<PAGE> 1
As filed with the Securities and Exchange Commission on August 15, 1997
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------
CNA SURETY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6331 36-4144905
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Classification Code Number) Identification No.)
Organization)
</TABLE>
MARK C. VONNAHME
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CNA SURETY CORPORATION
CNA PLAZA
CHICAGO, ILLINOIS 60685
(312) 822-2000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
with copies to:
<TABLE>
<C> <C>
David S. Stone, Esq. Mitchell L. Hollins, Esq.
Seyfarth, Shaw, Fairweather & Geraldson Arthur J. Simon, Esq.
55 East Monroe Street Sonnenschein Nath & Rosenthal
Chicago, Illinois 60603 8000 Sears Tower
(312) 346-8000 Chicago, Illinois 60603
(312) 876-8000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC As soon as practicable following the effectiveness of this Registration
Statement.
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. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
==================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTRATION
REGISTERED REGISTERED(1) UNIT(2) PRICE(1) FEE(1)(3)
- -------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value
per share..................... 16,784,371 N/A $216,098,777 $43,220
==================================================================================================================
</TABLE>
(1) CNA Surety Corporation is registering the number of shares of CNA Surety
Common Stock issuable to holders of common stock of Capsure, including
shares of Capsure Common Stock issuable prior to the Merger upon the
exercise of outstanding Capsure Options. The shares held by certain Capsure
stockholders being registered for reoffer hereunder are included within the
shares being registered hereunder.
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis of
$12.875 per share, the average of the high and low sale prices of Capsure
Common Stock on August 14, 1997 on the New York Stock Exchange in accordance
with Rule 457(c) under the Securities Act of 1933.
(3) Total fees of $39,863 have been previously paid in connection with the
filing of a Proxy Statement/Prospectus on Schedule 14A. The remaining
registration fee of $3,357 is being paid with this registration statement.
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CAPSURE HOLDINGS CORP.
CNA SURETY CORPORATION
PROXY STATEMENT/PROSPECTUS
-------------------------
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATIONS IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY PART 1 OF FORM S-4
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<CAPTION>
FORM S-4 CAPTION CAPTION IN PROSPECTUS
---------------- ---------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Forepart of Registration Statement; Cross
Outside Front Cover Page of Prospectus Reference Sheet; Outside Front Cover Page.
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page; Available
of Prospectus Information; Documents to Be Incorporated
By Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Risk Factors; Summary; Selected
Charges, and Other Information Consolidated Financial Data -- CCC Surety
Operations; Selected Consolidated Financial
Data -- Capsure
4. Terms of the Transaction Summary; Introduction; The Merger; The
Reorganization Agreement and Other
Transaction Agreements; Amendment to
Capsure Certificate of Incorporation;
Description of CNA Surety Common Stock;
Comparison of Stockholder Rights
5. Pro Forma Financial Information Summary; Unaudited Pro Forma Consolidated
Financial Information
6. Material Contracts with the Company Being The Merger; The Reorganization Agreement
Acquired and Other Transaction Agreements
7. Additional Information Required for Stockholders Registering Shares for Reoffer
Reoffering by Persons and Parties Deemed to
Be Underwriters
8. Interest of Named Experts and Counsel Legal Matters; Experts
9. Disclosure of Commission Position on Part II of Proxy Statement/Prospectus
Indemnification for Securities Act Indemnification of Officers and Directors
Liabilities and Undertakings
10. Information With Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by Not Applicable
Reference
12. Information With Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information By Not Applicable
Reference
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-4 CAPTION CAPTION IN PROSPECTUS
---------------- ---------------------
<C> <S> <C>
14. Information With Respect to Registrants Summary; Market for CNA Surety Stock;
Other Than S-2 or S-3 Registrants Description of CCC Surety Operations;
Selected Consolidated Financial Data -- CCC
Surety Operations; Management's Discussion
and Analysis of the Statements of Certain
Assets and Liabilities and the Statements
of Certain Revenues and Direct Operating
Expenses of the CCC Surety Operations;
Description of CNA Surety Common Stock;
Comparison of Stockholder Rights;
Management of CNA Surety; Financial
Statements
15. Information With Respect to S-3 Companies Documents to Be Incorporated by Reference;
Summary; Market for Capsure Common Stock;
Description of Capsure Business; Comparison
of Stockholder Rights; Experts
16. Information With Respect to S-2 or Not Applicable
S-3 Companies
17. Information With Respect to Companies Other Not Applicable
Than S-2 or S-3 Companies
18. Information if Proxies, Consents or Summary; Introduction; The Merger;
Authorizations Are to Be Solicited Amendment to Capsure Certificate of
Incorporation; Management of CNA Surety;
Security Ownership of Certain Beneficial
Owners and Management; Relationships and
Related Transactions
19. Information if Proxies, Consents or Not Applicable
Authorizations Are Not to Be Solicited
</TABLE>
2
<PAGE> 4
CAPSURE HOLDINGS LOGO
AUGUST 15, 1997
Dear Stockholder:
You are invited to attend a Special Meeting of stockholders of Capsure
Holdings Corp. ("Capsure") on September 23, 1997 to consider and vote upon a
proposal to merge Capsure and the surety business of CNA Financial Corporation
("CNAF") pursuant to a Reorganization Agreement, as amended and related
agreements (the "Merger") described in the attached Proxy Statement/Prospectus.
If the Merger is approved, you will also be asked to approve an amendment to
Capsure's certificate of incorporation, deleting Article Twelfth, which was
originally adopted in order to preserve Capsure's net operating tax loss
carryforwards ("NOLs") by restricting the ownership or transfer of 5% or more of
the outstanding capital stock of Capsure.
Your Board of Directors has unanimously approved the Merger and supports
this combination for several reasons. The Board believes the strategic fit of
the respective businesses is very strong: the books of business are
complementary with little overlap and the joining of Capsure's vast independent
agent force with CNAF's 41 branches nationwide would create a highly competitive
distribution network. Your Board is of the view that the new company's higher
profile in the marketplace, greater underwriting capacity and other benefits of
being the market leader represent a special opportunity for Capsure to more
rapidly achieve its profit and growth objectives.
Central also to your Board's positive view of the Merger are the
reinsurance and administrative services agreements negotiated with CNAF for the
benefit of the surviving corporation. These agreements are designed to provide
continuing underwriting capacity, protect against adverse loss reserve
development related to the CNAF surety reserves being transferred, and help
preserve, through the year 2000, the profitability of the CNAF surety business
being transferred in connection with the Merger. Finally, your Board expects
Capsure's stockholders will be well served by the experienced management team of
the combined operations and by the new board of CNA Surety Corporation ("CNA
Surety"), a newly-formed public holding company for the combined operations.
Three members of the CNA Surety board of directors will be Capsure designees.
The proposed transaction would be accomplished through the Merger of
Capsure with a wholly-owned subsidiary of CNA Surety. CNA Surety would be a new
publicly-held company which Capsure expects will be listed on the New York Stock
Exchange. Pursuant to the Reorganization Agreement, each outstanding share of
Capsure would be exchanged, on a tax-free basis, for one share of CNA Surety
(the "Exchange Ratio"). Following the Merger, Capsure's existing stockholders
and option holders would own 38.25% of CNA Surety's outstanding shares and
options, on a fully diluted basis, and CNAF, through its subsidiaries, would own
the remaining 61.75%. The Reorganization Agreement provides for a post-closing
adjustment to the number of shares of CNA Surety common stock held by a CNAF
affiliate (the "Lookback Adjustment") if actual 1997 net written premiums of the
CNAF surety operations and/or Capsure vary from certain targets. As a group,
Capsure stockholders' relative ownership percentage of CNA Surety may be
adjusted from 38.25% to between 36.47% and 46.13% of CNA Surety.
Correspondingly, the CNAF affiliate's ultimate ownership of CNA Surety may be
adjusted from 61.75% to between 53.87% and 63.53%. The Lookback Adjustment, if
any, will be made on March 31, 1998, by either the surrender of shares of CNA
Surety common stock by the CNAF affiliate or the issuance of additional shares
of CNA Surety common stock to such CNAF affiliate, as the case may be. Because
the Lookback Adjustment, if any, will be based upon the results of Capsure and
CNA Surety for the year ending December 31, 1997, and will be effected on March
31, 1998, you will not know the ultimate percentage of the CNAF affiliate's
ownership either at the time of the Special Meeting or the Merger.
<PAGE> 5
CNAF would also reinsure and contribute its surety business and certain
assets to Capsure's insurance subsidiaries and would contribute capital to the
combined insurance operations. Under the Reorganization Agreement, together with
the transactions contemplated thereby applicable to the insurance subsidiaries,
a total of $102.25 million would be contributed to the capital of the combined
insurance operations, consisting of a $52.25 million cash contribution by CNAF
and a contribution of the proceeds from $50 million of new borrowings by CNA
Surety. When these amounts are considered with the $29 million ceding commission
payable by CNA Surety to CNAF under one of the reinsurance agreements, the
statutory surplus of the combined insurance operations would be increased by
$73.25 million.
If the Merger is approved, Capsure intends to declare a cash dividend to
its stockholders in an aggregate amount equal to the sum of $3.5 million and
$58,600 per day from and including June 1, 1997 to the closing of the Merger
(the "Closing Dividend"). For example, if the Merger were to be consummated on
September 30, 1997, it is anticipated that Capsure stockholders would receive a
Closing Dividend of approximately $0.64 per share.
CNAF's surety operations currently have a leading position in the
commercial surety and contract bond market, particularly in the medium and large
account segments. Together with Capsure's subsidiaries, Western Surety Company
and Universal Surety of America, which specialize in small contract and
commercial surety bonds, CNA Surety would be the largest surety company in the
United States with the most diverse surety product line and the most extensive
distribution system. Based on pro forma figures for 1996, CNA Surety would have
approximately $235 million of net written premiums, strong underwriting margins
and statutory surplus of approximately $122 million.
In reaching its recommendation in support of the Merger, your Board
considered many issues and risks relating to the Merger, including the
significant limitation of Capsure's future utilization of its NOLs as a result
of the Merger and the dilution to book value and tangible book value per share
of Capsure stockholders. Based upon these and various other factors considered,
your Board concluded that these and certain other risks related to the Merger
are more than offset by the positive impact on earnings per share and the
strategic and operational benefits that the Board believes will accrue to
stockholders as a result of the Merger.
In approving the Merger, your Board of Directors also received the opinion
of Capsure's financial advisor, Smith Barney Inc., to the effect that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the Exchange Ratio was fair from a financial point of view to the
Capsure stockholders.
Capsure's Board of Directors recommends that you vote FOR the Merger and
FOR the amendment to Capsure's certificate of incorporation.
Your vote is important. Please date, sign and return promptly the enclosed
proxy form whether or not you plan to attend the Special Meeting.
Sincerely,
Samuel Zell Signature
Samuel Zell
Chairman of the Board and
Chief Executive Officer
Bruce A. Esselborn Signature
Bruce A. Esselborn
President
<PAGE> 6
CAPSURE HOLDINGS CORP.
TWO NORTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
A Special Meeting of stockholders of Capsure Holdings Corp., a Delaware
corporation ("Capsure"), will be held at One North Franklin Street, 3rd floor,
Chicago, Illinois on September 23, 1997 starting at 10:00 a.m. for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the
Reorganization Agreement, dated as of December 19, 1996 and amended as of July
14, 1997 (as amended, the "Reorganization Agreement") by and among Capsure,
Continental Casualty Company, an Illinois corporation, and certain of its
affiliates (collectively, "CCC"), CNA Surety Corporation, a Delaware corporation
("CNA Surety"), all of whose outstanding shares are owned by CCC, and Surety
Acquisition Company, a Delaware corporation ("Acquisition"), and a wholly-owned
subsidiary of CNA Surety, pursuant to which Acquisition will be merged with and
into Capsure (the "Merger") following which Capsure will be the surviving
corporation and a wholly-owned subsidiary of CNA Surety;
2. If, and only if, the Reorganization Agreement and Merger are approved,
to consider and vote upon a proposal to approve and adopt an amendment to
Capsure's certificate of incorporation, deleting Article Twelfth (the
"Amendment"), which was originally adopted in order to preserve Capsure's net
operating tax loss carryforwards and restricts the ownership or transfer of 5%
or more of the outstanding capital stock of Capsure; and
3. To transact such other business as may properly be brought before the
meeting and any adjournment thereof.
In the event that a sufficient number of proxies or votes to obtain a
quorum or to approve the above-referenced proposals have not been received by
the date of the Special Meeting, then it is expected that the Special Meeting
will be postponed or adjourned in order to permit additional solicitation of
stockholder proxies or votes.
Stockholders of record at the close of business on August 15, 1997 will be
entitled to notice of and to vote at the Special Meeting and any adjournments or
postponements thereof. Approval of the Reorganization Agreement and Merger and
the Amendment each require the affirmative vote of the holders of a majority of
the outstanding shares of the Capsure common stock.
THE BOARD OF DIRECTORS OF CAPSURE HAS UNANIMOUSLY APPROVED THE PROPOSALS TO
APPROVE AND ADOPT THE REORGANIZATION AGREEMENT AND MERGER AND TO APPROVE AND
ADOPT THE AMENDMENT AND RECOMMENDS THAT THE CAPSURE STOCKHOLDERS VOTE FOR THE
PROPOSALS.
By Order of the Board of Directors,
Samuel Zell Signature
Samuel Zell
Chairman of the Board
Dated: August 15, 1997
IMPORTANT
TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, WHETHER OR NOT YOU PLAN TO
ATTEND, PLEASE VOTE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED ENVELOPE. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO REVOKE
SUCH PROXY BY APPROPRIATE WRITTEN NOTICE OR BY VOTING IN PERSON AT THE MEETING.
PLEASE NOTE THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST BRING TO THE MEETING A
LETTER FROM THE BROKER, BANK OR OTHER NOMINEE CONFIRMING YOUR BENEFICIAL
OWNERSHIP OF THE SHARES AND YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY
ISSUED IN YOUR NAME.
DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE> 7
CAPSURE HOLDINGS CORP.
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS OF
CAPSURE HOLDINGS CORP.
TO BE HELD ON SEPTEMBER 23, 1997
------------------------
CNA SURETY CORPORATION
PROSPECTUS
------------------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock of Capsure Holdings Corp., a Delaware corporation ("Capsure"), in
connection with the solicitation of proxies by the board of directors of Capsure
(the "Capsure Board") for use at the special meeting of Capsure stockholders
(the "Special Meeting") and any adjournments or postponements thereof. The
Special Meeting will be held on September 23, 1997 beginning at 10:00 a.m.
Chicago time. This Proxy Statement/Prospectus is first being mailed to
stockholders of Capsure on or about August 19, 1997.
At the Special Meeting, the stockholders of Capsure will vote upon
proposals to approve and adopt (i) the Reorganization Agreement, dated as of
December 19, 1996 and amended as of July 14, 1997, by and among Continental
Casualty Company, an Illinois corporation, and certain of its affiliates
(collectively, "CCC"), CNA Surety Corporation, a Delaware corporation ("CNA
Surety"), all of whose outstanding shares are owned by CCC, Surety Acquisition
Company, a Delaware corporation ("Acquisition"), and a wholly-owned subsidiary
of CNA Surety, and Capsure (as amended, the "Reorganization Agreement"),
pursuant to which Acquisition will be merged with and into Capsure (the
"Merger"), following which Capsure will be the surviving corporation (the
"Surviving Corporation") and a wholly-owned subsidiary of CNA Surety; and (ii)
if the Reorganization Agreement and Merger are adopted and approved, an
amendment to Capsure's certificate of incorporation, deleting Article Twelfth
(the "Amendment"), which was originally adopted in order to preserve Capsure's
net operating tax loss carryforwards ("NOLs") and which restricts the ownership
or transfer of 5% or more of the outstanding capital stock of Capsure. Approval
and adoption of the Amendment is necessary for the consummation of the Merger.
The Amendment will be presented to the Capsure stockholders only if the
Reorganization Agreement and Merger have been approved and adopted by the
Capsure stockholders at the Special Meeting.
The proposed Merger will be tax-free to the Capsure stockholders, based
upon the opinion of tax counsel to Capsure. Each outstanding share of common
stock, par value $0.05, of Capsure (the "Capsure Common Stock") will be
converted upon the effective time of the Merger (the "Effective Time") into the
right to receive one (1) share (the "Exchange Ratio") of CNA Surety common
stock, par value $0.01 per share (the "CNA Surety Common Stock"). As of July 31,
1997, an aggregate of up to 16,784,371 shares of CNA Surety Common Stock are
being offered for exchange in the Merger. Upon the consummation of the Merger,
(Continued on next page)
SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR CERTAIN INFORMATION WHICH
SHOULD BE CAREFULLY CONSIDERED BEFORE VOTING UPON THE MATTERS DESCRIBED HEREIN.
THE SHARES OF CNA SURETY COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is August 15, 1997.
<PAGE> 8
(Continued from previous page)
Capsure stockholders and holders of options to purchase Capsure Common Stock
(the "Capsure Options") will own, on a fully-diluted basis, 38.25% of the CNA
Surety Common Stock and CCC will own 61.75% of the CNA Surety Common Stock. The
Reorganization Agreement provides for a post-closing adjustment to the number of
shares of CNA Surety common stock held by CCC (the "Lookback Adjustment") if
actual 1997 net written premiums of the CCC Surety Operations and/or Capsure
vary from certain targets. After giving effect to the Lookback Adjustment, as
more fully described under "The Reorganization Agreement and Other Transaction
Agreements -- Lookback Adjustment," the Capsure stockholders' ultimate
percentage ownership of CNA Surety may be adjusted. The Capsure stockholders'
relative ownership percentage of CNA Surety, as a group, may be adjusted from
38.25% to between 36.47% and 46.13% of CNA Surety. Correspondingly, CCC's
ultimate ownership of CNA Surety may be adjusted from 61.75% to between 53.87%
and 63.53%. The Lookback Adjustment, if any, will be made on March 31, 1998, by
either the surrender of shares of CNA Surety Common Stock by CCC or the issuance
of additional shares of CNA Surety Common Stock to CCC, as the case may be.
Because the Lookback Adjustment, if any, will be based upon the results of
Capsure and CNA Surety for the year ending December 31, 1997 and will be
effected on March 31, 1998, Capsure stockholders will not know the ultimate
percentage of CCC's ownership either at the time of the Special Meeting or the
Merger. The CNA Surety Common Stock will be listed for trading on the New York
Stock Exchange ("NYSE") under the symbol SUR, subject to notice of issuance to
the NYSE. As of August 5, 1997, the last reported sale price of the Capsure
Common Stock on the NYSE was $13 5/16.
This Proxy Statement/Prospectus also constitutes the prospectus of the
Selling Stockholders (as hereinafter defined). CNA Surety will not receive any
proceeds from the sale by the Selling Stockholders of the shares of CNA Surety
Common Stock registered for reoffer pursuant to this Proxy Statement/Prospectus.
See "Stockholders Registering Shares for Reoffer."
2
<PAGE> 9
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS,
OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO
WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR
PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CCC, CNA
SURETY OR CAPSURE SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES THEREOF. IF ANY MATERIAL CHANGE
OCCURS DURING THE PERIOD IN WHICH THIS PROXY STATEMENT/PROSPECTUS IS REQUIRED TO
BE DELIVERED, THIS PROXY STATEMENT/PROSPECTUS WILL BE AMENDED AND SUPPLEMENTED
ACCORDINGLY.
AVAILABLE INFORMATION
Capsure is, and after consummation of the Merger, CNA Surety will be,
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith Capsure
files, or CNA Surety will file, reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information may be inspected and copied at the
Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, where copies may be obtained at
prescribed rates, as well as at the following regional offices: Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and
Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. This material also may be inspected at the offices
of the NYSE, 20 Broad Street, New York, New York 10005. Certain information and
reports are also available electronically through the Commission's Electronic
Data Gathering, Analysis and Retrieval system database, which can be accessed
through the Commission's website located at http://www.sec.gov.
After consummation of the Merger, Capsure will no longer file reports,
proxy statements or other information with the Commission. Instead, such
information would be provided, to the extent required, in filings made by CNA
Surety.
CNA Surety has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, and schedules thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), covering the shares of CNA Surety Common Stock to be issued
in connection with the Merger. This Proxy Statement/Prospectus constitutes the
Prospectus of CNA Surety filed as part of the Registration Statement relating to
the shares of CNA Surety Common Stock to be issued to Capsure's stockholders in
connection with the consummation of the Merger.
This Proxy Statement/Prospectus does not contain all of the information
contained in the Registration Statement filed with the Commission by CNA Surety
in connection with the offering of the shares of CNA Surety Common Stock to be
issued and exchanged in the Merger, certain portions of which have been omitted
in accordance with the Commission's rules and regulations. Such additional
information is available for inspection and copying at the offices of the
Commission.
All information in this Proxy Statement/Prospectus concerning CNA Surety
has been furnished by CNA Surety, and in certain instances, by CNA Financial
Corporation ("CNAF") and CCC, and all information concerning Capsure and its
subsidiaries has been furnished by Capsure. Statements contained in this Proxy
Statement/Prospectus as to the contents of any contract or document are not
necessarily complete and in each instance such statements are qualified in their
entirety by reference to the copy of such contract or other document filed as an
exhibit to the Registration Statement or incorporated by reference herein or
therein.
3
<PAGE> 10
Cautionary Statement Regarding Forward-Looking Information.
When used in this Proxy Statement/Prospectus, the words "estimate,"
"targets," "project," "intend," "expect," and similar expressions are intended
to identify forward-looking statements. In addition, certain sections of this
Proxy Statement/Prospectus refer to financial forecasts for Capsure and CNA
Surety which include projected earnings and other forecasted operating data and
include forward-looking information. All such statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those contemplated in such forward-looking statements. For a discussion of such
risks, see "Risk Factors." Readers are cautioned not to place undue reliance on
forward-looking statements. Neither CNAF, CNA Surety, CCC nor Capsure undertakes
any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
DOCUMENTS TO BE INCORPORATED BY REFERENCE
The following documents previously filed by Capsure with the Commission
under the Exchange Act are incorporated herein by reference:
Capsure's Annual Report on Form 10-K/A for the year ended December 31,
1996;
Capsure's Quarterly Report on Form 10-Q for the periods ended March 31,
1997 and June 30, 1997; and
Capsure's Current Report on Form 8-K, dated July 16, 1997.
All documents filed by Capsure pursuant to Sections 12(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus and
prior to September 22, 1997, shall be deemed to be incorporated by reference in
this Proxy Statement/Prospectus and to be a part hereof from the date of filing
such documents.
Any statement contained in a document incorporated or deemed to be
incorporated in this Proxy Statement/Prospectus by reference shall be deemed to
be modified or superseded for the purpose of this Proxy Statement/Prospectus to
the extent that a statement contained in this Proxy Statement/Prospectus or in
any other subsequently filed document which also is or is deemed to be
incorporated in this Proxy Statement/Prospectus by reference modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herein or delivered herewith. These documents (other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference herein) are available, upon request, in the case of documents relating
to Capsure, from Capsure Holdings Corp., Two North Riverside Plaza, Chicago,
Illinois 60606, attention: Susan Obuchowski, secretary; telephone number (312)
466-4010; and in the case of documents relating to CNA Surety at CNA Plaza,
Chicago, Illinois 60685, attention: Roger Morris; telephone number (312)
822-4195. In order to ensure timely delivery of the documents, any request
should be made by September 18, 1997.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... 3
DOCUMENTS TO BE INCORPORATED BY REFERENCE................... 4
SUMMARY..................................................... 9
The Companies.......................................... 9
The Proposed Merger.................................... 9
The Amendment.......................................... 10
The Special Meeting.................................... 10
The Reorganization Agreement........................... 10
Certain Other Agreements............................... 13
Tax Consequences to Holders of Capsure Common Stock.... 14
Accounting Treatment................................... 14
Recommendations of the Capsure Board of Directors...... 14
Opinion of Capsure's Financial Advisor................. 14
CNA Surety Securities to be Issued..................... 14
Dissenters' Rights..................................... 14
Regulatory Filings and Approvals....................... 14
Risk Factors........................................... 15
Interest of Certain Persons in the Transaction;
Severance Benefits; Retention and Transaction
Arrangements.......................................... 15
Stockholders Registering Shares for Reoffer............ 15
Selected Consolidated Financial Data -- Capsure........ 16
Selected Consolidated Financial Data -- CCC Surety
Operations............................................ 17
Comparative Pro Forma Consolidated Financial Data...... 18
CNA Surety Merger Strategy............................. 18
Market for Common Stock................................ 19
Dividends.............................................. 19
RISK FACTORS................................................ 20
Integration of the Companies........................... 20
Controlling Stockholder; Conflict of Interest.......... 20
Immediate Dilution to Stockholders..................... 21
Holding Company Structure.............................. 21
No Prior Public Market for CNA Surety Common Stock;
Possible Volatility of Stock Price.................... 21
Shares Eligible for Future Sale........................ 22
Failure to Obtain Consents of Certain Governmental
Authorities........................................... 22
Competition and Other Factors.......................... 22
Susceptibility to Changes in Interest Rates and General
Economic Conditions................................... 22
Issuance of Preferred Stock............................ 23
Change-in-Control Restrictions......................... 23
Insurance Ratings...................................... 23
Adequacy of Reserves................................... 24
Investment Portfolio; Absence of Historical Investment
Results............................................... 24
Regulation............................................. 24
Adverse Legislation.................................... 25
INTRODUCTION................................................ 26
General................................................ 26
The Special Meeting.................................... 26
Solicitation, Voting and Revocability of Proxies....... 26
Recommendation of the Capsure Board.................... 28
Proxy Solicitation..................................... 28
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Conversion of Shares; Exchange of Stock Certificates... 28
THE MERGER.................................................. 29
Background and Reasons for the Merger.................. 29
Opinion of Capsure's Financial Advisor................. 33
Certain Federal Income Tax Consequences to Capsure and
Its Stockholders...................................... 37
Accounting Treatment................................... 38
Interest of Certain Persons in the Transaction;
Severance Benefits; Retention and Transaction
Arrangements.......................................... 39
Certain Regulatory Filings and Approvals............... 40
NYSE Listing of CNA Surety Common Stock................ 41
Federal Securities Law Consequences.................... 41
Dissenters' Rights..................................... 41
THE REORGANIZATION AGREEMENT AND OTHER TRANSACTION
AGREEMENTS................................................ 42
The Merger............................................. 42
Exchange of Capsure Common Stock for CNA Surety Common
Stock................................................. 42
Lookback Adjustment.................................... 43
Effective Time......................................... 45
Terms and Conditions of the Merger..................... 45
Representations and Warranties......................... 46
Certain Covenants...................................... 46
No Solicitation........................................ 48
Termination............................................ 49
Termination Fees....................................... 49
CCC Restrictions....................................... 49
Closing Dividend....................................... 50
Reinsurance Agreements and Services and Indemnity
Agreement............................................. 50
Administrative Services Agreement...................... 52
Voting Agreement....................................... 52
Registration Rights Agreement.......................... 53
AMENDMENT TO CAPSURE CERTIFICATE OF INCORPORATION........... 54
Proposed Amendment and Reasons Therefor................ 54
MARKET FOR CAPSURE COMMON STOCK............................. 55
Dividend Policy........................................ 55
MARKET FOR CNA SURETY COMMON STOCK.......................... 56
Dividend Policy........................................ 56
DESCRIPTION OF CCC SURETY OPERATIONS........................ 57
General................................................ 57
Products............................................... 57
Marketing.............................................. 60
Underwriting........................................... 61
Competition............................................ 61
Regulation............................................. 61
Reinsurance............................................ 62
Employee Relations..................................... 62
Properties............................................. 62
Loss Reserve Development............................... 62
Asbestos and Environmental Claims...................... 64
Investments............................................ 64
A.M. Best Rating....................................... 64
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SELECTED FINANCIAL DATA -- CCC SURETY OPERATIONS............ 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENTS OF
CERTAIN ASSETS AND LIABILITIES AND THE STATEMENTS OF
CERTAIN REVENUES AND DIRECT OPERATING EXPENSES OF THE CCC
SURETY OPERATIONS......................................... 66
Background............................................. 66
Basis of Financial Data Presented...................... 66
Results of Operations -- Years Ended December 31, 1996,
1995 and 1994......................................... 66
Premiums Written....................................... 66
Operating Results...................................... 68
Interim Results of Operations -- Three and Six Months
Ended June 30, 1997 and 1996.......................... 69
Premiums Written....................................... 69
Operating Results...................................... 70
Loss and LAE Reserves.................................. 71
Liquidity and Capital Resources........................ 72
DESCRIPTION OF CAPSURE BUSINESS............................. 73
DESCRIPTION OF CNA SURETY................................... 74
CNA Surety Merger Strategy............................. 74
Liquidity and Capital Resources........................ 75
Investments............................................ 76
A.M. Best Rating....................................... 76
Reinsurance............................................ 76
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...... 78
Basis of Preparation................................... 78
Purchase Accounting.................................... 78
Limitations and Instructions........................... 78
CNA Surety Pro Forma Condensed Consolidated Balance
Sheet................................................. 79
CNA Surety Pro Forma Condensed Statement of
Consolidated Operations............................... 80
Notes to Unaudited Pro Forma Consolidated Financial
Information........................................... 82
DESCRIPTION OF CNA SURETY COMMON STOCK...................... 89
CNA Surety Common Stock................................ 89
CNA Surety Preferred Stock............................. 89
Voting Rights.......................................... 89
Absence of Preemptive and Conversion Rights............ 89
NYSE Listing of CNA Surety Common Stock................ 89
Registrar and Exchange Agent........................... 89
COMPARISON OF STOCKHOLDER RIGHTS............................ 89
Special Meetings of Stockholders....................... 89
Supermajority Voting Provisions........................ 90
MANAGEMENT OF CNA SURETY.................................... 91
Directors and Executive Officers....................... 91
Director Compensation.................................. 93
Committees of the CNA Surety Board..................... 93
Executive Compensation Arrangements.................... 93
Limitation of Liability and Indemnification Matters.... 94
CNA Surety Option Plan................................. 94
Other Plans............................................ 95
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 96
Security Ownership of Beneficial Owners of Capsure
Common Stock.......................................... 96
Security Ownership of Capsure Management............... 96
Security Ownership of Beneficial Owners of CNA Surety
Common Stock.......................................... 98
STOCKHOLDERS REGISTERING SHARES FOR REOFFER................. 99
RELATIONSHIPS AND RELATED TRANSACTIONS...................... 99
Employment Contracts and Termination Of Employment and
Change of Control Arrangements........................ 99
Certain Relationships and Related Transactions......... 100
LEGAL MATTERS............................................... 100
EXPERTS..................................................... 100
OTHER MATTERS............................................... 100
GLOSSARY OF SELECTED INSURANCE TERMS........................ 101
APPENDICES
APPENDIX A -- Reorganization Agreement, as amended
APPENDIX B -- Smith Barney Inc. Opinion
APPENDIX C -- Mayer, Brown & Platt Tax Opinion
APPENDIX D -- CCC Surety Operations Financial
Statements
APPENDIX E -- Voting Agreement
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<PAGE> 15
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, the
Appendices hereto and the documents incorporated by reference or otherwise
referred to herein. Stockholders of Capsure are urged to review this entire
Proxy Statement/Prospectus carefully, including the Appendices hereto and such
other documents incorporated herein. Cross-references in this Summary refer to
indicated captions or portions of this Proxy Statement/Prospectus.
THE COMPANIES
Capsure. Capsure provides principally small contract and commercial surety
and fidelity bond insurance products through its insurance subsidiaries: Western
Surety Company, a South Dakota insurance corporation ("Western Surety"),
Universal Surety of America, a Texas insurance corporation ("USA"), and Surety
Bonding Company of America, a South Dakota insurance corporation ("SBCA", and
collectively with Western Surety and USA, the "Insurance Subsidiaries"). The
mailing address of Capsure's principal executive offices is Two North Riverside
Plaza, Chicago, Illinois 60606; its telephone number is (312) 879-1900. See
"Description of Capsure Business."
CCC. CCC and certain of its affiliates, primarily property/casualty
insurers, are direct or indirect wholly-owned subsidiaries of CNAF. The CCC
Surety Operations (as defined in "Description of CCC Surety Operations") are
conducted principally through CCC. The mailing address of CCC's principal
executive offices is CNA Plaza, Chicago, Illinois 60685; its telephone number is
(312) 822-4915. See "Description of CCC Surety Operations."
CNA Surety. CNA Surety is a newly-formed subsidiary of CCC that has not
conducted any business activities to date. The mailing address of CNA Surety's
principal executive offices is CNA Plaza, Chicago, Illinois 60685; its telephone
number is (312) 822-4915. See "Description of CNA Surety."
Acquisition. Acquisition is a newly-formed and wholly-owned subsidiary of
CNA Surety that has not conducted any business activities to date. Acquisition
will be merged with and into Capsure and will cease to exist following the
Merger. As used hereinafter, references to CNA Surety shall mean CNA Surety and
Acquisition.
THE PROPOSED MERGER
This Proxy Statement/Prospectus relates to the Special Meeting at which the
Capsure stockholders will vote upon the principal terms of the proposed Merger
of Acquisition with and into Capsure, pursuant to the Reorganization Agreement
(Proposal Number 1). Following the Merger, Capsure will become a wholly-owned
subsidiary of CNA Surety. See "The Merger" and "The Reorganization Agreement and
Other Transaction Agreements."
At the Effective Time, each outstanding share of Capsure Common Stock will
be converted into the right to receive one share of CNA Surety Common Stock. As
a result of the Merger, holders of Capsure Common Stock and Capsure Options will
own, on a fully-diluted basis (assuming exercise and exchange of all outstanding
Capsure Options), 38.25% of the CNA Surety Common Stock and CCC will own 61.75%
of the shares of CNA Surety Common Stock, subject to the Lookback Adjustment.
See "The Reorganization Agreement and Other Transaction Agreements -- Lookback
Adjustment."
Capsure intends to declare a cash dividend, conditioned upon consummation
of the Merger, to its stockholders of record prior to the Effective Time,
payable as soon as practicable thereafter (the "Closing Dividend"). The Closing
Dividend shall be an aggregate amount equal to the sum of $3.5 million and
$58,600 per day from and including June 1, 1997 through and including the day
immediately preceding the Effective Time. For example, if the Merger were to be
consummated on September 30, 1997, the aggregate amount of the Closing Dividend
would be $10.6 million. Assuming that there were 16,652,485 shares of Capsure
Common Stock outstanding (which includes the assumed exercise of 802,240 vested
Capsure Options) on the
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<PAGE> 16
record date of the Closing Dividend, the Capsure stockholders would receive a
Closing Dividend of $0.64 per share. See "The Reorganization Agreement and Other
Transaction Agreements -- Closing Dividend."
Under the terms of the Reorganization Agreement, three Capsure-nominated
members will sit on the CNA Surety board of directors ("CNA Surety Board") until
the 1999 annual meeting of CNA Surety stockholders. See "The Reorganization
Agreement and Other Transaction Agreements -- Certain Covenants."
CNA Surety will provide a stock option plan for holders of Capsure Options
as of the date of the Merger, in order to provide for the termination of the
Capsure Options in exchange for options to purchase CNA Surety Common Stock
("CNA Surety Options"), which will provide rights and benefits similar to those
held currently by holders of Capsure Options. See "Management of CNA Surety --
CNA Surety Option Plan."
THE AMENDMENT
If, and only if, the Reorganization Agreement and Merger are approved by
Capsure stockholders at the Special Meeting, the Capsure stockholders will also
be asked to approve the Amendment deleting, in its entirety, Article Twelfth
from Capsure's certificate of incorporation (Proposal Number 2). This provision
was originally adopted in order to preserve Capsure's NOLs and restricts the
ownership or transfer of 5% or more of the outstanding shares of Capsure Common
Stock. Approval of the Amendment is necessary to consummate the Merger. See
"Amendment to Capsure Certificate of Incorporation."
THE SPECIAL MEETING
At the Special Meeting, holders of Capsure Common Stock will vote on a
proposal to approve the terms of the Reorganization Agreement and Merger and the
Amendment. The Special Meeting will be held at One North Franklin Street, 3rd
floor, Chicago, Illinois on September 23, 1997 beginning at 10:00 a.m. Chicago
time.
Record Date; Shares Entitled to Vote
Holders of record of Capsure Common Stock at the close of business on
August 15, 1997, (the "Record Date") will be entitled to notice of and to vote
at the Special Meeting. Each outstanding share of Capsure Common Stock is
entitled to one vote at the Special Meeting.
Vote Required
The affirmative vote of the holders of a majority of the outstanding shares
of Capsure Common Stock is required for the approval of the Reorganization
Agreement and Merger and the Amendment. The presence, in person or by proxy, of
the holders of at least a majority of the outstanding shares of Capsure Common
Stock entitled to vote is necessary to constitute a quorum at the Special
Meeting. See also "The Reorganization Agreement and Other Transaction Agreements
- -- The Voting Agreement."
THE REORGANIZATION AGREEMENT
General
The Reorganization Agreement, together with the transactions contemplated
thereunder, provides, among other things, for (i) the Merger of Acquisition with
Capsure, which will result in Capsure, as the Surviving Corporation of the
Merger, becoming a wholly-owned subsidiary of CNA Surety; (ii) the contribution
and the simultaneous cession of the CCC Surety Operations to the Insurance
Subsidiaries; and (iii) the contribution of funds to the Insurance Subsidiaries,
all of which will result in an increase of $73.25 million in the statutory
surplus of the Insurance Subsidiaries, of which $50 million is to be funded from
bank borrowings by CNA Surety. See "The Reorganization Agreement and Other
Transaction Agreements -- Certain Covenants" and "Description of CNA Surety --
Liquidity and Capital Resources."
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<PAGE> 17
Conversion of Capsure Common Stock
Upon consummation of the Merger and in accordance with the Exchange Ratio,
each outstanding share of Capsure Common Stock will be converted into one share
of CNA Surety Common Stock. See "The Reorganization Agreement and Other
Transaction Agreements -- Exchange of Capsure Common Stock for CNA Surety Common
Stock." For a description of the CNA Surety Common Stock, see "Description of
CNA Surety Common Stock." For a summary of the principal differences between the
rights of holders of CNA Surety Common Stock and Capsure Common Stock, see
"Comparison of Stockholder Rights."
Outstanding Capsure Options
Pursuant to the Reorganization Agreement, Capsure Options outstanding and
unexercised as of the Effective Time shall be terminated and exchanged on a
one-for-one basis for CNA Surety Options which will carry rights and benefits
similar to those held currently by holders of Capsure Options. See "Management
of CNA Surety -- CNA Surety Option Plan."
AT THE EFFECTIVE TIME, EACH CERTIFICATE REPRESENTING SHARES OF CAPSURE
COMMON STOCK SHALL, WITHOUT ANY ACTION ON THE PART OF THE HOLDER THEREOF, BE
DEEMED TO REPRESENT AN EQUIVALENT NUMBER OF SHARES OF CNA SURETY COMMON STOCK.
HOLDERS OF CAPSURE COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING
CAPSURE COMMON STOCK WITH THE ENCLOSED PROXY CARD.
Promptly after the Effective Time, a letter of transmittal and instructions
will be mailed to each person who was a holder of Capsure Common Stock
immediately prior to the Effective Time.
Conditions to the Merger
The obligations of Capsure and CNA Surety to consummate the Merger are
subject to the fulfillment of various conditions, including, among others: (i)
approval by the Capsure stockholders of the Reorganization Agreement, the
Merger, the Amendment and the other transactions contemplated under the
Reorganization Agreement; (ii) absence of any order, decree, ruling or other
action restraining or otherwise prohibiting the Merger or any of the other
transactions contemplated by the Reorganization Agreement; (iii) receipt of all
requisite regulatory approvals, and the expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"); (iv) listing of the CNA Surety Common Stock
on the NYSE, subject only to official notice of issuance; (v) receipt of
opinions of tax counsel as to the tax-free treatment of the Merger and exchange
of shares; (vi) maintenance by Western Surety and USA of their respective
ratings by A.M. Best & Company, Inc. ("A.M. Best") of "A" or better from the
date of the Reorganization Agreement to one day immediately prior to the Closing
Date; and (vii) declaration of the Registration Statement, of which this Proxy
Statement/Prospectus is a part, as effective by the Commission. See The
Reorganization Agreement and Other Transaction Agreements -- Terms and
Conditions of the Merger."
CCC Restrictions
In order to further assure a complete transfer to the Surviving Corporation
of the CCC Surety Operations, CCC will direct any inquiries or requests that it
may receive for any surety products to the Insurance Subsidiaries. Further, CCC
will cede to the Insurance Subsidiaries after the Closing Date any bonds or
policies relating to the CCC Surety Operations that for any reason should have
been, but were not, transferred to the Insurance Subsidiaries as of the Closing
Date. In addition, CCC will not restrict the Insurance Subsidiaries from
entering into any new lines of business. See "The Reorganization Agreement and
Other Transaction Agreements -- CCC Restrictions."
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No Solicitation
The Reorganization Agreement provides that neither Capsure nor its
subsidiaries will authorize its officers and directors to initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of a proposal or
offer for a merger, consolidation, business combination, sale of substantial
assets, sale of shares of capital stock involving a change of control or similar
transaction involving Capsure (collectively, an "Acquisition Proposal"). The
Capsure Board, however, is entitled to furnish information to, or enter into
discussions or negotiations with, any person or entity that makes an Acquisition
Proposal if the Capsure Board, after consultation with its legal counsel,
determines that such action is necessary for the Capsure Board to comply with
its fiduciary duties to Capsure's stockholders under applicable law. Capsure
will notify CCC if any such inquiries or proposals are received.
Termination
The Reorganization Agreement may be terminated by either Capsure or CCC if
the Merger has not been consummated on or before September 30, 1997. In
addition, the Reorganization Agreement is subject to termination if: (i) the
Reorganization Agreement and the Merger are not approved by the Capsure
stockholders at the Special Meeting; (ii) any court or government body shall
have issued a final order, decree or ruling permanently restraining, enjoining
or otherwise prohibiting the Merger; or (iii) Capsure and CCC mutually consent
to such termination.
CCC may terminate the Reorganization Agreement if: (i) there exists a
material breach of any representation, warranty, covenant, agreement or
obligation by Capsure in the performance of any of its obligations under the
Reorganization Agreement, or by Equity Capsure Limited Partnership, an Illinois
limited partnership (the "Major Stockholder"), under the Voting Agreement, and
any such breach is not cured within 15 business days after notice of such
breach; or (ii) if Capsure has entered into an agreement providing for an
Acquisition Proposal or the Capsure Board withdraws its recommendation of the
Reorganization Agreement or the Merger.
Capsure may terminate the Merger Agreement if there exists a material
breach of any representation, warranty, covenant, agreement or obligation by CCC
or CNA Surety in the performance of any of their obligations under the
Reorganization Agreement, and any such breach is not cured within 15 business
days after notice of such breach. See "The Reorganization Agreement and Other
Transaction Agreements -- Termination."
Termination Fees
If a termination occurs due to (i) a material breach of the Reorganization
Agreement by Capsure or (ii) Capsure entering into an agreement providing for an
Acquisition Proposal, the Capsure Board withdrawing its recommendation of the
Reorganization Agreement or the Merger, or the Capsure Board recommending any of
the above actions, then Capsure will pay liquidated damages of $750,000 to CCC.
If a termination occurs due to a material breach of the Reorganization Agreement
by CCC or CNA Surety, CCC will pay liquidated damages of $750,000 to Capsure.
In addition, Capsure has agreed, under certain limited circumstances
relating to the acceptance of an Acquisition Proposal or a successful tender
offer within specified 12-month time periods, to pay $4.25 million to CCC. CCC
also has agreed to pay $4.25 million to Capsure if CCC terminates the
Reorganization Agreement in breach of its obligations under the Reorganization
Agreement and then enters into an agreement for the merger, consolidation,
business combination or sale of its surety business within 12 months of such
termination. See "The Reorganization Agreement and Other Transaction Agreements
- -- Termination Fees."
Lookback Adjustment
The Reorganization Agreement provides for a post-closing adjustment to the
number of shares of CNA Surety Common Stock held by CCC (the "Lookback
Adjustment") if actual 1997 net written premiums of
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the CCC Surety Operations and/or of Capsure vary from certain targets. The
Lookback Adjustment, if any, will be made on March 31, 1998, by either the
surrender of shares of CNA Surety Common Stock by CCC to CNA Surety or the
issuance by CNA Surety of additional shares of CNA Surety Common Stock to CCC,
as the case may be. As described under "The Reorganization Agreement and Other
Transaction Agreements -- Lookback Adjustment", the Capsure stockholders'
ultimate percentage ownership of CNA Surety may be adjusted. The Capsure
stockholders' relative ownership percentage of CNA Surety may be adjusted from
38.25% to between 36.47% and 46.13% of CNA Surety. Correspondingly, CCC's
ultimate ownership of CNA Surety may be adjusted from 61.75% to between 53.87%
and 63.53%. The Lookback Adjustment, if any, will be made on March 31, 1998, by
either the surrender of shares of CNA Surety Common Stock by CCC or the issuance
of additional shares of CNA Surety Common Stock to CCC, as the case may be.
Because the Lookback Adjustment, if any, will be based upon the results of
Capsure and CNA Surety for the year ending December 31, 1997 and will be
effected on March 31, 1998, Capsure stockholders will not know the ultimate
percentage of CCC's ownership either at the time of the Special Meeting or the
Merger.
CERTAIN OTHER AGREEMENTS
Reinsurance Agreements and the Services and Indemnity Agreement
The Surety Quota Share Treaty, the Aggregate Stop Loss Reinsurance Contract
and the Surety Excess of Loss Reinsurance Contract (collectively, the
"Reinsurance Agreements"), together with the Services and Indemnity Agreement,
provide CNA Surety and the Insurance Subsidiaries with certain ongoing financial
assurances. These agreements are designed to provide continuing underwriting
capacity, protect against adverse loss reserve development related to the CCC
surety reserves being transferred, and help preserve, through the year 2000, the
profitability of the CCC Surety Operations and certain additional accounts. The
Reinsurance Agreements, together with the Services and Indemnity Agreement, also
effect the transfer of the CCC Surety Operations to the Insurance Subsidiaries.
From an operational standpoint, the Services and Indemnity Agreement
provides the Insurance Subsidiaries with the authority to perform various
administrative, underwriting, claims and management functions relating to the
operations of the transferred CCC Surety Operations. See "The Reorganization
Agreement and Other Transaction Agreements -- Reinsurance Agreements and
Services and Indemnity Agreement."
Administrative Services Agreement
Pursuant to the Administrative Services Agreement, for a period of three
years following the Effective Time, CCC will (i) lease to CNA Surety the real
and personal property used by CCC in the CCC Surety Operations prior to the
Merger and (ii) offer to provide to CNA Surety various services presently
performed by CCC, including telecommunications, computer access and support,
marketing, strategic management and direction, investment advice and various
other business services, at rates no more than the amounts currently charged to
the CCC Surety Operations, subject to inflationary increases. The Administrative
Services Agreement also provides CNA Surety an option at the end of three years
to purchase the personal property CNA Surety leases from CCC for $1.
Voting Agreement
The Major Stockholder, the president of Capsure and a director of Capsure
entered into a voting agreement (the "Voting Agreement") with CCC on December
19, 1996 pursuant to which such persons agreed to vote all shares of Capsure
Common Stock that they beneficially own or may own on the Record Date in favor
of the Reorganization Agreement and Merger and against any competing Acquisition
Proposals. Subsequent to the execution of the Voting Agreement, the Major
Stockholder distributed 486,760 shares of Capsure Common Stock to one of its
limited partners, which in turn, transferred such shares to a charitable
foundation. The charitable foundation has agreed to be bound by the terms of the
Voting Agreement. As of the Record Date, an aggregate of 4,114,629 shares of
Capsure Common Stock, representing approximately 26% of the outstanding shares,
were subject to the Voting Agreement. See "The Reorganization Agreement and
Other Transaction Agreements -- Voting Agreement."
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Registration Rights Agreement
As of the Effective Time and as a condition to Capsure's obligation to
effect the Merger, CCC and the Major Stockholder will enter into the
Registration Rights Agreement pursuant to which the Major Stockholder and
certain of its permitted assigns, including the charitable foundation referenced
above, will have, subject to certain conditions, certain rights to require CNA
Surety to register for sale all or any portion of the shares of CNA Surety
Common Stock owned by the Major Stockholder. See "The Reorganization Agreement
and Other Transaction Agreements -- Registration Rights Agreement."
TAX CONSEQUENCES TO HOLDERS OF CAPSURE COMMON STOCK
No gain or loss will be recognized by a Capsure stockholder in connection
with the exchange of Capsure Common Stock for CNA Surety Common Stock. See "The
Merger -- Certain Federal Income Tax Consequences to Capsure and Its
Stockholders."
ACCOUNTING TREATMENT
For financial reporting purposes, the Merger will be accounted for using
the purchase method of accounting. See "The Merger -- Accounting Treatment."
RECOMMENDATIONS OF THE CAPSURE BOARD OF DIRECTORS
The Capsure Board has unanimously approved the Reorganization Agreement and
Merger and the Amendment. THE CAPSURE BOARD UNANIMOUSLY RECOMMENDS THAT ITS
STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE REORGANIZATION
AGREEMENT AND MERGER AND FOR THE PROPOSAL TO APPROVE AND ADOPT THE AMENDMENT.
See "The Merger -- Background and Reasons for the Merger" for a discussion of
the factors considered by the Capsure Board.
OPINION OF CAPSURE'S FINANCIAL ADVISOR
Smith Barney Inc. ("Smith Barney"), Capsure's financial advisor, has
delivered to the Capsure Board a written opinion dated July 14, 1997 to the
effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Exchange Ratio was fair, from a financial
point of view, to the holders of Capsure Common Stock. The full text of the
written opinion of Smith Barney dated July 14, 1997, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Appendix B to this Proxy Statement/Prospectus and should be read
carefully in its entirety. Smith Barney's opinion is directed to the Capsure
Board and relates only to the fairness of the Exchange Ratio from a financial
point of view, does not address any other aspect of the Merger or related
transactions and does not constitute a recommendation to any stockholder as to
how such stockholder should vote at the Special Meeting. See "The Merger --
Opinion of Capsure's Financial Advisor."
CNA SURETY SECURITIES TO BE ISSUED
In connection with the Merger, CNA Surety will issue shares of CNA Surety
Common Stock to holders of Capsure Common Stock in exchange for their shares of
Capsure Common Stock. The CNA Surety Common Stock will have rights similar to
those of the Capsure Common Stock. See "Description of CNA Surety Common Stock"
and "Comparison of Stockholder Rights."
DISSENTERS' RIGHTS
Holders of Capsure Common Stock are not entitled to dissenters' rights or
appraisal rights in connection with the Merger. See "The Merger -- Dissenters'
Rights."
REGULATORY FILINGS AND APPROVALS
The Merger is subject to the approvals of the South Dakota Department of
Commerce and Regulation -- Division of Insurance (the "South Dakota Department")
and the Texas Department of Insurance (the "Texas Department"). The filings with
both the South Dakota and Texas Departments have been made and must be approved
prior to the Merger. Pursuant to the request of the Insurance Commissioner of
the State of California ("California Commissioner"), CNA Surety has filed an
application seeking the consent of the
14
<PAGE> 21
California Commissioner for the proposed Merger and transfer of the CCC Surety
Operations in connection with the Merger.
Certain acquisition transactions, such as the Merger, are reviewed by the
Antitrust Division of the United States Department of Justice (the "Justice
Department") and the Federal Trade Commission (the "FTC") to determine whether
or not such transactions comply with applicable antitrust laws. Capsure and CCC
have filed Pre-Merger Notification and Report Forms pursuant to the HSR Act with
the Justice Department and the FTC and have received notice of early termination
of the waiting period requirements. See "The Merger -- Certain Regulatory
Filings and Approvals."
RISK FACTORS
In connection with the determination to approve the Reorganization
Agreement and Merger, stockholders should evaluate certain risk factors
associated with the Merger and related transactions, beginning on page 20. The
principal risk factors related to the Merger include (i) integration of the
companies, (ii) controlling stockholder and conflict of interest, (iii)
immediate dilution to Capsure stockholders, (iv) no prior public market for CNA
Surety Common Stock and possible volatility of stock price, (v) holding company
structure and (vi) shares eligible for future sale. See "Risk Factors."
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION; SEVERANCE BENEFITS;
RETENTION AND TRANSACTION ARRANGEMENTS
In connection with its possible sale or merger, Capsure developed a plan
pursuant to which Capsure would provide severance benefits and transaction or
retention bonuses to certain officers and employees of Capsure and its
subsidiaries (the "Severance/Retention Plan"). Under the Severance/Retention
Plan or pursuant to existing employment contracts, Capsure expects to make cash
severance payments of $1.15 million to Bruce A. Esselborn, president, $630,000
to Mary Jane Robertson, chief financial officer, and $255,000 to Ronald D.
Bobman, vice president -- mergers and acquisitions, of Capsure, in connection
with the termination of their employment upon consummation of the Merger. Eight
other Capsure employees are entitled to cash severance payments from Capsure in
the aggregate amount of approximately $121,000 in the event of their termination
of employment.
The Severance/Retention Plan also provides for the payment by Capsure of
transaction and retention bonuses. Transaction bonuses will be payable or have
already been paid to the following officers of Capsure and executive officers of
its subsidiaries: Mr. Esselborn -- $581,250, Ms. Robertson -- $337,500, Mr.
Bobman -- $170,000, John S. Heneghan, vice president -- controller of Capsure --
$71,250, Stephen T. Pate, president of Western Surety -- $312,500 and John T.
Knox, Jr., president of USA -- $250,000. Transaction and retention bonuses in
the aggregate amount of approximately $776,000 will be payable to approximately
80 additional employees of Capsure and its subsidiaries upon consummation of the
Merger. See "The Merger -- Interest of Certain Persons in the Transaction;
Severance Benefits, Retention and Transaction Arrangements."
STOCKHOLDERS REGISTERING SHARES FOR REOFFER
A limited number of shares of CNA Surety Common Stock received in the
Merger in exchange for shares of Capsure Common Stock by an officer and certain
directors of Capsure, none of whom will continue with CNA Surety following the
Merger, (the "Selling Stockholders") will be registered for sale pursuant to
this Proxy Statement/Prospectus. The registration of such shares of CNA Surety
Common Stock for sale under this Proxy Statement/Prospectus removes the
restrictions upon sale imposed by Rule 145 of the Securities Act and permits the
Selling Stockholders to reoffer for sale such shares at their discretion,
immediately following the Merger. In the event that any such shares of CNA
Surety Common Stock are sold by the Selling Stockholders, CNA Surety will not
receive any of the proceeds from such sales. See "Stockholders Registering
Shares for Reoffer."
15
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA -- CAPSURE
The following financial information has been derived from and should be
read in conjunction with Capsure's audited Consolidated Financial Statements and
notes thereto which appear in previously filed Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q of Capsure which are incorporated herein by
reference. See "Documents to Be Incorporated by Reference."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31
------------------- ------------------------------------------------------
1997 1996 1996(1) 1995 1994(2)(3) 1993 1992(4)
---- ---- ------- ---- ---------- ---- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues................................. $ 51,818 $ 57,734 $110,650 $117,510 $112,555 $107,915 $ 57,133
======== ======== ======== ======== ======== ======== ========
Gross written premiums......................... $ 52,502 $ 60,858 $107,269 $111,398 $102,356 $100,775 $ 50,105
======== ======== ======== ======== ======== ======== ========
Net written premiums........................... $ 50,366 $ 50,995 $ 95,109 $ 97,728 $ 90,578 $ 88,306 $ 40,310
======== ======== ======== ======== ======== ======== ========
Net earned premiums............................ $ 45,258 $ 46,533 $ 92,491 $ 98,692 $ 92,481 $ 86,029 $ 41,249
======== ======== ======== ======== ======== ======== ========
Underwriting income............................ $ 10,813 $ 9,881 $ 19,233 $ 44,831 $ 15,233 $ 15,224 $ 9,932
Net investment income.......................... 5,924 9,546 16,444 20,471 19,129 19,815 15,504
Net investment gains (losses).................. 636 1,655 1,715 (1,653) 945 2,071 380
Interest expense............................... (1,998) (633) (1,717) (4,103) (4,726) (6,280) (4,838)
Write-off of unamortized deferred loan
fees(5)...................................... -- (700) (700) -- (1,556) -- --
Non-recurring compensation and merger
costs(6)..................................... -- -- (7,865) -- -- -- --
Amortization and impairment of goodwill and
intangibles(7)............................... (1,396) (1,418) (2,761) (16,853) (3,365) (3,407) (1,592)
Other expenses, net............................ (1,300) (1,352) (2,789) (2,442) (1,881) (1,905) (1,914)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes..................... 12,679 16,979 21,560 40,251 23,779 25,518 17,472
Income taxes................................... 5,129 6,454 8,181 19,721 9,401 9,234 6,777
-------- -------- -------- -------- -------- -------- --------
Net income..................................... $ 7,550 $ 10,525 $ 13,379 $ 20,530 $ 14,378 $ 16,284 $ 10,695
======== ======== ======== ======== ======== ======== ========
Weighted average common shares outstanding..... 16,594 15,931 16,395 15,404 15,160 15,036 12,214
======== ======== ======== ======== ======== ======== ========
Earnings per common share...................... $ 0.45 $ 0.66 $ 0.82 $ 1.33 $ 0.95 $ 1.08 $ 0.88
======== ======== ======== ======== ======== ======== ========
Cash distributions and dividends per common
share........................................ $ -- $ -- $ 10.00 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ========
Book value per share........................... $ 8.17 $ 17.25 $ 7.76 $ 16.70 $ 14.61 $ 13.80 $ 12.25
======== ======== ======== ======== ======== ======== ========
Loss ratio(8).................................. 7.0% 13.3% 10.9% (7.5)% 25.2% 23.2% 25.8%
Expense ratio.................................. 69.1 65.5 68.3 62.1 58.3 59.1 50.1
-------- -------- -------- -------- -------- -------- --------
Combined ratio................................. 76.1% 78.8% 79.2% 54.6% 83.5% 82.3% 75.9%
======== ======== ======== ======== ======== ======== ========
Invested assets and cash(3).................... $167,580 $249,191 $165,268 $307,556 $305,898 $317,077 $297,974
Intangible assets and goodwill, net of
amortization................................. 74,549 77,706 75,956 84,158 102,130 85,566 94,006
Total assets................................... 317,643 403,356 313,139 514,768 553,370 530,075 507,574
Insurance reserves............................. $114,232 $113,149 $108,444 $202,842 $225,671 $205,188 $194,357
Long-term debt................................. 54,000 -- 60,000 25,000 71,000 85,214 103,214
Total liabilities.............................. 188,136 137,524 190,556 257,464 328,505 322,450 323,653
Stockholders' equity(3)........................ 129,507 265,832 122,583 257,304 224,865 207,625 183,921
</TABLE>
- -------------------------
(1) Capsure disposed of United Capitol Holding Company and its subsidiaries
(collectively, "United Capitol") on May 22, 1996. The inclusion of the
results of United Capitol through May 22, 1996 and the payment of the
Special Distribution (as hereinafter defined) affects the comparability of
financial information. See "Market for Capsure Common Stock -- Dividend
Policy."
(2) Capsure acquired USA in September 1994. The inclusion of the results of USA
since the date of its acquisition affects the comparability of financial
information.
(3) Effective January 1, 1994, Capsure adopted Statement of Financial Accounting
Standards ("FAS") No. 115.
(4) Capsure acquired Western Surety in August 1992. The inclusion of the results
of Western Surety since the date of its acquisition affects the
comparability of financial information.
(5) Capsure incurred a $0.7 million charge in 1996 related to the refinancing of
its revolving credit facility and a similar charge of $1.6 million in 1994
for the early retirement of bank term loans.
(6) Capsure incurred a non-recurring compensation charge of $6.4 million in 1996
for the repricing of all outstanding common stock options in connection with
a $10.00 per share special cash distribution paid on October 4, 1996 and an
additional $1.5 million in non-recurring Merger-related expenses.
(7) Amortization and impairment of goodwill and intangibles for 1995 included a
$13.2 million write-down of goodwill associated with the 1990 United Capitol
acquisition to reflect the estimated net realizable value on the sale of
those operations.
(8) Capsure's incurred losses and loss adjustment expenses in 1995 were reduced
by $29.1 million, net of reinsurance, as a result of favorable claim
settlements and certain changes in estimates relating to insured events of
prior years, of which $23.2 million, net of reinsurance, related to United
Capitol.
16
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA -- CCC SURETY OPERATIONS
The following selected financial information for the CCC Surety Operations
has been derived from and should be read in conjunction with the more detailed
information or unaudited interim and audited annual financial statements
included elsewhere in this Proxy Statement/Prospectus. The selected financial
information of the CCC Surety Operations does not include data with respect to
assets, liabilities (other than insurance reserves), and equity because CNAF did
not customarily allocate the investment portfolio or equity of its operating
subsidiaries to its business units, such as the CCC Surety Operations. See
"Selected Financial Data -- CCC Surety Operations." Dollar amounts in the
following table and footnotes are presented in thousands.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31
---------------------- --------------------------------
1997 1996 1996 1995(1) 1994
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Gross written premiums................... $ 73,568 $ 75,551 $155,208 $136,605 $ 94,182
======== ======== ======== ======== ========
Net written premiums..................... $ 68,765 $ 69,537 $143,904 $122,012 $ 82,064
======== ======== ======== ======== ========
Net earned premiums...................... $ 69,984 $ 74,533 $149,069 $130,603 $ 77,981
Net losses and loss adjustment
expenses(2)............................ (19,738) 19,896 33,006 32,440 8,580
Amortization of deferred policy
acquisition costs...................... 30,874 32,343 66,382 58,243 34,202
Other direct expenses(3)................. 7,779 5,921 13,268 11,840 6,716
Policyholders' dividends................. 1,017 1,150 1,965 1,508 1,009
-------- -------- -------- -------- --------
Excess of net earned premiums over direct
operating expenses before income
taxes(2)(3)............................ $ 50,052 $ 15,223 $ 34,448 $ 26,572 $ 27,474
======== ======== ======== ======== ========
Loss ratio(2)............................ (28.2)% 26.7% 22.1% 24.8% 11.0%
Expense ratio(3)......................... 56.7 52.9 54.8 54.8 53.8
-------- -------- -------- -------- --------
Combined ratio(2)(3)..................... 28.5% 79.6% 76.9% 79.6% 64.8%
======== ======== ======== ======== ========
Insurance reserves(4).................... $174,820 $223,818 $214,828 $239,716 $111,695
======== ======== ======== ======== ========
</TABLE>
- -------------------------
(1) CNAF acquired The Continental Corporation ("Continental") in May 1995. The
inclusion of the results of the surety operations of Continental since the
date of its acquisition affects the comparability of financial information.
(2) Includes the effect of recording revisions of prior year loss reserves. The
dollar amount and the percentage point effect on the loss ratio of these
reserve revisions, all of which were net reductions, were $35,000 or 50.0%,
$1,605 or 2.2%, $9,742 or 6.5%, $10,846 or 8.3%, and $8,454 or 10.8% for the
six months ended June 30, 1997 and 1996 and the years ended December 31,
1996, 1995, and 1994, respectively.
(3) Does not include the effects of certain general and administrative expenses,
which are indirect or overhead in nature, since such costs were not
historically allocated to the CCC Surety Operations by CNAF or its
subsidiaries. Accordingly, the comparability of this data to other data that
include such costs is affected.
(4) The insurance reserves include both loss and loss adjustment expense and
unearned premium reserves. These reserves are shown before the effects of
ceded reinsurance. In accordance with the Reinsurance Agreements, these
reserves are expected to be transferred to the Insurance Subsidiaries, net
of reinsurance which totaled $11,662 and $29,663 at June 30, 1997 and 1996,
respectively, and $21,779, $31,060 and $21,098 at December 31, 1996, 1995
and 1994, respectively.
17
<PAGE> 24
COMPARATIVE PRO FORMA CONSOLIDATED FINANCIAL DATA
The following compares certain per share information for Capsure on an
historical basis at June 30, 1997 and on an adjusted, historical basis for the
year ended December 31, 1996 to the corresponding pro forma per share
information for CNA Surety at December 31, 1996 and for the year then ended and
for the six months ended June 30, 1997. This data should be read in conjunction
with the unaudited interim and audited annual financial statements and notes
thereto of Capsure incorporated by reference herein and of the CCC Surety
Operations attached hereto as Appendix D, and the unaudited pro forma
consolidated financial information of CNA Surety located elsewhere in this Proxy
Statement/Prospectus. See "Unaudited Pro Forma Consolidated Financial
Information." The pro forma per share data is not necessarily indicative of the
actual amounts which would have resulted had the Merger been consummated on the
acquisition dates assumed. Historically, no dividends have been paid by Capsure.
On October 4, 1996, Capsure paid a $10.00 per share special cash distribution.
Capsure intends to declare the Closing Dividend, conditioned upon consummation
of the Merger, to its stockholders of record prior to the Effective Time,
payable as soon as practicable thereafter. See "The Reorganization Agreement and
Other Transaction Agreements -- Closing Dividend."
<TABLE>
<CAPTION>
PER CNA SURETY
PER CAPSURE COMMON SHARE --
COMMON SHARE PRO FORMA
------------ ---------------
<S> <C> <C>
Adjusted net income from continuing operations per common
share for year ended December 31, 1996, fully
diluted(1)(2)............................................. $0.39 $0.52(4)
===== =====
Adjusted net income from continuing operations per common
share for the six months ended June 30, 1997, fully
diluted................................................... $0.45 $0.85(4)(5)
===== =====
Book value per share, fully diluted, June 30, 1997(2)
Tangible(3)............................................... $3.59 $2.10
Intangible................................................ 4.21 3.52
----- -----
Total..................................................... $7.80 $5.62
===== =====
</TABLE>
- -------------------------
(1) Adjusted from the historical per share amount of $0.81 to reflect the net
income effects associated with the Special Distribution on October 4, 1996
which reduced by $156 million the capital of Capsure and the capital
available to stockholders of CNA Surety. See "Unaudited Pro Forma
Consolidated Financial Information."
(2) The number of shares of CNA Surety Common Stock is subject to adjustment
under the provisions of the Lookback Adjustment. See "Note 5 to Unaudited
Pro Forma Consolidated Financial Information" for the range of effect of
such provisions.
(3) Tangible book value is computed as total book value less intangible assets,
net of applicable deferred income tax liabilities of approximately $4.7
million, divided by fully diluted shares outstanding of 16,613,000 for the
Per Capsure Common Share column and 43,675,000 for the Per CNA Surety Common
Share -- Pro Forma column.
(4) Amounts do not include the estimated investment income that would have been
earned by the CCC Surety Operations. The effect of the estimated investment
income that would have been earned was $0.25 and $0.12 in pro forma per CNA
Surety Common Share for the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively. See "Note 3 to Unaudited Pro Forma
Consolidated Financial Information."
(5) The pro forma earnings per share of CNA Surety benefited from net favorable
loss reserve development of the CCC Surety Operations of $35.0 million, the
per share effect of which was $0.53.
18
<PAGE> 25
CNA SURETY MERGER STRATEGY
The management of CNAF believes the Merger will result in the combination
of three complementary surety businesses, each with distinct strengths and
marketing strategies, into a single, larger entity that will be better able to
compete in the surety market and that will have the potential for additional
growth. The affiliation with CNAF and the CNAF branch network will enable USA to
accelerate the expansion of its small contract surety business and will enable
Western Surety to increase its market presence nationally and expand into larger
commercial surety exposures. CNA Surety also intends to consolidate certain
functions and to centralize processing and underwriting in certain offices.
MARKET FOR COMMON STOCK
The Capsure Common Stock trades on the NYSE under the symbol CSH. On August
5, 1997, the last reported sale price for the Common Stock was $13 5/16 per
share. On December 9, 1996, the date prior to Capsure's public announcement that
it was involved in merger negotiations, the last reported sale price for the
Capsure Common Stock was $10 3/8 per share. On December 19, 1996, prior to the
public announcement of the Merger and the execution of the Reorganization
Agreement, the last reported sale price for the Capsure Common Stock was $11 7/8
per share. See "Market for Capsure Common Stock."
There has been no prior trading market for shares of CNA Surety Common
Stock. CNA Surety will apply for a listing of the CNA Surety Common Stock on the
NYSE and it is anticipated that such shares will trade on the NYSE under the
symbol SUR. It is a condition to the consummation of the Merger that the shares
of CNA Surety Common Stock to be issued in connection with the Merger shall have
been approved for listing on the NYSE, subject only to official notice of
issuance.
DIVIDENDS
On October 4, 1996, Capsure paid a special cash distribution of $10.00 per
share to holders of record of Capsure Common Stock on September 25, 1996. Prior
to this time, Capsure had not made any dividend payments or cash distributions
to its stockholders. See "Market for Capsure Common Stock -- Dividend Policy"
and "Documents to Be Incorporated by Reference."
Capsure intends to declare a cash dividend, conditioned upon consummation
of the Merger, to its stockholders of record prior to the Effective Time,
payable as soon as practicable thereafter. The Closing Dividend shall be an
aggregate amount equal to the sum of $3.5 million and $58,600 per day from and
including June 1, 1997 through and including the day immediately preceding the
Effective Time. For example, if the Merger were to be consummated on September
30, 1997, the aggregate amount of the Closing Dividend would be $10.6 million.
Assuming that there were 16,652,485 shares of Capsure Common Stock outstanding
(which includes the assumed exercise of 802,240 vested Capsure Options) on the
record date of the Closing Dividend, the Capsure stockholders would receive a
Closing Dividend of $0.64 per share. See "The Reorganization Agreement and Other
Transaction Agreements -- Closing Dividend."
As a newly-formed corporation, CNA Surety has never declared or paid a cash
dividend on the CNA Surety Common Stock. The CNA Surety Board is expected to
consider a regular quarterly dividend policy for CNA Surety after consummation
of the Merger. The declaration and payment of future dividends to holders of CNA
Surety Common Stock will be at the discretion of the CNA Surety Board and will
depend upon many factors, including CNA Surety's financial condition, operating
characteristics, projected earnings and growth, capital requirements of the
Insurance Subsidiaries, debt service obligations and such other factors as the
CNA Surety Board deems relevant. There can be no assurance that any future
dividends will be paid. See "Market for CNA Surety Common Stock -- Dividend
Policy."
19
<PAGE> 26
RISK FACTORS
The following risk factors should be considered by holders of Capsure
Common Stock in evaluating whether to approve the Reorganization Agreement and
Merger and the Amendment. In evaluating the Merger, stockholders should
carefully consider the following risk factors in conjunction with and in
addition to the other information presented in this Proxy Statement/Prospectus
and information incorporated herein by reference.
INTEGRATION OF THE COMPANIES
Capsure, CCC and CNA Surety have entered into the Reorganization Agreement
with the expectation that the Merger will result in certain benefits. To achieve
these benefits, CNA Surety will need to integrate the CCC Surety Operations with
the businesses of Capsure, and there can be no assurance that such integration
will occur in the desired manner. The transition to a combined company will
require substantial attention from management. See "Description of CNA Surety --
CNA Surety Merger Strategy." The diversion of management's attention and any
difficulties encountered in the transition process could have an adverse effect
on the revenues and operating results of CNA Surety. In addition, the process of
combining the organizations could cause the interruption of, or a disruption in,
the activities of any or all of the companies' businesses, which could have a
material adverse effect on their combined operations. There can be no assurances
that CNA Surety will realize all or any of the anticipated benefits of the
Merger.
CONTROLLING STOCKHOLDER; CONFLICT OF INTEREST
Immediately after completion of the Merger, CCC will own, on a fully
diluted basis, 61.75% of the outstanding shares of CNA Surety Common Stock,
subject to the Lookback Adjustment. In addition, CCC will have a number of
ongoing relationships with CNA Surety. In light of CCC's beneficial ownership of
stock, CCC will have the ability to elect the directors of the CNA Surety Board.
See "The Reorganization Agreement and Other Transaction Agreements -- Certain
Covenants." In that regard, CCC will be able to control the policy decisions of
CNA Surety, including decisions regarding the issuance of securities, payment of
dividends, approval of acquisitions and the sale of its assets. CCC will also
have the ability to approve any action requiring majority stockholder approval,
including adopting amendments to CNA Surety's certificate of incorporation and
approving or disapproving mergers or sales of all or substantially all of the
assets of CNA Surety, subject to certain provisions of CNA Surety's bylaws which
require supermajority votes on certain matters for a period of two years
following the Merger. See "The Reorganization Agreement and Other Transaction
Agreements -- Certain Covenants."
Most of the reinsurance arrangements and other business relationships
between CCC and CNA Surety will be pursuant to agreements that have terms of not
more than five years. While reinsurance and other arrangements may be renewed,
CNA Surety has no reason to believe that the Reinsurance Agreements will be
extended at the end of such period on the same terms and conditions.
CCC currently intends to maintain beneficial ownership of at least 61.75%
of the CNA Surety Common Stock, on a fully-diluted basis, subject to the
Lookback Adjustment. However, there is no restriction on CCC's ability to sell a
portion or all of the CNA Surety Common Stock owned by it at some future date
(subject to certain limitations under tax and securities laws). Any such sale
may have an adverse effect on the market price of the CNA Surety Common Stock.
In addition, sales of shares of CNA Surety Common Stock by CNA Surety or CCC
which result in a change of control may affect the relationship between CCC and
CNA Surety. For instance, the license agreement between CNAF and CNA Surety
allowing CNA Surety to use the CNA name or some derivation thereof, is subject
to termination by CCC if a change of control occurs. Purchases of additional
shares of CNA Surety Common Stock by CNA Surety, CCC or CNAF could also have an
impact on the market price of the CNA Surety Common Stock; although CNA Surety,
CCC and CNAF are subject to certain restrictions on such purchases for 18 months
after the Closing Date. See "The Reorganization Agreement and Other Transaction
Agreements -- Certain Covenants."
CCC has agreed not to write certain types of surety policies for the next
five years for its own account and to the extent such surety policies are
written, such policies will be ceded to CNA Surety. See "The
20
<PAGE> 27
Reorganization Agreement and Other Transaction Agreements -- CCC Restrictions."
However, CCC will continue to write the other lines of insurance that are
currently written by it and such lines may be expanded from time to time.
Conflicts of interest between CNA Surety and CCC could arise with respect
to business dealings between them, including new products, potential
acquisitions, the election of new or additional directors, the payment of
dividends and the amounts paid or services provided pursuant to various
agreements between the entities. There is no formal plan or arrangement to
resolve potential conflicts of interest that may arise. CNA Surety intends to
seek the approval of the audit committee of the CNA Surety Board for any issues
or future business transactions between the companies and will refer to that
committee any issues that arise with respect to those transactions. See
"Management of CNA Surety -- Committees of the CNA Surety Board."
IMMEDIATE DILUTION TO STOCKHOLDERS
As of June 30, 1997, CNA Surety's pro forma book value and pro forma net
tangible book value per fully diluted share, after giving effect to the Merger,
was $5.62 and $2.10, respectively. Capsure stockholders will incur an immediate
dilution in book value and net tangible book value of $2.18 and $1.49 per fully
diluted share, respectively. See "Summary -- Comparative Pro Forma Consolidated
Financial Data."
HOLDING COMPANY STRUCTURE
CNA Surety is a holding company and will have substantially all of its
operations conducted through the Insurance Subsidiaries and will derive its
operating income and operating cash flow from such subsidiaries. CNA Surety will
rely on dividends from the Insurance Subsidiaries as well as returns on its
holding company cash and invested assets to generate the funds necessary to meet
its obligations and pay dividends, if any, on its capital stock. The ability of
the Insurance Subsidiaries to make such payments after the Merger will be
subject to, among other things, applicable state laws, rating agency
requirements, and any restrictions that may be contained in credit agreements or
other financing arrangements entered into by the Insurance Subsidiaries. Claims
of creditors of the Insurance Subsidiaries will generally have priority as to
the assets of such subsidiaries over the claims of CNA Surety and the holders of
CNA Surety Common Stock.
The payment of dividends to CNA Surety by the Insurance Subsidiaries
without prior approval of the Insurance Subsidiaries' domiciliary state
insurance commissioners is limited to amounts determined by formula in
accordance with the accounting practices prescribed or permitted by the state's
insurance departments. These formulae vary by state. All dividends must be
reported to the appropriate insurance departments prior to payment. No assurance
can be given that there will not be further regulatory actions restricting the
ability of the Insurance Subsidiaries to pay dividends and, accordingly, that
funds held by the Insurance Subsidiaries will be available to CNA Surety for
payment of debt, expenses or dividends.
NO PRIOR PUBLIC MARKET FOR CNA SURETY COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE
Prior to the Merger, there has been no public market for the CNA Surety
Common Stock. Although the CNA Surety Common Stock will have been approved for
listing on the NYSE, subject to official notice of issuance, at and after the
Effective Time there can be no assurance that an active trading market will
develop or be sustained. Factors such as quarterly variations in CNA Surety's
financial results, announcements by CNA Surety or others and developments
affecting CNA Surety could cause the market price of the CNA Surety Common Stock
to fluctuate significantly. The stock market has, on occasion, experienced
extreme price and volume fluctuations which have often been unrelated to the
operating performance of the affected companies. No prediction can be made as to
the market price of CNA Surety Common Stock prevailing from time to time. Sales
of substantial amounts of CNA Surety Common Stock or the possibility that such
sales could occur may adversely affect prevailing market prices for CNA Surety
Common Stock. See also "Shares Eligible for Future Sale" in this Section.
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SHARES ELIGIBLE FOR FUTURE SALE
As indicated above, if CCC were to sell its shares of CNA Surety Common
Stock, the market price of the stock could be adversely impacted. CCC has no
present intention of selling any shares of CNA Surety Common Stock.
All shares of CNA Surety Common Stock received by Capsure stockholders in
the Merger will be freely transferable, except that shares of CNA Surety Common
Stock received by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act) of Capsure prior to the Merger and whose
shares are not included in the reoffer provisions set forth in this Proxy
Statement/Prospectus under the heading "Stockholders Registering Shares for
Reoffer" may be resold by them only in transactions permitted under the resale
provisions of Rule 145 promulgated under the Securities Act (or Rule 144 for
persons who become affiliates of CNA Surety) as otherwise permitted under the
Securities Act. See "The Merger -- Federal Securities Law Consequences."
CNA Surety will enter into a Registration Rights Agreement with the Major
Stockholder which, together with a charitable foundation that was the indirect
recipient of a distribution by the Major Stockholder to one of its limited
partners, is expected to own approximately 9.4% of the outstanding shares of CNA
Surety following the Merger. Under this Registration Rights Agreement, the Major
Stockholder will have the right to require CNA Surety to register for sale all
or a portion of its shares of CNA Surety Common Stock, including those held by
the charitable foundation, commencing six months after the Effective Time,
whereupon the Major Stockholder could sell all or a portion of its CNA Surety
Common Stock which would be tradeable without restriction. In addition, John T.
Knox, Jr., president of USA, has certain registration rights with respect to
275,113 shares, commencing six months after the Effective Time.
Sales of all such shares into the market following the Merger, or the
perception that such sales could occur, could materially and adversely affect
the market price of the CNA Surety Common Stock prevailing from time to time.
See "The Reorganization Agreement and Other Transaction Agreements --
Registration Rights Agreement."
FAILURE TO OBTAIN CONSENTS OF CERTAIN GOVERNMENTAL AUTHORITIES
Consummation of the Merger is subject to the condition that all consents of
any governmental authority required for consummation of the Merger and the
transactions contemplated by the Reorganization Agreement shall have been
obtained by the Effective Time. Although Capsure and CCC are seeking such
consents, no assurance can be given that such consents will be obtained.
COMPETITION AND OTHER FACTORS
The surety market is highly competitive. Companies generally compete for
surety business on the basis of price, service, financial strength, ratings,
reputation and capabilities of the independent agents and brokers who solicit
the business, and reputation of the insurance company. The small contract and
commercial bond markets in which CNA Surety will compete have seen additional
competition as both large and small insurance companies are competing and
expanding in this area. CNA Surety does not have a direct sales force but
instead relies on a nationwide network of independent insurance agencies. In
order to compete effectively in the market, CNA Surety will need to continue to
maintain productive relationships with the independent insurance agencies that
offer its products. Since surety bonds may account for only a small portion of
an agency's revenues, an important factor considered by agencies is the range of
products and the services offered by a surety company. Certain existing and
potential competitors of CNA Surety are larger, and have greater financial
resources and more extensive insurance product lines than the Insurance
Subsidiaries. The businesses of the Insurance Subsidiaries could be adversely
affected by such competition.
SUSCEPTIBILITY TO CHANGES IN INTEREST RATES AND GENERAL ECONOMIC CONDITIONS
CNA Surety's business will be affected by fluctuations in interest rates
and by general economic conditions in the United States.
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An estimated 50% of CNA Surety's business is expected to be related to the
contract surety market, comprised of contract bonds typically required in
construction projects. The number of construction projects initiated from time
to time is directly related to general economic conditions at such time, the
level of interest rates, and the funding of public works projects by federal,
state and local governments. In the event of an increase in interest rates
and/or an economic downturn, CNA Surety's business could be adversely affected.
It is anticipated that CNA Surety's investment portfolio will consist
primarily of investment grade debt securities. The market value of those
securities will vary depending upon general economic and market conditions and
the interest rate environment. From time to time, CNA Surety may be required for
business or regulatory reasons to sell certain of its investments at a time when
their market value is less than the cost of such investments.
ISSUANCE OF PREFERRED STOCK
The certificate of incorporation of CNA Surety authorizes the issuance from
time to time of up to 20 million shares of preferred stock. The CNA Surety Board
has the authority to issue such shares and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of such stock
without further stockholder approval. The rights of holders of CNA Surety Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of preferred stock that may be issued in the future.
CHANGE-IN-CONTROL RESTRICTIONS
Certain provisions of Delaware law could have the effect of delaying,
deferring or preventing a change of control of CNA Surety, which could adversely
affect the market price of the CNA Surety Common Stock. CNA Surety is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law ("DGCL") which prohibit CNA Surety from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
combination is approved in the statutorily prescribed manner.
INSURANCE RATINGS
Insurers compete with other insurance companies on the basis of a number of
factors, including the ratings assigned by A.M. Best.
Western Surety and USA are currently rated A+ (Superior) and A (Excellent),
respectively, by A.M. Best. A.M. Best's letter ratings range from A++ (Superior)
to C- (Fair) with A++ being highest. An A+ (Superior) rating is assigned to
those companies which A.M. Best believes have achieved superior overall
performance when compared to the norms of the property and casualty insurance
industry. A+ (Superior) rated insurers have been shown to be among the strongest
in ability to meet policyholder and other contractual obligations. A rating of A
(Excellent) is assigned to those companies which A.M. Best believes have
achieved excellent overall performance when compared to the norms of the
property and casualty insurance industry and generally have demonstrated a
strong ability to meet their respective policyholder and other contractual
obligations.
A.M. Best reviews an insurer's profitability, leverage and liquidity, as
well as the insurer's book of business, the adequacy and soundness of its
reinsurance, the quality and estimated market value of its assets, the adequacy
of its reserves and the experience and competence of its management. A.M. Best
ratings are based upon factors relevant to policyholders and are not directed to
the protection of investors.
As is its practice upon announcement of a proposed merger, A.M. Best placed
the ratings of Western Surety and USA under review in December 1996. If the
Insurance Subsidiaries' ratings are downgraded below A by A.M. Best, sales of
the Insurance Subsidiaries' products could be adversely affected. Based upon
conversations with A.M. Best, management of CNA Surety has no reason to believe
that Western Surety and USA will not retain their current ratings. However,
there can be no assurance that the ratings of Western Surety and USA will be
maintained following the Merger or, if maintained, would not be changed in
subsequent periodic reviews by A.M. Best.
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ADEQUACY OF RESERVES
The CCC Surety Operations which will be transferred to the Insurance
Subsidiaries by CCC are subject to the Reinsurance Agreements which provide
certain guarantees and protections against losses on such business. However, the
Surety Quota Share Treaty only guarantees and protects CNA Surety from losses
incurred on the CCC Surety Operations and does not cover any business written by
the Insurance Subsidiaries prior to the Effective Time. See "The Reorganization
Agreement and Other Transaction Agreements -- Reinsurance Agreements and
Services and Indemnity Agreement."
CNA Surety's Insurance Subsidiaries' reserves for loss and loss adjustment
expenses may prove to be deficient in the future due to the inherent
uncertainties involved in the process of establishing reserves which relies on
estimates which may differ from actual future loss payments. The reserve
adjustments required to cure such deficiencies would be charged against future
operations and could have an adverse effect on CNA Surety's results of
operations and financial condition.
INVESTMENT PORTFOLIO; ABSENCE OF HISTORICAL INVESTMENT RESULTS
Prior to the Merger, the CCC Surety Operations were conducted as a line of
business within CNAF but not as a separate subsidiary or division. In that
regard, although management of the CCC Surety Operations was responsible for
direct underwriting revenues and expenses, it was not responsible for the
performance of the investment portfolio since such responsibility was undertaken
by CNAF. CNAF's investment objectives and policies were developed and maintained
in the context of CCC, as a whole, rather than on the basis of individual lines
of insurance. Accordingly, there are no historical investment results for the
CCC Surety Operations.
Immediately after the Merger, the investment portfolio of CNA Surety will
be managed separately by the current outside investment manager for Capsure. The
CNA Surety Board and the investment committee may, at a later time, consider
other options for investment management services.
REGULATION
The Insurance Subsidiaries are subject to varying degrees of supervision
and regulation in the jurisdictions in which they conduct business under
statutes which delegate regulatory, supervisory and administrative powers to
state insurance regulators. The nature of the regulation varies from
jurisdiction to jurisdiction but typically involves prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, limitations on dividends, approval
or filing of premium rates and policy forms for many lines of insurance,
solvency standards, minimum amounts of capital and surplus that must be
maintained, limitations on amounts or types and amounts of investments,
limitations on the size of risks which may be insured by a single company,
licensing of insurers and agents, deposits of securities for the benefit of
policy or surety bond holders, reporting of financial condition and other
matters. In addition, state insurance regulators perform periodic financial and
market conduct examinations of insurance companies. All such regulation is
intended generally to protect the policy or surety bond holders, rather than
equity holders. No assurance can be given that future legislative or regulatory
changes will not adversely affect CNA Surety and the Insurance Subsidiaries.
Certain states in which the Insurance Subsidiaries conduct business require
insurers to participate in a guaranty association to provide protection to
policyholders of insurers licensed in such states against the insolvency of
those insurers. In order to provide the association with funds to pay certain
claims under policies issued by insolvent insurers, the guaranty associations
charge members assessments based on the amount of direct premiums written in
that state. Such assessments have historically not been material to the combined
results of operations, but no assurance can be given that such assessments will
not be material in the future to the results of operations of the Insurance
Subsidiaries.
Although the federal government does not generally regulate the operations
of insurance companies, from time to time, the federal government considers
various bills which could expand its powers in the insurance
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industry. CNA Surety cannot predict, however, whether such legislation will be
enacted, what the terms and conditions will be if enacted, or what effect such
legislation might have on CNA Surety and the Insurance Subsidiaries. If
regulation of CNA's businesses increase in the future at the federal and state
level, CNA Surety believes that the costs associated with compliance would also
increase.
ADVERSE LEGISLATION
A significant portion of the Insurance Subsidiaries' business is and will
continue to be derived from the writing of small fidelity and commercial surety
bonds mandated by various state statutes and local ordinances to cover acts of
public officials and private businesses, such as realtors, automobile dealers
and others who generally interact with members of the public. In recent years,
several jurisdictions have repealed legislation mandating use of various types
of these bonds, often replacing them with alternative protection mechanisms,
such as recovery funds administered by the states for the benefit of citizens
who assert claims against such officials or businesses. In addition, contract
surety bonds are required generally by federal, state and local governments for
public works projects. If numerous governments were to repeal the requirements
for obtaining bonds of the type written by the Insurance Subsidiaries, their
results of operations and financial condition would be materially and adversely
affected, and, consequently, CNA Surety's financial condition could be
materially and adversely affected.
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INTRODUCTION
GENERAL
This Proxy Statement/Prospectus constitutes the Prospectus of CNA Surety
with respect to shares of CNA Surety Common Stock to be issued in connection
with the Merger. The information in this Proxy Statement/Prospectus with respect
to Capsure has been supplied by Capsure and the information with respect to CNA
Surety, CNAF and CCC has been supplied by CNA Surety, and in certain instances
by CNAF and CCC.
THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the holders of
outstanding shares of Capsure Common Stock in connection with the solicitation
of proxies for use by the Capsure Board at the Special Meeting. See "The
Merger", "The Reorganization Agreement and Other Transaction Agreements" and
"Amendment to Capsure Certificate of Incorporation."
Date, Time, Place and Purpose of Special Meeting
The Special Meeting will be held at One North Franklin Street, 3rd floor,
Chicago, Illinois on September 23, 1997 starting at 10:00 a.m. Chicago time. At
the Special Meeting, Capsure stockholders will be asked to consider and vote
upon a proposal to approve and adopt the Reorganization Agreement and Merger
and, if approved and adopted, to consider and vote upon a proposal to approve
and adopt the Amendment deleting, in its entirety, Article Twelfth of Capsure's
certificate of incorporation, relating to the ownership or transfer of 5% or
more of the outstanding Capsure Common Stock. A copy of the Reorganization
Agreement is attached to this Proxy Statement/Prospectus as Appendix A.
Record Date; Shares Entitled to Vote
Holders of record of Capsure Common Stock at the close of business on
August 15, 1997, the Record Date, will be entitled to notice of and to vote at
the Special Meeting. Each outstanding share of Capsure Common Stock is entitled
to one vote at the Special Meeting. As of the Record Date, there were 15,929,313
outstanding shares of Capsure Common Stock.
Vote Required
The affirmative vote of the holders of a majority of the outstanding shares
of Capsure Common Stock is required for the approval of the Reorganization
Agreement and Merger and the Amendment. The presence, in person or by proxy, of
the holders of at least a majority of the outstanding shares of Capsure Common
Stock entitled to vote is necessary to constitute a quorum at the Special
Meeting.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Voting of Proxies
All shares of Capsure Common Stock represented by properly executed proxies
will be voted at the Special Meeting in accordance with the directions indicated
on the proxies unless the proxies have been previously revoked. Unless contrary
instructions are given, all shares represented by such proxies will be voted FOR
the Reorganization Agreement and Merger and FOR the Amendment, and in the proxy
holders' discretion, as to such other matters incident to the conduct of the
Special Meeting as may properly come before the stockholders.
Effect of Abstentions and Broker Non-Votes
A properly executed proxy marked "ABSTAIN," although counted for purposes
of determining whether there is a quorum, will not be voted. Accordingly, since
the affirmative vote of a majority of the shares of Capsure Common Stock
outstanding on the Record Date is required for approval of both the
Reorganization
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Agreement and Merger and the Amendment, a proxy marked "ABSTAIN" will have the
effect of a vote against both of the proposals.
In accordance with NYSE rules, brokers and nominees are precluded from
exercising their voting discretion on the proposals and thus, absent specific
instructions from the beneficial owners of the Capsure Common Stock, are not
empowered to vote such shares with respect to the proposals. Therefore, because
the affirmative vote of a majority of the shares of Capsure Common Stock
outstanding on the Record Date is required for approval of both the
Reorganization Agreement and Merger and the Amendment, a broker non-vote (i.e.,
shares held by brokers or nominees which are represented at a meeting but with
respect to which the broker or nominee is not empowered to vote on a particular
proposal) will have the effect of a vote against both of the proposals. Shares
of Capsure Common Stock represented by broker non-votes will, however, be
counted for purposes of determining whether a quorum is present at the Special
Meeting.
