<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1995
REGISTRATION NO. 33-62451
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
U S WEST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-0926774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
7800 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(303) 793-6500
(Name, address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
<TABLE>
<S> <C>
STEPHEN E. BRILZ, ESQ. PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
U S WEST, INC. DENNIS J. BLOCK, ESQ.
7800 EAST ORCHARD ROAD WEIL, GOTSHAL & MANGES
ENGLEWOOD, COLORADO 80111 767 FIFTH AVENUE
(303) 793-6626 NEW YORK, NEW YORK 10153
(Name, address, including zip code, and (212) 310-8000
telephone number
of agent for service for the registrant)
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of the Registration Statement, as determined by
market conditions.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. /X/
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 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. / /
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- --------------------------------------------------------------------------------
<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.
<PAGE>
Subject to Completion
December 4, 1995
PROSPECTUS SUPPLEMENT [LOGO]
(To Prospectus Dated December , 1995)
4,900,000 DECS-SM-
(DEBT EXCHANGEABLE FOR COMMON STOCK-SM-)
U S WEST, INC.
% EXCHANGEABLE NOTES DUE , 1998
(SUBJECT TO EXCHANGE INTO SHARES OF COMMON STOCK, PAR VALUE $0.10 PER SHARE, OF
ENHANCE FINANCIAL SERVICES GROUP INC.)
The principal amount of each of the % Exchangeable Notes Due ,
1998 (each, a "DECS"), of U S WEST, Inc. ("U S WEST") being offered hereby will
be $ (the last sale price of the common stock, par value $0.10 per share (the
"Enhance Common Stock"), of Enhance Financial Services Group Inc. ("Enhance") on
, 1995, as reported on the New York Stock Exchange Composite Tape) (the
"Initial Price"). The DECS will mature on , 1998. Interest on the
DECS, at the rate of % of the principal amount per annum, is payable
quarterly on , , and , beginning
, 1995. DECS are not subject to redemption or any sinking fund prior
to maturity.
At maturity (including as a result of acceleration or otherwise), the principal
amount of each DECS will be mandatorily exchanged by U S WEST into a number of
shares of Enhance Common Stock (or, at U S WEST's option under the circumstances
described herein, the cash equivalent) at the Exchange Rate (as defined herein).
The Exchange Rate is equal to, subject to certain adjustments, (a) if the
Maturity Price per share of Enhance Common Stock is greater than or equal to
$ per share of Enhance Common Stock, shares of Enhance Common Stock per
DECS, (b) if the Maturity Price is less than $ but is greater than the
Initial Price, a fractional share of Enhance Common Stock per DECS so that the
value thereof at the Maturity Price equals the Initial Price and (c) if the
Maturity Price is less than or equal to the Initial Price, one share of Enhance
Common Stock per DECS. The "Maturity Price" means the average Closing Price (as
defined herein) per share of Enhance Common Stock on the 20 Trading Days (as
defined herein) immediately prior to maturity, except as otherwise described
herein. Accordingly, the value of the Enhance Common Stock to be received by
holders of the DECS (or the cash equivalent) at maturity will not necessarily
equal the principal amount thereof. The DECS will be unsecured obligations of U
S WEST ranking pari passu with all of its other unsecured and unsubordinated
indebtedness. Enhance will have no obligations with respect to the DECS. See
"Description of the DECS."
SEE "RISK FACTORS RELATING TO DECS" BEGINNING ON PAGE S-3 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS.
Attached hereto as Appendix A and included as part of this Prospectus Supplement
is a prospectus of Enhance relating to the shares of Enhance Common Stock that
may be received by holders of DECS at maturity. The Enhance Common Stock is
listed on the New York Stock Exchange ("NYSE") under the symbol "EFS".
For a discussion of certain United States federal income tax consequences for
holders of DECS, see "Certain United States Federal Income Tax Considerations."
"DECS" and "Debt Exchangeable for Common Stock" are service marks of Salomon
Brothers Inc.
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 SUPPLEMENT OR THE ACCOMPANYING
<TABLE>
<CAPTION>
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT U S WEST(1)(2)
Per DECS......................................... $ $ $
Total (3)........................................ $ $ $
- -----------------------------------------------------------------------------------------------
<FN>
(1) Plus accrued interest, if any, from , 1995 to the date of
delivery.
(2) Before deducting expenses payable by U S WEST, estimated to be $ .
(3) U S WEST has granted the Underwriter an option, exercisable within 30 days
from the date hereof, to purchase up to an additional DECS at the Price
to Public, less the Underwriting Discount, for the purpose of covering
over-allotments, if any. If the Underwriter exercises such option in full,
the total Price to Public, Underwriting Discount, and Proceeds to U S WEST
will be $ , $ and $ , respectively. See "Plan of
Distribution."
</TABLE>
The DECS are offered subject to receipt and acceptance by the Underwriter, to
prior sales and to the Underwriter's right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the DECS will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1995.
- --------------------------------------------
SALOMON BROTHERS INC
- ------------------------------------------------------------
The date of this Prospectus Supplement is , 1995.
<PAGE>
U S WEST was incorporated in 1995 under the laws of the State of Delaware in
order to effect the Recapitalization Plan described herein under "Recent
Development." As part of the Recapitalization Plan, U S WEST changed its state
of incorporation from Colorado to Delaware on November 1, 1995 through the
merger of U S WEST, Inc., a Colorado corporation and U S WEST's predecessor ("U
S WEST Colorado"), with and into U S WEST, with U S WEST continuing as the
surviving corporation. As used herein, unless the context otherwise requires,
references to "U S WEST" shall refer to U S WEST and U S WEST Colorado, its
Colorado predecessor.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DECS AND THE
ENHANCE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE
(WITH RESPECT TO THE ENHANCE COMMON STOCK) IN THE OVER-THE- COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<PAGE>
RISK FACTORS RELATING TO DECS
As described in more detail below, the trading price of the DECS may vary
considerably prior to maturity (including by acceleration or otherwise,
"Maturity") due to, among other things, fluctuations in the market price of
Enhance Common Stock and other events that are difficult to predict and beyond U
S WEST's control.
COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP TO ENHANCE COMMON STOCK
The terms of the DECS differ from those of ordinary debt securities in that
the value of the Enhance Common Stock (or cash equivalent thereof) that a holder
of the DECS will receive upon mandatory exchange of the principal amount thereof
at Maturity (the "Amount Receivable at Maturity") is not fixed, but is based on
the market price of the Enhance Common Stock as specified in the Exchange Rate
(as defined under "Description of the DECS"). There can be no assurance that the
Amount Receivable at Maturity will be equal to or greater than the principal
amount of the DECS. For example, if the Maturity Price of the Enhance Common
Stock is less than the Initial Price, the Amount Receivable at Maturity will be
less than the principal amount paid for the DECS, in which case an investment in
DECS would result in a loss.
In addition, the opportunity for equity appreciation afforded by an
investment in the DECS is less than the opportunity for equity appreciation
afforded by an investment in Enhance Common Stock because the Amount Receivable
at Maturity will only exceed the principal amount of such DECS if the Maturity
Price exceeds the Threshold Appreciation Price (as defined under "Description of
the DECS"), which represents an appreciation of % of the Initial Price.
Moreover, holders of the DECS will only be entitled to receive upon exchange at
Maturity % of any appreciation of the value of Enhance Common Stock in excess
of the Threshold Appreciation Price. Because the market price of the Enhance
Common Stock is subject to market fluctuations, the Amount Receivable at
Maturity may be more or less than the principal amount of the DECS.
It is impossible to predict whether the price of Enhance Common Stock will
rise or fall. Trading prices of Enhance Common Stock will be influenced by
Enhance's operational results and by complex and interrelated political,
economic, financial and other factors that can affect the capital markets
generally, the stock exchange on which Enhance Common Stock is traded and the
market segment of which Enhance is a part. See the prospectus relating to
Enhance and to Enhance Common Stock attached hereto as Appendix A and included
as part of this Prospectus Supplement. Trading prices of Enhance Common Stock
also may be influenced if U S WEST or another principal shareholder of Enhance
hereafter issues securities with terms similar to those of the DECS or otherwise
transfers shares of Enhance Common Stock. As of the date hereof, an indirect
wholly owned subsidiary of U S WEST held an aggregate of 5,430,800 shares of
Enhance Common Stock, 4,900,000 shares of which (5,430,800 shares if the
Underwriter's over-allotment option is exercised in full) U S WEST may deliver
to holders of the DECS at Maturity.
DILUTION OF ENHANCE COMMON STOCK
The Amount Receivable at Maturity is subject to adjustment for certain
events arising from stock splits and combinations, stock dividends and certain
other actions of Enhance that modify its capital structure. See "Description of
the DECS -- Dilution Adjustments; Reorganization Events." Such Amount Receivable
at Maturity may not be adjusted for other events, such as offerings of Enhance
Common Stock for cash or in connection with acquisitions, that may adversely
affect the price of Enhance Common Stock and, because of the relationship of
such Amount Receivable at Maturity to the price of Enhance Common Stock, such
other events may adversely affect the trading price of the DECS. There can be no
assurance that Enhance will not make offerings of Enhance Common Stock or take
such other action in the future or as to the amount of such offerings, if any.
In addition, until such time, if any, as U S WEST shall deliver shares of
Enhance Common Stock to holders of the DECS at Maturity thereof, holders of the
DECS will not be entitled to any rights with respect to Enhance Common Stock
(including, without limitation, voting rights and the rights to receive any
dividends or other distributions in respect thereof).
S-3
<PAGE>
NO OBLIGATION ON THE PART OF ENHANCE WITH RESPECT TO THE DECS
Enhance has no obligations with respect to the DECS or the Amount Receivable
at Maturity, including any obligation to take the needs of U S WEST or of
holders of the DECS into consideration for any reason. Enhance will not receive
any of the proceeds of the offering of the DECS made hereby and is not
responsible for, and has not participated in, the determination of the time of,
prices for or quantities of DECS to be issued or the determination or
calculation of the Amount Receivable at Maturity. Enhance is not involved with
the administration or trading of the DECS and has no obligations with respect to
the Amount Receivable at Maturity.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the DECS will trade in the secondary
market or whether such market will be liquid or illiquid. DECS are novel and
innovative securities and there is currently no secondary market for the DECS.
The DECs will not be listed or traded on any securities exchange or trading
market. Accordingly, pricing information for the DECS may be difficult to obtain
and the liquidity of the DECS may be limited. The Underwriter currently intends,
but is not obligated, to make a market in the DECS. There can be no assurance
that a secondary market will develop or, if a secondary market does develop,
that it will provide the holders of the DECS with liquidity or that it will
continue for the life of the DECS.
UNCERTAINTY OF FEDERAL INCOME TAX CONSEQUENCES
No statutory, judicial or administrative authority directly addresses the
characterization of the DECS or instruments similar to the DECS for U.S. federal
income tax purposes. As a result, significant aspects of the U.S. federal income
tax consequences of an investment in the DECS are not certain. No ruling is
being requested from the Internal Revenue Service with respect to the DECS and
no assurance can be given that the Internal Revenue Service will agree with the
conclusions expressed under "Certain United States Federal Income Tax
Considerations."
S-4
<PAGE>
U S WEST, INC.
U S WEST is a diversified global communications company engaged in the
telecommunications, cable, wireless communications and multimedia content and
services businesses. U S WEST conducts its businesses through two groups: the U
S WEST Communications Group (the "Communications Group") and the U S WEST Media
Group (the "Media Group").
The Communications Group provides telecommunications services to more than
25 million residential and business customers in the states of Arizona,
Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota,
Oregon, South Dakota, Utah, Washington and Wyoming (collectively, the
"Communications Group Region"). Such services include local telephone services,
exchange access services and certain long distance services, as well as various
new services, including Caller ID, voice messaging and high-speed data
networking services. The Communications Group also provides customer premise
equipment and certain communications services to business customers and
governmental agencies both inside and outside the Communications Group Region.
The Media Group is comprised of (i) cable and telecommunications network
businesses outside the Communications Group Region and internationally, (ii)
domestic and international wireless communications network businesses and (iii)
domestic and international multimedia content and services businesses. The Media
Group's cable and telecommunications businesses include domestic cable and
telecommunications businesses and investments outside of the Communications
Group Region, including U S WEST's cable systems in the Atlanta, Georgia
metropolitan area and its interest in Time Warner Entertainment Company, L.P.,
and international cable and telecommunications investments, including U S WEST's
interest in TeleWest plc, the largest provider of combined cable and
telecommunications services in the United Kingdom. The Media Group provides
domestic wireless communications products and services, including cellular
services, to a rapidly growing customer base. U S WEST and AirTouch
Communications, Inc. have entered into Phase I of a cellular joint venture
pursuant to which their domestic cellular properties will receive centralized
services from a Wireless Management Company on a contract basis. The Media Group
also provides wireless communications services internationally through Mercury
One-2-One, the world's first Personal Communications Service, in the United
Kingdom. The Media Group's multimedia content and services businesses develop
and package content and information services, including telephone directories,
database marketing and other interactive services in domestic and international
markets. The Media Group also includes the businesses of U S WEST's capital
assets segment, including U S WEST's interest in Enhance.
RECENT DEVELOPMENT
On November 1, 1995, U S WEST created two classes of common stock that are
intended to reflect separately the performance of the Communications Group and
the Media Group and changed the state of incorporation of U S WEST from Colorado
to Delaware (the "Recapitalization Plan"). The Recapitalization Plan was
effected in accordance with the terms of an Agreement and Plan of Merger, dated
August 17, 1995, between U S WEST Colorado and U S WEST pursuant to which (i) U
S WEST Colorado was merged with and into U S WEST, with U S WEST continuing as
the surviving corporation and (ii) each outstanding share of Common Stock,
without par value, of U S WEST Colorado was converted into one share of U S WEST
Communications Group Common Stock, par value $.01 per share, of U S WEST, which
is intended to reflect separately the performance of the Communications Group,
and one share of U S WEST Media Group Common Stock, par value $.01 per share, of
U S WEST, which is intended to reflect separately the performance of the Media
Group.
The Recapitalization Plan was approved by U S WEST Colorado's shareholders
at a special meeting held on October 31, 1995. Implementation of the
Recapitalization Plan has not resulted in the transfer of any assets from U S
WEST or any of its subsidiaries or altered the legal nature of U S WEST's
obligations to its creditors. Creditors of U S WEST, including the holders of
the DECS, will continue to benefit from the cash flow of the subsidiaries
comprising both the Communications Group and the Media Group, subject to the
satisfaction of obligations by such subsidiaries.
The Recapitalization Plan is not expected to have any adverse impact on U S
WEST's credit rating. However, as part of its growth strategy, U S WEST from
time to time engages in discussions regarding acquisitions. U S WEST may fund
any such acquisitions, if consummated, with internally generated
S-5
<PAGE>
funds, debt or equity. The incurrence of indebtedness to fund such acquisitions
and/or the assumption of indebtedness in connection with such acquisitions could
result in a downgrading of U S WEST's credit rating and, as a result, have an
adverse effect upon the market value of the DECS.
ENHANCE FINANCIAL SERVICES GROUP INC.
Enhance, together with its consolidated subsidiaries (the "Enhance Group"),
is principally engaged in the reinsurance of financial guaranties of municipal
and asset-backed debt obligations of monoline financial guaranty insurers. In
addition, the Enhance Group is engaged in the insurance and reinsurance of
various specialty lines of business that utilize the Enhance Group's expertise
in performing sophisticated analyses of complex, credit-based risks. The Enhance
Group expects that a significant portion of its growth will come from its
expanding specialty businesses.
Monoline financial guaranty insurers guaranty to the holders of debt
obligations, primarily those issued by municipalities, the full and timely
payment of principal and interest. In conducting its reinsurance business, the
Enhance Group assumes a portion of the risk insured, and receives a portion of
the premium collected, by the primary insurer. Reinsurance of financial
guaranties issued by monoline financial guaranty insurers represented 68.7% and
57.4% of the Enhance Group's gross premiums written for the year ended December
31, 1994 and the nine months ended September 30, 1995, respectively. During the
year ended December 31, 1994, the Enhance Group received 35.5% of the total
reinsurance premiums ceded by all monoline financial guaranty insurers.
The Enhance Group's specialty businesses currently involve the issuance of
direct financial guaranties of smaller municipal and multi-family housing-backed
debt obligations, trade credit insurance, financial responsibility bonds and
excess-SIPC bonds. This area of the Enhance Group's business, measured by gross
premiums written, has grown from its inception in 1991 to represent over 42% of
the Enhance Group's gross premiums written for the nine months ended September
30, 1995. The Enhance Group is continuing to expand these businesses and is
diversifying its products and services into other areas that the Enhance Group
believes have strong growth potential and in which the Enhance Group's strength
in credit analysis can provide a competitive advantage.
The Enhance Group's business strategy is to concentrate its efforts on the
maintenance and growth of its financial guaranty business, both primary and
reinsurance, while maintaining its commitment to intensive and prudent credit
underwriting and conservative investment policies; to utilize its expertise in
underwriting credit risks to expand and develop its specialty businesses; and to
accelerate its diversification effort into other areas that the Enhance Group
believes have strong profit and growth potential.
The Enhance Group's aggregate insurance in force as of September 30, 1995
was $54.6 billion, of which $38.9 billion, or 71.4%, was attributable to
reinsurance of municipal bond obligations; $10.0 billion, or 18.2%, was
attributable to reinsurance of asset-backed debt obligations; and $5.7 billion,
or 10.4%, was attributable to specialty businesses.
For additional information about the Enhance Group, see the prospectus of
Enhance attached hereto as Appendix A. Enhance is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
prospectus of Enhance attached hereto as Appendix A incorporates its 1994 Annual
Report on Form 10-K, its Quarterly Reports on Form 10-Q for the quarters ended
March 31, June 30 and September 30, 1995, the description of the Enhance Common
Stock contained in Enhance's Registration Statement dated February 12, 1992 on
Form 8-A and all documents filed by Enhance pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of such prospectus and prior
to the termination of this DECS offering. Such documents may be inspected and
copied at the public reference facilities maintained by the Commission in
Washington, D.C. and at its regional offices and at the offices of the NYSE on
which the Enhance Common Stock is listed. Such documents, without exhibits, also
may be obtained by writing to the Secretary of Enhance, Enhance Financial
Services Group Inc., 335 Madison Avenue, New York, New York 10017 (telephone
number (212) 983-3100). See "Available Information" and "Incorporation of
Certain Documents by Reference" in the prospectus of Enhance attached hereto as
Appendix A.
S-6
<PAGE>
RELATIONSHIP BETWEEN U S WEST AND ENHANCE
An indirect wholly owned subsidiary of U S WEST currently owns approximately
31.5% (5,430,800 shares) of the outstanding Enhance Common Stock and two of the
directors of Enhance are officers of U S WEST or its affiliates. Enhance is
operated as a corporation independent from U S WEST, and while U S WEST may have
some influence over Enhance, U S WEST does not consider that its ownership of
Enhance Common Stock affords it the power to control the management of Enhance.
Following consummation of the offering of the DECS, U S WEST currently intends,
but is not committed by any agreement or otherwise, to cause its subsidiary to
vote its shares of Enhance Common Stock proportionately to the votes cast by
non-U S WEST shareholders; provided, however, that U S WEST will continue to
cause its subsidiary to vote its shares of Enhance Common Stock in favor of the
nominees of Manufacturers Life Insurance Company to Enhance's Board of Directors
pursuant to an agreement between U S WEST's subsidiary, Enhance and
Manufacturers Life Insurance Company; and provided, further, that if (i) a
person or group of persons other than U S WEST is deemed to own more than 15
percent of the Enhance Common Stock within the meaning of Section 13(d) of the
Exchange Act and (ii) there occurs a contested proxy solicitation within the
meaning of Rule 14a-11(a) promulgated under the Exchange Act, U S WEST intends
to cause its subsidiary to vote its shares of Enhance Common Stock in a manner U
S WEST deems appropriate. In addition, U S WEST intends to cause the two U S
WEST designees who currently serve on Enhance's Board of Directors to resign
following issuance of the DECS, however, U S WEST will retain its rights to
nominate and vote for candidates for Enhance's Board of Directors. Moreover, U S
WEST is not required to retain its current holdings of shares of Enhance Common
Stock in connection with the DECS or otherwise and may sell some or all of such
shares from time to time. Accordingly, there can be no assurance that U S WEST
will have any influence over the actions and decisions taken and made by
Enhance.
In connection with the offering of the DECS, Enhance has agreed to indemnify
U S WEST against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"), and to pay the expenses of U S
WEST incurred in connection therewith. For a description of certain agreements
between U S WEST and Enhance, see "Certain Relationships and Related
Transactions" in the prospectus of Enhance attached hereto as Appendix A.
Enhance has no obligations with respect to the DECS. See "Risk Factors Relating
to DECS -- No Obligation on the Part of Enhance with Respect to the DECS."
S-7
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
U S WEST at September 30, 1995, and as adjusted to reflect the application of
the estimated net proceeds from the sale of the DECS (assuming the Underwriters'
over-allotment option is not exercised) and the sale of certain securities by U
S WEST and its affiliates subsequent to September 30, 1995. See "Use of
Proceeds." The table should be read in conjunction with U S WEST's consolidated
financial statements and notes thereto included in the documents incorporated by
reference herein. See "Incorporation of Certain Documents by Reference" in the
accompanying Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1995
--------------------------
ACTUAL (1) AS ADJUSTED (1)
------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Short-term borrowings........................................ $3,640 $ (2)
------- --------
------- --------
Long-term borrowings:
Debentures, notes and other................................ $5,144 $ (2)
DECS....................................................... --
------- --------
Total long-term borrowings................................... $5,144 $ (2)
------- --------
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely company guaranteed
debentures.................................................. $ 600 $
------- --------
Preferred stock subject to mandatory redemption.............. $ 51 $
------- --------
Common shareholders' equity:
Common shares -- no par, 2,000,000,000 authorized;
471,650,698 outstanding................................. $8,161 $
Cumulative deficit....................................... (223 )
LESOP guarantee.......................................... (157 )
Foreign currency translation adjustment.................. (17 )
------- --------
Total common shareholders' equity............................ $7,764 $ (3)
------- --------
Total capitalization......................................... $13,559 $ (2)(3)
------- --------
------- --------
<FN>
- ------------------------
(1) Does not give effect to the 10,164,480 shares of common stock, without par
value, of U S WEST Colorado ("Common Stock") that were issuable at
September 30, 1995 upon exercise of exercisable options under U S WEST's
stock option plans or the 9,633,826 shares of Common Stock that were
issuable upon conversion of Liquid Yield Option Notes due 2011 of U S WEST
outstanding at September 30, 1995.
(2) Gives effect to (i) the issuance by U S WEST Capital Funding, Inc. on
October 6, 1995 of $300 million of 6 3/4% Notes Due October 1, 2005, (ii)
the issuance by U S WEST Communications, Inc. on October 13, 1995 of $250
million of 6 3/8% Notes due 2002 and $250 million of 7 1/4% Debentures due
2035, (iii) the issuance by U S WEST Capital Funding, Inc. on October 27,
1995 of $250 million of 6.31% Notes Due November 1, 2005, (iv) the issuance
by U S WEST Communications, Inc. on November 10, 1995 of $250 million of
7.20% Debentures due 2026, (v) the issuance by U S WEST Communications,
Inc. on November 21, 1995 of $250 million of 6.125% Notes due November 21,
2000 and (vi) the issuance by U S WEST Communications, Inc. on November 27,
1995 of Swiss Francs 150 million of 4 1/8% Bonds due 2001, and the
application of the net proceeds thereof to the reduction of short-term
borrowings.
(3) The Recapitalization Plan has not affected the total common shareholders'
equity or the total capitalization of U S WEST.
</TABLE>
S-8
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data below should be read in conjunction with the
financial statements and notes thereto included in U S WEST's Annual Report on
Form 10-K for the year ended December 31, 1994 and Form 10-Q for the nine months
ended September 30, 1995. See "Incorporation of Certain Documents by Reference"
in the accompanying Prospectus. The summary financial data at December 31, 1990,
1991, 1992, 1993 and 1994 and for each of the five years ended December 31, 1994
are derived from the consolidated financial statements of U S WEST which have
been audited by Coopers & Lybrand L.L.P., independent certified public
accountants. See "Experts" in the accompanying Prospectus. The summary financial
data at September 30, 1994 and 1995 and for the nine months ended September 30,
1994 and 1995 are derived from the unaudited consolidated financial statements
of U S WEST, which have been prepared on the same basis as U S WEST's audited
consolidated financial statements and, in the opinion of management, contain all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for these
periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ---------------------
1990 1991 1992 1993 1994 1994 1995
--------- -------- -------- ------- ---------- ---------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales and other revenues..................... $ 9,369 $ 9,528 $ 9,823 $10,294 $10,953 $ 8,114 $8,686
Income from continuing operations (1)........ 1,145 840 1,076 476 1,426 1,017 973
Net income (loss) (2)........................ 1,199 553 (614) (2,806) 1,426 1,017 964
Total assets................................. $ 22,160 $ 23,375 $ 23,461 $20,680 $23,204 $21,388 $24,761
Total debt (3)............................... 5,147 5,969 5,430 7,199 7,938 7,251 8,784
Shareholders' equity......................... 9,240 9,587 8,268 5,861 7,382 6,724 7,764
Earnings per common share (continuing
operations) (1)............................. 2.97 2.09 2.61 1.13 3.14 2.25 2.06
Earnings (loss) per common share............. 3.11 1.38 (1.49) (6.69) 3.14 2.25 2.04
Return on common shareholders' equity (4).... 13.7% 5.7% 14.4% -- 21.6% 21.0% 16.8%
Percentage of debt to total capital (3)...... 35.8% 38.4% 39.6% 55.1% 51.8% 51.9% 51.1%
Capital expenditures (3)..................... $ 2,217 $ 2,425 $ 2,554 $ 2,441 $ 2,820 $ 1,958 $2,183
OPERATING DATA
EBITDA (5)................................... $ 3,889 $ 3,920 $ 3,963 $ 4,228 $ 4,559 $ 3,443 $3,713
Telephone network access lines in service
(thousands)................................. 12,562 12,935 13,345 13,843 14,336 14,175 14,670
Billed access minutes of use (millions)...... 38,832 41,701 44,369 48,123 52,275 38,719 42,489
Cellular subscribers......................... 219,000 300,000 415,000 601,000 968,000 821,000 1,269,000
Cable television basic subscribers served.... -- -- -- -- 486,000 481,000 517,000
Employees.................................... 65,469 65,829 63,707 60,778 61,505 61,167 61,123
Number of common shareholders................ 935,530 899,082 867,773 836,328 816,099 823,971 790,692
Weighted average common shares outstanding
(thousands)................................. 386,012 401,332 412,518 419,365 453,316 451,037 470,076
- ------------------------------
(1) 1993 income from continuing operations was reduced by a restructuring
charge of $610 ($1.46 per share) and $54 ($.13 per share) for the
cumulative effect on deferred taxes of the 1993 federally mandated increase
in income tax rates. 1991 income from continuing operations was reduced by
a restructuring charge of $230 ($.57 per share). 1994 income from
continuing operations includes a gain of $105 ($.23 per share) on the sale
of 24.4 percent of U S WEST's joint venture interest in cable
television/telephone operations in the United Kingdom (TeleWest
Communications plc), a gain of $41 ($.09 per share) on the sale of U S
WEST's paging unit and a gain of $51 ($.11 per share) on the sales of
certain rural telephone exchanges. 1994 first nine months income includes a
gain on the sales of rural telephone exchanges of $31 ($0.07 per share) and
a gain on the sale of paging operations of $41 ($.09 per share). 1995 first
nine months income includes a gain on the sales of rural telephone
exchanges of $70 ($0.14 per share) and expenses associated with the
Recapitalization Plan of $10 ($0.02 per share).
(2) 1992 income includes a charge of $1,793 ($4.35 per share) for the
cumulative effect of change in accounting principles. 1993 net income was
reduced by extraordinary charges of $3,123 ($7.45 per share) for the
discontinuance of Statement of Financial Accounting Standards ("SFAS") No.
71 and $77 ($.18 per share) for the early extinguishment of debt. 1993 net
income also includes a charge of $120 ($.28 per share) for U S WEST's
decision to discontinue the operations of its capital assets segment. 1995
first nine months income includes an extraordinary loss of $9 ($0.02 per
share) for the early extinguishment of debt. Discontinued operations
provided net income (loss) of $54 ($.14 per share), $(287) ($.71 per
share), $103 ($.25 per share) and $38 ($.09 per share) in 1990, 1991, 1992
and 1993, respectively.
(3) Capital expenditures, debt and the percentage of debt to total capital
exclude discontinued operations.
(4) 1992 return on shareholders' equity is based on income before the
cumulative effect of change in accounting principles. 1993 return on
shareholders' equity is not presented. Return on shareholders' equity for
fourth quarter 1993 was 19.9 percent based on income from continuing
operations.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA").
EBITDA excludes gains on sales of assets, restructuring charges and other
income. U S WEST considers EBITDA an important indicator of the operational
strength and performance of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of
the performance of U S WEST's businesses or as an alternative to cash flows
from operating activities as a measure of liquidity, in each case
determined in accordance with generally accepted accounting principles.
</TABLE>
S-9
<PAGE>
PRICE RANGE AND DIVIDEND HISTORY
OF ENHANCE COMMON STOCK
Enhance Common Stock has been traded on the NYSE under the symbol "EFS"
since March 1992. The following table sets forth the high and low sales prices
for the Enhance Common Stock for the calendar quarters indicated as reported on
the NYSE consolidated transaction system.
<TABLE>
<CAPTION>
SALES PRICES
-------------------- DIVIDENDS
HIGH LOW PAID
--------- --------- -----------
<S> <C> <C> <C>
1993
First Quarter..................................................................... $ 24 7/8 $ 17 1/2 $ 0.07
Second Quarter.................................................................... 23 5/8 19 1/2 0.07
Third Quarter..................................................................... 23 1/2 17 3/4 0.07
Fourth Quarter.................................................................... 22 18 3/4 0.07
1994
First Quarter..................................................................... $ 19 7/8 $ 18 1/8 $ 0.08
Second Quarter.................................................................... 19 3/8 17 3/8 0.08
Third Quarter..................................................................... 20 5/8 17 3/4 0.08
Fourth Quarter.................................................................... 19 3/8 15 1/2 0.08
1995
First Quarter..................................................................... $ 18 3/8 $ 15 7/8 $ 0.09
Second Quarter.................................................................... 19 5/8 16 1/4 0.09
Third Quarter..................................................................... 20 5/8 18 0.09
Fourth Quarter (through November 14, 1995)........................................ 21 5/8 19 7/8 --
</TABLE>
As of September 30, 1995, there were 135 holders of record of Enhance Common
Stock and 17,235,625 shares of Enhance Common Stock outstanding.
For a recent sales price of the Enhance Common Stock, see the cover page of
this Prospectus Supplement. See also "Price Range of Common Stock and Dividends"
in the prospectus of Enhance attached hereto as Appendix A.
U S WEST makes no representation as to the amount of dividends, if any, that
Enhance will pay in the future. In any event, holders of the DECS will not be
entitled to receive any dividends that may be payable on the Enhance Common
Stock until such time as U S WEST, if it so elects, delivers Enhance Common
Stock at Maturity of the DECS, and then only with respect to dividends having a
record date on or after the date of delivery of such Enhance Common Stock. See
"Description of the DECS."
USE OF PROCEEDS
The net proceeds to be received by U S WEST from sales of the DECS will be
used for general corporate purposes, including the reduction of short-term and
long-term borrowings and other business opportunities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges from
continuing operations of U S WEST for the periods indicated. For the purpose of
calculating this ratio, earnings consist of income before income taxes and fixed
charges. Fixed charges include interest on indebtedness (excluding discontinued
operations) and the portion of rentals representative of the interest factor.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
- ----------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
4.07 3.11 3.85 2.38 4.85 4.88 4.02
</TABLE>
S-10
<PAGE>
DESCRIPTION OF THE DECS
The following description of the particular terms of the DECS supplements,
and to the extent inconsistent therewith replaces, the description of the
general terms and provisions of Debt Securities set forth in the Prospectus, to
which description reference is hereby made.
GENERAL
The DECS are a series of Debt Securities (as defined in the Prospectus), to
be issued under an indenture dated as of November 13, 1995, as supplemented by
the First Supplemental Indenture, dated as of , 1995 (the indenture
dated as of November 13, 1995, as supplemented from time to time, the
"Indenture"), between U S WEST and The First National Bank of Chicago, as
Trustee (the "Trustee").
The DECS will be unsecured and will rank on a parity with all other
unsecured and unsubordinated indebtedness of U S WEST. The aggregate number of
DECS to be issued will be 4,900,000 plus such additional number of DECS as may
be issued pursuant to the over-allotment option granted by U S WEST to the
Underwriter (see "Plan of Distribution"). The DECS will mature on ,
1998. In the future U S WEST may issue additional Debt Securities or other
securities with terms similar to those of the DECS.
Each DECS, which will be issued with a principal amount of $ , will
bear interest at the annual rate of % of the principal amount per annum (or
$ per annum) from , 1995, or from the most recent Interest
Payment Date (as defined below) to which interest has been paid or provided for
until the principal amount thereof is exchanged at Maturity pursuant to the
terms of the DECS. Interest on the DECS will be payable quarterly in arrears on
, , and , commencing
, 1995 (each, an "Interest Payment Date"), to the persons in whose
names the DECS are registered at the close of business on the day of the
calendar month immediately preceding such Interest Payment Date, provided that
interest payable at Maturity shall be payable to the person to whom the
principal is payable. Interest on the DECS will be computed on the basis of a
360-day year of twelve 30-day months. If an Interest Payment Date falls on a day
that is not a Business Day (as defined below), the interest payment to be made
on such Interest Payment Date will be made on the next succeeding Business Day
with the same force and effect as if made on such Interest Payment Date, and no
additional interest will accrue as a result of such delayed payment.
At Maturity (including as a result of acceleration or otherwise), the
principal amount of each DECS will be mandatorily exchanged by U S WEST into a
number of shares of Enhance Common Stock at the Exchange Rate (as defined
below). The "Exchange Rate" is equal to, (a) if the Maturity Price (as defined
below) per share of Enhance Common Stock is greater than or equal to $ per
share of Enhance Common Stock (the "Threshold Appreciation Price"), shares
of Enhance Common Stock per DECS, (b) if the Maturity Price is less than the
Threshold Appreciation Price but is greater than the Initial Price, a fractional
share of Enhance Common Stock per DECS so that the value thereof (determined at
the Maturity Price) is equal to the Initial Price and (c) if the Maturity Price
is less than or equal to the Initial Price, one share of Enhance Common Stock
per DECS. ACCORDINGLY, THE VALUE OF THE ENHANCE COMMON STOCK TO BE RECEIVED BY
HOLDERS OF THE DECS (OR, AS DISCUSSED BELOW, THE CASH EQUIVALENT TO BE RECEIVED
IN LIEU OF SUCH SHARES) AT MATURITY WILL NOT NECESSARILY EQUAL THE PRINCIPAL
AMOUNT OF SUCH DECS. The numbers of shares of Enhance Common Stock per DECS
specified in clauses (a) and (c) above of the Exchange Rate definition are
hereinafter referred to as the "Share Components". Any shares of Enhance Common
Stock delivered by U S WEST to the holders of the DECS that are not affiliated
with Enhance shall be free of any transfer restrictions and the holders of the
DECS will be responsible for the payment of any and all brokerage costs upon the
subsequent sale of such shares. No fractional shares of Enhance Common Stock
will be issued at Maturity as provided under "-- Fractional Shares" below.
Although it is U S WEST's current intention to deliver shares of Enhance Common
Stock at Maturity, U S WEST may at its option deliver cash, in lieu of
delivering such shares of Enhance Common Stock, except where such
S-11
<PAGE>
delivery would violate applicable state law. The amount of cash deliverable in
respect of each DECS shall be equal to the product of the number of shares of
Enhance Common Stock otherwise deliverable in respect of such DECS on the date
of Maturity multiplied by the Maturity Price. In the event U S WEST elects to
deliver cash in lieu of shares at Maturity, it will be obligated to deliver cash
to all holders of DECS except those holders with respect to whom it has
determined delivery of cash may violate applicable state law and as to whom it
will deliver shares of Enhance Common Stock. On or prior to the seventh Business
Day prior to , 1998, U S WEST will notify The Depository Trust
Company and the Trustee and publish a notice in a daily newspaper of national
circulation stating whether the principal amount of each DECS will be exchanged
for shares of Enhance Common Stock or cash; provided, however, that if U S WEST
intends to deliver cash, U S WEST shall have the right, as a condition to
delivery of such cash, to require certification as to the domicile and residency
of each beneficial holder of DECS. Notwithstanding the foregoing, (i) in the
case of certain dilution events, the Exchange Rate will be subject to adjustment
and (ii) in the case of certain reorganization events, the consideration
received by holders of DECS at Maturity will be cash or other property. See "--
Dilution Adjustments; Reorganization Events" below.
The "Maturity Price" is defined as the average Closing Price per share of
Enhance Common Stock on the 20 Trading Days immediately prior to (but not
including) the date of Maturity; provided, however, that if there are not 20
Trading Days for the Enhance Common Stock following the 60th calendar day
immediately prior to, but not including, the date of maturity, "Maturity Price"
shall be defined as the market value per share of Enhance Common Stock as of
Maturity as determined by a nationally recognized investment banking firm
retained for such purpose by U S WEST. The "Closing Price" of any security on
any date of determination means the closing sale price (or, if no closing price
is reported, the last reported sale price) of such security (regular way) on the
NYSE on such date or, if such security is not listed for trading on the NYSE on
any such date, as reported in the composite transactions for the principal
United States securities exchange on which such security is so listed, or if
such security is not so listed on a United States national or regional
securities exchange, as reported by the NASDAQ National Market, or, if such
security is not so reported, the last quoted bid price for such security in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization. A "Trading Day" is defined as a day on which the security the
Closing Price of which is being determined (A) is not suspended from trading on
any national or regional securities exchange or association or over-the-counter
market at the close of business and (B) has traded at least once on the national
or regional securities exchange or association or over-the-counter market that
is the primary market for the trading of such security. "Business Day" means any
day that is not a Saturday, a Sunday or a day on which the NYSE, banking
institutions or trust companies in The City of New York are authorized or
obligated by law or executive order to close.
For illustrative purposes only, the following chart shows the number of
shares of Enhance Common Stock or the amount of cash that a holder of DECS would
receive for each DECS at various Maturity Prices. The table assumes that there
will be no adjustments to the Exchange Rate described under "-- Dilution
Adjustments" below. There can be no assurance that the Maturity Price will be
within the range set forth below. Given the Initial Price of $ per DECS and
the Threshold Appreciation Price of $ , a DECS holder would receive at
Maturity the following number of shares of Enhance Common Stock or amount of
cash (if U S WEST elects to pay the DECS in cash):
<TABLE>
<CAPTION>
MATURITY PRICE OF NUMBER OF SHARES OF
ENHANCE ENHANCE
COMMON STOCK COMMON STOCK AMOUNT OF CASH
- ----------------- --------------------- ----------------
<S> <C> <C>
$ $
</TABLE>
Interest on the DECS will be payable, and delivery of Enhance Common Stock
(or, at the option of U S WEST, its cash equivalent) in exchange for the DECS at
Maturity will be made upon surrender of such DECS, at the office or agency of U
S WEST maintained for such purposes; provided, however, that payment of interest
may be made at the option of U S WEST by check mailed to the persons in whose
names the DECS are registered at the close of business on ,
,
S-12
<PAGE>
and . See "-- Book-Entry System." Initially such office
will be the principal corporate trust office of First Chicago Trust Company of
New York, 14 Wall Street, 8th Fl, New York, NY 10005.
The DECS will be transferable at any time or from time to time at the
aforementioned office. No service charge will be made to the holder for any such
transfer except for any tax or governmental charge incidental thereto.
The Indenture does not contain any restriction on the ability of U S WEST to
sell, pledge or convey all or any portion of the Enhance Common Stock held by it
or its subsidiaries, and no such shares of Enhance Common Stock will be pledged
or otherwise held in escrow for use at Maturity of the DECS. Consequently, in
the event of a bankruptcy, insolvency or liquidation of U S WEST or its
subsidiaries, the Enhance Common Stock, if any, owned by U S WEST or its
subsidiaries will be subject to the claims of the creditors of U S WEST or its
subsidiaries, respectively. In addition, as described herein, U S WEST will have
the option, exercisable in its sole discretion, to satisfy its obligations
pursuant to the mandatory exchange for the principal amount of each DECS at
Maturity by delivering to holders of the DECS either the number of shares of
Enhance Common Stock specified above or cash in an amount equal to the product
of such number of shares multiplied by the Maturity Price. In the event of such
a sale, pledge or conveyance, a holder of the DECS may be more likely to receive
cash in lieu of Enhance Common Stock. As a result, there can be no assurance
that U S WEST will elect at Maturity to deliver Enhance Common Stock or, if it
so elects, that it will use all or any portion of its current holdings of
Enhance Common Stock to make such delivery. Consequently, holders of the DECS
will not be entitled to any rights with respect to Enhance Common Stock
(including, without limitation, voting rights and rights to receive any
dividends or other distributions in respect thereof) until such time, if any, as
U S WEST shall have delivered shares of Enhance Common Stock to holders of the
DECS at Maturity thereof.
DILUTION ADJUSTMENTS; REORGANIZATION EVENTS
The Exchange Rate is subject to adjustment if Enhance shall (i) pay a stock
dividend or make a distribution with respect to Enhance Common Stock in shares
of such stock, (ii) subdivide or split its outstanding shares of Enhance Common
Stock, (iii) combine its outstanding shares of Enhance Common Stock into a
smaller number of shares, (iv) issue by reclassification (other than a
reclassification upon a Reorganization Event, described in the following
paragraph) of its shares of Enhance Common Stock any shares of common stock of
Enhance, (v) issue rights or warrants to all holders of Enhance Common Stock
entitling them to subscribe for or purchase shares of Enhance Common Stock at a
price per share less than the market price of the Enhance Common Stock (other
than rights to purchase Enhance Common Stock pursuant to a plan for the
reinvestment of dividends or interest) or (vi) pay a dividend or make a
distribution to all holders of Enhance Common Stock of evidences of its
indebtedness or other assets (excluding any dividends or distributions referred
to in clause (i) above, any shares of common stock issued pursuant to a
reclassification referred to in clause (iv) above or any cash dividends other
than any Extraordinary Cash Dividends (as defined below)) or issue to all
holders of Enhance Common Stock rights or warrants to subscribe for or purchase
any of its securities (other than those referred to in clause (v) above). In the
case of the events referred to in clauses (i), (ii), (iii) and (iv) above, the
Exchange Rate shall be adjusted by adjusting each of the Share Components of the
Exchange Rate in effect immediately prior to such event so that a holder of any
DECS shall be entitled to receive, upon mandatory exchange of the principal
amount of such DECS at Maturity pursuant to either Share Component of the
Exchange Rate, the number of shares of Enhance Common Stock (or, in the case of
a reclassification referred to in clause (iv) above, the number of shares of
other common stock of Enhance issued pursuant thereto) which such holder of such
DECS would have owned or been entitled to receive immediately following such
event had such DECS been exchanged pursuant to either Share Component of the
Exchange Rate immediately prior to such event or any record date with respect
thereto. In the case of the event referred to in clause (v) above, the Exchange
Rate shall be adjusted by multiplying each of the Share Components of the
Exchange Rate in effect immediately prior to the date of issuance of the rights
or warrants referred to in clause (v) above, by a fraction, of which the
numerator shall be the number of shares of Enhance Common Stock outstanding on
the date of issuance of such
S-13
<PAGE>
rights or warrants, immediately prior to such issuance, plus the number of
additional shares of Enhance Common Stock offered for subscription or purchase
pursuant to such rights or warrants, and of which the denominator shall be the
number of shares of Enhance Common Stock outstanding on the date of issuance of
such rights or warrants, immediately prior to such issuance, plus the number of
additional shares of Enhance Common Stock which the aggregate offering price of
the total number of shares of Enhance Common Stock so offered for subscription
or purchase pursuant to such rights or warrants would purchase at the market
price (determined as the average Closing Price per share of Enhance Common Stock
on the 20 Trading Days immediately prior to the date such rights or warrants are
issued; provided, however, that if there are not 20 Trading Days for the Enhance
Common Stock occurring later than the 60th calendar day prior to, but not
including, such date, such current market price shall be determined as the
market value per share of Enhance Common Stock as of such date as determined by
a nationally recognized investment banking firm retained for such purpose by U S
WEST), which shall be determined by multiplying such total number of shares by
the exercise price of such rights or warrants and dividing the product so
obtained by such market price. To the extent that shares of Enhance Common Stock
are not delivered after the expiration of such rights or warrants, the Exchange
Rate shall be readjusted to the Exchange Rate which would then be in effect had
such adjustments for the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Enhance Common Stock actually
delivered. In the case of the event referred to in clause (vi) above, the
Exchange Rate shall be adjusted by multiplying each of the Share Components of
the Exchange Rate in effect on the record date with respect to such dividend or
distribution referred to in clause (vi) above, by a fraction of which the
numerator shall be the market price per share of the Enhance Common Stock on the
record date for the determination of stockholders entitled to receive the
dividend or distribution referred to in clause (vi) above (such market price
being determined as the average Closing Price per share of Enhance Common Stock
on the 20 Trading Days immediately prior to such record date; provided, however,
that if there are not 20 Trading Days for the Enhance Common Stock occurring
later than the 60th calendar day prior to, but not including, such record date,
such market price shall be determined as the market value per share of Enhance
Common Stock as of such record date as determined by a nationally recognized
investment banking firm retained for such purpose by U S WEST), and of which the
denominator shall be such market price per share of Enhance Common Stock less
the fair market value (as determined by the Board of Directors of U S WEST,
whose determination shall be conclusive, and described in a resolution adopted
with respect thereto) as of such record date of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights or
warrants applicable to one share of Enhance Common Stock. An "Extraordinary Cash
Dividend" means, with respect to any one-year period, all cash dividends on the
Enhance Common Stock during such period to the extent such dividends exceed on a
per share basis 10% of the average Closing Prices of the Enhance Common Stock
over such period (less any such dividends for which a prior adjustment to the
Exchange Rate was previously made). All adjustments to the Exchange Rate will be
calculated to the nearest 1/10,000th of a share of Enhance Common Stock (or, if
there is not a nearest 1/10,000th of a share, to the next lower 1/10,000th of a
share). No adjustment in the Exchange Rate shall be required unless such
adjustment would require an increase or decrease of at least one percent
therein; provided, however, that any adjustments which by reason of the
foregoing are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. If an adjustment is made to the Exchange
Rate pursuant to clauses (i), (ii), (iii), (iv), (v) or (vi) above, an
adjustment shall also be made to the Maturity Price solely to determine which of
clauses (a), (b) or (c) of the Exchange Rate definition will apply at Maturity.
