EXHIBIT 2.1
AGREEMENT AND
PLAN OF MERGER
AMONG
USF&G CORPORATION,
UNITED STATES FIDELITY AND GUARANTY COMPANY,
AND
TITAN HOLDINGS, INC.
DATED AS OF AUGUST 7, 1997
TABLE OF CONTENTS
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ARTICLE I
THE MERGER
1.1 The Merger.......................................................................................... 1
1.2 Closing............................................................................................. 1
1.3 Effective Time...................................................................................... 2
1.4 Effects of the Merger............................................................................... 2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; MERGER CONSIDERATION;
EXCHANGE OF CERTIFICATES; WARRANTS AND OPTIONS
2.1 Effect on Capital Stock............................................................................. 2
2.2 Company Common Stock Elections...................................................................... 4
2.3 Proration........................................................................................... 6
2.4 Tax Adjustment...................................................................................... 7
2.5 Dividends, Fractional Shares, Etc................................................................... 7
2.6 Warrants............................................................................................ 8
2.7 Stock Options....................................................................................... 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company....................................................... 9
3.2 Representations and Warranties of Parent and USF&G.................................................. 32
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of the Company............................................................................ 36
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Form S-4 and Proxy Statement; Shareholder Meeting; Comfort Letters................... 41
5.2 Contract and Regulatory Approvals................................................................... 42
5.3 HSR Filings......................................................................................... 43
5.4 Access to Information; Confidentiality.............................................................. 43
5.5 Fees and Expenses................................................................................... 44
5.6 Indemnification..................................................................................... 44
5.7 Reasonable Best Efforts............................................................................. 46
5.8 Public Announcements................................................................................ 46
5.9 Environmental Studies............................................................................... 46
5.10 Affiliates.......................................................................................... 46
5.11 Support Agreement................................................................................... 46
5.12 Cooperation......................................................................................... 46
5.13 NYSE Listing........................................................................................ 47
5.14 Benefit Plans and Employee Arrangements............................................................. 47
5.15 Tax-Free Reorganization............................................................................. 47
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5.16 Tri-West............................................................................................ 47
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger.......................................... 47
6.2 Conditions to Obligations of Parent and USF&G....................................................... 48
6.3 Conditions to Obligation of the Company............................................................. 49
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination......................................................................................... 49
7.2 Effect of Termination............................................................................... 50
7.3 Amendment........................................................................................... 50
7.4 Extension; Waiver................................................................................... 51
ARTICLE VIII
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and Agreements........................................... 51
8.2 Notices............................................................................................. 51
8.3 Interpretation...................................................................................... 52
8.4 Counterparts........................................................................................ 52
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership................................. 52
8.6 Governing Law....................................................................................... 52
8.7 Assignment.......................................................................................... 52
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of August 7, 1997 (the
"AGREEMENT"), is made and entered into by and among USF&G Corporation, a
Maryland corporation ("PARENT"), United States Fidelity and Guaranty Company, a
Maryland corporation and a wholly owned subsidiary of Parent ("USF&G"), and
Titan Holdings, Inc., a Texas corporation (the "COMPANY").
WHEREAS, the respective Boards of Directors of the Company, Parent and USF&G
have determined that the merger of the Company with and into USF&G (the
"MERGER"), upon the terms and subject to the conditions set forth in this
Agreement, would be fair to and in the best interests of their respective
shareholders, and such Boards of Directors have approved the Merger, pursuant to
which each share of common stock, par value $0.01 per share, of the Company (the
"COMPANY COMMON STOCK") issued and outstanding immediately prior to the
Effective Time (as defined in Section 1.3) (other than (a) shares of Company
Common Stock owned, directly or indirectly, by the Company, any Subsidiary (as
defined in Section 3.1(c)) of the Company, Parent or USF&G or any Subsidiary of
USF&G or Parent and (b) Dissenting Shares (as defined in Section 2.1(e))) will
be converted into, subject to the terms hereof, the right to receive the Merger
Consideration (as defined in Section 2.1(c));
WHEREAS, the Merger requires, for the approval thereof, the affirmative vote
of two-thirds of each of (a) the outstanding shares of the Company Common Stock
(the "Company Shareholder Approval") and (b) the outstanding shares of USF&G's
common stock, par value $2.50 per share (the "USF&G COMMON STOCK");
WHEREAS, Parent and USF&G are unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, Mark E.
Watson, Jr., in his capacity as a shareholder of the Company, enters into a
voting and support agreement with Parent and USF&G, the form of which is
attached hereto as Exhibit A (the "SUPPORT AGREEMENT");
WHEREAS, Parent, USF&G and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, it is intended that the Merger constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "CODE"), and that this Agreement shall constitute a "plan of
reorganization" for purposes of the Code.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the Texas Business Corporation Act
("TBCA") and the Maryland General Corporation Law ("MGCL"), the Company
shall be merged with and into USF&G at the Effective Time. At the Effective
Time, the separate corporate existence of the Company shall cease and USF&G
shall continue as the surviving corporation (USF&G and the Company are
sometimes hereinafter referred to as "CONSTITUENT CORPORATIONS" and, as the
context requires, USF&G is sometimes hereinafter referred to as the
"SURVIVING CORPORATION"). The name of the Surviving Corporation shall be
United States Fidelity and Guaranty Company.
1.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "CLOSING") shall take
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place at 10:00 a.m., Chicago, Illinois time, on the second business day
after satisfaction and/or waiver of all of the conditions set forth in
Article VI (the "CLOSING DATE"), at the offices of Mayer, Brown & Platt, 190
South LaSalle Street, Chicago, Illinois 60603, unless another date, time or
place is agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME. Subject to the provisions of this Agreement, the
parties hereto shall cause the Merger to be consummated by filing articles
of merger (the "ARTICLES OF MERGER") with the Secretary of State of the
State of Texas, as provided in the TBCA, and the Maryland State Department
of Assessments and Taxation, as provided in the MGCL, as soon as practicable
on or after the Closing Date. The Merger shall become effective upon the
acceptance for record of such filings or at such time thereafter as is
provided in the Articles of Merger (the "EFFECTIVE TIME").
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects as set
forth in the applicable provisions of the TBCA and MGCL.
(a) The Articles of Incorporation of USF&G shall be the Articles of
Incorporation of the Surviving Corporation until duly amended in
accordance with the terms thereof and the MGCL.
(b) The Bylaws of USF&G (the "USF&G BYLAWS") shall be the Bylaws of
the Surviving Corporation until thereafter amended as provided by
applicable law, the Surviving Corporation's Articles of Incorporation or
the Bylaws.
(c) The directors of USF&G immediately prior to the Effective Time
shall be the directors of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
(d) The officers of USF&G at the Effective Time shall, from and after
the Effective Time, be the officers of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; MERGER CONSIDERATION;
EXCHANGE OF CERTIFICATES; WARRANTS AND OPTIONS
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any further action on the part of the holder of any
shares of Company Common Stock or the holder of any shares of USF&G Common
Stock:
(a) CAPITAL STOCK OF USF&G. Each share of USF&G Common Stock issued
and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of
common stock, par value $2.50 per share of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND COMPANY COMMON STOCK OWNED BY
USF&G OR PARENT. Each share of Company Common Stock that is owned by the
Company, any Subsidiary of the Company, Parent or USF&G or any Subsidiary
of Parent or USF&G shall automatically be canceled and retired and shall
cease to exist, and no stock of Parent or other consideration shall be
delivered or deliverable in exchange therefor.
(c) MERGER CONSIDERATION. Subject to Sections 2.1(b) and (e) and
Section 2.3, at the Effective Time each issued and outstanding share of
Company Common Stock shall be converted
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into, at the election of the holder thereof, one of the following (as
adjusted pursuant to this Article II), (the "Merger Consideration"):
(i) for each such share of Company Common Stock (other than shares as to
which a Stock Election or Cash Election (each as defined below) has
been made), the right to receive (x) 0.46516 (the "STANDARD EXCHANGE
RATIO") of a share of the Common Stock, $2.50 par value per share
(including the associated Parent Rights (as defined below), "PARENT
COMMON STOCK"), of Parent (the "Standard Stock Consideration") and
(y) an amount in cash, without interest, equal to $11.60 (the
"STANDARD CASH CONSIDERATION" and, together with the Standard Stock
Consideration, the "STANDARD CONSIDERATION"); provided, however,
that
(1) in the event the Average Stock Price is greater or less than
$24.94 but not greater than $28.68 or less than $21.20, the
allocation of the consideration between stock and cash will be
adjusted to maintain a 50% stock, 50% cash relationship by
adjusting the Standard Cash Consideration to an amount equal to
0.50 times the product of (a) $23.20 times (b) 1 plus the product
of (i) 0.50 times (ii) a fraction the numerator of which is the
Average Stock Price minus $24.94 and the denominator of which is
$24.94 and adjusting the Standard Exchange Ratio to an amount
equal to the quotient obtained by dividing the Standard Cash
Consideration as so adjusted by the Average Stock Price; and
(2) in the event the Average Stock Price is greater than $28.68, the
Standard Cash Consideration shall be an amount equal to $12.47
and the Standard Exchange Ratio shall be equal to the quotient
obtained by dividing $12.47 by the Average Stock Price; and
(3) in the event the Average Stock Price is less than $21.20, the
Standard Cash Consideration shall be an amount equal to $10.73
and the Standard Exchange Ratio shall be equal to the quotient
obtained by dividing $10.73 by the Average Stock Price.
(ii) for each such share of Company Common Stock with respect to which
an election to receive solely Parent Common Stock has been
effectively made and not revoked or lost pursuant to Sections
2.2(c), (d) or (e), the right to receive 2.0 times the Standard
Exchange Ratio as determined by (c)(i) above (the "STOCK EXCHANGE
RATIO") of a share of Parent Common Stock (the "STOCK
CONSIDERATION"); or
(iii) for each such share of Company Common Stock with respect to which
an election to receive solely cash has been effectively made and
not revoked or lost pursuant to Section 2.2(c), (d) or (e), the
right to receive in cash, without interest, in an amount equal to
2.0 times the Standard Cash Consideration as determined pursuant to
(i) above (the "CASH CONSIDERATION"); provided, however, that (1)
in the event the Average Stock Price is less than $21.20, the Cash
Consideration shall be equal to $21.46 and (2) in the event the
Average Stock Price is more than $28.68, the Cash Consideration
shall be equal to $24.94.
"AVERAGE STOCK PRICE" means the average of the Closing Market Prices (as
hereinafter defined) for the ten consecutive trading days ending on the third
trading day prior to the Effective Time; PROVIDED, HOWEVER, that the Average
Stock Price used for purposes of the calculations in this Article II shall not
in any event be less than $17.46. The "CLOSING MARKET PRICES" for any trading
day means the closing sales price of Parent Common Stock as reported in the New
York Stock Exchange Composite Tape for that day.
(d) CANCELLATION AND RETIREMENT OF COMPANY COMMON STOCK. As a
result of the Merger and without any action on the part of the holder
thereof, at the Effective Time and except as provided in Sections 2.1(b)
and (e), all shares of Company Common Stock shall cease to be outstanding
and shall be canceled and retired and shall cease to exist, and each
holder of such shares of Company Common Stock shall thereafter cease to
have any rights with respect to such
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shares of Company Common Stock, except the right to receive, without
interest, the Merger Consideration and cash for fractional shares of
Parent Common Stock in accordance with Section 2.5(c) upon the surrender
of a certificate representing such shares of Company Common Stock (a
"COMPANY CERTIFICATE").
(e) DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, holders of Company Common Stock that have, as of the
Effective Time, complied with all procedures necessary to assert
appraisal rights in accordance with the TBCA, if applicable, shall have
such rights, if any, as they may have pursuant to Section 5.12 of the
TBCA and such Company Common Stock shall not be converted or be
exchangeable as provided in this Section 2.1, but such holders shall be
entitled to receive such payment as may be determined to be due to such
holders pursuant to the TBCA; PROVIDED, HOWEVER, that if such holder
shall have failed to perfect or shall have effectively withdrawn or lost
his right to appraisal and payment under the TBCA, such holder's Company
Common Stock shall thereupon be deemed to have been converted and to have
become exchangeable, as of the Effective Time, into the Standard
Consideration. The Company Common Stock described in this Section 2.1(e)
held by holders who exercise and perfect appraisal rights are referred to
herein as "DISSENTING SHARES." The Company shall give Parent prompt
notice of any demands for appraisal of shares received by the Company
(and shall also give Parent prompt notice of any withdrawals of such
demands for appraisal rights) and Parent shall have the opportunity and
right to participate in and direct all negotiations with respect to such
demands. The Company shall not, except with the prior written consent of
Parent, make any payment with respect to, settle or otherwise negotiate
or offer to settle any such demand for appraisal rights. Parent agrees
that it shall make all payments with respect to appraisal rights and that
the funds therefor shall not come, directly or indirectly, from the
Company.
2.2 COMPANY COMMON STOCK ELECTIONS
(a) ELECTIONS. Each person who, at the Effective Time, is a record
holder of shares of Company Common Stock (other than holders of shares of
Company Common Stock to be canceled as set forth in Section 2.1(b) or of
Dissenting Shares) shall have the right to submit an Election Form (as
defined in Section 2.2(c)) specifying that such person desires to have
all of the shares of Company Common Stock owned by such person converted
into the right to receive either (i) the Standard Consideration (a
"STANDARD ELECTION") (ii) the Stock Consideration (a "STOCK ELECTION"),
or (iii) the Cash Consideration (a "CASH ELECTION").
(b) DEPOSIT OF EXCHANGE FUND. Promptly after the Allocation
Determination (as defined in Section 2.2(d)), Parent shall deposit (or
cause to be deposited) with a bank or trust company to be designated by
Parent and reasonably acceptable to the Company (the "EXCHANGE AGENT"),
for the benefit of the holders of shares of Company Common Stock, for
exchange in accordance with this Article II, (i) cash in an amount
sufficient to pay the aggregate cash portion of the Merger Consideration
in accordance with this Article II and (ii) certificates representing
shares of Parent Common Stock ("PARENT CERTIFICATES") for exchange in
accordance with this Article II (the cash and certificates deposited
pursuant to clauses (i) and (ii) being hereinafter referred to as the
"EXCHANGE FUND").
(c) METHOD OF ELECTION; DEEMED STANDARD ELECTION. As soon as
reasonably practicable after the Effective Time, the Exchange Agent shall
mail to each holder of record of Company Common Stock immediately prior
to the Effective Time (excluding any shares of Company Common Stock which
(i) are canceled pursuant to Section 2.1(b), or (ii) are Dissenting
Shares) (A) a letter of transmittal (the "COMPANY LETTER OF TRANSMITTAL")
(which shall specify that delivery shall be effected, and risk of loss
and title to the Company Certificates shall pass, only upon delivery of
such Company Certificates to the Exchange Agent and shall be in such form
and have
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such other provisions as Parent shall specify), (B) instructions for use
in effecting the surrender of the Company Certificates in exchange for
the Merger Consideration with respect to the shares of Company Common
Stock formerly represented thereby, and (C) an election form (the
"ELECTION FORM") providing for such holders to make the Standard
Election, the Cash Election or the Stock Election. As of the Election
Deadline (as defined in Section 2.2(d)) all holders of Company Common
Stock immediately prior to the Effective Time (excluding any shares of
Company Common Stock that (i) are canceled pursuant to Section 2.1(b) or
(ii) are Dissenting Shares) that shall not have properly submitted to the
Exchange Agent, or that shall have properly revoked, an effective and
properly completed Election Form shall be deemed to have made a Standard
Election (each a "DEEMED STANDARD ELECTION").
(d) ELECTION DEADLINE. Any Cash Election, Standard Election, or
Stock Election shall have been validly made only if the Exchange Agent
shall have received by 5:00 p.m. New York City time on a date (the
"ELECTION DEADLINE") to be mutually agreed upon by Parent and the Company
(which date shall not be later than the twentieth business day after the
Effective Time), an Election Form properly completed and executed (with
the signature or signatures thereof guaranteed to the extent required by
the Election Form) by such holder accompanied by such holder's Company
Certificates, or by an appropriate guarantee of delivery of such Company
Certificates from a member of any registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company in the United States as set forth in
such Election Form. Any holder of Company Common Stock that has made an
election by submitting an Election Form to the Exchange Agent may at any
time prior to the Election Deadline change such holder's election by
submitting a revised Election Form, properly completed and signed that is
received by the Exchange Agent prior to the Election Deadline. Any holder
of Company Common Stock may at any time prior to the Election Deadline
revoke such holder's election and withdraw such holder's Company
Certificate deposited with the Exchange Agent by written notice to the
Exchange Agent received by the close of business on the day prior to the
Election Deadline. As soon as practicable after the Election Deadline
(but in no event later than ten business days after the Election
Deadline), the Exchange Agent shall determine the allocation of the cash
portion and stock portion of the Merger Consideration and shall notify
Parent of its determined allocation (the "ALLOCATION DETERMINATION").
(e) NO FURTHER OWNERSHIP RIGHTS IN COMPANY. From and after the
Effective Time, each holder of a certificate that immediately prior to
the Effective Time represented outstanding shares of Company Common
Stock, shall, upon surrender of such certificate for cancellation to the
Exchange Agent, together with the Company Letter of Transmittal, duly
executed, and such other documents as Parent or the Exchange Agent shall
reasonably request, be entitled to receive promptly after the Election
Deadline in exchange therefor (A) a check in the amount equal to the
cash, if any, which such holder has the right to receive pursuant to the
provisions of this Article II (including any cash in lieu of fractional
shares of Parent Common Stock), and (B) a Parent Certificate representing
that number of shares of Parent Common Stock, if any, which such holder
has the right to receive pursuant to this Article II (in each case less
the amount of any required withholding taxes), and the Company
Certificate so surrendered shall forthwith be canceled. Until surrendered
as contemplated by this Section 2.2(e), each Company Certificate shall be
deemed at any time after the Effective Time to represent only the right
to receive the Merger Consideration with respect to the shares of Company
Common Stock formerly represented thereby. If any certificate for shares
of Parent Common Stock to be issued in the Merger is to be issued in a
name other than that in which the certificate for shares of Company
Common Stock surrendered in exchange therefor is registered, it shall be
a condition of such issuance that the person requesting such issuance
shall pay any transfer or other tax required by reason of the issuance of
certificates for such shares of Parent Common Stock in a name other than
that of the
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registered holder of the certificate surrendered, or shall establish to
the satisfaction of Parent or its agent that such tax has been paid or is
not applicable.
(f) RULES GOVERNING ELECTIONS. Parent shall have the right to make
rules, not inconsistent with the terms of this Agreement, governing the
validity of the Election Forms, the manner and extent to which Standard
Elections, Cash Elections or Stock Elections are to be taken into account
in making the determinations prescribed by Section 2.3, the issuance and
delivery of certificates for Parent Common Stock into which shares of
Company Common Stock are converted in the Merger, and the payment of cash
for shares of Company Common Stock converted into the right to receive
cash in the Merger.
2.3 PRORATION.
(a) As is more fully set forth below, the maximum number of shares of
Parent Common Stock issuable to holders of Company Common Stock (the
"MAXIMUM NUMBER OF PARENT SHARES") shall not exceed the product of (x)
the Standard Exchange Ratio and (y) the number of Outstanding Company
Shares (as defined below).
(b) As is more fully set forth below, the aggregate amount of cash to
be paid to holders of Outstanding Company Shares (as defined below) (the
"Maximum Cash Amount") shall not exceed the product of (x) the Standard
Cash Consideration and (y) the number of Outstanding Company Shares.
"OUTSTANDING COMPANY SHARES" shall mean those shares of Company Common
Stock outstanding immediately prior to the Effective Time.
(c) In the event that the aggregate number of shares of Parent Common
Stock issuable pursuant to the Stock Elections received by the Exchange
Agent exceeds an amount equal to the Maximum Number of Parent Shares
minus the number of shares of Parent Common Stock issuable pursuant to
Standard Elections and Deemed Standard Elections, including any
fractional shares of Parent Common Stock for which a cash adjustment
shall be paid pursuant to Section 2.5(c) (such difference, the "REMAINING
PARENT SHARES"), each holder making a Stock Election shall receive, for
each share of Company Common Stock held by such holder, (x) a number of
shares of Parent Common Stock equal to the quotient obtained by dividing
(i) the Remaining Parent Shares by (ii) the aggregate number of shares of
Company Common Stock held by holders making Stock Elections (the "STOCK
ELECTION COMPANY SHARES"), plus (y) cash in an amount equal to the
quotient obtained by dividing (iii) the Remaining Stock Election Cash
Amount (as defined below) by (iv) the Stock Election Company Shares. The
"REMAINING STOCK ELECTION CASH AMOUNT" shall be equal to the Maximum Cash
Amount minus the sum of (i) the aggregate amount of cash payable pursuant
to, or with respect to, Standard Elections, Deemed Standard Elections,
Cash Elections, Dissenting Shares and fractional shares and (ii) the
aggregate amount of consideration transferred by Parent in acquiring the
Parent Shares (as defined below). "PARENT SHARES" means any and all
shares of Company Common Stock that are (i) owned by Parent or USF&G and
(ii) canceled and retired at the Effective Time pursuant to Section
2.1(b). For purposes of this paragraph and the following paragraph, the
aggregate amount of cash payable with respect to Dissenting Shares shall
be deemed to be the product of (x) the number of Dissenting Shares times
(y) the sum of (i) the Standard Cash Consideration and (ii) the product
of the Standard Exchange Ratio times the Average Stock Price.
(d) In the event that the aggregate amount of cash payable pursuant
to Cash Elections received by the Exchange Agent exceeds the Maximum Cash
Amount minus the sum of (i) the aggregate amount of cash payable pursuant
to Standard Elections and Deemed Standard Elections, (ii) the aggregate
amount of cash payable with respect to the Dissenting Shares and
fractional shares and (iii) the aggregate amount of consideration
transferred by Parent in acquiring the Parent Shares (such difference,
the "REMAINING CASH"), each holder making a Cash Election shall receive,
for each share of Company Common Stock held by such holder, (x) cash in
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an amount equal to the quotient obtained by dividing the (i) Remaining
Cash by (ii) the aggregate number of shares of Company Common Stock held
by holders making Cash Elections (the "CASH ELECTION COMPANY SHARES"),
plus (y) a number of shares of Parent Common Stock equal to the quotient
obtained by dividing (iii) the Remaining Cash Election Parent Shares (as
defined below) by (iv) the Cash Election Company Shares. The "REMAINING
CASH ELECTION PARENT SHARES" shall be the Maximum Number of Parent Shares
minus the number of shares of Parent Common Stock issuable pursuant to
Standard Elections, Deemed Standard Elections and Stock Elections
(including any fractional shares of Parent Common Stock for which a cash
adjustment shall be paid pursuant to Section 2.5(c) in respect of such
Standard Elections, Deemed Standard Elections and Stock Elections).