Voting Agreement
Bruce A. Esselborn, president of Capsure, the Major Stockholder, an
Illinois limited partnership controlled indirectly by Samuel Zell, chairman of
the Capsure Board and chief executive officer of Capsure and Rod F. Dammeyer, a
director of Capsure and a member of the Special Committee (as hereinafter
defined), of the Capsure Board, have agreed with CCC to vote all shares
beneficially owned by them FOR the Reorganization Agreement and Merger and the
Amendment and against any competing Acquisition Proposals. Subsequent to the
execution of the Voting Agreement, the Major Stockholder distributed 486,760
shares of Capsure Common Stock to one of its limited partners, which in turn,
transferred such shares to a charitable foundation. The charitable foundation,
pursuant to the terms of the Voting Agreement, has agreed to be bound by the
terms of the Voting Agreement. As of the Record Date, these persons beneficially
owned or had the power to vote an aggregate of 4,114,629 shares of Capsure
Common Stock entitled to vote at the Special Meeting, or approximately 26% of
the total outstanding shares eligible to vote. See "The Reorganization Agreement
and Other Transaction Agreements -- The Voting Agreement."
No Other Matters
The Capsure Board is not aware of any matters other than those specifically
stated in this Proxy Statement/Prospectus which are to be presented for action
at the Special Meeting. If any other matters are properly presented at the
Special Meeting for action, including a question of adjourning the meeting from
time to time, the persons named in the proxies and acting thereunder will have
discretion to vote on those matters in accordance with their best judgment. Any
adjournment of the Special Meeting will require the affirmative vote of the
holders of at least a majority of the shares of Capsure Common Stock represented
at the Special Meeting (regardless of whether those shares constitute a quorum).
Revocation of Proxies
A Capsure stockholder executing and returning a proxy has the power to
revoke it at any time before it is voted. A Capsure stockholder who wishes to
revoke a proxy can do so by executing a later-dated proxy relating to the same
shares and delivering it to the secretary of Capsure prior to the vote at the
Special Meeting, by written notice of revocation to the Secretary prior to the
vote at the Special Meeting or by appearing in person at the Special Meeting and
voting in person the shares to which the proxy relates. Any written notice
revoking a Capsure proxy should be sent to Capsure at Two North Riverside Plaza,
Chicago, Illinois, 60606, attention: Susan Obuchowski, secretary.
Adjournment of Special Meeting
A vote (i) in person by a Capsure stockholder for an adjournment of the
Special Meeting, or (ii) for the third proposal on the Capsure proxy card
authorizing the named proxies to vote the shares covered by such proxies to
adjourn the Special Meeting, would allow for additional solicitation of
stockholder votes in order to obtain a quorum or in order to obtain more votes
in favor of the Merger.
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The Capsure Board unanimously recommends that holders of Capsure Common
Stock vote in favor of any adjournment of the Special Meeting proposed by the
Capsure Board in order to solicit additional votes in favor of the Merger, or in
favor of the third proposal on the proxy card.
RECOMMENDATION OF THE CAPSURE BOARD
THE CAPSURE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
REORGANIZATION AGREEMENT AND MERGER AND THE AMENDMENT TO CAPSURE'S CERTIFICATE
OF INCORPORATION.
PROXY SOLICITATION
Proxies are being solicited from Capsure stockholders by and on behalf of
the Capsure Board for use at the Special Meeting. Capsure will bear its own
expenses for the solicitation, including the costs of preparing and mailing this
Proxy Statement/Prospectus to its stockholders. In addition to solicitation by
mail, proxies may be solicited from Capsure stockholders by directors, officers
and employees of Capsure, in person, by facsimile or by telephone. Such
directors, officers and employees will not receive any additional compensation
for such services but may be reimbursed for reasonable expenses incurred by them
in forwarding the proxy soliciting materials to the beneficial owners of Capsure
Common Stock. Capsure has retained MacKenzie Partners, Inc., a proxy
solicitation firm, in connection with the Special Meeting, at an estimated cost
of $6,000, plus expenses. Capsure will reimburse banks, brokerage firms and
other custodians, nominees and fiduciaries for the cost of forwarding of proxy
solicitation materials to beneficial owners of Capsure Common Stock.
CONVERSION OF SHARES; EXCHANGE OF STOCK CERTIFICATES
At the Effective Time, by virtue of the Merger and without any action on
the part of Capsure, CCC or CNA Surety or any of their stockholders, each share
of Capsure Common Stock issued and outstanding immediately prior to the
Effective Time shall be canceled and extinguished and, in accordance with the
Exchange Ratio, be converted into the right to receive one share of CNA Surety
Common Stock.
Promptly after the Effective Time, CNA Surety will send, or will cause
Boston EquiServe L.L.P., as the exchange agent (the "Exchange Agent"), to send,
to each holder of record of shares of Capsure Common Stock at the Effective Time
a letter of transmittal for use in such exchange (which letter shall specify
that the delivery shall be effected, and risk of loss and title shall pass, only
upon proper delivery of the Capsure Common Stock certificates to the Exchange
Agent). After receipt of such transmittal letter, each holder of certificates
representing shares of Capsure Common Stock (the "Certificates") should
surrender such Certificates to the Exchange Agent, together with such
transmittal letter duly executed and completed in accordance with the
instructions thereto, and each such holder will be entitled to receive in
exchange therefor an equal number of shares of CNA Surety Common Stock pursuant
to the Reorganization Agreement. Until so surrendered, each such Certificate
shall, after the Effective Time, represent for all purposes only the right to
receive such CNA Surety Common Stock. See "The Reorganization Agreement and
Other Transaction Agreements -- Exchange of Capsure Common Stock for CNA Surety
Common Stock."
HOLDERS OF CAPSURE COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING CAPSURE COMMON STOCK WITH THE ENCLOSED PROXY CARD. CAPSURE
STOCKHOLDERS SHOULD SEND CERTIFICATES REPRESENTING SHARES OF CAPSURE COMMON
STOCK TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH, THE
INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL.
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THE MERGER
(PROPOSAL NUMBER 1)
BACKGROUND AND REASONS FOR THE MERGER
On March 15, 1995, management and the Capsure Board initiated a strategic
review of Capsure's operating capital levels, holding company debt structure and
excess capital deployment alternatives. The review was prompted in part by
Capsure's growing excess capital, particularly at United Capitol, Capsure's
excess and surplus lines operation. United Capitol had experienced declining
premium volume as a result of the prolonged soft market in the property and
casualty insurance industry and the Capsure Board concluded that the prospects
for profitable growth at United Capitol were limited. Capsure had been
maintaining substantial capital at United Capitol to support its operations.
Management and the Capsure Board were also of the view that there was little
likelihood of Capsure needing its excess capital in the near-to-intermediate
term to finance a large acquisition or to fund rapid internal growth at its
surety operations.
On May 24, 1995, as a result of the ongoing strategic review, the Capsure
Board authorized management to explore a sale of United Capitol. Capsure's
management initiated contact with Smith Barney in June 1995 to assist Capsure in
the sale of United Capitol and on February 29, 1996, Capsure entered into a
definitive agreement to sell United Capitol to Frontier Insurance Company. The
sale was consummated on May 22, 1996, producing net cash proceeds of
approximately $77 million, which included approximately $27 million for the net
purchase price for the capital stock of United Capitol and the dividend to
Capsure of approximately $50 million of United Capitol's excess statutory
surplus as of such date.
Concurrent with the United Capitol divestiture process, the strategic
review proceeded, incorporating the expected proceeds from the sale of United
Capitol. Management and the Capsure Board considered a number of alternatives,
including the acquisition of other businesses and the payment of a special
distribution to stockholders. The income tax consequences of the various options
were analyzed and management initiated the process of restructuring its credit
facility to accommodate its capital deployment alternatives, particularly the
payment of a leveraged, special distribution to Capsure stockholders.
During the United Capitol divestiture process, management and Smith Barney
informed the Capsure Board that general interest had been expressed in the
acquisition of all of Capsure. The Capsure Board discussed the possible sale of
Capsure and appointed a subcommittee of the Capsure Board to study the matter
comprised of the following Capsure directors: Rod F. Dammeyer, Bradbury Dyer III
and Bruce A. Esselborn (the "Special Committee"). Following a meeting on March
27, 1996, the Capsure Board retained Smith Barney to assist Capsure in exploring
a potential sale or merger of Capsure. Also at this meeting, the Capsure Board
received the recommendation of Capsure management to pay a leveraged, special
distribution to stockholders. Without reaching a decision on the issue of
whether or not to declare and pay a leveraged, special distribution, the Capsure
Board authorized management to proceed with preparations for a distribution
following the closing of the sale of United Capitol in order to insure that a
distribution could be made in a timely fashion if so authorized by the Capsure
Board.
In May 1996, a confidential memorandum was prepared with regard to a
possible sale or cash merger of Capsure which was distributed in May and June,
1996 to potential purchasers. Of the approximately 59 potential purchasers
contacted, approximately 36 parties executed confidentiality agreements with
Capsure and requested and received the confidential memorandum. In identifying
those potential purchasers to be contacted, Capsure management and Smith Barney
considered, among other things, the financial capability, product similarity and
strategic fit of such parties. On May 28, 1996, the Capsure Board announced that
it was considering several strategic alternatives, including a leveraged
recapitalization and sale or merger of Capsure.
In late June 1996, after receiving indications of interest from eight
potential purchasers, based upon their level of interest, Capsure invited five
parties, including CNAF, to conduct due diligence and meet with the management
of Capsure. Two of these parties subsequently withdrew from the process prior to
undertaking a due diligence review of Capsure. The remaining three parties,
including CNAF, proceeded with the next stage of the process, conducted a due
diligence review of Capsure and met with Capsure's management.
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In July 1996, interested parties were requested to submit a formal proposal
for the acquisition of Capsure. CNAF declined to submit a proposal, but
expressed a desire to enter into a merger transaction generally similar in
structure to the currently proposed Merger. Another party declined to bid. A
third party submitted a bid which contained both cash and convertible preferred
stock as consideration. The bidder was a property/casualty insurance holding
company which is a significant writer of surety business in the United States
and whose shares are publicly-held and traded on the NYSE. In light of the
structure and terms of the non-cash portion of the third party's proposed bid,
the bid did not have a precise valuation. In addition, Smith Barney estimated
that the convertible preferred stock portion of such bid would likely trade
below par value. Taking into account the structure and terms of the non-cash
portion of the third party's proposed bid, Smith Barney estimated the valuation
range of such bid to be from approximately $17.51 to approximately $17.80 per
share, resulting in an estimated valuation range for such bid which was below
the then current market price of the Capsure Common Stock. On August 9, 1996,
the last trading day prior to the rejection of such bid by the Special
Committee, the closing price for the Capsure Common Stock on the NYSE was $18.50
per share. Together with the availability to Capsure of other strategic
alternatives, such as the leveraged, special dividend which was valued by
Capsure management in excess of the implied value of the bid, the Special
Committee rejected the bid as inadequate.
On August 27, 1996, members of the Special Committee, Capsure management
and representatives of Smith Barney met with executive and senior officers of
CNAF to discuss the business combination previously proposed by CNAF. CNAF
outlined its view of the general terms of the transaction. A follow-up meeting
was held on September 3, 1996 between Rod Dammeyer, a member of the Special
Committee, and Dennis Chookaszian, chief executive officer of CNAF, to clarify
certain broad considerations of the transaction.
On September 5, 1996, the Capsure Board approved the declaration of a
$10.00 per share leveraged, special cash distribution, payable on October 4,
1996, to holders of record as of September 25, 1996 (the "Special
Distribution"). At this meeting, the Special Committee presented the CNAF
proposal, in general terms, to the Capsure Board. The Capsure Board directed the
Special Committee to investigate further and obtain additional information from
CNAF regarding its proposed business combination.
Following the declaration of the Special Distribution, and at the Capsure
Board's direction, the Special Committee and Capsure management conducted more
detailed conversations with CNAF management regarding the combination of the CCC
Surety Operations and Capsure. During the period from September 6, 1996 to
November 19, 1996, representatives of Capsure and CNAF held numerous discussions
and meetings regarding the structure, terms and conditions of a possible merger.
During this period, members of Capsure management also conducted due diligence
on the CCC Surety Operations.
On November 20, 1996, the Capsure Board met to review and consider the
status of negotiations. The Special Committee reported that there were
sufficient areas of general agreement to recommend pursuing further negotiations
toward reaching a definitive agreement of merger. Smith Barney also discussed
with the Capsure Board the valuation methodologies to be utilized by Smith
Barney in connection with its financial analysis of the proposed transaction.
The Capsure Board authorized the Special Committee to proceed with the
negotiation of a definitive merger agreement.
From November 21, 1996 to December 16, 1996, the Special Committee, Capsure
management and Capsure's legal and financial advisors participated in further
discussions and the negotiation of a merger agreement.
On December 17, 1996, the Capsure Board met to consider the transaction, at
which meeting Capsure's Special Committee, management, and its legal and
financial advisors updated the Board as to the status of the negotiations with
CNAF. At such meeting, legal counsel reviewed the terms of the proposed
Reorganization Agreement and related agreements and the remaining unresolved
material issues. Smith Barney reviewed for the Capsure Board the financial
analyses performed by Smith Barney in respect of the proposed transaction. The
Capsure Board then recessed the meeting pending completion of the negotiations.
On December 19, 1996, the Capsure Board reconvened the meeting of December
17, 1996 to vote on the proposed transaction. At such meeting, the members of
Capsure management and legal counsel updated the Capsure Board as to the final
resolution of outstanding matters discussed at the recessed Capsure Board
meeting. Smith Barney then rendered to the Capsure Board its oral opinion to the
effect that, as of such date
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and based upon and subject to certain matters, the Exchange Ratio was fair, from
a financial point of view, to the holders of Capsure Common Stock on December
19, 1996. Unlike the offer of cash and convertible preferred stock submitted by
the third party bidder, the exchange offer for shares of CNA Surety Common Stock
presented by CNAF did not avail itself to specific valuation. Rather the Capsure
Board focused upon the fairness of the Exchange Ratio. Accordingly, the Capsure
Board did not ascribe a specific value to CNAF's final offer, but instead
reviewed and relied upon the factors described below, including, in particular,
the fairness opinion of Capsure's financial advisor with respect to the Exchange
Ratio, the broader distribution channels of the combined entity, and the
financial analyses set forth in the "Opinion of Capsure's Financial Advisor" in
this section, in ultimately accepting such offer as in the best interests of the
Capsure stockholders. Following the meeting, Capsure and CNAF executed the
Reorganization Agreement and issued a joint press release announcing the Merger.
During the first quarter of 1997, Capsure management and the Capsure Board
raised certain concerns with CNAF regarding the CCC Surety Operations' January
and February gross and net written premiums compared to the 1997 projected gross
and net written premiums and requested additional information from CNAF.
Following receipt of the first quarter results and responses to requests for
information, the Special Committee and CNAF re-opened discussions in order to
address the concerns presented by Capsure. From April through July, 1997,
Capsure management, the Special Committee and Capsure's legal and financial
advisors discussed with CNAF, among other things, mechanisms by which the
Capsure stockholders could be assured that an equitable basis for the Exchange
Ratio could be maintained if actual 1997 net written premiums, of either (or
both) of the CCC Surety Operations or the Insurance Subsidiaries deviated from
their projected 1997 net written premium levels. In addition, given the delays
in the consummation of the Merger and related transactions, Capsure also
requested from CNAF, that Capsure be permitted to pay a cash dividend to its
stockholders prior to the Merger. On May 21, 1997, the Capsure Board held a
meeting in order for the Special Committee to update the Capsure Board regarding
the status of such discussions and on July 14, 1997, the Capsure Board approved
and authorized the execution of the First Amendment to the Reorganization
Agreement providing for, among other things, the Lookback Adjustment and the
Closing Dividend. At the July 14, 1997 meeting of the Capsure Board, Smith
Barney confirmed its opinion of December 19, 1996 by delivery of a written
opinion dated July 14, 1997 and reviewed with the Capsure Board its updated
financial analyses. See "The Merger -- Opinion of Capsure's Financial Advisor."
The Capsure Board believes that the Merger is fair to and in the best
interests of Capsure stockholders. In unanimously recommending approval of the
Reorganization Agreement and Merger by stockholders, the Capsure Board
considered all of the following material factors:
1. Based upon early success of the USA/Western joint venture, which
linked Western Surety's nationwide independent agency force and marketing
representatives with USA's small contract bond underwriting expertise, the
Capsure Board decided to actively pursue similar strategic marketing
alliances with third parties and selectively explore business combinations
that would include administrative economies and other synergies that would
result in an enhancement of stockholder values. Supporting this strategy
were the concerns of management and the Capsure Board regarding internal
growth prospects of Capsure's existing surety operations. Management
believed that the development of marketing alliances with third parties
similar to the USA/Western joint venture would provide greater growth
opportunities than management's estimates of short - to - intermediate term
revenue growth at Western Surety solely through its existing distribution
channels. Projected percentage growth in revenue at USA, while much
stronger than at Western Surety, was based on a significantly smaller
revenue base and would thus have a small short - to - intermediate term
impact on Capsure. The Capsure Board believed that a business combination
with the CCC Surety Operations, with its strong nationwide branch office
network, represented such an opportunity to accelerate revenue growth rates
at both Western Surety and USA.
2. The Capsure Board believed the strategic and operational fit with
the CCC Surety Operations was very strong. Capsure's businesses and the CCC
Surety Operations are very complementary, with little overlap. The Capsure
Board also believed that the marriage of Capsure's large independent agency
force and CNAF's 41 branches nationwide would create a highly competitive
distribution network. Although there could be no assurance that such
benefits would be realized, the Capsure Board believed
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that the Merger could generate marketing synergies which could ultimately
result in increased net written premiums. However, the Capsure Board
believed that it had insufficient information to quantify, and did not
quantify these marketing benefits at the time it approved the
Reorganization Agreement and Merger. The Capsure Board also believed that
cost savings could be achieved by the elimination of certain redundant
underwriting and administrative costs, which savings were estimated for the
year following the Merger to be 2% of total pro forma combined underwriting
and administrative expenses.
3. The Capsure Board believed that the combined companies would be
able to compete more effectively relative to larger, well-capitalized
companies in terms of market position, underwriting capacity, cost of
capital and acquisition opportunities compared to Capsure on a stand-alone
basis. In the opinion of Capsure's management and the Capsure Board, the
minimum size necessary to compete successfully in the marketplace has been
increasing in all sectors of the property and casualty insurance industry
and the public capital markets will continue to reward large,
well-capitalized companies.
4. The Reinsurance Agreements, the Services and Indemnity Agreement
and the Administrative Services Agreement, negotiated for the benefit of
the post-merger CNA Surety, provided the Surviving Corporation with
critical guarantees as to the profitability of the CCC Surety Operations to
be transferred. Specifically, these agreements, collectively, were designed
(i) to provide CNA Surety with underwriting capacity, (ii) to protect CNA
Surety from adverse loss reserve development related to the CCC Surety
Operations' reserves being transferred, (iii) to limit CNA Surety's loss
ratio associated with the CCC Surety Operations and certain accounts
through the year 2000, and (iv) to continue to make the administrative
resources of CNAF available to CNA Surety at predetermined rates, subject
to inflationary increases. The Capsure Board viewed these agreements as
integral components of the proposed transactions.
5. In the opinion of management and the Capsure Board, acquisition
opportunities in the property and casualty insurance industry on terms
acceptable to Capsure were limited. Capsure had previously solicited and
responded to acquisition opportunities in the surety market by directly
contacting owners and managers of surety businesses as well as numerous
merger and acquisition intermediaries. Generally, the identified
acquisition opportunities were not consummated due to one or more of the
following: (i) the seller's pricing expectation exceeded Capsure's; (ii)
the determination following due diligence that the acquisition target did
not meet Capsure's acquisition criteria; or (iii) a competing acquisition
proposal included more favorable terms for the seller. While the Capsure
Board maintained Capsure's financial flexibility to pursue complementary
acquisitions in the surety sector, Capsure's management and the Capsure
Board believed that the combination of abundant capital available for
acquisitions in the industry and Capsure's conservative acquisition
criteria reduced the likelihood of Capsure's success in completing
meaningful acquisitions.
6. Given the Capsure Board's judgment regarding the likelihood of
Capsure successfully completing meaningful acquisitions and the reduced
level of operating and investment income resulting from the sale of United
Capitol and the payment of the Special Distribution, the Capsure Board
recognized that a portion of its NOLs would begin to expire unused in 1997.
Accordingly, based on financial analyses of the transaction prepared
independently by both Capsure management and Smith Barney, the Capsure
Board believed that the potential favorable effects of the Merger on future
earnings (the Capsure Board noted, without specifically quantifying the
potential favorable effects of the Merger, that the Merger was expected to
be accretive to the earnings per share of CNA Surety relative to Capsure on
a stand-alone basis) and benefits of the Merger to the Capsure
stockholders, as described in the factors set forth above, would more than
offset the approximately $1.45 per share decrease in NOL value attributable
to the change in ownership as a result of the Merger. See "Opinion of
Capsure's Financial Advisor" in this Section for a more complete discussion
of Smith Barney's financial analyses.
7. In addition to the limitation in utilization of the NOLs referred
to above, the Capsure Board also considered the following potential
material negative factors in connection with the proposed Merger: the
declining trend in the premium volume of the CCC Surety Operations
following the acquisition of CIC in May 1995; the difficulties in
integrating the operations of the Capsure Insurance Subsidiaries with the
CCC Surety Operations; the composition of the CNA Surety Board and the
conflict of interest issues
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presented by a controlling stockholder owning over 60% of the outstanding
shares; and the immediate dilution in book value per share to Capsure
stockholders. Specifically, the re-underwriting process undertaken by the
CCC Surety Operations with respect to the CIC book of business resulted in
a decline in gross written premium volume (including CIC on a pro forma
basis) in 1995 and 1996. In view of such decline, the Capsure Board had
sufficient concern over the uncertainty regarding the CCC Surety
Operations' ability to meet its 1997 premium projections that Capsure
requested that CNA Surety represent and warrant to Capsure in the
Reorganization Agreement that there would not be a material adverse change
in the CCC Surety Operations which would reasonably be expected to result
in a material deviation from the CCC Surety Operations 1997 projected net
written premiums of $155.2 million. Given the level of net written premiums
generated in the first quarter of 1997 by the CCC Surety Operations,
Capsure and CNAF agreed to amend the Reorganization Agreement in order to
adopt the Lookback Adjustment. The Lookback Adjustment provides for a
post-closing adjustment to the number of shares of CNA Surety Common Stock
owned by CCC if actual 1997 net written premiums of the CCC Surety
Operations and/or of Capsure vary from certain targets.
8. The Capsure Board conducted its own independent evaluation of the
Exchange Ratio in conjunction with internal financial analyses prepared by
Capsure's management, and the financial analyses of Smith Barney which are
discussed in greater detail elsewhere herein. See "Opinion of Capsure's
Financial Advisor" in this Section. In evaluating the Exchange Ratio, the
Capsure Board considered all of the foregoing material factors, including
those factors that were subject to quantification and other factors, such
as the ability to expand and more effectively compete in the marketplace,
which involved a subjective and qualitative analysis. The Capsure Board
compared projected future earnings, book value and potential market value
of the combined entity to Capsure's projected results and ability to expand
and compete in the marketplace in the absence of the Merger. Based upon its
evaluation, the Capsure Board concluded that the potential positive effects
of the Merger on future earnings, market value and competitive strength
more than offset the book value per share dilution that Capsure
stockholders would experience as a result of the Merger.
OPINION OF CAPSURE'S FINANCIAL ADVISOR
Smith Barney was retained by Capsure as its financial advisor in connection
with the proposed Merger. In connection with such engagement, Smith Barney was
requested by Capsure to evaluate the fairness, from a financial point of view,
to the holders of Capsure Common Stock of the consideration to be received by
such holders in the Merger. On December 19, 1996, the date on which the
Reorganization Agreement was initially executed, Smith Barney delivered to the
Capsure Board a written opinion to the effect that, as of the date of such
opinion and based upon and subject to certain matters stated therein, the
Exchange Ratio was fair, from a financial point of view, to the holders of
Capsure Common Stock. Smith Barney has confirmed its opinion of December 19,
1996 by delivery of a written opinion dated July 14, 1997, the date of execution
of the First Amendment to the Reorganization Agreement.
In arriving at its opinion, Smith Barney reviewed the Reorganization
Agreement and held discussions with certain senior officers, directors and other
representatives and advisors of Capsure and certain senior officers and other
representatives of CNAF concerning the business, operations and prospects of
Capsure, the CCC Surety Operations to be contributed to CNA Surety and the
prospects of CNA Surety. Smith Barney examined certain publicly available
business and financial information relating to Capsure and certain business and
financial information relating to the CCC Surety Operations to be contributed to
CNA Surety as well as certain financial forecasts and other data for Capsure,
the CCC Surety Operations and CNA Surety which were provided to or otherwise
discussed with Smith Barney by the respective managements of Capsure and CNAF,
including reserve reports and information relating to certain strategic
implications and operational benefits anticipated to result from the Merger.
Smith Barney reviewed the financial terms of the Merger as set forth in the
Reorganization Agreement in relation to, among other things: current and
historical market prices of Capsure Common Stock; the historical and projected
earnings and other operating data of Capsure and CNA Surety; and the
capitalization and financial condition of Capsure and CNA Surety. Smith Barney
also analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations Smith
Barney considered relevant in evaluating those of Capsure and CNA
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Surety. Smith Barney also evaluated the potential pro forma financial impact of
the Merger on CNA Surety. In connection with its engagement, Smith Barney was
requested to approach, and held discussions with, certain third parties to
solicit indications of interest in a possible acquisition of Capsure. In
addition to the foregoing, Smith Barney conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as Smith Barney deemed appropriate in arriving at its opinion. Smith Barney
noted that its opinion was necessarily based upon information available, and
financial, stock market and other conditions and circumstances existing and
disclosed, to Smith Barney as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts, reserve
reports and other information and data provided to or otherwise reviewed by or
discussed with Smith Barney, the respective managements of Capsure and CNAF
advised Smith Barney that such forecasts and other information and data were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of Capsure and CNAF as to the future financial
performance of Capsure and CNA Surety and the strategic implications and
operational benefits anticipated to result from the Merger. Smith Barney
assumed, with the consent of the Capsure Board, that such reserve reports were
reasonably prepared reflecting the best currently available estimates and
judgments of the preparers thereof as to the reserves of Capsure and CNA Surety.
Smith Barney also assumed, with the consent of the Capsure Board, that the
Merger will be treated as a tax-free reorganization for federal income tax
purposes. Smith Barney did not express any opinion as to what the value of the
CNA Surety Common Stock actually will be when issued to Capsure's stockholders
pursuant to the Merger or the prices at which the CNA Surety Common Stock will
trade subsequent to the Merger. Smith Barney's opinion, as set forth therein,
relates to the relative values of Capsure and CNA Surety. Smith Barney did not
make and, except with respect to certain reserve reports, was not provided with
an independent evaluation or appraisal of the assets, liabilities (contingent or
otherwise) or reserves of Capsure or CNA Surety nor did Smith Barney make any
physical inspection of the properties or assets of Capsure or CNA Surety.
Although Smith Barney evaluated the Exchange Ratio from a financial point of
view, Smith Barney was not asked to and did not recommend the specific
consideration payable in connection with the Merger, which was determined
through negotiation by Capsure and CNAF. No other limitations were imposed by
Capsure on Smith Barney with respect to the investigations made or procedures
followed by Smith Barney in rendering its opinion.
The full text of the written opinion of Smith Barney dated July 14, 1997,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached hereto as Appendix B and is incorporated herein
by reference. Holders of Capsure Common Stock are urged to read this opinion
carefully in its entirety. Smith Barney's opinion is directed to the Capsure
Board and relates only to the fairness of the Exchange Ratio from a financial
point of view, does not address any other aspect of the Merger or related
transactions and does not constitute a recommendation to any stockholder as to
how such stockholder should vote at the Special Meeting. The summary of the
opinion of Smith Barney set forth in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of such opinion.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below performed by Smith Barney
in connection with its opinion dated July 14, 1997. The summary of such analyses
does not purport to be a complete description of the analyses underlying Smith
Barney's opinion. The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and relevant
methods of financial analyses and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, Smith Barney believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors, without considering all analyses and factors, could create
a misleading or incomplete view of the processes underlying such analyses and
its opinion. In its analyses, Smith Barney made numerous assumptions with
respect to Capsure, the CCC Surety Operations, CNA Surety, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Capsure, CNAF and CNA Surety. The
estimates contained in such analyses and the valuation ranges resulting from any
particular analysis are not necessarily indicative of actual values or
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predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. Smith Barney's opinion and financial analyses were only one of many
factors considered by the Capsure Board in its evaluation of the Merger and
should not be viewed as determinative of the views of the Capsure Board or
management with respect to the Exchange Ratio or the proposed Merger.
Selected Company Analysis
Using publicly available information, Smith Barney analyzed, among other
things, the market values and trading multiples of Capsure and the following
selected publicly traded companies in the specialty insurance sector of the
property and casualty insurance industry: (i) small capitalization companies
(companies with a market capitalization of less than $350 million): Amwest
Insurance Group, Inc., Capitol Transamerica Corporation, EMC Insurance Group,
Inc., GAINSCO Inc., Intercargo Corporation, The Navigators Group, Inc., NYMAGIC,
Inc. and RLI Corporation (the "Small Capitalization Companies") and (ii) medium
capitalization companies (companies with a market capitalization of greater than
$350 million): W.R. Berkley Corporation, Executive Risk, Inc., Frontier
Insurance Group, Inc., HSB Group, Inc., Markel Corp., MMI Companies, Inc. and
Orion Capital Corporation (the "Medium Capitalization Companies" and, together
with the Small Capitalization Companies, the "Selected Companies"). Smith Barney
compared (i) market values as a multiple of, among other things, estimated
calendar 1998 net income, and (ii) adjusted market values (equity market value,
plus total debt and the book value of preferred stock) as a multiple of, among
other things, estimated calendar 1998 earnings before interest, taxes,
depreciation and amortization ("EBITDA"). Smith Barney also compared the
relationship between the price to book value multiples and projected 1998 return
on equity ("ROE") of Capsure and CNA Surety with that of the Selected Companies.
Net income projections for the Selected Companies were based on estimates of
selected investment banking firms and net income projections, in the case of
Capsure, were based on internal estimates of the management of Capsure, and, in
the case of CNA Surety, were based on internal estimates of the management of
CNAF as adjusted by the management of Capsure (in each case, after giving effect
to the Lookback Adjustment). All multiples for Capsure and the Selected
Companies were based on closing stock prices as of July 8, 1997. The ranges of
multiples (excluding outliers) of estimated calendar 1998 net income and EBITDA
of the Small Capitalization Companies were 7.9x to 10.6x (with a median of 9.7x)
and 5.2x to 6.6x (with a median of 6.1x), respectively, and the ranges of
multiples (excluding outliers) of estimated calendar 1998 net income and EBITDA
of the Medium Capitalization Companies were 9.6x to 16.2x (with a median of
13.9x) and 6.5x to 11.1x (with a median of 9.3x), respectively. Applying these
multiples to corresponding financial data for Capsure (the estimated calendar
1998 net income and EBITDA of which was $0.90 and $1.74, respectively, per
share) and CNA Surety (the estimated calendar 1998 net income and EBITDA of
which was $1.03 and $1.88, respectively, per share) resulted in implied equity
reference ranges (excluding any potential market value of Capsure's NOLs and, in
the case of CNA Surety, after giving effect to an assumed Closing Dividend of
approximately $0.59 per share) for Capsure of approximately $6.53 to $8.96 per
share (based on the Small Capitalization Companies) and for CNA Surety of
approximately $7.63 to $10.33 per share (based on the Small Capitalization
Companies) and approximately $9.73 to $17.45 per share (based on the Medium
Capitalization Companies). Based on the relationship of the price to estimated
December 31, 1997 book value multiples and projected 1998 ROE of the Selected
Companies, the implied equity value for Capsure was approximately $7.66 per
share (based on the Small Capitalization Companies) and the implied equity value
for CNA Surety was approximately $9.78 per share (based on the Small
Capitalization Companies) and approximately $13.57 per share (based on the
Medium Capitalization Companies), excluding any potential market value of
Capsure's NOLs and, in the case of CNA Surety, after giving effect to an assumed
Closing Dividend of approximately $0.59 per share.
No company or business used in the "Selected Company Analysis" as a
comparison is identical to Capsure or CNA Surety. Accordingly, an analysis of
the results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating
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characteristics and other factors that could affect the acquisition, public
trading or other values of the Selected Companies or the business segment or
company to which they are being compared.
Contribution Analysis
Smith Barney analyzed the relative contributions of Capsure and the CCC
Surety Operations to the net written premiums, statutory net income,
underwriting income and pretax operating income of the combined company for
fiscal years 1997 through 1999, based, in the case of Capsure, on internal
estimates of the management of Capsure and, in the case of CNA Surety, on
internal estimates of the management of CNAF as adjusted by the management of
Capsure. This analysis indicated that, during such fiscal years, Capsure would
contribute an average of approximately 41.8% of the net written premiums, 38.1%
of the statutory net income, 39.1% of the GAAP underwriting income and 40.3% of
the pretax operating income, of the combined company, and the CCC Surety
Operations would contribute an average of approximately 58.2% of the net written
premiums, 61.9% of the statutory net income, 60.9% of the GAAP underwriting
income and 59.7% of the pretax operating income, of CNA Surety. In addition,
Smith Barney performed a contribution analysis of the projected free cash flows
of Capsure and the CCC Surety Operations for the fiscal years 1997 through 2001,
based, in the case of Capsure, on internal estimates of the management of
Capsure and, in the case of CNA Surety, on internal estimates of the management
of CNAF as adjusted by the management of Capsure, and after making adjustments
to the after-tax earnings of Capsure and the CCC Surety Operations for (a)
estimated corporate overhead expenses and (b) certain NOL utilization
limitations estimated by Capsure management to result from the proposed Merger.
No adjustment was made for potential cost savings or other synergies resulting
from the Merger, the amortization of goodwill created as a result of the Merger
or expenses incurred related to the Merger. The contribution cash flow analysis
was determined by adding (i) the present value of projected free cash flows over
the period from September 15, 1997 to December 31, 2001 and (ii) the present
value of Capsure's and the CCC Surety Operations' estimated terminal values on
December 31, 2001. The estimated terminal values for Capsure and the CCC Surety
Operations on December 31, 2001 were calculated on the basis of the Small
Capitalization Companies by applying multiples of 9.7x projected 2002 net
income, 6.1x projected 2002 EBITDA and 1.43x projected year-end 2001 book value
in the case of Capsure and 3.60 x projected year-end 2001 book value in the case
of the CCC Surety Operations. After adjustment for the amount of indebtedness of
Capsure and the CCC Surety Operations estimated to be outstanding as of the
closing of the Merger, this analysis indicated that Capsure and the CCC Surety
Operations would contribute approximately 35.4% and 64.6%, respectively, of the
present value of the pre-overhead, after-tax earnings of CNA Surety. Smith
Barney also compared the relationship between the price to book value multiples
and projected 1998 ROE of Capsure and the CCC Surety Operations with that of the
Small Capitalization Companies. Based on the relationship of the price to book
value multiples and projected 1998 ROE of the Small Capitalization Companies,
this analysis indicated that Capsure and the CCC Surety Operations would
contribute approximately 32.8% and 67.2%, respectively, of the pre-overhead
equity value of CNA Surety. Following consummation of the Merger and after
giving effect to the Lookback Adjustment, the stockholders and option holders of
Capsure would own between approximately 36.5% to 46.1%, and CCC would own
between approximately 63.5% to 53.9%, of CNA Surety, on a fully-diluted basis.
Discounted Cash Flow Analysis
Smith Barney performed a discounted cash flow analysis of the projected
free cash flows of Capsure and of CNA Surety for the period from September 15,
1997 to December 31, 2001, based, in the case of Capsure, on internal estimates
of the management of Capsure and, in the case of CNA Surety, on internal
estimates of the management of CNAF as adjusted by the management of Capsure (in
each case, after giving effect to the Lookback Adjustment). The discounted cash
flow analysis of Capsure, on a stand-alone basis, and of CNA Surety was
determined by adding (i) the present value of projected free cash flows over the
period from September 15, 1997 to December 31, 2001 and (ii) the present value
of Capsure's and CNA Surety's estimated terminal values on December 31, 2001.
The estimated terminal value for Capsure was calculated on the basis of the
Small Capitalization Companies by applying multiples of 9.7x projected 2002 net
income, 6.1x projected 2002 EBITDA and 1.52x projected year-end 2001 book value.
The estimated terminal value for CNA Surety was calculated on the basis of both
the Small Capitalization and Medium Capitalization
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Companies by applying multiples of, in the case of the Small Capitalization
Companies, 9.7x projected 2002 net income, 6.1x projected 2002 EBITDA and 2.0x
projected book value and, in the case of the Medium Capitalization Companies,
multiples of 13.9x projected 2002 net income, 9.3x projected 2002 EBITDA and
2.83x projected year-end 2001 book value. The estimated cash flows and terminal
values of Capsure and CNA Surety were discounted to present values using
discount rates ranging from 10% to 15%. This analysis resulted in an implied
equity reference range for Capsure (based on the Small Capitalization Companies)
of approximately $9.75 to $12.33 per share. Excluding any potential market value
of Capsure's NOLs and after giving effect to an assumed Closing Dividend of
approximately $0.59 per share, this analysis also resulted in implied equity
reference ranges for CNA Surety of approximately $10.41 to $13.58 per share
(based on the Small Capitalization Companies) and approximately $14.30 to $18.84
per share (based on the Medium Capitalization Companies).
Pro Forma Merger Analysis
Smith Barney analyzed certain pro forma effects resulting from the Merger,
including, among other things, the impact of the Merger on the projected
earnings per share ("EPS") of CNA Surety for the period September 15, 1997 to
December 31, 1997 on an annualized basis and for fiscal years 1998 and 1999
relative to the EPS of Capsure on a stand-alone basis, based, in the case of
Capsure, on internal estimates of the management of Capsure and, in the case of
CNA Surety, on internal estimates of the management of CNAF as adjusted by the
management of Capsure (in each case, after giving effect to the Lookback
Adjustment and an assumed Closing Dividend of approximately $0.59 per share).
The results of the pro forma merger analysis suggested that the Merger would be
accretive by approximately 19%, 15% and 12% in fiscal years 1997, 1998 and 1999,
respectively, relative to Capsure's EPS on a stand-alone basis during such
periods. The actual results achieved by the combined company may vary materially
from projected results.
Other Factors and Comparative Analyses
In rendering its opinion, Smith Barney considered certain other factors and
conducted certain other comparative analyses, including, among other things, a
review of the following: (i) indications of interest received from third parties
other than CNAF in respect of a possible transaction with Capsure; (ii)
Capsure's historical and projected financial results and CNA Surety's projected
financial results; (iii) the historical trading prices of the Capsure Common
Stock; and (iv) the pro forma ownership of the combined company.
Miscellaneous
Pursuant to the terms of Smith Barney's engagement, Capsure has agreed to
pay Smith Barney for its services, if the Merger is consummated, an aggregate
financial advisory fee equal to approximately 1% of the total consideration
(including liabilities assumed and subject to certain limitations) payable in
the Merger. Capsure also has agreed to reimburse Smith Barney for reasonable
travel and other out-of-pocket expenses incurred in performing its services,
including the reasonable fees and expenses of its legal counsel, and to
indemnify Smith Barney and related persons against certain liabilities,
including liabilities under the federal securities laws, arising out of Smith
Barney's engagement.
Smith Barney has advised Capsure that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of
Capsure and CNAF for their own account or for the account of customers and,
accordingly, may at any time hold a long or short position in such securities.
In addition, Smith Barney and its affiliates (including Travelers Group Inc. and
its affiliates) may maintain relationships with Capsure and CNAF.
Smith Barney is a nationally recognized investment banking firm and was
selected by Capsure based on Smith Barney's experience, expertise and
familiarity with Capsure and its business. Smith Barney regularly engages 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.
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<PAGE> 44
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO CAPSURE AND ITS STOCKHOLDERS
The following is a summary of certain material federal income tax
consequences of the Merger to Capsure and its stockholders. The summary is based
on the Code, its legislative history, U.S. Department of Treasury regulations
promulgated thereunder, court decisions and rulings by the Internal Revenue
Service ("IRS"), all as in effect on the date hereof and all of which are
subject to change at any time, which change may be retroactive. The summary only
applies to persons that hold shares of Capsure Common Stock as capital assets
and does not address tax considerations which apply to taxpayers who are subject
to special rules (e.g., financial institutions, tax exempt organizations,
foreign taxpayers or persons who receive the stock or options thereon as
compensation). Each stockholder's individual circumstances may affect the tax
consequences of the Merger to such stockholder. Accordingly, Capsure
stockholders should consult their own tax advisors regarding the particular
consequences to them of the Merger, including the applicability of any state,
local or foreign tax laws to which they may be subject.
General
As a condition to the Merger, Capsure will receive an opinion from Mayer,
Brown & Platt based on certain representations from CNA Surety, CCC, Capsure and
the Major Stockholder that the Merger will be treated as an exchange within the
meaning of Section 351(a) of the Code or a reorganization within the meaning of
Section 368(a) of the Code. Based on the opinion of Mayer, Brown & Platt, a copy
of which is attached hereto as Appendix C and is incorporated herein by
reference, the federal income tax consequences of the Merger will be as follows:
Tax Treatment to Capsure
No gain or loss will be recognized by Capsure as a result of the Merger.
Tax Treatment to Capsure Stockholders
Except, possibly, to the extent of dividends declared or paid at or prior
to the Merger (as described below), no gain or loss will be recognized by a
Capsure stockholder who receives CNA Surety Common Stock in exchange for Capsure
Common Stock. The tax basis of the CNA Surety Common Stock received will be the
same as the Capsure Common Stock exchanged therefor. The holding period of the
CNA Surety Common Stock received will include the holding period of the shares
of Capsure Common Stock exchanged therefor.
Dividends Declared or Paid at or Prior to the Merger
Capsure intends to take the position and will report to the IRS that any
dividends it declares or pays at or prior to the Merger will be treated as
ordinary dividend income for tax purposes to the extent of Capsure's current or
accumulated earnings and profits as determined for U.S. federal income tax
purposes. However, it is possible that some or all of such dividend could be
treated as consideration in the Merger. In such event, stockholders would be
required to recognize income equal to the lesser of (i) the amount of the
dividend treated as consideration in the Merger and/or (ii) the gain realized on
the exchange of Capsure Common Stock for CNA Surety Common Stock (i.e., the
excess of the value of the CNA Surety Common Stock received plus the amount of
the dividend treated as consideration in the Merger over the tax basis in the
Capsure Common Stock transferred). Such income generally would be capital gain,
but in some limited circumstances, could be treated as ordinary dividend income.
Information Reporting
Capsure stockholders will be required to attach a statement to their tax
return for the year of the Merger that contains the information listed in
Treasury Regulation Section 1.368-3(b) and Treasury Regulation Section
1.351-3(a). Such statement will include the stockholder's tax basis in Capsure
Common Stock and a description of the CNA Surety Common Stock received.
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<PAGE> 45
ACCOUNTING TREATMENT
CNA Surety will account for the Merger as an acquisition of Capsure, using
purchase accounting. Accordingly, the purchase price for Capsure will be
allocated to Capsure's assets that have been acquired and to Capsure's
liabilities that have been assumed based on the estimated fair value of such
assets and liabilities at the Effective Time. The purchase price for the Capsure
Common Stock will be determined based on the traded market value of the Capsure
Common Stock to be exchanged, plus the estimated value of the Capsure Options.
The final allocation of the purchase price has not been determined as it will be
based on the fair value of the assets and liabilities at the Effective Time. See
"Unaudited Pro Forma Consolidated Financial Information -- Notes to Unaudited
Pro Forma Consolidated Financial Information."
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION; SEVERANCE BENEFITS; RETENTION
AND TRANSACTION ARRANGEMENTS
Pursuant to the Reorganization Agreement, CCC has agreed to elect the
following persons as directors of CNA Surety for a period of two years following
the Merger: Rod F. Dammeyer, a director of Capsure; Bruce A. Esselborn,
president and a director of Capsure; and John T. Knox, Jr., president and chief
executive officer of USA.
In connection with the possible sale or merger of Capsure, the Special
Committee, upon its appointment in March 1996, directed management to develop
the Severance/Retention Plan pursuant to which Capsure would provide certain
severance benefits and transaction or retention bonuses to certain officers and
employees of Capsure and its subsidiaries. The Severance/Retention Plan was
designed to (i) incentivize key employees to negotiate and effectuate
consummation of the Merger; (ii) keep employees in place during the completion
or failure of the Merger; and (iii) compensate employees for the loss of their
employment. The Severance/ Retention Plan was proposed by Capsure management in
April 1996 and was reviewed and negotiated by and between Capsure management and
the Special Committee of the Capsure Board between April 1996 and September
1996. The Severance/Retention Plan was formally approved by the compensation
committee of the Capsure Board in December 1996.
Severance Benefits
Under the terms of the Severance/Retention Plan, two officers and eight
employees of Capsure will receive severance benefits in the event his or her
employment is terminated in connection with the Merger, excluding Bruce A.
Esselborn, president, and Mary Jane Robertson, chief financial officer, of
Capsure, whose severance benefits are provided under the terms of their
respective employment agreements. Individuals who accept employment positions
with CNA Surety, an affiliate of CNA Surety or another entity affiliated with
Mr. Zell are not considered to be terminated in connection with the Merger and
are not entitled to severance benefits under the Severance/Retention Plan.
Severance benefits include cash payments of up to one and one-half times annual
salary, depending upon the level and seniority of the terminated officer or
employee. Ronald D. Bobman, vice president -- mergers and acquisitions, whose
employment will be terminated in connection with the Merger will be entitled to
receive cash payments from Capsure in the amount of $255,000. John S. Heneghan,
vice president -- controller, of Capsure, has agreed to serve as CNA Surety's
chief financial officer following the Merger and in such event, he will not
receive the severance benefits under the Severance/Retention Plan to which he
would otherwise be entitled. The other eight employees entitled to severance
benefits under the Severance/Retention Plan will receive cash severance payments
from Capsure in an aggregate amount of approximately $121,000, assuming that all
such employees are terminated in connection with the Merger and not hired by CNA
Surety, an affiliate of CNA Surety or another entity affiliated with Mr. Zell.
In addition, all Capsure Options held by directors, officers, employees and
consultants terminated in connection with the Merger will automatically vest and
be exercisable, following their exchange for CNA Surety Options, for one year
following their termination. As of July 31, 1997, approximately 623,950 of the
934,126 outstanding Capsure Options are held by officers, employees and
consultants expected to be terminated in connection with the Merger. Upon
termination of employment in connection with the Merger,
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<PAGE> 46
all vesting requirements under the Capsure Holdings Corp. Money Purchase Pension
Plan and Trust and under the Capsure Holdings Corp. 401(k) Plan will be waived
for such terminated individuals.
Pursuant to the terms of their employment agreements with Capsure, Mr.
Esselborn and Ms. Robertson, whose employment will terminate upon the Merger,
will each receive two times their cash compensation, as reflected in Capsure's
1996 Annual Report on Form 10-K/A, subject to certain adjustments. Under the
terms of their respective employment agreements, upon termination of employment,
Mr. Esselborn and Ms. Robertson will receive payments in the amount of $1.15
million and $630,000, respectively. Mr. Esselborn has agreed to serve as a
director of CNA Surety following the Merger, which service does not affect his
entitlement to severance benefits pursuant to his employment contract.
Retention and Transaction Arrangements
The Severance/Retention Plan also provides for the payment by Capsure of
various transaction and retention bonuses. Transaction bonuses will be payable
or have already been paid to the following officers of Capsure and executive
officers of its subsidiaries: Mr. Esselborn -- $581,250, Ms.
Robertson -- $337,500, Mr. Bobman -- $170,000, Mr. Heneghan -- $71,250, Stephen
T. Pate, president of Western Surety -- $312,500 and John T. Knox, Jr.,
president of USA -- $250,000. Transaction and retention bonuses of approximately
$776,000 in the aggregate will be payable by Capsure to approximately 80
additional employees of Capsure and its subsidiaries upon consummation of the
Merger. Transaction bonuses due Messrs. Esselborn, Bobman, Heneghan and Ms.
Robertson were paid on December 27, 1996 in recognition of their efforts in
negotiating and executing the Reorganization Agreement and related documents.
The remaining amounts will be paid upon consummation of the Merger. The
transaction and retention bonuses were designed to reward pre-Merger activities
and entitlement thereto is not affected by the individual's employment status
following the Merger. There is no agreement that transaction bonuses paid on
December 27, 1996 be returned by the payees in the event the Merger is not
consummated.
CERTAIN REGULATORY FILINGS AND APPROVALS
Insurance
The consummation of the Merger will require the approvals of the South
Dakota Department and the Texas Department under the state insurance codes
("Insurance Codes") of the states of South Dakota and Texas, respectively, which
are the jurisdictions in which the Insurance Subsidiaries are domiciled. The
Insurance Codes of South Dakota and Texas contain provisions applicable to the
acquisition of control of a domestic insurer. The filing of an application for
acquisition of control of a domestic insurer (on Form A) gives rise to mandatory
or, in some states, discretionary public hearing requirements and/or statutory
periods (ranging from 30 to 90 days, which may be extended in certain
circumstances) within which decisions must be rendered approving or disapproving
the acquisition of control. Appropriate filings with the South Dakota Department
and the Texas Department have been made and must be approved by the Effective
Time. It is anticipated, although there can be no assurance, that approvals of
the South Dakota Department and the Texas Department will be obtained.
In addition, pursuant to the request of the California Commissioner, CNA
Surety has filed an application seeking the consent of the California
Commissioner for the proposed transactions.
Antitrust
Under the HSR Act and the rules promulgated thereunder by the FTC, certain
acquisition transactions such as the Merger may not be consummated until
notifications have been given and certain information has been furnished to the
Antitrust Division of the Justice Department and the FTC and the requisite
waiting period requirements under the HSR Act have been satisfied. Capsure and
CCC filed Pre-Merger Notification and Report Forms pursuant to the HSR Act with
the Justice Department and the FTC on February 4, 1997 with respect to the
Merger. Capsure and CCC received notice on February 13, 1997 that early
termination of the required waiting period under the HSR Act had been granted by
the Justice Department and the FTC. At any time before or after consummation of
the Merger and notwithstanding that the HSR Act waiting period
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<PAGE> 47
has been terminated, any state could take such action under the antitrust laws
as it deems necessary or desirable in the public interest. Such action could
include seeking to enjoin the consummation of the Merger or seeking divestiture
of certain businesses of Capsure or CNA Surety. Private parties may also seek to
take legal action under the antitrust laws under certain circumstances.
Additional Regulatory Approvals
Except as disclosed in this Proxy Statement/Prospectus, Capsure and CCC are
not aware of any other material federal, state or foreign regulatory approval
that is required in order to consummate the Merger. Should any such approval be
required, it is currently contemplated that such approval will be sought.
NYSE LISTING OF CNA SURETY COMMON STOCK
CNA Surety will apply for listing of the CNA Surety Common Stock on the
NYSE under the symbol SUR. It is a condition to the Merger that the shares of
CNA Surety Common Stock to be issued in connection with the Merger shall have
been approved for listing on the NYSE, subject only to official notice of
issuance.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of CNA Surety Common Stock received by Capsure stockholders in
the Merger will be freely transferable, except that shares of CNA Surety Common
Stock received by persons who are deemed "affiliates" (as such term is defined
under the Securities Act) of Capsure prior to the Merger and whose shares are
not included in the reoffer provisions of this Proxy Statement/Prospectus set
forth under the heading "Stockholders Registering Shares for Reoffer" may be
resold by them only in transactions permitted under the resale provisions of
Rule 145 promulgated under the Securities Act (or Rule 144 in the case of
persons who become affiliates of CNA Surety) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Capsure, CNA
Surety or CCC generally include individuals or entities that control, are
controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as the principal
stockholder of such party.
In connection with, and as a covenant and condition to, the Reorganization
Agreement (and as partial consideration for the agreement of the Major
Stockholder to enter into the Voting Agreement), CNA Surety is required to enter
into the Registration Rights Agreement with the Major Stockholder. Under the
terms of the Registration Rights Agreement and subject to certain conditions,
CNA Surety will grant to the Major Stockholder and certain of its permitted
assigns, including a charitable foundation, certain rights to require CNA Surety
to register for sale all or any portion of the shares of CNA Surety Common Stock
owned by the Major Stockholder for a period commencing six months after the
Effective Time and continuing until the third anniversary of the Effective Time.
See "The Reorganization Agreement and Other Transaction Agreements --
Registration Rights Agreement."
DISSENTERS' RIGHTS
Under the DGCL, holders of Capsure Common Stock are not entitled to
dissenters' rights in connection with the Merger because the Capsure Common
Stock is listed on a national securities exchange and the consideration which
the Capsure stockholders will receive in the Merger consists solely of CNA
Surety Common Stock, which will also be listed on a national securities
exchange.
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<PAGE> 48
THE REORGANIZATION AGREEMENT
AND OTHER TRANSACTION AGREEMENTS
THE MERGER
The Reorganization Agreement provides that, subject to the adoption of the
Reorganization Agreement by the holders of Capsure Common Stock and the
satisfaction of the other conditions to the Merger, Acquisition will be merged
with and into Capsure. Following the consummation of the Merger, Acquisition
will no longer exist and Capsure will be the Surviving Corporation and a
wholly-owned subsidiary of CNA Surety. As part of the Merger, Capsure
stockholders will receive the consideration described below.
The Reorganization Agreement is briefly summarized below. This summary does
not purport to be complete and is qualified in its entirety by reference to the
complete text of the Reorganization Agreement, which is reprinted as Appendix A
to this Proxy Statement/Prospectus and incorporated herein by reference. Holders
of Capsure Common Stock are urged to read the Reorganization Agreement in its
entirety for a more complete description of the Merger and related transactions.
EXCHANGE OF CAPSURE COMMON STOCK FOR CNA SURETY COMMON STOCK
At the Effective Time, each share of Capsure Common Stock outstanding
immediately prior to the Effective Time will be converted into the right to
receive one share of CNA Surety Common Stock. Outstanding and unexercised
Capsure Options will be terminated in exchange for CNA Surety Options with
similar rights and benefits as the Capsure Options. Following the consummation
of the Merger, CNA Surety will own all of the outstanding shares of common stock
of the Surviving Corporation and upon conversion of their shares, holders of
Capsure Common Stock will become holders of CNA Surety Common Stock. Holders of
Capsure Common Stock and Capsure Options will own, or have the right to acquire,
respectively, an aggregate of 38.25% of the outstanding shares of CNA Surety
Common Stock, on a fully-diluted basis, following the Merger, and CCC will own
the remaining 61.75% of the outstanding shares of CNA Surety Common Stock,
calculated on a fully-diluted basis and subject to the Lookback Adjustment.
Exchange of Certificates
Boston EquiServe L.L.P. will act as the Exchange Agent for the exchange of
Certificates for certificates representing CNA Surety Common Stock. At the
Effective Time, CNA Surety will deliver to the Exchange Agent the CNA Surety
Common Stock issuable to Capsure stockholders in the Merger. Promptly after the
Effective Time, the Exchange Agent will mail to all holders of record of Capsure
Common Stock at the Effective Time instructions for surrendering their
Certificates in exchange for a certificate or certificates representing CNA
Surety Common Stock. CAPSURE STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL AND
INSTRUCTIONS FROM THE EXCHANGE AGENT.
Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with the letter of transmittal, duly executed, the holder of such
Certificate will be entitled to receive in exchange a certificate for the number
of shares of CNA Surety Common Stock represented by the Certificate so
surrendered. The Certificate surrendered will then be canceled. In the event of
a transfer of ownership of Capsure Common Stock which is not registered in the
transfer records of Capsure, CNA Surety Common Stock may be delivered to a
transferee if the Certificate representing the Capsure Common Stock is presented
to the Exchange Agent and accompanied by all documents required to evidence and
effect such transfer and by evidence that any applicable stock transfer taxes
have been paid.
No dividends or other distributions with respect to the CNA Surety Common
Stock will be paid to the holder of a Certificate until the Certificate has been
surrendered. Upon surrender, the amount of dividends, if any, which would have
been payable but which were not paid with respect to the number of shares of CNA
Surety Common Stock represented by the new certificate issued upon such
surrender, will be paid, without interest. After the Effective Time, there will
be no further registration of transfers on the stock transfer books of Capsure
of the Capsure Common Stock outstanding immediately prior to the Effective Time.
If, after the
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Effective Time, certificates are presented for any reason, they will be canceled
and exchanged as described above; provided, however, that after 12 months from
the Effective Time, any unclaimed shares of CNA Surety Common Stock will be
returned to CNA Surety and Capsure stockholders who have not exchanged their
Capsure Common Stock for CNA Surety Common Stock shall look only to CNA Surety
for such an exchange.
Stock Options
At the Effective Time, each Capsure Option shall be terminated in exchange
for a CNA Surety Option to purchase an equivalent number of shares of CNA Surety
Common Stock at the same exercise price as the exchanged Capsure Option. Each
CNA Surety Option will have the same rights, benefits, terms and conditions as
the Capsure Option being replaced (other than exercise periods for certain
parties, as discussed below). The CNA Surety Options may be exercised (i) in the
case of officers, employees and consultants who are terminated, and directors
who resign, in connection with the Merger, up to one year following the
Effective Time, or (ii) in the case of all other holders of Capsure Options who
are not terminated, for the remaining period during which the exchanged Capsure
Option would have been exercisable had the Merger not occurred, subject to
earlier expiration in accordance with the terms of such Capsure Option. CNA
Surety will reimburse any such terminated officer, employee, consultant or
director for the commissions or other customary costs they may incur upon the
sale of CNA Surety Common Stock immediately upon the exercise of their CNA
Surety Option.
As of the close of business on the Record Date, unexercised and outstanding
Capsure Options entitled the holders thereof to purchase an aggregate of 855,058
shares of Capsure Common Stock.
CNA Surety will file, on the Closing Date, both a Form S-8 registration
statement and a NYSE listing application covering the CNA Surety Options and the
shares of CNA Surety Common Stock issuable upon exercise of such CNA Surety
Options. CNA Surety will use its reasonable best efforts to have the Form S-8
registration statement, which will be effective immediately upon filing,
continuously effective under the Securities Act and to have shares of CNA Surety
Common Stock admitted to trading on the NYSE upon the exercise of the CNA Surety
Options.
LOOKBACK ADJUSTMENT
The Reorganization Agreement provides for a mechanism, referred to as the
"Lookback Adjustment", which may adjust the number of shares of CNA Surety
Common Stock owned by CCC in the event that either or both of Capsure's and the
CCC Surety Operations' actual net written premiums for 1997 vary from certain
targets. As described under "The Reorganization Agreement and Other Transaction
Agreements -- Lookback Adjustment," the Capsure stockholders' ultimate
percentage ownership of CNA Surety may be adjusted. The Capsure stockholders'
relative ownership percentage of CNA Surety, as a group, may be adjusted from
38.25% to between 36.47% and 46.13% of CNA Surety. Correspondingly, CCC's
ultimate ownership of CNA Surety may be adjusted from 61.75% to between 53.87%
and 63.53%. The Lookback Adjustment, if any, will be made on March 31, 1998, by
either the surrender of shares of CNA Surety Common Stock by CCC or the issuance
of additional shares of CNA Surety Common Stock to CCC, as the case may be.
Because the Lookback Adjustment, if any, will be based upon the results of
Capsure and CNA Surety for the year ending December 31, 1997 and will be
effected on March 31, 1998, Capsure stockholders will not know the ultimate
percentage of CCC's ownership either at the time of the Special Meeting or the
Merger.
The Lookback Adjustment provides that the actual 1997 net written premiums
of the CCC Surety Operations, after adjustment by the Capsure Net Written
Premium Adjustment, as hereinafter defined, are applied to the first column in
the following table to determine the amount of the Lookback Adjustment. The
Lookback Adjustment shall be effected through the surrender by, or the issuance
to, CCC of shares of CNA Surety Common Stock as of March 31, 1998 in an amount
determined in accordance with the second column in the following table.
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<PAGE> 50
The adjustment to the CCC Surety Operations actual 1997 net written
premiums (which adjusted premiums figure is the reference amount for the first
column in the following table) is based on a comparison of the actual 1997 net
written premiums of the Insurance Subsidiaries to a 1997 net written premiums
target of $99.764 million. If the Insurance Subsidiaries actual 1997 net written
premiums are less than $99.764 million, then the shortfall, multiplied by an
adjustment factor, will be added to the CCC Surety Operations' 1997 net written
premiums. Conversely, if the Insurance Subsidiaries actual 1997 net written
premiums are more than $99.764 million, then the excess, multiplied by an
adjustment factor, will be subtracted from the CCC Surety Operations 1997 net
written premiums. The adjustment factor is equal to 1.5754 if the actual 1997
net written premiums of the CCC Surety Operations are greater than $139 million
or 1.2954 if the actual 1997 net written premiums of the CCC Surety Operations
are less than or equal to $139 million. The foregoing adjustment to the actual
1997 net written premiums of the CCC Surety Operations is hereinafter referred
to collectively as the "Capsure Net Written Premium Adjustment."
<TABLE>
<CAPTION>
(1) (2) (3)
------------------------------------- ----------------------- -----------------------
CCC SURETY OPERATIONS
NET WRITTEN PREMIUMS
FOR THE YEAR ENDED NUMBER OF SHARES OF CNA
DECEMBER 31, 1997, SURETY COMMON STOCK CCC
AS ADJUSTED (SURRENDERED BY CCC) OR PERCENTAGE OWNERSHIP --
($ IN MILLIONS) ISSUED BY CNA SURETY ADJUSTED RATIO(1)
------------------------------------- ----------------------- -----------------------
Greater than -- Equal to or less than
-------------------------------------
<S> <C> <C> <C>
0 -- $120.2 (7,495,772) 53.87%
$120.2 -- 122.7 (6,959,522) 54.54%
$122.7 -- 125.2 (6,423,955) 55.19%
$125.2 -- 127.7 (5,889,828) 55.82%
$127.7 -- 130.2 (5,357,938) 56.43%
$130.2 -- 132.7 (4,820,035) 57.03%
$132.7 -- 135.2 (4,285,589) 57.61%
$135.2 -- 137.7 (3,745,914) 58.18%
$137.7 -- 140.2 (3,211,042) 58.73%
$140.2 -- 142.7 (2,681,957) 59.26%
$142.7 -- 145.2 (2,138,925) 59.79%
$145.2 -- 147.7 (1,602,695) 60.30%
$147.7 -- 150.2 (1,074,355) 60.79%
$150.2 -- 160.2 0 61.75%
$160.2 -- 162.7 1,069,402 62.66%
$162.7 -- 165.2 1,605,392 63.10%
$165.2 or above 2,141,697 63.53%
</TABLE>
- -------------------------
(1) The percentages are based upon the beneficial ownership by CCC of 27,096,337
shares of CNA Surety Common Stock and 43,880,708 total outstanding shares of
CNA Surety (giving effect to all options) at the Effective Time.
The following are examples of how the Lookback Adjustment is calculated and
are presented for illustrative purposes only. Assuming that the net written
premiums of the CCC Surety Operations and Capsure for the year ending December
31, 1997, were $140 million and $100 million, respectively, the CCC Surety
Operations net written premiums, as adjusted (for purposes of the table above),
would be $139.6 million. In that case, CCC would surrender 3,211,042 shares of
CNA Surety Common Stock as of March 31, 1998, thereby adjusting the relative
percentages of CCC and the Capsure stockholders to 58.73% and 41.27%,
respectively. Assuming that net written premiums of the CCC Surety Operations
and Capsure were $155 million and $90 million, respectively, the CCC Surety
Operations net written premiums, as adjusted, would
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<PAGE> 51
be $170.4 million, and CNA Surety would issue an additional 2,141,697 shares of
CNA Surety Common Stock to CCC as of March 31, 1998, thereby adjusting the
relative percentages of CCC and the Capsure stockholders to 63.53% and 36.47%,
respectively.
Neither Capsure nor CNA Surety can provide any assurance regarding its
ultimate performance, as compared to targeted 1997 net written premiums, or the
ultimate result of the Lookback Adjustment, if any.
EFFECTIVE TIME
The Effective Time of the Merger will occur when a certificate of merger
(the "Certificate of Merger") is duly filed with the Secretary of State of
Delaware. The filing of the Certificate of Merger will be made as soon as
practicable after all conditions set forth in the Reorganization Agreement have
been satisfied.
TERMS AND CONDITIONS OF THE MERGER
The obligations of Capsure, CNA Surety and CCC to consummate the Merger are
each subject to the satisfaction of the following conditions: (i) the
Reorganization Agreement and the transactions contemplated thereby (including
the Amendment) shall have been validly approved by the affirmative vote of a
majority of the holders of Capsure Common Stock; (ii) there shall not be in
effect any order, decree or ruling or other action restraining or otherwise
prohibiting the Merger or any of the other transactions contemplated by the
Reorganization Agreement; (iii) all requisite regulatory approvals shall have
been obtained, and the applicable waiting period under the HSR Act shall have
expired or been terminated; (iv) the NYSE listing application for CNA Surety
shall have been approved, subject only to official notice of issuance; (v) each
party shall have received the opinion of its respective tax counsel and certain
representations from certain stockholders as to its or their intentions
regarding its or their shares of CNA Surety Common Stock; (vi) the parties will
have received executed copies of the transaction documents including, without
limitation, the Reinsurance Agreements, the Services and Indemnity Agreement,
the Administrative Services Agreement and the Registration Rights Agreement;
(vii) Western Surety and USA each shall have maintained a rating by A.M. Best of
"A" or better from the date of the Reorganization Agreement to one day
immediately prior to the Closing Date; and (viii) the Registration Statement, of
which this Proxy Statement/Prospectus is a part, shall have been declared
effective by the Commission.
The obligations of CCC and CNA Surety to consummate the Merger are also
subject to the satisfaction of the following conditions: (i) Capsure shall have
duly performed and complied in all material respects with all agreements,
covenants and conditions required by the Reorganization Agreement to be
performed by it or complied with up to the Closing Date and the stockholders who
are party to the Voting Agreement shall have performed in all material respects
their respective obligations under the Voting Agreement up to the Closing Date;
(ii) except as otherwise contemplated in the Reorganization Agreement, the
representations and warranties of Capsure contained in the Reorganization
Agreement shall be true in all material respects when made and as though made at
and as of the Closing Date; (iii) Capsure shall have delivered a certificate of
certain officers of Capsure certifying as to the accuracy of the representations
and warranties of Capsure and the performance of obligations required to be
performed under the Reorganization Agreement; (iv) there shall have been no
material modification of the Voting Agreement; (v) CCC shall have received the
resignations of certain Capsure officers and all Capsure directors; and (vi)
Capsure shall have delivered certain other additional certificates and documents
requested by CCC.
The obligations of Capsure to consummate the Merger are also subject to the
satisfaction of the following conditions: (i) CCC and CNA Surety shall have duly
performed and complied in all material respects with all agreements, covenants
and conditions required by the Reorganization Agreement to be performed or
complied with by it up to the Closing Date; (ii) except as otherwise
contemplated in the Reorganization Agreement, the representations and warranties
of CCC and CNA Surety contained in the Reorganization Agreement shall be true in
all material respects when made and as though made at and as of the Closing
Date; (iii) CCC shall have delivered to Capsure a certificate of certain
officers of CCC certifying as to the accuracy of the representations and
warranties of CCC and CNA Surety and the performance of their respective
obligations required to be performed under the Reorganization Agreement; and
(iv) CCC and CNA Surety shall have delivered certain other additional
certificates and documents requested by Capsure.
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Capsure, on the one hand, and CNAF, on the other hand, may (i) extend the
time for performance of any obligations, (ii) waive any inaccuracies in the
representations and warranties of the other party, or (iii) waive compliance by
the other party of any agreements or conditions contained in the Reorganization
Agreement. Under the terms of the Reorganization Agreement, any amendment or
waiver of a material condition would require the approval of the Capsure Board,
except that any amendment which decreases the merger consideration or changes
the form thereof or which adversely affects the rights of the Capsure
stockholders would require the approval of the Capsure stockholders. The Capsure
Board will not take actions which would require stockholder approval without
soliciting the approval of the Capsure stockholders. However, the Capsure Board
reserves its rights to waive or amend any material condition of the
Reorganization Agreement in its discretion without resoliciting stockholder
votes where such approval is not required.
REPRESENTATIONS AND WARRANTIES
In the Reorganization Agreement, the parties have made certain
representations and warranties concerning corporate existence and power,
corporate authorization, governmental consents and approvals, non-contravention
of agreements and instruments, capitalization, subsidiaries, Commission filings
and reports, financial statements, derivative securities, absence of certain
changes, no undisclosed material liabilities, litigation, taxes, employee
benefits, environmental matters, intellectual property rights, material and
additional contracts, compliance with laws, insurance regulatory compliance,
related party transactions, finders' fees, real property, labor matters,
takeover statutes, voting requirements, powers and authority of agents,
reinsurance arrangements, investments, insurance products and policies, opinion
of financial advisor, books and records and exclusions from investment company
definition. These representations and warranties are generally qualified as to
materiality and are, where appropriate, mutual in nature.
CERTAIN COVENANTS
Conduct of the Business Pending the Merger
In the Reorganization Agreement, Capsure, CCC and CNA Surety have made
certain covenants regarding the operations of the respective businesses of
Capsure and CCC, in the ordinary course of business, pending the consummation of
the Merger and the transactions contemplated under the Reorganization Agreement.
Specifically, Capsure has agreed among other things: (i) to operate its
businesses in the ordinary course of business to preserve intact its business
organization, relationships with customers, agents and others having business
dealings with it, to keep available the services of its officers and employees,
and not to substitute any methods of soliciting business, valuing investments on
its books, processing or administering claims, in each case to the end that
goodwill and ongoing business shall not be materially and adversely impaired;
(ii) not to declare any dividend or make any distributions with respect to the
Capsure Common Stock to the Capsure stockholders (other than the Closing
Dividend); not to split, combine or reclassify any of its capital stock or to
issue or authorize any additional securities in lieu of or in substitution for
its capital stock, and not to redeem or repurchase any securities of Capsure or
its subsidiaries, except as required or contemplated under agreements or plans
existing as of the date of the Reorganization Agreement; (iii) not to amend or
reprice any Capsure Options, not to issue or authorize any shares of capital
stock of Capsure, not to amend any of the terms of any outstanding securities or
related agreements (other than the issuance of shares of Capsure Common Stock
pursuant to the exercise of outstanding Capsure Options and issuance by a
wholly-owned subsidiary of its capital stock to its parent); (iv) not to amend
the certificate of incorporation or bylaws of Capsure or its subsidiaries,
except as contemplated by the Reorganization Agreement; (v) not to (and not to
permit its subsidiaries to) organize any subsidiary, not to acquire or agree to
acquire a substantial equity interest or substantial portion of the assets of
any other entity, not to authorize any new capital expenditures in an amount
more than 5% of the amount budgeted therefor, not to pay or agree to pay in
settlement of any litigation or claim against Capsure or its subsidiaries,
officers, directors, employees or agents (other than claims or disputes under or
relating to any insurance policy, contract or bond) more than $100,000 (net of
insurance), and not to enter into or materially amend any agreement relating to
the foregoing; (vi) not to dispose of any material assets other than investment
securities which are reinvested in a manner consistent
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with past investment policies or practices or pursuant to prudent investment
policies taking into account market conditions; (vii) not to acquire any
derivative financial instruments; (viii) not to authorize any plan of
dissolution or liquidation of Capsure or any of the Insurance Subsidiaries; (ix)
not to adopt, amend or terminate any benefit or welfare plan, except as required
by law or where such termination would not result in any material liability to
Capsure, not to increase the compensation or benefits payable to any officer,
director or employee (other than increases for non-officer employees consistent
with past practice and not material on an aggregate basis), and not to pay any
compensation or benefit not required by any plan or arrangement in effect as of
the date of the Reorganization Agreement; (x) not to incur or guarantee any
indebtedness for borrowed money, not to issue or sell any debt securities and
not to create any material liens on the property of Capsure and its
subsidiaries, except that Capsure is permitted to continue to use its existing
revolving line of credit in the ordinary course of business, provided that the
balance outstanding on the closing date of the Reorganization Agreement shall
not exceed $60 million; (xi) not to terminate or materially amend any material
contract of Capsure or its subsidiaries; (xii) except as permitted under the
Reorganization Agreement, not to take any action out of the ordinary course of
business; (xiii) to file all tax returns and not to make any tax election, which
would have a material adverse effect on Capsure, without CCC's consent; (xiv)
not to enter into any agreement providing for the acceleration of any payment or
obligation upon a change of control of Capsure; (xv) not to enter into any new
lines of business or materially change its business operations; (xvi) not to
take any action that would result in the conditions to the Reorganization
Agreement not being satisfied; and (xvii) not to enter into or amend any related
party agreement.
CCC has agreed, among other things, (i) to operate the CCC Surety
Operations in the ordinary course of business to preserve intact its present
operations, relationships with customers, agents and others having business
dealings with it, to keep available the services of its officers and employees,
and not to substitute any methods of soliciting business, valuing investments on
its books, processing or administering claims, in each case to the end that
goodwill and ongoing business shall not be materially and adversely impaired;
(ii) to maintain its certificates of authority and licenses relating to the CCC
Surety Operations and to maintain the current U.S. Department of Treasury
underwriting limitations; (iii) not to terminate or materially amend any
material contract of CCC relating to the surety business; (iv) except as
permitted under the Reorganization Agreement, not to take any action out of the
ordinary course of business; (v) not to take any action that would result in the
conditions to the Reorganization Agreement not being satisfied; (vi) to prepare
and provide audited financial statements; and (vii) to amend CNA Surety's
certificate of incorporation to increase to 100 million the number of authorized
shares of CNA Surety Common Stock.
CCC Covenants Regarding Transfer of the CCC Surety Operations
In connection with the transactions contemplated under the Reorganization
Agreement, CCC has covenanted that it will (i) make a capital contribution to
CNA Surety in the amount of $52.25 million immediately prior to the Effective
Time; (ii) enter into the Administrative Services Agreement with CNA Surety (the
"Administrative Services Agreement"); (iii) enter into the Reinsurance
Agreements, which require, among other things, payment by the Insurance
Subsidiaries of certain ceding commissions; and (iv) assign all intangible
assets used in the CCC Surety Operations to CNA Surety or the Surviving
Corporation. CCC will grant to CNA Surety or the Surviving Corporation the right
to use the mark "CNA" or some derivation thereof and will cause CNA Surety to
borrow an additional $50 million and contribute those funds to the Insurance
Subsidiaries as of the Effective Time. In connection with the foregoing
transactions, the statutory surplus of the Insurance Subsidiaries will be
increased by $73.25 million. See "Reinsurance Agreements and Services and
Indemnity Agreement" and "CCC Restrictions" in this Section.
Certain Other Covenants
CCC has covenanted that it will nominate and elect three Capsure-designated
directors to the CNA Surety Board and, subject to Delaware law and NYSE rules,
vote its shares in favor of those Capsure-designated directors so that they will
remain in office until the 1999 annual meeting of CNA Surety stockholders. CCC
has further agreed that CCC will not vote to increase the size of the CNA Surety
Board to more than eleven members prior to such 1999 annual meeting. CCC
covenants that it will cause its designees
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to the CNA Surety Board to appoint at least one of the Capsure-designated
directors to the CNA Surety Board audit committee. The Capsure-designated
directors are Rod F. Dammeyer, Bruce A. Esselborn and John T. Knox, Jr. See
"Management of CNA Surety." CCC has also agreed that, if any of Messrs.
Dammeyer, Esselborn or Knox ceases to act as a director prior to the 1999 annual
meeting, the remaining Capsure-designated directors on the CNA Surety Board will
have the right to appoint a new person to fill such vacancy.
CCC and CNA Surety also covenanted that for two years from the date on
which the Merger closes (the "Closing Date"), the bylaws of CNA Surety shall
require a vote of 75% of the outstanding shares of CNA Surety Common Stock in
order to approve any of the following actions: (i) business combinations; (ii)
proposals to sell or otherwise transfer substantially all of CNA Surety's
assets; or (iii) any amendments to the bylaw provision requiring such
supermajority vote. In addition, CCC covenanted that for a period of 18 months
following the Closing Date, CNA Surety will not engage in a self-tender offer,
and CCC will not engage in a tender offer, for shares of CNA Surety; provided,
however that nothing shall prevent CCC from acquiring up to 69% of CNA Surety,
calculated on a fully-diluted basis.
Both Capsure and CCC have also agreed: (i) to promptly make their
respective filings, and any other submissions, under the HSR Act and under the
Insurance Codes of the South Dakota and Texas Insurance Departments and to
obtain all other consents, approvals or permits from the necessary federal and
state governments and regulatory agencies (including any national securities
exchange) prior to the Effective Time and to consult and provide Capsure with
the opportunity to review and comment upon any filings or communications with
the relevant Insurance Departments; (ii) to consult with each other prior to
issuing any press release or public statement; (iii) to allow all designated
officers, attorneys, accountants and representatives of the other reasonable
access to offices, records and files and to hold any nonpublic information so
obtained in confidence in accordance with the respective confidentiality
agreements entered into between the parties; (iv) to cooperate in the filing of
the Registration Statement and obtain all necessary state securities permits or
approvals; (v) that CCC will cause CNA Surety to submit listing applications to
the NYSE and will use reasonable efforts to obtain approval of such applications
prior to the Effective Time; (vi) to give prompt notice to the other party of
the occurrence or non-occurrence of any event which would be likely to cause a
representation or warranty to be untrue or inaccurate, the failure to comply
with any covenant or the failure to satisfy any condition to the Reorganization
Agreement; (vii) that Capsure will duly call, give notice of, convene and hold
the Special Meeting as soon as practicable; (viii) that each will deliver to the
other an officer's certificate as of the date of first mailing of this Proxy
Statement/Prospectus to Capsure stockholders; (ix) that each will deliver to the
other a comfort letter from each company's independent accountant in connection
with the Registration Statement; (x) that CNA Surety will execute the
Registration Rights Agreement with the Major Stockholder, that CCC will enter
into the Reinsurance Agreements with Capsure and/or the Insurance Subsidiaries,
as appropriate, and that Capsure will have obtained reinsurance limiting USA's
individual policy exposure on individual policies to $500,000 for a period of
three years following the Closing Date of the Reorganization Agreement; (xi)
that CCC will cause the Reinsurance Agreements to be in full force and effect as
of the Effective Time; and (xii) that CCC shall deliver to Capsure an update, as
of March 31, 1997, to the actuarial study of loss reserves of CCC's surety
business by the earlier of June 30, 1997 or ten business days prior to the
Closing Date.
NO SOLICITATION
The Reorganization Agreement provides that Capsure will not, and will not
authorize its officers and directors, its subsidiaries or their officers and
directors to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making of a proposal or offer for an Acquisition Proposal. The
Capsure Board, however, is entitled to furnish information to, or enter into
discussions or negotiations with, any person or entity that makes an Acquisition
Proposal if the Capsure Board, after consultation with its legal counsel,
determines that such action is necessary for the Capsure Board to comply with
its fiduciary duties to Capsure's stockholders under applicable law. Capsure
will notify CCC if any such inquiries or proposals are received.
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TERMINATION
The Reorganization Agreement is subject to termination at the option of
either Capsure or CCC if the Merger has not been consummated on or before
September 30, 1997. In addition, prior to such time, the Reorganization
Agreement is subject to termination upon: (i) the disapproval of the
Reorganization Agreement and Merger by the Capsure stockholders at the Special
Meeting; (ii) the issuance by any court or governmental body of a final order,
decree or ruling permanently restraining, enjoining or otherwise prohibiting the
Merger; or (iii) the mutual consent of Capsure and CCC.
CCC may terminate the Reorganization Agreement if: (i) there exists a
breach of any representation, warranty, covenant, agreement or obligation by
Capsure or the Major Stockholder in the performance of any of their material
obligations under the Reorganization Agreement, and any such breach is not cured
within 15 business days after notice of such breach; or (ii) if Capsure has
entered into an agreement providing for an Acquisition Proposal or the Capsure
Board withdraws its recommendation of the Reorganization Agreement or the Merger
or the Capsure Board recommends any of the above actions.
Capsure may terminate the Merger Agreement if there exists a breach of any
representation, warranty, covenant, agreement or obligation by CCC or CNA Surety
in the performance of any of their material obligations under the Reorganization
Agreement, and any such breach is not cured within 15 business days after notice
of such breach.
TERMINATION FEES
If a termination occurs due to (i) a material breach of the Reorganization
Agreement by Capsure or (ii) Capsure entering into an agreement providing for an
Acquisition Proposal or the Capsure Board withdraws its recommendation of the
Reorganization Agreement or the Merger or the Capsure Board recommends any of
the above actions, then Capsure will pay liquidated damages of $750,000 to CCC.
If a termination occurs due to a material breach of the Reorganization Agreement
by CCC or CNA Surety, CCC will pay liquidated damages of $750,000 to Capsure.
In addition to the foregoing, Capsure has agreed to pay CCC the sum of
$4.25 million if (i) an Acquisition Proposal is commenced and (A) the Capsure
Board withdraws its approval or recommendation of the Reorganization Agreement
and Merger and (B) Capsure enters into an agreement with respect to an
Acquisition Proposal within 12 months of receiving the Acquisition Proposal,
(ii) there is a successful tender offer for control of Capsure within 12 months
of the date of the Reorganization Agreement, or (iii) Capsure terminates the
Reorganization Agreement in breach of its obligations under the Reorganization
Agreement and within 12 months of such termination, enters into an Acquisition
Proposal. CCC has agreed similarly to pay to Capsure the sum of $4.25 million if
CCC terminates the Reorganization Agreement in breach of its obligations under
the Reorganization Agreement and then enters into an agreement for the merger,
consolidation, business combination or sale of its surety business within 12
months of such termination.
CCC RESTRICTIONS
In order to assure a complete transfer of the CCC Surety Operations, CCC
has covenanted that it will direct any inquiries or requests that it may receive
for certain surety products to the Insurance Subsidiaries, so that the Insurance
Subsidiaries can offer to issue such surety products. CCC will refrain from
making a quote on certain surety products for 30 days if CCC does not offer such
surety product issued by the Insurance Subsidiaries or offers a competing surety
product from a third party. After the Closing Date, CCC will cede to the
Insurance Subsidiaries any bonds or policies relating to such surety business it
or any of its subsidiaries may hold at any such time.
CCC has further covenanted that it will not restrict the Insurance
Subsidiaries from entering into any new lines of business.
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CLOSING DIVIDEND
The Reorganization Agreement provides that, subject to the representations,
warranties and covenants set forth in the Reorganization Agreement, Capsure is
entitled to pay to its stockholders the Closing Dividend. The Closing Dividend
shall be an aggregate amount equal to the sum of $3.5 million and $58,600 per
day from and including June 1, 1997 through and including the day immediately
preceding the Effective Time. If the Merger were to be consummated on September
30, 1997, the aggregate amount of the Closing Dividend would be $10.6 million.
Assuming that there were 16,652,485 shares of Capsure Common Stock outstanding
(which includes the assumed exercise of 802,240 vested Capsure Options) on the
record date of the Closing Dividend, the Capsure stockholders would receive a
Closing Dividend of $0.64 per share. The Closing Dividend, which will be
declared prior to the Effective Time, is conditioned upon the consummation of
the Merger and will be payable as soon as practicable following the Effective
Time.
REINSURANCE AGREEMENTS AND SERVICES AND INDEMNITY AGREEMENT
The Reinsurance Agreements are designed to protect against adverse loss
reserve development related to the CCC Surety Operations' reserves being
transferred, and help preserve, through the year 2000, the profitability of the
CCC Surety Operations and certain additional accounts. The Reinsurance
Agreements together with the Services and Indemnity Agreement also effect the
transfer of the CCC Surety Operations to the Insurance Subsidiaries. In
addition, the Services and Indemnity Agreement provides the Insurance
Subsidiaries with the authority to perform various administrative, management,
underwriting and claim functions in order to conduct the business of the CCC
Surety Operations.
The Reinsurance Agreements to be entered into as of the Effective Time are
as follows: (i) the Surety Quota Share Treaty; (ii) the Aggregate Stop Loss
Reinsurance Contract; and (iii) the Surety Excess of Loss Reinsurance Contract.
Forms of each of the Reinsurance Agreements and the Services and Indemnity
Agreement are attached as exhibits to the Reorganization Agreement and are each
incorporated herein by reference.
Surety Quota Share Treaty
As of the Effective Time, CCC and Western Surety will enter into the Surety
Quota Share Treaty (the "Quota Share Treaty") to (i) transfer the CCC Surety
Operations from CCC to Western Surety, including the net loss reserves,
allocated and unallocated loss adjustment expense reserves ("LAE"), and the
reserves for incurred but not reported losses (collectively, the "Reserves"),
unearned premium reserves as of the Effective Time, as well as cash and other
statutorily admitted assets equal to such Reserves plus unearned premium
reserves and (ii) provide a guarantee to Western Surety regarding the adequacy
of the Reserves transferred to Western Surety at the Effective Time.
Specifically, CCC will transfer to Western Surety 100% of the net
liabilities of the existing CCC Surety Operations under surety bonds written or
renewed by CCC prior to the Effective Time. CCC will effect the transfer of the
existing CCC Surety Operations by paying Western Surety an amount in cash and
other statutorily net admitted assets (insurance premium receivables minus
expenses accrued for statutory reporting purposes) equal to (i) CCC's net
unearned premium reserves relating to the in-force CCC Surety Operations as of
the Effective Time, plus (ii) CCC's Reserves for all CCC Surety Operations'
business written or assumed prior to the Effective Time, and minus (iii) a
ceding commission of $29 million to be retained by CCC, which reimburses CCC for
acquisition expenses incurred by CCC in connection with the net unearned premium
reserves being transferred. CCC will transfer to Western Surety all of the CCC
Surety Operations' business written or renewed by CCC after the Effective Time
by transferring the related liabilities of such business and paying to Western
Surety an amount in cash equal to CCC's net premiums written on all such
business, minus a quarterly ceding commission to be retained by CCC equal to
$50,000 plus 28% of net premiums written on such business.
CCC has also agreed to guarantee the Reserves transferred to Western Surety
by agreeing to pay to Western Surety within 30 days following the end of each
calendar quarter the amount of any adverse development on such Reserves, as
reestimated as of the end of such calendar quarter.
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The Quota Share Treaty shall have a term of five years, commencing at the
Effective Time. Notwithstanding the Quota Share Treaty's term, the provisions of
the Treaty shall continue to apply until all obligations of the parties have
been performed, including the guarantee with respect to the adequacy of the
Reserves. CCC shall be responsible for losses on business covered by the Quota
Share Treaty which are not discovered within three years of its termination.
Aggregate Stop Loss Reinsurance Contract
The Aggregate Stop Loss Reinsurance Contract (the "Stop Loss Contract") to
be entered into as of the Effective Time will protect CNA Surety from adverse
loss experience on certain business underwritten after the Effective Time. The
Stop Loss Contract between the Insurance Subsidiaries and CCC limits the
Insurance Subsidiaries' prospective net loss ratios with respect to certain
accounts and lines of insured business for at least three fiscal years following
the Effective Time. In the event the Insurance Subsidiaries' accident year net
loss ratio exceeds 24% in each of 1997 through 2000 on certain insured accounts
(the "Loss Ratio Cap"), the Stop Loss Contract requires CCC at the end of each
calendar quarter following the Effective Time, to pay to the Insurance
Subsidiaries a dollar amount equal to (i) the amount, if any, by which their
actual accident year net loss ratio exceeds the applicable Loss Ratio Cap,
multiplied by (ii) the applicable net earned premiums.
The Loss Ratio Cap only applies to the results of insureds that were
accounts of the CCC Surety Operations as of the Effective Time as well as
similar accounts at any time following the Effective Time but prior to the
termination of the Stop Loss Contract. Although the Stop Loss Contract remains
in effect until December 31, 2000, the provisions shall continue until all
obligations of the parties have been performed. In consideration for the
coverage provided by the Stop Loss Contract, the Insurance Subsidiaries will pay
to CCC an annual premium equal to $20,000.
Surety Excess of Loss Reinsurance Contract
The Surety Excess of Loss Reinsurance Contract (the "Excess of Loss
Contract") provides CNA Surety with the capacity to underwrite large surety bond
exposures by providing the Insurance Subsidiaries with reinsurance support from
CCC. Historically, CCC's substantial capital base has enabled it to underwrite
and retain large aggregate surety bond exposures. The Excess of Loss Contract to
be entered into by CCC and the Insurance Subsidiaries as of the Effective Time
cedes to CCC certain liabilities in excess of the capacity provided by the
Insurance Subsidiaries' reinsurance program.
Specifically, CCC will provide the Insurance Subsidiaries with $75 million
of coverage in excess of the $55 million of coverage to be provided to the
Insurance Subsidiaries by third party reinsurers, which is in turn in excess of
the $5 million of coverage per principal to be retained by the Insurance
Subsidiaries. CCC will be obligated to pay to the Insurance Subsidiaries, on a
quarterly basis, the amount of any loss to the extent such loss exceeds $60
million per principal; provided, however, that CCC's obligations to the
Insurance Subsidiaries with respect to the Excess of Loss Contract shall not
exceed $75 million per principal in any one year. Over the last five years, no
more than ten CCC Surety Operations accounts have had exposures that would have
been reinsured under the Excess of Loss Contract.
The Excess of Loss Contract provides coverage for losses discovered on
surety bonds in force at the Effective Time and for losses discovered on new and
renewal business written, renewed or assumed during the term of the Excess of
Loss Contract. CCC is also obligated to act as a joint insurer, or "co-surety,"
for business covered by the Excess of Loss Contract when requested by the
Insurance Subsidiaries.
The Excess of Loss Contract shall commence as of the Effective Time and
continue for a period of five years. For a period of three years following the
termination of the Excess of Loss Contract, CCC will be liable for applicable
losses discovered with respect to business covered prior to the date of
termination of the Excess of Loss Contract. In consideration for the reinsurance
coverage provided by the Excess of Loss Contract, the Insurance Subsidiaries
will pay to CCC, on a quarterly basis, a premium equal to 1% of the net written
premiums applicable to the Excess of Loss Contract, subject to a minimum premium
of $20,000 per quarter.
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Services and Indemnity Agreement
The Services and Indemnity Agreement, to be entered into as of the
Effective Time between CCC and the Insurance Subsidiaries, authorizes the
Insurance Subsidiaries to perform certain underwriting, claims, agency and
accounting functions on behalf of CCC as they relate to the business assumed
under the Quota Share Treaty for a period of five years. In consideration for
the provision of the foregoing services, CCC has agreed to pay the Insurance
Subsidiaries a quarterly fee of $50,000.
In addition, the Services and Indemnity Agreement prohibits any changes or
modifications to it or any of the Reinsurance Agreements without the written
approval of CCC and the audit committee of the CNA Surety Board.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Reorganization Agreement, CNA Surety will enter into an
Administrative Services Agreement with CCC to allow for the continued use by CNA
Surety of real and personal property currently owned or leased by CCC. In
addition, CCC will offer to CNA Surety many of the services currently provided
by CCC to the CCC Surety Operations. The Administrative Services Agreement has a
three year term commencing upon execution at the Effective Time. The form of
Administrative Services Agreement is attached as an exhibit to the
Reorganization Agreement and is incorporated herein by reference.
The Administrative Services Agreement provides that the rental and service
fees charged by CCC thereunder shall be no less favorable than currently charged
to the CCC Surety Operations. Such charges may be increased annually in an
amount not more than the increase in the consumer price index during the
previous 12 months. The CNA Surety Board audit committee shall have the
authority to choose, at its discretion, to receive any or all of the services
offered under the Administrative Services Agreement. CNA Surety, however, is
under no obligation to purchase any services under the Administrative Services
Agreement.
Services to be provided and offered under the Administrative Services
Agreement include the following: telecommunications, computer access and
support, human resource assistance, accounting, legal, financial and
administrative support, marketing, strategic management and direction,
investment advice and various other business services.
The CCC Surety Operations neither own nor directly lease any office space.
The CCC Surety Operations share in the cost of CCC owned or leased facilities
throughout the United States. Such costs have been directly allocated to the CCC
Surety Operations based upon the estimated space used by its operations. CCC
Surety Operations currently use approximately 72,500 square feet of space and
related personal property in CCC's 41 branch locations and home office in
Chicago, Illinois. CNA Surety may terminate its use of these locations as set
forth in the Administrative Services Agreement, without penalty, by providing
CCC with 60 days written notice.
