<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1997
REGISTRATION NO. 333-40341
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
ESG RE LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------
BERMUDA 6719 NOT APPLICABLE
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
------------
SKANDIA INTERNATIONAL HOUSE
16 CHURCH STREET
HAMILTON, HM 11, BERMUDA
(441) 295-2185
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------
ESG RE LIMITED
C/O CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 664-1666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------
WITH COPIES TO:
RICHARD S. BORISOFF, ESQ. JAMES C. SCOVILLE, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & DEBEVOISE & PLIMPTON
GARRISON 875 THIRD AVENUE
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10022
NEW YORK, NEW YORK 10019 (212) 909-6000
(212) 373-3153
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus relating to a
public offering of an aggregate of 8,000,000 Common Shares, $1.00 par value,
of ESG Re Limited. One is to be used in connection with an offering in the
United States and Canada (the "U.S. Prospectus"), and the other is to be used
in connection with a concurrent offering outside the United States and Canada
(the "International Prospectus"). The U.S. Prospectus and the International
Prospectus are identical except that they contain different front cover pages.
The form of the U.S. Prospectus follows immediately after this Explanatory
Note and is followed by the front cover page to be used for the International
Prospectus which is labeled "Alternate Page for International Prospectus." A
copy of each complete prospectus in the exact form in which it is to be used
after effectiveness will be filed with the Securities and Exchange Commission
pursuant to Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1997
PROSPECTUS
, 1997
ESG
INTELLIGENT
REINSURANCE
ESG RE LIMITED
8,000,000 COMMON SHARES
All of the Common Shares, par value $1.00 per share (the "Common Shares"), of
ESG Re Limited (the "Company" or "ESG") offered hereby are being sold by the
Company. Of the 8,000,000 Common Shares offered hereby, Common Shares are
being offered for sale in the United States and Canada by the U.S. Underwriters
(the "U.S. Offering") and Common Shares are being offered for sale outside
the United States and Canada in a concurrent offering by the International
Managers (the "International Offering," and together with the U.S. Offering,
the "Offerings"), subject to transfers between the U.S. Underwriters and the
International Managers (collectively, the "Underwriters"). See "Underwriting."
It is estimated that the initial public offering price will be $20.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
Certain affiliates of Head & Company L.L.C. (the "Head Group") and certain
other investors (together with the Head Group, the "Direct Purchasers") have
severally purchased for investment directly from the Company (i) an aggregate
of 2,673,799 Common Shares, (ii) Class A Warrants to purchase up to 1,148,087
Common Shares, and (iii), in the case of the Head Group, Class B Warrants to
purchase up to 1,148,087 Common Shares (if certain performance criteria are
satisfied), at an aggregate price equal to 2,673,799 multiplied by the initial
public offering price per Common Share less the underwriting discounts and
commissions (the "Direct Sales"). See "Direct Sales." The closing of the Direct
Sales occurred on December 3, 1997. The initial exercise price for the Class A
Warrants and the Class B Warrants is the initial public offering price per
Common Share, subject to a reduction of $1.50 on September 1, 2001, for the
Class B Warrants.
Prior to the Offerings, there has been no market for the Common Shares. The
Common Shares have been accepted for quotation on the Nasdaq National Market
subject to official notice of issuance under the symbol "ESREF."
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
UNDERWRITING PROCEEDS
INITIAL PUBLIC DISCOUNTS AND TO THE
OFFERING PRICE COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share......... $20.00 $1.30 $18.70
Total(3)................. $160,000,000 $10,400,000 $149,600,000
- -------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the United States Securities Act
of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 1,200,000 shares at the Price to the Public per share less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$184,000,000, $11,960,000 and $172,040,000, respectively. See
"Underwriting." Including the Direct Sales, the total proceeds to Company
will be $199,600,000 or $222,040,000 if the over-allotment option is
exercised in full.
-----------
The Common Shares are being offered by the several Underwriters, when, as and
if delivered to and accepted by the Underwriters and subject to various
conditions. It is expected that the delivery of the Common Shares will be made
in New York, New York on or about , 1997, in New York, New York against
payment therefor in New York funds.
DEUTSCHE MORGAN GRENFELL INC. HAS SERVED AS ADVISOR TO THE COMPANY IN
CONNECTION WITH THIS TRANSACTION. SEE "UNDERWRITING."
-----------
JOINT GLOBAL COORDINATORS AND JOINT BOOK-RUNNERS
DEUTSCHE MORGAN GRENFELL DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
-----------
DONALDSON, LUFKIN & JENRETTE DEUTSCHE MORGAN GRENFELL
SECURITIES CORPORATION
CONNING & COMPANY STEPHENS INC.
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THESE OFFERINGS TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information............. 3
Preparation of Financial
Statements........................ 3
Enforceability of Civil Liabilities
under United States Federal
Securities Laws................... 4
Summary............................ 6
Risk Factors....................... 16
Use of Proceeds.................... 22
Capitalization..................... 22
Dilution........................... 23
Dividend Policy.................... 23
Selected Financial Data............ 24
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 25
The Company........................ 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management......................... 49
Certain Relationships and Related
Transactions...................... 53
Principal Shareholders............. 54
Description of Capital Stock....... 55
Shares Eligible for Future Sale.... 58
Direct Sales....................... 59
Certain Tax Considerations......... 59
Underwriting....................... 69
Legal Considerations............... 73
Legal Matters...................... 74
Experts............................ 74
Available Information.............. 74
Glossary of Selected Insurance
Terms............................. 75
Index to Financial Statements...... F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THESE OFFERINGS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE-
LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THESE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERINGS
AND MAY BID FOR AND PURCHASE COMMON SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Common Shares have not been recommended by any federal or state
securities commission or regulatory authority or the Registrar of Companies of
Bermuda. Furthermore, the foregoing authorities have not confirmed the
accuracy or determined the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
This Prospectus may not be distributed to any person in the United Kingdom
unless that person is a qualifying institution or corporation or other person
falling within article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1986 of the United Kingdom and also either
is a qualifying securities professional within regulation 7(2)(a) of the
Public Offers of Securities Regulations 1995 of the United Kingdom or is
personally selected by or on behalf of the underwriters.
Consent under the Bermuda Exchange Control Act 1972 (and regulations
thereunder) has been obtained from the Bermuda Monetary Authority for the
issue of the shares being offered pursuant to these Offerings to persons not
resident in Bermuda for exchange control purposes. In addition, a copy of this
document has been delivered to the Registrar of Companies in Bermuda for
filing pursuant to the Companies Act 1981 of Bermuda.
2
<PAGE>
In giving such consent and in accepting this Prospectus for filing, the
Bermuda Monetary Authority and the Registrar of Companies in Bermuda accept no
responsibility for the financial soundness of any offer or for the correctness
of any of the statements made or opinions expressed herein.
No action has been or will be taken in any jurisdiction by the Company or by
any Underwriter that would permit a public offering of the Common Shares or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons who
come into possession of this Prospectus are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Common Shares and the distribution of this Prospectus.
------------
NOTICE TO NORTH CAROLINA RESIDENTS ONLY:
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF
INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT. THE BUYER
IN NORTH CAROLINA UNDERSTANDS THAT NEITHER THE COMPANY NOR ITS SUBSIDIARIES IS
LICENSED IN NORTH CAROLINA PURSUANT TO CHAPTER 58 OF THE NORTH CAROLINA
GENERAL STATUTES.
------------
ADDITIONAL INFORMATION
The Company will register the Common Shares under Section 12(b) of the
United States Securities Exchange Act of 1934 (the "Exchange Act"). As a
foreign private issuer (as defined in Rules under the Exchange Act), the
Company is exempt from the periodic reporting requirements imposed upon a U.S.
domestic private issuer of equity securities registered under the Exchange
Act, as well as the provisions of the Exchange Act prescribing the content and
filing of proxy statements and the solicitation of proxies and the provisions
of Section 16 of the Exchange Act alluding to the reporting of securities
transactions by certain persons and the recovery of "short-swing" profits from
the purchase or sale of securities.
The Company's Bye-Laws require it (i) to furnish to the holders of Common
Shares and submit to the U.S. Securities and Exchange Commission (the
"Commission") (unless the Commission will not accept such materials) annual
reports, quarterly reports and reports with respect to specified events
required of a U.S. issuer on Forms 10-K, 10-Q and 8-K, respectively, and (ii)
to comply substantially with the proxy rules under the Exchange Act except to
the extent that such rules require filings with the Commission and the
inclusion of shareholder proposals in proxy materials prepared by the Company
and except for provisions specifying the required disclosures relating to
corporate reorganizations. The proxy rules include rules prescribing the
content of annual reports to shareholders. The audited financial statements
contained in such annual reports and unaudited quarterly financial information
contained in such quarterly reports will be prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP").
In addition, requirements with regard to the accuracy of proxy disclosures
will be governed by certain Bye-law provisions interpreted under Bermuda law.
The Company has been advised that, under Bermuda law, the record and
beneficial owners of Common Shares will, to the extent indicated in the
Company's Bye-Laws, also be bound by such principles incorporated from
Commission rules relating to proxy statements and the solicitation of proxies.
These Bye-Law provisions can be amended only by a vote of two-thirds of
shareholders present at a shareholders' meeting. See "Description of Capital
Stock--Periodic Reports and Proxy Statements."
PREPARATION OF FINANCIAL STATEMENTS
The Company's financial statements have been prepared in accordance with
U.S. GAAP. Audited financial statements for 1994 through 1996 are included
herein. The financial statements included herein represent the financial
performance and results of the Company's prior operations as a reinsurance
management company and do not reflect the financial performance and results of
the Company as a reinsurer for its own account. As used in this Prospectus,
"$" refers to U.S. dollars and "BD$" refers to Bermuda dollars.
3
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES UNDER
UNITED STATES FEDERAL SECURITIES LAWS
The Company is organized pursuant to the laws of Bermuda and all of its
assets are located outside the United States. In addition, most of the
directors, officers and controlling persons of the Company, as well as certain
of the experts named herein, reside outside the United States, and all or a
substantial portion of their assets are located outside the United States. As
a result, it may be difficult for investors to effect service of process
within the United States upon such persons or to execute against them
judgments of courts of the United States predicated upon civil liabilities
under the U.S. federal securities laws ("Foreign Judgments").
The Company has been informed by its Bermuda counsel, Appleby, Spurling &
Kempe, that the United States and Bermuda do not currently have a treaty
providing for reciprocal recognition and enforcement of judgments of U.S.
courts in civil and commercial matters and that a final judgment for the
payment of money rendered by any federal or state court in the United States
based on civil liability, whether or not predicated solely upon the U.S.
federal securities laws, would, therefore, not be automatically enforceable in
Bermuda. The Company has also been advised by Appleby, Spurling & Kempe that a
final and conclusive judgment obtained in federal or state courts in the
United States under which a sum of money is payable as compensatory damages
(i.e., not being a sum claimed by a revenue authority for taxes or other
charges of a similar nature by a governmental authority, or in respect of a
fine or penalty or multiple or punitive damages) may be the subject of an
action on a debt in the Supreme Court of Bermuda under the common law doctrine
of obligation. Such an action should be successful upon proof that the sum of
money is due and payable, and without having to prove the facts supporting the
underlying judgment, as long as: (i) the court that gave the judgment was
competent to hear the action in accordance with private international law
principles as applied by the courts in Bermuda; and (ii) the judgment is not
contrary to public policy in Bermuda, was not obtained by fraud or in
proceedings contrary to natural justice of Bermuda and is not based on an
error in Bermuda law. A Bermuda court may impose civil liability on the
Company or its directors or officers in a suit brought in the Supreme Court of
Bermuda against the Company or such persons with respect to a violation of
U.S. federal securities laws, provided that the facts surrounding such
violation would constitute or give rise to a cause of action under Bermuda
law.
The Company has been advised by its German counsel, Meyersrenken &
Rheingantz, that there may be doubt as to the enforceability in Germany, in
original actions, of Foreign Judgments and that in Germany both recognition
and enforcement of Foreign Judgments are solely governed by Section 328 of the
German Civil Procedure Code (Zivilprozessordnung or "ZPO") as well as
multilateral and bilateral treaty agreements. In some cases, especially when
according to the German statutory provisions, the international jurisdiction
of the U.S. court will not be recognized or the Foreign Judgments conflict
with basic principles of German law (e.g., the restriction to compensatory
damages and limited pre-trial discovery), the U.S. judgment might not be
recognized by a German court.
The enforceability of Foreign Judgments in Germany requires their
recognition in Germany. Under German law, the enforceability of Foreign
Judgments requires a "writ of enforcement" under Section 722 ZPO. A writ of
enforcement is issued only after a contested proceeding resulting from a
complaint of a plaintiff against a defendant and renders the Foreign Judgments
enforceable in Germany. A precondition for the issuance of such a writ is that
the Foreign Judgments be a non-appealable final judgement and otherwise be
permitted under Section 328 ZPO. Under Section 1042 I ZPO, the results of an
arbitration can only be enforced if it is entered as a judgment by a court.
The service of process in U.S. proceedings on persons in Germany is
regulated by a multilateral treaty guaranteeing service of writs and other
legal documents in civil cases if the current address of the defendant is
known.
The Company has been advised by its Irish counsel, Matheson Ormsby Prentice,
that any proceedings taken in Ireland for the enforcement of Foreign Judgments
would be recognized and enforced by the courts of Ireland
4
<PAGE>
except that, to enforce such a Foreign Judgment in Ireland, it would be
necessary to obtain an order of the Irish courts. Such order would be granted
on proper proof of the Foreign Judgment without any retrial or examination of
the merits of the case subject to the following qualifications: (i) the
Foreign Judgment must be final; (ii) that the foreign court had jurisdiction
in the view of the laws of Ireland; (iii) that the Foreign Judgment was not
obtained by fraud; (iv) that the Foreign Judgment was not contrary to the
public policy or natural justice as understood in Irish law; (v) that the
Foreign Judgment is for a definite sum of money; and (vi) that the procedural
rules of the court giving the Foreign Judgment have been observed.
Any such order of the Irish courts may be expressed in a currency other than
Irish pounds in respect of any amount due and payable, but such order may be
issued out of the Central Office of the Irish High Court expressed in Irish
pounds by reference to the official rate of exchange prevailing on the date of
issue of such Order. However, in the event of a winding up, amounts claimed in
a foreign currency would, to the extent properly payable in the winding up, be
paid if not in such currency in the Irish currency equivalent of the amount
due in the currency converted at the rate of exchange pertaining on the date
of the commencement of such winding up or, in the case of winding up by the
court, the date of the making of the winding up order. While in a proceeding
being brought in an Irish court in respect of a monetary obligation payable in
a currency other than Irish pounds, an Irish court would have the power to
give a judgment to pay such obligation in a currency other than Irish pounds,
it may decline to do so in its discretion. An Irish court might not enforce
currency conversion or indemnity clauses of a contract not governed by Irish
Law and, with respect to a bankruptcy, liquidation, insolvency, reorganization
or similar proceedings, Irish law may require that all claims or debts are
converted into Irish pounds at an exchange rate determined by the court as of
a date related thereto, such as the date of commencement of a winding up.
Also, provisions of contracts not governed by Irish Law providing for
indemnification for losses, in a liquidation, suffered on conversion of a
foreign currency claim into Irish pounds, may not be enforceable.
An Irish court has power to stay an action where it is shown that there is
some other forum having competent jurisdiction which is more appropriate for
the trial of the action and in which the case can be tried more suitably for
the interests of all parties and the ends of justice.
The Company has irrevocably appointed CT Corporation System, New York, New
York, as its agent to receive service of process in actions against it arising
out of or in connection with violations of the U.S. federal securities laws in
any federal or state court in the United States relating to the transactions
covered by this Prospectus.
5
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
included elsewhere in this Prospectus. The sale of Common Shares, Class A
Warrants and Class B Warrants by ESG Re Limited (the "Company" or "ESG") to
certain affiliates of Head & Company L.L.C. ("HMI") and certain pension plan
trusts and other entities created by affiliates of HMI (together with HMI, the
"Head Group") and to a limited number of other investors (together with the
Head Group, the "Direct Purchasers"), is referred to herein as the "Direct
Sales." All financial statements presented in this Prospectus have been
prepared in accordance with U.S. GAAP. Unless the context otherwise requires,
references herein to the "Company" or "ESG" include the Company's subsidiaries
(through which the Company will operate all of its businesses upon completion
of the Offerings). All references to the Company prior to the Offerings are to
the Company's subsidiary, European Specialty Group Holding AG, and its
subsidiaries (collectively, "ES Management"). Insurance terms defined in
"Glossary of Selected Insurance Terms" are printed in boldface type the first
time they appear in this Prospectus. Except where otherwise indicated, the
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised.
THE COMPANY
The Company was formed on August 21, 1997 to provide accident, health, life
and special risk REINSURANCE ("personal and special risk reinsurance") to
insurers and selected reinsurers on a worldwide basis. The Company intends to
become a leading specialist reinsurer writing for its own account with a
priority of UNDERWRITING PROFITABILITY.
Since 1994, the Company, through its subsidiary, ES Management, has provided
UNDERWRITING management services by operating as a personal and special risk
reinsurance underwriter on behalf of certain reinsurers. ES Management has
performed the principal underwriting functions normally handled by a reinsurer,
including risk analysis, pricing, contract structuring, claims management and
LOSS RESERVE estimation on behalf of certain companies (its "reinsurance
partners") participating in reinsurance pools arranged by ES Management, or has
been retained under FACULTATIVE or treaty arrangements outside of the pools.
Under the pool arrangements, the reinsurance partners each assume a
contractually fixed share of the risk underwritten by ES Management, which does
not assume risk for its own account. The share of risk underwritten by each
reinsurance partner has been negotiated by ES Management and its reinsurance
partners based on estimates of market capacity, the relative amount of capacity
that each such reinsurance partner has been willing to make available and ES
Management's strategic considerations. The pool business reflects the Company's
personal and special risk focus. See "The Company--Lines of Business." The pool
contracts limit the business ES Management is permitted to write to personal
and special risk business. The management and business origination fees paid to
ES Management by its reinsurance partners have been established by agreement
between ES Management and such partners and range up to 9.5% of the premiums
that are paid to the reinsurance partners by CEDING CLIENTS in consideration
for ES Management's management services, with the remainder of the premiums
retained by its reinsurance partners in consideration for assuming the
reinsurance risk. In addition, ES Management's agreements with its partners
entitle it to receive negotiated profit commissions, which depend on the pools'
loss ratios. ES Management's relationship with ceding clients approximates the
relationship between an insurer and a reinsurer except that ES Management uses
its pool underwriting authority to accept risk on behalf of other reinsurers
rather than on its own behalf. In essence, ES Management serves as the agent
for its reinsurance partners. ES Management's reinsurance partners have
included Swiss Re Life & Health/The Mercantile and General Life Reinsurance
Company Limited, Manulife Reinsurance, AXA RE VIE and Skandia International
Insurance Corporation.
Following the Offerings, the Company will discontinue its management services
business and become a reinsurer of risks for its own account. The Company
believes that the skills which have allowed it to develop a
6
<PAGE>
successful management business are the same skills required to operate a
successful reinsurance company and that, following its transition, its
underwriting activities and its relationships with ceding clients will remain
largely unchanged.
THE BUSINESS
The Company believes that its reinsurance management subsidiary, ES
Management, distinguishes itself and strengthens its client relationships by
offering "intelligent reinsurance" products and services that help its ceding
clients to better manage their risks. These include software solutions to
particular underwriting problems (including software developed by reinsurance
and health care professionals to predict future severity of medical conditions
based on current diagnoses), actuarial support, product design, and, in the
field of medical expense reinsurance, loss prevention and disease management.
In order to maximize the quality of the information related to the risks that
it underwrites, the Company maintains close relationships with its ceding
clients and professional reinsurance BROKERS.
In 1996, gross premiums written by ES Management on behalf of its reinsurance
partners totaled $63.9 million. ES Management expects that its GROSS PREMIUMS
WRITTEN on behalf of its reinsurance partners for the year ending December 31,
1997, will be approximately $100 million. ES Management's principal lines of
business as a percentage of gross premiums written on behalf of its reinsurance
partners were as follows for the year ended December 31, 1996:
<TABLE>
<CAPTION>
1996 GROSS
PREMIUMS
WRITTEN
<S> <C>
Medical Expense................................................. 39%
Personal Accident and Disability................................ 35
Credit/Life..................................................... 16
Special Risk.................................................... 10
---
100%
===
</TABLE>
In the years ended December 31, 1994, 1995 and 1996, ES Management's revenues
were $3.3 million, $4.5 million and $4.1 million, respectively. ES Management's
revenues in these years derived primarily from management fees, except for the
year ended December 31, 1996, in which $398,000 in profit commissions were
recognized as a result of favorable loss developments with respect to earlier
underwriting years.
ES Management's business can be characterized as short-TAIL. Approximately
85% of its business has a typical RUN-OFF pattern of less than 24 months and
13% has a slightly longer run-off pattern of up to 60 months. The remaining 2%
of ES Management's business is long-tail. Of ES Management's business, 88% is
written on a proportional basis, as quota share reinsurance, and 12% is written
on a non-proportional basis, as specific EXCESS OF LOSS REINSURANCE.
ES Management underwrites risks emanating from more than 49 countries and
maintains operations in its key markets. Approximately 69% of ES Management's
gross premiums written in 1996 originated in Europe. In addition to ES
Management's offices in Hamburg, London, Hong Kong and Moscow, the Company has
offices in Bermuda and Ireland, and has formed a strategic alliance with an
independent broker in Miami with respect to Latin American business. This
international network of offices enables ES Management to be close to its
customers and the risks underwritten, in line with the operating principle of
"think globally--act locally." ESG is seeking a selective North American
presence in the health care field and, to this end, has opened an office and
hired additional personnel in Toronto.
POOL UNDERWRITING RESULTS
ES Management's underwriting approach is analytical and proactive, taking
into consideration trends and developments that affect loss development, rather
than focusing on pricing techniques based on loss history
7
<PAGE>
alone. ES Management's business underwritten on behalf of its reinsurance
partners is derived from (i) pool business, where ES Management is authorized
to underwrite reinsurance coverage on behalf of, and bind, reinsurance partners
in specified lines of business; (ii) facultative business, where ES Management
separately negotiates coverage on a risk-by-risk basis between CEDENTS and
reinsurance companies; and (iii) other business, where ES Management arranges
coverage outside of pools because of coverage or risk restrictions contained in
the pool agreements. In 1996, pool business amounted to $53.2 million (or 83.3%
of total gross premiums written), facultative business amounted to $5.7 million
(or 8.9% of total gross premiums written) and other business amounted to $5.0
million (or 7.8% of total gross premiums written). As reflected in the
following table, ES Management has achieved underwriting profitability and
steady growth in the business it managed for each of the 1994, 1995 and 1996
UNDERWRITING YEARS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
(U.S. DOLLARS IN MILLIONS,
EXCEPT RATIO DATA)
<S> <C> <C> <C>
Gross premiums written....................... $ 36.5 $ 58.3 $ 63.9
NET PREMIUMS WRITTEN (2)..................... 35.6 57.6 62.7
Net losses and loss adjustment expenses (3).. 18.1 25.4 34.7
Net losses and loss adjustment expenses as a
percentage of net premiums written.......... 51.0% 44.1% 55.3%
Commissions and expenses (4)................. $ 11.5 $ 22.5 $ 18.1
Commissions and expenses as a percentage of
net premiums written........................ 32.2% 39.1% 28.9%
</TABLE>
- --------------------
(1) All figures show the business as underwritten by ES Management on behalf of
its reinsurance partners and do not represent premiums received by, or
revenues of, ES Management, which are determined under the terms of ES
Management's arrangements with its reinsurance partners.
(2) Net premiums written represent gross premiums written reduced by the cost
of excess of loss reinsurance coverage.
(3) Net losses and loss adjustment expenses include claims costs and reserves,
and represent the actual or anticipated final close-out ratio reduced by
any amounts recovered under excess of loss reinsurance coverage. Claims
costs include actual claims expenditures, loss adjustment costs, and loss
prevention charges and consulting expenses directly related to particular
claims. Net losses do not include costs for internal claims supervision and
auditing charges, if applicable, for ES Management and corresponding items
for the pool or open market reinsurers.
(4) Commissions and expenses include all original commissions, overriders,
reinsurance brokerage fees and other fees, taxes and general loss
prevention charges. Commissions and expenses do not include (i) ES
Management's general expenses for managing and administering its business,
(ii) the expenses incurred by reinsurance partners for their internal
administration functions, such as accounting, auditing and investment
management and (iii) expenses allocated to cover the reinsurer's
utilization of capital and surplus. ES Management's total operating
expenses for the years ended December 31, 1994, 1995 and 1996 were $3.1
million, $3.8 million and $3.6 million, respectively.
FINANCIAL TRANSITION
Subsequent to the Offerings, ESG will assume for its own account risks that
its subsidiary, ES Management, previously underwrote on behalf of its
reinsurance partners. After completion of the Offerings, the Company will
exercise a contractual right provided for in its current pool agreements to
underwrite for its own account a 30% share, retroactive to January 1, 1997, of
the 1997 business it currently manages for its reinsurance partners in its
reinsurance pools. ESG's assumption of 30% of the current pool business will be
through retrocession from its reinsurance partners, proportional to such
partners' share of the pool. After completion of the Offerings, ESG will no
longer perform any management functions on behalf of third parties except in
connection with the runoff of the reinsurance pools. Beginning in 1998, ESG
will write reinsurance on its own behalf, retaining not less
8
<PAGE>
than 70% of the total book of business, including renewals. ESG believes this
transition will not have a significant negative impact on its relationship with
its reinsurance partners or ceding clients since the Company will continue to
provide identical underwriting capabilities and related services. The Company
will not be required to compensate either its ceding clients or its reinsurance
partners by reason of the Company's current contractual arrangements. The
Company intends to form strategic alliances with other reinsurers (some of
which may be current reinsurance partners), which will assume up to 30% of the
business that will be underwritten by ESG as lead reinsurer. Since ES
Management's business is characterized by high renewal ratios and the Company's
reinsurance subsidiaries will offer a strong financial position, the Company is
confident that it will retain all or a substantial part of this business. From
1994 to 1995, 90% of ES Management's business with ceding clients was renewed
and from 1995 to 1996, 79% was renewed. The Company will not act as an agent on
behalf of its reinsurance partners and will not receive management and profit
commissions from them.
As ES Management has handled all of the functions usually administered by a
professional reinsurer, other than investment management, the Company believes
that its established infrastructure is sufficiently developed to meet the
demands of ESG's new role and its anticipated growth. The Company has entered
into an Investment Advisory Agreement (as defined herein) with Head Asset
Management (as defined herein) for the provision of investment advisory
services. See "The Company--Investments." In the future, the Company may add
additional personnel to meet its anticipated growth.
Because the Company previously acted only as a management company through ES
Management, its initial capital will be unencumbered by issues of LOSS RESERVE
adequacy, unrealized losses in its investment portfolio and uncollectible
reinsurance. As a management company, ES Management's revenues were previously
comprised of underwriting management fees and profit commissions based on the
underwriting results of the reinsurance pools. As a reinsurer, the Company's
revenues will include premiums written for its own account as well as income
derived from its investment portfolio.
The Company will seek an early rating from a major rating agency. In
addition, the Company will enter into co-reinsurance agreements and licensing
and fronting arrangements, as necessary, allowing the Company to share
underwriting knowledge of, and to gain access to, markets in which it currently
is not doing business. Under such arrangements, ESG would be able to accept
risks in the name of the other reinsurers, and those reinsurers would be
obligated to cede to ESG a portion of the business underwritten by ESG on their
behalf.
MARKET GROWTH
ESG believes that its reinsurance markets are currently experiencing
significant growth as a result of: (i) the worldwide trend of transferring
social security and national health responsibilities to the private sector,
particularly in Western Europe; (ii) increasing insurance demand accompanying
economic growth in emerging markets in Eastern Europe, Asia and Latin America;
(iii) the deregulation of certain European markets as a consequence of new
trade directives from the European Union, enabling the introduction of new
products; (iv) increasing individual MORBIDITY and decreasing MORTALITY within
large demographic segments of the population; and (v) increased capacity
requirements for the insurance of major global sports and entertainment events.
GROWTH STRATEGY
The Company believes that it is well positioned to benefit from these market
growth developments because of ES Management's reputation as a lead underwriter
in negotiating on behalf of the pools, its risk-oriented approach and its far-
ranging and well-established relationship network.
While continuing ES Management's strategy of placing primary emphasis on
underwriting profitability rather than market share, the Company's goal is to
underwrite gross premiums written exceeding $190 million in 1998 and $300
million in 1999. There can be no assurance that this goal will be achieved. See
"Risk Factors--Forward-Looking Statements." The Company intends to achieve this
growth objective through the following strategic initiatives:
9
<PAGE>
PRODUCTS AND SERVICES
Management believes that its ES Management subsidiary is recognized by its
customers as a provider of intelligent reinsurance through innovative
reinsurance products and services. ESG intends to maintain its competitive
position by developing reinsurance products and services that are tailored to
the needs of particular markets and working closely with primary insurers and
insureds to implement loss control techniques. The Company intends to (i)
introduce and implement managed care techniques in Germany, Spain, Italy and
other European markets where these techniques have been underutilized; (ii)
create private medical care and insurance products for emerging markets within
Eastern Europe, Latin America and Asia; (iii) expand occupational injury and
health reinsurance programs in Scandinavia; and (iv) continue to structure
innovative special risk reinsurance programs for major sporting events and
performances such as World Cup Soccer, European Soccer Championships and the
"Three Tenors" concerts. Consistent with ES Management's practice and
experience, ESG will offer reinsurance of health risks in conjunction with
loss-reducing products and services. The Company expects that its ceding
clients will assist with the use and implementation of such products and
services because of their favorable impact on claims expenses.
In support of its loss prevention programs, the Company intends to assume
responsibility for claims assistance services that were previously provided by
third parties. Assistance services include such functions as 24-hour emergency
evacuation and repatriation, medical treatment referrals and supporting
clinical services. In addition, the Company will use the ESIMS software system
developed by ES Management to assist ceding companies with portfolio and claims
handling.
NEW BUSINESSES AND MARKETS
The Company plans to enter the North American market, where business
agreements with one of ES Management's reinsurance partners previously
prevented ES Management from competing. Ms. Renate M. Nellich, Chief Executive
Officer of European Specialty (North America) Limited ("ES North America") and
her team have had considerable experience in the North American health business
and will pursue opportunities in these markets. See "Management." In addition,
access to specialized U.S. claims service providers and the consummation of
additional strategic alliances will enable the Company to import managed care
techniques that have proven successful in the United States to Europe and other
areas where they are currently underutilized by health care providers.
STANDING AS A SPECIALIST LEAD REINSURER
The Company believes that its specialist reputation and substantial
capitalization will qualify it to be included on the security lists of major
reinsurance brokers and ceding clients and, as a result, will be presented with
lead and participation risk opportunities not previously available to it as a
reinsurance management company. Management expects that ES Management's
profitable underwriting history on behalf of reinsurance partners will give ESG
opportunities to participate in additional reciprocal reinsurance programs with
its current reinsurance partners as well as with new reinsurers in strategic
alliances. ES Management has generally incurred losses as an underwriting
management company as a result of the expense of initial system development
and, in 1996, charges relating to the Company's reorganization to become a
reinsurer. See "Management's Discussion Analysis of Financial Condition and
Results of Operations." The Company believes that its losses as a reinsurance
management company are not indicative of its future performance as a reinsurer
and will not adversely affect the Company's ability to attract ceding clients.
FOCUS ON HIGH GROWTH MARKETS
ES Management focuses its health insurance underwriting activities on markets
with high growth potential in developing areas such as Latin America, the
Commonwealth of Independent States ("CIS"), Eastern Europe and Asia, and the
Company intends to continue this emphasis after completion of the Offerings.
The Company will also target selected developed markets for the introduction
of innovative products. In Germany, for example, the public health sector is
undergoing rapid changes, attributable in part to health reform
10
<PAGE>
legislation recently enacted by the German parliament, that the Company
believes will lead to greater demand for health reinsurance.
CAPITALIZING ON EXPERIENCE OF MANAGEMENT
The Company's Managing Director and Chief Executive Officer, Mr. Wolfgang M.
Wand, has extensive experience in the personal and health insurance areas and
has been in the insurance business for over 20 years. He formed a specialized
health care insurance group in 1983 that was acquired by Winterthur Insurance
Group in 1993.
Mr. Steven H. Debrovner, Chief Operating Officer, was the European Accident
and Health Manager of AFIA, which was subsequently acquired by CIGNA, where he
assumed global marketing responsibility for all non-life business at CIGNA
Worldwide headquarters. With more than 30 years of underwriting experience, Mr.
Debrovner is considered within the reinsurance industry to be one of the
leading personal accident underwriters.
The Company's Chief Financial Officer, Mr. Gerhard Jurk, was Chief Executive
Officer of a Winterthur Group insurance subsidiary and Chief Internal Auditor
for Transatlantic Insurance Group. Mr. Jurk has worked in the insurance
industry for more than 25 years and is an accountant certified by the German
government.
Dr. Jean-Claude Mayor, a member of the Supervisory Board of ESG Germany (as
defined herein), was formerly a member of the executive board of Swiss Re
Group, responsible for the worldwide life and disability business, and has
established life reinsurance programs in many international markets.
Ms. Renate M. Nellich, Chief Executive Officer of ES North America, heads
ESG's Toronto-based operations. Ms. Nellich previously served as Chief
Operating Officer of North American life and health operations for Swiss Re
Life & Health/The Mercantile and General Life Reinsurance Company Limited. Ms.
Nellich has more than 25 years of experience in the North American life and
health insurance industry.
The Company believes that the experience of its management in the insurance
and financial markets positions it to take advantage of reinsurance
opportunities and to maintain and attract additional experienced underwriting,
marketing and administrative personnel.
11
<PAGE>
ORGANIZATION
The Company currently operates its reinsurance management business through ES
Management, which consists of ESG Germany and its subsidiaries in their
capacity as reinsurance management companies. The Company believes it will
benefit from the market presence and efficiency of its operation in Germany and
the favorable regulatory and fiscal environments of its locations in Bermuda
and Ireland, where the Company expects a substantial portion of its business to
be written. The Company's non-North American business will be generated
primarily on behalf of European Specialty Reinsurance (Ireland) Limited ("ES
Ireland"), and a substantial portion of its business will be ceded to European
Specialty Reinsurance (Bermuda) Limited ("ES Bermuda"), with profits accruing
primarily in Bermuda and Ireland. Canadian business will be generated on behalf
of ES Ireland, while the remainder of the Company's North American business
written will be generated on behalf of ES Bermuda. The Company expects to be
subject to no taxation in Bermuda and a maximum corporate tax rate of 10% on
its trading profits in Ireland. The Company's European business will be
generated primarily on behalf of ES Germany and ES Ireland. See "Certain Tax
Considerations--Taxation of the Company and its Subsidiaries." European
Specialty Group (United Kingdom) Limited ("ESG UK") will fulfill certain
administrative and other functions on behalf of its wholly-owned subsidiaries
in the United Kingdom, Canada and Germany. The chart below depicts the
organization of ESG and its subsidiaries after completion of the Formation (as
defined herein). Each of the companies specifically named below, except ESG
Germany, has been formed for the purpose of effectuating the Company's
transition to a reinsurer for its own account and has no current operations.
[CHART APPEARS HERE]
The Company's principal offices are located at Skandia International House,
16 Church Street, Hamilton, HM 11 Bermuda, and its telephone number is (441)
295-2185.
12
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Shares offered in the
Offerings
U.S. Offering.................... shares
International Offering........... shares
-----------
Total.......................... 8,000,000 shares
================
Direct Sales (1):
The Head Group................... 574,867 shares
Other Direct Purchasers.......... 2,098,932 shares
----------------
Total.......................... 2,673,799 shares
================
Common Shares outstanding after
giving effect to the Formation (as
defined herein), Direct Sales, and
the Offerings..................... 11,573,799 shares (1)(2)
Proposed Nasdaq National Market
symbol............................ ESREF
Use of Proceeds.................... Proceeds from the Direct Sales are
estimated to be $50.0 million and net
proceeds from the Offerings are estimated
to be $149.6 million. Approximately $4.6
million of net proceeds from the Offerings
will be used for the payment of certain
expenses and fees related to the Direct
Sales and the Offerings. The remainder of
net proceeds from the Offerings together
with the proceeds from the Direct Sales
will be contributed to the Company's
operating subsidiaries to establish a
capital base to be used to support the
underwriting of reinsurance or will be held
by the Company for general corporate
purposes.
Dividend Policy.................... The Board of Directors intends to declare
quarterly cash dividends of $0.075 per
share beginning in the first quarter of
1998. The declaration and payment of
dividends to holders of Common Shares will
be at the discretion of the Board of
Directors. See "Dividend Policy."
</TABLE>
- --------------------
(1) Does not include (i) 1,148,087 Common Shares reserved for issuance upon the
exercise of Class A Warrants purchased by the Direct Purchasers and (ii)
1,148,087 Common Shares reserved for issuance upon the exercise of Class B
Warrants (if certain performance criteria are satisfied) purchased by the
Head Group, which will be received upon completion of the Direct Sales and
the Offerings. See "Direct Sales" and "Description of Capital Stock--
Warrants."
(2) Does not include 12,000 Ordinary Shares that will be repurchased by the
Company and retired simultaneously upon completion of the Formation.
13
<PAGE>
SPONSOR
The Company's sponsor is Head & Company L.L.C. ("Head Company"). As sponsor,
Head Company has provided support and assistance in the planning, structuring
and formation of the Company and capital raising in both the Direct Sales and
Offerings, in the belief that both the capital markets and the insurance
markets will view favorably a well-capitalized, knowledgeable, personal and
special risk reinsurer that enjoys strong sponsorship.
Head Company is an investment banking firm formed in 1987 to specialize in
the insurance industry. The primary activity of Head Company is the management
of its investment affiliates dedicated to making equity investments in
insurance and reinsurance companies and companies providing services to the
insurance industry. Head Company has a proven investment track record,
extensive contacts throughout the insurance industry and an established
reputation in the investment community.
Affiliates of Head Company made capital investments in the Direct Sales.
Following the completion of the Offerings, the Head Group will hold 5.0% of the
outstanding Common Shares. John C Head III, Chairman of the Board of Directors,
is a Managing Member of Head Company. Head Asset Management L.L.C. ("Head Asset
Management"), an affiliate of Head Company, is party to an Investment Advisory
Agreement (as defined herein) with the Company for the provision of certain
investment advisory services. See "The Company--Investments" and "Principal
Shareholders."
FORMATION AND DIRECT SALES
The Company was formed on August 21, 1997 under the laws of Bermuda. On
December 2, 1997, the current shareholders of European Specialty Group Holding
AG ("ESG Germany") exchanged all of their interests in ESG Germany for 900,000
Common Shares (the "Formation"). ESG Germany thereby became an indirect,
wholly-owned subsidiary of the Company. As adjusted to give effect to the
Direct Sales and the Offerings, such Common Shares will represent 7.8% of the
aggregate outstanding Common Shares.
Following the Formation, on December 3, 1997, the Direct Purchasers purchased
from the Company Common Shares, Class A Warrants and Class B Warrants. See
"Direct Sales."
14
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth the summary consolidated financial data for
European Specialty Group Holding AG and Subsidiaries or, prior to 1996,
European Specialty Group GmbH and Subsidiaries, for the periods and as of the
dates indicated. The financial statements included herein represent the
financial performance and results of the Company's prior operations as a
reinsurance management company and do not reflect the financial performance and
results of the Company as a reinsurer for its own account. The consolidated
statement of income data for the years ended December 31, 1994, 1995 and 1996,
and the consolidated balance sheet data as of December 31, 1995, and 1996, have
been derived from the Company's audited consolidated financial statements. The
consolidated statement of income data for the years ended December 31, 1992,
and 1993, and the periods ended June 30, 1996 and 1997, and the consolidated
balance sheet data as of December 31, 1992, 1993 and 1994, and as of June 30,
1996 and 1997, have been derived from the Company's unaudited consolidated
financial statements and, in the opinion of management, reflect all adjustments
necessary for a fair presentation of the results of operations and financial
condition. The data should be read in conjunction with the Company's
Consolidated Financial Statements, related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information appearing elsewhere herein. For information on underwriting
results, see "The Company--Underwriting Results" and "--Lines of Business."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
----------------------------------------------------- ---------------------
1992 1993(1) 1994 1995 1996 1996 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (U.S. DOLLARS
IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DA-
TA:
Total revenues.......... $ 921.4 $ 1,820.9 $ 3,351.0 $ 4,541.0 $ 4,149.5 $ 3,242.7 $ 2,680.3
Total expenses (excludes
tax
benefits/expenses)..... 1,143.1 2,329.0 3,313.2 4,097.2 4,156.9 2,116.1 2,139.3
Net income (loss)....... (70.9) (165.3) (6.0) 145.5 (162.6)(2) 441.3 197.9
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------------------
1992 1993(1) 1994 1995 1996 1996 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $ 503.5 $ 1,505.0 $ 2,881.1 $ 2,683.5 $ 2,518.7 $ 3,532.6 $ 3,153.6
Short-term and current
portion of long-term
debt................... 147.2 674.1 537.3 1,745.7 1,812.7 1,731.5 1,882.7
Long-term debt.......... -- 724.1 1,736.9 195.4 -- -- --
Total shareholders'
equity................. 87.2 (76.9) (90.4) (151.8) (488.8)(3) 38.5 (233.1)
</TABLE>
- --------------------
(1) In 1994, the Company began operations as an underwriting management
company. Prior to 1994, the Company operated principally as a reinsurance
intermediary.
(2) In 1996, the Company incurred a one-time tax expense of $121.0 related to
the reorganization of ESG Germany. Also in 1996, the Company incurred an
expense of $130.0 (after tax) for advisory services provided by an
affiliate of Deutsche Morgan Grenfell Inc., one of the Representatives (as
defined herein) of the Underwriters. For 1996, on a pro forma basis, the
Company would have had a net loss of $(0.18) per share assuming 900,000
shares outstanding after the Formation (prior to the Direct Sales and the
Offerings). Earnings per share data is not meaningful for the historical
operations of the Company.
(3) In 1996, the Company entered into a series of equity transactions to
simplify its capital structure that, upon the settlement of certain of
these transactions, resulted in a reduction of shareholders' equity at
December 31, 1996, of $173.0. Subsequent to December 31, 1996, certain of
these transactions settled and resulted in an increase in capital of
$440.4.
15
<PAGE>
RISK FACTORS
An investment in the Common Shares involves material risks. Prospective
investors should carefully consider the matters set forth below as well as the
other information set forth in this Prospectus.
NO HISTORY AS A REINSURER; INCREASED SCOPE OF BUSINESS
Although the Company has acted as a reinsurance management company for
several years through its subsidiary, ES Management, and, as such, has
performed substantially all of the functions of a reinsurance company, other
than investment management services, the Company has never been a reinsurance
company and has never underwritten insurance or reinsurance for its own
account. The financial statements of ES Management included herein are not
representative of the Company's future business. There can be no assurance
that the Company will be able to make the transition successfully from a
management company to a reinsurance company or that its customers will
continue to work with the Company in such capacity. In addition, the scope of
the Company's current management operations is substantially smaller than the
proposed scope of its reinsurance operations and the Company will have to
increase its management capacity to handle such business successfully. There
can be no assurance that the Company will be able to attract adequate business
or to manage the increased business with the same financial results as are
currently realized.
DEPENDENCE ON KEY CLIENTS
The business that ES Management currently manages on behalf of its
reinsurance partners depends on a limited number of clients for a substantial
portion of its premium revenue. ES Management has approximately 180 centrally
administered reinsurance acceptances from ceding clients. During 1996, ES
Management's largest ceding client, Chiyoda Fire & Marine Insurance Company
(Europe) Ltd., accounted for 14.4% of the premium revenue generated on behalf
of reinsurance partners. ES Management's second and third largest ceding
clients, Best Meridian Insurance Company and ADAC Schutzbrief Versicherungs-
AG, accounted for 12.1% and 4.2% of the premium revenue generated on behalf of
reinsurance partners in 1996, respectively. The non-renewal of even a limited
number of programs or policies after completion of the Offerings could
adversely affect the business of the Company in the future as it seeks to
write reinsurance on its own behalf. The Company will solicit new ceding
clients to supplement the existing clients of ES Management, but there can be
no assurance that the Company will be successful in doing so.
DEPENDENCE ON KEY EMPLOYEES
The Company's success will depend in substantial part upon the continued
service of Wolfgang M. Wand, Steven H. Debrovner, Renate M. Nellich and
Gerhard Jurk, and the Company's ability to attract and retain executives and
underwriting personnel for its expanded operations. Each of Mr. Wand, Mr.
Debrovner, Ms. Nellich and Mr. Jurk has entered into an employment contract
with the Company, effective upon the Closing Date, through September 1, 2000.
There can be no assurances that the Company will be successful in attracting
and retaining qualified employees and the failure to do so could have a
material adverse effect on the Company. See "Management."
VOLATILITY OF RESULTS
The Company's profitability and revenue trends could be affected by volatile
and unpredictable developments in the specialty risk lines, which are
characterized by a relatively small number of large risks, e.g., the risk of
cancellation of a World Cup Soccer championship or the nonappearance of a
performing artist.
REINSURANCE BUSINESS CONSIDERATIONS
Historically the reinsurance industry has been cyclical, with reinsurers
experiencing significant fluctuations in operating results due to competition,
catastrophic events, levels of capacity, general economic conditions, and
other factors. Demand for reinsurance is influenced significantly by
underwriting results of PRIMARY INSURERS and prevailing general economic
conditions. The supply of reinsurance is related directly to prevailing prices
and levels of surplus capacity which, in turn, may fluctuate in response to
changes in rates of return on
16
<PAGE>
investments being realized in the reinsurance industry. Of particular
significance to the Company is the risk of a general account deterioration,
i.e., an increase of LOSS RATIOS, and the ability to maintain an appropriate
mix of risk classes and regions. The insolvency of a retrocessionaire could
affect the operating results and the profitability of the Company. As a
reinsurer, the Company will need to establish loss reserves for risks it
underwrites. See "--Loss Reserves."
COMPETITION AND RATINGS
The reinsurance industry is highly competitive. The Company will compete
with major domestic and foreign insurers and reinsurers, some of which have
substantially greater financial, marketing and management resources than the
Company. Competition in the types of reinsurance business that the Company
intends to underwrite is based on many factors, including the perceived
financial strength of the reinsurers, premium charges, other terms and
conditions offered, services provided, ratings assigned by independent rating
agencies, speed of claims payment and reputation and experience in the line of
reinsurance to be written. Ultimately, this competition could affect the
Company's ability to attract business on terms having the potential to yield
appropriate levels of profits.
Ratings by insurance rating agencies are based on a quantitative evaluation
of performance with respect to profitability, leverage and liquidity and a
qualitative evaluation of spread of risk, reinsurance programs, investments,
reserves and management. The Company is not currently rated by any of the
major independent rating agencies. Insurance ratings are used by insurers and
reinsurance intermediaries as an important means of assessing the financial
strength and quality of reinsurers. Subsequent to the completion of the
Offerings, the Company will seek a rating by a major credit rating agency as
to claims payment ability. In the event that such an early and adequate rating
cannot be obtained, the lack of such a rating may dissuade a ceding client
from reinsuring with the Company.
The Company and its subsidiaries are not licensed or admitted as reinsurers
in any jurisdiction other than Bermuda, Ireland and Germany. Because many
jurisdictions do not permit insurance companies to take credit for reinsurance
obtained from unlicensed or non-admitted insurers on their statutory financial
statements unless security is posted, the Company's reinsurance contracts may
frequently require it to post a letter of credit or other security immediately
or after a reinsured reports a claim. Although the Company intends to seek a
letter of credit facility, it does not yet have one and no assurances can be
made that it will be able to obtain a letter of credit facility on terms
favorable to the Company.
There can be no assurances that increased competitive pressure from current
reinsurers and future entrants and the lack of a rating by insurance rating
agencies will not adversely affect the Company. See "The Company--
Competition."
FOREIGN CURRENCY
The Company's functional currency is the U.S. dollar. However, because the
Company expects to write a portion of its business in currencies other than
the U.S. dollar and will maintain a portion of its investment portfolio in
investments denominated in currencies other than the U.S. dollar, the Company
could experience significant exchange gains and losses, which will in turn
affect the Company's results of operations. See Notes to the Balance Sheet of
ESG Re Limited.
While a substantial portion of the Company's investments will be in U.S.
dollar-denominated instruments, the Company might be exposed to significant
underwriting losses in currencies other than U.S. dollars. Exchange rate
fluctuations may increase the Company's losses (as measured in U.S. dollars)
as claim amounts are settled.
REGULATION
The Company is subject to the general corporate and insurance laws and
regulations of Bermuda, Ireland and Germany, the jurisdictions of
incorporation of ESG and each of its principal operating subsidiaries, and the
laws and regulations of the other jurisdictions in which such entities are
licensed or authorized to do business. The insurance laws of each state of the
United States and of many non-U.S. jurisdictions regulate the sale of
17
<PAGE>
insurance and reinsurance within their jurisdiction by foreign insurers, such
as the Company, which are not admitted to do business within such
jurisdiction. The Company does not intend to maintain an office or to solicit,
advertise, settle claims or conduct other insurance activities in any
jurisdiction where the conduct of such activities would be prohibited by the
Company's lack of license in such jurisdiction. There can be no assurances
that inquiries or challenges relating to the activities of the Company will
not be raised in the future or that the Company's location, regulatory status
or restrictions on its activities resulting therefrom will not adversely
affect its ability to conduct its business. No assurance can be given that if
the Company were to become subject to any such laws of the United States or
any state thereof or of any other country at any time in the future, it would
be in compliance with such laws. See "The Company--Regulation."
The Company is unable to predict what additional government regulations, if
any, affecting its business may be promulgated in the future or how they might
be interpreted; such changes could have a material adverse effect on the
Company or the insurance industry in general.
LOSS RESERVES
The Company will establish loss reserves for the ultimate payment of all
losses and loss adjustment expenses ("LAE") incurred with respect to the
business it underwrites. Under U.S. GAAP, the Company will not be permitted to
establish loss reserves with respect to its personal and special risk
reinsurance until an event which may give rise to a claim occurs. Reserves are
estimates for reported but not paid claims and for INCURRED BUT NOT REPORTED
("IBNR") claims involving actuarial and statistical projections at a given
time to reflect the Company's expectations of the costs of the ultimate
settlement and administration of claims. The estimation of reserves by new
reinsurers, such as the Company, may be inherently less reliable than the
reserve estimations of a reinsurer with a stable volume of business and an
established long-term loss history. Actual losses and LAE paid may deviate,
perhaps substantially, from estimates reflected in the Company's loss reserves
in its financial statements. If the Company's loss reserves in respect of
business written are inadequate due to the occurrence of unpredicted events or
unpredicted demographic or political developments, the Company will be
required to increase loss reserves with a corresponding reduction in the
Company's net income in the period in which the deficiency is identified.
There can be no assurances that losses will not exceed the Company's loss
reserves and have a material adverse effect on the Company's financial
condition or results of operations in a particular period. See "The Company--
Underwriting" and "--Reserves."
TAX MATTERS
The Company and its subsidiaries intend to operate their business in a
manner that will not cause them to be viewed as engaged in a trade or business
in the United States and, thus, will not require them to pay United States
corporate income taxes (other than withholding taxes). However, because there
is considerable uncertainty as to the activities which constitute being
engaged in a trade or business within the United States, there can be no
assurances that the United States Internal Revenue Service (the "IRS") will
not contend successfully that the Company or a subsidiary is engaged in a
trade or business in the United States. If the Company or any of its
subsidiaries were subject to U.S. income tax, the Company's shareholders'
equity and earnings could be materially adversely affected. See "Certain Tax
Considerations--Taxation of the Company and its Subsidiaries--United States."
If the Company has "related person insurance income" ("RPII"), determined on
a gross basis, in excess of 20% of its gross insurance income for any fiscal
year, each U.S. shareholder of the Company who owns Common Shares (directly or
through foreign entities) on the last day of such fiscal year may be required
to include in such shareholder's gross income for U.S. tax purposes a
proportionate share of such RPII. RPII is income of the Company or one of its
subsidiaries attributable to insurance or reinsurance policies where the
direct or indirect insureds are U.S. shareholders or are related to U.S.
shareholders. RPII may be included in a U.S. shareholder's gross income
whether or not such shareholder or a person related to it is a policyholder.
While the Company intends to operate its business so that RPII does not exceed
20% of gross insurance income, there can
18
<PAGE>
be no assurance that it will not have gross RPII exceeding such threshold. See
"Certain Tax Considerations--Taxation of Shareholders--United States Taxation
of U.S. and Non-U.S. Shareholders."
Under ESG's Bye-laws, no U.S. shareholder is permitted to hold 10% or more
of ESG's total combined voting power, except for John C Head III and persons
deemed to own Common Shares with him ("Head") under Section 958 of the
Internal Revenue Code of 1986, as amended (the "Code"), subsequent to the
Closing Date, who are not permitted to hold 25% or more of such voting power.
Accordingly, the Company believes that no shareholder other than Head could be
considered to be a "U.S. shareholder" for purposes of Section 951(b) of the
Code. Additionally, Head has no intention of acquiring any shares that would
cause Head to be treated as owning 25% or more of the value of the Company.
Therefore, the Company does not believe that either it or any of its
subsidiaries will be "controlled foreign corporations" ("CFC") for U.S.
federal income tax purposes. In the absence of any controlling authority,
however, there can be no assurance that the IRS would not take a contrary
position regarding the effect of the foregoing limitations on voting power,
and therefore assert that the Company is a CFC. Moreover, if Head acquires
sufficient shares that would cause Head to be treated as owning (for purpose
of the CFC rules) more than 25% of the value of the Company for an
uninterrupted period of 30 days or more during any tax year, the Company would
be a CFC. If the Company or any subsidiary of the Company were deemed to be a
CFC, each "U.S. shareholder" would be required to include in its gross income
for U.S. federal income tax purposes its pro rata share of the Company's
"Subpart F income," even if the "Subpart F" income is not distributed.
"Subpart F income" includes, among other things, "insurance income" within the
meaning of Section 953(a) of the Code.
The Company, ES Ireland and ES Bermuda intend to operate their business in a
manner that will not cause the Company and its subsidiaries, other than the
German subsidiaries, to be subject to tax in Germany. However, because this is
essentially a factual test and there is considerable uncertainty as to the
activities which will cause a foreign corporation to be subject to tax in
Germany, there can be no assurance that German tax authorities will not
successfully contend that the Company and/or ES Ireland or ES Bermuda are
subject to tax in Germany. If the Company, ES Ireland or ES Bermuda were
subject to German tax, the Company's shareholders' equity and earnings would
be materially and adversely affected. At present, the overall effective tax
rate in Germany for ES Ireland or ES Bermuda would be approximately 56%
although non-deductible expenses would increase the overall effective tax
burden. See "Certain Tax Considerations--Taxation of the Company and its
Subsidiaries--Germany."
The Company and its subsidiaries intend to operate their business in a
manner that will not cause the Company or any of its subsidiaries, other than
ES North America, its Canadian subsidiary, to be subject to tax in Canada.
However, because this is essentially a factual test and there is considerable
uncertainty as to the activities which will cause a foreign corporation to be
subject to tax in Canada, there can be no assurance that Canadian tax
authorities will not successfully contend that the Company and/or a non-
Canadian subsidiary are subject to tax in Canada. If the Company and/or its
non-Canadian subsidiaries were subject to Canadian tax, the Company's
shareholders' equity and earnings could be materially and adversely affected.
At present, the overall effective tax rate in Canada is approximately 44%. See
"Certain Tax Considerations--Taxation of the Company and its Subsidiaries--
Canada."
ANTI-TAKEOVER CONSIDERATIONS
The provision for a staggered Board of Directors and voting cut-backs in the
Company's Bye-laws will have the effect of discouraging unsolicited takeover
bids from third parties or the removal of incumbent management. The Company's
Bye-Laws provide that the voting rights with respect to Common Shares and any
other voting securities directly or indirectly beneficially or constructively
owned by any person, other than Head subsequent to the Closing Date, will be
limited, in the aggregate, to a voting power of 9.9%. The voting rights with
respect to all shares held by such person in excess of the 9.9% limitation
will be allocated to the other holders of Common Shares, pro rata based on the
number of Common Shares held by all such other holders of Common Shares,
subject only to the further limitation that no shareholder allocated any such
voting rights, other than Head subsequent to the Closing Date, may exceed the
9.9% limitation as a result of such allocation. See "Description
19
<PAGE>
of Capital Stock--Common Shares." In addition, the terms of Class B Warrants
provide that any such Class B Warrants remaining unvested at the time of a
change of control of the Company will vest immediately upon the occurrence of
such change. See "Description of Capital Stock--Warrants."
CERTAIN TRANSACTIONS, CONFLICTS OF INTEREST AND BUSINESS OPPORTUNITIES
The Company has entered into an agreement with Head Asset Management, an
affiliate of Head Company, relating to the provision of investment management
services, for which the Company will pay fees. Conflicts of interest could
arise with respect to future transactions involving the Direct Purchasers, on
the one hand, and the Company, on the other hand. Such transactions must be
approved by a majority vote of the disinterested members of the Board of
Directors. See "The Company--Investments."
Conflicts of interest could also arise with respect to business
opportunities that could be advantageous to Head Company, on the one hand, and
the Company, on the other hand. Head Company, through its affiliates, makes
investments in insurance and reinsurance companies and companies providing
services to the insurance industry. The Company may compete with affiliates of
Head Company on personal and special risk reinsurance programs for the same
prospective clients. In such cases, the Company will conduct its underwriting
and pricing analyses independently.
Wolfgang M. Wand is the legal representative in Germany of Les Mutuelles du
Mans, a French insurance company. In this capacity, Mr. Wand's duties to Les
Mutuelles du Mans may conflict with his duties to the Company, as Les
Mutuelles du Mans and the Company may have diverging business priorities with
respect to opportunities to which Mr. Wand may have access.
NO PRIOR MARKET
Prior to the Offerings, there has been no public trading market for the
Common Shares and there can be no assurance that an active trading market will
develop and continue upon completion of the Offerings or that the market price
of the Common Shares will not decline below the initial public offering price.
The initial public offering price was determined by agreement among the
Company and the Underwriters and may not be indicative of the market price of
the Common Shares after the Offerings. See "Underwriting" for factors
considered in determining the initial public offering price.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of Common Shares for future sale, will have
on the market price of the Common Shares prevailing from time to time. Sales
of substantial amounts of the Common Shares following the Offerings, or the
perception that such sales could occur, could adversely affect the market
price of the Common Shares and may make it more difficult for the Company to
sell its equity securities in the future at a time and price which it deems
appropriate. Upon completion of the Formation, Direct Sales and the Offerings,
there will be 11,573,799 Common Shares outstanding and Class A Warrants to
purchase 1,148,087 Common Shares that will be immediately exercisable. If the
Underwriters' over-allotment option is exercised, 12,773,799 Common Shares
will be outstanding and Class A Warrants to purchase 1,267,124 Common Shares
will be immediately exercisable. The Common Shares sold in the Offerings will
be freely transferable without restriction or further registration under the
Securities Act of 1933 (the "Securities Act"), except for any of those Common
Shares owned at any time by an "affiliate" of the Company (an "Affiliate")
within the meaning of Rule 144 under the Securities Act (which sales will be
subject to the volume limitations and certain other restrictions). The Direct
Purchasers have been granted rights to require the Company to register their
Common Shares, Warrants and Common Shares underlying the Warrants, which
rights can be exercised, contingent upon the closing of the Offerings,
immediately upon expiration of the lock-up agreement they have entered into
with the Company. Pursuant to such lock-up agreements, each of the Company and
the Direct Purchasers, excluding HMI, has agreed, subject to certain limited
exceptions, not to offer, sell, contract to sell or otherwise dispose of any
Common Shares or any other
20
<PAGE>
securities convertible into or exercisable or exchangeable for any Common
Shares or grant options or warrants to purchase any Common Shares for a period
of one year after the date of this Prospectus, without the prior written
consent of the Representatives. HMI, Mr. Wand and Mr. Debrovner have agreed to
such restrictions for two years after the date of this Prospectus unless
otherwise agreed in writing by the Representatives. Certain other shareholders
who acquired Common Shares in the Formation have agreed to such restrictions
for six months after the date of this Prospectus unless otherwise agreed in
writing by the Representatives. See "Shares Eligible for Future Sale."
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
The majority of the Company's officers and directors are residents of
various jurisdictions outside the United States. All or a substantial portion
of the assets of such officers and directors and of the Company are or may be
located in jurisdictions outside the United States. Although the Company has
irrevocably agreed that it may be served with process in New York, New York
with respect to actions based on offers and sales of the Common Shares made
hereby, it could be difficult for investors to effect service of process
within the United States on directors and officers of the Company who reside
outside the United States or to recover against the Company or such directors
and officers on judgments of United States courts predicated upon civil
liabilities under the United States federal securities laws. See
"Enforceability of Civil Liabilities Under United States Federal Securities
Laws."
HOLDING COMPANY STRUCTURE AND DIVIDENDS
The Company is a holding company with no operations or significant assets
other than through its ownership of the capital stock of subsidiaries. Future
dividends and other permitted payments from subsidiaries are expected to be
the Company's sole source of funds to pay expenses and dividends, if any.
While the Company is not itself subject to any significant legal prohibitions
in the payment of dividends, its subsidiaries are subject to regulatory
constraints which affect their ability to pay dividends to the Company. See
"The Company--Regulation," "Description of Capital Stock" and "Dividend
Policy."
DILUTION
The subscription agreements pursuant to which the Warrants were purchased
provide that Warrants will be granted to purchase a proportion of the total
number of Common Shares outstanding on the Closing Date, together with Common
Shares sold pursuant to the exercise of the Underwriters' over-allotment
option. See "Direct Sales" and "Description of Capital Stock--Warrants."
Therefore, to the extent that the number of Common Shares to be sold in the
Offerings varies, the number of Common Shares issuable upon the exercise of
the Warrants will vary. Upon completion of the Offerings, Class A Warrants to
purchase up to 1,148,087 Common Shares, and Class B Warrants to purchase up to
1,148,087 Common Shares (if certain performance criteria are satisfied), will
be outstanding. The purchasers in the Offerings will experience an immediate
dilution of $3.20 per share upon completion of the Offerings. See "Dilution."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition,
including, in particular, the likelihood of the Company's success in
maintaining the favorable results of its current book of business. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of
which are beyond the control of the Company, and reflect future business
decisions which are subject to change. The foregoing description of risk
factors specifies the principal contingencies and uncertainties to which the
Company believes it is subject. Some of these assumptions inevitably will not
materialize, and unanticipated events will or may occur which will affect the
Company's results.
21
<PAGE>
USE OF PROCEEDS
Proceeds from the Direct Sales are estimated to be $50.0 million and net
proceeds from the Offerings are estimated to be $149.6 million. Approximately
$4.6 million of net proceeds from the Offerings will be used for the payment
of certain expenses and fees related to the Direct Sales and the Offerings.
The remainder of net proceeds from the Offerings together with the proceeds
from the Direct Sales will be contributed to the Company's operating
subsidiaries to establish a capital base to be used to support the
underwriting of reinsurance or will be held by the Company for general
corporate purposes. See "The Company--Investments."
CAPITALIZATION
The following table sets forth the capitalization of ESG (i) as of August
21, 1997, (ii) as adjusted to give effect to the Formation, and (iii) as
adjusted to give effect to the Formation, Direct Sales and the Offerings.
<TABLE>
<CAPTION>
AS ADJUSTED FOR
THE FORMATION,
AS ADJUSTED FOR DIRECT SALES AND
ACTUAL THE FORMATION THE OFFERINGS
<S> <C> <C> <C>
Long-term debt................. $ -- $ -- $ --
Preference Shares (50,000,000
shares authorized; 0 shares
issued and outstanding)....... -- -- --
Shareholders' equity:
Ordinary Shares, par value $
1.00 per share
(12,000 shares authorized,
issued and outstanding)..... 12,000 -- --
Common Shares, par value
$1.00 per share
(100,000,000 shares
authorized; 11,573,799
shares
issued and outstanding)..... -- 900,000 11,573,799
Class B Common Shares, par
value $1.00 per share
(100,000,000 shares
authorized; 0 shares issued
and outstanding)............ -- -- --
Additional paid-in capital... 0 (780,100) 183,546,101(1)
Less: receivable from
shareholders................ (12,000)(2) -- --
Accumulated deficit........... -- (608,700) (608,700)(3)
-------- --------- ------------
Total shareholders' equity..... 0 (488,800) 194,511,200
-------- --------- ------------
Total capitalization........... $ 0 $(488,800) $194,511,200
======== ========= ============
</TABLE>
- ---------------------
(1) Includes (a) $50.0 million from the Direct Sales, which includes $5.2
million attributable to Class A Warrants to purchase 1,148,087 Common
Shares and no amount attributable to Class B Warrants to purchase up to
1,148,087 Common Shares (if certain performance criteria are satisfied),
(b) $149.6 million of net proceeds from the Offerings and (c) estimated
expenses and fees of $4.6 million. See "Summary--The Offerings" and "--
Formation and Direct Sales."
(2) Represents the required contributions from the Company's initial issuance
of Ordinary Shares in connection with the incorporation of the Company.
Such shares will be repurchased by the Company and retired simultaneously
upon completion of the Formation.
(3) Reflects the December 31, 1996, accumulated deficit of ESG Germany and the
inclusion of its shares in connection with the Formation. See Notes to the
Balance Sheet of ESG Re Limited.
22
<PAGE>
DILUTION
The net tangible book value (deficiency) of the Company, after giving effect
to the Formation and prior to the Direct Sales and the Offerings, was
approximately $(0.6) million, or $(0.61) per share. Net tangible book value
(deficiency) per share is equal to the Company's total assets excluding
intangible assets less its total liabilities, divided by the total number of
Common Shares then outstanding. After giving effect to the Formation, Direct
Sales and the Offerings, and after deducting the Underwriters' discounts and
commissions and estimated expenses related to the Offerings, the net tangible
book value of the Company would be $194.5 million, or $16.80 per share. This
represents an immediate increase in net tangible book value of $17.41 per
share to shareholders at the time of the Formation and an immediate dilution
in net tangible book value of $3.20 per share to investors in the Offerings.
The following table illustrates the per share dilution in net tangible book
value to investors in the Offerings.
<TABLE>
<S> <C> <C>
Assumed price per share to investors in the Offerings.......... $20.00
Net tangible book value (deficiency) per share prior to the
Direct Sales and the Offerings (1)............................ $(0.61)
Increase in net tangible book value per share attributable to
the Direct Sales and the Offerings............................ 17.41
Net tangible book value per share after giving effect to the
Formation, Direct Sales and the Offerings..................... 16.80
======
Dilution per share to investors in the Offerings............... $ 3.20
======
</TABLE>
The following table summarizes the number of Common Shares purchased from
the Company, the total consideration paid and the average price per share paid
in the Formation, Direct Sales and the Offerings:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- ------------------------PRICE PER
AMOUNT % AMOUNT % SHARE
<S> <C> <C> <C> <C> <C>
Formation.................. 900,000 7.8 $ -- -- $ --
Direct Sales............... 2,673,799 23.1 50,000,000(2) 23.8 18.70(2)
The Offerings.............. 8,000,000 69.1 160,000,000 76.2 20.00
---------- ----- ------------- ------
11,573,799 100.0 $ 210,000,000 100.0
========== ===== ============= ======
</TABLE>
The calculations of net tangible book value and other computations above
assume no exercise of the Underwriters' over-allotment option and that the
Class A Warrants and Class B Warrants are not exercised. See "Description of
--------------
Capital Stock."
- -------------
(1) Based upon the December 31, 1996 financial statements of ESG Germany and
after giving effect to the Formation.
(2) Represents amount paid for Common Shares and Warrants in the Direct Sales.
The average price per share is based on the number of Common Shares
purchased in the Direct Sales.
DIVIDEND POLICY
The Board of Directors expects to declare quarterly cash dividends of $0.075
per share beginning in the first quarter of 1998. The declaration and payment
of dividends will be at the discretion of the Board of Directors and will
depend upon the Company's results of operations and cash flows, the financial
position and capital requirements of the Company's reinsurance operations,
general business conditions, legal, tax and regulatory restrictions on the
payment of dividends and other factors the Board of Directors deems relevant.
While the Company is not itself subject to any significant legal prohibitions
on the payment of dividends, its subsidiaries are subject to regulatory
constraints which affect their ability to pay dividends to the Company. See
"The Company--Regulation" and "Description of Capital Stock." Accordingly,
there can be no assurance that dividends will be declared or paid by the
Company in the future.
23
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth the selected consolidated financial data for
European Specialty Group Holding AG and Subsidiaries or, prior to 1996,
European Specialty Group GmbH and Subsidiaries, for the periods and as of the
dates indicated. The financial statements included herein represent the
financial performance and results of the Company's prior operations as a
reinsurance management company and do not reflect the financial performance
and results of the Company as a reinsurer for its own account. The
consolidated statement of income data for the years ended December 31, 1994,
1995 and 1996, and the consolidated balance sheet data as of December 31,
1995, and 1996, have been derived from the Company's audited consolidated
financial statements. The consolidated statement of income data for the years
ended December 31, 1992, and 1993, and the periods ended June 30, 1996 and
1997, and the consolidated balance sheet data as of December 31, 1992, 1993
and 1994, and as of June 30, 1996 and 1997 have been derived from the
Company's unaudited consolidated financial statements and, in the opinion of
management, reflect all adjustments necessary for a fair presentation of the
results of operations and financial condition. The data should be read in
conjunction with the Company's Consolidated Financial Statements, related
notes, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information appearing elsewhere
herein. For information on underwriting results, see "The Company--
Underwriting Results" and "--Lines of Business."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
----------------------------------------------------- ---------------------
1992 1993(1) 1994 1995 1996 1996 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (U.S. DOLLARS
IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DA-
TA:
Total revenues.......... $ 921.4 $ 1,820.9 $ 3,351.0 $ 4,541.0 $ 4,149.5 $ 3,242.7 $ 2,680.3
Total expenses (excludes
tax
benefits/expenses)..... 1,143.1 2,329.0 3,313.2 4,097.2 4,156.9 2,116.1 2,139.3
Net income (loss)....... (70.9) (165.3) (6.0) 145.5 (162.6)(2) 441.3 197.9
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------------------
1992 1993(1) 1994 1995 1996 1996 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $ 503.5 $ 1,505.0 $ 2,881.1 $ 2,683.5 $ 2,518.7 $ 3,532.6 $ 3,153.6
Short-term and current
portion of long-term
debt................... 147.2 674.1 537.3 1,745.7 1,812.7 1,731.5 1,882.7
Long-term debt.......... -- 724.1 1,736.9 195.4 -- -- --
Total shareholders'
equity................. 87.2 (76.9) (90.4) (151.8) (488.8)(3) 38.5 (233.1)
</TABLE>
- ---------------------
(1) In 1994, the Company began operations as an underwriting management
company. Prior to 1994, the Company operated principally as a reinsurance
intermediary.
(2) In 1996, the Company incurred a one-time tax expense of $121.0 related to
the reorganization of ESG Germany. Also in 1996, the Company incurred an
expense of $130.0 (after tax) for advisory services provided by an
affiliate of Deutsche Morgan Grenfell Inc., one of the Representatives of
the Underwriters. For 1996, on a pro forma basis, the Company would have
had a net loss of $(0.18) per share assuming 900,000 shares outstanding
after the Formation (prior to the Direct Sales and the Offerings).
Earnings per share data is not meaningful for the historical operations of
the Company.
(3) In 1996, the Company entered into a series of equity transactions to
simplify its capital structure that, upon the settlement of certain of
these transactions, resulted in a reduction of shareholders' equity at
December 31, 1996, of $173.0. Subsequent to December 31, 1996, certain of
these transactions settled and resulted in an increase in capital of
$440.4.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the Company's financial statements included
elsewhere in this Prospectus. Unless otherwise indicated, all dollar
references below are to thousands of U.S. dollars.
GENERAL
The Company currently operates as a personal and special risk reinsurance
management company through its subsidiary, ES Management. Upon completion of
the Offerings, the Company intends to operate as a specialist reinsurer
writing for its own account and will assume for its own account risks it
previously underwrote on behalf of its reinsurance partners.
The financial statements included herein represent the financial performance
and results of the Company's prior operations as a reinsurance management
company and do not reflect the financial performance and results of the
Company as a reinsurer for its own account. Such results are not, therefore,
an indication of the Company's future financial performance.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenue is primarily comprised of underwriting management and related fees
and profit commissions based on the underwriting results of the reinsurance
pools, as well as commissions for facultative and other business placed with
reinsurers that do not participate in the pools. Total revenues decreased by
$562.4 or 17.3% from $3,242.7 to $2,680.3. The decline in total revenue was
partially due to 1994 underwriting year profit commissions (amounting to
$200.0) which were earned in the period ended June 30, 1996. No profit
commissions were earned in the corresponding period ending June 30, 1997. The
Company did not record a profit commission in the six month period ended June
30, 1997, due to the fact management believed it to be prudent to ensure the
profitability of the pools. The additional decrease in total revenue was due
to the approximate decline of 13% in the value of translating the Deutsche
Mark into U.S. dollars for reporting purposes. This decrease in revenue was
partially offset by an increase in new business written in 1997 of $37.8.
Total expenses increased by $23.2 or 1.1% from $2,116.1 to $2,139.3.
Personnel costs increased by $268.8 which was principally due to a
reallocation of expenses from consulting and related expenses to personnel
expenses of $289.3, an increase in staff salaries of approximately $125.5 and
an offsetting decrease resulting from an approximate decline of 13% in the
value of translating the Deutsche Mark into U.S. dollars for reporting
purposes. As described in the notes to the December 31, 1996 financial
statements, two consultants engaged by ES Management during 1996 signed
employment agreements effective January 1, 1997. The related expenses of these
consultants has therefore been transferred to personnel expenses for the
period ended June 30, 1997. This explains the reallocation of expenses between
personnel costs and consulting and related expenses. Other operating expenses
increased by $45.1. This increase was due principally to relocation expenses
and additional rent incurred when the company moved offices of $90.7. The
increase in total expenses was offset by the approximate decline of 13% in the
value of translating the Deutsche Mark into U.S. dollars for reporting
purposes.
As described in the footnotes to the financial statements included elsewhere
in the prospectus, revenue is recognized when an underwriting contract becomes
effective. A significant majority of underwriting contracts that ES Management
writes becomes effective on January 1 each year. Thus the majority of the
revenue is recognized in the first quarter of the year. As the estimated cost
of the administrative services required to be provided with respect to these
contracts is accrued when the contract becomes effective, the accrual will
therefore be greater at interim accounting periods than at the end of the
year.
25
<PAGE>
Given the nature of the ES Management's business cycle as described and its
accounting policies, interim financial statements should be read in
conjunction with the full year financial statements.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues decreased by $391.5 or 8.6% from $4,541.0 to $4,149.5. This
decrease was caused by a management decision to reduce ES Management's fees
and commissions by approximately 20% in order to enhance ES Management's
competitive position and the underwriting profitability of the business
underwritten for the pools. This decision resulted in a decrease in fee
revenue of approximately $881.8. There was a further decline in total revenue
of $253.5 due to an approximately 6% decline in the value of translating the
Deutsche Mark into U.S. dollars for reporting purposes. These decreases were
offset in part by the ES Management's recognition of approximately $398.0 in
profit commissions in 1996 of which no amounts were recognized in prior years.
ES Management can earn a profit commission based on the underlying
profitability of the pool business. ES Management recorded its first profit
commission in 1996 based upon the clear emergence of profitability in the
underlying pools. ES Management had not recorded profit commission in 1995 and
1994 as management believed it prudent to ensure the profitability of the
pools.
Total expenses increased by $59.7 or 1.5% from $4,097.2 to $4,156.9. This
was principally due to an increase in personnel costs of $80.5. This net
increase resulted from an increase in the numbers of staff of $164.9 and a
decrease caused by the decline of approximately 6% in the value of translating
the Deutsche Mark into U.S. dollars for reporting purposes of $84.4. In
addition, an advisory fee expense of $251.9 was incurred for advice on
possible ways to enhance the capitalization of ES Management and for support
in the production of the draft prospectus to potential investors. Additional
advisory fees have been incurred in 1997 which are directly attributable to
the formation, direct sales and offerings. These advisory fees will be shown
as a reduction of the proceeds raised and not as an expense of the period.
These increases were offset by a decrease of $253.9 in total operating
expenses due to the decline of approximately 6% in translating the Deutsche
Mark into U.S. dollars for reporting purposes.
In addition, in 1996, ES Management incurred a one-time tax expense related
to the reorganization of ESG Germany of $121.0. The total effect of these
transactions was a net loss of $(162.6) for 1996 in comparison with net income
of $145.5 in 1995.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased in 1995 by $1,190.0 or 35.5% from $3,351.0 to
$4,541.0. This increase was primarily attributable to the increased
underwriting activities of ES Management on behalf of reinsurance partners in
the personal accident market. Fee revenue from the personal accident market
increased by $887.8 from 1994 to 1995. In addition, revenues increased by
$439.6 reflecting the approximate 11% increase in translating the Deutsche
Mark into U.S. dollars for reporting purposes. In addition, ES Management
increased its interest earnings from funds held in the pools by $21.8.
Total expenses increased by $784.0 or 23.7% from $3,313.2 to $4,097.2.
Personnel costs accounted for $276.0 of this increase. This increase was due
in part to an increase in the number of staff and an increase in employee
compensation of $150.1 and an increase of $125.9 due to the approximate 11%
increase in translating the Deutsche Mark into U.S. dollars for reporting
purposes. In addition, marketing and selling-related costs increased by $189.9
principally for the opening of new representative offices to cover the Eastern
European markets. In addition, expenses increased by $396.6 reflecting the
approximately 11% increase in translating the Deutsche Mark into U.S. dollars
for reporting purposes. Net income increased to $145.5 from the prior year net
loss of $(6.0).
YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993
1994 represented the first year of ES Management's new core activities as an
underwriting management company, whereas previously ES Management's
predecessor had only performed services as a personal and
26
<PAGE>
special risk broker. ES Management's revenues were principally generated from
business written and ceded on behalf of various reinsurers into pools
pertaining to the classes of medical expense, personal accident, credit/life
as well as special risk. The underwriting activities resulted in a generation
of management fees and interest income amounting to $3,351.0 and represent an
increase in revenue in comparison to 1993 of $1,530.1 or 84.0%. This revenue
was also positively affected by an approximately 5% or $163.5 increase in the
rate of exchange for translating Deutsche Marks into U.S. dollars for
reporting purposes.
ES Management incurred total expenses of $3,313.2, which included charges
for depreciation, amortization and interest. Total expenses in 1994 increased
42.3% over total expenses in 1993, which were $2,329.0. This increase was
directly related to ES Management's increased business activities.
Specifically, consulting fees increased by $691.9 as a result of ES
Management's increased business activities.
ES Management incurred a net loss of $(6.0) in 1994 as compared with a net
loss of $(165.3) for 1993.
ES Management does not believe inflation has had a material impact on its
operations for any of the three years presented.
LIQUIDITY AND CAPITAL RESOURCES
After the Formation, the Company will rely primarily on cash dividends from
ES Bermuda to pay its operating expenses. The payment of dividends by ES
Bermuda to the Company is governed by Bermuda law. The Bermuda Companies Act
1981 would allow dividend payments when there are reasonable grounds for
believing that (i) ES Bermuda's assets will exceed the aggregate value of its
liabilities and its issued share capital and premium accounts, and (ii) ES
Bermuda will be able to pay its debts as they become due after payment of a
dividend. The Bermuda Insurance Act 1978 requires the Company to maintain a
minimum solvency margin and a minimum liquidity ratio. See "The Company--
Regulation."
The primary sources of liquidity for the Company will be net cash flow from
the maturity or sale of investments and operating activities, principally
premiums received. The Company's cash flow will also be affected by claim
payments which, due to the nature of the reinsurance coverage provided by the
Company, may include large loss payments. Therefore, the Company's cash flow
may fluctuate significantly from period to period.