The required adjustment to the Maturity Price shall be made at Maturity by
multiplying the Maturity Price by the number or fraction determined pursuant to
the Exchange Rate adjustment procedure described above. In the case of the
reclassification of any shares of Enhance Common Stock into any shares of common
stock of Enhance other than Enhance Common Stock, such shares of common stock
shall be deemed shares of Enhance Common Stock solely to determine the Maturity
Price and to apply the Exchange Rate at Maturity. Each such adjustment to the
Exchange Rate and the Maturity Price shall be made successively.
S-14
<PAGE>
In the event of (A) any consolidation or merger of Enhance, or any surviving
entity or subsequent surviving entity of Enhance (an "Enhance Successor"), with
or into another entity (other than a merger or consolidation in which Enhance is
the continuing corporation and in which the Enhance Common Stock outstanding
immediately prior to the merger or consolidation is not exchanged for cash,
securities or other property of Enhance or another corporation), (B) any sale,
transfer, lease or conveyance to another corporation of the property of Enhance
or any Enhance Successor as an entirety or substantially as an entirety, (C) any
statutory exchange of securities of Enhance or any Enhance Successor with
another corporation (other than in connection with a merger or acquisition) or
(D) any liquidation, dissolution or winding up of Enhance or any Enhance
Successor (any such event, a "Reorganization Event"), each holder of DECS will
receive at Maturity, in lieu of shares of Enhance Common Stock, as described
above, cash in an amount equal to (a) if the Transaction Value (as defined
below) is greater than or equal to the Threshold Appreciation Price,
multiplied by the Transaction Value, (b) if the Transaction Value is less than
the Threshold Appreciation Price but greater than the Initial Price, the Initial
Price and (c) if the Transaction Value is less than or equal to the Initial
Price, the Transaction Value. "Transaction Value" means (i) for any cash
received in any such Reorganization Event, the amount of cash received per share
of Enhance Common Stock, (ii) for any property other than cash or securities
received in any such Reorganization Event, an amount equal to the market value
at Maturity of such property received per share of Enhance Common Stock as
determined by a nationally recognized independent investment banking firm
retained for this purpose by U S WEST and (iii) for any securities received in
any such Reorganization Event, an amount equal to the average Closing Price per
share of such securities on the 20 Trading Days immediately prior to Maturity
multiplied by the number of such securities received for each share of Enhance
Common Stock; provided, however, that in the case of clause (iii), if there are
not 20 Trading Days for such securities occurring later than the 60th calendar
day immediately prior to, but not including, the date of Maturity, Transaction
Value means the market value per share of such securities as of Maturity as
determined by a nationally recognized independent investment banking firm
retained for such purpose by U S WEST. Notwithstanding the foregoing, in lieu of
delivering cash as provided above, U S WEST may at its option deliver an
equivalent value of securities or other property received in such Reorganization
Event, determined in accordance with clause (ii) or (iii) above, as applicable.
If U S WEST elects to deliver securities or other property, holders of the DECS
will be responsible for the payment of any and all brokerage and other
transaction costs upon the sale of such securities or other property. The kind
and amount of securities into which the DECS shall be exchangeable after
consummation of such transaction shall be subject to adjustment as described in
the immediately preceding paragraph following the date of consummation of such
transaction.
No adjustments will be made for certain other events, such as offerings of
Enhance Common Stock by Enhance for cash or in connection with acquisitions.
U S WEST is required, within ten Business Days following the occurrence of
an event that requires an adjustment to the Exchange Rate or the occurrence of a
Reorganization Event (or, in either case, if U S WEST is not aware of such
occurrence, as soon as practicable after becoming so aware), to provide written
notice to the Trustee and to each holder of DECS of the occurrence of such event
and a statement in reasonable detail setting forth the method by which the
adjustment to the Exchange Rate or change in the consideration to be received by
holders of DECS following the Reorganization Event was determined and setting
forth the revised Exchange Rate or consideration, as the case may be; provided,
however, that, in respect of any adjustment to the Maturity Price, such notice
will only disclose the factor by which the Maturity Price is to be multiplied in
order to determine which clause of the Exchange Rate definition will apply at
Maturity.
FRACTIONAL SHARES
No fractional shares of Enhance Common Stock will be issued if U S WEST
exchanges the DECS for shares of Enhance Common Stock. If more than one DECS
shall be surrendered for exchange at one time by the same holder, the number of
full shares of Enhance Common Stock which shall be delivered upon exchange, in
whole or in part, as the case may be, shall be computed on the basis of the
aggregate
S-15
<PAGE>
number of DECS so surrendered at maturity. In lieu of any fractional share
otherwise issuable in respect of all DECS of any holder which are exchanged at
Maturity, such holder shall be entitled to receive an amount in cash equal to
the value of such fractional share at the Maturity Price.
REDEMPTION
The DECS are not subject to redemption prior to Maturity and do not contain
sinking fund or other mandatory redemption provisions. The DECS are not subject
to payment prior to the date of Maturity at the option of the holder.
BOOK-ENTRY SYSTEM
It is expected that the DECS will be issued in the form of one or more
global securities (the "Global Securities") deposited with The Depository Trust
Company (the "Depositary") and registered in the name of a nominee of the
Depositary.
The Depositary has advised U S WEST and the Underwriter as follows: The
Depositary is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. The
Depositary was created to hold securities of persons who have accounts with the
Depositary ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the Depositary's book-entry system also is
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Upon the issuance of a Global Security, the Depositary or its nominee will
credit the respective DECS represented by such Global Security to the accounts
of participants. The accounts to be credited shall be designated by the
Underwriter. Ownership of beneficial interests in the Global Securities will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests by participants in such Global Securities will
be shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depositary or its nominee for such Global
Securities. Ownership of beneficial interests in such Global Securities by
persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the DECS for all
purposes under the Indenture. Except as set forth below, owners of beneficial
interests in such Global Securities will not be entitled to have the DECS
registered in their names, will not receive or be entitled to receive physical
delivery of the DECS in definitive form and will not be considered the owners or
holders thereof under the Indenture.
Payment of principal of and any interest on the DECS registered in the name
of or held by the Depositary or its nominee will be made to the Depositary or
its nominee, as the case may be, as the registered owner or the holder of the
Global Security. None of U S WEST, the Trustee, any Paying Agent or any
securities registrar for the DECS will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in a Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
U S WEST expects that the Depositary, upon receipt of any payment of
principal or interest in respect of a permanent Global Security, will credit
immediately participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of such Global
S-16
<PAGE>
Security as shown on the records of the Depositary. U S WEST also expects that
payments by participants to owners of beneficial interests in such Global
Security held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name", and
will be the responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depositary
to a nominee or a successor of the Depositary. If the Depositary is at any time
unwilling or unable to continue as depositary and a successor depositary is not
appointed by U S WEST within ninety days, U S WEST will issue DECS in definitive
registered form in exchange for the Global Security representing such DECS. In
addition, U S WEST may at any time and in its sole discretion determine not to
have any DECS represented by one or more Global Securities and, in such event,
will issue DECS in definitive form in exchange for all of the Global Securities
representing the DECS. Further, if U S WEST so specifies with respect to the
DECS, an owner of a beneficial interest in a Global Security representing DECS
may, on terms acceptable to U S WEST and the Depositary for such Global
Security, receive DECS in definitive form. In any such instance, an owner of a
beneficial interest in a Global Security will be entitled to physical delivery
in definitive form of DECS represented by such Global Security equal in number
to that represented by such beneficial interest and to have such DECS registered
in its name.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon the advice of U S WEST's counsel,
Weil, Gotshal & Manges, as to certain of the material U.S. federal income tax
consequences that may be relevant to a citizen or resident of the United States,
a corporation, partnership or other entity created or organized under the laws
of the United States and an estate or trust the income of which is subject to
U.S. federal income taxation regardless of its source (any of the foregoing, a
"U.S. person") who is the beneficial owner of a DECS (a "U.S. Holder"). All
references to "holders" (including U.S. Holders) are to beneficial owners of the
DECS. This summary is based on U.S. federal income tax laws, regulations,
rulings and decisions in effect as of the date of this Prospectus Supplement (or
in the case of certain Treasury regulations now in proposed form), all of which
are subject to change at any time (possibly with retroactive effect). As the law
is technical and complex, the discussion below necessarily represents only a
general summary.
This summary addresses the U.S. federal income tax consequences to holders
who are initial holders of the DECS and who will hold the DECS and, if
applicable, Enhance Common Stock as capital assets. This summary does not
address all aspects of federal income taxation that may be relevant to a
particular holder in light of his or its individual investment circumstances or
to certain types of holders subject to special treatment under the U.S. federal
income tax laws, such as dealers in securities or foreign currency, financial
institutions, insurance companies, tax-exempt organizations and taxpayers
holding the DECS as part of a "straddle", "hedge", "conversion transaction",
"synthetic security", or other integrated investment. Moreover, the effect of
any applicable state, local or foreign tax laws is not discussed.
No statutory, judicial or administrative authority directly addresses the
characterization of the DECS or instruments similar to the DECS for U.S. federal
income tax purposes. As a result, significant aspects of the U.S. federal income
tax consequences of an investment in the DECS are not certain. No ruling is
being requested from the Internal Revenue Service (the "IRS") with respect to
the DECS and no assurance can be given that the IRS will agree with the
conclusions expressed herein. ACCORDINGLY, A PROSPECTIVE INVESTOR (INCLUDING A
TAX-EXEMPT INVESTOR) IN THE DECS SHOULD CONSULT ITS TAX ADVISOR IN DETERMINING
THE TAX CONSEQUENCES OF AN INVESTMENT IN THE DECS, INCLUDING THE APPLICATION OF
STATE, LOCAL OR OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
OTHER TAX LAWS.
Pursuant to the terms of the Indenture, U S WEST and all holders of the DECS
will be obligated to treat the DECS as a unit (the "Unit") consisting of (i) an
exchange note ("Exchange Note") which is a debt obligation with a fixed
principal amount unconditionally payable at Maturity equal to the principal
S-17
<PAGE>
amount of the DECS, bearing interest at the stated interest rate of the DECS,
and (ii) a forward purchase contract (the "Purchase Contract") pursuant to which
the holder agrees to use the principal payment due on the Exchange Note to
purchase at Maturity the Enhance Common Stock which the holder is entitled to
receive at that time (subject to U S WEST's right to deliver cash in lieu of the
Enhance Common Stock). The Indenture will require that a U.S. Holder include
currently in income payments denominated as interest that are made with respect
to the DECS, in accordance with such holder's method of accounting.
Pursuant to the agreement to treat the DECS as a Unit, a holder will be
required to allocate the purchase price of the DECS between the two components
of the Unit (the Exchange Note and the Purchase Contract) on the basis of their
relative fair market values. The purchase price so allocated will generally
constitute the tax basis for each component. Pursuant to the terms of the
Indenture, U S WEST and the holders agree to allocate the entire purchase price
of the DECS to the Exchange Note. Upon the sale or other disposition of a DECS,
a U.S. Holder generally will be required to allocate the amount realized between
the two components of the DECS on the basis of their then relative fair market
values. A U.S. Holder will recognize gain or loss with respect to each component
equal to the difference between the amount realized on the sale or other
disposition for each such component and the U.S. Holder's tax basis in such
component. Such gain or loss generally will be long-term capital gain or loss if
the U.S. Holder has held the DECS for more than one year at the time of
disposition.
At maturity, pursuant to the agreement to treat the DECS as a Unit, on the
repayment of the Exchange Note, a U.S. Holder will recognize long-term capital
gain or loss equal to any differences between its tax basis and the principal
amount of the Exchange Note. (In general, a holder who purchases the DECS for
the Initial Price and therefore has allocated all of its purchase price to the
Exchange Note should not have gain or loss on repayment because its tax basis
will equal the principal amount.) If U S WEST delivers Enhance Common Stock, a
U.S. Holder will recognize no additional gain or loss on the exchange, pursuant
to the Purchase Contract, of the principal payment due on the Exchange Note for
the Enhance Common Stock. However, a U.S. Holder will recognize additional gain
or loss (which will be short-term capital gain or loss rather than long-term
capital gain or loss) with respect to cash received in lieu of fractional
shares. The amount of such gain or loss recognized by a U.S. Holder will be
equal to the difference between the cash received and the portion of the
principal amount of the Exchange Note allocable to fractional shares. A U.S.
Holder will have a tax basis in such stock equal to the principal amount of the
Exchange Note less the amount of the portion of the principal amount of the
Exchange Note allocable to the fractional shares and will realize capital gain
or loss upon the sale or disposition of such stock. Alternatively, at Maturity,
if U S WEST pays the DECS in cash, a U.S. Holder will have capital gain or loss
equal to any difference between the principal amount of the Exchange Note and
the amount of cash received from U S WEST.
Due to the absence of authority as to the proper characterization of the
DECS, no assurance can be given that the IRS will accept or that a court will
uphold the characterization and tax treatment described above. Proposed Treasury
regulations issued in 1994 with respect to "contingent payment" debt instruments
(the "Proposed Regulations") would provide for a different tax result under some
circumstances for instruments with characteristics similar to the DECS, but the
Proposed Regulations would be effective only for instruments issued 60 days or
more after publication as final regulations. Under the Proposed Regulations, the
amount of interest included in a holder's taxable income for any year would
generally be determined by projecting the amounts of contingent payments and the
yield on the instrument. Taxable interest income would be measured with
reference to the projected yield, which might be less than or greater than the
stated interest rate under the instrument. In the event that the amount of an
actual contingent payment differed from the projected amount of that payment,
the difference would generally increase or reduce taxable interest income, or
create a loss. Because of their prospective effective date, the Proposed
Regulations, if finalized in their current form, would not apply to the DECS. In
addition, it is unclear whether the IRS would view a single instrument that has
"principal" that is entirely contingent as debt for U.S. federal income tax
purposes.
S-18
<PAGE>
Even in the absence of regulations applicable to the DECS, the DECS may be
characterized in a manner that results in tax consequences different from those
reflected in the agreement and described above, including treating the DECS as a
single instrument or treating the Purchase Contract element of the DECS as
itself the combination of a forward contract and one or more options. Under
alternative characterizations of the DECS, it is possible, for example, that (i)
gain may be treated as ordinary income, instead of capital gain, (ii) a U.S.
Holder may be taxable upon the receipt of Enhance Common Stock with a value in
excess of the principal amount of the Exchange Note, rather than upon the sale
of such stock, or (iii) all or part of the interest income on the Exchange Note
may be treated as nontaxable, increasing the gain (or decreasing the loss) at
Maturity or disposition of the DECS (or disposition of the Enhance Common
Stock).
The Revenue Reconciliation Act of 1993 added Section 1258 to the Internal
Revenue Code, which may require certain holders of the DECS who have entered
into hedging transactions or offsetting positions with respect to the DECS to
recognize ordinary income rather than capital gain upon the disposition of the
DECS. In addition, if the DECS is hedged, or is itself a hedge, the timing of
income for the DECS may be affected. Holders should consult their tax advisors
regarding the applicability of this legislation to an investment in the DECS.
NON-UNITED STATES PERSONS
In the case of a holder of the DECS that is not a U.S. person, payments made
with respect to the DECS should not be subject to U.S. withholding tax; PROVIDED
that such holder complies with applicable certification requirements. Any
capital gain realized upon the sale or other disposition of the DECS by a holder
that is not a U.S. person will generally not be subject to U.S. federal income
tax if (i) such gain is not effectively connected with a U.S. trade or business
of such holder and (ii) in the case of an individual, such individual is not
present in the United States for 183 days or more in the taxable year of the
sale or other disposition or the gain is not attributable to a fixed place of
business maintained by such individual in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A holder of the DECS may be subject to information reporting and to backup
withholding at a rate of 31 percent of certain amounts paid to the holder unless
such holder provides proof of an applicable exemption or a correct taxpayer
identification number, and otherwise complies with applicable requirements of
the backup withholding rules. Any amounts withheld under the backup withholding
rules are not an additional tax and may be refunded or credited against the U.S.
Holder's U.S. federal income tax liability, provided the required information is
furnished to the IRS.
S-19
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among U S WEST, Enhance and Salomon Brothers Inc,
U S WEST has agreed to sell to the Underwriter, and the Underwriter has agreed
to purchase, the number of DECS set forth below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER DECS
- --------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Brothers Inc............................................................. 4,900,000
</TABLE>
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, that the obligations of the Underwriter
are subject to certain conditions precedent and that the Underwriter will be
obligated to purchase all of the DECS offered hereby if any of the DECS are
purchased.
U S WEST has been advised by the Underwriter that it proposes to offer the
DECS directly to the public initially at the public offering price set forth on
the cover of this Prospectus Supplement and to certain dealers at such price
less a concession not in excess of $ per DECS. The Underwriter may allow, and
such dealers may reallow, a concession not in excess of $ per DECS to other
dealers. After the initial public offering, such public offering price and such
concession and reallowance may be changed.
U S WEST and Enhance have agreed not to offer for sale, sell or contract to
sell, or otherwise dispose of, or announce the offering of, without the prior
written consent of the Underwriter, any shares of Enhance Common Stock or any
securities convertible into or exchangeable for, or warrants to acquire, Enhance
Common Stock for a period of 90 days after the date of this Prospectus
Supplement; provided, however, that such restriction shall not affect the
ability of (i) U S WEST, Enhance or their respective subsidiaries to take any
such actions in connection with the offering of the DECS made hereby or any
exchange at Maturity pursuant to the terms of the DECS or (ii) Enhance to take
any such actions in connection with any employee stock option plan, stock
ownership plan or dividend reinvestment plan of Enhance in effect at the date of
this Prospectus Supplement.
U S WEST has granted to the Underwriter an option, exercisable for the
30-day period after the date of this Prospectus Supplement, to purchase up to an
additional 530,800 DECS from U S WEST, at the same price per DECS as the initial
DECS to be purchased by the Underwriter. The Underwriter may exercise such
option only for the purpose of covering over-allotments, if any, incurred in
connection with the sale of DECS offered hereby.
The DECS will be a new issue of securities with no established trading
market. The DECS will not be listed or traded on any securities exchange or
trading market. The Underwriter intends to make a market in the DECS, subject to
applicable laws and regulations. However, the Underwriter is not obligated to do
so and any such market-making may be discontinued at any time at the sole
discretion of the Underwriter without notice. Accordingly, no assurance can be
given as to the liquidity of such market.
The Underwriting Agreement provides that U S WEST and Enhance will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriter may be required to
make in respect thereof.
The Underwriter has from time to time performed various investment banking
and financial advisory services for U S WEST, Enhance and their affiliates, for
which customary compensation has been received.
LEGAL OPINIONS
The validity of the DECS will be passed upon for U S WEST by Weil, Gotshal &
Manges and for the Underwriter by Cleary, Gottlieb, Steen & Hamilton. Certain
tax matters with respect to the DECS also will be passed upon by Weil, Gotshal &
Manges.
S-20
<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.
<PAGE>
Subject to Completion
December 4, 1995
[LOGO]
PROSPECTUS
$500,000,000
U S WEST, INC.
DEBT SECURITIES
U S WEST, Inc. ("U S WEST"), a Delaware corporation, from time to time may offer
its notes, debentures, or other debt securities (the "Debt Securities"). The
Debt Securities offered pursuant to this Prospectus may be issued in one or more
series and will be limited to $500,000,000 aggregate public offering price.
Certain specific terms of the particular series of Debt Securities will be set
forth in a supplement to this Prospectus (the "Prospectus Supplement") which
will be delivered together with this Prospectus, including, where applicable,
the specific designation, aggregate principal amount, denomination, maturity,
premium, if any, the rate (which may be fixed or variable), time and method of
calculating payment of interest, if any, the place or places where principal of,
premium, if any, and interest, if any, on such Debt Securities will be payable,
optional or mandatory redemption and sinking fund provisions, if any,
conversion, exercise or exchange provisions, if any, and any other specific
terms in respect of the offering and sale of the Debt Securities.
The Debt Securities may be offered and sold through one or more underwriters,
directly by U S WEST, or through dealers or agents. The names of any
underwriters, dealers or agents involved in the distribution of the Debt
Securities in respect of which this Prospectus is being delivered, and any
applicable discounts, commissions or allowances, will be set forth in the
applicable Prospectus Supplement. See "Plan of Distribution" for possible
indemnification arrangements for any underwriters, dealers or agents. Unless
otherwise provided in the Prospectus Supplement relating thereto, the Debt
Securities will not be listed on any securities exchange.
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.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1995.
<PAGE>
The Debt Securities will be sold directly, through agents, underwriters or
dealers as designated from time to time, or through a combination of such
methods. If agents or any dealers or underwriters are involved in the sale of
the Debt Securities in respect of which this Prospectus is being delivered, the
names of such agents, dealers or underwriters and any applicable commissions or
discounts will be set forth in or may be calculated from the Prospectus
Supplement with respect to such Debt Securities.
No dealer, salesperson or any other individual has been authorized by U S
WEST to give any information or to make any representation other than those
contained or incorporated by reference in this Prospectus or any accompanying
Prospectus Supplement and, if given or made, such information or representation
must not be relied upon as having been authorized. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of U S WEST since the date hereof.
------------------------
U S WEST was incorporated in 1995 under the laws of the State of Delaware in
order to effect the Recapitalization Plan described herein under "Recent
Development". As part of the Recapitalization Plan, U S WEST changed its state
of incorporation from Colorado to Delaware on November 1, 1995 through the
merger of U S WEST, Inc., a Colorado corporation and U S WEST's predecessor ("U
S WEST Colorado"), with and into U S WEST, with U S WEST continuing as the
surviving corporation. As used herein, unless the context otherwise requires,
references to "U S WEST" shall refer to U S WEST and U S WEST Colorado, its
Colorado predecessor.
AVAILABLE INFORMATION
U S WEST is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information concerning U S WEST can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60601. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements and
other information concerning U S WEST may also be inspected at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005 and
the Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104,
the securities exchanges on which shares of U S WEST's common stock are listed.
U S WEST has filed with the Commission a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") relating to the Debt Securities under the Securities
Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement, which is available for inspection and copying as set
forth above. Statements contained in this Prospectus or a Prospectus Supplement
as to the contents of any contract or other document which is filed as an
exhibit to the Registration Statement are not necessarily complete, and each
such statement is qualified in its entirety by reference to the full text of
such contract or document.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed by U S WEST with the
Commission (File No. 1-8611) are incorporated herein by reference: (i) Annual
Report on Form 10-K for the year ended December 31, 1994, (ii) Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September
30, 1995 and (iii) Current Reports on Form 8-K dated January 19, 1995, April 10,
1995, April 18, 1995, May 23, 1995 (as amended by Forms 8-K/A filed on July 12,
1995 and August 24, 1995), June 20, 1995, July 28, 1995, September 22, 1995,
September 28, 1995, October 6, 1995, October 27, 1995 and November 2, 1995.
All documents filed by U S WEST pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date any such document is filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in a Prospectus Supplement (or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein or therein) modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
U S WEST WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A PROSPECTUS IS
DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF
THE DOCUMENTS WHICH ARE INCORPORATED BY REFERENCE HEREIN, OTHER THAN EXHIBITS TO
SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
INTO SUCH DOCUMENTS). REQUESTS SHOULD BE DIRECTED TO INVESTOR RELATIONS, U S
WEST, INC., 7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111 (TELEPHONE NUMBER
(303) 793-6500).
------------------------
3
<PAGE>
U S WEST, INC.
U S WEST is a diversified global communications company engaged in the
telecommunications, cable, wireless communications and multimedia content and
services businesses. U S WEST conducts its businesses through two groups: the U
S WEST Communications Group (the "Communications Group") and the U S WEST Media
Group (the "Media Group"). U S WEST has its principal executive offices at 7800
East Orchard Road, Englewood, Colorado 80111 (telephone number (303) 793-6500).
The Communications Group provides telecommunications services to more than
25 million residential and business customers in the states of Arizona,
Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota,
Oregon, South Dakota, Utah, Washington and Wyoming (collectively, the
"Communications Group Region"). Such services include local telephone services,
exchange access services and certain long distance services, as well as various
new services, including Caller ID, voice messaging and high-speed data
networking services. The Communications Group also provides customer premise
equipment and certain communications services to business customers and
governmental agencies both inside and outside the Communications Group Region.
The Media Group is comprised of (i) cable and telecommunications network and
businesses outside the Communications Group Region and internationally, (ii)
domestic and international wireless communications network businesses and (iii)
domestic and international multimedia content and services businesses. The Media
Group's cable and telecommunications businesses include domestic cable and
telecommunications businesses and investments outside of the Communications
Group Region, including U S WEST's cable systems in the Atlanta, Georgia
metropolitan area and its interest in Time Warner Entertainment Company, L.P.,
and international cable and telecommunications investments, including U S WEST's
interest in TeleWest plc, the largest provider of combined cable and
telecommunications services in the United Kingdom. The Media Group provides
domestic wireless communications products and services, including cellular
services, to a rapidly growing customer base. U S WEST and AirTouch
Communications, Inc. have entered into Phase I of a cellular joint venture
pursuant to which their domestic cellular properties will receive centralized
services from a Wireless Management Company on a contract basis. The Media Group
also provides wireless communications services internationally through Mercury
One-2-One, the world's first Personal Communications Service, in the United
Kingdom. The Media Group's multimedia content and services businesses develop
and package content and information services, including telephone directories,
database marketing and other interactive services in domestic and international
markets.
RECENT DEVELOPMENT
On November 1, 1995, U S WEST created two classes of common stock that are
intended to reflect separately the performance of the Communications Group and
the Media Group and changed the state of incorporation of U S WEST from Colorado
to Delaware (the "Recapitalization Plan"). The Recapitalization Plan was
effected in accordance with the terms of an Agreement and Plan of Merger, dated
as of August 17, 1995, between U S WEST Colorado and U S WEST, pursuant to which
(i) U S WEST Colorado was merged with and into U S WEST, with U S WEST
continuing as the surviving corporation and (ii) each outstanding share of
Common Stock, without par value, of U S WEST was converted into one share of U S
WEST Communications Group Common Stock, par value $.01 per share, of U S WEST,
which is intended to reflect separately the performance of the Communications
Group, and one share of U S WEST Media Group Common Stock, par value $.01 per
share, of U S WEST, which is intended to reflect separately the performance of
the Media Group.
The Recapitalization Plan was approved by U S WEST Colorado's shareholders
at a special meeting held on October 31, 1995. Implementation of the
Recapitalization Plan has not resulted in the transfer of any assets from U S
WEST or any of its subsidiaries or altered the legal nature of U S WEST's
obligations to its creditors, including its obligations under the Debt
Securities. Creditors of U S WEST, including the holders of the Debt Securities,
will continue to benefit from the cash flow of the subsidiaries comprising both
the Communications Group and the Media Group, subject to the satisfaction of
obligations by such subsidiaries. The Recapitalization Plan is not expected to
have any adverse impact on U S WEST's credit rating.
4
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges from
continuing operations of U S WEST for the periods indicated. For the purpose of
calculating this ratio, earnings consist of income before income taxes and fixed
charges. Fixed charges include interest on indebtedness (excluding discontinued
operations) and the portion of rentals representative of the interest factor.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
- ----------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
4.07 3.11 3.85 2.38 4.85 4.88 4.02
</TABLE>
USE OF PROCEEDS
Unless otherwise specified in the Prospectus Supplement, U S WEST will apply
the net proceeds from the sale of the Debt Securities to its general funds to be
used for general corporate purposes, including the reduction of short-term and
long-term borrowings and other business opportunities.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions of
the Debt Securities to which any Prospectus Supplement may relate. The
particular terms and provisions of the series of Debt Securities offered by a
Prospectus Supplement, and the extent to which such general terms and provisions
described below may apply thereto, will be described in the Prospectus
Supplement relating to such series of Debt Securities.
The Debt Securities are to be issued under an Indenture (the "Indenture"),
dated as of November 13, 1995, between U S WEST and The First National Bank of
Chicago, as Trustee (the "Trustee"). The following summaries of certain
provisions of the Debt Securities and the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all provisions of the Debt Securities and the Indenture, including the
definitions therein of certain terms. Wherever particular sections or defined
terms of the Indenture are referred to, it is intended that such sections or
defined terms shall be incorporated herein by reference.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that can be issued thereunder and debt securities may be issued
thereunder up to the aggregate principal amount which may be authorized from
time to time by, or pursuant to a resolution of, U S WEST's Board of Directors
or by a supplemental indenture. Reference is made to the Prospectus Supplement
for the following terms of the particular series of Debt Securities being
offered hereby: (i) the title of the Debt Securities of the series; (ii) any
limit upon the aggregate principal amount of the Debt Securities of the series;
(iii) the date or dates on which the principal of the Debt Securities of the
series will mature; (iv) the rate or rates (or manner of calculations thereof),
if any, at which the Debt Securities of the series will bear interest, the date
or dates from which any such interest will accrue and on which such interest
will be payable, and, with respect to Debt Securities of the series in
registered form, the record date for the interest payable on any interest
payment date; (v) the place or places where the principal of and interest, if
any, on the Debt Securities of the series will be payable; (vi) any redemption
or sinking fund provisions; (vii) if other than the entire principal amount
thereof, the portion of the principal amount of Debt Securities of the series
which will be payable upon declaration of acceleration of the maturity thereof;
(viii) whether the Debt Securities of the series will be issuable in registered
or bearer form or both, any restrictions applicable to the offer, sale or
delivery of Debt Securities in bearer form ("bearer Debt Securities"), and
whether, and the terms upon which, bearer Debt Securities will be exchangeable
for Debt Securities in registered form ("registered Debt Securities") and vice
versa; (ix) whether and under what circumstances U S WEST will pay additional
amounts on the Debt Securities of the series held by a person who is not a U.S.
person (as
5
<PAGE>
defined below) in respect of taxes or similar charges withheld or deducted and,
if so, whether U S WEST will have the option to redeem such Debt Securities
rather than pay such additional amounts; (x) whether the Debt Securities will be
denominated or provide for payment in United States dollars or a foreign
currency or units of two or more such foreign currencies; (xi) whether the Debt
Securities of the series will be convertible into or exchangeable or exercisable
for shares of a class of capital stock of U S WEST or any other corporation and
the terms and conditions relating thereto; and (xii) any additional provisions
or other special terms not inconsistent with the provisions of the Indenture,
including any terms which may be required by or advisable under United States
laws or regulations or advisable in connection with the marketing of Debt
Securities of such series. (Sections 2.01 and 2.02.) To the extent not described
herein, principal, premium, if any, and interest will be payable, and the Debt
Securities of a particular series will be transferable, in the manner described
in the Prospectus Supplement relating to such series.
Each series of Debt Securities will constitute unsecured and unsubordinated
indebtedness of U S WEST and will rank on a parity with U S WEST's other
indebtedness. However, since U S WEST is a holding company, the right of U S
WEST and, hence, the right of creditors of U S WEST (including the holders of
the Debt Securities) to participate in any distribution of the assets of any
subsidiaries of U S WEST, whether upon liquidation, reorganization, or
otherwise, is subject to prior claims of creditors of the subsidiary, except to
the extent that claims of U S WEST itself as a creditor of a subsidiary may be
recognized.
Debt Securities of any series may be issued as registered Debt Securities or
bearer Debt Securities or both as specified in the terms of the series. Unless
otherwise indicated in the Prospectus Supplement, Debt Securities will be issued
in denominations of $1,000 and integral multiples thereof, and bearer Debt
Securities will not be offered, sold, resold or delivered to U.S. persons in
connection with their original issuance. For purposes of this Prospectus, "U.S.
person" means a citizen, national or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States, or any political subdivision thereof, or an estate or
trust which is subject to United States federal income taxation regardless of
its source of income.
To the extent set forth in the Prospectus Supplement, except in special
circumstances set forth in the Indenture, interest on bearer Debt Securities
will be payable only against presentation and surrender of the coupons for the
interest installments evidenced thereby as they mature at a paying agency of U S
WEST located outside of the United States and its possessions. (Section
2.05(c).) U S WEST will maintain such an agency for a period of two years after
the principal of such bearer Debt Securities has become due and payable. During
any period thereafter for which it is necessary in order to conform to United
States tax law or regulations, U S WEST will maintain a paying agent outside the
United States and its possessions to which the bearer Debt Securities may be
presented for payment and will provide the necessary funds therefor to such
paying agent upon reasonable notice. (Section 2.04.)
The general provisions of the Indenture do not afford holders of the Debt
Securities protection in the event of a highly-leveraged transaction,
reorganization, merger or similar transaction involving U S WEST that may
adversely affect holders of the Debt Securities.
Bearer Debt Securities and the coupons related thereto will be transferable
by delivery. (Section 2.08(e).)
If appropriate, federal income tax consequences applicable to a series of
Debt Securities will be described in the Prospectus Supplement relating thereto.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in the form of one or more
fully registered global securities (each a "Global Security") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the Prospectus Supplement relating to such series. Unless and until it is
exchanged for Debt Securities in definitive registered form, a Global Security
may not be transferred
6
<PAGE>
except as a whole by the Depositary for such Global Security to a nominee of
such Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor of such Depositary or a nominee of such successor.
The specific terms of the depositary arrangements with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. U S WEST anticipates that the following provisions will apply to
all depositary arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit the accounts held with it with the respective principal
amounts of the Debt Securities represented by such Global Security. Such
accounts shall be designated by the underwriters or agents with respect to such
Debt Securities or by U S WEST if such Debt Securities are offered and sold
directly by U S WEST. Ownership of beneficial interests in a Global Security
will be limited to persons that have accounts with the Depositary for such
Global Security ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests in such Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary for such Global Security or on the records
of participants. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture governing such Debt Securities. Except as provided below, owners of
beneficial interests in a Global Security will not be entitled to have Debt
Securities of the series represented by such Global Security registered in their
names, will not receive or be entitled to receive physical delivery of Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture governing such Debt Securities.
Principal, premium, if any, and interest payments on Debt Securities
registered in the name of a Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner of the
Global Security representing such Debt Securities. Neither U S WEST, the Trustee
for such Debt Securities, any Paying Agent nor the Security Registrar for such
Debt Securities will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Security for such Debt Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
U S WEST expects that the Depositary for a series of Debt Securities issued
in the form of a Global Security, upon receipt of any payment of principal,
premium or interest, will credit immediately participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the Global Security for such Debt Securities as shown on
the records of such Depositary. U S WEST also expects that payments by
participants to owners of beneficial interests in such Global Security held
through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participants.
If a Depositary for a series of Debt Securities is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
U S WEST within 90 days, U S WEST will issue Debt Securities of such series in
definitive form in exchange for the Global Security representing such series of
Debt Securities. In addition, U S WEST may at any time and in its sole
discretion determine not to have the Debt Securities of a series represented by
a Global Security and, in such event, will issue Debt Securities of such series
in definitive form in exchange for the Global Security representing such series
of Debt Securities. In either instance, an owner of a beneficial interest in a
Global Security will be entitled to have Debt Securities of the series
represented by such Global Security equal in principal amount to such beneficial
interest registered in its name and will be entitled to physical delivery of
such
7
<PAGE>
Debt Securities in definitive form. Debt Securities of such series so issued in
definitive form will be issued in denominations of $1,000 and integral multiples
thereof and will be issued in registered form only, without coupons.
EXCHANGE OF SECURITIES
To the extent permitted by the terms of a series of Debt Securities
authorized to be issued in registered form and bearer form, bearer Debt
Securities may be exchanged for an equal aggregate principal amount of
registered Debt Securities of the same series and date of maturity in such
authorized denominations as may be requested upon surrender of the bearer Debt
Securities with all unpaid coupons relating thereto, at an agency of U S WEST
maintained for such purpose and upon fulfillment of all other requirements of
such agent. (Section 2.08(b).) As of the date of this Prospectus, United States
Treasury regulations do not permit exchanges of registered Debt Securities for
bearer Debt Securities and, unless such regulations are modified, the terms of a
series of Debt Securities will not permit registered Debt Securities to be
exchanged for bearer Debt Securities.
AMENDMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
by U S WEST and the Trustee with the consent of the holders of a majority in
principal amount of the outstanding Debt Securities of each series affected by
the amendment or supplement (with each series voting as a class), or compliance
with any provision may be waived with the consent of the holders of a majority
in principal amount of the outstanding Debt Securities of each series affected
by such waiver (with each series voting as a class). However, without the
consent of each Debt Securityholder affected, an amendment or waiver may not (i)
reduce the amount of Debt Securities whose holders must consent to an amendment
or waiver; (ii) change the rate of or change the time for payment of interest on
any Debt Security; (iii) change the principal of or change the fixed maturity of
any Debt Security; (iv) change the terms of any Debt Securities so as to
adversely affect the terms on which such Debt Securities are convertible into,
or exchangeable or exercisable for, shares of a class of capital stock of U S
WEST or any other corporation; (v) waive a default in the payment of the
principal of or interest on any Debt Security; (vi) make any Debt Security
payable in money other than that stated in the Debt Security; or (vii) impair
the right to institute suit for the enforcement of any payment on or with
respect to any Debt Security. (Section 9.02.) The Indenture may be amended or
supplemented without the consent of any Debt Securityholder (i) to cure any
ambiguity, defect or inconsistency in the Indenture, or the Debt Securities of
any series; (ii) to provide for the assumption of all the obligations of U S
WEST under the Debt Securities, any coupons related thereto and the Indenture by
any corporation in connection with a merger, consolidation, transfer or lease of
U S WEST's property and assets substantially as an entirety, as provided for in
the Indenture; (iii) to provide for uncertificated Debt Securities in addition
to or in place of certificated Debt Securities; (iv) to make any change that
does not adversely affect the rights of any Debt Securityholder; (v) to provide
for the issuance of and establish the form and terms and conditions of a series
of Debt Securities endorsed thereon or to establish the form of any
certifications required to be furnished pursuant to the terms of the Indenture
or any series of Debt Securities; or (vi) to add to the rights of Debt
Securityholders. (Section 9.01.)
MERGER
U S WEST may consolidate with or merge into, or transfer or lease its
property and assets substantially as an entirety to, another entity if the
successor entity is a corporation and assumes all the obligations of U S WEST
under the Debt Securities and any coupons related thereto and the Indenture and
if, after giving effect to such transaction, a Default or Event of Default would
not occur or be continuing. Thereafter, all such obligations of U S WEST shall
terminate. (Sections 5.01 and 5.02.)
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default"
with respect to a series of Debt Securities: (i) default in the payment of
interest on any Debt Security of such series for 90 days; (ii) default in the
payment of the principal of any Debt Security of such series; (iii) failure by U
S WEST for 90 days after notice to it to comply with any of its other agreements
in the Debt Securities of such series,
8
<PAGE>
in the Indenture or in any supplemental indenture; and (iv) certain events of
bankruptcy or insolvency of U S WEST. (Section 6.01.) If an Event of Default
occurs with respect to the Debt Securities of any series and is continuing, the
Trustee or the holders of at least 25% in principal amount of all of the
outstanding Debt Securities of that series may declare the principal (or, if the
Debt Securities of that series are original issue discount Debt Securities, such
portion of the principal amount as may be specified in the terms of that series)
of all the Debt Securities of that series to be due and payable. Upon such
declaration, such principal (or, in the case of original issue discount Debt
Securities, such specified amount) shall be due and payable immediately.
(Section 6.02.)
Securityholders may not enforce the Indenture or the Debt Securities except
as provided in the Indenture. The Trustee may require indemnity satisfactory to
it before it enforces the Indenture or the Debt Securities. (Section 7.01.)
Subject to certain limitations, holders of a majority in principal amount of the
Debt Securities of each series affected (with each series voting as a class) may
direct the Trustee in its exercise of any trust power. (Section 6.05.) The
Trustee may withhold from holders of Debt Securities notice of any continuing
default (except a default in payment of principal or interest) if it determines
that withholding notice is in their interests. (Section 7.05.)
CONCERNING THE TRUSTEE
U S WEST and certain of its affiliates maintain banking relationships in the
ordinary course of business with the Trustee. In addition, the Trustee and
certain of its affiliates serve as trustee, authenticating agent or paying agent
with respect to certain debt securities of U S WEST and its affiliates.
9
<PAGE>
PLAN OF DISTRIBUTION
DISTRIBUTION OF SECURITIES
U S WEST may offer and sell the Debt Securities (i) to or through
underwriting syndicates represented by managing underwriters, (ii) to or through
underwriters without a syndicate, (iii) through dealers, (iv) through agents or
(v) through a combination of any such methods of sale. The Prospectus Supplement
with respect to each series of Debt Securities will set forth the terms of the
offering, including the name or names of any underwriters, dealers or agents,
the purchase price and the net proceeds to U S WEST from such sale, any
underwriting discounts, agency fees and other items constituting underwriters'
or agents' compensation, the initial public offering price and any discounts or
concessions allowed, re-allowed or paid to dealers.
If any underwriters are involved in the offer and sale, the Debt Securities
will be acquired by the underwriters and may be resold by them from time to time
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale.
Unless otherwise set forth in the accompanying Prospectus Supplement, the
obligations of the underwriters to purchase the Debt Securities will be subject
to certain conditions precedent and the underwriters will be obligated to
purchase all the Securities described in such Prospectus Supplement if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or re-allowed or paid to dealers may be changed from time to time.
The Debt Securities may be offered and sold by U S WEST directly or through
an agent or agents designated by U S WEST from time to time. Unless otherwise
indicated in the applicable Prospectus Supplement, any such agent or agents will
be acting on a best efforts basis for the period of its or their appointment.
Any agent participating in the distribution of the Debt Securities may be deemed
to be an "underwriter," as that term is defined in the Securities Act, of the
Securities so offered and sold. The Securities also may be sold to dealers, at
the applicable price to the public set forth in the applicable Prospectus
Supplement relating to a particular series of the Securities, who later resell
to investors. Such dealers may be deemed to be "underwriters" within the meaning
of the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered
into with U S WEST, to indemnification by U S WEST against certain liabilities,
including liabilities under the Securities Act.
The place and time of delivery for the Debt Securities in respect of which
this Prospectus is delivered will be set forth in the accompanying Prospectus
Supplement, if appropriate.
DELAYED DELIVERY ARRANGEMENTS
If so indicated in the Prospectus Supplement, U S WEST will authorize
dealers or other persons acting as U S WEST's agents to solicit offers by
certain institutions to purchase Debt Securities from U S WEST pursuant to
contracts providing for payment and delivery on a future date. Institutions with
which such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and others, but in all cases such institutions must be approved by
U S WEST. The obligations of any purchaser under any such contract will not be
subject to any conditions except that (a) the purchaser of the Debt Securities
shall not at the time of delivery be prohibited from purchasing such securities
under the laws of the jurisdiction to which such purchaser is subject and (b) if
the Debt Securities are also being sold to underwriters, U S WEST shall have
sold to such underwriters the Debt Securities not sold for delayed delivery. The
dealers and such other persons will not have any responsibility in respect of
the validity or performance of such contracts.
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LEGAL OPINIONS
The validity of the Debt Securities will be passed upon by Stephen E. Brilz,
Senior Attorney of U S WEST.
EXPERTS
The consolidated financial statements and the consolidated financial
statement schedule included in U S WEST's Annual Report on Form 10-K for the
year ended December 31, 1994 are incorporated herein by reference in reliance on
the reports of Coopers & Lybrand L.L.P., independent certified public
accountants, given upon the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of U S WEST and the combined financial
statements of the U S WEST Communications Group and the U S WEST Media Group as
of December 31, 1993 and 1994 and for each of the three years in the period
ended December 31, 1994 included in the Current Report on Form 8-K of U S WEST,
dated September 28, 1995, are incorporated herein by reference in reliance on
the reports of Coopers & Lybrand L.L.P., independent certified public
accountants, given upon the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of Time Warner Entertainment Company,
L.P. as of December 31, 1994 and 1993 and for each of the three years in the
period ended December 31, 1994, which appear in the Current Report on Form 8-K
of U S WEST, dated May 23, 1995, as amended by Forms 8-K/ A filed on July 12,
1995 and August 24, 1995, are incorporated herein by reference in reliance on
the report of Ernst & Young LLP, independent auditors, given upon the authority
of that firm as experts in accounting and auditing.
The financial statements of Mercury Personal Communications (trading as
Mercury One-2-One) as of March 31, 1995, 1994 and 1993 and for each of the three
years in the period ended March 31, 1994, which appear in the Current Report on
Form 8-K of U S WEST, dated May 23, 1995, as amended by Forms 8-K/A filed on
July 12, 1995 and August 24, 1995, are incorporated herein by reference in
reliance on the report of Arthur Andersen LLP, independent chartered
accountants, given upon the authority of that firm as experts in accounting and
auditing.
The combined financial statements of Georgia Cable Holdings Limited
Partnership and Subsidiary Partnerships as of December 31, 1993 and 1992 and for
each of the years in the two-year period ended December 31, 1993, which appear
in the Current Report on Form 8-K of U S WEST, dated May 23, 1995, as amended by
Forms 8-K/A filed on July 12, 1995 and August 24, 1995, have been incorporated
by reference herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated financial statements of Wometco Cable Corp. and
subsidiaries as of December 31, 1993 and 1992 and for each of the years in the
two-year period ended December 31, 1993, which appear in the Current Report on
Form 8-K of U S WEST, dated May 23, 1995, as amended by Forms 8-K/ A filed on
July 12, 1995 and August 24, 1995, have been incorporated by reference herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein and in the Registration Statement,
and upon the authority of said firm as experts in accounting and auditing. The
report on the 1993 consolidated financial statements of Wometco Cable Corp. and
subsidiaries refers to a change in the method of accounting for income taxes in
1993 to adopt the provisions of Financial Accounting Standards Board FASB No.
109 -- Accounting for Income Taxes.
11
<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.
<PAGE>
APPENDIX A
SUBJECT TO COMPLETION
[LOGO]
NOVEMBER 15, 1995
PROSPECTUS
4,900,000 SHARES
ENHANCE FINANCIAL SERVICES GROUP INC.