2.4 TAX ADJUSTMENT.
In the event that the Closing Stock Price (as defined below) is less
than the Average Stock Price such that the allocation of the consideration
between stock and cash based on the Closing Stock Price is not 50% stock and
50% cash, appropriate adjustment will be made, as determined by Parent and
the Company upon advice of counsel, to the extent if any, as may be required
to cause the Merger Consideration allocation between cash and stock to
satisfy the continuity of interest requirements for purposes of causing the
transaction to qualify as a tax-free reorganization, provided that the total
value of the Merger Consideration to be delivered by Parent, based upon the
Average Stock Price, shall not increase. For purposes of this Section 2.4,
the "CLOSING STOCK PRICE" shall mean the mean between the highest and lowest
quoted selling prices of the Parent Common Stock as reported on the New York
Stock Exchange Composite Tape on the day of the Effective Time of the
Merger. In the event that an adjustment is made under this Section 2.4, any
adjustments necessary or appropriate to reflect such adjustment shall be
made to the other provisions of this Article II.
2.5 DIVIDENDS, FRACTIONAL SHARES, ETC.
(a) DIVIDENDS ON PARENT COMMON STOCK. Notwithstanding any other
provisions of this Agreement, no dividends or other distributions
declared after the Effective Time on Parent Common Stock shall be paid
with respect to any shares of Company Common Stock represented by a
Company Certificate, until such Company Certificate is surrendered for
exchange as provided herein. Subject to the effect of applicable laws,
following surrender of any such Company Certificate, there shall be paid
to the holder of Parent Certificates issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Parent Common
Stock and not paid, less the amount of any withholding taxes that may be
required thereon, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective
Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of Parent Common Stock, less
the amount of any withholding taxes that may be required thereon.
(b) NO TRANSFERS; CLOSING OF STOCK TRANSFER BOOK. At or after the
Effective Time, there shall be no transfer on the stock transfer books of
the Company of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
certificates representing any such shares are presented to the Surviving
Corporation, they shall be canceled and exchanged for the Merger
Consideration, if any, deliverable in respect thereof pursuant to this
Agreement.
(c) NO FRACTIONAL SHARES. No fractional shares of Parent Common
Stock shall be issued pursuant to the Merger. In lieu of the issuance of
any fractional share of Parent Common Stock pursuant to the Merger, cash
adjustments shall be paid to holders in respect of any fractional share
of Parent Common Stock that would otherwise be issuable, and the amount
of such cash adjustment shall be equal to the product of such fractional
amount and the Average Stock Price.
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(d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any shares of
Parent Common Stock) that remains unclaimed by the former stockholders of
the Company two years after the Effective Time shall be delivered to
Parent. Any former stockholder of the Company who has not theretofore
complied with this Article II shall thereafter look only to the Surviving
Corporation and Parent for payment of the applicable Merger
Consideration, cash in lieu of fractional shares and unpaid dividends and
distributions on Parent Common Stock deliverable in respect of each share
of Company Common Stock such stockholder holds as determined pursuant to
this Agreement, in each case without any interest thereon.
(e) None of Parent, the Company, USF&G, the Surviving Corporation,
the Exchange Agent or any other person shall be liable to any former
holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to applicable or unclaimed
property, escheat or similar laws.
(f) In the event that any Company Certificate shall have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the
person claiming such Company Certificate to be lost, stolen or destroyed
and, if required by Parent, the posting by such person of a bond in such
reasonable amount as Parent may direct as indemnity against any claim
that may be made against it with respect to such Company Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Company Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of
Parent Common Stock, as provided in this Section 2.5, deliverable in
respect thereof pursuant to this Agreement.
(g) In the event of any change in Parent Common Stock between the
date of this Agreement and the Effective Time by reason of any stock
split, stock dividend, subdivision, reclassification, combination,
exchange of Parent Common Stock or the like, the Merger Consideration and
other terms set forth in this Agreement shall be appropriately adjusted.
(h) The pricing terms set forth herein are based on the information
disclosed in Section 3.1(b) hereof. If the number of such shares and
share equivalents outstanding is greater than the foregoing, the Merger
Consideration shall be appropriately adjusted.
2.6 WARRANTS. The Company shall use its reasonable best efforts to
cause holders of all then outstanding warrants to purchase Company Common
Stock (each a "COMPANY WARRANT") whether or not then exercisable in whole or
in part, to agree to surrender and receive, in exchange for cancellation and
in settlement thereof a number of shares of Parent Common Stock for each
share of Company Common Stock subject to such Company Warrant (subject to
any applicable withholding tax) equal to the quotient of (i) the product of
(1) the number of shares of Company Common Stock which the holder would be
entitled to receive if such Company Warrant were exercised in full
immediately prior to the Effective Time MULTIPLIED BY (2) the difference
between (x) the Cash Consideration and (y) the exercise price of such share
of Company Common Stock under the Company Warrant, to the extent such amount
is a positive number DIVIDED BY (ii) the Average Closing Price (such amount
being hereinafter referred to as the "WARRANT CONSIDERATION"); PROVIDED,
HOWEVER, that with respect to any person subject to Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), any such
amount shall be paid as soon as practicable after the first date payment can
be made without liability to such person under Section 16(b) of the Exchange
Act. Upon receipt of the Warrant Consideration, the Company Warrant shall be
canceled. The surrender of a Company Warrant to the Company in exchange for
the Warrant Consideration shall be deemed a release of any and all rights
the holder had or may have had in respect of such Company Warrant. With
respect to the Company Warrants that are not surrendered prior to the
Effective Time, after the Effective Time, the Surviving Corporation shall
comply with all applicable terms of such unsurrendered Company Warrants.
8
2.7 STOCK OPTIONS. Each stock option issued and outstanding under the
1993 Stock Option Plan, as amended, of the Company (the "STOCK OPTION PLAN")
is referred to herein as an "EMPLOYEE/ DIRECTOR STOCK OPTION" and all such
options are referred to herein, collectively, as the "EMPLOYEE/ DIRECTOR
STOCK OPTIONS." Each stock option issued and outstanding under the 1993
Directors' Stock Option Plan (the "DIRECTORS' STOCK OPTION PLAN") is
referred to herein as a "DIRECTOR'S OPTION" and all such options are
referred to herein, collectively, as the "DIRECTORS' OPTIONS." The
Employee/Director Stock Options and the Directors' Options are referred to
herein, collectively, as the "COMPANY OPTIONS" and, individually, as a
"COMPANY OPTION." At the Effective Time, each Company Option shall become
immediately fully vested and shall be converted into an option to purchase
shares of Parent Common Stock, as provided below. Following the Effective
Time, each such Company Option shall be exercisable upon the same terms and
conditions as then are applicable to such Company Option, except that (i)
each such Company Option shall be exercisable for that number of shares of
Parent Common Stock equal to the product of (x) the number of shares of
Company Common Stock for which such Company Option was exercisable
immediately prior to the Effective Date and (y) the Stock Exchange Ratio and
(ii) the exercise price of such option shall be equal to the quotient
obtained by dividing the exercise price per share of such Company Option by
the Stock Exchange Ratio. From and after the date of this Agreement, no
additional options to purchase shares of Company Common Stock shall be
granted under the Company Stock Option Plan, Directors' Stock Option Plan or
otherwise. Except as otherwise agreed to by the parties, no person shall
have any right under any stock option plan (or any option granted
thereunder) or other plan, program or arrangement of the Company with
respect to, including any right to acquire, equity securities of the Company
following the Effective Time. At or as soon as practicable after the
Effective Time, Parent shall issue to each holder of a Company Option that
is canceled an agreement that accurately reflects the terms of the Parent
Option substituted therefore as contemplated by this Section 2.7. Parent
shall (i) take all corporate actions necessary to reserve for issuance such
number of shares of Parent Common Stock as will be necessary to satisfy
exercises in full of all Parent Options after the Effective Time, (ii) use
its reasonable best efforts to ensure that an effective Registration
Statement on Form S-8 is on file with the Securities and Exchange Commission
(the "SEC") with respect to such Parent Common Stock, and (iii) use its
reasonable best efforts to have such shares admitted to trading upon
exercises of Parent Options.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as disclosed
in (i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, (ii) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997, or (iii) the disclosure memorandum (the
"DISCLOSURE MEMORANDUM") delivered at or prior to the date of this Agreement
(it being understood that each section of the Disclosure Memorandum shall
list all items applicable to such section, although the inadvertent omission
of an item from one section shall not be a breach of this Agreement if such
item and an explanation of the nature of such item is clearly disclosed in
another section of the Disclosure Memorandum) the Company represents and
warrants to Parent and USF&G as follows:
(a) ORGANIZATION, STANDING AND POWER. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it is incorporated, has all requisite corporate
power and authority to own, lease and operate its properties and to carry
on its business as now being conducted and is duly qualified or licensed
to do business as a foreign corporation and in good standing to conduct
business in each jurisdiction in which the business it is conducting, or
the operation, ownership or leasing of its properties, makes such
qualification or license necessary, other than such jurisdictions where
the failure so to qualify or become so licensed would not individually or
in the aggregate adversely affect the Company and
9
its Subsidiaries taken as a whole in any material respect. The Company
has heretofore made available to Parent complete and correct copies of
its Amended and Restated Articles of Incorporation, as currently in
effect as of the date of this Agreement (the "COMPANY ARTICLES OF
INCORPORATION"), and the Bylaws. As used in this Agreement, a "MATERIAL
ADVERSE EFFECT" shall mean, with respect to any specified party to this
Agreement, any event, change, condition, fact or effect which has or
could reasonably be expected to have a material adverse effect on (i) the
business, results of operations, or financial condition of such party and
its Subsidiaries taken as a whole or (ii) the ability of such party to
consummate the transactions contemplated by this Agreement.
(b) CAPITAL STRUCTURE. As of the date of this Agreement, the
authorized capital stock of the Company consists of 45,000,000 shares,
divided into the following: (i) 5,000,000 shares of preferred stock, par
value $0.01 per share (the "COMPANY PREFERRED STOCK"); and (ii)
40,000,000 shares of Company Common Stock. At the close of business on
August 1, 1997: (i) 10,101,915 shares of Company Common Stock were issued
and outstanding, 27,825 of which are restricted shares; (ii) 815,902
shares of Company Common Stock were reserved for issuance in connection
with the Stock Option Plan; (iii) 122,457 shares of Company Common Stock
were reserved for issuance in connection with the Directors' Stock Option
Plan; (iv) 491,222 shares of Company Common Stock were reserved for
issuance upon exercise of outstanding Company Warrants; (v) no shares of
Company Common Stock were held in treasury; (vi) no shares of Company
Preferred Stock were issued and outstanding or held by the Company or any
Subsidiary of the Company; and (vii) no bonds, debentures, notes or other
instruments or evidence of indebtedness having the right to vote (or
convertible into, or exercisable or exchangeable for securities having
the right to vote) on any matters on which the Company shareholders may
vote ("COMPANY VOTING DEBT") were issued or outstanding. All outstanding
shares of Company Common Stock are validly issued, fully paid and
nonassessable and are not subject to preemptive or other similar rights.
Except as set forth in Section 3.1(b) of the Disclosure Memorandum, there
are outstanding: (i) no securities of the Company convertible into or
exchangeable or exercisable for shares of capital stock, Company Voting
Debt or other voting securities of the Company; and (ii) no stock awards,
options, warrants, calls, rights (including stock purchase or preemptive
rights), commitments or agreements to which the Company is a party or by
which it is bound, in any case obligating the Company to issue, deliver,
sell, purchase, redeem or acquire, or cause to be issued, delivered,
sold, purchased, redeemed or acquired, additional shares of its capital
stock, any Company Voting Debt or other voting securities or securities
convertible into or exchangeable or exercisable for voting securities of
the Company, or obligating the Company to grant, extend or enter into any
such option, warrant, call, right, commitment or agreement. Except as set
forth in Section 3.1(b) of the Disclosure Memorandum, since December 31,
1996, the Company has not (i) granted any options, warrants or rights to
purchase shares of Company Common Stock or (ii) amended or repriced, as
applicable, any Company Option, any Company Warrant, the Stock Option
Plan or the Directors' Stock Option Plan. Section 3.1(b) of the
Disclosure Memorandum sets forth the following information with respect
to each Company Option and Company Warrant outstanding on the date of
this Agreement: (A) the name of the optionee or warrantholder, (B) the
number of shares of Company Common Stock subject to such Company Option
or Company Warrant, and (C) the exercise price of such Company Option or
Company Warrant. None of the Company Options are "incentive stock
options" (within the meaning of Section 422 of the Code). There are not
as of the date of this Agreement and there will not be on the date of the
Shareholders' Meeting any shareholder agreements, voting trusts or other
agreements or understandings to which the Company is a party or by which
it is bound relating to the voting of any shares of the capital stock of
the Company which will limit in any way the solicitation of proxies by or
on behalf of the Company from, or the casting of votes by, the
shareholders of the Company with respect to the Merger. True and correct
copies of all agreements relating to the
10
Company Warrants and the Company Options and the issuance of any
restricted stock have previously been provided or made available to
Parent.
(c) SUBSIDIARIES; INVESTMENTS. Section 3.1(c) of the Disclosure
Memorandum sets forth the name of each Subsidiary of the Company, the
jurisdiction of its incorporation or organization and whether it is an
insurance company. Each Subsidiary is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has the power and authority and all
necessary government approvals to own, lease and operate its properties
and to carry on its business as now being conducted. Each Subsidiary of
the Company is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary. The Company has heretofore made
available to USF&G complete and correct copies of the articles of
incorporation (or other organizational documents) and bylaws of each of
its Subsidiaries. Section 3.1(c) of the Disclosure Memorandum sets forth,
as to each Subsidiary of the Company, its authorized capital stock and
the number of issued and outstanding shares of capital stock (or similar
information with respect to any Subsidiary not organized as a corporate
entity). All outstanding shares of the capital stock of the Subsidiaries
of the Company are validly issued, fully paid and nonassessable and are
not subject to preemptive or other similar rights; neither the Company
nor any Subsidiary of the Company has any call obligations or similar
liabilities with respect to partnerships or other Subsidiaries not
organized as corporate entities. Except as set forth in Section 3.1(c) of
the Disclosure Memorandum, the Company is, directly or indirectly, the
record and beneficial owner of all of the outstanding shares of capital
stock (or other interests, with respect to Subsidiaries not organized as
corporate entities) of each of its Subsidiaries free and clear of all
Liens and other restrictions with respect to the transferability or
assignability thereof (other than restrictions on transfer imposed by
federal or state securities laws) and no capital stock (or other
interests, with respect to Subsidiaries not organized as corporate
entities) of any of its Subsidiaries is or may become required to be
issued by reason of any options, warrants, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable or exercisable for, shares of
capital stock (or other interests, with respect to Subsidiaries not
organized as corporate entities) of any of its Subsidiaries and there are
no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may be bound to issue, redeem,
purchase or sell shares of Subsidiary capital stock (or other interests,
with respect to Subsidiaries not organized as corporate entities) or
securities convertible into or exchangeable or exercisable for any such
shares or interests. Except for the ownership interests set forth in
Section 3.1(c) of the Disclosure Memorandum, neither the Company nor any
of its Subsidiaries owns, directly or indirectly, any capital stock or
other ownership interest in any corporation, partnership, business
association, joint venture or other entity, except for portfolio
investments made in the ordinary course of business. As used in this
Agreement, the word "SUBSIDIARY," with respect to any party to this
Agreement, means any corporation, partnership, joint venture or other
organization, whether incorporated or unincorporated, of which: (i) such
party or any other Subsidiary of such party is a general partner; (ii)
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation,
partnership, joint venture or other organization is held by such party or
by any one or more of its Subsidiaries, or by such party and any one or
more of its Subsidiaries; or (iii) at least 10% of the equity, other
securities or other interests is, directly or indirectly, owned or
controlled by such party or by any one or more of its Subsidiaries or by
such party and any one or more of its Subsidiaries.
(d) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) The Company has all requisite corporate power and authority to
enter into this Agreement and, subject to the Company
Shareholder Approval, to consummate the
11
transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject, in the
case of the Merger, to the Company Shareholder Approval. This
Agreement has been duly executed and delivered by the Company
and, subject, in the case of the Merger, to the Company
Shareholder Approval, and assuming that this Agreement
constitutes the valid and binding agreement of Parent and USF&G,
constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms and conditions except
that the enforcement hereof may be limited by (A) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally and (B) general
principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity) and (C) any
ruling or action of any Governmental Entity as set forth in
Section 3.1(d)(iii).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by the
Company will not conflict with, or result in any violation of,
or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or
acceleration (including pursuant to any put right) of any
obligation or the loss of a material benefit under, or the
creation of a Lien on assets or property, or right of first
refusal with respect to any asset or property or change any
other rights, benefits, liabilities or obligations (any such
conflict, violation, default, right of termination,
cancellation or acceleration, loss, creation or right of first
refusal, or change, a "VIOLATION"), pursuant to, (A) any
provision of the Articles of Incorporation or Bylaws of the
Company or the comparable documents of any of its Subsidiaries
or (B) except as to which requisite waivers or consents have
been obtained and specifically identified in Section 3.1(d) of
the Disclosure Memorandum and assuming the consents, approvals,
authorizations or permits and filings or notifications referred
to in paragraph (iii) of this Section 3.1(d) are duly and
timely obtained or made and, in the case of the Merger, the
Company Shareholder Approval has been obtained, any loan or
credit agreement, note, mortgage, deed of trust, indenture,
lease, Company License (as defined in Section 3.1(g)), Company
Benefit Plan (as defined in Section 3.1(n)), Company Material
Contract (as defined in Section 3.1(r)), or any other
agreement, obligation, instrument, concession or license or any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company, any of its Subsidiaries
or any of their respective properties or assets except for such
Violations which would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit
from any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign
(a "GOVERNMENTAL ENTITY"), is required by or with respect to
the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by the Company or the
consummation by the Company of the transactions contemplated
hereby, except for: (A) any actions and approval that may be
required under the insurance laws and regulations of the
jurisdictions in which the Subsidiaries of the Company that are
insurance companies are domiciled or licensed, each of which is
listed in Section 3.1(d)(iii)(A) of the Disclosure Memorandum;
(B) the filing of a pre-merger notification and report form by
the Company under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR ACT"), and the expiration or
termination of the applicable waiting period thereunder; (C)
the filing with the SEC of (x) a proxy
12
statement in definitive form relating to the approval by the
holders of Company Common Stock of the Merger (such proxy
statement as amended or supplemented from time to time being
hereinafter referred to as the "PROXY STATEMENT"), (y) the
registration statement on Form S-4 to be filed with the SEC by
Parent pursuant to which Shares of Parent Common Stock issuable
in the Merger will be registered with the SEC (the "FORM S-4"),
and (z) such reports under and such other compliance with the
Exchange Act and the rules and regulations thereunder as may be
required in connection with this Agreement and the transactions
contemplated hereby; (D) the filing of the Articles of Merger
with the Secretary of State of the State of Texas and the
Maryland State Department of Assessments and Taxation; (E) such
filings and approvals as may be required by any applicable
state securities, "blue sky" or takeover laws; (F) the Company
Shareholder Approval; and (G) where the failure to obtain
consent, approval, order, or authorization of, or registration,
declaration or filing with, notice to, or permit from a
Government Entity would not adversely effect the Company and
its Subsidiaries taken as a whole in any material respect.
(e) GOVERNMENT FILINGS. The Company has made available to USF&G a
true and complete copy of each report, schedule, registration statement
and definitive proxy statement filed by the Company with the SEC since
December 31, 1994 and prior to the date of this Agreement (the "FILED
COMPANY SEC DOCUMENTS"), which are all the documents (other than
preliminary material) that the Company was required to file with the SEC
since such date. As of their respective dates, the Filed Company SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or the
Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such Filed Company SEC
Documents, and none of the Filed Company SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The consolidated financial statements of the Company included
in the Filed Company SEC Documents comply as to form in all material
respects with the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Rule 10-01 of
Regulation S-X of the SEC) and fairly present in accordance with
applicable requirements of GAAP the consolidated financial position of
the Company and its consolidated subsidiaries as of the dates therein and
the consolidated results of their operations and cash flows for the
periods presented therein (subject, in the case of unaudited interim
financial statements, to normal recurring adjustments none of which are
material). Section 3.1(e) of the Disclosure Memorandum lists with respect
to the Company Common Stock for the period since December 31, 1996 and
prior to the date of this Agreement each: (i) Schedule 13D filed with the
SEC and (ii) application for change in control filed under the insurance
holding company laws of any state or other jurisdiction. No Subsidiary of
the Company has been or is required to or has filed any documents with
the SEC. Section 3.1(e) of the Disclosure Memorandum includes the
Company's reported results for the six-month period ended June 30, 1997
and such reported results fairly present in summary fashion and in
accordance with applicable requirements of GAAP the consolidated
financial position of the Company and its consolidated subsidiaries as of
the dates therein and the consolidated results of their operations for
the periods presented therein (subject to normal recurring adjustments
none of which are material).
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in
(i) the Form S-4 will, at the time the Form S-4 is filed with the SEC,
and at any time it is amended or supplemented or at the time it
13
becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading, and (ii) the
Proxy Statement will, on the date it is first mailed to the holders of
the Company Common Stock or at the time of the Shareholders' Meeting,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they
are made, not misleading. The Proxy Statement will comply as to form in
all material respects with the requirements of the Exchange Act and the
rules and regulations promulgated thereunder, except that no
representation is made by the Company with respect to statements made or
incorporated by reference therein based on information supplied in
writing by Parent or USF&G specifically for inclusion therein. If, at any
time prior to the Shareholders' Meeting, any event with respect to the
Company, or with respect to other information supplied by the Company for
inclusion in the Proxy Statement, shall occur which is required to be
described in an amendment of, or a supplement to, any of such documents,
such event shall be so described, and such amendment or supplement shall
be promptly filed with the SEC and, as required by law, disseminated to
the shareholders of the Company.
(g) COMPLIANCE WITH APPLICABLE LAWS.
(i) Except as disclosed in Section 3.1(g)(i) of the Disclosure
Memorandum, the business of the Company and each of its
Subsidiaries is being, in all material respects, conducted in
compliance with all applicable laws, including, without
limitation, all insurance laws, ordinances, rules and
regulations, decrees and orders of any Governmental Entity, and
all notices, reports, documents and other information required
to be filed thereunder within the last three years were properly
filed and were in compliance in all respects with such laws.