It is currently the Company's intention that all fixed income securities in
its portfolio will be classified as securities available for sale and will be
carried at fair market value. Any unrealized gains or losses as a result of
changes in fair value over the period such investments are held will not be
reflected in the Company's statement of operations but rather will be
reflected in shareholders' equity. See Notes to the Balance Sheet of ESG Re
Limited.
As of January 1, 1997, ES Management had the following material commitments
for operating leases and employment contracts:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1997............................................................. $1,308.5
1998............................................................. 1,451.2
1999............................................................. 1,424.2
2000............................................................. 1,109.5
2001............................................................. 945.5
Thereafter....................................................... --
--------
Total.......................................................... $6,238.9
========
</TABLE>
27
<PAGE>
In addition to the employment contracts entered into on January 1, 1997, ES
Management is obliged to pay 12.5% of its annual profits to these executives.
However upon the successful completion of the Offering, these employment
contracts will be replaced with new employment contracts as described under
"Employment Arrangements" of the Prospectus.
In August 1997, the Company committed to open a new office in Toronto,
Canada, the cost of which the Company estimates to be $420.0.
The Company expects that its financing and operational needs for the
foreseeable future will be met by the proceeds of the Direct Sales and the
Offerings, as well as by funds generated from on-going operations. However, no
assurance can be given that the Company will be successful in the
implementation of its new operating strategy. See "Risk Factors--No History as
a Reinsurer; Increased Scope of Business."
ES Management's total outstanding debt increased by $70.0 or 3.9% from
$1,812.7 to $1,882.7 in the six month period ended June 30, 1997 compared to
December 31, 1996. This increase was the result of additional short term
borrowings of $278.8 (15.4%). This increase in outstanding debt was offset by
the decline in the value of translating the Deutsche Mark into U.S. dollars
for reporting purposes.
During 1996, ES Management entered into agreements to issue 80,000 common
shares, but such shares were not legally registered until July 1997.
Subsequent to legal registration, the common shares were sold, increasing the
Company's common shareholders' equity by $440.4.
ES Management's total outstanding debt decreased by $128.4 from $1,941.1 in
1995 to $1,812.7 in 1996. This decrease was the result of principal repayments
of $132.6 to a former shareholder and $139.2 to banks for long-term debt. This
decrease was offset by an increase in short-term debt of $296.0 and the effect
of translating the Deutsche Mark into U.S. dollars for reporting purposes. ES
Management also purchased $152.5 of fixed assets and intangible assets.
In 1996, ES Management entered into a series of equity transactions to
simplify its capital structure, resulting, upon the settlement of certain of
these transactions, in a reduction of shareholders' equity at December 31,
1996 of $173.0. Subsequent to December 31, 1996 certain other of these
transactions settled and resulted in an increase in capital of $516.0.
During 1995 ES Management reduced its outstanding debt by repaying $771.0 of
long-term debt, including $633.2 to a former shareholder, which was partially
offset by an increase in short-term borrowings from banks of $251.3. ES
Management also made capital purchases for furniture and equipment of $46.3
and ES Management agreed to repurchase from a selling shareholder $203.9 of
equity capital.
During 1994, ES Management borrowed from certain of its shareholders $857.7
to finance its new activities. In addition, the Company increased its long-
term bank borrowings by $182.6 before paydowns of other previously existing
long-term bank borrowings of $36.9. With these borrowings ES Management
decreased its borrowings under short-term credit arrangements by approximately
$299.0. ES Management also paid $193.7 to secure a franchise agreement. The
balance of the increased borrowings were used to fund current operations.
CURRENCY
The Company's functional currency is the U.S. dollar. However, because the
Company expects to write a portion of its business in currencies other than
the U.S. dollar and will maintain a portion of its investment portfolio in
investments denominated in currencies other than the U.S. dollar, the Company
expects that it may experience significant exchange gains and losses, which
will in turn affect the Company's statement of operations. See Notes to
Consolidated Financial Statements of European Specialty Group Holding AG and
Subsidiaries.
28
<PAGE>
While a substantial portion of the Company's investments will be in U.S.
dollar-denominated instruments, the Company may be exposed to significant
underwriting losses in currencies other than U.S. dollars. Exchange rate
fluctuations may increase the Company's losses as claim amounts are settled.
Foreign currency exposure originates as a result of the fact that, while the
Company publishes its financial statements in U.S. dollars, a portion of its
revenues and its expenses are denominated in other currencies.
The Company intends to hold investments in the currencies in which it will
collect premiums, pay claims and hold reserves thus creating a natural foreign
exchange hedge so that resulting foreign exchange rate gains and losses can be
reduced to the extent assets equal liabilities. If in the future this hedging
strategy is not effective, the Company may consider other hedging activities
to reduce its foreign currency exposures. See "Risk Factors--Foreign
Currency."
29
<PAGE>
THE COMPANY
The Company was formed on August 21, 1997 to provide personal and special
risk reinsurance to insurers and selected reinsurers on a worldwide basis. The
Company intends to become a leading specialist reinsurer writing for its own
account with a priority of underwriting profitability.
Since 1994, the Company, through its subsidiary, ES Management, has operated
as a personal and special risk reinsurance underwriter on behalf of certain
reinsurers. ES Management has performed the principal underwriting functions
normally handled by a reinsurer, including risk analysis, pricing, contract
structuring, claims management and loss reserve estimation on behalf of its
reinsurance partners participating in reinsurance pools arranged by ES
Management, or has been retained under facultative or treaty arrangements
outside of the pools. Under the pool arrangements, the reinsurance partners
each assume a contractually fixed share of the risk underwritten by ES
Management, which does not assume risk for its own account. The share of risk
underwritten by each reinsurance partner has been negotiated by ES Management
and its reinsurance partners based on estimates of market capacity, the
relative amount of capacity that each such reinsurance partner has been
willing to make available and ES Management's strategic considerations. The
pool business reflects the Company's personal and special risk focus. See "--
Lines of Business." The pool contracts limit the business ES Management is
permitted to write to personal and special risk business. The management and
business origination fees paid to ES Management by its reinsurance partners
have been established by agreement between ES Management and such partners and
range up to 9.5% of the premiums that are paid to the reinsurance partners by
ceding clients in consideration for ES Management's management services, with
the remainder of the premiums retained by its reinsurance partners in
consideration for assuming the reinsurance risk. In addition, ES Management's
agreements with its partners entitle it to receive negotiated profit
commissions, which depend on the pools' loss ratios. ES Management's
relationship with ceding clients approximates the relationship between an
insurer and a reinsurer except that ES Management uses its pool underwriting
authority to accept risk on behalf of other reinsurers rather than on its own
behalf. In essence, ES Management serves as the agent for its reinsurance
partners. ES Management's reinsurance partners have included the following:
AXA RE VIE;
Caisse Centrale de Reassurance;
CNP Assurances;
Manulife Reinsurance;
ReliaStar Reinsurance Group (NL) (a subsidiary of ReliaStar Financial
Corporation);
Rhine Reinsurance Company Ltd.;
Royal Belge Re, a subsidiary of AXA RE VIE;
Skandia International Gestion de Reassurance Vie S.A. (a subsidiary of
Skandia International Holdings AB);
Skandia International Insurance Corporation (a subsidiary of Skandia
International Holdings AB);
Swiss Re Life & Health/The Mercantile and General Life Reinsurance Company
Limited; and Union Reinsurance Company (subsidiaries of Swiss Reinsurance
Company).
Following the Offerings, the Company will discontinue its management
services business and become a reinsurer of risks for its own account. The
Company believes that the skills which have allowed it to develop a successful
management business are the same skills required to operate a successful
reinsurance company and that, following its transition, its underwriting
activities and its relationships with ceding clients will remain largely
unchanged.
THE BUSINESS
The Company believes that its reinsurance management subsidiary, ES
Management, distinguishes itself and strengthens its client relationships by
offering "intelligent reinsurance" products and services that help its ceding
clients to better manage their risks. These include software solutions to
particular underwriting problems (including software developed by reinsurance
and health care professionals to predict future severity of medical conditions
based on current diagnoses), actuarial support, product design, and, in the
field of medical expense
30
<PAGE>
reinsurance, loss prevention and disease management. In order to maximize the
quality of the information related to the risks that it underwrites, the
Company maintains close relationships with its ceding clients and professional
reinsurance brokers.
In 1996, gross premiums written by ES Management on behalf of its
reinsurance partners totaled $63.9 million. ES Management expects that its
gross premiums written on behalf of its reinsurance partners for the year
ending December 31, 1997 will be approximately $100 million. ES Management's
principal lines of business as a percentage of gross premiums written on
behalf of its reinsurance partners were as follows for the year ended December
31, 1996:
<TABLE>
<CAPTION>
1996 GROSS
PREMIUMS
WRITTEN
<S> <C>
Medical Expense................................................. 39%
Personal Accident and Disability................................ 35
Credit/Life..................................................... 16
Special Risk.................................................... 10
---
100%
===
</TABLE>
In the years ended December 31, 1994, 1995 and 1996, ES Management's
revenues were $3.3 million, $4.5 million and $4.1 million, respectively. ES
Management's revenues in these years derived primarily from management fees,
except for the year ended December 31, 1996, in which $398,000 in profit
commissions were recognized as a result of favorable loss developments with
respect to earlier underwriting years.
ES Management's business can be characterized as short-tail. Approximately
85% of its business has a typical run-off pattern of less than 24 months and
13% has a slightly longer run-off pattern of up to 60 months. The remaining 2%
of ES Management's business is long-tail. Of ES Management's business, 88% is
written on a proportional basis, as quota share reinsurance, and 12% is
written on a non-proportional basis, as specific excess of loss reinsurance.
ES Management underwrites risks emanating from more than 49 countries and
maintains operations in its key markets. Approximately 69% of ES Management's
gross premiums written in 1996 originated in Europe. In addition to ES
Management's offices in Hamburg, London, Hong Kong and Moscow, the Company has
offices in Bermuda and Ireland, and has formed a strategic alliance with an
independent broker in Miami with respect to Latin American business. This
international network of offices enables ES Management to be close to its
customers and the risks underwritten, in line with the operating principle of
"think globally--act locally." ESG is seeking a selective North American
presence in the health care field and, to this end, has opened an office and
hired additional personnel in Toronto.
31
<PAGE>
POOL UNDERWRITING RESULTS
ES Management's underwriting approach is analytical and proactive, taking
into consideration trends and developments that affect loss development,
rather than focusing on pricing techniques based on loss history alone. ES
Management's business underwritten on behalf of its reinsurance partners is
derived from (i) pool business, where ES Management is authorized to
underwrite reinsurance coverage on behalf of, and bind, reinsurance partners
in specified lines of business; (ii) facultative business, where ES Management
separately negotiates coverage on a risk-by-risk basis between cedants and
reinsurance companies; and (iii) other business, where ES Management arranges
coverage outside of pools because of coverage or risk restrictions contained
in the pool agreements. In 1996, pool business amounted to $53.2 million (or
83.3% of total gross premiums written), facultative business amounted to $5.7
million (or 8.9% of total gross premiums written) and other business amounted
to $5.0 million (or 7.8% of total gross premiums written). As reflected in the
following table, ES Management has achieved underwriting profitability and
steady growth in the business it managed for each of the 1994, 1995 and 1996
underwriting years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
(U.S. DOLLARS IN MILLIONS,
EXCEPT RATIO DATA)
<S> <C> <C> <C>
Gross premiums written.......................... $ 36.5 $ 58.3 $ 63.9
Net premiums written (2)........................ 35.6 57.6 62.7
Net losses and loss adjustment expenses (3)..... 18.1 25.4 34.7
Net losses and loss adjustment expenses as a
percentage of net premiums written............. 51.0% 44.1% 55.3%
Commissions and expenses (4).................... $ 11.5 $ 22.5 $ 18.1
Commissions and expenses as a percentage of net
premiums written............................... 32.2% 39.1% 28.9%
</TABLE>
- ---------------------
(1) All figures show the business as underwritten by ES Management on behalf
of its reinsurance partners and do not represent premiums received by, or
revenue of, ES Management, which are determined under the terms of ES
Management's arrangements with its reinsurance partners.
(2) Net premiums written represent gross premiums written reduced by the cost
of excess of loss reinsurance coverage.
(3) Net losses and loss adjustment expenses include claims costs and reserves,
and represent the actual or anticipated final close-out ratio reduced by
any amounts recovered under excess of loss reinsurance coverage. Claims
costs include actual claims expenditures, loss adjustment costs and loss
prevention charges and consulting expenses directly related to particular
claims. Net losses do not include costs for internal claims supervision
and auditing charges, if applicable, for ES Management and corresponding
items for the pool or open market reinsurers.
(4) Commissions and expenses include all original commissions, overriders,
reinsurance brokerage fees and other fees, taxes and general loss
prevention charges. Commissions and expenses do not include (i) ES
Management's general expenses for managing and administering its business,
(ii) the expenses incurred by reinsurance partners for their internal
administration functions, such as accounting, auditing and investment
management and (iii) expenses allocated to cover the reinsurer's
utilization of capital and surplus. ES Management's total operating
expenses for the years ended December 31, 1994, 1995 and 1996 were $3.1
million, $3.8 million and $3.6 million, respectively.
FINANCIAL TRANSITION
Subsequent to the Offerings, ESG will assume for its own account risks that
its subsidiary, ES Management, previously underwrote on behalf of its
reinsurance partners. After completion of the Offerings, the Company will
exercise a contractual right provided for in its current pool agreements to
underwrite for its own account a 30% share, retroactive to January 1, 1997, of
the 1997 business it currently manages for its reinsurance partners in its
reinsurance pools. ESG's assumption of 30% of the current pool business will
be through retrocession from its reinsurance partners, proportional to such
partners' share of the pool. After completion of the Offerings, ESG
32
<PAGE>
will no longer perform any management functions on behalf of third parties
except in connection with the runoff of the reinsurance pools. Beginning in
1998, ESG will write reinsurance on its own behalf, retaining not less than
70% of the total book of business, including renewals. ESG believes this
transition will not have a significant negative impact on its relationship
with its reinsurance partners or ceding clients since the Company will
continue to provide identical underwriting capabilities and related services.
The Company will not have to compensate either its ceding clients or
reinsurance partners by reason of the Company's current contractual
arrangements. The Company intends to form strategic alliances with other
reinsurers, (some of which may be current reinsurance partners), to assume up
to 30% of the business that will be underwritten by ESG as lead reinsurer.
Since ES Management's business is characterized by high renewal ratios and the
Company's reinsurance subsidiaries will offer a strong financial position, the
Company is confident that it will retain all or a substantial part of this
business. From 1994 to 1995, 90% of the ES Management's business with ceding
clients was renewed and from 1995 to 1996, 79% was renewed. The Company will
not act as an agent on behalf of its reinsurance partners and will not receive
management and profit commissions from them.
As ES Management has handled all of the functions usually administered by a
professional reinsurer, other than investment management, the Company believes
that its established infrastructure is sufficiently developed to meet the
demands of ESG's new role and its anticipated growth. The Company has entered
into an Investment Advisory Agreement with Head Asset Management for the
provision of investment advisory services. See "--Investments." In the future,
the Company may add additional personnel to meet its anticipated growth.
Because the Company previously acted only as a management company through ES
Management, its initial capital will be unencumbered by issues of loss reserve
adequacy, unrealized losses in its investment portfolio and uncollectible
reinsurance. As a management company, ES Management's revenues were previously
comprised of underwriting management fees and profit commissions based on the
underwriting results of the reinsurance pools. As a reinsurer, the Company's
revenues will include premiums written for its own account as well as income
derived from its investment portfolio.
The Company will seek an early rating from a major rating agency. In
addition, the Company will enter into co-reinsurance agreements and licensing
and fronting arrangements, as necessary, allowing the Company to share
underwriting knowledge of, and gain access to, markets in which it currently
is not doing business. Under such arrangements, ESG would be able to accept
risks in the name of the other reinsurers, and those reinsurers would be
obligated to cede to ESG a portion of the business underwritten by ESG on
their behalf.
MARKET GROWTH
ESG believes that its reinsurance markets are currently experiencing
significant growth as a result of: (i) the worldwide trend of transferring
social security and national health responsibility to the private sector,
particularly in Western Europe; (ii) increasing insurance demand accompanying
economic growth in emerging markets in Eastern Europe, Asia and Latin America;
(iii) the deregulation of certain European markets as a consequence of new
trade directives from the European Union enabling the introduction of new
products; (iv) increasing individual morbidity and decreasing mortality within
large demographic segments of the population; and (v) increased capacity
requirements for the insurance of major global sports and entertainment
events.
GROWTH STRATEGY
The Company believes that it is well positioned to benefit from these market
growth developments because of ES Management's reputation as a lead
underwriter in negotiating on behalf of its pools, its risk-oriented approach
and its far-ranging and well-established relationship network.
While continuing ES Management's strategy of placing primary emphasis on
underwriting profitability rather than market share, the Company's goal is to
underwrite gross premiums written exceeding $190 million in 1998 and $300
million in 1999. There can be no assurance that this goal will be achieved.
See "Risk Factors--Forward-Looking Statements." The Company intends to achieve
this growth objective through the following strategic initiatives:
33
<PAGE>
PRODUCTS AND SERVICES
Management believes that its ES Management subsidiary is recognized by its
customers as a provider of intelligent reinsurance through innovative
insurance products and services. ESG intends to maintain its competitive
position by developing reinsurance products and services that are tailored to
the needs of particular markets and working closely with primary insurers and
insureds to implement loss control techniques. The Company intends to (i)
introduce and implement managed care techniques in Germany, Spain, Italy and
other European markets where these techniques have been underutilized; (ii)
create private medical care and insurance products for emerging markets within
Eastern Europe, Latin America and Asia; (iii) expand occupational injury and
health reinsurance programs in Scandinavia; and (iv) continue to structure
innovative special risk reinsurance programs for major sporting events and
performances such as World Cup Soccer, European Soccer Championships and the
"Three Tenors" concerts. Consistent with ES Management's practice and
experience, ESG will offer reinsurance of health risks in conjunction with
loss-reducing products and services. The Company expects that its ceding
clients will assist with the use and implementation of such products and
services because of their favorable impact on claims expenses.
In support of its loss prevention programs, the Company intends to assume
responsibility for claims assistance services that were previously provided by
third parties. Assistance services include such functions as 24-hour emergency
evacuation and repatriation, medical treatment referrals and supporting
clinical services. In addition, the Company will use the ESIMS software system
developed by ES Management to assist ceding companies with portfolio and
claims handling.
NEW BUSINESSES AND MARKETS
The Company plans to enter the North American market, where business
agreements with one of ES Management's North American-based reinsurance
partners previously prevented ES Management from competing. Ms. Renate M.
Nellich, Chief Executive Officer of ES North America, has considerable
experience in the North American health business and will pursue opportunities
in these markets. See "Management." In addition, access to specialized U.S.
claims service providers and the consummation of additional strategic
alliances will enable the Company to import managed care techniques that have
proven successful in the United States to Europe and other areas where they
are currently underutilized by health care providers.
STANDING AS A SPECIALIST LEAD REINSURER
The Company believes that its specialist reputation and substantial
capitalization will qualify it to be included on the security lists of major
reinsurance brokers and ceding clients and, as a result, will be presented
with lead and participation risk opportunities not previously available to it
as a reinsurance management company. Management expects that ES Management's
profitable underwriting history on behalf of reinsurance partners will give
ESG opportunities to participate in additional reciprocal reinsurance programs
with its current reinsurance partners as well as with new reinsurers in
strategic alliances. ES Management has generally incurred losses as an
underwriting management company as a result of the expense of initial system
development and, in 1996, charges relating to the Company's reorganization to
become a reinsurer. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company believes that its losses as
a reinsurance management company are not indicative of its future performance
as a reinsurer and will not adversely affect the Company's ability to attract
ceding clients.
FOCUS ON HIGH GROWTH MARKETS
ES Management focuses its health insurance underwriting activities on
markets with high growth potential in developing areas such as Latin America,
CIS, Eastern Europe and Asia, and the Company will continue this emphasis
after completion of the Offerings.
The Company will also target selected developed markets for the introduction
of innovative products. In Germany, for example, the public health sector is
undergoing rapid changes, attributable in part to health reform legislation
recently enacted by the German parliament, that the Company believes will lead
to greater demand for health reinsurance.
34
<PAGE>
CAPITALIZE ON EXPERIENCE OF MANAGEMENT
The Company's Managing Director and Chief Executive Officer, Mr. Wolfgang M.
Wand, has extensive experience in the personal and health insurance areas and
has been in the insurance business for over 20 years. He formed a specialized
health care insurance group in 1983 that was acquired by Winterthur Insurance
Group in 1993.
Mr. Steven H. Debrovner, Chief Operating Officer, was the European Accident
and Health Manager of AFIA, which was subsequently acquired by CIGNA, where he
assumed global marketing responsibility for all non-life business at CIGNA
Worldwide headquarters. With more than 30 years of underwriting experience,
Mr. Debrovner is considered within the reinsurance industry to be one of the
leading personal accident underwriters.
The Company's Chief Financial Officer, Mr. Gerhard Jurk, was Chief Executive
Officer of a Winterthur Group insurance subsidiary and Chief Internal Auditor
for Transatlantic Insurance Group. Mr. Jurk has worked in the insurance
industry for more than 25 years and is an accountant certified by the German
government.
Dr. Jean-Claude Mayor, member of the Supervisory Board of ESG Germany, was
formerly a member of the executive board of Swiss Re Group, responsible for
the worldwide life and disability business, and has established life
reinsurance programs in many international markets.
Ms. Renate M. Nellich, Chief Executive Officer of ES North America, heads
ESG's Toronto-based operations. Ms. Nellich previously served as Chief
Operating Officer of North American life and health operations for Swiss Re
Life & Health/The Mercantile and General Life Reinsurance Company Limited. Ms.
Nellich has more than 25 years of experience in the North American life and
health insurance industry.
The Company believes that the experience of its management in the insurance
and financial markets positions it to take advantage of reinsurance
opportunities and to maintain and attract additional experienced underwriting,
marketing and administrative personnel.
LINES OF BUSINESS
ES Management's major lines of business include medical expense, personal
accident and disability, credit/life and special risk reinsurance. ES
Management also underwrites primary insurance on a selected basis as an agent
of the French insurance company, Les Mutuelles du Mans. The Company believes
it will maintain ES Management's current client base of ceding companies. See
"--Financial Transition."
MEDICAL EXPENSE
Medical expense reinsurance consists primarily of medical expense
reimbursement plans, short-term travel, defined illnesses and dread diseases,
as well as medical expense add-on coverages, TOP-UP BENEFITS and CARVE-OUT
PROGRAMS. To properly evaluate these reinsurance risks, ES Management relies
on its detailed knowledge of the underlying insurance product and active risk
management, instead of relying solely on past performance or general market
pricing. This approach has historically resulted in profitability from ES
Management's underwriting operations on behalf of its reinsurance partners. ES
Management usually underwrites risk only concurrently with the implementation
of ES Management's loss control measures and underwriting support systems. ES
Management focuses on underwriting high net worth individuals, frequent
travelers and expatriates, with less emphasis on underwriting volume group
business. ES Management generally does not underwrite business where the
insured has no deductible or co-payment without being able to influence its
loss ratios (by applying cost containment measures whenever prudent). To this
end, ES Management generally seeks to have insurers include deductibles and
coinsurance requirements in the primary insurance contracts. In developing
countries, ES Management encourages ceding clients to develop adequate
RETENTION levels.
35
<PAGE>
ES Management requires its ceding clients to employ ES Management's
stringent cost control and loss prevention measures, such as limiting a
patient's choice of doctors and hospital networks, reducing benefit
utilization and minimizing claims patterns. ES Management implements managed
care concepts in Europe and emerging insurance markets through intelligent
reinsurance (i.e., the combination of capacity, system and data management
support and the application of preventative loss control). The Company
believes insurance companies in these markets are receptive to managed care
since they often have less experience with contemporary cost containment
measures.
As part of the intelligent reinsurance concept, ES Management has developed
a complete software package, which includes medical tarification, policy
issuance, portfolio management and claims handling. An advanced clinically
driven loss prevention and early warning software program called EcuQuest is
integrated into ES Management's system. EcuQuest, for which ES Management
acquired the license rights outside North America, was developed by a
subsidiary of Swiss Re Life & Health/The Mercantile & General Life Reinsurance
Company Limited and enables ES Management to equip ceding clients with
clinically driven data management for the early identification of potential
shock losses or disease developments.
ESG believes that medical expense reinsurance is one of the strongest
growing classes in the insurance industry. The restructuring of social
security systems throughout numerous countries generates the need for private
insurance and, consequently, generates reinsurance demand. New markets have
emerged particularly in Eastern Europe, due to changes in laws that have
transferred insurance responsibility from government funds to private
institutions, such as trade unions.
In the area of health reinsurance, ES Management has focused its
underwriting activities on both highly developed markets, like Germany, and
less developed markets (with high growth potential), like Latin America, the
CIS, Eastern Europe and Asia. In Bulgaria, ES Management and Bulstrad, the
leading Bulgarian insurer, created the first national health care policy which
is modeled on international private health-care standards.
The financial results of the ES Management's medical expense reinsurance
line of business managed on behalf of reinsurance partners are set forth in
the table below on an underwriting year basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
(U.S. DOLLARS IN MILLIONS,
EXCEPT RATIO DATA)
<S> <C> <C> <C>
Gross premiums written....................... $ 16.8 $ 21.5 $ 25.0
Net premiums written......................... 16.6 21.3 24.8
Net losses and loss adjustment expenses...... 7.4 9.6 12.4
Net losses and loss adjustment expenses as a
percentage of net premiums written.......... 44.3% 45.1% 50.1%
Commissions and expenses..................... $ 6.6 $ 8.3 $ 9.0
Commissions and expenses as a percentage of
net premiums written........................ 39.9% 38.8% 36.1%
</TABLE>
Gross premiums written for the medical expense reinsurance line of business
represented 46%, 37% and 39% of total gross premiums written by ES Management
on behalf of its reinsurance partners for the 1994, 1995 and 1996 underwriting
years, respectively.
PERSONAL ACCIDENT AND DISABILITY
Personal accident reinsurance covers death and dismemberment, disability,
loss of license and special coverages for credit card issuing corporations
relating to injuries to card holders. The reinsurance of nontraditional risks,
such as tailor-made coverage for occupational injuries, also comprises an
important part of ES Management's personal accident reinsurance business. ESG
favors the "local approach" to personal accident reinsurance (i.e., it
acquires direct knowledge of the underlying business by establishing personal
relationships and transacting business directly with the ceding clients or
local brokers in the country of origin). ES
36
<PAGE>
Management is reluctant to solicit business through non-local brokers or to
conduct business in areas in which it does not have detailed knowledge of
local culture, insureds' behavior, market conditions and other risk elements,
since such knowledge allows ES Management to assess and price risk
appropriately.
The financial results of ES Management's personal accident and disability
reinsurance line of business managed on behalf of reinsurance partners are set
forth in the table below on an underwriting year basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
(U.S. DOLLARS IN MILLIONS,
EXCEPT RATIO DATA)
<S> <C> <C> <C>
Gross premiums written....................... $ 16.5 $ 20.7 $ 22.1
Net premiums written......................... 15.8 20.2 21.1
Net losses and loss adjustment expenses...... 9.3 11.4 15.4
Net losses and loss adjustment expenses as a
percentage of net premiums written.......... 59.1% 56.4% 73.1%
Commissions and expenses..................... $ 3.6 $ 4.8 $ 4.3
Commissions and expenses as a percentage of
net premiums written........................ 22.5% 24.0% 20.4%
</TABLE>
Gross premiums written for the personal accident and disability reinsurance
line of business represented 45%, 35% and 35% of total gross premiums written
by ES Management on behalf of its reinsurance partners for the 1994, 1995 and
1996 underwriting years, respectively.
CREDIT/LIFE
ES Management provides reinsurance for credit/life, accident, disability and
unemployment insurance. In this market, ES Management seeks to avoid single
premium coverage where it cannot vary terms annually. ES Management has
considerable experience underwriting credit/life reinsurance in the American,
French and Scandinavian markets. The Company will seek to enter the German and
selected European markets for credit/life reinsurance, applying the same
underwriting practice it has employed in its existing markets (with the
necessary adaptations for local markets). ES Management has recently begun
underwriting activities in the area of traditional life reinsurance, initially
limited to the Eastern European and CIS markets. Because the Company does not
intend to compete with established insurers and reinsurers in long-term life
insurance or investment-related life products, it seeks to offer these
products in less established markets.
The financial results of the ES Management's credit/life reinsurance line of
business managed on behalf of reinsurance partners are set forth in the table
below on an underwriting year basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
(U.S. DOLLARS IN MILLIONS,
EXCEPT RATIO DATA)
<S> <C> <C> <C>
Gross premiums written.......................... $ 2.4 $ 13.9 $ 10.0
Net premiums written............................ 2.4 13.9 10.0
Net losses and loss adjustment expenses......... 1.2 3.9 5.8
Net losses and loss adjustment expenses as a
percentage of net premiums written............. 51.0% 28.0% 58.3%
Commissions and expenses........................ $ 1.1 $ 8.9 $ 3.1
Commissions and expenses as a percentage of net
premiums written............................... 45.8% 63.8% 30.6%
</TABLE>
Gross premiums written for the credit/life reinsurance line of business
represented 7%, 24% and 16% of total gross premiums underwritten by ES
Management on behalf of its reinsurance partners for the 1994, 1995 and 1996
underwriting years, respectively.
37
<PAGE>
SPECIAL RISK
Special risk reinsurance includes insurance with unique risk character, such
as sports disabilities, sports and entertainment contingency, non-appearance,
cancellation and abandonment. For example, for the 1998 World Cup Soccer
Tournament, ES Management controlled the largest contingency insurance risk
ever arranged in the global market. ES Management has also covered the 1994
World Soccer Tournament, the European Soccer Championships, the World Athletic
Championship, the ATP finals, the European Athletic Association Cups and
numerous performances by internationally renowned artists such as the "Three
Tenors," Ziegfried & Roy and the Holiday on Ice events.
The financial results of ES Management's special risk reinsurance line of
business managed on behalf of reinsurance partners are set forth in the table
below on an underwriting year basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
(U.S. DOLLARS IN MILLIONS,
EXCEPT RATIO DATA)
<S> <C> <C> <C>
Gross premiums written.......................... $ 0.8 $ 2.2 $ 6.8
Net premiums written............................ 0.8 2.2 6.8
Net losses and loss adjustment expenses......... 0.2 0.5 1.0
Net losses and loss adjustment expenses as a
percentage of net premiums written............. 28.9% 24.1% 14.6%
Commissions and expenses........................ $ 0.2 $ 0.6 $ 1.8
Commissions and expenses as a percentage of net
premiums written............................... 23.9% 26.0% 26.2%
</TABLE>
Gross premiums written for the special risk reinsurance line of business
represented 2%, 4% and 10% of total gross under premiums written by ES
Management on behalf of its reinsurance partners for the 1994, 1995 and 1996
underwriting years, respectively.
PRIMARY INSURANCE
ES Management also underwrites primary insurance in the same classes in
which it manages reinsurance on behalf of Les Mutuelles du Mans, using and
benefitting from the direct writing license of Les Mutuelles du Mans to
provide direct coverage for personal and special risk insurance in selected
markets. Les Mutuelles du Mans has delegated underwriting authority to ES
Management for personal accident, medical and life insurance. This operation
does not compete with ES Management's core client base of direct writing
companies and enables ES Management to explore new opportunities and concepts
that may be applied within its reinsurance business. See "Risk Factors--
Certain Transactions, Conflicts of Interest and Business Opportunities."
38
<PAGE>
GEOGRAPHICAL MARKETS
In 1996, ES Management's business comprised approximately 180 reinsurance
acceptances from ceding clients emanating from more than 49 countries. In most
of the 180 acceptances, ES Management, as underwriting manager, acted in a
capacity similar to a lead or sole reinsurer.
The geographical split of gross premiums underwritten on behalf of
reinsurance partners illustrates ES Management's strong European origin and
client base:
<TABLE>
<CAPTION>
1996 GROSS
COUNTRY OR REGION PREMIUMS WRITTEN
<S> <C>
Europe
Western and Northern Europe (excluding
United Kingdom and Germany)........................... 34%
United Kingdom......................................... 20
Germany................................................ 14
Eastern Europe/CIS..................................... 1
Latin America............................................ 23
North America............................................ 1
Asia..................................................... 1
Other.................................................... 6
---
100%
===
</TABLE>
WESTERN AND NORTHERN EUROPE (EXCLUDING UNITED KINGDOM AND GERMANY)
As a reinsurance manager, ES Management has pioneered occupational injury
reinsurance within the Norwegian insurance markets and believes itself to have
the highest market share of any foreign reinsurer or reinsurance manager. ES
Management performs the function of a lead reinsurer for loss of license as a
consequence of accidental injury for the oil rig workers in the Norwegian
North Sea and for compulsory occupational injury coverage in Oslo and
Trondheim Commune, Norway. Because of its existing connections in Scandinavia,
management believes it is in a strong position to introduce private medical
insurance (providing insureds quicker access to treatment) in Sweden and
Denmark. The Company believes it will have opportunities throughout Europe to
increase premium volume and develop new markets by introducing tailored
product solutions for particular markets. In Spain, ES Management has agreed
to structure and support self-funded health care plans using systems
technology and reinsurance capacity in partnership with the largest Spanish
industrial brokerage company.
UNITED KINGDOM
The Company has been critically assessing ES Management's presence in the
London market. The Company believes that present market conditions are
characterized by over-capacity and poor profitability and, accordingly,
expects to reduce its exposure in London in future years.
GERMANY
In Germany, the public health sector is currently undergoing rapid changes
that the Company believes will result in greater demand for health
reinsurance. The health reform legislation recently enacted by the German
parliament includes provisions to stimulate competition among public health
care providers. Management believes that new competition may lead to
instability in health insurance pricing. In this environment, insurers may
consider certain forms of non-PROPORTIONAL REINSURANCE to stabilize their
accounts. The Company believes that it is at the forefront to benefit from
this legal reform due to its existing network of relationships within the
German health care system.
39
<PAGE>
As a consequence of European Union deregulation, management believes the
German market shows significant potential for successful introduction of new
products. One such new product is credit/life insurance, which includes
unemployment insurance and until recently was not available in the German
market. In addition, disability as a result of either accident or sickness is
now insurable by non-life, non-health insurers on a stand-alone basis in
Germany. The Company believes that its expertise in accident and health
insurance places it in a strong position to assess risk and create products
tailored to these insurers' needs.
EASTERN EUROPE/COMMONWEALTH OF INDEPENDENT STATES
The Company believes that less developed markets such as Eastern Europe and
the Commonwealth of Independent States ("CIS") show considerable potential for
new reinsurance demand with the growth of per capita income. The Company
believes that ES Management has a strong reputation with respect to product
development, access to primary insurance companies and targeted risk
solutions, all of which support the Company's view that it has the potential
to exploit new opportunities in Eastern Europe and the CIS. This is
demonstrated by ES Management's introduction in Bulgaria of the first private
health plan with Western coverage standards.
LATIN AMERICA
During the 1990s, Latin America has experienced increasing demand for
insurance and, accordingly, reinsurance, in line with the growth of the middle
class and increases in per capita income. Restructuring of social security,
health and occupational injury programs have occurred in a number of countries
throughout Latin America. ES Management also participates in various programs
of this nature in Colombia and Mexico. In addition, ES Management provides
reinsurance on behalf of its reinsurance partners to local private insurance
companies which sell private health care programs with U.S. coverage
standards. In keeping with its intelligent reinsurance concept, ES Management
also provides claims handling and management to its cedents.
NORTH AMERICA
Under the terms of its pool agreements, ES Management was previously
restricted from competing in the North American markets. The Company has hired
a senior executive with considerable experience in the North American health
business to pursue opportunities in these markets. See "Management." Access to
specialized U.S. claims service providers and the consummation of additional
strategic alliances will enable the Company to import managed care techniques
that have proven successful in the United States to Europe and other areas
where they are currently underutilized by health care providers.
ASIA
In Asia, ES Management has been active in the Hong Kong and Philippine
reinsurance markets. In addition, it recently began reinsurance activities in
Indonesia in response to significantly increased demand for health reinsurance
during the mid-1990s.
MARKETING
ES Management markets its reinsurance products through five regional offices
in the key target areas which allows ES Management to stay close to its
clients and the risks which it underwrites.
ES Management markets its reinsurance products through direct contacts with
primary insurers (in 1996 representing 70% of total gross premiums written on
behalf of reinsurance partners) as well as through reinsurance brokers (in
1996 representing 30% of total gross premiums written on behalf of reinsurance
partners). Given the loyalty of customers in the reinsurance industry,
management believes that its existing portfolio of business, which had a
renewal ratio between 1995 and 1996 of 79%, is a valuable asset. Because of
the importance of relationships within the industry, management intends to
strengthen ties with its existing clients and brokers.
40
<PAGE>
ES Management seeks, and the Company intends to continue, to avoid competing
solely on price for most of its products. Instead, ES Management offers
additional intelligent reinsurance services to its clients in order to become
a valuable partner to ceding clients, particularly in the areas of product
development and claims handling. Aside from consultation and development of
products, ES Management's service programs encompass actuarial support, claims
administration and loss prevention measures as well as computer-based
administrative support, in an attempt to further strengthen client loyalty
toward ES Management. Management believes that products, services and loss
prevention techniques that have proven successful in North America can be
successfully transferred into areas which have not previously been introduced
to these products.
The Company intends to closely monitor potential regulatory changes in its
target markets in order to respond to these changes with innovative products
and services.
UNDERWRITING
Consistent with ES Management's past practices, the Company intends to
employ a disciplined, analytical and forward-looking approach to underwriting
in order to maximize underwriting profitability. The Company intends to
construct a portfolio of reinsurance contracts in the personal and special
risk markets that maximizes shareholders' return on equity, subject to prudent
risk constraints.
Underwriting new and renewal business is conducted on a risk-by-risk basis,
with consideration given to the general direction of rates, policy terms, loss
histories and future exposures, ES Management's acceptance limits and general
book of business. As part of its underwriting process, the Company will focus
on the reputation of the proposed cedent, the likelihood of establishing a
long-term relationship with the cedent, the geographic area in which the
cedent conducts business and the cedent's market share. The Company will
review historical loss data in order to compare the cedent's historical loss
experience to industry averages, as well as the perceived financial strength
of the cedent. Over time, ES Management has developed its own comprehensive
underwriting manuals that serve as a detailed guideline for the markets in
which ES Management is active.
As a pool manager, ES Management has, and the Company intends to continue,
to protect its portfolio by effecting non-proportional reinsurance coverage in
various LAYERS to protect against large individual losses, serial losses and
risk of known and unknown concentration. In addition, the Company will
continue to effect proportional coverage on underwritten risks that might have
fluctuating results.
The Company, together with co-reinsurers, intends to provide initially the
following gross capacities:
<TABLE>
<C> <S>
Medical Expense $5 million life time benefit
Personal Accident and Disability $3 million any one person and $30 million
in accumulated losses from any one known
event
Credit/Life $1 million any one person
Special Risk $10 million any one event or series of
events
</TABLE>
Initially, the Company does not intend to expose itself to risk for any
individual in excess of $500,000 for personal accident, special risk, medical,
life and credit/life reinsurance, $1 million for any one known accumulation
and $2,500,000 for contingency for major events, prior to additional co-
reinsurance.
CLAIMS
Normally a reinsurer is not actively involved in claims handling. It is the
task of the ceding client to adjust the original losses and settle claims made
by its direct insureds. Although some of the business managed by ES Management
operates in this manner, ESG's approach differs from other reinsurers in that
it actively seeks to reduce risks in most of its medical expense reinsurance
lines while its reinsurance policies are in effect.
41
<PAGE>
ES Management's claims handling activities, particularly for complicated
cases, have proven to be successful in significantly reducing loss ratios of
ceding clients' portfolios in comparison to their loss ratios before ES
Management's involvement. Involvement in claims handling also will allow the
Company to be constantly aware of claims development in the health care field
and to establish reserves more accurately at an early point in time. The
Company, therefore, believes that its exposure to IBNR losses after it begins
reinsuring for its own account should be less than that of its competitors.
These claims support techniques have also proven to be an important tool in
the acquisition of new business.
Depending on the experience and the retention of the ceding client and the
extent of non-proportional reinsurance made available through the Company, it
will require either claims control or claims cooperation clauses in the
reinsurance treaties it negotiates. Claims control clauses allow the reinsurer
to determine the extent to which a claim will be paid, whereas claims
cooperation clauses require the agreement of the insurer and reinsurer to
jointly determine the extent to which a claim will be paid. These clauses
improve the claims performance of a ceding client which might not always be
sufficiently experienced in dealing with complex issues.
The Company performs regular audits at its ceding clients where deemed
necessary. Such audits may include underwriting claims, financial, and systems
audits. Qualitatively, such audits do not serve solely to test compliance, but
to discover weaknesses in the reporting and reserving system of a ceding
client and thereby help the ceding client to arrive at a realistic and timely
methodology to evaluate risk exposure. The Company has begun to conduct a
portion of the audits electronically by directly linking EcuQuest technology
into the Company's operations and expects to offer this service to a majority
of its customers by 1998.
COMPETITION
The reinsurance industry is highly competitive. The Company will compete
with other reinsurers, some of which have substantially greater financial,
marketing and management resources than the Company. It may also compete with
new market entrants in the future, including entities which may currently be
in the process of formation. Management believes that virtually all major
reinsurers write personal accident business, mainly through their property and
casualty departments. A relatively smaller number engages also in the fields
of health, credit/life and special risks. On an international basis, excluding
carriers which are predominantly focused on the United States, few reinsurers
are considered lead reinsurers in the segments in which ESG is active. In
other markets, however, certain traditional or domestic reinsurers hold a
dominant position, creating highly competitive market conditions.
Most reinsurers provide capacities for the various classes of personal
reinsurance through discrete units or profit centers. ESG believes that it
will benefit from being a flexible, innovative specialist reinsurer with its
focus on personal and special risk reinsurance (allowing specialized risk
solutions from one source).
The Company intends to apply for a voluntary and early claims paying ability
rating with a major credit rating agency. In the event that such an early and
adequate rating cannot be obtained, the lack of such a rating may dissuade a
ceding client from reinsuring with the Company.
OPERATIONS
The Company has structured its operations according to business lines.
Underwriters are responsible for underwriting the business according to
internal guidelines and procedural and underwriting manuals, as well as for
supervising claims and handling claims subsequent to entering into the
contract. All business is continuously monitored by the Company's actuary,
supported by consulting actuaries, management and internal control staff. The
Company's recently introduced management and underwriting information system,
Open Co, provides a current database for individual and general risk
assessment.
42
<PAGE>
The Company has entered, or intends to enter, into agreements with various
companies in the SINSER Group (subsidiaries of the Skandia Group of
Companies), for the provision of office space, certain administrative
services, and accounting and regulatory reporting support in Ireland and
Bermuda.
PROPERTIES
The Company leases office space in Bermuda, Dublin, Hamburg, London, Toronto
and Moscow. The Company does not own any real property. The Company believes
its space is adequate to meet its expected needs.
RESERVES
The Company expects that, due to the short-tail nature of personal and
special risk reinsurance claims, most claims under its treaties will generally
become known and ascertainable within approximately 12 to 24 months from the
date the insurance policy is written. However, a portion of ES Management's
business, written and classified as typical "London market business," is
generally longer-tail in nature. The benefit of short-tail business is that it
allows the reinsurer to determine exposure to risk at an early stage. The
majority of ES Management's reinsurance contracts permit annual adjustment of
terms.
As a reinsurance management company, ES Management has not been required to
establish reserves for losses and loss expenses to date, although it
recommends appropriate levels for such reserves for its reinsurance customers.
The reserve for losses and loss expenses established by the Company will
include reserves for unpaid reported losses and loss expenses and for IBNR.
Such reserves will be estimated by management based upon reports received from
ceding clients, supplemented by ES Management's own estimates of reserves for
which ceding client reports have not been received and its own historical
experience. To the extent that the Company's own historical experience is
inadequate for estimating reserves, such estimates may be actuarially
determined based upon industry experience and management's judgment. The
estimates will be continually reviewed and reflected in current operations as
adjustments to reserves become necessary. The Company's recommended reserve
setting methodology has been deemed realistic in the opinion of an actuarial
trustee approved by the Bundesaufsichtsamt fur das Versicherungswesen ("BAV"),
the German Federal Supervisory Authority for Insurance.
Loss reserves represent estimates of what an insurer or reinsurer ultimately
expects to pay on claims at a given time, based on facts and circumstances
then known, and it is possible that the ultimate liability may exceed or be
less than such estimates. The estimates are not precise in that, among other
things, they are based on predictions of future developments and estimates of
future trends in claim severity and other variable factors such as inflation.
During the loss settlement period, it often becomes necessary to refine and
adjust the estimates of liability on a claim either upward or downward. Even
after such adjustments, ultimate liability may exceed or be less than the
revised estimates. The estimation of reserves by new reinsurers, such as the
Company, may be inherently less reliable than the reserve estimations of a
reinsurer with a stable volume of business and an established loss history.
Each of Messrs. Wand, Debrovner and Jurk has over 15 years of experience in
estimating and adjusting loss reserves during their tenures with various
insurance companies.
INVESTMENTS
After the Offerings, the Company's primary investment objective for the
portfolio will be to preserve the capital assets of the Company while
achieving a total return commensurate with market conditions. The Company has
entered into an investment advisory agreement (the "Investment Advisory
Agreement") with Head Asset Management, an affiliate of Head Company, to
supervise and direct the investment of the Company's asset portfolio in
accordance with, and subject to, the investment objectives and guidelines
established by the Company. Since 1990, Head Asset Management and its
affiliate have managed portfolios for other insurance companies affiliated
with Head Company. In the future, the Company may enter into additional
investment advisory agreements with third parties (together with Head Asset
Management, the "Investment Advisors").
43
<PAGE>
Pursuant to the terms of the Investment Advisory Agreement, the Company will
pay a fee, payable quarterly in arrears, equal to 0.25% per annum of the first
$200 million of assets under its management declining to 0.15% per annum of
the assets under its management, in excess of $200 million. The Investment
Advisory Agreement may be terminated upon 90 days written notice by the
Investment Advisor or by the Company on five days notice or upon shorter
notice upon mutual written agreement by the parties. See "Certain
Relationships and Related Transactions--Investment Advisory Agreement." The
performance of, and the fees paid to, the Investment Advisor will be reviewed
periodically by the Board of Directors.
The Company's present intention, subject to periodic review by the Board of
Directors, is to invest in a diversified portfolio of investment grade debt
securities. The Company does not intend to invest in real estate other than
for its own use.
FOREIGN CURRENCY EXPOSURES
Initially, the Company's investment portfolio will be invested predominantly
in fixed income securities denominated in U.S. and Canadian dollars and
European currencies. The Investment Advisors may be instructed to invest the
balance of the Company's investment portfolio in securities denominated in
currencies other than U.S. dollars based upon the business the Company
anticipates writing and the local currency outlook compared to that of the
U.S. and Canadian dollars and European currencies. It is anticipated that the
Company's primary risk exposures and premiums receivable will be denominated
predominantly in U.S. and Canadian dollars and European currencies. As the
Company develops its business, unearned premium and loss reserves will
generally be invested in fixed income securities in currencies matching its
liabilities.
EMPLOYEES
As of June 30, 1997, the Company had 35 employees. None of these employees
is represented by a labor union. It is expected that the Company will add
additional underwriting, marketing and administrative staff subsequent to the
Offerings and the implementation of the Company's business plan. The Company
believes that its employee relations are generally good.
LEGAL PROCEEDINGS
Management expects that the Company will be subject to litigation and
arbitration in the ordinary course of its business. Neither the Company nor
any of its subsidiaries is currently involved in any litigation or arbitration
that could result in a material adverse effect on the financial condition or
results of operations of the Company.
REGULATION
The following discussion of regulation of the Company pertains to its
operations as a reinsurer for its own account after completion of the
Offerings and not to its operation as a reinsurance management company.
BERMUDA
The Companies Act 1981 (as amended) and Related Regulations. The Companies
Act regulates the business of both the Company and ES Bermuda.
The Insurance Act 1978 (as amended) and Related Regulations. The Insurance
Act 1978 of Bermuda (as amended) and related regulations from time to time in
force (the "Act"), which regulates the business of ES Bermuda, provides that
no person shall carry on an insurance business in or from within Bermuda
unless registered as an insurer under the Act by the Minister of Finance. The
Company intends to register under the Act upon completion of the Offering. The
Minister of Finance in deciding whether to grant registration, has broad
discretion to act as he thinks fit in the public interest. The Minister of
Finance is required by the Act to determine whether the applicant is a fit and
proper body to be engaged in insurance business and, in particular, whether it
has, or has available to it, adequate knowledge and expertise. In connection
with registration, the Minister of Finance may impose conditions relating to
the writing of certain types of insurance.
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An Insurance Advisory Committee and sub-committees thereof appointed by the
Minister of Finance advises him on matters connected with the discharge of his
functions and supervise and review the law and practice of insurance in
Bermuda, including reviews of accounting and administrative procedures.
The Act imposes on Bermuda insurance companies solvency and liquidity
standards and auditing and reporting requirements and grants to the Minister
of Finance powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework are set out below.
Cancellation of Insurer's Registration. An insurer's registration may be
canceled by the Minister of Finance on certain grounds specified in the Act,
including failure of the insurer to comply with its obligations under the Act
or if, in the opinion of the Minister of Finance, after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, which
are required to be filed annually with the Registrar of Companies (the
"Registrar"), who is the chief administrative officer under the Act. The
auditor must be approved by the Minister of Finance as the independent auditor
of the insurer. The approved auditor may be the same person or firm which
audits the insurer's financial statements and reports for presentation to its
shareholders.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, and a statement of capital and
surplus, and detailed notes). The insurer is required to give detailed
information and analyses regarding premiums, claims, reinsurance and
investments. The Statutory Financial Statements are not prepared in accordance
with U.S. GAAP and are distinct from the financial statements prepared for
presentation to the insurer's shareholders under The Companies Act 1981 of
Bermuda, which financial statements may be prepared in accordance with U.S.
GAAP. Copies of the Company's and ES Bermuda's Statutory Financial Statements
must be filed annually together with its Statutory Financial Return. The
Statutory Financial Statements must be maintained at the principal office of
the insurer for a period of five years.
Minimum Capital and Surplus. Under the Act, ES Bermuda has been designated
as a Class 3 composite insurer. The Act requires $1.25 million minimum capital
and surplus for Class 3 composite insurers (i.e. insurers which write both
general business and long term business) with a minimum paid up share capital
of $370,000. Upon completion of the Offerings, ES Bermuda will satisfy the
minimum paid up capital and surplus requirements of the Act.
Minimum Solvency Margin. The Act provides that the statutory assets of a
Class 3 insurer writing general business must exceed its statutory liabilities
by an amount equal to or greater than the applicable minimum solvency margin
for that class. The applicable minimum solvency margin for a Class 3 insurer
is 20% of net premiums written for the first $6 million of net premium
writings plus 15% of net premium writings in excess of $6 million or 15% of
loss and loss expense reserves, whichever is greater. The minimum solvency
margin for writers of long-term business is $250,000. Upon completion of the
Offerings, ES Bermuda will meet the Act's minimum solvency margin.
Minimum Liquidity Ratio. The Act provides a minimum liquidity ratio for
insurers which write general business. An insurer engaged in general
businesses is required to maintain the value of its relevant assets at not
less than 75% of the amount of its relevant liabilities. Relevant assets
include cash and time deposits, quoted investments, unquoted bonds and
debentures, first liens on real estate, investment income due and accrued,
accounts and premiums receivable, reinsurance balances receivable and funds
held by ceding reinsurers. There are certain categories of assets which,
unless specifically permitted by the Minister of Finance, do not automatically
qualify as relevant assets, such as unquoted equity securities, investments in
and advances to
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affiliates, real estate and collateral loans. The relevant liabilities are
total general business insurance reserves and total other liabilities less
deferred income tax and sundry liabilities (by interpretation, those not
specifically defined) and certain letters of credit and guarantees. Upon
completion of the Offerings, ES Bermuda will meet the Act's minimum liquidity
ratio.
Statutory Financial Return. A Class 3 insurer is required to file with the
Registrar an Annual Statutory Financial Return at the same time as it files
its Statutory Financial Statements but, in any event, no later than four
months from the insurer's financial year end (unless specifically extended).
The Statutory Financial Return includes, among other matters, a report of the
approved independent auditor on the Statutory Financial Statements of the
insurer, a schedule of ceded reinsurers, an annual actuarial opinion or loss
reserves prepared by the approved loss specialist and a declaration of the
statutory ratios and a solvency certificate.
Supervision, Investigation and Intervention. The Minister of Finance may
appoint an inspector with extensive powers to investigate the affairs of an
insurer if the Minister of Finance believes that an investigation is required
in the interest of the insurer's policyholders or persons who may become
policyholders. In order to verify or supplement information otherwise provided
to him, the Minister of Finance may direct an insurer to produce documents or
information relating to matters connected with the insurer's business.
If it appears to the Minister of Finance that there is a risk of the insurer
becoming insolvent, the Minister of Finance may direct the insurer not to take
on any new insurance business; not to vary any insurance contract if the
effect would be to increase the insurer's liabilities; not to make certain
investments; to realize certain investments; to maintain in Bermuda, or
transfer to the custody of a Bermuda bank, certain assets; and to limit its
premium income. Neither the Company nor any of its subsidiaries has ever been
subjected to an investigation by the Minister of Finance or subject to
intervention relating to insolvency.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda to oversee the
business of the Company and to report to the Minister of Finance and the
Registrar of Companies in respect of certain events. Unless the approval of
the Minister of Finance has been obtained, an insurer may not terminate the
appointment of its principal representative, and the principal representative
may not cease to act as such, unless thirty days' notice in writing to the
Minister of Finance is given of the intention to do so. It is the duty of the
principal representative, within thirty days of his reaching the view that
there is a likelihood of the insurer, for which he acts, becoming insolvent or
its coming to his knowledge, or his having reason to believe, that an "event"
has occurred, to make a written report to the Minister of Finance setting out
all the particulars of the case that are available to him. Examples of such an
"event" include failure by the reinsurer to comply substantially with a
condition imposed upon the reinsurer by the Minister of Finance relating to a
solvency margin or a liquidity or other ratio.
Dividends. The Bermuda Companies Act 1981 would allow dividend payments when
there are reasonable grounds for believing that (i) ES Bermuda's assets will
exceed the aggregate value of its liabilities and its issued share capital and
premium accounts, and (ii) ES Bermuda will be able to pay its debts as they
fall due after payment of a dividend. The Bermuda Insurance Act 1978 requires
ES Bermuda to maintain a minimum solvency margin and a minimum liquidity
ratio.
Reduction of Statutory Capital. Approval is needed from the Minister of
Finance for any reduction in total statutory capital of an insurance company
of 15% or more. Applicants are required to show that the proposed reduction of
capital will not cause ES Bermuda to fail to meet applicable statutory margin
requirements in Bermuda.
GERMANY
The German regulatory framework for the insurance industry is provided by
the Insurance Supervisory Law (Versicherungsaufsichtsgesetz, or "VAG"). The
supervision of all insurance companies domiciled in Germany is the
responsibility of the BAV, which is an agency of the Ministry of Finance.
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<PAGE>
Other than the area of primary insurance, reinsurance has been largely
liberalized. Consequently, except as set forth under "European Union" below,
there are no detailed regulations for reinsurers under the law of the European
Union or Germany.
A professional reinsurance company requires no license from the BAV. Only a
summary filing is required, setting forth the domicile and corporate form of
the reinsurance company and the members of the executive and supervisory
boards. The BAV encourages reinsurers to submit the names of the company's
shareholders with such filings, and also to include the qualifications of the
members of the executive and supervisory boards. The submission of a business
plan is not necessary.
Insurance and reinsurance companies are under the direct supervision of the
BAV. For reinsurers, however, the level of supervision is substantially
relaxed, and pertains primarily to the financial supervision of reinsurers,
requiring only submission of financial statements. Except as set forth above,
the provisions of the VAG and the Capitalization Law (KapitalausstattungsVO)
do not apply to reinsurers. Reinsurance mutuals (Ruckversicherungsverein VVaG)
are subject to solvency controls. Reinsurance companies, such as ES Germany,
are not subject to capitalization requirements, but the BAV prefers that
reinsurance companies have the same level of capitalization as primary
insurers (approximately 16-18% of net premiums).
Sections 55-59 VAG, pertaining to accounting and auditing of insurance
companies, are also applicable to reinsurance companies.
IRELAND
Irish law directly regulates only one of the Company's subsidiaries, ES
Ireland.
Regulation. Direct insurance business in Ireland is regulated by an
extensive list of acts and regulations from the Assurance Companies Act 1909
to the Insurance Act 1989 and the European Communities (Non Life Insurance)
Regulations 1976 to the European Communities (Non Life Insurance) Framework
Regulations 1994. Direct insurance companies must be authorized by the
Minister for Enterprise, Trade and Employment (the "Minister") before
commencing business.
Specialist reinsurers incorporated in Ireland, such as ES Ireland, are not
subject to authorization by the Irish Government and are only required to
notify the Minister that they carry on the business of Reinsurance pursuant to
Section 22 of the Insurance Act 1989.
Auditor's Report and Duties. The Companies Act 1963 requires all companies
incorporated in Ireland to prepare and have audited annual accounts for their
shareholders. Section 22(1) Insurance Act 1989 requires reinsurance companies
to prepare their accounts in such form as the Minister may specify and such
audited accounts are required to be filed in the Companies Registration Office
and are available for public inspection.
EUROPEAN UNION
The European Communities (Insurance Undertakings: Accounts) Regulations 1996
(the "1996 Regulations") apply both to direct insurance companies and
reinsurance companies (but not reinsurance management companies, such as ES
Management), and provide that reinsurers must calculate their reserves and
value the assets representing them on the same basis as direct insurance
underwriters. Technical reserves consist of the aggregate provisions for
outstanding claims (including those incurred but not yet reported at the end
of the Company's financial year). The 1996 Regulations require that
reinsurance companies value the assets representing their reserves on the same
basis as direct insurance underwriters and set out the detailed requirements
for the preparation of the accounts of insurance and reinsurance underwriters.
The 1996 Regulations require insurance and reinsurance underwriters to
demonstrate that they possess sufficient free assets to cover a safety margin,
that is financial resources exceeding those necessary to cover the technical
reserves.
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UNITED STATES AND OTHER
The Company is not admitted to do business in any jurisdiction except
Bermuda, Ireland and Germany. The insurance laws of each state of the United
States and of many foreign countries regulate the sale of insurance within
their jurisdictions by alien insurers, such as the Company, which are not
admitted to do business within such jurisdiction. With some exceptions, such
sale of insurance within a jurisdiction where the insurer is not admitted to
do business is prohibited. The Company does not intend to maintain an office
or to solicit, advertise, settle claims or conduct other insurance activities
in any jurisdiction where the conduct of such activities would require that
the Company be so admitted and the Company is not so admitted.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the persons who
will be the directors of the Company and executive officers of the Company
and/or its principal operating subsidiaries. Messrs. Jurk, Newkirk, Poutsiaka
and Tilly will become directors of the Company immediately following the
completion of the Offerings.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Wolfgang M. Wand.............. 45 Managing Director and Chief Executive Officer
Steven H. Debrovner........... 60 Chief Operating Officer
Gerhard Jurk.................. 48 Chief Financial Officer and Director
Renate M. Nellich............. 59 Chief Executive Officer of ES North America
Anthony Parfitt............... 31 Audit and Compliance Officer
John C Head III............... 49 Chairman of the Board
David L. Newkirk.............. 45 Director
William J. Poutsiaka.......... 44 Director
Edward A. Tilly............... 54 Director
</TABLE>
Wolfgang M. Wand has been active in the insurance business for over 20
years, 17 of which were in the international insurance market. In 1983, Mr.
Wand founded a specialized health care insurance group in which Winterthur
Insurance Group acquired a majority interest in 1989 and a 100% interest in
1993. Later in 1993, Mr. Wand co-founded ESG Germany, through which the
Company operated its insurance businesses prior to the Offerings. Mr. Wand
serves as a member of the German delegation of the International Chamber of
Commerce and is a representative on the Chamber's Committee for insurance
affairs in Eastern Europe. Following the reunification of Germany, Mr. Wand
served on behalf of the German government's privatization agency, the
Treuhandanstalt, in connection with the privatization and restructuring of the
East German economy, as Chairman of the Board of Directors for certain
segments of the German shoe manufacturing industry from 1991 to 1992. Mr. Wand
also acts as designated legal representative of Les Mutuelles du Mans in
Germany. Mr. Wand completed a degree in economics in 1974 and studied at
Cologne and Wuppertal Universities.
Steven H. Debrovner co-founded ESG Germany with Mr. Wand in 1993. From 1987
to 1993, Mr. Debrovner served as the head of marketing for all non-life
business at CIGNA Worldwide headquarters in Philadelphia. In 1974, he created
the European accident and health activities for AFIA and, subsequently, CIGNA.
Mr. Debrovner received a bachelor's degree in history from Duke University in
1959. Mr. Debrovner has more than 30 years of insurance underwriting
experience, having started with American International Group, Inc. in 1967. He
has also been both a student and lecturer in Harvard's Graduate International
Marketing Program.
Gerhard Jurk has been Chief Financial Officer of ES Management since 1996.
From 1992 to 1996, Mr. Jurk was Chief Internal Auditor of the Transatlantic
Insurance Group. In this function, he was a member of the audit team of
Winterthur Insurance Group. Between 1993 and 1996, Mr. Jurk acted as Chief
Executive Officer for a Winterthur Group underwriting subsidiary. Prior to
that, from 1984 to 1992, Mr. Jurk was the Chief Officer of the Financial and
Investment Department of the Transatlantic Insurance Group, then a subsidiary
of ITT Corporation and subsequently a subsidiary of Winterthur Insurance
Group. Mr. Jurk has worked in the insurance industry for more than 25 years
and is an accountant certified by the German government.
Renate M. Nellich has been Chief Executive Officer of European Specialty
(North America) Limited ("ES North America") since September 1997. Prior to
that, Ms. Nellich was Chief Operating Officer of Swiss Re Life and
Health/Mercantile and General Life Reinsurance Company Limited responsible for
the Group Reinsurance Operation of the Americas from 1985 to 1997. Between
1975 and 1985, Ms. Nellich served in various capacities in the Mercantile and
General's North American Group Division. Ms. Nellich is a Director of Avandel
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Healthcare, Inc. Ms. Nellich has more than 25 years of experience in the North
American life and health insurance industry.
Anthony Parfitt has been Assistant Managing Director of ESG Germany since
1995 and was the technical account manager in 1994. From 1991 to 1994 Mr.
Parfitt was head of the International Risk Placement Department of the
predecessor of ESG Germany.
John C Head III has been a Managing Member of Head Company since 1987.
Mr.Head is also a Director of PartnerRe Ltd., Kiln Capital plc, FFTW, Inc. and
other private companies.
David L. Newkirk has been Vice President of Booz-Allen & Hamilton, Inc. and
various of its wholly-owned subsidiaries since 1991.
William J. Poutsiaka has been President and Chief Executive Officer of
Arkwright Mutual Insurance Company, Waltham, Massachusetts since 1994 and has
served in other executive capacities for the company since 1989.
Edward A. Tilly has been Chairman and Chief Executive of Consolidated
Financial Insurance Group, Ltd., a subsidiary of General Electric Company,
since 1994. Prior to that, Mr. Tilly was Chairman and Chief Executive of
Financial Insurance Group Ltd. since 1989.
The following table sets forth the annual base salaries that the Company
intends to pay in 1997, and the compensation the Company actually paid in
1996, to its Chief Executive Officer and the four most highly compensated
executive officers during such years:
<TABLE>
<CAPTION>
1996 TOTAL 1997
NAME POSITION COMPENSATION BASE SALARY
<S> <C> <C> <C>
Wolfgang M. Wand........ Managing Director and Chief Executive Officer $508,292 $300,000
Steven H. Debrovner..... Chief Operating Officer 239,084 275,000
Renate M. Nellich....... Chief Executive Officer of ES North America -- 250,000
Gerhard Jurk............ Chief Financial Officer and Director 114,803 200,000
Anthony Parfitt......... Audit and Compliance Officer 56,410 70,000
</TABLE>
No amounts were paid to John C Head III, David L. Newkirk, William J.
Poutsiaka and Edward A. Tilly in 1996. Amounts to be paid to these individuals
are described under "Compensation of Directors". The salary paid to Renate M.
Nellich is to be pro-rated from September 1, 1997 to December 31, 1997 for an
amount of $83,333.
The Company is not obliged to make provision for pension, retirement or
similar benefits for directors and officers of the Company.
ROTATION OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Bye-Laws provide that the Board of Directors will be divided
into three classes which classes will be as follows: the first class, whose
initial term expires at the first annual meeting of the Company's shareholders
following the completion of the Offerings, will be comprised of John C Head
III and Wolfgang M. Wand; the second class, whose initial term expires at the
second annual meeting of the Company's shareholders following the completion
of the Offerings, will be comprised of Gerhard Jurk and William J. Poutsiaka;
and the third class, whose initial term expires at the third annual meeting of
the Company's shareholders following the completion of the Offerings, will be
comprised of Edward A. Tilly and David L. Newkirk. Following their initial
terms, all classes of directors will be elected to three-year terms.
The Board of Directors has established a Compensation Committee and an Audit
Committee, each of which reports to the Board of Directors. The Compensation
Committee consists of Messrs. Head, Newkirk and Tilly. The Compensation
Committee will recommend to the Board of Directors the compensation for the
Board of
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Directors and senior employees. The Audit Committee consists of Messrs.
Newkirk, Poutsiaka and Tilly. The Audit Committee will establish standards for
review of the Company's compliance with applicable accounting and regulatory
requirements.
COMPENSATION OF DIRECTORS
Directors who are full-time employees of ESG or its subsidiaries will not be
paid any fees or additional compensation for services as members of the Board
of Directors or any committee thereof. Directors who are not full-time
employees of ESG or its subsidiaries ("Non-Management Directors") will be
eligible to participate in the ESG Re Limited Non-Management Directors'
Compensation and Option Plan (the "Directors Plan"). A total of 1,000,000
Common Shares may be issued under the Directors Plan, which limit will be
proportionately adjusted in the event of certain changes in the Company's
capitalization, a merger or a similar transaction. For their services, Non-
Management Directors will receive fees annually which will be paid in cash,
and Common Shares, unless the Non-Management Director otherwise elects to
receive all or a portion of such fees in options or to defer all or a portion
of such fees pursuant to the terms of the Directors Plan as described below.
If a Non-Management Director elects to receive options in lieu of such stock
and cash payment, such Director may elect to receive options for Common Shares
with a value, as determined by the Board, equal to two times the amount of
fees that would otherwise be payable. The Non-Management Directors may
alternatively elect to receive deferred compensation ("Deferred Compensation")
indexed to the greater of (i) total return on the Common Shares and (ii) the
one-year U.S. treasury bill rate. Deferred Compensation will be paid in cash,
in accordance with the terms of the Directors Plan. Directors' shares granted
under the Directors Plan will be subject to restrictions on transfer, for six
months after receipt. All Directors will be reimbursed for travel and other
related expenses incurred in attending meetings of the Board of Directors or
committees thereof.
In addition, under the Directors Plan, Non-Management Directors joining the
Board of Directors within one year of the closing of the Offerings will
receive options to purchase 10,000 Common Shares. Options granted on the
closing of the Offerings will be granted at the initial public offering price
and all other options will be granted at the then market price per share. Non-
Management Directors will also receive automatic annual awards of options to
purchase 5,000 Common Shares (or such other amount as the Board may determine)
at an exercise price per share equal to the then market price per share (or,
in each case, a lesser amount prorated to the extent the participating
director did not serve on the Board of Directors for the entire year preceding
the relevant annual shareholders' meeting), on each successive annual
shareholders' meeting. The Board shall also have discretionary authority to
(i) award additional options to the Chairman of the Board, the Deputy Chairman
of the Board and the Committee Chairmen and members of the Board of Directors
or the Supervisory Board of any of the subsidiaries of ESG and (ii) grant
options to permit a Non-Management Director to reacquire any Common Shares the
Non-Management Director delivered as payment of the exercise price or to
satisfy any withholding obligation in connection will the exercise of an
option. All options will be vested and exercisable at the time of grant.
Common Shares issued on exercise of options issued pursuant to the Directors
Plan may be either authorized but unissued shares or treasury shares. Options
granted under the Directors Plan are non-transferable, except in limited
circumstances in the Board's discretion as set forth in the Directors Plan.
The Directors Plan may be amended or terminated by the Board at any time, in
whole or in part. However, any amendment for which shareholder approval is
required by law will not be effective until such approval has been attained.
Unless earlier terminated, the Directors Plan will expire on the tenth
anniversary of its effective date, and no further options may be granted
thereunder.
EMPLOYMENT ARRANGEMENTS
The Company and ESG UK have entered into an employment agreement with Mr.
Wand to serve as Managing Director and Chief Executive Officer of the Company,
Chairman of ESG Germany and Chief Executive Officer of ESG UK, effective as of
December 1, 1997. Mr. Wand's compensation under the employment agreement
includes (i) an annual base salary of $300,000 which is subject to review
annually for increase at the discretion of the Compensation Committee, (ii) an
annual bonus determined by the Compensation
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<PAGE>
Committee (which will be not less than $100,000 in 1998), and (iii) pension,
welfare and fringe benefits. Mr. Wand is entitled to receive reimbursement of
expenses incurred in connection with promoting the business of the Company or
any of its subsidiaries, including expenses for travel and other expenses
while away from home on business or in the service of the Company or any of
its subsidiaries. The term of the employment agreement is three years, subject
to automatic renewal for successive one-year periods unless the Company, ESG
UK or Mr. Wand provides written notice at least 12 months prior to the then
scheduled expiration date. In the event of termination of Mr. Wand's
employment by the Company or ESG Germany without Cause (as defined in the
Employment Agreement) or by Mr. Wand for Good Reason (as defined in the
Employment Agreement), Mr. Wand will receive his then current base salary for
the remaining term of the agreement, but in no event less than 12 months base
salary. In the event that Mr. Wand's employment is terminated by the Company
or ESG Germany without Cause or by Mr. Wand for Good Reason within one year of
a Change in Control (as defined in the Employment Agreement), in addition to
the compensation otherwise payable to Mr. Wand upon his termination of
employment, as set forth above, Mr. Wand will be entitled to a lump sum
payment in an amount which, when added to the present value of all other
benefits or payments which would constitute "Parachute Payments" (as defined
in Section 280G of the Code), equals 2.99 times Mr. Wand's "Base Amount" (as
defined in Section 280G). In the event that any excise taxes are assessed
under Section 4999 of the Code, the Company will reimburse Mr. Wand for such
taxes. Mr. Wand will retain any other rights and benefits as determined in
accordance with the applicable terms of the benefit programs maintained by the
Company, ESG Germany or any of it's affiliates in which Mr. Wand participates.
In the event the employment agreement expires by reason of the Company or ESG
Germany's election not to renew the term, or death or disability, Mr. Wand
will receive his base salary through the date of termination. In the event of
the termination of Mr. Wand's employment for Cause, or by Mr. Wand without
Good Reason, Mr. Wand will be entitled to his base salary through the date of
termination. The Employment Agreement prohibits Mr. Wand from using or
disclosing confidential information about the Company and its affiliates and
their operations at any time and from engaging in any competitive reinsurance
or insurance business or soliciting any employee of the Company or its
affiliates for a period of 18 months after the termination of employment
(other than a termination within one year of a Change in Control).
The Company has entered into an employment agreement with Mr. Debrovner to
serve as the Chief Operating Officer as of December 1, 1997. ESG Germany has
entered into an employment agreement with Mr. Jurk to serve as Chief Financial
Officer of the Company as of December 1, 1997. ES North America has entered
into an Employment Agreement with Ms. Nellich to serve as Chief Executive
Officer of ES North America as of December 1, 1997. The employment agreements
of Mr. Debrovner, Ms. Nellich and Mr. Jurk will continue, unless terminated
upon one year's notice, until September 1, 2000. Under their employment
agreements, Mr. Debrovner, Ms. Nellich and Mr. Jurk will receive annual base
salaries of $275,000, $250,000 and $200,000, respectively. Other benefits
granted to Mr. Debrovner, Ms. Nellich and Mr. Jurk will be similar to those
granted to Mr. Wand. The employment agreements of Mr. Debrovner, Ms. Nellich
and Mr. Jurk prohibit the executive from using or disclosing confidential
information about the Company and its affiliates and their operations and from
engaging in any competitive reinsurance or insurance business for a period of
one year after the term of employment.
Mr. Head is not party to any employment agreement with the Company.
STOCK OPTION PLAN
The Company has adopted the 1997 Stock Option Plan (the "Stock Option Plan")
under which employees of ESG and its subsidiaries are eligible to participate.
The Stock Option Plan is administered by the Compensation Committee. Subject
to the provisions of the Stock Option Plan, the Compensation Committee has
sole discretionary authority to interpret the Stock Option Plan and to
determine the type of awards to grant, when, if and to whom awards are
granted, the number of Common Shares covered by each award and the terms and
conditions of the award.
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<PAGE>
The exercise price of the options granted at the Closing Date will be the
initial public offering price. Thereafter the exercise price of the options
will be determined by the Compensation Committee when the options are granted.
In the discretion of the Compensation Committee, the option exercise price may
be paid in cash or in Common Shares or other property having Fair Market Value
(as defined in the Stock Option Plan) on the date of exercise equal to the
option exercise price, or by delivering to the Company a copy of irrevocable
instructions to a stock broker to deliver promptly to the Company an amount of
sale or loan proceeds sufficient to pay the exercise price. Options granted
under the Stock Option Plan are non-transferrable except in limited
circumstances as set forth in the Stock Option Plan, in the Board's
discretion. The Board may amend or terminate the Stock Option Plan provided
that no such amendment will be made without shareholder approval if such
approval is necessary to comply with any tax or regulatory requirement and
provided that any such amendment that would impair the rights of any holder of
an option already granted will not be effective without the consent of the
holder.
The Company has reserved 2,000,000 Common Shares for issuance under the
Stock Option Plan, which limit will be proportionately adjusted in the event
of certain changes in the Company's capitalization, a merger or similar
transaction.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADVISORY FEE
For advisory services rendered by Head Company in connection with the Direct
Sales and the Offerings, Head Company will be paid a fee of $1,500,000 and
reimbursed for reasonable out-of-pocket expenses. As sponsor of the Company,
Head Company has provided support and assistance in connection with the
planning, structuring and formation of the Company, as well as capital raising
in both the Direct Sales and the Offerings.
INVESTMENT ADVISORY AGREEMENT
The Company has entered into an Investment Advisory Agreement with Head
Asset Management, an affiliate of Head Company. See "The Company--
Investments."
TRANSACTIONS BETWEEN MR. WAND AND SHAREHOLDER
During 1996, Mr. Wand received payments from ES Management in consideration
of a loan made by Mr. Wand to a shareholder of ESG Germany to enable such
shareholder to purchase shares of ESG Germany. In order to repay Mr. Wand,
amounts payable to the debtor by ES Management in respect of reinsurance
brokerage services provided by the debtor are paid directly to Mr. Wand. For
1996, ES Management paid Mr. Wand $32,870 in respect of this loan. Prior to
the Offerings, such loan was repaid in full by the debtor.
INDEMNIFICATION FOR CONTINGENT LIABILITIES
In connection with the Formation, certain shareholders of ESG Germany have
agreed to indemnify ESG Germany for certain contingent liabilities.
DIRECT SALES
William J. Poutsiaka, a director of the Company, is President and Chief
Executive Officer of Arkwright Mutual Insurance Company. Arkwright Mutual
Insurance Company is a Direct Purchaser. See "Direct Sales."
Affiliates of Head Company have made capital investments in the Direct
Sales. See "Direct Sales" for a description of the Common Shares and Warrants
purchased by the Head Group.
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PRINCIPAL SHAREHOLDERS
The table below sets forth the expected beneficial ownership of Ordinary
Shares or Common Shares (i) before giving effect to the Formation, Direct
Sales and the Offerings, (ii) after giving effect to the Formation and Direct
Sales and (iii) after giving effect to the Formation, Direct Sales and the
Offerings, by all persons who will beneficially own 5% or more of the Ordinary
Shares or Common Shares and the number of Ordinary Shares or Common Shares
beneficially owned by each director and executive officer and by the directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BEFORE GIVING EFFECT
TO THE FORMATION, AS ADJUSTED AS ADJUSTED FOR THE
DIRECT SALES AND FOR THE FORMATION FORMATION, DIRECT SALES
THE OFFERINGS AND DIRECT SALES AND THE OFFERINGS
----------------------------------- -------------------------------- ----------------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF
ORDINARY SHARES (1) ORDINARY SHARES COMMON SHARES COMMON SHARES COMMON SHARES COMMON SHARES
<S> <C> <C> <C> <C> <C> <C>
John C Head III ........ 6,000 50.0% 2,084,214 (2)(3) 54.4% 2,887,791 (4)(5) 22.8%
Madie Ivy .............. 6,000 50.0% 2,084,214 (2)(3) 54.4% 2,877,791 (4) 22.8%
ESG Partners (Bermuda)
L.P. .................. 6,000 50.0% 869,302 (2)(6) 23.8% 869,302 (2)(6) 7.5%
Wolfgang M. Wand........ 3,000 25.0% 369,315 10.3% 404,315 (7) 3.5%
Steven H. Debrovner..... -- -- 228,600 6.4% 251,100 (8) 2.2%
David L. Newkirk........ -- -- -- -- 10,000 (5) *
William J. Poutsiaka.... -- -- -- -- 10,000 (5) *
Edward A. Tilly......... -- -- -- -- 10,000 (5) *
Gerhard Jurk............ 3,000 25.0% -- -- 6,250 (9) *
Renate M. Nellich....... -- -- -- -- 6,250 (9) *
Anthony Parfitt......... -- -- -- -- 1,000 (10) *
All directors and
executive officers as a
group (6 persons,
6 persons and
9 persons,
respectively).......... 12,000 100.0% 2,682,129 (2) 69.9% 3,586,706 (2) 28.2%
</TABLE>
- ---------------------
*Less than 1%
(1) Reflects the Company's initial issuance of Ordinary Shares in connection
with the incorporation of the Company. Such shares were repurchased by the
Company and retired simultaneously upon completion of the Formation.
(2)Assumes the exercise of Class A Warrants but not Class B Warrants.
(3) Includes (a) 451,872 Common Shares held by HMI, (b) 122,995 Common Shares
held by certain pension plan trusts of Head Company and other entities
created by affiliates of HMI, (c) 123,627 Common Shares issuable upon
exercise of Class A Warrants held by HMI and certain pension plan trusts
of Head Company, (d) 783,155 Common Shares held by ESG Partners (Bermuda)
L.P. ("ESG Partners") and 465,241 Common Shares held by an affiliate
investor, and (e) 86,147 and 51,177 Common Shares issuable upon exercise
of Class A Warrants held by ESG Partners and held by an affiliate
investor, respectively. Does not include up to 354,510 Common Shares
issuable upon exercise of Class B Warrants (if certain performance
criteria are satisfied) held by HMI. Mr. Head is married to Ms. Ivy.
(4) Includes (a) 451,872 Common Shares held by HMI, (b) 122,995 Common Shares
held by certain pension plan trusts of Head Company and other entities
created by affiliates of HMI, (c) 917,204 Common Shares issuable upon
exercise of Class A Warrants held by HMI and certain pension plan trusts
of Head Company, (d) 783,155 Common Shares held by ESG Partners and
465,241 Common Shares held by an affiliate investor, and (e) 86,147 and
51,177 Common Shares issuable upon exercise of Class A Warrants held by
ESG Partners and held by an affiliate investor, respectively. Does not
include up to 1,148,087 Common Shares issuable upon exercise of Class B
Warrants (if certain performance criteria are satisfied) held by HMI.
(5)Includes options to purchase 10,000 Common Shares. See "Management--
Compensation of Directors."
(6)Includes 86,147 Common Shares issuable upon exercise of Class A Warrants.
(7) Includes 35,000 Common Shares issuable upon exercise of Management Options
and 144,405 Common Shares owned by Mr. Wand's wife. Mr. Wand disclaims
beneficial ownership of all such shares held by his wife. See
"Management--Executive Officers and Directors."
