AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 2003
REGISTRATION NO. 333-__________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STATE AUTO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 6331 31-1324304
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization Classification Code) No.)
518 East Broad Street
Columbus, Ohio 43215-3976
(614) 464-5000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
John R. Lowther, Esq.
Senior Vice President, Secretary, and General Counsel
State Auto Financial Corporation
518 East Broad Street
Columbus, Ohio 43215-3976
(614) 464-5000
(Name, address, including zip code, and telephone number,
including area code, of registrant's agent for service of process)
Copies to:
Joseph P. Boeckman, Esq.
Baker & Hostetler LLP
65 East State Street, Suite 2100
Columbus, Ohio 43215
Telephone: (614) 462-4737
Facsimile: (614) 462-2616
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Each Class of To be Price Offering Registration
Securities to be Registered Registered Per Security Price (1) Fee
--------------------------- ---------- ------------ --------- ------------
6 1/4% Senior Notes due 2013...................... $100,000,000 100% $100,000,000 $8,090.00
(1) Represents the maximum principal amount at maturity of 6 1/4% Senior
Notes due 2013 that may be issued pursuant to the exchange offer
described in this registration statement. The registration fee was
calculated pursuant to Rule 457(f) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Information contained in this prospectus is not complete and may be changed. We
may not offer these securities for exchange until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, dated December 23 2003
PROSPECTUS
OFFER TO EXCHANGE ALL
6 1/4% SENIOR NOTES DUE 2013
OF
STATE AUTO FINANCIAL CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON [_______, 2004], UNLESS EXTENDED
TERMS OF THE EXCHANGE OFFER:
- We are offering to exchange $100,000,000 aggregate principal
amount of our 6 1/4% Senior Notes due 2013, which have been
registered under the Securities Act of 1933, for all of our
original unregistered 6 1/4% Senior Notes due 2013 that were
originally issued on November 13, 2003.
- The terms of the exchange notes will be substantially
identical to the original notes, except for transfer
restrictions and registration rights relating to the original
notes.
- You may withdraw tendered original notes at any time prior to
the expiration of the exchange offer.
- The exchange of original notes will not be a taxable exchange
for U.S. federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
- There is no existing market for the exchange notes to be
issued, and we do not intend to apply for their listing on any
securities exchange or arrange for them to be quoted on any
quotation system.
See the section entitled "Description of Notes" that begins on page 42
for more information about the notes to be issued in this exchange offer.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for original notes where
such original notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. We have agreed that, for a
period of 180 days after the expiration date of the exchange offer, we will make
this prospectus available to any broker-dealer for use in connection with any
such resales. See "Plan of Distribution."
THIS INVESTMENT INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK FACTORS"
THAT BEGINS ON PAGE 11 FOR A DISCUSSION OF THE RISKS THAT YOU SHOULD CONSIDER
PRIOR DECIDING WHETHER TO TENDER YOUR ORIGINAL NOTES IN THE EXCHANGE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This prospectus is dated [__________, 2004].
TABLE OF CONTENTS
Page
Where You Can Find More Information......................................................................... ii
Disclosure Regarding Forward-Looking Statements............................................................. iii
Prospectus Summary.......................................................................................... 1
Risk Factors................................................................................................ 11
Use of Proceeds............................................................................................. 18
Capitalization.............................................................................................. 19
Selected Historical Consolidated Financial Data............................................................. 20
Business.................................................................................................... 21
Management.................................................................................................. 37
Other Indebtedness and Certain Financing Arrangements....................................................... 40
Description of Notes........................................................................................ 42
The Exchange Offer.......................................................................................... 52
Certain United States Federal Tax Considerations............................................................ 62
Plan of Distribution........................................................................................ 66
Legal Matters............................................................................................... 67
Experts..................................................................................................... 67
Unless the context indicates or otherwise requires, as used in this
prospectus, the terms "STFC," "our company," "we," "us," and "our" refer to
State Auto Financial Corporation and its consolidated subsidiaries; "State Auto
Mutual" refers to State Automobile Mutual Insurance Company, which owns
approximately 67% of STFC's outstanding common shares; "State Auto P&C" refers
to State Auto Property and Casualty Insurance Company; and the "State Auto
Group" refers to the STFC insurance subsidiaries, State Auto Mutual, and the
State Auto Mutual insurance subsidiaries and affiliates (see "Business--
History and Corporate Structure" on page 22).
WHEN WE REFER TO THIS PROSPECTUS, WE MEAN NOT ONLY THIS PROSPECTUS BUT
ALSO ANY DOCUMENTS THAT ARE INCORPORATED OR DEEMED INCORPORATED BY REFERENCE.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS OR ANY SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE
USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS
DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES TO ANY PERSON IN ANY JURISDICTION
WHERE IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other information with the U.S. Securities and Exchange Commission ("SEC"). You
may read and copy such materials at the public reference facilities maintained
by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also obtain copies of such material by mail from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Please call the SEC at 1-800-SEC-0330 for more information
on the public reference rooms. You can also find our SEC reports at the SEC web
site (http://www.sec.gov). Such reports, proxy statements, and other documents
and information concerning us are also available for inspection at the offices
of NASDAQ, 1735 K Street, N.W., Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we may disclose important information to you by
referring to those documents. The information incorporated by reference is
considered to be part of this prospectus, and the information that we later file
with the SEC will automatically update and supercede this information. We
incorporate by reference the documents listed below and any additional documents
filed by us with the SEC under Section 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934, as amended, to the extent that such documents
are deemed "filed" with the SEC for purposes of the Exchange Act, until we
complete the exchange offer:
- Our Annual Report on Form 10-K for the year ended December 31,
2002;
- Our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2003, June 30, 2003, and September 30, 2003; and
- Our Current Reports on Form 8-K as filed with the SEC on May
30, 2003, June 4, 2003, June 6, 2003, June 13, 2003, June 30,
2003, July 21, 2003, August 21, 2003, September 2, 2003,
October 16, 2003, November 5, 2003, and December 16, 2003.
You may obtain copies of any documents incorporated by reference in
this prospectus from us without charge, excluding exhibits to those documents
unless we have specifically incorporated by reference such exhibits in this
prospectus, by making a request to us by telephone or in writing. Requests
should be directed to Terrence L. Bowshier, Director of Investor Relations,
State Auto Financial Corporation, 518 East Broad Street, Columbus, Ohio 43215,
telephone number (614) 464-5000. If you would like to request copies of these
documents, please do so by [_______, 2004], in order to receive them before the
expiration of the exchange offer. You can also find any of the documents
incorporated by reference into this prospectus, along with any of our other SEC
reports, on our web site (http://www.stfc.com).
Any statement contained in this prospectus or in a document
incorporated or deemed incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any other subsequently filed
document that is also or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus.
We have filed a registration statement on Form S-4 with the SEC under
the Securities Act with respect to the exchange notes. This prospectus, which
constitutes a part of the registration statement on Form S-4, does not contain
all the information set forth in the registration statement, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. We
are referring you to the registration statement and to the exhibits for further
information with respect to us and the exchange notes. The statements contained
in this prospectus concerning the provisions of any document are not necessarily
complete, and, in each instance, we refer you to the copy of such document filed
as an exhibit to the registration statement or otherwise filed with the SEC.
Each such statement is qualified in its entirety by such reference.
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical facts included in
this prospectus, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs, goals and
plans, and objectives of management for future operations, are forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"intend," "estimate," "anticipate," "project," "believe," or "continue" or the
negative thereof or variations thereon or similar terminology. Although we
believe that the expectations reflected in forward-looking statements have a
reasonable basis, we can give no assurance that these expectations will prove to
have been correct. Forward-looking statements are subject to risks and
uncertainties that could cause actual events or results to differ materially
from those expressed in or implied by the statements. Important factors that
could cause actual results to differ materially from our expectations are
disclosed under "Risk Factors" and elsewhere in this prospectus, including,
without limitation, the factors set forth below and in conjunction with the
forward-looking statements included in this prospectus. All subsequent written
and oral forward-looking statements attributable to us, or persons acting on our
behalf, are expressly qualified in their entirety by the cautionary statements.
Factors that could cause actual results to differ materially from our
expectations include the following:
- the adequacy of loss reserves;
- negative changes to our financial strength ratings;
- legislative and regulatory developments;
- elimination or restrictions on the use of credit scores in
underwriting;
- the inability to attract and retain customers and agents;
- realization of growth and business retention estimates;
- the competitive pricing environment, initiatives by
competitors, and other changes in competition;
- interpretation of insurance policy provisions by courts, court
decisions regarding coverage and theories of liability, trends
in litigation, and changes in claims settlement practices;
- weather conditions, including the severity and frequency of
storms, hurricanes, snowfalls, hail, and winter conditions,
and the occurrence of significant natural disasters, including
earthquakes;
- the occurrence of significant acts of terrorism;
- the availability of, pricing of, and ability to collect
reinsurance;
- changes in the mix of our property and casualty book of
business;
- fluctuations in interest rates, performance of financial
markets, and inflationary pressures on economic sectors that
increase the severity of claims;
- general economic and market conditions; and
- the outcome of any future litigation against us.
We assume no obligation to update any forward-looking information
contained in this prospectus, as well as any statements incorporated by
reference in this prospectus, which speak as of the respective dates thereof,
except as otherwise required by law.
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PROSPECTUS SUMMARY
The following summary highlights some of the information from this
prospectus and does not contain all the information that is important to you.
Before deciding to participate in the exchange offer, you should read the entire
prospectus and the documents incorporated by reference, including the sections
entitled "Disclosure Regarding Forward-Looking Statements" and "Risk Factors" as
well as our consolidated financial statements and the related notes.
THE COMPANY
GENERAL
State Auto Financial Corporation is a regional insurance holding
company headquartered in Columbus, Ohio. Through our six insurance subsidiaries,
we provide personal and commercial insurance for the standard insurance market
and automobile insurance for the nonstandard insurance market. Our principal
lines of business include standard personal and commercial automobile,
nonstandard personal automobile, homeowners, commercial multi-peril, fire,
general liability and workers' compensation insurance. We market our insurance
products through more than 22,000 independent agents associated with more than
3,400 agencies in 26 states. Our products are marketed primarily in the central
and eastern United States, excluding New York, New Jersey, and the New England
states. We are affiliated with State Automobile Mutual Insurance Company, which
owns approximately 67% of our outstanding common shares.
Our insurance subsidiaries consist of State Auto Property and Casualty
Insurance Company, Milbank Insurance Company, Farmers Casualty Insurance
Company, State Auto Insurance Company of Ohio, State Auto National Insurance
Company, and Mid-Plains Insurance Company. We also have three non-insurance
subsidiaries that support our insurance operations. An insurance pooling
arrangement, which we refer to as the "State Auto Pool," exists between various
insurers in the State Auto Group by which premiums, losses, and underwriting
expenses are shared among the pool participants. We receive 80% in the aggregate
of this underwriting pool, while State Auto Mutual and certain of its
subsidiaries receive 20% in the aggregate.
With a commitment to sound underwriting practices, responsible
cost-based pricing, and conservative investments, we have maintained a healthy
financial record since we began operations in 1991. Our average annual statutory
combined ratio of 100.5% and return on GAAP equity of 11.8% compare favorably
with the property and casualty insurance industry average annual statutory
combined ratio of 108.4% and return on GAAP equity of 6.8% computed from 1991
through 2002. Through September 30, 2003, our GAAP revenue, assets, and equity
have grown at a compound annual growth rate of 19.9%, 19.5%, and 15.2%,
respectively, since we began operations in 1991. Combined with our focus on
providing outstanding customer service to policyholders and agents, we believe
we have earned the reputation as one of the strongest and best managed regional
insurance groups in the industry. The State Auto Pool consistently has received
A.M. Best Company's A+ (Superior) rating.
COMPETITIVE ADVANTAGES
We believe our success has been built, in part, on the following
strengths:
- ADHERENCE TO DISCIPLINED UNDERWRITING PRINCIPLES. We adhere to
disciplined and consistent underwriting principles. These
principles include insistence on selecting and retaining
business based on the merits of each account and a dedication
to cost-based pricing, where each line of business is priced
at a rate anticipated to generate a profit. No line of
business, or classification within major lines, subsidizes
another line or classification. We believe our adherence to
these disciplined underwriting principles is the primary
reason that our company has outperformed the property and
casualty insurance industry on a statutory combined ratio
basis in every year since 1991.
- FAIR AND EFFICIENT CLAIMS SERVICE. We strive to provide prompt
and fair claims service. We maintain a claims contact center
24 hours a day, seven days a week, for receipt of claim calls.
Claims may also be reported to the policyholder's independent
agent or via the Internet. We make a pledge to our
policyholders to make contact with them within two hours of
reporting a claim to us. Once an
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automobile repair is made at one of our approved repair
facilities, we guarantee that repair for as long as the
automobile is owned by our policyholder.
- STRONG INDEPENDENT INSURANCE AGENT NETWORK. We offer our
products through more than 22,000 independent insurance agents
associated with more than 3,400 agencies in 26 states. We
believe the success of our independent insurance agent
network, which is our only distribution channel, grows out of
our commitment to promote and foster close working
relationships with our agents. We seek relationships with
agencies where we will be one of their top three insurers,
measured on the basis of direct premiums written, for the type
of business we desire. Our agents' compensation package
includes competitive commission rates and other sales
inducements designed to maintain and enhance relationships
with existing independent agents as well as to attract new
independent agents. We provide our agents with a co-operative
advertising program, sales training programs, an agent's stock
purchase program, profit-sharing and travel incentives, and
agency recognition. We continually monitor our agencies for
compatibility with us, taking into account factors such as
loss ratio, premium volume, business profiles and relationship
history. This allows us to be proactive in helping the agents
to enhance profitability and, thus, maintain the advantages of
the State Auto affiliation. Our senior management regularly
makes itself available to the agency force to reinforce this
partnership commitment. We believe each of these elements
creates a relationship that has resulted in our independent
insurance agents placing quality insurance business with us.
- RISK MITIGATION STRATEGIES. We deploy specific strategies
designed to mitigate our exposure to certain risks. We
continually seek to diversify our business on a geographic
basis. The number of states we operate in has increased from
17 states in 1991 to 26 states in 2003. The concentration of
gross written premiums for our property and casualty
operations in our largest state, Ohio, has decreased from 28%
for the year ended December 31, 1991, to 18.5% for the year
ended December 31, 2002. We avoid writing insurance in states
that we believe present difficult legislative, judicial and/or
regulatory environments for the insurance industry, such as
California, Massachusetts, New Jersey, New York, Louisiana,
and Texas. Our underwriting guidelines are designed to limit
exposures for high-risk insurance matters such as asbestos,
workers' compensation, and environmental claims. Our loss and
loss expenses liability at December 31, 2002, relating to
asbestos, environmental remediation, product liability, mold,
and other highly uncertain exposures was approximately 1% of
our net loss and loss expenses liability. Our catastrophe
management strategies are designed to mitigate our exposure to
earthquakes and hurricanes. We believe these efforts have
played a significant role in our underwriting profitability
and have been very effective in controlling our catastrophe
reinsurance costs.
- CONSERVATIVE INVESTMENT STRATEGY. We have a conservative
investment strategy that emphasizes the quality of our fixed
income portfolio, which comprised 90.8% of our total portfolio
at September 30, 2003, and includes only investment grade
securities. We have a disciplined approach to the equity
portion of our portfolio, which comprised 6.7% of our total
portfolio at September 30, 2003, that emphasizes large
capitalization, dividend-paying companies. We select equity
investments based on a stock's potential for appreciation as
well as ability to continue paying dividends.
- EXPERIENCED SENIOR MANAGEMENT TEAM. Our senior management team
has extensive experience with our company and in the insurance
industry. This management team has led us through various
industry cycles and has managed our growth through both
strategic acquisitions and internal expansion, including the
2001 acquisition of the Meridian insurance companies. This
experience has proved invaluable in the integration of
Meridian's operations into ours and has guided us in the
migration of Meridian policies into our policies, pricing,
underwriting, and claims philosophies. Twelve of our 15-person
senior management team have over 11 years with the State Auto
Group (seven have over 20 years), led by Robert H. Moone, our
Chairman, President, and Chief Executive Officer, who has over
33 years with the State Auto Group.
ADDITIONAL INFORMATION ABOUT OUR COMPANY
State Auto Financial Corporation is an Ohio corporation. Our principal
executive offices are located at 518 East Broad Street, Columbus, Ohio 43215.
The telephone number of our executive offices is (614) 464-5000.
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RECENT DEVELOPMENTS
On August 20, 2003, Gregory M. Shepard, who owns approximately 5.1% of
our outstanding common shares, and his wholly owned corporation filed a Schedule
TO with the SEC relating to a proposed tender offer to purchase 8.0 million of
our outstanding common shares at a price of $32.00 per share, subject to certain
conditions. This tender offer, which we refer to as the "Shepard tender offer,"
was commenced on September 11, 2003. The Shepard tender offer has been extended
two times and currently is scheduled to expire at 5:00 p.m., New York City time,
on February 13, 2004, unless further extended by Mr. Shepard. On September 1,
2003, our Board of Directors and a special committee of its independent
directors were informed that State Auto Mutual's Board of Directors, based on
the unanimous recommendation of a special committee of its independent
directors, had unanimously determined to: (1) oppose and reject the Shepard
tender offer because it is not in the best interests of State Auto Mutual, its
policyholders and its other constituencies; (2) decline and refuse to turn over
control of State Auto Mutual and its affiliates, including STFC, to Mr. Shepard
because the transfer of such control would not be in the best interests of State
Auto Mutual, its policyholders, and its other constituencies; (3) decline and
refuse to provide financing to Mr. Shepard or his company (Mr. Shepard and his
company intend to have State Auto Mutual borrow at least $256 million through
the issuance of surplus notes to finance the Shepard tender offer); and (4) vote
State Auto Mutual's common shares of STFC against approval of the Shepard tender
offer if submitted to a vote of STFC's shareholders. On September 1, 2003, our
Board of Directors and a special committee of its independent directors met and
each unanimously determined that the Shepard tender offer was impossible to
complete because certain essential conditions of the tender offer could not be
met and that the Shepard tender offer is illusory. Our Board of Directors has
unanimously recommended to our shareholders that they reject the Shepard tender
offer and not tender their shares to Mr. Shepard or his company pursuant to the
Shepard tender offer. See "Business--Tender Offer by Minority Shareholder."
See also "Business--Legal Proceedings" for information concerning litigation
related to the Shepard tender offer.
-3-
THE EXCHANGE OFFER
THE INITIAL OFFERING OF NOTES............... On November 13, 2003, we issued in a private placement 6 1/4%
Senior Notes due 2013, which we refer to as the "original notes."
The initial purchasers of those notes subsequently resold them to
qualified institutional buyers pursuant to Rule 144A under the
Securities Act and to persons outside the United States under
Regulation S.
REGISTRATION RIGHTS AGREEMENT............... Contemporaneously with the initial sale of the original notes, we
entered into a registration rights agreement with the initial
purchasers of those notes in which we agreed, among other things,
to file a registration statement with the SEC and to complete an
exchange offer as promptly as possible. This exchange offer is
intended to satisfy those rights set forth in the registration
rights agreement. After the exchange offer is complete, you will
not have any further rights under the registration rights
agreement, including the right to require us to register any
original notes that you do not exchange or to pay you liquidated
damages.
THE EXCHANGE OFFER.......................... We are offering to exchange $100.0 million aggregate principal
amount of our 6 1/4% Senior Notes due 2013, which we refer to as
the "exchange notes." The exchange notes have been registered
under the Securities Act for the same aggregate principal amount
as the original notes.
The terms of the exchange notes are identical in all material
respects to the terms of the original notes for which they are
being exchanged.
The original notes may be tendered only in $1,000 increments. We
will exchange the applicable exchange notes for all original notes
that are validly tendered and not withdrawn prior to the
expiration of the exchange offer. We will cause the exchange to be
effected promptly after the expiration of the exchange offer.
The new registered exchange notes will evidence the same debt as
the old original notes and will be issued under and entitled to
the benefits of the same indenture that governs the old original
notes. Holders of the original notes do not have any appraisal or
dissenter rights in connection with the exchange offer. Because we
have registered the exchange notes, the exchange notes will not be
subject to transfer restrictions and holders of original notes
will have no registration rights.
RECORD DATE................................. We mailed this prospectus and the related offer documents to the
registered holders of the original notes on [___________, 2004.]
-4-
EXPIRATION DATE............................. The exchange offer will expire at 5:00 p.m., New York City time,
on [_________________, 2004], unless we decide to extend the
expiration date; provided, however, that the latest time and date
to which the exchange offer may be extended is at 5:00 p.m., New
York City time, on [________, 2004].
CONDITIONS TO THE EXCHANGE OFFER............ The exchange offer is subject to customary conditions, including
that the exchange offer not violate applicable law or any
applicable interpretation of the staff of the SEC. This exchange
offer is not conditioned upon any minimum principal amount of the
original notes being tendered.
PROCEDURES FOR TENDERING NOTES.............. If you wish to tender your original notes for exchange notes, you
must:
- complete and sign the enclosed letter of
transmittal by following the related
instructions; and
- send the letter of transmittal, as directed in
the instructions, together with any other
required documents, to the exchange agent
either (1) with the original notes to be
tendered, or (2) in compliance with the
specified procedures for guaranteed delivery of
the original notes.
Brokers, dealers, commercial banks, trust companies and other
nominees may also effect tenders by book-entry transfer.
Please do not send your letter of transmittal or certificates
representing your original notes to us. Those documents should be
sent only to the exchange agent. Questions regarding how to tender
and requests for information should be directed to the exchange
agent. See "The Exchange Offer--Exchange Agent."
IF YOU FAIL TO EXCHANGE YOUR
ORIGINAL NOTES.............................. If you do not exchange your original notes for exchange notes in
the exchange offer, you will continue to be subject to the
restrictions on transfer provided in the original notes and
indenture governing those notes. In general, you may not offer or
sell your original notes unless they are registered under the
federal securities laws or are sold in a transaction exempt from
or not subject to the registration requirements of the federal
securities laws and applicable state securities laws.
-5-
RESALE OF THE EXCHANGE NOTES................ Except as provided below, we believe that the exchange notes may
be offered for resale, resold, and otherwise transferred by you
without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that:
- the exchange notes are being acquired in the
ordinary course of business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate in
the distribution of the exchange notes issued
to you in the exchange offer;
- you are not an affiliate of ours;
- you are not a broker-dealer tendering original
notes acquired directly from us for your
account; and
- you are not prohibited by law or any policy of
the SEC from participating in the exchange
offer.
Our belief is based on interpretations by the Staff of the SEC, as
set forth in no-action letters issued to third parties unrelated
to us. The Staff has not considered this exchange offer in the
context of a no-action letter, and we cannot assure you that the
Staff would make similar determinations with respect to this
exchange offer. If any of these conditions are not satisfied (or
if our belief is not accurate) and you transfer any exchange notes
issued to you in the exchange offer without delivering a resale
prospectus meeting the requirements of the Securities Act or
without an exemption from registration of your exchange notes from
those requirements, you may incur liability under the Securities
Act. We will not assume, nor will we indemnify you against, any
such liability.
Each broker-dealer that receives exchange notes for its own
account in exchange for original notes, where the original notes
were acquired by such broker-dealer as a result of market-making
or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such exchange notes.
See "Plan of Distribution."
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS...................................... If your original notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee, we urge
you to contact that person promptly if you wish to tender your
original notes pursuant to this exchange offer. See "The Exchange
Offer--Procedures for Tendering."
-6-
WITHDRAWAL RIGHTS........................... You may withdraw the tender of your original notes at any time
before the expiration date of the exchange offer by delivering a
written notice of your withdrawal to the exchange agent. You must
follow the withdrawal procedures as described under the heading
"The Exchange Offer--Withdrawal of Tenders."
EXCHANGE AGENT.............................. Fifth Third Bank is serving as exchange agent for the exchange
offer.
FEDERAL INCOME TAX CONSIDERATIONS........... The exchange of the original notes for the exchange notes in the
exchange offer should not be a taxable event for U.S. federal
income tax purposes. See "Certain United States Federal Tax
Considerations"
USE OF PROCEEDS............................. We will not receive any proceeds from the issuance of the exchange
notes pursuant to the exchange offer. We will pay all of our
expenses incident to the exchange offer.
-7-
THE EXCHANGE NOTES
The form and terms of the exchange notes are the same as the form and
terms of the original notes for which they are being exchanged, except that the
exchange notes will be registered under the Securities Act. As a result, the
exchange notes will not bear legends restricting their transfer and will not
have the benefit of the registration rights and liquidated damage provisions
contained in the original notes. The exchange notes represent the same debt as
the original notes for which they are being exchanged. Both the original notes
and the exchange notes are governed by the same indenture. We use the term
"notes" in this prospectus to collectively refer to the original notes and the
exchange notes.
ISSUER...................................... State Auto Financial Corporation
NOTES OFFERED............................... $100,000,000 aggregate principal amount of 6 1/4% Senior Notes due
2013.
MATURITY.................................... November 15, 2013.
INTEREST PAYMENT DATES...................... May 15 and November 15 of each year, beginning on May 15, 2004.
RANKING..................................... The exchange notes will be our unsecured senior obligations and
will rank equally with our existing and future senior indebtedness
and senior to our existing and future subordinated indebtedness.
The exchange notes will not be guaranteed by any of our
subsidiaries and therefore will be effectively subordinated to the
indebtedness and liabilities of our subsidiaries. The exchange
notes will be effectively subordinated to any of our future
secured indebtedness to the extent of the value of the assets
securing that debt. We currently have no secured indebtedness.
OPTIONAL REDEMPTION......................... We may redeem some or all of the exchange notes at any time at a
price equal to the greater of 100% of the principal amount of the
notes or a "make-whole" amount, plus, in each case, any accrued
interest to the date of redemption. The "make-whole" amount will
be based on U.S. Treasury rates as specified in this offering
memorandum under "Description of the Notes--Optional
Redemption."
CERTAIN COVENANTS........................... The indenture under which the exchange notes will be issued
contains covenants that, among other things, limit our ability and
that of certain of our subsidiaries to:
- issue indebtedness secured by the capital stock
of certain of our subsidiaries; and
- sell the capital stock of certain of our
subsidiaries
-8-
The indenture also contains covenants that:
- require us to take certain actions in the event
we engage in mergers, consolidations, or sales
of all or substantially all of our assets; and
- prohibit us from engaging in such a transaction
if we are in default under the indenture.
ABSENCE OF AN ESTABLISHED
MARKET FOR THE NOTES........................ The exchange notes are new issues of securities, and currently
there is no market for them. The initial purchasers of the
original notes have advised us that they intend to make a market
for the exchange notes but they are not obligated to do so. The
initial purchasers may discontinue any market making in the
exchange notes at any time in their sole discretion. Accordingly,
we cannot assure you that a liquid market will develop for the
exchange notes.
For additional information regarding the exchange notes, see "Description of
Notes" on page 42.
-9-
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data and
should be read in conjunction with our consolidated financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," incorporated by reference into this
prospectus from our annual report on Form 10-K for the year ended December 31,
2002, and our quarterly report on Form 10-Q for the quarter ended September 30,
2003. The operating results for the nine months ended September 30, 2003, are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 2003.