(ii) (A) INSURANCE LICENSES. Section 3.1(g)(ii)(A) of the
Disclosure Memorandum contains a true and complete list of all
jurisdictions in which each of the Subsidiaries of the Company
is licensed to transact insurance business. Except as disclosed
in Section 3.1(g)(ii)(B) of the Disclosure Memorandum, each of
the Subsidiaries of the Company has all the licenses necessary
to conduct the lines of insurance business which such
Subsidiary is currently conducting in each of the states set
forth in Section 3.1(g)(ii)(A) of the Disclosure Memorandum,
which are all of the states in which the Company is currently
conducting business or in the process of commencing conducting
business. The Subsidiaries of the Company own or validly hold
the insurance licenses referred to in Section 3.1(g)(ii)(A) of
the Disclosure Memorandum, all of which licenses are valid and
in full force and effect. Except as set forth in Section
3.1(g)(ii)(A) of the Disclosure Memorandum, there is no
proceeding or investigation pending or, to the knowledge (as
defined below) of the Company, threatened which would
reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, suspension or restriction of any
such license to transact insurance business. As used in this
Agreement, "knowledge" means the actual knowledge, after
reasonable inquiry, of, in the case of the Company, the
management of the Company, and, in the case of Parent, the
management of Parent.
(B) OTHER LICENSES. The Company and each of its Subsidiaries
owns or validly holds all licenses, franchises, permits,
approvals, authorizations, exemptions, classifications,
registrations, rights and similar documents (other than licenses
to transact insurance business) which are necessary for it to
own, lease or operate its properties and assets and to conduct
its business as now conducted, except for such licenses the
failure to hold which would not individually or in the aggregate
adversely affect the Company and its
14
Subsidiaries taken as a whole in any material respect. The
business of the Company and each of its Subsidiaries has been and
is being conducted in compliance in all material respects with
all such licenses. All such licenses are in full force and
effect, and there is no proceeding or investigation pending or,
to the knowledge of the Company, threatened which would
reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, suspension or restriction of any
such license.
(C) The licenses referred to in subparagraphs (A) and (B) are
collectively referred to herein as the "COMPANY LICENSES."
(iii) Each Subsidiary of the Company that is an insurance company has
filed all annual and quarterly statements, together with all
exhibits and schedules thereto, required to be filed with or
submitted to the appropriate regulatory authorities of the
jurisdiction in which it is domiciled and to any other
jurisdiction where required on forms prescribed or permitted by
such authority. Each Annual Statement filed by any Subsidiary
of the Company that is an insurance company with the insurance
regulator in its state of domicile for the three years ended
December 31, 1996 (each a "COMPANY ANNUAL STATEMENT"), together
with all exhibits and schedules thereto, financial statements
relating thereto and any actuarial opinion, affirmation or
certification filed in connection therewith and each Quarterly
Statement so filed for the quarterly periods ended after
January 1, 1997 (each a "COMPANY QUARTERLY STATEMENT") were
prepared in conformity with the statutory accounting practices
prescribed or permitted by the insurance regulatory authorities
of the applicable state of domicile applied on a consistent
basis ("SAP"), present fairly, in all material respects, to the
extent required by and in conformity with SAP, the statutory
financial condition of such Subsidiary at their respective
dates and the results of operations, changes in capital and
surplus and cash flow of such Subsidiary for each of the
periods then ended, and were correct when filed and there were
no omissions therefrom when filed. No deficiencies or
violations have been asserted in writing (or, to the knowledge
of the Company, orally) by any insurance regulator with respect
to the foregoing financial statements which have not been cured
or otherwise resolved to the satisfaction of such insurance
regulator and which have not been disclosed in writing to USF&G
prior to the date of this Agreement. Set forth in Section
3.1(g)(iii) of the Disclosure Memorandum is a list of permitted
practices under SAP which are utilized in any of the Company's
Annual or Quarterly Statements.
(iv) All statutory reserves as established or reflected in the
Company Annual Statements and Company Quarterly Statements were
determined in accordance with SAP and generally accepted
actuarial assumptions and met the requirements of the insurance
laws of each applicable jurisdiction as of the respective dates
of such statements. The statutory reserves set forth in the
Company Annual Statement and Company Quarterly Statements meet
in all material respects the requirements of the insurance laws
of the jurisdictions in which such Subsidiaries do business and
reflect a reasonable provision for unpaid policy losses and
loss adjustment expenses as of such date. The reserves of the
Subsidiaries of the Company including, but not limited to, the
reserves for incurred losses, incurred loss adjustment
expenses, incurred but not reported losses and loss adjustment
expenses for incurred but not reported losses (the "LOSS
RESERVES") as set forth in the audited consolidated financial
statements and unaudited interim financial statements of such
Subsidiaries included in the Filed Company SEC Documents were
determined in good faith by the Company and such Subsidiaries
in accordance with generally accepted accounting principles and
were believed by the Company and such Subsidiaries to be
reasonable when made. The Loss Reserves established or
reflected in
15
the Company Annual Statements and the Company Quarterly
Statements were determined in accordance with generally
accepted actuarial standards consistently applied and are in
compliance in all material respects with the insurance laws,
rules and regulations of their respective states of domicile as
well as those of any other applicable jurisdictions. The
Company has delivered or made available to Parent true and
complete copies of all actuarial reports and actuarial
certificates in the possession or control of the Company, any
of the Subsidiaries or any other affiliates of the Company
relating to the adequacy of the Loss Reserves (or any portion
thereof) of the Company or any of its Subsidiaries for any
period ended on or after December 31, 1996.
(v) Except as set forth in Section 3.1(g)(v) of the Disclosure
Memorandum, from January 1, 1997 through the date of this
Agreement, none of the Company's Subsidiaries have paid any
dividend or made any other distribution in respect of its
capital stock.
(h) INSURANCE ISSUED. Except (i) as set forth in Section 3.1(h) of
the Disclosure Memorandum and (ii) where noncompliance would not
individually or in the aggregate adversely affect the Company and its
Subsidiaries taken as a whole in any material respect, with respect to
all insurance issued:
(i) All insurance policies issued, reinsured or underwritten by the
Subsidiaries of the Company are, to the extent required by
applicable law, and in all material respects on forms approved
by the insurance regulatory authority of the jurisdiction where
issued or delivered or have been filed with and not objected to
by such authority within the period prescribed for such
objection, and utilize premium rates which if required to be
filed with or approved by insurance regulatory authorities have
been so filed or approved and the premiums charged conform
thereto.
(ii) All insurance policy benefits payable by any Subsidiary of the
Company and, to the knowledge of the Company, by any other
person that is a party to or bound by any reinsurance,
coinsurance or other similar agreement with any Subsidiary of
the Company, have in all material respects been paid or are in
the course of settlement in accordance with the terms and
within the limits of the insurance policies and other contracts
under which they arose, except for such benefits for which
there is a reasonable basis to contest payment and which are
being or have been contested by appropriate proceedings and in
accordance with applicable law.
(iii) The Company has not received any information which would
reasonably cause it to believe that the financial condition of
any other party to any reinsurance, coinsurance or other
similar agreement with any of its Subsidiaries is so impaired
as to result in a default thereunder.
(iv) All advertising, promotional, sales and solicitation materials
and product illustrations used by any Subsidiaries of the
Company or any agent of any of its Subsidiaries have complied
and are in compliance, in all material respects, with all
applicable laws.
(v) To the knowledge of the Company, each insurance agent, at the
time such agent wrote, sold or produced business for any
Subsidiary of the Company since January 1, 1993 was duly
licensed as an insurance agent (for the type of business
written, sold or produced by such insurance agent) in the
particular jurisdiction in which such agent wrote, sold or
produced such business and was properly appointed by such
Subsidiary. All written contracts and agreements between any
such agent, on the one hand, and the Company or any of its
Subsidiaries, on the other hand, are in material compliance with
all applicable laws and regulations. To the knowledge of the
Company and its Subsidiaries, no such agent is the subject of,
or party to, any disciplinary action or proceeding under
16
applicable law. As of the date hereof, to the Company's
knowledge, the Company has not been advised that any insurance
agent intends to terminate or materially change its relationship
with the Company or its Subsidiaries as a result of the Merger
or the contemplated operations of the Company and its
Subsidiaries after the Merger is consummated.
(vi) Except as set forth in Section 3.1(h)(vi) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries is
a party to any fronting agreement or places or sells
reinsurance whether for its own account or for any reinsurance
company.
(vii) There are (A) to the knowledge of the Company or its
Subsidiaries, no claims asserted, (B) no actions, suits,
investigations or proceedings by or before any court or other
Governmental Entity, and (C) no investigations by or on behalf
of any of the Company or its Subsidiaries ((A), (B) and (C)
being collectively referred to as "ACTIONS") pending or, to the
knowledge of the Company or its Subsidiaries, threatened,
against or involving any of the Company or its Subsidiaries, or
any of their agents that include allegations that any of the
Company or its Subsidiaries or any of the agents of the Company
or its Subsidiaries were in violation of or failed to comply
with any law, statute, ordinance, rule, regulation, code, writ,
judgement, injunction decree, determination or award applicable
to the Company or its Subsidiaries in the respective
jurisdictions in which their products have been sold, and, to
the knowledge of the Company or the Subsidiary, no facts exist
which would reasonably be expected to result in the filing or
commencement of any such Action.
(i) RATING AGENCIES. Except as disclosed in Section 3.1(i) of the
Disclosure Memorandum, since December 31, 1996, no rating agency has
imposed conditions (financial or otherwise) on retaining any currently
held rating assigned to any Subsidiary of the Company that is an
insurance company or indicated to the Company that it is considering the
downgrade of any rating assigned to any Subsidiary of the Company that is
an insurance company. As of the date of this Agreement, each Subsidiary
of the Company that is an insurance company has the A.M. Best rating set
forth in Section 3.1(i) of the Disclosure Memorandum. Notwithstanding
anything to the contrary, the imposition of conditions (financial or
otherwise) on retaining any currently held rating assigned to any
Subsidiary of the Company that is an insurance company or downgrade of
any rating assigned to any subsidiary of the Company that is an insurance
company primarily as a result of the transactions contemplated by this
Agreement shall not be a breach of this representation and warranty.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1996,
there has not been, occurred, or arisen any change, event (including
without limitation any damage, destruction, or loss whether or not
covered by insurance), condition, or state of facts of any character with
respect to the business or financial condition of the Company or any of
its Subsidiaries, except (i) as disclosed in Section 3.1(j) of the
Disclosure Memorandum or in the Filed Company SEC Documents, (ii) the
imposition of conditions (financial or otherwise) on retaining any
currently held rating assigned to any Subsidiary of the Company that is
an insurance company or downgrade of any rating assigned to any
Subsidiary of the Company that is an insurance company primarily as a
result of the transactions contemplated by this Agreement, and (iii) for
events in the ordinary course of business consistent with past practice
that would not, individually or in the aggregate, result in a Material
Adverse Effect on the Company. Except as disclosed in Section 3.1(j) of
the Disclosure Memorandum or in the Filed Company SEC Documents, since
December 31, 1996, the Company and each of its Subsidiaries has operated
only in the ordinary course of business consistent with past practice and
(without limiting the generality of the foregoing) there has not been,
occurred, or arisen:
17
(i) any declaration, setting aside, or payment of any dividend or
other distribution in respect of the capital stock of the
Company (other than as expressly permitted by this Agreement) or
any direct or (other than any retirement of Options or Warrants
contemplated pursuant to this Agreement) indirect redemption,
purchase, or other acquisition by the Company of any such stock
or of any interest in or right to acquire any such stock;
(ii) any split, combination or reclassification of any of its
outstanding capital stock or any issuance or the authorization
of any issuance of any other securities in respect of, in lieu
of or in substitution for shares of the Company's or any of its
Subsidiary's outstanding capital stock;
(iii) (A) any granting by the Company or any of its Subsidiaries to
any director, officer or other employee of the Company or any
of its Subsidiaries of any increase in compensation (including
perquisites), except, with respect to employees other than Key
Employees (as defined below), grants in the ordinary course of
business consistent with prior practice, (B) any granting by
the Company or any of its Subsidiaries to any such director,
officer or other employee of any increase in severance or
termination pay, or (C) any entry into, modification,
amendment, waiver or consent by the Company or any of its
Subsidiaries with respect to any employment, severance, change
of control, termination or similar agreement, arrangement or
plan (oral or otherwise) with any officer, director or other
employee;
(iv) any change in the method of accounting or policy used by the
Company or any of its Subsidiaries other than as disclosed in
the financial statements included in the Filed Company SEC
Documents or in the Company Annual Statement or the Company
Quarterly Statement most recently filed and publicly available
prior to the date hereof or which were required by GAAP or SAP;
(v) made any material amendment to the insurance policies in force
of any Subsidiary of the Company or made any change in the
methodology used in the determination of the reserve liabilities
of the Subsidiaries of the Company or any reserves contained in
the financial statements included in the Filed Company SEC
Documents or in the Company Annual Statement or the Company
Quarterly Statements;
(vi) any termination, amendment or entrance into as ceding or
assuming insurer any reinsurance, coinsurance or other similar
agreement or any trust agreement or security agreement relating
thereto, other than (A) facultative reinsurance contracts
related to the Company's public entity business only that have
been entered into in the ordinary course of business consistent
with past practice, and (B) renewals for periods of one year or
less on substantially the same terms, in the ordinary course of
business;
(vii) any introduction of any insurance policy or any changes made in
its customary marketing, pricing, underwriting, investing or
actuarial practices and policies, except in the ordinary course
of business consistent with past practice;
(viii) any Lien created or assumed on any of the assets or properties
of the Company or any of its Subsidiaries;
(ix) any liability involving the borrowing of money by the Company
or any of its Subsidiaries or the incurrence by the Company or
any of its Subsidiaries of any deferred purchase price
obligation (other than trade credit incurred in the ordinary
course of business and consistent with past practice);
18
(x) any cancellation of any liability owed to the Company or any of
its Subsidiaries by any other person or entity other than
immaterial amounts owed by a person or entity who is not a
Related Party (as defined in Section 3.1(s));
(xi) any write-off or write-down of, or any determination to
write-off or write-down, the assets or properties (other than
any statutory write-down of investment assets which is not
related to a permanent impairment of value) of the Company of
any of its Subsidiaries or any portion thereof;
(xii) any expenditure or commitment for additions to property, plant,
equipment, or other tangible or intangible capital assets or
properties of the Company or any of its Subsidiaries which
exceeds $75,000 individually or in the aggregate;
(xiii) any material change in any marketing relationship between the
Company or any of its Subsidiaries and any person or entity
through which the Company sells insurance Contracts; or
(xiv) any Contract to take any of the actions prohibited in this
Section 3.1(j).
(k) ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in
Section 3.1(k) of the Disclosure Memorandum, as of December 31, 1996,
neither the Company nor any of its Subsidiaries had any liabilities,
absolute, accrued, contingent or otherwise, whether due or to become due
(and there was no basis for any such liability), which were not shown or
provided for in the audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
and which should have been so shown or provided for under generally
accepted accounting principles. Since December 31, 1996, neither the
Company nor any of its Subsidiaries has incurred any liabilities,
absolute, accrued, contingent or otherwise, whether due or to become due
(and there is no basis for such liabilities) except: (i) liabilities
arising in the ordinary course of business consistent with past practice,
which would not individually or in the aggregate adversely affect the
Company and its Subsidiaries taken as a whole in any material respect;
(ii) as specifically and individually reflected in Section 3.1(k) of the
Disclosure Memorandum or Filed Company SEC Documents, or (iii) other
liabilities which, individually or in the aggregate, together with those
liabilities referenced in subparagraphs (i) and (ii), would not adversely
affect the Company and its Subsidiaries taken as a whole in any material
respect. Except for regular periodic assessments in the ordinary course
of business, no claim or assessment is pending or, to the knowledge of
the Company, threatened, against the Company or any of its Subsidiaries
by any state insurance guaranty association in connection with such
association's fund relating to insolvent insurers.
(l) LITIGATION. Except as set forth in Section 3.1(1) of the
Disclosure Memorandum and except for claims arising under insurance
policies in (i) an amount no greater than the limits set forth in such
policies and/or (ii) not involving punitive, extra-contractual or
extraordinary damages, (A) there is no suit, action, investigation,
arbitration or proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries,
at law or in equity, before any person and (B) there is no writ judgment,
decree, injunction, rule or similar order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries.
(m) TAXES. Except as set forth in Section 3.1(m) of the Disclosure
Memorandum:
(i) The Company and its Subsidiaries have (x) duly and timely filed
(or there have been filed on their behalf) with the appropriate
taxing authorities all Tax Returns required to be filed by them,
and all such Tax Returns are true, correct and complete in all
material respects and (y) timely paid or there have been paid on
their behalf all Taxes due or claimed to be due from them by any
taxing authority.
19
(ii) The Company and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes and have,
within the time and manner prescribed by law, withheld and paid
over to the proper governmental authorities all amounts
required to be withheld and paid over under all applicable
laws.
(iii) There are no liens for Taxes upon the assets or properties of
the Company or any of its Subsidiaries except for statutory
liens for current Taxes not yet due.
(iv) Neither the Company nor any of its Subsidiaries has requested
any extension of time within which to file any Tax Return in
respect of any taxable year which has not since been filed.
(v) Based upon the Company's knowledge, no federal, state, local or
foreign audits or other administrative proceedings or court
proceedings ("AUDITS") exist with regard to any Taxes or Tax
Returns of the Company or any of its Subsidiaries and there has
not been received any written notice that such an Audit is
pending or threatened with respect to any Taxes due from or with
respect to the Company or any of its Subsidiaries or any Tax
Return filed by or with respect to the Company or any of its
Subsidiaries.
(vi) Neither the Company nor any of its Subsidiaries has requested
or received a ruling from any taxing authority or signed a
closing or other agreement with any taxing authority which
would affect any taxable period after the Closing Date.
(vii) The federal and state income Tax Returns of the Company and its
Subsidiaries have been examined by the appropriate taxing
authorities (or the applicable statute of limitations for the
assessment of Taxes for such periods have expired) for all
periods through December 31, 1992 and a list of all Audits
commenced or completed with respect to the Company and its
Subsidiaries for all taxable periods not yet closed by the
statute of limitations is set forth in Section 3.1(m) of the
Disclosure Memorandum.
(viii) All material Tax deficiencies which have been claimed, proposed
or asserted in writing against the Company or any of its
Subsidiaries have been fully paid or finally settled, and no
issue has been raised in writing in any examination which, by
application of similar principles, could be expected to result
in the proposal or assertion of a material Tax deficiency for
any other year not so examined.
(ix) Neither the Company nor any of its Subsidiaries is required to
include in income any adjustment pursuant to Section 481(a) of
the Code, for any period after the Closing Date, by reason of
any voluntary or involuntary change in accounting method (nor
has any taxing authority proposed in writing any such
adjustment or change of accounting method).
(x) Neither the Company nor any of its Subsidiaries is a party to,
is bound by, nor has any obligation under, any Tax sharing
agreement, Tax indemnification agreement or similar contract or
arrangement.
(xi) No power of attorney has been granted by or with respect to the
Company or any of its Subsidiaries with respect to any matter
relating to Taxes, which is currently effective.
(xii) Neither the Company nor any of its Subsidiaries has filed a
consent pursuant to Section 341(f) of the Code (or any
predecessor provision) or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as
such term is defined in Section 341(f)(4) of the Code) owned by
the Company or any of its Subsidiaries.
20
(xiii) Since the date of the December 31, 1996 consolidated financial
statements of the Company, neither the Company nor any of its
Subsidiaries has incurred any liability for Taxes other than in
the ordinary course of business.
(xiv) Neither the Company nor any of its Subsidiaries has or could
have any liability for Taxes of any person other than itself or
the Company or any of its Subsidiaries under Treasury
Regulation Section 1.1502-6 (or any similar provision of state,
local or foreign law).
(xv) Neither the Company nor any of its Subsidiaries has any
intercompany items or corresponding items that have not been
taken into account under Treasury Regulation Section 1.1502-13
(or any similar provision under state, local or foreign law).
(xvi) Neither the Company nor any of its Subsidiaries has made any
tax election that would result in deferring any income or gain
from a tax period ending on or before the Closing Date to a tax
period ending after the Closing Date without a corresponding
receipt of cash and/or property or would result in accelerating
any loss or deduction from a tax period ending after the
Closing Date to a tax period ending on or before the Closing
Date.
(xvii) Neither the Company nor any of its Subsidiaries is a party to
any contract, agreement or other arrangement(s) which could
result in the payment of amounts that could be nondeductible by
reason of Section 280G or 162(m) of the Code.
For purposes of this Agreement, (i) "TAXES" (including, with correlative
meaning, the term "TAX") shall mean all taxes, charges, fees, levies, penalties
or other assessments imposed by any federal, state, local or foreign taxing
authority, including, but not limited to, income, gross receipts, excise,
property, sales, transfer, franchise, payroll, withholding, social security and
other taxes, and shall include any interest, penalties or additions attributable
thereto and (ii) "TAX RETURN" shall mean any return, report, information return
or other document (including any related or supporting information) required to
be prepared with respect to Taxes.
(n) PENSION AND BENEFIT PLANS; ERISA.
(i) Section 3.1(n)(i) of the Disclosure Memorandum sets forth a
complete and correct list of:
(A) all "employee benefit plans," as defined in Sections 3(3)
and 4(b)(4) of ERISA, under which Company or any of its
Subsidiaries maintains or has any obligation or liability,
contingent or otherwise ("COMPANY BENEFIT PLANS"); and
(B) all employment or consulting agreements and all bonus or
other incentive compensation, deferred compensation, salary
continuation, severance, perquisites or other special or fringe
benefit agreements (including mortgage financings and tuition
reimbursements), policies or arrangements which the Company or
any of its Subsidiaries maintains or has any obligation or
liability (contingent or otherwise) in each case, written or
oral, with respect to any current or former officer, director or
employee of the Company or any of its Subsidiaries and which
individually (or in the aggregate with respect to a single
individual) has a cost to the Company or any of its Subsidiaries
in excess of $10,000 per year (the "COMPANY EMPLOYEE
ARRANGEMENTS").
(ii) With respect to each Company Benefit Plan and Company Employee
Arrangement, a complete and correct copy of each of the
following documents (if applicable) has been provided or made
available to Parent: (A) the most recent plan and related trust
documents, and all amendments thereto; (B) the most recent
summary plan description, and all related summaries of material
modifications thereto; (C) the most recent Form 5500 (including
schedules and attachments); (D) the most recent IRS
determination
21
letter or request therefor; (E) the most recent actuarial
reports (including for purposes of Financial Accounting
Standards Board report no. 87, 106 and 112), if any; and (F) to
the extent not provided pursuant to (A) and (B) above, all
documents that set forth the terms of the Company Employee
Arrangements.
(iii) Except as set forth in Section 3.1(n)(iii) of the Disclosure
Memorandum, the Company Benefit Plans and their related trusts
intended to qualify under Sections 401(a) and 501(a) of the
Code, respectively, have received favorable determination
letters from the Internal Revenue Service and the Company is
not aware of any event or circumstance that could reasonably be
expected to result in the failure of such Company Benefit Plans
or their related trusts to be so qualified.
