Stock Incentive Plans. The Company follows Accounting Principals Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock incentive plans. For stock options granted to employees of Mutual in 1999, the Company also followed APB 25 and related Interpretations, as the Company deemed such employees to be common law employees of the Company, Compensation cost charged against operations in 2000 and 1999 were $31,000 and $137,000, respectively, for those employee stock options granted where the exercise price was less than the market price of the underlying stock on the date of grant. Had compensation cost for the Company's plans been determined based on the fair values at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123), the Company's pro forma net earnings and net earnings per share information would have been as follows: 2000 1999 1998 ---- ---- ---- (in thousands, except per share figures) Pro forma net earnings....................... $45,784 41,414 35,700 Pro forma net earnings per common share Basic................................... $ 1.19 1.02 0.85 Diluted................................. $ 1.17 1.00 0.83 The fair value of options granted in 2000, 1999 and 1998 were estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions for options granted were as follows: 2000 1999 1998 ---- ---- ---- Fair value......................... $4.66 $4.49 $6.10 Dividend yield..................... 90% .90% .75% Risk free interest rate ........... 6.51% 5.77% 5.31% Expected volatility factor......... .34 .32 .31 Expected life (years).............. 7.2 5.7 6.6 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company has stock option plans for certain directors and key employees. The nonemployee directors' plan provides each nonemployee director an option to purchase 1,500 shares of common stock following each annual meeting of the shareholders at an option price equal to the fair market value at the last business day prior to the annual meeting. The Company has reserved 300,000 shares of common stock under this plan. These options are exercisable at issuance to 10 years from date of grant. The key employee's plan provides that qualified stock options STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES (a majority-owned subsidiary of State Automobile Mutual Insurance Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED may be granted at an option price not less than fair market value at date of grant and that nonqualified stock options may be granted at any price determined by the options committee of the Board of Directors. The Company has reserved 5,000,000 shares of common stock under this plan. These options are exercisable at such time or times as may be determined by a committee of the Company's Board of Directors. Normally, for certain employees these options are exercisable from 1 to 10 years from date of grant and 3 to 10 years for remaining employees. The Company has an employee stock purchase plan with a dividend reinvestment feature, under which employees of the Company may choose at two different specified time intervals each year to have up to 6% of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-interval or end-of- interval market price. The Company has reserved 2,400,000 shares of common stock under this plan. At December 31, 2000, 1,699,000 shares have been purchased under this plan. The Company has a stock option incentive plan for certain designated independent insurance agencies that represent the Company and its affiliates. The Company has reserved 400,000 shares of common stock under this plan. The plan provides that the options become exercisable on the first day of the calendar year following the agency's achievement of specific production and profitability requirements over a period not greater than two calendar years from date of grant or a portion thereof in the first calendar year in which an agency commences participation under the plan. Options granted and vested under this plan have a 10-year term. The Company has accounted for the plan in its accompanying financial statements at fair value. The fair value of options granted was estimated at the reporting date or vesting date using the Black-Scholes option-pricing model. The weighted average fair value and related assumptions for 2000 and 1999, respectively, were as follows: fair value of $10.91 and $4.02; dividend yield of .90% for both years; expected volatility factor of .32 and .30; risk-free interest rate of 5.19% and 6.80%; and expected life of the option of 9.0 and 9.7 years. Expense of $493,000 and $105,000 associated with this plan was recognized in 2000 and 1999, respectively. A summary of the Company's stock option activity and related information for these plans for the years ended December 31, 2000, 1999 and 1998, follows: 2000 1999 1998 ------------------------ ------------------------ ------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- (numbers in thousands, except per share figures) Outstanding, beginning of year 2,546 $ 7.76 2,272 $ 6.76 2,019 $ 5.04 Granted 492 10.29 453 11.24 339 16.31 Exercised (129) 4.32 (165) 3.34 (86) 4.02 Canceled (57) 11.15 (14) 10.52 -- -- ----- ----- ----- Outstanding, end of year 2,852 8.28 2,546 7.76 2,272 6.76 ===== ===== ===== A summary of information pertaining to options outstanding and exercisable as of December 31, 2000 follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ------------------------- WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE ------------------------ ------ ---------------- ---------------- ------ ---------------- (numbers in thousands, except per share figures) Less than $5.00 734 2.0 $ 3.98 734 $ 3.98 $5.01 - $10.00 1,004 4.9 6.66 961 6.56 Greater than $10.01 1,114 8.5 12.58 537 13.89 ----- ----- 2,852 5.5 8.28 2,232 7.47 ===== ===== Put Agreement Schedule III Part B During 2001, the common shares of STFC became a permitted investment