The Administrative Services Agreement also provides for prior notice of any
termination of the underlying leases of real property from third parties and an
option to CNA Surety to purchase the personal property owned by CCC and leased
to CNA Surety under the Administrative Services Agreement at the end of three
years for the price of $1.
VOTING AGREEMENT
The Major Stockholder and Messrs. Esselborn and Dammeyer (collectively the
"Capsure Participants"), have entered into the Voting Agreement, pursuant to
which they have agreed to vote all Capsure Common Stock they may beneficially
own in favor of the Reorganization Agreement and Merger and against any
competing Acquisition Proposal entered into within 12 months following the
receipt of such Acquisition Proposal. Subsequent to the execution of the Voting
Agreement, the Major Stockholder distributed 486,760 shares of Capsure Common
Stock to one of its limited partners, which in turn, transferred such shares to
a charitable foundation. The charitable foundation, pursuant to the terms of the
Voting Agreement, has agreed to be bound by the terms of the Voting Agreement.
In addition, the charitable foundation, together with the
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<PAGE> 59
Capsure Participants have each granted CCC an irrevocable proxy to vote their
shares if the Capsure Participants or the charitable foundation do not vote
their shares in accordance with the terms of the Voting Agreement. The Voting
Agreement shall be in effect until the earlier of December 31, 1997 or the
termination of the Reorganization Agreement under certain circumstances. As of
the Record Date, the Capsure Participants together with the charitable
foundation beneficially owned 4,114,629 shares, or 26.0% of Capsure Common
Stock. The foregoing summary is qualified in its entirety by reference to the
complete text of the Voting Agreement, which is attached hereto as Appendix E
and hereby incorporated herein by reference.
REGISTRATION RIGHTS AGREEMENT
As a condition to Capsure's obligation to effect the Merger, CNA Surety is
required to execute the Registration Rights Agreement, which provides that the
Major Stockholder will have the right, for the period commencing six months
following the Effective Time through the third anniversary of the Effective
Time, to require CNA Surety to register for sale all or any portion of the CNA
Surety Common Stock owned by the Major Stockholder and its permitted assigns,
including the charitable foundation referenced above (collectively, the
"Registrable Securities"). The Major Stockholder will have the right to "demand"
CNA Surety to effect (i) one underwritten registration of all or part of the
Major Stockholder's CNA Surety Common Stock, provided that any such demand
registration must cover a minimum of 500,000 shares of CNA Surety Common Stock,
or (ii) one "shelf" registration pursuant to Rule 415 under the Securities Act
for all, but not less than all, of Major Stockholder's shares of CNA Surety
Common Stock. Such demand registration may be postponed by CNA Surety for a
limited period of time if such registration would interfere with any proposed
offering of shares or pending financing, or would require the disclosure of
material information which CNA Surety has a bona fide business purpose for
preserving as confidential, such as a material acquisition, corporate
reorganization or other significant transaction involving CNA Surety.
If CNA Surety seeks to register any CNA Surety Common Stock while the
Registration Rights Agreement is in effect, Major Stockholder has the right to
request that CNA Surety include any or all of its CNA Surety Common Stock in the
proposed offering. CNA Surety must provide Major Stockholder with prompt written
notice of CNA Surety's intention to file the registration statement and Major
Stockholder shall have a period of 15 business days to notify CNA Surety of its
intention to register shares of CNA Surety Common Stock for sale in such
offering. CNA Surety shall use its best efforts to register such securities,
subject to constraints of marketability of the proposed offering, as set forth
in a written opinion of the managing underwriters. In the event marketing
constraints prevent the registration of all Registrable Securities requested to
be registered, such Registrable Securities shall be registered, to the extent
marketable, as set forth in the written opinion of such managing underwriters.
In registering Registrable Securities, CNA Surety will use its best
efforts, which include relevant filings with the Commission, relevant notices
and necessary disclosures to requesting parties, and customarily required
representations and warranties to underwriters.
Major Stockholder will pay all underwriting discounts, commissions and
transfer taxes related to the Registrable Securities offered for sale by Major
Stockholder as well as the fees and disbursements of its counsel. All other fees
and expenses in connection with the registration of the Registrable Securities
will be borne by CNA Surety.
CNA Surety agrees to indemnify Major Stockholder and the prospective
underwriters of registrations of Registrable Securities for liabilities arising
out of violations by CNA Surety of applicable laws relating to the registration
statement and for material misstatements and omissions in information not
provided by Major Stockholder included in the registration statement. Likewise,
Major Stockholder agrees to indemnify CNA Surety or any underwriter for any
liabilities arising out of violations of applicable laws relating to its offer
and sale of Registrable Securities and for material misstatements and omissions
made in the registration statement in reliance upon information provided to CNA
Surety by Major Stockholder. Contribution will also be available to CNA Surety
and Major Stockholder to the extent that indemnification from an indemnifying
party to an indemnified party is unavailable.
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<PAGE> 60
AMENDMENT TO CAPSURE CERTIFICATE OF INCORPORATION
(PROPOSAL NUMBER 2)
If, and only if, the Reorganization Agreement and Merger are approved by
the Capsure stockholders, the Capsure Board proposes to adopt the Amendment
deleting, in its entirety, Article Twelfth to Capsure's certificate of
incorporation. The approval of the Amendment is a condition to CCC's and CNA
Surety's obligation to consummate the Merger and the failure to approve and
adopt the Amendment will prevent the consummation of the Merger.
PROPOSED AMENDMENT AND REASONS THEREFOR
The Capsure certificate of incorporation currently contains a provision
designed to preserve and utilize the NOLs Capsure is currently entitled to use
under the Code.
The provisions of Article Twelfth were adopted by the stockholders of
Capsure at the annual meeting held on August 2, 1988 in order to facilitate
Capsure's ability to preserve and utilize its NOLs by restricting the ability of
certain stockholders to acquire additional securities. At the time of adoption
of Article Twelfth, Capsure had approximately $300 million of NOLs in the
aggregate. The provisions of Article Twelfth of the certificate of incorporation
provide, in part, that until after December 31, 1998, any person who owns common
stock equal to or exceeding 5% of the total then outstanding Capsure Common
Stock (a "5% Stockholder") is prohibited from acquiring additional stock or
transferring any such stock unless: (i) the transfer does not jeopardize
Capsure's ability to preserve and utilize its NOLs; (ii) such transfer is
pursuant to a merger or consolidation in which holders of Capsure Common Stock
are offered cash for their shares and the acquiror will own at least a majority
of the outstanding shares of Capsure Common Stock; or (iii) the increase in
ownership is due to the exercise of warrants issued to the Capsure stockholders
on a pro rata basis. Article Twelfth also provides that the acquisition of
Capsure Common Stock or other securities made in violation of these limitations
will be null and void.
Unless the Amendment is approved and adopted, the Merger would violate the
terms of Article Twelfth of the Capsure certificate of incorporation. Article
Twelfth would void the exchange of shares of Capsure Common Stock for shares of
CNA Surety Common Stock by 5% Stockholders as required by the Reorganization
Agreement, making the Merger as currently proposed impossible to accomplish.
The proposed Amendment to the Capsure certificate of incorporation deletes
Article Twelfth in its entirety and renumbers the subsequent articles therein.
The proposed Amendment will become effective immediately prior to the
consummation of the Merger and will continue in effect until amended or
repealed. The proposed Amendment requires the affirmative vote of the holders of
a majority of the outstanding shares of Capsure Common Stock entitled to vote at
the Special Meeting.
In connection with its examination of whether the Merger is in the best
interests of the Capsure stockholders, the Capsure Board considered the impact
of the limitations on the utilization of the NOLs relating to a change in
control and concluded that the potential benefits and value of the Merger to the
Capsure stockholders outweighed the value of the lost NOLs. See "The Merger --
Background and Reasons for the Merger."
The Capsure Board recommends that stockholders vote FOR the adoption of the
proposed Amendment.
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<PAGE> 61
MARKET FOR CAPSURE COMMON STOCK
The Capsure Common Stock trades on the NYSE under the symbol CSH. On August
5, 1997, the last reported sale price for the Capsure Common Stock was $13 5/16
per share. On December 9, 1996, the date prior to Capsure's public announcement
that it was involved in merger negotiations, the last reported sale price for
the Capsure Common Stock was $10 3/8 per share. On December 19, 1996, prior to
the public announcement of the Merger and the execution of the Reorganization
Agreement, the last reported sale price for the Capsure Common Stock was $11 7/8
per share.
The following table shows the range of high and low sale prices for shares
of Capsure Common Stock as reported on the NYSE for each calendar quarter of the
past two years:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
3rd Quarter (through August 5, 1997)...................... $14.00 $12.44
2nd Quarter............................................... 12.94 11.25
1st Quarter............................................... 13.13 10.38
1996
4th Quarter............................................... $18.38 $ 8.00(1)
3rd Quarter............................................... 18.88 16.63
2nd Quarter............................................... 18.75 15.75
1st Quarter............................................... 17.63 15.00
1995
4th Quarter............................................... $17.88 $13.13
3rd Quarter............................................... 14.88 13.00
2nd Quarter............................................... 14.88 12.50
1st Quarter............................................... 14.38 12.38
</TABLE>
- -------------------------
(1) The sale prices for the 4th quarter of 1996 and thereafter reflect the
payment of the $10.00 per share Special Distribution. On October 7, 1996,
the first business day following payment of the Special Distribution, the
Capsure Common Stock opened at a price per share that was $10.00 less than
the closing price per share on the previous business day.
The number of stockholders of record of Common Stock on June 30, 1997, was
approximately 2,300.
DIVIDEND POLICY
Following a review of strategic alternatives for the deployment of its
capital, the Capsure Board declared the Special Distribution on September 11,
1996, in the amount of $10.00 per share of Capsure Common Stock. The Special
Distribution was funded from $62 million of borrowings under Capsure's revolving
credit agreement and approximately $94 million from available cash and
marketable securities accumulated at the parent company level, approximately $77
million of which was raised in connection with the sale of United Capitol. See
"The Merger -- Background and Reasons for the Merger."
Capsure also intends to pay to its stockholders of record as of the date
immediately prior to the Effective Time, the Closing Dividend. The Closing
Dividend, which will be declared prior to the Effective Time, is conditioned
upon the consummation of the Merger and will be payable as soon as practicable
following the Effective Time. If the Merger were to be consummated on September
30, 1997, the aggregate amount of the Closing Dividend would be $10.6 million.
Assuming that there were 16,652,485 shares of Capsure Common Stock outstanding
(which includes the assumed exercise of 802,240 vested Capsure Options) on the
record date of the Closing Dividend, the Capsure stockholders would receive a
Closing Dividend of $0.64 per share.
Capsure did not pay any dividends or make any cash distributions prior to
the Special Distribution and will not pay any additional dividends to Capsure
stockholders prior to the consummation of the Merger.
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<PAGE> 62
MARKET FOR CNA SURETY COMMON STOCK
CNA Surety is a newly-formed corporation. There has not been, and prior to
the Merger, there will not be, any public market for shares of CNA Surety Common
Stock. See "Risk Factors -- No Prior Public Market for CNA Surety Common Stock;
Possible Volatility of Stock Price."
DIVIDEND POLICY
As a newly-formed corporation, CNA Surety has never declared or paid a cash
dividend on the CNA Surety Common Stock. The CNA Surety Board is expected to
consider a regular quarterly dividend for CNA Surety after consummation of the
Merger. The declaration and payment of future dividends to holders of CNA Surety
Common Stock will be at the discretion of the CNA Surety Board and will depend
upon many factors, including CNA Surety's financial condition, operating
characteristics, projected earnings and growth, capital requirements of the
Insurance Subsidiaries, debt service obligations and such other factors as the
CNA Surety Board deems relevant. There can be no assurance that any future
dividends will be paid. For a discussion of the liquidity and capital resources
of CNA Surety, see "Description of CNA Surety -- Liquidity and Capital
Resources" and "Unaudited Pro Forma Consolidated Financial Information -- Notes
to Unaudited Pro Forma Consolidated Financial Information."
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<PAGE> 63
DESCRIPTION OF CCC SURETY OPERATIONS
GENERAL
CNAF was incorporated in 1967 as the parent company of Continental Casualty
Company, incorporated in 1897, and Continental Assurance Company ("CAC"),
incorporated in 1911. In 1975, CAC became a wholly-owned subsidiary of
Continental Casualty Company. In late 1994, CNAF reached an agreement to acquire
all the outstanding common stock of The Continental Corporation ("Continental")
for approximately $1.1 billion and the merger was completed on May 10, 1995. As
a result and upon consummation of the merger, Continental became a wholly-owned
subsidiary of CNAF. Continental, a New York corporation incorporated in 1968, is
an insurance holding company. The principal operating insurance companies of
Continental are Continental Insurance Company and its affiliates ("CIC").
CNAF's subsidiaries are multi-line insurers and as such underwrite
property, casualty, life, and accident and health coverages. In addition, CNAF
subsidiaries offer surety and fidelity policies and bonds. The principal market
for these insurance lines is the United States.
Prior to the acquisition of Continental in May 1995, CNAF, through its
subsidiaries, wrote various contract and commercial surety bonds. Such insurance
was written principally through Continental Casualty Company and two of its
affiliates, American Casualty Company of Reading, Pennsylvania and National Fire
Insurance Company of Hartford. Continental Casualty Company and certain of its
affiliated property and casualty insurers participate in pooling arrangements to
share in their combined underwriting results.
CNAF surety operations increased significantly as a result of the
acquisition of Continental in May 1995. Prior to the acquisition, both CCC and
CIC were among the top 10 national writers of surety products, according to
Surety Association of America ("SAA") statistics. Gross written premiums for
1994 were approximately $95 million for each company and each company had a
similar mix between contract and commercial surety business. CNAF has sought to
move all new and renewal CIC surety business to CCC, a process which has been
substantially completed. CCC and CIC have agreed to transfer their surety
business to CNA Surety. The combined operations are referred to herein
collectively as the "CCC Surety Operations."
The CCC Surety Operations are conducted from the home office of CNAF at CNA
Plaza, Chicago, Illinois 60685. Of the 320 employees assigned to the CCC Surety
Operations, approximately 75 employees are involved in underwriting, claims and
administration in the home office; and approximately 245 employees are located
in the 41 full-service branch offices located throughout the United States and
are principally involved in underwriting, production and processing. The CCC
Surety Operations offer surety products in all 50 states, Puerto Rico and the
District of Columbia.
PRODUCTS
Unlike a standard, two-party insurance policy, surety bonds are three-party
agreements in which the issuer of the bond (the surety) joins with a second
party (the principal) in guaranteeing to a third party (the owner/obligee) the
fulfillment of some obligation on the part of the principal. According to SAA
industry estimates, approximately 80% of the $2.7 billion United States surety
market is represented by bonds or policies required by federal statutes, state
laws, and local ordinances. These bonding requirements range from federal
construction projects, where the contractor is required to post performance and
payment bonds which guarantee performance of contracts to the government as well
as payment of bills to subcontractors and suppliers, to license and permit bonds
which guarantee compliance with legal requirements for business operations. In
general, under surety bonds, the surety company has certain rights of
indemnification and reimbursement from the principal, allowing the surety
company to pursue recovery of monies paid under its bond.
The surety business is comprised of contract surety business and commercial
surety business, although the products comprising each are sold through the same
distribution system.
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Contract bond guarantee obligations include the following:
Bid bonds: used to prequalify contractors submitting proposals on
potential contracts.
Performance bonds: guarantee to the owner the performance of the
contractor's obligations according to the terms and conditions of the
contract.
Payment bonds: guarantee payment of the contractor's obligations under
the contract for labor, subcontractors, and materials supplied to the
project. Payment bonds are utilized in public projects where liens are not
permitted.
Other examples of contract bonds are completion, maintenance and supply
bonds.
Commercial surety business is comprised of bonds covering obligations
typically required by law or regulation, such as the following:
License and Permit bonds: required by statutes or ordinances for a
number of purposes including guaranteeing the payment of certain taxes and
fees and providing consumer protection as a condition to granting licenses
related to selling real estate or motor vehicles and contracting services.
Judicial and Fiduciary bonds: required by statutes, courts or legal
documents for the protection of those on whose behalf a fiduciary acts.
Examples of such fiduciaries include executors and administrators of
estates, and guardians of minors and incompetents.
Public Official bonds: required by statutes and ordinances to
guarantee the lawful and faithful performance of the duties of office by
public officials.
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The following table provides selected production information relating to
the CCC Surety Operations for each of the last three calendar years.
<TABLE>
<CAPTION>
% OF % OF % OF
1996 TOTAL 1995 TOTAL 1994 TOTAL
---- ----- ---- ----- ---- -----
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BOND PENALTY)
<S> <C> <C> <C> <C> <C> <C>
Gross written premiums ("GWP")(1)
Contract............................. $108,130 69.7% $ 94,569 69.2% $ 65,528 69.6%
Commercial
License & permit.................. 33,051 21.3 28,190 20.6 20,706 22.0
Judicial & fiduciary.............. 11,714 7.5 11,007 8.1 6,313 6.7
Public official................... 1,383 0.9 1,166 0.9 437 0.5
Other............................. 930 0.6 1,673 1.2 1,198 1.2
-------- ----- -------- ----- -------- -----
Total commercial.................. 47,078 30.3 42,036 30.8 28,654 30.4
-------- ----- -------- ----- -------- -----
Total GWP.............................. $155,208 100.0% $136,605 100.0% $ 94,182 100.0%
======== ===== ======== ===== ======== =====
Percentage of total GWP generated by
largest agency....................... 2.1% 1.6% 3.5%
Percentage of total GWP generated in
top 5 states......................... 35.6% 36.4% 35.5%
Net written premiums(1)
Contract............................. $103,445 71.9% $ 88,566 72.6% $ 63,176 77.0%
Commercial........................... 40,459 28.1 33,446 27.4 18,888 23.0
-------- ----- -------- ----- -------- -----
Total................................ $143,904 100.0% $122,012 100.0% $ 82,064 100.0%
======== ===== ======== ===== ======== =====
Net earned premiums(1)
Contract............................. $104,115 69.8% $ 96,841 74.2% $ 57,541 73.8%
Commercial........................... 44,954 30.2 33,762 25.8 20,440 26.2
-------- ----- -------- ----- -------- -----
Total................................ $149,069 100.0% $130,603 100.0% $ 77,981 100.0%
======== ===== ======== ===== ======== =====
Number of bonds in force at year-end(2)
Contract............................. 18,127 16.7% 21,664 17.4% 10,912 17.2%
Commercial........................... 90,383 83.3 102,929 82.6 52,523 82.8
-------- ----- -------- ----- -------- -----
Total................................ 108,510 100.0% 124,593 100.0% 63,435 100.0%
======== ===== ======== ===== ======== =====
Average bond penalty(3)................ $234,000 $228,000 $254,000
======== ======== ========
</TABLE>
- -------------------------
(1) Gross and net written premiums and net earned premiums include the surety
operations of CIC since its acquisition in May 1995 which, accordingly,
affects the comparability of this data for all years presented. See
"Management's Discussion and Analysis of the Statements of Certain Assets
and Liabilities and the Statements of Certain Revenues and Direct Operating
Expenses of the CCC Surety Operations" for further discussion of premiums
written and the re-underwriting of the CIC surety book of business.
(2) The number of bonds in force includes the CIC surety operations at year-end
1996 and 1995 which affects the comparability of this data to year-end 1994.
The number of bonds in force decreased from 1995 to 1996 due primarily to
the re-underwriting of the CIC surety book of business.
(3) The average bond penalty is a measure of the average limit of liability
associated with in-force contract and commercial surety bonds at each
reporting period.
In 1996, the agency with which the CCC Surety Operations did the most
business generated approximately $3.2 million of gross written premiums, or 2.1%
of aggregate gross written premiums. The ten agencies which did the most
business with the CCC Surety Operations produced a total of $16.3 million or
10.5% of aggregate gross written premiums.
Although the CCC Surety Operations have continually considered new products
to address the surety needs of its clients, the products comprising the surety
market have been relatively stable for many years.
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MARKETING
The CCC Surety Operations market contract and commercial surety bonds in
all 50 states, as well as Puerto Rico and the District of Columbia. The bonds
are marketed primarily through independent producers, including multi-line
agents and brokers such as surety specialists, many of whom are members of the
National Association of Surety Bond Producers. Relationships with these
independent producers are maintained through various local branch offices of the
CCC Surety Operations, of which there are currently 41. The CCC Surety
Operations do business with approximately 3,500 agents and brokers throughout
the United States.
The following table sets forth the distribution of the business of the CCC
Surety Operations by state based upon gross written premiums in each of the last
three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gross Written Premiums by State
California........................................ 10.0% 10.6% 9.5%
Texas............................................. 9.0 10.3 9.2
Florida........................................... 6.3 5.6 6.5
New York.......................................... 6.0 6.2 5.7
Illinois.......................................... 4.3 3.7 4.6
Pennsylvania...................................... 4.2 5.2 5.2
Indiana........................................... 3.1 2.8 4.0
Georgia........................................... 3.0 2.8 2.1
All Other......................................... 54.1 52.8 53.2
----- ----- -----
Total.......................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Contract Surety Marketing
With respect to the contract surety business, the core focus for the CCC
Surety Operations are contractors with less than $50 million in contracted work
in progress. However, the CCC Surety Operations also service small contractors
(less than $5 million in work in progress), medium contractors ($5-$25 million)
and the lower end of the large contractors ($25-$150 million). These small and
medium contractors, as a group, represent a significant portion of the United
States construction market. Currently, the CCC Surety Operations have a small
number of accounts with contracted work in progress in excess of $150 million,
the majority of which have been clients of the CCC Surety Operations for more
than ten years. Some of these accounts are maintained on a "co-surety" or joint
insurer basis with other sureties in order to manage aggregate exposure.
The CCC Surety Operations also participate in the non-standard contract
market, utilizing the federal government's Small Business Administration ("SBA")
preferred surety bond guarantee program ("Plan B"). Plan B is a reinsurance
program that provides 70% coverage in exchange for 23% of the premium.
CNA Surety management anticipates that the strategic marketing focus of the
CCC Surety Operations will continue to be on the surety needs of those
contractors with less than $50 million in contracted work in progress. See
"Description of CNA Surety -- CNA Surety Merger Strategy." In addition, it is
intended that the CCC Surety Operations will continue to maintain a presence in
the non-standard market (through the SBA and similar programs), and may market
selectively to large contractors with work in progress in excess of $150
million, in each case utilizing a joint insurer or co-surety approach.
Commercial Surety Marketing
A large portion of the commercial surety market is comprised of small
obligations represented by licenses and permits that are routine in nature and
require minimal underwriting. Customers are focused principally on prompt and
efficient service. While most of this market is represented by small entities,
the CCC Surety Operations also seek to service the bonding needs of larger,
"Fortune 1000" firms, where a high level of
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technical and underwriting skill is required. Customers in this latter market
are sophisticated, professional buyers of commercial surety bonds who demand
exceptional service and expertise. In that regard, the CCC Surety Operations
maintain a specific underwriting staff in its home office dedicated to this
market. See "Description of CNA Surety -- CNA Surety Merger Strategy."
The CCC Surety Operations also direct their marketing to particular
industries or classes of bonds on a broad basis. For instance, the CCC Surety
Operations maintain programs directed at mortgage broker compliance bonds, games
of chance bonds (guaranteeing payment of prizes from promotional games) and
grain warehouse dealers bonds (protecting funds associated with grain storage).
The CCC Surety Operations recognize that continued success in the
commercial surety market will depend in part on the enhancement of automation
and the centralization of processing, and the CCC Surety Operations' strategic
plans include such enhancements.
UNDERWRITING
The underwriting philosophy of the CCC Surety Operations is conservative
and focused on long-term relationships established at the local level with
centralized home office authority. While this focus may limit growth during soft
market conditions, management believes the approach results in a stable presence
and profitable underwriting results over the long term.
The extent and sophistication of underwriting activity varies by type of
risk. Contractor accounts and large commercial surety customers undergo
extensive credit, financial and managerial review and analysis on a regular
basis. Certain classifications of bonds, such as fiduciary and court appeal
bonds, also require more extensive underwriting.
COMPETITION
The surety business is highly competitive. According to the SAA, an
industry trade organization comprised of approximately 650 members which are
direct writers of surety and fidelity bonds, in 1995, the surety market was
represented by aggregate gross premiums in excess of $2.7 billion. While no one
company dominates the market (the largest insurance company offering surety
bonds has a 6% share of the overall surety market, according to 1995
SAA-published statistics for the U.S.), the ten largest surety companies account
for nearly 50% of the total U.S. surety market. Primary competitors of the CCC
Surety Operations are approximately 20 national, multi-line companies
participating in the surety business. In addition, there are numerous regional
and specialty companies actively participating in the surety market throughout
the country. Management of the CCC Surety Operations believes that its principal
competitive strengths are capacity, service and accessibility and long-term
relationships with agents and accounts.
While the surety industry has experienced slow premium growth, competition
has increased as a result of nine years of profitable underwriting experience.
This competition has typically manifested itself through reduced premium rates
and greater tolerance for relaxation of underwriting standards. Management of
the CCC Surety Operations believes such competition will continue.
REGULATION
The insurance industry is subject to comprehensive and detailed regulation
and supervision by each state throughout the United States. Each state has
established supervisory agencies with broad administrative powers relative to
licensing insurers and agents, prescribing the form and content of statutory
financial reports, regulating solvency and controlling the type and amount of
investments permitted. Regulatory powers also extend to premiums charged which
require that rates not be excessive, inadequate or unfairly discriminatory. In
addition, the operating companies are subject to periodic financial and market
conduct examinations by state regulators.
The CCC Surety Operations have been conducted through several wholly-owned
insurance subsidiaries of CNAF and the surety business has represented only a
small portion of the business of such subsidiaries. Because the insurance
regulations generally focus on the operating companies, the CCC Surety
Operations
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have been only indirectly impacted by the insurance regulations. Upon
consummation of the Merger, the businesses of CCC Surety Operations will be
transferred to the Insurance Subsidiaries of Capsure, and will therefore be
subject to insurance regulations through the Insurance Subsidiaries. See
Capsure's Annual Report on Form 10-K/A for the year ended December 31, 1996,
incorporated herein by reference, for a discussion of the regulation and
supervision of the Insurance Subsidiaries. Management believes that the
Insurance Subsidiaries will continue to comply with the applicable insurance
regulations following the Merger.
The CCC Surety Operations have qualified as an approved surety for federal
and other public works project bonds pursuant to U.S. Department of Treasury
Circular 570. As of July 1, 1997, the individual surety bond limitation for CCC
was $345.3 million.
REINSURANCE
The CCC Surety Operations cede a portion of their surety bond exposures to
other insurers and reinsurers in order to limit maximum loss, provide greater
diversification of risk and minimize aggregate exposures. The reinsurance
coverages address the contract and commercial product lines separately with the
CCC Surety Operations' retentions varying by principal or face amount of bond.
Because the ceding of insurance does not discharge the primary liability of the
original insurer, the CCC Surety Operations place their reinsurance with
qualified carriers after conducting a detailed review of the nature of the
obligation and a thorough assessment of the reinsurers' credit qualifications
and claims settlement performance and capabilities.
For contract surety business, an excess of loss program is in effect. It
provides for coverage on a per principal basis, equal to 90% of $55 million in
excess of a $5 million retention. For commercial surety business, a surplus
share treaty is utilized, providing per bond coverage at 50% of $40 million in
excess of a $3 million net retention. The CCC Surety Operations' largest
recoverable from a single reinsurer, including prepaid reinsurance premiums, was
approximately $3.4 million and $6.9 million at December 31, 1996 and December
31, 1995, respectively. The CCC Surety Operations have not experienced any
difficulties collecting from reinsurers, however, there can be no assurance that
this experience will continue in the future. See "Description of CNA Surety --
Reinsurance."
EMPLOYEE RELATIONS
The CCC Surety Operations have approximately 320 full-time equivalent
employees and have experienced satisfactory labor relations. CNAF has never
experienced a work stoppage.
PROPERTIES
The CCC Surety Operations neither own nor directly lease any office space,
but share in the cost of CCC owned or leased facilities throughout the United
States. Such costs have been directly allocated to the CCC Surety Operations
based upon the estimated space used by its operations. CCC Surety Operations
currently use approximately 72,500 square feet of space and related personal
property in CCC's 41 branch locations and home office in Chicago, Illinois. CNA
Surety may terminate its use of these locations as set forth in the
Administrative Services Agreement, without penalty, by providing CCC with 60
days written notice. For 1996, the charge to the CCC Surety Operations for
occupied facilities totaled $1.3 million. See "The Reorganization Agreement and
Other Transaction Agreements -- Administrative Services Agreement."
LOSS RESERVE DEVELOPMENT
The CCC Surety Operations' loss and LAE reserves are based on undiscounted
(i) case basis estimates for claims reported on direct business, adjusted in the
aggregate for ultimate loss expectations, (ii) estimates of unreported losses
based upon past experience, (iii) estimates of losses on assumed insurance, (iv)
estimates of future expenses to be incurred in settlement of claims and (v)
estimates of claim recoveries, exclusive of reinsurance recoveries which are
reported as an asset. In establishing these estimates, consideration is given to
current conditions and trends as well as past experience of the CCC Surety
Operations and the surety industry.
The loss reserve development table below illustrates the change over time
of reserves established for surety losses and loss expense at the end of various
calendar years. The first section shows the reserves as originally
62
<PAGE> 69
reported at the end of the stated year. The second section shows the cumulative
amounts paid as of the end of successive years with respect to that reserve
liability. The third section shows re-estimates of the original recorded reserve
as of the end of each successive year which is the result of management's
expanded awareness of additional facts and circumstances that pertain to the
unsettled claims. The last section compares the latest re-estimated reserve to
the reserve originally established, and indicates whether or not the original
reserve was adequate or inadequate to cover the estimated costs of unsettled
claims.
The loss reserve development table is cumulative as of each December 31,
and, therefore, ending balances should not be added since the amount at the end
of each calendar year includes activity for both the current and prior years.
The loss reserve development table reflects the reserves of the CCC Surety
Operations and the historical development is not necessarily indicative of
future results.
<TABLE>
<CAPTION>
CALENDAR YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1986(1) 1987(1) 1988(1) 1989(1) 1990(1) 1991(1) 1992(1)
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net reserves for losses and
loss adjustment
expenses.................. $15,861 $33,236 $41,278 $34,614 $44,598 $35,764 $34,105
Net Paid (Cumulative) as of:
One year later.............. 7,041 6,937 5,099 841 6,446 8,699 11,173
Two years later............. 11,693 10,865 4,762 2,229 10,437 12,636 15,364
Three years later........... 14,429 10,458 5,174 3,902 12,207 15,855 16,139
Four years later............ 14,726 10,723 6,534 5,253 15,355 15,992 16,480
Five years later............ 15,016 11,785 7,568 5,703 15,228 16,338 --
Six years later............. 15,903 12,524 7,778 7,077 15,457 -- --
Seven years later........... 16,824 12,639 8,929 7,218 -- -- --
Eight years later........... 16,962 13,604 9,021 -- -- -- --
Nine years later............ 17,969 13,665 -- -- -- -- --
Ten years later............. 18,074 -- -- -- -- -- --
Net Reserves Re-estimated as
of:
End of initial year......... 15,861 33,236 41,278 34,614 44,598 35,764 34,105
One year later.............. 26,581 30,831 28,577 31,213 28,625 33,747 31,606
Two years later............. 24,847 26,194 25,494 19,579 27,951 27,103 28,619
Three years later........... 25,733 24,167 18,812 18,029 22,775 24,100 24,553
Four years later............ 25,697 21,867 17,730 13,172 20,562 21,912 22,503
Five years later............ 23,266 20,622 13,532 11,109 20,293 20,202 --
Six years later............. 22,046 17,144 12,669 11,335 18,000 -- --
Seven years later........... 19,209 17,416 12,698 9,017 -- -- --
Eight years later........... 19,242 17,148 10,679 -- -- -- --
Nine years later............ 19,316 15,197 -- -- -- -- --
Ten years later............. 19,185 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total net (deficiency)
redundancy................ $(3,324) $18,039 $30,599 $25,597 $26,598 $15,562 $11,602
======= ======= ======= ======= ======= ======= =======
<CAPTION>
CALENDAR YEARS ENDED DECEMBER 31
---------------------------------------
1993(1) 1994(2) 1995(3) 1996(3)
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net reserves for losses and
loss adjustment
expenses.................. $32,936 $35,048 $114,126 $103,684
Net Paid (Cumulative) as of:
One year later.............. 5,868 5,124 35,270 --
Two years later............. 8,089 7,863 -- --
Three years later........... 8,857 -- -- --
Four years later............ -- -- -- --
Five years later............ -- -- -- --
Six years later............. -- -- -- --
Seven years later........... -- -- -- --
Eight years later........... -- -- -- --
Nine years later............ -- -- -- --
Ten years later............. -- -- -- --
Net Reserves Re-estimated as
of:
End of initial year......... 32,936 35,048 114,126 103,684
One year later.............. 24,482 22,042 104,384 --
Two years later............. 18,431 20,111 -- --
Three years later........... 16,654 -- -- --
Four years later............ -- -- -- --
Five years later............ -- -- -- --
Six years later............. -- -- -- --
Seven years later........... -- -- -- --
Eight years later........... -- -- -- --
Nine years later............ -- -- -- --
Ten years later............. -- -- -- --
------- ------- -------- --------
Total net (deficiency)
redundancy................ $16,282 $14,937 $ 9,742 --
======= ======= ======== ========
</TABLE>
- -------------------------
(1) Reflects surety reserves of CCC only and does not include surety reserves of
CIC which were acquired on May 10, 1995. Accordingly, the reserve
development (net reserves recorded at the end of the year, as initially
estimated, less net reserves reestimated as of subsequent years) relates
only to the surety operations of CCC and does not include CIC.
(2) Reserve development related to the 1994 surety reserves of CCC, as
determined by the balances in this column, plus reserve development related
to the surety reserves of CIC, acquired on May 10, 1995, which are not
reflected in this column, were recorded by the CCC Surety Operations in 1995
and subsequent periods.
(3) Includes the combined surety reserves and related reserve development of CCC
and CIC.
The CCC Surety Operations, consistent with sound insurance reserving
practices, regularly adjust reserve estimates in subsequent reporting periods as
new facts and circumstances emerge that indicate that the previous estimates
need to be modified. These adjustments, referred to as "reserve development,"
are
63
<PAGE> 70
inevitable given the complexities of the reserving process. This reserve
development reflects the effects of the CCC Surety Operations' ongoing
evaluation of reserve levels.
The following table presents a reconciliation between the beginning and
ending balance of loss and LAE reserves for the years ended December 31, 1996,
1995 and 1994 and the six months ended June 30, 1997 and 1996 (dollars in
thousands). For an explanation of the substantial revision of prior year
reserves recorded in the first quarter of 1997, see "Management's Discussion and
Analysis of the Statements of Certain Assets and Liabilities and the Statements
of Certain Revenues and Expenses of the CCC Surety Operations -- Loss and LAE
Reserves".
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
-------------------- -------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reserves at beginning of period:
Gross...................................... $119,151 $138,657 $138,657 $ 48,818 $53,751
Ceded reinsurance.......................... 15,467 24,531 24,531 13,770 20,815
-------- -------- -------- -------- -------
Net reserves at beginning of period...... 103,684 114,126 114,126 35,048 32,936
CIC surety reserves at
acquisition -- net....................... -- -- -- 64,780 --
-------- -------- -------- -------- -------
Total net reserves.................... 103,684 114,126 114,126 99,828 32,936
-------- -------- -------- -------- -------
Net incurred losses and loss adjustment
expenses:
Provision for insured events of current
period................................ 15,262 21,501 42,748 43,286 17,034
Decrease in provision for insured events
of prior periods(1)................... (35,000) (1,605) (9,742) (10,846) (8,454)
-------- -------- -------- -------- -------
Total net incurred.................... (19,738) 19,896 33,006 32,440 8,580
-------- -------- -------- -------- -------
Net payments attributable to:
Current period events.................... 5,803 3,501 7,728 1,648 600
Prior period events...................... 3,131 25,899 35,720 16,494 5,868
-------- -------- -------- -------- -------
Total net payments.................... 8,934 29,400 43,448 18,142 6,468
-------- -------- -------- -------- -------
Net reserves at end of period.............. 75,012 104,622 103,684 114,126 35,048
Ceded reinsurance at end of period......... 5,427 22,813 15,467 24,531 13,770
-------- -------- -------- -------- -------
Gross reserves at end of period....... $ 80,439 $127,435 $119,151 $138,657 $48,818
======== ======== ======== ======== =======
</TABLE>
- -------------------------
(1) This favorable development is the result of positive claim settlement
experience. There is no assurance that such past experience will continue in
future periods.
ASBESTOS AND ENVIRONMENTAL CLAIMS
The CCC Surety Operations do not bond contractors that specialize in
environmental remediation work. The CCC Surety Operations do however bond
several accounts that have incidental environmental exposure with respect to
which the CCC Surety Operations provide limited bonding programs. In the
commercial surety market, the CCC Surety Operations provide bonds to large
corporations that are in the business of mining various minerals and are
obligated to post reclamation bonds that guarantee that property which was
disturbed during mining is returned to an acceptable condition when the mining
is complete. While no environmental responsibility is overtly provided by
commercial or contract bonds, some risk of environmental exposure may exist if
the surety were to assume certain rights of ownership of the property in the
completion of a defaulted project or through salvage recovery.
To date, the CCC Surety Operations have received no environmental claim
notices nor is management aware of any potential environmental claims.
INVESTMENTS
CNAF did not customarily allocate the investment portfolio or equity of its
operating subsidiaries to business units such as the CCC Surety Operations.
Accordingly, there is no investment information for the CCC Surety Operations.
See "Description of CNA Surety -- Investments."
A.M. BEST RATING
The CCC Surety Operations are conducted through CCC and CIC, which have
received ratings of A and A- respectively, from A.M. Best. See "Description of
CNA Surety -- A.M. Best Rating."
64
<PAGE> 71
SELECTED FINANCIAL DATA -- CCC SURETY OPERATIONS
The following selected financial information for the CCC Surety Operations
is derived from and should be read in conjunction with the more detailed
information or unaudited interim and audited annual financial statements
included elsewhere in this Proxy Statement/Prospectus. The selected financial
information of CCC Surety Operations does not include data with respect to
assets, liabilities (other than insurance reserves), and equity because CNAF did
not customarily allocate the investment portfolio or equity of its operating
subsidiaries to its business units like CCC Surety Operations. Dollar amounts in
the following table and footnotes are presented in thousands.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31
------------------- ----------------------------------------------------
1997 1996 1996 1995(1) 1994 1993 1992
---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross written
premiums............. $ 73,568 $ 75,551 $155,208 $136,605 $ 94,182 $ 88,040 $ 88,541
======== ======== ======== ======== ======== ======== ========
Net written premiums... $ 68,765 $ 69,537 $143,904 $122,012 $ 82,064 $ 73,005 $ 69,512
======== ======== ======== ======== ======== ======== ========
Net earned premiums.... $ 69,984 $ 74,533 $149,069 $130,603 $ 77,981 $ 72,632 $ 69,103
Net losses and
LAE(2)............... (19,738) 19,896 33,006 32,440 8,580 12,508 12,291
Amortization of
deferred policy
acquisition costs.... 30,874 32,343 66,382 58,243 34,202 27,928 22,334
Other direct
expenses(3).......... 7,779 5,921 13,268 11,840 6,716 6,029 13,301
Policyholders'
dividends............ 1,017 1,150 1,965 1,508 1,009 1,005 1,000
-------- -------- -------- -------- -------- -------- --------
Excess of net earned
premiums over direct
operating expenses
before income
taxes(2)(3).......... $ 50,052 $ 15,223 $ 34,448 $ 26,572 $ 27,474 $ 25,162 $ 20,177
======== ======== ======== ======== ======== ======== ========
Loss ratio(2).......... (28.2)% 26.7% 22.1% 24.8% 11.0% 17.2% 17.8%
Expense ratio(3)....... 56.7 52.9 54.8 54.8 53.8 48.2 53.0
-------- -------- -------- -------- -------- -------- --------
Combined ratio(2)(3)... 28.5% 79.6% 76.9% 79.6% 64.8% 65.4% 70.8%
======== ======== ======== ======== ======== ======== ========
Insurance
reserves(4).......... $174,820 $223,818 $214,828 $239,716 $111,695 $112,764 $119,505
======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------------------------
(1) CNAF acquired Continental in May 1995. Results include the surety operation
of Continental since its acquisition in May 1995 which affects the
comparability of financial information.
(2) Includes the effect of recording revisions of prior year loss reserves. The
dollar amount and the percentage point effect on the loss ratio of these
reserve revisions, all of which were net reductions, were $35,000 and 50.0%,
$1,605 and 2.2%, $9,742 and 6.5%, $10,846 and 8.3%, and $8,454 and 10.8% for
the six months ended June 30, 1997 and 1996 and the years ended December 31,
1996, 1995, and 1994, respectively.
(3) Does not include the effects of certain general and administrative expenses,
which are indirect or overhead in nature, since such costs were not
historically allocated to the CCC Surety Operations by CNAF or its
subsidiaries. Accordingly, the comparability of this data to other data that
include such costs is affected.
(4) The insurance reserves include both loss and LAE and unearned premium
reserves. These reserves are shown before the effects of ceded reinsurance.
In accordance with the Reinsurance Agreements, these reserves, as of the
Effective Time, will be transferred to the Insurance Subsidiaries, net of
reinsurance which totalled $11,662 and $29,663 at June 30, 1997 and 1996,
respectively, and $21,779, $31,060, $21,098, $28,362 and $34,307 at December
31, 1996, 1995, 1994, 1993 and 1992, respectively.
65
<PAGE> 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENTS OF
CERTAIN ASSETS AND LIABILITIES AND THE STATEMENTS
OF CERTAIN REVENUES AND DIRECT OPERATING EXPENSES OF
THE CCC SURETY OPERATIONS
The following discussion and analysis should be read in conjunction with
the Statements of Certain Assets and Liabilities and Statements of Certain
Revenues and Direct Operating Expenses of the CCC Surety Operations and the
related notes thereto, which are attached as Appendix D to this Proxy Statement/
Prospectus. For purposes of this Section only, the term CCC does not include
Continental and its direct and indirect subsidiaries, including CIC.
BACKGROUND
Organization
CNAF, through its operating subsidiaries, writes multiple lines of
property/casualty insurance, including surety insurance. The principal operating
subsidiaries of CNAF that write the surety line of business are CCC and CIC. CIC
was acquired by CNAF on May 10, 1995. Accordingly, the surety operation of CIC
has been included in the financial statements of the CCC Surety Operations since
its acquisition in May 1995. The CCC Surety Operations are comprised of the
combined surety operations of CCC and CIC.
Proposed Merger
The CCC Surety Operations are subject to the proposed Merger. Pursuant to
the Reorganization Agreement, the CCC Surety Operations and Capsure will merge
their operations. The merged company, CNA Surety, will be publicly-held and
owned, on a fully-diluted basis, 61.75% by CCC and CIC and 38.25% by the holders
of Capsure Common Stock and Capsure Options. The proposed Merger is conditioned
upon, among other approvals, the approval of Capsure stockholders, state
insurance regulators and certain governmental authorities and the satisfaction
of certain other conditions.
BASIS OF FINANCIAL DATA PRESENTED
As described in Note 1 to the aforementioned financial statements, the CCC
Surety Operations were not an existing legal entity for which separate financial
statements had been prepared. In addition, certain aspects of the CNAF
operation, principally investments and various administrative functions, have
been managed on a CNAF corporate-wide basis. CNAF has customarily not allocated
capital, investments, related investment income, realized capital gains and
losses, or certain general and administrative expenses, which are indirect or
overhead in nature, to the various lines of business written by its operating
units, including the surety insurance lines of the CCC Surety Operations. As a
result of these circumstances, the aforementioned financial statements reflect
only those assets and liabilities that have been identified as being
attributable to the CCC Surety Operations. The receivable from affiliates is
calculated at an amount necessary to balance all other identified assets with
the total of all identified liabilities. Similarly, the statement of certain
revenues and direct operating expenses reflects premiums earned, losses
incurred, LAE (allocated and unallocated) and other direct expenses relating to
the CCC Surety Operations.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
PREMIUMS WRITTEN
The CCC Surety Operations market contract and commercial surety bonds.
Contract bonds guarantee obligations covered by a written agreement between two
parties. The most common types include bid, performance and payment bonds. The
commercial surety market includes numerous types of bonds that are categorized
as court judicial, court fiduciary, public official, license and permit and many
miscellaneous bonds that include guarantees of financial performance.
66
<PAGE> 73
Net written premiums (premiums written net of ceded premiums) during the
three-year period ended December 31, 1996, of CCC throughout the period and of
CIC subsequent to May 10, 1995, the date of acquisition, are shown in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Contract...................................... $103,445 $ 88,566 $63,176
Commercial.................................... 40,459 33,446 18,888
-------- -------- -------
$143,904 $122,012 $82,064
======== ======== =======
</TABLE>
Changes in net written premiums during this three-year period were
primarily due to the acquisition of CIC and, in 1996, also due to changes in the
reinsurance programs. CIC net written premiums have not been included in the
1994 results, have been included for approximately seven and one-half months in
the 1995 results and have been included for the full year in the 1996 results.
The more significant changes in the reinsurance programs were that contract
surety retentions increased from $3 million to $5 million per principal
effective January 1, 1996. Similarly, commercial bond retentions increased from
$750,000 to $3 million effective January 1, 1996. These changes in the
reinsurance arrangements were made as a result of the larger capital base of the
combined operations, and allowed the CCC Surety Operations to lower reinsurance
costs and retain additional amounts of insurance premiums. The increase in
retentions in 1996 accounted for approximately 25% of the total 1996 increase in
net written premiums. Correspondingly, the increased retention by the CCC Surety
Operations in part contributed to the reduction of ceded loss reserves which
decreased from $24.5 million at December 31, 1995 to $15.5 million at December
31, 1996. Although the CCC Surety Operations' potential exposure increased as a
result of the increased retentions, the CCC Surety Operations' management
believed that, based upon the favorable loss experience with respect to such
business, the retention of potentially profitable business offset such increased
exposure.
Due to the significant effect of the CIC acquisition on the foregoing
balances and changes in the reinsurance programs, it is more meaningful to
review gross written premiums (premiums written before ceded premiums) during
the three-year period ended December 31, 1996 for CCC and CIC, as if they had
been combined throughout this period (dollars in thousands):
<TABLE>
<CAPTION>
PRO FORMA COMBINED GROSS PREMIUMS WRITTEN FOR CCC AND CIC
------------------------------------------------------------
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Contract.............................. $108,130 69.7% $113,255 69.1% $137,025 71.9%
Commercial............................ 47,078 30.3 50,588 30.9 53,517 28.1
-------- ----- -------- ----- -------- -----
$155,208 100.0% $163,843 100.0% $190,542 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Combined gross written premiums in 1995 declined from the combined 1994
level by $26.7 million, of which approximately 89% related to contract business.
This decrease in gross written premiums was almost entirely attributable to CIC.
This decrease was expected and consistent with the initiatives of CIC that
started prior to the CIC acquisition to decrease writings in certain territories
and to reduce writings where the profit potential and risk were considered
unsatisfactory. Because of the unfavorable results of CIC's contract business, a
greater portion of the decrease in writings related to the contract business.
Contract business was 69.1% of total gross written premiums for 1995 as compared
to 71.9% for 1994.
Combined gross written premiums in 1996 declined from the combined 1995
level by $8.6 million. This decrease was attributable in part to the continued
program that commenced in 1995 to re-underwrite the CIC book of business on an
account-by-account basis and remove business with unsatisfactory profit
potential and risk. To a lesser extent, a portion of the decrease is believed to
be due to considerable management attention focused on effecting and completing
the integration of CIC and CCC. The decrease in gross written premiums in 1996
was 5.3%; this percentage decline was less than half of the 1995 percentage
decrease.
67
<PAGE> 74
OPERATING RESULTS
The following table is a summary of the pretax operating results of the CCC
Surety Operations and certain operating ratios for each of the three years in
the period ended December 31, 1996. As described in Note 1 to the aforementioned
financial statements, these pretax operating results do not include investment
income, realized capital gains and losses, and certain indirect or overhead type
expenses.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net earned premiums......................................... $149,069 $130,603 $77,981
Net losses and LAE.......................................... 33,006 32,440 8,580
Other direct costs and expenses(1).......................... 81,615 71,591 41,927
-------- -------- -------
Excess of net earned premiums over direct operating expenses
before income taxes(1).................................... $ 34,448 $ 26,572 $27,474
======== ======== =======
Large losses................................................ $ 14,900 $ 13,900 $ 3,100
======== ======== =======
Loss ratio.................................................. 22.1% 24.8% 11.0%
Expense ratio(1)............................................ 54.8 54.8 53.8
-------- -------- -------
Combined ratio(1)........................................... 76.9% 79.6% 64.8%
======== ======== =======
Effect of large losses on combined ratio.................... 10.0% 10.6% 4.0%
======== ======== =======
</TABLE>
- -------------------------
(1) Does not include the effects of certain general and administrative expenses,
which are indirect or overhead in nature, since such costs were not
historically allocated to the CCC Surety Operations by CNAF or its
subsidiaries. Accordingly, the comparability of this data to other data that
include such costs is affected.
The year-over-year changes in the combined ratio were due to fluctuations
in both the loss and expense ratios as more fully discussed in the following
paragraphs.
Loss Ratio
The loss ratio was 22.1% in 1996, compared to 24.8% and 11.0% in 1995 and
1994, respectively. The 11% loss ratio in 1994 was substantially below the
historical average ratio. Prior to the CIC acquisition, the average loss ratio
was approximately 17% for the past ten years and 19% for the past 15 years. The
CIC acquisition in May 1995 affected the loss ratios. The historical average
loss ratio of the CIC surety business was in excess of 50% for the five years
prior to 1995, significantly higher than the historical average ratio of CCC.
Accordingly, the increase in the loss ratio of the combined operations in 1996
and 1995 as compared to 1994 was due largely to the integration of the CIC
surety business. The relatively higher historical loss ratio for CIC was
primarily due to a number of large contractor defaults and concentration of
risks in certain historically unprofitable territories. Large losses have also
substantially influenced overall loss ratios and year-over-year changes. Large
losses, as used herein, are individual claims attributable to the current year
which are in excess of $2.5 million. Because the CCC Surety Operations
underwrite the bonding needs of medium to large contractor accounts, large
losses will occur from time to time, contributing to fluctuations in the overall
loss ratio. There is no meaningful trend for large losses and they cannot be
predicted with any certainty. In 1996, large losses, net of reinsurance, were
$14.9 million in aggregate compared to $13.9 million and $3.1 million in 1995
and 1994, respectively. These large losses had the effect of increasing loss
ratios for 1996, 1995 and 1994 by 10.0%, 10.6% and 4.0%, respectively.
Expense Ratio
The expense ratio was 54.8% in 1996, compared to 54.8% in 1995 and 53.8% in
1994. The two-year increase of 1.0% is primarily attributable to acquisition
costs which increased from 43.8% to 44.5% of premiums. This increase resulted
primarily from the re-underwriting of the CIC book of business.
68
<PAGE> 75
INTERIM RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND
1996
PREMIUMS WRITTEN
Gross and net written premiums for the three months ended June 30, 1997 and
1996 are shown in the table below (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Gross written
Contract............................................... $28,813 71.1% $27,137 69.8%
Commercial............................................. 11,713 28.9 11,727 30.2
------- ----- ------- -----
$40,526 100.0% $38,864 100.0%
======= ===== ======= =====
Net written
Contract............................................... $27,872 72.8% $26,003 73.2%
Commercial............................................. 10,413 27.2 9,540 26.8
------- ----- ------- -----
$38,285 100.0% $35,543 100.0%
======= ===== ======= =====
Net written as a percentage of gross written............. 94.5% 91.5%
</TABLE>
Gross written premiums for the three months ended June 30, 1997 increased
$1.7 million, or 4.3%, over the three months ended June 30, 1996. This increase
was attributed to growth in contract premiums which increased 6.2%. Commercial
premiums were down slightly during this time period.
Net written premiums for the three months ended June 30, 1997 increased
$2.7 million, or 7.7%, over the three months ended June 30, 1996. This increase
was attributed to the aforementioned increase in gross written premiums as well
as lower ceded premiums, principally related to the mix of the commercial
business.
Gross and net written premiums for the six months ended June 30, 1997 and
1996 are shown in the table below (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Gross written
Contract............................................... $50,279 68.3% $52,784 69.9%
Commercial............................................. 23,289 31.7 22,767 30.1
------- ----- ------- -----
$73,568 100.0% $75,551 100.0%
======= ===== ======= =====
Net written
Contract............................................... $48,404 70.4% $50,439 72.5%
Commercial............................................. 20,361 29.6 19,098 27.5
------- ----- ------- -----
$68,765 100.0% $69,537 100.0%
======= ===== ======= =====
Net written as a percentage of gross written............. 93.5% 92.0%
</TABLE>
For the six months ended June 30, 1997, gross written premiums decreased
$2.0 million, or 2.6%, as compared to the six months ended June 30, 1996. This
decrease was due to a $2.5 million, or 4.8% decline in contract premiums,
partially offset by a $0.5 million, or 2.3%, increase in commercial premiums.
This decline in gross contract written premiums, all of which occurred in the
first quarter of 1997, was attributable to a number of factors including
increased competition, the success and timing of the contractor accounts being
awarded new business by their customers which in turn generates premiums for the
CCC Surety Operations, and the amount and timing of revenue from large
contractor accounts. Gross contract written premiums in the second quarter of
1997 increased 6.2% over the comparable quarter of 1996.
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<PAGE> 76
The trend in net new contractor accounts has been positive since June 30,
1996, the approximate date the re-underwriting of the CIC book of business was
completed. During the four quarters from June 30, 1996 through June 30, 1997,
the ratio of new contractor accounts added to contractor accounts terminated was
1.9 to 1. This ratio was 0.7 to 1 during the four quarters ended June 30, 1996,
which reflected the effect of re-underwriting the CIC book of business.
Net written premiums for the six months ended June 30, 1997 decreased $0.8
million, or 1.1%, from the six months ended June 30, 1996. This decrease was
attributed to the aforementioned decline in gross written premiums, partially
offset by lower ceded premiums, principally related to the commercial business.
OPERATING RESULTS
The following table is a summary of the pretax operating results and
certain operating ratios of the CCC Surety Operations for the three months ended
June 30, 1997 and 1996 and the six months ended June 30, 1997 and 1996 (dollars
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net earned premiums................................... $36,155 $37,504 $ 69,984 $74,533
Net losses and LAE(1)................................. 7,874 9,732 (19,738) 19,896
Other direct costs and expenses(2).................... 20,107 19,245 39,670 39,414
------- ------- -------- -------
Excess of net earned premiums over direct operating
expenses before income taxes(1)(2).................. $ 8,174 $ 8,527 $ 50,052 $15,223
======= ======= ======== =======
Loss ratio(1)......................................... 21.8% 25.9% (28.2)% 26.7%
Expense ratio(2)...................................... 55.6 51.3 56.7 52.9
Combined ratio(1)(2).................................. 77.4% 77.2% 28.5% 79.6%
</TABLE>
- -------------------------
(1) Includes the effect of recording revisions on prior year loss reserves. See
"Loss and LAE Reserves" below.
(2) Does not include the effects of certain general and administrative expenses,
which are indirect or overhead in nature, since such costs were not
historically allocated to the CCC Surety Operations by CNAF or its
subsidiaries. Accordingly, the comparability of this data to other data that
include such costs is affected.
The period-over-period changes in the combined ratio were due to
fluctuations in both the loss and expense ratios as more fully discussed in the
following paragraphs.
Loss Ratio
The loss ratio for the three months ended June 30, 1997 was 21.8% compared
to 25.9% for the three months ended June 30, 1996. This improvement is
consistent with the trend over the past several quarters and management believes
it reflects the positive effects of re-underwriting the CIC book of business.
The loss ratio for the six months ended June 30, 1997 was (28.2)% compared
to 26.7% for the six months ended June 30, 1996. The (28.2)% loss ratio for the
six months ended June 30, 1997 includes the effect of $35 million of net
favorable loss reserve development, related to prior reserve estimates, recorded
in the first quarter of 1997. See "Loss and LAE Reserves" in this section for an
explanation of this reserve revision. The six months ended June 30, 1996
included approximately $1.6 million of releases of prior year reserves.
Excluding the impact of the $35 million reduction of prior year reserves, the
loss ratio for the six months ended June 30, 1997 would have been 21.8%. This
ratio compares to accident year loss ratios of 22.0%, 18.3%, and 13.8%, for
1996, 1995, and 1994, respectively, which ratios reflect loss reserve
development through June 30, 1997.
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<PAGE> 77
Expense Ratio
The expense ratio for the three months ended June 30, 1997 was 55.6%
compared to 51.3% for the three months ended June 30, 1996. This increase was
due to an increase in other direct costs and a decrease in earned premiums.
Other direct costs and expenses increased 4.5%, largely as a result of $0.4
million of incurred transition related costs associated with the pending merger
with Capsure. Net earned premiums for the three months ended June 30, 1997
decreased 3.6% from the three months ended June 30, 1996, also contributing to
the higher expense ratio.
The expense ratio for the six months ended June 30, 1997 was 56.7% compared
to 52.9% for the six months ended June 30, 1996. The primary factor contributing
to this increase in the expense ratio was a 6.1% decrease in net earned premiums
for the period.
LOSS AND LAE RESERVES
Underwriting results of the CCC Surety Operations are significantly
influenced by estimates of loss and LAE reserves. Loss and LAE reserves are
based on undiscounted (i) case basis estimates for claims reported on direct
business, adjusted in the aggregate for ultimate loss expectations, (ii)
estimates of unreported losses based upon past experience, (iii) estimates of
losses on assumed insurance, (iv) estimates of future expenses to be incurred in
settlement of claims and (v) estimates of claim recoveries, exclusive of
reinsurance recoveries which are reported as an asset. In establishing these
estimates, consideration is given to current conditions and trends as well as
past CCC Surety Operations' and industry experience.
Loss and LAE reserves are estimates and the ultimate liability may vary
significantly from such estimates. The CCC Surety Operations regularly update
the reserve estimates as new facts become known and further events occur which
may impact the resolution of unsettled claims. Changes in prior reserve
estimates (reserve development) are reflected in results of operations in the
year such changes are determined to be needed. Large losses (individual claims
which are in excess of $2.5 million) can significantly affect underwriting
results and loss reserves. Estimating reserves for such losses in the early
stages of development can be difficult. Because of the somewhat volatile nature
of the contract surety business and the potential for shock losses, the CCC
Surety Operations historically have had a strong bias to estimate reserves
conservatively and, as more information became available that would warrant a
change, adjust such reserve estimates. These later reserve adjustments have
typically, but not always, been releases of reserves.
The most significant variable in estimating the CCC Surety Operations'
reserves for years subsequent to 1994 was the addition of the CIC surety
business. While the surety business of CIC was similar in many ways to that of
CCC, there were certain aspects of the CIC book of business that elevated the
inherent level of underwriting risk as compared to the CCC book of business. One
of these factors was that CIC had underwritten contractors in certain geographic
locations where it was very difficult to attain underwriting results
historically targeted by CCC. CIC had consistently experienced a significantly
higher loss and loss adjustment expense ratio than the CCC business,
particularly in the early 1990's. The average loss ratio for CIC in this time
period was in excess of 50% versus approximately 17% for CCC.
The unfavorable results of the CIC book of business prompted a number of
operating and organizational changes. Prior to the merger with CCC, CIC, on its
own initiative, had begun to react to the poor underwriting experience by
scaling back operations in specific territories and re-underwriting its book of
business. Subsequent to the merger, the CIC customer accounts were included by
CCC in an annual re-underwriting process performed under the supervision of CCC
management using the historical underwriting standards of the CCC book of
business. CCC also consolidated the claims operations of CIC with CCC as there
was concern with CIC's claim handling processes, particularly in the handling of
large contract surety claims. The majority of this consolidation took place over
a period of eighteen months spanning from July 1995 to December 1996, during
which time CCC management assimilated knowledge about the CIC claims.
From a reserving perspective, it was unclear how much and when these
re-underwriting efforts and changes in claims responsibilities would be evident
in the underwriting results. As a result of this uncertainty, and consistent
with its generally conservative estimating philosophy in reserving, the CCC
Surety Operations
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<PAGE> 78
did not anticipate immediate and significant improvement in underwriting results
for the CIC book of business.
Based on the CCC Surety Operations' most recent study of reserves that was
completed in connection with the preparation of the March 31, 1997 financial
statements, the CCC Surety Operations' management determined that it had been
overly cautious in interpreting claim data and had discounted favorable trends.
As shown in the table below, and consistent with the CCC Surety Operations' most
recent study of reserve levels, the CCC Surety Operations' released $35.0
million of prior year reserves in the first quarter of 1997. Approximately $33
million of this reserve development related to CIC and principally to accident
years prior to 1996.
The following is a summary of reserve development, net of reinsurance,
recorded in the first six months of 1997 and 1996 and for the full years of
1996, 1995 and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
FAVORABLE
RESERVE
DEVELOPMENT
-----------
<S> <C>
Six months ended June 30, 1997......................... $35,000
Six months ended June 30, 1996......................... $ 1,605
Year ended December 31, 1996........................... $ 9,742
Year ended December 31, 1995........................... $10,846
Year ended December 31, 1994........................... $ 8,454
</TABLE>
There is no assurance that this past experience of favorable reserve
development will continue in future years.
As part of the proposed Merger with Capsure, CCC has agreed to enter into
the Quota Share Treaty which, among other things, calls for CCC to assume, as of
the Effective Time, the obligation for any adverse development on recorded
reserves for the CCC Surety Operations. If actual ultimate loss and LAE are less
than recorded reserves for the CCC Surety Operations at the Effective Time of
the Merger, any such difference will benefit CNA Surety. While the reserves
recorded at each reporting date are management's best estimate at that time, for
all of the reasons noted above, these reserve estimates may change in the
future.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds generated by the business of the CCC Surety
Operations are premiums and, while not reflected in the accompanying CCC Surety
Operations' financial statements, the amounts earned from the investment of
these funds. The principal uses of funds by the CCC Surety Operations are the
payment of claims and related expenses and other operating expenses.
The CCC Surety Operations generate substantial cash flow as a result of
premiums being received in advance of the time when claim payments are required.
These positive operating cash flows, along with the cash flows shared among the
other CNAF insurance operating units, including investment income, have
historically met the liquidity requirements of the CCC Surety Operations. As of
the Effective Time of the Merger with Capsure, the liquidity and capital
resources of the business of the CCC Surety Operations will be part of CNA
Surety. See "Description of CNA Surety -- Liquidity and Capital Resources."
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<PAGE> 79
DESCRIPTION OF CAPSURE BUSINESS
Capsure and its subsidiaries provide surety and fidelity bonds in all 50
states through a combined network of 120,000 independent agents. Capsure is one
of the premier, national property casualty franchises in the U.S. with a
dominant position in the commercial surety and fidelity bond business and a
growing presence in the contractor bonding market. Capsure's principal
subsidiaries are Western Surety and USA. Western Surety writes small fidelity
and commercial surety bonds and errors and omissions liability insurance, as a
licensed insurer in all 50 states and the District of Columbia. Western Surety's
sister company, SBCA, writes similar business and is licensed in 17 states. USA
specializes in the underwriting of small contract and miscellaneous surety
bonds. USA is licensed in 37 states and the District of Columbia with most of
its business generated in Texas.
On August 14, 1992, Capsure acquired Western Surety. Founded in 1900,
Western Surety is one of the largest writers of commercial bonds in the United
States. Bonds underwritten by Western Surety are relatively low-risk,
low-premium products where prompt service, easy-to-use forms and availability of
an extensive array of bond products are emphasized. Western Surety's success is
attributable to its product specialization, underwriting expertise and broad
distribution network. Substantially all of Western Surety's surety bonds are
mandated by various state statutes and local ordinances.
On September 22, 1994, Capsure acquired USA. Founded in 1984, USA
specializes in writing commercial and small to medium-sized contract surety
bonds primarily in the southern United States. Contract bonds underwritten by
USA, including those underwritten on behalf of Western Surety, are primarily
contractor performance and payment bonds in principal amounts under $3.0 million
for which underwriting expertise and distinctive service to agents are
emphasized. USA/Western Surety acts as the contract bond division of Western
Surety. USA personnel underwrite contract surety bonds submitted by Western
Surety agents on Western Surety's bond forms. Contract bonds written through the
USA/Western Surety program are generally reinsured 100% by USA. USA underwrites
primarily standard and some specialty accounts for which it will utilize
supplemental collateral arrangements and excess rates for contractors not
qualified for standard surety rates.
Additional information concerning Capsure is included in the reports filed
by Capsure with the Commission and are incorporated by reference in this Proxy
Statement/Prospectus. See "Available Information" and "Documents to be
Incorporated by Reference."
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<PAGE> 80
DESCRIPTION OF CNA SURETY
CNA SURETY MERGER STRATEGY
CNA Surety management believes the Merger will result in the combination of
three complementary businesses, each with distinct strengths, product focuses
and marketing strategies. The combination of those businesses is expected to
result in a single, larger entity focused on serving the needs of virtually all
segments of the surety market, in terms of the types of products offered and the
size of bonds available, as well as the realization of synergies that exist
among the businesses, including expanded distribution channels for all products,
administrative efficiencies and expense savings.
Historically, the CCC Surety Operations' contract surety business has been
focused upon the medium to large contract surety business, generally contractors
with contracted work in progress of $50 million or less. USA has focused its
marketing on smaller contractors, typically those with contracted work in
progress of $3 million or less. In addition, USA's business has had a strong
South-Central U.S. regional orientation, although in recent years it has
increased its efforts to expand nationally through its alliance with Western
Surety. Following the Merger, the contract surety business of CNA Surety will
more thoroughly cover the full contract surety market, ranging from very small
to very large contractors. The USA surety operations will benefit from CNA
Surety's anticipated increased underwriting capacity to service the needs of
customers and enhanced expertise in underwriting, particularly as to certain
bonds requiring more extensive scrutiny. Management believes the geographic
expansion of the USA surety business currently underway will be aided
significantly by the existing local presence and market knowledge of the 41 CNAF
branch offices.
Capsure management believes that Western Surety is the largest writer of
smaller miscellaneous commercial surety bonds with strong capabilities in
marketing, distribution and service. CNA Surety management believes that as a
result of the Merger, the distribution network of Western Surety, comprised of
58 marketing representatives across the country and 37,000 agents, will gain
immediate access to increased capacity to write bonds and policies for larger
exposures, in reliance on CNA Surety's greater financial resources and
underwriting capabilities. Western Surety marketing representatives will receive
support and training from CNAF branch personnel, enabling greater
cross-marketing opportunities. In addition, in light of its focused market and
its need for immediate response, Western Surety has developed expertise and
systems that allow it to service the commercial surety needs of smaller
customers efficiently and quickly. CNA Surety expects to rely on this expertise
and service orientation to better compete in the commercial surety market
generally. For instance, the CCC Surety Operations have focused on serving the
surety needs of "Fortune 1000" companies, and with the expertise and
capabilities developed by Western Surety, CNA Surety management believes that
CNA Surety will be able to better support these companies. Such companies would
then continue to be serviced through the CNAF offices. After the Merger, CNA
Surety management anticipates that it will be able to capitalize on the computer
systems expertise and the strong processing capabilities of Western Surety to
improve its service orientation to those customers, including the expansion of
its surety product offerings, the implementation of new programs and the
expansion of existing opportunities for the international operations of its U.S.
customers.
While CNA Surety management intends to focus its attention on building upon
the synergies that exist among the businesses, management also expects that the
Merger will result in certain expense savings as CNA Surety will consolidate
certain functions, including administration, agency licensing, collections and
accounting. In that regard, CNA Surety expects to eliminate redundant computer
system applications, take steps toward a common computer system architecture and
enhance communications and processing capabilities throughout the combined
entity.
Management does not, however, intend to centralize all operations.
Management believes that while each of the businesses can learn from the
respective strengths, capabilities and resources of the others, CNA Surety's
long-term strategies will best be served by maintaining the marketing and
underwriting operations of the businesses in substantially their current form.
CNA Surety will be headquartered in Chicago, Illinois, where it will provide
underwriting for medium and large contract and commercial surety business.
Western Surety will continue to maintain its office in Sioux Falls, South Dakota
where it will provide marketing support
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<PAGE> 81
and back office operations for the commercial surety business as well as
underwriting for small commercial surety and fidelity policies and bonds. Larger
commercial surety accounts will continue to be serviced and underwritten by the
existing CCC Surety Operations field offices in combination with home office
support in Chicago. Finally, CNA Surety will rely on USA's Houston office to
provide underwriting and servicing for the small contract surety business.
There can be no assurance that any of the benefits described above will be
realized. See "Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
It is anticipated that the liquidity requirements of CNA Surety will be met
primarily by funds generated from operations. The principal operating cash flow
sources are premiums, investment income, and sales and maturities of
investments. CNA Surety also may generate funds from additional borrowings under
the credit facility described below. The primary cash flow uses are payments for
claims, operating expenses, debt service on the credit facility, as well as
dividends, if any, to CNA Surety stockholders. In general, surety operations
generate premium collections from customers in advance of cash outlays for
claims. Premiums are invested until such time as funds are required to pay
claims and claims adjusting expenses.
In connection with the Merger, CNA Surety has obtained a commitment from
The Chase Manhattan Bank to enter into a five-year revolving credit facility
(the "Credit Facility") in the amount of $130 million. CNA Surety initially
expects to borrow $110 million, the proceeds of which are expected to be used to
(i) retire the existing Capsure debt of approximately $60 million and (ii) make
a $50 million capital contribution to the Insurance Subsidiaries. The interest
rate on borrowings under the Credit Facility may be fixed, at CNA Surety's
option, for a period of one, two, three, or six months and is based on, among
other rates, the London Interbank Offered Rate ("LIBOR"), plus the applicable
margin. The margin, including the facility fee, varies based on CNA Surety's
leverage ratio (debt to total capitalization) and ranges from 0.25% to 0.40%.
Based on the expected leverage ratios, management anticipates the margin to be
0.30%, which margin was used for purposes of computing interest expense for the
unaudited pro forma condensed consolidated financial statements. The Credit
Facility contains, among other conditions, limitations on CNA Surety with
respect to the incurrence of additional indebtedness and requires the
maintenance of certain financial ratios. The Credit Facility provides for the
payment of all outstanding principal balances after five years with no required
principal payments prior to such time. Principal prepayments, if any, and
interest payments are expected to be funded primarily through intercompany tax
sharing payments and dividends from the CNA Surety Insurance Subsidiaries.
The intercompany tax sharing agreements between Capsure and the Insurance
Subsidiaries provide that tax sharing payments are determined based upon each
subsidiaries' separate return liability as calculated in accordance with the
Code. CNA Surety will be able to use Capsure's available NOLs, subject to
significant limitations arising from the Merger, to reduce consolidated federal
taxable income, thereby reducing federal income tax payments. Such cash flow
benefits will inure to CNA Surety. An intercompany tax sharing agreement between
CNA Surety and Capsure will be in place as of the Effective Time.
As an insurance holding company, CNA Surety will depend upon dividends and
other permitted payments from the Insurance Subsidiaries to pay cash dividends,
as well as pay operating expenses and meet debt service requirements. The
payment of dividends by the Insurance Subsidiaries will be subject to varying
degrees of supervision by the South Dakota Department and Texas Department. In
South Dakota, where Western Surety and SBCA are domiciled, insurance companies
may only pay dividends from earned surplus excluding surplus arising from
unrealized capital gains or revaluation of assets. In Texas, where USA is
domiciled, an insurance company may only declare or pay dividends to
stockholders from the insurer's earned surplus. The Insurance Subsidiaries may
pay dividends without obtaining prior regulatory approval only if such dividend
or distribution (together with dividends or distributions made within the
preceding 12-month period) is less than, as of the end of the immediately
preceding year, the greater of (i) 10% of the insurer's surplus to policyholders
and (ii) net income. In South Dakota, net income includes net realized capital
gains in an amount not to exceed 20% of net unrealized capital gains. All
dividends must be reported to the appropriate insurance department prior to
payment.
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<PAGE> 82
The Insurance Subsidiaries can pay to CNA Surety during 1997 aggregate
dividends of approximately $18.0 million without prior regulatory approval. The
dividends that may be paid without prior regulatory approval are determined by
formulas established by the applicable insurance regulations, as described
above. The formulas that determine dividend capacity in the current year are
dependent on, among other items, the prior year's ending statutory surplus and
net income. Accordingly, dividend capacity for 1997 does not reflect the effects
of the Merger. Dividend capacity for 1998 will be based on statutory surplus and
income at and for the year ended December 31, 1997 which will include the
results of the CCC Surety Operations for the period from the Effective Time to
December 31, 1997. Dividend capacity for 1999 will be based on statutory surplus
and income at and for the year ended December 31, 1998 which will include the
effects of the CCC Surety Operations for all of 1998. See "Risk Factors --
Holding Company Structure."
It is anticipated that at the Effective Time, the Insurance Subsidiaries
will have combined policyholders' surplus of approximately $122 million, which
would generate a net written premium to surplus ratio of approximately 2 to 1.
Regulatory guidelines suggest that this net written premium to surplus ratio for
property and casualty insurers, in general, should not exceed 3 to 1.
CNA Surety management believes that it will have sufficient available
resources to meet its short-term capital needs.
INVESTMENTS
Subsequent to the Merger, the investment committee of the CNA Surety Board
will establish investment policies and guidelines. Such investment policies will
be determined consistent with the operating characteristics of CNA Surety.
Accordingly, it is expected that the portfolios generally will be managed to
maximize after-tax investment returns, while minimizing credit risks with
investments concentrated in high quality, fixed maturity securities. CNA
Surety's portfolios will generally be managed to provide diversification by
limiting exposures to any one issue or issuer, and to provide liquidity by
investing in the public securities markets. The portfolios will be structured to
support CNA Surety's operations and consider the expected duration of
liabilities and short-term cash needs.
Immediately after the Merger, the outside investment manager currently
engaged by Capsure to manage the Insurance Subsidiaries' portfolios will
continue to manage those portfolios of CNA Surety. CNA Surety may determine at a
later time to review other options for investment management services.
CNA Surety is expected to have the capacity to hold its fixed maturity
portfolios to maturity. However, securities may be sold to take advantage of
investment opportunities generated by changing interest rates, prepayments, tax
and credit considerations, or other similar factors. Accordingly, the fixed
maturity securities will be classified as available-for-sale.
A.M. BEST RATING
Following Capsure's December 19, 1996 announcement of its agreement to
merge its business with the CCC Surety Operations and form CNA Surety, A.M. Best
placed the A+ and A ratings of Western Surety and USA, respectively, under
review with developing implications. A.M. Best has indicated that the ratings
will remain under review until completion of the transaction and regulatory
approval. CNA Surety management is encouraged by A.M. Best's initial positive
reaction to the proposed Merger, recognizing the complementary markets and
opportunity to streamline processing and administration. Based upon discussions
with A.M. Best, CNA Surety management has no reason to believe that the current
ratings of the Insurance Subsidiaries will not be maintained.
REINSURANCE
Subsequent to the Merger, CNA Surety intends to maintain excess of loss
coverage for substantial portions of the contract and commercial lines of
business. The amount of coverage provided by third party reinsurers will be $55
million in excess of a $5 million net retention per principal. Pursuant to the
Excess of Loss Contract, CCC will provide $75 million of coverage in excess of
$60 million third party reinsurance and
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<PAGE> 83
net retention per principal. CNA Surety management intends to retain on a net
basis and exclude from this treaty much of the small commercial business written
by Western Surety as of the Effective Time. The excess of loss treaty currently
in effect between USA and Munich American Reinsurance Company limits USA's net
retained loss to $500,000 per principal, provides $5.0 million of net and treaty
capacity and is subject to an annual aggregate reinsured amount for all
principals of $12.5 million. The reinsurance rate varies from 0.50% to 16.0% of
subject premium based upon the reinsurer's loss experience under the treaty and
is currently 5.0%. CNA Surety has reviewed the terms of this excess of loss
treaty and has obtained an informal commitment for similar coverage, at a lower
rate, as a sub-line to its third party excess of loss treaty. See also "The
Reorganization Agreement and Other Transaction Agreements -- Reinsurance
Agreements and Services and Indemnity Agreement."
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<PAGE> 84
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
BASIS OF PREPARATION
The following unaudited Pro Forma Condensed Consolidated Balance Sheet and
Statement of Consolidated Operations reflect the effects of the Merger of
Capsure and the CCC Surety Operations and various transactions related to the
Merger. The pro forma balance sheet has been prepared as if the Merger had been
consummated on June 30, 1997. The pro forma statement of operations for the year
ended December 31, 1996 and the six months ended June 30, 1997 have been
prepared as if the Merger had been consummated on January 1, 1996. The newly
formed corporation is CNA Surety.
The unaudited pro forma financial statements give effect to the following,
all of which are set forth in greater detail in the explanatory notes: (i)
adjustment to the Capsure statement of operations, as reported, to reflect the
income effects as if the Special Distribution was made on January 1, 1996; (ii)
consummation of the Merger and the related transactions and the contribution of
capital to and the incurrence of additional debt by CNA Surety; (iii) purchase
accounting adjustments to reflect Capsure's assets and liabilities at fair
value; (iv) estimated indirect and overhead expenses for the CCC Surety
Operations; and (v) estimated interest expense related to the additional debt.
The accompanying Pro Forma Condensed Statements of Consolidated Operations
do not include the estimated net investment income resulting from investment of
Merger-related cash flow, including (i) the $50 million debt proceeds, (ii) the
$52.25 million capital contribution from CCC, and (iii) collection of the
receivable from CCC. Investment earnings are an integral part of an insurance
entity's operations. If proceeds from these sources of funds were assumed to be
invested in high-quality, taxable fixed income securities with an average
duration of approximately 3 years, yielding 6.4%, net investment income would
increase approximately $17.1 million ($11.1 million net of tax, or $0.25 in pro
forma earnings per share) for the year ended December 31, 1996 and $8.5 million
($5.5 million net of tax, or $0.12 in pro forma earnings per share) for the six
months ended June 30, 1997.
PURCHASE ACCOUNTING
The unaudited pro forma condensed consolidated financial statements have
been prepared under the purchase accounting method. Accordingly, the assets and
liabilities of Capsure are reflected at their estimated fair value as of the
assumed acquisition date. The purchase price has been estimated at $184.4
million, which is based on the traded market price of shares of Capsure Common
Stock of $11.00 per share, the estimated fair market value of the Capsure
Options and the estimated Merger-related costs of the CCC Surety Operations.
LIMITATIONS AND INSTRUCTIONS
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the accompanying explanatory notes, the audited and
unaudited financial statements of Capsure and CCC Surety Operations and the
notes thereto, and the other financial information pertaining to Capsure and CCC
Surety Operations included or incorporated by reference herein. The unaudited
pro forma consolidated financial information is intended for information
purposes only and is not necessarily indicative of the results of operations or
financial position which would have been achieved and reported had the Merger
and related transactions been consummated on the dates assumed, nor is it
necessarily indicative of the future consolidated operating results or financial
position of CNA Surety.
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<PAGE> 85
CNA SURETY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CCC SURETY
CAPSURE OPERATIONS CNA SURETY
----------- ----------- --------------------------------
PRO FORMA
PRO FORMA CONDENSED
AS REPORTED AS REPORTED ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and investments......................... $167,580 $ 211,482 c $379,062
Deferred policy acquisition costs............ 31,201 $ 37,198 68,399
Insurance receivables........................ 18,379 43,330 (11,734)b 49,975
Intangible assets, net of amortization....... 74,549 6,963 76,613 a 158,125
Deferred income taxes, net of valuation
allowance.................................. 11,832 (5,052) (6,700)a 80
Receivable from affiliates................... 99,071 (109,232)c --
10,161 b
Other assets................................. 14,102 6,235 (6,235)b 14,102
-------- -------- --------- --------
Total assets............................... $317,643 $187,745 $ 164,355 $669,743
======== ======== ========= ========
LIABILITIES
Reserves:
Unpaid losses and loss adjustment
expenses................................ $ 39,301 $ 80,439 $ (5,427)b $114,313
Unearned premiums.......................... 74,931 94,381 (6,235)b 163,077
Long-term debt............................... 54,000 50,000 c 104,000
Other liabilities............................ 19,904 12,925 15,058 a 43,080
(4,807)b
-------- -------- --------- --------
Total liabilities.......................... 188,136 187,745 48,589 424,470
-------- -------- --------- --------
STOCKHOLDERS' EQUITY
Common stock................................. 793 (364)a 429
Additional paid-in capital................... 118,580 126,264 a,b 244,844
Retained earnings............................ 9,847 (9,847)a --
Unrealized gain on securities, net of
deferred income taxes...................... 287 (287)a --
-------- -------- --------- --------
Total stockholders' equity................. 129,507 -- 115,766 245,273
-------- -------- --------- --------
Total liabilities and stockholders'
equity.................................. $317,643 $187,745 $ 164,355 $669,743
======== ======== ========= ========
</TABLE>
SEE BASIS OF PREPARATION, PURCHASE ACCOUNTING, LIMITATIONS AND INSTRUCTIONS,
AND NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
79
<PAGE> 86
CNA SURETY
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CCC SURETY
CAPSURE OPERATIONS CNA SURETY
--------------------------------------- ----------- --------------------------
PRO FORMA
PRO FORMA CONDENSED
AS REPORTED ADJUSTMENTS AS ADJUSTED AS REPORTED ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net earned premiums..... $ 92,491 $ (3,230)d $ 89,261 $149,069 $238,330
Net investment income... 16,444 (5,648)d 10,796 $ 0* 10,796*
Net realized capital
gains................ 1,715 (647)d 1,068 1,068
-------- -------- -------- -------- ------- --------
Total revenues....... 110,650 (9,525) 101,125 149,069 0 250,194
-------- -------- -------- -------- ------- --------
Expenses:
Net losses and loss
adjustment........... 10,054 (1,610)d 8,444 33,006 41,450
Net commissions,
brokerage and other
underwriting......... 63,204 (134)d 63,070 81,239 2,000 f 146,309
Interest................ 1,717 3,001d 4,718 2,191 e 6,909
Non-recurring charges... 8,565 8,565 8,565
Amortization of
intangible assets.... 2,761 2,761 376 2,491 g 5,628
Other operating......... 2,789 2,789 1,100 f 3,889
-------- -------- -------- -------- ------- --------
Total expenses....... 89,090 1,257 90,347 114,621 7,782 212,750
-------- -------- -------- -------- ------- --------
Income before income
taxes................... 21,560 (10,782) 10,778 34,448 (7,782) 37,444
Income taxes.............. 8,181 (3,795)d 4,386 12,188 (1,852)e,f 14,722
-------- -------- -------- -------- ------- --------
Net income........... $ 13,379 $ (6,987) $ 6,392 $ 22,260 $(5,930)* $ 22,722*
======== ======== ======== ======== ======= ========
Weighted average shares
outstanding (in
thousands of shares)
(Note 5):
Primary................. 16,395 16,395 16,395 43,675
======== ======== ======== ========
Fully diluted........... 16,510 16,510 16,510 43,675
======== ======== ======== ========
Earnings per share (Note
5):
Primary................. $0.82 $(0.43) $0.39 $0.52*
======== ======== ======== ========
Fully diluted........... $0.81 $(0.42) $0.39 $0.52*
======== ======== ======== ========
</TABLE>
- -------------------------
* Amounts do not include the estimated investment income that would have been
earned by the CCC Surety Operations. See "Note 3 to Unaudited Pro Forma
Consolidated Financial Information."
SEE BASIS OF PREPARATION, PURCHASE ACCOUNTING, LIMITATIONS AND INSTRUCTIONS,
AND NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
80
<PAGE> 87
CNA SURETY
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CCC SURETY
CAPSURE OPERATIONS CNA SURETY
----------- ----------- --------------------------
PRO FORMA
PRO FORMA CONDENSED
AS REPORTED AS REPORTED ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- ------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Net earned premiums........................... $45,258 $ 69,984 $115,242
Net investment income......................... 5,924 $ 0* 5,924*
Net realized capital gains.................... 636 636
------- -------- ------- --------
Total revenues............................. 51,818 69,984 0 121,802
------- -------- ------- --------
Expenses:
Net losses and loss adjustment................ 3,159 (19,738) (16,579)
Net commissions, brokerage and other
underwriting............................... 31,286 39,482 1,000 i 71,768
Interest...................................... 1,998 1,242 h 3,240
Amortization of intangible assets............. 1,396 188 1,230 j 2,814
Other operating............................... 1,300 550 i 1,850
------- -------- ------- --------
Total expenses............................. 39,139 19,932 4,022 63,093
------- -------- ------- --------
Income before income taxes...................... 12,679 50,052 (4,022) 58,709
Income taxes.................................... 5,129 17,584 (977)h,i 21,736
------- -------- ------- --------
Net income................................. $ 7,550 $ 32,468 $(3,045)* $ 36,973*
======= ======== ======= ========
Weighted average shares outstanding
(in thousands of shares) (Note 5):
Primary....................................... 16,594 43,675
======= ========
Fully diluted................................. 16,613 43,675
======= ========
Earnings per share (Note 5):
Primary....................................... $0.45 $0.85*
======= ========
Fully diluted................................. $0.45 $0.85*
======= ========
</TABLE>
- -------------------------
* Amounts do not include the estimated investment income that would have been
earned by the CCC Surety Operations. See "Note 3 to Unaudited Pro Forma
Consolidated Financial Information."
SEE BASIS OF PREPARATION, PURCHASE ACCOUNTING, LIMITATIONS AND INSTRUCTIONS,
AND NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
81
<PAGE> 88
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
NOTE 1. MERGER AND PURCHASE ACCOUNTING
Capsure and the CCC Surety Operations have agreed to merge their operations
into CNA Surety according to terms and conditions discussed elsewhere in this
Proxy Statement/Prospectus.
This transaction will be accounted for by CNA Surety as an acquisition of
Capsure, using purchase accounting. Accordingly, the purchase price for Capsure
will be allocated to Capsure's assets that have been acquired and to Capsure's
liabilities that have been assumed based on the estimated fair value of such
assets and liabilities at the Effective Time. The final allocation of the
purchase price has not been determined, as it will be based on fair values of
the assets and liabilities at the actual acquisition date; the amounts shown in
the pro forma financial statements are based on the fair values at the assumed
acquisition date of the Merger.
NOTE 2. ADJUSTMENTS TO PRESENT PRO FORMA FINANCIAL INFORMATION
Pro Forma Condensed Consolidated Balance Sheet
The unaudited pro forma condensed consolidated balance sheet gives effect
to the pro forma adjustments necessary to reflect the Merger and related
transactions as if the acquisition and related transactions had been consummated
on June 30, 1997.
The purchase price for the outstanding shares of Capsure Common Stock is
determined as follows (dollars in thousands, other than per share amount):
<TABLE>
<S> <C>
Traded value of Capsure shares to be exchanged at $11.00 per
share..................................................... $173,882
Estimated value of Capsure Options.......................... 8,480
Estimated CCC Surety Operations Merger-related costs........ 2,000
--------
Total purchase price........................................ $184,362
========
</TABLE>
The estimated value of Capsure Options of $8.5 million was determined by
taking the 976,937 Capsure Options outstanding at February 12, 1997 and
subtracting 205,974 shares of treasury stock assumed to be purchased from the
proceeds of the Capsure Options at $11.00 per share and multiplying the result
(770,963 Capsure Options) by $11.00 per share. See Note 13 to the audited
financial statements of Capsure for the year ended December 31, 1996
incorporated herein by reference for information regarding the number of
options, the average exercise price and range of exercise prices of outstanding
options.
CCC Surety Operations Merger-related costs are estimated to total
approximately $2.0 million and are comprised of professional fees.
The following sets forth and describes the pro forma and purchase
accounting adjustments to the historical balance sheet of Capsure at June 30,
1997 to reflect the allocation of the purchase price to the assets
82
<PAGE> 89
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
and liabilities of Capsure, and other adjustments arising from transactions
related to the Merger. Dollar amounts in the following table and footnotes are
in thousands.
<TABLE>
<CAPTION>
ASSETS LIABILITIES EQUITY
------ ----------- ------
ADD (SUBTRACT)
<S> <C> <C> <C> <C> <C>
(a) (i) Reduce Capsure's deferred income tax asset
associated with the Capsure net operating tax
loss carryforward as a result of the limitation
of its utilization following a change of
ownership; (ii) accrue the obligation for
Capsure's Merger-related costs(1); (iii) accrue
the Closing Dividend(2); and (iv) increase
intangible assets, including excess of purchase
price over fair value of Capsure's net assets
acquired, to allocate purchase price as
follows:....................................... $ 69,913 $ 15,058 $ 54,855
Capsure net assets at historical cost.......... $129,507
Fair value adjustments:
(i) Deferred income taxes...................... (6,700)
(ii) Merger-related costs(1)................... (9,800)
(iii) Accrual of the Closing Dividend(2)....... (5,258)
(iv) Purchased intangibles..................... (74,549)
(v) Intangibles arising from Merger(3)......... 151,162
--------
Purchase price................................. $184,362
========
(b) Reflect the effects of reinsurance agreements
and adjustments to the receivable from
affiliates(4).................................. (7,808) (16,469) 8,661
(c) Reflect effects of (i) collecting receivables
from CCC of $109,232; (ii) receipt of $52,250
capital contribution from CCC; (iii) borrowing
an additional $50,000 of debt (each of the
transactions in (i), (ii) and (iii) being
required by the Reorganization Agreement); and
(iv) investing proceeds of (i), (ii), and
(iii), aggregating $211,482.................... 102,250 50,000 52,250
-------- -------- --------
Total pro forma adjustments.................... $164,355 $ 48,589 $115,766
======== ======== ========
</TABLE>
- -------------------------
(1) Capsure's Merger-related costs are comprised of estimated employee severance
costs of $2,260 and employee retention costs of $1,330 under Capsure's
Severance/Retention Plan, estimated professional fees and other expenses of
$4,010 and estimated investment banking fees of $2,200, all of which are
directly attributable to the Merger. See "The Merger -- Interest of Certain
Persons in the Transaction; Severance Benefits; Retention and Transaction
Arrangements -- Severance Benefits and Retention and Transaction
Arrangements" and "The Merger -- Opinion of Capsure's Financial Advisor --
Miscellaneous."
(2) The Closing Dividend pro forma adjustment consists of the fixed portion of
$3,500 and $1,758, equal to the sum of $58.6 per day for the period from
June 1, 1997 through June 30, 1997. See "The Reorganization Agreement and
Other Transaction Agreements -- Closing Dividend."
(3) The principal intangible assets identified in this preliminary allocation of
purchase price to Capsure's net assets are Western Surety's distribution
system consisting of 37,000 independent insurance agencies, valued at
approximately $14,024, and goodwill, valued at approximately $137,138, both
of which are initially assumed to have estimated useful lives of 30 years.