(iv) Except as set forth in Section 3.1(n)(iv) of the Disclosure
Memorandum, all contributions or other payments required to
have been made by the Company or any of its Subsidiaries to or
under any Company Benefit Plan or Company Employee Arrangement
by applicable law or the terms of such Company Benefit Plan or
Company Employee Arrangement (or any agreement relating
thereto) have been timely and properly made.
(v) Except as set forth in Section 3.1(n)(v) of the Disclosure
Memorandum, the Company Benefit Plans and Company Employee
Arrangements have been maintained and administered in all
respects in accordance with their terms and applicable laws.
(vi) Except as disclosed in Section 3.1(n)(vi) of the Disclosure
Memorandum, there are no pending or, to the knowledge of the
Company, threatened actions, claims or proceedings against or
relating to any Company Benefit Plan or Company Employee
Arrangement other than routine benefit claims by persons
entitled to benefits thereunder.
(vii) Except as set forth in Section 3.1(n)(vii) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries
maintains or has an obligation to contribute to retiree life or
retiree health plans which provide for continuing benefits or
coverage for current or former officers, directors or employees
of the Company or any of its Subsidiaries except (A) as may be
required under Part 6 of Title I of ERISA and at the sole
expense of the participant or the participant's beneficiary or
(B) a medical expense reimbursement account plan pursuant to
Section 125 of the Code.
(viii) Except as disclosed in Section 3.1(n)(viii) of the Disclosure
Memorandum, none of the assets of any Company Benefit Plan is
stock of the Company or any of its affiliates, or property
leased to or jointly owned by the Company or any of its
affiliates.
(ix) Except as disclosed in Section 3.1(n)(ix) of the Disclosure
Memorandum and as otherwise provided in Sections 2.6 and 2.7,
neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (A)
result in any payment becoming due to any employee (current,
former or retired) of Company, (B) increase any benefits under
any Company Benefit Plan or Company Employee Arrangement, or
(C) result in the acceleration of the time of payment of,
vesting of or other rights with respect to any such benefits.
(x) Neither the Company nor any of its Subsidiaries has any
obligation (or prior obligation) to make contributions to any
benefit plan described in Sections 3(37), 4063 or 4064 of ERISA.
(xi) Neither the Company nor any of its Subsidiaries is acting on
behalf of an employee benefit plan subject to ERISA, or acting
on behalf of or using (A) assets which are or which are deemed
under ERISA to be assets of an employee benefit plan subject to
22
ERISA, (B) assets of a foreign, church or governmental employee
benefit plan, or (C) assets of individual retirement accounts.
(xii) No prohibited transaction under Section 406 of ERISA or Section
4975 of the Code has occurred with respect to a Company Benefit
Plan.
(xiii) Each Company Benefit Plan (including, without limitation, a
Company Benefit Plan covering retirees or the beneficiaries of
such retirees) may be terminated or amended by the plan sponsor
at any time without the consent of any person covered
thereunder, and may be terminated without liability for
benefits accruing after the date of such termination.
(xiv) The Company has no knowledge of any oral or written statement
made by or on behalf of the Company or a Subsidiary regarding a
Company Benefit Plan or Company Employee Arrangement that was
not in accordance with the Company Benefit Plan or Company
Employee Arrangement.
(xv) There are no trusts or other arrangements under any Company
Benefit Plan which are intended to qualify as a voluntary
employees' beneficiary association under Section 501(c)(9) of
the Code.
(o) LABOR MATTERS.
(i) Except as set forth in Section 3.1(o) of the Disclosure
Memorandum, (A) neither the Company nor any of its Subsidiaries
is a party to any labor or collective bargaining agreement and
no employees of the Company or any of its Subsidiaries are
represented by any labor organization; (B) within the preceding
three years, there have been no representation or certification
proceedings, or petitions seeking a representation proceeding,
pending or, to the knowledge of the Company, threatened in
writing to be brought or filed with the National Labor Relations
Board or any other labor relations tribunal or authority; and
(C) within the preceding three years, to the knowledge of the
Company, there have been no organizing activities involving the
Company or any of its Subsidiaries with respect to any group of
employees of the Company or any of its Subsidiaries.
(ii) There are no strikes, work stoppages, slowdowns, lockouts,
material arbitrations or material grievances or other material
labor disputes pending or threatened in writing against or
involving the Company or any of its Subsidiaries. There are no
unfair labor practice charges, grievances or complaints pending
or, to the knowledge of the Company, threatened in writing by
or on behalf of any employee or group of employees of the
Company or any of its Subsidiaries.
(iii) Except as set forth in Section 3.1(o) of the Disclosure
Memorandum, there are no complaints, charges or claims against
the Company or any of its Subsidiaries pending or, to the
knowledge of the Company, threatened to be brought or filed
with any governmental authority, arbitrator or court based on,
arising out of, in connection with, or otherwise relating to
the employment or termination of employment of any individual
by the Company or any of its Subsidiaries.
(iv) The Company and each of its Subsidiaries is in compliance with
all laws, regulations and orders relating to the employment of
labor, including all such laws, regulations and orders relating
to wages, hours, Worker Adjustment Retraining and Notification
Act of 1988, as amended ("WARN ACT"), collective bargaining,
discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding
and/or social security taxes and any similar tax, except where
non compliance would
23
not individually or in the aggregate adversely affect the
Company and its Subsidiaries taken as a whole in any material
respect.
(v) Since December 31, 1993, there has been no "mass layoff" or
"plant closing" (as deemed by the WARN Act) with respect to the
Company or any of its Subsidiaries.
(p) ENVIRONMENTAL MATTERS.
(i) For purposes of this Agreement:
(A) "ENVIRONMENTAL LAW" means any applicable law regulating or
prohibiting Releases of Hazardous Materials into any part of the
natural environment, or pertaining to the protection of natural
resources, the environment, and public and employee health and
safety from Hazardous Materials including, without limitation,
the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") (42 U.S.C. Section 9601 ET SEQ.), the
Hazardous Materials Transportation Act (49 U.S.C. Section 1801 ET
SEQ.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 ET SEQ.), the Clean Water Act (33 U.S.C. Section
1251 ET SEQ.), the Clean Air Act (33 U.S.C. Section 7401 ET
SEQ.), the Toxic Substances Control Act (15 U.S.C. Section 7401
ET SEQ.), the Federal Insecticide, Fungicide, and Rodenticide Act
(7 U.S.C. Section 136 ET SEQ.), and the Occupational Safety and
Health Act (29 U.S.C. Section 651 ET SEQ.) ("OSHA") (to the
extent OSHA regulates occupational exposure to Hazardous
Materials) and the regulations promulgated pursuant thereto, and
any such applicable state or local statutes, and the regulations
promulgated pursuant thereto, as such laws have been and may be
amended or supplemented through the Closing Date;
(B) "HAZARDOUS MATERIAL" means any substance, material or waste
which is regulated as hazardous or toxic by any public or
governmental authority in the jurisdictions in which the
applicable party or its Subsidiaries conducts business, or the
United States, including, without limitation, any material or
substance which is defined as a "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste" or
"restricted hazardous waste," "contaminant," "toxic waste" or
"toxic substance" under any provision of Environmental Law and
shall also include, without limitation, petroleum, petroleum
products, asbestos, polychlorinated biphenyls and radioactive
materials;
(C) "RELEASE" means any release, spill, effluence, emission,
leaking, pumping, injection, deposit, disposal, discharge,
dispersal, leaching, or migration of Hazardous Material into the
environment; and
(D) "REMEDIAL ACTION" means all actions, including, without
limitation, those involving any capital expenditures, required by
a governmental entity or required under any Environmental Law, or
voluntarily undertaken to (w) clean up, remove, treat, or in any
other way mitigate the adverse effects of any Hazardous Materials
Released in the environment; (x) prevent the Release or threat of
Release, or minimize the further Release of any Hazardous
Material so it does not endanger or threaten to endanger the
public health or welfare or the environment; (y) perform
preremedial studies and investigations or postremedial monitoring
and care pertaining or relating to a Release or threat of
Release; or (z) bring the applicable party into compliance with
any Environmental Law.
(ii) Except as set forth in Section 3.1(p) of the Disclosure
Memorandum:
(A) The operations of the Company and each of its Subsidiaries
have been and, as of the Closing Date, will be, in compliance
with all Environmental Laws, except for such
24
noncompliance which would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect;
(B) The Company and each of its Subsidiaries have obtained and
will, as of the Closing Date, maintain all permits required under
applicable Environmental Laws for the continued operations of
their respective businesses, except where the failure to so
obtain or maintain would not individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a
whole in any material respect;
(C) Neither the Company nor any of its Subsidiaries is subject
to any outstanding orders from, or agreements with, any
Governmental Entity or other person respecting (x) Environmental
Laws, (y) Remedial Action or (z) any Release or threatened
Release of a Hazardous Material;
(D) Neither the Company nor any of its Subsidiaries has received
any written communication alleging, with respect to any such
party, the violation of or potential liability under any
Environmental Law;
(E) Neither the Company nor any of its Subsidiaries has
contingent liability in connection with the Release of any
Hazardous Material into the environment (whether on-site or
off-site);
(F) Neither the operations of the Company nor any of its
Subsidiaries involve the generation, transportation, treatment,
storage or disposal of hazardous waste as defined and regulated
under 40 C.F.R. Parts 260-270 (in effect as of the date of this
Agreement) or any state equivalent;
(G) There is not now, nor, to the knowledge of the Company, has
there been in the past, on or in any property of the Company or
any of its Subsidiaries any of the following: (w) any underground
storage tanks; (x) surface impoundments; (y) any polychlorinated
biphenyls; or (z) any asbestos-containing materials;
(H) No judicial or administrative proceedings or governmental
investigations are pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries
alleging the violation of or seeking to impose liability pursuant
to any Environmental Law;
(I) The Company has made available to Parent copies of all
environmental investigations, studies, audits, tests, reviews and
other analyses, including soil and/or groundwater analyses,
conducted by or on behalf of, or that are in the possession,
custody or control of the Company or any of its Subsidiaries, in
relation to any site or facility owned, operated, leased or used,
at any time, by the Company or any of its Subsidiaries or any of
their respective predecessors;
(J) Neither the Company nor any of its Subsidiaries has caused
or suffered to occur any Release at, under, above or within any
real property, owned, operated, used or leased by the Company or
any of its Subsidiaries;
(K) No environmental approvals, clearances or consents are
required under applicable law from any governmental entity or
authority in order to consummate the transactions contemplated
herein; and
25
(L) Neither the Company nor any of its Subsidiaries has any
fixed or contingent liability in connection with environmental
conditions at or associated with any vessel or facility in which
the Company or any of its Subsidiaries owns or previously owned
or holds or previously held a mortgage or other security
interest, and neither the Company nor any of its Subsidiaries has
participated in the management of any such vessel or facility.
(iii) This Section 3.1(p) sets forth the sole representations and
warranties of the Company with respect to Environmental Laws.
(q) PROPERTY AND ASSETS.
(i) Section 3.1(q)(i) of the Disclosure Memorandum sets forth all of
the real property owned in fee by the Company and its
Subsidiaries. The Company or its Subsidiaries have good and
marketable title to each parcel of real property owned by them
free and clear of all Liens, except (A) those reflected or
reserved against in the consolidated balance sheet of the
Company dated as of December 31, 1996, (B) taxes and general and
special assessments not in default and payable without penalty
and interest for which reasonable reserves have been
established, (C) mechanics and similar statutory liens arising
or incurred in the ordinary course of business for amounts that
are not delinquent, (D) any zoning, building, and land use
regulation imposed by any Governmental Entity, and (E) any
covenant, restriction, or easement expressly set forth in the
title documents governing such real property filed with the
appropriate Governmental Entity. There are no (A) zoning,
building or land use regulations imposed by any Governmental
Entities or (B) any covenant, restriction or easement filed and
expressly set forth in the title documents governing such real
property which in any case materially interfere with the current
and intended use of such property or materially impair the value
of such property as reflected on the books of the Company.
(ii) Each lease, sublease or other agreement (collectively, the
"REAL PROPERTY LEASES") under which the Company or any of its
Subsidiaries uses or occupies or has the right to use or
occupy, now or in the future, any real property is valid,
binding and in full force and effect, all rent and other sums
and charges payable by the Company or any of its Subsidiaries
as a tenant thereunder are current, and no termination event or
condition or uncured default of a material nature on the part
of the Company or any of its Subsidiaries or, to the Company's
knowledge, the landlord, exists under any Real Property Lease.
The Company and its Subsidiaries have a good and valid
leasehold interest in each parcel of real property leased by
them free and clear of all Liens, except those reflected or
reserved against in the consolidated balance sheet of the
Company dated as of December 31, 1996.
(iii) Section 3.1(q)(iii) of the Disclosure Memorandum contains a
list of all purchases or acquisitions, sales or dispositions of
all investment assets of the Company and its Subsidiaries since
December 31, 1996 and prior to the date of this Agreement. The
Company and its Subsidiaries have good and marketable title to
such investment assets owned by them free and clear of all
Liens.
(iv) Except as set forth in Section 3.1(q)(iv) of the Disclosure
Memorandum, the Company and its Subsidiaries own good and
indefeasible title to, or have a valid leasehold interest in or
a valid right under contract to use, all tangible personal
property that is used in the conduct of their business, free
and clear of any Liens, except for any mechanics or similar
statutory liens arising in the ordinary course of business. All
such tangible personal property is in good operating condition
and repair (normal wear and tear) and is suitable for its
current uses.
26
(v) Except as set forth in Section 3.1(q)(v) of the Disclosure
Memorandum, the Company and its Subsidiaries own or have a right
to use each trademark, trade name, patent, service mark, brand
mark, brand name, database, copyright and other intellectual
property owned or used in connection with the operation of the
business of the Company and its Subsidiaries, including any
registrations thereof, and each license or other contract
relating thereto (collectively, the "COMPANY INTANGIBLE
PROPERTY"), free and clear of any and all Liens. Section
3.1(q)(v) of the Disclosure Memorandum sets forth a complete
list of the Company Intangible Property. The use of the Company
Intangible Property by the Company and its Subsidiaries does not
conflict with, infringe upon, violate or interfere with or
constitute an appropriation of any right, title, interest or
goodwill, including, without limitation, any intellectual
property right, trademark, trade name, patent, service mark,
brand mark, brand name, database or copyright of any other
person. Except as set forth in Section 3.1(q)(v) of the
Disclosure Memorandum, the Company and its Subsidiaries own or
have valid and enforceable licenses or other rights to use, free
and clear of any and all Liens, all software used in connection
with the operation of the business of the Company and its
Subsidiaries, the use of such software by the Company and its
Subsidiaries does not infringe on or otherwise violate the
rights of any person, and, to the knowledge of the Company, no
person is challenging, infringing on or otherwise violating the
right of the Company or any Subsidiary with respect to any such
software used by the Company and its Subsidiaries.
(vi) The Company and its Subsidiaries own or have the rights to use
all assets required for the conduct of the business of the
Company and its Subsidiaries as it is now conducted.
(r) MATERIAL CONTRACTS. Section 3.1(r) of the Disclosure Memorandum
contains a true and complete list of each of the following Contracts in
effect as of the date of this Agreement (true and complete copies of
which have been made available to Parent) to which the Company or any of
its Subsidiaries is a party or by which any of their respective assets or
properties is or may be bound (each of which is a "COMPANY MATERIAL
CONTRACT"):
(i) all employment, agency (other than insurance agency),
consultation, or representation Contracts or other Contracts of
any type (including without limitation loans or advances) with
any present officer, director, Key Employee (as defined below),
agent (other than an insurance agent), consultant, or other
similar representative of the Company or any of its Subsidiaries
(or former officer, director, Key Employee, agent (other than an
insurance agent), consultant or similar representative of the
Company or any of its Subsidiaries if there exists any present
or future liability with respect to such Contract);
(ii) a specimen form insurance agent Contract (the "Producer
Agreements") and any insurance agent Contract having terms
different in any material respect than the terms contained in
the specimen form agent Contract;
(iii) all Contracts with any person or entity containing any
provision or covenant (A) limiting the ability of the Company
to (x) sell any products or services, (y) engage in any line of
business, or (z) compete with or obtain products or services
from any person or entity or (B) limiting the ability of any
person or entity to compete with or to provide products or
services to the Company;
(iv) all Contracts relating to the borrowing of money by the
Company, relating to the deferred purchase price for property
or services, or relating to the direct or indirect guarantee by
the Company or any of its Subsidiaries of any liability;
27
(v) all Contracts (other than Contracts of insurance or reinsurance
entered into in the ordinary course of business) pursuant to
which the Company or any of its Subsidiaries has agreed to
indemnify or hold harmless any person or entity (other than
indemnifications or hold harmless covenants in the ordinary
course of business and consistent with past practice);
(vi) all leases or subleases of real property used in the business,
operations, or affairs of the Company or any of its
Subsidiaries;
(vii) all Contracts or arrangements (including without limitation
those relating to allocations of expenses, personnel, services,
or facilities) between the Company and any of its Subsidiaries
or among the Subsidiaries of the Company;
(viii) all leases of automobiles used in the business, operations, or
affairs of the Company or any of its Subsidiaries;
(ix) all reinsurance (whether as assuming or ceding insurer or
otherwise), coinsurance or other similar Contracts;
(x) all other Contracts (other than insurance Contracts issued,
reinsured, or underwritten by the Company) that involve the
payment or potential payment, pursuant to the terms of such
Contracts, by or to the Company of more than $75,000 or that are
otherwise material to the business or condition of the Company;
and
(xi) any commitments or other obligations to enter into any of the
foregoing.
Each Contract disclosed or required to be disclosed in Section 3.1(r)
of the Disclosure Memorandum is in full force and effect and constitutes
a legal, valid and binding obligation of the Company or any of its
Subsidiaries to the extent any such entity is a party thereto and, to the
knowledge of Company, each other party thereto. Neither the Company nor
any of its Subsidiaries has received from any other party to such
Contract any written notice of termination or intention to terminate or
not to honor the terms of such Contract, or to the knowledge of the
Company, any oral notice of termination or intention to terminate or not
to honor the terms of such Contract. Except as set forth in Section
3.1(r) of the Disclosure Memorandum, neither the Company nor any of its
Subsidiaries nor, to the knowledge of the Company, any other party to
such Contract is in violation or breach of or default under any such
Contract (or with or without notice or lapse of time or both, would be in
violation or breach of or default under any such Contract), which
violations, breach or default would individually or in the aggregate
adversely affect the Company and its Subsidiaries taken as a whole in any
material respect. As used in this Agreement, the word "CONTRACT" shall
mean any agreement, arrangement, undertaking, lease, sublease, license,
sublicense, promissory note, evidence of indebtedness or other binding
contract, in each case, whether or not reduced to writing. As used in
this Agreement "Key Employee" shall mean employees of the Company or
Parent, as the case may be, having a salary of $90,000 or more per year.
(s) RELATED PARTY TRANSACTIONS. Except as set forth in Section
3.1(s) of the Disclosure Memorandum, no director, officer, Key Employee,
"affiliate" or "associate" (as such terms are defined in Rule 12b-2 under
the Exchange Act) of the Company (each a "RELATED PARTY") (i) has
borrowed any monies from or has outstanding any indebtedness, liabilities
or other similar obligations to the Company or any of its Subsidiaries;
(ii) owns any direct or indirect interest of any kind in, or is a
director, officer, employee, partner, affiliate or associate of, or
consultant or lender to, or borrower from, or has the right to
participate in the management, operations or profits of, any person or
entity which is (A) a competitor, supplier, customer, distributor,
lessor, tenant, creditor or debtor of the Company or any of its
Subsidiaries, (B) engaged in a business related to the business of the
Company or any of its Subsidiaries, or (C) participating in any
28
transaction to which the Company or any of its Subsidiaries is a party;
or (iii) is otherwise a party to any contract, arrangement or
understanding with the Company or any of its Subsidiaries.
(t) PREPAYMENT OF CREDIT FACILITIES. The Loan Agreement, dated July
30, 1996, among the Company, Dresdner Bank AG, New York Branch, as Agent,
and the lenders party thereto and the Loan Agreement, dated July 30, 1996
and amended as of February 14, 1997, among Westchester Premium Acceptance
Corporation, Dresdner Bank AG, New York Branch, as Agent, and the lenders
party thereto (collectively referred to herein as the "COMPANY CREDIT
FACILITIES") are prepayable without the payment of any premium or
penalties.
(u) LIENS. Except as set forth in Section 3.1(u) of the Disclosure
Memorandum, neither the Company nor any of its Subsidiaries has granted,
created, or suffered to exist with respect to any of its assets, any
mortgage, pledge, charge, hypothecation, collateral assignment, lien
(statutory or otherwise), encumbrance or security agreement of any kind
or nature whatsoever (collectively, the "LIENS").
(v) OPERATIONS INSURANCE. Section 3.1(v) of the Disclosure
Memorandum contains a true and complete list and description of all
liability, property, workers compensation, directors and officers
liability, and other similar insurance policies or agreements that insure
the business, operations, or affairs of the Company and its Subsidiaries
or affect or relate to the ownership, use, or operations of any of the
assets or properties of the Company and its Subsidiaries. Excluding
insurance policies that have expired and been replaced in the ordinary
course of business, no insurance policy has been canceled within the last
year except as disclosed in Section 3.1(v) of the Disclosure Memorandum,
and, to the knowledge of the Company or its Subsidiaries, no threat has
been made to cancel any insurance policy of any of the Company or its
Subsidiaries during such period. Except as disclosed in Section 3.1(v) of
the Disclosure Memorandum, all such insurance will remain in full force
and effect with respect to periods before the Closing without the payment
of additional premiums. No event has occurred, including, without
limitation, the failure by any of the Company or its Subsidiaries to give
any notice or information or any of the Company or its Subsidiaries
giving any inaccurate or erroneous notice or information, which limits or
impairs the rights of such Company or Subsidiary under any such insurance
policies.
(w) OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of Furman Selz LLC (the "FINANCIAL ADVISOR") dated August 7, 1997
(the "FS OPINION"), to the effect that, as of the date thereof, the
Merger Consideration to be received by the holders of Company Common
Stock in the Merger is fair from a financial point of view to such
holders. A signed, true and complete copy of the FS Opinion has been
delivered to Parent, and the FS Opinion has not been withdrawn or
modified. True and complete copies of all agreements and understandings
between the Company or any of its affiliates and the Financial Advisor
relating to the transactions contemplated by this Agreement are attached
hereto as Section 3.1(w) of the Disclosure Memorandum.