in the State Auto 401(k) Capital Accumulation Plan (the "CAP") plan and in non-qualified deferred compensation plans for key employees and directors. The CAP and the Employee Non-Qualified Deferred Compensation Plan were registered with the SEC. The Directors' Non-Qualified Deferred Compensation Plan was not registered with the SEC, since it is within the scope of an exception to registration. The participants in the non-qualified deferred compensation plans are unsecured creditors of State Auto and part of the obligations under those plans will reflect the value of STFC common shares to the extent any participants investments are so directed. Fidelity Investments is the Trustee of the CAP. Agreemen/put agreement schedule III 11-6-01 EXHIBIT A to the Put Agreement [Form of Put Notice] [Date] State Automobile Mutual Insurance Company State Auto Financial Corporation [Address] Re: Put Agreement dated as of November 16, 2001, between State Automobile Mutual Insurance Company, State Auto Financial Corporation and Bank One, NA, as Agent. Dear Ladies and Gentlemen: Reference is made to the Amended and Restated Put Agreement dated as of November 16, 2001 (as modified and supplemented and in effect from time to time, the "PUT AGREEMENT"), among State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL"), State Auto Financial Corporation and Bank One, NA, as Agent. Capitalized terms used but not defined herein shall have the respective meanings assigned to such terms in the Put Agreement. [Pursuant to Section 2.2 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of each Lender's Loans, Note and Commitment. The aggregate purchase price payable by State Auto Mutual for all such Loans, Notes and Commitments shall be $_______________ representing the sum of (a) principal of such Loans in the amount of $_______________, PLUS (b) accrued and unpaid interest thereon in the amount of $______________, PLUS (c) other amounts payable under the Basic Documents in respect thereof in the amount of $_______________.] [Pursuant to Section 2.3 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of the Pledged Stock for an aggregate purchase price equal to $_______________ representing the sum of (a) the aggregate Redemption Value of such Pledged Stock in the amount of $_____________, PLUS (b) accrued and unpaid dividends thereon in the amount of $_______________.] The Put Purchase Date for such purchase shall be _______________, _____. BANK ONE, NA, as Agent By ------------------------------------- Title: A-1 EXHIBIT B OPINION OF GENERAL COUNSEL OF THE STATE AUTO OBLIGORS [STATE AUTO INSURANCE COMPANIES LETTERHEAD] November 16, 2001 To each of the Lenders party to the Credit Agreement referred to below and Bank One, NA, as Agent Ladies and Gentlemen: I am the general counsel of State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL") and State Auto Financial Corporation ("STATE AUTO FINANCIAL" and, together with State Auto Mutual, the "STATE AUTO OBLIGORS") and have acted as counsel to the State Auto Obligors in connection with (i) the Amended and Restated Put Agreement dated as of November 16, 2001 (the "PUT AGREEMENT") among the State Auto Obligors and Bank One, NA, in its capacity as Agent (the "AGENT") on behalf of the lenders party to an Amended and Restated Credit Agreement dated as of November 16, 2001, among SAF Funding Corporation, the Agent and (ii) the agreements, instruments and other documents referred to in the next paragraph. All capitalized terms used but not defined herein have the respective meanings given to such terms in the Put Agreement. This opinion letter is delivered to you pursuant to Section 4.18(c) of the Put Agreement. In rendering the opinions expressed below, I have examined the following agreements, instruments and other documents: (a) the Credit Agreement; (b) the Pledge Agreements; (c) the Put Agreement; (d) the Standby Purchase Agreement (collectively with the Put Agreement, the "STATE AUTO AGREEMENTS"); and (e) such records of the State Auto Obligors and such other documents as I have deemed necessary as a basis for the opinions expressed below. In my examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with authentic original documents of all documents submitted to me as copies. When relevant facts were not independently established, I have relied upon certificates of governmental officials and appropriate representatives of the State Auto Obligors and upon representations made in or pursuant to the State Auto Agreements. In rendering the opinions expressed below, I have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent set forth in the opinions expressed below, as to the State Auto Obligors): (i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents; (ii) all signatories to such documents have been duly authorized; and (iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate, partnership or other) to execute, deliver and perform such documents. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as I have deemed necessary as a basis for the opinions expressed below, I am of the opinion that: 1. State Auto Mutual is a mutual insurance company duly organized, validly existing and in good standing under the laws of the State of Ohio. State Auto Financial is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio. 2. Each State Auto Obligor has all requisite corporate power and authority to execute and deliver, and to perform its obligations and to incur liabilities under, the State Auto Agreements to which it is a party. 3. The execution, delivery and performance by each State Auto Obligor of, and the incurrence by such State Auto Obligor of liabilities under, each State Auto Agreement to which such State Auto Obligor is a party, have been duly authorized by all necessary corporate action on the part of such State Auto Obligor. 