AS OF AND FOR THE
NINE MONTHS ENDED
AS OF AND FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------------- --------------------------
1998 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS) (UNAUDITED)
STATEMENTS OF INCOME DATA:
Earned premiums ................ $ 356,210 $ 392,058 $ 397,967 $ 555,207 $ 896,595 $ 664,238 $ 720,124
Net investment income .......... 32,506 34,262 38,915 47,375 59,691 44,214 47,587
Net realized gains on
investments .................. 2,925 2,555 5,255 1,962 5,909 854 9,568
Other income ................... 10,418 11,996 20,637 18,728 5,284 3,838 4,342
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues ................ 402,059 440,871 462,774 623,272 967,479 713,144 781,621
----------- ----------- ----------- ----------- ----------- ----------- -----------
Losses and loss expenses ....... 242,294 264,628 272,167 427,074 653,474 493,749 503,342
Acquisition and operating
expenses ..................... 104,224 111,772 119,569 167,207 264,348 195,209 209,074
Interest expense ............... -- 955 2,730 2,275 2,333 1,621 2,320
Other expense, net ............. 5,936 6,531 6,864 8,740 9,534 6,887 8,608
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses ................ 352,454 383,886 401,330 605,296 929,689 697,466 723,344
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before federal
income taxes ................. 49,605 56,985 61,444 17,976 37,790 15,678 58,277
Income taxes ................... 12,108 14,169 13,730 (2,639) 795 (1,986) 13,332
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income ..................... $ 37,497 $ 42,816 $ 47,714 $ 20,615 $ 36,995 $ 17,664 $ 44,945
=========== =========== =========== =========== =========== =========== ===========
GAAP RATIOS:
Loss and LAE ratio (1) ......... 68.0 67.5 68.4 76.9 72.9 74.3 69.9
Expense ratio (2) .............. 29.3 28.5 30.0 30.1 29.5 29.4 29.0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Combined ratio ............... 97.3 96.0 98.4 107.0 102.4 103.7 98.9
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT
PERIOD END):
Total investments .............. $ 579,966 $ 627,305 $ 750,870 $ 1,138,656 $ 1,272,316 $ 1,271,072 $ 1,470,907
Total assets ................... 717,520 759,945 898,106 1,367,496 1,592,995 1,560,107 1,745,525
Losses and loss expense
payable ...................... 217,450 232,489 244,583 523,860 600,958 589,776 645,457
Total debt ..................... -- 45,500 45,500 45,500 75,500 60,500 90,964
Total stockholders' equity ..... 340,824 317,687 386,059 400,193 463,769 452,098 515,946
Ratio of earnings to fixed
charges (3) .................. 43.8x 24.3x 16.5x 5.5x 9.0x 6.0x 15.9x
---------------------
(1) Ratio of losses and loss adjustment expenses to earned premiums.
(2) Ratio of acquisition and operating expenses to earned premiums.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
represent income from continuing operations before income taxes and
cumulative effect of change in accounting principles, plus fixed charges
net of capitalized interest. Fixed charges include interest expense
(including interest on deposit contracts), amortization of deferred debt
expense and the proportion deemed representative of the interest factor of
rent expense.
-10-
RISK FACTORS
Prospective participants in the exchange offer should carefully
consider all of the information contained in and incorporated by reference into
this prospectus, including the risks and uncertainties described below. The risk
factors set forth below (with the exception of the Risk Factors associated with
the exchange offer) are generally applicable to the original notes as well as
the exchange notes.
RISK FACTORS ASSOCIATED WITH THE EXCHANGE OFFER
IF YOU FAIL TO FOLLOW THE EXCHANGE OFFER PROCEDURES, YOUR NOTES WILL
NOT BE ACCEPTED FOR EXCHANGE.
We will not accept your notes for exchange if you do not follow the
exchange offer procedures. We will issue exchange notes as part of this exchange
offer only after timely receipt of your original notes, properly completed and
duly executed letter of transmittal and all other required documents. Therefore,
if you want to tender your original notes, please allow sufficient time to
ensure timely delivery. If we do not receive your original notes, letter of
transmittal, and all other required documents by the expiration date of the
exchange offer, or you do not otherwise comply with the guaranteed delivery
procedures for tendering your notes, we will not accept your original notes for
exchange. We are under no duty to give notification of defects or irregularities
with respect to the tenders of original notes for exchange. If there are defects
or irregularities with respect to your tender of original notes, we will not
accept your original notes for exchange unless we decide in our sole discretion
to waive such defects or irregularities.
IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES FOR EXCHANGE NOTES, THEY
WILL CONTINUE TO BE SUBJECT TO THE EXISTING TRANSFER RESTRICTIONS AND YOU MAY
NOT BE ABLE TO SELL THEM.
We did not register the original notes, nor do we intend to do so
following the exchange offer. Original notes that are not tendered will
therefore continue to be subject to the existing transfer restrictions and may
be transferred only in limited circumstances under the securities laws. As a
result, if you hold original notes after the exchange offer, you may not be able
to sell them. To the extent any original notes are tendered and accepted in the
exchange offer, the trading market, if any, for the original notes that remain
outstanding after the exchange offer may be adversely affected due to a
reduction in market liquidity.
BECAUSE THERE IS NO PUBLIC MARKET FOR THE EXCHANGE NOTES, YOU MAY NOT
BE ABLE TO RESELL THEM.
The exchange notes will be registered under the Securities Act but will
constitute a new issue of securities with no established trading market, and
there can be no assurance as to the liquidity of any trading market that may
develop, the ability of holders to sell their exchange notes, or the price at
which the holders will be able to sell their exchange notes.
We understand that certain of the initial purchasers of the original
notes presently intend to make a market in the exchange notes. However, they are
not obligated to do so, and any market-making activity with respect to the
exchange notes may be discontinued at any time without notice. In addition, any
market-making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act and may be limited during the exchange offer or the
pendency of an applicable shelf registration statement. There can be no
assurance that an active market will exist for the exchange notes or that any
trading market that does develop will be liquid.
RISK FACTORS RELATED TO INVESTMENT IN THE EXCHANGE NOTES
THE NOTES WILL BE EFFECTIVELY SUBORDINATED TO ALL INDEBTEDNESS AND
OTHER LIABILITIES OF OUR SUBSIDIARIES.
As a holding company, we conduct substantially all of our operations
through our subsidiaries. None of our subsidiaries will guarantee the notes or
otherwise have any obligations to make payments in respect of the notes, which
will be our direct, unsecured obligations. As a result, claims of holders of the
notes will be effectively subordinated to the indebtedness and other liabilities
of our subsidiaries, including the losses and loss expenses of
-11-
our insurance subsidiaries. In the event of any bankruptcy, liquidation,
dissolution, or similar proceeding involving one of our subsidiaries, any of our
rights or the rights of the holders of the notes to participate in the assets of
that subsidiary will be effectively subordinated to the claims of creditors of
that subsidiary (including any policyholders, trade creditors, debt holders,
secured creditors, taxing authorities, and guarantee holders), and following
payment by that subsidiary of its liabilities, the subsidiary may not have
sufficient assets remaining to make payments to us as a shareholder or
otherwise. In addition, if we caused a subsidiary to pay a dividend to enable us
to make payments in respect of the notes and such a transfer were deemed a
fraudulent transfer or an unlawful distribution, the holders of the notes could
be required to return the payment to (or for the benefit of) the creditors of
our subsidiaries. As of September 30, 2003, after giving pro forma effect to the
issuance of the notes and the application of the net proceeds therefrom, our
subsidiaries would have had no indebtedness for borrowed money and approximately
$1.2 billion in the aggregate of other liabilities, all of which are effectively
senior to the notes offered hereby.
IF WE BECOME INSOLVENT, HOLDERS OF SECURED DEBT WOULD BE PAID FIRST AND
WOULD RECEIVE PAYMENTS FROM OUR ASSETS USED AS SECURITY BEFORE YOU WOULD RECEIVE
PAYMENTS.
The notes will not be secured by any of our assets or the assets of our
subsidiaries. Although we currently have no secured indebtedness, the indenture
governing the notes will generally permit us to incur future secured
indebtedness. If we were to become insolvent, holders of any future secured
indebtedness would be paid first and would receive payments from our assets used
as security before you would receive any payments. You may therefore not be
fully repaid if we become insolvent.
THE INABILITY OF OUR SUBSIDIARIES TO PAY US DIVIDENDS COULD ADVERSELY
AFFECT OUR ABILITY TO PAY INTEREST AND PRINCIPAL ON THE NOTES.
Our subsidiaries are separate and distinct legal entities and will have
no obligation, contingent or otherwise, to pay any dividends or make any other
distribution to us or to otherwise pay amounts due or to make specific funds
available for such payments with respect to the notes. As a holding company, our
ability to pay our obligations, including interest and principal on the notes,
will depend primarily upon our receipt of dividends from our subsidiaries. Our
insurance subsidiaries are restricted by the insurance laws of their respective
states of domicile as to the amount of dividends they may pay to us without the
prior approval of their respective regulatory authorities. Under these current
laws, a total of $35.3 million is available for payment to us as dividends from
our insurance subsidiaries during 2003 without prior regulatory approval. If any
of our subsidiaries are limited in their ability to pay dividends to us in the
future, this could impair our ability to pay interest and principal due on the
notes.
RISK FACTORS RELATED TO OUR COMPANY
IF OUR ESTIMATED LIABILITY FOR LOSSES AND LOSS EXPENSES IS INCORRECT,
OUR RESERVES MAY BE INADEQUATE TO COVER OUR ULTIMATE LIABILITY FOR LOSSES AND
LOSS EXPENSES AND MAY HAVE TO BE INCREASED.
We establish and carry, as a liability, reserves based on actuarial
estimates of how much we will need to pay for future claims. We maintain loss
reserves to cover our estimated ultimate unpaid liability for losses and loss
expenses with respect to reported and unreported claims incurred as of the end
of each accounting period. Reserves do not represent an exact calculation of
liability, but instead represent estimates, generally using actuarial projection
techniques at a given accounting date. These reserve estimates are expectations
of what the ultimate settlement and administration of claims will cost based on
our assessment of facts and circumstances then known, review of historical
settlement patterns, estimates of trends in claims severity and frequency, legal
theories of liability, and other factors. Variables in the reserve estimation
process can be affected by both internal and external events, such as changes in
claims handling procedures, trends in loss costs, economic inflation, legal
trends, and legislative changes. Many of these items are not directly
quantifiable, particularly on a prospective basis. Additionally, there may be a
significant reporting lag between the occurrence of an insured event and the
time it is actually reported to the insurer. We refine reserve estimates in a
regular ongoing process as historical loss experience develops and additional
claims are reported and settled. We record adjustments to reserves in the
results of operations for the periods in which the estimates are changed. In
establishing reserves, we take into account estimated recoveries for
reinsurance, salvage, and subrogation.
-12-
Because establishing reserves is an inherently uncertain process
involving estimates, currently established reserves may not be adequate. If we
conclude that estimates are incorrect and our reserves are inadequate, we are
obligated to increase our reserves. An increase in reserves results in an
increase in losses and a reduction in our net income for the period in which the
deficiency in reserves is identified. Accordingly, an increase in reserves could
have a material adverse effect on our results of operations, liquidity, and
financial condition and our ability to pay the notes. At September 30, 2003, for
every 1% change in our reserves, our pre-tax income would be affected by
approximately $6.3 million.
ACQUISITIONS SUBJECT US TO A NUMBER OF FINANCIAL AND OPERATIONAL RISKS.
During the past several years, we and State Auto Mutual have acquired
other insurance companies, such as Meridian, Milbank Insurance Company, Farmers
Casualty Insurance Company, and Midwest Security Insurance Company (now known as
State Auto Insurance Company of Wisconsin), and it is anticipated that we and
State Auto Mutual may continue to pursue acquisitions of other insurance
companies in the future. Acquisitions involve numerous risks and uncertainties,
such as:
- obtaining necessary regulatory approvals of the acquisition
may prove to be more difficult than anticipated;
- integrating the acquired business may prove to be more costly
than anticipated;
- integrating the acquired business without material disruption
to existing operations may prove to be more difficult than
anticipated;
- anticipated cost savings may not be fully realized (or not
realized within the anticipated time frame);
- loss results of the company acquired may be worse than
expected; and
- retaining key employees of the acquired business may prove to
be more difficult than anticipated.
In addition, other companies in the insurance industry have similar
acquisition strategies. Competition for acquisitions may intensify or we may not
be able to complete such acquisitions on terms and conditions acceptable to us.
Additionally, the costs of unsuccessful acquisition efforts may adversely affect
our financial performance.
A DOWNGRADE IN OUR FINANCIAL STRENGTH RATINGS MAY NEGATIVELY AFFECT OUR
BUSINESS.
Insurance companies are subject to financial strength ratings produced
by external rating agencies. Higher ratings generally indicate financial
stability and a strong ability to pay claims. Ratings are assigned by rating
agencies to insurers based upon factors that they believe are relevant to
policyholders. Ratings are important to maintaining public confidence in our
company and in our ability to market our products. A downgrade in our financial
strength ratings could, among other things, negatively affect our ability to
sell certain insurance products, our relationships with agents, new sales, and
our ability to compete.
Although other agencies cover the property and casualty industry, we
believe our ability to write business is most influenced by our rating from A.M.
Best. According to A.M. Best, its ratings are designed to assess an insurer's
financial strength and ability to meet ongoing obligations to policyholders. Our
insurance subsidiaries currently have a rating from A.M. Best Company of A+
(Superior) (the second highest of A.M. Best's 15 ratings), other than
Mid-Plains, which has a rating of A- (Excellent) (the fourth highest of A.M.
Best's 15 ratings). We may not be able to maintain our current A.M. Best
ratings.
ELIMINATION OR SIGNIFICANT RESTRICTION OF THE USE OF CREDIT-SCORING IN
THE PRICING AND UNDERWRITING OF PERSONAL LINES PRODUCTS COULD REDUCE OUR FUTURE
PROFITABILITY.
Our personal lines business uses insurance-scoring as a factor in
making risk selection and pricing decisions. Where allowed by state law, an
individual's credit score is one of the criteria used to develop an
-13-
insurance score. Recently, some consumer groups and regulators have questioned
whether the use of credit-scoring unfairly discriminates against people with low
incomes, minority groups, and the elderly, and are calling for the prohibition
of or restrictions on the use of credit-scoring in underwriting and pricing.
Some states have enacted, and a number of state legislatures and insurance
regulatory agencies are currently considering, laws or regulations that would
significantly curtail the use of credit-scoring in the underwriting process. The
enactment of such laws or regulations in a large number of states could reduce
our future profitability.
OUR INVESTMENT PORTFOLIO MAY SUFFER REDUCED RETURNS OR LOSSES THAT
COULD REDUCE OUR PROFITABILITY.
Investment returns are an important part of our overall profitability,
and fluctuations in the fixed income or equity markets could impair our
profitability, financial condition, and/or cash flows. Net investment income and
net realized investment gains accounted for 6.8% of our consolidated revenues
for the year ended December 31, 2002, and 7.3% of our consolidated revenues for
the nine months ended September 30, 2003.
Fixed income and short-term investments comprised 95.9% of the market
value of our investment portfolio at December 31, 2002, and 92.7% at September
30, 2003. Fluctuations in interest rates affect our returns on, and the market
value of, these fixed income and short-term investments. In addition, defaults
by third parties in the payment or performance of their obligations, primarily
from our investments in corporate and municipal bonds, could reduce our
investment income and realized investment gains or result in investment losses.
Equity investments comprised 3.9% of the market value of our investment
portfolio at December 31, 2002, and 6.7% at September 30, 2003. Equity
investments generally provide higher expected total returns, but are subject to
greater volatility and present greater risk than our fixed income investments.
General economic conditions, stock market conditions, and many other factors
beyond our control can adversely affect the value of our equity investments and
our ability to control the timing of the realization of investment income. When
a security in our investment portfolio has a decline in fair value that is other
than temporary, we adjust the cost basis of the security to fair value, which
would reduce earnings as a realized loss. This charge to earnings is not changed
for subsequent recoveries in fair value.
OUR INDEPENDENT AGENTS SELL INSURANCE PRODUCTS OF OUR COMPETITORS, AND
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE BEST AGENTS OR PERSUADE THEM TO
DEVOTE SUFFICIENT ATTENTION TO OUR PRODUCTS, OUR SALES AND RESULTS OF OPERATIONS
COULD BE ADVERSELY AFFECTED.
We market and sell our insurance products through independent,
non-exclusive insurance agents, whereas some of our competitors sell their
insurance products through insurance agents who sell products exclusively for
one insurance company. If we are unsuccessful in attracting and retaining
productive agents to sell our insurance products, our sales and results of
operations could be adversely affected. The agents through which we market and
sell our products also sell our competitors' products. These agents may
recommend our competitors' products over our products or may stop selling our
products altogether. Additionally, we compete with our competitors for
productive agents, primarily on the basis of our financial position, support
services and compensation and product features. Although we make efforts to
ensure that we have strong relationships with our independent agents and to
persuade them to promote and sell our products, we may not be successful in
these efforts.
STATE AUTO MUTUAL OWNS A SIGNIFICANT INTEREST IN US AND MAY EXERCISE
ITS CONTROL IN A MANNER DETRIMENTAL TO YOUR INTERESTS.
State Auto Mutual currently controls approximately 67% of the voting
power of our company. Therefore, State Auto Mutual has the power to direct our
affairs and is able to determine the outcome of substantially all matters
required to be submitted to shareholders for approval, including the election of
all our directors. State Auto Mutual could exercise its control over us in a
manner detrimental to your interests.
-14-
RISK FACTORS RELATED TO OUR INDUSTRY
DEVELOPING CLAIM AND COVERAGE ISSUES IN OUR INDUSTRY ARE UNCERTAIN AND
MAY ADVERSELY AFFECT OUR INSURANCE OPERATIONS.
As industry practices and legislative, judicial, and regulatory
conditions change, unexpected and unintended issues related to claims and
coverage may develop. These issues could have an adverse effect on our business
by either extending coverage beyond our underwriting intent or by increasing the
number or size of claims. The premiums we charge for our insurance products are
based upon certain risk expectations. When the legislative, judicial, or
regulatory authorities expand the burden of risk beyond our expectations, the
premiums we previously charged or collected may no longer be sufficient to cover
the risk, and we do not have the ability to retroactively modify premium
amounts. Recent examples of these claims and coverage issues include:
- changes in interpretation of the named insured provision with
respect to the uninsured/underinsured motorist coverage in
commercial auto policies that broaden the definition of the
named insured;
- a growing trend of plaintiffs targeting property and casualty
insurers, including us, in purported class action litigation
relating to claim-handling and other practices, particularly
with respect to the handling of personal lines auto and
homeowners claims; and
- increases in the number and size of water damage claims
related to expenses for testing and remediation of mold
conditions.
Many of these issues are beyond our control. The effects of these and
other unforeseen claims and coverage issues are extremely hard to predict and
could materially harm our business and results of operations.
THE OCCURRENCE OF CATASTROPHIC EVENTS COULD MATERIALLY REDUCE OUR
PROFITABILITY.
Our insurance operations expose us to claims arising out of
catastrophic events. We have experienced, and will in the future experience,
catastrophe losses that may cause substantial volatility in our financial
results for any fiscal quarter or year and could materially reduce our
profitability or harm our financial condition. Our ability to write new business
also could be affected. Catastrophes can be caused by various natural events,
including hurricanes, hailstorms, windstorms, earthquakes, explosions, severe
winter weather, and fires, none of which are within our control. Catastrophe
losses can vary widely and could significantly exceed our recent historic
results. The frequency and severity of catastrophes are inherently
unpredictable.
The extent of losses from a catastrophe is a function of both the total
amount of insured exposure in the area affected by the event and the severity of
the event. Most catastrophes are restricted to small geographic areas; however,
hurricanes and earthquakes may produce significant damage in larger areas,
especially those that are heavily populated. Although catastrophes can cause
losses in a variety of our property and casualty lines, most of our catastrophe
claims in the past have related to homeowners and other personal lines
coverages. The geographic distribution of our business subjects us to
catastrophe exposure from hailstorms and earthquakes in the Midwest as well as
catastrophe exposure from hurricanes in Florida and the Gulf Coast, southern
coastal states, and Mid-Atlantic regions. In the last five years, the largest
catastrophe to affect our results of operations occurred between May 2 and May
11, 2003, when tornadoes, hailstorms, and windstorms caused damage in 17 of our
26 operating states resulting in approximately $39.2 million in pre-tax losses.
We believe that increases in the value and geographic concentration of
insured property and the effects of inflation could increase the severity of
claims from catastrophic events in the future. In addition, states have from
time to time passed legislation that has the effect of limiting the ability of
insurers to manage catastrophe risk, such as legislation prohibiting insurers
from withdrawing from catastrophe-prone areas. Although we attempt to reduce the
impact on our business of a catastrophe through the purchase of reinsurance
covering various categories of catastrophes, reinsurance may prove inadequate if
a major catastrophic loss exceeds the reinsurance limit, or an insurance
subsidiary pays a number of smaller catastrophic loss claims that, individually,
fall below the subsidiary's retention level.
-15-
OUR BUSINESS IS HEAVILY REGULATED, AND CHANGES IN REGULATION MAY REDUCE
OUR PROFITABILITY AND LIMIT OUR GROWTH.
We are subject to extensive regulation in the states in which we
conduct business. This regulation is generally designed to protect the interests
of policyholders, as opposed to shareholders and other investors, and relates to
authorization for lines of business, capital, and surplus requirements;
investment limitations; underwriting limitations; transactions with affiliates;
dividend limitations; changes in control; premium rates; and a variety of other
financial and nonfinancial components of an insurance company's business.
In recent years, the state insurance regulatory framework has come
under increased federal scrutiny, and some state legislatures have considered or
enacted laws that may alter or increase state authority to regulate insurance
companies and insurance holding companies. Further, the National Association of
Insurance Commissioners, or NAIC, and state insurance regulators are reexamining
existing laws and regulations, specifically focusing on modifications to holding
company regulations, interpretations of existing laws, and the development of
new laws. In addition, Congress and some federal agencies from time to time
investigate the current condition of insurance regulation in the United States
to determine whether to impose federal regulation or to allow an optional
federal incorporation, similar to banks. We cannot predict with certainty the
effect any proposed or future legislation or NAIC initiatives may have on the
conduct of our business. In addition, the insurance laws or regulations adopted
or amended from time to time may be more restrictive or may result in materially
higher costs than current requirements. Although the federal government does not
directly regulate the insurance business, changes in federal legislation and
administrative policies in several areas, including changes in the
Gramm-Leach-Bliley Act, financial services regulation, and federal taxation, can
significantly harm the insurance industry and us.
REINSURANCE MAY NOT BE AVAILABLE OR ADEQUATE TO PROTECT US AGAINST
LOSSES.
We use reinsurance to help manage our exposure to insurance risks. The
availability and cost of reinsurance are subject to prevailing market
conditions, both in terms of price and available capacity, which can affect our
business volume and profitability. Although the reinsurer is liable to us to the
extent of the ceded reinsurance, we remain liable as the direct insurer on all
risks reinsured. As a result, ceded reinsurance arrangements do not eliminate
our obligation to pay claims. We are subject to credit risk with respect to our
ability to recover amounts due from reinsurers. Reinsurance may not be adequate
to protect us against losses and may not be available to us in the future at
commercially reasonable rates. In addition, the magnitude of losses in the
reinsurance industry resulting from catastrophes may adversely affect the
financial strength of certain reinsurers, which may result in our inability to
collect or recover reinsurance. Reinsurers also may reserve their right to
dispute coverage with respect to specific claims. With respect to catastrophic
or other loss, if we experience difficulty collecting from reinsurers or
obtaining additional reinsurance in the future, we will bear a greater portion
of the total financial responsibility for such loss, which could materially
reduce our profitability or harm our financial condition.
Many reinsurers experienced significant losses related to the terrorist
acts of September 11, 2001, and future terrorist acts may have similar effects.
As a result, we may incur significantly higher reinsurance costs and more
restrictive terms and conditions, or may be unable to attain reinsurance for
some types of commercial exposures.
TERRORIST ATTACKS, AND THE THREAT OF TERRORIST ATTACKS, AND ENSUING
EVENTS COULD HAVE AN ADVERSE EFFECT ON US.
Terrorism, both within the United States and abroad, and military and
other actions and heightened security measures in response to these types of
threats, may cause loss of life, property damage, additional disruptions to
commerce, and reduced economic activity. Actual terrorist attacks could cause
losses from insurance claims related to the property and casualty insurance
operations of the State Auto Group, as well as a decrease in our shareholders'
equity, net income, and/or revenue. The Terrorism Risk Insurance Act of 2002, or
Terrorism Act, requires the federal government and the insurance industry to
share in insured losses up to $100 billion per year resulting from certain
future terrorist attacks within the United States. Under the Terrorism Act, we
must offer our commercial policyholders coverage against certified acts of
terrorism. In addition to certified acts of terrorism, we intend, subject to the
approval of the state regulators, to cover only such acts of terrorism that are
not certified acts under the Terrorism Act and that do not arise out of nuclear,
biological, or chemical agents.
-16-
In addition, some of the assets in our investment portfolio may be
adversely affected by declines in the equity markets and economic activity
caused by the continued threat of terrorism, ongoing military and other actions,
and heightened security measures. We cannot predict at this time whether and the
extent to which industry sectors in which we maintain investments may suffer
losses as a result of potential decreased commercial and economic activity, how
any such decrease might impact the ability of companies within the affected
industry sectors to pay interest or principal on their securities, or how the
value of any underlying collateral might be affected.
OUR INDUSTRY IS HIGHLY COMPETITIVE, WHICH COULD ADVERSELY AFFECT OUR
SALES AND PROFITABILITY.
The property and casualty insurance business is highly competitive, and
we compete with a large number of other insurers. Many of our competitors have
well-established national reputations, and substantially greater financial,
technical, and operating resources and market share than us. We may not be able
to effectively compete, which could adversely affect our sales or profitability.
We believe that competition in our lines of business is based on price, service,
commission structure, product features, financial strength ratings, reputation,
and name or brand recognition. Our competitors sell through various distribution
channels, including independent agents, captive agents, and directly to the
consumer. We compete not only for business and individual customers, employer,
and other group customers but also for independent agents to market and sell our
products. Some of our competitors offer a broader array of products, have more
competitive pricing, or have higher claims paying ability ratings. In addition,
other financial institutions are now able to offer services similar to our own
as a result of the Gramm-Leach-Bliley Act, which was adopted in November 1999.
THE PROPERTY AND CASUALTY INSURANCE INDUSTRY IS HIGHLY CYCLICAL, WHICH
MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS.
The property and casualty insurance industry, particularly commercial
lines businesses, has been historically characterized by periods of intense
price competition due to excess underwriting capacity, as well as periods of
shortages of underwriting capacity that allow for attractive premiums. The
periods of intense price competition may adversely affect our operating results,
and the overall cyclicality of the industry may cause fluctuations in our
operating results. In response to periods of intense price competition, our
strategy with respect to our commercial lines business has been to adjust prices
to allow for acceptable profit levels and to decline coverage in situations
where pricing or risk would not result in acceptable returns. Accordingly, our
commercial lines business tends to contract during periods of severe competition
and price declines and expand when market pricing allows an acceptable return.
The personal lines businesses are characterized by an auto underwriting
cycle of loss cost trends. Driving patterns, inflation in the cost of auto
repairs and medical care, and increasing litigation of liability claims are some
of the more important factors that affect loss cost trends. Inflation in the
cost of building materials and labor costs and demand caused by weather-related
catastrophic events affect personal lines homeowners loss cost trends. We and
other personal lines insurers are generally unable to increase premiums unless
permitted by changes in insurance laws and regulations, typically after the
costs associated with the coverage have increased. Accordingly profit margins
generally decline in a period of increasing loss costs.
-17-
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement that we entered into in connection with the
private offering of the original notes. We will not receive any cash proceeds
from the issuance of the exchange notes. The original notes that are surrendered
in exchange for the exchange notes will be retired and cancelled and cannot be
reissued. As a result, the issuance of the exchange notes will not result in any
increase or decrease in our indebtedness.
We received net proceeds from the private offering of the original
notes, after deducting initial purchaser discounts and our expenses, of
approximately $98.3 million. To date, we have used these proceeds as follows:
(1) $15.0 million was used to repay a term loan from a bank; (2) $15.0 million
was contributed to Milbank, one of our insurance subsidiaries, and then used by
Milbank to repay a surplus contribution note to Meridian Security, one of State
Auto Mutual's insurance subsidiaries; and (3) $39.0 million was contributed to
State Auto P&C and $15.0 million was contributed to State Auto National
Insurance Company to support the growth of their insurance operations. The
remaining proceeds are available for general corporate purposes.
-18-
CAPITALIZATION
The following table sets forth our unaudited historical capitalization
as of September 30, 2003, and our unaudited capitalization on an as adjusted
basis as of such date after giving pro forma effect to the issuance of the notes
and the application of the net proceeds therefrom. You should read this table in
conjunction with the consolidated financial statements and the notes thereto
contained in our quarterly report on Form 10-Q for the quarter ended September
30, 2003, which is incorporated by reference into this prospectus, and other
financial data included elsewhere in this prospectus.
