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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1998 1-7801
ORION CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-6069054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9 Farm Springs Road, Farmington, Connecticut 06032
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 860-674-6600
Securities registered pursuant to Section 12(b)of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
9.125% Senior Notes due September 1, 2002
7.25% Senior Notes due July 15, 2005
8.73% Trust Preferred Capital Securities due January 1, 2037
7.701% Trust Preferred Capital Securities due April 15, 2028
(issued by wholly-owned Trusts of the Registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $910.5 million as of March 1, 1999.
As of March 1, 1999, 27,231,000 Shares of Common Stock, $1.00 par value, of
registrant were outstanding exclusive of shares held by registrant and its
subsidiaries.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from
registrant's definitive proxy statement for its Annual Meeting to be held on May
25, 1999. Registrant intends to file the proxy material, which involves the
election of directors, not later than 120 days after the close of its fiscal
year.
Table of Contents Page
Part I
Item 1: Business 3
General 3
Workers Compensation 8
Nonstandard Automobile 9
Specialty Commercial 11
Insurance Industry Characteristics 15
Item 2: Properties 27
Item 3: Legal Proceedings 28
Item 4: Submission of Matters to a Vote of Security Holders 28
Information concerning Executive Officers of the Company 28
Part II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 30
Item 6: Selected Financial Data 31
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 49
Item 8: Financial Statements and Supplementary Data 50
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 85
Part III
Item 10: Directors and Executive Officers of the Company 85
Item 11: Executive Compensation 85
Item 12: Security Ownership of Certain Beneficial Owners
and Management 85
Item 13: Certain Relationships and Related Transactions 85
Part IV
Item 14: Exhibits, Financial Statement Schedules
and Reports on Form 8-K 85
Signatures 91
Exhibit Index 93
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Forward-Looking Statements
All statements made in this Annual Report on Form 10-K that do not reflect
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of Orion Capital
Corporation and its consolidated subsidiaries to be materially different from
any future results, performance or achievements, expressed or implied by the
forward-looking statements. Such risks, uncertainties and other factors include,
among other things, (i) general economic and business conditions; (ii) interest
rate and financial market changes; (iii) competition and the regulatory
environment in which we operate; (iv) claims frequency; (v) claims severity;
(vi) medical cost inflation; (vii) increases in the cost of property repair;
(viii) the number of new and renewal policy applications submitted to us; (ix)
Year 2000 problems; and (x) other factors over which the Company has little or
no control. The Company's expectation is that its plan for Year 2000 Compliance
will be completed on schedule depends, in large part, on the Company's own
efforts and expenditures on hardware, software and systems, which is on schedule
as to those exposures which the Company has been able to identify. However, Year
2000 problems could also arise because of unanticipated non-compliance on the
part of vendors, agents, customers and other third parties including
governmental entities. Significant Year 2000 problems could materially and
adversely affect future performance and results of operations. The Company
disclaims any obligation to update or to publicly announce the impact of the
above risks, uncertainties and other factors or any revisions to any
forward-looking statements to reflect future events or developments.
PART I
ITEM 1. BUSINESS
GENERAL
Our Operations
Orion Capital Corporation ("Orion") is an insurance holding company. We
have the ability, through our nineteen wholly-owned insurance subsidiaries, to
write almost all types of property and casualty insurance nationwide and
throughout Canada. However, our operations are highly specialized. We currently
only underwrite and sell specialized insurance products and services through
three segments: Workers Compensation, Nonstandard Automobile and Specialty
Commercial.
Over the past two years, Orion has been reshaping its business to focus
resources in high potential lines of business. Business in Orion's workers
compensation segment is conducted through EBI Companies, Inc., a specialty
monoline workers compensation operation. Orion has been reshaping EBI from a
regional to a national monoline workers compensation specialist.
In Orion's nonstandard personal automobile segment, Orion increased its
ownership in Guaranty National Corporation ("Guaranty National") to 81% in July
1996 and to 100 % in December 1997. In January 1998, we transformed Guaranty
National into a focused personal nonstandard automobile company by shifting the
commercial lines business of Guaranty National to a newly-formed unit, Orion
Specialty Group, Inc. At that same time, we also shifted the Company's program
business from Connecticut Specialty Insurance Group, Inc., to the new Orion
Specialty unit and began integrating and refocusing the two operations. Guaranty
National was recently renamed OrionAuto, Inc. We added scale to our nonstandard
automobile operation by acquiring two businesses, Unisun Insurance Company in
December 1997 and portions of Strickland Insurance Group in April 1998 expanding
our geographic focus to 35 states.
During the third quarter of 1998, we accelerated the reshaping in our
specialty commercial segment. This segment includes DPIC Companies, Inc.,
Orion's professional liability business, Wm. H. McGee & Co., Inc., the marine
business, and Orion Specialty, which includes ARTIS, our alternative risk
business formed in June 1997, Orion Financial (formerly Intercon), our
collateral protection business and the commercial lines business from Guaranty
National and Connecticut Specialty. In July 1998, we added a specialty insurance
company serving the grocery and food services industry with the purchase of
Grocers Insurance Group. We sold a unit of Orion Specialty, Colorado Casualty
Insurance Company, in September 1998. Additionally, we took steps to exit a
block of commercial automobile and transportation business, representing
approximately $100 million in net written premiums, that is highly price-driven
and performing poorly. Orion will continue its reshaping of this segment in
1999. As part of that effort, we will exit the marine segment by selling our 26%
interest in Intercargo Corporation and Wm. H. McGee & Co., Inc.
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In November 1996, we exited the assumed reinsurance business when we sold
the ongoing operations of our subsidiary, SecurityRe Companies, Inc. As a result
of the sale, SecurityRe ceased actively writing business and became an inactive
company. The capacity we have developed to handle the run-off of SecurityRe will
support our administration of run-off business which results from the reshaping
of our specialty commercial segment.
We own insurance companies, as well as brokerage companies and insurance
management and service companies. Those companies have licenses to transact
business nationwide and in all Canadian provinces. In general we do not sell our
insurance products directly to our policyholders. We obtain substantially all
our business through independent insurance agents and brokers. We have
approximately 4,100 employees. Substantially all of our employees work in our
insurance or insurance-related operations. The Company is not a party to any
collective bargaining agreements and believes its relationship with its
employees is good.
Orion Capital Corporation was incorporated in the State of Delaware in
1960, and its wholly-owned insurance subsidiaries are incorporated in the States
of California, Connecticut, Colorado, North Carolina, Oklahoma, Oregon, South
Carolina, Texas and Wisconsin. Our principal executive offices are located at 9
Farm Springs Road, Farmington, Connecticut 06032 and the telephone numbers are
(860) 674-6600 and (800) 243-7060. Information about Orion is available on the
Internet at www.orioncapital.com.
In the following pages of this report, Orion Capital Corporation is
referred to as "Orion" or the "parent corporation," while Orion and its
consolidated subsidiaries are collectively referred to as the "Company."
ORION CAPITAL CORPORATION - CAPITAL STRUCTURE
In July 1997, to increase the trading liquidity and affordability of our
common stock, we declared a 2-for-1 stock split. At December 31, 1998 the
securities that Orion (or its wholly-owned Trusts) had outstanding were:
- 27,170,000 shares of Common Stock;
- $110 million face amount of 9.125% Senior Notes, due September 1, 2002;
- $100 million face amount of 7.25% Senior Notes, due July 15, 2005;
- $125 million of 8.73% Trust Preferred Capital Securities, due January 1,
2037; and
- $125 million of 7.701% Trust Preferred Capital Securities due April
15, 2028.
On January 13, 1997, Orion issued $125 million of 8.73% Junior Subordinated
Deferrable Interest Debentures, due January 1, 2037, to Orion Capital Trust I
("Trust I"), a Delaware statutory business trust we sponsored. Trust I then
simultaneously sold, in a private placement, $125 million of the Trust I's 8.73%
Preferred Capital Securities, which have substantially the same terms as the
8.73% Debentures. The proceeds from the sale of the securities were used, in
part, to purchase Guaranty National in December 1997. The securities were
registered with the Securities and Exchange Commission in April 1997.
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On February 2, 1998, similar to the prior year's issuance of trust
preferred securities, Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest Debentures, due April 15, 2028, to Orion Capital Trust II
("Trust II"), a Delaware statutory business trust we sponsored. Trust II then
simultaneously sold $125 million of the Trust II's 7.701% Preferred Capital
Securities, which have substantially the same terms as the 7.701% Debentures.
Approximately $100 million of the net proceeds from the sale were used to retire
the bank indebtedness of Guaranty National. The securities were registered with
the Securities and Exchange Commission in June 1998.
While the two trust preferred issues have complicated structures, they
offer us advantages of preferred stock with the tax deductibility feature of
debt. The securities provide a low after-tax cost of financing for our business
growth. See Note 9 to the Company's consolidated financial statements.
On July 8, 1998 Orion entered into a five year credit agreement with a
group of banks which provides for unsecured borrowings up to $150 million. We
intend to use the credit facility for general corporate purposes that may
include acquisitions. Borrowings outstanding under the credit agreement are $8
million at 1998 year end and accrue interest equal to LIBOR (London Interbank
Offered Rate) plus a margin based upon Orion's credit rating. The credit
agreement requires the Company to maintain certain covenants including financial
ratios.
SEGMENT REPORTING
The Securities and Exchange Commission requires registered companies to
report their results in segments by type of business, geographic distribution or
other meaningful breakdown. During the fourth quarter of 1998, we adopted a new
accounting standard on segment reporting. The standard requires that public
companies disclose segment information based on how management organizes the
segments of the enterprise to make operating decisions and assess performance.
Our insurance operations are divided into three segments. See Notes 1 and 17 to
the Company's consolidated financial statements. Our segments are as follows:
- Workers Compensation - this segment includes the workers compensation
insurance products and services sold by EBI Companies, Inc.
- Nonstandard Automobile - this segment specializes in personal nonstandard
automobile insurance sold by OrionAuto (formerly named Guaranty National).
- Specialty Commercial - as of 1998 year end, this segment markets various
specialty commercial products and services including professional liability
insurance through DPIC Companies, Inc.; client-focused specialty insurance
programs through Orion Specialty; underwriting management specializing in
ocean marine, inland marine and commercial property insurance through Wm.
H. McGee & Co, Inc.; insurance for international trade through the
Company's 26% interest in Intercargo Corporation; and also includes the
run-off operations of our assumed reinsurance business, SecurityRe, which
was sold in late 1996. The Company expects to close its sale of Wm. H.
McGee and its 26% interest in Intercargo Corporation ("Intercargo") in
1999.
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For purposes herein, historical statements and transactions related to the
former Guaranty National (the commercial lines and personal lines company) will
be referred to as "Guaranty National" whereas the presently existing personal
lines only company will be referred to as "OrionAuto."
Net Earnings
Our net earnings and per share amounts for the past three years, were as
follows:
(In millions, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------
Net earnings $ 102.8 $ 115.8 $ 86.6
Net earnings per basic share $ 3.78 $ 4.24 $ 3.16
Net earning per diluted share $ 3.69 $ 4.15 $ 3.12
Weighted average shares outstanding 27.2 27.3 27.4
Weighted average shares and diluted
equivalent outstanding 27.8 27.9 27.8
Earnings per share has been calculated based upon a new accounting standard
adopted in 1997. Additionally, the 1996 shares and per share amounts have been
restated for the 2-for-1 stock split issued on July 7, 1997.
The following tables present condensed financial information showing
revenues, pre-tax earnings and other financial data and ratios of our segments
for each of the three years in the period ended December 31, 1998. Identifiable
assets, by segment, are included in Note 17 to the Company's consolidated
financial statements.
(In millions) 1998 1997 1996
- -----------------------------------------------------------------------------
REVENUES:
Workers Compensation .................... $ 484.7 $ 418.0 $ 402.0
Specialty Commercial .................... 782.9 812.1 804.8
Nonstandard Automobile .................. 441.5 349.7 283.5
Other ................................... 7.6 10.8 3.2
--------- --------- ---------
Consolidated ......................... $ 1,716.7 $ 1,590.6 $ 1,493.5
========= ========= =========
EARNINGS:
Workers Compensation .................... $ 86.2 $ 86.8 $ 68.4
Specialty Commercial .................... 54.2 65.3 56.5
Nonstandard Automobile .................. 37.1 40.7 23.3
--------- --------- ---------
Total property and casualty operations 177.5 192.8 148.2
Other ................................... (20.8) (16.6) (20.9)
--------- --------- ---------
156.7 176.2 127.3
Federal income taxes .................... (41.1) (46.5) (32.0)
Minority interest expense ............... (12.8) (13.9) (8.7)
--------- --------- ---------
Net earnings ............................... $ 102.8 $ 115.8 $ 86.6
========= ========= =========
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The following table sets forth certain insurance ratios for the past three years
for the Company:
1998 1997 1996
- ----------------------------------------------------------------------
Loss and loss adjustment expenses
to premiums earned 67.9% 66.7% 67.9%
Policy acquisition and other insurance
expenses to premiums earned 31.0% 31.2% 30.1%
----- ----- -----
Total before policyholders' dividends 98.9% 97.9% 98.0%
Policyholders' dividends to premiums
earned 1.6% 1.8% 1.8%
----- ----- -----
Combined ratio 100.5% 99.7% 99.8%
===== ===== =====
One or more of Orion's insurance subsidiaries are licensed to transact
business in each of the 50 states of the United States, the District of
Columbia, Puerto Rico and all provinces of Canada. In 1998, approximately 13.9%
of the Company's consolidated direct premiums written was generated in
California, 6.7% in South Carolina, 6.4% in both Pennsylvania and Texas, 5.5% in
North Carolina and 5.4% in New York. California premiums are primarily generated
from nonstandard personal automobile coverages written by OrionAuto. Also
significant in California is architects and engineers professional liability
insurance issued by DPIC Companies. The increases in South Carolina and North
Carolina premiums are from the acquisitions in December 1997 and April 1998 of
two nonstandard personal automobile businesses. The primary line of business in
Pennsylvania and Texas is workers compensation. New York's primary line in 1998
was the ocean and inland marine business written by Wm. H. McGee.
The following table shows the geographical distribution of direct premiums
written by the Company for the years ended December 31:
<TABLE>
<CAPTION>
Geographical distribution of Direct Premiums Written
--------------------------------------------------------------
(In millions, except for %) 1998 % 1997 % 1996 %
- --------------------------------------------------------------------------------------------
States
<S> <C> <C> <C> <C> <C> <C>
California ... $ 259.1 13.9% $ 226.0 14.8% $ 172.0 12.0%
South Carolina 125.6 6.7% 13.5 0.9% 12.7 0.9%
Pennsylvania . 119.3 6.4% 116.7 7.7% 130.8 9.1%
Texas ........ 118.4 6.4% 85.3 5.6% 84.9 5.9%
North Carolina 102.0 5.5% 25.7 1.7% 21.7 1.5%
New York ..... 101.0 5.4% 96.8 6.4% 106.1 7.4%
All Others (1) 1,036.6 55.7% 957.3 62.9% 903.2 63.2%
---------- ----- ---------- ----- ---------- -----
$ 1,862.0 100.0% $ 1,521.3 100.0% $ 1,431.4 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
(1) In 1998, no other single state or country, other than the United States,
accounted for more than 5% of total direct premiums written.
For 1998, 29.5% of the Company's net premiums written was derived from
nonstandard personal automobile insurance; 28.9% came from workers compensation
insurance; 16.5% related to liability insurance other than automobile, primarily
professional liability insurance; 9.2% came from commercial automobile
insurance, 6.9% was from marine insurance coverages and 5.1% for commercial
multiple peril insurance. No other line of business contributed in excess of
5.0% to the 1998 net premiums written.
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<TABLE>
<CAPTION>
The following table shows the Company's net premiums written, by major
statutory lines of business, for the years ended December 31:
Net Premiums Written
-----------------------------------------------------------
(In millions, except for %) 1998 % 1997 % 1996 %
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonstandard personal automobile $ 452.4 29.5% $ 373.1 27.3% $ 307.5 23.0%
Workers compensation .......... 444.3 28.9% 380.8 27.8% 383.6 28.8%
Liability other than automobile 252.4 16.5% 250.0 18.3% 249.4 18.7%
Commercial automobile ......... 140.7 9.2% 155.7 11.4% 147.3 11.0%
Marine ........................ 105.3 6.9% 69.1 5.1% 67.6 5.1%
Commercial multiple peril ..... 78.8 5.1% 65.8 4.8% 46.4 3.5%
All Others .................... 59.7 3.9% 72.6 5.3% 132.3 9.9%
---------- ----- ---------- ----- ---------- -----
$ 1,533.6 100.0% $ 1,367.1 100.0% $ 1,334.1 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
WORKERS COMPENSATION
The Workers Compensation segment is comprised of the EBI Companies ("EBI"),
which provides workers compensation insurance, and accident prevention and cost
containment services.
A specialist in workers compensation on a regional and national basis, EBI
continues to expand its market presence by bringing its distinctive value-added
approach to new states and through a new customer focus in multi-state accounts.
EBI operates on a nationwide basis through 46 offices located in 27 states.
Through the addition of alternative products and pricing approaches, entry into
new states and continued emphasis on its value-added services, EBI expects
further to expand its presence in the workers compensation market. It ranks
among the 15 largest writers of workers compensation insurance in the United
States based on net premiums written and has one of the lowest three year
average loss ratios within this group. Its headquarters are in Itasca, Illinois,
a suburb of Chicago. Information about EBI is available on the Internet at
http://www.ebico.com.
EBI's competitive edge stems from its service-oriented approach. EBI
offices are staffed with underwriters, marketing representatives, claim
representatives, accident prevention consultants, lawyers, medical and
rehabilitation experts and other technical and administrative personnel who work
in a multidisciplinary team environment. The team approach starts with the
underwriting process. EBI's method of underwriting is not merely to evaluate the
risk, but also to assess the likelihood of reducing injury through accident
prevention services. Accident prevention and claims management personnel, as
well as underwriters, have direct responsibility for account selection,
underwriting and servicing each client.
EBI teams work directly with the client and its employees to identify the
factors that affect their insurance costs, and to provide services designed to
reduce the frequency and severity of injuries. EBI's approach to accident
prevention requires insureds to establish and maintain a Zero Accident
Culture(R) (ZAC(R)), designed to keep the work environment free of accidents.
EBI manages worker injuries through claims personnel and rehabilitation nurses
to minimize the employee's disability and related medical costs.
With a desire to influence the work place environment to reduce losses and
long-term insurance costs, EBI's marketing targets businesses where its
ZAC(R)philosophy and service-oriented approach can have the greatest impact. EBI
concentrates its efforts on businesses in selected industries, including
manufacturing, healthcare, hospitality, school districts and service industries.
EBI's geographic expansion and growth in recent years has given it a much
broader base of operations. Today, EBI is recognized as a national workers
compensation niche insurance carrier.
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As EBI has continued to grow, it has refined its agency force by
strengthening relationships with large, regional and national insurance agents
and brokers. Approximately 1,100 independent agents and brokers produced all of
the direct business written in 1998 by EBI. These agents and brokers receive
commissions on the sale of insurance. No single independent agent or broker
contributed more than 10% of this segment's net written premiums.
EBI has recorded profitable underwriting results for the past five years
which has led it to continue its plan of geographic expansion. In 1998, it
expanded into three new states. Expansion opportunities now also include
multi-state clients. EBI has been able to gain a strong reputation for service.
Among the alternative products EBI offers is workers compensation excess
coverage and an accompanying self-insured administration program and an
integrated employee benefit program. These products and services are designed to
capitalize on EBI's expertise in traditional workers compensation. EBI applies
those skills to writing workers compensation for larger accounts and clients
desiring large deductibles.
Description of Workers Compensation Insurance: A workers compensation
policy obligates an insurance company to pay all disability, medical and other
benefits for injured workers as may be required by applicable state laws. The
insurance policies currently written by EBI provide workers compensation
coverage with limits of liability set by the provisions of state workers
compensation laws. The benefits provided by these laws vary with the nature and
severity of the injury or disease, as well as with the wage level, occupation,
and age of the employee. Employers' liability coverage is also provided to
employers who may be subject to claims for damages (other than workers
compensation benefits) due to an injury to a worker.
The amount of workers compensation premiums earned is directly dependent
upon wage levels, the number of employees on the payroll of each policyholder
and the job classifications of those employees. Premium rates are revised
annually in most states in which EBI does business. EBI uses the rates and
rating plans filed in the states where it does business. See "Industry
Characteristics - Rates."
NONSTANDARD AUTOMOBILE
The nonstandard automobile segment consists of OrionAuto, which is one of
the leading national writers of nonstandard personal automobile insurance. In
December 1997, the Company purchased the remaining interest in Guaranty National
that it did not already own, in part to provide a more appropriate ownership
structure to continue the Company's expansion in the nonstandard personal
automobile insurance business. Immediately following the purchase of Guaranty
National, in January 1998, the Company consolidated Guaranty National's
commercial insurance operations to its newly-formed unit, Orion Specialty. This
action transformed Guaranty National into a focused nonstandard personal
automobile insurance company. Guaranty National was recently renamed OrionAuto,
Inc.
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In December 1997, the Company purchased Unisun Insurance Company ("Unisun")
from Michigan Mutual Insurance Company for $26.2 million in cash including
acquisition expenses. Unisun is the largest servicing carrier for the state
automobile insurance facility in South Carolina and also writes personal
automobile insurance in the States of Alabama, Georgia and North Carolina. Total
net premiums written by Unisun for 1997 were approximately $20 million.
Effective March 1, 1999 the State of South Carolina will transition to a
voluntary market environment that will provide OrionAuto with further business
opportunities in this market.
In April 1998, the Company acquired the nonstandard personal automobile
insurance business of North Carolina-based Strickland Insurance Group
("Strickland") for $44.1 million in cash including acquisition expenses.
Strickland is the second largest automobile insurance writer in North Carolina
and also writes personal automobile insurance in Florida. In 1997, Strickland
reported approximately $99 million of personal automobile gross premiums written
and $46 million of net premiums written.
OrionAuto focuses its operations on the nonstandard markets. Nonstandard
personal automobile insurance represents insurance (i) for drivers usually
unacceptable to other insurers for, among other reasons, adverse driving or
accident history, age or vehicle type, or (ii) for customers who can only afford
a low down payment or are transitioning from an uninsured to an insured status.
Nonstandard risks generally involve a potential for poor claims experience
because of increased risk exposure and require specialized underwriting, claims
management and other skills and experience. OrionAuto's loss exposure is limited
by the fact that its insureds typically purchase low liability limits, often at
a state's statutory minimum. The nonstandard insurance industry is also
characterized by the insurer's ability to minimize its exposure to unprofitable
business by effecting timely changes in premium rates and policy terms in
response to changing loss and other experiences. This insurance coverage is sold
primarily in the State of California, the Rocky Mountain and Pacific Northwest
regions, and the Southeastern United States. OrionAuto sells its insurance
through approximately 12,000 independent agents located in 35 states.
Overall, OrionAuto seeks to distinguish itself from its competitors by
providing a superior, highly automated and responsive level of service to its
agents and insureds. In addition to high quality service, OrionAuto provides
ease of payment for insureds through low monthly installments.
In underwriting nonstandard automobile risks, OrionAuto sets premium rates
which are substantially higher than standard rates. Policy coverage periods are
generally one or six months on personal automobile policies. The business of
OrionAuto is not materially dependent upon any single customer, group of
customers, or group of agents.
Customer service and policy processing operations are a critical part of
OrionAuto. Offices are currently located in Phoenix Arizona; Irvine, California;
Pleasant Hill, California; Englewood, Colorado; Freeport, Illinois; Goldsboro,
North Carolina; High Point, North Carolina; Salem, Oregon; Charleston, South
Carolina; Salt Lake City; Utah and Madison, Wisconsin. Multiple locations in
multiple time zones contribute to efficient volume routing. In the customer
service area, use of the Interactive Voice Response system permits efficient,
automated answering of routine agent and customer questions.
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SPECIALTY COMMERCIAL
The Company's Specialty Commercial segment concentrates in highly
specialized, client-focused lines of business in the property and casualty
insurance field. As of 1998 year end, the Specialty Commercial segment marketed
various specialty commercial products and services including professional
liability insurance through DPIC Companies; client-focused specialty insurance
programs through Orion Specialty; underwriting management specializing in ocean
marine, inland marine and commercial property insurance through Wm. H. McGee;
insurance for international trade through the Company's 26% interest in
Intercargo Corporation; and also includes the run-off operations of the
Company's assumed reinsurance business, SecurityRe, which was sold in late 1996.
In December 1998, Intercargo announced an agreement of merger pursuant to which,
when consummated, the Company would receive $22.8 million in cash for its
interest in Intercargo. On March 11, 1999 the Company announced the signing of a
definitive agreement to sell Wm. H. McGee & Co., Inc. Both the sale of our
interest in Intercargo and of McGee are a part of Orion's continued sharpening
of the Company's focus on profitable lines of business.
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DPIC
DPIC Companies, Inc. ("DPIC" or the "DPIC Companies"), through the
Company's insurance company affiliates, writes professional liability insurance
for its niche markets: architects, engineers, environmental consultants,
accountants and lawyers. It is the largest underwriter of architect, engineer
and environmental consultants in North America. DPIC operates in offices
throughout the United States and Canada. It is headquartered in Monterey,
California. Information about DPIC can be found on the Internet at
http://www.dpic.com.
DPIC's operations are organized to be directly aligned with its various
client markets, both geographically and by profession. Since its inception,
DPIC's claims operations have been set up in strategic geographical locations.
In July 1997, DPIC's underwriting operations were decentralized, linking up with
its major regional claims offices to serve clients and agency representatives
more efficiently and effectively. DPIC underwriting/claims offices are in
Newport Beach, California; San Francisco, California; Englewood, Colorado;
Norcross, Georgia; Itasca, Illinois; Clifton, New Jersey; New York, New York;
and Toronto, Ontario; DPIC claims offices can also be found in and Montreal,
Quebec. Satellite claims offices are located in Calgary, Alberta and Dallas,
Texas.
Professional liability insurance covers liability arising out of alleged
negligent performance of professional services. Underwriting and claims
management require a high level of knowledge and expertise. To limit risk
exposure, DPIC's specialized underwriters evaluate a great number of factors,
including the experience of an applicant firm's professional personnel, the loss
history of the firm, the employees covered, the type of work performed and the
firm's utilization of loss prevention measures. DPIC actively rewards firms that
participate in loss prevention education, risk management and business practice
improvement programs. It offers a series of client-focused professional
liability education programs and provides financial incentives for resolving
disputes through mediation.
The professional liability coverage offered by DPIC is on a "claims-made"
policy form, a form that generally insures only those claims reported by the
insured during the policy term. With some exceptions in Canada, DPIC's policies
cap defense costs, primarily legal fees, within the insureds stated policy
limits. This has resulted in a favorable impact in controlling legal costs.
DPIC's specialized claims staff stresses early intervention in disputes to
avoid litigation. DPIC has pioneered the use of alternative dispute resolution
("ADR"), mediation in particular, to resolve disputes promptly. Because of
mediation's proven success in reducing the costs of claims in terms of time,
money, and relationships - over 25% of DPIC's claim files are resolved through
this technique. These initiatives have had a favorable impact on DPIC's
operating results.
DPIC markets its products through 65 specialized agencies, each highly
knowledgeable about loss prevention and risk management for the professions
served. The agents are active in continuing education programs, sponsored by
DPIC, and in their professional association, Professional Liability Agents
Network, and participate extensively in their clients' professional societies.
Exclusive territory assignments and extensive support from DPIC lead to a
focused commitment to meet the insurance and loss prevention needs of the
professions served.
Orion Specialty
Upon completion of the December 1997 merger of Guaranty National into a
wholly-owned subsidiary of the Company, the Company formed a new business unit
in January 1998, Orion Specialty Group, Inc. Orion Specialty consolidates
Connecticut Specialty Insurance Group, Inc., the Company's program business
unit, and the commercial lines business of Guaranty National. With this
consolidation, Orion Specialty began refocusing its business mix to fewer,
narrower customer segments targeting distinct client groups in the commercial
service, trade and financial services industries, as well in the alternative
risk sector. Orion Specialty uses three underwriting and distribution models
that enable it to deliver a spectrum of insurance products and services to meet
the particular needs of these targeted groups.
12
<PAGE>
Segments of the business initially combined under the Orion Specialty
umbrella were heavily exposed to commodity pricing pressures, especially the
commercial automobile and transportation area. Orion Specialty had been writing
nearly 30 classes of such business and, as a part of its refocusing efforts,
actively worked to reduce the amount of this business. In the third quarter of
1998, the Company accelerated this realignment, resulting in the decision to
exit unprofitable business totaling approximately $100 million in annualized net
written premiums. The third quarter action also included a reduction of
approximately 90 employees whose duties were related to the business being
exited. At the same time, the Company sold Colorado Casualty Insurance Company,
which while profitable wrote approximately $55 million in annual net premium
consisting largely of standard commercial business that did not fit the
Company's specialization strategy. The Company will continue in 1999 to assess
Orion Specialty's remaining programs.
The three underwriting and distribution models used by Orion Specialty to
deliver a spectrum of insurance products are as follows:
- Property & Casualty Division ("P&C Division") with offices located in
Farmington, Connecticut, Englewood, Colorado and Portland, Oregon;
-Alternative Risk Transfer Insurance Strategies ("ARTIS") located in
Windsor, Connecticut; and
- Financial Services Division located in Dallas, Texas.
P&C DIVISION
Orion Specialty's P&C Division tailors coverage packages to the needs of
specific classes of insureds. By structuring programs to group insureds with
common exposures (e.g., hairdressers, travel agents, etc.), Orion Specialty
delivers effective and efficient risk transfer and management to its targeted
client groups. It operates through general agents and program administrators.
The Division administers the operation of approximately 15 specialized programs
with emphasis in professional services and trade industries.
In addition, the P&C Division provides agents with binding authority in
selected "Premier Product" lines. These products appeal to a broader base of
customers and are generally offered on a mono-line basis. These lines of
business include general liability, property, professional liability, commercial
auto, and umbrella coverages.
A key aspect to the business of the P&C Division is the strategic alliances
it has formed with what it believes are knowledgeable and well respected agents
in the specialty insurance field. Each of its general agents has superior
knowledge of its markets and has earned customer loyalty by providing quality
services and support.
In July 1998, the Company purchased Grocers Insurance Group ("Grocers") an
Oregon-based specialty insurance holding company serving the grocery and food
service industry. The purchase price was $36.7 million in cash including
acquisition expenses. In 1997, Grocers reported approximately $23 million of net
premiums written, principally general liability, property and workers
compensation with the majority of its volume concentrated in the Northwestern
states. Grocers is headquartered in Portland, Oregon and operates offices in
Woodland, California; Medford, Oregon; Brentwood, Tennessee; and North Richland
Hills, Texas. Approximately 14 independent agents and 17 contract agents
produced the direct business written by Grocers in 1998.
13
<PAGE>
ARTIS
ARTIS, offers an unbundled alternative market approach to allow insureds,
producers and sponsoring associations and groups to participate in the
underwriting and risk assumption of their insurance programs. ARTIS custom
designs its alternative risk programs for groups and individual clients
utilizing traditional captives, agency-owned-captives, member-owned-captives,
rent-a-captives, joint-owned-captives, self-insured retentions, large
deductibles, portfolio transfers and finite reinsurance. While workers
compensation is the largest component of its business, ARTIS also offers
coverage in general liability, automobile liability, property, inland marine,
surety and professional liability lines of business.
FINANCIAL SERVICES DIVISION
Orion Specialty's Financial Services Division offers products and coverages
to credit unions, banks, leasing companies, finance companies, and automobile
and equipment dealerships strictly through general agents. Insurance programs
offered by the Financial Services Division are collateral protection, mortgage
security, lenders' comprehensive single interest, creditors' installment sales,
inland marine, credit fire, guaranteed auto protection and flood. The largest of
the products offered, collateral protection insurance, primarily insures
automobiles pledged as security for loans for which the borrower has not
produced evidence of physical damage coverage as required by the lender. The
Financial Services Division currently markets its products in 50 states, the
District of Columbia and Commonwealth of Puerto Rico through 60 general and
retail agents.
McGee
Wm. H. McGee & Co., Inc. ("McGee") is a leading ocean cargo, inland marine
and related commercial property insurance underwriter and has been in business
for over 110 years. Security Insurance Company of Hartford ("Security"), a
subsidiary of the Company, has been represented by McGee since 1894. McGee
provides all related services in connection with this business, including policy
issuance, claim settlement, accounting and placement of reinsurance. McGee's
operations are conducted in the United States, through its headquarters in New
York City and 20 branch offices throughout the country. Activities in Canada,
Bermuda and Puerto Rico are managed by McGee's subsidiaries located in those
jurisdictions and they each perform substantially similar services.
In the United States, McGee ranks among the top 10 writers of ocean cargo
insurance and among the 20 largest writers of inland marine insurance. Ocean
cargo insurance covers cargo against the perils of the sea and is usually
broadened to include loss or damage to the goods while in transit until they
arrive at the destination specified in the policy. Inland marine insurance
covers property while being transported, property of a movable nature and
property instrumental to transportation or communication. Some common examples
of property covered by inland marine insurance are cargo being shipped by train,
truck or airplane; mobile equipment; bridges and tunnels; radio and television
transmitting equipment; personal jewelry and furs; art collections; livestock
and medical equipment.
Each insurer represented by McGee participates in either the United States
or Canadian Inter-Office Reinsurance Agreement (the "McGee Pools"). It is
through these underwriting pooling agreements that premiums and risk are
allocated among the various participating insurers. The insurers participating
in the McGee Pools and the percentage allocated to each insurer is reviewed and
revised annually. Security is a member and clearing company in both the United
States and Canadian pools. For 1998, McGee underwrote approximately $198 million
of gross premiums on behalf of the insurers participating in the McGee Pools.
The Company's participation in the United States pool was 71.5% in 1998, 52% in
1997, and 37% in 1996. Participation in the Canadian pool was 72% in 1998, 61%
in 1997, and 49% in 1996.
14
<PAGE>
McGee, as an underwriting manager, does not directly solicit business from
insureds but instead relies on a production force consisting of insurance
brokers and agents appointed to represent the portion of the insurers' business
which McGee manages. McGee is compensated for its services by the insurers it
represents based upon a combination of factors, including a percentage of the
premiums written, the profitability of the business written and the management
services provided.
On March 11, 1999, the Company announced the signing of a definitive
agreement to sell McGee. The transaction is expected to be complete by April
1999, subject to regulatory approvals and other closing conditions.
INTERCARGO CORPORATION
The Specialty Commercial segment also includes the Company's 26% interest
in Intercargo, a publicly traded insurance holding company whose subsidiaries
specialize in international trade and transportation coverages. Its principal
product lines are United States customs bonds and marine cargo insurance sold to
importers and exporters through customs brokers and other service firms engaged
in the international shipment of goods. Intercargo operates as an independent
entity and a pro rata share of any profit or loss is reflected in the Company's
consolidated financial statements, based on the Company's equity interest in
Intercargo. In December 1998, the Company agreed to sell its investment in
Intercargo for $22.8 million in cash pursuant to terms of a merger between
Intercargo and X. L. America, Inc., a subsidiary of EXEL Limited. The sale is
expected to be complete late in the first quarter or early in the second quarter
of 1999, subject to regulatory approval.
SECURITYRE
In November 1996, the Company exited the assumed reinsurance business and
sold for cash the ongoing business of its subsidiary, SecurityRe. SecurityRe
primarily underwrote a diverse book of casualty business, using reinsurance
intermediaries, with exposures largely concentrated in the domestic market.
SecurityRe's premiums had been principally concentrated in the treaty segment
reinsuring small-to-medium-sized regional and specialty companies in various
lines of business (primarily automobile and commercial coverages). Facultative
coverage was provided on an excess of loss basis for casualty and property
exposures. Generally, the largest net amount insured by SecurityRe was
approximately $1 million. As a result of the sale, SecurityRe discontinued
writing business. The Company kept the reserves with respect to the outstanding
business and will continue to manage the settlement of claims arising out of
that business.
INSURANCE INDUSTRY CHARACTERISTICS
LOSS RESERVES
The Company establishes reserve liabilities for reported losses, incurred
but not reported ("IBNR") losses, and claim settlement and administration
expenses. Reserves for reported losses and loss adjustment expenses are
estimates of the ultimate costs of claims reported to the Company but not
settled. IBNR loss reserves are estimates for both unreported claims and
additional development of previously reported claims. Reserves are based on the
circumstances surrounding each claim, the Company's historical experience with
losses arising from claims both reported and not yet reported and the particular
experience associated with the line of business and type of risk involved.
Consideration is also given to expected changes in costs for property, repairs
to property, benefit changes for injured workers, medical care, and litigation
and other legal costs. Reserve estimates are regularly reviewed and adjusted to
consider all pertinent information, as it becomes available. Such reevaluation
is a normal, recurring activity that is inherent in the process of loss reserve
estimation.
Several methods are used for reviewing loss reserves, including paid and
incurred loss development, and incurred claim counts and average claim costs.
These methods can be subject to variability in loss reserve estimation for a
number of reasons, including improved claims department operating procedures,
accelerated claims settlement due to the use of alternate dispute resolution,
and expedited resolution of civil suits in litigation. Other factors that are
analyzed and are considered in the determination of loss reserves include: (i)
claim emergence and settlement patterns and changes in these patterns from year
to year, (ii) trends in the frequency and severity of paid and incurred losses,
(iii) changes in policy limits and changes in reinsurance coverages, (iv)
changes in the mix and classes of business, and (v) changes in claims handling
procedures.
Management revises its loss reserve estimates as appropriate and believes
that the loss and loss adjustment expense reserves of the Company's insurance
subsidiaries make reasonable and sufficient provision for the ultimate cost of
all losses and claims incurred. However, no assurances can be given that adverse
reserve development will not occur in the future.
ACCIDENT YEAR LOSS AND LOSS ADJUSTMENT EXPENSE ANALYSIS
Accident year is a period of exposure. It is used to accumulate loss and
loss adjustment experience by the year in which an incident giving rise to a
claim occurs. Accident year information is used for loss reserving and in
establishing premium rates. Each accident year loss experience is updated in
subsequent years until all losses and loss adjustment expenses related to that
given accident year have been settled. Accident year loss ratio relates losses
associated with incidents giving rise to claims occuring during a given calendar
year to the premiums earned during the same calendar year. Presented below are
loss reserve development tables for the five years ended December 31, 1998
prepared in an accident year format.
15
<PAGE>
For each accident year, the following table presents premiums earned, and
the provision for loss and loss adjustment expenses as a percentage of premiums
earned (the "loss ratios") as established in the initial accident year and the
cumulative figures as of December 31, 1998:
Loss and Loss Adjustment
Accident Premiums Expense Development
---------------------------
(In millions, except for %) Year Earned Initial Cumulative
- --------------------------------------------------------------------------
1994 $ 691.2 69.6 % 69.0%
1995 749.0 66.8 % 66.8%
1996 1,300.8 67.2 % 68.1%
1997 1,357.7 66.0 % 67.9%
1998 1,503.0 65.6 % -
The table set forth below indicates premiums earned, the cumulative loss
ratio for each accident year, the ratio of policy acquisition costs and other
insurance expenses to premiums earned (the "expense ratio"), the ratio of
policyholders' dividends to premiums earned (the "policyholders' dividend
ratio") and the total of the ratios (the "combined ratio") at December 31, 1998:
Accident Premiums Loss Expense Policyholders' Combined
Year Earned Ratio Ratio Dividend Ratio Ratio
- --------------------------------------------------------------------------
(In millions, except for %)
1994 $ 691.2 69.0% 27.0% 2.1% 98.1%
1995 749.0 66.8% 29.0% 2.9% 98.7%
1996 1,300.8 68.1% 30.1% 1.8% 100.0%
1997 1,357.7 67.9% 31.2% 1.8% 100.9%
1998 1,503.0 65.6% 31.0% 1.6% 98.2%
16
<PAGE>
Calendar Year Loss Reserve Analysis
An analysis of the Company's calendar year loss and loss adjustment expense
reserves, net of reinsurance, for the most recent three years ended December 31
is presented in the following table. The 1996 current year provision includes
favorable loss development for Guaranty National of $1.0 million and 1996
current year payments include $144.8 million attributable to periods prior to
the consolidation of Guaranty National's results in the Company's financial
statements. The 1998 provision - prior year and payments - prior year includes
amounts related to Colorado Casualty Insurance Company, which was sold in 1998,
of $1.1 million and $ 6.9 million, respectivley.
(In millions) 1998 1997 1996
- ----------------------------------------------------------------------------
Beginning of year .............. $ 1,390.7 $ 1,368.4 $ 994.0
Effect of acquisitions and other 16.9 8.9 286.3
---------- ---------- ----------
1,407.6 1,377.3 1,280.3
---------- ---------- ----------
Provision:
Current year ................ 986.6 896.3 874.1
Prior year .................. 33.9 9.2 8.9
---------- ---------- ----------
1,020.5 905.5 883.0
---------- ---------- ----------
Payments:
Current year ................ 450.3 370.9 499.2
Prior year .................. 559.4 521.2 295.7
---------- ---------- ----------
1,009.7 892.1 794.9
---------- ---------- ----------
End of year .................... $ 1,418.4 $ 1,390.7 $ 1,368.4
========== ========== ==========
<TABLE>
<CAPTION>
Cumulative reserve development for the Company's wholly-owned insurance
subsidiaries (including acquisitions from date of purchase and excluding amounts
related to a divestiture for all periods presented) as of December 31, 1998 for
the calendar years then ended from 1992 through 1998 is shown in the table that
follows:
(In millions) 1992 1993 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross liability .. $ 1,081.4 $ 1,140.4 $ 1,181.3 $ 1,275.0 $ 1,772.9 $ 1,864.8 $ 2,017.7
Reinsurance
recoverable ... 335.1 309.6 289.8 281.0 415.2 491.0 599.3
--------- --------- --------- ---------- ---------- ---------- ----------
Net liability .... $ 746.3 $ 830.8 $ 891.5 $ 994.0 $ 1,357.7 $ 1,373.8 $ 1,418.4
========= ========= ========= ========== ========== ========== ==========
Gross re-estimated
liability ..... $ 1,177.1 $ 1,171.5 $ 1,219.5 $ 1,302.0 $ 1,816.0 $ 1,905.9 $ -
Re-estimated
recoverable ... 346.1 308.6 309.7 295.7 444.5 499.3 -
--------- --------- --------- ---------- ---------- ---------- ----------
Net re-estimated
liability ..... $ 831.0 $ 862.9 $ 909.8 $ 1,006.3 $ 1,371.5 $ 1,406.6 -
========= ========= ========= ========== ========== ========== ==========
Gross (deficiency) $ (95.7) $ (31.1) $ (38.2) $ (27.0) $ (43.1) $ (41.1) $ -
redundancy ========= ========= ========= ========== ========== ========== ==========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Cumulative reserve development, net of reinsurance, for the Company's
wholly-owned insurance subsidiaries (including acquisitions from date of
purchase and excluding amounts related to a divestiture for all periods
presented) as of December 31, 1998 for the calendar years 1988 through 1998 is
shown in the table that follows:
December 31,
--------------------------------------------------------------------------------------------------------
(In millions) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Net liability for unpaid
loss and loss
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
adjustment expenses ... $ 520.3 $ 602.5 $ 595.5 $ 668.5 $ 746.3 $ 830.8 $ 891.5 $ 994.0 $ 1,357.7 $ 1,373.8 $ 1,418.4
Paid (cumulative) as of:
One year later ........ 236.7 281.2 261.5 240.3 249.6 303.3 263.3 295.7 516.7 552.5 --
Two years later ....... 403.1 438.3 408.6 378.5 429.5 445.4 434.7 495.6 800.9 -- --
Three years later ..... 488.4 526.2 493.2 484.3 514.2 543.7 553.4 607.7 -- -- --
Four years later ...... 544.4 581.9 567.1 540.3 577.5 625.7 622.2 -- -- -- --
Five years later ...... 582.5 633.4 605.0 580.1 634.2 668.5 -- -- -- -- --
Six years later ....... 624.4 660.6 629.7 625.0 663.2 -- -- -- -- -- --
Seven years later ..... 643.4 676.9 666.5 648.5 -- -- -- -- -- -- --
Eight years later ..... 653.8 706.7 690.9 -- -- -- -- -- -- -- --
Nine years later ...... 680.6 727.7 -- -- -- -- -- -- -- -- --
Ten years later ....... 698.6 -- -- -- -- -- -- -- -- -- --
Net liability re-estimated
as of:
One year later ........ 573.6 647.6 657.1 694.9 770.6 848.1 903.3 1,002.8 1,364.0 1,406.6 --
Two years later ....... 624.3 695.2 685.7 715.0 782.3 855.0 903.0 1,003.2 1,371.5 -- --
Three years later ..... 658.0 722.6 705.5 732.0 786.0 855.3 903.1 1,006.3 -- -- --
Four years later ...... 687.8 741.8 741.1 744.3 801.2 856.0 909.8 -- -- -- --
Five years later ...... 705.5 770.4 756.5 763.7 822.6 862.9 -- -- -- -- --
Six years later ....... 733.8 788.3 786.6 782.5 831.0 -- -- -- -- -- --
Seven years later ..... 747.5 812.4 802.7 793.4 -- -- -- -- -- -- --
Eight years later ..... 771.4 831.5 817.8 -- -- -- -- -- -- -- --
Nine years later ...... 794.7 843.5 -- -- -- -- -- -- -- -- --
Ten years later ....... 804.6 -- -- -- -- -- -- -- -- -- --
Net deficiency ........... (284.3) (241.0) (222.3) (124.9) (84.7) (32.1) (18.3) (12.3) (13.8) (32.8) --
</TABLE>
18
<PAGE>
The preceding loss reserve development tables indicate the aggregate
year-end liability for loss and loss adjustment expenses, net of reinsurance,
the cumulative amounts paid attributable to those reserves through December 31,
1998, the re-estimate of the aggregate liability as of December 31 of each
subsequent year and the cumulative development of prior years' reserves.
Information is also provided on a gross basis for 1992 through 1998. Consistent
with industry practice, certain claims for long- term disability workers
compensation benefits are carried at discounted values. At December 31, 1998 and
1997, long-term disability workers compensation loss reserves are carried in the
Company's consolidated financial statements at $46.0 million and $52.9 million,
respectively, at net present value using a statutory interest rate of 3.5%.
The Company's IBNR loss and loss adjustment expense reserves and other bulk
reserves for losses and loss adjustment expenses for which claim files have not
been established, net of reinsurance, were $616.2 million, $686.4 million and
$690.6 million as of December 31, 1998, 1997 and 1996, respectively.
During 1998 and 1997, the Company strengthened loss reserves and
experienced adverse development for prior years' business of $33.9 million and
$9.2 million, respectively. For 1998, adverse development for reserve
strengthening in connection with the Orion Specialty realignment of $17.0
million, various pools and associations of $6.9 million (other than from McGee),
the assumed reinsurance business of $3.1 million, and workers compensation of
$8.7 million was partly offset by favorable development from other lines of
business of $1.8 million. For 1997, adverse development for various pools and
associations (other than McGee) of $11.4 million, for the assumed reinsurance
exited in 1996 of $12.2 million and certain cancelled program business of $20.9
million was partly offset by favorable development from workers compensation of
$34.3 million and other lines of business of $0.8 million. In the third quarter
of 1998, the Company completed an actuarial study of the business being exited
in connection with Orion Specialty's realignment and strengthened reserves by
$27.8 million including $17.0 million related to 1997 and prior accident years.
Adverse development relating to the Company's pools and associations business is
based on their experience, which is generally recorded as the information is
reported to the Company and relates primarily to environmental reserves. The
adverse development from workers compensation in 1998 primarily reflects upward
adjustments to 1997 and prior year initial reserve estimates based upon higher
current case reserves. The adverse development from cancelled programs in 1997
is largely due to an ocean marine program cancelled in that year which
experienced high claim frequency and severity. The favorable development from
the workers compensation and other lines of business in 1997 was the result of
improvement from the application of loss prevention and loss control procedures.
Loss reserve estimates are based on forecasts of the ultimate settlement of
claims and are subject to uncertainty with respect to future events. Loss
reserve amounts are based on management's informed estimates and judgments,
using data currently available. Reserve amounts and the underlying actuarial
factors and assumptions are regularly analyzed and adjusted to reflect new
information. Current operations are more focused on underwriting risks where the
Company has specialized knowledge and can provide enhanced service to reduce
loss costs. This concentration, and the specialized knowledge and growing
experience in its selected lines of business arising from such concentration,
have enabled the Company to implement improvements in its claims administration
and underwriting procedures which have enhanced the Company's ability to analyze
data and project reserve trends.