4. Each State Auto Agreement has been duly executed and delivered by each State Auto Obligor party thereto. 5. Under Ohio conflict of laws principles, the stated choice of Illinois law to govern the State Auto Agreements will be honored by the courts of the State of Ohio and the State Auto Agreements will be construed in accordance with, and will be treated as being governed by, the law of the State of Illinois. However, if the State Auto Agreements were stated to be governed by and construed in accordance with the law of the State of Ohio, or if an Ohio court were to apply the law of the State of Ohio to the State Auto Agreements, each State Auto Agreement would constitute the legal, valid and binding obligation of each State Auto Obligor party thereto, enforceable against such State Auto Obligor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the State Auto Agreements is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. 6. No authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of Ohio (other than any authorizations, approvals, consents, filings and registrations heretofore duly made or obtained and in full force and effect) is required on the part of either State Auto Obligor for the execution, delivery or performance by such State Auto Obligor of, or for the incurrence by such State Auto Obligor of any liabilities under, the State Auto Agreements to which such State Auto Obligor is a party. 7. The execution, delivery and performance by each State Auto Obligor of, and the consummation by such State Auto Obligor of the transactions contemplated by, the State Auto Agreements to which such State Auto Obligor is a party do not and will not (a) violate any provision of the Articles of Incorporation or Code of Regulations of such State Auto Obligor, (b) violate any applicable law, rule or regulation of the United States of America or the State of Ohio, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to such State Auto Obligor of which I have knowledge (after due inquiry) or (d) result in a breach of, constitute a default under, require any consent under, or result in the
Appears in 2 contracts
Sources: Put Agreement (State Auto Financial Corp), Put Agreement (State Auto Financial Corp)
Stock Incentive Plans. The Company follows Accounting Principals Principles Board Opinion Option No. 25, "Accounting for Stock issued Issued to Employees" (APB 25) and related Interpretations interpretations in accounting for its employee stock incentive plans. For stock options granted to employees of Mutual in 1999, the Company also followed APB 25 and related Interpretationsinterpretations, as the Company deemed such employees to be common law employees of the Company, . Compensation cost charged against operations in 2000 and 1999 were $31,000 and $137,000, respectively, for those employee stock options granted where the exercise price was less than the market price of the underlying stock on the date of grant. Had compensation cost for the Company's plans been determined based on the fair values at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123), the Company's pro forma net earnings and net earnings per share information would have been as follows: 2000 1999 1998 ---- ---- ---- (in thousands, except per share figures) Pro forma net earnings....................... earnings .......................... $45,784 41,414 35,700 Pro forma net earnings per common share Basic................................... Basic ......................................... $ 1.19 1.02 0.85 Diluted................................. Diluted ....................................... $ 1.17 1.00 0.83 The fair value of options granted in 2000, 1999 and 1998 were estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions for options granted were as follows: 2000 1999 1998 ---- ---- ---- Fair value......................... value ...................................... $4.66 $4.49 $6.10 Dividend yield..................... 90yield .................................. .90% .90% .75% Risk free interest rate ........... ......................... 6.51% 5.77% 5.31% Expected volatility factor......... factor ...................... .34 .32 .31 Expected life (years).............. ) ........................... 7.2 5.7 6.6 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company has stock option plans for certain directors and key employees. The nonemployee directors' plan provides each nonemployee director an option to purchase 1,500 shares of common stock following each annual meeting of the shareholders at an option price equal to the fair market value at the last business day prior to the annual meeting. The Company has reserved 300,000 shares of common stock under this plan. These options are exercisable at issuance to 10 years from date of grant. The key employee's plan provides that qualified stock options STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES (a majority-owned subsidiary of State Automobile Mutual Insurance Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED may be granted at an option price not less than fair market value at date of grant and that nonqualified stock options may be granted at any price determined by the options committee of the Board of Directors. The Company has reserved 5,000,000 shares of common stock under this plan. These options are exercisable at such time or times as may be determined by a committee of the Company's Board of Directors. Normally, for certain employees these options are exercisable from 1 to 10 years from date of grant and 3 to 10 years for remaining employees. The Company has an employee stock purchase plan with a dividend reinvestment feature, under which employees of the Company may choose at two different specified time intervals each year to have up to 6% of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-interval or end-of- interval market price. The Company has reserved 2,400,000 shares of common stock under this