AS OF SEPTEMBER 30, 2003
------------------------
AS
ACTUAL ADJUSTED
--------- ---------
(IN MILLIONS)
Debt:
Junior subordinated debt securities................... $ 15.5 $ 15.5
Senior notes offered hereby........................... -- 100.0
Notes payable, bank................................... 15.0 --
Notes payable, affiliates............................. 60.5 45.5
-------- --------
Total debt........................................... 91.0 161.0
-------- --------
Stockholders' equity:
Class A preferred stock, no par value; none issued.... -- --
Class B preferred stock, no par value; none issued.... -- --
Common stock, no par value............................ 109.8 109.8
Less treasury shares.................................. (55.5) (55.5)
Additional paid-in capital............................ 53.8 53.8
Accumulated other comprehensive income................ 48.0 48.0
Retained earnings..................................... 359.8 359.8
-------- --------
Total stockholders' equity........................... 515.9 515.9
-------- --------
Total capitalization............................... $ 606.9 $ 676.9
======== ========
-19-
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
In the following table, we have provided the selected historical
consolidated financial data for each of the five years in the period ended
December 31, 2002, which are derived from our audited consolidated financial
statements. The following table also sets forth the selected consolidated
financial data for the nine-month periods ended September 30, 2002 and 2003,
which are derived from our unaudited consolidated financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, that we consider necessary for a fair presentation of the
financial position and the results of operations for these periods. The
operating results for the nine months ended September, 2003, are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2003. You should read the consolidated financial data below in
conjunction with the consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," incorporated by reference into this prospectus from out our annual
report on Form 10-K for the year ended December 31, 2002, and our quarterly
report Form 10-Q for the quarter ended September 30, 2003.
AS OF AND FOR THE
NINE MONTHS ENDED
AS OF AND FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- -------------------------
1998 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- ------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENTS OF INCOME DATA:
Earned premiums ..................... $ 356,210 $ 392,058 $ 397,967 $ 555,207 $ 896,595 $ 664,238 $ 720,124
Net investment income ............... 32,506 34,262 38,915 47,375 59,691 44,214 47,587
Net realized gains on investments.... 2,925 2,555 5,255 1,962 5,909 854 9,568
Other income ........................ 10,418 11,996 20,637 18,728 5,284 3,838 4,342
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues ..................... 402,059 440,871 462,774 623,272 967,479 713,144 781,621
----------- ----------- ----------- ----------- ----------- ----------- -----------
Losses and loss expenses ............ 242,294 264,628 272,167 427,074 653,474 493,749 503,342
Acquisition and operating
expenses .......................... 104,224 111,772 119,569 167,207 264,348 195,209 209,074
Interest expense .................... -- 955 2,730 2,275 2,333 1,621 2,320
Other expense, net .................. 5,936 6,531 6,864 8,740 9,534 6,887 8,608
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses ..................... 352,454 383,886 401,330 605,296 929,689 697,466 723,344
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before federal income
taxes ............................. 49,605 56,985 61,444 17,976 37,790 15,678 58,277
Income taxes ........................ 12,108 14,169 13,730 (2,639) 795 (1,986) 13,332
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income ....................... $ 37,497 $ 42,816 $ 47,714 $ 20,615 $ 36,995 $ 17,664 $ 44,945
=========== =========== =========== =========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic ............................... $ 0.89 $ 1.05 $ 1.24 $ 0.53 $ 0.95 $ 0.45 $ 1.15
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted ............................. $ 0.87 $ 1.03 $ 1.21 $ 0.52 $ 0.93 $ 0.44 $ 1.12
----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends per common share .......... $ 0.10 $ 0.11 $ 0.12 $ 0.13 $ 0.14 $ 0.10 $ 0.11
=========== =========== =========== =========== =========== =========== ===========
GAAP RATIOS:
Loss and LAE ratio (1) .............. 68.0 67.5 68.4 76.9 72.9 74.3 69.9
Expense ratio (2) ................... 29.3 28.5 30.0 30.1 29.5 29.4 29.0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Combined ratio .................... 97.3 96.0 98.4 107.0 102.4 103.7 98.9
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT PERIOD
END):
Total investments ................... $ 579,966 $ 627,305 $ 750,870 $ 1,138,656 $ 1,272,316 $ 1,271,072 $ 1,470,907
Total assets ........................ 717,520 759,945 898,106 1,367,496 1,592,995 1,560,107 1,745,525
Losses and loss expense payable ..... 217,450 232,489 244,583 523,860 600,958 589,776 645,457
Total debt .......................... -- 45,500 45,500 45,500 75,500 60,500 90,964
Total stockholders' equity .......... 340,824 317,687 386,059 400,193 463,769 452,098 515,946
Ratio of earnings to fixed
charges (3) ....................... 43.8x 24.3x 16.5x 5.5x 9.0x 6.0x 15.9x
---------------------
(1) Ratio of losses and loss adjustment expenses to earned premiums.
(2) Ratio of acquisition and operating expenses to earned premiums.
(3) For purposes of computing the ratio of earnings to fixed charges,
earnings represent income from continuing operations before income
taxes and cumulative effect of change in accounting principles, plus
fixed charges net of capitalized interest. Fixed charges include
interest expense (including interest on deposit contracts),
amortization of deferred debt expense and the proportion deemed
representative of the interest factor of rent expense.
-20-
BUSINESS
You should read the information in the section entitled "Item 1.
Business" in our annual report on Form 10-K for the year ended December 31,
2002, which is incorporated by reference into this prospectus, for more detailed
information.
GENERAL
State Auto Financial Corporation is a regional insurance holding
company headquartered in Columbus, Ohio. Through our six insurance subsidiaries,
we provide personal and commercial insurance for the standard insurance market
and automobile insurance for the nonstandard insurance market. Our principal
lines of business include standard personal and commercial automobile,
nonstandard personal automobile, homeowners, commercial multi-peril, fire,
general liability, and workers' compensation insurance. We market our insurance
products through more than 22,000 independent agents associated with more than
3,400 agencies in 26 states. Our products are marketed primarily in the central
and eastern United States, excluding New York, New Jersey, and the New England
states. We are affiliated with State Auto Mutual Insurance Company, which owns
approximately 67% of our outstanding common shares.
Our insurance subsidiaries consist of State Auto Property and Casualty
Insurance Company, Milbank Insurance Company, Farmers Casualty Insurance
Company, State Auto Insurance Company of Ohio, State Auto National Insurance
Company, and Mid-Plains Insurance Company. We also have three non-insurance
subsidiaries that support our insurance operations. An insurance pooling
arrangement, which we refer to as the "State Auto Pool," exists between various
insurers in the State Auto Group by which premiums, losses, and underwriting
expenses are shared among the pool participants. We receive 80% in the aggregate
of this underwriting pool, while State Auto Mutual and certain of its
subsidiaries receive 20% in the aggregate.
With a commitment to sound underwriting practices, responsible
cost-based pricing and conservative investments, we have maintained a healthy
financial record since we began operations in 1991. Our average annual statutory
combined ratio of 100.5% and return on GAAP equity of 11.8% compare favorably
with the property and casualty insurance industry average annual statutory
combined ratio of 108.4% and return on GAAP equity of 6.8% computed from 1991
through 2002. Through September 30, 2003, our GAAP revenue, assets, and equity
have grown at a compound annual growth rate of 19.9%, 19.5%, and 15.2%,
respectively, since we began operations in 1991. Combined with our focus on
providing outstanding customer service to policyholders and agents, we believe
we have earned the reputation as one of the strongest and best managed regional
insurance groups in the industry. The State Auto Pool consistently has received
A.M. Best Company's A+ (Superior) rating.
-21-
HISTORY AND CORPORATE STRUCTURE
State Auto Mutual was founded in 1921. STFC was formed in 1990 as a
wholly owned subsidiary of State Auto Mutual and began operations in 1991
following the completion of its initial public offering. The following chart
shows our current corporate structure, along with that of State Auto Mutual:
[FLOW CHART]
-22-
COMPETITIVE ADVANTAGES
We believe our success has been built, in part, on the following
strengths:
ADHERENCE TO DISCIPLINED UNDERWRITING PRINCIPLES. We adhere to
disciplined and consistent underwriting principles. These principles include
insistence on selecting and retaining business based on the merits of each
account and a dedication to cost-based pricing, where each line of business is
priced at a rate anticipated to generate a profit. No line of business, or
classification within major lines, subsidizes another line or classification. We
believe our adherence to these disciplined underwriting principles is the
primary reason that our company has outperformed the property and casualty
insurance industry on a statutory combined ratio basis in every year since 1991.
FAIR AND EFFICIENT CLAIMS SERVICE. We strive to provide prompt and fair
claims service. We maintain a claims contact center 24 hours a day, seven days a
week, for receipt of claim calls. Claims may also be reported to the
policyholder's independent agent or via the Internet. We make a pledge to our
policyholders to make contact with them within two hours of reporting a claim to
us. Once an automobile repair is made at one of our approved repair facilities,
we guarantee that repair for as long as the automobile is owned by our
policyholder.
STRONG INDEPENDENT INSURANCE AGENT NETWORK. We offer our products
through more than 22,000 independent insurance agents associated with more than
3,400 agencies in 26 states. We believe the success of our independent insurance
agent network, which is our only distribution channel, grows out of our
commitment to promote and foster close working relationships with our agents. We
seek relationships with agencies where we will be one of their top three
insurers, measured on the basis of direct premiums written, for the type of
business we desire. Our agents' compensation package includes competitive
commission rates and other sales inducements designed to maintain and enhance
relationships with existing independent agents as well as to attract new
independent agents. We provide our agents with a co-operative advertising
program, sales training programs, an agent's stock purchase program,
profit-sharing and travel incentives, and agency recognition. We continually
monitor our agencies for compatibility with us, taking into account factors such
as loss ratio, premium volume, business profiles, and relationship history. This
allows us to be proactive in helping the agents to enhance profitability and,
thus, maintain the advantages of the State Auto affiliation. Our senior
management regularly makes itself available to the agency force to reinforce
this partnership commitment. We believe each of these elements creates a
relationship that has resulted in our independent insurance agents placing
quality insurance business with us.
RISK MITIGATION STRATEGIES. We deploy specific strategies designed to
mitigate our exposure to certain risks. We continually seek to diversify our
business on a geographic basis. The number of states we operate in has increased
from 17 states in 1991 to 26 states in 2003. The concentration of gross written
premiums for our property and casualty operations in our largest state, Ohio,
has decreased from 28% for the year ended December 31, 1991, to 18.5% for the
year ended December 31, 2002. We avoid writing insurance in states that we
believe present difficult legislative, judicial, and/or regulatory environments
for the insurance industry, such as California, Massachusetts, New Jersey, New
York, Louisiana, and Texas. Our underwriting guidelines are designed to limit
exposures for high risk insurance matters such as asbestos, workers'
compensation, and environmental claims. Our loss and loss expenses liability at
December 31, 2002, relating to asbestos, environmental remediation, product
liability, mold, and other highly uncertain exposures was approximately 1% of
our net loss and loss expenses liability. Our catastrophe management strategies
are designed to mitigate our exposure to earthquakes and hurricanes. We believe
these efforts have played a significant role in our underwriting profitability
and have been very effective in controlling our catastrophe reinsurance costs.
CONSERVATIVE INVESTMENT STRATEGY. We have a conservative investment
strategy that emphasizes the quality of our fixed income portfolio, which
comprised 90.8% of our total portfolio at September 30, 2003, and includes only
investment grade securities. We have a disciplined approach to the equity
portion of our portfolio, which comprised 6.7% of our total portfolio at
September 30, 2003, that emphasizes large capitalization, dividend-paying
companies. We select equity investments based on a stock's potential for
appreciation as well as ability to continue paying dividends.
-23-
EXPERIENCED SENIOR MANAGEMENT TEAM. Our senior management team has
extensive experience with our company and in the insurance industry. This
management team has led us through various industry cycles and has managed our
growth through both strategic acquisitions and internal expansion, including the
2001 acquisition of the Meridian insurance companies. This experience has proved
invaluable in the integration of Meridian's operations into ours and has guided
us in the migration of Meridian policies into our policies, pricing,
underwriting, and claims philosophies. Twelve of our 15-person senior management
team have over 11 years with the State Auto Group (seven have over 20 years),
led by Robert H. Moone, our Chairman, President, and Chief Executive Officer,
who has over 33 years with the State Auto Group.
PROPERTY AND CASUALTY OPERATIONS
Through independent agents, our property and casualty businesses
provide customers with standard personal and commercial automobile, nonstandard
personal automobile, homeowners, commercial multi-peril, fire, general
liability, and workers' compensation insurance. Our insurance operations
generated 92.7% of our consolidated revenues in 2002, with $896.6 million of net
earned premiums. For the nine-month period ended September 30, 2003, our
insurance operations generated 92.1% of our consolidated revenues, with net
earned premiums of $720.1 million.
We currently operate in three insurance segments. We have a standard
insurance segment, a non-standard insurance segment, and the Meridian standard
insurance segment. Our standard insurance segment includes personal and
commercial lines of business. Our non-standard insurance segment includes
nonstandard automobile insurance. Our Meridian standard insurance segment
includes the standard insurance business of the former Meridian Mutual Insurance
Company, or Meridian Mutual.
Our standard insurance segment generated $673.1 million, or 75.1%, of
our net earned premiums in 2002, and $580.3 million, or 80.6%, for the
nine-month period ended September 30, 2003. Our nonstandard insurance segment
generated $73.6 million, or 8.2%, of our net earned premiums in 2002, and $62.7
million, or 8.7%, for the nine-month period ended September 30, 2003. Our
Meridian standard insurance segment generated $149.9 million, or 16.7%, of our
net earned premiums in 2002, and $77.1 million, or 10.7%, for the nine-month
period ended September 30, 2003.
We sell property and casualty insurance products in 26 states. The
following table shows gross written premiums for our property and casualty
operations by state for the year ended December 31, 2002.
% OF
STATE AMOUNT TOTAL
------------------------------ ------------ ------
(DOLLARS IN THOUSANDS)
Ohio.......................... $ 177,231 18.5%
Kentucky...................... 118,154 12.3
Tennessee..................... 65,124 6.8
Indiana....................... 63,438 6.6
Minnesota..................... 56,026 5.8
Pennsylvania.................. 52,215 5.4
South Carolina................ 41,171 4.3
Maryland...................... 34,090 3.6
North Carolina................ 34,037 3.6
Wisconsin..................... 30,986 3.2
------------ -----
Total ten largest states.... 672,472 70.1
All others.................... 287,379 29.9
------------ -----
Total....................... $ 959,851 100%
============ =====
-24-
The following table presents our earned premiums for each product line
by segment as well as a percentage of total earned premiums:
FOR THE NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------------------------------
2001 % 2002 % 2002 % 2003 %
-------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN MILLIONS)
Automobile -- personal:
Standard insurance ............................ $ 191.6 34.5% $ 281.4 31.4% $ 206.8 31.1% $ 247.9 34.4%
Nonstandard insurance ......................... 41.7 7.5 73.6 8.2 53.2 8.0 62.7 8.7
Meridian standard insurance ................... 26.2 4.7 56.9 6.4 43.9 6.6 25.7 3.6
Automobile -- commercial:
Standard insurance ............................ 45.8 8.2 74.7 8.3 54.8 8.3 62.7 8.7
Meridian standard insurance ................... 10.2 1.9 22.3 2.5 17.2 2.6 12.3 1.7
Homeowners and farmowners:
Standard insurance ............................ 77.1 13.9 112.4 12.5 82.6 12.5 97.7 13.6
Meridian standard insurance ................... 9.5 1.7 21.2 2.4 16.0 2.4 12.5 1.7
Commercial multi-peril:
Standard insurance ............................ 31.2 5.6 50.3 5.6 36.6 5.5 44.8 6.2
Meridian standard insurance ................... 11.4 2.0 26.0 2.9 19.9 3.0 15.1 2.1
Workers' compensation:
Standard insurance ............................ 15.4 2.8 23.2 2.6 17.4 2.6 18.0 2.5
Meridian standard insurance ................... 8.7 1.6 16.1 1.8 13.9 2.1 7.3 1.0
Fire and allied lines:
Standard insurance ............................ 36.0 6.5 57.3 6.4 42.0 6.3 48.7 6.8
Meridian standard insurance ................... 0.5 0.1 1.1 0.1 0.8 0.1 0.7 0.1
Other liability and products liability:
Standard insurance ............................ 21.9 3.9 49.2 5.5 36.0 5.5 40.8 5.7
Meridian standard insurance ................... 0.5 0.1 1.8 0.2 1.4 0.2 1.1 0.2
Other personal lines and other commercial lines:
Standard insurance ............................ 25.3 4.6 24.6 2.7 18.2 2.7 19.7 2.7
Meridian standard insurance ................... 2.2 0.4 4.5 0.5 3.5 0.5 2.4 0.3
-------- ----- -------- ----- -------- ----- -------- -----
Total earned premiums .......................... $ 555.2 100.0% $ 896.6 100.0% $ 664.2 100.0% $ 720.1 100.0%
======== ===== ======== ===== ======== ===== ======== =====
The following table presents our GAAP loss and LAE ratio for each
product line by segment:
FOR THE FOR THE NINE
YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
2001 2002 2002 2003
Automobile -- personal:
Standard insurance ........................... 62.5 67.5 66.5 63.8
Nonstandard insurance ........................ 92.0 79.0 83.4 76.8
Meridian standard insurance .................. 122.5 75.1 76.0 70.7
Automobile -- commercial:
Standard insurance ........................... 75.9 63.5 64.7 58.6
Meridian standard insurance .................. 153.7 76.5 80.0 56.6
Homeowners and farmowners:
Standard insurance ........................... 79.5 81.1 85.2 91.0
Meridian standard insurance .................. 136.3 106.5 128.4 79.9
Commercial multi-peril:
Standard insurance ........................... 74.4 80.8 83.5 70.5
Meridian standard insurance .................. 171.6 107.5 104.3 120.7
Workers' compensation:
Standard insurance ........................... 69.9 84.4 84.7 87.1
Meridian standard insurance .................. 165.4 82.7 82.2 50.3
Fire and allied lines:
Standard insurance ........................... 62.8 58.8 61.1 74.4
Meridian standard insurance .................. 66.9 60.8 89.8 85.9
Other liability and products liability:
Standard insurance ........................... 54.5 78.8 79.1 58.0
Meridian standard insurance .................. 214.5 50.0 7.4 82.0
Other personal lines and other commercial lines:
Standard insurance ........................... 40.7 30.0 30.9 24.7
Meridian standard insurance .................. 27.1 65.4 33.5 49.1
Total GAAP loss and LAE ratio .................. 76.9 72.9 74.3 69.9
-25-
STANDARD INSURANCE SEGMENT AND MERIDIAN STANDARD INSURANCE SEGMENT
Our Meridian standard insurance segment includes the standard personal
and commercial business of the former Meridian Mutual, which was merged into
State Auto Mutual in June 2001 and thus became part of the State Auto pool at
that time. Our standard insurance segment and the Meridian standard insurance
segment include the following personal and commercial insurance products:
AUTOMOBILE -- PERSONAL INSURANCE. This line provides coverage for
liability to others for both bodily injury and property damage and for physical
damage to an insured's own vehicle from collision and other hazards. In
addition, first-party personal injury protection, frequently referred to as
no-fault coverage, may be included as part of this insurance product if required
by applicable state law.
In writing our personal automobile line, we use "insurance-scoring,"
which utilizes multiple variants to classify risks. Variants used may include
age, past claim record, credit record, and other differentiating
characteristics. The use of insurance-scoring, along with tighter underwriting
standards, has resulted in more accurately matching rate to risk. Our
multi-variant underwriting model segments our potential customers into risk
groups, with four different pricing tiers. These pricing tiers provide more
refined price points and allow us to make insurance available to a broader range
of customers. Legislative or regulatory action could cause us to limit or adjust
our use of credit-scoring within our multi-variant underwriting process. The use
of credit-scoring has been restricted in some states, and is the subject of both
legislative and regulatory review in several other states where our property and
casualty operations have a concentration of business.
AUTOMOBILE -- COMMERCIAL INSURANCE. This line provides coverage for
businesses against losses incurred from personal bodily injury, bodily injury to
third parties, property damage to an insured's vehicle, property damage to other
vehicles, and damage to other property resulting from the ownership,
maintenance, or use of automobiles and trucks in a business.
HOMEOWNERS AND FARMOWNERS INSURANCE. This product line provides
protection against losses to dwellings, equipment, and contents from a wide
variety of hazards, as well as coverage for liability arising from ownership or
occupancy. We write homeowners insurance for dwellings, condominiums, mobile
homes, and rental property contents.
COMMERCIAL MULTI-PERIL INSURANCE. This line provides coverage for
businesses against third-party liability from accidents occurring on their
premises or arising out of their operations. This type of insurance also insures
business property for damage such as that caused by fire, wind, hail, water,
mold, theft, and vandalism, and protects businesses from financial loss due to
business interruption.
WORKERS' COMPENSATION INSURANCE. This line provides coverage for the
obligation of an employer under state law to provide its employees with specific
benefits for work-related injuries, deaths, and diseases, regardless of fault.
Typically the four types of benefits payable under workers' compensation
policies are medical, disability, death, and disease benefits.
FIRE AND ALLIED LINES INSURANCE. These lines provide coverage for
losses to an insured's property, including its contents, as a result of weather,
fire, theft, or other causes. For our commercial lines, we provide coverage
through a variety of business policies. With respect to our personal lines, we
provide coverage primarily through homeowners insurance, although we write a
variety of policies to cover losses pertaining to recreational vehicles and
watercraft. Our insurance also may include policies covering injury to persons
and inland marine policies.
OTHER LIABILITY AND PRODUCTS LIABILITY INSURANCE. Our other liability
line provides coverage for both individuals and businesses protecting the
insured against legal liability resulting from negligence, carelessness, or a
failure to act causing property damage or personal injury to others. Products
liability provides coverage protecting the manufacturer, distributor, seller, or
lessor of a product against legal liability resulting from a defective condition
causing personal injury, or damage, to any individual or entity associated with
the use of the product.
-26-
OTHER PERSONAL LINES AND OTHER COMMERCIAL LINES INSURANCE. These lines
of insurance provide coverage for both individuals and businesses, including
boats and inland marine coverages, fidelity and surety coverage, coverage for
property taken or destroyed by breaking and entering the insurer's premise,
burglary or theft, forgery or counterfeiting, and fraud and coverage for the
failure of boilers, machinery, and electrical equipment.
NONSTANDARD INSURANCE SEGMENT
Our nonstandard insurance segment includes our nonstandard automobile
insurance. We write personal automobile insurance for nonstandard risks through
State Auto National and Mid-Plains. State Auto National is licensed in 24 states
and active in 19 of those states. Mid-Plains operates in Kansas and Iowa.
PROPERTY AND CASUALTY INSURANCE POOLING ARRANGEMENT
Certain of our insurance subsidiaries are parties to an intercompany
pooling arrangement, as described in our corporate structure chart on page 22.
The pooling arrangement covers all the property and casualty insurance written
by the participating parties, except voluntary assumed reinsurance written by
State Auto Mutual and catastrophe inter-company reinsurance written by State
Auto P&C. Under the terms of the pooling arrangement, each of our pooled
subsidiaries, as well as State Auto Wisconsin and State Auto Florida, cede
premiums, losses, and expenses on all of their business to State Auto Mutual. In
turn, State Auto Mutual cedes to each of our pooled subsidiaries, State Auto
Wisconsin, and State Auto Florida a specified portion of premiums, losses, and
expenses, and State Auto Mutual retains the balance.
The pooling arrangement is designed to produce more uniform and stable
underwriting results for each of the pooled companies than any one company would
experience individually by spreading the underwriting risk among each of the
participants. Under the terms of the pooling arrangement, all premiums, incurred
losses, loss expenses, and other underwriting expenses are prorated among the
companies on the basis of their participation in the pool. One effect of the
pooling arrangement is to provide each participant with an identical mix of
property and casualty insurance business on a net basis.
In the following table, we have set forth a summary of our and State
Auto Mutual's pooling arrangement participant percentages, aggregating our and
State Auto Mutual's respective wholly owned subsidiaries, since 1998:
OUR POOLED SUBSIDIARIES STATE AUTO MUTUAL
(IN THE AGGREGATE) (IN THE AGGREGATE)
----------------------- ------------------
1/1/1998-6/30/1998......... 37 63
7/1/1998-12/31/1998........ 47 53
1/1/1999-12/31/1999........ 50 50
1/1/2000-9/30/2001......... 53 47
10/1/2001-Present.......... 80 20
As part of the June 2001 merger of Meridian Mutual into State Auto
Mutual, all insurance business written by Meridian Mutual legally became the
business of State Auto Mutual and was included in the pooling arrangement
effective July 1, 2001. The former Meridian Mutual business is monitored as a
standard segment separate from the State Auto standard business segment. Over
time, we anticipate that the Meridian standard segment will decrease and
eventually disappear as that segment is fully integrated into the State Auto
systems platform.
The direct business of the Meridian Insurers is not included in the
pooling arrangement, and to that extent is not included in our insurance
operations. If State Auto P&C were required to pay catastrophe losses of the
Meridian Insurers under the intercompany catastrophe reinsurance agreement,
those losses would impact our results. See "--Reinsurance" for additional
information.
Prior to 2001, the pooling percentages were reviewed by management at
least annually, and more often if deemed appropriate by management or the Board
of Directors of each company, to determine whether any adjustments should be
made. As a result of the changes made to the pooling percentages in 2001,
management does not currently intend to recommend an adjustment to the pooled
subsidiaries aggregate participation percentage in the foreseeable future. Under
revised procedures, management of each of the pooled companies would make
-27-
recommendations to an independent committee of our Board and the Board of State
Auto Mutual. These independent committees would review and evaluate such factors
as they deem relevant and recommend any appropriate pooling change to our Board
and the Board of State Auto Mutual. The pooling arrangement is terminable by any
party on 90 days' notice or by mutual agreement of the parties. We are not aware
that any of the pooled companies currently intends to terminate the pooling
arrangement.
The pooling arrangement contains a provision excluding catastrophe
losses incurred by the parties in the amount of $100.0 million in excess of
$120.0 million, as well as the premium for such exposures. State Auto P&C
reinsures each insurer in the State Auto Group for this layer of reinsurance
under the Property Catastrophe Overlying Excess of Loss Reinsurance Contract,
which we refer to as our intercompany catastrophe reinsurance agreement. See
"--Reinsurance" and "Other Indebtedness and Certain Financing Arrangements--
Description of Our Structured Contingent Financing Agreement."
MARKETING
In its 26 states of operation, the State Auto Group markets its
products through more than 22,000 insurance agents associated with more than
3,400 independent insurance agencies. None of the companies in the State Auto
Group has any contracts with managing general agencies.
State Auto National markets nonstandard products in 19 states
exclusively through our network of independent agents. Mid-Plains writes
nonstandard auto insurance in Iowa and Kansas through the Farmers Casualty
agency network in those states. The Mid-Plains business is processed on State
Auto National's system.
Because independent insurance agents significantly influence which
insurance company their customers select, management views our independent
insurance agents as our primary customers. Management strongly supports the
independent agency system and believes that maintenance of a strong agency
system is essential for our present and future success. Our senior management
and branch office staff travel regularly to meet with agents, in person, in
their home states. We continually develop programs and procedures to enhance
agency relationships. We actively help our agencies develop professional sales
skills within their staff. The training programs include both products and sales
training in concentrated programs in our home office. Further, the training
programs include disciplined follow-up and coaching for an extended time.
We take a leadership role in the insurance industry with respect to
agency automation, promoting single entry multi-company interface using industry
standards, especially through software developed and marketed by Strategic
Insurance Software (SEMCI Partner(R)). We believe that, because agents and their
customers realize better service and efficiencies through automation, they value
their relationship with us. Automation can make it easier for the agent to do
business with us, which attracts prospective agents and enhances the existing
agencies' relationship with us.