19
<PAGE>
The following table presents the differences between loss and loss
adjustment expense reserves reported in the consolidated financial statements in
accordance with generally accepted accounting principles ("GAAP"), and those
reported in the combined annual statement filed with state insurance departments
in accordance with statutory accounting practices ("SAP") for the years ended
December 31:
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Liability on SAP basis $ 1,405.7 $ 1,380.6
Estimated salvage and subrogation
recoveries recorded on a cash basis for
SAP and on an accrual basis for
GAAP (related to acquisition of Unisun) - (1.2)
Foreign subsidiary reserves 12.7 11.3
------------ ------------
Liability on GAAP basis, net of reinsurance 1,418.4 1,390.7
Reinsurance recoverables on GAAP reserves 599.3 481.0
------------ ------------
Liability on GAAP basis $ 2,017.7 $ 1,871.7
============ ============
Investments
The Company derives a significant part of its income from its investments.
The investment portfolio of the Company's insurance subsidiaries must comply
with applicable insurance laws and regulations of the respective states in which
such companies are domiciled and other jurisdictions in which they conduct
business. Neither Orion nor any of its non-insurance subsidiaries is constrained
by investment restrictions set forth in state insurance laws.
The Company maintains a diversified portfolio representing a broad spectrum
of industries and types of securities. The Company manages its total
investments, so that at all times there are fixed income securities that are
adequate in amount and duration to meet the cash requirements of current
operations and longer term liabilities, as well as to meet insurance regulatory
requirements with respect to investments under specific state insurance laws. To
the extent that there are funds available for investment beyond these
requirements, the investment objective for such funds are to maximize total
return within a prudent level of risk, taking into account the potential impact
on the volatility of reported earnings and reserves. The Company adjusts
investment risk to offset or complement insurance risk based upon total
corporate risk tolerance. The Company has investment guidelines for fixed income
and equity portfolios covering portfolio characteristics, permitted investments,
diversification and performance benchmarks.
Approximately 59% of the Company's fixed maturity portfolio is invested in
tax-advantaged securities at December 31, 1998. Except for investments in
securities of the United States Government and its agencies, the Company had
investments in only one issuer (AAA rated fixed income securities totaling $26.7
million) that exceeded $25 million at December 31, 1998.
The Company has the ability to hold its fixed maturity investments to term
since its operating cash flow and its short-term investment portfolio provide
the Company with substantial liquidity. Fixed maturity investments that the
Company has the positive intent to hold to maturity are recorded at amortized
cost. Fixed maturity investments which may be sold in response to, among other
things, changes in interest rates, prepayment risk, income tax strategies, or
liquidity needs are classified as available-for-sale and are carried at market
value, with unrealized gains and losses reflected in stockholders' equity.
Equity securities are stated at market value. Both the fixed maturities and the
equity investments consist primarily of readily marketable securities. See
"Market Risk of Financial Instruments" on page 47.
20
<PAGE>
<TABLE>
<CAPTION>
The following table shows the composition of the investment portfolio of
the Company as of December 31, 1998 and 1997, and the quality ratings for the
Company's fixed maturity investments. The investments shown below are listed at
their amortized cost, market and financial statement (book) values.
1998: Market Book
(In millions, except for %) Cost % Value % Value %
- ----------------------------------------------------------------------------------------
Fixed Maturities:
<S> <C> <C> <C> <C> <C> <C>
AAA .................... $ 697.1 29.0% $ 724.4 29.0% $ 716.8 28.8%
AA ..................... 339.3 14.1% 361.1 14.5% 357.7 14.4%
A ...................... 215.6 9.0% 226.0 9.0% 224.1 9.0%
BBB .................... 100.5 4.2% 102.4 4.1% 103.1 4.2%
BB ..................... 59.3 2.5% 60.6 2.4% 60.6 2.4%
B and Below ............ 120.5 5.0% 108.7 4.3% 108.8 4.4%
Not Rated .............. 33.8 1.4% 39.4 1.6% 39.4 1.6%
---------- ----- ---------- ----- ------------ -----
Sub-total ........... 1,566.1 65.2% 1,622.6 64.9% 1,610.5 64.8%
Equity Securities ......... 469.4 19.6% 510.9 20.4% 510.9 20.5%
Other Long-Term Investments 116.2 4.8% 116.2 4.7% 116.2 4.7%
Short-Term Investments .... 248.7 10.4% 248.7 10.0% 248.7 10.0%
---------- ----- ---------- ----- ------------ -----
$ 2,400.4 100.0% $ 2,498.4 100.0% $ 2,486.3 100.0%
========== ===== ========== ===== ============ =====
</TABLE>
<TABLE>
<CAPTION>
1997: Market Book
(In millions, except for %) Cost % Value % Value %
- ----------------------------------------------------------------------------------------
Fixed Maturities:
<S> <C> <C> <C> <C> <C> <C>
AAA .................... $ 700.8 29.5% $ 730.6 28.7% $ 725.6 28.7%
AA ..................... 417.0 17.5% 441.2 17.3% 437.6 17.3%
A ...................... 198.9 8.4% 212.2 8.3% 211.8 8.3%
BBB .................... 147.4 6.2% 151.4 5.9% 150.9 5.9%
BB ..................... 73.4 3.1% 76.9 3.0% 76.8 3.0%
B and Below ............ 137.6 5.8% 145.7 5.7% 145.7 5.7%
Not Rated .............. 33.1 1.3% 34.2 1.3% 34.2 1.3%
---------- ----- ---------- ----- ------------ -----
Sub-total ........... 1,708.2 71.8% 1,792.2 70.2% 1,782.6 70.2%
Equity Securities ......... 346.6 14.6% 438.5 17.2% 438.5 17.2%
Other Long-Term Investments 94.3 4.0% 94.3 3.7% 94.3 3.7%
Short-Term Investments .... 228.3 9.6% 228.3 8.9% 228.3 8.9%
---------- ----- ---------- ----- ------------ -----
$ 2,377.4 100.0% $ 2,553.3 100.0% $ 2,543.7 100.0%
========== ===== ========== ===== ============ =====
</TABLE>
Investment yields on the Company's average investment portfolio for the years
ended December 31 are as follows:
1998 1997
- -----------------------------------------------------------
Yields on average investments:
Pre-tax 6.0% 7.0%
=== ===
After-tax 4.7% 5.3%
=== ===
21
<PAGE>
Included in Other Long-Term Investments at December 31, 1998 were
investments in limited partnerships carried at $111.1 million. The assets of
these partnerships are managed by outside entities. Individual partnerships may
invest in a variety of investment vehicles, including but not limited to U.S.
and foreign bonds and equities, both public and private, and real estate. The
Company accounts for its investments in limited partnership using the equity
method of accounting. Such partnerships are carried at the Company's interest in
the underlying net assets of the limited partnerships. Net investment income
from these partnerships was $2.6 million, $17.1 million and $16.0 million for
1998, 1997 and 1996, respectively.
The Company strives to enhance the average return of its portfolio by
investing a small percentage of the portfolio in a diversified group of
non-investment grade fixed maturity securities, or securities that are not
rated. In the non-investment grade segment of the investment portfolio, the
Company maintains a high degree of diversity, with an average investment per
issuer of approximately $1.7 million at December 31, 1998.
The Company closely monitors the financial stability of issuers of
securities that it owns. When conditions are deemed appropriate, the Company
ceases to accrete discount, or accrue interest and dividends. In cases where the
value of investments are deemed to be other than temporarily impaired, the
Company recognizes losses. During 1998, provisions for such losses were $1.1
million for equity securities and $3.2 million for fixed maturity investments.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations, Investment Performance."
REINSURANCE
In the ordinary course of business, the Company's insurance subsidiaries
enter into reinsurance contracts with other insurers which serve to provide
greater diversification of business and to limit the Company's maximum loss from
catastrophes, large risks or unusually hazardous risks. Ceding reinsurance
reduces an insurer's operating leverage ratio. Operating leverage is defined as
net premiums written as a multiple of policyholders' surplus.
A large portion of the Company's reinsurance protection is provided by
reinsurance contracts or treaties under which all risks meeting prescribed
criteria are automatically covered. In other instances, reinsurance is obtained
by negotiation for individual risks, or facultative reinsurance. The Company's
insurance subsidiaries have certain excess-of-loss and catastrophe treaties with
unaffiliated insurers or reinsurers which provide protection against a specified
part or all of certain types of losses over stipulated dollar amounts arising
from one or more occurrences. The amount of each risk retained by an insurer is
subject to maximum limits which vary by line of business and type of coverage.
Retention limits are periodically revised as the capacity of the Company's
insurance subsidiaries to retain risk varies and as reinsurance prices change.
Reinsurance contracts do not relieve the Company of its obligation to the
policyholders. The collectibility of reinsurance is subject to the solvency of
the reinsurers. The Company is very selective as to its reinsurers, placing
reinsurance with only those reinsurers considered to be in sound financial
condition and having satisfactory underwriting ability. Many of the Company's
reinsurance agreements are subject to annual renewal as to coverage, limits and
price. The Company continually monitors the financial strength of its
reinsurers. The Company's insurance subsidiaries, to their knowledge, have no
material exposure to potential unrecognized losses due to reinsurers that are in
known financial difficulties.
EBI has reinsurance protection for losses in excess of $1.5 million per
occurrence up to $200 million and for losses in excess of $5.0 million per
person up to $20 million subject to annual aggregate limitations. EBI's
reinsurance includes aggregate stop loss coverage providing loss ratio
protection with aggregate limits. EBI also has excess of loss protection and 15%
quota share reinsurance agreements covering lower layers of losses. The Company
is evaluating alternatives in response to a recent regulatory action taken
related to a reinsurance arrangement in which EBI participates. Although this
regulatory action is pending further clarification, the Company believes that
the resolution of this matter will not materially effect its results of
operations or financial position.
22
<PAGE>
DPIC has a 50% quota share reinsurance agreement on the first $1.0 million
of coverage for the lawyers and accountants classes of business. DPIC has
reinsurance for losses in excess of $1.0 million up to $5.0 million. Policy
limits greater than $5.0 million up to $20 million for DPIC are reinsured by a
facultative agreement.
Guaranty National Insurance Company ("GNIC"), an affiliated company of
Guaranty National has reinsurance coverage in excess of $0.5 million up to $6.0
million for property and casualty losses, and in excess of $0.5 million up to
$25 million for excess and umbrella losses with an aggregate limit of $25
million. GNIC's reinsurance includes a $6.0 million annual aggregate deductible
for all coverages and protection for catastrophic losses for each occurrence
exceeding $1 million.
Orion Specialty (primarily program business) is protected by per event
coverage for losses in excess of $0.5 million up to $10 million with an annual
aggregate limit of $15 million except for property related losses which is $10
million. Grocers has reinsurance protection in excess of $0.2 million up to $20
million per occurrence for workers compensation, up to $4 million of treaty
protection with facultative above that amount for property losses, and up to $5
million of treaty protection for general/auto liability.
McGee's business is reinsured for losses in excess of $1.5 million up to
$150 million, with retention buydowns to excess of $0.5 million on Canadian,
cargo/hull and armored car classes of business.
The Company has corporate-wide aggregate stop loss reinsurance that
protects it from extraordinary losses.
GOVERNMENT REGULATION
Similar to other insurance companies, the Company's insurance subsidiaries
are subject to comprehensive regulation by insurance authorities. In particular,
the Company is subject to regulation by the insurance departments of the states
of incorporation of all of the Company's insurance subsidiaries. These states
include California, Connecticut, Colorado, North Carolina, Oklahoma, Oregon,
South Carolina, Texas, and Wisconsin. All insurance companies must file annual
statements and other reports with state regulatory agencies and are subject to
regular and special examinations by those agencies. Regular periodic
examinations of the Company's insurance subsidiaries, covering their operations
and statutory financial statements are conducted on a regular basis by the state
of domicile of each insurance company and may include other states, insurance
departments in which they are licensed. The last periodic examinations of the
Company's insurance subsidiaries were completed for periods ending from December
31, 1993 to December 31, 1996. No significant adjustments resulted from the
examinations of any of the Company's insurance subsidiaries. The State of
Connecticut recently commenced their periodic examination of insurance
subsidiaries domiciled in Connecticut for periods from January 1, 1995 to
December 31, 1998.
Each of the Company's insurance subsidiaries is also subject to regulation
by other jurisdictions in which it sells insurance, including Puerto Rico,
certain Canadian provinces and Bermuda. States regulate the insurance business
through supervisory agencies that have broad administrative powers, including
powers relating to, among other things:
23
<PAGE>
- the standards of solvency which must be met and maintained;
- the licensing of insurers and their agents;
- restrictions on the amount of risk which may be insured under a single
policy;
- the approval of premium rates;
- the form and content of the insurance policy and sales literature;
- the form and content of financial statements;
- reserve requirements;
- the imposition of monetary penalties for rules violation; and
- the nature of and limitations on permitted investments.
In general, such regulations are for the protection of policyholders rather than
stockholders.
In some instances, particularly in connection with workers compensation
insurance, various states routinely require deposits of assets for the
protection of policyholders and their employee claimants located in those
states. As of December 31, 1998 and 1997, securities representing approximately
10% and 9%, respectively, of the book value of the Company's investment
portfolio were on deposit with various state treasurers or custodians for such
purpose. These deposits consist of securities of the types that comply with
standards established by each state.
The Company is also subject to state laws regulating insurance holding
company systems. Most states have enacted legislation and adopted administrative
regulations affecting insurance holding companies and the acquisition of control
of insurance companies, as well as transactions between insurance companies and
their affiliates. The nature and extent of such legislation and regulations
currently in effect vary from state to state. Most states currently require
administrative approval of the acquisition of 10% or more of the outstanding
shares of an insurance company incorporated in the state or the acquisition of
10% or more of an insurance holding company whose insurance subsidiary is
incorporated in the state. The acquisition of 10% of such shares is deemed to be
the acquisition of "control" for the purpose of most holding company statutes
and requires the filing of detailed information concerning the acquiring parties
and the plan of acquisition and administrative approval prior to such
acquisition. Material transactions between insurance companies and affiliated
members of the holding company system are generally required to be "fair and
reasonable" and in some cases are subject to administrative approval.
Other states, in addition to an insurance company's state of domicile, may
regulate affiliated transactions and the acquisition of control of licensed
insurers. The State of California, for example, presently treats certain
insurance subsidiaries of the Company, which are not domiciled in California as
though they were domestic insurers for insurance holding company purposes. Such
subsidiaries are required to comply with the holding company provisions of the
California Insurance Code, certain of which provisions may be more restrictive
than the comparable laws of the insurance company's state of domicile.
All state jurisdictions in which the Company is authorized to transact
business require participation in guaranty funds. Insurers authorized to
transact business in those jurisdictions can be assessed by a state guaranty
fund a percentage (usually from 1% to 2%) of direct premiums written in that
jurisdiction each year to pay claims on behalf of insolvent insurers. The
likelihood and amount of any future assessment cannot be estimated until after
an insolvency has occurred. For the years ended December 31, 1998 and 1997 the
Company's insurance subsidiaries were assessed approximately $1.5 million and
$0.7 million, respectively (net of estimated future recoveries) as a result of
known insolvencies. Insurance companies are required by certain states in which
they do business to participate in automobile insurance plans and workers
compensation plans. These plans provide insurance on risks that are not written
in the voluntary market. Participation in these plans has usually been
unprofitable for the Company.
24
<PAGE>
A number of state legislatures and the United States Congress have for
years been considering, or have now enacted, some type of legislative proposals
which alter the rules for tort claims and increase the states' authority to
regulate insurance companies. These initiatives have expanded, in some
instances, the states' regulation over rates (see "Rates" below) and also have
increased data reporting requirements. In recent years the state insurance
regulatory framework has come under federal scrutiny, and certain state
legislatures have considered or enacted laws that alter, and in many cases
increase, state authority to regulate insurance companies and insurance holding
company systems.
The National Association of Insurance Commissioners ("NAIC") and state
regulators are re-examining existing laws and regulations relating to the
solvency of insurers. The NAIC has adopted Risk Based Capital ("RBC")
requirements for property and casualty insurers. RBC refers to the determination
of the amount of statutory capital required for an insurer based on the risks
assumed by the insurer (including, for example, investment risks, credit risks
relating to reinsurance recoverables and underwriting risks) rather than just
the amount of net premiums written by the insurer. A formula that applies
prescribed factors to the various risk elements in an insurer's business is used
to determine the minimum statutory capital requirement for the insurer. The
statutory capital of each of the Company's active insurance subsidiaries at
December 31, 1998 exceeds the RBC requirements.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, is proposed to
be effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices and
it is uncertain when, or if, the Company's domiciling states will require
adoption of Codification for the preparation of statutory based financial
statements. The Company has not finalized the quantification of the effects of
Codification on its statutory based financial statements.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. There are various current, proposed and tabled federal
measures that may significantly affect the Company's insurance business,
including, among other proposals:
- Superfund reform;
- tort liability reform, including limitation on punitive damages and
"loser pays" litigation expense costs; - regulatory reform concerning
financial services modernization;
- revocation of the antitrust exemption provided by the McCarran-Ferguson
Act and the ensuing federal regulation of the business of insurance; and
- suggested changes of the nation's health care system that, if enacted,
might negatively affect the Company's workers compensation and automobile
liability businesses.
The economic and competitive effects of any such proposals upon the Company
would depend upon the final form such legislation might take. The Company is
unable to predict what regulatory proposals may be adopted in the future or the
effect any such proposals might have on the Company's businesses if adopted.
25
<PAGE>
LIMITATIONS ON PAYMENTS FROM INSURANCE SUBSIDIARIES
The principal sources of cash available to Orion are dividends,
reimbursement of various administrative charges, repayment of principal and
interest on loans due from its subsidiaries; and tax payments from its
subsidiaries. The payment of dividends to Orion by its insurance subsidiaries is
subject to state regulation. No state restricts dividend payments by the Company
to its stockholders.
The ability of the Company's insurance subsidiaries to declare dividends is
governed primarily by the insurance laws of such subsidiaries' state of
domicile. Generally, such laws currently provide that, unless prior approval is
obtained, dividends of a property and casualty insurance company in any
consecutive 12-month period shall not exceed the greater of its net income, as
adjusted for individual state regulations, for the preceding calendar year or
10% of its policyholders' surplus as of the preceding December 31, determined on
a statutory accounting basis. Dividends and distributions by the Company's
insurance subsidiaries are also subject to a requirement that statutory
policyholders' surplus be reasonable in relation to outstanding liabilities and
adequate to meet the companies' financial needs following the declaration of any
dividends or distributions. State insurance regulators, however, have broad
discretionary authority with respect to approving the payment of dividends by
insurance companies. Under current regulations, the maximum dividends permitted
at December 31, 1998 for the ensuing twelve months, without prior approval,
aggregated $135.5 million. Orion received $55.2 million in the aggregate in
dividends from its subsidiaries in 1998. Since it is difficult to predict future
levels of statutory policyholders' surplus or earnings, the amount of dividends
that could be paid in the future without prior approval cannot be determined at
this time.
RATES
The Company's insurance subsidiaries are generally subject to regulation as
to rates. Most states have insurance laws requiring that rate schedules and
other information be filed with or made available to the state's regulatory
authority, either directly or through a rating organization with which the
insurer is affiliated. The regulatory authority may, in most states, disapprove
of a rate filing if it finds that the rates are inadequate, excessive or
unfairly discriminatory. Rates, which are not necessarily uniform for all
insurers, vary by class of business, hazard assumed and size of risk. Subject to
regulatory requirements, the Company's management determines the prices charged
for its policies based on a variety of factors including recent historical
claims experience, inflation, competition, tax law and anticipated changes in
the legal environment, both judicial and legislative. Methods for arriving at
rates vary by type of business, exposure assumed and size of risk. Underwriting
profitability is affected by the accuracy of these assumptions, by the
willingness of insurance regulators to approve changes in those rates which they
control and by such other matters as underwriting selectivity and expense
control.
Some states have adopted open rating systems for workers compensation,
which permit insurers to set premium rates independently without the prior
approval of the insurance commissioners. A number of other states permit
insurers to deviate from standard rates for workers compensation insurance after
receiving prior approval. In insuring professional liability risks, DPIC is
generally not limited to the standard rates of a rating organization but
establishes its own rates because of the unique nature of the risks being
underwritten. Nonstandard and special risks, including nonstandard automobile
insurance rates, are generally not limited to the standard rates of national
rating bureaus. Nonstandard automobile insurance rates are usually higher than
those charged for standard risks, reflecting the higher probability of loss.
Several states have recently adopted laws or their legislatures are considering
proposed laws which, among other things, limit the ability of insurance
companies to effect rate increases and to cancel, reduce or not renew coverage
with respect to existing policies, particularly personal auto insurance.
26
<PAGE>
COMPETITION
The insurance industry is highly competitive. Over 3,000 property and
casualty insurance companies write business in the United States, but about 900
companies write most of the business. No single company or group has more than
10% of the overall market. The Company's insurance subsidiaries are in
competition with numerous stock and mutual property and casualty insurance
companies, as well as state-run workers compensation insurance funds, many of
which are substantially larger and have significantly greater resources than the
Company. Competition might also come from service organizations, which
administer self-insured workers compensation programs.
The impact of competition may take the form of lower premiums, specialized
products, more complete and complex product lines, greater pricing flexibility,
superior service, different marketing methods, higher policyholder dividend
rates or higher agent compensation. Superior service and marketing methods are
of particular importance in workers compensation.
The Company relies on multiple distribution channels to market its
insurance products. The Company's insurance subsidiaries sell their insurance
principally through independent agents, brokers and general agents, who
typically also represent one or more competing insurance companies. They are
paid commissions based on premiums collected from insureds. Commission rates
vary according to the type and amount of insurance sold. Some competitors in
certain lines obtain their business at a lower direct cost through the use of
salaried personnel rather than independent agents and brokers.
RATING
A.M. Best Company rates the Company's insurance subsidiaries "A
(Excellent)," excluding Viking Insurance Company of Wisconsin and its affiliate
and Grocers Insurance Company which are rated "A- (Excellent)." In general, A.M.
Best Company's ratings are based on an analysis of the financial condition and
operation of an insurance company as it relates to the industry. These ratings
are not primarily designed for investors and do not constitute recommendations
to buy, sell or hold any security
Management believes that a significant change in its A.M. Best ratings
could affect the business of the subsidiary where ratings were altered,
including its relationship with its independent agents, positive in the case of
an upgrade or negative in the case of a downgrade.
ITEM 2. PROPERTIES
The Company's executive office is located at 9 Farm Springs Road,
Farmington, Connecticut, 06032. The Company's executive office facility consists
of approximately 140,000 square feet and is leased at an annual rental of
approximately $3.2 million. DPIC owns its office building, which consists of
approximately 42,000 square feet, in Monterey, California. OrionAuto owns
facilities in Englewood, Colorado; Salem, Oregon; Freeport, Illinois; and
Goldsboro, North Carolina. Those facilities consist, in the aggregate, of
approximately 254,000 square feet. Grocers owns its office building, which
consists of 43,500 square feet, in Portland, Oregon.
All of the other insurance operations of the Company are conducted from
leased premises in or adjacent to major urban centers throughout the United
States, Puerto Rico, Canada and Bermuda. These operations, in the aggregate,
occupy approximately 1,070,000 square feet, at an annual rental of approximately
$12.0 million. The Company believes that its current facilities are suitable and
adequate for their present use and anticipated requirements.
27
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental to its
businesses. In the judgment of the Company's management, there are no
significant legal proceedings pending against the Company which, net of reserves
established therefor, are likely to result in judgments for amounts that are
material to the financial condition, liquidity or results of operations of Orion
and its consolidated subsidiaries, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE COMPANY
The following is a summary of certain information regarding the current
executive officers of Orion. All officers of Orion and its subsidiaries serve at
the pleasure of their respective Boards of Directors.
W. Marston Becker, Chairman of the Board and Chief Executive Officer of
Orion since January 1997; Vice Chairman of the Board from March 1996 to December
1996; President and Chief Executive Officer of the DPIC from July 1994 to June
1996; and Senior Vice President of Orion and the Orion Capital Companies, Inc.
("OC Companies") from July 1994 to March 1996; President and Chief Executive
Officer of McDonough Caperton Insurance Group, an insurance brokerage firm, from
March 1987 to July 1994; age 47.
Raymond W. Jacobsen, Executive Vice President of Orion since December 1997;
Senior Vice President of Orion from July 1994 to December 1997; Vice President
of Orion from March 1990 to July 1994; Chairman of EBI since July 1996;
President and Chief Executive Officer of EBI from June 1993 to July 1996; Acting
President and Chief Executive Officer of Connecticut Specialty from October 1995
to November 1996; Executive Vice President of EBI from December 1989 to May
1993; Senior Vice President of the OC Companies since March 1990; age 46.
John J. McCann, Executive Vice President and Secretary of Orion since May
1998; Partner of Donovan Leisure Newton & Irvine from September 1995 to May
1998; and Partner of Hall, Dicklery, Kent, Friedman & Wood from January 1994 to
September 1995; age 62.
James R. Pouliot, Executive Vice President of Orion since December 1997;
President and Chief Executive Officer of Guaranty National Corporation since
December 1996; President and Chief Executive Officer of Viking Insurance Company
from October 1992 to December 1996; age 45.
Claudia F. Lindsey, Senior Vice President of Orion since December 1997;
Vice President of Orion from January 1997 to December 1997; Vice President -
Business Development of the OC Companies since September 1996; President of
Strategic Marketing & Research, Inc. and Vice President of Anthem Financial from
1994 to 1996; Director, Managing Partner and Chief Financial Officer of
McDonough Caperton Insurance Group from 1985 to 1994; age 43.
William G. McGovern, Senior Vice President and Chief Actuary of Orion since
December 1997; Vice President and Chief Actuary of Orion from March 1990 to
December 1997; Senior Vice President and Chief Actuary of OC Companies since
October 1989; age 46.
28
<PAGE>
Stephen M. Mulready, Senior Vice President of Orion since December 1997;
Vice President of Orion from January 1997 to December 1997; President of Orion
Specialty, previously known as Connecticut Specialty, since November 1996;
Senior Vice President - Strategic Underwriting and Product Development of
Travelers/Aetna Property Casualty Corporation from January 1996 to November
1996; Senior Vice President - National Commercial Accounts of Aetna Life &
Casualty from 1994 to 1996; Vice President, Field Operations - National
Commercial Accounts of Aetna Life & Casualty from 1991 to 1994; age 49.
Thomas M. Okarma, Senior Vice President of Orion since December 1997; Vice
President of Orion from January 1997 to December 1997; President and Chief
Executive Officer of DPIC since July 1996; Chief Claims Officer of DPIC from
December 1995 to June 1996; President of Professional Concepts Insurance Agency
and Executive Vice President of AVA Insurance Agency Inc. from February 1989 to
September 1994; age 49.
Michael L. Pautler, Senior Vice President and Chief Financial Officer of
Orion since January 1999; Vice President of Corporate Development of Orion from
December 1997 to December 1998; Senior Vice President-Finance and Treasurer of
Guaranty National Corporation from September 1988 to February 1998; age 44.
David B. Semeraro, Senior Vice President of Orion since December 1997; Vice
President of Orion from January 1997 to December 1997; Vice President and Chief
Information Officer of OC Companies since April 1996; Vice President - Business
& Technology Solutions of Connecticut Mutual Life Insurance Company from
November 1990 to April 1996; age 51.
Susan B. Sweeney, Senior Vice President-Finance and Chief Investment
Officer of Orion since January 1999; Vice President - Finance of Orion from
March 1998 to December 1998; Independent Consultant from October 1997 to
February 1998; Vice President Planning and Analysis of Travelers Property and
Casualty Corporation, from April 1996 to September 1997; Managing Director,
Strategic Planning Property/Casualty Finance of Aetna Life & Casualty Company
from 1994 to April 1996; Director of Corporate Finance of Aetna Life & Casualty
Company from 1991 to 1994; age 46.
Jeanne S. Hotchkiss, Vice President-Investors Relations since March 1999;
Assistant Vice President, Corporate Communications from May 1994 to March 1999;
Director, Corporate Communications from 1983 to May 1994; age 46.
Craig A. Nyman, Vice President and Treasurer of Orion since January 1997;
Assistant Vice President and Assistant Treasurer from June 1988 to December
1996; Treasurer of OC Companies since March 1996; Vice President of OC Companies
since January 1991; Assistant Vice President of OC Companies since March 1987
and; Assistant Treasurer since March 1985; age 43.
Peter M. Vinci, Vice President, Chief Accounting Officer and Controller of
Orion since December 1997; Vice President and Controller of OC Companies since
January 1997; Vice President of OC Companies from July 1988 to January 1997; age
46.
29
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Principal Market. The principal market on which Orion's Common Stock is
traded is the New York Stock Exchange.
(b) Stock Price and Dividend Information. The table below presents the high and
low market prices and dividend information for Orion's Common Stock for 1998 and
1997.
Cash
Stock Prices Dividends
High Low Declared
1998:
Quarter Ended December 31 $ 39.813 $ 28.000 $ 0.18
Quarter Ended September 30 59.250 34.563 0.18
Quarter Ended June 30 57.750 52.000 0.18
Quarter Ended March 31 55.688 43.063 0.16
-----------
Total $ 0.70
===========
1997:
Quarter Ended December 31 $ 51.000 $ 42.375 $ 0.16
Quarter Ended September 30 45.750 36.720 0.16
Quarter Ended June 30 37.625 30.813 0.16
Quarter Ended March 31 33.875 30.000 0.14
----------
Total $ 0.62
==========
Stock prices and cash dividends declared are restated for the 2-for-1 stock
split of the Company's common stock issued on July 7, 1997. Cash dividends have
been paid on Orion's Common stock in every quarter since the fourth quarter of
1978, when dividends were first commenced.
(c) Approximate Number of Holders of Common Stock. The number of holders of
record of Orion's Common Stock as of March 1, 1999 was approximately 2,000.
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes information with respect to the operations
and financial condition of Orion and its subsidiaries. Common stock and per
common share data have been restated to give effect to the 2-for-1 stock split
issued on July 7, 1997. The Company owned slightly less than 50% of Guaranty
National Corporation until the Company increased its ownership to 81% in July
1996 and 100% in December 1997. Guaranty National Corporation is included in the
financial statements of the Company on a consolidated basis beginning on January
1, 1996 with recognition of minority interest expense for the portion of
Guaranty National Corporation's earnings attributable to shares not owned by the
Company until it became a wholly-owned subsidiary. For 1994 and 1995, the
Company's investment in Guaranty National Corporation was accounted for using
the equity method. The Company's acquisitions have been included in its
financial statements from date of purchase and up to the date of sale for
divestitures.
<TABLE>
<CAPTION>
(In millions, except for % and per share amounts) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Year Ended December 31:
<S> <C> <C> <C> <C> <C>
Total revenues ..................... $ 1,716.7 $ 1,590.6 $ 1,493.5 $ 874.3 $ 780.9
========= ========= ========= ========= =========
Operating earnings ................. $ 68.6 $ 85.7 $ 72.9 $ 59.9 $ 52.8
After-tax investment gains ......... 34.2 30.1 13.7 7.7 2.4
--------- --------- --------- --------- ---------
Net earnings ....................... $ 102.8 $ 115.8 $ 86.6 $ 67.6 $ 55.2
========= ========= ========= ========= =========
Combined ratios (GAAP) ............. 100.5% 99.7% 99.8% 100.3% 101.2%
========= ========= ========= ========= =========
Per basic common share:
Operating earnings .............. $ 2.52 $ 3.14 $ 2.66 $ 2.13 $ 1.85
After-tax investment gains ...... 1.26 1.10 0.50 0.28 0.09
--------- --------- --------- --------- ---------
Net earnings ................. $ 3.78 $ 4.24 $ 3.16 $ 2.41 $ 1.94
========= ========= ========= ========= =========
Per diluted common share:
Operating earnings .............. $ 2.46 $ 3.07 $ 2.63 $ 2.11 $ 1.84
After-tax investment gains ...... 1.23 1.08 0.49 0.27 0.09
--------- --------- --------- --------- ---------
Net earnings ................. $ 3.69 $ 4.15 $ 3.12 $ 2.38 $ 1.93
========= ========= ========= ========= =========
Dividends declared per common share $ 0.70 $ 0.62 $ 0.51 $ 0.43 $ 0.38
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic ........................... 27.2 27.3 27.4 28.1 28.5
Diluted ......................... 27.8 27.9 27.8 28.4 28.7
At December 31:
Total cash and investments ......... $ 2,504.3 $ 2,553.0 $ 2,321.4 $ 1,606.4 $ 1,325.2
Total assets ....................... 4,164.4 3,884.1 3,464.4 2,473.6 2,112.8
Total policy liabilities ........... 2,599.6 2,443.8 2,304.4 1,596.0 1,450.8
Notes payable ...................... 217.4 310.2 310.9 209.1 152.4
Minority interest .................. -- -- 45.2 -- --
Trust preferred securities ......... 250.0 125.0 -- -- --
Stockholders' equity ............... 727.3 723.1 576.7 490.9 365.1
Common shares outstanding .......... 27.2 27.6 27.5 27.9 28.1
Book value per common share ........ $ 26.77 $ 26.19 $ 20.94 $ 17.59 $ 13.0
Statutory policyholders' surplus ... 732.1 789.0 670.6 521.5 458.7
</TABLE>
31
<PAGE>
ITEM 7. ORION CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Orion Capital Corporation ("Orion") and its wholly-owned subsidiaries
(collectively the "Company") operate principally in the property and casualty
insurance business. The Company reports its insurance operations in three
segments as of December 31, 1998 as follows:
Workers Compensation - this segment includes the workers compensation insurance
products and services sold by the EBI Companies ("EBI").
Specialty Commercial - as of 1998 year end, this segment markets various
specialty commercial products and services and includes professional
liability insurance through DPIC Companies ("DPIC"); client-focused
specialty insurance programs through Orion Specialty; underwriting
management specializing in ocean marine, inland marine and commercial
property insurance through Wm. H. McGee & Co., Inc. ("McGee");
insurance for international trade through the Company's 26% interest in
Intercargo Corporation (" Intercargo"); and also includes the run-off
operations of the Company's assumed reinsurance business, SecurityRe,
which was sold in late 1996. McGee and Intercargo are expected to be
sold in 1999 (see below).
Nonstandard Automobile - this segment specializes in nonstandard personal
automobile insurance sold by OrionAuto, formerly known as Guaranty
National Corporation.
RECENT ACTIVITIES
The Company increased its ownership of Guaranty National Corporation ("Guaranty
National") to 100% in December 1997. Beginning in 1998, the commercial insurance
operations of Guaranty National were consolidated with Connecticut Specialty to
form a new company named Orion Specialty. Since the formation of Orion
Specialty, OrionAuto's only business is nonstandard personal automobile
insurance.
On December 16, 1997 the Company purchased Unisun Insurance Company ("Unisun")
from Michigan Mutual Insurance Company for $26.2 million in cash including
acquisition expenses. Unisun is the largest automobile insurance facility
carrier in South Carolina and also writes personal automobile insurance in the
States of Alabama, Georgia and North Carolina. Unisun has been included in the
Company's consolidated financial statements from the date of acquisition. Total
net premiums written by Unisun for 1997 are approximately $20 million. The total
consideration exceeded the fair value of the acquired net assets by
approximately $5.3 million and is being amortized over 25 years.
On April 30, 1998 the Company acquired the nonstandard personal automobile
insurance business of North Carolina-based Strickland Insurance Group, Inc.
("Strickland"). The acquisition included two insurance companies, a premium
finance company, a claim adjusting company and a general agency in Florida. In
1997, Strickland reported approximately $99 million of personal automobile gross
premiums written and $46 million of net premiums written. The purchase price was
$44.1 million including acquisition expenses. The acquisition was accounted for
as a purchase and accordingly, the acquired business has been included in the
Company's consolidated financial statements from the date of acquisition. The
total consideration exceeded the fair value of the acquired net assets by
approximately $28.7 million and is being amortized over 25 years.
32
<PAGE>
On July 9, 1998 the Company completed the acquisition of Grocers Insurance Group
("Grocers") from United Grocers, Inc. for $36.7 million in cash including
acquisition expenses. Grocers, an Oregon-based specialty insurance holding
company, is a recognized leader in providing specialized insurance programs to
the grocery and food service industry. In 1997, Grocers wrote approximately $23
million of net premiums, principally general liability, property and workers
compensation with the majority of its volume concentrated in the Northwestern
states. The acquisition was accounted for as a purchase and, accordingly,
Grocers has been included in the Company's consolidated financial statements
from the date of acquisition. The total consideration exceeded the fair value of
the net assets acquired by approximately $8.1 million and is being amortized
over 25 years.
In the third quarter of 1998, the Company announced an accelerated realignment
of its Orion Specialty unit to address lines that had not met the Company's
growth and profitability expectations. The realignment continued Orion
Specialty's shift away from commodity business, primarily commercial auto and
transportation, to a smaller number of more client-focused programs and
specialty niches. The realignment involved exiting approximately $100 million in
annualized net written premiums of unprofitable commodity and marginal lines of
business, the reduction of approximately 90 employees related to the exited
business, and the sale of its Colorado Casualty unit. Colorado Casualty produced
approximately $55 million in annual net premiums, which consisted largely of
business that did not fit the Company's specialization strategy.
On September 29, 1998, the Company sold Colorado Casualty resulting in a pre-tax
gain of approximately $24.2 million. The Company recorded severance and program
termination expenses of $7.0 million and asset write downs of $1.9 million
related to the exited business in the third quarter of 1998. Subsequently, the
Company recorded $1.9 million of charges against the severance and program
termination liability for incurred costs during 1998.
In connection with the third quarter realignment, the Company performed an
actuarial analysis for the business to be exited resulting in a provision for
losses and loss adjustment expenses of $27.8 million in the third quarter of
1998, including reserve strengthening of $10.8 million related to the 1998
accident year. The Company will continue in 1999 to assess Orion Specialty's
remaining programs.
In December 1998, the Company agreed to sell its investment in Intercargo for
$22.8 million or $12 per share, in cash pursuant to the terms of Intercargo's
merger with X. L. America, Inc, a subsidiary of EXEL Limited. The Company
reduced the carrying value of its investment in Intercargo to $22.8 million
resulting in $7.0 million pre-tax realized investment loss during December 1998.
The sale of Intercargo is expected to be complete late in the first quarter or
early in the second quarter of 1999, subject to regulatory approval.
Also a part of the Company's reshaping to focus resources on high potential
lines of business, on March 11, 1999 the Company announced the signing of a
definitive agreement to sell McGee. The transaction is expected to be complete
by April 1999, subject to regulatory approvals and other closing conditions.
33
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW
Earnings by segment before federal income taxes and minority interest expense
are summarized as follows:
% Change
--------------
(In millions, except for %) 1998 1997 1996 98/97 97/96
- ---------------------------------------------------------------------
Workers Compensation . $ 86.2 $ 86.8 $ 68.4 -0.8% 27.0%
Specialty Commercial . 54.2 65.3 56.5 -16.9% 15.5%
Nonstandard Automobile 37.1 40.7 23.3 -8.7% 74.8%
-------- -------- -------- --- ----
177.5 192.8 148.2 -7.9% 30.1%
Other ................ (20.8) (16.6) (20.9) -25.6% 20.3%
-------- -------- -------- --- ----
$ 156.7 $ 176.2 $ 127.3 -11.1% 38.3%
======== ======== ======== ==== ====
During the fourth quarter of 1998, the Company adopted FAS No.131, "Disclosure
about Segments of an Enterprise and Related Information." FAS 131 establishes
new standards for reporting information about operating segments and requires
that the segments be based on the internal structure and reporting of the
Company's operations. See footnote 17 to the consolidated financial statements
for the Company's segment disclosure.
Miscellaneous income and expenses (primarily interest, general and
administrative expenses and other consolidating elimination entries) of the
parent company are reported as "Other" in the above table.
Operating earnings, after-tax realized investment gains, net earnings and per
diluted common share amounts for the years ended December 31 are summarized as
follows:
<TABLE>
<CAPTION>
% Change
--------------
(In millions, except for per share amounts and %) 1998 1997 1996 98/97 97/96
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating earnings ....... $ 68.6 $ 85.7 $ 72.9 -19.9% 17.5%
After-tax investment gains 34.2 30.1 13.7 13.5% 120.0%
--------- --------- -------- ---- ----
Net earnings .......... $ 102.8 $ 115.8 $ 86.6 -11.2% 33.7%
========= ========= ======== ==== ====
Per diluted common share:
Operating earnings ....... $ 2.46 $ 3.07 $ 2.63 -19.8% 16.7%
After-tax investment gains 1.23 1.08 0.49 13.7% 120.4%
--------- --------- -------- ---- ----
Net earnings .......... $ 3.69 $ 4.15 $ 3.12 -11.0% 33.0%
========= ========= ======== ==== ====
</TABLE>
Operating earnings represents earnings after taxes, excluding net realized
investment gains. For 1998, operating earnings of $68.6 million reflects a
realignment of Orion Specialty and third-quarter losses from the Company's
limited partnership investments. In the third quarter of 1998, the Company
recorded $12.5 million of net pre-tax charges, or $0.35 per diluted share on an
after-tax basis, in connection with a realignment of Orion Specialty and related
reserve strengthening for exited business. In the third quarter of 1998, the
Company reported pre-tax investment losses of $14.1 million, or $0.33 per
diluted share on an after-tax basis, related to declines in the value of the
Company's limited partnership investments which are accounted for on an equity
basis. These charges and losses have obscured continued strong operating
performance from the Company's insurance operations, in particular EBI, DPIC and
OrionAuto. That performance is combined with an increase in after-tax
investment gains to arrive at net earnings. For the five year period ended
December 31, 1998, the Company's return on equity from net earnings and
operating earnings has averaged 15.7% and 12.9% per year, respectively.
34
<PAGE>
Weighted average common shares and diluted equivalents outstanding were
27,842,000, 27,900,000 and 27,788,000 for 1998, 1997 and 1996, respectively. The
1996 common stock and per common share data presented in this document has been
restated to give effect to the 2-for-1 split of the Company's common stock
issued on July 7, 1997.
REVENUES
<TABLE>
<CAPTION>
Revenues for the years ended December 31 are summarized as follows:
% Change
-----------------
(In millions, except for %) 1998 1997 1996 98/97 97/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premiums written .... $ 1,533.6 $ 1,367.1 $ 1,334.1 12.2% 2.5%
========= ========= ========= ===== =====
Net premiums earned ..... $ 1,503.0 $ 1,357.7 $ 1,300.8 10.7% 4.4%
Net investment income ... 143.2 164.9 145.4 -13.1% 13.4%
Realized investment gains 52.5 47.8 24.2 9.9% 97.6%
Other income ............ 18.0 20.2 23.1 -11.0% -12.8%
--------- --------- --------- ----- -----
Total revenues ....... $ 1,716.7 $ 1,590.6 $ 1,493.5 7.9% 6.5%
========= ========= ========= ===== =====
</TABLE>
<TABLE>
<CAPTION>
PREMIUMS WRITTEN
The Company's net premiums written by segment for the years ended December 31
are as follows:
% Change
------------------
(In millions, except for %) 1998 1997 1996 98/97 97/96
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Workers Compensation . $ 439.5 $ 365.1 $ 353.0 20.4% 3.4%
Specialty Commercial . 665.1 669.2 725.8 -0.6% -7.8%
Nonstandard Automobile 429.0 332.8 255.3 28.9% 30.3%
---------- ---------- ---------- ---- ----
$ 1,533.6 $ 1,367.1 $ 1,334.1 12.2% 2.5%
========== ========== ========== ==== ====
</TABLE>
In November 1996, the Company sold the renewal book of business of its assumed
reinsurance operation to concentrate on businesses where the Company could
better service its specialized niche markets. Excluding premiums from this
operation, the Company's net premiums written increased by 13.1% in 1998 and
8.1% in 1997 compared to prior year periods.
WORKERS COMPENSATION
Net premiums written for Workers Compensation increased by 20.4% in 1998 and
3.4% in 1997 compared to prior year periods largely due to new business written
through EBI's multi-state accounts program established in 1997 and continued
geographic expansion and penetration. The increases in net premiums written are
mitigated, in part, by the effects of legislative reforms in certain states that
have led to an increasingly competitive workers compensation marketplace with
lower premium rates as well as a reduction in losses. Additionally, 1998
reflects lower premium retention from a change in EBI's reinsurance programs
effective October 1998.
35
<PAGE>
SPECIALTY COMMERCIAL
Net premiums written from Specialty Commercial for the years ended December 31
are as follows:
% Change
------------------
(In millions, except for %) 1998 1997 1996 98/97 97/96
- ------------------------------------------------------------------------------
Orion Specialty ... $ 376.2 $ 402.8 $ 409.6 -6.6% -1.7%
DPIC .............. 185.0 198.7 195.6 -6.9% 1.7%
McGee ............. 104.4 57.1 41.6 82.8% 37.4%
-------- -------- -------- ---- ----
665.6 658.6 646.8 1.1% 1.8%
Assumed reinsurance (0.5) 10.6 79.0 (a) (a)
-------- -------- -------- ---- ----
$ 665.1 $ 669.2 $ 725.8 -0.6% -7.8%
======== ======== ======== ==== ====
(a) - not meaningful
Net premiums written by DPIC for professional liability insurance decreased by
6.9% in 1998 compared to 1997 primarily due to rate reductions resulting from
the competitive professional liability insurance market and growth in its more
heavily reinsured products areas, partly offset by continual high levels of
policy renewals and growth in project policies. The 1.7% increase in 1997
compared to 1996 is primarily attributable to the DPIC's continued high levels
of policy renewals and new business offset in part by rate reductions in a
competitive professional liability insurance market.
Orion Specialty's net premiums written decreased by 6.6% in 1998 compared to
1997 primarily due to its exit of unprofitable commodity program business and
marginal lines of business related to a realignment of this unit. Exited
programs during the past two years with the largest year-over-year impact on net
premiums written were truck liability, marine, coal mine and nonstandard
automobile personal injury protection. Net premiums written also reflect lower
premiums from Orion Specialty's collateral protection business and from Colorado
Casualty, which was sold on September 29, 1998 as part of realigning Orion
Specialty. These decreases were partly offset by higher premiums from the
acquisition of Grocers on July 9, 1998.
In 1997 compared to 1996, Orion Specialty's net premiums written decreased by
1.7% primarily due to the cancellation of marine programs and lower premiums of
the commercial nonstandard business of Guaranty National resulting from agent
and program cancellations, increased competition and lower production. These
decreases were partly offset by higher premiums written by the former
Connecticut Specialty unit from transportation programs and low exposure
professional liability programs, higher retentions after a change in reinsurance
effective May 1996, and premium volume growth for Orion Specialty's collateral
protection business.
McGee's net premiums written increased by 82.8% in 1998 compared to 1997 due to
the Company's greater participation in the underwriting pools managed by McGee
and increased premium retention reflecting a change in McGee's reinsurance
programs effective July 1998. The Company's participation in McGee's United
States pool was 71.5% in 1998, 52% in 1997 and 37% in 1996. Participation in
McGee's Canadian pool was 72% in 1998, 61% in 1997 and 49% in 1996.
The assumed reinsurance business was sold in late 1996 resulting in the
continued decline in net premiums written.
36
<PAGE>
NONSTANDARD AUTOMOBILE
The net premiums written growth of 28.9% for Nonstandard Automobile in 1998
compared to 1997 is primarily due to the acquisitions of Strickland and Unisun,
premium growth in the monthly product business in California and the
northwestern United States , offset in part by rate reductions due to a
competitive market. Premium growth in California is primarily attributed to
enacted legislation requiring all drivers to maintain minimum liability
insurance.
The net premiums written growth of 30.3% for Nonstandard Automobile in 1997
compared to 1996 is due to newly-enacted legislation in the state of California
which requires all drivers to maintain minimum liability insurance effective
January 1997. This change in California law resulted in a 75% increase in the
Nonstandard Automobile's one-month product business to approximately $155
million in 1997.
PREMIUMS EARNED
The Company's premiums earned increased 10.7%, or $145.3 million, to $1,503.0
million in 1998 and increased 4.4%, or $56.9 million, to $1,357.7 million in
1997 from $1,300.8 million in 1996. Premiums earned reflect the recognition of
income from the changing levels of net premium writings.
