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10(FF)
Option Agreement
Between
State Auto Mutual and
State Auto Financial Corporation
Dated March 11, 1997
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OPTION AGREEMENT
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Option Agreement entered into as of the 11th day of March, 1997
("Option Agreement") by and between STATE AUTOMOBILE MUTUAL INSURANCE COMPANY,
an Ohio corporation ("Mutual"), and STATE AUTO FINANCIAL CORPORATION, an Ohio
corporation ("Financial").
WHEREAS, Mutual heretofore has entered into a Stock Purchase Agreement
dated as of December 12, 1996 ("Stock Purchase Agreement") pursuant to which
Mutual has agreed to purchase from R. W. Houser, Inc. a Wisconsin corporation,
for cash (the "Mutual Acquisition"), all of the issued and outstanding capital
stock of Midwest Security Insurance Company, a Wisconsin corporation
("Midwest"); and
WHEREAS, Pursuant to the terms and provisions of the Stock Purchase
Agreement, Mutual on this date has purchased, and is now the owner of, all of
the outstanding capital stock of Midwest ; and
WHEREAS, Mutual believes its value in Midwest will be enhanced in the
future if Midwest is owned by Financial, Mutual's 66% owned subsidiary; and
WHEREAS, due to capital market uncertainties and the required cash
acquisition price for Midwest , Mutual's liquid capital resources facilitated
the acquisition of Midwest ; and
WHEREAS, Mutual's ultimate objective is to increase its capital
liquidity to provide for continued growth and to enhance its position with
respect to risk base capital requirements, and ownership by Financial of Midwest
would advance these objectives; and
WHEREAS, Financial over a period of time, will have access to capital
markets for the purpose of expanding its business; and
WHEREAS, Financial has an interest in obtaining an option to purchase
Midwest and Mutual is willing to grant Financial such an option, in each case
subject to the terms and provisions of this Option Agreement; and
WHEREAS, This Option Agreement has been reviewed and evaluated by the
Coordinating Committee of the Boards of Directors of Mutual and Financial, and
recommended for approval by such Coordinating Committee, and has been reviewed
and approved by the respective Boards of Directors of Mutual and Financial.
NOW, THEREFORE, in consideration of the mutual provisions herein set
forth and subject to the terms and conditions hereof, the parties hereto agree
as follows:
SECTION 1 - GRANT OF OPTION. In consideration of the payment by
Financial to Mutual of $25,000 ("Option Price"), the receipt and sufficiency of
which by Mutual is hereby acknowledged, and during a period of five (5) years
from the date hereof ("Option Term"), Mutual hereby grants to Financial the
exclusive right and option ("Option") to acquire Midwest, such acquisition, at
the exclusive election of Financial, to be structured as (i) a stock
acquisition, in the form of either the
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acquisition of all of the capital stock of Midwest in exchange for cash, or the
acquisition of all of the capital stock of Midwest in exchange for common
shares, without par value, of Financial ("Financial Common Shares"), or any
combination of cash, and Financial Common Shares or (ii) a statutory merger, in
the form of either the merger of Midwest with and into Financial or a company
affiliated with Financial in exchange for Financial Common Shares or cash or any
combination of Financial Common Shares or cash, or the merger of a company
affiliated with Financial with and into Midwest in exchange for Financial Common
Shares or cash, or any combination of Financial Common Shares or cash, or (iii)
such other form of acquisition and form of consideration as may be agreed upon
by the parties hereto.
SECTION 2 - EXERCISE OF OPTION; DEFINITIVE ACQUISITION AGREEMENT. At
any time during the Option Term Financial may elect to exercise the Option by
delivering written notice of exercise to Mutual setting forth the form of the
acquisition and the form of consideration to be paid ("Election"), together with
a proposed form of acquisition agreement. Upon receipt by Mutual of the Election
and the proposed form of acquisition agreement the parties hereto, subject to
the terms and conditions of this Option Agreement, promptly shall finalize and
execute or cause to be executed and use their reasonable best efforts to secure
any legally required director, shareholder and policyholder approvals of a
definitive acquisition agreement containing usual and customary terms and
provisions ("Definitive Acquisition Agreement"), the parties hereto agreeing to
bargain in good faith with respect to such terms and provisions. In addition,
upon exercise of the Option, Mutual and Financial agree to use their reasonable
best efforts to obtain, as promptly as practicable, all regulatory and
governmental approvals necessary to complete the acquisition.