COMMON STOCK
($.10 PAR VALUE)
This Prospectus relates to shares of common stock, par value $.10 per share (the
"Common Stock"), of Enhance Financial Services Group Inc., a New York
corporation ("Enhance Financial" and, together with its consolidated
subsidiaries, the "Company"), which may be delivered by U S WEST, Inc., a
Colorado corporation ("U S WEST"), or an affiliate thereof, at U S WEST's
option, pursuant to the terms of the % Exchangeable Notes due ,
1998 (the "Debt Exchangeable for Common Stock-SM-" or "DECS-SM-") of U S WEST.
This Prospectus is Appendix A to a Prospectus Supplement and Prospectus of U S
WEST relating to the sale of 4,900,000 DECS (the "DECS Prospectus"). See
"Prospectus Summary." Enhance Financial will not receive any of the proceeds
from the sale of the DECS or delivery thereunder of shares of Common Stock to
which this Prospectus relates.
U S WEST has granted the underwriter of the DECS a 30-day option to purchase up
to an additional 530,800 DECS, which may be exchangeable at their maturity for
additional shares of Common Stock. Such option has been granted solely to cover
over-allotments, if any.
The Common Stock is traded on the New York Stock Exchange, Inc. (the "NYSE")
under the symbol "EFS." On November 14, 1995, the last reported sale price of
the Common Stock on the NYSE Composite Tape was $21.625 per share. See "Price
Range of Common Stock and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS.
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.
The date of this Prospectus is , 1995.
<PAGE>
ENHANCE FINANCIAL HAS BEEN ADVISED THAT IN CONNECTION WITH THE OFFERING BY U
S WEST OF THE DECS, THE UNDERWRITERS OF THE DECS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DECS OR THE
COMMON STOCK OF ENHANCE FINANCIAL AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE (WITH
RESPECT TO THE COMMON STOCK ONLY), IN THE OVER-THE-COUNTER MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
Enhance Financial is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Enhance Financial with the Commission
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Room 3190, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material may be obtained from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates.
Enhance Financial has filed with the Commission a Registration Statement on
Form S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed as a part thereof,
as permitted by the rules and regulations of the Commission. For further
information with respect to Enhance Financial and the Common Stock, reference is
hereby made to such Registration Statement, including the exhibits and schedules
filed as a part thereof. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and where such contract or other document is an exhibit to
the Registration Statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof. The Registration Statement, including the
exhibits and schedules filed as a part thereof, may be inspected without charge
at the public reference facilities maintained by the Commission as set forth in
the preceding paragraph. Copies of these documents may be obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Common Stock is listed on the NYSE. Reports, proxy statements,
information statements and other information concerning Enhance Financial can be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Commission (Registration
No. 1-10967) are hereby incorporated by reference in this Prospectus:
1. Enhance Financial's Annual Report on Form 10-K for the year ended
December 31, 1994;
2. Enhance Financial's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1995, June 30, 1995 and September 30, 1995; and
3. the description of the Common Stock contained in Enhance Financial's
registration statement, dated February 12, 1992, on Form 8-A.
2
<PAGE>
All documents filed by Enhance Financial pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing
such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Enhance Financial hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above other than exhibits to such documents. Requests for such copies should be
directed to the Secretary of Enhance Financial, Enhance Financial Services Group
Inc., 335 Madison Avenue, New York, New York 10017, telephone number (212)
983-3100.
------------------------
"Debt Exchangeable for Common Stock" and "DECS" are service marks of Salomon
Brothers Inc.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED HEREIN. FOR
DEFINITIONS OF AND ADDITIONAL INFORMATION CONCERNING CERTAIN TERMS USED HEREIN,
SEE "GLOSSARY OF INSURANCE TERMS."
Enhance Financial Services Group Inc. ("Enhance Financial" and, together
with its consolidated subsidiaries, the "Company") is principally engaged,
through its subsidiaries, in the reinsurance of financial guaranties of
municipal and asset-backed debt obligations of monoline financial guaranty
insurers. In addition, the Company is engaged in the insurance and reinsurance
of various specialty lines of business that utilize the Company's expertise in
performing sophisticated analyses of complex, credit-based risks. The Company
expects that a significant portion of its growth will come from its expanding
specialty businesses.
Monoline financial guaranty insurers guaranty to the holders of debt
obligations, primarily those issued by municipalities, the full and timely
payment of principal and interest. In conducting its reinsurance business, the
Company assumes a portion of the risk insured, and receives a portion of the
premium collected, by the primary insurer. Reinsurance of financial guaranties
issued by monoline financial guaranty insurers represented 68.7% and 57.4% of
the Company's gross premiums written for the year ended December 31, 1994 and
the nine months ended September 30, 1995, respectively. During the year ended
December 31, 1994, the Company received 35.5% of the total reinsurance premiums
ceded by all monoline financial guaranty insurers.
The Company's specialty businesses currently involve the issuance of direct
financial guaranties of smaller municipal and multi-family housing-backed debt
obligations, trade credit insurance, financial responsibility bonds and
excess-SIPC bonds. This area of the Company's business, measured by gross
premiums written, has grown from its inception in 1991 to represent over 42% of
the Company's gross premiums written for the nine months ended September 30,
1995. The Company is continuing to expand these businesses and is diversifying
its products and services into other areas that the Company believes have strong
growth potential and in which the Company's strength in credit analysis can
provide a competitive advantage.
The Company's business strategy is to concentrate its efforts on the
maintenance and growth of its financial guaranty business, both primary and
reinsurance, while maintaining its commitment to intensive and prudent credit
underwriting and conservative investment policies; to utilize its expertise in
underwriting credit risks to expand and develop its specialty businesses; and to
accelerate its diversification effort into other areas that the Company believes
have strong profit and growth potential.
The Company's aggregate insurance in force as of September 30, 1995 was
$54.6 billion, of which $38.9 billion, or 71.4%, was attributable to reinsurance
of municipal bond obligations; $10.0 billion, or 18.2%, was attributable to
reinsurance of asset-backed debt obligations; and $5.7 billion, or 10.4%, was
attributable to specialty businesses.
As of September 30, 1995, the Company had total assets of $843 million and
shareholders' equity of $406 million. The Company had net income for the nine
months ended September 30, 1994 and 1995 of $27.0 million and $33.3 million
(representing a 23.1% increase), respectively, and earnings per share for the
same respective periods of $1.51 and $1.92 (representing a 27.2% increase).
Of Enhance Financial's two principal insurance subsidiaries, Enhance
Reinsurance Company ("Enhance Re") has triple-A claims-paying ability ratings,
the highest rating, from Standard & Poor's Corporation ("Standard & Poor's"),
Moody's Investors Service, Inc. ("Moody's") and Duff & Phelps Credit Rating
Company ("Duff & Phelps"), and Asset Guaranty Insurance Company ("Asset
Guaranty" and, together with Enhance Re, the "Insurance Subsidiaries") has
triple-A and double-A claims-paying ability ratings from Duff & Phelps and
Standard & Poor's, respectively. The Company's principal executive offices are
located at 335 Madison Avenue, New York, New York 10017 and its telephone number
is (212) 983-3100.
4
<PAGE>
THE OFFERING OF THE DECS
This Prospectus relates to 4,900,000 shares of Common Stock, plus up to an
additional 530,800 shares solely to cover over-allotments, which may be
delivered by U S WEST or an affiliate thereof, at U S WEST's option, pursuant to
the terms of the DECS, which are being offered by U S WEST pursuant to the DECS
Prospectus. Such 5,430,800 shares of Common Stock are owned by U S WEST
Financial Services, Inc., an indirect wholly-owned subsidiary of U S WEST
("USWFS"). For a description of the relationship between U S WEST and the
Company, see "Security Ownership of Certain Beneficial Owners and Management,"
"Selling Shareholder" and "Certain Relationships and Related Transactions."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, (1) SEPTEMBER 30,
----------------------------------------------------- ----------------------
1990 1991 1992 1993 1994 1994(1) 1995
--------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross premiums written.................... $ 38,680 $ 57,619 $ 63,655 $ 89,788 $ 85,112 $ 63,210 $ 57,558
Net premiums written...................... 37,650 55,274 61,428 86,649 80,685 60,306 54,589
Premiums earned........................... 24,758 35,950 45,552 59,629 61,757 45,758 45,406
Net realized gains (losses) on sale of
investments.............................. 131 6,239 7,936 16,649 (5,829) (2,733) (193)
Net investment income (2)................. 22,176 26,792 29,806 32,214 38,225 28,350 32,462
Total revenues............................ 47,359 69,447 84,686 109,693 95,693 72,534 79,105
Income before income taxes................ 32,220 40,869 49,449 50,284 32,659 34,241 44,128
Net income................................ 25,060 32,436 37,617 37,974 26,565 27,030 33,266
Earnings per share........................ 1.60 1.85 2.07 2.09 1.49 1.51 1.92
Dividends per share....................... -- -- 0.24 0.28 0.32 0.24 0.27
SELECTED FINANCIAL RATIOS: (3)
Loss ratio................................ 9.1% 14.2% 20.4% 37.0% 37.0% 18.7% 14.8%
Expense ratio............................. 54.0 64.6 56.5 53.8 55.5 55.4 55.3
Combined ratio............................ 63.1 78.8 76.9 90.8 92.5 74.1 70.1
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, (1) SEPTEMBER 30,
----------------------------------------------------- --------------
1990 1991 1992 1993 1994 1995
--------- --------- --------- --------- --------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investments (4)........................... $ 356,170 $ 426,280 $ 490,777 $ 622,303 $ 639,888 $ 711,363
Total assets.............................. 429,785 501,853 576,246 725,048 749,388 842,579
Deferred premium revenue.................. 146,717 166,112 181,988 209,008 227,883 237,191
Total liabilities......................... 176,501 213,778 244,101 360,581 389,127 437,055
Total shareholders' equity................ 253,284 288,075 332,145 364,467 360,261 405,524
Book value per share...................... 14.46 16.46 18.29 20.14 20.45 23.53
STATUTORY BASIS RESERVES: (5)
Contingency reserves...................... $ 30,321 $ 43,269 $ 58,494 $ 79,404 $ 98,554 $ 114,747
Policyholders' surplus.................... 167,158 200,221 219,624 299,984 287,629 296,482
--------- --------- --------- --------- --------- --------------
Qualified statutory capital............... 197,479 243,490 278,118 379,388 386,183 411,229
Unearned premiums......................... 167,040 190,724 212,613 242,996 269,832 285,096
Losses and LAE reserves................... 2,944 7,995 14,847 5,835 19,535 20,124
--------- --------- --------- --------- --------- --------------
Total policyholders' reserves............. $ 367,463 $ 442,209 $ 505,578 $ 628,219 $ 675,550 $ 716,449
--------- --------- --------- --------- --------- --------------
--------- --------- --------- --------- --------- --------------
Leverage ratio (6)........................ 139:1 134:1 128:1 108:1 124:1 132:1
</TABLE>
- ------------------------------
(1) Certain of the 1994 and prior years' amounts have been reclassified to
conform to the 1995 presentation.
(2) Excludes capital gains and losses.
(3) The loss ratio is derived by dividing losses and loss adjustment expenses
incurred by premiums earned. The expense ratio is derived by dividing
underwriting and operating expenses by premiums earned. The combined ratio
is the sum of the loss and expense ratios. Such ratios have been calculated
using amounts determined in accordance with generally accepted accounting
principles ("GAAP").
(4) Excludes investments in affiliates.
(5) Represents the combined statutory financial position of the Insurance
Subsidiaries.
(6) Leverage ratio is net insurance in force divided by qualified statutory
capital.
6
<PAGE>
RISK FACTORS
CLAIMS-PAYING ABILITY RATINGS
In the financial guaranty insurance and reinsurance industries, the rating
agencies (consisting of Duff & Phelps, Fitch Investors Service, Inc., Moody's
and Standard & Poor's), periodically evaluate insurers and reinsurers to confirm
that they continue to meet the criteria established by such rating agencies for
maintaining their claims-paying ability ratings. Although the Company intends to
continue to comply with the criteria of Duff & Phelps, Standard & Poor's and
Moody's, the rating agencies which currently rate Enhance Re, and Duff & Phelps
and Standard & Poor's, the rating agencies which currently rate Asset Guaranty,
no assurance can be given that one or more of such rating agencies will not
downgrade or withdraw their claims-paying ability ratings of either Insurance
Subsidiary in the future. The Company's ability to compete with other financial
guaranty reinsurers, and consequently its results of operations, would be
materially adversely affected by any downgrade in either Insurance Subsidiary's
ratings. Moreover, several treaties to which either Insurance Subsidiary is a
party grant the respective primary insurers the right to recapture business
previously ceded to such Insurance Subsidiary should it suffer a downgrade of a
specified magnitude in its claims-paying ability rating. Such recapture of
previously ceded contracts would materially adversely affect the Company's
deferred premium revenue and its recognition of future income therefrom. See
"Business -- Rating Agencies."
The claims-paying ability ratings assigned by the rating agencies to a
reinsurance or insurance company are based upon factors relevant to
policyholders and are not directed toward the protection of investors. Such a
rating is neither a rating of securities nor a recommendation to buy, hold or
sell any security.
ADEQUACY OF LOSS RESERVES
The Insurance Subsidiaries are required to maintain reserves in amounts
sufficient to pay their estimated ultimate liability for losses and loss
adjustment expenses ("LAE"). Because of the absence of an actuarially
significant number of losses in its financial guaranty reinsurance activities,
and in the financial guaranty industry generally, the Company does not consider
traditional actuarial approaches used in the property/casualty industry
applicable to the determination of loss reserves for financial guaranty
insurers. The Company establishes reserves for losses and LAE based upon its
best estimate of specific and non-specific losses, including expenses associated
with the settlement of such losses, on its insured and reinsured obligations.
The Company establishes a reserve for losses and related LAE when a provision
for such losses and related LAE is reported by a primary insurer or when, in the
Company's opinion, an insured risk is in default or a default is probable and
the amount of the loss is reasonably estimable based on an analysis of
individual insured risks. From the commencement of its operations in 1986
through September 30, 1995, the Company incurred $69.4 million in losses and
LAE, of which the Company paid approximately $40.2 million through that date. As
of September 30, 1995, the Company's reserves for losses and LAE were $29.2
million, compared to $26.7 million as of December 31, 1994.
Reserves established by the Company for losses and LAE are necessarily based
on estimates, and, although the Company believes its reserves will prove to be
adequate, there can be no assurance thereof.
COMPETITION
In its financial guaranty reinsurance business, the Company is subject to
direct competition from only one U.S. company that specializes in the
reinsurance of financial guaranties, which, together with the Company, provide
most of the reinsurance available for monoline financial guaranty insurers,
particularly with respect to facultative reinsurance. However, several foreign
insurers and reinsurers compete with the Company on both treaty and facultative
bases in providing reinsurance for municipal and asset-backed transactions.
Certain of these foreign insurers and reinsurers are companies with which some
of the U.S. primary financial guaranty insurers have formed strategic alliances.
In addition, the Company also competes to a certain extent with banks, other
financial institutions and governmental institutions that issue letters of
credit, guaranties and other forms of credit enhancement. In its specialty
7
<PAGE>
businesses, Company believes that there are a number of direct competitors, some
of which have greater financial and other resources than the Company. Increased
competition, either in terms of price or in terms of new entrants into the
financial guaranty market or the Company's specialty markets, may have an
adverse effect on the Company's results of operations. See "Business --
Competition."
CONCENTRATION OF CLIENTS
In its principal business of reinsuring financial guaranties issued by
monoline financial guaranty insurers, the Company derives substantially all of
its premium revenues from seven primary insurer clients. For the year ended
December 31, 1994 and for the nine months ended September 30, 1995, two primary
insurers accounted for 23% and 23% and 20% and 16%, respectively, of the
Company's gross premiums written. No other single customer accounted for greater
than 10% of the Company's gross premiums written in these periods. A substantial
reduction in the amount of insurance ceded by one or more of the Company's
principal clients, without a commensurate increase in the amount of insurance
ceded by one or more of the Company's other insurer clients, would have a
material adverse effect on the Company's gross premiums written. Such reduction
could eventually have a material adverse effect on the Company's results of
operations. See "Business -- Sources of Premiums."
MARKET AND OTHER FACTORS
The demand for financial guaranty insurance, and therefore the demand for
primary insurance and reinsurance provided by the Company, depends upon many
factors, which are generally beyond the control of the Company, including
prevailing interest rates, investor concern regarding the credit quality of
municipalities and corporations, investor perception of the strength of
financial guaranty providers and the guaranty offered, premium rates charged for
the insurance and the availability of other forms of credit enhancement.
Prevailing interest rate levels affect demand for financial guaranty
insurance to the extent that lower interest rates are accompanied by narrower
spreads between insured and uninsured obligations. The purchase of insurance
during periods of relatively narrower interest rate spreads will generally
provide lower cost savings to the issuer than during periods of relatively wider
spreads. These lower cost savings generally are accompanied by corresponding
decreases in the demand for financial guaranty insurance and reinsurance.
However, relatively low interest rate levels may encourage the issuance of new,
or the refunding of existing, debt securities by companies and municipalities,
which may increase the demand for financial guaranty insurance and reinsurance.
Investor concern regarding municipal and corporate credit quality typically
results in an increase in demand by issuers for financial guaranties since
investors generally prefer to purchase higher rated investments during times of
economic stress. Generally all financial guarantors have triple-A claims-paying
ability ratings, and bonds insured by companies having such ratings are
themselves rated triple-A.
Investor perception of the strength of financial guaranty providers affects
demand since investors usually receive a lower interest rate on an insured bond
than an uninsured bond. Should a major financial guaranty insurer, or the
industry as a whole, have its claims-paying ability rating lowered, or suffer
for some other reason a deterioration in investor confidence, demand for
financial guaranty insurance may be reduced and possibly eliminated entirely.
Premium rates are affected by factors such as the primary insurer's
appraisal of the insured credit, the spread between the then prevailing general
interest rates on insured versus uninsured debt obligations, the level of
competition among primary insurers, the amount of municipal debt issuances and
the nature and mix of the insured credits.
In addition, financial guaranty insurance and reinsurance compete with other
forms of credit enhancement, such as letters of credit, as well as with the
issuer's alternative of foregoing credit enhancement altogether and paying
higher interest rates. Moreover, if the interest savings from insurance or other
forms of credit enhancement are not greater than the cost of such credit
enhancement, the issuer will generally choose to issue unenhanced debt
obligations.
8
<PAGE>
Additionally, the financial guaranty industry has historically been and will
continue to be subject to the direct and indirect effects of governmental
regulation, including changes in tax laws affecting the municipal and
asset-backed debt markets. See "Financial Guaranty Industry Overview --
Financial Guaranty Market." No assurance can be given that future legislative or
regulatory changes might not adversely affect the Company's results of
operations or the interests of the shareholders of Enhance Financial.
HOLDING COMPANY STRUCTURE
Enhance Financial conducts substantially all its operations through its
subsidiaries, principally the Insurance Subsidiaries. The financial condition
and cash flow of Enhance Financial and its attendant ability to pay dividends on
the Common Stock is dependent upon the earnings of the Insurance Subsidiaries
and the distribution of those earnings to Enhance Financial in the form of
dividends. The payment of dividends to Enhance Financial by the Insurance
Subsidiaries is subject to restrictions set forth in the New York Insurance Law
and the regulations thereunder (the "Insurance Law"). The payment of such
dividends may also be subject to other statutory or contractual restrictions, is
contingent upon the earnings of the Insurance Subsidiaries, and is subject to
various business considerations. As of September 30, 1995, up to $23.0 million
was available for the payment of dividends without the prior approval of the
insurance regulatory authorities to Enhance Financial by the Insurance
Subsidiaries for the payment of Enhance Financial's operating expenses,
principal and interest on its debt obligations, dividends to its shareholders,
if any, and the repurchase of Common Stock. See "Price Range of Common Stock and
Dividends," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Insurance
Regulatory Matters -- Restrictions on Dividends by the Insurance Subsidiaries."
SPECIALTY BUSINESSES
Specialty businesses have constituted, and the Company expects that they
will continue to constitute, a significant component of its business. In certain
of its specialty businesses, the Company underwrites with the anticipation of
higher loss levels than those experienced in connection with its reinsurance of
municipal and asset-backed debt obligations due to the nature of the risk
assumed or the limited history of the business. The Company believes that the
higher premiums it receives for such activities adequately compensate it for the
risks involved, since the Company takes into account expected higher loss ratios
in determining appropriate premium rates. See "Business -- Loss Experience."
Premiums in respect of certain of the Company's specialty businesses are
earned over a significantly shorter period that those in respect of the
Company's monoline reinsurance business. The Company's ability to realize
consistent levels of earned premiums in these specialty businesses will
therefore depend on its ability to write consistent levels of new insurance. See
"Business -- Specialty Businesses."
VOTING CONTROL
As of September 30, 1995, the two largest shareholders of Enhance Financial,
USWFS and Manufacturers Life Insurance Company ("Manufacturers Life"), together
owned approximately 46.4% of the Common Stock outstanding. The holders of Common
Stock do not have cumulative voting rights with respect to the election of
directors, and, accordingly, any shareholder or group of shareholders holding
shares representing in excess of 50% of the shares of Common Stock outstanding
would by itself have the power to elect the entire board of directors. In
addition, a shareholders' agreement among Enhance Financial, USWFS and
Manufacturers Life (the "Shareholders' Agreement") requires that each of USWFS
and Manufacturers Life votes for the election of two designees of each of USWFS
and Manufacturers Life as directors of Enhance Financial. Subject to the
following paragraph, USWFS will continue to vote the shares of Common Stock
owned by it unless and until it delivers such shares pursuant to the terms of
the DECS or otherwise disposes of such shares. As a result of the Shareholders'
Agreement, USWFS and Manufacturers Life may be deemed to constitute a control
group of Enhance Financial pursuant to the Exchange Act.
9
<PAGE>
Following consummation of the offering of the DECS, U S WEST currently
intends, but is not committed by any agreement or otherwise, to cause USWFS to
vote its shares of Common Stock proportionately to the votes cast by non-U S
WEST shareholders; provided, however, that U S WEST will continue to cause USWFS
to vote its shares of Common Stock in favor of the nominees of Manufacturers
Life to Enhance Financial's board of directors pursuant to the Shareholders'
Agreement; and provided, further, that if (i) a person or group of persons other
than U S WEST is deemed to own more than 15% of the Common Stock within the
meaning of Section 13(d) of the Exchange Act and (ii) there occurs a contested
proxy solicitation within the meaning of Rule 14a-11(a) promulgated under the
Exchange Act, U S WEST intends to cause USWFS to vote its shares of Common Stock
in a manner U S WEST deems appropriate. In addition, U S WEST intends to cause
the two U S WEST designees who currently serve on Enhance Financial's board of
directors to resign following issuance of the DECS, however, U S WEST will
retain its rights to nominate and vote for candidates for Enhance Financial's
board of directors.
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1995, the two largest shareholders of Enhance Financial,
USWFS and Manufacturers Life, together owned approximately 46.4% of the Common
Stock outstanding. U S WEST has the right to cause the delivery of the shares of
Common Stock owned by USWFS (representing 31.5% of the outstanding shares)
pursuant to the terms of the DECS. The shares of Common Stock owned by USWFS and
by Manufacturers Life (representing 14.9% of the outstanding shares) will
continue to be tradeable in the open market subject to the volume limitations,
manner of sale and notice requirements of Rule 144 under the Securities Act or
without such requirements or limitations through the exercise of registration
rights available under a registration rights agreement with Enhance Financial.
See "Certain Relationships and Related Transactions -- Registration Rights
Agreement."
Sales of substantial amounts of Common Stock in the public or private
market, or the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock.
It is not possible to predict accurately how or whether any market that
develops for the DECS will influence the market for the Common Stock. For
example, the price of the Common Stock could become more volatile and could be
depressed by investors' anticipation of the potential distribution into the
market of substantial additional amounts of Common Stock upon the maturity of
the DECS, by possible sales of Common Stock by investors who view the DECS as a
more attractive means of equity participation in Enhance Financial and by
hedging or arbitrage trading activity that may develop involving the DECS and
the Common Stock.
USE OF PROCEEDS
All of the shares of Common Stock to which this Prospectus relates may be
delivered by U S WEST, at its option, pursuant to the terms of the DECS, which
are being offered by U S WEST pursuant to the DECS Prospectus. Enhance Financial
will not receive any of the proceeds from the sale of the DECS or delivery
thereunder of the shares of Common Stock to which this Prospectus relates.
10
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The following table sets forth for the calendar quarters indicated the high
and low sales prices for the Common Stock, as reported in the NYSE consolidated
transaction system, and the dividends paid per share:
<TABLE>
<CAPTION>
SALES PRICES
------------------------ DIVIDENDS
HIGH LOW PAID
----------- ----------- -----------------
<S> <C> <C> <C>
1993
- -----
First Quarter............................................ $ 247/8 $ 171/2 $ 0.07
Second Quarter........................................... 235/8 191/2 0.07
Third Quarter............................................ 231/2 173/4 0.07
Fourth Quarter........................................... 22 183/4 0.07
1994
- -----
First Quarter............................................ $ 197/8 $ 181/8 $ 0.08
Second Quarter........................................... 193/8 173/8 0.08
Third Quarter............................................ 205/8 173/4 0.08
Fourth Quarter........................................... 193/8 151/2 0.08
1995
- -----
First Quarter............................................ $ 183/8 $ 157/8 $ 0.09
Second Quarter........................................... 195/8 161/4 0.09
Third Quarter............................................ 205/8 18 0.09
Fourth Quarter (through November 14, 1995)............... 215/8 197/8 --
</TABLE>
As of September 30, 1995, there were 135 holders of record of the Common
Stock and 17,235,625 shares outstanding.
Subsequent to the initial public offering of its Common Stock in 1992,
Enhance Financial has increased its dividend at the rate of $.04 per share per
year, and it paid a dividend in each of the first, second and third quarters of
1995 of $.09 per share. The amount of dividends payable in the future will be
reviewed periodically by the board of directors in light of the Company's
earnings, financial condition and capital requirements. It is the policy of the
board of directors that the Company retain an adequate portion of its earnings
to support the growth of its business. The declaration and payment of dividends
are subject to the discretion of the board of directors of Enhance Financial,
and there is no requirement or assurance that dividends will be paid.
Enhance Financial's ability to pay dividends, as well as its operating, debt
service and other expenses, is dependent upon the ability of the Insurance
Subsidiaries to pay dividends to Enhance Financial and is subject to
restrictions contained in agreements relating to Enhance Financial's
indebtedness. The Insurance Subsidiaries' ability to pay dividends to Enhance
Financial is subject to restrictions contained in the Insurance Law. The Company
expects that such restrictions will not affect the ability of the Insurance
Subsidiaries to declare and pay dividends sufficient to support the payment of
dividends by Enhance Financial consistent with the practice adopted in recent
years. As of September 30, 1995, up to $23.0 million was available for the
payment of dividends without the prior approval of the insurance regulatory
authorities to Enhance Financial by the Insurance Subsidiaries. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Insurance Regulatory Matters
- -- Restrictions on Dividends by the Insurance Subsidiaries."
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1995.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
--------------------
<S> <C>
(IN THOUSANDS)
Liabilities
Long-term debt............................................................................ $ 79,800
Shareholders' Equity
Common stock -- $.10 par value 30,000,000 shares authorized; 18,285,475 shares issued;
17,235,625 shares outstanding............................................................ 1,830
Additional paid-in capital................................................................ 192,799
Retained earnings......................................................................... 222,805
Unearned compensation/excess pension liability............................................ (139)
Unrealized gains.......................................................................... 6,272
Treasury stock............................................................................ (18,043)
----------
Total shareholders' equity.............................................................. 405,524
----------
Total capitalization.................................................................. $ 485,324
----------
----------
</TABLE>
12
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information derived from the historical consolidated financial statements of the
Company as of and for each of the years in the five-year period ended December
31, 1994 and as of and for the nine months ended September 30, 1994 and 1995.
This information should be read in conjunction with the historical consolidated
financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The results for interim periods are not necessarily indicative of
results that may be expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, (1) SEPTEMBER 30,
------------------------------------------------------ ----------------------
1990 1991 1992 1993 1994 1994 (1) 1995
--------- --------- --------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross premiums written.......... $ 38,680 $ 57,619 $ 63,655 $ 89,788 $ 85,112 $ 63,210 $ 57,558
Net premiums written............ 37,650 55,274 61,428 86,649 80,685 60,306 54,589
Premiums earned................. 24,758 35,950 45,552 59,629 61,757 45,758 45,406
Net realized gains (losses) on
sale of investments............ 131 6,239 7,936 16,649 (5,829) (2,733 ) (193 )
Net investment income (2)....... 22,176 26,792 29,806 32,214 38,225 28,350 32,462
Total revenues.................. 47,359 69,447 84,686 109,693 95,693 72,534 79,105
Income before income taxes...... 32,220 40,869 49,449 50,284 32,659 34,241 44,128
Net income...................... 25,060 32,436 37,617 37,974 26,565 27,030 33,266
Earnings per share.............. 1.60 1.85 2.07 2.09 1.49 1.51 1.92
Dividends per share............. -- -- 0.24 0.28 0.32 0.24 0.27
SELECTED FINANCIAL RATIOS: (3)
Loss ratio...................... 9.1% 14.2% 20.4% 37.0% 37.0 % 18.7 % 14.8 %
Expense ratio................... 54.0 64.6 56.5 53.8 55.5 55.4 55.3
Combined ratio.................. 63.1 78.8 76.9 90.8 92.5 74.1 70.1
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, (1) SEPTEMBER 30,
---------------------------------------------------------- --------------
1990 1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ---------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investments (4)................... $ 356,170 $ 426,280 $ 490,777 $ 622,303 $ 639,888 $ 711,363
Total assets...................... 429,785 501,853 576,246 725,048 749,388 842,579
Deferred premium revenue.......... 146,717 166,112 181,988 209,008 227,883 237,191
Total liabilities................. 176,501 213,778 244,101 360,581 389,127 437,055
Total shareholders' equity........ 253,284 288,075 332,145 364,467 360,261 405,524
Book value per share.............. 14.46 16.46 18.29 20.14 20.45 23.53
STATUTORY BASIS RESERVES: (5)
Contingency reserves.............. $ 30,321 $ 43,269 $ 58,494 $ 79,404 $ 98,554 $ 114,747
Policyholders' surplus............ 167,158 200,221 219,624 299,984 287,629 296,482
---------- ---------- ---------- ---------- ---------- --------------
Qualified statutory capital....... 197,479 243,490 278,118 379,388 386,183 411,229
Unearned premiums................. 167,040 190,724 212,613 242,996 269,832 285,096
Losses and LAE reserves........... 2,944 7,995 14,847 5,835 19,535 20,124
---------- ---------- ---------- ---------- ---------- --------------
Total policyholders' reserves..... $ 367,463 $ 442,209 $ 505,578 $ 628,219 $ 675,550 $ 716,449
---------- ---------- ---------- ---------- ---------- --------------
---------- ---------- ---------- ---------- ---------- --------------
Leverage ratio (6)................ 139:1 134:1 128:1 108:1 124:1 132:1
</TABLE>
- --------------------------
(1) Certain of the 1994 and prior years' amounts have been reclassified to
conform to the 1995 presentation.
(2) Excludes capital gains and losses.
(3) The loss ratio is derived by dividing losses and LAE incurred by premiums
earned. The expense ratio is derived by dividing underwriting and operating
expenses by premiums earned. The combined ratio is the sum of the loss and
expense ratios. Such ratios have been calculated using amounts determined in
accordance with GAAP.
(4) Excludes investment in affiliates.
(5) Represents the combined statutory financial position of the Insurance
Subsidiaries.
(6) Leverage ratio is net insurance in force divided by qualified statutory
capital.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is principally engaged in the reinsurance of financial
guaranties of municipal and asset-backed debt obligations of monoline financial
guaranty insurers. Monoline financial guaranty insurers guaranty to the holders
of debt obligations, primarily those issued by municipalities, the full and
timely payment of principal and interest. In conducting its reinsurance
business, the Company assumes a portion of the risk insured, and receives a
portion of the premium collected, by the primary insurer. In addition, the
Company is engaged in the insurance and reinsurance of various specialty
businesses that utilize the Company's expertise in performing sophisticated
analyses of complex, credit-based risks. The Company's specialty businesses
currently involve the issuance of direct financial guaranties of smaller
municipal and multi-family housing-backed debt obligations, trade credit
insurance, financial responsibility bonds and excess-SIPC bonds. The Company
expects that a significant portion of its growth will come from its expanding
specialty businesses.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1994
Gross premiums written in the first nine months of 1995 were $57.6 million
compared to $63.2 million in the same period in 1994, representing an 8.9%
decrease. This decline is principally attributable to significantly lower
municipal industry new-issue volume, a slowdown in refunding activity and lower
premium rates on certain high quality assumed reinsurance, all of which was in
large part offset by continued growth in premiums derived from the Company's
specialty businesses.
Facultative activity contributed $16.2 million of monoline reinsurance gross
premiums in the first nine months of 1995 compared to $28.5 million in the same
period in 1994.
The principal amount of debt obligations insured and reinsured by the
Company aggregated $7.6 billion for the first nine months of 1995 compared to
$6.2 billion during the corresponding period in 1994, an increase of 22%. This
period-to-period increase was achieved despite an industry-wide decline in
new-issue municipal bond and refunding volume and resulted in large part from
the continued high levels of premiums derived from the Company's specialty
businesses. These businesses accounted for $24.5 million (42.6%) of gross
premiums in the first nine months of 1995 compared to $19.7 million (31.2%) in
the same period in 1994.
In the first nine months of 1995, industry new-issue volume of $106.4
billion was recorded, a 17.8% decrease from the same period in 1994. The insured
portion of such new issues increased to 41.2% compared to 37.0% in the third
quarter of 1994. Total municipal bond refundings in the first nine months of
1995 decreased to 20% of new-issue volume from 27% in the first nine months of
1994, reflecting the higher interest rates during the 1995 period which tended
to reduce refunding activity.
Net premiums written decreased 9.5% to $54.6 million in the first nine
months of 1995 from $60.3 million in the same period in 1994, consistent with
the decrease in gross premiums discussed in the preceding paragraphs. Of the
Company's net premiums written in the first nine months of 1995, 49.9%, 9.4% and
40.7% were derived from the reinsurance of municipal bonds, the reinsurance of
asset-backed debt obligations and the Company's specialty businesses,
respectively, compared to 60.5%, 9.4% and 30.1% during the same period in 1994.
Premiums earned decreased minimally to $45.4 million in the first nine
months of 1995 from $45.8 million during the comparable period in 1994. The
decrease in earned premiums was largely due to a lower level of refundings in
the period, which accounted for an estimated $3.7 million of earned premiums in
the first nine months of 1995 compared to $9.6 million in the first nine months
of 1994. This decrease was in large part offset by the growth in earned premiums
derived from the Company's specialty businesses which contributed $17.2 million
(38%) of earned premiums in the first nine months of 1995 compared to $13.1
million (29%) in the comparable 1994 period.
14
<PAGE>
Net investment income increased 14.5% to $32.5 million in the first nine
months of 1995 from $28.4 million for the same period in 1994. This growth
resulted primarily from the Company's ability to invest substantially all of its
available cash flow in higher yielding special private placements without
lowering the credit quality of the portfolio. The increase further reflected the
growth in the Company's investment portfolio during the period. The average
yields on the Company's investment portfolio after all associated costs, were
6.3% and 6.1% for the first nine months of 1995 and 1994, respectively. In
addition, the Company realized $0.2 million of net capital losses in the first
nine months of 1995 compared to $2.7 million during the same period in 1994. Net
investment income is presented after deduction of both external investment
management fees and internal costs associated with managing the portfolio.
Incurred losses and LAE were $6.7 million in the first nine months of 1995
compared to $8.6 million in the same period in 1994.
The Company's operating expense ratio remained constant at approximately
55.4% in the first nine months of 1995 and 1994. Policy acquisition costs
("PAC") were $15.5 million and $14.9 million for the first nine months of 1995
and 1994, respectively, representing 34.0% and 32.6% of premiums earned in those
respective periods. Other operating expenses increased only marginally to $9.5
million in the first nine months of 1995 from $9.3 million during the same
period in 1994.
Interest expense was $4.2 million in the first nine months of 1995 compared
to $4.4 million for the same period in 1994. The decrease reflected the impact
of a reverse interest-rate swap entered into in January 1995, and subsequently
terminated in June 1995, from which the Company realized a net interest
reduction of $0.4 million, including amortization of gain on termination of the
swap. This reduction was offset in part by additional interest expense on the
increased drawdowns on the Company's line of credit under a bank credit
agreement (the "Credit Agreement").
The Company's effective tax rate for the first nine months of 1995 was 24.6%
compared to 21.1% for the 1994 comparable period. The higher 1995 rate reflects
the Company's move to taxable investments.
Net income for the first nine months of 1995 increased 23.1% to $33.3
million from $27.0 million in the first nine months of 1994, reflecting an
increase in investment income and lower total expenses. Earnings per share for
the first nine months of 1995 increased 27.2% to $1.92 from $1.51 for the same
period in 1994. Operating earnings per share, which exclude the impact of
capital losses, increased 18.3% in the first nine months of 1995, to $1.91 from
$1.61 per share in the same period in 1994. The per-share increases also
reflected the reduction in the weighted average number of shares outstanding
during the 1995 period resulting from the Company's stock repurchase program.
The weighted average number of shares outstanding for the first nine months
of 1995 was 17.3 million compared to 17.9 million for the first nine months of
1994. The Company repurchased 549,500 of its shares on the open market at
various times during the fourth quarter of 1994 and the first nine months of
1995.
YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993
Gross premiums written in 1994 were $85.1 million compared to $89.8 million
in 1993, a 5.2% decrease. This decline primarily reflects the significantly
lower municipal debt new-issue volume, a slowdown in refunding activity and
lower premium rates on certain high quality assumed reinsurance, all of which
was in large part offset by continued growth in premiums derived from the
Company's specialty businesses. Facultative activity contributed $34.7 million
of monoline reinsurance gross premiums in 1994 compared to $40.1 million in
1993. Additionally, municipal reinsurance premiums written benefited from the
grant by Standard & Poor's of a double-A claims-paying ability rating to Asset
Guaranty in the latter half of 1993. Municipal reinsurance premiums written by
Asset Guaranty were $4.8 million in 1994 compared to $1.5 million in 1993.
The principal amount of debt obligations insured and reinsured by the
Company aggregated $7.9 billion in 1994 compared with $6.6 billion in 1993, a
20% increase. This year-to-year increase was
15
<PAGE>
achieved despite an industry-wide slow down in new-issue municipal bond and
refunding volume and resulted in large part from the continued high levels of
premiums derived from the Company's specialty businesses. These businesses
accounted for $26.6 million (31.3%) of gross premiums in 1994 compared to $19.8
million (22.0%) in 1993.
The volume of municipal bonds issued in 1994, $164.9 billion, represented a
decline of 44% from the $292.0 billion in issuances in the prior year. This
decline was due to the substantial and rapid increase in interest rates, which
caused a reduction in refunding issues such that they represented only 23% of
total issuance compared to 51% in 1993. The Company believes that this reduced
level of refundings is a more normal and sustainable level. Bonds issued for new
money purposes, however, increased to $116.0 billion in 1994 from the 1993 level
of $97.0 billion. The insured portion of new issues was 37% in both years.
Net premiums written decreased 6.9% to $80.7 million in 1994 from $86.6
million in 1993, consistent with the decrease in gross premiums discussed in the
preceding paragraphs. Of the Company's net premiums written in 1994, 59%, 11%
and 30% were derived from the reinsurance of municipal bonds, the reinsurance of
asset-backed debt obligations and the Company's specialty businesses,
respectively, compared to 72%, 7% and 21% in 1993.
Net premiums written from specialty businesses have grown from $8.6 million
(16%) in 1991 to $24.6 million (30%) in 1994. The Company expects that these
specialty businesses will continue to contribute a significant component of the
Company's revenues. In connection with certain of its specialty businesses, the
Company underwrites with the anticipation of higher loss levels than those
associated with its core municipal and asset-backed reinsurance business. The
Company takes these higher loss ratios into account in determining appropriate
premium rates.
Premiums earned grew 3.6% to $61.8 million in 1994 from $59.6 million in
1993. This increase was achieved despite the decrease in premiums written and a
lower level of refundings in 1994. The growth reflects the increased
contribution to earned premiums derived from the Company's specialty businesses,
which contributed $18.9 million (31%) of earned premiums in 1994 compared to
$13.1 million (22%) in 1993. This growth in earned premiums was to a large
degree offset by the lower level of refundings, which accounted for an estimated
$11.7 million of earned premiums in 1994 compared with $14.4 million in 1993. A
refunding eliminates the Company's reinsurance exposure to the refunded
obligation, and, as a result, the Company recognizes in current earnings the
remaining related deferred premium revenue. The growth in premiums earned also
reflects the amortization of the growing deferred premium revenue balance, which
increased to $228 million at year-end 1994 from $209 million at year-end 1993.
Net investment income increased 18.7% to $38.2 million in 1994 from $32.2
million for 1993. This growth resulted primarily from the Company's ability to
invest substantially all of its available cash flow in higher yielding special
private placements without lowering the credit quality of the portfolio.
Substantially all of these special assets have received a double-A rating. The
increase further reflects the growth in the Company's investment portfolio from
$622 million at December 31, 1993 to $640 million at December 31, 1994. The
average yields on the Company's investment portfolio increased to 6.2% for 1994
from 5.8% for 1993.
In addition, the Company realized $5.8 million of net capital losses in 1994
compared with net realized capital gains of $16.6 million in 1993. This
year-to-year change reflects the rapid increase in interest rates during 1994.
Incurred losses and LAE were $22.8 million in 1994 compared to $22.1 million
in the same period in 1993. Of these amounts, losses and LAE incurred in
connection with the Company's discontinued commercial real estate related
portfolio aggregated $9.5 million in 1994 compared to $13.1 million in 1993.
In 1991 and 1992, the Company established reserves aggregating $9.8 million
in connection with three transactions for which the Company was a reinsurer of
financial guaranties of securities backed by
16
<PAGE>
pools of commercial real estate. In 1993, in connection with the refinancing of
these three transactions and with a resulting reduction in exposure, the Company
paid losses of approximately $20 million, including the remaining balance of
amounts previously reserved, and thereby incurred additional losses and LAE of
$12.9 million.
In 1994, following notification from the primary insurer, the Company
increased its case reserves on these refinanced transactions by $7.1 million. In
addition, in 1994 the Company established case reserves of $2.4 million on two
additional transactions in its commercial real estate portfolio. Of these
additions to case reserves, $7.5 million were established by transfer from the
Company's non-specific reserve, thereby depleting that reserve. Following
re-evaluation of all of its potential exposures, the Company increased its
non-specific reserve to $10 million at year end 1994. Net additions to the
Company's non-specific reserve in 1994 and 1993 were $3.6 million and $5.6
million, respectively.
In addition, in 1994 and 1993, the Company incurred losses of $5.7 million
and $3.7 million, respectively, in connection with its credit and surety
businesses commensurate with the continued growth in premiums written from these
specialty businesses.
The Company believes that the reserves for losses and LAE, including the
case and non-specific reserves, are adequate to cover the ultimate net cost of
claims. However, the reserves are necessarily based on estimates, and there can
be no assurance that the ultimate liability will not exceed such estimates.
The Company's operating expense ratio was 56.7% in 1994 compared to 54.9% in
1993. PAC, which are those costs which vary with and are directly related to the
generation of new and renewal premium, totaled $20.3 million and $19.6 million
in 1994 and 1993, respectively, representing 32.8% and 32.9% of premiums earned
in those respective periods. Other operating expenses increased to $13.2 million
in 1994 from $11.6 million in 1993 due in part to $0.5 million in non-recurring
expenses in 1994.
Interest expense of $5.8 million was recorded in 1994 compared to $5.2
million in 1993. The 1994 expense includes a full year's interest charge on
Enhance Financial's $75 million aggregate principal amount of 6.75% Debentures
due 2003 (the "6.75% Debentures"), which were issued in March 1993.
The Company's effective tax rate was 18.6% for 1994 compared to 24.5% in
1993. The 1994 rate reflects the benefit from capital losses incurred in 1994
which may be carried back to recover taxes paid on prior years' capital gains.
The 1993 charge includes $0.95 million for the retroactive increase in the
deferred tax liability as at December 31, 1992, resulting from an increase in
1993 in the corporate tax rate to 35%.
Net income for 1994 decreased 30.0% to $26.6 million from $38.0 million in
1993. This decrease primarily reflects the after tax impact of the $22.5 million
swing in realized capital gains. Earnings per share declined similarly by 29.0%
to $1.49 in 1994 from $2.09 for 1993.
The weighted average shares outstanding for 1994 was 17.88 million compared
to 18.14 million for 1993. The Company continued its share repurchase program in
1994 and repurchased 471,300 of its shares of Common Stock on the open market at
various times throughout the year. Through December 31, 1994, the Company
repurchased 620,200 shares of Common Stock out of a total number of shares
authorized by the board of directors of 1.2 million.
YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31, 1992
Gross premiums written in 1993 were $89.8 million compared with $63.7
million in 1992, an increase of 41.0%. This growth reflects an increase in
facultative writings during the period and the continued strength of the
municipal bond market. Facultative activity contributed $39.2 million of
monoline reinsurance premiums in 1993 compared to $16.8 million in 1992.
The principal amount of debt obligations insured and reinsured by the
Company aggregated $6.6 billion for 1993 compared with $4.0 billion in 1992, an
increase of 62.4%. This increase was primarily
17
<PAGE>
attributable to a 75.3% year-to-year increase in par insured derived from the
Company's municipal reinsurance business, which benefited from continued
increases in the volume of municipal debt obligations issued and insured.
In 1993, industry new-issue volume of $292.0 billion was recorded, an
increase of 24.3% over 1992. The insured portion of such new issues was 37.1%
compared with 34.5% in 1992. Total municipal bond refundings in 1993 accounted
for almost 65.9% of new-issue volume, up from 52.2% for 1992 reflecting the
continued low interest rates during the year.
The increase in gross premiums was further impacted by the continued growth
in the Company's specialty insurance and reinsurance businesses which in 1993
accounted for $19.8 million of gross premiums written compared with $17.1
million in 1992.
Net premiums written increased 41.0% to $86.6 million in 1993 from $61.4
million in 1992, consistent with the increase in gross premiums discussed in the
preceding paragraphs. Of the Company's net premiums written in 1993, 71.7%, 7.1%
and 21.2% were derived from the reinsurance of municipal bonds, the reinsurance
of asset-backed debt obligations and the Company's specialty businesses,
respectively, compared to 60.6%, 13.6% and 25.8% during 1992.