(x) BOARD RECOMMENDATION. The Board of Directors of the Company, at
a meeting duly called and held, has by the unanimous vote of those
directors present (who constituted all of the directors then in office)
(i) determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of the shareholders of the
Company and has approved the same, (ii) resolved to recommend, subject to
the board's fiduciary duties, that the holders of the shares of Company
Common Stock approve this Agreement and the transactions contemplated
herein, and (iii) resolved to call a special meeting of the shareholders
of the Company to approve the Merger.
(y) VOTE REQUIRED. The affirmative vote of the holders of
two-thirds of the outstanding shares of Company Common Stock is the only
vote of the holders of any class or series of the
29
Company's capital stock necessary (under applicable law or otherwise) to
approve the Merger and the transactions contemplated hereby.
(z) BROKERS. The Company represents, as to itself and its
affiliates, that no agent, broker, investment broker, financial advisor
or other firm or person is or will be entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement, except for E. B. Lyon,
III and/or Stonegate Securities Inc. (in either case, pursuant to the
letter agreement with the Company dated May 13, 1997) and the Financial
Advisor, whose fees and expenses shall be paid by the Company in
accordance with the Company's agreements with such individual and/or
firm(s) (copies of which have been delivered by the Company to USF&G
prior to the date of this Agreement).
(aa) BANK ACCOUNTS. Section 3.1(aa) of the Disclosure Memorandum
contains (i) a true and complete list of the names and locations of all
banks, trust companies, securities brokers, and other financial
institutions at which the Company and each of its Subsidiaries has an
account or safe deposit box or maintains a banking, custodial, trading,
trust, or other similar relationship, (ii) a true and complete list and
description of each such account, box, and relationship, and (iii) a list
of all signatories for each such account and box.
(bb) PREMIUM BALANCES RECEIVABLE. The premium balances receivable
of the Company and its Subsidiaries as reflected in the Company's
financial statements for the quarter ended March 31, 1997, to the extent
uncollected on the date hereof, and the premium balances receivable
reflected on the books of the Company and its Subsidiaries as of the date
hereof, are valid and existing and represent monies due, and the Company
and its Subsidiaries have made reserves reasonably considered adequate
for receivables not collectible in the ordinary course of business, and
(subject to the aforesaid reserves) are subject to no refunds or other
adjustments and to no defenses, rights of setoff, assignments,
restrictions, encumbrances or conditions enforceable by third parties or
affecting any material amount thereof.
(cc) INVESTMENT PORTFOLIO AND OTHER ASSETS. The Company and its
Subsidiaries own an investment portfolio acquired in the ordinary course
of business, and a true and complete list of the securities and other
investments in such investment portfolio, as of June 23, 1997 with
respect to mortgage loans and May 30, 1997 with respect to debt and
equity securities and other investments, with true and correct
information included thereon as to the cost of each such investment and
the market value thereof as of such date, is listed in Section 3.1(cc) of
the Disclosure Memorandum. Except as otherwise set forth in Section
3.1(cc) of the Disclosure Memorandum, (i) none of the investments
included in such investment portfolio is in default in the payment of
principal or interest or dividends or impaired to any extent, (ii) all
investments included in such investment portfolio comply (x) with all
insurance laws and regulations of each of the states to which the Company
and its Subsidiaries is subject relating thereto and (y) with all federal
and state securities laws, and (iii) such investments constitute all of
the investments or holdings (including loans to agencies) of the Company
and its Subsidiaries other than any disclosed in Sections 3.1(c),
3.1(q)(i) or 3.1(q)(iii) of the Disclosure Memorandum
(dd) QUESTIONABLE PAYMENTS. To the knowledge of the Company,
neither the Company nor any of its Subsidiaries nor any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or any Subsidiary has used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity, or made any direct or indirect unlawful
payments to government officials or employees or agents from corporate
funds, or established or maintained any unlawful or unrecorded funds.
(ee) REINSURANCE AGREEMENTS. Section 3.1(ee) of the Disclosure
Memorandum is a true and complete list of all reinsurance treaties and
contracts applicable to the Company (whether as
30
ceding insurer or assuming reinsurer) or the Subsidiaries (individually,
a "REINSURANCE AGREEMENT" and collectively, the "REINSURANCE
AGREEMENTS"), copies of which have been delivered or made available to
Parent. Each of the Reinsurance Agreements is valid and binding in all
material respects in accordance with its terms and is in full force and
effect. None of the Reinsurance Agreements will terminate because of a
change in control of the Company or any of the Subsidiaries. No other
party to any Reinsurance Agreement has given notice to the Company or any
of its Subsidiaries that intends to terminate or cancel any such
Reinsurance Agreement as a result of the Merger or the contemplated
operations of the Company or its Subsidiaries after the Merger is
consummated, which termination or change would have a Material Adverse
Effect on the Company. Any Subsidiary of the Company that has ceded
reinsurance pursuant to any such Reinsurance Agreement is entitled to
take full credit in its financial statements for all amounts recoverable
(net of any reserve for collectibility under such Reinsurance Agreement)
with such credit accounted for (i) pursuant to SAP, as a reduction of
such Company's loss reserves, and (ii) pursuant to GAAP, as a reinsurance
recoverable asset.
(ff) QUICK-SURE AUTO AGENCY, INC. Quick-Sure Auto Agency, Inc.
("QUICK-SURE") is a Texas corporation owned 99% by Mark E. Watson, Jr.
("WATSON") and 1% by Dennis Walsh ("Walsh"). There are outstanding (i) no
shares of capital stock of Quick-Sure other than those shares held by
Watson and Walsh; (ii) no securities of Quick-Sure convertible into or
exchangeable for shares of capital stock of Quick-Sure or any other
voting securities of Quick Sure; and (iii) no stock awards, options,
warrants, calls, rights (including stock purchase or preemptive rights)
commitments or agreements to which Quick-Sure is bound, in any case
obligating Quick-Sure to issue, deliver, sell, purchase, redeem or
acquire or cause to be issued, delivered, sold, purchased, redeemed or
acquired, additional shares of its capital stock, any other voting
securities or securities convertible into or exchangeable or exercisable
for voting securities of Quick-Sure, or obligating Quick-Sure to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. Quick-Sure has appointed under a Local Recording Agent
Agreement (the "LRA AGREEMENT") with Titan Insurance Services, Inc.
("TIS"), a subsidiary of Whitehall Insurance Agency of Texas, Inc. (a
wholly owned subsidiary of the Company), to write insurance on behalf of
TIS, and a true and correct copy of the LRA Agreement, including any
amendments thereto, has been provided to the Parent. The LRA Agreement is
terminable by TIS at any time in its sole discretion without any further
liability or obligation to Quick-Sure. Except as set forth in Section
3.1(hh) of the Disclosure Memorandum, Quick-Sure does not engage in any
business other than the writing of insurance policies on behalf of TIS
and is not obligated by any material agreement or other obligation. TIS
has an exclusive right to any renewals of policies written by Quick-Sure,
and nothing in any producer agreement or other agreement to which
Quick-Sure, the Company or any of the Company's Subsidiaries is a party
provides to the contrary. The insurance written by Quick-Sure is placed
with Home State County Mutual Insurance ("HOME STATE") pursuant to a
Managing General Agent Agreement between Home State and TIS (the "MGA
AGREEMENT"), and a true and correct copy of the MGA Agreement, including
any amendments thereto, has been provided to the Parent. All operations
of Quick-Sure have been conducted in accordance with the terms of the LRA
Agreement and the MGA Agreement. All arrangements between Home State,
Quick-Sure, and the Company and/or any of its Subsidiaries are in
compliance with all applicable laws and have received all necessary
consents, approvals and authorizations from any required regulatory
authorities or third parties.
(gg) Tri-West of New Mexico, LLC, a New Mexico limited liability
company, Tri-West of Indianapolis, LLC, an Indiana limited liability
company, and Tri-West of Florida, LLC, a Florida limited liability
company (collectively, the "TRI-WEST AGENCIES") are each owned one-third
by each of E.B. Lyon, III, Michael J. Claypool and Michael J. Bodayle.
There are outstanding (i) no membership or other equity or voting
interests of Tri-West Holdings, LLC ("TRI-WEST") or any Tri-West Agency,
other than as set forth above; (ii) no securities of Tri-West Holdings or
any Tri-West
31
Agency convertible into or exchangeable for membership or other equity or
voting interests; and (iii) no stock awards, options, warrants, calls,
rights (including stock purchase or preemptive rights), commitments or
agreements to which Tri-West Holdings or any Tri-West Agency is bound, in
any case obligating Tri-West Holdings or any Tri-West Agency to issue,
deliver, sell, purchase, redeem or acquire or cause to be issued,
delivered, sold, purchased, redeemed or acquired additional membership or
other equity or voting interests or securities convertible into or
exchangeable or exercisable for membership, equity or other voting
interests of Tri-West Holdings or any Tri-West Agency, or obligating
Tri-West Holdings or any Tri-West Agency to grant, extend or enter into
any such option, warrant, call, right, commitment or agreement. Each of
the Tri-West Agencies has entered into a producer agreement with Titan
Indemnity Company ("INDEMNITY") in the form set forth in Section 3.1(gg)
of the Disclosure Memorandum. Tri-West of New Mexico, LLC has entered
into a Direct Response Center Agreement dated November 30, 1996 (together
with the producer agreements referenced in the immediately preceding
sentence, the "TRI-WEST AGREEMENTS"). To the knowledge of the Company,
none of the Tri-West Agencies engage in any business other than the
writing of insurance policies on behalf of Indemnity and none of the
Tri-West Agencies is obligated by any material agreement or other
obligation other than employment agreements entered into in connection
with the acquisition of such Tri-West agency. Each of the Tri-West
Agencies has an exclusive right to any renewals of policies written by
such Tri-West Agency, and, to the knowledge of the Company, nothing in
any producer agreement nor other agreement to which Tri-West Holdings or
any Tri-West Agency is a party provides to the contrary. To the knowledge
of the Company, all operations of the Tri-West Agencies have been
conducted in accordance with the terms of the Tri-West Agreements. All
arrangements between Tri-West Holdings or any Tri-West Agency, on the one
hand, and the Company and/or any of its Subsidiaries, on the other hand,
are in compliance with all applicable laws and have received all
necessary consents, approvals and authorizations from any required
regulatory authorities or third parties.
3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND USF&G. Except as
disclosed in (i) Parent's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, (ii) Parent's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997 (collectively such Form 10-K and Form
10-Q, the "PARENT SEC REPORTS"), or (iii) the Disclosure Memorandum
delivered at or prior to the date of this Agreement (it being understood
that each section of the Disclosure Memorandum shall list all items
applicable to such section, although the inadvertent omission of an item
from one section shall not be a breach of this Agreement if such item and an
explanation of the nature of such item is clearly disclosed in another
section of the Disclosure Memorandum), Parent and USF&G represent and
warrant to the Company as follows:
(a) ORGANIZATION, STANDING AND POWER. Each of Parent and USF&G is a
corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is incorporated, has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted and is
duly qualified or licensed to do business as a foreign corporation and in
good standing to conduct business in each jurisdiction in which the
business it is conducting, or the operation, ownership or leasing of its
properties, makes such qualification or license necessary, other than
such jurisdictions where the failure so to qualify or become so licensed
would not, individually or in the aggregate, adversely affect Parent and
its Subsidiaries taken as a whole in any material respect. Parent has
heretofore made available to the Company complete and correct copies of
its Articles of Incorporation, as currently in effect as of the date of
this Agreement (the "PARENT ARTICLES OF INCORPORATION"), and its Bylaws,
as currently in effect as of the date of this Agreement (the "PARENT
BYLAWS").
(b) CAPITAL STRUCTURE. As of June 30, 1997, the authorized capital
stock of Parent consists of 240,000,000 shares of Parent Common Stock and
12,000,000 shares of Preferred Stock, $50.00
32
par value. As of the close of business on June 30, 1997, there were
110,691,498 shares of Parent Common Stock validly issued and outstanding
(all of which are fully paid and nonassessable). As of such date, except
for (i) options to purchase or other obligations to issue 11,531,342
shares of Parent Common Stock, (ii) $175,653,000 principal amount at
maturity of Zero Coupon Convertible Subordinated Notes due March 3, 2009
issued by Parent, and (iii) the Preferred Share Purchase Rights issued
pursuant to the Amended and Restated Rights Agreement dated March 11,
1997, between Parent and The Bank of New York ("PARENT RIGHTS"), there
are no options, warrants, calls or other rights, agreements or
commitments presently outstanding obligating Parent to issue, deliver or
sell shares of its capital stock, or obligating Parent to grant, extend
or enter into any such option, warrant, call or other such right,
agreement or commitment. Parent has not issued any securities in
violation of any preemptive or similar rights.
(c) As of June 30, 1997, the authorized capital stock of USF&G
consists of 40,000,000 shares of USF&G Common Stock, 28,231,715 shares of
which are validly issued and outstanding, fully paid and nonassessable,
and 4,000,000 shares of Preference Stock, par value $50.00 per share,
none of which are issued and outstanding. USF&G has not issued any
securities in violation of any preemptive or similar rights, and there
are no options, warrants, calls, rights or other securities, agreements
or commitments of any character obligating USF&G to issue capital stock.
(d) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) Parent and USF&G have all requisite corporate power and
authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and USF&G. This Agreement
has been duly executed and delivered by Parent and USF&G and
assuming that this Agreement constitutes the valid and binding
agreement of the Company, constitutes a valid and binding
obligation of Parent and USF&G enforceable in accordance with
its terms and conditions except that the enforcement hereof may
be limited by (A) applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other
similar laws now or hereafter in effect relating to creditors'
rights generally and (B) general principles of equity
(regardless of whether enforceability is considered in a
proceeding at law or in equity) and (c) any ruling or action of
any Governmental Entity as set forth in Section 3.2(d)(iii).
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by Parent
and USF&G will not result in a violation pursuant to (A) any
provision of the Parent Articles of Incorporation or Parent
Bylaws or the comparable documents of any of its Subsidiaries
or (B) except as to which requisite waivers or consents have
been obtained as specifically identified in Section 3.2(d) of
the Disclosure Memorandum and assuming the consents, approvals,
authorizations or permits and filings or notifications referred
to in paragraph (iii) of this Section 3.2(d) are duly and
timely obtained or made, any loan or credit agreement, note,
mortgage, deed of trust, indenture, lease, or any other
agreement, obligation, instrument, concession or license or any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent, USF&G or any of their
respective properties or assets, except for such Violations
which would not, individually or in the aggregate, adversely
affect Parent and its Subsidiaries taken as a whole in any
material respect.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit
from a Governmental Entity is required by or with respect to
Parent or USF&G or any of their respective Subsidiaries in
connection with the
33
execution and delivery of this Agreement by Parent or USF&G or
the consummation by Parent or USF&G of the transactions
contemplated hereby, except for: (A) any actions, consents,
approvals, filings and/or notices that may be required under the
insurance laws and regulations of the jurisdictions in which the
Subsidiaries of Parent that are insurance companies are
domiciled or licensed, each of which is listed in Section
3.2(d)(iii) of the Disclosure Memorandum; (B) the filing of a
pre-merger notification and report form by Parent under the HSR
Act, and the expiration or termination of the applicable waiting
period thereunder; (C) the filing with the SEC of (x) the Proxy
Statement, (y) the Form S-4, and (z) such reports under and such
other compliance with the Exchange Act and the rules and
regulations thereunder as may be required in connection with
this Agreement and the transactions contemplated hereby; (D) the
filing of the Articles of Merger with the Secretary of State of
the State of Texas and the Maryland State Department of
Assessments and Taxation; and (E) such filings and approvals as
may be required by any applicable state securities, "blue sky"
or takeover laws.
(e) GOVERNMENT FILINGS. Parent has made available to the Company a
true and complete copy of each report, schedule and definitive proxy
statement filed by Parent with the SEC pursuant to the Exchange Act and
the Rules and Regulations promulgated thereunder since December 31, 1994
and prior to the date of this Agreement other than reports on Form 11-K
relating to employee benefit plans, which are all the documents (other
than preliminary material) that Parent was required to file with the SEC
under the Exchange Act since such date. As of their respective dates, the
Parent SEC Reports complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to such Parent SEC Reports, and none of
the Parent SEC Reports contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The consolidated financial
statements of Parent included in the Parent SEC Reports comply as to form
in all material respects with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and
fairly present in accordance with applicable requirements of GAAP the
consolidated financial position of Parent and its consolidated
subsidiaries as of the dates therein and the consolidated results of
their operations and cash flows for the periods presented therein
(subject, in the case of unaudited interim financial statements, to
normal recurring adjustments none of which are material). Section 3.2(e)
of the Disclosure Memorandum lists with respect to the Parent Common
Stock for the period since December 31, 1996 and prior to the date of
this Agreement each: (i) Schedule 13D filed with the SEC and (ii)
application for change in control filed under the insurance holding
company laws of any state or other jurisdiction.
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Parent (including information concerning USF&G) for inclusion
or incorporation by reference in (i) the Form S-4 will, at the time the
Form S-4 is filed with the SEC, and at any time it is amended or
supplemented or at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading, and (ii) the Proxy Statement will, on the date it
is first mailed to the holders of Company Common Stock or at the time of
the Shareholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4
will, as of its effective date, and the prospectus
34
contained therein will, as of its date, comply as to form in all material
respects with the requirements of the Securities Act and the rules and
regulations promulgated thereunder, except that no representation is made
by Parent with respect to statements made or incorporated by reference
therein based on information supplied in writing by the Company
specifically for inclusion therein. If, at any time prior to the
Shareholders' Meeting, any event with respect to Parent, or with respect
to other information supplied by Parent for inclusion in the Proxy
Statement, shall occur which is required to be described in an amendment
of, or a supplement to, any of such documents, such event shall be so
described, and such amendment or supplement shall be promptly filed with
the SEC and, as required by law, disseminated to the shareholders of
Parent.
(g) COMPLIANCE WITH APPLICABLE LAWS.
(i) Except as disclosed in Section 3.2(g)(i) of the Disclosure
Memorandum, the business of Parent and each of its Subsidiaries
is being conducted in compliance in all material respects with
all applicable laws, including, without limitation, all
insurance laws, ordinances, rules and regulations, decrees and
orders of any Governmental Entity, and all notices, reports,
documents and other information required to be filed thereunder
within the last three years were properly filed and were in
compliance in all respects with such laws.
(ii) OTHER LICENSES. Parent and each of its Subsidiaries owns or
validly holds all licenses, franchises, permits, approvals,
authorizations, exemptions, classifications, registrations,
rights and similar documents which are necessary for it to own,
lease or operate its properties and assets and to conduct its
business as now conducted, except for such licenses the failure
to hold which would not individually or in the aggregate
adversely affect Parent and its Subsidiaries taken as a whole
in any material respect. The business of Parent and each of its
Subsidiaries has been and is being conducted in compliance in
all material respects with all such licenses. All such licenses
are in full force and effect, and there is no proceeding or
investigation pending or, to the knowledge of Parent,
threatened which would reasonably be expected to lead to the
revocation, amendment, failure to renew, limitation, suspension
or restriction of any such license.
(h) ABSENCE OF UNDISCLOSED LIABILITIES. Since December 31, 1996,
neither Parent nor any of its Subsidiaries has incurred any liabilities,
except: (i) liabilities arising in the ordinary course of business
consistent with past practice, which individually or in the aggregate
would not adversely affect Parent and its Subsidiaries taken as a whole
in any material respect; (ii) as specifically and individually reflected
in Section 3.2(h) of the Disclosure Memorandum or Parent SEC Reports; or
(iii) other liabilities, which, individually or in the aggregate,
together with those liabilities referenced in subparagraphs (i) and (ii),
would not adversely affect Parent and its Subsidiaries taken as a whole
in any material respect.
(i) LITIGATION. Except as set forth on Section 3.2(i) of the
Disclosure Memorandum and except for claims arising in the ordinary
course of business, (A) there is no suit, action, investigation,
arbitration or proceeding pending or, to the knowledge of Parent,
threatened against or affecting Parent or any of its Subsidiaries, at law
or in equity, before any person and (B) there is no writ judgment,
decree, injunction, rule or similar order of any Governmental Entity or
arbitrator outstanding against Parent or any of its Subsidiaries, which,
individually or in the aggregate, would adversely affect Parent and its
Subsidiaries taken as a whole in any material respect.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Parent SEC Reports, since March 31, 1997, there has not been (i) any
transaction, commitment, dispute or other event or condition of any
character (whether or not in the ordinary course of business) which
would,
35
individually or in the aggregate, have a Material Adverse Effect on
Parent; or (ii) any damage, destruction or loss, whether or not covered
by insurance, which, insofar as reasonably can be foreseen, in the future
would, individually or in the aggregate, have a Material Adverse Effect
on Parent.
(k) BOARD RECOMMENDATION. The Board of Directors of Parent and
USF&G, at a meeting duly called and held or by unanimous written consent,
has by the requisite vote of directors determined that this Agreement and
the transactions contemplated hereby are fair to and in the best
interests of the shareholders of Parent and USF&G, as the case may be and
has approved the same, and in the case of USF&G resolved to recommend
that Parent approve this Agreement and the transactions contemplated
herein.
(l) VOTE REQUIRED. The affirmative vote of Parent, as the sole
stockholder of USF&G, is sufficient, and no further vote or consent of
any class or series of capital stock of Parent or USF&G is necessary
under applicable law or otherwise, to approve the Merger and the other
transactions contemplated hereby on the part of Parent or USF&G.
(m) BROKERS. Parent and USF&G represent, as to themselves and their
affiliates, that no agent, broker, investment broker, financial advisor
or other firm or person is or will be entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement, except for Merrill Lynch
& Co., Merrill Lynch Pierce Fenner & Smith Incorporated, whose fees and
expenses shall be paid by Parent.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the earlier of (i) the Effective Time and
(ii) the termination of this Agreement pursuant to Article VII, the Company
agrees (and has caused its Subsidiaries to agree) that (except to the extent
that Parent shall consent in writing, which consent shall not be
unreasonably withheld or delayed):
(a) ORDINARY COURSE. The Company will (and will cause each of its
Subsidiaries to) conduct its business only in the ordinary course and
consistent with past practice. Without limiting the generality of the
foregoing and except as expressly provided herein or in Section 4.1(a) of
the Disclosure Memorandum:
(i) The Company will use (and will cause each of its Subsidiaries to
use) reasonable best efforts to (A) maintain in full force and
effect all Company Material Contracts, except those which expire
in accordance with their terms, (B) maintain all Company
Licenses, qualifications, and authorizations of the Company to
do business in each jurisdiction in which it is so licensed,
qualified, or authorized, and (C) maintain each rating
classification assigned to the Subsidiaries of the Company that
are insurance companies by all rating agencies as of the date of
this Agreement, except in the case of (A) and (B) above where
the Company's Board of Directors determines in good faith that
the maintenance of any such Company Material Contract or Company
License, qualification or authorization is no longer necessary
or advisable for the conduct of the Company as presently
conducted or as proposed to be conducted after the Effective
Time, if appropriate after consultation with USF&G pursuant to
Section 5.12.
