and the
performance of Company.
(c) Performance Shares. In each calendar year in the Term, beginning
in 2001, Employee shall receive an annual Performance Share grant under the
Company's 1993 Equity Participation Plan (the "Performance Share Plan"), as
presently in effect or as may be modified or added to by Company from time to
time, equal to no less than 50% of such Employee's 2000 Performance Share
grant. Such awards shall comply with the terms of the compensation program
included in the post-transaction compensation program prepared by Johnson
Associates, Inc. included in the Merger Agreement, except as provided herein.
Except as provided herein, such Performance Shares shall vest according to the
terms of the Performance Share Plan.
5. Other Employee Benefits. In addition to the cash compensation
provided for in Section 4 hereof, Employee, subject to meeting eligibility
provisions thereof, shall be entitled to participate in Company's employee
benefit plans, as presently in effect or as they may be modified or added to
by Company from time to time to the same extent as are otherwise enjoyed by
the senior executives of Company, which shall not be reduced in any material
respect from plans in existence as of the Effective Time. In addition,
Employee shall be required to continue the deferral of outstanding equity
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bonus balances into alternative investments under the Company's Deferred
Compensation Plan [for Mr. [ ] and Mr. []].
6. Termination.
(a) Termination by Company Without Cause;
Termination by Employee for Good Reason.
(i) During the Term. If, during the Term, Company
should terminate Employee's employment without Cause (as defined
below), or if Employee should terminate his employment for Good
Reason (as defined below), Company shall pay to Employee an amount
equal to two times the sum of (A) Employee's annual base salary at
the rate in effect immediately prior to the date of termination and
(B) the average annual bonus payable to Employee for the two (2)
years immediately prior to the year during which termination occurred
(the "Severance Payment"). The Severance Payment, which shall be in
lieu of any amount payable to Employee under the Company's Severance
Policy for Senior Management, shall be payable in monthly
installments over the Restricted Period (as defined in Section 7(b)
below). Notwithstanding any provision of the Performance Share Plan
to the contrary, in the event the Employee's employment is terminated
pursuant to this Section 6(a)(i), (x) all Performance Shares then
outstanding shall vest pro rata in proportion to the percentage of
the performance cycle for such Performance Shares during which
Employee was employed by Company, (y) Employee shall vest in
two-thirds of such Performance Shares that are then outstanding which
have not vested pursuant to clause (x), and (z) Employee shall be
deemed to have been awarded and to have vested in two-thirds of the
minimum annual Performance Share grant(s) provided for in Section
4(c) to which he is otherwise entitled and for which a Performance
Share grant has not otherwise been made. Employee shall receive a
cash payment with respect to all
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such Performance Shares valued pursuant to the valuation
mechanism provided in the Performance Share Plan (which provides a
mechanism for determining the number of Performance Shares and the
price per share) as applicable to Performance Shares outstanding at
the Effective Time and Performance Shares granted subsequent to the
Effective Time, respectively. If the performance cycle includes at
least one completed year, the payout for each such completed year
shall be based on the actual results for the completed year(s) and
100% will be used for uncompleted years; or if the performance cycle
does not include any completed years, 100% payout. The value which
is obtained by multiplying the number of Performance Shares
determined under (x), (y) and (z) above by, the applicable share
price determined under the valuation mechanism in the Performance
Share Plan at the time of the termination will be increased with
interest at 8% per year, compounded semi-annually, from the date of
termination to the date of payment. Such cash payment shall be made
within five (5) days after the end of the Restricted Period (as
defined in Section 7(b)). Such cash payment shall be forfeited in
the event Employee breaches his obligations under Section 7(b) and
(c) of this Agreement.
(ii) After the Term. If, at any time after the
Term, Company should terminate Employee's employment without Cause,
or if Employee should terminate his employment for Good Reason,
Company shall pay to Employee the Severance Payment, which shall be
in lieu of any amount payable to Employee under the Company's
Severance Policy for Senior Management, payable in a lump sum within
five (5) days of termination. Notwithstanding any provision of the
Performance Share Plan to the contrary, in the event Employee's
employment is terminated pursuant to this Section 6(a)(ii), (A) all
Performance Shares granted during the Term shall vest pro rata in
proportion to the percentage of the
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performance cycle for such Performance Shares during which Employee
was employed by Company and (B) Employee shall vest in two-thirds of
the Performance Shares granted during the Term which have not vested
pursuant to clause (A). All Performance Shares granted after the
Term shall be treated according to the terms of the Performance
Share Plan as then in effect. Within five (5) days of a termination
pursuant to this Section 6(a)(ii), Employee shall receive a lump sum
cash payment with respect to all such Performance Shares at a value
of such shares multiplied by the applicable share price determined
under the valuation mechanism in the Performance Share Plan.
"Cause" shall mean (i) conviction or plea of nolo contendere (or
similar plea) in a criminal proceeding for commission of a misdemeanor or a
felony that is materially injurious to the Company; (ii) willful and continued
failure by Employee to perform substantially his duties with Company (other
than any such failure resulting from incapacity due to physical or mental
illness) after a demand for substantial performance is delivered to Employee
by Company which specifically identifies the manner in which Company believes
Employee has not substantially performed his duties; or (iii) Employee engages
in willful misconduct in carrying out his duties with Company which is
directly and materially harmful to the business or reputation of Company.
Employee shall not be terminated for Cause unless he is provided with notice
stating in reasonable detail the alleged misconduct and if such misconduct is
reasonably susceptible to cure, he is allowed a period of time (not less than
ten (10) days) to cure the misconduct; and a resolution is adopted by the
Board at a scheduled meeting at which Employee shall be entitled to attend and
speak to the Board.
"Good Reason" shall mean, without Cause: (i) a diminution of any of
Employee's significant duties or responsibilities; (ii) breach by the Company
of its obligations hereunder; (iii) Company's requiring Employee to be based
at an office that
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is greater than twenty-five (25) miles from the location of Employee's office
as of the Effective Time; or (iv) after the Term and prior to January 1, 2008,
a material adverse change in Employee's total compensation as in effect at the
Effective Time. Notwith standing the foregoing, Employee shall not be deemed
to have terminated his employment for Good Reason unless he gives 60 days'
prior written notice to Companystating in reasonable detail the basis upon
which "Good Reason" is asserted, such notice is given within 120 days of the
later of the occurrence of the event or the date Employee knows or should have
known of the event which would otherwise constitute Good Reason and, if such
failure or breach is reasonably susceptible to cure, Company does not effect a
cure within such 60-day period.
(b) Termination by Company for Cause; Termination by Employee
without Good Reason.
(i) During the Term. If, during the Term, Company should
terminate Employee's employment for Cause or Employee should
terminate his employment without Good Reason, Employee will be
entitled only to be paid the pro-rata annual base salary
otherwise payable to Employee under paragraph (a) of Section 4
through the date of termination. All Performance Shares that
are unvested on the date of termination shall be forfeited.
(ii) After the Term. If, after the Term, Company should
terminate Employee's employment for Cause or Employee should
terminate his employment without Good Reason, Employee will be
entitled to be paid the pro-rata annual base salary otherwise
payable to Employee under paragraph (a) of Section 4 through
the date of termination and a pro-rata annual bonus through the
date of termination. Notwithstanding any provision of the
Performance Share Plan to the contrary, in the event Employee's
employment is terminated pursuant to this Section 6(b)(ii), all
outstanding Performance Shares granted during the
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<PAGE>
Term shall vest pro rata in proportion to the percentage of the
performance cycle for such Performance Shares during which
Employee was employed by Company. All Performance Shares
granted after the Term shall be treated according to the terms
of the Performance Share Plan then in effect. Within five (5)
days of a termination pursuant to this Section 6(b)(ii),
Employee shall receive a lump sum cash payment with respect to
all such Performance Shares at a value of such shares
multiplied by the applicable share price determined under the
valuation mechanism in the Performance Share Plan.
(c) Additional Payments. If applicable, Employee shall be eligible
to receive the additional payments set forth on Annex A.
(d) No Disparaging Statements.
In the event of termination of Employee's employment for any reason
by Company or Employee, Employee will not at any time publicly denigrate,
ridicule or intentionally criticize Company or any of its affiliates
including, without limitation, by way of news interviews, or the expression of
personal views, opinions or judgments to the news media. Similarly, neither
Company nor any of its affiliates will publicly denigrate, ridicule or
intentionally criticize Employee.
7. Restrictive Covenants.
(a) Confidential Information.
Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to Company or any affiliate
of Company, including, without limitation, customer lists, client lists, trade
secrets, pricing policies and other nonpublic business affairs of Company and
any affiliate of Company learned by him from Company or any such affiliate or
otherwise before or after the date of this Agreement, and not to disclose any
such confidential matter to anyone outside Company or any of its affiliates,
whether during or after his period of service with Company,
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<PAGE>
except as may be required by a court of law, by any governmental agency having
supervisory authority over the business of Company or by any administrative or
legislative body (including a committee thereof) with apparent jurisdiction to
order him to divulge, disclose or make accessible such information. Employee
agrees to give Company advance written notice of any disclosure pursuant to
the preceding sentence and to cooperate at the Company's expense with any
efforts by Company to limit the extent of such disclosure. Upon request by
Company, Employee agrees to deliver promptly to Company upon termination of
his services for Company, or at any time thereafter as Company may request,
all Company or affiliate memoranda, notes, records, reports, manuals,
drawings, designs, computer files in any media and other documents (and all
copies thereof) relating to Company's or any affiliate's business and all
property of Company or any affiliate associated therewith, which he may then
possess or have under his control, other than personal notes, diaries,
rolodexes and correspondence.
(b) Covenant Not to Compete.
During the term of this Agreement and for the remainder of the Term,
upon a termination of Employee's employment for any reason (the "Restricted
Period"), Employee shall not directly or indirectly, own, manage, operate,
join, control, or participate in the ownership, management, operation or
control of, or be employed by or connected in any manner with, any competing
business, whether for compensation or otherwise, without the prior written
consent of Company (excluding less than 5% stakes in public vehicles). For the
purposes of this Agreement, a "competing business" shall be any financial
services business which is a significant competitor of Company or its
affiliates. Should Employee, directly or indirectly, own, manage, operate,
join, control or participate in the ownership, management, operation or
control of, or be employed by or connected in any manner with, any competing
business, all payments under this Agreement shall cease.
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<PAGE>
(c) Covenant Not to Solicit Company Clients or Employees.
During the term of this Agreement, and for the Restricted Period,
Employee shall not, in any manner, directly or indirectly, (i) raid or solicit
any client or prospective client of Company or its affiliates to whom Employee
provided services, or for whom Employee transacted business, or whose identity
became known to Employee in connection with Employee's employment with
Company, to transact business with a competing business or reduce or refrain
from doing any business with Company or its affiliates or (ii) interfere with
or damage (or attempt to interfere with or damage) any relationship between
Company or its affiliates and any such client or prospective client. During
the term of this Agreement, and for the Restricted Period, Employee further
agrees that Employee shall not, in any manner, directly or indirectly, solicit
any person who is an employee of Company or its affiliates to apply for or
accept employment with any competing business. The term "solicit" as used in
this Agreement means any communication of any kind whatsoever, regardless of
by whom initiated, inviting, encouraging or requesting any person or entity to
take or refrain from taking any action.
