ALEXANDER & ALEXANDER SERVICES INC.1211 Avenue of the AmericasNew York, New York 10036
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS JULY 15, 1994
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of
Directors of Alexander & Alexander Services Inc. (the "Company") to be voted at a Special
Meeting of Stockholders which will be held at The Equitable Center Auditorium, 787 Seventh
Avenue, New York, New York at 11:00 a.m., local time, on Friday, July 15, 1994, and at any
adjournments thereof (the "Special Meeting") for the purpose of submitting to a vote of the
stockholders the proposals described in the attached Notice of Special Meeting (the "Investment
Proposals").
Shares represented by properly executed proxies received prior to or at the meeting, unless such
proxies have been revoked, will be voted in accordance with the instructions indicated in the
proxies. If no instructions are indicated on a properly executed proxy of the Company, the proxy
will be voted in accordance with the recommendations of the Board of Directors.
A stockholder may revoke a proxy at any time before it is exercised by filing with the Secretary
of the Company a written revocation or a duly executed proxy bearing a later date or by voting in
person at the Special Meeting. Any written notice revoking a proxy should be sent to the
attention of Frank R. Wieczynski, Secretary, Alexander & Alexander Services Inc., 10461 Mill
Run Circle, Owings Mills, Maryland 21117.
This Proxy Statement and the accompanying form of proxy are being mailed to stockholders on
or about June 27, 1994.
If a stockholder is the beneficial owner of the Company's Class A Common Stock, a direction
and proxy will be delivered to Montreal Trust Company, as trustee, in connection with the shares
beneficially owned by said stockholder and held by the trustee. The trustee will vote the Class A
Common Stock in accordance with the directions received from the beneficial owners.
The cost of soliciting proxies will be borne by the Company. In addition to the solicitation by
mail, proxies may be solicited by officers, directors and regular employees of the Company in
person or by telephone, telegraph or facsimile. The Company has retained D.F. King & Co., Inc.
to assist in the solicitation for a fee estimated at $20,000 plus reasonable expenses. The
Company may also reimburse brokers, custodians, nominees and other fiduciaries for their
reasonable expenses in forwarding proxy materials to principals.VOTING SECURITIES AND PRINCIPAL HOLDERS
Only holders of record of the Company's Common Stock, par value $1.00 ("Common Stock"),
Class A Common Stock, par value $.00001 ("Class A Stock"), and Class C Common Stock, par
value $1.00 ("Class C Stock"), at the close of business on June 27, 1994 (the "Record Date") are
entitled to vote at the Special Meeting. As of the close of business on June 21, 1994, there were
outstanding 41,037,453 shares of Common Stock, 2,409,600 shares of Class A Stock and
382,130 shares of Class C Stock. Such shares are each entitled to one vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following sets forth information as of June 2, 1994, regarding persons who, to the best of the
Company's knowledge, beneficially own more than five percent of the outstanding shares of the
Common Stock, Class A Stock or Class C Stock.
Percentage Percent
and Class Number of Total
Name and Address of Stockholder of Stock of Shares Voting Shares
The Prudential Insurance Company of America(l) 9.91% 4,039,500 9.27%
Prudential Plaza Common
Newark, NJ 07102-3777 Stock 13.79% 317,252 0%
Series A
Convertible
Preferred Stock
Southeastern Asset Management, Inc.(l) 9.53% 3,886,470 8.92%
Suite 301 Common
860 Ridgelake Boulevard Stock
Memphis, TN 38120
Delaware Management Company, Inc.(l) 8.19% 3,337,700 7.66%
1818 Market Street Common
Philadelphia, P.A 19103 Stock
Norwest Corporation(l)(2) 7.25% 2,955,950 6.79% Norwest Center Common
Sixth and Marquette Stock
Minneapolis, MN 55479
Ontario Municipal Employees Retirement 55.89% 1,346,823 3.1%
System(l) Class A
One University Avenue Stock
Suite 1100
Toronto, Canada M5J 2PI
Trustees of the Alexander & Alexander 65.28% 249,980 .57%
U.K. Voluntary Equity Scheme(l) Class C
145 St. Vincent Street Stock
Glasgow, Scotland G2 5NX.32% 130,130 .30%
Common
Stock
__________
(1) As reported on the Schedule 13G most recently filed by the stockholder with the
Securities and Exchange Commission.
(2) Together with subsidiaries: Norwest Colorado, Inc. and Norwest Bank Colorado,
National Association.__________
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of June 2, 1994 regarding the beneficial ownership
of outstanding shares of Common Stock and Class A Stock by directors and certain officers and
all directors and executive officers as a group.
Common
Stock Common Stock Class A Stock
Beneficially Subject to Beneficially
Name Owned(l) Options(2) Owned
Tinsley H. Irvin(3) 39,991 211,946
Kenneth Black, Jr 500
John A. Bogardus, Jr 91,700
Robert E. Boni 1,000
Lawrence E. Burk 28,618 25,750
Ronald W. Forrest(3) 8,595 42,440
Peter C. Godsoe 500
Angus M.M. Grossart
Ronald A. Iles(4) 32,195 50,601
Vincent R. McLean 200
Michael K. White(5) 38,688 98,425
William M. Wilson 2,346 83,925 26,975
All directors and executive officers as a group
(18 persons) (4) (5) (6) (7) (8) 288,710 435,686 26,975
______
(1) Includes the number of shares: (i) that are held directly or indirectly for the benefit of the individuals listed or directly for the benefit of members of an individual's family as to
which beneficial ownership is disclaimed; (ii) that represent such individuals' interests in
shares vested as of March 31, 1994 in the stock fund under the Company's Thrift Plan or
similar plans; and (iii) that represent restricted stock that may vest in the future.
(2) Represents shares which are subject to options exercisable within 60 days from June 2, 1994.
(3) Mr. Irvin retired from the Company effective April 1, 1994. Mr. Forrest retired from the
Company effective January 1, 1994. The information as to beneficial ownership by
Messrs. Irvin and Forrest reflects information available to the Company as of their
respective retirement dates.
(4) Does not include 83 shares of Common Stock and 159 shares of Class C Stock held under
the U.K. Voluntary Equity Scheme attributed to Mr. Iles, who does not have any present
voting or dispositive power.
(5) As of June 16, 1994, Mr. White stepped down as President of the Company and Dr. Boni stepped down as Chairman of the Board of Directors. Dr. Boni continues as a director
and as Chairman of the Executive Committee of the Board of Directors.
(6) Mr. Wilson beneficially owns 1.1 percent of the Class A Stock. No other individual director or executive officer beneficially owns more than I percent of any class of the
Company's voting shares. All officers and directors as a group own approximately 1.8
percent of the Common Stock, approximately 1.1 percent of the Class A Stock, none of
the Class C Stock and approximately 1.7 percent of the total outstanding voting shares.