Premiums earned grew 30.9% to $59.6 million in 1993 from $45.6 million in
1992. This increase is due in large measure to the higher level of refundings,
which accounted for an estimated $14.4 million of 1993 earned premiums compared
with $8.4 million in 1992, as well as the earnings generated from the
amortization of the growing balance of deferred premium revenue.
Net investment income increased 8.3% to $32.2 million in 1993 from $29.8
million in 1992. During the year, the investment portfolio grew from $491
million to $622 million including the net proceeds of approximately $74 million
from Enhance Financial's sale of the 6.75% Debentures in March 1993. The average
yields on the Company's investment portfolio were 5.8% and 6.5% for 1993 and
1992, respectively. This decrease in yield reflects the general market decline
in interest rates and the Company's strategy of seeking maximum total rate of
return from its investment portfolio. The portfolio is managed externally by
professional advisors whose performance is measured against established indexes;
yield from interest income, as well as realized and unrealized gains, are the
key components of such performance. In 1993, the total rate of return of the
portfolio on this basis was 10.9%.
In addition, the Company generated $16.6 million of realized capital gains
in 1993 compared with $7.9 million in 1992. The high levels of realized gains
reflects the effect of lower interest rates, which served to increase the
realized gains on sales of investments in both years.
Incurred losses and LAE were $22.1 million in 1993 compared to $9.3 million
in 1992. The 1993 amount includes a $12.9 million charge in connection with the
refinancing of three transactions for which the Company was a reinsurer of
financial guaranties of securities backed by pools of commercial real estate. In
connection with the refinancings, the Company paid losses of approximately $20
million, including amounts previously reserved, and the Company's exposure was
reduced correspondingly. The increase in paid losses over reserves already
established for these transactions resulted primarily from decreases in
projected operating cash flows from, and sales prices of, certain of the
underlying properties based on updated appraisals. In addition, certain
recoveries under guaranties provided in connection with the original reinsured
transaction were determined by the primary insurer to have been overvalued. At
December 31, 1993, the Company's total principal outstanding with respect to the
three refinanced reinsured transactions was $63.5 million. Additionally, the
1993 incurred losses include net additions of approximately $4 million to the
non-specific reserve, bringing the reserve at year-end 1993 to approximately $5
million.
18
<PAGE>
Of the Company's total insured principal of $21.9 billion at December 31,
1993, $16.2 billion, $4.2 billion and $1.5 billion represented exposure with
respect to reinsurance of municipal debt obligations, the reinsurance of
asset-backed obligations and the Company's specialty businesses, respectively.
Of the $4.2 billion related to asset-backed obligations, 60.3% related to
consumer receivables, 19.5% related to investor-owned utilities and 7.4% related
to commercial real estate exposure (representing 1.4% of total principal
outstanding).
The Company's operating expense ratio declined to 54.9% in 1993 from 57.6%
in 1992, reflecting increased economies of scale. Although operating expenses
increased, the expense ratio declined principally as a result of the increase in
earned premiums generated from refundings. PAC were $19.6 million and $14.5
million for 1993 and 1992, respectively, representing 32.9% and 31.9% of
premiums earned in those respective periods. This year-to-year increase
reflects, in part, the increase in premiums earned, as well as a revision in the
amounts of certain internal costs being deferred. Other operating expenses
increased 5.9% to $11.6 million in 1993 from $10.9 million in 1992. This
increase is due in part to growth in the Company's operations, as well as
increased occupancy and overhead costs following the Company's relocation in
June 1992 and offset in part by the deferral of additional internal costs.
Interest expense totaled $5.2 million in 1993 compared to $0.8 million in
1992, reflecting the sale by Enhance Financial of the 6.75% Debentures issued in
March 1993.
The Company's effective tax rate for 1993 was 24.5% compared to 23.9% for
1992 reflecting the increase in the corporate tax rate in 1993 to 35%.
Additionally, the 1993 tax charge includes $0.95 million for the retroactive
increase in the deferred tax liability as at December 31, 1992 resulting from
the increase in the corporate tax rate.
The Company's 1993 net income increased 1.0% to $38.0 million from $37.6
million in 1992. Earnings per share for 1993 grew 1.0% to $2.09 per share from
$2.07 per share in 1992. These increases were due to the continued growth of
premiums earned and investment income and offset by the significant increase in
incurred losses in 1993 discussed above as well as the change in the Federal
income tax rate.
The weighted average shares outstanding for the year 1993 was 18.14 million
compared to 18.13 million for 1992. This increase reflects the impact of Enhance
Financial's initial public offering in February 1992, in which 750,000 shares of
Common Stock were sold, and offset in part by the repurchase of 64,200 and
84,700 shares on the open market in 1993 and 1992, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, Enhance Financial finances the payment of its
operating expenses, principal and interest on its debt obligations, dividends to
its shareholders, if any, and the repurchase of Common Stock from dividends and
other payments from its subsidiaries, principally the Insurance Subsidiaries,
and draws on the line of credit provided under the Credit Agreement. As of
September 30, 1995, up to $23.0 million was available for the payment of
dividends without prior approval of the insurance regulating authorities from
the Insurance Subsidiaries for the aforesaid purposes. See "Insurance Regulatory
Matters -- Restrictions on Dividends by the Insurance Subsidiaries."
The Company maintains the Credit Agreement with two major commercial banks
providing for borrowings of up to $30 million to be used for general corporate
purposes, the availability of which is subject to the satisfaction by the
Company of certain tests. As of September 30, 1995, the outstanding balance was
$12.0 million and an additional $11.0 million was available under the Credit
Agreement. Of the $12.0 million outstanding, $9.0 million was borrowed during
the first quarter of 1995 to finance Enhance Financial's stock repurchase
program and to contribute $3 million to Asset Guaranty. In the fourth quarter of
1995, the Company borrowed an additional $3 million under the Credit Agreement.
That amount was used to fund a portion of the approximately $4 million purchase
price of the interest the
19
<PAGE>
Company acquired in a newly formed joint venture through which the Company
proposes to continue its investment in higher-yielding private placement assets.
See "Business -- Investments and Investment Policy."
Payments of dividends by Enhance Financial to its shareholders are further
restricted by the terms of agreements relating to its indebtedness. As of
September 30, 1995, the maximum amount of dividends which may be paid by Enhance
Financial to its shareholders in compliance with the terms of such indebtedness
was $35.1 million.
The Company's cash flow from operations for the first nine months of 1995
was $39.0 million compared to $55.7 million for the same period in 1994. The
Company's investment portfolio, excluding investments in affiliates, grew to
$711 million at September 30, 1995 from $640 million at December 31, 1994,
including adjustments due to market value. The Company believes that the
operating liquidity needs of the Insurance Subsidiaries can be funded
exclusively from their respective operating cash flows. The Company's cash flow
from operations consists principally of insurance and reinsurance premiums
collected and income earned on invested assets, which in turn is applied to the
payment of claims, operating expenses and income taxes. Liquidity is also
provided by the Company's sales of its available-for-sale portfolio investments
prior to maturity and payments of principal on investments at maturity. Sales of
investments prior to maturity occur periodically, at the discretion of the
Company's investment managers, typically to realign portions of the investment
portfolio in accordance with the Company's objectives relating to average
maturity and quality and to achieve the optimal mix of taxable and tax-exempt
securities. In 1994 and for the first nine months of 1995, the Company's
non-operating cash outflows were invested almost exclusively in high quality,
fixed-maturity, private placement securities.
Based on the historical cash flow of the Company, the Company's current
financial results and the Company's expectation as to the level of the Company's
net premiums written during the next 12 months, the Company believes that cash
flow provided by operating activities of the Insurance Subsidiaries over the
next year will provide sufficient liquidity for the operations of the Company,
as well as funds to Enhance Financial so that Enhance Financial will be able to
meet its debt service and other obligations. The ability of Enhance Financial to
meet its debt service and other obligations beyond the next 12 months will
depend upon the cash flow generated by the operating activities of the Insurance
Subsidiaries and the availability to Enhance Financial of sufficient amounts of
funds from the Insurance Subsidiaries in the form of dividends or other
payments. Beyond the next 12 months, the Company's cash flow available to
Enhance Financial may be influenced by a variety of factors, including market
changes, insurance regulatory changes and changes in general economic
conditions. Consequently, although the Company presently anticipates that it
will be able to meet all debt service and other obligations over the long term,
no assurance can be given as to whether the available net cash provided by the
Company's operating activities will provide sufficient liquidity for Enhance
Financial to meet all its long-term liquidity needs.
At December 31, 1992, 1993 and 1994, the carrying value of the Company's
investments was $491 million, $622 million, and $640 million, respectively, on
which was earned $30.3 million, $32.8 million and $38.2 million in 1992, 1993
and 1994, respectively, excluding $7.9 million, $16.6 million and $(5.8) million
of net realized gains (losses) in 1992, 1993 and 1994, respectively. The
increase in investments resulted principally from cash flow from operations
generated during the period. As of September 30, 1995, the Company held
approximately $59.7 million and $10.9 million in short term investments and cash
and cash equivalents, respectively, to meet liquidity needs.
Enhance Financial issued $9 million principal amount of notes in December
1991, of which $1.4 million principal amount was redeemed in the fourth quarter
of each of 1994, 1993 and 1992. Debt service on such notes, including interest
and repayment of principal, totaled $1.9 million in 1994 and will approximate
$1.8 million in 1995. In March 1993, Enhance Financial completed a public
offering of the
20
<PAGE>
6.75% Debentures. Annual debt service on the 6.75% Debentures is approximately
$5.1 million, which became payable in semi-annual installments beginning
September 1993. All of the net proceeds of the 6.75% Debenture offering,
approximately $74 million, were contributed to Enhance Re.
In 1994, Enhance Financial continued its stock repurchase program and
purchased 471,300 shares of Common Stock for a total consideration of $8.6
million. Enhance Financial purchased an additional 404,800 shares for a total
consideration of $6.7 million during the nine months ended September 30, 1995,
bringing the total number of shares purchased to that date to 1,025,000 out of
the total number of shares authorized by the board of directors of 1.2 million.
Effective January 19, 1995, the Company entered into a reverse interest-rate
swap transaction with a triple A-rated counterparty based on a notional amount
of $50 million over a term equal to the remaining term of the 6.75% Debentures.
Pursuant to the terms of the swap, the Company incurred an obligation to pay
interest semi-annually at a variable LIBOR-based interest rate and in exchange
will receive interest at a fixed rate of 8.00%. The variable rate is set
quarterly in advance until the September 1, 1995 reset date and thereafter
semi-annually in advance. The variable rate for the initial period to the first
reset date was 6.1875%. Effective June 1, 1995, the Company terminated the swap
and realized a gain on termination in the amount of $4.6 million. The gain has
been deferred and will be amortized over the original term of the swap.
The Company has no other material commitments for capital or other
expenditures within the next 12 months or thereafter.
FINANCIAL GUARANTY INDUSTRY OVERVIEW
GENERAL
Financial guaranty insurance provides an unconditional and irrevocable
guaranty to the holder of a debt obligation of full and timely payment of
principal and interest. Financial guaranty insurance is primarily offered on
municipal and asset-backed debt obligations. In the event of a default under the
obligation, the insurer has recourse against the issuer and/or any related
collateral (which is a more common component in the case of insured asset-backed
obligations or other non-municipal debt) for amounts paid under the terms of the
policy. Payments under the insurance policy may not be accelerated by the holder
of the debt obligation. Absent payment in full at the option of the insurer, in
the event of a default under an insured obligation the holder continues to
receive payments of principal and interest on schedule, as if no default had
occurred. Each subsequent purchaser of the obligation generally receives the
benefit of such guaranty.
Financial guaranty insurance benefits both issuers and investors. The
principal economic value of financial guaranty insurance to an issuer of an
obligation is the savings in interest costs resulting from the difference
between the interest rates on an insured obligation and the interest rate on the
same obligation on an uninsured basis. Investors benefit from the greater
marketability of the insured obligation and a reduction in the risk of loss
associated with an issuer's default, as well as greater retention of value of
their investment should the issuer experience adversity. See "Risk Factors --
Market and Other Factors" for a discussion of factors affecting the demand for
and supply of financial guaranty insurance.
The premium for financial guaranty insurance is paid by the issuer of the
obligation either in full at the inception of the policy or, less commonly, in
installments on an annual basis. Premium rates are typically calculated as a
percentage of either the principal amount of the debt or total exposure
(principal and interest). Rate setting reflects such factors as the credit
strength of the issuer, type of issue, sources of income, collateral pledged,
restrictive covenants, maturity, prevailing market spreads between insured and
uninsured obligations and competition from other insurers, other providers of
credit enhancement and alternatives to credit enhancement.
21
<PAGE>
Premiums are generally non-refundable and are recognized as income over the
life of the insured obligation. This long and relatively predictable earnings
pattern is characteristic of the financial guaranty insurance industry and
provides a relatively stable source of future revenues and claims-paying ability
to financial guaranty insurers and reinsurers.
In addition to Asset Guaranty, there are currently seven active primary U.S.
financial guaranty insurers: Municipal Bond Investors Assurance Corporation
("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial Guaranty Insurance
Company ("FGIC"), Financial Security Assurance Inc. ("FSA"), Capital Market
Assurance Corporation ("CapMAC"), Connie Lee Insurance Company ("Connie Lee")
and Capital Guaranty Insurance Company ("CGIC"). FSA and CGIC have entered into
a merger agreement relating to the acquisition of CGIC by FSA.
FINANCIAL GUARANTY MARKET
The primary financial guaranty insurance market consists of two main
sectors: municipal bond insurance and insurance on asset-backed debt.
MUNICIPAL BOND MARKET. Municipal bond insurance provides credit enhancement
of bonds, notes and other evidences of indebtedness issued by states and their
political subdivisions (for example, counties, cities, or towns), utility
districts, public universities and hospitals, public housing and transportation
authorities, and other public and quasi-public entities. Municipal bonds are
supported by the issuer's taxing power in the case of general obligation or
special tax-supported bonds, or by its ability to impose and collect fees and
charges for public services or specific projects in the case of most revenue
bonds. Insurance provided to the municipal bond market has been and continues to
be the major source of revenue for the financial guaranty insurance industry.
The volume of municipal bonds issued in 1994, $164.9 billion, represented a
substantial decline from the $292.0 billion issued in the prior year. This
decline was due to the substantial and rapid increase in interest rates, which
caused a reduction in refunding issues to the point where they represented only
23% of total issuance compared to 51% in 1993. Bonds issued for new money
purposes, however, increased to $116.0 billion in 1994 from the 1993 level of
$97.0 billion. The insured volume of municipal bonds in 1994 declined to $61.2
billion from the 1993 level of $107.9 billion, representing 37% of total
municipal bonds issued in both years.
In the first nine month of 1995, $105.4 billion of municipal bonds were
issued, of which $78.5 billion was for new money purposes. The insured portion
of such new issues amounted to 41% in the nine-month period.
The following table sets forth certain information regarding new-issue long
term (over one year) municipal bonds and new-issue insured long term municipal
bonds, in each case issued during the years indicated:
<TABLE>
<CAPTION>
NEW INSURED MUNICIPAL
NEW TOTAL NEW INSURED VOLUME AS PERCENT OF
MUNICIPAL MUNICIPAL NEW TOTAL MUNICIPAL
YEAR VOLUME VOLUME VOLUME
- --------------------------------------- ------------- --------------- -----------------------
(IN BILLIONS)
<S> <C> <C> <C>
1986................................... $ 151.3 $ 24.8 16.4%
1987................................... 105.4 21.6 20.5
1988................................... 117.8 30.5 25.9
1989................................... 125.0 30.6 24.5
1990................................... 128.1 33.5 26.2
1991................................... 174.1 52.0 29.9
1992................................... 235.0 81.0 34.5
1993................................... 292.0 107.9 37.0
1994................................... 164.9 61.2 37.1
</TABLE>
- ------------------------
Figures are based upon estimated data provided by The Bond Buyer, November 7,
1995.
22
<PAGE>
In addition to insurance of new issues, financial guaranty insurers have
provided insurance to certain investment vehicles, usually unit investment
trusts or mutual funds, which invest in outstanding issues of municipal bonds.
Although the insurer in such circumstances typically does not have the authority
to restructure the documents of an outstanding issue to conform to its preferred
format, it generally does apply stricter underwriting criteria in determining
which issuers qualify for insurance. Issues with no reserve funds or other
factors usually deemed important in assessing risk of non-payment will be
insured only if the underlying creditworthiness of the issuer is stronger than
usual.
ASSET-BACKED DEBT MARKET. Asset-backed transactions or securitizations
constitute a form of structured financing distinguishable from unsecured debt
issues by being secured by a specific pool of assets having an ascertainable
cash flow or market value that is held by the issuing entity, rather than
relying on the general unsecured creditworthiness of the issuer of the
obligation. While most asset-backed debt obligations represent interests in
pools of assets, such as residential and commercial mortgages and credit card
and auto loan receivables, monoline financial guarantors have also insured
asset-backed debt obligations secured by one or a few assets, such as utility
mortgage bonds and multi-family housing bonds.
The asset-backed securities market experienced very substantial growth in
this decade, with new issuances increasing from approximately $25 billion in
1989 to approximately $75 billion in 1994 and approximately $73 billion in the
nine months ended September 30, 1995. Securities backed by credit card
receivables were the fastest growing segment of the market in 1993 and 1994 and
constituted the largest single component of the market in 1994. The principal
amount of asset-backed debt obligations insured by monoline financial guarantors
grew from $6.7 billion in 1989 to an estimated $27.4 billion in 1994.
REINSURANCE
Reinsurance is the commitment by one insurance company, the "reinsurer," to
reimburse another insurance company, the "ceding company," for a specified
portion of the insurance risks underwritten by the ceding company. Because the
insured party contracts for coverage solely with the ceding company, the failure
of the reinsurer to perform does not relieve the ceding company of its
obligation to the insured party under the terms of the insurance contract.
Reinsurance provides various benefits to the ceding company. It reduces net
liability on individual risks, thereby enabling the ceding company to underwrite
larger policies than its own resources would otherwise support; it reduces
excessive exposure in a geographical area or to a particular type of risk and
affords catastrophe protection from large and/or multiple losses; it stabilizes
the ceding company's results of operations by leveling fluctuations in its loss
ratio; and, by reducing its exposure, it helps the ceding company maintain an
acceptable ratio of exposure to policyholders' surplus.
Perhaps most importantly for financial guaranty insurers, reinsurance
enables a primary insurer to write single risks and greater aggregate risks
without contravening the capital requirements of applicable state insurance laws
and rating agency guidelines. State insurance regulators allow primary insurers
to reduce the liabilities appearing on their balance sheets to the extent of
reinsurance coverage obtained from licensed reinsurers or from unlicensed
reinsurers meeting certain solvency and other financial criteria. Similarly, the
rating agencies permit such a reduction for reinsurance in an amount which
depends on the strength of the reinsurer. See "Business -- Rating Agencies" and
"Insurance Regulatory Matters."
The principal forms of reinsurance are treaty and facultative. Under a
treaty arrangement, the ceding company is obligated to cede, and the reinsurer
is correspondingly obligated to assume, a specified portion of a specified type
of risk or risks insured by the ceding company during the term of the treaty
(although the reinsurance risk thereafter extends for the life of the respective
underlying obligations). Under a facultative agreement, the ceding company from
time to time during the term of the agreement offers a portion of specific risks
to the reinsurer, usually in connection with particular debt obligations. A
23
<PAGE>
facultative arrangement differs from a treaty in that the reinsurer performs its
own underwriting credit analysis to determine whether to accept a particular
risk. Treaty and facultative agreements are typically entered into for an
indefinite term, subject to a right of termination under certain circumstances.
Treaty and facultative reinsurance is typically written on either a
proportional or non-proportional basis. Proportional relationships are those in
which the ceding company and the reinsurer share the premiums, as well as the
losses and expenses, of a single risk or group of risks in an agreed percentage.
In addition, the reinsurer generally pays the ceding company a ceding
commission, which is normally related to the ceding company's cost of obtaining
the business being reinsured. Non-proportional reinsurance relationships are
typically on an excess-of-loss basis. An excess-of-loss relationship provides
coverage to a ceding company to the extent that losses exceed a certain amount,
in an amount up to a certain dollar limit. Excess-of-loss coverage can relate to
a complete line of business or to a specific transaction. These relationships
provide the ceding company with earnings protection and, where the coverage is
on a transaction-by-transaction basis, additional single-risk capacity.
Reinsurers may also, in turn, purchase reinsurance under what are called
"retrocessional agreements" to cover all or a portion of their own exposure and
otherwise for reasons similar to those that cause primary insurers to purchase
reinsurance. See "Business -- Retrocession."
24
<PAGE>
BUSINESS
GENERAL
The Company is principally engaged in the reinsurance of financial
guaranties of municipal and asset-backed debt obligations of monoline financial
guaranty insurers. In addition, the Company is engaged in the insurance and
reinsurance of various specialty lines of business that utilize the Company's
expertise in performing sophisticated analyses of complex, credit-based risks.
The Company expects that a significant portion of its growth will come from its
expanding specialty businesses.
Monoline financial guaranty insurers guaranty to the holders of debt
obligations, primarily those issued by municipalities, the full and timely
payment of principal and interest. In conducting its reinsurance business, the
Company assumes a portion of the risk insured, and receives a portion of the
premium collected, by the primary insurer. Reinsurance of financial guaranties
issued by monoline financial guaranty insurers represented 68.7% and 57.4% of
the Company's gross premiums written for the year ended December 31, 1994 and
the nine months ended September 30, 1995, respectively. During the year ended
December 31, 1994, the Company received 35.5% of the total reinsurance premiums
ceded by all monoline financial guaranty insurers.
The Company's specialty businesses currently involve the issuance of direct
financial guaranties of smaller municipal and multi-family housing-backed debt
obligations, trade credit insurance, financial responsibility bonds and
excess-SIPC bonds. This area of the Company's business, measured by gross
premiums written, has grown from its inception in 1991 to represent over 42% of
the Company's gross premiums written for the nine months ended September 30,
1995. The Company is continuing to expand these businesses and is diversifying
its products and services into other areas that the Company believes have strong
growth potential and in which the Company's strength in credit analysis can
provide a competitive advantage.
The Company's business strategy is to concentrate its efforts on the
maintenance and growth of its financial guaranty business, both primary and
reinsurance, while maintaining its commitment to intensive and prudent credit
underwriting and conservative investment policies; to utilize its expertise in
underwriting credit risks to expand and develop its specialty businesses; and to
accelerate its diversification effort into other areas that the Company believes
have strong profit and growth potential.
The Company's aggregate insurance in force as of September 30, 1995 was
$54.6 billion, of which $38.9 billion, or 71.4%, was attributable to reinsurance
of municipal bond obligations; $10.0 billion, or 18.2%, was attributable to
reinsurance of asset-backed debt obligations; and $5.7 billion, or 10.4%, was
attributable to specialty businesses.
The following table is a summary of the Company's net premiums written for
the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ----------------------
1992 1993 1994 1995
---------- ---------- 1994 ---------- ----------
--------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET PREMIUMS WRITTEN:
Monoline municipal reinsurance................. $ 37,205 $ 62,134 $ 47,235 $ 36,458 $ 27,238
Monoline non-municipal reinsurance............. 8,350 6,169 8,844 5,658 5,132
Specialty business............................. 15,873 18,346 24,606 18,190 22,219
---------- ---------- -------------- ---------- ----------
Total........................................ $ 61,428 $ 86,649 $ 80,685 $ 60,306 $ 54,589
---------- ---------- -------------- ---------- ----------
---------- ---------- -------------- ---------- ----------
</TABLE>
REINSURANCE OF MONOLINE FINANCIAL GUARANTY INSURERS
The Company's principal business is the reinsurance of financial guaranty
insurance written by the seven monoline financial guaranty insurers. The Company
provides reinsurance on both a treaty and facultative basis for all the monoline
primary insurers except CGIC, which it reinsures only on a facultative basis.
See "-- Sources of Premiums" in this section. As of September 30, 1995,
approximately 54% of the insurance in force attributable to monoline financial
guaranty insurers represented business
25
<PAGE>
underwritten on a treaty basis, with the balance being facultative. The
reinsurance written by the Company is subject to a detailed underwriting review.
See "-- Underwriting Staffing, Policies and Procedures" below. Most of the
Company's reinsurance activity is written on a proportional reinsurance basis.
The Company believes that the reinsurance of municipal bond guaranties,
which the Company expects will grow in response to the anticipated long term
growth in the municipal bond market, provides a relatively stable source of
premium income for the Company.
Except for its reinsurance of a small amount of multi-family housing-backed
business written by one primary insurer, the Company has since 1992 ceased
reinsuring real estate-backed business, and it does not expect to resume
reinsuring such business in the foreseeable future. Accordingly, its portfolio
of such business, totaling $220 million principal amount outstanding as of
September 30, 1995 (a decrease from $342 million at year end 1992), is in
run-off.
PREMIUMS CEDED BY INDIVIDUAL PRIMARY INSURERS. The following tables set
forth certain information regarding premiums ceded to the Company by the
monoline financial guaranty insurers in 1992, 1993 and 1994 indicating the
Company's position in the industry during those years:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
YEAR ENDED DECEMBER 31, 1992 YEAR ENDED DECEMBER 31, 1993 1994
------------------------------------------------- ------------------------------------------------- -------------
PREMIUMS CEDED PREMIUMS CEDED PREMIUMS CEDED PREMIUMS CEDED
GROSS AS % OF TOTAL AS % OF TOTAL GROSS AS % OF TOTAL AS % OF TOTAL GROSS
PREMIUMS CEDED TO THE PREMIUMS CEDED PREMIUMS CEDED TO THE PREMIUMS CEDED PREMIUMS
PRIMARY CEDED TO THE COMPANY BY ALL BY PRIMARY CEDED TO THE COMPANY BY ALL BY PRIMARY CEDED TO THE
INSURER COMPANY PRIMARY INSURERS INSURER COMPANY PRIMARY INSURERS INSURER COMPANY
- --------- ------------- ---------------- ---------------- ------------- ---------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AMBAC.... $ 10,248 22.0% 19.8% $ 14,417 20.6% 40.3% $ 5,631
CapMAC... 1,229 2.7 28.9 574 0.8 16.0 3,618
CGIC..... 715 1.5 65.9 7,198 10.3 100.0 464
Connie
Lee..... 998 2.2 35.8 1,838 2.6 48.2 1,272
FGIC..... 7,599 16.3 19.6 13,690 19.6 27.4 19,608
FSA...... 13,480 29.0 25.6 9,987 14.3 16.1 7,674
MBIA..... 12,247 26.3 38.8 22,320 31.8 46.4 20,195
------------- ------ ------------- ------ -------------
Total.. $ 46,516 100.0% 25.4% $ 70,024 100.0% 33.3% $ 58,462
------------- ------ ------------- ------ -------------
------------- ------ ------------- ------ -------------
<CAPTION>
PREMIUMS CEDED PREMIUMS CEDED
AS % OF TOTAL AS % OF TOTAL
CEDED TO THE PREMIUMS CEDED
PRIMARY COMPANY BY ALL BY PRIMARY
INSURER PRIMARY INSURERS INSURER
- --------- ---------------- ----------------
<S> <C> <C>
AMBAC.... 9.6% 23.6%
CapMAC... 6.2 27.8
CGIC..... 0.8 70.1
Connie
Lee..... 2.2 99.0
FGIC..... 33.5 42.4
FSA...... 13.1 26.8
MBIA..... 34.6 39.7
------
Total.. 100.0% 35.5%
------
------
</TABLE>
EXPOSURE ATTRIBUTABLE TO INDIVIDUAL PRIMARY INSURERS. The following table
sets forth the Company's insurance in force attributable to the reinsurance of
financial guaranties issued by monoline primary insurers as of the dates
indicated:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------- ----------------------
1994 1995
---------------------- ----------------------
INSURANCE % OF INSURANCE % OF
PRIMARY INSURER IN FORCE TOTAL IN FORCE TOTAL
- ------------------------------------------------------------------- ----------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
AMBAC.............................................................. $ 8,725 19.6% $ 10,199 20.8%
CapMAC............................................................. 637 1.4 1,081 2.2
CGIC............................................................... 981 2.2 1,102 2.3
Connie Lee......................................................... 407 0.9 428 0.9
FGIC............................................................... 11,396 25.6 12,218 25.0
FSA................................................................ 5,191 11.7 5,499 11.2
MBIA............................................................... 17,148 38.6 18,419 37.6
----------- --------- ----------- ---------
Total.......................................................... $ 44,485 100.0% $ 48,946 100.0%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
PORTFOLIO DATA. The Company seeks to maintain a diversified insurance
portfolio designed to spread its risk based on issuer, type of debt obligation
insured and geographic concentration. The following table sets forth the
distribution of the Company's reinsured monoline-guarantied obligations
26
<PAGE>
by bond type as of December 31, 1994 and September 30, 1995. As the following
table indicates, municipal bond reinsurance accounted for 81.1% and 79.7% of the
Company's insurance in force ceded by the monoline financial guaranty insurers
at these respective dates.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994 AS OF SEPTEMBER 30, 1995
------------------------- ---------------------------
INSURANCE IN INSURANCE IN % OF
TYPE OF OBLIGATION FORCE % OF TOTAL FORCE TOTAL
- ------------------------------------------------------------ ------------ ----------- ------------ -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Municipal:
General obligation/tax supported............................ $ 13,888 31.2% $ 14,698 30.0%
Water/sewer/electric/gas.................................... 9,023 20.3 9,094 18.6
Health care................................................. 5,330 12.0 6,651 13.6
Airports/transportation..................................... 4,406 9.9 4,926 10.1
Housing revenue............................................. 1,303 2.9 1,130 2.3
Other (1)................................................... 2,137 4.8 2,487 5.1
------------ ----- ------------ -----
Total municipal......................................... 36,087 81.1 38,986 79.7
------------ ----- ------------ -----
Asset-backed:
Consumer obligations........................................ 3,656 8.2 5,224 10.7
Investor-owned utilities.................................... 3,177 7.1 3,044 6.2
Commercial mortgage......................................... 353 0.8 312 0.6
Other (2)................................................... 1,212 2.8 1,380 2.8
------------ ----- ------------ -----
Total asset-backed...................................... 8,398 18.9 9,960 20.3
------------ ----- ------------ -----
Total................................................... $ 44,485 100.0% $ 48,946 100.0%
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
- ------------------------
(1) Represents other types of municipal obligations, none of which individually
constitutes a material amount or percentage of the Company's insurance in
force.
(2) Includes $585 million and $630 million at December 31, 1994 and September
30, 1995, respectively, collateralized by corporate debt obligations; the
balance represents other types of assets which collateralize obligations
reinsured by the Company, none of which individually constitutes a material
amount or percentage of the Company's insurance in force.
The following table identifies by issuer the Company's 10 largest
single-risk principal amounts outstanding as of September 30, 1995 and the
credit rating assigned by Standard & Poor's as of that date (in the absence of
financial guaranty insurance) to each such issuer:
<TABLE>
<CAPTION>
CREDIT
CREDIT(1) RATING OBLIGATION TYPE
- ------------------------------------------------------- --------- ------------------------- AS OF SEPTEMBER 30,
1995
--------------------
PRINCIPAL AMOUNT
OUTSTANDING
--------------------
(IN MILLIONS)
<S> <C> <C> <C>
Mid-State Trust IV..................................... BBB Consumer Obligation $ 397.7
New York City, NY...................................... BBB+ General Obligation 293.5
State of California.................................... A General Obligation 289.6
Municipal Electric Authority of Georgia................ AA- Public Power 280.2
Commonwealth of Massachusetts.......................... A+ General Obligation 276.8
Commonwealth of Puerto Rico............................ A General Obligation 276.6
New York City Municipal Water Finance Authority........ A- Water & Sewer 261.2
Dade County, Florida Water & Sewer System.............. A Water & Sewer 254.5
District of Columbia................................... B General Obligation 233.2
Metropolitan Washington Airport Authority.............. AA- Airports 230.2
</TABLE>
- ------------------------
(1) Mid-State Trust IV is an asset-backed security obligation backed by
residential mortgages. The other credits are municipal obligations.
27
<PAGE>
The following table sets forth the distribution by state of the Company's
insurance in force in connection with its reinsurance of monoline-guarantied
obligations as of September 30, 1995:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1995
-----------------------------
STATE % OF TOTAL
- --------------------------------------------------------------- INSURANCE IN ---------------
FORCE
------------
(IN
MILLIONS)
<S> <C> <C>
California..................................................... $ 6,266 12.80%
New York....................................................... 5,282 10.79
Florida........................................................ 4,018 8.21
Pennsylvania................................................... 2,884 5.89
Texas.......................................................... 2,873 5.87
Illinois....................................................... 2,261 4.62
New Jersey..................................................... 1,791 3.66
Massachusetts.................................................. 1,546 3.16
Ohio........................................................... 1,373 2.81
Georgia........................................................ 1,144 2.34
Other (1)...................................................... 19,508 39.85
------------ -------
Total...................................................... $ 48,946 100.00%
------------ -------
------------ -------
</TABLE>
- ------------------------
(1) Includes $6.7 billion related to pooled or foreign credits for which
specific allocation by state is not available; the balance represents other
states and jurisdictions in which obligations insured and reinsured by the
Company arise, none of which individually constitutes a material portion of
the Company's insurance in force.
UNDERWRITING STAFFING, POLICIES AND PROCEDURES. The Company believes that
its underwriting discipline has been critical to its profitable growth. The
Company has a structured underwriting process to determine the characteristics
and creditworthiness of risks that it reinsures, which process supplements the
underwriting procedures of the primary insurers. Rather than relying entirely
upon the underwriting performed by the primary insurers, both the Company and
the rating agencies conduct extensive reviews of the primary insurers.
The Company conducts periodic detailed reviews of each monoline primary
carrier with which it does treaty business. That review entails an examination
of the primary insurer's operating, underwriting and surveillance procedures;
personnel; organization and existing book of business; as well as the primary
insurer's underwriting of a sample of business assumed under the treaty. Any
underwriting issues are discussed internally by the Company's credit committee
and with the primary insurer's personnel.
The Company responds to and usually approves, on a same-day-basis and with a
minimum of credit analysis and no prior review by its full credit committee,
certain high-quality primary facultative submissions falling within certain
aggregate exposure limits. In responding to facultative submissions not meeting
the foregoing criteria, one of the Company's credit analysts, together with the
primary insurer's analyst, reviews the transaction and may also be involved in
the early stages of structuring the financing. The Company's analyst prepares a
formal transaction and credit review, utilizing a standardized report format,
including a recommendation, and presents the review to the Company's credit
committee for approval.
The Company relies on ongoing oversight by its credit committee to avoid
undue exposure concentration in any given type of obligation or geographic area.
Moreover, the ceding insurer is typically required to retain at least 25% of the
exposure on any single risk assumed.
Limitations on the Company's single-risk exposure derive from state
insurance regulation, rating agency guidelines and internally established
criteria. The primary factor in determining single-risk capacity is the class or
sector of business being underwritten. For municipal credits, the Company has
self-imposed single-risk guidelines which range widely, depending upon the
perceived risk of default of
28
<PAGE>
the municipal obligation reinsured. On individual underwritings, the Company's
credit committee may limit the allocation of capacity to an amount below that
allowed by the single-risk guidelines noted above. For asset-backed
transactions, the Company's single-risk guidelines generally follow state
insurance regulation limitations.
The Company's surveillance procedures include reviews of all risks insured
as a primary insurer and those exposures assumed as a reinsurer as to which it
may have concerns. The Company also maintains regular communication with the
surveillance departments of the ceding primary insurers.
SPECIALTY BUSINESSES
The Company services certain specialty markets not served by the monoline
financial guaranty industry. In certain of these new business areas, the Company
operates as a primary insurer in areas or for transactions where the monoline
financial guaranty primaries decline to provide coverage; others involve the
Company serving as a reinsurer for certain specialty primary insurers in which
the Company has significant equity interests or is otherwise a participant.
In writing these specialty lines of business, the Company utilizes its
expertise in evaluating complex credit-based risks. In terms of gross premiums
written, the specialty businesses have increased significantly since their
inception in 1991 to the point where they represented over 42% of the Company's
gross premiums written for the nine months ended September 30, 1995, compared to
31% for the nine months ended September 30, 1994. The Company's business
strategy includes its objective to expand and develop further these specialty
lines. To that end, the Company is devoting its data, technology and expertise
as part of an accelerated program to seek out and identify significant
diversification opportunities that the Company believes have strong profit and
growth potential and where the Company's expertise can be utilized.
The following tables set forth certain information concerning the Company's
specialty businesses as of the dates and for the periods indicated:
<TABLE>
<CAPTION>
INSURANCE IN FORCE
--------------------------------------------------
AS OF DECEMBER 31,
------------------------------- AS OF SEPTEMBER
CATEGORY OF SPECIALTY BUSINESS 1992 1993 1994 30, 1995
- -------------------------------------------------------------------------- --------- --------- --------- -----------------
(IN BILLIONS)
<S> <C> <C> <C> <C>
Municipal bonds-direct.................................................... $ 0.6 $ 1.0 $ 1.5 $ 1.8
Multi-family housing-backed financings-direct............................. 0.3 0.4 0.4 0.4
Credit reinsurance........................................................ 0.2 0.4 1.7 3.1
Financial responsibility bonds............................................ 0.1 0.1 0.2 0.3
Other..................................................................... 0.1 0.1 0.1 0.1
--- --- --- ---
Total(1).............................................................. $ 1.3 $ 2.0 $ 3.9 $ 5.7
--- --- --- ---
--- --- --- ---
</TABLE>
- ------------------------
(1) Does not include insurance in force pursuant to the excess-SIPC program,
described below.
29
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1992 1993 1994
---------------------------- ---------------------------- ----------------------------
NET PREMIUMS PREMIUMS NET PREMIUMS PREMIUMS NET PREMIUMS PREMIUMS
CATEGORY OF SPECIALTY BUSINESS WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- ------------------------------ ------------- ------------- ------------- ------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Municipal bonds -- direct..... $ 6.2 $ 0.6 $ 4.6 $ 1.5 $ 7.2 $ 1.9
Multi-family housing-backed
financings-direct............ 3.0 0.8 2.8 1.2 1.3 1.4
Credit reinsurance............ 4.7 4.8 6.7 6.5 10.9 10.4
Financial responsibility
bonds........................ 1.9 1.5 2.5 2.0 2.8 2.6
Excess-SIPC................... -- -- 2.0 1.5 2.2 2.0
Other......................... 0.1 0.9 (0.3) 0.4 0.2 0.6
----- --- ----- ----- ----- -----
Total..................... $ 15.9 $ 8.6 $ 18.3 $ 13.1 $ 24.6 $ 18.9
----- --- ----- ----- ----- -----
----- --- ----- ----- ----- -----
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1995
----------------------------
NET PREMIUMS PREMIUMS
CATEGORY OF SPECIALTY BUSINESS WRITTEN EARNED
- ------------------------------ ------------- -------------
<S> <C> <C>
Municipal bonds -- direct..... $ 5.2 $ 1.8
Multi-family housing-backed
financings-direct............ 0.2 0.9
Credit reinsurance............ 10.4 9.8
Financial responsibility
bonds........................ 3.4 2.7
Excess-SIPC................... 2.4 1.8
Other......................... 0.6 0.2
----- -----
Total..................... $ 22.2 $ 17.2
----- -----
----- -----
</TABLE>
MUNICIPAL BONDS. The Company writes municipal bond insurance as a primary
insurer in certain transactions where the monoline financial guaranty primary
insurers have not elected to participate. This writing is focused on various
market sectors including tax-backed obligations, infrastructure revenue bonds,
health care bonds, higher education bonds and municipal lease obligations. Each
such issue, subsequent to its being insured, must be reviewed by Standard &
Poor's and Duff & Phelps, which determine whether the issue is of investment
grade quality and, after their review, report their findings to the Company.
MULTI-FAMILY HOUSING-BACKED FINANCINGS. Multi-family housing-backed
financings consist principally of refinancings of tax-exempt bonds originally
issued by an industrial development authority or housing finance authority for
the development of multi-family housing. By focusing on refinancings, the
Company is able to avoid the construction and "lease-up" risks which often
characterize initial real estate-backed financings. In addition to the Company's
underwriting procedures, each such financing is reviewed by Standard & Poor's
and Duff & Phelps soon after the transaction is insured by the Company.
CREDIT REINSURANCE. Credit reinsurance protects sellers of goods against
non-payment of the receivables they hold from buyers of those goods, under
certain circumstances. Some companies cover receivables only where the buyer and
seller are in the same country, while other insurers cover cross-border
receivables. In the latter instance, the insurer may cover certain political
risks (foreign currency controls, expropriation, etc.) which interfere with the
payment from the buyer. The Company's credit reinsurance book of business
includes domestic and cross-border business, and some treaties include political
risks.
The Company is a member-reinsurer, together with Great American Insurance
Company, of the Foreign Credit Insurance Association ("FCIA"), which guaranties
export financing for transactions between exporters and foreign purchasers.
In addition, the Company participates in proportional and non-proportional
reinsurance treaties with several credit insurers, primarily in Europe. The
largest relationships in terms of premium are with the NCM Group (domiciled in
the Netherlands) and Trade Indemnity PLC (domiciled in the United Kingdom).
As of September 30, 1995, Enhance Financial owned approximately a 37% equity
interest (representing 55% of the voting interest) in EIC Corporation Ltd.,
which, in turn, owns all the outstanding capital stock of Exporters Insurance
Company Ltd. ("Exporters"), an insurer of domestic and foreign trade receivables
for export companies. The Company provides significant reinsurance capacity to
this joint venture on a proportional quota share and facultative
non-proportional excess-of-loss basis.
FINANCIAL RESPONSIBILITY BONDS. The Company owns an indirect controlling
equity interest in Van-American Insurance Company ("Van-Am"), which writes
reclamation bonds for the coal mining industry, generally in strip mining
ventures, and surety bonds covering the closure and post-closure obligations of
landfill operators.
30
<PAGE>
EXCESS-SIPC. The Company writes surety bonds for the protection of
customers of large securities brokers against the loss of securities in their
brokerage accounts in the event of the broker's insolvency and liquidation.
Bonds issued under this program provide coverage for loss per account in excess
of the $500,000 of loss covered by the government-established Securities
Investor Protection Corporation ("SIPC") up to a maximum of $100 million of
loss. The coverage is offered only to members of the brokerage community that
meet specific financial, legal and operating criteria established by the
Company.
Although the dollar value of customer assets protected by the Company's
excess-SIPC policies totals in the billions, the Company's actual exposure is
considerably lower. Losses in a brokerage account occur only to the extent, if
any, a covered broker-dealer becomes insolvent and securities are missing and
the individual customer losses, which are prorated among all the customers of
that broker-dealer, exceed the applicable deductible amount, which ranges from
$500,000 to $25 million per customer on the excess-SIPC policies issued by the
Company. As part of its underwriting process, the Company reviews the operations
and exposure amounts of each broker-dealer applying for coverage and calculates
a maximum loss based on the normal day-to-day operational exposures of that
broker-dealer. The Company estimates that its maximum total losses, net of
reinsurance, in the unlikely circumstance that all covered broker-dealers were
liquidated would not exceed $5 million.
The Company also engages in a limited amount of other types of insurance
business including surety and residual value insurance.
UNDERWRITING PROCESS AND SURVEILLANCE. The underwriting criteria applied in
evaluating a given issue and the internal procedures (for example, credit
committee review) for approval of the issue are substantially the same as for
the underwriting of reinsurance. The principal differences in the process stem
from the fact that the entire underwriting responsibility rests with the Company
as the primary insurer. As a result, the Company participates more actively in
the structuring of the transaction. The Company conducts, at least annually,
in-depth surveillance of issues insured as a primary.
SOURCES OF PREMIUMS
The following table sets forth certain information regarding insurance
business assumed and written by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------------------------------------------------
GROSS PREMIUMS
WRITTEN AS
PERCENT OF PREMIUMS EARNED
GROSS NET TOTAL GROSS AS PERCENT OF PREMIUMS EARNED
PREMIUMS PREMIUMS PREMIUMS PREMIUMS TOTAL PREMIUMS AS PERCENT OF
SOURCES OF PREMIUMS WRITTEN WRITTEN EARNED WRITTEN EARNED TOTAL REVENUES
- ---------------------------- ----------- ----------- ----------- --------------- --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Financial guaranty
reinsurance
AMBAC..................... $ 5,631 $ 5,572 $ 6,488 6.6% 10.5% 6.7%
CapMAC.................... 3,618 3,618 889 4.3 1.4 0.9
CGIC...................... 464 464 575 0.6 0.9 0.6
Connie Lee................ 1,272 1,272 269 1.5 0.4 0.3
FGIC...................... 19,608 19,608 13,164 23.0 21.3 13.6
FSA....................... 7,674 7,323 8,392 9.0 13.6 8.7
MBIA...................... 20,195 19,725 13,383 23.7 21.7 13.9
Specialty businesses (1).... 26,650 26,650 20,646 31.3 33.5 21.4
Retrocessions............... -- (3,547) (2,049) -- (3.3) (2.1)
----------- ----------- ----------- ----- ----- ---
$ 85,112 $ 80,685 $ 61,757 100.0% 100.0% 64.0%
----------- ----------- ----------- ----- ----- ---
----------- ----------- ----------- ----- ----- ---
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
----------------------------------------------------------------------------------------
GROSS PREMIUMS
WRITTEN AS
PERCENT OF PREMIUMS EARNED
GROSS NET TOTAL GROSS AS PERCENT OF PREMIUMS EARNED
PREMIUMS PREMIUMS PREMIUMS PREMIUMS TOTAL PREMIUMS AS PERCENT OF
SOURCES OF PREMIUMS WRITTEN WRITTEN EARNED WRITTEN EARNED TOTAL REVENUES
- ---------------------------- ----------- ----------- ----------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Financial guaranty
reinsurance
AMBAC..................... $ 9,132 $ 9,132 $ 4,306 15.9% 9.5% 5.4%
CapMAC.................... 1,340 1,340 1,386 2.3 3.1 1.8
CGIC...................... 1,075 1,075 469 1.9 1.0 0.6
Connie Lee................ 230 230 142 0.4 0.3 0.2
FGIC...................... 5,749 5,749 5,753 10.0 12.7 7.3
FSA....................... 4,233 4,233 6,539 7.4 14.4 8.3
MBIA...................... 11,279 11,213 9,747 19.6 21.5 12.3
Specialty businesses (1).... 24,520 24,521 19,006 42.5 41.8 24.0
Retrocessions............... -- (2,904) (1,942) -- (4.3) (2.5)
----------- ----------- ----------- ----- ----- -----
$ 57,558 $ 54,589 $ 45,406 100.0% 100.0% 57.40%
----------- ----------- ----------- ----- ----- -----
----------- ----------- ----------- ----- ----- -----
</TABLE>
- ------------------------
(1) Includes business written by the Company as a primary insurer. For all
periods presented, no single primary insurer included in "Specialty
businesses" provided greater than 6.3%, 6.6% and 6.0% of gross premiums
written, net premiums written and premiums earned, respectively.