(d) Employee agrees that during his employment and thereafter
Employee shall be available to Company and Parent and shall assist Company and
Parent in connection with any litigation brought by or against Company or its
affiliates and Parent relating to the period during which Employee was
employed by Company; provided, however, that all costs and expenses in
connection with the foregoing shall be borne by Company and/or Parent and
advanced to the Employee.
(e) The provisions of this Section 7 shall survive the termination
or expiration of this Agreement in accordance with the terms hereof. It is the
intention of the parties hereto that the restrictions contained in this
Section 7 be enforceable to the fullest extent permitted by law. Therefore, to
the extent any court of competent jurisdiction shall determine that any
portion of the foregoing restrictions is excessive,
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<PAGE>
such provision shall not be entirely void, but rather shall be limited or
revised only to the extent necessary to make it enforceable.
8. Remedy.
Should Employee engage in or perform, either directly or indirectly,
any of the acts prohibited by Section 7 hereof, it is agreed that Company
shall be entitled to full injunctive relief, to be issued by any competent
court of equity, enjoining and restraining Employee and each and every other
person, firm, organization, association, or corporation concerned therein,
from the continuance of such violative acts. The foregoing remedy available to
Company shall not be deemed to limit or prevent the exercise by Company of any
or all further rights and remedies which may be available to Company hereunder
or at law or in equity.
9. Prior Notice to Prospective Employer.
Prior to accepting employment with any other person or entity during
Employee's employment or the Restricted Period, Employee shall provide such
prospective employer with written notice of the provisions of this Agreement.
10. Arbitration.
If a dispute arises between the parties respecting the terms of this
Agreement or Employee's employment by Company, such dispute shall be settled
only by binding arbitration in New York, New York, in accordance with the
commercial arbitration rules of the American Arbitration Association. Company
will pay the costs of arbitration and reasonable legal fees, provided that the
claim is determined not to be frivolous.
11. Directors' and Officers' Insurance.
During the Employee's employment, Company shall maintain directors'
and officers' liability insurance covering Employee, which contains at least
the same
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coverage and amounts and contains terms and conditions no less
advantageous than that coverage provided by Company as of the Effective Time.
12. Governing Law.
This Agreement is governed by and is to be construed and enforced in
accordance with the laws of the State of New York, without reference to
principles relating to conflict of laws. If under such law, any portion of
this Agreement is at any time deemed to be in conflict with any applicable
statute, rule, regulation or ordinance, such portion shall be deemed to be
modified or altered to conform thereto or, if that is not possible, to be
omitted from this Agreement; the invalidity of any such portion shall not
affect the force, effect and validity of the remaining portion hereof.
13. Notices.
All notices under this Agreement shall be in writing and shall be
deemed effective when delivered in person, or five (5) days after deposit
thereof in the U.S. mails, postage prepaid, for delivery as registered or
certified mail, addressed to the respective party at the address set forth
below or to such other address as may hereafter be designated by like notice.
Unless otherwise notified as set forth above, notice shall be sent to each
party as follows:
(a) Employee, to:
[Name and Address]
(b) Company, to:
[Address]
Attention: [ ]
In lieu of personal notice or notice by deposit in the U.S. mail, a
party may give notice by confirmed telegram, telex or fax, which shall be
effective upon receipt.
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<PAGE>
14. Entire Agreement.
This Agreement constitutes the entire understanding between Company
and Employee relating to the terms of employment of Employee by Company and
supersedes and cancels all prior written and oral agreements and
understandings with respect to the subject matter of this Agreement. This
Agreement may be amended but only by a subsequent written agreement of the
parties. This Agreement shall be binding upon and shall inure to the benefit
of Employee, Employee's heirs, executors, administrators and beneficiaries,
and Company and its successors.
15. Successors.
This Agreement is personal to Employee and without the prior written
consent of Company shall not be assignable by Employee otherwise than by will
or the laws of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by Employee's legal representatives. This
Agreement shall inure to the benefit of and be binding upon Company and its
successors and assigns.
16. Withholding Taxes.
All amounts payable to Employee under this Agreement shall be
subject to applicable withholding of income, wage and other taxes.
17. Waiver of Breach.
The waiver by either party of a breach of any term of this Agreement
shall not operate nor be construed as a waiver of any subsequent breach
thereof. Any waiver must be in writing and signed by the Executive or an
authorized officer of the Company, as the case may be.
18. Survivorship.
The respective rights and obligations of the parties hereunder shall
survive any termination of the Executive's employment to the extent necessary
to the intended preservation of such rights and obligations.
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<PAGE>
EXHIBIT B
19. Severability.
If any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
20. Headings.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
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<PAGE>
21. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the year and day first above written.
By: ______________________________________
_______________________________________
[Name of Employee]
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<PAGE>
ANNEX A
Additional Payments
(a) Except as set forth below, in the event it shall be determined
that any payment or distribution by Company to or for the benefit of Employee
(whether paid or payable or distributed or distributable pursuant to the terms
of the Agreement or otherwise, but determined without regard to any additional
payments required under this Annex A) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties are incurred by Employee
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then Employee shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by
Employee of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of paragraph (c), all determinations
required to be made under this Annex A, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made by
Company's independent auditors or such other certified public accounting firm
reasonably acceptable to Employee as may be designated by Company (the
"Accounting Firm") which shall provide detailed supporting calculations both
to Company and Employee within 15 business days of the receipt of notice from
Employee that there has been a Payment, or such earlier time as is requested
by Company. All fees and expenses of the Accounting Firm shall be borne solely
by Company. Any Gross-Up Payment, as determined pursuant to this Annex A,
shall be paid by Company to Employee not later than the due date for the
payment of any Excise Tax. Any determination by the Accounting Firm shall be
binding upon Company and Employee. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that Company exhausts its remedies pursuant to
paragraph (c) and Employee thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by Company
to or for the benefit of Employee. In the event the amount of the Gross-up
Payment exceeds the amount necessary to reimburse Employee for the Excise Tax
(the "Overpayment"), the Accounting Firm shall determine the amount of the
Overpayment
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that has been made and any such Overpayment shall be promptly paid by Employee
(to the extent Employee has received a refund if the applicable Excise Tax has
been paid to the Internal Revenue Service) to or for the benefit of the
Company. Employee shall cooperate, to the extent expenses are reimbursed by
the Company, with any reasonable requests by the Company in connection with
any contests or disputes with the Internal Revenue Service in connection with
the Excise Tax.
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EXHIBIT C
==============================================================================
STOCK PURCHASE AND INDEMNITY AGREEMENT
by and among
WHITE MOUNTAINS INSURANCE GROUP, LTD.,
WHITE MOUNTAINS HOLDINGS (BARBADOS) SRL
and
DEXIA S.A.
for
all of the outstanding capital stock of
WHITE MOUNTAINS HOLDINGS, INC.
and
indirectly for certain of the outstanding capital stock of
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
dated as of
March 14, 2000
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
CERTAIN DEFINITIONS
SECTION 1.1 Certain Definitions..............................................1
SECTION 1.2 Merger Agreement Definitions.....................................4
ARTICLE II
SALE AND PURCHASE OF SHARES
SECTION 2.1 Sale and Purchase of Holdings Shares.............................4
SECTION 2.2 Purchase Price...................................................4
SECTION 2.3 Payment of Purchase Price, Holdback Amount and Repurchase Shares.4
SECTION 2.4 Closing..........................................................7
SECTION 2.5 Substitute Buyer.................................................7
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SELLERS
SECTION 3.1 Organization and Good Standing...................................7
SECTION 3.2 Capitalization and Ownership of Shares.......................... 8
SECTION 3.3 Authority....................................................... 9
SECTION 3.4 Consents and Approvals.......................................... 9
SECTION 3.5 No Violations...................................................10
SECTION 3.6 Financial Statements, Financial Reports, SEC Documents and SAP
Statements....................................................10
SECTION 3.7 Absence of Certain Changes and Events...........................11
SECTION 3.8 Assets and Liabilities .........................................11
SECTION 3.9 Taxes...........................................................12
SECTION 3.10 Employee Benefits; ERISA........................................13
SECTION 3.11 Contracts.......................................................13
SECTION 3.12 Business of Services and Runoff.................................13
SECTION 3.13 Holdings Activities.............................................13
<PAGE>
Page
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DEXIA
SECTION 4.1 Organization and Good Standing..................................14
SECTION 4.2 Corporate Authority .........................................14
SECTION 4.3 Consents and Approvals; No Violations...........................14
SECTION 4.4 Securities Act .........................................15
ARTICLE V
COVENANTS
SECTION 5.1 LLC Transactions................................................15
SECTION 5.2 No Sale.........................................................15
SECTION 5.3 Reasonable Best Efforts.........................................15
SECTION 5.4 Press Releases..................................................15
SECTION 5.5 Access; Information; Confidentiality............................16
SECTION 5.6 Tax Matters.....................................................16
ARTICLE VI
CONDITIONS TO CLOSING
SECTION 6.1 Conditions to Obligations of Dexia..............................17
SECTION 6.2 Conditions to Obligations of Sellers............................19
SECTION 6.3 Conditions to Obligations of Sellers and Dexia..................19
ARTICLE VII
TERMINATION
SECTION 7.1 Termination ....................................................19
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Indemnification and Reimbursement by Sellers....................19
SECTION 8.2 No Expiration of Indemnification. The right....................20
SECTION 8.3 Computation of Losses Subject to Indemnification................21
SECTION 8.4 Notice and Payment of Claims....................................21
SECTION 8.5 Procedure for Conduct of Third Party Claims.....................21
<PAGE>
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Waiver; Amendment................................................22
SECTION 9.2 Counterparts.....................................................22
SECTION 9.3 Governing Law....................................................22
SECTION 9.4 Waiver of Jury Trial.............................................22
SECTION 9.5 Notices..........................................................23
SECTION 9.6 Entire Understanding; No Third Party Beneficiaries...............24
SECTION 9.7 Expenses.........................................................24
SECTION 9.8 Specific Performance. ..........................................24
SECTION 9.9 Purpose..........................................................25
SECTION 9.10 Interpretation; Effect..........................................25
SECTION 9.11 Certain Events...................................................25
<PAGE>
STOCK PURCHASE AND INDEMNITY AGREEMENT (the "Agreement"), dated as
of March 14, 2000, by and among WHITE MOUNTAINS INSURANCE GROUP, LTD., a
corporation organized under the laws of Bermuda ("White Mountains"), WHITE
MOUNTAINS HOLDINGS (BARBADOS) SRL, a society with restricted liability
organized under the laws of Barbados ("Sub 1") (each a "Seller" and,
collectively, the "Sellers"), and DEXIA S.A., a corporation organized under
the laws of Belgium ("Dexia") (each a "Party" and, collectively, the
"Parties").
IN CONSIDERATION of the respective representations, warranties,
covenants, agreements, undertakings and obligations set forth herein, and
intending to be legally bound hereby, the Parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
SECTION 1.1 Certain Definitions. The following terms are used in
this Agreement with the meanings set forth below and other terms are later
defined:
"Berkshire Hathaway Stock" has the meaning given to it in Section
2.3(c).
"Effective Date" has the meaning given to it in the Merger
Agreement.
"Effective Time" has the meaning given to it in the Merger
Agreement.
"FSA" means Financial Security Assurance Holdings Ltd., a New York
corporation.