(4) In connection with the transactions contemplated under the Reorganization
Agreement, the business of the CCC Surety Operations will be transferred to
Western Surety by means of the Reinsurance Agreements. See "The
Reorganization Agreement and Other Transaction Agreements -- Reinsurance
Agreements and Services and Indemnity Agreement." The Reinsurance Agreements
provide, among other things, that the balances
83
<PAGE> 90
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
transferred to Western Surety will be net of ceded reinsurance and that the
net assets to be transferred will be cash and other statutorily net admitted
assets. The adjustments made to the CCC Surety Operations' balances to
effect the Reinsurance Agreements offset ceded amounts against the
respective liabilities (reinsurance recoverable on unpaid losses of $5,427
and paid losses of $6,307 totaling $11,734; prepaid reinsurance premiums of
$6,235; and ceded premiums payable of $4,807) and increase the receivable
from affiliate (CCC), the net effect of which is to increase the equity of
CNA Surety. The detailed balance sheet accounts and pro forma adjustments
are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
---------------------------------------
ASSETS LIABILITIES EQUITY
------ ----------- ------
<S> <C> <C> <C>
Receivable from affiliate.............................. $ 10,161
Unpaid losses and loss adjustment expenses............. $ (5,427)
Unearned premiums...................................... (6,235)
Other liabilities...................................... (4,807)
Insurance receivables.................................. (11,734)
Other assets........................................... (6,235)
Additional paid-in capital............................. $8,661
-------- -------- ------
$ (7,808) $(16,469) $8,661
======== ======== ======
</TABLE>
Pro Forma Condensed Statement of Consolidated Operations
The unaudited pro forma condensed statement of consolidated operations
gives effect to the adjustments necessary to reflect the Merger and other
transactions as if the Merger and the other transactions had occurred on January
1, 1996. Those adjustments and their effects on revenues, expenses, income taxes
and net income for the year ended December 31, 1996 and the six months ended
June 30, 1997 are summarized and explained below (dollars in following table and
footnotes in thousands, except per share amounts):
<TABLE>
<CAPTION>
INCOME NET
FOR THE YEAR ENDED DECEMBER 31, 1996 REVENUES EXPENSES TAXES INCOME
------------------------------------ -------- -------- ------ ------
ADD (SUBTRACT)
<S> <C> <C> <C> <C>
Capsure adjustment:
(d) Adjustment to the Capsure statement of
operations, as reported, to reflect the income
effects as if the Special Distribution was made
on January 1, 1996(1)............................ $(9,525) $1,257 $(3,795) $ (6,987)
Pro forma adjustments:
(e) Record the estimated interest expense
adjustment(2) related to the total pro forma
debt............................................. 2,191 (767) (1,424)
(f) Record the expense effects of estimated indirect
and overhead expenses allocable to the CCC Surety
Operations.(3)................................... 3,100 (1,085) (2,015)
(g) Record additional amortization of intangible
assets resulting from the Merger and related
transactions, using useful lives of 20 to 30
years............................................ 2,491 (2,491)
------ ------- --------
Total pro forma adjustments.................. 0 7,782 (1,852) (5,930)
------- ------ ------- --------
Total effect of all adjustments.............. $(9,525) $9,039 $(5,647) $(12,917)
======= ====== ======= ========
</TABLE>
84
<PAGE> 91
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
INCOME NET
FOR THE SIX MONTHS ENDED JUNE 30, 1997 REVENUES EXPENSES TAXES INCOME
-------------------------------------- -------- -------- ------ ------
ADD (SUBTRACT)
<S> <C> <C> <C> <C>
Pro forma adjustments:
(h) Record the estimated interest expense
adjustment(2) related to the total pro forma
debt. ........................................... $1,242 $ (435) $ (807)
(i) Record the expense effects of estimated indirect
and overhead expenses allocable to the CCC Surety
Operations.(3)................................... 1,550 (542) (1,008)
(j) Record additional amortization of intangible
assets resulting from the Merger and related
transactions, using useful lives of 20 to 30
years............................................ 1,230 (1,230)
------ ------- --------
Total pro forma adjustments.................. $4,022 $ (977) $ (3,045)
====== ======= ========
</TABLE>
- -------------------------
(1) On October 4, 1996, a $10.00 per share Special Distribution, aggregating
$156,000, was paid to Capsure stockholders. The sources of funds for this
distribution were (i) proceeds from the sale of United Capitol, including
the release of United Capitol's excess statutory surplus at closing
($77,000), (ii) proceeds from the incurrence of additional indebtedness
($62,000), and (iii) cash and investments of Capsure ($17,000). As a result
of the Special Distribution, the capital base of Capsure that gave rise to
the historical 1996 operating results of Capsure and which will be available
to stockholders of CNA Surety was substantially reduced. Accordingly, the
historical Capsure income and expense amounts that are used to develop the
pro forma results of operations have been adjusted to reflect the effects as
if the Special Distribution was made on January 1, 1996 and funded by the
same sources described above. For purposes of estimating investment income
effects, a 5.5% annual yield was used which approximated the short-term rate
that was earned by Capsure. For purposes of estimating interest expense
effects, Capsure's historical borrowing rate was used.
85
<PAGE> 92
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
The revenue, expense, income tax, and net income adjustments related to the
funds from (i) the sale of United Capitol, (ii) the additional indebtedness,
and (iii) cash and investments, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
INCOME NET
REVENUES EXPENSES TAXES INCOME
-------- -------- ------ ------
ADD (SUBTRACT)
<S> <C> <C> <C> <C>
(i) Eliminate the results of operations of United
Capitol for the period from January 1, 1996
through May 22, 1996, the date of sale by
Capsure, and the investment income earned on
the net proceeds from the date of the sale to
October 4, 1996, the date of the Special
Distribution................................. $(8,824) $(1,744) $(2,500) $(4,580)
(ii) Accrue interest expense from January 1, 1996
to October 4, 1996 on $62,000 of debt that
was incurred to fund a portion of the Special
Distribution................................. 3,001 (1,050) (1,951)
(iii) Eliminate investment income from January 1,
1996 to October 4, 1996 on $17,000 of
investments that funded a portion of the
Special Distribution......................... (701) (245) (456)
------- ------- ------- -------
Total adjustment............................ $(9,525) $ 1,257 $(3,795) $(6,987)
======= ======= ======= =======
</TABLE>
(2) The estimated interest expense adjustment is comprised of (i) the interest
expense on the additional $50,000 of debt and (ii) the adjustment to
interest expense on Capsure's pre-Merger debt, based on the bank commitment
letter received by CNA Surety. Based on the terms of the bank commitment
letter, the average interest rates for the year ended 1996 and the six
months ended June 30, 1997 would have been 5.79% and 5.87%, respectively.
The comparable average Capsure interest rates for the year ended 1996 and
the six months ended June 30, 1997 were 6.90% and 7.00%, respectively. An
increase or decrease of the interest rate by 12.5 basis points would have
increased or decreased the pro forma interest expense by $138 and $69, on
the total pro forma borrowings of $110,000, for the year ended December 31,
1996 and the six months ended June 30, 1997, respectively.
(3) The estimates of overhead and other indirect expenses of $3,100 and $1,550,
for the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively, have been determined pursuant to the terms of the
Administrative Services Agreement and assume that all services offered
thereunder were purchased by CNA Surety. The estimated cost of such services
was based on the rates set forth in the Administrative Services Agreement
and management's best estimate of usage of each of the services to be
provided, without giving effect to any potential savings resulting from the
Merger. CNA Surety is under no obligation to purchase any services under the
Administrative Services Agreement.
NOTE 3. INVESTMENT INCOME
The accompanying Pro Forma Condensed Statements of Consolidated Operations
do not include the estimated net investment income resulting from investment of
Merger-related cash flow, including (i) the $50 million debt proceeds, (ii) the
$52.25 million capital contribution from CCC, and (iii) collection of the
receivable from CCC. Investment earnings are an integral part of an insurance
entity's operations. If proceeds from these sources of funds were assumed to be
invested in high-quality, taxable fixed income securities with an average
duration of approximately 3 years, yielding 6.4%, net investment income would
increase by approximately $17.1 million ($11.1 million net of tax, or $0.25 in
pro forma earnings per share) for the year ended December 31, 1996 and $8.5
million ($5.5 million net of tax, or $0.12 in pro forma earnings per share) for
the six months ended June 30, 1997. An increase or decrease in the interest rate
by 12.5 basis
86
<PAGE> 93
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
points would have increased or decreased the pro forma investment income by $334
and $167 for the year ended December 31, 1996 and the six months ended June 30,
1997, respectively.
NOTE 4. SIGNIFICANT CREDITS AND NONRECURRING CHARGES
Net losses and loss adjustment expenses reported in the first half of 1997
by the CCC Surety Operations benefited from net favorable reserve development of
$35.0 million, which is equivalent to $0.53 in pro forma earnings per share.
The historical income of Capsure for 1996, which has been used in
developing the pro forma income of CNA Surety, includes certain non-recurring
charges. These items, which are discussed below, have not been adjusted in
deriving the pro forma income statement for 1996. There were no such
non-recurring items in the first six months of 1997.
1996 income reflects a non-recurring compensation charge of $6.4 million
before taxes ($4.1 million after taxes) for the repricing of all outstanding
stock options of Capsure. The repricing was required as a result of the $10.00
per share Special Distribution paid by Capsure on October 4, 1996.
1996 income reflects non-recurring merger-related expenses of $1.5 million
before taxes ($1.1 million after taxes). These expenses were incurred in 1996 in
connection with the definitive agreement reached on December 19, 1996 between
Capsure and CNAF to form CNA Surety.
Capsure incurred a $0.7 million charge before taxes ($0.5 million after
taxes) in 1996 related to the refinancing of its revolving credit facility.
NOTE 5. PER SHARE CALCULATIONS
Earnings per common and common equivalent shares outstanding are computed
using the treasury stock method. Weighted average shares outstanding assuming
full dilution for 1996 would have been approximately 43.7 million had the Merger
taken place on January 1, 1996 and are calculated as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Capsure shares outstanding at February 12, 1997............. 15,807,434
Capsure options outstanding at February 12, 1997............ 976,937
----------
Capsure fully diluted outstanding (38.25%).................. 16,784,371
CCC equivalent (61.75%)..................................... 27,096,337
----------
43,880,708
Less: Treasury stock purchased from Capsure Options proceeds
at $11.00 per share....................................... 205,974
----------
Weighted average shares outstanding......................... 43,674,734
==========
</TABLE>
There are certain provisions in the Reorganization Agreement that may
affect the total number of shares of CNA Surety and the relative ownership of
such shares by CCC and the stockholders and option holders of Capsure. The
operation of these provisions is dependent upon actual 1997 net written premiums
of both the Insurance Subsidiaries and the CCC Surety Operations as more fully
discussed at "The Reorganization Agreement and Other Transaction Agreements --
Lookback Adjustment."
Since the effect, if any, of these provisions on the total shares
outstanding initially established is not presently known or estimable, the
earnings per share calculations in the Unaudited Pro Forma Condensed
Consolidated Financial Statements do not reflect the effect of these provisions.
According to these provisions, the minimum and maximum average shares
outstanding for CNA Surety may range approximately from 36,179,000 to
45,816,000, which compares to average shares outstanding of 43,675,000, used in
these Unaudited Pro Forma Condensed Consolidated Financial Statements. The
corresponding range of pro forma earnings per share for the year ended December
31, 1996 would have been $0.63 and $0.50, assuming average
87
<PAGE> 94
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
minimum and maximum shares outstanding, respectively, and for the six months
ended June 30, 1997 would have been $1.02 and $0.81, assuming average minimum
and maximum shares outstanding, respectively.
CNA Surety's pro forma book value per share as of June 30, 1997 was $5.62.
The corresponding range of book value per share would have been $6.78, and
$5.35, assuming minimum and maximum shares outstanding, respectively.
NOTE 6. STATUTORY FINANCIAL DATA AND SURPLUS
The pro forma statutory surplus of CNA Surety's insurance operations at
June 30, 1997 was approximately $123 million. This amount reflects the Merger
and related transactions, including capital infused into the insurance
operations.
The ability of CNA Surety to pay dividends will be dependent on business
conditions, income, cash requirements of CNA Surety, receipt of dividends from
the Insurance Subsidiaries and other relevant factors. The payment of
stockholder dividends by insurance companies without the prior approval of state
insurance regulators is limited to formula amounts based on net income and
capital and surplus, determined in accordance with statutory accounting
principles, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that CNA Surety's Insurance
Subsidiaries can distribute during 1997, without prior approval of regulators,
is approximately $18.0 million. See "Description of CNA Surety -- Liquidity and
Capital Resources."
NOTE 7. DEBT
CNA Surety intends to consolidate its bank borrowings under a single credit
facility. A commitment letter, received from The Chase Manhattan Bank, provides
for a five-year revolving line of credit facility of up to $130.0 million. The
interest rate on borrowings under the credit facility may be fixed, at CNA
Surety's option, for a period of one, two, three or six months and is based on,
among other rates, the London Interbank offered Rate ("LIBOR") plus the
applicable margin. The margin, including the facility fee, varies based on CNA
Surety's leverage ratio (debt to total capitalization) and ranges from 0.25% to
0.40%. Based on the expected leverage ratios, management anticipates the margin
to be 0.30% which margin was used for purposes of computing interest expense for
these pro forma financial statements.
The unaudited pro forma condensed consolidated balance sheet reflects total
long-term debt of $110.0 million, comprised of $60.0 million of pre-existing
Capsure debt and an additional $50.0 million of debt arising in connection with
the Merger. Using the rates established by the bank commitment letter, the
effective rates of interest that are reflected in the accompanying Unaudited Pro
Forma Condensed Consolidated Financial Statements are 5.79% and 5.87% for the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively. The comparable average Capsure interest rates for the year ended
1996 and the six months ended June 30, 1997 were 6.90% and 7.00%, respectively.
88
<PAGE> 95
DESCRIPTION OF CNA SURETY COMMON STOCK
CNA Surety is authorized to issue two classes of shares: common and
preferred.
CNA SURETY COMMON STOCK
The number of shares of CNA Surety Common Stock authorized by CNA Surety's
certificate of incorporation is 100 million, $.01 par value per share. As of the
Record Date, 27,096,337 shares of CNA Surety Common Stock were issued and
outstanding to CCC. All issued and outstanding shares of CNA Surety Common Stock
offered hereby, when issued pursuant to the Merger, will be validly issued,
fully paid and non-assessable.
CNA SURETY PREFERRED STOCK
The CNA Surety Board has the authority to issue up to 20 million shares of
preferred stock of CNA Surety, $0.01 par value per share and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of such stock without further stockholder approval.
VOTING RIGHTS
The holders of CNA Surety Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of stockholders and are
not entitled to cumulative voting.
ABSENCE OF PREEMPTIVE AND CONVERSION RIGHTS
Holders of CNA Surety Common Stock have no preemptive rights and have no
rights to convert their CNA Surety Common Stock into any other securities.
NYSE LISTING OF CNA SURETY COMMON STOCK
It is a condition to Capsure's obligations under the Reorganization
Agreement that the shares of CNA Surety Common Stock to be issued in the Merger
be listed on the NYSE, subject to official notice of issuance.
REGISTRAR AND EXCHANGE AGENT
The registrar for the CNA Surety Common Stock and the Exchange Agent for
the purpose of exchanging Certificates for certificates representing shares of
CNA Surety Common Stock will be Boston EquiServe, L.L.P.
COMPARISON OF STOCKHOLDER RIGHTS
As a result of the Merger, Capsure stockholders will become stockholders of
CNA Surety, and the rights of Capsure stockholders will be governed by the
certificate of incorporation and the bylaws of CNA Surety. Although both Capsure
and CNA Surety stockholders are governed by the DGCL, CNA Surety's governing
documents differ with respect to certain stockholder rights. The following
discussion summarizes the material differences between the rights of Capsure
stockholders and the rights of CNA Surety stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS
The bylaws of Capsure provide that special meetings of stockholders may be
called at any time by the president or upon the written request of 25% of the
holders of the outstanding stock entitled to vote at such meeting.
A special meeting of the stockholders of CNA Surety may be called at any
time by the chairman of the board of directors or by the president or upon the
written request of stockholders owning a majority of the stock entitled to vote.
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<PAGE> 96
SUPERMAJORITY VOTING PROVISIONS
The bylaws of Capsure provide that in any stockholders' meeting the
affirmative vote of the majority of stock entitled to vote is required for all
stockholder action in which a quorum is present, except for the election of
directors in which case a plurality of votes is required.
The CNA Surety bylaws provide that for two years following the Effective
Time, the following fundamental corporate actions will require the affirmative
vote of the holders of at least 75% of the stock having voting power and
entitled to vote: (i) any amendment to the certificate of incorporation; (ii)
any business combination between CNA Surety and any third party; (iii) the sale
of all or substantially all of the assets of CNA Surety; and (iv) any amendment
to the foregoing provisions in the bylaws of CNA Surety.
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<PAGE> 97
MANAGEMENT OF CNA SURETY
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of CNA Surety as of June 30, 1997 and with
respect to persons who have been designated and have consented to become
directors or executive officers immediately after the Effective Time.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Robert E. Ayo........................ 56 Vice President -- Designee
Giorgio Balzer....................... 57 Director -- Designee
David T. Cumming..................... 53 Director and Secretary(1)
Rod F. Dammeyer...................... 56 Director -- Designee
Bruce A. Esselborn................... 54 Director -- Designee
Melvin Gray.......................... 64 Director -- Designee
John S. Heneghan..................... 35 Vice President and Chief Financial Officer -- Designee
Peter E. Jokiel...................... 49 Director and Treasurer(1)
Dan L. Kirby......................... 50 Executive Vice President, General Counsel and Secretary
of Western Surety
Joe P. Kirby......................... 43 Director -- Designee
Matthew W. Klimczak.................. 48 Vice President -- Designee
John T. Knox, Jr..................... 41 President and Chief Executive Officer of USA and
Director
-- Designee
Stephen T. Pate...................... 50 President and Chief Operating Officer of Western Surety
Roy E. Posner........................ 63 Director -- Designee
Adrian M. Tocklin.................... 45 Chairman of the Board and Director -- Designee
Mark C. Vonnahme..................... 48 President, Chief Executive Officer and Director
</TABLE>
- -------------------------
(1) Messrs. Cumming and Jokiel are currently the Secretary and Treasurer
respectively of CNA Surety. Immediately after the Merger, they will no
longer serve as officers of CNA Surety but will each remain as a Director of
CNA Surety.
ROBERT E. AYO -- Vice President and Chief Contract Underwriting Officer --
Surety of all insurance subsidiaries of CNAF, including CCC and CIC, since March
1995; Assistant Vice President and Underwriting Manager, Contract Surety of all
insurance subsidiaries of CNAF, including CCC and CIC, from January 1993 until
March 1995; Underwriting Manager, Contract Surety of CCC from 1985 to January
1993. Mr. Ayo has been designated and has consented to become an executive
officer of CNA Surety immediately after the Effective Time.
GIORGIO BALZER -- Chairman and Chief Executive Officer, Businessmen's
Assurance Company of America since 1990. U.S. representative for Assicurazioni
Generali, S.p.A. Director of Commerce Bancshares, Inc. Mr. Balzer has been
designated and has consented to become a Director immediately after the
Effective Time.
DAVID T. CUMMING -- Secretary and a Director of CNA Surety since December
1996. Deputy General Counsel of all insurance subsidiaries of CNAF, including
CCC and CIC, since 1993; Vice President of Leucadia National Corporation from
1978 to 1992. After the Merger, Mr. Cumming will remain as a Director of CNA
Surety but will not be an officer.
ROD F. DAMMEYER -- Director of Capsure since 1993; Managing Director of EGI
Corporate Investments since 1996, a division of Equity Group Investments, Inc.;
President and Director since 1985 and Chief
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<PAGE> 98
Executive Officer since 1993 of Anixter International Inc.; Director since 1992
and President and Chief Executive Officer since 1994 of Great American
Management and Investment, Inc.; Director of ANTEC Corporation; Director of IMC
Global Inc.; Director of Jacor Communications, Inc.; Director of Lukens, Inc.;
Director of Sealy Corporation; Director of TeleTech Holdings, Inc; and Trustee
of Van Kampen American Capital, Inc. closed end mutual funds. Mr. Dammeyer has
been designated and has consented to become a Director immediately after the
Effective Time.
BRUCE A. ESSELBORN -- Director of Capsure since February 20, 1990 and
President since June 24, 1992; Chairman of the Board from 1988 until May 22,
1996 and President and Chief Executive Officer from 1986 of United Capitol
Holding Company and United Capitol. Mr. Esselborn has been designated and has
consented to become a Director immediately after the Effective Time.
MELVIN GRAY -- Chairman and Chief Executive Officer since 1982 and various
other positions since 1962 of Graycor, Inc. Member Board of Advisors of the
Construction Industry Institute. Mr. Gray has been designated and consented to
become a Director immediately after the Effective Time.
JOHN S. HENEGHAN -- Vice President of Capsure since December 21, 1995;
Controller since June 27, 1994; and various positions and most recently Senior
Audit Manager with Deloitte & Touche L.L.P. from 1984 to June 27, 1994. Mr.
Heneghan has been designated and has consented to join CNA Surety as Vice
President and Chief Financial Officer immediately after the Effective Time.
PETER E. JOKIEL -- Treasurer and Director of CNA Surety since December
1996. President of CNA life operations since April of 1997, Senior Vice
President and Chief Financial Officer of CNAF and all insurance subsidiaries of
CNAF, including of CCC and CIC, from 1990 to April of 1997. Director of
Continental Assurance Company. After the Merger, Mr. Jokiel will remain as a
Director of CNA Surety but will not be an officer of CNA Surety.
DAN L. KIRBY -- Executive Vice President, General Counsel and Secretary of
Western Surety since 1974. Director of Capsure since May 27, 1993. After the
Merger, Mr. Kirby has agreed to serve as Vice President -- Legislative Relations
of CNA Surety. Mr. Kirby is the brother of Joe P. Kirby.
JOE P. KIRBY -- Director of Capsure since May 27, 1993; President from 1979
until 1995 and Chief Executive Officer of Western Surety Company since 1979. Mr.
Kirby has been designated and has consented to become a Director immediately
after the Effective Time. Mr. Kirby is the brother of Dan L. Kirby.
MATTHEW W. KLIMCZAK -- Vice President and Chief Commercial Surety
Underwriting Officer of all insurance subsidiaries of CNAF, including CCC and
CIC since December 1995; Surety Bond Officer and Senior Vice President of
Continental's insurance subsidiaries from 1992 to December 1995.
JOHN T. KNOX, JR. -- President and Chief Executive Officer of Universal
Surety Holding Corporation since 1986 and of USA since 1983. Mr. Knox has been
designated and has consented to become a Director immediately after the
Effective Time.
STEPHEN T. PATE -- President and Chief Operating Officer of Western Surety
since June 1995; Executive Vice President and Chief Operating Officer of Western
Surety from October 1994 to June 1995; President, Surety Profit Center of CIC
from April 1993 to October 1994; Regional Vice President, Surety of CIC from
June 1991 to April 1993.
ROY E. POSNER -- Retired. Chief Financial Officer and Senior Vice President
of Loews Corporation from 1985 to February 1997. Mr. Posner has been designated
and has consented to become a Director immediately after the Effective Time.
ADRIAN M. TOCKLIN -- President, Diversified Operations, CCC since May 1995;
President and Chief Operating Officer of Continental and all of its insurance
subsidiaries from June 1994 to May 1995; Executive Vice President of Continental
from September 1992 to June 1994; various other positions with Continental since
December 1974; Director of SONAT, Inc. and Trustee of George Washington
University. Ms. Tocklin has been designated and has consented to become the
Chairman of the Board of Directors immediately after the Effective Time.
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<PAGE> 99
MARK C. VONNAHME -- President, Chief Executive Officer and Director of CNA
Surety since December 1996; Group Vice President and Senior Surety Officer of
all CNAF insurance subsidiaries, including CCC and CIC since August 1993; Vice
President, Contract Surety Division of CCC from January 1993 to August 1993; and
Assistant Vice President, Contract Surety Division of CCC, from 1991 to January
1993; and Director of Surety Association of America.
DIRECTOR COMPENSATION
Effective upon the consummation of the Merger, CNA Surety's directors who
are not also employees of CNA Surety or CCC will be paid an annual retainer of
$25,000 and a fee of $1,500 for each meeting of the CNA Surety Board or its
committees. Directors who are also employees of CNA Surety or CCC will not
receive any additional compensation for serving on the CNA Surety Board.
COMMITTEES OF THE CNA SURETY BOARD
The CNA Surety Board will have, upon consummation of the Merger, standing
Executive, Audit and Investment Committees to assist the CNA Surety Board in the
discharge of its responsibilities. Members of each such Committee are elected by
the CNA Surety Board annually and serve for one-year terms. CNA Surety intends
to create an Incentive Compensation Committee of the CNA Surety Board shortly
after the consummation of the Merger.
The Executive Committee possesses and may exercise the full and complete
authority of the CNA Surety Board in the management and business affairs of CNA
Surety between meetings of the CNA Surety Board, subject to limitations under
the DGCL. Any actions taken by the Executive Committee will be reported to the
CNA Surety Board promptly but in no event later than the next meeting of the CNA
Surety Board.
The Audit Committee reports to the CNA Surety Board regarding the
appointment of the independent public accountants, the scope and fees of
prospective annual audits and the results thereof, compliance with the
accounting and financial policies and management's procedures and policies
relative to the adequacy of CNA Surety's internal accounting controls. In
addition, it is anticipated that the Audit Committee will review any and all
agreements and arrangements between CNA Surety and CCC, as well as any disputes
that may arise thereunder. CCC and Capsure have agreed that at least until the
1999 annual meeting of CNA Surety stockholders, at least one of the
Capsure-designated directors will be appointed as a member of the Audit
Committee. Consistent with NYSE requirements, the Audit Committee of CNA Surety
will be comprised solely of directors who are independent of management and are
free from relationships that, in the opinion of the CNA Surety Board, would
interfere with the exercise of independent judgment. Directors who are employed
by CNAF or its affiliates will not be qualified to serve on the Audit Committee.
CNA Surety will have an Investment Committee that is responsible for
establishing investment policies and overseeing the management of the CNA Surety
investment portfolio.
The Incentive Compensation Committee will review and approve the incentive
payments for each executive officer, review, approve and recommend terms and
conditions for all employee benefit plans and administer the CNA Surety Option
Plan and other employee benefit plans as may be adopted from time to time. The
members of the Incentive Compensation Committee will consist only of
non-employee directors.
EXECUTIVE COMPENSATION ARRANGEMENTS
CNA Surety will commence operations as of the date of the Merger. It
expects to enter into employment agreements with certain employees of CNAF and
Capsure who will become executive officers of CNA Surety upon the Merger. The
employment agreements with Mark Vonnahme, the president and chief executive
officer of CNA Surety, and certain executive officers providing for annual
compensation in excess of $100,000 are described below.
CNA Surety anticipates entering into an employment agreement with Mr.
Vonnahme. It is expected that Mr. Vonnahme will serve as CNA Surety's chief
executive officer for a period of up to three years and from
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<PAGE> 100
year to year thereafter subject to the review of the CNA Surety Board. CNA
Surety expects that Mr. Vonnahme's base salary as president and chief executive
officer of CNA Surety will be approximately $300,000 per year. In addition, it
is anticipated that Mr. Vonnahme will be entitled to receive additional
compensation, including bonuses and incentive awards (which may include the
grant of options or shares of CNA Surety Common Stock), as may be determined by
the CNA Surety Board and the Incentive Compensation Committee from time to time.
Mr. Vonnahme will also be entitled to receive other employee benefits which will
be available to CNA Surety employees generally. CNA Surety expects that Mr.
Vonnahme will agree to certain confidentiality, non-competition and
non-solicitation provisions as part of his employment agreement.
CNA Surety expects to maintain the existing employment agreements or enter
into new agreements with each of Messrs. John T. Knox, Jr. and Stephen T. Pate
and enter into an employment agreement with Mr. Dan L. Kirby. It is anticipated
that Mr. Kirby's agreement will have a term of two years from the Effective
Time, will provide for an initial base salary of $200,000 and will provide a
severance payment if CNA Surety terminates his employment without cause in an
amount equal to the discounted present value of the salary that he would have
received under the agreement through the term of such agreement. CNA Surety
expects that Mr. Kirby will agree to certain confidentiality, non-competition
and non-solicitation provisions as part of his employment agreement.
Under their current agreements, each of Messrs. Knox and Pate are entitled
to receive an annual base salary equal to $262,500. If terminated by CNA Surety
without cause, Messrs. Knox and Pate, respectively, would each be entitled to a
severance payment equal to the discounted present value of the salary otherwise
payable to Messrs. Knox or Pate under their respective agreements.
While the other executive officers shown in the table under "Management of
CNA Surety -- Directors and Executive Officers" are expected to serve in the
capacities indicated as of the Effective Time, those executives will serve
without employment agreements. Mr. Ayo's current base salary is $150,000. Mr.
Ayo's base salary as an officer of CNA Surety may be greater than his salary as
an officer of the CCC Surety Operations, but will be commensurate with similar
executives of comparable companies.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
CNA Surety's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. The DGCL provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of directors for monetary damages for any
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL, or (iv) any
transaction from which the director derived an improper personal benefit. CNA's
Surety's bylaws provide that CNA Surety shall indemnify its directors and
officers and may indemnify its employees and agents to the fullest extent
permitted by Delaware law.
At present, there is no material pending or, to CNA Surety management's
knowledge, any threatened material litigation or proceeding involving any
current director, officer, employee or agent of CNA Surety where indemnification
will be required or permitted.
CNA SURETY OPTION PLAN
All Capsure Options held by employees, consultants and directors of Capsure
under the Capsure Holdings Corp. Amended and Restated 1990 Stock Option Plan
will be cancelled as of the Effective Time. Prior to the Merger, CNA Surety will
adopt, subject to CCC's approval, a replacement stock option plan ("Replacement
Plan") under which the holders of the canceled Capsure Options will be granted
substantially similar CNA Surety Options to purchase CNA Surety Common Stock. It
is contemplated that shortly after the Merger, CNA Surety will adopt a new
equity incentive plan ("New CNA Surety Plan") that will provide discretionary
authority to the Incentive Compensation Committee of the CNA Surety Board to
grant additional options to purchase CNA Surety Common Stock ("New CNA Surety
Options") and other awards,
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<PAGE> 101
including stock appreciation rights, restricted stock and stock bonus awards
("Other Awards"), from time to time, to employees, consultants and directors of
CNA Surety.
Under the Replacement Plan, CNA Surety Options will be issued as of the
Effective Time in exchange for each Capsure Option that is terminated. The
number of shares of CNA Surety Common Stock that are subject to each CNA Surety
Option shall be equal to the number of shares of Capsure Common Stock that are
subject to the Capsure Option that is exchanged for the CNA Surety Option. Each
such CNA Surety Option will have the same rights, benefits, terms and conditions
as the Capsure Option which it replaces, except that (i) the period of time
during which a CNA Surety Option may be exercised by an employee, director or
consultant who is terminated in connection with the Merger will be one year from
the Effective Time, and (ii) subject to the agreement of certain holders of
Capsure Options who have the right to cause Capsure or the Surviving Corporation
to pay to the holder the excess of the fair market value of the Capsure Common
Stock over the exercise price of such Capsure Options, no CNA Surety Option will
contain the right to cause Capsure or CNA Surety to pay cash to the holder
thereof upon the election of such holder. CNA Surety will reimburse any
terminated employee, consultant or director whose Capsure Options are replaced
by CNA Surety Options for any commissions or other customary and reasonable
costs incurred upon the sale of shares of CNA Surety Common Stock immediately
upon the exercise of the CNA Surety Option.
As of June 30, 1997, 934,126 shares of Capsure Common Stock were subject to
Capsure Options. If the Merger is approved by Capsure's stockholders, the
Replacement Plan and the New CNA Surety Plan will be submitted to CCC, the sole
shareholder of CNA Surety, for approval to make available an aggregate of 3.0
million shares of CNA Surety Common Stock for the grant of CNA Surety Options,
New CNA Surety Options and Other Awards pursuant to the Replacement Plan and the
New CNA Surety Plan. CCC intends to give such approval.
OTHER PLANS
Capsure sponsors the Capsure Holdings Corp. 401(k) Plan and Trust (the
"401(k) Plan") to which eligible employees of Capsure and the Insurance
Subsidiaries may make pre-tax employee contributions. The 401(k) Plan provides
for employer matching contributions equal to 50% of that portion of each
employee's pre-tax contributions that do not exceed 6% of the employee's annual
compensation, and also permits employers to make additional discretionary profit
sharing contributions. It is contemplated that following the Merger the 401(k)
Plan will be amended to increase the employer matching contribution from 50% to
70% of that portion of each employee's pre-tax contributions that do not exceed
6% percent of the employee's annual compensation.
Capsure also sponsors the Capsure Holdings Corp. Money Purchase Pension
Plan ("Money Purchase Plan") in which eligible employees of Capsure and USA
participate, and Western Surety sponsors the Western Surety Company Defined
Benefit Pension Plan ("Defined Benefit Plan") in which eligible employees of
Western Surety participate. It is contemplated that in connection with the
Merger, the Money Purchase Plan will be terminated or frozen and that no further
contributions will be made thereto, and the Defined Benefit Plan will be
terminated or frozen and no further benefits will accrue thereunder.
Capsure and the Insurance Subsidiaries also maintain various non-qualified
deferred compensation, employee welfare and fringe benefit plans including life,
health, dental, travel accident and disability benefit plans. It is contemplated
that in connection with the Merger certain of such plans will be terminated and
certain others will be amended to provide modified levels of coverage or
benefits.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF BENEFICIAL OWNERS OF CAPSURE COMMON STOCK
The following table sets forth, as of July 31, 1997, except as noted,
certain information with respect to each person or entity who is known by the
management of the Capsure to be the beneficial owner of more than 5% of the
outstanding shares of the Capsure Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------- -------------------------- ----------------
<S> <C> <C>
Equity Capsure Limited Partnership.................. 3,552,862(2)(3) 22.4%
Two N. Riverside Plaza
Chicago, IL 60606
Shapiro Capital Management Company, Inc. ........... 1,253,698(4) 7.9%
3060 Peachtree Road, N.W.
Atlanta, Georgia 30305
</TABLE>
- -------------------------
(1) The number of shares of Capsure Common Stock indicated as beneficially owned
is reported on the basis of regulations of the Commission governing the
determination of beneficial ownership of securities.
(2) Equity Capsure Limited Partnership, the Major Stockholder, is an Illinois
limited partnership comprised of four partners: the Samuel Zell Revocable
Trust, Alphabet Partners, LFT Partnership and ZFT Partnership. The Samuel
Zell Revocable Trust, of which Mr. Zell is the trustee, is the general
partner of the Major Stockholder, and the remaining partners are limited
partners of the Major Stockholder. Sheli Z. Rosenberg is the sole trustee of
the three trusts which are the partners of ZFT Partnership and Arthur A.
Greenberg is the sole trustee of 15 trusts which are the partners of
Alphabet Partners. Mr. Zell is the Chairman of the Board and Chief Executive
Officer of Capsure. Messrs. Zell and Greenberg and Mrs. Rosenberg may be
deemed to be the beneficial owners of the shares of Capsure Common Stock
owned by the Major Stockholder but they each disclaim beneficial ownership
of these shares.
(3) The shares are held by three institutions as collateral for loans to the
Major Stockholder. Under the loan agreements, the institutions cannot vote
or exercise any ownership rights relating to the pledged shares unless there
is an event of default thereunder.
(4) Pursuant to a Schedule 13G filed with the Commission for calendar year 1996,
Shapiro Capital Management Company, Inc. ("Shapiro") is a registered
investment advisor. One or more of Shapiro's advisory clients is the legal
owner of 861,998 shares of Capsure Common Stock. Pursuant to investment
advisory agreements with its clients, Shapiro has the authority to divest
investments held by its advisory clients. Samuel R. Shapiro is the
president, director and majority shareholder of Shapiro. Mr. Shapiro's wife
is also the beneficial owner of 38,000 shares of Capsure Common Stock.
Additionally, The Kaleidoscope Fund, L.P. ("Kaleidoscope") is the beneficial
owner of 373,700 shares of Capsure Common Stock. Shapiro is the general
partner of Kaleidoscope.
SECURITY OWNERSHIP OF CAPSURE MANAGEMENT
The following information is furnished as of July 31, 1997, with respect to
the shares of Capsure Common Stock beneficially owned by each director, by the
executive officers of Capsure and by all directors
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and executive officers (17 persons) as a group. Information concerning the
directors and executive officers and their security holdings has been furnished
by them to Capsure.
<TABLE>
<CAPTION>
SHARES OF SHARES UPON PERCENT
CAPSURE EXERCISE OF OF
NAME OF BENEFICIAL OWNER COMMON STOCK STOCK OPTIONS(1) TOTAL(2) CLASS
------------------------ ------------ ---------------- -------- -------
<S> <C> <C> <C> <C>
Rod F. Dammeyer......................... 0 20,000 20,000 *
Herbert A. Denton....................... 47,860 0 47,860 *
Bradbury Dyer, III...................... 546,158(3) 40,000 586,158 3.7%
Talton R. Embry......................... 32,175(4) 40,000 72,175 *
Bruce A. Esselborn...................... 83,507(5) 182,500 266,007 1.7%
Dan L. Kirby............................ 66,365 54,190 120,555 *
Joe P. Kirby............................ 51,885 54,190 106,075 *
Donald W. Phillips...................... 0 40,000 40,000 *
Sheli Z. Rosenberg...................... 3,595,568(6)(7) 20,000 3,615,568 22.8%
L.G. Schafran........................... 13,768(8) 40,000 53,768 *
Richard I. Weingarten................... 0 15,000 15,000 *
Samuel Zell............................. 3,552,862(6) 60,000 3,612,862 22.7%
Mary Jane Robertson..................... 68,740 46,635 115,375 *
Arthur A. Greenberg..................... 3,582,112(6)(9) 2,000 3,584,112 22.6%
Kelly L. Stonebraker.................... 0 1,125 1,125 *
John T. Knox, Jr. ...................... 290,645 40,718 331,363 2.1%
Stephen T. Pate......................... 200 7,500 7,700 *
All directors and executive officers as
a group (17 persons) including the
above-named persons................... 4,826,121 663,858 5,489,979 33.2%
</TABLE>
- -------------------------
* Less than 1%
(1) Represents beneficial ownership of shares that may be acquired by the
exercise of stock options which are currently exercisable or exercisable
within sixty days of the date of this table.
(2) The amounts of Capsure Common Stock and stock options beneficially owned are
reported on the basis of regulations of the Commission governing the
determination of beneficial ownership of securities.
(3) Includes 544,258 shares of Capsure Common Stock owned by Paragon Joint
Venture ("Paragon"). Paragon is a joint venture formed by Paragon Associates
and Paragon Associates II, both Texas limited partnerships. Mr. Dyer is the
sole general partner of Paragon Associates and Paragon Associates II. Under
the terms of the joint venture agreement of Paragon, each partner has
beneficial ownership in proportion to its respective account in Paragon. Mr.
Dyer does not have full direct ownership; however, as the general partner of
the partners of Paragon, he may be deemed to have beneficial ownership.
(4) The 32,175 shares are owned as follows: 300 shares are owned by Mr. Embry;
14,400 shares are owned by the Magten Asset Management Corp. Pension Plan &
Trust; 1,675 shares are owned by Mr. Embry's minor children; 300 shares are
owned by Mr. Embry's wife; and 15,500 shares are owned by the Magten Asset
Management Profit Sharing Plan.
(5) Includes 8,500 shares beneficially owned by Mr. Esselborn's wife.
(6) Includes 3,552,862 shares of Capsure Common Stock owned by the Major
Stockholder. Under regulations of the Commission, Mr. Zell, Mrs. Rosenberg
and Mr. Greenberg may be deemed to be the beneficial owners of the shares of
Capsure Common Stock owned by the Major Stockholder (see notes (2) and (3)
under "Security Ownership of Beneficial Owners of Capsure Common Stock"),
but they each disclaim beneficial ownership of these shares.
(7) Includes 16,388 shares of Capsure Common Stock beneficially owned by the
Rosenberg Family Foundation. Mrs. Rosenberg may be deemed to be the
beneficial owner of the shares beneficially owned by the Rosenberg Family
Foundation. Mrs. Rosenberg disclaims beneficial ownership of such shares.
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(8) Shares are beneficially owned by Mr. Schafran's spouse. Mr. Schafran
disclaims beneficial ownership of such shares.
(9) Includes 2,000 shares held in a trust, the beneficiary of which is Mr.
Greenberg.
SECURITY OWNERSHIP OF BENEFICIAL OWNERS OF CNA SURETY COMMON STOCK
CCC owned all of the outstanding shares of CNA Surety prior to the Merger.
The following table sets forth certain information with respect to the
beneficial ownership of the CNA Surety Common Stock, as of June 30, 1997, and
reflecting the exchange of shares in the Merger and the vesting of all Capsure
Options, by: (i) each person or entity who is known by CNA Surety, and is
expected to beneficially own five percent or more of the outstanding shares of
CNA Surety Common Stock, (ii) each director, (iii) each executive officer, and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF CNA SURETY PERCENT
NAME OF BENEFICIAL OWNER AFTER MERGER OF CLASS
------------------------ -------------------- --------
<S> <C> <C>
CCC(1)...................................................... 27,096,337 63.1%
Equity Capsure Limited Partnership(1)....................... 3,552,862 8.3%
Robert E. Ayo............................................... 0 --
Giorgio Balzer.............................................. 0 --
David T. Cumming............................................ 0 --
Rod F. Dammeyer(2).......................................... 20,000 *
Bruce A. Esselborn(1)(3).................................... 278,507 *
Melvin Gray................................................. 0 --
John S. Heneghan(1)(4)...................................... 2,350 *
Peter E. Jokiel............................................. 0 --
Dan L. Kirby................................................ 120,555 *
Joe P. Kirby................................................ 106,075 *
Matthew W. Klimczak......................................... 0 --
John T. Knox, Jr.(2)........................................ 331,363 *
Stephen T. Pate(2).......................................... 7,700 *
Roy E. Posner............................................... 0 --
Adrian M. Tocklin........................................... 0 --
Mark C. Vonnahme............................................ 0 --
All directors and executive officers as a group (16 persons)
including the above-named persons......................... 866,550 2.0%
</TABLE>
- -------------------------
* Less than 1%
(1) The Reorganization Agreement provides that CCC is to beneficially own 61.75%
of the outstanding CNA Surety Common Stock, on a fully-diluted basis. The
beneficial ownership for CCC and Equity Capsure Limited Partnership reported
in this table is higher than 61.75% and 8.1%, respectively, because the
rules under the Exchange Act require disclosure of ownership on other than a
fully-diluted basis. See note (6) under "Security Ownership of Beneficial
Owners of Capsure Common Stock."
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of CNA Surety Common
Stock subject to options held by the person that are currently exercisable
or exercisable within 60 days of June 30, 1997 are deemed outstanding. Such
shares are not, however, deemed outstanding for the purpose of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table, each stockholder named in the table has sole voting
and investment power with respect to the shares set forth opposite the
stockholder's name.
(3) Includes 8,500 shares of Capsure Common Stock owned by Mr. Esselborn's
spouse.
(4) Includes 1,000 shares of Capsure Common Stock owned by Mr. Heneghan's
spouse.
98
<PAGE> 105
STOCKHOLDERS REGISTERING SHARES FOR REOFFER
A limited number of shares of CNA Surety Common Stock held by the Selling
Stockholders listed below will be registered for sale pursuant to this Proxy
Statement/Prospectus. Each of the Selling Stockholders, other than Ms.
Robertson, is a director of Capsure who will not continue as a director of CNA
Surety. Ms. Robertson's employment with Capsure will be terminated in connection
with the Merger. The registration of the following shares of CNA Surety Common
Stock for sale under this Proxy Statement/Prospectus, removes the restrictions
upon transfer imposed by Rule 145 of the Securities Act and permits the Selling
Stockholders to reoffer for sale such shares, at their discretion, immediately
following the Effective Time. In the event that such shares of CNA Surety Common
Stock are sold by the Selling Stockholders, CNA Surety will not receive any of
the proceeds from such sales.
<TABLE>
<CAPTION>
AMOUNT OF SHARES SHARES AVAILABLE AMOUNT OF SHARES
OWNED BEFORE FOR SALE UNDER OWNED AFTER PERCENT
OFFERING(1) REOFFER OFFERING(2) OF CLASS
---------------- ---------------- ---------------- --------
<S> <C> <C> <C> <C>
Bradbury Dyer III....................... 586,158 293,079 293,079 *
Mary Jane Robertson(3).................. 125,000 68,740 56,260 *
Talton R. Embry......................... 72,175 72,175 0 --
L.G. Schafran........................... 53,768 53,768 0 --
Herbert A. Denton....................... 47,860 47,860 0 --
Donald W. Phillips...................... 40,000 40,000 0 --
Richard I. Weingarten................... 15,000 15,000 0 --
------- ------- --------
All Selling Stockholders................ 939,961 590,622 349,339 *
======= ======= ========
</TABLE>
- -------------------------
* Less than one percent.
(1) Includes shares issuable upon Capsure Options exercisable within 60 days
following the Effective Time, and Capsure Options that will become
exercisable by virtue of the Merger.
(2) Assumes sale of all shares of CNA Surety Common Stock available for sale
under reoffer pursuant to this Proxy Statement/Prospectus.
(3) Ms. Robertson has the contractual right under her employment agreement with
Capsure to cause Capsure to purchase Capsure Options from her at a per share
price equal to the excess of the fair market value of the Capsure Common
Stock over the exercise price of any such unexercised Capsure Options.
Each of Messrs. Dyer, Embry, Denton, Phillips, Schafran and Weingarten are
all currently members of the Board of Directors of Capsure and have served as
directors for at least three years. Ms. Robertson has been senior vice president
and chief financial officer of Capsure since May 1993.
RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE OF CONTROL ARRANGEMENTS
The employment agreements between Capsure and Bruce A. Esselborn, president
of Capsure, and Mary Jane Robertson, chief financial officer of Capsure, include
certain provisions which will be triggered upon each employee's respective
termination of employment in connection with the Merger. Mr. Esselborn and Ms.
Robertson each have agreements for the continuation of their employment on a
rolling, two-year basis. Thus, until written notice is received by either party,
the employment period at any point in time shall be two years. Mr. Esselborn's
agreement provides for a minimum salary of $387,500 with annual salary
adjustments determined by Capsure, an annual bonus that is mutually agreed upon
by Mr. Esselborn and Capsure and Capsure-paid premiums for a $2,000,000 life
insurance policy with Mr. Esselborn designating the beneficiary and certain
other employee benefits. Ms. Robertson's agreement provides for a minimum salary
of $225,000 with annual salary adjustments determined by Capsure, an annual
bonus that is mutually agreed
99
<PAGE> 106
upon by Ms. Robertson and Capsure and certain other employee benefits.
Additional information concerning employment contracts is included in the
reports filed by Capsure with the Commission and incorporated by reference in
this Proxy Statement/Prospectus. See "Available Information" and "Documents to
be Incorporated by Reference." See also "The Merger -- Interest of Certain
Persons in the Transaction; Severance Benefits; Retention and Transaction
Arrangements."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Capsure Relationships and Related Transactions
Information concerning certain relationships and related transactions with
respect to Capsure is included in the reports filed by Capsure with the
Commission and incorporated by referenced in this Proxy Statement/ Prospectus.
See "Available Information" and "Documents to be Incorporated by Reference."
CNA Surety Related Transactions
For information concerning certain relationships and related transactions
with respect to CNA Surety, see "The Reorganization Agreement and Other
Transaction Agreements -- Reinsurance Agreements and Services and Indemnity
Agreement" and "Description of CNA Surety -- Liquidity and Capital Resources."
LEGAL MATTERS
The validity of the shares of CNA Surety Common Stock to be issued in
connection with the Merger will be passed upon by Sonnenschein Nath & Rosenthal,
Chicago, Illinois. The tax matters discussed in the tax opinion referred to in
"The Merger -- Certain Federal Income Tax Consequences to Capsure and its
Stockholders" will be passed upon by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Capsure, as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
appearing in Capsure's Annual Report on Form 10-K/A, for the year ended December
31, 1996, have been audited by Coopers & Lybrand L.L.P., independent auditors,
as set forth in their report thereon and included therein and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
It is expected that representatives of Coopers & Lybrand L.L.P.,
independent auditors, will be present at the Special Meeting where they will
have an opportunity to respond to appropriate questions of Capsure stockholders
and to make a statement if they so desire.
The Statement of Certain Assets and Liabilities of the CCC Surety
Operations as of December 31, 1996 and 1995, and the related Statements of
Certain Revenues and Direct Operating Expenses of the CCC Surety Operations for
each of the three years in the period ended December 31, 1996, have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon and included herein. Such financial statements are included in this
Proxy Statement/Prospectus in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
OTHER MATTERS
The Capsure Board knows of no other business which will be presented at the
Special Meeting. If any other business is properly brought before the Special
Meeting, it is intended that proxies in the enclosed form will be voted in
respect thereof in accordance with the judgments of the persons voting the
proxies.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING, YOU ARE
URGED TO COMPLETE, SIGN AND RETURN YOUR PROXY PROMPTLY.
By Order of the Capsure Board
Susan Obuchowski Sig.
August 15, 1997 Susan Obuchowski
Chicago, Illinois Secretary
100
<PAGE> 107
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used in this Proxy Statement/Prospectus have the
following meanings:
Bid Bonds..................... Contract bonds used by owners to prequalify
contractors submitting proposals on potential
contracts.
Combined Ratio................ The sum of the Loss Ratio and the Expense
Ratio.
Commercial Surety Bonds....... Surety bonds that are not contract bonds.
Contract Bonds................ Bonds which secure the payment and/or
performance of an obligation under a written
contract.
Expense Ratio................. The percentage of premium income that goes to
cover acquisition and underwriting costs and is
computed as acquisition and underwriting
expenses divided by earned premiums.
Fidelity Bonds................ Bonds which cover losses arising from employee
dishonesty.
Judicial and Fiduciary
Bonds......................... Bonds required by statutes, courts or legal
documents for the protection of those on whose
behalf a fiduciary acts.
LAE........................... Loss adjustment expenses, including both
allocated and unallocated adjustment expenses.
License and Permit Bonds...... Bonds required by statutes or ordinances for a
number of purposes, including guaranteeing the
payment of certain taxes and fees and providing
consumer protection as a condition to granting
licenses related to selling real estate or
motor vehicles and contracting services.
Loss Ratio.................... The percentage of incurred loss and loss
adjustment expenses to earned premiums.
Non-Standard Contract
Market........................ Bonds that have higher risks or special
exposures, such as bonds written through the
Small Business Administration programs.
Notary Public Bonds........... Bonds required by statutes to protect against
losses resulting from the improper actions of
notaries public.
Payment Bonds................. Contract bonds which guarantee payment of the
contractor's obligation under the contract for
labor, subcontractors and materials supplied to
the project. Since liens may not be placed on
public jobs, the payment bond may be the only
protection for those supplying labor or
materials to a public job.
Performance Bonds............. Contract bonds which guarantee to the owner the
obligations of the contractor according to the
terms and conditions of the contract.
Public Official Bonds......... Bonds required by statutes and ordinances to
guarantee the lawful and faithful performance
of the duties of office by public officials.
Surety Bonds.................. Three party agreements where the issuer of the
bond (the surety) joins with the second party
(the principal) in guaranteeing to a third
party (the obligee) the fulfillment of some
obligation on the part of the principal.
101
<PAGE> 108
APPENDIX A
*CONFORMED COPY
REORGANIZATION AGREEMENT
DATED AS OF
DECEMBER 19, 1996
AMONG
CAPSURE HOLDINGS CORP.,
CONTINENTAL CASUALTY COMPANY,
CNA SURETY CORPORATION,
SURETY ACQUISITION COMPANY
AND
CERTAIN AFFILIATES OF CONTINENTAL CASUALTY COMPANY
<PAGE> 109
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
</TABLE>
ARTICLE 1 DEFINITIONS....................................... A-1
Section 1.1 Definitions................................. A-1
ARTICLE 2 THE MERGER........................................ A-7
Section 2.1 The Merger.................................. A-7
Section 2.2 Effects of the Merger; Subsequent Actions... A-7
Section 2.3 Certificate of Incorporation and By-Laws.... A-7
Section 2.4 Directors................................... A-7
Section 2.5 Officers.................................... A-7
Section 2.6 Conversion of Securities.................... A-8
Section 2.7 Surrender and Payment....................... A-8
Section 2.8 Fractional Shares........................... A-9
Section 2.9 Stock Options............................... A-9
Section 2.10 NYSE Listing................................ A-10
Section 2.11 Tax Consequences............................ A-10
Section 2.12 Exchange Ratio.............................. A-10
ARTICLE 3 THE CLOSING....................................... A-10
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY..... A-11
Section 4.1 Organization and Qualification;
Subsidiaries........................................... A-11
Section 4.2 Capitalization of the Company and Its
Subsidiaries........................................... A-11
Section 4.3 Authority Relative to This Agreement........ A-12
Section 4.4 Non-Contravention; Required Filings and
Consents............................................... A-12
Section 4.5 Company SEC Reports......................... A-13
Section 4.6 Absence of Certain Changes.................. A-13
Section 4.7 Derivatives................................. A-14
Section 4.8 Proxy Statement............................. A-14
Section 4.9 Finder's Fee................................ A-14
Section 4.10 Absence of Litigation....................... A-14
Section 4.11 Taxes....................................... A-14
Section 4.12 Employee Benefits........................... A-16
Section 4.13 Environmental Matters....................... A-17
Section 4.14 Intellectual Property....................... A-17
Section 4.15 Material Contracts.......................... A-18
Section 4.16 Additional Contracts........................ A-18
Section 4.17 Compliance.................................. A-18
Section 4.18 Insurance Regulatory Compliance............. A-18
Section 4.19 Related Party Transactions.................. A-19
Section 4.20 Real Property............................... A-19
Section 4.21 Labor Matters............................... A-20
Section 4.22 Takeover Statutes........................... A-20
Section 4.23 Voting Requirements......................... A-20
Section 4.24 Powers and Authority........................ A-20
Section 4.25 Reinsurance Arrangements.................... A-20
Section 4.26 Investments................................. A-20
Section 4.27 Insurance Business.......................... A-20
Section 4.28 Opinion of Financial Advisor................ A-21
Section 4.29 Books and Records........................... A-21
Section 4.30 No Investment Company....................... A-21
i
<PAGE> 110
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PARENT, NEWCO
AND ACQUISITION................................... A-21
Section 5.1 Organization, Qualification, Subsidiaries... A-21
Section 5.2 Capitalization of Acquisition and Newco..... A-22
Section 5.3 Authority Relative to this Agreement........ A-22
Section 5.4 Non-Contravention; Required Filings and
Consents............................................... A-22
Section 5.5 Finder's Fee................................ A-23
Section 5.6 Absence of Litigation....................... A-23
Section 5.7 Absence of Certain Changes.................. A-24
Section 5.8 Financial Statements........................ A-24
Section 5.9 No Prior Activities......................... A-24
Section 5.10 Derivatives................................. A-24
Section 5.11 Registration Statement on Form S-4.......... A-24
Section 5.12 PR66 Insurance Business..................... A-24
Section 5.13 Intentionally deleted....................... A-25
Section 5.14 Intellectual Property....................... A-25
Section 5.15 Material Contracts.......................... A-25
Section 5.16 Compliance.................................. A-26
Section 5.17 Insurance Regulatory Compliance............. A-26
Section 5.18 Labor Matters............................... A-26
Section 5.19 Powers and Authority........................ A-26
Section 5.20 Reinsurance Arrangements.................... A-26
Section 5.21 Subsidiaries and Affiliates of Newco........ A-27
Section 5.22 No Investment Company....................... A-27
Section 5.23 Administrative Services Agreement Charges... A-27
Section 5.24 Takeover Statutes........................... A-27
Section 5.25 Voting Requirements......................... A-27
Section 5.26 Books and Records........................... A-27
Section 5.27 Employee Benefits........................... A-28
ARTICLE 6 COVENANTS......................................... A-29
Section 6.1 Conduct of the Business..................... A-29
Section 6.2 Conduct of the Business of PR66............. A-31
Section 6.3 No Solicitation............................. A-32
Section 6.4 Notification of Certain Matters............. A-32
Section 6.5 Access to Information....................... A-32
Section 6.6 Reasonable Best Efforts..................... A-33
Section 6.7 Regulatory Matters.......................... A-33
Section 6.8 Public Announcements........................ A-33
Section 6.9 Stockholders' Meeting....................... A-34
Section 6.10 Form S-4.................................... A-34
Section 6.11 Capital Contribution and Agreements......... A-35
Section 6.12 Other Agreements............................ A-35
Section 6.13 Parent Restrictions......................... A-35
Section 6.14 Transaction Documents....................... A-36
Section 6.15 Newco By-Laws............................... A-36
Section 6.16 Newco Board of Directors.................... A-36
Section 6.17 Acquisition and Newco Operations............ A-36
Section 6.18 Necessary Assurances........................ A-36
Section 6.19 Notifications by Company or Parent.......... A-36
Section 6.20 Intentionally Deleted....................... A-36
Section 6.21 Self Tender................................. A-36
</TABLE>
ii
<PAGE> 111
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 6.22 Certain Fees and Expenses Payable by the
Company................................................ A-36
Section 6.23 Certain Fees and Expenses Payable by
Parent................................................. A-37
Section 6.24 PR66 Reinsurance Agreements................. A-37
Section 6.25 Actuarial Update............................ A-37
ARTICLE 7 CONDITIONS........................................ A-37
Section 7.1 Conditions to Each Party's Obligations...... A-37
Section 7.2 Conditions to the Obligation of Parent,
Newco and Acquisition.................................. A-38
Section 7.3 Conditions to the Obligations of the
Company................................................ A-38
ARTICLE 8 TERMINATION; AMENDMENT; WAIVER.................... A-39
Section 8.1 Termination................................. A-39
Section 8.2 Effect of Termination....................... A-40
Section 8.3 Fees and Expenses........................... A-40
Section 8.4 Amendment................................... A-40
Section 8.5 Extension; Waiver........................... A-40
Section 8.6 Procedure for Termination, Amendment,
Extension or Waiver.................................... A-40
ARTICLE 9 MISCELLANEOUS..................................... A-40
Section 9.1 Nonsurvival of Representations and
Warranties............................................. A-40
Section 9.2 Entire Agreement; Assignment................ A-40
Section 9.3 Notices..................................... A-41
Section 9.4 Governing Law; Jurisdiction................. A-41
Section 9.5 Parties in Interest......................... A-41
Section 9.6 Specific Performance........................ A-42
Section 9.7 Severability................................ A-42
Section 9.8 Descriptive Headings........................ A-42
Section 9.9 WAIVER OF TRIAL BY JURY..................... A-42
Section 9.10 Counterparts................................ A-42
ANNEXES
Annex A Services and Indemnity Agreement
Annex B Administrative Services Agreement
Annex C Registration Rights Agreement
Annex D Reinsurance Agreements
Annex E Opinion of Mayer, Brown & Platt
Annex F Opinion of Kirkland & Ellis
SCHEDULES
Schedule 1.1 PR66 Assets
Schedule 2.12 Affiliates' Stock Ownership
Schedule 4.1.1 Organization and Qualification of
Company; Subsidiaries of Company
Schedule 4.1.4 Investments in Corporations Listed on
National Securities Exchanges
Schedule 4.2 Capitalization of the Company and Its
Subsidiaries
Schedule 4.4.1 Contravention of Required Filings and
Consents
Schedule 4.4.2 Required Filings and Consents
Schedule 4.5.2 Liabilities
Schedule 4.6 Extraordinary Changes
Schedule 4.7 Derivative Financial Instruments
Schedule 4.10 Litigation
Schedule 4.11 Tax
Schedule 4.11.2(c) Financial Information of Members of the
Group
Schedule 4.12.1 ERISA Plans
</TABLE>
iii
<PAGE> 112
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule 4.12.4 ERISA Plan Valuations
Schedule 4.12.7 Non-Compliance of ERISA Plans with Law
Schedule 4.12.9 Unwritten Plans
Schedule 4.12.10 ERISA Plans for post-retirement health,
accident or life insurance
Schedule 4.12.11 ERISA Plans in Non-Compliance
Schedule 4.13 Hazardous Materials
Schedule 4.14 Intellectual Property of the Company
Schedule 4.15 Material Contracts of the Company
Schedule 4.17 Permits
Schedule 4.18 Insurance Regulatory Compliance
Schedule 4.19 Related Party Transactions of Company
Schedule 4.20.1 Real Property
Schedule 4.20.2 Real Property Leases
Schedule 4.21 Labor Matters
Schedule 4.25 Reinsurance Agreements
Schedule 4.26 Investments of Company
Schedule 4.27 Insurance Policies
Schedule 5.1.2 Qualification of Parent, Newco and
Acquisition
Schedule 5.4.2 Required Filings and Consents
Schedule 5.6 Litigation
Schedule 5.8.2 Liabilities of the PR66 Insurance
Business
Schedule 5.12 PR66 Insurance Business Products
Schedule 5.14 Intellectual Property of Parent, Newco
and Acquisition
Schedule 5.15 Material Contracts of Parent, Newco and
Acquisition
Schedule 5.16 Compliance of PR66 Insurance Business
Schedule 5.17 Insurance Regulatory Compliance
Schedule 5.18 Labor Matters
Schedule 5.20 Reinsurance Agreements of PR66 Insurance
Business
Schedule 5.27.1 Post-Merger Plans
Schedule 5.27.9 Description of Unwritten Post-Merger
Plans
Schedule 6.1.2 Permitted Transactions
Schedule 6.1.3 Permitted Issuances
Schedule 6.1.9 Permitted Changes in Company Benefits
Schedule 6.1.10 Permitted Indebtedness
Schedule 6.14 Permitted Accelerations by the Company
Schedule 6.16 Directors of Newco
Schedule 7.2.6 Closing Documents to be Delivered by
Company
Schedule 7.3.5 Closing Documents to be Delivered by
Parent, Newco and Acquisition
</TABLE>
iv
<PAGE> 113
REORGANIZATION AGREEMENT
THIS REORGANIZATION AGREEMENT ("Agreement"), dated as of December 19, 1996,
is among Capsure Holdings Corp., a Delaware corporation (the "Company"),
Continental Casualty Company, an Illinois corporation ("Continental"), CNA
Surety Corporation, a Delaware corporation and a wholly-owned subsidiary of
Continental ("Newco"), Surety Acquisition Company, a Delaware corporation and a
wholly-owned subsidiary of Newco ("Acquisition") and certain other affiliates of
Continental listed on the signature pages hereto (such affiliates, together with
Continental, being collectively referred to as "Parent").
WHEREAS, the Board of Directors of the Company (the "Board") has approved
this Agreement and the transactions contemplated hereby, and resolved to
recommend approval and adoption of this Agreement by the stockholders of the
Company;
WHEREAS, the Board of Directors of Continental has approved the merger of
the Company with Acquisition upon the terms and subject to the conditions set
forth in this Agreement;
WHEREAS, simultaneous with the execution and delivery hereof, Equity
Capsure Limited Partnership, an Illinois limited partnership (the "Major
Stockholder") and certain of the Company's directors and officers are entering
into a Voting Agreement (the "Voting Agreement") with Continental pursuant to
which the Major Stockholder and certain of the Company's directors and officers
have agreed, among other things, that all of the shares of the Company's common
stock, $.05 par value per share (the "Common Stock"), held by such persons are
to be voted in favor of the adoption of this Agreement;
WHEREAS, the Board, the Board of Directors of Acquisition and the Board of
Directors of Newco and each other affiliate of Continental that is a party
hereto have each approved the merger (the "Merger") of Acquisition with and into
the Company in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law") pursuant to a Certificate of Merger, in connection
with such Merger, concurrently with the consummation thereof, all of the then
issued and outstanding shares of Common Stock of the Company shall be converted
into the right to receive fully paid, nonassessable and validly issued shares of
common stock of Newco, all as more fully described and upon the terms and
subject to the conditions set forth herein and in the Certificate of Merger; and
WHEREAS, simultaneous with the execution and delivery hereof and pursuant
to the same plan and arrangement, Parent has agreed to make the Capital
Contribution (as defined below) to Newco;
WHEREAS, it is intended that the Merger and the Capital Contribution shall
qualify as a tax-free exchange under the provisions of Section 351 of the Code.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company, Parent, Newco, Acquisition and affiliates of Parent listed on the
signature pages hereby agree as follows.
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions. The following terms shall have the meanings set
forth below unless otherwise defined herein.
"accumulated funding deficiency" shall have the meaning as defined in
Section 302 of ERISA and Section 412 of the Code.
"Acquisition" shall have the meaning as defined in the Preamble.
"Acquisition Proposal" means a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, sale of shares
of capital stock involving a change of control (including, without limitation,
by way of tender offer) or similar transactions involving the Company or any of
its subsidiaries.
A-1
<PAGE> 114
"affiliate" of a person means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person.
"Agreement" means this Reorganization Agreement.
"associate" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act.
"beneficial owner" shall have the meaning set forth in Rule 13d-3 under the
Exchange Act.
"Board" shall have the meaning as defined in the Preamble.
"Capital Contribution" means the assets contributed to Newco as described
in Section 6.11.
"Certificate of Merger" means a certificate to be filed with the Secretary
of State of the State of Delaware to consummate the Merger.
"Closing" means the closing of the Merger.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares Trust" means the net proceeds from the sale or sales of the
Excess Shares held in trust by the Exchange Agent for the holders of shares of
Common Stock.
"Common Stock" shall have the meaning as defined in the Preamble.
"Company" shall have the meaning as defined in the Preamble.
"Company's knowledge" means actual knowledge after reasonable inquiry of
each vice president or more senior officer of the Company and its Insurance
Subsidiaries, including, without limitation, the following persons: Bruce A.
Esselborn, Ronald D. Bobman, Mary Jane Robertson and John M. Zoeller.
"Company Mailing Date" means the date the Proxy Statement contained in the
Form S-4 is first mailed to stockholders of the Company.
"Company Options" means options to purchase shares of Common Stock issued
pursuant to the Company's Amended and Restated 1990 Stock Option Plan.
"Company Reinsurance Agreements" means all in force material reinsurance
arrangements and treaties, and all addenda thereto, to which the Company or any
of its Insurance Subsidiaries is a party.
"Company Securities" means all (i) shares of capital stock or other voting
securities of the Company, (ii) securities of the Company convertible into or
exchangeable for shares of capital stock or voting securities of the Company,
(iii) written or oral options, subscriptions, warrants, convertible securities,
calls or other rights to acquire from the Company and obligations of the Company
to issue, deliver or sell, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Company, and (iv) equity equivalents (including, without limitation, stock
appreciation rights), interest in the ownership or earnings of the Company or
other similar rights.
"Company Software" means all system and application software developed by
or for any of the Company or its subsidiaries.
"Confidentiality Agreements" means the letter agreements dated May 9, 1996
and November 4, 1996 between the Company and Parent.
"Continental" shall have the meaning as defined in the Preamble.
"control" (including the terms "controlled by" and "under common control
with") means the possession, directly or indirectly or as trustee or executor,
of the power to direct or cause the direction of the management policies of a
person, whether through the ownership of stock, as trustee or executor, by
contract or credit arrangement or otherwise.
"Delaware Law" shall have the meaning as defined in the Preamble.
A-2
<PAGE> 115
"Derivative Financial Instrument" means any futures, forward, swap, option
or swaption contract, high-risk collateralized mortgage obligations or any other
financial instrument with similar characteristics and/or generally characterized
as a "derivative" security.
"Diligence Materials" means the properties, books, contracts, commitments,
personnel and records of the Company and Parent respectively.
"Effective Time" means such time as the Certificate of Merger with respect
to the Merger is duly filed with the Secretary of State of the State of
Delaware, or at such later time as is specified in the Certificate of Merger.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" with respect to any person means any trade or business,
whether or not incorporated, that together with such person would be deemed a
"single employer" within the meaning of Section 4001(b) of ERISA or Section 414
of the Code.
"ERISA Plans" means the Plans that are "employee benefit plans", as that
term is defined in Section 3(3) of ERISA.
"Excess Shares" means the aggregate of the fractional shares of New Common
which would otherwise have been issued pursuant to Section 2.7.
"Exchange Act" means the Securities Exchange Act of 1934, as amended and
the rules and regulations promulgated thereunder.
"Exchange Agent" means the agent responsible for exchanging certificates
representing shares of Common Stock as provided for in Section 2.6.1.
"foreign person" shall have the meaning as defined in Section 1445(f)(3) of
the Code.
"Form S-4" means the registration statement prepared and filed on Form S-4
with the SEC.
"generally accepted accounting principles" shall mean the generally
accepted accounting principles set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession in the United
States, in each case applied on a consistent basis.
"Governmental Entity" means any national, supranational, federal, state or
local legislative body, court, arbitral tribunal, administrative agency or
commission or other governmental or other regulatory authority or agency.
"Group" shall mean for any tax year, individually and collectively, the
Company and any corporation that joins or joined in the filing of a consolidated
federal income tax return with the Company and any partnership in which the
Company has or had an interest.
"Hazardous Materials" means any flammables, contaminants, gasoline,
petroleum products, crude oil, explosives, radioactive materials, hazardous
materials, hazardous wastes, hazardous or toxic substances, polychlorinated
biphenyls or related or similar materials, asbestos or any material containing
asbestos, any underground storage tanks, any air, soil or water pollution or any
other substance or material as may be defined as hazardous under any applicable
federal, state or local governmental law, rule, regulation or ordinance,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et
seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C.
Sections 1801 et seq.), the Resource Conservation and Recovery Act, as amended
(42 U.S.C. Sections 6901 et seq.), the Federal Water Pollution Control Act (33
U.S.C. Sections 1251 et seq.), and the Clean Air Act (42 U.S.C. Sections 7401 et
seq.).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
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"Insurance Regulators" means state Governmental Entities charged with
supervision of insurance companies.
"Insurance Reports" means all filings, statements, documents, and reports
required of insurance companies and their affiliates by the insurance laws of
any state.
"Insurance Subsidiary" means a subsidiary of the Company that is a
regulated insurance company.
"Intellectual Property" means trademarks, service marks, certification
marks, assumed names, trade names and other indications of origin, the goodwill
associated with the foregoing and registrations in any jurisdiction of, and
applications in any jurisdiction to register, the foregoing, including any
extension, modification or renewal of any such registration or application;
inventions, processes, discoveries and ideas, whether patentable or not in any
jurisdiction; patents, applications for patents (including, without limitation,
division, continuations, continuations in part and renewal applications), and
any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic
information, trade secrets and confidential information and rights (including,
without limitation, customer lists, agent lists and know-how) in any
jurisdiction to limit the use or disclosure thereof by any person; writings and
other works, whether copyrightable or not in any jurisdiction; registrations or
applications for registration of copyrights in any jurisdiction, and any
renewals or extensions thereof; any similar intellectual property or proprietary
rights; and any claims or causes of action arising out of or related to any
infringement or misappropriation of any of the foregoing.
"Invested Assets" means those assets included in the total on Line 8(a) of
the statutory Annual Statements or statutory quarterly statements for each
Insurance Subsidiary of the Company and the equivalent investments of the
Company and its non-insurance subsidiaries.
"Liabilities" means any liability of any nature, whether arising out of
contract, tort, statute or otherwise accrued, matured or unmatured, absolute,
contingent or otherwise.
"Licensed Software" means all system and application software licensed or
leased by, or necessary for the operation of, the Company or any of its
subsidiaries other than non-customized application software.
"Liens" means security interests, mortgages, liens, claims, pledges,
charges, voting agreements or other encumbrances of any nature whatsoever.
"Major Stockholder" shall have the meaning as defined in the Preamble.
"Material Adverse Effect" with respect to any person means a material
adverse effect, or the occurrence or existence of facts or circumstances
reasonably expected to result in a material adverse effect, on the business,
assets, liabilities, results of operations, properties, financial or operating
condition of such person and its subsidiaries taken as a whole or the ability of
such person (and to the extent applicable, its subsidiaries) to consummate the
transactions contemplated hereby; provided that it will not be a Material
Adverse Effect if A.M. Best & Company, Inc. places the rating of any party
hereto or any of the Insurance Subsidiaries on review, whether with neutral or
negative implications, subject to the provisions of Section 7.1.8.
"Merger" means the merger of Acquisition with and into the Company.
"Merger Consideration" means an amount equal to one (1) share of New
Common.
"multiemployer plan" shall have the meaning as defined in Section
4001(a)(3) of ERISA.
"Nasdaq" means the Nasdaq Stock Market.
"Newco" shall have the meaning as defined in the Preamble.
"Newco Audit Committee" means the audit committee of the Board of Directors
of Newco, the members of which shall be certain of the independent directors of
such Board.
"Newco Securities" means collectively (i) shares of capital stock or other
voting securities of Newco, (ii) securities of Newco convertible into or
exchangeable for shares of capital stock or voting securities of Newco, (iii)
written or oral options, subscriptions, warrants, convertible securities, calls
or other rights to acquire from Newco, and obligations of Newco to issue,
deliver or sell, any capital stock, voting securities or
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securities convertible into or exchangeable for capital stock or voting
securities of Newco and (iv) equity equivalents (including, without limitation,
stock appreciation rights), interests in ownership or earnings of Newco or other
similar rights.
"New Common" means the common stock, $.01 par value per share, of Newco.
"New Option" means options to purchase shares of New Common in lieu of
Company Options.
"NYSE" means the New York Stock Exchange.
"Parent" shall have the meaning as defined in the Preamble.
"Parent's knowledge" means the actual knowledge after reasonable inquiry of
each vice president or more senior officer of Continental or its affiliates
reporting, directly or indirectly, to Mark Vonnahme and the following persons:
Dennis H. Chookaszian, Peter Jokiel, Thomas Pottle, Jeff Rohrer, John J.
Sullivan, Adrian M. Tocklin and Mark Vonnahme.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permits" means all federal, state, local and foreign governmental
approvals, authorizations, certificates, filings, franchises, licenses, notices,
permits and rights.
"person" means an individual, corporation, partnership, limited liability
company, association, trust, unincorporated organization, other entity or group
(as defined in Section 13(d)(3) of the Exchange Act).
"Plans" with respect to any person means each bonus, deferred compensation,
incentive compensation, stock purchase, stock option, restricted stock issuance,
severance or termination pay, hospitalization or other medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, employee stock
ownership, pension, or retirement plan, program, agreement or arrangement, and
each other employee benefit plan, program, agreement or arrangement for the
benefit of present or former officers, employees, agents, directors or
independent contractors of such person or any of its subsidiaries or any ERISA
Affiliate, and that is currently sponsored, maintained or contributed to or
required to be contributed to by such person or by an ERISA Affiliate.
"Proxy Statement" means the proxy statement/prospectus or similar materials
distributed to the Company's stockholders in connection with the Merger,
including any amendments or supplements thereto.
"PR66 Insurance Business" means the Surety Business of Parent and its
affiliates, including without limitation, insurance policies, bonds or licenses
that Parent and its affiliates prior to the Closing Date encoded as "66" in the
Product Responsibility field in their processing, statistical and financial
reporting systems, together with the tangible and intangible assets and
employees specifically designated to service such policies, bonds and licenses,
all as more fully described in Schedule 1.1 hereto.
"PR66 Licensed Software" means all system application and software
licensed, leased or necessary for the operation of the PR66 Insurance Business.
"PR66 Software" means all system and application software developed by or
for any of the Parent or Newco used in the PR66 Insurance Business.
"PR66 Reinsurance Agreements" means all reinsurance agreements relating to
the PR66 Insurance Business to which Parent is or will be a party.
"Real Property" means all of the property set forth on Schedule 4.20.1
together with all property subject to the Real Property Leases.
"Real Property Leases" means all leases, subleases or other agreements
under which the Company or any subsidiaries uses or occupies or has the right to
use or occupy any real property.
"Registration Rights Agreement" means an agreement in the form attached
hereto as Annex C between Newco and the Major Stockholder.
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"Reinsurance Agreements" means the following agreements substantially in
the forms attached as Annex D: Surety Quota Share Treaty, Aggregate Stop Loss
Reinsurance Contract and Surety Excess of Loss Contract.
"Returns" shall mean all reports, estimates, claims for refunds,
declarations of estimated tax, information statements and returns (including,
without limitation, any schedule or attachment thereto or any amendment thereof)
relating to, or required to be filed in connection with, any Taxes, including,
without limitation, information returns or reports with respect to backup or
employee withholding and other payments to third parties.
"SAP" means statutory accounting practices prescribed or permitted by
Insurance Regulators.
"SEC" means the United States Securities and Exchange Commission.
"SEC Reports" means all forms, reports, and documents required to be filed
with the SEC.
"Securities Act" means the Securities Act of 1933, as amended and the rules
and regulations promulgated thereunder.
"Stockholders' Meetings" means an annual or special meeting of the
Company's stockholders.
"subsidiary" or "subsidiaries" of any person means any corporation,
partnership, limited liability company, joint venture or other legal entity of
which such person (either alone or through or together with any other
subsidiary), owns, directly or indirectly, 50% or more of the stock or other
equity interests the holder of which is generally entitled to vote for the
election of the board of directors or other governing body of such corporation,
partnership, limited liability company, joint venture or other legal entity.
"Surety Business" means the issuance, writing or underwriting of bonds,
policies or licenses with respect to the following: (i) bonds required by
statutes or ordinances guaranteeing the payment of certain taxes and fees and
providing consumer protection as a condition to granting licenses to engage in
various trades or professions, (ii) bonds required by statutes, courts or legal
documents for the protection of those on whose behalf a fiduciary acts, (iii)
bonds required by statutes or ordinances to guarantee the lawful and faithful
performance of the duties of office by public officials, (iv) bonds required by
statutes to protect against improper actions by notaries public, and (v) bonds
which secure the payment and/or performance of an obligation under a written
contract; but it shall not include, without limitation, the issuance, writing or
underwriting of bonds and licenses which cover losses arising from employee
dishonesty.
"Surviving Corporation" means the corporate entity existing after the
consummation of the Merger.
"Taxes" shall mean all taxes, however denominated, including, without
limitation, any interest, penalties, assessments or deficiencies or other
additions to tax that may become payable in respect thereof, whether disputed or
not, imposed by any federal, territorial, state, local or foreign government or
any agency or political subdivision of any such government, which taxes shall
include, without limiting the generality of the foregoing, all income or profits
taxes, real property gains taxes, payroll, employment or withholding taxes,
unemployment insurance taxes, social security taxes, sales and use taxes, ad
valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business
license taxes, occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, transfer taxes, workers' compensation, PBGC premiums or
other guarantee fund assessments whether federal, state or local, back-up
withholding taxes, alternative minimum taxes, severance taxes, information
reporting taxes, premium taxes, state insurance department maintenance taxes or
fees, and other governmental charges, and other obligations of the same or of a
similar nature to any of the foregoing, which the Group is required to pay,
withhold or collect.
"Transaction Documents" shall mean this Agreement, the Voting Agreement,
all of the Reinsurance Agreements, the Administrative Services Agreement and the
Services and Indemnity Agreement in the form attached as Annex A.
"USA" means Universal Surety of America.
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"Voting Agreement" means the agreement among Continental, the Major
Stockholder and certain Company directors and officers.
"Western" means, collectively, Western Surety Company and Surety Bonding
Company of America.
"withdrawal liability" shall have the meaning as defined in Title IV of
ERISA.
ARTICLE 2
THE MERGER
Section 2.1 The Merger. At the Effective Time and upon the terms and
subject to the conditions of this Agreement and Delaware Law, Acquisition shall
be merged with and into the Company whereupon the separate corporate existence
of Acquisition shall cease and the Company shall continue as the Surviving
Corporation.
Section 2.2 Effects of the Merger; Subsequent Actions.
2.2.1 The Merger shall have the effects set forth in Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time, all the properties, rights, privileges, powers and
franchises of the Company and Acquisition shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and
Acquisition shall become the debts, liabilities and duties of the Surviving
Corporation.
2.2.2 If, at any time after the Effective Time, the Surviving
Corporation shall consider or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of
the rights, properties or assets of the Company or Acquisition acquired or
to be acquired by the Surviving Corporation as a result of or in connection
with the Merger, or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of the Company and Acquisition, all such
deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of such corporations or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect
or confirm any and all right, title and interest in, to and under such
rights, properties or assets of the Surviving Corporation or otherwise to
carry out this Agreement.
Section 2.3 Certificate of Incorporation and By-Laws.
2.3.1 The Certificate of Incorporation of the Company in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until amended in accordance with
applicable law.
2.3.2 The By-Laws of the Company in effect immediately prior to the
Effective Time shall be the By-Laws of the Surviving Corporation until
amended in accordance with applicable law.
Section 2.4 Directors. The directors of Acquisition at the Effective Time
shall be the initial directors of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and By-Laws of the Surviving
Corporation and until his or her successor is duly elected and qualified.
Section 2.5 Officers. The officers of Acquisition at the Effective Time
shall be the initial officers of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and By-Laws of the Surviving
Corporation and until his or her successor is duly appointed and qualified.
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Section 2.6 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of the Company, Parent, Newco or
Acquisition or the holder of any of the following securities:
2.6.1 Each share of Common Stock issued and outstanding immediately
prior to the Effective Time shall by virtue of the Merger be canceled and
extinguished and be converted into the right to receive the Merger
Consideration.
2.6.2 As a result of the transactions contemplated herein, Newco shall
own all of the outstanding shares of the Common Stock of the Surviving
Corporation outstanding on the Closing Date, and the stockholders of the
Company will become stockholders of Newco.
Section 2.7 Surrender and Payment.
2.7.1 Prior to the Effective Time, Continental shall appoint an
Exchange Agent reasonably satisfactory to the Company for the purpose of
exchanging certificates representing shares of Common Stock as provided in
Section 2.6.1. At the Effective Time, Newco will deposit with the Exchange
Agent certificates representing the aggregate Merger Consideration to be
paid in respect of the shares of Common Stock. Promptly after the Effective
Time, Newco will send, or will cause the Exchange Agent to send, to each
holder of shares of Common Stock at the Effective Time a letter of
transmittal for use in such exchange (which shall specify that the delivery
shall be effected, and risk of loss and title shall pass, only upon proper
delivery of the certificates representing shares of Common Stock to the
Exchange Agent).
2.7.2 Each holder of shares of Common Stock that have been converted
into a right to receive the Merger Consideration, upon surrender to the
Exchange Agent of a certificate or certificates representing such shares of
Common Stock, together with a properly completed letter of transmittal
covering such shares of Common Stock, will be entitled to receive the
Merger Consideration payable in respect of such shares of Common Stock.
Until so surrendered, each such certificate shall, after the Effective
Time, represent for all purposes only the right to receive such Merger
Consideration.
2.7.3 If any portion of the Merger Consideration is to be paid to a
person other than the registered holder of the shares of Common Stock
represented by the certificate or certificates surrendered in exchange
therefor, it shall be a condition to such payment that the certificate or
certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the person requesting such payment shall
pay to the Exchange Agent any transfer or other Taxes required as a result
of such payment to a person other than the registered holder of such shares
of Common Stock or establish to the satisfaction of the Exchange Agent that
such Tax has been paid or is not payable.
2.7.4 After the Effective Time, there shall be no further registration
of transfers of Common Stock. If, after the Effective Time, certificates
representing shares of Common Stock are presented to Newco, they shall be
canceled and exchanged for the Merger Consideration in accordance with the
procedures set forth herein.
2.7.5 Any portion of the Merger Consideration deposited with the
Exchange Agent pursuant to Section 2.7.1, and any portion of the Common
Shares Trust that remains unclaimed by the holders of shares of Common
Stock twelve months after the Effective Time shall be returned to Newco,
upon demand, and any such holder who has not exchanged shares of Common
Stock for the Merger Consideration in accordance herewith prior to that
time shall thereafter look only to Newco for any claim for New Common, any
cash in lieu of fractional shares of New Common and any dividends or
distributions with respect to New Common. Notwithstanding the foregoing,
neither Newco nor the Surviving Corporation shall be liable to any holder
of shares of Common Stock for any amount paid to a public official pursuant
to applicable abandoned property laws.
2.7.6 No dividends or other distributions with respect to the shares
of New Common constituting part of the Merger Consideration shall be paid
to the holder of any unsurrendered certificates representing shares of
Common Stock until such certificates are surrendered as provided herein.
Upon
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such surrender, there shall be paid, without interest, to the person in
whose name the certificates representing the shares of New Common into
which such shares of Common Stock were converted are registered, all
dividends and other distributions in respect of shares of New Common that
are payable on a date subsequent to, and the record date for which occurs
after, the Effective Time.
2.7.7 None of Parent, Newco, Surviving Corporation nor the Exchange
Agent shall be liable to any person in respect of any cash, shares,
dividends or distributions delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any certificates
representing Common Stock shall not have been surrendered prior to five
years after the Effective Time (or immediately prior to such earlier date
on which any Merger Consideration in respect of such certificate would
otherwise escheat or become the property of any Governmental Entity), any
such cash, shares, dividends or distributions payable in respect to such
certificate shall, to the extent permitted by applicable law, become the
property of Newco, free and clear of all claims or interests of any person
previously entitled thereto.
2.7.8 In the event any certificate representing Common Stock, the
holder of which is entitled to Merger Consideration hereunder, shall have
been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such certificate to be lost, stolen or
destroyed, and, if required by Newco, the posting by such person of a bond
in customary form and amount as indemnity against any claim that may be
made, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificate the Merger Consideration deliverable in respect
thereof in accordance with the procedures set forth in this Section 2.7.
Section 2.8 Fractional Shares. No certificates or scrip representing
fractional shares of New Common will be issued in the Merger, but in lieu
thereof each holder of Excess Shares will be entitled to receive, from the
Exchange Agent in accordance with the provisions of this Section 2.8, a cash
payment in lieu of such fractional shares of New Common representing such
holder's proportionate interest in the net proceeds from the sale by the
Exchange Agent in one or more transactions (which sale transactions shall be
made at such times, in such manner and on such terms as the Exchange Agent shall
determine in its reasonable discretion) on behalf of all such holders of the
Excess Shares. The sale of Excess Shares by the Exchange Agent shall be executed
on the NYSE through one or more member firms of the NYSE and shall be executed
in round lots to the extent practicable. Until the net proceeds of such sale or
sales have been distributed to the holders of shares of Common Stock, the
Exchange Agent will hold such proceeds in the Common Shares Trust for the
holders of Excess Shares. Newco shall pay all commissions, transfer taxes and
other out-of-pocket transaction costs, including the expenses and compensation
of the Exchange Agent, incurred in connection with this sale of the Excess
Shares. The Exchange Agent shall determine the portion of the Common Shares
Trust to which each holder of Excess Shares shall be entitled, if any, by
multiplying the amount of the aggregate net proceeds comprising the Common
Shares Trust by a fraction the numerator of which is the amount of the
fractional share of New Common to which such holder of Excess Shares is entitled
and the denominator of which is the aggregate amount of fractional New Common
share interests to which all holders of Excess Shares are entitled. As soon as
practicable after the determination of the amount of cash, if any, to be paid to
holders of Excess Shares in lieu of any fractional shares of New Common, the
Exchange Agent shall make available such amounts to such holders of Excess
Shares without interest. Interest, if any, earned on the investment of any cash
in the Common Shares Trust shall be applied by the Exchange Agent to offset the
costs of administering such Trust.
Section 2.9 Stock Options.
2.9.1 At the Effective Time, each Company Option shall be canceled and
substituted with a New Option to acquire New Common. Such cancellation and
substitution shall comply in all respects with, and shall be performed in
accordance with, the methodology prescribed by the provisions of Section
424(a) of the Code and the regulations thereunder.
(a) The period during which a New Option may be exercised shall be
(i) one year from the Effective Time in the case of terminated
employees, consultants and directors, or (ii) the remaining period
during which the Company Option being replaced would have been
exercisable had the
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Merger not occurred for all other holders of Company Options who are not
terminated in connection with the Merger subject, in the case of (ii),
to the other terms and conditions of such New Option.
(b) Each New Option shall have the same rights, benefits, terms and
conditions (other than the exercise period for terminated employees,
consultants and directors) as, and not give to the holder of such New
Option any benefits he did not have under, the Company Option being
replaced, provided, that, subject to the agreement of certain holders of
Company Options who have the right to cause the Company or the Surviving
Corporation to pay to the holder the excess of the fair market value of
the Common Stock over the exercise price of such Company Option, no New
Option will contain the right to cause Newco to pay cash to the holder
of such Company Option upon the election of such holder.
(c) With respect to terminated employees, consultants and directors
who exchange Company Options for New Options, Newco shall agree to
reimburse such holder of a New Option for any commissions or other
customary and reasonable costs incurred upon the sale of shares of New
Common immediately upon the exercise of the New Option.
(d) Newco will use its reasonable best efforts to structure the New
Option in a manner that would avoid adverse tax consequences to the
option holders.
2.9.2 At or as soon as practicable after the Effective Time (but in
any event within five business days thereafter), Newco shall issue to each
holder of a Company Option which is canceled pursuant to Section 2.9.1 an
agreement that accurately reflects the terms of the New Option substituted
therefor as contemplated by Section 2.9.1.
2.9.3 Newco shall take all corporate actions necessary to reserve for
issuance such number of shares of New Common as will be necessary to
satisfy exercises in full of all New Options after the Effective Time. With
respect to such New Common, Newco shall (i) on the Closing Date file with
the SEC a registration statement on Form S-8 and use its reasonable best
efforts to have such registration statement become and remain continuously
effective under the Securities Act and (ii) file with the NYSE a listing
application and use its reasonable best efforts to have such shares of New
Common admitted to trading thereon upon exercises of New Options.
Section 2.10 NYSE Listing. The parties shall use their reasonable best
efforts to cause the shares of New Common to be issued in the Merger to be
approved for listing on the NYSE or another United States national stock
exchange, subject to official notice of issuance, prior to the Closing Date as
required in Section 7.1.5.
Section 2.11 Tax Consequences. The Merger is intended to qualify as a
tax-free exchange under Section 351 of the Code, and the parties hereto agree to
take such actions to effectuate such treatment and to report the Merger for
federal and state income tax purposes in a manner consistent with such
characterization.
Section 2.12 Exchange Ratio. The parties agree that immediately prior to
the Effective Time, Parent shall beneficially own 27,078,219 shares of New
Common, which will represent 61.75% of the outstanding shares of New Common
after giving effect to the issuance of shares of New Common pursuant to Section
2.6 (assuming such issuance were made on a fully-diluted basis). The record
holders of shares of New Common shall include the affiliates of Parent set forth
on the signature pages attached hereto and such affiliates shall hold shares in
the proportions as shown on Schedule 2.12.
ARTICLE 3
THE CLOSING
At 10:00 a.m. central time on the third business day after the last of the
conditions set forth in Article 7 has been fulfilled or waived (or such other
date as may be mutually agreed upon by the parties), the parties hereto will
file a Certificate of Merger with the Secretary of State of the State of
Delaware and make all other filings or recordings required by Delaware Law in
connection with the Merger. The Merger shall become effective at the Effective
Time. The Closing, which shall be at the time of such filing, shall be held at
the
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offices of Sonnenschein Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois
60606, or such other place as the parties shall agree.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent, Newco and Acquisition as of
the date of this Agreement and as of the Closing Date as follows:
Section 4.1 Organization and Qualification; Subsidiaries.
4.1.1 Schedule 4.1.1 contains an organizational chart setting forth
the Company and each of its subsidiaries and identifying which subsidiaries
are Insurance Subsidiaries and which subsidiaries are inactive. Schedule
4.1.1 also sets forth the authorized capital stock of each direct and
indirect subsidiary of the Company and the number of issued and outstanding
shares of such stock. Each of the Company and each of its subsidiaries is a
corporation organized (in accordance with all legal requirements applicable
thereto, the non-compliance with which would have a Material Adverse Effect
on the Company), validly existing and in good standing under the laws of
the jurisdiction of its incorporation (which jurisdictions are set forth on
Schedule 4.1.1) and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted, except where the failure to have such power and authority would
not, individually or in the aggregate, have a Material Adverse Effect on
the Company.
4.1.2 Each of the Company and each of its subsidiaries is qualified or
licensed and in good standing to do business in each jurisdiction
(including any foreign country) (which jurisdictions are set forth on
Schedule 4.1.1) in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so qualified or
licensed and in good standing would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
4.1.3 The Company has heretofore furnished to Parent complete and
correct copies of the Certificate of Incorporation and By-Laws, or other
equivalent organizational documents, as amended, for the Company and each
of its subsidiaries. Such organizational documents are in full force and
effect and no other organizational documents are applicable to or binding
upon the Company or any of its subsidiaries. None of the Company or any of
its subsidiaries is in violation of any of the provisions of its respective
organizational documents.
4.1.4 Except as set forth on Schedule 4.1.4, none of the Company, or
any of its subsidiaries owns any direct or indirect equity interest in any
person, except for investments of less than 2% of any corporation listed on
a national securities exchange or Nasdaq.