SECTION 3 - VALUATION OF MIDWEST, OF FINANCIAL COMMON SHARES, AND
FINANCIAL PREFERRED SHARES AND PURCHASE PRICE OF MIDWEST. Upon the Election by
Financial to exercise the Option, the purchase price for Midwest, as set forth
in the Definitive Acquisition Agreement, shall, if the form of the acquisition
is as set forth in Section 1(i) or 1(ii) above, be calculated as follows: (i)
Midwest shall be valued at its GAAP Book Value, as of the month end next
preceding the closing date described in the Definitive Acquisition Agreement,
adjusted through the last business day prior to the closing date described in
the Definitive Acquisition Agreement, times a multiple which is equivalent to
the multiple of Midwest's GAAP Book Value as of December 31, 1996 paid by Mutual
in connection with the Mutual Acquisition provided, however, that if at the time
the Option is exercised, the most recent market value to book value of the
Composite Statistics for the Property and Casualty Industry as published by
Value Line publishing, which index is 127 in its most recent report (1995) (the
"Index") should fall below 102 (the range minimum) or rise above 152 (the range
maximum), then in such event, the multiple pursuant to which the option price is
calculated as described in the preceding sentence shall be adjusted by
increasing the multiple by the amount by which the Index exceeds the range
maximum or by decreasing the multiple by the amount by which the Index is less
than the range minimum, as the case may be; (ii) Financial Common Shares shall
be valued at their closing sale price as reported on the NASDAQ National Market
System on the last business day prior to the closing date described in the
Definitive Acquisition Agreement, and (iii) Financial Preferred Shares shall be
valued at 100% of their call price, as described below. As used herein, GAAP
Book Value of Midwest means the assets, less liabilities, of Midwest, prepared
in accordance with generally accepted accounting principles.
Cash and Financial Common Shares or any combination thereof, with a
value, calculated as set forth above, equal to the value of Midwest, calculated
as set forth above, shall be delivered by
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Financial to Mutual on the closing date described in the Definitive Acquisition
Agreement in exchange for all of the outstanding capital stock of Midwest (or in
exchange for causing the merger of Midwest with and into Financial or a company
affiliated with Financial or the merger of a company affiliated with Financial
with and into Midwest) and shall represent the purchase price for Midwest .
Upon the Election of Financial to exercise the Option, the purchase
price for Midwest, as set forth in the Definitive Acquisition Agreement, shall,
if the form of the acquisition is as set forth in Section 1(iii) above, be
calculated in a manner to be agreed upon by the parties hereto.
SECTION 4 - RESTRICTIONS ON DISPOSITION AND REGISTRATION RIGHTS. Any
Financial Common Shares (together called "Shares") issued by Financial to Mutual
in connection with the Definitive Acquisition Agreement may be issued in
reliance upon an exemption from registration under the Securities Act of 1933,
as amended ("1933 Act") provided by Section 4(2) of the 1933 Act or any other
exemption deemed appropriate by Financial. As such, the Shares so received by
Mutual will be restricted as to their disposition and may not be sold or
otherwise disposed of by Mutual in the absence of (i) their registration under
the 1933 Act or, in the alternative, (ii) the receipt by Financial of an opinion
of counsel, reasonably acceptable in form and in substance to Financial, stating
that such registration is not required.
If at any time after Mutual has received Shares of Financial in
connection with the Definitive Acquisition Agreement Financial files a
registration statement with the Securities and Exchange Commission
("Commission") on Form S-1, S-2 or S-3 with respect to Financial Common Shares,
then at Mutual's written request and subject to Mutual's bearing its
proportionate share of the registration expenses and any underwriting discount,
Financial agrees to include up to 100% of the Shares of Mutual so acquired as
part of Financial's registration statement, subject to Mutual's compliance with
the appropriate provisions of the 1933 Act and the rules and regulations
promulgated thereunder and to Mutual's agreement to the reasonable requests of
any managing underwriter(s) in connection with such registration.
In addition, Financial agrees, at the written request of Mutual
received by Financial during a period of twenty-four (24) months after Mutual's
receipt of Shares of Financial pursuant to the Definitive Acquisition Agreement,
to use its best efforts to prepare and file with the Commission a registration
statement on Form S-1, S-2 or S-3 (to the extent Financial qualifies for the use
of such Forms) to register such Shares under the 1933 Act and to use its best
efforts to cause such registration statement to be declared effective, provided,
however, that Mutual shall bear all costs and expenses of such registration
statement.
SECTION 5 - REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF MUTUAL.