"FSA Common Stock" has the meaning given to it in the definition of
FSA Shares.
"FSA Shares" means 6,020,807 of issued and outstanding shares of
common stock of FSA, par value $0.01 per share (the "FSA Common Stock"), and
2,000,000 of issued and outstanding shares of Series A Convertible Redeemable
Preferred Stock of FSA, par value $0.01 per share (the "FSA Preferred Stock"),
subject in each case to adjustment to reflect the conversion of any shares of
FSA Preferred Stock into shares of FSA Common Stock. Any shares received
pursuant to such conversion shall be FSA Shares.
"FSA Preferred Stock" has the meaning given to it in the definition
of FSA Shares.
"Governmental Authorization" means any approval, franchise,
certificates of authority, order, consent, judgment, decree, license, permit,
waiver or other authorization issued, granted given or otherwise made
available under the authority of any Governmental Entity (as defined in
Section 3.4) or pursuant to any Law (as defined in Section 3.2(d)).
"Holdings" means White Mountains Holdings, Inc, a Delaware
corporation, all of the issued and capital stock of which comprises the
Holdings Shares.
<PAGE>
"Holdings Shares" means all of the issued and outstanding shares of
capital stock of Holdings, comprising common stock, par value $1.00 per share.
"LLC Transactions" means (1) the contribution by Sub 1 to Holdings
of the Services Shares, (2) pursuant to Section 266 of the Delaware General
Corporation Law, the conversion of Services into a Delaware limited liability
company, (3) the distribution by Services to Holdings (the sole member of
Services) of the FSA Shares and (4) the transfer by Holdings to a wholly owned
subsidiary of White Mountains that is not owned, directly or indirectly, by
Holdings of all the membership interests in Services.
"Majority Services Shares" means all of the issued and outstanding
shares of common stock of Services, par value $0.01 per share, owned by
Holdings as at the date of this Agreement, which shares comprise all of the
issued and outstanding shares of capital stock of Services (except for the
Services Shares).
"Material Adverse Effect" means, with respect to White Mountains,
Sub 1, Services or Holdings, as the case may be, any effect that (a) is
material and adverse to the financial position, results of operations (if any)
or business of White Mountains and its Subsidiaries taken as a whole, or (b)
would materially impair the ability of White Mountains or Sub 1 to perform its
obligations under this Agreement or the ability of White Mountains, Sub 1,
Services or Holdings to consummate the transactions contemplated herein.
"Merger" has the meaning given to it in the Merger Agreement.
"Merger Agreement" means the Agreement and Plan of Merger, dated as
of March 14, 2000 by and among Dexia S.A., PAJY, Inc. and FSA, as it may be
amended from time to time.
"Merger Consideration" has the meaning given to it in the Merger
Agreement.
"Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, Governmental Entity (as defined in Section 3.4), joint venture,
estate, trust, association, organization or other entity of any kind or
nature.
"Pre-Closing Balance Sheet" means a balance sheet of Services dated
as of the last day of the month of the month immediately preceding the month
in which the Closing occurs prepared in accordance with U.S. generally
accepted accounting principles.
"Pre-Closing Tax Period" means any taxable year or period that ends
on or before the Effective Date and, with respect to any taxable year or
period beginning before and ending after the Effective Date, the portion of
such taxable year or period ending on and including the Effective Date. For
this purpose, the Taxes of Holdings for the portion of the taxable year or
period ending on, and for the portion of a taxable year or period beginning
after, the Effective Date shall be determined by assuming that Holdings had a
taxable year or period which ended at the close of the Effective Date, except
that exemptions, allowances or deductions that are calculated on an annual
basis (such as the deduction for depreciation) shall be apportioned on a time
basis.
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<PAGE>
"Quarter Date" shall mean each successive three month anniversary
date of the Effective Date occurring after the thirteenth month after the
Effective Date and prior to the eight and a half year anniversary of the
Effective Date.
"Related Person" means, with respect to any Person, (a) any Person
which, directly or indirectly, controls, is controlled by, or is under common
control with, such Person, (b) each Person that serves as a director, officer,
partner, executor, trustee or agent of such Person (or in any other similar
capacity), or (c) any Person with respect to which such Person serves as a
general partner or trustee (or in any other similar capacity).
"Representatives" means, with regard to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"Repurchase Securities" means all Repurchase Shares, all U.S.
treasury obligations sold to Dexia by Sub 1 pursuant to Section 2.3 hereof and
any securities obtained by Dexia pursuant to Section 2.3 hereof.
"Repurchase Shares" shall mean all shares of Berkshire Hathaway
Stock sold to Dexia by Sub 1 pursuant to Section 2.3 hereof (whether pursuant
to Section 2.3(c)(i) or 2.3(c)(vii)).
"Security Purchase Price" shall mean as of any date (i) with respect
to shares of Berkshire Hathaway Stock (A) purchased and sold pursuant to
Section 2.3(c)(i), the "Original Price Per Share" (as defined in Section
2.3(c)(i)), and (B) purchased and sold pursuant to Section 2.3(c)(vii), the
"Adjusted Price Per Share" (as defined in Section 2.3(c)(vii)) and (ii) with
respect to any U.S. treasury obligations, the principal amount thereof.
"Semi-Annual Date" shall mean each six month anniversary of the
Effective Date.
"Services" means White Mountains Services Corporation, a Delaware
corporation, all of the issued and outstanding capital stock of which
comprises common stock.
"Services Shares" means all of the issued and outstanding shares of
common stock of Services, par value $0.01 per share, owned beneficially by
White Mountains.
"Sub 1 Shares" means all of the issued and outstanding common quotas
of Sub 1.
"Subsidiary" has the meaning given to it in Rule 1-02 of Regulation
S-X of the Securities and Exchange Commission.
"Taxes" has the meaning given to it in Section 3.9(n).
"U.S. dollar" or "$" means the lawful currency of the United States
of America.
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SECTION 1.2 Merger Agreement Definitions. Capitalized terms used but
not defined herein have the meanings ascribed to them in the Merger Agreement.
ARTICLE II
SALE AND PURCHASE OF SHARES
SECTION 2.1 Sale and Purchase of Holdings Shares.
(a) Sale and Purchase of Holdings Shares. Upon the terms and subject
to the conditions set forth in this Agreement and on the basis of the
representations, warranties, covenants, agreements, undertakings and
obligations contained herein, immediately prior to the Merger on the Effective
Date, White Mountains shall cause Sub 1 to sell to Dexia, and Sub 1 shall sell
to Dexia, and Dexia shall purchase from Sub 1, all of the Holdings Shares,
free and clear of any and all Liens, for the consideration specified in this
Article II. For purposes of this Agreement, the term "Liens" shall mean any
charges, claims, community property interests, covenants, encumbrances,
equitable interests, exceptions, liens, mortgages, options, pledges,
reservations, rights of first refusal, security interests, statutory liens,
warrants, or restrictions of any kind, including any restrictions on voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
SECTION 2.2 Purchase Price.
(a) Purchase Price for Holdings Shares. The purchase price for the
Holdings Shares shall be an amount in cash in U.S. dollars equal to the sum of
(i) the product of (A) the number of shares of FSA Common Stock included in
the FSA Shares and being sold hereunder and (B) the per share Merger
Consideration and (ii) the product of (A) the number of shares of FSA
Preferred Stock included in the FSA Shares and being sold hereunder and (B)
the per share Preferred Merger Consideration (as defined in the Merger
Agreement) (the "Purchase Price"). The Purchase Price shall be paid in
accordance with Section 2.3 hereof.
SECTION 2.3 Payment of Purchase Price, Holdback Amount and
Repurchase Shares.
(a) On the Effective Date and subject to the terms and conditions
set forth in this Agreement, in reliance on the representations, warranties,
covenants and agreements of the Parties contained herein and in consideration
of the sale, assignment, transfer and delivery of the Holdings Shares to
Dexia, Dexia shall pay the Purchase Price (less the Holdback Amount (as
defined in Section 2.3(b)(i)) for the Holdings Shares to White Mountains (for
Sub 1's account in respect of the Holdings Shares) by wire transfer of
immediately available funds to an account or accounts designated by White
Mountains.
(b) Holdback Amount.
(i) Notwithstanding anything to the contrary contained herein,
Dexia shall withhold an amount equal to $50,000,000 plus, if the increase in
the liabilities of Services from December 31, 1999 ($42,200,000) to the date
of the Pre-Closing Balance Sheet is greater than $2,000,000, an additional
amount equal to such
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increase, from the Purchase Price payable on the Effective Date (as it may be
reduced pursuant to Section 2.3, the "Holdback Amount").
(ii) Except as set forth in Section 2.3(d), on each date on
which Sub 1 repurchases Repurchase Securities pursuant to clauses (ii), (iii)
and (iv) of Section 2.3(c), Dexia shall pay to Sub 1 an amount equal to the
aggregate Security Purchase Price paid for all Repurchase Securities being
repurchased on such date less an amount attributable to the Security Purchase
Price paid for Repurchase Securities sold by Dexia pursuant to Section 2.3(d)
and deemed sold pursuant to Section 2.3(c) and less any reductions in the
Holdback Amount pursuant to Section 2.3(d) not previously reduced against such
a payment and the Holdback Amount shall be reduced by such amount.
(c) Security Purchases.
(i) At the Effective Time, Sub 1 shall sell to Dexia, and Dexia
shall purchase for an amount equal to the Holdback Amount from Sub 1, a number
of Class A shares of common stock (the "Berkshire Hathaway Stock") of
Berkshire Hathaway Inc. ("Berkshire Hathaway"), equal to the Holdback Amount
divided by the average closing price per share of Berkshire Hathaway Stock
reported on the New York Stock Exchange for the ten trading days ending on and
including the second day prior to the Effective Date (the "Original Price Per
Share"), and Sub 1 shall, at the Effective Time and to effectuate the
foregoing purchase and sale, deliver and transfer to Dexia a certificate or
certificates evidencing the Berkshire Hathaway Stock duly endorsed in blank or
accompanied by stock powers duly executed in blank, in proper form for
transfer, with all signatures guaranteed and with any requisite stock transfer
tax stamps properly affixed thereto. Such stock shall not be subject to any
restrictions on transfer except as set forth herein.
(ii) On the thirteenth month anniversary of the Effective Date,
Sub 1 shall repurchase from Dexia half the number or amount of Repurchase
Securities then held by Dexia for a per security price equal to the Security
Purchase Price.
(iii) On each Quarter Date, Sub 1 shall repurchase from Dexia
Repurchase Securities in an amount equal to the quotient of half the number of
Repurchase Securities then held by Dexia divided by the number of Quarter
Dates then remaining (including the Quarter Date on which such determination
is being made) for a per security price equal to the relevant Security
Purchase Price as of such date.
(iv) On the eight and a half year anniversary of the Effective
Date, Sub 1 shall repurchase from Dexia all Repurchase Securities then held by
Dexia for a per security price equal to the Security Purchase Price in effect
on such date.
(v) On each Semi-Annual Date, if the average closing price of
Berkshire Hathaway Stock reported on the New York Stock Exchange for the ten
trading days ending on and including the sixth business day prior to such
Semi-Annual Date is less than 90% of the Security Purchase Price for any
Berkshire Hathaway Stock held by Dexia pursuant to this Agreement, Dexia may,
by giving written notice to Sub 1 at least five business days prior to the
Semi-Annual Date, require Sub 1 to repurchase all of such shares of Berkshire
Hathaway Stock held by Dexia for a price per security equal to the Security
Purchase Price in effect with respect thereto.