(8) Includes 22,500 Common Shares issuable upon exercise of Management
Options. See "Management--Executive Officers and Directors."
(9) Includes 6,250 Common Shares issuable upon exercise of Management Options.
See "Management--Executive Officers and Directors."
(10) Includes 1,000 Common Shares issuable upon exercise of Management
Options. See "Management-- Executive Officers and Directors."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized share capital of the Company after the completion of the
Formation, Direct Sales and the Offerings will consist of 100,000,000 Common
Shares, par value $1.00 per share, of which 11,573,799 shares will be issued
and outstanding; 100,000,000 Class B Common Shares, par value $1.00 per share,
of which no shares will be issued and outstanding; and 50,000,000 Preference
Shares, of which no shares will be issued and outstanding. Prior to the Direct
Sales, 12,000 Ordinary Shares, par value $1.00 per share, were issued and
outstanding. The Ordinary Shares will be repurchased by the Company and
retired simultaneously upon completion of the Formation. The Common Shares and
the Class B Common Shares are identical except that the Class B Common Shares
have no voting rights except as required by applicable law.
COMMON SHARES
Holders of the Common Shares have no preemptive, redemption, conversion or
sinking fund rights. Subject to the voting restrictions set forth below,
holders of Common Shares are entitled to one vote per share on all matters
submitted to a vote of holders of Common Shares and do not have any cumulative
voting rights. In the event of a liquidation, dissolution, or winding-up of
the Company, the holders of Common Shares are entitled to share equally and
ratably in the assets of the Company, if any, remaining after the payment of
all debts and liabilities of the Company and the liquidation preference of any
outstanding Preference Shares. Upon completion of the Offerings, all
outstanding Common Shares will be fully paid and nonassessable. Additional
authorized but unissued Common Shares may be issued by the Board of Directors
without the approval of the shareholders.
Each Common Share has one vote, except that if, and so long as, the
Controlled Shares (as defined below) of any person, other than Head subsequent
to the Closing Date, constitute more than 9.9% of the voting power of the
outstanding shares, including Common Shares, of the Company (a "Ten-percent
Shareholder"), the voting rights with respect to the Controlled Shares owned
by such person will be limited, in the aggregate, to a voting power of 9.9%,
pursuant to a formula specified in the Bye-Laws. The Common Share votes that
could be cast by Ten-percent Shareholders but for the restrictions on voting
rights described above will be allocated to the other holders of Common
Shares, pro rata based on the number of Common Shares held by all other
holders of Common Shares, subject only to the further limitation that no
shareholder, other than Head subsequent to the Closing Date, allocated any
such voting rights may exceed the 9.9% limitation as a result of such
allocation. "Controlled Shares" includes, among other things, all Common
Shares that a person is deemed (i) to constructively own directly or
indirectly pursuant to rules defining a CFC under the Code (see "Certain Tax
Considerations--Taxation of Shareholders") or (ii) to beneficially own
directly or indirectly (other than ownership attributable to Head) as a result
of the possession of sole or shared voting power within the meaning of Section
13(d)(3) of the Exchange Act and the rules and regulations promulgated
thereunder. These voting reallocation provisions could make it difficult or
impossible for any person or group of persons acting in concert to acquire
control of the Company without agreement by the Company's Board of Directors
and its shareholders.
The holders of Common Shares will receive such dividends, if any, as may be
declared by the Board of Directors out of funds legally available for such
purposes. Under Bermuda law, a company may not declare or pay a dividend, or
make a distribution out of contributed surplus, if there are reasonable
grounds for believing that (i) the company is, or after the payment would be,
unable to pay its liabilities as they fell due, or (ii) the realizable value
of the company's assets after such payment or distribution would be less than
the aggregate amount of its liabilities and its issued share capital and share
premium accounts. See "Dividend Policy." For a description of taxes and
withholding provisions to which U.S. shareholders are subject, see "Certain
Tax Considerations--Taxation of Shareholders--United States Taxation of U.S.
and Non-U.S. Shareholders."
PREFERENCE SHARES
The Board of Directors is authorized to provide for the issuance of up to
50,000,000 Preference Shares without shareholder approval in one or more
series and to fix the designations, preferences, powers, and relative,
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<PAGE>
participating, optional or other rights and restrictions thereof, including
but not limited to the dividend rate, conversion rights, voting rights,
redemption price and liquidation preference, to fix the number of shares
constituting any such series and to increase and decrease the number of shares
of such series. In determining the voting rights of holders of any such
series, however, the Board will take appropriate steps, analogous to the
restrictions described above on the voting rights of holders of Common Shares,
to assure that Holdings will not be a CFC for U.S. tax purposes. See "Certain
Tax Considerations--Taxation of Shareholders."
The issuance of Preference Shares could decrease the amount of earnings and
assets available for distribution to the holders of Common Shares or adversely
affect the rights and powers, including voting rights, of the holders of
Common Shares. Additionally, the issuance of preference shares could have the
effect of delaying or preventing a change in control of the Company without
further action by the shareholders. The Company has no current plans to issue
any Preference Shares.
WARRANTS
Upon completion of the Offerings, Class A Warrants to purchase 1,148,087
Common Shares will have been issued to the Direct Purchasers. The Class A
Warrants are exercisable for a period of 10 years from the Closing Date. The
exercise price per Common Share of the Class A Warrants will be the initial
public offering price per share. Upon completion of the Offerings, Class B
Warrants to purchase up to 1,148,087 Common Shares (if certain performance
criteria are satisfied) will have been issued to certain members of the Head
Group as part of the Direct Sales. Additional Class A Warrants and Class B
Warrants will be issued if the over-allotment option is exercised. See "Direct
Sales." Twenty percent of the Class B Warrants are available for vesting
during each of the first five years following the Closing Date, and will vest
only if, for any 20 consecutive trading days during the one-year vesting
period, the percentage change in the market price (as defined below) of the
Common Shares since the Closing Date, as compared to the initial public
offering price, exceeds by at least 500 basis points the percentage change in
the Wilshire 5000 Equity Index as measured in the same manner during the same
period. Any Class B Warrants not vested in any year will vest in any
subsequent period (during the first five years following the closing of the
Direct Sales) in which the vesting test is met. Any Class B Warrants not
vested by the fifth anniversary of the Closing Date will be forfeited and no
longer deemed outstanding. In addition, in the event of a Change of Control
(as defined below) of the Company, all Class B Warrants then outstanding will
automatically vest. The Class B Warrants are exercisable for a period of 10
years from the date of vesting. The exercise price per Common Share of the
Class B Warrants is initially the initial public offering price and will be
reduced by $1.50 on September 1, 2001.
The exercise prices for the Warrants are subject to adjustment upon the
occurrence of certain events including: (i) the issuance or sale of Common
Shares at a price below 90% of the then current market price per share (except
for such sales in connection with an underwritten public offering); (ii) the
grant or issuance of certain rights, options or warrants to purchase Common
Shares or securities convertible into or exchangeable for Common Shares; (iii)
the payment of dividends upon the Common Shares in Common Shares or certain
other capital stock of the Company; or (iv) subdivisions, combinations or
certain reclassifications of the Common Shares.
For purposes of the foregoing, (i) the "market price" as of any day is the
average of the closing reported bid and asked prices for the Common Shares
during the 15 consecutive trading days concluding on such day in the over-the-
counter market as furnished by the National Quotation Bureau, Inc., so long as
the Common Shares are traded on Nasdaq, (ii) "Wilshire 5000 Equity Index" as
of any day means the average of the closing quotations during the 15
consecutive trading days concluding on such day of the index prepared by
Wilshire Associates, Inc., as reported on Bloomberg Financial Markets, or in
the event such index is no longer published, a comparable index selected by
the Board of Directors in good faith and (iii) "Change of Control" means the
acquisition by any person of 50% or more, in the aggregate, of either the
voting power of the then outstanding Common Shares or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors; provided, however, that if such
acquisition results in whole or in part from a transfer of any Common Shares
or other voting securities by the holder of any Class B Warrants, such
56
<PAGE>
acquisition shall not constitute a Change of Control for purposes of
determining whether such holder's Class B Warrants will vest unless such
transfer is effected pursuant to an offer by such acquiror to purchase all of
the Company's outstanding Common Shares.
Fractional Common Shares will not be issued upon exercise of Warrants; in
lieu thereof the Company will pay a cash adjustment.
The Warrant holders have been granted certain registration rights with
respect to the Warrants and any Common Shares acquired upon exercise of the
Warrants, and have entered into certain lock-up agreements with the
Underwriters relating to such securities. See "Shares Eligible for Future
Sale" and "Underwriting."
THE BYE-LAWS
The Bye-Laws provide for the corporate governance of the Company, including
the establishment of share rights, modification of such rights, issuance of
share certificates, imposition of a lien over shares in respect of unpaid
amounts on those shares, calls on shares which are not fully paid, forfeiture
of shares, the transfer of shares, alterations to capital, the calling and
conduct of general meetings, proxies, the appointment and removal of
directors, conduct and powers of directors, dividends, the appointment of an
auditor and the winding-up of the Company.
POTENTIAL ANTI-TAKEOVER EFFECTS
The voting provisions of the Common Shares and the discretion conferred upon
the Board of Directors with respect to the issuance of series of Preference
Shares (including with respect to voting rights) could substantially impede
the ability of one or more shareholders (acting in concert) to acquire
sufficient influence over the election of directors and other matters to
effect a change in control or management of the Company, and the Board of
Directors' ability to issue Preference Shares could also be utilized to change
the economic and control structure of the Company. As a result, such
provisions, together with certain other provisions of the Company's Bye-Laws
summarized below, may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a shareholder might
consider in such shareholder's best interest, including attempts that might
result in a premium over the market price for the Common Shares held by
shareholders.
The Bye-Laws provide that the Board of Directors shall be divided into three
classes that are elected for staggered three-year terms. Shareholders may only
remove a director for cause prior to the expiration of such director's term at
a special meeting of shareholders at which eighty percent of the holders of
shares entitled to vote thereon vote in favor of such action.
The Bye-Laws establish an advance notice procedure for the nomination, other
than by or at the direction of the Board of Directors, of candidates for
election as directors, as well as for other shareholder proposals to be
considered at annual meetings of shareholders. In general, notice of intent to
nominate a director or raise business at such meeting must be received by the
Company not less than 60 nor more than 90 days prior to the anniversary of the
previous year's annual meeting, and must contain certain specified information
concerning the person to be nominated or the matter to be brought before the
meeting and concerning the shareholder submitting the proposal.
The Company's Bye-Laws further provide that a 75% vote for the outstanding
voting shares is required to amend the Memorandum of Association and Bye-Laws
with respect to certain matters, including, without limitation, the voting
provisions and other matters set forth above.
PERIODIC REPORTS AND PROXY STATEMENTS
The Company intends and has included provisions in its Bye-Laws requiring it
(i) to furnish to the holders of Common Shares and submit to the Commission
(unless the Commission will not accept such materials) annual and quarterly
reports, and reports with respect to specified events, required of a U.S.
domestic private issuer on
57
<PAGE>
Forms 10-K, 10-Q and 8-K, respectively, and (ii) to comply with the proxy
rules under the Exchange Act except to the extent that such rules require
filings with the Commission and the inclusion of shareholder proposals in
proxy materials prepared by the Company and except for provisions specifying
the required disclosures relating to corporate reorganizations. The proxy
rules include rules prescribing the content of annual reports to shareholders.
The audited financial statements contained in such annual reports and
unaudited quarterly financial information contained in such quarterly reports
will be prepared in accordance with U.S. GAAP. In addition, requirements with
regard to the accuracy of proxy disclosures will be governed by certain Bye-
law provisions interpreted under Bermuda law. The Company has been advised
that, under Bermuda law, the record and beneficial owners of Common Shares
will, to the extent indicated in the Company's Bye-Laws, also be bound by such
principles incorporated from Commission rules relating to proxy statements and
the solicitation of proxies. These Bye-Law provisions can be amended only by a
vote of two-thirds of shareholders present at a shareholders' meeting.
TRANSFER AGENT
The transfer agent and registrar of the Common Shares will be State Street
Bank and Trust Company, Boston, Massachusetts.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no market for the Common Shares, and
no predictions can be made as to the effect, if any, that market sales of
Common Shares or the availability of Common Shares for sale will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Shares, or the perception that such sales could take place, may
adversely affect prevailing market prices of the Common Shares as well as the
ability of the Company to raise additional capital in the public equity
markets at a desirable time and price.
Upon completion of the Offerings, the Company will have outstanding
11,573,799 Common Shares, 8,000,000 of which will have been sold in the
Offerings (9,200,000 if the initial Purchasers' over-allotment option is
exercised) and 3,573,799 of which will be sold in the Direct Sales or issued
in the Formation. The Common Shares sold in the Offerings will be freely
transferable without restriction or further registration under the Securities
Act, except for any of those Common Shares owned at any time by an Affiliate
of the Company (which sales will be subject to the volume limitations and
certain other restrictions). The Common Shares sold in the Direct Sales, or
issued as part of the Formation are deemed "restricted securities" as defined
in Rule 144 under the Securities Act and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including the exemption provided by Rule 144 under the
Securities Act.
In connection with the Direct Sales, the Company has granted each of the
Direct Purchasers the right to require the Company to register its Common
Shares, Warrants and Common Shares underlying the Warrants (the "Registrable
Securities") under the Securities Act on two separate occasions (each such
right, a "Demand Registration") at any time commencing one year after the
Closing Date, provided that the Direct Purchasers, alone or together with
other Direct Purchasers who elect to exercise one of their Demand
Registrations at such time, holds or hold Common Shares with a fair market
value equal to or exceeding $10 million. The Company has also granted HMI the
right to require four Demand Registrations with respect to their Registrable
Securities on substantially the same terms as granted to the Underwriters,
commencing two years after the Closing Date (or a shorter period with the
consent of the Representatives). In addition, whenever the Company proposes to
register Common Shares under the Securities Act for its own account or for the
account of another security holder, the Direct Purchasers are entitled to
include their Registrable Securities in the registration, subject to the
waiting periods described above and certain other conditions.
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In connection with each such registration, the Company is required to bear
all registration and selling expenses (other than underwriting fees and
commissions and the fees of any counsel for the holders participating in such
registrations). Registration rights may be transferred to an assignee or
transferee of the Registrable Securities.
DIRECT SALES
The Company entered into subscription agreements, dated September 30, 1997,
relating to the purchase by the Direct Purchasers of (i) an aggregate of
2,673,799 Common Shares and, after giving effect to the closing of the Direct
Sales and the Offerings, (ii) Class A Warrants to purchase up to 1,148,087
Common Shares, and (iii) in the case of the Head Group, Class B Warrants to
purchase up to 1,148,087 Common Shares (if certain performance criteria are
satisfied), for an aggregate purchase price of $50.0 million.
The number of Common Shares sold to the Direct Purchasers in the Direct
Sales was calculated as the quotient of (i) the aggregate dollar amount the
Direct Purchasers have committed to invest in the Company, divided by (ii) the
initial public offering price less the underwriting discounts and commissions
rounded to the nearest whole Common Share. The Direct Purchasers will receive
warrants to purchase a proportion of the total number of Common Shares
outstanding, which, if applicable, will include Common Shares sold pursuant to
the Underwriters' over-allotment option. One-half of the warrants issued will
be Class A Warrants and one-half will be Class B Warrants. Therefore, to the
extent that the number of Common Shares to be sold in the Offerings varies,
the number of Common Shares issuable upon the exercise of the warrants will
vary. Upon completion of the Offerings, Class A Warrants to purchase up to
1,148,087 Common Shares (1,267,124 Common Shares if the Underwriters' over-
allotment option is exercised), and Class B Warrants (if certain performance
criteria are satisfied), to purchase up to 1,148,087 Common Shares (1,267,124
Common Shares if the Underwriters over-allotment option is exercised) will be
outstanding.
CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of the Company, ES Bermuda, ESG
Germany and ES Ireland and the taxation of shareholders of the Company is
based upon current law. Legislative, judicial or administrative changes may be
forthcoming that could affect this summary. Statements made below as to
Bermuda law are based upon the opinion of Appleby, Spurling & Kempe, Bermuda
counsel to the Company. Statements made below as to United States law are
based upon the opinion of Paul, Weiss, Rifkind, Wharton and Garrison, United
States counsel to the Company. Statements made below as to German taxation are
based upon the opinion of Deloitte & Touche GmbH, German advisors to the
Company. Statements made below as to United Kingdom taxation are based upon
the opinion of Deloitte & Touche, United Kingdom advisors to the Company.
Statements made below as to Canadian taxation are based upon the opinion of
Deloitte & Touche, Canadian advisors to the Company. Statements made below as
to Irish law are based upon the opinion of Matheson Ormsby Prentice, Irish
counsel to the Company.
TAXATION OF THE COMPANY AND ITS SUBSIDIARIES
BERMUDA
The Company and ES Bermuda have each received from the Minister of Finance
of Bermuda a written undertaking under the Exempted Undertakings Tax
Protection Act, 1966 (as amended) of Bermuda, to the effect that in the event
of there being enacted in Bermuda any legislation imposing tax computed on
profits or income, or computed on any capital asset, gain or appreciation, or
any tax in the nature of estate duty or inheritance tax, then the imposition
of any such tax shall not be applicable to the Company and ES Bermuda or to
any of their operations or the shares, debentures or other obligations of the
Company and ES Bermuda until March 28, 2016. These assurances are subject to
the proviso that they are not construed so as to prevent the application of
any tax or duty to such persons as are ordinarily resident in Bermuda or to
prevent the application of any tax payable in
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<PAGE>
accordance with the provisions of The Land Tax Act 1967 of Bermuda or
otherwise payable in relation to the land leased to the Company and ES
Bermuda. Each of the Company and ES Bermuda is required to pay certain annual
Bermuda government fees and ES Bermuda, additionally, is required to pay
certain insurance registration fees as an insurer under the Insurance Act
1978. Under current rates, the Company pays a fixed fee of BD$1,680 and ES
Bermuda pays a total of BD$7,904 per year (which includes the annual Bermuda
government fee and the annual insurance registration fee). Currently there is
no Bermuda withholding tax on dividends that may be paid by ES Bermuda to the
Company.
UNITED STATES
The Company and its subsidiaries intend to operate their business in a
manner that will not cause them to be treated as engaged in a trade or
business within the United States. On this basis, the Company and its
subsidiaries do not expect to be required to pay U.S. income tax (other than
withholding tax as described below). However, because there is considerable
uncertainty as to the activities which constitute being engaged in a trade or
business in the United States, there can be no assurances that the IRS will
not contend successfully that the Company or a subsidiary is engaged in a
trade or business in the United States. A foreign corporation deemed to be so
engaged (i) would be subject to U.S. income tax, as well as the branch profits
tax, on its income which is treated as effectively connected with the conduct
of that trade or business except to the extent the corporation is entitled to
relief under the permanent establishment provision of a tax treaty, as
discussed below, and (ii) would be required to file yearly income tax returns.
Such income tax, if imposed, would be based on effectively connected income
computed in a manner generally analogous to that applied to the income of a
domestic corporation, except that a foreign corporation can claim an allowance
of deductions and credits only if it files a U.S. income tax return. Under
regulations, the foreign corporation would be entitled to deductions and
credits for a taxable year only if the return for that year is filed timely
under rules set forth therein. Currently, the maximum federal tax rate on a
corporation's effectively connected income is 35% and the branch profits tax
rate is 30%. The branch profits tax is imposed each year on a corporation's
effectively connected earnings and profits (with certain adjustments) deemed
repatriated out of the United States.
Under the tax convention between Bermuda and the United States (the "Bermuda
Treaty"), a Bermuda company, such as ES Bermuda, predominantly engaged in the
insurance business, is subject to U.S. income tax on income found to be
effectively connected with a U.S. trade or business only if that trade or
business is conducted through a permanent establishment in the United States.
The Bermuda Treaty exemption, according to its terms, does not apply to
dividends and interest income. While there can be no assurances, the Company
does not believe ES Bermuda will have a permanent establishment in the United
States. ES Bermuda would not be entitled to the benefits of the Bermuda
Treaty, however, if (i) 50% or more of ES Bermuda's stock were beneficially
owned, directly or indirectly, by persons other than Bermuda residents or U.S.
citizens or residents, or (ii) ES Bermuda's income were used in substantial
part to make disproportionate distributions to, or to meet certain liabilities
to, persons who are not Bermuda residents or U.S. citizens or residents. While
there can be no assurances, the Company believes that the above exception to
Bermuda Treaty benefits will not apply to ES Bermuda after the Offerings. The
Bermuda Treaty does not provide relief from the U.S. branch profits tax.
ES Ireland intends to operate its business activities in a manner that will
not result in its being considered to be engaged in a trade or business or to
have a permanent establishment in the United States under the income tax
treaty between Ireland and the United States (and the new treaty expected to
become effective January 1, 1998 (the "Irish Treaty"). Whether or not a
company is engaged in a trade or business or has a permanent establishment in
the United States is essentially a factual test, and there is considerable
uncertainty as to the activities that will cause a foreign corporation to be
subject to tax in the United States, and thus, there can be no assurance that
U.S. tax authorities will not successfully contend that ES Ireland is subject
to United States tax. If, however, ES Ireland were subject to U.S. tax, it is
not expected that the amount of such tax would materially affect the Company's
shareholders' equity and earnings.
Under the income tax treaty between Germany and the United States (the
"German Treaty") ES Germany (or any other German subsidiary of the Company)
will generally not be subject to United States Federal income tax unless it
engages in a trade or business in the United States through a permanent
establishment. While there can be no assurances, the Company believes that ES
Germany and other German subsidiaries of the Company
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will operate their business activities in a manner that will not result in
them being considered to be engaged in a trade or business or to have a
permanent establishment in the United States.
Under the income tax treaty between United Kingdom and the United States
(the "U.K. Treaty"), ESG UK (or any other U.K. subsidiary of the Company) will
generally not be subject to United States Federal income tax unless it engages
in a trade or business in the United States through a permanent establishment.
While there can be no assurances, the Company believes that ESG UK will
operate its business activities in a manner that will not result in its being
considered to be engaged in a trade or business or to have a permanent
establishment in the United States.
Under the income tax treaty between Canada and the United States, ES North
America will generally not be subject to United States Federal income tax by
reason of its Toronto operations unless it engages in a trade or business in
the United States through a permanent establishment. While there can be no
assurances, the Company believes that its Toronto operations will operate its
business activities in a manner that will not result in its being considered
to be engaged in a trade or business or to have a permanent establishment in
the United States.
Foreign corporations not engaged in a trade or business in the United States
are nonetheless subject to U.S. income tax on certain "fixed or determinable
annual or periodic gains, profits and income" derived from sources within the
United States as enumerated in Section 881(a) of the Code (such as dividends
and certain interest on investments).
The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located
in the United States. The rate of tax applicable to reinsurance premiums paid
to ES Bermuda and ES Ireland is 1% of gross premiums.
IRELAND
In general, Irish companies must pay corporation tax on their trading income
at the rate of 36%. However, a company which holds a certificate (a
"Certificate") under Section 39B of the Irish Finance Act, 1980 ("IFSC
Company") qualifies for special relief. The effect of Section 39B(2) Finance
Act, 1980 ("Section 39B") is to reduce the rate of corporation tax on income
arising from the trading operations specified in a Certificate to 10%,
provided the conditions attaching to the Certificate are met. Section 39B
defines the trading operations specified in a Certificate as relevant trading
operations ("Relevant Trading Operations"). The Irish Authorities have
approved the grant of a Certificate to ES Ireland. The Certificate will issue
after ES Ireland commences trading and unless it is revoked, it shall remain
in force until December 31, 2005. The principal Relevant Trading Operations of
ES Ireland comprise:
(a) the provision of reinsurance facilities consisting of the
underwriting by ES Ireland of reinsurance placements of insurance or
reinsurance companies where such placements are solely in respect of risks
arising outside Ireland; and
(b) reinsurance (RETROCESSION) of the risk referred to at (a) above with
insurance and reinsurance companies.
To the extent that ES Ireland is engaged in activities outside the scope of
its Relevant Trading Operations, its profits on such activities will be liable
to Irish taxation at the rate of 36%.
Withholding Taxes/Advance Corporation Tax. There is no withholding tax on
dividends or interest payments made by IFSC Companies in the course of
carrying on their Relevant Trading Operations.
Advance corporation tax ("ACT") is, however, payable on dividends paid by an
IFSC company to a non-resident 75% parent in a country which does not have a
tax treaty with Ireland. Where the dividends are paid out of profits earned
carrying out relevant trading operations the ACT payable is one eighteenth of
the dividend. ACT may be offset against the general corporation tax liability
of the IFSC Company.
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Stamp Duty. Irish capital duty will generally arise in respect of monies
subscribed for shares in Irish limited liability companies such as ES Ireland.
The rate of duty is 1%. Irish capital duty does not arise in respect of monies
subscribed to unlimited companies or to limited companies if the effective
center of management of that limited company is located in another European
Union member state. Where the effective center of management of a limited
liability company is in another member state, there may be a liability to
capital duty in that other state.
The transfer of the beneficial ownership of any shares in ES Ireland will
give rise to Irish stamp duty at a rate of 1%. Stamp duty becomes payable when
the share transfer is executed. No stamp duty is chargeable on a transfer of
nominal or legal title.
No stamp duty is payable on the issue of policies of insurance which relate
to risk located outside Ireland.
GERMANY
ESG Germany and its subsidiaries will be subject to tax in Germany on their
income. By entering into fiscal unity (Organschaft) with ES Germany and the
other German subsidiaries of ESG Germany, the income of the subordinated
companies is directly attributed to ESG Germany. Fiscal unity requires that
the subordinated companies are integrated financially, organizationally and
economically from the beginning of the respective business year and that a
profit and loss pooling agreement has been concluded for a period of at least
five years and is in fact carried on.
ESG Germany will be subject to trade tax on its income (including the income
of the Company's other subsidiaries attributed to it) at an effective rate of
about 19% based upon the current municipal multiplier of 470% for Hamburg. The
remaining profit after the deduction of the trade tax on income as a business
expense is subject to corporate income tax at a retention rate of 45% for
retained earnings which is reduced to 30% if the profits are distributed to
ESG UK. Additionally, a solidarity surcharge of 7.5% is levied on the
corporate income tax. Accordingly, the overall effective tax rate in Germany
will be approximately 58% for retained earnings and 45% for distributed
earnings. Non-deductible expenses would increase the overall effective tax
burden.
Dividends paid by ESG Germany to ESG UK will be exempt from German
withholding tax and solidarity surcharge, provided there is sufficient
business purpose for ESG UK under German tax law. The Company expects that a
sufficient business purpose will be found, under German tax law, because ESG
UK will own all of the shares of ES North America, European Specialty Limited,
and European Specialty Insurance Management Services Limited, in addition to
all of the shares of ESG Germany, and will provide management functions for
these companies. If sufficient business purpose were lacking, ESG Germany
would have to withhold 25% withholding tax and a solidarity surcharge of 7.5%
on the withholding tax on dividends paid to ESG UK. The total withholding tax
burden would then be 26.875%.
ES Ireland will not be subject to tax in Germany unless it operates through
a permanent establishment in Germany. Although it is not free from doubt, the
Company expects that ES Germany will qualify as an independent agent acting in
the ordinary course of its business for ES Ireland and thus will not
constitute a permanent establishment. In this regard, it is intended that the
activities of ES Germany will be structured as follows:
ES Germany will be independently capitalized at a level comparable to that
of other German reinsurers with similar levels of business and will assume a
considerable part of the business. ES Germany will have its own employees with
extensive experience, knowledge and relationships in the reinsurance industry,
and decisions regarding the underwriting business will be made in Germany by
employees of ES Germany. ES Germany will write reinsurance policies on behalf
of itself, ES Ireland and to a considerable extent also on behalf of unrelated
companies. ES Ireland will not direct the manner in which ES Germany operates,
nor will it exercise any other form of control over ES Germany's operations.
ES Ireland will not guarantee the profitability of ES Germany, there will be
no common employees, and the fees charged by ES Germany to ES Ireland will be
calculated on the same basis as those charged to the unrelated reinsurers.
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Although not free from doubt, the Company believes that structuring the
activities of ES Germany as described above should also support the opinion
that ES Bermuda, which assumes business from ES Ireland, is not subject to tax
in Germany. The tax position of ES Bermuda is strengthened by the fact that it
will have no contractual relationship with ES Germany. If ES Ireland or ES
Bermuda were taxed in Germany, the current overall effective tax rate would be
approximately 56%, although non-deductible expenses would increase the overall
effective tax burden.
UNITED KINGDOM
ESG UK and its U.K. subsidiaries will be subject to corporate income tax in
the United Kingdom at the 31% rate. ESG UK will be entitled to a foreign tax
credit for German taxes paid by ESG Germany, and for Canadian taxes paid by ES
North America, with respect to profits paid as dividends to ESG UK, so that
the effective U.K. corporate tax rate on dividends received from ESG Germany
and ES North America should be zero on the assumption that foreign tax borne
in each jurisdiction is at least equivalent to the UK rate of taxation.
The Company intends that ESG UK qualify as an International Holding Company
("IHC") for U.K. tax purposes. ESG UK may qualify as an IHC if the shares of
the Company are listed and traded on a non-U.K. stock exchange, or if other
tests are met. Assuming ESG UK qualifies as an IHC, dividends paid by ESG UK
to ESG will be exempt from ACT, to the extent they are comprised of dividends
from ESG Germany, or other non-U.K. subsidiaries of ESG UK. Dividends paid by
ESG UK, to the extent they are not comprised of dividends from non-U.K.
subsidiaries, will be subject to ACT, which may be offset, subject to certain
limitations, against the U.K. corporate tax of ESG UK and its U.K.
subsidiaries. On November 25, 1997 it was announced that ACT is to be
abolished with respect to dividends paid on or after April 6, 1999.
CANADA
ES North America will be subject to Canadian federal and provincial income
tax on its income at a combined rate of approximately 44%. It will also be
subject to Canadian federal and provincial capital taxes at a combined rate of
up to 0.5%. Dividends paid by ES North America to ESG UK will be subject to
Canadian withholding tax at the rate of 10%.
Non-resident companies that carry on business in Canada may also be subject
to Canadian income and capital taxes on the profits of the business carried on
in Canada. Pursuant to the Canada-Ireland tax treaty, ES Ireland will be
subject to tax in Canada only if it carries on business through a permanent
establishment in Canada, and then only on income attributable to that
permanent establishment. The Company intends to operate so that none of its
subsidiaries, other than ES North America, is subject to tax in Canada.
TAXATION OF SHAREHOLDERS
BERMUDA TAXATION
There is no Bermuda withholding tax on dividends paid by the Company.
UNITED STATES TAXATION OF U.S. AND NON-U.S. SHAREHOLDERS
Classification as a Controlled Foreign Corporation. Under Section 951(a) of
the Code, each "U.S. shareholder" of a CFC must include, among other things,
in its gross income for U.S. federal income tax purposes its pro rata share of
the CFC's "subpart F income", even if the subpart F income is not distributed.
"Subpart F income" includes, inter alia, "insurance income", defined as
including income (including premium and investment income) attributable to the
issuing (or reinsuring) of any insurance or annuity contract in connection
with risks located in, liabilities arising out of activities in or lives or
health of residents of a country other than the country under the laws of
which the corporation is organized and which would be taxed under the
provisions of the Code relating to insurance companies if the income were the
income of a domestic insurance
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company. Subpart F insurance income does not include, however, any income from
sources within the United States that is effectively connected with the
conduct of a trade or business within the United States (unless such income is
exempt from, or subject to a reduced rate of, tax pursuant to an income tax
treaty with the United States), or in the case of a company entitled to the
benefits of an income tax treaty with the U.S., any income which is
attributable to a permanent establishment in the United States. Moreover,
subpart F insurance income does not include any item of income received by a
CFC if such income was subject to an effective rate of income tax imposed by a
foreign country greater than 90% of the maximum rate specified in Section 11
of the Code. As discussed above, such maximum tax rate is currently 35%.
Under Section 951(b) of the Code, any U.S. person who owns, directly or
indirectly through foreign persons, or is considered to own (by application of
the rules of constructive ownership set forth in Section 958(b) of the Code),
10% or more of the voting power of all classes of shares of the foreign
corporation will be considered to be a "U.S. shareholder". In general, a
foreign corporation is treated as a CFC if "U.S. shareholders" collectively
own more than 50% of the total combined voting power or total value of the
corporation's shares for an uninterrupted period of 30 days or more during any
tax year. Additionally, a 25% threshold applies if more than 75% of a foreign
corporation's gross premium or other income in respect of all risks is derived
from the issuance (or reinsurance) of insurance or annuity contracts with
respect to risks outside its country of organization. The Company believes
that neither the 25% or 50% ownership tests will apply to it or its
subsidiaries because (i) share ownership of ESG will be widely dispersed and
(ii) under ESG's Articles of Association, no U.S. Holder except Head is
permitted to hold as much as 10% of ESG's total combined voting power, and
Head is not permitted to hold more than 25% of such voting power. See "Risk
Factors-Anti-Takeover Considerations." Additionally, Head has no intention of
acquiring any shares that would cause it to be treated as owning 25% or more
of the total value of the Company. Therefore, the Company does not believe
that either it or any of its subsidiaries will be a CFC for U.S. federal
income tax purposes. In the absence of any controlling authority, however,
there can be no assurance that the IRS would not successfully take a contrary
position regarding the effect of the foregoing limitations on voting power and
therefore assert that the Company is a CFC. Moreover, if Head acquires
sufficient shares that would cause Head to be treated as owning more than 25%
of the value of the Company for an uninterrupted period of 30 days or more
during any tax year, the Company would be a CFC. If the Company or any
subsidiary of the Company were deemed to be a CFC, each "U.S. shareholder"
would be required to include in its gross income for U.S. federal income tax
purposes its pro rata share of the Company's "Subpart F income," even if the
"Subpart F" income is not distributed. "Subpart F income" includes, among
other things, "insurance income" within the meaning of Section 953(a) of the
Code.
Related Person Insurance Income. The discussion below is generally
applicable only to the RPII, if any, of ES Bermuda, ES Ireland or ES Germany.
The rules below will not apply to ES Bermuda, ES Ireland or ES Germany if (i)
less than 20% of the voting power and less than 20% of the total value of ES
Bermuda, ES Ireland or ES Germany is owned (directly or indirectly) by persons
who are (directly or indirectly) insured under any policy of insurance or
reinsurance issued by such corporation or who are related persons to any such
person, (ii) the RPII of ES Bermuda, ES Ireland or ES Germany for the taxable
year is less than 20% of its insurance income (as defined above but without
provisions which limit insurance income to income from countries other than
the country in which the corporation was created or organized), (iii) such
foreign corporation elects to treat its RPII as income effectively connected
with the conduct of a trade or business in the U.S., or (iv) ES Bermuda, ES
Ireland or ES Germany elects to be treated as a United States corporation.
RPII is defined in Section 953(c)(2) of the Code as any "insurance income"
attributable to policies of insurance (or reinsurance) with respect to which
the person (directly or indirectly) insured is a "U.S. shareholder" or a
"related person" to such a shareholder. For these purposes, a "U.S.
shareholder" generally includes any U.S. person who beneficially owns any
amount (rather than 10% or more by vote) of ES Bermuda, ES Ireland or ES
Germany shares. (Such "U.S. shareholders" hereafter are referred to as "RPII
Shareholders.") In determining the RPII Shareholders of ES Bermuda, ES Ireland
or ES Germany, shares of ES Bermuda, ES Ireland or ES Germany held indirectly
by U.S. persons through any non-U.S. entity generally will be treated as held
by such persons. The term "related person" for these purposes generally means
someone who controls or
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is controlled by the RPII Shareholder, or someone who is controlled by the
same person or persons that control the RPII Shareholder. Control is generally
defined by reference to ownership interests in excess of 50% measured by vote
or value in the case of corporate entities.
If none of the exceptions described above applies and if all RPII
Shareholders own, directly or indirectly, 25% or more of the total combined
voting power or total value of ES Bermuda, ES Ireland or ES Germany shares,
the RPII of ES Bermuda, ES Ireland or ES Germany must be included in the gross
income of each RPII Shareholder even though not distributed, under the rules
summarized below. Although no assurances can be given, the Company anticipates
that its RPII as a percentage of gross insurance income in 1997 and in future
fiscal years will not equal or exceed the 20% threshold.
Computation of RPII. In order to determine how much RPII ES Bermuda, ES
Ireland or ES Germany has earned in each fiscal year in which the Company
considers there to be a substantial possibility of it reaching or exceeding
the 20% limits described above, the Company intends to obtain and rely upon
information from its RPII Shareholders to determine which, if any, of the RPII
Shareholders or persons related to such RPII Shareholders were or are insured
by ES Bermuda, ES Ireland or ES Germany. For any year in which gross RPII is
20% or more of ES Bermuda, ES Ireland or ES Germany's gross insurance income,
the Company may also seek information from its shareholders as to whether
beneficial owners of shares at the end of the year are RPII Shareholders so
that the status of ES Bermuda, ES Ireland or ES Germany as a CFC and the
apportionment of the RPII among such persons may be determined. The Company
may also take any other reasonable actions it deems necessary to comply with
the IRS rules.
There are currently no IRS rulings or Treasury Regulations that provide a
definitive method for determining whether an insured is, or is related to, an
RPII Shareholder or whether a beneficial owner of shares is a U.S. person.
Although there is no currently active regulations project, the U.S. Treasury
Department is authorized to promulgate regulations that provide that a person
will not be treated as an RPII Shareholder with respect to any foreign
corporation if neither such person nor any related person to such person is
(directly or indirectly) insured under any policy of insurance or reinsurance
issued by such foreign corporation. To the extent the Company is unable to
make determinations with respect to who constitutes an RPII Shareholder, it is
possible that it may assume that insureds are, or are related to RPII
Shareholders for purposes of determining the amount of RPII, but may assume
for apportionment purposes that such owners are not RPII Shareholders, thereby
increasing the per share RPII amount for all known RPII Shareholders.
Apportionment of RPII to RPII Shareholders. The amount of RPII includible in
the income of any RPII Shareholder is based upon the net RPII income for the
year after deducting related expenses such as losses, loss reserves and
operating expenses. Where no exceptions apply, each RPII Shareholder owning or
treated as owning shares in ES Bermuda, ES Ireland or ES Germany on the last
day of ES Bermuda, ES Ireland or ES Germany's fiscal year will be required to
include in its gross income for federal income tax purposes its share of the
RPII for the entire taxable year, determined as if all such RPII were
distributed proportionately only to such RPII Shareholder at that date, but
limited to such RPII Shareholder's share of the ES Bermuda, ES Ireland or ES
Germany's earnings and profits for the current taxable year and reduced by the
RPII Shareholders' share, if any, of certain deficits in earnings and profits
for prior taxable years. This inclusion would be required even though the
shareholder may not have owned the Common Shares for more than one day during
the entire year. On the other hand, a RPII Shareholder who owns Common Shares
during a fiscal year but not on the last day of the fiscal year may not be
required to include in gross income any part of ES Bermuda, ES Ireland or ES
Germany's RPII.
Dispositions of Ordinary Shares. Section 1248 of the Code provides that if a
U.S. person owns directly or indirectly through foreign persons, or is
considered to own (by application of the rules of constructive ownership set
forth in section 958(b) of the Code), 10% or more of the voting shares of a
corporation that is or within a certain period was, a CFC (such person being
referred to as a "10% U.S. Shareholder"), any gain from the sale or exchange
of stock of such CFC may be treated as ordinary income to the extent of the
CFC's earnings and profits during the period that the shareholder held the
shares (with certain adjustments). A 10% U.S. Shareholder
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may, in certain circumstances, be required to report a disposition of shares
of a CFC by attaching IRS Form 5471, Information Return with Respect to a
Foreign Corporation, to the U.S. income tax or information return that it
would normally file for the taxable year in which the disposition occurs. It
is unclear whether Section 1248 of the Code will also apply to the sale or
exchange of shares in a foreign insurance company that earns RPII, and 25% or
more of the shares of which are owned by U.S. persons, even if (i) the U.S.
person is not a 10% shareholder, (ii) RPII does not constitute 20% or more of
the corporation's gross insurance income and/or (iii) 20% or more of either
the voting power or value of the corporation is not owned directly or
indirectly through foreign entities by persons (directly or indirectly)
insured (or reinsured) by such foreign insurer, or by persons related to such
insureds (or reinsureds).
The Company believes that such rules (and related reporting requirements)
will not apply to the disposition of Common Shares of ESG because ESG does not
expect to have any 10% U.S. Shareholders other than HMI, ESG is not directly
engaged in the insurance business, and the proposed regulations issued by the
U.S. Department of the Treasury ("Treasury Department") on April 17, 1991
should be interpreted in this manner. No assurance, however, can be given that
the IRS will agree with this interpretation or that the final Treasury
regulations when issued will provide that Section 1248 of the Code and the
respective reporting requirements will apply to the disposition of the shares
of the Company.
If the IRS or Treasury Department were to make section 1248 and the Form
5471 filing requirement applicable to the sale of Common Shares, the Company
would notify shareholders that Section 1248 of the Code and the requirement to
file Form 5471 will apply to dispositions of Common Shares. Thereafter, the
Company will send a notice after the end of each calendar year to all persons
who were shareholders during the year notifying them that Section 1248 of the
Code and the requirement to file Form 5471 apply to dispositions of Common
Shares. The Company will attach to this notice a copy of Form 5471 completed
with all Company information and instructions for completing the shareholder
information.
Information Reporting. A U.S. Holder of Common Shares may have an
independent obligation to file a copy, for informational purposes, of IRS Form
5471 with its tax return for any taxable year in which such holder: (i)
acquires 5% or more of the value of the Common Shares; or (ii) disposes of a
sufficient number of Common Shares to decrease its interest below 5%. The Form
5471 is an information return on which the holder must provide data concerning
the holder, ESG and the acquisition or disposition of Common Shares. Effective
January 1, 1998, the foregoing threshold for reporting will increase from 5%
to 10% of the total value or total combined voting power of a corporation.
Foreign Tax Credit. Because U.S. persons are likely to own a majority of ESG
shares, only a portion of the RPII and dividends paid by ESG (including any
gain from the sale of shares that are treated as a dividend under section 1248
of the Code) will be treated as foreign source income for purposes of
computing a shareholder's U.S. foreign tax credit limitation. The Company will
provide shareholders with information regarding the portion of such RPII or
dividend inclusions constituting foreign source income. It is likely that
substantially all of the RPII and dividends that are foreign source income
will constitute either "passive" or "financial services" income for foreign
tax credit limitation purposes. Thus, it may not be possible for most U.S.
Holders to utilize excess foreign tax credits to reduce U.S. tax on such
income.
Passive Foreign Investment Companies. Sections 1291 through 1297 of the Code
contain special rules applicable to foreign corporations that are "passive
foreign investment companies" ("PFICs"). In general, a foreign corporation
will be a PFIC if 75% or more of its income constitutes "passive income" or
50% or more of its assets produce passive income. If the Company were to be
characterized as a PFIC, its United States shareholders would be subject to a
penalty tax at the time of their sale of (or receipt of an "excess
distribution" with respect to) the Common Shares. In general, a shareholder
receives an "excess distribution" if the amount of the distribution is more
than 125% of the average distribution with respect to the Common Shares during
the three preceding taxable years (or shorter period during which the taxpayer
held the Common Shares). In general, the penalty tax is equivalent to the
taxes that are deemed due during the period the U.S. shareholder owned the
Common Shares, computed by assuming that the excess distribution or gain (in
the case of a sale) with respect
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to the Common Shares was taxed in equal portions throughout the holder's
period of ownership at the maximum tax rate for ordinary income applicable to
each such period, and an interest charge thereon. The interest charge is equal
to the applicable rate imposed on underpayment of U.S. federal income tax for
such period.
The PFIC statutory provisions contain an express exception for income
"derived in the active conduct of an insurance business by a corporation which
is predominantly engaged in an insurance business." This exception is intended
to ensure that income derived by a bona fide insurance company is not treated
as passive income, except to the extent such income is attributable to
financial reserves in excess of the reasonable needs of the insurance
business. It is the Company's intention that the Company and ES Bermuda, ES
Ireland and ES Germany taken together, will be predominantly engaged in an
insurance business and will not have financial reserves in excess of the
reasonable needs of their insurance business. The PFIC statutory provisions
contain a look-through rule that states that, for purposes of determining
whether a foreign corporation is a PFIC, such foreign corporation shall be
treated as if it "received directly its proportionate share of the income" and
as if it "held its proportionate share of the assets" of any other corporation
in which it owns at least 25% of the shares. While no explicit guidance is
provided by the statutory language, the Company believes that under the look-
through rule the Company would be deemed to own the assets and to have
received any income of ES Bermuda, ES Ireland and ES Germany directly for the
purposes of determining whether the Company qualifies for the aforementioned
insurance exception. The Company believes, based upon the advice of counsel,
that its interpretation of the look-through rule is consistent with the
legislative intention generally to exclude bona fide insurance companies from
the application of PFIC provisions; there can, of course, be no assurance as
to what positions the IRS or a court might take in the future.
No regulations interpreting these specific issues under the PFIC provisions
have yet been issued. Therefore, substantial uncertainty exists with respect
to their application or their possible retroactivity. Each U.S. person who is
considering an investment in the Common Shares should consult its tax advisor
as to the effects of these rules.
Other. Dividends paid by the Company to U.S. corporate shareholders will not
be eligible for the dividends received deduction provided by section 243 of
the Code.
Except as discussed below with respect to backup withholding, dividends paid
by the Company will not be subject to U.S. withholding tax.
Nonresident alien individuals will not be subject to U.S. estate tax with
respect to Common Shares of the Company.
Information reporting to the IRS by paying agents and custodians located in
the United States will be required with respect to payments of dividends on
the Common Shares to U.S. persons. Thus, a holder of Common Shares may be
subject to backup withholding at the rate of 31% with respect to dividends
paid by such persons, unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. The backup withholding tax is
not an additional tax and may be credited against a holder's regular federal
income tax liability. Subject to certain exceptions, persons that are not U.S.
persons will be subject to United States federal income tax on dividend
distributions with respect to, and gain realized from the sale or exchange of,
Common Shares only if such dividends or gains are effectively connected with
the conduct of a trade or business within the United States.
IRELAND TAXATION
There is no withholding tax imposed on dividends paid by Irish companies.
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GERMANY TAXATION
Profits from the Company should not be taxed at the level of a German
shareholder until they are distributed.
However, because Bermuda is considered as a low tax state and the Company's
income should qualify as (normal) passive income and/or passive income with
investment character, German shareholders of the Company may be subject to
German CFC rules.
Under CFC rules, passive income qualifying as passive income with investment
character derived at the level of a foreign company, which is subject to low
taxation, is included in the income of a German resident in proportion to his
participation in the foreign company and is therefore subject to German
taxation. Such passive income is subject to German taxation if the German
resident has at least 10% of the shares or voting rights in the foreign
company.
If the Company has (normal) passive income, its income would be attributed
to the German residents in proportion to their participation, if German
residents in their totality held more than 50% of the shares of voting rights
in the Company, even if the shareholding of each resident is lower than 10%.
The CFC rules may also be applicable if one or several companies or
partnerships are interposed between the shareholders and the Company.
The CFC rules, under certain circumstances, may also require German
residents to include in income their proportionate share of the income of
subsidiaries of ESG. German residents are urged to consult their personal tax
advisors regarding the possible application of the CFC rules to their
particular circumstances.
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The opinions of Appleby, Spurling & Kempe, Paul, Weiss, Rifkind, Wharton and
Garrison, Matheson Ormsby Prentice, Deloitte & Touche, Canada, Deloitte &
Touche, United Kingdom and Deloitte & Touche GmbH upon which the foregoing
discussion is based do not include any factual or accounting matters,
determinations or conclusions such as RPII amounts and computations and
amounts of components thereof (e.g., amounts or computations of income or
expense items or reserves entering into RPII computations) or facts relating
to the Company's business or activities. The summary is based upon current tax
law. The tax treatment of a holder of Common Shares, or of a person treated as
a holder of Common Shares for United States federal income, state, local or
non-U.S. tax purposes, may vary depending on the holder's particular tax
situation. Legislative, judicial or administrative changes or interpretations
may be forthcoming that could be retroactive and could affect the tax
consequences to holders of Common Shares. PROSPECTIVE INVESTORS SHOULD CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. TAX CONSEQUENCES OF OWNING THE COMMON SHARES.
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UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1997 (the "Underwriting Agreement"), the U.S. Underwriters named below
(the "U.S. Underwriters"), who are represented by Donaldson, Lufkin & Jenrette
Securities Corporation, Deutsche Morgan Grenfell Inc., Conning & Company and
Stephens Inc. (the "U.S. Representatives"), and the International Managers
named below (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters"), who are represented by Morgan Grenfell &
Co. Limited, Donaldson, Lufkin & Jenrette International, Conning & Company and
Stephens Inc. (the "International Representatives" and, together with the U.S.
Representatives, the "Representatives"), have severally agreed to purchase
from the Company the respective number of shares of Common Shares set forth
opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Deutsche Morgan Grenfell Inc..........................................
Conning & Company.....................................................
Stephens Inc. ........................................................
---------
U.S. Offering subtotal..............................................
=========
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
<S> <C>
Morgan Grenfell & Co. Limited.........................................
Donaldson, Lufkin & Jenrette International............................
Conning & Company.....................................................
Stephens Inc. ........................................................
International Offering subtotal....................................
---------
Total............................................................... 8,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Shares
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Shares offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
The Underwriters initially propose to offer the shares of Common Shares in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including
the Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the initial
offering of the Common Shares, the public offering price and other selling
terms may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 1,200,000 additional shares of Common
Shares at the initial public offering price less underwriting discounts and
commissions. The
69
<PAGE>
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the Offerings. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to
certain conditions, to purchase its pro rata portion of such additional shares
based on such Underwriter's percentage underwriting commitment in the
Offerings as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
Each of the Company and the Direct Purchasers, excluding HMI, has agreed,
subject to certain limited exceptions, not to offer, sell, offer to sell,
contract to sell or otherwise dispose of any Common Shares or any other
securities convertible into or exercisable or exchangeable for any Common
Shares or grant options or warrants to purchase any Common Shares for a period
of one year after the date of this Prospectus without the prior written
consent of the Representatives. HMI, Mr. Wand and Mr. Debrovner have agreed to
such restrictions for two years after the date of this Prospectus unless
otherwise agreed in writing by the Representatives. Certain other shareholders
who received Common Shares in the Formation have agreed to such restrictions
for six months after the date of this Prospectus unless otherwise agreed in
writing by the Representatives.
Prior to the Offerings, there has been no established trading market for the
Common Shares. The initial public offering price for the shares of Common
Shares offered hereby was determined by negotiation between the Company and
the Representatives. The factors considered in determining the initial public
offering price and exercise price for Warrants and options included the
history of and the prospects for the industry in which the Company competes,
the past and present operations of the Company, the historical results of
operations of the Company, the prospects for future earnings of the Company,
the recent market prices of securities of generally comparable companies and
the general condition of the securities markets at the time of the Offerings.
The Representatives have informed the Company that they intend to make a
market in the Common Shares subsequent to the Offerings, but there can be no
assurance that the Representatives will take any action to make a market in
any securities of the Company.
The Common Shares have been accepted for quotation on the Nasdaq National
Market in the United States subject to official notice of issuance under the
symbol "ESREF."
Pursuant to an Agreement Between U.S. Underwriters and International
Managers (the "Intersyndicate Agreement"), each U.S. Underwriter has
represented and agreed that, with certain exceptions, (i) it is not purchasing
any shares of Common Shares offered hereby for the account of anyone other
than a United States or Canadian Person (as defined below) and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
shares of Common Shares offered hereby or distribute any prospectus relating
to such shares of Common Shares outside the United States or Canada or to
anyone other than a United States or Canadian Person. Pursuant to the
Intersyndicate Agreement, each International Manager has represented and
agreed that, with certain exceptions, (i) it is not purchasing any shares of
Common Shares offered hereby for the account of any United States or Canadian
Person and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Common Shares offered hereby or
distribute any prospectus relating to such shares of Common Shares in the
United States or Canada or to any United States or Canadian Person. With
respect to any Underwriter that is both a U.S. Underwriter and an
International Manager, the foregoing representations and agreements (i) made
by it in its capacity as a U.S. Underwriter apply only to it in its capacity
as a U.S. Underwriter and (ii) made by it in its capacity as an International
Manager apply only to it in its capacity as an International Manager. The
foregoing limitations do not apply to stabilization transactions and to
certain other transactions specified in the Intersyndicate Agreement. As used
herein, "United States or Canadian Person" means any individual who is
resident in the United States or Canada, or any corporation, pension, profit-
sharing or other trust or other entity organized under or governed by the laws
of the United States or Canada or of any political subdivision thereof (other
than the foreign branch of any United States or Canadian Person), and includes
any United States or Canadian branch of a person other than a United States or
Canadian Person.
Pursuant to the Intersyndicate Agreement, sales may be made between the
syndicates of U.S. Underwriters and International Managers of such number of
shares of Common Shares offered hereby as may be mutually
70
<PAGE>
agreed. Unless otherwise determined by the Representatives, the per share
price of any shares of Common Shares so sold shall be the initial public
offering price set forth on the cover page hereof, in United States dollars,
less an amount not greater than the per share amount of the concession to
dealers set forth above.
Pursuant to the Intersyndicate Agreement, each U.S. Underwriter has
represented and agreed that (i) it has not offered or sold and will not offer
or sell, directly or indirectly, any shares of Common Shares offered hereby in
any province or territory of Canada or to, or for the benefit of, any resident
of any province or territory of Canada in contravention of the securities laws
thereof and (ii) without limiting the generality of the foregoing, any offer
or sale of such shares of Common Shares in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer or sale is made. Each U.S. Underwriter
has further agreed to send to any dealer who purchases from it any shares of
Common Shares offered hereby a notice stating in substance that by purchasing
such shares of Common Shares such dealer represents and agrees that (i) it has
not offered or sold and will not offer or sell, directly or indirectly, any of
such shares of Common Shares in any province or territory of Canada or to, or
for the benefit of, any resident of any province or territory of Canada in
contravention of securities laws thereof, (ii) any offer or sale of such
shares of Common Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of
Canada in which such offer or sale is made and (iii) it will send to any other
dealer to whom it sells any of such shares of Common Shares a notice
containing substantially the same statement as is contained in this sentence.
Pursuant to the Intersyndicate Agreement, each International Manager has
represented and agreed that (i) it has not offered or sold and, prior to the
date six months after the closing date for the sale of shares of Common Shares
to the International Managers pursuant to the Underwriting Agreement, will not
offer or sell, any shares of Common Shares offered hereby to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the shares of Common Shares offered hereby in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the Offerings to a person who is of a kind described
in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom the document
may otherwise lawfully be issued or passed on.
Pursuant to the Intersyndicate Agreement, each International Manager has
further represented and agreed that it has not offered or sold and will not
offer or sell, directly or indirectly, any Common Shares acquired in
connection with the distribution contemplated hereby in Japan or to or for the
account of any resident thereof, except for offers or sales to Japanese
International Managers or dealers and except pursuant to an exemption from the
registration requirements of the Securities and Exchange Law of Japan and
otherwise in compliance with applicable provisions of Japanese law. Each
International Manager has further agreed to send to any dealer who purchases
from it any Common Shares offered hereby a notice stating in substance that by
purchasing such Common Shares such dealer represents and agrees that (i) it
has not offered or sold and will not offer or sell, directly or indirectly,
any of such Common Shares in Japan or to or for the account of any resident
thereof, except for offers or sales to Japanese International Managers or
dealers and except pursuant to an exemption from the registration requirements
of the Securities and Exchange Law of Japan and otherwise in compliance with
applicable provisions of Japanese law and (ii) it will send to any other
dealer whom it sells any of such Common Shares a notice containing
substantially the same statement as is contained in this sentence.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of Common
Shares offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Shares offered hereby may not be offered or
sold, directly or indirectly, nor may this Prospectus or any other offering
material or advertisements in connection with the offer
71
<PAGE>
and sale of any such shares of Common Shares be distributed or published in
any jurisdiction, except under circumstances that will result in compliance
with the applicable rules and regulations of such jurisdiction. Persons into
whose possession this Prospectus comes are advised to inform themselves about
and to observe any restrictions relating to the Offerings and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Shares offered hereby in
any jurisdiction in which such an offer or a solicitation is unlawful.
In connection with the Offerings, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offerings,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Shares in the open market to cover such syndicate short
position or to stabilize the price of the Common Stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members,
if the Representatives repurchase previously distributed Common Shares in
syndicate covering transactions, in stabilization transactions or otherwise or
if the Representatives receive a report that indicates that the clients of
such syndicate members have "flipped" the Common Stock. These activities may
stabilize or maintain the market price of the Common Shares above independent
market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
Certain of the Underwriters have in the past, and may in the future, provide
investment banking and other services to the Company and its affiliates in the
ordinary course of business. Deutsche Morgan Grenfell Inc. has served as
advisor to the Company, its predecessors and affiliates, in connection with
the formation of the Company. In connection with these services, Deutsche
Morgan Grenfell Inc. will receive a fee of $1,100,000 on closing of the
Offerings.
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<PAGE>
LEGAL CONSIDERATIONS
The Company has been designated as a non-resident for exchange control
purposes by the Bermuda Monetary Authority, Foreign Exchange Control, whose
permission for the issue of Common Shares has been obtained. Prior to the
Offerings, this Prospectus will be filed with the Registrar of Companies in
Bermuda in accordance with Bermuda law.
IT MUST BE DISTINCTLY UNDERSTOOD THAT, IN GRANTING SUCH PERMISSION AND UPON
ACCEPTING THIS PROSPECTUS FOR FILING, THE BERMUDA MONETARY AUTHORITY AND THE
REGISTRAR OF COMPANIES IN BERMUDA WILL ACCEPT NO RESPONSIBILITY FOR THE
FINANCIAL SOUNDNESS OF ANY SCHEMES OR FOR THE CORRECTNESS OF ANY OF THE
STATEMENTS MADE OR OPINIONS EXPRESSED WITH REGARD TO THEM.
The transfer of Common Shares between persons regarded as non-resident in
Bermuda for exchange control purposes and the issue of shares after the
completion of the Offerings to such persons may be effected without specific
consent under the Exchange Control Act of 1972 and regulations thereunder.
Issues and transfers of shares to any person regarded as resident in Bermuda
for exchange control purposes require specific prior approval under the
Exchange Control Act of 1972.
There are no limitations on the rights of persons regarded as non-resident
of Bermuda for foreign exchange control purposes owning Common Shares to hold
or vote their Common Shares. Because the Company has been designated as a non-
resident for Bermuda exchange control purposes, there are no restrictions on
its ability to transfer funds in and out of Bermuda or to pay dividends to
U.S. residents who are holders of Common Shares, other than in respect of
local Bermuda currency.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may,
at the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the
Company is not bound to investigate or incur any responsibility in respect of
the proper administration of any such estate or trust.
The Company will take no notice of any trust applicable to any of its Common
Shares whether or not it had notice of such trust.
As an "exempted company," the Company is exempt from Bermuda laws
restricting the percentage of share capital that may be held by non-
Bermudians, but as an exempted company the Company may not participate in
certain business transactions, including: (i) the acquisition or holding of
land in Bermuda (except that required for its business and held by way of
lease or tenancy for terms of not more than 21 years) without the express
authorization of the Bermuda legislature; (ii) the taking of mortgages on land
in Bermuda to secure an amount in excess of $50,000 without the consent of the
Minister of Finance of Bermuda; (iii) the acquisition of securities created or
issued by, or any interest in, any local company or business, other than
certain types of Bermuda government securities or securities of another
"exempted" company, partnership or other corporation resident in Bermuda but
incorporated abroad; or (iv) the carrying on of business of any kind in
Bermuda, except in furtherance of the business of the Company carried on
outside Bermuda or under a license granted by the Minister of Finance of
Bermuda.
The Bermuda government actively encourages foreign investment in "exempted"
entities like the Company that are based in Bermuda but do not operate in
competition with local business. In addition to having no restrictions on the
degree of foreign ownership, the Company is subject neither to taxes on its
income or dividends nor to any foreign exchange controls in Bermuda. In
addition, there is no capital gains tax in Bermuda, and profits can be
accumulated by the Company, as required, without limitation. There is no
minimum subscription which must be raised by the issue of Common Shares
pursuant to the Offerings in order to provide for the matters listed in
section 28 of the Companies Act 1981 of Bermuda.
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<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offerings will be passed upon
for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New
York, who will rely as to Bermuda law upon the opinion of Appleby, Spurling &
Kempe, Hamilton, Bermuda. The validity of the issuance of the Common Shares
offered hereby is being passed upon for the Company by Appleby, Spurling &
Kempe. Certain legal matters will be passed upon for the Underwriters by
Debevoise & Plimpton, New York, New York. Certain German legal matters will be
passed upon for the Company and the Underwriters by Meyersrenken & Rheingantz,
Cologne, Germany. Certain Irish legal matters will be passed upon for the
Company and the Underwriters by Matheson Ormsby Prentice, Dublin, Ireland.
Certain Bermuda tax matters have been passed upon for the Company and the
Underwriters by Appleby, Spurling & Kempe.
EXPERTS
The consolidated financial statements of European Specialty Group Holding AG
and Subsidiaries as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 have been audited by Deloitte &
Touche GmbH, independent auditors, as stated in their report appearing herein
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing. The balance sheet of ESG Re
Limited as of August 21, 1997, has been audited by Deloitte & Touche,
Hamilton, Bermuda, independent chartered accountants, as stated in their
report appearing herein and is included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form F-1 under the Securities
Act with respect to the Common Shares offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which
are contained in exhibits to the Registration as permitted by the rules and
regulations of the Commission. Statements made in this Prospectus concerning
the contents of any document referred to herein are not necessarily complete.
With respect to each such document filed with the Commission as an exhibit to
the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved.
The Registration Statement, as well as such reports and other information
filed by the Company with the Commission, may be inspected at the public
reference facilities maintained by the Commission at its principal office
located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material may be obtained by mail from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a World Wide Web site
(http://www.sec.gov) that contains material regarding issuers that file
electronically with the Commission. The Registration Statement, of which the
Prospectus forms a part, has been so filed and may be obtained at such site.
74
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GLOSSARY OF SELECTED INSURANCE TERMS
Attachment point............. The amount of loss (per occurrence or in the
aggregate, as the case may be) above which
excess of loss coverage becomes operative.
Broker....................... One who negotiates contracts of insurance or
reinsurance, receiving a commission for
placement and other services rendered, between
(1) a policy holder and a primary insurer, on
behalf of the primary insurer (or, in the U.K.,
on behalf of the insured party), (2) a primary
insurer and reinsurer on behalf of the primary
insurer, or (3) a reinsurer and a
retrocessionaire, on behalf of the reinsurer.
Carve-out Programs........... Carve-out programs refer to the coverage of
segmented benefits under an existing medical
program. A typical example relates to Blue
Cross/Blue Shield which at a certain point in
time only reinsured the cost of transplant
coverage and related exposure in the
reinsurance market and bore all other risk
elements themselves.
Cedent; Ceding Client........ When a party reinsures its liability with
another, it "cedes" business and is referred to
as the "cedent" or "ceding client."
Excess of loss reinsurance... A generic term describing reinsurance that
indemnifies the reinsured against all or a
specified portion of losses on underlying
insurance policies in excess of a specified
amount, which is called a "level" or
"retention." Also known as non-proportional
reinsurance. Excess of loss reinsurance is
written in layers. A reinsurer or group of
reinsurers accepts a band of coverage up to a
specified amount. The total coverage purchased
by the cedent is referred to as a "program" and
will typically be placed with predetermined
reinsurers in renegotiated layers. Any
liability exceeding the outer limit of the
program reverts to the ceding client, which
also bears the credit risk of a reinsurer's
insolvency.
Facultative.................. The reinsurance of all or a portion of the
insurance provided by a single policy or
program. Each policy reinsured is separately
negotiated. Facultative reinsurance is
evidenced by "facultative certificates."
Gross premiums written....... Total premiums for insurance and reinsurance
assumed during a given period before deduction
of brokerage, commission and other acquisition
costs.
Incurred but not reported
(IBNR)....................... Reserves for estimated losses that have been
incurred by insureds and reinsureds but not yet
reported to the insurer or reinsurer including
unknown future developments on losses which are
known to the insurer or reinsurer.
Layer........................ The interval between the retention or
attachment point and the maximum limit of
indemnity for which a reinsurer is responsible.
Loss adjustment expenses
(LAE)........................ The expenses of settling claims, including
legal and other fees and the portion of general
expenses allocated to claim settlement costs.
Loss ratio................... The ratio of incurred losses including loss
reserves, IBNR and loss adjustment expenses to
premium earned.
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Loss reserves................ Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims payments and the related expenses that
the insurer or reinsurer will ultimately be
required to pay in respect of insurance or
reinsurance it has written. Reserves are
established for losses and for loss adjustment
expenses.
Morbidity.................... Frequency of illness, sickness and diseases
contracted.
Mortality.................... Frequency of death.
Net premiums written......... Gross premiums written for a given period less
premiums ceded to reinsurers and
retrocessionaires during such period.
Primary insurer.............. An insurance company that contracts with the
consumer to provide insurance coverage. Such
primary insurer may then cede a portion of its
business to reinsurers.
Proportional reinsurance..... A generic term describing all forms of
reinsurance in which the reinsurer shares a
proportional part of the original premiums and
losses of the ceding clients. (Also known as
pro rata reinsurance, quota share reinsurance
or participating reinsurance.) In proportional
reinsurance the reinsurer generally pays the
ceding client a ceding commission. The ceding
commission generally is based on the ceding
client's cost of acquiring the business being
reinsured (including commissions, premium
taxes, assessments and miscellaneous
administrative expense) and also may include a
profit factor.
Reinsurance.................. An arrangement in which the reinsurer agrees to
indemnify the ceding client against all or a
portion of reinsurance risks underwritten by
the ceding client under one or more policies.
Reinsurance can provide a ceding client with
several benefits, including a reduction in net
liability on individual risks and catastrophe
protection from large or multiple losses.
Reinsurance also provides a ceding client with
additional UNDERWRITING CAPACITY by permitting
it to accept larger risks and write more
business than would be possible without a
concomitant increase in capital and surplus,
and facilitates the maintenance of acceptable
financial ratios by the ceding client.
Retention.................... The amount or portion of risk that an insurer
retains for its own account. Losses in excess
of the retention level are paid by the
reinsurer. In proportional treaties, the
retention may be a percentage of the original
policy's limit. In excess of loss reinsurance,
the retention is a dollar amount of loss, a
loss ratio or a percentage.
Retrocession................. A transaction whereby a reinsurer cedes to
another reinsurer (the "retrocessionaire") all
or part of the reinsurance that the first
reinsurer has assumed. Retrocessions do not
legally discharge the ceding reinsurer from its
liability with respect to its obligations to
the reinsured. Reinsurance companies cede risks
to retrocessionaires
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for reasons similar to those that cause primary
insurers to purchase reinsurance: to reduce net
liability on individual risks, to protect
against catastrophic losses, to stabilize
financial ratios and to obtain additional
underwriting capacity.
Run-off...................... Liability of an insurance or reinsurance
company for future claims that it expects to
pay and for which a reserve has been
established. This term also can refer to the
period of discontinuance related to a book of
business for which no new premiums are being
written and claims are continuing to be paid.
Tail......................... The period of time that elapses between the
writing of the applicable insurance policy or
the loss event (or the insurer's knowledge of
the loss event) and the payment in respect
thereof.
Top-up Benefits.............. Special coverage implemented over and above an
underlying medical expense policy to create a
uniform level of coverage. This is standard in
multinational employee benefit programs where
the various local coverages might have
different benefits. The term can be best
compared with DIC (Difference in Conditions)
coverage customary in the casualty field.
Treaty....................... The reinsurance of a specified type or category
of risks defined in a reinsurance agreement
between an insurer and a reinsurer or between a
reinsurer and a retrocessionaire. In treaty
reinsurance the cedent is typically obligated
to offer, and the reinsurer or retrocessionaire
is obligated to accept, a specified portion of
a type or category of risks insured by the
ceding client as set forth in the governing
contract. Treaty reinsurance may provide for
proportional or non-proportional reinsurance.
Underwrite or Underwriting... The process of reviewing applications submitted
for insurance coverage, deciding whether to
accept all or part of the coverage requested
and determining the applicable premiums
undertaken by an insurer or reinsurer, or its
authorized management company.
Underwriting capacity........ The maximum amount that an insurance company
can underwrite. The limit is generally
determined by the company's retained earnings
and investment capital. Reinsurance serves to
increase a company's capacity by reducing its
exposure to particular risks.
Underwriting profitability... Profit that remains after paying claims and
expenses without including investment income.
Underwriting year............ The calendar year in which a reinsurance
contract began and in which premiums and losses
for such contract are reflected.
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INDEX TO FINANCIAL STATEMENTS
ESG RE LIMITED
BALANCE SHEET
August 21, 1997 (date of inception)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheet.............................................................. F-3
Notes to the Balance Sheet................................................. F-4
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
FINANCIAL STATEMENTS
as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................... F-8
Consolidated Balance Sheets................................................ F-9
Consolidated Statements of Income.......................................... F-10
Consolidated Statements of Cash Flows...................................... F-11
Consolidated Statements of Shareholders' Equity............................ F-12
Notes to Consolidated Financial Statements................................. F-13
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS
as of June 30, 1997 and 1996 and
for the six month periods ended June 30, 1997 and 1996
<CAPTION>
PAGE
<S> <C>
Consolidated Balance Sheets................................................ F-22
Consolidated Statements of Income.......................................... F-23
Consolidated Statements of Cash Flow....................................... F-24
Notes to Consolidated Financial Statements................................. F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
ESG Re Limited
We have audited the accompanying balance sheet of ESG Re Limited as at
August 21, 1997 (date of inception). This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
balance sheet presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of ESG Re Limited as at August 21, 1997 (date
of inception) in conformity with accounting principles generally accepted in
the United States of America.
Deloitte & Touche
Chartered Accountants
Hamilton, Bermuda
August 28, 1997
F-2
<PAGE>
ESG RE LIMITED
BALANCE SHEET
August 21, 1997 (date of inception)
(U.S. dollars)
<TABLE>
<S> <C>
ASSETS.............................................................. $ 0
========
SHAREHOLDERS' EQUITY
Ordinary Shares (par value $1.00; 12,000 shares authorized, issued
and outstanding)................................................... $ 12,000
Less: receivable from shareholders.................................. (12,000)
--------
Total shareholders' equity........................................ $ 0
========
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
NOTES TO THE BALANCE SHEET
August 21, 1997 (date of inception)
(U.S. dollars)
1. ORGANIZATION
ESG Re Limited (the "Company" or "ESG") was incorporated under the laws of
Bermuda on August 21, 1997 by an affiliate of Head & Company L.L.C. ("Head
Company") and senior members of the Company's management. Its principal
activities will be to provide accident, health, life and special risk
reinsurance.
The shareholders of European Specialty Group Holding AG ("ESG Germany") have
entered into agreements to receive Common Shares, par value $1 per share, of
the Company (the "Common Shares") in exchange for all of their interests in
ESG Germany (the "Formation"). ESG Germany will thereby become a wholly-owned
indirect subsidiary of the Company. For accounting purposes, the Formation
will be considered a recapitalization, since the majority shareholders of ESG
Germany will continue to be significant shareholders in ESG, key management of
ESG will be substantially the same individuals holding such positions in ESG
Germany, and the assets, revenues, net earnings and current value of ESG
Germany will significantly exceed those of ESG, which was recently formed and
has no prior operating activity. Additionally, no other group of shareholders
will obtain control of ESG Re Limited through the direct sales to investors or
through offerings to the public.
The Company formed European Specialty Reinsurance (Bermuda) Limited ("ES
Bermuda"), European Specialty Reinsurance (Ireland) Limited ("ES Ireland"),
European Specialty Group (United Kingdom) Limited ("ESG UK") and European
Specialty (North America) Limited ("ES North America") through which it will
carry out its operations. No amounts have been recorded in these financial
statements for these operating subsidiaries as they have had no operating
activity as of the inception date of the Company and have not yet been
capitalized.
2. ACCOUNTING POLICIES
The balance sheet has been prepared in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP"). The Company
intends to record transactions in accordance with U.S. GAAP and include the
following significant accounting policies.
(a) Premiums
Premiums written will be estimated based upon reports received from ceding
companies, supplemented by the Company's estimates of premium written for
which ceding company reports have not been received. Differences between such
estimates and actual amounts will be recorded in the period in which the
actual amounts are determined.
Premiums will be recognized as revenue over the period of the contract or
policy in proportion to the amount of insurance protection provided. Unearned
premiums represent the portion of premiums written which is applicable to the
unexpired terms of policies in force.
(b) Losses and loss adjustment expenses
The reserve for losses and loss adjustments expenses will include an amount
determined from loss reports and individual cases and an amount for losses
incurred but not reported. Such reserves will be estimated based upon reports
received from ceding companies supplemented by the Company's estimate of
reserves for which ceding company reports have not been received and its own
historical experience. To the extent that the Company's historical experience
is inadequate for estimating reserves such estimates may be actuarially
determined based upon industry experience and management's judgment. These
estimates will be reviewed and will be subject to the impact of future changes
in such factors as claim severity and frequency. The ultimate liability may be
in excess of, or less than, the amounts provided and any adjustments will be
reflected in the periods in which they become known.
(c) Investments
The Company will designate all debt securities either as available-for-sale-
securities or held-to-maturity securities. Securities available-for-sale will
be carried at fair value with unrealized holding gains and losses excluded
from net earnings and reported as an amount in a separate component of
shareholders' equity. Securities
F-4
<PAGE>
ESG RE LIMITED
NOTES TO THE BALANCE SHEET--(CONTINUED)
August 21, 1997 (date of inception)
(U.S. dollars)
which are considered held-to-maturity will be carried at amortized cost.
Realized gains and losses on sales of securities will be recognized in net
earnings on the specific identification basis.
(d) Deferred Acquisition Costs
Commissions and other costs incurred in the acquisition of new and renewal
business will be deferred over the terms of the policies or contracts of
reinsurance to which they relate and amortized in proportion to premium
revenue recognized.
(e) Reinsurance
Reinsurance premiums ceded will be reported as prepaid reinsurance premiums
and amortized over the respective contract or policy periods in proportion to
the amount of insurance protection provided. At this time the Company does not
anticipate ceding business on a retroactive basis. Commissions on reinsurance
ceded will be deferred over the terms of the contracts of reinsurance to which
they relate and amortized in proportion to the amount of insurance protection
provided.
(f) Translation of Foreign Currencies
Foreign currency receivables or payables that are denominated in a currency
other than U.S. dollars will be translated into U.S. dollars at the rates of
exchange in effect at the balance sheet date. Revenues and expenses will be
translated at the average yearly exchange rate. The resulting exchange gains
or losses will be included in the results of operations. Exchange gains and
losses related to the translation of investments available for sale will be
included in net unrealized gains and losses on investments, a separate
component of shareholders' equity.
Financial statements of subsidiaries denominated in foreign currencies will
be translated into U.S. dollars using the rate of exchange in effect at the
balance sheet date for assets and liabilities, and the average yearly exchange
rate for revenues and expenses. Related translation adjustments will be
reported as a separate component of shareholder's equity.
(g) Organizational Costs
Costs incurred by the Company relating to its organization will be
capitalized and amortized over a period of 5 years.
(h) Cash and cash equivalents
The Company will consider all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
(i) Income Taxes
The Company will account for income tax expense and liabilities under the
liability method in accordance with Financial Accounting Standards Board
("FASB") Statement No. 109, "Accounting for Income Taxes." Deferred income
taxes may arise from the recognition of temporary differences between income
reported for financial statement purposes and for income tax purposes. These
deferred taxes will be measured by applying currently enacted tax rates.
(j) Consolidation
The consolidated financial statements of the Company will include the
accounts of its wholly-owned subsidiaries, ES Ireland, ESG UK, ESG Germany,
and ES North America. All significant intercompany balances will be
eliminated.
(k) Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted
average number of Common Shares. Fully diluted earnings per Common Share
reflect the maximum dilution that would have resulted from the exercise of
stock options and warrants to purchase Common Shares. Fully diluted earnings
per Common
F-5
<PAGE>
ESG RE LIMITED
NOTES TO THE BALANCE SHEET--(CONTINUED)
August 21, 1997 (date of inception)
(U.S. dollars)
Share are computed by dividing net income by the weighted average number of
common shares and all dilutive securities.
(l) Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") SFAS No. 123,
"Accounting for Stock-Based Compensation" defines a fair value based method of
accounting for stock-based employee compensation plans. Under SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
for all employee awards granted. Companies are permitted to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), but must disclose in a note to the
financial statements pro forma net income and earnings per share as if SFAS
No. 123 had been applied. The Company has determined that it will account for
stock-based compensation under APB No. 25 with the fair value method
disclosures required by SFAS No. 123.
(m) Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period as well as the disclosure of such amounts. Actual
results could differ from those estimates and assumptions.
3. DIRECT SALES AND THE OFFERINGS
Simultaneous with the closing of the Direct Sales (as defined below), the
ordinary shares issued upon the incorporation of the Company will be retired.
The Company will issue Common Shares upon closing of the Direct Sales and the
Offerings (as defined below).
The Company intends to enter into subscription agreements with affiliates of
Head Company and certain other investors for the purchase for investment
directly from the Company of an aggregate of 2,673,799 Common Shares, Class A
Warrants to purchase up to 1,148,087 Common Shares and Class B Warrants to
purchase up to 1,148,087 Common Shares (in the event that certain performance
criteria are satisfied) (the "Direct Sales"). In addition, the shareholders of
ESG Germany have entered into agreements to exchange all of their interests in
ESG Germany for 900,000 Common Shares in the Formation. Further, the Company
intends to offer to sell 8,000,000 Common Shares in offerings (the
"Offerings") registered under the United States Securities Act of 1933 (the
"Securities Act").
Upon completion of the Offerings, the Company expects that the Common Shares
will be quoted on Nasdaq.
4. TAXATION
Under current Bermuda law the Company will not be required to pay taxes in
Bermuda on either income or capital gains. The Company will be subject to
taxes in other jurisdictions in which it will have operations including but
not limited to Germany, Ireland, Canada and England. The Company intends to
operate its business in a manner such that it will not pay United States
income tax.
On completion of the Formation as discussed in Note 1, ESG Germany will
become a wholly owned indirect subsidiary of the Company. As of December 31,
1996, ESG Germany had a deferred tax asset of $271,900 resulting primarily
from a net operating loss carryforward for which no valuation allowance was
deemed necessary. Based on management's plan for the future operation of the
Company, under German tax law which recently changed as to the utilization of
loss carryforwards, management believes it is more likely than not that the
realization of the net deferred tax asset will not be affected by the
recapitalization.
F-6
<PAGE>
ESG RE LIMITED
NOTES TO THE BALANCE SHEET--(CONTINUED)
August 21, 1997 (date of inception)
(U.S. dollars)
5. AGREEMENTS WITH RELATED PARTIES
In connection with the Formation, initial financing and commencement of
operations of the Company, the Company has entered, or plans to enter, into
various agreements for various investment management and administrative
services.
The Company has entered into an agreement with Head Asset Management L.L.C.
("Head Asset Management"), which is an affiliate of Head Company, relating to
the provision of investment management services. Pursuant to this agreement
which will be subject to the Company's investment guidelines and other
restrictions, the Company will pay Head Asset Management a fee equal to the
sum of (i) 0.25% per annum of the first $200 million of assets under
management, and (ii) 0.15% per annum of assets under management in excess of
$200 million.
6. STOCK AND STOCK OPTION PLANS
(a) Employee Stock Option Plan
The Company plans to adopt the 1997 Employee Stock Option Plan (the "Stock
Option Plan") under which employees of the Company and its subsidiaries are
eligible to participate. The Stock Option Plan is administered by the
Compensation Committee. Subject to the provisions of the Stock Option Plan,
the Compensation Committee has sole discretionary authority to interpret the
Stock Option Plan and to determine the type of awards to grant, when, if and
to whom awards are granted, the number of Common Shares covered by each award
and the terms and conditions of the award.