(7) Does not include Common Stock shares beneficially owned or subject to options that are
held by Messrs. Irvin and Forrest.
(8) As of June 17, 1994, Mr. Frank G. Zarb, whose appointment as Chairman, Chief Executive Officer and President of the Company became effective on June 16, 1994,
received a restricted stock grant for 271,307 shares of Common Stock, which will
generally vest on June 16, 1996 and is subject to reduction based on the amount of the
bonus that is paid to Mr. Zarb by his former employer with respect to 1994.
INVESTMENT PROPOSALS
CERTAIN ASPECTS OF THE INVESTMENT PROPOSALS ARE SUMMARIZED
BELOW. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PURCHASE
AGREEMENT, ATTACHED AS APPENDIX I, THE CHARTER AMENDMENT,
SUBSTANTIALLY IN THE FORM ATTACHED AS APPENDIX II, AND THE
ARTICLES SUPPLEMENTARY, SUBSTANTIALLY IN THE FORM ATTACHED AS
APPENDIX III, EACH OF WHICH IS HEREBY INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS ARE URGED TO READ THE APPENDICES TO
THIS PROXY STATEMENT IN THEIR ENTIRETY.
THE APPROVAL OF EACH INVESTMENT PROPOSAL IS CONTINGENT ON THE
APPROVAL OF BOTH INVESTMENT PROPOSALS. UNLESS BOTH INVESTMENT
PROPOSALS ARE APPROVED BY THE STOCKHOLDERS AT THE MEETING,
BOTH INVESTMENT PROPOSALS WELL BE DEEMED TO HAVE BEEN REJECTED
BY THE STOCKHOLDERS.
Background of and Reasons for the Investment Proposals
On January 14, 1994, the Board of Directors of the Company effected the following significant
changes in the management of the Company: (i) the Executive Committee of the Board of
Directors assumed added responsibilities for oversight of policy and management controls of the
Company; (ii) the functions of chairman of the Board of Directors and chief executive officer of
the Company were separated; (iii) T.H. Irvin resigned as chairman of the Board of Directors and
chairman of its Executive Committee and agreed to continue to serve as chief executive officer
of the Company through March 1994 and complete his term on the Board of Directors; (iv) Dr.
Robert E. Boni, a non-employee member of the Company's Board of Directors for the past five
years, was elected as non-executive Chairman of the Board of Directors and Chairman of its
Executive Committee; and (v) the Board of Directors authorized the Executive Committee to
establish a committee to conduct an international search for a new chief executive officer.
On April 25, 1994, the Company announced a net loss of $0.15 per share for the first quarter of
1994. As reported in the Company's Form 10-Q for the first quarter of 1994, at March 31, 1994,
the Company was not in compliance with one of the financial covenants in its long-term credit
agreement, under which no borrowings were outstanding. The Company's bank group granted a
waiver of this covenant requirement for the first quarter of 1994. Effective as of March 31, 1994,
the long-term credit agreement was amended to reduce the amount available from $150 million
to $75 million and to require the Company, before making any committed borrowings under the
agreement, to be in compliance with all of the agreement's financial covenants, without giving
effect to any waivers of compliance, for two consecutive quarters. While the Company believed
it had adequate cash resources to meet operating needs through the first quarter of 1995, the
Company, based on its financial projections, would not be able to borrow under its long-term
credit agreement until the first quarter of 1995, at the earliest.
Following the Company's January announcement and the announcement of its first quarter 1994
results, the Company from time to time received preliminary unsolicited expressions from third
parties as to possible business combinations, including a possible acquisition by the Company of
another business in exchange for shares of the Company, and possible acquisitions of the
Company. The Company expressed no interest in pursuing these approaches.
A number of the candidates for the chief executive officer position who were interviewed by the
Company's search committee (including Mr. Frank G. Zarb) indicated their views that the
Company needed additional capital to enable it to build its core businesses. Mr. Zarb indicated
that a satisfactory arrangement for the obtaining of additional capital was a pre-condition to his
willingness to accept an offer to become chief executive officer of the Company.
On April 20, Maurice R. Greenberg, Chairman and Chief Executive Officer of American Interna-
tional Group, Inc. ("AIG"), and Dr. Robert E. Boni, who had been appointed non-executive
Chairman of the Board of the Company on January 14, 1994, discussed the Company's strategic
opportunities and its need for additional capital to realize those opportunities. On May 4, Mr.
Greenberg and Dr. Boni met again, with other representatives of the two companies. At that
meeting Mr. Greenberg expressed interest in the making by AIG or an AIG subsidiary of a
significant minority investment in the Company, by means of a purchase of convertible preferred
stock of the Company. Mr. Greenberg said that AIG was not interested in acquiring control of
the Company, was not looking for representation on the Company's Board of Directors and was
instead interested in acquiring equity in the Company. Dr. Boni said that the Company was
interested in an arrangement to assist it with respect to its contingent exposures relating to its
discontinued operations, including the Company's indemnification obligations to purchasers of
Sphere Drake Insurance Group (an insurance business the Company had acquired in 1982 as part
of its acquisition of Alexander Howden). Mr. Greenberg indicated that AIG, as a company
whose insurance subsidiaries sell insurance through the Company's insurance brokerage
operations, was interested in seeing the Company remain an independent insurance broker.Dr. Boni indicated to Mr. Greenberg that the Company might be interested in exploring an
investment in the Company by AIG, but only if it was clear that the investment did not involve a
change of control of the Company (since the investment was for only a minority of the
Company's equity).
In mid-May, the Company retained CS First Boston Corporation ("CS First Boston") to act as its
financial advisor in connection with the Company's review of strategic and financial planning
matters, including the possible sale of equity or equity-linked securities of the Company to an
investor and also retained J.P. Morgan Securities Inc. ("JP Morgan") as its advisor on strategic
issues.
On May 16, the Board of Directors of the Company considered the Company's cash needs and
sources of capital, and discussed AIG's expression of interest in a minority investment in the
Company. On May 19, the Board of Directors of the Company considered these matters further,
and also reviewed the discussions with the Company's lenders and the Company's prospects as
an independent company. In addition, the Board, with the assistance of its financial advisors CS
First Boston and JP Morgan, considered whether and on what terms and timetable alternative
sources of capital might be available, including a sale of a minority interest to a financial
investor or to a strategic investor other than AIG, a public offering or underwritten private
placement of convertible or debt securities, a rights offering to existing shareholders, and a sale
of assets. After considering these alternatives the Board authorized the Chairman, the Treasurer
and the Chief Financial Officer of the Company to conduct discussions with AIG and to
negotiate preliminary terms for such an investment, with the final terms of the investment to be
subject to the Board's approval.