We share the cost of approved advertising with selected agencies. We
provide agents with certain travel and cash incentives if they achieve certain
sales and underwriting profit levels. Further, we recognize our very top
agencies as "Inner Circle Agencies." We reward Inner Circle Agencies with
additional trip and financial incentives, including additional profit-sharing
bonuses and additional contributions to their Inner Circle Agent stock purchase
plan, a part of the agent stock purchase plan described below.
To strengthen our agency commitment to producing profitable business
and further develop our agency relationships, our agent stock purchase plan
offers our agents the opportunity to use commission income to purchase our
stock. Our transfer agent administers the plan using commission dollars assigned
by the agents to purchase shares on the open market through a broker.
CLAIMS
Insurance claims on policies we write are usually investigated and
settled by staff claims representatives. Our claims division emphasizes timely
investigation of claims, settlement of meritorious claims for equitable amounts,
maintenance of adequate reserves for claims, and control of external claims
adjustment expenses.
-28-
Achievement of these goals supports our marketing efforts by providing agents
and policyholders with prompt and effective service.
We attempt to minimize claims costs by settling as many claims as
possible through our internal claims staff and, if possible, by settling
disputes regarding automobile physical damage and property insurance claims
(first party claims) through arbitration. In addition, selected agents have
authority to settle small first-party claims, which improves claims service. We
utilize a third-party bodily injury evaluation software, which helps claims
representatives more accurately estimate the value of bodily injury claims. Our
central claims department allows us to improve claims efficiency and economy by
concentrating the handling of smaller, less complex claims in a centralized
environment. The claims division also provides 24 hour, seven days a week,
claims service through associates in our contact center.
RESERVES
Our property and casualty insurance subsidiaries are required by
applicable insurance laws to maintain reserves for losses and loss adjustment
expenses with respect to both reported and unreported losses. Loss reserves are
management's best estimates at a given point in time of what we expect to pay to
claimants, based on facts, circumstances, and historical trends then known.
During the loss settlement period, additional facts regarding individual claims
may become known, and consequently it often becomes necessary to refine and
adjust the estimates of liability.
We maintain reserves for the eventual payment of losses and loss
expenses for both reported claims and incurred claims that have not yet been
reported. Loss expense reserves are intended to cover the ultimate costs of
settling all losses, including investigation, litigation, and in-house claims
processing costs from such losses.
Reserves for reported losses are initially established on either a
case-by-case or formula basis depending on the type and circumstances of the
loss. The case-by-case reserve amounts are determined based on our reserving
practices, which take into account the type of risk, the circumstances
surrounding each claim, and policy provisions relating to types of loss. The
formula reserves are based on historical paid loss data for similar claims with
provisions for trend changes caused by inflation. Loss and loss expense reserves
for incurred claims that have not yet been reported are estimated based on many
variables including historical and statistical information, inflation, legal
developments, storm loss estimates, and economic conditions. Case and formula
basis loss reserves are reviewed on a regular basis. As new data become
available, estimates are updated resulting in adjustments to loss reserves.
Generally, reported losses initially reserved on a formula basis that
have not settled after six months are case reserved at that time. Although
management uses many resources to calculate reserves, there is no precise method
for determining the ultimate liability. We do not discount loss reserves for
financial statement purposes. Our objective is to set reserves that are adequate
such that the amounts that we originally record as reserves should equal the
amounts that we ultimately require to settle losses. We believe our reserves are
adequate as of September 30, 2003.
REINSURANCE
Reinsurance is an arrangement by which a reinsurance company, referred
to as the "reinsurer," agrees to indemnify an insurance company, referred to as
the "ceding company," for all or a portion of the insurance risks underwritten
by the ceding company. In exchange for the assumption of risk, the ceding
company pays some of the premiums it receives to the reinsurer. Reinsurance can
benefit a ceding company in a number of ways, including reducing net liability
exposure on individual risks, providing catastrophe protection from large or
multiple losses, and stabilizing financial results. Reinsurance can also provide
a ceding company with additional underwriting capacity by permitting it to
accept larger risks and underwrite a greater number of risks without a
corresponding increase in its capital or surplus. Reinsurance can benefit a
reinsurer by providing premium revenue at levels of risk acceptable to the
reinsurer.
Members of the State Auto Group follow the customary industry practice
of reinsuring a portion of their exposures and paying to the reinsurers a
portion of the premiums received. Insurance is ceded principally to reduce
-29-
net liability on individual risks or for individual loss occurrences, including
catastrophic losses. Although reinsurance does not legally discharge the
individual members of the State Auto Group from primary liability for the full
amount of limits applicable under their policies, it does make the assuming
reinsurer liable to the extent of the reinsurance ceded. To our knowledge, none
of our reinsurers are experiencing financial difficulties such that they would
be unable to meet their obligations to us.
Each member of the State Auto Group is party to working reinsurance
treaties for property, casualty, and workers' compensation lines with several
reinsurers arranged through a reinsurance broker. Under these treaties, each
member is responsible for the first $2.0 million of each defined loss, and the
reinsurers are responsible for the excess over $2.0 million up to $10.0-15.0
million of defined loss, depending upon the nature of the injury or damage. The
rates for this reinsurance are negotiated annually.
In addition, the State Auto Group has secured other reinsurance to
limit the net cost of large loss events for certain types of coverage. Included
are umbrella liability losses, which are reinsured up to a limit of $15.0
million above a maximum $600,000 retention. The State Auto Group also makes use
of facultative reinsurance for unique risk situations and participates in
involuntary pools and associations in certain states.
The State Auto Group participates in an intercompany catastrophe
reinsurance program. Under this program, the members of the State Auto Group, on
a combined basis, retain the first $40.0 million of catastrophe losses that
affect at least two individual risks. For catastrophe losses incurred by the
State Auto Group up to $80.0 million, in excess of $40.0 million, traditional
reinsurance coverage is provided with a co-participation of 5%. For catastrophe
losses incurred by the State Auto Group up to $100.0 million, in excess of
$120.0 million, State Auto P&C acts as the catastrophe reinsurer for the State
Auto Group under the terms of our intercompany catastrophe reinsurance
agreement. In order to provide funding if the State Auto Group were to incur
catastrophe losses in excess of $120.0 million, we have implemented a structured
contingent financing agreement with a financial institution and a syndicate of
other lenders. See "Other Indebtedness and Certain Financing Arrangements --
Description of Our Structured Contingent Financing Agreement."
State Auto National has a reinsurance agreement with State Auto Mutual
under which State Auto Mutual assumes up to $4,950,000 of each liability loss
occurrence in excess of State Auto National's $50,000 of retention and up to
$450,000 of each catastrophe loss occurrence in excess of State Auto National's
$50,000 of retention. State Auto Mutual further provides State Auto National
with an 8.5% quota share within the $50,000 retention on liability coverages and
a 20% quota share on physical damage coverages. Mid-Plains also has a
reinsurance agreement with State Auto Mutual pursuant to which State Auto Mutual
assumes up to $450,000 of each liability loss occurrence in excess of
Mid-Plains' $50,000 of retention.
For the period October 1, 2001, through December 31, 2003, State Auto
Mutual entered into a stop loss reinsurance arrangement with certain of the
pooled companies. Under the stop loss arrangement, State Auto Mutual has agreed
to participate to some extent in the State Auto Pool's quarterly underwriting
losses and gains.
REGULATION
Most states, including all the domiciliary states of the State Auto
Group, have enacted legislation that regulates insurance holding company
systems. Each insurance company in the holding company system is required to
register with the insurance supervisory agency of its state of domicile and
furnish information concerning the operations of companies within the holding
company system that may materially affect the operations, management, or
financial condition of the insurers within the system. Under these laws, the
respective insurance departments may examine any members of the State Auto Group
at any time, require disclosure of material transactions involving insurer
members of the holding company system, and require prior notice and an
opportunity to disapprove of certain "extraordinary" transactions, including,
but not limited to, extraordinary dividends to shareholders. Under these laws,
all transactions within the holding company system affecting any members of the
State Auto Group must be fair and equitable. In addition, approval of the
applicable insurance commissioner is required prior to the consummation of
transactions affecting the control of an insurer.
In addition to being regulated by the insurance department of its state
of domicile, each insurance company is subject to supervision and regulation in
the states in which it transacts business. Such supervision and regulation
-30-
relate to numerous aspects of an insurance company's business operations and
financial condition. The primary purpose of such supervision and regulation is
to ensure financial stability of insurance companies for the protection of
policyholders. The laws of the various states establish insurance departments
with broad regulatory powers relative to granting and revoking licenses to
transact business, regulating trade practices, licensing agents, approving
policy forms and rates, setting reserve requirements, determining the form and
content of required statutory financial statements, prescribing the types and
amount of investments permitted, and requiring minimum levels of statutory
capital and surplus. In addition, all of the states in which the State Auto
Group transacts business have enacted laws which restrict these companies'
underwriting discretion. Examples of these laws include restrictions on policy
terminations, restrictions on agency terminations, and laws requiring companies
to accept any applicant for automobile insurance.
Insurance companies are required to file detailed annual reports with
the supervisory agencies in each of the states in which they do business, and
their business and accounts are subject to examination by such agencies at any
time.
Our insurance subsidiaries are restricted by the insurance laws of
their respective states of domicile as to the amount of dividends they may pay
to us without the prior approval of their respective regulatory authorities. Our
insurance subsidiaries are domiciled in South Carolina, Ohio, Iowa, and South
Dakota. In general, the laws of each of these states provide that an insurer
domiciled in that state must obtain the prior approval of the state insurance
commissioner for the declaration or payment of any dividend that, together with
any other dividends paid within the prior 12-month period, would exceed the
greater of (1) 10% of that subsidiary's statutory surplus as of the prior
calendar year-end and (2) the statutory net income from the subsidiary's
operations for the prior calendar year. Under South Carolina law, if the
dividend is not paid from earned surplus, the threshold is the lesser of (1) and
(2), rather than the greater. Regulatory authorities may, from time to time,
impose other restrictions that may affect the actual amounts available for
dividends. Under these current laws, a total of $35.3 million is available for
payment to us as dividends from our insurance subsidiaries during 2003 without
prior regulatory approval.
Generally, state insurance laws require our insurance subsidiaries to
obtain prior regulatory approval for any dividend paid from other than earned
surplus, which is defined as the amount equal to the insurance subsidiary's
unassigned funds as reported in its most recent statutory financial statements.
In addition, following any dividend, the policyholders' surplus of an insurance
subsidiary must be reasonable in relation to its outstanding liabilities and
adequate for its financial needs, as determined by the state insurance
commissioner of that subsidiary's state of domicile. South Carolina requires
State Auto P&C to give that state's regulatory authorities notice of a dividend
at least five days after the declaration of a dividend and ten days prior to
payment in order to allow them sufficient time to satisfy themselves that
surplus will be reasonable after the dividend payment.
The total statutory surplus of our insurance subsidiaries was $359.3
million as of December 31, 2002, and total statutory net income was $17.0
million for 2002. As of the date of this prospectus, no cash dividends and no
cash dividends in the form of returns of capital were paid in the preceding
twelve months by our insurance subsidiaries to us.
INVESTMENTS
As of September 30, 2003, the market value of our investment portfolio
was $1.5 billion. Our investment portfolio is managed to provide growth of
statutory surplus in order to facilitate increased premium writings over the
long term while maintaining the ability to service current insurance operations.
The primary objectives are to generate income, preserve capital and maintain
liquidity. Our investment portfolio is managed separately from that of State
Auto Mutual and its affiliates, and investment results are not shared by any of
the pooled companies through the pooling arrangement. Stateco performs
investment management services for us and State Auto Mutual and its
subsidiaries, although investment policies implemented by Stateco continue to be
set for each company through the Investment Committee of its Board of Directors.
Stateco receives an investment management fee for its services from each of the
companies based on a percentage of the average investable assets of each
company. The percentage currently set is 0.4% for bonds and 0.5% for equities,
with a 0.1% bonus available if the stock portfolio return exceeds that of the
S&P 500 Index for the same period. During 2002, Stateco received investment
management fees of $2.1 million in the aggregate from State Auto Mutual and its
subsidiaries and $5.0 million from
-31-
our insurance subsidiaries. We believe the fees charged by Stateco are
comparable to those charged by independent investment managers under similar
circumstances.
Our decision to make a specific investment is influenced primarily by
the following factors:
- investment risks;
- general market conditions;
- relative valuations of investment vehicles;
- general market interest rates;
- our liquidity requirements at any given time; and
- our current federal income tax position and relative spread
between after tax yields on tax-exempt and taxable fixed
income investments.
We have investment policy guidelines with respect to purchasing fixed
income investments. These guidelines provide that all bonds purchased must be
rated A or better for quality by two major rating services. In addition, the
maximum investment in any one corporation (both bonds and stocks) may not exceed
5.0% of our admitted assets, other than obligations of the U.S. government or
government agencies, for which there is no limit. Investments in equity
securities are selected based on their potential for appreciation as well as
ability to continue paying dividends.
At September 30, 2003, our equity portfolio totaled $100.5 million. At
September 30, 2003, our fixed income portfolio totaled $1.4 billion. In the
table below, we have provided information about the quality and the scope of our
fixed maturity portfolio as of September 30, 2003:
FAIR MARKET VALUE AVERAGE AMORTIZED FAIR MARKET
% OF PORTFOLIO QUALITY (1) COST VALUE
----------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
INVESTMENT GRADE:
Corporate and Municipals................ 59.0% Aa1 $ 750,133 $ 803,158
U.S. Governments........................ 2.4% Aaa 30,910 32,954
U.S. Government Agencies................ 38.6% Aaa 513,754 525,427
---- ------------- -------------
100% $ 1,294,797 $ 1,361,539
==== ============= =============
----------------------
(1) As rated by Moody's Investors Service.
In the following table, we have set forth our investment results for
the periods indicated:
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2001 2002 2002 2003
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Average Invested Assets (1).. $ 870,864 $1,210,641 $1,190,379 $1,363,087
Net Investment Income (2) ... $ 47,375 $ 59,691 $ 44,214 $ 47,587
Average Yield ............... 5.4% 4.9% 5.0% 4.7%
------------------
(1) Average of the aggregate invested assets at the beginning and end of
each period. Invested assets include fixed maturities at amortized
cost, equity securities and other invested assets at cost and cash
equivalents.
(2) Net investment income is net of investment expenses and does not
include realized or unrealized investment gains or losses or provision
for income taxes.
-32-
STATUTORY RATIOS
Our insurance subsidiaries, as well as our competitors in the property
and casualty insurance industry, file financial statements with the state
insurance departments in each of the states in which they are licensed to do
business. These financial statements are prepared in accordance with statutory
accounting practices prescribed or permitted by each of our insurance
subsidiaries' respective state of domicile in accordance with the NAIC
Accounting Practices and Procedures manual, or NAIC SAP.
The NAIC utilizes a collection of analytical tools designed to assist
state insurance departments with an integrated approach to analyzing the
financial condition of insurance companies operating in their respective states.
These analytical tools include the "loss and loss expense ratio," the "expense
ratio," which together are the components of the "combined ratio," and a series
of 12 ratios known within the insurance industry as the "IRIS" ratios. We refer
to these ratios collectively as the "statutory ratios." The statutory ratios are
derived from financial statements prepared in accordance with NAIC SAP. We
utilize these statutory ratios to monitor the solvency and operating performance
of our insurance subsidiaries from a regulatory perspective and to compare our
performance with the performance of our competitors in the property and casualty
insurance industry.
The combined ratio and the components thereof are commonly used in the
insurance industry as a measure of profitability. The combined ratio is the sum
of (a) the loss and loss expense ratio (the ratio of incurred losses and loss
adjustment expenses to net earned premiums) and (b) the expense ratio (the ratio
of expenses incurred for commissions, premium taxes, administrative and other
underwriting expenses to net written premiums). When the combined ratio is under
100%, underwriting results are generally considered profitable. Conversely, when
the combined ratio is over 100%, underwriting results are considered
unprofitable. The ratio of net premiums written to statutory surplus, or the
leverage ratio, is an IRIS ratio. The higher the leverage ratio, the more risk
an insurance company bears in relation to the amount of statutory surplus
available to absorb its insurance losses. The NAIC has established a "defined
range" for the leverage ratio of 3.0 to 1.0 or less for solvency monitoring
purposes.
The following table sets forth the statutory loss and loss expense
ratios, expense ratios, combined ratios, and leverage ratios for our insurance
subsidiaries, as a group, for the periods indicated, along with the industry
combined ratio for the periods indicated:
AS OF AND FOR
AS OF AND FOR THE THE NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ---------------
2001 2002 2002 2003
------ ------- ------ -----
Loss and loss expense ratio ........................................ 77.4 73.1 74.5 70.0
Expense ratio ...................................................... 27.8 29.2 29.0 28.9
------ ------ ------ -----
Combined ratio ................................................... 105.2 102.3 103.5 98.9
====== ====== ====== =====
Industry combined ratio (1) ........................................ 115.9 107.4
Ratio of net premiums written to statutory capital and surplus (2).. 1.81 2.62 2.89 2.20
------------------------
(1) Based on industry information from A.M. Best Company. Source: Best's
Aggregates & Averages -- Property/Casualty (2002), except for year
ended December 31, 2002, which is BestWeek (August 11, 2003, Issue).
Information for the nine-month comparative periods is not available.
(2) For the nine-month periods ended September 30, calculated based upon
net premiums written for a rolling 12-month period.
These ratios should not be viewed as a substitute for measures
determined in accordance with GAAP. However, we believe that the presentation of
these statutory ratios as measured by us for management purposes enhances the
understanding of the underlying profitability factors of our business. We also
believe that presentation of such information, prepared in accordance with NAIC
SAP, will allow you to compare our results and performance against others in the
property and casualty insurance industry and the industry as a whole.
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EMPLOYEES
As of September 30, 2003, we had 1,962 employees. None of our employees
are covered by any collective bargaining agreement. Our management considers our
relationship with our employees to be excellent.
PROPERTIES
We share our operating facilities with State Auto Mutual pursuant to
the terms of our management and operations agreement. Our corporate headquarters
are located in Columbus, Ohio, in buildings owned by State Auto Mutual that
contain approximately 280,000 square feet of office space. We and State Auto
Mutual also own or lease other office facilities throughout our 26 states of
operations.
LEGAL PROCEEDINGS
MINORITY SHAREHOLDER LITIGATION--OHIO
On June 30, 2003, STFC and State Auto Mutual filed a complaint against
Gregory M. Shepard, who owns approximately 5.1% of our outstanding common
shares, in the United States District Court, Southern District of Ohio, Eastern
Division, seeking injunctive relief on a variety of claims, including enjoining
Mr. Shepard from making material misrepresentations and omissions in his
Schedule 13D filings with the SEC and from violating federal securities laws.
The factual basis for this suit related to a series of press releases and
Schedule 13D filings made by Mr. Shepard regarding proposals or purported offers
to purchase certain amounts of our common shares and to take control of us and
State Auto Mutual. On August 25, 2003, STFC and State Auto Mutual amended their
original complaint against Mr. Shepard to seek injunctive relief on additional
claims, including enjoining Mr. Shepard from making material misrepresentations
and omissions in connection with the Shepard tender offer and from illegally
tipping persons with material, nonpublic information concerning the Shepard
tender offer. On October 16, 2003, STFC and State Auto Mutual dismissed, without
prejudice, this action against Mr. Shepard in light of the United States
District Court's dismissal of Mr. Shepard's lawsuit against STFC, State Auto
Mutual, and their respective directors, discussed in the following paragraph.
On August 21, 2003, one day after Mr. Shepard and his company filed a
Schedule TO with the SEC (see "--Tender Offer by Minority Shareholder"), they
filed a complaint against STFC, State Auto Mutual, and their respective
directors in the United States District Court, Southern District of Ohio,
Eastern Division, seeking (1) declaratory relief that STFC's directors and State
Auto Mutual and its directors violated their respective fiduciary duties to Mr.
Shepard, his company, and STFC's minority shareholders in their consideration of
Mr. Shepard's prior proposals and were likely to engage in breaches of their
respective fiduciary duties in their consideration of the proposed Shepard
tender offer (which tender offer was not commenced until September 11, 2003) and
(2) injunctive relief to enjoin STFC, State Auto Mutual, and their respective
directors and employees from taking actions which would have the effect of
impeding or interfering with the Shepard tender offer. On October 15, 2003, the
United States District Court dismissed this action against STFC, State Auto
Mutual, and their respective directors based on a finding that the District
Court lacked subject matter jurisdiction.
On October 16, 2003, STFC, State Auto Mutual, and their respective
directors filed a complaint against Mr. Shepard and his company in the Common
Pleas Court of Franklin County, Ohio, seeking (1) declaratory relief that
neither STFC, State Auto Mutual, nor their respective directors and officers
owed or violated any fiduciary duties to Mr. Shepard, his company, or STFC's
minority shareholders in responding to the Shepard tender offer; (2) declaratory
relief that neither STFC nor its directors and officers have an obligation to
call a meeting of shareholders under Ohio's Control Share Acquisition statute
with respect to the Shepard tender offer; and (3) compensatory damages in favor
of STFC and State Auto Mutual from Mr. Shepard and his company for knowingly
making misrepresentations in connection with their control bid in violation of
Ohio's control bid statute. On December 19, 2003, Mr. Shepard and his company
filed an answer and counterclaim against STFC, State Auto Mutual, and their
respective directors. Their counterclaim seeks (1) a declaratory judgment
requiring STFC to call a meeting of shareholders under Ohio's Control Share
Acquisition statue with respect to the Shepard tender offer; and (2) injunctive
relief to enjoin STFC, State Auto Mutual, and their respective directors and
employees from taking actions that would have the effect of impeding or
interfering with the Shepard tender offer. On December 22, 2003, STFC and State
Auto Mutual filed a motion to expedite the trial on the declaratory judgment
action.
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MINORITY SHAREHOLDER LITIGATION--INDIANA
On July 27, 2001, Mr. Shepard and American Union Insurance Company
("AUIC"), an Illinois insurance company owned by Mr. Shepard and his brother,
Tracy Shepard, filed a complaint against STFC, State Auto Mutual, Meridian
Insurance Group, and Meridian Insurance Group's former directors in the United
States District Court for the Southern District of Indiana. The factual basis
for this suit arises from the circumstances surrounding the merger of Meridian
Insurance Group with and into a wholly owned subsidiary of State Auto Mutual
(the "Merger"), which was effective June 1, 2001. In their complaint, Mr.
Shepard and AUIC allege claims of (1) breach of fiduciary duty against the
former Meridian Insurance Group directors for entering into the Merger; (2)
breach of contract against STFC and State Auto Mutual with respect to a
confidentiality agreement, dated September 29, 2000, between STFC and AUIC; and
(3) tortious interference against Meridian Insurance Group and one of its former
directors with respect to such confidentiality agreement. On December 3, 2003,
the Court granted the request of Mr. Shepard and AUIC to voluntarily dismiss the
claims of breach of fiduciary duty and tortious interference. Thus, the only
remaining claim in this suit is for breach of the confidentiality agreement
against STFC and State Auto Mutual. Mr. Shepard and AUIC are seeking
yet-to-be-disclosed compensatory damages in this suit. As of December 22, 2003,
the suit continues in its discovery phase.
OTHER
We are a party to a number of lawsuits arising in the ordinary course
of our insurance business. Management believes that the ultimate resolution of
these lawsuits will not, individually or in the aggregate, have a material,
adverse effect on our financial condition.
TENDER OFFER BY MINORITY SHAREHOLDER
On August 20, 2003, Gregory M. Shepard and his wholly owned corporation
filed a Schedule TO with the SEC relating to a proposed tender offer to purchase
8.0 million of our outstanding common shares at a price of $32.00 per share upon
the terms and subject to the conditions set forth in their Schedule TO. The
Shepard tender offer was commenced on September 11, 2003. The Shepard tender
offer has been extended two times by Mr. Shepard and currently is scheduled to
expire at 5:00 p.m., New York City time, on February 13, 2004, unless further
extended by Mr. Shepard. See also "--Legal Proceedings" for information
concerning litigation related to the Shepard tender offer.
Mr. Shepard's acceptance and purchase of any tendered common shares is
conditioned upon, among other things, the satisfaction of the following
conditions, which we refer to as the "essential conditions":
- State Auto Mutual's transferring control of State Auto Mutual
and STFC to Mr. Shepard and his company, including giving Mr.
Shepard and his company the right to designate a majority of
the members of the Board of Directors and each Board committee
of State Auto Mutual and its affiliates, including STFC;
- State Auto Mutual's financing the Shepard tender offer by
State Auto Mutual borrowing through the issuance of surplus
notes in amounts and upon terms and conditions determined by
Mr. Shepard and his company in their reasonable discretion;
and
- State Auto Mutual's giving all other approvals and consents
required to consummate the Shepard tender offer upon terms and
conditions determined by Mr. Shepard and his company in their
reasonable discretion.
On September 1, 2003, our Board of Directors and a special committee of
its independent directors were informed that State Auto Mutual's Board of
Directors, based upon the unanimous recommendation of a special committee of its
independent directors, had unanimously determined to:
- oppose and reject the Shepard tender offer because it is not
in the best interests of State Auto Mutual, its policyholders,
and other constituencies;
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- decline and refuse to turn over control of State Auto Mutual
and its affiliates, including STFC, to Mr. Shepard because
such transfer of control would not be in the best interests of
State Auto Mutual, its policyholders, and other
constituencies;
- decline and refuse to issue surplus notes or to provide other
financing to Mr. Shepard or his company (Mr. Shepard and his
company intend to have State Auto Mutual borrow at least $256
million through the issuance of surplus notes to finance the
Shepard tender offer); and
- vote State Auto Mutual's common shares of STFC (approximately
67%) against approval of the Shepard tender offer if submitted
to a vote of STFC's shareholders.
At its September 1, 2003, meeting, our Board of Directors and its
special committee of independent directors each unanimously determined that the
Shepard tender offer was impossible to complete because each of the essential
conditions could not be met and that the Shepard tender offer is illusory.
Accordingly, our Board of Directors has unanimously recommended to our
shareholders that they reject the Shepard tender offer and not tender their
shares to Mr. Shepard or his company pursuant to the Shepard tender offer.
The foregoing discussion of the Shepard tender offer is not intended to
be complete. For complete information concerning the Shepard tender offer and
its terms and conditions, you should read the Schedule TO, as amended, filed by
Mr. Shepard and his company with the SEC, which is available at no charge on the
SEC's website at http://www.sec.gov. You may also obtain at no charge our
Board's recommendation statement on Schedule 14D-9, as amended, at the SEC's
website. See "Where You Can Find More Information." The information contained in
the Schedule TO and the information contained in the Schedule 14D-9 are not a
part of this prospectus.
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MANAGEMENT
Our directors and executive officers as of November 30, 2003, are as
follows:
NAME AGE POSITION
---- --- ---------------------------------------------------------------
Robert H. Moone.................................. 60 Director, Chairman, President, and Chief Executive Officer
John R. Lowther.................................. 53 Director, Senior Vice President, Secretary, and General Counsel
David J. D'Antoni................................ 58 Director
Urlin G. Harris, Jr.............................. 67 Director
Paul W. Huesman.................................. 67 Director
William J. Lhota................................. 63 Director
S. Elaine Roberts................................ 51 Director
Richard K. Smith................................. 58 Director
Paul S. Williams................................. 43 Director
Steven J. Johnston............................... 44 Senior Vice President, Treasurer, and Chief Financial Officer
Mark A. Blackburn................................ 51 Senior Vice President
Terrence L. Bowshier............................. 50 Vice President
James E. Duemey.................................. 56 Vice President and Investment Officer
William D. Hansen................................ 37 Vice President
Steven R. Hazelbaker............................. 47 Vice President
Noreen W. Johnson................................ 54 Vice President
Robert A. Lett................................... 63 Vice President
John B. Melvin................................... 53 Vice President
Cathy B. Miley................................... 54 Vice President
Richard L. Miley................................. 49 Vice President
John M. Petrucci................................. 44 Vice President
Cynthia A. Powell................................ 43 Vice President and Comptroller
ROBERT H. MOONE, DIRECTOR, CHAIRMAN OF THE BOARD, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER. Mr. Moone has been a director of our company since 1998, our
Chairman of the Board since 2001, our Chief Executive Officer since 1999, and
our President since 1996. He is also the Chairman of the Board (since 2001),
Chief Executive Officer (since 1999), and President (since 1996) of State Auto
Mutual. Mr. Moone has been with the State Auto Group since 1970.