The exercise price of the options will be determined by the Compensation
Committee when the options are granted. At the discretion of the Compensation
Committee, the option exercise price may be paid in cash or in Common Shares
or other property having Fair Market Value (as defined in the Stock Option
Plan) on the date of exercise equal to the option exercise price, or by
delivering to the Company a copy of irrevocable instructions to a stock broker
to deliver promptly to the Company an amount of sale or loan proceeds
sufficient to pay the exercise price. Options granted under the Stock Option
Plan are freely assignable subject to certain limitations. The Company has
reserved 2,000,000 Common Shares for issuance under the Stock Option Plan.
(b) Directors' Stock Plan
The Company also plans to adopt the ESG Re Limited Non-Management Directors'
Compensation and Option Plan (the "Directors Plan"), under which non-
management directors joining the Board of Directors within one year of the
closing of the Offering shall receive stock options ("Options") to purchase
10,000 Common Shares at an exercise price per share equal to the price per
Common Share at which the Common Shares were sold in the Offering. In
addition, the Directors Plan provides for automatic annual awards of Options
to purchase 5,000 Common Shares at an exercise price per share equal to the
then market price per share (or, in each case, a lesser amount prorated to the
extent the participating director did not serve on the Board of Directors for
the entire year preceding the relevant annual shareholders' meeting), to be
made to non-management directors on each successive annual shareholders'
meeting. In addition, in any year, in lieu of such stock and cash payment, a
director may elect to receive all or a portion of such fees in options or to
defer all or a portion of such fees. If a director elects to receive options,
the director will receive options for Common Shares with a value, as
determined by the Board, equal to two times the fees that would otherwise be
payable. If the director elects to defer the receipt of the fees, he will
receive deferred compensation indexed to the greater of (i) the total return
on the Common Shares or (ii) the one-year U.S. treasury bill rate. Deferred
Compensation will be paid in cash at the time elected by the directors, in
accordance with the terms of the Directors Plan. Directors' shares granted
under the Directors Plan will be non-transferable, for six months after
receipt. The Company has reserved 1,000,000 Common Shares for issuance under
the Directors Plan.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
European Specialty Group Holding AG
We have audited the accompanying consolidated balance sheets of European
Specialty Group Holding AG and Subsidiaries (the "Company"), prior to 1996
European Specialty Group GmbH and Subsidiaries, as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of European Specialty Group
Holding AG and Subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche GmbH
Wirtschaftsprufungsgesellschaft
Hamburg, Germany
August 15, 1997
F-8
<PAGE>
EUROPEAN SPECIALTY GROUP AG AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 33.2 $ 15.0
Fees receivable....................................... 1,045.1 856.7
Other current assets.................................. 95.6 248.2
--------- ---------
Total current assets................................ 1,173.9 1,119.9
--------- ---------
Fees receivable--non-current............................ 1,031.5 922.7
Intangibles (net of accumulated amortization of $124.9
and $205.5)............................................ 105.3 62.5
Fixed assets (net of accumulated depreciation of $68.0
and $104.3)............................................ 58.0 117.3
Deferred taxes.......................................... 293.9 271.9
Equity investments...................................... 20.9 24.4
--------- ---------
Total assets........................................ $ 2,683.5 $ 2,518.7
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ($941.8 and $868.3 due to related
parties)............................................. $ 1,745.7 $ 1,812.7
Accrued expenses...................................... 473.2 713.9
Liability for share transactions...................... 203.9 373.0
Accounts payable...................................... 217.1 107.9
--------- ---------
Total current liabilities........................... 2,639.9 3,007.5
--------- ---------
Fiduciary liabilities................................... 6,495.9 4,928.6
Less: Cash and cash equivalents held in a fiduciary
capacity............................................... (6,495.9) (4,928.6)
--------- ---------
-- --
Long-term debt.......................................... 195.4 --
--------- ---------
Total liabilities................................... 2,835.3 3,007.5
--------- ---------
Commitments and contingencies (notes 6, 7, 8, 11)
--------- ---------
Shareholders' equity:
Common stock (5DM par value, 100,000 shares
authorized, 20,000 issued and outstanding)........... -- 62.0
Registered capital.................................... 316.6 --
Additional paid-in capital............................ -- 62.3
Treasury capital...................................... (19.3) --
Accumulated deficit................................... (446.1) (608.7)
Foreign currency translation adjustments.............. (3.0) (4.4)
--------- ---------
Total shareholders' equity.......................... (151.8) (488.8)
--------- ---------
Total liabilities and shareholders' equity.......... $ 2,683.5 $ 2,518.7
========= =========
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-9
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
<S> <C> <C> <C>
Fee revenues..................................... $3,309.3 $4,514.5 $3,869.4
Other income..................................... 41.7 26.5 280.1
-------- -------- --------
Total revenues................................. 3,351.0 4,541.0 4,149.5
-------- -------- --------
Operating expenses
Personnel costs.................................. 1,025.5 1,301.5 1,382.0
Consulting and related expenses (includes $747.4,
$793.0 and $861.2 for related parties).......... 990.3 1,005.4 986.1
Advisory fee..................................... -- -- 251.9
Depreciation and amortization.................... 57.3 93.4 132.5
Other operating expenses......................... 1,058.2 1,511.7 1,263.7
-------- -------- --------
Total operating expenses....................... 3,131.3 3,912.0 4,016.2
-------- -------- --------
Interest expense (includes $118.5, $129.5 and
$67.7 to related partes)........................ 181.9 185.2 140.7
-------- -------- --------
Total expenses................................. 3,313.2 4,097.2 4,156.9
-------- -------- --------
Income (loss) before income taxes................ 37.8 443.8 (7.4)
-------- -------- --------
Provision for income taxes....................... 43.8 298.3 155.2
-------- -------- --------
Net income (loss)................................ $ (6.0) $ 145.5 $ (162.6)
======== ======== ========
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-10
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (6.00) $ 145.5 $(162.6)
Depreciation and amortization.................... 57.3 93.4 132.5
Changes in operating assets and liabilities:
Fees receivable................................ (1,037.5) 158.6 139.4
Deferred taxes................................. 49.1 222.7 (0.1)
Accrued expenses............................... 236.1 91.0 286.1
Other current assets........................... 11.6 (24.4) (164.9)
Accounts payable............................... 261.7 (130.6) (95.1)
--------- ------- -------
Net cash flows provided by (used in) operating
activities...................................... (427.7) 556.2 135.3
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity investments................... (25.8) -- --
Sale of equity investment........................ -- 21.1 --
Purchases of fixed assets........................ (15.6) (46.3) (108.9)
Purchases of intangible assets................... (220.1) (2.9) (43.6)
--------- ------- -------
Net cash flows (used in) investing activities.... (261.5) (28.1) (152.5)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of capital............................ -- -- (203.9)
Reorganization of holding company................ -- -- 58.2
Sale of shares................................... -- -- 66.1
Advances for issuance of shares.................. -- -- 66.3
Net change in short-term debt.................... (299.0) 251.3 296.0
Proceeds from long-term borrowings............... 1,040.3 -- --
Repayments of long-term borrowings............... (36.9) (771.0) (271.8)
--------- ------- -------
Net cash flows provided by (used in) financing
activities...................................... 704.4 (519.7) 10.9
--------- ------- -------
Effect of exchange rate changes on cash.......... 5.4 4.1 (11.9)
--------- ------- -------
Net change in cash............................... 20.6 12.5 (18.2)
Cash, at beginning of period..................... .1 20.7 33.2
--------- ------- -------
Cash, at end of period........................... $ 20.7 $ 33.2 $ 15.0
========= ======= =======
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 164.4 $ 193.3 $ 124.4
========= ======= =======
Income taxes paid.............................. $ -- $ 75.3 $ 156.1
========= ======= =======
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-11
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON REGISTERED PAID-IN TREASURY ACCUMULATED TRANSLATION
STOCK CAPITAL CAPITAL CAPITAL DEFICIT ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993....... $ -- $ 316.6 $ -- $ -- $(401.0) $ 7.5 $ (76.9)
Net loss................ (6.0) (6.0)
Foreign currency
translation
adjustments............ (7.5) (7.5)
----- ------- ----- ------ ------- ----- -------
December 31, 1994....... -- 316.6 -- -- (407.0) -- (90.4)
Net income.............. 145.5 145.5
Capital repurchased..... (19.3) (184.6) (203.9)
Foreign currency
translation
adjustments............ (3.0) (3.0)
----- ------- ----- ------ ------- ----- -------
December 31, 1995....... -- 316.6 -- (19.3) (446.1) (3.0) (151.8)
Reorganization of
holding company........ 62.0 (316.6) 62.3 19.3 (173.0)
Net loss................ (162.6) (162.6)
Foreign currency
translation
adjustments............ (1.4) (1.4)
----- ------- ----- ------ ------- ----- -------
December 31, 1996....... $62.0 $ -- $62.3 $ -- $(608.7) $(4.4) $(488.8)
===== ======= ===== ====== ======= ===== =======
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-12
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
1. ORGANIZATION
European Specialty Group Holding AG (the "Company"), a closely held
corporation, is incorporated under the laws of Germany. The Company
principally operates through its wholly-owned subsidiary, European Specialty
Group GmbH (the "Agency") an underwriting management company which specializes
in personal accident, health, life and special risk reinsurance. In addition
to the Agency, the Company's consolidated financial statements also include
European Specialty Group London, Ltd., an operative unit of the Agency,
European Specialty Insurance Management Services Limited, an administrative
unit of the Agency, ESG Asia Limited, a representative office, and European
Specialty Ruckversicherungs AG, a reinsurance company founded in 1996. In
1995, the Company agreed to repurchase 6% of the registered capital from a
former employee, totaling $203.9. Payment was made in 1996.
Prior to 1996, the Company and its subsidiaries were owned by the Agency. To
simplify its capital structure and to provide additional capital, the
Company's shareholders executed a series of transactions which has resulted in
the Company owning 100% of the Agency and its subsidiaries (the
"Reorganization of Holding Company"). Because these cash transactions closed
over a period of time, shareholders' equity was reduced by $173.0 for those
transactions closing in 1996, and increased by $440.4 for those transactions
settling in 1997. Transactions not closing in 1996 resulted in a liability for
share transactions of $373.0 at December 31, 1996. All of these share
transactions were executed among the existing shareholders or other related
parties.
The detail of these transactions are described in the following table:
<TABLE>
<CAPTION>
ACCOUNTS EFFECTED
---------------------------
LIABILITY FOR
SHARE SHAREHOLDERS'
DATE TRANSACTION TRANSACTIONS EQUITY
---- ----------- ------------- -------------
<C> <S> <C> <C>
January 1, 1996... Opening balance of equity
representing the registered
capital of the Agency. $ 297.3
May 6, 1996....... The Shareholders of the
Agency sold their ownership
in the Agency to the Company.
The balance was not paid thus
is presented as a liability
in the caption: "Liability
for Share Transactions." $297.3 $(297.3)
May 6, 1996....... The Agency sold 94% of its
investment in the Company to
the Shareholders of the
Agency. Consideration for
this transaction was $58.2. $ 58.2
May 6, 1996....... The Shareholders of the
Company authorized the
issuance of an additional
80,000 shares in the Company.
However final legal
registration of these shares
was not approved until July
1997. Thus there was no
effective increase in shares
outstanding until July 1997.
August 2, 1996.... The Shareholders of the
Company paid consideration of
$66.3 for 80,000 shares which
were not legally registered.
Since the shares were not
properly registered as at
August 2, 1996, the
consideration is accounted
for as a liability and is
disclosed as "Liability for
share transactions." $ 66.3
November 4, 1996.. The Agency sold its remaining
6% ownership in the Company
for $66.1 to RVERS GmbH which
is wholly owned by the ex-
spouse, a related party, of a
senior executive and
shareholder of the Company. $ 66.1
</TABLE>
F-13
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
ACCOUNTS EFFECTED
---------------------------
LIABILITY FOR
SHARE SHAREHOLDERS'
DATE TRANSACTION TRANSACTIONS EQUITY
---- ----------- ------------- -------------
<C> <S> <C> <C>
December 31, 1996.. Closing balance $373.0 $124.3
July 15, 1997...... The Shareholders of the
Company paid the remaining
consideration for 80,000
shares issued of $165.2. The
consideration previously
accounted for as a liability
of $55.0 was transferred to
equity. ($55.0) $220.2
July 15, 1997...... RVERS GmbH purchased 6%,
being its ownership share of
the Company of the 80,000
shares issued for
consideration of $220.2. $220.2
</TABLE>
The Agency earns a management fee from reinsurers for administering various
underwriting pools without directly participating in the underwriting results
as well as providing underwriting services to reinsurers outside of the pool
structure.
2. ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP"). The Company's significant accounting policies
include the following:
(a) Revenue Recognition
Revenue is primarily comprised of underwriting management and related fees
and profit commissions based on the underwriting results of the reinsurance
pools, as well as commissions for facultative and other business placed with
reinsurers that do not participate in the pools. Management and related fees
are recorded based on the estimated gross premiums written in each
underwriting year and are recognized in revenue when the underwriting contract
becomes effective. The recognition of fee revenue as of the effective date of
the contract is based upon the fact that the Company has no future obligations
under these contracts except to provide ancillary administrative services.
Management and related fees, which generally are collected over a period up to
24 months, are discounted for any amounts expected to be collected after the
first twelve months of the underwriting contract. Any adjustments to
management and related fees are made in the period in which ceding companies
report information requiring such changes. The Company is only entitled to
receive its management fees to the extent that gross written premiums are
collected. Profit commissions due from reinsurers are based upon the actual
underwriting results of each underwriting pool and are generally calculated
and earned 12 to 24 months after the end of each underwriting year. Expenses
for future administrative services that the Company is obligated to provide
are accrued when the underwriting contract is established. Such accrued
expenses were $77.0 and $72.3 at December 31, 1995 and 1996, respectively.
(b) Fixed Assets
Fixed assets primarily consist of computer equipment and office furniture
and are depreciated over the estimated useful lives of the assets by the
straight-line method. The estimated useful lives of assets are for periods
ranging between three and ten years depending on the type of the asset.
Leasehold improvements are amortized over the shorter of the term of the lease
or the estimated useful lives of the improvements. Balances are periodically
reviewed and evaluated for impairment.
F-14
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
(c) Equity Investments
As of December 31, 1996, the Company has a 40% ownership interest in
SportSecure GmbH, a reinsurance intermediary specializing in sports and
entertainment risks and a 30% ownership interest in European Specialty Group
Berlin GmbH, a representative office. These investments are accounted for
under the equity method. The Company's proportion of the results was $5.3,
$3.9 and $5.3 for the years ended December 31, 1994, 1995 and 1996,
respectively.
(d) Intangibles
Intangible assets consist primarily of a fee paid for the exclusive rights
to certain businesses generated for three years, software which was purchased
in 1996 and trademark rights. These assets are recorded at cost and are
amortized on a straight-line basis over useful lives of three to five years.
Balances are periodically reviewed and evaluated for impairment. The exclusive
rights fee of $193.7 was paid to a then shareholder of the Company in April
1994. In the exclusive rights agreement the then shareholder of the Company
agreed to exclusively use the Company's reinsurance pools for any insurance
developed in Latin America and the Company granted the third party exclusive
rights to market the Company's reinsurance pools throughout Latin America.
This asset had a net book value of $98.8 and $26.8 at December 31, 1995 and
1996, respectively.
(e) Translation of Foreign Currencies
The reporting currency of the financial statements is the U.S. dollar. The
functional currency is the Deutsche Mark and the British Pound Sterling for
subsidiaries in Germany and England, respectively. Subsequent to December 31,
1996 the Deutsche Mark declined in value relative to a number of currencies in
which the Company transacts business, including the Company's reporting
currency. It is not practicable for the Company to estimate the financial
impact of this relative decline in value. Assets and liabilities are
translated at current exchange rates and the related revenues and expenses are
translated at the average rates of exchange in effect during the period.
Gains and losses from foreign currency transactions, primarily related to
management fees, are reflected in current operating results.
(f) Income Taxes
The Company and its subsidiaries file separate income tax returns as
required. The Company accounts for income tax expense and liabilities under
the liability method in accordance with Financial Accounting Standards Board
("FASB") Statement No. 109, "Accounting for Income Taxes". Deferred income
taxes arise from the recognition of temporary differences between income
reported for financial statement purposes and for income tax purposes. These
deferred taxes are measured by applying currently enacted tax rates. In
addition, FASB Statement 109 requires the recognition of future benefits, such
as for net operating loss carryforwards, to the extent that realization of
such benefits are more likely than not.
(g) Dividends
Under German law, the Company is restricted as to the amounts of dividends
it may pay. The Company may only pay dividends from positive retained earnings
(based on accounting principles generally accepted in Germany) as adjusted by
certain formulae. There were no amounts available for dividend payments at
December 31, 1995 and 1996, respectively.
(h) Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
F-15
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
amounts of assets and liabilities and contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period as well as the disclosure of such
amounts. Actual results could differ from those estimates and assumptions.
3. FORMATION
The current shareholders of the Company have entered into agreements to
exchange all of their interest in the Company for 900,000 Common Shares of ESG
Re Limited, a company which will be incorporated under the laws of Bermuda on
August 21, 1997. The exchange of shares (the "Formation") will occur on or
before December 2, 1997.
The Formation will result in the Company becoming a wholly-owned indirect
subsidiary of ESG Re Limited. For accounting purposes, the Formation will be
considered to be a recapitalization, since the majority shareholders of the
Company, including the principal shareholder, continue to be significant
shareholders in ESG Re Limited, key management of ESG Re Limited will be
substantially the same individuals holding such positions in the Company, and
the assets, revenues, net earnings and current value of the Company
significantly exceed those of ESG Re Limited, which will have no operating
activity prior to the Formation. Additionally, no other group of shareholders
will obtain control of ESG Re Limited through Direct Sales to investors or
through the Offerings to the public.
4. RECEIVABLES
Receivables represent management fee and related revenue, which are
primarily due from the reinsurers participating in the reinsurance pools. The
Company's receivables are collectible in various currencies. In selective
instances, the Company has entered into foreign currency contracts in order to
hedge the risk of fluctuations in exchange rates. Net foreign currency
realized gains and (losses), including results from foreign currency
contracts, are reflected in other income and amounted to ($33.1), ($128.7) and
$87.6, for the years ended December 31, 1994, 1995 and 1996, respectively. The
receivables are recorded net of $244.2 and $321.6 of advances from the pool
participants as of December 31, 1995 and 1996, respectively. As described in
Note 2 (a), receivables are discounted for any amounts expected to be
collected after the first twelve months of the underwriting contract. The
discount rate used by the Company was 6.1% for 1995 and 1996 which is an
approximation of U.S. treasury rates during these periods. This discount is
amortized into other income over a period of 24 months. Amounts included in
other income were $45.7, $105.7 and 113.7 for the years ended December 31,
1994, 1995 and 1996, respectively.
F-16
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
5. DEBT
The Company has outstanding debt as of December 31, 1995, and 1996, as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
<S> <C> <C>
Shareholder loan, due December 1997, payable in balloon
payment, interest at bank borrowing rate of 5.7% and 7.4%,
plus 1%, for 1996 and 1995, respectively.................. $767.40 $707.50
Shareholder loan, due December 1997, payable in balloon
payment, interest at bank borrowing rate of 5.7% and 7.4%,
plus 1%, for 1996 and 1995, respectively.................. 174.4 160.8
Shareholder loan, due December 1996, payable in balloon
payment, interest at bank borrowing of 5.7% and 7.4% plus
1% for 1996 and 1995 respectively......................... 139.5 --
Bank payable on demand borrowings, monthly adjustable
interest rate; 8%-8.5% during 1996 and 1995,
respectively.............................................. 691.7 925.0
Loan payable to bank due January 1997, interest rate 7.2%,
monthly installment of $8.6............................... 107.8 7.9
Loan payable to bank due March 1997, interest rate 7.7%,
monthly installment of $4.2............................... 60.3 11.5
------- -------
Total debt............................................... 1,941.1 1,812.7
======= =======
Current portion of debt.................................... 1,745.7 1,812.7
------- -------
Long-term portion of debt.................................. $ 195.4 $ --
======= =======
</TABLE>
The Company's debt is scheduled to be paid during 1997. No amounts are due
to be paid after 1997.
One of the shareholder loans was scheduled to mature in December 1996. The
loan was extended under the same terms until December 1997.
Included in interest expense was $118.5, $129.5 and $67.7 for the
shareholder loans for the years ended December 31, 1994, 1995 and 1996,
respectively.
As of December 31, 1996, the Company has available the ability to borrow an
additional $419.0 under its bank demand borrowing arrangements.
6. EMPLOYMENT CONTRACTS
The Company had entered into employment contracts with certain of its
employees. Amounts expensed under these contracts were $225.0, $243.7 and
$253.9 for the periods ended December 31, 1994, 1995 and 1996, respectively.
In addition, the Company also had entered into annual consulting contracts
with two individuals. Amounts expensed under these arrangements were $747.4,
$793.0 and $828.3 for the periods ended December 31, 1994, 1995 and 1996,
respectively.
Effective January 1, 1997, the Company entered into three employment
contracts, which included the two former consultants, which had total
commitments of $3,750.0. These contracts are to expire in 2001 and represent
approximately $750.0 of commitments per annum. These contracts also pay
annually to the employees a total of 12.5% of the annual profits. It is the
intention of the Company and management to replace these contracts with new
employment contracts effective as of the earlier of December 1, 1997 or upon
the closing of the initial public
F-17
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
offering of ESG Re Limited. Annual profit is calculated on the basis of net
income for the year, less losses carried forward from the preceding year, less
any earnings that must be retained as stipulated by law. The contracts
remunerate the employees for providing services to the Company. There are no
other specific rights and obligations of each party to the contract included
in the contracts. In addition, in August 1997 the Company also entered into an
employment contract with a new employee for a total minimum commitment of
$900.0 payable equally over three years (which includes a $50.0 minimum annual
bonus). The employee may also receive a discretionary bonus based on
performance to be determined by the board of directors. As part of that
agreement the Company has also agreed to open a new office in Canada which the
Company estimates may cost $420.0.
7. RELATED PARTIES
During 1996, the principal shareholder of the Company received payments from
the Company in consideration of a loan made to another shareholder to enable
such shareholder to purchase shares of the Company. In order to repay the
principal shareholder, amounts payable to the debtor in respect of reinsurance
brokerage services provided by the debtor are paid directly to the principal
shareholder. During 1996, the Company paid the principal shareholder $32.9.
During 1997 such loan was paid in full.
In connection with the Formation, certain shareholders of ESG Germany
participating in the Formation have agreed to indemnify ESG Germany for
certain contingent liabilities. The Company believes that the likelihood of
incurring a loss related to any of those contingent liabilities is remote.
8. UNDERWRITING MANAGEMENT SERVICES
As a part of its underwriting pool management services, the Company collects
premiums and pays claims on behalf of the pool participants. In addition to
fees received for the underwriting services, the Company also earns interest
income on funds it is authorized to hold in accordance with the underwriting
management agreement between the Company and the pool participants. The
Company is authorized to retain 25% of gross premiums as a claims fund held in
bank accounts having trustee status with any interest accruing to such balance
being credited to the Company quarterly. Interest income on these funds
amounted to $23.8, $45.6 and $73.5 for the years ended December 31, 1994, 1995
and 1996, respectively. All of the underwriting pool funds are invested in
short-term investments with original maturities of less than ninety days. The
total amount of funds held on behalf of the pools was $6,495.9 and $4,928.6 at
December 31, 1995 and 1996, respectively.
9. SIGNIFICANT CLIENTS
The percentages of the Company's management fees obtained from its three
most significant client relationships were 25.5%, 9.1% and 5.8% in 1994,
20.4%, 10.4% and 9.1% in 1995, and 20.0%, 6.8% and 5.8% in 1996.
F-18
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
10. TAXATION
The provision for income taxes consists of the German Federal corporate
income tax and solidarity surcharge, the German municipal income tax referred
to as the Trade tax and Foreign income taxes which includes all non-German
income taxes. The provision for income taxes consists of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ 22.4 $ 61.0
Foreign......................................... -- -- 56.3
Trade........................................... -- 52.9 38.8
------- ------- -------
Total Current................................. -- 75.3 156.1
------- ------- -------
Deferred:
Federal......................................... 40.2 203.5 (53.9)
Foreign......................................... (31.3) (42.9) 73.0
Trade........................................... 34.9 62.4 (20.0)
------- ------- -------
Total Deferred................................ 43.8 223.0 (0.9)
------- ------- -------
Total......................................... $ 43.8 $ 298.3 $ 155.2
======= ======= =======
</TABLE>
In 1995, the company incurred a significant deferred tax charge primarily as
a result of utilizing net operating loss carryforwards from earlier years
which had been recorded as a deferred tax asset as of December 31, 1994.
The net deferred tax asset (liability) recorded as of December 31, 1995, and
1996 represents the net temporary difference between the tax bases of assets
and liabilities and their amounts for financial reporting. The components of
the net deferred tax assets (liability) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1995 1996
<S> <C> <C>
Net operating loss carryforward.............................. $ 76.9 $178.3
Fee income................................................... 38.2 --
Investments.................................................. 193.9 53.6
Rent expense................................................. -- 31.8
Foreign currency............................................. -- 16.3
Other deferred tax assets.................................... 1.3 14.0
------ ------
Total deferred tax assets.................................. $310.3 $294.0
------ ------
Deferred tax liabilities
Fee income................................................. -- (22.1)
Investment income.......................................... (16.4) --
------ ------
Total deferred tax liabilities........................... (16.4) (22.1)
------ ------
Net deferred tax asset....................................... $293.9 $271.9
====== ======
</TABLE>
Realization of the deferred tax asset is dependent on generating sufficient
taxable income in the future. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will
be realized. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable
income are reduced. The Company has a tax loss carryforward
F-19
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
included in the calculation of the deferred tax assets as of December 31, 1996
of $262.3 available to offset future German taxable income. This tax loss
carryforward currently does not have an expiration date under German tax law.
Based on management's plan for the future operation of the Company, under
German tax law which recently changed as to the utilization of loss
carryforwards, management believes it is more likely than not that the
realization of the net deferred tax asset will not be affected by the
recapitalization.
The actual income tax expense attributable to income for the three years in
the period ended December 31, 1996, differed from the amount computed by
applying the combined effective rate of 48.375% (comprised of German Federal
Corporate Income tax rate (45%) and Solidarity Tax Surcharge (7.5%)) to income
before income taxes, as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
<S> <C> <C> <C>
Computed "expected tax expense": $ 18.4 $ 214.7 $ (3.6)
Tax effect of:
Trade taxes, net of federal corporation
income tax benefit......................... 18.0 59.6 9.6
Foreign taxes............................... 6.5 (9.2) 9.3
Taxable gain on Reorganization of Holding
Company...................................... -- -- 121.0
Non-deductible expenses....................... 5.7 9.8 6.9
Other......................................... (4.8) 23.4 12.0
------- -------- --------
Total..................................... $ 43.8 $ 298.3 $ 155.2
======= ======== ========
</TABLE>
11. COMMITMENTS & CONTINGENCIES
(a) Lease Commitments
The Company and its subsidiaries have various lease obligations. Rental
expenses are amortized on the straight-line basis over the term of the lease.
Total rental expense was approximately $167.8, $193.7 and $295.3 for the years
ended December 31, 1994, 1995 and 1996, respectively. Future minimum
commitments under lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1997.............................................................. $ 458.5
1998.............................................................. 401.2
1999.............................................................. 374.2
2000.............................................................. 359.5
2001.............................................................. 195.5
Thereafter........................................................ --
--------
Total........................................................... $1,788.9
========
</TABLE>
The Company has recorded a current liability of $38.6 as of December 31,
1996 for vacated office space at its former headquarters pursuant to an
agreement with the lessor.
(b) Pension obligations
Certain subsidiaries are obligated to make defined contributions to personal
pension plans for their employees. There was no outstanding liability for
pension contributions as of December 31, 1995 and 1996, respectively. Pension
contribution expense was $19.8, $24.5 and $20.0 for the years ended December
31, 1994, 1995 and 1996, respectively.
F-20
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. dollars in thousands, except share data)
12. FOREIGN CURRENCY DERIVATIVE FINANCIAL INSTRUMENTS
The Company records receivables for estimated management fees to be received
under noncancelable management contracts entered into with the reinsurers
participating in the reinsurance pools. The management fees to be received
under the various management agreements are denominated in different
currencies. The Company periodically enters into foreign currency put options
and forward exchange contracts to mitigate its exposure to fluctuations in
foreign currency exchange rates. Gains and losses arising from these contracts
are recorded currently in income, and offset gains or losses arising from the
receivable being hedged. Any discount or premium on foreign exchange contracts
are deferred and recognized in income over the life of the forward contract in
accordance with Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation."
The Company's forward exchange contracts and put options are subject to the
credit risk that counterparties to the agreement may be unable to fulfill
their obligations upon settlement of the contracts. To mitigate this risk,
management only enters into such agreements with reputable and financially
sound institutions.
13. FAIR VALUE INFORMATION
The carrying amount for Cash, Fees Receivable, Fiduciary Liabilities and
Debt approximate their fair market values. Fair values relating to foreign
currency contracts reflect the estimated amounts that the Company would
receive or pay to terminate the contracts at the reporting date based on
exchange rates as of December 31, 1995, and 1996, respectively. These
contracts related to the conversion of U.S. dollars into Deutsche Marks.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------
CONTRACT PRINCIPAL CARRYING ESTIMATED MATURITY
TYPE DATE AMOUNTS AMOUNT FAIR VALUE DATE
<S> <C> <C> <C> <C> <C>
Forward contract............ Dec 95 $900.0 -- $ (2.1) Jan 96
Put Option.................. Dec 95 300.0 -- (18.4) Mar 96
Put Option.................. Dec 95 200.0 -- (12.2) June 96
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
CONTRACT PRINCIPAL CARRYING ESTIMATED MATURITY
TYPE DATE AMOUNTS AMOUNT FAIR VALUE DATE
<S> <C> <C> <C> <C> <C>
Forward contract............ Dec 96 $244.0 -- $(11.7) Jan 97
</TABLE>
F-21
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
<TABLE>
<CAPTION>
AUDITED UNAUDITED UNAUDITED
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------ --------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 15.0 $ 45.0 $ 51.5
Fees receivable........................... 856.7 2,080.8 2,054.7
Other current assets...................... 248.2 231.4 85.2
--------- --------- ---------
Total current assets.................... 1,119.9 2,357.2 2,191.4
--------- --------- ---------
Fees receivable--non-current................ 922.7 712.4 592.1
Intangibles (net of accumulated amortization
of $205.5,
$175.2 and $196.3)......................... 62.5 80.8 27.3
Fixed assets (net of accumulated
depreciation of $104.3, $101.4 and
$112.9).................................... 117.3 119.3 112.2
Deferred taxes.............................. 271.9 240.5 201.3
Equity investments.......................... 24.4 22.4 29.3
--------- --------- ---------
Total assets............................ $ 2,518.7 $ 3,532.6 $ 3,153.6
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ($868.3, $978.1 and $764.8
due to related parties).................. $ 1,812.7 $ 1,731.5 $ 1,882.7
Accrued expenses.......................... 713.9 1,206.2 1,119.7
Liability for share transactions.......... 373.0 443.6 333.2
Accounts payable.......................... 107.9 112.8 51.1
--------- --------- ---------
Total current liabilities............... 3,007.5 3,494.1 3,386.7
--------- --------- ---------
Fiduciary liabilities....................... 4,928.6 5,539.6 6,581.0
Less Cash and cash equivalents held in a
fiduciary capacity......................... (4,928.6) (5,539.6) (6,581.0)
--------- --------- ---------
Total liabilities....................... 3,007.5 3,494.1 3,386.7
--------- --------- ---------
Commitments and contingencies............... -- -- --
Shareholders' equity:
Common stock (5DM par value, 100,000
shares authorized, 20,000, 18,800 and
20,000 issued and outstanding)........... 62.0 58.2 62.0
Additional paid-in capital................ 62.3 -- 62.3
Accumulated deficit income................ (608.7) (4.7) (410.9)
Foreign currency translation adjustments.... (4.4) (15.0) 53.5
--------- --------- ---------
Total shareholders' equity/(deficit).... (488.8) 38.5 (233.1)
--------- --------- ---------
Total liabilities and shareholders'
equity................................. $ 2,518.7 $ 3,532.6 $ 3,153.6
========= ========= =========
</TABLE>
See accompanying notes to the Unaudited Consolidated Financial Statements.
F-22
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
Fee revenues........................................ $3,138.3 $2,594.8
Other income........................................ 104.4 85.5
------------ ------------
Total revenues...................................... 3,242.7 2,680.3
------------ ------------
Operating expenses
Personnel costs..................................... 644.0 912.8
Consulting and related expenses (includes $272.8 and
$0 for related parties)............................ 396.1 132.1
Depreciation and amortization....................... 64.1 57.1
Other operating expenses............................ 935.1 980.2
------------ ------------
Total operating expenses............................ 2,039.3 2,082.2
------------ ------------
Interest expense (includes $23.8 and $16.3 for
related parties)................................... 76.8 57.1
------------ ------------
Total expenses...................................... 2,116.1 2,139.3
------------ ------------
Income before income taxes.......................... 1,126.6 541.0
------------ ------------
Provision for income taxes.......................... 685.3 343.1
------------ ------------
Net income.......................................... $ 441.3 $ 197.9
============ ============
</TABLE>
See accompanying notes to the Unaudited Consolidated Financial Statements.
F-23
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
UNAUDITED
-----------------
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 441.3 $ 197.9
Depreciation and amortization............................... 64.1 57.1
Increase in equity investment............................... (1.5) (4.9)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Fees receivable........................................... (856.6) (1,119.9)
Deferred taxes............................................ 38.1 44.1
Accrued expenses.......................................... 781.6 510.6
Other current assets...................................... (145.3) 144.6
Accounts payable.......................................... (94.9) (48.0)
------- --------
Net cash flows provided by (used in) operating activities... 226.8 (218.5)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets................................... (21.4) (32.0)
Purchases of intangible assets.............................. (87.4) --
------- --------
Net cash flows (used in) investing activities............... (108.8) (32.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of capital....................................... (65.9) --
Reorganization of holding company........................... 58.2 --
Net change in short-term debt............................... 85.4 278.8
Repayments of long-term borrowings.......................... (190.0) --
------- --------
Net cash flows provided by (used in) financing activities... (112.3) 278.8
Effect of exchange rate changes on cash..................... 6.1 8.2
Net change in cash.......................................... 11.8 36.5
Cash, at beginning of period................................ 33.2 15.0
------- --------
Cash, at end of period...................................... $ 45.0 $ 51.5
======= ========
</TABLE>
See accompanying notes to the Unaudited Consolidated Financial Statements.
F-24
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; U.S. dollars in thousands except share data)
1.
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. The Company's unaudited consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
In the opinion of management, the unaudited consolidated financial statements
reflect all adjustments, consisting only those of a normal and recurring
nature, necessary for a fair presentation of the results of operations and
financial condition. The interim results presented herein are not indicative
of full year results. These unaudited consolidated financial statements should
be read in conjunction with the audited financial statements and the notes
thereto as presented elsewhere in this prospectus.
2. ACCOUNTING POLICIES
The Company's unaudited significant accounting policies include the following:
(a) Revenue Recognition
Revenue is primarily comprised of underwriting management and related fees
and profit commissions based on the underwriting results of the reinsurance
pools, as well as commissions for facultative business placed with reinsurers
that do not participate in the pools. Management and related fees are recorded
based on the estimated gross premiums written in each underwriting year and
are recognized in revenue when the underwriting contract becomes effective.
The recognition of fee revenue as of the effective date of the contract is
based upon the fact that the Company has no future obligations under these
contracts except to provide ancillary administrative services. Management and
related fees, which generally are collected over a period up to 24 months, are
discounted for any amounts expected to be collected after the first twelve
months of the underwriting contract. Any adjustments to management and related
fees are made in the period in which ceding companies report information
requiring such changes. The Company is only entitled to receive its management
fees to the extent that gross written premiums are converted. Profit
commissions due from reinsurers are based upon the actual underwriting results
of each underwriting pool and are generally calculated and earned 12 to 24
months after the end of each underwriting year. Expenses for future
administrative services that the Company is obligated to provide are accrued
when the underwriting contract is established. Such accrued expenses were
$159.4 and $145.1 at June 30, 1996, and 1997, respectively.
(b) Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period as well as the disclosure of such amounts. Actual
results could differ from those estimates and assumptions.
3. FORMATION
The current shareholders of the Company have entered into agreements to
exchange all of their interest in the Company for 900,000 Common Shares of ESG
Re Limited, a company which will be incorporated under the laws of Bermuda on
August 21, 1997. The exchange of shares (the "Formation") will occur by the
earlier of December 1, 1997 or the date that common shares of ESG Re Limited
are offered to the public.
The Formation will result in the Company becoming a wholly-owned subsidiary
of ESG Re Limited. For accounting purposes, the Formation will be considered
to be a recapitalization, since the majority shareholders of the Company,
including the principal shareholder, will continue to be significant
shareholders in ESG Re
F-25
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(unaudited; U.S. dollars in thousands, except share data)
Limited, key management of ESG Re Limited will be substantially the same
individuals holding such positions in the Company, and the assets, revenues,
net earnings and current value of the Company will significantly exceed those
of ESG Re Limited, which will have no operating activity prior to the
Formation. Additionally, no other group of shareholders will obtain control of
ESG Re Limited through Direct Sales to investors or through the Offerings to
the public.
4. UNDERWRITING MANAGEMENT SERVICES
As a part of its underwriting pool management services, the Company collects
premiums and pays claims on behalf of the pool participants. In addition to
fees received for the underwriting services, the Company also earns interest
income on funds it is authorized to hold in accordance with the underwriting
management agreement between the Company and the pool participants. The
Company is authorized to retain 25% of gross premiums as a claims fund held in
bank accounts having trustee status with any interest accruing to such
balances being credited to the Company quarterly. Interest income on these
funds amounted to $27.2 and $15.1 for the periods ended June 30, 1996 and
1997, respectively. All of the underwriting pool funds are invested in short-
term investments with original maturities of less than ninety days. The total
amount of funds held on behalf of the pools was $5,539.6 and $6,581.0 at June
30, 1996 and 1997, respectively.
5. CAPITAL TRANSACTIONS
The Company principally operates through its wholly-owned subsidiary,
European Specialty Group GmbH (the "Agency") an underwriting management
company which specializes in personal accident, health, life and special risk
reinsurance. In 1995, the Company agreed to repurchase 6% of the registered
capital from a former employee, totaling $203.9. Payment of $65.9 was made
during the first six months of 1996.
Prior to 1996, the Company and its subsidiaries were owned by the Agency. To
simplify its capital structure and to provide additional capital, the
Company's shareholders executed a series of transactions which has resulted in
the Company owning 100% of the Agency and its subsidiaries (the
"Reorganization of Holding Company"). Because these cash transactions closed
over a period of time, shareholder's equity was reduced by $239.1 (which
include a cash settlement of $58.2) for those transactions closing in the six
month period ended June 30, 1996, and increased by $66.1 for those
transactions settling by the six month period ended December 31, 1996.
Transactions not closing by June 30, 1996 and June 30, 1997 resulted in a
liability for share transactions of $443.6 and $333.2, respectively. Certain
of these transactions were settled in July 1997 which resulted in an increase
of shareholder's equity by $440.4. All of these share transactions were
executed amongst the existing shareholders or other related parties.
6. INTERIM PERIOD RESULTS
As described in the accounting policy for the recognition of revenue above,
revenue is recognized when the underwriting contract becomes effective. A
significant majority of underwriting contracts that the Company writes become
effective on January 1 each year. Thus the majority of the revenue is
recognized in the first quarter of the year. As the estimated cost of the
administrative services required to be provided in respect to these contracts
is accrued when the contract becomes effective, the accrual will therefore be
greater at interim accounting periods than at the end of the year.
Given the nature of the Company's business cycle as described and its
accounting policies, interim financial statements should be read in
conjunction with the full year financial statements.
7. CURRENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("EPS")
which supersedes Accounting Principles Board Opinion No. 15 "Earnings per
Share" ("APB No. 15") and replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
F-26
<PAGE>
EUROPEAN SPECIALTY GROUP HOLDING AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(unaudited; U.S. dollars in thousands, except share data)
diluted EPS on the face of the income statement for all entities with complex
capital structures and provides guidance on other computational changes. SFAS
No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The Company intends to adopt this new standard for its annual statement for
the year ended December 31, 1997. The Company's capital structure did not
require it to report EPS for any periods prior to the year ended December 31,
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 130 will
require the Company to (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which will be effective for the
Company beginning January 1, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The Company has
not yet completed its analysis of the impact of SFAS No. 131.
F-27
<PAGE>
ESG
INTELLIGENT
REINSURANCE
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1997
PROSPECTUS
, 1997
ESG RE LIMITED LOGO
- --------------------------------------------------------------------------------
8,000,000
COMMON SHARES
- --------------------------------------------------------------------------------
All of the Common Shares, par value $1.00 per share (the "Common Shares"), of
ESG Re Limited (the "Company" or "ESG") offered hereby are being sold by the
Company. Of the 8,000,000 Common Shares offered hereby, Common Shares are
being offered for sale outside the United States and Canada by the
International Managers (the "International Offering") and Common Shares are
being offered for sale in the United States and Canada in a concurrent
offering by the U.S. Underwriters (the "U.S. Offering" and together with the
International Offering, the "Offerings"), subject to transfers between the
International Managers and the U.S. Underwriters (collectively, the
"Underwriters"). See "Underwriting." It is estimated that the initial public
offering price will be $20.00 per share. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
Certain affiliates of Head & Company L.L.C. (the "Head Group") and certain
other investors (together with the Head Group, the "Direct Purchasers") have
severally purchased for investment directly from the Company (i) an aggregate
of 2,673,799 Common Shares, (ii) Class A Warrants to purchase up to 1,148,087
Common Shares, and (iii), in the case of the Head Group, Class B Warrants to
purchase up to 1,148,087 Common Shares (if certain performance criteria are
satisfied), at an aggregate price equal to 2,673,799 multiplied by the
initial public offering price per Common Share less the underwriting
discounts and commissions (the "Direct Sales"). See "Direct Sales." The
closing of the Direct Sales occurred on December 3, 1997. The initial
exercise price for the Class A Warrants and the Class B Warrants is the
initial public offering price per Common Share, subject to a reduction of
$1.50 on September 1, 2001, for the Class B Warrants.
Prior to the Offerings, there has been no market for the Common Shares. The
Common Shares have been accepted for quotation on the Nasdaq National Market
in the United States subject to official notice of issuance under the symbol
"ESREF."
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
THE PUBLIC AND COMMISSIONS(1) THE COMPANY(2)
<S> <C> <C> <C>
Per Common Share $20.00 $1.30 $18.70
Total(3) $160,000,000 $10,400,000 $149,600,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the United States Securities Act
of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to an additional 1,200,000 shares at the Price to the Public per share
less Underwriting Discounts and Commissions, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to the Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $184,000,000, $11,960,000 and $172,040,000, respectively.
See "Underwriting." Including the Direct Sales, the total proceeds to
Company will be $199,600,000 or $222,040,000 if the over-allotment option
is exercised in full.
The Common Shares are being offered by the several Underwriters, when, as and
if delivered to and accepted by the Underwriters and subject to various
conditions. It is expected that the delivery of the Common Shares will be
made in New York, New York on or about , 1997, in New York, New York
against payment therefor in New York funds.
DEUTSCHE MORGAN GRENFELL INC. HAS SERVED AS ADVISOR TO THE COMPANY IN
CONNECTION WITH THIS TRANSACTION.
SEE "UNDERWRITING."
--------
JOINT GLOBAL COORDINATORS AND JOINT BOOK-RUNNERS
--------
DEUTSCHE MORGAN GRENFELL DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
-----------
DEUTSCHE MORGAN GRENFELL DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
CONNING & COMPANY STEPHENS INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and the NASD filing fee:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 55,758
NASD Fees...................................................... 18,900
Transfer Agent and Registrar Fees and Expenses................. 15,000
Printing and Engraving Expenses................................ 350,000
Legal Fees and Expenses........................................ 650,000
Accounting Fees and Expenses................................... 850,000
Blue Sky Fees and Expenses..................................... 50,000
Miscellaneous Expenses......................................... 10,342
----------
Total........................................................ $2,000,000
==========
</TABLE>
- ---------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 98 of the Companies Act 1981 of Bermuda (the "Act") provides
generally that a Bermudian company may indemnify its directors, officers and
auditors against any liability which by virtue of Bermudian law otherwise
would be imposed on them, except in cases where such liability arises from the
willful negligence, willful default, fraud or dishonesty of which such
director, officer or auditor may be guilty in relation to the company. Section
98 further provides that a Bermudian company may indemnify its directors,
officers and auditors against any liability incurred by them in defending any
proceedings, whether civil or criminal, in which judgment is awarded in their
favor or they are acquitted or in which they are acquitted or granted relief
by the Supreme Court of Bermuda in certain proceedings arising under Section
281 of the Act.
The Company has adopted provisions in its Memorandum of Association and Bye-
Laws that provide that the Company shall indemnify its officers and directors
to the maximum extent permitted under the Act. The Company also entered into
indemnification agreements with each of its directors and officers to provide
them with the maximum indemnification allowed under its Memorandum of
Association, Bye-Laws and the Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company was incorporated in August 1997 under the laws of Bermuda. On
August 21, 1997, the Company issued 6,000 of its Ordinary Shares to ESG
Partners (Bermuda) L.P. (then known as Head Insurance Investors IX (Bermuda)
L.P.), and 3,000 each to Gerhard Jurk and Wolfgang M. Wand. The General
Partner of ESG Partners (Bermuda) L.P. is an affiliate of Head Company. Such
securities were sold in a private placement outside the United States and
therefore are exempt from registration under the Securities Act pursuant to
Section 4(2) thereof. The aggregate offering price for this transaction was
$12,000.
On December 3, 1997, the Company issued 2,673,799 Common Shares, and, after
giving effect to the Offerings, Class A Warrants to purchase 1,148,087 Common
Shares, and Class B Warrants to purchase 1,148,087 Common Shares (if certain
performance criteria are satisfied) for an aggregate purchase price of
$50 million. Such securities were sold in a private placement and therefore
are exempt from registration under the Securities Act pursuant to Section 4(2)
thereof.
On December 2, 1997, the Company issued 900,000 Common Shares in exchange
for all of the outstanding capital stock of European Specialty Group (United
Kingdom) Limited ("ESG UK"). See "Summary--Formation and Direct Sales." Such
securities were sold in a private placement outside the United States and
therefore are exempt from registration under the Securities Act pursuant to
Regulation S under the Securities Act. The Company issued 900,000 Common
Shares in exchange for all of the outstanding capital stock of ESG UK. At the
time of this exchange, European Specialty Group Holding AG was a wholly owned
subsidiary of ESG UK.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<C> <S>
1.1 --Form of Underwriting Agreement
2.1 --Share Exchange Agreement between ESG Re Limited and European Specialty
Group (United Kingdom) Limited, dated as of November 13, 1997.
2.2 --Share Exchange Agreement between the shareholders of European
Specialty Group Holding AG and European Specialty Group (United
Kingdom) Limited, dated as of November 13, 1997.
3.1 --Memorandum of Association
3.2 --Bye-Laws
4.1 --Specimen Common Share certificate
4.2 --Form of Class A Warrant
4.3 --Form of Class B Warrant
5.1+ --Opinion of Appleby, Spurling & Kempe as to the legality of the Common
Shares
8.1 --Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to certain tax
matters
8.2 --Opinion of Deloitte & Touche GmbH as to certain tax matters
8.3 --Opinion of Deloitte & Touche, United Kingdom as to certain tax matters
8.4 --Opinion of Deloitte & Touche, Canada as to certain tax matters
8.5+ --Opinion of Appleby, Spurling & Kempe as to certain tax matters
8.6+ --Opinion of Matheson Ormsby Prentice as to certain tax matters
10.1 --Form of Subscription Agreement, between ESG Re Limited and certain
Direct Purchasers, dated as of September 30, 1997
10.2 --Employment Agreement between European Specialty Group (United Kingdom)
Limited, ESG Re Limited and Wolfgang M. Wand, dated as of December 1,
1997
10.3 --Employment Agreement between ESG Re Limited and Steven H. Debrovner,
dated as of December 1, 1997
10.4 --Employment Agreement between European Specialty Group Holding AG and
Gerhard Jurk, dated as of December 1, 1997
10.5 --Employment Agreement between European Specialty (North America)
Limited and Renate M. Nellich, dated as of December 1, 1997
10.6 --Investment Advisory Agreement, between ESG Re Limited and Head Asset
Management L.L.C., dated as of December 1, 1997
10.7 --Investment Advisory Agreement, between ES Ruckversicherungs AG and
Head Asset Management L.L.C., dated as of December 1, 1997
10.8 --Form of Registration Rights Agreement between ESG Re Limited and the
Direct Purchasers named therein
22.1 --Subsidiaries of the Registrant
23.1 --Consent of Deloitte & Touche GmbH
23.2 --Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in
Exhibit 8.1)
23.3 --Consent of Deloitte & Touche GmbH (included in Exhibit 8.2)
23.4 --Consent of Deloitte & Touche, United Kingdom (included in Exhibit 8.3)
23.5 --Consent of Deloitte & Touche, Canada (included in Exhibit 8.4)
23.6+ --Consent of Appleby, Spurling & Kempe (included in Exhibit 5.1)
23.7 --Consent of Deloitte & Touche, Hamilton, Bermuda
23.8+ --Consent of Matheson Ormsby Prentice (included in Exhibit 8.6)
23.9 --Consent of David L. Newkirk
23.10 --Consent of William J. Poutsiaka
23.11 --Consent of Edward A. Tilly
24.1* --Power of Attorney
</TABLE>
- ---------------------
* Previously filed.
+ To be filed by amendment
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to its Memorandum
of Association, Bye-Laws, the Underwriting Agreement 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 Securities 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 the director,
officers 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 Securities Act and will be governed by the final
adjudication of such issue.
(3) The Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of the Registration Statement as of the time it was declared
effective.
(b) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
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-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT CERTIFIES
THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS
FOR FILING ON FORM F-1 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF NEW YORK, STATE OF NEW YORK, ON DECEMBER 9, 1997.
ESG Re Limited
/s/ Gerhard Jurk
By: __________________________________
NAME: GERHARD JURK
TITLE: CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
Chief Executive
* Officer, Director
- ------------------------------------ (Principal
WOLFGANG M. WAND Executive Officer)
Chief Operating
* Officer
- ------------------------------------
STEVEN H. DEBROVNER
/s/ Gerhard Jurk Chief Financial
- ------------------------------------ Officer, Director December 9,
GERHARD JURK (Principal 1997
Financial and
Accounting
Officer)
/s/ John C Head III Chairman of the
- ------------------------------------ Board December 9,
JOHN C HEAD III 1997
/s/ John C Head III Authorized
- ------------------------------------ Representative in December 9,
JOHN C HEAD III the United States 1997
/s/ John C Head III Attorney-in-Fact December 9,
1997
*By: __________________________
JOHN C HEAD III
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1 --Form of Underwriting Agreement
2.1 --Share Exchange Agreement between ESG Re Limited and European
Specialty Group (United Kingdom) Limited, dated as of November 13,
1997.
2.2 --Share Exchange Agreement between the shareholders of European
Specialty Group Holding AG and European Specialty Group (United
Kingdom) Limited, dated as of November 13, 1997.
3.1 --Memorandum of Association
3.2 --Bye-Laws
4.1 --Specimen Common Share certificate
4.2 --Form of Class A Warrant
4.3 --Form of Class B Warrant
5.1+ --Opinion of Appleby, Spurling & Kempe as to the legality of the
Common Shares
8.1 --Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to certain
tax matters
8.2 --Opinion of Deloitte & Touche GmbH as to certain tax matters
8.3 --Opinion of Deloitte & Touche, United Kingdom as to certain tax
matters
8.4 --Opinion of Deloitte & Touche, Canada as to certain tax matters
8.5+ --Opinion of Appleby, Spurling & Kempe as to certain tax matters
8.6+ --Opinion of Matheson Ormsby Prentice as to certain tax matters
10.1 --Form of Subscription Agreement, between ESG Re Limited and certain
Direct Purchasers, dated as of September 30, 1997
10.2 --Employment Agreement between European Specialty Group (United
Kingdom) Limited, ESG Re Limited and Wolfgang M. Wand, dated as of
December 1, 1997
10.3 --Employment Agreement between ESG Re Limited and Steven H. Debrovner,
dated as of December 1, 1997
10.4 --Employment Agreement between European Specialty Group Holding AG and
Gerhard Jurk, dated as of December 1, 1997
10.5 --Employment Agreement between European Specialty (North America)
Limited and Renate M. Nellich, dated as of December 1, 1997
10.6 --Investment Advisory Agreement, between ESG Re Limited and Head Asset
Management L.L.C., dated as of December 1, 1997
10.7 --Investment Advisory Agreement, between ES Ruckversicherungs AG and
Head Asset Management L.L.C., dated as of December 1, 1997
10.8 --Form of Registration Rights Agreement between ESG Re Limited and the
Direct Purchasers named therein
22.1 --Subsidiaries of the Registrant
23.1 --Consent of Deloitte & Touche GmbH
23.2 --Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in
Exhibit 8.1)
23.3 --Consent of Deloitte & Touche GmbH (included in Exhibit 8.2)
23.4 --Consent of Deloitte & Touche, United Kingdom (included in Exhibit
8.3)
23.5 --Consent of Deloitte & Touche, Canada (included in Exhibit 8.4)
23.6+ --Consent of Appleby, Spurling & Kempe (included in Exhibit 5.1)
23.7 --Consent of Deloitte & Touche, Hamilton, Bermuda
23.8+ --Consent of Matheson Ormsby Prentice (included in Exhibit 8.6)
23.9 --Consent of David L. Newkirk
23.10 --Consent of William J. Poutsiaka
23.11 --Consent of Edward A. Tilly
24.1* --Power of Attorney
</TABLE>
- ---------------------
* Previously filed.
+ To be filed by amendment.
<PAGE>
Draft -- December 4, 1997
EXHIBIT 1.1
8,000,000 Shares
ESG RE LIMITED
Common Shares
UNDERWRITING AGREEMENT
----------------------
__________, 1997
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEUTSCHE MORGAN GRENFELL INC.
CONNING & COMPANY
STEPHENS INC.
As representatives of the several U.S.
Underwriters named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
MORGAN GRENFELL & CO. LIMITED
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
CONNING & COMPANY
STEPHENS INC.
As representatives of the several International
Managers named in Schedule II hereto
c/o Morgan Grenfell & Co. Limited
6 Bishopsgate
London EC2N 4DA, England
Dear Sirs:
ESG Re Limited, a Bermuda corporation (the "Company"), proposes to
issue and sell to the several Underwriters (as defined below) 8,000,000 shares
of its Common Shares, par value $1.00 per share ("Common Shares") (the "Firm
Shares"). It is understood that, subject to the conditions hereinafter stated,
__________ Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. Underwriters and International Managers of even date
herewith), and _________ Firm Shares (the "International Shares") will be sold
to the several International Managers named in Schedule II hereto (the
"International Managers") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United
<PAGE>
2
States and Canadian Persons. Donaldson, Lufkin & Jenrette Securities
Corporation, Deutsche Morgan Grenfell Inc., Conning & Company and Stephens Inc.
shall act as representatives (the "U.S. Representatives") of the several U.S.
Underwriters, and Morgan Grenfell & Co. Limited, Donaldson Lufkin & Jenrette
International, Conning & Company and Stephens Inc. shall act as representatives
(the "International Representatives") of the several International Managers. The
U.S. Underwriters and the International Managers are hereinafter collectively
referred to as the "Underwriters".
The Company also proposes to issue and sell to the several
Underwriters not more than an additional 1,200,000 shares of its Common Shares
(the "Additional Shares"), if requested by the Underwriters as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares".
Section 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form F-1, including a
prospectus, relating to the Shares. The registration statement contains two
prospectuses to be used in connection with the offering and sale of the Shares:
the U.S. prospectus, to be used in connection with the offering and sale of
Shares in the United States and Canada to United States and Canadian Persons,
and the international prospectus, to be used in connection with the offering and
sale of Shares outside the United States and Canada to persons other than United
States and Canadian Persons. The international prospectus is identical to the
U.S. prospectus except for the outside front and back cover pages. The
registration statement, as amended at the time it became effective, including
the information (if any) deemed to be part of the registration statement at the
time of effectiveness pursuant to Rule 430A under the Act, is hereinafter
referred to as the "Registration Statement"; and the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "Prospectus". If the
Company has filed or is required pursuant to the terms hereof to file a
registration statement pursuant to Rule 462(b) under the Act registering
additional shares of Common Stock (a "Rule 462(b) Registration Statement"),
then, unless otherwise specified, any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462(b) Registration Statement.
The Company has also entered into Subscription Agreements, each dated
November 13, 1997 (the "Institutional Investor Subscription Agreements"), with
<PAGE>
3
certain institutional investors (the "Institutional Investors"), pursuant to
which the Institutional Investors purchased an aggregate of 2,098,932 Common
Shares and Class A Warrants to purchase an aggregate of ______ Common Shares,
and Subscription Agreements, each dated November 13, 1997 (the "Sponsor
Subscription Agreements", and together with the Institutional Investor
Subscription Agreements, the "Subscription Agreements"), with Head & Co. L.L.C.
and certain of its affiliates (collectively, the "Sponsors," and together with
the Institutional Investors, the "Initial Investors"), pursuant to which the
Sponsors purchased an aggregate of 574,867 Common Shares, Class A Warrants to
purchase an aggregate of _______ Common Shares, and Class B Warrants to purchase
up to 1,148,087 Common Shares, in each case on the Closing Date (as hereinafter
defined). The Common Shares purchased by the Initial Investors are hereinafter
collectively referred to as the "Initial Investors Shares" and the Class A
Warrants and Class B Warrants purchased by the Initial Investors are hereinafter
collectively referred to as the "Warrants."
Each of the existing shareholders (the "Existing Shareholders") of
European Specialty Group Holding AG ("ESG Germany") have entered into agreements
(the "Formation Agreements"), pursuant to which the Existing Shareholders
exchanged all of their interests in ESG Germany for an aggregate of 900,000
Common Shares (the "Formation Shares") prior to the Closing Date (the
"Formation").
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $20.00 (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I and II hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 1,200,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. The U.S.
Representatives shall give any such notice on behalf of the Underwriters and the
International Representative shall give any such notice on behalf of the
International
<PAGE>
4
Managers, and such notices shall specify the aggregate number of Additional
Shares to be purchased pursuant to such exercise and the date for payment and
delivery thereof, which date shall be a business day (i) no earlier than two
business days after such notice has been given (and, in any event, no earlier
than the Closing Date (as hereinafter defined)) and (ii) no later than ten
business days after such notice has been given. If any Additional Shares are to
be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Company the number of Additional Shares (subject to such adjustments to
eliminate fractional shares as the U.S. Representatives and the International
Representatives may determine) which bears the same proportion to the total
number of Additional Shares to be purchased from the Company as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I or II
bears to the total number of Firm Shares.
The Company hereby agrees not to (i) offer, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any Common Shares of or any securities
convertible into or exercisable or exchangeable for Common Shares or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Shares
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Shares, or such other securities, in
cash or otherwise), except (a) to the Underwriters pursuant to this Agreement or
(b) to the Initial Investors pursuant to the Subscription Agreements or upon the
exercise of any Initial Investor's Warrants, for a period of one year after the
date of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may issue Directors Shares (as defined in the Prospectus)
under the Company's 1997 Non-Employee Directors' Stock Plan on the terms and
conditions specified in the Prospectus and (ii) the Company may grant options to
purchase no more than 2,000,000 Common Shares to employees of the Company or its
subsidiaries (or may issue Common Shares upon the exercise thereof) under the
Company's 1997 Employee Stock Option Plan. The Company also agrees not to file
any registration statement with respect to any Common Shares or any securities
convertible into or exercisable or exchangeable for Common Shares, other than a
Registration Statement on Form S-8 for securities issued under the Company's
Non-Employee Directors' Stock Plan and the Company's 1997 Employee Stock Option
Plan, for a period of one year after the date of the Prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
The Company shall, prior to or concurrently with the execution of this
Agreement, deliver "lock-up" letters, in form and
<PAGE>
5
substance satisfactory to you, signed by the Chief Executive Officer and Chief
Operating Officer of the Company, the Initial Investors and the Existing
Shareholders.
Section 3. Terms of Public Offering. The Company is advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
Section 4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 9:00 A.M., New York City time, on
__________ , 1997 (the "Closing Date") at such place as you shall designate. The
Closing Date and the location of delivery of and payment for the Firm Shares may
be varied by agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at such place as the U.S.
Representatives shall designate at 9:00 A.M., New York City time, on the date
specified in the applicable exercise notice given by the U.S. Representatives
and the International Representative pursuant to Section 2 (an "Option Closing
Date"). Any such Option Closing Date and the location of delivery of and payment
for such Additional Shares may be varied by agreement among the U.S.
Representatives, the International Representatives and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Shares shall be delivered to you
on the Closing Date or the applicable Option Closing Date, as the case may be,
with any transfer taxes thereon duly paid by the Company, for the respective
accounts of the several Underwriters, against payment to the Company of the
Purchase Price therefor by wire transfer of Federal or other funds immediately
available in New York City.
Section 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, of any request by the Commission for amendments to the
Registration Statement
<PAGE>
6
or amendments or supplements to the Prospectus or for additional information, of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of the Shares
for offering or sale in any jurisdiction, or the initiation of any proceeding
for such purposes, when any amendment to the Registration Statement becomes
effective, if the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, when the Rule 462(b)
Registration Statement has become effective and of the happening of any event
during the period referred to in Section 5(d) below which makes any statement of
a material fact made in the Registration Statement or the Prospectus untrue or
which requires any additions to or changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading. If at any
time the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) To furnish to you five signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or supplement
to the Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business
day after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each
<PAGE>
7
Underwriter and any dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or dealer may
reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws or the insurance
securities laws or regulations of such jurisdictions as you may request, to
continue such registration or qualification in effect so long as required for
distribution of the Shares and to file such consents to service of process or
other documents as may be necessary in order to effect such registration or
qualification; provided, however, that the Company shall not be required in
connection therewith to qualify as a foreign corporation in any jurisdiction in
which it is not now so qualified or to take any action that would subject it to
general consent to service of process or taxation other than as to matters and
transactions relating to the Prospectus, the Registration Statement, any
preliminary prospectus or the offering or sale of the Shares, in any
jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its shareholders as soon
as practicable an earnings statement covering the twelve-month period ending
December 31, 1998 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this
Agreement, to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Shares or furnished to
or filed with the Commission or any
<PAGE>
8
national securities exchange on which any class of securities of the Company is
listed and such other publicly available information concerning the Company and
its subsidiaries as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: the fees, disbursements and expenses of the Company's counsel and the
Company's accountants in connection with the registration and delivery of the
Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states or the insurance securities
laws or regulations of other regulating authorities or bodies and all costs of
printing or producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including the filing fees and fees and disbursements of
counsel for the Underwriters in connection with such registration or
qualification and memoranda relating thereto), (v) the filing fees and
disbursements of counsel for the Underwriters in connection with the review and
clearance of the offering of the Shares by the National Association of
Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company hereunder for which provision is not otherwise
made in this Section.
(j) To apply the net proceeds from the sale of the Shares, the
Initial Investors Shares and the Warrants to be sold hereunder and under the
Subscription Agreements substantially in accordance with the description set
forth in the Prospectus.
<PAGE>
9
(k) To use its best efforts to list for quotation the Shares on
the Nasdaq National Market and to maintain the listing of the Shares on the
Nasdaq National Market, the New York Stock Exchange or the American Stock
Exchange, for a period of three years after the date of this Agreement.
(l) To use its best efforts to do and perform all things required
or necessary to be done and performed under this Agreement by the Company prior
to the Closing Date or any Option Closing Date, as the case may be, and to
satisfy all conditions precedent to the delivery of the Shares.
(m) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, to file a Rule
462(b) Registration Statement with the Commission registering the Shares not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the
date of this Agreement and to pay to the Commission the filing fee for such Rule
462(b) Registration Statement at the time of the filing thereof or to give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
(n) For at least two years after the Closing Date, to (i) file
annual reports, quarterly reports and reports with respect to specified events
required of a U.S. domestic private issuer on Forms 10-K, 10-Q and 8K and (ii)
subject to certain exceptions, comply with the proxy rules under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including the rules
prescribing the content of the annual reports to shareholders. The audited
financial statements contained in such annual reports and unaudited quarterly
financial information contained in such quarterly reports shall be prepared in
accordance with generally accepted accounting principles in the United States
("U.S. GAAP").
Section 6. Representations and Warranties of the Company. The
Company represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
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10
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, the Registration Statement (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act;
if the Company is required to file a Rule 462(b) Registration Statement after
the effectiveness of this Agreement, such Rule 462(b) Registration Statement and
any amendments thereto, when they become effective (A) will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act; and the Prospectus does
not contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of
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11
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens granted or
issued by the Company or any of its subsidiaries relating to or entitling any
person to purchase or otherwise to acquire any shares of the capital stock of
the Company or any of its subsidiaries, except as otherwise disclosed in the
Registration Statement.
(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; the Initial Investors Shares
and the Formation Shares have been duly authorized and are readily issued, fully
paid and non-assessable; the Shares have been duly authorized and, when issued
and delivered to the Underwriters, against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, the issuance
of such Shares, Initial Investors Shares and Formation Shares are not subject to
any preemptive or similar rights. The Warrants have been duly authorized and are
validly issued, fully paid and nonassessable and free of any preemptive or
similar rights; the maximum number of Common Shares issuable upon exercise of
the Warrants has been duly authorized and reserved for issuance upon exercise
thereof and, when issued and delivered upon exercise in accordance with the
terms of the Warrants, such Common Shares will be validly issued, fully paid and
nonassessable and free of any preemptive or similar rights. There are no
outstanding rights (including, without limitation, preemptive rights), warrants
or options to acquire, or instruments convertible into or exchangeable for, any
shares of capital stock or other equity interest in the Company or its
subsidiaries, or any contract, kind relating to the issuance of any capital
stock of the Company or its subsidiaries, any such convertible or exchangeable
securities or any such rights, warrants or options, except for the Warrants and
options granted under the Directors Plan and the Stock Option Plan as described
in the Prospectus. The Initial Investors have purchased the Initial Investor
Shares and the Warrants in the amounts and in the terms set forth in the
Prospectus, and the formation has occurred.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and, except for directors' qualifying shares and
as set forth in Exhibit A hereto (which subsidiaries, considered in the
aggregate, do not constitute a "significant
<PAGE>
12
subsidiary" as defined in Rule 1-02 of Regulation S-X, are owned by the Company,
directly or indirectly through one or more subsidiaries, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) The issuance, sale and delivery of the Initial Investors Shares,
the Formation Shares and the Warrants are exempt from the registration
requirements of the Act.
(j) The forms of certificate for the Shares, the Initial Investor
Shares and the Formation Shares conform to the requirements of The Companies Act
1981 (Bermuda).
(k) There are no currency exchange control laws or withholding taxes
of Bermuda or elsewhere that would be applicable to the payment of dividends (i)
on the Shares by the Company or (ii) by the subsidiaries of the Company to the
Company, except as set forth in the Prospectus.
(l) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
(m) The Company has full power and authority to execute and perform
its obligations under this Agreement, the Subscription Agreements and the
Formation Agreements. The execution and delivery of this Agreement, the
Subscription Agreements and the Formation Agreements have been duly authorized
by all necessary corporate action of the Company. This Agreement, the
Subscription Agreements and the Formation Agreements have been duly executed and
delivered by the Company. The Subscription Agreements and the Formation
Agreements, when duly executed and delivered by the other parties thereto, will
be the valid and binding agreements of the Company, enforceable against the
Company in accordance with their respective terms.
(n) The execution, delivery and performance by the Company of, the
compliance by the Company with all the provisions of and the consummation of the
transactions contemplated by this Agreement, the Subscription Agreements and the
Formation Agreements will not (i) require any consent, approval, authorization
or other
<PAGE>
13
order of, or qualification with, any court or governmental body or agency
(except (x) as described in the Prospectus, which have been or will have been
obtained prior to the Closing Date, and (y) such as may be required under the
securities or Blue Sky laws of the various states or the insurance or securities
laws or regulations of other regulating authorities or bodies relating to the
issuance and sale of the Shares), (ii) conflict with or constitute a breach of
any of the terms or provisions of, or a default under, the charter or by-laws of
the Company or any of its subsidiaries or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the Company
and its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
their respective property is bound, (iii) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any court
or any governmental body or agency having jurisdiction over the Company, any of
its subsidiaries or their respective property or (iv) result in the suspension,
termination or revocation of any Authorization (as defined below) of the Company
or any of its subsidiaries or any other impairment of the rights of the holder
of any such Authorization.
(o) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is or could be a
party or to which any of their respective property is or could be subject that
are required to be described in the Registration Statement or the Prospectus and
are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(p) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
and regulations promulgated thereunder, in each case that is applicable to the
Company or such subsidiary, except for such violations which, singly or in the
aggregate, would not have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company and its subsidiaries,
taken as a whole.
(q) The Company and each of its subsidiaries have good and marketable
title in fee simple to all items of real property and marketable title to all
personal property owned by each of them, in each case free and clear of any
security interests, liens, encumbrances,
<PAGE>
14
equities, claims and other defects, except such as do not have a material
adverse effect on the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company or such subsidiary,
and any real property and buildings held under lease by the Company or any such
subsidiary are held under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made or
proposed to be made of such property and buildings by the Company or such
subsidiary, in each case except as described in or contemplated by the
Prospectus.
(r) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent applications, trademarks,
service marks, trade names, licenses, know-how, copyrights, trade secrets and
proprietary or other confidential information necessary to operate the business
now operated by them, and neither the Company nor any such subsidiary has
received any notice of infringement of or conflict with asserted rights of any
third party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole.
(s) European Specialty Reinsurance (Bermuda) Ltd. ("ES Bermuda") is
in compliance with the requirements of the Bermuda Insurance Act 1978 and any
applicable rules and regulations thereunder and has filed all reports,
documents, or other information required to be filed thereunder, except where
the failure to comply or file would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole. European Specialty Ruckversicherungs AG
("ES Germany") is in compliance with the requirements of the German Insurance
Supervisory Law and any applicable rules and regulations thereunder and has
filed all reports, documents, or other information required to be filed
thereunder, except where the failure to comply or file would not have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its sub sidiaries, taken as a whole. European
Specialty Reinsurance (Ireland) Limited ("ES Ireland") is in compliance with the
requirements of the Insurance Act of 1989 and any applicable rules and
regulations thereunder and has filed all reports, documents, or other
information required to be filed thereunder, except where the failure to comply
or file would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each of the Company and its subsidiaries is in
compliance with all other insurance laws and regulations of the jurisdictions
which are applicable to it, except where the failure to comply would not
<PAGE>
15
have a material adverse effect on or constitute a materially adverse change in,
or constitute a development involving a prospective materially adverse effect
on, the business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole; and none of the Company or its
subsidiaries has received any notification from any insurance authority,
commission or other insurance regulatory body in Bermuda, Ireland, Germany, the
United Kingdom or elsewhere to the effect that the Company or its subsidiaries
is not in compliance with any insurance law or regulation.
(t) ES Bermuda is duly registered as an insurer and is subject to
regulation and supervision in Bermuda. ES Germany is duly registered as an
insurer and in subject to regulation and supervision in Germany. ES Ireland is
duly registered as an insurer and is subject to regulation and supervision in
Ireland. Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, all Authorizations of
all applicable insurance regulatory agencies or bodies and all Authorizations
under any applicable Environmental Laws, as are necessary to own, lease, license
and operate its respective properties and to conduct its business, except where
the failure to have any such Authorization or to make any such filing or notice
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole. Each such Authorization is valid and in
full force and effect and each of the Company and its subsidiaries is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto and each of the Company and its subsidiaries has fulfilled and
performed all of the obligations with respect to such Authorizations (including,
without limitation, having made all required declarations and filings with all
insurance regulatory authorities, commissions, governmental authorities, all
self-regulatory organizations and all courts and other tribunals); and no event
has occurred (including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of time or
both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would result
in any other impairment of the rights of the holder of any such Authorization;
and, except as described in the Prospectus, such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any
<PAGE>
16
such restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole. Neither the Company nor
any of its subsidiaries has received any notification from any insurance
authority, commission or other insurance regulatory body or any other
governmental authority in Bermuda, Ireland, the United Kingdom, Germany or
elsewhere to the effect that any additional consent, authorization, approval,
order, license, certificate or permit from such authority, commission or body is
needed to be obtained by any of the Company or any of its subsidiaries or that
such authority, commission or body is considering limiting, suspending or
revoking any such consent, authorization, approval, order, license, certificate
or permit except, in each case, where the failure to possess any such item or
additional item, as the case may be, would not have a material adverse effect on
the business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.
(u) There are no costs or liabilities associated with any
Environmental Law applicable to the Company and its subsidiaries (including,
without limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(v) Deloitte & Touche LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act, and Deloitte
& Touche, Bermuda, are independent public accountants with respect to the
Company as required by the Act.
(w) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and its subsidiaries on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
U.S. generally accepted accounting principles ("GAAP") consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and
<PAGE>
17
the Prospectus (and any amendment or supplement thereto) are, in all material
respects, accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(y) No subsidiary of the Company is currently prohibited,
directly or indirectly, by an insurance regulatory agency or body or otherwise,
from paying any dividends to the Company, making any other distribution on such
subsidiary's capital stock, repaying to the Company and loans or advances to
such subsidiary from the Company or transferring any of such subsidiary's
property or assets to the Company or any other subsidiary of the Company, except
as described in the Prospectus.
(z) No labor dispute with the employees of the Company or any of
its subsidiaries exists or is threatened or imminent that could have a
materially adverse effect on business, prospects, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole.
(aa) No relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries on the one hand, and the directors,
officers, affiliates or shareholders of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(bb) All material tax returns required to be filed by the Company
and each of its subsidiaries in any jurisdiction have been filed, other than
those filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
<PAGE>
18
(cc) The Company is not and, after giving effect to the offering
and sale of the Shares, the Initial Investors Shares, the Formation Shares and
the Warrants and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(dd) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(ee) The Company has not paid or agreed to pay any person any
compensation for soliciting another to purchase any Common Shares (except as
contemplated by this Agreement or disclosed in the Prospectus).
(ff) Since the respective dates as of which information is given
in the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(gg) No receiver or liquidator (or similar person) has been
appointed in respect of the Company or any subsidiary of the Company or in
respect of any part of the assets of the Company or any subsidiary of the
Company; no resolution, order of any court, regulatory body, governmental body
or otherwise, or petition or application for an order, has been passed, made or
presented for the winding up of the Company or any subsidiary of the Company or
for the protection of the Company or any such subsidiary from its creditors; and
the Company has not, and no subsidiary of the Company has, stopped or suspended
payments of its debts, become unable to pay its debts or otherwise become
insolvent.
<PAGE>
19
(hh) None of the Underwriters or any subsequent purchasers of the
Shares (other than purchasers resident in Bermuda for Bermuda exchange control
purposes) will be subject to any stamp duty, excise or similar tax imposed in
Bermuda in connection with the offering, sale or purchase of the Shares.
(ii) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
Section 7. Indemnification. (a) The Company agrees to indemnify
and hold harmless each Underwriter, its directors, its officers and each person,
if any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, liabilities and judgments (including, without limitation, any
reasonable legal or other expenses incurred in connection with investigating or
defending any matter, including any action, that could give rise to any such
losses, claims, damages, liabilities or judgments) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus, or caused by 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,
except (i) insofar as such losses, claims, damages, liabilities or judgments are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter furnished in writing
to the Company by such Underwriter through you expressly for use therein and
(ii) with respect to any preliminary prospectus to the extent that any such
loss, claim, damage, liability or judgment of such Underwriter results solely
from the fact that such Underwriter sold Shares to a person as to whom the
Company shall establish that there was not sent by commercially reasonable
means, at or prior to the written confirmation of such sale, a copy of the
Prospectus in any case where such delivery is required by the Act, if the
Company has previously furnished copies thereof in sufficient quantity to such
Underwriter and the loss, claim, damage, liability or judgment of such
Underwriter results from an untrue statement or omission of a material fact
contained in the preliminary prospectus that was corrected in the Prospectus.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
to the same extent as the foregoing indemnity
<PAGE>
20
from the Company to such Underwriter but only with reference to information
relating to such Underwriter furnished in writing to the Company by such
Underwriter through you expressly for use in the Registration Statement (or any
amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 7(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that the counsel selected by the indemnifying party has
a conflicting interest because there may be one or more legal defenses available
to the indemnified party which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all indemnified parties
and all such fees and expenses shall be reimbursed as they are incurred. Such
firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation, in the case of parties indemnified pursuant to Section 7(a), and by
the Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason
<PAGE>
21
of any settlement of any action (i) effected with its written consent or (ii)
effected without its written consent if the settlement is entered into more than
thirty business days after the indemnifying party shall have received a request
from the indemnified party for reimbursement for the fees and expenses of
counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request, except to the
extent that the amount of such fees and expenses is being contested in good
faith. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this
Section 7 is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material
<PAGE>
22
fact relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any reasonable legal or other expenses incurred by such indemnified
party in connection with investigating or defending any matter, including any
action, that could have given rise to such losses, claims, damages, liabilities
or judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
Section 8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have
<PAGE>
23
become effective by 10:00 P.M., New York City time, on the date of this
Agreement; and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been commenced or shall be pending before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate
dated the Closing Date, signed by the Company's Chairman of the Board, its
President or its Chief Executive Officer and its Chief Financial Officer, in
their respective capacities, confirming the matters set forth in Sections 6(ff),
8(a) and 8(b) and that the Company has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 8(d)(i),
8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date a legal opinion
from each of Paul, Weiss, Rifkind, Wharton & Garrison, special U.S. counsel for
the Company, Appleby, Spurling & Kempe, Bermuda counsel for the Company,
Meyersrenken & Rheingatz, special German counsel for the Company, Matheson
Ormsby Prentice, special Irish counsel for the Company, Deloitte & Touche GmbH,
special German tax counsel for the Company, each dated the Closing Date, to the
effect set forth in Exhibits A, B, C, D and E, respectively.
The opinions described in Section 8(e) shall be rendered to you at
the request of the Company and shall so state therein.
<PAGE>
24
(f) You shall have received on the Closing Date an opinion, dated
the Closing Date, of Debevoise & Plimpton, counsel for the Underwriters, on such
matters as the Underwriters may reasonably request.
(g) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Deloitte & Touche LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements
specified in Section 2 hereof which agreements shall be in full force and effect
on the Closing Date.
(i) The employment agreements between the Company and Wolfgang M.
Wand, Steven H. Debrovner and Gerhard Jurk, respectively, shall be in full force
and effect on the Closing Date.
(j) The Shares shall have been duly listed for quotation on the
Nasdaq National Market, subject only to official notice of issuance.
(k) The Company shall not have failed on or prior to the Closing
Date to perform or comply with any of the agreements herein contained and
required to be performed or complied with by the Company on or prior to the
Closing Date.
The several obligations of the U.S. Underwriters to purchase any
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the applicable Option Closing Date of such documents as they
may reasonably request with respect to the good standing of the Company, the due
authorization and issuance of such Additional Shares and other matters related
to the issuance of such Additional Shares.
<PAGE>
25
Section 9. Effectiveness of Agreement and Termination. This
Agreement shall become effective upon the execution and delivery of this
Agreement by the parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your reasonable
judgment, is material and adverse and, in your judgment, makes it impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus, (ii) the suspension or material limitation of trading in securities
or other instruments on the New York Stock Exchange, the American Stock
Exchange, or the Nasdaq National Market or limitation on prices for securities
or other instruments on any such exchange or the Nasdaq National Market, (iii)
the suspension of trading of any securities of the Company on any exchange or in
the over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your reasonable opinion
materially and adversely affects, or will materially and adversely affect, the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole, (v) the declaration of a banking
moratorium by either federal or state authorities in New York, New York, or
Bermuda.