Section 4.2 Capitalization of the Company and Its Subsidiaries. The
authorized capital stock of the Company consists of (i) 25,000,000 shares of
Common Stock of which, as of November 30, 1996, 15,751,749 shares of Common
Stock were issued and outstanding and (ii) 5,000,000 shares of Preferred Stock,
par value of $.01 per share, of which, as of November 30, 1996, no shares were
issued and outstanding. All outstanding shares of Common Stock have been
authorized, validly issued, and are fully paid, nonassessable and free of all
preemptive and rescission rights. As of November 30, 1996, Company Options to
purchase an aggregate of 1,021,399 shares of Common Stock were outstanding and
the weighted average exercise price of such Company Options was $2.292 per share
of Common Stock. Except as set forth in this Agreement or in Schedule 4.2, and
except as a result of the exercise of Company Options outstanding as of November
30, 1996, there are no outstanding Company Securities. There are no outstanding
obligations of the Company or any of its subsidiaries to repurchase, redeem or
otherwise acquire any Company Securities, other than the Company's obligation to
repurchase Company Options under, and in accordance with the express terms of
the employment agreements set forth on Schedule 4.2 (accurate and complete
copies of which have previously been delivered to Parent) and for obligations of
the Company to employees terminated as a result of the
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transactions contemplated under this Agreement as set forth on Schedule 4.2.
Each of the outstanding shares of capital stock of each of the Company's
subsidiaries (excluding inactive subsidiaries) is duly authorized, validly
issued, fully paid and nonassessable and is directly or indirectly owned by the
Company, free and clear of all Liens, except as set forth on Schedule 4.2. There
are no existing options, calls or commitments of any character relating to the
issued or unissued capital stock or other securities of any subsidiary of the
Company. No bonds, debentures, notes or other indebtedness of the Company or any
of its Insurance Subsidiaries having the right to vote (or convertible into, or
exchangeable for securities having the right to vote) on any matters on which
the stockholders of the Company may vote, are issued or outstanding.
Section 4.3 Authority Relative to This Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and, subject (as of the date hereof, but not on the Closing Date) to the
stockholder and regulatory approvals as set forth in Section 4.4.2, to perform
its obligations hereunder and under the Transaction Documents and to consummate
the transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the Transaction Documents and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement, or to consummate the transactions so
contemplated (other than, with respect to the Merger, the approval and adoption
of this Agreement by the holders of a majority of the outstanding shares of
Common Stock, prior to the Closing Date, the filing of the appropriate merger
documents as required by Delaware Law and the insurance regulatory approvals as
set forth on Schedule 4.4.2). The Board has approved the transactions
contemplated hereby so as to render inapplicable to such transactions,
including, without limitation, the Merger, the restrictions on business
combinations contained in Section 203 of the Delaware Law. The Board has
resolved to recommend approval and adoption of this Agreement by the
stockholders of the Company entitled to vote thereon. This Agreement has been
duly and validly executed and delivered by the Company, and, subject (as of the
date hereof, but not on the Closing Date) to the regulatory approvals set forth
in Section 4.4.2, constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, subject to
the qualification that the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent transfer and other laws of general
applicability relating to or affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding for the enforcement thereof may be brought, and the Transaction
Documents to be executed, delivered and performed by the Company in connection
with the transactions contemplated hereby and, subject (as of the date hereof,
but not on the Closing Date), to the regulatory approvals set forth in Section
4.4.2, will constitute legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, subject to the
qualification that the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent transfer and other laws of general
applicability relating to or affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding for the enforcement thereof may be brought.
Section 4.4. Non-Contravention; Required Filings and Consents.
4.4.1 The execution, delivery and performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby
(including the Merger and the Transaction Documents) do not and will not
(i) contravene or conflict with, result in the breach of any of the terms
or conditions of, or constitute a default under, the organizational
documents of the Company or any of its Insurance Subsidiaries; (ii) except
as set forth in Schedule 4.4.1, assuming that all consents, authorizations
and approvals contemplated by Section 4.4.2 have been obtained and all
filings described therein have been made, contravene or conflict with or
constitute a violation of any provision of any law, statute, regulation,
rule, ordinance, judgment, injunction, writ, award, order or decree binding
upon or applicable to the Company, any of its Insurance Subsidiaries or any
of their respective properties; (iii) except as set forth in Schedule
4.4.1, conflict with, or result in the breach or termination of any
provision of or constitute a default (with or without the giving of notice
or the lapse of time or both) under, or give rise to any right of
modification, termination, cancellation, or loss of any benefit to which
the Company or any
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of its Insurance Subsidiaries is entitled, under any provision of any
agreement, contract, license or other instrument binding upon the Company,
any of its Insurance Subsidiaries or any of their respective properties, or
allow the acceleration of the performance or maturity of, any obligation of
the Company or any of its Insurance Subsidiaries under any indenture,
mortgage, deed of trust, lease, license, contract, instrument or other
agreement to which the Company or any of its Insurance Subsidiaries is a
party or by which the Company, any of its Insurance Subsidiaries or any of
their respective assets or properties is subject or bound; or (iv) result
in the creation or imposition of any Lien on any asset or property of the
Company or any of its Insurance Subsidiaries; provided, however, that with
respect to clauses (ii), (iii) and (iv) above, no such conflict, breach,
default, termination, modification, amendment, cancellation, acceleration,
Lien, encumbrance or violation shall in any way constitute a breach of this
Section 4.4.1 unless it, individually or in the aggregate, would have a
Material Adverse Effect on the Company.
4.4.2 The execution, delivery and performance by the Company of this
Agreement and the Transaction Documents, the consummation of the
transactions contemplated hereby and thereby (including the Merger) and the
maintenance of any certificate of authority or of any license require no
action by or in respect of, or filing with, or notice to, any governmental
body, agency, official or authority (either domestic or foreign) other than
(i) the filing of the Certificate of Merger in accordance with Delaware Law
and appropriate documents with the relevant authorities of other states in
which the Company or its Insurance Subsidiaries hold a certificate of
authority or are licensed to do business, all of which documents and
authorities, together with the required timing of such filings, are set
forth on Schedule 4.4.2; (ii) compliance with any applicable requirements
of the HSR Act with respect to the Merger; (iii) the consents, approvals
and authorizations of, and filings and/or notices required under the
insurance laws of the jurisdictions set forth on Schedule 4.4.2; (iv)
compliance with any applicable requirements of the Exchange Act and the
Securities Act and state securities, takeover and Blue Sky laws; and (v)
such actions or filings which, if not taken or made, would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company.
Section 4.5 Company SEC Reports.
4.5.1 The Company has filed all required Company SEC Reports with the
SEC since January 1, 1993, each of which has complied as to form in all
material respects with applicable requirements of the Securities Act and
the Exchange Act. As of their respective dates, none of the Company SEC
Reports contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in the Company SEC Reports have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis (except as may be indicated in the notes thereto), and
present fairly, in all material respects, the consolidated financial
position of the Company and its consolidated subsidiaries as of the dates
thereof and their consolidated results of operations and cash flows for the
periods then ended (subject to normal year-end adjustments in the case of
any unaudited interim financial statements). The Company has previously
provided or made available to Parent complete and correct copies of each of
the Company SEC Reports filed since January 1, 1993 and on or prior to the
date of this Agreement.
4.5.2 Except as disclosed or recorded in the unaudited consolidated
balance sheet of the Company and its subsidiaries at September 30, 1996 or
as set forth on Schedule 4.5.2, the Company and its subsidiaries have no
liabilities of any nature (whether arising out of contract, tort, statute
or otherwise and whether direct or indirect, accrued, matured or unmatured,
asserted or unasserted, absolute, contingent or otherwise), except for
Liabilities incurred in the ordinary course of business since September 30,
1996 which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
Section 4.6 Absence of Certain Changes. Since September 30, 1996, except as
specifically disclosed in the Company SEC Reports filed on or prior to the date
of this Agreement or as set forth in Schedule 4.6, and except for this Agreement
and the Transaction Documents, neither the Company nor any of its subsidiaries
has entered into any transaction, or conducted its business or operations, other
than in the ordinary course of
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business consistent with past practice. Since September 30, 1996, there has not
been any material adverse change in the business, assets, liabilities, results
of operations, properties, financial or operating condition of the Company and
its subsidiaries, taken as a whole.
Section 4.7 Derivatives. Schedule 4.7 sets forth a complete and correct
list of all Derivative Financial Instruments held by the Company and its
subsidiaries as of the date of this Agreement.
Section 4.8 Proxy Statement. The Proxy Statement shall not, at the time
mailed to the Company's stockholders and at the time of the Stockholders'
Meeting contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. Notwithstanding the foregoing, the Company makes no representation
or warranty with respect to any information provided by Parent, Newco,
Acquisition and/or by their auditors, attorneys, financial advisors or other
consultants or advisors specifically for use in the Proxy Statement. The Proxy
Statement will comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder.
Section 4.9 Finder's Fee. No broker, finder, investment banker or other
person (other than Smith Barney Inc.) is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement or by the Voting Agreement based upon arrangements made by or on
behalf of the Company.
Section 4.10 Absence of Litigation. Except for claims, suits, arbitration
proceedings, or investigations relating to insurance products, policies, bonds
or contracts occurring in the ordinary course of business, none of which,
individually, or in the aggregate, would have a Material Adverse Effect on the
Company, or as specifically disclosed in the Company SEC Reports filed on or
prior to the date of this Agreement or as set forth on Schedule 4.10, there is
no action, suit, claim, arbitration, investigation or proceeding pending
against, or to the Company's knowledge overtly threatened against the Company,
or any of its subsidiaries before any court or arbitrator or any administrative,
regulatory or governmental body, or any agency or official which (i)
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on the Company; or (ii) alleges criminal action or
inaction. Neither the Company nor any of its subsidiaries nor any of their
respective businesses or properties are subject to any order, writ, judgment,
injunction, decree, determination or award having, or which would reasonably be
expected to have, a Material Adverse Effect on the Company or which, would
materially interfere with the consummation of the transactions contemplated by
this Agreement or the Voting Agreement.
Section 4.11 Taxes.
4.11.1 (a) All Returns required to be filed on or before the date
hereof and the Closing Date by or on behalf of each member of the Group
have been duly filed on a timely basis and such Returns are true, correct
and complete in all respects; (b) Each member of the Group has timely paid
all Taxes that have been shown as due and payable on the Returns that have
been filed, and no other material Taxes are payable by the Group with
respect to items or periods covered by such Returns (whether or not shown
on or reportable on such Returns); (c) The Company has made or will make
adequate provision for all material Taxes payable for any periods that end
on or before the Effective Time for which no Returns have yet been filed
and for any periods that begin before the Effective Time and end after the
Effective Time to the extent such Taxes are attributable to the portion of
any such period ending at the Effective Time; (d) The charges, accruals and
reserves for current Taxes (excluding reserves for deferred Taxes)
reflected on the books of the Company are not materially less than the Tax
liabilities accruing or payable by the Company in respect of periods prior
to the date hereof and such charges, accruals and reserves are reflected on
the Company's most recent financial statements; (e) No member of the Group
is delinquent in the payment of any Taxes or has requested any extension of
time within which to file or send any Return, which Return has not since
been filed or sent and which Taxes have not been paid; (f) No deficiencies
exist for any Taxes or any penalties, interest or assessments nor have any
been proposed, asserted, or assessed against any Group member that are not
adequately reserved for; (g) There is no dispute or claim concerning any
Tax liability of any member of the Group either (i) claimed or raised by
any authority in writing or (ii) as to which any director or officer of any
member of the Group (or
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employees responsible for Taxes of any such member of the Group) has
knowledge based upon personal contact with any agent of such authority,
other than those Taxes, identified in Schedule 4.11 attached hereto, being
contested in good faith by appropriate proceedings; (h) Except as
identified in Schedule 4.11 attached hereto, there is no pending audit,
examination, or any investigation of any Return by any authority nor has
any Group member received any notice of such audit, examination, or
investigation; (i) Except as identified in Schedule 4.11 attached hereto,
no member of the Group has waived any statute of limitations in respect of
Taxes or granted any extension of the limitations period applicable to any
claim of Taxes; (j) No Group member is subject to Liability for Taxes of
any person (other than the Company or any other member of the affiliated
group of corporations that files a consolidated federal income tax return,
of which the Company is the common parent), including, without limitation,
liability arising from the application of U.S. Treasury Regulation section
1.1502-6 or any analogous provision of state, local or foreign law or any
Liability pursuant to a tax sharing agreement; (k) Except as identified in
Schedule 4.11 attached hereto, since January 1, 1993, no Group member is or
has been a party to any tax sharing agreement with any entity which is not
currently a member of the Group; (l) Except as identified in Schedule
4.11attached hereto, since January 1, 1993, no claim has ever been made by
an authority in a jurisdiction where any member of the Group does not file
Returns that it is or may be subject to taxation by that jurisdiction; (m)
There are no Liens on any of the assets of any member of the Group that
arose in connection with any failure (or alleged failure) to pay any Taxes;
(n) Each member of the Group has withheld and paid over all Taxes required
to have been withheld and paid over and complied with all information
reporting and backup withholding requirements, including, without
limitation, maintenance of required records with respect thereto, in
connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party; (o) No director or
officer of a member of the Group (or employee responsible for Taxes of any
such member of the Group) expects any authority to assess any additional
material Taxes for any period for which Returns have been filed; (p)
Schedule 4.11 lists all material federal, state, local, and foreign Returns
filed with respect to the Company for taxable periods ended on or after
December 31, 1992, indicates those Returns that have been audited, and
indicates those Returns that currently are the subject of audit; (q) The
Company has delivered or made available to Parent correct and complete
copies of all Returns, examination reports, and statements of deficiencies
assessed against or agreed to by such member of the Group since January 1,
1993; (r) No member of the Group is a party to any safe harbor lease within
the meaning of Section 168(f)(8) of the Code, as in effect prior to the
amendment by the Tax Equity and Fiscal Responsibility Act of 1982; and (s)
Except as identified on Schedule 4.11 attached hereto, all net operating
losses, credits and other tax attributes utilized by the Company during any
taxable year ending on or prior to the Closing were fully and properly
available to the Company under all applicable tax laws, regulations and
administrative interpretations thereof, and the utilization of such net
operating losses, credits and other tax attributes was not subject to any
restrictions pursuant to Sections 382, 383 or 384 of the Code or Treasury
Regulation Section 1.1502-21T(c) or otherwise.
4.11.2 (a) No shareholder of the Company who owns (i) more than 5% of
any class of the Company's stock that is regularly traded on an established
securities market, within the meaning of Section 897(c)(3) of the Code, or
(ii) any amount of any other class of the Company's stock is a "foreign
person"; (b) No member of the Group is a "consenting corporation" under
Section 341(f) of the Code; (c) Except as identified on Schedule 4.11.2(c)
attached hereto, no member of the Group has entered into any compensatory
agreement with respect to the performance of services which payment
thereunder would result in a nondeductible expense to the Group pursuant to
Sections 162(m) or 280G of the Code or an excise tax to the recipient of
such payment pursuant to Section 4999 of the Code; (d) The Company has not
agreed, nor is it required to make, any adjustment under Section 481(a) of
the Code by reason of a change in accounting method or otherwise; (e) The
Company will not be required as a result of any "closing agreement"
described in Section 7121 of the Code (or any corresponding provision of
state, local or foreign income Tax law), to include any item of income in,
or exclude any item of deduction from, taxable income for any taxable
period (or portion thereof) ending after the Closing Date; and (f) the
Company will not be required as a result of any deferred intercompany gain
described in Treasury Regulation Section 1.1502-13 or any excess loss
account described in Treasury Regulation
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Section 1.1502-19 (or any corresponding or similar provision or
administrative rule of federal, state, local or foreign income tax law), to
include any item of income in taxable income for any period (or portion
thereof) ending after the Closing Date. For purposes of all of Section
4.11, the term "Company" includes the Company and each subsidiary of the
Company.
Section 4.12. Employee Benefits.
4.12.1 Schedule 4.12.1 contains a true and complete list of each
Company Plan. Schedule 4.12.1 identifies each of the Company ERISA Plans.
Each reference in this Section 4.12 to: a "Plan" means a Company Plan; an
"ERISA Affiliate" means an ERISA Affiliate of the Company; an "ERISA Plan"
means a Company ERISA Plan.
4.12.2 No material monetary liability under Title IV of ERISA has been
incurred by the Company or any ERISA Affiliate that has not been satisfied
in full, and no condition exists that presents a material risk to the
Company or any ERISA Affiliate of incurring a Liability under such Title,
other than liability for premiums due the PBGC (which premiums have been
paid when due). To the extent this representation applies to sections 4064,
4069 or 4204 of Title IV of ERISA, it is made not only with respect to each
ERISA Plan but also with respect to any employee benefit plan, program,
agreement or arrangement subject to Title IV of ERISA to which the Company
or any ERISA Affiliate made, or was required to make, contributions during
the five (5)-year period ending on the Effective Time. Neither the Company
nor any ERISA Affiliate is required to contribute to a "multiemployer plan"
(as defined in Section 4001(a)(3) of ERISA) or has withdrawn from any
multiemployer plan where such withdrawal has resulted or would result in
any "withdrawal liability" (within the meaning of Title IV of ERISA) that
has not been fully paid.
4.12.3 The PBGC has not instituted proceedings to terminate any Plan
and no condition exists that presents a material risk that such proceedings
will be instituted.
4.12.4 Except as set forth in Schedule 4.12.4 with respect to each
Plan subject to Title IV of ERISA, the present value of accrued benefits
under such plan, based upon the actuarial assumptions used for funding
purposes in the most recent actuarial report prepared by such plan's
actuary with respect to such plan did not exceed, as of its latest
valuation date, the then current value of the assets of such plan allocable
to such accrued benefits.
4.12.5 Neither the Company nor any ERISA Affiliate, nor any Plan, nor
any trust created thereunder, nor any trustee or administrator thereof has
engaged in a transaction in connection with which the Company, any ERISA
Affiliate or any ERISA Plan would be subject to either a material civil
penalty assessed pursuant to section 409 or 502(i) of ERISA or a material
tax imposed pursuant to section 4975 or 4976 of the Code.
4.12.6 No Plan or any trust established thereunder has incurred any
"accumulated funding deficiency" (as defined in section 302 of ERISA and
section 412 of the Code), whether or not waived, as of the last day of the
most recent fiscal year of each Plan ended prior to the Effective Time; and
all contributions required to be made with respect thereto (whether
pursuant to the terms of any Plan or otherwise) on or prior to the
Effective Time have been timely made.
4.12.7 Except as set forth on Schedule 4.12.7, each Plan has been
operated and administered in all material respects in accordance with its
terms and applicable law, including, but not limited to, ERISA and the
Code.
4.12.8 There are no pending claims, or to the Company's knowledge
threatened or anticipated claims (which individually or in the aggregate
are reasonably expected to be material), by or on behalf of any Plan, by
any employee or beneficiary covered under any such Plan, or otherwise
involving any such Plan (other than routine claims for benefits).
4.12.9 The Company has provided Parent with a correct and complete
copy of each written Plan, as amended, together with a copy of the most
recent Internal Revenue Service determination letter issued with respect to
each Plan that is intended to be qualified under Section 401(a) of the
Code, a copy of the
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latest actuarial valuation (if any) for each such Plan that is a defined
benefit plan, a copy of each trust agreement and/or insurance contract, if
any, with respect to each Plan and a copy of the most recent summary plan
description, if any, for each Plan. A description of the material terms of
any unwritten Plan (including a description of eligibility, participation,
benefits, funding arrangements and assets) is set forth on Schedule 4.12.9.
4.12.10 Except as set forth in Schedule 4.12.10, neither the Company
nor any ERISA Affiliate maintains or has any obligation to contribute to
(or has a liability with respect to) any Plan which provides
post-retirement health, accident or life insurance benefits to current or
former employees, current or former independent contractors, current or
former retirees, or their spouses, dependents or beneficiaries, other than
medical benefits required to be provided to former employees, their
spouses, former spouses, and other dependents under Code Section 4980B.
4.12.11 Except as set forth in Schedule 14.12.11, all reports and
descriptions (including Form 5500 Annual Report, summary annual reports,
and summary plan descriptions) with respect to all ERISA Plans have been
timely and properly filed with the appropriate governmental agencies and/or
distributed as required by ERISA to Plan participants and beneficiaries,
and are complete and accurate as so filed and/or distributed.
4.12.12 The Company and its ERISA Affiliates have complied in all
material respects with the requirements of Section 4980B of the Code and
Part 6 of Subtitle B of Title I of ERISA with respect to each Plan which is
a group health plan (within the meaning of Section 607(1) of ERISA).
Section 4.13 Environmental Matters. Except as disclosed on Schedule 4.13,
to the Company's knowledge there does not exist at, on, under or about any of
the Real Property currently owned, leased, used or occupied by the Company or
its subsidiaries, any Hazardous Materials, other than materials customarily used
in minor amounts in offices and which have been stored and used in compliance
with applicable laws, rules, regulations and ordinances, except to such laws,
rules, regulations and ordinances, the non-compliance with which would not,
individually or in the aggregate, have a Material Adverse Affect. To the
Company's knowledge without inquiry of persons not affiliated with the Company
and its subsidiaries, except as set forth above, none of the Real Property has
ever been used to generate, manufacture, refine, transport, treat, store,
handle, dispose, transfer, produce, process or in any manner deal with Hazardous
Materials. To the Company's knowledge without inquiry of persons not affiliated
with the Company and its subsidiaries, none of the Company, any of its
subsidiaries or any of their agents have disposed of any material quantities of
Hazardous Materials located off the Real Property which originated therefrom.
Section 4.14 Intellectual Property. Except to the extent that the
inaccuracy of any of the following (or the circumstances giving rise to such
inaccuracy) individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect on the Company: (i) except as set forth on
Schedule 4.14, the Company and each of its Insurance Subsidiaries own, or is
licensed to use (in each case, free and clear of any Liens), all Intellectual
Property used in or necessary for the conduct of its business as currently
conducted; (ii) the Company has not received notice that the use of any
Intellectual Property by the Company and its Insurance Subsidiaries infringes on
or otherwise violates the rights of any person; (iii) to the Company's
knowledge, without inquiry, no service or product (or component or process
thereof) provided, used, sold or produced by and/or for, or supplied to, the
Company or any of its Insurance Subsidiaries infringes or otherwise violates the
Intellectual Property of any other person; and (iv) to the Company's knowledge,
without inquiry, no person is challenging, infringing on or otherwise violating
any right of the Company or any of its Insurance Subsidiaries with respect to
any Intellectual Property owned by and/or licensed to the Company or any of its
Insurance Subsidiaries. Except as set forth on Schedule 4.14, neither the
Company nor any of its Insurance Subsidiaries (a) has registered, or filed an
application for registration of, any trademark, service mark, trade name or
copyright, or (b) own or has any rights in any patents or applications for
patents and no patents or applications for patents are used in the business of
the Company or any of its Insurance Subsidiaries. Schedule 4.14 contains a
listing of the following used by the Company or any of its Insurance
Subsidiaries in connection with operation of their respective businesses: (x)
all Company Software, and (y) the Licensed Software. The Company Software and
the Licensed Software include by reference all data files read, updated or
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otherwise accessed by the Company Software and the Licensed Software. Within the
past three years, no suit or action has been pending and no claim has been
served against the Company or any of its Insurance Subsidiaries alleging illegal
use of the Company Software or the Licensed Software. There exists no event of
default (or any event which with the giving of notice or passage of time would
result in a default) by the Company or any of its Insurance Subsidiaries with
respect to any agreement, license, lease or contract pursuant to which the
Company or any of its Insurance Subsidiaries uses the Licensed Software which
would have a Material Adverse Effect on the Company. Neither the Company nor any
of its Insurance Subsidiaries has authorized any other person to use the Company
Software or the Licensed Software other than its employees in the ordinary
course of performing their duties on behalf of the Company or any of its
Insurance Subsidiaries.
Section 4.15 Material Contracts. All of the material contracts of the
Company or any of its subsidiaries that are required to be described in the
Company SEC Reports or to be filed as exhibits thereto are described in the
Company SEC Reports or filed as exhibits thereto and are in full force and
effect or have terminated in accordance with their terms. True and complete
copies of all such material contracts have been made available by Company to
Parent. Neither the Company nor any of its subsidiaries nor, to the Company's
knowledge, any other party is in breach of or in default under any such contract
except for such breaches and defaults as in the aggregate have not had and are
not reasonably expected to have a Material Adverse Effect on the Company. Except
as set forth in Schedule 4.15 hereto, neither the Company nor any of its
subsidiaries is party to any agreement containing any provision or covenant
limiting in any material respect the ability of the Company or any subsidiary to
(A) sell any products or services of any other person, (B) engage in any line of
business, or (C) compete with or to obtain products or services from any person
or limiting the ability of any person to provide products or services to the
Company or any subsidiary.
Section 4.16 Additional Contracts. To the extent not described in the
Company SEC Reports or required to be filed as exhibits thereto, the Company has
provided Parent with complete and accurate copies of all written (and summary
descriptions of all oral) (i) agreements which provide for any payments or other
benefits or acceleration of rights in the event of a change in ownership or
control, (ii) agreements set forth on Schedule 4.15, (iii) standard forms of
agency or distributor agreements, if any, (iv) employment or consulting
agreements providing for compensation and/or benefits in excess of $100,000
annually, and (v) agreements, not otherwise described above, the termination of
which, individually or in the aggregate, would have a Material Adverse Effect on
the Company.
Section 4.17 Compliance. Except as set forth in Schedule 4.17, neither the
Company nor any of its Insurance Subsidiaries is in violation of, nor has the
Company or any of its Insurance Subsidiaries violated, any applicable provisions
of any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise, or other instrument or obligations to which the Company or
any of its Insurance Subsidiaries is a party or by which the Company, any of its
Insurance Subsidiaries or any of their respective properties are bound or
affected, which, individually or in the aggregate, would result or reasonably be
expected to result in a Material Adverse Effect on the Company. The Company and
each of its Insurance Subsidiaries has in effect all Permits necessary for it to
own, lease or operate its properties and assets and to carry on its business as
now conducted (all of which Permits are set forth on Schedule 4.17), and there
has occurred no default under any such Permit except where the failure to hold
such Permit or a default thereunder (in each case, individually or in the
aggregate) would not have a Material Adverse Effect on the Company. Except as
disclosed in the Company SEC Reports filed on or prior to the date of this
Agreement, the Company and its Insurance Subsidiaries are in compliance with all
applicable statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity, including, without limitation, those that govern the
development and marketing of insurance products, the licensure or registration
of agents and brokers and the execution and performance of reinsurance
agreements except where such failure to comply (individually or in the
aggregate) would not have a Material Adverse Effect on the Company. Except as
disclosed in the Company SEC Reports filed on or prior to the date of this
Agreement or on Schedule 4.17, and except for routine examinations by Insurance
Regulators, as of the date of this Agreement, no investigation by any
Governmental Entity with respect to the Company or any of its subsidiaries is
pending or to the Company's knowledge threatened.
Section 4.18. Insurance Regulatory Compliance. The statutory Annual
Statements for the year ended December 31, 1995, together with all exhibits and
schedules thereto, and financial statements relating thereto,
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and any actuarial opinion, affirmation or certification filed in connection
therewith, and the statutory Quarterly Statements for the periods ended after
January 1, 1996, together with all exhibits and schedules thereto, and all
Insurance Reports, with respect to the Company and each of its Insurance
Subsidiaries, in each case as filed with the applicable Insurance Regulator of
its jurisdiction or domicile, where so required, were prepared in all material
respects in conformity with SAP, applied on a consistent basis, and present
fairly, in all material respects, to the extent required by and in conformity
with SAP, the admitted assets, liabilities, capital and surplus, cashflow and
other funds of the Insurance Subsidiaries at their respective dates and the
results of operations, changes in capital and surplus and cash flow of each such
entity for each of the periods then ended, and were correct in all material
respects when filed and there were no material omissions therefrom when filed.
Except as set forth on Schedule 4.18, no Insurance Regulator has given any
written notice of any deficiency or violation of any applicable statute, law,
ordinance, rule, order or regulation of any Governmental Entity which deficiency
or violation would have a Material Adverse Effect on the Company. Each of the
Company and its Insurance Subsidiaries has filed with Insurance Regulators all
Insurance Reports required to be filed under the insurance and other laws of its
state of domicile and in each state where it holds a certificate of authority
except where such failure to file, individually or in the aggregate, would not
have a Material Adverse Effect on the Company. Schedule 4.18 sets forth all
reports of examination issued by any Insurance Regulator with respect to the
Company or any of its Insurance Subsidiaries since January 1, 1996. The Company
and its Insurance Subsidiaries have resolved all material issues raised in such
reports to the satisfaction of the issuer thereof.
Section 4.19 Related Party Transactions. Except as set forth in Schedule
4.19, all transactions involving the Company or its Insurance Subsidiaries that
are required to be disclosed in the Company SEC Reports in accordance with Item
404 of Regulation S-K under the Exchange Act have been so disclosed, and, to the
Company's knowledge, since September 30, 1996, neither the Company nor any of
the Insurance Subsidiaries has entered into any transaction that would be
required to be disclosed in future public filings under the Exchange Act
pursuant to such Item 404 that have not already been disclosed in the Company
SEC Reports filed prior to the date hereof.
Section 4.20 Real Property.
4.20.1 Schedule 4.20.1 sets forth all of the real property owned in
fee by the Company or any of its subsidiaries. The Company and each of its
subsidiaries has good and marketable title to each parcel of real property
owned by it free and clear of all Liens, except (i) to the extent disclosed
or recorded in the most recent balance sheet of the Company included in the
Company SEC Reports filed on or prior to the date of this Agreement, (ii)
taxes and general and special assessments not in default and payable
without penalty and interest, and (iii) other liens, mortgages, pledges,
encumbrances and security interests which do not materially interfere with
the Company's, or any of its subsidiaries', use and enjoyment of such real
property or materially detract from or diminish the value thereof.
4.20.2 Schedule 4.20.2 sets forth all Real Property Leases under which
the Company or any of its subsidiaries uses or occupies or has the right to
use or occupy, now or in the future, any real property. The Company has
previously delivered or made available to Parent correct and complete
copies of all Real Property Leases (including all modifications, amendments
and supplements thereto). Each Real Property Lease is valid, binding and in
full force and effect, all rent and other sums and charges payable by the
Company and its subsidiaries as tenants thereunder are current, no
termination event or condition or uncured default of a material nature on
the part of the Company or any such subsidiary or, to the Company's
knowledge, the landlord, exists under any Real Property Lease. Each of the
Company and its subsidiaries has a good and valid leasehold interest in
each Real Property Lease free and clear of all Liens, except (i) to the
extent disclosed or recorded in the most recent balance sheet of the
Company included in the Company SEC Reports filed on or prior to the date
of this Agreement, (ii) taxes and general and special assessments not in
default and payable without penalty and interest; and (iii) other liens,
mortgages, pledges, encumbrances and security interests which do not
materially interfere with the Company's or any of its subsidiaries' use and
enjoyment of such real property or materially detract from or diminish the
value thereof.
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Section 4.21 Labor Matters. The Company and each of its subsidiaries is (i)
in compliance, in all material respects, with all federal and state laws
respecting (a) employment and employment practices (including immigration laws
relevant to employment) except where such failure (individually or in the
aggregate) would not have a Material Adverse Effect on the Company, and (b)
terms and conditions of employment and wages and hours. There is no unfair labor
practice complaint against the Company or any of its subsidiaries pending before
the National Labor Relations Board. Except as set forth in Schedule 4.21, there
is no (x) material labor strike or material dispute, slow down or stoppage
actually pending or, to the knowledge of the Company, threatened against or
involving the Company or any of its subsidiaries, (y) grievance which if
adversely determined (individually or in the aggregate) would reasonably be
expected to have a Material Adverse Effect on the Company, or (z) pending
arbitration proceeding and no claim therefor has been asserted. Except as
disclosed on Schedule 4.21, neither the Company nor any of its subsidiaries has
experienced any material work stoppage during the five-year period prior to the
date of this Agreement. There are no collective bargaining agreements, union
contracts or similar types of agreements by which the Company or any of its
subsidiaries is bound or covered.
Section 4.22 Takeover Statutes. No "control share acquisition" or other
similar antitakeover statute or regulation enacted under the laws of the states
of Delaware, South Dakota or Texas or federal laws in the United States (other
than laws requiring appropriate disclosure or prohibiting fraudulent, deceptive
or manipulative practices) applicable to the Company or any of its subsidiaries
is applicable to the Merger or the other transactions contemplated hereby.
Section 4.23 Voting Requirements. The affirmative vote of a majority of the
outstanding shares of Common Stock approving this Agreement and an amendment to
the Company's Certificate of Incorporation to delete Article XII thereof are the
only votes of the holders of any class or series of the Company's securities
necessary to approve this Agreement and the transactions contemplated hereby.
Section 4.24 Powers and Authority. Neither the Company nor any of its
Insurance Subsidiaries has empowered any independent agent with the authority to
bind it to any insurance or reinsurance contract or any amendment or endorsement
thereto, with the exception of the authority granted to the agents of the
Company or its Insurance Subsidiaries pursuant to (a) their respective agency
agreements, (b) powers of attorney, or (c) pre-executed bond forms, all of which
were executed in the ordinary course of business and correct and complete copies
of the form of which have been made available to Parent.
Section 4.25 Reinsurance Arrangements. Schedule 4.25 identifies all in
force Company Reinsurance Agreements. Each Company Reinsurance Agreement is in
full force and effect, enforceable in accordance with the terms thereof, and
neither the Company nor any of its Insurance Subsidiaries is in default under or
breach of any of the provisions of any Company Reinsurance Agreements and,
except as set forth on Schedule 4.25, there is no event that has occurred which,
with the passage of time or the giving of notice, or both, would create a
default or breach by the Company or any such subsidiary thereunder, except to
the extent that any such default or breach would not have a Material Adverse
Effect on the Company. None of the Company, any of its Insurance Subsidiaries or
any reinsurer under any Company Reinsurance Agreement has given any notice of
termination with respect to any such arrangement or treaty, and there is no
dispute other than those that occur in the ordinary course of business, under
any such arrangement or treaty regarding the liability for any claim against the
Company or any of its Insurance Subsidiaries by its insureds that to the
Company's knowledge is covered by any such arrangement or treaty, which if
adversely determined would, individually or in the aggregate, have a Material
Adverse Effect on the Company.
Section 4.26 Investments. Except as set forth on Schedule 4.26, the Company
or its subsidiaries is in possession of all certificates or other documentation
evidencing ownership of Invested Assets, and has good and marketable title, free
and clear of all Liens, to all Invested Assets as of September 30, 1996 (which
assets are set forth on such Schedule), and all Invested Assets acquired after
September 30, 1996, excluding those Invested Assets sold after such date in the
ordinary course of the Company's business or the business of any of its
subsidiaries.
Section 4.27 Insurance Business. Except as set forth on Schedule 4.27, all
products, policies, bonds and contracts of insurance offered or marketed,
entered into, issued or sold, as the case may be, by the Company or
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any of its Insurance Subsidiaries complied as to form when entered into, issued
or sold, with the provisions of all applicable laws and regulations, except
where the failure to so comply would not, individually or in the aggregate, have
a Material Adverse Effect on the Company. To the extent required under
applicable law, all products, policies, bonds or contracts of insurance issued
by the Company or any of its Insurance Subsidiaries, as now in force, are on
forms approved by applicable Insurance Regulators or which have been filed with
and not objected to by such Insurance Regulators within the period provided for
objection and all insurance in force of the Company and its Insurance
Subsidiaries is valid and binding upon the Company or its Insurance
Subsidiaries, as the case may be, and their policyholders in accordance with the
terms thereof, except where the failure to obtain such approval or make such
filings would not, individually or in the aggregate, have a Material Adverse
Effect on the Company. All the premium rates required to be filed with or be
approved by Insurance Regulators have been so filed or approved (except where
the failure to file or be approved would not, individually or in the aggregate,
have a Material Adverse Effect on the Company) or not objected to within the
period provided for objection, and all premiums charged conform thereto. The
Company or its Insurance Subsidiaries have paid in full or accrued all guaranty
fund assessments for which each of them has been billed. To the Company's
knowledge, neither the Company nor any of its Insurance Subsidiaries has
advertised or used other literature in connection with the offer and sale of
insurance products that does not comply with applicable laws and such
advertising and literature is in compliance with such laws except to the extent
non-compliance would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
Section 4.28 Opinion of Financial Advisor. The Board has received the
opinion of Smith Barney Inc., financial advisor to the Company, dated the date
of this Agreement, to the effect that the Merger Consideration is fair, from a
financial point of view, to the holders of the Common Stock.
Section 4.29 Books and Records. All of the books and records of the Company
and its subsidiaries (including, without limitation, all minute books and stock
records) are accurate and complete in all material respects, are kept in the
ordinary course of business and are maintained at the executive offices of the
Company.
Section 4.30 No Investment Company. Neither the Company nor any of its
subsidiaries is an "investment company" nor a company "controlled" by an
investment company" within the meaning of the Investment Company Act of 1940, as
amended.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT, NEWCO AND ACQUISITION
Parent, Newco and Acquisition represent and warrant to the Company as of
the date of this Agreement and as of the Closing Date as follows:
Section 5.1 Organization, Qualification, Subsidiaries.
5.1.1 Continental is a corporation organized (in accordance with all
legal requirements applicable thereto, the non-compliance with which would
have a Material Adverse Effect) validly existing and in good standing under
the laws of the State of Illinois and each of Newco and Acquisition is a
corporation organized (in accordance with all legal requirements applicable
thereto, the non-compliance with which would have a Material Adverse Effect
on the PR66 Insurance Business), validly existing and in good standing
under the laws of the State of Delaware. Each other affiliate of
Continental listed on the signature pages hereto is a corporation organized
(in accordance with all legal requirements applicable thereto, the
non-compliance with which would have a Material Adverse Effect on the PR66
Insurance Business), validly existing and in good standing under the laws
of the state of incorporation for such affiliate listed on the signature
pages hereto. Each of Parent, Newco and Acquisition has all requisite
corporate power and authority to own, lease and operate its properties and
to carry on its business as now being conducted. Acquisition and Newco were
formed solely for the purpose of participating in the Merger and do not
have, and will not have as of the Closing, any debts or other monetary
Liabilities, except for Liabilities of Newco expressly set forth herein
(including, without limitation, liabilities for
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expenses related to the printing, mailing and distribution of the Proxy
Statement/Prospectus) and except for indebtedness for borrowed money in the
principal amount of $50,000,000, the proceeds of which as of the Closing
Date shall have been contributed to the Insurance Subsidiaries.
5.1.2 Each of Parent (in connection with the PR66 Insurance Business),
Newco and Acquisition is qualified or licensed and in good standing to do
business in each jurisdiction (including any foreign country) (which
jurisdictions are set forth on Schedule 5.1.2) in which the property owned,
leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except where the failure
to be so qualified or licensed and in good standing would not, individually
or in the aggregate, have a Material Adverse Effect on the PR66 Insurance
Business of Parent or Newco.
5.1.3 Parent has heretofore furnished to the Company complete and
correct copies of the Certificate of Incorporation and By-Laws, or other
equivalent organizational documents, as amended, for Parent, Newco and
Acquisition. Such organizational documents are applicable to or binding
upon Parent, Newco and Acquisition, as the case may be. None of Parent,
Newco or Acquisition are in violation of any of the provisions of its
respective organizational documents.
Section 5.2 Capitalization of Acquisition and Newco. As of the date hereof,
the authorized capital stock of Newco consists of 1,000 shares of common stock,
$.01 par value, of which 1,000 shares were issued and outstanding as of December
10, 1996. All outstanding shares of New Common have been, and all shares of New
Common to be issued in connection with the Merger will be, duly authorized,
validly issued, and are or will be fully paid, nonassessable and free and clear
of all Liens, including, without limitation, preemptive and rescission rights.
Except as set forth in this Agreement, there are outstanding no Newco
Securities. There are no outstanding obligations of Parent, Newco or Acquisition
to repurchase, redeem or otherwise acquire any Newco Securities. Each of the
outstanding shares of capital stock of Acquisition is duly authorized, validly
issued, fully paid and nonassessable and is directly owned by Newco, free and
clear of all Liens. There are no existing options, calls or commitments of any
character relating to the issued or unissued capital stock or other securities
of Acquisition. No bonds, debentures, notes or other indebtedness of Parent,
Newco or Acquisition having the right to vote (or convertible into, or
exchangeable for securities having the right to vote) on any matters on which
the stockholders of Newco may vote, are issued or outstanding.
Section 5.3 Authority Relative to this Agreement. Each of Parent, Newco and
Acquisition has all necessary corporate power and authority to execute and
deliver this Agreement and the other Transaction Documents, and, subject (as of
the date of this Agreement, but not on the Closing Date) to approvals, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the other Transaction Documents, and the
consummation of the transactions contemplated thereby have been duly and validly
authorized by the respective Boards of Directors of Parent, Newco and
Acquisition, and no other corporate proceedings on the part of Parent, Newco or
Acquisition are necessary to authorize this Agreement and the other Transaction
Documents or to consummate the transactions contemplated hereby. This Agreement
and the other Transaction Documents have been duly and validly executed and
delivered by each of Parent, Newco and Acquisition and, subject (as of the date
of this Agreement, but not on the Closing Date) to regulatory approvals set
forth on Schedule 5.4.2, constitutes a legal, valid and binding agreement of
Parent, Newco and Acquisition, enforceable against each of Parent, Newco and
Acquisition in accordance with its terms, subject to the qualification that the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent transfer and other laws of general applicability relating to or
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding for the enforcement
thereof may be brought. Neither Parent, Newco nor Acquisition is an "interested
stockholder" of the Company within the meaning of Section 203 of the Delaware
Law.
Section 5.4 Non-Contravention; Required Filings and Consents.
5.4.1 The execution, delivery and performance by Parent, Newco and
Acquisition of this Agreement and the consummation of the transactions
contemplated hereby (including the Merger and the
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Transaction Documents) do not and will not (i) contravene or conflict with
the Certificate of Incorporation, By-Laws or other organizational documents
of Parent, Newco or Acquisition; (ii) assuming that all consents,
authorizations and approvals contemplated by Section 5.4.2 have been
obtained and all filings described therein have been made, contravene or
conflict with or constitute a violation of any provision of any law,
statute, regulation, rule, ordinance, judgment, injunction, writ, award,
order or decree binding upon or applicable to Parent, Newco, Acquisition or
any of their respective properties; (iii) conflict with, or result in the
breach or termination of any provision of or constitute a default (with or
without the giving of notice or the lapse of time or both) under, or give
rise to any right of modification, termination, cancellation, or loss of
any benefit to which Parent, Newco or Acquisition is entitled, under any
provision of any agreement, contract, license or other instrument binding
upon Parent, Newco or Acquisition or any of their respective properties, or
allow the acceleration of the performance or maturity of, any obligation of
Parent, Newco or Acquisition under any indenture, mortgage, deed of trust,
lease, license, contract, instrument or other agreement to which Parent,
Newco or Acquisition is a party or by which any of their respective assets
or properties is subject or bound; or (iv) result in the creation or
imposition of any Lien on any asset or property of Parent, Newco or
Acquisition; provided, however, that with respect to clauses (ii), (iii)
and (iv) above, no such conflict, breach, default, termination,
modification, amendment, cancellation, acceleration, Lien, encumbrance or
violation shall in any way constitute a breach of this Section 5.4.1 unless
it, individually or in the aggregate, would have a Material Adverse Effect
on the PR66 Insurance Business.
5.4.2 The execution, delivery and performance by Parent, Newco and
Acquisition of this Agreement and the Transaction Documents and the
consummation of the transactions contemplated thereby (including the
Merger) and the maintenance of any certificate of authority or of any
license relating to the PR66 Insurance Business require no action by or in
respect of, or filing with, or notice to, any governmental body, agency,
official or authority (either domestic or foreign) other than (i) the
filing of a Certificate of Merger in accordance with Delaware Law and
appropriate documents with the relevant authorities of other states in
which Parent, Newco or Acquisition are qualified or licensed to do
business; (ii) compliance with any applicable requirements of the HSR Act
with respect to the Merger; (iii) the consents, approvals and authorization
of, and filings and/or notices required under the insurance laws of the
jurisdictions set forth on Schedule 5.4.2; (iv) compliance with any
applicable requirements of the Exchange Act and the Securities Act and
state securities, takeover and Blue Sky laws; and (v) such actions or
filings which, if not taken or made, would not individually or in the
aggregate have a Material Adverse Effect on the PR66 Insurance Business or
materially interfere with the consummation of the transactions contemplated
by this Agreement or the Transaction Documents.
Section 5.5 Finder's Fee. No broker, finder, investment banker or other
person is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement or by the Voting
Agreement based upon arrangements made by or on behalf of Parent, Newco or
Acquisition.
Section 5.6 Absence of Litigation. Except claims, suits, arbitration
proceedings, or investigations relating to insurance policies, bonds or
contracts occurring in the ordinary course of business, none of which,
individually or in the aggregate, would have a Material Adverse Effect on the
PR66 Insurance Business or as set forth on Schedule 5.6, there is no action,
suit, claim, arbitration, investigation or proceeding pending against, or to
Parent's knowledge, overtly threatened against Parent which relates to the PR66
Insurance Business, Newco, or Acquisition before any court or arbitrator or any
administrative, regulatory or governmental body, or any agency or official which
(i) individually or in the aggregate would reasonably be expected to have, a
Material Adverse Effect on the PR66 Insurance Business, or (ii) alleges any
criminal action or inaction as it relates to the PR66 Insurance Business. None
of Parent, Newco, Acquisition or any of their respective properties are subject
to any order, writ, judgment, injunction, decree, determination or award which
has, or which would reasonably be expected to have, a Material Adverse Effect on
the PR66 Insurance Business or which, would materially interfere with the
consummation of the transactions contemplated by this Agreement or the
Transaction Documents.
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Section 5.7 Absence of Certain Changes.
(a) Since December 31, 1995, there has not been any material adverse
change in the business, assets, liabilities, results of operations,
properties, financial or operating condition of the PR66 Insurance
Business, taken as a whole. Except as set forth in this Agreement, since
the date of delivery to the Company of the December 31, 1995 financial
statements, neither Parent nor any of its subsidiaries has entered into any
transaction, or conducted any of its business or operations, in each case
relating to the PR66 Insurance Business, other than in the ordinary course
of business consistent with past practices.
(b) There has not been any material adverse change in the business,
assets, liabilities, results of operations, properties, financial or
operating condition of the PR66 Insurance Business that would reasonably be
expected to result in a material deviation from a net written premium, as
of December 31, 1997, for the PR66 Insurance Business of $155.2 million;
provided, however, that the reinsurance arrangements of the PR66 Insurance
Business in effect on the Closing Date shall be substantially similar to
those in effect as of the date of this Agreement.
Section 5.8 Financial Statements.
5.8.1 The unaudited financial statements relating to the PR66
Insurance Business provided to the Company prior to the date of this
Agreement have been, and the audited financial statements relating to the
PR66 Insurance Business to be delivered pursuant to Section 6.2.7, when
delivered to the Company and included in the Form S-4, will be, prepared in
conformity with generally accepted accounting principles applied on a
consistent basis and present fairly, in all material respects, the
financial position of the PR66 Insurance Business as of the dates thereof
and its results of operation and cash flows for the periods indicated
(other than delivery of footnotes and subject to normal year-end
adjustments in the case of unaudited statements).
5.8.2 Except as disclosed or recorded in the unaudited consolidated
balance sheet for the PR66 Insurance Business at December 31, 1995 or as
set forth on Schedule 5.8.2, there are no liabilities relating to the PR66
Insurance Business of any nature (whether arising out of contract, tort,
statute or otherwise and whether direct or indirect, accrued, matured or
unmatured, asserted or unasserted, absolute, contingent or otherwise),
except for such Liabilities incurred in the ordinary course of business
since December 31, 1995 which would not, individually or in the aggregate,
have a Material Adverse Effect on the PR66 Insurance Business.
Section 5.9 No Prior Activities. Since the date of its incorporation, Newco
and Acquisition have not engaged in any activities other than in connection with
or as contemplated by this Agreement.
Section 5.10 Derivatives. Newco and Acquisition do not hold any Derivative
Financial Instruments.
Section 5.11 Registration Statement on Form S-4. The Form S-4 shall not, at
the time it is delivered to stockholders or is declared effective by the SEC or
at the Effective Time, contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. Notwithstanding the foregoing, Parent, Acquisition and
Newco make no representation or warranty with respect to any information
provided by the Company, its subsidiaries and/or their auditors, attorneys,
financial advisors or consultants specifically for use in the Form S-4. The Form
S-4 will comply as to form in all material respects with the applicable
provisions of the Exchange Act and the Securities Act and the rules and
regulations thereunder.
Section 5.12 PR66 Insurance Business. The PR66 Insurance Business
constitutes substantially all of the Surety Business conducted by Parent and its
affiliates. Except as set forth on Schedule 5.12, the products, policies, bonds
and contracts of insurance comprising the PR66 Insurance Business complied as to
form when entered into, issued or sold, with the provisions of all applicable
laws and regulations, except where the failure to so comply would not,
individually or in the aggregate, have a Material Adverse Effect on the PR66
Insurance Business. To the extent required under applicable law, all products,
policies, bonds or contracts of insurance comprising the PR66 Insurance
Business, as now in force are on forms approved by applicable
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Insurance Regulators or which have been filed with and not objected to by such
Insurance Regulators within the period provided for objection and all insurance
of the PR66 Insurance Business in force is valid and binding on the Parent and
its subsidiaries as the case may be, and their policyholders in accordance with
the terms thereof, except where the failure to obtain such approval or make such
filings would not, individually or in the aggregate, have a Material Adverse
Effect on the PR66 Insurance Business. All premium rates for the PR66 Insurance
Business required to be filed with or approved by Insurance Regulators have been
so filed or approved (except where the failure to file or be approved would not,
individually or in the aggregate, have a Material Adverse Effect on the PR66
Insurance Business) or not objected to within the period provided for objection,
and all premiums charged conform thereto. Parent and each of its subsidiaries
have paid in full or accrued all guaranty fund assessments that relate to the
PR66 Insurance Business for which each of them has been billed. To Parent's
knowledge, neither it nor any of its subsidiaries have advertised or used other
literature in connection with the offer and sale of the products comprising the
PR66 Insurance Business that does not comply with applicable laws and such
advertising and literature is in material compliance with such laws.
Section 5.13 Intentionally deleted.
Section 5.14 Intellectual Property. Except to the extent that the
inaccuracy of any of the following (or the circumstances giving rise to such
inaccuracy) individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect on the PR66 Insurance Business: (i) Parent (in
connection with the PR66 Insurance Business) or Newco own or are licensed to use
(in each case, free and clear of any Liens), all Intellectual Property used in
or necessary for the conduct of the PR66 Insurance Business as currently
conducted, all of which is listed in Schedule 5.14; (ii) the use of any such
Intellectual Property by Parent, its subsidiaries or Newco does not infringe on
or otherwise violate the rights of any person; (iii) to the Parent's knowledge,
no service or product (or component or process thereof), provided, used, sold or
produced by and/or for, or supplied to, Parent, in connection with the PR66
Insurance Business, or Newco infringes or otherwise violates the Intellectual
Property of any other person; and (iv) to the Parent's knowledge, no person is
challenging, infringing on or otherwise violating any right of Parent or Newco
with respect to any Intellectual Property owned by and/or licensed to Parent in
connection with the PR66 Insurance Business or Newco. Except as set forth on
Schedule 5.14, neither Parent or Newco (a) has registered any trademark, service
mark, trade name or copyright, or (b) owns or has any rights in any patents or
applications for patents and no patents or applications for patents are used in
the PR66 Insurance Business. Schedule 5.14 contains a listing of the following
used by Parent or Newco in connection with operation of the PR66 Insurance
Business: (x) all PR66 Software, and (y) all PR66 Licensed Software. The PR66
Software and the PR66 Licensed Software include by reference all data files
read, updated or otherwise accessed by PR66 Software and the PR66 Licensed
Software. Within the past three years, no suit or action has been pending and no
claim has been served against Parent or Newco alleging illegal use of the PR66
Software or the PR66 Licensed Software. There exists no event of any default by
Parent or Newco with respect to any agreement, license, lease or contract
pursuant to which Parent, its subsidiaries or Newco uses the PR66 Licensed
Software. Neither Parent, its subsidiaries or Newco has authorized any other
person to use the PR66 Software or the PR66 Licensed Software other than its
employees in the ordinary course of performing their duties on behalf of Parent
or Newco. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not alter or impair the right of the
Surviving Corporation to use the PR66 Software and the PR66 Licensed Software
and other Intellectual Property of Parent and its Affiliates related to the PR66
Insurance Business.
Section 5.15 Material Contracts. All of the material contracts of Parent or
any of its subsidiaries relating to the PR66 Insurance Business are set forth in
Schedule 5.15 and are in full force and effect. True and complete copies of all
such material contracts have been delivered or made available to the Company.
Neither Parent nor any of its subsidiaries is in breach of or in default under
any such contract nor, to the best of Parent's knowledge, is any other party in
breach of or in default under any such contract except for such breaches or
defaults as in the aggregate have not had and are not reasonably expected to
have a Material Adverse Effect on the PR66 Insurance Business.
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Section 5.16 Compliance. Neither Parent nor any of its subsidiaries is in
violation of, nor has Parent or any of its subsidiaries violated, any applicable
provisions of any contract, agreement, lease, license, permit, franchise or
other instrument or obligation which relates to the PR66 Insurance Business
which violation individually or in the aggregate would result, or would
reasonably be expected to result, in a Material Adverse Effect on the PR66
Insurance Business. Parent, its subsidiaries and Newco have in effect all
Permits necessary for it to own, lease or operate its properties and assets and
to carry on the PR66 Insurance Business as now conducted, and there has occurred
no default under any such Permit, except where such default would not have a
Material Adverse Effect on the PR66 Insurance Business. Parent and Newco are in
compliance with all applicable statutes, laws, ordinances, rules, orders and
regulations of any Governmental Entity, including, without limitation, those
that govern the development and marketing of insurance products, the licensure
or registration of agents and brokers and the execution and performance of
reinsurance agreements, in each case as such relates to the PR66 Insurance
Business, except where such failure to comply would not have a Material Adverse
Effect on the PR66 Insurance Business. Except as disclosed on Schedule 5.16, and
except for routine examinations by state Insurance Regulators, as of the date of
this Agreement, no investigation by any Governmental Entity with respect to
Parent (in connection with the PR66 Insurance Business) or Newco is pending or,
to Parent's knowledge, threatened.
Section 5.17 Insurance Regulatory Compliance. Except as set forth on
Schedule 5.17, no Insurance Regulator has given any written notice of, or
otherwise asserted, any deficiency or violation of any applicable statute, law,
ordinance, rule, order or regulation of any Governmental Entity which deficiency
or violation would have a Material Adverse Effect on the PR66 Insurance
Business. Each of Parent or Newco has filed with appropriate governmental
authorities all Insurance Reports required to be filed under the insurance and
other laws of its state of domicile and in each state where it holds a
certificate of authority as the same relates to the PR66 Insurance Business.
Parent and its subsidiaries do not prepare and file statutory statements solely
with respect to the PR66 Insurance Business. Schedule 5.17 sets forth all
reports of examination issued by any Insurance Regulator to Parent or Newco as
such relates to the PR66 Insurance Business since January 1, 1996, except where
the failure to file such report would not have a Material Adverse Effect on the
PR66 Insurance Business. Parent and Newco have resolved all material issues
raised in such reports to the satisfaction of the issuer thereof.
Section 5.18 Labor Matters. Each of Parent (in connection with the
employees specifically designated to the PR66 Insurance Business) and Newco is
in compliance in all material respects with all federal and state laws
respecting (i) employment and employment practices (including immigration laws
relevant to employment), and (ii) terms and conditions of employment and wages
and hours. There is no unfair labor practice complaint against Parent or Newco
or any of its subsidiaries pending before the National Labor Relations Board
relating to the PR66 Insurance Business. There is no (x) labor strike, dispute,
slow down or stoppage actually pending or, to Parent's knowledge, overtly
threatened against or involving Parent with respect to the PR66 Insurance
Business or Newco, (y) grievance which could have a Material Adverse Effect on
the PR66 Insurance Business, or (z) pending arbitration proceeding and no claim
therefor has been asserted in connection with the PR66 Insurance Business.
Except as disclosed on Schedule 5.18, neither Parent or Newco has experienced
any work stoppage or other labor difficulty relating to the PR66 Insurance
Business during the five-year period prior to the date of this Agreement. There
are no collective bargaining agreements, union contracts or similar types of
agreements by which Parent (in connection with the PR66 Insurance Business) or
Newco is bound or covered.
Section 5.19 Powers and Authority. Neither Parent or Newco has empowered
any independent agent with the authority to bind it to any insurance or
reinsurance contract relating to the PR66 Insurance Business or any amendment or
endorsement thereto, with the exception of the authority granted to the agents
of Parent (in connection with the PR66 Insurance Business) or Newco pursuant to
(a) their respective agency agreements, (b) powers of attorney, or (c)
pre-executed bond forms, all of which were executed in the ordinary course of
business and correct and complete copies of the form of which have previously
been delivered or made available to the Company.
Section 5.20 Reinsurance Arrangements. Schedule 5.20 identifies all PR66
Reinsurance Agreements. Each PR66 Reinsurance Agreement is in full force and
effect, enforceable in accordance with the terms
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thereof, and neither Parent nor Newco is in default under or breach of any of
the provisions of any PR66 Reinsurance Agreements and there is no event that has
occurred which, with the passage of time or the giving of notice, or both, would
create a default or breach by Parent (in connection with the PR66 Insurance
Business) or Newco thereunder, except to the extent that any such default or
breach would not have a Material Adverse Effect on the PR66 Insurance Business
of Parent or Newco. None of Parent or Newco or any reinsurer under any PR66
Reinsurance Agreement has given any notice of termination with respect to any
such arrangement or treaty, and there is no dispute, other than in the ordinary
course of business, under any such arrangement or treaty regarding the liability
for any claim against Parent (in connection with the PR66 Insurance Business) or
Newco by its insureds that to the Parent's knowledge is covered by any such
arrangement or treaty, which if adversely determined would have a Material
Adverse Effect on the PR66 Insurance Business of Parent or Newco.
Section 5.21 Subsidiaries and Affiliates of Newco.
5.21.1 The only direct or indirect subsidiary of Newco is Acquisition.
Newco does not have any direct or indirect equity or ownership interest in
any other business or entity and does not have any direct or indirect
obligation or any commitment to invest any funds in any corporation or
other business or entity, other than for investment purposes in the
ordinary course of business in accordance with past practices.
5.21.2 Parent is the record and beneficial owner of all of the
outstanding shares of capital stock of Newco, and Newco is the record and
beneficial owner of all of the outstanding shares of capital stock of
Acquisition and all of the outstanding shares of capital stock of each of
Parent, Newco and Acquisition are, and upon issuance pursuant to the
Merger, all shares of capital stock of Newco will be, duly and validly
issued, not issued in violation of any preemptive rights, fully paid and
nonassessable and owned by such respective owners free and clear of any
claim, lien, encumbrance or agreement with respect thereto. There are no
options, warrants, calls, subscriptions, conversions, rights, agreements,
commitments or arrangements of any character with respect to the issuance
of shares of capital stock of Parent, Newco or Acquisition or any other
securities convertible into, exchangeable for or evidencing the right to
subscribe for any such shares.
Section 5.22 No Investment Company. Neither Parent, Newco nor Acquisition
is an "investment company", nor a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
Section 5.23 Administrative Services Agreement Charges. The charges for
services set forth in the Administrative Services Agreement referenced in
Section 6.11 are consistent with the charges reflected in the financial
statements provided to the Company prior to the date of this Agreement and are
no less favorable than those currently charged by Parent and its affiliates to
the PR66 Insurance Business for such services.
Section 5.24 Takeover Statutes. No "control share acquisition" or other
similar antitakeover statute or regulation enacted under Delaware Law, or
federal laws in the United States (other than laws requiring appropriate
disclosure or prohibiting fraudulent, deceptive or manipulative practices)
applicable to the Parent or any of its subsidiaries is applicable to the Merger
or the other transactions contemplated hereby.
Section 5.25 Voting Requirements.The affirmative votes of a majority of the
outstanding shares of New Common and of the majority of the outstanding shares
of common stock of Acquisition are the only votes of the holders of any class or
series of the Parent, Newco and Acquisition securities necessary to approve this
Agreement and the transactions contemplated hereby.
Section 5.26 Books and Records. All of the books and records of Parent
(with respect to the PR66 Insurance Business), Newco and Acquisition (including,
without limitation, all minute books and stock
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records) are accurate and complete in all material reports, are kept in the
ordinary course of business and are maintained at the principal offices of
Newco.
Section 5.27 Employee Benefits.
5.27.1 Schedule 5.27.1 contains a true and complete list of each Plan
that will be, or is currently intended to be, available to employees of the
Company or its subsidiaries following the Effective Time ("Post-Merger
Plans"). Newco shall deliver to the Company the Stock Option Plan to be
adopted for the benefit of holders of Company Options at least fifteen days
prior to the Closing, which plan shall be on the terms and conditions
contemplated by Section 2.9. Each reference in this Section 5.27 to: a
"Plan" shall mean a Parent Plan; an "ERISA Affiliate" shall mean an ERISA
Affiliate of Continental; an "ERISA Plan" a Parent ERISA Plan.
5.27.2 No material monetary liability under Title IV of ERISA has been
incurred by Parent or any ERISA Affiliate that has not been satisfied in
full, and no condition exists that presents a material risk to Parent or
any ERISA Affiliate of incurring a Liability under such Title, other than
liability for premiums due the PBGC (which premiums have been paid when
due). To the extent this representation applies to sections 4064, 4069 or
4204 of Title IV of ERISA, it is made not only with respect to each ERISA
Plan that is also a Post-Merger Plan, but also with respect to any employee
benefit plan, program, agreement or arrangement subject to Title IV of
ERISA and to which Parent or any ERISA Affiliate made, or was required to
make, contributions during the five (5)-year period ending at the Effective
Time. Neither Parent nor any ERISA Affiliate is required to contribute to a
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or has
withdrawn from any multiemployer plan where such withdrawal has resulted or
would result in any "withdrawal liability" (within the meaning of Title IV
of ERISA) that has not been fully paid.
5.27.3 The PBGC has not instituted proceedings to terminate any Plan,
and no condition exists that presents a material risk that such proceedings
will be instituted.
5.27.4 With respect to each Plan subject to Title IV of ERISA, the
present value of accrued benefits under such plan, based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such plan's actuary with respect to such plan did not exceed,
as of its latest valuation date, the then current value of the assets of
such plan allocable to such accrued benefits.
5.27.5 Neither Parent nor any ERISA Affiliate, nor any Plan, nor any
trust created thereunder, nor any trustee or administrator thereof has
engaged in a transaction in connection with which Parent, any ERISA
Affiliate or any Post-Merger Plan would be subject to either a material
civil penalty assessed pursuant to section 409 or 502(i) of ERISA or a
material tax imposed pursuant to section 4975 or 4976 of the Code.
5.27.6 No Plan or any trust established thereunder has incurred any
"accumulated funding deficiency" (as defined in section 302 of ERISA and
section 412 of the Code), whether or not waived, as of the last day of the
most recent fiscal year of each Plan ended prior to the Effective Time; and
all contributions required to be made with respect thereto (whether
pursuant to the terms of any Plan or otherwise) on or prior to the
Effective Time have been timely made.
5.27.7 Each Plan has been operated and administered in all material
respects in accordance with its terms and applicable law, including, but
not limited to, ERISA and the Code.
5.27.8 There are no pending, or to Parent's knowledge, threatened or
anticipated material claims (which individually or in the aggregate are
reasonably expected to be material) by or on behalf of any Plan, by any
employee or beneficiary covered under any such Plan, or otherwise involving
any such Plan (other than routine claims for benefits).
5.27.9 Parent has provided the Company with a correct and complete
copy of each written Post-Merger Plan, as amended, together with a copy of
the most recent Internal Revenue Service determination letter issued with
respect to each Post-Merger Plan that is intended to be qualified under
Section 401(a) of the Code, a copy of the latest actuarial valuation (if
any) for each such Post-Merger
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Plan that is a defined benefit plan, a copy of each trust agreement and/or
insurance contract, if any, with respect to each Post-Merger Plan and a
copy of the most recent summary plan description for each Post-Merger Plan
(for which a summary plan description is required). A description of the
material terms of any unwritten Post-Merger Plan (including a description
of eligibility, participation, benefits, funding arrangements and assets)
is set forth on Schedule 5.27.9.
ARTICLE 6
COVENANTS
Section 6.1 Conduct of the Business. During the period from the date of
this Agreement and continuing until the Effective Time, the Company agrees as to
the Company and its subsidiaries that (except to the extent that Parent shall
otherwise consent in writing, which consent shall not be unreasonably withheld):
6.1.1 The Company and each of its subsidiaries shall carry on its
business in the usual, regular and ordinary course in substantially the
same manner as previously conducted and shall use its reasonable efforts to
preserve intact its present business organizations, keep available the
services of its current officers and employees and preserve its
relationships with customers, agents and others having business dealings
with it and shall not substitute any new methods of soliciting business,
valuing investments on their books, processing or administering claims or
lease management or operation, in each case to the end that their goodwill
and ongoing business shall not be adversely impaired in any material
respect at the Effective Time; provided, however, that the foregoing shall
not preclude the Company from liquidating any of its inactive subsidiaries.
6.1.2 Except as set forth on Schedule 6.1.2, the Company shall not,
nor shall it permit any of its subsidiaries to: (i) declare, set aside or
pay any dividends on or make other distributions in respect of any of its
capital stock (whether in cash, stock, or property or any combination
thereof) other than direct or indirect dividends or distributions to the
Company from its subsidiaries; (ii) split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock; or (iii) redeem, repurchase or otherwise acquire any of its
securities or any securities of its subsidiaries, except as required by the
terms of its securities outstanding on the date hereof, as contemplated by
this Agreement or as contemplated by employee benefit and dividend
reinvestment plans as in effect on the date hereof and except, in the case
of clause (iii), for the acquisition of shares of Common Stock or Company
Options as set forth on Schedule 6.1.2 from (x) holders of Company Options
in full or partial payment of the exercise price payable by such holder
upon exercise of Company Options outstanding on the date of this Agreement
or upon payment to such holder of such amount as may be payable with
respect to such Company Options pursuant to the specific terms thereof, or
(y) current or former directors, officers or employees of, or consultants
to, the Company or any of its current or former subsidiaries set forth on
Schedule 6.1.2 hereto who have agreements with the Company to repurchase
such Company Options or shares of Common Stock.
6.1.3 Except as set forth in Schedule 6.1.3, the Company shall not,
nor shall it permit any of its subsidiaries to, (i) amend or reprice any
Company Options, (ii) issue, deliver or sell, or authorize or propose to
issue, deliver or sell (whether through issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise), any
shares of its capital stock of any class or series, or any other securities
or Company Securities, or (iii) amend any of the terms of any such
securities or agreements outstanding as of the date hereof, other than, in
the case of (i) through (iii) above: (A) the issuance of shares of Common
Stock upon the exercise of Company Options which are outstanding on the
date hereof; and (B) issuances by a wholly-owned subsidiary of its capital
stock to its parent.
6.1.4 Except as contemplated by Section 2.3, the Company shall not,
and shall cause its subsidiaries not to, amend or propose to amend its
Certificate of Incorporation or By-Laws.
6.1.5 The Company shall not, nor shall it permit any of its
subsidiaries to: (i) organize any subsidiary; (ii) acquire or agree to
acquire by merging or consolidating with, or by purchasing a
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substantial equity interest in or a substantial portion of the assets of,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof; (iii)
authorize any new capital expenditure or expenditures which is in an amount
greater than 5% of the amount budgeted therefor as indicated in the budgets
previously provided to Parent; (iv) pay or agree to pay in settlement or
compromise of any suits or claims of liability against the Company, its
directors, officers, employees or agents (except for claims or disputes
under or relating to insurance policies, contracts or bonds) more than
$100,000 (net of insurance) for all such suits and claims; or (v) enter
into or amend in any material respect any contract, agreement, commitment
or arrangement with respect to any of the foregoing.
6.1.6 Other than: (i) dispositions or proposed dispositions of
investment securities, the proceeds of which are then used to invest in
securities which are in the aggregate substantially of the same quality,
liquidity and duration as those invested as of the date hereof or which are
otherwise invested in a manner consistent with prior investment policies or
strategies or pursuant to prudent investment policies in light of existing
market conditions; or (ii) dispositions in the ordinary course of business
consistent with past practices which are not material, individually or in
the aggregate, to the Company and its subsidiaries taken as a whole, the
Company shall not, nor shall it permit any of its subsidiaries to, sell,
lease, encumber or otherwise dispose of, or agree to sell, lease (whether
such lease is an operating or capital lease), encumber or otherwise dispose
of, any of its assets.
6.1.7 The Company shall not, nor shall it permit any of its
subsidiaries to, acquire any Derivative Financial Instruments.
6.1.8 The Company shall not authorize, recommend, propose or announce
an intention to adopt a plan of complete or partial liquidation or
dissolution of the Company or any of its Insurance Subsidiaries.
6.1.9 Except as set forth on Schedule 6.1.9, the Company and its
subsidiaries shall not enter into, adopt or (except as may be required by
law) amend or terminate any Plan (unless such amendment or termination
would not result in any material Liability), or (except, in the case of
employees who are not officers or directors, for normal compensation
increases in the ordinary course of business consistent with past practice
that, in the aggregate, do not result in a material increase in benefits or
compensation expense) increase in any manner the compensation or benefits
of any director, officer or employee or pay any benefit not required by any
plan or arrangement as in effect as of the date hereof (including, without
limitation, the granting of stock options, restricted stock, stock
appreciation rights or performance units).
6.1.10 Except as set forth on Schedule 6.1.10, the Company shall not,
nor shall the Company permit any of its subsidiaries to, assume, incur or
increase any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of the Company or any of its subsidiaries or
guarantee any debt securities of others or enter into any lease (whether
such lease is an operating or capital lease) or create any material Liens
on the property of the Company or any of its subsidiaries in connection
with any indebtedness thereof, or enter into any "keep well" or other
agreement or arrangement to maintain the financial condition of another
person; provided, however, that nothing herein shall in any way limit the
ability of the Company to utilize its credit agreement, lines of credit or
similar arrangements, which were existing as of the date of this Agreement,
as may be necessary in the ordinary course of business and consistent with
past practice; and provided, further that the balance outstanding as of the
Closing Date under the Company's existing revolving line of credit shall
not exceed $60,000,000.
6.1.11 The Company shall not, nor shall the Company permit any of its
subsidiaries to, enter into, modify, rescind, terminate, waive, release or
otherwise amend in any material respect any of the terms or provisions of
any contract described in Section 4.15, except in the ordinary course of
business.
6.1.12 Except as expressly permitted elsewhere in Section 6.1, the
Company shall not take any action, other than in the ordinary course of
business, consistent with past practice or as required by the SEC or by
law, with respect to financial or tax accounting policies, procedures and
practices.
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6.1.13 The Company and each of its subsidiaries shall file all
necessary Returns on a basis consistent with prior practices. The Company
shall not, nor shall the Company permit any of its subsidiaries to, make
any tax election or settle or compromise any tax liability which is
material in amount or may have a Material Adverse Effect on the Company
without the express written consent of Parent.
6.1.14 Except as set forth in Schedule 6.1.14, the Company shall not,
and shall not permit any of its subsidiaries to, enter into any agreement
providing for the acceleration of payment or performance or other
consequences as a result of a change in control of the Company.
6.1.15 The Company shall not, and shall not permit any of its
subsidiaries to, enter into any new lines of business or otherwise make
material changes to the operation of its business.
6.1.16 The Company shall not take, or agree in writing or otherwise to
take, any action which would result in any of the conditions hereunder not
being satisfied.
6.1.17 The Company shall not, and shall not permit any of its
subsidiaries to, directly or indirectly, enter into or amend any agreement
with any Related Party, except as otherwise permitted in this Section 6.1.
6.1.18 The Company shall not commit (orally or in writing) to any of
the foregoing actions prohibited under this Section 6.1.
Section 6.2 Conduct of the Business of PR66. During the period from the
date of this Agreement and continuing until the Effective Time, Parent agrees as
to Parent and its subsidiaries that (except to the extent that the Company shall
otherwise consent in writing, which consent shall not be unreasonably withheld):
6.2.1 Parent and each of its subsidiaries shall carry on the PR66
Insurance Business in the usual, regular and ordinary course in the same
manner as previously conducted and shall use its reasonable efforts to
preserve intact its present operations, keep available the services of its
current officers and employees involved directly in the PR66 Insurance
Business and preserve its relationships with customers and agents and
others having business dealings with the PR66 Insurance Business and shall
not substitute any new methods of soliciting business, administering
business in accordance with industry standards, processing or administering
claims with respect to the PR66 Insurance Business, in each case to the end
that the goodwill and ongoing business of the PR66 Insurance Business shall
not be impaired in any material respect at the Effective Time.
6.2.2 Parent and its subsidiaries shall continue to maintain its
certificates of authority and licenses which relate to the PR66 Insurance
Business and shall maintain the current U.S. Department of Treasury
underwriting limitations.
6.2.3 Parent shall not, nor shall Parent permit any of its
subsidiaries to, enter into, modify, rescind, terminate, waive, release or
otherwise amend in any material respect any of the terms or provisions of
any contract described in Section 5.15.
6.2.4 Parent shall not take any action, and shall not permit any
subsidiary to take any action, other than in each case in the ordinary
course of business, consistent with past practice or as may be required by
law, to make any material changes to the operation of the PR66 Insurance
Business.
6.2.5 Parent and its subsidiaries shall not take, or agree in writing
or otherwise take, any action which would result in any of the conditions
hereunder not being satisfied.
6.2.6 Parent and its subsidiaries shall not commit (orally or in
writing) to any of the foregoing actions prohibited under this Section 6.2.
6.2.7 Parent shall provide as soon as reasonably possible audited
financial statements, to the extent required by the SEC and as contemplated
by Section 5.8 hereof, which statements shall be prepared on a basis
consistent with the unaudited financial statements previously delivered to
the Company as set forth in Section 5.8.
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6.2.8 Newco shall amend its Certificate of Incorporation prior to the
Effective Time to, among other things, increase the number of authorized
shares of common stock to 100,000,000 shares.
Section 6.3 No Solicitation.
6.3.1 Prior to the Effective Time, the Company agrees that neither the
Company nor any of its subsidiaries nor any of the respective officers and
directors of the Company or any of its subsidiaries shall, and the Company
shall direct and use its best efforts to cause its employees, agents and
representatives (including, without limitation, any investment banker,
attorney or accountant retained by the Company) not to, initiate, solicit
or encourage, directly or indirectly, any inquiries or the making of any
Acquisition Proposal (including, without limitation, any Acquisition
Proposal to stockholders of the Company) (except that "Acquisition
Proposal" shall not include any such transaction among the Company and its
wholly-owned subsidiaries or among the Company's wholly-owned subsidiaries)
or engage in any negotiations concerning, or provide any non-public
information or data to, or have any discussions with, any person relating
to an Acquisition Proposal, or otherwise facilitate directly or indirectly
any effort or attempt to make or implement an Acquisition Proposal;
provided, however, that the Board of Directors of the Company may furnish
or cause to be furnished information and may participate or cause its
representatives to participate in such discussions and negotiations if the
failure to provide or receive such information could, in the opinion of its
outside counsel, be deemed to cause the members of such Board of Directors
to breach their fiduciary duties under applicable law; and provided,
further, that nothing contained in this Agreement shall prohibit the
Company and its directors from making to its stockholders any
recommendation and related filing with the SEC as required by Rule 14e-2
and Rule 14e-9 under the Exchange Act, with respect to any tender offer.
The Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. The Company will take the
necessary steps to inform the individuals or entities referred to in the
first sentence hereof of the obligations undertaken in this Section. The
Company will promptly notify Parent if any such inquiries or proposals are
received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with
the Company.
Section 6.4 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause any representation or warranty by such party
contained in this Agreement to be untrue or inaccurate and (ii) any failure of
the Company, or Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.4 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice. Each party hereto shall promptly provide the
other parties hereto (or their counsel) with copies of all filings made by such
party with the SEC or any other Governmental Entity filings made in connection
with this Agreement and the transactions contemplated hereby.
Section 6.5 Access to Information. Each of the Company and Parent shall,
and shall cause each of its respective subsidiaries to, afford to the other
party and to the officers, employees, counsel, financial advisors and auditors
and other representatives of such other party, reasonable access during normal
business hours during the period prior to the Effective Time to all its
Diligence Materials and, during such period, each of the Company and Parent
shall, and shall cause each of its respective subsidiaries to, furnish as
promptly as practicable to the other party, such information concerning its
business, properties, financial condition, operations and personnel as such
other party may from time to time reasonably request; provided, however, that
nothing shall require the Company or Parent to provide access to corporate
records or minutes relating to the sale or merger of the Company and, provided
further, that the foregoing obligations of Parent are limited to Diligence
Materials related solely to the PR66 Insurance Business and Transaction
Documents. No investigation pursuant to this Section 6.5 shall affect any
representations or warranties of the parties herein or the conditions to the
obligations of the parties hereunder.
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6.5.1 Parent shall hold, and shall cause its directors, officers,
partners, employees, accountants, counsel, financial advisors and other
representatives and affiliates to hold, any nonpublic information obtained
from Company in confidence to the extent required by, and in accordance
with, the provisions of that certain Confidentiality Agreement dated May 9,
1996.
6.5.2 The Company shall hold, and shall cause its directors, officers,
partners, employees, accountants, counsel, financial advisors and other
representatives and affiliates to hold, any nonpublic information obtained
from Parent in confidence to the extent required by, and in accordance
with, the provisions of that certain Confidentiality Agreement dated
November 4, 1996.
6.5.3 The Company shall retain all records pertaining to its business.
Section 6.6 Reasonable Best Efforts. Subject to the terms and conditions
herein provided, each of the Company and its subsidiaries on the one hand, and
Parent, Newco and Acquisition on the other hand, agree to use their reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, all things reasonably necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, Parent, Newco, Acquisition and the Company shall cooperate with one
another (i) in the preparation and filing of the Proxy Statement, the Form S-4,
any required filings under the HSR Act, any required notices or filings with any
Insurance Regulators and the other laws referred to in Sections 4.4.2 and 5.4.2;
(ii) in determining whether action by or in respect of, or filing with, any
Governmental Entity is required, proper or advisable or any actions, consents,
waivers or approvals are required to be obtained from parties to any contracts,
in connection with the transactions contemplated by this Agreement; and (iii) in
seeking timely to obtain any such actions, consents and waivers and to make any
such filings. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each party hereto shall take all such necessary
action.
Section 6.7 Regulatory Matters. Parent, with Company's cooperation, will
promptly prepare and file all applications, notices, consents and other
documents necessary or advisable to obtain the state regulatory approvals
specified in Schedule 5.4.2, promptly file all supplements or amendments thereto
and use all reasonable efforts to obtain the regulatory approvals specified in
Schedule 5.4.2 hereto as promptly as practicable. Parent will provide the
Company and its counsel (a) a reasonable opportunity to review in advance and
comment on all filings required to be made with Insurance Regulators and rating
agencies relating to this transaction and all written communications with
respect thereto, (b) prompt notice of all written (or material oral) contacts by
such Insurance Regulators and rating agencies, and (c) with respect to any
regulatory approval or review required by any state other than Parent's state of
domicile, the opportunity to reasonably consult with respect to, and comment on,
any filings or written communications and the substance of any oral
communications and to participate in any meetings. Parent will from time to time
keep the Company informed of the status of matters relating to obtaining the
regulatory approvals specified in Schedule 5.4.2 hereto and will promptly
furnish the Company with copies of all written communications with respect
thereto. The Company shall promptly review and comment on any filings or other
correspondence submitted to it for review and otherwise reasonably cooperate
with and assist Parent in obtaining the approvals specified in Schedule 5.4.2.
The parties agree that Parent shall not be in breach of its obligations set
forth in this Section unless it fails (to the extent feasible) to reasonably
cure any such breach within five business days thereof.
Section 6.8 Public Announcements. The Company and Parent will consult with
each other before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this Agreement and
the Voting Agreement, and shall not issue any such press release or make any
such public statement prior to such consultation, except as may be required by
applicable law or by applicable rules of any securities exchange or inter-dealer
quotation system.
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Section 6.9 Stockholders' Meeting. The Company, acting through the Board,
shall, in accordance with applicable law, as soon as practicable:
6.9.1 duly call, give notice of, convene and hold the Stockholders'
Meeting for the purpose of considering and taking action upon this
Agreement and the Transaction Documents and the transactions contemplated
under this Agreement, including, without limitation, the amendment of the
Certificate of Incorporation of the Company;
6.9.2 subject to the fiduciary duties of the Board under applicable
law, include in the Proxy Statement the recommendation of the Board that
stockholders of the Company vote in favor of the approval and adoption of
this Agreement and the transactions contemplated hereby; and
6.9.3 use its reasonable best efforts (A) to obtain and furnish the
information required to be included by it in the Proxy Statement and, prior
to submitting the Proxy Statement and any amendment, supplement or
revisions thereof to the SEC or the Company stockholders, the Company shall
submit such materials to Parent and its counsel and provide Parent and its
counsel with a reasonable opportunity to review and comment upon such
materials (B) to respond promptly to any comments made by the SEC with
respect to the Proxy Statement or the Form S-4 and any preliminary version
thereof after providing Parent and its counsel with a reasonable
opportunity to review and comment thereon and cause the Proxy Statement to
be mailed to its stockholders at the earliest practicable time and (C)
subject to the fiduciary duties of the Board under applicable law, to
obtain the necessary approvals by its stockholders of this Agreement and
the transactions contemplated hereby.
At such meeting, Parent, Newco and Acquisition will vote all shares of
Common Stock over which they have voting authority, if any, in favor of this
Agreement and the transactions contemplated hereby.
Section 6.10 Form S-4.
6.10.1 Filing. Newco will prepare and file with the SEC the
registration statement on Form S-4(in which the Proxy Statement will be
included as a prospectus) and will take any action required to be taken
under any applicable state Blue Sky law in connection with the issuance of
shares of New Common and prior to submitting the Form S-4 and any
amendment, supplement or revisions thereof to the SEC or the Company
stockholders, Parent shall submit such materials to Company and its counsel
and provide Company and its counsel with a reasonable opportunity to review
and comment upon such materials. Parent and the Company agree that the
Company will obtain an opinion of Mayer, Brown & Platt, on or before the
filing date of the Form S-4, as required by the Securities Act, to the
effect that the Merger will qualify as a tax-free exchange under the Code.
Parent, Newco and Acquisition will use their reasonable best efforts to
respond promptly to any comments made by the SEC with respect to the Proxy
Statement or the Form S-4 and to have the Form S-4 declared effective by
the staff of the SEC as soon as practicable.
6.10.2 Company Certification. On the Company Mailing Date, the Company
shall deliver to Parent, Newco and Acquisition a certificate dated as of
the Company Mailing Date signed by its President and its Chief Financial
Officer, in their capacities as officers of the Company, that the
representations and warranties of the Company and its subsidiaries
contained in the Agreement are true and correct on the Company Mailing Date
(except to the extent that they relate to an earlier time, in which case
they shall have been true and correct as of such earlier time) and that
with respect to information relating to the Company and its subsidiaries,
the Form S-4 does not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
6.10.3 Parent Certification. On the date the Proxy Statement contained
in the Form S-4 is first mailed, Parent shall deliver to the Company a
certificate dated as of the Company Mailing Date signed by its President
and its Chief Financial Officer, in their capacities as officers of Parent,
that the representation and warranties of Parent and its subsidiaries
contained in the Agreement are true and correct on the Company Mailing Date
(except to the extent that they relate to an earlier time, in which
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case they shall have been true and correct as of such earlier time) and
that with respect to information relating to Parent and its subsidiaries,
the Form S-4 does not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
6.10.4 Letter of the Company's Accountant. The Company shall use its
reasonable best efforts to cause to be delivered to the Company, Parent,
Newco and Acquisition a letter of Coopers & Lybrand, LLP, the Company's
independent public accountants, dated a date within two business days
before the date on which the Form S-4 shall become effective and a letter
of Coopers & Lybrand, LLP, dated a date within two business days before the
Closing Date, addressed to Company, Parent, Newco and Acquisition, in form
and substance reasonably satisfactory to the foregoing and customary in
scope and substance for letters delivered by independent public accountants
in connection with registration statements similar to the Form S-4.
6.10.5 Letter of Newco's and Acquisition's Accountant. Parent shall
use its reasonable best efforts to cause to be delivered to the Company,
Parent, Newco and Acquisition a letter of Deloitte & Touche, Newco's and
Acquisition's independent public accountants, dated a date within two
business days before the date on which the Form S-4 shall become effective
and a letter of Deloitte & Touche, dated a date within two business days
before the Closing Date, addressed to Company, Parent, Newco and
Acquisition, in form and substance reasonably satisfactory to the foregoing
and customary in scope and substance for letters delivered by independent
public accountants in connection with registration statements similar to
the Form S-4.
Section 6.11 Capital Contribution and Agreements. Immediately prior to the
Effective Time, Parent shall (i) contribute cash or cash equivalents to Newco in
the amount of fifty-two million two hundred fifty thousand dollars ($52,250,000)
("Cash Contribution") and Newco shall contribute such cash and cash equivalents
to Acquisition, (ii) enter into the Administrative Services Agreement
substantially in the form set forth in Annex B and contribute the assets
described therein, and (iii) assign all intangible assets used in the PR66
Insurance Business to Newco and/or the Surviving Corporation. As of the
Effective Time, Continental shall grant a perpetual license to Newco and/or the
Surviving Corporation to use the mark "CNA or some derivation thereof", subject
to a right of cancellation by Parent in the event of a change in control of
Newco and other reasonable terms and conditions. Continental shall cause Newco
to borrow money in the principal amount of $50,000,000 and to contribute the
proceeds thereof to the Insurance Subsidiaries as of the Closing Date.
Section 6.12 Other Agreements. At or prior to the Closing, Newco agrees to
enter into the Registration Rights Agreement, substantially in the form set
forth in Annex C pursuant to which Newco will grant certain registration rights
to the Major Stockholder. Continental also agrees to enter into the Reinsurance
Agreements, substantially in the form set forth in Annex D, and the Company
shall have obtained such reinsurance agreements or treaties as are necessary to
limit the loss to the Company and its Insurance Subsidiaries to $500,000 on any
individual USA policy arising within three years after the Closing Date.
Section 6.13 Parent Restrictions. For a period of five years after the
Closing Date, as an ancillary part of this Agreement and for no separate
consideration, Parent shall, and shall cause its direct and indirect
subsidiaries (other than the Surviving Corporation and any of its subsidiaries)
to, refer any inquiry or request for the issuance of a Surety Business product
from proposed insureds or agents to the Surviving Corporation's insurance
subsidiaries so that they may offer to issue such products. Parent further
covenants that in the event that an agent of Parent or any of its subsidiaries
referenced above which are licensed as insurance companies (a) declines to offer
a Surety Business product of the Surviving Corporation's insurance subsidiaries
or (b) offers a competing surety product of a third party, Parent will provide
such information as it possesses relating to the proposed surety product to the
Surviving Corporation's insurance subsidiaries, or to an agent designated by the
Surviving Corporation's insurance subsidiaries and will refrain from making a
quote or bid for the insurance of such product for a period of thirty days. If
before or after the Closing Date it is determined that Parent or any of its
subsidiaries has engaged in, or otherwise holds bonds, policies or licenses
relating to, any Surety Business, Parent or any of its subsidiaries shall cede
such Surety Business to an Insurance
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Subsidiary. Parent agrees that it will not restrain the ability of the Surviving
Corporation from entering into new lines of business.
Section 6.14 Transaction Documents. Parent, Newco and Acquisition shall
enter into the Transaction Documents to which each is a party.
Section 6.15 Newco By-Laws. The By-Laws of Newco will provide that, prior
to expiration of the two-year period following the Closing, the following will
require the vote of 75% of the outstanding shares of New Common: any amendments
to the Certificate of Incorporation of Newco; any business combination; any
proposal to sell or otherwise transfer substantially all of Newco's assets; and
any amendment to the By-Laws provision requiring the foregoing supermajority
vote.
Section 6.16 Newco Board of Directors. Immediately prior to the Effective
Time, Parent shall cause the individuals listed in Schedule 6.16 to be nominated
and elected as directors of Newco, which individuals shall serve until Newco's
next annual meeting of stockholders or until their successors are duly elected
and qualified; provided thatParent shall, subject to the applicable provisions
of the NYSE rules and Delaware Law (i) vote its shares in Newco for the
directors listed in Schedule 6.16 at the next annual meeting of stockholders
expected to occur in 1998 so that such directors shall serve until the 1999
annual meeting of the stockholders of Newco, (ii) not vote to increase the size
of the Board of Directors of Newco to more than eleven members prior to the 1999
annual meeting of the stockholders of Newco, and (iii) cause its designees to
the Board of Directors to appoint at least one of Messrs. Esselborn and Dammeyer
to the Newco Audit Committee.
Section 6.17 Acquisition and Newco Operations. During the period from the
date of this Agreement and continuing until the Effective Time, Parent, Newco
and Acquisition agree that Newco and Acquisition shall not engage in any
activities of any nature except as provided in or contemplated by this
Agreement.
Section 6.18 Necessary Assurances. Subject to the terms and conditions of
this Agreement, Parent, Newco, Acquisition and the Company, and following the
Effective Time, the Surviving Corporation, shall cooperate with one another and
use reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things reasonably necessary or desirable under applicable
laws and regulations to consummate the transactions contemplated by this
Agreement, including the execution and delivery of such other documents,
certificates, applications, agreements and other writings and the taking of such
other actions as may be reasonably necessary or desirable to consummate the
Merger or implement expeditiously the transactions contemplated under this
Agreement.
Section 6.19 Notifications by Company or Parent. From time to time prior to
the Effective Time, Company shall promptly notify Parent and Parent shall
promptly notify the Company with respect to any matter arising after the date of
this Agreement which, if existing or occurring at the date of this Agreement,
would have been required to be set forth or described in such Schedules or which
is necessary to correct any information in such Schedules or in the
representations and warranties herein which has been rendered inaccurate by such
matter.
Section 6.20 Intentionally Deleted.
Section 6.21 Self Tender. For a period of eighteen months following the
Closing Date, neither Newco (unless consented to by the Newco Audit Committee)
nor Parent will engage in a self-tender offer or, in the case of Parent, a
tender offer for shares of Newco, pursuant to Rules 13e-3 or 13e-4 of the
Exchange Act; provided that nothing in this Section 6.21 shall prevent Parent
from acquiring shares of New Common in the open market following the Effective
Time if such acquisitions shall not result in Parent beneficially owning more
than 69% of Newco on a fully diluted basis.
Section 6.22 Certain Fees and Expenses Payable by the Company. The Company
shall pay to Continental upon demand, as a fee and in reimbursement of expenses,
the sum of $4,250,000, if (i) an Acquisition Proposal is commenced, publicly
proposed, publicly disclosed or communicated to the Company (or the willingness
of any person to make an Acquisition Proposal is publicly disclosed or
communicated to the Company) and (A) the Board of Directors of the Company
withdraws or modifies, in a manner adverse to Parent or Newco, its approval or
recommendation of this Agreement or the Merger, or approves or
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recommends an Acquisition Proposal; and (B) the Company enters into an agreement
with respect to an Acquisition Proposal within 12 months of the commencement,
disclosure or communication of such Acquisition Proposal; (ii) a person (other
than Parent or one of its affiliates) becomes the beneficial owner of 50% or
more of the outstanding Common Stock pursuant to a tender offer within 12 months
of the date of this Agreement; or (iii) the Company terminates this Agreement
pursuant to Section 8.1 other than pursuant to Section 8.1.1, 8.1.2, 8.1.3
(other than due to an order, decree, ruling or other action resulting from an
action or proceeding instituted by any of the parties hereto or their
affiliates), 8.1.5 or 8.1.7, provided such termination did not result from a
breach by the Company of its covenants set forth herein, and within 12 months of
such termination the Company enters into an agreement with respect to an
Acquisition Proposal (whether such Proposal existed prior to, or arose after,
termination). Any amounts paid by the Company to Continental under Section 8.2
shall be in addition to any amounts payable under Section 6.22.