INVESTMENT PERFORMANCE
<TABLE>
<CAPTION>
The pre-tax performance of the Company's investments, including net investment
income, net realized gains (losses) and net unrealized appreciation
(depreciation) is as follows:
(In millions, except for %) 1998 1997 1996
- --------------------------------------------------------------------------------------------
Year ended December 31:
<S> <C> <C> <C>
Net investment income ................................. $ 143.2 $ 164.9 $ 145.4
---------- ---------- ----------
Net realized gains:
Fixed maturities ................................... 12.5 4.0 2.1
Equity securities .................................. 40.0 43.8 22.1
---------- ---------- ----------
Total realized gains ............................ 52.5 47.8 24.2
---------- ---------- ----------
Net unrealized appreciation (depreciation) recorded in
stockholders' equity:
Fixed maturities - available for sale .............. (30.0) 38.9 (11.1)
Equity securities .................................. (50.4) 18.4 18.4
Net unrealized appreciation (depreciation) for
fixed maturities - held to maturity ................ 2.5 1.7 (5.3)
---------- ---------- ----------
Total unrealized appreciation (depreciation) .... (77.9) 59.0 2.0
---------- ---------- ----------
$ 117.8 $ 271.7 $ 171.6
========== ========== ==========
Investment yields on average portfolio:
Pre-tax ............................................ 6.0% 7.0% 6.9%
========== ========== ==========
After-tax .......................................... 4.7% 5.3% 5.4%
========== ========== ==========
Carrying value at December 31:
Fixed maturities and short-term investments ........ $ 1,859.2 $ 2,010.9 $ 1,858.0
Equity securities .................................. 510.9 438.5 361.7
Other long-term investments ........................ 116.2 94.3 90.1
---------- ---------- ----------
$ 2,486.3 $ 2,543.7 $ 2,309.8
========== ========== ==========
</TABLE>
37
<PAGE>
NET INVESTMENT INCOME
Pre-tax net investment income decreased by $21.7 million in 1998 compared to
1997 primarily due to lower earnings on limited partnership investments
accounted for on an equity basis, the continued shift in the fixed income
portfolio from taxable to tax-advantaged securities, which generally provide
lower income yields than taxable fixed income securities, and lower investment
yields. Additionally, investment yields declined from the reinvestment of the
proceeds of matured and called securities at declining rates during the year.
Net investment income was favorably affected by positive operating cash flow.
Net investment income increased by $19.5 million in 1997 compared to 1996
primarily due to a higher investment base and a slight increase in pre-tax
investment yields. The higher investment base for 1997 reflects the proceeds
from the issuance of $125 million of trust preferred securities in January 1997
and the effects of positive operating cash flow. These increases have been
offset in part by the July 1996 cash outlay of approximately $88.2 million for
the purchase of Guaranty National common shares.
Net investment income reflects limited partnership investment equity earnings of
$2.6 million in 1998, $17.1 million in 1997 and $16.0 million in 1996. The
decrease in limited partnership earnings in 1998 as compared to 1997 is due
primarily to a $14.1 million pre-tax investment loss recorded in the third
quarter of 1998. This loss was attributed to volatility and declines in the
financial markets during the third quarter of 1998 resulting in significant
declines in value of three of the Company's larger limited partnership
investments. The increase in limited partnership earnings for 1997 as compared
to 1996 is primarily attributable to favorable performance for a majority of the
limited partnership investments. Earnings (losses) from limited partnership
investments can vary considerably from year-to-year. The Company's long-term
experience with limited partnership investments has been quite favorable;
however, they represented only 4.5% and 3.6% of total investments at December
31, 1998 and 1997, respectively. The Company currently plans to modestly reduce
its limited partnership investments in 1999.
Fixed maturity investments, which the Company has both the positive intent and
the ability to hold-to-maturity, are recorded at amortized cost. Fixed maturity
investments, which may be sold in response to, among other things, changes in
interest rates, prepayment risk, income tax strategies or liquidity needs are
classified as available-for-sale and are carried at market value. At December
31, 1998 and 1997 fixed maturities and short-term investments comprised 74.2%
and 78.8%, respectively, of the Company's cash and investments. The effective
duration of the Company's fixed income investment portfolio was 5.0 years at
December 31, 1998.
The Company invests primarily in investment grade securities and strives to
enhance the average return of its portfolio through limited investment in a
diversified group of non-investment grade fixed maturity securities or
securities that are not rated. The risk of loss due to default is generally
considered greater for non-investment grade securities than for investment grade
securities because the former, among other things, are often subordinated to
other indebtedness of the issuer and are often issued by highly leveraged
companies. At December 31, 1998 and 1997, the Company's investment in
non-investment grade and non-rated fixed maturity securities were carried at
$208.7 million and $256.7 million, respectively. These investments represented a
total of 8.3% and 10.1% of cash and investments and 5.0% and 6.6% of total
assets at December 31, 1998 and 1997, respectively.
38
<PAGE>
The Company monitors the financial condition of the issuers of securities that
it owns. When conditions are deemed appropriate, the Company ceases to accrete
discounts, or accrue interest and dividends and, in cases where the value of
such investments is deemed to be other than temporarily impaired, recognizes
losses. The Company's non-investment grade securities are highly diversified,
with an average investment per issuer of approximately $1.7 million at December
31, 1998. The largest non-investment grade security had a carrying value of
$12.0 million at December 31, 1998.
REALIZED AND UNREALIZED INVESTMENT RESULTS
Net realized investment gains are $52.5 million, $47.8 million and $24.2 million
for 1998, 1997 and 1996, respectively. Realized investment gains (losses) vary
from period to period, depending on market conditions relative to the Company's
investment holdings, the timing of investment sales generating gains and losses,
the occurrence of events which give rise to other-than-temporary impairment of
investments, and other factors. Approximately 25% of the 1998 net realized
investment gains resulted from the sale of two investments in entities which
were acquired or taken public during the first quarter. In the fourth quarter of
1998, the Company recorded a $7.0 million realized loss in connection with the
pending sale of its investment in Intercargo. Excluding provisions for
other-than-temporary impairment, sales of equity securities have resulted in net
gains of $41.1 million, $44.2 million and $22.4 million and sales of fixed
maturity investments have resulted in net gains of $15.7 million, $6.0 million
and $3.2 million in 1998, 1997 and 1996, respectively. Realized investment gains
may be reduced by provisions for losses on securities deemed to be
other-than-temporarily impaired. Impairment provisions of $1.1 million, $0.4
million and $0.3 million for equity securities and $3.2 million, $2.0 million
and $1.1 million for fixed maturity investments were recognized in 1998, 1997
and 1996, respectively. Any such provision is based on available information at
the time and is made in consideration of the decline in the financial condition
of the issuers of such securities.
Net unrealized investment appreciation (depreciation) for equity securities and
fixed maturities classified as available-for-sale are recorded in stockholders'
equity, net of federal taxes. Unrealized investment appreciation (depreciation)
can vary significantly depending upon fluctuations in interest rates, changes in
credit spreads and in equity prices. For 1998, equity securities and fixed
maturities recorded in stockholders' equity had unrealized depreciation of $50.4
million and $30.0 million, respectively, after taking $52.5 million of realized
net gains. For 1997, equity securities and fixed maturities recorded in
stockholders' equity had unrealized appreciation of $18.4 million and $38.9
million, respectively, after taking $47.8 million of realized net gains. See
section titled "Market Risk of Financial Instruments" on pages 47-48.
39
<PAGE>
EXPENSES AND OTHER
OPERATING RATIOS
The following table sets forth certain ratios of insurance operating expenses to
premiums earned for the years ended December 31:
1998 1997 1996
----- ----- -----
Loss and loss adjustment expenses 67.9% 66.7% 67.9%
Policy acquisition costs and other
insurance expenses 31.0% 31.2% 30.1%
----- ---- ----
Total before policyholders' dividends 98.9% 97.9% 98.0%
Policyholders' dividends 1.6% 1.8% 1.8%
----- ---- ----
Combined ratio 100.5% 99.7% 99.8%
===== ==== ====
Loss and loss adjustment expenses ratio by segment:
Workers Compensation 57.5% 53.7% 58.8%
Specialty Commercial 74.0% 72.1% 71.3%
Nonstandard Automobile 69.1% 70.0% 71.3%
The loss ratio for Workers Compensation increased in 1998 compared to 1997 due
to the effects of competitive pricing pressure and a change in loss development
reflecting upward adjustments to initial reserve estimates for the 1997 and
prior accidents years. The benefit of EBI's service-oriented approach, working
with its customers to prevent losses and reduce claim costs, has partially
offset this impact. The loss ratio for Workers Compensation decreased in 1997
compared to 1996 due to favorable loss development and loss experience achieved
by EBI through its service-oriented approach.
The loss ratio for Specialty Commercial increased in 1998 compared to 1997
primarily due to $27.8 million of loss reserve strengthening recorded in 1998
related to business being exited in connection with an Orion Specialty
realignment. Excluding these charges, the loss ratio for Specialty Commercial
would have been 69.7% in 1998. Additionally, the loss ratio for Specialty
Commercial reflects reserve strengthening for the Company's pools and
associations, and for the assumed reinsurance business exited in late 1996.
These increases were partly offset by an improvement in DPIC's and McGee's loss
ratios in 1998 as compared to 1997.
The loss ratio for Specialty Commercial increased in 1997 compared to 1996
primarily due to losses from certain programs cancelled by Orion Specialty,
reserve strengthening for the Company's pools and associations and reinsurance
business, and higher estimates for losses and loss adjustment expenses for the
commercial automobile line of business written by Guaranty National. The 1997
loss ratio increase has been partly offset by the favorable effect of a change
in this segment's mix of business, particularly the lower premiums and losses
from the assumed reinsurance business that the Company exited in November 1996.
The loss ratio for Nonstandard Automobile improved in 1998 compared to 1997
primarily due to a decline in claims frequency and claims severity partly offset
by higher loss expenses. The improvement in the Nonstandard Automobile loss
ratio for 1997 compared to 1996 is primarily due to lower claims frequency. This
improvement has been partly offset by costs incurred to improve claim handling
and reduce insurance fraud.
40
<PAGE>
The ratios of policy acquisition costs and other insurance expenses to premiums
earned (the "expense ratio") are 31.0% in 1998, 31.2% in 1997, and 30.1% in
1996. Policy acquisition costs include direct costs, such as commissions,
premium taxes, and salaries that relate to and vary with the production of new
and renewal business. These costs are deferred and amortized as the related
premiums are earned, subject to a periodic test for recoverability. The increase
in the expense ratio in 1997 as compared to 1996 is attributable to the
Company's continued investment in building its loss prevention competencies and
the costs of expanding in new territories and changing the EBI office
operations. Additionally, the 1997 increase is the result of higher commissions
at EBI and Orion Specialty including a change in reinsurance in 1996, which
provides for lower ceding commissions. The ratio of policyholders' dividends to
premiums earned (the "dividend ratio") was 1.6% in 1998 and 1.8% in both 1997
and 1996. The decrease in the dividend ratio for 1998 as compared to 1997 was
due to a change in business mix at Orion Specialty resulting in a lower
percentage of policies paying dividends to policyholders.
Provisions for losses and loss adjustment expenses include development of loss
and loss adjustment expense reserves relating to prior accident years, which
increased the calendar year combined ratio by 2.3 percentage points in 1998 and
0.7 percentage points in both 1997 and 1996. During 1998, the Company's loss
ratio was unfavorably affected by loss development in exited programs at Orion
Specialty, the assumed reinsurance business discontinued in 1996, pools and
associations (other than from McGee), and workers compensation line of business.
In the third quarter of 1998, the Company recorded $17.0 million of loss
reserves pertaining to prior accident years for business being exited in
connection with the Orion Specialty realignment. Excluding this charge, adverse
development of prior accident years increased the calendar year combined ratio
by 1.1 percentage points in 1998. During 1997, the Company's loss ratio was
unfavorably affected by loss development in the pools and associations, assumed
reinsurance business discontinued in 1996 and cancelled program business, partly
reduced by favorable development in the workers compensation insurance line of
business.
The Company's environmental claims principally relate to asbestos and hazardous
waste, arising from certain liability business written prior to the mid 1980's,
which business was never a major element of the Company's operations.
Environmental claims are also received from certain pools and associations where
reserves are established based on information reported to the Company by the
managers of those pools and associations. The Company discontinued its
participation in these reinsurance pools and associations in the mid 1980's.
Establishing reserve liabilities for environmental claims is subject to
significant uncertainties that make reserve estimation difficult. Judicial
decisions have tended to expand insurance coverage beyond the intent of the
policies. The disposition of such claims often requires lengthy and costly
litigation. Uncertainties as to required clean-up remedies and difficulties in
identifying the responsible parties add further to the complexity of reserve
estimation for these claims. In recent years, the Company has intensified its
efforts to settle and close environmental claims. In recognition of these
efforts, reserves have also been increased to provide for the costs related to
settling claims. To help minimize the cost of losses and claims, the Company
maintains a dedicated environmental claims staff, which administers and
continually evaluates each claim and its defense and settlement possibilities.
In 1998, 1997 and 1996, the Company paid $7.5 million, $6.8 million and $4.8
million, respectively, for the costs of defending and settling such claims.
Claim counts have been aggregated by year of coverage for each occurrence for
which policyholders are being defended, and often include numerous claimants.
As of December 31, 1998 and 1997, the Company has environmental claims-related
loss and loss adjustment expense reserves, net of reinsurance recoverables, of
$65.7 million and $67.9 million, respectively. Claim counts are 515 and 551 at
December 31, 1998 and 1997, respectively, for direct business written by the
Company that excludes pools and associations. Following industry practice,
counts for asbestos claims are generally established for each insured for each
policy. Counts for environmental claims are based upon each site. In estimating
liabilities for environmental-related claims, the Company considers all
pertinent information, as it becomes available. The net reserve for
environmental claims and IBNR increased $10.9 million in 1997 primarily due to
higher claims reported to the Company by certain reinsurance pools and
associations, which is the basis of establishing such reserve, and higher loss
reserve estimates.
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Management believes that the Company's reserves for loss and loss adjustment
expenses make reasonable and sufficient provision for the ultimate cost of all
losses on claims incurred. However, there can be no assurance that changes in
loss trends will not result in additional development of prior years' reserves
in the future. Variability in claim emergence and settlement patterns and other
trends in loss experience can result in future development patterns different
than expected. The Company believes that any such development will continue at
the low levels experienced in recent years, considering actions that have been
taken to increase reserving levels, improve underwriting standards and emphasize
loss prevention and control. The Company's loss ratios in recent years,
including development of prior years' losses, have compared favorably with loss
ratios experienced by the industry.
The Company limits both current losses and future development of losses by
ceding business to reinsurers. The Company continually monitors the financial
strength of its reinsurers and, to the Company's knowledge, has no material
exposure with regard to potential unrecognized losses due to reinsurers having
known financial difficulties.
INTEREST EXPENSE
Interest expense was $19.4 million in 1998 and $24.7 million for both 1997 and
1996, decreasing 21.6% in 1998 compared to 1997. Interest expense declined in
1998 as a result of the repayment of the $100 million bank indebtedness of
Guaranty National in February 1998 with proceeds from the issuance of the
Company's 7.701% Trust Preferred Securities.
OTHER EXPENSES
Other expenses were $44.0 million, $45.0 million and $43.0 million in 1998, 1997
and 1996, respectively. During the fourth quarter of 1998, the Company closed
its corporate office in New York City and integrated the investment function
into the corporate office located in Farmington, Connecticut. These actions
resulted in a $2.3 million pre-tax charge for severance and office closure
expenses.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATE
Equity in earnings (losses) of affiliate represents earnings (losses) from the
Company's 26% investment in Intercargo and was $(0.7) million in 1998, $8.6
million in 1997 and $(0.4) million in 1996. The Company has agreed to sell its
investment in Intercargo, which is expected to close late in the first quarter
or early in the second quarter of 1999 pursuant to Intercargo's merger with X.
L. America, Inc., a subsidiary of EXEL Limited. The Company recorded its share
of Intercargo's results in the subsequent quarter as Intercargo reports its
quarterly earnings after the Company reports its earnings. In 1997, equity in
earnings of affiliates reflected a pre-tax gain of $7.0 million from
Intercargo's sale of Kingsway Financial Services.
FEDERAL INCOME TAXES
Federal income taxes, including tax benefits from trust preferred securities,
and the related effective tax rates are $34.3 million (25.0%) for 1998, $42.8
million (25.8%) for 1997 and $32.0 million (25.2%) for 1996. The Company's
effective tax rates are less than the statutory tax rate of 35% primarily
because of income derived from tax-advantaged securities.
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In October 1996 the Internal Revenue Service ("IRS") completed an examination of
the Company's federal income tax returns through 1992. Certain tax benefits from
tax attributes existing at the date of the Company's reorganization in 1976 were
not recognized pending completion of the IRS examination. Accordingly, the
Company recorded a credit to capital surplus in 1996 for tax benefits of $11.9
million with respect to the 1976 reorganization. The recording of this credit
had no impact on the Company's earnings.
MINORITY INTEREST EXPENSE
Minority interest expense in trust preferred securities was $12.8 million for
1998 and $6.9 million for 1997. Minority interest expense in trust preferred
securities represents the financing cost, after the federal income tax benefit,
on Orion's 8.73% and 7.701% Trust Preferred Securities. The increase in 1998 and
1997 reflects minority interest expense associated with the issuance of the
7.701% and 8.73% Trust Preferred Securities in February 1998 and January 1997,
respectively.
Minority interest expense in subsidiary net earnings of $7.0 million in 1997 and
$8.7 million in 1996 was recorded for the after-tax portion of Guaranty
National's earnings attributable to stockholders of Guaranty National other than
the Company. Guaranty National became a wholly-owned subsidiary of the Company
in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the years ended December 31 was as follows:
(In millions) 1998 1997 1996
- -----------------------------------------------------------------
Cash flows:
Operating activities ....... $ 29.9 $ 100.0 $ 167.7
Investing activities ....... 11.3 (207.4) (132.4)
Financing activities ....... (32.5) 105.1 (27.3)
-------- -------- --------
$ 8.7 $ (2.3) $ 8.0
======== ======== ========
The decrease in operating cash flow for 1998 and 1997 is primarily the result of
higher payments for losses, policy acquisition costs, federal income taxes (in
1998) and minority interest from trust preferred securities. The higher loss
payments reflect both an acceleration of claims settlement in two of our
operations during 1998 and loss payments related to the assumed reinsurance
business exited by the Company. Higher payments for policy acquisition costs,
are related to the Company's current rate of growth. Federal income tax payments
for 1998 include $8.5 million of federal tax payments related to 1997 and a
$20.0 million federal tax refund that was received by the Company in the first
quarter of 1999. Partially offsetting these increased cash outflows are higher
premiums collected, reflective of the Company's current rate of growth, as well
as higher investment income collected.
Cash is used in or provided by investment activities primarily for purchases or
from sales and maturities of investments, for acquisition activities, and for
purchases of property and equipment. Investment purchases are funded by
maturities and sales of investments, as well as by the net cash from operating
cash flows after cash provided by or used in financing activities. Cash used for
acquisitions totaled $80.1 million in 1998 and $132.6 million in 1997 (excluding
acquired cash of $17.5 million in 1998 and $1.7 million in 1997). Cash used in
acquisition activities (excluding cash acquired) in 1998 included $39.7 million
for purchase of Strickland's nonstandard personal automobile insurance business,
$32.4 million for purchase of Grocers, $5.1 million related to settlement of
purchase price contingency for Guaranty National's acquisition of Viking
Insurance Company of Wisconsin in 1995, and $2.9 million to tender the remaining
shares of Guaranty National related to the December 1997 purchase. In September
1998, the Company sold Colorado Casualty providing cash proceeds of $13.1
million (net of cash sold with Colorado Casualty and before taxes). Cash used in
acquisition activities (excluding cash acquired) in 1997 included $104.4 million
for the purchase of Guaranty National common stock, $26.2 million for the
purchase of Unisun, and a $2.0 million purchase price deposit for the
acquisition of Strickland.
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<PAGE>
Cash used in financing activities included repayment of $100 million bank
indebtedness of Guaranty National from net proceeds of the 7.701% Trust
Preferred Securities issued in February 1998. The issuance of trust preferred
securities by the Company provided $121.9 million and $123.0 million of cash in
1998 and 1997, respectively. During 1998, the Company used $8.0 million from
unsecured borrowings under its bank credit facility to fund uses of cash and
repaid $9.4 million of assumed bank debt related to the acquisition of
Strickland. Cash used in financing activities also includes dividend payments,
scheduled debt repayments and payments related to the Company's common stock
repurchase program. Orion increased the quarterly dividend rate on its common
stock by 12.5% and 14.3% in the second quarters of 1998 and 1997, respectively.
Orion's uses of cash consist of debt service, dividends to stockholders and
overhead expenses. These cash uses are funded from existing available cash,
financing transactions and receipt of dividends, reimbursement of overhead
expenses, debt service costs from loans due from subsidiaries, and amounts in
lieu of federal income taxes from Orion's insurance subsidiaries. Orion has
received $55.2 million, $42.8 million and $35.3 million in dividends, $8.3
million, $8.1 million and $7.4 million for overhead expenses and federal tax
payments of $20.8 million, $9.5 million and $7.5 million from its insurance
subsidiaries in 1998, 1997 and 1996, respectively. Payments of dividends by
Orion's insurance subsidiaries must comply with insurance regulatory limitations
concerning stockholders' dividends and capital adequacy. State insurance
regulators have broad discretionary authority with respect to limitations on the
payment of dividends by insurance companies. Limitations under current
regulations are well in excess of Orion's cash requirements.
Orion's insurance subsidiaries maintain liquidity in their investment portfolios
substantially in excess of that required to pay claims and expenses. The
insurance subsidiaries held cash and short-term investments of $242.4 million
and $160.4 million at December 31, 1998 and 1997, respectively. The consolidated
policyholders' surplus of Orion's insurance subsidiaries was $732.1 million and
$789.0 million at December 31, 1998 and 1997, respectively. The Company's
statutory operating leverage ratios of trailing twelve months net premiums
written to policyholders' surplus was 2.1:1 at December 31, 1998 and 1.8:1 at
December 31, 1997.
On July 8, 1998 the Company entered into a five year credit agreement with a
group of banks which provides for unsecured borrowings up to $150 million, of
which $8.0 million was outstanding at December 31, 1998. The Company intends to
use the credit facility for general corporate purposes, which may include
acquisitions. Borrowings under the credit agreement bear interest at LIBOR
(London Interbank Offered Rate) plus a margin based upon the Company's credit
ratings. The credit agreement requires the Company to maintain certain defined
financial covenants including a maximum debt to total capitalization ratio and a
minimum combined statutory surplus. Also, the credit agreement limits the
Company's ability to incur secured indebtedness or certain contingent
obligations except for indebtedness secured by liens specifically permitted by
the credit agreement and additional secured indebtedness with a principal amount
not exceeding a defined percentage of the Company's consolidated net worth. The
Company is in compliance with the terms of this credit agreement. Management
does not believe that the credit agreement's covenants or limitations unduly
restrict the Company's operations or limit Orion's ability to acquire additional
indebtedness.
44
<PAGE>
The terms of Orion's indentures for its $100 million of 7.25% Senior Notes due
2005 and its $110 million of 9.125% Senior Notes due 2002 limit the amount of
liens and guarantees by the Company and its ability to incur secured
indebtedness without equally and ratably securing the senior notes. The senior
notes are non-callable to maturity. Management does not believe that these
limitations unduly restrict the Company's operations or limit Orion's ability to
pay dividends on its stock. At December 31, 1998 the Company is in compliance
with the terms of its senior note indentures. Management believes that the
Company continues to have substantial sources of capital and liquidity from the
capital markets and bank borrowings.
On January 13, 1997 Orion issued $125 million of 8.73% Junior Subordinated
Deferrable Interest Debentures due January 1, 2037 (the "8.73% Debentures") to
Orion Capital Trust I ("Trust I"), a Delaware statutory business trust sponsored
by Orion. Trust I simultaneously sold $125 million of 8.73% capital securities
(the "8.73% Trust Preferred Securities") which have substantially the same terms
as the 8.73% Debentures. The net proceeds from the sale of the 8.73% Trust
Preferred Securities were used in part for the acquisition of Guaranty National
common stock in December 1997. The 8.73% Trust Preferred Securities may be
redeemed without premium on or after January 1, 2007.
On February 2, 1998 Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest Debentures due April 15, 2028 (the "7.701% Debentures") to
Orion Capital Trust II ("Trust II"), a Delaware statutory business trust
sponsored by Orion. Trust II then sold $125 million of 7.701% capital securities
(the "7.701% Trust Preferred Securities"), which have substantially the same
terms as the 7.701% Debentures. Approximately $100 million of net proceeds from
the sale of the 7.701% Trust Preferred Securities were used to repay bank
indebtedness of Guaranty National in February 1998. The 7.701% Trust Preferred
Securities are non-callable to maturity.
The 8.73% and 7.701% Trust Preferred Securities are subordinated to all
liabilities of the Company. The Company may defer interest distributions on
these capital securities; however, during any period when such cumulative
distributions have been deferred, Orion may not declare or pay any dividends or
distributions on its common stock.
The Company issued a 2-for-1 split of its common stock on July 7, 1997 to
shareholders of record on June 23, 1997. The Company has repurchased 836,100
shares, 42,916 shares and 482,228 shares of its common stock at an aggregate
cost of $35.6 million, $1.5 million and $11.2 million under the Company's stock
repurchase program in 1998, 1997 and 1996, respectively. The Company's Board of
Directors increased authorization for purchases of its common stock by an
additional $75 million in 1998. The remaining stock purchase authorization was
$42.5 million at March 1, 1999.
LEGAL PROCEEDINGS
Orion and its subsidiaries are routinely engaged in litigation incidental to
their businesses. Management believes that there are no significant legal
proceedings pending against the Company which, net of reserves established
therefore, are likely to result in judgments for amounts that are material to
the financial condition, liquidity or results of operations of Orion and its
consolidated subsidiaries, taken as a whole.
45
<PAGE>
YEAR 2000 COMPLIANCE
The "Year 2000 problem" exists because many computer programs which companies
use rely on only the last two digits to refer to a particular year. As a result,
these computer programs may interpret the Year 2000 as 1900. If not corrected,
computer software may fail or create erroneous results. The potential impact of
the Year 2000 problem on business, financial and governmental entities
throughout the world is not known and, if not timely corrected, may broadly
affect the national economy in which we operate.
The Company concluded that as an extensive user of technology, it has a material
exposure to the Year 2000 problem and has taken steps to assess and address that
exposure. In response to this issue, the Company has inventoried and assessed,
for all its operations and locations, its insurance policy issuance, billing and
collection, claims paying, and other operational systems, along with the
hardware and software used in its computing facilities, embedded chips used in
its physical structures, third party data-exchanges, and reliance on external
business relations. This work has been carried out by the Company through
central coordination supported by dedicated teams working at each Company site.
Progress has been reviewed regularly by senior management. The process by which
the Company is managing its Year 2000 efforts has also been reviewed by
independent consultants.
The Company began addressing its computer programs in 1996 at the locations
where its most significant technology concentration exists. Similar work
commenced shortly thereafter at other locations.
As of December 31, 1998, the Company had completed approximately 95% of its
scheduled remediation of critical production systems for processing Year 2000
dates. This places the Company on or ahead of its plan for meeting Year 2000
processing needs. Non-critical systems will be tested and critical systems will
be re-tested during 1999. The total costs to test or modify these existing
systems, which include both internal and external costs of programming and
testing, is estimated to be approximately $19.4 million, of which $15.8 million
has been expensed ($2.4 million through 1997 and $13.4 million in 1998).
With a timely start on correcting the Year 2000 problem, the Company has been
able to address this potential exposure. This has allowed the Company to
continue replacement of outdated systems with newer versions offering greater
functionality and cost efficiencies. The Company completed replacing its
financial, personnel, and payroll systems in 1998 and began phasing in new
integrated processing systems for certain of its operations in 1999. The total
cost for these major technology improvement projects are estimated at
approximately $13.1 million of which $11.7 million had been capitalized through
December 31, 1998. Additional technology projects are planned for 1999 as Year
2000 projects wind down. All costs are being funded through operating cash
flows.
In addition to addressing its own hardware, software and processing exposure,
the Company has been engaged since 1996 in a process of identifying and
prioritizing critical suppliers and customers at the direct interface level, and
communicating with them about their plans and progress in addressing the Year
2000 problem.
The Company has mailed letters to significant vendors and service providers and
has verbally communicated with many strategic customers to determine the extent
to which interfaces with such entities are vulnerable to Year 2000 problems and
whether the products and services purchased from or by such entities are Year
2000 compliant. As of December 31, 1998, the Company had received responses from
approximately 65% of the third parties of whom it has inquired and 90% of the
companies that have responded have provided written assurances that they expect
to address all their significant Year 2000 problems on a timely basis.
46
<PAGE>
Evaluations of the most critical third parties have been initiated. These
evaluations will be followed by the development of contingency plans, which have
been prepared for third parties having near term Year 2000 impact or are being
developed for other third parties, with completion during the first quarter of
1999. The Company believes that this aspect of its Year 2000 effort was on
schedule at December 31, 1998.
A follow-up mailing to significant vendors and service providers that did not
initially respond, or whose responses were deemed unsatisfactory by the Company,
is expected to be completed by March 31, 1999. The Company will also expand its
survey to vendors and service providers who do not directly interface with the
Company's systems.
The Company presently believes that the Year 2000 problems will not pose
significant operational problems for the Company. However, if all Year 2000
problems are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others.
The Company is unable to determine at this time whether the consequences of
counter-parties Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The possibility exists
that a portion of its third-party distribution channels may not be ready, that
communications with its agents could be disrupted, that underwriting data, such
as motor vehicle reports, could be unobtainable, that the claim settling process
could be delayed or that the frequency and severity of losses may increase due
to external factors. Where concern appears justified about an aspect of
readiness, contingency plans have been prepared or are being developed. However,
there can be no assurance that unanticipated Year 2000 issues of other entities
will not have a material adverse impact on the Company's systems or results of
operations.
This is a Year 2000 Readiness Disclosure statement. Readers are cautioned that
forward-looking statements contained in "Year 2000 Compliance" should be read in
conjunction with the Company's disclosures under the heading: "Forward-Looking
Statements."
MARKET RISK OF FINANCIAL INSTRUMENTS
The Company is subject to market risk arising from the potential change in the
value of its various financial instruments. These changes may be due to
fluctuations in interest rates, and changes in credit spreads and in equity
prices. The level of market risk is influenced by many factors, such as
volatility, correlation and liquidity. Potential gains or losses from changes in
market conditions can be estimated through statistical models that attempt to
predict within a specified confidence level the " value at risk" based on
historical price and volatility movements. For example, if historical
probabilities indicate that the change in the value of a fixed income security
would not be expected to exceed $1 million with a 95 percent probability within
a given time period, then the security's value at risk at a 95 percent
confidence level for that period is $1 million.
The major components of market risk affecting the Company are interest rate and
equity risk. The Company has a fixed income investment portfolio, which includes
non-redeemable preferred stocks and short term investments, with a market value
of $2,139.8 million at December 31, 1998 that is subject to changes in value due
to changes in market interest rates. Within the fixed income portfolio, certain
mortgage-backed and asset-backed securities ($145.0 million of value at December
31, 1998) are exposed to accelerated prepayment risk generally caused by
interest rate movements. Should interest rates decline, mortgage holders are
more likely to refinance existing mortgages at lower rates. Acceleration of
repayments could unfavorably affect future investment income, if reinvestment of
the cash received from repayments is in lower yielding securities.
Statistically, the Company's estimated prepayment risk was not significant at
December 31, 1998.
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<PAGE>
In addition to interest rate risk, the Company's common equity portfolio of
$242.4 million at December 31, 1998 is subject to changes in value based on
changes in equity prices in United States markets. The Company's common equity
portfolio is highly correlated with the S&P 500 and Russell 2000 indices in
equal amounts.
The Company's portfolio includes investments in limited partnerships ($111.1
million at December 31, 1998) that generally provide higher investment returns,
but also carries higher volatility and market risk compared to the Company's
other investments. Changes in the market value of limited partnership
investments can vary considerably from year-to-year. However, the long-term
performance of the Company's limited partnership investments has been favorable.
The effect of limited partnership investments is not included in the value at
risk disclosure shown below.
The Company's exposure to foreign exchange risk arising from the possibility
that changes in foreign currency exchange rate will impact the value of
financial instruments is not significant.
The Company manages its total investments, so that at all times, there are fixed
income securities that are adequate in amount and duration to meet the cash
requirements of current operations and longer term liabilities, as well as to
meet insurance regulatory requirements with respect to investments under
specific state insurance laws. To the extent that there are funds available for
investment beyond these requirements, the investment objective for such funds is
to maximize total return within a prudent level of risk, taking into account the
potential impact on the volatility of reported earnings and reserves. The
Company shall adjust investment risk to offset or complement insurance risk
based upon total corporate risk tolerance. The Company has investment guidelines
for fixed income and equity portfolios covering portfolio characteristics,
permitted investments, diversification and performance benchmarks.
Value at risk estimates are presented in the table below and represent the
potential after-tax change in value of the Company's invested assets, which, to
the extent unrealized, would generally be included directly in stockholders'
equity. Caution should be used in evaluating the Company's overall market risk
from the information below, since actual results could differ materially because
the information was developed using estimates and assumptions as described in
this section. These estimates exclude any potentially offsetting effect
resulting from movements in the economic value of the Company's liabilities,
most importantly, loss reserves and reinsurance recoverables on unpaid losses.
The estimates shown in the table were calculated using Monte Carlo simulation
involving 5,000 stochastic paths with a 95 percent confidence level based on
weekly correlation's and volatilities based upon observed values for 1991 -
1998. Mean assumptions included no change in weekly interest rates and an 8.0%
annual appreciation for the common equity portfolio. The Company's total value
at risk includes a diversification benefit since interest rate and equity risks
are only partially correlated.
The overall after-tax value at risk for the Company at December 31,
1998 was as follows:
(In millions)
- ---------------------------------------------
Interest rate risk $ 19.5
Equity risk 6.0
Diversification benefit (9.8)
---------
Total $ 15.7
=========
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ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which companies are to record gains or losses resulting from changes in the
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective for the Company's
financial statements beginning January 1, 2000, with early adoption permitted.
The Company is currently evaluating the impact of the adoption of this statement
and the potential effect on its financial position or results of operations.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement provides
guidance on accounting for costs of computer software developed or obtained for
internal use including when incurred costs are and are not eligible for
capitalization. This statement is effective for 1999 financial statements with
early adoption permitted. The Company is currently evaluating the impact of the
adoption of this statement and the potential effect on its financial position
and result of operations.
FORWARD-LOOKING STATEMENTS
All statements made in this annual report that do not reflect historical
information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors include, among other
things, (i) general economic and business conditions; (ii) interest rate
changes; (iii) competition and regulatory environment in which the Company
operates; (iv) claims frequency; (v) claims severity; (vi) medical cost
inflation; (vii) increases in the cost of property repair; (viii) the number of
new and renewal policy applications submitted to the Company; (ix) Year 2000
problems and (x) other factors over which the Company has little or no control.
The Company's expectation that its plan for Year 2000 Compliance will be
completed on schedule depends, in large part, on the Company's own efforts and
expenditures on hardware, software and systems, which is on schedule as to those
exposures which the Company has been able to identify. However, Year 2000
problems could also arise because of unanticipated non-compliance on the part of
vendors, agents, customers and other third parties including governmental
entities. Significant Year 2000 problems could materially and adversely affect
future performance and results of operations. The Company disclaims any
obligation to update or to publicly announce the impact of any such factors or
any revisions to any forward-looking statements to reflect future events or
developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See section "Market Risk of Financial Instruments" on pages 47- 48.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Orion Capital Corporation is responsible for the
consolidated financial statements and the information included therein. The
consolidated financial statements are fairly presented and have been prepared in
accordance with generally accepted accounting principles appropriate in the
circumstances, and, where necessary, include amounts based on management's
informed estimates and judgments.
The Company has a system of internal control which it believes provides
reasonable assurance that assets are safeguarded from loss or unauthorized use,
that transactions are recorded in accordance with management's policies and that
the financial records are reliable for preparing financial statements. The
system of internal control includes written policies and procedures that are
communicated to all appropriate personnel and updated as necessary.
Compliance with the system of internal control is continuously maintained
and monitored by management. The internal audit staff of the Company evaluates
and reports on the adequacy of and adherence to these controls, policies and
procedures. In addition, as part of its audit of the consolidated financial
statements, Deloitte & Touche LLP, the independent auditors for the Company,
perform an evaluation of the system of internal control to the extent they
consider necessary to express an opinion on the consolidated financial
statements. Both the internal auditors and Deloitte & Touche LLP provide
recommendations concerning the system of internal control, and management takes
actions, which are believed to be appropriate responses to these
recommendations.
The Audit and Information Services Committee of the Board of Directors is
comprised of independent directors, and has general responsibility for oversight
of financial controls and audit activities of the Company and its subsidiaries.
The Audit and Information Services Committee, which reports to the Board,
annually reviews the qualifications of the independent auditors and meets
periodically with them, the internal auditors and management to review the plans
and results of the audits. Both internal and independent auditors have free
access to the Audit and Information Services Committee, without members of
management present, to discuss the adequacy of the system of internal control
and any other matters which they believe should be brought to the attention of
the Committee.
W. Marston Becker Michael L. Pautler
Chairman & Chief Executive Officer Senior Vice President &
Chief Financial Officer
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Orion Capital Corporation
Farmington, Connecticut
We have audited the accompanying consolidated balance sheets of Orion
Capital Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a)2. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedules based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Orion Capital Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 22, 1999
(except for Note 20, as to
which the date is March 11, 1999)
51
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
----------------------
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Assets:
Investments: -
Fixed maturities, at amortized cost
(market $272.7 - 1998 and $322.4 - 1997) .......... $ 260.6 $ 312.8
Fixed maturities, at market (amortized cost
$1,305.5 - 1998 and $1,395.4 - 1997) .............. 1,349.9 1,469.8
Common stocks, at market (cost $200.3 -
1998 and $163.0 - 1997) ........................... 242.4 245.4
Non-redeemable preferred stocks, at market
(cost $269.1 - 1998 and $183.6 - 1997) ............ 268.5 193.1
Other long-term investments .......................... 116.2 94.3
Short-term investments ............................... 248.7 228.3
---------- ----------
Total investments .............................. 2,486.3 2,543.7
Cash ................................................. 18.0 9.3
Accrued investment income ............................ 27.0 29.6
Investment in affiliate .............................. 22.8 31.3
Accounts and notes receivable ( less allowance for
doubtful accounts $3.4 - 1998 and $4.1 - 1997) .... 217.2 189.3
Reinsurance recoverables and prepaid reinsurance ..... 801.5 622.2
Deferred policy acquisition costs .................... 155.6 147.1
Property and equipment ( less accumulated depreciation
$49.0 - 1998 and $35.9 - 1997) .................... 95.4 70.8
Excess of cost over fair value of net assets acquired
( less accumulated amortization $33.6 - 1998
$27.4 - 1997) ..................................... 167.7 140.0
Deferred federal income taxes ........................ 26.7 1.0
Other assets ......................................... 146.2 99.8
---------- ----------
Total assets ................................... $ 4,164.4 $ 3,884.1
========== ==========
[FN]
See Notes to Consolidated Financial Statements
</FN>
52
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------
(In millions, except for share amounts) 1998 1997
- -------------------------------------------------------------------------------
Liabilities:
Policy liabilities: -
Losses ................................................$ 1,602.1 $ 1,476.4
Loss adjustment expenses .............................. 415.6 395.3
Unearned premiums ..................................... 564.0 551.6
Policyholders' dividends .............................. 17.9 20.5
--------- ---------
Total policy liabilities ................................ 2,599.6 2,443.8
Notes payable ........................................... 217.4 310.2
Other liabilities ....................................... 370.1 282.0
--------- ---------
Total liabilities ....................................... 3,187.1 3,036.0
--------- ---------
Commitments and Contingencies (Notes 13 and 14)
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
the junior subordinated debentures of the Company .... 250.0 125.0
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares; issued
and outstanding - none
Common stock, $1 par value; authorized 50,000,000
shares; issued 30,675,300 shares ..................... 30.7 30.7
Capital surplus ......................................... 149.6 152.1
Retained earnings ....................................... 553.2 469.5
Accumulated other comprehensive income .................. 58.5 109.2
Treasury stock, at cost (3,505,091 shares -
1998 and 3,069,756 shares - 1997)...................... (57.8) (34.3)
Deferred compensation on restricted stock ............... (6.9) (4.1)
--------- ---------
Total stockholders' equity .......................... 727.3 723.1
--------- ---------
Total liabilities and stockholders' equity ..........$ 4,164.4 $ 3,884.1
========= =========
[FN]
See Notes to Consolidated Financial Statements
</FN>
53
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
Year Ended December 31,
---------------------------
(In millions, except for per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Premiums earned ................................. $ 1,503.0 $ 1,357.7 $ 1,300.8
Net investment income ........................... 143.2 164.9 145.4
Realized investment gains ....................... 52.5 47.8 24.2
Other income .................................... 18.0 20.2 23.1
--------- --------- ---------
Total revenues ................................. 1,716.7 1,590.6 1,493.5
--------- --------- ---------
Expenses:
Losses incurred ................................. 800.6 701.3 694.5
Loss adjustment expenses ........................ 219.9 204.2 188.5
Amortization of deferred policy acquisition costs 417.9 387.2 363.6
Other insurance expenses ........................ 48.0 36.6 27.9
Dividends to policyholders ...................... 24.8 24.0 23.6
Interest expense ................................ 19.4 24.7 24.7
Other expenses .................................. 44.0 45.0 43.0
Restructuring expenses and other (Note 3) ....... (15.3) -- --
--------- --------- ---------
Total expenses ................................. 1,559.3 1,423.0 1,365.8
--------- --------- ---------
Earnings before equity in earnings (loss) of
affiliate, federal income taxes and minority
interest expense .............................. 157.4 167.6 127.7
Equity in earnings (loss) of affiliate .......... (0.7) 8.6 (0.4)
Earnings before federal income taxes and --------- --------- ---------
minority interest expense ..................... 156.7 176.2 127.3
Federal income taxes ............................ 41.1 46.5 32.0
Minority interest expense:
Subsidiary trust preferred securities, net
of federal income taxes ..................... 12.8 6.9 --
Subsidiary net earnings ....................... -- 7.0 8.7
--------- --------- ---------
Net earnings ................................... $ 102.8 $ 115.8 $ 86.6
========= ========= =========
Net earnings per common share:
Basic ....................................... $ 3.78 $ 4.24 $ 3.16
========= ========= =========
Diluted ..................................... $ 3.69 $ 4.15 $ 3.12
========= ========= =========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements
</FN>
54
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year Ended December 31,
--------------------------------------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Common Stock:
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ 30.7 $ 15.3 $ 15.3
Stock issued in 2-for-1
common stock split - 15.4 -
------- ------- -------
Balance, end of period $ 30.7 $ 30.7 $ 15.3
======= ======= =======
Capital Surplus:
Balance, beginning of period $ 152.1 $ 158.6 $ 146.7
Exercise of stock options and net
issuance of restricted stock (2.5) 0.5 -
Acquisition of Guaranty National - 8.4 -
Recognition of pre-reorganization
federal income tax benefits - - 11.9
Stock issued in 2-for-1
common stock split - (15.4) -
------- ------- -------
Balance, end of period $ 149.6 $ 152.1 $ 158.6
======= ======= =======
Retained Earnings:
Balance, beginning of period $ 469.5 $ 370.8 $ 298.5
Net earnings 102.8 $ 102.8 115.8 $ 115.8 86.6 $ 86.6
------- ------- -------
Dividends declared (19.1) (17.1) (14.3)
------- ------- -------
Balance, end of period $ 553.2 $ 469.5 $ 370.8
======= ======= =======
Accumulated Other
Comprehensive Income:
Balance, beginning of period $ 109.2 $ 70.1 $ 59.3
Unrealized investment
gains (losses), net of taxes (52.4) 41.3 9.0
Unrealized foreign exchange
translation gains (losses), net of taxes 1.7 (2.2) 1.8
------- ------- -------
Other comprehensive income (loss) (50.7) (50.7) 39.1 39.1 10.8 10.8
------- ------- ------- ------- ------- -------
Comprehensive income $ 52.1 $ 154.9 $ 97.4
======= ======= =======
Balance, end of period $ 58.5 $ 109.2 $ 70.1
======= ======= =======
Treasury Stock:
Balance, beginning of period $ (34.3) $ (35.0) $ (26.5)
Exercise of stock options and net
issuance of restricted stock 13.4 3.2 2.7
Common stock issued pursuant to
employee stock purchase plan 1.1 - -
Acquisition of treasury stock (38.0) (2.5) (11.2)
------- ------- -------
Balance, end of period $ (57.8) $ (34.3) $ (35.0)
======= ======= =======
Deferred Compensation on
Restricted Stock:
Balance, beginning of period $ (4.1) $ (3.1) $ (2.3)
Net issuance of restricted stock (4.3) (1.9) (1.8)
Amortization of deferred
compensation on restricted stock 1.5 0.9 1.0
------- ------- -------
Balance, end of period $ (6.9) $ (4.1) $ (3.1)
======= ======= =======
</TABLE>
[FN]
See Notes to Consolidated Financial Statements
</FN>
55
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Premiums collected ..................................... $ 1,521.9 $ 1,364.5 $ 1,330.3
Net investment income collected ........................ 145.7 140.1 127.1
Losses and loss adjustment expenses paid ............... (1,009.7) (892.1) (794.9)
Policy acquisition costs paid .......................... (456.5) (401.1) (387.7)
Federal income tax payments ............................ (57.1) (28.4) (30.3)
Dividends paid to policyholders ........................ (27.5) (26.0) (20.1)
Interest paid .......................................... (20.5) (23.8) (24.1)
Payments on trust preferred securities ................. (17.6) (5.1) --
Other payments ......................................... (48.8) (28.1) (32.6)
---------- ---------- ----------
Net cash provided by operating activities .............. 29.9 100.0 167.7
---------- ---------- ----------
Cash flows from investing activities:
Sales of fixed maturities available-for-sale ........... 1,014.5 308.3 250.9
Sales of equity securities ............................. 447.9 199.7 153.2
Maturities of fixed maturity investments
available-for-sale .................................. 144.5 100.4 144.2
Maturities of fixed maturity investments
held-to-maturity .................................... 60.5 20.1 34.6
Investments in fixed maturities
available-for-sale .................................. (1,005.0) (595.9) (449.5)
Investments in equity securities ....................... (533.1) (204.1) (83.4)
Investments in fixed maturities
held-to-maturity .................................... -- (14.3) (8.6)
Net sales (purchases) of short-term investments ........ (18.5) 108.5 (78.1)
Acquisition of businesses, net of cash acquired ........ (62.6) (130.9) (81.8)
Sale of business, net of cash sold ..................... 13.1 -- --
Purchases of property and equipment, net ............... (30.5) (18.5) (14.9)
Other receipts (payments) .............................. (19.5) 19.3 1.0
---------- ---------- ----------
Net cash provided by (used in) investing activities .... 11.3 (207.4) (132.4)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of trust preferred securities 121.9 123.0 --
Proceeds from stock issued under employee benefit plans 2.3 0.6 --
Repayment of notes payable, net ........................ (102.0) (0.8) (1.3)
Purchases of common stock .............................. (35.6) (1.5) (10.7)
Dividends paid to stockholders ......................... (18.5) (18.0) (15.3)
Other receipts (payments) .............................. (0.6) 1.8 --
---------- ---------- ----------
Net cash (used in) provided by financing activities .... (32.5) 105.1 (27.3)
---------- ---------- ----------
Net increase (decrease) in cash ........................ 8.7 (2.3) 8.0
Cash balance, beginning of period ...................... 9.3 11.6 3.6
---------- ---------- ----------
Cash balance, end of period ............................ $ 18.0 $ 9.3 $ 11.6
========== ========== ==========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements
</FN>
56
<PAGE>
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
Year Ended December 31,
----------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------
Reconciliation of net earnings to net cash
provided by operating activities:
<S> <C> <C> <C>
Net earnings .......................................... $ 102.8 $ 115.8 $ 86.6
---------- ---------- ----------
Adjustments:
Depreciation and amortization ......................... 15.9 13.4 12.1
Amortization of excess of cost over fair
value of net assets acquired ....................... 6.7 3.2 3.1
Deferred federal income taxes ......................... 3.6 4.5 10.0
Equity in (earnings) loss of affiliates,
net of dividends received .......................... 1.0 (8.2) 0.7
Realized investment gains ............................. (52.5) (47.8) (24.2)
Non-cash investment income ............................ (1.6) (19.0) (17.8)
Amortization (accretion) of fixed maturity investments (1.5) (2.5) 1.4
Restructuring expenses and other (Note 3) ............. (15.3) -- --
Minority interest expense in subsidiary net earnings .. -- 7.0 8.7
Other ................................................. 0.6 1.5 2.1
Changes in assets and liabilities, net of acquisitions,
divestiture and restructuring:
Decrease (increase) in accrued investment income ...... 2.0 (2.3) 1.2
(Increase) decrease in accounts and notes receivable .. (28.8) 1.4 7.5
Increase in reinsurance recoverables
and prepaid reinsurance ............................ (123.0) (91.0) (78.0)
Increase in deferred policy acquisition costs ......... (11.9) (8.1) (20.9)
Increase in other assets .............................. (16.0) (10.8) (34.3)
Increase in losses .................................... 60.5 47.4 115.2
Increase in loss adjustment expenses .................. 20.0 29.6 32.4
Increase in unearned premiums ......................... 38.4 45.6 58.9
Increase (decrease) in policyholders' dividends ....... (2.7) (2.0) 3.5
Increase (decrease) in other liabilities .............. 31.7 22.3 (0.5)
---------- ---------- ----------
Total adjustments and changes ........................ (72.9) (15.8) 81.1
---------- ---------- ----------
Net cash provided by operating activities ............. $ 29.9 $ 100.0 $ 167.7
========== ========== ==========
</TABLE>
[FN]
See Notes to Consolidated Financial Statements
</FN>
57
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
Note 1 - Significant Accounting Policies
Basis of Financial Statement Presentation - Orion Capital Corporation
("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate
principally in the property and casualty insurance business. The consolidated
financial statements and notes thereto are presented in accordance with
generally accepted accounting principles ("GAAP") for property and casualty
insurance companies and include the accounts of Orion and its wholly-owned
subsidiaries. The Company's investment in its unconsolidated affiliate is
accounted for using the equity method (See Note 4). All material intercompany
balances and transactions have been eliminated. The preparation of the Company's
consolidated financial statements in conformity with GAAP requires the Company's
management to make estimates and assumptions that affect the amounts reported in
these consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Regulation - The Company's insurance subsidiaries are subject to
comprehensive regulation by various state insurance departments including
regulations limiting dividend payments to Orion and intercompany transactions.