The Company has maintained close and long-standing relationships with its
monoline financial guaranty insurer clients, dating essentially from either the
Company's or the given primary insurer's inception. In the Company's opinion,
these relationships provide the Company with a comprehensive understanding of
its clients' procedures and reinsurance requirements and allow the clients to
utilize the Company's underwriting expertise effectively, thus improving the
service they receive.
The Company is a party to treaty agreements with all the monoline primary
insurers except CGIC and with FCIA, NCM Group, Trade Indemnity PLC and Exporters
and to facultative agreements with all the monoline primary insurers. The
Company's treaty and facultative agreements usually are entered into for an
indefinite term, subject to termination (i) upon written notice (ranging from 90
to 120 days) prior to the specified deadline for renewal or (ii) at the option
of the primary insurer if the Company fails to maintain certain financial,
regulatory and rating agency criteria which are equivalent to or more stringent
than those the Company is otherwise required to maintain for its own compliance
with the Insurance Law and, in the case of the agreements with the primary
monoline insurers, to maintain specified rating agencies' claims-paying ability
ratings for the particular Insurance Subsidiary. Upon termination under the
conditions set forth in (ii) above, the Company may be required to return to the
primary insurer all unearned premiums, less ceding commissions, attributable to
reinsurance ceded pursuant to such agreements. Upon the occurrence of the
conditions set forth in (ii) above, whether or not an agreement is terminated,
the Company may be required to obtain a letter of credit or alternative form of
security to collateralize its obligation to perform under such agreement.
Of the Company's aggregate monoline reinsurance exposure of $48.9 billion as
of September 30, 1995, $26.6 billion, or 54%, was derived through its treaty
relationships with the primary insurers.
LOSS EXPERIENCE
The Company establishes a provision for losses and LAE when reported by
primary insurers or when, in the Company's opinion, an insured risk is in
default or a default is probable and the amount of the loss is reasonably
estimable. Provisions for losses and LAE are established based on the estimated
loss, including expenses associated with settlement of the loss, through the
full term of the insured
32
<PAGE>
obligation. In the case of obligations with fixed periodic payments, the
provision for losses and LAE represents the present value of the Company's
ultimate expected losses, adjusted for estimated recoveries under salvage or
subrogation rights. The estimates for losses and LAE are periodically evaluated
by the Company, and changes in estimates are reflected in income currently. The
Company believes that the reserves are adequate to cover the ultimate net cost
of all claims. However, the reserves are necessarily based on estimates, and
there can be no assurance that the ultimate liability will not exceed such
estimates. The estimation of reserves for losses and LAE includes a non-specific
loss reserve.
On any given municipal and asset-backed reinsurance transaction, the Company
and its primary insurer clients underwrite based on a zero-loss underwriting
objective.
As the Company anticipated when it entered into the specialty business area,
it has experienced relatively higher loss levels in certain of these businesses
than it experienced in connection with its monoline reinsurance business. The
Company considers these higher loss levels when it establishes premium rates for
its specialty businesses.
The following table sets forth certain information regarding the Company's
loss experience for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
LOSS EXPERIENCE 1992 1993 1994 1994 1995
- ------------------------------------------------------------ --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net reserve for losses and LAE at beginning of period....... $ 7,231 $ 13,812 $ 8,753 $ 8,753 $ 26,717
Net provision for losses and LAE
Occurring in current period............................... 9,705 2,772 9,921 5,638 1,679
Occurring in prior periods................................ (410) 19,315 12,921 2,912 5,036
--------- --------- --------- --------- ---------
Total................................................... 9,295 22,087 22,842 8,550 6,715
--------- --------- --------- --------- ---------
Net payments for losses and LAE
Occurring in current period............................... 1,709 616 3,216 1,841 439
Occurring in prior periods................................ 1,005 26,530 1,662 1,150 3,750
--------- --------- --------- --------- ---------
Total................................................... 2,714 27,146 4,878 2,991 4,189
--------- --------- --------- --------- ---------
Net reserve for losses and LAE at end of period............. $ 13,812 $ 8,753 $ 26,717 $ 14,312 $ 29,243
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
In 1991 and 1992, the Company established reserves aggregating $9.8 million
in connection with three transactions for which the Company was a reinsurer of
financial guaranties of securities backed by pools of commercial real estate. In
1993, in connection with the refinancing of these three transactions and with a
resulting reduction in exposure, the Company paid losses of approximately $20
million, including the remaining balance of amounts previously reserved, and
thereby incurred additional losses and LAE of $12.9 million. In 1994, following
notification from the primary insurer, the Company increased its case reserves
on these refinanced transactions by $7.1 million. In 1994, the Company also
established case reserves of $2.4 million on two additional transactions in its
discontinued commercial real estate portfolio. Of these additions to case
reserves, $7.5 million were established by transfer from the Company's
non-specific reserve, thereby depleting that reserve. Following re-evaluation of
all its potential exposures, the Company increased its non-specific reserve to
$10 million at year-end 1994.
In addition, in 1993 and 1994, the Company incurred losses of $3.5 million
and $5.7 million, respectively, in connection with its credit and surety
businesses, commensurate with the continued growth in premiums written from
these specialty businesses. In the nine months ended September 30, 1995, the
Company incurred losses of $4.4 million in connection with its credit and surety
business.
Net additions to the Company's non-specific reserve in 1993, 1994 and for
the nine months ended September 30, 1995 were $3.6 million, $5.5 million and
$0.9 million, respectively.
33
<PAGE>
The Company believes that the reserves for losses and LAE, including the
case and non-specific reserves, are adequate to cover the ultimate net cost of
claims. However, the reserves are necessarily based on estimates, and there can
be no assurance that the ultimate liability will not exceed such estimates.
INVESTMENTS AND INVESTMENT POLICY
The Company's investment portfolio is managed by five professional
independent investment managers, each of which manages a segment of the
portfolio. See "Certain Relationships and Related Transactions -- Advisory
Services." All investments are guided by the Company's general investment
objectives and policies, including guidelines relating to average maturities and
quality, which are periodically reviewed and revised as appropriate. The
investment policies are designed to achieve diversification of the portfolio and
generally to preclude investments in obligations insured by the Company.
Investments comprise almost entirely fixed income securities, with a mix of
taxable and tax-exempt investments which maximize the net income of the Company.
Moreover, the Company's investment policy does not permit investment in any debt
obligation which is below investment grade, and the Company does not have any
investments of this type.
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. In accordance with SFAS No. 115, the Company
classifies all securities at the time of purchase as "held to maturity" or
"available for sale." Securities held to maturity are those securities which the
Company intends and has the ability to hold until maturity and are carried at
amortized cost. All other fixed maturity securities are classified as available
for sale, are carried at market value and may be sold in response to changes in
interest rates, prepayment risk, payment of losses and other factors. Unrealized
gains and losses, net of taxes, on the available-for-sale portfolio are charged
or credited to shareholders' equity.
Effective January 15, 1994, the Company assumed internal management and
control of invested assets representing approximately 17% of the book value of
the investment portfolio at December 31, 1993. The Company intends to hold these
assets to maturity, and, accordingly, in accordance with SFAS No. 115, they will
continue to be accounted for on an amortized cost basis.
34
<PAGE>
The following tables set forth certain information concerning the types of
investments and maturities composing the investment portfolio of the Company.
<TABLE>
<CAPTION>
AS OF AS OF SEPTEMBER 30, 1995
DECEMBER 31, 1994
------------------------- -------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
INVESTMENT CATEGORY (1) VALUE (2) YIELD (3) VALUE (2) YIELD (3)
- ---------------------------------------------------------------- ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed Maturities -- held to maturity
Municipal Obligations -- Tax Exempt........................... $ 96,868 6.69% $ 101,294 6.58%
Corporate Securities.......................................... 9,718 8.27 9,746 8.10
US Government Obligations..................................... 3,108 6.60 3,586 6.47
Private Placements............................................ 54,586 10.41 91,374 10.26
----------- -----------
Total....................................................... 164,280 8.02 206,000 8.28
----------- -----------
Fixed Maturities -- available for sale
Municipal Obligations -- Tax Exempt........................... 252,653 5.58 268,654 5.52
Corporate Securities.......................................... 46,456 7.44 49,365 7.19
US Government Obligations..................................... 31,771 7.26 25,080 6.93
Mortgage-backed securities.................................... 87,390 8.18 69,190 7.78
Foreign securities............................................ 22,374 8.23 31,485 8.33
----------- -----------
Total....................................................... 440,644 6.54 443,774 6.34
----------- -----------
Short term investments (4)...................................... 34,235 5.57 60,860 5.34
Common stocks................................................... 729 8.57 729 8.57
----------- -----------
Total Investments........................................... $ 639,888 6.86% $ 711,363 6.83%
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
(1) Excludes investments in affiliates.
(2) Investments in fixed maturities held to maturity are carried at amortized
cost. Investments in fixed maturities available for sale are carried at
market value. Short-term investments are carried at cost, which
approximates their market values. Common stocks are carried at market
value. Unrealized gains and losses on fixed maturities available for sale
and common stocks are reflected in shareholder's equity.
(3) Represents yield to maturity on fixed maturities and current yield on
common stocks and certain short-term investments. All amounts are stated on
a pre-tax basis.
(4) Includes $5.8 million and $10.9 million of cash and cash equivalents as of
December 31, 1994 and as of September 30, 1995, respectively.
35
<PAGE>
<TABLE>
<CAPTION>
CARRYING VALUE
-----------------------------------------
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
1994 1995
------------------- --------------------
<S> <C> <C>
MATURITY OF FIXED MATURITIES
Held to Maturity (1)
Due in one year or less.............................................. $ 11,885 $ 30,948
Due after one year through five years................................ 55,275 56,779
Due after five years through ten years............................... 75,532 86,912
Due after ten years.................................................. 21,588 31,361
---------- ----------
Total (2).......................................................... $ 164,280 $ 206,000
---------- ----------
---------- ----------
Available for Sale (3)
Due in one year or less.............................................. $ 2,133 $ 7,232
Due after one year through five years................................ 66,871 40,205
Due after five years through ten years............................... 168,922 146,900
Due after ten years.................................................. 202,718 249,436
---------- ----------
Total (4).......................................................... $ 440,644 $ 443,773
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) The weighted average maturity of the portfolio is estimated to be 6.9 years
and 5.5 years for December 31, 1994 and September 30, 1995, respectively.
(2) Investments in fixed maturities in the held-to-maturity portfolio are
carried at amortized cost. Total market value as of December 31, 1994 and
September 30, 1995 was $167.3 million and $215.8 million, respectively.
(3) While a significant portion of total fixed maturities are due after 10
years, the weighted average maturity of the portfolio is estimated to be
10.7 years and 10.9 years for December 31, 1994 and September 30, 1995,
respectively. This is due to the nature of mortgage-backed securities and
pre-funded municipal bonds, the expected maturities of which are
significantly shorter than their stated maturities.
(4) Investments in fixed maturities in the available for sale portfolio are
carried at market value. Total amortized cost as of December 31, 1994 and
September 30, 1995 was $481.3 million and $433.7 million, respectively.
36
<PAGE>
The Company has an investment policy of maintaining an investment portfolio
having a weighted average credit rating of not lower than AA and of holding
substantially only those debt securities having a credit rating not lower than
A-. The Company's adherence to these policies is reflected in the following
table setting forth certain information concerning the rating by Standard &
Poor's of the Company's investments. The Company's investment strategy also
entails the investment of the maximum available cash in higher yielding, private
placement assets. These assets are fixed-maturity obligations whose quality
ratings do not alter the otherwise weighted average credit rating of the
Company's investment portfolio. In the fourth quarter of 1995, the Company
entered into a joint venture through which the Company will continue to invest
in these assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
<TABLE>
<CAPTION>
PERCENT OF INVESTMENT PORTFOLIO
------------------------------------
AS OF DECEMBER AS OF SEPTEMBER
31, 30,
RATING 1994 1995
- --------------------------------------------------------------------- ---------------- ------------------
<S> <C> <C>
AAA (1).............................................................. 40.9% 37.9%
AA................................................................... 48.3 43.9
A.................................................................... 9.1 12.9
Securities not yet rated............................................. 1.6 4.3
Other................................................................ 0.1(2) 1.0(3)
</TABLE>
- ------------------------
(1) Includes U.S. Treasury and agency obligations, which constituted
approximately 21.0% and 13.7% of the total portfolio as of December 31, 1994
and September 30, 1995, respectively.
(2) Consists of common stock.
(3) Consists of common stock and securities rated BBB.
RETROCESSION
The Company is a party to certain facultative retrocession agreements,
pursuant to which it cedes to certain retrocessionnaires a portion of its
reinsurance exposure. Retrocessions do not discharge the Company from liability
to the primary insurer. That is, the Company is required to pay the full amount
of its obligations to the primary insurer regardless of whether it is entitled
to receive payments from its retrocessionnaire. The Company therefore believes
that in most cases it is vital that retrocessions be made only to very
creditworthy retrocessionnaires. The Company also cedes to reinsurers a portion
of its direct insurance exposure, and the foregoing also describes in general
the relationship between the Company and its reinsurers.
The Company has historically retroceded relatively little of its financial
guaranty reinsurance exposure mainly because the economic gain was not deemed
sufficient to offset both the costs of developing a program and the additional
risks the Company would assume. These risks include that of the solvency of the
retrocessionnaire and possible additional risk if the retrocession is effected
on a non-proportional basis. In 1994, in order to provide needed single-risk
capacity to its primary insurers while staying within regulatory limitations,
the Company retroceded financial guaranty business to two companies highly rated
by Standard & Poor's and expects to retrocede additional amounts in the future,
but on a limited basis.
In its specialty businesses, the Company in recent years has increased the
amount of direct exposure which it reinsures out, particularly that incurred in
its excess-SIPC program, principally in order to comply with applicable
regulatory single-risk limitations. Most of the reinsurance capacity for its
excess-SIPC program is provided by certain of the primary financial guaranty
insurers, for which the Company serves as reinsurer in their municipal bond and
asset-backed transactions. In addition, the Company retrocedes a portion of its
credit reinsurance business from FCIA to several international reinsurance
companies.
In addition to its proportional retrocession agreements described above,
Enhance Re is party to an excess-of-loss reinsurance agreement with Hannover
Ruckversicherungs AG ("Hannover Re") under
37
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which it will be entitled, subject to certain conditions, to draw from Hannover
Re up to $25 million to the extent, if any, it incurs losses in a single
calendar year (a) in excess of the greater of (i) $100 million or (ii) 325% of
net earned premiums for that year or (b) which reduce its statutory capital to
an amount below $75 million. The agreement has a term of one year and is
cancelable annually at the option of either party, except that the Company has
the option to force a seven-year run-off period. Hannover Re is a German
reinsurance company which has a claims-paying ability rating from Standard &
Poor's of AA+.
Gross written premiums of $3.5 million were ceded or retroceded by the
Insurance Subsidiaries to unaffiliated companies in 1994, of which amount 55%
was paid to insurance companies having triple-A claims-paying ability ratings
from Standard & Poor's. Gross written premiums of $2.9 million were ceded or
retroceded by the Insurance Subsidiaries to unaffiliated companies in the nine
months ended September 30, 1995, of which 43% was paid to insurers having
triple-A claims-paying ability ratings from Standard & Poor's.
MARKETING
Most of the Company's business derives from relationships it has established
and maintains with primary insurance companies. These relationships provide
business for the Company in the following major areas: (1) reinsurance for
municipal bonds and asset-backed securities (in which area the Company currently
has either quota share or facultative agreements with all the monoline primary
companies); (2) credit reinsurance (in which the Company collected premiums from
25 credit insurers through September 30, 1995, primarily domiciled in Europe);
and (3) affiliated-company reinsurance (which includes Exporters and FCIA).
The Company markets directly to the monoline insurers writing credit
enhancement business and has direct relationships with its affiliated primary
insurers. Specialist reinsurance intermediaries, most of whom are located in
London, usually present to the Company reinsurance opportunities in the credit
insurance sector. These brokers work with the Company's marketing personnel in
introducing the Company to the primary credit insurance markets and in
structuring reinsurance to meet the needs of the primary insurers.
Intermediaries are typically compensated by the reinsurer based on a percentage
of premium assumed, which varies from transaction to transaction.
COMPETITION
REINSURANCE OF MONOLINE FINANCIAL GUARANTIES. The Company is subject to
direct competition from the only other U.S. company specializing in the
reinsurance of financial guaranty insurance, Capital Reinsurance Company
("Capital Re"), which, together with the Company, provide most of the
reinsurance available for the monoline financial guaranty primary insurers
particularly with respect to facultative reinsurance. The Company believes that
it and Capital Re generally participate in roughly equal percentages in treaties
with primary insurers. Almost all U.S. multiline insurers have declined to
participate in the reinsurance market, which the Company ascribes primarily to
their lack of the special expertise and underwriting skills necessary for this
line of reinsurance. However, several foreign insurers and reinsurers do compete
with the Company on both treaty and facultative bases in the provision of
reinsurance for municipal and asset-backed transactions. Certain of these are
companies with which some of the U.S. primary financial guaranty insurers have
formed strategic alliances. In light of the relatively few primary insurers and
dedicated reinsurers in the financial guaranty insurance industry and the
relatively narrow insurance industry segment in which these companies operate,
and assuming there is no extraordinary increase in the amount of financial
instruments requiring guaranties, increased competition, either in terms of
price or in terms of new entrants into the financial guaranty market, would
likely have an adverse effect on the Company's prospects.
Competition in the financial guaranty reinsurance business is based upon
many factors, including overall financial strength, pricing, service and
evaluation by the rating agencies of claims-paying ability. The agencies allow
credit to a ceding primary insurer's capital requirements and single-risk limits
for reinsurance ceded in an amount which is a function of the strength of the
reinsurer. The Company believes that competition from multiline reinsurers and
new monoline financial guaranty insurers will be
38
<PAGE>
limited due to (a) the declining number of multiline insurers with the requisite
financial strength and (b) the barriers to entry for new reinsurers posed by
state insurance law and rating agency criteria governing minimum capitalization.
Financial guaranty insurance, including municipal bond insurance, also
competes with other forms of credit enhancement, including letters of credit and
guaranties provided primarily by foreign banks and other financial institutions,
some of which are governmental agencies or have been assigned the highest credit
ratings awarded by one or more of the major rating agencies. However, these
credit enhancements serve to provide primary insurers with increased insurance
capacity only for rating agency purposes. They do not qualify as capital for
state regulatory purposes, nor do they constitute credit against specific
liabilities which would allow the primary insurer greater single-risk capacity.
SPECIALTY BUSINESSES. The Company believes that there are a number of
direct competitors of the Company in these specialty businesses, some of which
have greater financial and other resources than the Company. The Company has
limited its activities in specialty market areas to those activities which are
not served by the Company's financial guaranty monoline primary insurer clients.
As a primary insurer, the Company writes insurance on those multi-family
housing-backed financings which are too small for the Company's financial
guaranty monoline primary insurer clients and those municipal bonds with respect
to which such primary insurers have declined to participate because of the size
or complexity of such bond issuances relative to the return. The Company also
serves as a reinsurer for certain specialty primary insurers which are not
monoline financial guaranty insurers, in which the Company has significant
equity interests or is otherwise a participant. Such reinsurance accounted for
5.1% of the Company's gross premiums written in 1994. These specialty primary
insurers are themselves subject to competition from other primary insurers, many
of which have greater financial and other resources.
RATING AGENCIES
The rating agencies allow credit to a ceding primary insurer's capital
requirements and single-risk limits for reinsurance ceded in an amount depending
on the strength of the reinsurer. Standard & Poor's allows 100% credit for
AAA-rated reinsurers, 70% credit for AA-rated reinsurers, 30% credit for A-rated
reinsurers and no credit for lower rated reinsurers. Moody's considers
reinsurers' financial strength, but has not published specific guidelines. Duff
& Phelps allows primary insurers 100% credit for reinsurance rated A or better,
but in applying its financial modeling tests, the credit for reinsurance rated
AA or A is thereafter reduced annually in small increments pursuant to a preset
formula. Standard & Poor's, Moody's and Duff & Phelps periodically review the
business and financial condition of the Company. Moody's reviews reinsurers and
reinsurance programs on a case-by-case basis and gives credit in accordance with
an undisclosed formula.
The claims-paying ability ratings assigned by the rating agencies to a
reinsurance or insurance company are based upon factors relevant to
policyholders and are not directed toward the protection of the reinsurer's or
insurer's securityholders. Such a rating is neither a rating of securities nor a
recommendation to buy, hold or sell any security. Claims-paying ability ratings
assigned to the Insurance Subsidiaries should not be viewed as indicative of or
relevant to any ratings which may be assigned to the Company's outstanding debt
securities by any rating agency and should not be considered an evaluation of
the likelihood of the timely payment of principal or interest under such
securities.
The claims-paying ability rating criteria used by the rating agencies focus
on the following factors: capital resources, financial strength and resources;
demonstrated management expertise in financial guaranty and traditional
reinsurance, credit analysis, systems development, marketing, capital markets
and investment operations; and a minimum policyholders' surplus comparable to
primary company requirements, with initial capital sufficient to meet projected
growth as well as access to such additional capital as may be necessary to
continue to meet standards for capital adequacy. As part of their rating
process, Standard & Poor's, Moody's and Duff & Phelps test the capital adequacy
of the Insurance Subsidiaries they rate by subjecting them to a "worst-case
depression scenario." Expected losses over a depression period are established
by applying capital charges to the existing and projected insurance portfolio.
39
<PAGE>
The Company's ability to compete with other triple-A rated financial
guaranty reinsurers, and consequently its results of operations, would be
materially adversely affected by any downgrade in Enhance Re's or Asset
Guaranty's ratings. Moreover, in addition to the loss of new business that would
result from any such downgrade, several treaties to which either Insurance
Subsidiary is a party grant the respective primary insurers the right to
recapture business previously ceded to such Insurance Subsidiary should it
suffer a downgrade of a specified magnitude in its claims-paying ability rating.
This could result in a material adverse affect on the Company's deferred premium
revenue and its recognition of future income therefrom.
The Company's ability to continue engaging in certain specialty businesses,
principally municipal bonds, would be adversely affected by a downgrade in Asset
Guaranty's rating by Standard & Poor's or Duff & Phelps.
DATA PROCESSING
The Company believes that its data processing system is adequate to support
its current needs and has the capacity to support a greater volume of
reinsurance business. Since it commenced operations, the Company has used
minicomputer systems, currently consisting of a configuration composed of two
Digital Equipment processors, which provide computing services even if only one
processor is available. The Company's data center provides computing services on
a continuous basis 24 hours a day, seven days a week. System applications files
and data bases are backed up to tape on a daily basis, and image back-ups to
tape of all disks are performed quarterly. Back-up tapes are shipped to an
off-site storage facility weekly. Prior to shipment, these tapes are stored
outside the data center in a fireproof safe.
EMPLOYEES
As of September 30, 1995, the Company had 88 employees. None of the
employees is covered by collective bargaining agreements. The Company considers
its employee relations to be good.
PROPERTIES
The Company other than Van-Am occupies 40,550 square feet of office space
comprising its executive offices at 335 Madison Avenue, New York, New York 10017
pursuant to a sublease expiring August 2000. Van-Am occupies 6,300 square feet
of office space at 167 East Main Street, Lexington, Kentucky, pursuant to a
lease expiring December 1999.
LEGAL PROCEEDINGS
The Company is not a party, nor is any of its property subject, to any
material legal proceedings.
ACCOUNTING
GENERAL
The consolidated financial statements of the Company are prepared in
accordance with GAAP. For reporting to certain state regulatory authorities and
the National Association of Insurance Commissioners, financial statements of the
Insurance Subsidiaries are prepared in accordance with statutory accounting
practices ("SAP"), which generally reflect the financial position of the
reporting entity on a more conservative basis than GAAP.
PREMIUM REVENUE RECOGNITION
The Company's revenue consists primarily of (a) premiums earned over the
life of obligations insured or reinsured and (b) investment income. Premiums for
the Company's financial guaranty insurance and reinsurance contracts are in most
cases payable in full at the outset of the terms of noncancellable policies. In
such cases, the premium charged is usually a percentage of the principal
outstanding and interest to be paid over the remaining life of the underlying
debt obligations. Under GAAP, the net premiums written are credited to the
Company's deferred premium revenue and are earned in proportion to the level
amortization of insured principal over the term of each insured debt obligation.
Because of the long maturities of most municipal and asset-backed obligations
insured or reinsured by the Company, the portion of premium earned on a policy
in any year represents a relatively
40
<PAGE>
small percentage of the total net premium written at the commencement of the
policy. Premiums not earned in the first year of the policy remain in deferred
premium revenue until earned in subsequent years over the life of the debt
obligation.
When an insured issue has been refunded, the remaining deferred premium
revenue on the refunded issue in excess of any deferred premium credited to the
refunding issue (the "new issue") is recognized at that time, since the risk to
the Company on the refunded issue is considered to have been eliminated.
Typically, the Company participates in the reinsurance of the new issue. If the
new issue is not insured or is not reinsured by the Company, the entire
remaining deferred premium revenue on the refunded issue is recognized as
revenue when the Company receives proper notification and documentation that the
refunding has occurred.
DEFERRED POLICY ACQUISITION COSTS
In accordance with GAAP, in order to match expenses with revenues, the
Company defers certain policy acquisition costs and amortizes them over the
period in which the related premiums are earned. Deferred policy acquisition
costs comprise those expenses, generally incurred at the commencement of the
term of the insurance and reinsurance contract, that vary with and are primarily
related to the production of new or renewal business, including: commissions
paid on reinsurance assumed, salaries and related costs of underwriting and
marketing personnel, rating agency fees, premium taxes and certain other
underwriting expenses, offset by ceding commission income on premiums ceded to
reinsurers, or retrocessionaires. Deferred policy acquisition costs are reviewed
periodically to determine that they do not exceed recoverable amounts.
INSURANCE REGULATORY MATTERS
NEW YORK FINANCIAL GUARANTY INSURANCE STATUTE
The Insurance Subsidiaries are domiciled and licensed in the State of New
York as financial guaranty insurers under that portion of the Insurance Law
constituting the financial guaranty insurance statute. They are also subject to
the provisions of the Insurance Law and related rules and regulations governing
property-casualty insurers to the extent such provisions are not inconsistent
with the financial guaranty insurance statute. Both Insurance Subsidiaries are
also licensed under the Insurance Law to write surety insurance, credit
insurance and residual value insurance, which are the only other types of
insurance that a financial guaranty insurer licensed under the Insurance Law may
be authorized to write.
The Insurance Subsidiaries are required by New York and each other
jurisdiction in which they are licensed to make various filings, including
quarterly and annual financial statements prepared in accordance with SAP, with
those jurisdictions and with the National Association of Insurance Commissioners
(the "NAIC").
The Insurance Law requires that financial guaranty insurers and reinsurers
maintain both a reserve for known incurred losses (similar to the reserve
described in "Business -- Loss Experience") and a special "contingency reserve"
to protect policyholders against the impact of excessive losses occurring during
adverse economic cycles. Statutory contingency reserves with respect to
obligations reinsured by Enhance Re and Asset Guaranty have been in existence
since each such company's inception and have not been reduced. As of September
30, 1995, the statutory contingency reserves of the Insurance Subsidiaries
aggregated $114.7 million. The size of the contingency reserve is a function of
the premiums written and the principal guaranteed. Moreover, the reserve must be
maintained for a specified period, although it may be drawn on under specified
circumstances if certain conditions are satisfied.
The Insurance Law establishes single-risk limits applicable to all
obligations issued by a single entity and backed by a single revenue source and
aggregate risk limits on the basis of aggregate net liability and policyholders'
surplus requirements. The Insurance Law also regulates the types of securities
in which the Insurance Subsidiaries may invest their minimum policyholders'
surplus.
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<PAGE>
In connection with a recent examination of filings of Asset Guaranty by the
New York Insurance Department (the "Department"), the Company has become aware
that Asset Guaranty is not in compliance with the provision of the Insurance Law
that regulates the types of securities in which insurance companies may invest
their minimum policyholders' surplus. The Company intends to restructure Asset
Guaranty's portfolio as soon as practicable in order to comply with the
Insurance Law. The Company does not believe that such non-compliance or such
restructuring of Asset Guaranty's portfolio will have a material adverse effect
on the Company's results of operations.
FINANCIAL GUARANTY INSURANCE REGULATION IN OTHER STATES
The Insurance Subsidiaries are subject to the insurance laws in each
jurisdiction in which they are licensed to transact insurance.
Reinsurance activities are generally not directly regulated by state law,
which typically excludes the transaction of reinsurance from the activities that
constitute the transaction of insurance and that therefore require licensure.
Reinsurance activities are, however, generally subject to limited indirect
regulation in most states through the regulation of ceding primary insurers
domiciled in those states.
INSURANCE HOLDING COMPANY LAWS
Enhance Financial, as the parent, and the Insurance Subsidiaries, as
controlled insurers, are subject to regulation under the insurance holding
company laws of New York, which requires the Insurance Subsidiaries to register
with the Department and to file with it certain reports including information
concerning their capital structure, ownership, financial condition, certain
intercompany transactions and general business operations.
State holding company laws also require prior notice or regulatory approval
of direct or indirect changes in control of an insurer or its holding company
and of certain material intercorporate transfers of assets within the holding
company structure.
Under the Insurance Law, any person holding or acquiring, directly or
indirectly, 10% or more of the voting securities of an insurance company is
presumed to be holding or acquiring "control" of such company and its
subsidiaries, unless the Department determines upon application that such
acquiror would not control such company. As a beneficial owner of more than 10%
of the voting shares of Enhance Financial, each of USWFS and Manufacturers Life
is presumed under the Insurance Law indirectly to control the Insurance
Subsidiaries. See "Security Ownership of Certain Beneficial Owners and
Management." Pursuant to applications made under Section 1501(c) of the
Insurance Law, the Department has determined, subject to certain conditions,
that neither of such shareholders is considered the ultimate controlling person
of either Insurance Subsidiary.
RESTRICTIONS ON DIVIDENDS BY THE INSURANCE SUBSIDIARIES
The principal source of cash for the payment by Enhance Financial of
dividends and the principal and interest on its debt is the receipt of dividends
from the Insurance Subsidiaries. Under the Insurance Law, the Insurance
Subsidiaries may declare or distribute dividends only out of their earned
surplus (defined to exclude unrealized appreciation) and so long as any such
dividend payment does not reduce their respective statutory capital below $68.4
million, the minimum statutory capital required under the Insurance Law. The
maximum amount of dividends that either Insurance Subsidiary may declare or
distribute in any 12-month period is, in general, the lesser of (a) adjusted net
investment income (defined to include net investment income for the 12 months
preceding the declaration or distribution of the current dividend increased by
the excess, if any, of net investment income over dividends declared or
distributed during the period commencing 36 months prior to the current dividend
and ending 12 months prior thereto) or (b) 10% of policyholders' surplus as of
the end of the most recently reported quarter. As of September 30, 1995, based
on the most recently filed statutory financial statements of the Insurance
Subsidiaries, the amounts (determined on a SAP basis) for Enhance Re represented
by (a) and (b) above were $40.0 million and $21.6 million, respectively, and the
amounts for Asset Guaranty represented by (a) and (b) above were $23.1 million
and $7.9 million, respectively. Accordingly, after giving effect to the dividend
restrictions in the Insurance Law and the requirement that each such
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<PAGE>
company maintain minimum statutory capital of $68.4 million as of September 30,
1995, the maximum amounts which may be distributed by Enhance Re and Asset
Guaranty, based on such statutory financial statements, were $15.0 million and
$8.0 million, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
NAIC/IRIS RATIOS
The Insurance Regulatory Information System of the NAIC was developed
primarily to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. The system identifies eleven industry ratios and
specifies "usual values" for each ratio.
For 1994, Asset Guaranty's change in net writings was +84%, which fell
outside the usual value for change in writings of -33% to +33%. Departure from
the usual value may result in inquiries from the state insurance regulators. The
unusual increase was due to significant increases in all major business lines
and in particular its municipal reinsurance business, which increased over 260%,
year-to-year, exclusive of business assumed from Enhance Re, following receipt
of its AA rating from Standard & Poor's. Direct municipal and other specialty
business net writings increased 58% and 50%, respectively, for the same period.
43
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning directors and executive
officers of Enhance Financial. Each director holds office (subject to Enhance
Financial's by-laws) until the next annual meeting of shareholders and until his
or her successor has been elected and qualified. The information concerning the
directors has been furnished by them to Enhance Financial.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION WITH ENHANCE FINANCIAL
- -------------------------- --------- -----------------------------------------------------------------
<S> <C> <C>
Allan R. Tessler 59 Chairman of the Board
Wallace O. Sellers 65 Vice Chairman of the Board
Daniel Gross 52 President, Chief Executive Officer and Director
Samuel Bergman 47 Executive Vice President, General Counsel and Secretary
Ronald M. Davidow 45 Executive Vice President
Tony M. Ettinger 38 Executive Vice President
Robert M. Rosenberg 50 Executive Vice President and Chief Financial Officer
Bernard L. Smith, Jr. 53 Executive Vice President
James T. Anderson 56 Director
Arthur Dubroff 45 Director
Brenton W. Harries 67 Director
David R. Markin 64 Director
Christopher J. Marsico 34 Director
Bruce D. Monus 40 Director
Richard J. Shima 56 Director
Zane Stait-Gardner 51 Director
Spencer R. Stuart 73 Director
Frieda K. Wallison 52 Director
</TABLE>
- ------------------------
(1) As of September 30, 1995
MR. TESSLER has held the position with Enhance Financial set forth above
since its inception. He has also been Chairman of the Board and Chief Executive
Officer of International Financial Group, Inc., a merchant banking concern,
since 1987 and Allis-Chalmers Corporation, a manufacturer of miscellaneous
fabricated textile products, since November 1993. He also served as Chairman of
the Board and Chief Executive Officer of Ameriscribe Corporation, a provider of
reprographic and related facilities management services, from 1988 to 1993. Mr.
Tessler is also Chairman of the Board of Great Dane Holdings Inc. ("Great Dane")
and Jackpot Enterprises Inc. ("Jackpot") and a director of The Limited, Inc.
Beginning in 1990, Mr. Tessler was retained by Infotechnology, Inc. and
Financial News Network Inc. ("FNN") as a member of a two-person restructuring
team and to serve as a Co-Chief Executive Officer during the restructuring of
these companies. As part of the plan implemented by the restructuring team,
these companies were placed in bankruptcy. FNN emerged from bankruptcy in 1992
as Data Broadcasting Corporation ("DBC"), a provider of market data services to
the investment community. Mr. Tessler continues to serve as Co-Chairman of the
Board and Co-Chief Executive Officer of DBC.
MR. SELLERS has held the position with Enhance Financial set forth above
since January 1995. Prior thereto, he served as President, Chief Executive
Officer and a director of Enhance Financial and Chairman of the Board and Chief
Executive Officer of the Insurance Subsidiaries from their inception. He is a
director of Danielson Holding Company, Inc.
44
<PAGE>
MR. GROSS has held the position with Enhance Financial set forth above and
has served as Chief Executive Officer of the Insurance Subsidiaries since
January 1995. Prior thereto he held senior executive positions with Enhance
Financial and Enhance Re from their inception and was among the founders of the
Company in 1986. Previously, he was President of Daniel J. Gross & Associates
and was a co-founder and Chairman of F.G. Holding Company. Mr. Gross also was
President of Kramer Capital Consultants and worked for Colonial Penn Group as
President of Colonial Penn Insurance Company and Vice President of Marketing for
Colonial Penn Group, and Vice President and Actuary of Colonial Penn Life.
MR. BERGMAN has been Executive Vice President and General Counsel of the
Company since 1991. He has been Secretary of Enhance Financial since 1991 and
Secretary of each of the Insurance Subsidiaries since their inception. He was a
member of the law firm of Shea & Gould from 1980 to 1991.
MESSRS. DAVIDOW AND ROSENBERG have each served as senior executive officers
of the Insurance Subsidiaries since such companies' inception; and as officers
of Enhance Financial since September 1990.
MR. ETTINGER has held the position with Enhance Financial set forth above
since January 1995. From 1993 to 1995 he rendered consulting and strategic
planning services to life insurance companies, and previously thereto from 1989
he served as general partner of Hannibal Associates, L.P., an investment
partnership.
MR. SMITH has held the position with Enhance Financial set forth above and
has served as a senior executive officer of each of the Insurance Subsidiaries
since 1991. He previously served from 1990 to 1991 as a consultant to the
Commonwealth Technology Foundation, the venture capital division of the
endowment fund of Boston University, and from 1984 to 1990 served as Executive
Vice President of Bond Investors Guaranty, a financial guaranty insurer, which
was acquired by MBIA.
MR. ANDERSON has served as a director of Enhance Financial since January
1994, having also served as a director of Asset Guaranty from 1993 until
September 1995. He has since 1976 served in various senior management capacities
with U S WEST and its subsidiaries, currently as acting Executive Vice President
and Chief Financial Officer of U S WEST. Mr. Anderson serves as a director of
Community First Bank, Fargo, North Dakota.
MR. DUBROFF has served as a director of Enhance Financial since 1992 having
previously served as a director of Enhance Financial from 1986 through 1991 and
of Enhance Re from 1986 through 1992. Mr. Dubroff has since November 1993 served
in various senior management capacities, currently as Executive Vice President,
Chief Financial Officer and Chief Quality Officer, of The Shareholder Services
Group, a subsidiary of First Data Corporation, a provider of high-volume
information processing and related services. Previously thereto from 1992, he
served as Chief Financial Officer of Securities Processing Group, a division of
Shearson Lehman Brothers, Inc. ("Shearson"), and also as Executive Vice
President of Shearson. Previously thereto from 1991, Mr. Dubroff served as a
financial officer of American Express Information Services Corporation.
Previously thereto from 1985, Mr. Dubroff served in various senior management
capacities with various subsidiaries of Merrill Lynch & Co., Inc.
MR. HARRIES has served as a director of Enhance Financial since 1991, having
also served as a director of the Insurance Subsidiaries from 1986 until
September 1995. He has been retired since 1986, having previously served from
1985 as President of Global Electronic Markets Company, a joint venture of
McGraw-Hill and Citicorp dealing in electronic trading of commodities. Mr.
Harries also serves as a trustee of the Equitable Funds, Inc. and the Hudson
River Trust.
MR. MARKIN has served as a director of Enhance Financial since 1986. He has
since 1989 served as President of International Controls Corp. and its successor
corporation, Great Dane. Mr. Markin serves as a director of Jackpot and DBC.
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<PAGE>
MR. MARSICO has served as director of Enhance Financial since April 1995. He
has served in various management capacities with U S WEST and its subsidiaries
since 1988, currently as Vice President-Finance of U S WEST Financial Services,
Inc. and U S WEST Real Estate, Inc.
MR. MONUS has served as a director of Enhance Financial since March 1995. He
has since 1988 served in various management capacities with Manufacturers Life
and its subsidiaries, currently principally as Investment Vice President, U.S.
Bonds, Investment Operations, of Manulife Financial.
MR. SHIMA has served as a director of Enhance Financial since 1993. He has
been an independent consultant since 1993, having previously thereto from 1992
served as Managing Director of Russell Miller, Inc., an investment banking
concern specializing in the insurance industry. He previously served from 1963
as an officer of The Travelers Corporation, most recently, from 1985 to 1991, as
Vice Chairman and Chief Investment Officer. Mr. Shima serves as a director of
Connecticut Natural Gas Corporation and the Keystone Mutual Funds.
MS. STAIT-GARDNER has served as a director of Enhance Financial since March
1995. She has since 1973 served in various management capacities with
Manufacturers Life and its subsidiaries, currently principally as Senior Vice
President and General Manager, Reinsurance Operations, of Manulife Financial
MR. STUART has served as a director of Enhance Financial and Enhance Re
since 1992, having also served as a director of Asset Guaranty since its
inception until September 1995. He has for the last ten years served as an
independent consultant regarding organizational and personnel matters. He served
from 1990 to 1992 as Chairman of the Council of Management Advisors of Dean
Witter Reynolds Inc. He is the founder and honorary chairman of Spencer Stuart
Executive Recruiting Consultants and serves as a director of UST Inc.
MS. WALLISON has served as a director of Enhance Financial since 1992,
having also served as a director of each of the Insurance Subsidiaries since its
inception until September 1995. She has since 1983 been a member of the law firm
of Jones, Day, Reavis & Pogue, resident in its Washington, D.C. office.
46
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of September 30, 1995 by (a) each
shareholder known to Enhance Financial to be the beneficial owner, within the
meaning of Section 13(d) of the Exchange Act, of more than 5% of the outstanding
shares of Common Stock; (b) each director of Enhance Financial; (c) each of the
five most highly compensated executive officers of Enhance Financial; and (d)
all executive officers and directors of Enhance Financial as a group. Unless
otherwise indicated, the address of each such person is
c/o Enhance Financial Services Group Inc., 335 Madison Avenue, New York, New
York 10017.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME AND ADDRESS SHARES (1) OF CLASS
- ------------------------------------------------------------------------------------ ------------------ -----------
<S> <C> <C>
U S WEST, Inc. ..................................................................... 5,430,800(2)(3) 31.5
7800 East Orchard Road
Suite 200
Englewood, Colorado 80111
Manufacturers Life Insurance Company ............................................... 2,561,745(3) 14.9
200 Bloor Street, East
Toronto, Ontario
Canada M4W 1E5
The Capital Group Companies, Inc. .................................................. 1,013,000(4) 5.9
333 South Hope Street
Los Angeles, California 90071
Heine Securities Corporation ....................................................... 977,700 5.7
51 J.F.K. Parkway
Short Hills, NJ 07078
Allan R. Tessler.................................................................... 265,500(5)(6) 1.5
Daniel Gross........................................................................ 341,800(5) 2.0
Wallace O. Sellers.................................................................. 462,875(5) 2.7
Robert M. Rosenberg................................................................. 102,850(5) *
Samuel Bergman...................................................................... 33,970(5) *
Bernard L. Smith, Jr................................................................ 29,375 (5) *
James T. Anderson................................................................... 1,000 (7) *
Arthur Dubroff...................................................................... 6,000 (6) *
Brenton W. Harries.................................................................. 6,000 (6) *
David R. Markin..................................................................... 113,000 (6) *
Christopher J. Marsico.............................................................. -- *
Bruce D. Monus...................................................................... -- *
Richard J. Shima.................................................................... 2,000 (8) *
Zane Stait-Gardner.................................................................. -- *
Spencer R. Stuart................................................................... 6,000 (6) *
Frieda K. Wallison.................................................................. 9,400 (6) *
All executive officers and directors as a group..................................... 1,487,425 (9) 8.6
</TABLE>
- ------------------------
* Less than 1%
(1) The table in this section is based upon information supplied by directors,
officers and principal shareholders and Schedules 13D and 13G, if any, filed
with the Commission. Unless otherwise indicated in the footnotes to the
table and subject to the community property laws where applicable, each of
the shareholders named in this table has sole voting and investment power
with respect to the shares shown as beneficially owned by him or her.
47
<PAGE>
(2) The shares are owned directly by USWFS, an indirect wholly-owned subsidiary
of U S WEST. Assuming U S WEST delivers all of the shares of Common Stock to
which this Prospectus relates, U S WEST will thereafter not own any shares
of Common Stock. See "Selling Shareholder" and "Plan of Distribution."
(3) See "Certain Relationships and Related Transactions -- Shareholders'
Agreement" for information regarding a voting agreement to which all or a
portion of such shares are subject and "-- Special Charter Provision" for
information regarding special powers of U S WEST under Enhance Financial's
certificate of incorporation.
(4) Represents shares owned by various institutional investors as to which two
wholly owned operating subsidiaries of the named shareholder exercise
investment discretion. Such subsidiaries hold voting power with respect to
673,000 of such shares.
(5) Includes the shares set forth in: (a) Column A below issued to the named
officer under the Company's Long-Term Incentive Plan for Key Employees (the
"Incentive Plan") which have not vested, (b) Column B below issuable to the
named officer upon the exercise of presently exercisable options granted
under the Incentive Plan and (c) Column C below owned by such officer's wife
and children or in trusts of which the named officer is a trustee (as to
which shares such officer disclaims beneficial ownership).
<TABLE>
<CAPTION>
NAME A B C
- -------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Allan R. Tessler.................................. 0 13,500 2,000
Daniel Gross...................................... 22,150 110,000 93,500
Wallace O. Sellers................................ 31,250 147,375 280,250
Robert M. Rosenberg............................... 8,225 46,250 200
Samuel Bergman.................................... 0 30,125 600
Bernard L. Smith, Jr.............................. 0 29,375 0
</TABLE>
(6) Includes 5,000 shares issuable upon the exercise of the presently
exercisable portion of options granted to such director under the Company's
Non-Employee-Director Stock Option Plan (the "Director Option Plan").
(7) Represents shares issuable upon the exercise of the presently exercisable
portion of options granted to such director under the Director Option Plan.
(8) Includes 1,000 shares issuable upon the exercise of the presently
exercisable portion of options granted to such director under the Director
Option Plan.
(9) Includes 32,000 shares issuable to the directors who are not employees of
the Company upon the exercise of the presently exercisable portion of
options granted to them under the Director Option Plan; 424,875 shares
issuable to the executive officers and one former executive officer upon the
exercise of presently exercisable options granted to them under the
Incentive Plan; 376,550 shares owned by spouses of four executive officers
and one former executive officer, in trusts of which officers are trustees,
or by executive officers or their spouses as custodians for their children;
and 70,850 shares issued under the Incentive Plan which have not vested.
Such persons disclaim beneficial ownership of such shares owned by their
spouses, individually or as custodians, or by such trusts.