Section 6.23 Certain Fees and Expenses Payable by Parent. Continental shall
pay to the Company upon demand, as a fee and in reimbursement of expenses, the
sum of $4,250,000 if Parent, Newco or Acquisition terminates this Agreement
other than pursuant to Section 8.1.1, 8.1.2., 8.1.3 (other than due to an order,
decree, ruling or other action resulting from an action or proceeding instituted
by any of the parties hereto or their affiliates), 8.1.4, 8.1.6 or 8.1.7 within
12 months of such termination Parent enters into a agreement for the merger,
consolidation, business combination or sale of the PR66 Insurance Business to an
entity (other than a wholly-owned subsidiary of Parent or its affiliates). Any
amounts paid by Continental to the Company under Section 8.2 shall be in
addition to any amounts payable under Section 6.23.
Section 6.24 PR66 Reinsurance Agreements. As of the Effective Time, the
PR66 Reinsurance Agreements shall be in full force and effect and shall be
applicable to the Insurance Subsidiaries.
Section 6.25 Actuarial Update. By the earlier of (i) April 30, 1997, and
(ii) ten business days prior to the Closing, Parent shall deliver to the Company
an update (as of March 31, 1997) of the June 1996 actuarial study of loss
reserves on the PR66 Insurance Business.
ARTICLE 7
CONDITIONS
Section 7.1 Conditions to Each Party's Obligations. The respective
obligations of each party hereto to effect the Merger are subject to the
satisfaction at or prior to the Closing of the following conditions:
7.1.1 This Agreement and the transactions contemplated hereby
(including the amendment to the Company's Certificate of Incorporation
contemplated in Section 4.23) shall have been approved by the affirmative
vote of the holders of Common Stock of the Company by the requisite vote in
accordance with Delaware Law.
7.1.2 There shall not be in effect any order, decree or ruling or
other action restraining, enjoining or otherwise prohibiting the Merger or
any of the other transactions contemplated by this Agreement which order,
decree, ruling or action shall have been issued or taken by any court of
competent jurisdiction or other governmental body located or having
jurisdiction within the United States or any country or economic region in
which the Company or Parent or any of their respective affiliates, directly
or indirectly, has material assets or operations.
7.1.3 All regulatory approvals set forth in Schedules 4.4.2 and 5.4.2
shall have been obtained and there shall have been no material modification
to the terms of the transactions contemplated by this Agreement or the
other Transaction Documents except as reasonably agreed by the parties.
7.1.4 Any waiting period applicable to the Merger under the HSR Act
shall have terminated or expired.
7.1.5 The NYSE listing application for Newco shall have been approved,
subject to official notice of issuance.
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7.1.6 Each party shall have received the opinion of its respective
counsel as to the tax-free treatment of the exchange of securities and the
transactions contemplated under this Agreement in substantially the forms
attached hereto as Annexes G and H. In addition, each party shall have
received a representation of the Major Stockholder to the effect that such
person has not entered into nor will it enter into any binding commitment
to sell or transfer (and such person is not nor will it be under any
economic compulsion to sell or transfer) any shares of New Common received
in the Merger.
7.1.7 Executed copies of the Transaction Documents shall have been
delivered to both parties, in substantially the forms set forth in the
schedules hereto.
7.1.8 Western and USA each shall have maintained a rating by A.M. Best
& Company, Inc. of "A" or better from the date of this Agreement through
and including one business day prior to the Closing Date. For purposes
hereof, any notice that Western's or USA's rating is under review, whether
with or without negative implications, by A.M. Best & Company, Inc. shall
not constitute a downgrade below A.
7.1.9 The Form S-4 shall have been declared effective.
Section 7.2 Conditions to the Obligation of Parent, Newco and
Acquisition. The obligations of Parent, Newco and Acquisition to effect the
Merger are subject to the satisfaction at or prior to the Closing of the
following further conditions:
7.2.1 The Company shall have performed in all material respects its
covenants, agreements and obligations under this Agreement up to the
Closing and the Major Stockholder and the directors and officers of the
Company who are parties to the Voting Agreement shall have performed in all
material respects their respective covenants, agreements and obligations
under the Voting Agreement up to the Closing.
7.2.2 Except as otherwise contemplated by this Agreement, the
representations and warranties of the Company contained in this Agreement
which are qualified as to materiality shall be true and correct and which
are not so qualified shall be true and correct in all material respects, in
each case, as of the date when made and at and as of the Closing as though
newly made at and as of that time.
7.2.3 The Company shall have delivered to Acquisition a certificate
dated as of the Closing and signed by each of the Chief Financial Officer
and the General Counsel of the Company in his or her capacity as such
certifying as to (i) the accuracy, as of the date when made and at and as
of the Closing as though newly made at and as of that time, of the
representations and warranties of the Company contained in this Agreement
which are qualified as to materiality, (ii) the accuracy, as of the date
when made and at and as of the Closing as though newly made at and as of
that time, in all material respects, of the representations and warranties
of the Company contained in this Agreement which are not so qualified, and
(iii) the performance, in all material respects, of the obligations
required by the Company to be performed under this Agreement as of the
Closing, including, without limitation, the receipt by the Company of the
vote of its stockholders as set forth in Section 7.1.1.
7.2.4 There shall have been no material modification to the terms of
the Voting Agreement.
7.2.5 Parent shall have received the resignations of each director and
officer of the Company and its subsidiaries to the extent requested by
Parent.
7.2.6 The Company shall have delivered to Acquisition the documents
set forth on Schedule 7.2.6.
Section 7.3 Conditions to the Obligations of the Company. The obligations
of the Company to effect the Merger is subject to the satisfaction at or prior
to the Closing of the following further conditions:
7.3.1 Parent, Newco and Acquisition shall have performed in all
material respects their respective covenants, agreements and obligations
under this Agreement to the date of the Closing.
7.3.2 Except as otherwise contemplated by this Agreement, the
representations and warranties of Parent, Newco and Acquisition contained
in this Agreement which are qualified as to materiality shall be
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true and correct and which are not so qualified shall be true and correct
in all material respects, in each case, as of the date when made and at and
as of the Closing as though newly made at and as of that time.
7.3.3 Parent shall have delivered to the Company a certificate dated
as of the Closing and signed by the Chief Financial Officer and the General
Counsel of Parent in his or her capacity as such certifying as to (i) the
accuracy, as of the date when made and at and as of the Closing as though
newly made at and as of that time, of the representations and warranties of
Parent, Newco and Acquisition contained in this Agreement which are
qualified as to materiality, (ii) the accuracy, as of the date when made
and at and as of the Closing as though newly made at and as of that time,
in all material respects, of the representations and warranties of Parent,
Newco and Acquisition contained in this Agreement which are not so
qualified, and (iii) the performance, in all material respects, of the
obligations required by Parent, Newco and Acquisition to be performed under
this Agreement as of the Closing.
7.3.4 Parent shall have completed all of its obligations required to
be performed by the Closing Date under the Contribution Agreement.
7.3.5 Parent, Newco and Acquisition shall have delivered to the
Company the documents set forth on Schedule 7.3.5.
ARTICLE 8
TERMINATION; AMENDMENT; WAIVER
Section 8.1 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time:
8.1.1 By mutual written consent of the Company and Parent.
8.1.2 By the Company or Parent if the Closing has not occurred on or
prior to July 31, 1997.
8.1.3 By the Company or Parent if any court of competent jurisdiction
or other governmental body located or having jurisdiction within the United
States or any country or economic region in which the Company or any of its
subsidiaries or Parent or any of its subsidiaries, directly or indirectly,
has material assets or operations, shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable.
8.1.4 By Parent if (i) there shall have been a material breach of any
representation or warranty of the Company contained herein or of the Major
Stockholder, or the directors and officers of the Company who are parties
to the Voting Agreement, contained in the Voting Agreement, or (ii) there
shall have been a material breach of any covenant, agreement or obligation
of the Company contained herein or of the Major Stockholder and certain
directors and officers contained in the Voting Agreement, in either the
case of (i) or (ii) which shall not have been cured within fifteen business
days following notice of such breach; provided, however, that such cure
shall have been effected at least ten days prior to the Closing Date.
8.1.5 By the Company if (i) there shall have been a material breach of
any representation or warranty of Parent, Newco or Acquisition contained
herein, (ii) there shall have been a material breach of any covenant,
agreement or obligation of Parent, Newco or Acquisition, in either the case
of (i) or (ii) which shall not have been cured within fifteen business days
following notice of such breach; provided, however, that such cure shall
have been effected at least ten days prior to the Closing Date.
8.1.6 By Parent if the Board shall have withdrawn or modified in a
manner adverse to Parent, Newco or Acquisition its approval or
recommendation of this Agreement or the Merger or shall have recommended,
or the Company shall have entered into an agreement providing for, an
Acquisition Proposal, or the Board shall have resolved to do any of the
foregoing or by the Company if the Board takes any of the foregoing actions
in the exercise of its fiduciary duties; provided that any termination
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pursuant to this Section 8.1.6 shall not affect Parent's rights to receive,
or the Company's obligation to pay, the fees and expenses provided in
Sections 6.22 and 8.2.
8.1.7 By Parent or the Company if this Agreement and the Merger do not
receive the requisite vote of the stockholders of Company to approve the
Merger at the Stockholders' Meeting.
Section 8.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 8.1, the respective obligations of the parties
under this Agreement shall terminate, except that the provisions of Sections
6.22, 6.23, 8.2 and 8.3 shall survive the termination of this Agreement. In the
case of a termination pursuant to Sections 8.1.4, 8.1.5 or 8.1.6, the
terminating party shall be entitled to receive from the other party upon demand
the sum of $750,000 as liquidated damages hereunder.
Section 8.3 Fees and Expenses. Except as otherwise expressly provided in
Sections 6.22, 6.23 and 8.2 hereof if the Merger is not consummated, each party
shall bear its own expenses and costs in connection with this Agreement and the
transactions contemplated hereby; except the expenses related to the printing,
mailing and distribution of the Proxy Statement/Prospectus and to the HSR and
insurance regulatory filings and the costs, expenses and deposits (excluding
premiums) related to certain reinsurance policies to be in effect as of the
Effective Time shall be borne equally by Parent or Newco, on the one hand, and
the Company, on the other. In the event of the consummation of the Merger,
Parent will bear all costs, expenses and fees of Parent, Newco and Acquisition
relating to the Merger and the transactions contemplated hereunder other than
the registration fees and printing and distribution costs relating to the Form
S-4.
Section 8.4 Amendment. This Agreement may be amended by action taken by the
Company, Parent, Newco and Acquisition at any time before or after adoption of
the Merger by the stockholders of the Company but, after any such approval, no
amendment shall be made which decreases the Merger Consideration or changes the
form thereof or which adversely affects the rights of the Company's stockholders
hereunder without the approval of such stockholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 8.5 Extension; Waiver. The Company, on the one hand, and Parent, on
the other hand, may (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto, or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of any party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
Section 8.6 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.4 or an extension or waiver pursuant to Section
8.5 shall, in order to be effective, require, action by the respective Board of
Directors of each of Parent and the Company or the duly authorized designee of
each such Board of Directors.
ARTICLE 9
MISCELLANEOUS
Section 9.1 Nonsurvival of Representations and Warranties. The
representations and warranties made herein shall not survive beyond the
Effective Time. The covenants and agreements herein shall survive in accordance
with their respective terms.
Section 9.2 Entire Agreement; Assignment. This Agreement and the
Transaction Documents (i) constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (ii) shall not be assigned by operation
of law or otherwise; provided that Parent may assign its rights and obligations
in whole or in part to any affiliate of Parent, but no such assignment shall
relieve Parent of its obligations hereunder if such assignee does not perform
such obligations.
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Section 9.3 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by fax, by
nationally-recognized overnight delivery service or by registered or certified
mail (postage prepaid, return receipt requested), to the other party as follows:
if to the Company:
Capsure Holdings Corp.
115 Perimeter Center Place
Suite 1190
Atlanta, Georgia 30346
Attention: Bruce A. Esselborn
Facsimile: (770) 668-1224
with a copy to each of the following:
Rosenberg & Liebentritt
Two North Riverside Plaza, Suite 1515
Chicago, Illinois 60606
Attention: Kelly L. Stonebraker
Facsimile: (312) 454-0335
Seyfarth, Shaw, Fairweather & Geraldson
55 East Monroe Street
Chicago, IL 60603-5803
Attention: David S. Stone
Facsimile: (312) 269-8869
if to Parent, Newco or Acquisition:
CNA Insurance Companies
CNA Plaza; 42 South
Chicago, Illinois 60685
Attention: David T. Cumming,
Group Vice President &
Associate General Counsel
Facsimile: (312) 822-1186
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
Attention: Mitchell L. Hollins
Arthur J. Simon
Facsimile: (312) 876-7934
or to such other address or person as the person to whom notice is given may
have previously furnished to the other in writing in the manner set forth above.
Section 9.4 Governing Law; Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware, without
regard to principles of conflicts of law; however, any action or proceeding
relating to this Agreement shall be brought only in and decided by the federal
or state courts in Chicago, Illinois, such courts being a proper forum in which
to adjudicate such action or proceeding, and each party hereby waives any claim
of inconvenient forum.
Section 9.5 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns, and nothing in this Agreement, express or implied,
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<PAGE> 154
is intended to or shall confer upon any other person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement.
Section 9.6 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
Section 9.7 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity and enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid and unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
Section 9.8 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 9.9 WAIVER OF TRIAL BY JURY. EACH OF THE COMPANY, PARENT,
ACQUISITION AND NEWCO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY
OF THE TRANSACTION DOCUMENTS, AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT.
Section 9.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement. The parties hereto agree that
facsimile transmission of original signatures shall constitute and be accepted
as original signatures.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its representatives thereunto duly authorized, all as
of the day and year first above written.
CAPSURE HOLDINGS CORP.,
a Delaware corporation
By: /s/ BRUCE A. ESSELBORN
------------------------------------
Name: Bruce A. Esselborn
Title: President
CONTINENTAL CASUALTY COMPANY,
an Illinois corporation
By: /s/ DONALD M. LOWRY
------------------------------------
Name: Donald M. Lowry
Title: Senior Vice President
Secretary and General Counsel
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<PAGE> 155
CNA SURETY CORPORATION,
a Delaware corporation
By: /s/ MARK VONNAHME
------------------------------------
Name: Mark Vonnahme
Title: President
SURETY ACQUISITION COMPANY,
a Delaware corporation
By: /s/ MARK VONNAHME
------------------------------------
Name: Mark Vonnahme
Title: President
FIREMAN'S INSURANCE COMPANY OF
NEWARK, NEW JERSEY,
a New Jersey corporation
By: /s/ DONALD M. LOWRY
------------------------------------
Name: Donald M. Lowry
Title: Senior Vice President
Secretary and General Counsel
CONTINENTAL INSURANCE COMPANY,
an New Hampshire corporation
By: /s/ DONALD M. LOWRY
------------------------------------
Name: Donald M. Lowry
Title: Senior Vice President
Secretary and General Counsel
NATIONAL FIRE INSURANCE
COMPANY OF HARTFORD
a Connecticut corporation
By: /s/ DONALD M. LOWRY
------------------------------------
Name: Donald M. Lowry
Title: Senior Vice President
Secretary and General Counsel
AMERICAN CASUALTY COMPANY OF
READING, PENNSYLVANIA,
a Pennsylvania corporation
By: /s/ DONALD M. LOWRY
------------------------------------
Name: Donald M. Lowry
Title: Senior Vice President
Secretary and General Counsel
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<PAGE> 156
FIRST AMENDMENT TO THE
REORGANIZATION AGREEMENT
First Amendment dated as of July 14, 1997 to the Reorganization Agreement
(the "Amendment") among Capsure Holdings Corp., a Delaware corporation (the
"Company"), Continental Casualty Company, an Illinois corporation
("Continental"), CNA Surety Corporation, a Delaware corporation ("Newco"),
Surety Acquisition Company, a Delaware corporation ("Acquisition"), and certain
other affiliates of Continental Casualty Company listed on the signature pages
of this Amendment (such affiliates together with Continental, being collectively
referred to as "Parent");
WHEREAS, the parties hereto have executed the Reorganization Agreement,
dated as of December 19, 1996 (the "Agreement"), and the Merger as contemplated
therein is to be submitted to stockholders of the Company for their approval
pursuant to the articles of incorporation of the Company and Delaware Law;
WHEREAS, the parties to the Agreement desire to amend, alter and modify the
Agreement as set forth herein in accordance with Sections 8.4 and 8.6 of the
Agreement; and
WHEREAS, the Boards of Directors of the Company, Parent, Newco and
Acquisition have each approved the terms of the Amendment and authorized its
execution and delivery.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company, Parent, Newco and Acquisition hereby agree as follows:
ARTICLE I
AMENDMENTS, ALTERATIONS AND
MODIFICATIONS TO THE AGREEMENT
Section 1.1 Section 5.7(a) of the Agreement. Section 5.7(a) of the
Agreement is amended to (i) add the clause ", except with respect to net written
premiums as contemplated by Section 2.13 hereof" at the end of the first
sentence of such Section 5.7(a); (ii) add the clause "and except for the $35.0
million adjustment to the net loss and loss adjustment expense reserves for the
first quarter ended March 31, 1997" after the word "Agreement" in the second
sentence of such Section 5.7(a); and (iii) delete reference to paragraph "(a)".
Section 1.2 Section 5.7(b) of the Agreement. Section 5.7(b) of the
Agreement is amended by deleting such Section in its entirety.
Section 1.3 New Section 2.13 of the Agreement. The Agreement is amended to
add the following Section immediately following Section 2.12 of the Agreement:
2.13 Post Closing Lookback Adjustment. The parties acknowledge that the
exchange ratio set forth in Section 2.12 of the Agreement is based upon, among
other things, certain projections of net written premiums for the PR66 Insurance
Business and the Company for the year ended December 31, 1997. Parent, Newco,
Acquisition and the Company agree that, in order to reflect the parties'
intention as of the Effective Time, the exchange ratio shall be adjusted either
by the surrender by Parent of shares of New Common to Newco or the issuance to
Parent by Newco of additional shares of New Common (in each case at a price
equal to $0.01 per share), as the case may be, based upon the PR66 Business Net
Written Premiums (as hereinafter defined), as adjusted by the Company Net
Written Premium Adjustment (as hereinafter defined), and in accordance with the
table set forth in Exhibit A to the Amendment (collectively, the "Lookback
Adjustment").
2.13.1 For the purpose of the Amendment, the following terms shall have the
meanings ascribed below:
(i) "PR66 Business Net Written Premiums" shall mean the actual net
written premiums of the PR66 Insurance Business for the year ended December
31, 1997 (including, for the purposes of this Section, business written
after the Closing Date which is accounted for as PR66 Insurance Business in
accordance with Section 2.13.5(i)), as determined in accordance with SAP
(based on the same accounting month convention as has been followed in the
preparation of the historical audited financial
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<PAGE> 157
information for the PR66 Insurance Business for the year ended December 31,
1996 and for the three months ended March 31, 1997), consistently applied;
(ii) "Company Net Written Premiums" shall mean the actual aggregate
net written premiums of Western and USA for the year ended December 31,
1997, determined in accordance with SAP, consistently applied; and
(iii) "Company Net Written Premium Adjustment" shall mean the increase
or decrease, as appropriate, to the PR66 Business Net Written Premiums,
determined by adding (in the case of a positive amount) or subtracting (in
the case of a negative amount) an amount calculated in accordance with the
following equation:
Company Net Written Premium Adjustment = ($99,764,000 - Company Net Written
Premiums) X N
N = 1.5754 if the PR66 Business Net Written Premiums are greater than
$139.0 million, or 1.2954 if the PR66 Business Net Written Premiums are
equal to or less than $139.0 million.
2.13.2 The Lookback Adjustment provided in this Section 2.13 shall be
determined by adding (in the case of a positive amount) or subtracting (in the
case of a negative amount) the Company Net Written Premium Adjustment to or
from, respectively, the PR66 Business Net Written Premiums and applying such
result to the table set forth in Exhibit A hereto to determine the number of
shares to be surrendered by Parent or issued by Newco (any shares surrendered
are based on the initial negotiated value of the New Common shares as of the
Closing Date).
2.13.3 The Lookback Adjustment shall be initially determined as of a date
no later than the date of the audit opinion issued with respect to Newco's
financial statements for the year ended December 31, 1997, and Newco's chief
executive officer will deliver a certificate relating to the Lookback Adjustment
to the Newco Audit Committee and Parent no later than five business days after
the date of the audit opinion, but in no event later than March 25, 1998. The
certificate, which shall be signed by Newco's chief executive officer, shall
contain the specific Lookback Adjustment, a schedule which indicates in
reasonable detail how the Lookback Adjustment was determined, and a statement
that, based upon such officer's reasonable belief, the Lookback Adjustment was
prepared on a basis consistent with the provisions of this Section 2.13 and
Newco has complied with the provisions of Section 2.13.5. Such certificate shall
be accompanied by a report of Deloitte & Touche, L.L.P., with respect to the
Lookback Adjustment prepared pursuant to the Statement on Auditing Standards No.
35 of the American Institute of Certified Public Accountants or any successor
pronouncement, in either case, as in effect on the date of such report. Such
certificate shall verify the accuracy of the computation of the Lookback
Adjustment, if any, based upon procedures customarily employed in a certified
audit. The Newco Audit Committee and Parent shall have the right, upon written
notice to Deloitte & Touche, L.L.P., to receive and review all workpapers of
Deloitte & Touche, L.L.P. relating to the matters covered hereby.
2.13.4 The shares of New Common shall be surrendered by Parent or issued by
Newco, as the case may be, on March 31, 1998. Except as otherwise indicated in
this Section 2.13.4, the number of shares surrendered or issued pursuant to
Section 2.13 shall not be adjusted for the issuance or repurchase of shares by
Newco, the purchase or sale of shares by Parent, or the making of any dividends
or distributions by Newco after the Effective Time. In case Newco shall, after
the Effective Time but prior to March 31, 1998:
(i) pay a dividend or make a distribution on the New Common shares of
New Common,
(ii) subdivide its outstanding shares of New Common into a greater
number of shares, or
(iii) combine its outstanding shares into a smaller number of shares,
the number of shares to be surrendered or issued, as the case may be, shall be
equitably adjusted as if such dividend, distribution, subdivision or combination
had been made immediately after the Effective Time and immediately prior to the
Lookback Adjustment.
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<PAGE> 158
2.13.5 The parties acknowledge that for purposes of this Section 2.13:
(i) Newco may combine the PR66 Insurance Business with those
businesses of the Company and will continue to maintain separate accounting
records with respect to the PR66 Business for purposes of the Lookback
Adjustment.
(ii) Subject to subparagraph (iii) below, Newco will through December
31, 1997 continue to operate each of the PR66 Insurance Business and the
Company's businesses in a manner consistent with each of their prior
practices.
(iii) Newco may effect such changes to the operations or practices of
each of the businesses as Newco management believes is in the best
interests of Newco stockholders generally, and the effects, if any, of such
changes will be allocated and adjusted equitably among the PR66 Insurance
Business and the Company's businesses in order to achieve the intentions
and purposes of this Section 2.13.
2.13.6 All claims, disputes and other matters in question arising out of,
or relating to, this Section 2.13 shall be submitted to, and determined by,
arbitration if good faith negotiations between Parent and Newco Audit Committee
do not resolve such claim, dispute or other matter within 60 days. Such
arbitration shall proceed in accordance with the Commercial Arbitration Rules of
the American Arbitration Association ("AAA") then pertaining (the "Rules") but
not under the auspices of AAA, unless the Newco Audit Committee and Parent
mutually agree otherwise, and pursuant to the following procedures:
(i) notice of the demand for arbitration shall be filed in writing
with the Newco Audit Committee or Parent, as the case may be. Newco Audit
Committee and Parent shall each appoint an arbitrator, and such arbitrators
shall appoint a third neutral arbitrator within 10 days. If the appointed
arbitrators fail to appoint a third, neutral arbitrator within 10 days,
such third, neutral arbitrator shall be appointed by the CPR Institute for
Dispute Resolution or such other neutral organization as may be mutually
agreed to by Newco Audit Committee and Parent. Newco Audit Committee and
the Parent agree that each will appoint an arbitrator who is a current or
retired executive of an insurance company. A determination by a majority of
the panel shall be binding;
(ii) reasonable discovery shall be allowed in arbitration;
(iii) all proceedings before the arbitrators shall be held in the
principal office of Newco;
(iv) the governing law shall be as specified in Section 9.4 of the
Agreement;
(v) the costs and fees of the arbitration, including attorneys' fees,
shall be allocated by the arbitrators; and
(vi) the award rendered by the arbitrators shall be final and judgment
may be entered in accordance with applicable law and in any court having
jurisdiction thereof.
Section 1.4 Section 2.12 of the Agreement
Section 2.12 of the Agreement is amended by deleting the
number "27,078,219" in the first sentence and replacing it with the number
"27,096,337."
Section 1.5 Section 6.1.2 of the Agreement
Section 6.1.2 of the Agreement is amended by adding the clause
"and as specifically provided in Section 6.26 below" in the first line after
"Schedule 6.1.2."
Section 1.6 Section 6.26 of the Agreement
The following is added as new Section 6.26 of the Agreement:
"Section 6.26 Pre-Closing Distribution. Parent, Newco and
Acquisition agree that, subject to the representations, warranties and
conditions set forth herein, the Company may declare prior to the Effective Time
a dividend or a distribution payable in cash to its stockholders, provided that
such dividend or distribution shall be in an amount no greater in aggregate than
an amount equal to the sum of (i) $3,500,000
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<PAGE> 159
and (ii) the product of (X) the number of calendar days between June 1, 1997 and
the calendar day immediately preceding the Effective Time (inclusive of both
such dates) and (Y) $58,600. Such dividend or distribution shall be paid as soon
as practicable after the Effective Time."
Section 1.7 Section 8.1.2 of the Agreement. Section 8.1.2 of the Agreement
is amended by substituting "September 30, 1997" for "July 31, 1997."
Section 1.8 Section 4.2 of the Agreement. Section 4.2 of the Agreement is
amended by (i) deleting the number "15,751,749" in the third line of the first
sentence and replacing it with the number "15,850,245" and (ii) deleting the
number "1,021,399" in the third sentence and replacing it with the number
"934,126."
Section 1.9 Section 7.3.4 of the Agreement. Section 7.3.4 of the Agreement
is amended by deleting the entire text of such Section and inserting the words
"Intentionally left blank." in its place.
Section 1.10 Section 6.25 of the Agreement. Section 6.25 of the Agreement
is amended by deleting the words "April 30, 1997" in the second line and
inserting the words "June 30, 1997" in its place.
Section 1.11 Annex D of the Agreement. The agreement included in Appendix I
to this Amendment shall replace and be substituted for the corresponding
agreement included in Annex D of the Agreement.
Section 1.12 Section 6.27 of the Agreement. The Agreement is amended to add
the following Section immediately following Section 6.26 of the Agreement (as
set forth in Section 1.6 of this Amendment):
"6.27 Capsure Designated Directors. Parent agrees that, if any of
Messrs. Esselborn, Dammeyer or Knox, ceases to serve as a director of Newco
prior to the 1999 annual meeting of stockholders of Newco, the remaining
individuals designated by Capsure or their successors shall appoint the
individual to fill such vacancy."
Section 1.13 Section 6.10.1 of the Agreement. Section 6.10.1 of the
Agreement is amended by adding the following sentence immediately after the
first sentence in Section 6.10.1:
"Parent and Company agree that Newco will include in the registration
statement on Form S-4 the shares to be reoffered by certain directors and
officers of the Company; provided, that such shares shall not exceed
590,622 shares in aggregate; and provided further, that Newco shall be
permitted to withdraw the registration of such shares at any time and from
time to time after the 90th calendar day following the Effective Time."
ARTICLE II
MISCELLANEOUS
Section 2.1 Effective Time. This Amendment shall be effective on the date
first written above.
Section 2.2 Ratification. Except as hereby otherwise expressly provided,
the Agreement is in all respects ratified and confirmed, and all the terms,
provisions and conditions thereof shall be and remain in full force and effect.
Section 2.3 Conforming Changes. All section, subsection and other similar
references in the Agreement shall be changed to conform to the amendments,
alterations and modification thereto made hereby.
Section 2.4 Definitions. Capitalized terms used herein and not otherwise
defined herein shall have the meaning ascribed thereto in the Agreement.
Section 2.5 Counterparts. This Amendment may be executed in counterparts,
each of which shall be deemed an original and each of which shall constitute one
and the same instrument.
Section 2.7 Amendments. This Amendment and the Agreement may not be further
amended, altered or modified except by a written instrument executed by the
parties to the Agreement.
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<PAGE> 160
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its representatives thereunto duly authorized, all as
of the day and year first above written.
CAPSURE HOLDINGS CORP.,
a Delaware corporation
By: /s/ BRUCE A. ESSELBORN
------------------------------------
Name: Bruce A. Esselborn
Title: President
CONTINENTAL CASUALTY COMPANY,
an Illinois corporation
By: /s/ DAVID T. CUMMING
------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
CNA SURETY CORPORATION,
a Delaware corporation
By: /s/ MARK C. VONNAHME
------------------------------------
Name: Mark C. Vonnahme
Title: President
SURETY ACQUISITION COMPANY,
a Delaware corporation
By: /s/ MARK C. VONNAHME
------------------------------------
Name: Mark C. Vonnahme
Title: President
FIREMEN'S INSURANCE COMPANY OF
NEWARK, NEW JERSEY,
a New Jersey corporation
By: /s/ DAVID T. CUMMING
------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
CONTINENTAL INSURANCE COMPANY,
a New Hampshire corporation
By: /s/ DAVID T. CUMMING
------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
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<PAGE> 161
NATIONAL FIRE INSURANCE COMPANY
OF HARTFORD,
a Connecticut corporation
By: /s/ DAVID T. CUMMING
------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
AMERICAN CASUALTY COMPANY OF
READING, PENNSYLVANIA,
a Pennsylvania corporation
By: /s/ DAVID T. CUMMING
------------------------------------
Name: Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
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<PAGE> 162
EXHIBIT A
<TABLE>
<CAPTION>
PR66 BUSINESS NUMBER OF SHARES
NET WRITTEN PREMIUMS FOR THE OF NEW COMMON PARENT PERCENTAGE
YEAR ENDED DECEMBER 31, 1997 (SURRENDERED BY PARENT) OWNERSHIP
AS ADJUSTED OR ISSUED BY NEWCO AFTER ADJUSTMENT*
---------------------------- ----------------------- -----------------
($ MILLIONS)
GREATER THAN - EQUAL TO OR LESS THAN
<S> <C> <C>
0 - $120.2 (7,495,772) 53.87%
120.2 - 122.7 (6,959,522) 54.54%
122.7 - 125.2 (6,423,955) 55.19%
125.2 - 127.7 (5,889,828) 55.82%
127.7 - 130.2 (5,357,938) 56.43%
130.2 - 132.7 (4,820,035) 57.03%
132.7 - 135.2 (4,285,589) 57.61%
135.2 - 137.7 (3,745,914) 58.18%
137.7 - 140.2 (3,211,042) 58.73%
140.2 - 142.7 (2,681,957) 59.26%
142.7 - 145.2 (2,138,925) 59.79%
145.2 - 147.7 (1,602,695) 60.30%
147.7 - 150.2 (1,074,355) 60.79%
150.2 - 160.2 0 61.75%
160.2 - 162.7 1,069,402 62.66%
162.7 - 165.2 1,605,392 63.10%
165.2 or greater 2,141,697 63.53%
</TABLE>
- -------------------------
* The percentages are based upon the beneficial ownership by Parent of
27,096,337 shares of New Common and total outstanding shares and options of
43,880,708 at the Effective Time.
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<PAGE> 163
[LOGO] APPENDIX B
July 14, 1997
The Board of Directors
Capsure Holdings Corp.
Two North Riverside Plaza
Chicago, IL 60606
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Capsure Holdings Corp. ("Capsure")
of the consideration to be received by such holders pursuant to the terms and
subject to the conditions set forth in the Reorganization Agreement, dated as of
December 19, 1996, as amended as of July 14, 1997 (as amended, the
"Reorganization Agreement"), by and among Capsure, Continental Casualty Company
("CNA"), CNA Surety Corporation, a wholly owned subsidiary of CNA ("Newco"),
Surety Acquisition Company ("Acquisition"), a wholly owned subsidiary of Newco,
and certain affiliates of CNA. As more fully described in the Reorganization
Agreement, (i) Acquisition will be merged with and into Capsure (the "Merger"),
(ii) each outstanding share of the common stock, par value $0.05 per share, of
Capsure (the "Capsure Common Stock") will be converted into the right to receive
one share (the "Exchange Ratio") of the common stock, par value $0.01 per share,
of Newco (the "Newco Common Stock") and (iii) immediately prior to the effective
time of the Merger, CNA will, among other things, contribute to Newco cash or
cash equivalents and contribute or assign to Newco certain assets, as more fully
specified in the Reorganization Agreement.
In arriving at our opinion, we reviewed the Reorganization Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of Capsure and certain senior officers and other representatives of
CNA concerning the business, operations and prospects of Capsure, the business
and operations of CNA to be contributed to Newco and the prospects of Newco. We
examined certain publicly available business and financial information relating
to Capsure and certain business and financial information relating to the
business and operations of CNA to be contributed to Newco as well as certain
financial forecasts and other data for Capsure and Newco which were provided to
or otherwise discussed with us by the respective managements of Capsure and CNA,
including reserve reports and information relating to certain strategic
implications and operational benefits anticipated to result from the Merger. We
reviewed the financial terms of the Merger as set forth in the Reorganization
Agreement in relation to, among other things: current and historical market
prices and trading volumes of Capsure Common Stock; the historical and projected
earnings and other operating data of Capsure and Newco; and the capitalization
and financial condition of Capsure and Newco. We also analyzed certain
financial, stock market and other publicly available information relating to the
businesses of other companies whose operations we considered relevant in
evaluating those of Capsure and Newco. We also evaluated the potential pro forma
financial impact of the Merger on Newco. In connection with our engagement, we
were requested to approach, and held discussions with, certain third parties to
solicit indications of interest in a possible acquisition of Capsure. In
addition to the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts, reserve reports and
other information and data provided to or otherwise reviewed by or discussed
with us, we have been advised by the respective managements of Capsure and CNA
that such forecasts and other information and data were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
managements of Capsure and CNA as to the future financial performance of Capsure
and Newco and the strategic implications and operational benefits anticipated to
result from the Merger, and assumed, with your consent, that such reserve
reports were reasonably prepared reflecting the best currently available
estimates and judgments of the
B-1
<PAGE> 164
The Board of Directors
Capsure Holdings Corp.
July 14, 1997
Page 2
preparers thereof as to the reserves of Capsure and Newco. We also assumed, with
your consent, that the Merger will be treated as a tax-free reorganization for
federal income tax purposes. Our opinion, as set forth herein, relates to the
relative values of Capsure and Newco. We are not expressing any opinion as to
what the value of the Newco Common Stock actually will be when issued to Capsure
stockholders pursuant to the Merger or the price at which the Newco Common Stock
will trade subsequent to the Merger. We have not made or, except with respect to
certain reserve reports, been provided with an independent evaluation or
appraisal of the assets, liabilities (contingent or otherwise) or reserves of
Capsure or Newco nor have we made any physical inspection of the properties or
assets of Capsure or Newco. Our opinion is necessarily based upon information
available to us, and financial, stock market and other conditions and
circumstances existing and disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to Capsure
in connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation of the Merger.
We also will receive a fee upon the delivery of this opinion. In the ordinary
course of our business, we and our affiliates may actively trade or hold the
securities of Capsure and CNA for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. We have in the past provided investment banking and financial
advisory services to Capsure unrelated to the proposed Merger, for which
services we have received compensation. In addition, Smith Barney and its
affiliates (including Travelers Group Inc. and its affiliates) may maintain
relationships with Capsure and CNA.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Capsure in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Smith Barney be made, without our prior
written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of Capsure Common Stock.
Very truly yours,
Smith Barney Inc.
SMITH BARNEY INC.
B-2
<PAGE> 165
APPENDIX C
MAYER, BROWN & PLATT LETTERHEAD
PHONE NUMBER
August 15, 1997
Capsure Holdings Corp.
Two North Riverside Plaza
Chicago, IL 60606
Re: Tax Opinion for Transaction with Continental
Casualty Company and its Affiliates
Ladies and Gentlemen:
We have acted as counsel to Capsure Holdings Corp., a Delaware corporation
("Capsure"), in connection with a proposed transaction pursuant to which Surety
Acquisition Company ("Acquisition"), a Delaware corporation which is a
wholly-owned subsidiary of CNA Surety Corporation ("Newco"), will be merged with
and into Capsure (the "Merger"). Upon consummation of the Merger, each issued
and outstanding share of Capsure common stock will be converted into the right
to receive shares of Newco common stock, as provided in detail in the
Reorganization Agreement dated as of December 19, 1996 among Capsure,
Continental Casualty Company, ("Continental"), certain affiliates of Continental
(collectively with Continental, the "Continental Group"), Newco and Acquisition
(the "Reorganization Agreement") and amended pursuant to the First Amendment to
the Reorganization Agreement dated as of July 14, 1997 (the "Amended
Reorganization Agreement"). The opinions set forth below are based upon the
Internal Revenue Code of 1986, as amended (the "Code"), the legislative history
with respect thereto, rules and regulations promulgated thereunder, published
rulings and court decisions, all as in effect and existing on the date hereof,
and all of which are subject to change at any time, possibly on a retroactive
basis.
In addition, with respect to the opinions set forth below, we have relied
upon the Reorganization Agreement and the Amended Reorganization Agreement and
upon representations of Capsure, the Continental Group, Newco, Acquisition, and
certain holders of Capsure common stock concerning certain facts underlying and
relating to the proposed transactions. We have further assumed that disclosure
documents to be issued in connection with the transaction will describe the
proposed transactions in a manner consistent with these agreements and the
representations.
Based on the foregoing, we offer the following opinions:
1. The Merger will be treated as an exchange within the meaning of
Section 351(a) of the Code or a reorganization within the meaning of
section 368(a) of the Code.
LOCATIONS
C-1
<PAGE> 166
[MAYER, BROWN & PLATT LETTERHEAD]
Capsure Holdings Corp.
August 15, 1997
Page 2
2. Except, possibly, to the extent cash is received pursuant to
dividends paid or declared at or prior to the Merger (which will be treated
in whole or in part as ordinary dividend income to the extent of Capsure's
current or accumulated earnings and profits or, possibly, as capital gain
if such dividend is treated as consideration in the Merger), no gain or
loss will be recognized by Capsure or its shareholders as a result of the
exchange of Capsure common stock for Newco common stock pursuant to the
Merger.
Except as provided above, this opinion does not address the tax treatment
of any dividends declared or paid at or prior to the Merger. In addition, there
is no assurance that our conclusions will not be rendered invalid as a result of
subsequent changes in the law, including changes to the Code or the
interpretation thereof by the courts or the Internal Revenue Service. The
opinions rendered herein are solely for your benefit and may not be relied upon
by any person or entity or for any purpose without prior written consent.
Very truly yours,
sig
MAYER, BROWN & PLATT
C-2
<PAGE> 167
APPENDIX D
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CNA Financial Corporation
We have audited the accompanying special-purpose statements of certain
assets and liabilities of CCC Surety Operations, a business unit of CNA
Financial Corporation, as of December 31, 1996 and 1995, and the special-purpose
statements of certain revenues and direct operating expenses for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of CNA Financial Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying special-purpose financial statements were prepared to
present certain assets and liabilities and certain revenues and direct operating
expenses of CCC Surety Operations and are not intended to be a complete
presentation of CCC Surety Operations. Note 1 to the financial statements
describes the basis of presentation of these special-purpose financial
statements.
In our opinion, such special-purpose financial statements present fairly,
in all material respects, certain assets and liabilities of CCC Surety
Operations at December 31, 1996 and 1995, and certain revenues and direct
operating expenses for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Deloitte & Touche LLP
Chicago, Illinois
March 20, 1997
D-1
<PAGE> 168
CCC SURETY OPERATIONS
STATEMENTS OF CERTAIN ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CERTAIN ASSETS
Insurance Receivables
Premiums.................................................. $ 30,379 $ 24,714
Reinsurance............................................... 20,069 29,719
Prepaid reinsurance premiums................................ 6,312 6,529
Deferred policy acquisition costs........................... 37,689 42,727
Receivable from affiliates.................................. 131,478 147,765
Intangible assets, net of amortization...................... 6,897 7,273
-------- --------
Total assets........................................... $232,824 $258,727
======== ========
CERTAIN LIABILITIES
Reserves
Loss and loss adjustment expense.......................... $119,151 $138,657
Unearned premiums......................................... 95,677 101,059
Policyholders' dividends payable............................ 1,839 2,559
Ceded premiums payable...................................... 2,407 1,933
Deferred income taxes....................................... 4,540 5,646
Accrued expenses............................................ 6,244 4,702
Collateral deposits held.................................... 2,966 4,171
-------- --------
Total liabilities...................................... $232,824 $258,727
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
D-2
<PAGE> 169
CCC SURETY OPERATIONS
STATEMENTS OF CERTAIN REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CERTAIN REVENUES
Net earned premiums....................................... $149,069 $130,603 $ 77,981
DIRECT OPERATING EXPENSES
Net loss and loss adjustment expenses..................... 33,006 32,440 8,580
Amortization of deferred policy acquisition costs......... 66,382 58,243 34,202
Other direct expenses..................................... 13,268 11,840 6,716
Policyholders' dividends.................................. 1,965 1,508 1,009
-------- -------- --------
114,621 104,031 50,507
EXCESS OF NET EARNED PREMIUMS OVER DIRECT OPERATING EXPENSES
BEFORE INCOME TAXES....................................... 34,448 26,572 27,474
INCOME TAXES................................................ 12,188 9,385 9,616
-------- -------- --------
EXCESS OF NET EARNED PREMIUMS OVER DIRECT OPERATING
EXPENSES, NET OF INCOME TAXES............................. $ 22,260 $ 17,187 $ 17,858
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
D-3
<PAGE> 170
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Current Organization
CNA Financial Corporation ("CNAF"), through its operating subsidiaries,
writes multiple lines of property/casualty insurance, including surety
insurance. Loews Corporation owns approximately 84% of the outstanding common
stock of CNAF. The principal operating subsidiaries of CNAF that write the
surety line of business are Continental Casualty Company and its property and
casualty affiliates (collectively, "CCC") and Continental Insurance Company and
its property and casualty affiliates (collectively, "CIC"). As described in Note
2, CIC was acquired by CNAF on May 10, 1995. The combined surety operations of
CCC and CIC are referred to as CCC Surety Operations.
Formation of CNA Surety Corporation and Proposed Merger
In December 1996, CNAF and Capsure Holdings Corp. ("Capsure") agreed to
merge the CCC Surety Operations with Capsure's business under a newly-formed
holding company, CNA Surety Corporation ("CNA Surety"). Capsure is a
publicly-held company whose operating subsidiaries principally write surety
insurance.
According to a reorganization agreement, CCC Surety Operations and Capsure
will merge their respective operations. The merger provides that CNAF, through
its property and casualty subsidiaries, CCC and CIC, will contribute $52.25
million of capital to CNA Surety. Through reinsurance agreements, CCC and CIC
will cede to CNA Surety, as of the closing date, all of their net unearned
premium and loss and loss adjustment expense reserves. Further, CCC and CIC will
assume the obligation for any adverse development on recorded reserves for CCC
Surety Operations as of the effective date of the merger, limit the loss ratio
on certain defined business written by CNA Surety through December 31, 2000 and
provide certain additional excess of loss reinsurance. CCC has also agreed to
provide certain administrative services at rates, subject to inflationary
increases, for three years after the merger if CNA Surety chooses to purchase
such services. Immediately after the merger, the common stock of CNA Surety will
be publicly-held and owned on a fully diluted basis by CCC and CIC (61.75%) and
the stockholders and option holders of Capsure common stock (38.25%).
The merger closing is subject to the approvals of the Capsure stockholders,
state insurance regulators, and certain governmental authorities and the
satisfaction of certain other conditions. Until the required approvals are
received and the merger is complete, which is expected in the second quarter of
1997, CCC Surety Operations continue to operate as a business unit of CNAF.
Business
CCC Surety Operations write contract and commercial surety bonds in all
fifty states through independent producers, including multi-line agents and
brokers such as surety specialists. Surety bonds guarantee the performance of a
principal who has undertaken contractual or statutory obligations and thereby
indemnifies third-party obligees for damages caused by the principal's failure
to perform.
Basis of Presentation
The accompanying Statements of Certain Assets and Liabilities reflect
assets and liabilities identified as being attributable to the business of CCC
Surety Operations. Because CNAF did not customarily allocate the investment
portfolio or capital of its operating subsidiaries to its business units like
CCC Surety Operations, the Statements of Certain Assets and Liabilities do not
include investments or capital. The receivable from affiliates is calculated at
an amount necessary to balance all other identified assets with the total of all
identified liabilities.
D-4
<PAGE> 171
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The accompanying Statements of Certain Revenues and Direct Operating
Expenses reflect premiums earned, losses incurred, loss adjustment expenses
(allocated and unallocated) and other direct operating expenses of CCC Surety
Operations. Such operating revenues and costs as investment income, realized
gains and losses on investments and certain general and administrative expenses,
which are indirect or overhead in nature, are not reflected in operating results
since such items were not historically allocated to CCC Surety Operations by
CNAF or its subsidiaries.
Since the accompanying financial statements exclude certain assets,
liabilities, revenues, and expenses, as described in the preceding two
paragraphs, these financial statements are not intended to be a complete
presentation of CCC Surety Operations. Those assets, liabilities, revenues and
costs that are reflected in the accompanying financial statements have been
determined in accordance with generally accepted accounting principles.
Premium Revenue
Premiums on surety bonds are recognized as revenue ratably over the terms
of the related bonds. Premium revenues are reported net of amounts ceded to
reinsurers. Unearned premiums represent the portion of premiums written, before
ceded reinsurance, applicable to the unexpired terms of bonds in-force,
calculated on a pro-rata basis.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expense reserves are based on undiscounted (a)
case basis estimates for claims reported on direct business, adjusted in the
aggregate for ultimate loss expectations, (b) estimates of unreported losses
based upon past experience, (c) estimates of losses on assumed insurance, (d)
estimates of future expenses to be incurred in settlement of claims and (e)
estimated claim recoveries, exclusive of reinsurance recoveries which are
reported as an asset. In establishing these estimates, consideration is given to
current conditions and trends as well as past experience of CCC Surety
Operations and past industry experience.
Loss and loss adjustment expense reserves are estimates and the ultimate
liability may vary significantly from such estimates. CCC Surety Operations
regularly update the reserve estimates as new facts become known and further
events occur which may impact the resolution of unsettled claims. Changes in
prior reserve estimates are reflected in results of operations in the year such
changes are determined to be needed.
Acquisition Costs
Acquisition costs, consisting principally of commissions, premium taxes and
certain underwriting and policy issuance costs, are deferred and amortized as a
charge to income as the related premiums are earned.
Reinsurance
CCC Surety Operations assume and cede insurance with other insurers and
reinsurers. Premiums and loss and loss adjustment expenses that are ceded under
reinsurance arrangements reduce the respective revenues and expenses. Amounts
recoverable from reinsurers with respect to ceded losses are estimated in a
manner consistent with the related loss liability and are reported as
reinsurance receivables.
Income Taxes
Income taxes are recorded using the liability method. Deferred tax assets
and liabilities are established for the future tax effects of temporary
differences between the financial statement and tax bases of assets and
liabilities, using the statutory tax rates. The principal temporary differences
relate to loss and loss adjustment expense reserve discounting, unearned premium
reserves and deferred policy acquisition costs.
D-5
<PAGE> 172
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Policyholders' Dividends
Policyholders' dividends represent credits extended to policyholders with
respect to projects in Texas, which credits result in a reduction of the cost of
the surety bond to the policyholder. The amount of dividends to be extended to
such policyholders is generally 20% of gross premiums on such policies and is
recorded as an operating expense. Payment of such dividends is based on
satisfactory completion of the project and payment of the policyholders'
subcontractors and suppliers. The total amount of credits recorded in 1996, 1995
and 1994 was $1,965 thousand, $1,508 thousand and $1,009 thousand, respectively.
Intangible Assets
Intangible assets represent goodwill arising from the acquisition of The
Continental Corporation ("Continental") by CNAF (See Note 2) that was allocated
to the surety business of CIC. Intangible assets are amortized over 20 years and
are reflected in other direct expenses in the Statement of Certain Revenues and
Direct Operating Expenses. Intangible assets are reported net of accumulated
amortization of $619 thousand and $243 thousand at December 31, 1996 and 1995,
respectively. Management assesses the recoverability of intangible assets based
upon estimates of undiscounted future operating cash flows whenever significant
events or changes in circumstances suggest that the carrying amount of an asset
may not be recoverable.
Related Party Transactions
CCC Surety Operations share facilities, services and employees with CCC and
CIC. The cost of these facilities, services and employees, including related
employee benefit costs that is charged to CCC Surety Operations and included in
the accompanying financial statements, is determined based on CCC Surety
Operations' usage and the costs incurred by CCC and CIC. Certain general and
administrative expenses that are indirect or overhead in nature are not
reflected in the accompanying financial statements.
No interest has been accrued or reflected in the accompanying financial
statements with respect to the receivable from affiliates.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. CONTINENTAL ACQUISITION
On May 10, 1995, CNAF acquired Continental, including the surety business
of CIC. This acquisition has been accounted for as a purchase and, accordingly,
the surety business of CIC has been included in the financial statements of CCC
Surety Operations since May 10, 1995.
D-6
<PAGE> 173
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table presents unaudited, pro forma premiums and direct
operating expenses, assuming the acquisition of the surety business of CIC had
occurred at the beginning of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net earned premiums......................................... $161,523 $167,952
Net loss and loss adjustment expenses....................... 40,916 86,959
Other direct expenses....................................... 88,971 91,168
-------- --------
Excess of net earned premiums over direct operating expenses
before income taxes....................................... 31,636 (10,175)
Income tax expense (benefit)................................ 11,204 (3,430)
-------- --------
Excess of net earned premiums over direct operating
expenses, net of income taxes............................. $ 20,432 $ (6,745)
======== ========
</TABLE>
The unaudited, pro forma financial data presented above is not necessarily
indicative of results that would have occurred had the CIC acquisition been
consummated at the beginning of the periods presented nor is it necessarily
indicative of future operations of CCC Surety Operations.
3. REINSURANCE
CCC Surety Operations, in the ordinary course of business, assume and cede
insurance with other companies. Reinsurance arrangements are used to limit
maximum loss, provide greater diversification of risk and minimize exposures on
larger risks. The ceding of insurance does not discharge CCC Surety Operations
of obligations as the primary insurer. Accordingly, a contingent liability
exists to the extent that any reinsurer is unable to meet the obligations
assumed under the reinsurance agreements. CCC Surety Operations place
reinsurance with other carriers only after careful review of the nature of the
contract and a thorough assessment of the reinsurers' credit quality and claim
settlement performance. At December 31, 1996 and 1995, CCC Surety Operations'
largest reinsurance receivable from a single reinsurer, including prepaid
reinsurance premiums, was approximately $3.4 million and $6.9 million,
respectively.
The effect of reinsurance on written and earned premiums was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Direct.......................... $152,517 $158,160 $135,803 $145,176 $ 93,872 $ 89,880
Assumed......................... 2,691 2,429 802 885 310 438
Ceded........................... (11,304) (11,520) (14,593) (15,458) (12,118) (12,337)
-------- -------- -------- -------- -------- --------
Net premiums.................... $143,904 $149,069 $122,012 $130,603 $ 82,064 $ 77,981
======== ======== ======== ======== ======== ========
Assumed/Net..................... 1.9% 1.6% 0.7% 0.7% 0.4% 0.6%
</TABLE>
D-7
<PAGE> 174
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The effect of reinsurance on the provision for loss and loss adjustment
expenses was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross loss and loss adjustment expenses..................... $29,952 $34,236 $ 3,707
Ceded amounts............................................... 3,054 (1,796) 4,873
------- ------- -------
Net loss and loss adjustment expenses....................... $33,006 $32,440 $ 8,580
======= ======= =======
</TABLE>
4. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The following table presents a reconciliation between the beginning and
ending balance of loss and loss adjustment expense reserves for the years ended
December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Reserves at beginning of year:
Gross....................................................... $138,657 $ 48,818 $53,751
Ceded reinsurance........................................... 24,531 13,770 20,815
-------- -------- -------
Net reserves at beginning of year...................... 114,126 35,048 32,936
CIC Surety reserves at acquisition-net...................... -- 64,780 --
-------- -------- -------
Total net reserves..................................... 114,126 99,828 32,936
-------- -------- -------
Net incurred loss and loss adjustment expenses:
Provision for insured events of current year.............. 42,748 43,286 17,034
Decrease in provision for insured events of prior years... (9,742) (10,846) (8,454)
-------- -------- -------
Total net incurred..................................... 33,006 32,440 8,580
-------- -------- -------
Net payments attributable to:
Current year events....................................... 7,728 1,648 600
Prior year events......................................... 35,720 16,494 5,868
-------- -------- -------
Total net payments..................................... 43,448 18,142 6,468
-------- -------- -------
Net reserves at end of year................................. 103,684 114,126 35,048
Ceded reinsurance at end of year............................ 15,467 24,531 13,770
-------- -------- -------
Gross reserves at end of year.......................... $119,151 $138,657 $48,818
======== ======== =======
</TABLE>
CCC Surety Operations have recorded favorable development of prior year
loss and loss adjustment expense reserves in each of the last three years. This
favorable development is the result of positive claim settlement experience.
There is no assurance that this past experience will continue in future years.
CCC Surety Operations do not bond contractors that specialize in
environmental remediation work. CCC Surety Operations do, however, bond several
accounts that have incidental environmental exposure with respect to which CCC
Surety Operations provide limited bonding programs. In the commercial surety
market, CCC Surety Operations provide bonds to large corporations that are in
the business of mining various minerals and are obligated to post reclamation
bonds that guarantee that property which was disturbed during mining is returned
to an acceptable condition when the mining is complete. While no environmental
responsibility is overtly provided by commercial or contract bonds, some risk of
environmental exposure may exist if the surety were to assume certain rights of
ownership of the property in the completion of a defaulted project or through
salvage recovery.
To date, CCC Surety Operations have received no environmental claims
notices nor is management aware of any potential environmental claims.
D-8
<PAGE> 175
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs that were deferred and the amortization of deferred
policy acquisition costs in each of the past three years are set forth in the
following reconciliation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1............................ $ 42,727 $ 24,314 $ 22,599
Deferred policy acquisition costs of CIC at
acquisition................................... -- 21,503 --
Costs deferred.................................. 61,344 55,153 35,917
Amortization of deferred policy acquisition
costs......................................... (66,382) (58,243) (34,202)
-------- -------- --------
Balance at December 31.......................... $ 37,689 $ 42,727 $ 24,314
======== ======== ========
</TABLE>
6. INCOME TAXES
The revenues and expenses of CCC Surety Operations are included in the tax
return of CNAF and its eligible subsidiaries, which, in turn, is included in the
consolidated federal income tax return of Loews Corporation and its eligible
subsidiaries. Income tax amounts included in the accompanying financial
statements have been determined on a separate return basis and are balances with
affiliates.
The components of the deferred income tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loss and loss adjustment expense reserve discounting..... $ 1,905 $ 2,097
Unearned premium reserves................................ 6,256 6,617
Policyholders' dividends................................. 490 594
-------- --------
Total deferred tax assets........................... 8,651 9,308
Deferred policy acquisition costs........................ (13,191) (14,954)
-------- --------
Net deferred income tax liabilities...................... $ (4,540) $ (5,646)
======== ========
</TABLE>
The provision for income taxes is determined by applying the statutory tax
rate of 35% to income subject to tax and is comprised of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current taxes........................................ $13,294 $7,448 $9,542
Deferred taxes....................................... (1,106) 1,937 74
------- ------ ------
Total income taxes................................... $12,188 $9,385 $9,616
======= ====== ======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
CCC Surety Operations are party to litigation arising in the ordinary
course of business. The outcome of this litigation will not, in the opinion of
management, materially affect the results of operations, liquidity or capital
resources.
The surety business is subject to regulation and supervision by the various
state insurance regulatory authorities in which business is conducted. Such
regulation is generally designed to protect policyholders.
D-9
<PAGE> 176
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Regulatory authority also extends to premiums charged and requires that rates
not be excessive, inadequate or discriminatory.
8. STATUTORY ACCOUNTING PRACTICES (UNAUDITED)
Generally accepted accounting principles vary in some respects from
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. Financial statements prepared in accordance with statutory
accounting practices do not reflect deferred acquisition costs, deferred income
taxes or goodwill. Based on statutory accounting practices, the excess of net
earned premiums over certain direct operating expenses, net of income taxes, was
$26,142 thousand, $19,555 thousand and $17,471 thousand for the years ended
December 31, 1996, 1995 and 1994, respectively.
D-10
<PAGE> 177
APPENDIX D-2
CCC SURETY OPERATIONS
STATEMENTS OF CERTAIN ASSETS AND LIABILITIES
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CERTAIN ASSETS
Insurance Receivables
Premiums.................................................. $ 31,596 $ 30,379
Reinsurance............................................... 11,734 20,069
Prepaid reinsurance premiums................................ 6,235 6,312
Deferred policy acquisition costs........................... 37,198 37,689
Receivable from affiliates.................................. 99,071 131,478
Intangible assets, net of amortization...................... 6,963 6,897
-------- --------
Total assets........................................... $192,797 $232,824
======== ========
CERTAIN LIABILITIES
Reserves
Loss and loss adjustment expense.......................... $ 80,439 $119,151
Unearned premiums......................................... 94,381 95,677
Policyholders' dividends payable............................ 1,628 1,839
Ceded premiums payable...................................... 4,807 2,407
Deferred income taxes....................................... 5,052 4,540
Accrued expenses............................................ 3,988 6,244
Collateral deposits held.................................... 2,502 2,966
-------- --------
Total liabilities...................................... $192,797 $232,824
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS (UNAUDITED).
D2-1
<PAGE> 178
CCC SURETY OPERATIONS
STATEMENTS OF CERTAIN REVENUES AND DIRECT OPERATING EXPENSES
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CERTAIN REVENUES
Net earned premiums.................................. $36,155 $37,504 $ 69,984 $74,533
DIRECT OPERATING EXPENSES
Net loss and loss adjustment expenses (Note 3)....... 7,874 9,732 (19,738) 19,896
Amortization of deferred policy acquisition costs.... 16,121 16,264 30,874 32,343
Other direct expenses................................ 3,783 2,572 7,779 5,921
Policyholders' dividends............................. 203 409 1,017 1,150
------- ------- -------- -------
27,981 28,977 19,932 59,310
======= ======= ======== =======
EXCESS OF NET EARNED PREMIUMS OVER DIRECT OPERATING
EXPENSES
BEFORE INCOME TAXES.................................. 8,174 8,527 50,052 15,223
INCOME TAXES........................................... 2,894 3,017 17,584 5,394
------- ------- -------- -------
EXCESS OF NET EARNED PREMIUMS OVER DIRECT OPERATING
EXPENSES,
NET OF INCOME TAXES.................................. $ 5,280 $ 5,510 $ 32,468 $ 9,829
======= ======= ======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS (UNAUDITED).
D2-2
<PAGE> 179
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Current Organization
CNA Financial Corporation ("CNAF"), through its operating subsidiaries,
writes multiple lines of property/casualty insurance, including surety
insurance. Loews Corporation owns approximately 84% of the outstanding common
stock of CNAF. The principal operating subsidiaries of CNAF that write the
surety line of business are Continental Casualty Company and its property and
casualty affiliates (collectively, "CCC") and Continental Insurance Company and
its property and casualty affiliates (collectively, "CIC"). The combined surety
operations of CCC and CIC are referred to as CCC Surety Operations.
Basis of Presentation
The accompanying Statements of Certain Assets and Liabilities reflect
assets and liabilities identified as being attributable to the business of CCC
Surety Operations. Because CNAF did not customarily allocate the investment
portfolio or capital of its operating subsidiaries to its business units like
CCC Surety Operations, the Statements of Certain Assets and Liabilities do not
include investments or capital. The receivable from affiliates is calculated at
an amount necessary to balance all other identified assets with the total of all
identified liabilities.
The accompanying Statements of Certain Revenues and Direct Operating
Expenses reflect premiums earned, losses incurred, loss adjustment expenses
(allocated and unallocated) and other direct operating expenses of CCC Surety
Operations. Such operating revenues and costs as investment income, realized
gains and losses on investments and certain general and administrative expenses,
which are indirect or overhead in nature, are not reflected in operating results
since such items were not historically allocated to CCC Surety Operations by
CNAF or its subsidiaries.
Since the accompanying financial statements exclude certain assets,
liabilities, revenues, and expenses, as described in the preceding two
paragraphs, these financial statements are not intended to be a complete
presentation of CCC Surety Operations. Those assets, liabilities, revenues and
costs that are reflected in the accompanying financial statements have been
determined in accordance with generally accepted accounting principles.
Interim Financial Statements
These unaudited interim financial statements should be read in conjunction
with the audited financial statements of CCC Surety Operations as of and for the
year ended December 31, 1996 and notes thereto, included elsewhere in this Proxy
Statement/Prospectus. Certain financial information that is normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles has been condensed herein or omitted as it is not required
for interim reporting. The accompanying unaudited financial statements reflect,
in the opinion of management, all adjustments necessary for a fair presentation
of the interim financial statements. All such adjustments are of a normal and
recurring nature. The financial results for interim periods may not be
indicative of financial results for a full year.
D2-3
<PAGE> 180
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. REINSURANCE
The effect of reinsurance on premium written and earned was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------------------------- ----------------------------------------
1997 1996 1997 1996
------------------ ------------------ ------------------ ------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
------- ------ ------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct.................. $40,454 $37,760 $38,477 $39,791 $73,065 $73,908 $74,828 $79,214
Assumed................. 72 468 387 613 503 957 723 870
Ceded................... (2,241) (2,073) (3,321) (2,900) (4,803) (4,881) (6,014) (5,551)
------- ------- ------- ------- ------- ------- ------- -------
Net premiums............ 38,285 36,155 35,543 37,504 68,765 69,984 69,537 74,533
======= ======= ======= ======= ======= ======= ======= =======
Assumed/Net............. 0.19% 1.29% 1.09% 1.63% 0.73% 1.37% 1.04% 1.17%
</TABLE>
The effect of reinsurance on the provision for loss and loss adjustment
expenses was as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30 JUNE 30
--------------- ------------------
1997 1996 1997 1996
------ ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross loss and loss adjustment expense................... $6,523 $9,197 $(19,473) $18,072
Ceded amounts............................................ 1,351 535 (265) 1,824
------ ------ -------- -------
Net loss and loss adjustment expense..................... $7,874 $9,732 $(19,738) $19,896
====== ====== ======== =======
</TABLE>
3. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense reserves are estimates and the ultimate
liability may vary significantly from such estimates. The CCC Surety Operations
regularly update the reserve estimates as new facts become known and further
events occur which may impact the resolution of unsettled claims. Changes in
prior reserve estimates (reserve development) are reflected in results of
operations in the period such changes are determined to be needed.
Large losses (individual claims which are in excess of $2.5 million) can
significantly affect underwriting results and loss reserves. Estimating reserves
for such losses in the early stages of development can be difficult. Because of
the somewhat volatile nature of the contract surety business and the potential
for shock losses, the CCC Surety Operations historically have had a strong bias
to estimate reserves conservatively and, as more information became available
that would warrant a change, adjust such reserve estimates. These later reserve
adjustments have typically, but not always, been releases of reserves.
The most significant variable in estimating the CCC Surety Operations
reserves for years subsequent to 1994 was the addition of the CIC surety
business. While the surety business of CIC was similar in many ways to that of
CCC, there were certain aspects of the CIC book of business that elevated the
inherent level of underwriting risk as compared to the CCC book of business. One
of these factors was that CIC had underwritten contractors in certain geographic
locations where it was very difficult to attain the underwriting results
historically targeted by CCC. CIC had consistently experienced a significantly
higher loss and loss adjustment expense ratio than the CCC business,
particularly in the early 1990's. The average loss ratio for CIC in this time
period was in excess of 50% versus approximately 17% for CCC.
The unfavorable results of the CIC book of business prompted a number of
operating and organizational changes. Prior to the merger with CCC, CIC, on its
own initiative, had begun to react to the poor underwriting
D2-4
<PAGE> 181
CCC SURETY OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
experience by scaling back operations in specific territories and
re-underwriting its book of business. Subsequent to the merger, the CIC customer
accounts were included by CCC in an annual re-underwriting process performed
under the supervision of CCC management using the historical underwriting
standards of the CCC book of business. CCC also consolidated the claims
operations of CIC with CCC as there was concern with CIC's claim handling
processes, particularly in the handling of large contract surety claims. The
majority of this consolidation took place over a period of eighteen months
spanning from July 1995 to December 1996, during which time CCC management
assimilated knowledge about the CIC claims.
From a reserving perspective, it was unclear how much and when these
re-underwriting efforts and changes in claims responsibilities would be evident
in the underwriting results. As a result of this uncertainty, and consistent
with its generally conservative estimating philosophy in reserving, the CCC
Surety Operations did not anticipate immediate and significant improvement in
underwriting results for the CIC book of business.
Based on the Company's most recent study of reserves that was completed in
connection with the preparation of the March 31, 1997 financial statements, the
CCC Surety Operations management determined that it had been overly cautious in
interpreting claim data and had discounted favorable trends. As shown in the
table below, and consistent with the Company's most recent study of reserve
levels, the Company released $35.0 million of prior year reserves in the first
quarter of 1997. Approximately $33 million of this reserve development related
to CIC and principally to accident years prior to 1996.
The following table presents a reconciliation between the beginning and
ending balance of loss and loss adjustment expense reserves for the six month
periods ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Reserves at beginning of period:
Gross....................................................... $119,151 $138,657
Ceded reinsurance........................................... 15,467 24,531
-------- --------
Net reserves at beginning of period.................... 103,684 114,126
-------- --------
Net incurred loss and loss adjustment expenses:
Provision for insured events of current period............ 15,262 21,501
Decrease in provision for insured events of prior
periods................................................ (35,000) (1,605)
-------- --------
Total net incurred..................................... (19,738) 19,896
-------- --------
Net payments attributable to:
Current period events..................................... 5,803 3,501
Prior period events....................................... 3,131 25,899
-------- --------
Total net payments..................................... 8,934 29,400
-------- --------
Net reserves at end of period............................... 75,012 104,622
Ceded reinsurance at end of period.......................... 5,427 22,813
-------- --------
Gross reserves at end of period........................ $ 80,439 $127,435
======== ========
</TABLE>
D2-5
<PAGE> 182
APPENDIX E
*CONFORMED COPY
VOTING AGREEMENT
This Voting Agreement ("Agreement") is made this 19th day of December, 1996
among Equity Capsure Limited Partnership, an Illinois limited partnership (the
"Major Stockholder"), Continental Casualty Company, an Illinois corporation
("CCC"), Bruce A. Esselborn, an individual residing in the State of Georgia, Rod
F. Dammeyer, an individual residing in the State of Illinois, and any other
signatory set forth on the signature page hereto (collectively, the
"Stockholders").
WHEREAS, the Stockholders each hold shares of the common stock (the
"Stock") of Capsure Holdings Corp., a Delaware corporation (the "Company") or
options to acquire Stock; and
WHEREAS, as a condition to CCC's agreement to merge its surety business
with and into the Company (the "Merger"), as an inducement for CCC to enter into
the Reorganization Agreement, dated as of December 19, 1996 (the "Reorganization
Agreement") among the Company, CCC, CNA Surety Corporation, a Delaware
corporation ("Newco") and Surety Acquisition Company, a Delaware corporation
("Acquisition"), as an inducement for Acquisition and Newco to enter into the
Reorganization Agreement and as an inducement for Newco to agree to enter into
the Registration Rights Agreement between Newco and the Major Stockholder in the
form attached to the Reorganization Agreement as Annex C, and to effectuate the
Merger, the Stockholders have agreed to enter into this Agreement, to be
specifically enforceable against each of them, pursuant to which they agree to
vote their shares of the Stock in the manner and for the purpose specified
herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Stockholders hereby agree as follows:
1. Voting Agreement. Each of the Stockholders hereby agrees to vote all of
the Stock beneficially owned, directly or indirectly, by him or it (and all
Stock issued pursuant to the exercise of stock options) in favor of the Merger
between the Company and Acquisition, as contemplated by the Reorganization
Agreement. Each of the Stockholders hereby agrees that he or it will vote such
shares of Stock against any other competing proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, sale of shares
of capital stock involving a change of control within the meaning of Section 203
of the Delaware General Corporation Law (including, without limitation, by way
of tender offer) or similar transactions involving the Company or any of its
subsidiaries for the duration of this Agreement; provided, however, that nothing
contained herein shall prevent any Stockholder from transferring, selling or
otherwise disposing of Stock held by such Stockholder provided any such
transferee agrees in a written instrument satisfactory to CCC to be bound by the
terms hereof. It is expressly understood and agreed by each of the Stockholders
that this Agreement is intended to, and does hereby, create and constitute a
voting agreement within the meaning of Section 218(c) of the General Corporation
Law of the State of Delaware, as amended, and not a voting trust agreement under
Section 218(a) thereof.
2. Irrevocable Proxy. In order to secure each Stockholder's obligation to
vote his or its Stock and other voting securities of the Company in accordance
with the provisions of Section 1, each Stockholder (other than CCC) hereby
appoints CCC (the "Proxy") as its true and lawful proxy and attorney-in-fact,
with full power of substitution, to vote all of his or its Stock and other
voting securities of the Company as expressly provided for in Section 1. The
Proxy may exercise the irrevocable proxy granted to it hereunder at any time any
party fails to comply with the provisions of this Agreement. The proxies and
powers granted by each Stockholder pursuant to this Section 2 are coupled with
an interest and are given to secure the performance of the Stockholder's
obligations under this Agreement. Such proxies and powers will be irrevocable
with respect to the matters set forth in Section 1 for the term set forth in
Section 5, and, with respect to any individual, will survive the death,
incompetency and disability of such Stockholder.
E-1
<PAGE> 183
3. Representations of Stockholders. Each Stockholder hereby represents and
warrants to each of the other Stockholders that (a) he or it owns and has the
right to vote the number of shares of the Stock set forth opposite his name on
Exhibit A attached hereto, (b) he or it has full power to enter into this
Agreement, and (c) he or it is not a party to any proxy, voting trust or other
agreement which is inconsistent with or conflicts with the provisions of this
Agreement, and no Stockholder will grant any proxy or become party to any voting
trust or other agreement which is inconsistent with or conflicts with the
provisions of this Agreement. All representations and warranties contained
herein or made in writing by any party in connection herewith will survive the
execution and delivery of this Agreement, regardless of any investigation made
by any party.
4. Specific Performance. The parties hereto agree that irreparable damage
would occur in the event any provision of this Agreement was not performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof, in addition to any other remedy at law
or in equity.
5. Term. This Agreement shall remain in effect until the earlier of (i)
December 31, 1997; (ii) the date on which the Reorganization Agreement is
terminated pursuant to Sections 8.1.1, 8.1.2 (as may be amended from time to
time by the parties thereto and provided such termination does not result from a
breach by the Company of the Reorganization Agreement), 8.1.3 (other than due to
an order, decree, ruling or other action resulting from an action or proceeding
instituted by any of the parties hereto or to the Reorganization Agreement or
any affiliates of such parties), 8.1.5 or 8.1.7 (provided no Stockholder is in
breach of this Agreement) of the Reorganization Agreement.
6. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT, AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT.
7. General Provisions.
(a) All of the covenants and agreements contained in this Agreement shall
be binding upon, and inure to the benefit of, the respective parties and their
successors, assigns, heirs, executors, administrators and other legal
representatives, as the case may be. Nothing contained herein shall prevent any
of the parties hereto from assigning their rights hereunder.
(b) This Agreement may be executed in two or more counterparts, each of
which will be deemed an original but all of which together shall constitute one
and the same instrument. The parties hereto agree that facsimile transmissions
of original signatures shall constitute and be accepted as original signatures.
(c) If any provision of this Agreement shall be declared void or
unenforceable by any court or administrative board of competent jurisdiction,
such provision shall be deemed to have been severed from the remainder of this
Agreement and this Agreement shall continue in all respects to be valid and
enforceable.
(d) No waiver of any breach of this Agreement extended by any party hereto
to any other party shall be construed as a waiver of any rights or remedies of
any other party hereto or with respect to any subsequent breach.
(e) Whenever the context of this Agreement shall so require, the use of the
singular number shall include the plural and the use of any gender shall include
all genders.
(f) This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without regard to principles of conflicts of
law; however, any action or proceeding relating to this Agreement shall be
brought only in and decided by the federal or state courts in Chicago, Illinois,
such courts being a proper forum in which to adjudicate such action or
proceeding, and each party hereby waives any claim of inconvenient forum.
(g) The language used in this Agreement shall be deemed to be the language
chosen by the parties to express their mutual intent and no rule of strict
construction will be applied against any party.
E-2
<PAGE> 184
IN WITNESS WHEREOF, each of the Stockholders has executed this Agreement as
of the date first written above.
EQUITY CAPSURE LIMITED PARTNERSHIP
By: /s/ SAMUEL ZELL
--------------------------------------
Name: Samuel Zell
--------------------------------------
Its: Trustee
--------------------------------------
CONTINENTAL CASUALTY COMPANY
By: /s/ DONALD M. LOWRY
--------------------------------------
Name: Donald M. Lowry
--------------------------------------
Its: Senior Vice President,
Secretary
------------------------------------
and General Counsel
------------------------------------
/s/ BRUCE A. ESSELBORN
--------------------------------------
Bruce A. Esselborn
/s/ ROD F. DAMMEYER
--------------------------------------
Rod F. Dammeyer
E-3
<PAGE> 185
EXHIBIT A
Equity Capsure Limited Partnership..............................4,039,622 shares
Continental Casualty Company...........................................10 shares
Bruce A. Esselborn.................................................74,907 shares
Rod F. Dammeyer.................................Options to acquire 20,000 shares
<PAGE> 186
CONFIDENTIAL - FOR USE
OF THE SECURITIES AND
EXCHANGE COMMISSION ONLY
PROXY FOR HOLDERS OF CAPSURE HOLDINGS CORP. COMMON STOCK
PROXY SOLICITED BY THE BOARD OF DIRECTORS
OF CAPSURE HOLDINGS CORP.
FOR THE SPECIAL MEETING
OF CAPSURE HOLDINGS CORP. STOCKHOLDERS ON
[___________], 1997
The undersigned hereby appoints [______________] and [____________]
and each of them, proxies with full power of substitution and resubstitution,
for and in the name of the undersigned, to vote all shares of common stock of
CAPSURE HOLDINGS CORP. ("Capsure") that the undersigned would be entitled to
vote if personally present at the Special Meeting of stockholders of Capsure on
[________], 1997 at [___]a.m., at One North Franklin Street, 3rd floor,
Chicago, Illinois, and at any adjournment thereof, upon the matters described
in the accompanying Notice of Special Meeting of stockholders of Capsure and
Proxy Statement/Prospectus, receipt of which is hereby acknowledged, and upon
any other business that may properly come before the meeting or any adjournment
thereof. Said Proxies are directed to vote on the matters described in the
Notice of Special Meeting of stockholders of Capsure and Proxy
Statement/Prospectus as follows, and otherwise in their discretion upon such
other business as may properly come before the meeting or any adjournment
thereof.
1. To approve the Reorganization Agreement, dated as of December 19, 1996
by and among Capsure, Continental Casualty Company and certain of its
affiliates, CNA Surety Corporation and Surety Acquisition Company
pursuant to which Surety Acquisition Company will be merged with and
into Capsure.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. If Proposal Number One is approved, to approve and adopt an amendment
to Capsure's certificate of incorporation, deleting Article Twelfth.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To adjourn the Special Meeting, and in the discretion of the proxies,
on any other matter that may properly come before the meeting of
stockholders or any adjournment thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED, AND TO BE SIGNED, ON THE OTHER SIDE)
<PAGE> 187
PLEASE MARK ALL CHOICES LIKE THIS:[x]
THIS PROXY WILL BE VOTED AS DIRECTED BY THE UNDERSIGNED, BUT IF NO
DIRECTION IS INDICATED, THE PROXY WILL BE VOTED FOR PROPOSALS NUMBER ONE AND
TWO AND ACCORDING TO THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTER
THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
Signature:________________________ Date:_________________
Signature:________________________ Date:_________________
Please sign exactly as your name or names appear hereon. Where more than one
owner is shown above, each should sign. When signing in a fiduciary capacity,
please give full title. If this proxy is submitted by a corporation, it should
be executed in the full corporate name by a duly authorized officer. If a
partnership, please sign in a partnership name by an authorized person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. IF
YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
<PAGE> 188
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law permits a corporation to adopt a provision in its certificate
of incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except that such provision shall not limit the liability of
a director for: (i) any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) acts or omission not in good faith or
which involve intentional misconduct or a knowing violation of the law; (iii)
liability under section 174 of the DGCL; or (iv) any transaction from which the
directors derived an improper personal benefit. The CNA Surety certificate of
incorporation limits the personal liability of CNA Surety's directors for
monetary damages to the fullest extent permissible under applicable law.
Under Delaware law, a corporation may indemnify any person made a party or
threatened to be made a party to any type of proceeding (other than an action by
or in the right of the corporation) because he or she is or was an officer,
director, employee or agent of the corporation, or was serving at the request of
the corporation as an officer, director, employee or agent of the corporation,
against expenses, judgements, fines, and amounts paid in settlement actually and
reasonably incurred in connection with such proceeding if: (i) he or she acted
in good faith and in a manner such director reasonably believed to be in or not
opposed to the best interests of the corporation; or (ii) in the case of a
criminal proceeding, he or she had no reasonable cause to believe that his or
her conduct was unlawful. A corporation may indemnify any person made party or
threatened to be made a party to any threatened, pending or completed action or
suit brought by or in the right of the corporation because he or she was an
officer, director, employee or agent of the corporation, or was serving at the
request of the corporation as an officer, director, employee or agent of the
corporation, against expenses actually and reasonably incurred in connection
with such action or suit if he or she acted in good faith and in a manner such
director reasonably believed to be in or not opposed to the best interests of
the corporation, except that there may be no such indemnification if the person
is found liable to the corporation unless, in such case, the court determines
the person is entitled thereto. A corporation must indemnify a director,
officer, employee or agent against expenses actually and reasonably incurred by
him or her who successfully defends himself or herself in a proceeding to which
they were a party because he or she was a director, officer, employee or agent
of the corporation. Expenses incurred by any officer or director (or other
employees or agents as deemed appropriate by the board of directors) in
defending a civil or criminal proceeding may be paid by the corporation in
advance of the final disposition of such proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation. The Delaware law indemnification and expense
advancement provisions are not exclusive of any other rights which may be
granted by the bylaws, a vote of stockholders or disinterested directors,
agreement or otherwise.
The CNA Surety bylaws provide for the indemnification, in a non-derivative
suit, of any person who is a party or is threatened to be made a party to any
suit or proceeding, because such person, or a person for whom such person was or
is a representative, was or is an officer, director, employee or agent of the
CNA Surety, or was serving at the request of CNA Surety as an officer, director,
employee or agent of the corporation, against expenses in connection with such
suit, action or proceeding if such person acted in good faith and in a manner
such director reasonably believed to be in or not opposed to the best interests
of CNA Surety, and with respect to any criminal action or proceeding, had no
reasonable cause to believe such conduct was unlawful. The CNA Surety bylaws
provide further for the indemnification in derivative suits if such person acted
in good faith and in a manner such person believed to be in or not opposed to
the best interests of CNA Surety; provided, however, that no indemnification
will be made for any claim, issue or matter as to which such person has been
adjudged liable to CNA Surety, unless the court in which such action was brought
determined, despite the adjudication of liability, that such person is fairly
and reasonably entitled to indemnity for such expenses that such court deems
proper. The bylaws of CNA Surety also permit the advancement of expenses
incurred by a director, officer, employee or agent of CNA Surety in defending a
suit or action, provided that such person executes an undertaking to repay the
advanced expenses if it is ultimately determined that such person is not
entitled to be indemnified by CNA Surety.
II-1
<PAGE> 189
ITEM 21. INDEX TO EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2(1) Reorganization Agreement dated as of December 19, 1996 among
Capsure Holdings Corp., Continental Casualty Company, CNA
Surety Corporation, Surety Acquisition Company and certain
affiliates of Continental Casualty Company (filed on
December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s
Form 8-K, and incorporated herein by reference).
2(2) First Amendment to the Reorganization Agreement dated as of
July 14, 1997 among Capsure Holdings Corp., Continental
Casualty Company, CNA Surety Corporation, Surety Acquisition
Company and certain affiliates of Continental Casualty
Company (filed on July 16, 1997 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
3(1) Certificate of Incorporation of CNA Surety Corporation dated
December 10, 1996.
3(2) Amendment to Certificate of Incorporation of CNA Surety
Corporation dated May 27, 1997.
3(3) Bylaws of CNA Surety Corporation.
4(1) Specimen certificate of CNA Surety Corporation.
4(2) Form of Registration Rights Agreement, between CNA Surety
Corporation and Equity Capsure Limited Partnership.
5 Opinion of Sonnenschein Nath & Rosenthal.
8 Opinion of Mayer, Brown & Platt, with respect to certain tax
matters.
9 Not applicable.
10(1) Employment Agreement dated as of September 30, 1995 by and
between Capsure Holdings Corp., a Delaware corporation, and
Bruce A. Esselborn, an individual (filed on March 27, 1996
as Exhibit 10.1 to Capsure Holdings Corp.'s Annual Report on
Form 10-K, and incorporated herein by reference).
10(2) First Amendment dated as of February 20, 1997 to the
Employment Agreement dated as of September 30, 1995 between
Capsure Holdings Corp., a Delaware corporation, and Bruce A.
Esselborn, an individual (filed on March 21, 1997 as Exhibit
10.2 to Capsure Holdings Corp.'s Annual Report on Form 10-K,
and incorporated herein by reference).
10(3) Employment Agreement dated as of September 30, 1995 by and
between Capsure Holdings Corp., a Delaware corporation and
Mary Jane Robertson, an individual (filed on March 27, 1996
as Exhibit 10.2 to Capsure Holdings Corp.'s Annual Report on
Form 10-K, and incorporated herein by reference).
10(4) First Amendment dated as of February 20, 1997 to the
Employment Agreement dated as of September 30, 1995 by and
between Capsure Holdings Corp., a Delaware corporation, and
Mary Jane Robertson, an individual (filed on March 21, 1997
as Exhibit 10.4 to Capsure Holdings Corp.'s Annual Report on
Form 10-K, and incorporated herein by reference).
10(5) Employment Agreement dated as of September 22, 1994 by and
among Universal Surety Holdings Corp., Universal Surety of
America, Capsure Financial Group, Inc., Capsure Holdings
Corp. and John Knox, Jr.
10(6) Agreement dated as of June 30, 1997 by and among John Knox,
Jr., Capsure Holdings Corp. and CNA Surety Corporation.
10(7) Employment Agreement dated as of April 26, 1996 (effective
as of April 15, 1996) by and between Western Surety Company
and Steven T. Pate.
10(8) Stock Purchase Agreement among John Knox, Jr., Universal
Surety Holding Corp., Capsure Financial Group, Inc. and
Capsure Holdings Corp. dated July 26, 1994 (filed on October
6, 1994 as Exhibit 2 to Capsure Holdings Corp.'s Current
Report on Form 8-K, and incorporated herein by reference).
10(9) Non-Competition and Non-Solicitation Agreement between
Capsure Holdings Corp. and Frontier Insurance Company, dated
as of May 22, 1996.
</TABLE>
II-2
<PAGE> 190
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10(10) Contract Surety Bond Reinsurance Agreement dated as of
September 22, 1994 between Western Surety Company, a South
Dakota corporation, and Universal Surety of America, a Texas
corporation (filed on March 30, 1995 as Exhibit 10.23 to
Capsure Holdings Corp.'s Annual Report on Form 10-K, and
incorporated herein by reference).
10(11) Co-Employee Agreement dated as of September 22, 1994 between
Western Surety Company and Universal Surety of America
(filed on March 30, 1995 as Exhibit 10.24 to Capsure
Holdings Corp.'s Annual Report on Form 10-K, and
incorporated herein by reference).
10(12) Form of The CNA Surety Corporation Replacement Stock Option
Plan.
10(13) Form of CNA Surety Corporation 1997 Long-Term Equity
Compensation Plan.
10(14) Form of Aggregate Stop Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on December 27, 1996 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
10(15) Form of Surety Excess of Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on December 27, 1996 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
10(16) Form of Surety Quota Share Treaty by and between Western
Surety Company and Continental Casualty Company (filed on
December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s
Form 8-K, and incorporated herein by reference).
11 Not Applicable.
21 Subsidiaries of the Registrant.
23(1) Consent of Coopers & Lybrand L.L.P. dated August 15, 1997.
23(2) Consent of Deloitte & Touche LLP dated August 15, 1997.
23(3) Consent of Sonnenschein Nath & Rosenthal dated August 15,
1997 included in opinion filed as Exhibit 5 hereto.
23(4) Consent of Mayer, Brown & Platt dated August 15, 1997.
24 Power of Attorney, dated as of August 11, 1997.
27 Financial Data Schedule.
99(1) Consent of Smith Barney Inc. dated August 15, 1997.
99(2) Consent of Adrian M. Tocklin to serve as a Director on the
CNA Surety Corporation Board of Directors.
99(3) Consent of Melvin Gray to serve as a Director on the CNA
Surety Corporation Board of Directors.
99(4) Consent of Roy E. Posner to serve as a Director on the CNA
Surety Corporation Board of Directors.
99(5) Consent of Bruce A. Esselborn to serve as a Director on the
CNA Surety Corporation Board of Directors.
99(6) Consent of Rod F. Dammeyer to serve as a Director on the CNA
Surety Corporation Board of Directors.
99(7) Consent of John T. Knox, Jr. to serve as a Director on the
CNA Surety Corporation Board of Directors.
99(8) Consent of Joe P. Kirby to serve as a Director on the CNA
Surety Corporation Board of Directors.
99(9) Consent of Giorgio Balzer to serve as a Director on the CNA
Surety Corporation Board of Directors.
</TABLE>
II-3
<PAGE> 191
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(b) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 (the "Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Act, 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.
(c) Insofar as indemnification for liabilities arising under the Act 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 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.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form S-4, 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.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) 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
Act;
(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 set forth
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 the 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
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
II-4
<PAGE> 192
(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 Act,
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 post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(g) The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 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.
II-5
<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on August 15, 1997.
CNA SURETY CORPORATION
By: /s/ MARK C. VONNAHME
------------------------------------
Mark C. Vonnahme
President and Chief Executive
Officer
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.
<TABLE>
<S> <C> <C>
* /s/ DAVID T. CUMMING 8-15-97
- --------------------------------------------------- ---------------------------- ----------------
*David T. Cumming Director (Date)
/s/ MARK C. VONNAHME 8-15-97
- --------------------------------------------------- ---------------------------- ----------------
Mark C. Vonnahme Director, President and (Date)
Chief Executive Officer
(Principal Executive
Officer)
* /s/ PETER E. JOKIEL 8-15-97
- --------------------------------------------------- ---------------------------- ----------------
*Peter E. Jokiel Director, (Date)
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
*/s/ ENID TANENHAUS 8-15-97
- --------------------------------------------------- ----------------
Enid Tanenhaus (Date)
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 1
Exhibit 3(1)
CERTIFICATE OF INCORPORATION
OF
CNA SURETY CORPORATION
===============================================================================
THE UNDERSIGNED, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, as amended to date, does hereby
certify as follows:
FIRST: The name of the corporation is CNA Surety Corporation.
SECOND: The registered office of the corporation is to be located at 1013
Centre Road, in the City of Wilmington, in the County of New Castle, in the
State of Delaware (19805). The name of its registered agent at that address is
Corporation Service Company.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware, as amended to date.
FOURTH: The total number of common shares of stock which the corporation
is authorized to issue is 1,000, and the par value of each of such shares is
$0.01.
FIFTH: The name and address of the Sole Incorporator are as follows:
Demetra A. Nicozisin
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
<PAGE> 2
SIXTH: The number of directors of the corporation shall be such as from
time to time shall be fixed by, or in the manner provided in, the by-laws.
Election of directors need not be by ballot unless the by-laws so provide.
SEVENTH: To the fullest extent that the general corporate law of the State
of Delaware, as it exists on the date hereof or as it may hereafter be amended,
permits the limitation or elimination of the liability of directors, no
director of the corporation shall be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
No amendment to or repeal of this Article shall apply to or have any effect on
liability or alleged liability of any director of the corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
EIGHTH: The Board of Directors shall have power without the assent or
vote of the stockholders to make, alter, amend, change, add to or repeal the
by-laws of the corporation.
NINTH: The corporation is to have perpetual existence.
IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of December,
1996.
/s/ Demetra A. Nicozisin
--------------------------------
Sole Incorporator
Demetra A. Nicozisin
<PAGE> 1
Exhibit 3(2)
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
CNA SURETY CORPORATION
It is hereby certified that:
FIRST: The name of the corporation (hereinafter called the "corporation")
is CNA Surety Corporation.
SECOND: The certificate of incorporation of the corporation is hereby
amended by striking out Article Fourth thereof and by substituting in lieu of
said Article Fourth the following new Article Fourth:
"FOURTH: The total number of shares which the corporation shall
have the authority to issue is One Hundred Twenty Million
(120,000,000) shares which shall consist of the following classes:
A. COMMON STOCK: The total number of shares of common stock which
the corporation shall have the authority to issue is One Hundred
Million (100,000,000) shares, par value $0.01 per share (the "Common
Stock").
B. PREFERRED STOCK: The total number of shares of preferred stock
which the corporation shall have authority to issue is Twenty Million
(20,000,000) shares, par value $0.01 per share (the "Preferred Stock").
1. Shares of Preferred Stock may be divided into and issued in
series or classes as from time to time determined by the board of
directors of the corporation, the shares of each series or class to have
such voting rights, designations, preferences, and relative,
participating, optional or special rights, and qualifications,
limitations or restrictions thereof as determined by the board
<PAGE> 2
of directors of the corporation as hereinafter provided. Each series or class
shall be so designated as to distinguish the shares thereof from the shares of
all other series and classes.
Authority is hereby expressly granted to the board of directors of the
corporation, subject to the provisions of this Article FOURTH and to the
limitations prescribed by the General Corporation Law of the State of Delaware,
to authorize the issuance of one or more series or classes of Preferred Stock
and with respect to each such series or class to fix for such series or class
the voting powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof. The authority of the board of directors of the
corporation with respect to each series or class shall include, but not be
limited to, the determination or fixing of the following: (i) the designation
of such series or class; (ii) the dividend rate of such series or class, the
conditions and dates upon which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any other class or
classes of stock or any other series of any class of stock of the corporation,
and whether such dividends shall be cumulative or non-cumulative; (iii) whether
the shares of such series or class shall be subject to redemption by the
corporation and, if made subject to such redemption, the times, prices and
other terms and conditions of such redemption; (iv) the terms and amount of any
sinking fund provided for the purchase or redemption of the shares of such
series or class; (v) whether or not the shares of such series or class shall be
convertible into or exchangeable for shares of any other class or classes of
any stock or any
-2-
<PAGE> 3
other series of any class of stock of the corporation, and, if provision is
made for conversion or exchange, the times, prices, rates, adjustments, and
other terms and conditions of such conversion or exchange; (vi) the extent, if
any, to which the holders of shares of such series or class shall be entitled
to vote with respect to the election of directors or otherwise; (vii) the
restrictions, if any, on the issue or reissue of any additional Preferred
Stock; and (viii) the rights of the holders of the shares of such series or
class upon the liquidation, dissolution, or distribution of assets of the
corporation.
2. The board of directors is authorized to alter the designation, rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and, within the limits and restrictions
stated in any resolution or resolutions of the board of directors originally
fixing the number of shares constituting any series of Preferred Stock, to
increase or decrease (but not below the number of shares of any such series
then outstanding) the number of shares of any such series subsequent to the
issue of shares of that series.
3. Each share of Preferred Stock issued by the corporation, if reacquired
by the corporation (whether by redemption, repurchase, conversion to Common
Stock or other means), shall upon such reacquisition resume the status of
authorized and unissued shares of Preferred Stock, undesignated as to series
and available for designation and issuance by the corporation in accordance
with this Article FOURTH."