Under these regulations, the maximum dividends permitted at December 31, 1998
for the ensuing twelve months, without prior approval, aggregated $135.5
million. However, state insurance regulators have broad discretionary authority
with respect to approving the payment of dividends by insurance companies.
Policyholders' surplus of Orion's insurance subsidiaries determined in
accordance with prescribed statutory accounting practices amounted to $732.1
million and $789.0 million at December 31, 1998 and 1997, respectively.
Statutory net income amounted to $151.5 million, $146.1 million and $107.9
million for 1998, 1997 and 1996, respectively.
Cash - For purposes of the consolidated statement of cash flows, the
Company considers only demand deposit accounts to be cash.
Investments - Fixed maturity investments include bonds, preferred stocks
with mandatory redemption features, and certificates of deposit that mature more
than one year after the balance sheet date. Fixed maturity investments that the
Company has both the positive intent and the ability to hold to maturity are
recorded at amortized cost. Fixed maturity investments, which may be sold in
response to, among other things, changes in interest rates, prepayment risk,
income tax strategies or liquidity needs are classified as available-for-sale
and are carried at market value. Common stocks and non-redeemable preferred
stocks are also carried at market value. Fluctuations in the market value of
these available-for-sale securities are recorded as unrealized investment gains
or losses and credited or charged to stockholders' equity. Other long-term
investments principally include equity ownership interests in limited
partnerships, which are recorded using the equity method of accounting.
Short-term investments include certificates of deposit and commercial paper that
mature within one year of the balance sheet date, money market accounts and
United States Treasury Bills. Short-term investments are recorded at market
value, which approximates cost. Market values are generally based on quoted
market prices or dealer quotes. Realized investment gains and losses, including
provision for other than temporary impairment of investment securities, are
recognized on the specific identification method.
Deferred Policy Acquisition Costs - Costs that vary with, and are directly
related to, the production of new and renewal business are deferred and
amortized as the related premiums are earned. These costs primarily comprise
commissions, premium taxes and salaries. The test for recoverability of such
deferred
58
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
costs includes the consideration of net investment income.
Excess of Cost Over Fair Value of Net Assets Acquired - The excess of the
cost of acquiring subsidiaries over the fair value of their net assets
("goodwill") is amortized on a straight-line basis over periods of 25 to 40
years. The Company evaluates the recoverability of goodwill from expected future
cash flows, and impairments would be recognized in operating results if a
permanent diminution in value were to occur.
Revenue Recognition - Premiums are earned on a daily pro rata basis over
the policy period. A provision is made for anticipated retrospective premium
adjustments and audit premiums. Direct and assumed premiums are reduced for
reinsurance ceded to other insurers.
Policy Liabilities and Reinsurance - Loss and loss adjustment expense
liabilities are established in consideration of individual cases for reported
losses and past experience for incurred but not yet reported losses ("IBNR").
Estimated reinsurance receivables are recognized in a manner consistent with the
liabilities relating to the underlying reinsured contracts. At December 31, 1998
and 1997, long-term disability workers compensation loss reserves are carried at
$46.0 million and $52.9 million, respectively, in the consolidated financial
statements at net present value using a statutory interest rate of 3.5%.
Policyholders' dividends on participating policies are accrued at estimated
payment rates as the related premiums are earned. Participating business
represented 19% and 18% of premiums in-force at December 31, 1998 and 1997,
respectively. As a percent of premiums earned, participating business amounted
to 19% in 1998, 18% in 1997 and 16% in 1996.
Federal Income Taxes - The Company recognizes taxes payable or refundable
for the current year, and deferred taxes for the future tax consequences of
differences between the financial reporting and tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years the temporary differences
are expected to reverse.
Earnings Per Common Share - In the fourth quarter of 1997, the Company
adopted Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings
per Share," for all periods presented. Basic earnings per share computations are
based on the average number of shares of common stock outstanding during the
year. Diluted earnings per share reflect the assumed exercise and conversion of
all securities, including stock options. All common stock and per share common
stock data presented has been restated to give effect to the 2-for-1 stock split
of the Company's common stock issued on July 7, 1997.
Comprehensive Income - As of January 1, 1998 the Company adopted FAS No.
130, "Reporting Comprehensive Income". This statement establishes standards for
the reporting and presentation of comprehensive income and its components in
financial statements. Comprehensive income encompasses all changes in
shareholders' equity (except those arising from transactions with shareholders)
and includes net income, net unrealized capital gains or losses on
available-for-sale securities and foreign currency translation adjustments. This
standard requires additional disclosures and does not affect the Company's
financial position or results of operations.
Segment disclosures - During the fourth quarter of 1998, the Company
adopted FAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." FAS 131 establishes new standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. It requires that the segments be based on
the
59
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
internal structure and reporting of the Company's operations. The adoption of
FAS 131 did not materially effect the Company's primary financial statements,
but did affect the disclosure of segment information contained in Note 17 to the
consolidated financial statement. The segment disclosures for prior years have
been restated to conform to the current year presentation.
Reclassifications - The 1997 and 1996 consolidated financial statements
have been reclassified to conform to the 1998 presentation.
Note 2 - Acquisitions
Grocers - On July 9, 1998 the Company completed the acquisition of Grocers
Insurance Group ("Grocers") from United Grocers, Inc ("United"). Grocers is an
Oregon-based specialty insurance holding company serving the grocery and food
service industry. In 1997, Grocers reported approximately $23 million of net
premiums written, principally general liability, property and workers
compensation with the majority of its volume concentrated in the Northwestern
states. The purchase price was $36.7 million in cash including acquisition
expenses of $ 0.4 million. The Company made cash payments of $32.4 million in
1998 related to the purchase of Grocers. At December 31, 1998 the Company
retained $4.0 million of the purchase price due to United to secure obligations
of United and Grocers. The Company used cash and short-term investments to fund
the purchase. The acquisition was accounted for as a purchase and accordingly,
Grocers has been included in the Company's consolidated financial statements
from the date of acquisition. The total consideration exceeded the fair value of
the net assets acquired by approximately $8.1 million and is being amortized
over 25 years. The pro forma consolidated results of the Company's operations,
as if the Grocers purchase had been made as of the beginning of the year, would
not be materially different than reported herein.
Strickland - On April 30, 1998 the Company completed the acquisition of the
nonstandard personal automobile insurance business of North Carolina - based
Strickland Insurance Group, Inc. ("Strickland"). The acquisition included two
insurance companies, a premium finance company, a claims adjusting company and a
general agency in Florida. In 1997, Strickland reported approximately $99
million of personal automobile gross premiums written and $46 million of net
premiums written. The purchase price was $44.1 million in cash including
acquisition expenses of $0.2 million. The Company made cash payments of $39.7
million in 1998 and $2.0 million in 1997 related to the Strickland acquisition
with $2.4 million of the purchase price including interest retained by the
Company in part to secure obligations of Strickland. Simultaneous with the
acquisition, the Company repaid $9.4 million of Strickland bank debt. The
acquisition includes a purchase price contingency for loss development incurred
by the acquired business during the period from the acquisition date to December
31, 2000 relating to accident years prior to the acquisition date. The Company
used cash and short-term investments to fund the acquisition. The acquisition
was accounted for as a purchase and accordingly, the acquired business has been
included in the Company's consolidated financial statements from the date of
acquisition. The total consideration exceeded the fair value of the net assets
acquired by approximately $28.7 million and is being amortized over 25 years.
The pro forma consolidated results of the Company's operations, as if the
Strickland purchase had been made as of the beginning of the year, would not be
materially different than reported herein.
Unisun - On December 16, 1997, the Company purchased Unisun Insurance
Company ("Unisun") from Michigan Mutual Insurance Company for $26.2 million in
cash including acquisition expenses of $0.2 million. Unisun is the largest
automobile insurance facility carrier in South
60
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Carolina and also writes personal automobile insurance in the States of Alabama,
Georgia and North Carolina. Total net premiums written by Unisun for 1997 were
approximately $20.0 million. The acquisition includes a purchase price
contingency for loss development incurred by Unisun during the period from the
acquisition date to December 31, 2002 relating to accident years prior to the
acquisition date. The acquisition of Unisun was accounted for as a purchase, and
accordingly, Unisun has been included in the Company's financial statements from
the date of acquisition. The total consideration exceeded the estimated fair
value of net assets of Unisun by $5.3 million, which is being amortized over 25
years. The pro forma consolidated results of the Company's operations, as if the
Unisun purchase had been made as of the beginning of the year, would not be
materially different than reported herein.
Guaranty National Corporation 1997 purchase - The Company completed a
tender offer that increased its ownership of Guaranty National Corporation
("Guaranty National") from approximately 81% to 100% on December 10, 1997. The
Company purchased the remaining or 2,970,000 shares of Guaranty National common
stock in 1997 that were held by minority interest shareholders for $36 per share
in cash ("1997 GNC Purchase"). Immediately following the 1997 GNC Purchase,
Guaranty National was merged into a wholly owned subsidiary of the Company and
delisted as a publicly traded company on the New York Stock Exchange. As part of
the merger, 450,238 outstanding stock options granted by Guaranty National were
converted into 358,090 stock options of the Company, with equivalent terms as
the Guaranty National options except for the exercise price, which was adjusted
to reflect the difference between the then current stock prices.
The 1997 GNC Purchase was recorded as a step acquisition using the purchase
method of accounting. The aggregate purchase price was $116.1 million, including
stock options converted of $8.4 million and acquisition expenses of $0.8
million. The Company recorded the excess of the cost over the estimated fair
value of the 19.7% interest in Guaranty National's net assets acquired during
1997 of $59.5 million and eliminated the related minority interest. The excess
of the cost over fair value will be amortized over 27 years, which is the
remaining amortization period for goodwill recorded upon the Company's initial
investment in Guaranty National.
Guaranty National Corporation 1996 purchase - On July 2, 1996, the Company
completed a tender offer for 4,600,000 shares of Guaranty National common stock
("1996 GNC Purchase"). Together with the open-market purchase of 120,000
additional shares on July 17, 1996, the Company increased its ownership of
Guaranty National from 49.5% to approximately 81%. The aggregate purchase price
of approximately $88.2 million, including expenses, was paid in cash.
The 1996 GNC Purchase was recorded as a step acquisition using the purchase
method of accounting as of June 30, 1996. The assets and liabilities of Guaranty
National were consolidated in the Company's financial statements and minority
interest for approximately 19% of Guaranty National's shareholders equity was
recorded. Beginning in 1996, all revenues and expenses of Guaranty National have
been consolidated with those of the Company, and minority interest expense has
been recorded for the portion of Guaranty National's earnings that was
attributable to the shares not owned by the Company until it became a
wholly-owned subsidiary.
The increase in the Company's ownership in 1996 to over 80% of Guaranty
National allowed the inclusion of Guaranty National in Orion's consolidated
federal income tax return, as well as the reversal of a deferred tax liability
previously established by the Company for its share of the undistributed
earnings
61
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of Guaranty National. The excess of cost over the estimated fair value of the
31.5% interest in Guaranty National's net assets acquired during 1996 was $9.1
million, after the reversal of $21.5 million of deferred taxes, and will be
amortized over 28 years, which was the remaining amortization period for
goodwill recorded upon Orion's initial investment in Guaranty National.
Pro forma information, as if Guaranty National was 100% owned as of the
beginning of 1996, is as follows for the year ended December, 31:
(In millions, except for per share amounts) 1997 1996
- --------------------------------------------------------------------------
Total revenues $ 1,590.5 $ 1,491.2
=========== ===========
Net earnings $ 116.9 $ 93.8
=========== ===========
Net earnings per diluted share $ 4.16 $ 3.35
=========== ===========
Note 3 - Orion Specialty Realignment
In the third quarter of 1998, the Company announced an accelerated
realignment of its Orion Specialty unit to address lines that had not met the
Company's growth and profitability expectations. The realignment continued Orion
Specialty's shift away from commodity business, primarily commercial auto and
transportation, to a smaller number of more client-focused programs and
specialty niches. The 1998 realignment has included the discontinuation of
approximately $100 million in annualized net written premiums of unprofitable
commodity and marginal lines of business, the reduction of approximately 90
employees related to the exited business, and the sale of Colorado Casualty.
Colorado Casualty produced approximately $55 million in annual net premiums,
which consisted largely of business that did not fit the Company's
specialization strategy.
The Company recorded severance and program termination expenses of $7.0
million and asset write downs of $1.9 million related to the exited business in
the third quarter of 1998. On September 29, 1998, the Company sold Colorado
Casualty resulting in a pre-tax gain of approximately $24.2 million. Charges for
severance and program termination expenses and asset write-offs, and the gain
from the sale of Colorado Casualty, representing a net pre-tax gain of $15.3
million, are reflected as "Restructuring expenses and other" in the Company's
Consolidated Statement of Earnings.
The restructuring liability activity for the year ended December 31, 1998 is as
follows:
(In millions)
- -------------------------------------------------------------------
Balance at December 31, 1997 $ -
Restructuring expenses 8.9
Actions taken:
Asset write-downs (1.9)
Severance and program termination costs (1.9)
----------
Balance at December 31, 1998 $ 5.1
==========
62
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the third quarter realignment, the Company completed an
actuarial analysis for the business to be exited resulting in a provision for
losses and loss adjustment expenses of $27.8 million in the third quarter of
1998. The Company will continue in 1999 to assess Orion Specialty's remaining
programs.
Note 4 - Investment in Affiliate
As of December 31, 1998, the Company owned 26% of the common stock of
Intercargo Corporation ("Intercargo"), a publicly held company. The Company
records its share of Intercago's operating results on a quarterly lag basis,
after Intercargo has reported its financial results. In December 1998, the
Company agreed to sell its investment in Intercargo for $22.8 million or $12 per
share in cash pursuant to Intercargo's merger with X. L. America, Inc., a
subsidiary of EXEL Limited. The Company reduced the carrying value of its
investment in Intercargo to $22.8 million resulting in $7.0 million pre-tax
realized investment loss during December 1998. The sale of Intercargo is
expected to be complete in the late first quarter or early second quarter of
1999, subject to regulatory approval.
The carrying values of the Company's investment in affiliates were $22.8
million at December 31, 1998 and $31.3 million at December 31, 1997. The
carrying value included $3.0 million and $10.5 million of goodwill at December
31, 1998 and 1997, respectively. In August 1997, Intercargo recognized a gain
before taxes of $49.4 million from the sale of substantially all of its
interest in Kingsway Financial Services. The Company reflected its portion of
the Kingsway sale by recording a gain before taxes of $7.0 million in the fourth
quarter of 1997.
Summarized financial information for the Company's affiliate is set forth
below:
(In millions) 1998 1997 1996
- ---------------------------------------------------------------------
Year Ended December 31:
Revenues ............................. $ 63.7 $ 117.8 $ 74.5
Expenses ............................. 62.6 65.2 74.8
------- ------- -------
1.1 52.6 (0.3)
Federal income (taxes) benefit ....... (2.3) (15.9) 0.2
------- ------- -------
Net earnings (loss) .................. $ (1.2) $ 36.7 $ (0.1)
======= ======= =======
Company's proportionate share,
including goodwill amortization (a) $ (0.7) $ 8.6 $ (0.4)
======= ======= =======
(In millions) 1998 1997
- ----------------------------------------------------------------------
At December 31:
Cash and investments $ 109.6 $ 131.8
Other assets 55.6 54.0
------- -------
165.2 185.8
Policy liabilities (70.3) (72.7)
Other liabilities (13.8) (29.2)
------- -------
Stockholders' equity $ 81.1 $ 83.9
======= =======
(a) 1998 excludes $7.0 million pre-tax realized investment loss.
63
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Note 5 - Investments
The amortized cost and estimated market values of investments in fixed
maturities, equity securities and short-term investments at December 31 are as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
1998:
Held-to-maturity securities:
United States Government and
<S> <C> <C> <C> <C>
government agencies and authorities $ 81.4 $ 3.2 $ - $ 84.6
States, municipalities and
political subdivisions 156.1 8.4 - 164.5
Corporate securities 23.1 0.5 - 23.6
--------- --------- --------- ---------
$ 260.6 $ 12.1 $ - $ 272.7
========= ========= ========= =========
Available-for-sale securities:
United States Government and
Government agencies and authorities $ 69.0 $ 1.9 $ (0.3) $ 70.6
States, municipalities and
political subdivisions 684.1 41.1 (1.4) 723.8
Foreign governments 4.1 0.6 - 4.7
Corporate securities 447.6 20.7 (19.3) 449.0
Mortgage-backed securities
(exclusive of government agencies) 100.7 2.5 (1.4) 101.8
Equity securities 469.4 78.9 (37.4) 510.9
Short-term investments 248.7 - - 248.7
--------- --------- --------- ---------
$ 2,023.6 $ 145.7 $ (59.8) $ 2,109.5
========= ========= ========= =========
1997:
Held-to-maturity securities:
United States Government and
government agencies and authorities $ 122.7 $ 1.8 $ (0.5) 124.0
States, municipalities and
political subdivisions 166.9 7.6 - 174.5
Corporate securities 23.2 0.7 - 23.9
--------- --------- --------- ---------
$ 312.8 $ 10.1 $ (0.5) $ 322.4
========= ========= ========= =========
Available-for-sale securities:
United States Government and
government agencies and authorities $ 381.7 $ 22.5 $ (2.9) $ 401.3
States, municipalities and
political subdivisions 439.5 30.6 (0.2) 469.9
Foreign governments 4.6 0.5 - 5.1
Corporate securities 526.5 27.4 (4.5) 549.4
Mortgage-backed securities
(exclusive of government agencies) 43.1 1.0 - 44.1
Equity securities 346.6 101.4 (9.5) 438.5
Short-term investments 228.3 - - 228.3
--------- --------- --------- ---------
$ 1,970.3 $ 183.4 $ (17.1) $ 2,136.6
========= ========= ========= =========
</TABLE>
64
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net investment income for the years ended December 31 is as follows:
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------
Net investment income:
Fixed maturities ............ $ 109.2 $ 115.8 $ 98.2
Equity securities ........... 19.4 18.4 19.9
Other long-term investments . 2.6 17.4 16.1
Short-term investments ...... 10.8 16.3 13.2
Accounts and notes receivable 0.7 0.5 0.3
Other ....................... 3.2 0.1 0.3
-------- -------- --------
Total investment income ..... 145.9 168.5 148.0
Less investment expenses .... 2.7 3.6 2.6
-------- -------- --------
Net investment income $ 143.2 $ 164.9 $ 145.4
======== ======== ========
Certain information concerning realized and unrealized gains (losses) for fixed
maturities and equity securities during the years ended December 31 is set forth
below:
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------
Fixed maturities available-for-sale:
Gross realized gains ....................$ 31.1 $ 12.0 $ 10.3
Gross realized losses ................... (15.4) (7.4) (7.1)
Provision for other than temporary
Impairment ........................... (3.2) (2.0) (1.1)
-------- -------- --------
$ 12.5 $ 2.6 $ 2.1
======== ======== ========
Change in unrealized gains (losses)
Recorded in stockholders' equity .....$ (30.0) $ 38.9 $ (11.1)
======== ======== ========
Equity securities:
Gross realized gains ....................$ 80.9 $ 51.5 $ 29.0
Gross realized losses (a) ............... (39.8) (7.3) (6.6)
Provision for other than temporary
Impairment ........................... (1.1) (0.4) (0.3)
-------- -------- --------
$ 40.0 $ 43.8 $ 22.1
======== ======== ========
Change in unrealized gains (losses)
Recorded in stockholders' equity .....$ (50.4) $ 18.4 $ 18.4
======== ======== ========
(a) 1998 includes $7.0 million realized loss related to the planned sale of
Intercargo.
65
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated market values of fixed maturity and
short-term investments at December 31, 1998, by contractual fiscal maturity, are
shown below. Expected maturities will differ from contractual maturities because
issuers of securities may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Fixed Maturities Fixed Maturities
Held-to-Maturity Available-for-Sale
--------------------------- -----------------------
Estimated Estimated
Amortized Market Amortized Market
(In millions) Cost Value Cost Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less .............. $ 8.7 $ 8.8 $ 264.7 $ 264.9
Due after one year through five years 173.4 179.4 256.9 252.1
Due after five years through ten years 34.7 37.1 266.0 278.1
Due after ten years .................. 43.8 47.4 655.6 691.3
-------- ---------- ---------- ----------
260.6 272.7 1,443.2 1,486.4
Mortgage-backed securities ........... -- -- 111.0 112.2
-------- ---------- ---------- ----------
$ 260.6 $ 272.7 $ 1,554.2 $ 1,598.6
======== ========== ========== ==========
</TABLE>
Other long-term investments had aggregate carrying values of $116.2 million
at December 31, 1998 and $94.3 million at December 31, 1997 including mortgage
loans on real estate of $2.2 million and $2.3 million, respectively. Estimated
market values of mortgage loans and other long-term investments approximate
their carrying values. The carrying value of the Company's investments in
principal-only securities and interest-only securities totaled approximately
$1.5 million at December 31, 1998.
The carrying value of securities on deposit with state regulatory
authorities in accordance with statutory requirements totaled $242.4 million and
$223.4 million at December 31, 1998 and 1997, respectively. Excluding
investments in securities of the United States Government and its agencies, the
Company had investments in only one issuer (AAA rated fixed income securities
totaling $26.7 million) that exceeded $25.0 million. The Company had $0.2
million of fixed maturity investments for which it was not accruing income for
both 1998 and 1997.
Note 6 - Reinsurance
In the normal course of business, the Company's insurance subsidiaries
reinsure certain risks, generally on an excess-of-loss or pro rata basis, with
other companies to limit exposure to losses. Reinsurance does not discharge the
primary liability of the original insurer. As of December 31, 1998 and 1997,
recoverables for reinsurance ceded to the Company's two largest reinsurers were
an aggregate of $71.7 million and $132.8 million, respectively. As of December
31, recoverables for reinsurance ceded to the two largest McGee pool members
other than the Company aggregated $50.6 million for 1998, and $54.7 million for
1997, and the Company had ceded balances payable to these pool members of $6.3
million and $21.0 million, respectively.
66
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below illustrates the effect of reinsurance on premiums written
and premiums earned for the years ended December 31:
(In millions, except for %) 1998 1997 1996
- -------------------------------------------------------------------------------
Direct premiums written ............... $ 1,862.0 $ 1,521.3 $ 1,431.4
Reinsurance assumed ................... 117.8 72.0 174.7
---------- ---------- ----------
Gross premiums written ................ 1,979.8 1,593.3 1,606.1
Reinsurance ceded ..................... (446.2) (226.2) (272.0)
---------- ---------- ----------
Net premiums written .................. $ 1,533.6 $ 1,367.1 $ 1,334.1
========== ========== ==========
Percentage of amount assumed to net ... 7.7% 5.3% 13.1%
========== ========== ==========
Direct premiums earned ................ $ 1,810.6 $ 1,500.8 $ 1,388.9
Reinsurance assumed ................... 116.8 106.1 182.5
---------- ---------- ----------
Gross premiums earned ................. 1,927.4 1,606.9 1,571.4
Reinsurance ceded ..................... (424.4) (249.2) (270.6)
---------- ---------- ----------
Net premiums earned ................... $ 1,503.0 $ 1,357.7 $ 1,300.8
========== ========== ==========
Loss and loss adjustment expenses
incurred recoverable from reinsurers $ 457.2 $ 165.4 $ 174.3
========== ========== ==========
Reinsurance recoverables and prepaid reinsurance includes prepaid
reinsurance of $129.8 million at December 31, 1998 and $125.5 million at
December 31, 1997.
67
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7- Loss and Loss Adjustment Expense Reserves
An analysis of the Company's calendar year net loss and loss adjustment
expense reserves for the three years ended December 31, 1998 is summarized in
the following table. The 1996 current year provision and payments include
favorable loss development for Guaranty National of $1.0 million and payments of
$144.8 million attributable to periods prior to the consolidation of Guaranty
National's results in the Company's financial statements.
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------
Net balance, beginning of year . $ 1,390.7 $ 1,368.4 $ 994.0
Effect of acquisitions and other 16.9 8.9 286.3
---------- ---------- ----------
1,407.6 1,377.3 1,280.3
---------- ---------- ----------
Provision:
Current year ................ 986.6 896.3 874.1
Prior years ................. 33.9 9.2 8.9
---------- ---------- ----------
1,020.5 905.5 883.0
---------- ---------- ----------
Payments:
Current year ................ 450.3 370.9 499.2
Prior years ................. 559.4 521.2 295.7
---------- ---------- ----------
1,009.7 892.1 794.9
---------- ---------- ----------
Net balance, end of year ....... 1,418.4 1,390.7 1,368.4
Add reinsurance recoverables 599.3 481.0 417.3
---------- ---------- ----------
Balance, end of year ........... $ 2,017.7 $ 1,871.7 $ 1,785.7
========== ========== ==========
Loss reserve estimates are based on forecasts of the ultimate settlement of
claims and are subject to uncertainty with respect to future events. Loss
reserve amounts are based on management's informed estimates and judgments,
using data currently available. Reserve amounts and the underlying actuarial
factors and assumptions are regularly analyzed and adjusted to reflect new
information. Such re-evaluation is a normal, recurring activity that is inherent
in the process of loss reserve estimation and therefore, no assurances can be
given that reserve development will not occur in the future. During the three
years ended December 31, 1998 a substantial portion of the loss development
experienced by the Company resulted from pools and associations, assumed
reinsurance, and certain discontinued lines and program business (including
$17.0 million in 1998 related to Orion Specialty realignment), partly reduced by
favorable development in workers compensation.
68
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
An analysis of the Company's loss and loss adjustment expense environmental
reserves and claim counts for the three years ended December 31, 1998 is
presented below. Claim counts (excluding pools and associations) have been
aggregated by year of coverage for each occurrence for which policyholders are
being defended, and often include numerous claimants.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ---------------- ---------------
Claim Claim Claim
(In millions, except for claims count) Amount Counts Amount Counts Amount Counts
- ----------------------------------------------------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net balance, beginning of year $ 67.9 551 $ 57.0 632 $ 34.6 474
Provision .................. 5.3 17.7 24.4
Payments ................... (7.5) (6.8) (4.8)
Acquisitions ............... -- -- 2.8 70
------- ------- -------
Net balance, end of year ...... 65.7 515 67.9 551 57.0 632
Add reinsurance recoverables 13.0 12.3 12.5
------- ------- -------
Balance, end of year .......... $ 78.7 $ 80.2 $ 69.5
======= ======= =======
</TABLE>
The Company's environmental claims principally relate to asbestos and
hazardous waste, arising from certain liability business written prior to the
mid 1980's, which business was never a major element of the Company's
operations. Environmental claims are also received from certain pools and
associations where reserves are established based on information reported to the
Company by the managers of those pools and associations. In view of the lines of
insurance that the Company has traditionally written, environmental claims have
not represented, and are not expected to represent in the future, a material
portion of the Company's total claims.
Establishing reserve liabilities for environmental claims is subject to
significant uncertainties that make reserve estimation difficult. Legal
decisions have tended to expand insurance coverage beyond the intent of the
policies. The Company does not use discounting in determining its reserves for
environmental claims. IBNR of $45.6 million and $51.0 million is included in net
reserves for environmental claims at December 31, 1998 and 1997, respectively.
The net reserve for environmental claims and IBNR increased in 1997 primarily
due to higher claims reported to the Company by certain pools and associations,
which is the basis of establishing such reserve, and higher loss reserve
estimates.
69
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8 - Notes Payable
Notes payable are recorded at face value less unamortized discount. The
carrying value and estimated market value of notes payable at December 31
consist of the following:
Estimated
Carrying Value Market Value
------------------ -------------------
(In millions) 1998 1997 1998 1997
- ----------------------------------------------------------- -------------------
$110.0 face amount, 9.125% Senior
Notes, due September 1, 2002 . $ 109.9 $ 109.9 $ 118.9 $ 121.2
$100.0 face amount, 7.25% Senior
Notes, due July 15, 2005 ..... 99.5 99.4 102.9 103.2
Bank credit facility ............ 8.0 -- 8.0 --
Loan agreement with banks ....... -- 100.0 -- 100.0
Collateralized term loan ........ -- 0.9 -- 0.9
-------- -------- -------- --------
$ 217.4 $ 310.2 $ 229.8 $ 325.3
======== ======== ======== ========
On July 8, 1998 the Company entered into a credit agreement with a group of
banks ("Bank Credit Facility") which provides for unsecured borrowings up to
$150 million. The Bank Credit Facility expires on July 8, 2003 and provides for
two one-year extension periods. The Company intends to use the Bank Credit
Facility for general corporate purposes, which may include acquisitions. The
Bank Credit Facility carries an annual facility fee on the unused amounts of the
credit facility. Borrowings under the Bank Credit Facility bear interest at
LIBOR (London Interbank Offered Rate) plus a margin based upon the Company's
credit ratings. The Bank Credit Facility requires the Company to maintain
certain financial covenants including a maximum debt to total capitalization
ratio of 0.4 to 1.0, as defined, and a minimum combined statutory surplus of
$650 million plus 30% of the Company's aggregate combined annual statutory net
income. The Bank Credit Facility limits the Company's ability to incur secured
indebtedness or certain contingent obligations except for indebtedness secured
by liens specifically permitted by the Bank Credit Facility and additional
secured indebtedness with a principal amount not exceeding 10% of the Company's
consolidated net worth, as defined.
The indentures for the 7.25% Senior Notes and the 9.125% Senior Notes limit
the amount of liens and guarantees by the Company, and the Company's ability to
incur secured indebtedness without equally and ratably securing the senior
notes.
The $100 million borrowings under the loan agreement between Guaranty
National and several banks outstanding at December 31, 1997 was fully repaid by
the Company in February 1998 from proceeds of the sale of the 7.701% Trust
Preferred Securities (See Note 9).
As of December 31, 1998 maturities of the Company's notes payable are as
follows: 2002 - $110.0 million, 2003 - $8.0 million, and 2005 - $100.0 million.
70
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9 - Trust Preferred Securities
Company-Obligated Mandatorily Redeemable Preferred Capital Securities
of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the
Company ("Trust Preferred Securities") at December 31 comprise the following:
Estimated
Carrying Value Market Value
----------------- ----------------
(In millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------------
8.73% Trust Preferred Securities
due January 1, 2037 $ 125.0 $ 125.0 $ 119.0 $ 137.5
7.701% Trust Preferred Securities
due April 15, 2028 125.0 - 112.0 -
------- ------- ------- -------
$ 250.0 $ 125.0 $ 231.0 $ 137.5
======= ======= ======= =======
On January 13, 1997 Orion issued $125 million of 8.73% Junior Subordinated
Deferrable Interest Debentures due January 1, 2037 (the "8.73% Debentures") to
Orion Capital Trust I ("Trust I"), a Delaware statutory business trust sponsored
by Orion. Trust I simultaneously sold $125 million of 8.73% capital securities
(the "8.73% Trust Preferred Securities") which have substantially the same terms
as the 8.73% Debentures. The net proceeds from the sale of the 8.73% Trust
Preferred Securities were used in part for the acquisition of Guaranty National
common stock in December 1997. The 8.73% Trust Preferred Securities may be
redeemed without premium on or after January 1, 2007.
On February 2, 1998 Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest Debentures due April 15, 2028 (the "7.701% Debentures") to
Orion Capital Trust II ("Trust II"), a Delaware statutory business trust
sponsored by Orion. Trust II then sold $125 million of 7.701% capital securities
(the "7.701% Trust Preferred Securities"), which have substantially the same
terms as the 7.701% Debentures. Approximately $100 million of net proceeds from
the sale of the 7.701% Trust Preferred Securities were used to repay bank
indebtedness of Guaranty National in February 1998.
The 8.73% and 7.701% Trust Preferred Securities are subordinate to all
liabilities of the Company. The Company may defer interest distributions on
these Trust Preferred Securities; however, during any period when such
cumulative distributions have been deferred, Orion may not declare or pay any
dividends or distributions on its common stock. The Company registered the Trust
Preferred Securities under the Securities Act of 1933. The Trusts are
consolidated in the Company's financial statements because they are wholly-owned
by the Company. The sole assets of the Trusts are the Debentures issued by
Orion. Orion has given its partial guarantee, which when taken together with the
Company's obligations under the declaration of the Trust, the Debentures, and
the indenture pursuant to which the Trust Preferred Securities are issued
including its obligations to pay costs, expenses, debts and liabilities of the
Trusts (other than with respect to the Trust Preferred Securities), provides a
full and unconditional guarantee of amounts due on the Trust Preferred
Securities.
71
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10 - Federal Income Taxes
Orion and its wholly-owned subsidiaries file a consolidated federal income
tax return, including Guaranty National from July 2, 1996. Substantially all
federal income taxes incurred by Orion and its subsidiaries relate to domestic
operations.
In October 1996 the Internal Revenue Service ("IRS") completed an
examination of the Company's federal income tax returns through 1992. Certain
tax benefits from tax attributes existing at the date of the Company's
reorganization in 1976 were not recognized pending completion of the IRS
examination. Accordingly, the Company recorded a credit to capital surplus in
1996 for tax benefits of $11.9 million with respect to the 1976 reorganization.
The recording of this credit had no impact on the Company's earnings.
The components of the provision (benefit) for federal income taxes on
income from operations and allocations of taxes (benefits) to other items for
the years ended December 31 are as follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------
Taxes on income from operations before minority interest:
<S> <C> <C> <C>
Current .................................................$ 37.5 $ 42.0 $ 22.0
Deferred ................................................ 3.6 4.5 10.0
------ ------ ------
41.1 46.5 32.0
Tax benefit from trust preferred securities ................ (6.8) (3.7) --
------ ------ ------
Total tax expense ....................................... 34.3 42.8 32.0
Taxes allocated to stockholders' equity for:
Unrealized appreciation (depreciation) of securities .... (28.0) 22.8 2.0
Pre-reorganization income tax benefits .................. -- -- (11.9)
Other ................................................... (1.5) (2.0) 0.6
------ ------ ------
$ 4.8 $ 63.6 $ 22.7
====== ====== ======
</TABLE>
72
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of the temporary differences comprising the Company's net
deferred tax asset at December 31 are as follows:
(In millions) 1998 1997
- -----------------------------------------------------------
Deferred tax assets:
Loss reserve discounting ........ $ 71.8 $ 72.2
Unearned premium reserves ....... 32.6 30.1
Policyholders' dividends ........ 6.3 7.1
Retiree medical benefits ........ 5.4 4.6
Deferred compensation ........... 5.0 7.8
Other ........................... 20.9 19.8
------- -------
142.0 141.6
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs 54.7 51.5
Unrealized investment gains ..... 30.2 58.4
Investment income ............... 18.3 16.5
Other ........................... 12.1 14.2
------- -------
115.3 140.6
------- -------
Net deferred tax asset ....... $ 26.7 $ 1.0
======= =======
A reconciliation of expected federal income tax expense on pre-tax earnings
at regular corporate rates to actual tax expense for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
(In millions, except for %) 1998 1997 1996
- ----------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Expected income tax expense $ 48.0 35.0% $ 58.0 35.0% $ 44.6 35.0%
Tax-exempt interest ........ (13.1) -9.6% (11.5) -6.9% (10.2) -8.0%
Dividends-received deduction (5.7) -4.2% (5.6) -3.3% (6.5) -5.1%
Amortization of goodwill ... 4.2 3.1% 1.1 0.6% 1.0 0.8%
Other ...................... 0.9 0.7% 0.8 0.4% 3.1 2.5%
------- ---- ------- ---- ------- ----
Actual income tax expense .. $ 34.3 25.0% $ 42.8 25.8% $ 32.0 25.2%
======= ==== ======= ==== ======= ====
</TABLE>
Note 11 - Employee Benefit Plans
The Company maintains 401(k) and Profit Sharing Plan(s) ("Plans"),
qualified under the Internal Revenue Code Section 401(a) for eligible employees
of the Company. (These Plans include the Orion Capital 401(k) and Profit Sharing
Plan, Orion Capital Corporation Retirement Savings Plan for the Employees of
Guaranty National Insurance Company and Wm. H. McGee & Co., Inc. Profit Sharing
Plan.) Employee and employer matched contributions to the Plans are limited to
the extent allowable under the Plans and in accordance with Internal Revenue
Code limits. The Plans also provide a provision that allows the Company to make
annual profit sharing contributions to the Plans based on percentage of
employee's compensation. The profit sharing contribution is determined annually
by the Company. Employees vest in the Company's contributions on a graduated
scale over a six-year or seven-year period. In addition to the active plans,
Strickland, acquired in April 1998, froze its 401(k) defined contribution plan
for all its eligible employees. The Company has adopted supplemental benefit
plans to provide
73
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accrual of benefits for those eligible employees who receive less than the full
employer contributions to the Company's qualified plans as a result of the
Internal Revenue Code limitations.
During 1998, the Company's shareholders approved the Employees' Stock
Purchase Plan to allow eligible employees of the Company and its subsidiaries to
purchase, through payroll deductions, shares of the Company's common stock at 90
percent of the fair market value at specified dates. In May 1998, the Company
reserved 300,000 shares of its common stock for issuance under the Employees'
Stock Purchase Plan. The initial purchase period began on July 1, 1998 and ended
December 31, 1998, resulting in 29,851 shares issued at an aggregate purchase
price of $1.1 million. At December 31, 1998 approximately 24% of eligible
employees participated in the plan and 270,149 shares are reserved for future
issuance under the plan.
The Company maintains incentive plans for key employees, including the 1982
Long-Term Performance Incentive Plan and the Equity Incentive Plan (together the
"Incentive Plans"). Orion has awarded both stock options and restricted stock to
members of the Company's management under the Incentive Plans. All stock options
are granted by Orion with exercise prices at fair market value at date of grant,
and are intended to qualify to the maximum extent possible as incentive stock
options. Stock options become exercisable from the first through fourth
anniversaries of the date of grant, and expire ten years after the date of
grant. Restricted stock is considered issued and outstanding when awarded. There
are restrictions as to its transferability, which restrictions generally lapse
in 25% increments over four or five year periods from the date of grant. For
certain employees, the restrictions fully lapse after three years from the date
of grant if the participant remains employed with the Company. As of December
31, 1998, the number of shares of stock reserved under the Incentive Plans is
1,693,152, of which 1,611,442 are for outstanding stock options and 81,710 are
available for future awards under the Incentive Plans. Included in 1997 granted
options of 696,600 were 358,090 of stock options relating to the 1997
acquisition of Guaranty National.
74
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
A summary of the status of Orion's stock option plans at December 31, 1998
and for the three years then ended is presented below:
(Shares in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Beginning of year ........ 1,452.4 $ 25.16 893.7 $ 18.07 588.3 $ 12.40
Granted ............... 538.9 37.39 696.6 32.39 374.1 25.68
Cancelled ............. (75.8) 31.37 (33.1) 29.42 (13.9) 17.14
Exercised ............. (304.1) 13.47 (104.8) 11.41 (54.8) 9.47
------- ------- -----
End of year .............. 1,611.4 31.10 1,452.4 25.16 893.7 18.07
======= ======= ======= ======= ===== =======
Exercisable at end of year 594.4 $ 23.59 646.1 $ 16.95 402.0 $ 11.48
======= ======= ======= ======= ===== =======
</TABLE>
(Shares in thousands) December 31, 1998
- -------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Options Exercise Remaining Options Exercise
Prices Outstanding Price Years Exercisable Price
$ 10.01 - $ 17.50 167.3 $ 15.12 5.1 167.3 $ 15.12
17.51 - 25.00 310.5 21.48 6.9 210.3 21.44
25.01 - 40.00 791.2 32.32 9.0 140.4 25.89
40.01 - 46.00 305.4 43.87 8.8 76.4 43.87
46.01 - 57.00 37.0 52.95 9.3 - -
------- ---------
10.01 - 57.00 1,611.4 31.10 8.1 594.4 23.59
======= ======== === ========= =========
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock options granted under the Incentive
Plans and the Employees' Stock Purchase Plan. Accordingly, no compensation cost
has been recognized for activities related to these plans. Had compensation cost
for these plans been recognized pursuant to FAS 123 "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per diluted share on a
proforma basis for the years ended December 31, 1998, 1997 and 1996 would have
been approximately $100.8 million or $3.62 per diluted share, $114.9 million or
$4.12 per diluted share, and $86.5 million or $3.11 per diluted share,
respectively.
The weighted average fair value of options granted was $10.62 per share for
1998, $14.08 per share for 1997 and $14.58 per share for 1996. The fair value of
options granted was estimated on the date of grant using the binomial
option-pricing model with the following weighted-average assumptions: dividend
yield of 1.9% - 1998 and 1996, and 1.5% - 1997; expected volatility of 22% -
1998, 23% - 1997 and 19% - 1996; risk free interest rate of 5.4% - 1998, 5.5% -
1997 and 6.0% - 1996; and expected life 7.0 years - both 1998 and 1997 and 7.1
years in 1996.
75
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1998 and 1997 Orion granted 26,000 and 69,000 stock options,
respectively, to directors at fair market value, which become exercisable one
year from the date of grant and expire in ten years.
Orion granted 130,263 shares of restricted stock at a weighted average fair
value of $40.91 per share during 1998, 57,202 shares at $43.95 per share during
1997 and 92,636 shares at $25.61 per share for 1996. As of December 31, 1998,
the restrictions have not lapsed on 224,013 shares of restricted stock. The fair
market value of restricted stock on the date of issuance is amortized over the
vesting period during which the restrictions lapse.
The total expense for 1998, 1997 and 1996 for the above savings, retirement
and employee benefit plans, excluding amortization of deferred compensation on
restricted stock, was $10.1 million, $10.9 million and $9.5 million,
respectively.
Note 12 - Postretirement Medical Benefits and Defined Benefit Pension Plans
During the fourth quarter of 1998, the Company adopted FAS 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which modifies
the Company's disclosure of such benefits.
The Company and subsidiaries provide postretirement benefits to eligible
employees, who have attained age 55 and have 10 years of consecutive service
immediately prior to retirement. The Company premium subsidy provided to
eligible participants electing continuation of medical Plan benefits coverage is
a service formula based on years of service up to a maximum of 25 years.
McGee has a noncontributory defined benefit retirement plan covering all
eligible employees. Unisun, which was acquired in December 1997, froze its
defined benefit pension plan for all of its eligible employees.
76
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's benefit obligation, plan assets and recorded balances for the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
-------------------- -------------------
(In millions, except for %) 1998 1997 1998 1997
- -------------------------------------------------------------------------- -------------------
Change in benefit obligation:
<S> <C> <C> <C> <C>
Benefit obligation, beginning of year .............. $ 30.6 $ 23.0 $ 6.2 $ 9.8
Service cost .................................... 0.9 0.8 0.5 1.0
Interest cost ................................... 2.1 1.6 0.5 0.7
Actuarial losses (gains) and amendments ......... 1.7 1.1 0.7 (4.9)
Acquisitions .................................... -- 5.8 0.5 --
Benefit paid, net of participants' contributions (2.1) (1.7) (0.5) (0.4)
------- ------- ------- ------
Benefit obligation, end of year .................... 33.2 30.6 7.9 6.2
------- ------- ------- ------
Change in plan assets:
Fair value of plan assets, beginning of year ....... 27.9 19.4 -- --
Return on plan assets ........................... 4.0 2.6
Acquisitions .................................... -- 7.1 -- --
Employer contributions .......................... 0.9 0.5 0.5 0.4
Benefits paid, net of participants' contributions (2.1) (1.7) (0.5) (0.4)
------- ------- ------- ------
Fair value of plan assets, end of year ............. 30.7 27.9 -- --
------- ------- ------- ------
Funded status ...................................... (2.5) (2.7) (7.9) (6.2)
Unrecognized net gains ............................. (1.4) (1.2) (7.1) (8.9)
------- ------- ------- ------
Accrued benefit cost ............................ $ (3.9) $ (3.9) $ (15.0) $(15.1)
======= ======= ======= ======
Weighted-average assumptions as
of December 31:
Discount rate ...................................... 6.75% 7.0% 6.75% 7.0%
Rate of compensation increase ...................... 5.0% 5.0%
Expected return on plan assets ..................... 8.0%-9.0% 8.0%-9.0%
</TABLE>
<TABLE>
<CAPTION>
The components of net periodic benefit costs for the years ended December
31 are as follows:
Postretirement
Pension Benefits Benefits
--------------------------------- ----------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------- ----------------------------------
Components of net periodic benefit cost:
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 0.9 $ 0.8 $ 0.8 $ 0.5 $ 1.0 $ 1.1
Interest cost 2.1 1.6 1.6 0.5 0.7 0.7
Return on plan assets (2.1) (1.5) (1.5) - - -
Recognized net gains - - - (1.2) (0.5) (0.5)
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost $ 0.9 $ 0.9 $ 0.9 $ (0.2) $ 1.2 $ 1.3
========= ========= ========= ========= ========= =========
</TABLE>
77
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The expected health care cost trend rates used to calculate the
postretirement benefits obligation were 15.0% for 1998 and 8.5% for 1999,
decreasing linearly each year until it reaches 5% for 2006 and future years.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement medical benefit plans. A one percentage-point
change in assumed health care cost trend rates would have the following effects:
(In millions) 1-Percentage Point Change
- ---------------------------------------------------------------------
1998 1997
-------- --------
Effect on total of service and interest
cost components $ 0.1 $ 0.3
Effect on postretirement benefit obligation $ 0.8 $ 0.6
Orion maintained a non-qualified defined benefit retirement plan for
members of the Board of Directors who are not employees. On December 31, 1997,
the Company terminated this plan resulting in $0.3 million of benefits payments
in January 1998 with the remaining accrued benefits of $0.4 million to be paid
with interest in future periods. Benefits were based on years of service and
director fee levels at retirement or termination date of the plan.
Note 13 - Commitments
Minimum lease commitments at December 31, 1998, with the majority having
initial lease periods from one to twenty-five years, are as follows:
(In millions)
- ------------------------------------------
1999 $ 22.6
2000 20.2
2001 15.7
2002 12.5
2003 10.0
2004 and thereafter 37.8
-----------
Minimum lease commitments $ 118.8
===========
Rent expense amounted to $20.2 million, $23.1 million and $19.8 million for
1998, 1997 and 1996, respectively. Substantially all leases are for office space
and equipment. A number of lease commitments contain renewal options ranging
from one to thirty years.