plan. At December 31, 2000, 1,699,000 shares have been purchased under this plan. The Company has a stock option incentive plan for certain designated independent insurance agencies that represent the Company and its affiliates. The Company has reserved 400,000 shares of common stock under this plan. The plan provides that the options become exercisable on the first day of the calendar year following the agency's achievement of specific production and profitability requirements over a period not greater than two calendar years from date of grant or a portion thereof in the first calendar year in which an agency commences participation under the plan. Options granted and vested under this plan have a 10-year term. The Company has accounted for the plan in its accompanying financial statements at fair value. The fair value of options granted was estimated at the reporting date or vesting date using the Black-Scholes option-pricing model. The weighted average fair value and related assumptions for 2000 and 1999, respectively, were as follows: fair value of $10.91 and $4.02; dividend yield of .90% for both years; expected volatility factor of .32 and .30; risk-free interest rate of 5.19% and 6.80%; and expected life of the option of 9.0 and 9.7 years. Expense of $493,000 and $105,000 associated with this plan was recognized in 2000 and 1999, respectively. A summary of the Company's stock option activity and related information for these plans for the years ended December 31, 2000, 1999 and 1998, follows: 2000 1999 1998 ------------------------ ------------------------ ------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- (numbers in thousands, except per share figures) Outstanding, beginning of year 2,546 $ 7.76 2,272 $ 6.76 2,019 $ 5.04 Granted 492 10.29 453 11.24 339 16.31 Exercised (129) 4.32 (165) 3.34 (86) 4.02 Canceled (57) 11.15 (14) 10.52 -- -- ----- ----- ----- Outstanding, end of year 2,852 8.28 2,546 7.76 2,272 6.76 ===== ===== ===== A summary of information pertaining to options outstanding and exercisable as of December 31, 2000 follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ------------------------- WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE ------------------------ ------------------------- ------ ---------------- ---------------- ------ ---------------- (numbers in thousands, except per share figures) Less than $5.00 734 2.0 $ 3.98 734 $ 3.98 $5.01 - $10.00 1,004 4.9 6.66 961 6.56 Greater than $10.01 1,114 8.5 12.58 537 13.89 ----- ----- 2,852 5.5 8.28 2,232 7.47 ===== ===== Put Agreement Schedule III Part SCHEDULE 1 PART B During 2001, the common shares of STFC became a permitted investment in the State Auto 401(k) Capital Accumulation Plan (the "CAP") plan and in non-qualified deferred compensation plans for key employees and directors. The CAP and the Employee Non-Qualified Deferred Compensation Plan were registered with the SEC. The Directors' Non-Qualified Deferred Compensation Plan was not registered with the SEC, since it is within the scope of an exception to registration. The participants in the non-qualified deferred compensation plans are unsecured creditors of State Auto and part of the obligations under those plans will reflect the value of STFC common shares to the extent any participants investments are so directed. Fidelity Investments is the Trustee of the CAP. State Auto Financial has an active program of share repurchases ongoing as authorized by its board of directors. Agreemen/put agreement schedule III Standby Purchase Agreement part B 11-605-01 EXHIBIT A to the Put Standby Purchase Agreement [Form of Put NoticeClass A Preferred Stock Certificate] [DateFront of Class A Preferred Stock Certificate] State Automobile Mutual Insurance Company State Auto Financial Corporation [Address] Re: Put Agreement dated as of November 16, 2001, between State Automobile Mutual Insurance Company, State Auto Financial Corporation and Bank One, NA, as Agent. Dear Ladies and Gentlemen: Reference is made to the Amended and Restated Put Agreement dated as of November 16, 2001 (as modified and supplemented and in effect from time to time, the "PUT AGREEMENT"), among State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL"), State Auto Financial Corporation and Bank One, NA, as Agent. Capitalized terms used but not defined herein shall have the respective meanings assigned to such terms in the Put Agreement. [Pursuant to Section 2.2 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of each Lender's Loans, Note and Commitment. The aggregate purchase price payable by State Auto Mutual for all such Loans, Notes and Commitments shall be $CERTIFICATE NUMBER SHARES ------ ------ _________________ representing the sum of (a) principal of such Loans in the amount of $_______________, PLUS (b) accrued and unpaid interest thereon in _ STATE AUTO FINANCIAL CORPORATION Incorporated under the amount laws of $the State of Ohio CUSIP ______________, PLUS (c) other amounts payable under the Basic Documents in respect thereof in the amount of $_ SEE REVERSE SIDE FOR CERTAIN TRANSFER RESTRICTIONS AND OTHER IMPORTANT INFORMATION This is to Certify that _______________.] [Pursuant to Section 2.3 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of the Pledged Stock for an aggregate purchase price equal to $_______________ representing is the sum owner of (a) the aggregate Redemption Value of such Pledged Stock in the amount of $_____________, PLUS (b) accrued and unpaid dividends thereon in the amount of $_______________.] The Put Purchase Date for such purchase shall be _______________, _____. BANK ONE, NA, as Agent By ------------------------------------- Title: A-1 EXHIBIT B OPINION ___________________________________ FULLY PAID AND NON-ASSESSABLE SHARES OF GENERAL COUNSEL CLASS A PREFERRED STOCK NO PAR VALUE OF THE STATE AUTO OBLIGORS [STATE AUTO INSURANCE COMPANIES LETTERHEAD] November 