If on the Closing Date or on an Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I and Schedule II
bears to the total number of Firm Shares which all the non-defaulting
Underwriters have agreed to purchase, or in such other proportion as you may
specify, to purchase the Firm Shares or Additional Shares, as the case may be,
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase on such date; provided that in no event shall the number of Shares
which any Underwriter has agreed to purchase pursuant to Section 2 hereof be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of Shares without the written consent of such Underwriter. If on the
Closing Date any Underwriter or Underwriters shall fail or refuse to purchase
Firm
<PAGE>
26
Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to
be purchased by all Underwriters and arrangements satisfactory to you and the
Company for purchase of such Firm Shares are not made within 48 hours after such
default, this Agreement will terminate without liability on the part of any non-
defaulting Underwriter and the Company. In any such case which does not result
in termination of this Agreement, either you or the Company shall have the right
to postpone the Closing Date, but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
Section 10. Miscellaneous. Notices given pursuant to any provision
of this Agreement shall be addressed as follows: (i) if to the Company, to ESG
Re Limited, Skandia International House, 16 Church Street, Hamilton, HM 11,
Bermuda and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin &
Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.
The respective indemnities, contribution agreements,
representations, warranties and other statements of the Company and the several
Underwriters set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Shares, regardless of (i) any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company or any person controlling the
Company, (ii) acceptance of the Shares and payment for them hereunder and (iii)
termination of this Agreement.
<PAGE>
27
If for any reason the Shares are not delivered by or on behalf of
the Company as provided herein (other than as a result of any termination of
this Agreement pursuant to Section 9), the Company agrees to reimburse the
several Underwriters for all reasonable out-of-pocket expenses (including the
reasonable fees and disbursements of counsel) incurred by them. Notwithstanding
any termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Company also
agrees to reimburse the several Underwriters, their directors and officers and
any persons controlling any of the Underwriters for all reasonable fees and
expenses (including, without limitation, the reasonable fees disbursements of
counsel) incurred by them in connection with enforcing their rights hereunder
(including, without limitation, pursuant to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
The Company agrees that any legal suit, action or proceeding
against the Company brought by any Underwriter or by any person, if any, who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, arising out of or based upon this Agreement
or the transactions contemplated hereby may be instituted in any State or
federal court in the Borough of Manhattan, The City of New York, New York, and,
to the fullest extent permitted by applicable law, waives any objection which it
may now or hereafter have to the laying of venue of any such proceeding, and
irrevocably submits to the non-exclusive jurisdiction of such courts in any
suit, action or proceeding. The Company has appointed CT Corporation System,
1633 Broadway, New York, New York, 10019 as its authorized agent (the
"Authorized Agent") upon whom process may be served in any legal suit, action or
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby which may be instituted in any State or federal court in the
Borough of Manhattan, The City of New York, New York, by any Underwriter, or
controlling person and expressly accepts the non-exclusive jurisdiction of any
such court in respect of any such action. Such appointment shall be irrevocable.
The Company represents and warrants that the Authorized Agent has agreed to act
as said agent for service of process,
<PAGE>
28
and the Company agrees to take any and all action, including the filing of any
and all documents and instruments, that may be necessary to continue such
appointment in full force and effect as aforesaid. Service of process upon the
Authorized Agent shall be deemed, in every respect, effective service of process
upon the Company. Nothing in this Section 17 shall affect the right of any
Underwriter to serve process in any manner permitted by law, or limit any right
to bring proceedings against the Company or any of its subsidiaries in the
courts of any jurisdiction or to enforce in any lawful manner a judgment
obtained in one jurisdiction in any other jurisdiction.
This Agreement shall be governed and construed in accordance with
the laws of the State of New York.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
<PAGE>
29
Please confirm that the foregoing correctly sets forth the agreement between the
Company and the several Underwriters.
Very truly yours,
ESG RE LIMITED
By:
-------------------------------
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEUTSCHE MORGAN GRENFELL INC.
CONNING & COMPANY
STEPHENS INC.
Acting severally on behalf of themselves and the several U.S.
Underwriters named in Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-----------------------------
MORGAN GRENFELL & CO. LIMITED
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
CONNING & COMPANY
STEPHENS INC.
Acting severally on behalf of themselves and the several
International Managers named in Schedule II hereto
By: MORGAN GRENFELL & CO. LIMITED
By:
--------------------------------
<PAGE>
SCHEDULE I
----------
U.S. Underwriters Number of Firm Shares
- -----------------
to be Purchased
Donaldson, Lufkin & Jenrette Securities Corporation
Deutsche Morgan
G
r
e
n
f
e
l
l
I
n
c
.
Conning & Company
---------------------
Stephens Inc.
Total
<PAGE>
SCHEDULE II
-----------
-----------------------
International Managers Number of Firm Shares
- ----------------------
to be Purchased
Morgan Grenfell & Co. Limited
Donaldson, Lufkin & Jenrette International
Conning & Company
Stephens Inc.
Total
<PAGE>
Exhibit A
[List of non-Wholly-owned Subsidiaries]
<PAGE>
EXHIBIT 2.1
DATED 13 November, 1997
SHARE EXCHANGE AGREEMENT
relating to the sale and purchase of the
entire issued share capital of
EUROPEAN SPECIALTY GROUP (UNITED
KINGDOM) LIMITED
THE VENDORS (1)
ESG RE LIMITED (2)
<PAGE>
SHARE EXCHANGE AGREEMENT
DATE
13 November, 1997
PARTIES
(1) THE SEVERAL PERSONS whose names and addresses are set out in Schedule 2
(together "the Vendors", and each a "Vendor"); and
(2) ESG RE LIMITED, a company duly incorporated and existing in accordance
with the laws of Bermuda, whose registered office is at P O Box 2062, 16
Church Street, Hamilton, HM4X, Bermuda ("the Purchaser").
INTRODUCTION
(A) European Specialty Group (United Kingdom) Limited ("the Company"), short
particulars of which are set out in Schedule 1, is a private company
incorporated in England and Wales and at Completion will have an
authorised share capital of (Pounds)100,000.00 divided into 100,000
ordinary shares of (Pounds)1.00 each, all of which will, at Completion,
have been issued and be fully paid ("the Shares").
(B) The Vendors are (or will become prior to Completion) the registered and
beneficial holders of all the Shares as set out in Schedule 2 and, as
such, have, or will have at Completion, the ability to sell the Shares
with full title guarantee.
(C) The Purchaser is a company duly incorporated and existing in accordance
with the laws of Bermuda under the Companies Act 1981 and has at the date
of this Agreement an authorised share capital of US$250,012,000.00 divided
into 12,000 ordinary shares of par value US$1.00 each, 100,000,000 common
shares of par value US$1.00 each ("Common Shares"), 100,000,000 class B
common shares of par value US$1.00 each and 50,000,000 preference shares
of par value US$1.00 each.
(D) The Vendors have agreed to sell to the Purchaser, and the Purchaser has
agreed to purchase, the Shares in consideration of the allotment and issue
to the Vendors of 900,000 Common Shares in aggregate ("the Consideration
Shares") in the amounts set out in Schedule 2.
OPERATIVE PROVISIONS
1 CONDITION PRECEDENT
This Agreement, and all the obligations of the parties hereunder, are
conditional upon the unconditional completion to the satisfaction of the
Purchaser of any one or more Direct Sales (as such expression is defined
in the prospectus to be issued by the Purchaser after the date of this
Agreement and in such form as may be approved by each of the Purchaser and
Wolfgang Wand (acting as duly authorised agent on behalf of all the
Vendors)), evidenced by notice in writing to Wolfgang Wand from the
Purchaser, taking place on or prior to 31 December 1997, or such other
date as Wolfgang Wand (acting as duly authorised agent on behalf of all
the Vendors) and the Purchaser may agree, failing which this Agreement
shall lapse and be of no further effect.
<PAGE>
2 SALE AND PURCHASE
2.1 Each of the Vendors shall sell as legal and beneficial owner and with full
title guarantee and the Purchaser, relying on the representations and
warranties set out in clause 4, shall purchase the Shares shown against
the Vendors' respective names in column (2) of Schedule 2 free from all
liens, charges and encumbrances and together with all rights attaching
thereto.
2.2 In exchange for the Shares, the Purchaser shall issue to each of the
Vendors the Consideration Shares credited as fully paid (at such premium
to the nominal value of such shares as the Purchaser shall reasonably
determine), in the amounts set out against the Vendors' respective names
in column (3) of Schedule 2.
3 COMPLETION
3.1 Completion of the exchange of the Consideration Shares for the Shares
("Completion") shall take place at such time and place as the Purchaser
and Wolfgang Wand (acting as duly authorised agent on behalf of all of the
Vendors) shall agree, or in the absence of agreement at the office of
Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New
York NY10019-6064, forthwith upon satisfaction of the condition described
in clause 1 when:
(a) each of the Vendors shall deliver to the Purchaser:
(i) a duly executed transfer of the Shares in favour of the
Purchaser (or as it may direct) together with the relevant
share certificate(s); and
(ii) any other documents which may be required to vest in the
Purchaser the full legal and beneficial ownership of the
Shares and enable the Purchaser to procure them to be
registered in its name or as it shall direct;
(b) the Purchaser shall issue the Consideration Shares to each of the
Vendors credited as fully paid in the amounts set out against their
respective names in column (3) of Schedule 2 and shall procure that
each of the Vendors is registered as a member of the Purchaser in
respect of such shares; and
(c) the parties shall procure that a meeting of the directors of the
Company shall be held at which the transfer of the Shares shall be
approved subject to duly executed and stamped transfers, and the
relevant share certificates, being presented for registration and
until such registration each of the Vendors shall hold the Shares as
trustee for the Purchaser and subject to its directions (including
directions as to the exercise of voting and other rights attaching
to the Shares).
3.2 The Purchaser shall not be obliged to purchase any of the Shares unless
the purchase of all of the Shares is completed simultaneously in
accordance with this Agreement.
4 WARRANTIES
Each of the Vendors hereby jointly and severally represents and warrants
to the Purchaser that (as at the date of this Agreement and throughout the
period up to and including Completion):
-2-
<PAGE>
(a) he is the legal and beneficial owner of the Shares set out against
his name in column (2) of Schedule 2 and that there is no pledge,
lien, option, warrant, charge or encumbrance on, over or affecting
any such Shares, no agreement to create any such pledge, lien,
option, warrant, charge or encumbrance has been made and no claim
has been made that any person is entitled to any such pledge, lien,
charge or encumbrance or any interest in the Shares;
(b) the Vendors are together the sole legal and beneficial owners of all
the Shares, which represent the entire issued share capital of the
Company, there being no other share or loan capital in the Company,
whether existing or under option, of any nature; and
(c) the particulars of the Company set out in Schedule 1 are true,
complete and accurate in all respects.
5 GENERAL
5.1 All the provisions of this Agreement (except for any fully performed
before or at Completion) shall continue in full force and effect after
Completion.
5.2 Each of the Vendors shall be jointly and severally liable in the event of
any breach of any of the warranties, representations, agreements and
obligations of the Vendors under this Agreement, provided that the
Purchaser may release or compromise the liability of any of the Vendors
hereunder, or grant to any of the Vendors time or other indulgence,
without affecting the liability of any other of the Vendors.
5.3 The Purchaser may assign in whole or in part the benefit of this Agreement
which shall enure to the benefit of the successors in title and assigns of
the Purchaser.
5.4 The Vendors shall not divulge to any third party the fact that this
Agreement has been entered into, or any information regarding its terms or
any matters contemplated by this transaction, or make any announcement or
disclose any information relating to it without the prior agreement in
writing of the Purchaser.
5.5 Each of the Vendors hereby undertakes to the Purchaser, at the request of
the Purchaser and at the expense of the Vendors, to do or procure to be
done all such further acts and things and to execute or procure to be
executed all such further deeds and documents as may be necessary,
desirable or expedient fully and effectively to vest in the Purchaser the
legal and beneficial ownership of the Shares and the benefits of this
Agreement.
5.6 This Agreement shall be binding upon each of the Vendors' personal
representatives, heirs and successors.
5.7 This Agreement is governed by and is to be construed in accordance with
the laws of England and Wales and the parties hereby submit to the non-
exclusive jurisdiction of the English courts.
5.8 This Agreement may be executed in several counterparts (whether original
or facsimile counterparts) and upon the execution of all such counterparts
by the parties, each counterpart shall be deemed to be an original hereof.
-3-
<PAGE>
SCHEDULE 1
PARTICULARS OF THE COMPANY
(AS AT COMPLETION)
Registered number : 3405914
Status : private company limited by shares
Registered office : 25 Lime Street, London, England
Directors : Wolfgang Wand, Gerhard Jurk
Secretary : Gerhard Jurk
Accounting Reference Date : 31 December
Loans : None
Charges : None
Bankers : To be appointed
Auditors : To be appointed
Authorised Share Capital : 100,000 divided into 100,000 ordinary
shares of (Pounds)1.00 each
Issued Share Capital : 100,000 ordinary shares of
(Pounds)1.00 each
Options, warrants and other
subscription rights : None
-4-
<PAGE>
SCHEDULE 2
THE VENDORS
(1) (2) (3)
Vendor SHARES CONSIDERATION
SHARES
Wolfgang Wand 24,990 224,910
Alte Landstrasse 16
23843 Neritz
Germany
Johanna Wand 3,870 34,830
Albert Schwiezer Str. 72
29003 Celle
Germany
Sabine Wand 16,045 144,405
Alte Landstrasse 16
23843 Neritz
Germany
Steven Debrovner 25,400 228,600
Upper Hollow Road
Vermont
USA
Dr Jean-Claude Mayor 5,010 45,090
Birkenstrasse 18
8135 Langnau am Albis
Switzerland
Yves Forestier 505 4,545
122 Quai Amiral Lalande
7200 Le Mans
France
Franco Canadienne de Re, Ltee 12,000 108,000
10th floor Brunswick House
44 Chipmann Hill
Saint John
New Brunswick
Canada
RVERS Beteiligungs - und 6,090 54,810
Verwaltungs-GmbH
Hohscheider Strasse 116
42699 Solingen
Germany
Horning Financial, Inc. 6,090 54,810
c/o Gestinor AG
Postfach 248
6301 Zug
Switzerland ________ ____________
100,000 900,000
-5-
<PAGE>
ATTESTATIONS
SIGNED by )
WOLFGANG WAND ) /s/ Wolfgang Wand
SIGNED by )
JOHANNA WAND ) /s/ Johanna Wand
SIGNED by )
SABINE WAND ) /s/ Sabine Wand
SIGNED by )
STEVEN DEBROVNER ) /s/ Steven Debrovner
SIGNED by )
DR JEAN-CLAUDE MAYOR ) /s/ Jean-Claude Mayor
SIGNED by )
YVES FORESTIER ) /s/ Yves Forestier
SIGNED by )
FRANCO CANADIENNE DE )
RE, LTEE ) /s/ Yves Forestier
SIGNED by )
for and on behalf of )
RVERS BETEILIGUNGS - UND)
VERWALTUNGS-GMBH ) /s/ Henning Meyersrenken
-6-
<PAGE>
SIGNED by )
for and on behalf of )
HORNING FINANCIAL, INC. ) /s/ Markus Herzig
SIGNED by )
for and on behalf of )
ESG RE )
LIMITED ) /s/ Gerhard Jurk
-7-
<PAGE>
DATED 13 November, 1997 EXHIBIT 2.2
SHARE EXCHANGE AGREEMENT
relating to the sale and purchase of the
entire issued share capital of
ESG HOLDING AG
THE VENDORS (1)
EUROPEAN SPECIALTY GROUP (UNITED KINGDOM) LIMITED (2)
<PAGE>
SHARE EXCHANGE AGREEMENT
DATE
13 November, 1997
PARTIES
(1) THE SEVERAL PERSONS whose names and addresses are set out in Schedule 2
(together "the Vendors", and each a "Vendor"); and
(2) EUROPEAN SPECIALTY GROUP (UNITED KINGDOM) LIMITED, a company incorporated
in England and Wales with number 3405914, whose registered office is at 25
Lime Street, London ("the Purchaser").
INTRODUCTION
(A) European Specialty Group Holding AG ("the Company"), short particulars of
which are set out in Schedule 1, is a company duly incorporated and
existing in accordance with the laws of the Federal Republic of Germany
and has at the date of this Agreement an authorised share capital of
DM500,000.00 divided into 100,000 shares of DM5.00 each, all of which have
been issued and are fully paid ("the Shares").
(B) The Vendors are the registered and beneficial holders of all the Shares as
set out in Schedule 2 and, as such, have the ability to sell the Shares
with full title guarantee.
(C) The Purchaser is a private company limited by shares incorporated in
England and Wales under the Companies Act 1985 and has at the date of this
Agreement an authorised share capital of (Pounds)1,000 consisting of 1,000
shares of (Pounds)1.00 each of which 2 have been issued and are fully
paid, and which authorised share capital will be increased to
(Pounds)100,000 divided into 100,000 ordinary shares of (Pounds)1.00 each
("Ordinary Shares") prior to Completion.
(D) The Vendors have agreed to sell to the Purchaser, and the Purchaser has
agreed to purchase, the Shares in consideration of the allotment and issue
to the Vendors of 100,000 Ordinary Shares in aggregate ("the Consideration
Shares") in the amounts set out in Schedule 2.
OPERATIVE PROVISIONS
1 CONDITIONS PRECEDENT
This Agreement, and all the obligations of the parties hereunder, are
conditional upon the unconditional completion to the satisfaction of the
Purchaser of any one or more Direct Sales (as such expression is defined
in the prospectus to be issued by ESG Re Limited after the date of this
Agreement and in such form as may be approved by each of the Purchaser and
Wolfgang Wand (acting as duly authorised agent on behalf of all the
Vendors)), evidenced by notice in writing to the Purchaser and Wolfgang
Wand from ESG Re Limited, taking place on or prior to 31 December 1997, or
such other date as Wolfgang Wand (acting as duly authorised agent on
behalf of all the Vendors) and the Purchaser may agree, failing which this
Agreement shall lapse and be of no further effect.
<PAGE>
2 SALE AND PURCHASE
2.1 Each of the Vendors shall sell as legal and beneficial owner and with full
title guarantee and the Purchaser, relying on the representations and
warranties set out in clause 4, shall purchase the Shares shown against
the Vendors' respective names in column (2) of Schedule 2 free from all
liens, charges and encumbrances and together with all rights attaching
thereto.
2.2 In exchange for the Shares, the Purchaser shall issue to each of the
Vendors the Consideration Shares credited as fully paid (at such premium
to the nominal value of such shares as the Purchaser shall reasonably
determine), in the amounts set out against the Vendors' respective names
in column (3) of Schedule 2.
3 COMPLETION
3.1 Completion of the exchange of the Consideration Shares for the Shares
("Completion") shall take place at such time and place as the Purchaser
and Wolfgang Wand (acting as duly authorised agent on behalf of all of the
Vendors) shall agree, or in the absence of agreement at the office of
Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New
York NY10019-6064, forthwith upon satisfaction of the condition described
in clause 1 when:
(a) each of the Vendors shall deliver to the Purchaser:
(i) a duly executed transfer of the Shares in favour of the
Purchaser (or as it may direct) together with the relevant
share certificate(s); and
(ii) any other documents which may be required to vest in the
Purchaser the full legal and beneficial ownership of the
Shares and enable the Purchaser to procure them to be
registered in its name or as it shall direct;
(b) the Purchaser shall issue the Consideration Shares to each of the
Vendors credited as fully paid in the amounts set out against their
respective names in column (3) of Schedule 2 and shall procure that
each of the Vendors is registered as a member of the Purchaser in
respect of such shares; and
(c) the parties shall procure that a meeting of the directors of the
Company shall be held at which the transfer of the Shares shall be
approved subject to such documents of title, in a form satisfactory
to the directors, as the directors may require being presented for
registration in the Company's share register and until such
registration each of the Vendors shall hold the Shares as trustee
for the Purchaser and subject to its directions (including
directions as to the exercise of voting and other rights attaching
to the Shares).
3.2 The Purchaser shall not be obliged to purchase any of the Shares unless
the purchase of all of the Shares is completed simultaneously in
accordance with this Agreement.
4 WARRANTIES
Each of the Vendors hereby jointly and severally represents and warrants
to the Purchaser that (as at the date hereof and throughout the period up
to and including Completion):
-2-
<PAGE>
(a) he is the legal and beneficial owner of the Shares set out against
his name in column (2) of Schedule 2 and that there is no pledge,
lien, option, warrant, charge or encumbrance on, over or affecting
any such Shares, no agreement to create any such pledge, lien,
option, warrant, charge or encumbrance has been made and no claim
has been made that any person is entitled to any such pledge, lien,
charge or encumbrance or any interest in the Shares;
(b) the Vendors are together the sole legal and beneficial owners of all
the Shares, which represent the entire issued share capital of the
Company, there being no other share or loan capital in the Company,
whether existing or under option, of any nature; and
(c) the particulars of the Company set out in Schedule 1 are true,
complete and accurate in all respects.
5 GENERAL
5.1 All the provisions of this Agreement (except for any fully performed
before or at Completion) shall continue in full force and effect after
Completion.
5.2 Each of the Vendors shall be jointly and severally liable in the event of
any breach of any of the warranties, representations, agreements and
obligations of the Vendors under this Agreement, provided that the
Purchaser may release or compromise the liability of any of the Vendors
hereunder, or grant to any of the Vendors time or other indulgence,
without affecting the liability of any other of the Vendors.
5.3 The Purchaser may assign in whole or in part the benefit of this Agreement
which shall enure to the benefit of the successors in title and assigns of
the Purchaser.
5.4 The Vendors shall not divulge to any third party the fact that this
Agreement has been entered into, or any information regarding its terms or
any matters contemplated by this transaction, or make any announcement or
disclose any information relating to it without the prior agreement in
writing of the Purchaser.
5.5 Each of the Vendors hereby undertakes to the Purchaser, at the request of
the Purchaser and at the expense of the Vendors, to do or procure to be
done all such further acts and things and to execute or procure to be
executed all such further deeds and documents as may be necessary,
desirable or expedient fully and effectively to vest in the Purchaser the
legal and beneficial ownership of the Shares and the benefits of this
Agreement.
5.6 This Agreement shall be binding upon each of the Vendors' personal
representatives, heirs and successors.
5.7 This Agreement is governed by and is to be construed in accordance with
the laws of England and Wales and the parties hereby submit to the non-
exclusive jurisdiction of the English courts.
5.8 This Agreement may be executed in several counterparts (whether original
or facsimile counterparts) and upon the execution of all such counterparts
by the parties, each counterpart shall be deemed to be an original hereof.
-3-
<PAGE>
SCHEDULE 1
PARTICULARS OF THE COMPANY
Registered number : HRB 59932, Civil Court of Hamburg
Status : Aktiengesellschaft
Principal place of business : Hamburg, Germany
Directors : Wolfgang Wand, Steven Debrovner,
Gerhard Jurk
Supervisory board : Dr J-C Mayor, Yves Forestier, Michael
Weiss
Accounting Reference Date : 31 December
Loans : None, save for certain loans from
shareholders and group companies
Charges : None
Bankers : Deutsche Bank AG, Germany
Auditors : WP-StB Harald Hermann
Authorised Share Capital : DM500,000
Issued Share Capital : DM500,000
Options, warrants and other
subscription rights : None
-4-
<PAGE>
SCHEDULE 2
THE VENDORS
(1) (2) (3)
VENDOR SHARES CONSIDERATION
SHARES
Wolfgang Wand 24,990 24,990
Alte Landstrasse 16
23843 Neritz
Germany
Johanna Wand 3,870 3,870
Albert Schwiezer Str. 72
29003 Celle
Germany
Sabine Wand 16,045 16,045
Alte Landstrasse 16
23843 Neritz
Germany
Steven Debrovner 25,400 25,400
Upper Hollow Road
Vermont
USA
Dr Jean-Claude Mayor 5,010 5,010
Birkenstrasse 18
8135 Langnau am Albis
Switzerland
Yves Forestier 505 505
122 Quai Amiral Lalande
7200 Le Mans
France
Franco Canadienne de Re, Ltee 12,000 12,000
10th floor Brunswick House
44 Chipmann Hill
Saint John
New Brunswick
Canada
RVERS Beteiligungs - und Verwaltungs-GmbH 6,090 6,090
Hohscheider Strasse 116
42699 Solingen
Germany
Horning Financial, Inc. 6,090 6,090
c/o Gestinor AG
Postfach 248
6301 Zug
Switzerland ________ ____________
100,000 100,000
-5-
<PAGE>
ATTESTATIONS
SIGNED by )
WOLFGANG WAND ) /s/ Wolfgang Wand
SIGNED by )
JOHANNA WAND ) /s/ Johanna Wand
SIGNED by )
SABINE WAND ) /s/ Sabine Wand
SIGNED by )
STEVEN DEBROVNER ) /s/ Steven Debrovner
SIGNED by )
DR JEAN-CLAUDE MAYOR ) /s/ Jean-Claude Mayor
SIGNED by )
YVES FORESTIER ) /s/ Yves Forestier
SIGNED by )
FRANCO CANADIENNE DE )
RE, LTEE ) /s/ Yves Forestier
SIGNED by )
for and on behalf of )
RVERS BETEILIGUNGS - UND)
VERWALTUNGS-GMBH ) /s/ Henning Meyersrenken
-6-
<PAGE>
SIGNED by )
for and on behalf of )
HORNING FINANCIAL, INC. ) /s/ Markus Herzig
SIGNED by )
for and on behalf of )
EUROPEAN SPECIALTY )
GROUP (UNITED KINGDOM) )
LIMITED ) /s/ Gerhard Jurk
-7-
<PAGE>
[LOGO] EXHIBIT 3.1
BERMUDA
THE COMPANIES ACT 1981
MEMORANDUM OF ASSOCIATION OF
COMPANY LIMITED BY SHARES
(Section 7(1) AND (2))
MEMORANDUM OF ASSOCIATION
OF
ESG Re Limited
- --------------------------------------------------------------------------------
(hereinafter referred to as "The Company")
1. The liability of the members of the Company is limited to the amount (if
any) for the time being unpaid on the shares respectively held by them.
2. We, the undersigned, namely:
NAME ADDRESS BERMUDIAN NATIONALITY NUMBER OF
STATUS SHARERS
(Yes/No) SUBSCRIBED
David R. Lines, Jr.
Cedar House, 41 Cedar Avenue
Hamilton, HM 12, Bermuda Yes British 1
Ruby L.Rawlins
Cedar House, 41 Cedar Avenue
Hamilton HM 12, Bermuda Yes British 1
Judith Morgan-Swan
Cedar House, 41 Cedar Avenue
Hamilton HM 12, Bermuda Yes British 1
Stacy L. Robinson
Cedar House, 41 Cedar Avenue
Hamilton HM 12, Bermuda Yes British 1
do hereby respectively agree to take such number of shares of the Company as may
be allotted to us respectively by the provisional directors of the Company, not
exceeding the number of shares for which we have respectively subscribed, and to
satisfy such calls as may be made by the directors, provisional directors or
promoters of the Company in respect of the shares allotted to us respectively.
<PAGE>
3. The Company is to be an exempted Company as defined by the Companies Act
1981.
4. The Company has power to hold land situate in Bermuda not exceeding in all,
including the following parcels -
Not Applicable
5. The authorised share capital of the Company is $12,000.00 divided into
shares of US one dollar each. The minimum subscribed share capital of the
Company is $12,000.00 in United States currency.
6. The objects for which the Company is formed and incorporated are -
whose sole objects is that of holding beneficially all the shares in
European Specialty Reinsurance (Bermuda) Ltd.
7. The Company has the powers set out in the Schedule annexed hereto.
<PAGE>
The Schedule
(referred to in Clause 7 of the Memorandum of Association)
-----------------------------------------------------------
(a) To borrow and raise money in any currency or currencies and to secure or
discharge andy debt or obligation in any manner and in particular (without
prejudice to the generality of the foregoing) by mortgages of or charges
upon all or any part of he undertaking, property and assets (present an
future) and uncalled capital of the Company or by the creation and issue of
securities.
(b) To enter into any guarantee, contract of indemnity or suretyship and in
particular (without prejudice to the generality of the foregoing) to
guarantee, support or secure, with or without consideration, whither by
personal obligation or by mortgaging or charging all or any part of the
undertaking, property and assets (present and future) and uncalled capital
of the Company or both such methods or in any other manner, the performance
of any obligations or comments, of , and the repayment or payment of the
principal amounts of and any premiums, interest, dividends and other moneys
payable on or in respect of any securities or liabilities of, any person
including (without prejudice to the generality of the foregoing) any
company which is for the time being a subsidiary or a holding company of
the Company or another subsidiary or a holding company of the Company or
otherwise associated with the Company.
(c) To accept, draw, make , create, issue, execute, discount, endorse,
negotiate bills of exchange, promissory notes, and other instruments and
securities, whether negotiable or otherwise.
(d) To sell, exchange, mortgage, charge, let on rent, share of profit, royalty
or otherwise, grant licences, easements, options, servitudes and other
rights over, and in any other manner deal with or dispose of, all or any
part of the undertaking, property and assets (present and future) of the
Company for any consideration and in particular (without prejudice to the
generality of the foregoing) for any securities.
(e) To issue and allot securities of the Company for cash or in payment or part
payment for any real or personal property purchased or otherwise acquired
by the Company or any services rendered to the Company or as security for
any obligation or amount (even if less than the nominal amount of such
securities) or for any other purpose.
(f) To grant pensions, annuities, or other allowances, including allowances on
death, to any directors, officers or employees or former directors,
officers or employees of the Company or any company which at any time is or
was a subsidiary or a holding company or another subsidiary of a holding
company of the Company or otherwise associated with the Company or of any
predecessor in business of any of them, and to the relations, connections
or dependants of any such persons, and to other persons whose services or
services have
<PAGE>
directly or indirectly been of benefit to the Company or whom the Company
considers have any moral claim on the Company or to their relations,
connections or dependants, and to establish or support any associations,
institutions, clubs, schools, building and housing schemes, funds and
trusts, and to make payments toward insurance or another arrangements
likely to benefit any such persons or otherwise advance the interests of
the Company or of its Members, and to subscribe, guarantee or pay money for
any purpose likely, directly or indirectly to further the interests of the
Company or of its Members or for any national, charitable, benevolent,
educational, social, public, general or useful object.
(g) Subject to the provisions of Section 42 of the Companies Act 1981, to issue
preference shares which at the option of the holders thereof are to be
liable to be redeemed.
(h) To purchase its own shares in accordance with the provisions of Section
42A of the Companies Act 1981.
<PAGE>
Signed by each subscriber in the presence of at least one witness attesting the
signature thereof.
/s/ David R. Lines /s/ Walia Lodge
- -------------------------- --------------------------
/s/ Ruby L. Rawlins /s/ Walia Lodge
- -------------------------- --------------------------
/s/ Judith Morgan-Swann /s/ Walia Lodge
- -------------------------- --------------------------
/s/ Stacy L. Robinson /s/ Walia Lodge
- -------------------------- --------------------------
(Subscribers) (Witnesses)
SUBSCRIBED this 30th day of July , 1997
<PAGE>
EXHIBIT 3.2
BYE-LAWS
of
ESG RE LIMITED
INTERPRETATION
--------------
1. In these Bye-Laws unless the context otherwise requires -
"Bermuda" means the Islands of Bermuda;
"Board" means the Board of Directors of the Company or the Directors
present at a meeting of directors at which there is a quorum;
"Class B Common Shares" shall have the meaning ascribed to it as Bye-
Law 3(a)(ii);
"Code" means the Internal Revenue Code of 1986, as amended, of the
United States of America;
"Common Shares" shall have the meaning ascribed to in Bye-Law
3(a)(ii);
"Company" means the company incorporated in Bermuda under the name of
ESG Re Limited on the 21 August, 1997;
"Exchange Act" means the United States Securities Exchange Act of
1934. Citations to sections of the Exchange Act or to regulations, rules or
schedules thereunder are to such provisions as they were in effect on 3 December
1997;
"Non-assessable means the holder is not bound by any subsequent change
to the Memorandum of Association or the Bye-Laws of the Company which increases
a member's liability to the Company;"
<PAGE>
2
"Offering" means the offering of the Company's Common Shares (as
defined herein) registered under the United States Securities Act of 1933
pursuant to Registration Statement No. 333-40341, the related Direct Sales (as
defined in such registration statement) and listing of such shares on the Nasdaq
Stock Exchange;
"Organisational Shares" shall have the meaning ascribed to it in Bye-
Law 3(a)(ii);
"paid up" means paid up or credited as paid up;
"Preference Shares" shall have the meaning ascribed to it in Bye-Law
3(a)(ii);
"Register" means the Register of Shareholders of the
Company;
"Registered Office" means the registered office for the time being of
the Company;
"Resolution" means a resolution of the Board or, as the case may be
the Shareholders or, where required, of a separate class or separate classes of
Shareholders, adjusted either in a General Meeting or by unanimous written
resolution in accordance with the provisions of these Bye-Laws;
"Seal" means the common seal of the Company and includes any duplicate
thereof;
"Secretary" includes a temporary or assistant Secretary and any person
appointed by the Board to perform any of the duties of the Secretary;
"Shareholder" means a shareholder or member of the Company;
<PAGE>
3
"the Companies Acts" means the Bermuda Companies Act 1981 as amended
and every Bermuda statute from time to time in force concerning companies,
insofar as the same shall apply to the Company;
"these Bye-Laws" means these Bye-Laws in their present form or as from
time to time amended;
"U.S. SEC" means the United States Securities and Exchange Commission;
for the purposes of these Bye-Laws a company shall be deemed to be
present in person if its representative duly authorized pursuant to the
Companies Acts is present;
words importing the singular number also include the plural number and
vice versa;
words importing the masculine gender also include the feminine and
neuter genders, respectively;
words importing persons include companies or associations or bodies of
persons, whether corporate or un-incorporate;
reference to writing shall include typewriting, printing, lithography,
photography and other modes of representing or reproducing words in a legible
and non-transitory form;
any words or expressions defined in the Companies Acts in force at the
date when these Bye-Laws or any part thereof are adopted shall bear the same
meaning in these Bye-Laws or such part (as the case may be).
<PAGE>
4
REGISTERED OFFICE
-----------------
2. The Registered Office shall be at such place in Bermuda as the
Board shall from time to time appoint.
SHARE RIGHTS
------------
3. (a) (i) Subject to any special rights conferred on the holders of
any share or class of shares, any share in the Company may be issued with or
have attached thereto such preferred, deferred, qualified or other special
rights or such restrictions, whether in regard to dividend, voting, return of
capital or otherwise, as the Company may in general meeting determine or, if
there has not been any such determination or so far as the same shall not make
specific provision, as the Board may determine.
(ii) The authorized share capital of the Company at the date of the
adoption of these Bye-Laws is US $250,012,000, divided into 12,000 ordinary
shares, par value US$l.00 each (the "Organisational Shares"), 100,000,000 common
shares, par value US$1.00 each (the "Common Shares"), 100,000,000 Class B common
shares, par value US$1.00 each (the "Class B Common Shares"), and 50,000,000
preference shares par value US$1.00 each (the "Preference Shares").
(iii) The Organisational Shares shall be purchased by the Company and
cancelled pursuant to section 42A of the Companies Act 1981 as soon as
practicable after any of the other shares in the capital of the Company are sold
to any
<PAGE>
5
person, either for monetary or other consideration, other than the purchasers of
the Organisational Shares.
(iv) The rights of the Class B Common Shares shall be identical to
that of the Common Shares in every respect, provided that the Class B Common
Shares shall have no voting rights except as required by Bermuda law.
4. (a) The Board is expressly authorized at any time, and from time
to time, without any vote of or action by the Shareholders, to issue preference
shares, including, without limitation, redeemable preference shares, in one or
more classes or series and to determine the rights, designations, powers,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions thereof, including, without
limitation, consideration, dividend rights, conversion rights, voting powers
(full or limited, or no voting powers), terms and manner of redemption
(including, without limitation, sinking fund provisions), redemption dates,
redemption prices, liquidation preferences, conditions and the number of shares
constituting and the designation of any class or series of such preference
shares. Any such determination shall be made by resolution adopted by the
Board. The designation and issue by the Board of any class or series of
preference shares and the establishment of the rights and preferences thereof
shall not be deemed to constitute an alteration or abrogation of the special
rights attached to any class of shares for the purpose of Bye-Law 5 except as
may be explicitly provided in the terms of issue of any shares for the time
being issued.
<PAGE>
6
(b) Subject to the Companies Acts, any preference shares may, with
the sanction of a resolution of the Board, be issued on terms:
(1) that they are to be redeemed on the happening of a specified
event or on a given date; and/or
(2) that they are liable to be redeemed at the option of the
Company; and/or
(3) if authorized by the Memorandum of Association of the
Company, that they are liable to be redeemed at the option of
the holder.
The terms and manner of redemption shall be provided for in such
resolution of the Board and shall be attached to but shall not form part of
these Bye-Laws.
MODIFICATION OF RIGHTS
----------------------
5. Subject to the Companies Acts and to Bye-Law 3(a)(ii)-(iv), all
or any of the special rights for the time being attached to any class of shares
for the time being issued may from time to time (whether or not the Company is
being wound up) be altered or abrogated with the consent in writing of the
holders of not less than fifty percent of the issued shares of that class or
with the sanction of a Resolution passed at a separate general meeting of the
holders of such shares voting in person or by proxy. To any such separate
general meeting, all the provisions of these Bye-Laws as to general meetings of
the Company shall mutatis mutandis apply, but so that the necessary quorum shall
be two or more persons holding or representing by proxy any of the shares of the
relevant class, that every holder of shares of the relevant class shall be
entitled on a poll to one vote for every such share held by him and that any
holder of shares of the relevant class present in person or by proxy may demand
a poll. Nothing
<PAGE>
7
in this Bye-Law 5 shall be deemed to permit the holders of any non-voting class
of shares to amend the terms of such class of shares to provide for voting
rights in respect of such class.
6. The special rights conferred upon the holders of any shares or
class of shares shall not, unless otherwise expressly provided in the rights
attaching to or the terms of issue of such shares, be deemed to be altered by
the creation or issue of further shares ranking pari passu therewith or senior
---- -----
thereto.
SHARES
------
7. Subject to the provisions of these Bye-Laws, the unissued shares
of the Company (whether forming part of the original capital or any increased
capital) shall be at the disposal of the Board, who may offer, allot, grant
options over or otherwise dispose of them to such persons, at such times and for
such consideration and upon such terms and conditions as the Board may
determine.
8. The Board may in connection with the issue of any shares exercise
all powers of paying commission and brokerage conferred or permitted by law.
9. Except as ordered by a court of competent jurisdiction or as
required by law, no person shall be recognised by the Company as holding any
share upon trust and the Company shall not be bound by or required in any way to
recognise (even when having notice thereof) any equitable, contingent, future or
partial interest in any share or any interest in any fractional part of a share
or (except only as otherwise provided in these Bye-Laws or by law) any other
right in respect of any share except an absolute right to the entirety thereof
in the registered holder.
<PAGE>
8
CERTIFICATES
------------
10. The preparation, issue and delivery of certificates shall be
governed by the Companies Acts. In the case of a share held jointly by several
persons, delivery of a certificate to one of several joint holders shall be
sufficient delivery to all.
11. If a share certificate is defaced, lost or destroyed it
may be replaced without fee but on such terms (if any) as to evidence and
indemnity and to payment of the costs and out of pocket expenses of the Company
in investigating such evidence and preparing such indemnity as the Board may
think fit and, in case of defacement, on delivery of the old certificate to the
Company.
12. All certificates for share or loan capital or other securities of
the Company (other than letters of allotment, scrip certificates and other like
documents) shall, except to the extent that the terms and conditions for the
time being relating thereto otherwise provide, be issued under the Seal. The
Board may by resolution determine, either generally or in any particular case,
that any signatures on any such certificates need not be autographic but may be
affixed to such certificates by some mechanical means or may be printed thereon
or that such certificates need not be signed by any persons.
LIEN
----
13. The Company shall have a first and paramount lien on every share
(not being a fully paid share) for all moneys, whether presently payable or not,
called or payable, at a date fixed by or in accordance with the terms of issue
of such
<PAGE>
9
share in respect of such share, and the Company shall also have a first and
paramount lien on every share (other than a fully paid share) standing
registered in the name of a Shareholder, whether singly or jointly with any
other person, for all the debts and liabilities of such Shareholder or his
estate to the Company, whether the same shall have been incurred before or after
notice to the Company of any interest of any person other than such Shareholder,
and whether the time for the payment or discharge of the same shall have
actually arrived or not, and notwithstanding that the same are joint debts or
liabilities of such Shareholder or his estate and any other person, whether a
Shareholder or not. The Company's lien on a share shall extend to all dividends
payable thereon. The Board may at any time, either generally or in any
particular case, waive any lien that has arisen or declare any share to be
wholly or in part exempt from the provisions of this Bye-Law.
14. The Company may sell, in such manner as the Board may think
fit, any share an which the Company has a lien, but no sale shall be made unless
some sum in respect of which the lien exists is presently payable nor until the
expiration of fourteen days after a notice in writing, stating and demanding
payment of the sum presently payable and giving notice of the intention to sell
in default of such payment, has been served on the holder for the time being of
the share.
15. The net proceeds of sale by the Company of any shares on which
it has a lien shall be applied in or towards payment or discharge of the debt or
liability in respect of which the lien exists so far as the same is presently
<PAGE>
10
payable, and any residue shall (subject to a like lien for debts or liabilities
not presently payable as existed upon the share prior to the sale) be paid to
the holder of the share immediately before such sale. For giving effect to any
such sale the Board may authorize some person to transfer the share sold to the
purchaser thereof. The purchaser shall be registered as the holder of the share
and he shall not be bound to see to the application of the purchase money, nor
shall his title to the share be affected by any irregularity or invalidity in
the proceedings relating to the sale.
CALLS ON SHARES
---------------
16. The Board may from time to time make calls upon the
Shareholders in respect of any moneys unpaid on their shares (whether on account
of the par value of the shares or by way of premium) and not by the terms of
issue thereof made payable at a date fixed by or in accordance with such terms
of issue, and each Shareholder shall (subject to the Company serving upon him at
least fourteen days notice specifying the time or times and place of payment)
pay to the Company at the time or times and place so specified the amount called
on his shares. A call may be revoked or postponed as the Board may determine.
17. A call may be made payable by installments and shall be deemed to
have been made at the time when the resolution of the Board authorizing the call
was passed.
18. The joint holders of a share shall be jointly and severally
liable to pay all calls in respect thereof.
<PAGE>
11
19. If a sum called in respect of the share is not paid before or on
the day appointed for payment thereof, the person from whom the sum is due shall
pay interest on the sum from the day appointed for the payment thereof to the
time of actual payment at such rate as the Board may determine, but the Board
shall be at liberty to waive payment of such interest wholly or in part.
20. Any sum which, by the terms of issue of a share, becomes payable
on allotment or at any date fixed by or in accordance with such terms of issue,
whether on account of the nominal amount of the share or by way of premium,
shall for all the purposes of these Bye-Laws be deemed to be a call duly made,
notified and payable on the date on which, by the terms of issue, the same
becomes payable and, in case of non-payment, all the relevant provisions of
these Bye-Laws as to payment of interest, forfeiture or otherwise shall apply as
if such sum had become payable by virtue of a call duly made and notified.
21. The Board may on the issue of shares differentiate between the
allottees or holders as to the amount of calls to be paid and the times of
payment.
FORFEITURE OF SHARES
--------------------
22. If a Shareholder fails to pay any call or instalment of a call on
the day appointed for payment thereof, the Board may at any time thereafter
during such time as any part of such call or instalment remains unpaid serve a
notice on him requiring payment of so much of the call or instalment as is
unpaid, together with any interest which may have accrued.
<PAGE>
12
23. The notice shall name a further day (not being less than 14 days
from the date of the notice) on or before which, and the place where, the
payment required by the notice is to be made and shall state that, in the event
of non-payment on or before the day and at the place appointed, the shares in
respect of which such call is made or instalment is payable will be liable to be
forfeited. The Board may accept the surrender of any share liable to be
forfeited hereunder and, in such case, references in these Bye-Laws to
forfeiture shall include surrender.
24. If the requirements of any such notice as aforesaid are not
complied with, any share in respect of which such notice has been given may at
any time thereafter, before payment of all calls or installments and interest
due in respect thereof has been made, be forfeited by a resolution of the Board
to that effect. Such forfeiture shall include all dividends declared in respect
of the forfeited shares and not actually paid before the forfeiture.
25. When any share has been forfeited, notice of the forfeiture
shall be served upon the person who was before forfeiture the holder of the
share; but no forfeiture shall be in any manner invalidated by any omission or
neglect to give such notice as aforesaid.
26. A forfeited share shall be deemed to be the property of the
Company and may be sold, re-offered or otherwise disposed of either to the
person who was, before forfeiture, the holder thereof or entitled thereto or to
any other person upon such terms and in such manner as the Board shall think
fit, and at any time before a
<PAGE>
13
sale, re-allotment or disposition the forfeiture may be cancelled on such terms
as the Board may think fit.
27. A person whose shares have been forfeited shall thereupon cease
to be a Shareholder in respect of the forfeited shares but shall,
notwithstanding the forfeiture, remain liable to pay to the Company all moneys
which at the date of forfeiture were presently payable by him to the Company in
respect of the shares with interest thereon at such rate as the Board may
determine from the date of forfeiture until payment, and the Company may enforce
payment without being under any obligation to make any allowance for the value
of the shares forfeited.
28. An affidavit in writing that the deponent is a Director or the
Secretary and that a share has been duly forfeited on the date stated in the
affidavit shall be conclusive evidence of the facts therein stated as against
all persons claiming to be entitled to the share. The Company may receive the
consideration (if any) given for the share on the sale, re-allotment or
disposition thereof and the Board may authorize some person to transfer the
share to the person to whom the same is sold, re-allotted or disposed of, and he
shall thereupon be registered as the holder of the share and shall not be bound
to see to the application of the purchase money (if any) nor shall his title to
the share be affected by any irregularity or invalidity in the proceedings
relating to the forfeiture, sale, re-allotment or disposal of the share.
REGISTER OF SHAREHOLDERS
------------------------
29. The Secretary shall establish and maintain the Register of
Shareholders at the Registered Office in the manner prescribed by the Companies
Acts.
<PAGE>
14
Unless the Board otherwise determines, the Register of Shareholders shall be
open to inspection in the manner prescribed by the Companies Acts between 10:00
a.m. and 12:00 noon on every working day. Unless the Board so determines, no
Shareholder or intending Shareholder shall be entitled to have entered in the
Register any indication of any trust or any equitable, contingent, future or
partial interest in any share or any interest in any fractional part of a share
and if any such entry exists or is permitted by the Board it shall not be deemed
to abrogate any of the provisions of Bye-Law 9.
REGISTER OF DIRECTORS AND OFFICERS
-----------------------------------
30. The Secretary shall establish and maintain a register of the
Directors and Officers of the Company as required by the Companies Acts. The
register of Directors and Officers shall be open to inspection in the manner
prescribed by the Companies Acts between 10:00 a.m. and 12:00 noon on every
working day.
TRANSFER OF SHARES
------------------
31. Subject to the Companies Acts, Bye-Law 56 and to such other
restrictions contained in these Bye-Laws as may be applicable, any Shareholder
may transfer all or any of his shares by an instrument of transfer in the usual
common form or in any other form which the Board may approve.
32. The instrument of transfer of a share shall be signed by or on
behalf of the transferor and where any share is not fully paid the transferee,
and the transferor shall be deemed to remain the holder of the share until the
name of the transferee is entered in the Register in respect thereof. All
instruments of transfer when registered may be retained by the Company. The
Board may, in their absolute
<PAGE>
15
discretion and without assigning any reason therefor, decline to register any
transfer of any share which is not a fully paid share.
The Board may also decline to register any transfer unless:
(a) the instrument of transfer is duly stamped and lodged with
the Company, accompanied by the certificate for the shares to which it relates,
and such other evidence as the Board may reasonably require to show the right of
the transferor to make the transfer,
(b) the instrument of transfer is in respect of only one class of
share,
(c) where applicable, the permission of the Bermuda Monetary
Authority with respect thereto has been obtained.
Subject to any directions of the Board from time to time in force, the
Secretary may exercise the powers and discretions of the Board under this Bye-
Law and Bye-Laws 31 and 33.
33. If the Board declines to register a transfer, it shall, within
three months after the date on which the instrument of transfer was lodged, send
to the transferee notice of such refusal.
34. No fee shall be charged by the Company for registering any
transfer, probate, letters of administration, certificate of death or marriage,
power of attorney, distringas or stop notice, order of court or other instrument
relating to or affecting the title to any share, or otherwise making an entry in
the Register relating to any share.
<PAGE>
16
TRANSMISSION OF SHARES
----------------------
35. In the case of the death of a Shareholder, the survivor or
survivors, where the deceased was a joint holder, and the estate representative,
where he was sole holder, shall be the only person recognised by the Company as
having any title to his shares; but nothing herein contained shall release the
estate of a deceased holder (whether the sole or joint) from any liability in
respect of any share held by him solely or jointly with other persons. For the
purpose of this Bye-Law, estate representative means the person to whom probate,
letters of administration or a confirmation as executor has or have been granted
in Bermuda, the Commonwealth or any part of the United States of America or,
failing any such person, such other person as the Board may in its absolute
discretion determine to be the person recognised by the Company for the purpose
of this Bye-Law.
36. Any person becoming entitled to a share in consequence of the
death of a Shareholder or otherwise by operation of applicable law may, subject
as hereafter provided and upon such evidence being produced as may from time to
time be required by the Board as to his entitlement, either be registered
himself as the holder of the share or elect to have some person nominated by him
registered as the transferee thereof. If the person so becoming entitled elects
to be registered himself, he shall deliver or send to the Company a notice in
writing signed by him stating that he so elects. If he shall elect to have his
nominee registered, he shall signify his election by signing an instrument of
transfer of such share in favour of his nominee. All the limitations,
restrictions and provisions of these Bye-Laws relating to the right to
<PAGE>
17
transfer and the registration of transfer of shares shall be applicable to any
such notice or instrument of transfer as aforesaid as if the death of the
Shareholder or other event giving rise to the transmission had not occurred and
the notice or instrument of transfer was an instrument of transfer signed by
such Shareholder.
37. A person becoming entitled to a share in consequence of the
death of a Shareholder or otherwise by operation of applicable law shall (upon
such evidence being produced as may from time to time be required by the Board
as to his entitlement) be entitled to receive and may give a discharge for any
dividends or other moneys payable in respect of the share, but he shall not be
entitled in respect of the share to receive notices of or to attend or vote at
general meetings of the Company or, save as aforesaid, to exercise in respect of
the share any of the rights or privileges of a Shareholder until he shall have
become registered as the holder thereof. The Board may at any time give notice
requiring such person to elect either to be registered himself or to transfer
the share, and if the notice is not complied with within sixty days the Board
may thereafter withhold payment of all dividends and other moneys payable in
respect of the shares until the requirements of the notice have been complied
with.
38. Subject to any directions of the Board from time to time in
force, the Secretary may exercise the powers and discretions of the Board under
Bye-Laws 35, 36 and 37.
INCREASE OF CAPITAL
-------------------
<PAGE>
18
39. The Company may from time to time increase its capital by such
sum to be divided into shares of such par value as the Company in general
meeting shall prescribe.
40. The Board may direct that the new shares or any of them shall
be offered in the first instance either at par or at a premium or (subject to
the provisions of the Companies Acts) at a discount to all the holders for the
time being of shares of any class or classes in proportion to the number of such
shares held by them respectively or make any other provision as to the issue of
the new shares.
41. The new shares shall be subject to all the provisions of these
Bye-Laws with reference to lien, the payment of calls, forfeiture, transfer,
transmission and otherwise.
ALTERATION OF CAPITAL
---------------------
42. The Company may from time to time in general meeting:
(a) divide its shares into several classes and attach thereto
respectively any preferential, deferred, qualified or special rights, privileges
or conditions;
(b) consolidate and divide all or any of its share capital into
shares of larger par value than its existing shares;
(c) subdivide its shares or any of them into shares of smaller par
value than is fixed by its memorandum, so, however, that in the subdivision the
proportion between the amount paid and the amount, if any, unpaid on each
reduced
<PAGE>
19
share shall be the same as it was in the case of the share from which the
reduced share is derived;
(d) make provision for the issue and allotment of shares which do not
carry any voting rights;
(e) cancel shares which, at the date of the passing of the resolution
in that behalf, have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital by the amount of the shares so
cancelled; and
(f) change the currency denomination of its share capital.
Where any difficulty arises in regard to any division, consolidation,
or subdivision under this Bye-Law, the Board may settle the same as it has
expedient and, in particular, may arrange for the sale of the shares
representing fractions and the distribution of the net proceeds of sale in due
proportion amongst the Shareholders who would have been entitled to the
fractions, and for this purpose the Board may authorize some person to transfer
the shares representing fractions to the purchaser thereof, who shall not be
bound to see to the application of the purchase money nor shall his title to the
shares be affected by any irregularity or invalidity in the proceedings relating
to the sale.
43. Subject to the Companies Acts and to any confirmation
or consent required by law or these Bye-Laws or by the terms of any series of
Preference Shares in issue, the Company may by resolution in general meeting
from time to time convert any preference shares into redeemable preference
shares.
<PAGE>
20
REDUCTION OF CAPITAL
--------------------
44. Subject to the Companies Acts, its memorandum and any
confirmation or consent required by law or these Bye-Laws, the Company may from
time to time in general meeting authorize the reduction of its issued share
capital or any capital redemption reserve fund or any share premium or
contributed surplus account in any manner.
45. In relation to any such reduction, the Company may in general
meeting determine the terms upon which such reduction is to be effected,
including, in the case of a reduction of part only of a class of shares, those
shares to be affected.
GENERAL MEETINGS AND WRITTEN RESOLUTIONS
----------------------------------------
46. (a) The Board shall convene and the Company shall hold general
meetings as Annual General Meetings in accordance with the requirements of the
Companies Acts at such times and places as the Board shall appoint. The Board
may, whenever it thinks fit, and shall, when required by the Companies Acts,
convene general meetings other than Annual General Meetings which shall be
called Special General Meetings.
(b) Except in the case of the removal of auditors and Directors,
anything which may be done by resolution of the Company in general meeting or by
resolution of a meeting of any class of the Shareholders of the Company may,
without a meeting and without any previous notice being required, be done by
resolution in writing, signed by all of the Shareholders or their proxies, or in
the case of a Shareholder that is a corporation (whether or not a company within
the meaning of
<PAGE>
21
the Companies Acts) on behalf of such Shareholder, being all of the Shareholders
of the Company who at the date of the resolution in writing would be entitled to
attend a meeting and vote on the resolution. Such resolution in writing may be
signed by, or in the case of a Shareholder that is a corporation (whether or not
a company within the meaning of the Companies Acts), on behalf of, all the
Shareholders of the Company, or any class thereof, in as many counterparts as
may be necessary.
(c) For the purposes of this Bye-Law, the date of the resolution in
writing is the date when the resolution is signed by, or in the case of a
Shareholder that is a corporation (whether or not a company within the meaning
of the Companies Acts), on behalf of, the last Shareholder to sign and any
reference in any enactment to the date of passing of a resolution is, in
relation to a resolution in writing made in accordance with this section, a
reference to such date.
(d) A resolution in writing made in accordance with this Bye-Law is as
valid as if it had been passed by the Company in general meeting or, if
applicable, by a meeting of the relevant class of Shareholders of the Company,
as the case may be. A resolution in writing made in accordance with this
section shall constitute minutes for the purposes of the Companies Acts and
these Bye-Laws.
NOTICE OF GENERAL MEETINGS
--------------------------
47. An Annual General Meeting shall be called by not less than 20
days' notice in writing and a Special General Meeting shall be called by not
less than 20 days' notice in writing. The notice shall be exclusive of the day
on which it is served or deemed to be served and of the day for which it is
given, and shall specify the place,
<PAGE>
22
day and time of the meeting, and, in the case of a Special General Meeting, the
general nature of the business to be considered. Notice of every general meeting
shall be given in any manner permitted by Bye-Laws 110 and 111 to all
Shareholders other than such as, under the provisions of these Bye-Laws or the
terms of issue of the shares they hold, are not entitled to receive such notice
from the Company.
Notwithstanding that a meeting of the Company is called by shorter
notice than that specified in this Bye-Law, it shall be deemed to have been duly
called if it is so agreed:
(a) in the case of a meeting called as an Annual General Meeting, by
all the Shareholders entitled to attend and vote thereat;
(b) in the case of any other meeting, by a majority in number of the
Shareholders having the right to attend and vote at the meeting, being a
majority together holding not less than 95 percent in nominal value of the
shares giving that right.
48. The accidental omission to give notice of a meeting or (in cases
where instruments of proxy are sent out with the notice) the accidental omission
to send such instrument of proxy to, or the non-receipt of notice of a meeting
or such instrument of proxy by, any person entitled to receive such notice shall
not invalidate the proceedings at that meeting.
48A. Advance notice shall at all times be required for the nomination,
other than by or at the direction of the Company's Board of Directors, of
candidates for election as directors, as well as other Shareholder proposals to
be considered at an
<PAGE>
23
Annual General Meeting. A notice of intent to nominate a Director or raise
business at the Annual General Meeting must be received by the Company not less
than sixty nor more than ninety days prior to the anniversary of the prior
year's Annual General Meeting, and must contain information concerning the
person to be nominated or the matter to be brought before the meeting and
concerning the Shareholder submitting the proposal, including the name, and
business background of the person to be nominated and the Shareholder submitting
the proposal and a summary of any material background information regarding the
proposal, as well as other information as may from time to time be specified by
the Board.
PROCEEDINGS AT GENERAL MEETINGS
-------------------------------
49. No business shall be transacted at any general meeting unless a
quorum is present when the meeting proceeds to business, but the absence of a
quorum shall not preclude the appointment, choice or election of a chairman
which shall not be treated as part of the business of the meeting. Save as
otherwise provided by these Bye-Laws, Shareholders holding at least 50% of the
issued Shares in the capital of the Company present in person or by proxy and
entitled to vote shall be a quorum for all purposes.
50. If within five minutes (or such longer time as the chairman of
the meeting may determine to wait) after the time appointed for the meeting, a
quorum is not present, the meeting, if convened on the requisition of
Shareholders, shall be dissolved. In any other case, it shall stand adjourned
to such other day and such other
<PAGE>
24
time and place as the chairman of the meeting may determine. The Company shall
give not less than 15 days' notice of any meeting adjourned through want of a
quorum.
51. A meeting of the Shareholders or any class thereof may be held by
means of such telephone, electronic or other communication facilities as permit
all persons participating in the meeting to communicate with each other
simultaneously and instantaneously, and participation in such a meeting shall
constitute presence in person at such meeting.
52. Each Director shall be entitled to attend and speak at any
general meeting of the Company.
53. The Chairman of the Board shall preside as chairman at every
general meeting. If at any meeting the Chairman is not present within five
minutes after the time appointed for holding the meeting, or if the Chairman is
not willing to act as chairman, the Directors present shall choose one of their
number to act or if one Director only is present he shall preside as chairman if
willing to act. If no Director is present or if each of the Directors present
declines to take the chair, the persons present and entitled to vote on a poll
shall elect one of their number to be chairman.
54. The chairman of the meeting may, with the consent of any meeting
at which a quorum is present (and shall if so directed by the meeting), adjourn
the meeting from time to time and from place to place, but no business shall be
transacted at any adjourned meeting except business which might lawfully have
been transacted at the meeting from which the adjournment took place. When a
meeting is
<PAGE>
25
adjourned for three months or more, notice of the adjourned meeting shall be
given as in the case of an original meeting.
55. Save as expressly provided by these Bye-Laws, it shall not be
necessary to give any notice of an adjournment or of the business to be
transacted at an adjourned meeting.
VOTING
------
56. Every Shareholder of record present in person or by proxy shall
have one vote for each Common Share registered in such Shareholder's name in the
Register, PROVIDED that, subject to Bye-Law 57, if and so long as the Controlled
Shares of any person would, upon giving effect to the principle that holders of
Common Shares shall have one vote for each Common Share so registered, confer
upon such person ten percent (10%) or more of the votes that may be cast by all
holders of Common Shares of the Company (any such person being referred to as an
"Over-the-Threshold Common Shareholder"), each issued share comprised in such
Controlled Shares shall confer only a fraction of a vote according to the
following formula (the "Cut-back Formula"):
[(T divided by 10) - 1] (rounded down to the nearest whole number) divided
by C.
Where: "T" is the aggregate number of votes conferred by all the issued
Common Shares, and "C" is the number of Controlled Shares of such person.
A number of votes equal to the excess of the number of votes that
could have been cast by the Controlled Shares held by all Over-the-Threshold
Common Shareholders if the Cut-back Formula were not applicable (the
"Reallocable Votes")
<PAGE>
26
shall be reallocated equally among the Common Shares that are not included in
such Controlled Shares and that are not held by other Over-the-Threshold Common
Shareholders (and, to the extent permitted by Bye-Law 57, among Grandfathered
Investors) in accordance with the following formula (the "Reallocation
Formula"):
R
------
T-C+
Where: "T" is used in the manner defined in the Cut-back Formula, C+ is
the aggregate number of Controlled Shares of all Over-the-Threshold Common
Shareholders and "R" is the aggregate number of Reallocable Votes that
could be cast by all Over-the-Threshold Common Shareholders (including
persons who become Over-the Threshold Common Shareholders as a result of
the application of the Reallocation Formula).
If the Application of the Reallocation Formula causes any person to
become an Over-the-Threshold Common Shareholder, the Cut-back Formula shall be
applied to such person's Controlled Shares (taking into account the additional
votes of such shares after the application of the Reallocation Formula), and the
Cut-back Formula and the Reallocation Formula shall continue to be applied until
there are no Over-the-Threshold Common Shareholders.
"Controlled Shares" in reference to any person means:
(i) all Common Shares directly, indirectly, or constructively
owned by such person within the meaning of section 958 of the Code (the
"Code Formula"); and
(ii) all Common Shares directly, indirectly or constructively
owned as a result of voting power held or shared by any person or "group"
of persons
<PAGE>
27
within the meaning of section 13(d)(3) of the Exchange Act and the rules
and regulations promulgated thereunder (the "13(d) Formula").
For the purposes of the application of the 13(d) Formula, "person"
means any individual, firm, partnership, company, association or other entity or
any "group" of persons with respect to the exercise of voting power within the
meaning of section 13(d)(3) of Exchange Act and the rules and regulations
thereunder. Only the Code Formula shall apply in determining the number of a
person's Controlled Shares until the completion of a public offering of the
Common Shares in the United States.
The Board shall have the power and authority to make all determina
tions that may be required to effectuate the provisions of this Bye-Law,
including any required determination of the number of Common Shares that may be
deemed to be held by any person, and such determinations shall be conclusive.
All record and beneficial owners of Common Shares shall be deemed to have
agreed, by virtue of their ownership thereof, to provide to the Board, at such
times and in such detail as the Board may reasonably request, any information
that the Board may require in order to make such determinations.
57. The provisions of Bye-Law 56 shall be modified to apply as
follows to Controlled Shares of John C Head III or the successors by will or
operation of law of at least a majority of the Controlled Shares deemed to be
held by him upon his death or disability ("Head"): (a) Common Shares that would
be deemed to be Controlled Shares held by Head or persons who would be deemed to
hold Controlled Shares together with Head ("Associated Owners") both pursuant to
the 13(d) Formula
<PAGE>
28
but not pursuant to the Code Formula shall not be deemed owned by
either Head or Associated Owners and (b) from and after the completion of a
public offering of the Common Shares in the United States, Head shall be
entitled to cast the number of votes that he would be entitled to cast pursuant
to Bye-Law 56 if the number "10" in the Cut-back Formula was replaced by the
number "4" (and Reallocable Votes shall be reallocated pursuant to the
Reallocation Formula in relation to the Controlled Shares held by Head pursuant
to the Cut-back Formula as so modified) (the "25% Limitation"). If Head ceases
to hold Controlled Shares (applying both portions of the definition thereof)
constituting at least 1% of the outstanding Common Shares, Head and his
Associated Owners shall permanently cease to have the special rights conferred
by this Bye-Law 57.
58. If the Company creates, pursuant to Bye-Law 3 or otherwise, any
new class or series of shares, the Company shall take such action in determining
the voting rights of the holders of such class or series as may be required to
assure that the Company is not characterized as a Controlled Foreign Corporation
for purposes of the Code, in each case applying any resulting restrictions on
voting rights equitably to all Shareholders (regardless of whether a Shareholder
is a U.S. Shareholder for purposes of the Code), subject to the rights of Head
and Associated Owners under Bye-Law 57.
59. In addition to any other requirement applicable to the amendment
of these Bye-Laws, Bye-Law 56 to this Bye-Law 59 inclusive may not be amended
without the consent of a majority of the Common Shares deemed held by Head so
long
<PAGE>
29
as Head has not ceased to hold Controlled Shares (applying both portions of
the definition thereof) constituting at least 1% of the outstanding Common
Shares.
VOTING AT A GENERAL MEETING
---------------------------
59A. At any general meeting, and subject at all times to Bye-Laws 56
to 59 inclusive a resolution put to the vote of the meeting shall be decided on
a show of hands unless (before or on the declaration of the result of the show
of hands or on the withdrawal of any other demand for a poll) a poll is demanded
by:
(1) the chairman of the meeting; or
(2) at least three Shareholders present in person or represented
by proxy; or
(3) any Shareholder or Shareholders present in person or
represented by proxy and holding between them not less than
one-tenth of the total voting rights of all the Shareholders
having the right to vote at such meeting; or
(4) a Shareholder or Shareholders present in person or
represented by proxy holding shares conferring the right to
vote at such meeting, being shares on which an aggregate sum
has been paid up equal to not less than one-tenth of the
total sum paid up on all such shares conferring such right.
The demand for a poll may be withdrawn by the person or any of the
persons making it at any time prior to the declaration of the result where it is
carried
<PAGE>
30
out. Unless a poll is so demanded and the demand is not withdrawn, a
declaration by the chairman that a resolution has, on a show of hands, been
carried or carried unanimously or by a particular majority or not carried by a
particular majority or lost shall be final and conclusive, and any entry to that
effect in the minute book of the Company shall be conclusive evidence of the
fact without proof of the number or proportion of votes recorded for or against
such resolution.
59B. If a poll is duly demanded, the result of the poll shall be
deemed to be the resolution of the meeting at which the poll is demanded.
59C. A poll demanded on the election of a chairman, or on a question
of adjournment, shall be taken forthwith. A poll demanded on any other question
shall be taken in such manner and either forthwith or at such time (being not
later than three months after the date of the demand) and place as the chairman
shall direct. It shall not be necessary (unless the chairman otherwise directs)
for notice to be given of a poll.
59D. The demand for a poll shall not prevent the continuance of a
meeting for the transaction of any business other than the question on which the
poll has been demanded and it may be withdrawn at any time before the close of
the meeting or the taking of the poll, whichever is the earlier.
59E. On a poll, votes may be cast either personally or by proxy.
59F. A person entitled to more than one vote on a poll need not use
all his votes or cast all the votes he uses in the same way.
<PAGE>
31
59G. In the case of an equality of votes at a general meeting, whether
on a show of hands or on a poll, the chairman of such meeting shall not be
entitled to a second or casting vote and the resolution shall fail.
59H. In the case of joint holders of a share, the vote of the senior
who tenders a vote, whether in person or by proxy, shall be accepted to the
exclusion of the votes of the other joint holders, and for this purpose
seniority shall be determined by the order in which the names stand in the
Register in respect of the joint holding.
59I. A Shareholder who is a patient for any purpose of any statute or
applicable law relating to mental health or in respect of whom an order has been
made by any Court having jurisdiction for the protection or management of the
affairs of persons incapable of managing their own affairs may vote, whether on
a show of hands or on a poll, by his receiver, committee, curator bonis or other
person in the nature of a receiver, committee or curator bonis appointed by such
Court and such receiver, committee, curator bonis or other person may vote on a
poll by proxy, and may otherwise act and be treated as such Shareholder for the
purpose of general meetings.
59J. No Shareholder shall, unless the Board otherwise determines, be
entitled to vote at any general meeting unless all calls or other sums presently
payable by him in respect of shares in the Company have been paid.
59K. If:
(1) any objection shall be raised to the qualification of any
voter; or
<PAGE>
32
(2) any votes have been counted which ought not to have been
counted or which might have been rejected; or
(3) any votes are not counted which ought to have been counted,
the objection or error shall not vitiate the decision of the
meeting or adjourned meeting on any resolution unless the
same is raised or pointed out at the meeting or, as the case
may be, the adjourned meeting at which the vote objected to
is given or tendered or at which the error occurs. Any
objection or error shall be referred to the chairman of the
meeting and shall only vitiate the decision of the meeting on
any resolution if the chairman decides that the same may have
affected the decision of the meeting. The decision of the
chairman on such matters shall be final and conclusive.
U.S. REPORTING AND PROXY
------------------------
60. (a) So long as the Company is required to maintain the
registration of its Common Shares under section 12 of the Exchange Act but
continues to be exempt (by virtue of its qualification as a "foreign private
issuer", as defined in rule 3b-4 under the Exchange Act, or for any other
reason):
(i) from the periodic filing and reporting requirements under
Regulation 13A under the Exchange Act that are applicable to a private
issuer of equity securities registered under the Exchange Act that is not a
<PAGE>
33
foreign private issuer (a "U.S. private issuer"), then the Company shall
nevertheless comply with the periodic reporting provisions and related
disclosure requirements, including filing requirements with the U.S. SEC,
that are applicable to a U.S. private issuer whose equity securities are
registered under section 12 of the Exchange Act; or
(ii) from the requirements imposed upon U.S. private issuers
pursuant to sections 14(a), (b) and (c) of the Exchange Act with regard to
the preparation and dissemination of proxy and information statements, then
the Company shall nevertheless be required to comply, and all record or
beneficial owners of Common Shares shall be required to comply, in
connection with any dissemination of information or solicitation of
proxies relating to action at a meeting of Shareholders or a solicitation
of consents for Shareholder action, with all provisions of Regulations 14A
and 14C under the Exchange Act other than those that relate to filing
requirements with the U.S. SEC, requirements to include Shareholder
proposals in proxy materials pursuant to Rule 14a-8, and requirements with
respect to the approval of certain transactions pursuant to item 14 of
Schedule 14A, PROVIDED THAT, in lieu of the application of the provisions
of rules 14a-9 and 14c-6, the following provision shall apply, interpreted
in accordance with the Companies Act and any applicable Bermuda law: No
dissemination of information or solicitation of proxies shall be made by
the Company or any record or beneficial owner of Common Shares containing
any statement that, at the time and under the
<PAGE>
34
circumstances under which it is made, is false or misleading with respect
to any material fact or that omits to state any material fact necessary in
order to make the statements therein not misleading or necessary to correct
any statement in any earlier communication with respect to the solicitation
of a proxy for the same meeting or with respect to the same matter that has
become false or misleading.
(b) The following rules and items under the Exchange Act shall be
applicable to the Company and its record and beneficial Shareholders in
compliance with the foregoing principles:
Rules: 14a-1, 14a-2, 14a-3(a) (but, with regard to specific matters, only
to the extent specified below with respect to specific disclosures required
by Schedule 14A), (b), (d), (e) and (f)(1), 14a-4, 14a-5, 14a-7, 14a-10,
14a-11(a), (b) and (f), 14a-12(a), 14a-13, 14a-14, 14c-1, 14c-2(a) (but,
with regard to specific matters, only to the extent specified below with
respect to specific disclosures required by Schedule 14C) and (b), 14c-
3(a), 14c-4 and 14c-7.
Schedule 14A: Items 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15, 16, 17,
18, 19, 20 (but not with respect to matters analogous to those governed by
items 14) and 21.
Schedule 14C: Items 1 (to the extent required by the items specified with
respect to Schedule 14A above), 2, and 3.
(c) All references to U.S. laws, regulations, rules and schedules in
this Bye-Law are to such provisions as in effect on 3 December 1997 and to any
successor provisions thereto.
(d) No amendment to this Bye-Law 60 shall be effective without the
approval in general meeting of 66-2/3% of the Common Shares represented in
person or by proxy at such meeting.
<PAGE>
35
PROXIES AND CORPORATE REPRESENTATIVES
--------------------------------------
61. The instrument appointing a proxy shall be in writing under the
hand of the appointor or of his attorney authorized by him in writing or, if the
appointor is a corporation, either under its seal or under the hand of an
officer, attorney or other person authorized to sign the same.
62. In the event that none of the Common Shares are listed on the
Nasdaq National Market, the provisions of this Bye-Law 62 shall apply. Any
Shareholder may appoint a standing proxy or (if a corporation) representative by
depositing at the Registered Office a proxy or (if a corporation) an
authorisation and such proxy or authorisation shall be valid for all general
meetings and adjournments thereof until notice of revocation is received at the
Registered Office. Where a standing proxy or authorisation exists, its
operation shall be deemed to have been suspended at any general meeting or
adjournment thereof at which the Shareholder is present or in respect to which
the Shareholder has specially appointed a proxy or representative. The Board
may from time to time require such evidence as it shall deem necessary as to the
due execution and continuing validity of any such standing proxy or
authorisation, and the operation of any such standing proxy or authorisation
shall be deemed to be suspended until such time as the Board determines that it
has received the requested evidence or other evidence satisfactory to it.
63. Subject to Bye-Law 62, the instrument appointing a proxy,
together with such other evidence as to its due execution as the Board may from
time to time require, shall be delivered at the Registered Office (or at such
place as may be
<PAGE>
36
specified in the notice convening the meeting or in any notice of any
adjournment or, in either case, in any document sent therewith) prior to the
holding of the meeting or adjourned meeting at which the person named in the
instrument proposes to vote or, in the case of a poll taken subsequently to the
date of a meeting or adjourned meeting, before the time appointed for the taking
of the poll, and in default the instrument of proxy shall not be treated as
valid.
64. In the event that none of the Common Shares are listed on the
Nasdaq National Market, the following provisions of this Bye-Law 64 shall apply.
Instruments of proxy shall be in any common form or in such other form as the
Board may approve and the Board may, if it thinks fit, send out with the notice
of any meeting forms of instruments of proxy for use at that meeting. The
instrument of proxy shall be deemed to confer authority to demand or join in
demanding a poll and to vote on any amendment of a resolution put to the meeting
for which it is given as the proxy thinks fit. The instrument of proxy shall
unless the contrary is stated therein be valid as well for any adjournment of
the meeting as for the meeting to which it relates.
65. A vote given in accordance with the terms of an instrument of
proxy shall be valid notwithstanding the previous death or insanity of the
principal, or revocation of the instrument of proxy or of the authority under
which it was executed, provided that no intimation in writing of such death,
insanity or revocation shall have been received by the Company at the Registered
Office (or such other place as may be specified for the delivery of instruments
of proxy in the notice convening the meeting or other documents sent therewith)
one hour at least before the commencement of the
<PAGE>
37
meeting or adjourned meeting, or the taking of the poll, at which the instrument
of proxy is used.
66. Subject to the Companies Acts, the Chairman of the Board may at
its discretion waive any of the provisions of these Bye-Laws related to proxies
or authorisations and, in particular, may accept such verbal or other assurances
as he thinks fit as to the right of any person to attend and vote on behalf of
any Shareholder at general meetings.
APPOINTMENT, RETIREMENT AND REMOVAL OF DIRECTORS
-------------------------------------------------
67. Unless otherwise determined by the Company in General Meeting,
the number of Directors shall not be fewer than two [and there shall be no
maximum number]. All Directors, upon election or appointment, must provide
written acceptance of their appointment, in such form as the Board may think
fit, by notice in writing to the Registered Office within thirty days of their
appointment.
68. There shall be three classes of Directors, with initial terms of
office of varying duration, with the result that there shall be a rotating
Board. The classes of Directors shall be known as Class 1, Class 2 and Class 3
and shall initially be established among the current Board at the Board meeting
at which these Bye-Laws are adopted subject to the Shareholders' approval. The
initial Class 1, Class 2 and Class 3 Directors shall serve in office as follows.
Class 1 shall retire at the first Annual General Meeting following the
completion of the offering (the "Effective Date"). Class 2 shall retire at the
second Annual General Meeting following the Effective Date, and Class 3 shall
retire at the third Annual General Meeting following the Effective
<PAGE>
38
Date. This sequence shall be repeated thereafter. Each director in a Class shall
be eligible for re-election at the Annual General Meeting of the Company at
which such Class shall retire, to hold office for three years or until its
successors are elected or appointed.
69A. Any additional Directors elected so as to increase the total
number of Directors then in office shall be elected to such Class as will ensure
that the number of Directors in each Class remains equal, and if that is not
possible, to the Class which is retiring at the Annual General Meeting at which
such Director is elected or, if any such Director is elected otherwise than at
an Annual General Meeting to the Class which was elected at the most recent
prior Annual General Meeting.
69B. If at the meeting at which a Director retires by rotation, the
Company does not fill the vacancy so created, the retiring Director shall, if
willing to act, be deemed to have been reappointed unless at the meeting it is
resolved not to fill the vacancy or unless a resolution for the reappointment of
the Director is put to the meeting and lost.
70. No person other than a Director retiring by rotation shall be
appointed or reappointed a Director at any general meeting unless:
a) he is recommended by the Board, or
b) subject to Bye-Law 48A, not less than 60 nor more than 90
clear days before the date appointed for the meeting, notice executed by a
Shareholder qualified to vote at the meeting has been given to the Company of
the intention of that Shareholder to propose that person for appointment or
reappointment.
<PAGE>
39
70A. Except as otherwise authorized by the Companies Acts, the
appointment of any person proposed as a Director shall be effected by a separate
resolution.
70B. Subject as aforesaid, the Company may by ordinary resolution
appoint a person who is willing to act to be a Director either to fill a vacancy
or as an additional director and may also determine the rotation in which any
additional directors are to retire.
70C. The Board may appoint one or more persons willing to act to be a
Director, either to fill a vacancy or vacancies or, if the Board is authorized
by a Resolution, as an additional Director or Directors. A Director so
appointed shall hold office only until the next following Annual General
Meeting, and shall not be taken into account in determining the Directors who
are to retire by rotation at the meeting, and shall then be eligible for re-
election.
70D. Subject as aforesaid, a Director who retires at an Annual General
Meeting may, if willing to act, be reappointed. If he is not reappointed, he
shall retain office until the meeting appoints someone in his place, or if it
does not do so, until the end of the meeting.
70E. Directors may be removed without cause by vote of the
Shareholders. Notwithstanding the preceding, a Director may not be removed at a
General Meeting unless notice of any such meeting shall have been served upon
the Director concerned not less than fourteen (14) days before the meeting and
he shall be entitled to be heard at that meeting, and provided further that the
-------- -------
Resolution removing
<PAGE>
40
any Director is duly adopted by Shareholders holding not less than seventy-five
percent (75%) of the shares of the Company entitled to vote at such meeting. Any
vacancy created by the removal of a Director at a General Meeting may be filled
at such meeting by the election of another Director in his place or, in the
absence of any such election, by the Board.
RESIGNATION AND DISQUALIFICATION OF DIRECTORS
---------------------------------------------
70F. The office of a Director shall be vacated upon the happening of
any of the following events:
(1) if he resigns his office by notice in writing delivered to
the Registered Office or tendered at a meeting of the Board;
(2) if he becomes of unsound mind or a patient for any purpose of
any statute or applicable law relating to mental health and
the Board resolves that his office is vacated;
(3) if he becomes bankrupt under the laws of any country or
compounds with his creditors;
(4) if he is prohibited under the laws of any country from being
a Director;
(5) if he ceases to be a Director by virtue of the Companies Acts
or is removed from office pursuant to these Bye-Laws.
<PAGE>
41
ALTERNATE DIRECTORS
-------------------
70G. The Company may by Resolution elect any person or persons to act
as Directors in the alternative to any of the Directors or may authorise the
Board to appoint such Alternate Directors and a Director may appoint and remove
his own Alternate Director. Any appointment or removal of an Alternate Director
by a Director shall be effected by depositing a notice of appointment or removal
with the Secretary at the Registered Office, signed by such Director, and such
appointment or removal shall become effective on the date of receipt by the
Secretary. Any Alternate Director may be removed by Resolution of the Company
and, if appointed by the Board, may be removed by the Board. Subject as
aforesaid, the office of Alternate Director shall continue until the next annual
election of Directors or, if earlier, the date on which the relevant Director
ceases to be a Director. An Alternate Director may also be a Director in his
own right and may act as alternate to more than one Director.