Note 14 - Contingencies
Orion and its subsidiaries are routinely engaged in litigation incidental
to their businesses. Management believes that there are no significant legal
proceedings pending against the Company which, net of reserves established
therefore, are likely to result in judgments for amounts that are material to
the financial condition, liquidity or results of operations of Orion and its
consolidated subsidiaries, taken as a whole.
78
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15 - Stockholders' Equity and Earnings Per Common Share
During 1998, the Company repurchased 836,100 shares of its common stock at
an aggregate cost of $35.6 million under the stock repurchase program authorized
by the Board of Directors and repurchased 45,615 shares at an aggregate cost of
$2.4 million related to its employee benefit plans. The Company repurchased
42,916 shares for $1.5 million in 1997 and 482,228 shares for $11.2 million in
1996 under the stock repurchase program.
Orion declared dividends on its common stock of $19.1 million, $17.1
million and $14.3 million, or $0.70, $0.62 and $0.51 per share in 1998, 1997 and
1996, respectively.
A reconciliation of basic and diluted earnings per share ("EPS") for the
years ended December 31 is as follows:
Net Average Per Share
(In millions, except for per share amounts) Earnings Shares Amount
- -------------------------------------------------------------------------------
1998 -
Basic EPS:
Net earnings available to
common stockholders $ 102.8 27.2 $ 3.78
==========
Stock options and awards - 0.6
--------- ---------
Diluted EPS:
Net earnings available to common
stockholders with assumed exercises $ 102.8 27.8 $ 3.69
========= ========= ==========
1997 -
Basic EPS:
Net earnings available to
common stockholders $ 115.8 27.3 $ 4.24
==========
Stock options and awards - 0.6
--------- ---------
Diluted EPS:
Net earnings available to common
stockholders with assumed exercises $ 115.8 27.9 $ 4.15
========= ========= ==========
1996 -
Basic EPS:
Net earnings available to
common stockholders $ 86.6 27.4 $ 3.16
==========
Stock options and awards - 0.4
--------- ---------
Diluted EPS:
Net earnings available to common
stockholders with assumed exercises $ 86.6 27.8 $ 3.12
========= ========= =========
Effective as of September 11, 1996, Orion redeemed its old stockholder
rights plan and adopted a new Stockholder Rights Plan ("Rights Plan"). Under the
Rights Plan each outstanding share of common stock includes one preferred stock
purchase right ("Right"). The Rights Plan is designed to assure
79
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
stockholders that they will receive equitable treatment in the event of a
proposed takeover. Under the Rights Plan, each holder of a Right is entitled to
buy two-hundredth of a share of Series B Junior Participating Preferred Stock.
The Rights become exercisable (i) if an acquiror gains a 15% or greater
beneficial ownership interest in Orion's outstanding common stock, on other than
fair and favorable terms to all stockholders or (ii) following the commencement
of a tender offer or exchange offer that would result in an acquiror owning 15%
or more of Orion's outstanding common stock. Each Right not owned by such
acquiror will enable the holder to purchase, at an initial purchase price of
$100, common stock having a value of twice the Right's purchase price. In
addition, under certain circumstances if Orion is involved in a merger each
Right will entitle its holder to purchase, at the Right's then current purchase
price, common shares of such other company having a value of twice the Right's
purchase price. Until 1998, the Rights Plan provided that, in the event of a
change in control for a period of 180 days, Rights could be redeemed only by
action of the continuing Directors. That restriction was removed in 1998.
Note 16 - Accumulated Other Comprehensive Income
Accumulated other comprehensive income balances, net of taxes, for the years
ended December 31 are as follows:
Unrealized Unrealized Foreign Accumulated
Unrealized Exchange Accumulated Other
Investment Gains Translation Comprehensive
(In millions) (Losses) Gains (Losses) Income (Loss)
- --------------------------------------------------------------------------------
1998:
Balance, beginning of year $ 113.6 $ (4.4) $ 109.2
Current year change (52.4) 1.7 (50.7)
-------- -------- --------
Balance, end of year $ 61.2 $ (2.7) $ 58.5
======== ======== ========
1997:
Balance, beginning of year $ 72.3 $ (2.2) $ 70.1
Current year change 41.3 (2.2) 39.1
-------- -------- --------
Balance, end of year $ 113.6 $ (4.4) $ 109.2
======== ======== ========
1996:
Balance, beginning of year $ 63.3 $ (4.0) $ 59.3
Current year change 9.0 1.8 10.8
-------- -------- --------
Balance, end of year $ 72.3 $ (2.2) $ 70.1
======== ======== ========
The pre-tax unrealized investment gains (losses) were $(80.4) million,
$62.9 million and $14.0 million for the year ended December 31, 1998, 1997 and
1996, respectively. The pre-tax unrealized foreign exchange translation gains
(losses) were $2.6 million, $(3.4) million and $2.8 million for the year ended
December 31, 1998, 1997 and 1996, respectively.
80
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of change in accumulated other comprehensive income related
to changes in unrealized investment gains (losses) for 1998 are as follows:
(In millions)
- --------------------------------------------------------------
Unrealized investment holding gains (losses)
arising during the period, net of taxes $ 2.6
Reclassification adjustment for gains (losses)
Included in net earnings, net of taxes (55.0)
Net investment gains (losses) recognized in ----------
other comprehensive income $ (52.4)
==========
Pre-tax unrealized investment holding gains (losses) arising during 1998
was $4.4 million. Pre-tax reclassification adjustment for gains included in net
earnings was $84.7 million.
Note 17 - Segment Information
The Company reports its insurance operations in three segments at December 31,
1998. These reportable segments comprise operating units of the Company that
have different insurance products and services, market focus and operational
structure. The Company reportable segments comprise:
Workers Compensation - this segment provides workers compensation insurance
products and services sold by the EBI Companies.
Specialty Commercial - this segment markets various specialty commercial
products and services and includes professional liability insurance through
DPIC Companies; client-focused specialty insurance programs through Orion
Specialty; underwriting management specializing in ocean marine, inland
marine and commercial property insurance through Wm. H. McGee; insurance
for international trade through the Company's 26% interest in Intercargo
Corporation; and also includes the run-off operations of the Company'
assumed reinsurance business, SecurityRe, which was sold in late 1996.
McGee and Intercargo are expected to be sold in 1999 as discussed in Notes
20 and 4.
Nonstandard Automobile - specializes in nonstandard personal automobile
insurance sold by OrionAuto.
81
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial information for the Company's segments for the years ended
December 31 is shown below:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Net Premiums Written:
Workers Compensation .................. $ 439.5 $ 365.1 $ 353.0
Specialty Commercial .................. 665.1 669.2 725.8
Nonstandard Automobile ................ 429.0 332.8 255.3
---------- ---------- ----------
Consolidated ....................... $ 1,533.6 $ 1,367.1 $ 1,334.1
========== ========== ==========
Revenues:
Workers Compensation -
Premiums earned ....................... $ 429.8 $ 362.1 $ 356.8
Net investment income ................. 35.2 41.8 38.2
Realized investment gains ............. 19.1 13.8 6.8
Other income .......................... 0.6 0.3 0.2
---------- ---------- ----------
Total Workers Compensation ......... 484.7 418.0 402.0
---------- ---------- ----------
Specialty Commercial -
Premiums earned ....................... 656.0 673.2 686.5
Net investment income ................. 82.9 90.5 82.4
Realized investment gains ............. 30.0 28.7 13.2
Other income .......................... 14.0 19.7 22.7
---------- ---------- ----------
Total Specialty Commercial ......... 782.9 812.1 804.8
---------- ---------- ----------
Nonstandard Automobile -
Premiums earned ....................... 417.2 322.4 257.5
Net investment income ................. 21.2 21.8 19.7
Realized investment gains ............. 3.1 5.5 6.3
---------- ---------- ----------
Total Nonstandard Automobile ....... 441.5 349.7 283.5
---------- ---------- ----------
Other .................................... 7.6 10.8 3.2
---------- ---------- ----------
Consolidated ....................... $ 1,716.7 $ 1,590.6 $ 1,493.5
========== ========== ==========
Pre-tax Earnings before Minority Interest:
Workers Compensation .................. $ 86.2 $ 86.8 $ 68.4
Specialty Commercial .................. 54.2 65.3 56.5
Nonstandard Automobile ................ 37.1 40.7 23.3
Other ................................. (20.8) (16.6) (20.9)
---------- ---------- ----------
Consolidated ....................... $ 156.7 $ 176.2 $ 127.3
========== ========== ==========
Identifiable Assets at December 31:
Workers Compensation .................. $ 989.7 $ 936.2
Specialty Commercial .................. 2,240.5 2,066.2
Nonstandard Automobile ................ 883.3 811.4
Other ................................. 50.9 70.3
---------- ----------
Consolidated ....................... $ 4,164.4 $ 3,884.1
========== ==========
82
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The miscellaneous income and expenses (primarily interest, general and
administrative expenses and other consolidating elimination entries) of the
parent company are reported as "Other" in the above table.
The accounting policies of the segments are the same as those described in
Note 1 to the consolidated financial statements included herein. Investments,
net investment income and realized investment gains are allocated to each
segment based on the cash flows of these segments. Earnings for the segments
represents earnings (loss) before federal income taxes and minority interest
expense, and includes an allocation of payroll, office and other expenses
incurred by the parent company to support the operations of the Company's
segments. Earnings for Specialty Commercial include equity earnings (loss) of
affiliate of $(0.7) million in 1998, $8.6 million in 1997 and $(0.4) million in
1996. Additionally, identifiable assets for Specialty Commercial include
investment in affiliate, Intercargo, of $22.8 million and $31.3 million at
December 31, 1998 and 1997, respectively.
Less than 2% of the Company's premiums are derived from operating units
located outside the United States. Substantially all of the Company's long-lived
assets are located in the United States. No one single customer represents 10%
or more of the Company's revenue for 1998, 1997 and 1996.
Note 18 - Selected Quarterly Financial Data (Unaudited)
Quarterly results of operations and earnings per common share for 1998 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
(In millions, except for per share amounts) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned ..................... $ 348.8 $ 370.4 $ 396.5 $ 387.3
Net investment income ............... 41.4 42.5 22.3 37.0
Realized investment gains ........... 29.0 22.7 0.4 0.4
Other income ........................ 5.6 7.0 2.1 3.3
-------- -------- -------- ---------
Total revenues ................... $ 424.8 $ 442.6 $ 421.3 $ 428.0
======== ======== ======== =========
Net earnings ..................... $ 42.2 $ 38.2 $ 2.3 $ 20.1
======== ======== ======== =========
Net earnings per basic common share . $ 1.54 $ 1.39 $ 0.08 $ 0.75
======== ======== ======== =========
Net earnings per diluted common share $ 1.50 $ 1.36 $ 0.08 $ 0.74
======== ======== ======== =========
1997:
Premiums earned ..................... $ 324.0 $ 335.2 $ 347.4 $ 351.0
Net investment income ............... 40.2 41.3 40.8 42.6
Realized investment gains ........... 15.8 8.4 5.2 18.5
Other income ........................ 4.9 5.2 5.0 5.1
-------- -------- -------- ---------
Total revenues ................... $ 384.9 $ 390.1 $ 398.4 $ 417.2
======== ======== ======== =========
Net earnings ..................... $ 29.5 $ 25.4 $ 24.5 $ 36.4
======== ======== ======== =========
Net earnings per basic common share . $ 1.08 $ 0.93 $ 0.90 $ 1.33
======== ======== ======== =========
Net earnings per diluted common share $ 1.06 $ 0.91 $ 0.88 $ 1.30
======== ======== ======== =========
</TABLE>
Earnings per share are computed independently for the quarters presented.
Therefore, the sum of the quarterly earnings per share may not equal the total
computed for the year.
83
<PAGE>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19 - Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Standard
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which companies are to record gains or losses resulting from changes in the
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. This Standard is effective for the Company's
financial statements beginning January 1, 2000, with early adoption permitted.
The Company is currently evaluating the impact of the adoption of this statement
and the potential effect on its financial position or results of operations.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This Statement
provides guidance on accounting for costs of computer software developed or
obtained for internal use including when incurred costs are and are not eligible
for capitalization. This Statement is effective for 1999 financial statements
with early adoption permitted. The Company is currently evaluating the impact of
the adoption of this Statement and the potential effect on its financial
position and results of operations.
Note 20 - Subsequent Event
As a part of the Company's reshaping to focus resources on high potential
lines of business, on March 11, 1999, the Company announced the signing of a
definitive agreement to sell McGee. The transaction is expected to be complete
by April 1999, subject to regulatory approvals and other closing conditions.
84
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Pursuant to General Instruction G(3) to this form, the information required
by Part III (Items 10, 11, 12 and 13) hereof is incorporated by reference from
the Company's definitive proxy statement for its Annual Meeting to be held on
May 25, 1999. The Company intends to file the proxy material, which involves the
election of directors, not later than 120 days after the close of the Company's
fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1 Financial Statements:
The following financial statements are included in Part II, Item 8.
Page
Report of Management 50
Independent Auditors' Report 51
Orion Capital Corporation and Subsidiaries:
December 31, 1998 and 1997 Consolidated Balance Sheet 52-53
For the years ended December 31, 1998, 1997 and 1996:-
Consolidated Statement of Earnings 54
Consolidated Statement of Stockholders' Equity 55
Consolidated Statement of Cash Flows 56-57
Notes to the Consolidated Financial Statements 58-84
(a)2. Financial Statement Schedules:
Selected Quarterly Financial Data - for the years ended
December 31, 1998, and 1997 - Included in Part II, Item 8.
Schedule I Consolidated Summary of Investments - Other than
Investments in Related Parties - December 31, 1998. S-1
II Condensed Financial Information of Registrant -
December 31, 1998, 1997 and 1996 S-2 through S-8
III Supplementary Insurance Information -
December 31, 1998, 1997 and 1996 S-9
85
<PAGE>
V Valuation and Qualifying Accounts -
December 31, 1998, 1997 and 1996 S-10
VI Supplemental Information For Property - Casualty Insurance
Underwriters - December 31, 1998, 1997 and 1996 S-11
Schedules other than those listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the Financial Statements or notes thereto.
(a)3. Exhibits:
Exhibit 2(i) Agreement and Plan of Merger dated as of October 31, 1997, between
Guaranty National Corporation and Orion; filed as Exhibit (c)(1) to the
Company's Tender Offer Statement on Schedule 14D-1; filed on November 5, 1997.
Exhibit 3(i) Restated Certificate of Incorporation of Orion, as amended on June
5, 1997; filed as Exhibit 3(i) to the Company's Annual Report on Form 10-K for
1997.
Exhibit 3(ii) By-Laws of Orion, as amended on September 11, 1996; filed as
Exhibit 3(ii) to the Company's Annual Report on Form 10-K for 1996.
Exhibit 4(i) Certificate of Designation, Preferences and Rights of Series B
Junior Participating Preferred Stock of Orion, dated September 17, 1996; filed
as Exhibit 4(i) to the Company's Annual Report on Form 10-K for 1996.
Exhibit 4(ii) Specimen certificate representing shares of Orion's Common Stock
(proof of March 27, 1989); filed as Exhibit 4(xii) to the Company's Annual
Report on Form 10-K for 1988.
Exhibit 4(iii) Indenture, dated as of September 8, 1992, between Orion and the
Connecticut National Bank (now known as Fleet Bank Connecticut, National
Association), as Trustee of Orion's 9 1/8% Senior Notes due September 1, 2002;
filed as Exhibit 4(v) to the Company's Annual Report on Form 10-K for 1992.
Exhibit 4(iv) Specimen certificate representing Orion's 9 1/8% Senior Notes;
filed as Exhibit 4(vi) to the Company's Annual Report on Form 10-K for 1992.
Exhibit 4(v) Senior Debt Indenture, dated as of July 17, 1995, between Orion and
the State Street Bank and Trust Company of Connecticut, National Association, as
Trustee of Orion's 7 1/4% Senior Notes due July 15, 2005; filed as Exhibit 4.9
to the Company's Current Report on Form 8-K, filed on July 14, 1995.
Exhibit 4(vi) First Supplemental Indenture to the Senior Debt Indenture; filed
as Exhibit 4.9(a) to the Company's Current Report on Form 8-K, filed on July 14,
1995.
Exhibit 4(vii) Specimen Certificate representing Orion's 7 1/4% Senior Notes;
filed as Exhibit 4.9(b) to the Company's Current Report on Form 8-K, filed on
July 14, 1995.
86
<PAGE>
Exhibit 4(viii) Indenture, dated as of February 5, 1998, between Orion and the
Bank of New York, as Trustee of Orion's 7.701% Junior Subordinated Deferrable
Interest Debentures; filed as Exhibit 4(viii) to the Company's Annual Report on
Form 10-K for 1997.
Exhibit 4(ix) Indenture, dated as of January 13, 1997, between Orion and the
Bank of New York, as Trustee of Orion's 8.73% Junior Subordinated Deferrable
Interest Debentures; filed as Exhibit 4.1 to the Company's Registration
Statement on Form 4 (No. 333- 21205).
Exhibit 4(x) Form of Exchange Debenture Certificate representing Orion's 8.73%
Junior Subordinated Deferrable Interest Debentures; filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-4 (No. 333-21205), filed on February
5, 1997.
Exhibit 4(xi) Certificate of Trust of Orion Capital Trust II, dated as of
February 2, 1998; filed as Exhibit 4(xi) to the Company's Annual Report on Form
10-K for 1997.
Exhibit 4(xii) Certificate of Trust of Orion Capital Trust I, dated as of
January 3, 1997; filed as Exhibit 4.3 to the Company's Registration Statement on
Form S-4 (No. 333- 21205), filed on February 5, 1997.
Exhibit 4(xiii) Declaration of Trust of Orion Capital Trust II, dated as of
February 2, 1998; filed as Exhibit 4(xiii) to the Company's Annual Report on
Form 10-K for 1997.
Exhibit 4(xiv) Declaration of Trust of Orion Capital Trust I, dated as of
January 3, 1997; filed as Exhibit 4.4 to the Company's Registration Statement on
Form S-4 (No. 333-21205), filed on February 5, 1997.
Exhibit 4(xv) Amended and Restated Declaration of Trust of Orion Capital Trust
II, dated as of February 5, 1998; filed as Exhibit 4(xv) to the Company's Annual
Report on Form 10-K for 1997.
Exhibit 4(xvi) Amended and Restated Declaration of Trust of Orion Capital Trust
I, dated as of January 13, 1997; filed as Exhibit 4.5 to the Company's
Registration Statement on Form S-4 (No. 333-21205), filed on February 5, 1997.
Exhibit 4(xvii) Form of Certificate evidencing 8.73% Exchange Capital Securities
of Orion Capital Trust I; filed as Exhibit 4.6 to the Company's Registration
Statement on Form S-4 (No. 333-21205).
Exhibit 4(xviii) Capital Securities Guarantee Agreement, dated as of January 13,
1997, delivered by Orion as Guarantor and relating to the 8.73% Exchange Capital
Securities; filed as Exhibit 4.7 to the Company's Registration Statement on Form
S-4 (No. 333-21205).
Exhibit 4(xix) Capital Securities Guarantee Agreement, dated as of February 5,
1998, delivered by Orion as Guarantor, and relating to the 7.701% Capital
Securities of Orion Capital Trust II; filed as Exhibit 4(xix) to the Company's
Annual Report on Form 10-K for 1997.
87
<PAGE>
Exhibit 4(xx) Form of Certificate evidencing 7.701% Capital Securities of Orion
Capital Trust II included as part of Exhibit 4(xv); filed as Exhibit 4(xx) to
the Company's Annual Report on Form 10-K for 1997.
Exhibit 4(xxi) Form of Certificate representing Orion's 7.701% Junior
Subordinated Deferrable Interest Debentures (filed as Exhibit A to Exhibit
4(viii).
Exhibit 4(xxii) Credit Agreement, dated as of July 8, 1998, between the Company,
the lenders named therein, First Union National Bank, as Administrative Agent,
Bank if America National Trust and Savings Association, as Documentation Agent,
and Fleet National Bank, as Syndication Agent; filed as Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for June 30, 1998.
Exhibit 10(xx) Amendment, dated February 14, 1995, to the Letter Agreement by
and between Orion Capital Corporation and Intercargo Corporation; filed as
Exhibit 10(xxiii) to the Company's Annual Report on Form 10-K for 1994.
Exhibit 10(xxi) Second Amendment, dated August 12, 1997, to the Letter Agreement
by and between Orion Capital Corporation and Intercargo Corporation); filed as
Exhibit 10(xxi) to the Company's Annual Report on Form 10-K for 1997.
Exhibit 10(i)* Orion's Deferred Compensation Plan, as amended; filed as Exhibit
10(i) to the Company's Annual Report on Form 10-K for 1991.
Exhibit 10(ii)* Orion's 1982 Long-Term Performance Incentive Plan, as amended;
filed as Exhibit 10(ii) to the Company's Annual Report on Form 10-K for 1996.
Exhibit 10(iii)* Orion's 1994 Stock Option Plan for Non-Employee Directors;
filed as Exhibit 10(iii) to the Company's Annual Report on Form 10-K for 1994.
Exhibit 10(iv)* Employment Agreement between Raymond W. Jacobsen and Orion, as
amended and restated as of December 6 1995; filed as Exhibit 10(vii) to the
Company's Annual Report on Form 10-K for 1995.
Exhibit 10(v)* Employment Agreement between W. Marston Becker and Orion, dated
as of October 31, 1995; filed as Exhibit 10(viii) to the Company's Annual Report
on Form 10-K for 1995.
Exhibit 10(vi)* Amendment to Employment Agreement between W. Marston Becker and
Orion, dated as of January 1, 1997; filed as Exhibit 10(x) to the Company's
Annual Report on Form 10-K for 1996.
Exhibit 10(vii) Lease Agreement between Connecticut UTF, Inc., as lessor, and
Security Insurance Company of Hartford ("Security"), as lessee, dated as of
December 19, 1984; filed as Exhibit 10(xxxiii) to the Company's Annual Report on
Form 10-K for l984.
*Management contract or compensatory plan or arrangement.
88
<PAGE>
Exhibit 10(viii) Second Assignment of Lease and Agreement from Connecticut UTF,
Inc. to Security, dated as of December 19, 1984; filed as Exhibit 10(xxxiv) to
the Company's Annual Report on Form 10-K for 1984.
Exhibit 10(ix) Purchase Money Second Mortgage from Connecticut UTF, Inc., as
mortgagor, to Security, as mortgagee, dated as of December 19, 1984; filed as
Exhibit 10(xxxvi) to the Company's Annual Report on Form 10-K for 1984.
Exhibit 10(x) Purchase Money Note, in the face amount of $2,800,000, from
Connecticut UTF, Inc. to Security, dated December 19, 1984; filed as Exhibit
10(xxxvi) to the Company's Annual Report on Form 10-K for l984.
Exhibit 10(xi) Guarantee from Orion to Connecticut UTF, Inc., dated as of
December 19, 1984, guaranteeing the performance of Security under its lease with
Connecticut UTF, Inc.; filed as Exhibit 10(xxxvii) to the Company's Annual
Report on Form 10-K for 1984.
Exhibit 10(xii) Form of Indemnification Agreement, dated as of June 3, 1987,
between Orion and each of its Directors and Executive Officers; filed as Exhibit
10(xi) to the Company's Annual Report on Form 10-K for 1987.
Exhibit 10(xiii) Rights Agreement, dated as of September 11, 1996, between Orion
and First Chicago Trust Company of New York, as Successor Rights Agent to Chase
Mellon; filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for
1998.
Exhibit 10(xiv)* Orion Supplemental Benefits Plan, filed as Exhibit 10(xxv) to
the Company's Annual Report on Form 10-K for 1991.
Exhibit 10(xv) Orion's Equity Incentive Plan, dated September 11, 1996; filed as
Exhibit 10(xx) to the Company's Annual Report on Form 10-K for 1996.
Exhibit 10(xvi) Letter Agreement, dated September 13, 1993, by and between Orion
and Intercargo Corporation; filed as Exhibit 10(xxii) to the Company's Annual
Report on Form 10-K for 1993.
Exhibit 10(xvii) Purchase Agreement by and between Sun Alliance USA, Inc. and
Orion, dated as of June 30, 1995; filed as Exhibit 10(xxv) to the Company's
Annual Report on Form 10-K for 1995.
Exhibit 10(xviii)* Amended and Restated Employment Agreement between W. Marston
Becker and Orion, dated July, 1998; filed as Exhibit 10(i) to the Company's
Annual Report on Form 10-K for 1998.
Exhibit 10(xix)* Amended and Restated Employment Agreement between W. Marston
Becker and Orion, dated as of January 30, 1999; filed as Exhibit 10(ii) to the
Company's Annual Report on Form 10-K for 1998.
*Management contract or compensatory plan or arrangement.
89
<PAGE>
Exhibit 10(xx)* Form of Employment Agreement between Orion and each of its
Senior Executive Officers dated February 1999; filed as Exhibit 10(iii) to the
Company's Annual Report on Form 10-K for 1998.
Exhibit 10(xxi) Letter Agreement dated December 1, 1998, between Orion Capital
Corporation and XL America, Inc., a Delaware Corporation; filed as Exhibit
10(iv) to the Company's Annual Report on Form 10-K for 1998.
*Management contract or compensatory plan or arrangement
Copies of exhibits may be obtained upon payment of a $0.50 per page fee.
Such requests should be made in writing to: Corporate Secretary, Orion Capital
Corporation, 9 Farm Springs Road, Farmington, CT 06032.
(b) Reports on Form 8-K:
None.
(c) Filed exhibits:
See Exhibit Index.
90
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ORION CAPITAL CORPORATION
By: /s/ W. Marston Becker March 25, 1999
- -------------------------
W. Marston Becker
Chairman of the Board
and Chief Executive Officer
By: /s/ Michael L. Pautler March 25, 1999
- --------------------------
Michael L. Pautler
Senior Vice President and
Chief Financial Officer
91
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons (including a majority of
the members of the Board of Directors of the Registrant) in the capacities and
on the dates indicated:
Signature and Title Date
/s/ W. Marston Becker March 25, 1999
- ---------------------
W. Marston Becker
Chairman of the Board
/s/ Gordon F. Cheesbrough March 25, 1999
- -------------------------
Gordon F. Cheesbrough
Director
/s/ John C. Colman March 25, 1999
- ------------------
John C. Colman
Director
/s/ David H. Elliott March 25, 1999
- --------------------
David H. Elliott
Director
/s/ Victoria R. Fash March 25, 1999
- --------------------
Victoria R. Fash
Director
/s/ Robert H. Jeffrey March 25, 1999
- --------------------
Robert H. Jeffrey
Director
/s/ Gordon W. Kreh March 25, 1999
- ------------------
Gordon W. Kreh
Director
/s/ Warren R. Lyons March 25, 1999
- -------------------
Warren R. Lyons
Director
/s/ James K. McWilliams March 25, 1999
- -----------------------
James K. McWilliams
Director
/s/ Ronald W. Moore March 25, 1999
- -------------------
Ronald W. Moore
Director
/s/ William B. Weaver March 25, 1999
- ---------------------
William B. Weaver
Director
92
<PAGE>
EXHIBIT INDEX
Exhibit 10(i) Amended and Restated Employment Agreement between W. Marston
Becker and Orion, dated July 1998.
Exhibit 10(ii) Amended and Restated Employment Agreement between W. Marston
Becker and Orion, dated as of January 30, 1999.
Exhibit 10(iii) Form of Employment Agreement between Orion and each of its
Senior Executive Officers dated February 1999.
Exhibit 10(iv) Letter Agreement dated December 1, 1998, between Orion Capital
Corporation and XL America, Inc., a Delaware Corporation.
Exhibit 10(v) Rights Agreement, dated as of September 11, 1996, between Orion
Capital Corporation and First Chicago Trust Company of New York, as Successor
Rights Agent to Chase Mellon.
Exhibit 11 Statement re: computation of earnings per common share.
Exhibit 21 Subsidiaries of Orion.
Exhibit 23 Consent of Deloitte & Touche, LLP.
Exhibit 27 Financial Data Schedules.
93
<PAGE>
SCHEDULE I
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1998
(In millions)
- -------------------------------------------------------------------------------
Column A Column B Column C Column D
Amount Shown
Market on Balance
Type of Investment Cost Value Sheet
- -------------------------------------------------------------------------------
Fixed maturities held-to-maturity:
Bonds -
United States Government and
government agencies and
Authorities ............... $ 81.4 $ 84.6 $ 81.4
States, municipalities and
political subdivisions .... 156.1 164.5 156.1
All other corporate bonds .... 23.1 23.6 23.1
---------- --------- ---------
260.6 272.7 260.6
---------- --------- ---------
Fixed maturities available-for-sale:
Bonds -
United States Government and
government agencies and
authorities ............... 69.0 70.6 70.6
States, municipalities and
political subdivisions .... 684.1 723.8 723.8
Foreign governments .......... 4.1 4.7 4.7
All other corporate bonds .... 447.6 449.0 449.0
Redeemable preferred stocks ..... 100.7 101.8 101.8
---------- --------- ---------
1,305.5 1,349.9 1,349.9
---------- --------- ---------
Equity securities:
Common stocks -
Public utilities ............. 1.6 1.7 1.7
Banks, trusts and insurance
Companies ................. 15.1 39.2 39.2
Industrial, miscellaneous and
all other ................. 183.6 201.5 201.5
Non-redeemable preferred stocks . 269.1 268.5 268.5
---------- --------- ---------
469.4 510.9 510.9
---------- --------- ---------
Mortgage loans on real estate ...... 2.2 2.2 2.2
Other long-term investments ........ 114.0 114.0 114.0
Short-term investments ............. 248.7 248.7 248.7
---------- --------- ---------
Total investments ......... $ 2,400.4 $ 2,498.4 $ 2,486.3
========== ========= =========
S-1
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
BALANCE SHEET
ASSETS
December 31,
--------------------
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Fixed maturities, at market (cost $0.3) ................... $ 0.2 $ 0.2
Non-redeemable preferred stocks, at market (cost $27.8) ... 27.8 --
Short-term investments .................................... 4.3 68.7
Cash ...................................................... 0.2 0.4
Notes receivable and other assets ......................... 8.6 5.3
Deferred federal income taxes ............................. 27.4 9.4
Investment in subsidiaries ................................ 1,035.5 947.1
Loans receivable due from affiliates ...................... 99.0 --
Due from affiliates ....................................... 3.5 --
Excess of cost over fair value of net assets acquired ..... 43.4 98.9
-------- --------
Total assets ........................................... $1,249.9 $1,130.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ......................................... $ 55.2 $ 55.8
Due to affiliates ......................................... -- 16.8
Notes payable ............................................. 217.4 209.3
-------- --------
Total liabilities ...................................... 272.6 281.9
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
the junior subordinated debentures of the Company ...... 250.0 125.0
Stockholders' equity ...................................... 727.3 723.1
-------- --------
Total liabilities and stockholders' equity ............. $1,249.9 $1,130.0
======== ========
[FN]
See Notes to Condensed Financial Statements of Registrant
</FN>
S-2
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
STATEMENT OF EARNINGS
Year Ended December 31,
-----------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------
Revenues:
Net investment income ..................... $ 1.7 $ 8.4 $ 1.9
Interest income on affiliate loans ........ 6.1 -- --
Other income .............................. 0.8 0.6 0.4
-------- -------- ---------
8.6 9.0 2.3
-------- -------- ---------
Expenses:
Interest .................................. 18.4 18.4 17.8
General and administrative ................ 10.0 6.2 3.7
Amortization of excess of cost over fair
value of net assets acquired ........... 1.9 2.0 1.9
-------- -------- ---------
30.3 26.6 23.4
-------- -------- ---------
Loss before federal income taxes, equity in
net earnings of subsidiaries and minority
interest expense .......................... (21.7) (17.6) (21.1)
Federal income taxes ......................... 41.1 45.0 30.1
-------- -------- ---------
Loss before equity in net earnings of
subsidiaries and minority interest expense (62.8) (62.6) (51.2)
Equity in net earnings of subsidiaries ....... 178.4 185.3 137.8
Minority interest expense in subsidiary trusts
preferred securities, net of federal income
taxes ..................................... 12.8 6.9 --
-------- -------- ---------
Net earnings ........................... 102.8 115.8 86.6
Other comprehensive income, net of tax: -------- -------- ---------
Unrealized investment gains (losses) ...... (52.4) 41.3 9.0
Unrealized foreign exchange translation
gains (losses) ......................... 1.7 (2.2) 1.8
-------- -------- ---------
Other comprehensive income ............. (50.7) 39.1 10.8
-------- -------- ---------
Comprehensive income ................ $ 52.1 $ 154.9 $ 97.4
======== ======== =========
[FN]
See Notes to Condensed Financial Statements of Registrant
</FN>
S-3
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
Year Ended December 31,
---------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Dividends received from subsidiaries .......... $ 55.2 $ 42.8 $ 35.3
Net investment income collected ............... 4.6 8.0 1.9
Interest income received from affiliates ...... 7.0 -- --
Interest paid ................................. (20.4) (17.3) (17.3)
Payments on trust preferred securities ........ (17.6) (5.1) --
Other receipts (payments) ..................... (11.6) 7.9 6.4
------ ------- ------
Net cash provided by operating activities .. 17.2 36.3 26.3
------ ------- ------
Cash flows from investing activities:
Sales (purchases) of equity securities ........ (27.0) 0.2 --
Net sales (purchases) of short-term investments 64.4 (36.0) 22.8
Purchases of Guaranty National common stock ... (2.9) (104.4) (20.7)
Issuance of loans to affiliates, net .......... (99.0) -- --
Purchase of Grocers Insurance Group ........... (32.4) -- --
Other payments ................................ 1.4 (0.2) (2.6)
------ ------- ------
Net cash used in investing activities ...... (95.5) (140.4) (0.5)
------ ------- ------
Cash flows from financing activities:
Net proceeds from issuance of trust preferred
securities ................................. 121.9 123.0 --
Proceeds from loan with banks, net ............ 8.0 -- --
Proceeds from exercise of stock options ....... 2.3 0.6 --
Dividends paid to stockholders ................ (18.5) (18.0) (14.9)
Purchases of common stock ..................... (35.6) (1.5) (10.5)
Other receipts (payments) ..................... -- 0.1 --
------ ------- ------
Net cash provided by (used in) financing
activities .............................. 78.1 104.2 (25.4)
------ ------- ------
Net (decrease) increase in cash ............ (0.2) 0.1 0.3
Cash balance, beginning of year ............... 0.4 0.3 --
------ ------- ------
Cash balance, end of year ..................... $ 0.2 $ 0.4 $ 0.3
====== ======= ======
[FN]
See Notes to Condensed Financial Statements of Registrant
</FN>
S-4
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ORION CAPITAL CORPORATION
STATEMENT OF CASH FLOWS - (Continued)
Year Ended December 31,
---------------------------
(In millions) 1998 1997 1996
- ---------------------------------------------------------------------------
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ................................. $ 102.8 $ 115.8 $ 86.6
------- ------- -------
Adjustments:
Equity in net earnings of subsidiaries .... (178.4) (185.3) (137.8)
Consolidating elimination of subsidiaries
income taxes ........................... 51.1 40.1 35.5
Dividends received from subsidiaries ...... 55.2 42.8 35.3
Depreciation and amortization ............. 3.8 3.0 3.0
Deferred federal income taxes ............. 3.6 3.1 10.0
Other ..................................... -- 0.1 0.4
Change in assets and liabilities, net:
Decrease (increase) in notes receivable and
other .................................. (1.3) 1.1 (2.2)
Increase (decrease) in other liabilities .. 0.7 11.6 (3.7)
Change in amounts due to/from affiliates .. (20.3) 4.0 (0.8)
------- ------- -------
Total adjustments and changes .......... (85.6) (79.5) (60.3)
------- ------- -------
Net cash provided by operating activities . $ 17.2 $ 36.3 $ 26.3
======= ======= =======
[FN]
See Notes to Condensed Financial Statements of Registrant
</FN>
S-5
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Years Ended December 31, 1998, 1997, and 1996
Note 1 - Expense Reimbursement, Management Fees and Dividends from Subsidiaries
During 1996 through 1998 the Registrant was reimbursed for payroll, office
rental and other expenses incurred by it to support the operations of its
insurance subsidiaries. This reimbursement of $8.3 million, $8.1 million and
$7.4 million in 1998, 1997 and 1996, respectively, is accounted for as a
reduction of general and administrative expenses. The Registrant also received
an annual investment management fee from Guaranty National Corporation of $0.6
million in 1998, 1997 and 1996. The Registrant was reimbursed for federal tax
expenses pursuant to tax sharing agreements with its subsidiaries.
The Registrant has received $55.2 million, $42.8 million and $35.3 million
in dividends from its insurance subsidiaries in 1998, 1997 and 1996,
respectively. Payments of dividends by the Registrant's insurance subsidiaries
must comply with insurance regulatory limitations concerning stockholders'
dividends and capital adequacy. State insurance regulators have broad
discretionary authority with respect to limitations on the payment of dividends
by insurance companies. Under current regulation, the maximum dividends
permitted from the Registrant's insurance subsidiaries at December 31, 1998 for
the ensuing twelve months, without prior approval, aggregated $135.5 million.
Note 2 - Notes Payable
Notes payable at December 31 consist of the following:
(In millions) 1998 1997
- -----------------------------------------------------------------
$110,000,000 face amount, 9.125% Senior
Notes, due September 1, 2002 $ 109.9 $ 109.9
$100,000,000 face amount, 7.25% Senior
Notes, due July 15, 2005 99.5 99.4
Loan agreement with banks 8.0 -
--------- ---------
$ 217.4 $ 209.3
========= =========
On July 8, 1998 the Company entered into a credit agreement with a group of
banks ("Bank Credit Facility") which provides for unsecured borrowings up to
$150.0 million. The Bank Credit Facility expires on July 8, 2003 and provides
for two one-year extension periods. The Company intends to use the Bank Credit
Facility for general corporate purposes, which may include acquisitions. The
Bank Credit Facility carries an annual facility fee on the unused amounts of the
credit facility. Borrowings under the Bank Credit Facility bear interest at
LIBOR (London Interbank Offered Rate) plus a margin based upon the Company's
credit ratings. The Bank Credit Facility requires the Company to maintain
certain financial covenants including a maximum debt to total capitalization
ratio of 0.4 to 1.0, as defined, and a minimum combined statutory surplus of
$650.0 million plus 30% of the Company's aggregate combined annual statutory net
income. The Bank Credit Facility limits the Company's ability to incur secured
indebtedness or certain contingent obligations except for indebtedness secured
by liens specifically
S-6
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Years Ended December 31, 1998, 1997, and 1996
permitted by the Bank Credit Facility and additional secured indebtedness with a
principal amount not exceeding 10% of the Company's consolidated net worth, as
defined.
The indentures for the 7.25% Senior Notes and for Orion's 9.125% Senior
Notes limit the amount of liens and guarantees by the Company, and the Company's
ability to incur secured indebtedness without equally and ratably securing the
senior notes.
As of December 31, 1998 maturities of the Company's notes payable are as
follows: 2002 - $110.0 million; 2003 - $8.0 million; and 2005 - $100.0 million.
Note 3 - Trust Preferred Securities
Company-Obligated Mandatorily Redeemable Preferred Capital Securities of
Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the
Company ("Trust Preferred Securities") comprise the following at December 31:
(In millions) 1998 1997
- ------------------------------------------------------------
8.73% Trust Preferred Securities
due January 1, 2037 $ 125.0 $ 125.0
7.701% Trust Preferred Securities
due April 15, 2028 125.0 -
--------- ---------
$ 250.0 $ 125.0
========= =========
On January 13, 1997 the Registrant issued $125 million of 8.73% Junior
Subordinated Deferrable Interest Debentures due January 1, 2037 (the "8.73%
Debentures") to Orion Capital Trust I ("Trust I"), a Delaware statutory business
trust sponsored by the Registrant. Trust I simultaneously sold $125 million of
8.73% capital securities (the "8.73% Trust Preferred Securities") which have
substantially the same terms as the 8.73% Debentures. The 8.73% Trust Preferred
Securities may be redeemed without premium on or after January 1, 2007.
On February 2, 1998 the Registrant issued $125 million of 7.701% Junior
Subordinated Deferrable Interest Debentures due April 15, 2028 (the "7.701%
Debentures") to Orion Capital Trust II ("Trust II"), a Delaware statutory
business trust sponsored by the Registrant. Trust II then sold $125 million of
7.701% capital securities (the "7.701% Trust Preferred Securities"), which have
substantially the same terms as the 7.701% Debentures.
The 8.73% and 7.701% Trust Preferred Securities are subordinate to all
liabilities of the Company. The Company may defer interest distributions on
these Trust Preferred Securities; however, during any period when such
cumulative distributions have been deferred, the Registrant may not declare or
pay any dividends or distributions on its common stock. The sole assets of the
Trusts are the Debentures issued by the Registrant.
S-7
<PAGE>
SCHEDULE II
ORION CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Years Ended December 31, 1998, 1997, and 1996
The Registrant has given its partial guarantee, which when taken together
with the Company's obligations under the declaration of the Trust, the
Debentures, and the indenture pursuant to which the Trust Preferred Securities
are issued including its obligations to pay costs, expenses, debts and
liabilities of the Trusts (other than with respect to the Trust Preferred
Securities), provides a full and unconditional guarantee of amounts due on the
Trust Preferred Securities.
Note 4 - Loan Receivable Due from Affiliates
In February 1998, the Registrant entered into a ten-year $100.0 million
senior unsecured revolving loan with Guaranty National Corporation of which
$89.6 million was outstanding at December 31, 1998. Interest accrues at 6.5% per
annum for the first two-year period of this loan and then will reprice over the
remaining loan period. This loan was funded from the proceeds of the sale of the
7.701% Trust Preferred Securities (see Note 3). Guaranty National Corporation
used the loan proceeds to repay its bank indebtedness.
In April 1998, the Registrant entered into a $10.0 million revolving credit
loan with a subsidiary acquired in the Strickland purchase. The outstanding
balance under this loan ($9.4 million at December 31, 1998) is secured by
eligible receivables of the subsidiary borrower and accrues interest at prime
rate plus a margin (8.5% at December 31, 1998).
Note 5 - Comprehensive Income
As of January 1, 1998 the Registrant adopted FAS No. 130, "Reporting
Comprehensive Income". This statement establishes standards for the reporting
and presentation of comprehensive income and its components in financial
statements. Comprehensive income encompasses all changes in shareholders' equity
(except those arising from transaction with shareholders) and includes net
income, net unrealized investment gains or losses and foreign currency
translation adjustments. This standard requires additional disclosures and does
not affect the Registrant's financial position or results of operations. For
Registrant financial statements only, comprehensive income is displayed on the
Statements of Earnings.
Stockholders' equity includes accumulated other comprehensive income of
$58.5 million and $109.2 million at December 31, 1998 and 1997, respectively,
primarily comprising unrealized investment gains.
Note 6 - Subsequent Event
As a part of the Company's reshaping to focus resources on high potential
lines of business, on March 11, 1999, the Registrant announced the signing of a
definitive agreement to sell McGee. The transaction is expected to be complete
by April 1999, subject to regulatory approvals and other closing conditions.
S-8
<PAGE>
SCHEDULE III
<TABLE>
<CAPTION>
ORION CAPITAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K Column L
Reserve
For Unpaid Dividends Amortization
Deferred Losses Payable Losses of Deferred Policy-
Policy and Loss to Net and Loss Policy Other holders'
Acquisition Adjustment Unearned Policy- Premiums Investment Adjustment Acquisition Insurance Dividend Premiums
Segment Costs Expenses Premiums Holders Earned Income Expenses Costs Expenses Expenses Written
(a)
- --------------------------------------------------------------------------------------------------------------------------------
1998:
Workers
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Compensation... $ 48.5 $ 440.3 $ 95.7 $ 17.4 $ 429.8 $ 35.2 $ 247.1 $ 110.9 $ 15.1 $ 24.7 $ 439.5
Specialty
Commercial .... 89.2 1,326.7 390.7 0.5 656.0 82.9 485.1 210.9 23.2 0.1 665.1
Nonstandard
Automobile .... 17.9 250.7 77.6 -- 417.2 21.2 288.3 96.1 9.7 -- 429.0
Other ........... -- -- -- -- -- 3.9 -- -- -- -- --
------- --------- -------- ------- -------- -------- -------- -------- ------- ------- --------
$ 155.6 $ 2,017.7 $ 564.0 $ 17.9 $1,503.0 $ 143.2 $1,020.5 $ 417.9 $ 48.0 $ 24.8 $1,533.6
======= ========= ======== ======= ======== ======== ======== ======== ======= ======= ========
1997 (b):
Workers
Compensation... $ 41.4 $ 447.7 $ 86.0 $ 19.9 $ 362.1 $ 41.8 $ 194.4 $ 101.8 $ 13.2 $ 20.6 $ 365.1
Specialty
Commercial .... 91.7 1,212.6 405.0 0.6 673.2 90.5 485.5 217.4 14.8 3.4 669.2
Nonstandard
Automobile .... 14.0 211.4 60.6 -- 322.4 21.8 225.6 68.0 8.6 -- 332.8
Other ........... -- -- -- -- -- 10.8 -- -- -- -- --
------- --------- -------- ------- -------- -------- -------- -------- -------- -------
$ 147.1 $ 1,871.7 $ 551.6 $ 20.5 $1,357.7 $ 164.9 $ 905.5 $ 387.2 $ 36.6 $ 24.0 $1,367.1
======= ========= ======== ======= ======== ======== ======== ======== ======= ======= ========
1996 (c):
Regional
Operations.... $ 33.2 $ 466.0 $ 83.9 $ 20.5 $ 356.8 $ 38.2 $ 209.7 $ 92.0 $ 11.2 $ 18.5 $ 353.0
Special
Programs ..... 58.6 955.7 258.1 2.0 462.3 62.7 335.5 137.6 6.3 5.1 489.9
Guaranty
National ..... 44.4 364.0 154.2 -- 481.7 39.4 337.8 134.0 10.4 -- 491.2
Other ........... -- -- -- -- -- 5.1 -- -- -- -- --
------- --------- -------- ------- -------- -------- -------- -------- ------- ------- --------
$ 136.2 $ 1,785.7 $ 496.2 $ 22.5 $1,300.8 $ 145.4 $ 883.0 $ 363.6 $ 27.9 $ 23.6 $1,334.1
======= ========= ======== ======= ======== ======== ======== ======== ======= ======= ========
</TABLE>
(a) Net investment income is generally allocated on the basis of cash flow.
(b) 1997 restated to conform with 1998 basis of presentation.
(c) 1996 represents FAS 14 Segment Presentation including Guaranty National
Corporation, which comprises both commercial and personal lines of business.
S-9
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE V
ORION CAPITAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
- ------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
--------
Additions
(1) (2)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions End of
Description Year Expenses Accounts (a) Year
- ------------------------------------------------------------------------------------------------
1998:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts-
Accounts and notes receivable ...$ 4.1
Effects of acquisition .......... 0.7
------ ------- ---- ------ ------
$ 4.8 $ 3.0 $ -- $ 4.4 $ 3.4
====== ======= ==== ====== ======
1997:
Allowance for doubtful accounts-
Accounts and notes receivable ...$ 3.7
Effects of acquisition .......... 0.3
------ ------- ---- ------ ------
$ 4.0 $ 1.3 $ -- $ 1.2 $ 4.1
====== ======= ==== ====== ======
1996:
Allowance for doubtful accounts-
Accounts and notes receivable ...$ 3.2
Effects of acquisition .......... 0.4
------ ------- ---- ------ ------
$ 3.6 $ 1.5 $ -- $ 1.4 $ 3.7
====== ======= ==== ====== ======
(a) Accounts written off
</TABLE>
S-10
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI
ORION CAPITAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION FOR PROPERTY-CASUALTY INSURANCE UNDERWRITES
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Reserve Losses and
For Loss Adjustment
Unpaid Expenses Incurred Amortization Paid
Affiliation Deferred Losses Discount Related to of Deferred Losses
With Policy And loss Deducted Net (1) (2) Policy and Loss
Registrant Acquisition Adjustment in column Unearned Premiums Investment Currrent Prior Acquisition Adjustment Premiums
(a) Costs Expenses (b) Premiums Earned Income Year Year Costs Expenses Written
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $ 155.6 $ 2,017.7 $ 10.1 $ 564.0 $ 1,503.0 $ 139.3 $ 986.6 $ 33.9 $ 417.9 $1,009.7 $1,533.6
====================================================================================================================
1997 $ 147.1 $ 1,871.7 $ 4.1 $ 551.6 $ 1,357.7 $ 154.1 $ 896.2 $ 9.2 $ 387.2 $ 892.1 $1,367.1
====================================================================================================================
1996 $ 136.2 $ 1,785.7 $ 4.1 $ 496.2 $ 1,300.8 $ 140.3 $ 874.1 $ 8.9 $ 363.6 $ 794.9 $1,334.1
====================================================================================================================
(a) Consolidated Property and Casualty entities.