16, 2001 To each of the Lenders party to the Credit Agreement referred to below and Bank One, NA, as Agent Ladies and Gentlemen: I am the general counsel of State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL") and State Auto Financial Corporation ("transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. WITNESS the seal of the Corporation and the signatures of its duly authorized officers. ______________________________ __________________________________ Secretary Chief Executive Officer __________________________________ President [Reverse of Class A Preferred Stock Certificate] STATE AUTO FINANCIAL" andFINANCIAL CORPORATION The Corporation will furnish upon request and without charge to each shareholder the powers, together with State Auto Mutualdesignations, preferences and relative, participating, optional or other special rights of each class of stock series within a class of stock of the Corporation, as well as the qualifications, limitations and restrictions relating to those preferences and/or rights. THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED AND SOLD ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF SAID SECURITIES ACT OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE. In addition, the "STATE AUTO OBLIGORS") and have acted as counsel shares evidenced by this certificate are subject to the State Auto Obligors in connection with (i) the Amended and Restated Put Agreement dated as of November 16, 2001 (the "PUT AGREEMENT") among the State Auto Obligors and Bank One, NA, in its capacity as Agent (the "AGENT") restrictions on behalf of the lenders party to an Amended and Restated Credit Agreement dated as of November 16, 2001, among SAF Funding Corporation, the Agent and (ii) the agreements, instruments and other documents referred to in the next paragraph. All capitalized terms used but not defined herein have the respective meanings given to such terms in the Put Agreement. This opinion letter is delivered to you pursuant to Section 4.18(c) of the Put Agreement. In rendering the opinions expressed below, I have examined the following agreements, instruments and other documents:
(a) the Credit Agreement;
(b) the Pledge Agreements;
(c) the Put Agreement;
(d) the Standby Purchase Agreement (collectively with the Put Agreement, the "STATE AUTO AGREEMENTS"); and
(e) such records of the State Auto Obligors and such other documents as I have deemed necessary as a basis for the opinions expressed below. In my examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with authentic original documents of all documents submitted to me as copies. When relevant facts were not independently established, I have relied upon certificates of governmental officials and appropriate representatives of the State Auto Obligors and upon representations made in or pursuant to the State Auto Agreements. In rendering the opinions expressed below, I have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent transfer set forth in the opinions expressed below, as Terms and Conditions attached hereto. TERMS AND CONDITIONS of CLASS A PREFERRED STOCK of STATE AUTO FINANCIAL CORPORATION _______________________________________________________________________________ Pursuant to the State Auto Obligors):
(i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all Section 1701.14 of the parties to such documents;
(ii) all signatories to such documents have been duly authorized; and
(iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate, partnership or other) to execute, deliver and perform such documents. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as I have deemed necessary as a basis for the opinions expressed below, I am of the opinion that:
1. State Auto Mutual is a mutual insurance company duly organized, validly existing and in good standing under the laws of the State of Ohio. State Auto Financial is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio.
2. Each State Auto Obligor has all requisite corporate power and authority to execute and deliver, and to perform its obligations and to incur liabilities under, the State Auto Agreements to which it is a party.
3. The execution, delivery and performance by each State Auto Obligor of, and the incurrence by such State Auto Obligor of liabilities under, each State Auto Agreement to which such State Auto Obligor is a party, have been duly authorized by all necessary corporate action on the part of such State Auto Obligor.
4. Each State Auto Agreement has been duly executed and delivered by each State Auto Obligor party thereto.
5. Under Ohio conflict of laws principles, the stated choice of Illinois law to govern the State Auto Agreements will be honored by the courts of the State of Ohio and the State Auto Agreements will be construed in accordance with, and will be treated as being governed by, the law of the State of Illinois. However, if the State Auto Agreements were stated to be governed by and construed in accordance with the law of the State of Ohio, or if an Ohio court were to apply the law of the State of Ohio to the State Auto Agreements, each State Auto Agreement would constitute the legal, valid and binding obligation of each State Auto Obligor party thereto, enforceable against such State Auto Obligor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the State Auto Agreements is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing.
6. No authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of Ohio (other than any authorizations, approvals, consents, filings and registrations heretofore duly made or obtained and in full force and effect) is required on the part of either State Auto Obligor for the execution, delivery or performance by such State Auto Obligor of, or for the incurrence by such State Auto Obligor of any liabilities under, the State Auto Agreements to which such State Auto Obligor is a party.