In the weeks that followed, the terms of the proposed Series B Preferred Stock were intensively
negotiated between representatives of the Company and of AIG. The Company had explored the
possibility of a simultaneous rights offering to stockholders, with AIG acting as standby
underwriter. However, AIG declined to act as standby underwriter, and the $200 million
investment by AIG was perceived as adequate for the Company's capital needs. Negotiations
regarding the structure and terms of the Series B Preferred Stock included discussions for the
inclusion of standstill provisions in the Purchase Agreement; anti-dilution protection included in
the conversion feature; the existence of a class vote for the Series B Preferred Stock upon the
occurrence of certain specified corporate actions; the terms of certain conditions precedent to the
redemption of the Series B Preferred Stock at the option of the Company; and the events giving
rise to a special redemption right at the option of the holders of Series B Preferred Stock. After
review of various proposals by each of the parties, it was agreed that the purchase agreement
would include standstill provisions; that anti-dilution protection of the conversion feature would
apply if the Company issued shares. below the conversion price then in effect; that the holders of
the Series B Preferred Stock would not have a separate class vote for certain specified corporate
actions; that the Series B Preferred Stock would be redeemable at the option of the Company
only after the Common Stock of the Company had traded at a price in excess of 150% of the
conversion price then in effect for a period of 30 consecutive trading days; that the initial
conversion price would be set at $17 per share (or approximately 120% of the opening price of
$14 1/4 per share of Common Stock on May 13, the date the conversion price was set); and that
the special redemption at the option of the holders would be triggered, among other things, if.
dividends and other equity payments on any class or series of stock of the Company, Reed
Stenhouse Companies Limited ("RSC") or Alexander & Alexander Services UK plc ("AAE") or
any of their respective subsidiaries (other than dividends on $3.625 Series A Convertible
Preferred Stock ("Series A Preferred Stock") and Series B Preferred Stock and certain
intercompany dividends) were in excess of $0.075 per share of Common Stock, RSC Class A
Shares and AAE Dividend Shares in the aggregate in the last seven months of 1994,
cumulatively 25% of the Company's earnings in 1995 and 1996, and thereafter cumulatively
50% of earnings in subsequent years; 35% of the Company's assets were sold; or 35% (or in
certain circumstances, 10%) of the total voting power of the Company's voting stock were
purchased by third parties. For a description of the rights and privileges of the Series B Preferred
Stock, see "THE PURCHASE AGREEMENT-Terms of Series B Preferred Stock."During the period prior to the finalization of the Stock Purchase and Sale Agreement, dated as of
June 6, 1994 (as it may be amended from time to time, the "Purchase Agreement"), between the
Company and AIG, the Company also concluded negotiations with Mr. Frank G. Zarb
concerning his appointment as Chairman, Chief Executive Officer and President of the
Company. Dr. Boni informed Mr. Greenberg of the proposed appointment of Mr. Zarb, and
informed Mr. Zarb of AIG's proposed investment in the Company.
The Company intends to enter into an insurance or reinsurance arrangement to further protect its
financial position with respect to certain of its discontinued underwriting exposures. An
insurance or reinsurance arrangement reasonably acceptable to AIG with an insurer or reinsurer
reasonably acceptable to AIG is a condition precedent to AIG's obligation to make its investment
under the Purchase Agreement. See "THE PURCHASE AGREEMENT-Conditions to Closing."
On June 6 and 7, the Board of Directors held a special meeting to consider the Investment
Proposals. On June 7, the Board of Directors unanimously approved the Investment Proposals
and the election of Mr. Zarb (effective as of the commencement of his employment with the
Company which began on June 16) as Chairman, Chief Executive Officer and President of the
Company. On June 7, the Board of Directors reduced the Company's regular quarterly dividend
on its Common Stock from $0.25 to $0.025.
On June 1, Standard & Poor's Ratings Group ("S&P”) placed its BB- rating of the Company's
$60 million 11% convertible subordinated debentures due 2007 on CreditWatch with negative
implications, reflecting the ongoing difficult conditions for the Company's U.S. retail brokerage
operations, reduced financial flexibility relating to the reduction of its long term credit agreement
and uncertainty toward reserves for insurance operations of sold businesses. On June 8,
subsequent to the announcement of the proposed AIG investment and the appointment of Mr.
Zarb, S&P announced that the Company's 11% convertible subordinated debentures due 2007
remained on CreditWatch with negative implications. S&P also indicated its intent to discuss
with the management of the Company its plans for the business before making a final rating
determination.On June 7, 1994, Fitch Investors Services Inc. placed the Company's F-2 commercial paper
rating on FitchAlert with negative implications. The rating agency said the action is a result of
the Company's continuing poor performance in its core retail insurance brokerage operations,
uncertainty regarding eventual liabilities stemming from its previously owned Shand Morahan
and Sphere Drake operations and its being out of compliance with one of the financial covenants
in its long-term credit agreement. The Company has no commercial paper outstanding. On June
14, the Company sent a written request to Fitch Investor Services Inc. requesting that it withdraw
its rating on the Company's commercial paper.
After the announcement of the AIG Investment, Mr. Zarb's appointment as Chairman of the
Board of Directors, Chief Executive Officer and President of the Company and the dividend
reduction, on June 9, Moody's Investors Service Inc. ("Moody's") placed the rating on the Series
A Preferred Stock of the Company under review for possible upgrade. The rating agency said
that the review will focus on the possible changes in the Company's strategic direction and on its
long-term financial profile. Moody's also stated that the direct effects of the proposed preferred
stock investment by AIG will also be reviewed.
Board of Directors' Recommendations
The Board of Directors has reviewed and considered the terms and conditions of the Investment
Proposals and believes that the Investment Proposals are fair to, and are advisable and in the best
interests of, the Company and its stockholders and has unanimously approved the Investment
Proposals and unanimously recommends that stockholders vote for approval of the Investment
Proposals. The Company's directors and executive officers (who currently hold Common Stock
and Class A Stock representing in the aggregate less than 1% of the total voting power of the
Common Stock, the Class A Stock and the Class C Stock) have indicated that they intend to vote
all shares of voting stock over which they exercise voting power as of the close of business on
the Record Date in favor of approval of the Investment Proposals.