(b) Discount deducted in Column C is computed using a statutory interest
rate of 3.5% for certain workers compensation losses.
</TABLE>
S-11
<PAGE>
EMPLOYMENT AGREEMENT
THE EXECUTIVE'S EMPLOYMENT AGREEMENT AMENDMENT, dated as of the 10th day of
July, 1998 (the "Agreement"), between Orion Capital Corporation, a Delaware
corporation (the "Company"), and W. Marston Becker ("Executive"); WHEREAS, the
Company and the Executive entered into an Employment Agreement, dated October
31, 1995 (the "Original Agreement"); and WHEREAS, as a result of the assumption
by the Executive of additional duties and responsibilities with the Company,
Company and the Executive desire to amend and restate the Original Agreement.
NOW, THEREFORE, the Company and Executive hereby agree that the Original
Agreement shall be amended and restated in its entirety to provide as follows:
EMPLOYMENT. The Company hereby employs Executive to render services as the
Chairman and Chief Executive Officer of the Company. The Executive shall have
such responsibilities, perform such duties and have such authorities as are
consistent with the Executive's position as the Chairman and Chief Executive
Officer of the Company, reporting to, and subject only to the direction and
control of, the Board of Directors of the Company (the "Board"). The Executive
hereby accepts such employment and agrees to render the Executive's services
(unless prevented by sickness, injury or other incapacity) fully, faithfully,
and to the best of the Executive's ability. The Executive's services shall be
exclusive to the Company, except that with the prior approval of the Executive
Committee of the Board, the Executive may serve as a compensated member of the
board of directors of other, "for profit" unaffiliated corporations. PLACE OF
EMPLOYMENT. The Company agrees that the Executive will be located, and will
render such services (subject to necessary and appropriate business related
travel), at the Company's office in Farmington, Connecticut. TERM. The term of
the Executive's employment with the Company ("Term") under the Executive's
Agreement shall be for a period of two (2) years, commencing on July 10, 1998
and ending on July 10, 2000, which ending date shall automatically be extended
by one (1) additional day for each day of the Executive's employment with the
Company after July 10, 1998, unless either party shall at any time have given
written notice to the other of its or the Executive's intention not further to
extend the Term. COMPENSATION AND BENEFITS. Base Salary. The Company shall pay
to the Executive a base salary (the "Base Salary") at an annual rate of not less
than $410,000. The Executive's Base Salary during the Term may be increased by
such amount as shall be determined by the Board in its discretion. Once
established at any specific rate, the Executive's Base Salary shall not be
reduced. The Base Salary shall be payable to the Executive in installments on
the Company's normal payroll dates. Incentive Compensation and Stock Awards. The
Executive shall have the opportunity to participate in long-term and short-term
incentive or performance plans or programs and in stock option and stock award
plans of the Company to the same extent as other senior executive employees.
Expenses. The Executive is authorized to incur and shall be reimbursed for
reasonable business, entertainment and other related expenses (including all
travel and living expenses while away from home on Company business or at the
request of the Company) in the performance of the Executive's duties. The
Executive shall comply with the Company's expense and reimbursement policies as
in effect at the time the expense is incurred. Other Benefit Plans. The
Executive shall participate in, and shall be entitled to receive benefits under,
and in accordance with, the provisions of any health, life insurance,
disability, deferred compensation, profit sharing and savings or other employee
benefit plan or plans adopted, or to be adopted, by the Company and which are
generally applicable to senior executive employees of the Company. Disability
Insurance. In addition to the other benefits offered the Company shall also
maintain, at its expense, an executive long-term disability insurance policy
("Policy") for the Executive providing the Executive with benefits in the event
of a "disability" as such term is defined in the Policy (for all purposes of
this Agreement, "Disability"). The annual benefit payable under the Policy in
the event of a Disability shall be equal to an annual rate of 66.66% of the
Executive's Base Salary or as close there too as reasonably available. PAID TIME
OFF. The Executive shall be entitled to paid time off of not less than five (5)
weeks during each calendar year, earned on a per pay period basis ("Paid Time
Off"). TERMINATION. Death or Disability. The Executive's employment under this
Agreement shall terminate upon the Executive's death or Disability. Cause. The
Board may terminate the Executive's employment for Cause. For purposes of the
Executive's Agreement, the Board shall have "Cause" upon: (A) the commission by
the Executive of any felonious act or any other criminal act involving moral
turpitude, dishonesty, theft or unethical business conduct, (B) the willful and
continued failure of the Executive to substantially perform his duties (other
than as a result of incapacity due to physical or mental injury or illness)
which duties the Executive has been directed in writing to perform by the Board;
or (C) the Executive engaging in willful misconduct or is grossly negligent in
the performance of the Executive's duties hereunder, or (D) the Executive's
failure to comply with the policies or procedures of the Company. No action or
failure to act, by the Executive shall be considered "willful" if it is
determined by the Board to have been done by the Executive in good faith and
with the reasonable belief that the Executive's action or omission is in the
best interest of the Company. Early Termination. Either the Executive or the
Board shall have the right to terminate the Executive's employment at any time
for any reason whatsoever (an "Early Termination"); provided, however, that the
Board or its successor, may not, pursuant to this Section 6 (c), elect an Early
Termination from the date of the occurrence of a Change in Control until after
the expiration of twelve (12) calendar months following the calendar month in
which the Change in Control has occurred. ----------------- Change in Control.
At any time within the twelve (12) calendar months following the month in which
a Change in Control shall have occurred, the Board or the Executive shall have
the right to terminate the Executive's employment for any reason whatsoever. For
purpose this Agreement, a "Change in Control" shall be deemed to have occurred
upon the earliest to happen of the following: -----------------
(1) The acquisition, in one or more transactions, of beneficial ownership
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act") by any person or entity or any group of persons or entities who
constitute a group (within the meaning of Rule 13d-3 of the Exchange Act), other
than a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or a subsidiary, of any securities of the Company if, as a
result of such acquisition, such person, entity or group either (1) beneficially
owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, more than 20% of the Company's outstanding voting securities
entitled to vote on a regular basis for a majority of the members of the Board
or (2) otherwise has the ability to elect, directly or indirectly, a majority of
the members of the Board; (2) A change in the composition of the Board such that
a majority of the members of the Board are not Continuing Directors. A
"Continuing Director" means, as of any date of determination, any member of the
Board who (i) was a member of such Board on the date of this Agreement (ii) was
nominated and elected to such Board with the affirmative vote of a majority of
the Continuing Directors who were members of the Board at the time of such
nomination or election; or (3) The stockholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 80% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one or more transactions) of all
or substantially all of the Company's assets.
Notice of Termination. A written notice to the other party ("Notice of
Termination") must in order to be effective, precede any termination pursuant to
Section 6 (b), (c) or (d). A Notice of Termination shall indicate the specific
provision in the Executive's Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
- --------------------- Date of Termination. "Date of Termination" shall mean (i)
if the Executive's employment is terminated by the Executive's death, the date
of the Executive's death, or by reason of the Executive's Disability, the date
all of the conditions to constitute a Disability have occurred, or if upon
expiration of the Term, the last day of the Term, (ii) if the Executive's
employment is terminated for Cause, the date specified in the Notice of
Termination, and (iii) if the Executive's employment is terminated by reason of
the occurrence of a Change of Control or upon an Early Termination, the date
which is seven (7) days after the date of which the Notice of Termination is
given. COMPENSATION AND BENEFITS UPON TERMINATION. Upon termination of the
Executive's employment for any reason whatsoever (including Cause), the
Executive shall receive such other benefits, if any, as may be provided to him
under the terms of any employee benefit, incentive, option, stock award and
other plans or programs of the Company in which he may be, or have been, a
participant and shall be paid the balance of the Executive's earned but unpaid
Base Salary and Paid Time Off with the additions described below.
Involuntary Termination - Upon the Company's election of Early
Termination pursuant to Section 6 (c) for reasons other than Cause, the
following additional provisions shall apply:
Severance Pay - The Executive shall continue to receive Base Salary for two
(2) years after the Date of Termination. Bonus - The Executive shall receive a
prorated portion of the Executive's bonus, if any, as determined by the Board
based on the Company's actual performance during the fiscal year in which the
Executive's Date of Termination occurs. Such determination to be made at
termination and payment will be made at the same time that bonus consideration
and payments for other senior executive employees for the same performance
period are made. Car Allowance - The Executive shall continue to receive a car
allowance for the two- (2) year period after the Executive's Date of
Termination. The amount of such car allowance shall equal the amount, if any,
being received by the Executive as of the Date of Notice. Long-Term Incentive -
The Executive shall continue to vest for the two- (2) year period following the
Executive's Date of Termination. 401(k) Profit Sharing and Supplemental Benefit
Plans - The Executive shall continue to be treated as a participant in all such
plans in which the Executive had been a participant on the date of the Notice of
Termination, based on then applicable and corresponding elections and
contribution rates, for the 2-year period following the Executive's Date of
Termination. If such amounts cannot be paid to the plans, the tax-adjusted value
the Executive would have received shall be determined and paid by the Company
(outside of the plans). The Executive shall be allowed to change the Executive's
payment election under the terms of such Supplemental Benefit Plan at the
Executive's Date of Termination. Deferred Compensation Plan - The Executive
shall cease participation as of the Executive's Date of Termination and shall be
allowed to change the Executive's payment election under the terms of such
Deferred Compensation Plan at the Executive's Date of Termination. Split Dollar
Life Insurance - The Executive shall have the option to purchase the Company's
interest in the split dollar policy on the Executive's Date of Termination or
expiration of the Term, for an amount equal to the sum of the premiums paid to
date of transfer by the Company.
Involuntary Termination for Cause. In the event the Executive is terminated
for Cause, the Executive shall receive only such benefits, if any, as may be
provided to him under the terms of any employee benefit, incentive, option,
stock award and other plans or programs of the Company in which he may be, or
have been, a participant and shall be paid the balance of the Executive's earned
but unpaid Base Salary and Paid Time Off as of the Executive's Date of
Termination. ----------------------------------
Death. In the event of the Executive's death, the following additional
provisions shall apply:
Base Salary - The Executive's Base Salary shall continue to be
paid to the Executive's named beneficiary for six months immediately following
the date of death.
Bonus - A prorated portion of the Executive's bonus, if any, as
determined by the Board of Director's based on the Company's actual performance
during its fiscal year of the Executive's death shall be payable to the
Executive's named beneficiary. Such determination and payment will be made at
the same time that bonus consideration and payments for other senior executive
for the same performance period are made.
Disability. In the event of the Executive's Disability, the following
additional provisions shall apply:
Bonus - The Executive shall receive a prorated portion of the Executive's
bonus, if any, as determined by the Board based on the Company's actual
performance during the fiscal year in which the Date of Termination occurs. Such
determination and payment will be made at the same time that bonus consideration
and payments for other senior executives for the same performance period are
made. Split Dollar Life Insurance -The Company shall assign to the Executive,
without charge or cost, the Company's interest in the Executive's split dollar
policy.
Change in Control. In the event of termination following a Change in
Control the following provisions shall apply.
Severance Pay - The Executive shall receive Base Salary for 3 years after
the Executive's Date of Termination. Bonus - The Executive shall receive a
prorated portion of the Executive's bonus, if any, as determined by the Board
based on the Company's actual performance during the fiscal year in which the
Executive's Date of Termination occurs but not less than the bonus for the prior
fiscal year. Such determination and payment will be made at the same time that
bonus consideration and payments for other senior executive for the same
performance period are made. Car Allowance - The Executive shall continue to
receive a car allowance for the 3- year period after the Executive's Date of
Termination. The amount of such allowance shall equal the amount, if any, being
received by the Executive as of the date of the Change in Control 401(k) Profit
Sharing and Supplemental Benefit Plans - The Executive shall continue to be
treated as a participant in all such plans in which the Executive shall have
been a participant on the date Notice of Termination, based on then applicable
and corresponding elections and contribution rates, for the 3-year period
commencing on the Executive's Date of Termination. If such amounts cannot be
paid to the plans, the tax-adjusted value the Executive would have received
shall be determined and paid by the Company (outside of the plans). The
Executive shall be allowed to change the Executive's payment election under the
terms of such Supplemental Benefit Plan at the Executive's Date of Termination.
1 Deferred Compensation Plan - The Executive shall cease participation as of the
Executive's Date of Termination and shall be allowed to change the Executive's
payment election under the terms of such Deferred Compensation Plan at the
Executive's Date of Termination. Split Dollar Life Insurance - The Company shall
continue to pay the premium related to the Executive's participation in the
Split Dollar Life Insurance Plan for the 3-year period commencing on the
Executive's Date of Termination. The Executive shall have the option to purchase
the Company's interest at the end of such 3-year period for an amount equal to
the sum of the premiums paid to date by the Company Long Term Incentives - All
awards made to the Executive under long-term incentive plans or programs shall
immediately vest and be payable and all restrictions shall lapse.
Continuation of Agreement Provisions. The termination of the Executive's
employment for any reason whatsoever shall not operate to terminate the
Executive's Agreement as an entirety or adversely affect the respective
continuing rights and obligations of the parties under Sections 4(c), 7, 8, 9
and 10 of the Executive's Agreement, all of which shall survive the effective
date of such termination of employment in accordance with their respective
terms. ------------------------------------ EXCISE TAX. ---------- It is the
intention of this provision that the Executive receive a net amount, after
payment of all Excise Taxes (including Excise Taxes on any Excise Tax
Adjustment) equal to the aggregate compensation, benefits and other amounts
which gave rise to the Excise Tax. (a) In the event that Executive receives or
derives from the Company or otherwise any compensation, benefit or any amount
under any option plan, performance plan, or incentive plan, which is determined
to be subject to the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended, (the "Excise Tax"), then the Executive shall be
entitled to receive from the Company an Excise Tax Adjustment Payment equal to
the amount of all applicable U.S. federal, state and local taxes (computed at
the maximum marginal rates and including interest penalties and any cost of
contest or defense) including Excise Tax imposed upon the Excise Tax Adjustment
Payment. The amount of the any Excise Tax Adjustment Payment to be made shall be
determined, at the Company's expense, by a nationally recognized accounting firm
acceptable to the Executive and the Company.
(b) The Executive shall notify the Company in writing promptly of any
written claim by the IRS that would require the payment of the Excise Tax
Adjustment Payment. The Company may elect, by notifying the Executive in writing
within thirty (30) days of its receipt of Executive's notice, to contest such
claim and/or to retain legal counsel selected by the Company to represent the
Executive. Such contest will be at the Company's sole cost and expense and the
Company shall advance any amounts required to be paid in respect of such Excise
tax or the contest thereof. The Executive shall cooperate fully with the Company
in good faith including permitting the Company to participate in any proceedings
relating to such claim or contest and giving the Company any information
reasonably requested by the Company relating to such claim or contest.
(c) The Company shall be entitled to control all proceedings, conferences,
and appeals it may elect to take, but only with respect to the Excise Tax, and
may sue for a refund or contest the claim in any permissible manner provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount. The
Executive shall promptly pay to the Company the amount of any refund with
respect to such claim (together with any interest paid or credited thereon but
after payment by Executive of any taxes applicable thereto).
CONFIDENTIAL INFORMATION: COMPETITION.
Except as necessary or appropriate to the proper performance of the
Executive's duties, or with the prior written consent of the Company, or as
ordered by a court of competent jurisdiction, the Executive shall not at any
time either during the continuance of the Executive's employment or after its
termination disclose or communicate to any person or use for the Executive's own
benefit or the benefit of any person other than the Company or any subsidiary or
affiliate any information relating to the Company or any subsidiary or affiliate
that is not generally known to the public ("Confidential Information") which may
come to the Executive's knowledge in the course of the Executive's employment,
and the Executive shall during the continuance of the Executive's employment use
the Executive's best endeavors to prevent the unauthorized publication or misuse
of any Confidential Information, provided that such restrictions shall cease to
apply to any Confidential Information which may enter the public domain other
than through the fault of the Executive.
During the Term and for a period of two (2) years following an Early
Termination the Board, or for a period of three (3) years following Executive's
termination following a Change in Control, the Executive agrees not to carry on
or set up or be employed or engaged by or otherwise assist in or be interest in
any capacity (including without limitation as a shareholder) in any State of the
United States of America or in any foreign country in which the Company or any
subsidiary or affiliate thereof is conducting business, any business materially
competitive to that being carried on by the Company or any subsidiary or
affiliate thereof; provided, however, that the ownership by the Executive for
investment purposes (directly or through nominees) of not more than 5% of the
outstanding stock of any corporation which is publicly held and traded shall not
be deemed to be violation of this Agreement. The Executive will not solicit,
entice away, or otherwise encourage any executive or other employee of the
Company or its subsidiaries or affiliates to leave his or her employment in
order to join the Executive in any business endeavor, nor shall the Executive
aid, promote, encourage or be a party to any acts, the effect of which would
divert, diminish or prejudice the goodwill or business of the Company or any of
its subsidiaries or affiliates. The agreements by the Executive in this Section
9 are intended to be separate and severable and enforceable as such. MERGER OR
REORGANIZATION. This Agreement shall not be terminated by the voluntary or
involuntary dissolution of the Company or by any merger or consolidation where
the Company is not the surviving or resulting corporation, or upon any transfer
of all or substantially all of the assets of the Company. In the event of any
such merger or consolidation or transfer of assets, the provisions of this
Agreement shall be binding and shall inure to the benefit of the Executive and
the surviving or resulting corporation or the corporation to which such assets
shall be transferred, and the Company shall require the successor to the
Company, as the Executive's employer (whether such succession is direct or
indirect, by purchase, merger, consolidation or otherwise, to all or a
substantial portion of the business and/or assets of the Company), to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent as the Company would be required to perform it if no such succession had
taken place. As used in this Agreement, the term "Company" shall mean the
Company and any successor to all or a substantial portion of its business and/or
assets as aforesaid. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement, the breach thereof or the coverage of this
arbitration provision shall be settled by arbitration which shall be in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association as such rules shall be in effect on the date of delivery of demand
for arbitration. The arbitration of such issues, including the determination of
the amount of any damages suffered by either party hereto by reason of the acts
or omissions of the other, shall be to the exclusion of any court of law. The
decision of the arbitrators or a majority of them shall be final and binding on
both parties and their respective heirs, executors, administrators, successors
and assigns. Judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction. There shall be three arbitrators, one to be
chosen directly by each party at will and the third arbitrator to be selected by
the two arbitrators so chosen. Each party shall pay the fees of the arbitrator
selected by him and of the Executive's own attorney and the expense of the
Executive's witnesses and all other expenses connected with the presentation of
the Executive's case. All other costs of the arbitration, including the cost of
the third arbitrator, the record or transcripts thereof, if any, administrative
fees, and all other fees and costs shall be borne equally by the parties.
Nothing contained herein shall be construed or interpreted to preclude the
Company prior to, or pending the resolution of, any matter subject to
arbitration from seeking injunctive relief in any court for any breach or
threatened breach of any of the Executive's agreements in Section 9 hereof.
NON-ASSIGNABILITY. The obligations of the Executive hereunder are personal and
may not be delegated, assigned or transferred by the Executive in any manner
whatsoever, nor are such obligations subject to involuntary alienation,
assignment or transfer. AMENDMENT. This Agreement contains the entire agreement
of the parties. It may not be changed orally but only by a written agreement
executed by both of the parties hereto. NOTICES. ---- -- All notices which a
party is required or may desire to give to the other party under or in
connection with this Agreement shall be sufficient if given by addressing same
to the other party as follows:
if to the Executive, to:
W. Marston Becker
48 Ledyard Road
West Hartford, CT06117
if to the Company, to:
Orion Capital Corporation
9 Farms Spring Road
Farmington, CT 06032
Attn: Secretary
or at such other place as may be designed in writing by like notice. Any
notice shall be deemed to have been delivered when addressed as required herein
and deposited postage paid, in the United States Mail. WAIVER: MODIFICATION.
- ----------- --------- No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and the Board. The waiver by either party of any
breach by the other party, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall not be deemed a waiver
of the same provisions or conditions at any other time, nor shall it be deemed a
waiver of any other provisions or conditions at any time. SEVERABILITY. The
various Sections of this Agreement are severable, and if any Section or an
identifiable part thereof is held to be invalid or unenforceable by any court of
competent jurisdiction, then such invalidity or unenforceability shall not
affect the validity or enforceability of the remaining Sections or identifiable
parts thereof in this Agreement, and the parties hereto agree that the portion
so held invalid, unenforceable or void shall, if possible, be deemed amended or
reduced in scope, or otherwise be stricken from this Agreement, to the extent
required for the purposes of the validity and enforcement hereof. CHOICE OF LAW.
This Agreement shall be governed by the laws of the State of Connecticut,
without reference to any conflict of law rules. ENTIRE AGREEMENT. This Agreement
sets forth the entire agreement between the parties with respect to the subject
matter hereof and supersedes any and all prior agreements between the Company
and the Executive, whether written or oral, relating to any or all matters
covered by, and contained or otherwise dealt with, in this Agreement. No
agreements or representations, oral or otherwise, express or implied, have been
made by either party with respect to the subject matter of this Agreement,
unless set forth expressly in this Agreement. BENEFICIARIES: REFERENCES. The
Executive shall be entitled to select (and change, to the extent permitted under
any applicable law) a beneficiary or beneficiaries to receive any compensation
or benefit payable hereunder following the Executive's death, and may change
such election by giving the Company written notice thereof. In the event of the
Executive's death, Disability or a judicial determination of the Executive's
incompetence, all references in this Agreement to the Executive shall be deemed,
where appropriate, to refer to the Executive's beneficiary, estate or other
legal representative. ACTIONS FOR THE BOARD. Any reference in this Agreement to
the Board shall include the Compensation Committee thereof and any officers of
the Company to which the Board or the Compensation Committee thereof has by
resolution delegated any explicit authority or responsibilities with respect to
this Agreement.
TAX WITHHOLDINGS.
All payments to the Executive hereunder shall be subject to such withholding
of Federal, state and local income and excise taxes and to such employment taxes
as shall be reasonably determined by the Company to be required.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date hereinabove set forth.
ORION CAPITAL CORPORATION
By:
-------------------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
EXECUTIVE
By:
-------------------------------------------------
Name: W. Marston Becker
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<PAGE>
Amendment to Employment Agreement of W. Marston Becker
This Amendment ("Amendment"), dated January 30, 1999, amends the Employment
Agreement, dated as of July 10, 1998 (the "Agreement"), between Orion Capital
Corporation, a Delaware corporation (the "Company"), and W. Marston Becker
("Executive");
W I T N E S S E T H:
The Agreement is amended as set forth below.
Paragraph 7 (a) of this Agreement is amended in its entirety to read as follows:
Involuntary Termination - Upon the Company's election of Early Termination
pursuant to Section 6 (c) for reasons other than Cause, the following additional
provisions shall apply:
Severance Pay - The Executive shall continue to receive Base Salary for two
(2) years after the Date of Termination.
Bonus - The Executive shall continue to receive a Bonus for two (2) years
after the Date of Termination. Such amount shall be determined based on the
greater the last performance bonus paid or the average of the last two
performance bonuses paid immediately preceding the Date of Termination.
Car Allowance - The Executive shall continue to receive a car allowance for
the two- (2) year period after the Executive's Date of Termination. The amount
of such car allowance shall equal the amount, if any, being received by the
Executive as of the Date of Notice.
Long-Term Incentive - The Executive shall continue to vest for the two- (2)
year period following the Executive's Date of Termination.
Medical, Dental, 401(k) Profit Sharing and Supplemental Benefit Plans - The
Executive shall continue to be treated as a participant in all such plans in
which the Executive shall have been a participant on the date Notice of
Termination, based on then applicable and corresponding elections and
contribution rates, for the 3-year period commencing on the Executive's Date of
Termination. If such amounts cannot be paid to the plans, the tax-adjusted value
the Executive would have received shall be determined and paid by the Company
(outside of the plans). The Executive shall be allowed to change the Executive's
payment election under the terms of such Supplemental Benefit Plan at the
Executive's Date of Termination.
Deferred Compensation Plan - The Executive shall cease participation as of
the Executive's Date of Termination and shall be allowed to change the
Executive's payment election under the terms of such Deferred Compensation Plan
at the Executive's Date of Termination.
Split Dollar Life Insurance - The Executive shall have the option to
purchase the Company's interest in the split dollar policy on the Executive's
Date of Termination or expiration of the Term, for an amount equal to the sum of
the premiums paid to date of transfer by the Company.
2. Paragraph 7 (e) of this Agreement is amended in its entirety to read
Change in Control. In the event of termination following a Change in
Control the following provisions shall apply.
Severance Pay - The Executive shall receive Base Salary for 3 years
after the Executive's Date of Termination.
Bonus - The Executive shall continue to receive a Bonus for three (3) years
after the Date of Termination. Such amount shall be determined based on the
greater the last performance bonus paid or the average of the last two
performance bonuses paid immediately preceding the Date of Termination.
Car Allowance - The Executive shall continue to receive a car allowance
for the 3- year period after the Executive's Date of Termination. The amount of
such allowance shall equal the amount, if any, being received by the Executive
as of the date of the Change in Control
Medical, Dental, 401(k) Profit Sharing and Supplemental Benefit Plans - The
Executive shall continue to be treated as a participant in all such plans in
which the Executive shall have been a participant on the date Notice of
Termination, based on then applicable and corresponding elections and
contribution rates, for the 3-year period commencing on the Executive's Date of
Termination. If such amounts cannot be paid to the plans, the tax-adjusted value
the Executive would have received shall be determined and paid by the Company
(outside of the plans). The Executive shall be allowed to change the Executive's
payment election under the terms of such Supplemental Benefit Plan at the
Executive's Date of Termination.
Deferred Compensation Plan - The Executive shall cease participation as of
the Executive's Date of Termination and shall be allowed to change the
Executive's payment election under the terms of such Deferred Compensation Plan
at the Executive's Date of Termination.
Split Dollar Life Insurance - The Company shall continue to pay the premium
related to the Executive's participation in the Split Dollar Life Insurance Plan
for the 3-year period commencing on the Executive's Date of Termination. The
Executive shall have the option to purchase the Company's interest at the end of
such 3-year period for an amount equal to the sum of the premiums paid to date
by the Company
Long Term Incentives - All awards made to the Executive under long-term
incentive plans or programs shall immediately vest and be payable and all
restrictions shall lapse.
In Witness Whereof, the parties have executed this Amendment as of the
date herein above set forth.
ORION CAPITAL CORPORATION
By: _______________________
Name: _________________
Title: _________________
EXECUTIVE
By: _______________________
Name: W. Marston Becker
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of the ___ day of February, 1999 (the
"Agreement"), by and between Orion Capital Corporation, a Delaware corporation
with a principal place of business in Farmington, Connecticut (the "Company"),
and _______________, of ___________, ________________- ("Executive").
WHEREAS, pursuant to an agreement between the Company and the Executive,
the Executive currently serves as the Company's _________________________;
WHEREAS, the Company and the Executive desire that Executive be employed by
the Company in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual terms and covenants contained
herein, the receipt and sufficiency of which the parties acknowledge and accept,
the Company and the Executive hereby agree as follows:
EMPLOYMENT. The Company hereby employs Executive to render services as the
_______________- and the Executive hereby accepts such employment. The Executive
shall have such responsibilities, perform such duties and have such authorities
as are consistent with such position, reporting to, and subject only to the
direction and control of, the Chief Executive Officer and the Board of Directors
of the Company (the "Board"). The Executive hereby accepts such employment and
agrees to render the Executive's services (unless prevented by sickness, injury
or other incapacity) fully, faithfully, and to the best of the Executive's
ability. The Executive's services shall be exclusive to the Company, except that
with the prior approval of the Executive Committee of the Board, the Executive
may serve as a compensated member of the board of directors of other, "for
profit" unaffiliated corporations. PLACE OF EMPLOYMENT. The Executive shall be
located, and shall render such services (subject to necessary and appropriate
business related travel), at the Company's office in ___________,
_______________. TERM. The term of the Executive's employment with the Company
shall be for a period commencing on (month) ____, 19___ and ending on (month)
___, 20____, unless sooner terminated in accordance with Section 6 of this
Agreement; provided, however, that the term of the Executive's employment after
(month) ____, 20___ shall automatically be extended by one (1) additional day
for each successive day of the Executive's employment with the Company.
COMPENSATION AND BENEFITS. Base Salary. The Company shall pay to the Executive a
base salary (the "Base Salary") at an annual rate of not less than $_________.
The Executive's Base Salary during the Term may be increased by such amount as
shall be determined by the Board in its discretion. Once the Executive's Base
Salary is established at any specific rate, the Base Salary shall not thereafter
be reduced. The Base Salary shall be payable to the Executive in installments on
the Company's normal payroll dates; -------------
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<PAGE>
Incentive Compensation and Stock Awards. The Executive shall have the
opportunity to participate in long-term and short-term incentive or performance
plans or programs and in stock option and stock award plans of the Company to
the same extent as other senior executive employees;
- --------------------------------------- Expenses. The Executive is authorized to
incur and shall be reimbursed for reasonable business, entertainment and other
related expenses (including travel and living expenses while away from home on
Company business or at the request of the Company) incurred in the performance
of the Executive's duties. The Executive shall comply with the Company's expense
and reimbursement policies as in effect at the time the expense is incurred;
Other Benefit Plans. The Executive shall have the opportunity to participate in,
and shall be entitled to receive benefits under and in accordance with, the
provisions of any health, life insurance, disability, deferred compensation,
profit sharing and savings or other employee benefit plan or plans adopted, or
to be adopted, by the Company and which are generally applicable to senior
executive employees of the Company and for which the Executive is otherwise
eligible; and Disability Insurance. The Company shall also maintain, at its
expense, an executive long-term disability insurance policy ("Policy") for the
Executive providing the Executive with benefits in the event of a "disability"
as such term is defined in the Policy (a "Disability"). The annual benefit
payable under the Policy in the event of a Disability shall be equal to an
annual rate of 66.66% of the Executive's Base Salary or as close thereto as
reasonably available. PAID TIME OFF. The Executive shall be entitled to paid
time off of not less than five (5) weeks during each calendar year, earned on a
per pay period basis ("Paid Time Off"). TERMINATION. Death or Disability. The
Executive's employment under this Agreement shall terminate upon the Executive's
death or Disability. Cause. The Board may terminate the Executive's active
employment for Cause. For purposes of this Agreement, the Board shall have
"Cause" upon: (A) the commission by the Executive of any felonious act or any
other criminal act involving moral turpitude, dishonesty, theft or unethical
business conduct, (B) the willful and continued failure of the Executive to
substantially perform his duties (other than as a result of incapacity due to
physical or mental injury or illness) which duties the Executive has been
directed in writing to perform by the Board; (C) willful misconduct or gross
negligence by the Executive in the performance of the Executive's duties, or (D)
the failure of the Executive to comply with the policies or procedures of the
Company. No action or failure to act by the Executive shall be considered
"willful" if it is determined by the Board to have been done by the Executive in
good faith and with the reasonable belief that the Executive's action or
omission is in the best interest of the Company. Voluntary Termination. The
Executive may terminate his or her active employment or Post Employment at any
time for any reason whatsoever. Involuntary Termination. The Board may terminate
the Executive's active employment at any time for any reason whatsoever. Change
in Control (Termination by the Company). At any time within twelve (12) calendar
months following the month in which a Change in Control shall have occurred, the
Board may terminate the Executive's active employment for any reason whatsoever.
For purposes of this Agreement: a "Change in Control" shall be deemed to have
occurred upon the earliest to happen of the following:
- ---------------------------------------------- (A) The acquisition, in one or
more transactions, of beneficial ownership (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934 (the "Exchange Act") by any person or
entity or any group of persons or entities who constitute a group (within the
meaning of Rule 13d-3 of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
subsidiary, of any securities of the Company if, as a result of such
acquisition, such person, entity or group either (i) beneficially owns (within
the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, more
than 20% of the Company's outstanding voting securities entitled to vote on a
regular basis for a majority of the members of the Board or (ii) otherwise has
the ability to elect, directly or indirectly, a majority of the members of the
Board; (B) A change in the composition of the Board such that a majority of the
members of the Board are not Continuing Directors. A "Continuing Director"
means, as of any date of determination, any member of the Board who (i) was a
member of the Board on the date of this Agreement, or (ii) was nominated and
elected to such Board with the affirmative vote of a majority of the Continuing
Directors who were members of the Board at the time of such nomination or
election; or (C) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 80% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one or more transactions) of all
or substantially all of the Company's assets.
Notwithstanding the foregoing, the preceding events shall not be deemed a
Change in Control if, prior to any transactions constituting such change, a
majority of the Continuing Directors shall have voted not to treat such
transaction or transactions as resulting in a Change in Control.
Change in Control (Termination by the Executive). At any time within twelve
(12) calendar months following the month in which a Change in Control shall have
occurred, the Executive may terminate his or her Term of employment for Good
Reason or otherwise with the consent of the Company: "Good Reason" shall mean:
- ------------------------------------------------ The position or
responsibilities of the Executive are significantly reduced (including, without
limitation, the elimination of such position, a change in the reporting
responsibilities of such position, a substantial reduction in the size of the
Company or other substantial change in the character or scope of the Company's
operations), or the Executive is assigned without his or her written consent to
any duties inconsistent with his or her position with the Company immediately
prior to such assignment or the status and stature of those with whom the
Executive is asked to work or the position, authority, responsibility or type of
work or the working conditions under which the Executive is assigned is
inconsistent with, not comparable to, or reduced in status or altered in nature
from the Executive's position immediately preceding the Change in Control; The
annual incentive compensation provided to the Executive is eliminated or
significantly reduced, the Executive's participation level is reduced or the
manner of assessing actual performance is changed in a manner that results in
the Executive earning significantly less annual incentive compensation for a
given period than he or she would have for the same period absent such change,
except if such reduction occurs prior to a Change in Control and is part of an
across-the-board reduction in such benefits applicable to all senior level
executives of the Company; The Executive's aggregate level of benefits under the
Company's benefit plans is significantly reduced, except if such reduction
occurs prior to a Change in Control and is part of an across-the-board reduction
in such benefits applicable to all senior level executives of the Company; The
Company fails to provide the Executive with benefits and perquisites which are
substantially similar in the aggregate to those to which the Executive is
entitled under the Company's benefit plans in which the Executive was
participating immediately prior to the Change in Control, or fails to provide
the Executive with directors' or officers' insurance, as applicable, at least at
the level maintained immediately prior to the Change in Control; The Executive
is required to change his or her regular work location to a location that
requires the Executive to commute a distance more than 50 miles further from the
Executives principal place of employment existing at the time of the Change in
Control; or The Company fails to pay the Executive any amount otherwise vested
and due hereunder or under any plan or policy of the Company, or fails to comply
with any other provision of or perform any of its other obligations under this
Agreement.
Notwithstanding the foregoing, the preceding events shall not be deemed a
Change in Control if, prior to any transactions constituting such change, a
majority of the Continuing Directors shall have voted not to treat such
transaction or transactions as resulting in a Change in Control.
Notice of Termination. Any termination by the Board of Executive's active
employment pursuant to Section 6(b), (d) or (e) must, in order to be effective,
be preceded by a written notice to the Executive ("Notice of Termination")
indicating the specific provision of this Agreement relied upon and setting
forth in reasonable detail the facts and circumstances supporting the
termination under the provision so indicated and the Date of Termination.
- ---------------------
Any termination by the Executive of his active employment pursuant to
Section 6(f) must, in order to be effective, be preceded by a written notice to
the Company indicating the specific provision of Section 6(f) relied upon and
setting forth in reasonable detail the facts and circumstances supporting the
termination under the provision so indicated and the Date of Termination. After
receipt of such notice, the Company shall have ten (10) business days from the
date of receipt of such notice to cure the event described therein, and upon
cure thereof by the Company to the Executive's reasonable satisfaction, such
event shall no longer constitute "Good Reason" for purposes of this Agreement.
Date of Termination; Post Employment. "Date of Termination" shall mean (A)
if the Executive's employment is terminated by the Executive's death, the date
of the Executive's death, or by reason of the Executive's Disability, the date
all of the conditions to constitute a Disability have occurred, or if upon
expiration of the Term, the last day of the Term, (B) if the Executive's active
employment is terminated by the Board pursuant to Section 6 (d) or for Cause,
the date specified in the Notice of Termination, and (C) if the Executive's
active employment is terminated by the Executive or Section 6(f) pursuant to
Section 6 (c) or 6 (f) the date which is ten (10) business days after the date
of receipt of the Executive's notice of intention to terminate or such other
date as may be agreed by Executive and the Board. If Executive's active
employment shall be terminated pursuant to Section 6 (d), 6 (e) or 6 (f)
Executive shall, following the Date of Termination enter into a period of "Post
Employment".
COMPENSATION AND BENEFITS: POST EMPLOYMENT. Death. In the event of the
Executive's death while actively employed, the Company shall pay or provide to
the Executive: Base Salary - The Executive's Base Salary shall continue to be
paid to the Executive's named beneficiary for one month immediately following
the date of death; Bonus - A prorated portion of the Executive's bonus, if any,
as determined by the Board based on the Company's actual performance during its
fiscal year of the Executive's death shall be payable to the Executive's named
beneficiary. Such determination and payment will be made at the same time that
bonus consideration and payments, if any, for other senior executives for the
same performance period are made; and Benefits - The Executive shall be paid or
be provided such other benefits for which the Executive may otherwise be
eligible under the terms of any employee benefit, incentive, option, stock award
or other plans or programs of the Company in which he may be, or may have been,
a participant and any accrued but unpaid Paid Time Off through the Date of
Termination.
Disability. In the event of the Executive's termination due to a Disability
while actively employed, the Company shall pay or provide to the Executive:
Base Salary - The Executive's Base Salary shall be paid through the Date of
Termination; Bonus - The Executive shall receive a prorated portion of the
Executive's bonus, if any, as determined by the Board based on the Company's
actual performance during the fiscal year in which the Date of Termination
occurs. Such determination and payment, if any, will be made at the same time
that bonus consideration and payments for other senior executives for the same
performance period are made; Benefits - The Executive shall be paid or be
provided such other benefits for which the Executive may otherwise be eligible
under the terms of any employee benefit, incentive, option, stock award or other
plans or programs of the Company in which he may be, or may have been, a
participant and any accrued but unpaid Paid Time Off through the Date of
Termination.
Termination for Cause. In the event the Executive is terminated for Cause
while actively employed, the Executive shall receive only such benefits, if any,
as may be provided to him under the terms of any employee benefit, incentive,
option, stock award and other plans or programs of the Company in which he may
be, or may have been, a participant and shall be paid any balance of the
Executive's unpaid Base Salary and any Paid Time Off for the period through the
Date of Termination. ----------------------
Voluntary Termination. In the event the Executive voluntarily terminates
his employment while actively employed or during Post Employment (other than for
Good Reason following a Change in Control), the Company shall pay or provide to
the Executive only such benefits, if any, as may be provided to him under the
terms of any employee benefit, incentive, option, stock award and other plans or
programs of the Company in which he may be, or may have been, a participant and
shall be paid any balance of the Executive's unpaid Base Salary and any accrued
but unpaid Paid Time Off through the Date of Termination.
Involuntary Termination. In the event the Executive's active employment is
involuntarily terminated by the Company (other than for Cause or within twelve
months following a Change in Control), the Company shall pay or provide to the
Executive during the Executive's post-employment but subject to the provisions
of Section 19 hereof: Severance Pay - The Executive shall continue, during Post
Employment, to receive Base Salary for the remainder of the unexpired Term or 12
months after the Date of Termination, whichever is greater, payable in
installments on the Company's normal payroll dates; Bonus - The Executive shall
receive a prorated portion of the Executive's bonus, if any, as determined by
the Board based on the Company's actual performance during the fiscal year in
which the Date of Termination occurs, but such prorated portion shall be not be
based on an amount less than any bonus paid to the Executive for the prior
fiscal year. Such determination and payment will be made at the same time that
bonus consideration and payments, if any, for other senior executives for the
same performance period are made; Medical & Dental - The Executive shall
continue to receive coverage at a rate equal to that charged to active employees
for the longer of the remainder of the unexpired Term or 12 months after the
Date of Termination, but all other welfare benefits (including Life, Disability
and Workers' Compensation) shall cease as of the Date of Termination; Car
Allowance - The Executive shall continue, during Post Employment, to receive a
car allowance for the remainder of the unexpired Term or eighteen (12) months
after the Date of Termination, whichever is greater. The amount of such car
allowance shall equal the amount, if any, being received by the Executive
immediately prior to the Date of Termination; Long-Term Incentive - The
Executive shall continue during Post Employment to vest for the 12 month period
following the Executive's Date of Termination; 401(k) Profit Sharing and
Supplemental Benefits - The Executive shall continue to be treated, during Post
Employment, as a participant in all such plans in which the Executive shall have
been a participant immediately prior to the Date of Termination, based on then
applicable and corresponding elections and contribution rates, for the remainder
of the unexpired Term or 12 months after the Date of Termination, whichever is
greater. If such amounts cannot be paid to the plans, the tax-adjuste value the
Executive would have received shall be determined and paid by the Company
(outside of the plans); Deferred Compensation Plan - The Executive's
participation shall cease as of the Date of Termination and the Executive may
change the Executive's payment election under the terms of such Deferred
Compensation Plan as of the Date of Termination; and Benefits - The Executive
shall be paid or be provided such other benefits for which the Executive is
otherwise eligible, if any, under the terms of any employee benefit, incentive,
option, stock award or other plans or programs of the Company in which he may
be, or may have been, a participant and any accrued but unpaid Paid Time Off
through the Date of Termination.
Change in Control. In the event the Executive's active employment is
terminated by the Company other than for Cause following a Change in Control, or
in the event Executive terminates his active employment for Good Reason
following a Change in Control, the Company shall pay or provide to the Executive
during the Executive's Post Employment, but subject to the provisions of Section
19 hereof: ----------------- Severance Pay - The Executive shall continue,
during Post Employment, to receive Base Salary for the remainder of the
unexpired Term or eighteen (18) months after the Date of Termination, whichever
is greater, payable in installments on the Company's normal payroll dates; Bonus
- - The Executive shall receive a full year annual performance bonus for the
calendar year in which severance occurs equal to the latest performance bonus
paid or the average of last 2 performance bonuses paid, whichever is greater.
Such payment will be made at the same time that bonus consideration and payments
for other senior executives for the same performance period are made; Car
Allowance - The Executive shall continue, during Post Employment, to receive a
car allowance for the remainder of the unexpired Term or eighteen (18) months
after the Date of Termination, whichever is greater. The amount of such car
allowance shall equal the amount, if any, being received by the Executive
immediately prior to the Date of Termination; Medical & Dental - The Executive
shall continue, during Post Employment, to receive coverage at a rate equal to
that charged to active employees for the longer of the remainder of the
unexpired Term or eighteen (18) months after the Date of Termination, but all
other welfare benefits (including Life, Disability and Workers' Compensation)
shall cease as of the Date of Termination; 401(k) Profit Sharing and
Supplemental Benefits - The Executive shall continue, during Post Employment, to
be treated as a participant in all such plans in which the Executive shall have
been a participant immediately prior to the Date of Termination, based on then
applicable and corresponding elections and contribution rates, for the remainder
of the unexpired Term or 18 months after the Date of Termination, whichever is
greater. If such amounts cannot be paid to the plans, the tax-adjusted value the
Executive would have received shall be determined and paid by the Company
(outside of the plans); Deferred Compensation Plan - The Executive's
participation shall cease as of the Date of Termination and the Executive may
change the Executive's payment election under the terms of such Deferred
Compensation Plan as of the Date of Termination; and Long Term Incentives - All
awards made to the Executive under long-term incentive plans or programs shall
immediately vest and be payable, and all plan and program restrictions
inconsistent with such immediate vesting and payment shall lapse; and Benefits -
The Executive shall be paid or be provided such other benefits for which the
Executive is otherwise eligible, if any, under the terms of any employee
benefit, incentive, option, stock award or other plans or programs of the
Company in which he may be, or may have been, a participant and any Paid Time
Off.
REDUCTION OF PAYMENT. Notwithstanding any other provision of this Agreement
or of any other agreement, understanding or compensation plan, Executive shall
not be entitled to receive any payment which, taking into account all payments,
rights and benefits, would be deemed to be an "excess parachute payment" under
Section 280G (of the Internal Revenue Code of 1986, as amended), and the amount
of each payment shall be reduced to the extent necessary to ensure that the
Executive receives no "parachute payment" in connection with a Change of
Control; provided that no such reduction shall occur to the extent that
Executive shall have elected to defer receipt of payments beyond the end of the
Post Employment and such deferral shall have resulted in the present value of
such payment not constituting an "excess parachute payment". Any such election
by Executive, to be effective for purposes of this Agreement: (a) must be in
irrevocable when made, (b) must be made in a writing delivered to the Company
prior to the occurrence of a Change of Control, (c) must be for a period not be
exceed five years after the date on which Executive's period of Post Employment
would otherwise end, and (d) must be concurred in by the Company, on the basis
of the advice of its tax advisors, as being both necessary and effective to
reduce the extent to which payments to be made hereunder will constitute an
"excess parachute payment". If, at any future date following the making of a
payment hereunder, it shall have been determined by the IRS that such payment
was in excess of the limits set forth in Section 280G, and such excess shall not
have been caused by a voluntary action of the Executive not required by this
Agreement, then the Executive shall be entitled to receive from the Company, and
the Company shall pay to Executive promptly upon notification to the Company of
such determination, an Excise Tax Adjustment Payment equal to the amount of all
applicable U.S. federal, state and local taxes (computed at the maximum marginal
rates and including interest penalties and any cost of contest or defense and
including any applicable Excise Tax) imposed upon the Excise Tax Adjustment
Payment. PROTECTION OF THE COMPANY'S BUSINESS; CONFIDENTIAL INFORMATION AND
TRADE SECRETS; NON-SOLICITATION; AND NON-COMPETE. This Section 9 sets forth
rights of the Company and obligations of the Executive which are mutually
acknowledged to be for the protection of the Company and its successors and
assigns and to be reasonable in scope and duration. Executive acknowledges that
the provisions of this Section 9 are not intended to and will not have the
effect of preventing Executive from earning a living. The provisions of this
Section 9 shall be enforceable strictly in accordance with their terms,
notwithstanding any termination of this agreement, whether by the Company or by
the Executive and whether during the period of active employment or during
post-employment.
(a) Confidential Information; Trade Secrets. During Executive's active
employment with the Company, and thereafter for the longer of 18 months or the
remainder of the unexpired Term, the Executive shall not (1) disclose, directly
or indirectly, any Confidential Information to anyone outside of the Company or
to any employees of the Company not authorized to receive such information or
(2) use any Confidential Information other than as may be necessary to perform
the Executive's duties at the Company. In no event shall the Executive disclose
any Confidential Information to, or use any Confidential Information for the
benefit of, any current or future competitor, supplier or client of the Company,
whether on behalf of Executive, any subsequent employer, or any other person or
entity. The Executive is not, however, prohibited from using the general skills,
knowledge and experience that the Executive has learned or developed in his
position or positions with the Company or with others.
The Executive agrees that his position with the Company creates a
relationship of high trust and confidence with respect to Confidential
Information owned or used by the Company, and its clients or suppliers that may
be learned or developed by him while employed by the Company. For purposes of
this Agreement, the term "Confidential Information" includes all information
that the Company desires to protect and keep confidential or that the Company is
obligated to third parties to keep confidential, including but not limited to
"Trade Secrets" to the full extent of the definition of that term under state
law. It does not include "general skills, knowledge and experience" as those
terms are defined under applicable state law. Confidential Information includes,
but is not limited to: product information and designs, computer programs,
unpatented inventions, discoveries or improvements; marketing, sales,
organizational, financial, operating, research, development and business plans;
company policies and manuals; sales forecasts; personnel information (including
the identity of the Company employees, their responsibilities, competence,
abilities and compensation); medical information about employees; information
relating to the Company's agents and brokers; pricing and nonpublic financial
information; current and prospective client lists and information on clients or
their employees; information concerning planned or pending acquisitions or
divestitures; and information concerning purchases of major equipment or
property.
