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
December 31, 1996 number 1-10967
ENHANCE FINANCIAL SERVICES GROUP INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3333448
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 Madison Avenue, New York, NY 10017
- -------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: 212-983-3100
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.10 par value New York Stock Exchange, Inc.
- ---------------------------- -------------------------------------------
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
----------------
(Title of class)
Indicate by check mark whether 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 amendment to this
Form 10-K. [ X ]
The approximate aggregate market value of voting stock held by non-affiliates of
the registrant as of March 14, 1997 was $423,684,000. The number of shares of
Common Stock outstanding as of that date was $18,192,871. For purposes of this
calculation, shares of Common Stock held by directors, executive officers and
shareholders whose ownership exceeds ten percent of the Common Stock outstanding
on that date were excluded. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
<PAGE>
PART I
Item 1. Business.
GENERAL
Enhance Financial Services Group Inc. ("Enhance Financial," and
together with its consolidated subsidiaries, the "Company") is a holding company
engaged, through its subsidiaries, principally in the reinsurance of financial
guaranties of municipal and asset-backed debt obligations issued by monoline
financial guaranty insurers. In addition, the Company is engaged in other
insurance, reinsurance and non-insurance businesses that utilize the Company's
expertise in performing sophisticated analysis of complex, credit-based risks.
Enhance Financial has, since its inception, conducted the major portion of its
business through its wholly-owned licensed, financial guaranty insurance
subsidiaries, Enhance Reinsurance Company ("Enhance Re") and Asset Guaranty
Insurance Company ("Asset Guaranty"; together, the "Insurance Subsidiaries"),
and a smaller portion of its business through companies in which it has equity
investments, including two non-insurance businesses conducted by Singer Asset
Finance Company, L.L.C. and Credit-Based Asset Servicing and Securitization LLC.
The Company expects that a significant portion of its growth will come from
these non-financial guaranty businesses.
The Company's business strategy is to expand its financial guaranty
business, both primary and reinsurance, while maintaining its commitment to
intensive and prudent credit underwriting and conservative investment policies;
to utilize its expertise in underwriting credit risks to expand and develop its
other insurance businesses; and to continue to accelerate its diversification
efforts in areas that the Company believes have profit and strong growth
potential. To the foregoing end, the Company expects to further develop the
strategic relationship with Swiss Reinsurance Company which it initiated in
1996.
Reinsurance of financial guaranties issued by monoline financial
guaranty insurers represented 60.0% of the Company's gross premiums written for
the year ended December 31, 1996. During the year ended December 31, 1996, the
Company received 29.3% of the total reinsurance premiums ceded by all monoline
financial guaranty insurers.
The Company's other insurance businesses currently involve the issuance
of direct financial guaranties of smaller municipal debt obligations, trade
credit reinsurance, financial responsibility bonds and excess-SIPC/excess-ICS
and related types of bonds. This area of the Company's business, measured by
gross premiums written, has grown from its inception in 1991 to represent 40.0%
of the Company's gross premiums written for the year ended December 31, 1996.
The Company, through partially owned affiliates, is also engaged in the
origination, purchase, servicing and/or securitization of special assets,
including winning lottery tickets, structured settlements and
sub-performing/non-performing residential mortgages. The Company is continuing
to expand these businesses and is diversifying its products and services into
other areas that the Company believes have strong growth potential and in which
the Company's strengths in credit analysis and securitization can provide a
competitive advantage. See "Other Businesses" below in this section.
The Company's aggregate insurance in force as of December 31, 1996 was
$56.6 billion, of which $40.9 billion was attributable to reinsurance of
municipal bond obligations, $12.2 billion was attributable to reinsurance of
asset-backed debt obligations and $3.5 billion was attributable to other
insurance
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businesses. The Company's net premiums written in 1996 were $95.7 million, of
which $41.1 million was attributable to reinsurance of municipal bond
obligations, $17.4 million was attributable to reinsurance of asset-backed debt
obligations and $37.2 million was attributable to other insurance businesses.
As of December 31, 1996, the Company had total assets of $983.4
million, of which $797.1 million consisted of portfolio investments,
substantially all of which comprised high quality, fixed income securities. Also
as of December 31, 1996, the Company had $269.0 million of deferred premium
revenue and $488.3 million of shareholders' equity.
Enhance Re has been rated by Standard & Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's") and Duff & Phelps Credit
Rating Company ("Duff & Phelps"), which have assigned it triple-A claims-paying
ability ratings, their highest rating. Asset Guaranty has been rated by Duff &
Phelps and Standard & Poor's, which have assigned it triple-A and double-A
claims-paying ability ratings, respectively.
FINANCIAL GUARANTY INSURANCE INDUSTRY OVERVIEW
Financial Guaranty Insurance Generally
Financial guaranty insurance provides an unconditional and irrevocable
guaranty to the holder of a debt obligation of full and timely payment of
principal and interest. In the event of a default under the obligation, the
insurer has recourse against the issuer and/or any related collateral (which is
a more common component in the case of insured asset-backed obligations or other
non-municipal debt) for amounts paid under the terms of the policy. Payments
under the insurance policy may not be accelerated by the holder of the debt
obligation. Absent payment in full at the option of the insurer, in the event of
a default under an insured obligation the holder continues to receive payments
of principal and interest on schedule, as if no default had occurred. Each
subsequent purchaser of the obligation generally receives the benefit of such
guaranty.
The premium for financial guaranty insurance is paid by the issuer of
the obligation either in full at the inception of the policy or, less commonly,
in installments on an annual basis. Premium rates are typically calculated as a
percentage of either the principal amount of the debt or total exposure
(principal and interest). Rate setting reflects such factors as the credit
strength of the issuer, type of issue, sources of income, collateral pledged,
restrictive covenants, maturity and competition from other insurers.
Premiums are generally non-refundable and are earned over the life of
the insured obligation. This long and relatively predictable earnings pattern is
characteristic of the financial guaranty insurance industry and provides a
relatively stable source of future revenues and claims-paying ability to
financial guaranty insurers and reinsurers.
There are currently six active primary U.S. financial insurers:
Municipal Bond Investors Assurance Corporation ("MBIA"), AMBAC Indemnity
Corporation ("AMBAC"), Financial Guaranty Insurance Company ("FGIC"), Financial
Security Assurance Inc. ("FSA"), Capital Market Assurance Corporation ("CapMAC")
and Connie Lee Insurance Company ("Connie Lee").
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Financial Guaranty Market
The primary financial guaranty insurance market consists of two main
sectors: municipal bond insurance and insurance on asset-backed debt.
Municipal Bond Market. Municipal bond insurance provides credit
enhancement of bonds, notes and other evidences of indebtedness issued by states
and their political subdivisions (for example, counties, cities, or towns),
utility districts, public universities and hospitals, public housing and
transportation authorities, and other public and quasi-public entities.
Municipal bonds are supported by the issuer's taxing power in the case of
general obligation or special tax-supported bonds, or by its ability to impose
and collect fees and charges for public services or specific projects in the
case of most revenue bonds. Insurance provided to the municipal bond market has
been and continues to be the major source of revenue for the financial guaranty
insurance industry.
The following table sets forth certain information regarding new-issue
long term (over one year) municipal bonds and new-issue insured long term
municipal bonds, in each case issued during the years indicated:
<TABLE>
<CAPTION>
New Insured Volume
New New as Percent of
Year Total Volume(1) Insured Volume(1) New Total Volume
- ---- --------------- ----------------- ----------------
(Dollars in billions)
<C> <C> <C> <C>
1986......................... $151.3 $24.8 16.4%
1987......................... 105.4 21.6 20.5
1988......................... 117.8 30.5 25.9
1989......................... 125.0 30.6 24.5
1990......................... 128.1 33.5 26.2
1991......................... 174.1 52.0 29.9
1992......................... 235.0 80.8 34.5
1993......................... 292.0 107.9 37.0
1994......................... 164.5 61.3 37.3
1995......................... 160.3 68.3 43.0
1996......................... 184.4 85.2 46.2
</TABLE>
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(1) Based upon estimated data provided by The Bond Buyer, January 27, 1997.
The overall increase in the volume of municipal bond issuance in 1996
resulted from an increase in refunding issues, which represented 31% of total
issuance compared to 30% in 1995, as well as a higher amount of bonds issued for
new money purposes, which increased to $126.7 billion in 1996 from $112.5
billion in 1995.
Asset-Backed Debt Market. Asset-backed transactions or securitizations
constitute a form of structured financing which are distinguished from unsecured
debt issues by being secured by a specific pool of assets held by the issuing
entity, rather than relying on the general unsecured creditworthiness of the
issuer
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of the obligation. While most asset-backed debt obligations represent interests
in pools of assets, such as residential and commercial mortgages and credit card
and auto loan receivables, monoline financial guarantors have also insured
asset-backed debt obligations secured by one or a few assets, such as utility
mortgage bonds and multi-family housing bonds.
The domestic, public, non-mortgage asset-backed securities market
continued its rapid growth, increasing from $25.5 billion in 1989 to
approximately $151.4 billion in 1996. Securities backed by home equity loans
were the fastest growing segment of that market in 1996, more than double the
1995 home equity issuance. Though securities backed by credit card receivables
declined slightly in 1996 from 1995, they continued to constitute the largest
single component of the non-mortgage asset-backed securities market in 1996, as
they did in 1994 and 1995. There are no consensus estimates for issuance in the
total asset-backed securities market, which includes not only domestic,
non-mortgage, public debt, but international, private, and mortgage-backed
obligations.
Reinsurance
Reinsurance is the commitment by one insurance company, the
"reinsurer," to reimburse another insurance company, the "ceding company," for a
specified portion of the insurance risks underwritten by the ceding company.
Because the insured party contracts for coverage solely with the ceding company,
the failure of the reinsurer to perform does not relieve the ceding company of
its obligation to the insured party under the terms of the insurance contract.
While reinsurance provides various benefits to the ceding company,
perhaps most importantly it enables a primary insurer to write single risks and
greater aggregate risks without contravening the capital requirements of
applicable state insurance laws and rating agency guidelines. State insurance
regulators allow primary insurers to reduce the liabilities appearing on their
balance sheets to the extent of reinsurance coverage obtained from licensed
reinsurers or from unlicenced reinsurers meeting certain solvency and other
financial criteria. Similarly, the rating agencies permit such a reduction for
reinsurance in an amount which depends on the strength of the reinsurer. See
"Insurance Regulatory Matters" and "Description of Business -- Rating Agencies"
in this section.
The principal forms of reinsurance are treaty and facultative. Under a
treaty arrangement the ceding company is obligated to cede, and the reinsurer is
correspondingly obligated to assume, a specified portion of a specified type of
risk or risks insured by the ceding company during the term of the treaty
(although the reinsurance risk thereafter extends for the life of the respective
underlying obligations). Under a facultative agreement, the ceding company from
time to time during the term of the agreement offers a portion of specific risks
to the reinsurer, usually in connection with particular debt obligations. A
facultative arrangement differs from a treaty in that the reinsurer performs its
own underwriting credit analysis to determine whether to accept a particular
risk. Treaty and facultative agreements are typically entered into for an
indefinite term, subject to a right of termination under certain circumstances.
Treaty and facultative reinsurance is typically written on either a
proportional or non-proportional basis. Proportional relationships are those in
which the ceding company and the reinsurer share the premiums, as well as the
losses and expenses, of a single risk or group of risks in an agreed percentage.
In addition, the reinsurer generally pays the ceding company a ceding
commission, which is normally related to the ceding company's cost of obtaining
the business being reinsured. Non-proportional reinsurance
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relationships are typically on an excess-of-loss basis. An excess-of-loss
relationship provides coverage to a ceding company to the extent that losses
exceed a certain amount, in an amount up to a certain dollar limit.
Reinsurers may also, in turn, purchase reinsurance under what are
called "retrocessional agreements" to cover all or a portion of their own
exposure and otherwise for reasons similar to those that cause primary insurers
to purchase reinsurance. See "Description of Business -- Retrocession" in this
item.
DESCRIPTION OF BUSINESS
Reinsurance of Monoline Financial Guaranty Insurers
The Company's principal business is the reinsurance of financial
guaranty insurance written by the six active monoline financial guaranty
insurers. The Company provides reinsurance on both a treaty and a facultative
basis for all the monoline primary insurers. See "Sources of Premiums" in this
section. As of December 31, 1996, approximately 53.5% of the Company's insurance
in force attributable to the monoline financial guaranty insurers represented
business underwritten on a treaty basis, with the balance being facultative. The
reinsurance written by the Company is subject to a detailed underwriting review.
Most of the Company's reinsurance activity is written on a proportional
reinsurance basis.
The Company believes that the reinsurance of municipal bond guaranties,
which the Company expects will grow in response to the anticipated long term
growth in the municipal bond market, provides a relatively stable source of
premium income for the Company. In addition, premiums received are credited as
deferred premium revenue and are earned as the related risks amortize, thereby
providing a relatively stable, predictable source of earned premiums.
Except for its reinsurance of a small amount of multi-family
housing-backed business written by one primary insurer, the Company has since
1992 not reinsured real estate-backed business. Accordingly, its portfolio of
such business, totaling $214 million par outstanding as of December 31, 1996 has
decreased from $342 million at year-end 1992.
Premiums Ceded by Individual Primary Insurers. The following table sets
forth certain information regarding premiums ceded by the monoline financial
guaranty insurers to the Company in 1996, 1995 and 1994:
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- --------------------------- ---------------------------
Gross Premiums Gross Premiums Gross Premiums
Ceded Percent of Ceded Percent of Ceded Percent of
Primary Insurer (In thousands) Total (In thousands) Total (In thousands) Total
- --------------- -------------- ----- -------------- ----- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
AMBAC ......... $ 9,407 16.5% $19,218 34.9% $ 5,631 9.6%
CapMAC ........ 6,161 10.8 3,605 6.5 3,618 6.2
CGIC .......... ---(1) ---(1) 1,075 2.0 464 0.8
Connie Lee .... 2,265 4.0 856 1.6 1,272 2.2
FGIC .......... 7,301 12.8 6,724 12.2 19,608 33.5
FSA ........... 14,001 24.6 7,207 13.1 7,674 13.1
MBIA .......... 17,814 31.3 16,357 29.7 20,195 34.6
------- ----- ------- ----- ------- -----
Total $56,949 100.0% $55,042 100.0% $58,462 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
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(1) CGIC was acquired by the corporate parent of FSA in December 1995.
Portfolio Data. The Company seeks to maintain a diversified insurance
portfolio designed to spread its risk based on issuer, type of debt obligation
insured and geographic concentration. The following table sets forth the
distribution of the Company's reinsured monoline-guarantied obligations by bond
type as of December 31, 1996.
As of December 31, 1996
-------------------------
Insurance Percent
Type of Obligation in Force of Total
- ------------------ ------------- --------
(In millions)
Municipal:
General obligation/tax supported .......... $15,820 29.7%
Water/sewer/electric/gas .................. 9,218 17.4
Health care ............................... 6,162 11.6
Airports/transportation ................... 5,862 11.0
Housing revenue ........................... 1,531 2.9
Other (1) ................................. 2,321 4.4
------- -----
Total municipal ........................ 40,914 77.0
------- -----
Asset-backed:
Consumer obligations ...................... 6,000 11.3
Investor-owned utilities .................. 3,373 6.4
Commercial mortgage ....................... 202 0.4
Other (2) ................................. 2,626 4.9
------- -----
Total asset-backed ..................... 12,201 23.0
------- -----
Total .................................. $53,115 100.0%
======= =====
- ----------
(1) Represents other types of municipal obligations, none of which individually
constitutes a material amount or percentage of the Company's insurance in
force.
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(2) Includes $881 million collateralized by corporate debt obligations. The
balance represents other types of assets which collateralize obligations
reinsured by the Company, none of which individually constitutes a material
amount or percentage of the Company's insurance in force.
The following table identifies by issuer the Company's ten largest
single-risk insurance in force amounts outstanding as of December 31, 1996 and
the credit rating assigned by Standard & Poor's as of that date (in the absence
of financial guaranty insurance) to each such issuer:
<TABLE>
<CAPTION>
Credit Insurance in Force as of
Credit(1) Rating Obligation Type December 31, 1996
- --------- ------ ---------------------- ------------------------
(In millions)
<S> <C> <C> <C>
New York City Municipal Water Finance
Authority................................ A- Water & Sewer $820.3
New York City, NY......................... BBB+ General Obligation 690.9
Dade County, Florida Water & Sewer
System................................... A Water & Sewer 602.7
State of California....................... A+ General Obligation 560.5
Public Service Elec & Gas of
New Jersey.............................. A- Investor Owned Utility 446.7
Metropolitan Washington Airport, DC....... AA- Transportation 443.9
Nassau County, NY......................... A- General Obligation 432.3
Commonwealth of Puerto Rico............... A General Obligation 421.0
Municipal Electric Authority
of Georgia.............................. A Public Power 408.2
Texas Utility Electric Company, TX........ BBB+ Investor Owned Utility 395.9
</TABLE>
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(1) Mid-State Trust IV is an asset-backed security obligation backed by
residential mortgages.
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The following table sets forth the distribution by state of the
Company's insurance in force in connection with its reinsurance of
monoline-guarantied obligations as of December 31, 1996:
As of December 31, 1996
----------------------------------------------
State Insurance in Force Percent of Portfolio
- ----- ------------------ --------------------
(In millions)
California.............. $ 6,788.9 12.8%
New York................ 5,789.2 10.9
Florida................. 3,881.0 7.3
Texas................... 2,844.0 5.3
Pennsylvania............ 2,822.2 5.3
Illinois................ 2,473.4 4.7
New Jersey.............. 2,131.9 4.0
Ohio.................... 1,511.9 2.8
Massachusetts........... 1,425.1 2.7
Michigan................ 1,091.0 2.1
Other (1)............... 22,355.8 42.1
-------- ------
Total $53,114.4 100.0%
========= =====
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(1) Includes $8.9 billion related to pooled or foreign credits for which
specific allocation by state is not available. The balance represents all
remaining states, District of Columbia, Puerto Rico and several foreign
countries, in which obligations insured and reinsured by the Company arise,
none of which individually constitutes a material portion of the Company's
insurance in force.
Underwriting Staffing, Policies and Procedures. The Company believes
that its underwriting discipline has been critical to its profitable growth. The
Company has a structured underwriting process to determine the characteristics
and creditworthiness of risks that it reinsures, which process supplements the
underwriting procedures of the primary insurers. Rather than relying entirely
upon the underwriting performed by the primary insurers, both the Company and
the rating agencies conduct extensive reviews of the primary insurers.
The Company conducts periodic detailed reviews of each monoline primary
carrier with which it does treaty and facultative business. That review entails
an examination of the primary insurer's operating, underwriting and surveillance
procedures; personnel; organization and existing book of business, as well as
the primary insurer's underwriting of a sample of business assumed under the
treaty. Facultative transactions are reviewed individually under procedures
adopted by the Company's credit committee. Any underwriting issues are discussed
internally by the Company's credit committee and with the primary insurer's
personnel.
Moreover, the Company relies on ongoing oversight by its credit
committee to avoid undue exposure concentration in any given type of obligation
or geographic area. Moreover, the ceding insurer is typically required to retain
at least 25% of the exposure on any single risk assumed.
Limitations on the Company's single-risk exposure derive from state
insurance regulation, rating agency guidelines and internally established
criteria. The primary factor in determining single-risk capacity is the class or
sector of business being underwritten. For municipal credits, the Company has
self-imposed single-risk guidelines which range widely, depending upon the
perceived risk of default of the municipal obligation reinsured. On individual
underwritings, the Company's credit committee may limit the allocation of
capacity
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to an amount below that allowed by the single-risk guidelines noted above. For
asset-backed transactions, the Company's single-risk guidelines generally follow
state insurance regulation limitations.
The Company's surveillance procedures include reviews of all risks
insured as a primary insurer and those exposures assumed as a reinsurer as to
which it may have concerns. The Company also maintains regular communication
with the surveillance departments of the ceding primary insurers.
Other Insurance Businesses
The Company services certain insurance specialty markets not served by
the monoline financial guaranty industry. In certain of these new business
areas, the Company operates as a primary insurer in areas or for transactions
where the monoline financial guaranty primaries may decline to provide coverage;
others involve the Company serving as a reinsurer for certain specialty primary
insurers, in some of which the Company has significant equity interests or is
otherwise a participant.
In writing these other insurance lines of business, the Company
utilizes its expertise in evaluating complex credit-based risks. In terms of
gross premiums written, these businesses have increased significantly since
their inception in 1991 to the point where they represent 40.0% of the Company's
gross premiums written for the year ended December 31, 1996, compared to 36.8%
for the year ended December 31, 1995. The Company's business strategy is to
expand and develop further these other insurance lines, which the Company
believes have strong profit and growth potential and where the Company's
expertise can be utilized.
Premiums in respect of certain of the Company's other insurance
businesses are earned over a significantly shorter period than those in respect
of the Company's monoline reinsurance business. The Company's ability to realize
consistent levels of earned premiums in these insurance businesses will
therefore depend on its ability to write consistent levels of new insurance.
The following tables set forth certain information concerning the
Company's other insurance businesses as of December 31, 1996 and for the year
then ended:
Insurance in Force*
Category of Other Insurance Business As of December 31, 1996
- ------------------------------------ -----------------------
(In billions)
Municipal bonds - direct........................... $2.6
Multi-family housing-backed financings............. 0.4
Financial responsibility bonds..................... 0.4
Other.............................................. 0.1
----
Total $3.5
====
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* Does not include insurance in force pursuant to the excess-SIPC/excess-ICS
program and credit reinsurance described below in this section.
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Year Ended December 31, 1996
--------------------------------
Net Premiums
Category of Other Insurance Business Written Premiums Earned
- ------------------------------------ ------------ ---------------
(In millions)
Municipal bonds - direct.................. $10.2 $3.5
Credit reinsurance........................ 17.1 16.6
Financial responsibility bonds............ 4.3 4.6
Excess-SIPC/excess-ICS.................... 4.9 3.6
Other..................................... 0.6 1.7
----- -----
Total $37.1 $30.0
===== =====
Municipal bonds. The Company writes municipal bond insurance as a
primary insurer in certain transactions where the financial guaranty monoline
primary insurers generally elect not to participate. This writing is focused on
various market sectors including tax-backed obligations, infrastructure revenue
bonds, health care bonds, higher education bonds and municipal lease
obligations. Each such issue, subsequent to its being insured, must be reviewed
by Standard & Poor's and Duff & Phelps, which determine the credit quality of
the issue and, after their review, report their findings to the Company.
Credit Reinsurance. Credit reinsurance protects sellers of goods, under
certain circumstances, against non-payment of the receivables they hold from
buyers of those goods. Some companies cover receivables only where the buyer and
seller are in the same country, while other insurers cover cross-border
receivables. In the latter instance, the insurer may cover certain political
risks (foreign currency controls, expropriation, etc.) which interfere with the
payment from the buyer. The Company's credit reinsurance book of business
includes domestic and cross-border business, and some treaties include political
risks.
The Company is a member-reinsurer, together with Great American
Insurance Company, of the Foreign Credit Insurance Association ("FCIA"), which
guaranties export financing for transactions between exporters and foreign
purchasers.
In addition, the Company participates in proportional and
non-proportional reinsurance treaties with approximately 20 credit insurers,
primarily in Europe. The largest relationships in terms of premiums are with the
NCM Group (domiciled in the Netherlands) and Trade Indemnity PLC (domiciled in
the United Kingdom).
As of December 31, 1996, Enhance Financial owned a 36.5% equity
interest (representing 55% of the voting interest) in EIC Corporation Ltd.,
which, in turn, owns all the outstanding capital stock of Exporters Insurance
Company Ltd. ("Exporters"), an insurer of domestic and foreign trade receivables
for multinational companies. The Company provides significant reinsurance
capacity to this joint venture on a proportional quota share.
Financial Responsibility Bonds. The Company owns a controlling equity
interest in Van-American Insurance Company ("Van-Am"), which writes reclamation
bonds for the coal mining industry, generally in strip mining ventures, and
surety bonds covering the closure and post-closure obligations of landfill
operators.
Excess-SIPC/Excess-ICS. The Company writes surety bonds in the United
States and in the United Kingdom for the protection of customers of large
securities brokers against the loss of securities in their brokerage accounts in
the event of the broker's insolvency and liquidation. Bonds issued under this
program
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typically provide coverage for loss per account in excess of the $500,000 in the
case of loss covered by the U.S. government-established Securities Investor
Protection Corporation ("SIPC"), or 48,000 pounds sterling (approximately
$78,000) in the case of loss covered by the U.K. government-established
Investors Compensation Scheme ("ICS"), but in either case, up to a maximum of
$150 million of loss. The coverage is offered only to the members of the
securities brokerage community that meet specific financial, legal and operating
criteria established by the Company.
Although the dollar value of customer account assets protected by the
Company's excess-SIPC/excess-ICS policies totals in the billions, the Company's
actual exposure is considerably lower. Losses in a brokerage account occur only
to the extent, if any, a covered broker-dealer becomes insolvent and securities
are missing and the individual customer losses, which are prorated among all the
customers of that broker-dealer, exceed the applicable deductible amount, which
ranges from $500,000 for losses covered by SIPC, or 48,000 pounds sterling for
losses covered by ICS, to $150 million per customer on the policies issued by
the Company. As part of its underwriting process, the Company reviews the
operations and exposure amounts of each broker-dealer applying for coverage and
calculates a maximum loss based on the normal day-to-day operational exposures
of that broker-dealer. The Company estimates that its total losses, net of
reinsurance, in the unlikely circumstance that all covered broker-dealers were
liquidated would not exceed $10.3 million.
Underwriting Process and Surveillance. The underwriting criteria
applied in evaluating a given issue for primary insurance coverage and the
internal procedures (for example, credit committee review) for approval of the
issue are substantially the same as for the underwriting of reinsurance. See
"Reinsurance of Monoline Financial Guaranty Insurers -- Underwriting Staffing,
Policies and Procedures" in this section. The entire underwriting responsibility
rests with the Company as the primary insurer. As a result, the Company
participates more actively in the structuring of the transaction than it does as
a reinsurer. The Company conducts, at least annually, in-depth surveillance of
issues insured as a primary.
Other Businesses
The Company owns an 87.5% interest in Singer Asset Finance Company,
L.L.C. ("Singer"), which purchases from individuals, state lottery prizes,
structured settlement payment rights and other long term payment streams.
Working with leading financial institutions, Singer has securitized lottery
prizes and structured settlement payment streams, i.e., resold pools of such
assets into the securities market.
In July 1996, in furtherance of its diversification effort, the Company
formed Credit-Based Asset Servicing and Securitization LLC ("C-BASS"), a New
York City-based joint venture in which the Company and Mortgage Guaranty
Insurance Corporation ("MGIC"), a leading U.S. provider of private mortgage
insurance coverage, each own 48% interests. Integrating modeling, analytic and
securitization skills and specialty servicing capabilities, C-BASS evaluates,
accumulates, services and securitizes assets in the large market of
sub-performing and non-performing residential mortgages. As part of its
capitalization, C-BASS will receive from the Company the entire interest in
Litton Loan Servicing, Inc., a leading residential mortgage specialty servicer
based in Houston, Texas acquired by the Company in 1995.
Both Singer and C-BASS, which are larger scale opportunities than the
Company's previous diversification activities, utilize the Company's core skills
in complex credit analysis, securitization and strategic relationships.
11
<PAGE>
Sources of Premiums
The following table sets forth certain information regarding insurance
business assumed and written by the Company.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------------------------------------------------------------
Gross Premiums
Gross Written as Percent Premiums Earned Premiums Earned
Premiums Net Premiums Premiums of Total Gross as Percent of Total as Percent of
Sources of Premiums Written Written Earned Premiums Written Premiums Earned Total Revenues
- ------------------- -------- ------------ -------- ------------------ ------------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial guaranty
reinsurance
AMBAC ............ $ 9,407 $ 9,400 $ 7,014 9.5% 9.1% 5.3%
CapMAC ........... 6,161 6,161 3,947 6.2 5.1 3.0
Connie Lee ....... 2,265 2,265 575 2.3 0.7 0.4
FGIC ............. 7,301 7,301 8,424 7.4 10.9 6.4
FSA .............. 14,001 13,977 10,596 14.2 13.7 8.0
MBIA ............. 17,814 17,437 17,142 18.1 22.2 13.0
Other insurance (1).. 41,639 39,296 29,910 42.3 38.6 22.6
XOL Retrocessions.... -- (175) (175) -- (0.3) (0.2)
------- -------- -------- ----- ----- ----
$98,588 $ 95,662 $ 77,433 100.0% 100.0% 58.5%
======= ======== ======== ===== ===== ====
</TABLE>
- ----------
(1) Includes business written by the Company as a primary insurer. For the year
ended December 31, 1996, no single primary insurer included in "Other
insurance" provided greater than 4.5%, 4.6% and 5.7% of gross premiums
written, net premiums written and premiums earned, respectively.
The Company has maintained close and long-standing relationships with
its monoline financial guaranty insurer clients, dating essentially from either
the Company's or the given primary insurer's inception. In the Company's
opinion, these relationships provide the Company with a comprehensive
understanding of its clients' procedures and reinsurance requirements and allow
the clients to utilize the Company's underwriting expertise effectively, thus
improving the service they receive.
The Company is a party to treaty agreements with all active monoline
primary insurers except one, which terminated its treaty with the Company in
1997, and it has facultative agreements with all active monoline primary
insurers. It also has treaty and facultative agreements with FCIA, NCM Group,
Trade Indemnity PLC, Van-Am and Exporters. The Company's treaty and facultative
agreements usually are entered into for an indefinite term, subject to
termination (i) upon written notice (ranging from 90 to 120 days) prior to the
specified deadline for renewal or (ii) at the option of the primary insurer if
the Company fails to maintain certain financial, regulatory and rating agency
criteria which are equivalent to or more stringent than those the Company is
otherwise required to maintain for its own compliance with the New York
Insurance Law (the "Insurance Law") and, in the case of the agreements with the
primary monoline insurers, to maintain the rating agencies' current
claims-paying ability ratings for the particular Insurance Subsidiary. Upon
termination under the conditions set forth in (ii) above, the Company may be
required to return to the primary insurer all unearned premiums, less ceding
commissions, attributable to reinsurance ceded pursuant to such agreements. Upon
the occurrence of the conditions set forth in (ii) above, whether
12
<PAGE>
or not an agreement is terminated, the Company may be required to obtain a
letter of credit or alternative form of security to collateralize its obligation
to perform under such agreement.
Of the Company's aggregate monoline reinsurance exposure of $53.1
billion as of December 31, 1996, $28.4 billion, or 53.5%, was derived through
its treaty relationships with the primary insurers.
Loss Experience
The Company establishes a provision for losses and related loss
adjustment expenses ("LAE") when reported by primary insurers or when, in the
Company's opinion, an insured risk is in default or a default is probable and
the amount of the loss is reasonably estimable. Provisions for losses and LAE
are established based on the estimated loss, including expenses associated with
settlement of the loss, through the full term of the insured obligation. In the
case of obligations with fixed periodic payments, the provision for losses and
LAE represents the present value of the Company's ultimate expected losses,
adjusted for estimated recoveries under salvage or subrogation rights. On any
given municipal and asset-backed reinsurance transaction, the Company and its
primary insurer clients underwrite with a zero-loss underwriting objective. For
the credit reinsurance business, loss reserves are established based on
historical loss development patterns experienced by the Company and by ceding
companies in similar businesses. The estimate of reserves for losses and LAE,
which includes a non-specific loss reserve, is periodically evaluated by the
Company, and changes in estimate are reflected in income currently.
As the Company anticipated when it commenced its other insurance
businesses, it has experienced relatively higher loss levels in certain of these
businesses than it experienced in connection with its financial guaranty
reinsurance business. See "Other Insurance Businesses" in this section. The
Company believes that the higher premiums it receives in these businesses
adequately compensate it for the risks involved.
At December 31, 1996, the Company had established $26.3 million in net
reserves for losses and LAE (of which $15.3 million comprised incurred but not
reported and non-specific reserves). The following table sets forth certain
information regarding the Company's loss experience for the years indicated:
Year Ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Net reserve for losses and LAE
beginning of year ................ $28,946 $26,717 $ 8,753
Net provision for losses and LAE
Occurring in current year ........ 6,087 3,491 9,921
Occurring in prior years ......... 3,097 6,022 12,921
------- ------- -------
Total ...................... 9,184 9,513 22,842
------- ------- -------
Net payments for losses and LAE
Occurring in current year ........ 587 2,705 3,216
Occurring in prior years ......... 11,285 4,579 1,662
------- ------- -------
Total ...................... 11,872 7,284 4,878
------- ------- -------
Net reserve for losses and LAE at end
of year .......................... $26,258 $28,946 $26,717
======= ======= =======
13
<PAGE>
The Company paid losses of approximately $20 million in 1993 in
connection with the refinancing of three transactions for which the Company was
a reinsurer of financial guaranties of securities backed by pools of commercial
real estate. In 1994, following notification from the primary insurer, the
Company increased its case reserves on these refinanced transactions by $7.1
million. In 1994, the Company also established case reserves of $2.4 million on
two additional transactions in its discontinued commercial real estate
portfolio. Of these additions to case reserves, $7.5 million were established by
transfer from the Company's non-specific reserve, thereby depleting that
reserve. Following re-evaluation of all its potential exposures, the Company
increased its non-specific reserve to $10 million at year-end 1994. In 1995, the
Company established by transfer from the non-specific reserve additional net
case reserves relating to these transactions of approximately $3.0 million.
There was no significant development in these case reserves in 1996.
In addition, in 1996, 1995 and 1994 the Company incurred losses of $7.3
million, $6.1 million and $5.7 million, respectively, in connection with its
credit and surety businesses, commensurate with the continued growth in premiums
written from these businesses.
The Company believes that the reserves for losses and LAE, including
the case and non-specific reserves, are adequate to cover the ultimate net cost
of claims. However, the reserves are necessarily based on estimates, and there
can be no assurance that the ultimate liability will not exceed such estimates.
Investments and Investment Policy
The Company's investment portfolio is managed with a view maximizing
after-tax performance. While the Company allocates much of its portfolio to four
external specialty managers, a portion of the portfolio consisting of privately
placed securities and municipal bonds is managed internally. All investments are
guided by the Company's general investment objectives and policies, including
guidelines relating to average maturities and quality, which are periodically
reviewed and revised as appropriate. The investment policies are designed to
achieve diversification of the portfolio and generally to preclude investments
in obligations insured by the Company. Investments comprise almost entirely
fixed income securities, with a mix of taxable and tax-exempt investments which
maximize the net income of the Company.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities, the
Company classifies all securities at the time of purchase as "held to maturity"
or "available for sale." Securities held to maturity are those securities which
the Company intends and has the ability to hold until maturity and are carried
at amortized cost. All other fixed maturity securities are classified as
available for sale, are carried at market value and may be sold in response to
changes in interest rates, prepayment risk, payment of losses and other factors.
Unrealized gains and losses, net of taxes, on the available-for-sale portfolio
are charged or credited to shareholders' equity.
The Company internally manages and controls invested assets
representing approximately 53.0% of the book value of the investment portfolio
at December 31, 1996. The Company intends to hold 27.5% (based on carrying
value) of its invested assets to maturity, and, accordingly, in accordance with
SFAS No. 115, they are accounted for on an amortized cost basis.
14
<PAGE>
The following tables set forth certain information concerning the types
of investments and maturities composing the investment portfolio of the Company.
<TABLE>
<CAPTION>
As of December 31, 1996
----------------------------------------------
Investment Category (1) Carrying Value (2) Weighted Average Yield (3)
- ----------------------- ------------------ --------------------------
(Dollars in thousands)
<S> <C> <C>
Fixed Maturities, held to maturity
Municipal obligations - tax exempt ......... $ 98,513 6.87%
Corporate securities ....................... 8,039 8.08
U.S. Government obligations ................ 3,076 6.97
Private placements ......................... 108,064 9.04
--------
Total .................................... 217,692 7.99
--------
Fixed maturities, available for sale
Municipal obligations - tax exempt ......... 356,526 5.37
Corporate securities ....................... 47,151 7.10
U.S. Government obligations ................ 9,791 6.58
Mortgage-backed securities ................. 78,186 7.51
Foreign securities ......................... 48,230 7.41
--------
Total .................................... 539,884 6.04
--------
Short-term investments (4) .................... 38,632 5.46
Common Stocks ................................. 878 8.57
--------
Total Investments ........................ $797,086 6.55%
========
</TABLE>
- ----------
(1) Excludes investment in affiliates. See Note 5 of Notes to Consolidated
Financial Statements.
(2) Investments in fixed maturities in the held-to-maturity portfolio are
carried at amortized cost. Investments in fixed maturities in the
available-for-sale portfolio are carried at market value. Short-term
investments are carried at cost, which approximates their market values.
Common stocks are carried at market value. Unrealized gains and losses on
fixed maturities available for sale and common stocks are reflected in
shareholders' equity.
(3) Represents yield to maturity on fixed maturities and current yield on
common stocks and certain short-term investments. All amounts are stated on
a pre-tax basis.
(4) Includes $5.4 million of cash and cash equivalents as of December 31, 1996.
15
<PAGE>
Carrying Value
Maturity of Fixed Maturities As of December 31, 1996
- ---------------------------- -----------------------
(In thousands)
Held to Maturity (1)
Due in one year or less ....................... $ 25,112
Due after one year through five years ......... 77,272
Due after five years through ten years ........ 76,979
Due after ten years ........................... 38,329
--------
Total(2) .................................. $217,692
========
Available for Sale (3)
Due in one year or less ....................... $ 4,386
Due after one year through five years ......... 29,998
Due after five years through ten years ........ 214,316
Due after ten years ........................... 291,184
--------
Total(4) .................................. $539,884
========
- ----------
(1) The weighted average maturity of the portfolio is estimated to be 5.1 years
as of December 31, 1996.
(2) Investments in fixed maturities in the held-to-maturity portfolio are
carried at amortized cost. Total market value as of December 31, 1996 of
fixed maturities, held to maturity, was $227.1 million.
(3) The weighted average maturity of the portfolio as of December 31, 1996 is
estimated to be 11.8 years.
(4) Investments in fixed maturities in the available-for-sale portfolio are
carried at market value. Total amortized cost of fixed maturities,
available for sale, as of December 31, 1996 was $527 million.
The Company has an investment policy of maintaining an investment
portfolio having a weighted average credit rating of not lower than AA. The
Company's adherence to these policies is reflected in the following table
setting forth certain information concerning the rating by Standard & Poor's of
the Company's investments. The Company's investment strategy also includes the
investment of funds in higher yielding, private placement . These are
fixed-maturity obligations whose quality ratings do not alter the otherwise
weighted average credit rating of the Company's investment portfolio. In 1995,
the Company entered into a joint venture through which it originates and
securitizes most of these assets. See "Other Businesses" in this section.
However, the Company continues to utilize a portion of these assets in its
investment portfolio. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
16
<PAGE>
Percent of Investment Portfolio
Rating As of December 31, 1996
- ------ -------------------------------
AAA (1) .................................... 43.0%
AA ......................................... 39.3%
A ........................................ 12.8%
Other (2) .................................. 4.9%
- ----------
(1) Includes U.S. Treasury and agency obligations, which constituted 6.3% of
the total portfolio as of December 31, 1996.
(2) Consists of common stock, unrated securities and securities rated less than
A.
Retrocession. The Company is a party to certain facultative
retrocession agreements, pursuant to which it cedes to certain
retrocessionnaires a portion of its reinsurance exposure. Since it is required
to pay its obligations in full to the primary insurer regardless of whether it
is entitled to receive payments from its retrocessionnaire, the Company
therefore believes that in most cases it is vital that retrocessions be made
only to very creditworthy retrocessionnaires. The Company also cedes to
reinsurers a portion of its direct insurance exposure, and the foregoing also
describes in general the relationship between the Company and its reinsurers.
The Company has historically retroceded relatively little of its
financial guaranty reinsurance exposure mainly because the economic gain was not
deemed sufficient to offset both the costs of developing a program and the
additional risks the Company would assume. These risks include that of the
solvency of the retrocessionnaire and possible additional risk if the
retrocession is effected on a non-proportional basis.
In its specialty insurance businesses, the Company in recent years has
increased the amount of direct exposure which it reinsures out, particularly
that incurred in its excess-SIPC/excess-ICS program, principally in order to
comply with applicable regulatory single-risk limitations. Most of the
reinsurance capacity for its excess-SIPC/excess-ICS program is provided by
certain of the primary financial guaranty insurers, for which the Company serves
as reinsurer in their municipal bond and asset-backed transactions. In addition,
the Company retrocedes a portion of its credit reinsurance business from FCIA to
several international reinsurance companies.
Enhance Re is party to an excess-of-loss reinsurance agreement with
Hannover Ruckversicherungs AG ("Hannover Re") under which it will be entitled,
subject to certain conditions, to draw from Hannover Re up to $25 million under
certain circumstances. The agreement has a term of one year and is cancelable
annually at the option of either party, except that Company has the option to
force a seven-year run-off period. Hannover Re is a German reinsurance company
which has a claims-paying ability rating from Standard & Poor's of AA+.
Gross written premiums of $2.5 million were ceded or retroceded by the
Insurance Subsidiaries to unaffiliated companies in 1996, of which amount 32.2%
was paid to insurance companies having AAA claims-paying ability ratings from
Standard & Poor's.
17
<PAGE>
Marketing
Most of the Company's business derives from relationships it has
established and maintains with primary insurance companies. These relationships
provide business for the Company in the following major areas: (1) reinsurance
for municipal bonds and asset-backed securities (in which area the Company
currently has either quota share, surplus share or facultative agreements with
all the monoline primary companies); (2) credit reinsurance (in which the
Company collected premiums from 23 credit insurers in 1996, primarily domiciled
in Europe); and (3) affiliated-company reinsurance (which includes Exporters and
FCIA).
The Company markets directly to the monoline insurers writing credit
enhancement business and has direct relationships with its affiliated primary
insurers. Specialist reinsurance intermediaries, most of whom are located in
London, usually present to the Company reinsurance opportunities in the credit
insurance sector. These brokers work with the Company's marketing personnel in
introducing the Company to the primary credit insurance markets and in
structuring reinsurance to meet the needs of the primary insurers.
Intermediaries are typically compensated by the reinsurer based on a percentage
of premium assumed, which varies from transaction to transaction.
Competition
Reinsurance of Monoline Financial Guaranties. The Company is subject to
direct competition from one other U.S. company, Capital Reinsurance Company
("Capital Re"), and one foreign company, Axa Reassurance Finance S.A. ("Axa Re
Finance"), specializing in the reinsurance of financial guaranty insurance,
which, together with the Company, provides most of the reinsurance available for
the monoline financial guaranty primary insurers, particularly with respect to
facultative insurance. The Company believes that it and Capital Re have
generally participated in roughly equal percentages in treaties with primary
insurers. Almost all U.S. multiline insurers have declined to participate in the
reinsurance market, which the Company ascribes primarily to their lack of the
special expertise and underwriting skills necessary for this line of
reinsurance. However, several foreign insurers and reinsurers in addition to Axa
Re Finance do compete with the Company on both treaty and facultative bases in
the provision of reinsurance for municipal and asset-backed transactions.
Certain of these are companies with which some of the U.S. primary financial
guaranty insurers have formed strategic alliances.
Competition in the financial guaranty reinsurance business is based
upon many factors, including overall financial strength, pricing, service and
evaluation by the rating agencies of claims-paying ability. The agencies allow
credit to a ceding primary insurer's capital requirements and single-risk limits
for reinsurance ceded in an amount which is a function of the strength of the
reinsurer. See "Rating Agencies" in this section. The Company believes that
competition from multiline reinsurers and new monoline financial guaranty
insurers will be limited due to (a) the declining number of multiline insurers
with the requisite financial strength and (b) the barriers to entry for new
reinsurers posed by state insurance law and rating agency criteria governing
minimum capitalization.
Financial guaranty insurance, including municipal bond insurance, also
competes with other forms of credit enhancement, including letters of credit and
guaranties provided primarily by foreign banks and other financial institutions,
some of which are governmental agencies or have been assigned the highest credit
ratings awarded by one or more of the major rating agencies. However, these
credit enhancements serve to provide primary insurers with increased insurance
capacity only for rating agency purposes. They do not qualify as capital for
state regulatory purposes, nor do they constitute credit against specific
liabilities which would allow the primary insurer greater single-risk capacity.
18
<PAGE>
Other Insurance Businesses. The Company believes that there are a
number of direct competitors of the Company in its other insurance businesses,
some of which have greater financial and other resources than the Company. The
Company has limited its activities in these market areas to those activities
which are not served by the Company's financial guaranty monoline primary
insurer clients. As a primary insurer, the Company writes insurance on those
municipal bonds with respect to which such primary insurers have generally
declined to participate because of the size or complexity of such bond issuances
relative to the return. The Company also serves as a reinsurer for certain
specialty primary insurers which are not monoline financial guaranty insurers,
in which the Company has significant equity interests or is otherwise a
participant. Such reinsurance accounted for 5.0% of the Company's gross premiums
written in 1996. These specialty primary insurers are themselves subject to
competition from other primary insurers, many of which have greater financial
and other resources.
Rating Agencies
The rating agencies allow credit to a ceding primary insurer's capital
requirements and single-risk limits for reinsurance ceded in an amount depending
on the strength of the reinsurer. The claims-paying ability rating criteria used
by the rating agencies focus on the following factors: capital resources,
financial strength and commitment of the reinsurer's institutional stockholders;
demonstrated management expertise in financial guaranty and traditional
reinsurance, credit analysis, systems development, marketing, capital markets
and investment operations; and a minimum policyholders' surplus comparable to
primary company requirements, with initial capital sufficient to meet projected
growth as well as access to such additional capital as may be necessary to
continue to meet standards for capital adequacy. As part of their rating
process, Standard & Poor's, Moody's and Duff & Phelps test the capital adequacy
of the Insurance Subsidiaries by subjecting them to a "worst-case depression
scenario." Expected losses over a depression period are established by applying
capital charges to the existing and projected insurance portfolio.
The claims-paying ability ratings assigned by the rating agencies to a
reinsurance or insurance company are based upon factors relevant to
policyholders and are not directed toward the protection of the reinsurer's or
insurer's securityholders. Such a rating is neither a rating of securities nor a
recommendation to buy, hold or sell any security. Claims-paying ability ratings
assigned to the Insurance Subsidiaries should not be viewed as indicative of or
relevant to any ratings which may be assigned to the Company's outstanding debt
securities by any rating agency and should not be considered an evaluation of
the likelihood of the timely payment of principal or interest under such
securities.
The Company's ability to compete with other triple-A rated financial
guaranty reinsurers, and consequently its results of operations, would be
materially adversely affected by any downgrade in Enhance Re's or Asset
Guaranty's ratings. Moreover, in addition to the loss of new business that would
result from any such downgrade, several treaties to which either Insurance
Subsidiary is a party grant the respective primary insurers the right to
recapture business previously ceded to such Insurance Subsidiary should it
suffer a downgrade of a specified magnitude in its claims-paying ability rating.
This could result in a material adverse effect on the Company's deferred premium
revenue and its recognition of future income therefrom.
The Company's ability to continue engaging in certain specialty
insurance businesses, principally insurance of real estate-backed financings and
municipal bonds, would be adversely affected by a downgrade in Asset Guaranty's
rating by Standard & Poor's or Duff & Phelps. See "Specialty Insurance
Businesses" in this section.
19
<PAGE>
Data Processing
The Company believes that its data processing system is adequate to
support its current needs and has the capacity to support a greater volume of
reinsurance business. Since it commenced operations, the Company has used
minicomputer systems, currently consisting of a configuration composed of two
Digital Equipment processors, which provide computing services even if only one
processor is available. The Company's data center provides computing services on
a continuous basis 24 hours a day, seven days a week. System applications files
and data bases are backed up to tape on a daily basis, and image back-ups to
tape of all disks are performed quarterly. Back-up tapes are shipped to an
off-site storage facility weekly. Prior to shipment, these tapes are stored
outside the data center in a fireproof safe.
Employees
As of March 1, 1997, the Company had 100 employees. None of the
employees are covered by collective bargaining agreements. The Company considers
its employee relations to be good.
INSURANCE REGULATORY MATTERS
New York Financial Guaranty Insurance Statute
The Insurance Subsidiaries are domiciled and licensed in the State of
New York as financial guaranty insurers under that portion of the Insurance Law
constituting the financial guaranty insurance statute. They are also subject to
the provisions of the Insurance Law and related rules and regulations governing
property-casualty insurers to the extent such provisions are not inconsistent
with the financial guaranty insurance statute. Both Insurance Subsidiaries are
also licensed under the Insurance Law to write surety insurance, credit
insurance and residual value insurance, which are the only other types of
insurance that a financial guaranty insurer licensed under the Insurance Law may
be authorized to write.
The Insurance Subsidiaries are required by New York and each other
jurisdiction in which they are licensed to make various filings, including
quarterly and annual financial statements prepared in accordance with statutory
accounting practices, with those jurisdictions and with the NAIC.
The Insurance Law requires that financial guaranty insurers and
reinsurers maintain both a reserve for known incurred losses (similar to the
reserve described in "Description of Business -- Loss Experience" in this
section) and a special "contingency reserve" to protect policyholders against
the impact of excessive losses occurring during adverse economic cycles. As of
December 31, 1996, the statutory contingency reserves of the Insurance
Subsidiaries aggregated $149.8 million. The size of the contingency reserve is a
function of the premiums written and the principal guaranteed. Moreover, the
reserve must be maintained for a specified period, although it may be drawn on
under specified but limited circumstances.
The Insurance Law establishes single-risk limits applicable to all
obligations issued by a single entity and backed by a single revenue source and
aggregate risk limits on the basis of aggregate net liability and policyholders'
surplus requirements. The Insurance Law also regulates the types of securities
in which the Insurance Subsidiaries may invest their minimum policyholders'
surplus, and also imposes restrictions on the amount of dividends that the
Insurance Subsidiaries may pay. See Item 5. "Market for Registrant's Common
Equity and Related Stockholder Matters - Dividend Policy."
20
<PAGE>
The Company believes that each of Enhance Financial and the Insurance
Subsidiaries is in material compliance with all applicable laws and regulations
of the State of New York pertaining to its business and operations.
Financial Guaranty Insurance Regulation in Other States
The Insurance Subsidiaries are subject to the insurance laws in each
jurisdiction in which they are licensed to transact insurance. Reinsurance
activities are generally not directly regulated by state law, which typically
excludes the transaction of reinsurance from the activities that constitute the
transaction of insurance and that therefore require licensure. Reinsurance
activities are, however, generally subject to limited indirect regulation in
most states through the regulation of ceding primary insurers domiciled in those
states.
Insurance Holding Company Laws
Enhance Financial, as the parent, and the Insurance Subsidiaries, as
controlled insurers, are subject to regulation under the insurance holding
company laws of New York, which require the Insurance Subsidiaries to register
with the New York Insurance Department (the "Department") and to file with it
certain reports including information concerning their capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations.
State holding company laws also require prior notice or regulatory
approval of direct or indirect changes in control of an insurer or its holding
company and of certain material intercorporate transfers within the holding
company structure. Upon obtaining control, the acquiror would become subject to
various ongoing reporting requirements in New York and certain other states.
Under the Insurance Law, any person holding or acquiring, directly or
indirectly, 10% or more of the voting securities of an insurance company is
presumed to be holding or acquiring "control" of such company and its
subsidiaries, unless the Department determines upon application that such
acquiror would not control such company. As a beneficial owner of more than 10%
of the voting shares of Enhance Financial, U S WEST, Inc. ("U S WEST") is
presumed under the Insurance Law indirectly to control the Insurance
Subsidiaries. Pursuant to applications made under Section 1501(c) of the
Insurance Law, the Department has determined, subject to certain conditions,
that U S WEST is not considered the ultimate controlling person of either
Insurance Subsidiary. See Item 12. "Security Ownership of Certain Beneficial
Owners and Management."
NAIC/IRIS Ratios
The Insurance Regulatory Information System of the NAIC was developed
primarily to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. The system identifies eleven industry ratios and
specifies "usual values" for each ratio. The changes in writings of the
Insurance Subsidiaries all fell within these usual values.
21
<PAGE>
Item 2. Properties.
The Company other than Van-Am occupies 40,550 square feet of office
space comprising its executive offices at 335 Madison Avenue, New York, New York
10017 pursuant to a sublease expiring August 2000. Van-Am occupies 6,300 square
feet of office space at 167 East Main Street, Lexington, Kentucky, pursuant to a
lease expiring December 1999.
Item 3. Legal Proceedings.
The Company is not a party, nor is any of its property subject, to any
material legal proceedings.
Item 4. Submission of Matters to a Vote of Securityholders.
Not applicable.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
SHARE INFORMATION
The following table sets forth the high and low sales prices for the
Common Stock for the calendar quarters indicated as reported in the New York
Stock Exchange consolidated transaction system:
High Low
---- ---
1995
----
1st quarter .......................... $18-3/8 $15-7/8
2nd quarter .......................... 19-5/8 16-1/4
3rd quarter .......................... 20-5/8 18
4th quarter............................ 27 19-7/8
1996
----
1st quarter .......................... $27-5/8 $23-3/8
2nd quarter .......................... 29-1/2 26-1/8
3rd quarter .......................... 33 26-3/4
4th quarter .......................... 36-1/2 32-1/2
1997
----
1st quarter (through March 14)......... 39-3/8 34-1/4
As of March 14, 1997, there were 108 holders of record of the Common
Stock.
22
<PAGE>
DIVIDEND POLICY
Since the initial public offering of its Common Stock in 1992, Enhance
Financial has increased its dividend at the rate of $.04 per share per year.
Enhance Financial paid an aggregate dividend of $0.40 per share in 1996, and the
board of directors declared a dividend in the first quarter of 1997 of $0.11 per
share. The amount of dividends payable in the future will be reviewed
periodically by the board of directors in light of the Company's earnings,
financial condition and capital requirements. The declaration and payment of
dividends are subject to the discretion of the board of directors of Enhance
Financial, and there is no requirement or assurance that dividends will be paid.
Enhance Financial's ability to pay dividends as well as its operating,
debt service and other expenses depends upon the ability of the Insurance
Subsidiaries to pay dividends to Enhance Financial and is subject to
restrictions contained in an agreement relating to Enhance Financial's
indebtedness. The Insurance Subsidiaries' ability to pay dividends to Enhance
Financial is subject to restrictions contained in the Insurance Law. The Company
expects that such restrictions will not affect the ability of such subsidiaries
to declare and pay dividends sufficient to support the payment of dividends by
Enhance Financial consistent with the practice adopted in recent years. The
agreements relating to Enhance Financial's indebtedness limit Enhance
Financial's ability to pay dividends under certain circumstances. As of December
31, 1996, up to $21.2 million was available for the payment of dividends to
Enhance Financial by the Insurance Subsidiaries without the prior approval of
the insurance regulatory authorities. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note 8 of Notes to Consolidated Financial Statements.