70H. An Alternate Director shall be entitled to receive notices of all
meetings of Directors, to attend, be counted in the quorum and vote at any such
meeting at which any Director to whom he is alternate is not personally present,
and generally to perform all the functions of any Director to whom he is
alternate in his absence.
70I. Every person acting as an Alternate Director shall (except as
regards powers to appoint an alternate and remuneration) be subject in all
respects to the provisions of these Bye-Laws relating to Directors and shall
alone be responsible to the Company for his acts and defaults and shall not be
deemed to be the agent of or for
<PAGE>
42
any Director for whom he is alternate. An Alternate Director may be paid
expenses and shall be entitled to be indemnified by the Company to the same
extent mutatis mutandis as if he were a Director. Every person acting as an
Alternate Director shall have one vote for each Director for whom he acts as
alternate (in addition to his own vote if he is also a Director). The signature
of an Alternate Director to any resolution in writing of the Board or a
committee of the Board shall, unless the terms of his appointment provide to the
contrary, be as effective as the signature of the Director or Directors to whom
he is alternate.
DIRECTORS' FEES AND ADDITIONAL
REMUNERATION AND EXPENSES
------------------------------
71. The amount, if any, of Directors' fees shall from time to time be
determined by the Board, or any committee of the Board established for such
purpose, such fees shall be deemed to accrue from day to day. Each Director may
be paid his reasonable travel, hotel and incidental expenses in attending and
returning from meetings of the Board or committees constituted pursuant to these
Bye-Laws or general meetings and shall be paid all expenses properly and
reasonably incurred by him in the conduct of the Company's business or in the
discharge of his duties as a Director. Any Director who, by request, goes or
resides abroad for any purposes of the Company or who performs services which in
the opinion of the Board go beyond the ordinary duties of a Director may be paid
such extra remuneration (whether by way of salary, commission, participation in
profits or otherwise) as the Board may determine, and
<PAGE>
43
such extra remuneration shall be in addition to any remuneration provided for by
or pursuant to any other Bye-Law.
DIRECTORS' INTERESTS
---------------------
72. (a) A Director may hold any other office or place of profit with
the Company (except that of auditor) in conjunction with his office of Director
for such period and upon such terms as the Board may determine, and may be paid
such extra remuneration therefor (whether by way of salary, commission,
participation in profits or otherwise) as the Board may determine, and such
extra remuneration shall be in addition to any remuneration provided for by or
pursuant to any other Bye-Law.
(b) A Director may act by himself or his firm in a professional
capacity for the Company (otherwise than as auditor), and he or his firm shall
be entitled to remuneration for professional services as if he were not a
Director.
(c) Subject to the provisions of the Companies Acts, a Director
may notwithstanding his office be a party to, or otherwise interested in, any
transaction or arrangement with the Company or in which the Company is otherwise
interested; and be a Director or other officer of, or employed by, or a party to
any transaction or arrangement with, or otherwise interested in, any body
corporate promoted by the Company or in which the Company is interested. The
Board may also cause the voting power conferred by the shares in any other
company held or owned by the Company to be exercised in such manner in all
respects as it thinks fit, including the exercise thereof in favour of any
resolution appointing the Directors or any of them to
<PAGE>
44
be directors or officers of such other company, or voting or providing for the
payment of remuneration to the directors or officers of such other company.
(d) So long as, where it is necessary, he declares the nature of his
interest at the first opportunity at a meeting of the Board or by writing to the
Directors as required by the Companies Acts, a Director shall not by reason of
his office be accountable to the Company for any benefit which he derives from
any office or employment to which these Bye-Laws allow him to be appointed or
from any transaction or arrangement in which these Bye-Laws allow him to be
interested, and no such transaction or arrangement shall be liable to be avoided
on the ground of any interest or benefit.
(e) Subject to the Companies Acts and any further disclosure required
thereby, a general notice to the Directors by a Director or officer declaring
that he is a director or officer or has an interest in a person and is to be
regarded as interested in any transaction or arrangement made with that person
shall be a sufficient declaration of interest in relation to any transaction or
arrangement so made.
POWERS AND DUTIES OF THE BOARD
-------------------------------
73. Subject to the provisions of the Companies Acts and these Bye-
Laws and to any directions given by the Company in general meeting, the Board
shall manage the business of the Company and may pay all expenses incurred in
promoting and incorporating the Company and may exercise all the powers of the
Company. No alteration of these Bye-Laws and no such direction shall invalidate
any prior act of the Board which would have been valid if that alteration had
not been made or that
<PAGE>
45
direction had not been given. The powers given by this Bye-Law shall not be
limited by any special power given to the Board by these Bye-Laws, and a meeting
of the Board at which a quorum is present shall be competent to exercise all the
powers, authorities and discretions for the time being vested in or exercisable
by the Board.
74. The Board may exercise all the powers of the Company to borrow
money and to mortgage or charge all or any part of the undertaking, property and
assets (present and future) and uncalled capital of the Company and to issue
debentures and other securities, whether outright or as collateral security for
any debt, liability or obligation of the Company or of any other persons.
75. All cheques, promissory notes, drafts, bills of exchange and
other instruments, whether negotiable or transferable or not, and all receipts
for money paid to the Company shall be signed, drawn, accepted, endorsed or
otherwise executed, as the case may be, in such manner as the Board shall from
time to time by resolution determine.
76. The Board on behalf of the Company may provide benefits, whether
by the payment of gratuities or pensions or otherwise, for any person including
any Director or former Director, who has held any executive office or employment
with the Company or with any body corporate which is or has been a subsidiary or
affiliate of the Company or a predecessor in the business of the Company or of
any such subsidiary or affiliate, and to any member of his family or any person
who is or was dependent on him, and may contribute to any fund and pay premiums
for the
<PAGE>
46
purchase or provision of any such gratuity, pension or other benefit, or for the
insurance of any such person.
77. The Board may from time to time appoint one or more of its body
to be a managing director, joint managing director or an assistant managing
director or to hold any other employment or executive office with the Company
for such period and upon such terms as the Board may determine and may revoke or
terminate any such appointments. Any such revocation or termination as
aforesaid shall be without prejudice to any claim for damages that such Director
may have against the Company or the Company may have against such Director for
any breach of any contract of service between him and the Company which may be
involved in such revocation or termination. Any person so appointed shall
receive such remuneration (if any) (whether by way of salary, commission,
participation in profits or otherwise) as the Board may determine, and either in
addition to or in lieu of his remuneration as a Director.
DELEGATION OF THE BOARD'S POWERS
--------------------------------
78. The Board may by power of attorney appoint any company, firm or
person or any fluctuating body of persons, whether nominated directly or
indirectly by the Board, to be the attorney or attorneys of the Company for such
purposes and with such powers, authorities and discretions (not exceeding those
vested in or exercisable by the Board under these Bye-Laws) and for such period
and subject to such conditions as it may think fit, and any such power of
attorney may contain such provisions for the protection and convenience of
persons dealing with any such attorney and of such attorney as the Board may
think fit, and may also authorise any such attorney
<PAGE>
47
to sub-delegate all or any of the powers, authorities and discretions vested in
him.
79. The Board may entrust to and confer upon any Director or officer
any of the powers exercisable by it upon such terms and conditions with such
restrictions as it thinks fit, and either collaterally with, or to the exclusion
of, its own powers, and may from time to time revoke or vary all or any of such
powers, but no person dealing in good faith and without notice of such
revocation or variation shall be affected thereby.
80. The Board may delegate any of its powers, authorities and
discretions to committees, consisting of such person or persons (whether a
member or members of its body or not) as it thinks fit. Any committee so formed
shall, in the exercise of the powers, authorities and discretions so delegated,
and in conducting its proceedings conform to any regulations which may be
imposed upon it by the Board.
PROCEEDINGS OF THE BOARD
------------------------
81. The Board may meet for the despatch of business, adjourn and
otherwise regulate its meetings as it thinks fit. Questions arising at any
meeting shall be determined by a majority of votes. In the case of an equality
of votes the motion shall be deemed to have been lost. A Director may, and the
Secretary on the requisition of a Director shall, at any time summon a Board
meeting.
82. Notice of a Board meeting shall be deemed to be duly given to a
Director if it is given to him personally or by word of mouth or sent to him by
post,
<PAGE>
48
cable, telex, telecopier or other mode of representing or reproducing
words in a legible and non-transitory form at his last known address or any
other address given by him to the Company for this purpose. A Director may
waive notice of any meeting either prospectively or retrospectively.
83. (a) The quorum necessary for the transaction of the business of
the Board may be fixed by the Board and, unless so fixed at any other number,
shall be a majority of the Directors. Any Director who ceases to be a Director
at a Board meeting may continue to be present and to act as a Director and be
counted in the quorum until the termination of the Board meeting if no other
Director objects and if otherwise a quorum of Directors would not be present.
(b) A Director who to his knowledge is in any way, whether directly or
indirectly, interested in a contract or proposed contract, transaction or
arrangement with the Company and has complied with the provisions of the
Companies Acts and these Bye-Laws with regard to disclosure of his interest
shall be entitled to vote in respect of any contract, transaction or arrangement
in which he is so interested, and if he shall do so his vote shall be counted,
and he shall be taken into account in ascertaining whether a quorum is present.
84. So long as at least two Directors remain in office, the
continuing Directors may act notwithstanding any vacancy on the Board but, if
only one Director remains, the sole remaining Director shall act only for the
purpose of calling a general meeting.
<PAGE>
49
85. The Chairman of the Board shall preside as chairman at every
meeting of the Board. If at any meeting the Chairman is not present within five
minutes after the time appointed for holding the meeting, or if the Chairman is
not willing to act as chairman, the Directors present may chose one of their
number to be chairman of the meeting.
86. The meetings and proceedings of any committee consisting of two
or more members shall be governed by the provisions contained in these Bye-Laws
for regulating the meetings and proceedings of the Board so far as the same are
applicable and are not superseded by any regulations imposed by the Board.
87. A resolution in writing signed by all the Directors for the time
being entitled to receive notice of a meeting of the Board or by all the members
of a committee for the time being shall be as valid and effectual as a
resolution passed at a meeting of the Board or, as the case may be, of such
committee duly called and constituted. Such resolution may be contained in one
document or in several documents in the like form each signed by one or more of
the Directors or members of the committee concerned.
88. A meeting of the Board or a committee appointed by the Board may
be held by means of such telephone, electronic or other communication facilities
as permit all persons participating in the meeting to communicate with each
other simultaneously and instantaneously, and participation in such a meeting
shall constitute presence in person at such meeting.
<PAGE>
50
89. All acts done by the Board or by any committee or by any person
acting as a Director or member of a committee or any person duly authorized by
the Board or any committee, shall, notwithstanding that it is afterwards
discovered that there was some defect in the appointment of any member of the
Board or such committee or person acting as aforesaid or that they or any of
them were disqualified or had vacated their office, be as valid as if every such
person had been duly appointed and was qualified and had continued to be a
Director, member of such committee or person so authorized.
OFFICERS
---------
90. The officers of the Company shall be elected by the Board as soon
as possible after the statutory meeting and each annual general meeting. Any
person elected or appointed pursuant to this Bye-Law shall hold office for such
period upon such terms as the Board may determine, and the Board may revoke or
terminate any such election or appointment. Any such revocation or termination
shall be without prejudice to any claim for damages that such officer may have
against the Company or the Company may have against such officer for any breach
of any contract of service between him and the Company which may be involved in
such revocation or termination. Save as provided in the Companies Acts or these
Bye-Laws, the powers and duties of the officers of the Company shall be such (if
any) as are determined from time to time by the Board.
<PAGE>
51
MINUTES
-------
91. The Directors shall cause minutes to be made and books kept for
the purpose of recording -
(a) all appointments of officers made by the Directors;
(b) the names of the Directors and other persons (if any) present
at each meeting of Directors and of any committee;
(c) of all proceedings at meetings of the Inspectors of the
Company, of the holders of any class of shares in the Company, and of
committees.
SECRETARY
---------
92. The Secretary shall be appointed by the Board at such
remuneration (if any) and upon such terms as it may think fit, and any Secretary
so appointed may be removed by the Board. The duties of the Secretary shall be
those prescribed by the Companies Acts together with such other duties as shall
from time to time be prescribed by the Board.
93. A provision of the Companies Acts or these Bye-Laws requiring or
authorising a thing to be done by or to a Director and the Secretary shall not
be satisfied by its being done by or to the same person acting both as Director
and as, or in the place of, the Secretary.
THE SEAL
--------
94. (a) The Seal shall consist of a circular metal device with the
name of the Company around the outer margin thereof and the country and year of
incorporation across the centre thereof. Should the Seal not have been received
at the
<PAGE>
52
Registered Office in such form at the date of adoption of this Bye-Law
then, pending such receipt, any document requiring to be sealed with the Seal
shall be sealed by affixing a red wafer seal to the document with the name of
the Company, and the country and year of incorporation typewritten across the
centre thereof.
(b) The Board shall provide for the custody of every Seal. A Seal
shall only be used by authority of the Board or of a committee of the Board
authorized by the Board in that behalf. Subject to these Bye-Laws, any
instrument to which a Seal is affixed shall be signed by a Director and by the
Secretary or by a second Director; provided that the Secretary or a Director may
affix a Seal over his signature alone to authenticate copies of these Bye-Laws,
the minutes of any meeting or any other documents requiring authentication.
DIVIDENDS AND OTHER PAYMENTS
----------------------------
95. The Board may from time to time declare cash dividends or
distributions out of contributed surplus to be paid to the Shareholders
according to their rights and interests including such interim dividends as
appear to the Board to be justified by the position of the Company. The Board
may also pay any fixed cash dividend which is payable on any shares of the
Company half yearly or on such other dates, whenever the position of the
Company, in the opinion of the Board, justifies such payment.
96. Except insofar as the rights attaching to, or the terms of issue
of, any share otherwise provide:
<PAGE>
53
(a) all dividends or distributions out of contributed surplus may be
declared and paid according to the amounts paid up on the shares in respect of
which the dividend or distribution is paid, and an amount paid up on a share in
advance of calls may be treated for the purpose of this Bye-Law as paid-up on
the share;
(b) dividends or distributions out of contributed surplus may be
apportioned and paid pro rata according to the amounts paid-up on the shares
during any portion or portions of the period in respect of which the dividend or
distribution is paid.
97. The Board may deduct from any dividend, distribution or other
moneys payable to a Shareholder by the Company on or in respect of any shares
all sums of money (if any) presently payable by him to the Company on account of
calls or otherwise in respect of shares of the Company.
98. The Board in its absolute discretion may determine that no
dividend, distribution or other moneys payable by the Company on or in respect
of any share shall bear interest against the Company.
99. Any dividend, distribution, interest or other sum payable in cash
to the holder of shares may be paid by cheque or warrant sent through the post
addressed to the holder at his address in the Register or, in the case of joint
holders, addressed to the holder whose name stands first in the Register in
respect of the shares at his registered address as appearing in the Register or
addressed to such person at such address as the holder or joint holders may in
writing direct. Every such cheque or warrant shall, unless the holder or joint
holders otherwise direct, be made payable to
<PAGE>
54
the order of the holder or, in the case of joint holders, to the order of the
holder whose name stands first in the Register in respect of such shares, and
shall be sent at his or their risk, and payment of the cheque or warrant by the
bank on which it is drawn shall constitute a good discharge to the Company. Any
one of two or more joint holders may give effectual receipts for any dividends,
distributions or other moneys payable or property distributable in respect of
the shares held by such joint holders.
100. Any dividend or distribution out of contributed surplus unclaimed
for a period of six years from the date of declaration of such dividend or
distribution shall be forfeited and shall revert to the Company, and the payment
by the Board of any unclaimed dividend, distribution, interest or other sum
payable on or in respect of the share into a separate account shall not
constitute the Company a trustee in respect thereof.
101. The Board may direct payment or satisfaction of any dividend or
distribution out of contributed surplus wholly or in part by the distribution of
specific assets, and in particular of paid-up shares or debentures of any other
company, and where any difficulty arises in regard to such distribution or
dividend the Board may settle it as it thinks expedient, and in particular may
authorise any person to sell and transfer any fractions or may ignore fractions
altogether, and may fix the value for distribution or dividend purposes of any
such specific assets and may determine that cash payments shall be made to any
Shareholders upon the footing of the values so fixed in order to secure equality
of distribution and may vest any such specific assets in trustees as may seem
expedient to the Board.
<PAGE>
55
RESERVES
--------
102. The Board may, before paying or declaring any dividend or
distribution out of contributed surplus, set aside such sums as it thinks proper
as reserves which shall, at the discretion of the Board, be applicable for any
purpose of the Company and pending such application may, also at such
discretion, either be employed in the business of the Company or be invested in
such investments as the Shareholders may from time to time think fit. The Board
may also without placing the same to reserve carry forward any sums which they
may think it prudent not to distribute.
CAPITALIZATION OF PROFITS
-------------------------
103. The Board may at any time and from time to time resolve that it
is desirable to capitalize all or any part of any amount for the time being
standing to the credit of any reserve or fund which is available for
distribution or to the credit of any share premium account or any capital
redemption reserve fund and accordingly that such amount be set free for
distribution amongst the Shareholders or any class of Shareholders who would be
entitled thereto if distributed by way of dividend and in the same proportions,
on the footing that the same be not paid in cash but be applied either in or
towards paying up amounts for the time being unpaid on any shares in the Company
held by such Shareholders respectively or in payment up in full of unissued
shares, debentures or other obligations of the Company, to be allotted and
distributed credited as fully paid amongst such Shareholders, or partly in one
way and partly in the other, and the Board shall give effect to such resolution,
provided that for the purpose
<PAGE>
56
of this Bye-Law, a share premium account and a capital redemption reserve fund
may be applied only in paying up of unissued shares to be issued to such
Shareholders credited as fully paid, and provided further that any sum standing
-------- -------
to the credit of a share premium account may only be applied in crediting as
fully paid shares of the same class as that from which the relevant share
premium was derived.
104. Where any difficulty arises in regard to any distribution under
the last preceding Bye-Law, the Board may settle the same as it thinks expedient
and, in particular, may authorise any person to sell and transfer any fractions
or may resolve that the distribution should be as nearly as may be practicable
in the correct proportion but not exactly so or may ignore fractions altogether,
and may determine that cash payments should be made to any Shareholders in order
to adjust the rights of all parties, as may seem expedient to the Board. The
Board may appoint any person to sign on behalf of the persons entitled to
participate in the distribution any contract necessary or desirable for giving
effect thereto, and such appointment shall be effective and binding upon the
Shareholders.
RECORD DATES
------------
105. Notwithstanding any other provisions of these Bye-Laws, the Board
may fix any date as the record date for any dividend, distribution, allotment or
issue and for the purpose of identifying the persons entitled to receive notices
of general meetings. Any such record date may be on or at any time before or
after any date on which such dividend, distribution, allotment or issue is
declared, paid or made or such notice is dispatched.
<PAGE>
57
ACCOUNTING RECORDS
-------------------
106. The Board shall cause to be kept accounting records sufficient to
give a true and fair view of the state of the Company's affairs and to show and
explain its transactions, in accordance with the Companies Acts.
107. The records of account shall be kept at the Registered Office or
at such other place or places as the Board thinks fit, and shall at all times be
open to inspection by the Directors: PROVIDED that if the records of account
are kept at some place outside Bermuda, there shall be kept at an office of the
Company in Bermuda such records as will enable the directors to ascertain with
reasonable accuracy the financial position of the Company at the end of each
three month period. No Shareholder (other than an officer of the Company) shall
have any right to inspect any accounting record or book or document of the
Company except as conferred by law or authorized by the Board or the Company in
general meeting.
108. A copy of the financial statements which are to be laid before
the Company in general meeting, together with a copy of the auditor's report,
shall be sent to each person entitled thereto in accordance with the
requirements of the Companies Acts.
AUDIT
-----
109. Save and to the extent that an audit is waived in the manner
permitted by the Companies Acts, auditors shall be appointed and their duties
regulated in accordance with the Companies Acts, any other applicable law and
such
<PAGE>
58
requirements not inconsistent with the Companies Acts as the Board may from
time to time determine.
SERVICE OF NOTICES AND OTHER DOCUMENTS
--------------------------------------
110. Any notice or other document (including a share certificate) may
be served on or delivered to any Shareholder by the Company either personally or
by sending it through the post (by airmail where applicable) in a pre-paid
letter addressed to such Shareholder at his address as appearing in the Register
or by delivering it to or leaving it at such registered address. In the case of
joint holders of a share, service or delivery of any notice or other document on
or to one of the joint holders shall for all purposes be deemed as sufficient
service on or delivery to all the joint holders. Any notice or other document
if sent by post shall be deemed to have been served or delivered seven days
after it was put in the post, and in proving such service or delivery, it shall
be sufficient to prove that the notice or document was properly addressed,
stamped and put in the post.
111. Any notice of a general meeting of the Company shall be deemed
to be duly given to a Shareholder if it is sent to him by cable, telex,
telecopier or other mode of representing or reproducing words in a legible and
non transitory form at his address as appearing in the Register or any other
address given by him to the Company for this purpose. Any such notice shall be
deemed to have been served twenty-four hours after its despatch.
112. Any notice or other document delivered, sent or given to a
Shareholder in any manner permitted by these Bye-Laws shall, notwithstanding
that
<PAGE>
59
such Shareholder is then dead or bankrupt or that any other event has
occurred, and whether or not the Company has notice of the death or bankruptcy
or other event, be deemed to have been duly served or delivered in respect of
any share registered in the name of such Shareholder as sole or joint holder
unless his name shall, at the time of the service or delivery of the notice or
document, have been removed from the Register as the holder of the share, and
such service or delivery shall for all purposes be deemed as sufficient service
or delivery of such notice or document on all persons interested (whether
jointly with or as claiming through or under him) in the share.
WINDING UP
----------
113. If the Company shall be wound up, the liquidator may, with the
sanction of a resolution of the Company and any other sanction required by the
Companies Acts, divide amongst the Shareholders in specie or kind the whole or
any part of the assets of the Company (whether they shall consist of property of
the same kind or not) and may for such purposes set such values as he deems fair
upon any property to be divided as aforesaid and may determine how such division
shall be carried out as between the Shareholders or different classes of
Shareholders. The liquidation may, with the like sanction, vest the whole or any
part of such assets in trustees upon such trust for the benefit of the
contributories as the liquidator, with the like sanction, shall think fit, but
so that no Shareholder shall be compelled to accept any shares or other assets
upon which there is any liability.
<PAGE>
60
INDEMNITY
---------
114. (a) To the extent not prohibited by law, the Company shall
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Company to
procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a Director or
officer of the Company, or is or was serving in any capacity at the request of
the Company for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees and disbursements). Persons who
are not Directors or officers of the Company may be similarly indemnified in
respect of service of the Company or to an Other Entity at the request of the
Company to the extent the Board at any time specifies that such persons are
entitled to the benefits of this Bye-Law.
(b) The Company shall, from time to time, reimburse or advance to any
Director or officer or other person entitled to indemnification hereunder the
funds necessary for payment of expenses, including attorneys' fees and
disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; PROVIDED, HOWEVER, that, if required by
the Companies Acts, such expenses incurred by or on behalf of the Director or
officer or other person may be paid in advance of the final disposition of a
Proceeding only upon
<PAGE>
61
receipt by the Company of an undertaking, by or on behalf of such Director or
officer (or other persons indemnified hereunder), to repay any such amount so
advanced if it is ultimately determined by final judicial decision from which
there is no further right of appeal that such Director, officer or other person
is not entitled to be indemnified for such expenses.
(c) The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Bye-Law shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
reimbursement or advancement of expenses may have or hereafter be entitled under
any statute, the Memorandum of Association, these Bye-Laws, any agreement, any
vote of Shareholders or disinterested Directors or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding such office.
(d) The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Bye-Law shall continue as to
a person who has ceased to be a Director or officer (or other person indemnified
hereunder) and shall inure to the benefit of the executors, administrators,
legatees and distributees of such person.
(e) The Company shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of an Other Entity, against any liability asserted
against such person and incurred by such person in any such capacity, or arising
out of such
<PAGE>
62
person's status as such, whether or not the Company would have the power to
indemnify such person against such liability under the provisions of this Bye-
Law, the Memorandum of Association or under any applicable provision of the
Companies Act.
(f) The provisions of this Bye-Law shall be a contract between the
Company, on the one hand, and each Director and officer who serves in such
capacity at any time while this Bye-Law is in effect or before and any other
person indemnified hereunder, on the other hand, pursuant to which the Company
and each such Director, officer or other person intend to be legally bound. No
repeal or modification of this Bye-Law shall affect any rights or obligations
with respect to any state of facts then or theretofore existing or any
proceeding theretofore or thereafter brought or threatened based in whole or in
part upon any such state of facts.
(g) The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Bye-Law shall be enforceable
by any person entitled to such indemnification or reimbursement or advancement
of expenses in any court of competent jurisdiction. The burden of proving that
such indemnification or reimbursement or advancement of expenses is not
appropriate shall be on the Company. Neither the failure of the Company
(including its Board of Directors, its independent legal counsel and its
Shareholders) to have made a determination prior to the commencement of such
action that such indemnification or
<PAGE>
63
reimbursement or advancement of expenses is proper in the circumstances nor an
actual determination by the Company (including its Board of Directors, its
independent legal counsel and its Shareholders) that such person is not entitled
to such indemnification or reimbursement or advancement of expenses shall
constitute a defense to the action or create a presumption that such person is
not so entitled. Such a person shall also be indemnified for any expenses
incurred in connection with successfully establishing his or her right to such
indemnification or reimbursement or advancement of expenses, in whole or in
part, in any such proceeding.
(h) Any Director or officer of the Company serving in any capacity for
(i) another company of which a majority of the shares entitled to vote in the
election of its directors is held, directly or indirectly, by the Company or
(ii) any employee benefit plan of the Company or any company referred to in sub-
clause (a) hereof shall be deemed to be doing so at the request of the Company.
(i) Any person entitled to be indemnified or to reimburse ment or
advancement of expenses as a matter of right pursuant to this Bye-Law may elect
to have the right to indemnification or reimbursement or advancement of expenses
interpreted on the basis of Bermuda law in effect at the time of the occurrence
of the event or events giving rise to the applicable Proceeding, to the extent
permitted by law, or on the basis of the applicable law in effect at the time
such indemnification or reimbursement or advancement of expenses is sought.
Such election shall be made, by a notice in writing to the Company, at the time
indemnifi cation or reimbursement or advancement of expenses is sought;
PROVIDED, HOWEVER, that if no such notice is given, the right to indemnification
or reimbursement or advancement of expenses shall be determined by the law in
effect at the time indemnification or reimbursement or advancement of expenses
is sought.
<PAGE>
64
ALTERATION OF BYE-LAWS
----------------------
115. Subject to the provisions of any Bye-Law requiring a specific
level of shareholder approval, these Bye-Laws may be amended from time to time
in the manner provided for in these Bye-Laws and in the Companies Acts, provided
that the following Bye-Laws may be amended only with the approval of 75% of the
Common Shares outstanding from time to time, namely, Bye-Laws 3(a)(i), 7, 8,
48A, 67, 68, 69A, 69B, 70A-70E, 72-74, 77-81, 83, 85, 86, 88-90, 95, 96, 101-
103, 105, 114 and this Bye-Law 115.
<PAGE>
65
INDEX
-----
Bye-Law Subject Page
- -------- ------- ----
1 Interpretation 1-3
2 Registered Office 3
3, 4 Share Rights 4-6
5, 6 Modification of Rights 6
7-9 Shares 7
10-12 Certificates 7, 8
13-15 Lien 8, 9
16-21 Calls on Shares 10-11
22-28 Forfeiture of Shares 11-13
29 Register of Shareholders 13
30 Register of Directors and Officers 13
31-34 Transfer of Shares 14, 15
35-38 Transmission of Shares 15, 17
39-41 Increase of Capital 17
42, 43 Alteration of Capital 18, 19
44, 45 Reduction of Capital 19
46 General Meetings 19-21
47, 48 Notice of General Meetings 21, 22
49-55 Proceedings at General Meetings 22-24
56-59 Voting 24-31
60 U.S. Reporting and Proxy 31-33
61-66 Proxies and Corporate Representatives 33-36
67-70E Appointment and Removal of Directors 36-39
70F Resignation and Disqualification of Directors 39
70G-70I Alternate Directors 39-41
71 Directors' Fees and Additional Remuneration and 41
Expenses
<PAGE>
2
Bye-Law Subject Page
- -------- ------- ----
72 Directors' Interests 41-43
73-77 Powers and Duties of the Board 43-45
78-80 Delegation of the Board's Powers 45, 46
81-89 Proceedings of the Board 46-48
90 Officers 48, 49
91 Minutes 49
92, 93 Secretary 49, 50
94 The Seal 50
95-101 Dividends and other Payments 50-53
102 Reserves 53
103, 104 Capitalization of Profits 53, 54
105 Record Dates 54, 55
106-108 Accounting Records 55
109 Audit 55, 56
110-112 Service of Notices and Other Documents 56, 57
113 Winding Up 57
114 Indemnity 57-61
115 Alteration of Bye-Laws 62
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
INTERPRETATION...................................... 1
REGISTERED OFFICE................................... 3
SHARE RIGHTS........................................ 4
MODIFICATION OF RIGHTS.............................. 6
SHARES.............................................. 7
CERTIFICATES........................................ 7
LIEN 8
CALLS ON SHARES.....................................10
FORFEITURE OF SHARES................................11
REGISTER OF SHAREHOLDERS............................13
REGISTER OF DIRECTORS AND OFFICERS..................13
TRANSFER OF SHARES..................................14
TRANSMISSION OF SHARES..............................15
INCREASE OF CAPITAL.................................17
ALTERATION OF CAPITAL...............................18
REDUCTION OF CAPITAL................................19
GENERAL MEETINGS AND WRITTEN RESOLUTIONS............19
NOTICE OF GENERAL MEETINGS..........................21
PROCEEDINGS AT GENERAL MEETINGS.....................22
VOTING..............................................24
VOTING AT A GENERAL MEETING.........................28
U.S. REPORTING AND PROXY............................31
i
<PAGE>
PROXIES AND CORPORATE REPRESENTATIVES...............33
APPOINTMENT, RETIREMENT AND REMOVAL OF DIRECTORS....36
RESIGNATION AND DISQUALIFICATION OF DIRECTORS.......39
ALTERNATE DIRECTORS.................................39
DIRECTOR'S FEES AND ADDITIONAL REMUNERATION
AND EXPENSES........................................41
DIRECTORS' INTERESTS................................41
POWERS AND DUTIES OF THE BOARD.....................43
DELEGATION OF THE BOARD'S POWERS....................45
PROCEEDINGS OF THE BOARD............................46
OFFICERS............................................48
MINUTES.............................................49
SECRETARY...........................................49
THE SEAL............................................50
DIVIDENDS AND OTHER PAYMENTS........................50
RESERVES............................................53
CAPITALIZATION OF PROFITS...........................53
RECORD DATES........................................54
ACCOUNTING RECORDS..................................55
AUDIT 55
SERVICE OF NOTICES AND OTHER DOCUMENTS..............56
WINDING UP..........................................57
INDEMNITY...........................................57
ii
<PAGE>
ALTERATION OF BYE-LAWS..............................62
iii
<PAGE>
EXHIBIT 4.1
[LOGO OF ESG INTELLIGENT REINSURANCE]
COMMON SHARES COMMON SHARES
[ NUMBER ] [ SHARES ]
[ ESG ] [ ]
[ ] ESG Re Limited [ ]
Authorized Share Capital 100,000,000 Shares
having a par value of US$1.00 each
INCORPORATED IN THE ISLANDS OF BERMUDA CUSIP G31215 109
UNDER THE COMPANIES ACT, 1981
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA AND NEW YORK, NY
THIS IS TO CERTIFY THAT
is the registered holder of
FULLY PAID AND NON-ASSESSABLE COMMON SHARES OF PAR VALUE US$1.00 EACH OF
=================================ESG Re Limited=================================
transferable on the books of the Company by the holder hereof in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate and the shares represented hereby are issued and shall be held
subject to all of the provisions of the Memorandum of Association and Bye-Laws
of the Company and all amendments thereof to all of which the holder by
acceptance hereof assents and shall be transferable in accordance therewith.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Company and the facsimile signatures of its
duly authorized officers.
[CERTIFICATE OF STOCK]
Dated
[ SEAL OF ]
[ESG RE LIMITED]
[ BERMUDA ] MANAGING DIRECTOR AND
SECRETARY [ 1997 ] CHIEF EXECUTIVE OFFICER
COUNTERSIGNED
STATE STREET BANK AND TRUST COMPANY
(BOSTON) TRANSFER AGENT
BY
AUTHORIZED SIGNATURE
(C) SECURITY COLUMBIAN UNITED STATES BANKNOTE COMPANY 1960
<PAGE>
Each Common Share has one vote, except that if, and so long as, the
Controlled Shares (as defined below) of any person, other than certain Direct
Purchasers (as defined below) subsequent to the date of closing (the "Closing
Date") of the initial public offering of Common Shares by ESG Re Limited (the
"Company") constitute more than 9.9% of the voting power of the outstanding
shares, including Commons Shares, of the Company (a "Ten-percent Shareholder"),
the voting rights with respect to the Controlled Shares owned by such person
will be limited, in the aggregate, to a voting power of 9.9%, pursuant to a
formula specified in the Bye-Laws of the Company. The Common Shares votes that
could be cast by Ten-percent Shareholders but for the restrictions on voting
rights described above will be allocated to the other holders of Common Shares,
pro rata based on the number of Common Shares held by all other holders of
Common Shares, subject only to the further limitation that no shareholder, other
than certain Direct Purchasers subsequent to the Closing Date, allocated any
such voting rights may exceed the 9.9% limitation as a result of such
allocation. "Controlled Shares" includes, among other things, all Common Shares
that a person is deemed (i) to constructively own directly or indirectly
pursuant to rules defining a "controlled foreign corporation" under the Internal
Revenue Code of 1986, as amended, or (ii) to beneficially own directly or
indirectly (other than ownership attributable to certain Direct Purchasers) as a
result of the possession of sole or shared voting power within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder. "Direct Purchasers" means certain investors
who purchased Common Shares on or prior to the Closing Date in an offering
exempt from the registration requirements of the United States Securities Act of
1933.
FOR VALUE RECEIVED______________________________________________________________
(fill in amount for purposes of stamp duly)
________________________________________________________________________________
(name in full of Transferor)
hereby sell, assign and transfer unto___________________________________________
(name in full of Transferee)
________________________________________________________________________________
________________________________________________________________________________
(address)
_____________________________________________________shares of the capital stock
represented by the within Certificate.
Dated______________________________
In the presence of:
_____________________________________
(Transferor)
___________________________________
___________________________________
(2 witnesses sign here)
In the presence of:
_____________________________________
(Transferee)
___________________________________
___________________________________
(2 witnesses sign here)
___________________________________ ______________________________________
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: BELINDA BECK:
680 BLAIR MILL ROAD 212-830-2198
HORSHAM, PA 19044 PROOF OF OCTOBER 14, 1997
(215) 657-3480 ESG RE LIMITED
- ----------------------------------- H 52646back
SALES: J. NAPOLITANO: 212-557-9100 --------------------------------------
- ----------------------------------- OPERATOR: EG
/NET/BANKNOTE/HOME57/ESG52646%0 --------------------------------------
___________________________________ NEW
______________________________________
<PAGE>
EXHIBIT 4.2
FORM OF CLASS A WARRANT
ESG RE LIMITED
THIS WARRANT AND THE UNDERLYING COMMON SHARES MAY NOT BE TRANSFERRED EXCEPT (I)
IN COMPLIANCE WITH THE PROVISIONS OF THE BYE-LAWS OF THE COMPANY AND ANY
APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS AND (II) (A) PURSUANT TO AN
EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
(B) IN COMPLIANCE WITH RULE 144 UNDER THE ACT, (C) INSIDE THE UNITED STATES TO A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN AND IN COMPLIANCE WITH RULE 144A
UNDER THE ACT, (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 OF
REGULATION S UNDER THE ACT OR (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL
"ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE
ACT IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY, QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE ACT AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER. THIS WARRANT AND THE UNDERLYING COMMON
SHARES ARE SUBJECT TO CERTAIN ADDITIONAL RESTRICTIONS ON TRANSFER CONTAINED IN A
SUBSCRIPTION AGREEMENT AND THE COMPANY'S BYE-LAWS, COPIES OF WHICH ARE ON FILE
AT THE PRINCIPAL OFFICE OF THE COMPANY.
ESG RE LIMITED, a Bermuda corporation (the "Company"), hereby
certifies that, for value received, (the "Holder"), or
assigns, is entitled, subject to the terms set forth below, to purchase from the
Company, at any time and from time to time in whole or in part an aggregate of
fully paid and non-assessable Common Shares, par value $1.00 per share
("Common Shares"), of the Company during the period beginning on the date of
issuance hereof (the "Issue Date") and ending on the tenth anniversary of the
Issue Date.
1. PURCHASE PRICE. Such Common Shares shall be purchased at a
--------------
purchase price per Common Share, subject to the provisions of Paragraph 3
hereof, equal to $20 (as adjusted in accordance with the terms hereof, the
"Purchase Price"). The number and character of such Common Shares are subject
to adjustment as provided below, and the term "Common Shares" shall mean, unless
the context otherwise requires, the Common Shares or other securities or
property at the time deliverable upon the exercise of this Warrant. This
Warrant is herein called the "Warrant."
<PAGE>
2
2. EXERCISE OF WARRANT. The purchase rights evidenced by this
-------------------
Warrant shall be exercised by the Holder surrendering this Warrant, with the
form of subscription at the end hereof duly executed by such Holder (the
"Exercise Notice"), to the Company at its offices, 16 Church Street, Hamilton,
Pembroke Parish, Bermuda, accompanied by payment as specified below of the
aggregate Purchase Price determined as of the Determination Date (as defined
below) of the Common Shares being purchased pursuant to such exercise. Payment
of the aggregate Purchase Price may be made, at the option of the Holder, (i) in
cash, (ii) by certified check or bank cashier's check payable to the order of
the Company in the amount of such Purchase Price, (iii) by delivering Common
Shares with an aggregate Market Price (as hereinafter defined) as of the day
prior to the Company's receipt of the Exercise Notice (the "Determination Date")
equal to the product of the Purchase Price and the number of Common Shares being
purchased, (iv) by the Company reducing, at the request of the Holder, the
number of Common Shares for which this Warrant is exercisable by a number of
Common Shares (the "Surrendered Shares") such that the product of (a) the Market
Price per Common Share as of the Determination Date less the Purchase Price in
effect on the Determination Date and (b) the number of Surrendered Shares equals
or exceeds the product of (x) the Purchase Price in effect on the Determination
Date and (y) the number of Common Shares being purchased, or any combination of
the methods of payment described in clauses (i) through (iv) above.
2.1 Partial Exercise. This Warrant may be exercised for less
----------------
than the full number of Common Shares at the times called for hereby, in which
case the number of Common Shares receivable upon the exercise of this Warrant as
a whole, and the sum payable upon the exercise of this Warrant as a whole, shall
be proportionately reduced. Upon any such partial exercise, the Company at its
expense will forthwith issue to the holder hereof a new Warrant or Warrants of
like tenor calling for the number of Common Shares as to which rights have not
been exercised, such Warrant or Warrants to be issued in the name of the holder
hereof or his nominee (upon payment by such holder of any applicable transfer
taxes).
2.2 Delivery of Certificates for Common Shares on Conversion.
--------------------------------------------------------
As soon as practicable after the exercise of this Warrant and payment of the
Purchase Price, and in any event within ten (10) days thereafter, the Company,
at its expense, will cause to be issued in the name of and delivered to the
holder hereof a certificate or certificates for the number of fully paid and
non-assessable Common Shares or other securities or property to which such
Holder shall be entitled upon such exercise, plus, in lieu of any fractional
share to which such holder would otherwise be entitled, cash in an amount
determined in accordance with Paragraph 3.9 hereof. The Common Shares so
received shall be deemed to be issued to the Holder as the record owner of such
Common Shares as of the close of business on the date on which this Warrant is
surrendered and payment made for such Common Shares as aforesaid.
<PAGE>
3
3. ANTI-DILUTION PROVISIONS AND OTHER ADJUSTMENTS. In order to
----------------------------------------------
prevent dilution of the right granted hereunder, the Purchase Price shall be
subject to adjustment from time to time in accordance with this Paragraph 3.
Upon each adjustment of the Purchase Price pursuant to this Paragraph 3, the
registered holder hereof shall thereafter be entitled to acquire upon exercise
of this Warrant, at the Purchase Price resulting from such adjustment, the
number of the Company's Common Shares obtainable by multiplying the Purchase
Price in effect immediately prior to such adjustment by the number of the
Company's Common Shares acquirable upon conversion thereof immediately prior to
such adjustment and dividing the product thereof by the Purchase Price resulting
from such adjustment.
3.1 Adjustment for Issue or Sale of Common Shares at Less than
----------------------------------------------------------
90% of Market Price. Except as provided in Paragraph 3.2 or 3.5 below, if and
- -------------------
whenever on or after the date of issuance hereof the Company shall issue or
sell, or shall in accordance with subparagraphs 3.1(1) to (9), inclusive, be
deemed to have issued or sold, other than any issuance or sale in connection
with an underwritten public offering, any Common Shares for a consideration per
share less than 90% of the Market Price in effect immediately prior to the time
of such issue or sale, then forthwith upon such issue or sale (the "Triggering
Transaction"), the Purchase Price shall, subject to subparagraphs (1) to (9) of
this Paragraph 3.1, be reduced to the Purchase Price (calculated to the nearest
tenth of a cent) determined by multiplying the Purchase Price in effect
immediately prior to the time of such issue or sale by a fraction, the numerator
of which shall be the sum of (x) the product of the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction multiplied
by the Market Price immediately prior to such Triggering Transaction plus (y)
the total amount, if any, received or receivable at any time by the Company as
consideration for the issuance or sale of such Common Shares and the denominator
of which shall be the product of (x) the Number of Common Shares Deemed
Outstanding immediately after such issue or sale, multiplied by (y) the Market
Price immediately prior to such issue or sale.
For purposes of this Paragraph 3, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
the Company's Common Shares outstanding at such time, and (ii) the number of the
Company's Common Shares deemed to be outstanding under subparagraphs 3.1(1) to
(9), inclusive, at such time. For purposes of this Agreement, the term "Market
Price" as of any day shall mean the average closing price of a Common Share or
other security for the 15 consecutive trading days concluding on the principal
national securities exchange on which the Common Shares or securities are listed
or admitted to trading or, if not listed or admitted to trading on any national
securities exchange, the average of the reported bid and asked prices during
such 15 trading day period in the over-the-counter market as furnished by the
National Quotation Bureau, Inc., or, if such firm is not then engaged in the
business of reporting such prices, as furnished by any member of the National
Association of
<PAGE>
4
Securities Dealers, Inc. selected by the Company or, if the Common Shares or
securities are not publicly traded, the Market Price for such day shall be the
fair market value thereof determined in good faith by the Board of Directors of
the Company.
For purposes of determining the adjusted Purchase Price under this
Paragraph 3.1, the following subsections (1) to (9), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of, Common
Shares or any other securities convertible into or exchangeable for Common
Shares (such rights or options being herein called "Options" and such
convertible or exchangeable shares or securities being herein called
"Convertible Securities"), whether or not such Options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable and the price per share for which the Common Shares are
issuable upon exercise, conversion or exchange (determined by dividing (x)
the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (y) the total
maximum number of Common Shares issuable upon the exercise of such Options
or the conversion or exchange of such Convertible Securities) shall be less
than 90% of the Market Price determined as of the date of such grant, then
the total maximum number of Common Shares issuable upon exercise of such
Options or conversion or exchange of all such Convertible Securities shall
(as of the date of the grant of such Option) be deemed to be outstanding
and to have been issued and sold by the Company for such price per share.
No adjustment of the Purchase Price shall be made upon exercise of such
Options or conversion or exchange of such Convertible Securities, except as
otherwise provided in subparagraph (3) below.
(2) In case the Company at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which
Common Shares are issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the conversion or exchange thereof, by (y) the total
maximum number of Common Shares issuable upon the conversion or exchange of
all such Convertible Securities) shall be less than the 90% of Market
Price,
<PAGE>
5
determined as of the date of such issue or sale, as the case may be, then
the total maximum number of Common Shares issuable upon conversion or
exchange of all such Convertible Securities shall (as of the date of the
issue or sale of such Convertible Securities) be deemed to be outstanding
and to have been issued and sold by the Company for such price per share.
No adjustment of the Purchase Price shall be made upon the actual issue of
such Common Shares upon exercise of the rights to exchange or convert under
such Convertible Securities, except as otherwise provided in subparagraph
(3) below.
(3) If the exercise price provided for in any Options referred to
in subparagraph (1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraph (1) or (2), or the rate at which any Convertible Securities
referred to in subparagraph (1) or (2) are convertible into or
exchangeable for Common Shares shall change at any time (other than under
or by reason of provisions designed to protect against dilution of the type
set forth in Paragraph 3.1 or 3.3), the Purchase Price in effect at the
time of such change shall forthwith be readjusted to the Purchase Price
which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion or exchange rate, as the case
may be, at the time initially granted, issued or sold. If the exercise
price provided for in any Option referred to in subparagraph (1), the
additional consideration, if any, payable upon the conversion or exchange
of any Convertible Securities referred to in subparagraphs (1) or (2), or
the rate at which any Convertible Securities referred to in subparagraphs
(1) or (2) are convertible into or exchangeable for Common Shares, shall be
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of
Common Shares upon the exercise of any such Option or upon conversion or
exchange of any such Convertible Security, the Purchase Price then in
effect hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Security never been
issued as to such Common Shares and had adjustments been made upon the
issuance of Common Shares delivered as aforesaid, but only if as a result
of such adjustment the Purchase Price then in effect hereunder is hereby
reduced and provided that there shall be no duplication of any adjustments
otherwise made in accordance with the term hereof.
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Purchase Price
then in effect hereunder shall forthwith be increased to the Purchase Price
which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never been
issued.
<PAGE>
6
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Company, together comprising one
integral transaction in which no specific consideration is allocated to
such Options by the parties thereto, such Options shall be deemed to have
been issued without consideration.
(6) In case any Common Shares, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Company therefor. In case any Common Shares, Options or Convertible
Securities shall be issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall
be the fair value of such consideration as determined in good faith by the
Board of Directors of the Company.
(7) The number of Common Shares outstanding at any given time
shall not include shares owned or held by or for the account of the
Company, and the disposition of any shares so owned or held shall be
considered an issue or sale of Common Shares for the purpose of this
Paragraph 3.1.
(8) In case the Company shall declare a dividend or make any
other distribution upon the shares of the Company payable in Common Shares,
Options, or Convertible Securities, then in such case any Common Shares,
Options or Convertible Securities, as the case may be, issuable in payment
of such dividend or distribution shall be deemed to have been issued or
sold without consideration.
(9) For purposes of this Paragraph 3.1, in case the Company shall
take a record of the holders of its Common Shares for the purpose of
determining holders entitled (x) to receive a dividend or other
distribution payable in Common Shares, Options or in Convertible
Securities, or (y) to subscribe for or purchase Common Shares, Options or
Convertible Securities, then such record date shall be deemed to be the
date of the issue or sale of the Common Shares deemed to have been issued
or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right or subscription or
purchase, as the case may be.
3.2 Dividends Not Paid Out of Earnings or Earned Surplus. In the
----------------------------------------------------
event the Company shall declare a dividend upon the Common Shares (other than a
dividend covered by subparagraph 3.1(8)) payable otherwise than out of earnings
or earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the
<PAGE>
7
person exercising such Warrant an amount equal to the aggregate value at the
time of such exercise of all Liquidating Dividends which would have been payable
to such person had such person exercised this Warrant on the record date for
determining persons entitled to such Liquidating Dividend. For the purposes of
this Paragraph 3.2, a dividend other than in cash shall be considered payable
out of earnings or earned surplus only to the extent that such earnings or
earned surplus are charged an amount equal to the fair value of such dividend as
determined in good faith by the Board of Directors of the Company.
3.3 Subdivisions and Combinations. In case the Company shall at
-----------------------------
any time subdivide (other than by means of a dividend payable in Common Shares
covered by subparagraph 3.1(8)), its outstanding Common Shares into a greater
number of shares, the Purchase Price in effect immediately prior to such
subdivision shall be appropriately reduced, and, conversely, in case the
outstanding Common Shares of the Company shall be combined into a smaller number
of shares, the Purchase Price in effect immediately prior to such combination
shall be proportionately increased.
3.4 Reorganization, Reclassification, Consolidation, Merger or
----------------------------------------------------------
Sale of Assets. If any capital reorganization or reclassification of the
- --------------
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common
Shares shall be entitled to receive stock, securities, cash or other property
with respect to or in exchange for Common Shares, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holder of this Warrant shall have
the right to acquire and receive upon exercise hereof such common shares,
securities, cash or other property issuable or payable (as part of the
reorganization, reclassification, consolidation, merger or sale) with respect to
or in exchange for such number of outstanding Common Shares of the Company as
would have been received upon exercise of the Warrant at the Purchase Price then
in effect. The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if other
than the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written instrument mailed or delivered
to the holder of this Warrant at the last address of such holder appearing on
the books of the Company, the obligation to deliver to such holder such common
shares, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to purchase. In the event that pursuant to the
terms of this Paragraph 3.4, this Warrant becomes exercisable for securities
other than Common Shares, then the provisions of Section 3 shall apply to such
securities as though such securities were Common Shares. If a purchase, tender
or exchange offer is made to and accepted by the holders of more than 50% of the
outstanding Common Shares of the Company, the Company shall not effect any
consolidation, merger or sale with the person having made such offer or with any
Affiliate of such person, unless prior to the
<PAGE>
8
consummation of such consolidation, merger or sale the holder of this Warrant
shall have been given a reasonable opportunity to then elect to receive upon the
exercise of this Warrant either the common shares, securities or assets then
issuable with respect to the Common Shares of the Company or the common shares,
securities or assets, or the equivalent, issued to previous holders of the
Common Shares in accordance with such offer. For purposes hereof the term
"Affiliate" with respect to any given person shall mean any person controlling,
controlled by or under common control with the given person.
3.5 No Adjustment for Exercise of Certain Options, Warrants,
--------------------------------------------------------
Etc. The provisions of this Section 3 shall not apply to any Common Shares
- ----
issued, issuable or deemed outstanding under subparagraphs 3.1(1) to (9)
inclusive: (i) to any person pursuant to any stock option, stock purchase or
similar plan or arrangement for the benefit of employees, consultants or
directors of the Company or its subsidiaries or (ii) pursuant to options,
warrants and conversion rights in existence on the date of issuance hereof.
3.6 Notices of Record Date, Etc. In the event that:
---------------------------
(1) the Company shall declare any cash dividend upon its Common
Shares, or
(2) the Company shall declare any dividend upon its Common Shares
payable in common shares or make any special dividend or other distribution
to the holders of its Common Shares, or
(3) the Company shall offer for subscription pro rata to the
holders of its Common Shares any additional common shares of any class or
other rights, or
(4) there shall be any capital reorganization or reclassification
of the capital stock of the Company, including any subdivision or
combination of its outstanding Common Shares, or consolidation or merger of
the Company with, or sale of all or substantially all of its assets to,
another corporation, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in connection with such event, the Company shall give to the holder of
this Warrant:
(i) at least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record
<PAGE>
9
shall be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least ten (10) days' prior written notice of the date when the same shall
take place.
Such notice in accordance with the foregoing clause (i) shall
also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Shares shall
be entitled thereto, and such notice in accordance with the foregoing
clause (ii) shall also specify the date on which the holders of Common
Shares shall be entitled to exchange their Common Shares for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the
case may be. Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holder of this Warrant at the address of
such holder as shown on the books of the Company.
The failure to deliver any such notice shall not, however, affect the
capability of the action so taken by the Company.
3.7 Grant, Issue or Sale of Options, Convertible Securities, or
-----------------------------------------------------------
Rights. If at any time or from time to time on or after the date of issuance
- ------
hereof, the Company shall grant, issue or sell any Options, Convertible
Securities or rights to purchase property (the "Purchase Rights") pro rata to
the record holders of any class of Common Shares of the Company and such grants,
issuances or sales do not result in an adjustment of the Purchase Price under
Paragraph 3.1 hereof (other than by reason of the fact that the issuance of such
shares was at a Purchase Price equal to or greater than 90% of the then current
Market Price), then the holder of this Warrant shall be entitled to acquire
(within thirty (30) days after the later to occur of the initial exercise date
of such Purchase Rights or receipt by such holder of the notice concerning
Purchase Rights to which such holder shall be entitled under Paragraph 3.6) and
upon the terms applicable to such Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of Common Shares acquirable upon
exercise of this Warrant immediately before the grant, issuance or sale of
such Purchase Rights; provided that if any Purchase Rights were distributed
to holders of Common Shares without the payment of additional consideration
by such holders, corresponding Purchase Rights shall be distributed to the
exercising holder of this warrant as soon as possible after such exercise
and it shall not be
<PAGE>
10
necessary for the exercising holder of this Warrant specifically to request
delivery of such rights; or
(ii) in the event that any such Purchase Rights shall have
expired or shall expire prior to the end of said thirty (30) day period,
the number of Common Shares or the amount of property which such holder
could have acquired upon such exercise at the time or times at which the
Company granted, issued or sold such expired Purchase Rights.
3.8 Adjustment by Board of Directors. If any event occurs as to
--------------------------------
which, in the opinion of the Board of Directors of the Company, the provisions
of this Section 3 are not strictly applicable or if strictly applicable would
not fairly protect the rights of the holder of this Warrant in accordance with
the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
rights as aforesaid, but in no event shall any adjustment have the effect of
increasing the Purchase Price as otherwise determined pursuant to any of the
provisions of this Section 3 except in the case of a combination of shares of a
type contemplated in Paragraph 3.3 and then in no event to an amount larger than
the Purchase Price as adjusted pursuant to Paragraph 3.3.
3.9 Fractional Shares. The Company shall not issue fractions of
-----------------
Common Shares upon exercise of this Warrant or scrip in lieu thereof. If any
fraction of a Common Share would, except for the provisions of this Paragraph
3.9, be issuable upon exercise of this Warrant, the Company shall in lieu
thereof pay to the person entitled thereto an amount in cash equal to the
product of such fraction, calculated to the nearest one hundredth (1/100), and
the Market Price of a Common Share as of such date of exercise.
3.10 Officers' Statement as to Adjustments. Whenever the
-------------------------------------
Purchase Price shall be adjusted as provided in Section 3 hereof, the Company
shall forthwith file at the office designated for the exercise of this Warrant,
a statement, signed by the Chairman of the Board, the President, any Vice
President or the Treasurer of the Company, showing in reasonable detail the
facts requiring such adjustment and the Purchase Price that will be effective
after such adjustment. The Company shall also cause a notice setting forth any
such adjustments to be sent by mail, first class, postage prepaid, to the record
holder of this Warrant at his or its address appearing on the Warrant register
of the Company. If such notice relates to an adjustment resulting from an event
referred to in Paragraph 3.6, such notice shall be included as part of the
notice required to be mailed and published under the provisions of Paragraph 3.6
hereof.
4. NO DILUTION OR IMPAIRMENT. The Company shall not, by amendment
-------------------------
of its charter or through reorganization, consolidation, merger,
<PAGE>
11
dissolution, sale of assets or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the holder hereof against dilution or other impairment.
Without limiting the generality of the foregoing, the Company shall not increase
the par value of any Common Shares receivable upon the exercise of this Warrant
above the amount payable therefor upon such exercise, and at all times will take
all such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable Common Shares upon the
exercise of this Warrant.
5. RESERVATION OF COMMON SHARES, ETC., ISSUABLE UPON EXERCISE OF
-------------------------------------------------------------
WARRANTS. The Company shall at all times reserve and keep available out of its
- --------
authorized but unissued Common Shares, solely for the issuance and delivery upon
the exercise of this Warrant and other similar Warrants, such number of its duly
authorized Common Shares as from time to time shall be issuable upon the
exercise of this Warrant and all other similar Warrants at the time outstanding.
6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to it, or (in the case of mutilation) upon surrender and
cancellation thereof, the Company shall issue, in lieu thereof, a new Warrant of
like tenor.
7. REMEDIES. The Company stipulates that the remedies at law of the
--------
holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that the same may be specifically enforced.
8. NEGOTIABILITY, ETC. This Warrant is issued upon the following
-------------------
terms, to all of which each taker or owner hereof consents and agrees:
(a) This Warrant and Common Shares underlying this Warrant (the
"Underlying Shares") may not be transferred except (i) in compliance with the
provisions of the By-laws of the Company and any applicable state securities or
"blue sky" laws and (ii)(a) pursuant to an effective registration under the
Securities Act of 1933, as amended (the "Act"), (b) in compliance with Rule 144
under the Act, (c) inside the United States to a "qualified institutional buyer"
as defined in and in compliance with Rule 144A under the Act, (d) outside the
United States in compliance with Rule 904 of Regulation S under the Act or (e)
inside the United States to an institutional "accredited investor" as defined in
Rule 501(a)(1), (2),(3) or (7) under the Act in a transaction which, in the
opinion of counsel reasonably satisfactory to the company, qualifies as an
exempt transaction under the
<PAGE>
12
Act and the rules and regulations promulgated thereunder. This Warrant and the
Underlying Shares are subject to certain additional restrictions on transfer
contained in a Subscription Agreement and the Company's Bye-laws, copies of
which are on file at the principal office of the Company.
The provisions of this Section 8 shall be binding upon any transferee of this
Warrant and upon each holder of Underlying Shares.
(b) Subject to limitations described in this Paragraph 8, title to
this Warrant may be transferred by endorsement (by the holder hereof executing
the form of assignment at the end hereof including guaranty of signature) and
delivery in the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(c) Any person in possession of this Warrant properly endorsed and, if
not the original holder hereof, to whom possession was transferred in accordance
with the provisions of Paragraphs 8.1(a), (b) and (c) is authorized to represent
himself as absolute owner hereof and is granted power to transfer absolute title
hereto by endorsement and delivery hereof to a bona fide purchaser hereof for
value; each prior taker or owner waives and renounces all of his equities or
rights in this Warrant in favor of every such bona fide purchaser, and every
such bona fide purchaser shall acquire title hereto and to all rights
represented hereby.
(d) Until any this Warrant is transferred on the books of the Company,
the Company may treat the registered holder of this Warrant as the absolute
owner hereof for all purposes without being affected by any notice to the
contrary.
(e) The Company shall not be required to pay any Bermuda or U.S.
Federal or state transfer tax or charge that may be payable in respect of any
transfer involved in the transfer or delivery of this Warrant or the issuance or
conversion or delivery of certificates for Common Shares in a name other than
that of the registered holder of this Warrant or to issue or deliver any
certificates for Common Shares upon the exercise of this Warrant until any and
all such taxes and charges shall have been paid by the holder of this Warrant or
until it has been established to the Company's satisfaction that no such tax or
charge is due.
<PAGE>
13
9. NO RIGHTS TO VOTE OR RECEIVE DIVIDENDS OR OTHER DISTRIBUTIONS.
-------------------------------------------------------------
Prior to the exercise of this Warrant, the holder hereof shall not be entitled
to any rights of a shareholder of the Company with respect to Common Shares for
which this Warrant shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
10. MAILING OF NOTICES, ETC. All notices and other communications
------------------------
from the Company to the holder of this Warrant shall be mailed by first-class
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing.
11. CHANGE, WAIVER, ETC. The terms of this Warrant may not be
--------------------
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the holder of this Warrant against which enforcement of the
change, waiver, discharge or termination is sought.
ESG RE LIMITED
By:
--------------------------------------------
Name:
Title:
Accepted: _____________, 1997
[NAME OF HOLDER]
By:
-------------------------
Name:
Title:
<PAGE>
[To be signed only upon exercise of Warrant]
To ESG Re Limited
The undersigned, the holder of the within Warrant hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ___________ Common Shares of ESG Re Limited and herewith
makes payment of $________ therefor and/or requests that the number of Common
Shares for which the within Warrant is exercisable be reduced by ___________
Common Shares (in addition to the Common Shares being purchased) and/or delivers
___________ Common Shares, the aggregate of such payment being equal to the
aggregate purchase price for the Common Shares being purchased, and requests
that the certificates for the Common Shares being purchased be issued in the
name of, and be delivered to, ______________________ whose address is
___________________ ____________________________ .
Dated:
___________________________________
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant)
Address
<PAGE>
[To be signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _______________________________ the within Warrant and appoints
___________________ attorney to transfer said right on the books of ESG Re
Limited with full power of substitution in the premises.
Dated:
_______________________
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant)
Address
In the presence of
<PAGE>
EXHIBIT 4.3
FORM OF CLASS B WARRANT
ESG RE LIMITED
THIS WARRANT AND THE UNDERLYING COMMON SHARES MAY NOT BE TRANSFERRED EXCEPT (I)
IN COMPLIANCE WITH THE PROVISIONS OF THE BYE-LAWS OF THE COMPANY AND ANY
APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS AND (II) (A) PURSUANT TO AN
EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
(B) IN COMPLIANCE WITH RULE 144 UNDER THE ACT, (C) INSIDE THE UNITED STATES TO A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN AND IN COMPLIANCE WITH RULE 144A
UNDER THE ACT, (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 OF
REGULATION S UNDER THE ACT OR (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL
"ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE
ACT IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY, QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE ACT AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER. THIS WARRANT AND THE UNDERLYING COMMON
SHARES ARE SUBJECT TO CERTAIN ADDITIONAL RESTRICTIONS ON TRANSFER CONTAINED IN A
SUBSCRIPTION AGREEMENT AND THE COMPANY'S BYE-LAWS, COPIES OF WHICH ARE ON FILE
AT THE PRINCIPAL OFFICE OF THE COMPANY.
ESG RE LIMITED, a Bermuda corporation (the "Company"), hereby
certifies that, for value received, (the "Holder"), or assigns, is entitled,
subject to the terms set forth below, to purchase from the Company, at any time
and from time to time in whole or in part an aggregate of (the "Aggregate
Warrant Number") fully paid and non-assessable Common Shares, par value $1.00
per share ("Common Shares"), of the Company during the period beginning, with
respect to each Installment (as defined below), on the date of the vesting of
such Installment (each a "Vesting Date") and ending, with respect to each
Installment, on the tenth anniversary of the Vesting Date with respect to such
Installment (the "Exercise Period").
The Common Shares within each Installment shall be purchased at a
purchase price per Common Share, subject to the provisions of Paragraph 3
hereof, equal to (a) $20 (the "Price to Public") until September 1, 2001, if
applicable and (b) $18.50 during the balance of the Exercise Period (in each
case as adjusted in accordance with the terms hereof, the "Purchase Price").
The number and character of such Common Shares are subject to adjustment as
provided below, and the term "Common Shares" shall mean, unless the context
otherwise requires, the Common
<PAGE>
2
Shares or other securities or property at the time deliverable upon the exercise
of this Warrant. This Warrant is herein called the "Warrant."
1. VESTING OF WARRANTS. Each of the 5 successive one-year periods
-------------------
commencing on _________, 1997 (the "Issue Date") and ending on the day before
the first 5 anniversary dates thereof is referred to below as an "Anniversary
Period". During each Anniversary Period 20% of the Aggregate Number of Warrants
(an "Installment") shall be eligible to become vested. Any Warrants that are
eligible to become vested during a particular Anniversary Period but that do not
become vested during that Anniversary Period shall be eligible to become vested
in the subsequent Anniversary Periods, in additional to the Installment for that
subsequent Anniversary Period. Any Warrants that are unvested following the
fifth Anniversary Period shall be forfeited and shall no longer be deemed to be
outstanding, without any further action on the part of the Company. In the
event of a Change of Control of the Company, all unvested Warrants shall
immediately and automatically vest. The Installments that are available for
vesting during any particular Anniversary Period shall become vested if, on each
trading day of any 20 consecutive trading days during such Anniversary Period,
(a) the change in the Market Price (as defined in Section 3.1) of the Common
Shares from the Floor Price (the "Market Price Change"), expressed as a
percentage, exceeds (or in the event that the Market Price Change and the
Wilshire Index Change (as defined below) are both negative, is less than) (b)
the change in the Wilshire Index from the Wilshire Index Floor (the "Wilshire
Index Change"), expressed as a percentage, plus 5.0%.
For purposes of this Paragraph 1, the following terms have the
following meanings:
"Change of Control" means the acquisition by any person, entity or
-----------------
"group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act")) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more, in the
aggregate, of either the voting power of the then outstanding Common Shares or
the combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors; provided, however, that
if such acquisition results in whole or in part from a transfer of any Common
Shares or other voting securities by the Holder hereof, such acquisition shall
not constitute a Change of Control unless such transfer is effected pursuant to
an offer by such acquiror to purchase all of the Company's outstanding Common
Shares.
"Floor Price" means the Price to Public.
-----------
"Wilshire Index Floor" means the closing quotation of the Wilshire
--------------------
5000 Index as of the date hereof, as prepared by Wilshire Associates, Inc. and
as reported on Bloomberg Financial Markets.
"Wilshire Index" as of any day means the average closing quotation of
--------------
the Wilshire 5000 Index for the 15 consecutive trading days concluding on such
day.
<PAGE>
3
"Wilshire 5000 Index" means the index of that name prepared by
-------------------
Wilshire Associates, Inc., as reported on Bloomberg Financial Markets or, in the
event the Wilshire 5000 Index is no longer published, a comparable index
selected in good faith by the Board of Directors of the Company providing a
broad-based measurement of the changes in stock market conditions.
2. EXERCISE OF WARRANT. The purchase rights evidenced by this
-------------------
Warrant shall be exercised by the Holder surrendering this Warrant, with the
form of subscription at the end hereof duly executed by such Holder (the
"Exercise Notice"), to the Company at its offices, 16 Church Street , Hamilton,
Pembroke Parish, Bermuda, accompanied by payment as specified below of the
aggregate Purchase Price determined as of the Determination Date (as defined
below) of the Common Shares being purchased pursuant to such exercise. Payment
of the aggregate Purchase Price may be made, at the option of the Holder, (i) in
cash, (ii) by certified check or bank cashier's check payable to the order of
the Company in the amount of such Purchase Price, (iii) by delivering Common
Shares with an aggregate Market Price (as hereinafter defined) as of the day
prior to the Company's receipt of the Exercise Notice (the "Determination Date")
equal to the product of the Purchase Price and the number of Common Shares being
purchased, (iv) by the Company reducing, at the request of the Holder, the
number of Common Shares for which this Warrant is exercisable by a number of
Common Shares (the "Surrendered Shares") such that the product of (a) the Market
Price per Common Share as of the Determination Date less the Purchase Price in
effect on the Determination Date and (b) the number of Surrendered Shares equals
or exceeds the product of (x) the Purchase Price in effect on the Determination
Date and (y) the number of Common Shares being purchased, or any combination of
the methods of payment described in clauses (i) through (iv) above.
2.1 Partial Exercise. This Warrant may be exercised for less
----------------
than the full number of Common Shares at the times called for hereby, in which
case the number of Common Shares receivable upon the exercise of this Warrant as
a whole, and the sum payable upon the exercise of this Warrant as a whole, shall
be proportionately reduced. Upon any such partial exercise, the Company at its
expense will forthwith issue to the holder hereof a new Warrant or Warrants of
like tenor calling for the number of Common Shares as to which rights have not
been exercised, such Warrant or Warrants to be issued in the name of the holder
hereof or his nominee (upon payment by such holder of any applicable transfer
taxes).
2.2 Delivery of Certificates for Common Shares on Conversion.
--------------------------------------------------------
As soon as practicable after the exercise of this Warrant and payment of the
Purchase Price, and in any event within ten (10) days thereafter, the Company,
at its expense, will cause to be issued in the name of and delivered to the
holder hereof a certificate or certificates for the number of fully paid and
non-assessable Common Shares or other securities or property to which such
Holder shall be entitled upon such exercise, plus, in lieu of any fractional
share to which such holder would
<PAGE>
4
otherwise be entitled, cash in an amount determined in accordance with Paragraph
3.9 hereof. The Common Shares so received shall be deemed to be issued to the
Holder as the record owner of such Common Shares as of the close of business on
the date on which this Warrant is surrendered and payment made for such Common
Shares as aforesaid.
3. ANTI-DILUTION PROVISIONS AND OTHER ADJUSTMENTS. In order to
----------------------------------------------
prevent dilution of the right granted hereunder, the Purchase Price shall be
subject to adjustment from time to time in accordance with this Paragraph 3.
Upon each adjustment of the Purchase Price pursuant to this Paragraph 3, the
registered holder hereof shall thereafter be entitled to acquire upon exercise
of this Warrant, at the Purchase Price resulting from such adjustment, the
number of the Company's Common Shares obtainable by multiplying the Purchase
Price in effect immediately prior to such adjustment by the number of the
Company's Common Shares acquirable upon conversion thereof immediately prior to
such adjustment and dividing the product thereof by the Purchase Price resulting
from such adjustments.
3.1 Adjustment for Issue or Sale of Common Shares at Less than
----------------------------------------------------------
90% of Market Price. Except as provided in Paragraph 3.2 or 3.5 below, if and
- -------------------
whenever on or after the date of issuance hereof the Company shall issue or
sell, or shall in accordance with subparagraphs 3.1(1) to (9), inclusive, be
deemed to have issued or sold, other than any issuance or sale in connection
with an underwritten public offering, any Common Shares for a consideration per
share less than 90% of the Market Price in effect immediately prior to the time
of such issue or sale, then forthwith upon such issue or sale (the "Triggering
Transaction"), the Purchase Price shall, subject to subparagraphs (1) to (9) of
this Paragraph 3.1, be reduced to the Purchase Price (calculated to the nearest
tenth of a cent) determined by multiplying the Purchase Price in effect
immediately prior to the time of such issue or sale by a fraction, the numerator
of which shall be the sum of (x) the product of the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction multiplied
by the Market Price immediately prior to such Triggering Transaction plus (y)
the total amount, if any, received or receivable at any time by the Company as
consideration for the issuance or sale of such Common Shares and the denominator
of which shall be the product of (x) the Number of Common Shares Deemed
Outstanding immediately after such issue or sale, multiplied by (y) the Market
Price immediately prior to such issue or sale.
For purposes of this Paragraph 3, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
the Company' s Common Shares outstanding at such time, and (ii) the number of
the Company's Common Shares deemed to be outstanding under subparagraphs 3.1(1)
to (9), inclusive, at such time. For purposes of this Agreement, the term
"Market Price" as of any day shall mean the average closing price of a Common
Share or other security for the 15 consecutive trading days concluding on such
day on the
<PAGE>
5
principal national securities exchange on which the Common Shares or securities
are listed or admitted to trading or, if not listed or admitted to trading on
any national securities exchange, the average of the reported bid and asked
prices during such 15 trading day period in the over-the-counter market as
furnished by the National Quotation Bureau, Inc., or, if such firm is not then
engaged in the business of reporting such prices, as furnished by any member of
the National Association of Securities Dealers, Inc. selected by the Company or,
if the Common Shares or securities are not publicly traded, the Market Price for
such day shall be the fair market value thereof determined in good faith by the
Board of Directors of the Company.
For purposes of determining the adjusted Purchase Price under this
Paragraph 3.1, the following subsections (1) to (9), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of, Common
Shares or any other securities convertible into or exchangeable for Common
Shares (such rights or options being herein called "Options" and such
convertible or exchangeable shares or securities being herein called
"Convertible Securities"), whether or not such Options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable and the price per share for which the Common Shares are
issuable upon exercise, conversion or exchange (determined by dividing (x)
the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (y) the total
maximum number of Common Shares issuable upon the exercise of such Options
or the conversion or exchange of such Convertible Securities) shall be less
than 90% of the Market Price determined as of the date of such grant, then
the total maximum number of Common Shares issuable upon exercise of such
Options or conversion or exchange of all such Convertible Securities shall
(as of the date of the grant of such Option) be deemed to be outstanding
and to have been issued and sold by the Company for such price per share.
No adjustment of the Purchase Price shall be made upon exercise of such
Options or conversion or exchange of such Convertible Securities, except as
otherwise provided in subparagraph (3) below.
(2) In case the Company at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which
<PAGE>
6
Common Shares are issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the conversion or exchange thereof, by (y) the total
maximum number of Common Shares issuable upon the conversion or exchange of
all such Convertible Securities) shall be less than the 90% of Market
Price, determined as of the date of such issue or sale, as the case may be,
then the total maximum number of Common Shares issuable upon conversion or
exchange of all such Convertible Securities shall (as of the date of the
issue or sale of such Convertible Securities) be deemed to be outstanding
and to have been issued and sold by the Company for such price per share.
No adjustment of the Purchase Price shall be made upon the actual issue of
such Common Shares upon exercise of the rights to exchange or convert under
such Convertible Securities, except as otherwise provided in subparagraph
(3) below.
(3) If the exercise price provided for in any Options referred to
in subparagraph (1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraphs (1) or (2), or the rate at which any Convertible Securities
referred to in subparagraph (1) or (2) are convertible into or exchangeable
for Common Shares shall change at any time (other than under or by reason
of provisions designed to protect against dilution of the type set forth in
Paragraph 3.1 or 3.3), the Purchase Price in effect at the time of such
change shall forthwith be readjusted to the Purchase Price which would have
been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion or exchange rate, as the case may be, at the
time initially granted, issued or sold. If the exercise price provided for
in any Option referred to in subparagraph (1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraphs (1) or (2), or the rate
at which any Convertible Securities referred to in subparagraphs (1) or (2)
are convertible into or exchangeable for Common Shares, shall be reduced at
any time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of the delivery of Common Shares
upon the exercise of any such Option or upon conversion or exchange of any
such Convertible Security, the Purchase Price then in effect hereunder
shall forthwith be adjusted to such respective amount as would have been
obtained had such Option or Convertible Security never been issued as to
such Common Shares and had adjustments been made upon the issuance of
Common Shares delivered as aforesaid, but only if as a result of such
adjustment the Purchase Price then in effect hereunder is hereby reduced
and provided that there shall be no duplication of any adjustments
otherwise made in accordance with the terms hereof.
<PAGE>
7
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Purchase Price
then in effect hereunder shall forthwith be increased to the Purchase Price
which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never been
issued.
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Company, together comprising one
integral transaction in which no specific consideration is allocated to
such Options by the parties thereto, such Options shall be deemed to have
been issued without consideration.
(6) In case any Common Shares, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Company therefor. In case any Common Shares, Options or Convertible
Securities shall be issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall
be the fair value of such consideration as determined in good faith by the
Board of Directors of the Company.
(7) The number of Common Shares outstanding at any given time
shall not include shares owned or held by or for the account of the
Company, and the disposition of any shares so owned or held shall be
considered an issue or sale of Common Shares for the purpose of this
Paragraph 3.1.
(8) In case the Company shall declare a dividend or make any
other distribution upon the shares of the Company payable in Common Shares,
Options, or Convertible Securities, then in such case any Common Shares,
Options or Convertible Securities, as the case may be, issuable in payment
of such dividend or distribution shall be deemed to have been issued or
sold without consideration.
(9) For purposes of this Paragraph 3.1, in case the Company shall
take a record of the holders of its Common Shares for the purpose of
determining holders entitled (x) to receive a dividend or other
distribution payable in Common Shares, Options or in Convertible
Securities, or (y) to subscribe for or purchase Common Shares, Options or
Convertible Securities, then such record date shall be deemed to be the
date of the issue or sale of the Common Shares deemed to have been issued
or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right or subscription or
purchase, as the case may be.
<PAGE>
8
3.2 Dividends Not Paid Out of Earnings or Earned Surplus. In the
----------------------------------------------------
event the Company shall declare a dividend upon the Common Shares (other than a
dividend covered by subparagraph 3.1(8)) payable otherwise than out of earnings
or earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends which
would have been payable to such person had such person exercised this Warrant on
the record date for determining persons entitled to such Liquidating Dividend.
For the purposes of this Paragraph 3.2, a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Company.
3.3 Subdivisions and Combinations. In case the Company shall at
-----------------------------
any time subdivide (other than by means of a dividend payable in Common Shares
covered by subparagraph 3.1(8)) its outstanding Common Shares into a greater
number of shares, the Purchase Price in effect immediately prior to such
subdivision shall be appropriately reduced, and conversely, in case the
outstanding Common Shares of the Company shall be combined into a smaller number
of shares, the Purchase Price in effect immediately prior to such combination
shall be proportionately increased.
3.4 Reorganization, Reclassification, Consolidation, Merger or
----------------------------------------------------------
Sale of Assets. If any capital reorganization or reclassification of the
- --------------
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common
Shares shall be entitled to receive stock, securities, cash or other property
with respect to or in exchange for Common Shares, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holder of this Warrant shall have
the right to acquire and receive upon exercise hereof such common shares,
securities, cash or other property issuable or payable (as part of the
reorganization, reclassification, consolidation, merger or sale) with respect to
or in exchange for such number of outstanding Common Shares of the Company as
would have been received upon exercise of the Warrant at the Purchase Price then
in effect. The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if other
than the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written instrument mailed or delivered
to the holder of this Warrant at the last address of such holder appearing on
the books of the Company, the obligation to deliver to such holder such common
shares, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to
<PAGE>
9
purchase. In the event that pursuant to the terms of this Paragraph 3.4, this
Warrant becomes exercisable for securities other than Common Shares, then the
provisions of Section 3 shall apply to such securities as though such securities
were Common Shares. If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding Common Shares of the
Company, the Company shall not effect any consolidation, merger or sale with the
person having made such offer or with any Affiliate of such person, unless prior
to the consummation of such consolidation, merger or sale the holder of this
Warrant shall have been given a reasonable opportunity to then elect to receive
upon the exercise of this Warrant either the common shares, securities or assets
then issuable with respect to the Common Shares of the Company or the common
shares, securities or assets, or the equivalent, issued to previous holders of
the Common Shares in accordance with such offer. For purposes hereof the term
"Affiliate" with respect to any given person shall mean any person controlling,
controlled by or under common control with the given person.
3.5 No Adjustment for Exercise of Certain Options, Warrants,
--------------------------------------------------------
Etc. The provisions of this Section 3 shall not apply to any Common Shares
- ----
issued, issuable or deemed outstanding under subparagraphs 3.1(1) to (9)
inclusive: (i) to any person pursuant to any stock option, stock purchase or
similar plan or arrangement for the benefit of employees, consultants or
directors of the Company or its subsidiaries or (ii) pursuant to options,
warrants and conversion rights in existence on the date of issuance hereof.
3.6 Notices of Record Date, Etc. In the event that:
----------------------------
(1) the Company shall declare any cash dividend upon its Common
Shares, or
(2) the Company shall declare any dividend upon its Common Shares
payable in common shares or make any special dividend or other
distribution to the holders of its Common Shares, or
(3) the Company shall offer for subscription pro rata to the
holders of its Common Shares any additional common shares of any class
or other rights, or
(4) there shall be any capital reorganization. or
reclassification of the capital stock of the Company, including any
subdivision or combination of its outstanding Common Shares, or
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
<PAGE>
10
then, in connection with such event, the Company shall give to the holder of
this Warrant:
(i) at least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding
up, at least ten (10) days, prior written notice of the date when
the same shall take place.
Such notice in accordance with the foregoing clause (i) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Shares shall be entitled thereto, and
such notice in accordance with the foregoing clause (ii) shall also specify the
date on which the holders of Common Shares shall be entitled to exchange their
Common Shares for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Each such written notice shall
be given by first class mail, postage prepaid, addressed to the holder of this
Warrant at the address of such holder as shown on the books of the Company.
The failure to deliver any such notice shall not, however, affect the
validity of the action so taken by the Corporation.