JOHN R. LOWTHER, DIRECTOR, SENIOR VICE PRESIDENT, SECRETARY, AND
GENERAL COUNSEL. Mr. Lowther has been a director of our company since 1991, a
Senior Vice President of our company since 2001, and our Secretary and General
Counsel since 1991, and from 1991 to 2001 he served as a Vice President of our
company. He is also a Senior Vice President (since 2001) and the Secretary and
General Counsel (since 1989) of State Auto Mutual, and from 1989 to 2001 he
served as a Vice President of State Auto Mutual. Mr. Lowther has been with the
State Auto Group since 1986.
DAVID J. D'ANTONI, DIRECTOR. Mr. D'Antoni has been a director of our
company since 1995 and is a member of our Audit, Independent, and Compensation
Committees. Since 1999, Mr. D'Antoni has served as a Senior Vice President and
the Group Operating Officer of Ashland, Inc., an entity involved in oil refining
and marketing, highway construction, automotive after market products, specialty
chemicals, and chemical and plastics distribution. From 1988 to 1999, Mr.
D'Antoni served as a Senior Vice President of Ashland, Inc., and as the
President of Ashland Chemical, a division of Ashland, Inc.
URLIN G. HARRIS, JR., DIRECTOR. Mr. Harris has been a director of our
company since 1991 and is a member of our Investment Committee. Since 1999, Mr.
Harris has served as the Secretary and Treasurer of Aspen Ski & Board Co., a ski
equipment retailer. From 1991 until his retirement in 1997, Mr. Harris served as
an executive officer of our company. Prior to and during that time period, Mr.
Harris served as an officer of State Auto Mutual. Mr. Harris has been with State
Auto Mutual since 1962.
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PAUL W. HUESMAN, DIRECTOR. Mr. Huesman has been a director of our
company since 1991 and is a member of our Investment Committee. Since January
2003, he has been an agent with Huesman-Schmid Insurance Agency, Inc., an
insurance agency. Prior to that time, and for more than five years, Mr. Huesman
was the President of Huesman-Schmid Insurance Agency, Inc.
WILLIAM J. LHOTA, DIRECTOR. Mr. Lhota has been a director of our
company since 1994 and is a member of our Audit, Compensation, and Nominating
and Governance Committees. He is also a director of Huntington Bancshares, Inc.,
a bank holding company. Since 2002, Mr. Lhota has been a principal with Lhota
Services, a firm providing ethics consulting and arbitration and mediation
services. From 2000 to 2001, Mr. Lhota served as President of Energy Delivery, a
division of American Electric Power. From 1989 to 2001, he served as Executive
Vice President of American Electric Power Service Corporation, a management,
technical, and professional subsidiary of American Electric Power.
S. ELAINE ROBERTS, DIRECTOR. Ms. Roberts has been a director of our
company since 2002 and is a member of our Nominating and Governance,
Independent, and Investment Committees. Since January 2003, she has served as
the President and Chief Executive Officer of the Columbus Regional Airport
Authority, which manages three airport facilities. From 2000 to 2003, she served
as the Executive Director of the Columbus Airport Authority. From 1994 to 2000,
she served as the Executive Director of the Rhode Island Airport Corporation,
which managed six airport facilities.
RICHARD K. SMITH, DIRECTOR. Mr. Smith has been a director of our
company since 1999 and is a member of our Audit, Compensation, and Investment
Committees. In 1997, Mr. Smith retired as a Partner of KPMG, LLP, a public
accounting firm. Prior to that time and for more than five years, he was a
Partner of KPMG, LLP.
PAUL S. WILLIAMS, DIRECTOR. Mr. Williams has been a director of our
company since August 2003 and is a member of our Independent and Nominating and
Governance Committees. Since 1995, Mr. Williams has served as an officer of
Cardinal Health, Inc., a provider of products and services to healthcare
providers and manufacturers, and is currently its Executive Vice President and
General Counsel.
STEVEN J. JOHNSTON, SENIOR VICE PRESIDENT, TREASURER, AND CHIEF
FINANCIAL OFFICER. Mr. Johnston has been a Senior Vice President of our company
since 1999 and our Treasurer and Chief Financial Officer since 1997. From 1995
to 1999, he served as a Vice President of our company. He is also a Senior Vice
President (since 1999) and the Treasurer and Chief Financial Officer (since
1997) of State Auto Mutual. From 1995 to 1999, he served as a Vice President of
State Auto Mutual. Mr. Johnston has been with the State Auto Group for 18 years.
MARK A. BLACKBURN, SENIOR VICE PRESIDENT. Mr. Blackburn has been a
Senior Vice President of our company since 2001. From 1999 to 2001, he served as
a Vice President of our company. Mr. Blackburn has primary responsibility for
our insurance operations. He is also a Senior Vice President (since 2001) of
State Auto Mutual. From 1999 to 2001, he served as a Vice President of State
Auto Mutual. From 1996 to 1999, Mr. Blackburn served as Executive Vice President
of Grange Mutual Casualty Insurance Company.
TERRENCE L. BOWSHIER, VICE PRESIDENT. Mr. Bowshier has been a Vice
President of our company and State Auto Mutual since 1991. Mr. Bowshier is
responsible for investor relations and expense management. Mr. Bowshier has been
with the State Auto Group since 1977.
JAMES E. DUEMEY, VICE PRESIDENT AND INVESTMENT OFFICER. Mr. Duemey has
been a Vice President and the Investment Officer of our company and State Auto
Mutual since 1991. Mr. Duemey has been with the State Auto Group since 1980.
WILLIAM D. HANSEN, VICE PRESIDENT. Mr. Hansen has been a Vice President
of our company and State Auto Mutual since 2000. Mr. Hansen is our company's
chief actuary. From 1995 to 2000, Mr. Hansen served as an Assistant Vice
President of State Auto Mutual. Mr. Hansen has been with the State Auto Group
since 1990.
STEVEN R. HAZELBAKER, VICE PRESIDENT. Mr. Hazelbaker has been a Vice
President of our company and State Auto Mutual since 2001. Mr. Hazelbaker is
responsible for our branch and regional operations. From 1995 to
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2001, Mr. Hazelbaker was an officer of Meridian Insurance Group and Meridian
Mutual, last serving as Chief Operating Officer and Senior Vice President of
those companies.
NOREEN W. JOHNSON, VICE PRESIDENT. Ms. Johnson has been a Vice
President of our company and State Auto Mutual since 1998. Ms. Johnson is
responsible for information technology and communications. From 1997 to 1998,
Ms. Johnson served as an Assistant Vice President of State Auto Mutual. Ms.
Johnson has been with the State Auto Group since 1992.
ROBERT A. LETT, VICE PRESIDENT. Mr. Lett has been a Vice President of
our company since 1998 and a Vice President of State Auto Mutual since 1988. Mr.
Lett is responsible for human resources and administrative services. Mr. Lett
has been with the State Auto Group since 1974.
JOHN B. MELVIN, VICE PRESIDENT. Mr. Melvin has been a Vice President of
our company since 1998 and a Vice President of State Auto Mutual since 1993. Mr.
Melvin is responsible for our claims department. Mr. Melvin has been with the
State Auto Group since 1980.
CATHY B. MILEY, VICE PRESIDENT. Ms. Miley has been a Vice President of
our company since 1998 and a Vice President of State Auto Mutual since 1995. Ms.
Miley is responsible for branch and regional operations. Ms. Miley is the spouse
of Richard L. Miley. Ms. Miley has been with the State Auto Group since 1977.
RICHARD L. MILEY, VICE PRESIDENT. Mr. Miley has been a Vice President
of our company since 1998 and a Vice President of State Auto Mutual since 1995.
Mr. Miley is responsible for Core Agencies. Mr. Miley is the spouse of Cathy B.
Miley. Mr. Miley has been with the State Auto Group since 1977.
JOHN M. PETRUCCI, VICE PRESIDENT. Mr. Petrucci has been a Vice
President of our company and State Auto Mutual since 2000 and has been with the
State Auto Group since 1996. Mr. Petrucci is responsible for marketing and
sales.
CYNTHIA A. POWELL, VICE PRESIDENT. Ms. Powell has been a Vice President
of our company and State Auto Mutual since 2000. Ms. Powell also serves as our
company's comptroller. From 1997 to 2000, she served as an Assistant Vice
President of our company. From 1996 to 2000, she served as an Assistant Vice
President of State Auto Mutual. Ms. Powell has been with the State Auto Group
since 1990.
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OTHER INDEBTEDNESS AND CERTAIN FINANCING ARRANGEMENTS
DESCRIPTION OF OUR OUTSTANDING TRUST PREFERRED CAPITAL SECURITIES AND
SUBORDINATED DEBENTURES
On May 22, 2003, STFC Capital Trust I, our Delaware business trust
subsidiary, issued $15.0 million liquidation amount of its capital securities to
a third party. In connection with STFC Capital Trust's issuance of the trust
preferred capital securities and the related purchase by us of all of STFC
Capital Trust's common securities, we issued to STFC Capital Trust $15.5 million
aggregate principal amount of Floating Rate Junior Subordinated Debt Securities
due 2033. The sole assets of STFC Capital Trust are the subordinated debentures
and any interest paid thereon. Interest on the trust preferred capital
securities and common securities is payable quarterly at a rate equal to the
three-month LIBOR rate, adjusted quarterly, plus 4.20% (5.37% at December 22,
2003). Prior to May 2008, the interest rate may not exceed 12.5% per annum. The
interest rate and interest payment dates on the subordinated debentures are the
same as the interest rate and interest payment dates on the trust preferred
capital securities and common securities.
The trust preferred capital securities and common securities are
mandatorily redeemable on May 23, 2033, and may be redeemed at any time on and
after May 23, 2008, at a redemption price equal to 100% of the principal amount
thereof plus unpaid interest. The trust preferred capital securities and common
securities may be redeemed in whole, but not in part, at any time within 90 days
following the occurrence of a "Tax Event" or "Investment Company Event" (as
defined in the declaration of trust) (a) if such Tax Event or Investment Company
Event occurs on or after May 23, 2008, at a redemption price equal to 100% of
the principal amount thereof plus unpaid interest, and (b) if such Tax Event or
Investment Company Event occurs prior to May 23, 2008, at a redemption price
equal to the greater of 100% of the principal amount thereof plus accrued
interest and a "make-whole" amount. The subordinated debentures are subject to
these same redemption terms. Our obligations under the subordinated debentures
and related agreements, taken together, constitute a full and unconditional
guarantee of payments due on the trust preferred capital securities and common
securities.
We have the right, at any time, to defer payments of interest on the
subordinated debentures for up to 20 consecutive quarterly payment periods.
Consequently, distributions on the trust preferred capital securities and common
securities would be deferred (though such distributions would continue to accrue
with interest since interest would accrue on the subordinated debentures during
any such extended interest payment period). In no case may the deferral of
payments and distributions extend beyond the stated maturity dates of the
respective securities. During such deferments, we may not declare or pay any
dividends on, or purchase any of, our capital stock, make any principal or
interest payments on debt securities that rank in all respects equally with or
subordinated to the subordinated debentures, or make any payment under
guarantees that rank in all respects equally with or subordinated to our
guarantee of the preferred trust capital securities and common securities.
The subordinated debentures are unsecured and subordinated to all of
our existing and future senior indebtedness, including the notes offered hereby.
DESCRIPTION OF OUR STRUCTURED CONTINGENT FINANCING AGREEMENT
In order to provide funding if the State Auto Group were to incur
catastrophe losses under the intercompany catastrophe reinsurance agreement in
excess of $120.0 million, we have entered into a credit agreement that will
provide us with a structured contingent financing arrangement with a financial
institution and a syndicate of other lenders to provide up to $100.0 million for
catastrophe reinsurance purposes. In the event of such a loss, this arrangement
provides that we would sell redeemable preferred shares to SAF Funding
Corporation, a special purpose company that would borrow the money necessary for
such purchase from the lenders. We would then contribute to State Auto P&C the
funds received from the sale of our preferred shares. State Auto P&C would use
the contributed capital to pay its direct catastrophe losses and losses assumed
under the catastrophe reinsurance agreement. We are obligated to repay SAF
Funding (which would repay the lenders) by redeeming the preferred shares over a
five-year period. In the event we default, the obligation to repay SAF Funding
has been secured by a put agreement among us, State Auto Mutual and the lenders
under which State Auto Mutual would be obligated to either purchase the
preferred shares from SAF Funding or repay the lenders for the loan(s)
outstanding.
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Any of our preferred shares issued in a structured contingent financing
transaction would be subordinate to all of our senior indebtedness, including
the notes offered hereby.
DESCRIPTION OF OUR OUTSTANDING INDEBTEDNESS TO AFFILIATES
In 1999, we entered into a line of credit agreement with State Auto
Mutual pursuant to which State Auto Mutual loaned $45.5 million to us to fund
our then-existing stock repurchase program. Principal on this loan, which is
currently $45.5 million, is due on demand, with final payment due on or prior to
December 31, 2005. The interest rate for this loan is adjusted annually on each
January 1 to reflect adjustments in the then-current prime lending rate as well
as our current financial position (2.5% as of December 22, 2003). This loan is
unsecured. Any outstanding indebtedness under this line of credit would rank
pari passu with the notes offered hereby.
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DESCRIPTION OF NOTES
The original notes were, and the exchange notes will be, issued under
an indenture dated as of November 13, 2003 (the "Indenture"), between us and
Fifth Third Bank, as trustee (the "Trustee"). The following description is a
summary of certain provisions of the Indenture. It does not include all of the
information included in the Indenture and may not include all of the information
that you would consider important. This summary is qualified in its entirety by
reference to the Trust Indenture Act of 1939, as amended (the "TIA"), and to all
of the provisions of the Indenture, including the definitions therein of terms
and those terms made a part of the Indenture by reference to the TIA. As used in
this "Description of Notes," the terms "we," "our," and "us" refer to State Auto
Financial Corporation and not any of its subsidiaries.
Definitions of certain terms are set forth under "--Certain
Definitions" and throughout this description. Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Indenture, and those definitions are incorporated herein by reference.
GENERAL
We have issued $100.0 million principal amount of the original notes in
the private offering. The notes will mature on November 15, 2013, and will
accrue interest at a rate of 6 1/4% per annum. The notes will bear interest from
November 13, 2003, payable on May 15 and November 15 of each year, beginning May
15, 2004. We will make each interest payment to the holders of record of the
notes at the close of business on the May 1 or November 1 preceding such
interest payment date. Interest will be computed on the basis of a 360-day year
of twelve 30-day months.
The notes will be our general unsecured obligations ranking senior to
all of our existing and future subordinated indebtedness and pari passu with all
of our existing and future senior indebtedness. As of September 30, 2003, after
giving pro forma effect to this offering and the application of the net proceeds
therefrom, we would have had $15.5 million of subordinated indebtedness and
$45.5 million of senior indebtedness outstanding. Although we currently have no
secured indebtedness, the notes will be effectively subordinated to any of our
future secured indebtedness to the extent of the value of the assets securing
any such secured indebtedness. See "Risk Factors--If we become insolvent,
holders of secured debt would be paid first and would receive payments from our
assets used as security before you would receive payments." Additionally, the
Indenture will not limit our ability to incur unsecured indebtedness and will
only limit our ability to incur secured indebtedness if such indebtedness will
be secured by the Capital Stock of certain of our Subsidiaries.
The notes will not be guaranteed by any of our Subsidiaries.
Accordingly, the notes will be effectively subordinated to all of our
Subsidiaries' existing and future indebtedness and other liabilities. See "Risk
Factors--The notes will be effectively subordinated to all indebtedness and
other liabilities of our subsidiaries." As of September 30, 2003, our
Subsidiaries had $1.2 billion of indebtedness and other liabilities outstanding.
The Indenture will not limit the ability of our Subsidiaries to incur additional
indebtedness unless such indebtedness will be secured by the Capital Stock of
certain of our Subsidiaries. As an insurance holding company, our ability to
meet debt service obligations, including that of the notes, depends primarily on
the receipt of sufficient funds from our insurance Subsidiaries. Our insurance
Subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amount pursuant to the notes or to make any
funds available therefor, whether as dividends, loans, or other payments to us.
In addition, since our Subsidiaries are insurance companies, their ability to
pay dividends to us is subject to regulatory limitations. See "Risk Factors--
The inability of our subsidiaries to pay us dividends could adversely affect our
ability to pay interest and principal on the notes."
Interest on overdue principal and premium, if any, and, to the extent
permitted by law, on overdue installments of interest will accrue at the rate of
interest borne by the notes. The original notes and the exchange notes will be
treated as a single series of securities for all purposes under the Indenture,
including waivers, amendments and redemptions.
Principal and premium, if any, and interest on the notes will be
payable at our office or agency maintained for such purposes in New York City.
The Indenture will provide that we may pay interest on the notes by check mailed
to a holder at its registered address or by wire transfer of immediately
available funds. However, we will
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make payments in immediately available funds while the notes are maintained in
the form of global notes as described below under "--Same-Day Settlement and
Payment."
If any interest payment date or redemption date or the maturity date of
the notes is not a business day at any place of payment, then payment of the
principal, premium, if any, and interest on the notes may be made on the next
business day at that place of payment.
ADDITIONAL NOTES
The Indenture does not limit the amount of the notes that we may issue
under the Indenture, and we may issue additional notes ("Additional Notes")
under the Indenture having the same terms in all respects as the notes (or in
all respects except for the payment of interest scheduled and paid prior to the
date of issuance of the notes). The original notes were initially issued in the
aggregate principal amount of $100.0 million. The notes and the Additional
Notes, if any, will be treated as a single class for all purposes of the
Indenture, including waivers, amendments, and redemptions. Unless the context
otherwise requires, for all purposes of the Indenture and this "Description of
Notes," references to the notes include any Additional Notes actually issued.
OPTIONAL REDEMPTION
We may redeem the notes in whole at any time or in part from time to
time, at our option, on at least 30 but not more than 60 days' prior written
notice, at a redemption price equal to the greater of:
- 100% of the principal amount of such notes being redeemed on
the redemption date or
- the Make-Whole Amount,
plus, in each case, accrued and unpaid interest on the notes to the redemption
date.
In the event that we are redeeming less than all of the notes, the
selection of the notes for redemption will be made by the Trustee by such method
as the Trustee, in its sole discretion, deems fair and appropriate. No partial
redemption will reduce the principal amount at maturity of a note not redeemed
to less than $1,000.
Unless we default in our payment of the redemption price, on and after
the redemption date, interest will cease to accrue on the notes or portions of
the notes called for redemption and those notes will cease to be outstanding.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Reference Treasury Dealer as having a maturity comparable to the
remaining term of the notes to be redeemed that would be utilized, at the time
of selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of such notes.
"Comparable Treasury Price" means, with respect to any redemption date,
(1) the average of the four Reference Treasury Dealer Quotations for such
redemption date, after excluding the highest and lowest such Reference Treasury
Dealer Quotations, or (2) if the Trustee obtains fewer than four such Reference
Treasury Dealer Quotations, the average of all such quotations.
"Make-Whole Amount" means the sum of the present values of the
remaining scheduled payments of principal of the notes to be redeemed on the
redemption date and the scheduled payments of interest thereon from the
redemption date (but excluding any interest accrued to the redemption date) to
originally scheduled maturity, discounted to the redemption date (assuming a
360-day year consisting of twelve 30-day months) on a semi-annual basis at the
Special Adjusted Treasury Rate from the respective dates after the redemption
date on which such principal and interest would have been payable.
"Reference Treasury Dealer" means McDonald Investments, Inc., and its
successor or, at our option, another primary independent U.S. government
securities dealer in New York City selected by us.
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"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and ask prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third business day preceding such redemption date.
"Special Adjusted Treasury Rate" means, with respect to any date of
redemption, the rate per annum equal to the semi-annual equivalent yield to
maturity of the Comparable Treasury Issue, assuming a price for the Comparable
Treasury Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such date of redemption, plus 25 basis points.
SINKING FUND; MANDATORY REDEMPTION
We are not required to make any mandatory redemption or sinking fund
payments with respect to the notes.
CERTAIN COVENANTS
LIMITATION ON LIENS. We will not, and will not permit any Restricted
Subsidiary to, incur or suffer to exist any Lien on the Capital Stock of any
Restricted Subsidiary to secure indebtedness without making, or causing such
Restricted Subsidiary to make, effective provision for securing the notes
equally and ratably with such indebtedness so long as such indebtedness is so
secured.
We will not be prohibited from issuing our preferred shares in
connection with our structured contingent financing arrangement with a syndicate
of lenders, which shares would be pledged as collateral for a loan from such
lenders to a special purpose corporation. See "Other Indebtedness and Certain
Financing Arrangements -- Description of Our Structured Contingent Financing
Agreement."
"Restricted Subsidiary" means any Subsidiary which is incorporated or
organized under the laws of any State of the United States of America or the
District of Columbia, except (a) a Subsidiary that has total assets which are
less than 10% of our total consolidated assets determined as of our most recent
fiscal year-end balance sheet filed with the SEC and (b) 518 Property Management
and Leasing, LLC. As of the date of this prospectus, our Subsidiaries that meet
the definition of "Restricted Subsidiary" are State Auto P&C and Milbank.
LIMITATION ON SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. Neither
we nor any Restricted Subsidiary will be permitted to issue, sell, transfer, or
otherwise dispose of (except to us or a Wholly Owned Subsidiary) any shares of,
securities convertible into, or warrants, rights, or options to subscribe for or
purchase shares of, Capital Stock (other than preferred stock having no voting
rights and director's qualifying shares required by applicable law) of a
Restricted Subsidiary, except for any issuance, sale, transfer, or other
disposition (a) for cash or property which, in the opinion of our Board of
Directors acting in good faith, is at least equal to the fair market value of
such shares of, securities convertible into, or warrants, rights, or options to
subscribe for or purchase shares of, Capital Stock or (b) to comply with any
applicable law or order of a court or governmental or insurance regulatory
authority other than an order issued at our request or the request of any of our
Subsidiaries.
CONSOLIDATION, MERGER AND SALE OF ASSETS. We will not consolidate with
or merge into any other Person or convey, transfer, or lease our properties and
assets substantially as an entirety to any Person, and we will not permit any
Person to consolidate with or merge into us or convey, transfer, or lease its
properties and assets substantially as an entirety to us, unless:
(a) in case we consolidate with or merge into another Person
or convey, transfer, or lease our properties and assets substantially
as an entirety to any Person, the Person formed by such consolidation
or into which we are merged or the Person which acquires by conveyance
or transfer, or which leases, our properties and assets substantially
as an entirety is a corporation validly existing under the laws of the
United States of America, any State thereof, or the District of
Columbia and expressly assumes, by an indenture supplemental to the
Indenture, executed and delivered to the Trustee, in form satisfactory
to the Trustee, the due and punctual payment of the principal of and
any premium, if any, and interest on all the notes and the performance
or observance of every covenant of the Indenture and the Registration
Rights Agreement to be performed or observed by us;
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(b) immediately after giving effect to such transaction and
treating any indebtedness that becomes our obligation or an obligation
of any of our Subsidiaries as a result of such transaction as having
been incurred by us or such Subsidiary at the time of such transaction,
no Default or Event of Default has occurred and is continuing; and
(c) we deliver to the Trustee an officers' certificate and an
opinion of counsel, each stating that such consolidation, merger,
conveyance, transfer, or lease and, if a supplemental indenture is
required in connection with such transaction, such supplemental
indenture comply with the Indenture and that all conditions precedent
in the Indenture relating to such transaction have been complied with.
Upon any consolidation of us with, or merger of us into, any other
Person or any conveyance, transfer, or lease of our properties and assets
substantially as an entirety in accordance with the preceding paragraph, the
successor Person formed by such consolidation or into which we are merged or to
which such conveyance, transfer, or lease is made will succeed to, and be
substituted for, and may exercise every right and power of, us under the
Indenture with the same effect as if such successor Person had been named as us
therein, and thereafter, except in the case of a lease, the predecessor Person
will be relieved of all obligations and covenants under the Indenture and the
notes.
SEC REPORTS. So long as the notes are outstanding, whether or not we
are then subject to Section 13(a) or 15(d) of the Exchange Act, we will
electronically file with the SEC the annual reports, quarterly reports, and
other periodic reports that we would be required to file with the SEC pursuant
to Section 13(a) or 15(d) if we were so subject, and such documents will be
filed with the SEC on or prior to the respective dates (the "Required Filing
Dates") by which we would be required so to file such documents if we were so
subject, unless, in any case, if such filings are not then permitted by the SEC.
If such filings with the SEC are not then permitted by the SEC, or such
filings are not generally available on the Internet free of charge, we will,
within 15 days of each Required Filing Date, transmit by mail to holders of the
notes, as their names and addresses appear in the note register, without cost to
such holders, and file with the Trustee copies of the annual reports, quarterly
reports and other periodic reports that we would be required to file with the
SEC pursuant to Section 13(a) or 15(d) of the Exchange Act if we were so
subject, and promptly upon written request, supply copies of such documents to
any prospective holder or beneficial owner at our cost.
In addition, we have agreed that, for so long as any notes remain
outstanding and constitute "restricted securities" under Rule 144, we will
furnish to the holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Act.
EVENTS OF DEFAULT, NOTICE, AND WAIVER
Each of the following constitutes an Event of Default with respect to
the notes (whatever the reason for such Event of Default and whether it is
voluntary or involuntary or effected by operation of law or pursuant to any
judgment, decree, or order of any court or any order, rule, or regulation of any
administrative or governmental body):
(a) default in the payment of any interest on the notes when
it becomes due and payable, and continuance of such default for a
period of 30 days;
(b) default in the payment of the principal of or any premium
on the notes when due, whether at maturity, upon redemption, by
declaration or otherwise;
(c) failure to perform any other covenant in the Indenture and
continuance of such default or breach for 60 days after written notice
from the Trustee or holders of at least 25% in aggregate principal
amount of the notes;
(d) a default under any bond, debenture, note, or other
evidence of indebtedness for money borrowed by us having an aggregate
principal amount outstanding of at least $20.0 million, or under any
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mortgage, indenture, or instrument under which there may be issued or
by which there may be secured or evidenced any indebtedness for money
borrowed by us having an aggregate principal amount outstanding of at
least $20.0 million, whether such indebtedness now exists or shall
hereafter be created, which default is a payment default upon final
maturity of such indebtedness or shall have resulted in such
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable, without
such indebtedness having been discharged or such acceleration having
been rescinded or annulled within 30 days following such default or
acceleration; or
(e) certain events of bankruptcy, insolvency, or
reorganization.
If an Event of Default (other than in clause (e) of the preceding
paragraph) has occurred and is continuing, either the Trustee or the holders of
at least 25% in aggregate principal amount of the notes then outstanding, by
written notice to us (and to the Trustee, if the notice is given by the
holders), may, and the Trustee at the request of the holders shall, declare the
principal amount of and accrued interest and premium, if any, on the notes
immediately due and payable. If an Event of Default specified in clause (e) of
the preceding paragraph occurs, the principal amount of and accrued interest and
premium, if any, on the notes will automatically, without any declaration or
other action on the part of the Trustee or any holder of the notes, become
immediately due and payable.
The holders of at least a majority in aggregate principal amount of the
outstanding notes, by written notice to the Trustee, may rescind and annul a
declaration of acceleration and its consequences if:
(a) all existing Events of Default, other than the nonpayment
of the principal of and premium, if any, and interest on such notes
that have become due solely by such declaration of acceleration, have
been cured or waived; and
(b) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction.
If any Default occurs and is continuing and is known to the Trustee,
the Trustee will give to the holders of the notes notice of such Default as and
to the extent provided by the Indenture and the TIA.