Non-Solicitation. During the Executive's active employment, and thereafter
for the longer of 18 months or the remainder of the unexpired Term, the
Executive shall not directly or indirectly solicit any customer or client of the
Company or any person or entity who is a prospect of the Company on the Date of
Termination or induce or encourage any employee of the Company to terminate
employment with the Company or to accept employment with any competitor,
supplier, agent or broker of the Company, nor shall the Executive cooperate with
any others in doing or attempting to do any of the foregoing. As used herein,
the term "solicit, induce or encourage" includes, but is not limited to, the
Executive's (i) initiating communications with any employee of the Company
relating to possible employment or independent contractor relationship, (ii)
offering bonuses or additional compensation to encourage the Company's employees
to terminate their employment with the Company and accept employment with a
competitor, supplier, client, agent or broker of the Company, or (iii) referring
the Company's employees to personnel or agents employed by competitors,
suppliers, clients, agents or brokers of the Company (iv) initiating
communications with or offering inducements to any customer or client (or
prospect) of the Company for the purpose of inducing such customer or client to
transact business with a competitor of the Company.
Non-Compete. Until the __ month after the Date of Termination, and
thereafter during Post Employment and while Executive is entitled to receive
payments pursuant to this Agreement, the Executive shall not, directly or
indirectly, as principal, agent, contractor, employee, employer, partner,
shareholder (other than solely as an owner of 2% or less of the stock of a
public corporation) or in any other capacity engage in or perform any managerial
or executive services for any corporation, partnership, individual or entity, a
primary business of which is competitive with the Company in any of the places
where the Company is doing business in the United States, Canada, Puerto Rico,
or Virgin Islands (the "Territory"). Notwithstanding the foregoing provisions of
this subparagraph, the Executive may accept employment with a person or entity
whose business is diversified and includes a line of business competitive with
the Company; provided that, prior to such employment, the Company is given
reasonable assurance in writing that the Executive shall not, during such
restricted period, render managerial or executive services, directly or
indirectly, specifically for any line of business of such person or entity which
is competitive with the Company. The Executive understands and agrees that the
Company has sales and operations facilities throughout the Territory and,
therefore, to provide the Company with reasonable protection, the Executive's
obligations under this subparagraph shall extend throughout the Territory.
Returnof Property. Immediately upon the termination of the Executive's
employment with the Company and at any time upon the Company's request, the
Executive shall deliver to the Company all the Company property in the
Executive's possession, custody or control including notebooks, reports,
manuals, programming data, listings and materials, engineering or patent
drawings, patent applications, any other documents, files or materials which
contain, mention or relate to Confidential Information, and all copies and
summaries of such materials whether in written, mechanical, electromagnetic,
analog, digital or any other format or medium.
Consent to Modifications by the Court. It is the express intention of the
parties to this Agreement that, if it should appear that any of the terms or
covenants of this section are in conflict with any rule of law or statutory
provision of the State of Connecticut or any other jurisdiction where this
Agreement is being enforced, which conflict would ordinarily render such terms
or covenants inoperative or null and void, the parties request that the Courts
of such state modify any such term or covenant so that the intention of the
parties hereto is carried out to as great a degree and extent as the Court deems
reasonable in order to conform with any rule of law or statutory provision
regarding restrictive covenants of the State of Connecticut or of such other
jurisdiction. MERGER OR REORGANIZATION. This Agreement shall not be terminated
by the voluntary or involuntary dissolution of the Company or by any merger or
consolidation where the Company is not the surviving or resulting corporation,
or upon any transfer of all or substantially all of the assets of the Company.
In the event of any such merger or consolidation or transfer of assets, the
provisions of this Agreement shall be binding and shall inure to the benefit of
the Executive and the surviving or resulting entity or the entity to which such
assets shall be transferred. The Company's successor, as the Executive's
employer (whether such succession is direct or indirect, by purchase, merger,
consolidation or otherwise, to all or a substantial portion of the business
and/or assets of the Company), assumes and agrees to perform this Agreement in
the same manner and to the same extent as the Company would be required to
perform if no such succession had taken place. As used in this Agreement, the
term "Company" shall mean the Company and any successor to all or a substantial
portion of the Company's business or assets.
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ARBITRATION; JURY WAIVER.
Any controversy or claim arising out of or relating to this Agreement, the
breach thereof or the coverage of this arbitration provision shall be settled by
arbitration administered by the American Arbitration Association in accordance
with its Commercial Arbitration Rules in effect on the date of delivery of
demand for arbitration. The arbitration of such issues, including the
determination of the amount of any damages suffered by either party hereto by
reason of the acts or omissions of the other, shall be to the exclusion of any
court. The decision of the arbitrators shall be final and binding on the parties
and their respective heirs, executors, administrators, successors and assigns.
Judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction. There shall be three arbitrators, one to be chosen directly
by each party and the third arbitrator to be selected by the two arbitrators so
chosen. The arbitration shall be conducted in Farmington, Connecticut or at such
other location as agreed by the parties. All decisions and awards shall be made
by a majority of the arbitrators. Each party shall pay the fees and expenses of
that party's arbitrator and any representatives, witnesses and all other
expenses related to the presentation of that party's case. The cost of the third
arbitrator, the record or any transcripts, any administrative fees, and all
other fees and costs shall be borne equally by the parties.
By agreeing to arbitration under this Section, the Company and the Executive
understand that they are each waiving any right to a trial by jury and each
party makes that waiver knowingly and voluntarily with full consideration of the
ramifications of such waiver.
Nothing contained herein shall be construed or interpreted to preclude the
Company prior to, or pending the resolution of, any matter subject to
arbitration from seeking injunctive relief in any court for any breach or
threatened breach of any of the Executive's obligations in Section 9 hereof.
NON-ASSIGNABILITY. The obligations of the Executive hereunder are personal and
may not be delegated, assigned or transferred by the Executive in any manner
whatsoever, nor are such obligations subject to involuntary alienation,
assignment or transfer. AMENDMENT. This Agreement contains the entire agreement
of the parties. It may not be changed orally but only by a written agreement
executed by the Executive and the Board that expressly references this
Agreement.
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<PAGE>
NOTICES.
All notices which a party is required or may desire to give to the other
party under or in connection with this Agreement shall be sufficient if given by
hand delivery or by addressing same to the other party as follows:
if to the Executive, to:
==============
--------------
if to the Company, to:
Orion Capital Corporation
9 Farms Spring Road
Farmington, CT 06032
Attn: Secretary
or at such other place as may be designed in writing by like notice. Any
notice shall be deemed to have been delivered when addressed as required herein
and deposited postage prepaid, in the United States Mail. WAIVER; MODIFICATION.
No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing that expressly
reference this Agreement and signed by the Executive and the Board. The waiver
by either party of any breach by the other party, or of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall not be deemed a waiver of the same provisions or conditions at any other
time, nor shall it be deemed a waiver of any other provisions or conditions at
any time. SEVERABILITY. The various Sections of this Agreement are severable,
and if any Section or an identifiable part thereof is held to be invalid or
unenforceable by any court of competent jurisdiction, then such invalidity or
unenforceability shall not affect the validity or enforceability of the
remaining Sections or identifiable parts thereof in this Agreement, and the
parties hereto agree that the portion so held invalid, unenforceable or void
shall, if possible, be deemed amended or reduced in scope, or otherwise be
stricken from this Agreement, to the extent required for the purposes of the
validity and enforcement hereof. CHOICE OF LAW. The parties agree that
Connecticut, as the place of contracting and where the Company has its principal
place of business, has a substantial relationship to this Agreement and so the
parties agree that this Agreement shall be governed by the laws of the State of
Connecticut, without reference to any conflict of law rules. SURVIVAL AND
CONTINUATION OF AGREEMENT PROVISIONS. The termination of the Executive's
employment for any reason whatsoever shall not operate to terminate this
Agreement or otherwise adversely affect the respective continuing rights and
obligations of the parties, including those under Sections 4(c), 7, 8, 9, 10,
11, 14 and 19 of this Agreement, all of which shall survive the effective date
of such termination of employment in accordance with their respective terms.
RIGHT TO INJUNCTIVE AND OTHER RELIEF; CONSENT TO JURISDICTION.
The Executive acknowledges that the Company will suffer irreparable harm,
not readily susceptible of valuation in monetary damages, if the Executive
breaches any of his obligations in Section 9 of this Agreement. Accordingly, the
Executive agrees that the Company shall be entitled to injunctive relief against
any breach or prospective breach by the Executive of his obligations in Section
9 in any federal or state court of competent jurisdiction, and the Executive
hereby submits to the jurisdiction of any such federal or state court in the
State of Connecticut for the purposes of any actions or proceedings instituted
by the Company to obtain such injunctive relief. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies available
to the Company for such breach or threatened breach, including the recovery of
damages from the Executive,
In addition to the rights set forth in subsection (a), above, if Executive
breaches any of his obligations under Section 9 the Company shall be entitled to
cease making further payments to Executive pursuant to clauses (i) through (iv)
of Section 7 (e) or 7 (f), as the case may be, as well as pursuant to clause (v)
of Section 7 (e); and to terminate Executive's rights of participation under
clause (v) of Section 7 (e) or clause (vii) of Section 7(f), as the case may be,
This section shall survive the termination of the Executives Active
Employment ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior agreements between the Company and the Executive, whether written
or oral, relating to any or all matters covered by, and contained or otherwise
dealt with, in this Agreement. No agreements or representations, oral or
otherwise, express or implied, have been made by either party with respect to
the subject matter of this Agreement, unless set forth expressly in this
Agreement. BENEFICIARIES; REFERENCES. The Executive may select (and change, to
the extent permitted under any applicable law) a beneficiary or beneficiaries to
receive any compensation or benefit payable under this Agreement following the
Executive's death, and may change such election by giving the Company written
notice thereof. In the event of the Executive's death, Disability or a judicial
determination of the Executive's incompetence, all references in this Agreement
to the Executive shall be deemed, where appropriate, to refer to the Executive's
named beneficiary, estate or other legal representative. ACTION OF THE BOARD.
Any reference in this Agreement to the Board shall include the Compensation
Committee thereof and any officers of the Company to which the Board or the
Compensation Committee thereof has by resolution delegated any explicit
authority or responsibilities with respect to this Agreement.
TAX WITHHOLDINGS.
All payments to the Executive hereunder shall be subject to such withholding
of federal, state and local income and excise taxes and to such employment taxes
as may be reasonably determined by the Company to be required.
IN WITNESS WHEREOF, the Company and the Executive have
executed this Agreement as of the date set forth above.
ORION CAPITAL CORPORATION
By:
-------------------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
EXECUTIVE
By:
-------------------------------------------------
Name:
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<PAGE>
STOCKHOLDER AGREEMENT dated as of December 1, 1998 between X.L. America,
Inc. ("Emerald"), and the undersigned holder of shares of common stock, par
value $1.00 per share (the "Common Stock"), of Intercargo Corporation, a
Delaware corporation (the "Company") for and on behalf of itself and each of its
affiliates which is a holder of Common Stock (the undersigned holder, the
"Stockholder" and, where the content requires, all such holders, the
"Stockholders" or each A "Stockholder").
WHEREAS, Emerald and the Company propose to enter into an Agreement and
Plan of Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement"; capitalized terms used but not defined
herein shall have the meanings set forth in the Merger Agreement) providing for
the merger of the Company with and into Emerald (the "Merger"), upon the terms
and subject to the conditions set forth in the Merger Agreement;
WHEREAS, each Stockholder owns the number of shares of Common Stock set
forth opposite its name on the signature page of this Agreement (such shares of
Common Stock, the "Existing Shares" and, together with any other shares of
capital stock of the Company acquired by such Stockholder after the date hereof
and during the term of this Agreement, being collectively referred to herein as
the "Subject Shares"); and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, Emerald has requested that Stockholder enter into this Agreement;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements contained herein, the parties agree as follows:
1. Representations and Warranties of the Stockholder. Stockholder hereby
represents and warrants to Emerald as of the date hereof as follows:
(a) Stockholder has all requisite legal capacity, power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by the
Stockholder and constitutes a valid and binding obligation of the Stockholder
enforceable in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
and compliance with the terms hereof will not, conflict with, or result in any
breach or violation of, or default (with or without notice or lapse of time or
both) under any provision of, any Stockholder's charter or by-laws. The Existing
Shares are not subject to any lien, pledge or encumbrance of any kind other than
the Stockholder's Agreement with the Company with respect to the Existing
Shares. <PAGE>
(b) Stockholder is the record holder or beneficial owner of the number of
the Existing Shares as is set forth on the signature page hereto. On the date
hereof, the Existing Shares set forth on the signature page hereto constitute
all of the outstanding shares of Common Stock owned of record or beneficially by
Stockholder. Stockholder does not have record or beneficial ownership of any
shares of Common Stock not set forth on the signature page hereto. Stockholders
have, collectively, sole power of disposition with respect to all of the
Existing Shares set forth on the signature page hereto and sole voting power
with respect to the matters set forth in Section 3 hereof and sole power to
demand dissenter's or appraisal rights, in each case with respect to all of the
Existing Shares set forth on the signature page hereto, with no restrictions on
such rights, subject to applicable insurance laws and regulations in the case of
Subject Shares owned of record by an insurance subsidiary stockholder and to the
terms of this Agreement.
(c) Stockholder's Shares and the certificates representing such Subject
Shares are now and at all times during the term hereof will be held by
Stockholder, or by a nominee or custodian for the benefit of Stockholder, free
and clear of all liens, claims, security interests, proxies, voting trusts or
agreements, understandings or arrangements or any other encumbrances whatsoever,
except for any such encumbrances or proxies arising hereunder.
2. Representations and Warranties of Emerald. Emerald hereby represents and
warrants to Stockholder that Emerald has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Emerald,
and the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary corporation action on the part of Emerald. This
Agreement has been duly --------------------------------------------------
executed and delivered by Emerald and constitutes a valid and binding obligation
of Emerald enforceable in accordance with its terms.
3. Covenants of Stockholder. From and after the date hereof and until the
termination of this Agreement in accordance with Section 6, Stockholder agrees
as follows: ---------------------------------
(a) At any meeting of stockholders of the Company called to vote upon the
Merger or the Merger Agreement or any adjournment thereof or in any other
circumstances upon which a vote, consent or other approval with respect to the
Merger or the Merger Agreement is sought, Stockholder shall vote (or cause to be
voted) the Subject Shares in favor of the Merger, the adoption by the Company of
the Merger Agreement and the approval of the terms thereof.
(b) At any meeting of stockholders of the Company or at any adjournment
thereof or in any other circumstances upon which the Stockholder's vote, consent
or other approval is sought, the Stockholder shall vote (or cause to be voted)
<PAGE>
the Subject Shares against (i) any merger agreement or merger (other than the
Merger Agreement and the Merger), consolidation, combination, sale of assets,
reorganization, recapitalization, dissolution, liquidation or winding-up of or
by the Company or any other takeover proposal (collectively, "Takeover
Proposal"), (ii) any action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or agreement of the
Company under the Merger Agreement or this Agreement or (iii) (x) any material
amendment of the Company's certificate of incorporation or by-laws, (y) any
change in a majority of the persons who constitute the Board of Directors of the
Company or (z) any other proposal or transaction involving the Company, which is
intended by Stockholder to, or which Emerald notifies Stockholder that Emerald
reasonably believes will, impede, frustrate, prevent, delay or nullify (A) the
ability of the Company to consummate the Merger or (B) any of the transactions
contemplated by this Agreement or the Merger Agreement.
(c) Stockholder agrees not to (i) offer to sell, sell, transfer, encumber,
pledge, assign or otherwise dispose of (including by gift) (collectively,
"Transfer"), or enter into any contract, option or other arrangement with
respect to or consent to the Transfer of, the Subject Shares or any interest
therein to any person other than pursuant to the terms of the Merger, (ii)
except as contemplated hereby, grant any proxies or powers of attorney with
respect to the Subject Shares, deposit any Subject Shares into a voting trust or
enter into any voting arrangement with respect to the Subject Shares, or any
interest in the foregoing, except with Emerald, (iii) take any action that would
make any representation or warranty of Stockholder contained herein untrue or
incorrect to have the effect of preventing or disabling the Stockholder from
performing Stockholder's obligations under this Agreement or (iv) commit or
agree to take any of the foregoing actions; provided, however, that, for a
period equal to the shorter of (A) 360 days after Stockholder elects to
terminate this Agreement pursuant to Section 3(f) or (B) the payment by the
Company to Emerald of the Termination Fee, Stockholder may transfer the Subject
Shares to the proponent of a Superior Proposal upon the same terms and
conditions and at the same time as available to all other shareholders of the
Company.
(d) Stockholder hereby irrevocably waives any rights of appraisal or rights
to dissent from the Merger that the Stockholder may have.
(e) Stockholder agrees with, and covenants to, Emerald that the Stockholder
shall not request that the Company register the transfer (book-entry or
otherwise) of any certificate or uncertificated interest representing any of the
Subject Shares, unless such transfer is made in compliance with this Agreement.
(f) Stockholder will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to the sale, voting or other disposition of the Existing
<PAGE>
Shares or a business combination transaction involving the Company. Stockholder
shall not directly or indirectly, through any officer, director, employee,
representative, agent or other person, solicit or encourage the initiation or
submission of any direct or indirect inquiries, proposals or offers regarding
any acquisition, merger, takeover bid or sale of all or any of the assets or any
shares of capital stock of the Company, whether or not in writing and whether or
not delivered to the Company or to the stockholders of the Company generally
(including, without limitation, by way of a tender offer) by any party other
than Emerald or its affiliates (any of the foregoing inquiries or proposals
being referred to herein as an "Acquisition Proposal") provided, however, that
nothing contained in this Agreement shall prevent the Board of Directors of
Stockholder from referring any third party to this Section 3(f). Nothing
contained in this Section 3(f) or any other provision of this Agreement shall
prevent the Board of Directors of Stockholder from considering or negotiating an
unsolicited bona fide Acquisition Proposal. If the Board of Directors of
Stockholders, after duly considering written advice of counsel to Stockholder,
determines in good faith that it would be likely to be a violation of its
fiduciary responsibilities (assuming such fiduciary responsibilities of
Stockholder's Board of Directors vis-a-vis the shareholders of Stockholder are
those of the Board of Directors of the Company vis-a-vis the shareholders of the
Company) to not participate in a Superior Proposal (as defined below), then (i)
the Stockholder shall not enter into any agreement with respect to the Superior
Proposal and (ii) any other obligation of Stockholder under this Agreement shall
not be affected, unless this Agreement is terminated pursuant to Section 6
hereof prior to or simultaneously with the decision of Stockholder's Board of
Directors to participate in such Superior Proposal. As used herein the term
"Superior Proposal" means an unsolicited bona fide proposal publicly made by a
third party to acquire the Company pursuant to a tender or exchange offer, a
merger, a sale of all or any significant portion of its assets or otherwise that
the Stockholder's Board of Directors determines in its good faith judgment to be
a proposal which, if accepted (x) is reasonably likely to be consummated, taking
into account, without limitation, all legal, financial and regulatory aspects of
such proposal and person or persons making such proposal and (y) would, if
consummated, result in a more favorable transaction to the holders of the Common
Stock than the transaction contemplated by the Merger Agreement. Stockholder
will immediately notify Emerald, orally and in writing, of any direct or
indirect contact related in any way to an Acquisition Proposal, including the
identity of the person involved in such contact, or on whose behalf such contact
is made, and the terms and conditions of any proposal made.
(g) Stockholder agrees that, until this Agreement is terminated, neither
Stockholder nor any of its affiliates will, without the prior written consent of
Emerald: (i) acquire, offer to acquire, or agree to acquire, directly or
indirectly, by purchase or otherwise, any voting securities or direct or
indirect rights to acquire any voting securities of the Company or any
subsidiary thereof, or of any successor to or person in control of the Company,
<PAGE>
or any assets of the Company or any subsidiary or division thereof or of any
such successor or controlling person; (ii) other than as contemplated hereby,
make, directly or indirectly, any "solicitation" of "proxies" (as such terms are
used in the rules of the Securities and Exchange Commission) to vote, or seek to
advise or influence any person or entity with respect to the voting of, any
voting securities of the Company; (iii) make any public announcement with
respect to, or submit a proposal for, or offer of (with or without conditions)
any extraordinary transaction involving the Company or its securities or assets;
and (iv) form, join or in any way participate in a "group" (as defined in
Section 13 (d)(3) of the Securities Exchange Act of 1934, as amended) in
connection with any of the foregoing.
(h) THE STOCKHOLDER HEREBY GRANTS TO, AND APPOINTS EMERALD AND ANY DESIGNEE
OF EMERALD, EACH OF THEM INDIVIDUALLY, STOCKHOLDER'S IRREVOCABLE (UNTIL THE
TERMINATION OF THIS AGREEMENT) PROXY AND ATTORNEY-IN-FACT WITH FULL POWER OF
SUBSTITUTION TO VOTE THE SUBJECT SHARES OF STOCKHOLDER AS INDICATED IN SECTION
3(A) AND 3(B) ABOVE. THE STOCKHOLDER INTENDS THIS PROXY TO BE IRREVOCABLE (UNTIL
THE TERMINATION OF THIS AGREEMENT) AND COUPLED WITH AN INTEREST AND WILL TAKE
SUCH FURTHER ACTION TO REVOKE AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY
STOCKHOLDER WITH RESPECT TO SUCH STOCKHOLDER'S SUBJECT SHARES.
4. Further Assurances. The Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as Emerald may reasonably request for
the purpose of effectively carrying out the transactions contemplated by this
Agreement. ---------------------------
5. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the prior
written consent of the other parties, except that any Stockholder may assign, in
its sole discretion, any or all of its rights, interests and obligations
hereunder to any direct or indirect wholly owned subsidiary of such Stockholder;
provided that both such transferor and transferee shall continue to be bound by
all the provisions hereof. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successor and assigns.
6. Termination. This Agreement shall terminate, and no party shall have any
rights or obligations hereunder and this Agreement shall become null and void
and have no further effect upon the earlier of (a) the Effective Time, (b) the
date on which the Merger Agreement is terminated pursuant to Section 8.1 thereof
and (c) five (5) business days after Emerald's receipt of a written notice form
Stockholder declaring its intention to terminate this Agreement in order to
participate in a Superior Proposal and a certificate signed by Stockholder's
Chairman of the Board attesting that the requirements for termination specified
in Section 3(f) have been satisfied; provided, however, that a termination
pursuant to this clause (c) shall not, for a period equal to the shorter of (A)
360 days following such termination or (B) the payment by the Company to Emerald
of the Termination Fee, relieve Stockholder of the duty to sell only in the
manner set forth in the concluding proviso of Section 3(c). Nothing in this
Section 6 shall relieve any party of liability for breach of this Agreement.
<PAGE>
7. Costs and Expenses. All costs and expenses incurred in connection with
this agreement and the consummation of the transactions contemplated hereby
shall be paid by the party incurring such expenses. ---------------------------
8. General Provisions.
(a) Amendments. This Agreement may not be amended except by an instrument
in writing signed by each of the parties hereto.
(b) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or sent by overnight
courier (providing proof of delivery) to Emerald in accordance with Section 9.2
of the Merger Agreement and to Stockholder at its address set forth on the
signature page of this Agreement (or at such other address for a party as shall
be specified by like notice).
(c) Interpretation. When a reference is made in this Agreement to Sections,
such reference shall be to a Section to this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Wherever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
(d) Severability. If any term or other provision of this Agreement is
invalid illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated hereby may be consummated as originally
contemplated to the fullest extent possible.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each of the parties and delivered to the one party, it being understood that
each party need not sign the same counterpart.
(f) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (ii) is not intended to confer upon any Person other than the parties hereto
any rights or remedies hereunder.
(g) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
<PAGE>
9. Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in a Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit such party to the
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated hereby, (ii) agrees that such party will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court; (iii) agrees that such party will not
bring any action relating to this Agreement or the transactions contemplated
hereby in any court other than a Federal court sitting in the state of Delaware
or a Delaware state court and (iv) waives any right to trial by jury with
respect to any claim or proceeding related to or arising out of this Agreement
or any of the transactions contemplated hereby. All rights, powers and remedies
provided under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative, and the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other such right, power or remedy by such party.
<PAGE>
IN WITNESS WHEREOF, Emerald has caused this Agreement to be signed by its
officer thereunto duly authorized and Stockholder has caused this Agreement to
be signed by its officer thereunto duly authorized, all as of the date first
written above.
X.L. AMERICA, INC.
By: /s/Paul S. Giordano
Name: Paul S. Giordano
Title: Senior Vice President
and General Counsel
Number of Subject Shares: 1,899,223 SECURITY INSURANCE COMPANY OF HARTFORD
By: /s/John J. McCann
Name: John J. McCann
Title: Executive Vice
President
Address: 9 Farm Springs Road
Farmington, CT 06032
<PAGE>
Orion Capital Corporation
and
First Chicago Trust Company of New York
as Rights Agent
Rights Agreement
Dated as of September 11, 1996
<PAGE>
TABLE OF CONTENTS
Section Page
1. Certain Definitions...................................................... 2
2. Appointment of Rights Agent.............................................. 7
3. Issuance of Rights Certificates.......................................... 7
4. Form of Rights Certificates.............................................. 10
5. Countersignature and Registration........................................ 11
6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates 12
7. Exercise of Rights; Purchase Price; Expiration Date of Rights 13
8. Cancellation and Destruction of Rights Certificates 16
9. Reservation and Availability of Capital Stock............................ 17
10. Preferred Stock Record Date............................................. 19
11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights
12. Certificate of Adjusted Purchase Price or Number of Shares............ 32
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power 32
14. Fractional Rights and Fractional Shares................................. 36
15. Rights of Action........................................................ 38
16. Agreement of Rights Holders............................................. 38
17. Rights Certificate Holder Not Deemed a Stockholder 39
18. Concerning the Rights Agent............................................. 40
19. Merger or Consolidation or Change of Name of Rights Agent................40
20. Duties of Rights Agent.................................................. 41
21. Change of Rights Agent.................................................. 44
22. Issuance of New Rights Certificates..................................... 45
23. Redemption and Termination.............................................. 46
24. Exchange................................................................ 47
25. Notice of Certain Events................................................ 49
26. Notices................................................................. 50
27. Supplements and Amendments.............................................. 51
28. Successors.............................................................. 52
29. Determinations and Actions by the Board, etc............................ 52
30. Benefits of this Agreement.............................................. 52
31. Severability............................................................ 52
32. Governing Law........................................................... 53
33. Counterparts............................................................ 53
34. Descriptive Headings.................................................... 53
<PAGE>
EXHIBITS
Exhibit A -- Form of Certificate of Designation
Exhibit B -- Form of Rights Certificate
Exhibit C -- Form of Summary of Rights
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of September 11, 1996 (this
"Agreement"), between Orion Capital Corporation, a Delaware corporation (the
"Company"), and First Chicago Trust Company of New York, a New York trust
company, as Rights Agent (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on March 15, 1989 (the "1989 Rights Dividend
Declaration Date"), the Board of Directors of the Company (the "Board")
authorized the Rights Agreement, dated as of March 15, 1989, between the Company
and Manufacturers Hanover Trust Company (the "1989 Agreement") and declared a
dividend distribution of one right (a "1989 Right") for each share of common
stock, par value $1.00 per share, of the Company (the "Common Stock")
outstanding at the close of business on March 27, 1989 (the "1989 Record Date").
Each 1989 Right represents the right to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock of the Company;
WHEREAS, on September 11, 1996 the Board determined it
desirable and in the best interests of the Company and its stockholders for the
Company to redeem the 1989 Rights upon the close of business on September 16,
1996 and adopt a new rights plan which would provide benefits similar to those
afforded by the 1989 Agreement;
WHEREAS, on September 11, 1996 (the "Rights Dividend
Declaration Date"), the Board authorized and declared a dividend distribution of
one Right (as hereinafter defined) for each share of Common Stock outstanding
upon the close of business on September 16, 1996 (the "Record Date"), and has
authorized the issuance of one Right (as such number may hereinafter be adjusted
pursuant to the provisions of Section 11(p) hereof) for each share of Common
Stock issued between the Record Date (whether originally issued or delivered
from the Company's treasury) and the Distribution Date (as hereinafter defined),
each Right initially representing the right to purchase one two-hundredth of a
share of Series B Junior Participating Preferred Stock (the "Preferred Stock")
having the rights, powers and preferences set forth in the form of Certificate
of Designation, Preferences and Rights of the Company attached hereto as Exhibit
A, upon the terms and subject to the conditions hereinafter set forth (the
"Rights");
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:
1. Certain Definitions. For purposes of this Agreement, the following terms
have the meanings indicated: -------------------
(a) "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
fifteen percent (15%) or more of the shares of Common Stock then outstanding,
but shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii)
any employee benefit plan of the Company or of any Subsidiary of the Company,
(iv) any Person or entity organized, appointed or established by the Company for
or ---------------- pursuant to the terms of any such plan, (v) any Person who
becomes the Beneficial Owner of fifteen percent (15%) or more of the shares of
Common Stock then outstanding as a result of a reduction in the number of shares
of Common Stock outstanding due to the repurchase of shares of Common Stock by
the Company unless and until such Person, after becoming aware that such Person
has become the Beneficial Owner of fifteen percent (15%) or more of the then
outstanding shares of Common Stock, acquires beneficial ownership of additional
shares of Common Stock representing one percent (1%) or more of the shares of
Common Stock then outstanding or (vi) any such Person who has reported or is
required to report such ownership (but less than 20%) on Schedule 13G under the
Exchange Act (or any comparable or successor report) or on Schedule 13D under
the Exchange Act (or any comparable or successor report) which Schedule 13D does
not state any intention to or reserve the right to control or influence the
management or policies of the Company or engage in any of the actions specified
in Item 4 of such Schedule (other than the disposition of the Common Stock) and,
within 10 Business Days of being requested by the Company to advise it regarding
the same, certifies to the Company that such Person acquired shares of Common
Stock in excess of 14.9% inadvertently or without knowledge of the terms of the
Rights and who, together with all Affiliates and Associates, thereafter does not
acquire additional shares of Common Stock while the Beneficial Owner of 15% or
more of the shares of Common Stock then outstanding; provided, however, that if
the Person requested to so certify fails to do so within 10 Business Days, then
such Person shall become an Acquiring Person immediately after such 10 Business
Day Period.
(b) "Act" shall mean the Securities Act of 1933.
(c) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended and in effect on the date of this
Agreement (the "Exchange Act"). --------- ---------
(d) A Person shall be deemed the "Beneficial Owner" of, and shall be deemed
to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or Associates,
directly or indirectly, has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the "Beneficial
Owner" of, or to "beneficially own," (A) securities tendered pursuant to a
tender or exchange offer made by such Person or any of such Person's Affiliates
or Associates until such tendered securities are accepted for purchase or
exchange, (B) securities issuable upon exercise of Rights at any time prior to
the occurrence of a Triggering Event or (C) securities issuable upon exercise of
Rights from and after the occurrence of a Triggering Event which Rights were
acquired by such Person or any of such Person's Affiliates or Associates prior
to the Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) hereof in connection with an
adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or Associates,
directly or indirectly, has the right to vote or dispose of or has "beneficial
ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and
Regulations under the Exchange Act), including pursuant to any agreement,
arrangement or understanding, whether or not in writing; provided, however, that
a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially
own," any security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy given in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the General Rules and Regulations
under the Exchange Act, and (B) is not reportable by such Person on Schedule 13D
under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any other
Person (or any Affiliate or Associate thereof) with which such Person (or any of
such Person's Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing), for the purpose of acquiring,
holding, voting (except pursuant to a revocable proxy as described in the
proviso to subparagraph (ii) of this paragraph (d)) or disposing of any voting
securities of the Company;
provided, however, that nothing in this paragraph (d) shall cause a Person
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty (40) days after the date of such acquisition.
(e) "Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close. ------------
(f) "Close of business" on any given date shall mean 5:00 P.M., New York
time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 P.M., New York time, on the next succeeding Business Day.
- ----------------- -------- -------
(g) "Common Stock" shall have the meaning set forth in the first WHEREAS
clause at the beginning of this Agreement, except that "Common Stock" when used
with reference to any Person other than the Company shall mean the capital stock
of such Person with the greatest voting power, or the equity securities or other
equity interest having power to control or direct the management, of such
Person. ------------
(h) "Common Stock Equivalents" shall have the meaning set forth in Section
11(a)(iii) hereof. ------------------------
(i) "Current Market Price" shall have the meaning set forth in Section
11(d)(i) hereof. --------------------
(j) "Current Value" shall have the meaning set forth in Section 11(a)(iii)
hereof. -------------
(k) "Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.
(l) "Exchange Act" shall have the meaning set forth in Section 1(c) hereof.
(m) "Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
(n) "Final Expiration Date" shall mean the close of business on September
11, 2006.
(o) "Person" shall mean any individual, firm, corporation, partnership or
other entity.
(p) "Preferred Stock" shall mean shares of Series B Junior Participating
Preferred Stock, par value $1.00 per share, of the Company and, to the extent
that there are not a sufficient number of shares of Series B Junior
Participating Preferred Stock authorized to permit the full exercise of the
Rights, any other series of preferred stock of the Company designated for such
purpose containing terms substantially similar to the terms of the Series B
Junior Participating Pre --------------- ferred Stock.
(q) "Principal Party" shall have the meaning set forth in Section 13(b)
hereof. ---------------
(r) "Purchase Price" shall have the meaning set forth in Section 4(a)
hereof.
(s) "Record Date" shall have the meaning set forth in the third WHEREAS
clause at the beginning of this Agreement. -----------
(t) "Redemption Price" shall have the meaning set forth in Section 23(a)
hereof. ----------------
(u) "Rights" shall have the meaning set forth in the third WHEREAS clause
at the beginning of the Agreement. ------
(v) "Rights Agent" shall have the meaning set forth in the parties clause
at the beginning of this Agreement. ------------
(w) "Rights Certificates" shall have the meaning set forth in Section 3(a)
hereof.
(x) "Rights Dividend Declaration Date" shall have the meaning set forth in
the third WHEREAS clause at the beginning of this Agreement.
- --------------------------------
(y) "Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii) hereof. -----------------------
(z) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof. ------------------------------
(aa) "Section 13 Event" shall mean any event described in clauses (x), (y),
or (z) of Section 13(a) hereof. ----------------
(bb) "Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(cc) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed or amended pursuant to Section 13(d) under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such. ----------------------
(dd) "Subsidiary" shall mean, with reference to any Person, any corporation
of which an amount of voting securities sufficient to elect at least a majority
of the directors of such corporation is beneficially owned, directly or
indirectly, by such Person, or otherwise controlled by such Person. ----------
(ee) "Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
(ff) "Summary of Rights" shall have the meaning set forth in Section 3(b)
hereof.
(gg) "Trading Day" shall have the meaning set forth in Section 11(d)(i)
hereof.
(hh) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event. ----------------
2. Appointment of Rights Agent. The Company hereby appoints the Rights
Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-rights agents as it may deem
necessary or desirable. 3. Issuance of Rights Certificates. (a) Until the
earlier of (i) the close of business on the tenth day after the Stock
Acquisition Date (or, if the tenth day after the Stock Acquisition Date occurs
before the Record Date, the close of business on the Record Date) or (ii) the
close of business on the tenth Business Day (or such later date as the Board
shall determine) after the date that a tender or exchange offer by any Person
(other than the Company, any Subsidiary of the Company, or any employee benefit
plan of the Company or of any Subsidiary of the Company, or any Person or entity
organized, appointed or established by the Company for or pursuant to the terms
of any such plan) is first published or sent or given within the meaning of Rule
14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon
consummation thereof, such Person would be the Beneficial Owner of fifteen
percent (15%) or more of the shares of Common Stock then outstanding (the
earlier of (i) and (ii) being herein referred to as the "Distribution Date"),
(x) the Rights will be evidenced (subject to the provisions of paragraph (b) of
this Section 3) by the certificates for the Common Stock registered in the names
of the holders of the Common Stock (which certificates for Common Stock shall be
deemed also to be certificates for Rights) and not by separate certificates and
(y) the Rights will be transferable only in connection with the transfer of the
underlying shares of Common Stock (including a transfer to the Company). As soon
as practicable after the Distribution Date, the Rights Agent will send by
first-class, insured, postage prepaid mail, to each record holder of the Common
Stock as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, one or more right certificates,
in substantially the form of Exhibit B hereto (the "Rights Certificates"),
evidencing one Right for each share of Common Stock so held, subject to
adjustment as provided herein. In the event that an adjustment in the number of
Rights per share of Common Stock has been made pursuant to Section 11(p) hereof,
at the time of distribution of the Right Certificates, the Company shall make
the necessary and appropriate rounding adjustments (in accordance with Section
14(a) hereof) so that Rights Certificates representing only whole numbers of
Rights are distributed and cash is paid in lieu of any fractional Rights. As of
and after the Distribution Date, the Rights will be evidenced solely by such
Rights Certificates.
(b) The Company will make available a copy of a Summary of Rights, in
substantially the form attached hereto as Exhibit C (the "Summary of Rights"),
to any holder of Rights who may so request from time to time. With respect to
certificates for the Common Stock outstanding as of the Record Date or which
were issued subsequent to the Record Date, unless and until the Distribution
Date shall occur, the Rights will be evidenced by such certificates for the
Common Stock and the registered holders of the Common Stock shall also be the
registered holders of the associated Rights. Until the earlier of the
Distribution Date or the Expiration Date (as hereinafter defined), the transfer
of any certificates representing shares of Common Stock in respect of which
Rights have been issued shall also constitute the transfer of the Rights
associated with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of Common Stock which
are issued (whether originally issued or from the Company's treasury) after the
Record Date but prior to the earlier of the Distribution Date or the Expiration
Date. Certificates representing such shares of Common Stock shall also be deemed
to be certificates for Rights, and shall bear the following legend (or the
legend required under the 1989 Agreement):
This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in the Rights Agreement between Orion Capital Corporation
(the "Company") and the Rights Agent thereunder (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference and a copy of which
is on file at the principal offices of the Company. Under certain circumstances,
as set forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement, as
in effect on the date of mailing, without charge, promptly after receipt of a
written request therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or becomes an
Acquiring Person or any Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement), whether currently held by or on behalf of such
Person or by any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend (or the legend
required under the 1989 Agreement), until the earlier of (i) the Distribution
Date or (ii) the Expiration Date, the Rights associated with the Common Stock
represented by such certificates shall be evidenced by such certificates alone
and registered holders of Common Stock shall also be the registered holders of
the associated Rights, and the transfer of any of such certificates shall also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificates.
4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and of
assignment to be printed on the reverse thereof) shall each be substantially in
the form set forth in Exhibit B hereto and may have such marks of identification
or designation and such legends, summaries or endorsements printed thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any applicable law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Rights may from time to time be listed, or to
conform to usage. Subject to the provisions of Section 11 and Section 22 hereof,
the Rights Certificates, whenever distributed, shall be dated as of the Record
Date and on their face shall entitle the holders thereof to purchase such number
of one two-hundredths of a share of Preferred Stock as shall be set forth
therein at the price set forth therein (such exercise price per one
two-hundredth of a share, the "Purchase Price"), but the amount and type of
securities purchasable upon the exercise of each Right and the Purchase Price
thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a), Section 11(i)
or Section 22 hereof that represents Rights beneficially owned by: (i) an
Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect avoidance
of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6
or Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Rights Certificate referred to in this sentence, shall contain (to the
extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person (as such terms are defined in the
Rights Agreement). Accordingly, this Rights Certificate and the Rights
represented hereby may become null and void in the circumstances specified in
Section 7(e) of the Rights Agreement.
5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company by
its Chairman of the Board, its President or any Vice President, either manually
or by facsimile signature, and shall have affixed thereto the Company's seal or
a facsimile thereof which shall be attested by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer of the Company, either
manually or by facsimile signature. The Rights Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any Rights Certificates may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office or offices designated as the appropriate place
for surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates and the date of each of the Rights Certificates.
6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14
hereof, at any time after the close of business on the Distribution Date, and at
or prior to the close of business on the Expiration Date, any Rights Certificate
or Certificates (other than Rights Certificates that may have been exchanged
pursuant to Section 24) may be transferred, split up, combined or exchanged for
another Rights Certificate or Certificates, entitling the registered holder to
purchase a like number of one two-hundredths of a share of Preferred Stock (or,
following a Triggering Event, Common Stock, other securities, cash or other
assets, as the case may be) as the Rights Certificate or Certificates
surrendered then entitles such holder (or former holder in the case of a
transfer) to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Rights Certificate or Certificates shall make such
request in writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Certificates to be transferred, split up, combined or exchanged
at the principal office or offices of the Rights Agent designated for such
purpose. Neither the Rights Agent nor the Company shall be obligated to take any
action whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the Rights
Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to the Company and
the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect to
the total number of one two-hundredths of a share (or other securities, cash or
other assets, as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the earlier of (i) the close of business on
September 11, 2006 (the "Final Expiration Date"), or (ii) the time at which the
Rights are redeemed or exchanged as provided in Sections 23 and 24 hereof (the
earlier of (i) and (ii) being herein referred to as the "Expiration Date").
(b) The Purchase Price for each one two-hundredth of a share of Preferred
Stock pursuant to the exercise of a Right shall initially be $200, and shall be
subject to adjustment from time to time as provided in Section 11 and Section
13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable Rights,
with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price per one two-hundredths of a share of Preferred Stock (or other shares,
securities, cash or other assets, as the case may be) to be purchased as set
forth below and an amount equal to any applicable transfer tax, the Rights Agent
shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the shares of Preferred Stock (or make available, if
the Rights Agent is the transfer agent for such shares) certificates for the
total number of one two-hundredths of a share of Preferred Stock to be purchased
and the Company hereby irrevocably authorizes its transfer agent to comply with
all such requests, or (B) if the Company shall have elected to deposit the total
number of shares of Preferred Stock issuable upon exercise of the Rights
hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one two-hundredths of a share of
Preferred Stock as are to be purchased (in which case certificates for the
shares of Preferred Stock represented by such receipts shall be deposited by the
transfer agent with the depositary agent) and the Company will direct the
depositary agent to comply with such request, (ii) requisition from the Company
the amount of cash, if any, to be paid in lieu of fractional shares in
accordance with Section 14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to, or upon the order of the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, and (iv) after receipt thereof, deliver
such cash, if any, to or upon the order of the registered holder of such Rights
Certificate. The payment of the Purchase Price (as such amount may be reduced
pursuant to Section 11(a)(iii) hereof) shall be made in cash or by certified
bank check or bank draft payable to the order of the Company. In the event that
the Company is obligated to issue other securities (including Common Stock) of
the Company, pay cash and/or distribute other property pursuant to Section 11(a)
hereof, the Company will make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution by the
Rights Agent, if and when appropriate. The Company reserves the right to require
prior to the occurrence of a Triggering Event that, upon any exercise of Rights,
a number of Rights be exercised so that only whole shares of Preferred Stock
would be issued.
(d) In case the registered holder of any Rights Certificate shall exercise
less than all the Rights evidenced thereby, a new Rights Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise. The Company shall use all reasonable efforts to
insure that the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but shall have no liability to any holder of Rights Certificates
or other Person as a result of its failure to make any determinations with
respect to an Acquiring Person or its Affiliates, Associates or transferees
hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither the
Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
8. Cancellation and Destruction of Rights. All Rights Certificates surrendered
for the purpose of exercise, transfer, split up, combination or exchange shall,
if surrendered to the Company or any of its agents, be delivered to the Rights
Agent for cancellation or in cancelled form, or, if surrendered to the Rights
Agent, shall be cancelled by it, and no Rights Certificates shall be issued in
lieu thereof except as expressly permitted by any of the provisions of this
Agreement. The Company shall deliver to the Rights Agent for cancellation and
retirement, and the Rights Agent shall so cancel and retire, any other Rights
Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent shall deliver all cancelled Rights
Certificates to the Company, or shall, at the written request of the Company,
destroy such cancelled Rights Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued shares of Preferred Stock
(and, following the occurrence of a Triggering Event, out of its authorized and
unissued shares of Common Stock and/or other securities or out of its authorized
and issued shares held in its treasury), the number of shares of Preferred Stock
(and, following the occurrence of a Triggering Event, Common Stock and/or other
securities) that, as provided in this Agreement including Section 11(a)(iii)
hereof, will be sufficient to permit the exercise in full of all outstanding
Rights.
(b) So long as the shares of Preferred Stock (and, following the occurrence
of a Triggering Event, Common Stock and/or other securities) issuable and
deliverable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement under the Act, with respect to the securities
purchasable upon exercise of the Rights on an appropriate form, (ii) cause such
regis tration statement to become effective as soon as practicable after such
filing and (iii) cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Act) until the earlier
of (A) the date as of which the Rights are no longer exercisable for such
securities and (B) the date of the expiration of the Rights. The Company will
also take such action as may be appropriate under, or to ensure compliance with,
the securities or "blue sky" laws of the various states in connection with the
exercisability of the Rights. The Company may temporarily suspend, for a period
of time not to exceed ninety (90) days after the date set forth in clause (i) of
the first sentence of this Section 9(c), the exercisability of the Rights in
order to prepare and file such registration statement and permit it to become
effective. Upon any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer in effect. In addition, if the Company shall determine that a
registration statement is required following the Distribution Date, the Company
may temporarily suspend the exercisability of the Rights until such time as a
registration statement has been declared effective. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the requisite qualification in such jurisdiction has not
been obtained, the exercise thereof is not permitted under applicable law or a
registration statement has not been declared effective.
(d) The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all one two-hundredths of a share of Preferred
Stock (and, following the occurrence of a Triggering Event, Common Stock and/or
other securities) delivered upon exercise of Rights shall, at the time of
delivery of the certificates for such shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Rights Certificates and of
any certificates for a number of one two-hundredths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) upon the
exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of a
number of one two-hundredths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in respect of a name other than
that of, the registered holder of the Rights Certificates evidencing Rights
surrendered for exercise or to issue or deliver any certificates for a number of
one two-hundredths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
10. Preferred Stock Record Date. Each person in whose name any certificate for a
number of one two-hundredths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) is issued upon the exercise of
Rights shall for all purposes be deemed to have become the holder of record of
such fractional shares of Preferred Stock (or Common Stock and/or other
securities, as the case may be) represented thereby on, and such certificate
shall be dated the date upon which the Rights Certificate evidencing such Rights
was duly surrendered and payment of the Purchase Price (and all applicable
transfer taxes) was made; provided, however, that if the date of such surrender
and payment is a date upon which the Preferred Stock (or Common Stock and/or
other securities, as the case may be) transfer books of the Company are closed,
such Person shall be deemed to have become the record holder of such shares
(fractional or otherwise) on, and such certificate shall be dated, the next
succeeding Business Day on which the Preferred Stock (or Common Stock and/or
other securities, as the case may be) transfer books of the Company are open.
Prior to the exercise of the Rights evidenced thereby, the holder of a Rights
Certificate shall not be entitled to any rights of a stockholder of the Company
with respect to shares for which the Rights shall be exercisable, including,
without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights.
The Purchase Price, the number and kind of shares covered by each Right and the
number of Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Stock payable in shares of
Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the
outstanding Preferred Stock into a smaller number of shares or (D) issue any
shares of its capital stock in a reclassification of the Preferred Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), except
as otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and the
number and kind of shares of Preferred Stock or capital stock, as the case may
be, issuable on such date, shall be proportionately adjusted so that the holder
of any Right exercised after such time shall be entitled to receive, upon
payment of the Purchase Price then in effect, the aggregate number and kind of
shares of Preferred Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Stock transfer books of the Company were open, such holder would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification. If an event occurs which
would require an adjustment under both this Section 11(a)(i) and Section
11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be
in addition to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii) hereof.