The Board of Directors, in recommending that the stockholders of the Company approve the
Investment Proposals, considered a number of factors, including (a) the current business,
properties and prospects of the Company and its subsidiaries, the financial and operational
condition of the Company and its subsidiaries and the long-term strategy of the Company; (b) the
substantial increase in the Company's available cash and access to capital that will occur as a
result of AIG's investment and the resulting increased ability of the Company to take advantage
of strategic opportunities which may be available from time to time and to generally strengthen
its competitive position in the insurance industry; (c) the terms of the Purchase Agreement, the
Charter Amendment and other documents relating to the Investment Proposals; (d) the extent of
independence that the Company will retain following the consummation of the transactions
contemplated by the Purchase Agreement; (e) the alternatives to AIG s investment (the
"Investment") in the Company, including alternative public or private financing and seeking an
alternative investor; (j) the written opinion of CS First Boston to the effect that the consideration
to be received by the Company in the Investment is fair to the Company from a financial point of
view (see "--Opinion of Financial Advisor" below); (g) certain consequences that could result
from the transactions contemplated by the Investment Proposals that are described below under
"Certain Considerations"; (h) that the closing of the transactions contemplated by the Purchase
Agreement is conditioned upon approval by the Company's stockholders of the Investment
Proposals; and (i) certain possible implications of a single large minority shareholding in the
Company, including the conflicts of interest that might arise and the potential discouraging effect
on other transactions that might result from such shareholding. See "--Certain Considerations--
Diminished Ability to Sell the Company".THE BOARD OF DIRECTORS BELIEVES THAT THE INVESTMENT PROPOSALS ARE
FAIR TO, AND ARE ADVISABLE AND IN THE BEST INTERESTS OF, THE COMPANY
AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE INVESTMENT
PROPOSALS AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
THE COMPANY VOTE "FOR" APPROVAL OF THE INVESTMENT PROPOSALS.
The Board of Directors reserves its right, pursuant to the Purchase Agreement, to amend or
waive the provisions of the Purchase Agreement and the other documents related thereto in all
respects before or after approval of the Investment Proposals by the Company's stockholders. In
addition, the Board of Directors reserves the right to terminate the Purchase Agreement in
accordance with its terms notwithstanding stockholder approval.
Opinion of Financial Advisor
As described under "Background of and Reasons for the Investment Proposals" above, the
Company engaged CS First Boston to act as its financial advisor in connection with the
Company's review of strategic and financial planning matters, including the possible sale of
equity or equity-linked securities of the Company. CS First Boston assisted the Company in the
negotiation of AIG's proposed investment in the Company, through the issuance, pursuant to the
Purchase Agreement, of 4,000,000 shares of Series B Preferred Stock at a cash purchase price of
$50.00 per share. In connection with the engagement, the Company requested that CS First
Boston evaluate the fairness to the Company of the consideration to be received by the Company
in connection with the Investment. On June 7, 1994, CS First Boston delivered to the Board of
Directors its oral opinion to the effect that, as of such date and based upon and subject to certain
matters described to the Board of Directors, the consideration to be received by the Company in
exchange for the Series B Preferred Stock is fair to the Company from a financial point of view.
No limitations were imposed by the Board of Directors upon CS First Boston with respect to the
investigations made or procedures followed by CS First Boston in rendering its opinion, except
that CS First Boston was not authorized to seek any other potential investors in the Company or
acquirors for all or any portion of the Company's business or assets.
On June 10, 1994, CS First Boston delivered a written opinion to the Board of Directors
confirming the oral opinion rendered on June 7, 1994. A copy of CS First Boston's written
opinion, which sets forth the assumptions made, matters considered and limits on the review
undertaken, is attached to this Proxy Statement as Appendix IV and should be read by
stockholders carefully in its entirety.
In connection with its opinion, CS First Boston reviewed, among other things, the Purchase
Agreement, the Registration Rights Agreement, the Articles Supplementary, the Charter of the
Company and the Charter Amendment; the Annual Reports on Form 10-K of the Company for
the three years ended December 31, 1993; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q; certain other communications from the Company to its stockholders; and
certain internal financial analyses for the Company prepared by its management, including
analyses giving effect to the Investment. CS First Boston also had discussions with members of
the senior management of the Company regarding its paw and current business operations.
financial condition and future prospects. CS First Boston considered the view of senior
management of the Company that the Investment represents a significant business opportunity
for the Company and that certain strategic and operational benefits will be derived from the
transactions contemplated by the Purchase Agreement. In addition, CS First Boston reviewed the
reported price and trading activity for the Common Stock; compared certain financial and stock
market information for the Company with similar information for certain other companies
engaged in businesses similar to the Company's and the securities of which are publicly traded;
reviewed the financial terms of certain recent strategic investment transactions and performed
such other studies and analyses as CS First Boston considered appropriate. CS First Boston, in
rendering its opinion, took into account the extent to which certain provisions contained in the
Purchase Agreement, the Company's Charter, the Articles Supplementary and the Charter
Amendment could impede a change of control of the Company. CS First Boston relied without
independent verification upon the accuracy and completeness of all of the financial and other
information reviewed by it for purposes of its opinion. CS First Boston assumed that the
financial analyses for the Company, both with and without giving effect to the Investment, have
been reasonably prepared on a basis reflecting the best currently available judgments and
estimates of the management of the Company. In addition, CS First Boston made no independent
evaluation or appraisal of the assets and liabilities of the Company or any of its subsidiaries, and
CS First Boston was not furnished with any such evaluation or appraisal.
The following is a summary of the material financial analyses performed by CS First Boston in
arriving at its oral opinion delivered June 7, 1994 and its written opinion dated June 10, 1994,
but does not purport to be a complete description of the analyses performed by CS First Boston
for such purposes.
Comparable Public Company Analysis . CS First Boston reviewed and compared certain actual
and estimated financial, operating and stock market information for the Company with similar
information for the following publicly traded insurance brokerage companies: Acordia, Inc.; Aon
Corporation; Arthur J. Gallagher & Co.; E.W. Blanch Holdings, Inc.; Hilb, Rogal and Hamilton
Company; Marsh & McLennan Companies, Inc. and Poe & Brown, Inc. (the "U.S. Comparable
Companies"); C.E. Health p1c; Hogg Group p1c; JIB Group p1c; Lowndes Lambert Group
Holdings p1c; Sedgwick Group p1c; Steel Burrill Jones Group p1c; and Willis Corroon Group
plc (the "U.K. Comparable Companies") (collectively, the "Comparable Companies"). The
Comparable Companies were selected because they are publicly traded companies that derive a
significant portion of their revenues from insurance brokerage and risk management services. CS
First Boston reviewed the Comparable Companies in terms of various historical financial
measures and in terms of various multiples that certain of this information represents in
comparison to certain other information. In particular, such analysis indicated that, as of June 3,
1994, the market price of shares of common stock of such companies (a) as a multiple of latest
twelve month ("LTM") earnings, equity research analysts' consensus 1994 estimated earnings
and equity research analysts' consensus 1995 estimated earnings, ranged from 12.3x to 19.4x,
11.3x to 17.Ox and 10.2x to 14.8x, respectively, for the U.S. Comparable Companies, and from
14.2x to 18.2x, 10.4x to 17.8x, and 9.2x to 14.0x, respectively, for the U.K. Comparable
Companies, versus multiples of 181.9x, 26.Ox and 15.0x, respectively, for the Company; and (b)
as a multiple of stated book value, ranged from 2.Ox to 4.8x for the U.S. Comparable Companies
and from 1.5x to 15.6x for the U.K. Comparable Companies, versus a multiple of 4.9x for the
Company. The analysis further indicated that the adjusted market value (defined as equity market
capitalization plus the principal amount of outstanding debt plus the book value of preferred
stock, if any) of the Comparable Companies as a multiple of revenues and as a multiple of
EBITDA (earnings before interest, taxes, depreciation and amortization), in each case based on
the LTM financial results, ranged from 1.2x to 4.3x and 6.3x to 10.7x for the U.S. Comparable
Companies and 0.8x to 1.6x and 5.6x to 14.8x for the U.K. Comparable Companies, respectively,
as compared to 0.7x and I 1.5x for the Company.Comparison With Other Transactions . CS First Boston examined transactions involving the
purchase of a minority interest in various companies in a variety of industries that had occurred
since 1984, or were pending as of June 3, 1994. CS First Boston then analyzed the proposed
terms of the Investment as compared to the corresponding terms of such prior transactions,
including, without limitation, the size of the investment, voting power and board representation,
if any, acquired by the investor, dividend or interest rates applicable to the investment, the
relationship between conversion price and market price of the underlying common stock (in the
case of investments in convertible preferred stock or convertible debentures), and the
relationship between purchase price and market price (in the case of direct common stock
investments).