MODIFICATION
The Indenture and the rights of holders of the notes may be amended or
supplemented, and noncompliance in any particular instance with any provision
may be waived, in each case by us and the Trustee with the written consent of
the holders of not less than a majority of the aggregate principal amount of the
notes then outstanding; provided, however, that no such amendment, supplement,
or waiver will:
- change the stated maturity of the principal of or any
installment of interest on any note;
- reduce the principal amount of or any premium on any note;
- reduce the rate or extend the time of payment of interest on
any note;
- reduce any premium payable upon the redemption of any note;
- make any change in the percentage of the aggregate principal
amount of notes required for amendments, supplements, or
modifications of the Indenture or waivers of past defaults of
covenants;
- change the place or currency of payment of principal of or any
premium or interest on any note; or
- impair the right of any holder to institute suit for the
enforcement of any payment on or with respect to any note on
or after the stated maturity of the note,
without the consent of the holder of each note affected.
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The Indenture provides that we and the Trustee may enter into
supplemental indentures or amend or supplement the Indenture without notice to
or the consent of any holder of the notes to:
- provide for the assumption of our obligations to the holders
of notes in case of a merger or consolidation permitted by the
Indenture;
- evidence the assumption by a successor corporation of our
obligations, and make covenants for the protection of the
holders of the notes;
- cure any ambiguity or correct any inconsistency in the
Indenture or the notes;
- add to the covenants of ours for the benefit of the holders or
to surrender any right or power conferred in the Indenture
upon us;
- make any change that does not adversely affect the rights of
any holder;
- modify or amend the Indenture to permit the qualification of
supplemental indentures; or
- comply with any requirement of the SEC in connection with
qualification of the Indenture under the TIA or otherwise.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE; COVENANT DEFEASANCE
The Indenture will be discharged upon cancellation of all outstanding
notes or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the repayment or redemption thereof.
The Indenture provides that we, at our option:
(a) will be discharged from any and all obligations in respect
of the notes, except for certain obligations to register the transfer
or exchange of the notes; replace stolen, lost, or mutilated notes;
maintain paying agencies; and hold moneys for payment in trust; or
(b) need not comply with certain restrictive covenants of the
Indenture, including those described under "--Certain Covenants,"
without such noncompliance being deemed or resulting in an Event of
Default,
if, in each case, we deposit, or cause to be deposited, irrevocably with the
Trustee as trust funds in trust for the purpose of making the following
payments, specifically pledged as security for and dedicated solely to the
benefit of the holders of the notes, money or U.S. Government Obligations or any
combination thereof, which, through the payment of interest thereon and
principal thereof in accordance with their terms will provide, not later than
one day before the due date of any payment of money, an amount in cash
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay all the principal of and interest and premium, if any, on
the notes on the dates such payments are due in accordance with the terms of the
notes.
To exercise any such option, among other things:
- we must deliver to the Trustee an officers' certificate and an
opinion of counsel that will state (1) with respect to clause
(a), that we have received from, or there has been published
by, the Internal Revenue Service a ruling or, since the Issue
Date, there has been a change in applicable federal income tax
law, which, in either case, in the opinion of counsel provides
that the holders of the notes will not recognize income, gain,
or loss for federal income tax purposes as a result of such
deposit, defeasance, and discharge and will be subject to
federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit,
defeasance, and discharge had not occurred or (2) with respect
to clause (b), that the holders of the notes will not
recognize income, gain, or loss for
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federal income tax purposes as a result of such deposit,
defeasance, and discharge and will be subject to federal
income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit,
defeasance, and discharge had not occurred;
- no Default or Event of Default (other than specified in clause
(e) of the first paragraph under " -- Events of Default,
Notice, and Waiver") has occurred and is continuing at the
time of such deposit or, with regard to any such event
specified in clause (e) of the first paragraph under " --
Events of Default, Notice, and Waiver," at any time on or
prior to the 90th day after the date of such deposit (it being
understood that this condition will not be deemed satisfied
until after such 90th day);
- such exercise may not result in a breach or violation of, or
constitute a default under, the Indenture or any other
material agreement or instrument to which we are a party or by
which we are bound; and
- we must deliver to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent
with respect to such exercise have been complied with.
THE TRUSTEE
The Trustee in its individual or any other capacity may become the
owner or pledgee of notes and may otherwise deal with us or any Affiliate of
ours with the same rights it would have if it were not Trustee. However, in the
event that the Trustee acquires any conflicting interest, it must eliminate such
conflict within 90 days, apply to the SEC for permission to continue as Trustee
or resign.
The holders of at least a majority in aggregate principal amount of the
then original notes will have the right to direct the time, method, and place of
conducting any proceeding for exercising any remedy available to the applicable
Trustee or exercising any trust or power conferred on the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will not be under any
obligation to exercise any rights or powers under the Indenture at the request
of any holder of notes, unless such holder has offered to the Trustee security
and indemnity satisfactory to it against any loss, liability, or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, AFFILIATES, AND
SHAREHOLDERS
No director, officer, employee, incorporator, Affiliate, or holder of
capital stock of ours will have any liability for any of our obligations under
the notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations. Each holder of notes, by accepting a note, waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. This waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
PAYMENT, TRANSFER AND EXCHANGE
We will be required to maintain an office or agency at which the
principal of, premium, if any, and interest on the notes will be payable. We
will initially designate the office of the agent of the Trustee in New York City
as an office where such principal, premium, if any, and interest will be
payable. We may from time to time designate additional offices or agencies,
approve a change in the location of any office or agency, and rescind the
designation of any office or agency.
All moneys paid by us to the Trustee or a paying agent for the payment
of principal of, premium, if any, or interest on any notes that remain unclaimed
for two years after such principal, premium, if any, or interest becomes due and
payable will be repaid to us, and the holder of such notes will (subject to
applicable abandoned property or similar laws) thereafter, as an unsecured
general creditor, look only to us.
Subject to the terms of the Indenture, notes may be presented for
registration of transfer and for exchange (i) at each office or agency required
to be maintained by us, as described above, and (ii) at each other office or
agency that we may designate from time to time for such purposes. Registration
of transfers and exchanges will be
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effected if the transfer agent is satisfied with the evidence of ownership and
identity of the Person making the request and if the transfer form thereon is
duly executed and the transfer agent is otherwise satisfied that the transfer is
being made in accordance with the Indenture and applicable law. See
"--Book-Entry; Delivery and Form," "--Global Notes," "--Certificated Notes,"
and "Notice to Investors" for a description of additional transfer restrictions
applicable to the notes.
No service charge will be imposed in connection with any transfer or
exchange of any note, but we may in general require payment of a sum sufficient
to cover any transfer tax or similar governmental charge payable in connection
therewith.
BOOK-ENTRY; DELIVERY AND FORM
The notes will be issued in registered form, without interest coupons,
in denominations of $1,000 and integral multiples thereof, in the form of one or
more global notes. The Trustee is not required (1) to issue, register the
transfer of, or exchange any note for a period of 15 days before a selection of
notes to be redeemed; (2) to register the transfer of or exchange any note so
selected for redemption or purchase in whole or in part, except, in the case of
a partial redemption or purchase, that portion of any note not being redeemed or
purchased; or (3) if a redemption is to occur after a regular record date but on
or before the corresponding interest payment date, to register the transfer or
exchange of any note on or after the regular record date and before the date of
redemption.
GLOBAL NOTES
The global notes will be deposited with a custodian for The Depository
Trust Company ("DTC") and registered in the name of a nominee of DTC. Beneficial
interests in the global notes will be shown on records maintained by DTC and its
direct and indirect participants, including Euroclear and Clearstream. So long
as DTC or its nominee is the registered owner or holder of the global notes, DTC
or such nominee will be considered the sole owner or holder of the notes
represented by the global notes for all purposes under the Indenture and the
notes. No owner of a beneficial interest in the global notes will be able to
transfer such interest except in accordance with DTC's applicable procedures and
the applicable procedures of its direct and indirect participants.
We will apply to DTC for acceptance of the global notes in its
book-entry settlement system. The custodian and DTC will electronically record
the principal amount of notes represented by the global notes held within DTC.
Investors may hold their beneficial interests in the global notes directly
through DTC if they are participants in DTC, or indirectly through organizations
which are participants in DTC.
Payments of principal and interest under the global notes will be made
to DTC's nominee as the registered owner of such global notes. We expect that
the nominee, upon receipt of any such payment, will immediately credit DTC
participants' accounts with payments proportional to their respective beneficial
interests in the principal amount of the global notes as shown on the records of
DTC. We also expect that payments by DTC participants to owners of beneficial
interests will be governed by standing instructions and customary practices, as
is now the case with securities held for the accounts of customers registered in
the names of nominees for such customers. Such payments will be the
responsibility of such participants, and neither we, the Trustee, the custodian,
nor any paying agent or registrar will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
interests in the global notes or for maintaining or reviewing any records
relating to such beneficial interests.
DTC has advised us that DTC is a limited-purpose trust company created
to hold securities for its participating organizations and to facilitate the
clearance and settlement of transactions in those securities between
participants through electronic book-entry changes in accounts of participants.
The participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. Access to DTC's system
is also available to other entities such as banks, brokers, dealers, and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the participants and indirect
participants.
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CERTIFICATED NOTES
If (1) DTC notifies us that it is unwilling or unable to continue as
depositary for the global notes and a successor depositary is not appointed by
us within 90 days of such notice, (2) an Event of Default has occurred and the
Trustee has received a request from DTC, or (3) we determine not to have all of
the notes represented by global notes, the Trustee will exchange each beneficial
interest in the global notes for one or more certificated notes registered in
the name of the owner of such beneficial interest, as identified by DTC.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the notes
represented by the global notes be made by wire transfer of immediately
available funds to the accounts specified by the registered holders of the
global notes.
The notes represented by the global notes are expected to be eligible
to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in the notes will, therefore, be required by DTC to be
settled in immediately available funds. We expect that secondary trading in any
certificated notes will be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear
or Clearstream participant purchasing an interest in a global note from a
participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day, which must be a business day for Euroclear and
Clearstream, immediately following the settlement date of DTC. DTC has advised
us that cash received in Euroclear or Clearstream as a result of sales of
interests in a global note by or through a Euroclear or Clearstream participant
to a participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
GOVERNING LAW
The Indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
principles of conflicts of law to the extent the application of the law of
another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct or
cause the direction of the management and policies of such Person, directly or
indirectly, whether through the ownership of Voting Stock, by contract, or
otherwise; provided, that beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control. For the purposes of this
definition, the terms "controlling" and "controlled" have meanings correlative
to the foregoing.
"Capital Stock" means, with respect to any Person, any and all shares
of stock of a corporation, partnership interests, or other equivalent interests
(however designated, whether voting or no-voting) in such Person's equity,
entitling the holder to receive a share of the profits and losses, and a
distribution of assets, after liabilities, of such Person.
"Default" means any event that is, or with the giving of notice or
lapse of time, or both, would constitute an Event of Default.
"Issue Date" means the date on which the original notes were initially
issued.
"Lien" means, with respect to any asset, any mortgage, deed of trust,
lien, pledge, charge, debenture, security interest, or encumbrance of any kind
in respect of such asset, whether or not filed, recorded, or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the
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nature thereof, any option or other agreement to sell or give a security
interest in any asset, and any filing of, or agreement to give, any financing
statement under the Uniform Commercial Code or equivalent statutes) of any
jurisdiction other than to evidence a lease.
"Paying Agent" means a Person engaged to perform the obligations of the
Trustee in respect of payments made or funds held under the Indenture in respect
of the notes.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, or government, or any agency or political
subdivision thereof, or other entity of any kind.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means any corporation, company (including any limited
liability company), association, partnership, joint venture, or other business
entity of which more than 50% of the outstanding Voting Stock is owned, directly
or indirectly, by, or, in the case of a partnership, the sole general partner or
the managing partner or the only general partners of which are, us and/or one or
more of our other Subsidiaries.
"U.S. Government Obligations" means direct obligations fully guaranteed
or insured by the United States of America (including any agency or
instrumentality thereof) for the payment of which the full faith and credit of
the United States of America is pledged and which are not callable at the
issuer's option.
"Voting Stock" means, with respect to any Person, the Capital Stock of
any class or kind which ordinarily has the power to vote for the election of
directors, managers, or other voting members of the governing body of such
Person.
"Wholly Owned Subsidiary" means a Subsidiary all of the Voting Stock of
which is at such time owned, directly or indirectly, by us and our other Wholly
Owned Subsidiaries.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On November 13, 2003, we sold $100.0 million in aggregate principal
amount of the original notes in a private placement. The original notes were
sold to initial purchasers who in turn resold the notes to a limited number of
"Qualified Institutional Buyers," as defined under the Securities Act. In
connection with the sale of the original notes, we and the initial purchasers
entered into a registration rights agreement. Under the registration rights
agreement, we have agreed to file a registration statement regarding the
exchange of the original notes for new exchange notes which are registered under
the Securities Act. We have also agreed to use our best efforts to cause the
registration statement to become effective with the SEC, and we have agreed to
conduct this exchange offer after the registration statement is declared
effective. We will use our best efforts to keep this registration statement
continuously effective during the 180-day period following the closing of the
exchange offer. You are a holder with respect to the exchange offer if you are a
person in whose name any original notes are registered on our books or any
person who has obtained a properly completed assignment of original notes from
the registered holder.
We are making the exchange offer to comply with our obligations under
the registration rights agreement. A copy of the registration rights agreement
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
In order to participate in the exchange offer, you must represent to
us, among other things, that:
- you are acquiring the exchange notes under the exchange offer
in the ordinary course of your business;
- you are not engaged in, and do not intend to engage in, a
distribution of the exchange notes;
- you do not have any arrangement or understanding with any
person to participate in the distribution of the exchange
notes;
- you are not a broker-dealer tendering original notes acquired
directly from us for your own account;
- you are not one of our "affiliates," as defined in Rule 405 of
the Securities Act; and
- you are not prohibited by law or any policy of the SEC from
participating in the exchange offer.
RESALE OF THE EXCHANGE NOTES
Based on a previous interpretation by the Staff of the SEC set forth in
no-action letters issued to third parties, including Exxon Capital Holdings
Corporation (available May 13, 1988) and Morgan Stanley & Co. Incorporated
(available June 5, 1991), we believe that the exchange notes issued in the
exchange offer may be offered for resale, resold, and otherwise transferred by
you, except if you are an affiliate of us, without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the representations set forth in "--Purpose and Effect of the Exchange
Offer" apply to you.
If you tender in the exchange offer with the intention of participating
in a distribution of the exchange notes, you cannot rely on the interpretation
by the Staff of the SEC as set forth in the Morgan Stanley & Co. Incorporated
no-action letter and other similar letters, and you must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. If our belief regarding resale
is inaccurate, those who transfer exchange notes in violation of the prospectus
delivery provisions of the Securities Act and without an exemption from
registration under the federal securities laws may incur liability under these
laws. We do not assume or indemnify you against this liability.
The exchange offer is not being made to, nor will we accept surrenders
for exchange from, holders of original notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of the particular jurisdiction. Each broker-dealer
that receives exchange notes
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for its own account in exchange for original notes, where the original notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. See "Plan of Distribution." In
order to facilitate the disposition of exchange notes by broker-dealers
participating in the exchange offer, we have agreed, subject to specific
conditions, to make this prospectus, as it may be amended or supplemented from
time to time, available for delivery by those broker-dealers to satisfy their
prospectus delivery obligations under the Securities Act. Any holder that is a
broker-dealer participating in the exchange offer must notify the exchange agent
at the telephone number set forth in the enclosed letter of transmittal and must
comply with the procedures for broker-dealers participating in the exchange
offer. We have not entered into any arrangement or understanding with any person
to distribute the exchange notes to be received in the exchange offer.
TERMS OF THE EXCHANGE OFFER
This prospectus and the accompanying letter of transmittal together
constitute the exchange offer. Upon the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal, we will accept for
exchange original notes which are properly tendered on or before the expiration
date and are not withdrawn as permitted below. The expiration date for this
exchange offer is 5:00 p.m., New York City time, on [__________, 2004], or such
later date and time to which we, in our sole discretion, extend the exchange
offer; provided, however, that the latest time and date to which we can extend
the exchange offer is 5:00 p.m., New York City time, on [_______, 2004].
As of the date of this prospectus, $100.0 million in aggregate
principal amount of the original notes are outstanding. This prospectus,
together with the letter of transmittal, is being sent to all registered holders
of the original notes on this date. There will be no fixed record date for
determining registered holders of the original notes entitled to participate in
the exchange offer; however, holders of the original notes must tender their
certificates therefor or cause their original notes to be tendered by book-entry
transfer before the expiration date of the exchange offer to participate.
The form and terms of the new notes being issued in the exchange offer
are the same as the form and terms of the old securities, except that:
- the exchange notes being issued in the exchange offer will
have been registered under the Securities Act;
- the exchange notes being issued in the exchange offer will not
bear the restrictive legends restricting their transfer under
the Securities Act; and
- the exchange notes being issued in the exchange offer will not
contain the registration rights and liquidated damages
provisions contained in the old securities.
Outstanding capital securities being tendered in the exchange offer
must be in denominations of the principal amount of $1,000 and integral
multiples of that amount.
We intend to conduct the exchange offer in accordance with the
provisions of the registration rights agreement and applicable federal
securities laws. Original notes that are not tendered for exchange under the
exchange offer will remain outstanding and will be entitled to the rights under
the related indenture. Any original notes not tendered for exchange will not
retain any rights under the registration rights agreement and will remain
subject to transfer restrictions. See "--Consequences of Failure to Exchange."
We will be deemed to have accepted validly tendered original notes
when, as, and if we will have given oral or written notice of its acceptance to
the exchange agent. The exchange agent will act as agent for the tendering
holders for the purposes of receiving the exchange notes from us. If any
tendered original notes are not accepted for exchange because of an invalid
tender, the occurrence of other events set forth in this prospectus, or
otherwise, certificates for any unaccepted original notes will be returned, or,
in the case of original notes tendered by book-entry transfer, those unaccepted
original notes will be credited to an account maintained with The Depository
Trust
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Company, without expense to the tendering holder of those original notes as
promptly as practicable after the expiration date of the exchange offer. See
"--Procedures for Tendering."
Those who tender original notes in the exchange offer will not be
required to pay brokerage commission or fees or, subject to the instruction in
the letter of transmittal, transfer taxes with respect to the exchange under the
exchange offer. We will pay all charges and expenses, other than applicable
taxes described below, in connection with the exchange offer. See "--Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date is 5:00 p.m., New York City time on [________,
2004], unless we, in our sole discretion, extend the expiration date of the
exchange offer, in which case the expiration date will be the latest date and
time to which the exchange offer may be extended; provided, however, that the
latest time and date to which we can extend the exchange offer is 5:00 p.m., New
York City time, on [________, 2004]. We may, in our sole discretion, terminate
the exchange offer.
To extend the expiration date, we will notify the exchange agent of any
extension by oral or written notice prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date, and we
will notify the holders of original notes, or cause them to be notified, by
making a public announcement of the extension, as promptly as practicable
thereafter. Such notification may state that we are extending this exchange
offer for a specified period of time, but in no event later than [________,
2004].
We reserve the right (1) to refuse to accept any original notes, to
extend the expiration date of this exchange offer, or to terminate this exchange
offer and not accept any original notes for exchange if any of the conditions
set forth herein under "--Conditions to the Exchange Offer" shall not have
been satisfied or waived by us prior to the expiration date, by giving oral or
written notice of such delay, extension, or termination to the exchange agent;
or (2) to amend the terms of this exchange offer in any manner deemed by us to
be advantageous to the holders of the original notes. Any such refusal in
acceptance, extension, termination, or amendment will be followed as promptly as
practicable by oral or written notice thereof to the exchange agent. If this
exchange offer is amended in a manner determined by us to constitute a material
change, we will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the original notes of such amendment.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, amendment, or termination of the exchange
offer, we will have no obligation to publish, advertise, or otherwise
communicate that public announcement, other than by making a timely release to
an appropriate news agency.
CONDITIONS TO THE EXCHANGE OFFER
Without regard to other terms of the exchange offer, we are not
required to accept for exchange, or to issue exchange notes in the exchange
offer for, any original notes and we may terminate or amend the exchange offer
at any time before the acceptance of original notes for exchange if:
- any federal law, statute, rule, or regulation is proposed,
adopted, or enacted that, in our judgment, might reasonably be
expected to impair our ability to proceed with the exchange
offer;
- any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to
the exchange offer that, in our judgment, might impair our
ability to proceed with the exchange offer;
- any stop order is threatened or in effect with respect to the
registration statement of which this prospectus constitutes a
part or the qualification of the indenture under the Trust
Indenture Act of 1939;
- any governmental approval or approval by holders of the
original notes has not been obtained if we, in our reasonable
judgment, deem this approval necessary for the consummation of
the exchange offer; or
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- there occurs a change in the current interpretation by the
Staff of the SEC which permits the exchange notes to be issued
in the exchange offer to be offered for resale, resold, and
otherwise transferred by the holders of the exchange notes,
other than broker-dealers and any holder which is an
"affiliate" of ours within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided
that the exchange notes acquired in the exchange offer are
acquired in the ordinary course of that holder's business and
that holder has no arrangement or understanding with any
person to participate in the distribution of the exchange
notes to be issued in the exchange offer.
The preceding conditions are for our sole benefit and we may assert
them regardless of the circumstances giving rise to any such condition. The
failure by us at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right, and each such right shall be deemed an
ongoing right which may be asserted any time and from time to time by us. If we
determine that any of these conditions is not satisfied, we may:
- refuse to accept any original notes and return all tendered
original notes to the tendering holders, or, in the case of
original notes tendered by book-entry transfer, credit those
original notes to an account maintained with The Depository
Trust Company ("DTC");
- extend the expiration date of the exchange offer and retain
all original notes tendered before the expiration date of the
exchange offer, subject, however, to the rights of the holders
who have tendered the original notes to withdraw their
original notes; or
- waive unsatisfied conditions with respect to the exchange
offer and accept all properly tendered original notes that
have not been withdrawn. If the waiver constitutes a material
change to the exchange offer, we will promptly disclose the
waiver by means of a prospectus supplement that will be
distributed to the registered holders of the original notes,
and we will extend the exchange offer for a period of up to
ten business days, depending on the significance of the waiver
and the manner of disclosure of the registered holders of the
original notes, if the exchange offer would otherwise expire
during this period.
PROCEDURES FOR TENDERING
To effectively tender original notes held in physical form, a holder of
the original notes must complete, sign and date the letter of transmittal, or a
facsimile thereof; have the signatures thereon guaranteed if required by the
letter of transmittal; and mail or otherwise deliver such letter of transmittal
or a facsimile thereof, together with the certificates representing such
original notes and any other required documents, to the exchange agent prior to
5:00 p.m., New York City time, on the expiration date.
A holder may also, in lieu of the above, deposit original notes held in
physical form with DTC and make a book-entry transfer as set forth below.
To effectively tender original notes by book-entry transfer to the
account maintained by the exchange agent at DTC, holders of original notes may
request a DTC participant to, on their behalf, in lieu of physically completing
and signing the letter of transmittal and delivering it to the exchange agent,
electronically transmit their acceptance through DTC's Automated Tender Offer
Program ("ATOP"), and DTC will then edit and verify the acceptance and send an
agent's message (an "Agent's Message") to the exchange agent for its acceptance.
An Agent's Message is a message transmitted by DTC to, and received by, the
exchange agent and forming a part of the Book-Entry Confirmation (as defined
below), which states that DTC has received an express acknowledgment from the
DTC participant tendering original notes on behalf of the holder of such
original notes that such DTC participant has received and agrees to be bound by
the terms and conditions of the exchange offer as set forth in this prospectus
and the related letter of transmittal and that we may enforce such agreement
against such participant. Certificates representing original notes, or a timely
confirmation of a book-entry transfer of the original notes into the exchange
agent's account at DTC (a "Book-Entry Confirmation"), pursuant to the book-entry
transfer procedures described below, as well as either a properly completed and
duly executed consent and letter of transmittal (or manually signed facsimile
thereof), or an Agent's Message pursuant to DTC's ATOP system, and any other
documents required by
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the letter of transmittal, must be mailed or delivered to the exchange agent on
or prior to 5:00 p.m., New York City time, on the expiration date of the
exchange offer.
Holders of original notes whose certificates for original notes are not
lost but are not immediately available or who cannot deliver their certificates
and all other documents required by the letter of transmittal to the exchange
agent on or prior to the expiration date, or who cannot complete the procedures
for book-entry transfer on or prior to the expiration date, may tender their
original notes according to the guaranteed delivery procedures set forth in
"--The Exchange Offer - Guaranteed Delivery Procedures" section of this
prospectus.
The method of delivery of the letter of transmittal, any required
signature guarantees, the original notes, and all other required documents,
including delivery of original notes through DTC, and transmission of an Agent's
Message through DTC's ATOP system, is at the election and risk of the tendering
holders, and the delivery will be deemed made only when actually received or
confirmed by the exchange agent. If original notes are sent by mail, it is
suggested that the mailing be registered mail, properly insured, with return
receipt requested, made sufficiently in advance of the expiration date, as
desired, to permit delivery to the exchange agent prior to 5:00 p.m., New York
City time, on the expiration date. HOLDERS TENDERING ORIGINAL NOTES THROUGH
DTC'S ATOP SYSTEM MUST ALLOW SUFFICIENT TIME FOR COMPLETION OF THE ATOP
PROCEDURES DURING THE NORMAL BUSINESS HOURS OF DTC ON SUCH RESPECTIVE DATE.
No original notes, letters of transmittal, Agent's Messages, or other
required documents should be sent to us. Delivery of all original notes, letters
of transmittal, Agent's Messages, and other documents must be made to the
exchange agent. Holders may also request their respective brokers, dealers,
commercial banks, trust companies, or nominees to effect such tender for such
holders.
The tender by a holder of original notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth herein and in the letter of transmittal. Holders of
original notes registered in the name of a broker, dealer, commercial bank,
trust company, or other nominee who wish to tender must contact such registered
holder promptly and instruct such registered holder how to act on such
non-registered holder's behalf.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States, or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the
original notes tendered pursuant thereto are tendered (1) by a registered holder
of original notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the letter of transmittal or
(2) for the account of an Eligible Institution.
If a letter of transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations, or
others acting in a fiduciary or representative capacity, such person should so
indicate when signing, and, unless waived by us, evidence satisfactory to us of
their authority so to act must be submitted with such letter of transmittal.
All questions as to the validity, form, eligibility, time of receipt,
and withdrawal of the tendered original notes will be determined by us in our
sole discretion, which determination will be final and binding. We reserve the
absolute right to reject any and all original notes not validly tendered or any
original notes which, if accepted, would, in the opinion of our counsel, be
unlawful. We also reserve the absolute right to waive any irregularities or
conditions of tender as to particular original notes. Our interpretation of the
terms and conditions of this exchange offer, including the instructions in the
letter of transmittal, will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of original notes must
be cured within such time as we shall determine. None of us, the exchange agent,
or any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of original notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of original
notes will not be deemed to have been made until such irregularities have been
cured or waived. Any original notes received by the exchange agent that are not
validly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to such holder by
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the exchange agent, unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date of the exchange offer.
We reserve the right, in our sole discretion, to purchase or make
offers for any original notes after the expiration date of the exchange offer,
from time to time, through open market or privately negotiated transactions, one
or more additional exchange or tender offers, or otherwise, as permitted by law,
the indenture, and our other debt agreements. Following consummation of this
exchange offer, the terms of any such purchases or offers could differ
materially from the terms of this exchange offer.
By tendering, each holder will represent to us that, among other
things, the person acquiring the exchange notes in the exchange offer is
obtaining them in the ordinary course of its business, whether or not such
person is the holder, and that neither the holder nor such other person has any
arrangement or understanding with any person to participate in the distribution
of the exchange notes issued in the exchange offer. If any holder or any such
other person is an "affiliate," as defined under Rule 405 of the Securities Act,
of us, or is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of exchange notes
to be acquired in the exchange offer, that holder or any such other person:
- may not rely on the applicable interpretations of the staff of
the SEC; and
- must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
resale transaction.