SELLING SHAREHOLDER
This Prospectus relates to 4,900,000 shares of Common Stock, plus up to an
additional 530,800 shares solely to cover over-allotments, which may be
delivered by U S WEST or an affiliate thereof, at U S WEST's option, pursuant to
the terms of the DECS, which are being offered by U S WEST pursuant to the DECS
Prospectus. Such 5,430,800 shares of Common Stock are owned by USWFS, an
indirect wholly-owned subsidiary of U S WEST. Assuming U S WEST delivers all of
such 5,430,800 shares of Common Stock pursuant to the terms of the DECS, U S
WEST will not thereafter own any shares of Common Stock.
48
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SPECIAL CHARTER PROVISION
The certificate of incorporation of Enhance Financial grants to U S WEST the
right to preclude the Company from entering into certain activities or owning an
equity interest in any entity that engages in any such activity unless they are
determined by U S WEST's legal counsel not to be prohibited to U S WEST and its
subsidiaries under the Modification of Final Judgment (the "Judgment") entered
in 1984 in connection with the settlement of the legal action entitled UNITED
STATES V. WESTERN ELECTRIC COMPANY, INC. These activities consist of providing
information services or long distance telephone service or manufacturing
telecommunications equipment. Pursuant to the Judgment, American Telephone and
Telegraph Company divested itself of, among other assets, its interest in what
thereafter became the seven regional operating companies, of which U S WEST is
one. Stock certificates issued by Enhance Financial since the date of adoption
of the amendment to Enhance Financial's charter referred to above bear a legend
generally describing the restrictions referred to in the first sentence of the
preceding paragraph.
The Company has not entered, and does not intend to enter, into any of the
specified activities, and, accordingly, the aforesaid provision has not had any
material effect on the business of the Company. At such time as USWFS ceases to
own shares of Common Stock, Enhance Financial intends to propose at the next
following meeting of shareholders the elimination of the aforesaid provision
from the certificate of incorporation, which will require the vote of the
holders of a majority of shares of Common Stock outstanding.
SHAREHOLDERS' AGREEMENT
Enhance Financial and two of its shareholders, USWFS and Manufacturers Life
(the "Shareholder Parties"), are parties to the Shareholders' Agreement, which
requires each Shareholder Party to vote those shares of Common Stock owned by it
which are subject to the Shareholders' Agreement at all elections of directors
of Enhance Financial through 1998 in favor of two directors named by the other
(with adjustments in such number if the size of the board is increased above 15
members). An aggregate of 6,992,545 shares of Common Stock are subject to the
Shareholders' Agreement, of which 5,430,800 are owned by USWFS and 1,561,745 are
owned by Manufacturers Life. Subject to the paragraphs below, USWFS will
continue to vote the shares of Common Stock owned by it unless and until it
delivers such shares pursuant to the terms of the DECS or otherwise disposes of
such shares.
Under the agreement if at any time through the year 2010 U S WEST is
determined by the U.S. Department of Justice or a court of competent
jurisdiction to be in violation of the Judgment by virtue of the activities of
the Company, the Company will be obligated either to (a) curtail such activities
or (b) locate a third party to repurchase the shares of Common Stock owned by
USWFS or repurchase such shares at a price equal to the fair market value
thereof as determined by an accounting firm reasonably acceptable to USWFS. See
"Special Charter Provision" above in this section.
The Shareholders' Agreement will terminate at such time as either of the
Shareholder Parties sells or otherwise disposes of all of its shares of Common
Stock subject to the Shareholders' Agreement or, if such shares are not so sold
or otherwise disposed of, in 2010 or at such earlier time, if any, that either
of the Shareholder Parties owns more than 50% of the outstanding Common Stock.
As a result of the Shareholders' Agreement, the Shareholder Parties may be
deemed to constitute a control group of Enhance Financial pursuant to the
Exchange Act.
Following consummation of the offering of the DECS, U S WEST currently
intends, but is not committed by any agreement or otherwise, to cause USWFS to
vote its shares of Common Stock proportionately to the votes cast by non-U S
WEST shareholders; provided, however, that U S WEST will continue to cause USWFS
to vote its shares of Common Stock in favor of the nominees of Manufacturers
Life to Enhance Financial's board of directors pursuant to the Shareholders'
Agreement; and provided, further, that if (i) a person or group of persons other
than U S WEST is deemed to own more than 15% of the Common Stock within the
meaning of Section 13(d) of the Exchange Act and (ii) there occurs a contested
proxy solicitation within the meaning of Rule 14a-11(a) promulgated under the
Exchange Act,
49
<PAGE>
U S WEST intends to cause USWFS to vote its shares of Common Stock in a manner U
S WEST deems appropriate. In addition, U S WEST intends to cause the two U S
WEST designees who currently serve on Enhance Financial's board of directors to
resign following issuance of the DECS, however, U S WEST will retain its rights
to nominate and vote for candidates for Enhance Financial's board of directors.
REGISTRATION RIGHTS AGREEMENT
The shares of Common Stock offered hereby are being registered pursuant to a
registration rights agreement, dated October 31, 1986, as amended, among
Manufacturers Life, USWFS and certain other of Enhance Financial's shareholders.
Following the offering of the Common Stock hereby, Manufacturers Life will have
one demand registration right and Manufacturers Life and U S WEST will have
unlimited piggyback registration rights, subject to certain limitations.
Substantially all of the expenses of the offering made hereby and any future
demand or piggyback registration are to be borne by Enhance Financial. The
registration rights agreement contains cross-indemnification covenants by
Enhance Financial on the one hand and the shareholder parties thereto on the
other for damages sustained and expenses incurred resulting from material
misstatements or omissions in connection with any such offering.
ADVISORY SERVICES
An affiliate of Manufacturers Life performs investment advisory services in
the ordinary course of its business for the Company. Such services are performed
pursuant to a written advisory agreement the terms and provisions of which are
no less favorable to the Company than those currently in effect in agreements
for comparable services between the Company and unaffiliated entities. For its
services, such shareholder's affiliate, Manufacturers Advisory Corp., received
fees aggregating approximately $358,000 in fiscal year 1994.
REINSURANCE OF FSA BUSINESS
FSA, a financial guaranty insurer and 62%-owned indirect subsidiary of U S
WEST, reinsures a portion of its business with the Company, all on terms and
provisions equivalent to those in comparable transactions currently in effect
with unaffiliated entities. FSA accounted for 9.0% and 7.4% of the Company's
total gross premiums written in the year ended December 31, 1994 and the nine
months ended September 30, 1995, respectively. The Company believes that it and
FSA conduct their business with each other on an arm's-length basis and with
terms no more favorable to the other than would be the case absent the aforesaid
relationship. However, no assurance can be given that conflicts of interest may
not develop in the future or that the business conducted with FSA may not
diminish in future periods regardless of whether payment of the DECS is made in
the form of shares of Common Stock. See "Business -- Reinsurance of Monoline
Financial Guaranty Insurers" and "Security Ownership of Certain Beneficial
Owners and Management."
50
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among Enhance Financial, U S WEST and Salomon
Brothers Inc, U S WEST has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase, the number of DECS set forth below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER DECS
- -------------------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Brothers Inc........................................................................ 4,900,000
</TABLE>
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, that the obligations of the Underwriter
are subject to certain conditions precedent and that the Underwriter will be
obligated to purchase all of the DECS offered pursuant to the DECS Prospectus if
any of the DECS are purchased.
U S WEST has been advised by the Underwriter that it proposes to offer the
DECS directly to the public initially at the public offering price set forth on
the cover of the DECS Prospectus and to certain dealers at such price less a
concession not in excess of $ per DECS. The Underwriter may allow, and such
dealers may reallow, a concession not in excess of $ per DECS to other
dealers. After the initial public offering, such public offering price and such
concession and reallowance may be changed.
U S WEST and Enhance Financial have agreed not to offer for sale, sell or
contract to sell, or otherwise dispose of, or announce the offering of, without
the prior written consent of the Underwriter, any shares of Common Stock or any
securities convertible into or exchangeable for, or warrants to acquire, Common
Stock for a period of 90 days after the date of this Prospectus; provided,
however, that such restriction shall not affect the ability of (i) U S WEST,
Enhance Financial or their respective subsidiaries to take any such actions in
connection with the offering of the DECS made pursuant to the DECS Prospectus or
any exchange at maturity pursuant to the terms of the DECS or (ii) Enhance
Financial to take any such actions in connection with any employee stock option
plan, stock ownership plan or dividend reinvestment plan of Enhance Financial in
effect at the date of this Prospectus.
U S WEST has granted to the Underwriter an option, exercisable for the
30-day period after the date of the DECS Prospectus, to purchase up to an
additional 530,800 DECS from U S WEST, at the same price per DECS as the initial
DECS to be purchased by the Underwriter. The Underwriter may exercise such
option only for the purpose of covering over-allotments, if any, incurred in
connection with the sale of DECS offered pursuant to the DECS Prospectus.
The DECS will be a new issue of securities with no established trading
market. The Underwriter intends to make a market in the DECS, subject to
applicable laws and regulations. However, the Underwriter is not obligated to do
so and any such market-making may be discontinued at any time at the sole
discretion of the Underwriter without notice. Accordingly, no assurance can be
given as to the liquidity of such market.
At U S WEST's option, upon maturity of the DECS, shares of Common Stock may
be delivered by U S WEST or USWFS pursuant to the terms of the DECS. For a
description of the terms of such exchange, see the DECS Prospectus.
The Underwriting Agreement provides that U S WEST and Enhance Financial will
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act, or contribute to payments the Underwriter may be
required to make in respect thereof.
The Underwriter has from time to time performed various investment banking
and financial advisory services for U S WEST, Enhance Financial and their
respective affiliates, for which customary compensation has been received.
51
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
Enhance Financial by Samuel Bergman, Esq., Executive Vice President and General
Counsel of the Company. Mr. Bergman, together with members of his immediate
family, owns an aggregate of 3,850 shares of Common Stock and holds options to
purchase an additional 77,000 shares of Common Stock.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1993
and 1994 and for each of the three years in the period ended December 31, 1994
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports relating thereto,
and have been so incorporated by reference in reliance upon such reports given
upon the authority of that firm as experts in accounting and auditing.
52
<PAGE>
GLOSSARY OF INSURANCE TERMS
<TABLE>
<S> <C>
Acquisition costs............ All expenses incurred by an insurance or reinsurance company
that vary with and are primarily related to the production
of business.
Asset-backed debt obligation
or asset-backed debt
security.................... A debt instrument that is supported by a pool of assets,
such as automobile loans or single-family mortgage loans.
The payments on the assets produce the revenue stream that
services the interest and principal on the asset-backed debt
obligation.
Capacity..................... The measure of an insurer's financial strength to issue
contracts of insurance, usually determined by the largest
amount acceptable on a given risk or, in certain other
situations, by the maximum volume of business it is prepared
to accept.
Cede......................... To pass on to a reinsurer all or part of the insurance
written by an insurer (the ceding insurer) with the object
of reducing the possible liability of the latter. "Cessions"
is the noun equivalent of the verb "cede."
Ceded premiums............... Premiums transferred under reinsurance policies in
connection with the transfer by an insurance company of a
portion of its insured risk to another insurer (the
reinsurer).
Ceding commission............ The consideration paid by an assuming company to a ceding
company to cover acquisition costs related to business
assumed under a reinsurance or retrocession contract.
Ceding company............... A reinsured, synonymous with cedent.
Combined ratio............... The sum of the loss ratio and the expense ratio on either a
SAP or a GAAP basis, as the case may be.
Contingency reserve.......... A reserve used in SAP accounting designed to protect
policyholders against the effect of excessive losses
occurring during adverse economic cycles.
Credit enhancement........... A form of financial guaranty whereby the quality of a
security is upgraded through the use of an insurance policy
or letter of credit.
Credit rating................ An alphabetic system used by major rating agencies to
categorize the creditworthiness of an issuer of a specific
obligation. A credit rating of BBB or Baa or better is
considered an investment grade rating, meaning the
securities have been analyzed and are regarded as having
adequate capacity to provide timely payment of debt service.
A credit rating below BBB or Baa is considered a speculative
grade rating, meaning there is a greater vulnerability to
default.
Earned premium............... The portion of net premiums that is recognized as income
during a given period. The amount of earned premium in a
given period is determined differently under SAP and under
GAAP.
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
Excess of loss reinsurance
(also known as "non-
proportional
reinsurance")............... A generic term describing reinsurance which, subject to a
specified limit, indemnifies the ceding company against all
or a portion of the amount in excess of a specified
retention. The term includes various types of reinsurance,
such as catastrophe reinsurance, per risk reinsurance, per
occurrence reinsurance, and aggregate excess of loss
reinsurance and should not be confused with "surplus share,"
which always refers to a pro rata form of reinsurance.
Export financing............. Transactions that finance the export of goods. The guarantor
typically guaranties the payment obligation of the importer
or buyer of certain specified goods, which obligation can
extend for up to several years.
Facultative reinsurance...... Involves individual risks offered to the reinsurer which the
latter is under no obligation to accept.
Financial guaranty........... The promise to make payments to the holders of a debt, loan
or other similar financial instrument in the event the
borrower or underlying obligor fails to do so.
GAAP......................... Generally accepted accounting principles as defined by the
American Institute of Certified Public Accountants, the
Financial Accounting Standards Board and other recognized
accounting literature. See "SAP."
GAAP expense ratio........... The quotient derived by dividing underwriting and operating
expenses by net premiums earned.
Gross premiums written....... All premiums arising from policies issued and from
reinsurance business assumed.
Guarantor.................... The entity, such as an insurance company, that promises to
pay on an obligation in the event the obligor fails to do
so.
Incurred losses.............. Losses which have already occurred and which have or will
result in a claim under the terms of an insurance policy or
a reinsurance agreement.
Insurance in force or
exposure.................... Principal outstanding and interest to be paid over the
remaining life of a given obligation in respect of
obligations insured and reinsured by the Company, net of
refunded debt obligations, retrocessions, redemptions and
repayments.
Issuer....................... A municipality or corporation or other entity that is the
obligor on a debt issuance to the capital markets.
Leverage ratio............... The ratio of insurance in force to qualified statutory
capital.
Loss adjustment expenses or
LAE......................... The estimated expenses of settling claims, including legal
and other fees and general expenses.
Loss ratio................... The quotient derived by dividing losses and loss adjustment
expenses incurred by net premiums earned on either a SAP or
a GAAP basis, as the case may be.
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
Loss reserve................. For an individual loss, an estimate of the amount the
insurer expects to pay for the reported claim. For total
losses, estimates of expected payments for reported and
unreported claims. May include amounts for loss adjustment
expenses. See "Incurred losses."
Monoline financial guaranty
insurer..................... A property/casualty insurer which operates in areas of bond
insurance and closely related lines, and which has no
exposure resulting from other general property/casualty
lines of business. Monoline financial guaranty insurer
traditionally referred to a writer of municipal bond
insurance, but currently includes, as well, insurers of
asset-backed debt obligations.
Net premiums written......... Total premiums for insurance written and reinsurance assumed
during a given period less total premiums for insurance and
reinsurance ceded to others during such period.
Obligor...................... The entity required to make payments under a debt, loan or
other similar financial instrument.
Policyholders' or statutory
surplus..................... The excess of total assets over total liabilities,
determined in accordance with SAP.
Premiums earned.............. The portion of net premiums written during or prior to a
given period which was actually earned during such period.
Proportional reinsurance..... A generic term describing all forms of reinsurance in which
the reinsurer shares an agreed percentage of original
premiums and losses (usually from first dollar of loss) of
the ceding company. Proportional reinsurance is usually in
the form of quota share reinsurance but may also be in the
form of surplus share.
Qualified statutory
capital..................... The sum of policyholders' or statutory surplus and
contingency reserves.
Quota share.................. A form of proportional reinsurance in which the reinsurer
assumes an agreed percentage of each risk being insured and
shares all premiums and losses accordingly with the
reinsured.
Reclamation bond............. With respect to strip coal mines, an obligation to pay for
the restoration of the mine site in accordance with
applicable state and federal regulations should the insured
(the miner) fail to do so. The financial obligation is up
to, but does not exceed the stated amount of the reclamation
bond.
Reinsurance.................. The practice whereby one party, called the reinsurer or
assuming company, in consideration of a premium paid to such
party, agrees to indemnify another party, called the ceding
company, for part or all of the liability of the ceding
company under a policy or policies of insurance which it has
issued.
Residual value insurance..... Insurance that guaranties a minimum value for an asset or
pool of assets at a particular point in time, such as at the
expiration date of a lease with respect to such asset or
assets.
Retrocession................. The transaction whereby a reinsurer cedes to another
reinsurer (the retrocessionaire) all or part of the
reinsurance the ceding insurer has previously assumed.
</TABLE>
55
<PAGE>
<TABLE>
<S> <C>
SAP.......................... Statutory Accounting Practices required by state law which
must be followed by insurance companies in submitting their
financial statements to state insurance departments. These
differ from GAAP in some important respects.
Surety....................... A line of insurance in which the obligor promises to perform
the obligations of a third party under a contractual
agreement should the third party fail to do so. A surety is
similar in form to a financial guaranty, the essential
difference being that financial guaranties apply to
third-party obligations which are of a financial nature.
Surplus share................ A form of proportional reinsurance indemnifying the ceding
company against loss for the surplus liability ceded.
Treaty reinsurance........... A form of reinsurance which is effected through a single
contract for a period of time, usually one year, under which
the reinsurer agrees, in advance, to accept an agreed
portion, on either a pro-rata or excess basis, of an
enumerated type of risk insured by the reinsured during the
period.
Underwriting................. The insurer's or reinsurer's process of reviewing
submissions for insurance coverage, deciding whether to
accept all or part of the coverage requested and determining
the applicable premiums; also refers to the acceptance of
such coverage.
Underwriting expense......... The aggregate of the portion of administrative, general, and
other expenses attributable to insurance underwriting
operations.
Unearned premiums............ A reserve account that contains the portion of premium
attributable to the unexpired period of policies that has
been collected by an insurer but has not yet been recognized
as earned premiums and accounted for as revenues.
</TABLE>
56
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE FACTS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
Prospectus Summary............................. 4
Risk Factors................................... 7
Use of Proceeds................................ 10
Price Range of Common Stock and Dividends...... 11
Capitalization................................. 12
Selected Historical Consolidated Financial
Information................................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 14
Financial Guaranty Industry Overview........... 21
Business....................................... 25
Accounting..................................... 40
Insurance Regulatory Matters................... 41
Directors and Executive Officers............... 44
Security Ownership of Certain Beneficial Owners
and Management................................ 47
Selling Shareholder............................ 48
Certain Relationships and Related
Transactions.................................. 49
Plan of Distribution........................... 51
Legal Matters.................................. 52
Experts........................................ 52
Glossary of Insurance Terms.................... 53
</TABLE>
4,900,000 SHARES
ENHANCE FINANCIAL SERVICES
GROUP INC.
COMMON STOCK
($.10 PAR VALUE)
[LOGO]
PROSPECTUS
DATED , 1995
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION, OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY U S WEST OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF U S WEST SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS ARE NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Risk Factors Relating to DECS................. S-3
U S WEST, Inc................................. S-5
Recent Development............................ S-5
Enhance Financial Services Group Inc.......... S-6
Relationship Between U S WEST and Enhance..... S-7
Capitalization................................ S-8
Summary Financial Data........................ S-9
Price Range and Dividend History of Enhance
Common Stock................................ S-10
Use of Proceeds............................... S-10
Ratio of Earnings to Fixed Charges............ S-10
Description of the DECS....................... S-11
Certain United States Federal Income Tax
Considerations.............................. S-17
Plan of Distribution.......................... S-20
Legal Opinions................................ S-20
PROSPECTUS
Available Information......................... 2
Incorporation of Certain Documents by
Reference................................... 3
U S WEST, Inc................................. 4
Recent Development............................ 4
Ratio of Earnings to Fixed Charges............ 5
Use of Proceeds............................... 5
Description of Debt Securities................ 5
Plan of Distribution.......................... 10
Legal Opinions................................ 11
Experts....................................... 11
Appendix A
</TABLE>
4,900,000 DECS-SM-
(DEBT EXCHANGEABLE FOR
COMMON STOCK-SM-)
U S WEST, INC.
% EXCHANGEABLE NOTES
DUE , 1998
[LOGO]
PROSPECTUS SUPPLEMENT
DATED , 1995
- ------------------------------------------
SALOMON BROTHERS INC
- ------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee.................... $ 172,415
Rating Agency Fees............................................... 100,000
Blue Sky Fees and Expenses....................................... 20,000
Trustee's Expenses............................................... 30,000
Printing and Engraving Fees...................................... 100,000
Accounting Fees and Expenses..................................... 25,000
Legal Fees and Expenses.......................................... 100,000
Miscellaneous.................................................... 2,585
---------
Total........................................................ $ 550,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits U S
WEST's board of directors to indemnify any person against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened, pending or
completed action, suit or proceeding in which such person is made a party by
reason of his being or having been a director, officer, employee or agent of U S
WEST, in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the "Securities Act"). The
statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors, or
otherwise. U S WEST's By-laws provide for indemnification of its directors and
officers to the fullest extent permitted by law.
As permitted by sections 102 and 145 of the DGCL, U S WEST's Restated
Certificate of Incorporation eliminates a director's personal liability for
monetary damages to the Registrant and its stockholders arising from a breach or
alleged breach of a director's fiduciary duty except for liability under section
174 of the DGCL, for liability for any breach of the director's duty of loyalty
to the Registrant or its stockholders, for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law or for any
transaction which the director derived an improper personal benefit.
The directors and officers of U S WEST are covered by insurance policies
indemnifying against certain liabilities, including certain liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"), which might
be incurred by them in such capacities and against which they cannot be
indemnified by U S WEST.
Any agents, dealers or underwriters who execute an underwriting or other
distribution agreement in connection with an offering of Debt Securities will
agree to indemnify U S WEST's directors and their officers who signed the
registration statement against certain liabilities which might arise under the
Securities Act with respect to information furnished to U S WEST by or on behalf
of any such indemnifying party.
ITEM 16. EXHIBITS.
Exhibits identified in parentheses below are on file with the Securities and
Exchange Commission and are incorporated herein by reference to such previous
filings. All other exhibits are provided
as part of this electronic transmission.
<TABLE>
<S> <C> <C>
1 -- Form of Underwriting Agreement
*4-A -- Form of Indenture between U S WEST, Inc. and The First National Bank of
Chicago, as Trustee
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
4-B -- Form of Supplemental Indenture between U S WEST, Inc. and The First
National Bank of Chicago, as Trustee
*5 -- Opinion of Stephen E. Brilz
(12) -- Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc.
(Exhibit 12 to Form 10-K for the year ending December 31, 1994 and Exhibit
12 to Form 10-Q for the quarter ending June 30, 1995, File No. 1-8611)
*23-A -- Consents of Coopers & Lybrand L.L.P.
*23-B -- Consent of Ernst & Young LLP
*23-C -- Consent of Arthur Andersen LLP
*23-D -- Consents of KPMG Peat Marwick LLP
*23-E -- Consent of Stephen E. Brilz is contained in the opinion of counsel filed
as Exhibit 5
*24 -- Powers of Attorney
*25 -- Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of The First National Bank of Chicago, as Trustee under the
Indenture
</TABLE>
- ------------------------
* Filed previously.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of U S WEST's Annual Report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 15 (other than the
insurance policies referred to therein), or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
II-2
<PAGE>
(iii) to include any material information with respect to the Plan of
Distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that the undertakings set forth in paragraphs (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by U S WEST, Inc. pursuant to Section 13 or Section 15(d) of the Exchange
Act that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the 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.
(2) For the 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 OF 1933, U S WEST, INC.
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS POST-EFFECTIVE
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF
COLORADO, ON THE 4TH DAY OF DECEMBER, 1995.
U S WEST, Inc.
By /s/ STEPHEN E. BRILZ
------------------------------------
Stephen E. Brilz
Assistant Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING DIRECTORS AND OFFICERS OF U S WEST, INC. IN THE CAPACITIES AND ON THE
DATE INDICATED.
PRINCIPAL EXECUTIVE OFFICER:
RICHARD D. MCCORMICK* Chairman of the Board,
President and Chief
Executive Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
JAMES T. ANDERSON* Acting Executive Vice
President and Chief
Financial Officer
DIRECTORS:
REMEDIOS DIAZ-OLIVER*
GRANT A. DOVE*
ALLAN D. GILMOUR*
PIERSON M. GRIEVE*
SHIRLEY M. HUFSTEDLER*
ALLEN F. JACOBSON*
RICHARD D. MCCORMICK*
MARILYN CARLSON NELSON*
FRANK POPOFF*
JERRY O. WILLIAMS*
*By /s/ STEPHEN E.
BRILZ
----------------------------------
Stephen E. Brilz
Attorney-in-Fact
Dated: December 4, 1995
II-4
<PAGE>
CGS&H DRAFT
11/17/95
U S WEST, INC.
4,900,000 DECS(SM) (Debt Exchangeable for Common Stock(SM)*
% Exchangeable Notes Due _____________, 1998
(Subject to Exchange into Shares of Common Stock,
par value $.10 per share, of Enhance Financial Services Group Inc.)
Underwriting Agreement
New York, New York
_______________ , 1995
Salomon Brothers Inc
As Representative of the several Underwriters,
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
U S WEST, Inc., a Delaware corporation ("U S WEST"), proposes to sell
to the underwriters named in Schedule I hereto (the "Underwriters"), for whom
you (the "Representative") are acting as representative, an aggregate of
4,900,000 DECS (Debt Exchangeable for Common Stock) consisting of its ____%
Exchangeable Notes Due ____, 1998 (the "Underwritten DECS"), to be issued under
an indenture (the "Indenture") dated as of ________ between U S WEST and The
First National Bank of Chicago, as trustee (the "Trustee"), as amended to the
date hereof by the First Supplemental Indenture thereto dated as of _______. In
addition, the Underwriters will have an option to purchase up to 530,800 DECS
(the "Option DECS" and, together with the Underwritten DECS, the "DECS"). At
maturity (including as a result of acceleration or otherwise), the DECS will be
mandatorily
- -----------------------
* Plus an option to purchase from US West, Inc., up to 530,800 additional
DECS to cover over-allotments.
<PAGE>
exchanged by U S WEST into shares of Common Stock, par value $.10 per share (the
"Enhance Common Stock"), of Enhance Financial Services Group Inc., a New York
corporation ("Enhance") (or, at U S WEST's option under the circumstances
described in the Final USW Prospectus, cash with an equal value) at the rate
specified in the USW Prospectus (as defined below).
In connection with the foregoing and pursuant to the Subscribers'
Registration Rights Agreement dated October 31, 1986, as amended, between
Enhance and the Subscribers named therein ( the "Registration Rights
Agreements"), Enhance has filed with the Commission a registration statement
with respect to 4,900,000 shares (the "Underwritten Shares") of Enhance Common
Stock, in respect of the Underwritten DECS plus an additional 530,800 shares
(the "Option Shares" and, together with the Underwritten Shares, the "Shares")
of Enhance Common Stock in respect of the Option DECS, for sale by U S WEST as a
selling stockholder (to the extent U S WEST shall so elect to deliver Enhance
Common Stock to holders of the DECS at maturity thereof pursuant to the terms of
the DECS), which registration statement is referred to in Section 2 of this
Agreement.
Certain terms used in this Agreement are defined in paragraph (a)(vi)
of Section 1 and paragraph (c) of Section 2.
1. REPRESENTATIONS AND WARRANTIES OF U S WEST. (a) U S WEST
represents and warrants to, and agrees with, each Underwriter as set forth below
in this Section 1.
(i) U S WEST has filed with the Commission a registration statement
(file number 33-62451) on such Form, including a basic prospectus, for the
registration under the Securities Act of 1933, as amended (the "Act"), of
the offering and sale of the DECS. U S WEST may have filed one or more
amendments thereto, and may have used a Preliminary Final USW Prospectus,
each of which has previously been furnished to you. Such registration
statement, as so amended, has become effective. U S WEST will next file
with the Commission pursuant to Rules 415 and 424(b)(2) or (5) a final
supplement to the form of prospectus included in such registration
statement relating to the DECS and the offering thereof. As filed, such
final prospectus supplement, except to the extent the Representative shall
agree in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
Basic USW Prospectus and any Preliminary Final USW Prospectus) as U S WEST
has advised you, prior to the Execution Time, will be included or made
therein.
(ii) On the USW Effective Date, the USW Registration Statement did or
will, and when the Final USW Prospectus is first filed in accordance with
Rule 424(b) and on the Closing Date, the Final USW Prospectus (and any
supplement thereto) will, conform in all material respects with the
applicable requirements of the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Trust
2
<PAGE>
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the
respective rules thereunder; on the USW Effective Date, the USW
Registration Statement did not or will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; on the USW Effective Date and on the Closing Date the Indenture
did or will comply in all material respects with the applicable
requirements of the Trust Indenture Act and the rules thereunder; and, on
the date of any filing pursuant to Rule 424(b) and on the Closing Date, the
Final USW Prospectus (together with any supplement thereto) will not
include any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that U S WEST makes no representations or warranties as to (A)
that part of the USW Registration Statement which shall constitute the
Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of the Trustee or (B) the information contained in or omitted
from the USW Registration Statement or the Final USW Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to U S WEST by or on behalf of any Underwriter through
the Representative specifically for inclusion in the USW Registration
Statement or the Final USW Prospectus (or any supplement thereto) or (C)
the information contained in or omitted from the Enhance Prospectus
(attached as Appendix A to the Final USW Prospectus), other than
information contained in or omitted from the Enhance Prospectus in reliance
upon and in conformity with information furnished in writing to Enhance by
U S WEST specifically for inclusion in the Enhance Prospectus.
(iii) Subsequent to the respective dates as of which information
is presented in the USW Registration Statement and the Final USW
Prospectus, except as otherwise stated therein, there has been no material
adverse change or any development involving a prospective material adverse
change in the financial condition or results of operations of U S WEST and
its subsidiaries taken as a whole.
(iv) To the knowledge of U S WEST, the representations and warranties
of Enhance contained in Section 2 of this Agreement are (i) in cases where
such representations and warranties are qualified as to materiality, true
and correct and (ii) in all other cases, true and correct in all material
respects.
(v) U S WEST has not taken and will not take, directly or indirectly,
any action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of Enhance to
facilitate the sale or resale of the DECS or the Shares and has not
effected any sales of Enhance Common Stock which, if effected by the
issuer, would be required to be disclosed in response to Item 701 of
Regulation S-K.
3
<PAGE>
(vi) The terms which follow, when used in this Agreement, shall have
the meanings indicated. The term "Commission" shall mean the Securities
and Exchange Commission. "USW Effective Date" shall mean each date that
the USW Registration Statement and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean
the date and time that this Agreement is executed and delivered by the
parties hereto. "Basic USW Prospectus" shall mean the prospectus referred
to in paragraph (a) (i) of this Section 1 contained in the USW Registration
Statement at the USW Effective Date. "Preliminary Final USW Prospectus"
shall mean any preliminary prospectus supplement to the Basic USW
Prospectus which describes the DECS and the offering thereof, is used prior
to filing the Final USW Prospectus and is filed, together with the Basic
USW Prospectus, pursuant to Rule 424(b). "Final USW Prospectus" shall mean
the prospectus supplement relating to the DECS that is first filed pursuant
to Rule 424(b) after the Execution Time together with the Basic USW
Prospectus. "USW Registration Statement" shall mean the registration
statement referred to in paragraph (a) (i) of this Section 1, including
incorporated documents, exhibits and financial statements, as amended at
the Execution Time and, in the event any post-effective amendment thereto
becomes effective prior to the Closing Date (as hereinafter defined), shall
also mean such registration statement as so amended. Such term shall
include any Rule 430A Information deemed to be included therein at the USW
Effective Date as provided by Rule 430A. "Rule 415," "Rule 424," "Rule
430A" and "Regulation S-K" refer to such rules or regulation under the Act.
"Rule 430A Information" means information with respect to the DECS (or the
Shares) and the offering thereof permitted to be omitted from the USW
Registration Statement (or the Enhance Registration Statement) when it
becomes effective pursuant to Rule 430A. Any reference herein to the USW
Registration Statement, the Basic USW Prospectus, any Preliminary Final USW
Prospectus or the Final USW Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Item 12
of Form S-3 which were filed under the Exchange Act on or before the USW
Effective Date or the issue date of the Basic USW Prospectus, any
Preliminary Final USW Prospectus or the Final USW Prospectus, as the case
may be; and any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the USW Registration Statement, the Basic USW
Prospectus, any Preliminary Final USW Prospectus or the Final USW
Prospectus shall be deemed to refer to and include the filing of any
document under the Exchange Act after the USW Effective Date, or the issue
date of any Preliminary Final USW Prospectus or the Final USW Prospectus,
as the case may be, deemed to be incorporated therein by reference.
(b) In respect of any statements in or omissions from the Enhance
Registration Statement or the Enhance Prospectus or any supplements thereto made
in reliance upon and in conformity with information furnished in writing to
Enhance by U S WEST specifically for inclusion therein, U S WEST makes the same
representations and warranties to Enhance as U S WEST makes to each Underwriter
under paragraph (a)(ii) of this Section 1.
4
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF ENHANCE. Enhance represents and
warrants to, and agrees with, each Underwriter and U S WEST as set forth below
in this Section 2.
(a) Enhance meets the requirements for use of Form S-3 under the Act
and has filed with the Commission a registration statement (file number 33-
97824) on such Form, including a related preliminary prospectus, for the
registration under the Act of the offering and sale of the Shares. Enhance
may have filed one or more amendments thereto, including the related
preliminary prospectus, each of which has previously been furnished to you.
Enhance will next file with the Commission one of the following: (i) prior
to effectiveness of such registration statement, a further amendment to
such registration statement, including the form of final prospectus or (ii)
a final prospectus in accordance with Rules 430A and 424(b)(1) or (4). In
the case of clause (ii), Enhance has included in such registration
statement, as amended at the Enhance Effective Date, all information (other
than Rule 430A Information) required by the Act and the rules thereunder to
be included in the Enhance Prospectus with respect to the Shares and the
offering thereof. As filed, such amendment and form of final prospectus,
or such final prospectus, shall contain al Rule 430A Information, together
with all other such required information, with respect to the Shares and
the offering thereof and, except to the extent the Representative shall
agree in writing to a modification, shall be in all substantative respects
in the form furnished to you prior to the Execution Time, shall contain
only such specific additional information and other changes (beyond that
contained in the latest Preliminary Enhance Prospectus) as Enhance has
advised you, prior to the Execution Time, will be included or made therein.
(b) On the Enhance Effective Date, the Enhance Registration Statement
did or will, and when the Enhance Prospectus is first filed (if required)
in accordance with Rule 424(b) and on the Closing Date, the Enhance
Prospectus (and any supplement thereto) will, comply in all material
respects with the applicable requirements of the Act, the Exchange Act
and the respective rules thereunder; on the Enhance Effective Date, the
Enhance Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and, on the Enhance Effective Date the Enhance Prospectus,
if not filed pursuant to Rule 424(b), did not or will not, and on date of
any filing pursuant to Rule 424(b) and on the Closing Date, the Enhance
Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that Enhance makes no representations or warranties as to the
information contained in or omitted from the Enhance Registration
Statement or the Enhance Prospectus (or any supplement thereto) in
reliance upon and in conformity with information furnished in writing to
Enhance (i)
5
<PAGE>
by or on behalf of any Underwriter through the Representative or (ii)
by U S WEST, in either case, specifically for inclusion in the Enhance
Registration Statement or the Enhance Prospectus (or any supplement
thereto).
(c) The terms which follow, when used in this Agreement, shall have
the meanings indicated. The term "Enhance Effective Date" shall mean each
date that the Enhance Registration Statement and any post-effective
amendment or amendments thereto became or become effective. "Preliminary
Enhance Prospectus" shall mean any preliminary prospectus referred to in
paragraph (a) of this Section 2 and any preliminary prospectus included in
the Enhance Registration Statement at the Enhance Effective Date that omits
Rule 430A Information. "Enhance Prospectus" shall mean the prospectus
relating to the Shares that is first filed pursuant to Rule 424(b) after
the Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Shares included in
the Enhance Registration Statement at the Enhance Effective Date. "Enhance
Registration Statement" shall mean the registration statement referred to
in paragraph (a) of this Section 2 including incorporated documents,
exhibits and financial statements, as amended at the Execution Time and, in
the event any post-effective amendment thereto becomes effective prior to
the Closing Date (as hereinafter defined), shall also mean such
registration statement as so amended. Such term shall include any Rule
430A Information deemed to be included therein at the Enhance Effective
Date as provided by Rule 430A. Any reference herein to the Enhance
Registration Statement, Preliminary Enhance Prospectus or the Enhance
Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 which
were filed under the Exchange Act on or before the Enhance Effective Date
or the issue date of Preliminary Enhance Prospectus or the Enhance
Prospectus, as the case may be; and any reference herein to the terms
"amend," "amendment" or "supplement" with respect to the Enhance
Registration Statement, any Preliminary Enhance Prospectus or the Enhance
Prospectus shall be deemed to refer to and include the filing of any
document under the Exchange Act after the Enhance Effective Date, or the
issue date of any Preliminary Enhance Prospectus or the Enhance Prospectus,
as the case may be, deemed to be incorporated therein by reference. The
term "Material Adverse Effect" shall mean any material adverse effect on
the condition (financial or otherwise), earnings, business, properties,
results of operations or business prospects of Enhance and its consolidated
subsidiaries, taken as a whole.
(d) Each of Enhance, Enhance Reinsurance Company, a New York
corporation ("ERC"), and Asset Guaranty Insurance Company, a New York
corporation ("AGC") (ERC and AGC being hereinafter referred to as the
"Subsidiaries") is validly existing as a corporation in good standing under
the laws of the jurisdiction in which it is chartered or organized. Each
of Enhance and the Subsidiaries has been duly incorporated and has full
corporate power and authority to own its properties and conduct its
business as described in the Enhance Prospectus. Each of Enhance and the
6
<PAGE>
Subsidiaries is duly qualified to do business as a foreign corporation and
is in good standing under the laws of each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business
legally require such qualification, except where the failure so to qualify
or be in good standing would not have a Material Adverse Effect.
(e) To the best knowledge of Enhance, the accountants who certified
the financial statements and supporting schedules included in the Enhance
Registration Statement and the Enhance Prospectus are independent public
accountants as required by the Act and the regulations promulgated under
the Act.
(f) All of the outstanding shares of capital stock of the
Subsidiaries have been duly and validly authorized and issued, are fully
paid and nonassessable and are owned by Enhance directly or indirectly, in
each case, except as described in the Enhance Prospectus (including the
footnotes to the consolidated financial statements for Enhance and its
subsidiaries included in the Enhance Prospectus), free and clear of any
security interests, claims, liens, encumbrances, preemptive rights or other
restrictions.
(g) The historical consolidated financial statements (including the
related notes) included in the Enhance Registration Statement and the
Enhance Prospectus present fairly the consolidated financial position of
Enhance as of the dates indicated and the results of operations of Enhance
and its consolidated subsidiaries for the periods specified; except as
otherwise stated in the Enhance Registration Statement, such financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis; and the
selected historical consolidated financial information included in the
Enhance Prospectus presents fairly the information shown therein and has
been compiled on a basis consistent with that of the related historical
consolidated financial statements included in the Enhance Registration
Statement.
The statutory financial statements of Enhance and each of the
Subsidiaries have been prepared in accordance with the New York Insurance
Law and the rules and regulations of the New York Insurance Department (the
"Insurance Law"), and the selected statutory financial data included in the
Enhance Prospectus fairly presents the information shown therein.
(h) Enhance's issued and authorized capitalization as of September
30, 1995 was as set forth in the Enhance Prospectus under "Capitalization"
and there has been no material change thereto subsequent to such date.
(i) There is no pending or, to the knowledge of Enhance, threatened
action, suit, proceeding or investigation before any court, governmental
agency or body (including, without limitation, any insurance regulatory
agency or body) or arbitrator having jurisdiction over Enhance or the
Subsidiaries involving Enhance or any of the
7
<PAGE>
Subsidiaries that (a) would be reasonably likely to affect the execution by
Enhance of this Agreement or the performance by Enhance of its obligations
hereunder or the consummation by Enhance of any of the transactions
contemplated herein or (b) would have, or would be reasonably likely to
have, singularly or in the aggregate with all such actions, suits or
proceedings, a Material Adverse Effect or (c) is of a character required to
be disclosed in the Enhance Registration Statement or the Enhance
Prospectus which is not disclosed in the Enhance Registration Statement or
the Enhance Prospectus as required; there are no contracts or other
documents of a character required to be described in the Enhance
Registration Statement or the Enhance Prospectus, or to be filed as an
exhibit, which are not described or filed as required, and all such
contracts are in full force and effect; and the statements in the Enhance
Prospectus under the headings "Certain Relationships and Related
Transactions" and "Legal Matters" and in Item 11 of Enhance's Annual Report
on Form 10-K for 1994 fairly summarize in all material respects the matters
therein described.
(j) Each of Enhance and the Subsidiaries has good, valid and
marketable title to all properties and assets described in the Enhance
Prospectus as owned by them, free and clear of all liens, charges,
encumbrances or restrictions, except as (A) are described in the Enhance
Prospectus or (B) are neither material in amount nor materially significant
in relation to the business of Enhance and the Subsidiaries, considered as
one enterprise. All of the leases and subleases material to the business
of Enhance and the Subsidiaries, considered as one enterprise, and under
which Enhance or any Subsidiary holds properties described in the Enhance
Prospectus, are in full force and effect, and none of Enhance nor any
Subsidiary has any notice of any material claim of any sort that has been
asserted by anyone adverse to the rights of Enhance or any Subsidiary under
any of the leases or subleases mentioned above, or affecting or questioning
the rights of such entity to the continued possession of the leased or
subleased properties under any such lease or sublease.
(k) Enhance has not taken and will not take, directly or indirectly,
any action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of Enhance to
facilitate the sale or resale of the DECS or the Shares.
(l) No consent, approval, authorization or order of any court,
governmental agency or body (including, without limitation, the New York
Insurance Department or any other insurance regulatory agency or body) or
arbitrator having jurisdiction over Enhance or any of the Subsidiaries is
required for the performance by Enhance of its obligations hereunder or the
consummation by Enhance of any of the transactions contemplated herein
except such as have been obtained under the Act and the insurance laws and
regulations of New York and such as may be required under the blue sky laws
of any jurisdiction and the securities laws of any jurisdiction outside the
United States
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in connection with the purchase and distribution of the Shares by the
Underwriters in the manner contemplated in the Final USW Prospectus.
(m) Neither the consummation by Enhance of any of the transactions
contemplated herein nor the fulfillment of the terms hereof will violate,
conflict with, result in a breach of, or constitute a default (or an event
which with the giving of notice or the lapse of time or both would be
reasonably likely to constitute a default) under (a) any order, law,
treaty, rule, regulation or determination of any court, governmental agency
or body (including, without limitation, any insurance regulatory agency or
body), or arbitrator having jurisdiction over Enhance or any of the
Subsidiaries (other than any violation of or conflict with any such order,
law, treaty, rule, regulation or determination that would not in any manner
adversely affect the sale of the Shares in the manner contemplated in the
Final USW Prospectus or the execution and delivery of, and the performance
by Enhance of its obligations under, this Agreement and would not have,
singularly or in the aggregate with all such other violations or conflicts,
a Material Adverse Effect), (b) the charter or by-laws of Enhance or any of
the Subsidiaries or (c) the terms of any bond, debenture, note or any other
evidence of indebtedness or any agreement, indenture, lease or other
instrument to which Enhance or any Subsidiary is a party or by which any of
them is bound or any of their respective properties is subject or which
would result in the creation or imposition of any lien, charge or
encumbrance upon any of their assets (other than any breach of or default
under the terms of any such bond, debenture, note or other evidence of
indebtedness or agreement, indenture, lease or other instrument that would
not in any manner adversely affect the sale of the Shares in the manner
contemplated in the Final USW Prospectus or the execution and delivery of,
and the performance by Enhance of their obligations under, this Agreement
and would not have, singularly or in the aggregate with all such other
breaches or defaults, a Material Adverse Effect).
(n) None of Enhance or any of the Subsidiaries is in violation of, in
conflict with, in breach of or in default (or knows of an event which with
the giving of notice or the lapse of time or both would be reasonably
likely to constitute a default) under (a) any order, law, treaty, rule,
regulation or determination of any court, governmental agency or body
(including, without limitation, any insurance regulatory agency or body),
or arbitrator having jurisdiction over Enhance or any of the Subsidiaries
(other than any violation of or conflict with any such order, law, treaty,
rule, regulation or determination that would not adversely affect the sale
of the Enhance Common Stock or the execution and delivery of, and the
performance by Enhance of its obligations under, this Agreement and would
not have, singularly or in the aggregate with all such other violations or
conflicts, a Material Adverse Effect), (b) its charter or by-laws or (c)
the terms of any bond, debenture, note or any other evidence of
indebtedness or any agreement, indenture, lease or other instrument to
which any of them is a party or by which any of them is bound or any of
their respective properties is subject (other than any breach of or default
under the terms of any such bond, debenture, note or other
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evidence of indebtedness or agreement, indenture, lease or other instrument
that would not in any manner adversely affect the sale of the Shares or the
execution and delivery of, and the performance by Enhance of its
obligations under this Agreement and would not have, singularly or in the
aggregate with all such other breaches or defaults, a Material Adverse
Effect).
(o) Enhance and each of the Subsidiaries has such permits, licenses,
certificates and authorizations of governmental agencies or bodies
(including, without limitation, any insurance regulatory agencies or
bodies) as are necessary to own its properties and to conduct its business
as described in the Enhance Registration Statement (except where the
failure to have obtained such permits, licenses, certificates, and
authorizations, singularly or in the aggregate, would not have a Material
Adverse Effect) and there is no pending or, to the knowledge of Enhance,
threatened, action, suit, proceeding or investigation that may lead to the
revocation, termination or suspension of any such permit, license,
certificate, or authorization (including, without limitation, any permit,
license, certificate, or authorization from any insurance regulatory agency
or body), the revocation, termination or suspension of which would have,
singularly or in the aggregate with all other such revocations,
terminations or suspensions, a Material Adverse Effect.
(p) No relationship, direct or indirect, exists between or among any
of Enhance or any affiliate of Enhance, on the one hand, and any director,
officer, stockholder, customer or supplier of any of them, on the other
hand, which is required by the Act or by the rules and regulations
promulgated under the Act to be described in the Enhance Registration
Statement or the Enhance Prospectus which is not so described or is not
described as required.