(ii) The Company will (and will cause each of its Subsidiaries to)
in all material respects (A) maintain all its assets and
properties in good working order and condition (ordinary wear
and tear excepted), and (B) continue all current marketing and
selling activities relating to its business, operations and
affairs, except where the Company's Board of
36
Directors determines in good faith that such assets, properties
or marketing or selling activities are no longer necessary or
advisable for the conduct of the Company as presently conducted
or as proposed to be conducted after the Effective Time, if
appropriate after consultation with USF&G pursuant to Section
5.12.
(iii) The Company will (and will cause each of its Subsidiaries to)
maintain its books and records in the usual manner and
consistent with past practice and will not permit a material
change in any underwriting, investment, actuarial, financial
reporting, tax, or accounting practice or policy or in any
assumption underlying such a practice or policy, or in any
method of calculating any bad debt, contingency, insurance, or
other reserve for financial reporting purposes or for other
accounting purposes (including any practice, policy,
assumption, or method relating to or affecting the
determination of its insurance in force, premium or investment
income, reserves or other similar amounts, or operating ratios
with respect to expenses, losses or lapses).
(iv) The Company will (and will cause each of its Subsidiaries to)
(A) prepare properly and to file duly and validly all Tax
Returns required to be filed prior to the Closing Date with the
appropriate taxing authority, (B) pay duly and fully all Taxes
which are due with respect to the periods covered by such Tax
Returns or otherwise levied or assessed upon such entity or any
of its assets or properties, and to withhold or collect and pay
to the proper taxing authorities all Taxes that such entity is
required to so withhold or collect and pay, unless such taxes
are being contested in good faith and, if appropriate,
reasonable reserves therefore have been established and
reflected in the books and records of such entity and in
accordance with SAP and (C) provide Parent with copies of all
federal income tax returns and all material state income tax
returns as soon as practicable after the preparation, but prior
to the filing, thereof. The Company will not make (and will
prohibit its Subsidiaries from making) any tax election or
settle or compromise any income tax liability that may
reasonably be expected to be material to the Company and its
Subsidiaries taken as a whole.
(v) The Company will (and will cause each of its Subsidiaries to)
cause all statutory reserves and other similar amounts with
respect to losses, benefits, claims, and expenses in respect of
the Subsidiary's insurance business to be (A) determined in
accordance with SAP and generally accepted actuarial
assumptions, (B) determined in accordance with the benefits
specified in the related insurance or reinsurance Contracts in
all material respects, (C) calculated, established and reflected
on a basis consistent in all material respects with those
reserves and other similar amounts and reserving methods
followed at December 31, 1996, (D) determined in conformity with
the requirements of the insurance laws of each applicable
jurisdiction in all material respects and (E) adequate, in all
material respects, based upon then current information and
assumptions to cover the total amount of all matured and
reasonably anticipated unmatured benefits, dividends, losses,
claims, expenses, and other liabilities of the Subsidiary under
all insurance or reinsurance Contracts which the Subsidiary has
or will have any liability. The Company will (and will cause
each of its Subsidiaries to) continue to own assets and
properties that qualify as legal reserve assets under all
applicable insurance laws in an amount at least equal to all
required reserves and other similar amounts.
(vi) The Company will (and will cause each of its Subsidiaries to)
use reasonable best efforts to maintain in full force and
effect substantially the same levels of coverage as the
insurance afforded under the insurance coverage described in
Section 3.1(v) of the Disclosure Memorandum.
37
(vii) The Company will (and will cause each of its Subsidiaries to)
refrain from entering into any new treaty of reinsurance,
coinsurance, or other similar Contract, whether as reinsurer or
reinsured.
(viii) The Company will (and will cause each of its Subsidiaries to)
continue to comply in all material respects with all laws
applicable to its business, operations or affairs.
(ix) The Company shall not incur (and shall prohibit each of its
Subsidiaries from incurring) any capital expenditure in excess
of $75,000, individually or in the aggregate.
(x) Subject to Sections 2.6 and 2.7, the Company shall not (and
shall cause each of its Subsidiaries to not): (A) grant any
increases in the compensation of any of its directors, officers
or Key Employees; (B) pay or agree to pay any pension,
retirement allowance or other employee benefit not required to
be paid prior to the Effective Time by any of the existing
Company Benefit Plans or Company Employee Arrangements as in
effect on the date hereof to any such director, officer or
employee, whether past or present; (C) enter into any new, or
amend, modify or grant any consent or waiver with respect to any
existing, employment, retention or severance or termination
agreement with any director, officer or employee; or (D) become
obligated under any new Benefit Plan or Employee Arrangement,
which was not in existence on the date hereof, or amend any such
plan or arrangement in existence on the date hereof if such
amendment would have the effect of enhancing any benefits
thereunder.
(xi) Other than with respect to drawdowns in the ordinary course of
business with respect to the Company Credit Facilities, the
Company shall not (and shall cause each of its Subsidiaries to
not) assume or incur (which shall not be deemed to include
entering into credit agreements, lines of credit or similar
arrangements until borrowings are made under such arrangements)
any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt securities of the Company or any
of its Subsidiaries or guarantee any debt securities of others
or enter into any lease (whether such lease is an operating or
capital lease) or create any Liens on the property of the
Company or any of its Subsidiaries in connection with any
indebtedness thereof, or enter into any "keep well" or other
agreement or arrangement to maintain the financial condition of
another person.
(xii) The Company shall not (and shall cause each of its Subsidiaries
to not) pay, discharge, settle or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms
of liabilities reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the
notes thereto) of the Company dated included in the Filed
Company SEC Documents, or incurred since the date of such
financial statements in the ordinary course of business
consistent with past practice. Except in the ordinary course of
business consistent with past practice, the Company shall not
effect (and shall prohibit each of its Subsidiaries from
effecting) any settlements of any legal proceedings without the
prior written consent (such consent not to be unreasonably
withheld) of Parent.
The Company shall, from the date of this Agreement through the Effective
Time or earlier termination of this Agreement pursuant to Article VII, cause its
management and that of its Subsidiaries to consult on a regular basis and in
good faith with the employees and representatives of Parent concerning the
management of the Company's and its Subsidiaries' businesses.
38
(b) DIVIDENDS; CHANGES IN STOCK. Neither the Company nor any of its
Subsidiaries shall (i) declare or pay any dividends on or make other
distributions in respect of any of its capital stock (other than, with
respect to the Company, regular cash dividends on Company Common Stock
not in excess of $0.08 per share of Company Common Stock which shall be
paid on a quarterly basis, with identical record and payment dates as the
quarterly dividends paid by Parent on Parent Common Stock), (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, (iii) issue any shares
of capital stock (except pursuant to and in accordance with the terms of
currently outstanding Company Options and Company Warrants), or (iv)
repurchase or otherwise acquire any shares of its capital stock, except
as required by the terms of any employee benefit plan as in effect on the
date of this Agreement.
(c) ISSUANCE OF SECURITIES. Neither the Company nor any of its
Subsidiaries shall (i) grant any options, warrants or rights, to purchase
shares of its capital stock, (ii) amend the terms of or reprice any
Company Warrant or Company Option or amend the terms of the Stock Option
Plan or the Directors' Stock Option Plan, or (iii) issue, deliver or
sell, or pledge or otherwise encumber any shares of its capital stock, or
authorize or propose to issue, deliver or sell, any shares of its capital
stock, any Company Voting Debt or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, Company Voting
Debt or convertible securities, or agree to do any of the foregoing,
other than: (A) issue shares of Company Common Stock upon the exercise of
Options that are outstanding on the date of this Agreement or (B) issue
shares of Company Common Stock upon the exercise of Warrants that are
outstanding on the date of this Agreement.
(d) NO SOLICITATION. Prior to the Effective Time, the Company
agrees (a) that neither it nor any of its affiliates or Subsidiaries
shall, and it shall not authorize or permit its officers, directors,
employees, representatives, investment bankers, attorneys, accountants or
other agents to, initiate, solicit or encourage (including by way of
furnishing information), directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a
merger, consolidation or other business combination including the Company
or any of its Subsidiaries or any acquisition or similar transaction
(including, without limitation, a tender or exchange offer) involving the
purchase of (i) all or any significant portion of the assets of the
Company and its Subsidiaries taken as a whole, (ii) 15% or more of the
outstanding shares of Company Common Stock or (iii) 15% or more of the
outstanding shares of the capital stock of any Subsidiary of the Company
(any such proposal or offer being hereinafter referred to as an
"ACQUISITION PROPOSAL"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions
with, any person or group relating to an Acquisition Proposal (excluding
the transactions contemplated by this Agreement), or otherwise facilitate
any effort or attempt to make or implement an Acquisition Proposal; (b)
that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties with respect to
any of the foregoing, and it will take the necessary steps to inform such
parties of its obligations under this Section 4.1(d) and will require
each such party who has signed a confidentiality agreement to honor the
restrictions therein with respect to open market purchases of Company
Common Stock and to return or destroy all confidential information of the
Company previously provided by it; and (c) that it will notify Parent
immediately (orally followed by written confirmation) if any such
inquiries, proposals or offers are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it or any of such persons. Notwithstanding
the above, (A) the Company may provide non-public information to any
person or group if (i) such person or group has expressed a written
interest in (which, unless such person previously has been provided
confidential information, need not constitute a proposal for) making an
Acquisition Proposal providing greater aggregate value to the Company
and/or the
39
Company's shareholders than the transactions contemplated by this
Agreement; (ii) the Company reasonably believes such person or group has
the financial ability to consummate an Acquisition Proposal; (iii) such
person or group executes a confidentiality letter no less favorable to
the Company than the Parent Confidentiality Letter (as defined below);
(iv) the Board of Directors of the Company, based upon the advice of
outside counsel, determines in good faith that it is necessary, in order
to comply with the Board's fiduciary duties under applicable law, to
provide such requested information; and (v) the Company provides notice
to Parent of the identity of the person or group to whom the non-public
information is being given at or before the time such information is
given and the Company delivers to Parent a copy of all such information
concurrently with its delivery to the requesting party and (B) the
Company may (I) enter into discussions or negotiate with any person or
group that makes a wholly unsolicited BONA FIDE Acquisition Proposal
providing greater aggregate value to the Company and/or the Company's
shareholders than the transactions contemplated by this Agreement, if,
and only to the extent that, (1) the Board of Directors of the Company,
based upon the advice of outside counsel, determines in good faith that
such action is required for the Board of Directors to comply with its
fiduciary duties to stockholders imposed by law, (2) prior to entering
into discussions or negotiations with such person or group, the Company
provides written notice (the "ACQUISITION PROPOSAL NOTICE") to Parent to
the effect that it is entering into discussions or negotiations with such
person or group, and (3) the Company keeps Parent informed of the status
and all material information including the identity of such person or
group with respect to any such discussions or negotiations to the extent
such disclosure would not constitute a violation of any applicable law or
any confidentiality agreement with such person or group; and (II) to the
extent required, comply with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
(e) NO ACQUISITIONS; NO SUBSIDIARIES. Except as permitted by
Section 4.1(d), neither the Company nor any Subsidiary of the Company
shall merge or consolidate with, or acquire any equity interest in, any
corporation, partnership, association or other business organization, or
enter into an agreement with respect thereto. Neither the Company nor any
Subsidiary of the Company shall (i) acquire or agree to acquire any
assets of any corporation, partnership, association or other business
organization or division thereof, except for the purchase of inventory
and supplies in the ordinary course of business or (ii) create any
Subsidiary.
(f) NO DISPOSITIONS. Other than dispositions set forth in Section
4.1(f) of the Disclosure Memorandum and dispositions in the ordinary
course of business consistent with past practice which are not material,
individually or in the aggregate, to such party, and neither the Company
nor any Subsidiary of the Company shall sell, lease, encumber or
otherwise dispose of, or agree to sell, lease (whether such lease is an
operating or capital lease), reinsure, mortgage or otherwise encumber or
subject to any lien, encumber or otherwise dispose of, any of its
properties.
(g) NO DISSOLUTION, ETC. Except as otherwise permitted or
contemplated by this Agreement, neither the Company nor any of its
Subsidiaries shall authorize, recommend, propose or announce an intention
to adopt a plan of complete or partial liquidation or dissolution of such
entity.
(h) INVESTMENTS. Neither the Company nor any Subsidiary of the
Company shall make any investment other than (A) money market
instruments, A-1/P-1 commercial paper, treasury bills or other cash
equivalents, (B) investment grade publicly traded debt securities or (C)
exchange traded or Nasdaq National Market System traded equity-related
securities which in the aggregate, when combined with any other
equity-related securities holdings (which shall include preferred stock),
do not exceed nine percent (9%) of the total investments (excluding cash)
of the Company and its Subsidiaries, taken as a whole, in each case which
are made in accordance with
40
the Company's Investment Policy Guidelines (effective January 1, 1995)
(the "INVESTMENT GUIDELINES") and otherwise in accordance with past
practice. Neither the Company nor any Subsidiary of the Company shall
make any portfolio investments except in the ordinary course of business.
(i) OTHER ACTIONS. Except as contemplated or permitted by this
Agreement, neither Parent nor the Company shall authorize, take or agree
or commit to (and shall cause each of its respective Subsidiaries to take
or commit or agree to) take any action that is reasonably likely to
result in any of the representations or warranties hereunder being untrue
in any material respect or in any of the covenants hereunder or any of
the conditions to the Merger not being satisfied in all material
respects.
(j) QUICK-SURE. The Company will take commercially reasonable
actions necessary to cause all of the outstanding capital stock of
Quick-Sure to be transferred to USF&G or its designee for a nominal price
per share and to take whatever other actions are reasonably necessary to
ensure that upon Closing, the material benefits of Quick-Sure's
relationships with Home State, the Company and the Company's Subsidiaries
inure to the benefit of USF&G or its designee. Without limiting the
generality of the foregoing, the Company agrees to use commercially
reasonable efforts to cause Quick-Sure to assign any leases to which
Quick-Sure is a party to USF&G or its designee if so requested by the
Parent.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PREPARATION OF FORM S-4 AND PROXY STATEMENT; SHAREHOLDER MEETING;
COMFORT LETTERS.
(a) Promptly following the date of this Agreement, the Company shall
prepare the Proxy Statement, and Parent shall prepare and file with the
SEC the Form S-4, in which the Proxy Statement will be included. Parent
will cooperate with the Company in connection with the preparation of the
Proxy Statement including, but not limited to, furnishing to the Company
any and all information regarding Parent as may be required to be
disclosed therein. Parent shall use reasonable best efforts to have the
Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing. The Company will use reasonable best
efforts to cause the Proxy Statement to be mailed to the Company's
shareholders as promptly as practicable after the Form S-4 is declared
effective under the Securities Act. Parent shall also take any action
required to be taken under any applicable state securities laws in
connection with the issuance of Parent Common Stock following the Merger.
The information provided and to be provided by Parent and the Company,
respectively, for use in the Form S-4 shall, at the time the Form S-4
becomes effective and on the date of the Shareholders' Meeting referred
to below, be true and correct in all material respects and shall not omit
to state any material fact required to be stated therein or necessary in
order to make such information not misleading, and the Company and Parent
each agree to correct any information provided by it for use in the Form
S-4 which shall have become false or misleading.
(b) Parent will as promptly as practicable notify the Company of (i)
the effectiveness of the Form S-4, (ii) the receipt of any comments from
the SEC, and (iii) any request by the SEC for any amendment to the Form
S-4 for additional information. All filings with the SEC, including the
Form S-4 and any amendment thereto, and all mailings to the Company's
shareholders in connection with the Merger, including the Proxy
Statement, shall be subject to the prior review, comment and approval of
Parent or the Company, as the case may be (such approval not to be
unreasonably withheld or delayed).
41
(c) The Company will, as promptly as practicable following the date
of this Agreement and in consultation with Parent, duly call and give
notice of, and, provided that this Agreement has not been terminated,
convene and hold the Shareholders' Meeting for the purpose of approving
this Agreement and the transactions contemplated by this Agreement to the
extent required by the TBCA. Except as provided below, the Company will,
through its Board of Directors, recommend to its shareholders approval of
the foregoing matters, as set forth in Section 3.1(x); provided, however,
that the Board of Directors of the Company may fail to make or may
withdraw or modify such recommendation, but only to the extent that the
Board of Directors of the Company shall have concluded in good faith
after receiving the advice of outside counsel that such action is
required to prevent the Board of Directors of the Company from breaching
its fiduciary duties to the Company or the shareholders of the Company
under applicable law. Any such recommendation, together with a copy of
the opinion referred to in Section 3.1(w), shall be included in the Proxy
Statement. The Company will use reasonable best efforts to hold such
meeting as soon as practicable after the date hereof.
(d) Parent shall use reasonable best efforts to cause to be delivered
to the Company a letter of Ernst & Young LLP, Parent's independent public
accountants, dated a date within two business days before the date on
which the Form S-4 shall become effective and a letter of Ernst & Young
LLP dated a date within two business days before the date of the
Shareholders' Meeting, addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and
substance for letters delivered by independent public accountants in
connection with registration statements similar to the Form S-4.
(e) The Company shall use reasonable best efforts to cause to be
delivered to Parent a letter of KPMG Peat Marwick LLP, the Company's
independent public accountants, dated a date within two business days
before the date on which the Form S-4 shall become effective and a letter
of KPMG Peat Marwick LLP dated a date within two business days before the
Shareholders' Meeting, addressed to Parent, in form and substance
reasonably satisfactory to Parent and customary in scope and substance
for letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
5.2 CONTRACT AND REGULATORY APPROVALS. USF&G, Parent and the Company
will use (and will cause each of its Subsidiaries to use) reasonable best
efforts to obtain as promptly as practicable (a) all approvals and consents
required of any person or entity under all Contracts to which the Company or
any of its Subsidiaries is a party to consummate the transactions
contemplated hereby, and (b) all approvals, authorizations, and clearances
of Governmental Entities required of the Company and each of its
Subsidiaries to consummate the transactions contemplated hereby. The Company
will, and will cause each of its Subsidiaries to, (i) provide such other
information and communications to such Governmental Entities as USF&G,
Parent or such authorities may reasonably request, and (ii) cooperate with
USF&G or Parent in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities and
other persons or entities required of USF&G or Parent to consummate the
transactions contemplated hereby. Each of USF&G and the Parent will (i)
provide such information and communications to such Governmental Entities as
the Company or such authorities may reasonably request, and (ii) cooperate
with the Company in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities and
other persons or entities required of the Company to consummate the
transactions contemplated hereby. Parent and USF&G shall use their
reasonable best efforts to take or cause to be taken all actions necessary,
proper or advisable to obtain any consent, waiver, approval or authorization
relating to any federal, state or local statutes, rules, regulations,
orders, decrees, administrative and judicial doctrines and other laws that
are designed or intended to prohibit, restrict or regulate actions having
the purpose or effect of monopolization, lessening of competition or
restraint of trade and includes the HSR Act that is required for
42
consummation of the transactions contemplated by this Agreement; provided,
however, that the foregoing shall not obligate Parent or USF&G to agree to
take any action which would have a material adverse effect on the expected
benefits to Parent of the transactions contemplated hereby.
5.3 HSR FILINGS. The Company will (a) take all actions necessary to
make the filings required of it or its affiliates under the HSR Act with
respect to the transactions contemplated by this Agreement, (b) comply with
any request for additional information received by the Company or its
affiliates from the Federal Trade Commission or Antitrust Division of the
Department of Justice pursuant to the HSR Act, (c) cooperate with Parent in
connection with Parent's filings under the HSR Act, and (d) request early
termination of the applicable waiting period.
5.4 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Upon reasonable notice, the Company shall (and shall cause each
of its Subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of Parent or USF&G, access, during
normal business hours during the period prior to the Effective Time, to
all its properties, books, contracts, commitments, employees, auditors,
agents, representatives and records and, during such period, the Company
shall (and shall cause each of its Subsidiaries to) furnish promptly to
Parent, (i) each SAP Annual Statement and SAP Quarterly Statement filed
by the Company's Subsidiaries during such period pursuant to the
requirements of any applicable law; (ii) a copy of each report, schedule,
registration statement and other document filed or received by it during
such period pursuant to SEC requirements; (iii) all correspondence or
written communication with A.M. Best and Company or any of its
Subsidiaries, Standard & Poor's Corporation, Moody's Investor Services,
Inc., and with any Governmental Entity or insurance regulatory
authorities which relates to the transactions contemplated hereby or
which is otherwise material to the financial condition or operation of
the Company and its Subsidiaries taken as a whole; and (iv) all other
information concerning its business, properties and personnel as the
other party may reasonably request.
(b) Upon reasonable notice, Parent shall (and shall cause each of its
Subsidiaries to) afford to the officers, employees, accountants, counsel
and other representatives of the Company, access, during normal business
hours during the period prior to the Effective Time, to the books,
records, officers and employees of Parent and its Subsidiaries reasonably
necessary to perform a "due diligence" review with respect to (i)
material matters, conditions or events arising after the date hereof or
(ii) matters, conditions or events which the Company has a reasonable
basis for believing make any of the representations or warranties of
Parent contained herein not true in any material respect and, during such
period, Parent shall (and shall cause each of its Subsidiaries to)
furnish promptly to the Company, (a) each SAP Annual Statement and SAP
Quarterly Statement filed by such party's Subsidiaries during such period
pursuant to the requirements of any applicable law; (b) a copy of each
report filed by Parent with the SEC during such period pursuant to SEC
requirements; and (c) all correspondence or written communication with
A.M. Best and Company or any of its Subsidiaries, Standard & Poor's
Corporation, Moody's Investor Services, Inc., and with any Governmental
Entity or insurance regulatory authorities which primarily relates to the
transactions contemplated hereby.
(c) The Confidentiality Agreement dated June 26, 1997 (the "PARENT
CONFIDENTIALITY AGREEMENT"), between Parent and the Company and the
confidentiality agreement dated July 30, 1997 (the "COMPANY
CONFIDENTIALITY AGREEMENT"), between the Company and Parent shall apply
with respect to information furnished thereunder or hereunder and any
other activities contemplated thereby.
43
5.5 FEES AND EXPENSES.
(a) Except as otherwise provided in this Section 5.5 and except with
respect to claims for damages incurred as a result of the breach of this
Agreement (it being understood that such claims by Parent, USF&G or their
affiliates shall be precluded under Section 5.5(d) by the payment of the
amount set forth in Section 5.5(b) when Section 5.5(b) is applicable),
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring
such expense.