Pro Forma Analysis . CS First Boston analyzed the pro forma effects of the Investment on the
Company's balance sheet at March 31, 1994 and anticipated operating results for 1994 and 1995,
based on management's then current expectations for 1994 results and certain other assumptions
supplied by the Company and CS First Boston.
Public Offering Analysis . CS First Boston analyzed a hypothetical public offering by the Com-
pany of convertible preferred stock as an alternative financing method for the Company to raise
equity capital. CS First Boston compared the terms of a hypothetical public offering, including,
but not limited to, dividend rates and payment options, optional redemption provisions, and
conversion features, with those of the AIG Investment. In addition, CS First Boston analyzed the
likelihood of completing a public offering of various sizes for the Company based on then
current market conditions.
Historical Relative Trading and Valuation Comparisons . CS First Boston examined the history
of the trading prices for the Company's common stock, and the relationship between the
movements in the prices of such shares and movements in certain stock indices. CS First Boston
also compared the consideration to be received by the Company pursuant to the Investment to
the historical public trading prices of the Common Stock.
Other Analysis. CS First Boston reviewed and analyzed selected investment research reports on
the Company and the insurance brokerage industry and analyzed certain publicly available
information regarding the foregoing.
The preparation of a fairness opinion is a complex process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the application of those
methods to the particular circumstances. In arriving at its opinion, CS First Boston considered
each of the analyses described above, among other things, and did not assign any particular
weight to the results of any particular analysis. The analyses were prepared for the purpose of
enabling CS First Boston to evaluate whether the consideration to be received by the Company
in exchange for the Series B Preferred Stock is fair to the Company from a financial point of
view, and do not purport to be appraisals or to necessarily reflect the prices at which businesses
or securities of the Company actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be significantly more or
less favorable than suggested by such analyses. The foregoing summary is qualified by reference
to the written opinion of CS First Boston which is attached to this Proxy Statement as Appendix IV.
CS First Boston has advised the Company that, in the ordinary course of business, it may
actively trade the securities of the Company and AIG for its own account or for the account of its
customers and, accordingly, may at any time hold a long or short position in such securities.
CS First Boston was selected by the Company as its financial advisor based on its reputation,
experience and expertise. CS First Boston is an internationally recognized investment banking
firm that is continually engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. CS First Boston is familiar with the Company, having provided
financial advisory and other investment banking services to the Company over a period of years,
including acting as lead placement agent in the offering of the Company's Series A Preferred
Stock in March 1993.
The Company retained CS First Boston as its financial advisor in connection with the AIG
Investment pursuant to a letter agreement dated May 19, 1994. As compensation for its services,
the Company has paid CS First Boston a financial advisory fee of $250,000 and CS First Boston
will be entitled to receive an additional $750,000 upon the mailing of this proxy statement to the
Company's stockholders. The Company has also agreed to reimburse CS First Boston for its out-
of-pocket expenses incurred in performing its services, including reasonable attorney's fees and
expenses, and to indemnify CS First Boston and related persons against certain liabilities,
including liabilities under Federal securities laws, arising out of CS First Boston's engagement.
Use of Proceeds
On the date of the initial purchase of shares of Series B Preferred Stock under the Purchase
Agreement (the "Closing"), the Company will receive approximately $200 million in cash (the
"Transaction Proceeds") from the AIG Group in consideration for the issuance to AIG of shares
of Series B Preferred Stock. Expenses of the transaction to be borne by the Company, together
with the cost of an option for an insurance arrangement (see "THE PURCHASE AGREEMENT-
-Conditions to Closing"), are estimated to be $3,800,000. The Company anticipates that, pending
the application of the Transaction Proceeds as described below, the Transaction Proceeds will be
invested in interest bearing securities.The Transaction Proceeds will be available to the Company for general corporate purposes. The
Company anticipates that it will principally utilize the Transaction Proceeds (i) to invest in its
continuing businesses and (ii) to fund an insurance or reinsurance arrangement with respect to
discontinued operations. Except as described above, the Company does not currently have any
commitments or understandings regarding the use of the Transaction Proceeds.
There can be no assurance that the Company will be successful in its efforts to utilize the
Transaction Proceeds in a manner that contributes to the profitable growth of the Company's
business or that the Transaction Proceeds will not be used in such a way as to dilute the per share
earnings or equity of the Company after giving effect to the purchase of shares of Series B
Preferred Stock by AIG. See "THE PURCHASE AGREEMENT-Terms of Series B Preferred
Stock-Repurchase at Holder's Option."
Source of Funds; Information Concerning AIG
AIG has informed the Company that the $200 million to be used to purchase the Series B
Preferred Stock will come from working capital generated in the ordinary course of its
operations.
AIG is the leading U.S.-based international insurance organization and the largest underwriter of
commercial and industrial insurance in the United States. Its member companies write property,
casualty, marine, life and financial services insurance in approximately 130 countries and
jurisdictions, and are engaged in a range of financial services businesses. AIG's common stock is
listed on the New York Stock Exchange, as well as the stock exchanges in London, Paris,
Switzerland and Tokyo.