(ii) In the event any Person, alone or together with its Affiliates and
Associates, shall, at any time after the Rights Dividend Declaration Date,
become an Acquiring Person, unless the event causing such Person to become an
Acquiring Person is a transaction set forth in Section 13(a) hereof, or is an
acquisition of shares of Common Stock pursuant to a tender offer or an exchange
offer for all outstanding shares of Common Stock at a price and on terms
determined by at least a majority of the members of the Board who are not
officers of the Company and who are not representatives, nominees, Affiliates or
Associates of an Acquiring Person, after receiving advice from one or more
investment banking firms, to be (a) at a price that is not inadequate (taking
into account all factors that such members of the Board deem relevant including,
without limitation, prices that could reasonably be achieved if the Company or
its assets were sold on an orderly basis designed to realize maximum value) and
(b) otherwise in the best interests of the Company and its stockholders, then,
promptly following the occurrence of such event, proper provision shall be made
so that each holder of a Right (except as provided below and in Section 7(e)
hereof) shall thereafter have the right to receive, upon exercise thereof at the
then current Purchase Price in accordance with the terms of this Agreement, in
lieu of a number of one two-hundredths of a share of Preferred Stock, such
number of shares of Common Stock of the Company as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the then number
of one two-hundredths of a share of Preferred Stock for which a Right was
exercisable immediately prior to the first occurrence of a Section 11(a)(ii)
Event, and (y) dividing that product (which, following such first occurrence,
shall thereafter be referred to as the "Purchase Price" for each Right and for
all purposes of this Agreement) by fifty percent (50%) of the Current Market
Price (determined pursuant to Section 11(d) hereof) per share of Common Stock on
the date of such first occurrence (such number of shares, the "Adjustment
Shares").
(iii) In the event that the number of shares of Common Stock that are
authorized by the Company's Restated Certificate of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the
Company shall (A) determine the value of the Adjustment Shares issuable upon the
exercise of a Right (the "Current Value"), and (B) with respect to each Right
(subject to Section 7(e) hereof), make adequate provision to substitute for the
Adjustment Shares, upon the exercise of a Right and payment of the applicable
Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common
Stock or other equity securities of the Company (including, without limitation,
shares, or units of shares, of preferred stock, such as the Preferred Stock,
which the Board has deemed to have essentially the same value or economic rights
as shares of Common Stock (such shares of preferred stock being referred to as
"Common Stock Equivalents")), (4) debt securities of the Company, (5) other
assets or (6) any combination of the foregoing, having an aggregate value equal
to the Current Value (less the amount of any reduction in the Purchase Price),
where such aggregate value has been determined by the Board based upon the
advice of a nationally recognized investment banking firm selected by the Board;
provided, however, that if the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days following the
later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the date
on which the Company's right of redemption pursuant to Section 23(a) expires
(the later of (x) and (y) being referred to herein as the "Section 11(a)(ii)
Trigger Date"), then the Company shall be obligated to deliver, upon the
surrender for exercise of a Right and without requiring payment of the Purchase
Price, shares of Common Stock (to the extent available) and then, if necessary,
cash, which shares and/or cash have an aggregate value equal to the Spread. For
purposes of the preceding sentence, the term "Spread" shall mean the excess of
(i) the Current Value over (ii) the Purchase Price. If the Board determines in
good faith that it is likely that sufficient additional shares of Common Stock
could be authorized for issuance upon exercise in full of the Rights, the thirty
(30) day period set forth above may be extended to the extent necessary, but not
more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order
that the Company may seek stockholder approval for the authorization of such
additional shares (such thirty (30) day period, as it may be extended, is herein
called the "Substitution Period"). To the extent that action is to be taken
pursuant to the first and/or third sentences of this Section 11(a)(iii), the
Company (1) shall provide, subject to Section 7(e) hereof, that such action
shall apply uniformly to all outstanding Rights and (2) may suspend the
exercisability of the Rights until the expiration of the Substitution Period in
order to seek such stockholder approval for such authorization of additional
shares and/or to decide the appropriate form of distribution to be made pursuant
to such first sentence and to determine the value thereof. In the event of any
such suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For purposes
of this Section 11(a)(iii), the value of each Adjustment Share shall be the
current market price per share of the Common Stock on the Section 11(a)(ii)
Trigger Date and the per share or per unit value of any Common Stock Equivalent
shall be deemed to equal the current market price per share of the Common Stock
on such date.
(b) In case the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within forty-five (45) calendar
days after such record date) Preferred Stock (or shares having the same rights,
privileges and preferences as the shares of Preferred Stock ("Equivalent
Preferred Stock")) or securities convertible into Preferred Stock or Equivalent
Preferred Stock at a price per share of Preferred Stock or per share of
Equivalent Preferred Stock (or having a conversion price per share, if a
security convertible into Preferred Stock or Equivalent Preferred Stock) less
than the Current Market Price (as determined pursuant to Section 11(d) hereof)
per share of Preferred Stock on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fra tion, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock that the
aggregate offering price of the total number of shares of Preferred Stock and/or
Equivalent Preferred Stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such Current Market Price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or Equivalent Preferred Stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price may
be paid by delivery of consideration part or all of which may be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and the holders of the
Rights. Shares of Preferred Stock owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed,
and in the event that such rights or warrants are not so issued, the Purchase
Price shall be adjusted to be the Purchase Price that would then be in effect if
such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to all
holders of Preferred Stock (including any such distribution made in connection
with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained earnings of the Company), assets
(other than a dividend payable in Preferred Stock, but including any dividend
payable in stock other than Preferred Stock) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the Current Market Price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record date, less the
fair market value (as determined in good faith by the Board, whose determination
shall be described in a statement filed with the Rights Agent) of the portion of
the cash, assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to a share of Preferred Stock and the
denominator of which shall be such Current Market Price (as determined pursuant
to Section 11(d) hereof) per share of Preferred Stock. Such adjustments shall be
made successively whenever such a record date is fixed, and in the event that
such distribution is not so made, the Purchase Price shall be adjusted to be the
Purchase Price which would have been in effect if such record date had not been
fixed.
(d) (i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "Current Market
Price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the thirty (30)
consecutive Trading Days (as hereinafter defined) immediately prior to such
date, and for purposes of computations made pursuant to Section 11(a)(iii)
hereof, the Current Market Price per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such Common
Stock for the ten (10) consecutive Trading Days immediately following such date;
provided, however, that in the event that the Current Market Price per share of
the Common Stock is determined during a period following the announcement by the
issuer of such Common Stock of (A) a dividend or distribution on such Common
Stock payable in shares of such Common Stock or securities convertible into
shares of such Common Stock (other than the Rights), or (B) any subdivision,
combination or reclassification of such Common Stock, and the ex-dividend date
for such dividend or distribution, or the record date for such subdivision,
combination or reclassification shall not have occurred prior to the
commencement of the requisite thirty (30) Trading Day or ten (10) Trading Day
period, as set forth above, then, and in each such case, the Current Market
Price shall be properly adjusted to take into account ex-dividend trading. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the shares of Common
Stock are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
shares of Common Stock are listed or admitted to trading or, if the shares of
Common Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any such date the shares
of Common Stock are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Common Stock selected by the Board. If on any such date no
market maker is making a market in the Common Stock, the fair value of such
shares on such date as determined in good faith by the Board shall be used. The
term "Trading Day" shall mean a day on which the principal national securities
exchange on which the shares of Common Stock are listed or admitted to trading
is open for the transaction of business or, if the shares of Common Stock are
not listed or admitted to trading on any national securities exchange, a
Business Day. If the Common Stock is not publicly held or not so listed or
traded, Current Market Price per share shall mean the fair value per share as
determined in good faith by the Board, whose determination shall be described in
a statement filed with the Rights Agent and shall be conclusive for all
purposes.
(ii) For the purpose of any computation hereunder, the Current Market Price
per share of Preferred Stock shall be determined in the same manner as set forth
above for the Common Stock in clause (i) of this Section 11(d) (other than the
last sentence thereof). If the Current Market Price per share of Preferred Stock
cannot be determined in the manner provided above or if the Preferred Stock is
not publicly held or listed or traded in a manner described in clause (i) of
this Section 11(d), the Current Market Price per share of Preferred Stock shall
be conclusively deemed to be an amount equal to 200 (as such number may be
appropriately adjusted for such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock occurring after the date of
this Agreement) multiplied by the Current Market Price per share of the Common
Stock. If neither the Common Stock nor the Preferred Stock is publicly held or
so listed or traded, Current Market Price per share of the Preferred Stock shall
mean the fair value per share as determined in good faith by the Board, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest -------- ------- cent or to the nearest ten-thousandth of a share
of Common Stock or other share or one-millionth of a share of Preferred Stock,
as the case may be. Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this Section 11 shall be made no later than the
earlier of (i) three (3) years from the date of the transaction that mandates
such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock other than Preferred Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right and the Purchase Price thereof shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in Sections 11(a), (b),
(c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9,
10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like
terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one two-hundredths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one two-hundredths of a
share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one two-hundredths of a share covered by a
Right immediately prior to this adjustment, by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price, and (ii) dividing
the product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of one two-hundredths of a share of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after the adjustment in the
number of Rights shall be exercisable for the number of one two-hundredths of a
share of Preferred Stock for which a Right was exercisable immediately prior to
such adjustment. Each Right held of record prior to such adjustment of the
number of Rights shall become that number of Rights (calculated to the nearest
one ten-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase Price in
effect immediately after adjustment of the Purchase Price. The Company shall
make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Rights
Certificates have been issued, shall be at least ten (10) days later than the
date of the public announcement. If Rights Certificates have been issued, upon
each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one two-hundredths of a share of Preferred Stock issuable upon the
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one two-hundredth of a
share and the number of one two-hundredths of a share that were expressed in the
initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then stated value, if any, of the number of one
two-hundredths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action that may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable such number of one two-hundredths of a share
of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date of the
number of one two-hundredths of a share of Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise over and
above the number of one two-hundredths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board shall determine to be
advisable in order that any (i) consolidation or subdivision of the Preferred
Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less
than the Current Market Price, (iii) issuance wholly for cash of shares of
Preferred Stock or securities which by their terms are convertible into or
exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance
of rights, options or warrants referred to in this Section 11, hereafter made by
the Company to holders of its Preferred Stock shall not be taxable to such
stockholders.
(n) The Company covenants and agrees that it shall not, at any time after
the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction that complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than fifty percent (50%) of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements in
effect which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously with or
immediately after such consolidation, merger or sale, the stockholders of the
Person who constitutes, or would constitute, the "Principal Party" for purposes
of Section 13(a) hereof shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution Date, it
will not, except as permitted by Section 23 or Section 26 hereof, take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Rights Dividend Declaration
Date and prior to the Distribution Date (i) declare a dividend on the
outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, the number
of Rights associated with each share of Common Stock then outstanding, or issued
or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with
each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction the numerator which
shall be the total number of shares of Common Stock outstanding immediately
prior to the occurrence of the event and the denominator of which shall be the
total number of shares of Common Stock outstanding immediately following the
occurrence of such event.
12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an
adjustment is made as provided in Section 11 and Section 13 hereof, the Company
shall (a) promptly prepare a certificate setting forth such adjustment and a
brief statement of the facts accounting for such adjustment, (b) promptly file
with the Rights Agent, and with each transfer agent for the Preferred Stock and
the Common Stock, a copy of such certificate and (c) if a Distribution Date has
occurred, mail a brief summary thereof to each holder of a Rights Certificate in
accordance with Section 27 hereof. The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment therein contained.
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.
(a) In the event that, following the Stock Acquisition Date, directly or
indirectly, (x) the Company shall consolidate with, or merge with and into, any
other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the continuing
or surviving corporation of such consolidation or merger, (y) any Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof) shall consolidate with, or merge with or into, the Company, and
the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger,
all or part of the outstanding shares of Common Stock shall be changed into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer (or one or more of
its Subsidiaries shall sell or otherwise transfer) in one transaction or a
series of related transactions, assets or earning power aggregating more than
fifty percent (50%) of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company
or any Subsidiary of the Company in one or more transactions each of which
complies with Section 11(o) hereof), then, and in each such case (except as may
be contemplated by Section 13(d) hereof), proper provision shall be made so
that: (i) each holder of a Right, except as provided in Section 7(e) hereof,
shall thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price in accordance with the terms of this Agreement, such
number of validly authorized and issued, fully paid, non-assessable and freely
tradeable shares of Common Stock of the Principal Party (as such term is
hereinafter defined), not subject to any liens, encumbrances, rights of first
refusal or other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one two-hundredths
of a share of Preferred Stock for which a Right is exercisable immediately prior
to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event
has occurred prior to the first occurrence of a Section 13 Event, multiplying
the number of such one two-hundredths of a share for which a Right was
exercisable immediately prior to the first occurrence of a Section 11(a)(ii)
Event by the Purchase Price in effect immediately prior to such first
occurrence), and dividing that product (which, following the first occurrence of
a Section 13 Event, shall be referred to as the "Purchase Price" for each Right
and for all purposes of this Agreement) by (2) fifty percent (50%) of the
Current Market Price (determined pursuant to Section 11(d)(i) hereof) per share
of the Common Stock of such Principal Party on the date of consummation of such
Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such Section 13 Event, all the obligations and duties
of the Company pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 hereof shall apply only to such
Principal Party following the first occurrence of a Section 13 Event; (iv) such
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock) in connection
with the consummation of any such transaction as may be necessary to assure that
the provisions hereof shall thereafter be applicable, as nearly as reasonably
may be, in relation to its shares of Common Stock thereafter deliverable upon
the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) hereof
shall be of no effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x) or (y) of the
first sentence of Section 13(a), the Person that is the issuer of any securities
into which shares of Common Stock of the Company are converted in such merger or
consolidation, and if no securities are so issued, the Person that is the other
party to such merger or consolidation; and
(ii) in the case of any transaction described in clause (z) of the first
sentence of Section 13(a), the Person that is the party receiving the greatest
portion of the assets or earning power transferred pursuant to such transaction
or transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger, sale
or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this Section 13
and further providing that, as soon as practicable after the date of any
consolidation, merger or sale of assets mentioned in paragraph (a) of this
Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Act, with respect
to the Rights and the securities purchasable upon exercise of the Rights on an
appropriate form, and will use its best efforts to cause such registration
statement to (A) become effective as soon as practicable after such filing and
(B) remain effective (with a prospectus at all times meeting the requirements of
the Act) until the Expiration Date; and
(ii) will deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates which comply in all respects
with the requirements for registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. In the event that a
Section 13 Event shall occur at any time after the occurrence of a Section
11(a)(ii) Event, the Rights which have not theretofore been exercised shall
thereafter become exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary, Section 13
shall not be applicable to a transaction described in subparagraphs (x) and (y)
of Section 13(a) if (i) such transaction is consummated with a Person or Persons
who acquired shares of Common Stock pursuant to a tender offer or exchange offer
for all outstanding shares of Common Stock which complies with the provisions of
Section 11(a)(ii) hereof (or a wholly owned subsidiary of any such Person or
Persons), (ii) the price per share of Common Stock offered in such transaction
is not less than the price per share of Common Stock paid to all holders of
shares of Common Stock whose shares were purchased pursuant to such tender offer
or exchange offer and (iii) the form of consideration being offered to the
remaining holders of shares of Common Stock pursuant to such transaction is the
same as the form of consideration paid pursuant to such tender offer or exchange
offer. Upon consummation of any such transaction contemplated by this Section
13(d), all Rights hereunder shall expire.
14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights, except
prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this Section 14(a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable. The closing price of the Rights for any day shall be
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Rights are listed or admitted to trading, or if the Rights
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board.
If on any such date no such market maker is making a market in the Rights the
fair value of the Rights on such date as determined in good faith by the Board
shall be used.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions that are integral multiples of one
two-hundredth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions that are integral multiples of one two-hundredth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock that
are not integral multiples of one two-hundredth of a share of Preferred Stock,
the Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one two-hundredth of a share of
Preferred Stock. For purposes of this Section 14(b), the current market value of
one two-hundredth of a share of Preferred Stock shall be one two-hundredth of
the closing price of a share of Preferred Stock (as determined pursuant to
Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of
such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall not
be required to issue fractions of shares of Common Stock upon exercise of the
Rights or to distribute certificates which evidence fractional shares of Common
Stock. In lieu of fractional shares of Common Stock, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one (1) share of Common Stock. For purposes of this Section
14(c), the current market value of one share of Common Stock shall be the
closing price of one share of Common Stock (as determined pursuant to Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
(d) The holder of a Right by the acceptance of the Rights expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
15. Rights of Action. All rights of action in respect of this Agreement are
vested in the respective registered holders of the Rights Certificates (and,
prior to the Distribution Date, the registered holders of the Common Stock); and
any registered holder of any Rights Certificate (or, prior to the Distribution
Date, of the Common Stock), without the consent of the Rights Agent or of the
holder of any other Rights Certificate (or, prior to the Distribution Date, of
the Common Stock), may, in his own behalf and for his own benefit, enforce, and
may institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Rights Certificate in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
16. Agreement of Rights Holders. Every holder of a Right by accepting the same
consents and agrees with the Company and the Rights Agent and with every other
holder of a Right that: ----------------------------
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office or offices of the Rights Agent designated for such purposes, duly
endorsed or accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name a Rights Certificate
(or, prior to the Distribution Date, the associated Common Stock certificate) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Stock certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent, subject to the last sentence of Section 7(e)
hereof, shall be required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither the
Company nor the Rights Agent shall have any liability to any holder of a Right
or other Person as a result of its inability to perform any of its obligations
under this Agreement by reason of any preliminary or permanent injunction or
other order, decree or ruling issued by a court of competent jurisdiction or by
a governmental, regulatory or administrative agency or commission, or any
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority, prohibiting or otherwise restraining performance of such
obligation; provided, however, the Company must use its best efforts to have any
such order, decree or ruling lifted or otherwise overturned as soon as possible.
17. Rights Certificate Holder Not Deemed a Stockholder. No holder, as such, of
any Rights Certificate shall be entitled to vote, receive dividends or be deemed
for any purpose the holder of the number of one two-hundredths of a share of
Preferred Stock or any other securities of the Company that may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 25 hereof), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation
for all services rendered by it hereunder and, from time to time, on demand of
the Rights Agent, its reasonable expenses and counsel fees and disbursements and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense, incurred without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
(b) The Rights Agent shall be protected and shall incur no liability for or
in respect of any action taken, suffered or omitted by it in connection with its
administration of this Agreement in reliance upon any Rights Certificate or
certificate for Common Stock or for other securities of the Company, instrument
of assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons.
19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust or stock transfer business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; provided, however, that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Rights Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and
at such time any of the Rights Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been countersigned, the Rights
Agent may countersign such Rights Certificates either in its prior name or in
its changed name; and in all such cases such Rights Certificates shall have the
full force provided in the Rights Certificates and in this Agreement.
20. Duties of Rights Agent. The Rights Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Rights Certificates, by their
acceptance thereof, shall be bound: ----------------------
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of Current Market Price) be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by the
Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own negligence,
bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any adjustment required under the provisions of Section 11 or
Section 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Rights Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock or Preferred Stock to
be issued pursuant to this Agreement or any Rights Certificate or as to whether
any shares of Common Stock or Preferred Stock will, when so issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, reasonable care was exercised in the
selection -------- ------- and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may
resign and be discharged from its duties under this Agreement upon thirty (30)
days' notice in writing mailed to the Company, and to each transfer agent of the
Common Stock and Preferred Stock, by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Stock and Preferred Stock, by
registered or certified mail, and to the holders of the Rights Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after giving notice of such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then any registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be (a)
a legal business entity organized and doing business under the laws of the
United States or of any State thereof, in good standing, which is authorized
under such laws to exercise corporate trust or stock transfer powers and is
subject to supervision or examination by federal or state authority and which
has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $25,000,000 or (b) an affiliate of a legal business entity
described in clause (a) of this sentence. After ap pointment, the successor
Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Stock and the Preferred Stock, and mail a
notice thereof in writing to the registered holders of the Rights Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
22. Issuance of New Rights Certificates. Notwithstanding any of the provisions
of this Agreement or of the Rights to the contrary, the Company may, at its
option, issue new Rights Certificates evidencing Rights in such form as may be
approved by the Board to reflect any adjustment or change in the Purchase Price
and the number or kind or class of shares or other securities or property
purchasable under the Rights Certificates made in accordance with the provisions
of this Agreement. In addition, in connection with the issuance or sale of
shares of Common Stock following the Distribution Date and prior to the
redemption or expiration of the Rights, the Company (a) shall, with respect to
shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, granted or awarded as of the
Distribution Date, or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by the Board, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate shall be issued if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued, and (ii)
no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
23. Redemption and Termination.
(a) The Board may, at its option, at any time prior to the earlier of (i)
the close of business on the tenth day following the Stock Acquisition Date (or,
if the Stock Acquisition Date shall have occurred prior to the Record Date, the
close of business on the tenth day following the Record Date), or (ii) the Final
Expiration Date, redeem all but not less than all the then outstanding Rights at
a redemption price of $.01 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "Redemption Price"). Notwithstanding anything contained in
this Agreement to the contrary, the Rights shall not be exercisable after the
first occurrence of a Section 11(a)(ii) Event until such time as the Company's
right of redemption hereunder has expired. The Company may, at its option, pay
the Redemption Price in cash, shares of Common Stock (based on the Current
Market Price, as defined in Section 11(d)(i) hereof, of the Common Stock at the
time of redemption) or any other form of consideration deemed appropriate by the
Board.
(b) Immediately upon the action of the Board ordering the redemption of the
Rights, evidence of which shall have been filed with the Rights Agent and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price for each Right so held. Promptly after
the action of the Board ordering the redemption of the Rights, the Company shall
give notice of such redemption to the Rights Agent and the holders of the then
outstanding Rights by mailing such notice to all such holders at each holder's
last address as it appears upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Stock. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made.
24. Exchange.
(a) The Board may, at its option, at any time after any Person becomes an
Acquiring Person, exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become void pursuant to the
provisions of Section 7(e) hereof) for Common Stock at an exchange ratio of one
share of Common Stock per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such exchang ratio being hereinafter referred to as the "Exchange Ratio").
Notwithstanding the foregoing, the Board shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any such Subsidiary, or
any entity holding Common Stock for or pursuant to the terms of any such plan),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Stock then outstanding.
(b) Immediately upon the action of the Board ordering the exchange of any
Rights pursuant to subsection (a) of this Section 24 and without any further
action and without any notice, the right to exercise such Rights shall terminate
and the only right thereafter of a holder of such Rights shall be to receive
that number of shares of Common Stock equal to the number of such Rights held by
such holder multiplied by the Exchange Ratio. The Company shall promptly give
public notice of any such exchange; provided, however, that the failure to give,
or any defect in, such notice shall not affect the validity of such exchange.
The Company promptly shall mail a notice of any such exchange to all of the
holders of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange will state the method by which the exchange of the
Common Stock for Rights will be effected and, in the event of any partial
exchange, the number of Rights which will be exchanged. Any partial exchange
shall be effected pro rata based on the number of Rights (other than Rights
which have become void pursuant to the provisions of Section 7(e) hereof) held
by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Stock (or Equivalent Preferred Stock, as such
term is defined in paragraph (b) of Section 11 hereof) for Common Stock
exchangeable for rights, at the initial rate of one two-hundredth of a share of
Preferred Stock (or Equivalent Preferred Stock) for each share of Common Stock,
as appropriately adjusted to reflect stock splits, stock dividends and other
similar transactions after the date hereof.
(d) In the event that there shall not be sufficient Common Stock issued but
not outstanding or authorized but unissued to permit any exchange of Rights as
contemplated in accordance with this Section 24, the Company shall take all such
action as may be necessary to authorize additional Common Stock for issuance
upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of Common Stock or
to distribute certificates which evidence fractional Common Stock. In lieu of
such fractional Common Stock, there shall be paid to the registered holders of
the Right Certificates with regard to which such fractional Common Stock would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole share of Common Stock. For the purposes of this
subsection (e), the current market value of a whole share of Common Stock shall
be the closing price of a share of Common Stock (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the Distribution
Date, (i) to pay any dividend payable in stock of any class to the holders of
Preferred Stock or to make any other distribution to the holders of Preferred
Stock (other than a regular quarterly cash dividend out of earnings or retained
earnings of the Company), or (ii) to offer to the holders of Preferred Stock
rights or warrants to subscribe for or to purchase any additional shares of
Preferred Stock or shares of stock of any class or any other securities, rights
or options, or (iii) to effect any reclassification of its Preferred Stock
(other than a reclassification involving only the subdivision of outstanding
shares of Preferred Stock), or (iv) to effect any consolidation or merger into
or with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or a series of related transactions, of
more than fifty percent (50%) of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to any other Person or Persons (other than
the Company and/or any of its Subsidiaries in one or more transactions each of
which complies with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof shall
occur, then, in any such case, (i) the Company shall as soon as practicable
thereafter give to each holder of a Rights Certificate, to the extent feasible
and in accordance with Section 25 hereof, a notice of the occurrence of such
event, which shall specify the event and the consequences of the event to
holders of Rights under Section 11(a)(ii) hereof, and (ii) all references in the
preceding paragraph to Preferred Stock shall be deemed thereafter to refer to
Common Stock and/or, if appropriate, other securities.
26. Notices. Notices or demands authorized by this Agreement to be given or made
by the Rights Agent or by the holder of any Rights Certificate to or on the
Company shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing with the Rights
Agent) as follows: -------
Orion Capital Corporation
9 Farm Springs Road
Farmington, CT 06032
Attention: Corporate Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
First Chicago Trust Company of New York
525 Washington Blvd. - Suite 4660
Jersey City, NJ 07310
Attention: Corporate Actions Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
27. Supplements and Amendments. Prior to the Distribution Date, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date, the
Company and the Rights Agent shall, if the Company so directs, supplement or
amend this Agreement without the approval of any holders of Rights Certificates
in order (i) to cure any ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) to shorten or lengthen any time period hereunder or
(iv) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Rights Certificates; provided, from and after the
Distribution Date, this Agreement may not be supplemented or amended to lengthen
any time period hereunder, pursuant to clause (iii) of this sentence unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
27, the Rights Agent shall execute such supplement or amendment. Prior to the
Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Stock. Notwithstanding
anything contained herein to the contrary, this Agreement may not be amended at
a time when the Rights are not redeemable.
28. Successors. All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Rights Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder. ----------
29. Determinations and Actions by the Board, etc. For all purposes of this
Agreement, any calculation of the number of shares of Common Stock outstanding
at any particular time, including for purposes of determining the particular
percentage of such outstanding shares of Common Stock of which any Person is the
Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The
Board shall have the exclusive power and authority to administer this Agreement
and to exercise all rights and powers specifically granted to the Board or to
the Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power to (i) interpret
the provisions of this Agreement, and (ii) make all determinations deemed
necessary or advisable for the administration of this Agreement (including a
determination to redeem or not redeem the Rights or to amend the Agreement). All
such actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board in good faith, shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other parties, and (y) not subject the Board to any liability to the holders of
the Rights.
30. Benefits of this Agreemen. Nothing in this Agreement shall be construed to
give to any Person other than the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date,
registered holders of the Common Stock) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Rights Certificates (and, prior to the Distribution Date, registered holders
of the Common Stock).
31. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated; provided,
however, that notwithstanding anything in this Agreement to the contrary, if any
such term, provision, covenant or restriction is held by such court or authority
to be invalid, void or unenforceable and the Board determines in its good faith
judgment that severing the invalid language from this Agreement would adversely
affect the purpose or effect of this Agreement, the right of redemption set
forth in Section 23 hereof shall be reinstated and shall not expire until the
close of business on the tenth day following the date of such determination by
the Board.
1.
32. Governing Law. This Agreement, each Right and each Rights Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Delaware and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts made and to be performed
entirely within such State. -------------
33. Counterparts. This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument. ------------
34. Descriptive Headings. Descriptive headings of the several Sections of this
Agreement are inserted for convenience only and shall not control or affect the
meaning or construction of any of the provisions hereof. --------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement 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.
ORION CAPITAL CORPORATION
By
Name:
Title:
FIRST CHICAGO TRUST COMPANY
OF NEWYORK
By
Name:
Title:
<PAGE>
Exhibit A
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES B JUNIOR
PARTICIPATING PREFERRED STOCK
OF
ORION CAPITAL CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, Michael P. Maloney, Vice President, General Counsel and Secretary of
Orion Capital Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Restated Certificate of Incorporation of the said Corporation, the said Board of
Directors on September 11, 1996, adopted the following resolution creating a
series of 1,000,000 shares of Preferred Stock designated as Series B Junior
Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Restated
Certificate of Incorporation, a series of Preferred Stock of the Corporation be
and it hereby is created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
1. Designation and Amount. The shares of such series shall be designated as
"Series B Junior Participating Preferred Stock" and the number of shares
constituting such series shall be 1,000,000. ----------------------
2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series B Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series B Junior Participating Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the first business day of January, April, July and October in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series B Junior Participating Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set
forth, 200 times the aggregate per share amount of all cash divi dends, and 200
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock, par value $1.00 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series B
Junior Participating Preferred Stock. In the event the Corporation shall at any
time after September 11, 1996 (the "Rights Declaration Date") (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series B Junior Participating Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution
on the Series B Junior Participating Preferred Stock as provided in Paragraph
(A) above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the
Series B Junior Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series B Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series B Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series B Junior Participating Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series B Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series B Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series B Junior Participating
Preferred Stock shall have the following voting rights: -------------
(a) Subject to the provision for adjustment hereinafter set forth, each
share of Series B Junior Participating Preferred Stock shall entitle the holder
thereof to 200 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstandin Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series B Junior
Participating Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of shares of
Series B Junior Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(c)(i) If at any time dividends on any Series B Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "default period") which shall extend until such
time when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series B
Junior Participating Preferred Stock then outstanding shall have been declared
and paid or set apart for payment. During each default period, all holders of
Preferred Stock (including holders of the Series B Junior Participating
Preferred Stock) with dividends in arrears in an amount equal to six (6)
quarterly dividends thereon, voting as a class, irrespective of series, shall
have the right to elect two (2) Directors. (a)
(ii) During any default period, such voting right of the holders of Series
B Junior Participating Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(c) or at any
annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of ten percent (10%) in number of shares of Preferred Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
Directors or, if such right is exercised at an ann al meeting, to elect two (2)
Directors. If the number which may be so elected at any special meeting does not
amount to the required number, the holders of the Preferred Stock shall have the
right to make such increase in the number of Directors as shall be necessary to
permit the election by them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect Directors in any
default period and during the continuance of such period, the number of Di
rectors shall not be increased or decreased except by vote of the holders of
Preferred Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series B Junior
Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect Directors, the
Board of Directors may order, or any stockholder or stockholders owning in the
aggregate not less than ten percent (10%) of the total number of shares of
Preferred Stock outstanding, irrespective of series, may request, the calling of
special meeting of the holders of Preferred Stock, which meeting shall thereupon
be called by the President, a Vice-President or the Secretary of the
Corporation. Notice of such meeting and of any annual meeting at which holders
of Preferred Stock are entitled to vote pursuant to this Paragraph (c)(iii)
shall be given to each holder of record of Preferred Stock by mailing a copy of
such notice to him at his last address as the same appears on the books of the
Corporation. Such meeting shall be called for a time not earlier than 20 days
and not later than 60 days after such order or request or in default of the
calling of such meeting within 60 days after such order or request, such meeting
may be called on similar notice by any stockholder or stockholders owning in the
aggregate not less than ten percent (10%) of the total number of shares of
Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph
(C)(iii), no such special meeting shall be called during the period within 60
days immediately preceding the date fixed for the next annual meeting of the
stockholders.
(iv) In any default period, the holders of Common Stock, and other classes
of stock of the Corporation if applicable, shall continue to be entitled to
elect the whole number of Directors until the holders of Preferred Stock shall
have exercised their right to elect two (2) Directors voting as a class, after
the exercise of which right (x) the Directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in Paragraph
(c)(ii) of this Section 3) be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of stock which elected
the Director whose office shall have become vacant. References in this Paragraph
(c) to Directors elected by the holders of a particular class of stock shall
include Directors elected by such Directors to fill vacancies as provided in
clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right of
the holders of Preferred Stock as a class to elect Directors shall cease, (y)
the term of any Directors elected by the holders of Preferred Stock as a class
shall terminate, and (z) the number of Directors shall be such number as may be
provided for in the certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of Paragraph (c)(ii) of this Section 3
(such number being subject, however, to change thereafter in any manner provided
by law or in the certificate of incorporation or by-laws). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors.
(d) Except as set forth herein, holders of Series B Junior Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series B Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series B Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or redeem
or purchase or otherwise acquire for consideration any shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series B Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series B Junior Participating Preferred
Stock, except dividends paid ratably on the Series B Junior Participating
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series B Junior Participating Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of any
stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series B Junior Participating
Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series B
Junior Participating Preferred Stock, or any shares of stock ranking on a parity
with the Series B Junior Participating Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under Paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series B Junior Participating Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions ----------------- and restrictions on
issuance set forth herein.
6. Liquidation, Dissolution or Winding Up. (a) Upon any liquidation (voluntary
or otherwise), dissolution or winding up of the Corporation, no distribution
shall be made to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series B Junior
Participating Preferred Stock unless, prior thereto, the holders of shares of
Series B Junior Participating Preferred Stock shall have received $100 per
share, plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment (the "Series B
Liquidation Preference"). Following the payment of the full amount of the Series
B Liquidation Preference, no additional distributions shall be made to the
holders of shares of Series B Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Common Stock shall have received an amount per
share (the "Common Adjustment") equal to the quotient obtained by dividing (i)
the Series B Liquidation Preference by (ii) 200 (as appropriately adjusted as
set forth in subparagraph (c) below to reflect such events as stock splits,
stock dividends and recapitalizations with respect to the Common Stock) (such
number in clause (ii), the "Adjustment Number"). Following the payment of the
full amount of the Series B Liquidation Preference and the Common Adjustment in
respect of all outstanding shares of Series B Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series B Junior Participating
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
(b) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series B Liquidation
Preference and the liquidation preferences of all other series of preferred
stock, if any, which rank on a parity with the Series B Junior Participating
Preferred Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
(c) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
7. Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the shares of Series B Junior
Participating Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change of shares
of Series B Junior Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
8. No Redemption. The shares of Series B Junior Participating Preferred Stock
shall not be redeemable. -------------
9. Ranking. The Series B Junior Participating Preferred Stock shall rank junior
to all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of such series shall
provide otherwise. -------
10. Amendment. The Restated Certificate of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series B Junior
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding shares
of Series B Junior Participating Preferred Stock, voting separately as a class.
- ---------
11. Fractional Shares. Series B Junior Participating Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holders fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series B Junior Participating Preferred Stock. -----------------
<PAGE>
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this day of --
_________________, 199_.
By:
Name:
Title:
<PAGE>
Exhibit B
[Form of Rights Certificate]
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER SEPTEMBER 11, 2006 OR EARLIER IF REDEEMED BY THE COMPANY.
THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER
RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECOME AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT.]1
Rights Certificate
ORION CAPITAL CORPORATION
This certifies that , or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of September 11, 1996 (the "Rights Agreement"), between
Orion Capital Corporation, a Delaware corporation (the "Company"), and First
Chicago Trust Company of New York, as Rights Agent (the "Rights Agent"), to
purchase from the Company at any time prior to 5:00 P.M. (New York time) on
September 11, 2006 at the office or offices of the Rights Agent designated for
such purpose, or its successors as Rights Agent, one two-hundredth of a fully
paid, non-assessable share of Series B Junior Participating Preferred Stock (the
"Preferred Stock") of the Company, at a purchase price of $200 per one
two-hundredth of a share (the "Purchase Price"), upon presentation and surrender
of this Rights Certificate with the Form of Election to Purchase and rela ed
Certificate duly executed. The number of Rights evidenced by this Rights
Certificate (and the number of shares which may be purchased upon exercise
thereof) set forth above, and the Purchase Price per share set forth above, are
the number and Purchase Price as of September 11, 1996, based on the Preferred
Stock as constituted at such date. The Company reserves the right to require
prior to the occurrence of a Triggering Event (as such term is defined in the
Rights Agreement) that a number of Rights be exercised so that only whole shares
of Preferred Stock will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such term
is defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such Section 11(a)(ii)
Event.
As provided in the Rights Agreement, the Purchase Price and
the number and kind of shares of Preferred Stock or other securities, which may
be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events, including Triggering Events.
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Rights Certificates,
which limitations of rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in the
Rights Agreement. Copies of the Rights Agreement are on file at the
above-mentioned office of the Rights Agent and are also available upon written
request to the Company.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the principal office or offices of the Rights
Agent designated for such purpose, may be exchanged for another Rights
Certificate or Rights Certificates of like tenor and date evidencing Rights
entitling the holder to purchase a like aggregate number of one two-hundredths
of a share of Preferred Stock as the Rights evidenced by the Rights Certificate
or Rights Certificates surrendered shall have entitled such holder to purchase.
If this Rights Certificate shall be exercised in part, the holder shall be
entitled to receive upon surrender hereof another Rights Certificate or Rights
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right at any time prior to the earlier of the close
of business on (i) the tenth day following the Stock Acquisition Date (as such
time period may be extended pursuant to the Rights Agreement) and (ii) the Final
Expiration Date.
No fractional shares of Preferred Stock will be issued upon
the exercise of any Right or Rights evidenced hereby (other than, except that
the possible requirement that prior to the occurrence of a Triggering Event only
whole shares of Preferred Stock be issued, fractions which are integral
multiples of one two-hundredth of a share of Preferred Stock, which may, at the
election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of shares of
Preferred Stock or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal.
Dated as of __________________
ATTEST: ORION CAPITAL CORPORATION
By
Secretary Title:
Countersigned:
FIRST CHICAGO TRUST
COMPANY OF NEW YORK
By
Authorized Signature
1 The portion of the legend in brackets shall be inserted only if applicable and
shall replace the preceding sentence.
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to transfer the
within Rights Certificate on the books of the within-named Company, with full
power of substitution. -----------------
Dated: __________________
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Rights Certificate [ ]is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person
or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person.
Dated:
Signature
Signature Guaranteed:
<PAGE>
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights
represented by the Rights Certificate.)
To: ORION CAPITAL CORPORATION:
The undersigned hereby irrevocably elects to exercise
_________ Rights represented by this Rights Certificate to purchase the shares
of Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other person which may be issuable upon the
exercise of the Rights) and requests that certificates for such shares be issued
in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced
by this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated: _____________________
Signature
Signature Guaranteed:
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(3) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such
terms are defined pursuant to the Rights Agreement);
(4) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or became an Acquiring Person or an Affiliate
or Associate of an Acquiring Person.
Dated:
Signature
Signature Guaranteed:
<PAGE>
NOTICE
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED STOCK
On September 11, 1996, the Board of Directors of Orion Capital Corporation
(the "Company") declared a dividend distribution of one Right for each
outstanding share of Common Stock to stockholders of record at the close of
business on September 16, 1996 (the "Record Date"). Each Right entitles the
registered holder to purchase from the Company one two-hundredth of a share of
Series B Junior Participating Preferred Stock, par value $1.00 per share (the
"Preferred Stock"), at a Purchase Price of $200, subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and First Chicago Trust Company of New
York, as Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock and a
Distribution Date will occur upon the earlier of (i) ten (10) days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of fifteen percent (15%) or more of the outstanding shares
of Common Stock (the "Stock Acquisition Date"), other than as a result of
repurchases of stock by the Company or certain inadvertent actions by
institutional or certain other stockholders, or (ii) ten (10) business days (or
such later date as the Board shall determine) following the commencement of a
tender offer or exchange offer that would result in a person or group
beneficially owning fifteen percent (15%) or more of such outstanding shares of
Common Stock. Until the Distribution Date, (i) the Rights will be evidenced by
the Common Stock certificates and will be transferred with and only with such
Common Stock certificates, (ii) new Common Stock certificates issued after the
Record Date will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates for Common
Stock outstanding will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate. Pursuant to the Rights
Agreement, the Company reserves the right to require prior to the occurrence of
a Triggering Event (as defined below) that, upon any exercise of Rights, a
number of Rights be exercised so that only whole shares of Preferred Stock will
be issued.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on September 11, 2006, unless earlier redeemed or
exchanged by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board, only shares of Common Stock issued prior to the Distribution Date
will be issued with Rights.
In the event that a Person becomes an Acquiring Person (except pursuant to
an offer for all outstanding shares of Common Stock that the independent
directors determine not to be inadequate and to otherwise be in the best
interests of the Company and its stockholders), each holder of a Right will
thereafter have the right to receive, upon exercise, Common Stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Right. Notwithstanding any
of the foregoing, following the occurrence of the event set forth in this
paragraph, all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by any Acquiring Person will be null
and void. However, Rights are not exercisable following the occurrence of the
event set forth above until such time as the Rights are no longer redeemable by
the Company as set forth below.
For example, at an exercise price of $200 per Right, each Right not owned
by an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $400 worth
of Common Stock (or other consideration, as noted above) for $200. Assuming that
the Common Stock had a per share value of $50 at such time, the holder of each
valid Right would be entitled to purchase 8 shares of Common Stock for $200.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction
(other than a merger which follows an offer described in the second preceding
paragraph), or (ii) fifty percent (50%) or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right. The events set forth
in this paragraph and in the second preceding paragraph are referred to as the
"Triggering Events."
At any time after a person becomes an Acquiring Person and prior to the
acquisition by such person or group of fifty percent (50%) or more of the
outstanding Common Stock, the Board may exchange the Rights (other than Rights
owned by such person or group which have become void), in whole or in part, at
an exchange ratio of one share of Common Stock, or one two-hundredth of a share
of Preferred Stock (or of a share of a class or series of the Company's
preferred stock having equivalent rights, preferences and privileges), per Right
(subject to adjustment).
Generally, at any time until ten (10) days following the Stock Acquisition
Date, the Company may redeem the Rights in whole, but not in part, at a price of
$.01 per Right (payable in cash, Common Stock or other consideration deemed
appropriate by the Board). Immediately upon the action of the Board ordering
redemption of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive the $.01 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquir ing company as set forth above.
Any of the provisions of the Rights Agreement may be amended by the Board
prior to the Distribution Date. After the Distribution Date, the provisions of
the Rights Agreement may be amended by the Board in order to cure any ambiguity,
to make changes which do not adversely affect the interests of holders of
Rights, or to shorten or lengthen any time period under the Rights Agreement;
provided, however, that no amendment may be made at such time as the Rights are
not redeemable. -------- -------
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Current Report on Form 8-K. A copy of the
Rights Agreement is available free of charge from the Company. This summary
description of the Rights does not purport to be complete and is qualified in
its entirety by reference to the Rights Agreement, which is incorporated herein
by reference.
<PAGE>
<TABLE>
Exhibit 11
ORION CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
------------------- --------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
Basic:
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding ...... 26,880 27,392 27,236 27,333
======== ======== ========= ========
Net earnings attributable to common stockholders ... $ 20,175 $ 36,421 $ 102,830 $115,806
======== ======== ========= ========
Net earnings per basic common share ................ $ 0.75 $ 1.33 $ 3.78 $ 4.24
======== ======== ========= ========
Diluted:
Computation of weighted average number of
common and diluted equivalent shares
outstanding:-
Weighted average number of shares outstanding ... 26,880 27,392 27,236 27,333
Dilutive effect of stock options and stock awards 336 727 606 567
-------- -------- --------- --------
Weighted average number of common and
diluted equivalent shares ................... 27,216 28,119 27,842 27,900
======== ======== ========= ========
Net earnings attributable to common stockholders ... $ 20,175 $ 36,421 $ 102,830 $115,806
======== ======== ========= ========
Net earnings per diluted common share .............. $ 0.74 $ 1.30 $ 3.69 $ 4.15
======== ======== ========= ========
</TABLE>
Exhibit 21
SUBSIDIARIES OF ORION CAPITAL CORPORATION
State or Other
Jurisdiction
Subsidiary of Incorporation
Atlantic Claims Service, Inc. North Carolina
Atlantic Indemnity Company North Carolina
Atlantic Security Insurance Company North Carolina
Alternative Risk Transfer Insurance Strategies, Inc. Connecticut
Carolina American Insurance Company South Carolina
Clarke & Towner, Inc. Connecticut
Connecticut Specialty Insurance Company Connecticut
Design Professionals Administration Corporation California
Design Professionals Insurance Company Connecticut
DPIC Companies, Inc. California
DPIC Management Services Corp. Connecticut
EBI Companies, Inc. Connecticut
EBI Consulting Services, Inc. California
EBI Indemnity Company Connecticut
EFC Property Management, Inc. California
Employee Benefits Insurance Company Connecticut
Guaranty National Insurance Company Colorado
Guaranty National Insurance Company of California California
Guaranty National Warranty Services Company Colorado
Grocers Insurance Agency, Inc. Oregon
Grocers Insurance Company Oregon
Grocers Insurance Group, Inc. Oregon
Grocers Risk Services, Inc. Oregon
Intercon General Agency, Inc. Texas
Jabawwat, Inc. Delaware
Landmark American Insurance Company Oklahoma
Wm. H. McGee & Co., Inc. New York
Wm. H. McGee & Co., (Bermuda) Ltd. Bermuda
Wm. H. McGee & Co., of Canada, Ltd. Canada
Wm. H. McGee & Co., of Puerto Rico, Inc. Puerto Rico
Wm. H. McGee Services, Inc. New York
OrionAuto, Inc. (fka Guaranty National Corporation) Colorado
Orion Insurance Company Connecticut
Orion Capital Companies, Inc. Connecticut
Orion Specialty Group, Inc. Connecticut
Peak Property and Casualty Insurance Corporation Colorado
Peninsula Excess Insurance Brokers, Inc. California
Premium Payment Plan, Inc. North Carolina
Security Insurance Company of Hartford Connecticut
Security Insurance Company (UK), Ltd. United Kingdom
SecurityRe, Inc. Connecticut
Strickland Insurance Brokers Florida, Inc.
The Connecticut Indemnity Company Connecticut
The Fire and Casualty Insurance Company of Conn. Connecticut
Unisun Insurance Company South Carolina
Viking Insurance Company of Wisconsin Colorado
Viking County Mutual Insurance Company Texas
The listed subsidiaries are wholly owned by Orion Capital Corporation as of
December 31, 1998. The Company owns 26% of Intercargo Corporation of Schaumburg,
Illinois.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Orion Capital Corporation
Farmington, Connecticut
We consent to the incorporation by reference in Registration Statements No.
2-80636 and No. 333-58941 on Form S-8 relating to the Orion Capital Corporation
1982 Long-Term Performance Incentive Plan, No. 333-58905 on Form S-8 relating to
Orion Capital Corporation Equity Incentive Plan, No. 2-63344 and No. 333-58889
on Form S-8 relating to the Orion Capital 401(K) and Profit Sharing Plan, No.
33-59847 and No. 333-58939 on Form S-8 relating to the Orion Capital Corporation
1994 Stock Option Plan for Non- Employee Directors, No. 333-44901 on Form S-8
relating to the Wm. H. McGee & Co., Inc. 401(K) and Profit Sharing Plan, No.
333-55671 on Form S-8 relating to Orion Capital Corporation Employees' Stock
Purchase Plan, and No.333-62951 on Form S-8 relating to Retirement Savings Plan
for Employees of Guaranty National Insurance Company, of our report dated
February 22, 1999 (except for Note 20, as to which the date is March 11, 1999),
appearing in this annual report on Form 10-K of Orion Capital
Corporation for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
March 29, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE>7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ORION CAPITAL CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,349,858
<DEBT-CARRYING-VALUE> 260,609
<DEBT-MARKET-VALUE> 272,718
<EQUITIES> 510,872
<MORTGAGE> 2,222
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,486,241
<CASH> 18,031
<RECOVER-REINSURE> 671,726
<DEFERRED-ACQUISITION> 155,612
<TOTAL-ASSETS> 4,164,466
<POLICY-LOSSES> 2,017,682
<UNEARNED-PREMIUMS> 564,053
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 17,899
<NOTES-PAYABLE> 217,369
<COMMON> 180,285
0
0
<OTHER-SE> 547,050
<TOTAL-LIABILITY-AND-EQUITY> 4,164,466
1,503,035
<INVESTMENT-INCOME> 143,242
<INVESTMENT-GAINS> 52,491
<OTHER-INCOME> 17,961
<BENEFITS> 1,020,495
<UNDERWRITING-AMORTIZATION> 417,917
<UNDERWRITING-OTHER> 72,739
<INCOME-PRETAX> 156,710
<INCOME-TAX> 41,138
<INCOME-CONTINUING> 102,830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102,830
<EPS-PRIMARY> 3.78
<EPS-DILUTED> 3.69
<RESERVE-OPEN> 1,390,727
<PROVISION-CURRENT> 986,575
<PROVISION-PRIOR> 33,925
<PAYMENTS-CURRENT> 450,297
<PAYMENTS-PRIOR> 559,364
<RESERVE-CLOSE> 1,418,409
<CUMULATIVE-DEFICIENCY> 33,925
</TABLE>