-3-
<PAGE> 4
3. The amendment of the certificate of incorporation herein certified has
been duly adopted and written consent has been given in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
4. The effective time of the amendment herein certified shall be May 27,
1997.
Signed on May 27 , 1997.
--------------
/s/ Mark C. Vonnahme
------------------------------
Mark C. Vonnahme, President
-4-
<PAGE> 1
Exhibit 3(3)
BY-LAWS
OF
CNA SURETY CORPORATION
ARTICLE I
Offices
Section 1. Registered Office. The registered office shall be in the City
of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The corporation may also have offices at such
other places both within and without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
Stockholders
Section 1. Meetings. All meetings of the stockholders for the election of
directors or for any other purpose shall be held at such time and place, either
within or without the State of Delaware, as shall be designated from time to
time by the board of directors and stated in the notice of the meeting or in a
duly executed waiver of notice thereof.
Section 2. Annual Meetings. Annual meetings of stockholders shall be held
on such date and at such time as shall be designated by the board of directors
from time to time and stated in the notice of the meeting. If any annual
meeting for the election of directors shall not be held on the date designated
therefor, the board of directors shall cause the meeting to be held as soon
thereafter as is convenient. Stockholders shall elect the board of directors at
such annual meeting and transact such other business as may properly be brought
before the meeting.
Section 3. Advance Notice of Stockholder Proposed Business. At an annual
meeting of the stockholders, only such business shall be conducted as shall
have been properly brought before the meeting. To be properly brought before an
annual meeting, business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the board of directors or
otherwise properly brought before the meeting by a stockholder. In addition to
any other applicable requirements,
<PAGE> 2
for business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to the
secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation, not less than fifty days nor more than seventy-five days prior to
the meeting; provided, however, that in the event that less than sixty-five
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the fifteenth day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure was made.
A stockholder's notice to the secretary shall set forth as to each matter
the stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the stockholder proposing such business, (iii) the class
and number of shares of capital stock of the corporation which are beneficially
owned by such stockholder, and (iv) any material interest of such stockholder
in such business.
Notwithstanding anything in these by-laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 3; provided, however, that nothing in this
Section 3 shall be deemed to preclude discussion by any stockholder of any
business properly brought before the annual meeting in accordance with such
procedures.
The chairman of an annual meeting shall, if the facts so warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of Section 3, and if the
chairman should so determine, the chairman shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
Section 4. Meeting Notices. Written notice of stockholder meetings, whether
annual or special, stating the place, date and hour of the meeting shall be
given to each stockholder entitled to vote at such meeting not less than ten
or more than sixty days before the date of the meeting. Written notice of a
special meeting shall state the purpose or purposes for which the meeting is
called. Notice of any meeting of stockholders shall not be required to be given
to any stockholder who shall attend such meeting in person or by proxy, except
a stockholder who shall attend such meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting was not lawfully called or convened. Except
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<PAGE> 3
as otherwise required by law, notice of any meeting of stockholders following
an adjournment shall not be required to be given if the time and place thereof
are announced at the meeting which is adjourned.
Section 5. Voting Lists. The officer who has charge of the stock ledger of
the corporation shall prepare and make or cause to be prepared and made through
a transfer agent appointed by the board of directors, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof and may be inspected by any
stockholder who is present.
Section 6. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called at any time by the chairman of the
board of directors or by the president and shall be called by the chairman,
president or the secretary at the request in writing of a majority of the board
of directors or at the request in writing of stockholders owning a majority in
the amount of the entire capital stock of the corporation issued and
outstanding which are entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Section 7. Quorum. The holders of a majority of the stock issued and
outstanding which are entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the certificate of incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting,
-3-
<PAGE> 4
a notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Subject to the terms of Section 8 hereof, when a quorum is present at any
meeting, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of statute or of the certificate of incorporation, a different vote is required
in which case such express provision shall govern and control the decision of
such question.
Section 8. Supermajority Vote. Prior to the second anniversary of the
merger of Surety Acquisition Company into Capsure Holdings Corp., in addition
to the requirements of Section 7 of this Article, the following actions shall
require the affirmative vote of the holders of at least 75% of the outstanding
common stock: (i) any amendment to the certificate of incorporation; (ii) any
business combination between the corporation and any third party; (iii) any
proposal to sell or otherwise transfer substantially all of the assets of the
corporation; and (iv) any amendment to this Section 8.
Section 9. Voting of Shares. Unless otherwise specifically provided by
statute or the certificate of incorporation, or these by-laws each stockholder
shall at every meeting of the stockholders be entitled to one vote for each
share of the capital stock having voting power held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
Section 11. Informal Action by Stockholders. Whenever the vote of
stockholders at a meeting thereof is required or permitted to be taken for or
in connection with any corporate action, by any provision of the statutes, the
meeting and vote of stockholders may be dispensed with if all of the
stockholders who would have been entitled to vote upon the action if such
meeting were held shall consent in writing to such corporate action being
taken; or if the certificate of incorporation authorizes the action to be taken
with the written consent of the holders of less than all of the stock who would
have been entitled to vote upon the action if a meeting were held, then on the
written consent of the stockholders having not less than such percentage of the
number of votes as may be authorized in the certificate of incorporation;
provided that in no case shall the written consent be by the holders of stock
having less than the minimum percentage of the vote required by statute for the
proposed
-4-
<PAGE> 5
corporate action, and provided that prompt notice must be given to all
stockholders of the taking of corporate action without a meeting and by less
than unanimous written consent.
Section 12. Stock Ledger. The stock ledger of the corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 5 of this Article II or the books of the
corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 13. Conduct of Meeting. Unless otherwise provided by the board of
directors, the chief executive officer shall act as chairman; and the
secretary, or in his absence an assistant secretary, shall act as secretary of
the meeting. The order of business shall be determined by the chairman of the
meeting.
Section 14. Inspectors of Election. The corporation, in advance of each
meeting of stockholders, may appoint one or more inspectors of election to act
thereat. The corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act and, if no inspector or
alternate is able to act at a meeting of stockholders, the chairman shall
appoint one or more inspectors to act at the meeting.
ARTICLE III
Directors
Section 1. Number, Tenure and Qualifications. The number of directors
which shall constitute the whole board shall be eleven or such other number as
may be established from time to time by the board of directors. The directors
shall be elected at the annual meeting of the stockholders, except as provided
in Section 3 of this Article, and each director elected shall hold office until
his or her successor is elected and qualified, or until his or her earlier
resignation or removal. Directors need not be stockholders.
Section 2. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors at a meeting of stockholders. Nominations of persons for election to
the board of directors may be made at a meeting of stockholders by the board of
directors or by any nominating committee or person appointed by the board of
directors or by any stockholder of the corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures
set forth in this Section 2. Nominations by stockholders shall be made pursuant
to timely written notice to the secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed
-5-
<PAGE> 6
and received at the principal executive offices of the corporation not less
than fifty days nor more than seventy-five days prior to the meeting; provided,
however, that in the event that less than ninety-five days' notice or prior
public disclosure of the date of the meeting is given or made to the
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the fifteenth day following the day on
which such notice of the date of the meeting was mailed or such public
disclosure was made. Such stockholder's, notice to the secretary shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment of
the person, (iii) the class and number of shares of capital stock of the
corporation which are beneficially owned by the person, and (iv) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving the notice (i) the name and record address of the
stockholder, and (ii) the class and number of shares of capital stock of the
corporation which are beneficially owned by the stockholder. The corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the eligibility of such
proposed nominee to serve as a director. No person shall be eligible for
election as a director by the stockholders unless nominated in accordance with
the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and
declare at the meeting that a nomination was not made in accordance with the
foregoing procedure, and if the chairman should so determine, the chairman
shall so declare to the stockholders present at the meeting and the defective
nomination shall be disregarded.
Section 3. Vacancies. Except as otherwise provided by law, any vacancy on
the board of directors (whether because of death, resignation, removal, an
increase in the number of directors or any other cause) may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and any director so chosen shall hold office until the
next annual election and until his or her successor is duly elected and shall
qualify, or until his or her earlier resignation or removal. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute. If, at the time of filling any vacancy or newly-created
directorship, the directors then in office shall constitute less than a
majority of the whole board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of the shares at
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the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly-created
directorships, or to replace the directors chosen by the directors then in
office.
Section 4. General Powers. The business of the corporation shall be
managed under the direction of its board of directors which may exercise all
such powers of the corporation and do all such lawful acts and things as are
not by statute or by the certificate of incorporation or by these by-laws
directed or required to be exercised or done by the stockholders.
Section 5. Meetings. The board of directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 6. First Meeting. The first meeting of each newly-elected board of
directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly-elected directors in order to legally constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the
newly-elected board of directors, or in the event such meeting is not held at
the time and place so fixed by the stockholders, the meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the board of directors or as shall be
specified in a written waiver signed by all of the directors.
Section 7. Regular Meetings. Regular meetings of the board of directors
may be held without notice at such time and at such place as shall from time to
time be determined by the board.
Section 8. Special Meetings. Special meetings of the board may be called
by either the chairman of the board or the president on two days' notice to
each director, either personally or by facsimile or overnight courier; special
meetings shall be called by the president or the secretary in a like manner and
on like notice on the written request of two directors; provided, however, that
a meeting may be called on such shorter notice as the person or persons calling
such meeting may deem necessary or appropriate in the circumstances. Any
meeting of the board of directors shall be a legal meeting without any notice
thereof having been given if all the directors shall be present thereat or if
notice thereof shall be waived either before or after such meeting in writing
by all absentees therefrom provided a quorum be present thereat. Notice of any
adjourned meeting need not be given.
Section 9. Quorum. At all meetings of the board a majority of the
directors shall constitute a quorum for the transaction of
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business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board of directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum shall not be present at any meeting of the board of
directors the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 10. Organization. At each meeting of the board of directors, the
chairman of the board of directors, or in his or her absence, the president of
the corporation, or in his or her absence, a vice chairman, or in the absence
of all of said officers, a chairman chosen by a majority of the directors
present, shall preside. The secretary of the corporation, or in his or her
absence, an assistant secretary, if any, or, in the absence of both the
secretary and assistant secretaries, any person whom the chairman shall
appoint, shall act as secretary of the meeting.
Section 11. Informal Action by Directors. Unless otherwise restricted by
the certificate of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting, if all members of the board
or committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the board or
committee.
Section 12. Participation by Conference Telephone. Unless otherwise
restricted by the certificate of incorporation or these by-laws, members of the
board of directors, or any committee designated by the board, may participate
in a meeting of the board or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to
this Section shall constitute presence in person at such meeting.
Section 13. Committees. The board of directors may, by resolution passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee; provided, however, that, if the resolution of the board of
directors so provides, in the absence or disqualification of any such member or
alternate member of such committee or committees, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he,
she or they constitute a quorum, may unanimously appoint another member of the
board of directors to act at the meeting in
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the place of any such absent or disqualified member or alternate member. Any
such committee, to the extent provided in the resolution of the board of
directors, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, but no such committee shall have the power or authority in
reference to amending the certificate of incorporation, adopting an agreement
of merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution or amending the by-laws of the corporation; and,
unless the resolution expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
Such committee or committees shall have such name or names as may be determined
from time to time by resolution adopted by the board of directors. A majority
of those entitled to vote at any meeting of any committee shall constitute a
quorum for the transaction of business at that meeting. Each committee shall
keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 14. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the board of directors or committee and
may be paid a fixed sum for attendance at each meeting of the board of
directors or such committee and/or a stated salary as director. No such payment
shall preclude any director from serving the corporation in any other capacity
and receiving compensation therefor.
ARTICLE IV
Notices
Section 1. Written Notice. Whenever, under the provisions of the statutes
or of the certificate of incorporation or of these by-laws, notice is required
to be given to any director or stockholder, such notice shall be in writing and
shall be given in person or by mail to such director or stockholder. If mailed,
such notice shall be addressed to such director or stockholder at his or her
address as it appears on the records of the corporation, with postage thereon
prepaid, and shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given by
telegram, telex or facsimile transmission.
Section 2. Waiver of Notice. Whenever any notice is required to be given
under the provisions of the statutes or of the certificate of incorporation or
of these by-laws, a waiver thereof in writing, signed by the person or persons
entitled to
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said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
Officers
Section 1. Number. The officers of the corporation shall be chosen by the
board of directors and shall include a president, a treasurer and a secretary.
The board of directors, in its discretion, may also choose a chairman of the
board of directors and one or more vice chairmen of the board of directors from
among their members and one or more vice-presidents and one or more assistant
treasurers and assistant secretaries. The board of directors may appoint such
other officers and agents as it shall deem desirable who shall hold their
offices for such terms and shall exercise such powers and perform such duties
as shall be determined from time to time by the board. Any number of offices
may be held by the same person, unless the certificate of incorporation or
these by-laws otherwise provide. The officers of the corporation need not be
stockholders of the corporation.
Section 2. Election and Term of Office. The board of directors at its
first meeting after each annual meeting of stockholders shall elect the
officers of the corporation. The officers of the corporation shall hold office
until their successors are chosen and qualify.
Section 3. Removal. Any officer elected or appointed by the board of
directors may be removed, with or without cause, at any time by the affirmative
vote of a majority of the board of directors or by any committee or superior
officer upon whom such power of removal may be conferred by the board of
directors.
Section 4. Vacancies. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
Section 5. Chairman of the Board of Directors. The chairman of the board
of directors shall preside, if present, at all meetings of the board of
directors. Except where by law the signature of the president is required, the
chairman of the board of directors shall possess the same power as the
president to sign all documents of the corporation which the president may be
authorized to sign by these by-laws or by the board of directors. The chairman
of the board of directors shall see that all orders and resolutions of the
board of directors are carried into effect and shall from time to time report
to the board of directors all matters within his or her knowledge which the
interests of the corporation may require to be brought to their notice. During
the absence or disability of the president, the chairman of the
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board of directors shall exercise all the powers and discharge all the duties
of the president unless the board of directors shall designate another officer
to exercise such powers and discharge such duties. The chairman of the board of
directors shall also perform such other duties and he or she may exercise such
other powers as from time to time may be prescribed by these by-laws or by the
board of directors.
Section 6. Vice Chairmen of the Board of Directors. The vice chairmen of
the board of directors, if any, shall perform such duties and may exercise such
powers as from time to time may be prescribed by the board of directors.
Section 7. President. The president shall be the chief executive officer
of the corporation unless the board of directors shall designate another
officer as chief executive officer, and shall have general and active
management of the business of the corporation, subject to the control of the
board of directors. The president shall vote all shares of stock of any other
corporation standing in the name of this corporation except where the voting
thereof shall be expressly delegated by the board of directors to some other
officer or agent of the corporation. The president shall also perform all
duties incident to the office of the president and such other duties as may be
prescribed by these by-laws or by the board of directors from time to time.
Section 8. The Vice-Presidents. Each vice-president shall perform such
duties and have such powers as the board of directors or chief executive
officer may from time to time prescribe. At the request of the board of
directors, the vice-president (or in the event there be more than one
vice-president, the vice-presidents in the order designated, or in the absence
of any designation, then in the order of their election) shall perform the
duties of the president, and when so acting, shall have all the powers of and
be subject to all the restrictions upon the president.
Section 9. The Treasurer. If required by the board of directors, the
treasurer shall give bond for the faithful discharge of his or her duties in
such sum and with such surety or sureties as the board of directors shall
determine. The treasurer (or if there is none, the chief financial officer)
shall: (a) have charge and custody of and be responsible for all funds and
securities of the corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit all such
moneys in the name of the corporation in such banks, trust companies or other
depositories as shall be selected in accordance with the provisions of these
by-laws; (b) sign (unless the secretary or other proper officer thereunto duly
authorized by the board of directors shall sign), with the chairman of the
board of directors, or president, or a
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vice president, certificates for shares of the capital stock of the
corporation, the issue of which shall have been authorized by resolution of the
board of directors, provided that the signatures of the officers of the
corporation thereon may be facsimile as provided in these by-laws; and (c) in
general perform all the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him or her by the chief
executive officer or by the board of directors.
Section 10. The Secretary. The secretary shall: (a) keep the minutes of
the stockholders' and of the board of directors' meetings in one or more books
provided for that purpose; and at the request of the board of directors shall
also perform like duties for the standing committees thereof when required; (b)
see that all notices are duly given in accordance with the provisions of these
by-laws or as required by law; (c) be custodian of the corporate records; (d)
keep a register of the post office address of each stockholder which shall be
furnished to the secretary by such stockholder; (e) have general charge of the
stock transfer books of the corporation; (f) sign (unless the treasurer or
other proper officer thereunto duly authorized by the board of directors
shall sign), with the chairman of the board of directors, or president, or a
vice-president, certificates for shares of the capital stock of the
corporation the issue of which shall have been authorized by resolution of the
board of directors, provided that the signatures of the officers of the
corporation thereon may be facsimile as provided in these bylaws; and (g) in
general perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him or her by the chairman of
the board, the president or by the board of directors.
Section 11. Assistant Treasurers and Assistant Secretaries. The assistant
treasurers shall respectively, if required by the board of directors, give
bonds for the faithful discharge of their duties in such sums and with such
sureties as the board of directors shall determine. The assistant treasurers
and assistant secretaries, in general, shall perform such duties as shall be
assigned to them by the treasurer or the secretary, respectively, or by the
chief executive officer or the board of directors, and in the event of the
absence, inability or refusal to act of the treasurer or the secretary, the
assistant treasurers or assistant secretaries (in the order designated, or in
the absence of any designation, then in the order of their election) shall
perform the duties of the treasurer or the secretary, respectively.
Section 12. Other Officers. Such other officers as the board of directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the chief executive officer or the board of
directors. The board of directors may delegate to any other officer of the
corporation
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the power to choose such other officers and to prescribe their respective
duties and powers.
Section 13. Other Positions. The chief executive officer may authorize the
use of titles, including the titles of chairman, president and vice president,
by individuals who hold management positions with the business groups,
divisions or other operational units of the corporation, but who are not and
shall not be deemed officers of the corporation. Individuals in such positions
shall hold such titles at the discretion of the appointing officer, who shall
be the chief executive officer or any officer to whom the chief executive
officer delegates such appointing authority, and shall have such powers and
perform such duties as such appointing officer may from time to time determine.
Section 14. Salaries. The salaries of the officers shall be fixed from
time to time by the board of directors, or by one or more committees or
officers to the extent so authorized from time to time by the board of
directors, and no officer shall be prevented from receiving such salary by
reason of the fact that he or she is also a director of the corporation.
ARTICLE VI
Interested Directors and Officers
No contract or transaction between the corporation and one or more of its
directors or officers, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers or have a financial interest,
shall be void or voidable solely for this reason, or solely because the
director or officer is present at or participates in the meeting of the board
of directors or a committee thereof which authorizes the contract or
transaction, or solely because his, her or their votes are counted for such
purpose, if:
(a) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
board of directors or the committee, and the board or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) The material facts as to his or her relationship or interests
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
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(c) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified by the board of directors,
a committee thereof or the stockholders.
The common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorizes the contract or transaction.
ARTICLE VII
Indemnification of Directors and Officers
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in or called as a
witness in any Proceeding (as hereinafter defined) because he or she is an
Indemnified Person (as hereinafter defined), shall be indemnified and held
harmless by the corporation to the fullest extent permitted under the Delaware
General Corporation Law (the "DGCL"), as the same now exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that
such amendment permits the corporation to provide broader indemnification
rights than the DGCL permitted the corporation to provide prior to such
amendment). Such indemnification shall cover all expenses incurred by an
Indemnified Person (including, but not limited to, attorneys' fees and other
expenses of litigation) and all liabilities and losses (including, but not
limited to, judgments, fines, ERISA or other excise taxes or penalties and
amounts paid or to be paid in settlement) incurred by such person in connection
therewith.
Notwithstanding the foregoing, except with respect to indemnification
specified in Section 3 of this Article, the corporation shall indemnify an
Indemnified Person in connection with a Proceeding (or part thereof) initiated
by such person only if such Proceeding (or part thereof) were authorized by the
board of directors of the corporation.
For purposes of this Article:
(i) a "Proceeding" is an action, suit or proceeding, whether civil,
criminal, administrative or investigative, and any appeal therefrom;
(ii) an "Indemnified Person" is a person who is, was, or had agreed
to become a director or an officer or a Delegate, as defined herein, of
the corporation or the legal representative of any of the foregoing; and
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(iii) a "Delegate" is a person serving at the request of the
corporation or a subsidiary of the corporation as a director, trustee,
fiduciary, or officer of such subsidiary or of another corporation,
partnership, joint venture, trust or other enterprise.
Section 2. Expenses. Expenses, including attorneys' fees, incurred by a
person indemnified pursuant to Section 1 of this Article in defending or
otherwise being involved in a Proceeding shall be paid by the corporation in
advance of the final disposition of such Proceeding, including any appeal
therefrom, upon receipt of an undertaking (the "Undertaking") by or on behalf
of such person to repay such amount if it shall ultimately be determined that
he or she is not entitled to be indemnified by the corporation; provided, that
in connection with a Proceeding (or part thereof) initiated by such person,
except a Proceeding authorized by Section 3 of this Article, the corporation
shall pay said expenses in advance of final disposition only if such Proceeding
(or part thereof) were authorized by the board of directors. A person to whom
expenses are advanced pursuant hereto shall not be obligated to repay pursuant
to the Undertaking until the final determination of any pending Proceeding in a
court of competent jurisdiction concerning the right of such person to be
indemnified or the obligation of such person to repay pursuant to the
Undertaking.
Section 3. Protection of Rights. If a claim under Section 1 of this Article
is not promptly paid in full by the corporation after a written claim has been
received by the corporation or if expenses pursuant to Section 2 of this
Article have not been promptly advanced after a written request for such
advancement accompanied by the Undertaking has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim or the advancement of
expenses. If successful, in whole or in part, in such suit, such claimant shall
also be entitled to be paid the reasonable expense thereof (including, without
limitation, attorneys' fees). It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending
any Proceeding in advance of its final disposition where the required
Undertaking has been tendered to the corporation) that indemnification of the
claimant is prohibited by law, but the burden of proving such defense shall be
on the corporation. Neither the failure of the corporation (including its board
of directors, independent legal counsel or its stockholders) to have made a
determination, if required, prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances, nor an actual
determination by the corporation (including its board of directors, independent
legal counsel or its stockholders) that indemnification of the claimant is
prohibited,
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shall be a defense to the action or create a presumption that indemnification
of the claimant is prohibited.
Section 4. Miscellaneous.
(i) Non-Exclusivity of Rights. The rights conferred on any person by this
Article shall not be exclusive of any other rights which such person may
have or hereafter acquire under any statute, provision of the certificate
of incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise. The board of directors shall have the authority,
by resolution, to provide for such indemnification of employees or agents
of the corporation or others and for such other indemnification of
directors, officers or Delegates as it shall deem appropriate.
(ii) Insurance, Contracts and Funding. The corporation may maintain
insurance, at its expense, to protect itself and any director, officer,
employee, or agent of, or person serving in any other capacity with, the
corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expenses, liabilities or losses, whether or
not the corporation would have the power to indemnify such person against
such expenses, liabilities or losses under the DGCL. The corporation may
enter into contracts with any director, officer or Delegate of the
corporation in furtherance of the provisions of this Article and may
create a trust fund, grant a security interest or use other means
(including, without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect the advancing of expenses
and indemnification as provided in this Article.
(iii) Contractual Nature. The provisions of this Article shall be
applicable to all Proceedings commenced or continuing after its adoption,
whether such arise out of events, acts or omissions which occurred prior
or subsequent to such adoption, and shall continue as to a person who has
ceased to be a director, officer or Delegate and shall inure to the
benefit of the heirs, executors and administrators of such person. This
Article shall be deemed to be a contract between the corporation and each
person who, at any time that this Article is in effect, serves or agrees
to serve in any capacity which entitles him to indemnification hereunder
and any repeal or other modification of this Article or any repeal or
modification of the DGCL or any other applicable law shall not limit any
Indemnified Person's entitlement to the advancement of expenses or
indemnification under this Article for Proceedings then existing or later
arising out of events, acts or omissions occurring prior to such repeal or
modification, including, without limitation, the right to
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indemnification for Proceedings commenced after such repeal or
modification to enforce this Article with regard to Proceedings arising
out of acts, omissions or events occurring prior to such repeal or
modification.
(iv) Severability. If this Article or any portion hereof shall be
invalidated or held to be unenforceable on any ground by any court of
competent jurisdiction, the decision of which shall not have been reversed
on appeal, such invalidity or unenforceability shall not affect the other
provisions hereof, and this Article shall be construed in all respects as
if such invalid or unenforceable provisions had been omitted therefrom.
ARTICLE VIII
Certificates Of Stock and Their Transfer
Section 1. Certificates of Stock. Every holder of stock in the corporation
shall be entitled to have a certificate, in such form as the board of directors
shall prescribe, signed in the name of the corporation by (i) the chairman of
the board of directors, president or a vice-president and (ii) by the treasurer
or an assistant treasurer or the secretary or an assistant secretary of the
corporation, certifying the number and class of shares owned by him or her in
the corporation. Any of or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
Section 2. Records of Certificates. A record shall be kept of the name of
the person, firm or corporation of record holding the stock represented by such
certificates and the dates thereof, and in case of cancellation, the dates of
cancellation. Every certificate surrendered to the corporation for exchange or
transfer shall be cancelled and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 3 of this
Article VIII.
Section 3. Lost Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates therefore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
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authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his or her legal representative, to advertise the same in such
manner as it shall require and/or to give the corporation a bond in such sum as
it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen
or destroyed.
Section 4. Transfers of Stock. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 5. Transfer and Registry Agents. The corporation may maintain a
transfer office or agency where its stock shall be directly transferable and a
registry office, which may be identical with the transfer or agency, where its
stock shall be registered; and the corporation may, from time to time, maintain
one or more other transfer offices or agencies, and registry offices; and the
board of directors may from time to time define the duties of such transfer
agents and registrars and make such rules and regulations as it may deem
expedient, not inconsistent with these by-laws, concerning the issue, transfer
and registration of certificates for shares of the capital stock of the
corporation.
Section 6. Fixing Record Date. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the board of directors may fix,
in advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
Section 7. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the
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owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE IX
General Provisions
Section 1. Execution of Documents. The chief executive officer, or any
other officer, employee or agent of the corporation designated by the board of
directors or designated in accordance with corporate policy approved by the
board of directors, shall have the power to execute and deliver proxies, stock
powers, deeds, leases, contracts, mortgages, bonds, debentures, notes, checks,
drafts and other orders for payment of money and other documents for and in the
name of the corporation, and such power may be delegated (including the power
to redelegate) by the chief executive officer or to the extent provided in such
corporate policy by written instrument to other officers, employees or agents
of the corporation.
Section 2. Dividends. Subject to the provisions of the certificate of
incorporation, dividends upon the capital stock of the corporation, if any, may
be declared by the board of directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property or in shares of the
capital stock, subject to the provisions of the certificate of incorporation.
Before payment of any dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors from time
to time, in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interest of the corporation and the
directors may modify or abolish any such reserve in the manner in which it was
created.
Section 3. Fiscal Year. The fiscal year of the corporation shall end on
the last day of December in each year.
ARTICLE X
Amendments
Except as otherwise provided in these by-laws, these by-laws may be
altered, amended or repealed, in whole or in part, or new by-laws may be
adopted by the stockholders or the board of directors; provided, however, that
notice of such alteration,
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amendment, repeal or adoption of new by-laws be contained in the notice of such
meeting of stockholders or board of directors as the case may be. Except as
otherwise provided in these by-laws, all such amendments must be approved by
either the holders of a majority of the outstanding capital stock entitled to
vote thereon or by the board of directors.
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<PAGE> 1
Exhibit 4(1)
SPECIMEN CERTIFICATE OF CNA SURETY CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF
DELAWARE
NUMBER SHARES
CNA SURETY CORPORATION
This Certifites That * * * SPECIMEN * * * * is the owner of
___________________________full paid and non-assessable
COMMON SHARES $0.01 PAR VALUE OF CNA Surety Corporation
transferable on the books of the Corporation in person or by duly authorized
Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Cerftificate to be
signed by its duly authorized officers and sealed with the Seal of the
Corporation,
this____________ day of _________________ A.D. 19________
________________________ _____________________________
SECRETARY PRESIDENT
[SEAL]
<PAGE> 1
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of _________________________, 1997
("Agreement"), between CNA Surety Corporation, a Delaware corporation (the
"Company") and Equity Capsure Limited Partnership, an Illinois limited
partnership (the "Major Stockholder").
RECITALS
(A) Pursuant to the Reorganization Agreement (the "Reorganization
Agreement") by and among Capsure Holdings Corp., a Delaware corporation
("Capsure"), Continental Casualty Company, an Illinois corporation ("Parent"),
the Company and Surety Acquisition Company, a Delaware corporation, dated as of
December 19, 1996, the Major Stockholder agreed to, among other things, vote
all of the 4,039,622 shares of common stock, $.05 par value per share of
Capsure, held by it in favor of the adoption of the Merger.
(B) As a condition to the consummation of the Merger contemplated by the
Reorganization Agreement, the Company and the Major Stockholder have entered
into this Agreement to provide certain securities registration rights with
respect to the shares of CNA Surety Common Stock issued to the Major
Stockholder.
Capitalized terms used in this Agreement without definition shall have the
respective meanings given to them in the Reorganization Agreement.
AGREEMENTS
In consideration of the mutual covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
Section 1. Effectiveness of Registration Rights. The registration rights
pursuant to Sections 2 and 3 hereof shall become effective as of the first day
of the sixth month following the Closing Date and terminate on the 3rd
anniversary of the Closing Date; provided, that the rights set forth herein
shall continue as necessary to effect a written notice submitted prior to the
termination of this Agreement.
Section 2. Registration on Request.
2.1 Notice. Upon written notice from the Major Stockholder or the Holders
(as defined in Section 8 hereof) of at least a majority of the Registrable
Securities (as defined in Section 9 hereof) requesting (i) that the Company
effect the registration under the Securities Act of all or part of the
Registrable Securities held by it or them or (ii) that the Company effect the
registration under the Securities Act of all but not less than all of the
Registrable Securities on a Form S-3 registration statement pursuant to Rule
415 under the Securities Act (or any similar rule) ("shelf registration"),
which notice shall specify the intended method or methods of disposition of
such Registrable Securities, the Company shall use its best efforts to effect
(at the
<PAGE> 2
earliest possible date) the registration, under the Securities Act, of such
Registrable Securities for disposition in accordance with the intended method
or methods of disposition stated in such request, provided that:
(a) except in the case of a shelf registration, if the Company shall have
previously effected a registration with respect to Registrable Securities
pursuant to this Section 2 or Section 3 hereof, the Company shall not be
required to effect a registration pursuant to this Section 2 until a period
of 120 days shall have elapsed from the effective date of the most recent
such previous registration;
(b) if, in the reasonable judgment of the Company, a registration at the
time and on the terms requested would adversely affect any public financing
by the Company that had been contemplated by the Company prior to the notice
by such Holder requesting registration, the Company shall not be required to
commence using its best efforts to effect a registration pursuant to this
Section 2 until the earlier of (i) 60 days after the completion or
abandonment of such financing and (ii) the termination of any "black out"
period required by the underwriters, if any, in connection with such
financing;
(c) the Company shall not be required to file a registration statement if,
as a result, the Company would be required to include in such registration
statement (i) audited financial statements as of any date other than a fiscal
year end or (ii) pro forma financial statements pursuant to Regulation S-X
under the Securities Act if such pro forma statements cannot be reasonably
prepared in a timely fashion, until such audited financial statements or such
pro forma financial statements have been prepared; provided that the Company
shall use its reasonable efforts to prepare on a timely basis any audited
financial statements or pro forma financial statements required to be
included;
(d) if the Company determines, based on the good faith judgment of the
Company's general counsel, that the filing of a registration statement would
require the disclosure of material information which the Company has a bona
fide business purpose for preserving as confidential or the Company is unable
to comply with Securities and Exchange Commission requirements, the Company
shall not be required to commence using its best efforts to effect a
registration pursuant to this Section 2 until the earlier of (i) the date
upon which such material information is disclosed to the public (it being
understood that nothing herein shall require such disclosure) or ceases to be
material or (ii) 90 days after the Company makes such good faith
determination; and
(e) if, at any time the Company informs the Holder or Holders that it
believes that any fact or circumstance concerning the Company exists which,
in the opinion of the Company, constitutes material information which has not
been publicly disclosed and which the Company believes, in its sole opinion,
it is inappropriate or inadvisable to so disclose, the Company may instruct
orally (such oral instructions to be confirmed promptly in writing) such
Holder or Holders not to sell any of its or their Registrable Securities
until the Company either (i) discloses such fact or circumstance and delivers
to the Holder or Holders (in the context of a public offering) copies of an
amended or
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supplemented prospectus in accordance with the provisions of Section 4.1
hereof, or (ii) delivers written notice to each Holder that it may proceed
with such sale; provided, that no such limitation on the Holders' ability to
sell its Registrable Securities shall continue for more than a period of 60
business days.
(f) the Holders, cumulatively, shall have the right to exercise
registration rights pursuant to this Section 2.1 only once.
If in any case the Company shall under any of foregoing clauses (a) through (d)
postpone the filing of a registration statement requested by a Holder or
Holders, the Holder or Holders shall have the right to withdraw, in whole but
not in part, the request for registration by giving written notice to the
Company 30 days after receipt of the notice of postponement, and in the event
of such withdrawal such request shall not be counted as the exercise of the
right permitted under the foregoing clause (f) to this Section 2.1. In
addition, in no event shall a registration request be counted if the
Registrable Securities with respect to which a request is made are not
registered pursuant to an effective registration statement due to default by
the Company of its obligations hereunder. If the Company shall have filed a
shelf registration with respect to the Registrable Securities, the Company may
withdraw such registration statement upon the third anniversary date of the
Closing Date.
2.2 Third Person Shares. The Company shall have the right to cause the
registration of securities for sale for the account of any person (excluding
the Company in a primary offering of its voting securities) in any registration
of Registrable Securities requested pursuant to this Section 2, provided that
the Company shall not have the right to cause the registration of such
securities if:
(a) in the reasonable judgment of the Holder or Holders requesting such
registration pursuant to this Section 2, registration of such securities
would adversely affect the offering and sale of Registrable Securities then
contemplated by the Holders; or
(b) such Holder or Holders do not receive assurances satisfactory to it or
them that the person for which such securities are being registered will pay
any transfer taxes applicable to their securities being registered, all
commissions, discounts and other compensation payable to the underwriters
(including fees and expenses of underwriters' counsel other than those
referred to in clause (iv) of the definition of Registration Expenses) in
respect of such securities and the fees and expenses of their own counsel
(provided that for purposes of this clause (b), the guarantee by the Company
to each Holder of payment of such amounts shall be satisfactory assurance to
the Holders).
2.3 Registration Expenses. The Company shall pay or cause to be paid all
Registration Expenses in connection with any registration pursuant to this
Section 2; provided that with respect to any such registration each Holder
requesting such registration shall bear any transfer taxes applicable to such
Holder's Registrable Securities registered thereunder, all commissions,
discounts or other compensation payable to the underwriters in respect of such
Registrable Securities and the fees and expenses of such Holder's own counsel;
and provided further that
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in no event shall any Holder be required to pay any internal costs of the
Company or the Company be required to pay any internal costs of any Holder.
Section 3. Incidental Registration.
3.1 Notice and Registration. If the Company proposes to register any of its
voting securities ("Other Securities") for public sale under the Securities
Act, on a form and in a manner which would permit registration of Registrable
Securities for sale to the public under the Securities Act, it will give prompt
written notice to each Holder of its intention to do so, and upon the written
request of a Holder delivered to the Company within fifteen Business Days after
the giving of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such Holder and the intended method of
disposition thereof) the Company will use its best efforts to effect, in
connection with the registration of the Other Securities, the registration
under the Securities Act of all Registrable Securities which the Company has
been so requested to register by such Holder, to the extent required to permit
the disposition (in accordance with the intended method or methods thereof as
aforesaid) of the Registrable Securities so to be registered, provided that:
(a) if, at any time after giving such written notice of its intention to
register any Other Securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company receives the written opinion of the managing underwriters of such
offering or offerings that the aggregate amount of shares to be registered by
the Holders of the Registrable Securities could materially and adversely
affect such offering, then the Company may reduce the number of Registrable
Securities of such Holders to be included in such offering; provided, that
such Holders will be entitled to register the maximum number of Registrable
Securities which the underwriters deem advisable in such written opinion
(without regard to the limitations set forth in Section 7) and the Company
will allocate the number of Registrable Shares to be registered for each such
Holder on a pro rata basis in accordance with the number of shares each
Holder initially requested to be sold;
(b) the Company shall not be required to effect any registration of
Registrable Securities under this Section 3 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange
offers, dividend reinvestment plans or stock option or other employee benefit
plans; and
(c) Holders, cumulatively, shall have the right to exercise registration
rights pursuant to this Section 3 without limit during the term hereof.
No registration of Registrable Securities effected under this Section 3 shall
relieve the Company of its obligation to effect registrations of Registrable
Securities pursuant to Section 2.
3.2 Registration Expenses. The Company will pay all Registration Expenses
in connection with any registration pursuant to this Section 3; provided that
with respect to any such registration a Holder requesting such registration
shall bear all transfer taxes applicable to such Holder's Registrable
Securities registered thereunder, as such Holder's pro rata share of
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<PAGE> 5
all commissions, discounts or other compensation payable to the underwriters in
respect of such Registrable Securities and the fees and expenses of a Holder's
own counsel; and provided, further, that in no event shall any Holder be
required to pay any internal costs of the Company or the Company be required to
pay any internal costs of any Holder.
Section 4. Registration Procedures.
4.1 Registration and Qualification.
(a) If and whenever the Company is required to use its best efforts to
effect the registration of any Registrable Securities under the Securities
Act as provided in Sections 2 and 3, the Company will as promptly as is
practicable:
(i) prepare, file and use its best efforts to cause to become effective
a registration statement under the Securities Act regarding the Registrable
Securities to be offered;
(ii) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities until the
earlier of such time as all of such Registrable Securities have been disposed
of in accordance with the intended methods of disposition by the Holder set
forth in such registration statement or the expiration of five months after
such registration statement becomes effective (except in the case of a shelf
registration statement on Form S-3 the parties shall mutually agree upon an
appropriate expiration period which in no event shall be later than the end
of the term of this Agreement);
(iii) furnish to each Holder and to any underwriter of such Registrable
Securities such number of conformed copies of such registration statement and
of each such amendment and supplement thereto (in the case of a Holder or
managing underwriter, including all exhibits), such number of copies of the
prospectus included in such registration statement (including each
preliminary prospectus and any summary prospectus) or filed under the
Securities Act, in conformity with the requirements of the Securities Act,
such documents as may be incorporated by reference in such registration
statement or prospectus, and such other documents, as each Holder or such
underwriter may reasonably request;
(iv) use its best efforts to register or qualify all Registrable
Securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as a Holder or any underwriter of such
Registrable Securities shall reasonably request, and do any and all other
acts and things which may be necessary or advisable to enable each Holder or
any underwriter to consummate the disposition in such jurisdictions of its
Registrable Securities covered by such registration statement, except that
the Company shall not for any such purpose be required to qualify generally
to do business as a foreign corporation in any jurisdiction wherein it is not
so qualified, or to
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<PAGE> 6
subject itself to taxation in any such jurisdiction, or to consent to general
service of process in any such jurisdiction;
(v) furnish to each such Holder and the underwriters, addressed to them,
(A) an opinion of counsel for the Company, dated the date of the closing
under the underwriting agreement relating to any underwritten offering, and
(B) a "comfort" letter signed by the independent public accountants who have
certified the Company's financial statements included in such registration
statement, covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case
of such accountants' letter, with respect to events subsequent to the date of
such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters, respectively, delivered to underwriters
in underwritten public offerings of securities and such other matters as a
Holder may reasonably request;
(vi) immediately notify each such Holder at any time when a prospectus
relating to a registration pursuant to Section 2 or 3 is or was required to
be delivered under the Securities Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as
then in effect, includes or included an untrue statement of a material fact
or omits or omitted to state any material fact required to be stated therein
or necessary, in the light of the circumstances then existing, to make the
statements therein not misleading, and at the request of each such Holder
prepare and furnish to such Holder a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary, in
the light of the circumstances then existing, to make the statements therein
not misleading; and
(vii) use reasonable efforts to do any and all other acts any Holder may
reasonably request and which are customary for a registration of equity
securities.
The Company may require each Holder to furnish the Company such information
regarding such Holder and the distribution of such securities as the Company
may from time to time reasonably request in writing and as shall be required by
law or by the SEC in connection with any registration.
(b) Each Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section
4.1(a)(vi) thereof, such Holder shall use its best effort to discontinue
forthwith disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by Section
4.l(a)(vi) hereof.
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<PAGE> 7
4.2 Underwriting.
(a) If requested by the managing underwriter for any underwritten
offering of Registrable Securities pursuant to a registration requested
hereunder, the Company will enter into an underwriting agreement with the
underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with
respect to secondary distributions, including, without limitation,
indemnities and contribution to the effect provided in Section 6 and the
provision of opinions of counsel and accountants' letters to the effect
provided in Section 4.1(a)(v). Each Holder involved shall be a party to any
such underwriting agreement and the representations and warranties by, and
the other agreements on the part of, the Company to and for the benefit of
such underwriters, shall also be made to and for the benefit of each such
Holder.
(b) In the event that any registration pursuant to Section 3 shall
involve, in whole or in part, an underwritten offering, the Company may
require the Registrable Securities requested to be registered pursuant to
Section 3 by any Holder, to be included in such underwriting on the same
terms and conditions as shall be applicable to the Other Securities being
sold through underwriters under such registration. In any such case, the
requesting Holder shall be a party to any such underwriting agreement. Such
agreement shall contain such representations, warranties and covenants by
each such Holder and such other terms and provisions as are customarily
contained in underwriting agreements with respect to secondary distributions,
including, without limitation, indemnities and contribution to the effect
provided in Section 6. The representations and warranties in such
underwriting agreement by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters, shall also be made to
and for the benefit of such Holder.
Section 5. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Registrable
Securities under the Securities Act, the Company will give each Holder involved
and the underwriters, if any, and their respective counsel and accountants
(collectively, the "Inspectors"), such reasonable and customary access to its
books and records (collectively, the "Records") and such opportunities to
discuss the business of the Company with its officers and the independent
public accountants who have certified its financial statements as shall be
necessary, in the opinion of such Holder and such underwriters or their
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act. Records which the Company reasonably determines to be
confidential and which it notifies the Inspectors in writing are confidential
shall not be disclosed by the Inspectors unless (i) the disclosure of such
Records is necessary or appropriate to avoid or correct a misstatement or
omission in the registration statement, (ii) the portion of the Records to be
disclosed has otherwise become publicly known, (iii) the information in such
Records is to be used in connection with any litigation or governmental
investigation or hearing relating to any registration statement or (iv) the
release of such Records is ordered pursuant to a subpoena or other order. Each
Holder agrees that it will, upon learning that disclosure of such Records is
sought in a court of competent jurisdiction, give notice to the Company.
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Section 6. Indemnification and Contribution.
(a) In the event of any registration of any Registrable Securities
hereunder, the Company will enter into customary indemnification arrangements
to indemnify and hold harmless a Holder, its general and limited partners,
directors and officers, each other person who participates as an underwriter
in the offering or sale of such securities, each officer and director of each
underwriter, and each other person, if any, who controls such Holder or any
such underwriter within the meaning of the Securities Act against any losses,
claims, damages, liabilities and expenses, joint or several, to which such
person may be subject under the Securities Act or otherwise insofar as such
losses, claims, damages, liabilities or expenses (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus or final prospectus included
therein or filed under the Securities Act, or any amendment or supplement
thereto, or any document incorporated by reference therein, or (ii) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and the Company will reimburse each such person for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, any such preliminary prospectus or final prospectus,
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by a Holder or an underwriter for use in
the preparation thereof; and provided, further, that the Company shall not be
liable to any person who participates as an underwriter in the offering or
sale of Registrable Securities or any other person who controls such
underwriter within the meaning of the Securities Act under the indemnity
agreement in this subsection (a) with respect to any preliminary prospectus
to the extent that any such loss, claim, damage or liability or expense (or
actions or proceedings in respect thereof) of such person results from the
fact that such underwriter sold Registrable Securities to a purchaser to whom
there was not sent or given, at or prior to the written confirmation of such
sale, a copy of the prospectus (excluding documents incorporated by
reference) or of the prospectus as then amended or supplemented (excluding
documents incorporated by reference) in any case where such delivery is
required by the Securities Act if the Company has previously made available
copies thereof to such underwriter and the loss, claim, damage or liability
of such person results from an untrue statement or omission of a material
fact contained in the preliminary prospectus which was corrected in the
prospectus (or the prospectus as amended or supplemented). Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of a Holder or any such underwriter and shall survive the
transfer of such securities by a Holder. The Company also shall agree to
provide provision for contribution as shall be reasonably requested by a
Holder or any underwriters regarding circumstances where such indemnity may
be held unenforceable.
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(b) A Holder, by virtue of exercising its registration rights hereunder,
agrees and undertakes severally, and the Company may require, as a condition
to filing a registration statement, that the Company shall have received from
the underwriters an agreement to enter into customary indemnification
arrangements to indemnify and hold harmless (in the same manner and to the
same extent as set forth in clause (a) of this Section 6) the Company, each
director of the Company, each officer of the Company who shall sign such
registration statement, each other person who participates as an underwriter
in the offering or sale of such securities, each officer and director of each
underwriter, and each other person, if any, who controls the Company or any
such underwriter within the meaning of the Securities Act, with respect to
any statement in or omission from such registration statement, any
preliminary prospectus or final prospectus included therein, or any amendment
or supplement thereto, if such statement or omission was made in reliance
upon and in conformity with written information furnished by it to the
Company. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company or any such director,
officer or controlling person and shall survive the transfer of the
Registrable Securities by such Holder of Registrable Securities. Each Holder
also shall agree to provide provision for contribution as shall reasonably be
requested by the Company or any underwriters regarding circumstances where
such indemnity may be held unenforceable.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any indemnified person in respect of which
indemnity may be sought pursuant to this Section, such indemnified person
shall promptly notify the indemnifying person in writing and the indemnifying
person, upon request of the indemnified person, promptly shall retain counsel
satisfactory to the indemnified person to represent the indemnified person
and any others the indemnifying person may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified person shall have the
right to retain its own counsel, but the fees and disbursements of such
counsel shall be at the expense of such indemnified person unless (i) the
indemnifying person shall have failed to retain counsel for the indemnified
person as aforesaid, (ii) the indemnifying person and such indemnified person
shall have mutually agreed to the retention of such counsel or (iii) in the
reasonable opinion of such indemnified person representation of such
indemnified person by the counsel retained by the indemnifying person would
be inappropriate due to actual or potential differing interests between such
indemnified person and any other person represented by such counsel in such
proceeding. The indemnifying person shall not be liable for any settlement
of any proceeding effected without its written consent (which shall not be
unreasonably withheld) but if settled with such consent or if there be a
final judgment for the plaintiff, the indemnifying person agrees to indemnify
the indemnified person from and against any loss or liability by reason of
such settlement or judgment.
(d) Indemnification and contribution similar to that specified in the
preceding subdivisions of this Section 6 (with appropriate modifications)
shall be given by the Company and each Holder with respect to any required
registration or other qualification
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of such Registrable Securities under any federal or state law or regulation of
governmental authority other than the Securities Act.
Section 7. Limitation on Rights. Each Holder agrees that no requests for
registration shall be made hereunder for less than 500,000 shares, in
aggregate, of Registrable Securities.
Section 8. Definition of Holder. The term "Holder" means the Major
Stockholder and shall also mean any Permitted Assignee (as defined hereinafter)
that is a holder of Registrable Securities; provided that in the case of such
Permitted Assignee, the Major Stockholder shall have assigned rights hereunder
in writing and the Permitted Assignee shall have agreed in writing, addressed
to the Major Stockholder and the Company, to be bound hereby; and provided
further, that there shall be no more than 20 Permitted Assignees considered
Holders hereunder at any one time without the consent of the Company, which
consent will not be unreasonably withheld. For purposes of this Agreement, a
"Permitted Assignee" shall mean (i) an affiliate (as defined under the Exchange
Act, as defined in the Reorganization Agreement) of the Holder or its partners,
(ii) a lender or other pledgee of Registrable Securities as collateral or
(iii) a charitable foundation receiving Registrable Securities from the Holder
or an affiliate of the Holder. Rights hereunder assigned to any Permitted
Assignee covered by clauses (ii) or (iii) in the preceding sentence shall not,
without the consent of the Company, be further assignable by such Permitted
Assignee other than to a successor to all or substantially all of such
Permitted Assignee's business or assets which successor shall have agreed in
writing to be bound hereby. The Company shall not be obligated to effect any
registration pursuant to Section 3 hereof if, in the written opinion of counsel
to the Company who shall be reasonably satisfactory to any affected Holder, the
intended method or methods of disposition of any Registrable Securities by such
Holder may be effected without registration under the Securities Act.
Section 9. Definition of Registrable Securities. The term "Registrable
Securities" shall mean (a) the common stock of the Company held by the Major
Stockholder on the date hereof (and __________ shares of Common Stock held by
_________________________ (charitable foundation) on the date hereof), (b) any
common stock referred to in clause (a) held by a Permitted Assignee, (c) any
common stock issued or issuable with respect to the securities referred to in
clause (a) by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, and (d) any common stock issued or issuable pursuant to the
exercise of stock options. For purposes of determining the aggregate amount of
Registrable Securities outstanding at any time, shares with respect to which
the Company shall not be obligated to effect registration pursuant to the last
sentence of Section 8 hereof shall not be deemed Registrable Securities.
Section 10. Entire Agreement. This Agreement and the agreements referenced
herein constitute the entire agreement between the parties hereto with respect
to the subject matter hereof.
Section 11. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by fax, by
nationally-recognized overnight delivery service
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<PAGE> 11
or by registered or certified mail (postage prepaid, return receipt requested),
to the other party as follows:
if to the Company:
CNA Surety Corporation
c/o CNA Insurance Companies
CNA Plaza; 42 South
Chicago, IL 60685
Attention: David T. Cumming, Group Vice President
& Associate General Counsel
Facsimile: (312) 822-1186
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
Attention: Mitchell L. Hollins
Arthur J. Simon
Facsimile: (312) 876-7934
If to any Holder, addressed to such Holder at such Holder's address as shown
on the books of the Company or its transfer agent or to such other address or
person as the person to whom notice is given may have previously furnished to
the other in writing in the manner set forth above.
Section 12. GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW; HOWEVER, ANY ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT SHALL BE BROUGHT ONLY IN AND DECIDED BY THE FEDERAL
OR STATE COURTS IN CHICAGO, ILLINOIS, SUCH COURTS BEING A PROPER FORUM IN WHICH
TO ADJUDICATE SUCH ACTION OR PROCEEDING, AND EACH PARTY HEREBY WAIVES ANY CLAIM
OF INCONVENIENT FORUM.
Section 13. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement.
Section 14. Amendments; Severability. This Agreement may be amended,
modified or supplemented only by a written instrument executed by the Company
and the Major Stockholder or the Holders of a majority of the Registrable
Securities hereunder. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity and enforceability of the other provisions hereof. If any
provision
-11-
<PAGE> 1
EXHIBIT 5
[SONNENSCHEIN NATH & ROSENTHAL LETTERHEAD]
MITCHELL L. HOLLINS
(312) 876-8144
August 15, 1997
CNA Surety Corporation
CNA Plaza
Chicago, Illinois 60685
Re: CNA Surety Corporation Registration Statement on Form S-4
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-4 (the
"Registration Statement") filed by CNA Surety Corporation, a Delaware
corporation (the "Company"), with the Securities and Exchange Commission
relating to 16,784,371 shares of Common Stock, par value $0.01 per share (the
"Common Stock"), offered in connection with the merger of Capsure Holdings
Corp. with a wholly-owned subsidiary of the Company, please be advised that as
counsel to the Company, upon examination of such corporate documents and
records as we have deemed necessary or advisable for purposes hereof, it is our
opinion that:
1. The Company is a validly existing corporation in good standing
under the laws of the State of Delaware.
2. The Common Stock offered pursuant to the Registration Statement,
when issued as contemplated in the Registration Statement, will be
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement, and to reference to our firm under the heading "Legal
Matters" in the Proxy Statement/Prospectus included as part of the Registration
Statement.
Very truly yours,
SONNENSCHEIN NATH & ROSENTHAL
By: /s/ Mitchell L. Hollins
Mitchell L. Hollins
<PAGE> 1
EXHIBIT 8
[MAYER, BROWN & PLATT LETTERHEAD]
PHONE NUMBER
August 15, 1997
Capsure Holdings Corp.
Two North Riverside Plaza
Chicago, IL 60606
Re: Tax Opinion for Transaction with Continental
Casualty Company and its Affiliates
Ladies and Gentlemen:
We have acted as counsel to Capsure Holdings Corp., a Delaware corporation
("Capsure"), in connection with a proposed transaction pursuant to which Surety
Acquisition Company ("Acquisition"), a Delaware corporation which is a
wholly-owned subsidiary of CNA Surety Corporation ("Newco"), will be merged with
and into Capsure (the "Merger"). Upon consummation of the Merger, each issued
and outstanding share of Capsure common stock will be converted into the right
to receive shares of Newco common stock, as provided in detail in the
Reorganization Agreement dated as of December 19, 1996 among Capsure,
Continental Casualty Company, ("Continental"), certain affiliates of Continental
(collectively with Continental, the "Continental Group"), Newco and Acquisition
(the "Reorganization Agreement") and amended pursuant to the First Amendment to
the Reorganization Agreement dated as of July 14, 1997 (the "Amended
Reorganization Agreement"). The opinions set forth below are based upon the
Internal Revenue Code of 1986, as amended (the "Code"), the legislative history
with respect thereto, rules and regulations promulgated thereunder, published
rulings and court decisions, all as in effect and existing on the date hereof,
and all of which are subject to change at any time, possibly on a retroactive
basis.
In addition, with respect to the opinions set forth below, we have relied
upon the Reorganization Agreement and the Amended Reorganization Agreement and
upon representations of Capsure, the Continental Group, Newco, Acquisition, and
certain holders of Capsure common stock concerning certain facts underlying and
relating to the proposed transactions. We have further assumed that disclosure
documents to be issued in connection with the transaction will describe the
proposed transactions in a manner consistent with these agreements and the
representations.
Based on the foregoing, we offer the following opinions:
1. The Merger will be treated as an exchange within the meaning of
Section 351(a) of the Code or a reorganization within the meaning of
section 368(a) of the Code.
<PAGE> 2
[MAYER, BROWN & PLATT LETTERHEAD]
Capsure Holdings Corp.
August 15, 1997
Page 2
2. Except, possibly, to the extent cash is received pursuant to
dividends paid or declared at or prior to the Merger (which will be treated
in whole or in part as ordinary dividend income to the extent of Capsure's
current or accumulated earnings and profits or, possibly, as capital gain
if such dividend is treated as consideration in the Merger), no gain or
loss will be recognized by Capsure or its shareholders as a result of the
exchange of Capsure common stock for Newco common stock pursuant to the
Merger.
Except as provided above, this opinion does not address the tax treatment
of any dividends declared or paid at or prior to the Merger. In addition, there
is no assurance that our conclusions will not be rendered invalid as a result of
subsequent changes in the law, including changes to the Code or the
interpretation thereof by the courts or the Internal Revenue Service. The
opinions rendered herein are solely for your benefit and may not be relied upon
by any person or entity or for any purpose without prior written consent.
Very truly yours,
/s/ MAYER, BROWN & PLATT
MAYER, BROWN & PLATT
<PAGE> 1
Exhibit 10(5)
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of this 22nd day of
September, 1994, by and among UNIVERSAL SURETY HOLDING CORP. (the "Parent") a
Texas corporation, UNIVERSAL SURETY OF AMERICA (the "Company" or the
"Employer"), a Texas insurance corporation, CAPSURE FINANCIAL GROUP, INC.
("CFG"), a Oklahoma corporation, CAPSURE HOLDINGS CORP. ("Capsure"), a
Delaware corporation, and JOHN KNOX, JR. (the "Employee").
RECITALS
1. CFG, as Buyer, entered into a Stock Purchase Agreement dated July 26,
1994 (the "Purchase Agreement"), with the Parent and the Employee, as Seller,
pursuant to which CFG agreed to purchase, and Employee agreed to sell, all of
his authorized, issued and outstanding shares of stock of Parent.
2. The Purchase Agreement provides for the Employee to enter into this
Agreement, and all parties hereto acknowledge that this Agreement fulfills
their respective obligations with respect to the requirement for this Agreement
under the Purchase Agreement.
3. The Company, as Employer, desires to employ the Employee and the
Employee, as Employee, desires to be employed under the terms of the Agreement.
NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment.
(a) For the term indicated in Section 2 hereof, the Company employs the
Employee, and the Employee accepts such employment and agrees to act as an
employee of the Company, all in accordance with the terms provided herein.
(b) The Employee is hereby employed as President and Chief Executive
Officer, and he agrees to perform such duties as are commensurate with such
office and as are consistent with past practice, subject at all times to the
direction, approval and control of the Board of Directors of the Company.
During the term of this Agreement, the Employee shall continue to serve as
President and Chief Executive Officer of the Company. In such capacity, subject
to such direction, approval and control of the Board of Directors of the
Company at all times the Employee shall be in complete charge of all of the day
to day operations and management of the Company, as well as any of its direct
or indirect subsidiaries, and shall have full authority and responsibility for
setting strategic direction, formulating and carrying out the business plans,
administration and policies of the Company. In general, but subject to such
direction, approval or control, the Employee shall continue to perform the
duties previously performed by him commensurate with the past practices of the
Employee and the Company. In this connection, the Employee's responsibilities,
duties and
<PAGE> 2
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powers shall include, but are not limited to:
(i) developing, establishing and implementing plans and policies;
(ii) maintaining an effective organization of the Company, and
in this connection, he may select (subject to the election of officers
by the Board of Directors of the Company), control, supervise and
terminate, directly or through delegation, the employees of the
Company, and set their salaries and bonuses;
(iii) leading the operational planning process of the Company;
(iv) setting and maintaining the underwriting and marketing
philosophies of the Company;
(v) maintaining current knowledge of developments in the fidelity
and surety bond industry and liaison with reinsurers; and
(vi) representing the Company periodically at select industry
gatherings and in Company activities.
(c) The Employee agrees that during the term of his employment
hereunder he shall serve the Company diligently and faithfully and will devote
substantially all of his work time, skill, effort and energy, during normal
business hours, during the first three (3) years of this Agreement to the
conduct of the business of the Company and substantial amounts of time
thereafter as required to operate the business of the Company. The
determination of "substantially all" of the Employee's work time, skill, effort
and energy shall be made with respect to an annual period of employment.
(d) The Parent agrees that, so long as the Employee is employed under
this Agreement, all voting rights held, directly or indirectly, by the Parent,
its nominees or assignees, shall all be voted in favor of the Employee to be
nominated to the Board of Directors of the Company, to be elected to such Board
at each meeting of its stockholders at which the class of Directors to which
the Employee is assigned is to be elected.
(e) The Parent and the Employee agree that the Board of Directors of
the Company shall consist of at least seven (7) members. The Parent shall have
the right to nominate and elect all but one (1) of the Directors for the
Company and the Employee shall have the right to be a Director of the Company.
The Parent agrees to vote all its shares of the Company in favor of the
election of the Employee to the Board of the Company.
(f) The Parent and the Company agree that, so long as the Employee is
employed under this Agreement, the Parent's nominees and assignees constituting
the Board of Directors of the Company shall all vote in favor of the election
of Employee as President
<PAGE> 3
-3-
and Chief Executive Officer of the Company, the appointment of Employee to any
Executive or similar Committee of the Board of Directors of the Company and the
Board of Directors of the Company shall also consider any potential officers of
the Company nominated by Employee, subject, in all cases to the ultimate
responsibility of the Board of Directors under the law.
2. Term of Employment.
(a) The term of the Employee's employment hereunder shall commence on
the day first written above and continue for a period of six (6) years from the
date hereof, unless sooner terminated as provided below. Upon the expiration of
the original term, Employee's employment by Employer shall thereafter continue
from month to month on the same terms and conditions, with either party then
having the right to terminate said employment upon ninety (90) days prior
written notice to the other.
(b) The employment of Employee pursuant to this Agreement may be
terminated upon the occurrence of any of the following:
(i) at any time by mutual written agreement between Employee and
the Company;
(ii) immediately upon the death of Employee;
(iii) by either the Company or Employee due to the disability of
Employee. Disability shall mean that Employee has been unable to
perform his duties by reason of illness or incapacity for six (6)
months in the aggregate during any twelve (12) month period;
(iv) upon a good faith determination by a majority vote of the
Board of Directors of the Company that the termination of this
Agreement is necessary by reason of a final determination by the
Commissioner of Insurance of the State of Texas (or by any other
insurance department having jurisdiction over the Company or any
subsidiary or affiliate) that Employee must be removed or disqualified
from acting as an officer of the Company; or
(v) by the Company at any time for "cause" determined by a
majority vote of the Board of Directors of the Company upon the giving
of notice to Employee setting forth the basis of such termination. The
Board of Directors shall give written notice to Employee setting forth
the basis of such termination and shall provide Employee an opportunity
to appear before the Board of Directors either before or after such
termination is effective, as the Board may elect. For the purposes of
this Agreement, the term "cause" shall be limited to:
(A) the engaging of Employee in conduct materially
<PAGE> 4
- 4 -
injurious to the Company unless Employee engaged in
such conduct (i) in good faith and reasonably
believed such conduct to be in or not opposed to the
best interests of the Company or (ii) at the request
or direction of the Board of Directors of the
Company;
(B) the habitual absence of the Employee or the
continued and wilful inattention and neglect by
Employee of the material duties to be performed by
him (other than by reason of illness or engaging in
activities otherwise permitted or required under
this Agreement) and which inattention and neglect
does not cease within thirty (30) days after written
notice thereof, specifying the details of such
conduct, is given to Employee; and
(C) the conviction of Employee of, or plea of nolo
contendere to, a felony or of a crime involving
moral turpitude under state or federal law.
Upon a termination for cause pursuant to this Section 2(b)(v),
the Company shall pay to the Employee his base salary through
the date of termination and shall have no other obligation to
provide compensation or benefits to the Employee pursuant to
this Agreement.
(c) The employment of the Employee pursuant to this Agreement may
also be terminated at any time by the Employer, without good and sufficient
cause, in which case if such termination shall occur prior to December 31,
1999, the Employer shall pay the Employee, within thirty (30) days of said
termination, one lump sum payment representing the discounted present value
(using an interest rate equal to that offered at the U.S. Treasury auction,
first preceding the date of termination of the Employee's employment, of
Treasury Notes or Bills with a maturity date closest to December 31, 1999) of
the balance of the base salary that Employer would have paid the Employee from
the date of such termination through December 31, 1999 as if the Employee's
employment had not been so terminated assuming the base salary paid to the
Employee in the twelve (12) months preceding such termination remained constant
for the remainder of the period prior to December 31, 1999.
(d) The Employee's obligation to render services hereunder may be
terminated by the Employee if the Employee's "circumstances of employment shall
have changed" (as hereinafter defined), such termination to be known also as
termination for "good reason". In such event the Employee shall specify by
written notice to the Company the event or reason relied on for such
termination, and if such event or reason shall not have been cured within
thirty days thereafter, the Employee's employment hereunder shall be deemed
terminated. Within thirty (30) days after the Employee's employment is
terminated following a termination for "good reason", the Company shall pay
Employee a lump sum payment representing the discounted (discounted at the rate
existing as of such termination
<PAGE> 5
- 5 -
for Treasury Bills/Notes having a maturity concurrent with the sixth
anniversary of the date of this Agreement) balance of the base salary that the
Employer had paid the Employee from the date of such termination through the
sixth anniversary of the date of this Agreement assuming the base salary paid
to the Employee in the twelve (12) months preceding such termination remained
constant for the remainder of the term of this Agreement. The parties agree
that the Employee shall not be under any duty to mitigate damages under this
Agreement and such defense shall not be interposed in any legal proceedings
among the parties. Provided the Employee has not violated and is not violating
the terms and conditions of Sections 6 and 7 hereof, compensation or other
income earned by the Employee after termination of the Employee's employment
hereunder shall not reduce payments to be made to the Employee under this
Section 2(d).
(e) The Employee's "circumstances of employment shall have
changed" shall mean any of the following:
(i) Notice by the Board of Directors of the Parent or the
Company to the Employee of termination of his employment, or this
Agreement for any reason whatsoever, other than pursuant to Section
2(b) or 2(c);
(ii) failure of the Parent to nominate and vote for the
Employee in the position as provided in Section l(d) and 1(e) above;
(iii) reduction in the base salary being paid to the Employee
by the Company, or withdrawal from him of any material fringe benefits
or perquisites (including participation in current or future stock
option or stock appreciation plans) provided to him under this
Agreement or otherwise available to other senior corporate officers of
the Company;
(iv) a change in the Employee's place of employment without his
written consent as above described in Section 5(b) below, or
requirements or demands of Employee to perform services which would
make the continuance of his principal residence and home life in
Houston, Texas unreasonably difficult or inconvenient for him; and
(v) other material and adverse changes in Employee's conditions
of employment imposed on him by the Parent or the Company (including,
without limitation, a material and adverse change in the duties of the
Employee as described herein) or any material breach by the Company of
the provisions of this Agreement; provided, however, that it shall not
be considered or deemed to be a material adverse change in the duties
of the Employee for the Company to appoint an interim chief executive
officer (with all duties and responsibilities held by the Employee
pursuant to this Agreement), in the event that the Employee is unable
to perform his duties as a result of any disability. For purposes of
this Section 2(e)(v), disability shall mean the Employee's inability
to perform his duties by reason of illness and
<PAGE> 6
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incapacity, but without regard to the period of time of such inability
to perform or incapacity.
(f) The Employee's obligation to render services hereunder may be
terminated by the Employee following an event of a Change in Control (as
hereinafter defined). Upon a termination by the Employee following a Change
in Control pursuant to this Section 2(f), the Company shall pay to the Employee
his base salary through the date of termination and shall have no other
obligation to provide compensation or benefits to the Employee pursuant to this
Agreement. For the purposes of this Agreement, a Change in Control shall mean
the sale or transfer of at least 51% of the voting power of the Company to any
person or entity not owned or controlled by Capsure or any affiliate of
Capsure; provided, however, that a public offering of any securities of the
Company shall not be included within the definition of a Change in Control.
3. Compensation.
(a) The Company shall pay Employee a base salary at the rate of Two
Hundred Fifty Thousand Dollars ($250,000.00) for each 12-month period
hereunder, payable according to the Company's regular payroll policy. The
Company, through its Board of Directors, will confer with the Employee in good
faith, at least annually, to review the base salary to be paid the Employee for
the then fiscal year with a view to increasing (but not decreasing) the base
salary based upon the performance of the Employee in relationship to the goals
and performance of the Company and prevailing business and competitive
conditions. To the extent that the Employee's base salary is increased, the new
amount shall become the Employee's base salary and shall not thereafter be
reduced. The base salary excludes any bonus or other employee benefits or
perquisites to which the Employee is entitled and, when adjusting the
Employee's salary, the Board of Directors, or any other body or group of
persons responsible for setting the Employee's base salary, shall not take into
consideration the value of any employee benefits, or Contingent Payment (as
defined in Section 2.2 of the Purchase Agreement). The Company's obligation to
pay the Employee the base salary during the term hereof may be extinguished
only upon a termination of the Employee's employment in accordance herewith,
and subject to the provisions of this Agreement.
(b) The Company shall consider, and may pay to Employee, a bonus
annually, such bonus to be determined by, and at the sole discretion of, the
Compensation Committee of the Board of Directors of Capsure.
(c) The compensation payable hereunder shall be subject to all
applicable withholding taxes, other normal payroll deductions and any other
amounts required by law to be withheld.
(d) Capsure shall deliver to Employee concurrently with its execution
and delivery of this Agreement an option agreement providing for the purchase
of 75,000 shares of Capsure Holdings Corp. common stock in the form attached
hereto as Exhibit A.
<PAGE> 7
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4. Expenses. Employer will reimburse Employee in accordance with
Employer's standard policy guidelines for the reasonable and necessary expenses
incurred by Employee in the normal of Employer's business.
5. Benefits.
(a) During the term of this Agreement, the Employee shall be entitled
to participate in all employee benefit programs, including health insurance
programs, which are established for the Employer's employees similarly situated
to the Employee. The Employee shall also be entitled to paid annual vacation
time commensurate with past practices of the Employee and the Company. During
the term of this Agreement, the Employee covenants and agrees to cooperate with
the Company in order that the Company, or any of its affiliates, may obtain key
man life insurance in an amount acceptable to the Company or such affiliate.
In addition to any and all other benefits and vacation provided to the Employee
hereunder, in accordance with the past practices between the Employee and the
Company, the Company shall continue to provide the Employee with such
additional benefits and perquisites previously provided to him by the Company
(including, without limitation, participation in any fringe or employee benefit
program provided generally to senior executive officers of the Company, or
otherwise presently provided to the Employee, and medical, life and disability
insurance, including payment of the premiums of a $500,000 "split dollar" life
insurance policy issued on the Employee's life, first class travel and
accommodations, sick pay plans, and continued use of the Company owned
automobile currently provided to the Employee, including maintenance, insurance
and related costs, (provided that the Company shall have no obligation to
provide a replacement thereof) and payment or reimbursement for other expenses
in furtherance of the Company's business).
(b) During the term of this Agreement, the Employee's office shall be
customary to his position and shall be located in the principal executive
offices of the Company, both of which shall be located in, Houston, Texas. In
connection with his employment by the Company, the Employee shall not be
required to directly or indirectly relocate or transfer his principal residence
from Houston, Texas.
(c) Each of CFG, the Parent and the Company will indemnify, defend and
hold harmless the Employee, and his personal or legal representatives or other
successors, to the fullest extent permitted by the laws of their respective
states of incorporation, and the Employee shall be entitled to the protection
of all insurance policies which CFG, the Parent and the Company may acquire and
maintain generally for the benefit of their directors and officers, against all
costs, charges and expenses (including, but not limited to, attorneys' fees and
other legal expenses) whatsoever incurred or sustained by the Employee or his
personal or legal representatives in connection with any action, suit or
proceeding to which he (or his personal or legal representatives or other
successors) may be made a party by reason of his being or having been a
director, employee or officer of any of Capsure, the Parent or the Company and
their respective subsidiaries and affiliates, or those acts or omissions
relating thereto, all during the term hereof, to the extent permitted by the
laws of the respective states. If the existing certificates of incorporation
and bylaws of CFG, the Parent and the
<PAGE> 8
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Company do not at any time during the term of this Agreement provide for
indemnity of the Employee to the fullest extent permitted by the laws of its
state of incorporation, CFG, the Parent and the Company will use reasonable
efforts to amend such certificates of incorporation and bylaws so as to provide
indemnification to the fullest extent permitted by applicable law.
6. Non-Competition. The Employee acknowledges that the services he will
render to the Company are special, unique, of high quality and of unusual
character and therefore are of peculiar value to the Company. In addition, the
Employee acknowledges that the Company's business is highly competitive, and
through his employment by the Company he is given access to, and will use,
unique and confidential information which must be available exclusively to the
Company in order to preserve the value of its business. Accordingly, the
Employee agrees that during the term of employment under this Agreement and for
a five (5) year period from the date of termination hereunder (the "Non-Compete
Period"), he will not, anywhere in the United States of America, either
separately, jointly or in association with others, directly or indirectly, as
an officer, director, consultant, agent, employee, owner, partner, stockholder
(except for a minority stockholding of a publicly traded company in which the
Employee shall not participate in management) or otherwise:
(a) establish, engage in, become economically interested in or work on
behalf of any business in fidelity, surety, errors and omissions liability or
other lines of insurance underwritten by the Company or any of the affiliates
of the Company and which competes with the business of the Company or such
affiliates; or
(b) solicit or service any party who is or was a customer, agent or
supplier of the Company or any affiliates of the Company for any purpose
relating to, and in competition with, the lines of insurance underwritten by
the Company or any of the affiliates of the Company; or
(c) solicit for employment any person who is or was an employee of the
Company.
Notwithstanding the foregoing, the Non-Compete Period shall be reduced to
a period of two (2) years following termination of the Employee's employment
hereunder in the event the Employee (i) is terminated without cause pursuant to
Section 2(c) hereof, (ii) terminates his employment in the event "circumstances
of employment shall have changed" pursuant to Section 2(d) hereof, or (iii)
terminates his employment pursuant to Section 2(f) hereof following a Change in
Control of the Company.
7. Nondisclosure.
(a) The Employee acknowledges that business information and techniques
developed or acquired by the Company are among its most valuable assets and
that the Employee heretofore has and during the term hereof will have access to
such information and techniques. Consequently, in order to further protect the
legitimate interests of the
<PAGE> 9
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Company, the Employee hereby agrees that he will not at any time, without the
express written consent of the Company: (i) disclose, directly or indirectly,
any Confidential Information to anyone outside the employ of the Company and
its affiliates; or (ii) use, directly or indirectly, any Confidential
Information for the benefit of anyone other than the Company and its
affiliates.
(b) The term "Confidential Information" as used herein means all
information of a business or technical nature disclosed to, learned or
developed by the Employee, in the course of his employment by the Company,
which information relates to the business of the Company, the business of any
customer or supplier of the Company, or the business of any other person, firm
or corporation which consults with or is in any way affiliated with the
Company.
(c) The Employee's obligations under this section 7 shall survive his
employment by the Company and shall terminate with regard to any Confidential
Information only when it ceases to be Confidential Information.
8. Remedies. Both parties recognize that the services to be rendered by
the Employee are unique in character and that a breach by the Employee of the
terms and conditions of this Agreement would irreparably harm the Company and
that the remedies at law would not be adequate compensation to the Company for
such breach. Accordingly, in the event of any such breach, in addition to all
other remedies available to it in law, the Company shall be entitled to have an
injunction issued by any court of competent jurisdiction enjoining and
restraining the Employee and each and every party concerned therewith from
doing any act in violation of any provisions of this Agreement. For purposes of
this Section and Sections 6 and 7 hereof, the term "Company" shall include the
Company, its subsidiaries and other affiliates and their respective successors
and assigns. The term "affiliate" as used herein includes any entity
controlling, controlled by or under common control with the Company.
9. Miscellaneous.
(a) The parties hereto agree that the time period, the geographical
area and the scope of the restrictions contained in Section 6 hereof are
reasonable, but are also divisible and severable; and further, in the event any
of said provisions are held to be invalid or unenforceable by a court of
competent jurisdiction, such invalidity or unenforceability shall have no
effect on the validity or enforceability of any other provision hereof and such
provisions as are held invalid or unenforceable shall be deemed modified to the
extent necessary to make them valid and enforceable.
(b) In any court proceeding brought to enforce this Agreement, the
prevailing party shall be reimbursed by the non-prevailing party for his or its
reasonable attorneys' fees and the other expenses of such proceeding.
(c) This Agreement constitutes the entire agreement of the parties
hereto
<PAGE> 10
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with respect to the subject matter hereof.
(d) The provisions and terms of this Agreement shall be governed and
construed according to the laws of the State of Delaware. The parties
irrevocably consent to the personal jurisdiction of and the propriety of venue
in the courts located in the State of Delaware and of any state or federal
court located in Delaware in connection with any permitted action or proceeding
arising out of or related to this Agreement.
(e) If any dispute, claim or controversy shall arise between the
Employee, on the one hand, and any one or more of the other parties, on the
other hand, as to any issue whatsoever, other than the determination of
disability, the same shall be referred to and settled by the following
"arbitration" procedure which may be requested upon the application of any
interested party: It is agreed the arbitration hearings, if any, shall be held
in the State of Texas, or such other place as may be agreed upon by the
parties, and any such dispute, claim or controversy shall be referred to and
settled by such arbitration in accordance with, but not under the auspices of,
the Commercial Arbitration Rules ("Rules") of the American Arbitration
Association ("AAA") then in effect (which Rules are incorporated herein by
reference as though set forth at length herein other than those with respect to
the number of arbitrators) and any decision or order or finding rendered by a
panel of three (3) arbitrators ("arbitrators"), of whom one is chosen by
Capsure, one is chosen by the Employee and the third is chosen by the
arbitrators chosen by Capsure and the Employee, shall be final and conclusive
upon the parties hereto and judgement upon the award, finding or decision
rendered may be entered in the Court of the forum, state or federal, having
jurisdiction. It is expressly agreed between the parties hereto that whether or
not the Rules of the AAA shall provide for a discovery procedure, such
discovery procedure is hereby granted and permitted in the said arbitration
proceedings and the parties may apply to the arbitrators for the enforcement of
any form of discovery which would be permitted by the laws of the State of
Texas and their award or decision in respect of such discovery shall be final
and binding.
The arbitrators, if they deem that the matter requires it, are authorized
to award to the party whose contention is sustained such sums as they or a
majority of them shall deem proper to compensate it or him for the time and
expense incident to the proceedings and, if the arbitration was demanded
without reasonable cause, then they may also award damages for delay, if any.
The arbitrators shall determine their own reasonable compensation in accordance
with such AAA Rules, and, unless otherwise provided by agreement, shall assess
the cost and charges of the proceedings equally to both parties unless the
arbitrators shall find an issue raised by either party was unreasonable or
frivolous and that therefore the costs of the arbitration or any portion
thereof shall be borne by the said party.
(f) Any notices required or permitted hereunder shall be in writing and
shall be deemed to have been given when (i) personally delivered, or (ii)
forty-eight (48) hours after deposit in the U.S. mail, postage prepaid,
certified or registered mail, or (iii) the next business day when sent by
overnight courier (such as Federal Express, or (iv) when confirmed by the
sender by telephone when sent by facsimile transmission, and sent to the
following addresses:
<PAGE> 11
- 11 -
If to the Employee: John Knox, Jr.
950 Echo Lane, Suite 250
Houston, Texas 77024
Facsimile No.: 713/722-4601
with a copy to: Thompson, Coe, Cousins & Irons L.L.P.
200 Crescent Court
11th Floor
Dallas, Texas 75201-1840
Facsimile No.: 214/871-8209
Attention: Emory L. White, Jr.
If to the Company,
Parent, CFG or
Capsure: c/o Capsure Financial Group, Inc.
1400 Lake Hearn Drive, Suite 130
Atlanta, Georgia 30319
Facsimile No.: 404/843-5598
Attention: Bruce A. Esselborn
With a copy to: Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza
Suite 1600
Chicago, Illinois 60606
Facsimile No.: 312/454-0335
Attention: Kelly L. Stonebraker
or to such other address or addresses as the parties may from time to time
specify by notice in writing to the other parties, given in the manner provided
in this Section.
(g) The rights and obligations of the Company under this Agreement may
be assigned by the Company to any affiliate of or successor in interest to the
Company with the consent of the Employee, which consent shall not be
unreasonably withheld. This Agreement shall not be assignable by the Employee.
Subject to the foregoing, this
<PAGE> 12
- 12 -
Agreement shall inure to the benefit of, and shall be binding upon, the parties
hereto and upon their respective heirs, personal representative, successors and
assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY:
UNIVERSAL SURETY OF AMERICA
By: /s/ John Knox, Jr.
-------------------------------
Title: President
----------------------------
PARENT:
UNIVERSAL SURETY HOLDING CORP.
By: /s/ John Knox, Jr.
-------------------------------
Title: President
----------------------------
CAPSURE FINANCIAL GROUP, INC.
By: /s/ Bruce A. Esselborn
-------------------------------
Title: President
----------------------------
CAPSURE HOLDINGS CORP.
By: /s/ Bruce A. Esselborn
-------------------------------
Title: President
----------------------------
EMPLOYEE:
/s/ John Knox, Jr.
-----------------------------------
JOHN KNOX, JR.
<PAGE> 1
Exhibit 10(6)
AGREEMENT
This agreement ("Agreement") is entered into the 30th day of June, 1997, by
and among John T. Knox, Jr. ("Knox"), Capsure Financial Group, Inc., an
Oklahoma corporation ("Capsure Financial"), Capsure Holdings Corp., a Delaware
corporation ("Capsure Holdings"), and CNA Surety Corporation, a Delaware
corporation ("CNA Surety").
RECITALS:
a. Knox entered into a Stock Purchase Agreement as of July 26, 1994, with
Capsure Financial and Capsure Holdings (the "Stock Purchase
Agreement") whereby Knox and certain others sold the outstanding stock
of Universal Surety Holding Corp., a Texas corporation ("Universal
Surety"), to Capsure Financial. Capsure Financial is a wholly-owned
subsidiary of Capsure Holdings.
b. Universal Surety owned as of July 26, 1994, and continues to own at
this date, the outstanding capital stock of Universal Surety of
America, a Texas insurance company ("USA").
c. As part of the consideration under the Stock Purchase Agreement,
275,113 shares of the common stock of Capsure Holdings (the
"Restricted Shares") were issued to Knox and certain registration
rights were granted to Knox with respect to such shares. The Restricted
Shares are subject to, and the registration rights were granted under,
a Restricted Stock and Registration Rights Agreement entered into as
of September 22, 1994, among Capsure Financial, Capsure Holdings and
Knox (the "Restricted Stock Agreement").
d. As additional consideration under the Stock Purchase Agreement,
Capsure Financial agreed to make a contingent payment to Knox based
upon a calculation relating to the future performance and value of USA
(the "Contingent Payment") pursuant to Section 2.2 of the Stock
Purchase Agreement.
e. Capsure Holdings, CNA Surety and certain others have entered into a
Reorganization Agreement dated as of December 19, 1996, (the
"Reorganization Agreement") under which, among other things, Capsure
Holdings will be merged with a subsidiary of CNA Surety, and Capsure
Holdings will be the surviving corporation and a wholly-owned
subsidiary of CNA Surety.
f. Knox entered into an Employment Agreement with Universal Surety, USA,
Capsure Holdings and Capsure Financial on September 22, 1994 (the
"Employment Agreement") which included a five year non-compete period
commencing upon the termination of the Employment Agreement or Knox's
earlier termination of employment.
g. The parties desire to waive calculation of the Contingent Payment
and, in consideration for Knox's agreement to waive any claim to
payment of any amounts which may become due to Knox thereunder, if
any, to amend the terms of the Restricted Stock Agreement and
Employment Agreement.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises:
1. Settlement of the Contingent Payment
Knox hereby waives any and all rights or claims of rights now or hereafter
arising under or relating to Section 2.2 of the Stock Purchase Agreement,
including without limitation, any rights or claims to a calculation for the
purpose of determining any Contingent Payment or the payment of the Contingent
Payment, and agrees to accept the benefits provided to him by the amendment to
the terms of the Restricted Stock Agreement and Employment Agreement, as set
forth herein, in full settlement of any and all amounts due to him, if any, or
which he may claim to be due to him, as a Contingent Payment, and forever
discharges Capsure Holdings, Capsure Financial and their successors and assigns
(including, without limitation, CNA Surety) from any and all obligations under
or relating to Section 2.2 of the Stock Purchase Agreement.
2. Amendment of the Restricted Stock Agreement
The parties agree that the period of restriction contained in the
Restricted Stock Agreement shall expire on the date six months following
the Effective Time (as defined in the Reorganization Agreement) of the Merger
and that the term "Restricted Period", as used in the Restricted Stock
Agreement, shall be for the period commencing September 22, 1994, and
terminating on the date six months following the Effective Time of the Merger.
The parties hereby acknowledge and agree (a) that, subject to applicable
federal and state securities laws, upon termination of the Restricted Period,
pursuant to the Restricted Stock Agreement (i) all restrictions imposed therein
upon the sale, transfer, exchange, conveyance, pledge or other encumbrance of
or upon the Restricted Shares set forth under Section 1 thereof shall terminate
and (ii) the registration rights granted under Sections 4 and 5 thereof shall
be of immediate force and effect, and (b) that Capsure Holdings, Capsure
Financial, Universal Surety and USA hereby waive the right, and any and all
claims with respect to such right, to purchase the Restricted Shares pursuant
to Section l(b) of the Restricted Stock Agreement in the event of the
termination of Knox's employment. All other provisions of the Restricted Stock
Agreement shall remain in full force and effect.
3. Amendment to Non-Competition Provision of Employment Agreement
The parties agree that, notwithstanding any provision in the Employment
Agreement to the contrary, the Non-Compete Period, as defined and set forth in
Section 6 of the Employment Agreement, shall be reduced from five years to two
years from the expiration or earlier termination of Knox's employment.
4. Joinder by CNA Surety
CNA Surety, joining herein as successor to the rights and obligations of
Capsure Holdings upon the Effective Time of the Merger under the Reorganization
Agreement, agrees to all recitals and provisions hereof.
-2-
<PAGE> 1
Exhibit 10(7)
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is executed this 25th day of
April, 1996 and dated as of and effective as of the 15th day of April, 1996, by
and between Western Surety Company (the "Company"), a South Dakota Corporation,
and Stephen T. Pate (the "Employee").
RECITALS
1. Employment.
(a) For the term indicated in Section 2 hereof, the Company engages and
employs Employee, and Employee accepts such employment and agrees to act as an
employee of the Company, all in accordance with the terms provided herein.
(b) The Employee is hereby employed as President and Chief Operating
Officer, and he agrees to perform such duties as are commensurate with
such office, subject to the direction, approval and control of the Chief
Executive Officer of the Company and its Board of Directors. The Company agrees
that, so long as the Employee is employed under this Agreement, all voting
rights held, directly or indirectly, by them, their nominees or assignees,
shall all be voted in favor of the Employee to be nominated to the Board of any
subsidiaries of the Company, and to be elected to such Boards at each meeting
of their respective stockholders at which the class of Directors to which the
Employee is assigned is to be elected.
(c) The Employee agrees that during the term hereof he shall serve the
Company diligently and faithfully and will devote all of his work time, skill,
effort and energy to the conduct of the business of the Company.
2. Term of Employment.
(a) The term of the Employee's employment hereunder shall commence April
15, 1996 and continue until April 14, 1998 (the "Term"), unless sooner
terminated as provided below. Upon the expiration of the original Term,
Employee's employment by the Company shall thereafter continue from month to
month on the same terms and conditions, with either party then having the right
to terminate said employment upon thirty (30) days prior written notice to the
other.
(b) This Agreement shall be terminated upon the occurrence of any of the
following:
(i) the mutual agreement of the Company and the Employee;
(ii) the death of Employee;
(iii) if Employee shall be unable to perform his duties hereunder by
reason of illness or incapacity for any consecutive two (2)
month period or for three (3) months in the aggregate during
any twelve (12) month period, upon written notice from the
Company;
1
<PAGE> 2
(iv) for good and sufficient cause, upon written notice from the
Company; or
(v) a determination by the Board of Directors of the Company that the
termination of this Agreement is necessary by reason of a
determination of the Director of Insurance of the State of South
Dakota (or by any other insurance department having jurisdiction over
the Company or any subsidiary or affiliate) that the Employee must be
removed or disqualified from acting as an officer or director of the
Company.
(c) This Agreement may also be terminated at any time by the Company,
without good and sufficient cause, in which case the Company shall pay the
Employee, within thirty (30) days of said termination, one lump sum payment
representing the discounted present value (using a eight percent (8%) interest
rate) of the balance of the salary that the Company would have paid Employee
during the Term of this Agreement, if Employee's employment had not been so
terminated.
3. Compensation.
(a) The Company shall pay Employee a base salary at the annual rate of
$262,500.00 for the first 12-months hereunder, payable according to the
Company's regular payroll policy. The base salary paid hereunder shall be
reviewed by the Company after the first 12-months hereunder (however in no
event shall base salary be decreased as a result of such review).
(b) The compensation payable hereunder shall be subject to all applicable
withholding taxes, other normal payroll deductions and any other amounts
required by law to be withheld.
(c) In addition to the base salary hereunder, the Company shall determine
and pay to Employee a discretionary performance bonus after each full calendar
year during the Term of this Agreement, such bonus to be in the amount not less
than $0 and not more than $50,000.00.
4. Expenses. The Company will reimburse Employee in accordance with the
Company's standard policy guidelines for the reasonable and necessary expenses
incurred by Employee in the normal course of the Company's business.
5. Benefits. During the term of this Agreement, Employee shall be entitled
to participate in all customary employee benefit programs, including health
insurance programs, the 401(k) retirement program and health club membership,
which are established for the Company's employees similarly situated to
Employee, all to the extent he satisfies the eligibility requirements thereof.
Employee shall also be entitled to paid annual vacation time of up to four
weeks in accordance with the Company's standard policy guidelines as to prior
notice and approval thereof. In addition, the Company shall reimburse the
Employee for the initiation fees, regular monthly assessments, special
assessments and other charges incurred by Employee to join and maintain a
membership at the Minnehaha Country Club during the Term of this Agreement.
2
<PAGE> 3
6. Non-Competition. The Company has, since 1900, developed a unique and
successful approach to the miscellaneous bond business. The miscellaneous bond
business is a unique and highly specialized segment of the American property
and casualty insurance industry. The Company actively markets its products in
all 50 states of the United States of America and in the District of Columbia.
The Company's products are marketed to and through the independent insurance
agency network and the continued goodwill of agents is essential to the
Company. In the course of the Employee's employment, Employee will acquire
confidential information in both written and non-written form of a special and
unique nature and value relating to the Company's business and such information
shall be considered by the parties to be trade secrets owned by the Company.
This information shall include, but is not limited to, the names and addresses
of customers (agents) and potential customers, records concerning customer
contacts and customer purchases, the identity of customers' key employees,
information concerning Company systems, policies, methods of operations,
procedures, manuals, pricing and all other non-public information acquired by
the Employee as a result of or during the course of employment. Due to the
unique nature of its forms, procedures and sales techniques and the training it
provides to its employees, the Company is susceptible to significant and
material injury from former employees utilizing their Company training and
knowledge to the Company's competitive disadvantage. Therefore, the Employee
hereby agrees that upon the termination of this Agreement, for any reason, the
Employee shall:
(a) Return to the Company any equipment, records, lists or other
business related materials (including originals and all copies)
acquired by the Employee in the course of employment with the
Company; and
(b) Not at any time or in any manner, either directly or
indirectly, divulge or disclose the Company's trade secrets to
any other person or entity; and
(c) For two (2) years thereafter refrain from (i) hiring any person
who was an employee of the Company at any time during the
term of this Agreement, and (ii) calling upon or otherwise
contacting any of the top 200 customers (agents) of the Company
for the previous calendar year, for the purpose of soliciting
small, miscellaneous fidelity and surety bonds, which is the
Company's main business.
Employee's obligations under this paragraph 6 shall survive the
termination of this Agreement and his employment by the Company and shall
terminate with regard to any confidential information only when it ceases to be
confidential information.
7. Remedies. Both parties recognize that the services to be rendered by
Employee are unique in character and that a breach by Employee of the terms and
conditions of this Agreement would irreparably harm the Company. Accordingly,
in the event of any such breach, in addition to all other remedies available to
it in law, the Company shall be entitled to have an injunction issued by any
court of competent jurisdiction enjoining and restraining Employee and each and
every party concerned therewith from doing any act in violation of any
provisions of this Agreement. For purposes of this paragraph and paragraph 6
hereof, the term "Company" shall include the Company, its subsidiaries and
other affiliates and their respective successors and assigns. The term
"affiliate" as used herein includes any entity controlling, controlled by or
under common control with the Company.
3
<PAGE> 4
8. Miscellaneous.
(a) The parties hereto agree that the time period, the geographical area
and the scope of the restrictions contained in paragraph 6 hereof are divisible
and severable; and further, in the event any of said provisions are held to be
invalid or unenforceable by a court of competent jurisdiction, such invalidity
or unenforceability shall have no effect on the validity or enforceability of
any other provision hereof and such provisions as are held invalid or
unenforceable shall be deemed modified to the extent necessary to make them
valid and enforceable.
(b) In any court proceeding brought to enforce this Agreement, the
prevailing party shall be awarded his or its reasonable attorneys' fees and the
other expenses of such proceeding.
(c) This Agreement constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof.