Item 6. Selected Historical Consolidated Financial Information.
The following table presents selected historical consolidated financial
information derived from the historical consolidated financial statements of the
Company as of and for each of the years in the five-year period ended December
31, 1996. This information should be read in conjunction with the historical
consolidated financial statements of the Company and the related notes thereto
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Gross premiums written ................ $ 98,588 $ 87,159 $85,112 $ 89,788 $63,655
Net premiums written .................. 95,662 82,988 80,685 86,649 61,428
Premiums earned ....................... 77,433 62,950 61,757 59,629 45,552
Net realized gains (losses) on
sale of investments.................. 4,008 3,478 (5,829) 16,649 7,939
Net investment income (1).............. 48,122 44,159 38,225 32,214 29,806
Total revenues ........................ 132,301 112,456 95,693 109,693 84,686
Income before income taxes ............ 76,390 63,840 32,659 50,284 49,449
Net income ............................ 55,704 47,297 26,565 37,974 37,617
Earnings per share .................... 3.12 2.73 1.49 2.09 2.07
Fully diluted earnings per share....... 3.00 2.64 1.49 2.09 2.07
Selected Financial Ratios (2)
Loss ratio ............................ 11.9% 15.1% 37.0% 37.0% 20.4%
Expense ratio ......................... 52.6 54.2 55.5 53.8 56.5
Combined ratio ........................ 64.5 69.3 92.5 90.8 76.9
<CAPTION>
As of December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments (3)........................ $797,086 $749,200 $639,888 $622,303 $490,777
Total ................................ 983,443 885,961 749,388 725,048 576,246
Deferred premium revenue .............. 266,204 248,051 227,883 209,008 181,988
Total liabilities ..................... 495,094 462,024 389,127 360,581 244,101
Total shareholders' equity ............ 488,349 423,937 360,261 364,467 332,145
Book value per share................... 27.03 24.59 20.45 20.14 18.29
Statutory Basis Reserves (4):
Contingency reserves .................. $149,795 $120,833 $98,554 $79,404 $58,494
Policyholders' surplus ................ 311,987 294,516 287,629 299,984 219,624
------- ------- ------- ------- -------
Qualified statutory capital.......... 461,782 415,349 386,183 379,388 278,118
Unearned premiums.................... 323,180 298,171 269,832 242,996 212,613
Losses and LAE reserves ............. 17,722 22,026 19,535 5,835 14,847
-------- ------- ------- ------- -------
Total policyholders' reserves........ $802,684 $735,546 $675,550 $628,219 $505,578
======= ======= ======= ======= =======
Leverage ratio (5)..................... 122:1 128:1 124:1 108:1 128:1
</TABLE>
- ----------
(1) Excludes capital gains and losses.
(2) The loss ratio is the quotient derived by dividing losses and LAE incurred
by premiums earned. The expense ratio is the quotient derived by dividing
underwriting and operating expenses by premiums
24
<PAGE>
earned. The combined ratio is the sum of the loss and expense ratios. Such
ratios have been calculated using amounts determined in accordance with
GAAP.
(3) Excludes investments in affiliates. See Note 5 of Notes to Consolidated
Financial Statements for information concerning Enhance Financial's
investments in affiliates.
(4) Represents the combined statutory financial position of the Insurance
Subsidiaries.
(5) Leverage ratio is net insurance in force divided by qualified statutory
capital.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
General
The Company's initial capitalization of $113.8 million (net of issuance
expenses) when it commenced operations in 1986 was obtained through a private
placement in that year of Common Stock to management as well as institutional
and other investors. The Company obtained additional capital of $26.5 million in
1988 through the issuance of additional shares, $39.4 million in 1990 through
the issuance of additional shares in the merger between Enhance Financial and
its partially owned subsidiary, Asset Guaranty, Inc., and $11.8 million in 1992
through the issuance of additional shares in its initial public offering of
Common Stock. In 1993, Enhance Financial issued an aggregate $75.0 million
principal amount of 6.75% Debentures due 2003 (the "6.75% Debentures"). As of
December 31, 1996, the Company's total capitalization was $563.3 million.
The Company's revenues consist primarily of (a) premiums earned on
insurance and reinsurance contracts and (b) investment income.
Year Ended December 31, 1996 versus Year Ended December 31, 1995
Gross premiums written in 1996 increased 13.1% to $98.6 million from
$87.2 million in 1995. Total premium writings in 1996 benefitted from a 19.2%
increase in non-municipal reinsurance writings and a 22.8% increase in the
Company's other insurance lines.
The volume of municipal bonds issued in 1996 increased by 15.0% over
1995 issuance to $184.4 billion. Bonds issued for new money purposes, increased
to $126.7 billion in 1996 from the 1995 level of $112.5 billion. The insured
portion of new issues rose to 46.2% in 1996 from 42.7% in 1995. Total municipal
bond refundings in 1996 represented 23.9% of new-issue volume compared to 21.0%
in 1995.
Net premiums written increased 15.3% to $95.7 million in 1996 from
$83.0 million in 1995, consistent with the increase in gross premiums discussed
in the preceding paragraphs. The following table shows net premiums written by
line of business for the periods presented:
25
<PAGE>
Net Premiums Written (in thousands) 1996 1995
- ----------------------------------- ---- ----
Municipal Reinsurance ...................... $41,147 $39,768
Non-Municipal Reinsurance .................. 17,379 13,497
Other Insurance Lines ...................... 37,136 29,723
------- -------
$95,662 $82,988
======= =======
The Company's other insurance lines include direct municipal bond
insurance, credit reinsurance, financial responsibility, excess-SIPC/excess-ICS
and other surety lines. Net premiums written from these businesses have grown
from $8.6 million (15.6%) in 1991 to $37.1 million (38.8%) in 1996. The Company
expects that these other insurance lines will continue to contribute a
significant component of its premium revenues. In connection with certain of its
other insurance lines, the Company underwrites with the anticipation of higher
loss levels than those associated with its core municipal and non-municipal
reinsurance business. The Company takes into account these higher loss levels in
determining appropriate premium rates.
Net premiums earned grew 23.0% to $77.4 million in 1996 from $62.9
million in 1995. This growth in premiums earned was in large part attributable
to increased earnings from the Company's other insurance lines as discussed in
the preceding paragraph. The following table shows net premiums earned by line
of business for the periods presented:
Net Premiums Earned (in thousands) 1996 1995
- ---------------------------------- ---- ----
Municipal Reinsurance ...................... $34,405 $29,489
Non-Municipal Reinsurance .................. 13,002 9,445
Other Insurance Lines ...................... 30,026 24,016
------- -------
$77,433 $62,950
======= =======
Monoline reinsurance earned premiums increased 21.8% principally due to
refundings which contributed $9.9 million (12.8%) of earned premiums in 1996
compared to $5.7 million (9.0%) in 1995. A refunding eliminates the Company's
reinsurance exposure to the refunded obligation and as a result, the Company
recognizes in current earnings the remaining related deferred premium revenue.
Excluding the impact of refundings, premiums earned increased 18.0% over the
prior year. The growth in premiums earned also reflects the amortization of the
deferred premium revenue balance which has grown to $266.2 million at year-end
1996 from $248.1 million at year-end 1995.
Net investment income increased 9.0% to $48.1 million in 1996 from
$44.2 million for 1995 consistent with the growth in invested assets in the
period. The average yields on the Company's investment portfolio, after
deducting associated costs, were 6.4% for each of the years ended December 31,
1996 and 1995, respectively. In addition, the Company realized $4.0 million and
$3.5 million of net capital gains in 1996 and 1995, respectively. Net investment
income is presented after deduction of both external investment management fees
and internal costs associated with managing the portfolio.
Incurred losses and loss adjustment expenses ("LAE") were $9.2 million
in 1996 compared with $9.5 million in 1995. Of these amounts, $7.3 million and
$6.1 million were incurred in connection with the Company's credit and surety
businesses in 1996 and 1995, respectively. The Company believes that the
reserves for losses and LAE, including case and non-specific reserve, are
adequate to cover the ultimate net
26
<PAGE>
cost of claims. However, the reserves are necessarily based on estimates, and
there can be no assurance that the ultimate liability will not exceed such
estimates.
The Company's operating expense ratio for 1996 was 52.6% compared to
54.2% in 1995. Policy acquisition costs, which vary with and are directly
related to the generation of new and renewal premiums, totaled $26.7 million and
$21.1 million in 1996 and 1995, respectively, representing 34.5% and 33.4% of
premiums earned in those respective periods. Other operating expenses increased
only marginally to $13.2 million in 1996 and $12.7 million in 1995.
Interest expense of $6.2 million was incurred in 1996 compared to $5.6
million in 1995. The increase reflected the additional borrowings under the
Company's line of credit under a bank credit agreement (the "Credit Agreement").
The Company's short term debt increased to $42.6 million at year-end 1996 from
$15.0 at year-end 1995.
The Company's effective tax rate was 27.1% for 1996 compared to 25.9%
in 1995. The higher 1996 rate reflects the continuing reduction in the
percentage of pre-tax income represented by income from tax-exempt assets. This
impact has been reduced in part by the Company's strategy of directing a greater
proportion of its new cash flow to the purchase of tax-exempt securities in
1996.
Net income for 1996 increased 17.8% to $55.7 million from $47.3 million
in 1995. On a per share basis, earnings increased 14.1% to $3.12 in 1996 from
$2.73 in 1995. Operating earnings per share, which excludes the impact of
capital gains and losses and foreign exchange gains and losses, increased 15.2%
to $2.97 in 1996.
The per-share increases were offset, in part, by the higher weighted
average shares in 1996 following the reissuance, in the first quarter of 1996,
of 600,000 treasury shares to Swiss Reinsurance Company and the issuance at
various times throughout 1996 of 231,275 new shares in connection with the
exercise of stock options.
The weighted average shares outstanding for 1996 was 17.88 million
compared to 17.32 million for 1995.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
Gross premiums written in 1995 increased 2.4% to $87.2 million compared
with $85.1 million in 1994. Total premium writings in 1995 benefitted from the
59.0% increase in non-municipal reinsurance writings and the 20.5% increase in
specialty insurance writings, offset in part by a 18.0% decline in municipal
reinsurance premiums.
The volume of municipal bonds issued in 1995 decreased by 3.3% to
$159.0 billion as compared with $164.5 billion in issuance in the prior year.
Bonds issued for new money purposes decreased to $112.6 billion in 1995 from the
1994 level of $114.3 billion. The insured portion of new issues rose to 43.0% in
1995 compared with 37.3% in 1994.
Net premiums written increased 2.9% to $83.0 million in 1995 from $80.7
million in 1994, consistent with the increase in gross premiums discussed above.
Of the Company's net premiums written in 1995, 47.9%, 16.3% and 35.8% were
derived from the reinsurance of municipal bonds, the reinsurance of asset-
27
<PAGE>
backed debt obligations and the Company's specialty activities, respectively,
compared to 58.5%, 11.0% and 30.5% in 1994.
The Company's specialty businesses include direct municipal bond
insurance, credit reinsurance, financial responsibility, excess-SIPC/excess-ICS
and other surety lines. Net premiums written from these businesses have grown
from $8.6 million (15.6%) in 1991 to $29.7 million (35.8%) in 1995. The Company
expects that these specialty businesses will continue to contribute a
significant component to its revenues. The Company underwrites certain of its
specialty businesses with the anticipation of higher loss levels than those
associated with its core municipal and asset-backed reinsurance business. The
Company takes these higher loss levels into account in determining appropriate
premium rates.
Net premiums earned grew 1.9% to $62.9 million in 1995 from $61.8
million in 1994. Growth in premiums earned was achieved despite a $6.0 million
decline in refundings, which accounted for only 9.0% of earned premiums in 1995
compared with 18.9% of premiums earned in 1994. A refunding eliminates the
Company's reinsurance exposure to the refunded obligation, with the result that
the Company recognizes in current earnings the remaining related deferred
premium revenue. Excluding the impact of refundings, premiums earned were up
14.3% over the prior year. The growth in premiums earned also reflects the
amortization of the deferred premium revenue balance, which has grown to $248.1
million at year-end 1995 from $227.9 million at year-end 1994.
Net investment income increased 15.5% to $44.2 million in 1995 from
$38.2 million for 1994. This growth resulted primarily from the Company's having
invested all of its available cash flow in higher yielding special without
lowering the credit quality of the portfolio. The average yields on the
Company's investment portfolio, after deducting associated costs, were 6.4% and
6.2% for the years ended December 31, 1995 and 1994, respectively. The increase
in investment income further reflects the growth in the Company's investment
portfolio from $640 million at year-end 1994 to $749 million at December 31,
1995.
In addition, the Company realized $3.5 million of net capital gains in
1995 compared with net realized capital losses of $5.8 million in 1994,
reflecting lower interest rates during the year.
Incurred losses and LAE were $9.5 million in 1995 compared with $22.8
million in 1994. Of these amounts, losses and LAE incurred in connection with
the Company's discontinued commercial real estate-related portfolio aggregated
$9.5 million in 1994 compared with $1.2 million in 1995. In addition, in 1995
and 1994, the Company incurred losses and LAE of $5.4 million and $5.7 million,
respectively, in connection with its credit and surety businesses commensurate
with the growth in premiums written from these businesses.
The Company believes that the reserves for losses and LAE, including
the case and non-specific reserves, including the case and non-specific reserve,
are adequate to cover the ultimate net cost of claims. However, the reserves are
necessarily based on estimates, and there can be no assurance that the ultimate
liability will not exceed such estimates.
The Company's operating expense ratio was 54.2% in 1995 compared to
55.5% in 1994. Policy acquisition costs, which vary with and are directly
related to the generation of new and renewal premium, totaled $21.1 million and
$20.3 million in 1995 and 1994, respectively, representing 33.4% and 32.8% of
premiums earned in those respective periods. Other operating expenses increased
only marginally to $12.7 million in 1995 from $12.5 million in 1994.
28
<PAGE>
Interest expense of $5.6 million was recorded in 1995 compared to $5.8
million in 1994. The decrease reflected the impact of a reverse interest-rate
swap entered into in January 1995 and subsequently terminated in June 1995, from
which the Company realized a net interest reduction of $0.7 million, including
amortization of gain on termination of the swap. This reduction was offset in
part by interest expense of $0.6 million on the additional drawdowns of $12.0
million on the Company's line of credit under the Credit Agreement.
The Company's effective tax rate was 25.9% for 1995 compared to 18.7%
in 1994. The higher 1995 rate reflects the fact that income earned on tax-exempt
assets represented a smaller portion of pretax income in 1995 than in 1994. The
prior year's rate further reflects the benefit from capital losses.
Net income for 1995 increased 78.0% to $47.3 million from $26.6 million
in 1994. Earnings per share increased similarly by 83.8% to $2.73 in 1995 from
$1.49 for 1994.
The weighted average shares outstanding for 1995 was 17.32 million
compared to 17.88 million for 1994. The Company continued its share buyback
program in 1995 and repurchased 404,800 of its shares on the open market at
various times throughout the year. Through December 31, 1995, the Company has
repurchased 1,025,000 shares out of a total authorized by the board of directors
of 1.2 million.
Liquidity and Capital Resources
As a holding company, Enhance Financial finances the payment of its
operating expenses, principal and interest on its debt obligations, dividends,
if any, to its shareholders and the repurchase of its common stock primarily
from dividends and other payments from the Insurance Subsidiaries, and draws on
its line of credit provided under the Credit Agreement.
Payment of dividends to Enhance Financial by the Insurance Subsidiaries
are subject to restrictions relating to statutory capital and surplus and net
investment income. Enhance Re declared and paid a total of $13.3 million in
dividends in 1996. Asset Guaranty has not paid any dividends since its
inception. As of December 31, 1996, under the Insurance Law, Enhance Financial
had $21.2 million available from the Insurance Subsidiaries, compared with $20.8
million available as of December 31, 1995. Payments of dividends by Enhance
Financial to its shareholders are further restricted by the terms of the Credit
Agreement. At December 31, 1996, the maximum amount of dividends which may be
paid by Enhance Financial to its shareholders in compliance with the terms of
such agreement was $31.2 million.
As of December 31, 1996, the statutory policyholders' surplus of
Enhance Re and Asset Guaranty were $225.3 million and $86.7 million,
respectively, compared to the minimum $68.4 million required by each under the
Insurance Law.
Enhance Financial entered into the Credit Agreement with a major
commercial bank providing for borrowing by Enhance Financial of up to $60.0
million (increased from $30 million in October 1996) to be used for general
corporate purposes. The Credit Agreement provides for a revolving credit
facility under which individual advances may be converted, at Enhance
Financial's discretion, into a four-year term loan. The Company borrowed $3.0
million in 1994, an additional $12.0 million in 1995 and a further $27.5 million
in 1996. The total outstanding at year-end 1996 was $42.6 million.
29
<PAGE>
The Company believes that the operating liquidity needs of the
Insurance Subsidiaries can be funded exclusively from their respective operating
cash flows. The Company's cash flow from operations consists principally of
insurance and reinsurance premiums collected and income earned on invested
assets, which in turn is applied to the payment of claims, operating expenses
and income taxes. The Company's cash flow from operations was $59.8 million,
$66.3 million and $64.7 million for the years 1996, 1995 and 1994, respectively.
The Company paid a total of $11.9 million, $7.3 million and $4.9 million in
claims in 1996, 1995 and 1994, respectively. Of the claim payments made in 1996,
$11.3 million related to reserves established in prior years.
Liquidity is also provided by the Company's sales of securities in its
available-for-sale portfolio as well as payments of principal on investments
upon maturity.
In July 1996, the Company formed C-BASS, a joint venture in which the
Company and MGIC each own 48% interests. Under the terms of the joint venture
agreement, the Company contributed $15.8 million in cash in 1996 and will
contribute an additional $9.4 million (including its 100% interest in LLSI) in
1997. In connection with its joint venture agreement with Singer, the Company
makes available to Singer a LIBOR-based secured revolving credit facility, up to
a maximum of $17 million, for its use in originating assets for securitization.
In addition, the Company provides to Singer a LIBOR-based working capital credit
line. At December 31, 1996, $13.7 million and $3.3 million were outstanding
under the secured credit facility and the working capital credit line,
respectively.
Based on the historical cash flow of the Company, the Company's current
financial results and the Company's expectation as to the level of the Company's
net premiums written during the next twelve months, the Company believes that
cash flow provided by operating activities of the Insurance Subsidiaries over
the next year will provide sufficient liquidity for the operations of the
Company, as well as funds to Enhance Financial so that Enhance Financial will be
able to meet its debt service and other obligations. The ability of Enhance
Financial to meet its debt service and other obligations beyond the next twelve
months will depend upon the cash flow generated by the operating activities of
the Insurance Subsidiaries and the availability to Enhance Financial of
sufficient amounts of funds from the Insurance Subsidiaries in the form of
dividends or other payments. Beyond the next twelve months, the Company's cash
flow to Enhance Financial may be influenced by a variety of factors, including
market changes, insurance regulatory changes and changes in general economic
conditions. Consequently, although the Company presently anticipates that it
will be able to meet all debt service and other obligations over the long term,
no assurance can be given as to whether the available net cash provided by the
Company's operating activities will provide sufficient liquidity for Enhance
Financial to meet all its long-term liquidity needs.
At December 31, 1996, 1995 and 1994, the carrying value of the
Company's investments was $797 million, $749 million and $640 million,
respectively, on which was earned $48.1 million, $44.2 million and $38.2 million
in 1996, 1995 and 1994, respectively, excluding $4.0 million, $3.5 million and
$(5.8) million of net realized gains (losses) in 1996, 1995, and 1994,
respectively. The increase in investments resulted principally from cash flows
from operations generated during the period. As of December 31, 1996, the
Company held approximately $33.2 million and $5.4 million in short-term
investments and cash and cash equivalents, respectively, to meet liquidity
needs.
In 1996, the Company incurred annual debt service on its long and short
term borrowings of $6.2 million and will incur similar debt service expense in
1997. In 1996, the Company repaid the then remaining balance of its notes issued
in 1991 aggregating $3.4 million.
30
<PAGE>
The Company has no other material commitments for capital or other
expenditures within the next twelve months or thereafter.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Page
----
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 1996 and 1995 34
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995, and 1994 35
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994 37
Notes to Consolidated Financial Statements 38
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Enhance Financial Services Group Inc.
We have audited the accompanying consolidated balance sheets of Enhance
Financial Services Group Inc. and Subsidiaries (the "Company") as of December
31, 1996 and 1995 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 the Company as of December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
March 3, 1997
New York, New York
33
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Assets
Investments:
Fixed maturities, held to maturity, at amortized cost
(market value $227,048 and $218,036) .................... $ 217,692 $ 206,427
Fixed maturities, available for sale, at market
(amortized cost $526,973 and $471,011) .................. 539,884 489,159
Common stock, at market (cost $498) ........................ 878 729
Investment in affiliates ................................... 24,182 7,241
Short-term investments ..................................... 33,247 44,103
Cash and cash equivalents .................................. 5,385 8,782
--------- ---------
Total Investments ........................................ 821,268 756,441
Premiums receivable ........................................... 22,472 21,217
Accrued interest and dividends receivable ..................... 11,434 10,739
Deferred policy acquisition costs ............................. 87,325 81,197
Federal income taxes recoverable .............................. 1,428 726
Prepaid reinsurance premiums .................................. 2,793 2,850
Reinsurance recoverable on unpaid losses ...................... 1,823 1,853
Receivable from affiliates .................................... 22,205 945
Receivable for securities ..................................... 2,370 --
Other assets .................................................. 10,325 9,993
========= =========
TOTAL ASSETS ............................................. $ 983,443 $ 885,961
========= =========
Liabilities and Shareholders' Equity
LIABILITIES
Losses and loss adjustment expenses ........................... $ 28,081 $ 30,799
Reinsurance payable on paid losses and loss adjustment expenses 2,463 2,645
Deferred premium revenue ...................................... 268,997 250,901
Accrued profit commissions .................................... 3,050 3,719
Deferred income taxes ......................................... 46,402 39,198
Long-term debt ................................................ 75,000 78,400
Short-term debt ............................................... 42,575 15,000
Payable for securities ........................................ 2,083 17,324
Accrued expenses and other .................................... 26,443 24,038
--------- ---------
TOTAL LIABILITIES ......................................... 495,094 462,024
--------- ---------
SHAREHOLDERS' EQUITY
Common stock-$.10 par value
Authorized-30,000,000 shares ............................... 1,853 1,830
Additional paid-in capital .................................... 201,847 192,865
Retained earnings ............................................. 283,791 235,285
Unearned compensation ......................................... (20) (104)
Unrealized gains .............................................. 8,636 12,104
Treasury stock ................................................ (7,758) (18,043)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ................................. 488,349 423,937
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $ 983,443 $ 885,961
========= =========
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Net premiums written ............................ $ 95,662 $ 82,988 $ 80,685
Increase in deferred premium revenue ............ (18,229) (20,038) (18,928)
--------- --------- --------
Premiums earned ............................ 77,433 62,950 61,757
Net investment income ........................... 48,122 44,159 38,225
Net realized gains(losses) on sale of investments 4,008 3,478 (5,829)
Other income .................................... 2,738 1,869 1,540
--------- --------- --------
Total revenues ............................. 132,301 112,456 95,693
--------- --------- --------
Expenses
Losses and loss adjustment expenses ............. 9,184 9,513 22,842
Policy acquisition costs ........................ 26,703 21,053 20,276
Profit commissions .............................. 850 359 1,539
Other operating expenses ........................ 13,197 12,715 12,450
--------- --------- --------
Total expenses ............................. 49,934 43,640 57,107
--------- --------- --------
Income from operations .......................... 82,367 68,816 38,586
Equity in net income of affiliates .............. 274 115 168
Foreign currency gain(loss) ..................... (69) 547 (275)
Interest expense ................................ (6,182) (5,638) (5,820)
--------- --------- --------
Income before income taxes ................. 76,390 63,840 32,659
Income taxes .................................... 20,686 16,543 6,094
========= ========= ========
Net income ................................. $ 55,704 $ 47,297 $ 26,565
========= ========= ========
Primary earnings per share ......................... $ 3.12 $ 2.73 $ 1.49
========= ========= ========
Fully diluted earnings per share ................... $ 3.00 $ 2.64 $ 1.49
========= ========= ========
</TABLE>
See notes to consolidated financial statements
35
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended December 31, 1994, 1995 AND 1996
(In thousands except share amounts)
<TABLE>
<CAPTION>
Unearned
Common Stock Treasury Stock Additional Compensation/
--------------------- ------------------------ Paid-in Excess Pension
Shares Amount Shares Amount Capital Liability
---------- ------ ---------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ................... 18,274,200 $1,827 180,925 ($ 2,666) $ 192,380 ($ 573)
Amortization of unearned compensation (net
of terminations and income tax benefit) ...... 5,650 40 275
Reversal of additional pension liability
in excess of unrecognized prior service cost
(net of income tax benefit) ................ 34
Change in unrealized gains (losses) ..........
Dividends paid ($0.32 per share) .............
Exercise of stock options .................... 3,275 1 46
Purchase of treasury stock ................... 471,300 (8,645)
Net income ...................................
---------- ------ ---------- -------- --------- --------
Balance, December 31, 1994 ................... 18,277,475 1,828 657,875 (11,311) 192,466 (264)
Amortization of unearned compensation
(net of income tax benefit) ................ 229 160
Change in unrealized gains (losses) ..........
Dividends paid ($0.36 per share) .............
Exercise of stock options .................... 24,575 2 413
Registration costs of common stock ........... (243)
Purchase of treasury stock ................... 404,800 (6,732)
Net income ...................................
---------- ------ ---------- -------- --------- --------
Balance, December 31, 1995 ................... 18,302,050 1,830 1,062,675 (18,043) 192,865 (104)
Amortization of unearned compensation
(net of income tax benefit) ................ 282 84
Change in unrealized gains (losses) ..........
Dividends paid ($0.40 per share) .............
Exercise of stock options .................... 231,275 23 4,722
Registration costs of common stock ........... (184)
Reissuance of treasury stock ................. (600,000) 10,323 4,162
Purchase of treasury stock ................... 1,600 (38)
Net income ...................................
---------- ------ ---------- -------- --------- --------
Balance, December 31, 1996 ................... 18,533,325 $1,853 464,275 ($ 7,758) $ 201,847 ($ 20)
========== ====== ========== ======== ========= ========
<CAPTION>
Unrealized Retained
Gains (Losses) Earnings Total
-------------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1993 ................... $ 142 $ 173,357 $ 364,467
Amortization of unearned compensation (net
of terminations and income tax benefit) ...... 315
Reversal of additional pension liability
in excess of unrecognized prior service cost
(net of income tax benefit) ................ 34
Change in unrealized gains (losses) .......... (16,811) (16,811)
Dividends paid ($0.32 per share) ............. (5,711) (5,711)
Exercise of stock options .................... 47
Purchase of treasury stock ................... (8,645)
Net income ................................... 26,565 26,565
-------- --------- ---------
Balance, December 31, 1994 ................... (16,669) 194,211 360,261
Amortization of unearned compensation
(net of income tax benefit) ................ 389
Change in unrealized gains (losses) .......... 28,773 28,773
Dividends paid ($0.36 per share) ............. (6,223) (6,223)
Exercise of stock options .................... 415
Registration costs of common stock ........... (243)
Purchase of treasury stock ................... (6,732)
Net income ................................... 47,297 47,297
-------- --------- ---------
Balance, December 31, 1995 ................... 12,104 235,285 423,937
Amortization of unearned compensation
(net of income tax benefit) ................ 366
Change in unrealized gains (losses) .......... (3,468) (3,468)
Dividends paid ($0.40 per share) ............. (7,198) (7,198)
Exercise of stock options .................... 4,745
Registration costs of common stock ........... (184)
Reissuance of treasury stock ................. 14,485
Purchase of treasury stock ................... (38)
Net income ................................... 55,704 55,704
-------- --------- ---------
Balance, December 31, 1996 ................... $ 8,636 $ 283,791 $ 488,349
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 55,704 $ 47,297 26,565
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net .......... (8,333) (6,054) (1,329)
(Gain)loss on sale of investments, net ...... (4,008) (3,478) 5,829
Equity in net income of affiliates .......... (274) (115) (105)
Compensation, restricted stock award program 84 160 275
Change in assets and liabilities:
Premiums receivable ...................... (1,255) (11,376) 688
Accrued interest and dividends receivable (695) (147) (484)
Accrued expenses and other liabilities ... 2,812 17,386 (1,811)
Deferred policy acquisition costs ........ (6,128) (7,174) (7,830)
Deferred premium revenue, net ............ 18,153 20,168 18,928
Accrued profit commissions ............... (669) (3,944) 1,090
Losses and loss adjustment expenses,net .. (2,870) 762 20,085
Other assets ............................. (2,741) (432) (448)
Income taxes, net ........................ 9,999 13,220 3,205
--------- --------- ---------
Net cash provided by operating activities ...... 59,779 66,273 64,658
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............. (599) (345) (335)
Proceeds from sales of investments ............. 640,282 529,127 478,160
Proceeds from maturity of investments .......... 23,291 17,091 53,175
Purchase of investments ........................ (735,346) (585,833) (609,893)
Sales(purchases) of short-term investments, net 10,856 (15,633) 22,402
Investment in affiliates ....................... (16,667) (5,709) (1)
--------- --------- ---------
Net cash used in investing activities .......... (78,183) (61,302) (56,492)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receivable from affiliates ..................... (21,260) -- --
Capital stock .................................. 4,843 401 87
Short-term debt ................................ 27,575 12,000 3,000
Dividends paid ................................. (7,198) (6,223) (5,711)
Principal payment long-term debt ............... (3,400) (1,400) (1,400)
Reissuance of treasury stock ................... 14,485 -- --
Purchase of treasury stock ..................... (38) (6,732) (8,645)
--------- --------- ---------
Net cash provided by/(used in) financing activities.. 15,007 (1,954) (12,669)
--------- --------- ---------
Net change in cash and cash equivalents ............. (3,397) 3,017 (4,503)
Cash and cash equivalents, beginning of year ........ 8,782 5,765 10,268
--------- --------- ---------
Cash and cash equivalents, end of year .............. $ 5,385 $ 8,782 $ 5,765
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for income taxes $ 4,608 $ 3,772 $ 2,682
========= ========= =========
Cash paid during the year for interest ... $ 6,326 $ 6,233 $ 5,991
========= ========= =========
</TABLE>
See notes to consolidated financial statements
37
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
Note 1 - ORGANIZATION
Enhance Financial Services Group Inc. ("Enhance Financial") is a
holding company which was incorporated in the State of New York in December 1985
and commenced operations in November 1986. Business is conducted by Enhance
Financial's consolidated subsidiaries: Enhance Reinsurance Company ("Enhance
Re"); Asset Guaranty Insurance Company ("Asset Guaranty"); and Van-American
Companies, Inc. ("Van-Am", see Note 5). Enhance Re and Asset Guaranty (the
"Insurance Subsidiaries") are licensed financial guaranty insurance companies
domiciled in the State of New York which principally provide insurance and
reinsurance coverage on financial guaranties issued to support public and
private borrowing arrangements, including commercial paper, bond financing, and
similar transactions.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP") which, for
the Insurance Subsidiaries, differ in certain material respects from the
accounting practices prescribed or permitted by regulatory authorities (see Note
3). The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from these estimates. The significant accounting policies of
Enhance Financial and its subsidiaries are as follows:
Consolidation
The accompanying financial statements include the accounts of Enhance
Financial, the Insurance Subsidiaries and Van-Am (collectively the "Company").
All significant intercompany accounts and transactions have been eliminated.
Investments in non-material subsidiaries and in companies which represent from
20% to 50% of their ownership are accounted for in accordance with the equity
method of accounting (see Note 5).
Investments
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting For Certain Investments in Debt and Equity
Securities," management classifies all securities at the time of purchase as
"held to maturity" or "available for sale." Fixed maturity securities held to
maturity are those securities which the Company intends and has the ability to
hold until maturity and are carried at amortized cost. All other fixed maturity
securities are classified as available for sale and carried at market value.
Unrealized gains and losses, net of taxes, on the available for sale portfolio
are charged or credited to shareholders' equity.
Common stocks are carried at market value. Short-term investments are
carried at cost, which approximates market. Unrealized gains and losses net of
income taxes on common stocks are reflected in shareholders' equity. Realized
gains or losses on sales of investments are determined on the basis of specific
identification.
38
<PAGE>
Premium Revenue Recognition
Premiums are earned in proportion to the level amortization of insured
principal over the contract period. Deferred premium revenue represents that
portion of premiums which will be earned over the remainder of the contract
period. When insured issues are refunded or called, the remaining deferred
premium revenue is generally earned at that time, since the risk to the Company
is considered to have been eliminated.
The following is a summary of net premiums written:
In thousands Year Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
Direct premiums written .......... $ 10,178 $ 12,313 $ 12,311
Assumed premiums written ......... 88,410 74,846 72,801
Reinsured ceded .................. (2,518) (2,995) (3,546)
Return premiums/refundings ....... (408) (1,176) (881)
--------- -------- --------
Net premiums written ............. $ 95,662 $ 82,998 $ 80,685
========= ======== ========
Deferred Policy Acquisition Costs
Deferred policy acquisition costs comprise those expenses that vary
with and are primarily related to the production of business, including:
commissions paid on reinsurance assumed, salaries and related costs of
underwriting and marketing personnel, rating agency fees, premium taxes and
certain other underwriting expenses, offset by ceding commission income on
premiums ceded to reinsurers. Acquisition costs are deferred and amortized over
the period in which the related premiums are earned. Deferred policy acquisition
costs are reviewed periodically to determine that they do not exceed recoverable
amounts.
Losses and Loss Adjustment Expenses ("LAE")
Reserves for losses and LAE are established based on the Company's best
estimate of specific and non-specific losses, including expenses associated with
settlement of such losses, on its insured and reinsured obligations. The Company
records a provision for losses and related LAE when reported by primary insurers
or when, in the Company's opinion, an insured risk is in default or a default is
probable and the amount of the loss is reasonably estimable. In the case of
obligations with fixed periodic payments, the provision for losses and LAE
represents the present value of the Company's ultimate expected losses, adjusted
for estimated recoveries under salvage or subrogation rights. The estimates for
losses and LAE are periodically evaluated by the Company, and changes in
estimates are reflected in income currently. The Company believes that the
reserves are adequate to cover the ultimate cost of all claims net of
reinsurance recoveries. However, the reserves are necessarily based on
estimates, and there can be no assurance that the ultimate liability will not
exceed such estimates.
39
<PAGE>
Federal Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes",
deferred federal income taxes are provided for temporary differences between the
tax and financial reporting basis of assets and liabilities that will result in
deductible or taxable amounts in future years when the reported amount of the
asset or liability is recovered or settled. In the case of the Company, such
temporary differences relate principally to premium revenue recognition and
deferred acquisition costs.
The Internal Revenue Code permits municipal bond insurance companies to
deduct from taxable income, subject to certain limitations, the amounts added to
the statutory mandatory contingency reserve during the year. The deduction taken
is allowed only to the extent that U.S. Treasury non-interest-bearing tax and
loss bonds are purchased at their par value prior to the original due date of
the Company's consolidated federal tax return and held in an amount equal to the
tax benefit attributable to such deductions. The amounts deducted must be
included in taxable income when the contingency reserve is released, at which
time the Company may redeem the tax and loss bonds to satisfy the additional tax
liability. Purchases of tax and loss bonds are recorded as payments of federal
income taxes and are not reflected in the Company's current tax provision.
Post-retirement and Post-employment Benefits
The Company provides various post-retirement and post-employment
benefits, including pension, health and other insurance benefits covering
substantially all employees who meet certain age and service criteria. The
Company accounts for these benefits under the accrual method of accounting.
Amounts related to the defined benefit pension plan and postretirement benefits
are charged based on actuarial determinations.
Stock Compensation Plans
In 1991, the Company implemented a stock option program for key
employees. In 1992, the Company implemented a directors' stock option program
for the benefit of directors who are not employees of the Company. Under these
programs, awards are granted to eligible employees and directors of the Company
in the form of Incentive Stock Options, where they qualify under the Internal
Revenue Code, or Non Qualified Stock Options. In October 1995, the Financial
Accounting Standards Board adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 applies to all stock-based employee compensation
plans (except employee stock ownership plans) in which an employer grants shares
of its stock or other equity instruments to employees. SFAS No. 123 permits a
company to choose for its stock-based compensation plans either the fair value
based method of accounting as defined in the statement or the intrinsic value
based method of accounting as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). The company has elected to continue to
apply the accounting requirements under APB 25 and in accordance with SFAS No.
123 has made pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied (see Note 13).
Earnings Per Share
Primary and fully diluted earnings per share are computed using the
treasury stock method to determine the weighted average number of shares of
common stock and, where material, common stock equivalents outstanding during
each year.
40
<PAGE>
For primary earnings per share, the weighted average number of shares
of common stock outstanding were 17,875,000, 17,316,000 and 17,875,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The dilution from
the exercise of stock options outstanding was not material.
For fully diluted earnings per share, the weighted average number of
shares of common stock and common stock equivalents was 18,565,000, 17,949,000
and 17,875,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid short-term investments with an original maturity of three months
or less to be cash equivalents.
Reclassifications
Certain of the prior years' amounts have been reclassified to conform
to the current year presentation.
Note 3 - INSURANCE REGULATORY MATTERS
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles ("GAAP") which, for the Insurance
Subsidiaries, differ in certain material respects from accounting practices
prescribed or permitted by insurance regulatory authorities. The significant
differences result from the statutory accounting practices which treat premiums
earned, policy acquisition costs, deferred income taxes, investments in fixed
maturities and loss reserves differently.
At December 31, 1996 the statutory basis policyholders' surplus of
Enhance Re and Asset Guaranty, as reported to insurance regulatory authorities,
was $225.3 million and $86.7 million, respectively. Statutory net income of
Enhance Re and Asset Guaranty was $46.5 million and $8.8 million, respectively,
for the year ended December 31, 1996. At December 31, 1995 the statutory basis
policyholders' surplus of Enhance Re and Asset Guaranty was $214.2 million and
$80.3 million, respectively. Statutory net income of Enhance Re and Asset
Guaranty was $39.0 million and $10.5 million, respectively, for the year ended
December 31, 1995. Statutory net income of Enhance Re and Asset Guaranty was
$21.3 million and $2.0 million, respectively, for the year ended December 31,
1994.
The New York Financial Guarantee Insurance Law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to municipal bonds, the
insured average annual debt service for a single risk, net of reinsurance and
collateral, may not exceed 10% of the sum of the insurer's policyholders'
surplus and contingency reserves. In addition, insured principal of municipal
bonds attributable to any single risk, net of reinsurance and collateral, is
limited to 75% of the insurer's policyholders' surplus and contingency reserves.
Additional single risk limits, which generally are more restrictive than the
municipal bond single risk limit, are also specified for several other
categories of insured obligations.
41
<PAGE>
Note 4 - INVESTMENTS
The following is a summary of the Company's investments in fixed
maturities at December 31, 1996 and 1995:
In thousands
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Government obligations $ 3,076 $ 94 $ 40 $ 3,130
Municipal obligations 98,513 8,930 107,443
Corporate securities 8,039 372 8,411
Private placements 108,064 108,064
-------- ------- -------- --------
Total held to maturity $217,692 $ 9,396 $ 40 $227,048
======== ======= ======== ========
Available for Sale
U.S. Government obligations $ 9,680 $ 120 $ 9 $ 9,791
Municipal obligations 347,575 10,038 1,087 356,526
Foreign securities 46,108 2,158 36 48,230
Mortgage-backed securities 77,413 844 71 78,186
Corporate securities 46,197 1,100 146 47,151
-------- ------- -------- --------
Total available for sale $526,973 $14,260 $ 1,349 $539,884
======== ======= ======== ========
1995
Held to Maturity
U.S. Government obligations $ 3,584 $ 203 $ 5 $ 3,782
Municipal obligations 98,349 10,723 109,072
Corporate securities 9,757 688 10,445
Private placements 94,737 94,737
-------- ------- -------- --------
Total held to maturity $206,427 $11,614 $ 5 $218,036
======== ======= ======== ========
Available for Sale
U.S. Government obligations $ 30,447 $ 1,565 $ 6 $ 32,006
Municipal obligations 256,783 9,845 174 266,454
Foreign securities 36,347 2,277 264 38,360
Mortgage-backed securities 97,435 1,114 9 98,540
Corporate securities 49,999 3,850 50 53,799
-------- ------- -------- --------
Total available for sale $471,011 $18,651 $ 503 $489,159
======== ======= ======== ========
</TABLE>
42
<PAGE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1996 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
In thousands Amortized Market
Cost Value
-------- --------
Fixed maturities, held to maturity
Due in one year or less $ 25,112 $ 25,138
Due after one year through five years 77,272 79,743
Due after five years through ten years 76,979 81,782
Due after ten years 38,329 40,385
-------- --------
$217,692 $227,048
======== ========
Fixed maturities, available for sale
Due in one year or less $ 4,388 $ 4,386
Due after one year through five years 29,020 29,998
Due after five years through ten years 208,724 214,316
Due after ten years 284,841 291,184
-------- --------
$526,973 $539,884
======== ========
Proceeds from sales of investments in fixed maturities during 1996,
1995 and 1994 were approximately $640 million, $529 million and $478 million,
respectively. Gross gains of $7.7 million and gross losses of $3.7 million were
realized on those sales in 1996. Gross gains of $10.1 million and gross losses
of $6.6 million were realized on those sales in 1995. Gross gains of $5.9
million and gross losses of $11.7 million were realized on those sales in 1994.
Sources of the Company's consolidated net investment income are as
follows:
In thousands Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Fixed maturities $46,102 $42,188 $37,914
Short-term investments and cash equivalents 3,184 4,131 2,226
Other 849 261 216
------- ------- -------
Total investment income 50,135 46,580 40,356
Less investment expenses 2,013 2,421 2,131
------- ------- -------
Net investment income $48,122 $44,159 $38,225
======= ======= =======
Under agreements with its cedants and in accordance with statutory
requirements, the Insurance Subsidiaries maintain funds (bonds, common stocks,
cash equivalents) in trust accounts principally for the benefit of reinsured
companies and for the protection of policyholders in states in which the
Insurance Subsidiaries are not licensed. The carrying amount of such restricted
balances amounted to approximately $212 million and $162 million at December
31, 1996 and 1995 respectively.
43
<PAGE>
Note 5 - INVESTMENT IN AFFILIATES
The Company owns 360,000 shares of EIC Corporation Ltd. ("EIC"), an
insurance holding company which, through its wholly owned insurance subsidiary
licensed in Bermuda, insures foreign trade receivables. The Company's investment
represented an equity interest of approximately 41% at the date of acquisition
and approximately 36.5% at December 31, 1996. The Company's percentage ownership
may be reduced from time to time through the participation of additional equity
investors. However, in accordance with its purchase agreement the Company's
ownership percentage cannot be reduced below 36%. The Company accounts for its
investment in EIC in accordance with the equity method of accounting.
In 1990, the Company acquired $5.3 million of face value 9% cumulative
senior preferred shares (accounted for at cost) and $0.3 million of face value
convertible preferred shares of Van-Am, an insurance holding company.
In October 1995, the Company converted all the shares of convertible
preferred stock of Van-Am into shares of common stock of Van-Am. The Company
currently owns 89.1% (85.5% on a fully diluted basis) of the outstanding common
stock of Van-Am. Since the accumulated deficit attributable to the minority
interest exceeds the minority interest in the equity capital of Van-Am and there
is no obligation for the minority interest to make good such losses, the Company
has accounted for its investment in Van-Am as a wholly owned subsidiary of the
Company
Effective July 1, 1995, the Company acquired all of the outstanding
shares of Litton Loan Servicing, Inc. ("LLSI"), a Houston-based loss mitigation
residential mortgage servicer. The purchase price approximated the fair market
value of the acquired assets and liabilities at the date of acquisition. In
July, 1996, the Company and Mortgage Guaranty Insurance Corporation formed a
joint venture company, Credit-Based Asset Servicing and Securitization LLC
("C-BASS"), which evaluates, accumulates, services and securitizes
sub-performing and non-performing residential mortgages. The Company will
contribute approximately $25 million in cash and other assets for its 48%
interest in C-BASS. At December 31, 1996, the Company had contributed $15.8
million of its capital contribution to the C-BASS joint venture. Subsequent to
year end, the Company contributed an additional $4.5 million. The investment in
C-BASS is being accounted for on the equity basis of accounting. As part of the
Company's capital contribution to the joint venture, LLSI will become part of
C-BASS. Since Enhance Financial's current 100% ownership interest in LLSI is
temporary, the Company has also accounted for this investment on the equity
basis of accounting.
In October 1995, the Company acquired a 50% joint venture interest in
Singer Asset Finance Company, L.L.C. ("Singer"), which originates and
securitizes various types of special assets such as lottery winnings and similar
state obligations. The excess (approximately $3.7 million) of the Company's cost
over the fair value of its interest in the net assets of Singer represents
goodwill and is being amortized over 20 years. Subsequent to year end, the
Company increased its ownership interest in Singer to 87.5% in an all stock
transaction.
44
<PAGE>
Note 6 - INCOME TAXES
The Company files a consolidated federal income tax return with its
includable subsidiaries. Subject to the provisions of a tax sharing agreement,
income tax allocation is based upon separate return calculations.
The components of the Company's consolidated provision for income taxes
are as follows:
Year Ended December 31,
--------------------------------------
In thousands 1996 1995 1994
------- ------- ------
Current income taxes $ 9,992 $ 5,447 $3,217
Deferred income taxes 10,694 11,096 2,877
------- ------- ------
Tax provision $20,686 $16,543 $6,094
======= ======= ======
A reconciliation from the tax provision calculated at the federal statutory rate
of 35% to the actual tax is as follows:
Year Ended December 31,
--------------------------------------
In thousands 1996 1995 1994
------- ------- ------
Tax provision at statutory rate $ 26,736 $ 22,344 $ 11,431
Tax exempt interest and dividends (6,492) (5,816) (6,095)
Other, net 442 15 758
-------- -------- --------
Actual tax $ 20,686 $ 16,543 $ 6,094
======== ======== ========
The components of the net deferred income tax liability as of December
31, 1996 and 1995 are as follows:
December 31, 1996 December 31, 1995
----------------- -----------------
In thousands Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Contingency reserves $36,920 $31,364
Deferred policy acquisition costs 30,564 28,319
Deferred premium revenue 7,841 7,383
Unrealized capital gains 4,522 6,349
Tax and loss bonds $19,565 $17,896
Alternative minimum tax
credit carryforward 4,900 6,400
Losses and LAE reserves 4,575 3,360
Deferred income 2,137 2,475
Other 5,472 3,204 5,817 1,731
------- ------- ------- -------
$36,649 $83,051 $35,948 $75,146
======= ======= ======= =======
45
<PAGE>
Note 7 - LONG-TERM DEBT AND CREDIT FACILITY
The carrying value of the Company's long-term debt is as follows:
December 31,
---------------------------
1996 1995
------- -------
In thousands
Debentures, due 2003 $75,000 $75,000
1991 Notes, due 1996 1,400
1991 Note, due 2001 2,000
------- -------
Total $75,000 $78,400
======= =======
The debentures were issued at par and bear interest at 6.75% payable in
March and September each year. The debentures are non-callable and are general
unsecured and unsubordinated obligations of Enhance Financial.
The 1991 Notes due 1996 bore interest at 7.0% and were subject to
mandatory redemption by Enhance Financial in equal annual installments
throughout their term to maturity. The 1991 Note due 2001 bore interest at 8.4%
and was subject to mandatory redemption in equal annual installments throughout
the final five years of its term until maturity. Interest on the 1991 Notes was
payable semi-annually, on June 1 and December 1 of each year. In September 1996,
Enhance Financial redeemed the 1991 Notes and, in connection with such
redemption, incurred an interest penalty of $96,000.
Enhance Financial is a party to a credit agreement (the "Credit
Agreement") with a major commercial bank allowing Enhance Financial to borrow up
to $60 million (increased from $30 million in October 1996) to be used for
general corporate purposes. The Credit Agreement provides for a revolving credit
facility under which individual advances may be converted, at Enhance
Financial's discretion, into four-year term loans. Interest on advances under
the Credit Agreement is payable at the average of the then-current Eurodollar
rate on dollar deposits adjusted to reflect regulatory reserve requirements,
plus a margin equal to (i) .4% for advances under the revolving credit facility
or (ii) .5% for amounts outstanding under any term loan. Borrowings under the
Credit Agreement are conditioned on, among other things, the pledge by Enhance
Financial of the common stock of Enhance Re. The Credit Agreement prohibits the
Company from incurring additional indebtedness to the extent the resulting total
would exceed 25% of the Company's total capitalization as defined and includes
certain covenants, none of which significantly restrict the Company's operating
activities or dividend-paying ability. Enhance Financial borrowed under the
Credit Agreement $3 million in 1994, an additional $12 million in 1995 and a
further $27.5 million net in 1996, all of which was outstanding at December 31,
1996.
46
<PAGE>
Note 8 - SHAREHOLDERS' EQUITY AND DIVIDENDS
In 1992, Enhance Financial's board of directors authorized the
repurchase of up to 600,000 shares of its common stock and in 1994, increased
its authorization to 1,200,000 shares. Enhance Financial purchased 1,600,
404,800 and 471,300 shares of its common stock at an average price of $23.82,
$16.63, and $18.33 per share in 1996, 1995, and 1994, respectively. In December
1996, the board of directors canceled its prior authorization and authorized the
repurchase of up to 750,000 shares of Enhance Financial's common stock from that
date. Subsequent to year end, the Company purchased an additional 32,925 shares
at an average price of $36.15 per share.
In February 1996, Swiss Reinsurance Company purchased from Enhance
Financial and one of its shareholders, respectively, 600,000 and 400,000 shares
of Enhance Financial common stock at a purchase price of $24.48 per share.
In June 1996, Enhance Financial's charter was amended to authorize the
issuance of up to 5,000 shares of preferred stock, the terms of which are
determined by the board of directors upon issuance.
The New York Insurance Law requires financial guaranty insurers to
maintain a minimum policyholders' surplus of $65 million. When added to the
minimum policyholders' surplus of $3.4 million separately required for the other
lines of insurance which it is licensed to write, each of the Insurance
Subsidiaries is required to have an aggregate minimum policyholders' surplus of
$68.4 million.
Under the New York Insurance Law, the Insurance Subsidiaries may
declare or distribute dividends only out of earned surplus. The maximum amount
of dividends which may be paid by the Insurance Subsidiaries to Enhance
Financial without prior approval of the Superintendent of Insurance is subject
to restrictions relating to statutory surplus and net investment income as
defined by statute. Enhance Re declared and paid a total of $13.3 million in
dividends to Enhance Financial for the year ended December 31, 1996. Asset
Guaranty has paid no dividends since its inception. At December 31, 1996, the
Insurance Subsidiaries had $21.2 million available for dividend distribution.
Under the terms of the Credit Agreement, the maximum amount of
dividends which may be paid by Enhance Financial as of December 31, 1996 was
$31.2 million.
Note 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amount the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Fixed maturity securities - The fair values of fixed maturity
securities are based on quoted market prices or dealer quotes.
Short-term investments - Fair values of short-term investments are
assumed to equal cost.
Deferred premium revenue - The fair value of the Company's deferred
premium revenue is based on the estimated cost of entering into a cession of the
entire portfolio with third-party reinsurers under
47
<PAGE>
market conditions. This figure was determined by using the statutory basis
unearned premiums adjusted for ceding commission based on current market rates.
Loss and loss adjustment reserves - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with a general estimate for non-specific reserves. Therefore, the
carrying amount is a reasonable estimate of the fair value of the reserve.
Long-term debt - The fair value is estimated based on the quoted market
prices for the same or similar issue or on the current rates offered to the
Company for debt of the same remaining maturities.
Short-term debt - The fair value of short-term debt, which bears
interest at variable rates, is assumed to equal the carrying value of the debt.
The carrying amounts and estimated fair values of these financial
instruments are as follows:
<TABLE>
<CAPTION>
In thousands December 31, 1996 December 31, 1995
----------------- -----------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Fixed maturity securities $757,576 $766,932 $695,586 $707,195
Common stock 878 878 729 729
Short-term investments 33,247 33,247 44,103 44,103
Liabilities:
Deferred premium revenue 266,204 227,123 248,051 209,760
Loss and loss
adjustment expense reserve 26,258 26,258 28,946 28,946
Long-term debt 75,000 74,933 78,400 81,162
Short-term debt 42,575 42,575 15,000 15,000
</TABLE>
Note 10 - INSURANCE IN FORCE
The Company principally insures and reinsures financial guaranties
issued to support public and private borrowing arrangements, including
commercial paper, bond financings, and similar transactions. Financial
guaranties are conditional commitments which guaranty the performance of a
customer to a third party.
The Company's potential liability in the event of nonperformance by the
issuer of the insured obligation is represented by its proportionate share of
the aggregate outstanding principal and interest payable ("insurance in force")
on such insured obligation. At December 31, 1996, the Company's aggregate
insurance in force was $56.6 billion. The Company's insured portfolio as of
December 31, 1996 was broadly diversified by geographic and bond market sector
with no single credit representing more than 1% of the Company's net insurance
in force.
48
<PAGE>
The composition of the Company's insurance in force by type of issue
and by state of issue was as follows:
TYPE OF ISSUE
In billions December 31,
------------------------
1996 1995
--------- ---------
General obligation and other tax backed $ 15.8 $ 15.6
Non-municipal 12.2 11.0
Utilities 9.2 8.9
Health care 6.2 6.3
Airport/Transportation 5.9 5.2
Housing 1.5 1.4
Other municipal 2.3 2.2
Other insurance businesses 3.5 2.8
--------- ---------
Total $ 56.6 $ 53.4
========= =========
STATE OF ISSUE
In billions December 31,
------------------------
1996 1995
--------- ---------
California $ 6.9 $ 6.7
New York 6.2 5.7
Florida 4.2 4.2
Texas 3.1 3.0
Pennsylvania 3.1 3.1
Illinois 2.6 2.5
Other (each less than 4%) 30.5 28.2
--------- ---------
Total $ 56.6 $ 53.4
========= =========
The Company controls its exposure to credit risk through a structured
underwriting process which includes detailed credit analysis, review of
primaries' underwriting guidelines, surveillance policies and procedures, and
the use of reinsurance.
Note 11 - RELATED PARTY TRANSACTIONS
The Company makes available to Singer a LIBOR-based secured revolving
credit facility, up to a maximum of $17.0 million, for its use in originating
assets for securitization. In addition, the Company provides to Singer a
LIBOR-based working capital credit line. At December 31, 1996, $13.7 million and
$3.3 million were outstanding under the secured credit facility and working
capital credit line, respectively.