Certain Considerations
While the Board of Directors is of the opinion that the Investment Proposals are fair to, and their
approval is advisable and in the best interests of, the Company and its stockholders, stockholders
should consider the following possible effects in evaluating the Investment Proposals. Dilution . The Investment Proposals involve the issuance by the Company of substantial amounts
of additional securities. These issuances could have the effect of diluting the rights of the
existing holders of Common Stock. Series B Preferred Stock will be entitled to cumulative
quarterly dividends at the rate of 8% per annum per share, in preference to payment of dividends
on all series of Preferred Stock of the Company other than the Series A Preferred Stock as to
which it shall rank pari passu. Until December 15, 1996, dividends shall be payable in kind on
the Series B Preferred Stock and thereafter, at the election of the Board of Directors, in cash or in
kind until December 15, 1999, provided that if the Company at any time pays dividends in cash
on or after December 15, 1996, the Company may not thereafter declare or pay dividends in
kind. Series B Preferred Stock is initially convertible into Class D Stock at a conversion price of
$17 per share (the "Conversion Price"). Class D Stock is exchangeable for Common Stock on a
share-for-share basis.Repurchase at Option of the Holder . The holders of the Series B Preferred Stock will have the
right to require the Company to repurchase their shares at a specified premium if a "Special
Event" occurs. This right may tend to deter the Company from engaging in a Special Event,
which includes, for example, the declaration or payment of dividends aggregating in excess of
$0.075 per share of Common Stock during the last seven months of 1994, cumulatively 25% of
earnings in 1995 and 1996, and cumulatively 50% of earnings thereafter; the disposition by the
Company of assets representing 35% or more of the Company's book value or gross revenues;
and certain mergers of the Company or any of its principal subsidiaries with or into any other
firm or entity. Other Special Events include the acquisition by a third party, with the consent or
approval of the Company, of beneficial ownership of securities representing 35% or more of the
Company's total outstanding voting power. The repurchase price, in the event of a Special Event,
is at a specified premium plus accrued and unpaid dividends on the Series B Preferred Stock. See
"THE PURCHASE AGREEMENT-Terms of Series B Preferred Stock-Repurchase at the
Holder's Option."
Diminished Ability to Sell the Company . As a result of AIG's substantial ownership interest in the
Company's securities, it may be more difficult for a third party to acquire the Company without
the consent of AIG, even though the Series B Preferred Stock is non-voting and is convertible
into Class D Stock, which also is non-voting, and AIG has agreed to limit to less than 10% the
percentage of the Company's voting stock it may acquire, absent certain events described below
under "THE PURCHASE AGREEMENT-AIG Standstill Provisions". In addition, as noted in the
previous paragraph, holders of the Series B Preferred Stock would be able to require the
Company to repurchase their shares in the event of a merger or the acquisition, with the consent
or approval of the Company, by a third party of beneficial ownership of securities representing
35% or more of the Company's total outstanding voting power. Accordingly, approval of the
Investment Proposals may hinder a change in control of the Company should the Board of
Directors ever choose to seek a buyer, or may tend to require a stated amount of the proceeds of
a sale of the Company to be paid to holders of the Series B Preferred Stock. It should also be
noted, however, that AIG has agreed, with specified exceptions, to refrain from attempting to
increase its interest in or influence over the Company by tender offer or proxy solicitation for a
period of eight years following the Closing, subject to the occurrence of certain events that
would terminate AIG's standstill covenants. See "THE PURCHASE AGREEMENT--AIG
Standstill Provisions" below. In addition, the Board of Directors believes consummation of the
Investment Proposals will enhance the long-term value of Common Stock, although there can be
no assurance that they will have this result. In addition to the possible effects of the Investment
Proposals in the context of a sale of the Company, certain existing features of the Company's
Charter and the Rights Agreement, dated as of June 11, 1987, between the Company and First
Chicago Trust Company of New York, as amended and restated as of March 22, 1990 and as
further amended as of April 21, 1992 (as amended, the "Rights Agreement"), in conjunction with
Maryland law, may already have the effect of deterring a sale of the Company, but these other
provisions are generally subject to administration by the Board of Directors. See "CHARTER
AMEND ME NT-Existing Anti-Takeover Provisions".
Company Payments in Certain Events. Under the Purchase Agreement, the Company has agreed
to make certain payments to AIG if tax payments and reserves relating to periods before March
31, 1994 exceed the Company's tax reserves as of March 31, 1994, or if the Company determines
that certain liabilities (as defined in the Purchase Agreement) as of March 31, 1994 were greater
than, or that certain assets (as defined in the Purchase Agreement) as of March 31, 1994 had an
ultimate realizable value less than, the related amounts shown on the Company's balance sheet as
of March 31, 1994. The making of any such payments by the Company would, in effect, reduce
the consideration received by the Company for the Series B Preferred Stock. See "THE
PURCHASE AGREEMENT--Covenants-Company Payments in Certain Events."
Employment of New Chief Executive Officer . Under the terms of Mr. Zarb's employment
agreement with the Company, in the event that the investment by AIG, or a substantially
comparable equity investment by one or more third party investors, does not take place on or
before October 31, 1994, Mr. Zarb will have the right voluntarily to terminate his employment
with the Company. In such event, the Company will be obligated to pay Mr. Zarb a cash
severance payment in the amount of $12,000,000, and Mr. Zarb's rights in certain restricted stock
awards and stock options granted to him by the Company will vest, provided that in no event
may the cash severance payment and the value of the portion of the options and awards vesting
as a result of such termination exceed $20,000,000. There can be no assurance that, if the
Investment Proposals are not approved by the stockholders, the Company will be able to obtain a
substantially comparable equity investment by one or more third party investors prior to October
31, 1994. Accordingly, the failure by the stockholders to approve the Investment Proposals could
result in the termination of Mr. Zarb's employment as President and Chief Executive Officer of
the Company and give rise to a severance payment obligation of $12,000,000 as well as to the
vesting of award rights and stock options referred to above.
Effect on Capital and on Earnings Available for Common Stockholders . After giving effect to
estimated transaction expenses and the cost of an option for an insurance arrangement (see "THE
PURCHASE AGREEMENT-Conditions to Closing"), the sale of the Series B Preferred Stock to
AIG would increase the Company's capital by approximately $196 million. However, dividends
on the Series B Preferred Stock would reduce the amount of earnings otherwise available for
common stockholders by approximately $16 million in the first year after issuance, and by
approximately $23 million in the fifth year after issuance, assuming dividends on the Series B
Preferred Stock were to be paid in kind throughout the first five years after issuance.
PROPOSAL 1-THE PURCHASE AGREEMENT
On June 7, 1994, the Company and AIG executed the Purchase Agreement. Certain provisions of
the Purchase Agreement are discussed in more detail below; however, stockholders are urged to
read the Purchase Agreement, which is attached as Appendix I, in its entirety.