Each broker-dealer who acquired its original notes as a result of
market-making activities or other trading activities and thereafter receives
exchange notes issued for its own account in the exchange offer must acknowledge
that it will deliver a prospectus in connection with any resale of such exchange
notes issued in the exchange offer. The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
See "Plan of Distribution" for a discussion of the exchange and resale
obligations of broker-dealers in connection with the exchange offer.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES ISSUED IN
THE EXCHANGE OFFER
Upon satisfaction or waiver of all of the conditions to the exchange
offer, we will accept, promptly after the expiration date, all original notes
properly tendered and will issue exchange notes registered under the Securities
Act. For purposes of the exchange offer, we will be deemed to have accepted
properly tendered original notes for exchange when, as, and if we have given
oral or written notice to the exchange agent, with written confirmation of any
oral notice to be given promptly thereafter. See " -- Conditions to the Exchange
Offer" for a discussion of the conditions that must be satisfied before we
accept any original notes for exchange.
For each original note accepted for exchange, the holder will receive
an exchange note registered under the Securities Act having a principal amount
equal to that of the surrendered original note. Accordingly, registered holders
of exchange notes issued in the exchange offer on the relevant record date for
the first interest payment date following the completion of the exchange offer
will receive interest accruing from the most recent date to which interest has
been paid or, if no interest has been paid on the original notes, from November
13, 2003. Original notes that we accept for exchange will cease to accrue
interest from and after the date of completion of the exchange offer. Under the
registration rights agreement, we may be required to make additional payments in
the form of liquidated damages to the holders of the original notes under
circumstances relating to the timing of the exchange offer.
In all cases, we will issue exchange notes in the exchange offer for
original notes that are accepted for exchange only after the exchange agent
timely receives:
- certificates for such original notes or a timely book-entry
confirmation of such original notes into the exchange agent's
account at DTC;
- a properly completed and duly executed letter of transmittal
or an agent's message; and
- all other required documents.
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If for any reason set forth in the terms and conditions of the exchange
offer we do not accept any tendered original notes, or if a holder submits
original notes for a greater principal amount than the holder desires to
exchange, we will return such unaccepted or non-exchanged original note without
cost to the tendering holder. In the case of original notes tendered by
book-entry transfer into the exchange agent's account at DTC, such non-exchanged
original notes will be credited to an account maintained with DTC. We will
return the original notes or have them credited to the DTC account as promptly
as practicable after the expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the original notes at DTC for purposes of this exchange offer within
two business days after the date of this prospectus. Any financial institution
that is a participant in DTC's ATOP systems may use DTC's ATOP procedures to
tender original notes. Such participant may make book-entry delivery of original
notes by causing DTC to transfer such original notes into the exchange agent's
account at DTC in accordance with DTC's procedures for transfer. However,
although delivery of original notes may be effected through book-entry transfer
at DTC, the letter of transmittal, or facsimile thereof, with any required
signature guarantees, or an Agent's Message pursuant to the ATOP procedures and
any other required documents must, in any case, be transmitted to and received
by the exchange agent at the address set forth in this prospectus on or prior to
the expiration date of the exchange offer, or the guaranteed delivery procedures
described below must be complied with. Delivery of documents to DTC will not
constitute valid delivery to the exchange agent.
GUARANTEED DELIVERY PROCEDURES
Holders whose certificates for original notes are not lost but are not
immediately available or who cannot deliver their certificates and all other
required documents to the exchange agent on or prior to the expiration date, or
who cannot complete the procedures for book-entry transfer on or prior to the
expiration date, may nevertheless effect a tender of their original notes if:
- the tender is made through an eligible institution;
- prior to the expiration date of the exchange offer, the
exchange agent receives by facsimile transmission, mail, or
hand delivery from such eligible institution a validly
completed and duly executed letter of transmittal (or
facsimile thereof) or an Agent's Message pursuant to DTC's
ATOP system, and a notice of guaranteed delivery,
substantially in the form provided with this prospectus, which
- sets forth the name and address of the holder of the
original notes and the amount of original notes
tendered;
- states that the tender is being made thereby; and
- guarantees that within three NYSE trading days after
the date of execution of the notice of guaranteed
delivery, the certificates for all physically
tendered original notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and
any other documents required by the letter of
transmittal will be deposited by the eligible
institution with the exchange agent; and
- the certificates for all physically tendered original notes,
in proper form for transfer, or a Book-Entry Confirmation, as
the case may be, and all other documents required by the
letter of transmittal are received by the exchange agent
within three NYSE trading days after the date of execution of
the notice of guaranteed delivery.
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WITHDRAWAL OF TENDERS
Tenders of original notes may be properly withdrawn at any time prior
5:00 p.m., New York City time, on the expiration date of the exchange offer.
For a withdrawal of a tender to be effective, a written notice of
withdrawal delivered by hand, overnight by courier, or by mail, or a manually
signed facsimile transmission, or a properly transmitted "Request Message"
through DTC's ATOP system, must be received by the exchange agent prior to 5:00
p.m., New York City time, on the expiration date of the exchange offer. Any such
notice of withdrawal must:
- specify the name of the person that tendered the original
notes to be properly withdrawn;
- identify the original notes to be properly withdrawn,
including the principal amount of such original notes;
- in the case of original notes tendered by book-entry transfer,
specify the number of the account at DTC from which the
original notes were tendered and specify the name and number
of the account at DTC to be credited with the properly
withdrawn original notes and otherwise comply with the
procedures of such facility;
- contain a statement that such holder is withdrawing its
election to have such original notes exchanged for exchange
notes;
- other than a notice transmitted through DTC's ATOP system, be
signed by the holder in the same manner as the original
signature on the letter of transmittal by which such original
notes were tendered, including any required signature
guarantees, or be accompanied by documents of transfer to have
the Trustee with respect to the original notes register the
transfer of such original notes in the name of the person
withdrawing the tender; and
- specify the name in which such original notes are registered,
if different from the person who tendered such original notes.
All questions as to the validity, form, eligibility, and time of
receipt of such notice will be determined by us, and our determination shall be
final and binding on all parties. Any original notes so properly withdrawn will
be deemed not to have been validly tendered for exchange for purposes of this
exchange offer and no exchange notes will be issued with respect thereto unless
the original notes so withdrawn are validly re-tendered thereafter. Any original
notes that have been tendered for exchange but are not exchanged for any reason
will be returned to the tendering holder thereof without cost to such holder,
or, in the case of original notes tendered by book-entry transfer into the
exchange agent's account at DTC pursuant to the book-entry transfer procedures
described above, such original notes will be credited to an account maintained
with DTC for the original notes as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. Properly withdrawn
original notes may be re-tendered by following the procedures described above at
any time on or prior to the expiration date of the exchange offer.
TERMINATION OF CERTAIN RIGHTS
All rights given to holders of original notes under the registration
rights agreement will terminate upon the consummation of the exchange offer
except with respect to our duty:
- to use our best efforts to keep the registration statement
continuously effective during the 180-day period following the
closing of the exchange offer; and
- to provide copies of the latest version of this prospectus to
any broker-dealer that requests copies of this prospectus for
use in connection with any resale by that broker-dealer of
exchange notes received for its own account pursuant to the
exchange offer in exchange for original notes acquired for its
own
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account as a result of market-making or other trading
activities, subject to the conditions described above under
"--Resale of the Exchange Notes."
EXCHANGE AGENT
Fifth Third Bank has been appointed as exchange agent for this exchange
offer. Letters of transmittal, Agent's or Request Messages through DTC's ATOP
system, notices of guaranteed delivery, and all correspondence in connection
with this exchange offer should be sent or delivered by each holder of original
notes or a beneficial owner's broker, dealer, commercial bank, trust company, or
other nominee to the exchange agent at the addresses set forth in the letter of
transmittal. We will pay the exchange agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to this exchange offer will
be paid by us.
Except as described above, we will not make any payments to brokers,
dealers, or other persons soliciting acceptances of this exchange offer. We
will, however, pay the reasonable and customary fees and out-of-pocket expenses
of the exchange agent, the Trustee, and legal, accounting, and related fees and
expenses. We may also pay brokerage houses and other custodians, nominees, and
fiduciaries their reasonable out-of-pocket expenses incurred in forwarding
copies of this prospectus and related documents to the beneficial owners of the
original notes and in handling or forwarding tenders for exchange.
We will also pay all transfer taxes, if any, applicable to the exchange
of original notes pursuant to this exchange offer. If, however, original notes
are to be issued for principal amounts not tendered or accepted for exchange in
the name of any person other than the registered holder of the original notes
tendered or if tendered original notes are registered in the name of any person
other than the person signing the letter of transmittal, or if a transfer tax is
imposed for any reason other than the exchange of original notes pursuant to
this exchange offer, then the amount of any such transfer taxes, whether imposed
on the registered holder or any other persons, will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the consent and letter of transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
The estimated cash expenses to be incurred in connection with the
exchange offer are estimated in the aggregate to be approximately $75,000. These
expenses include registration fees, fees and expenses of the exchange agent,
accounting and legal fees, and printing costs, among others.
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
Holders who desire to tender their original notes in exchange for
exchange notes registered under the Securities Act should allow sufficient time
to ensure timely delivery. Neither the exchange agent nor us is under any duty
to give notification of defects or irregularities with respect to the tenders of
original notes for exchange.
Original notes that are not tendered or are tendered but not accepted
will, following the completion of the exchange offer, continue to be subject to
the provisions in the indenture regarding the transfer and exchange of the
original notes and the existing restrictions on transfer set forth in the legend
on the original notes and in the offering memorandum dated November 6, 2003,
relating to the original notes. Except in limited circumstances with respect to
specific types of holders of original notes, we will have no further obligation
to provide for the registration under the Securities Act of such original notes.
In general, original notes, unless registered under the Securities Act, may not
be offered or sold except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws.
We do not currently anticipate that we will take any action to register
the original notes under the Securities Act or under any state securities laws.
Upon completion of the exchange offer, holders of the original notes will not be
entitled to any further registration rights under the registration rights
agreement, except under limited circumstances.
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Holders of the exchange notes issued in the exchange offer and any
original notes which remain outstanding after completion of the exchange offer
will vote together as a single class for purposes of determining whether holders
of the requisite percentage of the class have taken certain actions or exercised
certain rights under the indenture.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following general discussion summarizes certain material U.S.
federal income tax aspects of the acquisition, ownership and disposition of the
notes. This discussion is a summary for general information only and does not
consider all aspects of U.S. federal income taxation that may be relevant to the
acquisition, ownership and disposition of the notes by a prospective investor in
light of his, her, or its personal circumstances. This discussion is limited to
the U.S. federal income tax consequences to persons who are beneficial owners of
the notes and who hold the notes as capital assets within the meaning of Section
1221 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). This
discussion does not address the U.S. federal income tax consequences to
investors subject to special treatment under the federal income tax laws, such
as dealers in securities or foreign currency, tax-exempt entities, banks,
thrifts, insurance companies, persons that hold the notes as part of a
"straddle," as part of a "hedge" against currency risk or as part of a
"conversion transaction," persons that have a "functional currency" other than
the U.S. dollar, and investors in pass-through entities that hold the notes. In
addition, this discussion is generally limited to the tax consequences to
initial holders that purchase the notes at the "issue price," which for this
purpose is the first price at which a substantial amount of the notes are sold
to the public for money, excluding sales to bond houses, brokers or similar
persons acting in the capacity of underwriters, placement agents, or
wholesalers. This discussion does not describe any tax consequences arising out
of the tax laws of any state, local, or foreign jurisdiction, or, except to a
limited extent under the caption "Non-U.S. Holders," any possible applicability
of U.S. federal gift or estate tax.
This summary is based upon the Code, existing and proposed regulations
thereunder, and current administrative rulings and court decisions, all as in
effect on the date of this prospectus. All of the foregoing are subject to
change, possibly on a retroactive basis, and any such change could affect the
continuing validity of this discussion.
PERSONS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS
THE LAW OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences to a holder of a note that is:
- a citizen or resident of the United States, including an alien
who is a resident of the United States within the meaning of
Section 7701(b) of the Code;
- a corporation created or organized under the laws of the
United States or any political subdivision thereof;
- an estate whose income is includible in gross income for
United States federal income tax purposes regardless of its
source; or
- a trust, if (1) a U.S. court is able to exercise primary
supervision over administration of the trust and one or more
United States persons have the authority to control all
substantial decisions of the trust, or (2) it has a valid
election in effect under applicable U.S. Treasury regulations
to be treated as a United States person.
STATED INTEREST. Interest on the notes will be taxable to a U.S. holder
as ordinary interest income at the time it accrues or is received in accordance
with such holder's method of accounting for U.S. federal income tax purposes.
The original notes were issued to investors with "de minimis original issue
discount" for U.S. federal income tax purposes. However, in general, U.S.
holders are not required to include de minimis original issue discount in income
in advance of their accrual or receipt of interest, and instead include de
minimis original issue discount in income as capital gain upon the retirement or
disposition of the notes.
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SALE, EXCHANGE, OR REDEMPTION OF THE NOTES. Unless a nonrecognition
provision applies, upon the disposition of a note by sale, exchange or
redemption, a U.S. holder generally will recognize gain or loss equal to the
difference between (i) the amount realized on the disposition (other than
amounts attributable to interest) and (ii) the U.S. holder's adjusted tax basis
in the notes. A U.S. holder's adjusted tax basis in a note generally will equal
the cost of the notes (net of accrued interest) to the holder.
Such gain or loss generally will constitute capital gain or loss and
will be long-term capital gain or loss if the U.S. holder has held the notes for
longer than one year. If the U.S. holder is an individual, any capital gain
generally will be subject to U.S. federal income tax at preferential rates if
specified minimum holding periods are met. The deductibility of capital losses
is subject to certain limitations. Any gain or loss recognized by a U.S. holder
on the sale, exchange, or disposition of a note will generally be treated as
U.S. source for purposes of computing the U.S. foreign tax credit limitation.
EXCHANGE OFFER. The exchange of the privately placed notes for publicly
registered notes pursuant to this exchange offer should not constitute a taxable
event for U.S. federal income tax purposes. The exchange should have no U.S.
federal income tax consequences to a U.S. holder, so that the holder's holding
period and adjusted tax basis for a note should not be affected, and the holder
should continue to take into account income in respect of a note in the same
manner as before the exchange.
BACKUP WITHHOLDING AND INFORMATION REPORTING. A U.S. holder of notes
may be subject, under certain circumstances, to backup withholding with respect
to payments of interest on, and gross proceeds from a sale or other disposition
of, the notes. These backup withholding rules may apply if the U.S. holder:
- fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of
perjury within a reasonable time after the request therefor;
- furnishes an incorrect TIN;
- fails to properly report interest; or
- under certain circumstances, fails to provide a certified
statement, signed under penalties of perjury, that the TIN
furnished is the correct number and that such holder is not
subject to backup withholding.
A U.S. holder of notes who does not provide his, her, or its correct
TIN may be subject to penalties imposed by the Internal Revenue Service (the
"IRS"). Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the holder's
U.S. federal income tax liability, provided that the required information is
furnished to the IRS. Certain persons are exempt from backup withholding,
including corporations and tax-exempt entities, provided their exemption from
backup withholding is properly established.
We will report to the U.S. holders of the notes and the IRS the amount
of interest and any other reportable payments made by us and any amount withheld
with respect to the notes during the calendar year.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income and
estate tax consequences to a holder of notes that is an individual, corporation,
estate, or trust that is not a U.S. holder, as described above (a "non-U.S.
holder"). For purposes of the discussion below, interest and gain on the sale,
exchange, or other disposition of notes will be considered to be "U.S. trade or
business income" if such income or gain is:
- effectively connected with the conduct of a U.S. trade or
business, or
- in the case of a treaty resident, attributable to a U.S.
permanent establishment (or, in the case of an individual, a
fixed base) in the United States.
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STATED INTEREST. Generally, interest paid to a non-U.S. holder of notes
will not be subject to U.S. federal income or withholding tax if such interest
is not U.S. trade or business income and is "portfolio interest." Generally,
interest on the notes will qualify as portfolio interest if the non-U.S. holder:
- does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock that
are entitled to vote within the meaning of Section 871(h)(3)
of the Code;
- is not a controlled foreign corporation with respect to which
we are a "related person" within the meaning of the Code;
- is not a bank receiving the interest pursuant to a loan
agreement in the ordinary course of its business; and
- certifies, under penalties of perjury, that such holder is not
a U.S. person and provides such holder's name and address.
The gross amount of payments of interest that do not qualify for the
portfolio interest exception and that are not U.S. trade or business income will
be subject to U.S. withholding tax at a rate of 30% unless a treaty applies to
reduce or eliminate withholding. U.S. trade or business income will be taxed at
regular graduated U.S. rates rather than the 30% gross rate. In the case of a
non-U.S. holder that is a corporation, such U.S. trade or business income also
may be subject to the branch profits tax. To claim an exemption from or
reduction in withholding a non-U.S. holder must provide a properly executed Form
W-8BEN or W-8ECI, as applicable, prior to the payment of interest. These forms
must be periodically updated. A non-U.S. holder who is claiming the benefits of
a treaty may be required, in certain instances, to obtain a U.S. taxpayer
identification number and to provide certain documentary evidence issued by
foreign governmental authorities to prove residence in the foreign country.
Also, special procedures are provided under applicable regulations for payments
through qualified intermediaries.
SALE, EXCHANGE, OR REDEMPTION OF NOTES. Except as described below and
subject to the discussion concerning backup withholding, any gain realized by a
non-U.S. holder on the sale, exchange, or redemption of a note generally will
not be subject to U.S. federal income tax, unless:
- such gain is effectively connected with the conduct of a U.S.
trade or business;
- the non-U.S. holder is an individual who is present in the
United States for 183 days or more in the taxable year of the
disposition, and certain conditions are met; or
- the non-U.S. holder is subject to Code provisions applicable
to certain U.S. expatriates.
We believe that we are not and do not anticipate becoming a "U.S. real
property holding corporation" for U.S. federal income tax purposes.
FEDERAL ESTATE TAX. Notes held (or treated as held) by an individual
who is a non-U.S. holder at the time of death will not be subject to U.S.
federal estate tax, provided that the individual does not actually or
constructively own 10% or more of the total voting power of our voting stock and
income on the notes was not U.S. trade or business income.
INFORMATION REPORTING AND BACKUP WITHHOLDING. We must report annually
to the IRS and to each non-U.S. holder any interest that is paid to the non-U.S.
holder and the amount of tax, if any, withheld with respect to such payments.
Copies of these information returns also may be made available under the
provisions of a specific treaty or other agreement to the tax authorities of the
country in which the non-U.S. holder resides.
The backup withholding tax and certain information reporting will not
apply to payments of interest on the notes with respect to which either the
requisite certification, as described above, has been received or an exemption
otherwise has been established, provided that neither we nor our paying agent
have actual knowledge that the holder is a U.S. person or that the conditions of
any other exemption are not, in fact, satisfied.
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The payment of the proceeds from the disposition of the notes to or
through the U.S. office of any U.S. or foreign broker will be subject to
information reporting and possible backup withholding unless the owner certifies
as to its non-U.S. status under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of the
notes to or through a non-U.S. office of a non-U.S. broker will not be subject
to information reporting or backup withholding unless the non-U.S. broker has
certain types of relationships with the United States (a "U.S. related person").
In the case of the payment of the proceeds from the disposition of the notes to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the Treasury regulations (i) require information reporting on
the payment unless the broker has documentary evidence in its files that the
owner is a non-U.S. holder and the broker has no knowledge to the contrary and
(ii) do not require backup withholding unless the broker has actual knowledge
that the holder is a U.S. person.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the non-U.S.
holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
THE PRECEDING DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
EACH INVESTOR SHOULD CONSULT HIS, HER, OR ITS OWN TAX ADVISOR AS TO PARTICULAR
TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING, AND DISPOSING OF NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, AND OF
ANY PROPOSED CHANGES IN APPLICABLE LAW.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for original notes where such original notes were acquired as a result
of market-making activities or other trading activities. We have agreed that,
for a period of 180 days after the expiration date of the exchange offer, we
will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by
brokers-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit of any such resale of exchange
notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date of the exchange
offer, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. We have agreed to pay all expenses
incident to this exchange offer (including the expenses of one counsel for the
holder of the original notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the original notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
Certain legal matters regarding the notes will be passed upon for us by
Baker & Hostetler LLP, Columbus, Ohio.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules included in our Annual Report on Form 10-K
for the year ended December 31, 2002, as set forth in their report, which is
incorporated by reference into this prospectus and elsewhere in the registration
statement. Our financial statements and schedules are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1701.13(E) of the Ohio Revised Code sets forth conditions and
limitations governing the indemnification of officers, directors, and other
persons.
Section 6.1 of Article 6 of the Amended and Restated Code of
Regulations of the Company (see Exhibit 3.04 herein) contains certain
indemnification provisions adopted pursuant to authority contained in Section
1701.13(E) of the Ohio Revised Code. The Company's Code of Regulations provides
for the indemnification of its officers, directors, employees, and agents, or
persons who are serving or have served at the request of the Company as
director, trustee, officer, employee, or agent of another corporation, domestic
or foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise, against all expenses with respect to any judgments, fines, and
completed action, suit, or proceeding to which they were or are parties or are
threatened to be made parties by reason of acting in such capacities, provided
that it is determined, either by a majority vote of a quorum of disinterested
directors of the Company or by the shareholders of the Company or otherwise as
provided in Section 1701.13(E) of the Ohio Revised Code, that: (a) they acted in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interests of the Company; (b) in any action, suit, or proceeding by or
in the right of the Company, they were not, and have not been adjudicated to
have been, negligent or guilty of misconduct in the performance of their duties
to the Company; or (c) with respect to any criminal action or proceeding, that
they had no reasonable cause to believe that their conduct was unlawful. Section
1701.13(E) provides that expenses, including attorneys' fees, incurred in
defending any action, suit, or proceeding, may be paid by the Company in advance
of the final disposition of such action, suit, or proceeding, upon receipt of an
undertaking by the indemnified person to repay such amount in the event that
indemnification shall be deemed improper.
The Company has entered into indemnification agreements with each of
its directors. These agreements generally: (i) confirm the existing indemnity
provided to them under the Company's Code of Regulations and assure that this
indemnity will continue to be provided; and (ii) provide that, in addition, the
directors shall be indemnified to the fullest extent permitted by law against
all expenses (including legal fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by them in any threatened, pending,
or completed action or proceeding, including any action by or in the right of
the Company or at the request or with the consent of the Company as a trustee,
director, officer, employee, or agent of another corporation or enterprise.
Coverage under the contracts is excluded: (a) to the extent the director is
indemnified under directors' and officers' liability insurance maintained by the
Company; (b) on account of conduct that is finally adjudged to be knowingly
fraudulent, deliberately dishonest, or willful misconduct; (c) if a final court
of adjudication shall determine that such indemnification is not lawful; or (d)
on account of any suit in which judgment is rendered against the director for an
accounting of profits made from the purchase or sale by the director of
securities of the Company pursuant to Section 16(b) of the Securities Exchange
Act of 1934 or any similar provision. The indemnification agreements are
applicable to all claims asserted after their effective dates, whether arising
from acts or omissions occurring before or after their effective dates.
The Company has purchased a liability policy to indemnify its officers
and directors against loss arising from claims by reason of their legal
liability for acts as officers and directors, subject to limitations and
conditions set forth in the policy.