(q) Other than as described in the Enhance Prospectus or as would not
have a Material Adverse Effect, all treaties and other arrangements to
participate as a reinsurer of the types of risks described in the Enhance
Prospectus to which Enhance or any of the Subsidiaries is a party are in
full force and effect, and neither Enhance nor any of the Subsidiaries is
in violation of, or in default in the performance, observance or
fulfillment of, any obligation, agreement, covenant or condition contained
therein; none of Enhance or any of the Subsidiaries has received any notice
from any of the other parties to such treaties, contracts or agreements
that such other party intends not to perform such treaty, contract or
agreement, and Enhance has no knowledge that any of the other parties to
such treaties or arrangements will be unable to perform such treaty or
arrangement; and, to the knowledge of Enhance, no change in any insurance
laws or regulations is pending which, if made effective, would have, or
would be reasonably likely to have, singularly or in the aggregate with all
such changes, a Material Adverse Effect.
(r) Other than as described in the Enhance Prospectus, there are no
outstanding warrants, options or other agreements that constitute the right
to receive or purchase
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any shares of capital stock of Enhance or any of the Subsidiaries and there
are no restrictions upon the voting or transfer of, or the declaration or
payment of any dividend or distribution on, any shares of capital stock of
Enhance or any of the Subsidiaries.
(s) Subsequent to the Enhance Effective Date, (A) there has been no
change and there has arisen no condition that would, or would be reasonably
likely to, singularly or in the aggregate with all such changes or
conditions, have a Material Adverse Effect, (B) there have been no
transactions entered into and no transactions are contemplated by Enhance
or any of the Subsidiaries which are material, individually or in the
aggregate with all such transactions, with respect to any of them and of a
character required to be disclosed in the Enhance Registration Statement
and (C) there has been no dividend or distribution of any kind declared,
paid or made by Enhance on any class of its capital stock, other than
___________ [if quarterly dividend is declared or payable between Enhance
Effective Date and Closing, specify].
(t) None of Enhance or the Subsidiaries is an "investment company" or
under the "control" of an "investment company," as such terms are defined
under the Investment Company Act of 1940, as amended.
(u) None of the employee benefit plans maintained at any time by
Enhance or the trusts created thereunder has engaged in a "prohibited
transaction" which could subject any such employee benefit plan or trust to
a tax or penalty, the effect of which would likely result in a Material
Adverse Effect; nor has any employee benefit plan maintained by Enhance or
any Subsidiary nor has Enhance or any Subsidiary (A) incurred liability to
the Pension Benefit Guaranty Corporation, other than for required insurance
premiums which have been paid when due, or (B) incurred any accumulated
funding deficiency, whether or not waived, except for any such liabilities
or deficiencies which, individually or in the aggregate, would not result
in a Material Adverse Effect.
(v) The Enhance Common Stock is duly listed and admitted for trading
on the New York Stock Exchange (the "NYSE").
3. PURCHASE AND SALE. (a) Subject to the terms and conditions and
in reliance upon the representations and warranties herein set forth, U S WEST
agrees to sell to each Underwriter, and each Underwriter agrees, severally and
not jointly, to purchase from U S WEST, the number of DECS set forth opposite
that Underwriter's name on Schedule I hereto, at a price of $[ ] per DECS.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, U S WEST hereby grants an
option to the several Underwriters to purchase, severally and not jointly, up to
530,800 of the Option DECS at the same purchase
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<PAGE>
price as the Underwriters shall pay for the Underwritten DECS. Said option may
be exercised only to cover over-allotments in the sale of the Underwritten DECS
by the Underwriters. Said option may be exercised in whole or in part at any
time (but not more than once) on or before the 30th day after the date of the
Final USW Prospectus upon written or telegraphic notice by the Representative to
U S WEST setting forth the number of the Option DECS as to which the several
Underwriters are exercising the option and the settlement date. Delivery of
certificates for the Option DECS, and payment therefor, shall be made as
provided in Section 4 hereof. The number of the Option DECS to be purchased by
each Underwriter shall be the same percentage of the total number of the Option
DECS to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten DECS, subject to such adjustments as you in your
absolute discretion shall make to eliminate any fractional Option DECS.
4. DELIVERY AND PAYMENT. Delivery of and payment for the
Underwritten DECS and the Option DECS (if the option provided for in Section
3(b) hereof shall have been exercised on or before the first business day prior
to the Closing Date) shall be made at 10:00 AM, New York City time, on ________,
1995, (or such later date not later than five business days after such specified
date as the Representative shall designate) which date and time may be postponed
by agreement between the Representative and U S WEST or as provided in Section
11 hereof (such date and time of delivery and payment for the DECS being herein
called the "Closing Date"). Delivery of the DECS shall be made to the
Representative for the respective accounts of the several Underwriters against
payment by the several Underwriters through the Representative of the purchase
price thereof to or upon the order of U S WEST by certified or official bank
check or checks drawn on or by a New York Clearing House bank and payable in
next day funds. Delivery of the DECS shall be made at such location as the
Representative shall reasonably designate at least one business day in advance
of the Closing Date and payment for such DECS shall be made at the office of
Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York.
Certificates for the DECS shall be registered in such names and in such
denominations as the Representative may request not less than three full
business days in advance of the Closing Date.
U S WEST agrees to have the DECS available for inspection, checking
and packaging by the Representative in New York, New York, not later than 1:00
PM on the business day prior to the Closing Date.
If the option provided for in Section 3(b) hereof is exercised after
the first business day prior to the Closing Date, U S WEST will deliver (at the
expense of U S WEST) to the Representative at One New York Plaza, New York, New
York, on the date specified by the Representative (which shall be within three
business days after exercise of said option), certificates for the Option DECS
in such names and denominations as the Representative shall have requested
against payment of the purchase price thereof to or upon the order of U S WEST
by certified or official bank check or checks drawn on or by a New York Clearing
House bank and payable in next day funds. If settlement for the Option DECS
occurs after the
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<PAGE>
Closing Date, U S WEST and Enhance will deliver to the Representative on the
settlement date for the Option DECS, and the obligation of the Underwriters
to purchase the Option DECS shall be conditioned upon receipt of,
supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant
to Section 7 hereof.
5. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the DECS for sale to the public as set forth in
the Final USW Prospectus.
6. AGREEMENTS OF U S WEST. U S WEST agrees with the several
Underwriters that:
(a) U S WEST will use its best efforts to cause the USW Registration
Statement, if not effective at the Execution Time, and any amendment
thereof to become effective. Prior to the termination of the offering of
the DECS, U S WEST will not file any amendment of the USW Registration
Statement or supplement (including the Final USW Prospectus or any
Preliminary Final USW Prospectus) to the Basic USW Prospectus unless U S
WEST has furnished you a copy for your review prior to filing and will not
file any such proposed amendment or supplement to which you reasonably
object unless U S WEST shall conclude in good faith that such filing is
required by applicable law. Subject to the foregoing sentence, U S WEST
will cause the Final USW Prospectus, properly completed, and any supplement
thereto to be filed with the Commission pursuant to the applicable
paragraph of Rule 424(b) within the time period prescribed and will provide
evidence satisfactory to the Representative of such timely filing. U S
WEST will promptly advise the Representative (i) when the USW Registration
Statement, if not effective at the Execution Time, and any amendment
thereto, shall have become effective, (ii) when the Final USW Prospectus,
and any supplement thereto, shall have been filed with the Commission
pursuant to Rule 424(b), (iii) when, prior to termination of the offering
of the DECS, any amendment to the USW Registration Statement shall have
been filed or become effective, (iv) of any request by the Commission for
any amendment of the USW Registration Statement or supplement to the Final
USW Prospectus or for any additional information, (v) of the issuance by
the Commission of any stop order suspending the effectiveness of the USW
Registration Statement or the institution or threatening of any proceeding
for that purpose and (vi) of the receipt by U S WEST of any notification
with respect to the suspension of the qualification of the DECS for sale in
any jurisdiction or the initiation or threatening of any proceeding for
such purpose. U S WEST will use its best efforts to prevent the issuance
of any such stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the DECS is
required to be delivered under the Act, any event occurs as a result of
which the Final USW Prospectus as then supplemented would include any
untrue statement of a material fact
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<PAGE>
or omit to state any material fact necessary to make the statements therein
in the light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend the USW Registration
Statement or supplement the Final USW Prospectus to comply with the Act or
the Exchange Act or the respective rules thereunder, U S WEST promptly will
prepare and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 6, an amendment or supplement which will
correct such statement or omission or effect such compliance.
(c) As soon as practicable, U S WEST will make generally available to
its security holders an earnings statement or statements of U S WEST and
its subsidiaries which will satisfy the provisions of Section 11(a) of the
Act and Rule 158 under the Act.
(d) U S WEST will furnish to the Representative and counsel for the
Underwriters, without charge, copies of the USW Registration Statement
(including exhibits thereto) and to each other Underwriter a copy of the
USW Registration Statement (without exhibits thereto) and, so long as
delivery of a prospectus by an Underwriter or dealer may be required by the
Act, as many copies of each Preliminary Final USW Prospectus and the Final
USW Prospectus and any supplement thereto as the Representative may
reasonably request. U S WEST will pay the expenses of printing or other
production of the USW Registration Statement, each Preliminary Final USW
Prospectus and the Final USW Prospectus.
(e) U S WEST will arrange for the qualification of the DECS and the
Shares for sale under the laws of such jurisdictions as the Representative
may designate and will maintain such qualifications in effect so long as
required for the distribution of the DECS and the Shares; provided,
however, that in connection therewith U S WEST shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction.
(f) U S WEST will not, for a period of 90 days following the
Execution Time, without the prior written consent of the Representative,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of any shares of Enhance Common Stock
or any securities convertible into, or exchangeable for, or warrants to
acquire, shares of Enhance Common Stock (other than the DECS).
(g) U S WEST confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, AN ACT
RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and U S WEST further
agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the USW
Registration Statement becomes or has become effective with the Commission
or with the Florida Department of Banking and Finance (the "Department"),
whichever date is later, or if the information reported in
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the Final USW Prospectus, if any, concerning U S WEST's business with Cuba
or with any person or affiliate located in Cuba changes in any material
way, U S WEST will provide the Department notice of such business or
change, as appropriate, in a form acceptable to the Department.
7. AGREEMENTS OF ENHANCE. Enhance agrees with the several
Underwriters that:
(a) Enhance will use its best efforts to cause the Enhance
Registration Statement, if not effective at the Execution Time, and any
amendment thereof to become effective. Prior to the termination of the
offering of the Shares, Enhance will not file any amendment of the Enhance
Registration Statement or supplement to the Enhance Prospectus unless
Enhance has furnished you a copy for your review prior to filing and will
not file any such proposed amendment or supplement to which you reasonably
object unless Enhance shall conclude in good faith that such filing is
required by applicable law. Subject to the foregoing sentence, if the
Enhance Registration Statement has become or becomes effective pursuant to
Rule 430A, or filing of the Enhance Prospectus is otherwise required under
Rule 424(b), Enhance will cause the Enhance Prospectus, properly completed,
and any supplement thereto to be filed with the Commission pursuant to the
applicable paragraph of Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to the Representative of such timely
filing. Enhance will promptly advise the Representative (i) when the
Enhance Registration Statement, if not effective at the Execution Time, and
any amendment thereto, shall have become effective, (ii) when the Enhance
Prospectus, and any supplement thereto, shall have been filed (if required)
with the Commission pursuant to Rule 424(b), (iii) when, prior to
termination of the offering of the Shares, any amendment to the Enhance
Registration Statement shall have been filed or become effective, (iv) if
any request by the Commission for any amendment of the Enhance Registration
Statement or supplement to the Enhance Prospectus or for any additional
information, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Enhance Registration Statement or the
institution or threatening of any proceeding for that purpose and (vi) of
the receipt by Enhance of any notification with respect to the suspension
of the qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose. Enhance will
use its best efforts to prevent the issuance of any such stop order and, if
issued, to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Enhance Common
Stock is required to be delivered under the Act, any event occurs as a
result of which the Enhance Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be necessary to
amend the Enhance Registration Statement or supplement the Enhance
Prospectus to comply with the Act or the Exchange Act or the respective
rules
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thereunder, Enhance promptly will prepare and file with the Commission,
subject to the second sentence of paragraph (a) of this Section 7, an
amendment or supplement which will correct such statement or omission or
effect such compliance.
(c) As soon as practicable, Enhance will make generally available to
its security holders and to the Representative an earnings statement or
statements of Enhance and its Subsidiaries which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 under the Act.
(d) Enhance will furnish to the Representative and counsel for the
Underwriters, without charge, signed copies of the Enhance Registration
Statement (including exhibits thereto) and to each other Underwriter a copy
of the Enhance Registration Statement (without exhibits thereto) and, so
long as delivery of a prospectus by an Underwriter or dealer may be
required by the Act, as many copies of each Preliminary Enhance Prospectus
and the Enhance Prospectus and any supplement thereto as the Representative
may reasonably request. Enhance will pay the expenses of printing or other
production of the Enhance Registration Statement, each Preliminary Enhance
Prospectus and the Enhance Prospectus.
(e) Enhance will cooperate with U S WEST for purposes of the
qualification of the DECS and the Shares for sale under the laws of such
jurisdictions as the Representative may designate and will maintain such
qualifications in effect so long as required for the distribution of the
DECS and the Shares.
(f) Enhance will not, for a period of 90 days following the Execution
Time, without the prior written consent of the Representative, offer, sell
or contract to sell, or otherwise dispose of, directly or indirectly, or
announce the offering of, (i) any shares of common stock or any securities
convertible into, or exchangeable for, shares of common stock (other than
the Shares in connection with the offering by U S WEST of the DECS);
PROVIDED, HOWEVER, that Enhance may sell Enhance Common Stock or grant
options to purchase the same, in either case, pursuant to any employee
stock option plan, stock ownership plan or dividend reinvestment plan of
Enhance in effect at the Execution Time and Enhance may issue Enhance
Common Stock issuable upon the conversion of securities or the exercise of
warrants outstanding at the Execution Time.
(g) Enhance confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, AN ACT
RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and Enhance further
agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Enhance Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported in
the Enhance Prospectus, if any, concerning Enhance's business with Cuba or
with
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any person or affiliate located in Cuba changes in any material way,
Enhance will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
(h) Enhance will furnish the Trustee in sufficient quantities for
transmission to holders of the DECS Enhance's annual report to shareholders
and reports on Forms 10-K and 10-Q as soon as practicable after such
reports are required to be filed with the Commission.
(i) Enhance will take such actions as may be reasonably necessary to
comply with the rules and regulations of the NYSE in respect of the
offering of the Shares contemplated hereby.
8. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the Underwriters to purchase the DECS shall be subject to the
accuracy of the representations and warranties on the part of U S WEST and
Enhance contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 4 hereof, to the accuracy of the statements
of U S WEST and Enhance made in any certificates pursuant to the provisions
hereof, to the performance by U S WEST and Enhance of their respective
obligations hereunder and to the following additional conditions:
(a) If the USW Registration Statement or the Enhance Registration
Statement has not become effective prior to the Execution Time, unless the
Representative agrees in writing to a later time, such Registration Statement
will become effective not later than (i) 6:00 PM, New York City time, on the
date of determination of the public offering price, if such determination
occurred at or prior to 3:00 PM, New York City time, on such date or (ii) 12:00
Noon, New York City time, on the business day following the day on which the
public offering price was determined, if such determination occurred after 3:00
PM, New York City time, on such date; if filing of the Final USW Prospectus or
the Enhance Prospectus, or any supplements thereto, is required pursuant to Rule
424(b), such Prospectuses, and any such supplements, will be filed in the manner
and within the time period required by Rule 424(b); and no stop order suspending
the effectiveness of the USW Registration Statement or the Enhance Registration
Statements shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
(b) U S WEST shall have furnished to the Representative the opinion
of Stephen E. Brilz, Esq., Senior Counsel of U S WEST, dated the Closing Date,
to the effect that:
(i) U S West has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction in which it
is organized, with full corporate power and authority to own its properties
and conduct its business as described in the Final USW Prospectus;
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(ii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated herein, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the distribution of the DECS and the Shares
by U S WEST and such other approvals (specified in such opinion) as have
been obtained; and
(iii) to the best knowledge of such counsel, U S WEST has good and
marketable title to the Shares and owns such Shares free and clear of all
liens, encumbrances, equities and claims.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the State of Colorado, the
State of Delaware or the United States, to the extent such counsel deems proper
and specified in such opinion, the State of Delaware, upon the opinion of other
counsel of good standing whom such counsel believes to be reliable and who are
satisfactory to counsel for the Underwriters and (B) as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
U S WEST and public officials. References to the Final USW Prospectus in this
paragraph (b) include any supplements thereto at the Closing Date.
(c) U S WEST shall have furnished to the Representative the opinion
of Weil, Gotshal & Manges, counsel for U S WEST, dated as of the Closing Date,
to the effect that:
(i) U S WEST has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
full corporate power and authority to own its properties and conduct its
business as described in the Final USW Prospectus;
(ii) the Indenture has been duly authorized, executed and delivered,
has been duly qualified under the Trust Indenture Act, and (assuming the
due authorization, execution and delivery thereof by the Trustee)
constitutes a legal, valid and binding instrument enforceable against U S
WEST in accordance with its terms (subject, as to enforcement of remedies,
to applicable bankruptcy, reorganization, insolvency, moratorium or other
laws affecting creditors' rights generally from time to time in effect);
and the DECS have been duly authorized and, when executed and authenticated
in accordance with the provisions of the Indenture and delivered to and
paid for by the Underwriters pursuant to this Agreement will constitute
legal, valid and binding obligations of U S WEST entitled to the benefits
of the Indenture;
(iii) the USW Registration Statement was declared effective under the
Act; any required filing of the Basic USW Prospectus, any Preliminary Final
USW Prospectus and the Final USW Prospectus, and of any supplements
thereto, pursuant to Rule
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424(b) has been made in the manner and within the time period required by
Rule 424(b); to the best knowledge of such counsel, no stop order
suspending the effectiveness of the USW Registration Statement has been
issued, no proceedings for that purpose have been instituted or threatened;
(iv) this Agreement has been duly authorized, executed and delivered
by U S WEST; and
(v) The statements in the Basic USW Prospectus under the heading
"Description of Debt Securities" and the statements in the Final USW
Prospectus under the heading "Description of the DECS", insofar as such
statements constitute a summary of certain provisions of the Indenture and
the DECS, are accurate in all material respects.
In addition, such counsel shall state that it has participated in
conferences with officers and other representatives of U S WEST, representatives
of the independent public accountants for U S WEST and representatives of the
Underwriters and counsel for the Underwriters, at which conferences the contents
of the USW Registration Statement and the Final USW Prospectus and related
matters were discussed; such counsel has not independently verified and is not
passing upon and assumes no responsibility for the accuracy, completeness or
fairness of the statements contained in the USW Registration Statement and the
Final USW Prospectus, except for the statements in the Basic USW Prospectus
under the heading "Description of Debt Securities" and the statements in the
Final USW Prospectus under the heading "Description of the DECS"; however, based
upon such counsel's participation in the aforesaid conferences, no facts have
come to its attention which lead it to believe that the USW Registration
Statement, as of the USW Effective Date, and the Final USW Prospectus (other
than the financial statements and other financial, statistical, accounting and
operating (as described below) information contained therein, the Enhance
Prospectus and exhibit 25 to the USW Registration Statement, as to which such
counsel need express no opinion) did not comply as to form in all material
respects with the applicable requirements of the Act, the Exchange Act and the
Trust Indenture Act and the respective rules thereunder; and such counsel has no
reason to believe that at the Effective Date the USW Registration Statement
(other than the financial statements and schedules and other financial,
accounting and operating (as described below) information included therein, the
Enhance Prospectus and exhibit 25 to the USW Registration Statement) contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements included
therein not misleading or that, as of the date thereof or on the Closing Date,
the Final USW Prospectus (other than the financial statements and schedules and
other financial, accounting and operating (as described below) information
included therein, the Enhance Prospectus and exhibit 25 to the USW Registration
Statement) includes or included any untrue statement of a material fact or
omitted or omits to state a material fact necessary to make the statements
included therein, in the light of the circumstances under which they were made,
not misleading. For purposes of this paragraph, the phrase "operating
information" means
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information of the type included in the Final USW Prospectus in the second
through fifth line items under the caption "Summary Financial Data - Operating
Data."
(d) The Representative shall have received from Cleary, Gottlieb,
Steen & Hamilton, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the DECS, the
Indenture, the USW Registration Statement, the Final USW Prospectus (together
with any supplement thereto), the Enhance Common Stock, the Enhance Registration
Statement, the Enhance Prospectus (together with any supplement thereto) and
other related matters as the Representative may reasonably require, and U S WEST
and Enhance shall have furnished to such counsel such documents as they request
for the purpose of enabling them to pass upon such matters.
(e) Enhance shall have furnished to the Representative the opinion of
Samuel Bergman, Esq., corporate counsel for Enhance, dated as of the Closing
Date, to the effect that:
(i) each of Enhance and the Subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the jurisdiction in which it is chartered or organized, with full corporate
power and authority to own its properties and conduct its business as
described in the Enhance Prospectus, and is duly qualified to do business
as a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification wherein it owns or leases
material properties or conducts material business, except where the failure
to qualify would not have a material adverse effect on Enhance and the
Subsidiaries, taken as a whole;
(ii) all the outstanding shares of capital stock of each Subsidiary
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Enhance
Prospectus, all outstanding shares of capital stock of the Subsidiaries are
owned by Enhance either directly or through wholly owned subsidiaries free
and clear of any perfected security interest and, to the knowledge of such
counsel, after due inquiry, any other security interests, claims, liens or
encumbrances;
(iii) Enhance's authorized equity capitalization is as set forth in
the Enhance Prospectus; the Shares are duly listed and admitted for trading
on the NYSE; the Enhance Common Stock conforms in all material respects to
the description thereof contained in the Enhance Prospectus; the
outstanding shares of Enhance Common Stock (including the Shares) have been
duly and validly authorized and issued and are fully paid and non-
assessable; the certificates for the Shares are in valid and sufficient
form;
(iv) to the best knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving Enhance or any of its
subsidiaries of a character required to
20
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be disclosed in the Enhance Registration Statement which is not adequately
disclosed in the Enhance Prospectus, and there is no franchise, contract or
other document of a character required to be described in the Enhance
Registration Statement or Enhance Prospectus, or to be filed as an exhibit,
which is not described or filed as required; and the statements in the
Enhance Prospectus under the headings "Certain Relationships and Related
Transactions" and "Legal Matters" and in Item 11 of Enhance's Annual Report
on Form 10-K for 1994 fairly summarize the matters therein described;
(v) the Enhance Registration Statement has become effective under the
Act; any required filing of the Enhance Prospectus, and of any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and within the
time period required by Rule 424(b); to the best knowledge of such counsel,
no stop order suspending the effectiveness of the Enhance Registration
Statement has been issued, no proceedings for that purpose have been
instituted or threatened and the Enhance Registration Statement and the
Enhance Prospectus (other than the financial statements and other financial
information contained therein as to which such counsel need express no
opinion) comply as to form in all material respects with the applicable
requirements of the Act, the Exchange Act and the Trust Indenture Act and
the respective rules thereunder; and such counsel has no reason to believe
that at the Effective Date the Enhance Registration Statement (other than
the financial statements and other financial information included therein
as to which such counsel need express no opinion) contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Enhance Prospectus (other than the financial
statements and other financial information included therein as to which
such counsel need express no opinion) includes any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(vi) this Agreement has been duly authorized, executed and delivered
by Enhance;
(vii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by Enhance of
the transactions contemplated herein, except such as have been obtained
under the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the DECS
by the Underwriters and the distribution of the Shares pursuant to the
terms of the DECS and such other approvals (specified in such opinion) as
have been obtained;
(viii) neither the sale of the Enhance Common Stock, nor the
consummation of any other of the transactions herein contemplated nor the
fulfillment of the terms hereof will conflict with, result in a breach or
violation of, or constitute a default under any
21
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law or the charter or by-laws of Enhance or the terms of any indenture or
other agreement or instrument known to such counsel and to which Enhance or
any of its subsidiaries is a party or bound or any judgment, order or
decree known to such counsel to be applicable to Enhance or any of its
subsidiaries of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over Enhance or any of
its subsidiaries; and
(ix) No holders of securities of Enhance, other than U S WEST and
holders that have previously waived their rights, have rights to the
registration of Enhance Common Stock under the Enhance Registration
Statement.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the State of New York or the
United States, to the extent he deems proper and specified in such opinion, upon
the opinion of other counsel of good standing whom such counsel believes to be
reliable and who are satisfactory to counsel for the Underwriters and (B) as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of Enhance and public officials. References to the Enhance
Prospectus in this paragraph (e) include any supplements thereto at the Closing
Date.
(f) U S WEST shall have furnished to the Representative a certificate
of U S WEST, signed by the acting Executive Vice President and Chief Financial
Officer of U S WEST, dated the Closing Date, to the effect that the signer of
such certificate has carefully examined the USW Registration Statement, the
Final USW Prospectus, any supplements to the Final USW Prospectus and this
Agreement and that to the best of his knowledge after reasonable investigation:
(i) the representations and warranties of U S WEST in this Agreement
are true and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date and U S WEST has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the USW
Registration Statement has been issued and no proceedings for that purpose
have been instituted or, to U S WEST's knowledge, threatened; and
(iii) since the date of the most recent financial statements included
in the Final USW Prospectus (exclusive of any supplement thereto), there
has been no material adverse change in the financial position or results of
operations of U S WEST and its subsidiaries taken as a whole, whether or
not arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Final USW Prospectus (exclusive of any
supplement thereto).
22
<PAGE>
(g) Enhance shall have furnished to the Representative a certificate
of Enhance, signed by the Chairman of the Board, the President or an Executive
Vice President and the principal financial or accounting officer of Enhance,
dated the Closing Date, to the effect that the signers of such certificate have
carefully examined the Enhance Registration Statement, the Enhance Prospectus,
any supplements to the Enhance Prospectus and this Agreement and that:
(i) the representations and warranties of Enhance in this Agreement
are true and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date and Enhance has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the Enhance
Registration Statement has been issued and no proceedings for that purpose
have been instituted or, to Enhance's knowledge, threatened; and
(iii) since the date of the most recent financial statements included
in the Enhance Prospectus (exclusive of any supplement thereto), there has
been no material adverse change in the condition (financial or other),
earnings, business or properties of Enhance and its subsidiaries taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Enhance Prospectus
(exclusive of any supplement thereto).
(h) At the Execution Time and at the Closing Date, Coopers & Lybrand
L.L.P., accountants for U S WEST, shall have furnished to the Representative a
letter or letters, dated respectively as of the Execution Time and as of the
Closing Date, in form and substance satisfactory to the Representative,
confirming that they are independent accountants within the meaning of the Act
and the Exchange Act and the respective applicable published rules and
regulations thereunder and stating in effect that:
(i) in their opinion the audited financial statements and financial
statement schedules included or incorporated in the USW Registration
Statement and the Final USW Prospectus and reported on by them comply in
form in all material respects with the applicable accounting requirements
of the Act and the Exchange Act and the related published rules and
regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the USW and its subsidiaries; carrying out
certain specified procedures (but not an examination in accordance with
generally accepted auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the shareholders,
directors and executive, finance, audit committees of U S WEST and its
subsidiaries; and inquiries of certain officials of U S WEST who have
responsibility for
23
<PAGE>
financial and accounting matters of U S WEST and its subsidiaries as to
transactions and events subsequent to December 31, 1994, nothing came to
their attention which caused them to believe that:
(1) any unaudited financial statements included or incorporated
in the USW Registration Statement and the Final USW Prospectus do not
comply in form in all material respects with applicable accounting
requirements and with the published rules and regulations of the
Commission with respect to financial statements included or
incorporated in quarterly reports on Form 10-Q under the Exchange Act;
or said unaudited financial statements are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included or incorporated in the USW Registration Statement and the
Final USW Prospectus; or
(2) with respect to the period subsequent to June 30, 1995,
there were any changes, at a specified date not more than five
business days prior to the date of the letter, in the capital stock of
U S WEST, or any increase in the consolidated long-term debt of U S
WEST and its subsidiaries, or decreases in consolidated net current
assets or net assets as compared with the amounts shown on the June
30, 1995 consolidated balance sheet included or incorporated in the
USW Registration Statement and the Final USW Prospectus, or for the
period from July 1, 1995 to such specified date there were any
decreases, as compared with the corresponding period in the preceding
year in consolidated revenues, net income or net income per share of U
S WEST and its subsidiaries, except in all instances for changes or
decreases set forth in such letter, in which case the letter shall be
accompanied by an explanation by U S WEST as to the significance
thereof unless said explanation is not deemed necessary by the
Representative;
(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of U S WEST
and its subsidiaries) set forth or incorporated in the USW Registration
Statement and the Final USW Prospectus and in Exhibit 12 to the USW Registration
Statement, agrees with the accounting records of U S WEST and its subsidiaries,
excluding any questions of legal interpretation.
References to the Final USW Prospectus in this paragraph (h) include any
supplement thereto at the date of the letter.
(i) At the Execution Time and at the Closing Date, Deloitte & Touche,
accountants for Enhance, shall have furnished to the Representative a letter or
letters, dated respectively as of the Execution Time and as of the Closing Date,
in form and substance
25
<PAGE>
satisfactory to the Representative, confirming that they are independent
accountants within the meaning of the Act and the Exchange Act and the
respective applicable published rules and regulations thereunder and stating in
effect that:
(i) in their opinion the audited financial statements and financial
statement schedules included or incorporated in the Enhance Registration
Statement and the Enhance Prospectus and reported on by them comply in form
in all material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by Enhance and its subsidiaries; carrying out
certain specified procedures (but not an examination in accordance with
generally accepted auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the stockholders,
directors and committees of Enhance and its subsidiaries; and inquiries of
certain officials of Enhance who have responsibility for financial and
accounting matters of Enhance and its subsidiaries as to transactions and
events subsequent to December 31, 1994, nothing came to their attention
which caused them to believe that:
(1) any unaudited financial statements included or incorporated
in the Enhance Registration Statement and the Enhance Prospectus do
not comply in form in all material respects with applicable accounting
requirements and with the published rules and regulations of the
Commission with respect to financial statements included or
incorporated in quarterly reports on Form 10-Q under the Exchange Act;
or said unaudited financial statements are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included or incorporated in the Enhance Registration Statement and the
Enhance Prospectus; or
(2) with respect to the period subsequent to June 30, 1995,
there were any changes, at a specified date not more than five
business days prior to the date of the letter, in the capital stock of
Enhance and its consolidated subsidiaries, or any decreases in
consolidated total assets, stockholders' equity, investments,
increases in long-term debt or liability for losses or loss adjustment
expenses of Enhance as compared with the amounts shown on the June 30,
1995 consolidated balance sheet included or incorporated in the
Enhance Registration Statement and the Enhance Prospectus, or for the
period from July 1, 1995 to such specified date there were any
decreases, as compared with the corresponding period in the preceding
year in consolidated total revenues, pretax operating income, net
income or in the total or per-share amounts of net income, gross
premiums written, net premiums written, net investment income, or
increases in losses and loss adjustment expenses, except in all
instances for
25
<PAGE>
changes or decreases set forth in such letter, in which case the
letter shall be accompanied by an explanation by Enhance as to the
significance thereof unless said explanation is not deemed necessary
by the Representative.
(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting records of
Enhance and its subsidiaries) set forth or incorporated in the Enhance
Registration Statement and the Enhance Prospectus, agrees with the
accounting records of Enhance and its subsidiaries, excluding any questions
of legal interpretation.
References to the Enhance Prospectus in this paragraph (i) include any
supplement thereto at the date of the letter.
(j) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in each of the USW Registration Statement and the
Enhance Registration Statements (exclusive of any amendment thereof) and each of
the Final USW Prospectus and the Enhance Prospectus (exclusive of any supplement
thereto), there shall not have been any change, or any development involving a
prospective change, in or affecting the business or properties of either U S
WEST or Enhance and their respective subsidiaries, taken as a whole, the effect
of which is, in the judgment of the Representative, so material and adverse as
to make it impractical or inadvisable to proceed with the offering or delivery
of the DECS as contemplated by the USW Registration Statement (exclusive of any
amendment thereof) and the Final USW Prospectus (exclusive of any supplement
thereto).
(k) Subsequent to the Execution Time, there shall not have been any
decrease in the rating of any of U S WEST's or Enhance's debt securities by any
"nationally recognized statistical rating organization" (as defined for purposes
of Rule 436(g) under the Act) or any notice given of any intended or potential
decrease in any such rating or of a possible change in any such rating that does
not indicate the direction of the possible change; it is understood by the
parties that as of the Execution Time the outlook for the rating of U S WEST
debt securities, according to Standard & Poor's Corporation [and Moody's
Investors Service, Inc.], is "negative".
(l) Prior to the Closing Date, each of U S WEST and Enhance shall
have furnished to the Representative such further information, certificates and
documents as the Representative may reasonably request.
If any of the conditions specified in this Section 8 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representative and counsel for the
26
<PAGE>
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representative. Notice of such cancellation shall be given to U S WEST and
Enhance in writing or by telephone or telegraph confirmed in writing.
9. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the DECS
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 8 hereof is not satisfied, because of
any termination pursuant to Section 12 hereof or because of any refusal,
inability or failure on the part of U S WEST or Enhance to perform any agreement
herein or comply with any provision hereof other than by reason of a default by
any of the Underwriters, U S WEST will reimburse the Underwriters severally upon
demand for all reasonable out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the DEC. The Underwriters agree to pay
such expenses, fees and disbursements in any other event. In no event will U S
WEST be liable to any of the Underwriters for damages on account of loss of
anticipated profits.
10. INDEMNIFICATION AND CONTRIBUTION. (a) U S WEST agrees to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter, and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the USW Registration Statement as originally filed or
in any amendment thereof, or in the Basic USW Prospectus, any Preliminary Final
USW Prospectus or the Final USW Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that U S WEST
will not be liable under the indemnity agreement in this subsection (a) to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made in the USW Registration Statement as originally filed or
in any amendment thereof, or in the Basic USW Prospectus, any Preliminary Final
USW Prospectus or the Final USW Prospectus, or in any amendment thereof or
supplement thereto in reliance upon and in conformity with written information
furnished to U S WEST or Enhance by or on behalf of any Underwriter through the
Representative specifically for inclusion therein or in reliance and in
conformity with the Statement of Eligibility of the Trustee; PROVIDED, FURTHER,
that U S WEST will not be liable under the indemnity agreement in this
subsection (a) to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged
27
<PAGE>
untrue statement or omission or alleged omission made in the USW Registration
Statement as originally filed or in any amendment thereof, or in the Basic USW
Prospectus, any Preliminary Final USW Prospectus or the Final USW Prospectus, or
in any amendment thereof or supplement thereto in reliance upon and in
conformity with written information furnished to U S WEST by Enhance
specifically for inclusion therein (including the information contained in any
Preliminary Enhance Prospectus or Enhance Prospectus included in any such
document (other than information contained in or omitted from any such
Preliminary Enhance Prospectus or Enhance Prospectus in reliance on and
conformity with information furnished to Enhance by U S WEST specifically for
inclusion therein)); and PROVIDED, FURTHER that U S WEST shall not be liable to
any Underwriter under the indemnity agreement in this subsection (a) with
respect to the Preliminary Final USW Prospectus to the extent that any such
loss, claim, damage or liability of such Underwriter results from the fact that
such Underwriter sold DECS to a person as to whom it shall be established that
there was not sent or given, at or prior to the written confirmation of such
sale, a copy of the Final USW Prospectus (excluding documents incorporated by
reference), as the case may be, or of the Final USW Prospectus as then amended
or supplemented (excluding documents incorporated by reference) in any case
where such delivery is required by the Act and where U S WEST has previously
furnished copies thereof in sufficient quantity to such Underwriter and the
loss, claim, damage or liability of such Underwriter results from an untrue
statement or omission of a material fact contained in the Final Preliminary USW
Prospectus and corrected in the Final USW Prospectus (excluding documents
incorporated by reference) or in the Final USW Prospectus as then amended or
supplemented (excluding documents incorporated by reference). This indemnity
agreement will be in addition to any liability which U S WEST may otherwise
have.
(b) U S WEST agrees to indemnify and hold harmless Enhance, each of
its directors, each of its officers who signs the Enhance Registration
Statement, and each person who controls Enhance within the meaning of either the
Act or the Exchange Act, against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Enhance Registration Statement as originally filed or in any amendment
thereof, or in the Preliminary Enhance Prospectus or the Enhance Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission is made in reliance upon and in
conformity with written information furnished in writing to Enhance by U S WEST
specifically for inclusion therein, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability
28
<PAGE>
or action. The indemnity agreement shall be in addition to any liability which
U S WEST may otherwise have.
(c) Enhance agrees to indemnify and hold harmless each Underwriter,
the directors, officers, employees and agents of each Underwriter, and each
person who controls any Underwriter within the meaning of either the Act or the
Exchange Act and Enhance agrees to indemnify and hold harmless U S WEST, the
directors, officers, employees and agents of U S WEST, and each person who
controls U S WEST within the meaning of either the Act or the Exchange Act, in
either case, against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act, the
Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in (i) the Enhance
Registration Statement as originally filed or in any amendment thereof, or in
any Preliminary Enhance Prospectus or the Enhance Prospectus, or in any
amendment thereof or supplement thereto, or (ii) the USW Registration Statement
as originally filed or in any amendment thereof, or in any Preliminary Final USW
Prospectus or the Final USW Prospectus, or in any amendment thereto or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in the documents referred to in clause (i) or (ii) above a
material fact required to be stated in the documents referred to in clause (i)
or (ii) above or necessary to make the statements therein not misleading, but in
the case of the documents referred to clause (ii) only to the extent that the
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished in
writing to U S WEST by Enhance specifically for inclusion therein (including the
information contained in any Preliminary Enhance Prospectus or Enhance
Prospectus included in any such document (other than information contained in or
omitted from any such Preliminary Enhance Prospectus or Enhance Prospectus in
reliance on and conformity with information furnished to Enhance by U S WEST
specifically for inclusion therein)), and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; PROVIDED, HOWEVER, that Enhance will not be
liable under the indemnity agreement in this subsection (c) to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made in the documents referred to in clause (i) above in reliance upon
and in conformity with written information furnished to Enhance by or on behalf
of any Underwriter through the Representative specifically for inclusion
therein; PROVIDED, FURTHER that Enhance shall not be liable under the indemnity
agreement in this subsection (c) to the extent that any such loss, claim, damage
or liability arises out of or is based on any such untrue statement or alleged
untrue statement or omission or alleged omission made in the documents referred
to in clause (i) above in reliance upon and in conformity with written
information furnished to Enhance by U S WEST specifically for inclusion therein;
and PROVIDED, FURTHER Enhance shall not be liable to any Underwriter under the
indemnity agreement in this subsection (c) with respect to the
30
<PAGE>
Preliminary Enhance Prospectus to the extent that any such loss, claim, damage
or liability of such Underwriter results from the fact that such Underwriter
sold DECS to a person as to whom it shall be established that there was not sent
or given, at or prior to the written confirmation of such sale, a copy of the
Enhance Prospectus (excluding documents incorporated by reference) or of the
Enhance Prospectus as then amended or supplemented (excluding documents
incorporated by reference), as the case may be, in any case where such delivery
is required by the Act and where Enhance has previously furnished copies thereof
in sufficient quantity to such Underwriter and the loss, claim, damage or
liability of such Underwriter results from an untrue statement or omission of a
material fact contained in the Preliminary Enhance Prospectus and corrected in
the Enhance Prospectus (excluding documents incorporated by reference) or in the
Enhance Prospectus as then amended or supplemented (excluding documents
incorporated by reference). This indemnity agreement will be in addition to any
liability which Enhance may otherwise have.
(d) Each Underwriter severally agrees to indemnify and hold harmless
U S WEST, each of its directors, each of its officers who signs the USW
Registration Statement, and each person who controls U S WEST within the meaning
of either the Act or the Exchange Act, to the same extent as the foregoing
indemnity in subsection (a) from U S WEST to each Underwriter, but only with
reference to written information furnished to U S WEST by or on behalf of such
Underwriter through the Representative specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any Underwriter may otherwise have. U S
WEST acknowledges that the statements set forth in the last paragraph of the
cover page, in the last paragraph of the inside cover page and under the heading
"Plan of Distribution" in any Preliminary Final USW Prospectus or the Final USW
Prospectus constitute the only information furnished in writing by or on behalf
of the several Underwriters for inclusion in the documents referred to in the
foregoing indemnity, and you, as the Representative, confirm that such
statements are correct.
(e) Each Underwriter severally agrees to indemnify and hold harmless
Enhance and U S WEST, each of their respective directors, each of their
respective officers who signs the Enhance Registration Statement or the USW
Registration Statement, respectively, and each person who controls Enhance or U
S WEST within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity in subsection (c) from Enhance to each
Underwriter and U S WEST, but only with reference to written information
relating to such Underwriter furnished to Enhance or U S WEST by or on behalf of
such Underwriter through the Representative specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any Underwriter may otherwise have.
Enhance acknowledges that the statements set forth in the first paragraph of the
inside cover page and under the heading "Plan of Distribution" in any
Preliminary Enhance Prospectus or the Enhance Prospectus constitute the only
information furnished in writing by or on behalf of the several Underwriters for
inclusion in the documents
30
<PAGE>
referred to in the foregoing indemnity, and you, as the Representative, confirm
that such statements are correct.
(f) Promptly after receipt by an indemnified party under this Section
10 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 10, notify the indemnifying party in writing of the commencement
thereof; but the failure so to notify the indemnifying party (i) will not
relieve it from any liability under paragraphs (a), (b), (c), (d) or (e) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the indemnifying
party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraphs (a), (b), (c), (d) or (e)
above. In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to the
indemnified party of its election to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party (except as set
forth below) under this Section 10 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation. Notwithstanding the indemnifying
party's election to assume the defense of an action pursuant to the immediately
preceding sentence, the indemnified party shall have the right to employ one
separate counsel (including, to the extent necessary, local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the actual or potential defendants in, or targets of,
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party or
(ii) the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action (so long as such failure to
employ counsel is not the result of an unreasonable determination by the
indemnified party that counsel selected pursuant to the immediately preceding
sentence is unsatisfactory). The indemnifying party or parties shall not be
liable under this Agreement with respect to any settlement made by any
indemnified party or parties without prior written consent (not to be
unreasonably withheld) by the indemnifying party or parties to such settlement.
(g) In the event that the indemnity provided in paragraphs (a), (b),
(c), (d) or (e) of this Section 10 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, U S WEST, Enhance and the
Underwriters agree to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating or defending same) (collectively "Losses") to which U S WEST,
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<PAGE>
Enhance and one or more of the Underwriters may be subject in such proportion as
is appropriate to reflect the relative benefits received by U S WEST, Enhance
and the Underwriters from the offering of the DECS; PROVIDED, HOWEVER, that in
no case shall any Underwriter (except as may be provided in any agreement among
underwriters relating to the offering of the DECS) be responsible for any amount
in excess of the product of (i) the total Losses and (ii) the percentage
(expressed as a decimal) that the aggregate underwriting discount applicable to
the DECS purchased by such Underwriter hereunder bears to the aggregate initial
public offering price of such DECS. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, U S WEST, Enhance
and the Underwriters shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of U S WEST,
Enhance and the Underwriters in connection with the statements or omissions
which resulted in such Losses as well as any other relevant equitable
considerations. The relative benefits received by U S WEST or Enhance on the
one hand and the Underwriters on the other with respect to such offering shall
be deemed to be equal to the total net proceeds from the offering (before
deducting expenses) received by U S WEST, and the total underwriting discounts
and commissions, respectively, in each case as set forth on the cover page of
the Final USW Prospectus and, as between Enhance and the Underwriters, Enhance
shall be deemed for this purpose to have received such total net proceeds as
received by U S WEST. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by U S WEST and Enhance on the one hand or the Underwriters on the other. U S
WEST, Enhance and the Underwriters agree that it would not be just and equitable
if contribution were determined by PRO RATA allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (g), 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. For purposes of this Section 10, each person
who controls an Underwriter within the meaning of either the Act or the Exchange
Act and each director, officer, employee and agent of an Underwriter shall have
the same rights to contribution as such Underwriter, and each person who
controls U S WEST or Enhance within the meaning of either the Act or the
Exchange Act, each officer of U S WEST or Enhance who shall have signed the
Registration Statement and each director of U S WEST or Enhance shall have the
same rights to contribution as U S WEST or Enhance, subject in each case to the
applicable terms and conditions of this paragraph (g).
11. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters shall
fail to purchase and pay for any of the DECS agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the principal amount of DECS
set forth opposite their names in Schedule I hereto bears to the aggregate
principal amount of DECS set forth opposite the names of all the remaining
Underwriters) the DECS which the defaulting Underwriter or Underwriters agreed
but failed to purchase;
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<PAGE>
PROVIDED, HOWEVER, that in the event that the aggregate principal amount of DECS
which the defaulting Underwriter or Underwriters agreed but failed to purchase
shall exceed 10% of the aggregate amount of DECS set forth in Schedule I hereto,
the remaining Underwriters shall have the right to purchase all, but shall not
be under any obligation to purchase any, of the DECS, and if such nondefaulting
Underwriters do not purchase all the DECS, this Agreement will terminate without
liability to any nondefaulting Underwriter, U S WEST or Enhance. In the event
of a default by any Underwriter as set forth in this Section 11, the Closing
Date shall be postponed for such period, not exceeding seven days, as the
Representative shall determine in order that the required changes in the USW or
Enhance Registration Statement and the Final USW or Enhance Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
U S WEST, Enhance and any nondefaulting Underwriter for damages occasioned by
its default hereunder.
12. TERMINATION. This Agreement shall be subject to termination in
the absolute discretion of the Representative, by notice given to U S WEST and
Enhance prior to delivery of and payment for the DECS, if prior to such time (i)
trading in U S WEST's or Enhance's common stock shall have been suspended by the
Commission or trading in securities generally on the New York Stock Exchange
shall have been suspended or limited or minimum prices shall have been
established on such Exchange, (ii) a banking moratorium shall have been declared
by either Federal or New York State authorities or (iii) there shall have
occurred any outbreak or escalation of hostilities, declaration by the United
States of a national emergency or war or other calamity or crisis, the effect of
which on financial markets of the United States is such as to make it, in the
judgment of the Representative, impracticable or inadvisable to proceed with the
offering or delivery of the DECS as contemplated by the Final USW Prospectus
(exclusive of any supplement thereto).
13. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of U S
WEST and Enhance or their respective officers and of the Underwriters set forth
in or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter, U S
WEST or Enhance or any of the officers, directors or controlling persons
referred to in Section 10 hereof, and will survive delivery of and payment for
the DECS. The provisions of Sections 9 and 10 hereof shall survive the
termination or cancellation of this Agreement.
14. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representative, will be mailed,
delivered or telegraphed and confirmed to it at Seven World Trade Center, New
York, New York 10048; if sent to U S WEST, will be mailed, delivered or
telegraphed and confirmed to it at 7800 Orchard Road, Englewood, Colorado 80111,
attention of the Legal Department; or if sent to Enhance, will be mailed,
delivered, telegraphed and confirmed to it at 335 Madison Avenue, 25th Floor,
New York, New York 10017, Attention: Samuel Bergman, Esq.
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<PAGE>
15. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 10 hereof, and no
other person will have any right or obligation hereunder.
16. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among U S
WEST, Enhance and the several Underwriters.
Very truly yours,
U S WEST Inc.
By: ____________________________
Name:
Title:
Enhance Financial Services Group Inc.
By:_____________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Brothers Inc
By:
___________________________
Vice President
For itself and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
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<PAGE>
SCHEDULE I
Amount of
Underwritten DECS
Underwriter to be Purchased
- ----------- -----------------------
Salomon Brothers Inc . . . . . . . . 4,900,000
-----------------------
Total. . . . . . . . . . . 4,900,000
-----------------------
-----------------------
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U S WEST, INC.,
Issuer
and
THE FIRST NATIONAL BANK OF CHICAGO,
Trustee
- -------------------------------------------------------------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of _________, 1995
Supplemental to Indenture dated as of ________, 1995
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FIRST SUPPLEMENTAL INDENTURE dated as of ________, 1995 (this
"Supplemental Indenture"), made and entered into by and between U S WEST, Inc.,
a corporation organized and existing under the laws of the State of Delaware
having its principal office at 7800 Orchard Road, Englewood, Colorado 80111, and
The First National Bank of Chicago, a national banking association duly
organized and existing under the laws of the United States, as Trustee (the
"Trustee") under the indenture of the Company (the "Indenture") dated as of
_________, 1995.
WHEREAS Sections 9.01(6) and (7) of the Indenture provide that the
Company and Trustee may enter into one or more indentures supplemental to the
Indenture without the consent of any Securityholder, (a) to provide for the
issuance of and establish the form, terms and conditions of Securities of any
Series as provided by Section 2.02 thereof and (b) to make any change in the
Indenture that does not adversely affect the rights of any Securityholder in any
material respect; and
WHEREAS the Indenture also provides for the issuance from time to time
of unsecured and unsubordinated debentures, notes or other evidences of
indebtedness (the "Securities"), issuable for the purposes and subject to the
limitations contained in the Indenture; and
WHEREAS the Company has duly authorized the creation of a Series of
its Securities denominated its "_____% Exchangeable Notes Due ________, 199_"
representing up to_______________ of its "Debt Exchangeable for Common Stock
(SM)" (such Securities being referred to herein as the "DECS (SM)", the
principal amount of which is mandatorily exchangeable at Maturity into shares of
Common Stock, par value $0.10 per share (the "Enhance Common Stock"), of Enhance
Financial Services Group Inc., a New York corporation ("Enhance"), or, at the
option of the Company, cash, in either case at the Exchange Rate (as defined
herein); and
WHEREAS the entry into this Supplemental Indenture by the parties
hereto is in all respects authorized by the provisions of the Indenture; and
WHEREAS the Company has duly authorized the execution and delivery of
this Supplemental Indenture, and all things necessary have been done to make the
DECS, when executed by the Company and authenticated and delivered hereunder and
duly issued by the Company, the valid obligations of the Company, and to make
this Supplemental Indenture a valid agreement of the Company, in accordance with
their and its terms:
NOW, THEREFORE:
For and in consideration of the premises and purchase of the
Securities of any Series issued on or after the date hereof by the Holders
thereof, it is mutually covenanted and agreed, for the equal and proportionate
benefit of all Holders of the Securities of any such Series, as follows:
<PAGE>
ARTICLE I
CERTAIN PROVISIONS OF GENERAL APPLICATION
SECTION 101. DEFINITIONS.
For all purposes of the Indenture and this Supplemental Indenture,
except as otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article;
(2) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to the Indenture and this Supplemental Indenture as a whole
and not to any particular Article, Section or other subdivision; and
(3) capitalized terms used but not defined herein are used as they
are defined in the Indenture.
"Business Day" means any day that is not a Saturday, a Sunday or a day
on which the NYSE or banking institutions or trust companies in The City of New
York are authorized or obligated by law or executive order to close.
"Closing Price" of any security on any date of determination means the
closing sale price (or, if no closing price is reported, the last reported sale
price) of such security (regular way) on the NYSE on such date or, if such
security is not listed for trading on the NYSE on any such date, as reported in
the composite transactions for the principal United States securities exchange
on which such security is so listed, or if such security is not so listed on a
United States national or regional securities exchange, as reported by the
NASDAQ National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System, or, if such security is not so reported, the last
quoted bid price for such security in the over-the-counter market as reported by
the National Quotation Bureau or similar organization.
"DECS" has the meaning set forth in the recitals to this Supplemental
Indenture.
"Dilution Event" has the meaning set forth in Section 205(a)(ii).
"Enhance Common Stock" has the meaning set forth in the recitals to
this Supplemental Indenture.
"Exchange Rate" means a rate equal to, (a) if the Maturity Price per
share of Enhance Common Stock is greater than or equal to $_______(the
"Threshold Appreciation Price"), shares of Enhance Common Stock per DECS, (b) if
the Maturity Price is less than the Threshold Appreciation Price but is greater
than the Initial Price, a fractional share of Enhance Common Stock per DECS so
that the value thereof (determined at the Maturity Price) is equal to the
Initial Price (such fractional share being calculated to the nearest 1/10,000th
of a share or, if there is not a nearest 1/10,000th of a share, to the next
highest 1/10,000th of a share)
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<PAGE>
and (c) if the Maturity Price is less than or equal to the Initial Price, one
share of Enhance Common Stock per DECS; PROVIDED, HOWEVER, that the Exchange
Rate is subject to adjustment from time to time pursuant to Section 204(a).
"Extraordinary Cash Dividend" has the meaning set forth in paragraph
(a)(vi) of Section 204(a).
"Initial Price" means $__________ per share of Enhance Common Stock.
"Maturity" means the date on which the principal of a DECS becomes due
and as provided therein or herein, whether at Stated Maturity or by declaration
of acceleration or otherwise.
"Maturity Price" means the average Closing Price per share of Enhance
Common Stock on the 20 Trading Days immediately prior to, but not including, the
date of Maturity; PROVIDED, HOWEVER, that if there are not 20 Trading Days for
the Enhance Common Stock occurring later than the 60th calendar day immediately
prior to, but not including, the date of Maturity, Maturity Price means the
market value per share of Enhance Common Stock as of Maturity as determined by
a nationally recognized independent investment banking firm retained for this
purpose by the Company.
"NYSE" means the New York Stock Exchange, Inc.
"Reorganization Event" has the meaning set forth in Section 204(b).
"Share Components" means the numbers of shares of Enhance Common Stock
per DECS specified in clauses (a) and (c) of the definition of "Exchange Rate"
set forth in this Article.
"Stated Maturity" means, when used with respect to any DECS, the date
specified in such DECS as the fixed date on which the principal of such DECS is
due and payable and, when used with respect to any installment of interest on a
DECS, the fixed date on which such installment of interest is due.
"Threshold Appreciation Price" has the meaning specified in the
definition of "Exchange Rate" set forth in this Article.
"Trading Day" means a day on which the security the Closing Price of
which is being determined (a) is not suspended from trading on any national or
regional securities exchange or association or over-the-counter market at the
close of business and (b) has traded at least once on the national or regional
securities exchange or association or over-the-counter market that is the
primary market for the trading of such security.
3
<PAGE>
"Transaction Value" means (x) for any cash received in any
Reorganization Event, the amount of cash received per share of Enhance Common
Stock, (y) for any property other than cash or securities received in any
Reorganization Event, an amount equal to the market value at Maturity of such
property received per share of Enhance Common Stock as determined by a
nationally recognized independent investment banking firm retained for this
purpose by the Company and (z) for any securities received in any Reorganization
Event, an amount equal to the average Closing Price per share of such securities
on the 20 Trading Days immediately prior to Maturity multiplied by the number of
such securities received for each share of Enhance Common Stock; PROVIDED,
HOWEVER, that in the case of clause (z), if there are not 20 Trading Days for
such securities occurring later than the 60th calendar day immediately prior to,
but not including, the date of Maturity, Transaction Value means the market
value per share of such securities as of Maturity as determined by a nationally
recognized independent investment banking firm retained for such purpose by the
Company.
SECTION 102. EFFECT OF HEADINGS.
The Article and Section headings herein are for convenience only and
shall not affect the construction hereof.
SECTION 103. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Supplemental Indenture by the
Company shall bind its successors and assigns, whether so expressed or not.
SECTION 104. SEPARABILITY.
In case any provision in this Supplemental Indenture or the DECS shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 105. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Supplemental Indenture
by any of the provisions of the Trust Indenture Act, such required provision
shall control.
SECTION 106. BENEFITS OF SUPPLEMENTAL INDENTURE.
Nothing in this Supplemental Indenture, expressed or implied, shall
give to any person, other than the parties hereto and their successors
hereunder, and the Holders of the DECS any benefit or any legal or equitable
right, remedy or claim under this Supplemental Indenture.
SECTION 107. GOVERNING LAW.
THIS SUPPLEMENTAL INDENTURE AND THE DECS SHALL BE DEEMED TO BE A
----------------------------------------------------------------
CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW
- ------------------------------------------------
4
<PAGE>
YORK AND THIS SUPPLEMENTAL INDENTURE AND EACH SUCH DECS SHALL BE GOVERNED BY AND
- --------------------------------------------------------------------------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
- --------------------------------------------------------------
ARTICLE II
The DECS
SECTION 201. TITLE AND TERMS.
There is hereby created under the Indenture a Series of Securities
known and designated as the "___% Exchangeable Notes Due 199_" of the Company.
The aggregate principal amount of DECS that may be authenticated and delivered
under this Indenture is limited to $____________, except for DECS authenticated
and delivered upon reregistration of, transfer of, or in exchange for, or in
lieu of, other DECS pursuant to Section 2.08, 2.09, 2.12, 3.06 or 9.05 of the
Indenture.
The Stated Maturity for payment of principal of the DECS shall be
__________, 199_ and the DECS shall bear interest (computed on the basis of a
360-day year of twelve 30-day months) at the rate of ___% per annum, from
______, 1995 or the most recent Interest Payment Date to which interest has been
paid or duly provided for, payable quarterly in arrears on __________,
_________, _________ and __________ of each year (commencing ______________,
1995), to the persons in whose names the DECS (or any predecessor securities)
are registered at the close of business on the _______, _______, _______ or
_______ next preceding such interest payment date, until principal thereof is
paid or made available for payment.
The DECS shall be initially issued in the form of a Global Security
and the Depositary for the DECS shall be the Depository Trust Company, New York,
New York.
The DECS shall not be redeemable prior to their Stated Maturity.
The DECS shall not be subject to any sinking fund.
The DECS shall be issuable in denominations of $___ and any integral
multiple thereof.
The DECS shall be issuable as Registered Securities only, without
coupons.
The Company shall not be obligated to pay any additional amount on the
DECS in respect of taxes, except as otherwise provided in Sections 206 and 302.
The form of DECS attached hereto as Exhibit A is hereby adopted,
pursuant to Section 9.01(7) of the Indenture, as a form of Securities of a
Series that consists of DECS.
The DECS shall be mandatorily exchangeable as provided in Section 202.
5
<PAGE>
SECTION 202. EXCHANGE AT MATURITY.
At Maturity the principal amount of each DECS shall be mandatorily
exchanged by the Company into a number of shares of Enhance Common Stock at
the Exchange Rate; PROVIDED, HOWEVER, that, pursuant to Section 203, no
fractional shares of Enhance Common Stock shall be issued. The Holders of
the DECS shall be responsible for the payment of any and all brokerage costs
upon the subsequent sale of such shares. The Company may, at its option, in
lieu of delivering shares of Enhance Common Stock, deliver cash in an amount
(calculated to the nearest 1/100th of a dollar per DECS or, if there is not a
nearest 1/100th of a dollar, then to the next higher 1/100th of a dollar)
equal to the product of the number of shares of Enhance Common Stock
otherwise deliverable on the date of Maturity multiplied by the Maturity
Price; PROVIDED, HOWEVER, that if such option in excersised, the Compay shall
deliver cash with respect to all, but not less than all, of the shares of
Enhance Common Stock that would otherwise be deliverable, except to those
Holders with respect to whom it has determinded delivery of cash may violate
applicable state law and as to whom it will deliver shares of Enhance Common
Stock as provided herein. In determining the amount of cash deliverable in
exchange for the DECS in lieu of shares of Enhance Common Stock pursuant to
the prior sentence hereof, if more than one DECS shall be surrendered for
exchange at one time by the same Holder, the amount of cash which shall be
delivered upon exchange shall be computed on the basis of the aggregate
number of DECS so surrendered at Maturity.
SECTION 203. NO FRACTIONAL SHARES.
If more than one DECS shall be surrendered for exchange pursuant to
Section 202 at one time by the same Holder, the number of full shares of Enhance
Common Stock which shall be delivered upon such exchange, in whole or in part,
as the case may be, shall be computed on the basis of the aggregate number of
DECS surrendered. No fractional shares or scrip representing fractional shares
of Enhance Common Stock shall be issued or delivered upon any exchange pursuant
to Section 202 of any DECS. In lieu of any fractional share of Enhance Common
Stock which, but for the immediately preceding sentence, would otherwise be
deliverable upon such exchange, the Company, through any applicable Paying
Agent, shall make a cash payment in respect of such fractional interest in an
amount equal to the value of such fractional shares at the Maturity Price. The
Company shall, upon such exchange of any DECS, provide cash to any applicable
Paying Agent in an amount equal to the cash payable with respect to any
fractional shares of Enhance Common Stock deliverable upon such exchange, and
the Company shall retain such fractional shares of Enhance Common Stock.
SECTION 204. ADJUSTMENT OF EXCHANGE RATE.
(a) ADJUSTMENT FOR DISTRIBUTIONS, RECLASSIFICATIONS, ETC. The
Exchange Rate shall be subject to adjustment from time to time as follows:
(i) If Enhance shall:
6
<PAGE>
(A) pay a dividend or make a distribution, in either case, with
respect to the Enhance Common Stock in shares of such stock;
(B) subdivide or split the outstanding shares of Enhance Common
Stock into a greater number of shares;
(C) combine the outstanding shares of Enhance Common Stock into
a smaller number of shares; or
(D) issue by reclassification (other than a reclassification
upon a Reorganization Event, as defined in paragraph (b) of this
Section) of shares of Enhance Common Stock any shares of common stock
of Enhance;
then, in any such event, the Exchange Rate shall be adjusted by adjusting
each of the Share Components of the Exchange Rate in effect immediately
prior to such event so that a Holder of any DECS shall be entitled to
receive, upon mandatory exchange pursuant to Section 202 of the principal
amount of such DECS at Maturity pursuant to either Share Component of the
Exchange Rate, the number of shares of Enhance Common Stock (or, in the
case of a reclassification referred to in clause (D) of this sentence, the
number of shares of other common stock of Enhance issued pursuant thereto)
which such Holder of such DECS would have owned or been entitled to receive
immediately following such event had such DECS been exchanged pursuant to
either Share Component of the Exchange Rate immediately prior to such event
or any record date with respect thereto. Each such adjustment shall become
effective at the opening of business on the Business Day next following the
record date for determination of Holders of Enhance Common Stock entitled
to receive such dividend or distribution in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, split, combination or reclassification.
Each such adjustment shall be made successively.
(ii) If Enhance shall, after the date hereof, issue rights or
warrants to all holders of Enhance Common Stock entitling them to subscribe
for or purchase shares of Enhance Common Stock (other than rights to
purchase Enhance Common Stock pursuant to a plan for the reinvestment of
dividends or interest) at a price per share less than the current market
price of Enhance Common Stock (determined for purposes of this paragraph
(a)(ii) as the average Closing Price per share of Enhance Common Stock on
the 20 Trading Days immediately prior to the date such rights or warrants
are issued; PROVIDED, HOWEVER, that if there are not 20 Trading Days for
the Enhance Common Stock occurring later than the 60th calendar day
immediately prior to, but not including, such date, such current market
price shall be determined as the market value per share of Enhance Common
Stock as of such date as determined by a nationally recognized independent
investment banking firm retained for this purpose by the Company), then in
each case the Exchange Rate shall be adjusted by multiplying each of the
Share Components of the Exchange Rate in effect immediately prior to the
date of issuance of such rights or warrants, by a fraction, of which the
numerator shall be
7
<PAGE>
the number of shares of Enhance Common Stock outstanding on the date of
issuance of such rights or warrants, immediately prior to such issuance,
plus the number of additional shares of Enhance Common Stock offered for
subscription or purchase pursuant to such rights or warrants, and of which
the denominator shall be the number of shares of Enhance Common Stock
outstanding on the date of issuance of such rights or warrants, immediately
prior to such issuance, plus the number of additional shares of Enhance
Common Stock which the aggregate offering price of the total number of
shares of Enhance Common Stock so offered for subscription or purchase
pursuant to such rights or warrants would purchase at such current market
price (calculated as the average Closing Price per share of Enhance Common
Stock on the 20 Trading Days immediately prior to the date such rights or
warrants are issued; PROVIDED, HOWEVER, that if there are not 20 Trading
Days for the Enhance Common Stock occurring later than the 60th calendar
day immediately prior to, but not including, such date, such current market
price shall be determined as the market value per share of such Enhance
Common Stock as of such date as determined by a nationally recognized
independent investment banking firm retained for this purpose by the
Company), which shall be determined by multiplying such total number of
shares by the exercise price of such rights or warrants and dividing the
product so obtained by such current market price. Such adjustment shall
become effective at the opening of business on the Business Day next
following the record date for the determination of stockholders entitled to
receive such rights or warrants. To the extent that shares of Enhance
Common Stock are not delivered after the expiration of such rights or
warrants, the Exchange Rate shall be readjusted to the Exchange Rate which
would then be in effect had such adjustments for the issuance of such
rights or warrants been made upon the basis of delivery of only the number
of shares of Enhance Common Stock actually delivered. Each such adjustment
shall be made successively.
(iii) If Enhance shall pay a dividend or make a distribution to
all holders of Enhance Common Stock of evidences of its indebtedness or
other assets (excluding any dividends or distributions referred to in
clause (A) of paragraph (a)(i) of this Section, any shares of common stock
issued pursuant to a reclassification referred to in clause (D) of
paragraph (a)(i) of this Section above or any ordinary periodic cash
dividends that do not constitute Extraordinary Cash Dividends) or shall
issue to all holders of Enhance Common Stock rights or warrants to
subscribe for or purchase any of its securities (other than those referred
to in paragraph (a)(ii) of this Section), then in each such case, the
Exchange Rate shall be adjusted by multiplying each of the Share Components
of the Exchange Rate in effect on the record date mentioned below, by a
fraction of which the numerator shall be the current market price per share
of the Enhance Common Stock on the record date for the determination of
stockholders entitled to receive such dividend or distribution (such
current market price being determined for purposes of this paragraph
(a)(iii) as the average Closing Price per share of Enhance Common Stock on
the 20 Trading Days immediately prior to such record date; PROVIDED,
HOWEVER, that if there are not 20 trading Days for the Enhance Common Stock
occurring later than the 60th calendar day immediately prior to, but not
including, such record date, such current market price shall be determined
as the
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market value per share of such Enhance Common Stock as of such record date
as determined by a nationally recognized independent investment banking
firm retained for this purpose by the Company), and of which the
denominator shall be such current market price per share of Enhance Common
Stock less the fair market value (as determined by the Board of Directors
of the Company, whose determination shall be conclusive, and described in a
resolution adopted with respect thereto) as of such record date of the
portion of the assets or evidences of indebtedness so distributed or of
such subscription rights or warrants applicable to one share of Enhance
Common Stock. Each such adjustment shall become effective on the opening
of business on the Business Day next following the record date for the
determination of stockholders entitled to receive such dividend or
distribution. Each such adjustment shall be made successively.
(iv) Any shares of Enhance Common Stock issuable in payment of a
dividend shall be deemed to have been issued immediately prior to the
close of business on the record date for such dividend for purposes of
calculating the number of outstanding shares of Enhance Common Stock
under paragraph (a)(ii) of this Section.
(v) All adjustments to the Exchange Rate shall be calculated to the
nearest 1/10,000th of a share of Enhance Common Stock (or if there is not a
nearest 1/10,000th of a share to the next lower 1/10,000th of a share). No
adjustment in the Exchange Rate shall be required unless such adjustment
would require an increase or decrease of at least one percent therein;
PROVIDED, HOWEVER, that any adjustments which by reason of this paragraph
(a)(v) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. If an adjustment is made to the
Exchange Rate pursuant to paragraphs (a)(i), (a)(ii) or (a)(iii) of this
Section, an adjustment shall also be made to the Maturity Price solely to
determine which of clauses (a), (b) or (c) of the definition of Exchange
Rate set forth in Section 101 will apply upon an exchange at Maturity
pursuant to Section 202. The required adjustment to the Maturity Price
shall be made at Maturity by multiplying the Maturity Price by the number
or fraction determined under paragraphs (a)(i), (a)(ii) or (a)(iii) of this
Section by which the then existing Exchange Rate was multiplied to adjust
such rate. In the case of the reclassification of any shares of Enhance
Common Stock into any shares of common stock of Enhance other than Enhance
Common Stock, such shares of common stock shall be deemed shares of Enhance
Common Stock solely to determine the Maturity Price and to apply the
Exchange Rate at Maturity. Each such adjustment to the Exchange Rate and
the Maturity Price shall be made successively. This paragraph (a)(v) shall
be so used to adjust the definition of Maturity Price only as such term is
used for the first time in each of subparagraphs (a), (b) and (c) of the
definition of Exchange Rate set forth in Section 101.
(vi) For purposes of the foregoing, the term "Extraordinary Cash
Dividend" shall mean, with respect to any consecutive 365-day period, any
cash dividend with respect to Enhance Common Stock the amount of which,
together with the aggregate amount of all other such cash dividends on the
Enhance Common Stock
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occurring in such 365-day period, exceeds on a per share basis 10% of the
average of the Closing Prices per share of the Enhance Common Stock over
such 365-day period, and for purposes of applying the formula set forth in
clause (iii) above, the fair market value of such dividends being
calculated pursuant to such clause (iii) shall be equal to (x) the
aggregate amount of such cash dividend together with the amounts of such
other cash dividends occurring in such period minus (y) the aggregate
amount of such other cash dividends occurring in such period for which a
prior adjustment in the Exchange Rate was previously made under this
paragraph (a). In making the determinations required by the foregoing
sentence, the amount of cash dividends paid on a per share basis shall be
appropriately adjusted to reflect the occurrence during such period of any
event described in this paragraph (a).
(b) ADJUSTMENT FOR CONSOLIDATION, MERGER OR OTHER REORGANIZATION
EVENT. In the event of (i) any consolidation or merger of Enhance, or any
surviving entity or subsequent surviving entity of Enhance (an "Enhance
Successor"), with or into another entity (other than a merger or
consolidation in which Enhance is the continuing corporation and in which the
Enhance Common Stock outstanding immediately prior to the merger or
consolidation is not exchanged for cash, securities or other property of
Enhance or another corporation), (ii) any sale, transfer, lease or conveyance
to another corporation of the property of Enhance, or any Enhance Successor,
as an entirety or substantially as an entirety, (iii) any statutory exchange
of securities of Enhance or any Enhance Successor with another corporation
(other than in connection with a merger or acquisition) or (iv) any
liquidation, dissolution or winding up of Enhance or any Enhance Successor
(any such event, a "Reorganization Event"), each Holder of DECS will receive
at Maturity, in lieu of shares of Enhance Common Stock, as required by
Section 202, cash in an amount equal to (a) if the Transaction Value is
greater than or equal to the Threshold Appreciation Price, _______ multiplied
by the Transaction Value, (b) if the Transaction Value is less than the
Threshold Appreciation Price but greater than the Initial Price, the Initial
Price and (c) if the Transaction Value is less than or equal to the Initial
Price, the Transaction Value. Notwithstanding the foregoing, in lieu of
delivering cash as provided above, the Company may at its option deliver an
equivalent value of securities or other property received in such
Reorganization Event, determined in accordance with clause (y) or (z) of the
definition of Transaction Value set forth in Section 101, as applicable. If
the Company elects to deliver securities or other property, Holders of DECS
will be responsible for the payment of any and all brokerage and other
transaction costs upon the sale of such securities or other property. The
kind and amount of securities into which the DECS shall be exchangeable after
consummation of such transaction shall be subject to adjustment as described
in paragraph (a) of this Section following the date of consummation of such
transaction.
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SECTION 205. NOTICE OF ADJUSTMENTS AND CERTAIN OTHER EVENTS.
(a) Whenever the Exchange Rate is adjusted as herein provided, the
Company shall:
(i) forthwith compute the adjusted Exchange Rate in accordance
with Section 204 and prepare a certificate signed by an officer of the
Company setting forth the adjusted Exchange Rate, the method of calculation
thereof in reasonable detail, and the facts requiring such adjustment and
upon which such adjustment is based, which certificate shall be conclusive,
final and binding evidence of the correctness of the adjustment, and file
such certificate forthwith with the Trustee; and
(ii) within 10 Business Days following the occurrence of an event
that permits or requires an adjustment to the Exchange Rate pursuant to
Section 204(a) (each, a "Dilution Event") or a Reorganization Event that
permits or requires a change in the consideration to be received by Holders
pursuant to Section 204(b) (or, in either case, if the Company is not aware
of such occurrence, as soon as practicable after becoming so aware),
provide written notice to the Trustee and to the Holders of the outstanding
DECS of the occurrence of such Dilution Event or Reorganization Event
including a statement in reasonable detail setting forth the method by
which any adjustment to the Exchange Rate or change in the consideration to
be received was determined and setting forth the revised Exchange Rate or
consideration, as the case may be, per DECS, provided, that, in respect of
any adjustment to the Maturity Price, such notice need only disclose the
factor by which the Maturity Price is to be multiplied pursuant to Section
204(a)(v) in order to determine which clause of the definition of the
Exchange Rate will apply at Maturity, it being understood that, until
Maturity, the Exchange Rate itself cannot be determined.
(b) In case at any time while any of the DECS are outstanding the
Company receives notice that:
(i) Enhance shall declare a dividend (or any other distribution)
on or in respect of the Enhance Common Stock to which Section 204(a)(i) or
(ii) shall apply (other than any cash dividends and distributions, if any,
paid from time to time by Enhance that do not constitute Extraordinary Cash
Dividends);
(ii) Enhance shall authorize the issuance to all holders of
Enhance Common Stock of rights or warrants to subscribe for or purchase
shares of Enhance Common Stock or of any other subscription rights or
warrants;
(iii) there shall occur any conversion or reclassification of
Enhance Common Stock (other than a subdivision or combination of
outstanding shares of such Enhance Common Stock) or any consolidation,
merger or reorganization to which Enhance is a party and for which approval
of any stockholders of Enhance is required, or the sale or transfer of all
or substantially all of the assets of Enhance; or
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(iv) there shall occur the voluntary or involuntary dissolution,
liquidation or winding up of Enhance;
then the Company shall promptly cause to be delivered to the Trustee and any
applicable Paying Agent and filed at the office or agency maintained for the
purpose of exchange of DECS at Maturity in the Borough of Manhattan, in The City
of New York by the Trustee (or any applicable Paying Agent), and shall promptly
cause to be mailed to the Holders of DECS at their last addresses as they shall
appear upon the registration books of the Security Registrar, at least 10 days
before the date hereinafter specified (or the earlier of the dates hereinafter
specified, in the event that more than one is specified), a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution or grant of rights or warrants, or, if a record is not to be taken,
the date as of which the holders of Enhance Common Stock of record to be
entitled to such dividend, distribution or grant of rights or warrants are to be
determined, or (y) the date, if known by the Company, on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective.
(c) On or prior to seven Business Days preceding the Stated Maturity
of the DECS, the Company will provide notice to the Holders of record of the
DECS and to the Trustee and will publish a notice in a daily newspaper of
national circulation stating whether the Company will deliver, in accordance
with Section 202, Enhance Common Stock or cash (or, in accordance with Section
204(b), cash or any other property or securities) upon the mandatory exchange of
the principal amount of the DECS; PROVIDED, HOWEVER, in the event the Company
intends to deliver cash, the Company shall have the right to require
certification as to the domicile and residency of each beneficial holder of
DECS, as a condition to delivery of such cash.
SECTION 206. TAXES.
(a) The Company will pay any and all documentary, stamp, transfer or
similar taxes that may be payable in respect of the transfer and delivery of
Enhance Common Stock pursuant hereto; PROVIDED, HOWEVER, that the Company shall
not be required to pay any such tax which may be payable in respect of any
transfer involved in the delivery of Enhance Common Stock in a name other than
that in which the DECS so exchanged were registered, and no such transfer or
delivery shall be made unless and until the person requesting such transfer has
paid to the Company the amount of any such tax, or has established, to the
satisfaction of the Company, that such tax has been paid.
(b) The parties hereto hereby agree, and each Holder of a DECS by its
purchase of a DECS hereby agrees:
(i) to treat, for U.S. federal income tax purposes, each DECS as
a unit (the "unit characterization") consisting of (A) a debt obligation
(the "Exchange Note") with a fixed principal amount and issue price equal
to the principal amount of the DECS, bearing interest at the stated
interest rate, and with the principal amount unconditionally payable at
Maturity, and (B) a purchase contract (the "Purchase
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Contract") pursuant to which the Holder agrees to use the principal payment
due on the Exchange Note to purchase, at Maturity, the Enhance Common Stock
to which the Holder is entitled to receive at that time (subject to the
Company's right to deliver cash in lieu of such Enhance Common Stock),
which treatment will require, among other things, the Holder to include in
income as interest, in accordance with its method of accounting, payments
made with respect to the DECS that are denominated as interest;
(ii) in the case of an initial purchase, to allocate the entire
purchase price of a DECS to the Exchange Note and to allocate no part
thereof to the Purchase Contract; and
(iii) to file all U.S. federal, state and local income and
franchise tax returns consistent with the unit characterization (unless
required otherwise by an applicable taxing authority).
SECTION 207. CANCELLATION OF SECURITY.
Upon receipt by the Trustee of DECS delivered to it for exchange under
this Article II, the Trustee shall cancel and dispose of the same as provided in
Section 2.13 of the Indenture.
ARTICLE III
Covenants
SECTION 301. LIMITATIONS ON TRADING DURING CERTAIN DAYS.
With respect to the DECS only and for the benefit of only the Holders
thereof, the Company hereby covenants that it will not, and it will cause each
of its Majority-Owned Subsidiaries (as defined below) not to, buy or sell shares
of Enhance Common Stock for their own account during the 20 days prior to the
Stated Maturity of the DECS. For purposes hereof, "Majority-Owned Subsidiary"
with respect to the Company means a subsidiary more than 50% of whose
outstanding securities representing the right, other than as affected by events
of default, to vote for the election of directors, is owned by the Company
and/or one or more of the Company's other Majority-Owned Subsidiaries.
SECTION 302. SHARES FREE AND CLEAR.
With respect to the DECS only and for the benefit of only the Holders
thereof, the Company covenants and warrants that upon exchange of a DECS at
Maturity pursuant to the Indenture and this Supplemental Indenture, the Holder
of a DECS shall receive all rights held by the Company in the Enhance Common
Stock for which such DECS is at such time exchangeable pursuant to this
Indenture, free and clear of any and all liens, claims, charges and encumbrances
other than any liens, claims, charges and encumbrances which may have been
placed on any Enhance Common Stock by the prior owner thereof, prior to the time
such Enhance Common Stock was acquired by the Company. Except as provided in
Section 206(a),
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the Company will pay all taxes and charges with respect to the delivery of
Enhance Common Stock delivered in exchange for DECS hereunder. In addition, the
Company further warrants that any Enhance Common Stock so delivered in exchange
for DECS hereunder shall be free of any transfer restrictions (other than such
as are solely attributable to any Holder's status as an affiliate of Enhance).
Section 303. DISCHARGE OF INDENTURE.
With respect to the DECS only and for the benefit of only the Holders
thereof, the Company surrenders all rights and powers conferred on it by Article
8 of the Indenture.
ARTICLE IV
Miscellaneous
SECTION 401. CONFIRMATION OF INDENTURE.
The Indenture, as supplemented and amended by this Supplemental
Indenture and all other indentures supplemental thereto, is in all respects
ratified and confirmed, and the Indenture, this Supplemental Indenture and all
indentures supplemental thereto shall be read, taken and construed as one and
the same instrument.
SECTION 402. CONCERNING THE TRUSTEE.
The Trustee assumes no duties, responsibilities or liabilities by
reason of this Supplemental Indenture other than as set forth in the Indenture.
----------------------
This Supplemental Indenture may be executed in any number of
counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
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In WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
U S WEST, INC.
By:___________________________
Name:
Title:
Attest:___________________________
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
as Trustee
By:____________________________
Name:
Title:
Attest:___________________________
Name:
Title:
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EXHIBIT A
This Security is a Global Security within the meaning of the Indenture
hereinafter referred to and is registered in the name of the Depositary or a
nominee of the Depositary. Except as otherwise provided in Section 2.15 of the
Indenture, this Security may not be exchanged in whole or in part for securities
registered in the name of any person other than the Depositary or a nominee of
the Depositary and no transfers of this Security in whole or in part may be
registered in the name of any person other than the Depositary or a nominee of
the Depositary.
Unless this Security is presented by an authorized representative of
The Depository Trust Company (55 Water Street, New York, New York) to the
Company or its agent for registration of transfer, exchange or payment, and any
security issued is registered in the name of Cede & Co., or such other name as
requested by an authorized representative of the Depository Trust Company and
any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL since the registered owner
hereof, Cede & Co., has an interest herein.
NO. CUSIP NO. __________
Form of Face of DECS
U S WEST, INC.
_______ DECS (SM)
(Debt Exchangeable for Common Stock (SM) )
_____% Exchangeable Note due ________, 199_
(Subject to Exchange at Maturity into Shares of
Common Stock, Par Value $____ Per Share,
of Enhance Financial Services Group Inc.)
U S WEST, Inc., a Colorado corporation (hereinafter called the
"Company", which term includes any successor corporation under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_____________ or registered assigns, the principal sum of ____________ DOLLARS
(or $____ for each Debt Exchangeable for Common Stock (each, a "DECS")
represented by this note) on __________, 199_ (subject to the mandatory exchange
provisions at Maturity described below), and to pay interest (computed on the
basis of a 360-day year of twelve 30-day months) on such principal amount from
__________, 1995, or from the most recent Interest Payment Date (as defined
below) to which interest has
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been paid or duly provided for, quarterly on __________, __________, __________
and ___________ of each year (each, an "Interest Payment Date" and,
collectively, the "Interest Payment Dates"), commencing __________, 1995, at the
rate per annum specified in the title of this note, until the principal hereof
is paid or made available for payment. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in
said Indenture, be paid to the person in whose name this DECS (or the DECS in
exchange or substitution for which this DECS was issued) is registered at the
close of business on the Regular Record Date (as defined below) for interest
payable on such Interest Payment Date. The Regular Record Date for any interest
payment is the close of business on the _____, _____, _____ or _____, as the
case may be, whether or not a Business Day (as defined below), next preceding
such Interest Payment Date, PROVIDED that interest payable at Maturity shall be
payable to the person to whom the principal hereof is payable. In any case
where such Interest Payment Date shall not be a Business Day, then
(notwithstanding any other provision of said Indenture or this DECS) payment of
such interest need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made on such date,
and, if such payment is so made, no interest shall accrue for the period from
and after such date. Any such interest not so punctually paid or duly provided
for shall forthwith cease to be payable to the registered Holder on such Regular
Record Date, as the case may be, and may be paid to the person in whose name
this DECS (or the DECS in exchange or substitution for which this DECS was
issued) is registered at the close of business on a record date for the payment
of such interest to be fixed by the Trustee for the DECS, notice whereof shall
be given to Holders of the DECS not less than 10 days prior to such record date,
or may be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the DECS may be listed, and
upon such notice as may be required by such exchange. At Maturity, the
principal amount of this DECS will be mandatorily exchanged into a number of
shares of common stock, par value $0.10 per share (the "Enhance Common Stock"),
of Enhance Financial Services Group Inc. ("Enhance") at the Exchange Rate (as
defined below). The "Exchange Rate" is equal to (a) if the Maturity Price (as
defined below) is greater than or equal to $______ (the "Threshold Appreciation
Price"), _________________ shares of Enhance Common Stock per DECS, (b) if the
Maturity Price is less than the Threshold Appreciation Price but is greater than
$__________ (the "Initial Price"), a fractional share of Enhance Common Stock
per DECS so that the value thereof (determined at the Maturity Price) is equal
to the Initial Price (such fractional share being calculated to the nearest
1/10,000th of a share or, if there is not a nearest 1/10,000th of a share, to
the next higher 1/10,000th of a share) and (c) if the Maturity Price is less
than or equal to the Initial Price, one share of Enhance Common Stock per DECS.
ACCORDINGLY, THE VALUE OF THE ENHANCE COMMON STOCK TO BE RECEIVED BY HOLDERS OF
THE DECS (OR, AS DISCUSSED BELOW, THE CASH EQUIVALENT THAT MAY BE RECEIVED IN
LIEU OF SUCH SHARES) AT MATURITY WILL NOT NECESSARILY EQUAL THE PRINCIPAL AMOUNT
OF SUCH DECS. Any shares of Enhance Common Stock delivered by the Company to
the Holders of the DECS that are not affiliated with Enhance shall be free of
any transfer restrictions and the holders of DECS will be responsible for the
payment of any and all brokerage costs upon the subsequent sale of such shares.
No fractional shares of Enhance Common Stock will be issued at Maturity as
provided in the Indenture. The Company may at its option, in lieu of delivering
shares of Enhance Common Stock, deliver
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cash in an amount equal to the value of such number of shares of Enhance Common
Stock at the Maturity Price as provided in the Indenture. Notwithstanding the
foregoing, (i) in the case of certain dilution events, the Exchange Rate will be
subject to adjustment and (ii) in the case of certain reorganization events, the
property received by Holders of DECS at Maturity will be cash or other property,
as provided in the Indenture.
The "Maturity Price" is defined as the average Closing Price per share of
Enhance Common Stock on the 20 Trading Days immediately prior to (but not
including) Maturity or, under certain circumstances, the market value per share
of Enhance Common Stock as of the date of Maturity as determined by a nationally
recognized independent investment banking firm retained for this purpose by the
Company, as provided in the Indenture. The "Closing Price" of any security on
any date of determination means the closing sale price (or, if no closing price
is reported, the last reported sale price) of such security (regular way) on the
New York Stock Exchange (the "NYSE") on such date or, if such security is not
listed for trading on the NYSE on any such date, as reported in the composite
transactions for the principal United States securities exchange on which such
security is so listed, or if such security is not so listed on a United States
national or regional securities exchange, as reported by the NASDAQ National
Market, or, if such security is not so reported, the last quoted bid price for
such security in the over-the-counter market as reported by the National
Quotation Bureau or similar organization. A "Trading Day" is defined as a day
on which the security the Closing Price of which is being determined (A) is not
suspended from trading on any national or regional securities exchange or
association or over-the-counter market at the close of business and (B) has
traded at least once on the national or regional securities exchange or
association or over-the- counter market that is the primary market for the
trading of such security. "Business Day" means any day that is not a Saturday,
a Sunday or a day on which the NYSE or banking institutions or trust companies
in The City of New York, New York are authorized or obligated by law or
executive order to close.
Interest on this DECS will be payable, and delivery of Enhance Common
Stock (or, at the Company's option, cash in an amount equal to the value of such
Enhance Common Stock) in exchange for the principal amount of this DECS at
Maturity will be made upon surrender of this DECS, at the office or agency of
the Company maintained for that purpose in The City of New York, New York, and
payment of interest on (and, if the Company elects not to deliver Enhance Common
Stock upon exchange at Maturity, the cash equivalent thereof payable upon
exchange for the principal amount of) this DECS will be made in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; PROVIDED, HOWEVER, that at the
option of the Company payment of interest may be made by check mailed to the
address of the person entitled thereto as such address shall appear on the
register for the DECS.
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ADDITIONAL PROVISIONS OF THIS DECS ARE CONTAINED ON THE REVERSE HEREOF
AND SUCH PROVISIONS SHALL HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH IN THIS
PLACE.
Unless the certificate of authentication hereon has been executed by
or on behalf of the Trustee for this DECS by manual signature, this DECS shall
not be entitled to any benefit under the Indenture, or be valid or obligatory
for any purpose. "DECS" and "Debt Exchangeable for Common Stock" are service
marks of Salomon Brothers Inc.
In WITNESS WHEREOF, U S WEST, Inc. has caused this instrument to be
duly executed under its corporate seal.
Dated:
U S WEST, INC.
By:______________________
Name:
Title:
Attest:
Name:
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TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the Series designated herein and
referred to in the within-mentioned Indenture.
THE FIRST NATIONAL BANK OF
CHICAGO, as Trustee,
By: ______________________
Authorized Signatory
Form of Reverse of DECS
U S WEST, INC.
_____% Exchangeable Note due _________________, 199_
(Subject to Exchange at Maturity into Shares of
Common Stock, Par Value $.10 Per Share,
of Enhance Financial Services Group Inc.)
This DECS is one of a duly authorized issue of debentures, notes or
other evidences of indebtedness (hereinafter called the "Securities") of the
Company of the Series hereinafter specified, which Series is limited to
______________ DECS, all such Securities issued and to be issued under an
indenture dated as of ________, 1995 between the Company and The First National
Bank of Chicago, as Trustee, as supplemented by a First Supplemental Indenture
dated as of ________, 1995 (as so supplemented and as may be further
supplemented from time to time, the "Indenture") between the Company and The
First National Bank of Chicago, as trustee (herein called the "Trustee", which
term includes any successor Trustee under the Indenture), pursuant to which the
Company has designated The First National Bank of Chicago as Trustee for the
DECS, to which Indenture and all other indentures supplemental thereto reference
is hereby made for a statement of the rights and limitation of rights thereunder
of the Holders of the Securities and of the rights, obligations, duties and
immunities of the Trustee for each Series of Securities and of the Company, and
the terms upon which the Securities are and are to be authenticated and
delivered. As provided in the Indenture, the Securities may be issued in one or
more Series, which different series may be issued in various aggregate principal
amounts, may be denominated in currencies other than U.S. Dollars, (including
composite currencies), may mature at different times, may bear interest, if any,
at different rates, may be subject to different redemption provisions, if any,
may be subject to different sinking, purchase of analogous funds, if any, may be
subject to different covenants and Events of Default and may otherwise vary as
in the Indenture provided
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<PAGE>
or permitted. This DECS is one of a Series of the Securities designated as
____% Exchangeable Notes Due ________ 199_.
The DECS may not be redeemed prior to Stated Maturity and are not
entitled to the benefit of any sinking fund.
The provisions contained in the Indenture for defeasance and discharge
of the entire principal of all the Securities of any Series upon compliance by
the Company with certain conditions set forth therein will not be applicable to
the DECS, as provided in a supplement to the Indenture.
If an Event of Default with respect to the DECS, as defined in the
Indenture, shall occur and be continuing, the principal of all DECS may be
declared due and payable and therefore will result in the mandatory exchange of
the principal amount thereof for Enhance Common Stock (or, at the Company's
option, cash), all in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each Series under the
Indenture at anytime by the Company with the consent of the Holders of not less
than a majority in aggregate principal amount of the Securities at the time
outstanding of each Series to be affected thereby. The Indenture also contains
provisions permitting the Holders of specified percentages in aggregate
principal amount of the Securities of any Series at the time outstanding, on
behalf of the Holders of all the Securities of such Series, to waive compliance
by the Company with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences with respect to such Series.
Any such consent or waiver by the Holder of this DECS shall be conclusive and
binding upon such Holder and upon all future Holders of this DECS and of any
DECS issued upon the transfer hereof or in exchange herefor or in lieu hereof
whether or not notation of such consent of waiver is made upon this DECS.
No reference herein to the Indenture and no provision of this DECS or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this DECS at
the times, place and rate, and in the manner, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, this DECS is transferable on the register for the DECS, upon
surrender of this DECS for registration of transfer at the office or agency of
the Company to be maintained for that purpose in The City of New York, New York,
or at any other office or agency of the Company maintained for that purpose,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Registrar for the DECS duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new DECS, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees. No service
charge shall be made for any such transfer or exchange, but the Company may
require payment of a sum
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<PAGE>
sufficient to cover any tax or other governmental charge payable in connection
with the registration of such transfer or exchange, other than certain exchanges
not involving any transfer.
Certain terms used in this DECS which are defined in the Indenture
have the meanings set forth therein.
THIS DECS SHALL FOR ALL PURPOSES BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
The Company, the Trustee for the DECS and any agent of the Company or
such Trustee may treat the person in whose name this DECS is registered as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this DECS be overdue, and neither the Company,
such Trustee nor any such agent shall be affected by notice to the contrary.
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<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- _______ Custodian _________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right Under Uniform Gifts to Minors Act
of survivorship and not as _________________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
----------------------------------------------------------------------
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
Please insert Social Security or Taxpayer I.D. or other
Identifying Number of Assignee
- -------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please Print or Type Name and Address Including Postal Zip Code of Assignee
- --------------------------------------------------------------------------------
the within DECS and all rights thereunder, hereby irrevocably constituting and
appointing
- --------------------------------------------------------------------- attorney
to transfer said DECS on the books of U S WEST, Inc. with full power of
- --------------------------------------------------------------------------------
substitution in the premises.
Dated: ____________________________ ________________________________________
Signature
________________________________________
NOTICE: The signature to this
assignment must correspond with the name
as it appears upon the face of the
within DECS in every particular, without
alteration or enlargement or any change
whatsoever.
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