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(vi) On each Semi-Annual Date, if the average closing price of
Berkshire Hathaway Stock reported on the New York Stock Exchange for the ten
trading days ending on and including the sixth business day prior to such
Semi-Annual Date is greater than 110% of the Security Purchase Price for any
Berkshire Hathaway Stock held by Dexia pursuant to this Agreement, then Sub 1
may, by giving written notice to Dexia at least five business days prior to
the Semi-Annual Date, require Dexia to sell to Sub 1 all of such shares of
Berkshire Hathaway Stock held by Dexia for a price per security equal to the
Security Purchase Price then in effect with respect thereto.
(vii) Simultaneously with any sale and repurchase of
Repurchase Shares pursuant to clause (v) or (vi) above or under Section 2.3(e)
and in substitution therefor, Sub 1 shall sell to Dexia, and Dexia shall
purchase from Sub 1, at Sub 1's discretion, either (i) United States treasury
obligations with an aggregate principal value equal to the Holdback Amount as
of the date of such sale and repurchase (after giving effect to any reduction
thereof on the date of such sale and repurchase) or (ii) a number of shares of
Berkshire Hathaway Stock equal to the quotient of the Holdback Amount as of
the date of such sale and repurchase (after giving effect to any reduction
thereof on the date of such sale and repurchase) divided by the average
closing price per share (the "Adjusted Price Per Share") of Berkshire Hathaway
Stock reported on the New York Stock Exchange for the ten trading days ending
on and including the second day prior to the date of such sale and repurchase.
(d) Dexia may, at its option, withhold an amount equal to the amount
of any unsatisfied claims (whether or not finally determined) made by Dexia
against White Mountains or Sub 1, or a Related Person of White Mountains or
Sub 1, under this Agreement, from the Holdback Amount on the due date for
payment thereof and may satisfy any such claim, in whole or in part as the
case may be, from the amount withheld. Additionally, or alternatively, Dexia
may, at its option, satisfy any such claim by selling on the date such claim
becomes payable that number of Repurchase Securities yielding proceeds (after
taxes, commissions and all other related transaction expenses) in an amount
closest in equivalent value to the amount of such claim. In such case, the
Holdback Amount shall be reduced by the Security Purchase Price of the
Repurchase Securities so sold, although for purposes of the repurchase
provisions herein payments shall be made by Sub 1 as if it were purchasing the
Repurchase Securities so sold, if Dexia so satisfies any such claim, Sub 1
shall have no right or claims, under this Agreement or otherwise, in respect
of the sold Repurchase Securities. If Dexia has a substantial reason to
believe that there are other similar claims that will be made, Dexia may
similarly withhold amounts from the Holdback Amount or sell Repurchase
Securities. Notwithstanding the foregoing, there shall be no obligation on
Dexia to satisfy any such claims as are referred to in this Section 2.3(d)
first from the Holdback Amount or any Repurchase Securities and in no event
shall the Holdback Amount or the value of the Repurchase Securities represent
a cap on the amount of any such claim. If Dexia withholds any amount pursuant
to this Section 2.3(d) and the claim or potential claims which gave rise to
such withholding is withdrawn, settled, terminated by final judgment or
otherwise determined to be for less than the amount so withheld, Dexia shall
promptly pay to Sub 1 an amount equal to the difference between the amount so
withheld and the actual final amount of the claim.
(e) Dexia shall pass through to Sub 1 all interest, dividends and
distributions paid on the Repurchase Securities. If an extraordinary
distribution or dividend is made on the Repurchase Shares, Dexia may, by
giving written notice to
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Sub 1 at least five business days prior to the date of payment of such
dividend or such distribution, require Sub 1 to repurchase, on the date of
payment of such dividend or such distribution, all of the Repurchase Shares
then held by Dexia for a price per security equal to the relevant Security
Purchase Price. Concurrently with such repurchase and in substitution
therefor, Sub 1 shall sell to Dexia, and Dexia shall purchase from Sub 1, new
Repurchase Securities as set forth in Section 2.3(c)(vii) hereof. Dexia shall
vote the Repurchase Shares at each annual or special meeting of Berkshire
Hathaway shareholders in person or by proxy as instructed by Sub 1 so long as
Dexia receives reasonable advance written notice of such instructions. If
there shall be a liquidation, merger, consolidation, sale of the assets, or
other combination or similar transaction with respect to Berkshire Hathaway
such that the Repurchase Shares are no longer outstanding or are not exchanged
for outstanding common stock of the acquiring or successor corporation, the
proceeds of such transaction shall be distributed to Sub 1 as consideration
therefor and Sub 1 and Dexia shall enter into a similar repurchase arrangement
with respect to such other publicly traded securities as the parties hereto
otherwise agree or, if the parties cannot so agree, Sub 1 shall replace such
securities with U.S. treasury obligations, and all such securities shall be
deemed to be "Repurchase Securities" hereunder.
SECTION 2.4 Closing. The sale and delivery of the Holdings Shares by
White Mountains and Sub 1 and the payment of the Purchase Price (less the
Holdback Amount) to White Mountains (the "Closing") shall take place on the
Effective Date; provided that for the purposes of the Merger and this
Agreement, the Closing shall be deemed to be effective immediately before the
Effective Time.
SECTION 2.5 Substitute Buyer. Dexia may at any time prior to the
Closing substitute as buyer under this Agreement any other Person; provided,
however, that such other Person shall be a Subsidiary of Dexia and Dexia shall
remain fully responsible for the obligations set forth herein and, provided
further, that Dexia shall provide White Mountains with written notice of such
substitution.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SELLERS
Except as may be set forth on a schedule delivered by White
Mountains to Dexia ("Disclosure Schedule") prior to the execution hereof that
sets forth, among other things, items the disclosure of which is necessary or
appropriate in response to an express disclosure requirement contained in a
provision hereof or as an exception to one or more representations and
warranties in Article III or to one or more of the covenants in Article V (the
disclosure of any such item in the Disclosure Schedule shall be disclosure for
the purposes of only that particular Section of this Agreement identified and
not for any other Section), each Seller hereby jointly and severally
represents and warrants to Dexia as follows:
SECTION 3.1 Organization and Good Standing.
(a) Each of Holdings, Services, White Mountains and Sub 1 is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, with full power and authority to conduct its
business as it is now being
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conducted, to own or use the properties (except for Holdings and Services,
which do not own any properties) or assets that it purports to own or use, and
to perform all of its respective obligations under this Agreement.
(b) White Mountains has made available or delivered to Dexia a true,
complete and correct copy of the certificate of incorporation and by-laws (or
equivalent documents including memorandum and articles of association, a
certificate of organization or articles of organization), each as amended to
date, of White Mountains, Sub 1, Services and Holdings (collectively, the
"Organizational Documents") . The Organizational Documents so delivered are in
full force and effect.
SECTION 3.2 Capitalization and Ownership of Shares.
(a) The authorized capital stock of Holdings consists solely of
200,000 shares of common stock, par value $1.00 per share, of which only
106,552 shares of common stock are issued and outstanding. As of the date
hereof, the authorized capital stock of Services consists solely of 5,000,000
shares of common stock, par value $0.01 per share, of which only 3,211,481
shares of common stock are issued and outstanding. All of the issued and
outstanding shares of capital stock of Holdings and all of the shares of
authorized capital stock of Services referred to in this paragraph (a) have
been duly authorized and is validly issued, fully paid and nonassessable.
(b) White Mountains is the indirect and beneficial owner of the Sub
1 Shares and (at the date hereof) of the Services Shares, free and clear of
all Liens. Sub 1 is the sole record and beneficial owner and holder of the
Holdings Shares, free and clear of all Liens. Holdings shall, at the Closing
and pursuant solely to the LLC Transactions, be the sole record and beneficial
owner and holder of the FSA Shares, free and clear of all Liens and shall not
own, directly or indirectly, any shares of capital stock of Services. Services
is, at the date hereof, the sole record and beneficial owner and holder of the
FSA Shares, free and clear of all Liens. Sub 1 shall, immediately before the
transfer and delivery to Dexia of the Repurchase Shares or other Repurchase
Securities (as the case may be), be the sole record and beneficial owner and
holder of the Repurchase Shares or other Repurchase Securities (as the case
may be), free and clear of all Liens.
(c) There are no shares of capital stock or other securities of
Holdings (i) reserved for issuance or (ii) subject to preemptive rights or any
outstanding subscrip tions, options, warrants, calls, rights, convertible
securities or other agreements or other instruments outstanding or in effect
giving any Person the right to acquire any shares of capital stock or other
securities of Holdings or any commitments of any character relating to the
issued or unissued capital stock or other securities of Holdings. Holdings
does not have outstanding any bonds, debentures, notes or other obligations
the holders of which have the right to vote (or convertible into or
exercisable for securities having the right to vote) with the stockholders
Holdings on any matter.
(d) No legend or other reference to any purported Lien appears upon
any certificate representing the Holdings Shares or the FSA shares. The
Holdings Shares were not issued in violation of (i) the Securities Act of
1933, as amended (the "Securities Act"), the securities laws of any state, or
any other federal, state, local, municipal, foreign, international,
multinational, or other constitution, law, rule, standard, requirement,
administrative ruling, order, ordinance, principle of common law, legal
doctrine, code, regulation, statute, treaty or process ("Law") or (ii) any
award, decision,
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injunction, judgment, decree, settlement, order, process, ruling, subpoena or
verdict (whether temporary, preliminary or permanent) entered, issued, made or
rendered by any court, administrative agency, arbitrator, Governmental Entity
(as defined in Section 3.4) or other tribunal of competent jurisdiction
("Order").
(e) Assuming Dexia has the requisite corporate power and authority
to be the lawful owner of the Holdings Shares, upon delivery to Dexia at the
Effective Time of certificates representing the Holdings Shares, duly endorsed
by Sub 1 for transfer to Dexia, and upon the payment of the Purchase Price
(less the Holdback Amount) by Dexia to White Mountains, good title in the
Holdings Shares shall pass to Dexia, free and clear of all Liens, other than
those arising from acts of Dexia or its affiliates. Assuming Dexia has the
requisite corporate power and authority to be the lawful owner of the
Repurchase Shares or other Repurchase Securities, upon delivery to Dexia at
the Effective Time of certificates representing the Repurchase Shares or other
Repurchase Securities (as the case may be), duly endorsed by White Mountains
for transfer to Dexia, good title in the Repurchase Shares or Repurchase
Securities (as the case may be) shall pass to Dexia, free and clear of all
Liens, other than those arising from acts of each of Dexia or its affiliates
and other than from the arrangements set out in Section 2.3. The Repurchase
Shares and the Repurchase Securities shall be registered under the Securities
Act and shall be freely transferable and tradeable without transfer
restrictions of any sort, other than for restrictions on transfer resulting
from the circumstances of Dexia.