Mutual represents and warrants to Financial that (i) Mutual is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Ohio and has full corporate power and authority to own its properties
and assets and to carry on the business as it is now being conducted, (ii)
Midwest is a corporation duly incorporated, validly existing and in good
standing under the laws of Wisconsin and has the full corporate power and
authority to own its property and assets and to carry on the business as it is
now being conducted, (iii) Mutual is the legal and beneficial owner of 1500
common shares, no par value, of Midwest, free and clear of any claim, lien,
security interest, pledge, restriction on transfer or encumbrance, such 1500
common shares, with no par value, representing all of the outstanding capital
stock of Midwest and the only authorized class of capital stock of
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Midwest, (iv) there are no options, warrants or rights of any nature whatsoever
outstanding to purchase common shares, no par value, of Midwest , and no
outstanding securities of any nature which are convertible into or exchangeable
for common shares, with no par value, of Midwest, (v) Mutual has the corporate
power and authority to enter into and perform its obligations under this Option
Agreement, (vi) the execution, delivery and performance by Mutual of its
obligations hereunder does not and will not result in the breach or violation of
any covenant or agreement to which Mutual or Midwest is a party or by which
Mutual or Midwest or their property may be bound, and (vii) Mutual has received
all federal, state and local regulatory approvals that may be necessary to enter
into and to perform its obligations under this Option Agreement, except for
approvals that may be required under state insurance laws in the States of Ohio
and Wisconsin and for such filing as is required under the Hart-Scott-Rodino
Anti-trust Improvements Act of 1976, to occur upon exercise of the Option and
which shall be a condition to Mutual's and Financial's obligations to consummate
the transactions contemplated by the Definitive Acquisition Agreement.
Mutual agrees with Financial that from and after the date hereof and
until the first to occur of the execution of the Definitive Acquisition
Agreement, the expiration of the Option Term or the agreement of the parties
hereto to terminate this Option Agreement, Mutual (i) shall make or cause to be
made available to Financial, its representatives, attorneys, accountants and
agents, for their review and examination, all of the books, records, financial
statements, agreements, licenses, tax returns and other records and documents of
or concerning Midwest and will cause the officers and directors of Midwest and
of Mutual to be available for inquiries about Midwest, subject, in each case, to
the treatment of such information by the recipients thereof as confidential and
to the execution by Mutual and the recipients of such information of a mutually
acceptable Confidentiality Agreement, (ii) will cause the business of Midwest to
be conducted only in the usual, regular and ordinary course, and, among other
matters, without the prior consent of Financial, will not permit any change in
the capital structure of Midwest, including, without limitation, the issuance of
any options or rights to purchase common shares, no par value, of Midwest or the
issuance of any security convertible into such common shares, (iii) will not
sell, transfer or assign Midwest or any of its capital stock or pledge or grant
a security interest in any of the capital stock of Midwest, (iv) will not
willfully undertake any action which would cause the representations and
warranties set forth in the preceding paragraph (other than the disclaimer as to
regulatory approval set forth in clause vii thereof) to become false, and (v)
will cause the existence of this Option Agreement to be noted on the stock
certificate or certificates representing Mutual's ownership of all of the
outstanding capital stock of Midwest.
SECTION 6 - MISCELLANEOUS PROVISIONS. Mutual and Financial agree that
(i) none of the rights created hereunder may be assigned, and none of the duties
created hereunder may be delegated, without the prior written consent of the
other party hereto, (ii) any written notice hereunder, including the Election,
shall be in writing and shall be deemed to have been duly received on the date
given, if delivered personally or by telegram, telex or telecopy, or on the date
received if mailed by registered or certified mail to the parties at the
following addresses (or such other address for a party as may be specified by
like notice): If to Mutual -- State Automobile Mutual Insurance Company, 518
East Broad Street, Columbus, Ohio 43216, Attention: Robert H. Moone, President;
if to Financial -- State Auto Financial Corporation, 518 East Broad Street,
Columbus, Ohio 43216, Attention: Steven J. Johnston, Treasurer (iii) this Option
Agreement constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof, and (iv) this Option Agreement shall be
governed in all respects by the laws of the State of Ohio.
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IN WITNESS WHEREOF, the parties hereto, being duly authorized, have
executed this Option Agreement as of the date first set forth above.
STATE AUTOMOBILE MUTUAL INSURANCE
COMPANY
/s/Robert H. Moone
Robert H. Moone
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President
STATE AUTO FINANCIAL CORPORATION
/s/Urlin G. Harris, Jr.
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Urlin G. Harris, Jr.
Executive Vice President