Note 12 - EMPLOYEE BENEFITS
The Company maintains a non-contributory defined benefit pension plan
for the benefit of all eligible employees. Employer contributions are based upon
a fixed percentage of employee salaries
49
<PAGE>
determined at the discretion of the Company. Plan assets consist primarily of
U.S. government and corporate debt securities.
The actuarially computed net pension cost for 1996, 1995, and 1994
using the projected unit credit actuarial method of attribution includes the
following components:
<TABLE>
<CAPTION>
In thousands Year Ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 1,298 $ 1,225 $ 1,701
Interest cost on projected benefit obligation 485 396 287
Actual return on plan assets (579) (320) 223
Net amortization and deferral 205 55 (524)
------- ------- -------
Net periodic pension cost $ 1,409 $ 1,356 $ 1,687
======= ======= =======
</TABLE>
The following table sets forth the funding status of the plan and the
accrued pension cost recognized in the Company's consolidated balance sheets:
50
<PAGE>
<TABLE>
<CAPTION>
In thousands December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Accumulated benefits obligation, including vested
benefits of $4,457, $4,879 and $5,122 $(4,635) $(5,809) $(5,532)
------- ------- -------
Projected benefit obligation $(6,475) $(8,824) $(7,024)
Plan assets at fair value 4,437 5,053 3,856
------- ------- -------
Projected benefit obligation in excess of plan assets (2,038) (3,771) (3,168)
------- ------- -------
Unrecognized prior service cost 1,014 1,067 (92)
Unrecognized transition net asset 16 17 19
Unrecognized net (gain)loss (2,717) 189 1,446
------- ------- -------
Accrued pension cost $(3,725) $(2,498) $(1,795)
======= ======= =======
</TABLE>
Actuarial assumptions utilized to determine the projected benefit
obligation and estimated unrecognized net (gain) loss were as follows:
1996 1995 1994
---- ---- ----
Discount rate 7.5% 5.5% 5.5%
Expected long-term rate of return on plan assets 8.5% 8.5% 8.5%
Rate of increase in future compensation levels 6.0% 6.0% 6.0%
In addition to pension benefits, the Company provides certain health
care benefits for retired employees. Substantially all employees of Enhance
Financial and the Insurance Subsidiaries may become eligible for these benefits
if they reach retirement age while working for the Company.
The net post-retirement benefit cost for 1996, 1995 and 1994 was
$118,000, $105,000, and $88,000, respectively, and includes service cost,
interest cost and amortization of the transition obligation.
At December 31, 1996 the accumulated post-retirement benefit obligation
was $484,000 and was not funded. The discount rate used in determining the
accumulated post-retirement benefit obligation was 7% and the health care cost
trend rate was 13%, graded to 6% over 8 years.
On January 1, 1996, the Company implemented a 401(k) retirement savings
plan covering substantially all employees of the Company. Under this plan, the
Company provides a matching contribution of 25% on contributions up to 6% of
base salary made by eligible employees to the plan. The Company contributed
$110,000 to the plan in 1996.
Note 13 - STOCK OPTION AND RESTRICTED STOCK AWARD PROGRAMS
The Company maintains a stock option program for its key employees.
Options issued under the program vest in four equal annual installments
commencing approximately one year after the date of grant.
The Company also maintains a directors' option program pursuant to
which directors of Enhance Financial or the Insurance Subsidiaries who are not
employees of the Company are granted non-qualified stock options. Options under
this program vest in two equal annual installments commencing on December 31
next following the date of grant. Options under both plans are exercisable at
the option price, being the fair market value at the date of grant. The Board of
Directors of Enhance Financial has authorized a maximum of 3,367,950 shares of
the Company's common stock to be awarded as options of which
51
<PAGE>
2,810,985 options (net of expirations and cancellations) had been awarded as of
December 31, 1996. Information regarding activity in the option programs
follows:
1996 Number Option Price
of shares per share
--------- ------------
Outstanding at beginning of year 2,415,721 $14.50 - $26.625
Granted - Employees 400,110 $26.875 $34.00
- Directors 26,000 $36.50
Exercised (231,275) $14.50 - $20.25
Expired or canceled (57,446) $16.00 - $23.875
---------
Outstanding at year-end 2,553,110 $14.50 - $36.50
---------
Exercisable at year-end - Employees 1,321,457 $14.50 - $23.875
- Directors 143,333 $17.125 -$26.625
---------
1995 Number Option Price
of shares per share
--------- ------------
Outstanding at beginning of year 1,944,759 $14.50 - $20.25
Granted - Employees 490,350 $17.25 - $23.875
- Directors 30,000 $26.625
Exercised (24,575) $14.50 - $20.25
Expired or canceled (24,813) $16.00 - $20.25
---------
Outstanding at year-end 2,415,721 $14.50 - $26.625
---------
Exercisable at year-end - Employees 1,166,213 $14.50 - $20.25
- Directors 114,333 $17.125 - $19.875
---------
1994 Number Option Price
of shares per share
--------- ------------
Outstanding at beginning of year 1,502,100 $14.50 - $20.25
Granted - Employees 459,100 $16.00
- Directors 30,000 $17.125
Exercised (3,275) $14.50
Expired or canceled (43,166) $14.50 - $20.25
---------
Outstanding at year-end 1,944,759 $14.50 - $20.25
---------
Exercisable at year-end - Employees 250,026 $14.50 - $20.25
- Directors 83,333 $19.50 - $19.875
---------
No shares have been issued under the Company's restricted stock award
program since 1989. Total compensation expense of $79,000, $157,000, and
$211,000 was recognized related to services rendered in 1996, 1995 and 1994,
respectively.
The Company applies the provisions of APB Opinion No.25 "Accounting for
Stock Issued to Employees" in accounting for its stock option program.
Accordingly, no compensation expense has
52
<PAGE>
been recognized for options granted under its stock option program, and the
Company has adopted the disclosure-only provisions of SFAS No.123, "Accounting
for Stock-Based Compensation." Had compensation cost for the Company's stock
option program been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
1996
----
Net income - as reported $55,704
Net income - pro forma $55,046
Primary earnings per share - as reported $ 3.12
Primary earnings per share - pro forma $ 3.08
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions were
used for option grants awarded in 1996 and 1995:
Options Granted
1996 1995
---- ----
Dividend Yield 1.1% to 1.5% 1.4% to 2.0%
Volatility 20.5% to 30.3% 26.5% to 31.1%
Risk-free interest rate 6.2% to 6.8% 5.6% to 7.2%
Assumed annual forfeiture rate 3.0% 3.0%
Expected life 10 years 10 years
Note 14 - COMMITMENTS AND CONTINGENCIES
A. Leases
The Company has committed to lease office space under non-cancelable
leases which expire in August 1999, December 1999, April 2000 and August 2000.
The leases provided for escalations resulting from increased assessments for
taxes, utilities and maintenance. Future minimum rental payments on all leases,
before any deductions for estimated sublease income, are as follows:
53
<PAGE>
In thousands Operating
Years Ended December 31, Leases
---------
1997 $2,161
1998 2,147
1999 2,059
2000 754
------
$7,121
======
Rent expense was $1,139,000, $1,236,000 and $1,515,000 for the years
ended December 31, 1996, 1995 and 1994, respectively, net of sublease income.
B. Accrued Profit Commissions
According to the terms of a number of the Company's treaty reinsurance
contracts, the Company is required to pay the ceding companies a contingent
commission based upon a percentage of the net underwriting profit, as defined,
accruing to the Company under these treaties. Under the terms of most of these
contracts, each individual underwriting year is required to be adjusted no
earlier than five years after its inception, and adjustments are to be made
annually thereafter until all written premiums are fully earned and all losses
are settled.
54
<PAGE>
Note 15 - PARENT COMPANY FINANCIAL INFORMATION
The following are the condensed balance sheets of Enhance Financial as
of December 31, 1996 and 1995 and its condensed statements of income and cash
flows for the years ended December 31, 1996, 1995 and 1994:
CONDENSED BALANCE SHEETS
In thousands December 31,
------------------
1996 1995
---- ----
Assets:
Investments $ 10,213 $ 3,790
Investment in affiliated companies 563,395 501,713
Other assets 38,386 21,218
-------- --------
$611,994 $526,721
======== ========
Liabilities and Shareholders' Equity:
Long-term debt $ 75,000 $ 78,400
Other liabilities 48,645 24,384
Shareholders' equity 488,349 423,937
-------- --------
$611,994 $526,721
======== ========
CONDENSED STATEMENTS OF INCOME
In thousands Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Total revenues $ 1,312 $ 272 $ 253
Total expenses 12,343 11,321 8,459
-------- -------- --------
(11,031) (11,049) (8,206)
Equity in net income of affiliates 61,727 55,873 30,117
-------- -------- --------
Income before income taxes 50,696 44,824 21,911
Income tax benefit 5,008 2,473 4,654
-------- -------- --------
Net income $ 55,704 $ 47,297 $ 26,565
======== ======== ========
55
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 55,704 $ 47,297 $ 26,565
Adjustments to reconcile net income to
net cash from operating activities:
Equity in net income of affiliates (61,727) (55,873) (30,117)
Other (22,188) (3,577) 782
-------- -------- --------
Net cash used in operating activities (28,211) (12,153) (2,770)
-------- -------- --------
Cash Flows from Investing Activities:
Investment in affiliates net of dividends
received (3,423) 14,328 18,062
Purchase of investments (2,456) (2,787)
Sale of investments 750 1,498
Sales of short-term investments, net (5,529) 837 138
-------- -------- --------
Net cash provided by (used in) investing activities (8,202) 14,207 15,413
-------- -------- --------
Cash Flows from Financing Activities:
Capital stock 4,843 401 87
Short-term debt 27,500 12,000 3,000
Dividends paid (7,198) (6,223) (5,711)
Principal payment - senior notes (3,400) (1,400) (1,400)
Reissuance of treasury stock 14,485
Purchase of treasury stock (38) (6,732) (8,645)
-------- -------- --------
Net cash provided by (used in) financing activities 36,192 (1,954) (12,669)
-------- -------- --------
Net increase (decrease) in cash (221) 100 (26)
Cash, beginning of year 221 121 147
-------- -------- --------
Cash, end of year $ -- $ 221 $ 121
======== ======== ========
</TABLE>
Note 16 - MAJOR CUSTOMERS
The Company derives a substantial portion of its premium writings from
a small number of primary insurers. Specifically:
o In 1996 four primary insurers accounted for 18%, 14%, 10% and 7% of
gross premiums written.
o In 1995 four primary insurers accounted for 22%, 18%, 8% and 8% of
gross premiums written.
o In 1994 four primary insurers accounted for 23%, 23%, 9% and 7% of
gross premiums written.
This customer concentration results from the small number of primary
insurance companies which are licensed to write financial guaranty insurance.
Note 17 - LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for losses and loss adjustment expenses
("LAE") is summarized as follows:
56
<PAGE>
In thousands Year Ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
Balance at January 1, $30,799 $29,337 $ 8,947
Less reinsurance recoverables 1,853 2,620 194
------- ------- -------
Net balance at January 1, 28,946 26,717 8,753
------- ------- -------
Net incurred related to:
Current year 6,087 3,491 9,921
Prior years 3,097 6,022 12,921
------- ------- -------
Net incurred 9,184 9,513 22,842
------- ------- -------
Net paid related to:
Current year 587 2,705 3,216
Prior years 11,285 4,579 1,662
------- ------- -------
Net paid 11,872 7,284 4,878
------- ------- -------
Net balance at December 31, 26,258 28,946 26,717
Plus reinsurance recoverables 1,823 1,853 2,620
------- ------- -------
Balance at December 31, $28,081 $30,799 $29,337
======= ======= =======
The liability for losses and LAE increased by $3.1 million, $6.0
million and $12.9 million in 1996, 1995, and 1994, respectively, principally as
a result of changes in estimates of ultimate loss on certain real estate-backed
transactions in the Company's discontinued commercial real estate portfolio. The
terms "current year" and "prior years" in the foregoing table refer to the year
in which case reserves were established.
Note 18 - INTEREST RATE SWAP
In January 1995, the Company entered into a reverse interest-rate swap
transaction with a AAA-rated counterparty based on a notional amount of $50
million over a term equal to the remaining term of Enhance Financial's 6.75%
Debentures. Pursuant to the terms of the swap, the Company incurred an
obligation to pay interest semi-annually at a variable LIBOR-based interest rate
in exchange for interest at a fixed rate of 8.00%. The variable rate was set
quarterly in advance. The variable rate for the initial period to the first
reset date was 6.1875%.
On June 1, 1995, the Company terminated the swap and realized a gain on
termination in the amount of $4.6 million. The gain has been deferred and is
being amortized over the original term of the swap.
57
<PAGE>
Note 19 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
In thousands except share amounts
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
<S> <C> <C> <C> <C> <C>
1996
Net premiums written $20,447 $25,172 $20,836 $ 29,207 $95,662
Premiums earned 19,252 17,825 18,704 21,652 77,433
Investment and other income 13,371 11,081 13,226 17,190 54,868
Losses and loss adjustment expenses 2,377 1,964 2,083 2,760 9,184
Income before income taxes 18,074 15,825 18,656 23,835 76,390
Net income $13,239 $11,880 $13,850 $ 16,735 $55,704
------- ------- ------- -------- -------
Primary earnings per share $ 0.76 $ 0.66 $ 0.77 $ 0.90 $ 3.12
------- ------- ------- -------- -------
Fully diluted earnings per share $ 0.73 $ 0.64 $ 0.74 $ 0.89 $ 3.00
------- ------- ------- -------- -------
1995
Net premiums written $11,557 $24,622 $18,411 $ 28,398 $82,988
Premiums earned 14,211 15,948 15,247 17,544 62,950
Investment and other income 11,026 10,351 12,324 15,805 49,506
Losses and loss adjustment expenses 2,401 2,270 2,044 2,798 9,513
Income before income taxes 13,680 14,631 15,818 19,711 63,840
Net income $10,454 $11,119 $11,694 $ 14,030 $47,297
------- ------- ------- -------- -------
Primary earnings per share $ 0.60 $ 0.64 $ 0.68 $ 0.81 $ 2.73
------- ------- ------- -------- -------
Fully diluted earnings per share $ 0.79 $ 2.64
-------- -------
1994
Net premiums written $23,143 $22,382 $14,781 $ 20,379 $80,685
Premiums earned 13,245 15,176 17,337 15,999 61,757
Investment and other income 10,813 7,460 8,502 7,161 33,936
Losses and loss adjustment expenses 1,795 2,648 4,108 14,291 22,842
Income before income taxes 13,509 10,033 10,698 (1,581) 32,659
Net income (loss) $10,445 $ 8,001 $ 8,585 $ (466) $26,565
------- ------- ------- -------- -------
Earnings (loss) per share $ 0.58 $ 0.45 $ 0.48 $ (0.03) $ 1.49
------- ------- ------- -------- -------
</TABLE>
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
None.
58
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below is certain information concerning directors and
executive officers of Enhance Financial. Each director holds office (subject to
Enhance Financial's by-laws) until the next annual meeting of shareholders and
until his or her successor has been elected and qualified. The information
concerning the directors has been furnished by them to Enhance Financial.
Name Age (1) Position with Enhance Financial
- ---- ------- -------------------------------
Allan R. Tessler 60 Chairman of the Board
Wallace O. Sellers 67 Vice Chairman of the Board
Daniel Gross 54 President, Chief Executive Officer and
Director
Samuel Bergman 49 Executive Vice President and Secretary
Ronald M. Davidow 47 Executive Vice President
Arthur Dubroff 46 Executive Vice President and Chief Financial
Officer
Tony M. Ettinger 40 Executive Vice President
Paul C. Kwiatkoski 41 Executive Vice President
Robert M. Rosenberg 51 Executive Vice President
Brenton W. Harries 69 Director
David R. Markin 66 Director
Robert P. Saltzman 54 Director
Richard J. Shima 57 Director
Spencer R. Stuart 74 Director
Adrian U. Sulzer 50 Director
Frieda K. Wallison 54 Director
Jerry Wind 59 Director
- ----------
(1) As of March 15, 1997
Mr. Tessler has held the position with Enhance Financial set forth
above since its inception. He has also since 1987 been Chairman of the Board and
Chief Executive Officer of International Financial Group, Inc., a merchant
banking concern, and since 1992 served as Co-Chairman of the Board and Co-Chief
Executive Officer of Data Broadcasting Corporation ("DBC"), a provider of market
data services to the investment community. He also serves as Chairman of the
Board and Chief Executive Officer of Ameriscribe Corporation, a provider of
reprographic and related facilities management services, from 1988 to 1993. Mr.
Tessler is also Chairman of the Board of Jackpot Enterprises Inc. ("Jackpot")
and a director of The Limited, Inc.
Mr. Sellers has held the position with Enhance Financial set forth
above since January 1, 1995, and he also serves as a consultant to the Company.
Prior thereto, he served as President, Chief Executive Officer and a director of
Enhance Financial and Chairman of the Board and Chief Executive Officer of the
Insurance Subsidiaries from their inception. Mr. Sellers also serves as a
director of Danielson Holding Corporation.
Mr. Gross has held the position with Enhance Financial set forth above
and has served as Chief Executive Officer of the Insurance Subsidiaries since
January 1, 1995. Prior thereto he held senior executive positions with Enhance
Financial and Enhance Re from their inception and was among the founders of the
59
<PAGE>
Company in 1986. Previously, he was President of Daniel J. Gross & Associates
and was a co-founder and Chairman of F.G. Holding Company. Mr. Gross also was
President of Kramer Capital Consultants and worked for Colonial Penn Group as
President of Colonial Penn Insurance Company and Vice President of Marketing for
Colonial Penn Group, and Vice President and Actuary of Colonial Penn Life.
Mr. Bergman has been Executive Vice President of the Company since
1991. He has been Secretary of Enhance Financial since 1991 and Secretary of
each of the Insurance Subsidiaries since their inception. He was a member of the
law firm of Shea & Gould from 1980 to 1991.
Messrs. Davidow, Kwiatkoski and Rosenberg have each served as senior
executive officers of the Insurance Subsidiaries since such companies'
inception, and as officers of Enhance Financial since 1990.
Mr. Ettinger has held the position with Enhance Financial set forth
above since January 1995. From 1993 to 1995 he rendered consulting and strategic
planning services to life insurance companies, and previously thereto from 1989
he served as general partner of Hannibal Associates, L.P., an investment
partnership.
Mr. Dubroff has held the position with Enhance Financial set forth
above since July 1996. From November 1993 to July 1996, Mr. Dubroff served in
various senior management capacities at First Data Corporation, a provider of
high-volume information processing and related services. Previously thereto from
1992, he served as Executive Vice President of Shearson Lehman Brothers, Inc.
and as Chief Financial Officer of its Securities Processing Group. Mr. Dubroff
served as a director of Enhance Financial from 1986 to 1991 and 1992 to July
1996 and of Enhance Re from 1986 to 1992.
Mr. Harries has served as a director of Enhance Financial since 1991,
having previously served as a director of the Insurance Subsidiaries since 1986.
He has been retired since 1986, having previously served from 1985 as President
of Global Electronic Markets Company, a joint venture of McGraw-Hill and
Citicorp dealing in electronic trading of commodities. Mr. Harries also serves
as a trustee of the Alliance Funds, Inc. and the Hudson River Trust.
Mr. Markin has served as a director of Enhance Financial since 1986. He
has served as President of Checker Motors Corporation for more than five years.
From 1989 to December 1996, he also served as President and Chief Executive
Officer of International Controls Corp. and its successor corporation, Great
Dane Holdings, Inc. Mr. Markin serves as a director of Jackpot and DBC.
Mr. Saltzman has served as a director of Enhance Financial since
September 1996. He has been President and Chief Executive Officer of Jackson
Life Insurance Company since 1994. He previously served from 1983 as Executive
Vice President of SunAmerica Inc. and as President of its subsidiary life
insurance company.
Mr. Shima has served as a director of Enhance Financial since 1993. He
has been an independent consultant since 1993, having previously thereto from
1992 served as Managing Director of Russell Miller, Inc., an investment banking
concern specializing in the insurance industry. He previously served from 1963
as an officer of The Travelers Corporation, most recently, from 1985 to 1991, as
Vice Chairman and Chief Investment Officer. Mr. Shima serves as a director of
Connecticut Natural Gas Corporation and the Keystone Mutual Funds.
Mr. Stuart has served as a director of Enhance Financial since 1992,
having also served as a director of Asset Guaranty from its inception until
1995. He has for the last ten years served as an independent
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consultant regarding organizational and personnel matters. He served from 1990
to 1992 as Chairman of the Council of Management Advisors of Dean Witter
Reynolds Inc. He is the founder and honorary chairman of Spencer Stuart
Executive Recruiting Consultants and serves as a director of UST Inc.
Mr. Sulzer has served as a director of Enhance Financial since March
1996. He has served in various management capacities with Swiss Re, a
shareholder of Enhance Financial, since January 1991 as head of its credit and
bonding department.
Ms. Wallison has served as a director of Enhance Financial since 1992,
having also served as a director of each of the Insurance Subsidiaries since its
inception until 1995. She has since 1983 been a member of the law firm of Jones,
Day, Reavis & Pogue, resident in its Washington, D.C. office.
Mr. Wind has served as a director of Enhance Financial since September
1996. He has been on the faculty of the Wharton School of the University of
Pennsylvania since 1967, currently serving as The Lauder Professor and Professor
of Marketing. He also serves as a business consultant to several publicly and
privately held, U.S. and non-U.S. corporations and has served on the editorial
boards of and as a contributor to numerous journals on marketing.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers, based on salary and bonus earned during
1996. Except as described below in this item under "Employment Agreement," the
Company has not entered with any executive officer into (i) an employment
agreement or (ii) any compensatory plan or arrangement which is activated upon
the resignation, termination or retirement of the executive officer or upon a
change in control of the Company or change in the executive officer's
responsibilities following a change in control.
Long-Term
Annual Compensation Compensation(1)
------------------- ---------------
Securities
Underlying
Name and Principal Position Year Salary Bonus Options/SARs
- --------------------------- ---- ------ ----- ------------
Daniel Gross 1996 $480,000 $675,000 75,000
President and Chief 1995 450,000 420,000 60,000
Executive Officer 1994 422,500 172,000 60,000
Samuel Bergman 1996 301,042 145,000 14,000
Executive Vice President 1995 293,125 100,000 20,000
and Secretary 1994 276,458 82,500 20,000
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Long-Term
Annual Compensation Compensation(1)
------------------- ---------------
Securities
Underlying
Name and Principal Position Year Salary Bonus Options/SARs
- --------------------------- ---- ------ ----- ------------
Ronald M. Davidow 1996 260,625 127,500 13,500
Executive Vice President 1995 250,833 87,000 20,000
1994 236,250 70,500 17,500
Robert M. Rosenberg 1996 272,460 100,000 13,500
Executive Vice President 1995 258,708 97,000 22,500
1994 236,874 70,500 20,000
Tony M. Ettinger(2) 1996 261,041 132,500 14,000
Executive Vice President 1995 211,718 100,000 15,000
- ----------
(1) Does not reflect the aggregate number and market value (based on the
closing price of the Common Stock on the New York Stock Exchange),
respectively, of the unvested restricted shares of Common Stock issued in
prior years pursuant to the Long-Term Incentive Plan for Key Employees (the
"Incentive Plan") and held as of December 31, 1996 as follows: Mr. Gross,
3,550 shares, $130,000; Mr. Rosenberg, 1,375 shares, $50,000; and Mr.
Davidow, 1,375 shares, $50,000. No restricted shares have been issued since
1989.
(2) Became an officer of the Company in 1995.
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<PAGE>
Option/SAR Grants During 1996
The following table provides information regarding stock options/SARs
granted to the named executive officers during 1996:
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------
Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Grant Date
Name and Options Fiscal Exercise or Expiration Present Value
Principal Position Granted Year Base Price Date (2)
- ------------------ ---------- ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Daniel Gross
President and Chief
Executive Officer 75,000 21.9 $34.00 12/31/06 $810,750
Samuel Bergman
Executive Vice President
and Secretary 14,000 4.1 34.00 12/31/06 151,340
Ronald M. Davidow
Executive Vice President 13,500 3.9 34.00 12/31/06 145,935
Robert M. Rosenberg
Executive Vice President 13,500 3.9 34.00 12/31/06 145,935
Tony M. Ettinger
Executive Vice President 14,000 4.1 34.00 12/31/06 151,340
</TABLE>
- ----------
(1) Options granted pursuant to the Incentive Plan. Such options vest,
subject to continuation of employment, in 25% increments during the
consecutive four-year period commencing December 31, 1997. The options are
not transferable except by the laws of descent and distribution and,
accordingly, may be exercised during the life of the optionee only by the
optionee or the optionee's legal representative and after the optionee's
death only by the beneficiary previously designated by the optionee.
(2) The present value is, in each case, based upon the Black-Scholes option
valuation model. Such valuation assumes a volatility of 20.5%, a risk-free
rate of return of 6.2%, a dividend yield of 1.15% and a discount due to the
risk of forfeiture of 3.0%. The valuation assumes no specific time of
exercise since this is viewed by the Company as entirely indeterminate, but
takes into account the term of the option, ten years in each case. The
actual value, if any, an executive may realize will depend on the excess of
the stock price over the exercise price on the date the option is
exercised, so that there is no assurance the value realized will be at or
near the value estimated by the Black-Scholes model.
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<PAGE>
Aggregated Option/SAR Exercises During 1996
and Fiscal Year-End Option Values
- -------------------------------------------
The following table provides information as to the named executive
officers regarding stock option exercises and the number and value of stock
options/SARs held by them at December 31, 1996.
<TABLE>
<CAPTION>
No. of Securities Underlying Value of Unexercised In-The-
Unexercised Stock Options/ Money Options/SARs at
Shares SARs at December 31, 1996 December 31, 1996(1)
Acquired ---------------------------- ----------------------------
Name and on Value
Principal Position Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel Gross
President and Chief
Executive Officer -0- -0- 211,875 160,625 $3,865,391 $1,549,922
Samuel Bergman
Executive Vice President
and Secretary 2,000 42,500 65,625 43,375 1,138,984 503,204
Robert M. Rosenberg
Executive Vice President -0- -0- 83,750 44,750 1,541,250 525,625
Ronald M. Davidow
Executive Vice President 37,500 580,000 44,375 41,625 748,359 476,329
Tony M. Ettinger
Executive Vice President -0- -0- 13,125 40,875 215,391 183,281
</TABLE>
- ----------
(1) Calculated on the basis of (a) the excess of the closing price of the
Common Stock as reported by the New York Stock Exchange on December 31,
1996 over the option exercise price multiplied by (b) the number of shares
of Common Stock underlying the option.
Enhance Reinsurance Pension Plan
The Company maintains a defined benefit pension plan named the "Enhance
Reinsurance Pension Plan" (the "Pension Plan") which is intended to be a
tax-qualified plan under Section 401(a) of the Code. All employees of the
Company (other than Van-Am) who have attained age 21 and who have completed at
least one year of service are eligible to participate in the Pension Plan. The
Pension Plan provides a normal retirement benefit at normal retirement (the
earlier of the date on which a participant (a) has attained age 65 and completed
five years of participation or (b) has attained age 62 and completed ten years
of participation) equal to 2.25% of the participant's compensation multiplied by
his or her years of service up to his or her first 15 years, plus 1.75% of the
participant's compensation multiplied by his or her years of service for his or
her next ten years, plus 1% of the participant's compensation multiplied by his
or her years of service for his or her next five years. Compensation is defined
as the average of the participant's three highest consecutive
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years of earnings. (See Note 2 to the table below regarding the maximum
compensation considered "earnings" for the foregoing purposes. No such maximum
applies with respect to the determination of compensation for purposes of the
Summary Compensation Table above in this item.) A participant whose service
terminates prior to normal retirement is also eligible for percentage of his or
her normal retirement benefit at normal retirement date multiplied by a
retirement benefit, payable at normal retirement age, in an amount equal to the
vested fraction, the numerator of which is the number of years of plan
participation by him or her as of the date of his or her termination and the
denominator of which is the number of years of participation he or she would
have had under the Pension Plan had he or she remained a participant until
normal retirement. The actuarial equivalent of such vested benefit may be
distributed in a lump sum prior to normal retirement age. The vested percentage
of a participant increases 20% per year beginning after two years of service,
such that his or her vested percentage is 100% after six years. For purposes of
determining a participant's retirement benefit and vested percentage, "years of
service" and "years of participation," while not synonymous, include service
with the Company and certain service with predecessor employers.
The following table illustrates annual pension benefits payable under
the Pension Plan assuming retirement at normal retirement age at various levels
of compensation and years of service. Such benefits are based on a straight life
annuity and are not subject to any deduction for Social Security or other offset
amounts.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Highest
Average Years of Service
Earnings ----------------------------------------------------------------------
15 20 25 30 35*
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 33,750 $ 42,500 $ 51,250 $ 56,250 $ 56,250
125,000 42,188 53,125 64,063 70,313 70,313
150,000 50,625 63,750 76,875 84,375 84,375
175,000(2) 59,063 74,375 89,688 98,438 98,438
200,000(2) 67,500 85,000 102,500(1) 112,500(1) 112,500(1)
225,000(2) 75,938 95,625 115,313(1) 126,563(1) 126,563(1)
250,000(2) 84,375 106,250(1) 128,125(1) 140,625(1) 140,625(1)
300,000(2) 101,250(1) 127,500(1) 153,750(1) 168,750(1) 168,750(1)
400,000(2) 135,000(1) 170,000(1) 205,000(1) 225,000(1) 225,000(1)
450,000(2) 151,875(1) 191,250(1) 230,625(1) 253,125(1) 253,125(1)
500,000(2) 168,750(1) 212,500(1) 256,250(1) 281,250(1) 281,250(1)
</TABLE>
- ----------
* Plan limits service to 30 years for benefit purposes.
(1) These are hypothetical benefits based upon the Pension Plan's normal
retirement benefit formula. The maximum annual benefit permitted under
Section 415 of the Code in 1996 is $96,000, which will be increased in 1997
to $100,000.
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<PAGE>
(2) The benefits shown corresponding to these compensation ranges are
hypothetical benefits based upon the Pension Plan's normal retirement
benefit formula. Under Section 401(a)(17) of the Code, a participant's
compensation in excess of a specified maximum is disregarded for purposes
of determining highest average earnings. (Such specified maximum amount (as
adjusted to reflect cost of living increases) November 1, 1994 and
decreased to $150,000 for plan years beginning thereafter.)
As of December 31, 1996, Messrs. Gross, Bergman, Rosenberg, Davidow and
Ettinger had nine, four, fifteen, twelve and one year of service, respectively,
and nine, four, nine, nine and one year of participation, respectively, under
the Pension Plan.
Employment Agreement
Enhance Financial and Arthur Dubroff, Executive Vice President and
Chief Financial Officer, are parties to an employment agreement which provides
for the payment of an annual base salary to Mr. Dubroff of not less than
$275,000 plus an annual bonus of not less than 45% of such base salary. Under
the employment agreement, Mr. Dubroff was granted in 1996 options to purchase
75,000 shares of Common Stock and is entitled to annual grants of stock options
to purchase 20,000 shares of Common Stock in each of 1997 and 1998 (or, at
Enhance Financial's election, the cash value thereof). If Mr. Dubroff's
employment is terminated by Enhance Financial within a 12-month period following
a change of control (as defined), Enhance Financial is required to pay Mr.
Dubroff a prorated portion of his annual bonus and, for the greater of the
remainder of the term of his employment agreement and 12 months from the date of
termination of his employment, his base salary. The employment agreement
terminates on December 31, 1999, unless renewed by the parties.
Directors' Compensation
Cash Compensation. Directors who are employees of the Company receive
no fees or other compensation for services rendered as members of the board of
directors of Enhance Financial. Mr. Tessler received a basic fee of $105,000 in
1996, and each other director of Enhance Financial who is not employed by the
Company received a basic fee of $16,000. In addition, each such outside director
who also served as chair of any committee of the board received in 1996 an
additional $5,000 for all committees chaired by such director. Each outside
director also received an additional $2,000 for each regular meeting of the
board of directors attended plus $1,250 for each committee meeting attended
which was held on a day other than a day on which the board met. No directors'
fees were payable to corporate shareholders in respect of directorships occupied
by their designees. All directors are reimbursed for travel and related expenses
incurred in attending meetings of the board or committees.
Non-Employee-Director Stock Option Plan. Pursuant to the Directors'
Option Plan, on each December 31 during the period in which the plan is in
effect, each director of Enhance Financial or either Insurance Subsidiary who is
not an employee of the Company (an "Eligible Director") is granted a
non-qualified stock option to purchase 2,000 shares of Common Stock at an
exercise price equal to the closing price of the Common Stock on the New York
Stock Exchange on such date. There are reserved for issuance upon the exercise
of options under the Directors' Option Plan an aggregate of 400,000 shares of
Common
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<PAGE>
Stock (subject to anti-dilutive adjustment), of which options for 178,333 shares
were subject to outstanding options after the option grants made on December 31,
1996.
Options granted under the Directors' Option Plan become exercisable as
to one half the shares subject thereto on each of the first and second
anniversaries of grant, subject to continuation of service on the board of
directors and other terms of the option grants; expire on the tenth anniversary
of the date of grant; are not transferrable except by the laws of descent and
distribution; and, accordingly, may be exercised during the life of the optionee
only by the optionee or the optionee's legal representative and after the
optionee's death only by the beneficiary previously designated by the optionee.
The unvested portion of an outstanding option lapses upon the resignation or
removal of the optionee from the boards of directors of Enhance Financial and
the Insurance Subsidiaries.
Compensation Committee Interlocks and Insider Participation
The persons who served as members of the Compensation Committee during
1996 are Spencer R. Stuart (Chairman), Brenton W. Harries, David R. Markin,
Richard J. Shima and Allan R. Tessler. The only person of the foregoing who is
currently or has at any time been an officer or employee of the Company is Mr.
Tessler, who serves as Chairman of the Board of Enhance Financial.
The Manufacturers Life Insurance Company ("Manufacturers Life"), a
major shareholder of Enhance Financial until April 1996, and American Country
Insurance Company ("American Country"), a majority-owned subsidiary of Great
Dane, of which Messrs. Markin and Tessler serve as directors, were,
respectively, holders of two of the 1991 Notes, all of which 1991 Notes were
prepaid in November 1996. The 1991 Notes held by Manufacturers Life and American
Country bore interest at the rate of 7% per annum and, upon payment, were in the
remaining respective principal amounts of $1.2 million and $300,000. Based on
its experience in connection with their placement, the Company believes that the
terms of the 1991 Notes were no less favorable to the Company than would obtain
were they all issued to purchasers unaffiliated with the Company.
Non-Competition Agreements
Messrs. Tessler, Sellers, and Gross are parties to non-competition
agreements with Enhance Financial prohibiting them from, among other things,
competing with the Company for a period of two years following their respective
cessation of employment by or service to the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 14, 1997 by (a) each
shareholder known to Enhance Financial to be the beneficial owner, within the
meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of more than 5% of the outstanding shares of Common Stock; (b)
each director of Enhance Financial; (c) each of the five most highly compensated
executive officers of Enhance Financial; and (d) all executive officers and
directors of Enhance Financial as a group. Unless otherwise indicated, the
address of each such person is c/o Enhance Financial Services Group Inc., 335
Madison Avenue, New York, New York 10017.
67
<PAGE>
Number of Percent
Name and Address Shares(1) of Class
- ---------------- --------- --------
U S WEST, Inc. ................................. 5,430,800(2)(3) 29.8
7800 East Orchard Road
Suite 200
Englewood, Colorado 80111
Franklin Resources, Inc. ....................... 945,100 5.2
777 Mariners Island Blvd
San Mateo, CA 94404
FMR Corp. ...................................... 974,000 5.4
82 Devonshire St
Boston, MA 02109
Swiss Reinsurance Company ...................... 1,000,000 5.5
Mythenquai 50/60
8022 Zurich
Switzerland
Allan R. Tessler ............................... 260,000(4)(5) 1.4
Wallace O. Sellers ............................. 412,125(4) 2.2
Daniel Gross .................................. 426,675(4) 2.3
Samuel Bergman ................................. 69,475(4) *
Robert M. Rosenberg ............................ 137,350(4) *
Ronald M. Davidow .............................. 105,475(4) *
Tony M. Ettinger ............................... -0- --
Brenton W. Harries ............................. 8,000(5) *
David R. Markin ................................ 109,000(5) *
Robert P. Saltzman ............................. 60,000(6) --
Richard J. Shima ............................... 6,000(5) *
Spencer R. Stuart .............................. 10,000(5) *
Adrian U. Sulzer ............................... -0- --
Frieda K. Wallison ............................. 13,400(5) *
Jerry Wind ..................................... 5,000 *
All executive officers and
directors as a group .......................... 1,685,370(7) 8.9
- ----------
* Less than 1%
(1) The table in this section is based upon information supplied by directors,
officers, and principal shareholders and Schedules 13D and 13G, if any,
filed with the Securities and Exchange Commission. Unless otherwise
indicated in the footnotes to the table and subject to the community
property laws where applicable, each of the stockholders named in this
table has sole voting and investment power with respect to the shares shown
as beneficially owned by him or her.
(2) In 1995, U S WEST consummated the sale of U S WEST's 7.625% Exchangeable
Notes due December 15, 1998 ("Debt Exchangeable for Common Stock" or
"DECS"). At maturity (including
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<PAGE>
as a result of acceleration or otherwise), the principal amount of the DECS
will be mandatorily exchanged by U S WEST for up to 5,430,800 shares of
Common Stock (or, at U S WEST's option under certain circumstances, the
cash equivalent thereof).
(3) See Item 13. "Certain Relationships and Related Transactions" for
information regarding special powers of U S WEST under Enhance Financial's
certificate of incorporation and the manner in which U S WEST has announced
its intention to vote the shares owned by it.
(4) Includes the shares set forth in: (a) Column A below issued to the named
officer under the Incentive Plan which have not vested, (b) Column B below
issuable to the named officer upon the exercise of presently exercisable
options granted under the Incentive Plan and (c) Column C below owned by
the named officer's wife and children or in trusts of which such officer is
a trustee (as to which shares such officer disclaims beneficial ownership).
Name A B C
---- --------------------------------------
Allan R. Tessler 0 29,000 2,000
Wallace O. Sellers 5,625 145,500 259,000
Daniel Gross 3,550 211,875 93,500
Samuel Bergman 0 65,625 3,850
Ronald M. Davidow 1,375 44,375 0
Robert M. Rosenberg 1,375 83,750 200
(5) Includes shares issuable upon the exercise of the presently exercisable
portion of options granted to such director under the Directors' Option
Plan, as follows: Brenton W. Harries -- 9,000 shares; David E. Markin --
9,000 shares; Richard J. Shima -- 5,000 shares; Spencer R. Stuart -- 9,000
shares; Allan R. Tessler -- 9,000 shares; and Frieda K. Wallison -- 9,000
shares.
(6) Held in a living trust account of which Mr. Saltzman and his wife are
co-trustees.
(7) Includes 57,000 shares issuable to the directors who are not employees of
the Company upon the exercise of the presently exercisable portion of
options granted to them under the Directors' Option Plan; 620,875 shares
issuable to the executive officers upon the exercise of presently
exercisable options granted to them under the Incentive Plan; 358,750
shares owned by spouses of executive officers in trusts of which such
officers are trustees or by executive officers or their spouses as
custodians for their children; and 11,925 shares issued under the Incentive
Plan which have not vested. Such persons disclaim beneficial ownership of
such shares owned by their spouses, individually or as custodians, or by
such trusts.
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<PAGE>
Item 13. Certain Relationships and Related Transactions.
U S WEST
The certificate of incorporation of Enhance Financial grants to U S
WEST the right to preclude the Company from entering into certain activities or
owning an equity interest in any entity that engages in any such activity unless
they are determined by U S WEST's legal counsel not to be prohibited to U S WEST
and its subsidiaries under the Modification of Final Judgment (the "Judgment")
entered in 1984 in connection with the settlement of the legal action entitled
United States v. Western Electric Company, Inc. These activities consist of
providing information services or long distance telephone service or
manufacturing telecommunications equipment.
The Company has not entered, and does not intend to enter, into any of
the specified activities, and, accordingly, the aforesaid provision has not had,
and is not expected to have, any material effect on the business of the Company.
At such time as U S WEST ceases to own shares of Common Stock, Enhance Financial
intends to propose at the next following meeting of shareholders the elimination
of the aforesaid provision from the certificate of incorporation, which will
require the vote of the holders of a majority of shares of Common Stock
outstanding.
U S WEST has advised Enhance Financial that it intends, but is not
legally obligated, to vote its shares of Common Stock proportionately to the
votes cast by non-U S WEST shareholders; provided, however, that if (i) a person
or group of persons other than U S WEST is deemed to own more than 15% of the
Common Stock within the meaning of Section 13(d) of the Exchange Act and (ii)
there occurs a contested proxy solicitation within the meaning of Rule 14a-11(a)
promulgated under the Exchange Act, U S WEST intends to vote its shares of
Common Stock in a manner U S WEST deems appropriate. In addition, although U S
WEST currently has no designees on the Enhance Financial board of directors, it
has retained the right to nominate directors.
Registration Rights Agreement
The shares of Common Stock offered in connection with the sale of the
DECS were registered pursuant to a registration rights agreement, dated October
31, 1986, as amended, among Enhance Financial, U S WEST and Swiss Re. Each of
U S WEST and Swiss Re has one demand and unlimited piggyback registration
rights, subject to certain limitations. Substantially all the expenses of any
future demand or piggyback registration are to be borne by Enhance Financial.
The registration rights agreement contains cross-indemnification covenants by
Enhance Financial on the one hand and U S WEST and Swiss Re on the other for
damages sustained and expenses incurred resulting from material misstatements or
omissions in connection with any such offering.
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<PAGE>
Reinsurance of FSA Business
U S WEST owns a substantial interest in FSA, a financial guaranty
insurer which reinsures a portion of its business with the Company, all on terms
and provisions equivalent to those in comparable transactions currently in
effect with unaffiliated entities. FSA accounted for 14.2% of the Company's
total gross premiums written in 1996. The Company believes that it and FSA
conduct their business with each other on an arms'-length basis and with terms
no more favorable to the other than would be the case absent the aforesaid
relationship. However, no assurance can be given that conflicts of interest may
not develop in the future or that the business conducted with FSA may not
diminish in future periods regardless of whether payment of the DECS is made in
the form of shares of Common Stock. See Item 1. "Business -- Description of
Business -- Reinsurance of Monoline Financial Guaranty Insurers" and Item 12.
"Security Ownership of Certain Beneficial Owners and Management."
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<PAGE>
PART IV
Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements - See Part II, Item 8.
(2) Financial Statement Schedules:
All schedules are omitted, as the required information is nonapplicable
or the information is presented in the financial statements or related
notes.
(3) Exhibits:
3.1.1 Restated certificate of incorporation of the registrant filed with the
State of New York on February 18, 1992. (Incorporated by reference to
Exhibit 3.3.1 to the Annual Report on Form 10-K for the year ended
December 31, 1991 of the registrant.)
3.1.2 Certificate of amendment to the restated certificate of incorporation of
the registrant filed with the State of New York on June 6, 1996.
3.2 By-laws of the registrant, as amended through December 3, 1991.
(Incorporated by reference to Exhibit 3.2 to Amendment No. 1 filed with
the Securities and Exchange Commission (the "Commission") on January 21,
1992 ("Amendment No. 1") to the registrant's Registration Statement on
Form S-1 (File No. 33-44322) filed with the Commission on December 11,
1991 (the "1991 Registration Statement")).
4.1 Specimen certificate evidencing shares of Common Stock. (Incorporated by
reference to Exhibit 4.1 to Amendment No. 4 to the 1991 Registration
Statement, filed with the Commission on February 12, 1992 ("Amendment No.
4")).
4.2.1 Amended and restated credit agreement dated as of November 24, 1992, as
amended and restated October 1, 1996 (the "Credit Agreement"), among the
registrant and The Chase Manhattan Bank ("Chase"), as lender and
administrative agent, and Fleet National Bank and Bank of
Tokyo-Mitsubishi Trust Company, as lenders.
4.2.2 Bank pledge agreement dated as of November 24, 1992 between the
registrant and Chase, as agent and lender. (Incorporated by reference to
Exhibit 4.3.2 to the Registration Statement on Form S-1 (File No.
33-55958) filed with the Commission on December 18, 1992 (the "1992
Registration Statement")).
4.3.1 Form of Indenture dated as of February ____, 1993 (the "Indenture")
between the registrant and Chase, as Trustee. (Incorporated by reference
to Exhibit 4.1 to Amendment No. 2 to the 1992 Registration Statement,
filed with the Commission on February 10, 1993 ("Amendment No. 2")).
72
<PAGE>
4.3.2 Form of Enhance Financial Services Group Inc. ____% Debentures due 2003.
(Incorporated by reference to Exhibit 4.3.3 to Amendment No. 2 to the
1992 Registration Statement.)
10.1.1 Non-competition agreement dated as of March 5, 1986 between the
registrant and Allan R. Tessler. (Incorporated by reference to Exhibit
10.2.1 to the 1991 Registration Statement.)
10.1.2 Non-competition agreement dated as of March 5, 1986 between the
registrant and Wallace O. Sellers. (Incorporated by reference to Exhibit
10.2.2 to the 1991 Registration Statement.)
10.1.3 Non-competition agreement dated as of March 5, 1986 between the
registrant and Daniel J. Gross. (Incorporated by reference to Exhibit
10.2.3 to the 1991 Registration Statement.)
10.2.1 1987 Long Term Incentive Plan for Key Employees, as amended (the
"Incentive Plan").
10.2.2 Form of option grant certificate for all other employees under the
Incentive Plan for options granted in December 1996.
10.3.1 Non-Employee-Director Stock Option Plan (the "Directors' Option Plan").
(Incorporated by reference to Exhibit 10.6.4 to the 1992 Registration
Statement.)
10.3.2 Form of option grant certificate under the Directors' Option Plan for
options granted in 1996. (Incorporated by reference to Exhibit 10.6.5 to
the 1992 Registration Statement.)
10.4 Initial Purchasers' Registration Rights Agreement dated as of March 5,
1986 among the registrant and certain of its employees. (Incorporated by
reference to Exhibit 10.7 to the 1991 Registration Statement.)
10.5.1 Subscribers' Registration Rights Agreement dated as of October 31, 1986
among the registrant and certain of its shareholders (the "Registration
Rights Agreement"). (Incorporated by reference to Exhibit 10.8.1 to
Amendment No. 1 to the 1991 Registration Statement.)
10.5.2 Amendment No. 1 dated as of April 1, 1987 to the Registration Rights
Agreement. (Incorporated by reference to Exhibit 10.8.2 to the 1991
Registration Statement.)
10.5.3 Amendment No. 2 dated as of May 10, 1988 to the Registration Rights
Agreement. (Incorporated by reference to Exhibit 10.8.3 to the 1991
Registration Statement.)
10.5.4 Combined Amendments to Registration Rights Agreements dated as of June
29, 1990 (including Amendment No. 3 to the Registration Rights
Agreement). (Incorporated by reference to Exhibit 10.8.4 to the 1991
Registration Statement.)
10.5.5 Amendment No. 4 dated as of December 19, 1991 to the Registration Rights
Agreement. (Incorporated by reference to Exhibit 10.8.5 to Amendment No.
1 to the 1991 Registration Statement.)
10.5.6 Letter agreement dated October 3, 1995 between the registrant and The
Manufacturers Life Insurance Company constituting Amendment No. 5 to the
Registration Rights Agreement.
73
<PAGE>
(Incorporated by reference to Exhibit 10.3 to the registration statement
on Form S-3 (File No. 333-2064) filed with the Commission on March 8,
1996 (the "1996 Registration Statement")).
10.5.7 Amendment No. 6 dated February 23, 1996 to the Registration Rights
Agreement. (Incorporated by reference to Exhibit 10.4 to the 1996
Registration Statement.)
10.6 Employment agreement dated July 16, 1996 between the registrant and
Arthur Dubroff.
10.7 Stock purchase agreement dated February 9, 1996 among the registrant, The
Manufacturers Life Insurance Company, Manulife (International) Limited
and Swiss Reinsurance Company. (Incorporated by reference to Exhibit 10.1
to the 1996 Registration Statement.)
22.1 Subsidiaries of the registrant. (Incorporated by reference to Exhibit
22.1 to Amendment No. 2 to the 1992 Registration Statement.)
25.1 Power of Attorney. (Included on signature page of this report.)
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fourth quarter
of 1996.
74
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 22, 1997.
ENHANCE FINANCIAL SERVICES GROUP INC.
By: /s/ Daniel Gross
----------------------------
Daniel Gross
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Daniel Gross and Samuel Bergman, and each
of them individually, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and his
name, place and stead in any and all capacities, to sign any or all amendments
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below on March 22, 1997 by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Daniel Gross
----------------------------
Daniel Gross
President and Chief Executive
Officer and a director (principal
executive officer)
<PAGE>
By: /s/ Arthur Dubroff
----------------------------
Arthur Dubroff
Executive Vice President
(principal financial officer
and principal accounting
officer)
By: /s/ Brenton W. Harries
----------------------------
Brenton W. Harries
Director
By: /s/ David R. Markin
----------------------------
David R. Markin
Director
By: /s/ Wallace O. Sellers
----------------------------
Wallace O. Sellers
Director
By: /s/ Richard J. Shima
----------------------------
Richard J. Shima
Director
By: /s/ Robert P. Saltzman
----------------------------
Robert P. Saltzman
Director
By: /s/ Spencer R. Stuart
----------------------------
Spencer R. Stuart
Director
By: /s/ Adrian U. Sulzer
----------------------------
Adrian U. Sulzer
Director
By: /s/ Allan R. Tessler
----------------------------
Allan R. Tessler
Director
<PAGE>
By: /s/ Frieda K. Wallison
----------------------------
Frieda K. Wallison
Director
By: /s/ Jerry Wind
----------------------------
Jerry Wind
Director
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
ENHANCE FINANCIAL SERVICES GROUP INC.
Under Section 805 of the Business Corporation
Law of the State of New York
Enhance Financial Services Group Inc.
335 Madison Avenue
New York, New York 10017
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF ENHANCE FINANCIAL SERVICES GROUP INC.
Under Section 805 of
the Business Corporation Law
-----------------------
The undersigned, officers of Enhance Financial Services Group Inc.
(the "Corporation"), do hereby certify that:
1. The name of the Corporation is Enhance Financial Services Group
Inc. It was formed under the name Enhance Financial Services Inc.
2. The certificate of incorporation of the Corporation was filed by
the department of state on December 4, 1995.
3. The certificate of incorporation of the Corporation is hereby
amended to authorize the issuance of a new class of five million shares of
preferred stock, par value $.01 per share, and to effect such amendment Article
FOURTH of the certificate of incorporation is hereby amended in its entirety to
read as follows:
FOURTH. The aggregate number of shares which the Corporation
shall have authority to issue is 35,000,000 of which 5,000,000 shares
of the par value of $.0l per share shall be designated "Preferred
Stock" and 30,000,000 shares of the par value of $.10 per share shall
be designated "Common Stock." Authority is hereby expressly granted to
the board of directors, at any time and from time to time, to issue
the Preferred Stock as Preferred Stock of any series and, in
connection with
<PAGE>
the creation of each such series, to fix by the resolution or
resolutions providing for the issue of shares thereof, the number of
shares of such series and the designation and the voting, dividend,
liquidation and other rights, preferences and limitations of such
series, to the fullest extent now or hereafter permitted by the laws
of the State of New York.
4. The amendment to the certificate of incorporation was authorized by
an affirmative vote of the holders of at least a majority of all outstanding
shares entitled to vote on an amendment to the certificate of incorporation at a
meeting of shareholders, said authorization being subsequent to the affirmative
vote of the board of directors.
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein are true under the penalties and perjury, this 6th day of
June 1996.
/s/ Daniel Gross
-----------------------------------
Daniel Gross, President
/s/ Samuel Bergman
-----------------------------------
Samuel Bergman, Secretary
[Conformed Counterpart]
===============================================================
ENHANCE FINANCIAL SERVICES GROUP INC.
-----------------------------
AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of November 24, 1992
Amended and Restated as of October 1, 1996
------------------------------
$60,000,000
------------------------------
THE CHASE MANHATTAN BANK,
as Administrative Agent
<PAGE>
-2-
===============================================================
Exhibits C and D are copies of the opinions as delivered.
<PAGE>
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is
attached but is inserted for convenience of reference only.