SECTION 3.3 Authority. Each of White Mountains and Sub 1 has the
full legal right, requisite power and authority (corporate or otherwise) and
has taken all action (including corporate action) necessary in order to
execute, deliver and perform fully its obligations under this Agreement and to
consummate the transactions contem plated hereby and each of White Mountains,
Sub 1, Holdings and Services has such authority to consummate fully the LLC
Transactions. This Agreement has been duly executed and delivered by each of
White Mountains and Sub 1 and constitutes, assuming the due authorization,
execution and delivery of this Agreement by Dexia, a valid and binding
agreement of each of White Mountains and Sub 1, enforceable against each of
White Mountains and Sub 1 in accordance with its terms.
SECTION 3.4 Consents and Approvals. Except for the notification and
report form required to be filed under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") (such filings, the "HSR Filing"), and except as set
forth in Schedule 3.4 of the Disclosure Schedule, no notices, reports or other
filings are required to be made by White Mountains, Sub 1, Services or
Holdings with, nor are any consents, registrations, approvals, declarations,
permits, expiration of any applicable waiting periods or authorizations
required to be obtained by White Mountains, Sub 1, Services or Holdings from,
any foreign, federal, state, local, municipal, county or other governmental,
quasi-governmental, administrative or regulatory authority, body, agency,
court, tribunal, commission or other similar entity (including any branch,
department or official thereof) ("Governmental Entity"), in connection with
the execution or delivery of this Agreement by White Mountains or Sub 1, the
performance by each of White Mountains or Sub 1 of its obligations hereunder
and the consummation by White Mountains, Sub 1, Services or Holdings of the
transactions contemplated herein (including the LLC Transactions) other than
those the failure of which to obtain would not prevent or materially delay the
Closing or the consummation of the transactions contemplated herein.
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SECTION 3.5 No Violations. The execution and delivery of this
Agreement by White Mountains or Sub 1 does not, and the performance and
consummation of any of the transactions contemplated herein (including the LLC
Transactions), shall not with respect to each of White Mountains, Sub 1,
Services and Holdings, directly or indirectly (with or without the giving of
notice or the lapse of time or both):
(a) violate the Organizational Documents;
(b) conflict with or result in a default (or give rise to any right
of reimbursement, termination, cancellation, modification or acceleration)
under any of the provisions of any contract, note, bond, lease, mortgage,
indenture, license, franchise, permit, agreement or other instrument or
obligation ("Contract") to which White Mountains, Sub 1, any of White
Mountains' Subsidiaries is a party, or by which White Mountains, Sub 1, any of
White Mountains' Subsidiaries or the properties or assets of White Mountains,
Sub 1 or any of White Mountains' Subsidiaries may be bound or affected other
than any such conflict, breach, default or other occurrence that, individually
or in the aggregate, would not have a Material Adverse Effect or would not
adversely affect the ability to transfer good title to the Holdings Shares to
Dexia free and clear of all Liens or the ability to cause Holdings to become
the owner with good title of the FSA Shares free and clear of all Liens or
result in the creation or imposition of any Lien on the Holdings Shares or FSA
Shares or any property or assets owned or used by Holdings.
(c) violate any Law (as defined in Section 3.2(d)), Order (as
defined in Section 3.2(d)) or Governmental Authorization (as defined in
Section 1.1) applicable to White Mountains, Sub 1, Services or Holdings or the
properties or assets of White Mountains, Sub 1, Services or Holdings or result
in the creation or imposition of any Lien upon any of the properties or assets
owned or used by White Mountains, Sub 1, Services or Holdings, other than any
such violation or other occurrence that, individually or in the aggregate,
would not have a Material Adverse Effect or would not adversely affect the
ability to transfer good title to the Holdings Shares to Dexia free and clear
of all Liens or the ability to cause Holdings to become the owner with good
title of the FSA Shares free and clear of all Liens or result in the creation
or imposition of any Lien on the Holdings Shares or FSA Shares or any property
or assets owned or used by Holdings.
SECTION 3.6 Financial Statements, Financial Reports, SEC Documents
and SAP Statements.
(a) Schedule 3.6 of the Disclosure Schedule contains the following
financial statements (collectively, the "Financial Statements"): (i) an
unaudited balance sheet of Holdings as at December 31, 1999, and the related
statement of income, (ii) an unaudited balance sheet of Services as at
December 31, 1999, and the related statement of income, and (iii) an unaudited
consolidated balance sheet of White Mountains as at December 31, 1999, and the
related statements of income and comprehensive income and statement of
shareholders' equity.
(b) The Financial Statements present the financial condition
and the results of operations, of each of Holdings, Services and White
Mountains (and the changes in stockholders' equity and cash flow of White
Mountains) as at the respective dates of and for the periods referred to in
such Financial Statements, all in accordance
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with generally accepted U.S. accounting principles consistently applied,
subject, in the case of unaudited financial statements, to normal recurring
year-end adjustments (the effect of which will not, individually or in the
aggregate, be material in amount or effect) and the absence of notes (that, if
presented, would not differ materially from those included in audited
financial statements). The Financial Statements reflect the consistent
application of such accounting principles throughout the periods involved.
(c) White Mountains's Annual Reports on Form 10-K for the fiscal
years ended December 31, 1997 and 1998 and all other reports, registration
statements, definitive proxy statements or information statements filed by
White Mountains or any of its Subsidiaries subsequent to December 31, 1998
under the Securities Act, or under Section 13(a), 13(c), 14 or 15(d) of the
Securities and Exchange Act of 1934 (the "Exchange Act"), in the form filed
(collectively, "SEC Documents") with the Securities and Exchange Commission,
as of the date filed, (A) complied in all material respects as to form with
the applicable requirements under the Securities Act or the Exchange Act, as
the case may be, and (B) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and each of the balance sheets
contained in or incorporated by reference into any such SEC Document
(including the related notes and schedules thereto) fairly presents the
financial position of White Mountains and its Subsidiaries as of its date, and
each of the statements of income and changes in shareholders' equity and cash
flows or equivalent statements in such SEC Documents (including any related
notes and schedules thereto) fairly presents the results of operations,
changes in shareholders' equity and changes in cash flows, as the case may be,
of White Mountains and its Subsidiaries for the periods to which they relate,
in each case in accordance with generally accepted U.S. accounting principles
consistently applied during the periods involved, except in each case as may
be noted therein and subject to normal year-end audit adjustments.
(d) The Pre-Closing Balance Sheet shall, when delivered in
accordance with the terms hereof, present the financial condition of Services
as at its date, in accordance with generally accepted U.S. accounting
principles consistently applied, subject to normal recurring year-end
adjustments (the effect of which will not, individually or in the aggregate,
be material in amount or effect) and the absence of notes (that, if presented,
would not differ materially from those included in audited financial
statements).
SECTION 3.7 Absence of Certain Changes and Events. Since December
31, 1999 to the date of this Agreement, there has not been any event or
circumstance that, individually, or taken together with other facts,
circumstances and events has had or is reasonably likely to have a Material
Adverse Effect with respect to White Mountains and its Subsidiaries taken as a
whole.
SECTION 3.8 Assets and Liabilities.
(a) Except as set forth in Schedule 3.8(a), Holdings has no
Liabilities. For purposes of this Agreement, the term "Liability" shall mean
any debt, liability, commitment or obligation of any kind, character or nature
whatsoever, whether known or unknown, choate or inchoate, secured or
unsecured, accrued, fixed, absolute, contingent or otherwise, and whether due
or to become due.
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(b) Except as set forth in Schedule 3.8(b) and except for Holdings'
ownership of the Majority Services Shares, Holdings does not own any property
or assets including any real property, leaseholds or other interest in land or
any tangible or intangible personal property. At Closing, Holdings shall have
no assets or Liabilities except for the FSA Shares.
SECTION 3.9 Taxes
(a) All material Tax Returns (as defined in paragraph (n) below)
that are required to be filed on or before the Effective Date by or with
respect to Holdings, have been or will be timely filed on or before the
Effective Date, and all such Tax Returns are or will be true and complete in
all material respects.
(b) All Taxes as (defined in paragraph (n) below) shown to be due on
the Tax Returns referred to in paragraph (a) above have been or will be timely
paid in full.
(c) Except as set forth in Schedule 3.9(c), the Tax Returns referred
to in paragraph (a) above have been examined by the Internal Revenue Service
or the appropriate state, local or foreign taxing authority or the period for
assessment of the Taxes in respect of which such Tax Returns were required to
be filed has expired.
(d) All material deficiencies asserted or assessments made as a
result of such examinations have been paid in full.
(e) Except as set forth in Schedule 3.9(e), no issues that have been
raised by the relevant taxing authority in connection with the examination of
any of the Tax Returns referred to in paragraph (a) above are currently
pending.
(f) Except as set forth in Schedule 3.9(f), no waivers of statutes
of limitation have been given by or requested with respect to any Taxes of
Services or Holdings.
(g) Holdings will not be required, as a result of (A) a change in
accounting method for a Tax period beginning on or before the Effective Date,
to include any adjustment under Section 481(c) of the Code (as defined in
paragraph (n) below) (or any similar provision of state, local or foreign law)
in taxable income for any Tax period beginning on or after the Effective Date,
or (B) any "closing agreement" as described in Section 7121 of the Code (or
any similar provision of state, local or foreign Tax law), to include any item
of income in or exclude any item of deduction from any Tax period beginning on
or after the Effective Date.
(h) There are no material Liens on any of the assets of Holdings
that arose in connection with any failure (or alleged failure) to pay any Tax.
(i) Holdings has never been a member of an affiliated, combined,
consolidated or unitary Tax group for purposes of filing any Tax Return, other
than, for purposes of filing consolidated U.S. Federal income tax returns, a
group of which White Mountains was the common parent.
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(j) No closing agreements, private letter rulings, technical advance
memoranda or similar agreement or rulings have been entered into or issued by
any taxing authority with respect to Holdings.
(k) None of White Mountains, Sub 1, any of White Mountains or Sub
1's affiliates, Holdings or any predecessor to Holdings has made with respect
to any Seller, Holdings, or any predecessor of Holdings any consent under
Section 341 of the Code.
(l) No Tax is required to be withheld pursuant to Section 1445 of
the Code as a result of the transfer contemplated by this Agreement.
(m) As a result of Dexia's purchase of the Holdings Shares, neither
Holdings nor Dexia will be obligated to make a payment to an individual that
would be a "parachute payment" to a "disqualified individual" as those terms
are defined in Section 280G of the Code without regard to whether such payment
is reasonable compensation for personal services performed or to be performed
in the future.
(n) For the purposes of this Agreement, (i) "Code" shall mean the
Internal Revenue Code of 1986, as amended, (ii) "Tax Returns" shall mean all
reports and returns required to be filed with respect to the Taxes and (iii)
"Taxes" shall mean all federal, state, local or foreign income, gross
receipts, windfall profits, severance, property, production, sales, use,
license, excise, franchise, employment, withholding or similar taxes together
with any interest, additions or penalties with respect thereto and any
interest in respect of such additions or penalties.
SECTION 3.10 Employee Benefits; ERISA.
(a) Holdings does not maintain and has never maintained any benefit
or compensation plans, contracts, policies, arrangements, or "employee benefit
plans" within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
(b) Except as set forth in Schedule 3.10(b), each of Services and
Holdings has not incurred and does not expect to incur any liability under
Subtitle IV of ERISA 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 an entity which is considered one employer
with Services or Holdings under Section 4001 of ERISA or Section 414 of the
Code.