(b) The Company agrees to pay Parent a fee in immediately available
funds equal to $7,500,000 if (i) this Agreement is terminated pursuant to
Section 7.1(d) hereof and any person or group of persons shall, within 90
days after the date of such termination, consummate an Acquisition
Proposal or enter into an agreement with respect to an Acquisition
Proposal or (ii) this Agreement is terminated pursuant to Section 7.1(e)
hereof. Such fee shall be paid within one business day of any termination
of this Agreement pursuant to Section 7.1(e) hereof or within one
business day of the consummation of an Acquisition Proposal or the entry
into of any agreement with respect to an Acquisition Proposal, in either
case during the 90-day period after any termination of this Agreement
pursuant to Section 7.1(d) hereof.
(c) Any amounts due under this Section 5.5 that are not paid when due
shall bear interest at the rate of 9% per annum from the date due through
and including the date paid.
(d) Upon the payment of any fee pursuant to Section 5.5(b) above
(regardless of whether a transaction pursuant to an Acquisition Proposal
is consummated), such fee shall be the exclusive remedy of Parent, USF&G
and their affiliates relating to this Agreement or the transactions
contemplated thereunder, and upon payment of any such fee, Parent, USF&G
and their affiliates shall have no rights, in tort, contract or
otherwise, arising under or relating to this Agreement or the
transactions contemplated thereunder, except for rights under the second
sentence of Section 5.4 hereof.
(e) The fee set forth in Section 5.5(b) shall be payable solely under
the circumstances set forth in Section 5.5(b) and shall not be payable
under any other circumstances.
5.6 INDEMNIFICATION.
(a) The Company shall, and from and after the Effective Time the
Surviving Corporation shall, indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date hereof or
who becomes prior to the Effective Time, an officer or director of the
Company (the "INDEMNIFIED PARTIES") against all losses, claims, damages,
costs, expenses (including attorneys' fees and expenses), liabilities or
judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be unreasonably withheld) of
or in connection with any threatened or actual claim, action, suit,
proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director or
officer of the Company whether pertaining to any matter existing or
occurring at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective Time ("INDEMNIFIED
LIABILITIES"), including all Indemnified Liabilities based in whole or in
part on, or arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, in each case to the
full extent a corporation is permitted under applicable law to indemnify
its own directors or officers as the case may be (and the Company and the
Surviving Corporation, as the case may be, will pay expenses in advance
of the final disposition of any such action or proceeding to each
Indemnified Party to the full extent permitted by law). Without limiting
the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Parties (whether arising
before or after the Effective Time), (i) the Indemnified Parties may
retain counsel satisfactory to them and
44
the Company (or them and the Surviving Corporation after the Effective
Time) and the Company (or after the Effective Time, the Surviving
Corporation) shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefor are received;
and (ii) the Company (or after the Effective Time, the Surviving
Corporation) will use reasonable best efforts to assist in the defense of
any such matter, provided that neither the Company nor the Surviving
Corporation shall be liable for any settlement effected without its prior
written consent which consent shall not unreasonably be withheld. Any
Indemnified Party wishing to claim indemnification under this Section
5.6, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify the Company (or after the Effective Time, the
Surviving Corporation) (but the failure so to notify shall not relieve a
party from any liability which it may have under this Section 5.6 except
to the extent such failure prejudices such party). The Indemnified
Parties as a group may retain only one law firm to represent them with
respect to each such matter unless there is, under applicable standards
of professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnified Parties. The Company and Parent
agree that the foregoing rights to indemnification, including provisions
relating to advances of expenses incurred in defense of any action or
suit, existing in favor of the Indemnified Parties with respect to
matters occurring through the Effective Time, shall survive the Merger
and shall continue in full force and effect for a period of not less than
six years from the Effective Time; provided, however, that all rights to
indemnification in respect of any Indemnified Liabilities asserted or
made within such period shall continue until the disposition of such
Indemnified Liabilities. Furthermore, the provisions with respect to
indemnification set forth in the articles of incorporation or bylaws of
the Surviving Corporation shall not be amended for a period of six years
following the Effective Time if such amendment would materially and
adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of the Company in
respect of actions or omissions occurring at or prior to the Effective
Time.
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies
of directors' and officers' liability insurance maintained by the Company
(provided that Parent may substitute therefor (i) policies of at least
the same coverage and amounts containing terms and conditions which are
no less advantageous in any material respect to the Indemnified Parties
and (ii) coverage under Parent's directors' and officers' liability
insurance coverage if such substitution is approved by those persons, in
their sole discretion, who at the Effective Time constitute or
constituted a majority of the Company's Board of Directors) with respect
to matters arising before the Effective Time, provided that the Surviving
Corporation shall not be required to pay an annual premium for such
insurance in excess of 200% of the last annual premium paid by the
Company prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount. The last annual premium paid by the
Company was $130,000.
(c) The provisions of this Section 5.6 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his
heirs and his personal representatives and shall be binding on all
successors and assigns of the Company and the Surviving Corporation.
(d) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers or conveys all or
substantially all of its properties and assets to any person, then, and
in each case, to the extent necessary to effectuate the purpose of this
Section 5.6, proper provision shall be made so that the successors and
assigns of the Surviving Corporation shall succeed to the obligations set
forth in this Section 5.6 and none of the actions described in clauses
(i) or (ii) shall be taken until such provision is made.
45
5.7 REASONABLE BEST EFFORTS. Subject to the terms and conditions of
this Agreement, except as otherwise expressly contemplated hereby, each of
the parties hereto agrees to use all reasonable best efforts to take, or
cause to be taken, all action and to do, or cause to be done as promptly as
practicable, all things necessary, proper or advisable, under applicable
laws and regulations or otherwise, to consummate and make effective the
Merger and the other transactions contemplated by this Agreement, subject,
as applicable, to the Company Shareholder Approval.
5.8 PUBLIC ANNOUNCEMENTS. The parties hereto will consult with each
other regarding any press release or public announcement pertaining to the
Merger and shall not issue any such press release or make any such public
announcement prior to such consultation, except as may be required by
applicable law, court process or obligations pursuant to any listing
agreement with any national securities exchange, in which case the party
proposing to issue such press release or make such public announcement shall
use reasonable efforts to consult in good faith with the other party before
issuing any such press release or making any such public announcement. The
parties hereto shall also consult with each other before engaging in any
communications with A.M. Best and Company with respect to this Agreement or
the transactions contemplated hereby.
5.9 ENVIRONMENTAL STUDIES. Within thirty (30) days of this Agreement,
the Company shall deliver to Parent a report of a Phase I Environmental Site
Assessment, which shall be conducted in accordance with and presented in the
form prescribed by the most recent edition of the ASTM Standard for Phase I
environmental site assessments and a report of an environmental compliance
audit conducted in substantial accordance with the ASTM Standard for
environmental compliance audits, on the real property located at NBC Plaza,
2700 NE Loop 410, San Antonio, TX, and the Village at NBC Plaza, 8200 Perrin
Beitel Rd., San Antonio, TX (including the undeveloped real property owned
by the Company in the vicinity thereof) ("ENVIRONMENTAL REPORTS"), prepared
by an environmental consultant, engineer or environmental consulting or
engineering firm reasonably satisfactory to Parent. The cost of preparing
the reports contemplated by this Section 509 shall be borne by the Company.
5.10 AFFILIATES. Prior to the Closing Date, the Company shall deliver
to Parent a letter identifying all persons who are, at the time this
Agreement is submitted for approval to the shareholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities
Act. The Company shall cause each such person to deliver to Parent on or
prior to the Closing Date a written agreement substantially in the form
attached as Exhibit B hereto.
5.11 SUPPORT AGREEMENT. The Support Agreement shall be executed
contemporaneously with this Agreement.
5.12 COOPERATION. From the date hereof until the Effective Time, the
parties agree to work together to coordinate all aspects of transition
planning and the integration of the Public Entity and Nonstandard Businesses
of Parent and its Subsidiaries with the businesses of the Company and its
Subsidiaries from and after the Effective Time. In this regard, the parties
agree, among other things, (i) to create a dedicated transition team,
including consultation between the parties to identify the appropriate
officers and employees of each of the Company and Parent who will be members
of such team, to plan and prepare for the integration of the business and
other matters following the Merger and preparing for the execution of any
such plans, (ii) to jointly develop any employee, agent, policyholder or
other communications relating to such plans and the Merger, (iii) to discuss
and consult with respect to investment management activities, (iv) to
jointly consider information processing systems updates and technology
integration issues and to plan and prepare for an agreed-upon resolution of
such issues following the Merger and (v) to take such actions as are
necessary or appropriate to promote and implement the integration plan,
subject to applicable law.
46
5.13 NYSE LISTING. Parent shall use its best efforts to cause the
shares of Parent Common Stock to be issued in the Merger to be approved for
listing on the New York Stock Exchange (the "NYSE"), subject to official
notice of issuance, prior to the Effective Time
5.14 BENEFIT PLANS AND EMPLOYEE ARRANGEMENTS. For employees who are
employees of the Company as of the Effective Time and who continue to be
employed by the Company, Parent shall cause the Surviving Corporation to
provide employee benefits which are substantially comparable in the
aggregate to the benefits provided under the Company Benefit Plans until the
first anniversary of the Effective Time.
5.15 TAX-FREE REORGANIZATION. Parent and the Company shall each use
its best efforts to cause the Merger to be treated as a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
Parent shall own all of the issued and outstanding shares of USF&G
immediately prior to the Merger. Parent shall not, nor shall Parent permit
any of its affiliates to, take any action which would cause the Merger to
fail to qualify as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code.
5.16 TRI-WEST. The Company will use its reasonable best efforts to
cause each of E.B. Lyon, III, Michael J. Claypool and Michael J. Bodayle to
enter into an agreement with the Company granting the Company the right to
purchase, on terms reasonably acceptable to Parent, the outstanding
membership, equity and voting interests of Tri-West of New Mexico, LLC,
Tri-West of Indianapolis, LLC, Tri-West of Florida, LLC, and any other
agency owned by any of them which has entered into a producer agreement with
any Subsidiary of the Company.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) COMPANY SHAREHOLDER APPROVAL. The Merger shall have been
approved and adopted by the affirmative vote or written consent of the
holders of two-thirds of the outstanding shares of Company Common Stock
entitled to vote thereon.
(b) GOVERNMENTAL AND REGULATORY CONSENTS. All actions, consents,
approvals, filings and notices listed in Sections 3.1(d)(ii)(A) and
3.2(d)(iii)(A) of the Disclosure Memorandum shall have been taken, made
or obtained; provided, however, that such consents or approvals shall be
in full force and effect at the Effective Time and shall not obligate
Parent or USF&G to agree to take any action which would have a material
adverse effect on the expected benefits to Parent of the transactions
contemplated hereby.
(c) HSR ACT. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired, and no restrictive order or other requirements shall
have been placed on the Company, Parent or the Surviving Corporation in
connection therewith.
(d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however,
that prior to invoking this condition, each party shall use reasonable
best efforts to have any such decree, ruling, injunction or order
vacated.
(e) FORM S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material
47
"blue sky" and other state securities laws applicable to the registration
and qualification of the Parent Common Stock following the Merger shall
have been complied with.
(f) NYSE LISTING. The shares of Parent Common Stock which shall be
issued to the stockholders of the Company upon consummation of the Merger
shall have been authorized for listing on the NYSE, subject to official
notice of issuance.
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND USF&G. The obligations of
Parent and USF&G to effect the Merger are further subject to the
satisfaction or waiver following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct (without regard to any materiality qualifiers contained therein)
in each case as of the date of this Agreement and (except to the extent
such representations and warranties speak as of a particular date) as of
the Closing as though made on and as of the Closing, except where the
failure of one or more representations or warranties to be true and
correct, individually or in the aggregate, would not result in a Material
Adverse Effect on the Company. Parent shall have received a certificate
signed on behalf of the Company by the chief executive officer and the
chief financial officer of the Company to the effect set forth in this
paragraph.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall
have performed and complied with, in all material respects, all
agreements and covenants required to be performed and complied with by
the Company under this Agreement at or prior to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE. There shall not have occurred or
arisen after March 31, 1997 and prior to the Effective Time any change,
event (including without limitation any damage, destruction or loss,
whether or not covered by insurance), condition (financial or otherwise),
or state of facts with respect to the Company or any of its Subsidiaries
which would constitute a Material Adverse Effect on the Company.
(d) NO LITIGATION. There shall not be pending or, to the Company's
or Parent's knowledge threatened, any action, suit, investigation, or
other proceeding by any Governmental Entity to restrain, enjoin, or
otherwise prevent consummation of any of the transactions contemplated by
this Agreement.
(e) AFFILIATE LETTERS. A duly executed copy of each of the
agreements referred to in Section 5.10 shall have been received by
Parent.
(f) OPTION AGREEMENTS AND WARRANTS. The Company shall have (i)
taken all actions required to enable the consummation of the transactions
contemplated by Section 2.6 and (ii) received agreements in the form of
Exhibit C attached hereto from holders of Company Warrants representing
the right to purchase 75% of the shares of Company Common Stock
underlying all outstanding Company Warrants as of the date of this
Agreement, whether or not then exercisable in whole or in part.
(g) TAX OPINION. Parent shall have received an opinion of Piper &
Marbury L.L.P. (or another nationally recognized law firm) to the effect
that the Merger will be treated for federal income tax purposes as a
tax-free reorganization within the meaning of Section 368(a)(1)(A) and
368(a)(2)(D) of the Code.
(h) AUTHORIZATION. The Company shall have delivered to Parent
evidence reasonably satisfactory to Parent that all requisite action on
the part of the Company necessary for the due authorization of this
Agreement and the performance and consummation of the transactions
contemplated hereby has been taken.
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6.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the
Company to effect the Merger is further subject to the satisfaction or
waiver of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Parent and USF&G set forth in this Agreement shall be true
and correct (without regard to any materiality qualifiers contained
therein), in each case as of the date of this Agreement and (except to
the extent such representations and warranties speak as of a particular
date) as of the Closing Date as though made on and as of the Closing
Date, except where the failure of one or more representations or
warranties to be true and correct, individually or in the aggregate,
would not result in a Material Adverse Effect on Parent. The Company
shall have received certificates signed on behalf of Parent by the chief
executive officer and chief financial officer of Parent to the effect set
forth in this paragraph.
(b) PERFORMANCE OF OBLIGATIONS OF USF&G. Parent and USF&G shall
have performed and complied with, in all material respects, all
agreements and covenants required to be performed and complied with by
Parent and USF&G under this Agreement at or prior to the Closing Date.
(c) FEDERAL TAX OPINION. The Company shall have received an opinion
of Mayer, Brown & Platt (or another nationally recognized law firm) to
the effect that the Merger will be treated for federal income tax
purposes as a tax-free reorganization within the meaning of Section
368(a)(1)(A) and 368(a)(2)(D) of the Code.
(d) NO MATERIAL ADVERSE CHANGE. Except as publicly disclosed in a
document filed by Parent under the Exchange Act, there shall not have
been any change in the business, results of operation or financial
condition of the Parent and its Subsidiaries taken as a whole at any time
between March 31, 1997 and the Effective Time which would have a Material
Adverse Effect on the Parent.
(e) AUTHORIZATION. Parent shall have delivered to the Company
evidence reasonably satisfactory to the Company that all requisite action
on the part of Parent necessary for the due authorization of this
Agreement and the performance and consummation of the transactions
contemplated hereby has been taken.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of the Company or Parent:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent if any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and non-appealable;
(c) by either the Company or Parent, if the Merger shall not have
been consummated on or before December 31, 1997; provided that if the
conditions set forth in Article VI have not been satisfied as of such
date, this Agreement may not be terminated until February 28, 1998 if it
can reasonably be anticipated that such conditions can be satisfied by
February 28, 1998 (such December 31, 1997 or February 28, 1998, the
"TERMINATION DATE"); and provided further that the right to terminate
this Agreement under this Section 7.1(c) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has
been the cause of or resulted in the failure of the Merger to occur on or
before such date;
49
(d) by either Parent or the Company if at the duly held meeting of
the shareholders of the Company (including any adjournment thereof) held
for the purpose of voting on the Merger, this Agreement and the
consummation of the transactions contemplated hereby, the holders of at
least two-thirds of the outstanding shares of Company Common Stock shall
not have approved the Merger, this Agreement and the consummation of the
transactions contemplated hereby;
(e) by Parent or the Company, in the event that a Trigger Event has
occurred prior to the consummation of the Merger (for purposes of this
Section 7.1(e), "TRIGGER EVENT" shall mean: (i) the Board of Directors of
the Company shall have failed to give or shall have withdrawn or
adversely modified in any material respect, or taken a public position
materially inconsistent with, its approval or recommendation of the
Merger or this Agreement; or (ii) an Acquisition Proposal shall have been
recommended or accepted by the Company or the Company shall have entered
into an agreement with respect to an Acquisition Proposal with any person
or entity other than Parent or an affiliate thereof);
(f) by Parent, upon a breach of any representation or warranty of the
Company, or in the event the Company fails to comply in any respect with
any of its covenants and agreements, or if any representation or warranty
of the Company shall be or become untrue, in each case, where such
breach, failure to so comply or untruth (either individually or in the
aggregate with all other such breaches, failures to comply or untruths)
would cause one or more of the conditions set forth in Sections 6.1(a),
6.1(b), 6.2(a) or 6.2(b) to be incapable of being satisfied as of a date
within ten days after the occurrence thereof, provided that a willful
breach by the Company shall be deemed to cause such conditions to be
incapable of being satisfied by such date;
(g) by the Company, upon a breach of any representation or warranty
of Parent or USF&G, or in the event Parent or USF&G fails to comply in
any respect with any of its covenants or agreements, or if any
representation or warranty of Parent or USF&G shall be or become untrue,
in each case, where such breach, failure to so comply or untruth (either
individually or in the aggregate with all other such breaches, failures
to comply or untruths) would cause one or more of the conditions set
forth in Sections 6.1(a), 6.1(b), 6.3(a) or 6.3(b) to be incapable of
being satisfied as of a date within ten days after the occurrence
thereof, provided that a willful breach by Parent or USF&G shall be
deemed to cause such conditions to be incapable of being satisfied by
such date; or
(h) by either Parent or the Company within two days of the
determination of the Average Stock Price if the Average Stock Price shall
be greater than $32.42 or less than $17.46.
7.2 EFFECT OF TERMINATION. If this Agreement is validly terminated by
either the Company or Parent pursuant to Section 7.1, this Agreement will
forthwith become null and void and there will be no liability or obligation
on the part of either the Company or Parent (or any of their respective
Subsidiaries or affiliates), except (i) that the provisions of Section
5.4(c), Section 5.5 and this Section 7.2 will continue to apply following
any such termination, (ii) such termination shall not in any case affect the
obligations of the Company under the Parent Confidentiality Agreement and
the Company Confidentiality Agreement and (iii) that nothing contained
herein shall relieve any party hereto from liability for willful breach of
its representations, warranties, covenants or agreements contained in this
Agreement. The effectiveness of any termination under this Agreement shall
be subject to the payments required to be made pursuant to Section 5.5 being
so made, if applicable.
7.3 AMENDMENT. Subject to applicable law, this Agreement may be
amended, modified or supplemented only by written agreement of Parent, USF&G
and the Company at any time prior to the Effective Date of the Merger with
respect to any of the terms contained herein; provided, however, that, after
this Agreement is approved by the Company's shareholders, no such amendment
or modification shall (a) reduce the amount or change the form of
consideration to be delivered to the
50
holders of shares of Company Common Stock, (b) change the date by which the
Merger is required to be effected, or (c) change the amounts payable in
respect of the Options or Warrants.
7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (a) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto; (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto; and (c) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party. The failure of any party hereto to assert any of its rights
hereunder shall not constitute a waiver of such rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time; provided, however, that Article II, Sections 5.6 and 5.14, the Parent
Confidentiality Agreement and the Company Confidentiality Agreement (with
respect to directors, officers, advisors and representatives of Parent and
the Company) shall survive the Effective Time.
8.2 NOTICES. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, telegraphed
or telecopied or sent by certified or registered mail, postage prepaid, and
shall be deemed to be given, dated and received upon receipt. Any such
notice or communication shall be provided to the following address or
telecopy number, or to such other address or addresses as such person may
subsequently designate by notice given hereunder:
(a) if to USF&G or Parent, to:
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209-3653
Attn: Andrew A. Stern, Mail Stop LA-0300
Telecopy: (410) 205-6802
with a copy to:
Piper & Marbury L.L.P.
36 South Charles Street
Baltimore, Maryland 21201
Attn: R.W. Smith, Jr.
Telecopy: (410) 576-5052
(b) if to the Company, to:
Titan Holdings, Inc.
2700 N.E. Loop 410, Suite 500
San Antonio, Texas 78217
Attn: Mark E. Watson, III
Telecopy: (210) 527-2936
51
with a copy to:
Mayer, Brown & Platt
190 S. LaSalle Street
Chicago, Illinois 60603
Attn: Edward S. Best
Telecopy: (312) 701-7711
8.3 INTERPRETATION. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, glossary of defined terms and
headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the word "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that
the information referred to has been made available if requested by the
party to whom such information is to be made available.
8.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood
that all parties need not sign the same counterpart.
8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement together with the Parent Confidentiality
Agreement and the Company Confidentiality Agreement (and any other documents
and instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings including that certain
Letter Agreement, dated July 15, 1997 between Parent and the Company, both
written and oral, among the parties with respect to the subject matter
hereof and, except as provided in Article II, Sections 5.6 and 5.14, is not
intended to confer upon any person other than the parties hereto any rights
or remedies hereunder. Anything to the contrary notwithstanding, paragraph 6
of the Parent Confidentiality Agreement and paragraph 6 of the Company
Confidentiality Agreement shall terminate after the date of this Agreement.
8.6 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas, without giving effect to the
principles of conflicts of law thereof.
8.7 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, such consent not to be unreasonably withheld
and any such assignment that is not consented to shall be null and void;
PROVIDED, HOWEVER, that Parent may assign this Agreement to an affiliate
without the consent of the Company. Any such assignment shall not affect
Parent's or USF&G's liability hereunder, including its obligations to
deliver the Merger Consideration. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
[The remainder of this page intentionally left blank.]
52
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
USF&G:
UNITED STATES FIDELITY AND
GUARANTY COMPANY
By: /s/ ANDREW A. STERN
--------------------------------------
Name: Andrew A. Stern
--------------------------------------
Title: Executive Vice President--Strategic
Planning & Reinsurance Operations
--------------------------------------
PARENT:
USF&G CORPORATION
By: /s/ ANDREW A. STERN
--------------------------------------
Name: Andrew A. Stern
--------------------------------------
Title: Executive Vice President--Strategic
Reinsurance Operations
--------------------------------------
COMPANY:
TITAN HOLDINGS, INC.
By: /s/ MARK E. WATSON, JR.
--------------------------------------
Name: Mark E. Watson, Jr.