Page
----
Section 1. Definitions and Accounting Matters............................. 1
1.01 Certain Defined Terms.......................................... 1
1.02 Accounting Terms and Determinations............................ 16
1.03 Classes; Series; Type.......................................... 17
Section 2. Commitments, Loans, Notes and Prepayments...................... 17
2.01 Loans.......................................................... 17
2.02 Borrowings..................................................... 19
2.03 Changes in Aggregate Amount of Commitments..................... 21
2.04 Commitment Fee................................................. 21
2.05 Several Obligations; Remedies Independent...................... 22
2.06 Notes.......................................................... 22
2.07 Optional Prepayments and Conversions or
Continuations of Loans..................................... 23
2.08 Mandatory Prepayments of Loans or Pledge of
Additional Shares.......................................... 24
2.09 Extension of Commitment Termination Date....................... 25
Section 3. Payments of Principal and Interest............................. 25
3.01 Repayment of Loans............................................. 25
3.02 Interest....................................................... 26
Section 4. Payments; Pro Rata Treatment; Computations;
Etc....................................................... 27
4.01 Payments....................................................... 27
4.02 Pro Rata Treatment............................................. 28
4.03 Computations................................................... 29
Credit Agreement
<PAGE>
- ii -
Page
----
4.04 Minimum Amounts................................................ 29
4.05 Certain Notices................................................ 30
4.06 Non-Receipt of Funds by the Administrative Agent............... 31
4.07 Sharing of Payments, Etc....................................... 32
Section 5. Yield Protection, Etc.......................................... 33
5.01 Additional Costs............................................... 33
5.02 Limitation on Types of Loans................................... 36
5.03 Illegality..................................................... 36
5.03A Treatment of Affected Loans................................... 37
5.04 Compensation................................................... 37
5.05 U.S. Taxes..................................................... 38
5.06 Fair Allocation; Substitution of Banks......................... 39
Section 6. Conditions Precedent........................................... 41
6.01 Amendment Effective Date....................................... 41
6.02 Term Loans..................................................... 43
6.03 Initial and Subsequent Loans................................... 43
Section 7. Representations and Warranties................................. 44
7.01 Corporate Existence............................................ 44
7.02 Financial Condition............................................ 44
7.03 Litigation..................................................... 45
7.04 No Breach...................................................... 45
7.05 Action......................................................... 46
7.06 Approvals...................................................... 46
7.07 Margin Stock................................................... 46
7.08 ERISA.......................................................... 47
7.09 Taxes.......................................................... 47
7.10 Investment Company Act......................................... 47
7.11 Public Utility Holding Company Act............................. 47
7.12 Material Agreements and Liens.................................. 47
7.13 Environmental Matters.......................................... 48
7.14 Capitalization................................................. 48
7.15 Subsidiaries, Etc.............................................. 48
Credit Agreement
<PAGE>
- iii -
Page
----
7.16 True and Complete Disclosure................................... 49
Section 8. Covenants of the Company....................................... 49
8.01 Financial Statements; Information; Etc......................... 50
8.02 Litigation..................................................... 54
8.03 Existence, Etc................................................. 54
8.04 Insurance...................................................... 55
8.05 Prohibition of Fundamental Changes............................. 55
8.06 Limitation on Liens............................................ 56
8.07 Indebtedness................................................... 58
8.08 Investments.................................................... 58
8.09 Restricted Payments............................................ 59
8.10 Financial Covenants............................................ 60
8.11 Capital Expenditures........................................... 61
8.12 Lines of Business.............................................. 61
8.13 Transactions with Affiliates................................... 61
8.14 Use of Proceeds................................................ 62
8.15 Certain Obligations Respecting Subsidiaries.................... 62
8.16 Modifications of Certain Documents............................. 62
8.17 Claims-Paying Rating........................................... 63
8.18 Dividends to or Investments in the Company by
Subsidiaries............................................... 63
Section 9. Events of Default.............................................. 63
Section 10. The Administrative Agent...................................... 66
10.01 Appointment, Powers and Immunities............................ 66
10.02 Reliance by Administrative Agent.............................. 67
10.03 Defaults...................................................... 67
10.04 Rights as a Bank.............................................. 68
10.05 Indemnification............................................... 68
10.06 Non-Reliance on Administrative Agent and Other
Banks...................................................... 69
10.07 Failure to Act................................................ 69
10.08 Resignation or Removal of Administrative Agent................ 70
10.09 Consents under Basic Documents................................ 70
Credit Agreement
<PAGE>
- iv -
Page
----
Section 11. Miscellaneous................................................. 71
11.01 Waiver........................................................ 71
11.02 Notices....................................................... 71
11.03 Expenses, Etc................................................. 71
11.04 Amendments, Etc............................................... 72
11.05 Successors and Assigns........................................ 73
11.06 Assignments and Participations................................ 73
11.07 Survival...................................................... 75
11.08 Captions...................................................... 76
11.09 Counterparts.................................................. 76
11.10 Governing Law; Submission to Jurisdiction..................... 76
11.11 Waiver of Jury Trial.......................................... 76
11.12 Treatment of Certain Information;
Confidentiality............................................ 76
11.13 Acknowledgement and Consent................................... 77
SCHEDULE I - Material Agreements and Liens
SCHEDULE II - Subsidiaries
SCHEDULE III - Litigation
EXHIBIT A-1 - Form of Revolving Credit Note
EXHIBIT A-2 - Form of Term Loan Note
EXHIBIT B - Form of Pledge Agreement
EXHIBIT C - Form of Opinion of General Counsel to the Company
EXHIBIT D - Form of Opinion of Special New York Counsel to Chase
EXHIBIT E - Form of Confidentiality Agreement
EXHIBIT F - Form of Assignment and Acceptance
Credit Agreement
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 24, 1992,
amended and restated as of October 1, 1996 among: ENHANCE FINANCIAL SERVICES
GROUP INC., a corporation duly organized and validly existing under the laws of
the State of New York (together with its successors and assigns, the "Company");
each of the lenders named under the caption "BANKS" on the signature pages
hereof (together with its successors and assigns, individually, a "Bank",
together, the "Banks"); and THE CHASE MANHATTAN BANK, as Swingline Bank
hereunder (in such capacity, together with its successors and permitted assigns
in such capacity, the "Swingline Bank") and as agent for the Banks (in such
capacity, together with its successors in such capacity, the "Administrative
Agent").
The Company, certain of the Banks (the "Existing Banks") and the
Administrative Agent are party to the Credit Agreement dated as of November 24,
1992 (as in effect immediately prior to the Amendment Effective Date defined
below, the "Existing Credit Agreement").
The Company has requested that the Existing Banks and the
Administrative Agent, and the Banks and the Administrative Agent are willing to,
amend and restate the Existing Credit Agreement to provide, among other things,
for an increase in the Commitments and an addition of a Bank and for Base Rate
Loans and Swingline Loans (each as defined below), on the terms and conditions
hereof.
Accordingly, the parties hereto agree to amend and restate the
Existing Credit Agreement so that, as amended and restated, it reads in its
entirety as herein provided.
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following terms
shall have the following meanings (all terms defined in this Section 1.01 or in
other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa):
Credit Agreement
<PAGE>
-2-
"Affiliate" shall mean, as to any specified Person, any other Person
that directly or indirectly controls, or is under common control with, or is
controlled by, such specified Person. As used in this definition, "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of power to direct
or cause the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person that owns directly or
indirectly securities having 10% or more of the voting power for the election of
directors or other governing body of a corporation or 10% or more of the
partnership or other ownership interests of any other Person will be deemed to
control such corporation or other Person. Notwithstanding the foregoing, (a) no
individual shall be an Affiliate of any Person or any of its Subsidiaries solely
by reason of such individual being a director, officer or employee of such
Person or any of its Subsidiaries, (b) a Person and its Subsidiaries shall not
be Affiliates of each other and (c) neither the Administrative Agent nor any
Bank shall be an Affiliate of the Company or any of its Subsidiaries.
"Amendment Effective Date" shall mean the date on which all of the
conditions set forth in Section 6.01 hereof shall have been satisfied or waived
by the Banks and the Administrative Agent.
"Applicable Insurance Regulatory Authority" shall mean, with respect
to any Insurance Subsidiary, the insurance department or similar insurance
regulatory or administrative authority or agency of the state in which such
Insurance Subsidiary is domiciled.
"Applicable Lending Office" shall mean, for each Bank and each Type
of Loan, the "Lending Office" of such Bank (or of an affiliate of such Bank)
designated for such Type of Loan on the signature pages hereof or such other
office of such Bank (or of an affiliate of such Bank) as such Bank may from time
to time specify to the Administrative Agent and the Company as the office by
which its Loans of a Type are to be made and maintained. The
Credit Agreement
<PAGE>
-3-
Swingline Loans shall be made and maintained at the "Lending Office" of the
Swingline Bank.
"Applicable Margin" shall mean: (a) with respect to Revolving Credit
Loans (i) that are Base Rate Loans, 0% per annum and (ii) that are Eurodollar
Loans, 0.40%; and (b) with respect to Term Loans (i) that are Base Rate Loans,
0% per annum and (ii) that are Eurodollar Loans, 0.50% per annum.
"Asset Guaranty" shall mean Asset Guaranty Reinsurance Company, a
New York financial guaranty insurance company and a Wholly Owned Subsidiary of
the Company.
"Available Cash Flow" shall mean, for any period, the sum, for the
Company (determined on an unconsolidated, stand-alone basis in accordance with
GAAP), of the following: (a) income from operations (calculated before taxes,
Debt Service, extraordinary and unusual items, and income or loss attributable
to equity in Affiliates of the Company) for such period plus (b) dividends
received from Subsidiaries of the Company during such period plus (c) dividends
declared by Subsidiaries of the Company during such period but not yet paid plus
(d) without duplication of any amount included above, the aggregate amount of
dividends legally available for payment by each Subsidiary of the Company as of
the last day of such period to the extent such payment would not result in a
Default hereunder.
"Bankruptcy Code" shall mean the Federal Bankruptcy Code of 1978, as
amended from time to time.
"Base Rate" shall mean, for any day, a rate per annum equal to the
higher of (a) the Federal Funds Rate for such day plus 1/2 of 1% and (b) the
Prime Rate for such day. Each change in any interest rate provided for herein
based upon the Base Rate resulting from a change in the Base Rate shall take
effect at the time of such change in the Base Rate.
"Base Rate Loans" shall mean Loans that bear interest at rates based
upon the Base Rate.
Credit Agreement
<PAGE>
-4-
"Basic Documents" shall mean, collectively, this Agreement, the
Notes and the Pledge Agreement.
"Business Day" shall mean any day (a) on which commercial banks are
not authorized or required to close in New York City and (b) if such day relates
to a borrowing of, a payment or prepayment of principal of or interest on, a
Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice
by the Company with respect to any such borrowing, payment, prepayment,
Conversion or Interest Period, also on which dealings in Dollar deposits are
carried out in the London interbank market.
"Capital Expenditures" shall mean, for any period, expenditures
(including, without limitation, the aggregate amount of Capital Lease
Obligations incurred during such period) made by the Company or any of its
Subsidiaries to acquire or construct fixed assets, plant and equipment
(including renewals, improvements and replacements, but excluding repairs)
during such period computed in accordance with GAAP.
"Capital Lease Obligations" shall mean, for any Person, all
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) Property to the extent such
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP (including Statement of Financial
Accounting Standards No. 13 of the Financial Accounting Standards Board), and,
for purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP (including such
Statement No. 13).
"Change in Control" shall mean, with respect to the Company, the
occurrence of a state of facts where (a) any one Person, together with its
Subsidiaries and Affiliates, or any group of Persons acting together as a group
(whether pursuant to a shareholders agreement, partnership or joint venture
agreement or otherwise), shall own (beneficially or otherwise) 50% or more of
the Voting Stock of the Company (except where such circumstance shall obtain as
a result of the arrangement existing
Credit Agreement
<PAGE>
-5-
on the date hereof as set forth in the Shareholders' Agreement, or (b) the
Company is or would be required to register itself as a "controlled insurer"
under Section 1503 of the New York Insurance Law, or (c) the Company is or would
be required under Section 1506(e) of the New York Insurance Law to notify the
New York State Superintendent of Insurance of a Person which controls or has
acquired control of the Company, or (d) a Person has filed under Section 1506(a)
of the New York Insurance Law to obtain the prior approval of the New York State
Superintendent of Insurance to acquire control of the Company and such approval
has been obtained.
"Chase" shall mean The Chase Manhattan Bank.
"Class" shall have the meaning assigned to such term in Section 1.03
hereof.
"Closing Date" shall mean the date upon which the initial Loans
hereunder are made.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral Account" shall have the meaning assigned to such term in
Section 4.01 of the Pledge Agreement.
"Commitment" shall mean, as to each Bank, the obligation of such
Bank to make Loans in an aggregate amount not exceeding the amount set opposite
such Bank's name on the signature pages hereof under the caption "Commitment"
(as the same may be reduced at any time or from time to time pursuant to Section
2.03 hereof).
"Commitment Termination Date" shall mean September 30, 1997
(provided that, if such date is not a Business Day, the next preceding Business
Day), as the same may be extended pursuant to Section 2.09 hereof.
"Computation Date" shall have the meaning in Section 8.09 hereof.
Credit Agreement
<PAGE>
-6-
"Computation Period" shall have the meaning assigned to such term in
Section 8.09 hereof.
"Consent Date" shall have the meaning assigned to such term in
Section 2.09 hereof.
"Continue", "Continuation" and "Continued" shall refer to the
continuation pursuant to Section 2.07 hereof of a Eurodollar Loan from one
Interest Period to the next Interest Period.
"Convert", "Conversion" and "Converted" shall refer to a conversion
pursuant to Section 2.07 hereof of one Type of Loans into another Type of Loans,
which may be accompanied by the transfer by a Bank (at its sole discretion) of a
Loan from one Applicable Lending Office to another.
"date hereof" and "date of this Agreement" shall mean November 24,
1992.
"Debt Service" shall mean, for any period, the sum, for the Company
and its Subsidiaries (determined on a consolidated basis without duplication in
accordance with GAAP), of the following: (a) Interest Expense plus (b) 1/3 of
all lease payments (net of any amounts received from subtenants with respect to
such leases) plus (c) the amount of dividends due and redemptions paid in
respect of Preferred Stock during such period plus (d) the amount of mandatory
repayment of the principal of Indebtedness due during such period.
"Default" shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Equity Rights" shall mean, with respect to any Person, any
outstanding subscriptions, options, warrants, commitments, preemptive rights or
agreements of any kind (including, without
Credit Agreement
<PAGE>
-7-
limitation, any stockholders' or voting trust agreements) for the issuance,
sale, registration or voting of, or outstanding securities convertible into, any
additional shares of capital stock of any class, or partnership or other
ownership interests of any type in, such Person.
"ERC" shall mean Enhance Reinsurance Company, a New York financial
guaranty insurance corporation and a Wholly Owned Subsidiary of the Company.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
that is a member of any group of organizations (a) described in Section 414(b)
or (c) of the Code of which the Company is a member and (b) solely for purposes
of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11)
of the Code and the lien created under Section 302(f) of ERISA and Section
412(n) of the Code, described in Section 414(m) or (o) of the Code of which the
Company is a member.
"Eurodollar Base Rate" shall mean, with respect to any Eurodollar
Loan for any Interest Period therefor, the arithmetic mean (rounded upwards, if
necessary, to the nearest 1/16 of 1%), as determined by the Administrative
Agent, of the respective rates per annum quoted by the Reference Banks at
approximately 11:00 a.m. London time (or as soon thereafter as practicable) on
the date two Business Days prior to the first day of such Interest Period for
the offering by such Reference Bank to leading banks in the London interbank
market of Dollar deposits having a term comparable to such Interest Period and
in an amount comparable to the principal amount of the Eurodollar Loan to be
made by such Reference Bank for such Interest Period. If any Reference Bank or
Reference Banks do not timely furnish information for determination of any
Eurodollar Base Rate, the Administrative Agent shall determine such Eurodollar
Base Rate on the basis of information timely furnished by the remaining
Reference Banks or Reference Bank.
Credit Agreement
<PAGE>
-8-
"Eurodollar Loans" shall mean Loans that bear interest at rates
based on rates referred to in the definition of "Eurodollar Base Rate" in this
Section 1.01.
"Eurodollar Rate" shall mean, for any Eurodollar Loan for any
Interest Period therefor, a rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to
the quotient of (a) the Eurodollar Base Rate for such Loan for such Interest
Period divided by (b) the sum of (i) 1 minus (ii) the Reserve Requirement for
such Loan for such Interest Period.
"Event of Default" shall have the meaning assigned to such term in
Section 9 hereof.
"Existing Banks" shall have the meaning assigned to such term in the
recitals hereto.
"Existing Commitment Termination Date" shall have the meaning
assigned to such term in Section 2.09 hereof.
"Existing Loans" shall mean the loans outstanding under the Existing
Credit Agreement on the Amendment Effective Date.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, provided that (a) if the day for which such rate is to
be determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day and (b) if such rate is not so
published for any Business Day, the Federal Funds Rate for such Business Day
shall be the average rate charged to Chase on such Business Day on such
transactions as reasonably determined by the Administrative Agent.
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"Fixed Charge Coverage Ratio" shall mean, for any period, the ratio
of (a) Available Cash Flow for such period to (b) Debt Service for such period.
"Funded Debt" shall mean Indebtedness of the Company and its
Subsidiaries which by its terms becomes payable more than one year from the date
of origination thereof or which is renewable at the option of the Company or any
of its Subsidiaries beyond one year from the date of such origination.
"GAAP" shall mean the generally accepted accounting principles
which, in accordance with Section 1.02(a) hereof, are to be used in preparing
financial statements on the basis of which are to be made the calculations for
purposes of determining compliance with the financial covenants in this
Agreement.
"Guarantee" shall mean a guarantee, an endorsement, a contingent
agreement to purchase or to furnish funds for the payment or maintenance of, or
otherwise to be or become contingently liable under or with respect to, the
Indebtedness, other obligations, net worth, working capital or earnings of any
Person, or a guarantee of the payment of dividends or other distributions upon
the stock or equity interests of any Person, or an agreement to purchase, sell
or lease (as lessee or lessor) Property, products, materials, supplies or
services primarily for the purpose of enabling a debtor to make payment of such
debtor's obligations or an agreement to assure a creditor against loss, and
including, without limitation, causing a bank or other financial institution to
issue a letter of credit or other similar instrument for the benefit of another
Person, but excluding endorsements for collection or deposit in the ordinary
course of business; provided that the term Guarantee shall not include any
financial guaranty insurance, credit insurance or residual value insurance (or
any reinsurance of the same), or similar or related products, issued by any
Insurance Subsidiary in the ordinary course of its business. The terms
"Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning.
"Indebtedness" shall mean, for any Person: (a) obligations created,
issued or incurred by such Person for
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borrowed money (whether by loan, the issuance and sale of debt securities or the
sale of Property to another Person subject to an understanding or agreement,
contingent or otherwise, to repurchase such Property from such Person); (b) all
Redeemable Preferred Stock issued by such Person; (c) obligations of such Person
to pay the deferred purchase or acquisition price of Property or services, other
than trade accounts payable (other than for borrowed money) arising, and accrued
expenses incurred, in the ordinary course of business so long as such trade
accounts payable are payable within 90 days of the date the respective goods are
delivered or the respective services are rendered; (d) Indebtedness of others
secured by a Lien on the Property of such Person, whether or not the respective
Indebtedness so secured has been assumed by such Person; (e) obligations
(contingent or otherwise) of such Person in respect of letters of credit,
bankers' acceptances or similar instruments issued or accepted by banks and
other financial institutions for account of such Person; (f) Capital Lease
Obligations of such Person; and (g) Indebtedness of others Guaranteed by such
Person; provided that accrued profit commissions shall not be treated as
Indebtedness.
"Insurance Subsidiaries" shall mean ERC, Asset Guaranty and any
other Subsidiary of the Company that is licensed to do an insurance business by
an Applicable Insurance Regulatory Authority.
"Interest Expense" shall mean, for any period, the sum, for the
Company and its Subsidiaries (determined on a consolidated basis without
duplication in accordance with GAAP), of the following: (a) all interest in
respect of Indebtedness accrued or capitalized during such period (whether or
not actually paid during such period) plus (b) the net amounts payable (or minus
the net amounts receivable) under Interest Rate Protection Agreements accrued
during such period (whether or not actually paid or received during such
period).
"Interest Period" shall mean (a) with respect to any Revolving
Credit Loan that is a Eurodollar Loan, each period commencing on the date such
Eurodollar Loan is made or Converted
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from a Base Rate Loan or (in the event of a Continuation) the last day of the
next preceding Interest Period and ending on the numerically corresponding day
in the first, second or third calendar month thereafter, as the Company may
select as provided in Section 4.05 hereof, and (b) with respect to any Term Loan
that is a Eurodollar Loan, each period commencing on the date such Term Loan is
made or Converted from a Base Rate Loan or (in the event of a Continuation) the
last day of the next preceding Interest Period and ending on the numerically
corresponding day in the first, second, third or sixth calendar month
thereafter, as the Company may select as provided in Section 4.05 hereof, except
that each Interest Period that commences on the last Business Day of a calendar
month (or on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last Business Day of the
appropriate subsequent calendar month and (c) with respect to any Swingline
Loan, the period commencing on the date such Swingline Loan is made and ending
on the date three Business Days thereafter. Notwithstanding the foregoing: (i)
the Company may not select any Interest Period for any Revolving Credit Loan
that ends after the Commitment Termination Date; (ii) no Interest Period for any
Series of Term Loans may commence before and end after any Principal Payment
Date for such Series of Term Loans unless, after giving effect thereto, the
aggregate principal amount of Term Loans of such Series having Interest Periods
that end after such Principal Payment Date shall be equal to or less than the
aggregate principal amount of such Term Loans scheduled to be outstanding after
giving effect to the payments of principal required to be made on such Principal
Payment Date; and (iii) each Interest Period that would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business Day (or,
with respect to Eurodollar Loans, if such next succeeding Business Day falls in
the next succeeding calendar month, on the next preceding Business Day).
"Interest Rate Protection Agreement" shall mean, for any Person, an
interest rate swap, cap or collar agreement or similar arrangement between such
Person and one or more financial institutions providing for the transfer or
mitigation of interest risks either generally or under specific contingencies.
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"Investment" shall mean, for any Person: (a) the acquisition
(whether for cash, Property, services or securities or otherwise) of capital
stock, bonds, notes, debentures, partnership or other ownership interests or
other securities of any other Person or any agreement to make any such
acquisition (including, without limitation, any "short sale" or any sale of any
securities at a time when such securities are not owned by the Person entering
into such short sale); (b) the making of any deposit with, or advance, loan or
other extension of credit to, any other Person (including the purchase of
Property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such Property to such Person, but excluding
any such advance, loan or extension of credit having a term not exceeding 90
days representing the purchase price of inventory or supplies sold by such
Person in the ordinary course of business) and (without duplication) the
entering into of any commitment to deposit funds with, advance or lend funds to
or otherwise extend credit to such Person; (c) the entering into of any
Guarantee of Indebtedness of any other Person; or (d) the entering into of any
Interest Rate Protection Agreement; provided that the term "Investment" shall
not include (i) the ownership interest of the Company and its Subsidiaries on
the date hereof in the capital stock of any Subsidiary of the Company other than
Vantage America, Inc. or (ii) any capital contribution or loan by the Company or
by any Wholly Owned Subsidiary of the Company to the Company or to any Wholly
Owned Subsidiary of the Company.
"Lien" shall mean, with respect to any Property, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
Property. For purposes of this Agreement and the other Basic Documents, a Person
shall be deemed to own subject to a Lien any Property that it has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement (other than an
operating lease) relating to such Property.
"Loans" shall mean the Revolving Credit Loans, Term Loans, and the
Swingline Loans.
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"Majority Banks" shall mean Banks having at least 66-2/3% of the
aggregate amount of the Commitments or, if the Commitments shall have
terminated, Banks holding at least 66-2/3% of the aggregate unpaid principal
amount of the Loans.
"Margin Stock" shall mean "margin stock" within the meaning of
Regulations U and X.
"Material Adverse Effect" shall mean a material adverse effect on
(a) the Property, business, operations, financial condition, prospects,
liabilities or capitalization of the Company and its Subsidiaries taken as a
whole, (b) the ability of the Company to perform its obligations under any of
the Basic Documents, (c) the validity or enforceability of any of the Basic
Documents, (d) the rights and remedies of the Banks and the Administrative Agent
under any of the Basic Documents or (e) the timely payment of the principal of
or interest on the Loans or other amounts payable in connection therewith.
"Material Subsidiary" shall mean any Subsidiary of the Company other
than Vantage American, Inc., Guaranty Risk Services, Inc., AG Intermediaries,
Inc., Orleans Acquisition Corporation, Enhance Reinsurance Bermuda Ltd. and
Litton Loan Servicing Inc. and their respective Subsidiaries.
"Multiemployer Plan" shall mean a multiemployer plan defined as such
in Section 3(37) of ERISA to which contributions have been made by the Company
or any ERISA Affiliate and which is covered by Title IV of ERISA.
"Net Worth" shall mean, as at any date, the sum, for the Company and
its Subsidiaries (determined on a consolidated basis without duplication in
accordance with GAAP), of the following:
(a) the amount of capital stock (other than any Redeemable Preferred
Stock), plus
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(b) the amount of additional paid-in capital and retained earnings
(or, in the case of a retained earnings deficit, minus the amount of such
deficit).
"Notes" shall mean the Revolving Credit Notes and the Term Loan
Notes and the Swingline Note.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof).
"Plan" shall mean an employee benefit or other plan established or
maintained by the Company or any ERISA Affiliate and that is covered by Title IV
of ERISA, other than a Multiemployer Plan.
"Pledge Agreement" shall mean a Pledge Agreement, substantially in
the form of Exhibit B hereto, between the Company and the Administrative Agent,
as the same shall be modified and supplemented and in effect from time to time.
"Pledged Stock" shall have the meaning assigned to such term in the
Pledge Agreement.
"Post-Default Rate" shall mean, in respect of any principal of any
Loan or any other amount under this Agreement, any Note or any other Basic
Document that is not paid when due (whether at stated maturity, by acceleration,
by optional or mandatory prepayment or otherwise), a rate per annum during the
period from and including the due date to but excluding the date on which such
amount is paid in full equal to 2% plus the Base Rate as in effect from time to
time (provided that, if the amount so in default is principal of a Eurodollar
Loan and the due date thereof is a day other than the last day of the Interest
Period therefor, the "Post-Default Rate" for such principal shall be,
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for the period from and including such due date to but excluding the last day of
such Interest Period, the greater of (i) 2% plus the interest rate for such
Eurodollar Loan as provided in Section 3.02(b) hereof or (ii) 2% plus the Base
Rate as in effect from time to time and, thereafter, the rate provided for above
in this definition).
"Prime Rate" shall mean the rate of interest from time to time
announced by Chase at its principal office as its prime commercial lending rate.
"Principal Payment Date" shall have the meaning assigned to such
term in Section 3.01(b) hereof.
"Property" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Quarterly Dates" shall mean the last Business Day of each March,
June, September and December in each year, the first of which shall be the first
such day after the Amendment Effective Date.
"Redeemable Preferred Stock" shall mean, for any Person, all
preferred or preference stock issued by such Person, other than perpetual,
non-cumulative preferred stock.
"Reference Banks" shall mean Chase and such other Bank(s) as shall
be mutually acceptable to Chase and the Borrower (or their respective Applicable
Lending Offices, as the case may be).
"Regulation A", "Regulation D", "Regulation U" and "Regulation X"
shall mean, respectively, Regulation A, Regulation D, Regulation U and
Regulation X of the Board of Governors of the Federal Reserve System (or any
successor), as the same may be modified and supplemented and in effect from time
to time.
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"Regulatory Change" shall mean, with respect to any Bank, any change
after the date of this Agreement in Federal, state or foreign law or regulations
(including, without limitation, Regulation D) or the adoption or making after
such date of any interpretation, directive or request applying to a class of
banks including such Bank of or under any Federal, state or foreign law or
regulations (whether or not having the force of law and whether or not failure
to comply therewith would be unlawful) by any court or governmental or monetary
authority charged with the interpretation or administration thereof.
"Reserve Requirement" shall mean, for any Interest Period for any
Eurodollar Loan, the average maximum rate at which reserves (including, without
limitation, any marginal, supplemental or emergency reserves) are required to be
maintained during such Interest Period under Regulation D by member banks of the
Federal Reserve System in New York City with deposits exceeding one billion
Dollars against "Eurocurrency liabilities" (as such term is used in Regulation
D). Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any Regulatory Change with respect to (i) any category of liabilities
that includes deposits by reference to which the Eurodollar Base Rate is to be
determined as provided in the definition of "Eurodollar Base Rate" in this
Section 1.01 or (ii) any category of extensions of credit or other assets that
includes the Eurodollar Loans.
"Restatement Date" shall mean October 1, 1996.
"Restricted Payment" shall mean dividends (in cash, Property or
obligations) on, or other payments or distributions on account of, or the
setting apart of money for a sinking or other analogous fund for, or the
purchase, redemption, retirement or other acquisition of, any shares of any
class of stock of the Company or of any warrants, options or other rights to
acquire the same (or to make any payments to any Person, such as "phantom stock"
payments, where the amount thereof is calculated with reference to the fair
market or equity value of the Company or
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any of its Subsidiaries), but excluding dividends payable solely in shares of
common stock of the Company.
"Revolving Credit Loans" shall mean the loans provided for by
Section 2.01(a) hereof, which may be Base Rate Loans and/or Eurodollar Loans.
"Revolving Credit Notes" shall mean the promissory notes provided
for by Section 2.06(a) hereof and all promissory notes delivered in substitution
or exchange therefor, in each case as the same shall be modified and
supplemented and in effect from time to time.
"Senior Note Purchase Agreements" shall mean the Note Purchase
Agreements dated as of December 1, 1991 among the Company and the purchasers
named therein, as in effect on the date hereof.
"Series" shall have the meaning assigned to such term in Section
1.03 hereof.
"Shareholders' Agreement" shall mean the Shareholders' Agreement
dated May 10, 1988 among US West Financial Services, Inc., Manufacturers Life
Insurance Company, the Shareholders party thereto and the Company, as in effect
on the date hereof.
"Statutory Statement" shall mean, as to any Insurance Subsidiary, a
statement of the condition and affairs of such Insurance Subsidiary, prepared in
accordance with statutory accounting practices required or permitted by the
Applicable Insurance Regulatory Authority, and filed with the Applicable
Insurance Regulatory Authority.
"Subsidiary" shall mean, with respect to any Person, any
corporation, partnership or other entity of which at least a majority of the
securities or other ownership interests having by the terms thereof ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions of such corporation, partnership or other entity
(irrespective of whether or not at the time securities or other
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ownership interests of any other class or classes of such corporation,
partnership or other entity shall have or might have voting power by reason of
the happening of any contingency) is at the particular time in question directly
or indirectly owned or controlled by such Person or one or more Subsidiaries of
such Person or by such Person and one or more Subsidiaries of such Person.
"Swingline Commitment" shall mean the obligation of the Swingline
Bank to make Swingline Loans in an aggregate amount not to exceed the lesser of
(i) $10,000,000 and (ii) the aggregate amount of the Commitments.
"Swingline Loans" shall mean the loans provided for by Section
2.01(d) hereof.
"Swingline Maturity Date" shall mean, for any Swingline Loan, the
last day of the Interest Period for such Swingline Loan.
"Swingline Note" shall mean the promissory note provided for by
Section 2.06(d) hereof and any promissory note delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Swingline Rate" shall mean, for any day, a rate per annum equal to
the Federal Funds Rate for such day plus 1/2 of 1%. Each change in any interest
rate provided for herein based upon the Swingline Rate resulting from a change
to the Swingline Rate shall take effect at the time of such change in the
Swingline Rate.
"Tangible Net Worth" shall mean, as at any date, the sum for the
Company and its Subsidiaries (determined on a consolidated basis without
duplication in accordance with GAAP), of the following:
(a) Net Worth, minus
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(b) the sum of the following (without duplication of deductions in
respect of items already deducted in arriving at Net Worth): cost of
treasury shares and the book value of all assets which should be
classified as intangibles but in any event including goodwill, minority
interests, trademarks, trade names, copyrights, patents and franchises,
unamortized debt discount and expense, all reserves and any write-up in
the book value of assets resulting from a revaluation thereof subsequent
to December 31, 1991.
"Term Loan Notes" shall mean the promissory notes provided for by
Section 2.06(b) hereof and all promissory notes delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Term Loans" shall mean the loans provided for by Section 2.01(b)
hereof, which may be Base Rate Loans and/or Eurodollar Loans.
"Total Capitalization" shall mean the sum of (a) Funded Debt and (b)
Net Worth.
"Type" shall have the meaning assigned to such term in Section 1.03
hereof.
"Value" shall mean, as to any share of common stock of ERC, (X) the
sum of (a) policyholders' surplus in ERC, plus (b) the aggregate amount of the
contingent reserve of ERC, plus (c) 60% of the aggregate amount of unearned
premium reserve of ERC, (Y) divided by the total number of outstanding shares of
common stock of ERC. Such computations are to be made in accordance with
statutory accounting practices required or permitted by the Applicable Insurance
Regulatory Authority of ERC.
"Voting Stock" shall mean, at any date, the capital stock of any
class or classes of a corporation having general voting power under ordinary
circumstances to elect the board of directors of such corporation, or persons
performing similar
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functions (irrespective of whether or not at the time stock or other securities
of any other class or classes shall have or might have special voting power or
rights by reason of the happening of any contingency).
"Wholly Owned Subsidiary" shall mean, with respect to any Person,
any Subsidiary of such Person all of the equity securities or other ownership
interests (other than, in the case of a corporation, directors' qualifying
shares) of which are owned or controlled by such Person or one or more Wholly
Owned Subsidiaries of such Person.
1.02 Accounting Terms and Determinations.
(a) Except as otherwise expressly provided herein, (i) all
accounting terms used herein shall be interpreted, (ii) all financial statements
and all certificates and reports as to financial matters required to be
delivered to the Banks hereunder shall (unless otherwise disclosed to the Banks
in writing at the time of delivery thereof in the manner described in subsection
(b) below) be prepared and (iii) all calculations made for the purposes of
determining compliance with this Agreement shall (except as otherwise expressly
provided herein) be made in accordance with or by application of generally
accepted accounting principles or statutory accounting practices, as the case
may be, applied on a basis consistent with those used in the preparation of the
most recent financial statements furnished to the Banks hereunder (or, prior to
the delivery of the first financial statements under Section 8.01 hereof, the
financial statements as at December 31, 1991 referred to in Section 7.02 hereof)
unless (x) the Company shall notify the Banks of its objection thereto at the
time of delivery of any financial statements pursuant to Section 8.01 hereof or
(y) the Majority Banks shall notify the Company (through the Administrative
Agent) of their objection within 30 days after the delivery of any such
financial statements, in either of which events such interpretations,
statements, certificates, reports and calculations shall be made in accordance
with, or by application of, generally accepted accounting principles or
statutory accounting practices, as the case may be, on a basis
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consistent with those used in the preparation of the most recent financial
statements as to which no such objection shall have been made (or, prior to the
delivery of the first financial statements under Section 8.01 hereof, the
financial statements as at December 31, 1991 referred to in Section 7.02
hereof).
(b) The Company shall deliver to the Banks at the same time as the
delivery of any annual or quarterly financial statement under Section 8.01
hereof (i) a description in reasonable detail of any material variation between
the application of accounting principles employed in the preparation of such
statement and the application of accounting principles employed in the
preparation of the next preceding annual or quarterly financial statements as to
which no objection has been made in accordance with the last sentence of
paragraph (a) above and (ii) reasonable estimates of the difference between such
statements arising as a consequence thereof.
(c) The Company will not, and will not permit any of its
Subsidiaries to, change the last day of its fiscal year from December 31 of each
year, or the last days of the first three fiscal quarters in each of its fiscal
years from March 31, June 30 and September 30 of each year, respectively.
1.03 Classes; Series; Type. Loans hereunder are distinguished by
"Class". The "Class" of a Loan refers to whether such Loan is a Revolving Credit
Loan, a Swingline Loan or a Term Loan, each of which constitutes, respectively,
a "Class" of Loan. Loans are also distinguished by "Series". The Loans of any
one Class made on the occasion of any borrowing constitute a "Series" of Loans.
Loans hereunder are also distinguished by "Type". The "Type" of a Loan refers to
whether such Loan is a Base Rate Loan or a Eurodollar Loan, each of which
constitutes a Type. The Loans may be identified by both Class and Type.
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Section 2. Commitments, Loans, Notes and Prepayments.
2.01 Loans.
(a) Revolving Credit Loans. Each Bank severally agrees, on the terms
and conditions of this Agreement, at the request of the Company, to make
revolving credit loans to the Company in Dollars during the period from and
including the Amendment Effective Date to but not including the Commitment
Termination Date in an aggregate principal amount at any one time outstanding up
to but not exceeding the amount of the Commitment of such Bank as in effect from
time to time (each such revolving credit loan being herein called a "Revolving
Credit Loan" and collectively the "Revolving Credit Loans"); provided that, on
or before the Commitment Termination Date, in no event shall the aggregate
unpaid principal amount of all Loans (including all Swingline Loans) exceed the
aggregate amount of the Commitments as in effect from time to time. Subject to
the terms and conditions of this Agreement, during such period the Company may
borrow, repay and reborrow the amount of the Commitments by means of Base Rate
Loans and Eurodollar Loans, and the Company may Convert Loans of one Type into
Loans of another Type (as provided in Section 2.07 hereof) or Continue Loans of
one Type as Loans of the same Type (as provided in Section 2.07 hereof).
(b) Term Loans. Each Bank severally agrees, on the terms and
conditions of this Agreement, at the request of the Company, to make, on the
last day of any Interest Period of any Revolving Credit Loan made by such Bank,
a term loan (each such term loan being herein called a "Term Loan" and
collectively the "Term Loans") to the Company in Dollars in a principal amount
up to but not exceeding the unpaid principal balance of such Revolving Credit
Loan, the proceeds of which Term Loan shall be applied (and the Company hereby
authorizes and instructs such Bank to apply such proceeds) to refinance, in
whole or in part, the unpaid principal balance of such Revolving Credit Loan;
provided that the Banks shall not be obligated to make any Series of Term Loans
unless the aggregate amount of such Term Loans is equal to $3,000,000 or an
integral multiple of $200,000 in excess thereof. Subject to the terms and
conditions of this Agreement,
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the Company may borrow such Term Loans by means of Base Rate Loans and
Eurodollar Loans and, prior to payment in full of the principal of such Term
Loans, the Company may Convert Loans of one Type into Loans of another Type (as
provided in Section 2.07 hereof) or Continue Loans of one Type as Loans of the
same Type (as provided in Section 2.07 hereof).
(c) Limit on Revolving Credit Loans. No more than five separate
Revolving Credit Loans from each Bank may be outstanding at any one time.
(d) Swingline Loans. In addition to the Loans provided for in
Subsections (a) and (b) above of this Section 2.01, the Swingline Bank hereby
agrees, on the terms an conditions of this Agreement, to make loans ("Swingline
Loans") to the Company during the period from the date hereof to but excluding
the date five Business Days prior to the Commitment Termination Date in an
aggregate amount at any one time outstanding up to but not exceeding its
Swingline Commitment; provided that the aggregate principal amount of all Loans
(including Swingline Loans) shall not at any time outstanding exceed the
aggregate amount of the Commitments. Subject to the terms of this Agreement, the
Company may borrow, repay and reborrow the amount of the Swingline Commitment by
means of Loans that bear interest at the Swingline Rate; provided that only one
Swingline Loan may be outstanding at any one time and no Swingline Loan may be
borrowed to repay an outstanding Swingline Loan.
2.02 Borrowings.
(a) Revolving Credit Loans. The Company shall give the
Administrative Agent (which shall promptly notify the Banks) notice of each
borrowing hereunder as provided in Section 4.05 hereof. Not later than 1:00 p.m.
New York time on the date specified for each borrowing of Revolving Credit Loans
hereunder, each Bank shall make available the amount of the Revolving Credit
Loan to be made by it on such date to the Administrative Agent, at an account in
New York designated by the Administrative Agent, in Dollars and immediately
available funds, for account of the
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Company. The amount so received by the Administrative Agent shall, subject to
the terms and conditions of this Agreement, be made available by the
Administrative Agent to the Company by depositing the same, in immediately
available funds, in an account of the Company designated by the Company or by
repaying any then outstanding Swingline Loan.
(b) Swingline Loans. The Company shall give the Administrative Agent
(which shall promptly notify the Swingline Bank) notice of each borrowing of
Swingline Loans hereunder as provided in Section 4.05 hereof. Not later than
1:00 p.m. New York time on the date specified for each borrowing of Swingline
Loans hereunder, the Swingline Bank shall make available the amount of the
Swingline Loan to be made by it on such date to the Administrative Agent, at an
account in New York designated by the Administrative Agent, in Dollars and
immediately available funds, for account of the Company. The amount so received
by the Administrative Agent shall, subject to the terms and conditions of this
Agreement, be made available by the Administrative Agent to the Company by
depositing the same, in immediately available funds, in an account of the
Company designated by the Company.
(c) Borrowings to Repay Swingline Loans. Unless the Company has
already given a notice of borrowing of Revolving Credit Loans to repay a
Swingline Loan, at any time from and including the Swingline Maturity Date for
any Swingline Loan until the unpaid principal amount of such Swingline Loan
shall have been paid in full, the Swingline Bank may, and the Company hereby
irrevocably authorizes and empowers (which power is coupled with an interest)
the Swingline Bank to, deliver, on behalf of the Company, to the Administrative
Agent under Section 2.02(a) hereof a notice of borrowing of Revolving Credit
Loans that are Base Rate Loans in an amount equal to the then unpaid principal
amount of such Swingline Loan. In the event that the power of the Swingline Bank
to give such notice of borrowing on behalf of the Company is terminated for any
reason whatsoever (including, without limitation, a termination resulting from
the occurrence of an event specified in clause (f) or (g) of Section 9 hereof
with respect to the Company), or the Swingline Bank is otherwise precluded for
any reason whatsoever
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from giving a notice of borrowing on behalf of the Company as provided in the
preceding sentence, each Bank shall, upon notice from the Swingline Bank on or
after the Swingline Maturity Date for such Swingline Loan, promptly purchase
from the Swingline Bank a participation in (or, if and to the extent specified
by the Swingline Bank, an assignment of) such Swingline Loan in the amount of
the Base Rate Loan it would have been obligated to make pursuant to such notice
of borrowing. Each Bank shall, not later than 4:00 p.m. New York time on the
Business Day on which such notice is given (if such notice is given by 3:00 p.m.
New York time) or 9:00 a.m. New York time on the next succeeding Business Day
(if such notice is given after 3:00 p.m., but before 5:00 p.m., New York time),
make available the amount of the Base Rate Loan to be made by it (or the amount
of the participation or assignment to be purchased by it, as the case may be) to
the Administrative Agent at the account specified in Section 2.02(a) hereof and
the amount so received by the Administrative Agent shall promptly be made
available to the Swingline Bank by remitting the same, in immediately available
funds, to the Swingline Bank. Promptly following its receipt of any payment in
respect of such Swingline Loan, the Swingline Bank shall pay to each Bank that
has acquired a participation in such Swingline Loan such Bank's proportionate
share of such payment. Anything in this Agreement to the contrary
notwithstanding (including, without limitation, in Section 6.03 hereof), the
obligation of each Bank to make its Base Rate Loan (or purchase its
participation in or assignment of such Swingline Loan, as the case may be)
pursuant to this Section 2.02(c) is unconditional under any and all
circumstances whatsoever and shall not be subject to set-off, counterclaim or
defense to payment that such Bank may have or have had against the Company, the
Administrative Agent, the Swingline Bank or any other Bank and, without limiting
any of the foregoing, shall be unconditional irrespective of (i) the occurrence
of any Default, (ii) the financial condition of the Company, any Subsidiary, the
Administrative Agent, the Swingline Bank or any other Bank or (iii) the
termination or cancellation of the Commitments; provided that no Bank shall be
obligated to make any such Base Rate Loan (or to purchase any such participation
or direct interest in the Swingline Loan) if (i) before the making of such
Swingline Loan, such Bank had
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notified the Swingline Bank that a Default had occurred and was continuing and
that such Bank would not refinance such Swingline Loan or (ii) to the extent
(and only to the extent) that such Swingline Loan, together with all Revolving
Credit Loans and Term Loans then outstanding at the time of the making of such
Swingline Loan, exceeded the then aggregate amount of the Commitments at the
time of the making of such Swingline Loan. The Company agrees that any Bank so
purchasing a participation (or assignment) in such Swingline Loan may exercise
all rights of set-off, bankers' lien, counterclaim or similar rights with
respect to such participation as fully as if such Bank were a direct holder of a
Swingline Loan in the amount of such participation.
2.03 Changes in Aggregate Amount of Commitments.
(a) The aggregate amount of the Commitments shall be automatically
reduced to zero on the Commitment Termination Date.
(b) The Company shall have the right at any time or from time to
time to terminate in whole, or to reduce in part, the aggregate unused amount of
the Commitments; provided that (x) the Company shall give notice of each such
termination or reduction as provided in Section 4.05 hereof, (y) each partial
reduction shall be in an integral multiple of $1,000,000 and (z) on or before
the Commitment Termination Date, the aggregate amount of the Commitments shall
at no time be less than the aggregate outstanding principal amount of all Loans
(including the Swingline Loans).
(c) The Company shall have the right to terminate or reduce the
unused amount of the Swingline Commitment at any time or from time to time on
not less than three Business Days' prior notice to the Administrative Agent
(which shall promptly notify the Swingline Bank and each Bank) or each such
termination or reduction, which notice shall specify the effective date thereof
and the amount of any such reduction (which shall be in integral multiples of
$1,000,000) and shall be irrevocable and effective only upon receipt by the
Administrative Agent.
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(d) The Commitments and Swingline Commitment, once terminated or
reduced, may not be reinstated.
2.04 Commitment Fee. The Company shall pay to the Administrative
Agent for account of each Bank a commitment fee on the daily average unused
amount of such Bank's Commitment (for which purpose the aggregate unpaid
principal amount of the Revolving Credit Loans, Swingline Loans and Term Loans
outstanding shall be deemed to constitute a use of the Commitments), for the
period from and including the Amendment Effective Date to but not including the
earlier of the Commitment Termination Date and the date such Commitment is
otherwise terminated, at a rate per annum equal to 1/8 of 1%. Accrued commitment
fee shall be payable on each Quarterly Date and on the earlier of the Commitment
Termination Date and the date the Commitment is otherwise terminated, as the
case may be.
2.05 Several Obligations; Remedies Independent. The failure of any
Bank to make any Loan to be made by it on the date specified therefor shall not
relieve any other Bank of its obligation to make its Loan on such date, but
neither any Bank nor the Administrative Agent shall be responsible for the
failure of any other Bank to make a Loan to be made by such other Bank, and no
Bank shall have any obligation to the Administrative Agent or any other Bank for
the failure by such Bank to make any Loan required to be made by such Bank. The
amounts payable by the Company at any time hereunder and under the Notes to each
Bank shall be a separate and independent debt and each Bank shall, subject to
the express provisions of Section 9 with respect to the termination of the
Commitments and the declaration of the Loans to be due and payable, be entitled
to protect and enforce its rights arising out of this Agreement and the Notes,
and it shall not be necessary for any other Bank or the Administrative Agent to
consent to, or be joined as an additional party in, any proceedings for such
purposes.
2.06 Notes.
(a) The Revolving Credit Loans made by each Bank shall be evidenced
by a single promissory note of the Company
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substantially in the form of Exhibit A-1 hereto, dated the Restatement Date,
payable to such Bank in a principal amount equal to the amount of its Commitment
as originally in effect and otherwise duly completed.
(b) Each Term Loan made by each Bank shall be evidenced by a
separate promissory note of the Company substantially in the form of Exhibit A-2
hereto, dated the date of such Term Loan, payable to such Bank in a principal
amount equal to the amount of such Term Loan and otherwise duly completed.
(c) The date, amount, Type, interest rate and duration of Interest
Period (if applicable) of each Revolving Credit Loan made by each Bank to the
Company, and each payment made on account of the principal thereof, shall be
recorded by such Bank on its books and, prior to any transfer of the Revolving
Credit Note evidencing the Revolving Credit Loans held by it, endorsed by such
Bank on the schedule attached to such Revolving Credit Note or any continuation
thereof; provided that the failure of such Bank to make any such recordation or
endorsement shall not affect the obligations of the Company to make a payment
when due of any amount owing hereunder or under such Revolving Credit Note in
respect of the Revolving Credit Loans evidenced by such Revolving Credit Note.
(d) The Swingline Loans made by the Swingline Bank shall be
evidenced by a single promissory note of the Company substantially in the form
of Exhibit A-3 hereto, dated the Amendment Effective Date, payable to the
Swingline Bank in a principal amount equal to $10,000,000 and otherwise duly
completed. The date and amount of each Swingline Loan and each payment made on
account of the principal thereof, shall be recorded by the Swingline Bank on its
books and, prior to any transfer of its Swingline Note, endorsed by the
Swingline Bank on the schedule attached to the Swingline Note or any
continuation thereof; provided that the failure by the Swingline Bank to make
any such recordation or endorsement shall not affect the obligations of the
Company to make a payment when due of any
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amount owing hereunder or under such Swingline Note in respect of the Swingline
Loans evidenced by such Swingline Note.
(e) No Bank shall be entitled to have its Notes subdivided, by
exchange for promissory notes of lesser denominations or otherwise, except in
connection with a permitted assignment of all or any portion of such Bank's
relevant Commitment, Loans and Notes pursuant to Section 11.06(b) hereof. The
Swingline Bank shall not be entitled to have its Note subdivided, by exchange
for promissory notes of lesser denominations or otherwise, except in connection
with a permitted assignment of all or any portion of the Swingline Bank's
Swingline Commitment, the Swingline Loans and the Swingline Note pursuant to
Section 11.06(g) hereof.
2.07 Optional Prepayments and Conversions or Continuations of Loans.
Subject to Section 4.04 hereof, the Company shall have the right to prepay
Swingline Loans or any Series of Revolving Credit Loans or any Series of Term
Loans, in whole at any time or in part from time to time or to Convert Loans of
one Type into Loans of another type or Continue Loans of one Type as Loans of
the same Type, provided that:
(a) the Company shall give the Administrative Agent notice of each
such prepayment, Conversion or Continuation as provided in Section 4.05
hereof (and, upon the prepayment date specified in any such notice of
prepayment, the amount to be prepaid shall become due and payable
hereunder);
(b) the Company shall simultaneously pay interest on any principal
so prepaid accrued to the date of such prepayment;
(c) if any Revolving Credit Loan that is a Eurodollar Loan is
prepaid or Converted on any day other than the last day of the Interest
Period therefor, the Company shall simultaneously pay any amounts required
by Section 5.04 hereof in respect of such prepayment;
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(d) prepayments or Conversions of any Series of Term Loans that are
Eurodollar Loans may only be made on the last day of any Interest Period
therefor and shall be applied ratably to the outstanding installments of
such Series of Term Loans;
(e) if any Swingline Loan is outstanding, the Revolving Credit Loans
may not be prepaid or Converted;
(f) Swingline Loans may not be Continued.
Notwithstanding the foregoing, and without limiting the rights and remedies of
the Banks under Section 9 hereof, in the event that any Event of Default shall
have occurred and be continuing, the Administrative Agent may (and at the
request of the Majority Banks shall) suspend (for so long as such Event of
Default shall be continuing) the right of the Company to Convert any Loan into a
Eurodollar Loan, or to Continue any Loan as a Eurodollar Loan, in which event
all Loans shall be Converted (on the last day(s) of the respective Interest
Periods therefor) or Continued, as the case may be, as Base Rate Loans.
2.08 Mandatory Prepayments of Loans or Pledge of Additional Shares.
The Company shall from time to time when and to the extent necessary pledge
additional shares of common stock of ERC in accordance with the Pledge Agreement
and/or prepay the Loans so that at all times the aggregate outstanding amount of
the Loans, less any collected funds standing to the credit of the Collateral
Account, shall not exceed 60% of the aggregate Value of the shares of Pledged
Stock (as defined in the Pledge Agreement); provided that the amount of any such
prepayment shall be applied first to any outstanding Swingline Loan, next to any
outstanding Revolving Credit Loans and finally to any outstanding Term Loans and
to the installments of the Term Loans in the inverse order of their maturity
(regardless of Series) and, in the case of a partial prepayment of installments
due on the same date, ratably based on the respective unpaid principal amounts
of such installments. Simultaneously with each such prepayment, the Company
shall pay interest on the principal so prepaid accrued to the date of such
prepayment and, if any Loan is prepaid on any
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day other than the last day of an Interest Period therefor, the Company shall
simultaneously pay any amounts required by Section 5.04 hereof in respect of
such prepayment. Any such pledge of additional shares of common stock of ERC
shall be subject to the condition that the Company shall have satisfied the
conditions set forth in Section 6.03(c) hereof with respect to such pledge.
2.09 Extension of Commitment Termination Date. The Company may, by
notice to the Administrative Agent (which shall promptly deliver a copy thereof
to each of the Banks) not more than 45 days prior to the Commitment Termination
Date then in effect hereunder (the "Existing Commitment Termination Date"),
request that the Banks extend the Commitment Termination Date for an additional
360 day period. If each Bank, acting in its sole discretion, by notice to the
Company and Administrative Agent given on the date (and only on the date) 30
days prior to the Existing Commitment Termination Date (provided, if such date
is not a Business Day, then such notice date shall by the next succeeding
Business Day) (the "Consent Date"), agrees to such request, then effective as of
the Existing Commitment Termination Date, the Commitment Termination Date shall
be extended to the date falling 360 days after the Existing Commitment
Termination Date (provided, if such date is not a Business Day, then such
Commitment Termination Date as so extended shall be the next preceding Business
Day); provided that such extension shall not be effective unless (i) no Default
shall have occurred and be continuing on the date of the notice requesting such
extension or on the Existing Commitment Termination Date and (ii) each of the
representations and warranties of the Company in Section 7 hereof shall be true
and correct on and as of each of the date of such notice and the Existing
Commitment Termination Date with the same force and effect as if made on and as
of each such date (or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific date).
Section 3. Payments of Principal and Interest.
3.01 Repayment of Loans.
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(a) The Company hereby promises to pay to the Administrative Agent
for account of each Bank the outstanding principal amount of each of such Bank's
Revolving Credit Loans, and each Revolving Credit Loan shall mature, on the
Commitment Termination Date.
(b) The Company hereby promises to pay to the Administrative Agent
for account of the Banks the aggregate principal amount of each Series of Term
Loans in sixteen equal consecutive quarterly installments commencing on the date
three months after the date of the making of such Series of Term Loans and
thereafter on the quarterly anniversary dates of the date of the making of such
Series of Term Loans (each a "Principal Payment Date"); provided that, if the
date of the making of such Series of Term Loans is the last Business Day of a
calendar month (or on any day for which there is no numerically corresponding
date in the appropriate subsequent calendar month) the payment date shall be the
last Business Day of the appropriate subsequent calendar month; and provided
that, if any Principal Payment Date would fall on a day other than a Business
Day, such Principal Payment Date shall be the next succeeding Business Day (or,
if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day).
(c) The Company hereby promises to pay to the Administrative Agent
for account of the Swingline Bank the principal of each Swingline Loan at or
prior to, and such Swingline Loan shall mature at, 1:00 p.m. New York time on
the Swingline Maturity Date for such Swingline Loan.
3.02 Interest. The Company hereby promises to pay to the
Administrative Agent for account of each Bank interest on the unpaid principal
amount of each Loan made by such Bank for the period from and including the date
of such Loan to but excluding the date such Loan shall be paid in full, at the
following rates per annum:
(a) if such Loan is a Revolving Credit Loan, (i) during such periods
as such Loan is a Base Rate Loan, the Base Rate (as in effect from time to
time) plus the
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Applicable Margin and (ii) during such periods as such Loan is a
Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar
Rate for such Loan for such Interest Period plus the Applicable Margin;
(b) if such Loan is a Term Loan, (i) during such periods as such
Loan is a Base Rate Loan, the Base Rate (as in effect from time to time)
plus the Applicable Margin and (ii) during such periods as such Loan is a
Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar
Rate for such Loan for such Interest Period plus the Applicable Margin;
and
(c) if such Loan is a Swingline Loan, the Swingline Rate for each
day during the period from and including the first day of the Interest
Period related thereto to but excluding the Swingline Maturity Date for
such Swingline Loan.
Notwithstanding the foregoing, the Company hereby promises to pay to the
Administrative Agent for account of each Bank interest at the applicable
Post-Default Rate on any principal of any Loan made by such Bank and on any
other amount payable by the Company hereunder or under the Notes held by such
Bank to or for account of such Bank, which shall not be paid in full when due
(whether at stated maturity, by acceleration, by mandatory prepayment or
otherwise), for the period from and including the due date thereof to but
excluding the date the same is paid in full. Accrued interest on each Loan shall
be payable (i) in the case of a Base Rate Loan, quarterly on the Quarterly
Dates, (ii) in the case of Eurodollar Loans or Swingline Loans, on the last day
of each Interest Period therefor and, if such Interest Period is longer than
three months, at three-month intervals following the first day of such Interest
Period, and (iii) upon the payment or prepayment thereof or the Conversion of
such Loan to a Loan of another Type (but only on the principal amount so paid,
or prepaid or Converted), except that interest payable at the Post-Default Rate
shall be payable from time to time on demand of the Banks for whose account such
interest is payable. Promptly after the determination of any interest rate
provided for herein
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or any change therein, the Administrative Agent shall give notice thereof to the
Banks to which such interest is payable and to the Company.