SECTION 3.11 Contracts. White Mountains has delivered or made
available to Dexia a true, complete and correct copy of each Contract to which
Services or Holdings is bound.
SECTION 3.12 Business of Services and Runoff. Except for the runoff
of its previous business (the "Runoff Business"), Services has no business or
operations and the Runoff Business is conducted in accordance with the Runoff
Business Plan disclosed in Schedule 3.12 of the Disclosure Schedule.
SECTION 3.13 Holdings Activities. Except as set forth in Schedule
3.13, Holdings has no business or operations, and has had no business or
operations, and
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its activities are limited, and have always been limited, solely to its being
a holding company engaged in holding and owning shares of subsidiaries and
other public companies.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DEXIA
Except as may be set forth on a schedule delivered by Dexia to White
Mountains prior to the execution hereof that sets forth ("Dexia's Disclosure
Schedule"), among other things, items the disclosure of which is necessary or
appropriate in response to an express disclosure requirement contained in a
provision hereof or an exception to one or more representations and warranties
in Article IV or to one or more of the covenants in Article V (the disclosure
of any such item in Dexia's Disclosure Schedule shall be disclosure for the
purposes of only that particular Section of this Agreement identified and not
for any other Section). Dexia hereby represents and warrants to the Sellers as
follows:
SECTION 4.1 Organization and Good Standing. Dexia is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization.
SECTION 4.2 Corporate Authority. Dexia has the full legal right,
requisite corporate power and authority and has taken all corporate action
necessary in order to execute, deliver and perform fully, its obligations
under this Agreement and to consummate the transactions contemplated herein.
This Agreement has been duly executed and delivered by Dexia and constitutes a
valid and binding agreement of Dexia, enforceable against Dexia in accordance
with its terms.
SECTION 4.3 Consents and Approvals; No Violations.
(a) Except for the HSR Filing and except as set forth in Schedule
4.3 of Dexia's Disclosure Schedule, no material notices, reports or other
filings are required to be made by Dexia with, nor are any material consents,
registrations, approvals, declarations, permits, expiration of any applicable
waiting periods or authorizations required to be obtained by Dexia from any
Governmental Entity in connection with the execution or delivery of this
Agreement by Dexia, the performance by Dexia of its obligations hereunder or
the consummation by Dexia of the transactions contemplated herein.
(b) Assuming the making of the HSR Filing and the making of the
other filings and the receipt of the necessary clearances or approvals set
forth in Schedule 4.3 of Dexia's Disclosure Schedule, the execution and
delivery of this Agreement by Dexia does not, and the performance and
consummation by Dexia of any of the transac tions contemplated herein will
not, with respect to Dexia, directly or indirectly (with or without the giving
of notice or the lapse of time or both):
(i) violate (A) any provision of the certificate of
incorporation or by-laws (or equivalent documents) of Dexia or (B)
any resolution adopted by the Board of Directors (or similar
governing body) of Dexia;
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(ii) require Dexia to obtain the consent, waiver,
authorization or approval of, or give notice to, any Person under any
Contract binding upon Dexia; or
(iii) contravene, conflict with, or constitute or result in
a breach or violation of, any material Law or material Order.
SECTION 4.4 Securities Act. Dexia is acquiring the Holdings Shares
for its own account and not with a view to their distribution within the
meaning of the Securities Act in any manner that would be in violation of the
Securities Act.
ARTICLE V
COVENANTS
SECTION 5.1 LLC Transactions.
(a) Each Seller shall cause, and each jointly and severally
covenants and agrees to cause, the outright sale, conveyance, transfer and
assignment of all of the assets and Liabilities of Holdings (except for the
FSA Shares) prior to the Closing.
(b) Each Seller shall cause, and each jointly and severally
covenants and agrees to cause, the LLC Transactions to be fully consummated
prior to the Closing and shall cause Holdings to limit its activities from the
date hereof until the Closing solely to the holding and ownership of shares
which holding and ownership shall, as a result of the LLC Transactions, be
limited to the FSA Shares. Each Seller shall ensure that at the time of the
LLC Transactions and the Closing, Services is adequately capitalized in light
of its obligations and that it has equity capital of not less than $15,000,000
and that it has the capacity to pay its debts as they become due.
SECTION 5.2 No Sale. Each Seller agrees that it will not, and White
Mountains agrees that it will cause each of Sub 1, Services and Holdings not
to, directly or indirectly, sell, transfer, pledge, assign or otherwise
dispose of, or enter into any contract, option, commitment or other
arrangement or understanding with respect to the sale, transfer, pledge,
assignment or other disposition of, any of the Services Shares, the Sub 1
Shares, the Holdings Shares, the Majority Services Shares or the FSA Shares
(except for this Agreement or pursuant to the LLC Transactions).
SECTION 5.3 Reasonable Best Efforts. Subject to the terms and
conditions of this Agreement, the Parties agree to use their reasonable best
efforts in good faith to take, or cause to be taken, all actions, and to do,
or cause to be done, all things necessary, proper or desirable, or advisable
under applicable laws, so as to permit the sale and purchase of the Holdings
Shares as promptly as practicable and otherwise to enable consummation of the
transactions contemplated hereby and shall cooperate fully with the other
Parties hereto to that end.
SECTION 5.4 Press Releases. White Mountains and Dexia agree that
they will not (and White Mountains agrees that it will cause its Subsidiaries
not to), without the prior approval of the other, issue any press release or
written statement for general circulation relating to the transactions
contemplated hereby, except as otherwise required by applicable Law or NYSE
rules.
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SECTION 5.5 Access; Information; Confidentiality.
(a) White Mountains agrees that upon reasonable notice and subject
to applicable Laws relating to the exchange of information, it shall afford
Dexia and its officers, employees, counsel, accountants and other authorized
Representatives, reasonable access during normal business hours throughout the
period prior to the Effective Date to White Mountains', Services' and
Holdings' books, records (including, without limitation, tax returns and work
papers of independent auditors), properties, personnel and to such other
information as Dexia may reasonably request and, during such period, White
Mountains shall furnish promptly to Dexia such other information concerning
its business as Dexia may reasonably request.
(b) Each Party agrees that it will not, and will cause its
Representatives not to, use any information obtained pursuant to this Section
5.5 (as well as any other information obtained prior to the date hereof in
connection with the entering into of this Agreement) for any purpose unrelated
to the consummation of the transactions contemplated by this Agreement.
Subject to the requirements of Law, each Party will keep confidential, and
will cause its Representatives to keep confidential, all information and
documents obtained pursuant to this Section 5.5 (as well as any other
information obtained prior to the date hereof in connection with the entering
into of this Agreement) unless such information (i) was already known to such
Party, (ii) becomes available to such Party from other sources not known by
such Party to be bound by a confidentiality obligation, (iii) is disclosed
with the prior written approval of the Party to which such information
pertains, (iv) is or becomes readily ascertainable from published information
or trade sources or (v) must, in the opinion of such Party, upon written
advice of counsel, be disclosed in order to avoid violating any applicable
Law. In the event that this Agreement is terminated or the transactions
contemplated by this Agreement shall otherwise fail to be consummated, each
Party shall promptly cause all copies of documents or extracts thereof
containing information and data as to another Party hereto to be returned to
the Party which furnished the same or to be destroyed. No investigation by
either Party of the business and affairs of the other shall affect or be
deemed to modify or waive any representation, warranty, covenant or agreement
in this Agreement, or the conditions to either Party's obligation to
consummate the transactions contemplated by this Agreement.
SECTION 5.6 Tax Matters.
(a) Adjustment to Purchase Price. Any payment by the Sellers under
Section 8.1(d) will be an adjustment to the Purchase Price.
(b) Tax Returns. Dexia shall file or cause to be filed when due all
Tax Returns that are required to be filed by or with respect to Holdings and
that are due to be filed after the Effective Date and shall remit any Taxes
due in respect of such Tax Returns. The Sellers shall pay Dexia the Taxes for
which the Sellers are liable pursuant to Section 8.1(d) but which are payable
with Tax Returns to be filed by Dexia pursuant to the previous sentence within
10 days prior to the due date for the filing of such Tax Returns.
(c) Termination of Tax Allocation Agreements. Any tax allocation or
sharing agreement or arrangement, whether or not written, that may have been
entered into by any Seller or any affiliate of any Seller and Holdings shall
be terminated as to
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Holdings as of the Effective Date, and no payments which are owed by or to
Holdings pursuant thereto shall be made thereunder.
(d) Transfer Taxes. The Sellers shall be liable for all transfer
taxes arising from the sale of the Holdings Shares.
(e) Services Reorganization or Contribution. Sellers shall ensure
that Services is not re-organized as a corporation and is not otherwise
treated as an association taxable as a corporation for U.S. Federal tax
purposes, and that it shall not contribute substantially all of its assets to
any corporation or association taxable as a corporation for U.S. Federal tax
purposes.
(f) FIRPTA Certificate. The Sellers shall deliver at Closing a
FIRPTA Certificate as required by Section 1445 of the Code in form and
substance reasonably satisfactory to Dexia.
ARTICLE VI
CONDITIONS TO CLOSING
SECTION 6.1 Conditions to Obligations of Dexia. The obligations of
Dexia to consummate the sale and purchase of the Holdings Shares and to take
the other actions to be taken by Dexia at the Closing is subject to the
satisfaction, at or prior to the Closing (except for Section 6.1(c) which
shall have to be satisfied at all times up to and including the Effective
Date), of each of the following conditions (any of which may be waived in
whole or in part by Dexia):
(a) Representations and Warranties. All of the representations and
warranties of each of White Mountains and Sub 1 set forth in this Agreement
shall be true and correct in all material respects (except for Sections
3.1(a), 3.2, 3.3, 3.4, 3.5, 3.7 and 3.13 as to which in all material respects
shall not apply) as of the date of this Agreement. The representations and
warranties of each of White Mountains and Sub 1 set forth in Sections 3.1(a),
3.2, 3.3, 3.4, 3.5, and 3.13 of this Agreement shall be true and correct as of
the Effective Date.
(b) Covenants. All of the covenants, agreements, undertakings and
obligations that each of White Mountains and Sub 1 is required to perform or
to comply with pursuant to this Agreement at or prior to the Closing, and each
of these covenants, agreements, undertakings and obligations, shall have been
duly performed and complied with in all material respects.
(c) No Material Impairment. Since December 31, 1999, there shall not
have occurred any event or circumstance (other than any event or circumstance
that has resulted in an increase in the liabilities of Services from December
31, 1999 to the date of the Pre-Closing Balance Sheet) that, individually, or
taken together with other facts, circumstances and events, has resulted in, or
would be reasonably likely to result in, (i) White Mountains' credit rating
(x) by Standard & Poor's Ratings Service ("S&P") falling below the lowest
investment grade rating awarded by S&P (which at the date hereof is BBB-) or
(y) by Moody's Investors Service ("Moody's") falling below the lowest
investment grade rating awarded by Moody's (which at the time hereof is Baa3),
or (ii) a decrease in White Mountains consolidated stockholders' equity,
determined in accordance with U.S. generally accepted accounting principles,
to less than $500,000,000
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(the calculation of which shall include the gain on a sale of the FSA Shares
at the per share Merger Consideration less applicable taxes as computed under
U.S. generally accepted accounting principles per share (each such event or
circumstance a "Downgrade Condition")).