3.7 Grant, Issue or Sale of Options, Convertible Securities, or
-----------------------------------------------------------
Rights. If at any time or from time to time on or after the date of issuance
- ------
hereof, the Company shall grant, issue or sell any Options, Convertible
Securities or rights to purchase property (the "Purchase Rights") pro rata to
the record holders of any class of Common Shares of the Company and such grants,
issuances or sales do not result in an adjustment of the Purchase Price under
Paragraph 3.1 hereof (other than by reason of the fact that the issuance of such
shares was at a Purchase Price equal to or greater than 90% of the then current
Market Price), then the holder of this Warrant shall be entitled to acquire
(within thirty (30) days after the later to occur of the initial exercise date
of such Purchase Rights or receipt by such holder of the notice concerning
Purchase Rights to which such holder shall be entitled under Paragraph 3.6) upon
the terms applicable to such Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of Common Shares acquirable
upon exercise of this Warrant immediately before the grant,
<PAGE>
11
issuance or sale of such Purchase Rights; provided that if any
Purchase Rights were distributed to holders of Common Shares
without the payment of additional consideration by such holders,
corresponding Purchase Rights shall be distributed to the
exercising holder of this Warrant as soon as possible after such
exercise and it shall not be necessary for the exercising holder
of this Warrant specifically to request delivery of such rights;
or
(ii) in the event that any such Purchase Rights shall have expired or
shall expire prior to the end of said thirty (30) day period, the
number of Common Shares or the amount of property which such
holder could have acquired upon such exercise at the time or
times at which the Company granted, issued or sold such expired
Purchase Rights.
3.8 Adjustment by Board of Directors. If any event occurs as to
--------------------------------
which, in the opinion of the Board of Directors of the Company, the provisions
of this Section 3 are not strictly applicable or if strictly applicable would
not fairly protect the rights of the holder of this Warrant in accordance with
the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
rights as aforesaid, but in no event shall any adjustment have the effect of
increasing the Purchase Price as otherwise determined pursuant to any of the
provisions of this Section 3 except in the case of a combination of shares of a
type contemplated in Paragraph 3.3 and then in no event to an amount larger than
the Purchase Price as adjusted pursuant to Paragraph 3.3.
3.9 Fractional Shares. The Company shall not issue fractions of
-----------------
Common Shares upon exercise of this Warrant or scrip in lieu thereof. If any
fraction of a Common Share would, except for the provisions of this Paragraph
3.9, be issuable upon exercise of this Warrant, the Company shall in lieu
thereof pay to the person entitled thereto an amount in cash equal to the
product of such fraction, calculated to the nearest one-hundredth (1/100), and
the Market Price of a Common Share as of such date of exercise.
3.10 Officer's Statement as to Adjustments. Whenever the
-------------------------------------
Purchase Price shall be adjusted as provided in Section 3 hereof, the Company
shall forthwith file at the office designated for the exercise of this Warrant,
a statement, signed by the Chairman of the Board, the President, any Vice
President or the Treasurer of the Company, showing in reasonable detail the
facts requiring such adjustment and the Purchase Price that will be effective
after such adjustment. The Company shall also cause a notice setting forth any
such adjustments to be sent by mail, first class, postage prepaid, to the record
holder of this Warrant at his or its address appearing on the Warrant register
of the Company. If such notice relates to an adjustment resulting from an event
referred to in Paragraph 3.6, such notice shall
<PAGE>
12
be included as part of the notice required to be mailed and published under the
provisions of Paragraph 3.6 hereof.
4. NO DILUTION OR IMPAIRMENT. The Company shall not, by amendment
-------------------------
of its charter or through reorganization, consolidation, merger, dissolution,
sale of assets or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder hereof against dilution or other impairment. Without
limiting the generality of the foregoing, the Company shall not increase the par
value of any Common Shares receivable upon the exercise of this Warrant above
the amount payable therefor upon such exercise, and at all times will take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable Common Shares upon the
exercise of this Warrant.
5. RESERVATION OF COMMON SHARES, ETC., ISSUABLE UPON EXERCISE OF
-------------------------------------------------------------
WARRANTS. The Company shall at all times reserve and keep available out of its
- --------
authorized but unissued Common Shares, solely for the issuance and delivery upon
the exercise of this Warrant and other similar Warrants, such number of its duly
authorized Common Shares as from time to time shall be issuable upon the
exercise of this Warrant and all other similar Warrants at the time outstanding.
6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (which surety if reasonably required) in an amount
reasonably satisfactory to it, or (in the case of mutilation) upon surrender and
cancellation thereof, the Company shall issue, in lieu thereof, a new Warrant of
like tenor.
7. REMEDIES. The Company stipulates that the remedies at law of the
--------
holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that the same may be specifically enforced.
8. NEGOTIABILITY, ETC. This Warrant is issued upon the following
-------------------
terms to all of which each taker or owner hereof consents and agrees:
(a) This Warrant and the Common Shares issuable upon exercise of
this Warrant (the "Underlying Shares") may not be
transferred except (i) in compliance with the provisions of
the Bye-laws of the Company and any applicable state
securities or "blue sky" laws and (ii)(a) pursuant to an
effective registration under the
<PAGE>
13
Securities Act of 1933, as amended (the "Act"), (b) in
compliance with Rule 144 under the Act, (c) inside the
United States to a "qualified institutional buyer" as
defined in and in compliance with Rule 144A under the Act,
(d) outside the United States in compliance with Rule 904 of
Regulation S under the Act or (e) inside the United States
to an institutional "accredited investor" as defined in Rule
501(a) (1), (2), (3) or (7) under the Act in a transaction
which, in the opinion of counsel reasonably satisfactory to
the Company, qualifies as an exempt transaction under the
Act and the rules and regulations promulgated thereunder.
This Warrant and the Underlying Shares are subject to
certain additional restrictions on transfer contained in a
Subscription Agreement and the Company's Bye-laws, copies of
which are on file at the principal office of the Company.
The provisions of this Section 8 shall be binding upon any
transferee of this Warrant and upon each holder of
Underlying Shares.
(b) Subject to the limitations described in this Paragraph 8,
title to this Warrant may be transferred by endorsement (by
the holder hereof executing the form of assignment at the
end hereof including guaranty of signature) and delivery in
the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(c) Any person in possession of this Warrant properly endorsed
and, if not the original holder hereof, to whom possession
was transferred in accordance with the provisions of
Paragraphs 8(a) and (b) is authorized to represent himself
as absolute owner hereof and is granted power to transfer
absolute title hereto by endorsement and delivery hereof to
a bona fide purchaser hereof for value; each prior taker or
owner waives and renounces all of his equities or rights in
this Warrant in favor of every such bona fide purchaser, and
every such bona fide purchaser shall acquire title hereto
and to all rights represented hereby.
(d) Until this Warrant is transferred on the books of the
Company, the Company may treat the registered holder of this
Warrant as the absolute owner hereof for all
<PAGE>
14
purposes without being affected by any notice to the
contrary.
(e) The Company shall not be required to pay any Bermuda or U.S.
Federal or state transfer tax or charge that may be payable
in respect of any transfer involved in the transfer or
delivery of this Warrant or the issuance or conversion or
delivery of certificates for Common Shares in a name other
than that of the registered holder of this Warrant or to
issue or deliver any certificates for Common Shares upon the
exercise of this Warrant until any and all such taxes and
charges shall have been paid by the holder of this Warrant
or until it has been established to the Company's
satisfaction that no such tax or charge is due.
9. NO RIGHTS TO VOTE OR RECEIVE DIVIDENDS OR OTHER DISTRIBUTIONS.
-------------------------------------------------------------
Prior to the exercise of this Warrant, the holder hereof shall not be entitled
to any rights of a shareholder of the Company with respect to Common Shares for
which this Warrant shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
10. MAILING OF NOTICES, ETC. All notices and other communications
------------------------
from the Company to the holder of this Warrant shall be mailed by firsts-class
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing.
<PAGE>
15
11. CHANGE, WAIVER, ETC. The terms of this Warrant may not be
--------------------
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the holder of this Warrant against which enforcement of the
change, waiver, discharge or termination is sought.
ESG RE LIMITED
By: _________________________________________________
Name:
Title:
Dated:
Attest:
- --------------------------------------
<PAGE>
[To be signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ___________________________________________________ the within
Warrant and appoints __________________________________________________ attorney
to transfer said right on the books of ESG Re Limited with full power of
substitution in the premises.
Dated:
- -------------------------------
-------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
-------------------------------------------
Address
In the presence of
- -------------------------------
<PAGE>
[To be signed only upon exercise of Warrant]
To ESG Re Limited
The undersigned, the holder of the within Warrant hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________________________ Common Shares of ESG Re Limited
and herewith makes payment of $____________________ therefor and/or requests
that the number of Common Shares for which the within Warrant is exercisable be
reduced by ________ Common Shares (in addition to the Common Shares being
purchased) and/or delivers _____________ Common Shares, the aggregate of such
payment being equal to the aggregate purchase price for the Common Shares being
purchased, and requests that the certificates for the Common Shares being
purchased be issued in the name of, and be delivered to,
_________________________ whose address is _____________________________________
_________________________________________________________.
Dated:
- -----------------------------
-------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
-------------------------------------------
Address
<PAGE>
EXHIBIT 8.1
December 9, 1997
ESG Re Limited
16 Church Street
Hamilton, Bermuda
ESG Re Limited
Registration Statement
----------------------
Dear Sirs:
In connection with the Registration Statement and the amendments
thereto (File No. 333-40341) (the "Registration Statement") filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder
(the "Rules"), we have been requested to render our opinion as to the matter
hereinafter set forth.
In this regard, we have reviewed copies of the Registration Statement.
We have also made such other investigations of fact and law and have examined
the originals, or copies authenticated to our satisfaction, of such documents,
records, certificates or other instruments as in our judgment are necessary or
appropriate to render the opinion expressed below.
Based on the foregoing, we are of the opinion that the sections entitled
"Certain Tax Considerations -- Taxation of the Company and its Subsidiaries --
United States" and "Certain Tax Considerations -- Taxation of Shareholders --
United States Taxation of U.S. and non-U.S. Shareholders" in the Registration
Statement contain an accurate general description, under currently applicable
law, of the principal United States Federal income tax considerations described
in the Registration Statement.
We consent to the use of this opinion in the section entitled "Certain
Tax Consequences" and to the reference to our name therein.
Very truly yours,
/s/ PAUL, WEISS, RIFKIND, WHARTON & GARRISON
________________________________________
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE>
Exhibit 8.2
Opinion of Deloitte & Touche
Special Tax Advisor for the Company
To the Board of Directors and Shareholders of
ESG Re Limited
The discussion of tax matters set forth under the caption "Certain Tax
Considerations-Taxation of the Company and its Subsidiaries - Germany" in the
Prospectus is accurate in all material respects and fairly presents the
information set out therein insofar as such statements constitute a summary of
German taxation. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement on Form F-1 (File No. 333-43041) and the
amendments thereto and to the references to our Firm under the heading "Certain
Tax Considerations" in the Prospectus.
Deloitte & Touche GmbH
Wirtschaftsprufungsellschaft
Dusseldorf, Germany
December 9, 1997
<PAGE>
Exhibit 8.3
Opinion of Deloitte & Touche
Special Tax Advisor for the Company
To the Board of Directors and Shareholders of
ESG Re Limited
The discussion of tax matters set forth under the caption "Certain Tax
Considerations-Taxation of the Company and its Subsidiaries - United Kingdom" in
the Prospectus is accurate in all material respects and fairly presents the
information set out therein insofar as such statements constitute a summary of
United Kingdom taxation. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement on Form F-1 (File No. 333-43041) and the
amendments thereto and to the references to our Firm under the heading "Certain
Tax Considerations" in the Prospectus.
Deloitte & Touche
London, United Kingdom
December 9, 1997
<PAGE>
Exhibit 8.4
Opinion of Deloitte & Touche
Special Tax Advisor for the Company
To the Board of Directors and Shareholders of
ESG Re Limited
The discussion of tax matters set forth under the caption "Certain Tax
Considerations-Taxation of the Company and its Subsidiaries - Canada" in the
Prospectus is accurate in all material respects and fairly presents the
information set out therein insofar as such statements constitute a summary of
Canadian taxation. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement on Form F-1 (File No. 333-3041) and the amendments
thereto and to the references to our Firm under the heading "Certain Tax
Considerations" in the Prospectus.
Deloitte & Touche
Toronto, Canada
December 9, 1997
<PAGE>
EXHIBIT 10.1
ESG Re Limited
SUBSCRIPTION AGREEMENT
September 30, 1997
Ladies and Gentlemen:
This agreement (the "Agreement") is made by and between ESG Re
Limited, a Bermuda company (the "Company"), and each of the purchasers executing
a counterpart hereto (each a "Purchaser" and, collectively, the "Purchasers") of
(i) the Common Shares, par value U.S. $1.00 per share (the "Common Shares") of
the Company and (ii) the Warrants (as defined below) of the Company.
In consideration of the mutual agreements of the parties contained
herein, the Company agrees and each Purchaser hereby severally agrees as
follows:
1. Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings:
"Affiliate" shall mean with respect to any person or entity any
---------
person or entity, directly or indirectly, controlling, controlled by or under
common control with such person or entity.
"Business Day" shall mean any day other than a Saturday, Sunday
------------
or a day on which banking institutions in the State of New York are authorized
or obligated by law or executive order to close.
"Closing Date" shall mean such date as the Company may designate,
------------
but not later than December 1, 1997.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"HMI" shall mean John C Head III, Madie Ivy and entities owned
---
directly or indirectly by them, their children or trusts for the benefit of the
foregoing except for Trusts.
<PAGE>
2
"Offering" shall mean the initial public offering of Common
--------
Shares by the Underwriters pursuant to a registration statement filed under the
Securities Act.
"Offering Closing Date" shall mean the date on which Common
---------------------
Shares are sold and delivered to the Underwriters pursuant to the Offering.
"Prospectus Draft" shall mean the draft of the Prospectus dated
----------------
September 30, 1997, relating to the Offering.
"Purchase Price" shall have the meaning ascribed to it in Section
--------------
2 of this Agreement.
"Registration Statement" shall mean the registration statement
----------------------
filed under the Securities Act in connection with the Offering.
"Representatives" shall mean the representatives of the
---------------
Underwriters as defined in the Prospectus Draft.
"Securities" shall mean, collectively, the Common Shares and the
----------
Warrants.
"Securities Act" shall mean the Securities Act of 1933, as
--------------
amended.
"Subscription Agreements" shall mean this Agreement or any other
-----------------------
Subscription Agreements entered into on the date hereof between the Company and
purchasers named therein, for the purchase and sale of Securities specified
therein.
"Total Securities Subscribed" shall have the meaning ascribed to
---------------------------
it in Section 2 of this Agreement.
"Transfer" shall mean any sale, assignment, pledge, hypothecation
--------
or other disposition or encumbrance.
"Trusts" shall mean pension plan trusts for the benefit of John C
------
Head III or Madie Ivy.
"Underwriters" shall mean the Representatives and the other
------------
underwriters of Common Shares in the Offering.
"Warrants" shall mean the Class A Warrants of the Company to
--------
purchase Common Shares.
<PAGE>
3
2. Purchase of Securities. Each Purchaser hereby severally and
----------------------
irrevocably agrees to purchase, subject to satisfaction of the conditions set
forth in Section 3 below, for the U.S. Dollar amount set forth opposite such
Purchaser's name on Schedule A attached to such Purchaser's executed copy of
this Agreement (the "Purchase Price"), such number of Common Shares and Warrants
as is described opposite the Purchaser's name in such Schedule A (collectively,
the "Total Securities Subscribed"), as follows:
(a) Subject to satisfaction of the conditions set forth in
Section 3 below, each Purchaser severally agrees to purchase from the Company,
and the Company agrees to sell to each Purchaser, on the Closing Date the
portion of the Total Securities Subscribed with respect to such Purchaser that
are designated as "Closing Date Securities"; provided that prior to the Closing
Date, such Purchaser may designate an Affiliate of such Purchaser (a "Designee")
to purchase all or a portion of such Total Securities Subscribed, so long as
such Designee (i) agrees to be bound by the terms of this Agreement (including
representing to and agreeing with the Company as set forth in Section 4(b)
below) and (ii) is acceptable to the Company in its sole discretion and,
provided further, that such designation shall not relieve such Purchaser of its
- --------
obligations hereunder.
(b) On the Closing Date, each Purchaser shall pay the Purchase
Price for the Total Securities Subscribed with respect to such Purchaser by wire
transfer of the Purchase Price in immediately available funds to the Bank and
account specified by the Company in writing two Business Days prior to the
Closing Date. Upon such payment, the Company shall deliver to each Purchaser
certificates for the Closing Date Securities being purchased by such Purchaser,
dated the Closing Date and registered in the name of such Purchaser evidencing
the number of Closing Date Securities purchased by such Purchaser.
(c) The closing for the purchase and sale of the Common Shares
and Warrants pursuant to this Agreement shall take place at 9:00 a.m., New York
City time, on the Closing Date, at the offices of Paul, Weiss, Rifkind, Wharton
& Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064, or at
such other place as the parties hereto shall agree in writing.
(d) In addition, each Purchaser shall be entitled to receive the
Additional Class A Warrants specified on Schedule A, calculated as a percentage
of additional Common Shares sold pursuant to the Underwriters' over-allotment
option in the Offering. Certificates for such Additional Class A Warrants shall
be delivered to the Purchaser or a Designee, as specified by such Purchaser,
promptly after the issuance of shares pursuant to the Underwriters' over-
allotment option in the Offering in respect of which such Additional Class A
Warrants are to be issued.
<PAGE>
4
3. Conditions Precedent to the Purchase and Sale of the Securities.
---------------------------------------------------------------
(a) The several obligations of each Purchaser to purchase its
Total Securities Subscribed from the Company on the Closing Date is subject to
the satisfaction of the following conditions precedent:
(i) the representations and warranties made by the
Company herein being true and correct in all material respects on and as of
the Closing Date with the same effect as though such representations and
warranties had been made on and as of the Closing Date;
(ii) the aggregate proceeds to the Company from the
purchase of Securities under this Agreement and the Subscription Agreements
shall be equal to not less than $50 million; and
(iii) the Company shall have entered into a Subscription
Agreement with ESG Partners (Bermuda) L.P.
(b) The obligation of the Company to sell the Total Subscribed
Securities to each Purchaser on the Closing Date is subject to the satisfaction
of the following conditions precedent:
(i) the representations and warranties made by such
Purchaser herein being true and correct in all material respects on and as
of the Closing Date with the same effect as though such representations and
warranties had been made on and as of the Closing Date; and
(ii) the Company shall have received on the Closing Date
payment of the Purchase Price for the Total Securities Subscribed from such
Purchaser.
4. Representations and Warranties of the Company and Purchasers.
------------------------------------------------------------
(a) The Company represents and warrants to each Purchaser that:
(i) The Company is a company duly organized, validly
existing and in good standing under the laws of Bermuda.
(ii) The Board of Directors of the Company has
authorized the execution, delivery, and performance of this Agreement. No
other corporate action is necessary to authorize such execution and
delivery, and upon such execution and delivery, this Agreement shall
constitute a valid and binding obligation of the Company.
<PAGE>
5
(iii) The Common Shares and Warrants to be issued and
sold by the Company pursuant to this Agreement and the Common Shares
issuable upon exercise of the Warrants when issued in accordance with the
provisions hereof or thereof, as the case may be, will be validly issued by
the Company, fully paid and nonassessable securities of the Company.
(iv) The creation, authorization, issuance, offer and
sale of each of the Common Shares and the Warrants does not require any
consent, approval or authorization of, or filing, registration or
qualification with, any governmental authority on the part of the Company
or the vote, consent or approval in any manner of the holders of any
security of the Company as a condition to the execution and delivery of
this Agreement or the creation, authorization, issuance, offer, and sale of
the Common Shares and the Warrants that has not been obtained. The
execution and delivery by the Company of this Agreement and the performance
by the Company of its obligations hereunder will not violate (i) the terms
and conditions of the Memorandum of Association or Bye-laws, or any
agreement to which the Company is a party or by which it is bound or (ii)
any Bermuda, U.S. or state law.
(v) Subsequent to the date as of the Prospectus Draft,
there has been no material adverse change in the condition (financial or
otherwise), management, properties, business affairs or business prospects,
of European Specialty Group Holding AG and its subsidiaries, taken as a
whole.
(b) Each Purchaser severally represents and agrees with the
Company, as follows:
(i) The Purchaser understands that the Total Securities
Subscribed which it is purchasing hereunder have not been registered under
the Securities Act, nor qualified under any state securities laws, and that
they are being offered and sold pursuant to an exemption from such
registration and qualification based in part upon the representations of
the Purchaser contained herein.
(ii) The Purchaser is familiar with the business and
operations which the Company intends to engage in and has been given the
opportunity to obtain from the Company all information that it has
requested regarding its proposed business plans and prospects.
(iii) The Purchaser has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits
and risks of the investment contemplated by this Agreement; the Purchaser
is able to bear the economic risk of its investment in the Company
(including a complete loss of its investment).
<PAGE>
6
(iv) The Purchaser is either (A) a "qualified
institutional buyer" as such term is defined in Rule 144A under the
Securities Act (a "QIB") or (B) an "accredited investor" as such term is
defined in Rule 501(a) under the Securities Act, and in either case is
acquiring the Common Shares and Warrants solely for its own account for
investment and not with a view toward the resale, Transfer, or distribution
thereof, nor with any present intention of distributing the Common Shares
or Warrants. No other person has any right with respect to or interest in
the Common Shares or Warrants to be purchased by the Purchaser, nor has the
Purchaser agreed to give any person any such interest or right in the
future.
(v) The Purchaser has full power and legal right to
execute and deliver this Agreement and to perform its obligations
hereunder.
(vi) The Purchaser acknowledges and agrees that the
Total Securities Subscribed which it is purchasing is being purchased directly
from the Company and that the Representatives are not acting as either placement
agents, underwriters or advisors in connection with the purchase; the Prospectus
Draft is being furnished to the Purchaser by the Company solely for
informational purposes and does not constitute any offer to sell or invitation
to subscribe or purchase any of the Securities; and in connection with the
furnishing of the Prospectus Draft to the Purchaser by the Company, no
representation or warranty is being made by the Representatives to the Purchaser
with respect to, and the Representatives shall not be responsible for, the
accuracy or completeness of the Prospectus Draft.
5. Covenants of the Company and Purchasers.
---------------------------------------
(a) Each Purchaser severally covenants that it will sell or
otherwise Transfer any Common Shares, Warrants or Common Shares underlying such
Warrants only when any such sale or Transfer is (i) in compliance with the
provisions of this Agreement, the Bye-laws of the Company and any applicable
U.S. state securities or "Blue Sky" laws and (ii) (A) pursuant to an effective
registration under the Securities Act, (B) in compliance with Rule 144 under the
Securities Act, (C) inside the United States to a QIB in compliance with Rule
144A, (D) outside the United States in compliance with Rule 904 of Regulation S
under the Securities Act or (E) inside the United States to an "accredited
investor" as defined in Rule 501(a) under the Securities Act in a transaction
which, in the opinion of counsel reasonably satisfactory to the Company,
qualifies as an exempt transaction under the Securities Act and the rules and
regulations promulgated thereunder.
(b) The certificates evidencing the Common Shares, the Warrants
and Common Shares underlying the Warrants, so long as such securities are not
freely transferable under the Securities Act, will bear a legend substantially
to the following effect reflecting the restrictions on the transfer of such
securities contained in this Agreement:
<PAGE>
7
"The securities evidenced hereby or issuable upon the exercise hereof have
not been registered under the Securities Act of 1933, as amended (the
"Act"), and may not be offered, sold or otherwise transferred except (i) in
compliance with the Subscription Agreement, dated September 30, 1997,
between the initial holder hereof and the Company, provisions of the Bye-
laws of the Company and any applicable state securities or "Blue Sky" laws
and (ii)(A) pursuant to an effective registration under the Act, (B) in
compliance with Rule 144 under the Securities Act, (C) inside the United
States to a "Qualified Institutional Buyer" in compliance with Rule 144A
under the Act, (D) outside the United States in compliance with Rule 904 of
Regulation S under the Act or (E) inside the United States to an
"accredited investor" as defined in Rule 501(a) under the Act in a
transaction which, in the opinion of counsel reasonably satisfactory to the
Company, qualifies as an exempt transaction under the Act and the rules and
regulations promulgated thereunder.
(c) Each Purchaser shall, upon the request by the Company,
execute a "lock-up" agreement for the benefit of the Underwriters in the
Offering pursuant to which such Purchaser will agree not to offer, sell,
contract to sell or otherwise dispose of any Common Shares, Warrants or any
other securities convertible into or exchangeable or exercisable for Common
Shares for a period of one year from the Offering Closing Date without the
written consent of the Representative, provided that such period shall be two
--------
years in the case of HMI.
6. Registration Rights.
-------------------
(a) Definitions. As used in this Section 6:
-----------
(i) "Commission" shall mean the U.S. Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act;
(ii) the term "Holder" means any holder of Registrable
Securities;
(iii) the term "Initiating Holder" means any Holder or
Holders who in the aggregate are Holders of Common Shares with a fair
market value equal to or exceeding $10 million; provided that HMI shall not
--------
be permitted to act as Initiating Holders until the date that is two years
after the Offering Closing Date without the consent of the Initial
Purchasers;
(iv) the terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Act (and any pre- or post-effective
amendments filed or required to be filed) and the declaration or ordering
of effectiveness of such registration statement;
<PAGE>
8
(v) the term "Registrable Securities" means (A) Common Shares
and Warrants issued to each Purchaser pursuant to this Agreement, (B) any
Common Shares issued to each Purchaser upon exercise of the Warrants, and
(C) any Common Shares of the Company issued as a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
Common Shares or Warrants referred to in clause (A) or (B) above; provided,
--------
however, that the term "Registrable Securities" shall not include (x) any
-------
such securities sold by any Purchaser pursuant to an effective registration
under the Securities Act or pursuant to Rule 144 under the Securities Act,
(y) any such securities held by such Purchaser which are eligible for sale
pursuant to Rule 144(k) under the Securities Act;
(vi) "Registration Expenses" shall mean all expenses incurred
by the Company in compliance with Sections 6(b), (c) and (e) hereof,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, blue sky fees
and expenses and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular
employees of the Company, which shall be paid in any event by the Company);
and
(vii) "Selling Expenses" shall mean all underwriting
discounts and selling commissions applicable to the sale of Registrable
Securities and all fees and disbursements of counsel for each of the
Holders.
(b) Requested Registration.
----------------------
(i) Request for Registration. If the Company shall receive
from an Initiating Holder, at any time after the date that is one year
after the Offering Closing Date unless consented to by the Representative,
a written request that the Company effect any registration with respect to
all or a part of the Registrable Securities, the Company will:
(A) promptly give written notice of the proposed
registration to all other Holders of Registrable Securities; and
(B) as soon as practicable, use all reasonable efforts
to effect such registration of all or such portion of such Registrable
Securities as are specified in such request, together with all or such
portion of the Registrable Securities of any Holder or Holders joining
in such request as are specified in a written request received by the
Company within 10 business days after written notice from the Company
is given under Section 6(b)(i)(A) above; provided that the Company
--------
shall not be obligated to effect, or take any action to effect, any
such registration pursuant to this Section 6(b)(i):
<PAGE>
9
(x) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of
process in effecting such registration, qualification or
compliance, unless the Company is already subject to service in
such jurisdiction and except as may be required by the Act or
applicable rules or regulations thereunder;
(y) If the Initiating Holder of any registration pursuant
to this Section 6(b)(i) includes any Purchaser (or its
transferee(s) or Affiliates) for which the Company has already
effected four such registrations that have either (1) been
declared or ordered effective or (2) withdrawn upon the request
of such Purchaser (or its transferee(s) or Affiliates) without
such withdraw having been requested by the Company; or
(z) On behalf of the HMI until the date that is two years
after the Offering Closing Date, unless consented to by the
Representative.
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Section 6(b)(ii)
below, include other securities to be issued for the account of the
Company and securities of the Company which are held by officers or
directors of the Company, or which are held by persons who, by virtue
of agreements with the Company, are entitled to include their
securities in any such registration.
The registration rights set forth in this Section 6 shall be
assignable, in whole or in part, to any transferee of Registrable
Securities provided such transferee agrees to be bound by all
provisions of this Agreement.
(ii) Underwriting. If the Initiating Holders intend to
------------
distribute the Registrable Securities covered by their request by means of
an underwriting, they shall so advise the Company as a part of their
request made pursuant to Section 6(b).
Subject to the further applicable provisions of this Section 6, if
officers or directors of the Company holding Common Shares (other than
Registrable Securities) shall request inclusion in any registration
pursuant to Section 6(b), or if holders of securities of the Company other
than Registrable Securities who are entitled, by contract with the Company
or otherwise, to have securities included in such a registration (the
"Other Shareholders") request such inclusion, the securities of such
officers, directors and Other Shareholders shall be included in the
underwriting. The Holders whose securities are to be
<PAGE>
10
included in such registration and the Company shall (together with all
officers, directors and Other Shareholders proposing to distribute their
securities (other than Registrable Securities) through such underwriting)
enter into an underwriting agreement in customary form with the
representative(s) of the underwriter or underwriters selected for such
underwriting by the Initiating Holders and reasonably acceptable to the
Company. If the representative or representatives of the underwriter or
underwriters has not limited the number or type of Registrable Securities
or other securities to be underwritten, the Company may include its
securities for its own account in such registration if the representative
or representatives so agrees or agree and if the number of Registrable
Securities and other securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.
Notwithstanding any other provision of this Section 6(b), if the
representative or representatives advises or advise the Holders in writing
that marketing factors require a limitation on the number or type of
securities to be underwritten, then the securities of the Company held by
officers or directors (other than Registrable Securities) of the Company,
the securities held by Other Shareholders and any securities proposed to be
issued for the account of the Company shall be excluded from such
registration to the extent so required by such limitations. If, after the
exclusion of such securities, further reductions are still required, the
number of securities included in the registration by each Holder (except
for any Initiating Holder(s)) shall be reduced on a pro rata basis (based
on the number of shares requested to be included in such underwriting by
the respective Holders) by such minimum number of securities as is
necessary to comply with such request and, if after such exclusion, a
further limitation in the number or type of securities that may be included
in the registration and underwriting is still required, then the Common
Shares to be sold by each of the Initiating Holders shall be reduced on a
pro rata basis (based on the number of securities requested to be included
in such underwriting by such Holders), by such minimum number of securities
as is necessary to comply with such limitation. No Registrable Securities
or any other securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration.
If any officer, director or Other Shareholder who has requested inclusion
in such registration as provided above disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice
to the Company, the underwriter and the Initiating Holders. The securities
so withdrawn shall also be withdrawn from registration.
(iii) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting the filing of a registration statement
pursuant to this Section 6(b), a certificate signed by the President or
Chief Executive Officer of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration
statement to be filed
<PAGE>
11
and it is therefore essential to defer the filing of such registration
statement, then the Company shall have the right to defer such filing for a
period of not more than ninety (90) days after receipt of the request of
the Initiating Holders; provided, however, that the Company may not utilize
-------- -------
this right more than once in any twelve (12) month period.
(c) Company Registration.
--------------------
(i) If at any time after the date that is one year (or, in
the case of the HMI, two years) unless consented to by the Representative
after the Offering Closing Date the Company shall determine to register any
of its equity securities either for its own account or for the account of a
security holder or holders, other than a registration relating solely to
employee benefit plans, a registration relating solely to a Commission Rule
145 transaction, or a registration on any registration form which does not
permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(A) promptly give to each of the Holders a written notice thereof
(which shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such securities under the applicable
blue sky or other state securities laws); and
(B) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a
written request or requests, made by the Holders within fifteen (15)
days after receipt of the written notice from the Company described in
clause (i) above, except as set forth in Section 6(c)(ii) below. Such
written request may specify all or a part of the Holders' Registrable
Securities.
(ii) Underwriting. If the registration of which the Company
------------
gives notice is for a registered public offering involving an underwriting,
the Company shall so advise each of the Holders as a part of the written
notice given pursuant to Section 6(c)(i)(A). In such event, the right of
each of the Holders to registration pursuant to this Section 6(c) shall be
conditioned upon such Holders' participation in such underwriting and the
inclusion of such Holders' Registrable Securities in the underwriting to
the extent provided herein. The Holders whose securities are to be
included in such registration shall (together with the Company and the
Other Shareholders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the
representative or representatives of the underwriter or underwriters
selected for underwriting by the Company or, if such registration has been
initiated by any Other
<PAGE>
12
Shareholder, by such Other Shareholder. Notwithstanding any other
provision of this Section 6(c), if the representative or representatives
determines or determine that marketing factors require a limitation on the
number or type of securities to be underwritten, the representative or
representatives may limit the number or type of Registrable Securities to
be included in the registration and underwriting to the extent so required
by such limitations. The Company shall so advise all holders of securities
requesting registration, and the number or type of securities that are
entitled to be included in the registration and underwriting shall be
allocated in the following manner: The securities of the Company held by
officers, directors and Other Shareholders (except for any Other
Shareholder(s) initiating such registration) of the Company (other than
Registrable Securities) shall be excluded from such registration and
underwriting to the extent required by such limitation. If a limitation on
the number or type of securities is still required, the number or type of
securities that may be included in the registration and underwriting by
each of the Holders shall be reduced, on a pro rata basis (based on the
number of securities requested to be included in such underwriting by such
Holders), by such minimum number of securities as is necessary to comply
with such limitation. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
(iii) Number and Transferability. Each of the Holders shall
--------------------------
be entitled to have its securities included in four registrations pursuant
to this Section 6(c). The registration rights granted pursuant to this
Section 6(c) shall be assignable, in whole or in part, to any transferee of
Registrable Securities provided such transferee agrees to be bound by all
provisions of this Agreement.
(d) Expenses of Registration. All Registration Expenses incurred
------------------------
in connection with any registration, qualification or compliance pursuant to
this Section 6 shall be borne by the Company and all Selling Expenses shall be
borne by the Holders of the Securities so registered pro rata on the basis of
the number of their Securities sold.
(e) Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to Section 6, the Company will keep the
Holders, as applicable, advised in writing as to the initiation of each
registration and as to the completion thereof. The Company agrees to promptly
notify each Holder of Registrable Securities, as applicable, of the happening of
any event as a result of which the prospectus included in the registration
statement then in effect with respect to such Registrable Securities, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing. Upon receiving such
notification, each Holder of such Registrable Securities agrees to forthwith
discontinue the disposition of such Registrable Securities pursuant to such
<PAGE>
13
registration statement until such Holder's receipt of copies of a supplemental
or amended registration statement or prospectus included therein. In addition,
at its expense, the Company will:
(i) keep such registration effective for a period of one
hundred twenty (120) days or until the Holders, as applicable, have
completed the distribution described in the registration statement relating
thereto, whichever first occurs; provided, however, that such 120-day
period shall be extended for a period of time equal to the period during
which the Holders are precluded from using a registration statement in the
circumstances described above;
(ii) furnish such number of prospectuses and other documents
incident thereto as each of the Holders, as applicable, from time to time
may reasonably request;
(iii) make available for inspection by any Holder of
Registrable Securities participating in any registration, any underwriter
thereof and any counsel or other professional retained by such Holder or
underwriter (the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company as shall be reasonably
necessary to enable them to exercise their due diligence responsibility and
cause the Company's officers, directors and employees to supply all
information reasonably requested by any Inspectors in connection with such
registration; and
(iv) use its best efforts to take all other actions
reasonably necessary to effect the registration of Registrable Securities
pursuant to Section 6 hereof.
(f) Indemnification.
---------------
(i) The Company will indemnify each of the Holders, as
applicable, each of its officers, directors and partners, and each person
controlling each of the Holders within the meaning of Section 15 under the
Securities Act or Section 20 under the Exchange Act, with respect to each
registration which has been effected pursuant to this Section 6, and each
underwriter, if any, and each person who controls any underwriter, against
all claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification
or compliance, or based on 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, or any
<PAGE>
14
violation by the Company of the Act or any rule or regulation thereunder
applicable to the Company and relating to action or inaction required of
the Company in connection with any such registration, qualification or
compliance, and will reimburse each of the Holders, each of its officers,
directors and partners, and each person controlling each of the Holders,
each such underwriter and each person who controls any such underwriter,
for any legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to
any particular Holder or underwriter to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission based upon written information furnished to the
Company by any Holder with respect to such Holder or underwriter with
respect to such underwriter and stated to be specifically for use therein.
(ii) Each of the Holders will, if Registrable Securities held
by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each
of its directors and officers and each underwriter, if any, of the
Company's securities covered by such a registration statement, each person
who controls the Company or such underwriter, each other Holder or each
Other Shareholder and each of their officers, directors, and partners, and
each person controlling such Other Shareholder within the meaning of
Section 15 under the Securities Act or Section 20 under the Exchange Act
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact with respect to such Holder contained in any
such registration statement, prospectus offering circular or other document
made by such Holder, or any omission (or alleged omission) to state therein
a material fact with respect to such Holder required to be stated therein
or necessary to make the statements by such Holder therein not misleading,
and will reimburse the Company and such other Holders and Other
Shareholders, directors, officers, partners, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder with respect to
such Holder and stated to be specifically for use therein; provided,
however, that the obligations of each of the Holders hereunder shall be
limited to an amount equal to the proceeds to such Holder of securities
sold as contemplated herein.
(iii) Each party entitled to indemnification under this
Section 6(f) (the "Indemnified Party") shall give notice to the party
required to
<PAGE>
15
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or any litigation resulting therefrom shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld) and
the Indemnified Party may participate in such defense at such party's
expense (unless the Indemnified Party shall have reasonably concluded that
there may be a conflict of interest between the Indemnifying Party and the
Indemnified Party in such action, in which case the fees and expenses of
counsel shall be at the expense of the Indemnifying Party), and provided
further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 6 unless the Indemnifying Party is materially prejudiced
thereby. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of an unconditional release from all
liability in respect to such claim or litigation. Each Indemnified Party
shall furnish such information regarding itself or the claim in question as
an Indemnifying Party may reasonably request in writing and as shall be
reasonably required in connection with the defense of such claim and
litigation resulting therefrom.
(iv) To the extent that the indemnification provided for in
this Section 6(f) is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party with respect to any loss, liability,
claim, damage or expense referred to herein, then the Indemnifying Party,
in lieu of indemnifying such Indemnified Party hereunder, shall contribute
to the amount paid or payable by such Indemnified Party as a result of such
loss, liability, claim, damage or expense in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other in connection with the
statements or omissions which resulted in such loss, liability, claim,
damage or expense, as well as any other relevant equitable considerations.
The relative fault of the Indemnifying Party and of the Indemnified Party
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Indemnifying Party or
by the Indemnified Party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission.
(v) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with any underwritten
<PAGE>
16
public offering contemplated by this Agreement are in conflict with the
provisions of this Section 6(f), the provisions in such underwriting
agreement shall be controlling.
(vi) The foregoing indemnity agreement of the Company and
Holders is subject to the condition that, insofar as they relate to any
loss, claim, liability or damage made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement in question becomes
effective or the amended prospectus filed with the Commission pursuant to
Commission Rule 424(b) (the "Final Prospectus"), such indemnity agreement
shall not inure to the benefit of any underwriter or any person controlling
such underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act if a copy of the Final Prospectus was
furnished to the underwriter and, if required by law to be so furnished,
was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Act.
(vii) Any indemnification payments required to be made to an
Indemnified Party under this Section 6(f) shall be made as the related
claims, losses, damages, liabilities or expenses are incurred.
(g) Information by the Holders. Each of the Holders holding
--------------------------
securities included in any registration shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Section 6. The Holder shall not be required, in connection
with any underwriting arrangements entered into in connection with any
registration, to provide any information, representations or warranties, or
covenants with respect to the Company, its business or its operations except as
required by law and shall not be required to provide any indemnification with
respect to any registration statement except as specifically provided for in
Section 6(f)(ii) hereof.
(h) Rule 144 Reporting. With a view to making available the
------------------
benefits of certain rules and regulations of the Commission which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to:
(A) make and keep public information available as those terms
are understood and defined in Rule 144 under the Securities Act, at all
times from and after one year following the effective date of the Offering;
<PAGE>
17
(B) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act at all times that it is subject to
such reporting requirements; and
(C) so long as the Holder owns any Registrable Securities,
furnish to the Holder upon request a written statement by the Company as to
its compliance with the reporting requirements, at any time from and after
one year following the Closing Date, of Rule 144 of the Securities Act and
the Exchange Act (at any time that it is subject to such reporting
requirements), a copy of the most recent annual report of the Company, and
such other reports and documents as the Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing the
Holder to sell any such securities without registration.
(i) Termination. The registration rights set forth in this
Section 6 shall not be available to any Holder if (x) in the opinion of
counsel to the Company, all of the Registrable Securities then owned by
such Holder and the Common Shares, if any, issuable upon exercise of such
Registrable Securities that, in each case, the Holder intends to sell
pursuant to such registration could be sold in any 90-day period pursuant
to Rule 144 under the Securities Act.
7. Miscellaneous.
-------------
(a) Governing Laws: Jurisdiction. This Agreement shall be
--------------
construed, performed and enforced in accordance with, and governed by, the laws
of the State of New York without giving effect to the principles of conflicts of
laws thereof. The parties hereto irrevocably elect as the sole judicial forum
for the adjudication of any matters arising under or in connection with this
Agreement, and consent to the exclusive jurisdiction of, the state and federal
courts located in New York.
(b) Severability. In the event that any part of this Agreement is
declared by any court or other judicial or administrative body to be null, void
or unenforceable, said provision shall survive to the extent it is not so
declared, and all of the other provisions of this Agreement shall remain in full
force and effect.
(c) Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (i) on the date of service if served personally on the
party to whom notice is to be given, (ii) on the day of transmission if sent via
facsimile transmission to the facsimile number given below, and telephonic
confirmation of receipt is obtained promptly after completion of transmission,
(iii) on the day after delivery to Federal Express or similar overnight courier
or the Express Mail service maintained
<PAGE>
18
by the United States Postal Service or (iv) on the fifth day after mailing, if
mailed to the party to whom notice is to be given, by first class mail,
registered or certified, postage prepaid and properly addressed, to the party as
follows:
If to the Company at:
P.O. Box 2062
16 Church Street
Hamilton HM 4X
Bermuda
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019
Attention: Richard S. Borisoff, Esq.
If to a Purchaser at:
the address listed opposite
such Purchaser's name on
Schedule A hereto
(d) Amendments; Waivers. This Agreement may be amended or
-------------------
modified, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by the
parties hereto, or in the case of a waiver, by the party waiving compliance. Any
waiver by any party of any condition, or of the breach of any provision, term,
covenant, representation or warranty contained in this Agreement, in any one or
more instances, shall not be deemed to be nor construed as further or continuing
waiver of any such condition, or of the breach of any other provision, term,
covenant, representation or warranty of this Agreement.
(e) Entire Agreement. This Agreement contains the entire
----------------
understanding between the parties hereto with respect to the transactions
contemplated hereby and supersedes and replaces all prior and contemporaneous
agreements and understandings, oral or written, with regard to such
transactions. All schedules hereto and any documents and instruments delivered
pursuant to any provision hereof are expressly made a part of this Agreement as
fully as though completely set forth herein.
(f) Section and Paragraph Headings. The section and paragraph
------------------------------
headings in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
<PAGE>
19
(g) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which shall constitute the
same instrument .
Very truly yours,
ESG RE LIMITED
By:______________________________
Name:
Title:
Accepted: ____________, 1997
Name of Purchaser:
By:__________________________
Name:
Title:
<PAGE>
20
Schedule A
----------
<TABLE>
<CAPTION>
Initial Additional
Common Class A Class A
Purchaser Address Purchase Price Shares /*/ Warrants /*/ Warrants /**/
- - --
- ----------- ------- -------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
</TABLE>
/*/ The Common Shares and the Initial Class A Warrants constitute the
- ---
"Closing Date Securities."
/**/ Additional Class A Warrants are a percentage of any Common Shares issued
- ----
pursuant to the Underwriters' over-allotment option in the Offering.
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made effective as of the 1st day of December, 1997, among
European Specialty Group (United Kingdom) Limited (the "Company"), ESG Re
Limited, a Bermuda company (the "Parent"), and Wolfgang Wand (the "Executive").
WHEREAS, the Company and the Parent wish to retain the services of the
Executive and recognize that the Executive's contribution to the growth and
success of the Company will be substantial; and
WHEREAS, the Executive is willing to commit himself to serve the
Company and the Parent, on the terms and conditions herein provided; and
WHEREAS, this Agreement shall supersede any former Employment
Agreements between the Parent, the Company or any of its affiliates and the
Executive;
NOW, THEREFORE, in order to effect the foregoing, the Company, the
Parent and the Executive wish to enter into an employment agreement on the terms
and conditions set forth below. Accordingly, in consideration of the premises
and the respective covenants and agreements of the parties herein contained, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Employment. The Company and the Parent hereby agree to employ the
----------
Executive, and the Executive hereby agrees to be employed by the Company and the
Parent, on the terms and conditions set forth herein.
2. Term. The term of the Executive's employment hereunder shall
----
commence as of the date hereof and shall continue until the close of business on
the third anniversary of the date hereof, subject to earlier termination in
accordance with the terms of this Agreement (the "Term"). The Term shall be
automatically extended for successive one year periods thereafter unless any of
the parties notifies the other in writing of its intention not to so extend the
Term at least one year prior to the commencement of the next scheduled one year
extension.
3. Position and Duties.
-------------------
(a) Title and Duties. The Executive shall serve as the Managing
----------------
Director and Chief Executive Officer of the Parent and Chairman and Chief
Executive Officer of the Company and European Specialty Group Holding AG, a
German Corporation ("ESG Germany"), and shall have such duties, authority and
responsibilities as are normally associated with and appropriate for such
positions. The Executive shall report directly to the Board of Directors of the
Parent (the
<PAGE>
"Board") and the Supervisory Board of the Company (the "Supervisory Board").
The Executive shall devote substantially all of his working time and efforts to
the business and affairs of the Company, the Parent and ESG Germany at such
locations, including Germany, Bermuda and Ireland, as are mutually agreed upon
by the Executive and the Board. Executive shall not serve on the Board of
Directors of any unaffiliated companies, including but not limited to, any
charitable organization or chamber of commerce without the written consent of
the Board; provided, however, that the Executive shall be permitted to serve as
-------- -------
a Director of ESA Ltd. and as a member of the German Delegation of the
International Chamber of Trade and Commerce and to serve as a legal
representative (Mandataire Generale) of the Mutuelles du Mans, a French
insurance company, if the Executive is so designated provided that such
activities do not interfere with the performance of the Executive's duties
hereunder.
(b) Office and Facilities. The Executive shall be provided with
---------------------
appropriate office and secretarial facilities at the Company's offices in
Hamburg, Germany and any other location that the Company and the Parent
reasonably deem necessary to have an office and support services in order for
the Executive to perform his duties to the Company, the Parent and ESG Germany.
The Executive shall serve as a director of the Parent and the Company and shall
agree to serve on other committees of the Parent, the Company or any other
affiliated company, without additional compensation, if requested by the Board.
4. Compensation.
------------
(a) Base Salary. During the Term, the Company shall pay to the
-----------
Executive an annual base salary of $300,000. The Executive's base salary shall
be paid in substantially equal installments on a basis consistent with the
Company's payroll practices. The Executive's base salary, as in effect at any
time, is hereinafter referred to as the "Base Salary." The Compensation
Committee of the Board (the "Compensation Committee") shall review Executive's
performance on an annual basis and may increase the Executive's Base Salary, in
its sole discretion, as it deems appropriate.
(b) Annual Bonus. The Compensation Committee may award the
------------
Executive an annual bonus, at such time and in such amount as the Compensation
Committee, in its sole discretion, deems appropriate, provided, however, that
--------
the annual bonus for the 1998 fiscal year shall in no event be less than
$100,000.
5. Employee Benefits.
-----------------
(a) Benefit Plans. The Executive shall be entitled to
-------------
participate in all employee benefit plans, perquisite and fringe benefit
arrangements of the Company generally made available by the Company to its
executives, subject to,
2
<PAGE>
and on a basis consistent with the terms, conditions and administration of such
plans and arrangements.
(b) Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement for all reasonable and customary expenses incurred by the
Executive in performing services hereunder, including all expenses of travel and
living expenses while away from home on business at the request of and in the
service of the Company or the Parent or any of its affiliates and promoting the
business of the Company, provided that such expenses are incurred and accounted
for in accordance with the policies and procedures established by the Company.
(c) Vacation. The Executive shall be entitled to vacations and
--------
holidays on a basis consistent with that offered to other senior executive
officers of the Company.
6. Termination of Employment. The Company and the Executive may each
-------------------------
terminate the Executive's employment hereunder and the Term for any reason.
(a) Termination by the Company without Cause or by the Executive
------------------------------------------------------------
for Good Reason. If the Company shall terminate the Executive's employment
- ---------------
without "Cause" (as defined in Section 6(f)), or if the Executive resigns for
Good Reason (as defined in Section 6(f)) then, the Executive shall be entitled
to his Base Salary for the greater of (1) the remainder of the Term, or (2) one
year, subject to and conditioned upon the Executive's compliance with Sections 7
and 8 hereof. Options held by the Executive will be treated as provided for in
the applicable Award Agreement.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(a).
(b) Termination due to Non-Renewal of the Term or Death or
------------------------------------------------------
Disability. If the Executive's employment is terminated due to the non-renewal
- ----------
of the Term or due to the Executive's death or Disability (as defined in Section
6(f)), the Executive shall be entitled to a lump sum cash payment equal to the
Executive's Base Salary through the date of termination. Options held by the
Executive will be treated as provided for in the applicable Award Agreement.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(b).
(c) Termination by the Company for Cause or by Executive Other
----------------------------------------------------------
than for Good Reason. If the Executive's employment is terminated by the
- --------------------
3
<PAGE>
Company for Cause or by the Executive other than for Good Reason, the Executive
shall be entitled to a lump sum cash payment equal to his Base Salary through
the date of termination. Options held by the Executive shall be treated as
provided for in the applicable Award Agreement.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(c).
(d) Termination Within One Year of a Change in Control. If the
--------------------------------------------------
Company terminates the Executive's employment without Cause or the Executive
terminates his employment for Good Reason within one year following a Change in
Control, the Executive shall be entitled, in addition to the compensation
otherwise payable upon his termination of employment pursuant to Section 6(a)
above, to a lump sum payment which, when added to the present value of all other
benefits or payments to which the Executive is entitled which would constitute
"Parachute Payments" (as defined in Section 280G of the U.S. Internal Revenue
Code of 1986, as amended (the "Code")); equals 2.99 times the Executive's "Base
Amount" (as defined in Section 280G of the Code).
(e) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive (other than termination pursuant
to the Executive's death) shall be communicated by written Notice of Termination
to the other party hereto in accordance with Section 11 hereof. If the Company
terminates the Executive's employment for Cause or if the Executive resigns for
Good Reason, the "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. For purposes of this Agreement, the date of the
Executive's termination of employment shall be deemed to be the date of receipt
of the Notice of Termination.
(f) Definitions. For purpose of this Agreement:
-----------
(i) "Cause" shall mean
(1) Executive's breach of any material term of this
Agreement, including, but not limited to, the covenants set forth in
Sections 7 and 8 hereof;
(2) Executive's failure or refusal to perform his
duties hereunder or to perform specific directives of the Board, provided
that such directives do not violate any applicable law or industry
standards;
4
<PAGE>
(3) Dishonesty of Executive affecting the Company, the
Parent or any affiliates;
(4) Any gross or willful conduct of Executive resulting
in substantial loss to or theft from any of the Company, the Parent or any
affiliate; or substantial damage to the Company's reputation or theft from
the Company; or
(5) Alcoholism or use of drugs or any controlled
substances which interferes with the performance of Executive's duties and
responsibilities under this Agreement ;
(6) Executive is charged with a felony or other serious
crime, whether or not related to the business of the Company, including but
not limited to, any crime related to tax evasion, bribery, theft, political
payoffs, etc.
(ii) "Change in Control" shall mean the occurrence of any of
the following: (i) the sale, lease, transfer or other disposition, in one or a
series of related transactions, of all or substantially all of the assets of the
Parent other than to the Parent or any of the Affiliates, or (ii) a merger or
sale of the Parent pursuant to which the shareholders of the Parent immediately
prior to such merger or sale do not own a majority of the stock of the Parent or
the surviving corporation immediately after such merger or sale.
(iii) "Disability" shall mean the Executive's adjudication as
mentally incompetent, or mental or physical disability preventing Executive from
performing his duties under this Employment Agreement for a period of 180
consecutive days.
(iv) "Good Reason" shall mean (1) a material diminution in
the Executive's duties or the assignment to the Executive of a title or duties
inconsistent with his position as Chief Executive Officer of the Parent, (2) a
material reduction in the Executive's salary, or (3) a failure of the Company or
the Parent to comply with any material provision of this Agreement.
7. Non-Competition
---------------
(a) Executive acknowledges and recognizes the highly competitive
nature of the businesses of the Company and its affiliates and accordingly
agrees as follows:
(i) During the Employment Term and for a period of 18
months following the Executive's termination of employment (unless such
termination of employment occurs within one year following a Change in Control,
in
5
<PAGE>
which case this paragraph shall not be applicable) (the "Restricted Period"),
the Executive will not, unless the Executive is given written permission by the
Board, directly or indirectly, (i) engage in any business for the Executive's
own account that competes with the business of the Company or any of its
affiliates that are engaged in the insurance or reinsurance business (the
"Company Affiliates"), (ii) enter the employ of, or render any services to, any
person engaged in any business that competes with the business of the Company or
the Company Affiliates, (iii) acquire a financial interest in, or otherwise
become actively involved with, any person engaged in any business that competes
with the business of the Company or the Company Affiliates, directly or
indirectly, as an individual, partner, shareholder, officer, director,
principal, agent, trustee or consultant, or (iv) interfere with business
relationships (whether formed before or after the date of this Agreement) of the
Company or the Company Affiliates.
(ii) Notwithstanding anything to the contrary in this
Agreement, the Executive may, directly or indirectly own, solely as an
investment, securities of any person engaged in the business of the Company or
the Company Affiliates if the Executive (i) is not a controlling person of, or a
member of a group which controls, such person and (ii) does not, directly or
indirectly, own more than one share less than 5% of any class of securities of
such person.
(iii) During the Restricted Period, the Executive will
not, directly or indirectly, (i) solicit or encourage any employee of the
Company or the Company Affiliates to leave the employment of the Company or the
Company Affiliates, or (ii) hire any such employee who has left the employment
of the Company or the Company Affiliates (other than as a result of the
termination of such employment by the Company or the Company Affiliates) within
one year after the termination of such employee's employment with the Company or
the Company Affiliates.
(iv) During the Restricted Period, the Executive will
not, directly or indirectly, solicit or encourage to cease to work with the
Company or the Company Affiliates any consultant then under contract with the
Company or the Company Affiliates.
(b) It is expressly understood and agreed that although Executive
and the Company consider the restrictions contained in this Section 7 to be
reasonable, if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against Executive, the provisions
of this Agreement shall not be rendered void but shall be deemed amended to
apply as to such maximum time and territory and to such maximum extent as such
court may judicially determine or indicate to be enforceable. Alternatively, if
any court of competent jurisdiction finds that any restriction contained in this
Agreement is unenforceable, and such restriction cannot be amended so as to make
it enforceable,
6
<PAGE>
such finding shall not affect the enforceability of any of the other
restrictions contained herein.
8. Confidentiality. Executive will not at any time (whether during or
---------------
after his employment with the Company) disclose or use for his own benefit or
purposes or the benefit or purposes of any other person, firm, partnership,
joint venture, association, corporation or other business organization, entity
or enterprise other than the Company, the Parent and any of their subsidiaries
or affiliates, any trade secrets, information, data, or other confidential
information relating to customers, development programs, costs, marketing,
trading, investment, sales activities, promotion, credit and financial data,
financing methods, plans, or the business and affairs of the Company, the
Parent, or of any subsidiary or affiliate of the Company, provided that the
--------
foregoing shall not apply to information which is not unique to the Company, the
Parent or any of its subsidiaries or affiliates or which is generally known to
the industry or the public other than as a result of Executive's breach of this
covenant. Executive agrees that upon termination of his employment with the
Company and the Parent for any reason, he will return to the Company and the
Parent immediately all memoranda, books, papers, plans, information, letters and
other data, and all copies thereof or therefrom, in any way relating to the
business of the Company and its affiliates, except that he may retain personal
notes, notebooks and diaries. Executive further agrees that he will not retain
or use for his account at any time any trade names, trademarks or other
proprietary business designations used or owned in connection with the business
of the Company, the Parent or their affiliates.
9. Equitable Relief. Executive acknowledges and agrees that the
----------------
Company's remedies at law for a breach or threatened breach of any of the
provisions of Section 7 or Section 8 would be inadequate and, in recognition of
this fact, Executive agrees that, in the event of such a breach or threatened
breach, in addition to any remedies at law, the Company, without posting any
bond or security, shall be entitled to obtain equitable relief in the form of
specific performance, temporary restraining order, temporary or permanent
injunction or any other equitable remedy which may then be available.
10. Successors; Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
herein defined and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 10 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
7
<PAGE>
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are
payable to him hereunder all such amounts unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
11. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered with receipt
acknowledged or after having been received by certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Mr. Wolfgang Wand
Alte. Landstr 16
23843 Neritz
Germany
If to the Company or the Parent:
ESG Re Limited
Skandia International House
16 Church Street
Hamilton, HM11
Bermuda
Attention: Chairman
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
12. Miscellaneous. No provisions of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company and the
Parent as may be specifically designated by the Supervisory Board or the Board
as the case may be. No waiver by any party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the Regional Court of Hamburg
without regard to its conflicts of law principles.
8
<PAGE>
13. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Withholding. The Company may withhold from any amounts payable
-----------
under this Agreement such federal, state and local and foreign taxes as may be
required to be withheld pursuant to applicable law or regulation.
16. Entire Agreement. This Agreement sets forth the entire agreement of
----------------
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto, including any prior
employment agreements.
IN WITNESS WHEREOF, the Company and the Parent have caused this Agreement
to be duly executed and the Executive has hereunto set his hand, effective as of
the 1st day of December, 1997.
EUROPEAN SPECIALTY (UNITED KINGDOM) LIMITED
By: /S/ Gerhard Jurk
__________________________________
Name: Gerhard Jurk
Title: Chief Financial Officer
ESG RE LIMITED
By: /s/ Gerhard Jurk
__________________________________
Name: Gerhard Jurk
Title: Chief Financial Officer
/s/ Wolfgang Wand
_____________________________________
Executive: Wolfgang Wand
9
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made effective as of the 1st day of December, 1997, between
ESG Re Limited, a Bermuda company (the "Company"), and Steven H. Debrovner (the
"Executive").
WHEREAS, the Company wishes to retain the services of the Executive
and recognize that the Executive's contribution to the growth and success of the
Company and its affiliates will be substantial; and
WHEREAS, the Executive is willing to commit himself to serve the
Company, and its affiliates, on the terms and conditions herein provided;
NOW, THEREFORE, in order to effect the foregoing, the Company and the
Executive wish to enter into an employment agreement on the terms and conditions
set forth below. Accordingly, in consideration of the premises and the
respective covenants and agreements of the parties herein contained, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
----------
and the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The term of the Executive's employment hereunder shall
----
commence as of the date hereof and shall continue until the close of business on
the third anniversary of the date hereof, subject to earlier termination in
accordance with the terms of this Agreement (the "Term"). The Term shall be
automatically extended for successive one year periods thereafter unless any of
the parties notifies the other in writing of its intention not to so extend the
Term at least one year prior to the commencement of the next scheduled one year
extension.
3. Position and Duties.
-------------------
(a) Title and Duties. The Executive shall serve as the Chief
----------------
Operating Officer of European Specialty Reinsurance (Bermuda) Limited ("ES
Bermuda"), European Specialty Ruckversicherungs AG ("ES Germany") and European
Specialty Reinsurance (Ireland) Limited ("ES Ireland"), each a wholly owned
subsidiary of the Company (the "Subs"), and shall have such duties, authority
and responsibilities as are normally associated with and appropriate for such
positions. The Executive shall report directly to the Board of Directors of the
Company (the "Board"). The Executive shall devote substantially all of his
working time and efforts to the business and affairs of the Subs at such
locations, including Germany, Bermuda and Ireland, as are mutually agreed upon
by the Executive and the Board. Executive shall not serve on the Board of
Directors of any unaffiliated companies, including but
<PAGE>
not limited to, any charitable organization or chamber of commerce without the
written consent of the Board.
(b) Office and Facilities. The Executive shall be provided with
---------------------
appropriate office and secretarial facilities at any location that the Company
reasonably deems necessary to have an office and support services in order for
the Executive to perform his duties to the Company. The Executive shall serve
as a director of the Company and shall agree to serve on other committees of the
Company or any other affiliated company, without additional compensation, if
requested by the Board.
4. Compensation.
------------
(a) Base Salary. During the Term, the Company shall pay to the
-----------
Executive an annual base salary of US$275,000. The Executive's base salary
shall be paid in substantially equal installments on a basis consistent with the
Company's payroll practices. The Executive's base salary, as in effect at any
time, is hereinafter referred to as the "Base Salary." The Compensation
Committee of the Board (the "Compensation Committee") shall review Executive's
performance on an annual basis and may increase the Executive's Base Salary, in
its sole discretion, as it deems appropriate.
(b) Annual Bonus. The Compensation Committee may award the Executive
------------
an annual bonus, at such time and in such amount as the Compensation Committee,
in its sole discretion, deems appropriate.
5. Employee Benefits.
-----------------
(a) Benefit Plans. The Executive shall be entitled to participate in
-------------
all employee benefit plans, perquisite and fringe benefit arrangements of the
Company generally made available by the Company to its executives, subject to,
and on a basis consistent with the terms, conditions and administration of such
plans and arrangements.
(b) Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement for all reasonable and customary expenses incurred by the
Executive in performing services hereunder, including all expenses of travel and
living expenses while away from home on business at the request of and in the
service of the Company or any of its affiliates and promoting the business of
the Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.
(c) Vacation. The Executive shall be entitled to vacations and
--------
holidays on a basis consistent with that offered to other senior executive
officers of the Company.
2
<PAGE>
6. Termination of Employment. The Company and the Executive may
-------------------------
each terminate the Executive's employment hereunder and the Term for any reason.
(a) Termination by the Company without Cause or by the Executive for
----------------------------------------------------------------
Good Reason. If the Company shall terminate the Executive's employment without
- -----------
"Cause" (as defined in Section 6(f)), or if the Executive resigns for Good
Reason (as defined in Section 6(f)) then, the Executive shall be entitled to his
Base Salary for the greater of (1) the remainder of the Term, or (2) one year,
subject to and conditioned upon the Executive's compliance with Sections 7 and 8
hereof. Options shall be treated as provided for in the applicable Award
Agreements.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(a).
(b) Termination due to Non-Renewal of the Term or Death or Disability.
-----------------------------------------------------------------
If the Executive's employment is terminated due to the non-renewal of the Term
or due to the Executive's death or Disability (as defined in Section 6(f)), the
Executive shall be entitled to a lump sum cash payment equal to the Executive's
Base Salary through the date of termination. Options shall be treated as
provided for in the applicable Award Agreements.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(b).
(c) Termination by the Company for Cause or by Executive Other than
---------------------------------------------------------------
for Good Reason. If the Executive's employment is terminated by the Company for
- ---------------
Cause or by the Executive other than for Good Reason, the Executive shall be
entitled to a lump sum cash payment equal to his Base Salary through the date of
termination. Options shall be treated as provided for in the applicable Award
Agreements.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(c).
(d) Termination Within One Year of a Change in Control. If the
--------------------------------------------------
Company terminates the Executive's employment without Cause or the Executive
terminates his employment for Good Reason within one year following a Change in
Control, the Executive shall be entitled, in addition to the compensation
otherwise payable upon his termination of employment pursuant to Section 6(a)
above, to a lump sum payment which, when added to the present value of all other
benefits or payments to which the Executive is entitled which would constitute
"Parachute
3
<PAGE>
Payments" (as defined in Section 280G of the U.S. Internal Revenue Code of 1986,
as amended (the "Code")); equals 2.99 times the Executive's "Base Amount" (as
defined in Section 280G of the Code).
(e) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive (other than termination pursuant
to the Executive's death) shall be communicated by written Notice of Termination
to the other party hereto in accordance with Section 11 hereof. If the Company
terminates the Executive's employment for Cause or if the Executive resigns for
Good Reason, the "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. For purposes of this Agreement, the date of the
Executive's termination of employment shall be deemed to be the date of receipt
of the Notice of Termination.
(f) Definitions. For purpose of this Agreement:
-----------
(i) "Cause" shall mean
(1) Executive's breach of any material term of this Agreement,
including, but not limited to, the covenants set forth in Sections 7 and 8
hereof;
(2) Executive's failure or refusal to perform his duties
hereunder or to perform specific directives of the Board, provided that
such directives do not violate any applicable law or industry standards;
(3) Dishonesty of Executive affecting the Company, the Subs or
any affiliates of the Company or the Subs (the "Affiliates");
(4) Alcoholism or use of drugs or any controlled substances which
interferes with the performance of Executive's duties and responsibilities
under this Agreement;
(5) Any gross or willful conduct of Executive resulting in
substantial loss to or theft from the Company or any of the Subs; or
substantial damage to the Company or any of the Subs' reputation or theft
from the Company or any of the Subs; or
(6) Executive is charged with a felony or other serious crime,
whether or not related to the business of the Company or the Subs,
including but not limited to, any crime related to tax evasion, bribery,
theft, political payoffs, etc.
4
<PAGE>
(ii) "Change in Control" shall mean the occurrence of any of the
following: (i) the sale, lease, transfer or other disposition, in one or a
series of related transactions, of all or substantially all of the assets of the
Company other than to the Company or any of its affiliates, or (ii) a merger or
sale of the Company pursuant to which the shareholders of the Company
immediately prior to such merger or sale do not own a majority of the stock of
the Company or the surviving corporation immediately after such merger or sale.
(iii) "Disability" shall mean the Executive's adjudication as mentally
incompetent, or mental or physical disability preventing Executive from
performing his duties under this Employment Agreement for a period of 180
consecutive days.
(iv) "Good Reason" shall mean (1) a material diminution in the
Executive's duties or the assignment to the Executive of a title or duties
inconsistent with his position as Chief Operating Officer of the Subs, (2) a
material reduction in the Executive's salary, or (3) a failure of the Company to
comply with any material provision of this Agreement.
7. Non-Competition
---------------
(a) Executive acknowledges and recognizes the highly competitive
nature of the businesses of the Company and its affiliates and accordingly
agrees as follows:
(i) During the Employment Term and for a period of 12 months following
the Executive's termination of employment (unless such termination of employment
occurs within one year following a Change in Control, in which case this
paragraph shall not be applicable) (the "Restricted Period"), the Executive will
not, unless the Executive is given written permission by the Board, directly or
indirectly, (i) engage in any business for the Executive's own account that
competes with the business of the Company or any of its affiliates that are
engaged in the insurance or reinsurance business (the "Company Affiliates"),
(ii) enter the employ of, or render any services to, any person engaged in any
business that competes with the business of the Company or the Company
Affiliates, (iii) acquire a financial interest in, or otherwise become actively
involved with, any person engaged in any business that competes with the
business of the Company or the Company Affiliates, directly or indirectly, as an
individual, partner, shareholder, officer, director, principal, agent, trustee
or consultant, or (iv) interfere with business relationships (whether formed
before or after the date of this Agreement) of the Company or the Company
Affiliates.
(ii) Notwithstanding anything to the contrary in this Agreement, the
Executive may, directly or indirectly own, solely as an investment, securities
of any person engaged in the business of the Company or the Company
5
<PAGE>
Affiliates if the Executive (i) is not a controlling person of, or a member of a
group which controls, such person and (ii) does not, directly or indirectly, own
more than one share less than 5% of any class of securities of such person.
(iii) During the Restricted Period, the Executive will not, directly
or indirectly, (i) solicit or encourage any employee of the Company or the
Company Affiliates to leave the employment of the Company or the Company
Affiliates, or (ii) hire any such employee who has left the employment of the
Company or the Company Affiliates (other than as a result of the termination of
such employment by the Company or the Company Affiliates) within one year after
the termination of such employee's employment with the Company or the Company
Affiliates.
(iv) During the Restricted Period, the Executive will not, directly or
indirectly, solicit or encourage to cease to work with the Company or the
Company Affiliates any consultant then under contract with the Company or the
Company Affiliates.
(b) It is expressly understood and agreed that although Executive and
the Company consider the restrictions contained in this Section 7 to be
reasonable, if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against Executive, the provisions
of this Agreement shall not be rendered void but shall be deemed amended to
apply as to such maximum time and territory and to such maximum extent as such
court may judicially determine or indicate to be enforceable. Alternatively, if
any court of competent jurisdiction finds that any restriction contained in this
Agreement is unenforceable, and such restriction cannot be amended so as to make
it enforceable, such finding shall not affect the enforceability of any of the
other restrictions contained herein.
8. Confidentiality. Executive will not at any time (whether during or
---------------
after his employment with the Company) disclose or use for his own benefit or
purposes or the benefit or purposes of any other person, firm, partnership,
joint venture, association, corporation or other business organization, entity
or enterprise other than the Company and any of its subsidiaries or affiliates,
any trade secrets, information, data, or other confidential information relating
to customers, development programs, costs, marketing, trading, investment, sales
activities, promotion, credit and financial data, financing methods, plans, or
the business and affairs of the Company or of any subsidiary or affiliate of the
Company, provided that the foregoing shall not apply to information which is not
--------
unique to the Company or any of its subsidiaries or affiliates or which is
generally known to the industry or the public other than as a result of
Executive's breach of this covenant. Executive agrees that upon termination of
his employment with the Company or the Subs for any reason, he will return to
the Company and the Subs immediately all memoranda,
6
<PAGE>
books, papers, plans, information, letters and other data, and all copies
thereof or therefrom, in any way relating to the business of the Company and its
affiliates, except that he may retain personal notes, notebooks and diaries.
Executive further agrees that he will not retain or use for his account at any
time any trade names, trademarks or other proprietary business designations used
or owned in connection with the business of the Company or its affiliates.
9. Equitable Relief. Executive acknowledges and agrees that the
----------------
Company's remedies at law for a breach or threatened breach of any of the
provisions of Section 7 or Section 8 would be inadequate and, in recognition of
this fact, Executive agrees that, in the event of such a breach or threatened
breach, in addition to any remedies at law, the Company, without posting any
bond or security, shall be entitled to obtain equitable relief in the form of
specific performance, temporary restraining order, temporary or permanent
injunction or any other equitable remedy which may then be available.
10. Successors; Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
herein defined and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 10 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are
payable to him hereunder all such amounts unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
11. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered with receipt
acknowledged or after having been received by certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:
7
<PAGE>
If to the Executive:
Mr. Steven H. Debrovner
214 Upper Hollow Rd.
Stowe, Vermont
05672 USA
If to the Company:
ESG Re Limited
Skandia International House
16 Church Street
Hamilton, HM11
Bermuda
Attention: Chairman
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
12. Miscellaneous. No provisions of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated by the Supervisory Board or the Board as the case may
be. No waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of Germany without regard to its
conflicts of law principles.
13. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Withholding. The Company may withhold from any amounts payable
-----------
under this Agreement such federal, state and local and foreign taxes as may be
required to be withheld pursuant to applicable law or regulation.
16. Entire Agreement. This Agreement sets forth the entire agreement of
----------------
the parties hereto in respect of the subject matter contained herein and
8
<PAGE>
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto, including any prior
employment agreements.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, effective as of the 1st
day of December, 1997.
ESG RE LIMITED
By:/s/ Wolfgang M. Ward
__________________________________
Name: Wolfgang M. Ward
Title: Chief Executive Officer
/s/ Steven H. Debrovner
_____________________________________
Executive: Steven H. Debrovner
9
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made effective as of the 1st day of December, 1997, between
European Specialty Group Holding AG (the "Company") and Gerhard Jurk (the
"Executive").
WHEREAS, the Company wishes to retain the services of the Executive
and recognizes that the Executive's contribution to the growth and success of
the Company will be substantial; and
WHEREAS, the Executive is willing to commit himself to serve the
Company, on the terms and conditions herein provided;
NOW, THEREFORE, in order to effect the foregoing, the Company and the
Executive wish to enter into an employment agreement on the terms and conditions
set forth below. Accordingly, in consideration of the premises and the
respective covenants and agreements of the parties herein contained, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
----------
and the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The term of the Executive's employment hereunder shall
----
commence as of the date hereof and shall continue until the close of business on
September 1, 2000, subject to earlier termination in accordance with the terms
of this Agreement (the "Term"). The Term shall be automatically extended for
successive one year periods thereafter unless either of the parties notifies the
other in writing of its intention not to so extend the Term at least one year
prior to the commencement of the next scheduled one year extension.
3. Position and Duties.
-------------------
(a) Title and Duties. The Executive shall serve as the Chief
----------------
Financial Officer of the Company and ESG Re Limited (the "Parent") and shall
have such duties, authority and responsibilities as are normally associated with
and appropriate for such positions. The Executive shall report directly to the
Board of Directors of the Parent (the "Board") and the Supervisory Board of the
Company. The Executive shall devote substantially all of his working time and
efforts to the business and affairs of the Company. Executive shall not serve
on the Board of Directors of any unaffiliated companies, including but not
limited to, any charitable organization or chamber of commerce without the
written consent of the Board.
<PAGE>
(b) Office and Facilities. The Executive shall be provided with
---------------------
appropriate office and secretarial facilities and any other location that the
Company reasonably deems necessary to have an office and support services in
order for the Executive to perform his duties to the Company. The Executive
shall serve as a director of the Company and shall agree to serve on other
committees of the Company or any other affiliated company, without additional
compensation, if requested by the Board.
4. Compensation.
------------
(a) Base Salary. During the Term, the Company shall pay to the
-----------
Executive an annual base salary of US$200,000. The Executive's base salary
shall be paid in substantially equal installments on a basis consistent with the
Company's payroll practices. The Executive's base salary, as in effect at any
time, is hereinafter referred to as the "Base Salary." The Compensation
Committee of the Board (the "Compensation Committee") shall review Executive's
performance on an annual basis and may increase the Executive's Base Salary, in
its sole discretion, as it deems appropriate.
(b) Annual Bonus. The Compensation Committee may award the
------------
Executive an annual bonus, at such time and in such amount as the Compensation
Committee, in its sole discretion, deems appropriate.
5. Employee Benefits.
-----------------
(a) Benefit Plans. The Executive shall be entitled to
-------------
participate in all employee benefit plans, perquisite and fringe benefit
arrangements of the Company generally made available by the Company to its
executives, subject to, and on a basis consistent with the terms, conditions and
administration of such plans and arrangements.
(b) Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement for all reasonable and customary expenses incurred by the
Executive in performing services hereunder, including all expenses of travel and
living expenses while away from home on business at the request of and in the
service of the Company or the Parent or any of its affiliates and promoting the
business of the Company, provided that such expenses are incurred and accounted
for in accordance with the policies and procedures established by the Company.
(c) Vacation. The Executive shall be entitled to vacations and
--------
holidays on a basis consistent with that offered to other senior executive
officers of the Company.
2
<PAGE>
6. Termination of Employment. The Company and the Executive may each
-------------------------
terminate the Executive's employment hereunder and the Term for any reason.
(a) Termination by the Company without Cause or by the Executive
------------------------------------------------------------
for Good Reason. If the Company shall terminate the Executive's employment
---------------
without "Cause" (as defined in Section 6(f)), or if the Executive resigns
for Good Reason (as defined in Section 6(f)) then, the Executive shall be
entitled to his Base Salary for the greater of (1) the remainder of the
Term, or (2) one year, subject to and conditioned upon the Executive's
compliance with Sections 7 and 8 hereof. Options shall be treated in the
manner provided for in the applicable Award Agreement.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(a).
(b) Termination due to Non-Renewal of the Term or Death or
------------------------------------------------------
Disability. If the Executive's employment is terminated due to the non-renewal
- ----------
of the Term or due to the Executive's death or Disability (as defined in Section
6(f)), the Executive shall be entitled to a lump sum cash payment equal to the
Executive's Base Salary through the date of termination. Options shall be
treated in the manner provided for in the applicable Award Agreement.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(b).
(c) Termination by the Company for Cause or by Executive Other
----------------------------------------------------------
than for Good Reason. If the Executive's employment is terminated by the Company
- --------------------
for Cause or by the Executive other than for Good Reason, the Executive shall be
entitled to a lump sum cash payment equal to his Base Salary through the date of
termination. Options shall be treated in the manner provided for in the
applicable Award Agreement.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(c).
(d) Termination Within One Year of a Change in Control. If the
--------------------------------------------------
Company terminates the Executive's employment without Cause or the Executive
terminates his employment for Good Reason within one year following a Change in
Control, the Executive shall be entitled, in addition to the compensation
otherwise payable upon his termination of employment pursuant to Section 6(a)
above, to a lump sum payment which, when added to the present value of all other
benefits
3
<PAGE>
or payments to which the Executive is entitled which would constitute "Parachute
Payments" (as defined in Section 280G of the U.S. Internal Revenue Code of 1986,
as amended (the "Code")); equals 2.99 times the Executive's "Base Amount" (as
defined in Section 280G of the Code).
(e) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive (other than termination pursuant
to the Executive's death) shall be communicated by written Notice of Termination
to the other party hereto in accordance with Section 11 hereof. If the Company
terminates the Executive's employment for Cause or if the Executive resigns for
Good Reason, the "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. For purposes of this Agreement, the date of the
Executive's termination of employment shall be deemed to be the date of receipt
of the Notice of Termination.
(f) Definitions. For purpose of this Agreement:
-----------
(i) "Cause" shall mean
(1) Executive's breach of any material term of this
Agreement, including, but not limited to, the covenants set forth in
Sections 7 and 8 hereof;
(2) Executive's failure or refusal to perform his
duties hereunder or to perform specific directives of the Board, provided
that such directives do not violate any applicable law or industry
standards;
(3) Dishonesty of Executive affecting the Company, the
Parent or any affiliates;
(4) Alcoholism or use of drugs or any controlled
substances which interferes with the performance of Executive's duties and
responsibilities under this Agreement ;
(5) Any gross or willful conduct of Executive resulting
in substantial loss to or theft from any of the Company, the Parent or any
affiliate; or substantial damage to the Company's reputation or theft from
the Company; or
(6) Executive is charged with a felony or other serious
crime, whether or not related to the business of the Company, including but
not limited to, any crime related to tax evasion, bribery, theft, political
payoffs, etc.
4
<PAGE>
(ii) "Change in Control" shall mean the occurrence of any of
the following: (i) the sale, lease, transfer or other disposition, in one or a
series of related transactions, of all or substantially all of the assets of the
Company other than to the Company or any of its Affiliates, or (ii) a merger or
sale of the Company pursuant to which the shareholders of the Company
immediately prior to such merger or sale do not own a majority of the stock of
the Company or the surviving corporation immediately after such merger or sale.
(iii) "Disability" shall mean the Executive's adjudication
as mentally incompetent, or mental or physical disability preventing Executive
from performing his duties under this Employment Agreement for a period of 180
consecutive days.
(iv) "Good Reason" shall mean (1) a material diminution in
the Executive's duties or the assignment to the Executive of a title or duties
inconsistent with his position as Chief Financial Officer of the Company, (2) a
material reduction in the Executive's salary, or (3) a failure of the Company to
comply with any material provision of this Agreement.
7. Confidentiality. Executive will not at any time (whether during
---------------
or after his employment with the Company) disclose or use for his own benefit or
purposes or the benefit or purposes of any other person, firm, partnership,
joint venture, association, corporation or other business organization, entity
or enterprise other than the Company, the Parent and any of their subsidiaries
or affiliates, any trade secrets, information, data, or other confidential
information relating to customers, development programs, costs, marketing,
trading, investment, sales activities, promotion, credit and financial data,
financing methods, plans, or the business and affairs of the Company, the
Parent, or of any subsidiary or affiliate of the Company, provided that the
--------
foregoing shall not apply to information which is not unique to the Company, the
Parent or any of its subsidiaries or affiliates or which is generally known to
the industry or the public other than as a result of Executive's breach of this
covenant. Executive agrees that upon termination of his employment with the
Company and the Parent for any reason, he will return to the Company and the
Parent immediately all memoranda, books, papers, plans, information, letters and
other data, and all copies thereof or therefrom, in any way relating to the
business of the Company and its affiliates, except that he may retain personal
notes, notebooks and diaries. Executive further agrees that he will not retain
or use for his account at any time any trade names, trademarks or other
proprietary business designations used or owned in connection with the business
of the Company, the Parent or their affiliates.