Section 4. Payments; Pro Rata Treatment; Computations; Etc.
4.01 Payments.
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Company under this
Agreement and the Notes, and, except to the extent otherwise provided therein,
all payments to be made by the Company under any other Basic Document, shall be
made in Dollars, in immediately available funds, without deduction, set-off or
counterclaim, to the Administrative Agent at an account in New York designated
by the Administrative Agent, not later than 1:00 p.m. New York time on the date
on which such payment shall become due (each such payment made after such time
on such due date to be deemed to have been made on the next succeeding Business
Day).
(b) Any Bank or Swingline Bank for whose account any such payment is
to be made may (but shall not be obligated to) debit the amount of any such
payment that is not made by such time to any ordinary deposit account of the
Company with such Bank (with notice to the Company and the Administrative
Agent).
(c) The Company shall, at the time of making each payment under this
Agreement or any Note for account of any Bank, specify to the Administrative
Agent (which shall notify the intended recipient(s) thereof) the Loans or other
amounts payable by the Company hereunder to which such payment is to be applied,
in which case such payment shall be, subject to Section 4.02 hereof, so applied
(and in the event that the Company fails to so specify, or if an Event of
Default has occurred and is continuing, such payment shall be, subject to said
Section 4.02, applied first to the Swingline Bank (to the extent any amounts are
then due and payable to the Swingline Bank on account of any Swingline Loan) and
then in payment of amounts due under this
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Agreement or any Note in such manner as is determined to be appropriate by the
Majority Banks or, if the Majority Banks fail to advise the Administrative Agent
of their determination promptly following a request from the Administrative
Agent for such a determination, by the Administrative Agent).
(d) Each payment received by the Administrative Agent under this
Agreement or any Note for account of any Bank shall be paid by the
Administrative Agent promptly to such Bank, in immediately available funds, for
account of such Bank's Applicable Lending Office for the Loan or other
obligation in respect of which such payment is made.
(e) If the due date of any payment under this Agreement or any Note
would otherwise fall on a day that is not a Business Day, such date shall be
extended to the next succeeding Business Day, and interest shall be payable on
any principal so extended for the period of such extension.
4.02 Pro Rata Treatment. Except to the extent otherwise provided
herein:
(a) the making of Loans of a particular Class shall be made pro rata
among the Banks according to the amounts of their respective Commitments
and the then current Interest Period of Loans of a particular Class and
Series shall be coterminous;
(b) except as otherwise provided in Section 5.03A hereof,
Eurodollar Loans having the same Interest Period shall be allocated pro
rata among the Banks according to the amounts of their respective
Commitments (in the case of the making of Loans) or their respective Loans
(in the case of Conversions and Continuations of Loans);
(c) each payment or prepayment of principal of Loans of a particular
Class and Series shall be made for account of the Banks pro rata in
accordance with the respective unpaid principal amounts of the Loans of
such Class and Series held by the Banks;
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(d) each payment of interest on Loans of a particular Class and
Series shall be made for account of the Banks pro rata in accordance with
the amounts of interest on Loans of such Class and Series then due and
payable to the respective Banks;
(e) each payment of commitment fee under Section 2.04 hereof shall
be made, and each termination or reduction of the amount of the
Commitments shall be applied to the Commitments of the Banks, pro rata
according to the respective amounts of the Commitments of the Banks; and
Notwithstanding the foregoing, borrowings, payments and prepayments of Swingline
Loans shall be made without regard to the foregoing provisions of this Section
4.02.
4.03 Computations. Interest on Eurodollar Loans and commitment fee
shall be computed on the basis of a year of 360 days and actual days elapsed
(including the first day but excluding the last day) occurring in the period for
which payable and interest on Base Rate Loans shall be computed on the basis of
a year of 365 or 366 days, as the case may be, and actual days elapsed
(including the first day but excluding the last day) occurring in the period for
which payable. Notwithstanding the foregoing, for each day that the Base Rate is
calculated by reference to the Federal Funds Rate, interest on Base Rate Loans
shall be computed on the basis of a year of 360 days and actual days elapsed.
4.04 Minimum Amounts. Except for mandatory prepayments referred by
Section 2.08 hereof and Conversions, or prepayments made pursuant to Section
5.04 hereof, each borrowing, Conversion and partial prepayment of principal of
Revolving Credit Loans shall be in an aggregate amount equal to $1,000,000 or
any integral multiple of $200,000 in excess thereof (borrowings, Conversions or
prepayments of or into Loans of different Types or, in the case of Eurodollar
Loans, having different Interest Periods at the same time hereunder to be deemed
separate borrowings, Conversions and prepayments for purposes of the foregoing,
one for each Type or Interest Period).
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Each borrowing and Conversion of Term Loans shall be in an aggregate amount
equal to $3,000,000 or any integral multiple of $200,000 in excess thereof, and
each partial prepayment or Conversion of the principal of any Series of Term
Loans shall be in an aggregate amount at least equal to $500,000 (Conversions or
prepayments of or into Loans of different Types or, in the case of Eurodollar
Loans, having different Interest Periods at the same time hereunder to be deemed
separate Conversions and prepayments for purposes of the foregoing, one for each
Type or
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Interest Period). Each borrowing or partial prepayment of Swingline Loans shall
be in an aggregate amount at least equal to $1,000,000 or in multiples of
$200,000 in excess thereof.
4.05 Certain Notices. Notices by the Company to the Administrative
Agent of terminations or reductions of Commitments, of borrowings, Conversions,
Continuations and optional prepayments of Loans, of Types of Loans and of the
duration of Interest Periods shall be irrevocable and shall be effective only if
received by the Administrative Agent not later than 10:00 a.m. New York time.
The number of Business Days prior to the date of the relevant termination,
reduction, borrowing, Conversion, Continuation or prepayment or the first day of
such Interest Period specified below:
Number of
Business
Notice Days Prior
------ ----------
Termination or reduction
of Commitments 3
Borrowing or prepayment of,
or Conversions into,
Base Rate Loans 0
Borrowing or prepayment of
Swingline Loans 0
Borrowing or prepayment of,
Conversions into, Continuations
as, or duration of Interest
Period for, Eurodollar Loans 3
Each such notice of termination or reduction shall specify the
amount of the Commitments to be terminated or reduced. Each such notice of
borrowing, Conversion, Continuation or optional prepayment shall specify the
Class and Series of Loans to be borrowed, Converted, Continued or prepaid, the
amount
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(subject to Section 4.04 hereof) of each Loan to be borrowed, Converted,
Continued or prepaid, the date of borrowing, Conversion, Continuation or
optional prepayment (which shall be a Business Day), and the duration of the
Interest Period for such Loan. The Administrative Agent shall promptly notify
the Banks of the contents of each such notice. In the event that the Company
fails to select the Type of Loan, or the duration of any Interest Period for any
Loan, within the time period and otherwise as provided in this Section 4.05,
such Loan (if outstanding as a Eurodollar Loan) will be automatically Converted
into a Base Rate Loan on the last day of the then current Interest Period for
such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not
then outstanding) will be made as, a Base Rate Loan.
4.06 Non-Receipt of Funds by the Administrative Agent. Unless the
Administrative Agent shall have been notified by a Bank or the Company (the
"Payor") prior to the date on which the Payor is to make payment to the
Administrative Agent of (in the case of a Bank) the proceeds of a Loan to be
made by such Bank hereunder or (in the case of the Company) a payment to the
Administrative Agent for account of one or more of the Banks hereunder (such
payment being herein called the "Required Payment"), which notice shall be
effective upon receipt, that the Payor does not intend to make the Required
Payment to the Administrative Agent, the Administrative Agent may assume that
the Required Payment has been made and may, in reliance upon such assumption
(but shall not be required to), make the amount thereof available to the
intended recipient(s) on such date; and, if the Payor has not in fact made the
Required Payment to the Administrative Agent, the recipient(s) of such payment
shall, on demand, repay to the Administrative Agent the amount so made available
together with interest thereon in respect of each day during the period
commencing on the date (the "Advance Date") such amount was so made available by
the Administrative Agent until the date the Administrative Agent recovers such
amount at a rate per annum equal to the Federal Funds Rate for such day and, if
such recipient(s) shall fail promptly to make such payment, the Administrative
Agent shall be entitled to recover such amount, on demand, from the Payor,
together with interest as
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aforesaid, provided that if the recipient(s) shall fail to return, and the Payor
shall fail to make, the Required Payment to the Administrative Agent within
three Business Days of the Advance Date, then the Payor and the recipient(s)
shall each be obligated to pay interest on the Required Payment (but without
duplication) as follows:
(a) if the Required Payment shall represent a payment to be made by
the Company to the Banks, the Company and the recipient(s) shall each be
obligated retroactively to the Advance Date to pay interest in respect of
the Required Payment at the Post-Default Rate (and, in case the
recipient(s) shall return the Required Payment to the Administrative
Agent, without limiting the obligation of the Company under Section 3.02
hereof to pay interest to such recipient(s) at the Post-Default Rate in
respect of the Required Payment); and
(b) if the Required Payment shall represent proceeds of a Loan to be
made by the Banks to the Company, the Payor and the Company shall each be
obligated retroactively to the Advance Date to pay interest in respect of
the Required Payment at the rate of interest provided for such Required
Payment pursuant to whichever of the rates specified in Section 3.02
hereof is applicable to the Type of such Loan (and, in case the Company
shall return the Required Payment to the Administrative Agent, without
limiting any claim the Company may have against the Payor in respect of
the Required Payment).
4.07 Sharing of Payments, Etc.
(a) The Company agrees that, in addition to (and without limitation
of) any right of set-off, banker's lien or counterclaim a Bank or the Swingline
Bank (as the case may be) may otherwise have, each Bank and the Swingline Bank
shall be entitled, at its option, to offset balances held by it for account of
the Company at any of its offices, in Dollars or in any other currency, against
any principal of or interest on any of such Bank's or the Swingline Bank's Loans
or any other amount
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payable to such Bank or Swingline Bank (as the case may be) hereunder, that is
not paid when due (regardless of whether such balances are then due to the
Company), in which case it shall promptly thereafter notify the Company and the
Administrative Agent thereof, provided that such Bank's or the Swingline Bank's
failure to give such notice shall not affect the validity thereof.
(b) If any Bank shall obtain payment of any principal of or interest
on any Loan of a particular Class and Series owing to it or payment of any other
amount under this Agreement or any other Basic Document through the exercise of
any right of set-off, banker's lien or counterclaim or similar right or
otherwise (other than through the Administrative Agent as provided herein), and,
as a result of such payment, such Bank shall have received a greater percentage
of the principal of or interest on the Loans of such Class and Series or such
other amounts then due hereunder or thereunder by the Company to such Bank than
the percentage received by any other Bank, it shall promptly purchase from such
other Banks participations in (or, if and to the extent specified by such Bank,
direct interests in) the Loans of such Class and Series or such other amounts,
respectively, owing to such other Banks (or in interest due thereon, as the case
may be) in such amounts, and make such other adjustments from time to time as
shall be equitable, to the end that all the Banks shall share the benefit of
such excess payment (net of any expenses that may be incurred by such Bank in
obtaining or preserving such excess payment) pro rata in accordance with the
unpaid principal of and/or interest on the Loans of such Class and Series or
such other amounts, respectively, owing to each of the Banks. To such end all
the Banks shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if such payment is rescinded or must otherwise
be restored.
(c) The Company agrees that any Bank so purchasing such a
participation (or direct interest) may exercise all rights of set-off, banker's
lien, counterclaim or similar rights with respect to such participation as fully
as if such Bank were a
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direct holder of Loans or other amounts (as the case may be) owing to such Bank
in the amount of such participation.
(d) Nothing contained herein shall require any Bank or the Swingline
Bank to exercise any such right or shall affect the right of any Bank or the
Swingline Bank to exercise, and retain the benefits of exercising, any such
right with respect to any other indebtedness or obligation of the Company. If,
under any applicable bankruptcy, insolvency or other similar law, any Bank
receives a secured claim in lieu of a set-off to which this Section 4.07
applies, such Bank shall, to the extent practicable, exercise its rights in
respect of such secured claim in a manner consistent with the rights of the
Banks entitled under this Section 4.07 to share in the benefits of any recovery
on such secured claim.
Section 5. Yield Protection, Etc.
5.01 Additional Costs.
(a) The Company shall pay directly to each Bank from time to time
such amounts as such Bank may determine to be necessary to compensate such Bank
for any costs that such Bank determines are attributable to its making or
maintaining of any Eurodollar Loans or its obligation to make any Eurodollar
Loans hereunder, or any reduction in any amount receivable by such Bank
hereunder in respect of any Loans or such obligation (such increases in costs
and reductions in amounts receivable being herein called "Additional Costs"),
resulting from any Regulatory Change that:
(i) changes the basis of taxation of any amounts payable to such
Bank under this Agreement or its Notes (other than taxes imposed on or
measured by the overall net income of such Bank or of its Applicable
Lending Office by the jurisdiction in which such Bank has its principal
office or such Applicable Lending Office); or
(ii) imposes or modifies any reserve, special deposit or similar
requirements (other than the Reserve Requirement
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utilized in the determination of the Eurodollar Rate for such Loan)
relating to any extensions of credit or other assets of, or any deposits
with or other liabilities of, such Bank (including, without limitation,
any of such Loans or any deposits referred to in the definition of
"Eurodollar Base Rate" in Section 1.01 hereof), or any commitment of such
Bank hereunder (including, without limitation, the Commitment of such
Bank); or
(iii) imposes any other condition affecting this Agreement or its
Notes or its Commitment.
If any Bank requests compensation from the Company under this Section 5.01(a),
the Company may, by notice to such Bank (with a copy to the Agent), suspend the
obligation of such Bank thereafter to make or Continue Eurodollar Loans, or to
Convert Base Rate Loans into Eurodollar Loans, until the Regulatory Change
giving rise to such request ceases to be in effect (in which case the provisions
of Section 5.03A hereof shall be applicable), provided that such suspension
shall not affect the right of such Bank to receive the compensation so
requested.
(b) Without limiting the effect of the provisions of paragraph (a)
of this Section 5.01, in the event that, by reason of any Regulatory Change, any
Bank either (i) incurs Additional Costs based on or measured by the excess above
a specified level of the amount of a category of deposits or other liabilities
of such Bank that includes deposits by reference to which the interest rate on
Eurodollar Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of such Bank that includes Eurodollar Loans
or (ii) becomes subject to restrictions on the amount of such a category of
liabilities or assets that it may hold, then, if such Bank so elects by notice
to the Company (with a copy to the Administrative Agent), the obligation of such
Bank to make Eurodollar Loans hereunder shall be suspended until such Regulatory
Change ceases to be in effect (in which case the Loans theretofore made by such
Bank shall bear interest at the Base Rate from the last day of the then current
Interest Period for such Loans in accordance with the provisions of Section
5.03A).
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(c) Without limiting the effect of the foregoing provisions of this
Section 5.01 (but without duplication), the Company shall pay directly to each
Bank from time to time on request such amounts as such Bank may determine to be
necessary to compensate such Bank (or, without duplication, the bank holding
company of which such Bank is a subsidiary) for any costs that it determines are
attributable to the maintenance by such Bank (or any Applicable Lending Office
or such bank holding company), pursuant to any law or regulation or any
interpretation, directive or request (whether or not having the force of law and
whether or not failure to comply therewith would be unlawful) of any court or
governmental or monetary authority (i) following any Regulatory Change or (ii)
implementing any risk-based capital guideline or other requirement (whether or
not having the force of law and whether or not the failure to comply therewith
would be unlawful) hereafter issued by any government or governmental or
supervisory authority implementing at the national level the Basel Accord
(including, without limitation, the Final Risk-Based Capital Guidelines of the
Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix
A; 12 C.F.R. Part 225, Appendix A) and the Final Risk-Based Capital Guidelines
of the Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix
A)), of capital in respect of its Commitment(s) or Loans (such compensation to
include, without limitation, an amount equal to any reduction of the rate of
return on assets or equity of such Bank (or any Applicable Lending Office or
such bank holding company) to a level below that which such Bank (or any
Applicable Lending Office or such bank holding company) could have achieved but
for such law, regulation, interpretation, directive or request). For purposes of
this Section 5.01(c), "Basel Accord" shall mean the proposals for risk-based
capital framework described by the Basel Committee on Banking Regulations and
Supervisory Practices in its paper entitled "International Convergence of
Capital Measurement and Capital Standards" dated July 1988, as amended, modified
and supplemented and in effect from time to time or any replacement thereof.
(d) Each Bank shall notify the Company of any event occurring after
the date of this Agreement entitling such Bank to
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compensation under paragraph (a) or (c) of this Section 5.01 as promptly as
practicable; provided that the Company shall not be required to pay any amounts
under this Section 5.01 to the extent the amount requested to be paid is
allocable to a period or date prior to the date which is 90 days before the date
of such notice by such Bank to the Company. Each Bank will designate a different
Applicable Lending Office for the Loans of such Bank affected by such event if
such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the sole good faith opinion of such Bank, be
disadvantageous to such Bank, except that such Bank shall have no obligation to
designate an Applicable Lending Office located in the United States of America.
Each Bank will furnish to the Company a certificate setting forth in reasonable
detail the basis and amount of each request by such Bank for compensation under
paragraph (a) or (c) of this Section 5.01. Determinations and allocations by any
Bank for purposes of this Section 5.01 of the effect of any Regulatory Change
pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect of
capital maintained pursuant to paragraph (c) of this Section 5.01, on its costs
or rate of return of maintaining Loans or its obligation to make Loans, or on
amounts receivable by it in respect of Loans, and of the amounts required to
compensate such Bank under this Section 5.01, shall be conclusive, provided that
such determinations and allocations are made on a reasonable basis and are not
manifestly in error.
5.02 Limitation on Types of Loans. Anything herein to the contrary
notwithstanding, if, on or prior to the determination of any Eurodollar Base
Rate for any Interest Period:
(a) the Administrative Agent determines, which determination shall
be conclusive, that quotations of interest rates for the relevant deposits
referred to in the definition of "Eurodollar Base Rate" in Section 1.01
hereof are not being provided in the relevant amounts or for the relevant
maturities for purposes of determining rates of interest for Eurodollar
Loans as provided herein; or
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(b) if the Majority Banks in good faith determine, which
determination shall otherwise be conclusive, and notify the Administrative
Agent that the relevant rates of interest referred to in the definition of
"Eurodollar Base Rate" in Section 1.01 hereof upon the basis of which the
rate of interest for Eurodollar Loans for such Interest Period is to be
determined are not likely adequately to cover the cost to such Banks of
making or maintaining Eurodollar Loans for such Interest Period;
then the Administrative Agent shall give the Company and each Bank prompt notice
thereof and, so long as such condition remains in effect, the Banks shall be
under no obligation to make additional Eurodollar Loans, to Continue Eurodollar
Loans or to Convert Base Rate Loans into Eurodollar Loans, and the Company
shall, on the last day(s) of the then current Interest Period(s) for the
outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans
into Base Rate Loans in accordance with Section 2.07 hereof.
5.03 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Bank or its Applicable
Lending Office to honor its obligation to make or maintain Eurodollar Loans
hereunder, then such Bank shall promptly notify the Company thereof (with a copy
to the Administrative Agent) and, in the case that it has become unlawful for
such Bank to make Loans, such Bank's obligation to make or Continue, or to
Convert Loans of any other Type into, Eurodollar Loans shall be suspended until
such time as such Bank may again make and maintain Eurodollar Loans and, in the
case that it has become unlawful for such Bank to maintain Loans, its
outstanding Loans shall bear interest at the Base Rate from the date such Bank
may specify to the Company with a copy to the Administrative Agent until it
shall no longer be unlawful for such Bank to maintain Eurodollar Loans (in which
case the provisions of Section 5.03A hereof shall be applicable).
5.03A Treatment of Affected Loans. If the obligation of any Bank to
make Eurodollar Loans or to Continue, or to Convert Base Rate Loans into,
Eurodollar Loans shall be suspended
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pursuant to Section 5.01 or 5.03 hereof, such Bank's Eurodollar Loans shall be
automatically Converted into Base Rate Loans on the last day(s) of the then
current Interest Period(s) for such Eurodollar Loans (or, in the case of a
Conversion resulting from a circumstance described in Section 5.03 hereof, on
such earlier date as such Bank may specify to the Company with a copy to the
Agent) and, unless and until such Bank gives notice as provided below that the
circumstances specified in Section 5.01 or 5.03 hereof that gave rise to such
Conversion no longer exist:
(a) to the extent that such Bank's Eurodollar Loans have been so
Converted, all payments and prepayments of principal that would otherwise
be applied to such Bank's Eurodollar Loans shall be applied instead to its
Base Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such Bank
as Eurodollar Loans shall be made or Continued instead as Base Rate Loans,
and all Base Rate Loans of such Bank that would otherwise be Converted
into Eurodollar Loans shall remain as Base Rate Loans.
If such Bank gives notice to the Company with a copy to the Agent that the
circumstances specified in Section 5.01 or 5.03 hereof that gave rise to the
Conversion of such Bank's Eurodollar Loans pursuant to this Section 5.03A no
longer exist (which such Bank agrees to do promptly upon such circumstances
ceasing to exist) at a time when Eurodollar Loans made by other Banks are
outstanding, such Bank's Base Rate Loans shall be automatically Converted, on
the first day(s) of the next succeeding Interest Period(s) for such outstanding
Eurodollar Loans, to the extent necessary so that, after giving effect thereto,
all Base Rate and Eurodollar Loans are allocated among the Banks ratably (as to
principal amounts, Types and Interest Periods) in accordance with their
respective Commitments.
5.04 Compensation. The Company shall pay to the Administrative Agent
for account of each Bank, upon the request of such Bank through the
Administrative Agent, such amount or amounts as shall be sufficient (in the
reasonable opinion of such
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Bank) to compensate it for any loss, cost or expense that such Bank determines
is attributable to:
(a) any payment, mandatory or optional prepayment, or Conversion of
a Eurodollar Loan made by such Bank for any reason (including, without
limitation, the acceleration of the Loans pursuant to Section 9 hereof) on
a date other than the last day of an Interest Period for such Loan;
(b) any failure by the Company (whether by reason of the Company's
election not to proceed or the failure of any of the conditions precedent
specified in Section 6 hereof to be satisfied) to borrow a Eurodollar Loan
from such Bank on the date for such borrowing specified in the relevant
notice of borrowing given under Section 2.02 hereof.
Without limiting the effect of the preceding sentence, such
compensation shall include an amount equal to the excess (if any) of (i) the
amount of interest that otherwise would have accrued on the principal amount of
such Eurodollar Loan so paid, prepaid, Converted or not borrowed, for the period
from the date of such payment, prepayment, Conversion or failure to borrow, to
the last day of the then current Interest Period for such Eurodollar Loan (or,
in the case of a failure to borrow, the Interest Period for such Eurodollar Loan
that would have commenced on the date specified for such borrowing) at the
applicable rate of interest for such Eurodollar Loan provided for herein, less
the Applicable Margin for such Eurodollar Loan, over (ii) the amount of interest
that otherwise would have accrued on such principal amount at a rate per annum
equal to the interest component of the amount such Bank would have bid on the
date of such payment, prepayment or failure to borrow in the London interbank
market for Dollar deposits of leading banks in amounts comparable to such
principal amount and with maturities comparable to such period (as reasonably
determined by such Bank).
5.05 U.S. Taxes.
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(a) The Company agrees to pay to each of the Banks and the Swingline
Bank that is not a U.S. Person such additional amounts as are necessary in order
that the net payment of any amount due to such non-U.S. Person hereunder after
deduction for or withholding in respect of any U.S. Taxes imposed with respect
to such payment (or in lieu thereof, payment of such U.S. Taxes by such non-U.S.
Person), will not be less than the amount stated herein to be then due and
payable, provided that the foregoing obligation to pay such additional amounts
shall not apply:
(i) to any payment to a Bank hereunder unless such Bank is, on the
Restatement Date (or on the date it becomes a Bank or the Swingline Bank
as provided in Section 11.06(b) hereof) and on the date of any change in
the Applicable Lending Office of such Bank or the Swingline Bank, either
entitled to submit a Form 1001 (relating to such Bank and entitling it to
a complete exemption from withholding on all interest to be received by it
hereunder in respect of the Loans) or Form 4224 (relating to all interest
to be received by such Bank hereunder in respect of the Loans), or
(ii) to any U.S. Taxes imposed solely by reason of the failure by such
non-U.S. Person to comply with applicable certification, information,
documentation or other reporting requirements if such compliance is
required by statute or regulation of the United States of America as a
precondition to relief or exemption from such U.S. Taxes.
For the purposes of this Section 5.05(a), (w) "Form 1001" shall mean Form 1001
(Ownership, Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America, (x) "Form 4224" shall mean Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) of the Department of the
Treasury of the United States of America (or in relation to either such Form
such successor and related forms as may from time to time be adopted by the
relevant taxing authorities of the United States of America to document a claim
to which such Form relates), (y) "U.S. Person" shall mean a citizen, national or
resident of the United States of America, a
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corporation, partnership or other entity created or organized in or under any
laws of the United States of America, or any estate or trust that is subject to
Federal income taxation regardless of the source of its income and (z) "U.S.
Taxes" shall mean any present or future tax, assessment or other charge or levy
imposed by or on behalf of the United States of America or any taxing authority
thereof or therein.
(b) Within 30 days after paying any amount to the Administrative
Agent or any Bank or the Swingline Bank from which it is required by law to make
any deduction or withholding, and within 30 days after it is required by law to
remit such deduction or withholding to any relevant taxing or other authority,
the Company shall deliver to the Administrative Agent for delivery to such
non-U.S. Person evidence satisfactory to such Person of such deduction,
withholding or payment (as the case may be).
5.06 Fair Allocation; Substitution of Banks.
(a) Anything herein to the contrary notwithstanding, any
determination by any Bank of any amounts payable by the Company under Section
5.01 shall be based upon a fair and equitable allocation by such Bank of the
particular overall cost or loss among all its similarly situated borrowers
relative to such Bank, and the Company shall not be obligated to compensate any
Bank for any costs that would not have been incurred by such Bank but for its
gross negligence or willful misconduct.
(b) Provided that no Default shall have occurred and be continuing,
the Company may, at any time, replace any Bank or the Swingline Bank that has
requested compensation from the Company pursuant to Section 5.01 hereof or whose
obligation to make additional Loans has been suspended pursuant to Section 5.03
hereof or that is entitled to payment of additional amounts under Section 5.05
hereof (any such Bank or the Swingline Bank being herein called an "Affected
Bank"), by giving not less than ten Business Days' prior notice to the
Administrative Agent (which shall promptly notify such Affected Bank and each
other Bank), that it intends to replace such Affected Bank with one or more
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banks (including, but not limited to, any other Bank under this Agreement)
selected by the Company and acceptable to the Administrative Agent (which shall
not unreasonably withhold its consent). The method (whether by assignment or
otherwise) of and documentation for such replacement shall be acceptable to the
Affected Bank, the other Banks and the Administrative Agent (which shall not
unreasonably withhold their consent and shall cooperate with the Company in
effecting such replacement). Upon the effective date of any replacement under
this Section 5.06 (and as a condition thereto), the Company shall, or shall
cause the replacement bank(s) to, pay to the Affected Bank being replaced any
amounts owing to such Affected Bank hereunder (including, without limitation,
interest, commitment fees, compensation and additional amounts under this
Section 5, in each case accrued to the effective date of such replacement),
whereupon each replacement bank shall become a "Bank" or the "Swingline Bank",
as the case may be, for all purposes of this Agreement having a Commitment in
the amount of such Affected Bank's Commitment assumed by it, and such Commitment
of the Affected Bank being replaced (including, if such Affected Bank is the
Swingline Bank, its Swingline Commitment) shall be terminated upon such
effective date and all of such Affected Bank's rights and obligations under this
Agreement shall terminate (provided that the obligations of the Company under
Sections 5.01, 5.04, 5.05 and 11.03 hereof to such Affected Bank shall survive
such replacement as provided in Section 11.07 hereof).
Section 6. Conditions Precedent.
6.01 Amendment Effective Date. The effectiveness of this amendment
and restatement of the Existing Credit Agreement provided for hereby is subject
to the receipt by the Administrative Agent of the following documents, each of
which shall be satisfactory to the Administrative Agent (and to the extent
specified below, to each Bank) in form and substance:
(a) Corporate Documents. The following documents, each certified as
indicated below:
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(i) a copy of the charters, as amended and in effect, of the
Company and of each Material Subsidiary certified as of a recent
date by the Secretary of State of the State of New York and by the
New York Insurance Department, as the case may be, and a certificate
from such respective New York State authorities dated as of a recent
date as to the good standing of and charter documents filed by the
Company and by such Material Subsidiary;
(ii) a certificate of the Secretary or an Assistant Secretary of
the Company, dated the Amendment Effective Date and certifying (A)
that attached thereto is a true and complete copy of the by-laws of
the Company and of each Material Subsidiary as amended and in effect
at all times from the date on which the resolutions referred to in
clause7 (B) were adopted to and including the date of such
certificate, (B) that attached thereto is a true and complete copy
of resolutions duly adopted by the board of directors of the Company
authorizing the execution, delivery and performance of the Basic
Documents and the extensions of credit hereunder, and that such
resolutions have not been modified, rescinded or amended and are in
full force and effect, (C) that the charters of the Company and the
Material Subsidiaries have not been amended since the date of the
certification thereto furnished pursuant to subparagraph (i) above,
and (D) as to the incumbency and specimen signature of each officer
of the Company executing the Basic Documents and each other document
to be delivered by the Company from time to time in connection
therewith (and the Administrative Agent and each Bank may
conclusively rely on such certificate until it receives notice in
writing from the Company); and
(iii) a certificate of another officer of the Company as to the
incumbency and specimen signature of the Secretary or Assistant
Secretary, as the case may be, of the Company.
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(b) Officer's Certificate. A certificate of a senior officer of the
Company, dated the Amendment Effective Date, to the effect set forth in
the first sentence of Section 6.03 hereof.
(c) Opinion of Counsel to the Company. An opinion, dated the
Amendment Effective Date, of Samuel Bergman, Executive Vice President and
General Counsel of the Company, substantially in the form of Exhibit C
hereto and covering such other matters as the Administrative Agent or any
Bank may reasonably request (and the Company hereby instructs such counsel
to deliver such opinion to the Banks and the Administrative Agent).
(d) Opinion of Special New York Counsel to Chase. An opinion, dated
the Amendment Effective Date, of Milbank, Tweed, Hadley & McCloy, special
New York counsel to Chase, substantially in the form of Exhibit D hereto.
(e) Notes. The Revolving Credit Notes, duly completed and executed
in exchange (in the case of the Existing Banks) for the promissory notes
issued under the Existing Credit Agreement.
(f) Tax Sharing Agreements. True, correct and complete copies of all
tax sharing agreements (if any) to which the Company or any of its
Subsidiaries is a party, which agreements must be in form and substance
satisfactory to the Banks.
(g) Capital Contribution Agreements. A true, correct and complete
copy of all agreements (if any) of the Company under which the Company is
obligated to make capital contributions to any of its Insurance
Subsidiaries, which agreements must be in form and substance satisfactory
to the Banks.
(h) Evidence that Existing Banks have been paid all principal of and
interest on the Existing Loans and all commitment fee, and all other
amounts owing, under the
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Existing Credit Agreement accrued to the Amendment Effective Date.
(i) Other Documents. Such other documents as the Administrative
Agent or any Bank or special New York counsel to Chase may reasonably
request.
The effectiveness of this amendment and restatement of the Existing Credit
Agreement is also subject to the payment by the Company of such fees as the
Company shall have agreed to pay or deliver to any Bank or the Administrative
Agent in connection herewith, including, without limitation, the reasonable fees
and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to
Chase in connection with the negotiation, preparation, execution and delivery of
this Agreement and the Notes and the other Basic Documents and the making of the
Loans hereunder (to the extent that statements for such fees and expenses have
been delivered to the Company not less than five days prior to the Amendment
Effective Date).
6.02 Term Loans.
The obligation of the Banks to make any Term Loans to the Company
hereunder on the occasion of the borrowing of any Series of Term Loans is
subject to the further condition precedent that the Company shall have delivered
to the Administrative Agent the Term Notes evidencing such Series of Term Loans.
6.03 Initial and Subsequent Loans.
The obligation of any Bank or the Swingline Bank to make any Loan to
the Company upon the occasion of any borrowing hereunder (including the initial
borrowing) is subject to the further conditions precedent that, both immediately
prior to the making of such Loan and also after giving effect thereto and to the
intended use thereof:
(a) no Default shall have occurred and be continuing;
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(b) the representations and warranties made by the Company in
Section 7 hereof, and in each of the other Basic Documents, shall be true
and complete on and as of the date of the making of such Loan with the
same force and effect as if made on and as of such date (or, if any such
representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date); and
(c) the Company shall have delivered to the Administrative Agent (i)
certificates (accompanied by stock powers duly endorsed in blank)
representing shares of common stock of ERC having an aggregate Value at
least equal to 166-2/3% of the aggregate unpaid principal amount of all
Loans outstanding (after giving effect to such borrowing), and (ii) a
certificate of the senior financial officer of the Company setting forth
in reasonable detail the computations necessary to determine the aggregate
Value of the shares of Pledged Stock after giving effect to the delivery
of the certificates referred to in clause (i) above.
Each notice of borrowing by the Company hereunder shall constitute a
certification by the Company to the effect set forth in the preceding sentence
(both as of the date of such notice and, unless the Company otherwise notifies
the Administrative Agent prior to the date of such borrowing, as of the date of
such borrowing).
Section 7. Representations and Warranties. The Company represents
and warrants to the Administrative Agent and the Banks and the Swingline Bank
that:
7.01 Corporate Existence. Each of the Company and its Material
Subsidiaries: (a) is a corporation, partnership or other entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization; (b) has all requisite corporate or other power, and has all
material governmental licenses, authorizations, consents and approvals,
necessary to own its assets and carry on its business as now being or as
proposed to be conducted; and (c) is qualified
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to do business and is in good standing in all jurisdictions in which the nature
of the business conducted by it makes such qualification necessary and where
failure so to qualify could, either individually or in the aggregate, have a
Material Adverse Effect.
7.02 Financial Condition.
(a) The Company has heretofore furnished to each of the Banks
consolidated and consolidating balance sheets of the Company and its
Subsidiaries as at December 31, 1995 and the related consolidated and
consolidating statements of income, shareholders' equity and cash flows of the
Company and its Subsidiaries for the fiscal year ended on said date, with the
opinion thereon (in the case of said consolidated balance sheet and statements)
of Deloitte & Touche LLP, and the unaudited consolidated and consolidating
balance sheets of the Company and its Subsidiaries as at June 30, 1996 and the
related consolidated and consolidating statements of income, shareholders'
equity and cash flows of the Company and its Subsidiaries for the six-month
period ended on such date. All such financial statements present fairly, in all
material respects, the consolidated financial condition of the Company and its
Subsidiaries, and (in the case of said consolidating financial statements) the
respective unconsolidated financial condition of the Company and of each of its
Subsidiaries, as at said dates and the consolidated results of their operations,
and (in the case of said consolidating statements) the respective unconsolidated
results of operations of the Company and of each of its Subsidiaries, for the
fiscal year and six-month period ended on said dates (subject, in the case of
such financial statements as at June 30, 1996, to normal year-end audit
adjustments), all in accordance with generally accepted accounting principles
and practices applied on a consistent basis. None of the Company nor any of its
Subsidiaries has on the Restatement Date any material contingent liabilities,
liabilities for taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments, except as referred to or
reflected or provided for in said financial statements (or in the notes thereto)
as at said dates. Since December 31, 1995, there has
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been no material adverse change in the consolidated financial condition,
operations, business or prospects of the Company and its Subsidiaries taken as a
whole from that set forth in said financial statements as at said date.
(b) The Company has heretofore furnished to each of the Banks the
annual and quarterly Statutory Statements of the Company (consolidated) and of
each of its Insurance Subsidiaries for the fiscal year ended December 31, 1995
and for the quarterly fiscal period ended June 30, 1996 as filed with the
Applicable Insurance Regulatory Authority. All such Statutory Statements present
fairly, in all material respects, the financial condition of the Company
(consolidated) and of each Insurance Subsidiary, respectively, as at the
respective dates thereof and its results of operations through fiscal year ended
on December 31, 1995 and the quarterly fiscal period ended June 30, 1996, in
accordance with statutory accounting practices prescribed or permitted by the
Applicable Insurance Regulatory Authority.
7.03 Litigation. Except as disclosed in Schedule III hereto, there
are no legal or arbitration proceedings, or any proceedings by or before any
governmental or regulatory authority or agency, now pending or (to the knowledge
of the Company) threatened against the Company or any of its Subsidiaries that,
if adversely determined, could, either individually or in the aggregate, have a
Material Adverse Effect.
7.04 No Breach. None of the execution and delivery of this Agreement
and the Notes and the other Basic Documents, the consummation of the
transactions herein and therein contemplated or compliance with the terms and
provisions hereof and thereof will conflict with or result in a breach of, or
require any consent under, (or, in the case of the Pledge Agreement, have
conflicted with or resulted in a breach of, or required any consent under) the
charter or by-laws of the Company, or any applicable law or regulation, or any
order, writ, injunction or decree of any court or governmental authority or
agency, or any agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them or any of their Property is
bound or to which any of them is subject, or
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constitute (or, in the case of the Pledge Agreement, constituted) a default
under any such agreement or instrument, or (except for the Liens created
pursuant to the Pledge Agreement) result (or, in the case of the Pledge
Agreement, resulted) in the creation or imposition of any Lien upon any Property
of the Company or any of its Subsidiaries pursuant to the terms of any such
agreement or instrument; provided that the pledge of shares of common stock of
ERC under the Pledge Agreement required the consent of the Required Majority
under (and as such term is defined in) the Senior Note Purchase Agreements.
7.05 Action. The Company has all necessary corporate power,
authority and legal right to execute and deliver this Agreement and the Notes
and perform its obligations under each of the Basic Documents; the execution and
delivery of this Agreement and the Notes and performance by the Company of each
of the Basic Documents have been duly authorized by all necessary corporate
action on its part (including, without limitation, any required shareholder
approvals); and this Agreement and the Pledge Agreement have been duly and
validly executed and delivered by the Company and constitute, and each of the
Notes when executed and delivered for value will constitute, the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
7.06 Approvals. No authorizations, approvals or consents of, and no
filings or registrations with, any governmental or regulatory authority or
agency, or any securities exchange, are necessary for the execution or delivery
by the Company of this Agreement and the Notes or performance by the Company of
the Basic Documents or for the legality, validity or enforceability hereof or
thereof except that the approval of the New York Insurance Department may be
required in connection with a foreclosure on the Pledged Stock in the event such
foreclosure results a Change in Control of ERC.
7.07 Margin Stock. Not more than 25% of the value (as determined by
any reasonable method) of the Properties of the Company and its Subsidiaries
(including, without limitation, common stock of the Company held in treasury)
subject to the
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provisions of Section 8.05 or 8.06 hereof is represented by Margin Stock.
7.08 ERISA. Each Plan, and, to the knowledge of the Company, each
Multiemployer Plan, is in compliance in all material respects with, and has been
administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law, and no event
or condition has occurred and is continuing as to which the Company would be
under an obligation to furnish a report to the Banks under Section 8.01(g)
hereof.
7.09 Taxes. The Company and its Subsidiaries are members of an
affiliated group of corporations filing consolidated returns for Federal income
tax purposes, of which the Company is the "common parent" (within the meaning of
Section 1504 of the Code) of such group. The Company and its Subsidiaries have
filed all Federal income tax returns and all other material tax returns that are
required to be filed by them and have paid all taxes due pursuant to such
returns or pursuant to any assessment received by the Company or any of its
Subsidiaries. The charges, accruals and reserves on the books of the Company and
its Subsidiaries in respect of taxes and other governmental charges are, in the
opinion of the Company, adequate. The Company has not given or been requested to
give a waiver of the statute of limitations relating to the payment of Federal,
state, local and foreign taxes or other impositions.
7.10 Investment Company Act. Neither the Company nor any of its
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
7.11 Public Utility Holding Company Act. Neither the Company nor any
of its Subsidiaries is a "holding company", or an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company", within the meaning of
the Public Utility Holding Company Act of 1935, as amended.
7.12 Material Agreements and Liens.
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(a) Part A of Schedule I hereto is a complete and correct list, as
of the Restatement Date, of each credit agreement, loan agreement, indenture,
securities purchase agreement, guarantee, letter of credit or other arrangement
providing for or otherwise relating to any Indebtedness of the Company or any of
its Subsidiaries the aggregate principal or face amount of which equals or
exceeds (or may equal or exceed) $1,000,000, and the aggregate principal or face
amount outstanding or that may become outstanding under each such arrangement is
correctly described in Part A of said Schedule I.
(b) Part B of Schedule I hereto is a complete and correct list, as
of the Restatement Date, of each Lien securing Indebtedness of any Person the
aggregate principal or face amount of which equals or exceeds (or may equal or
exceed) $1,000,000 and covering any Property of the Company or any of its
Subsidiaries, and the aggregate Indebtedness secured (or which may be secured)
by each such Lien and the Property covered by each such Lien is correctly
described in Part B of said Schedule I.
7.13 Environmental Matters. There have been no environmental
investigations, studies, audits, tests, reviews or other analyses conducted by
or that are in the possession of the Company or any of its Subsidiaries in
relation to any site or facility now or previously owned, operated or leased by
the Company or any of its Subsidiaries which have not been made available to the
Banks.
7.14 Capitalization. The authorized capital stock of the Company
consists, on the Restatement Date, of an aggregate of 30,000,000 shares of
common stock, par value $0.10 per share, of which [18,163,100] shares are duly
and validly issued and outstanding (and [111,400] shares of which are held in
treasury), each of which shares is fully paid and nonassessable. As of the
Restatement Date, except for the Company's Long-Term Incentive Plan for Key
Employees and its Non-Employee-Director Stock Option Plan as in effect on the
Restatement Date and any stock bonus awards, restricted stock awards,
performance units, stock options or stock appreciation rights heretofore issued
thereunder and
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other than pursuant to the Shareholders' Agreement, (x) there are no outstanding
Equity Rights with respect to the Company and (y) there are no outstanding
obligations of the Company or any of its Subsidiaries to repurchase, redeem, or
otherwise acquire any shares of capital stock of the Company nor are there any
outstanding obligations of the Company or any of its Subsidiaries to make
payments to any Person, such as "phantom stock" payments, where the amount
thereof is calculated with reference to the fair market value or equity value of
the Company or any of its Subsidiaries.
7.15 Subsidiaries, Etc.
(a) Set forth in Schedule II hereto is a complete and correct list,
as of the Restatement Date, of all of the Subsidiaries of the Company, together
with, for each such Subsidiary, (i) the jurisdiction of organization of such
Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and
(iii) the nature of the ownership interests held by each such Person and the
percentage of ownership of such Subsidiary represented by such ownership
interests. Except as disclosed in Schedule II hereto, as of the Restatement Date
(x) each of the Company and its Subsidiaries owns, free and clear of Liens
(other than Liens created pursuant to the Pledge Agreement), and has the
unencumbered right to vote, all outstanding ownership interests in each Person
shown to be held by it in Schedule II hereto, (y) all of the issued and
outstanding capital stock of each such Person organized as a corporation is
validly issued, fully paid and nonassessable and (z) there are no outstanding
Equity Rights with respect to such Person.
(b) None of the Subsidiaries of the Company is, on the Restatement
Date, subject to any indenture, agreement, instrument or other arrangement of
the type described in Section 8.15(c) hereof.
7.16 True and Complete Disclosure. The information, reports,
financial statements, exhibits and schedules furnished in writing by or on
behalf of the Company or any of its
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Subsidiaries to the Administrative Agent or any Bank in connection with the
negotiation, preparation or delivery of this Agreement and the other Basic
Documents or included herein or therein or delivered pursuant hereto or thereto,
when taken as a whole, do not, as of the Restatement Date, contain any untrue
statement of material fact or omit to state any material fact necessary to make
the statements herein or therein, in light of the circumstances under which they
were made, not misleading. All written information furnished after the
Restatement Date by the Company and its Subsidiaries to the Administrative Agent
and the Banks in connection with this Agreement and the other Basic Documents
and the transactions contemplated hereby and thereby will be true, complete and
accurate in every material respect, or (in the case of projections) based on
reasonable estimates, on the date as of which such information is stated or
certified. To the Company's knowledge, there is no fact peculiar to the Company
or any of its Subsidiaries (in contrast to information of a general economic or
industry nature) that could have a Material Adverse Effect that has not been
disclosed herein, in the other Basic Documents or in a report, financial
statement, exhibit, schedule, disclosure letter or other writing furnished to
the Banks for use in connection with the transactions contemplated hereby or
thereby.
Section 8. Covenants of the Company. The Company covenants and
agrees with the Banks, the Swingline Bank and the Administrative Agent that, so
long as any Commitment or Loan is outstanding and until payment in full of all
amounts payable by the Company hereunder:
8.01 Financial Statements; Information; Etc. The Company shall
deliver to each of the Banks and the Swingline Bank:
(a) as soon as available and in any event within 55 days after the
end of each quarterly fiscal period of each fiscal year of the Company,
consolidated and consolidating statements of income, shareholders' equity
and cash flows of the Company and its Subsidiaries for such period and for
the period from the beginning of the
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respective fiscal year to the end of such period, and the related
consolidated and consolidating balance sheets of the Company and its
Subsidiaries as at the end of such period, setting forth in each case in
comparative form the corresponding consolidated and consolidating figures
for the corresponding period in the preceding fiscal year, accompanied by
a certificate of a senior financial officer of the Company, which
certificate shall state that said consolidated financial statements
present fairly, in all material respects, the consolidated financial
condition and results of operations of the Company and its Subsidiaries,
and said consolidating financial statements present fairly in all material
respects, the respective individual unconsolidated financial condition and
results of operations of the Company and of each of its Subsidiaries, in
each case in accordance with generally accepted accounting principles,
consistently applied, as at the end of, and for, such period (subject to
normal year-end audit adjustments);
(b) as soon as available and in any event within 100 days after the
end of each fiscal year of the Company, consolidated and consolidating
statements of income, stockholders' equity and cash flows of the Company
and its Subsidiaries for such fiscal year and the related consolidated and
consolidating balance sheets of the Company and its Subsidiaries as at the
end of such fiscal year, setting forth in each case in comparative form
the corresponding consolidated and consolidating figures for the preceding
fiscal year, and accompanied (i) in the case of said consolidated
statements and balance sheet of the Company, by an opinion thereon of
independent certified public accountants of recognized national standing,
which opinion shall state that said consolidated financial statements
present fairly, in all material respects, the consolidated financial
condition and results of operations of the Company and its Subsidiaries as
at the end of, and for, such fiscal year in accordance with generally
accepted accounting principles, and a certificate of such accountants
addressed to the Banks stating that, in making the examination necessary
for their opinion, nothing came to
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their attention that caused them to believe that the Company had failed to
comply with any of its obligations under Sections 8.05 to 8.11 (inclusive)
or that any Default specified in paragraph (b) or (e) to (j), inclusive,
of Section 9 hereof had occurred, except as specifically stated, and (ii)
in the case of said consolidating statements and balance sheets, by a
certificate of a senior financial officer of the Company, which
certificate shall state that said consolidating financial statements
present fairly, in all material respects, the respective individual
unconsolidated financial condition and results of operations of the
Company and of each of its Subsidiaries, in each case in accordance with
generally accepted accounting principles, consistently applied, as at the
end of, and for, such fiscal year;
(c) within 5 days after filing with the Applicable Insurance
Regulatory Authority and in any event within 55 days after the end of each
of the first three quarterly fiscal periods of each fiscal year of the
Company the quarterly Statutory Statement of the Company (consolidated)
and of each Insurance Subsidiary for such fiscal period, together with
(except in the case of Van-American Insurance Company) a certificate of a
senior financial officer of the Company (x) stating that such Statutory
Statement fairly presents, in all material respects, the financial
condition of the Company (consolidated) and of each Insurance Subsidiary,
respectively, for such quarterly fiscal period in accordance with
statutory accounting practices required or permitted by the Applicable
Insurance Regulatory Authority and (y) in the case of ERC, setting forth
in reasonable detail the computations necessary to determine the aggregate
Value of the shares of Pledged Stock (if any).
(d) within 5 days after filing with the Applicable Insurance
Regulatory Authority and in any event within 55 days after the end of each
fiscal year of the Company the annual Statutory Statement of the Company
(consolidated) and of each Insurance Subsidiary for such year, together
with a certificate of a senior financial officer of the Company
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(except in the case of Van-American Insurance Company) (x) stating that
such annual Statutory Statement fairly presents, in all material respects,
the financial condition of the Company (consolidated) and of each
Insurance Subsidiary, respectively, for such fiscal year in accordance
with statutory accounting practices required or permitted by the
Applicable Insurance Regulatory Authority and (y) in the case of ERC,
setting forth in reasonable detail the computations necessary to determine
the aggregate Value of the shares of Pledged Stock (if any).
(e) promptly upon their becoming available, copies of all
registration statements and regular periodic reports, if any, which the
Company shall have filed with the Securities and Exchange Commission (or
any governmental agency substituted therefor) or any national securities
exchange;
(f) promptly upon the mailing thereof to the shareholders of the
Company generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) as soon as possible, and in any event within ten days after the
Company knows or has reason to believe that any of the events or
conditions specified below with respect to any Plan or Multiemployer Plan
has occurred or exists, a statement signed by a senior financial officer
of the Company setting forth details respecting such event or condition
and the action, if any, that the Company or its ERISA Affiliate proposes
to take with respect thereto (and a copy of any report or notice required
to be filed with or given to PBGC by the Company or an ERISA Affiliate
with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of
ERISA and the regulations issued thereunder, with respect to a Plan,
as to which PBGC has not by regulation waived the requirement of
Section 4043(a) of ERISA that it be notified within 30 days of the
occurrence of such event (provided that
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a failure to meet the minimum funding standard of Section 412 of the
Code or Section 302 of ERISA, including, without limitation, the
failure to make on or before its due date a required installment
under Section 412(m) of the Code or Section 302(e) of ERISA, shall
be a reportable event regardless of the issuance of any waivers in
accordance with Section 412(d) of the Code); and any request for a
waiver under Section 412(d) of the Code for any Plan;
(ii) the distribution under Section 4041 of ERISA of a notice of
intent to terminate any Plan or any action taken by the Company or
an ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section 4042
of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Company or any ERISA
Affiliate of a notice from a Multiemployer Plan that such action has
been taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer
Plan by the Company or any ERISA Affiliate that results in liability
under Section 4201 or 4204 of ERISA (including the obligation to
satisfy secondary liability as a result of a purchaser default) or
the receipt by the Company or any ERISA Affiliate of notice from a
Multiemployer Plan that it is in reorganization or insolvency
pursuant to Section 4241 or 4245 of ERISA or that it intends to
terminate or has terminated under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Company or any ERISA Affiliate to
enforce Section 515 of ERISA, which proceeding is not dismissed
within 30 days; and
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(vi) the adoption of an amendment to any Plan that, pursuant to
Section 401(a)(29) of the Code or Section 307 of ERISA, would result
in the loss of tax-exempt status of the trust of which such Plan is
a part if the Company or an ERISA Affiliate fails to timely provide
security to the Plan in accordance with the provisions of said
Sections;
(h) promptly after the Company knows or has reason to believe that
any Default has occurred, a notice of such Default specifying that such
notice is a "Notice of Default" and describing the same in reasonable
detail and, together with such notice or as soon thereafter as possible, a
description of the action that the Company has taken or proposes to take
with respect thereto; and
(i) from time to time such other information regarding the financial
condition, operations, business or prospects of the Company or any of its
Subsidiaries (including, without limitation, any Plan or Multiemployer
Plan and any reports or other information required to be filed under
ERISA) as any Bank or the Administrative Agent may reasonably request.
The Company will furnish to each Bank, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate of a
senior financial officer of the Company (i) to the effect that no Default has
occurred and is continuing (or, if any Default has occurred and is continuing,
describing the same in reasonable detail and describing the action that the
Company has taken or proposes to take with respect thereto) and (ii) setting
forth in reasonable detail the computations necessary to determine whether the
Company is in compliance with Sections 8.05(d)(v)(z), 8.06(i), 8.07(d), 8.09 and
8.10 hereof as of the end of the respective quarterly fiscal period or fiscal
year.
8.02 Litigation. The Company will promptly give to each Bank and the
Swingline Bank notice of all legal or arbitration proceedings, and of all
proceedings by or before any
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governmental or regulatory authority or agency, and any material development in
respect of such legal or other proceedings, affecting the Company or any of its
Subsidiaries, except proceedings which, if adversely determined, could not,
either individually or in the aggregate, have a Material Adverse Effect.
8.03 Existence, Etc. The Company will, and will cause each of its
Material Subsidiaries to:
(a) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises (provided that
nothing in this Section 8.03 shall prohibit any transaction expressly
permitted by Section 8.05 hereof);
(b) comply with the requirements of all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if
failure to comply with such requirements could, either individually or in
the aggregate, have a Material Adverse Effect;
(c) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any of
its Property prior to the date on which penalties attach thereto, except
for any such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and against which
adequate reserves are being maintained in accordance with GAAP;
(d) maintain all of its Properties material to its business in
reasonably adequate working order and condition, ordinary wear and tear
excepted;
(e) keep adequate records and books of account, in which complete
entries will be made in accordance with generally accepted accounting
principles consistently applied; and
(f) permit representatives of any Bank or the Administrative Agent,
during normal business hours, to
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examine, copy and make extracts from its books and records, to inspect any
of its Properties, and to discuss its business and affairs with its
officers, all to the extent reasonably requested by such Bank or the
Administrative Agent (as the case may be).
8.04 Insurance. The Company will, and will cause each of its
Material Subsidiaries to, keep insured by financially sound and reputable
insurers all Property of a character usually insured by corporations engaged in
the same or similar business similarly situated against loss or damage of the
kinds and in the amounts customarily insured against by such corporations and
carry such other insurance as is usually carried by such corporations.
8.05 Prohibition of Fundamental Changes.
(a) The Company will not, and will not permit any of its Material
Subsidiaries to, enter into any transaction of merger or consolidation or
amalgamation, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution).
(b) The Company will not, and will not permit any of its
Subsidiaries to, acquire any business or Property from, or capital stock of, or
be a party to any acquisition of, any Person.