(d) Officer's Certificates. Each of White Mountains and Sub 1 shall
have delivered to Dexia a certificate, dated as of the Effective Date and
signed by a senior executive officer or officers of White Mountains (in the
case of the officer's certificate to be delivered by White Mountains) or Sub 1
(in the case of the officer's certificate to be delivered by Sub 1),
representing that the conditions referred to in Sec tions 6.1(a), 6.1(b)
6.1(c) and 6.1(i) as it relates to the LLC Transactions have been satisfied.
(e) Secretary's Certificate. Dexia shall have received copies of the
resolutions of the Board of Directors (or other similar governing body) of
each of White Mountains, Sub 1, and Holdings, authorizing the execution,
delivery and performance of this Agreement and certificates of the secretaries
or assistant secretaries of such corporations dated as of the Effective Date,
to the effect that such resolutions were duly adopted and are in full force
and effect, together with copies of the articles or certificate of
incorporation and by-laws (or equivalent documents) of each such corporation
certified by such officers, and certifying the status, authority and signature
of each of their respective officers who executed and delivered this
Agreement.
(f) No Prohibition. No applicable Law or Order preventing or
impairing the purchase and sale of the Holding Shares by Sub 1 to Dexia on the
terms and conditions of this Agreement or preventing or impairing in a
material way the performance by White Mountains or Sub 1 of their obligations
hereunder shall be in effect.
(g) Receipt of Shares. Dexia shall have received from Sub 1 a
certificate or certificates evidencing all of the then issued and outstanding
Holdings Shares, duly endorsed in blank or accompanied by stock powers duly
executed in blank, in proper form of transfer, with all signatures guaranteed
and with any requisite stock transfer tax stamps properly affixed thereto.
Dexia shall have received from Sub 1 certificates or certificates evidencing
the FSA Shares registered in the name of Holdings. There shall not have been
made or threatened by any Person any claim having a material likelihood of
success asserting that such Person (i) is the holder or the beneficial owner
of, or has the right to acquire or to obtain beneficial ownership of, any
stock of, or any other voting, equity, or ownership interest in, Holdings, or
(ii) is entitled to all or any portion of the Purchase Price payable for the
Holdings Shares.
(h) HSR Act. The waiting period required by the HSR Act, and any
extensions thereof obtained by request or other action by the FTC and/or the
Antitrust Division, shall have expired or been terminated by the FTC and the
Antitrust Division.
(i) LLC Transactions, Repurchase Shares and Pre-Closing Balance
Sheet. The LLC Transactions shall have been consummated and White Mountains
shall have delivered and transferred the Repurchase Shares to Dexia by
delivery and transfer of a certificate or certificates evidencing the same
registered in the name of Dexia and shall have delivered to Dexia the
Pre-Closing Balance Sheet.
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SECTION 6.2 Conditions to Obligations of Sellers. The obligations of
each Seller to consummate the sale and purchase of the Holdings Shares and to
take the other actions to be taken by each Seller at the Closing is subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived in whole or in part by White
Mountains):
(a) No Prohibition. No applicable Law or Order preventing the sale
of the Holdings Shares by the Sellers to Dexia shall be in effect.
(b) Receipt of Purchase Price. White Mountains shall have received
from Dexia the payments required to be made on the Effective Date pursuant to
Section 2.3 hereof.
(c) HSR Act. The waiting period required by the HSR Act, and any
extensions thereof obtained by request or other action by the FTC and/or the
Antitrust Division, shall have expired or been terminated by the FTC and the
Antitrust Division.
SECTION 6.3 Conditions to Obligations of Sellers and Dexia. The
obligations of Dexia and each Seller to consummate the sale and purchase of
the Holdings Shares and to take the other action to be taken by them at
Closing is subject to all conditions to the consummation of Merger set forth
in the Merger Agreement (excluding the conditions set forth in Section 7.02(c)
and Section 7.03(f) thereof) having been satisfied or waived, it being
understood that the Merger shall become effective immediately after the
Closing.
ARTICLE VII
TERMINATION
SECTION 7.1 Termination. With the exception of the Excepted
Provisions (as defined below), which shall survive the termination of this
Agreement, this Agreement shall terminate simultaneously with the termination
of the Merger Agreement and the abandonment of the Merger; provided that
termination of this Agreement will not relieve a breaching party from
liability for any willful breach of this Agreement. "Excepted Provisions"
means Article V, Article VII, Article VIII , and Article IX of this Agreement.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Indemnification and Reimbursement by Sellers. Each
Seller, jointly and severally, shall indemnify and hold harmless Dexia and its
affiliates, Holdings, and their respective successors, permitted assigns,
stockholders, controlling persons, Related Persons and Representatives (each,
a "Dexia Indemnified Party") from and against, and shall reimburse the Dexia
Indemnified Parties for, any and all losses, liabilities, claims, damages,
advances to be made, repurchase obligations and expenses (including costs of
investigation and defense and attorneys' and accountants' fees and all costs
of any in-house personnel and resources) of any kind or nature whatsoever,
whether
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or not involving a third-party claim (all of the foregoing, collectively,
"Damages"), as incurred, arising out of, due to or directly or indirectly in
connection with:
(a) any (i) breach of or inaccuracy in any representation
made by a Seller in this Agreement, including the Disclosure
Schedule, or any other certificate or document delivered in
connection with this Agreement, or (ii) breach or violation of or
failure to perform any covenant, agreement, undertaking or obligation
of White Mountains or Sub 1, whether or not in relation to Holdings
or Services, set forth in this Agreement or any other certificate or
document delivered in connection with this Agreement;
(b) any sale or disposition of any assets, shares or
business prior to the Effective Time by, or on behalf of, White
Mountains, Sub 1, Services, Holdings or any of their respective
Related Persons and any obligations of Services or Holdings or any of
their respective Related Persons to indemnify or hold harmless, or
make any advances or repurchases in respect of any obligation (in the
case of Holdings, prior to the Effective Time) owed to, any Person,
including in connection with the Asset Purchase Agreement, dated as
of March 23, 1999, by and among Source One Mortgage Services
Corporation, as Seller, Fund American Enterprises Holdings, Inc., as
Parent, and Citicorp Mortgage, Inc. as Purchaser;
(c) any conduct, activity, business, acts, omissions,
liabilities or obligations of White Mountains, Sub 1, Services or
Holdings occurring or incurred prior to the Effective Time, including
the LLC Transactions, or any Damages sought (directly or indirectly)
from Services or Holdings by any Person in connection therewith
(whether based on any agency, express or implied partnership or joint
venture, respondent superior, vicarious liability, piercing the
corporate veil, conspiracy or other legal theory whereby liability is
asserted on one Person for or on account of the actions or omissions
of any other Person) whether or not known by Dexia or disclosed to
Dexia prior to the Closing (other than Damages relating to Taxes,
which are dealt with in paragraph (d) below); and
(d) any Taxes (including any obligation to contribute to the
payment of a Tax determined on a consolidated, combined or unitary
basis with respect to a group of corporations that includes or
included Holdings) (i) imposed on any Seller for any taxable year or
(ii) imposed on Holdings or Services or for which Holdings or
Services may otherwise be liable for any Pre-Closing Tax Period or in
respect of events arising on or before the Effective Date.
It is understood and agreed that the foregoing indemnity does not
relate to changes in value of the FSA Shares.
SECTION 8.2 No Expiration of Indemnification. The rights of any
Dexia Indemnified Party pursuant to Article VIII hereof shall survive the
execution and delivery of this Agreement and the Closing indefinitely as shall
all the representations and warranties and the covenants, undertakings or
obligations set forth in this Agreement. The provisions of this Article VIII
are (a) intended to be for the benefit of, and will be enforceable by, each
Dexia Indemnified Party, and (b) are not in addition to
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or substitution for any other right to indemnification or contribution that
any such Person may have by contract or otherwise.
SECTION 8.3 Computation of Losses Subject to Indemnification.
Damages for which a Dexia Indemnified Party would be entitled to
indemnification hereunder shall be quantified on an after-tax basis grossed-up
for any withholding taxes deducted from the indemnity payment and for any
taxes incurred by the Dexia Indemnified Party on the indemnity payment.
SECTION 8.4 Notice and Payment of Claims.
(a) Notice. A Dexia Indemnified Party shall notify White Mountains
in writing as soon as practicable, but not later than twenty (20) days, after
acquiring actual knowledge of, and shall provide to White Mountains as soon as
practicable thereafter reasonable information and documentation necessary to
support and verify, any Damages that the Dexia Indemnified Party shall have
determined to have given, or is reasonably likely to give rise to, a claim for
indemnification hereunder (including by virtue of any Third Party Claim (as
defined in Section 8.5)). Notwithstanding the foregoing, the failure to so
notify White Mountains shall not relieve White Mountains or Sub 1 of any
liability that it may have to any Dexia Indemnified Party, except to the
extent that White Mountains demonstrates that it is materially prejudiced by
the Dexia Indemnified Party's failure to give such notice (unless White
Mountains or any of its Subsidiaries knew of such liability).
(b) Payment. Upon receipt of the notice referred to in Section
8.4(a), White Mountains (without prejudice to each Seller's joint and several
liability hereunder) shall promptly pay any Damages as shall have been claimed
by the Dexia Indemnified Party in immediately available funds in U.S. dollars.
(c) Interest. Any amounts not paid when due pursuant to this Article
VIII shall bear interest from the date thereof until the date paid at a rate
equal to 5% above the "prime rate" as published in The Wall Street Journal.
SECTION 8.5 Procedure for Conduct of Third Party Claims.
(a) Upon receipt by a Dexia Indemnified Party of notice of the
commencement of any Action by a third party (a "Third Party Claim") against
it, such Dexia Indemnified Party shall, if a claim is to be made under this
Article VIII, give notice to White Mountains in writing of the commencement of
such Third Party Claim as soon as practicable, but in no event later than
twenty (20) days after the Dexia Indemnified Party shall have been served;
provided that the failure to so notify White Mountains shall not relieve White
Mountains of any liability that it or Sub 1 may have to any Dexia Indemnified
Party, except to the extent that White Mountains demonstrates that the defense
of such Third Party Claim is materially prejudiced by the Dexia Indemnified
Party's failure to give such notice (unless White Mountains or any of its
Subsidiaries knew of such Third Party Claim). Thereafter, the Dexia
Indemnified Party shall deliver to White Mountains, promptly following the
Dexia Indemnified Party's receipt thereof, copies of all notices and documents
(including court papers) received by the Dexia Indemnified Party relating to
the Third Party Claim.