8. Equitable Relief. Executive acknowledges and agrees that the
----------------
Company's remedies at law for a breach or threatened breach of any of the
provisions of Section 7 would be inadequate and, in recognition of this fact,
Executive agrees that, in the event of such a breach or threatened breach, in
addition to any remedies at
5
<PAGE>
law, the Company, without posting any bond or security, shall be entitled to
obtain equitable relief in the form of specific performance, temporary
restraining order, temporary or permanent injunction or any other equitable
remedy which may then be available.
9. Successors; Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
herein defined and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 9 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts are payable to him hereunder all such amounts unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee or, if there be no such
designee, to the Executive's estate.
10. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered with receipt
acknowledged or after having been received by certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Mr. Gerhard Jurk
Kampstr. 111
42787 Hann
Germany
6
<PAGE>
If to the Company:
European Specialty Group Holding AG
Fleethof
Stadthausbruke 1-3
Hamburg, Germany
Attention: CEO
With a Copy to:
ESG Re Limited
Skandia International House
16 Church Street
Hamilton, HM11,
Bermuda
Attention: Chairman
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
11. Miscellaneous. No provisions of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated by the Supervisory Board or the Board as the case may
be. No waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of Germany without regard to its
conflicts of law principles.
12. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
13. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Withholding. The Company may withhold from any amounts payable
-----------
under this Agreement such federal, state and local and foreign taxes as may be
required to be withheld pursuant to applicable law or regulation.
7
<PAGE>
15. Entire Agreement. This Agreement sets forth the entire agreement
----------------
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto, including any prior
employment agreements.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, effective as of the 1st
day of December, 1997.
EUROPEAN SPECIALTY GROUP HOLDING AG
By: /s/ Wolfgang M. Wand
__________________________________
Name: Wolfgang M. Wand
Title: Chief Executive Officer
/s/ Gerhard Jurk
_____________________________________
Executive: Gerhard Jurk
8
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made effective as of the 1st day of December, 1997, between
European Specialty (North America) Limited (the "Company") and Renate M. Nellich
(the "Executive").
WHEREAS, the Company wishes to retain the services of the Executive
and recognizes that the Executive's contribution to the growth and success of
the Company will be substantial; and
WHEREAS, the Executive is willing to commit herself to serve the
Company, on the terms and conditions herein provided;
NOW, THEREFORE, in order to effect the foregoing, the Company and the
Executive wish to enter into an employment agreement on the terms and conditions
set forth below. Accordingly, in consideration of the premises and the
respective covenants and agreements of the parties herein contained, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
----------
and the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The term of the Executive's employment hereunder shall
----
commence as of the date hereof and shall continue until the close of business on
September 1, 2000, subject to earlier termination in accordance with the terms
of this Agreement (the "Term"). The Term shall be automatically extended for
successive one year periods thereafter unless any of the parties notifies the
other in writing of its intention not to so extend the Term at least one year
prior to the commencement of the next scheduled one year extension.
3. Position and Duties.
-------------------
(a) Title and Duties. The Executive shall serve as the Chief
----------------
Executive Officer of the Company, and shall have such duties, authority and
responsibilities as are normally associated with and appropriate for such
positions. The Executive shall report directly to the Board of Directors of ESG
Re Limited, a Bermuda company (the "Parent") (the "Board"). The Executive shall
devote substantially all of her working time and efforts to the business and
affairs of the Company. Executive shall not serve on the Board of Directors of
any unaffiliated companies, including but not limited to, any charitable
organization or chamber of commerce without the written consent of the Board.
<PAGE>
(b) Office and Facilities. The Executive shall be provided with
---------------------
appropriate office and secretarial facilities at the Company's main offices and
any other location that the Company reasonably deems necessary to have an office
and support services in order for the Executive to perform her duties to the
Company.
4. Compensation.
------------
(a) Base Salary. During the Term, the Company shall pay to the
-----------
Executive an annual base salary of US$250,000. The Executive's base salary
shall be paid in substantially equal installments on a basis consistent with the
Company's payroll practices. The Executive's base salary, as in effect at any
time, is hereinafter referred to as the "Base Salary." The Compensation
Committee of the Board (the "Compensation Committee") shall review Executive's
performance on an annual basis and may increase the Executive's Base Salary, in
its sole discretion, as it deems appropriate.
(b) Annual Bonus. The Compensation Committee may award the Executive
------------
an annual bonus, at such time and in such amount as the Compensation Committee,
in its sole discretion, deems appropriate.
5. Employee Benefits.
-----------------
(a) Benefit Plans. The Executive shall be entitled to participate in
-------------
all employee benefit plans, perquisite and fringe benefit arrangements of the
Company generally made available by the Company to its executives, subject to,
and on a basis consistent with the terms, conditions and administration of such
plans and arrangements.
(b) Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement for all reasonable and customary expenses incurred by the
Executive in performing services hereunder, including all expenses of travel and
living expenses while away from home on business at the request of and in the
service of the Company or any of its affiliates and promoting the business of
the Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.
(c) Vacation. The Executive shall be entitled to vacations and
--------
holidays on a basis consistent with that offered to other senior executive
officers of the Company.
2
<PAGE>
6. Termination of Employment. The Company and the Executive may each
-------------------------
terminate the Executive's employment hereunder and the Term for any reason.
(a) Termination by the Company without Cause or by the Executive for
----------------------------------------------------------------
Good Reason. If the Company shall terminate the Executive's employment without
- -----------
"Cause" (as defined in Section 6(f)), or if the Executive resigns for Good
Reason (as defined in Section 6(f)) then, the Executive shall be entitled to her
Base Salary for the greater of (1) the remainder of the Term, or (2) one year,
subject to and conditioned upon the Executive's compliance with Sections 7 and 8
hereof. Options held by the Executive will be treated as provided for in the
applicable award agreements.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(a).
(b) Termination due to Non-Renewal of the Term or Death or Disability.
-----------------------------------------------------------------
If the Executive's employment is terminated due to the non-renewal of the Term
or due to the Executive's death or Disability (as defined in Section 6(f)), the
Executive shall be entitled to a lump sum cash payment equal to the Executive's
Base Salary through the date of termination. Options held by the Executive will
be treated as provided for in the applicable award agreements.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(b).
(c) Termination by the Company for Cause or by Executive Other than
---------------------------------------------------------------
for Good Reason. If the Executive's employment is terminated by the Company for
- ---------------
Cause or by the Executive other than for Good Reason, the Executive shall be
entitled to a lump sum cash payment equal to his Base Salary through the date of
termination. Options held by the Executive will be treated as provided for in
the applicable award agreements.
Except as expressly provided above, the Company will have no further
obligations to the Executive hereunder following the Executive's termination of
employment under the circumstances described in this Section 6(c).
(d) Termination Within One Year of a Change in Control. If the
--------------------------------------------------
Company terminates the Executive's employment without Cause or the Executive
terminates her employment for Good Reason within one year following a Change in
Control, the Executive shall be entitled, in addition to the compensation
otherwise payable upon her termination of employment pursuant to Section 6(a)
above, to a lump sum payment which, when added to the present value of all other
3
<PAGE>
benefits or payments to which the Executive is entitled which would constitute
"Parachute Payments" (as defined in Section 280G of the U.S. Internal Revenue
Code of 1986, as amended (the "Code")) if Section 280G were applicable; equals
2.99 times the Executive's "Base Amount" (as defined in Section 280G of the
Code).
Following a termination of the Executive's employment with the Company
after a Change of Control pursuant to this Section 6(d), the Executive shall not
be required in any manner whatsoever to mitigate any damages resulting from such
termination. Furthermore, the payments referred to in this Section 6(d) shall
be made regardless of whether the Executive seeks or finds employment of any
nature whatsoever.
The Company and the Executive confirm that the provisions of this
Section 6(d) are reasonable and that the total amount payable as outlined herein
is an amount which has been agreed between them to be payable hereunder, or in
the alternative is a reasonable preestimate of the damages which will be
suffered by the Executive in the event of a termination within one year of a
Change of Control by the Company without Cause or by the Executive for Good
Reason, and shall not be construed as a penalty.
Following a termination of the Executive's employment after a Change
of Control as contemplated in this Section 6(d) and upon receipt of the payments
and benefits referred to in this Section 6(d), the Executive hereby agrees to
resign from any offices, positions and directorships which he may have or may
have held in the Company, any of its subsidiaries and/or affiliates.
(e) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive (other than termination pursuant
to the Executive's death) shall be communicated by written Notice of Termination
to the other party hereto in accordance with Section 11 hereof. If the Company
terminates the Executive's employment for Cause or if the Executive resigns for
Good Reason, the "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. For purposes of this Agreement, the date of the
Executive's termination of employment shall be deemed to be the date of receipt
of the Notice of Termination.
(f) Definitions. For purpose of this Agreement:
-----------
(i) "Cause" shall mean
(1) Executive's breach of any material term of this
Agreement, including, but not limited to, the covenants set forth in
Sections 7 and 8 hereof;
4
<PAGE>
(2) Executive's failure or refusal to perform her duties
hereunder or to perform specific directives of the Board, provided that
such directives do not violate any applicable law or industry standards;
(3) Dishonesty of Executive affecting the Company, the
Parent or any affiliates;
(4) Any gross or willful conduct of Executive resulting in
substantial loss to or theft from any of the Company, the Parent or any
affiliate; or substantial damage to the Company's reputation or theft from
the Company; or
(5) Alcoholism or use of drugs or any controlled substances
which interferes with the performance of Executive's duties and
responsibilities under this Agreement;
(6) Executive is charged with a felony or other serious
crime, whether or not related to the business of the Company, including but
not limited to, any crime related to tax evasion, bribery, theft, political
payoffs, etc.
(ii) "Change in Control" shall mean the occurrence of any of the
following: (i) the sale, lease, transfer or other disposition, in one or a
series of related transactions, of all or substantially all of the assets of the
Company other than to the Company or any of its Affiliates, or (ii) a merger or
sale of the Company pursuant to which the shareholders of the Company
immediately prior to such merger or sale do not own a majority of the stock of
the Company or the surviving corporation immediately after such merger or sale.
(iii) "Disability" shall mean the Executive's adjudication as
mentally incompetent, or mental or physical disability preventing Executive from
performing her duties under this Employment Agreement for a period of 180
consecutive days.
(iv) "Good Reason" shall mean (1) a material diminution in the
Executive's duties or the assignment to the Executive of a title or duties
inconsistent with her position as Chief Executive Officer of the Company, (2) a
material reduction in the Executive's salary, or (3) a failure of the Company to
comply with any material provision of this Agreement.
5
<PAGE>
7. Non-Competition
---------------
(a) Executive acknowledges and recognizes the highly competitive
nature of the businesses of the Company and its affiliates and accordingly
agrees as follows:
(i) During the Employment Term and for a period of 12 months
following the Executive's termination of employment (unless such termination of
employment occurs within one year following a Change in Control, in which case
this paragraph shall not be applicable) (the "Restricted Period"), the Executive
will not, unless the Executive is given written permission by the Board,
directly or indirectly, (i) engage in any business for the Executive's own
account that competes with the business of the Company or any of its affiliates
that are engaged in the insurance or reinsurance business (the "Company
Affiliates"), (ii) enter the employ of, or render any services to, any person
engaged in any business that competes with the business of the Company or the
Company Affiliates, (iii) acquire a financial interest in, or otherwise become
actively involved with, any person engaged in any business that competes with
the business of the Company or the Company Affiliates, directly or indirectly,
as an individual, partner, shareholder, officer, director, principal, agent,
trustee or consultant, or (iv) interfere with business relationships (whether
formed before or after the date of this Agreement) of the Company or the Company
Affiliates.
(ii) Notwithstanding anything to the contrary in this Agreement,
the Executive may, directly or indirectly own, solely as an investment,
securities of any person engaged in the business of the Company or the Company
Affiliates if the Executive (i) is not a controlling person of, or a member of a
group which controls, such person and (ii) does not, directly or indirectly, own
more than one share less than 5% of any class of securities of such person.
(iii) During the Restricted Period, the Executive will not,
directly or indirectly, (i) solicit or encourage any employee of the Company or
the Company Affiliates to leave the employment of the Company or the Company
Affiliates, or (ii) hire any such employee who has left the employment of the
Company or the Company Affiliates (other than as a result of the termination of
such employment by the Company or the Company Affiliates) within one year after
the termination of such employee's employment with the Company or the Company
Affiliates.
(iv) During the Restricted Period, the Executive will not,
directly or indirectly, solicit or encourage to cease to work with the Company
or the Company Affiliates any consultant then under contract with the Company or
the Company Affiliates.
6
<PAGE>
(b) It is expressly understood and agreed that although
Executive and the Company consider the restrictions contained in this Section 7
to be reasonable, if a final judicial determination is made by a court of
competent jurisdiction that the time or territory or any other restriction
contained in this Agreement is an unenforceable restriction against Executive,
the provisions of this Agreement shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such maximum
extent as such court may judicially determine or indicate to be enforceable.
Alternatively, if any court of competent jurisdiction finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such finding shall not affect the
enforceability of any of the other restrictions contained herein.
8. Confidentiality. Executive will not at any time (whether during or
---------------
after her employment with the Company) disclose or use for her own benefit or
purposes or the benefit or purposes of any other person, firm, partnership,
joint venture, association, corporation or other business organization, entity
or enterprise other than the Company, the Parent and any of their subsidiaries
or affiliates, any trade secrets, information, data, or other confidential
information relating to customers, development programs, costs, marketing,
trading, investment, sales activities, promotion, credit and financial data,
financing methods, plans, or the business and affairs of the Company, the
Parent, or of any subsidiary or affiliate of the Company, provided that the
--------
foregoing shall not apply to information which is not unique to the Company, the
Parent or any of its subsidiaries or affiliates or which is generally known to
the industry or the public other than as a result of Executive's breach of this
covenant. Executive agrees that upon termination of her employment with the
Company and the Parent for any reason, he will return to the Company and the
Parent immediately all memoranda, books, papers, plans, information, letters and
other data, and all copies thereof or therefrom, in any way relating to the
business of the Company and its affiliates, except that he may retain personal
notes, notebooks and diaries. Executive further agrees that he will not retain
or use for her account at any time any trade names, trademarks or other
proprietary business designations used or owned in connection with the business
of the Company, the Parent or their affiliates.
9. Equitable Relief. Executive acknowledges and agrees that the
----------------
Company's remedies at law for a breach or threatened breach of any of the
provisions of Section 7 or Section 8 would be inadequate and, in recognition of
this fact, Executive agrees that, in the event of such a breach or threatened
breach, in addition to any remedies at law, the Company, without posting any
bond or security, shall be entitled to obtain equitable relief in the form of
specific performance, temporary restraining order, temporary or permanent
injunction or any other equitable remedy which may then be available.
7
<PAGE>
10. Successors; Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
herein defined and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 10 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are
payable to him hereunder all such amounts unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
11. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered with receipt
acknowledged or after having been received by certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Ms. Renate M. Nellich
3283 Chairmaine Heights
Mississauga, Ontario L5A3C2
Canada
If to the Company:
c/o ESG Re Limited
Skandia International House
16 Church Street
Hamilton, HM11
Bermuda
Attention: Chairman
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8
<PAGE>
12. Miscellaneous. No provisions of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated by the Supervisory Board or the Board as the case may
be. No waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of Germany without regard to its
conflicts of law principles.
13. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Withholding. The Company may withhold from any amounts payable
-----------
under this Agreement such federal, state and local and foreign taxes as may be
required to be withheld pursuant to applicable law or regulation.
16. Entire Agreement. This Agreement sets forth the entire agreement
----------------
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto, including any prior
employment agreements.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set her hand, effective as of the 1st
day of December, 1997.
EUROPEAN SPECIALTY (NORTH AMERICA) LIMITED
By:/s/ Richard E. Clark
_______________________________________
Name: Richard E. Clark
Title: Secretary
/s/ Renate M. Nellich
_______________________________________
Executive: Renate M. Nellich
9
<PAGE>
EXHIBIT 10.6
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT dated as of December 1, 1997, by and
between ESG RE LIMITED, a Bermuda company (the "Client"), and HEAD ASSET
MANAGEMENT L.L.C., a limited liability company formed under the laws of the
State of Delaware (the "Adviser").
1. Engagement. Commencing on December 1, 1997, the Client engages and
retains the Adviser to provide the investment advisory and related services
described below. The Adviser hereby accepts such engagement and shall provide
or make satisfactory arrangements for the provision of such services and assumes
the obligations herein set forth for the compensation provided herein.
2. Services and Authority of the Adviser. The Adviser will perform the
services and have the authority set forth in this Agreement with respect to all
cash, securities and other investment assets of the Client which are from time
to time deposited by the Client with the Adviser for investment pursuant to the
provisions hereof, and all proceeds thereof and additions thereto (the
"Account"). The Adviser will supervise and direct the investment of the Account
in accordance with, and subject to, the investment objectives, guidelines and
restrictions specified in written statements and notices given by the Client as
provided in Section 15 hereof.
The Adviser, as agent and attorney-in-fact with respect to the
Account, may, when it deems appropriate, without prior consultation with the
Client and at the risk of the Client (i) buy, sell, exchange, convert, tender
and otherwise trade in, retain, or reinvest in bonds, securities and any other
investments, including money market instruments, and (ii) place orders for the
execution of such investment transactions with or through such brokers, dealers,
issuers, or other persons as the Adviser may select, or tender or exchange such
securities in a tender or exchange offer or similar transaction initiated by the
issuer or any other person or entity. Subject to the last sentence of Section
15, the Adviser shall comply with all legal requirements and rules of securities
exchanges applicable to its duties in connection with the execution of
transactions. The Advisor shall not effect any borrowing of money on behalf of
the Client without Client's written consent thereto.
3. Transaction Procedures. At the commencement of the term of this
Agreement, the Client will provide the Adviser with a statement of the existing
Account portfolio which it desires the Adviser to manage as set forth in Exhibit
A hereto or as the parties hereto may agree from time to time. In connection
with each investment transaction in the Account, the Adviser shall instruct the
brokers and dealers to provide to the Client such written advice of trades,
including expenses and other incidents of the transaction, as is normally
provided.
Instructions of the Adviser to the custodian of the securities and
other investments in the Account selected by the Client (the "Custodian") shall
be made, at the option of the Adviser, either (i) in writing sent by first class
mail or by facsimile transmission, or (ii) orally and confirmed in writing by
first class mail or facsimile transmission as soon as practical thereafter. The
Adviser shall instruct all brokers and dealers executing orders on behalf of the
Account to forward to the Client copies of all confirmations promptly after
execution of transactions. The Adviser shall not be responsible for any loss
incurred by reason of any act or omission of any broker or dealer; provided,
however, that the Adviser exercises due care in the
<PAGE>
2
selection of brokers and dealers and makes reasonable efforts to see that
brokers and dealers selected by the Adviser perform their obligations with
respect to the Account.
4. Reports and Records of the Adviser. The Adviser will provide or
cause to be provided to the Client such periodic reports concerning the status
of the Account as the Client may reasonably request. The Adviser shall provide
to the Client within 10 business days of the end of each calendar month, a
report of Account transactions effected by the Adviser since the date of the
most recent such report, and within 20 business days of the end of each calendar
month, a valuation report of all investments and cash in the Account. The
Client and the Adviser will arrange for the Custodian to provide the Adviser
daily cash account statements and monthly asset position statements. The
Adviser will compare these statements with its own records and inform the
Custodian of any differences. In the event that differences between the
custodian's statements and the Adviser's records cannot be resolved between the
Adviser and the custodian, the Adviser will inform the Client in writing.
The Adviser shall preserve its records relating to the Account for no
less than six years and shall, upon the request of the Client, make such records
available for inspection, at reasonable times at its main business office during
normal business hours, by the Client, its auditors or any regulatory authority.
Prior to discarding or destroying any such records, the Adviser shall give the
Client reasonable opportunity, at the Client's expense, to review them and to
take all or such portion of them as the Client wishes to retain. The Adviser, in
the maintenance of its records, does not assume responsibility for the accuracy
of information furnished by or on behalf of the Client or any third party not an
officer or employee of the Adviser.
5. Confidential Relationship. All information and advice furnished by
either party to the other hereunder, including their respective agents and
employees, shall be treated as confidential and shall not be disclosed to third
parties except as provided in Section 4 or as required by law.
6. Service to Other Clients. The Adviser may perform investment advisory
and other services for various clients, including insurance companies,
investment companies and accounts held by the Adviser in a fiduciary capacity.
The Adviser may give advice and take action with respect to any of its other
clients which may differ from advice given or the timing or nature of action
taken with respect to the Account, so long as it is the Adviser's policy, to the
extent practical, to allocate investment opportunities to the Account over a
period of time on a fair and equitable basis relative to other clients. The
Adviser shall not have any obligation to purchase or sell, or to recommend for
purchase or sale, for the Account any security or other investment which the
Adviser, its officers, affiliates or employees may purchase or sell for its or
their own accounts or for the account of any other client, if in the opinion of
the Adviser such transaction or investment appears unsuitable, impractical or
undesirable for the Account.
7. Allocation of Brokerage. Where the Adviser places orders for the
execution of portfolio transactions for the Account, the Adviser may allocate
such transactions to such brokers and dealers for execution on such markets, at
such prices and at such commission rates (including commission rates that may
exceed those that another broker or dealer would have charged for effecting such
transactions) as the Adviser determines to be appropriate; provided, however,
that if such commission rate exceeds that which another broker or dealer might
have charged for the same transaction, the Adviser has determined in good faith
that the amount of such commission is reasonable in relation to the value of
brokerage and research services provided by such broker or
<PAGE>
3
dealer, viewed in terms of the particular transaction or the Adviser's overall
responsibilities with respect to some or all of the accounts over which the
Adviser exercises investment discretion; provided, further, that the Adviser
shall make reasonable efforts to minimize brokerage costs where similar services
of adequate standards and reliability are available from more than one broker or
dealer.
The Adviser may take into consideration in the selection of such
brokers and dealers not only the available prices and rate of brokerage
commissions, but all other relevant factors (including without limitation,
execution and processing capabilities, and general brokerage services, such as
economic, fixed income, and equity research, account evaluation, analysis and/or
performance and database and/or market information services, all of which are
provided by such brokers and dealers and which are expected to enhance the
overall investment management capabilities of the Adviser) without the Adviser's
having to demonstrate that such factors are a direct benefit to the Account.
8. Inside Information. The Adviser shall have no obligation to seek to
obtain any material non-public information about any issuer of securities, the
use of which, in any event, may be prohibited by the securities laws of certain
jurisdictions.
9. Proxies. The Adviser will not be required to take any action with
respect to the voting of proxies solicited by, or with respect to, the issuers
of securities in which assets of the Account may be invested from time to time,
but the Adviser shall, whenever the Client so requests, provide advice to the
Client with respect to the voting of such proxies.
10. Independent Contractor. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, except as otherwise expressly
provided or authorized by or under this Agreement, have no authority to act for
or represent the Client in any way or otherwise be deemed an agent of the
Client.
11. Reimbursement of Travel and Related Expenses. The Client shall
promptly pay or reimburse the Adviser for its payment of all travel and other
expenses reasonably incurred by the Adviser with respect to any visit to the
Client where such travel is requested by the Client.
12. Investment Advisory Fees.
(a) Description of Fee. In consideration of the services provided to
the Client under this Agreement, the Client shall pay the Adviser a fee to be
calculated on the market value of all assets in the Account, and paid quarterly
as set forth in paragraph (b) of this Section 12 (the "Investment Advisory Fee")
to be determined at the following annual rates for the corresponding market
values of the Account:
(x) $2.50 per $1,000 (25 basis points) for a market value of
$200 million or less; and
(y) $1.50 per $1,000 (15 basis points) for the balance.
(b) Payment of the Investment Advisory Fee. The Investment Advisory
Fee shall be payable in quarterly installments in arrears. The Adviser shall
earn a pro rata share of the first payment under which Section 12 based on the
amount of time the Adviser has provided
<PAGE>
4
services under this agreement during the quarter. The first payment under this
Section 12 shall be made for the period commencing on December 1, 1997 and
ending on December 31, 1997, and shall be calculated based upon the market value
of the assets in the Account at December 31, 1997. Subsequent Investment
Advisory Fees shall be based upon quarter-end market valuations beginning with
March 31, 1998, and shall be based on one-quarter of the annual rates specified
above. Each Investment Advisory Fee shall be paid by the Client promptly upon
the receipt of a statement from the Adviser showing the amount of the fee and
the manner in which the fee was calculated.
(c) Effect of Termination. If the quarterly Investment Advisory Fee
has not been paid as of the effective date of termination, the Adviser shall
earn a pro rata share of the quarterly fee. Payments shall be made as soon as
possible after such date of termination.
13. Limitation of Liability and Indemnification. Neither the Adviser nor
any shareholder, director, officer or employee of the Adviser performing
services for the Client at the direction or request of the Adviser in connection
with the discharge of the Adviser's obligations hereunder shall be liable for
any error of judgment or mistake of law or for any loss which the Client or any
subsidiary of the Client may incur in connection with the investment of assets
in the Account.
To the fullest extent permitted by law, the Client shall indemnify,
hold harmless, protect and defend the Adviser, its shareholders, directors,
officers and employees (the "Indemnitees") against any losses, claims, damages
or liabilities, including without limitation, legal or other expenses incurred
in investigating or defending against any such loss, claim, damages or
liability, and any amounts expended in settlement of any claim (collectively
"Liabilities"), to which any Indemnitee may become subject by reason of any act
or omission performed or omitted to be performed by or on behalf of the Client
in connection with the investment of assets in the Account. The provisions of
this Section 13 shall continue to afford protection to each Indemnitee
regardless of whether such Indemnitee remains in the position or capacity
pursuant to which such Indemnitee became entitled to indemnification under this
Section 13.
However, nothing contained in this Section 13 shall be construed to
protect any Indemnitee against Liability to the Client or any subsidiary or
parent corporation of the Client to which such Indemnitee would otherwise be
subject, or require the Client to indemnify any Indemnitee against Liability to
the Client to which such Indemnitee would otherwise be subject, or require the
Client to indemnify any Indemnitee against any Liability, by reason of actions
or omissions constituting willful misfeasance, bad faith or gross negligence in
the performance of the Adviser's duties or reckless disregard of the Adviser's
obligations and duties under this Agreement.
14. Valuation. The market value of the investments in the Account shall
be determined from reports published by any nationally recognized pricing
service, or, if such reports are not readily available with respect to a
particular security, the Adviser shall determine the value of any such security
either by securing a quotation from a broker or dealer it selects or in some
other manner which the Adviser determines in good faith reflects the fair market
value of such security.
<PAGE>
5
15. Investment Objectives, Guidelines, Procedures and Restrictions. It
will be the Client's responsibility to provide the Adviser from time to time
with written Investment Guidelines for the Account, approved by the Board of
Directors of the Client and signed by its Chief Financial Officer (or a Vice
President if no person has the title of Chief Financial Officer), as well as any
changes or modifications therein, and any further restrictions under applicable
Bermuda laws or regulations. In addition, the client shall give the Adviser
prompt written notice if the Client deems any investments recommended or made
for the Account to be in violation of any of the Investment Guidelines. Unless
the Investment Guidelines contain specific restrictions, the investments
recommended for, or made on behalf of, the Account shall be deemed not to be
restricted under the current or future regulations stipulated by any Bermuda
regulatory body applicable to the Client, or by virtue of the terms of any other
contract or instrument purporting to bind the Client or the Adviser.
16. Termination. This Agreement may be terminated at any time (i) by the
Client by giving not less than 5 days' written notice to Adviser, and (ii) by
the Adviser by giving not less than 90 days' written notice to the Client;
provided, however, that the parties may terminate on shorter notice upon mutual
- -------- -------
agreement in writing. Such termination shall be without penalty to either party
but shall not prejudice any rights which have accrued before the date of
termination. The Client shall remain liable for settlement of any transactions
outstanding at the date of termination. In addition, the Client may order
immediate cessation of securities transactions at any time, provided, however,
-------- -------
that the request is confirmed in writing immediately thereafter via facsimile
transmission to the Adviser. After the Client's termination of the Adviser's
authority as provided in Section 17 hereof, the Adviser shall not act further
for the Client. The Adviser shall reasonably cooperate with the Client to
ensure that there is an orderly transfer to an alternative investment adviser.
17. The Client's Termination of Authority. The Client shall compensate
the Adviser for any fees due in accordance with this Agreement and for any loss
the Adviser may suffer as a result of any action taken by the Adviser within the
terms of the Agreement, either before or after the Client's bankruptcy,
dissolution, or other termination of authority under this Agreement, but before
receipt by the Adviser of notice thereof. The Client further agrees that, to
the extent permitted by law, any such action taken by the Adviser shall be
binding upon the Client and any successor of the Client, who shall hold the
Adviser harmless from all Liability arising from any such action.
18. Notices. Unless otherwise specified herein, all notices,
instructions, directions, advice and other communication with respect to
security transactions or any other matter contemplated by this Agreement from
the Adviser to the Client and from the Client to the Adviser shall be given
either (i) in writing sent by first class mail, courier service, or facsimile
transmission or (ii) orally and confirmed in writing by first class mail,
courier service, or facsimile transmission as soon as practical thereafter. Any
such communication shall be deemed to have been made upon its receipt.
Communications by mail or courier service shall be effective if to the Adviser,
only if addressed to it at 1330 Avenue of the Americas, 12th floor, New York,
New York, 10019, or if to the Client, only if addressed to it at Skandia
International House, 16 Church Street, Hamilton, HM 11 Bermuda, with a copy of
such communication sent to European Specialty Group Holding AG, at
Stadthausbrucke 1-3, 20355 Hamburg, Germany, provided that either party may
specify another address or addresses for itself for this purpose in a notice
similarly given.
<PAGE>
6
The adviser may rely upon any communication (written or oral) from any
person if the Adviser reasonably believes it to be genuine and from an
authorized person. A person shall be deemed to be an authorized person for
purposes hereof if his name, specimen signature and authority have been
certified to the Adviser by a Director of the Client and such person shall
continue to be deemed an authorized person until the Adviser receives written
notice to the contrary from a Director of the Client.
19. Representation by the Client. The Client represents and confirms that
the employment of the Adviser is authorized by the governing documents relating
to the Account and that the terms hereof do not violate any obligation by which
the Client or any subsidiary of the Client is bound, or any obligation known to
the Client by which the Adviser, as investment manager of the Account, is
intended to be bound, whether arising by contract, operation of law, or
otherwise.
The Adviser represents and confirms that it has all requisite power
and authority to act as Adviser hereunder.
20. Amendment. This Agreement may be amended only by an instrument in
writing executed by both parties.
21. Assignment. Neither party may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
party to this Agreement.
22. Governing Law. This Agreement shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of New York
applicable to agreements made and to be performed in that State.
IN WITNESS HEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
ESG RE LIMITED
By: s/s Gerhard Jurk
____________________________
Name: Gernard Jurk
Title: Chief Financial Officer
HEAD ASSET MANAGEMENT L.L.C.
By /s/ Henry B. Spencer
____________________________
Name: Henry B. Spencer
Title: Chief Investment Officer
<PAGE>
EXHIBIT 10.7
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT dated as of December 1, 1997, by and
between EUROPEAN SPECIALTY RUCKVERSICHERUNGS AG, a German company (the
"Client"), and HEAD ASSET MANAGEMENT L.L.C., a limited liability company formed
under the laws of the State of Delaware (the "Adviser").
1. Engagement. Commencing on December 1, 1997, the Client engages and
retains the Adviser to provide the investment advisory and related services
described below. The Adviser hereby accepts such engagement and shall provide or
make satisfactory arrangements for the provision of such services and assumes
the obligations herein set forth for the compensation provided herein.
2. Services and Authority of the Adviser. The Adviser will perform the
services and have the authority set forth in this Agreement with respect to all
cash, securities and other investment assets of the Client which are from time
to time deposited by the Client with the Adviser for investment pursuant to the
provisions hereof, and all proceeds thereof and additions thereto (the
"Account"). The Adviser will supervise and direct the investment of the Account
in accordance with, and subject to, the investment objectives, guidelines and
restrictions specified in written statements and notices given by the Client as
provided in Section 15 hereof.
The Adviser, as agent and attorney-in-fact with respect to the
Account, may, when it deems appropriate, without prior consultation with the
Client and at the risk of the Client (i) buy, sell, exchange, convert, tender
and otherwise trade in, retain, or reinvest in bonds, securities and any other
investments, including money market instruments, and (ii) place orders for the
execution of such investment transactions with or through such brokers, dealers,
issuers, or other persons as the Adviser may select, or tender or exchange such
securities in a tender or exchange offer or similar transaction initiated by the
issuer or any other person or entity. Subject to the last sentence of Section
15, the Adviser shall comply with all legal requirements and rules of securities
exchanges applicable to its duties in connection with the execution of
transactions. The Advisor shall not effect any borrowing of money on behalf of
the Client without Client's written consent thereto.
3. Transaction Procedures. At the commencement of the term of this
Agreement, the Client will provide the Adviser with a statement of the existing
Account portfolio which it desires the Adviser to manage as set forth in Exhibit
A. In connection with each investment transaction in the Account, the Adviser
shall instruct the brokers and dealers to provide to the Client such written
advice of trades, including expenses and other incidents of the transaction, as
is normally provided.
Instructions of the Adviser to the custodian of the securities and
other investments in the Account selected by the Client (the "Custodian") shall
be made, at the option of the Adviser, either (i) in writing sent by first class
mail or by facsimile transmission, or (ii) orally and confirmed in writing by
first class mail or facsimile transmission as soon as practical thereafter. The
Adviser shall instruct all brokers and dealers executing orders on behalf of the
Account to forward to the Client copies of all confirmations promptly after
execution of transactions. The Adviser shall not be responsible for any loss
incurred by reason of any act or omission of any broker or dealer; provided,
however, that the Adviser exercises due care in the
Doc#:DS4:104985.4 22-082
<PAGE>
selection of brokers and dealers and makes reasonable efforts to see that
brokers and dealers selected by the Adviser perform their obligations with
respect to the Account.
4. Reports and Records of the Adviser. The Adviser will provide or cause
to be provided to the Client such periodic reports concerning the status of the
Account as the Client may reasonably request. The Adviser shall provide to the
Client within 10 business days of the end of each calendar month, a report of
Account transactions effected by the Adviser since the date of the most recent
such report, and within 20 business days of the end of each calendar month, a
valuation report of all investments and cash in the Account. The Client and the
Adviser will arrange for the Custodian to provide the Adviser daily cash account
statements and monthly asset position statements. The Adviser will compare these
statements with its own records and inform the Custodian of any differences. In
the event that differences between the custodian's statements and the Adviser's
records cannot be resolved between the Adviser and the custodian, the Adviser
will inform the Client in writing.
The Adviser shall preserve its records relating to the Account for
no less than six years and shall, upon the request of the Client, make such
records available for inspection, at reasonable times at its main business
office during normal business hours, by the Client, its auditors or any
regulatory authority. Prior to discarding or destroying any such records, the
Adviser shall give the Client reasonable opportunity, at the Client's expense,
to review them and to take all or such portion of them as the Client wishes to
retain. The Adviser, in the maintenance of its records, does not assume
responsibility for the accuracy of information furnished by or on behalf of the
Client or any third party not an officer or employee of the Adviser.
5. Confidential Relationship. All information and advice furnished by
either party to the other hereunder, including their respective agents and
employees, shall be treated as confidential and shall not be disclosed to third
parties except as provided in Section 4 or as required by law.
6. Service to Other Clients. The Adviser may perform investment advisory
and other services for various clients, including insurance companies,
investment companies and accounts held by the Adviser in a fiduciary capacity.
The Adviser may give advice and take action with respect to any of its other
clients which may differ from advice given or the timing or nature of action
taken with respect to the Account, so long as it is the Adviser's policy, to the
extent practical, to allocate investment opportunities to the Account over a
period of time on a fair and equitable basis relative to other clients. The
Adviser shall not have any obligation to purchase or sell, or to recommend for
purchase or sale, for the Account any security or other investment which the
Adviser, its officers, affiliates or employees may purchase or sell for its or
their own accounts or for the account of any other client, if in the opinion of
the Adviser such transaction or investment appears unsuitable, impractical or
undesirable for the Account.
7. Allocation of Brokerage. Where the Adviser places orders for the
execution of portfolio transactions for the Account, the Adviser may allocate
such transactions to such brokers and dealers for execution on such markets, at
such prices and at such commission rates (including commission rates that may
exceed those that another broker or dealer would have charged for effecting such
transactions) as the Adviser determines to be appropriate; provided, however,
that if such commission rate exceeds that which another broker or dealer might
have charged for the same transaction, the Adviser has determined in good faith
that the amount of such commission is reasonable in relation to the value of
brokerage and research services provided by such broker or
Doc#:DS4:104985.4 22-082
<PAGE>
dealer, viewed in terms of the particular transaction or the Adviser's overall
responsibilities with respect to some or all of the accounts over which the
Adviser exercises investment discretion; provided, further, that the Adviser
shall make reasonable efforts to minimize brokerage costs where similar services
of adequate standards and reliability are available from more than one broker or
dealer.
The Adviser may take into consideration in the selection of such
brokers and dealers not only the available prices and rate of brokerage
commissions, but all other relevant factors (including without limitation,
execution and processing capabilities, and general brokerage services, such as
economic, fixed income, and equity research, account evaluation, analysis and/or
performance and database and/or market information services, all of which are
provided by such brokers and dealers and which are expected to enhance the
overall investment management capabilities of the Adviser) without the Adviser's
having to demonstrate that such factors are a direct benefit to the Account.
8. Inside Information. The Adviser shall have no obligation to seek to
obtain any material non-public information about any issuer of securities, the
use of which, in any event, may be prohibited by the securities laws of certain
jurisdictions.
9. Proxies. The Adviser will not be required to take any action with
respect to the voting of proxies solicited by, or with respect to, the issuers
of securities in which assets of the Account may be invested from time to time,
but the Adviser shall, whenever the Client so requests, provide advice to the
Client with respect to the voting of such proxies.
10. Independent Contractor. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, except as otherwise expressly
provided or authorized by or under this Agreement, have no authority to act for
or represent the Client in any way or otherwise be deemed an agent of the
Client.
11. Reimbursement of Travel and Related Expenses. The Client shall
promptly pay or reimburse the Adviser for its payment of all travel and other
expenses reasonably incurred by the Adviser with respect to any visit to the
Client where such travel is requested by the Client.
12. Investment Advisory Fees.
(a) Description of Fee. In consideration of the services provided to
the Client under this Agreement, the Client shall pay the Adviser a fee to be
calculated on the market value of all assets in the Account, and paid quarterly
as set forth in paragraph (b) of this Section 12 (the "Investment Advisory Fee")
to be determined at the following annual rates for the corresponding market
values of the Account:
(x) $2.50 per $1,000 (25 basis points) for a market value
of $200 million or less; and
(y) $1.50 per $1,000 (15 basis points) for the balance.
(b) Payment of the Investment Advisory Fee. The Investment Advisory
Fee shall be payable in quarterly installments in arrears. The Adviser shall
earn a pro rata share of the first payment under which Section 12 based on the
amount of time the Adviser has provided
Doc#:DS4:104985.4 22-082
<PAGE>
services under this agreement during the quarter. The first payment under this
Section 12 shall be made for the period commencing on December 1, 1997 and
ending on December 31, 1997, and shall be calculated based upon the market value
of the assets in the Account at December 31, 1997. Subsequent Investment
Advisory Fees shall be based upon quarter-end market valuations beginning with
March 31, 1998, and shall be based on one-quarter of the annual rates specified
above. Each Investment Advisory Fee shall be paid by the Client promptly upon
the receipt of a statement from the Adviser showing the amount of the fee and
the manner in which the fee was calculated.
(c) Effect of Termination. If the quarterly Investment Advisory Fee
has not been paid as of the effective date of termination, the Adviser shall
earn a pro rata share of the quarterly fee. Payments shall be made as soon as
possible after such date of termination.
13. Limitation of Liability and Indemnification. Neither the Adviser nor
any shareholder, director, officer or employee of the Adviser performing
services for the Client at the direction or request of the Adviser in connection
with the discharge of the Adviser's obligations hereunder shall be liable for
any error of judgment or mistake of law or for any loss which the Client or any
subsidiary of the Client may incur in connection with the investment of assets
in the Account.
To the fullest extent permitted by law, the Client shall indemnify,
hold harmless, protect and defend the Adviser, its shareholders, directors,
officers and employees (the "Indemnitees") against any losses, claims, damages
or liabilities, including without limitation, legal or other expenses incurred
in investigating or defending against any such loss, claim, damages or
liability, and any amounts expended in settlement of any claim (collectively
"Liabilities"), to which any Indemnitee may become subject by reason of any act
or omission performed or omitted to be performed by or on behalf of the Client
in connection with the investment of assets in the Account. The provisions of
this Section 13 shall continue to afford protection to each Indemnitee
regardless of whether such Indemnitee remains in the position or capacity
pursuant to which such Indemnitee became entitled to indemnification under this
Section 13.
However, nothing contained in this Section 13 shall be construed to
protect any Indemnitee against Liability to the Client or any subsidiary or
parent corporation of the Client to which such Indemnitee would otherwise be
subject, or require the Client to indemnify any Indemnitee against Liability to
the Client to which such Indemnitee would otherwise be subject, or require the
Client to indemnify any Indemnitee against any Liability, by reason of actions
or omissions constituting willful misfeasance, bad faith or gross negligence in
the performance of the Adviser's duties or reckless disregard of the Adviser's
obligations and duties under this Agreement.
14. Valuation. The market value of the investments in the Account shall
be determined from reports published by any nationally recognized pricing
service, or, if such reports are not readily available with respect to a
particular security, the Adviser shall determine the value of any such security
either by securing a quotation from a broker or dealer it selects or in some
other manner which the Adviser determines in good faith reflects the fair market
value of such security.
Doc#:DS4:104985.4 22-082
<PAGE>
15. Investment Objectives, Guidelines, Procedures and Restrictions. It
will be the Client's responsibility to provide the Adviser from time to time
with written Investment Guidelines for the Account, approved by the Board of
Directors of the Client and signed by its Chief Financial Officer (or a Vice
President if no person has the title of Chief Financial Officer), as well as any
changes or modifications therein, and any further restrictions under applicable
Bermuda laws or regulations. In addition, the client shall give the Adviser
prompt written notice if the Client deems any investments recommended or made
for the Account to be in violation of any of the Investment Guidelines. Unless
the Investment Guidelines contain specific restrictions, the investments
recommended for, or made on behalf of, the Account shall be deemed not to be
restricted under the current or future regulations stipulated by any Bermuda
regulatory body applicable to the Client, or by virtue of the terms of any other
contract or instrument purporting to bind the Client or the Adviser.
16. Termination. This Agreement may be terminated at any time (i) by the
Client by giving not less than 5 days' written notice to Adviser, and (ii) by
the Adviser by giving not less than 90 days' written notice to the Client;
provided, however, that the parties may terminate on shorter notice upon mutual
agreement in writing. Such termination shall be without penalty to either party
but shall not prejudice any rights which have accrued before the date of
termination. The Client shall remain liable for settlement of any transactions
outstanding at the date of termination. In addition, the Client may order
immediate cessation of securities transactions at any time, provided, however,
that the request is confirmed in writing immediately thereafter via facsimile
transmission to the Adviser. After the Client's termination of the Adviser's
authority as provided in Section 17 hereof, the Adviser shall not act further
for the Client. The Adviser shall reasonably cooperate with the Client to ensure
that there is an orderly transfer to an alternative investment adviser.
17. The Client's Termination of Authority. The Client shall compensate the
Adviser for any fees due in accordance with this Agreement and for any loss the
Adviser may suffer as a result of any action taken by the Adviser within the
terms of the Agreement, either before or after the Client's bankruptcy,
dissolution, or other termination of authority under this Agreement, but before
receipt by the Adviser of notice thereof. The Client further agrees that, to the
extent permitted by law, any such action taken by the Adviser shall be binding
upon the Client and any successor of the Client, who shall hold the Adviser
harmless from all Liability arising from any such action.
18. Notices. Unless otherwise specified herein, all notices, instructions,
directions, advice and other communication with respect to security transactions
or any other matter contemplated by this Agreement from the Adviser to the
Client and from the Client to the Adviser shall be given either (i) in writing
sent by first class mail, courier service, or facsimile transmission or (ii)
orally and confirmed in writing by first class mail, courier service, or
facsimile transmission as soon as practical thereafter. Any such communication
shall be deemed to have been made upon its receipt. Communications by mail or
courier service shall be effective if to the Adviser, only if addressed to it at
1330 Avenue of the Americas, 12th floor, New York, New York, 10019, or if to the
Client, only if addressed to it at Skandia International House, 16 Church
Street, Hamilton, HM 11 Bermuda, with a copy of such communication sent to
European Specialty Group Holding AG, at Stadthausbrucke 1-3, 20355 Hamburg,
Germany, provided that either party may specify another address or addresses for
itself for this purpose in a notice similarly given.
Doc#:DS4:104985.4 22-082
<PAGE>
The adviser may rely upon any communication (written or oral) from
any person if the Adviser reasonably believes it to be genuine and from an
authorized person. A person shall be deemed to be an authorized person for
purposes hereof if his name, specimen signature and authority have been
certified to the Adviser by a Director of the Client and such person shall
continue to be deemed an authorized person until the Adviser receives written
notice to the contrary from a Director of the Client.
19. Representation by the Client. The Client represents and confirms that
the employment of the Adviser is authorized by the governing documents relating
to the Account and that the terms hereof do not violate any obligation by which
the Client or any subsidiary of the Client is bound, or any obligation known to
the Client by which the Adviser, as investment manager of the Account, is
intended to be bound, whether arising by contract, operation of law, or
otherwise.
The Adviser represents and confirms that it has all requisite power
and authority to act as Adviser hereunder.
20. Amendment. This Agreement may be amended only by an instrument in
writing executed by both parties.
21. Assignment. Neither party may assign any of its rights or obligations
under this Agreement without the prior written consent of the other party to
this Agreement.
22. Governing Law. This Agreement shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of New York
applicable to agreements made and to be performed in that State.
IN WITNESS HEREOF, the parties hereto have executed this Agreement
as of the date and year first above written.
EUROPEAN SPECIALTY
RUCKVERSICHERUNGS AG
By: /s/ Gerhard Jurk
____________________________
Name: Gerhard Jurk
Title: Chief Financial Officer
HEAD ASSET MANAGEMENT L.L.C.
By /s/ Henry B. Spencer
____________________________
Name: Henry B. Spencer
Title: Chief Investment Officer
Doc#:DS4:104985.4 22-082
<PAGE>
EXHIBIT 10.8
REGISTRATION RIGHTS AGREEMENT
dated as of December 1, 1997
among
ESG RE LIMITED
and
The Other Parties Listed on the Signature Pages Hereto
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS
Page No.
1. Definitions............................................................. 1
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2. Shelf Registration...................................................... 3
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(a) Shelf Registration Statement..................................... 3
----------------------------
(b) Provision by Holders of Certain Information in Connection with the
------------------------------------------------------------------
Shelf Registration Statement..................................... 3
----------------------------
(c) Notice and Postponement of Resales Under Shelf Re~istration Statement
--------------------------------------------------------------------
............................................................... 3
3. Registration Procedures................................................. 4
-----------------------
4. Registration Expenses................................................... 9
---------------------
5. Indemnification......................................................... 10
---------------
(a) Indemnification by the Company................................... 10
------------------------------
(b) Indemnification bv the Holders................................... 11
------------------------------
(c) Conduct of Indemnification Proceedings........................... 11
--------------------------------------
(d) Contribution..................................................... 12
------------
6. Rule 144................................................................ 13
--------
7. Underwritten Re~istrations.............................................. 13
--------------------------
8. Amendment of Subscription Agreement..................................... 13
-----------------------------------
9. Miscellaneous........................................................... 13
-------------
(a) Remedies...................................................... 13
--------
(b) No Inconsistent Agreements.................................... 13
--------------------------
(c) Amendments and Waivers........................................ 14
----------------------
(d) Notices....................................................... 14
-------
(e) Owner of Registrable Securities............................... 14
-------------------------------
(f) Successors and Assigns........................................ 14
----------------------
(g) Counterparts.................................................. 15
------------
(h) Headings...................................................... 15
--------
(i) Governing Law................................................. 15
-------------
(0) Severability.................................................. 15
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(k) Entire Agreement.............................................. 15
----------------
(1) Attorneys' Fees............................................... 15
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</TABLE>
i
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and entered
into as of December 1, 1997, by and among ESG Re Limited, a company formed under
the laws of Bermuda (the "Company"), and the other parties signatory hereto
(each a "Holder" and, collectively, the "Holders").
RECITALS
--------
WHEREAS, the Holders have entered into, or are equity owners in entities
that have entered into the Subscription Agreements (the "Subscription
Agreements"), dated September 30, 1997, by and among the Company and the
Holders, pursuant to which the Company is issuing Common Shares, par value $1.00
per share (the "Common Shares") to the Holders, which Common Shares will not be
registered under the Securities Act of 1993, as amended; and
WHEREAS, in order to induce the Holders to enter into the Subscription
Agreement, the Company agreed to provide certain registration rights with
respect to the Common Shares, which registration rights the Company and the
Purchasers now wish to modify as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
1. Definitions: For purposes of this Agreement, the following terms have
-----------
the following meanings when used herein with initial capital letters:
"Advice" shall have the meaning set forth in Section 3 hereof.
------
"Black-Out Period" shall have the meaning set forth in Section 2(c)
----------------
hereof.
"Commission" shall mean the Securities and Exchange Commission.
----------
"Common Shares" shall mean the Common Shares, par value $1.00 per share, of
-------------
the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
------------
"Holder" or "Holders" shall have the meaning set forth in the Preamble and
------ -------
their respective transferees in accordance with Section 8(f) hereof.
"Losses" shall have the meaning set forth in Section 5 hereof.
------
<PAGE>
2
"Prospectus" shall mean the prospectus included in the Shelf Registration
----------
Statement (including without limitation a prospectus that discloses information
previously omitted from a prospectus filed as part of the effective Shelf
Registration Statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Shelf Registration Statement and all other amendments
and supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" shall mean each of the Shares, until, in the case
----------------------
of any such Share, (i) it is effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement covering it,
(ii) it is saleable by the holder thereof pursuant to Rule 144(k), or (iii) it
is distributed to the public by the holder thereof pursuant to Rule 144.
"Registration Expenses" shall have the meaning set forth in Section 4
---------------------
hereof.
"Resale Notice" shall have the meaning set forth in Section 2(c) hereof.
-------------
"Rule 144" shall mean Rule 144 promulgated by the Commission under the
--------
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the SEC.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Shares" shall mean all Common Shares issued or to be issued to any Holder
------
upon the exercise of the Warrants which were issued to the Holders pursuant to
the Subscription Agreement.
"Shelf Registration Statement" shall have the meaning set forth in Section
----------------------------
2(a) hereof, and shall include the related Prospectus, all amendments and
supplements to such thereto (including post-effective amendments), all exhibits
and all material incorporated by reference or deemed to be incorporated by
reference therein.
"Special Counsel" shall have the meaning set forth in Section 4(b) hereof.
---------------
"Subscription Agreement" shall have the meaning set forth in the recitals
----------------------
hereof.
"Underwritten registration or underwritten offering" shall mean a sale of
--------------------------------------------------
securities of the Company to an underwriter for reoffering to the public
pursuant to
<PAGE>
3
the Shelf Registration Statement filed by the Company with the Commission under
the Securities Act.
2. Shelf Registration.
------------------
(a) Shelf Registration Statement. The Company hereby agrees to: (i)
----------------------------
cause to be filed a shelf registration statement pursuant to Rule 415 under the
Securities Act (the "Shelf Registration Statement"), which Shelf Registration
Statement shall provide for resales of all of the Registrable Securities held by
those Holders which shall have provided the information required pursuant to
Section 2(b) hereof; and (ii) cause such Shelf Registration Statement to be
declared effective by the Commission on or before one year after the closing
under the Subscription Agreements. The Company shall use its best efforts to
keep such Shelf Registration Statement continuously effective, supplemented and
amended until the earlier of (i) the date when all of the Registrable Securities
covered thereby are issued or resold or (ii) the date on which Holders may sell
Registrable Securities without registration under the Securities Act, pursuant
to Rule 144(k) thereunder or any similar rule that may be adopted by the
Commission.
(b) Provision by Holders of Certain Information in Connection with the
------------------------------------------------------------------
Shelf Registration Statement. No Holder of Registrable Securities may include
- ----------------------------
any of its Registrable Securities in any Shelf Registration Statement pursuant
to this Agreement unless and until such Holder furnishes to the Company in
writing, within 20 business days after receipt of a request therefor, such
information as the Company may reasonably request for use in connection with the
Shelf Registration Statement or Prospectus or preliminary Prospectus included
therein. Each Holder as to which the Shelf Registration Statement is being
effected agrees to furnish promptly to the Company all information required to
be disclosed in order to make the information previously furnished to the
Company by such Holder not materially misleading.
(c) Notice and Postponement of Resales Under Shelf Registration
-----------------------------------------------------------
Statement. At any time when one or more Holders proposes to engage in a
- ---------
transaction or series of related transactions to effect the resale of
Registrable Securities pursuant to the Shelf Registration Statement, such Holder
or Holders shall provide written notice to the Company of such proposed sale
(the "Resale Notice"). With respect to each such transaction or series of
related transactions, the Resale Notice shall set forth (i) the name of each
Holder that proposes to offer Registrable Securities for resale, (ii) the number
of Registrable Securities each such Holder intends to offer, and (iii) the
manner in which each such Holder intends to offer the Registrable Securities for
resale. Within one (1) business day of the receipt of a Resale Notice, the
Company shall be entitled to require the Holders by written notice to postpone
any such offering of Registrable Securities (as contemplated by the applicable
Resale Notice) for a reasonable period of time not in excess of 30 calendar days
(a "Black-Out Period"), if the Company determines, in the good faith exercise of
<PAGE>
4
the business judgment of its Board of Directors, that such offering could
materially interfere with a bona fide financing, acquisition, corporate
---- ----
reorganization or any other corporate development involving the Company or would
require disclosure of information, the premature disclosure of which could
materially and adversely affect the Company. If the events or circumstances
permitting the Black-Out Period end prior to the expiration of such Black-Out
Period, the Company will promptly notify the Holders in writing that such events
or circumstances have ended; the Holders will thereafter be permitted to effect
the proposed resale of the Registrable Securities as contemplated by the Resale
Notice.
3. Registration Procedures. In connection with the Company's
-----------------------
registration obligations pursuant to Section 2 hereof, the Company will effect
such registration to permit the sale of such Registrable Securities in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto the Company will as expeditiously as possible, in each case, to
the extent applicable:
(a) Prepare and file with the Commission at least sixty (60) days
prior to [DECEMBER __, 1998], the Shelf Registration Statement on any
appropriate form under the Securities Act available for the sale of the
Registrable Securities by the Holders in accordance with the intended method or
methods of distribution thereof, and cause such Shelf Registration Statement to
become effective and remain effective as provided herein; provided, however,
-------- -------
that before filing the Shelf Registration Statement or Prospectus or any
amendments or supplements thereto (including documents that would be
incorporated or deemed to be incorporated therein by reference) the Company will
furnish to the Holders whose Registrable Securities are covered by such Shelf
Registration Statement, the Special Counsel and the managing underwriters, if
any, copies of all such documents proposed to be filed, which documents will be
subject to review of such Holders, the Special Counsel and such underwriters,
and the Company will not file the Shelf Registration Statement or amendment
thereto or any Prospectus or any supplement thereto (including such documents
which, upon filing, would or would be incorporated or deemed to be incorporated
by reference therein) to which the Holders of a majority of the Registrable
Securities covered by the Shelf Registration Statement, the Special Counsel or
the managing underwriter, if any, shall reasonably object on a timely basis.
(b) Prepare and file with the Commission such amendments and post-
effective amendments to the Shelf Registration Statement as may be necessary to
keep such Shelf Registration Statement continuously effective for the applicable
period specified in Section 2(a); cause the related Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 (or any similar provision then in force) under the
Securities Act; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by the Shelf Registration
Statement during the applicable period in accordance with the intended methods
of disposition by the sellers
<PAGE>
5
thereof set forth in the Shelf Registration Statement as so amended or to such
Prospectus as so supplemented.
(c) Notify the selling Holders, the Special Counsel and the managing
underwriters, if any, promptly, and (if requested by any such person) confirm
such notice in writing, (i) when a Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to the Shelf
Registration Statement or any post-effective amendment, when the same has become
effective, (ii) of any request by the Commission or any other federal or state
governmental authority for amendments or supplements to the Shelf Registration
Statement or related Prospectus or for additional information, (iii) of the
issuance by the Commission or any other federal or state governmental authority
of any stop order suspending the effectiveness of the Shelf Registration
Statement or the initiation of any proceedings for that purpose, (iv) if at any
time the representations and warranties of the Company contained in any
agreement contemplated by Section 3(m) hereof (including any underwriting
agreement) cease to be true and correct, (v) of the receipt by the Company of
any notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose, (vi) of the occurrence of any event which makes any statement made in
the Shelf Registration Statement or related Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or which requires the making of any changes in the Shelf
Registration Statement, Prospectus or documents so that, in the case of the
Shelf Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and, in the case of
the Prospectus, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated or is necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and (vii) of the Company's reasonable determination that a
post-effective amendment to the Shelf Registration Statement would be
appropriate.
(d) Use every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Shelf Registration Statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of any
of the Registrable Securities for sale in any jurisdiction, at the earliest
possible moment.
(e) If requested by the managing underwriters, if any, or the Holders
of a majority of the Registrable Securities being registered, (i) promptly
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters, if any, and such Holder agree should
be included therein as may be required by applicable law and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such
<PAGE>
6
Prospectus supplement or post-effective amendment; provided, however, that the
-------- -------
Company will not be required to take any actions under this Section 3(e) that
are not, in the opinion of counsel for the Company, in compliance with
applicable law.
(f) Furnish to each selling Holder, the Special Counsel and each
managing underwriter, if any, without charge, at least one conformed copy of the
Shelf Registration Statement and any post-effective amendment thereto, including
financial statements (but excluding schedules, all documents incorporated or
deemed incorporated therein by reference and all exhibits, unless requested in
writing by such selling Holder, counsel or underwriter).
(g) Deliver to each selling Holder, the Special Counsel and the
underwriters, if any, without charge, as many copies of the Prospectus or
Prospectuses relating to such Registrable Securities (including each preliminary
prospectus) and any amendment or supplement thereto as such persons may request;
and the Company hereby consents to the use of such Prospectus or each amendment
or supplement thereto by each of the selling Holders and the underwriters, if
any, in connection with the offering and sale of the Registrable Securities
covered by such Prospectus or any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, to
register or qualify or cooperate with the selling Holders, the underwriters, if
any, and their respective counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or blue sky laws
of such jurisdictions within the United States as any seller or underwriter
reasonably requests in writing; use all reasonable efforts to keep each such
registration or qualification (or exemption therefrom) effective during the
period the Shelf Registration Statement is required to be kept effective and do
any and all other acts or things necessary or advisable to enable the
disposition in such jurisdiction of the Registrable Securities covered by the
Shelf Registration Statement; provided, however, that the Company will not be
-------- -------
required to (i) qualify generally to do business in any jurisdiction in which it
is not then so qualified or (ii) take any action that would subject it to
general service of process in any such jurisdiction in which it is not then so
subject.
(i) Cooperate with the selling Holders and the managing underwriters,
if any, to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and enable such Registrable
Securities to be in such denominations and registered in such names as the
managing underwriters, if any, shall request at least two business days prior to
any sale of Registrable Securities to the underwriters.
(j) Use all reasonable efforts to cause the Registrable Securities
covered by the Shelf Registration Statement to be registered with or approved by
such other governmental agencies or authorities within the United States
<PAGE>
7
except as may be required solely as a consequence of the nature of such selling
Holder's business, in which case the Company will cooperate in all reasonable
respects with the filing of the Shelf Registration Statement and the granting of
such approvals as may be necessary to enable the seller or sellers thereof or
the underwriters, if any, to consummate the disposition of such Registrable
Securities.
(k) Upon the occurrence of any event contemplated by Section 3(c)(vi)
or 3(c)(vii) hereof, prepare a supplement or post-effective amendment to the
Shelf Registration Statement or a supplement to the related Prospectus or any
document incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of the Registrable Securities
being sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(l) Use all reasonable efforts to cause all Registrable Securities
covered by the Shelf Registration Statement to be listed on each securities
exchange, if any, on which similar securities issued by the Company are then
listed.
(m) Enter into such agreements (including, in the event of an
underwritten offering, an underwriting agreement in form, scope and substance as
is customary in underwritten offerings) and take all such other actions in
connection therewith (including those requested by the selling Holders, in the
event of an underwritten offering, those requested by the managing underwriters)
in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, whether or not an underwriting agreement is
entered into and whether or not the registration is an underwritten
registration, (i) make such representations and warranties to the Holders and
the underwriters, if any, with respect to the business of the Company and its
subsidiaries, the Shelf Registration Statement, Prospectus and documents
incorporated by reference or deemed incorporated by reference, if any, in each
case, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters, if any, and the Holders of a majority
of the Registrable Securities being sold) addressed to such selling Holders and
each of the underwriters, if any, covering the matters customarily covered in
opinions requested in underwritten offerings and such other matters as may be
reasonably requested by such selling Holders and underwriters, including without
limitation the matters referred to in Section 3(m)(i) hereof; (iii) use its best
efforts to obtain "comfort" letters and updates thereof from the independent
certified public accountants of the Company (and, if necessary, any other
certified public accountants of any subsidiary of the Company or of any business
acquired by the Company for which financial statements and financial data is, or
is required to be, included in the Shelf Registration Statement), addressed
<PAGE>
8
to each selling Holder and each of the underwriters, if any, such letters to be
in customary form and covering matters of the type customarily covered in
"comfort" letters in connection with underwritten offerings; and (iv) deliver
such documents and certificates as may be requested by the Holders of a majority
of the Registrable Securities being sold, the Special Counsel and the managing
underwriters, if any, to evidence the continued validity of the representations
and warranties of the Company and its subsidiaries made pursuant to clause (i)
above and to evidence compliance with any customary conditions contained in the
underwriting agreement or similar agreement entered into by the Company. The
foregoing actions will be taken in connection with each closing under such
underwriting or similar agreement as and to the extent required thereunder.
(n) Make available for inspection by a representative of the selling
Holders, any underwriter participating in any disposition of Registrable
Securities, and any attorney or accountant retained by such selling Holders or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company and its subsidiaries, and cause the officers,
directors and employees of the Company and its subsidiaries to supply all
information reasonably requested by any such representative, underwriter,
attorney or accountant in connection with the Shelf Registration Statement;
provided, however, that any records, information or documents that are
- -------- -------
designated by the Company in writing as confidential at the time of delivery of
such records, information or documents will be kept confidential by such persons
unless (i) such records, information or documents are or come to be in the
public domain or otherwise publicly available, (ii) disclosure of such records,
information or documents is required by court or administrative order or is
necessary to respond to inquiries of regulatory authorities, or (iii) disclosure
of such records, information or documents, in the opinion of counsel to such
person, is otherwise required by law (including, without limitation, pursuant to
the requirements of the Securities Act).
(o) Comply with all applicable rules and regulations of the Commission
and make generally available to its security holders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder (or any similar rule promulgated under the Securities Act) no later
than 45 calendar days after the end of any 12-month period (or 90 calendar days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts underwritten offering,
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company, after the effective date
of the Shelf Registration Statement, which statements shall cover said 12-month
period.
(p) In connection with any underwritten offering, cause appropriate
members of its management to cooperate and participate on a reasonable basis in
the underwriters' "road show" conferences related to such offering.
<PAGE>
9
The Company may require each selling Holder as to which any registration is
being effected to furnish to the Company such information regarding the
distribution of such Registrable Securities as the Company may, from time to
time, reasonably request in writing and the Company may exclude from such
registration the Registrable Securities of any selling Holder who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
Each Holder will be deemed to have agreed by virtue of its acquisition of
such Registrable Securities that, upon receipt of any notice from the Company of
the occurrence of any event of the kind described in Section 3(c)(ii),
3(c)(iii), 3(c)(v), 3(c)(vi) or 3(c)(vii) hereof, such Holder will forthwith
discontinue disposition of such Registrable Securities covered by the Shelf
Registration Statement or Prospectus until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 3(k) hereof,
or until it is advised in writing (the "Advice") by the Company that the use of
the applicable Prospectus may be resumed, and has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus. The Company shall be obligated to
use its reasonable best efforts to allow use of the applicable Prospectus as
quickly as practicable. In the event the Company shall give any such notice,
the time period prescribed in Section 2(a) hereof will be extended by the number
of days during the time period from and including the date of the giving of such
notice to and including the date when each seller of Registrable Securities
covered by the Shelf Registration Statement shall have received (x) the copies
of the supplemented or amended Prospectus contemplated by Section 3(k) hereof or
(y) the Advice.
4. Registration Expenses.
---------------------
(a) All fees and expenses incident to the performance of or compliance
with this Agreement by the Company will be borne by the Company whether or not
the Shelf Registration Statement becomes effective. Such fees and expenses will
include, without limitation, (i) all registration and filing fees (including
without limitation fees and expenses (x) with respect to filings required to be
made with the National Association of Securities Dealers, Inc. and (y) of
compliance with securities or "blue sky" laws (including without limitation fees
and disbursements of counsel for the underwriters or Holders in connection with
"blue sky" qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any, or Holders of a majority of
the Registrable Securities being sold may designate)), (ii) printing expenses
(including without limitation expenses of printing certificates for Registrable
Securities in a form eligible for deposit with [THE DEPOSITORY TRUST COMPANY]
and of printing prospectuses if the printing of prospectuses is requested by the
Holders of a majority of the Registrable Securities included in the Shelf
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and the Special Counsel for
the selling Holders, (v) fees and disbursements of all independent
<PAGE>
10
certified public accountants referred to in Section 5(m)(iii) hereof (including
the expenses of any special audit and "comfort" letters required by or incident
to such performance), (vi) any fees and expenses of any "qualified independent
underwriter" or other independent appraiser participating in an offering
pursuant to Section 3 of Schedule E to the By-laws of the National Association
of Securities Dealers, Inc., (vii) Securities Act liability insurance if the
Company so desires such insurance, and (viii) fees and expenses of all other
persons retained by the Company. In addition, the Company will pay its internal
expenses (including without limitation all salaries and expenses of its officers
and employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
securities to be registered on any securities exchange on which similar
securities issued by the Company are then listed and the fees and expenses of
any person, including special experts, retained by the Company. In no event,
however, will the Company be responsible for any underwriting discount or
selling commission with respect to any sale of Registrable Securities pursuant
to this Agreement.
(b) In connection with any registration of Registrable Securities
hereunder, the Company will reimburse the Holders of the Registrable Securities
being registered in such registration for the reasonable fees and disbursements
of not more than one counsel (the "Special Counsel"), together with appropriate
local counsel, chosen by the Holders of a majority of the Registrable Securities
being registered.
5. Indemnification.
---------------
(a) Indemnification by the Company. The Company will, without
------------------------------
limitation as to time, indemnify and hold harmless, to the fullest extent
permitted by law, each Holder of Registrable Securities registered pursuant to
this Agreement, the officers, directors, partners, managers, agents and
employees of each of them, each person who controls such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, partners, managers, agents and employees of any
such controlling person, from and against all losses, claims, damages,
liabilities, costs (including without limitation the costs of investigation and
attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out
of or based upon any untrue or alleged untrue statement of a material fact
contained in the Shelf Registration Statement, Prospectus or form of Prospectus
(including any document incorporated by reference into any such Shelf
Registration Statement, Prospectus or form of Prospectus) or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or based
upon 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,
except insofar as the same are based solely upon information furnished in
writing to the Company by such Holder expressly for use therein; provided,
--------
however, that the Company will not be liable to any Holder to the extent that
- -------
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission
<PAGE>
11
made in any preliminary prospectus if either (A) (i) such Holder failed to send
or deliver a copy of the Prospectus with or prior to the delivery of written
confirmation of the sale by such Holder to the person asserting the claim from
which such Losses arise and (ii) the Prospectus would have completely corrected
such untrue statement or alleged untrue statement or such omission or alleged
omission; or (B) such untrue statement or alleged untrue statement, omission or
alleged omission is completely corrected in an amendment or supplement to the
Prospectus previously furnished by or on behalf of the Company with copies of
the Prospectus as so amended or supplemented, and such Holder thereafter fails
to deliver such Prospectus as so amended or supplemented prior to or
concurrently with the sale of a Registrable Security to the person asserting the
claim from which such Losses arise.
(b) Indemnification by the Holders. In connection with the Shelf
------------------------------
Registration Statement in which a Holder is participating, such Holder will
furnish to the Company in writing such information as the Company reasonably
requests for use in connection with the Shelf Registration Statement or
Prospectus and will indemnify, to the fullest extent permitted by law, the
Company, its directors and officers, agents and employees, each person who
controls the Company (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling persons, from and against all Losses arising out
of or based upon any untrue statement of a material fact contained in the Shelf
Registration Statement, Prospectus or preliminary prospectus or arising out of
or based upon any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement or omission is contained in any
information so furnished in writing by such Holder to the Company expressly for
use in the Shelf Registration Statement or Prospectus and was relied upon by the
Company in the preparation of the Shelf Registration Statement, Prospectus or
preliminary prospectus. In no event will the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the proceeds (net of
payment of all expenses) received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any person shall become
--------------------------------------
entitled to indemnity hereunder (an "indemnified party"), such indemnified party
shall give prompt notice to the party from which such indemnity is sought (the
"indemnifying party") of any claim or of the commencement of any action or
proceeding with respect to which such indemnified party seeks indemnification or
contribution pursuant hereto; provided, however, that the failure to so notify
-------- -------
the indemnifying party will not relieve the indemnifying party from any
obligation or liability except to the extent that the indemnifying party has
been prejudiced materially by such failure. All fees and expenses (including any
fees and expenses incurred in connection with investigating or preparing to
defend such action or proceeding) will be paid to the indemnified party, as
incurred, within five calendar days of written notice thereof to the
indemnifying party (regardless of whether it is
<PAGE>
12
ultimately determined that an indemnified party is not entitled to
indemnification hereunder). The indemnifying party will not consent to entry of
any judgment or enter into any settlement or otherwise seek to terminate any
action or proceeding in which any indemnified party is or could be a party and
as to which indemnification or contribution could be sought by such indemnified
party under this Section 5, unless such judgment, settlement or other
termination includes as an unconditional term thereof the giving by the claimant
or plaintiff to such indemnified party of a release, in form and substance
satisfactory to the indemnified party, from all liability in respect of such
claim or litigation for which such indemnified party would be entitled to
indemnification hereunder.
(d) Contribution. If the indemnification provided for in this Section
------------
5 is unavailable to an indemnified party under Section 5(a) or 5(b) hereof in
respect of any Losses or is insufficient to hold such indemnified party
harmless, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, will, jointly and severally, contribute to the amount paid or
payable by such indemnified party as a result of such Losses, in such proportion
as is appropriate to reflect the relative fault of the indemnifying party or
indemnifying parties, on the one hand, and such indemnified party, on the other
hand, in connection with the actions, statement or omissions that resulted in
such Losses as well as any other relevant equitable considerations. The relative
fault of such indemnifying party or indemnifying parties, on the one hand, and
such indemnified party, on the other hand, will be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of a
material fact, has been taken or made by, or related to the information supplied
by, such indemnifying party or indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action, statement or omission. The amount paid or payable by a party as a
result of any Losses will be deemed to include any legal or other fees or
expenses incurred by such party in connection with any action or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
--- ----
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provision of this Section 5(d), an indemnifying party that
is a selling Holder will not be required to contribute any amount in excess of
the amount by which the total price at which the Registrable Securities sold by
such indemnifying party and distributed to the public were offered to the public
exceed the amount of any damages which such indemnifying party has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
<PAGE>
13
The indemnity, contribution and expense reimbursement obligations of the
Company hereunder will be in addition to any liability the Company may otherwise
have hereunder or otherwise. The provisions of this Section 5 will survive so
long as Registrable Securities remain outstanding, notwithstanding any transfer
of the Registrable Securities by any Holder thereof or any termination of this
Agreement.
6. Rule 144. The Company will file the reports required to be filed by
--------
it under the Securities Act and the Exchange Act, and will cooperate with any
Holder (including without limitation by making such representations as any such
Holder may reasonably request), all to the extent required from time to time to
enable such Holder to sell Registrable Securities without registration under the
Securities Act within the limitations of the exemptions provided by Rule 144.
Upon the request of any Holder, the Company will deliver to such Holder a
written statement as to whether it has complied with such filing requirements.
Notwithstanding the foregoing, nothing in this Section 6 will be deemed to
require the Company to register any of its securities under any section of the
Exchange Act.
7. Underwritten Registrations. If any of the Registrable Securities
--------------------------
covered by the Shelf Registration Statement are to be sold in an underwritten
offering, the managing underwriter that will administer the offering will be
selected by the Holders of a majority of the Registrable Securities included in
such resale so long as such managing underwriter shall be reasonably
satisfactory to the Company; provided, however, that the Company shall have the
-------- -------
right to select any co-managing underwriters so long as such co-managing
underwriters shall be reasonably satisfactory to the such Holders.
8. Amendment of Subscription Agreement. The Subscription Agreement shall
-----------------------------------
be amended by deleting section 6 thereof, pertaining to registration rights, in
its entirety.
9. Miscellaneous.
-------------
(a) Remedies. In the event of a breach by the Company of its
--------
obligations under this Agreement, each Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of any of the provisions of this Agreement
and hereby further agrees that, in the event of any action for specified
performance in respect of such breach, it will waive the defense that a remedy
at law would be adequate.
(b) No Inconsistent Agreements. The Company has not, as of the date
--------------------------
hereof, and will not, on or after the date hereof, enter into any agreement
<PAGE>
14
with respect to its securities which is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
(c) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of the
Holders of 90% of the then-outstanding Registrable Securities. Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of the Holders whose
securities are being sold pursuant to the Shelf Registration Statement and that
does not directly or indirectly affect the rights of other Holders may be given
by Holders of at least 75% of the Registrable Securities being sold by such
Holders; provided, however, that the provisions of this sentence may not be
-------- -------
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.
(d) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing and will be deemed given (i) when
made, if made by hand delivery, (ii) upon confirmation, if made by telecopier,
or (iii) one business day after being deposited with a reputable next-day
courier, to the parties as follows:
(x) if to the Company, initially at 16 Church Street, Hamilton,
Bermuda, Telecopier (441) 292-1143, with a copy to Paul Weiss, Rifkind, Wharton
& Garrison, 1285 Avenue of the Americas, New York, New York 10019, Attention:
Richard S. Borisoff, Esq., and thereafter at such other address, notice of which
is given to the Holders in accordance with the provisions of this Section 9(d);
and
(y) if to any Holder, at the most current address given by such
Holder to the Company in accordance with the provisions of this Section 9(d).
(e) Owner of Registrable Securities. The Company will maintain, or
-------------------------------
will cause its registrar and transfer agent to maintain, a stock book with
respect to the Common Stock, in which all transfers of Registrable Securities of
which the Company has received notice will be recorded. The Company may deem and
treat the person in whose name Registrable Securities are registered in the
stock book of the Company as the owner thereof for all purposes, including
without limitation the giving of notices under this Agreement.
(f) Successors and Assigns. This Agreement will inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties and will
inure to the benefit of each Holder. Notwithstanding the foregoing, no
transferee will have any of the rights granted under this Agreement (i) until
such
<PAGE>
15
transferee shall have acknowledged its rights and obligations hereunder by a
signed written statement of such transferee's acceptance of such rights and
obligations, (ii) if the transferor notifies the Company in writing on or prior
to such transfer that the transferee shall not have such rights, or (iii) with
respect to specific Registrable Securities, if such transferee was not a party
to this Agreement on the date hereof (or an affiliate of a party hereto) and
acquired such Registrable Securities in open-market purchases or pursuant to an
underwritten public offering.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed will be deemed to be an original and all of which taken
together will constitute one and the same instrument.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and will not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE
AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS.
(j) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein will remain in full force and effect and will in
no way be affected, impaired or invalidated, and the parties hereto will use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(k) Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the registration rights granted by the Company with respect to the
Registrable Securities. This Agreement supersedes all prior agreements and
understandings among the parties with respect to such registration rights.
(l) Attorneys' Fees. In any action or proceeding brought to enforce
---------------
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by the court, will be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
<PAGE>
16
(m) Termination. This Agreement shall terminate, and thereby become
-----------
null and void, on the tenth anniversary of the date hereof; provided, however,
-------- -------
that the provisions of Section 5 and Sections 8(i) and (l) shall survive the
termination of this Agreement.
IN WITNESS HEREOF, the parties have executed a counterpart signature
page of this Agreement as of the date first above written.
ESG RE LIMITED
By:__________________________________________
Name:
Title:
[HOLDER]
By:__________________________________________
Name:
Title:
<PAGE>
EXHIBIT 22.1
LIST OF SUBSIDIARIES OF ESG RE LIMITED
1. EUROPEAN SPECIALTY REINSURANCE (BERMUDA) LIMITED, organized under the laws
of Bermuda
2. EUROPEAN SPECIALTY GROUP HOLDING AKTIENGESELLSCHAFT, organized under the
laws of Germany
3. EUROPEAN SPECIALTY GROUP MANAGEMENT GmbH, organized under the laws of
Germany
4. EUROPEAN SPECIALTY GROUP GmbH, organized under the laws of Germany
5. EUROPEAN SPECIALTY GROUP BERLIN GmbH, organized under the laws of Germany
6. EUROPEAN SPECIALTY RUECKVERSICHERUNG AKTIENGESELLSCHAFT, organized under
the laws of Germany
7. SPORTSECURE INSURANCE BROKERS GmbH, organized under the laws of Germany
8. EUROPEAN SPECIALTY (NORTH AMERICA) LIMITED., organized under the laws of
Ontario, Canada
9. ESG ASIA LIMITED, organized under the laws of Hong Kong
10. EUROPEAN SPECIALTY REINSURANCE (IRELAND) LIMITED, organized under the laws
of Ireland
11. EUROPEAN SPECIALTY GROUP LIMITED, organized under the laws of England
12. EUROPEAN SPECIALTY GROUP (UNITED KINGDOM) LIMITED, organized under the laws
of England
13. EUROPEAN SPECIALTY INSURANCE MANAGEMENT SERVICES LIMITED, organized under
the laws of England
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of ESG Re Limited on
Form F-1 of our report dated August 15, 1997 on the consolidated financial
statement of European Specialty Group Holding AG and Subsidiaries, appearing
in the Prospectus, which is part of this Registration Statement.
Deloitte & Touche GmbH
Wirtschaftsprufungsgesellschaft
Hamburg, Germany
November 14, 1997
<PAGE>
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of ESG Re Limited on
Form F-1 of our report dated August 28, 1997 on the balance sheet of ESG Re
Limited as of August 21, 1997 (date of inception), appearing in the
Prospectus, which is part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche
Chartered Accountants
Hamilton, Bermuda
November 14, 1997
<PAGE>
EXHIBIT 23.9
Consent of Director
November 13, 1997
I hereby consent to the use of my name as a person to be named a director of ESG
Re Limited (the "Company") in the Registration Statement on Form F-1 of the
Company, and in any amendment thereto (including any amendment pursuant to Rule
462 under the Securities Act of 1933, as amended), relating to the public
offering by the Company of its Common Shares.
/s/ David L. Newkirk
- --------------------------
David L. Newkirk
<PAGE>
EXHIBIT 23.10
Consent of Director
November 13, 1997
I hereby consent to the use of my name as a person to be named a director of ESG
Re Limited (the "Company") in the Registration Statement on Form F-1 of the
Company, and in any amendment thereto (including any amendment pursuant to Rule
462 under the Securities Act of 1933, as amended), relating to the public
offering by the Company of its Common Shares.
/s/ William J. Poutsiaka
- ------------------------------
William J. Poutsiaka
<PAGE>
EXHIBIT 23.11
Consent of Director
November 13, 1997
I hereby consent to the use of my name as a person to be named a director of ESG
Re Limited (the "Company") in the Registration Statement on Form F-1 of the
Company, and in any amendment thereto (including any amendment pursuant to Rule
462 under the Securities Act of 1933, as amended), relating to the public
offering by the Company of its Common Shares.
/s/ Edward A. Tilly
- -------------------------
Edward A. Tilly