--------------------------------------
Title: President
--------------------------------------
53
EXHIBIT A TO
MERGER AGREEMENT
[FORM OF VOTING AND SUPPORT AGREEMENT]
Agreement dated as of August 7, 1997 between the shareholder identified on
Exhibit A hereto (the "Shareholder") and USF&G Corporation, a Maryland
corporation ("Parent"). Capitalized terms used but not defined herein shall have
the meanings ascribed to such terms in the Merger Agreement (as defined below).
In consideration of the execution by Parent of the Agreement and Plan of
Merger dated as of August 7, 1997 (the "Merger Agreement") among Parent, United
States Fidelity and Guaranty Company, a Maryland corporation, and Titan
Holdings, Inc., a Texas corporation ("Company"), and other good and valuable
consideration, receipt of which is hereby acknowledged, the Shareholder and
Parent hereby agree as follows:
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SHAREHOLDER. The
Shareholder hereby represents and warrants to, and agrees with, Parent as
follows:
(a) TITLE. As of the date hereof, the Shareholder is the beneficial
and registered owner of 2,579,295 shares (the "Shares") of common stock,
$.01 par value per share ("Common Stock"), of Company. As of the date
hereof, except as set forth on Exhibit A hereto, the Shareholder does not
(i) beneficially own any shares of any class or series of capital stock
of Company (other than the Shares) or any securities convertible into or
exercisable for shares of any class or series of Company's capital stock
or (ii) have any options or other rights to acquire any shares of any
class or series of capital stock of Company or any securities convertible
into or exercisable for shares of any class of Company's capital stock.
Except as set forth in Exhibit B hereto, the Shareholder owns the Shares
free and clear of any lien, mortgage, pledge, charge, security interest
or any other encumbrance of any kind. The Shareholder covenants and
agrees to comply with the pledge agreements and other loan documents
relating to the pledges of certain of the Shares identified on Exhibit B
and to otherwise take any action necessary to insure that the Shareholder
can carry out the terms of this Agreement. Each pledgee of the Shares has
consented to this Agreement and to the Shareholder's fulfillment of the
terms thereof.
(b) RIGHT TO VOTE AND TO TRANSFER SHARES. The Shareholder has full
legal power, authority and right to vote all of the Shares in favor of
approval and adoption of the Merger Agreement without the consent or
approval of, or any other action on the part of, any other person or
entity. Without limiting the generality of the foregoing, except for this
Agreement, Shareholder has not entered into any voting agreement or any
other agreement with any person or entity with respect to any of the
Shares, granted any person or entity any proxy (revocable or irrevocable)
or power of attorney with respect to any of the Shares, deposited any of
the Shares in a voting trust or entered into any arrangement or agreement
with any person or entity limiting or affecting the Shareholder's ability
to enter into this Agreement or legal power, authority or right to vote
the Shares in favor of the approval and adoption of the Merger Agreement
or any of the transactions contemplated by the Merger Agreement, and
Shareholder will not take any such action after the date of this
Agreement and prior to the Company shareholders meeting to vote on
approval and adoption of the Merger Agreement, including any adjournment
or postponement thereof (the "Company Shareholders Meeting"). This
Agreement has been duly executed and delivered by the Shareholder and
constitutes a valid and binding agreement of the Shareholder.
2. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent hereby represents
and warrants to the Shareholder that this Agreement (i) has been duly
authorized by all necessary corporate action,
54
(iii) has been duly executed and delivered by Parent and (iii) is a valid
and binding agreement of Parent.
3. RESTRICTION ON TRANSFER. The Shareholder agrees that (other than
pursuant to the Merger Agreement) it will not, and will not agree to, sell,
assign, dispose of, encumber, mortgage, hypothecate or otherwise transfer or
encumber (collectively, "Transfer") any of the Shares to any person or
entity; provided, however, that the Shareholder may enter into pledge
agreements pledging any of the Shares as collateral security under loan
agreements, provided that (i) the lender under each such loan agreement
consents to this Agreement and fulfillment of the terms thereof and (ii) the
Shareholder covenants and agrees to comply with each pledge agreement and
other loan documents relating to pledges of Shares thereunder and to
otherwise take all action necessary to insure that the Shareholder can carry
out the terms of this Agreement.
4. AGREEMENT TO VOTE OF SHAREHOLDER. The Shareholder, in his
individual capacity as a shareholder of the Company only, hereby irrevocably
and unconditionally agrees to vote or to cause to be voted all of the Shares
at the Company Shareholders' Meeting and at any other annual or special
meeting of shareholders of Company where such matters arise (a) in favor of
the approval and adoption of the Merger Agreement and (b) against (i)
approval of any proposal made in opposition to or in competition with the
Merger or any of the other transactions contemplated by the Merger
Agreement, (ii) any merger, consolidation, sale of assets, business
combination, share exchange, reorganization or recapitalization of Company
or any of its subsidiaries, with or involving any party other than Parent or
one of its subsidiaries, (iii) any liquidation, dissolution or winding up of
Company, (iv) any extraordinary dividend by Company, (v) any change in the
capital structure of Company (other than pursuant to the Merger Agreement)
and (vi) any other action that may reasonably be expected to impede,
interfere with, delay, postpone or attempt to discourage the Merger or the
other transactions contemplated by the Merger Agreement or this Agreement or
result in a breach of any of the covenants, representations, warranties or
other obligations or agreements of Company under the Merger Agreement which
would materially and adversely affect Company or its ability to consummate
the transactions contemplated by the Merger Agreement. The Stockholder
further agrees not to take or commit or agree to take any action
inconsistent with the foregoing.
5. ACTION IN SHAREHOLDER CAPACITY ONLY. The Shareholder signs solely
in the Shareholder's capacity as a record and beneficial owner of the
Shares, and nothing herein shall prohibit, prevent or preclude the
Shareholder from fulfilling his fiduciary duties as a director of Company,
including without limitation, voting or consenting as a director in favor of
an Acquisition Proposal (as defined in the Merger Agreement) or negotiating
with respect to an Acquisition Proposal in his capacity as an officer or
director of the Company.
6. NO SHOPPING. The Shareholder, in his individual capacity as a
shareholder of the Company only, agrees not to, directly or indirectly, (i)
solicit, initiate or encourage (or authorize any person to solicit, initiate
or encourage) any inquiry, proposal or offer from any person to acquire the
business, property or capital stock of Company or any direct or indirect
subsidiary thereof, or any acquisition of a substantial equity interest in,
or a substantial amount of the assets of, Company or any direct or indirect
subsidiary thereof, whether by merger, purchase of assets, tender offer or
other transaction or (ii) participate in any discussion or negotiations
regarding, or furnish to any other person any information with respect to,
or otherwise cooperate in any way with, or participate in, facilitate or
encourage any effort or attempt by any other person to do or seek any of the
foregoing; PROVIDED that, notwithstanding the foregoing, the Shareholder
shall not be prohibited from taking any such actions as are required, based
upon advice of counsel, to comply with his fiduciary duties as an officer
and director of the Company to the extent such actions are permitted under
the Merger Agreement.
55
7. INVALID PROVISIONS. If any provision of this Agreement shall be
invalid or unenforceable under applicable law, such provision shall be
ineffective to the extent of such invalidity or unenforceability only,
without it affecting the remaining provisions of this Agreement.
8. EXECUTED IN COUNTERPARTS. This Agreement may be executed in
counterparts each of which shall be an original with the same effect as if
the signatures hereto and thereto were upon the same instrument.
9. SPECIFIC PERFORMANCE. The parties hereto agree that if for any
reason the Shareholder fails to perform any of his agreements or obligations
under this Agreement irreparable harm or injury to Parent would be caused
for which money damages would not be an adequate remedy. Accordingly, the
Shareholder agrees that, in seeking to enforce this Agreement against the
Shareholder, Parent shall be entitled to specific performance and injunctive
and other equitable relief in addition and without prejudice to any other
rights or remedies, whether at law or in equity, that Parent may have
against the Shareholder for any failure to perform any of its agreements or
obligations under this Agreement.
10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas without giving effect to
the principles of conflicts of laws thereof.
11. AMENDMENTS; TERMINATION.
(a) This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
(b) The provisions of this Agreement shall terminate upon the
earliest to occur of (i) the consummation of the Merger, (ii) the date
which is 12 months after the date hereof, (iii) the termination of the
Merger Agreement pursuant to Section 7.1(a) or (g) thereof, or (iv) the
termination of the Merger Agreement pursuant to Section 7.1 (b) or (c)
thereof if, but only if, the Merger Agreement is terminated pursuant to
such subsection (b) or (c) solely for reasons that are not directly or
indirectly related to the commencement of, or any person's or entity's
direct or indirect indication of interest in making, an Acquisition
Proposal with respect to the Company.
(c) For purposes of this Agreement, the term "Merger Agreement"
includes the Merger Agreement, as the same may be modified or amended
from time to time.
12. ADDITIONAL SHARES. If, after the date hereof the Shareholder
acquires beneficial ownership of any shares of the capital stock of Company
(any such shares, "Additional Shares"), including, without limitation, upon
exercise of any option, warrant or right to acquire shares of capital stock
or through any stock dividend or stock split, the provisions of this
Agreement (other than those set forth in Section 1 (a)) applicable to the
Shares shall be applicable to such Additional Shares as if such Additional
Shares had been Shares as of the date hereof. The provisions of the
immediately preceding sentence shall be effective with respect to Additional
Shares without action by any person or entity immediately upon the
acquisition by the Shareholder of beneficial ownership of such Additional
Shares.
13. ACTION BY WRITTEN CONSENT. If, in lieu of the Company Shareholders
Meeting, shareholder action in respect of the Merger Agreement or any of the
transactions contemplated by the Merger Agreement is taken by written
consent, the provisions of this Agreement imposing obligations in respect of
or in connection with the Company Shareholders Meeting shall apply MUTATIS
MUTANDIS to such action by written consent.
14. SHAREHOLDER CERTIFICATE. Shareholder agrees to execute and deliver
a certificate containing such representations as are reasonably necessary
and customary for tax counsel to Parent on the one hand, and Company on the
other hand, to render an opinion to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986 and that no gain or loss will be recognized by
the shareholders of Company to the extent they receive
56
Parent Common Stock solely in exchange for shares of Company Common Stock,
such certificate to be in the form attached hereto as Exhibit C.
15. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective legal successors and permitted assigns; PROVIDED that no party
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the consent of Parent (in the case of the
Shareholder or any of its permitted assigns) or the Shareholder (in the case
of Parent or any of its permitted assigns).
16. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by facsimile, or by registered or certified mail
(postage prepaid, return receipt requested) to such party at its address set
forth on the signature page hereto.
[The remainder of this page intentionally left blank.]
57
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
Mark E. Watson, Jr.
Address:
-------------------------------------
MEW FAMILY LIMITED PARTNERSHIP
By:
-------------------------------------
Mark E. Watson, Jr., General Partner
By:
-------------------------------------
Kathleen Watson, General Partner
Address:
-------------------------------------
THE MARK AND KATHLEEN WATSON
CHARITABLE FOUNDATION
By:
-------------------------------------
Mark E. Watson, Jr., Trustee
By:
-------------------------------------
Kathleen E. Watson, Trustee
By:
-------------------------------------
E.B. Lyon, III, Trustee
Address:
-------------------------------------
USF&G CORPORATION
By:
-------------------------------------
Address:
-------------------------------------
58
EXHIBIT B TO
MERGER AGREEMENT
[FORM OF AFFILIATE LETTER]
, 1997
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Titan Holdings, Inc., a Texas corporation ("Titan"), as the
term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule
145 of the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), and/or (ii) used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the Commission. I have been further advised
that pursuant to the terms of the Agreement and Plan of Merger dated as of
August , 1997 (the "Agreement"), between Titan, USF&G Corporation ("USF&G")
and United States Fidelity and Guaranty Company, a Maryland corporation (the
"Subsidiary"), Titan will be merged with and into the Subsidiary (the "Merger")
and I will receive shares of Common Stock, par value $2.50 per share, of USF&G
(the "USF&G Common Stock") in exchange for shares of Common Stock, par value
$0.01 per share, of Titan owned by me.
I represent, warrant and covenant to USF&G that in the event I receive any
USF&G Common Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the USF&G
Common Stock in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed
the requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of the USF&G Common Stock to
the extent I believe necessary, with my counsel or counsel for Titan.
C. I have been advised that the issuance of USF&G Common Stock to me
pursuant to the Merger has been registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger was submitted for a vote of the
stockholders of Titan, I may be deemed to have been an affiliate of Titan
and the distribution by me of the USF&G Common Stock has not been registered
under the Act, and that I may not sell, transfer or otherwise dispose of the
USF&G Common Stock issued to me in the Merger unless (i) such sale, transfer
or other disposition has been registered under the Act, (ii) such sale,
transfer or other disposition is made in conformity with Rule 145
promulgated by the Commission under the Act, or (iii) in the opinion of
counsel reasonably acceptable to USF&G, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
D. I understand that USF&G is under no obligation to register the sale,
transfer or other disposition of the USF&G Common Stock by me or on my
behalf under the Act or, to take any other action necessary in order to make
compliance with an exemption from such registration available.
E. I also understand that, in the event USF&G or USF&G's transfer agent
determines that I beneficially own one percent (1%) or more of the USF&G
Common Stock outstanding, stop transfer instructions will be given to
USF&G's transfer agents with respect to the USF&G Common Stock and
59
that there will be placed on the certificates for the USF&G Common Stock
issued to me, or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES
MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN COMPLIANCE WITH THE
REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION STATEMENT UNDER
SAID ACT OF AN EXEMPTION FROM SUCH REGISTRATION."
F. I also understand that, in the event USF&G or USF&G's transfer agent
determines that I beneficially own one percent (1%) or more of the USF&G
Common Stock outstanding, unless the transfer by me of my USF&G Common Stock
has been registered under the Act or is a sale made in conformity with the
provisions of Rule 145, USF&G reserves the right to put the following legend
on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER
THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE
HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE
WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933."
It is understood and agreed that the legend set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this Agreement.
It is understood and agreed that such legends and the stop orders referred to
above will be removed if (i) one year shall have elapsed from the date the
undersigned acquired the USF&G Common Stock received in the Merger and the
provisions of Rule 145(d)(2) are then available to the undersigned, (ii) two
years shall have elapsed from the date the undersigned acquired the USF&G Common
Stock received in the Merger and the provisions of Rule 145(d)(3) are then
applicable to the undersigned, or (iii) USF&G has received either an opinion of
counsel, which opinion and counsel shall be reasonably satisfactory to USF&G, or
a "no action" letter obtained by the undersigned from the staff of the
Commission, to the effect that the restrictions imposed by Rule 145 under the
Act no longer apply to the undersigned.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Titan as described in the first paragraph of this
letter or as a waiver of any rights I may have to object to any claim that I am
such an affiliate on or after the date of this letter.
Very truly yours,
----------------------------------------------
[Name]
Accepted this day of , 199 .
USF&G CORPORATION
By:
- -------------------------------------------
Name:
Title:
60
EXHIBIT C TO
MERGER AGREEMENT
[FORM OF WARRANT CANCELLATION AGREEMENT]
THIS AGREEMENT, dated as of , 1997, by and between Titan Holdings,
Inc., a Texas corporation (the "Company"), USF&G Corporation, a Maryland
corporation ("Parent") and (the "Holder").
WHEREAS, the Holder is the record owner of warrants (the "Warrants")
outstanding under the Warrant Agreement (the "Warrant Agreement"); and
WHEREAS, the Company, Parent and the Holder have agreed that it is now
desirable that the Warrants be cancelled and that the Parent shall pay the
Holder the Warrant Consideration, as such term is defined in the Agreement and
Plan of Merger, dated as of August 7, 1997, by and among Parent, United States
Fidelity and Guaranty Company and the Company (the "Merger Agreement"), in
consideration for such cancellation;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter
set forth, IT IS HEREBY AGREED by the parties hereto as follows:
1. The Company, Parent and the Holder hereby agree that the Warrants
will be cancelled immediately prior to the Effective Time (as such term is
defined in the Merger Agreement) and that the Holder will have no further
rights under the Warrant Agreement with respect to the Warrants; provided,
however, that such cancellations will be of no force and effect if the
Merger does not occur.
2. In consideration for the cancellation of the Warrants, Parent shall
pay to the Holder the Warrant Consideration, which amount shall be paid to
the Holder no later than ten days after the Effective Time.
3. The Holder hereby agrees to forever relinquish its rights to the
Warrants and any rights that it may have with respect to the Warrants under
the Warrant Agreement.
4. If the Merger does not occur, this Agreement shall be of no force
and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
USF&G CORPORATION [HOLDER]
By: ---------------------------------------- By: ----------------------------------------
Title: Title:
TITAN HOLDINGS, INC.
By: ----------------------------------------
Title:
61
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment"), dated as
of August 26, 1997, is made and entered into by and among USF&G Corporation, a
Maryland corporation ("Parent"), United States Fidelity and Guaranty Company, a
Maryland corporation and wholly-owned subsidiary of Parent ("USF&G"), and Titan
Holdings, Inc., a Texas corporation ("Titan").
WHEREAS, on August 7, 1997, Parent, USF&G and Titan entered into that
certain Agreement and Plan of Merger (the "Merger Agreement") pursuant to which,
among other things, the parties agreed that Titan would be merged with and into
USF&G, with USF&G to survive the merger; and
WHEREAS, the parties hereto now wish to amend the Merger Agreement to
clarify certain terms related to the merger consideration and elections and
prorations in connection therewith.
NOW THEREFORE, in consideration of the foregoing and various other
considerations, the receipt and sufficiency of which the parties hereby
acknowledge, the parties hereto hereby agree that the Merger Agreement shall be
amended as follows:
1. The last two sentences of Subsection (c) of Section 2.3 of the Merger
Agreement are hereby deleted and amended in their entirety to read as follows:
The "Remaining Stock Election Cash Amount" shall be equal to the Maximum
Cash Amount minus the aggregate amount of cash payable pursuant to, or
with respect to, Standard Elections, Deemed Standard Elections, Cash
Elections, Dissenting Shares, Parent Shares (as defined below) and
fractional shares. "Parent Shares" means any and all shares of Company
Common Stock that are (i) owned by Parent or USF&G and (ii) canceled and
retired at the Effective Time pursuant to Section 2.1(b). For purposes of
this paragraph and the following paragraph, the aggregate amount of cash
payable with respect to Dissenting Shares or Parent Shares shall be
deemed to be the product of (x) the number of Dissenting Shares or Parent
Shares, as the case may be, times (y) 2.0 times the Standard Cash
Consideration.
2. Subsection (d) of Section 2.3 of the Merger Agreement is hereby deleted
and amended in its entirety to read as follows:
(d) In the event that the aggregate amount of cash payable pursuant
to Standard Elections, Deemed Standard Elections and Cash Elections
received by the Exchange Agent exceeds the Maximum Cash Amount reduced by
the sum of (i) the aggregate amount of cash payable with respect to the
Dissenting Shares and fractional shares and (ii) the aggregate amount of
cash payable by Parent in acquiring the Parent Shares (such excess being
hereafter referred to as the "Excess Cash"), the following adjustments
shall be made:
(1) If the Excess Cash is less than or equal to one-half of the
aggregate amount of cash payable pursuant to Cash Elections, each
holder making a Cash Election shall receive, for each share of Company
Common Stock held by such holder, (x) cash in an amount equal to the
quotient obtained by dividing the (i) the excess of (A) the aggregate
amount of cash that otherwise would be payable pursuant to Cash
Elections over (B) the Excess Cash by (ii) the aggregate number of
shares of Company Common Stock held by holders making Cash Elections
(the "Cash Election Company Shares"), plus (y) a number of shares of
Parent Common Stock equal to the quotient obtained by dividing (iii)
the quotient obtained by dividing (C) the Excess Cash by (D) the
Average Stock Price (or the Closing Stock Price if adjustments are
required under Section 2.4) by (iv) the Cash Election Company Shares.
(2) If the Excess Cash is greater than one-half of the aggregate
amount of cash payable pursuant to Cash Elections, each holder making
a Standard Election, Deemed Standard Election or Cash Election shall
receive, for each share of Company Common Stock held by such holder,
(x) cash in an amount equal to the quotient obtained by dividing (i)
the excess of (A) the Maximum Cash Amount over (B) the aggregate
amount of cash payable with respect to Dissenting Shares, Parent
Shares and fractional shares by (ii) the aggregate number of shares of
Company Common Stock held by holders making Standard Elections, Deemed
Standard Elections or Cash Elections (the "Cash/Standard Election
Company Shares"), plus (y) a number of shares of Parent Common Stock
equal to the quotient obtained by dividing (iii) the Remaining
Cash/Standard Election Parent Shares (as defined below) by (iv) the
Cash/Standard Election Company Shares. The
62
"Remaining Cash/Standard Election Parent Shares" shall be the Maximum
Number of Parent Shares minus the number of shares of Parent Common
Stock issuable pursuant to Stock Elections (including any fractional
shares of Parent Common Stock for which a cash adjustment shall be
paid pursuant to Section 2.5(c) in respect of such Stock Elections).
3. Section 2.4 of the Merger Agreement is hereby deleted and amended in its
entirety to read as follows:
2.4 Tax Adjustment.
Notwithstanding any other provision of this Article II, in the event
that the allocation of the consideration between stock and cash is not
50% stock and 50% cash for any reason (including the Closing Stock Price
(as defined below) being less than the Average Stock Price and the
aggregate amount of consideration transferred by Parent in acquiring
Parent Shares being greater than the amount assumed under Section
2.3(c)), appropriate adjustment will be made, as determined by Parent and
the Company upon advice of counsel, to the extent if any, as may be
required to cause the Merger Consideration allocation between cash and
stock to satisfy the continuity of interest requirements for purposes of
causing the transaction to qualify as a tax-free reorganization, provided
that the total value of the Merger Consideration to be delivered by
Parent, based upon the Average Stock Price, shall not increase. For
purposes of this Section 2.4, the "Closing Stock Price" shall mean the
mean between the highest and lowest quoted selling prices of the Parent
Common Stock as reported on the New York Stock Exchange Composite Tape on
the day of the Effective Time of the Merger. In the event that an
adjustment is made under this Section 2.4, any adjustments necessary or
appropriate to reflect such adjustment shall be made to the other
provisions of this Article II.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
USF&G:
UNITED STATES FIDELITY
AND GUARANTY COMPANY
By:/s/ ANDREW A. STERN
-------------------------------------------------
Name: Andrew A. Stern
Title: Executive Vice President
Parent:
USF&G CORPORATION
By:/s/ ANDREW A. STERN
-------------------------------------------------
Name: Andrew A. Stern
Title: Executive Vice President
Company:
TITAN HOLDINGS, INC.
By:/s/ MARK E. WATSON, JR.
-------------------------------------------------
Name: Mark E. Watson, Jr.
Title: President
63