(d) The provisions and terms of this Agreement shall be governed and
construed according to the laws of the State of South Dakota without regard to
its choice of law provisions. The parties hereto agree that the state circuit
court situated in Minnehaha County, South Dakota shall be the exclusive
jurisdiction of any disputes relating to this Agreement and that said court
shall have personal jurisdiction over the parties. By initialling this
paragraph, Employee consents to the personal jurisdiction of said court.
STP (initial)
---
(e) Any notices required or permitted hereunder shall be in writing and
shall be deemed to have been given when personally delivered or forty-eight
(48) hours after deposit in the U.S. mail, postage prepaid, certified or
registered mail, and sent to the following addresses:
If to Employee: Stephen T. Pate
4804 Caraway Circle
Sioux Falls, So. Dakota 57106
If to Company: Western Surety Company
101 South Phillips Avenue
Sioux Falls, South Dakota 57102
Attention: Dan Kirby
With a copy to : Rosenberg & Liebentritt, P. C.
Two North Riverside Plaza
Suite 1600
Chicago, Illinois 60606
Attention: Kelly L. Stonebraker
(f) The obligations of the Company under this Agreement may be assigned by
the Company to any affiliate of or successor in interest to the Company. This
Agreement shall not be assignable by Employee. Subject to the foregoing, this
Agreement shall inure to the benefit of,
4
<PAGE> 5
and shall be binding upon, the parties hereto and upon their respective heirs,
personal representative, successors and assigns.
(g) This Agreement supersedes the Employment Agreement by and between the
Company and the Employee which was effective as of October 24, 1994, and such
prior Employment Agreement is hereby terminated effective as of April 15, 1996.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
COMPANY:
WESTERN SURETY COMPANY
By: /s/ Joe P. Kirby
-------------------------
Title: CEO
------------------------
EMPLOYEE:
/s/ Stephen T. Pate
-----------------------------
STEPHEN T. PATE
5
<PAGE> 6
JOINDER
Surewest Financial Corp. ("Surewest") hereby executes this Joinder to that
certain Employment Agreement dated as of April 15, 1996 by and between Western
Surety Company and Stephen T. Pate ("Employee") in order to agree to and be
bound by the following provisions:
BOARD OF DIRECTORS. SUREWEST COVENANTS AND AGREES THAT, SO LONG AS THE
EMPLOYEE IS EMPLOYED UNDER SAID EMPLOYMENT AGREEMENT, ALL VOTING RIGHTS HELD,
DIRECTLY OR INDIRECTLY, BY SUREWEST, OR ITS NOMINEES, SHALL BE VOTED IN FAVOR
OF THE EMPLOYEE TO BE NOMINATED TO THE BOARD OF DIRECTORS OF WESTERN SURETY
COMPANY (AND ALL OF ITS SUBSIDIARIES), AND TO BE ELECTED TO SUCH BOARDS AT EACH
MEETING OF THEIR RESPECTIVE STOCKHOLDERS AT WHICH THE CLASS OF DIRECTORS TO
WHICH THE EMPLOYEE IS ASSIGNED IS TO BE ELECTED.
IN WITNESS WHEREOF, the undersigned has executed this Joinder as of the
day and year below.
SUREWEST FINANCIAL CORP.
By: /s/ Joe P. Kirby
---------------------------
Title: CEO
---------------------------
Dated: April 25, 1996
---------------------------
/s/ Stephen T. Pate
---------------------------
STEPHEN T. PATE
1
<PAGE> 1
Exhibit 10(9)
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
THIS AGREEMENT between Frontier Insurance Company, a New York corporation
("Frontier") and Capsure Holdings Corp., a Delaware corporation ("Capsure"),
dated as of the 22nd day of May, 1996.
WITNESSETH:
WHEREAS, Capsure is a holding company owning insurance companies
underwriting specialty property and casualty insurance and is the ultimate
parent of United Capitol Holding Company ("UCHC") and its subsidiary Companies,
United Capitol Insurance Company ("UCIC"), United Capitol Managers, Inc. and
Fischer Underwriting Group, Incorporated ("Fischer"), collectively hereinafter
called the "United Capitol Companies"; and
WHEREAS, Capsure has determined it is in the best interest of Capsure and
its stockholders to sell the United Capitol Companies; and
WHEREAS, Frontier is desirous of purchasing the United Capitol Companies
on terms and conditions set forth in that certain Stock Purchase Agreement
dated February 29, 1996; and
WHEREAS, in order to induce Frontier to consummate such purchase, Capsure
has agreed to enter into this non-competition and non-solicitation agreement
(the "Agreement");
NOW, THEREFORE, Capsure and Frontier hereby agree as follows:
1. Definitions:
The following terms, as used herein, have the meanings indicated below:
"In force" shall have its customary meaning as respects insurance policies
underwritten by the property and casualty insurance industry.
"Person" means an individual, corporation, partnership, association,
trust, limited liability company, limited liability partnership or other entity
or organization, including a government or political subdivision or an agency
or instrumentality thereof.
"Restricted Insurance" means the following types of general liability
insurance policies covering any risk (except as provided in this paragraph)
located in the United States and its possessions: directors' and officers'
(with a risk profile and characteristics substantially similar to the majority
of such business written by Fischer during calendar year 1995), asbestos
abatement, contractors environmental remediation, demolition contractors, pest
control, crane operations, security guards, or errors and omissions (excluding
errors and omissions for tax preparers, notaries and insurance agents, and
errors and omissions with a risk profile and characteristics not
historically written by UCIC). Notwithstanding the foregoing, Capsure and its
subsidiaries
<PAGE> 2
shall not be restricted from selling, underwriting, placing or writing surety
bonds, notary bonds or fidelity bonds.
2. Non-Competition:
For the period ending on the third anniversary of the date hereof, Capsure will
not, and will cause its subsidiaries not to, in the United States and its
possessions, without the prior written consent of Frontier, (a) directly or
indirectly, sell, underwrite, place or write any Restricted Insurance;
provided, however, that nothing herein shall prohibit Capsure or its
subsidiaries from owning not more than 5% of the stock or other securities of
any corporation whose securities are publicly traded over-the-counter or on a
national securities exchange, or (b) acquire any insurance business in which
40% or more of the gross written premiums during the most recent calendar year
was from Restricted Insurance; provided, however, that Capsure or its
subsidiaries may acquire a group of insurance businesses in which not more than
40% of the gross written premiums of such group are from Restricted Insurance.
3. Non-Solicitation of Policies:
For the period ending on the third anniversary of the date hereof, Capsure
will not, and will cause its subsidiaries not to (a) solicit, directly or
indirectly, for placement, brokerage or sale, for itself and/or any other
Person, any insurance policy of UCIC or Fischer which was "in force" with UCIC
or administered by Fischer on the date hereof or (b) accept or place (through
renewals or otherwise) for itself or any other Person, any insurance policy
which was "in force" with UCIC or administered by Fischer on the date hereof.
4. Non-Solicitation of Employees:
(a) For the period ending on the third anniversary of the date hereof,
Capsure will not, and will cause its subsidiaries not to, without the prior
written consent of Frontier, solicit to hire in any capacity any of the
individuals listed on Schedule A hereto (comprising all employees of the United
Capitol Companies at the date hereof), except those employees whose employment
is terminated by the United Capitol Companies after the date hereof.
(b) For the period ending on the third anniversary of the date hereof,
Frontier will not, and will cause its subsidiaries not to, without the prior
written consent of Capsure, solicit to hire in any capacity any employees of
Capsure or its subsidiaries at the date hereof, except those employees whose
employment is terminated by Capsure or its subsidiaries after the date hereof.
5. Confidentiality:
Except as required by law or if such information becomes known to the
public through no breach of this Agreement, Capsure agrees to treat, and cause
its subsidiaries to treat, as strictly secret and confidential all information
relating to the United Capitol Companies, including financial information and
customer lists, divulged or made known to them or to which they had access
prior to the date hereof.
6. Jurisdiction and Venue:
The parties hereby irrevocably consent to the personal jurisdiction of and
the propriety of venue in the courts of the State of Illinois and of any
federal court located in such State in connection with any action or proceeding
arising out of or relating to this Agreement, any document or instrument
delivered pursuant to,
2
<PAGE> 3
in connection with, or simultaneously with this Agreement, or a breach of this
Agreement or any document or instrument.
7. Law:
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflicts in law.
8. Notices:
All notices hereunder shall be in writing and shall be, (1) sent by
registered or certified mail, return receipt request, or (2) served by personal
service. If intended for Frontier, such notice shall be addressed to Frontier,
attention of its President at Frontier's most current address for its executive
offices, or to such other address as Frontier shall give notice to Capsure in
the manner herein provided; and if intended for Capsure, such notice shall be
addressed to Capsure, attention of its President at Capsure's most current
address for its executive offices, or at such other address as Capsure shall
give notice to Frontier in the manner herein provided. Personal service of
notices may be substituted for mailing provided a written receipt of such
service is provided by the recipient party. For purposes of this Section,
notice shall be deemed received upon actual receipt.
9. Severability:
Capsure and Frontier agree that if any provision of this Agreement is held
to be invalid or unenforceable by a court of competent jurisdiction due to its
geographic scope, period of duration, or any other provision, such provision
shall be interpreted in a manner that is valid and enforceable while coming
closest to effectuating the intent of the parties as expressed in this
Agreement.
10. Assignment:
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by either of the parties hereto without the prior
written consent of the other party.
11. Headings:
The headings contained in this Agreement are inserted for convenience only
and do not constitute part of this Agreement.
12. Entire Agreement:
This Agreement constitutes the entire understanding between the parties
with respect to the matters referred to herein and no waiver or modification to
the terms hereof shall be valid unless in writing signed by the party to be
charged and only to the extent therein set forth.
13. Counterparts:
This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and each of which shall be
deemed an original.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
CAPSURE HOLDINGS CORP.
By: /s/ Bruce A. Esselborn
--------------------------------
Name: BRUCE A. ESSELBORN
Title: PRESIDENT
FRONTIER INSURANCE COMPANY
/s/ Walter A. Rhulen
By: -------------------------------
Name: WALTER A. RHULEN
Title: PRESIDENT
4
<PAGE> 5
CAPSURE HOLDINGS CORP.
SCHEDULE A
Kathy Aurand Bob Quarles
Vera Blumthal Karen Ramsey - p/t
Mark Brown Ned Rand
Peggy Brown Gary Resman
Don Browne Bobbie Richardson
Paul Bunone Linda Rickerson
Gloria Burgess Dubba Schulenburg
Janice Callwood Hamida Thawer
Vicki Carroll Tim Thomas
Sujitra Chaisangsukkul Kelly Thrift
Bill Coggin Emily Wheeler
Roberta Coleman Steve Zeitman
Ken Crease Delores Zizitski
Linda Den Bleyker
Debra DeLaTorre
Debbie Dunford
Glenn Ficklin
Donald Fischer
Elizabeth Fitzgerald
Karen Foster
Elizabeth Frey
Susan Godard
Carlie Groover
Kristin Henriksen
Linda Hope
Rick King
Bill Knight
Tanya Knowles
Juanita Leavell
Jane Lowendick
Jim Marcello
Carol Meng - p/t
Fred Miehe
Charlotte Miller
Tiffany Miller
Jackie Montoulieu
<PAGE> 1
EXHIBIT 10.12
THE CNA SURETY CORPORATION
REPLACEMENT STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. Purpose ............................................................... 1
2. Definitions ........................................................... 1
3. Scope of the Plan ..................................................... 3
(a) Number of Shares Available Under Plan ............................. 3
(b) Expired or Terminated Options not Available ....................... 4
(c) Treasury Stock .................................................... 4
4. Administration ........................................................ 4
(a) Committe Administration ........................................... 4
(b) Board Reservation and Delegation .................................. 4
(c) Committee Authority ............................................... 4
(d) Committee Determinations Final .................................... 5
5. Eligibility ........................................................... 5
6. Replacement Options ................................................... 5
(a) In General ........................................................ 5
(b) Grant of Replacement Options ...................................... 6
7. Non-transferability ................................................... 6
8. Exercise of Replacement Options ....................................... 6
9. Withholding Taxes ..................................................... 7
(a) Mandatory Withholding ............................................. 7
(b) Elective Share Withholding ........................................ 7
10. Termination of Affiliation ............................................ 8
(a) Non-vested Options ................................................ 8
(b) Vested Options .................................................... 8
11. Securities Law Maters ................................................. 9
12. No Funding Required ................................................... 9
13. No Employment Rights .................................................. 9
14. Rights as a Stockholder ............................................... 9
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
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(continued)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
15. Nature of Payments . . . . . . . . . . . . . . . . . . . . . . . . 9
16. Non-Uniform Determinations . . . . . . . . . . . . . . . . . . . . 10
17. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
18. Amendment of the Plan . . . . . . . . . . . . . . . . . . . . . . 10
19. Termination of the Plan . . . . . . . . . . . . . . . . . . . . . 10
20. No Illegal Transactions . . . . . . . . . . . . . . . . . . . . . 10
21. Controlling Law . . . . . . . . . . . . . . . . . . . . . . . . . 11
22. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
-ii-
<PAGE> 4
The Plan. The CNA Surety Corporation (the "Company") hereby
establishes the CNA Surety Corporation Replacement Stock Option Plan (as set
forth herein and from time to time amended, the "Plan"), to be effective on the
Merger Date, as defined hereinafter (the "Effective Date").
1. Purpose. The Plan has been adopted by the Board of Directors of
the Company, subject to the approval by Continental Casualty Company as the
sole shareholder of the Company. The purpose of the Plan is to provide
continuation of benefits and opportunities provided to former participants of
the Capsure Holdings Corp. Amended and Restated 1990 Stock Option Plan through
incentive stock options and nonqualified stock options granted thereunder,
which benefits and opportunities were lost, terminated or cancelled (with or
without consent of the grantee) as a result of the Merger, as hereinafter
defined, by providing for the grant of substitute options hereunder.
2. Definitions.
As used in the Plan, terms defined parenthetically immediately after
their use shall have the respective meanings provided by such definitions, and
the terms set forth below shall have the following meanings (such meanings to
be equally applicable to both the singular and plural forms of the terms
defined):
(a) "Board" means the Board of Directors of the Company.
(b) "Capsure" means Capsure Holdings Corp., a Delaware Corporation
prior to the Merger.
(c) "Capsure Grantee" means any individual who was granted a Capsure
Option prior to the Merger Date.
(d) "Capsure Option" means any ISO or NQSO granted pursuant to the
provisions of the Capsure Plan.
(e) "Capsure Plan" means the Capsure Holdings Corp. Amended and
Restated 1990 Stock Option Plan, as amended.
(f) "Committee" means the committee of the Board appointed pursuant
to Article 4.
(g) "Company" means CNA Surety Corporation, a Delaware corporation.
(h) "Effective Date" means the date described in the first paragraph
of the Plan.
(i) "Fair Market Value" of any security of the Company or any other
issuer means, as of any applicable date:
<PAGE> 5
(i) if the security is listed for trading on the New York
Stock Exchange, the mean between the high and low prices of the
security as reported on the New York Stock Exchange Composite Tape, or
if no such reported sale of the security shall have occurred on such
date, on the next preceding date on which there was such a reported
sale, or
(ii) if the security is not so listed, but is listed on
another national securities exchange or authorized for quotation on
the National Association of Securities Dealers Inc.'s NASDAQ National
Market ("NASDAQ/NM"), the closing price, regular way, of the security
on such exchange or NASDAQ/NM, as the case may be, or if no such
reported sale of the security shall have occurred on such date, on the
next preceding date on which there was such a reported sale, or
(iii) if the security is not listed for trading on a
national securities exchange or authorized for quotation on NASDAQ/NM,
the average of the closing bid and asked prices as reported by the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") or, if no such prices shall have been so reported for such
date, on the next preceding date for which such prices were so
reported, or
(iv) if the security is not listed for trading on a
national securities exchange or is not authorized for quotation on
NASDAQ/NM or NASDAQ, the fair market value of the security as
determined in good faith by the Committee.
(j) "Grant Date" means, except as provided in Article 6, the date on
which the Committee grants the Option or such later date as specified in
advance by the Committee.
(k) "Grantee" means an individual who has been granted an Option.
(l) "Internal Revenue Code" means the Internal Revenue Code of 1986,
as amended, and regulations and rulings thereunder. References to a particular
section of the Internal Revenue Code shall include references to successor
provisions.
(m) "ISO" means an incentive stock option, as described in Section
422 of the Internal Revenue Code.
(n) "Merger" means the merger of Capsure with and into Surety
Acquisition Company, a wholly owned subsidiary of the Company ("Acquisition"),
pursuant to a Reorganization Agreement, dated as of December 19, 1996 and
amended as of July 14, 1997, by and among Capsure, the Company and Acquisition.
(o) "Merger Date" means the date as of which the Merger shall be
effected.
(p) "1934 Act" means the Securities Exchange Act of 1934, as amended.
-2-
<PAGE> 6
(q) "NQSO" means a non qualified stock option.
(r) "Option" means an ISO or NQSO (as those terms are defined above)
granted pursuant to the provisions of the Plan.
(s) "Option Agreement" means the written agreement by which an Option
is evidenced.
(t) "Option Price" means the per share purchase price of Stock
subject to an option.
(u) "Plan" has the meaning set forth in the introductory paragraph.
(v) "SEC" means the Securities and Exchange Commission.
(w) "Section 16 Grantee" means a person subject to potential
liability with respect to equity securities of the Company under Section 16(b)
of the 1934 Act.
(x) "Stock" means common stock of the Company, par value $0.01 per
share.
(y) "Subsidiary" means a corporation as defined in Section 424(f) of
the Internal Revenue Code, with the Company being treated as the employer
corporation for purposes of this definition.
(z) "Termination of Affiliation" occurs as of the first day on which
an individual is for any reason no longer providing services for the Company or
any of its Subsidiaries in the capacity of an employee, director or consultant,
or with respect to an individual who is an employee, director or consultant of
a Subsidiary, the first day on which the Company no longer, directly or
indirectly, owns voting securities possessing at least 50% of the aggregate
Voting Power of such Subsidiary.
(aa) "Voting Power" of a corporation or other entity means the
combined voting power of the then-outstanding voting securities of such
corporation or other entity entitled to vote generally in the election of
directors.
3. Scope of the Plan.
(a) Number of Shares Available Under Plan. An aggregate number of
shares of Stock is hereby made available and is reserved for delivery on
account of the exercise of Options equal to the number of shares of Stock
determined pursuant to Article 6(b)(i) to be required to replace Capsure
Options; provided that in no event shall the aggregate number of such shares of
Stock exceed three million (3,000,000) shares of Stock. Shares of Stock
delivered on account of the exercise of Options hereunder shall serve to
reduce, share for share, the number of shares of Stock available for delivery
on account of the exercise of awards under the CNA Surety Corporation 1997
Long-Term Equity Compensation Plan.
-3-
<PAGE> 7
Subject to the foregoing limits, shares of authorized but unissued Stock or
shares of Stock held as treasury shares by the Company may be used for or in
connection with Options.
(b) Expired or Terminated Options not Available. If and to the
extent an Option shall expire or terminate for any reason without having been
exercised in full, or shall be forfeited, regardless of whether, in either
case, the Grantee enjoyed any of the benefits of stock ownership, the shares of
Stock associated with such Option shall NOT become available for other Options.
(c) Treasury Stock. The Committee shall have the authority to cause
the Company to purchase from time to time shares of Stock to be held as
treasury shares and used for or in connection with Options.
4. Administration.
(a) Committee Administration. Subject to Article 4(b), the Plan
shall be administered by the Committee, which shall consist of not less than
three persons who are appointed by the Board, who are directors of the Company
and not employees of the Company or any of its affiliates. Membership on the
Committee shall be subject to such limitations (including, if appropriate, a
change in the minimum number of members of the Committee) as the Board deems
appropriate to permit transactions pursuant to the Plan to be (1) exempt from
potential liability under Section 16(b) of the 1934 Act, and Rule 16b-3
pursuant thereto, and (2) exempt from limitations on deductibility under
Section 162(m) of the Internal Revenue Code.
(b) Board Reservation and Delegation. The Board may, in its
discretion, reserve to itself or delegate to another committee of the Board any
or all of the authority and responsibility of the Committee with respect to
Options to Grantees who are not Section 16 Grantees at the time any such
delegated authority or responsibility is exercised. Such other committee may
consist of one or more directors who may, but need not, be officers or
employees of the Company or of any of its Subsidiaries. To the extent that the
Board has reserved to itself or delegated the authority and responsibility of
the Committee to such other committee, all references to the Committee in the
Plan shall be to the Board or such other committee, as the case may be.
(c) Committee Authority. The Committee shall have full and final
authority, in its discretion, but subject to the express provisions of the
Plan, as follows:
(i) to grant Options on or after the Merger Date as
described in Article 6;
(ii) to determine when Options may be granted;
(iii) to interpret the Plan and to make all determinations
necessary or advisable for the administration of the Plan;
-4-
<PAGE> 8
(iv) to prescribe, amend, and rescind rules and
regulations relating to the Plan, including, without limitation, rules
with respect to the exercisability and nonforfeitability of Options
upon the Termination of Affiliation of a Grantee;
(v) to determine the terms and provisions of the Option
Agreements, which need not be identical and, with the consent (to the
extent required by the Plan) of the Grantee, to modify any such Option
Agreement at any time;
(vi) to accelerate the exercisability of, and to
accelerate or waive any or all of the restrictions and conditions
applicable to, any Option;
(vii) to make such adjustments or modifications to Options
to any Grantees working outside the United States as are necessary and
advisable to fulfill the purposes of the Plan, and
(viii) to impose such additional conditions, restrictions,
and limitations upon the grant, exercise or retention of Options as
the Committee may, before or concurrently with the grant thereof, deem
appropriate, including, without limitation, limiting the percentage of
Options which may from time to time be exercised by a Grantee.
The Committee shall have full and final authority to authorize any
action or make any determination as the Committee shall deem necessary or
advisable for carrying out the purposes of the Plan, including to correct any
defect, supply any omission and reconcile any inconsistency between the Plan
and the Capsure Options the Plan is intended to replace.
(d) Committee Determinations Final. The determination of the
Committee on all matters relating to the Plan or any Option Agreement shall be
conclusive and final. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option.
5. Eligibility. Options shall be granted to any employee (including
any officer), director or consultant of the Company or any of its Subsidiaries
to replace any options granted to such current, former or deceased employee,
director or consultant under the Capsure Plan which were terminated or
cancelled (with or without the consent of the Grantee) in connection with the
Merger.
6. Replacement Options.
(a) In General. In accordance with its powers under the Plan, the
Committee shall grant replacement Options, in accordance with this Article 6,
to preserve those opportunities and benefits of Capsure Grantees which were
terminated or cancelled in connection with the Merger.
-5-
<PAGE> 9
(b) Grant of Replacement Options. Subject to Article 3(a), the
Committee shall grant Options ("Replacement Options") under the Plan to each
Capsure Grantee who holds unexercised Capsure Options (whether or not
nonforfeitable) on the Merger Date; provided that such Capsure Grantee's right
to exercise any Capsure Options has been forfeited or cancelled in connection
with the Merger.
(i) The number of shares of Stock for which each
Replacement Option is exercisable shall be equal to the number of
shares of Capsure common stock which were subject to the Capsure
Option which such Replacement Option replaces.
(ii) The Option Price for each Replacement Option shall be
equal to the option price of the Capsure Option which such Replacement
Option replaces.
(iii) Each Replacement Option shall have, and the Committee
shall have the authority to cause it to have, the same terms and
conditions as, and not give the Grantee any benefits he did not have
under, the Capsure Option which such Replacement Option replaces;
provided, however, that (I) the period of time during which the
Replacement Option may be exercised by an employee, director or
consultant who, in the Committee's determination, has a Termination of
Affiliation in connection with the Merger shall be the lesser of one
year from the Merger Date or the remaining period during which the
Capsure Option which such Replacement Option replaces would have been
exercisable had the Merger not occurred; and (II) no Replacement
Option will carry stock appreciation rights.
7. Non-transferability. Each Option granted hereunder shall by its
terms not be assignable or transferable other than by will or the laws of
descent and distribution, and may be exercised, during the Grantee's lifetime,
only by the Grantee.
8. Exercise of Replacement Options. Subject to Articles 4 and 6,
and to the terms of the Option Agreement:
(a) Each Replacement Option granted to replace a Capsure Option shall
be exercisable in one or more installments.
(b) Replacement Options shall not be exercisable for twelve months
following a hardship distribution that is subject to Treasury Regulation
Section 1.401(k)-1(d)(2)(iv)(B)(4).
(c) Each Replacement Option shall be exercised by delivery to the
Company of written notice (in such form as may be required by the Committee) of
intent to purchase a specific number of shares of Stock subject to the
Replacement Option.
(d) The Option Price of any shares of Stock as to which a Replacement
Option shall be exercised shall be paid in full at the time of the exercise. A
Replacement Option shall be deemed exercised on the date such notice and
payment are received by the Company.
-6-
<PAGE> 10
Payment may be made in either one or any combination of the following, as
provided in the Option Agreement:
(i) in United States dollars, in cash or by check;
(ii) in shares of Stock held for at least six months,
valued at the Fair Market Value on the date of exercise;
(iii) a combination of (A) and (B) above; or
(iv) by other means which the Committee may determine.
Shares of Stock acquired by a Grantee on exercise of a Replacement
Option shall be delivered to the Grantee or, at the request of the Grantee,
shall be credited directly to a brokerage account specified by the Grantee.
9. Withholding Taxes.
(a) Mandatory Withholding. Whenever, under the Plan, cash or shares
of Stock are to be delivered upon exercise or payment of an Option or any other
event with respect to rights and benefits hereunder, the Company shall be
entitled to require as a condition of delivery (i) that the Grantee remit an
amount sufficient to satisfy all federal, state, and local withholding tax
requirements related thereto, (ii) the withholding of such sums from
compensation otherwise due to the Grantee or from any shares of Stock due to
the Grantee under the Plan or (iii) any combination of the foregoing.
(b) Elective Share Withholding.
(i) To the extent provided under the terms of the Capsure
Option which it replaces, and subject to the prior approval of the
Committee and to Article 9(b)(ii) below, a Grantee may elect the
withholding ("Share Withholding") by the Company of a portion of the
shares of Stock otherwise deliverable to such Grantee upon the
exercise or payment of an Option (a "Taxable Event") having a Fair
Market Value equal to
(A) the minimum amount necessary to satisfy required
federal, state, or local withholding tax liability attributable
to the Taxable Event; or
(B) with the Committee's prior approval, a greater
amount, not to exceed the estimated total amount of such
Grantee's federal, state and local tax liability with respect to
the Taxable Event.
(ii) Each Share Withholding election by a Grantee shall be
subject to the following restrictions:
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<PAGE> 11
(A) any Grantee's election shall be subject to the
Committee's right to revoke its approval of Share Withholding by
such Grantee at any time before the Grantee's election if the
Committee has reserved the right to do so at the time of its
approval;
(B) the Grantee's election must be made before the date
(the "Tax Date") on which the amount of tax to be withheld is
determined; and
(C) the Grantee's election shall be irrevocable.
10. Termination of Affiliation.
(a) Non-vested Options. Except as otherwise provided in Section
6(b)(iii)(I), in the event that a Grantee has a Termination of Affiliation for
any reason, any Options he holds as of such Termination of Affiliation shall
terminate and be null and void to the extent they are not immediately
exercisable on the date of Termination of Affiliation.
(b) Vested Options. Except as otherwise provided in Section
6(b)(iii)(I):
(i) In the event that a Grantee has a Termination of
Affiliation by reason of voluntary retirement with the consent of the
Company, death or disability ("Retirement"), (i) any Option which is
a NQSO and which was otherwise exercisable on the date of such
Retirement shall expire if not exercised within a period of one year
after the date of Retirement; and (ii) any Option which is an ISO and
which was otherwise exercisable on the date of Retirement shall expire
unless exercised within a period of three months (or, in the event the
Termination of Affiliation was by reason of death or permanent and
total disability within the meaning of Treasury Regulations Section
14a. 422A-1(A-2(b)), within a period of one year) after the date of
Retirement.
(ii) In the event that a Grantee has a Termination of
Affiliation by reason of discharge, removal, resignation or retirement
without the consent of the Company ("Termination"), any Options or
unexercised portions thereof which were otherwise exercisable on the
date of such Termination shall expire unless exercised within a period
of three months after the date of Termination;
(iii) Notwithstanding Sections 10(b)(i) and (ii), in the
event that a Grantee has a Termination of Affiliation which is
determined by the Committee to be for cause, all Options held by the
Grantee at the time of such Termination of Affiliation for cause which
were granted as replacements for Capsure Options granted on or after
March 27, 1996 shall expire as of the effective date of such
Termination of Affiliation for cause.
-8-
<PAGE> 12
Notwithstanding anything to the contrary herein, in the case of any
Retirement or Termination, the Committee may, if it determines that to do so
would be in the best interest of the Company, provide in a specific case or
cases for the immediate exercisability of Options which would not otherwise be
immediately exercisable on the date of such Retirement or Termination, or for
later expiration dates than are otherwise provided herein, upon such terms and
conditions as the Committee determines to be appropriate. Except as provided
in the preceding sentence, the foregoing provisions of this Article 10 shall
not extend the unexpired term of any Option.
11. Securities Law Matters.
(a) If the Committee deems necessary to comply with the Securities
Act of 1933, the Committee may require a written investment intent
representation by the Grantee and may require that a restrictive legend be
affixed to certificates for shares of Stock.
(b) If, based upon the opinion of counsel for the Company, the
Committee determines that the exercise or delivery of benefits pursuant to any
Option would violate any applicable provision of (i) federal or state
securities law or regulations or (ii) the listing requirements of any national
securities exchange on which are listed any of the Company's equity securities,
then the Committee may postpone any such exercise or delivery, as the case may
be, but the Company shall use its best efforts to cause such exercise or
delivery to comply with all such provisions at the earliest practicable date.
12. No Funding Required. Benefits payable under the Plan to any
person shall be paid directly by the Company. The Company shall not be
required to fund or otherwise segregate assets to be used for payment of
benefits under the Plan.
13. No Employment Rights. Neither the establishment of the Plan nor
the granting of any Option shall be construed to (a) give any Grantee the right
to remain employed by the Company or any of its Subsidiaries or to any benefits
not specifically provided by the Plan or (b) alter in any manner the right of
the Company or any of its Subsidiaries to modify, amend, or terminate any of
its employee benefit plans.
14. Rights as a Stockholder. A Grantee shall not, by reason of any
Option, have any right as a stockholder of the Company with respect to the
shares of Stock which may be deliverable upon exercise or payment of such
Option until such Stock has been delivered to him.
15. Nature of Payments. Any and all grants, payments of cash, or
deliveries of shares of Stock hereunder shall constitute special incentive
payments to the Grantee and shall not be taken into account in computing the
amount of salary or compensation of the Grantee for the purposes of determining
any pension, retirement, death or other benefits under (a) any pension,
retirement, profit-sharing, bonus, life insurance or other employee benefit
plan of the Company or any of its Subsidiaries or (b) any agreement between the
Company
-9-
<PAGE> 13
or any Subsidiary, on the one hand, and the Grantee, on the other hand, except
as such plan or agreement shall otherwise expressly provide.
16. Non-Uniform Determinations. The Committee and the Board may make
non-uniform determinations under the Plan and may make determinations
selectively among persons who receive, or are eligible to receive, Options
(whether or not such persons are similarly situated). Without limiting the
generality of the foregoing, the Committee shall be entitled, among other
things, to make non-uniform and selective determinations, to enter into
non-uniform and selective Option Agreements as to (a) the identity of the
Grantees, (b) the terms and provisions of Options, and (c) the treatment, under
Article 10, of Terminations of Affiliation.
17. Adjustments. Subject to Article 6, the Committee shall make
equitable adjustment of
(a) the aggregate numbers of shares of Stock available under
Article 3(a),
(b) the number of shares of Stock covered by an Option,
(c) the Option Price,
(d) all other appropriate matters,
to reflect any stock dividend, stock split, reverse stock split, stock split
up, share combination, recapitalization, reclassification, reorganization,
merger, consolidation, acquisition of property or shares, separation, spin-off,
reorganization, stock rights offering, liquidation or similar event of or by
the Company.
18. Amendment of the Plan. The Board may from time to time in its
discretion amend or modify the Plan without the approval of the stockholders of
the Company, except as such stockholder approval may be required (a) to permit
transactions in Stock pursuant to the Plan to be exempt from potential
liability under Section 16(b) of the 1934 Act, (b) to permit the Company to
deduct, in computing its income tax liability pursuant to the provisions of the
Internal Revenue Code, compensation resulting from Options, or (c) under the
listing requirements of any national securities exchange on which are listed
any of the Company's equity securities.
19. Termination of the Plan. The Plan shall terminate on the tenth
(10th) anniversary of the Effective Date or at such earlier time as the Board
may determine; provided that, any termination, whether in whole or in part,
shall not affect any Option then outstanding under the Plan.
20. No Illegal Transactions. The Plan and all Options granted
pursuant to it are subject to all laws and regulations of any governmental
authority which may be applicable
-10-
<PAGE> 14
thereto; and notwithstanding any provision of the Plan or any Option, Grantees
shall not be entitled to exercise Options or receive the benefits thereof and
the Company shall not be obligated to deliver any Stock or pay any benefits to
a Grantee if such exercise, delivery, receipt or payment of benefits would
constitute a violation by the Grantee or the Company of any provision of any
such law or regulation.
21. Controlling Law. The law of the State of Delaware, except its
law with respect to choice of law, shall be controlling in all matters relating
to the Plan.
22. Severability. If all or any part of the Plan is declared by any
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any portion of the Plan not declared to be
unlawful or invalid. Any Article or part of an Article so declared to be
unlawful or invalid shall, if possible, be construed in a manner which will
give effect to the terms of such Article or part of an Article to the fullest
extent possible while remaining lawful and valid.
-11-
<PAGE> 1
EXHIBIT 10.13
CNA Surety Corporation
1997 Long-Term Equity Compensation Plan
July 1997
<PAGE> 2
<TABLE>
<S> <C> <C>
Article 1. Establishment, Effective Date, Objectives, and Duration . . . 1
Article 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
Article 3. Administration . . . . . . . . . . . . . . . . . . . . . . . 6
Article 4. Shares Subject to the Plan and Maximum Awards . . . . . . . . 7
Article 5. Eligibility and General Conditions of Awards . . . . . . . . 9
Article 6. Stock Options . . . . . . . . . . . . . . . . . . . . . . . . 11
Article 7. Stock Appreciation Rights . . . . . . . . . . . . . . . . . . 14
Article 8. Restricted Shares . . . . . . . . . . . . . . . . . . . . . 15
Article 9. Performance Units and Performance Shares . . . . . . . . . . 16
Article 10. Bonus Shares. . . . . . . . . . . . . . . . . . . . . . . . 18
Article 11. Beneficiary Designation . . . . . . . . . . . . . . . . . . 18
Article 12. Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . 18
Article 13. Rights of Employees/Directors . . . . . . . . . . . . . . . 18
Article 14. Change in Control . . . . . . . . . . . . . . . . . . . . . 19
Article 15. Amendment, Modification, and Termination . . . . . . . . . . 19
Article 16. Withholding . . . . . . . . . . . . . . . . . . . . . . . . 20
Article 17. Successors . . . . . . . . . . . . . . . . . . . . . . . . . 21
Article 18. Additional Provisions . . . . . . . . . . . . . . . . . . . 21
</TABLE>
<PAGE> 3
CNA SURETY CORPORATION 1997 LONG-TERM EQUITY
COMPENSATION PLAN
ARTICLE 1. ESTABLISHMENT, EFFECTIVE DATE, OBJECTIVES, AND DURATION
1.1 Establishment of the Plan. CNA Surety Corporation, a Delaware
corporation (hereinafter referred to as the "Company"), hereby establishes an
incentive compensation plan to be known as the "CNA Surety Corporation 1997
Long-Term Equity Compensation Plan" (hereinafter referred to as the "Plan").
The Plan has been adopted by the Board of Directors of the Company, subject
to the approval by Continental Casualty Company as the sole shareholder of the
Company. The Plan shall be effective as of September 1, 1997 ("Effective
Date").
1.2 Objectives of the Plan. The Plan is intended to allow selected
employees, directors and consultants of the Company and its Subsidiaries to
acquire or increase equity ownership in the Company, thereby strengthening
their commitment to the success of the Company and stimulating their efforts on
behalf of the Company, and to assist the Company and its Subsidiaries in
attracting new employees, directors and consultants and retaining existing
employees, directors, and consultants.
The Plan is also intended to optimize the profitability and growth of the
Company through incentives which are consistent with the Company's goals; to
provide employees and directors with an incentive for excellence in individual
performance; and to promote teamwork among employees, directors, and
consultants.
1.3 Duration of the Plan. The Plan shall commence on the Effective Date and
shall remain in effect, subject to the right of the Board of Directors to amend
or terminate the Plan at any time pursuant to Article 15 hereof, until all
Shares subject to it shall have been purchased or acquired according to the
Plan's provisions. However, in no event may an Award be granted under the Plan
on or after the tenth anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below:
2.1 "Award" means options, including incentive stock options and replacement
options, Restricted Shares, Bonus Shares, stock appreciation rights (SARs),
performance units or performance shares granted under the Plan.
2.2 "Award Agreement" means the written agreement by which an Award shall be
evidenced.
2.3 "Board" or "Board of Directors" means the Board of Directors of the
Company.
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2.4 "Bonus Shares" means Shares that are awarded to a Grantee without cost
and without restrictions in recognition of past performance (whether determined
by reference to another employee benefit plan of the Company or otherwise) or
as an incentive to become an employee, director or consultant of the Company or
a Subsidiary.
2.5 "Cause" means any one or more of the following:
(A) a Grantee's commission of a crime which, in the judgment of the
Committee, is likely to result in injury to the Company or a Subsidiary;
(B) the material violation by the Grantee of written policies of the
Company or a Subsidiary; the habitual neglect by the Grantee in the
performance of his or her duties to the Company or a Subsidiary;
(C) or the action or inaction in connection with his or her duties to the
Company or a Subsidiary resulting, in the judgment of the Committee, in a
material injury to the Company or a Subsidiary;
(D) the rendering of services for any organization or engaging directly or
indirectly in any business which is or becomes competitive with the Company
or a Subsidiary or which organization or business, or the rendering of
services to such organization or business, is or becomes otherwise
prejudicial to or in conflict with the interests of the Company or a
Subsidiary;
(E) any attempt directly or indirectly to induce any employee of the
Company or a Subsidiary to be employed or perform services elsewhere or any
attempt directly or indirectly to solicit the trade or business of any
current or prospective customer, supplier, or partner of the Company or a
Subsidiary; or
(F) any other conduct or act determined by the Committee to be injurious,
detrimental, or prejudicial to any interest of the Company or a Subsidiary.
2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and regulations and rulings thereunder. References to a particular
section of the Code include references to successor provisions.
2.7 "Committee" means the committee of the Board appointed pursuant to
Article 3.
2.8 "Common Stock" means the common stock, $.01 par value, of the Company.
2.9 "Company" -- has the meaning ascribed to such term in Section 1.1.
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2.10 "Covered Employee" means a Grantee who, as of the date of inclusion in
income of the value of an Award, as applicable, is one of the group of "covered
employees," within the meaning of Code Section 162(m).
2.11 "Disability" means, for purposes of the exercise of an incentive stock
option after Termination of Affiliation, a disability within the meaning of
Section 22(e)(3) of the Code, and for all other purposes, a mental or physical
condition which, in the judgment of the Committee, renders a Grantee unable to
perform any of the principal job responsibilities which such Grantee held or
the tasks to which such Grantee was assigned at the time the disability was
incurred, and which condition is expected to be permanent or for an indefinite
duration exceeding two years.
2.12 "Disqualifying Disposition" -- see Section 6.4.
2.13 "Effective Date" shall have the meaning ascribed to such term in Section
1.1.
2.14 "Eligible Person" means (i) any employee (including any officer) of the
Company or any Subsidiary, including any such employee who is on an approved
leave of absence, layoff, or has been subject to a disability which does not
qualify as a Disability; (ii) any director of the Company or any Subsidiary;
and (iii) any person performing services for the Company or a Subsidiary in the
capacity of a consultant.
2.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
2.16 "Fair Market Value" of an equity security as of any date means the
closing price of such security on such date (or, if no sale of such security
was reported for such date, on the next preceding date on which a sale of such
security was reported) as reported in the principal consolidated transaction
reporting system for the New York Stock Exchange (or, if such security is not
listed on the New York Stock Exchange, on such other national exchange or the
over-the-counter market on which such security is principally traded); provided
that if such Fair Market Value as of any date cannot be so determined, such
Fair Market Value shall be determined by the Committee by whatever means or
method as it, in the good faith exercise of its discretion, shall at such time
deem appropriate.
2.17 "Freestanding SAR" means an SAR that is granted independently of any
other Award.
2.18 "Grant Date" -- see Section 5.2.
2.19 "Grantee" means an individual who has been granted an Award.
2.20 "including" or "includes" means "including, without limitation," or
"includes, without limitation", respectively.
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2.21 "Insider" shall mean a person who is subject to potential liability
under Section 16(b) of the 1934 Act with respect to transactions involving
equity securities of the Company.
2.22 "Mature Shares" means Shares for which the holder thereof has good
title, free and clear of all liens and encumbrances, and which such holder
either (i) has held for at least six months or (ii) has purchased on the open
market.
2.23 "Minimum Consideration" means $.01 per Share or such other amount that
is from time to time considered to be capital for purposes of Section 154 of
the Delaware General Corporation Law.
2.24 "1934 Act" means the Securities Exchange Act of 1934. References to a
particular section of, or rule under, the 1934 Act include references to
successor provisions.
2.25 "Option Price" means the price at which a Share may be purchased by a
Grantee pursuant to an option.
2.26 "Option Term" means the period beginning on the Grant Date of an option
and ending on the expiration date of such option, as specified in the Award
Agreement for such option and as may, in the discretion of the Committee and
consistently with the provisions of the Plan, be extended from time to time
prior to the expiration date of such stock option then in effect.
2.27 "Performance-Based Exception" means the performance-based exception from
the tax deductibility limitations of Code Section 162(m).
2.28 "Performance Period" -- see Section 9.2.
2.29 "Period of Restriction" means the period during which the transfer of
Restricted Shares is limited in some way (based on the passage of time, the
achievement of performance goals, or upon the occurrence of other events as
determined by the Committee, in its discretion), and the Shares are subject to
a substantial risk of forfeiture, as provided in Article 8 herein.
2.30 "Person" shall have the meaning ascribed to such term in Section 3(a)(9)
of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
2.31 "Plan" -- see the introductory paragraph.
2.32 "Reload Option" -- see Section 6.5.
2.33 "Required Withholding" -- see Article 16.
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2.34 "Restricted Shares" means Shares that are subject to forfeiture if the
Grantee does not satisfy the conditions specified in the Award Agreement
applicable to such Shares.
2.35 "Rule 16b-3" means Rule 16b-3 of the SEC under the 1934 Act, as amended
from time to time, together with any successor rule.
2.36 "Retirement" means for any Grantee who is an employee, a Termination of
Affiliation by the Grantee upon attaining age 65 with at least five years of
service as an employee of the Company or a Subsidiary.
2.37 "SAR" means stock appreciation right.
2.38 "SEC" means the Securities and Exchange Commission.
2.39 "Share" means a share of Common Stock.
2.40 "Strike Price" of any SAR shall equal, for any Tandem SAR that is
identified with an option, the Option Price of such option, or for any other
SAR, 100% of the Fair Market Value of a Share on the Grant Date of such SAR;
provided that the Committee may specify a higher Strike Price in the Award
Agreement.
2.41 "Subsidiary" means, for purposes of grants of incentive stock options, a
corporation as defined in Section 424(f) of the Code (with the Company being
treated as the employer corporation for purposes of this definition) and, for
all other purposes, a United States or foreign corporation with respect to
which the Company owns, directly or indirectly, 50% or more of the
then-outstanding common stock.
2.42 "Tandem SAR" means an SAR that is granted in connection with a related
Award, the exercise of which shall require forfeiture of the right to purchase
a Share under the related Award (and when a Share is purchased under the
related Award, the Tandem SAR shall similarly be canceled).
2.43 "10% Owner" means a person who owns capital stock (including stock
treated as owned under Section 424(d) of the Code) possessing more than 10% of
the total combined voting power of all classes of capital stock of the Company
or any Subsidiary.
2.44 "Termination of Affiliation" occurs on the first day on which an
individual is for any reason no longer providing services for the Company or
any of its Subsidiaries in the capacity of an employee, director or consultant,
or with respect to an individual who is an employee, or director of or
consultant to Subsidiary, the first day on which the Company no longer,
directly or indirectly, owns voting securities possessing at least 50% of the
combined voting power of the then-outstanding securities of a corporation
entitled to vote generally in the election of directors of such Subsidiary.
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ARTICLE 3. ADMINISTRATION
3.1 Committee. Subject to Article 15, and to Section 3.2, the Plan shall be
administered by a committee (the "Committee") which shall consist of two or
more directors of the Company, all of whom qualify as "outside directors" as
defined for purposes of the regulations under Code Section 162(m) and
"non-employee directors" within the meaning of Rule 16b-3 in respect of the
exemption of grants to Insiders from potential liability under Section 16(b) of
the 1934 Act. The number of members of the Committee shall from time to time be
increased or decreased, and shall be subject to such conditions, in each case
as the Board deems appropriate to permit transactions in Shares pursuant to the
Plan to satisfy such conditions of Rule 16b-3 as then in effect.
3.2 Delegation Authority. The Board may reserve to itself or delegate to
another committee of the Board any or all of the authority of the Committee
with respect to Awards. Such other committee (the "Management Committee") may
consist of one (or such greater number as may from time to time be required by
the bylaws of the Company) or more directors who may, but need not be, officers
or employees of the Company or a Subsidiary. To the extent that the Board has
reserved to itself or delegated to such Management Committee the authority of
the Committee, all references to the Committee in the Plan shall be to the
Board or such Management Committee. The Management Committee may not grant
Awards relating to an aggregate of more than 200,000 Shares in any calendar
year unless the Board gives its prior approval of a larger number of Shares.
3.3 Powers of Committee. Subject to the express provisions of the Plan, the
Committee has full and final authority and sole discretion as follows:
(i) to determine when and to whom Awards should be granted and the terms
and conditions applicable to each Award, including the benefit payable under
any SAR, performance unit or performance share, and whether or not specific
Awards shall be identified with other specific Awards, and if so whether they
shall be exercisable cumulatively with, or alternatively to, such other
specific Awards;
(ii) to determine the sizes and types of Awards;
(iii) to determine the amount, if any, that a Grantee shall pay for
Restricted Shares, whether to permit or require the payment of cash dividends
thereon to be deferred and the terms related thereto, when Restricted Shares
(including Restricted Shares acquired upon the exercise of an option) shall be
forfeited and whether such shares shall be held in escrow;
(iv) to construe and interpret the Plan and to make all determinations
necessary or advisable for the administration of the Plan;
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<PAGE> 9
(v) to make, amend, and rescind rules relating to the Plan, including rules
with respect to the exercisability and nonforfeitability of Awards upon the
Termination of Affiliation of a Grantee;
(vi) to determine the terms and conditions of all Award Agreements (which
need not be identical) and, with the consent of the Grantee, to amend any such
Award Agreement at any time, among other things, to permit transfers of such
Awards to the extent permitted by the Plan; provided that the consent of the
Grantee shall not be required for any amendment which (A) does not adversely
affect the rights of the Grantee, or (B) is necessary or advisable (as
determined by the Committee) to carry out the purpose of the Award as a result
of any new or change in existing applicable law;
(vii) to cancel, with the consent of the Grantee, outstanding Awards and to
grant new Awards in substitution therefor;
(viii) to accelerate the exercisability (including exercisability within a
period of less than one year after the Grant Date) of, and to accelerate or
waive any or all of the terms and conditions applicable to, any Award or any
group of Awards for any reason and at any time, including in connection with a
Termination of Affiliation (other than for Cause);
(ix) subject to Section 1.3 and 5.3, to extend the time during which any
Award or group of Awards may be exercised;
(x) to make such adjustments or modifications to Awards to Grantees working
outside the United States as are advisable to fulfill the purposes of the Plan;
(xi) to impose such additional terms and conditions upon the grant,
exercise or retention of Awards as the Committee may, before or concurrently
with the grant thereof, deem appropriate, including limiting the percentage of
Awards which may from time to time be exercised by a Grantee; and
(xii) to take any other action with respect to any matters relating to the
Plan for which it is responsible.
The determination of the Committee on all matters relating to the Plan or any
Award Agreement shall be final, conclusive and binding on all Persons. No
member of the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Award.
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 Number of Shares Available for Grants. Subject to adjustment as
provided in Section 4.2 herein, the number of Shares hereby reserved for
issuance under the Plan shall be three million (3,000,000), reduced by the
number of shares made subject to options under
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the CNA Surety Corporation Replacement Stock Option Plan. If any Shares
subject to an Award granted hereunder are forfeited or such Award otherwise
terminates without the issuance of such Shares or of other consideration in
lieu of such Shares, the Shares subject to such Award, to the extent of any
such forfeiture or termination shall again be available for grant under the
Plan. The Committee shall determine the appropriate methodology for
calculating the number of shares issued pursuant to the Plan.
(a) Options: The maximum aggregate number of Shares that may
be granted in the form of options, pursuant to any Award granted in any
one calendar year to any one single Grantee shall be two hundred
thousand (200,000).
(b) SARS: The maximum aggregate number of SARs available under
the Plan shall be one million (1,000,000), and the maximum aggregate
number of SARs that may be granted in any one calendar year to any one
single Grantee shall be two hundred thousand (200,000).
(c) Restricted Shares: The maximum aggregate number of Shares
that may be granted as Restricted Shares under the Plan shall be one
million (1,000,000), and the maximum aggregate grant with respect to
Awards of Restricted Shares granted in any one calendar year to any one
Grantee shall be one hundred thousand (100,000).
(d) Bonus Shares: The maximum number of Shares that may be
granted as Bonus Shares under the Plan shall be 300,000.
(e) Performance Shares/Performance Units: The maximum
aggregate payout (determined as of the end of the applicable
performance period) with respect to Awards of Performance Shares or
Performance Units granted in any one calendar year to any one Grantee
shall be equal to the value of one hundred thousand (100,000) Shares.
Shares issued pursuant to the Plan may be treasury Shares or newly
issued Shares.
4.2 Adjustments in Authorized Shares. In the event of any change in
corporate capitalization, such as a stock split, or share combination or a
corporate transaction, such as any merger, consolidation, separation, including
a spin-off, or other distribution of stock or property of the Company, any
reorganization (whether or not such reorganization comes within the definition
of such term in Code Section 368) or any partial or complete liquidation of the
Company, such adjustment shall be made in the number and class of Shares which
may be delivered under Section 4.1, in the number and class of and/or price of
Shares subject to outstanding Awards granted under the Plan, and in the Award
limits set forth in subsections 4.1(a) and 4.1(b), as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to prevent
dilution or enlargement of rights; provided, however, that the number of Shares
subject to any Award shall always be a whole number.
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ARTICLE 5. ELIGIBILITY AND GENERAL CONDITIONS OF AWARDS
5.1 Eligibility. The Committee may in its discretion grant Awards to any
Eligible Person, whether or not he or she has previously received an Award.
5.2 Grant Date. The Grant Date of an Award shall be the date on which the
Committee grants the Award or such later date as specified in advance by the
Committee.
5.3 Maximum Term. Any provision of the Plan to the contrary
notwithstanding, the Option Term or other period during which an Award may be
outstanding shall under no circumstances extend more than 10 years after the
Grant Date, and shall be subject to earlier termination as herein provided.
5.4 Award Agreement. To the extent not set forth in the Plan, the terms and
conditions of each Award (which need not be the same for each grant or for each
Grantee) shall be set forth in an Award Agreement.
5.5 Restrictions on Share Transferability. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an option
granted under the Plan as it may deem advisable, including, without limitation,
restrictions under applicable federal securities laws, under the requirements
of any stock exchange or market upon which Shares are then listed or traded,
and under any blue sky or state securities laws applicable to such Shares.
5.6 Termination of Affiliation. Each Grantee's Award Agreement shall set
forth the extent to which the Grantee shall have the right to exercise the
option following Termination of Affiliation. Such provisions shall be
determined in the sole discretion of the Committee, shall be included in the
Award Agreement, need not be uniform among all options granted under the Plan,
and may reflect distinctions based on the reasons for Termination of
Affiliation. Notwithstanding the foregoing, vesting of Restricted Shares and
distributions or payments with respect to other Awards intended to qualify for
the Performance-Based Exception shall occur at the time they would have, but
for the Termination of Affiliation, if such Termination of Affiliation is for a
reason other than death, Disability, or in connection with a change of control
of the Company or a Subsidiary.
5.7 Nontransferability of Awards.
(a) Incentive Stock Options. No incentive stock option granted under the
Plan may be sold, transferred, pledged, assigned, or otherwise alienated
or hypothecated, other than by will or by the laws of descent and
distribution. Further, all incentive stock options granted under the
Plan shall be exercisable during his or her lifetime only by the
Grantee.
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(b) Other Awards. Each Award granted hereunder shall not be assignable or
transferable other than by will or the laws of descent and distribution
and may be exercised, during the Grantee's lifetime, only by the Grantee
or his or her guardian or legal representative, except that, subject to
Section 6.4 in respect of incentive stock options, a Grantee may in a
manner and to the extent permitted by the Committee in its discretion,
(i) designate in writing a beneficiary to exercise an Award after his or
her death (provided, however, that no such designation shall be
effective unless received by the office of the Company designated for
that purpose prior to the Grantee's death) and (ii) transfer the Award
to such Grantee's spouse, children or grandchildren.
5.8 Cancellation and Rescission of Awards.
(a) Unless the Award Agreement specifies otherwise, the Committee may
cancel, rescind, suspend, withhold, or otherwise limit or restrict any
unexercised Award at any time if the Grantee is not in compliance with
all applicable provisions of the Award Agreement and the Plan or if the
Grantee has a Termination of Affiliation for Cause.
(b) Upon exercise, payment, or delivery pursuant to an option, the Grantee
shall certify in a manner acceptable to the Company that he or she is in
compliance with the terms and conditions of the Plan. In the event a
Grantee fails to comply with the provisions of this Section 5.8 prior
to, or during the six months after, any exercise, payment, or delivery
pursuant to an Award, such exercise, payment, or delivery may be
rescinded by the Company within two years thereafter. In the event of
any such rescission, the Grantee shall pay to the Company the amount of
any gain realized or payment received as a result of the rescinded
exercise, payment, or delivery in such manner and on such terms and
conditions as may be required, and the Company shall be entitled to
set-off against the amount of any such gain any amount owed to the
Grantee by the Company.
5.9 Loans and Guarantees. The Committee may in its discretion allow a
Grantee to defer payment to the Company of all or any portion of (i) the Option
Price of an option, (ii) the purchase price of Restricted Shares, or (iii) any
taxes associated with the exercise, nonforfeitability of, or payment of
benefits in connection with, an Award, or cause the Company to guarantee a loan
from a third party to the Grantee, in an amount equal to all or any portion of
such Option Price, or any related taxes. Any such payment deferral or guarantee
by the Company shall be on such terms and conditions as the Committee may
determine; provided that the interest rate applicable to any such payment
deferral shall not be more favorable to the Grantee than the terms applicable
to funds borrowed by the Company from time to time. Notwithstanding the
foregoing, a Grantee shall not be entitled to defer the payment of such Option
Price, purchase price or any related taxes unless the Grantee (i) enters into a
binding obligation to pay the deferred amount and (ii) except with respect to
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treasury shares, pays upon exercise of an option or grant of Restricted Shares,
as applicable, an amount at least equal to the Minimum Consideration therefor.
If the Committee has permitted a payment deferral or caused the Company to
guarantee a loan pursuant to this Section, then the Committee may require the
immediate payment of such deferred amount or the immediate release of such
guarantee upon the Grantee's Termination of Affiliation or if the Grantee sells
or otherwise transfers his or her Shares purchased pursuant to such deferral or
guarantee. The Committee may at any time in its discretion forgive the
repayment of any or all of the principal of, or interest on, any such deferred
payment obligation.
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
options may be granted to any Eligible Person in such number, and upon such
terms, and at any time and from time to time as shall be determined by the
Committee.
6.2 Award Agreement. Each option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the Option Term, the number of
shares to which the Option pertains, the time or times at which such option
shall be exercisable and such other provisions as the Committee shall
determine.
6.3 Option Price. The Option Price of an option under this Plan shall be at
least equal to one hundred percent (100%) of the Fair Market Value of a Share
on the Grant Date.
6.4 Grant of Incentive Stock Options. At the time of the grant of any
option, the Committee may in its discretion designate that such option shall be
made subject to additional restrictions to permit it to qualify as an
"incentive stock option" under the requirements of Section 422 of the Code. Any
option designated as an incentive stock option:
(i) shall, if granted to a 10% Owner, have an Option Price not less than
110% of the Fair Market Value of a Share on the Grant Date;
(ii) shall be for a period of not more than 10 years (five years in the
case of an incentive stock option granted to a 10% Owner) from the Grant Date,
and shall be subject to earlier termination as provided herein or in the
applicable Award Agreement;
(iii) shall not have an aggregate Fair Market Value (determined for each
incentive stock option at its Grant Date) of the Shares with respect to which
incentive stock options are exercisable for the first time by such Grantee
during any calendar year (under the Plan and any other stock option plan of the
Grantee's employer or any parent or Subsidiary thereof ("Other Plans")),
determined in accordance with the provisions of Section 422 of the Code, which
exceeds $100,000 (the "$100,000 Limit");
(iv) shall, if the aggregate Fair Market Value of the Shares (determined on
the Grant Date) with respect to the portion of such grant which is exercisable
for the first
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time during any calendar year ("Current Grant") and all incentive stock options
previously granted under the Plan and any Other Plans which are exercisable for
the first time during a calendar year ("Prior Grants") would exceed the
$100,000 Limit, be exercisable as follows:
(A) the portion of the Current Grant which would, when added to any Prior
Grants, be exercisable with respect to Shares which would have an aggregate
Fair Market Value (determined as of the respective Grant Date for such options)
in excess of the $100,000 Limit shall, notwithstanding the terms of the Current
Grant, be exercisable for the first time by the Grantee in the first subsequent
calendar year or years in which it could be exercisable for the first time by
the Grantee when added to all Prior Grants without exceeding the $100,000
Limit; and
(B) if, viewed as of the date of the Current Grant, any portion of a
Current Grant could not be exercised under the preceding provisions of this
Section during any calendar year commencing with the calendar year in which it
is first exercisable through and including the last calendar year in which it
may by its terms be exercised, such portion of the Current Grant shall not be
an incentive stock option, but shall be exercisable as a separate option at
such date or dates as are provided in the Current Grant;
(v) shall be granted within 10 years from the earlier of the date the Plan
is adopted or the date the Plan is approved by the stockholders of the Company;
(vi) shall require the Grantee to notify the Committee of any disposition
of any Shares issued pursuant to the exercise of the incentive stock option
under the circumstances described in Section 421(b) of the Code (relating to
certain disqualifying dispositions) (any such circumstance, a "Disqualifying
Disposition"), within 10 days of such Disqualifying Disposition; and
(vii) shall by its terms not be assignable or transferable other than by
will or the laws of descent and distribution and may be exercised, during the
Grantee's lifetime, only by the Grantee; provided, however, that the Grantee
may, to the extent provided in the Plan in any manner specified by the
Committee, designate in writing a beneficiary to exercise his or her incentive
stock option after the Grantee's death.
Notwithstanding the foregoing, the Committee may, without the consent of the
Grantee, at any time before the exercise of an option (whether or not an
incentive stock option), take any action necessary to prevent such option from
being treated as an incentive stock option.
6.5 Grant of Reload Options. The Committee may in connection with the grant
of an option or thereafter provide that a Grantee who (i) is an Eligible Person
when he or she exercise an Option, (ii) exercises such option [for Shares which
have a Fair Market Value equal to not less than 120% of the Option Price for
such option] ("Exercised Option") and (iii) satisfies the Option Price or
Required Withholding applicable thereto with Shares shall
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automatically be granted, subject to Article 3, an additional option ("Reload
Option") in an amount equal to the sum ("Reload Number") of the number of
Shares tendered to exercise the Exercised Option plus, if so provided by the
Committee, the number of Shares, if any, retained by the Company in connection
with the exercise of the Exercised Option to satisfy any federal, state or
local tax withholding requirements; provided that no Reload Option shall be
granted in connection with the exercise of an Option that has been transferred
by the initial Grantee thereof.
6.6 Conditions on Reload Options. Reload Options shall be subject to the
following terms and conditions:
(a) the Grant Date for each Reload Option shall be the date of exercise of
the Exercised Option to which it relates;
(b) subject to Article 5, the Reload Option may be exercised at any time
during the Option Term of the Exercised Option (subject to earlier termination
thereof as provided in the Plan or in the applicable Award Agreement); and
(c) the terms of the Reload Option shall be the same as the terms of the
Exercised Option to which it relates, except that (A) the Option Price for the
Reload Option shall be 100% of the Fair Market Value of a Share on the Grant
Date of the Reload Option, and (B) subject to Section 5, no Reload Option may
be exercised within one year after its Grant Date.
6.7 Payment. Options granted under this Article 6 shall be exercised by the
delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the option is to be exercised,
accompanied by full payment for the Shares.
Payment of the Option Price may be made by any one or more of the following
means:
(A) cash, personal check or wire transfer;
(B) Mature Shares, valued at their Fair Market Value on the date of
exercise;
(C) with the approval of the Committee, Restricted Shares held by the
Grantee for at least six months prior to the exercise of the option, each
such share valued at the Fair Market Value of a Share on the date of
exercise;
(D) pursuant to procedures previously approved by the Company, through
the sale of the Shares acquired on exercise of the Option through a
broker-dealer to whom the Grantee has submitted an irrevocable notice of
exercise
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and irrevocable instructions to deliver promptly to the Company the amount of
sale or loan proceeds sufficient to pay for such Shares, together with, if
requested by the Company, the amount of federal, state, local or foreign
withholding taxes payable by Grantee by reason of such exercise; or
(E) in the discretion of the Committee, payment may also be made in
accordance with Section 5.9.
The Committee may in its discretion specify that, if any Restricted Shares
("Tendered Restricted Shares") are used to pay the Option Price, (x) all the
Shares acquired on exercise of the option shall be subject to the same
restrictions as the Tendered Restricted Shares, determined as of the date of
exercise of the option, or (y) a number of Shares acquired on exercise of the
option equal to the number of Tendered Restricted Shares shall be subject to
the same restrictions as the Tendered Restricted Shares, determined as of the
date of exercise of the option.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs
may be granted to any Eligible Person at any time and from time to time as
shall be determined by the Committee. The Committee may grant Freestanding
SARs, Tandem SARs, or any combination thereof.
The Committee shall have complete discretion in determining the number of
SARs granted to each Grantee (subject to Article 4), the Strike Price thereof,
and, consistent with the provisions of the Plan, in determining the terms and
conditions pertaining to such SARs.
7.2 Exercise of Tandem SAR. Tandem SARs may be exercised for all or part of
the Shares subject to the related Award upon the surrender of the right to
exercise the equivalent portion of the related Award. A Tandem SAR may be
exercised only with respect to the Shares for which its related Award is then
exercisable.
Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO; (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than one
hundred percent (100%) of the difference between the Option Price of the
underlying ISO and the Fair Market Value of the Shares subject to the underling
ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be
exercised only when the Fair Market Value of the Shares subject to the ISO
exceeds the Option Price of the ISO.
7.3 Exercise of Freestanding SARs. Freestanding SARs may be exercised upon
whatever terms and conditions the Committee, in its sole discretion, imposes
upon them.
-14-
<PAGE> 17
7.4 Payment of SAR Amount. Upon exercise of an SAR, the Grantee shall be
entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on
the date of exercise over the grant price; by
(b) The number of Shares with respect to which the SAR is exercised;
provided that the Committee may provide that the benefit payable on
exercise of any SAR shall not exceed such percentage of The Fair
Market Value of a Share on the Grant Date as the Committee shall
specify.
At the discretion of the Committee, the payment upon SAR exercise may be in
cash, in Shares of equivalent value, or in some combination thereof, as set
forth in the Award Agreement.
ARTICLE 8. RESTRICTED SHARES
8.1 Grant of Restricted Shares. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Restricted
Shares to any Eligible Person in such amounts as the Committee shall determine.
8.2 Award Agreement. Each grant of Restricted Shares shall be evidenced by
an Award Agreement that shall specify the Period(s) of Restriction, the number
of Restricted Shares granted, and such other provisions as the Committee shall
determine. Subject to Article 11 herein, the Committee shall impose such other
conditions and/or restrictions on any Restricted Shares granted pursuant to the
Plan as it may deem advisable, including restrictions based upon the
achievement of specific performance goals (Company-wide, divisional, and/or
individual), time-based restrictions on vesting following the attainment of the
performance goals, and/or restrictions under applicable federal or state
securities laws.
8.3 Other Restrictions. The Committee shall determine the amount, if any,
that a Grantee shall pay for Restricted Shares, subject to the following
sentence. Except with respect to Restricted Shares that are treasury shares,
for which no payment need be required, the Committee shall require the Grantee
to pay at least the Minimum Consideration for each Restricted Share. Such
payment shall be made in full by the Grantee before the delivery of the shares
and in any event no later than 10 days after the Grant Date for such shares.
8.4 Effect of Forfeiture. If Restricted Shares are forfeited, then if the
Grantee was required to pay for such shares or acquired such Restricted Shares
upon the exercise of an option, the Grantee shall be deemed to have resold such
Restricted Shares to the Company at a price equal to the lesser of (x) the
amount paid by the Grantee for such Restricted Shares, or (y) the Fair Market
Value of a Share on the date of such forfeiture. The Company shall pay to the
Grantee the required amount as soon as is administratively practical. Such
-15-
<PAGE> 18
Restricted Shares shall cease to be outstanding, and shall no longer confer on
the Grantee thereof any rights as a stockholder of the Company, from and after
the date of the event causing the forfeiture, whether or not the Grantee
accepts the Company's tender of payment for such Restricted Shares.
8.5 Escrow; Legends. The Committee may provide that the certificates for
any Restricted Shares (x) shall be held (together with a stock power executed
in blank by the Grantee) in escrow by the Secretary of the Company until such
Restricted Shares become nonforfeitable or are forfeited or (y) shall bear an
appropriate legend restricting the transfer of such Restricted Shares. If any
Restricted Shares become nonforfeitable, the Company shall cause certificates
for such shares to be issued without such legend.
8.6 Termination of Affiliation. Each Restricted Shares Award Agreement
shall set forth the extent to which the Participant shall have the right to
receive unvested Restricted Shares following termination of the Participant's
employment or directorship with the Company. Such provision shall be
determined in the sole discretion of the Board, shall be included in the Award
Agreement entered into with each Participant, need not be uniform among all
Restricted Shares issued pursuant to the Plan, and may reflect distinctions
based on the reasons for termination; provided, however that, except in the
cases of terminations connected with a Change in Control and terminations by
reason of death or Disability, the vesting of Restricted Shares which qualify
for the Performance-Based Exception and which are held by Covered Employees
shall occur at the time they otherwise would have, but for the termination.
ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES
9.1 Grant of Performance Units/Shares. Subject to the terms of the Plan,
Performance Units and/or Performance Shares may be granted to any Eligible
Person in such amounts and upon such terms, and at any time and from time to
time as shall be determined by the Committee.
9.2 Value of Performance Units/Shares. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value of
a Share on the date of grant. The Committee shall set performance goals in its
discretion which, depending on the extent to which they are met, will determine
the number and/ or value of Performance Units/Shares that will be paid out to
the Grantee. For purposes of this Article 9, the time period during which the
performance goals must be met shall be called a "Performance Period."
9.3 Earning of Performance Units/Shares. Subject to the terms of this Plan,
after the applicable Performance Period has ended, the holder of Performance
Units/Shares shall be entitled to receive payout on the number and value of
Performance Units/Shares earned by
-16-
<PAGE> 19
the Grantee over the Performance Period, to be determined as a function of the
extent to which the corresponding performance goals have been achieved.
If a Grantee is promoted, demoted or transferred to a different business unit
of the Company during a Performance Period, then, to the extent the Committee
determines the performance goals or Performance Period are no longer
appropriate, the Committee may adjust, change or eliminate the performance
goals or the applicable Performance Period as it deems appropriate in order to
make them appropriate and comparable to the initial performance goals or
Performance Period.
9.4 Form and Timing of Payment of Performance Units/Shares. Payment of
earned Performance Units/Shares shall be made in a single lump sum following
the close of the applicable Performance Period. Subject to the terms of this
Plan, the Committee, in its sole discretion, may pay earned Performance
Units/Shares in the form of cash or in Shares (or in a combination thereof)
which have an aggregate Fair Market Value equal to the value of the earned
Performance Units/Shares at the close of the applicable Performance Period.
Such Shares may be granted subject to any restrictions deemed appropriate by
the Committee. The determination of the Committee with respect to the form of
payout of such Awards shall be set forth in the Award Agreement pertaining to
the grant of the Award.
At the discretion of the Committee, a Grantee may be entitled to receive any
dividends declared with respect to Shares which have been earned in connection
with grants of Performance Units and/or Performance Shares which have been
earned, but not yet distributed to the Grantee. In addition, a Grantee may, at
the discretion of the Committee, be entitled to exercise his or her voting
rights with respect to such Shares.
9.5 Performance Measures. Unless and until the Committee proposes for
shareholder vote and shareholders approve a change in the general performance
measures set forth in this Article 9, the attainment of which may determine the
degree of payout and/or vesting with respect to Awards designed to qualify for
the Performance-Based Exception, the performance measure(s) to be used for
purposes of such Awards shall be chosen from among the following:
(a) Earnings (either in the aggregate or on a per-share basis);
(b) Net income (before or after taxes);
(c) Operating income;
(d) Cash flow;
(e) Return measures (including, but not limited to, return on assets,
equity, or sales);
-17-
<PAGE> 20
(f) Earnings before or after taxes, and before or after depreciation
and amortization;
(g) Gross revenues;
(h) Share price (including, but not limited to, growth measures and
total shareholder return or attainment by the Shares of a
specified value for a specified period of time);
(i) Reductions in expense levels in each case where applicable
determined either in a Company-wide basis or in respect of any
one or more business units;
(j) Combined ratio (or any of its components);
(k) Gross or net written premiums; and
(l) Net economic value.
The Committee shall have the discretion to adjust the determinations of the
degree of attainment of the preestablished performance goals; provided,
however, that Awards which are designed to qualify for the Performance-Based
Exception, may not be adjusted upward (the Committee shall retain the
discretion to adjust such Awards downward).
In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining shareholder approval of such changes, and still qualify for the
Performance-Based Exception, the Committee shall have sole discretion to make
such changes without obtaining shareholder approval.
ARTICLE 10. BONUS SHARES.
10.1 Grant of Bonus Shares. Subject to the terms of the Plan, the Committee
may grant Bonus Shares to any Eligible Person, in such amount and upon such
terms and at any time and from time to time as shall be determined by the
Committee.
ARTICLE 11. BENEFICIARY DESIGNATION
Each Grantee under the Plan may, from time to time, name any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke
all prior designations by the same Grantee, shall be in a form prescribed by
the Company, and will be effective only when filed by the Grantee in writing
with the Company during the Grantee's lifetime. In the absence of any
-18-
<PAGE> 21
such designation, benefits remaining unpaid at the Grantee's death shall be
paid to the Grantee's estate.
ARTICLE 12. DEFERRALS
The Committee may permit or require a Grantee to defer receipt of the payment
of cash or the delivery of Shares that would otherwise be due by virtue of the
exercise of an Option or SAR, the lapse or waiver of restrictions with respect
to Restricted Shares, or the satisfaction of any requirements or goals with
respect to Performance Units/Shares. If any such deferral is required or
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals.
ARTICLE 13. RIGHTS OF EMPLOYEES/DIRECTORS
13.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Grantee's employment at any time,
nor confer upon any Grantee right to continue in the employ of the Company.
13.2 Participation. No Employee or Director shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to
be selected to receive a future Award.
ARTICLE 14. CHANGE IN CONTROL
14.1 Treatment of Outstanding Awards. The Committee may provide in an Award
Agreement for different terms and conditions to apply prior to and after a
Change in Control of the Company or a Subsidiary.
14.2 Occurrence of Change of Control. The Committee may set rules for
determining when a Change of Control of the Company or a Subsidiary has
occurred.
14.3 Pooling of Interests Accounting. Notwithstanding any other provision of
the Plan to the contrary, (a) in the event that the consummation of a Change in
Control is contingent on using pooling of interests accounting methodology the
Committee may take any action necessary to preserve the use of pooling of
interests accounting; and (b) if the Committee determines, in its discretion
exercised prior to a sale or merger of the Company that in the Committee's
judgment is reasonably likely to occur, that the exercise of SARs would
preclude the use of pooling-of-interests accounting ("pooling") after the
consummation of such sale or merger and that such preclusion of pooling would
have a material adverse effect on such sale or merger, the Committee may either
unilaterally cancel such SARs prior to the sale or merger or cause the Company
to pay the benefit attributable to such SARs in the form of Shares if the
Committee determines that such payment would not cause the transaction to
become ineligible for pooling.
-19-
<PAGE> 22
ARTICLE 15. AMENDMENT, MODIFICATION, AND TERMINATION
15.1 Amendment, Modification, and Termination. Subject to the terms of the
Plan, the Board may at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part without the approval of the Company's
stockholders, except (i) as such stockholder approval may be required under the
listing requirements of any securities exchange or national market system on
which are listed the Company's equity securities and except that (ii) the Board
may not without the approval of the Company's stockholders amend the Plan to
(x) increase the total number of shares reserved for the purposes of the Plan,
or (y) change the individuals or class of individuals eligible to
participate in the Plan.
15.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual
or nonrecurring events (including, without limitation, the events described in
Section 4.3 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan; provided that
no such adjustment shall be authorized to the extent that such authority would
be inconsistent with the Plan's meeting the requirements of Section 162(m) of
the Code.
15.3 Awards Previously Granted. Notwithstanding any other provision of the
Plan to the contrary (but subject to Section 14.3 hereof), no termination,
amendment, or modification of the Plan shall adversely affect in any material
way any Award previously granted under the Plan, without the written consent of
the Grantee of such Award.
ARTICLE 16. WITHHOLDING
(a) Mandatory Tax Withholding.
(1) Whenever under the Plan, Shares are to be delivered upon
exercise or payment of an Award or upon Restricted Shares becoming
nonforfeitable, or any other event with respect to rights and benefits
hereunder, the Company shall be entitled to require (i) that the
Grantee remit an amount in cash, or in the Company's discretion, Mature
Shares, sufficient to satisfy all federal, state, and local tax
withholding requirements related thereto ("Required Withholding"), (ii)
the withholding of such Required Withholding from compensation
otherwise due to the Grantee or from any Shares due to the Grantee
under the Plan or (iii) any combination of the foregoing.
-20-
<PAGE> 23
(2) Any Grantee who makes a Disqualifying Disposition or an
election under Section 83(b) of the Code shall remit to the Company an
amount sufficient to satisfy all resulting Required Withholding;
provided that, in lieu of or in addition to the foregoing, the Company
shall have the right to withhold such Required Withholding from
compensation otherwise due to the Grantee or from any Shares or other
payment due to the Grantee under the Plan.
(b) Elective Share Withholding.
(1) Subject to the following subsection, a Grantee may elect
the withholding ("Share Withholding") by the Company of a portion of
the Shares otherwise deliverable to such Grantee upon the exercise of
an Award or upon Restricted Shares becoming non-forfeitable (each, a
"Taxable Event") having a Fair Market Value equal to (i) the minimum
amount necessary to satisfy Required Withholding liability attributable
to the Taxable Event; or (ii) with the Committee's prior approval, a
greater amount, not to exceed the estimated total amount of such
Grantee's tax liability with respect to the Taxable Event.
(2) Each Share Withholding election shall be subject to the
following conditions:
(i) any Grantee's election shall be subject to the Committee's
discretion to revoke the Grantee's right to elect Share
Withholding at any time before the Grantee's election if the
Committee has reserved the right to do so in the Award Agreement;
(ii) the Grantee's election must be made before the date (the
"Tax Date") on which the amount of tax to be withheld is
determined; and
(iii) the Grantee's election shall be irrevocable.
16.1. Notification under Section 83(b). If the Grantee, in connection with
the exercise of any option, or the grant of Restricted Shares, makes the
election permitted under Section 83(b) of the Code to include in such Grantee's
gross income in the year of transfer the amounts specified in Section 83(b) of
the Code, then such Grantee shall notify the Company of such election within 10
days of filing the notice of the election with the Internal Revenue Service, in
addition to any filing and notification required pursuant to regulations issued
under Section 83(b) of the Code. The Committee may, in connection with the
grant of an Award or at any time thereafter, prohibit a Grantee from making the
election described above.
-21-
<PAGE> 24
ARTICLE 17. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards granted
hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise of all or substantially all of the business
and/or assets of the Company.
ARTICLE 18. ADDITIONAL PROVISIONS
18.1 Gender and Number. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
18.2 Severability. If any part of the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other part of the Plan. Any Section or part
of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.
18.3 Requirements of Law. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required. Notwithstanding any provision of the Plan or any
Award, Grantees shall not be entitled to exercise, or receive benefits under,
any Award, and the Company shall not be obligated to deliver any Shares or
deliver benefits to a Grantee, if such exercise or delivery would constitute a
violation by the Grantee or the Company of any applicable law or regulation.
18.4 Securities Law Compliance. If the Committee deems it necessary to comply
with any applicable securities law, the Committee may require a written
investment intent representation by the Grantee and may require that a
restrictive legend be affixed to certificates for Shares. If, based upon the
advice of counsel for the Company, the Committee determines that the exercise
or nonforfeitability of, or delivery of benefits pursuant to, any Award would
violate any applicable provision of (i) federal or state securities laws or
(ii) the listing requirements of any national securities exchange or national
market system on which are listed any of the Company's equity securities, then
the Committee may postpone any such exercise, nonforfeitability or delivery, as
applicable, but the Company shall use all reasonable efforts to cause such
exercise, nonforfeitability or delivery to comply with all such provisions at
the earliest practicable date.
18.5 No Rights as a Stockholder. A Grantee shall not have any rights as a
stockholder of the Company with respect to the Shares (other than Restricted
Shares) which may be deliverable upon exercise or payment of such Award until
such shares have been delivered to him or her. Restricted Shares, whether held
by a Grantee or in escrow by the Secretary of the Company, shall confer on the
Grantee all rights of a stockholder of the
-22-
<PAGE> 25
Company, except as otherwise provided in the Plan. At the time of a grant of
Restricted Shares, the Committee may require the payment of cash dividends
thereon to be deferred and, if the Committee so determines, reinvested in
additional Restricted Shares. Stock dividends and deferred cash dividends
issued with respect to Restricted Shares shall be subject to the same
restrictions and other terms as apply to the Restricted Shares with respect to
which such dividends are issued. The Committee may in its discretion provide
for payment of interest on deferred cash dividends.
18.6 Nature of Payments. Awards shall be special incentive payments to the
Grantee and shall not be taken into account in computing the amount of salary
or compensation of the Grantee for purposes of determining any pension,
retirement, death or other benefit under (a) any pension, retirement,
profit-sharing, bonus, insurance or other employee benefit plan of the Company
or any Subsidiary or (b) any agreement between (i) the Company or any
Subsidiary and (ii) the Grantee, except as such plan or agreement shall
otherwise expressly provide.
18.7 Governing Law. To the extent not preempted by federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and
governed by the laws or the State of Illinois, other than its laws respecting
choice of law.
-23-
<PAGE> 1
EXHIBIT 21
Subsidiaries of Registrant
Surety Acquisition Company, a Delaware corporation.
<PAGE> 1
Exhibit 23 (1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
CNA Surety Corporation on Form S-4 of our report dated February 20, 1997, on
our audits of the consolidated financial Statements and financial statement
schedules of Capsure Holdings Corp. and Subsidiaries as of December 31, 1996
and 1995, and for the years ended December 31, 1996, 1995, and 1994. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand, L.L.P.
Chicago, Illinois
August 15, 1997
<PAGE> 1
EXHIBIT 23(2)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CNA Surety Corporation
on Form S-4 of our report dated March 20, 1997, appearing in the Prospectus,
which is part of this Registration Statement, with respect to our audits of the
special-purpose statements of certain assets and liabilities of CCC Surety
Operations, a business unit of CNA Financial Corporation, as of December 31,
1996 and 1995, and the special-purpose statements of certain revenues and
direct operating expenses for each of the three years in the period ended
December 31, 1996.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Chicago, Illinois
August 15, 1997
<PAGE> 1
EXHIBIT 23(4)
[MAYER, BROWN & PLATT LETTERHEAD]
August 15, 1997
Capsure Holdings Corp.
Two North Riverside Plaza
Chicago, IL 60606
Re: Tax Opinion for Transaction with Continental
Casualty Company and its Affiliates
Ladies and Gentlemen:
We have acted as counsel to Capsure Holdings Corp., a Delaware
corporation ("Capsure"), in connection with a prosposed transaction
pursuant to which Surety Acquisition Company, a Delaware corporation which is a
wholly-owned subsidiary of CNA Surety Corporation ("Newco"), will be merged
with and into Capsure (the "Merger"). In connection with the Merger we
delivered an opinion that: (1) the Merger will be treated as an exchange within
the meaning of Section 351(a) of the Code or a reorganization within the
meaning of section 368(a) of the Code; and (2) except, possibly, to the extent
cash is received pursuant to dividends paid or declared at or prior to the
Merger (which will be treated in whole or in part as ordinary dividend income
to the extent of Capsure's current or accumulated earnings and profits or,
possibly, as capital gain if such dividend is treated as consideration in the
Merger), no gain or loss will be recognized by Capsure or its shareholders as a
result of the exchange of Capsure common stock for Newco common stock pursuant
to the Merger.
We hereby consent to the filing of our opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Proxy Statement/Prospectus included as part of the Registration
Statement.
Very truly yours,
/s/ MAYER, BROWN & PLATT
MAYER, BROWN & PLATT
<PAGE> 1
EXHIBIT 24
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on August 11, 1997.
CNA SURETY CORPORATION
By: /s/ Mark Vonnahme
-----------------------------------
Mark Vonnahme
President and Chief Executive Officer
Each person whose signature appears below hereby appoints Mark Vonnahme and
Enid Tanenhaus and each of them severally, acting alone and without the other,
his true and lawful attorney-in-fact with authority to execute in the name of
each such person, and to file with the Securities and Exchange Commission,
together with any exhibits thereto and other documents therewith, any and all
amendments (including without limitation post-effective amendments) to this
Registration Statement necessary or advisable to enable the Registration
Statement to comply with the Securities Act of 1933, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof, which amendments may make such other changes in the
Registration Statement as the aforesaid attorney-in-fact executing the same
deems appropriate.
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/ David T. Cumming 6 August 1997
- ------------------------- ------------------------- --------------
David T. Cumming Director (Date)
/s/ Mark Vonnahme 6 August 1997
- ------------------------- ------------------------- --------------
Mark Vonnahme Director, President and (Date)
Chief Executive Officer
/s/ Peter E. Jokiel 11 August 1997
- ------------------------- ------------------------- --------------
Peter E. Jokiel Director and (Date)
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION OF CCC SURETY OPERATIONS
EXTRACTED FROM FINANCIAL STATEMENTS AND RELATED NOTES AND SCHEDULES THERETO
INCLUDED IN THIS REGISTRATION STATEMENT ON FORM S-4 FOR CNA SURETY CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 0
<RECOVER-REINSURE> 20,069
<DEFERRED-ACQUISITION> 37,689
<TOTAL-ASSETS> 232,824
<POLICY-LOSSES> 119,151
<UNEARNED-PREMIUMS> 95,677
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 232,824
149,069
<INVESTMENT-INCOME> 0
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 33,006
<UNDERWRITING-AMORTIZATION> 66,382
<UNDERWRITING-OTHER> 15,233
<INCOME-PRETAX> 34,448
<INCOME-TAX> 12,188
<INCOME-CONTINUING> 22,260
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,260
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<RESERVE-OPEN> 114,126
<PROVISION-CURRENT> 42,748
<PROVISION-PRIOR> (9,742)
<PAYMENTS-CURRENT> 7,728
<PAYMENTS-PRIOR> 35,720
<RESERVE-CLOSE> 103,684
<CUMULATIVE-DEFICIENCY> 9,742
</TABLE>
<PAGE> 1
EXHIBIT 99(1)
[Letterhead of Smith Barney Inc.]
The Board of Directors
Capsure Holdings Corp.
Two North Riverside Plaza
Chicago, Illinois 60606
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Capsure Holdings Corp. ("Capsure") as Appendix B to the Proxy
Statement/Prospectus of Capsure relating to the proposed merger transaction
involving Capsure and CNA Surety Corporation and references thereto in such
Proxy Statement/Prospectus under the captions "SUMMARY--Opinion of Capsure's
Financial Advisor" and "THE MERGER--Background and Reasons for the Merger" and
"--Opinion of Capsure's Financial Advisor." In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under, and we do not admit that we are "experts" for purposes of, the
Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
By: /s/ Smith Barney Inc.
----------------------------------------
SMITH BARNEY INC.
New York, New York
August 15, 1997
<PAGE> 1
EXHIBIT 99(2)
CONSENT
EACH OF THE UNDERSIGNED HEREBY CONSENTS TO BE A DIRECTOR OF CNA SURETY
CORPORATION UPON THE CONSUMMATION OF THE MERGER AS CONTEMPLATED THE
REORGANIZATION AGREEMENT BETWEEN AND AMONG CAPSURE HOLDINGS CORP., CONTINENTAL
CASUALTY COMPANY AND CERTAIN OF ITS AFFILIATES.
DATED:
-------------- -------------------------------------
GEORGIO BALZER
DATED:
-------------- -------------------------------------
ROD F. DAMMEYER
DATED:
-------------- -------------------------------------
BRUCE A. ESSELBORN
DATED:
-------------- -------------------------------------
MELVIN GRAY
DATED:
-------------- -------------------------------------
JOE P. KIRBY
DATED:
-------------- -------------------------------------
JOHN T. KNOX, JR.
DATED:
-------------- -------------------------------------
ROY E. POSNER
DATED: 8-11-97 /s/ Adrian M. Tocklin
-------------- -------------------------------------
ADRIAN M. TOCKLIN
<PAGE> 1
EXHIBIT 99(3)
CONSENT
EACH OF THE UNDERSIGNED HEREBY CONSENTS TO BE A DIRECTOR OF CNA SURETY
CORPORATION UPON THE CONSUMMATION OF THE MERGER AS CONTEMPLATED THE
REORGANIZATION AGREEMENT BETWEEN AND AMONG CAPSURE HOLDINGS CORP., CONTINENTAL
CASUALTY COMPANY AND CERTAIN OF ITS AFFILIATES.
DATED:
-------------- -------------------------------------
GEORGIO BALZER
DATED:
-------------- -------------------------------------
ROD F. DAMMEYER
DATED:
-------------- -------------------------------------
BRUCE A. ESSELBORN
DATED: 8-11-97 /s/ Melvin Gray
-------------- -------------------------------------
MELVIN GRAY
DATED:
-------------- -------------------------------------
JOE P. KIRBY
DATED:
-------------- -------------------------------------
JOHN T. KNOX, JR.
DATED:
-------------- -------------------------------------
ROY E. POSNER
DATED:
-------------- -------------------------------------
ADRIAN M. TOCKLIN
<PAGE> 1
EXHIBIT 99(4)
CONSENT
EACH OF THE UNDERSIGNED HEREBY CONSENTS TO BE A DIRECTOR OF CNA SURETY
CORPORATION UPON THE CONSUMMATION OF THE MERGER AS CONTEMPLATED THE
REORGANIZATION AGREEMENT BETWEEN AND AMONG CAPSURE HOLDINGS CORP., CONTINENTAL
CASUALTY COMPANY AND CERTAIN OF ITS AFFILIATES.
DATED:
-------------- -------------------------------------
GEORGIO BALZER
DATED:
-------------- -------------------------------------
ROD F. DAMMEYER
DATED:
-------------- -------------------------------------
BRUCE A. ESSELBORN
DATED:
-------------- -------------------------------------
MELVIN GRAY
DATED:
-------------- -------------------------------------
JOE P. KIRBY
DATED:
-------------- -------------------------------------
JOHN T. KNOX, JR.
DATED: /s/ Roy E. Posner
-------------- -------------------------------------
ROY E. POSNER
DATED:
-------------- -------------------------------------
ADRIAN M. TOCKLIN
<PAGE> 1
Exhibit 99(5)
CONSENT
I hereby agree to serve as a member of CNA Surety Corporation's Board of
Directors upon the closing of the Merger of Capsure Holdings Corp. and Surety
Acquisition Company pursuant to the Reorganization Agreement among Capsure
Holdings Corp., Continental Casualty Company, CNA Surety Corporation, Surety
Acquisition Company and certain affiliates of Continental Casualty Company,
dated as of December 19, 1996 and as amended on July 14, 1997.
/s/ Bruce A. Esselborn
--------------------------
Bruce A. Esselborn
Date: August 12, 1997
-----------------------
<PAGE> 1
Exhibit 99(6)
CONSENT
I hereby agree to serve as a member of CNA Surety Corporation's Board of
Directors upon the closing of the Merger of Capsure Holdings Corp. and Surety
Acquisition Company pursuant to the Reorganization Agreement among Capsure
Holdings Corp., Continental Casualty Company, CNA Surety Corporation, Surety
Acquisition Company and certain affiliates of Continental Casualty Company,
dated as of December 19, 1996 and as amended on July 14, 1997.
/s/ Rod F. Dammeyer
-----------------------------
Rod F. Dammeyer
Date: 8-12-97
----------------------
<PAGE> 1
Exhibit 99(7)
CONSENT
I hereby agree to serve as a member of CNA Surety Corporation's Board of
Directors upon the closing of the Merger of Capsure Holdings Corp. and Surety
Acquisition Company pursuant to the Reorganization Agreement among Capsure
Holdings Corp., Continental Casualty Company, CNA Surety Corporation, Surety
Acquisition Company and certain affiliates of Continental Casualty Company,
dated as of December 19, 1996 and as amended on July 14, 1997.
/s/ John T. Knox, Jr.
-------------------------
John T. Knox, Jr.
Date: 8-11-97
--------------------------
<PAGE> 1
Exhibit 99(8)
CONSENT
I hereby agree to serve as a member of CNA Surety Corporation's Board of
Directors upon the closing of the Merger of Capsure Holdings Corp. and Surety
Acquisition Company pursuant to the Reorganization Agreement among Capsure
Holdings Corp., Continenta1 Casualty Company, CNA Surety Corporation, Surety
Acquisition Company and certain affiliates of Continental Casualty Company,
dated as of December 19, 1996 and as amended on July 14, 1997.
/s/ Joe P. Kirby
--------------------------
Joe P. Kirby
Date: 8-12-97
----------------------
<PAGE> 1
EXHIBIT 99(9)
CONSENT
EACH OF THE UNDERSIGNED HEREBY CONSENTS TO BE A DIRECTOR OF CNA SURETY
CORPORATION UPON THE CONSUMMATION OF THE MERGER AS CONTEMPLATED THE
REORGANIZATION AGREEMENT BETWEEN AND AMONG CAPSURE HOLDINGS CORP., CONTINENTAL
CASUALTY COMPANY AND CERTAIN OF ITS AFFILIATES.
DATED: 8-11-97 /s/ Giorgio Balzer
-------------- -------------------------------------
GIORGIO BALZER
DATED:
-------------- -------------------------------------
ROD F. DAMMEYER
DATED:
-------------- -------------------------------------
BRUCE A. ESSELBORN
DATED:
-------------- -------------------------------------
MELVIN GRAY
DATED:
-------------- -------------------------------------
JOE P. KIRBY
DATED:
-------------- -------------------------------------
JOHN T. KNOX, JR.
DATED:
-------------- -------------------------------------
ROY E. POSNER
DATED:
-------------- -------------------------------------
ADRIAN M. TOCKLIN