7. The execution, delivery and performance by each State Auto Obligor of, and the consummation by such State Auto Obligor of the transactions contemplated by, the State Auto Agreements to which such State Auto Obligor is a party do not and will not (a) violate any provision of the Articles of Incorporation or Code of Regulations of such State Auto Obligor, (b) violate any applicable law, rule or regulation of the United States of America or the State of Ohio, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to such State Auto Obligor of which I have knowledge (after due inquiry) or (d) result in a breach of, constitute a default under, require any consent under, or result in the General Corporation Law _______________________________________________________________________________
Appears in 2 contracts
Sources: Standby Purchase Agreement (State Auto Financial Corp), Standby Purchase Agreement (State Auto Financial Corp)
Stock Incentive Plans. The Company follows Accounting Principals Board Opinion NoCompany's stock option incentive plans provide for the awarding of options on common shares to employees, exercisable over ten-year periods. 25Certain options become exercisable upon the attainment of specified market price appreciation of the Company's common shares or at nine years after the date of grant, "Accounting while the remaining options become exercisable over a three-year period commencing with the date of grant. The exercise price per share is the fair market value on the date each option is granted. 40 ITT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DOLLARS IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED The following table summarizes the activity in common shares subject to options for Stock issued to Employees" the three years ended December 31, 1995 (APB 25shares in thousands): OPTION PRICE SHARES January 1, 1993......................................... $31.00 - $ 70.75 3,703 Granted............................................... 72.63 - 93.50 1,764 Exercised............................................. 31.00 - 66.75 (1,910) December 31, 1993....................................... 32.38 - 93.50 3,514 Rayonier spin-off adjustment.......................... 304 Granted............................................... 81.13 - 91.14 2,212 December 31, 1994....................................... 29.62 - 91.14 5,588 Granted............................................... 89.88 - 120.00 2,148 Exercised............................................. 29.62 - 108.75 (1,478) Canceled or expired................................... 29.62 - 109.25 (4,087) ITT Corporation and related Interpretations ITT Hartford spin-off adjustment......................................... 9,448 December 31, 1995....................................... $ 7.91 - $ 22.42 11,619 ====== In December 1995, in accounting for its employee conjunction with the Distribution, those individuals who became employees of ITT Hartford and ITT Corporation were offered substitute awards in the respective stock incentive plansof their new employer, and any stock awards or options held by them in respect of ITT Industries are reflected as canceled in the table above. For stock options granted to the remaining holders of unexercised options, including employees of Mutual in 1999ITT Industries, the Company also followed APB 25 retirees and related Interpretations, as the Company deemed such employees to be common law certain other former employees of the Company, Compensation cost charged against operations in 2000 the number of shares subject to options was increased and 1999 the option exercise price was decreased immediately following the Distribution to preserve, as closely as possible, the economic value of the options that existed prior to the Distribution. In March 1994, the number and exercise price of all options then outstanding were $31,000 similarly adjusted to recognize the effect of the Rayonier spin-off. As of December 31, 1995 and $137,0001994, options for 6,942,000 and 1,914,000 shares, respectively, for those employee stock options granted where the exercise price was less than the market price of the underlying stock on the date of grant. Had compensation cost for were exercisable under the Company's incentive plans been determined based on and at year-end 1995, 2,811,000 shares were available for future grants. Effective January 1, 1996, option shares available for future grants increased to 4,988,000 as a result of the fair values at allotment formula established in the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123), the Company's pro forma net earnings and net earnings per share information would have been as follows: 2000 1999 1998 ---- ---- ---- (in thousands, except per share figures) Pro forma net earnings....................... $45,784 41,414 35,700 Pro forma net earnings per common share Basic................................... $ 1.19 1.02 0.85 Diluted................................. $ 1.17 1.00 0.83 The fair value of options granted in 2000, 1999 and 1998 were estimated at the date of grant using the Black-Scholes option-pricing model1994 Incentive Stock Plan. The weighted average fair values incentive stock plans also provide for the awarding of restricted stock to employees which is subject to a restriction period and related assumptions for options granted cannot be sold, exchanged, pledged, or otherwise disposed of during that period. As of December 31, 1995, there were as follows: 2000 1999 1998 ---- ---- ---- Fair value......................... $4.66 $4.49 $6.10 Dividend yield..................... 90% .90% .75% Risk free interest rate ........... 6.51% 5.77% 5.31% Expected volatility factor......... .34 .32 .31 Expected life (years).............. 7.2 5.7 6.6 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferablesuch shares outstanding. In addition41 ITT INDUSTRIES, option valuation models require the input of highly subjective assumptions including the expected stock price volatilityINC. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company has stock option plans for certain directors and key employees. The nonemployee directors' plan provides each nonemployee director an option to purchase 1,500 shares of common stock following each annual meeting of the shareholders at an option price equal to the fair market value at the last business day prior to the annual meeting. The Company has reserved 300,000 shares of common stock under this plan. These options are exercisable at issuance to 10 years from date of grant. The key employee's plan provides that qualified stock options STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES (a majority-owned subsidiary of State Automobile Mutual Insurance Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS -- (CONTINUED) DOLLARS IN MILLIONS, CONTINUED may be granted at an option price not less than fair market value at date of grant and that nonqualified stock options may be granted at any price determined by the options committee of the Board of Directors. The Company has reserved 5,000,000 shares of common stock under this plan. These options are exercisable at such time or times as may be determined by a committee of the Company's Board of Directors. NormallyEXCEPT PER SHARE, for certain employees these options are exercisable from 1 to 10 years from date of grant and 3 to 10 years for remaining employees. The Company has an employee stock purchase plan with a dividend reinvestment feature, under which employees of the Company may choose at two different specified time intervals each year to have up to 6% of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-interval or end-of- interval market price. The Company has reserved 2,400,000 shares of common stock under this plan. At December 31, 2000, 1,699,000 shares have been purchased under this plan. The Company has a stock option incentive plan for certain designated independent insurance agencies that represent the Company and its affiliates. The Company has reserved 400,000 shares of common stock under this plan. The plan provides that the options become exercisable on the first day of the calendar year following the agency's achievement of specific production and profitability requirements over a period not greater than two calendar years from date of grant or a portion thereof in the first calendar year in which an agency commences participation under the plan. Options granted and vested under this plan have a 10-year term. The Company has accounted for the plan in its accompanying financial statements at fair value. The fair value of options granted was estimated at the reporting date or vesting date using the Black-Scholes option-pricing model. The weighted average fair value and related assumptions for 2000 and 1999, respectively, were as follows: fair value of $10.91 and $4.02; dividend yield of .90% for both years; expected volatility factor of .32 and .30; risk-free interest rate of 5.19% and 6.80%; and expected life of the option of 9.0 and 9.7 years. Expense of $493,000 and $105,000 associated with this plan was recognized in 2000 and 1999, respectively. A summary of the Company's stock option activity and related information for these plans for the years ended December 31, 2000, 1999 and 1998, follows: 2000 1999 1998 ------------------------ ------------------------ ------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- (numbers in thousands, except per share figures) Outstanding, beginning of year 2,546 $ 7.76 2,272 $ 6.76 2,019 $ 5.04 Granted 492 10.29 453 11.24 339 16.31 Exercised (129) 4.32 (165) 3.34 (86) 4.02 Canceled (57) 11.15 (14) 10.52 -- -- ----- ----- ----- Outstanding, end of year 2,852 8.28 2,546 7.76 2,272 6.76 ===== ===== ===== A summary of information pertaining to options outstanding and exercisable as of December 31, 2000 follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ------------------------- WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE ------------------------ ------ ---------------- ---------------- ------ ---------------- (numbers in thousands, except per share figures) Less than $5.00 734 2.0 $ 3.98 734 $ 3.98 $5.01 - $10.00 1,004 4.9 6.66 961 6.56 Greater than $10.01 1,114 8.5 12.58 537 13.89 ----- ----- 2,852 5.5 8.28 2,232 7.47 ===== ===== Put Agreement Schedule III Part B During 2001, the common shares of STFC became a permitted investment in the State Auto 401(k) Capital Accumulation Plan (the "CAP") plan and in non-qualified deferred compensation plans for key employees and directors. The CAP and the Employee Non-Qualified Deferred Compensation Plan were registered with the SEC. The Directors' Non-Qualified Deferred Compensation Plan was not registered with the SEC, since it is within the scope of an exception to registration. The participants in the non-qualified deferred compensation plans are unsecured creditors of State Auto and part of the obligations under those plans will reflect the value of STFC common shares to the extent any participants investments are so directed. Fidelity Investments is the Trustee of the CAP. Agreemen/put agreement schedule III 11-6-01 EXHIBIT A to the Put Agreement [Form of Put Notice] [Date] State Automobile Mutual Insurance Company State Auto Financial Corporation [Address] Re: Put Agreement dated as of November 16, 2001, between State Automobile Mutual Insurance Company, State Auto Financial Corporation and Bank One, NA, as Agent. Dear Ladies and Gentlemen: Reference is made to the Amended and Restated Put Agreement dated as of November 16, 2001 (as modified and supplemented and in effect from time to time, the "PUT AGREEMENT"), among State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL"), State Auto Financial Corporation and Bank One, NA, as Agent. Capitalized terms used but not defined herein shall have the respective meanings assigned to such terms in the Put Agreement. [Pursuant to Section 2.2 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of each Lender's Loans, Note and Commitment. The aggregate purchase price payable by State Auto Mutual for all such Loans, Notes and Commitments shall be $_______________ representing the sum of (a) principal of such Loans in the amount of $_______________, PLUS (b) accrued and unpaid interest thereon in the amount of $______________, PLUS (c) other amounts payable under the Basic Documents in respect thereof in the amount of $_______________.] [Pursuant to Section 2.3 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of the Pledged Stock for an aggregate purchase price equal to $_______________ representing the sum of (a) the aggregate Redemption Value of such Pledged Stock in the amount of $_____________, PLUS (b) accrued and unpaid dividends thereon in the amount of $_______________.] The Put Purchase Date for such purchase shall be _______________, _____. BANK ONE, NA, as Agent By ------------------------------------- Title: A-1 EXHIBIT B OPINION OF GENERAL COUNSEL OF THE STATE AUTO OBLIGORS [STATE AUTO INSURANCE COMPANIES LETTERHEAD] November 16, 2001 To each of the Lenders party to the Credit Agreement referred to below and Bank One, NA, as Agent Ladies and Gentlemen: I am the general counsel of State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL") and State Auto Financial Corporation ("STATE AUTO FINANCIAL" and, together with State Auto Mutual, the "STATE AUTO OBLIGORS") and have acted as counsel to the State Auto Obligors in connection with (i) the Amended and Restated Put Agreement dated as of November 16, 2001 (the "PUT AGREEMENT") among the State Auto Obligors and Bank One, NA, in its capacity as Agent (the "AGENT") on behalf of the lenders party to an Amended and Restated Credit Agreement dated as of November 16, 2001, among SAF Funding Corporation, the Agent and (ii) the agreements, instruments and other documents referred to in the next paragraph. All capitalized terms used but not defined herein have the respective meanings given to such terms in the Put Agreement. This opinion letter is delivered to you pursuant to Section 4.18(c) of the Put Agreement. In rendering the opinions expressed below, I have examined the following agreements, instruments and other documents:
(a) the Credit Agreement;
(b) the Pledge Agreements;
(c) the Put Agreement;
(d) the Standby Purchase Agreement (collectively with the Put Agreement, the "STATE AUTO AGREEMENTS"); and
(e) such records of the State Auto Obligors and such other documents as I have deemed necessary as a basis for the opinions expressed below. In my examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with authentic original documents of all documents submitted to me as copies. When relevant facts were not independently established, I have relied upon certificates of governmental officials and appropriate representatives of the State Auto Obligors and upon representations made in or pursuant to the State Auto Agreements. In rendering the opinions expressed below, I have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent set forth in the opinions expressed below, as to the State Auto Obligors):
(i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents;
(ii) all signatories to such documents have been duly authorized; and
(iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate, partnership or other) to execute, deliver and perform such documents. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as I have deemed necessary as a basis for the opinions expressed below, I am of the opinion that:
1. State Auto Mutual is a mutual insurance company duly organized, validly existing and in good standing under the laws of the State of Ohio. State Auto Financial is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio.
2. Each State Auto Obligor has all requisite corporate power and authority to execute and deliver, and to perform its obligations and to incur liabilities under, the State Auto Agreements to which it is a party.
3. The execution, delivery and performance by each State Auto Obligor of, and the incurrence by such State Auto Obligor of liabilities under, each State Auto Agreement to which such State Auto Obligor is a party, have been duly authorized by all necessary corporate action on the part of such State Auto Obligor.
4. Each State Auto Agreement has been duly executed and delivered by each State Auto Obligor party thereto.
5. Under Ohio conflict of laws principles, the stated choice of Illinois law to govern the State Auto Agreements will be honored by the courts of the State of Ohio and the State Auto Agreements will be construed in accordance with, and will be treated as being governed by, the law of the State of Illinois. However, if the State Auto Agreements were stated to be governed by and construed in accordance with the law of the State of Ohio, or if an Ohio court were to apply the law of the State of Ohio to the State Auto Agreements, each State Auto Agreement would constitute the legal, valid and binding obligation of each State Auto Obligor party thereto, enforceable against such State Auto Obligor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the State Auto Agreements is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing.
6. No authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of Ohio (other than any authorizations, approvals, consents, filings and registrations heretofore duly made or obtained and in full force and effect) is required on the part of either State Auto Obligor for the execution, delivery or performance by such State Auto Obligor of, or for the incurrence by such State Auto Obligor of any liabilities under, the State Auto Agreements to which such State Auto Obligor is a party.
7. The execution, delivery and performance by each State Auto Obligor of, and the consummation by such State Auto Obligor of the transactions contemplated by, the State Auto Agreements to which such State Auto Obligor is a party do not and will not (a) violate any provision of the Articles of Incorporation or Code of Regulations of such State Auto Obligor, (b) violate any applicable law, rule or regulation of the United States of America or the State of Ohio, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to such State Auto Obligor of which I have knowledge (after due inquiry) or (d) result in a breach of, constitute a default under, require any consent under, or result in the UNLESS OTHERWISE STATED
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Sources: Annual Report