(c) The Company will not, and will not permit any of its Material
Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of any part
of its business or Property, whether now owned or hereafter acquired (including,
without limitation, receivables and leasehold interests).
(d) Notwithstanding the foregoing paragraphs of this Section 8.05:
(i) any Subsidiary of the Company may be merged or consolidated with
or into (x) the Company if the Company shall be the continuing or
surviving corporation or (y) any other Subsidiary of the Company; provided
that if any such
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transaction shall be between a Subsidiary of the Company and a Wholly
Owned Subsidiary of the Company, such Wholly Owned Subsidiary shall be the
continuing or surviving corporation;
(ii) the Company or any of its Subsidiaries may (x) purchase
equipment, furniture and supplies to be used in the ordinary course of
business and (y) acquire all of the capital stock of Vesta American
Reinsurance Corporation Inc. ("Vesta American") from
Skadeforsikringsselskapet Vesta A/S for a consideration not to exceed the
net worth of Vesta American (determined as provided in the stock purchase
agreement) plus $1,000,000;
(iii) the Company or any of its Subsidiaries may make Investments
permitted by Section 8.08 hereof;
(iv) any Subsidiary of the Company may convey, sell, lease, transfer
or otherwise dispose of any or all of its Property (upon voluntary
liquidation or otherwise) to the Company or a Wholly Owned Subsidiary of
the Company; and
(v) the Company or any of its Subsidiaries may convey, sell, lease,
transfer or otherwise dispose of (x) equipment no longer used or useful in
its business, (y) any portfolio Investment sold or disposed of in the
ordinary course of business and (z) any other Investment (including any
Investment in the capital stock of Subsidiaries of the Company other than
ERC or Asset Guaranty) having a value, together with the value (when sold,
leased transferred or otherwise disposed of), of all Investments sold
leased, transferred or otherwise disposed of in reliance on this
sub-clause (z), not in excess of $1,000,000.
(e) Except as expressly permitted by paragraphs of this Section
8.05, the Company shall not, nor shall it permit any of its Material
Subsidiaries to, sell, transfer, convey or otherwise dispose of either directly
or indirectly (x) all or any portion of the capital stock of any of its Material
Subsidiaries (except that the Company may pledge shares of common stock of ERC
under the Pledge Agreement) or (y) all or substantially all of
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the Properties of any of its Material Subsidiaries in one transaction or a
series of related transactions.
8.06 Limitation on Liens. The Company will not, and will not permit
any of its Material Subsidiaries to, create, incur, assume or suffer to exist
any Lien upon any of its Property, whether now owned or hereafter acquired,
except:
(a) Liens created pursuant to the Pledge Agreement and Liens on the
common stock of ERC securing the principal of, and interest and Make-Whole
Amount on, the senior notes issued under the Senior Note Purchase
Agreements;
(b) Liens in existence on the Restatement Date and listed in Part B
of Schedule I hereto;
(c) Liens imposed by any governmental authority for taxes,
assessments or charges not yet due or which are being contested in good
faith and by appropriate proceedings, unless the amount thereof is
material with respect to it or its financial condition, if adequate
reserves with respect thereto are maintained on the books of the Company
or the affected Subsidiaries, as the case may be, in accordance with GAAP;
(d) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
which are not overdue for a period of more than 30 days or which are being
contested in good faith and by appropriate proceedings and Liens securing
judgments but only to the extent for an amount and for a period not
resulting in an Event of Default under Section 9(h) hereof;
(e) pledges or deposits under worker's compensation, unemployment
insurance and other social security legislation;
(f) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory
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obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business;
(g) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses, restrictions on
the use of Property or minor imperfections in title thereto which, in the
aggregate, are not material in amount, and which do not in any case
materially detract from the value of the Property subject thereto or
interfere with the ordinary conduct of the business of the Company or any
of its Subsidiaries;
(h) Liens on Property of any corporation which becomes a Subsidiary
of the Company after the Restatement Date; provided that such Liens are in
existence at the time such corporation becomes a Subsidiary of the Company
and were not created in anticipation thereof;
(i) Liens upon real and/or tangible personal Property acquired after
the Restatement Date (by purchase, construction or otherwise) by the
Company or any of its Subsidiaries, each of which Liens either existed on
such Property before the time of its acquisition and was not created in
anticipation thereof or was created solely for the purpose of securing
Indebtedness incurred to finance, refinance or refund the cost (including
the cost of construction) of such Property; provided that (i) no such Lien
shall extend to or cover any Property of the Company or such Subsidiary
other than the Property so acquired and improvements thereon and (ii) the
principal amount of Indebtedness secured by any such Lien shall not exceed
75% of the fair market value (as determined in good faith by a senior
financial officer of the Company) of such Property at the time it was
acquired (by purchase, construction or otherwise); and
(j) any extension, renewal or replacement of the foregoing; provided
that the Liens permitted by this
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paragraph shall not extend to or cover any additional Indebtedness or
Property (other than a substitution of like Property).
8.07 Indebtedness. The Company will not, and will not permit any of
its Material Subsidiaries to, create or incur any Indebtedness except:
(a) Indebtedness to the Banks and the Swingline Bank hereunder;
(b) Indebtedness of the Company to any Subsidiary of the Company or
Indebtedness of any Wholly Owned Subsidiary to the Company or to any other
Wholly Owned Subsidiary of the Company;
(c) Indebtedness of the Company and its Material Subsidiaries
secured by Liens permitted by Section 8.06(i) hereof;
(d) additional Indebtedness of the Company provided that on the date
such Indebtedness is incurred and after giving effect thereto and to the
concurrent retirement of any other Indebtedness of the Company, total
consolidated Indebtedness of the Company and its Subsidiaries does not
exceed 25% of Total Capitalization; and
(e) Indebtedness of ERC not exceeding $100,000,000 in aggregate
principal amount incurred under a credit facility established by ERC
solely for the purpose of acquiring or supporting one or more of its
claims-paying ability ratings.
8.08 Investments. The Company will not, and will not permit any of
its Material Subsidiaries to, make or permit to remain outstanding any
Investments except:
(a) Investments constituting (i) operating deposit accounts with
banks and (ii) accounts receivable arising in the ordinary course of
business on ordinary business terms that are not overdue;
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(b) portfolio Investments constituting short-term debt instruments
that are rated at least A-1 by Standard & Poor's Corporation or P-1 by
Moody's Investors Service Inc.;
(c) portfolio Investments constituting fixed income debt securities
if, after giving effect to such Investment:
(i) the weighted average credit quality of the fixed income
debt securities portfolio of the Company or any Material Subsidiary,
as determined by the rating system of Standard & Poor's Corporation,
is AA or higher; or
(ii) the aggregate amount invested by the Company and each of
its Material Subsidiaries in fixed income debt securities which are
rated lower than BBB by Standard & Poor's Corporation or Baa2 by
Moody's Investors Service Inc. does not exceed 1% of the aggregate
amount of all portfolio Investments of the Company and its Material
Subsidiaries;
(d) equity Investments if, after giving effect to such Investments,
the aggregate amount of equity Investments of the Company and of its
Material Subsidiaries (including, without limitation, Investments in
Vantage American, Inc. and in other Subsidiaries of the Company that are
not Wholly Owned Subsidiaries of the Company) does not exceed 6% of the
aggregate amount of the consolidated Investments (both debt and equity) of
the Company and its Material Subsidiaries; and
(e) travel and similar advances by the Company and its Material
Subsidiaries in the ordinary course of business and loans to officers and
directors of the Company and its Material Subsidiaries, provided that such
travel and similar advances and loans to officers and directors at any one
time do not, in the aggregate, exceed $500,000 for the Company and its
Material Subsidiaries.
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8.09 Restricted Payments. The Company will not declare or make any
Restricted Payment unless, on the date of declaration in the case of any
proposed dividend and on the date of payment or distribution in the case of the
making of any other Restricted Payment (the "Computation Date"), and after
giving effect thereto:
(i) the aggregate amount of all Restricted Payments made
during the period commencing on January 1, 1992 and ending on and
including the Computation Date (the "Computation Period") shall not
exceed an amount equal to the sum of:
(a) 25% (or, in the case of a deficit, minus 100%) of
consolidated net income of the Company and its Subsidiaries
for the Computation Period, plus
(b) the net cash proceeds received by the Company from
the issue or sale (other than to a Subsidiary) of shares of
common stock of the Company (including shares of common stock
issued upon conversion of Indebtedness to common stock, it
being understood and agreed that in any such conversion, the
Company shall be deemed to have received cash proceeds in an
amount equal to the principal amount of Indebtedness converted
to common stock; and
(ii) no Default shall have occurred and be continuing;
provided, that the Company shall not in any fiscal quarter of the Company
declare any dividend to the extent that the amount of such dividend, together
with the sum of (i) the aggregate amount of all dividends theretofore declared
in such fiscal quarter plus (ii) the aggregate amount of dividends actually paid
during the period (the "Measuring Period") of four consecutive fiscal quarters
of the Company ended on (or most recently ended prior to) such declaration,
would exceed 25% of the consolidated net
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income of the Company and its Subsidiaries for the Measuring Period (and the
Company shall not pay any dividends it has not previously declared as permitted
hereby); and provided further, that no Restricted Payments shall be permitted if
and for so long as the claims-paying ability rating of any Insurance Subsidiary
of the Company, as determined by Standard & Poor's Ratings Group (if rated by
said agency), falls below AA- (or is withdrawn).
8.10 Financial Covenants.
(a) Tangible Net Worth. The Company will not, on any date falling in
any period set forth below, permit Tangible Net Worth to be less than the amount
set forth opposite such period:
Period Amount
------ ------
From and including the date hereof
through December 31, 1992 $290,000,000
From and including January 1, 1993
through December 31, 1993 $310,000,000
From and including January 1, 1994
through December 31, 1994 $335,000,000
Thereafter $365,000,000
(b) Fixed Charge Coverage Ratio. The Company will not, as at any
date falling in any period set forth below, permit the Fixed Charge Coverage
Ratio for the period of the four consecutive fiscal quarters of the Company
ending on, or most recently ended prior to, such date to be less than the ratio
set forth opposite such period:
Period Ratio
------ -----
From and including the date hereof
through December 31, 1993 2.2 to 1
From and including January 1, 1994
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through December 31, 1994 2.5 to 1
Thereafter 2.7 to 1
8.11 Capital Expenditures. The Company will not permit the aggregate
amount of Capital Expenditures by the Company and its Subsidiaries to exceed
$2,000,000 in any fiscal year of the Company.
8.12 Lines of Business. The Company will not permit any of its
Insurance Subsidiaries to engage to any substantial extent in any line or lines
of business activity other than the business of issuing financial guaranty
insurance, credit insurance and residual value insurance (and reinsurance of the
same) and similar or related products.
8.13 Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly:
(a) make any Investment in any Affiliate of the Company;
(b) transfer, sell, lease, assign or otherwise dispose of any
Property to any such Affiliate;
(c) purchase or acquire Property from any such Affiliate; or
(d) enter into any other transaction directly or indirectly with or
for the benefit of any such Affiliate (including, without limitation,
Guarantees and assumptions of obligations of any such Affiliate);
provided that the Company and its Subsidiaries may enter into transactions
(other than Investments by the Company or any of its Subsidiaries in any
Affiliate of the Company) providing for the leasing of Property, the rendering
or receipt of services or the purchase or sale of Property in the ordinary
course of business if the monetary or business consideration arising therefrom
would
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be substantially as advantageous to the Company and its Subsidiaries as the
monetary or business consideration which would obtain in a comparable
transaction with a Person not an Affiliate of the Company.
8.14 Use of Proceeds. The Company will use the proceeds of the Loans
hereunder solely for general corporate purposes (in compliance with all
applicable legal and regulatory requirements) or, subject to Section 8.09
hereof, to purchase shares of the common stock of the Company; provided that (a)
the proceeds of any Swingline Loan may not be used to repay or prepay any other
Swingline Loan and (b) none of the Administrative Agent, any Bank or the
Swingline Bank shall have any responsibility as to the use of any of such
proceeds.
8.15 Certain Obligations Respecting Subsidiaries.
(a) Subject to Section 8.05 hereof, the Company will, and will cause
each of ERC and Asset Guaranty to, take such action from time to time as shall
be necessary to ensure that each of ERC and Asset Guaranty is a Wholly Owned
Subsidiary (subject only, in the case of the shares of common stock of ERC, to
the Lien of the Pledge Agreement).
(b) The Company will not permit any of ERC or Asset Guaranty to
issue any shares of stock of any class whatsoever to any Person (other than to
the Company).
8.16 Modifications of Certain Documents. The Company will not
consent to any modification, supplement or waiver of any of the provisions of
the Senior Note Purchase Agreements that would materially increase the
obligations, or materially reduce the rights, of the Company or any of its
Subsidiaries thereunder.
8.17 Claims-Paying Rating. The Company will not allow the
claims-paying rating of any Insurance Subsidiary as rated by Standard & Poor's
Corporation to be less than AA- (or to be withdrawn) at any time.
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8.18 Dividends to or Investments in the Company by Subsidiaries. The
Company will not, nor will it permit any of its Subsidiaries, to issue any
securities or enter into any agreements (other than with or as required by
applicable regulatory authorities) that will either (i) limit the ability of any
of the Subsidiaries of the Company to declare or pay or set apart any funds for
the payment of any dividend or make any distribution to or Investment in the
Company or (ii) prevent such Subsidiary from paying to the Company the entire
amount available to be paid as dividends or distributions by such Subsidiary;
provided, that nothing herein shall be deemed to require any Subsidiary of the
Company to pay any dividend to, or make any Investment in, the Company in excess
of the amount necessary to enable the Company to make all payments required
hereunder and under the Notes.
Section 9. Events of Default. If one or more of the following events
(herein called "Events of Default") shall occur and be continuing:
(a) The Company shall: (i) default in the payment of any principal
of any Loan when due (whether at stated maturity or upon mandatory or
optional prepayment); or (ii) default in the payment of any interest on
any Loan or any commitment fee hereunder when due and such default shall
have continued unremedied for five or more days; or
(b) The Company or any of its Subsidiaries shall default in the
payment when due of any principal of or interest on any of its
Indebtedness aggregating $1,000,000 or more (other than the Indebtedness
referred to in paragraph (a) above); or any event specified in any note,
agreement, indenture or other document evidencing or relating to any such
Indebtedness shall occur if the effect of such event is to cause, or (with
the giving of any notice or the lapse of time or both) to permit the
holder or holders of such Indebtedness (or a trustee or agent on behalf of
such holder or holders) to cause, such Indebtedness to become due, or to
be prepaid in full (whether by redemption, purchase, offer to purchase or
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otherwise), prior to its stated maturity or to have the interest rate
thereon reset to a level so that securities evidencing such Indebtedness
trade at a level specified in relation to the par value thereof; or
(c) Any representation, warranty or certification made or deemed
made herein or in any other Basic Document (or in any modification or
supplement hereto or thereto) by the Company, or any certificate furnished
to any Bank, the Swingline Bank or the Administrative Agent pursuant to
the provisions hereof or thereof, shall prove to have been false or
misleading as of the time made, deemed made or furnished in any material
respect; or
(d) The Company shall default in the performance of any of its
obligations under any of Sections 8.01(h), 8.05, 8.06, 8.07, 8.09, 8.10,
8.11 and 8.13 to 8.18 (inclusive) hereof or the Company shall default in
the performance of any of its obligations under Section 5.02 of the Pledge
Agreement; or the Company shall default in the performance of any of its
other obligations in this Agreement or any other Basic Document and such
default shall continue unremedied for a period of 15 days after notice
thereof to the Company by the Administrative Agent, any Bank or the
Swingline Bank (in either case, through the Administrative Agent); or
(e) The Company or any of its Material Subsidiaries shall admit in
writing its inability to, or be generally unable to, pay its debts as such
debts become due; or
(f) The Company or any of its Material Subsidiaries shall (i) apply
for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee, examiner, rehabilitator, conservator or
liquidator of itself or of all or a substantial part of its Property, (ii)
make a general assignment for the benefit of its creditors, (iii) commence
a voluntary case under the Bankruptcy Code, (iv) file a petition seeking
to take advantage of any other law relating to bankruptcy, insolvency,
reorganization,
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liquidation, dissolution, arrangement or winding-up, or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under the Bankruptcy Code or (vi) take any corporate
action for the purpose of effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the application
or consent of the Company or any of its Material Subsidiaries, in any
court of competent jurisdiction, seeking (i) its reorganization,
rehabilitation, conservation, liquidation, dissolution, arrangement or
winding-up, or the composition or readjustment of its debts, (ii) the
appointment of a receiver, custodian, trustee, examiner, rehabilitator,
conservator, liquidator or the like of the Company or such Material
Subsidiary or of all or any substantial part of its Property, or (iii)
similar relief in respect of the Company or such Subsidiary under any law
relating to bankruptcy, insolvency, reorganization, rehabilitation,
conservation, liquidation, winding-up, or composition or adjustment of
debts, and such proceeding or case shall continue undismissed, or an
order, judgment or decree approving or ordering any of the foregoing
(other than an order for relief in an involuntary case under the
Bankruptcy Code) shall be entered and continue unstayed and in effect, for
a period of 60 or more days; or an order for relief against the Company or
such Material Subsidiary shall be entered in an involuntary case under the
Bankruptcy Code; or
(h) A final judgment or judgments for the payment of money in excess
of $1,000,000 in the aggregate (exclusive of judgment amounts fully
covered by insurance where the insurer has admitted liability in respect
of such judgment) or in excess of $5,000,000 in the aggregate (regardless
of insurance coverage) shall be rendered by one or more courts,
administrative tribunals or other bodies having jurisdiction against the
Company or any of its Subsidiaries and the same shall not be discharged
(or provision shall not be made for such discharge), or a stay of
execution thereof shall not be
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procured, within 30 days from the date of entry thereof and the Company or
the relevant Subsidiary shall not, within said period of 30 days, or such
longer period during which execution of the same shall have been stayed,
appeal therefrom and cause the execution thereof to be stayed during such
appeal; or
(i) An event or condition specified in Section 8.01(g) hereof shall
occur or exist with respect to any Plan or Multiemployer Plan and, as a
result of such event or condition, together with all other such events or
conditions, the Company or any ERISA Affiliate shall incur or in the
opinion of the Majority Banks shall be reasonably likely to incur a
liability to a Plan, a Multiemployer Plan or PBGC (or any combination of
the foregoing) which, in the determination of the Majority Banks, could
have a Material Adverse Effect; or
(j) A Change in Control shall occur; or
(k) Except for expiration in accordance with its terms, the security
interest granted pursuant to the Pledge Agreement shall cease to be a
first priority perfected security interest for whatever reason;
THEREUPON: (1) in the case of an Event of Default other than one referred to in
paragraph (f) or (g) of this Section 9 with respect to the Company, the
Administrative Agent may and, upon request of the Majority Banks (or with
respect to Swingline Loans, upon the request of the Swingline Bank), shall, by
notice to the Company, terminate the Commitments (and/or the Swingline
Commitment) and/or declare the principal amount then outstanding of, and the
accrued interest on, the Loans and all other amounts payable by the Company
hereunder and under the Notes (including, without limitation, any amounts
payable under Section 5.04 hereof) to be forthwith due and payable, whereupon
such amounts shall be immediately due and payable without presentment, demand,
protest or other formalities of any kind, all of which are hereby expressly
waived by the Company; and (2) in the case of the occurrence of an Event of
Default referred to in paragraph (f)
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or (g) of this Section 9 with respect to the Company, the Commitments shall
automatically be terminated and the principal amount then outstanding of, and
the accrued interest on, the Loans and all other amounts payable by the Company
hereunder and under the Notes (including, without limitation, any amounts
payable under Section 5.04 hereof) shall automatically become immediately due
and payable without presentment, demand, protest or other formalities of any
kind, all of which are hereby expressly waived by the Company.
Section 10. The Administrative Agent.
10.01 Appointment, Powers and Immunities. Each Bank and the
Swingline Bank hereby irrevocably (subject to Section 10.08 hereof) appoints and
authorizes the Administrative Agent to act as its agent hereunder and under the
other Basic Documents with such powers as are specifically delegated to the
Administrative Agent by the terms of this Agreement and of the other Basic
Documents, together with such other powers as are reasonably incidental thereto.
The Administrative Agent (which term as used in this sentence and in Section
10.05 and the first sentence of Section 10.06 hereof shall include reference to
its affiliates and its own and its affiliates' officers, directors, employees
and agents): (a) shall have no duties or responsibilities except those expressly
set forth in this Agreement and in the other Basic Documents, and shall not by
reason of this Agreement or any other Basic Document be a trustee for any Bank
or the Swingline Bank; (b) shall not be responsible to the Banks or the
Swingline Bank for any recitals, statements, representations or warranties
contained in this Agreement or in any other Basic Document, or in any
certificate or other document referred to or provided for in, or received by any
of them under, this Agreement or any other Basic Document, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement, any Note or any other Basic Document or any other document referred
to or provided for herein or therein or for any failure by the Company or any
other Person to perform any of its obligations hereunder or thereunder; (c)
shall not be required to initiate or conduct any litigation or collection
proceedings hereunder or under any other Basic
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Document; (d) shall not be responsible for any action taken or omitted to be
taken by it hereunder or under any other Basic Document or under any other
document or instrument referred to or provided for herein or therein or in
connection herewith or therewith, except for its own gross negligence or willful
misconduct; and (e) shall not be responsible to the Company, the Banks or the
Swingline Bank for (i) determining whether or not any of the transactions
contemplated hereby qualifies as a highly leveraged transaction ("HLT") as
defined by any bank regulatory authority, (ii) notifying the Banks or the
Swingline Bank regarding the HLT status of any transaction contemplated hereby
or of any change in that status or (iii) the correctness of any determination as
to HLT status. The Administrative Agent may employ agents and attorneys-in-fact
and shall not be responsible for the negligence or misconduct of any such agents
or attorneys-in-fact selected by it in good faith. The Administrative Agent may
deem and treat the payee of any Note as the holder thereof for all purposes
hereof unless and until a notice of the assignment or transfer thereof shall
have been filed with the Administrative Agent, together with the consent of the
Company to such assignment or transfer (to the extent provided in Section
11.06(b) hereof).
10.02 Reliance by Administrative Agent. The Administrative Agent
shall be entitled to rely upon any certification, notice or other communication
(including, without limitation, any thereof by telephone, telecopy, telex,
telegram or cable) believed by it to be genuine and correct and to have been
signed or sent by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel, independent accountants and other experts
selected by the Administrative Agent. As to any matters not expressly provided
for by this Agreement or any other Basic Document, the Administrative Agent
shall in all cases be fully protected in acting, or in refraining from acting,
hereunder or thereunder in accordance with instructions given by the Majority
Banks or, if provided herein, in accordance with the instructions given by the
Majority Banks or all of the Banks as is required in such circumstance, and such
instructions of such Banks and any action
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taken or failure to act pursuant thereto shall be binding on all of the Banks.
10.03 Defaults. The Administrative Agent shall not be deemed to have
knowledge or notice of the occurrence of a Default (other than the non-payment
of principal of or interest on Loans or of commitment fees) unless the
Administrative Agent has received notice from a Bank or the Company specifying
such Default and stating that such notice is a "Notice of Default". In the event
that the Administrative Agent receives such a notice of the occurrence of a
Default, the Administrative Agent shall give prompt notice thereof to the Banks
and the Swingline Bank (and shall give each Bank and with respect to Swingline
Loans, the Swingline Bank prompt notice of each such non-payment). The
Administrative Agent shall (subject to Sections 10.01, 10.07 and 11.04 hereof)
take such action with respect to such Default as shall be directed by the
Majority Banks or in the case of Swingline Loans, the Swingline Bank, provided
that, unless and until the Administrative Agent shall have received such
directions, the Administrative Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default as
it shall deem advisable in the best interest of the Banks except to the extent
that this Agreement expressly requires that such action be taken, or not be
taken, only with the consent or upon the authorization of the Majority Banks or
all of the Banks.
10.04 Rights as a Bank. With respect to its Commitments, its
Swingline Commitment and the Loans made by it, Chase (and any successor acting
as Administrative Agent) in its capacity as a Bank or the Swingline Bank
hereunder shall have the same rights and powers hereunder as any other Bank and
may exercise the same as though it were not acting as the Administrative Agent,
and the term "Bank" or "Banks" or "Swingline Bank" shall, unless the context
otherwise indicates, include the Administrative Agent in its individual
capacity. Chase (and any successor acting as Administrative Agent) and its
affiliates may (without having to account therefor to any Bank) accept deposits
from, lend money to, make investments in and generally engage in any kind of
banking, trust or other business
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with the Company (and any of its Subsidiaries or Affiliates) as if it were not
acting as the Administrative Agent, and Chase and its affiliates may accept fees
and other consideration from the Company for services in connection with this
Agreement or otherwise without having to account for the same to the Banks or
the Swingline Bank.
10.05 Indemnification. The Banks agree to indemnify the
Administrative Agent (to the extent not reimbursed under Section 11.03 hereof,
but without limiting the obligations of the Company under said Section 11.03)
ratably in accordance with the aggregate principal amount of the Loans held by
the Banks (or, if no Loans are at the time outstanding, ratably in accordance
with their respective Commitments), for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever that may be imposed on, incurred
by or asserted against the Administrative Agent (including by any Bank) arising
out of or by reason of any investigation in or in any way relating to or arising
out of this Agreement or any other Basic Document or any other documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby (including, without limitation, the costs and
expenses that the Company is obligated to pay under Section 11.03 hereof, but
excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder) or the enforcement of any of the terms hereof or thereof or of
any such other documents, provided that no Bank shall be liable for any of the
foregoing to the extent they arise from the gross negligence or willful
misconduct of the party to be indemnified.
10.06 Non-Reliance on Administrative Agent and Other Banks. Each
Bank agrees that it has, independently and without reliance on the
Administrative Agent or any other Bank, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Company and its Subsidiaries and decision to enter into this Agreement and that
it will, independently and without reliance upon the Administrative Agent or any
other Bank, and based on such documents and information as
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it shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement. The
Administrative Agent shall not be required to keep itself informed as to the
performance or observance by the Company of this Agreement or any of the other
Basic Documents or any other document referred to or provided for herein or
therein or to inspect the Properties or books of the Company or any of its
Subsidiaries. Except for notices, reports and other documents and information
expressly required to be furnished to the Banks by the Administrative Agent
hereunder, the Administrative Agent shall not have any duty or responsibility to
provide any Bank with any credit or other information concerning the affairs,
financial condition or business of the Company or any of its Subsidiaries (or
any of their affiliates) that may come into the possession of the Administrative
Agent or any of its affiliates.
10.07 Failure to Act. Except for action expressly required of the
Administrative Agent hereunder and under the other Basic Documents, the
Administrative Agent shall in all cases be fully justified in failing or
refusing to act hereunder and thereunder unless it shall receive further
assurances to its satisfaction from the Banks of their indemnification
obligations under Section 10.05 hereof against any and all liability and expense
that may be incurred by it by reason of taking or continuing to take any such
action.
10.08 Resignation or Removal of Administrative Agent. Subject to the
appointment and acceptance of a successor Administrative Agent as provided
below, the Administrative Agent may resign at any time by giving notice thereof
to the Banks and the Company, and the Administrative Agent may be removed at any
time with or without cause by the Majority Banks. Upon any such resignation or
removal, the Majority Banks shall have the right to appoint a successor
Administrative Agent. If no successor Administrative Agent shall have been so
appointed by the Majority Banks and shall have accepted such appointment within
30 days after the retiring Administrative Agent's giving of notice of
resignation or the Majority Banks' removal of the retiring Administrative Agent,
then the retiring Administrative Agent may,
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on behalf of the Banks, after consultation with the Company, appoint a successor
Administrative Agent, that shall be a bank which has an office in New York, New
York and which has a combined capital and surplus of at least $500,000,000. Upon
the acceptance of any appointment as Administrative Agent hereunder by a
successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Administrative Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Administrative Agent's resignation or removal hereunder as
Administrative Agent, the provisions of this Section 10 shall continue in effect
for its benefit in respect of any actions taken or omitted to be taken by it
while it was acting as the Administrative Agent.
10.09 Consents under Basic Documents. Except as otherwise provided
in Section 11.04 hereof with respect to this Agreement, the Administrative Agent
may, with the prior consent of the Majority Banks (but not otherwise), consent
to any modification, supplement or waiver under any of the Basic Documents,
provided that, without the prior consent of each Bank, the Administrative Agent
shall not (except as provided herein or in the Pledge Agreement) release any
collateral or otherwise terminate any Lien under any Basic Document providing
for collateral security, or agree to additional obligations being secured by
such collateral security (unless the Lien for such additional obligations shall
be junior to the Lien in favor of the other obligations secured by such Basic
Document), except that no such consent shall be required, and the Administrative
Agent is hereby authorized, to release any Lien covering Property which is the
subject of a disposition of Property permitted hereunder or to which the
Majority Banks have consented.
Section 11. Miscellaneous.
11.01 Waiver. No failure on the part of the Administrative Agent or
any Bank or the Swingline Bank to exercise and no delay in exercising, and no
course of dealing with respect to, any right, power or privilege under this
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Agreement or any Note shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege under this Agreement or any
Note preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.
11.02 Notices. All notices, requests and other communications
provided for herein and under the Pledge Agreement (including, without
limitation, any modifications of, or waivers, requests or consents under, this
Agreement) shall be given or made in writing (including, without limitation, by
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof); or, as to any party, at
such other address as shall be designated by such party in a notice to each
other party. Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given when transmitted by
telecopier or personally delivered or, in the case of a mailed notice, upon
receipt, in each case given or addressed as aforesaid.
11.03 Expenses, Etc. The Company agrees to pay or reimburse each of
the Banks and the Swingline Bank and the Administrative Agent for paying: (a)
all reasonable out-of-pocket costs and expenses of the Administrative Agent
(including, without limitation, the reasonable fees and expenses of Milbank,
Tweed, Hadley & McCloy, special New York counsel to Chase), in connection with
(i) the negotiation, preparation, execution and delivery of this Agreement and
the other Basic Documents and the making of the Loans hereunder and (ii) any
modification, supplement or waiver of any of the terms of this Agreement or any
of the other Basic Documents; (b) all costs and expenses of the Banks, the
Swingline Bank and the Administrative Agent (including, without limitation,
reasonable counsels' fees) in connection with (i) any Default and any
enforcement or collection proceedings resulting therefrom or in connection with
the negotiation of any restructuring or "work-out" (whether or not consummated)
of the obligations of the Company hereunder or under any of the other Basic
Documents and (ii) the enforcement of this Section 11.03; and (c) all transfer,
stamp, documentary
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or other similar taxes, assessments or charges levied by any governmental or
revenue authority in respect of this Agreement or any of the other Basic
Documents or any other document referred to herein or therein and all costs,
expenses, taxes, assessments and other charges incurred in connection with any
filing, registration, recording or perfection of any security interest
contemplated by any Basic Document or any other document referred to therein.
The Company hereby agrees to indemnify the Administrative Agent each
Bank and the Swingline Bank and their respective directors, officers, employees,
attorneys and agents from, and hold each of them harmless against, any and all
losses, liabilities, claims, damages or expenses incurred by any of them (other
than liability of the Administrative Agent to any Bank) arising out of or by
reason of any investigation or litigation or other proceedings (including any
threatened investigation or litigation or other proceedings and whether or not
the Administrative Agent or such Bank or the Swingline Bank or other Person is a
party thereto) relating to the extensions of credit hereunder or any actual or
proposed use by the Company or any of its Subsidiaries of the proceeds of any of
the extensions of credit hereunder, including, without limitation, the
reasonable fees and disbursements of counsel incurred in connection with any
such investigation or litigation or other proceedings (but excluding any such
losses, liabilities, claims, damages or expenses incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified).
11.04 Amendments, Etc. Except as otherwise expressly provided in
this Agreement, any provision of this Agreement may be modified or supplemented
only by an instrument in writing signed by the Company, the Administrative Agent
and the Majority Banks, or by the Company and the Administrative Agent acting
with the consent of the Majority Banks, and, if the rights or obligations
hereunder of the Swingline Bank are affected thereby, the Swingline Bank, and
any provision of this Agreement may be waived by the Majority Banks or by the
Administrative Agent acting with the consent of the Majority Banks and, if the
rights or obligations hereunder of the Swingline Bank are affected
Credit Agreement
<PAGE>
-91-
thereby, the Swingline Bank; provided that: (a) no modification, supplement or
waiver shall, unless by an instrument signed by all of the Banks or by the
Administrative Agent acting with the consent of all of the Banks (i) increase or
extend the term of any of the Commitments, or extend the time or waive any
requirement for the reduction or termination of any of the Commitments, (ii)
extend any date fixed for the payment of principal of or interest on any Loan or
any fee hereunder (other than any fee payable solely for account of the
Administrative Agent), (iii) reduce the amount of any such payment of principal,
(iv) reduce the rate at which interest is payable thereon or any fee is payable
hereunder (other than any fee payable solely for account of the Administrative
Agent), (v) reduce the obligations of the Company to prepay Loans, (vi) alter
the terms of any of Sections 2.08, 2.09, 4.02 or 4.07 hereof or this Section
11.04, (vii) modify the definition of the term "Majority Banks" or modify in any
other manner the number or percentage of the Banks required to make any
determinations or waive any rights hereunder or to modify any provision hereof,
or (viii) waive any of the conditions precedent set forth in Section 6 hereof;
and (b) if at the time any Swingline Loans shall be outstanding, no
modification, supplement or waiver with respect to any provision of Sections 8
or 9 hereof shall be effective without the concurrence of the Swingline Bank;
and (c) any modification of any of the rights or obligations of the
Administrative Agent hereunder shall require the consent of the Administrative
Agent.
11.05 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
11.06 Assignments and Participations.
(a) The Company may not assign any of its rights or obligations
hereunder or under the Notes without the prior consent of all of the Banks and
the Administrative Agent and the Swingline Bank.
(b) Each Bank may, at any time or from time to time, assign to one
or more other Persons all or any portion of its
Credit Agreement
<PAGE>
-92-
Loans, its Notes, and its Commitment (but only with the consent of the Company,
the Administrative Agent and the Swingline Bank, which consents shall not be
unreasonably withheld); provided that (i) no such consent by the Company, the
Administrative Agent or the Swingline Bank shall be required in the case of any
assignment to another Bank; (ii) any such partial assignment shall be in an
amount at least equal to $5,000,000 or any integral multiple of $1,000,000 in
excess thereof; (iii) each such assignment by a Bank of its Revolving Credit
Loans, Revolving Credit Note, Term Loans, Term Loan Notes or Commitment shall be
made in such manner so that the same portion of its Revolving Credit Loans,
Revolving Credit Note, Term Loans, Term Loan Notes and Commitment is assigned to
the respective assignee; (iv) each such assignment shall be effected by an
Assignment and Acceptance in substantially the form of Exhibit F hereto. Upon
execution and delivery by the assignee to the Company and the Administrative
Agent of an Assignment and Acceptance pursuant to which such assignee agrees to
become a "Bank" hereunder (if not already a Bank) having the Commitment and
Loans specified in such Assignment and Acceptance, and upon consent thereto by
the Company and the Administrative Agent, to the extent required above, the
assignee shall have, to the extent of such assignment (unless otherwise provided
in such assignment with the consent of the Company and the Administrative
Agent), the obligations, rights and benefits of a Bank hereunder holding the
Commitment and Loans (or portions thereof) assigned to it (in addition to the
Commitment and Loans, if any, theretofore held by such assignee) and the
assigning Bank shall, to the extent of such assignment, be released from the
Commitment (or portion thereof) so assigned. Notwithstanding the foregoing, no
assignee or other transferee of any of the rights, obligations or benefits of a
Bank in respect of the Loans shall be entitled to receive any greater payment
under Sections 5.01, 5.04 and 5.05 than such Bank would have been entitled to
receive with respect to the Loans unless such transfer is made with the
Company's prior written consent specifically detailing the nature of the greater
payments to be due, or at a time when the circumstances giving rise to such
greater payment did not exist or had not been announced. Upon each such
assignment the assigning Bank shall pay the Administrative Agent an assignment
fee of $3,000.
Credit Agreement
<PAGE>
-93-
(c) A Bank may, at any time or from time to time, sell or agree to
sell to one or more other Persons a participation in all or any part of any
Loans held by it, or in its Commitment, but no purchaser of a participation (a
"Participant") shall, except as otherwise provided in Section 4.07(c) hereof,
have any rights or benefits under this Agreement or any Note or any other Basic
Document (the Participant's rights against such Bank in respect of such
participation to be those set forth in the agreements executed by such Bank in
favor of the Participant). All amounts payable by the Company to any Bank under
Section 5 hereof in respect of the Loans held by it, and its Commitment, shall
be determined as if such Bank had not sold or agreed to sell any participations
in such Loans and Commitment, and as if such Bank were funding each of such Loan
and Commitment in the same way that it is funding the portion of such Loan and
Commitment in which no participations have been sold. In no event shall a Bank
that sells a participation agree with the Participant to take or refrain from
taking any action hereunder or under any other Basic Document except that such
Bank may agree with the Participant that it will not, without the consent of the
Participant, agree to (i) increase or extend the term, or extend the time or
waive any requirement for the reduction or termination, of such Bank's related
Commitment, (ii) extend any date fixed for the payment of principal of or
interest on the related Loan or Loans or any portion of any fee hereunder
payable to the Participant, (iii) reduce the amount of any such payment of
principal, (iv) reduce the rate at which interest is payable thereon, or any fee
hereunder payable to the Participant, to a level below the rate at which the
Participant is entitled to receive such interest or fee, (v) increase the rights
or reduce the obligations of the Company to prepay the related Loans or (vi)
consent to any modification, supplement or waiver hereof or of any of the other
Basic Documents to the extent that the same, under Section 10.09 or 11.04
hereof, requires the consent of each Bank.
(d) In addition to the assignments and participations permitted by
the foregoing provisions of this Section 11.06, any Bank may assign and pledge
all or any portion of its Loans and its Notes to any Federal Reserve Bank as
collateral security
Credit Agreement
<PAGE>
-94-
pursuant to Regulation A and any Operating Circular issued by such Federal
Reserve Bank. No such assignment shall release the assigning Bank from its
obligations hereunder.
(e) A Bank or the Swingline Bank may furnish any information
concerning the Company or any of its Subsidiaries in the possession of such Bank
from time to time to assignees and participants (including prospective assignees
and participants), subject, however, to the provisions of Section 11.12(b)
hereof.
(f) Anything in this Section 11.06 to the contrary notwithstanding,
neither the Company nor any of its Subsidiaries or Affiliates may acquire
(whether by assignment, participation or otherwise), and neither any Bank nor
the Swingline Bank shall assign or participate to the Company or any of its
Subsidiaries or Affiliates, any interest in any Commitment or Loan without the
prior consent of each Bank.
(g) The Swingline Bank may not (except as provided in Section
2.02(c) hereof) assign or sell participations in all or any part of its
Swingline Loans, its Swingline Note or its Swingline Commitment; provided that
the Swingline Bank may assign to another Bank all of its obligations, rights and
benefits in respect of its Swingline Loans, its Swingline Note and its Swingline
Commitment (but only with the consent of the Company which consent will not be
unreasonably withheld). Upon the effectiveness of any such assignment, the
assignee shall have the obligations, rights and benefits of the Swingline Bank
hereunder holding the Swingline Commitment and Swingline Loans assigned to it,
and the assigning Swingline Bank shall be released from its Swingline Commitment
so assigned.
11.07 Survival. The obligations of the Company under Sections 5.01,
5.04, 5.05 and 11.03 hereof and the obligations of the Banks under Section 10.05
hereof shall survive the repayment of the Loans and the termination of the
Commitments. In addition, each representation and warranty made, or deemed to be
made by a notice of any Loan, herein or pursuant hereto shall survive the making
of such representation and warranty, and no Bank shall be deemed to have waived,
by reason of making any
Credit Agreement
<PAGE>
-95-
Loan, any Default which may arise by reason of such representation or warranty
proving to have been false or misleading, notwithstanding that such Bank or the
Swingline Bank or the Administrative Agent may have had notice or knowledge or
reason to believe that such representation or warranty was false or misleading
at the time such Loan was made.
11.08 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
11.09 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
11.10 Governing Law; Submission to Jurisdiction. This Agreement and
the Notes shall be governed by, and construed in accordance with, the law of the
State of New York. The Company hereby submits to the nonexclusive jurisdiction
of the United States District Court for the Southern District of New York and of
any New York State court sitting in New York City for the purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Company irrevocably waives, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have to
the laying of the venue of any such proceeding brought in such a court and any
claim that any such proceeding brought in such a court has been brought in an
inconvenient forum.
11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE ADMINISTRATIVE
AGENT AND THE BANKS AND THE SWINGLINE BANK HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
Credit Agreement
<PAGE>
-96-
11.12 Treatment of Certain Information; Confidentiality.
(a) The Company acknowledges that from time to time financial
advisory, investment banking and other services may be offered or provided to
the Company or one or more of its Subsidiaries (in connection with this
Agreement or otherwise) by any Bank or by one or more subsidiaries or affiliates
of such Bank and the Company hereby authorizes each Bank and the Swingline Bank
to share any information delivered to such Bank by the Company and its
Subsidiaries pursuant to this Agreement, or in connection with the decision of
such Bank or the Swingline Bank to enter into this Agreement, to any such
subsidiary or affiliate, it being understood that any such subsidiary or
affiliate receiving such information shall be bound by the provisions of
paragraph (b) below as if it were a Bank hereunder.
(b) Each Bank and the Swingline Bank and the Administrative Agent
agrees (on behalf of itself and each of its affiliates, directors, officers,
employees and representatives) to use reasonable precautions to keep
confidential, in accordance with their customary procedures for handling
confidential information of this nature and in accordance with safe and sound
banking practices, any non-public information supplied to it by the Company
pursuant to this Agreement which is identified by the Company as being
confidential at the time the same is delivered to the Banks or the Swingline
Bank or the Administrative Agent, provided that nothing herein shall limit the
disclosure of any such information (i) to the extent required by statute, rule,
regulation or judicial process (with concurrent notice thereof to be given to
the Company), (ii) to counsel, auditors or accountants for any of the Banks or
the Swingline Bank or the Administrative Agent (so long as they are advised of
the non-public nature of the information), (iii) to bank examiners, (iv) to the
Administrative Agent or any other Bank or the Swingline Bank (or to Chase
Securities, Inc.), (v) in connection with any litigation to which any one or
more of the Banks or the Swingline Bank or the Administrative Agent is a party,
(vi) to a subsidiary or affiliate of such Bank as provided in paragraph (a)
above or (vii) to any assignee or participant (or prospective
Credit Agreement
<PAGE>
-97-
assignee or participant) so long as such assignee or participant (or prospective
assignee or participant) first executes and delivers to the respective Bank and
the Company a Confidentiality Agreement substantially in the form of Exhibit E
hereto; provided, further, that in no event shall any Bank or the Administrative
Agent be obligated or required to return any materials furnished by the Company.
The obligations of each Bank under this Section 11.12 shall supersede and
replace the obligations of such Bank under the confidentiality letter in respect
of this financing signed and delivered by such Bank to the Company prior to the
Restatement Date.
11.13 Acknowledgement and Consent. The Company hereby acknowledges
that (a) each reference in the Pledge Agreement to the Credit Agreement shall
mean the Existing Credit Agreement as amended and restated hereby, and as the
same shall be modified and supplemented and in effect from time to time, (b)
each reference to the amount $30,000,000 in the Pledge Agreement shall be deemed
a reference to "$60,000,000", (c) each reference therein to "Bank" shall include
the Swingline Bank, (d) each reference therein to Loan shall include the
Swingline Loans and (e) each reference therein to the "Agent" shall be deemed to
be a reference to the Administrative Agent.
Credit Agreement
<PAGE>
-98-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the day and year first above written.
ENHANCE FINANCIAL SERVICES GROUP
INC.
By /s/ Jeffery A. Figurelli
---------------------------------------
Title: Senior Vice President & Treasurer
Address for Notices:
Enhance Financial Services Group
Inc.
335 Madison Avenue
25th Floor
New York, NY 10017-4605
Attention: Arthur Dubroff
Executive Vice President
and Chief Financial
Officer
Telecopier No.: (212) 983-3129
Telephone No.: (212) 983-3100
Credit Agreement
<PAGE>
-99-
BANKS
Commitment THE CHASE MANHATTAN BANK
$25,000,000
By /s/ J. David Parker, Jr.
--------------------------------------
Title: Vice President
Lending Office for all Loans:
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017
Address for Notices:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
5th Floor
New York, NY 10081
Attention: J. David Parker, Jr.
Vice President
Telecopier No.: (212) 552-3651
Telephone No.: (212) 552-7631
Credit Agreement
<PAGE>
-100-
Commitment FLEET NATIONAL BANK
$15,000,000
By /s/ Howard Carpenter
-----------------------------------
Title: Vice President
Lending Office for all Loans:
Fleet National Bank
777 Main Street, CT MO 0250
Hartford, Connecticut 06115
Address for Notice:
Fleet National Bank
777 Main Street, CT MO 0250
Hartford, Connecticut 06115
Attention: Financial Institutions Group
Telecopier No.: (860) 986-1264
Telephone No.: (860) 986-1963
Credit Agreement
<PAGE>
-101-
Commitment BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
$20,000,000
By /s/ Margaret Sunier
-----------------------------------
Title: Vice President & Manager
Lending Office for all Loans:
Bank of Tokyo-Mitsubishi Trust
Company
1251 Avenue of the Americas
12th Floor
New York, New York 10022-1104
Address for Notice:
Bank of Tokyo-Mitsubishi Trust
Company
1251 Avenue of the Americas
12th Floor
New York, New York 10022-1104
Attention: Mr. Dane Holmes
Telecopier No.: (212) 782-4935
Telephone No.: (212) 782-4354
Credit Agreement
<PAGE>
-102-
SWINGLINE BANK
THE CHASE MANHATTAN BANK,
as Swingline Bank
By /s/ J. David Parker, Jr.
-----------------------------------
Title: Vice President
Credit Agreement
<PAGE>
-103-
THE CHASE MANHATTAN BANK,
as Administrative Agent
By /s/ J. David Parker, Jr.
----------------------------------
Title: Vice President
Address for Notices to
the Administrative Agent:
The Chase Manhattan Bank
140 East 45th Street
29th Floor
New York, NY 10017
Attention: Agent Bank Services
Telecopier No.: (212) 622-0122
Telephone No.: (212) 622-0004
With a copy to:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
5th Floor
New York, NY 10081
Attention: J. David Parker, Jr.
Vice President
Credit Agreement
<PAGE>
SCHEDULE I
Material Agreements and Liens
[See Sections 7.12 and 8.07(b)]
Part A - Material Agreements
6 3/4% Debentures due 2003 - $75 million
Part B - Liens
None
Schedule I to Credit Agreement
<PAGE>
SCHEDULE II
Subsidiaries
[See Section 7.15]
(A) ENHANCE REINSURANCE COMPANY
(i) New York
(ii) Enhance Financial Services Group Inc.
(iii) 100% of the outstanding common stock
(B) ASSET GUARANTY REINSURANCE COMPANY
(i) New York
(ii) Enhance Financial Services Group Inc.
(iii) 100% of the oustanding common stock
(C) GUARANTY RISK SERVICES, INC.
(i) New York
(ii) Enhance Financial Services Group Inc.
(iii) 100% of the oustanding common stock
(D) VANTAGE AMERICAN, INC.
(i) Delaware
(ii); (iii) Enhance Financial Services Group Inc.;
100% of the Convertible Preferred Stock and
100% of the Senior Preferred Stock.
James A. Godfrey, Jr., Alan N. Alpern and
Alfred Zucker, 100% of the common stock.
(E) VAN-AMERICAN INSURANCE COMPANY
(i) Kentucky
(ii) Vantage American, Inc.
(iii) 100% of the common stock
(F) A.G. INTERMEDIARIES, INC.
Schedule II to Credit Agreement
<PAGE>
-2-
(i) New York
(ii) Enhance Financial Services Group Inc.
(iii) 100% of the outstanding common stock
(G) ORLEANS ACQUISITION CORPORATION
(i) Illinois
(ii) Enhance Financial Services Group Inc.
(iii) 100% of the outstanding common stock
(H) ENHANCE REINSURANCE BERMUDA, LTD.
(i) Bermuda
(ii) Enhance Financial Services Group Inc.
(iii) 100% of the outstanding common stock
(I) LITTON LOAN SERVICING INC.
(i) Texas
(ii) Enhance Financial Services Group Inc.
(iii) 100% of the outstanding common stock
Schedule II to Credit Agreement
<PAGE>
SCHEDULE III
Litigation
None
Schedule III to Credit Agreement
<PAGE>
EXHIBIT A-1
[Form of Revolving Credit Note]
PROMISSORY NOTE
$_______________ October 1, 1996
New York, New York
FOR VALUE RECEIVED, ENHANCE FINANCIAL SERVICES GROUP INC., a New
York corporation (the "Company"), hereby promises to pay to __________________
(the "Payee"), for account of its respective Applicable Lending Offices provided
for by the Credit Agreement referred to below, at the principal office of The
Chase Manhattan Bank at 270 Park Avenue, New York, New York 10017, the principal
sum of _______________ Dollars (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Revolving Credit Loans made by the
Payee to the Company under the Credit Agreement), in lawful money of the United
States of America and in immediately available funds, on the dates and in the
principal amounts provided in the Credit Agreement, and to pay interest on the
unpaid principal amount of each such Revolving Credit Loan, at such office, in
like money and funds, for the period commencing on the date of such Revolving
Credit Loan until such Revolving Credit Loan shall be paid in full, at the rates
per annum and on the dates provided in the Credit Agreement.
The date, amount, interest rate and duration of Interest Period of
each Revolving Credit Loan made by the Payee to the Company, and each payment
made on account of the principal thereof, shall be recorded by the Payee on its
books and, prior to any transfer of this Note, endorsed by the Payee on the
schedule attached hereto or any continuation thereof, provided that the failure
of the Payee to make any such recordation or endorsement shall not affect the
obligations of the Company to make a payment when due of any amount owing under
the Credit Agreement or hereunder in respect of the Revolving Credit Loans made
by the Payee.
Revolving Credit Note
<PAGE>
-2-
This Note is one of the Revolving Credit Notes referred to in the
Amended and Restated Credit Agreement dated as of November 24, 1992 amended and
restated as of October 1, 1996 (as modified and supplemented and in effect from
time to time, the "Credit Agreement") among the Company, the Banks and The Chase
Manhattan Bank, as Administrative Agent, and evidences Revolving Credit Loans
made by the Payee thereunder. Terms used but not defined in this Note have the
respective meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
Except as permitted by Sections 11.06(b) and 11.06(d) of the Credit
Agreement, this Note may not be assigned by the Payee to any other Person.
This Note shall be governed by, and construed in accordance with,
the law of the State of New York.
ENHANCE FINANCIAL SERVICES GROUP
INC.
By____________________________
Title:
Revolving Credit Note
<PAGE>
SCHEDULE OF REVOLVING CREDIT LOANS
This Note evidences Revolving Credit Loans made, Continued or
Converted under the within-described Credit Agreement to the Company, on the
dates, in the principal amounts, of the Types bearing interest at the rates and
having Interest Periods (if applicable) of the durations set forth below,
subject to the payments and prepayments, Continuations, Conversions of principal
set forth below:
Amount
Date Prin- Paid,
Made, cipal Duration Prepaid, Unpaid
Continued Type Amount of Continued Prin-
or of of Interest Interest or cipal Notation
Converted Loan Loan Rate Period Converted Amount Made by
- --------- ---- ---- ---- ------ --------- ------ -------
Revolving Credit Note
<PAGE>
EXHIBIT A-2
[Form of Term Loan Note]
PROMISSORY NOTE
$_______________ ____________, 199_
New York, New York
FOR VALUE RECEIVED, ENHANCE FINANCIAL SERVICES GROUP INC., a New
York corporation (the "Company"), hereby promises to pay to __________________
(the "Payee"), for account of its Applicable Lending Office provided for by the
Credit Agreement referred to below, at the principal office of The Chase
Manhattan Bank at 270 Park Avenue, New York, New York 10017, the principal sum
of _______________ Dollars, in lawful money of the United States of America and
in immediately available funds, on the dates and in the principal amounts
provided in the Credit Agreement, and to pay interest on the unpaid principal
amount hereof, at such office, in like money and funds, for the period
commencing on the date hereof until this Note shall be paid in full, at the
rates per annum and on the dates provided in the Credit Agreement.
This Note is one of the Term Loan Notes referred to in the Amended
and Restated Credit Agreement dated as of November 24, 1992 amended and restated
as of October 1, 1996 (as modified and supplemented and in effect from time to
time, the "Credit Agreement") among the Company, the Banks and The Chase
Manhattan Bank, as Administrative Agent, and evidences a Term Loan made by the
Payee thereunder. Terms used but not defined in this Note have the respective
meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain events and for prepayments of Term
Loans upon the terms and conditions specified therein.
Except as permitted by Sections 11.06(b) and 11.06(d) and of the
Credit Agreement, this Note may not be assigned by the Payee to any other
Person.
Term Loan Note
<PAGE>
This Note shall be governed by, and construed in accordance with,
the law of the State of New York.
ENHANCE FINANCIAL SERVICES GROUP
INC.
By____________________________
Title:
EXHIBIT A-3
[Form of Swingline Note]
PROMISSORY NOTE
$10,000,000.00 October 1, 1996
New York, New York
FOR VALUE RECEIVED, ENHANCE FINANCIAL SERVICES GROUP INC., a New
York corporation (the "Company"), hereby promises to pay to THE CHASE MANHATTAN
BANK (the "Bank") at its principal office at 270 Park Avenue, New York, New York
10017, the principal sum of TEN MILLION Dollars (or such lesser amount as shall
equal the aggregate unpaid principal amount of the Swingline Loans made by the
Bank to the Company under the Credit Agreement), in lawful money of the United
States of America and in immediately available funds, on the dates and in the
principal amounts provided in the Credit Agreement, and to pay interest on the
unpaid principal amount of each such Swingline Loan, at such office, in like
money and funds, for the period commencing on the date of such Swingline Loan
until such Swingline Loan shall be paid in full, at the rates per annum and on
the dates provided in the Credit Agreement.
The date and amount of each Swingline Loan made by the Bank to the
Company, and each payment made on account of the principal thereof, shall be
recorded by the Bank on its books and, prior to any transfer of this Note,
endorsed by the Bank on the schedule attached hereto or any continuation
thereof, provided that the failure of the Bank to make any such
Swingline Note
<PAGE>
- 2 -
recordation or endorsement shall not affect the obligations of the Company to
make a payment when due of any amount owing under the Credit Agreement or
hereunder in respect of the Swingline Loans made by the Bank.