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(b) If a Third Party Claim is brought against a Dexia Indemnified
Party and the Dexia Indemnified Party gives notice to White Mountains of the
commencement of such Third Party Claim in accordance with paragraph (a) above,
White Mountains shall promptly and in a timely manner and at its sole expense,
assume all aspects of the defense of such Third Party Claim (on behalf of
itself or the relevant Person) with counsel selected by White Mountains that
is reasonably satisfactory to the Dexia Indemnified Party. White Mountains
shall not be liable to the Dexia Indemnified Party for any legal expenses
incurred by the Dexia Indemnified Party in connection with the defense of a
Third Party Claim subsequent to White Mountains's assumption of the defense
thereof. The Dexia Indemnified Party shall have the right to participate in
the defense thereof and to employ counsel (not reasonably objected to by White
Mountains), at its own expense, separate from the counsel employed by White
Mountains, it being understood that White Mountains shall control such
defense. No Dexia Indemnified Party shall admit any liability with respect to,
or settle, compromise or discharge, any such Third Party Claim without White
Mountains's prior written consent. No compro mise, discharge or settlement of,
or admission of liability in connection with, such claims may be effected by
White Mountains (or the relevant Person) without the Dexia Indemni fied
Party's written consent in its sole discretion unless (A) there is no finding
or admission of any violation of Law or any violation of the rights of any
Person and no effect on any other claims that may be made against the Dexia
Indemnified Party and (B) the sole relief provided is monetary damages that
are paid in full by White Mountains. The Dexia Indemnified Party shall
cooperate (at White Mountains's sole expense) in all reasonable respects with
White Mountains in connection with such defense.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Waiver; Amendment. Prior to the Closing, any provision
of this Agreement may be (a) waived by the Party benefitted by the provision
or (b) amended or modified at any time, by an agreement in writing between the
Parties hereto executed in the same manner as this Agreement.
SECTION 9.2 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to constitute an original.
SECTION 9.3 Governing Law. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of New York applicable
to contracts made and to be performed entirely within such State.
SECTION 9.4 Waiver of Jury Trial. Each Party hereto acknowledges and
agrees that any controversy which may arise under this 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 transactions contemplated by this
Agreement. Each Party certifies and acknowledges that (a) 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, (b) each Party understands and has
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considered the implications of this waiver, (c) each Party makes this waiver
voluntarily, and (d) each Party has been induced to enter into this agreement
by, among other things, the mutual waivers and certifications in this Section
9.4.
SECTION 9.5 Notices. All notices, requests and other communications
hereunder to a Party shall be in writing and shall be deemed given if
personally delivered, telecopied (with confirmation) or mailed by registered
or certified mail (return receipt requested) to such Party at its address set
forth below or such other address as such Party may specify by notice to the
parties hereto.
If to White Mountains to:
White Mountains Insurance Group, Ltd.
Crawford House
23 Chruch Street
Hamilton HM11
Bermuda
Attention: Ray Barrette
If to Sub 1, to:
White Mountains Holdings (Barbados) SRL
Summerland House
Prospect
St. James
Barbados, West Indies
With a copy to:
White Mountains Insurance Group, Ltd.
80 South Main Street
Hanover, New Hempshire 03755
Attention: Michael Paquette
Telephone: (603) 643-1567
Facsimile: (603) 643-4562
With a copy (which shall not constitute notice) to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attention: Philip A. Gelston, Esq.
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
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If to Dexia, to:
Dexia S.A.
7 a 11 quai Andre Citroen BP-1002
75 901 Paris Cedex 15
Attention: Jean-Paul Gauzes
Telephone: 331 43 92 81 64
Facsimile: 331 43 92 81 50
With a copy (which shall not constitute notice) to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004-2498
Attention: Mark J. Menting, Esq.
Telephone: (212) 558-4000
Facsimile: (212) 558-3588
SECTION 9.6 Entire Understanding; No Third Party Beneficiaries. This
Agreement represents the entire understanding of the Parties hereto with
reference to the transactions contemplated hereby and this Agreement
supersedes any and all other oral or written agreements heretofore made.
Except as set forth in Article VIII, nothing in this Agreement expressed or
implied, is intended to confer upon any Person, other than the Parties hereto
or their respective successors, any rights, remedies, obligations or
liabilities under or by reason of this Agreement. All Dexia Indemnified
Parties are express third party beneficiaries of Article VIII and are entitled
to directly enforce the provisions thereof.
SECTION 9.7 Expenses. Except as otherwise expressly provided herein,
whether or not the transactions contemplated herein are consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated herein shall be paid by the Party incurring such expense. Without
limiting the generality of the foregoing, each Party shall pay all legal,
accounting and investment banking fees, and other fees to consultants and
advisors incurred by it, relating to this Agreement and the transactions
contemplated herein. White Mountains shall cause Holdings not to incur any
out-of-pocket expenses in connection with this Agreement. In the event of
termination of this Agreement, the obligation of each Party to pay its own
expenses will be subject to any rights of such Party arising from a breach of
this Agreement by another Party. White Mountains shall be liable for, and
shall pay prior to Closing, all transfer taxes arising from the sale of the
Holdings Shares and the Repurchase Shares or other Repurchase Securities.
SECTION 9.8 Specific Performance. Each Seller agrees that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed by it in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that Dexia shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement by any
Seller to enforce specifically the terms and provisions hereof in any court of
the United States or any state having jurisdiction, this being in addition to
any other remedy to which it is entitled at law or in equity and each Seller
waives the posting of any bond or security in connection with any proceeding
related thereto.
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SECTION 9.9 Purpose. It is the intention of White Mountains and Sub
1, jointly and severally, to convey Holdings without any liabilities and
obligations, whether fixed or contingent. To the extent that Holdings is
conveyed with any such liabilities or obligations, White Mountains and Sub 1
shall, in addition to being responsible and liable for all such liabilities
and obligations in accordance with Article VIII, also be responsible for any
and all acts required with respect to such liabilities and obligations and
shall discharge such liabilities and obligations as if they were their own
with a view towards minimizing the acts required on the part of Dexia and its
affiliates. This Agreement shall at all times be interpreted in a manner
consistent with, and in direct furtherance of this purpose.
SECTION 9.10 Interpretation; Effect. When a reference is made in
this Agreement to Sections, or Schedules, such reference shall be to a Section
of, or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and are not part of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation".
SECTION 9.11 Certain Events. Prior to entering into any agreement or
arrangement with respect to, or effecting, any proposed sale, exchange,
dividend or other distribution or liquidation of all or a significant portion
of its assets in one or a series of transactions or if any significant
recapitalization or reclassification of its outstanding securities as a result
of which either White Mountains or a person that becomes the successor to
White Mountains' obligations hereunder suffers, or is reasonably likely to
suffer, a Downgrade Condition, White Mountains shall notify Dexia in writing
thereof (if not previously so notified) and, if requested by Dexia, shall
arrange in connection therewith alternative means of providing for the
obligations of White Mountains set forth in this Agreement, including the
assumption of such obligations by another party, insurance, surety bonds or
the creation of an escrow, in each case in an amount and upon terms and
conditions reasonably satisfactory to Dexia.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers duly authorized as of the date first written
above.
WHITE MOUNTAINS INSURANCE
GROUP, LTD.
By:________________________
Name:
Title:
WHITE MOUNTAINS HOLDINGS
(BARBADOS) SRL
By:________________________
Name:
Title:
DEXIA S.A.
By:________________________
Name:
Title:
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APPENDIX B
April 14, 2000
Board of Directors
Financial Security Assurance Holdings Ltd.
350 Park Avenue
New York, NY 10022
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders (other than Dexia, S.A. ("Dexia") and White Mountains (as defined
below)) of the outstanding shares of Common Stock, par value $0.01 per share
(the "Shares"), of Financial Security Assurance Holdings Ltd. (the "Company") of
the $76.00 per Share in cash to be received by such holders pursuant to the
Agreement and Plan of Merger, dated as of March 14, 2000, among Dexia, Credit
local de France ("CLF"), a wholly-owned subsidiary of Dexia, PAJY Inc., a
wholly-owned subsidiary of Dexia, and the Company (the "Agreement").
You have informed us that, concurrently with the transactions contemplated by
the Agreement, CLF will acquire separately approximately 6.9 million Shares
indirectly through the purchase of the outstanding capital stock of White
Mountains Holdings, Inc. from the stockholders thereof pursuant to the form of
Holdings Purchase Agreement attached as Exhibit D to the Agreement. White
Mountain Holdings, Inc. will acquire such Shares as the result of the
distribution thereof from White Mountains Services, Inc. (such distribution and
acquisition by CLF being, collectively, the "White Mountains Purchase"). Both
White Mountains Holdings, Inc. and White Mountains Services, Inc. are
wholly-owned subsidiaries of White Mountain Insurance Group, Inc. (all of such
entities, collectively, "White Mountains"). Our opinion does not address the
fairness to any person of the White Mountains Purchase.
We also understand that certain shareholders of the Company have discussed with
Dexia the possibility of reinvesting all or a portion of the proceeds from the
merger transaction contemplated by the Agreement in capital stock of the
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2
Company following the transaction (a "Proposed Reinvestment"). You have advised
us that these discussions, in which we have not been involved, have been
terminated. We provide no view with respect to any Proposed Reinvestment.
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 to the Company
from time to time, including having acted as lead manager of the Company's $130
million Senior Quarterly Income Debt Securities ("QUIDS") offering in September
1997 and lead manager on the Company's $100 million QUIDS offering in November
1998 as well as having acted as its financial advisor in connection with, and
having participated in certain of the negotiations leading to, the Agreement.
Robert N. Downey, a former partner and current Senior Director of Goldman, Sachs
& Co., is a director of the Company. We have also from time to time provided
investment banking services to certain of the Company's shareholders. Goldman,
Sachs & Co. is a full service securities firm and in the course of our normal
trading activities may from time to time effect transactions and hold
securities, including derivative securities, of the Company and Dexia for our
own account and the accounts of customers.
In connection with this opinion, we have reviewed, among other things: the
Agreement; the form of Holdings Purchase Agreement attached as Exhibit D to the
Agreement; Annual Reports to Shareholders and Annual Reports on Form 10-K of the
Company for the five years ended December 31, 1999; certain interim reports to
stockholders and Quarterly Reports on Form 10-Q of the Company; Statutory Annual
Statements filed by the issuance subsidiaries of the Company with the insurance
departments of the states under the laws of which they are organized for the
five years ended
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3
December 31, 1999; certain other communications from the Company to its
shareholders; and certain internal financial analyses and forecasts for the
Company prepared by its management. We have also held discussions with members
of the senior management of the Company regarding their assessment of the past
and current business operations, financial conditions and future prospects of
the Company. In addition, we have reviewed the reported price and trading
activity for the Shares, compared certain financial and stock market information
for the Company 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 in 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 discussed with or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. In that
regard, we have assumed, with your consent, that the internal financial
forecasts prepared by the Company's management have been reasonably prepared on
a basis reflecting the best currently available estimates and judgments of the
Company's management. We are not actuaries and our services did not include
actuarial determinations or evaluations by us or any attempt to evaluate
actuarial assumptions. In addition, 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 any of its subsidiaries and we
have not been furnished with any such evaluation or appraisal. In that regard,
we have made no analysis of, and express no opinion as to, the adequacy of the
loss and loss adjustment expense reserves of the Company. We were not requested
to and did not solicit from third parties indications of interest in acquiring
all or part of the Company or in engaging in a business combination or any other
strategic transaction with the Company, except that, at your request, we held
limited discussions with one party regarding the possibility of such a
transaction. Our advisory services and the opinion
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4
expressed herein are provided for the information and assistance of the Board of
Directors of the Company in connection with its consideration of the transaction
contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with respect to 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 $76.00 per
Share in cash to be received by the holders of Shares (other than Dexia and
White Mountains) pursuant to the Agreement is fair from a financial point of
view to such holders.
Very truly yours,
/s/ Goldman, Sachs & Co.
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(GOLDMAN, SACHS & CO.)