Purchase and Sale of Series B Preferred Stock
Pursuant to the terms of the Purchase Agreement, the Company has agreed, subject to the terms
and conditions set forth therein, to issue to AIG or any of its wholly owned subsidiaries at the
closing of the transactions contemplated by the Purchase Agreement (the "Closing") 4,000,000
shares of Series B Preferred Stock, at a purchase price of $50 per share. Each share of Series B
Preferred Stock will initially be convertible into the number of shares of Class D Common Stock
obtained by dividing $50 by the then current conversion price. The initial conversion price is $17
per share (the "Conversion Price"). Each share of Class D Stock will be exchangeable on a share-
for-share basis with Common Stock. The approximately 11,765,000 shares of Common Stock
initially issuable upon such exchange represent approximately 21% of the aggregate number of
shares of Common Stock, Class A Stock and Class C Stock outstanding after giving effect to
such issuance based on shares of Common Stock, Class A Stock and Class C Stock outstanding
as of June 2, 1994. If dividends on the Series B Preferred Stock are paid in kind for the full five
year period permitted, 17,950,245 shares of Common Stock will be issuable upon such
exchange, representing approximately 29.2% of the total number of shares of Common Stock,
Class A Stock and Class C Stock outstanding after giving effect to such issuance, based on
shares outstanding as of June 2, 1994.
Terms of Series B Preferred StockRank . With respect to dividend rights and rights on liquidation, dissolution and winding up,
Series B Preferred Stock ranks senior to Common Stock, Class A Stock, Class C Stock, Class D
Stock and Series A Junior Participating Preferred Stock (when and if issued) and pari passu with
Series A Preferred Stock.
Liquidation Preference . In the event of any liquidation, dissolution or winding up of the
Company, holders of Series B Preferred Stock will be entitled to receive in preference to holders
of any stock ranking junior to Series B Preferred Stock in the event of a liquidation, dissolution
or winding up ("Junior Stock") $50 per share plus an amount equal to all accrued but unpaid
dividends thereon on the date of final distribution to such holders.
Dividends . Holders of Series B Preferred Stock are entitled to receive, when and as declared by
the Board of Directors, cumulative dividends at the rate of 8% per annum per share, payable in
equal quarterly payments on the 15th day of March, June, September and December (each, a
"Dividend Payment Date"). Dividends shall be payable in kind in shares of Series B Preferred
Stock ("Additional Shares") until December 15, 1996 and, thereafter, at the Board of Directors'
election, in cash, or in kind, until December 15, 1999; provided that if the Company shall at any
time pay dividends in cash, the Company shall not thereafter be entitled to elect to declare or pay
dividends in kind in shares of Series B Preferred Stock. Beginning December 16, 1999,
dividends on Series B Preferred Stock shall be payable in cash. Quarterly dividends which have
not been paid in full in Additional Shares will cumulate, as if quarterly dividends had been paid
on the relevant Dividend Payment Date in Additional Shares. Each fractional share of Series B
Preferred Stock outstanding shall be entitled to a ratably proportionate amount of all dividends
accruing with respect to each outstanding share of Series B Preferred Stock, and all such
dividends with respect to such outstanding fractional shares shall be cumulative and shall accrue
(whether or not declared), and shall be payable in the same manner and at such times as
dividends on each outstanding share of Series B Preferred Stock.
Voting Rights . The Series B Preferred Stock shall be non-voting stock, except that (i) if
dividends on the Series B Preferred Stock or any other class or series of stock ranking pari passu
as to dividends with the Series B Preferred Stock shall be in arrears in an aggregate amount equal
to at least six quarterly dividends, then the holders of Series B Preferred Stock (voting separately
as a class with all other affected classes or series of stock ranking pari passu as to dividends with
the Series B Preferred Stock) will have the right to vote to elect two additional members of the
Board of Directors, (ii) without the approval of the holders of two-thirds of the shares of Series B
Preferred Stock then outstanding, (x) the Company's Charter cannot be amended or modified so
as to adversely affect the holders of the Series B Preferred ' Stock, the Class D Stock or the
Common Stock, or (y) the Company cannot create any class or series of stock that ranks senior to
Series B Preferred Stock with respect to dividend or liquidation rights, and (iii) following the
occurrence of a Specified Corporate Action (as hereinafter defined) of the Company, the holders
of shares of Series B Preferred Stock shall have the right to vote as a class with the holders of
Common Stock and Class D Stock on all matters as to which the holders of Common Stock are
entitled to vote.Conversion. Each share of Series B Preferred Stock shall be convertible (subject to the anti-
dilution provisions thereof) at any time at the option of the holder thereof, unless previously
redeemed, into a number of shares of Class D Stock of the Company obtained by dividing $50 by
a conversion price of $17 per share, subject to adjustment (as it may be adjusted, the
"Conversion Price"). The Series B Preferred Stock shall have antidilution provisions similar to
the Series A Preferred Stock, except that in addition (w) adjustments shall be made for
Extraordinary Equity Payments (as defined below), (x) adjustments shall be made for any
issuance of Common Stock, Class A Stock or Class C Stock of the Company at a price per share
below the then effective Conversion Price and (y) adjustments shall be made, at the option of the
holder in the event of spin-offs or other similar circumstances so that the Series B Preferred
Stock (and related conversion rights) shall be fully protected against dilution and the Series B
Preferred Stock shall be the obligation of the spun-off entities as well as the Company. The
Series B Preferred Stock, like the Series A Preferred Stock, provides for adjustments upon the
occurrence of certain events including, but not limited to, stock dividends, stock subdivisions or
reclassification or combinations, issuance of rights or warrants to holders of Common Stock
generally entitling them to purchase Common Stock at a price less than the current market price
thereof or distributions to holders of Common Stock generally of evidences of indebtedness or
assets (other than dividends paid exclusively in cash other than Extraordinary Equity Payments)
or rights or warrants to subscribe to securities of the Company (other than those described in the
preceding clause). In addition, upon the occurrence of any merger or combination or similar
transaction, the Series B Preferred Stock is convertible into the consideration received by the
holders of the Common Stock in such merger, combination or similar transaction.
Redemption Provisions . The Series B Preferred Stock is not redeemable prior to December 15,
1999 ("Redemption Starting Date"). On and after such date, so long as the shares of Common
Stock of the Company have traded on the New York Stock Exchange after such date for each
business day during a consecutive 30 trading day period at a price in excess of 150% of the then
effective Conversion Price, the Series B Preferred Stock shall be redeemable in cash, at the
option of the Company, in whole at any time or in part from time to time upon no less than 45
days and no more than 60 days prior written notice to the holders thereof, unless previously
converted (conversions shall be permitted until the close of business on the business day
immediately preceding the redemption date), at a redemption price of $54.00 per share, plus an
amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption if
redeemed on or prior to December 14, 2000, and at the following redemption prices per share,
plus accrued and unpaid dividends, if redeemed during the 12-month period beginning December
15 of the years set forth below:Year Redemption Price
2000 $53.50
2001 53.00
2002 52.50
2003 52.00
2004 51.50
2005 51.00
2006 50.50
and thereafter at $50 per share, plus an amount equal to all accrued and unpaid dividends thereon
to the date fixed for redemption. All redemptions shall be made pro rata. The Company shall not redeem less than all of the shares
of Series B Preferred Stock at any time outstanding until all dividends accrued and in arrears
upon all shares of Series B Preferred Stock then outstanding shall have been paid for all past
dividend periods.