This Note is the Swingline Note referred to in the Amended and
Restated Credit Agreement dated as of November 24, 1992 amended and restated as
of October 1, 1996 (as modified and supplemented and in effect from time to
time, the "Credit Agreement") between the Company, the lenders party thereto
(including the Bank) and The Chase Manhattan Bank, as Administrative Agent, and
evidences Swingline Loans made by the Bank thereunder. Terms used but not
defined in this Note have the respective meanings assigned to them in the Credit
Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
Except as permitted by Section 11.06(g) of the Credit Agreement,
this Note may not be assigned by the Bank to any other Person.
This Note shall be governed by, and construed in accordance with,
the law of the State of New York.
________________
By_________________________
Title:
Swingline Note
<PAGE>
- 3 -
SCHEDULE OF SWINGLINE LOANS
This Note evidences Swingline Loans made under the within-described
Credit Agreement to the Company, on the dates and in the principal amounts set
forth below, subject to the payments and prepayments of principal set forth
below:
Principal
Date Amount Amount Unpaid
of of Paid or Principal Notation
Loan Loan Prepaid Amount Made by
---- ---- ------- ------ -------
Swingline Note
<PAGE>
EXHIBIT B
[Form of Pledge Agreement]
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of November 24, 1992 between ENHANCE
FINANCIAL SERVICES GROUP INC., a corporation duly organized and validly existing
under the laws of the State of New York (the "Company"); and THE CHASE MANHATTAN
BANK (NATIONAL ASSOCIATION), as agent for the lenders or other financial
institutions or entities party, as lenders, to the Credit Agreement referred to
below (in such capacity, together with its successors in such capacity, the
"Agent").
The Company, certain lenders and the Agent are parties to a Credit
Agreement dated as of November 24, 1992 (as modified and supplemented and in
effect from time to time, the "Credit Agreement"), providing, subject to the
terms and conditions thereof, for extensions of credit to be made by said
lenders to the Company in an aggregate principal amount not exceeding
$30,000,000.
To induce said lenders to enter into the Credit Agreement and to
extend credit thereunder, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company has agreed
to pledge and grant a security interest in the Collateral (as hereinafter
defined) as security for the Secured Obligations (as so defined). Accordingly,
the parties hereto agree as follows:
Section 1. Definitions. Terms defined in the Credit Agreement are
used herein as defined therein. In addition, as used herein:
"Collateral" shall have the meaning ascribed thereto in Section 3
hereof.
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"Collateral Account" shall have the meaning ascribed thereto in
Section 4.01 hereof.
"Issuer" shall mean the issuer of any Pledged Stock.
"Permitted Investments" shall mean: (a) direct obligations of the
United States of America, or of any agency thereof, or obligations
guaranteed as to principal and interest by the United States of America,
or of any agency thereof, in either case maturing not more than 90 days
from the date of acquisition thereof; (b) certificates of deposit issued
by any bank or trust company organized under the laws of the United States
of America or any state thereof and having capital, surplus and undivided
profits of at least $500,000,000, maturing not more than 90 days from the
date of acquisition thereof; and (c) commercial paper rated A-1 or better
or P-1 or better by Standard & Poor's Corporation or Moody's Investors
Services, Inc., respectively, maturing not more than 90 days from the date
of acquisition thereof.
"Pledged Stock" shall have the meaning ascribed thereto in Section
3(a) hereof.
"Secured Obligations" shall mean, together, (a) the principal of and
interest on the Loans made by the Banks to, and the Note(s) held by each
Bank of, the Company and (b) all obligations hereunder of the Company to
the Banks and the Agent.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as
in effect from time to time in the State of New York.
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Section 2. Representations and Warranties. The Company represents
and warrants to the Banks and the Agent that at the time of the delivery to the
Agent of certificates representing any Pledged Stock:
(a) the Company will be the sole beneficial owner of such Pledged
Stock and no Lien will exist upon such Pledged Stock at any time (and no
right or option to acquire the same exists in favor of any other Person),
except for the pledge and security interest in favor of the Agent for the
benefit of the Banks created or provided for herein, which pledge and
security interest constitute a first priority perfected pledge and
security interest in and to all of such Pledged Stock
(b) such Pledged Stock will be duly authorized, validly existing,
fully paid and non-assessable and none of such Pledged Stock will be
subject to any contractual restriction, or any restriction under the
charter or by-laws of the Issuer thereof (except for any such restriction
contained herein or in the Credit Agreement).
Section 3. The Pledge. As collateral security for the prompt payment
in full when due (whether at stated maturity, by acceleration or otherwise) of
the Secured Obligations, the Company hereby pledges and grants to the Agent, for
the benefit of the Banks as hereinafter provided, a security interest in all of
the Company's right, title and interest in the following property, whether now
owned by the Company or hereafter acquired and whether now existing or hereafter
coming into existence (all being together referred to herein as "Collateral"):
(a) the shares of common stock of ERC represented by certificates
delivered to the Agent by the Company at any time or from time to time
(the "Pledged Stock");
(b) all shares, securities, moneys or property representing a
dividend on any of the Pledged Stock, or
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representing a distribution or return of capital upon or in respect of the
Pledged Stock, or resulting from a split-up, revision, reclassification or
other like change of the Pledged Stock or otherwise received in exchange
therefor, and any subscription warrants, rights or options issued to the
holders of, or otherwise in respect of, the Pledged Stock;
(c) without affecting the obligations of the Company under any
provision prohibiting such action hereunder or under the Credit Agreement,
in the event of any consolidation or merger in which an Issuer is not the
surviving corporation, the shares of each class of the capital stock of
the successor corporation formed by or resulting from such consolidation
or merger corresponding to the shares of Pledged Stock redeemed or
exchanged pursuant to such consolidation or merger;
(d) the balance from time to time in the Collateral Account; and
(e) all proceeds of and to any of the property of the Company
described in the preceding clauses of this Section 3.
Section 4. Cash Proceeds of Collateral.
4.01 Collateral Account. The Agent may at any time establish at
Chase a cash collateral account (the "Collateral Account") in the name and under
the control of the Agent into which there shall be deposited from time to time
the cash proceeds of any of the Collateral required to be delivered to the Agent
pursuant hereto and into which the Company may from time to time deposit any
additional amounts which it wishes to pledge to the Agent for the benefit of the
Banks as additional collateral security hereunder. The balance from time to time
in the Collateral Account shall constitute part of the Collateral hereunder and
shall not constitute payment of the Secured
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Obligations until applied as hereinafter provided. Except as expressly provided
in the next sentence, the Agent shall remit the collected balance outstanding to
the credit of the Collateral Account to or upon the order of the Company as the
Company shall from time to time instruct. However, at any time following the
occurrence and during the continuance of an Event of Default, the Agent may
(and, if instructed by the Banks as specified in Section 10.03 of the Credit
Agreement, shall) in its (or their) discretion apply or cause to be applied
(subject to collection) the balance from time to time outstanding to the credit
of the Collateral Account to the payment of the Secured Obligations in the
manner specified in Section 5.08 hereof. The balance from time to time in the
Collateral Account shall be subject to withdrawal only as provided herein. In
addition to the foregoing, the Company agrees that if the proceeds of any
Collateral hereunder shall be received by it, the Company shall as promptly as
possible deposit such proceeds into the Collateral Account. Until so deposited,
all such proceeds shall be held in trust by the Company for and as the property
of the Agent and shall not be commingled with any other funds or property of the
Company.
4.02 Investment of Balance in Collateral Account. Amounts on deposit
in the Collateral Account shall be invested from time to time in such Permitted
Investments as the Company (or, after the occurrence and during the continuance
of a Default, the Agent) shall determine, which Permitted Investments shall be
held in the name and be under the control of the Agent, provided that at any
time after the occurrence and during the continuance of an Event of Default, the
Agent may (and, if instructed by the Banks as specified in Section 10.03 of the
Credit Agreement, shall) in its (or their) discretion at any time and from time
to time elect to liquidate any such Permitted Investments and to apply or cause
to be applied the proceeds thereof to the payment of the Secured Obligations in
the manner specified in Section 5.08 hereof.
Enhance Pledge Agreement
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Section 5. Further Assurances; Remedies. In furtherance of the grant
of the pledge and security interest pursuant to Section 3 hereof, the Company
hereby agrees with each Bank and the Agent as follows:
5.01 Delivery and Other Perfection. The Company shall:
(a) if any of the above-described shares, securities, moneys or
property required to be pledged by the Company under clauses (b) or (c) of
Section 3 hereof are received by the Company, forthwith either (x)
transfer and deliver to the Agent such shares or securities so received by
the Company (together with the certificates for any such shares and
securities duly endorsed in blank or accompanied by undated stock powers
duly executed in blank), all of which thereafter shall be held by the
Agent, pursuant to the terms of this Agreement, as part of the Collateral
or (y) take such other action as the Agent shall deem necessary or
appropriate to duly record the Lien created hereunder in such shares,
securities, moneys or property in said clauses (b) and (c);
(b) give, execute, deliver, file and/or record any financing
statement, notice, instrument, document, agreement or other papers that
may be necessary or desirable (in the judgment of the Agent) to create,
preserve, perfect or validate the security interest granted pursuant
hereto or to enable the Agent to exercise and enforce its rights hereunder
with respect to such pledge and security interest;
(c) keep full and accurate books and records relating to the
Collateral, and stamp or otherwise mark such books and records in such
manner as the Agent may reasonably require in order to reflect the
security interests granted by this Agreement; and
(d) permit representatives of the Agent, upon reasonable notice, at
any time during normal business hours
Enhance Pledge Agreement
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to inspect and make abstracts from its books and records pertaining to the
Collateral, and permit representatives of the Agent to be present at the
Company's place of business to receive copies of all communications and
remittances relating to the Collateral, and forward copies of any notices
or communications received by the Company with respect to the Collateral,
all in such manner as the Agent may require.
5.02 Other Financing Statements and Liens. Without the prior written
consent of the Agent (granted with the authorization of the Banks as specified
in Section 10.09 of the Credit Agreement), the Company shall not file or suffer
to be on file, or authorize or permit to be filed or to be on file, in any
jurisdiction, any financing statement or like instrument with respect to the
Collateral in which the Agent is not named as the sole secured party for the
benefit of the Banks.
5.03 Preservation of Rights. The Agent shall not be required to take
steps necessary to preserve any rights against prior parties to any of the
Collateral.
5.04 Collateral.
(a) So long as no Event of Default shall have occurred and be
continuing, the Company shall have the right to exercise all voting, consensual
and other powers of ownership pertaining to the Collateral for all purposes not
inconsistent with the terms of this Agreement, the Credit Agreement, the Notes
or any other instrument or agreement referred to herein or therein, provided
that the Company agrees that it will not vote the Collateral in any manner that
is inconsistent with the terms of this Agreement, the Credit Agreement, the
Notes or any such other instrument or agreement; and the Agent shall execute and
deliver to the Company or cause to be executed and delivered to the Company all
such proxies, powers of attorney, dividend and other orders, and all such
instruments, without recourse, as the Company may reasonably request for the
purpose of enabling the Company to exercise the rights and powers which it is
entitled to exercise pursuant to this Section 5.04(a).
Enhance Pledge Agreement
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(b) Unless and until an Event of Default has occurred and is
continuing, the Company shall be entitled to receive and retain any dividends on
the Collateral paid in cash out of earned surplus. Upon receipt of any such
dividends that the Company is entitled to receive and retain as aforesaid, the
security interest on such dividends provided for hereunder shall terminate.
(c) If any Event of Default shall have occurred, then so long as
such Event of Default shall continue, and whether or not the Agent or any Bank
exercises any available right to declare any Secured Obligation due and payable
or seeks or pursues any other relief or remedy available to it under applicable
law or under this Agreement, the Credit Agreement, the Notes or any other
agreement relating to such Secured Obligation, all dividends and other
distributions on the Collateral shall be paid directly to the Agent and retained
by it in the Collateral Account as part of the Collateral, subject to the terms
of this Agreement, and, if the Agent shall so request in writing, the Company
agrees to execute and deliver to the Agent appropriate additional dividend,
distribution and other orders and documents to that end, provided that if such
Event of Default is cured, any such dividend or distribution theretofore paid to
the Agent shall, upon request of the Company (except to the extent theretofore
applied to the Secured Obligations), be returned by the Agent to the Company.
(d) If at any time there are no Loans outstanding, at the request of
the Company, the Agent shall forthwith cause to be delivered, against receipt
but without any recourse, warranty or representation whatsoever, any remaining
Collateral to the Company.
(e) At the time of the delivery to the Agent of the quarterly or
annual Statutory Statement of ERC, together with the certificate of a senior
financial officer of the Company, as required by paragraphs (c) and (d) of
Section 8.01 of the Credit Agreement, if such certificate indicates that the
Value of the Pledged Stock as at the date of such Statutory Statement exceeds
Enhance Pledge Agreement
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175% of the aggregate unpaid principal amount of all Loans less any collected
funds standing to the credit of the Collateral Account then outstanding, then at
the request of the Company, so long as no Default has then occurred and is
continuing, the Agent shall promptly release to the Company the maximum number
of shares of Pledged Stock so that, after giving effect to such release, the
Value of the Pledged Stock is not less than 166-2/3% of the aggregate unpaid
principal amount of the Loans then outstanding less any collected funds standing
to the credit of the Collateral Account.
5.05 Events of Default, Etc. During the period during which an Event
of Default shall have occurred and be continuing:
(a) the Agent shall have all of the rights and remedies with respect
to the Collateral of a secured party under the Uniform Commercial Code
(whether or not said Code is in effect in the jurisdiction where the
rights and remedies are asserted) and such additional rights and remedies
to which a secured party is entitled under the laws in effect in any
jurisdiction where any rights and remedies hereunder may be asserted,
including, without limitation, the right, to the maximum extent permitted
by law, to exercise all voting, consensual and other powers of ownership
pertaining to the Collateral as if the Agent were the sole and absolute
owner thereof (and the Company agrees to take all such action as may be
appropriate to give effect to such right, including, without limitation,
causing certificates representing the Pledged Stock to be registered in
the name of the Agent);
(b) the Agent in its discretion may, in its name or in the name of
the Company or otherwise, demand, sue for, collect or receive any money or
property at any time payable or receivable on account of or in exchange
for any of the Collateral, but shall be under no obligation to do so; and
(c) the Agent may, upon ten business days' prior written notice to
the Company of the time and place, with
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respect to the Collateral or any part thereof which shall then be or shall
thereafter come into the possession, custody or control of the Agent, the
Banks or any of their respective agents, sell, lease, assign or otherwise
dispose of all or any part of such Collateral, at such place or places as
the Agent deems best, and for cash or for credit or for future delivery
(without thereby assuming any credit risk), at public or private sale,
without demand of performance or notice of intention to effect any such
disposition or of the time or place thereof (except such notice as is
required above or by applicable statute and cannot be waived), and the
Agent or any Bank or anyone else may be the purchaser, lessee, assignee or
recipient of any or all of the Collateral so disposed of at any public
sale (or, to the extent permitted by law, at any private sale) and
thereafter hold the same absolutely, free from any claim or right of
whatsoever kind, including any right or equity of redemption (statutory or
otherwise), of the Company, any such demand, notice and right or equity
being hereby expressly waived and released. The Agent may, without notice
or publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed
for the sale, and such sale may be made at any time or place to which the
sale may be so adjourned.
The proceeds of each collection, sale or other disposition under this Section
5.05 shall be applied in accordance with Section 5.08 hereof.
The Company recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, and applicable state
securities laws, the Agent may be compelled, with respect to any sale of all or
any part of the Collateral, to limit purchasers to those who will agree, among
other things, to acquire the Collateral for their own account, for investment
and not with a view to the distribution or resale thereof. The Company
acknowledges that any such private sales may be at prices and on terms less
favorable to the Agent than those obtainable
Enhance Pledge Agreement
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through a public sale without such restrictions, and, notwithstanding such
circumstances, agrees that any such private sale shall be deemed to have been
made in a commercially reasonable manner and that the Agent shall have no
obligation to engage in public sales and no obligation to delay the sale of any
Collateral for the period of time necessary to permit the or issuer thereof to
register it for public sale.
5.06 Deficiency. If the proceeds of sale, collection or other
realization of or upon the Collateral pursuant to Section 5.05 hereof are
insufficient to cover the costs and expenses of such realization and the payment
in full of the Secured Obligations, the Company shall remain liable for any
deficiency.
5.07 Private Sale. The Agent and the Banks shall incur no liability
as a result of the sale of the Collateral, or any part thereof, at any private
sale pursuant to Section 5.05 hereof conducted in a commercially reasonable
manner. The Company hereby waives any claims against the Agent or any Bank
arising by reason of the fact that the price at which the Collateral may have
been sold at such a private sale was less than the price which might have been
obtained at a public sale or was less than the aggregate amount of the Secured
Obligations, even if the Agent accepts the first offer received and does not
offer the Collateral to more than one offeree.
5.08 Application of Proceeds. Except as otherwise herein expressly
provided, the proceeds of any collection, sale or other realization of all or
any part of the Collateral pursuant hereto, and any other cash at the time held
by the Agent under Section 4 hereof or this Section 5, shall be applied by the
Agent:
First, to the payment of the costs and expenses of such collection,
sale or other realization, including reasonable out-of-pocket costs and
expenses of the Agent and the reasonable fees and expenses of its agents
and counsel, and
Enhance Pledge Agreement
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all expenses incurred and advances made by the Agent in connection
therewith;
Next, to the payment in full of the Secured Obligations, in each
case equally and ratably in accordance with the respective amounts thereof
then due and owing or as the Banks holding the same may otherwise agree;
and
Finally, to the payment to the Company, or its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining.
As used in this Section 5, "proceeds" of Collateral shall mean cash, securities
and other property realized in respect of, and distributions in kind of,
Collateral, including any thereof received under any reorganization, liquidation
or adjustment of debt of the Company or any issuer of or obligor on any of the
Collateral.
5.09 Attorney-in-Fact. Without limiting any rights or powers granted
by this Agreement to the Agent while no Event of Default has occurred and is
continuing, upon the occurrence and during the continuance of any Event of
Default the Agent is hereby appointed the attorney-in-fact of the Company for
the purpose of carrying out the provisions of this Section 5 and taking any
action and executing any instruments which the Agent may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact is irrevocable and coupled with an interest. Without limiting
the generality of the foregoing, so long as the Agent shall be entitled under
this Section 5 to make collections in respect of the Collateral, the Agent shall
have the right and power to receive, endorse and collect all checks made payable
to the order of the Company representing any dividend, payment or other
distribution in respect of the Collateral or any part thereof and to give full
discharge for the same.
5.10 Termination. When all Secured Obligations shall have been paid
in full and the Commitments of the Banks under the
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Credit Agreement shall have expired or been terminated, this Agreement shall
terminate, and the Agent shall forthwith cause to be assigned, transferred and
delivered, against receipt but without any recourse, warranty or representation
whatsoever, any remaining Collateral and money received in respect thereof, to
or on the order of the Company.
5.11 Expenses. The Company agrees to pay to the Agent all
out-of-pocket expenses (including reasonable expenses for legal services) of, or
incident to, the enforcement of any of the provisions of this Section 5, or
performance by the Agent of any obligations of the Company in respect of the
Collateral which the Company has failed or refused to perform, or any actual or
attempted sale, or any exchange, enforcement, collection, compromise or
settlement in respect of any of the Collateral, and for defending or asserting
rights and claims of the Agent in respect thereof, by litigation or otherwise,
and all such expenses shall be Secured Obligations to the Agent secured under
Section 3 hereof.
5.12 Further Assurances. The Company agrees that, from time to time
upon the written request of the Agent, the Company will execute and deliver such
further documents and do such other acts and things as the Agent may reasonably
request in order fully to effect the purposes of this Agreement.
Section 6. Miscellaneous.
6.01 No Waiver. No failure on the part of the Agent or any of its
agents to exercise, and no course of dealing with respect to, and no delay in
exercising, any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise by the Agent or any of its
agents of any right, power or remedy hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. The
remedies herein are cumulative and are not exclusive of any remedies provided by
law.
Enhance Pledge Agreement
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6.02 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of New York.
6.03 Notices. All notices, requests, consents and demands hereunder
shall be in writing and telexed, telecopied or delivered to the intended
recipient at its "Address for Notices" specified pursuant to Section 11.02 of
the Credit Agreement and shall be deemed to have been given at the times
specified in said Section 11.02.
6.04 Waivers, Etc. The terms of this Agreement may be waived,
altered or amended only by an instrument in writing duly executed by the Company
and the Agent (with the consent of the Banks as specified in Section 10.09 of
the Credit Agreement). Any such amendment or waiver shall be binding upon the
Agent and each Bank, each holder of any of the Secured Obligations and the
Company.
6.05 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the respective successors and assigns of the
Company, the Agent, the Banks and each holder of any of the Secured Obligations
(provided, however, that the Company shall not assign or transfer its rights
hereunder without the prior written consent of the Agent).
6.06 Severability. If any provision hereof is invalid and
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Agent and the
Banks in order to carry out the intentions of the parties hereto as nearly as
may be possible and (ii) the invalidity or unenforceability of any provision
hereof in any jurisdiction shall not affect the validity or enforceability of
such provision in any other jurisdiction.
Enhance Pledge Agreement
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IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed and delivered as of the day and year first above
written.
ENHANCE FINANCIAL SERVICES GROUP
INC.
By __________________________________
Title:
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Agent
By __________________________________
Title:
Enhance Pledge Agreement
<PAGE>
EXHIBIT C
[Form of Opinion of General Counsel to the Company]
October __, 1996
Each of the Banks party
to the Credit Agreement
referred to below
The Chase Manhattan Bank,
as Administrative Agent for said Banks
1 Chase Manhattan Plaza
New York, New York 10081
Ladies and Gentlemen:
I am Executive Vice President and General Counsel to Enhance
Financial Services Group Inc., a corporation organized under the law of the
State of New York (the "Company"), and am rendering this opinion in connection
with the Amended and Restated Credit Agreement dated as of November 24, 1992
amended and restated as of October 1, 1996 (the "Credit Agreement") among the
Company, the banks party thereto (the "Banks") and The Chase Manhattan Bank, in
its capacity as agent for said Banks (the "Administrative Agent"). All
capitalized terms used but not defined herein have the respective meanings given
to such terms in the Credit Agreement.
In rendering the opinions expressed below, I have examined:
(i) the Credit Agreement;
(ii) the Revolving Credit Notes and the form of the Term Notes;
Opinion of General Counsel to the Company
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(iii) the Pledge Agreement (together with the documents referred to in the
foregoing lettered clauses (i) to (iii), the "Credit Documents");
and
(iv) such corporate records of the Company and such other documents as I
have deemed necessary as a basis for the opinions expressed below.
In my examination, I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to me as originals and the conformity
with authentic original documents of all documents submitted to me as copies.
In rendering the opinions expressed below, I have assumed, with
respect to all of the documents referred to in this opinion, that (except, to
the extent set forth in the opinions expressed below, as to the Company):
(i) such documents have been duly authorized by, have been (or, in the
case of the Term Notes, will be) duly executed and delivered by, and
constitute (or, in the case of the Term Notes, will constitute)
legal, valid, binding and enforceable obligations of, all of the
parties to such documents;
(ii) all signatories to such documents have been duly authorized; and
(iii) all of the parties to such documents are duly organized and validly
existing and have the power and authority (corporate or other) to
execute, deliver and perform such documents.
Based upon and subject to the foregoing and subject also to the
comments and qualifications set forth below, and having considered such
questions of law as I have deemed necessary as a basis for the opinions
expressed below, I am of the opinion that:
Opinion of General Counsel to the Company
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1. The Company is a corporation duly organized, validly existing and
in good standing under the law of the State of New York. The Company has
all material government licenses, authorizations, consents and approvals,
necessary to own assets and carry on its business as now being conducted.
2. The Company has all requisite corporate power to execute and
deliver, and to perform its obligations under, each Credit Document. The
Company has all requisite corporate power to borrow under the Credit
Agreement and to pledge shares of the common stock of ERC under the Pledge
Agreement.
3. The execution, delivery and performance by the Company of each
Credit Document has been duly authorized by all necessary corporate action
on the part of the Company.
4. Each Credit Document (other than the Term Notes) has been duly
executed and delivered by the Company.
5. Each Credit Document (other than the Notes) constitutes, and each
Note upon its execution and delivery by the Company for value will
constitute, the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting the rights of creditors
generally and except as the enforceability of the Credit Documents is
subject to the application of general principles of equity (regardless of
whether considered in a proceeding in equity or at law), including,
without limitation, (a) the possible unavailability of specific
performance, injunctive relief or any other equitable remedy and (b)
concepts of materiality, reasonableness, good faith and fair dealing.
Opinion of General Counsel to the Company
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6. No authorization, approval or consent of, and no filing or
registration with, any governmental or regulatory authority or agency of
the United States of America or the State of New York is required on the
part of the Company for the execution, delivery or performance by the
Company of the Credit Documents, for any borrowings by the Company under
the Credit Agreement or for the pledge by the Company of shares of common
stock of ERC under the Pledge Agreement except that the approval of the
New York Insurance Department may be required in connection with a
foreclosure on the Pledged Stock in the event such foreclosure results in
a change in control of ERC and no opinion is expressed as to the ability
or likelihood of any Bank to obtain such approval.
7. The execution, delivery and performance by the Company of, and
the consummation by the Company of the transactions contemplated by, the
Credit Documents do not and will not (a) violate any provision of the
charter or by-laws of the Company, (b) violate any applicable law, rule or
regulation of the United States of America or the State of New York, (c)
violate any order, writ, injunction or decree of any court or governmental
authority or agency or any arbitral award applicable to the Company or any
of its Subsidiaries or (d) result in a breach of, constitute a default
under, require any consent under, or result in the acceleration or
required prepayment of any indebtedness pursuant to the terms of, any
agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which any of them is bound or to which any of them is
subject, or (except for the Lien of the Pledge Agreement) result in the
creation or imposition of any Lien upon any Property of the Company or any
of its Subsidiaries pursuant to the terms of any such agreement or
instrument.
8. Except as disclosed in Schedule III to the Credit Agreement,
there are no legal or arbitral proceedings, or any proceedings by or
before any governmental or regulatory
Opinion of General Counsel to the Company
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authority or agency, now pending or to my knowledge threatened against the
Company or any of its Subsidiaries or any of their respective Properties
that, if adversely determined, could have a Material Adverse Effect.
9. The Pledge Agreement is effective (together, in the case of that
portion of the Collateral consisting of Pledged Stock, with the delivery
to the Agent of the certificates representing the Pledged Stock) to create
in favor of the Agent for the benefit of the Agent and the Banks a valid
security interest under the Uniform Commercial Code as in effect in the
State of New York in all of the right, title and interest of the Company
in, to and under the Collateral (as defined in the Pledge Agreement) as
collateral security for the payment of the Secured Obligations (as defined
in the Pledge Agreement).
10. The Pledge Agreement creates in favor of the Agent for the
benefit of the Agent and the Banks a perfected security interest in the
Pledged Stock represented by the certificates in the possession of the
Agent on the date hereof so long as the Agent retains possession of such
certificates as collateral security for the Secured Obligations.
11. All of the outstanding shares of common stock of ERC have been
duly and validly issued and are fully paid and nonassessable. Assuming
that the Agent (or a Person designated by the Agent) obtains (or, in the
case of the Pledged Stock referred to in paragraph 10 above, obtained)
possession in the State of New York of the certificates representing the
Pledged Stock in good faith and without notice of any adverse claim (as
defined in Section 8-302(2) of the Uniform Commercial Code as in effect in
the State of New York ("UCC")) and in bearer form or in registered form
issued to the Agent or endorsed to the Agent or in blank, and thereafter
maintains possession thereof, the perfected security interest therein will
have priority over all other
Opinion of General Counsel to the Company
<PAGE>
-6-
security interests theretofore or thereafter created under the UCC.
12. Neither the Company nor any of its Subsidiaries is an
"investment company", or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as
amended.
13. Neither the Company nor any of its Subsidiaries is a "holding
company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
The foregoing opinions are subject to the following comments and
qualifications:
A. The enforceability of Section 11.03 of the Credit Agreement (and
Section 5.11 of the Pledge Agreement) may be limited by laws rendering
unenforceable indemnification contrary to Federal or state securities laws
and the public policy underlying such laws.
B. The enforceability of provisions in the Credit Documents to the
effect that terms may not be waived or modified except in writing may be
limited under certain circumstances.
C. I express no opinion as to (i) the effect of the laws of any
jurisdiction in which any Bank is located (other than the State of New
York) that limit the interest, fees or other charges such Bank may impose,
(ii) the last sentence of Section 2.02(c) and Section 4.07(c) of the
Credit Agreement and (iii) the second sentence of Section 11.10 of the
Credit Agreement, insofar as such sentence relates to the subject matter
jurisdiction of the United States District Court for the Southern District
of New York to adjudicate any controversy related to the Credit Documents.
Opinion of General Counsel to the Company
<PAGE>
-7-
D. I wish to point out that the obligations of the Company under the
Pledge Agreement may be subject to possible limitations upon the exercise
of remedial or procedural provisions contained in the Pledge Agreement,
but such limitations do not, in my opinion, make the remedies and
procedures that will be afforded to the Agent and the Banks inadequate for
the practical realization of the substantive benefits purported to be
provided to the Agent and the Banks by the Pledge Agreement and provided
further that this paragraph shall in no way derogate from the exception to
paragraph 6 of this opinion set forth at the conclusion of said paragraph.
The foregoing opinions are limited to matters involving the Federal
laws of the United States of America and the law of the State of New York, and I
do not express any opinion as to the laws of any other jurisdiction.
At the request of the Company, this opinion is, pursuant to Section
6.01(c) of the Credit Agreement, provided to you by me in my capacity as General
Counsel to the Company and may not be relied upon by any Person other than the
addressees hereof without, in each instance, my prior written consent.
Very truly yours,
Samuel Bergman
Executive Vice President and
General Counsel
Opinion of General Counsel to the Company
<PAGE>
EXHIBIT D
[Form of Opinion of Special New York Counsel to Chase]
October __, 1996
Each of the Banks party
to the Credit Agreement
referred to below
The Chase Manhattan Bank,
as Administrative Agent for said Banks
1 Chase Manhattan Plaza
New York, New York 10081
Ladies and Gentlemen:
We have acted as special New York counsel to The Chase Manhattan
Bank in connection with the Amended and Restated Credit Agreement dated as of
November 24, 1992 amended and restated as of October 1, 1996 (the "Credit
Agreement") among Enhance Financial Services Group Inc. (the "Company"), the
banks party thereto (the "Banks") and The Chase Manhattan Bank, in its capacity
as agent for said Banks (the "Administrative Agent"). All capitalized terms used
but not defined herein have the respective meanings given to such terms in the
Credit Agreement.
In rendering the opinions expressed below, we have examined:
(i) the Credit Agreement;
(ii) the Revolving Credit Notes and the form of the Term Notes;
(iii) the Pledge Agreement (together with the documents referred to in the
foregoing clauses (i) through (iii), the "Credit Documents"); and
Opinion of Special New York Counsel to Chase
<PAGE>
-2-
(iv) such corporate records of the Company and such other documents as we
have deemed necessary as a basis for the opinions expressed below.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
with authentic original documents of all documents submitted to us as copies.
When relevant facts were not independently established, we have relied upon
statements of governmental officials and upon representations made in or
pursuant to the Credit Documents and certificates of appropriate representatives
of the Company.
In rendering the opinions expressed below, we have assumed, with
respect to all of the documents referred to in this opinion, that:
(i) such documents have been duly authorized by, have been (or, in the
case of the Term Notes, will be) duly executed and delivered by, and
(except as to the Company) constitute (or, in the case of the Term
Notes, will constitute) legal, valid, binding and enforceable
obligations of, all of the parties to such documents;
(ii) all signatories to such documents have been duly authorized; and
(iii) all of the parties to such documents are duly organized and validly
existing and have the power and authority (corporate or other) to
execute, deliver and perform such documents.
Based upon and subject to the foregoing and subject also to the
comments and qualifications set forth below, and having considered such
questions of law as we have deemed necessary as a basis for the opinions
expressed below, we are of the opinion that:
Opinion of Special New York Counsel to Chase
<PAGE>
-3-
1. Each Credit Document (other than the Notes) constitutes, and each
Note upon its execution and delivery by the Company for value will constitute,
the legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting the rights of creditors generally and except as the enforceability of
the Credit Documents is subject to the application of general principles of
equity (regardless of whether considered in a proceeding in equity or at law),
including, without limitation, (a) the possible unavailability of specific
performance, injunctive relief or any other equitable remedy and (b) concepts of
materiality, reasonableness, good faith and fair dealing.
2. The Pledge Agreement is effective (together, in the case of that
portion of the Collateral consisting of Pledged Stock, with the delivery to the
Agent of the certificates representing the Pledged Stock) to create in favor of
the Agent and the Banks a valid security interest under the Uniform Commercial
Code as in effect in the State of New York (the "Uniform Commercial Code") in
all of the right, title and interest of the Company in, to and under the
Collateral (as defined in the Pledge Agreement) as collateral security for the
payment of the Secured Obligations (as defined in the Pledge Agreement).
3. The Pledge Agreement creates in favor of the Agent for the
benefit of the Agent and the Banks a perfected security interest in the Pledged
Stock represented by the certificates in the possession of the Agent on the date
hereof so long as the Agent retains possession of such certificates as
collateral security for the Secured Obligations.
The foregoing opinions are subject to the following comments and
qualifications:
Opinion of Special New York Counsel to Chase
<PAGE>
-4-
A. The enforceability of Section 11.03 of the Credit Agreement (and
Section 5.11 of the Pledge Agreement) may be limited by laws rendering
unenforceable indemnification contrary to Federal or state securities laws
and the public policy underlying such laws.
B. The enforceability of provisions in the Credit Documents to the
effect that terms may not be waived or modified except in writing may be
limited under certain circumstances.
C. We express no opinion as to (i) the effect of the laws of any
jurisdiction in which any Bank is located (other than New York) that limit
the interest, fees or other charges such Bank may impose, (ii) the last
sentence of Section 2.02(c) and Section 4.07(c) of the Credit Agreement,
(iii) the second sentence of Section 11.10 of the Credit Agreement,
insofar as such sentence relates to the subject matter jurisdiction of the
United States District Court for the Southern District of New York to
adjudicate any controversy related to the Credit Documents and (iv) the
waiver of inconvenient forum set forth in Section 11.10 of the Credit
Agreement with respect to proceedings in the United States District Court
for the Southern District of New York.
D. We wish to point out that the (i) obligations of the Company
under the Pledge Agreement may be subject to possible limitations upon the
exercise of remedial or procedural provisions contained in the Pledge
Agreement, provided that such limitations do not, in our opinion, make the
remedies and procedures that will be afforded to the Agent and the Banks
inadequate for the practical realization of the substantive benefits
purported to be provided to the Agent and the Banks by the Pledge
Agreement and (ii) the approval of the New York Insurance Department may
be required in connection with a foreclosure on the Pledged Stock in the
event such foreclosure results in a change in
Opinion of Special New York Counsel to Chase
<PAGE>
-5-
control of ERC and no opinion is expressed as to the ability or likelihood
of any Bank to obtain such approval.
E. We express no opinion as to the existence of, or the right, title
or interest of the Company in, to or under, any of the Collateral (as
defined in the Pledge Agreement) or as to the perfection or priority of
any security interest in, or other Lien on, the Collateral.
The foregoing opinions are limited to matters involving the Federal
laws of the United States and the law of the State of New York, and we do not
express any opinion as to the laws of any other jurisdiction.
This opinion is being delivered pursuant to Section 6.01(d) of the
Credit Agreement, and is being provided to you by us in our capacity as special
New York counsel to Chase and may not be relied upon by any Person for any
purpose other than in connection with the transactions contemplated by the
Credit Agreement without, in each instance, our prior written consent.
Very truly yours,
CDP/RJW
Opinion of Special New York Counsel to Chase
<PAGE>
EXHIBIT E
[Form of Confidentiality Agreement]
CONFIDENTIALITY AGREEMENT
[Date]
[Insert Name and
Address of Prospective
Participant or Assignee]
Re: Amended and Restated Credit Agreement dated as of November 24, 1992
amended and restated as of October 1, 1996 (the "Credit Agreement"),
among Enhance Financial Services Group Inc. (the "Company"), the
lenders named therein and The Chase Manhattan Bank, as
Administrative Agent.
Ladies and Gentlemen:
As a Bank party to the Credit Agreement, we have agreed with the
Company pursuant to Section 11.12 of the Credit Agreement to use reasonable
precautions to keep confidential, except as otherwise provided therein, all
non-public information identified by the Company as being confidential at the
time the same is delivered to us pursuant to the Credit Agreement.
As provided in said Section 11.12, we are permitted to provide you,
as a prospective [holder of a participation in the Loans (as defined in the
Credit Agreement)][assignee Bank], with certain of such non-public information
subject to the execution and delivery by you, prior to receiving such non-public
information, of a Confidentiality Agreement in this form. Such information will
not be made available to you until your execution and return to us of this
Confidentiality Agreement.
Accordingly, in consideration of the foregoing, you agree (on behalf
of yourself and each of your affiliates, directors, officers, employees and
representatives) that (A) such
Confidentiality Agreement
<PAGE>
-2-
information will not be used by you except in connection with the proposed
[participation][assignment] mentioned above and (B) you shall use reasonable
precautions, in accordance with your customary procedures for handling
confidential information and in accordance with safe and sound banking
practices, to keep such information confidential, provided that nothing herein
shall limit the disclosure of any such information (i) to the extent required by
statute, rule, regulation or judicial process, (ii) to your counsel or to
counsel for any of the Banks or the Administrative Agent, (iii) to bank
examiners, auditors or accountants, (iv) to the Administrative Agent or any
other Bank (or to Chase Securities, Inc.), (v) in connection with any litigation
to which you or any one or more of the Banks or the Administrative Agent are a
party, (vi) to a subsidiary or affiliate of yours as provided in Section
11.12(a) of the Credit Agreement or (vii) to any assignee or participant (or
prospective assignee or participant) so long as such assignee or participant (or
prospective assignee or participant) first executes and delivers to you a
Confidentiality Agreement substantially in the form hereof; provided, further,
that in no event shall you be obligated to return any materials furnished to you
pursuant to this Confidentiality Agreement.
Please indicate your agreement to the foregoing by signing as
provided below the enclosed copy of this Confidentiality Agreement and returning
the same to us.
Very truly yours,
[INSERT NAME OF BANK]
By______________________________
Title:
AGREED AS AFORESAID:
Confidentiality Agreement
<PAGE>
-3-
[INSERT NAME OF PROSPECTIVE
PARTICIPANT OR ASSIGNEE]
By___________________________
Title:
Confidentiality Agreement
<PAGE>
EXHIBIT F
[Form of Assignment and Acceptance]
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Amended and Restated Credit Agreement
Credit Agreement, dated as of November 24, 1992, amended and restated as of
October 1, 1996 (as modified and supplemented and in effect from time to time,
the "Credit Agreement"), among Enhance Financial Services Group Inc., (the
"Company") the lenders named therein, and The Chase Manhattan Bank, as agent for
such lenders (the "Administrative Agent"). Terms defined in the Credit Agreement
are used herein as defined therein.
____________________ (the "Assignor") and ____________________ (the
"Assignee") agree as follows:
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date as set forth in Schedule 1 hereto (the "Effective Date"), an
interest (the "Assigned Interest") in and to the Assignor's rights and
obligations under the Credit Agreement with respect to those credit facilities
contained in the Credit Agreement as are set forth on Schedule 1 (individually,
an "Assigned Facility"; collectively, the "Assigned Facilities"), in a principal
amount and percentage for each Assigned Facility as set forth on Schedule 1.
2. The Assignor (i) makes no representation or warranty and assumes
no responsibility with respect to any statements, warranties or representations
made in or in connection with the Credit Agreement, any other Basic Document or
any other instrument or document furnished pursuant thereto, or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of the
Credit Agreement, any other Basic Document or any other instrument or document
furnished pursuant thereto, other than that it has not created any adverse claim
upon the interest being assigned by it hereunder and that such interest is free
and clear of any such adverse claim; (ii) makes
Assignment and Acceptance
<PAGE>
-2-
no representation or warranty and assumes no responsibility with respect to the
financial condition of the Company, any of its Subsidiaries or any other
obligation or the performance or observance by the Company, any of its
Subsidiaries or any other obligor of any of their respective obligations under
the Credit Agreement or any other Basic Document or any other instrument or
document furnished pursuant hereto or thereto; and (iii) attaches the Note(s)
held by it evidencing the Assigned Facilities and requests that the
Administrative Agent exchange such Note(s) for a new Note or Notes payable to
the Assignor (if the Assignor has retained any interest in the Assigned
Facility) and a new Note or Notes payable to the Assignee in the respective
amounts which reflect the assignment being made hereby (and after giving effect
to any other assignments which have become effective on the Effective Date).
3. The Assignee (i) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (ii) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements referred to in Section 7.02 thereof, the financial
statements delivered pursuant to Section 8.01 thereof, if any, and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance; (iii) agrees
that it will, independently and without reliance upon the Assignor, the
Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement, the
other Basic Documents or any other instrument or document furnished pursuant
hereto or thereto; (iv) appoints and authorizes the Administrative Agent to take
such action as administrative agent on its behalf and to exercise such powers
and discretion under the Credit Agreement, the other Basic Documents or any
other instrument or document furnished pursuant hereto or thereto as are
delegated to the Administrative Agent by the terms thereof, together with such
powers as are incidental thereto; and (v) agrees that it will be bound by the
provisions of the Credit Agreement and will perform in accordance with its terms
all the
Assignment and Acceptance
<PAGE>
-3-
obligations which by the terms of the Credit Agreement are required to be
performed by it as a Lender including, if it is organized under the laws of a
jurisdiction outside the United States of America, its obligation pursuant to
Section 5.05 of the Credit Agreement to deliver the forms prescribed by the
Internal Revenue Service of the United States certifying as to the Assignee's
exemption from United States withholding taxes with respect to all payments to
be made to the Assignee under the Credit Agreement, or such other documents as
are necessary to indicate that all such payments are subject to such tax at a
rate reduced by an applicable tax treaty.
4. Following the execution of this Assignment and Acceptance, it
will be delivered to the Administrative Agent for acceptance by the
Administrative Agent pursuant to Section 11.06(b) of the Credit Agreement,
effective as of the Effective Date (which date shall not, unless otherwise
agreed to by the Administrative Agent, be earlier than five Business Days after
the date of such acceptance.
5. Upon such acceptance, from and after the Effective Date, the
Administrative Agent shall make all payments in respect of the Assigned Interest
(including payments of principal, interest, fees and other amounts) to the
Assignee which accrue subsequent to the Effective Date.
6. From and after the Effective Date, (i) the Assignee shall be a
party to the Credit Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Lender thereunder and under the
other Basic Documents and shall be bound by the provisions thereof and (ii) the
Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement except as provided in Section 11.07 of the Credit Agreement.
7. This Assignment and Acceptance shall be governed by and construed
in accordance with the law of the State of New York.
Assignment and Acceptance
<PAGE>
-4-
8. This Assignment and Acceptance may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Assignment and
Acceptance by signing any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
and Acceptance to be executed as of the date first above written by their
respective duly authorized officers on Schedule 1 hereto.
Assignment and Acceptance
<PAGE>
Schedule 1 to
Assignment and Acceptance
relating to the Amended and Restated Credit Agreement,
dated as of November 24, 1996,
amended and restated as of October 1, 1996
among Enhance Financial Services Group Inc.
the lenders named therein and
The Chase Manhattan Bank, as agent for the Lenders
(in such capacity, the "Administrative Agent")
Name of Assignor:
Name of Assignee:
Effective Date of Assignment:
Credit Principal Percentage
Facility Assigned Amount Assigned Assigned
----------------- --------------- --------
[ASSIGNEE] [ASSIGNOR]
By:___________________________ By:__________________________
Title: Title:
[Consented to and] Accepted:
THE CHASE MANHATTAN BANK, as
Administrative Agent
By:__________________________
Title:
Assignment and Acceptance
<PAGE>
-2-
[Consented to:
ENHANCE FINANCIAL SERVICES
GROUP INC.
By:__________________________
Title:
THE CHASE MANHATTAN BANK,
as Swingline Bank
By:__________________________
Title:]
Assignment and Acceptance
PLAN 10.2.1
ENHANCE FINANCIAL SERVICES GROUP INC.
LONG-TERM INCENTIVE PLAN FOR KEY EMPLOYEES
Amended and Restated as of June 6, 1996
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
LONG-TERM INCENTIVE PLAN FOR KEY EMPLOYEES
1. Purposes
The purposes of the Plan are to provide through the grant of Long-Term
Incentives under the Plan a means to attract and retain key personnel and to
provide to participating officers and other key employees long-term incentives
for sustained high levels of performance and for unusual efforts to improve the
financial performance of the Company.
2. Definitions
Unless otherwise required by the context, the following terms, when used
in this Plan, shall have the meanings set forth in this Section 2.
AWARD: A Restricted Stock Award or a Stock Bonus Award.
BENEFICIARY: A person or entity (including a trust or estate), designated
in writing by a Participant on such forms and in accordance with such terms and
conditions as the Board may prescribe, to whom the Participant's rights under
the Plan shall pass in the event of the death of the Participant or, if there be
no such person or entity so designated, or if such person or entity is not alive
or in existence at the time of the Participant's death, such other person to
whom such Participant's rights under the Plan shall pass by will or by the laws
of descent or distribution.
BOARD OF DIRECTORS or BOARD: The Board of Directors of Enhance. If the
Plan is being administered by a committee appointed by the Board pursuant to the
provisions of paragraph 11(a) below, the terms "Board" and "Board of Directors"
shall include such committee, except for purposes of paragraph 11(a) and Section
13.
CODE: The Internal Revenue Code of 1986, as amended and in effect from
time to time.
COMMITTEE: Such committee of the Board of Directors as may be designated
to administer the Plan pursuant to the provisions of paragraph 11(a) below.
COMMON STOCK: The common stock of Enhance, par value $.10 per share, or
such other class of shares or other securities or property as maybe applicable
pursuant to the provisions of Section 9.
COMPANY: Enhance and its present and future Subsidiaries.
ENHANCE: Enhance Financial Services Group Inc., a New York corporation,
its successors and assigns.
<PAGE>
FAIR MARKET VALUE: The fair market value of a share of Common Stock
determined in accordance with any reasonable method approved by the Board of
Directors; provided that in the case of a Non-Statutory Stock Option intended to
be performance-based for purposes of Section 162(m) of the Code or an Incentive
Stock Option, such method shall comply with, and be subject to, any applicable
requirements of the Code and the Treasury Regulations thereunder.
Notwithstanding the foregoing, if the Board so provides, fair market value shall
be determined by reference to a formula based on book value, earnings per share
or such other measure as the Board may prescribe.
INCENTIVE COMPENSATION: Bonuses, and other extra compensation payable in
addition to a salary or other base amount, whether contingent or not, whether
discretionary or required to be paid pursuant to a plan, agreement, resolution
or arrangement, and whether payable currently or on a deferred basis, in cash,
Common Stock or other property awarded by Enhance or a Subsidiary prior or
subsequent to the date of the approval and adoption of this Plan.
INCENTIVE STOCK OPTION: An option, including an Option as the context may
require, intended to meet the requirements of Section 422 of the code and the
regulations thereunder applicable to incentive stock options, or intended to
meet the requirements of a successor provision of the Code.
KEY EMPLOYEE: An employee of Enhance or of a Subsidiary regularly employed
on a full-time basis, including a director if he is such an employee, or an
officer of Enhance or a Subsidiary not so employed, in either event, who, in the
opinion of the Board, is in a position to make significant contributions to the
success of Enhance or of a Subsidiary.
LONG-TERM INCENTIVE: A long-term incentive granted under this Plan in one
of the forms provided for in Section 3.
NON-STATUTORY STOCK OPTION: An option, including an Option as the context
may require, which is not intended to be an Incentive Stock Option.
OPTION: An option granted under this Plan to purchase shares of Common
Stock.
PARTICIPANT: A Key Employee elected to receive one or more Long-Term
Incentives.
PERFORMANCE UNIT: A right granted pursuant to Section 8 to receive a fixed
dollar amount or an amount equivalent to the Fair Market Value of one share of
Common Stock (or a designated percentage thereof) in cash or shares if specific
performance goals are attained within the time prescribed by the Board therefor
and any other applicable terms and conditions of the award are satisfied.
2
<PAGE>
PLAN: The Enhance Financial Services Group Inc. Long-Term Incentive Plan
for Key Employees herein set forth as the same may from time to time be amended.
RESTRICTED STOCK AWARD: Shares of Common Stock which are issued or
transferred to a Key Employee subject to restrictions precluding a sale or other
disposition for a period of time and requiring as a condition to retention
compliance with any other terms and conditions (relating to continued employment
and/or achievement of pre-established performance objectives and/or other
matters) that may be imposed by the Board.
RULE 16b-3: As applied on a specific date, Rule 16b-3 of the General Rules
and Regulations under the Securities Exchange Act of 1934 as then in effect or
any comparable provision that may have replaced such Rule and then be in effect.
STOCK APPRECIATION RIGHT or SAR: A right granted pursuant to Section 7 to
receive a number of shares of Common Stock or cash, or a combination of such
shares and cash, based on the increase in Fair Market Value of the shares
subject to such right and determined in accordance with the Plan.
STOCK BONUS AWARD: Shares of Common Stock which are issued or transferred
to a Key Employee (including an undertaking to issue or transfer such shares in
the future) in lieu of, or as a supplement to, Incentive Compensation that has
been earned by services rendered prior to the date the award is made.
SUBSIDIARY: A corporation or other form of business association of which
shares (or other ownership interests) having more than 50% of the voting power,
or representing more than 50% of the net shareholders' equity interest
determined in accordance with generally accepted accounting principles, are
owned or controlled, directly or indirectly, by Enhance; provided, however, that
in the case of an Incentive Stock Option, the term "Subsidiary" shall mean a
Subsidiary (as defined by the preceding clause) which is a "subsidiary
corporation" as defined in Section 424(f) of the Code and the regulations
thereunder, or any provisions that may be adopted to amend or replace such
Section or regulation or both.
3. Grants of Long-Term Incentives
(a) Subject to the provisions of this Plan, the Board of Directors
may at any time or from time to time grant Long-Term Incentives to Key
Employees.
(b) Long-Term Incentives maybe granted in any of the following
forms:
(i) a Stock Bonus Award,
(ii) a Restricted Stock Award,
3
<PAGE>
(iii) an Option, with or without a related Stock Appreciation
Right,
(iv) an independent Stock Appreciation Right, or
(v) a Performance Unit.
(c) The Board may amend a Long-Term Incentive at any time or from
time to time after the date on which it is granted, provided that no such
amendment shall affect such Long-Term Incentive adversely without the consent of
the holder thereof
4. Stock Subject to this Plan
(a)(1) General Limitation Subject to the provisions below of
paragraph 4(c) and of Section 9, the maximum number of shares of Common Stock
which may be issued or transferred, and are hereby reserved for issuance or
transfer pursuant to Long-Term Incentives shall not exceed 3,600,000 shares of
Common Stock.
(2) Individual Limitations The maximum number of shares of
Common Stock which may be subject to any Option that may be granted to any Key
Employees elected to participate hereunder shall not exceed 75,000 shares of
Common Stock (subject to any increase or decrease pursuant to Section 9) for
each calendar year during the entire term of the Plan. The maximum number of
Stock Appreciation Rights that may be granted to any Key Employee selected to
participate hereunder shall not exceed 75,000 (subject to any increase or
decrease pursuant to Section 9) for each calendar year during the entire term of
the Plan. To the extent that the maximum number of shares of Common Stock with
respect to which Options or SARs may be granted are not granted in a particular
year to a Key Employee, such ungranted Options or SARs for any year shall
increase the maximum number of shares of Common Stock available to be granted to
such Key Employee in subsequent calendar years during the term of the Plan until
used.
(b) Authorized but unissued shares of Common Stock and shares of
Common Stock held in the treasury, whether acquired by Enhance specifically for
use under this Plan or otherwise, may be used, as the Board of Directors may
from time to time determine, for purposes of this Plan, provided, however, that
any shares acquired or held by Enhance for the purposes of this Plan shall,
unless and until transferred to a Participant in accordance with the terms and
conditions of a Long-Term Incentive, be and at all times remain treasury shares
of Enhance, irrespective of whether such shares are entered in a special account
for purposes of this Plan, and shall be available for any corporate purpose.
Notwithstanding the foregoing, in order to comply with Section 162(m) of the
Code, the Committee shall take into account that (i) if an Option or SAR is
canceled, the canceled Option or SAR continues to be counted against the maximum
number of shares of Common Stock for which Options or SARs may be granted to a
Key Employee under Section 4(a)(2) of the Plan, and (ii) if after the grant of
an Option or SAR, the Committee or the Board reduces the exercise price or
purchase price, the transaction is treated as a cancellation of the Option or
SAR and a grant of a new
4
<PAGE>
Option or SAR, and in such case, both the Option or SAR that is deemed to be
cancelled and the Option or SAR that is deemed to be granted, reduce the maximum
number of shares of Common Stock for which Options or SARs may be granted to a
Key Employee under the Plan.
(c) Subject to the provisions of paragraph 7(e), if any shares of
Common Stock subject to a Long-Term Incentive shall not be issued or transferred
and shall cease to be issuable or transferable because of the termination, in
whole or in part, of such Long-Term Incentive or for any other reason, or if any
such shares shall, after issuance or transfer, be reacquired by Enhance or a
Subsidiary because of the Participant's failure to comply with the terms and
conditions of the Long-Term Incentive granted to him, the shares not so issued
or transferred, or the shares so reacquired by Enhance or a Subsidiary, shall no
longer be charged against the limitations provided for in paragraph (a) above of
this Section 4 and shall again be available for grant in the form of or pursuant
to Long-Term Incentives.
(d) Any Long-Term Incentive granted under this Plan may contain such
provisions requiring or permitting the Participant (or his successor in
interest) to resell to the Company any shares issued or transferred under such
Long-Term Incentive at such time or times, under such circumstances and for such
consideration as the Board may prescribe.
5. Stock Bonus Awards and Restricted Stock Awards
Long-Term Incentives in the form of Stock Bonus Awards or Restricted
Stock Awards shall be subject to the following provisions:
(a) A Key Employee may be granted a Stock Bonus Award or Restricted
Stock Award whether or not he is eligible to receive Incentive Compensation
under any other plan or arrangement of the Company.
(b) Shares of Common Stock subject to a Stock Bonus Award may be
issued or transferred to the Participant at the time such Award is granted, or
at any time subsequent thereto, or in installments from time to time, as the
Board of Directors shall determine. In the event that any such issuance or
transfer shall not be made to the Participant at the time such Award is granted,
the Board of Directors may but need not provide for payment to such Participant,
either in cash or shares of Common Stock, from time to time or at the time or
times such shares shall be issued or transferred to such Participant, of amounts
equal to the dividends which would have been payable to such Participant in
respect of such shares (as adjusted under Section 9) if such shares had been
issued or transferred to such Participant at the time such Award was granted.