-II-1-
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is a list of all exhibits filed as a part of this
Registration Statement on Form S-4, including those incorporated by reference:
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
3.01 Amended and Restated Articles of Incorporation of State Auto Securities Act Registration Statement
Financial Corporation on Form S-1 (File No. 33-40643) (see
Exhibit 3(a) therein)
3.02 Amendment to Amended and Restated Articles of Incorporation Securities Act Registration Statement
of State Auto Financial Corporation on Form S-8 (File No. 33-89400) (see
Exhibit 4(b) therein)
3.03 Amendment to Amended and Restated Articles of Incorporation Form 10-K Annual Report for the year
of State Auto Financial Corporation ended December 31, 1998 (see
Exhibit 3(A)(3) therein)
3.04 Amended and Restated Code of Regulations of State Auto Securities Act Registration Statement
Financial Corporation on Form S-1 (File No. 33-40643) (see
Exhibit 3(b) therein)
4.01 Indenture dated as of November 13, 2003, among State Auto Included herein
Financial Corporation, as Issuer, and Fifth Third Bank as
Trustee
4.02 Form of 6 1/4% Senior Note due 2013 (Exchange Note) Included herein
4.03 Registration Rights Agreement by and among State Auto Included herein
Financial Corporation and the Representatives of the Initial
Purchasers dated November 13, 2003
5.01 Opinion and consent of Baker & Hostetler LLP with respect to Included herein
the validity of the exchange notes being registered
10.01 Guaranty Agreement between State Automobile Mutual Insurance Securities Act Registration Statement
Company and State Auto Property and Casualty Insurance on Form S-1 (File No. 33-40643) (see
Company, dated as of May 16, 1991 Exhibit 10(d) therein)
10.02 Form of Indemnification Agreement between State Auto Securities Act Registration Statement
Financial Corporation and each of its directors on Form S-1 (File No. 33-40643) (see
Exhibit 10(e) therein)
10.03 State Auto Financial Corporation 1991 Quality Performance Securities Act Registration Statement
Bonus Plan on Form S-1 (File No. 33-40643) (see
Exhibit 10(f) therein)
10.04 1991 Stock Option Plan Securities Act Registration Statement
on Form S-1 (File No. 33-40643) (see
Exhibit 10(h) therein)
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IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.05 Amendment Number 1 to the 1991 Stock Option Plan Securities Act Registration Statement
on Form S-8 (File No. 33-89400) (see
Exhibit 4(a) therein)
10.06 1991 Directors' Stock Option Plan Securities Act Registration Statement
on Form S-1 (File No. 33-40643) (see
Exhibit 10(i) therein)
10.07 License Agreement between State Automobile Mutual Insurance Securities Act Registration Statement
Company and Policy Management Systems Corporation, dated on Form S-1 (File No. 33-40643) (see
December 28, 1984 Exhibit 10(k) therein)
10.08 Investment Management Agreement between Stateco Financial Form 10-K Annual Report for the year
Services, Inc. and State Automobile Mutual Insurance ended December 31, 1992 (see
Company, effective April 1, 1993 Exhibit 10(N) therein)
10.09 State Auto Insurance Companies Directors' Deferred Form 10-K Annual Report for year ended
Compensation Plan December 31, 1995 (see Exhibit 10(S)
therein)
10.10 State Auto Insurance Companies Amended and Restated Securities Act Registration Statement
Non-Qualified Incentive Deferred Compensation Plan on Form S-8 (File No. 333-56338) (see
Exhibit 4(e) therein)
10.11 Amendment Number 2 to the 1991 Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 1996 (see
Exhibit 10(DD) therein)
10.12 Amendment Number 1 to the 1991 Directors' Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 1996 (see
Exhibit 10(EE) therein)
10.13 Amended and Restated SERP of State Auto Mutual, effective as Form 10-K Annual Report for the year
of January 1, 1994 ended December 31, 1997 (see
Exhibit 10(HH) therein)
10.14 Credit Agreement dated as of June 1, 1999, between State Form 10-Q Quarterly Report for the
Auto Financial Corporation and State Automobile Mutual quarter ended June 30, 1999 (see
Exhibit 10(LL) therein)
10.15 Reinsurance Pooling Agreement, amended and restated as of Form 10-K Annual Report for the year
January 1, 2000, by and among State Automobile Mutual ended December 31, 1999 (see
Insurance Company, State Auto Property and Casualty Exhibit 10(W) therein)
Insurance Company, Milbank Insurance Company, Midwest
Security Insurance Company (n/k/a State Auto Insurance
Company of Wisconsin), Farmers Casualty Insurance Company,
and State Auto Insurance Company (n/k/a State Auto Insurance
Company of Ohio)
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IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.16 Management and Operations Agreement, as of January 1, 2000, Form 10-K Annual Report for the year
among State Automobile Mutual Insurance Company, State Auto ended December 31, 1999 (see
Financial Corporation, State Auto Property and Casualty Exhibit 10(X) therein)
Insurance Company, State Auto National Insurance Company,
Milbank Insurance Company, State Auto Insurance Company
(n/k/a State Auto Insurance Company of Ohio), Stateco
Financial Services, Inc., Strategic Insurance Software,
Inc., and 518 Property Management and Leasing, LLC
10.17 Property Catastrophe Overlying Excess of Loss Reinsurance Form 10-K Annual Report for the year
contract issued to State Automobile Mutual Insurance ended December 31, 1999 (see
Company, State Auto National Insurance Company, Milbank Exhibit 10(Y) therein)
Insurance Company, Midwest Security Insurance Company (n/k/a
State Auto Insurance Company of Wisconsin), Farmers Casualty
Insurance Company, and Mid-Plains Insurance Company by State
Auto Property and Casualty Insurance Company
10.18 First Amendment to the Management and Operations Agreement, Form 10-K Annual Report for the year
effective January 1, 2000, among State Automobile Mutual ended December 31, 1999 (see
Insurance Company, State Auto Financial Corporation, State Exhibit 10(Z) therein)
Auto Property and Casualty Insurance Company, State Auto
National Insurance Company, Milbank Insurance Company, State
Auto Insurance Company (n/k/a State Auto Insurance Company
of Ohio), Stateco Financial Services, Inc., Strategic
Insurance Software, Inc., and 518 Property Management and
Leasing, LLC
10.19 First Amendment to the June 1, 1999, Credit Agreement, dated Form 10-K Annual Report for the year
November 1, 1999, between State Auto Financial Corporation ended December 31, 1999 (see
and State Automobile Mutual Insurance Company Exhibit 10(AA) therein)
10.20 Second amendment to the June 1, 1999, Credit Agreement, Form 10-Q Quarterly Report for the
dated December 1, 1999, between State Auto Financial quarter ended March 31, 2000 (see
Corporation and State Automobile Mutual Insurance Company Exhibit 10(BB) therein)
10.21 Form of Executive Agreement between State Auto Financial Form 10-K Annual Report for the year
Corporation and certain executive officers ended December 31, 2000 (see
Exhibit 10(CC) therein)
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IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.22 First Amendment to the Reinsurance Pooling Agreement Amended Form 10-K Annual Report for the year
and Restated as of January 1, 2000, by and among State Auto ended December 31, 2000 (see
Property and Casualty Insurance Company, State Automobile Exhibit 10(DD) therein)
Mutual Insurance Company, Milbank Insurance Company, Midwest
Security Insurance Company (n/k/a State Auto Insurance
Company of Wisconsin), Farmers Casualty Insurance Company,
and State Auto Insurance Company (n/k/a State Auto Insurance
Company of Ohio)
10.23 Addendum No. 1 of the Property Catastrophe Overlying Excess Form 10-K Annual Report for the year
of Loss Reinsurance Contract by and among State Auto ended December 31, 2000 (see
Property and Casualty Insurance Company, State Automobile Exhibit 10(EE) therein)
Mutual Insurance Company, State Auto National Insurance
Company, Milbank Insurance Company, Midwest Security
Insurance Company (n/k/a State Auto Insurance Company of
Wisconsin), Farmers Casualty Insurance Company, Mid-Plains
Insurance Company, and State Auto Insurance Company (n/k/a
State Auto Insurance Company of Ohio), dated November 17,
2000
10.24 2000 Stock Option Plan Definitive Proxy Statement on
Form DEF 14A for Annual Meeting of
Shareholders held on May 26, 2000 (File
No. 000-19289) (see Appendix A therein)
10.25 2000 Directors Stock Option Plan Definitive Proxy Statement on
Form DEF 14A for Annual Meeting of
Shareholders held on May 26, 2000 (File
No. 000-19289) (see Appendix B therein)
10.26 First Amendment to 2000 Directors Stock Option Plan Form 10-Q Quarterly Report for the
quarter ended March 31, 2001 (see
Exhibit 10(HH) therein)
10.27 Second Amendment to the Reinsurance Pooling Agreement Form 10-Q Quarterly Report for the
Amended and Restated as of January 1, 2000, by the State quarter ended June 30, 2001 (see
Automobile Mutual Insurance Company, State Auto Property and Exhibit 10(II) therein)
Casualty Insurance Company, Milbank Insurance Company,
Midwest Security Insurance Company (n/k/a State Auto
Insurance Company of Wisconsin), Farmers Casualty Insurance
Company, and State Auto Insurance Company (n/k/a State Auto
Insurance Company of Ohio)
10.28 Second Amendment to 1991 Directors Stock Option Plan Form 10-Q Quarterly Report for the
quarter ended September 30, 2001 (see
Exhibit 10(JJ) therein)
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IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.29 Second Amendment to 2000 Directors Stock Option Plan Form 10-Q Quarterly Report for the
quarter ended September 30, 2001 (see
Exhibit 10(KK) therein)
10.30 Third Amendment to 2000 Directors Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 2001 (see
Exhibit 10(EE) therein)
10.31 Third Amendment to State Auto Reinsurance Pooling Agreement, Form 10-K Annual Report for the year
Amended and Restated as of January 1, 2000 ended December 31, 2001 (see
Exhibit 10(FF) therein)
10.32 Stop Loss Reinsurance Agreement dated October 1, 2001, Form 10-K Annual Report for the year
between State Auto Property and Casualty Insurance Company, ended December 31, 2001 (see
Milbank Insurance Company, Farmers Casualty Insurance Exhibit 10(GG) therein)
Company, and State Auto Insurance Company (n/k/a State Auto
Insurance Company of Ohio) and State Automobile Mutual
Insurance Company
10.33 Amendment No. 2 to the Management and Operations Agreement, Form 10-K Annual Report for the year
dated January 1, 2000, among State Automobile Mutual ended December 31, 2001 (see
Insurance Company, State Auto Financial Corporation, State Exhibit 10(HH) therein)
Auto Property and Casualty Insurance Company, State Auto
National Insurance Company, Milbank Insurance Company, State
Auto Insurance Company (n/k/a State Auto Insurance Company
of Ohio), Stateco Financial Services, Inc., Strategic
Insurance Software, Inc., and 518 Property Management and
Leasing, LLC
10.34 Amendment No. 3 to the Management and Operations Agreement, Form 10-Q Quarterly Report for the
effective January 1, 2000, among State Automobile Mutual quarter ended June 30, 2002 (see
Insurance Company, State Auto Financial Corporation, State Exhibit 10(LL) therein)
Auto Property and Casualty Insurance Company, State Auto
National Insurance Company, Milbank Insurance Company, State
Auto Insurance Company (n/k/a State Auto Insurance Company
of Ohio), Stateco Financial Services, Inc., Strategic
Insurance Software, Inc., and 518 Property Management and
Leasing, LLC
10.35 Management Services Agreement, as of July 1, 2002, by and Form 10-Q Quarterly Report for the
among State Auto Property and Casualty Insurance Company, quarter ended September 30, 2002 (see
Meridian Insurance Group, Inc., Meridian Security Insurance Exhibit 10(NN) therein)
Company, Meridian Citizens Mutual Insurance Company, and
Meridian Citizens Security Insurance Company
10.36 Cost Sharing Agreement among State Auto Property and Form 10-K Annual Report for the year
Casualty Insurance Company, State Automobile Mutual ended December 31, 2002 (see
Insurance Company, and State Auto Florida Insurance Company, Exhibit 10(OO) therein)
effective January 1, 2003
-II-6-
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.37 Fourth Amendment to State Auto Reinsurance Pooling Form 10-K Annual Report for the year
Agreement, Amended and Restated as of January 1, 2000 ended December 31, 2002 (see
Exhibit 10(TT) therein)
10.38 Fourth Amendment to 2000 Directors Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 2002 (see
Exhibit 10(UU) therein)
10.39 Employment Agreement dated as of May 22, 2003, between State Form 10-Q Quarterly Report for the
Auto Financial Corporation and Robert H. Moone quarter ended June 30, 2003 (see
Exhibit 10(WW) therein)
10.40 Amended and Restated Declaration of Trust of STFC Capital Form 10-Q Quarterly Report for the
Trust I, dated as of May 22, 2003 quarter ended June 30, 2003 (see
Exhibit 10(XX) therein)
10.41 Indenture, dated as of May 22, 2003, for Floating Rate Form 10-Q Quarterly Report for the
Junior Subordinated Debt Securities Due 2033 quarter ended June 30, 2003 (see
Exhibit 10(YY) therein)
10.42 Amendment No. 3 to 1991 Stock Option Plan, effective January Form 10-Q Quarterly Report for the
1, 2001 quarter ended September 30, 2003 (see
Exhibit 10.01 therein)
10.43 Amendment No. 1 to 2000 Stock Option Plan, effective January Form 10-Q Quarterly Report for the
1, 2001 quarter ended September 30, 2003 (see
Exhibit 10.02 therein)
10.44 Addendum No. 1 to Property Catastrophe Overlying Excess of Form 10-Q Quarterly Report for the
Loss Reinsurance Contract, effective November 16, 2001 quarter ended September 30, 2003 (see
Exhibit 10.03 therein)
10.45 Property Catastrophe Overlying Excess of Loss Reinsurance Form 10-Q Quarterly Report for the
Contract, effective July 1, 2002 quarter ended June 30, 2003 (see
Exhibit 10.04 therein)
10.46 $100,000,000 Credit Agreement among SAF Funding Corporation, Form 8-K Current Report filed on
as Borrower, the Lenders, and KeyBank National Association, December 16, 2003 (see Exhibit 10.01
as Administrative Agent, head Arranger, and Sole Book therein).
Runner, dated as of November 12, 2003
10.47 Put Agreement among State Automobile Mutual Insurance Form 8-K Current Report filed on
Company, State Auto Financial Corporation, and KeyBank December 16, 2003 (see Exhibit 10.02
National Association, as Agent, dated as of November 12, 2003
therein).
10.48 Standby Purchase Agreement between State Auto Financial Form 8-K Current Report filed on
Corporation and SAF Funding Corporation, dated as of December 16, 2003 (see Exhibit 10.03
November 12, 2003 therein).
-II-7-
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
12.01 Computation of ratios Included herein
21.01 List of Subsidiaries of State Auto Financial Corporation Form 10-K Annual Report for the year
ended December 31, 2002 (see Exhibit 21
therein)
23.01 Consent of Ernst & Young LLP (Columbus, Ohio) Included herein
23.02 Consent of Baker & Hostetler LLP Contained in Exhibit 5.01, filed
herewith
24.01 Powers of Attorney of certain officers and directors of the Located on signature page hereto
Company
25.01 Form T-1 Statement of Eligibility and Qualification under Included herein
the Trust Indenture Act of 1939 of Fifth Third Bank to act
as trustee under the indenture
99.01 Form of Letter of Transmittal Included herein
99.02 Form of Notice of Guaranteed Delivery Included herein
99.03 Form of Letter to Clients Included herein
99.04 Form of Letter to Institutional Lenders Included herein
-II-8-
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
-II-9-
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired or involved therein, that was not the subject of and
included in the registration statement when it became effective.
-II-10-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Columbus,
State of Ohio, on the 23rd day of December, 2003.
STATE AUTO FINANCIAL CORPORATION
By: /s/ Robert H. Moone
------------------------------------------
Robert H. Moone, Chairman, President, and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below, hereby constitutes and appoints John R. Lowther, Steven J.
Johnston, and Joseph P. Boeckman, or any one of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place, and stead, in any
and all capacities, to sign any and all amendments to the Registration
Statement, including post-effective amendments and registration statements filed
pursuant to Rule 462 under the Securities Act of 1933, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and does hereby grant unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Robert H. Moone Date: December 23, 2003
--------------------------------------------
Robert H. Moone, Chairman, President,
and Chief Executive Officer (principal
executive officer)
/s/ Steven J. Johnston Date: December 23, 2003
--------------------------------------------
Steven J. Johnston, Senior Vice President,
Treasurer, and Chief Financial Officer
(principal financial officer)
/s/ Cynthia A. Powell Date: December 23, 2003
--------------------------------------------
Cynthia A. Powell, Vice President and
Comptroller (principal accounting officer)
/s/ John R. Lowther Date: December 23, 2003
--------------------------------------------
John R. Lowther, Director
/s/ David J. D'Antoni Date: December 23, 2003
--------------------------------------------
David J. D'Antoni, Director
[Signatures continued on next page]
-II-11-
/s/ Urlin G. Harris Jr. Date: December 23, 2003
--------------------------------------------
Urlin G. Harris Jr., Director
/s/ Paul W. Huesman Date: December 23, 2003
--------------------------------------------
Paul W. Huesman, Director
/s/ William J. Lhota Date: December 23, 2003
--------------------------------------------
William J. Lhota, Director
/s/ S. Elaine Roberts Date: December 23, 2003
--------------------------------------------
S. Elaine Roberts, Director
/s/ Richard K. Smith Date: December 23, 2003
--------------------------------------------
Richard K. Smith, Director
/s/ Paul S. Williams, Jr. Date: December 23, 2003
--------------------------------------------
Paul S. Williams, Director
-II-12-
INDEX OF EXHIBITS
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
3.01 Amended and Restated Articles of Incorporation of State Auto Securities Act Registration Statement
Financial Corporation on Form S-1 (File No. 33-40643) (see
Exhibit 3(a) therein)
3.02 Amendment to Amended and Restated Articles of Incorporation Securities Act Registration Statement
of State Auto Financial Corporation on Form S-8 (File No. 33-89400) (see
Exhibit 4(b) therein)
3.03 Amendment to Amended and Restated Articles of Incorporation Form 10-K Annual Report for the year
of State Auto Financial Corporation ended December 31, 1998 (see
Exhibit 3(A)(3) therein)
3.04 Amended and Restated Code of Regulations of State Auto Securities Act Registration Statement
Financial Corporation on Form S-1 (File No. 33-40643) (see
Exhibit 3(b) therein)
4.01 Indenture dated as of November 13, 2003, among State Auto Included herein
Financial Corporation, as Issuer, and Fifth Third Bank as
Trustee
4.02 Form of 6 1/4% Senior Note due 2013 (Exchange Note) Included herein
4.03 Registration Rights Agreement by and among State Auto Included herein
Financial Corporation and the Representatives of the Initial
Purchasers dated November 13, 2003
5.01 Opinion and consent of Baker & Hostetler LLP with respect to Included herein
the validity of the exchange notes being registered
10.01 Guaranty Agreement between State Automobile Mutual Insurance Securities Act Registration Statement
Company and State Auto Property and Casualty Insurance on Form S-1 (File No. 33-40643) (see
Company, dated as of May 16, 1991 Exhibit 10(d) therein)
10.02 Form of Indemnification Agreement between State Auto Securities Act Registration Statement
Financial Corporation and each of its directors on Form S-1 (File No. 33-40643) (see
Exhibit 10(e) therein)
10.03 State Auto Financial Corporation 1991 Quality Performance Securities Act Registration Statement
Bonus Plan on Form S-1 (File No. 33-40643) (see
Exhibit 10(f) therein)
10.04 1991 Stock Option Plan Securities Act Registration Statement
on Form S-1 (File No. 33-40643) (see
Exhibit 10(h) therein)
10.05 Amendment Number 1 to the 1991 Stock Option Plan Securities Act Registration Statement
on Form S-8 (File No. 33-89400) (see
Exhibit 4(a) therein)
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.06 1991 Directors' Stock Option Plan Securities Act Registration Statement
on Form S-1 (File No. 33-40643) (see
Exhibit 10(i) therein)
10.07 License Agreement between State Automobile Mutual Insurance Securities Act Registration Statement
Company and Policy Management Systems Corporation, dated on Form S-1 (File No. 33-40643) (see
December 28, 1984 Exhibit 10(k) therein)
10.08 Investment Management Agreement between Stateco Financial Form 10-K Annual Report for the year
Services, Inc. and State Automobile Mutual Insurance ended December 31, 1992 (see
Company, effective April 1, 1993 Exhibit 10(N) therein)
10.09 State Auto Insurance Companies Directors' Deferred Form 10-K Annual Report for year ended
Compensation Plan December 31, 1995 (see Exhibit 10(S)
therein)
10.10 State Auto Insurance Companies Amended and Restated Securities Act Registration Statement
Non-Qualified Incentive Deferred Compensation Plan on Form S-8 (File No. 333-56338) (see
Exhibit 4(e) therein)
10.11 Amendment Number 2 to the 1991 Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 1996 (see
Exhibit 10(DD) therein)
10.12 Amendment Number 1 to the 1991 Directors' Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 1996 (see
Exhibit 10(EE) therein)
10.13 Amended and Restated SERP of State Auto Mutual, effective as Form 10-K Annual Report for the year
of January 1, 1994 ended December 31, 1997 (see
Exhibit 10(HH) therein)
10.14 Credit Agreement dated as of June 1, 1999, between State Form 10-Q Quarterly Report for the
Auto Financial Corporation and State Automobile Mutual quarter ended June 30, 1999 (see
Exhibit 10(LL) therein)
10.15 Reinsurance Pooling Agreement, amended and restated as of Form 10-K Annual Report for the year
January 1, 2000, by and among State Automobile Mutual ended December 31, 1999 (see
Insurance Company, State Auto Property and Casualty Exhibit 10(W) therein)
Insurance Company, Milbank Insurance Company, Midwest
Security Insurance Company (n/k/a State Auto Insurance
Company of Wisconsin), Farmers Casualty Insurance Company,
and State Auto Insurance Company (n/k/a State Auto Insurance
Company of Ohio)
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.16 Management and Operations Agreement, as of January 1, 2000, Form 10-K Annual Report for the year
among State Automobile Mutual Insurance Company, State Auto ended December 31, 1999 (see
Financial Corporation, State Auto Property and Casualty Exhibit 10(X) therein)
Insurance Company, State Auto National Insurance Company,
Milbank Insurance Company, State Auto Insurance Company
(n/k/a State Auto Insurance Company of Ohio), Stateco
Financial Services, Inc., Strategic Insurance Software,
Inc., and 518 Property Management and Leasing, LLC
10.17 Property Catastrophe Overlying Excess of Loss Reinsurance Form 10-K Annual Report for the year
contract issued to State Automobile Mutual Insurance ended December 31, 1999 (see
Company, State Auto National Insurance Company, Milbank Exhibit 10(Y) therein)
Insurance Company, Midwest Security Insurance Company (n/k/a
State Auto Insurance Company of Wisconsin), Farmers Casualty
Insurance Company, and Mid-Plains Insurance Company by State
Auto Property and Casualty Insurance Company
10.18 First Amendment to the Management and Operations Agreement, Form 10-K Annual Report for the year
effective January 1, 2000, among State Automobile Mutual ended December 31, 1999 (see
Insurance Company, State Auto Financial Corporation, State Exhibit 10(Z) therein)
Auto Property and Casualty Insurance Company, State Auto
National Insurance Company, Milbank Insurance Company, State
Auto Insurance Company (n/k/a State Auto Insurance Company
of Ohio), Stateco Financial Services, Inc., Strategic
Insurance Software, Inc., and 518 Property Management and
Leasing, LLC
10.19 First Amendment to the June 1, 1999, Credit Agreement, dated Form 10-K Annual Report for the year
November 1, 1999, between State Auto Financial Corporation ended December 31, 1999 (see
and State Automobile Mutual Insurance Company Exhibit 10(AA) therein)
10.20 Second amendment to the June 1, 1999, Credit Agreement, Form 10-Q Quarterly Report for the
dated December 1, 1999, between State Auto Financial quarter ended March 31, 2000 (see
Corporation and State Automobile Mutual Insurance Company Exhibit 10(BB) therein)
10.21 Form of Executive Agreement between State Auto Financial Form 10-K Annual Report for the year
Corporation and certain executive officers ended December 31, 2000 (see
Exhibit 10(CC) therein)
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.22 First Amendment to the Reinsurance Pooling Agreement Amended Form 10-K Annual Report for the year
and Restated as of January 1, 2000, by and among State Auto ended December 31, 2000 (see
Property and Casualty Insurance Company, State Automobile Exhibit 10(DD) therein)
Mutual Insurance Company, Milbank Insurance Company, Midwest
Security Insurance Company (n/k/a State Auto Insurance
Company of Wisconsin), Farmers Casualty Insurance Company,
and State Auto Insurance Company (n/k/a State Auto Insurance
Company of Ohio)
10.23 Addendum No. 1 of the Property Catastrophe Overlying Excess Form 10-K Annual Report for the year
of Loss Reinsurance Contract by and among State Auto ended December 31, 2000 (see
Property and Casualty Insurance Company, State Automobile Exhibit 10(EE) therein)
Mutual Insurance Company, State Auto National Insurance
Company, Milbank Insurance Company, Midwest Security
Insurance Company (n/k/a State Auto Insurance Company of
Wisconsin), Farmers Casualty Insurance Company, Mid-Plains
Insurance Company, and State Auto Insurance Company (n/k/a
State Auto Insurance Company of Ohio), dated November 17,
2000
10.24 2000 Stock Option Plan Definitive Proxy Statement on
Form DEF 14A for Annual Meeting of
Shareholders held on May 26, 2000 (File
No. 000-19289) (see Appendix A therein)
10.25 2000 Directors Stock Option Plan Definitive Proxy Statement on
Form DEF 14A for Annual Meeting of
Shareholders held on May 26, 2000 (File
No. 000-19289) (see Appendix B therein)
10.26 First Amendment to 2000 Directors Stock Option Plan Form 10-Q Quarterly Report for the
quarter ended March 31, 2001 (see
Exhibit 10(HH) therein)
10.27 Second Amendment to the Reinsurance Pooling Agreement Form 10-Q Quarterly Report for the
Amended and Restated as of January 1, 2000, by the State quarter ended June 30, 2001 (see
Automobile Mutual Insurance Company, State Auto Property and Exhibit 10(II) therein)
Casualty Insurance Company, Milbank Insurance Company,
Midwest Security Insurance Company (n/k/a State Auto
Insurance Company of Wisconsin), Farmers Casualty Insurance
Company, and State Auto Insurance Company (n/k/a State Auto
Insurance Company of Ohio)
10.28 Second Amendment to 1991 Directors Stock Option Plan Form 10-Q Quarterly Report for the
quarter ended September 30, 2001 (see
Exhibit 10(JJ) therein)
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.29 Second Amendment to 2000 Directors Stock Option Plan Form 10-Q Quarterly Report for the
quarter ended September 30, 2001 (see
Exhibit 10(KK) therein)
10.30 Third Amendment to 2000 Directors Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 2001 (see
Exhibit 10(EE) therein)
10.31 Third Amendment to State Auto Reinsurance Pooling Agreement, Form 10-K Annual Report for the year
Amended and Restated as of January 1, 2000 ended December 31, 2001 (see
Exhibit 10(FF) therein)
10.32 Stop Loss Reinsurance Agreement dated October 1, 2001, Form 10-K Annual Report for the year
between State Auto Property and Casualty Insurance Company, ended December 31, 2001 (see
Milbank Insurance Company, Farmers Casualty Insurance Exhibit 10(GG) therein)
Company, and State Auto Insurance Company (n/k/a State Auto
Insurance Company of Ohio) and State Automobile Mutual
Insurance Company
10.33 Amendment No. 2 to the Management and Operations Agreement, Form 10-K Annual Report for the year
dated January 1, 2000, among State Automobile Mutual ended December 31, 2001 (see
Insurance Company, State Auto Financial Corporation, State Exhibit 10(HH) therein)
Auto Property and Casualty Insurance Company, State Auto
National Insurance Company, Milbank Insurance Company, State
Auto Insurance Company (n/k/a State Auto Insurance Company
of Ohio), Stateco Financial Services, Inc., Strategic
Insurance Software, Inc., and 518 Property Management and
Leasing, LLC
10.34 Amendment No. 3 to the Management and Operations Agreement, Form 10-Q Quarterly Report for the
effective January 1, 2000, among State Automobile Mutual quarter ended June 30, 2002 (see
Insurance Company, State Auto Financial Corporation, State Exhibit 10(LL) therein)
Auto Property and Casualty Insurance Company, State Auto
National Insurance Company, Milbank Insurance Company, State
Auto Insurance Company (n/k/a State Auto Insurance Company
of Ohio), Stateco Financial Services, Inc., Strategic
Insurance Software, Inc., and 518 Property Management and
Leasing, LLC
10.35 Management Services Agreement, as of July 1, 2002, by and Form 10-Q Quarterly Report for the
among State Auto Property and Casualty Insurance Company, quarter ended September 30, 2002 (see
Meridian Insurance Group, Inc., Meridian Security Insurance Exhibit 10(NN) therein)
Company, Meridian Citizens Mutual Insurance Company, and
Meridian Citizens Security Insurance Company
10.36 Cost Sharing Agreement among State Auto Property and Form 10-K Annual Report for the year
Casualty Insurance Company, State Automobile Mutual ended December 31, 2002 (see
Insurance Company, and State Auto Florida Insurance Company, Exhibit 10(OO) therein)
effective January 1, 2003
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
10.37 Fourth Amendment to State Auto Reinsurance Pooling Form 10-K Annual Report for the year
Agreement, Amended and Restated as of January 1, 2000 ended December 31, 2002 (see
Exhibit 10(TT) therein)
10.38 Fourth Amendment to 2000 Directors Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 2002 (see
Exhibit 10(UU) therein)
10.39 Employment Agreement dated as of May 22, 2003, between State Form 10-Q Quarterly Report for the
Auto Financial Corporation and Robert H. Moone quarter ended June 30, 2003 (see
Exhibit 10(WW) therein)
10.40 Amended and Restated Declaration of Trust of STFC Capital Form 10-Q Quarterly Report for the
Trust I, dated as of May 22, 2003 quarter ended June 30, 2003 (see
Exhibit 10(XX) therein)
10.41 Indenture, dated as of May 22, 2003, for Floating Rate Form 10-Q Quarterly Report for the
Junior Subordinated Debt Securities Due 2033 quarter ended June 30, 2003 (see
Exhibit 10(YY) therein)
10.42 Amendment No. 3 to 1991 Stock Option Plan, effective January Form 10-Q Quarterly Report for the
1, 2001 quarter ended September 30, 2003 (see
Exhibit 10.01 therein)
10.43 Amendment No. 1 to 2000 Stock Option Plan, effective January Form 10-Q Quarterly Report for the
1, 2001 quarter ended September 30, 2003 (see
Exhibit 10.02 therein)
10.44 Addendum No. 1 to Property Catastrophe Overlying Excess of Form 10-Q Quarterly Report for the
Loss Reinsurance Contract, effective November 16, 2001 quarter ended September 30, 2003 (see
Exhibit 10.03 therein)
10.45 Property Catastrophe Overlying Excess of Loss Reinsurance Form 10-Q Quarterly Report for the
Contract, effective July 1, 2002 quarter ended June 30, 2003 (see
Exhibit 10.04 therein)
10.46 $100,000,000 Credit Agreement among SAF Funding Corporation, Form 8-K Current Report filed on
as Borrower, the Lenders, and KeyBank National Association, December 16, 2003 (see Exhibit 10.01
as Administrative Agent, head Arranger, and Sole Book therein).
Runner, dated as of November 12, 2003
10.47 Put Agreement among State Automobile Mutual Insurance Form 8-K Current Report filed on
Company, State Auto Financial Corporation, and KeyBank December 16, 2003 (see Exhibit 10.02
National Association, as Agent, dated as of November 12, 2003
therein).
10.48 Standby Purchase Agreement between State Auto Financial Form 8-K Current Report filed on
Corporation and SAF Funding Corporation, dated as of December 16, 2003 (see Exhibit 10.03
November 12, 2003 therein).
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NUMBER DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
12.01 Computation of ratios Included herein
21.01 List of Subsidiaries of State Auto Financial Corporation Form 10-K Annual Report for the year
ended December 31, 2002 (see Exhibit 21
therein)
23.01 Consent of Ernst & Young LLP (Columbus, Ohio) Included herein
23.02 Consent of Baker & Hostetler LLP Contained in Exhibit 5.01, filed
herewith
24.01 Powers of Attorney of certain officers and directors of the Located on signature page hereto
Company
25.01 Form T-1 Statement of Eligibility and Qualification under Included herein
the Trust Indenture Act of 1939 of Fifth Third Bank to act
as trustee under the indenture
99.01 Form of Letter of Transmittal Included herein
99.02 Form of Notice of Guaranteed Delivery Included herein
99.03 Form of Letter to Clients Included herein
99.04 Form of Letter to Institutional Lenders Included herein