Repurchase at Holder's Option . If a Special Event (as defined below) shall occur, holders of the
Series B Preferred Stock shall have the right, at their individual option exercisable at any time
within 120 days after such occurrence, to require the Company to purchase all or any part of the
shares of Series B Preferred Stock then held by them as such holders may elect at a redemption
price equal (i) in the event a Special Event occurs on or before six months after the initial date on
which the shares of Series B Preferred Stock are issued (the "Original Issue Date"), $58.82 per
share plus accrued and unpaid dividends thereon to the date of redemption, (ii) in the event a
Special Event occurs more than six months after the Original Issue Date and on or before twelve
months after the Original Issue Date, $66.18 per share plus accrued and unpaid dividends thereon
to the date of redemption, or (iii) in the event a Special Event occurs more than twelve months
after the Original Issue Date, $72.06 per share plus accrued and unpaid dividends thereon to the
date of redemption.
As set forth in the Articles Supplementary:
"Special Event" shall mean (a) the declaration or payment on or after the original issue date for
the Series B Preferred Stock by the Company, Reed Stenhouse Companies Limited ("RSC") or
Alexander & Alexander Services U.K. plc ("AAE") of an "Extraordinary Equity Payment"
(defined below), (b) the sale or other disposition, directly or indirectly, by the Company or any
of its subsidiaries in one or a series of related transactions of assets representing 35% or more of
the then book value of the Company's assets on a consolidated basis or 35% or more of the
Company's gross revenues on a consolidated basis in either of the two most recently ended fiscal
years, (c) the merger or consolidation of the Company or any of its principal subsidiaries with or
into any other firm, corporation or other legal entity other than (i) a merger or consolidation of
one subsidiary of the Company into another or the Company and (ii) a merger or consolidation
involving the issuance by the Company of equity securities having a market value of less than
20% of the total market value of the Company's equity securities outstanding prior to such
issuance, or (d) the occurrence of a "Specified Corporate Action" on or after the original date of
issuance of the Series B Preferred Stock."Extraordinary Equity Payment" shall mean (a) the declaration or payment on or after June 1,
1994 by the Company, RSC or AAE, or any of their respective subsidiaries of any dividend or
distribution (except for any dividend or distribution from one subsidiary of the Company to
another subsidiary of the Company or from a subsidiary of the Company to the Company, RSC
or AAE or any of their respective wholly owned subsidiaries; provided that all of such dividend
paid or distribution made, net of applicable withholding taxes, is received by the Company, RSC
or AAE or such recipient subsidiary) on any class or series of its stock (other than regularly
scheduled quarterly cash dividends on the Series A Preferred Stock and Series B Preferred Stock
in accordance with the terms thereof as in effect on the date of the Closing) other than the
declaration and payment by the Company, RSC and AAE of dividends on the Common Stock,
the RSC Class A Shares and the AAE Dividend Shares, respectively, which do not exceed (i) on
and after June 1, 1994 and on and prior to December 31, 1994, more than $0.075 per share, (ii)
on and after January 1, 1995 and on and prior to December 31, 1996, in the aggregate more than
25% of the Company's net income available for distribution to common shareholders (after
preferred dividends) through the end of the last fiscal quarter prior to the date of declaration of
such dividend and (iii) on and after January 1, 1997, in the aggregate more than the sum of (A)
50% of the Company's net income available for distribution to common shareholders (after
preferred dividends) on and after such date and through the end of the last fiscal quarter prior to
the date of declaration of such dividend and (B) the excess, if any, of (1) 25% of the Company's
net income available for distribution to common shareholders (after preferred dividends) during
the period ending on and after January 1, 1995 through December 31, 1996 over (2) the
aggregate amount of dividends declared during the period from January 1, 1995 through
December 31, 1996 and (b) any repurchases, redemptions, retirements or other acquisitions
directly or indirectly by the Company or any of its subsidiaries on or after June 1, 1994 of any
stock of the Company or any of its subsidiaries (other than a wholly-owned subsidiary) (other
than redemptions or repurchases of the Series B Preferred Stock in accordance with the Charter
at the option of the Company or AIG) in excess of net proceeds on or after June 1, 1994 to the
Company from sales of stock of the Company (less amounts expended on redemptions or
repurchases of Series A Preferred Stock and Series B Preferred Stock on or after June 1, 1994).
"Specified Corporate Action" shall mean such time as (i) the Company shall consent or agree to
the acquisition of, or the commencement of a tender offer for, or the Board of Directors of the
Company shall recommend or, within ten business days after the commencement of the tender
offer, not recommend that shareholders reject, a tender offer for, "beneficial ownership" (as
defined in Rule 13d-3 under the Exchange Act) by any "person" or "group" (within the meaning
of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act-)) (other than AIG or its affiliates or any transferee thereof) of, voting securities
of the Company or securities convertible into voting securities (collectively, "Restricted
Securities"), representing, when added to the Restricted Securities already owned by such person
or groups, thirty-five percent (35%) or more of such Restricted Securities; (ii) the Company shall
amend, modify or supplement, or waive the benefit of, the Rights Agreement, so as to permit any
acquisition of beneficial ownership of thirty-five percent (35%) or more of the Restricted
Securities without causing such person or group (other than AIG or its affiliates or any transferee
thereof) to become an Acquiring Person (as defined in the Rights Agreement) or without causing
the Distribution Date or the Shares Acquisition Date (each as defined in the Rights Agreement)
to occur or without giving rise to a Section I I (a)(ii) Event (as defined in the Rights Agreement);
(iii) the Company shall take any action under Section 3-603(c) of the Maryland General
Corporation Law to exempt any transaction between the Company and any of its subsidiaries, on
the one hand, and any person or group (other than AIG or its affiliates or any transferee thereof),
or any affiliates of any such person or group, on the other hand, who (A) acquire, own or hold
beneficial ownership of Restricted Securities representing thirty-five percent (35%) or more of
such Restricted Securities, on the other hand, from the provisions of Title 3, Subtitle 6 of the
Maryland General Corporation Law or (B) acquire, own or hold beneficial ownership of
Restricted Securities representing ten percent (10%) or more of such Restricted Securities unless
such other person or group, or any affiliate of such person or group, enters into a standstill
agreement with the Company limiting the acquisition of Restricted Securities by such other
person or group, or any