(c) Any amount payable in shares of Common Stock under the terms of
a Stock Bonus Award may, in the discretion of the Board, be paid in cash, on
each date on which delivery of shares would otherwise have been made, in an
amount equal to the Fair Market Value of such date of the shares which would
otherwise have been delivered.
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(d) Stock Bonus Awards and Restricted Stock Awards shall be subject
to such terms and conditions, including, without limitation, restrictions on the
sale or other disposition of the Award or of the shares issued or transferred
pursuant to such Award, and conditions calling for forfeiture of the Award or
the shares issued or transferred pursuant thereto in designated circumstances,
as the Board of Directors shall determine; provided, however, that upon the
issuance or transfer of shares pursuant to any such Award, the Participant
shall, with respect to such shares, be and become a shareholder of Enhance fully
entitled to receive dividends, to vote and to exercise all other rights of a
shareholder except to the extent otherwise provided in the Award. All or any
portion of a Stock Bonus Award may but need not be made in the form of a
Restricted Stock Award. In the case of a Restricted Stock Award, the Board may
but need not require the Participant to pay the par value of the shares to be
issued or transferred pursuant thereto. Each Stock Bonus Award and Restricted
Stock Award shall be evidenced by a written instrument in such form as the Board
of Directors shall determine and shall be deemed to incorporate this Plan by
reference, provided that such instrument is consistent with this Plan.
6. Options
Long-Term Incentives in the form of Options shall be subject to the
following provisions:
(a) Subject to the provisions of Section 9, the purchase price per share
shall be, in the case of an Incentive Stock Option, not less than 100% of the
Fair Market Value of a share of Common Stock on the date the Incentive Stock
Option is granted (or in the case of a Participant who, at the time such
Incentive Stock Option is granted, owns (after applying the constructive
ownership rules of Section 424(d) of the Code) stock possessing more than ten
percent of the total combined voting power of all classes of stock of his
employer corporation or of its parent or subsidiary corporation (as those terms
are defined in Sections 424(e) and (f) of the Code) (a "10% Shareholder"), not
less than 110% of the Fair Market Value of a share of Common Stock on the date
the Incentive Stock Option is granted) and, in the case of a Non-Statutory Stock
Option, not less than 85% of the Fair Market Value of a share of Common Stock on
the date the Non-Statutory Stock Option is granted. The purchase price shall be
paid in cash or, if so provided in the Option (and subject to such terms and
conditions as are specified in the Option), in shares of Common Stock or other
property surrendered to Enhance or in a combination of cash and such shares or
other property. Shares of Common Stock thus surrendered shall be valued at their
Fair Market Value on the date of exercise. Any such other property thus
surrendered shall be valued at its fair market value on the date of exercise on
any reasonable basis established or approved by the Board. If so provided in the
Option (and subject to such terms and conditions as are specified in the
Option), in lieu of the foregoing methods of payment, any portion of the
purchase price of the shares to be issued or transferred may be paid by full
recourse promissory note in such form and containing such provisions (which may
but need not provide for interest, for pledging of the shares purchased, and for
payment of the note at the election of the Participant in cash or in shares of
Common Stock or other property surrendered to Enhance) as the Board may approve;
provided that (i) if the Board permits any such note to be paid by surrender of
shares of Common Stock, such shares shall be valued at their Fair Market Value
on the date of such surrender, and (ii) if the Board permits any such note to be
paid by surrender of other
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property, such other property shall be valued at its fair market value on any
reasonable basis established or approved by the Board, and (iii) in the case of
an Incentive Stock Option, any such note shall bear interest at the maximum rate
required to avoid imputation of unstated interest under federal income tax laws
applicable at the time of exercise.
(b) Each Option may be exercisable in full at the time of grant or may
become exercisable in one or more installments and at such time or times and
subject to such terms and conditions, as the Board of Directors shall determine.
Unless otherwise provided in the Option, an Option, to the extent it is or
becomes exercisable, may be exercised at any time in whole or in part until the
expiration or termination of the Option. No fractional shares shall be issued
pursuant to the exercise of an Option, and no cash payment shall be made in lieu
of fractional shares.
(c) Each Option shall be exercisable during the life of the optionee only
by him or his guardian or legal representative, and after death only by his
Beneficiary. Notwithstanding the foregoing provisions of this paragraph (c) or
any other provision of this Plan, (i) no Non-Statutory Stock Option shall be
exercisable after the expiration of a period of ten years and one month from the
date the Option is granted, (ii) no Incentive Stock Option shall be exercisable
after the expiration of ten years from the date such Option is granted, and
(iii) no Incentive Stock Option which is granted to a 10% shareholder shall be
exercisable after the expiration of five years from the date such Option is
granted. If a Non-Statutory Stock Option is granted for a term of less than ten
years and one month, the Board of Directors may, at any time prior to the
expiration of the Option, extend its term for a period ending not later than ten
years and one month from the date the Option was granted.
(d) Options shall be granted for such lawful consideration as may be
provided in the Option or as the Board of Directors may determine.
(e) No Option or any right thereunder may be assigned or transferred
except to a Beneficiary of the Participant.
(f) To the extent that the aggregate Fair Market Value (determined as of
the time a particular Option is granted) of the stock with respect to which
Incentive Stock Options are exercisable for the first time by any individual
during any calendar year (under all plans, including this Plan, of his employer
corporation and its parent and subsidiary corporations (as those terms are
defined in Section 424(e) or (f) of the Code)) exceeds $100,000, such Incentive
Stock Options shall be treated as Non-Statutory Stock Options, notwithstanding
any provision thereof to the contrary. The next preceding sentence shall be
applied by taking options into account in the order in which they were granted.
(g) Each Option shall be evidenced by a written instrument, which shall
contain such terms and conditions, and shall be in such form, as the Board of
Directors shall determine and shall be deemed to incorporate this Plan by
reference, provided the instrument is consistent with this Plan. An Option, if
so approved by the Board of Directors, may include terms, conditions,
restrictions and
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limitations in addition to those provided for in this Plan including, without
limitation, terms and conditions providing for the transfer or issuance of
shares on exercise of an Option, which may be non-transferable and forfeitable
to Enhance in designated circumstances, or providing for the transfer or
issuance of shares on a date subsequent to the date of exercise of the Option.
(h) An Option may, but need not, be granted in connection with related
Stock Appreciation Rights.
7. Stock Appreciation Rights
Long-Term Incentives granted as Stock Appreciation Rights shall be subject
to the following provisions:
(a) Stock Appreciation Rights may be granted in connection with any Option
either at the time of the grant of such Option or, if the Option is not an
Incentive Stock Option, at any time thereafter during the term of the Option, or
may be granted independently of an Option. Notwithstanding the foregoing, in the
event the Committee grants an Option which is intended to be "performance based"
for purposes of Section 162(m) of the Code, the purchase price per share shall
be not less than 100% of the Fair Market Value of a share of Common Stock on the
date the Option is granted. Stock Appreciation Rights may also be granted in
connection with any option heretofore or hereafter granted under any other stock
option plan or arrangement of the Company.
(b) (i) If granted in connection with an option, a Stock Appreciation
Right shall require the holder of the related option, upon exercise of such
Stock Appreciation Right, to surrender the option, or any portion thereof, to
the extent unexercised and entitle him to receive a number of shares of Common
Stock, or cash, or both, determined pursuant to clause (iii) of paragraph 7(c).
Such option shall, to the extent so surrendered, thereupon cease to be
exercisable.
(ii) If granted independently of an option, Stock Appreciation
Rights shall entitle the holder to receive a number of shares of Common Stock,
or cash, or both, determined pursuant to clause (iii) of paragraph 7(c).
(c) Stock Appreciation Rights shall be further subject to the following
terms and conditions and to such other terms and conditions, not inconsistent
with the Plan, as the Board shall from time to time approve:
(i) If granted in connection with an option, Stock Appreciation
Rights may be exercisable only at such time or times and to the extent that the
option to which they relate shall be exercisable.
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(ii) if granted independently of an option, Stock Appreciation
Rights shall be exercisable at such time or times as shall be determined by the
Board at the time of grant of the Stock Appreciation Rights, provided that in no
event shall the Stock Appreciation Rights be exercisable more than ten years
after the date such Stock Appreciation Rights are granted.
(iii) Upon exercise of Stock Appreciation Rights, the holder thereof
shall be entitled to receive a number of shares of Common Stock, or cash, or a
combination of such shares and cash, as the Board shall determine in its sole
discretion in each case or by rule of general application or otherwise, equal in
value on the date of exercise to an amount prescribed by the Board, which shall
in no event exceed the amount by which the Fair Market Value of one share of
Common Stock on the date of such exercise exceeds the Fair Market Value of one
share of Common Stock on the date of grant of such Stock Appreciation Rights as
specified in the award or, in the case of Stock Appreciation Rights granted in
connection with an option, on the date of grant of such option, multiplied by
the number of shares in respect of which the Stock Appreciation Rights are
exercised. If full payment is to be made in shares of Common Stock and the
amount payable results in a fractional share, payment for the fractional share
shall be made in cash.
(iv) An Incentive Stock Option granted together with Stock
Appreciation Rights shall be subject to such additional limitations as may be
required by Section 422 of the Code and the regulations thereunder which are
necessary or appropriate to cause Options granted to Key Employees as Incentive
Stock Options to so qualify under such section of the Code.
(d) Stock Appreciation Rights may be granted for such lawful consideration
as may be provided in the Rights or as the Board may determine.
(e) To the extent that Stock Appreciation Rights shall be exercised, an
Option in connection with which such Stock Appreciation Rights shall have been
granted shall be deemed to have been exercised for the purpose of the maximum
limitations set forth in paragraph 4(a). In the case of Stock Appreciation
Rights granted independently of an Option, any shares of Common Stock issued or
transferred in payment of such Stock Appreciation Rights shall be charged
against such maximum limitations.
(f) Stock Appreciation Rights may provide that, upon exercise of such
Stock Appreciation Rights, the shares, or cash, or both, as the case may be,
which the holder of such Stock Appreciation Rights shall be entitled to receive
shall be distributed or paid in such installments and over such number of years
as the Board may direct, with distribution or payment of each such installment
contingent, to the extent determined by the Board, upon continued services of
the employee to the Company until the time for distribution or payment of such
installment.
(g) The Board may, upon the grant of Stock Appreciation Rights, and if
Enhance is then a reporting company under the Securities Exchange Act of 1934,
impose such conditions on the exercise thereof as may, in its sole discretion,
be required to satisfy the requirements of Rule 16b-3. Without limiting the
generality of the foregoing, the Board may, in such event, determine that (i)
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Stock Appreciation Rights may be exercised only during the period beginning on
the third business day and ending on the twelfth business day following the
publication of the company's quarterly and annual summarized financial data, and
(ii) no Stock Appreciation Rights granted to a director or executive officer of
the Company may be exercised during the first six months after the date of
grant, except in the event of the death or disability of such Participant during
such period.
(h) Stock Appreciation Rights shall not be transferable other than to a
Beneficiary, and during a Participant's lifetime shall be exercisable only by
him or by his guardian or legal representative.
8. Performance Units
Long-Term Incentives granted as Performance Units shall be subject to the
following provisions:
(a) The performance period for the attainment of performance goals shall
be not less than two nor more than five fiscal years of the Company, as
determined by the Board.
(b) The Board shall establish a dollar value for each Performance Unit
(which may be a fixed dollar amount or an amount equivalent to the Fair Market
Value of one share of Common Stock form time to time during the performance
period), the performance goals to be attained in respect of the Performance
Unit, the various percentages of the Performance Unit value to be paid out upon
the attainment, in whole or in part, of the performance goals and such other
Performance Unit terms, conditions and restrictions as the Board deems
appropriate. As soon as practicable after the termination of the performance
period, the Board shall determine what, if any, payment is due on the
Performance Unit in accordance with the terms thereof.
(c) Performance Units shall be cancelled automatically if the
Participant's employment with the Company shall be terminated for any reason
prior to the expiration of the performance period, except that if the
Participant's employment terminates by reason of death, retirement, disability
or for other reasons beyond his control, the Board may, in its sole discretion
and subject to such limitations and at such time or times as it may deem
advisable, make full or partial payment with respect to such Performance Units.
(d) Payment with respect to any Performance Unit may be made, in the sole
discretion of the Board, in cash or in shares of Common Stock valued at their
Fair Market Value on the date of payment, or in both cash and such shares. Any
shares issued or transferred in payment of a Performance Unit shall be charged
against the maximum number of shares available under the Plan. If full payment
is to be made in shares of Common Stock and the amount payable results in a
fractional share, payment for the fractional share shall be made in cash.
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(e) Performance Units shall not be transferable other than to a
Beneficiary, and during a Participant's lifetime payments in respect thereof
shall be made only to the Participant or his guardian or legal representative.
9. Adjustment Provisions
(a) In the event that any recapitalization, reclassification, split-up or
consolidation of shares of Common Stock shall be effected, or the outstanding
shares of Common Stock shall be effected, or the outstanding shares of Common
Stock shall, in connection with a merger or consolidation of Enhance or a sale
by Enhance of all or a part of its assets, be exchanged for a different number
or class of shares of stock or other securities or property of Enhance or any
other entity or person, or a record date for determination of holders of Common
Stock entitled to receive a dividend payable in Common Stock shall occur, (a)
the number and class of shares or other securities or property that may be
issued or transferred pursuant to Long-Term Incentives thereafter granted, (b)
the number and class of shares or other securities or property that may be
issued or transferred under outstanding Long-Term Incentives, (c) the purchase
price (if any) to be paid per share under outstanding and future Long-Term
Incentives, and (d) the price (if any) to be paid per share by Enhance or a
Subsidiary for shares or other securities or property issued or transferred
pursuant to Long-Term Incentives which are subject to a right of Enhance or a
Subsidiary to reacquire such shares or other securities or property, shall in
each case be equitably adjusted.
(b) Upon any merger or consolidation in which Enhance is not the surviving
corporation or a dissolution or liquidation of Enhance, all outstanding Options
and SARs shall terminate provided that all holders of outstanding Options and
SARs shall be furnished with written notice of the proposed merger,
consolidation, dissolution or liquidation contemporaneously with the mailing to
stockholders of Enhance of notice of the meeting of stockholders at which such
proposed transaction is to be considered. The foregoing shall be of no effect in
the case of such a merger or consolidation if provision is made in writing in
connection therewith for the continuance of the Plan and for the assumption of
Options and SARs theretofore granted or the substitution for such Options and
SARs of new options and stock appreciation rights covering the shares of the
successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments, in which event the Plan and the Options and SARs theretofore
granted or the new options and stock appreciation rights covering the shares of
the successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments, in which event the Plan and the Options and SARs theretofore
granted or the new options and stock appreciation rights substituted therefor,
shall continue in the manner and under the terms so provided.
(c) At the discretion of the Board, any Long-Term Incentive may provide
that, upon the occurrence of any of certain specified events determined by the
Board, including a certain specified events determined by the Board, including a
change in control of the company (as such may be defined by the Board in its
discretion in any agreement granting a Long-Term Incentive, which definition
need not be identical for all such agreements), such Long-Term Incentive shall,
to the extent not theretofore exercisable, payable or free from restrictions, as
the case may be, become immediately exercisable, payable, or free from
restrictions, as the case may be, in its entirety and any
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shares of Common Stock acquired pursuant to a Long-Term Incentive which are not
fully vested shall immediately become fully vested, notwithstanding any other
provision of the Long-Term Incentive or the Plan.
(d) Each Long-Term Incentive shall provide that, in the event of a merger
or consolidation of Enhance with a third party which is proposed to be accounted
for as a pooling of interests, the Participant shall, if so requested by the
Company and notwithstanding any other provision of such Long-Term Incentive,
agree, as a condition to the exercisability, payment, or lapsing of
restrictions, as the case may be, of such Long-Term Incentive, not to sell,
assign, or gift or in any other way reduce his or her risk relative to the share
of Common Stock issuable pursuant to such Long-Term Incentive and all other
shares of Common Stock owned by such Participant for such period after the
consummation of such merger or consolidation as the Company shall, upon the
advice of its outside accountants, conclusively determine as necessary to ensure
that such merger or consolidation may be validly accounted for as a pooling of
interests.
(e) Adjustments under paragraphs 9(a) and 9(b) shall be made by the Board,
whose determination as to what adjustments will be made and the extent thereof
shall be final, binding, and conclusive. No fractional interests shall be issued
under the Plan resulting from any such adjustments. The Board shall give prompt
notice to each Participant affected thereby of the occurrence of any event
giving rise to any adjustment, which notice shall set forth the new purchase
price after giving effect to the adjustment, provided that such adjustment shall
be effective whether or not such notice is given.
10. Term
The Plan shall become effective upon the date of its adoption by the
Board, subject, however, to approval by the shareholders of Enhance within
twelve months next following such adoption. Prior to such approval, the Board
may in its sole discretion grant or authorize the granting of Long-Term
Incentives, including Options and SARs, provided the exercisability thereof
shall be deferred until, and expressly subject to the condition that the Plan
shall have been so approved. If the Plan is not so approved by the shareholders
of Enhance, the Plan and all Long-Term Incentive granted hereunder shall be
automatically cancelled and any shares of Common Stock or cash previously issued
or paid under all Long-Term Incentives shall promptly be returned to the Company
in return for any money or property it received therefor. The Plan shall
terminate at the close of business on December 10, 1997, and no Long-Term
Incentives may thereafter be granted, but such termination shall not affect any
Long-Term Incentives theretofore granted. No Long-Term Incentive shall be
granted under this Plan after the number of shares authorized for issuance or
transfer hereunder have been exhausted, but the Plan shall continue in effect
thereafter with respect to Long-Term Incentives theretofore granted.
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11. Administration
(a) The Plan shall be administered by the Board. If and to the extent the
Board so directs, the Plan shall be administered by a Committee of three or more
persons selected by the Board from its own membership. Each member of the Board
or the Committee shall (i) by virtue of administering the Plan as a member of
the Board or the Committee, as applicable, be ineligible to receive Long-Term
Incentive and (ii) during such time as Enhance is a reporting company under the
Securities Exchange Act of 1934, as a prerequisite qualification to
administering the Plan as a member of the Board or of the Committee, as
applicable, have been ineligible throughout the twelve months preceding his
election to the Board or appointment to the Committee, as applicable, to receive
a Long-Term Incentive or an allocation of shares of Common Stock or a grant of
stock options, stock appreciation rights or similar rights pursuant to any other
plan of the company such as to disqualify such member of the Board or of the
Committee as a "disinterested person" for purposes of Rule 16b-3 each director
appointed to such Committee shall quality (i) during such time as Enhance is a
reporting company under the Securities Exchange Act of 1934, as a "disinterested
person" as defined in Rule 16b-3 promulgated under Section 16(b) of the
Securities Exchange Act of 1934 to the extent then required, and (ii) as an
"outside director" as defined under Section 162(m) of the Code."
(b) The Board may establish such rules and regulations, not inconsistent
with the provisions of this Plan, as it may deem necessary for the proper
administration of this Plan, and may amend or revoke any rule or regulation so
established. The Board shall, subject to the provisions of the Plan, have full
power to interpret and administer the Plan and full authority to select the
Participants in the Plan and determine the number of shares (if any) to be made
subject to each Long-Term Incentive, the type of Long-Term Incentive to be
granted and the terms and conditions of each Long-Term Incentive (which need not
be identical). The interpretation by the Board of the terms and provisions of
the Plan and the administration thereof and all action taken by the Board, shall
be final, binding and conclusive on Enhance, its stockholders, Subsidiaries, all
Participants and employees, and upon their respective Beneficiaries, successors
and assigns, and upon all other persons claiming under or through any of them.
(c) Members of the board of Directors and members of the Committee acting
under this Plan shall be fully protected in relying in good faith upon the
advice of counsel and shall incur no liability except for gross or willful
misconduct in the performance of their duties.
(d) The Plan is intended to comply with the exception for
performance-based compensation under Section 162(m) of the Code and the
regulations thereunder with respect to Stock Options and SARs, and grants of
Options and SARs shall be limited, construed and interpreted in a manner so as
to comply therewith unless determined otherwise by the Board or the committee
with respect to a particular grant of an Option or SAR.
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12. General Provisions
(a) Nothing in this Plan or in any instrument executed pursuant hereto
shall confer upon any person any right to continue in the employment of Enhance
or a Subsidiary, or shall affect the right of Enhance or a Subsidiary to
terminate the employment of any person at any time with or without cause.
(b) No shares of Common Stock shall be issued or transferred pursuant to a
Long-Term Incentive unless and until all legal requirement applicable to the
issuance or transfer, of such shares have, in the opinion of counsel to Enhance,
been complied with. In connection with any such issuance or transfer, the person
acquiring the shares shall, if requested by Enhance and whether or not otherwise
required by the terms of the Participant's Long-Term Incentive, give assurances
satisfactory to counsel to Enhance, in respect of such matters as Enhance or a
Subsidiary may deem desirable to assure compliance with all applicable legal
requirements and take any reasonable action to comply with such requirements.
(c) No provision of this Plan shall be interpreted or construed to
obligate Enhance to register the shares issuable or transferable hereunder under
the Securities Act of 1933 or disposition of shares of Common Stock issued or
transferred under any Long-Term Incentive may be made unless and until Enhance's
counsel is satisfied that the shares have been registered under the Securities
Act of 1933 and any other applicable federal or state securities laws or that an
exemption from such registration is available. Certificates evidencing any
shares of Common Stock issued or transferred under any Long-Term Incentive shall
be legended in such manner as Enhance's counsel may deem to be necessary or
appropriate to reflect the provisions of this paragraph 12(c).
(d) No person (individually or as a member of a group) and no Beneficiary
or other person claiming under or through him, shall have any right, title or
interest in or to any shares of Common Stock allocated or reserved for the
purposes of this Plan or subject to any Long-Term Incentive except as to such
shares of Common Stock, if any, as shall have been issued or transferred to him.
(e) In the case of a grant of a Long-Term Incentive to a Key Employee of a
Subsidiary, such grant may, if the Board of Directors so approves, be
implemented by Enhance entering into an agreement with the Subsidiary containing
such terms and provisions as the Board of Directors may authorize, including,
without limitation, a provisions as the Board of Directors may authorize,
including, without limitation, a provision for the issuance or transfer of the
shares covered by the Long-Term Incentive to the Subsidiary, for such
consideration as the Board of Directors may approve, upon the condition or
understanding that the Subsidiary will transfer the shares to the Key Employee
in accordance with the terms of the Long-Term Incentive.
(f) Enhance or a Subsidiary may make such provisions as it may deem
appropriate for the withholding of any taxes which Enhance or a Subsidiary
determines it is required to withhold in connection with any Long-Term
Incentive. The Board may, in its sole discretion and subject to such rules as it
may adopt, permit a Participant to elect to satisfy any such withholding
obligation, in whole
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or in part, by having the Company withhold shares of Common Stock that are
otherwise issuable in connection with such Long-Term Incentive and have a Fair
Market Value equal to the amount required to be withheld, or by surrendering to
the Company previously-acquired shares of Common Stock that have such a Fair
Market Value. Each holder of an Incentive Stock Option shall give prompt notice
to the Company in the event of the disposition by him of any shares where such
disposition occurs within two years after the date of the grant of such Option
or within one year after the date of the such exercise.
(g) Nothing in this Plan is intended to be a substitute for, or shall
preclude or limit the establishment or continuation of, any other plan, practice
or arrangement for the payment of compensation or fringe benefits to directors,
officers, employees or consultants generally, or to any class or group of such
persons, which Enhance or any Subsidiary now has or may hereafter lawfully put
into effect, including, without limitation, any incentive compensation,
retirement, pension, group insurance, stock purchase, stock bonus or stock
option plan.
(h) In no event shall Long-Term Incentives be considered compensation to a
Participant for purposes of any other plan of the Company (including any
pension, profit-sharing, severance pay or other employee benefit plans) in
determining benefits to which such Participant may be entitled under such plan.
(i) By accepting any benefits under the Plan, each Participant, and each
person claiming under or through him, shall be conclusively deemed to have
indicated his acceptance and ratification of, and consent to, all provision of
the Plan and any action or decision under the Plan by enhance, its agents and
employees and the Board.
(j) The validity, construction, interpretation and administration of the
Plan and of any determinations or decisions made thereunder, and the rights of
all persons having or claiming to have any interest therein or thereunder, shall
be governed by, and determined exclusively in accordance with, the laws of the
State of New York, the state in which Enhance is incorporated, but without
giving effect to the principles of conflicts of laws thereof Without limiting
the generality of the foregoing, the period within which any action arising
under or in connection with the Plan must be commenced, shall be governed by the
laws of the State of New York, without giving effect to the principles of
conflicts of laws thereof; irrespective of the place where the act or omission
complained of took place and of the residence of any party to such action and
irrespective of the place where the action may be brought.
(k) The use of the masculine gender shall also include with it a meaning
the feminine. The use of the singular shall include within its meaning the
plural and vice versa.
13. Amendment and Termination
(a) This Plan may be amended or terminated by the Board of Directors at
any time and in any respect, including without limitation to permit or
facilitate qualification of Options theretofore
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or thereafter granted as Incentive Stock Options under the code, provided that,
without the approval of the shareholders of the Company, no amendment shall be
made which (i) increases the maximum number of shares of Common Stock that may
be issued or transferred pursuant to Long-Term Incentives, as provided in
paragraph (a)( 1) of Section 4 or increases the maximum number of shares of
Common Stock that may be granted as Options or SARs to any Key Employee selected
to participate in the Plan as provided in paragraph (a)(2) of Section 4, (ii)
except as may be required or desirable to conform this Plan to the federal or
state securities laws and regulations that may apply to it from time to time,
withdraws the administration of this Plan from the Board or Committee, (iii)
transfers the administration of this Plan to any person who is not a
"disinterested administrator" under Rule 16b-3, if Enhance is then a reporting
company under the Securities Exchange Act of 1934, (iv) permits any person who
is not a Key Employee to be granted a Long-Term Incentive, (v) changes the
minimum exercise price of any Option or any SAR or extends the maximum exercise
term of any Option or any SAR or otherwise materially increases the benefits
accruing to participants in the Plan, (vi) amends this Section 13, or (vii)
requires shareholder approval in order for the Plan to continue to comply with
the exception for performance-based compensation under Section 162(m) of the
Code.
(b) No amendment or termination of this Plan by the Board of Directors or
the shareholders of Enhance shall affect adversely any Long-Term Incentive
theretofore granted without the consent of the holder thereof.
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Certificate 10.2.2
OPTION GRANT CERTIFICATE
ENHANCE FINANCIAL SERVICES GROUP INC., a New York corporation (the
"Company"), hereby grants to ______________ (the "Executive") an Incentive
Stock Option (the "Option") to purchase ______ shares (the "Option Shares") of
common stock, par value $.10 per share ("Common Stock"), pursuant to the
Company's 1987 Long-Term Incentive Plan for Key Employees (as such may he
amended from time to time, the "Plan")
1. Basic Terms of Option.
(a) Term of Option. The option shall expire December 31, 2006.
(b) Exercise Price. The exercise price shall be $34.00 per Option Share (the
"Purchase Price").
(c) Vesting. The Option shall become exercisable in equal installments in
accordance with Article 3.
(d) Method of Exercise. The Option may be exercised by the Executive in
accordance with the terms hereof and of the Plan for any and all Option
Shares by written notice (the "Exercise Notice") from the Executive to the
Company substantially in the form of Annex A hereto. Payment of the
Purchase Price may be made in the form of cash or shares of Common Stock,
as permitted by the Plan, and shall accompany the Exercise Notice to the
Company; provided that, if such Exercise Notice indicates that the
Executive is simultaneously using the stock option exercise program of
Merrill Lynch Pierce Fenner & Smith Incorporated or other brokerage
concern approved by the Company, the Purchase Price shall be payable on
the fifth business day following the date of delivery of the Exercise
Notice.
2. Option Shares.
(a) Status of Option Shares. Effective upon the exercise of the Option in
whole or in part and the receipt by the Company of the Purchase Price for
the Option Shares being purchased, the Executive shall be the holder of
record of such shares and shall have all of the rights of a shareholder
with respect thereto (including the right to vote such shares at any
meeting at which the holders of the Common Stock may vote, the right to
receive all dividends declared and paid upon such shares and the right to
exercise any rights or warrants issued in respect of any such shares). The
Company shall, upon receipt of the Purchase Price, issue in the name of
the Executive a certificate representing the Option Shares purchased from
time to time.
<PAGE>
(b) Option Shares Unregistered. As of the date of grant of the Option, the
Option Shares have not been registered under the Securities Act of 1933,
as amended (the "Act"), and the Company has no obligation to effect or
maintain the effectiveness of the registration of the Option Shares under
the Act. Unless the Option Shares issuable upon a given exercise are then
subject to an effective registration statement under the Act, the
certificate representing such shares shall bear the following legend or
such other legend as the Company's counsel may deem appropriate:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may in
no event be offered, sold, transferred or assigned unless and until
the shares have been so registered or, in the opinion of counsel to
Enhance Financial Services Group Inc., an exemption from such
registration is available."
(c) Investment Intent. If the certificate representing the Option Shares
issuable upon a given exercise is required to bear the legend set forth
above (or a legend to like effect), the Executive shall, by such exercise
of the Option, be deemed conclusively to represent and to agree with the
Company that he or she is acquiring the Option Shares then being purchased
for his or her own account and not for the account of others, for
investment only and not with a view to public sale or distribution.
(d) Restriction Relating to Certain Mergers. In the event of a merger or
consolidation of the Company with a third party which is proposed to he
accounted for as a pooling of interests, the Executive shall, if so
requested by the Company and notwithstanding any other provision of this
Certificate, agree not to sell, assign, or gift or in any other way reduce
his or her risk relative to the Option Shares and all other shares of
Common Stock owned by the Executive for such period after the consummation
of such merger or consolidation as the Company shall, upon the advice of
its outside accountants, conclusively determine as necessary to ensure
that such merger or consolidation may be validly accounted for as a
pooling of interests.
(e) Prior Conditions. The Company shall not be required to issue or deliver
any certificate representing Option Shares prior to (i) the admission of
such shares to listing on any stock exchange on which the Common Stock may
then be listed, (ii) the completion of any registration or any other
qualification of such shares under any federal or state law or any rulings
or regulations of any governmental regulatory body, (iii) the obtaining of
any consent or approval or other clearance from any governmental agency
which the Company shall, in its sole discretion, determine to be necessary
or advisable, and (iv) the payment to the Company, upon its request, of
any amount requested by the Company for the purposes of satisfying its
liability, if any, to withhold taxes of any kind or any other applicable
assessment (plus interest or penalties thereon, if any, caused by a delay
in making such payment) incurred by reason of the exercise of the Option
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3. Vesting of Option.
(a) Vesting Conditions. If the Executive remains in the continuous employ of
the Company or a Subsidiary through the close of business on each date
indicated in Column I below the Option shall thereupon vest (on a
cumulative basis) as to the portion of the Option Shares indicated
opposite such date in Column II below:
(I) (II)
the %
(or additional %)
If employment of the Option
continuous through then which vests is
------------------ --------------
December 31, 1997 25%
December 31, 1998 25%
December 31, 1999 25%
December 31, 2000 25%
(b) Effect of Termination of Employment. If the Executive's employment with
the Company and its Subsidiaries is terminated for any reason whatsoever
before all installments of the Option shall have vested pursuant to
Paragraph 3 (a), then any portion of the Option which is not vested at the
time of such termination shall automatically terminate on the date of the
termination of employment, and all rights and interests of the Executive
in and to such unvested portion of the Option shall thereupon terminate.
Should the Executive's employment be terminated before any given date set
forth in Paragraph 3(a) upon his or her death, Disability or Retirement,
then the installments of the Option which are vested at the time of such
termination shall remain exercisable in accordance with the terms hereof
as if such termination of employment shall not have occurred. Should the
Executive's employment be terminated by the Company or a Subsidiary before
any given date set forth in Paragraph 3(a) other than for Cause, the
vested portion of the Option not subsequently exercised on or before the
90th day after such termination shall thereupon automatically terminate.
Should the Executive's employment be terminated before any given date set
forth in Paragraph 3(a) under any other circumstances, the vested portion
of the Option shall thereupon automatically terminate.
(c) Effect of Leave of Absence. A leave of absence from the Company or any
Subsidiary which is approved by the President shall not be considered a
termination of the Executive's employment with the Company for purposes of
this Article 3 or any other provision of this Certificate, provided that
each date set forth in the table in Paragraph 3(a) which shall follow the
commencement of the leave of absence shall be automatically deferred for a
period equal to the period of the leave of absence.
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(d) Board's Right to Waiver or Acceleration. Any provision of this Article 3
to the contrary notwithstanding, the Board reserves the right, in its sole
discretion, to waive any condition to the vesting of the Option and
accelerate the date on which any installment of the Option shall vest in
the event of a change in control of the Company or a public offering of
shares of Common Stock or otherwise.
4. Definitions.
Unless defined below or elsewhere in this Certificate, the
capitalized terms used in this Certificate shall have the meanings ascribed
thereto in the Plan.
(a) "Cause" shall consist of, the failure of the Executive to perform or
observe the provisions of any employment agreement with the Company or a
Subsidiary, dishonesty or insubordination in the performance of his or her
duties, misappropriation of funds, material and willful misconduct,
habitual insobriety or conviction of a crime involving moral turpitude.
(b) "Disability" means a disability which entitles the Executive to benefits
under the long-term disability insurance program of the Company or a
Subsidiary applicable to the Executive, or which would entitle the
Executive to such benefits after any applicable waiting period.
(c) "Retirement" means termination of the Executive's employment with the
Company and its Subsidiaries (other than for Cause or upon death or
Disability) on or after the later to occur of (i) the conclusion of ten
continuous years of employment by the Company or any Subsidiary or (ii)
the date on which the Executive attains age 55.
5. General Provisions.
(a) Administration and Construction. The provisions hereof shall be
administered and construed by the Board (or any authorized committee
thereof), whose decisions shall be conclusive and binding on the Company,
the Executive and anyone claiming under or through either of them. Without
limiting the generality of the foregoing, any determination as to whether
or not an event has occurred or failed to occur which causes any unvested
portion of the Option to be forfeited or become vested pursuant hereto,
shall be made in the good faith but otherwise absolute discretion of the
Board. By the Executive's acceptance of this Certificate, the Executive
and each person claiming under or through the Executive irrevocably
consents and agrees to all actions, decisions and determinations to be
taken or made by the Board in good faith pursuant to this Certificate and
the Plan.
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(b) Option Not Assignable or Transferable. The Option is not assignable or
transferable other than by will or the laws of descent and distribution,
either voluntarily, or, to the full extent permitted by law,
involuntarily, by way of encumbrance, pledge, attachment, levy or charge
of any nature. Any rights of the Executive hereunder shall be exercisable
during the Executive's lifetime only by him or her or by his or her
guardian or legal representative.
(c) No Employment Rights. No provision of this Certificate or of the Plan
shall confer upon the Executive any right to continue in the employ of the
Company or a Subsidiary or shall in any way affect the right of the
Company or a Subsidiary to dismiss, or otherwise terminate the employment
of, the Executive at any time for any reason or no reason, or shall impose
upon the Company or any Subsidiary any liability for any forfeiture of any
unvested portion of the Option which may result under this Certificate if
the Executive's employment is so terminated.
(d) Recapitalization. If the Executive receives, with respect to the Option,
any other option or warrant to purchase securities of the Company, of a
Subsidiary or of any other entity as a result of any recapitalization,
merger, consolidation, combination, or exchange of shares or a similar
corporate change, any such other option or warrant received by the
Executive shall likewise be subject to the terms and conditions of this
Certificate and shall be included in the term "Option." Similarly, any
securities or other property as to which such other option or warrant is
exercisable shall be included in the term "Option Shares." In the event of
any such corporate change, the Purchase Price set forth in Paragraph 1(b)
shall be appropriately adjusted by the Board such that the aggregate price
for all such Option Shares is not changed.
(e) Legal Representative. In the event of the Executive's death or a judicial
determination of his or her incompetence, reference in this Certificate to
the Executive shall be deemed to refer to his or her legal representative
or, where appropriate, to the Beneficiary.
(f) Holidays. If any event provided for in this Certificate is scheduled to
take place on a legal holiday, such event shall take place on the next
succeeding day that is not a legal holiday.
(g) Notices to the Company. Any notice or other communication to the Company
pursuant to any provision of this Certificate shall be deemed to have been
delivered when delivered in person to the Corporate Secretary of the
Company or when deposited in the United States mail, first class postage
prepaid, addressed to the Corporate Secretary of the Company at 335
Madison Avenue, New York, New York 10017 or at such other address of which
the Company may from time to time give the Executive written notice in
accordance with Paragraph 5 (h).
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(h) Notices to the Executive. Any notice or other communication to the
Executive pursuant to any provision of this Certificate shall be deemed to
have been delivered when delivered to the Executive in person or when
deposited in the United States mail, first class postage prepaid,
addressed to the Executive at his or her address on the security holder
records of the Company or at such other address of which the Executive may
from time to time give the Company written notice in accordance with
Paragraph 5(g).
(i) Agreement Subject to Plan. This Option Grant Certificate is being executed
and delivered pursuant to and is subject in all events to the Plan, a copy
of which, if not previously delivered to the Executive in connection with
a prior grant thereunder, is being delivered to the Executive concurrently
with this Certificate and which is incorporated in this Certificate by
reference. Each provision of this Certificate shall be administered and
construed in accordance with the Plan, and any provision that cannot be so
administered or construed shall to that extent be disregarded.
ENHANCE FINANCIAL, SERVICES
GROUP INC.
Date: As of December 31, 1996 By:__________________________
Daniel Gross
President
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<PAGE>
Annex A
Enhance Financial Services Group Inc.
335 Madison Avenue
New York, New York 10017
Ladies and Gentlemen:
I am an optionee under the Enhance Financial Services Group Inc. Long-Term
Incentive Plan for Key Employees (the "Plan"), having been granted on December
5, 1996 an option for ________ shares at an exercise price of $34.00 per share.
Of such grant, options for _________ shares remain unexercised and
unexpired. Of such number of unexercised and unexpired options, options for
________ shares are vested as of this date.
Select, by indicating with an "X", one exercise method:
___ I hereby exercise the aforesaid option for _______ shares using the
Merrill Lynch "Corporate Stock Option Exercise Program." Accordingly, payment
will be remitted to the company on my behalf by Merrill Lynch.
___ I hereby exercise the aforesaid option for ________ shares not using
the Merrill Lynch "Corporate Stock Option Exercise Program" and enclose my
check, payable to the order of Enhance Financial Services Group Inc., for
$________ in payment of the purchase price and applicable withholding taxes for
such shares. I ask that the certificate for the option shares be delivered to
me.
Very truly yours,
Date: Name:________________
EMPLOYMENT AGREEMENT
by and between
ENHANCE FINANCIAL SERVICES GROUP INC.
and
ARTHUR DUBROFF
July 16, 1996
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
July 16, 1996, by and between ENHANCE FINANCIAL SERVICES GROUP INC., a New York
corporation (the "Company"), and ARTHUR DUBROFF ("Executive"). Certain
capitalized terms are defined in Section 6.1 of this Agreement.
It is hereby agreed as follows:
ARTICLE I
DUTIES AND TERM
1.1 Employment. In consideration of their mutual covenants and other good
and valuable consideration, the receipt, adequacy and sufficiency of which is
hereby acknowledged, the Company shall employ Executive, and Executive shall
enter and remain in the employ of the Company, upon the terms and subject to the
conditions set forth in this Agreement for the period beginning on the date
hereof and ending as provided in Section 1.3 hereof (the "Employment Period").
1.2 Position and Responsibilities.
(a) During the Employment Period, Executive shall serve as Executive
Vice President and Chief Financial Officer of the Company (or in a capacity of
substantially equivalent stature and responsibility), reporting directly to the
Chief Executive Officer of the Company, and shall have the normal duties,
responsibilities and authority of a person occupying such a position in a public
company of comparable size, subject to the authority of the board of directors
of the Company (the "Board"). Executive agrees to perform services commensurate
with his position as shall from time to time be assigned to him by the Chief
Executive Officer or the Board.
(b) During the Employment Period, Executive shall devote
substantially all of his business time, attention, skill and efforts to the
faithful performance of his duties hereunder; provided that Executive shall be
entitled to (i) become a board member of one or more for profit organizations so
long as such memberships do not breach Section 5.2 below, or, in the aggregate,
materially interfere with Executive's performance of his duties hereunder and is
approved by the Board in its sole discretion; (ii) maintain or increase his
involvement in charitable organizations (so long as such involvement does not
materially interfere with Executive's performance of his duties hereunder); and
(iii) make passive investments in other entities.
<PAGE>
1.3 Term. The term of Executive's employment under this Agreement shall
commence on July 22, 1996 and shall continue until December 31, 1999 (the
"Original Term"), unless renewed by the mutual written agreement of the Company
and Executive (each such additional period, a "Renewal Term") or unless
terminated earlier as provided in Article III hereof in which case the
Employment Period shall be deemed terminated.
1.4 Location. During the Employment Period, Executive shall not be
required, except with his prior written consent, to relocate his principal place
of employment outside of the New York City metropolitan area.
ARTICLE II
COMPENSATION
In full consideration for all services rendered by Executive in any
capacity during the Employment Period, including, without limitation, services
as a director, officer or member of any committee of the Board or of the board
of directors of any subsidiary or affiliate of the Company, the Company shall
compensate Executive as follows:
2.1 Base Salary. The Company shall pay to Executive an annual base salary
at the rate of not less that $275,000 (the "Base Salary"), which salary shall be
payable in regular installments in accordance with the Company's customary
payroll practices. The Base Salary shall be reviewed annually by the Board or a
committee designated by the Board, and the Board or such committee may, in its
sole discretion, increase (but not decrease) the Base Salary.
2.2 Bonus Payments. Not later than the commencement of the Original Term,
Executive shall receive an immediate signing bonus equal to $100,000. In
addition, during the Employment Period, Executive shall be eligible to receive
an annual target bonus of not less than 45 percent of Base Salary, the actual
amount of which shall be determined in accordance with the criteria and
procedures of the Company applicable to other Senior Executives (as such term is
defined in Section 6.1 hereof). If Executive is not employed by the Company for
the entire fiscal year he shall be eligible to receive a pro-rated portion of
the annual bonus for such fiscal year, based on the number of days employed or
such other basis as is reasonably determined by the Board. Executive shall be
eligible to receive the bonus payable for the 1999 fiscal year or for the last
year of any Renewal Term even if such Original Term or Renewal Term is not
renewed.
2.3 Stock Options. Executive shall be entitled to an immediate grant of
"incentive stock options" (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended) for 55,000 shares of Common Stock pursuant to
the Company's Long-Term Incentive Plan for Key Employees (the "Incentive Plan"),
which grant shall, except as specifically provided herein, be on terms required
by the Incentive Plan and otherwise
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substantially identical to those governing stock options hitherto granted by the
Company to other Senior Executives. In addition, Executive shall be entitled, at
the Company's election, to either (i) an annual grant under the Incentive Plan
(or successor plan) of stock options for not less than 20,000 shares of Common
Stock in each of the calendar years 1996, 1997, and 1998, which grants shall,
except as specifically provided herein, be on terms identical to those granted
to other Senior Executives or, if no such stock options are granted to such
Senior Executives, then on terms identical to those governing the stock options
granted to Executive upon the commencement of his employment with the Company,
as described above in this paragraph, or (ii) if and to the extent stock options
for fewer than 20,000 shares of Common Stock are granted to Executive during any
of calendar years 1996, 1997, or 1998, then cash or other compensation having
value equal to the difference between the value of stock options for 20,000
shares of Common Stock and the value of any stock options actually granted in
such fiscal year, if any, as determined as of the time of grant (or when stock
option grants would normally be made if none are made in such fiscal year) by
the Compensation and Nominating Committee of the Board (the "Compensation
Committee") in good faith. The Compensation Committee shall promptly notify
Executive of its determination and the basis therefore in writing, and if the
Executive disagrees with such determination, the Executive shall notify (in
writing) the Compensation Committee thereof within 30 days of receipt of the
Compensation Committee notice. Any stock options granted to Executive which
remain outstanding after the Original Term and any Renewal Term will continue to
provide for accelerated vesting and post-employment exercise periods on the same
basis as provided herein.
If Executive timely notifies the Company of his disagreement with the
value of the applicable award as determined by the Compensation Committee
pursuant to the second preceding sentence, the matter shall be submitted for
resolution to a independent third party valuator experienced in valuing stock
options of similarly situated companies whose selection shall be made by the
Executive from a list of 5 recognized independent valuators, none of whom bave
performed any services for the Company for the immediately preceding 24 months
provided by the Compensation Committee. The determination of such valuator shall
be binding on all parties. The Company shall pay the costs of the valuator,
except that Executive shall pay for up to the first $10,000 of cost of the
valuator in the event the Valuator's valuation is not at least five percent (5%)
higher than that determined initially by the Compensation Committee.
2.4 Additional Benefits. Executive shall be entitled to participate in all
employee benefit and welfare programs, plans and arrangements (including,
without limitation, pension, profit-sharing, supplemental pension and other
retirement plans, insurance, hospitalization, medical and group disability
benefits, travel or accident insurance plans) and to receive other benefits,
such as dues and fees of professional organizations and associations, which are
from time to time available to the Company's executive personnel; provided,
however, there shall be no duplication of termination or severance benefits and
to the extent that such benefits are specifically provided by the Company to
Executive under other provisions of this Agreement, the benefits available under
the foregoing plans and
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<PAGE>
programs shall be reduced by any benefit amounts paid under such other
provisions.
2.5 Reimbursement of Business Expenses. The Company shall pay, or
reimburse Executive for, all reasonable ordinary and necessary business expenses
incurred by Executive in performing his obligations under this Agreement which
are consistent with the Company's policies in effect from time to time with
respect to travel, entertainment and other business expenses, subject to the
Company's requirements with respect to reporting and documentation of such
expenses.
2.6 Vacations. Executive shall be entitled to the number of business days,
excluding Company holidays, of paid vacation during each year of employment
hereunder commensurate with the vacation benefits accorded to other Senior
Executives of the Company.
ARTICLE III
TERMINATION OF EMPLOYMENT
3.1 Death of Executive. The Employment Period shall automatically
terminate upon the death of Executive.
3.2 By Executive. Executive shall be entitled to terminate the Employment
Period by giving Notice of Termination to the Company at any time with or
without Good Reason.
3.3 By the Company. The Company shall be entitled in its sole discretion
to terminate the Employment Period under this Agreement by giving Notice of
Termination to Executive:
(a) in the event of Executive's Total Disability;
(b) for Cause; and
(c) at any time without Cause.
ARTICLE IV
COMPENSATION UPON TERMINATION OF EMPLOYMENT PERIOD
If the Employment Period is terminated in accordance with the provisions
of Article III hereof, except for any other rights or benefits specifically
provided for herein following the Employment Period, the Company shall be
obligated to provide compensation and benefits to Executive only as follows,
subject to the provisions of Section 5.4 hereof:
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<PAGE>
4.1 Upon Termination for Death. If the Employment Period is terminated by
reason of Executive's death, the Company shall:
(a) pay Executive's Representative any Base Salary which has accrued
but not been paid as of the Termination Date (as defined in Section 4.6) (the
"Accrued Base Salary");
(b) pay Executive's Representative for unused vacation days accrued
as of the Termination Date (the "Accrued Vacation Payment");
(c) reimburse Executive's Representative for expenses incurred by
him prior to the Termination Date which are subject to reimbursement pursuant to
this Agreement (the "Accrued Reimbursable Expenses");
(d) provide to Executive's Representative any accrued and vested
benefits required to be provided by the terms of any Company-sponsored benefit
plans or programs (the "Accrued Benefits"), together with any benefits required
to be paid or provided in the event of Executive's death under applicable law;
(e) pay Executive's Representative any annual bonus with respect to
a prior fiscal year which has accrued but has not been paid, if any, and a
pro-rated annual bonus based on the current fiscal year's target bonus,
determined as described in Section 2.2 and adjusted for the period of time from
the beginning of the then current fiscal year to the Termination Date;
(f) permit Executive's Representative to exercise all stock options
previously granted (whether or not exercisable as of the Termination Date) at
any time for the remainder of the original terms of the options as set forth in
the applicable stock option agreements, and provide Executive's Representative
with equivalent value pursuant to Section 2.3(ii) for any of the ungranted
options referred to therein at the Termination Date (such ungranted options
shall be deemed to have the same terms as the options most recently granted to
Executive, provided, however, that the exercise price of such ungranted options
shall be deemed to be the fair market value of the Common Stock on the
Termination Date); and
(g) permit Executive's dependents to elect continuation medical
coverage in accordance with the requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), and for a period of twelve
(12) months from the Termination Date pay the applicable premium for such
coverage. In the event the period of COBRA coverage paid by the Company under
this Section 4.1(g) shall be less than the period mandated under applicable
provisions of COBRA, Executive's dependents shall be entitled to elect to
continue coverage at his or her own expense for the remainder of the COBRA
continuation period.
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4.2 Upon Termination for Disability. If the Employment Period is
terminated by reason of Executive's Total Disability, the Company shall:
(a) pay Executive the Accrued Base Salary;
(b) pay Executive the Accrued Vacation Payment;
(c) pay Executive the Accrued Reimbursable Expenses;
(d) pay Executive the Accrued Benefits, together with any benefits
required to be paid under applicable law, in the event of Executive's Total
Disability;
(e) pay Executive any annual bonus with respect to a prior fiscal
year which has accrued but has not been paid, if any;
(f) pay Executive for a period of twelve (12) months from his
Termination Date, his Base Salary, provided however, that such amounts shall be
offset by any amounts payable under the Company's short-term or long-term
disability plans;
(g) pay Executive a pro-rated annual bonus based on the current
fiscal year's target bonus determined as described in Section 2.2 and adjusted
for the period of time from the beginning of the then current fiscal year to the
Termination Date;
(h) permit Executive to elect continuation medical coverage in
accordance with the requirements of COBRA for him and his dependents, and for a
period of 12 months from the Termination Date pay the applicable premium for
such coverage, except that Executive shall continue to pay the applicable
premium Executive would pay if he continued as an active employee of the
Company. In the event the period of COBRA coverage paid by the Company under
this Section 4.2(h) shall be less than the period mandated under applicable
provisions of COBRA, Executive and his dependents shall be entitled to elect to
continue coverage at his or her own expense for the remainder of the COBRA
continuation period; and
(i) permit Executive to exercise all stock options previously
granted (whether or not exercisable as of the Termination Date) at any time for
the remainder of the original terms of the options as set forth in the stock
option agreements, and provide Executive with equivalent value pursuant to
Section 2.3(ii) for any of the ungranted options referred to therein at the
Termination Date (such ungranted options shall be deemed to have the same terms
as the options most recently granted to Executive, provided, however, that the
exercise price of such ungranted options shall be deemed to be the fair market
value of the Common Stock on the Termination Date).
4.3 Upon Termination by the Company for Cause or by Executive Without Good
Reason. If the Employment Period is terminated by the Company for Cause (other
than
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circumstances where Section 4.5 is applicable) or by Executive other than (i)
upon Executive's death or Total Disability, or (ii) with Good Reason, the
Company shall:
(a) pay Executive the Accrued Base Salary;
(b) pay Executive the Accrued Vacation Payment;
(c) pay Executive the Accrued Reimbursable Expenses; and
(d) pay Executive the Accrued Benefits, together with any additional
benefits required to be paid or provided under applicable law.
4.4 Upon Termination by the Company Without Cause or by Executive With
Good Reason. If the Employment Period is terminated by the Company without Cause
or by Executive with Good Reason, the Company shall:
(a) pay Executive the Accrued Base Salary;
(b) pay Executive the Accrued Vacation Payment;
(c) pay Executive the Accrued Reimbursable Expenses;
(d) pay Executive the Accrued Benefits, together with any additional
benefits required to be paid or provided under applicable law;
(e) pay Executive any annual bonus payments which have accrued but
not been paid as of the Termination Date;
(f) pay Executive the Base Salary (as in effect on the Termination
Date) for the greater of (i) the period commencing on the Termination Date and
ending at the conclusion of the Original Term or Renewal Term during which the
Termination Date shall have occurred, or (ii) twelve (12) months from the
Termination Date, which salary shall be payable in the sole discretion of the
Company either in regular installments as determined by the Company (but not
less often than monthly) or in one lump sum;
(g) pay Executive a pro-rated annual bonus based on the current
fiscal year's target bonus determined as described in Section 2.2 and adjusted
for the period of time from the beginning of the then current fiscal year to the
Termination Date;
(h) permit Executive to elect continuation medical coverage for him
and his dependents in accordance with the requirements of COBRA, and for a
period beginning on the Termination Date and ending on the earliest of (i)
eighteen (18) months thereafter, (ii) such time as Executive becomes covered
under another group medical plan, or (iii) the later of (x) the end of the
Original Term or the Renewal Term in which the Termination Date
-7-
<PAGE>
occurs, or (y) twelve (12) months from the Termination Date, pay the applicable
premium for such coverage, except that Executive shall continue to pay the
applicable premium Executive would pay if he continued as an active employee of
the Company. In the event the period of COBRA coverage paid by the Company under
this Section 4.4(h) shall be less than the period mandated under applicable
provisions of COBRA, Executive and his dependents shall be entitled to elect to
continue coverage at Executive's own expense for the remainder of the COBRA
continuation period; and
(i) permit Executive to exercise all stock options previously
granted (whether or not exercisable as of the Termination Date) at any time for
the remainder of the original terms of the options as set forth in the stock
option agreements, and provide Executive with equivalent value pursuant to
Section 2.3(ii) for any of the ungranted options referred to therein at the
Termination Date (such ungranted options shall be deemed to have the same terms
as the options most recently granted to Executive, provided, however, that the
exercise price of such ungranted options shall be deemed to be the fair market
value of the Common Stock on the Termination Date).
The foregoing provisions notwithstanding, Executive shall not be entitled
to any amounts payable under Sections 4.4(f), (g) and (h) after a material
breach of the provisions of Sections 5.1 or 5.2 hereof; provided, however, that
no breach shall be deemed to exist unless the Company shall have given prior
notice to Executive specifying the breach and, within ten (10) days after such
notice, Executive shall not have cured or eliminated the breach, and provided
further that the Company shall be entitled to suspend all payments during such
ten (10) day (or lesser) period but shall promptly pay all withheld amounts in
the event of and upon the timely cure or elimination of the breach.
Except as provided in the preceding paragraph in the event of a
termination of the Employment Period pursuant to this Section 4.4 or Section
4.5, the Company shall not have the right to set-off and apply any amount then
due and payable to Executive under Section 4.4 against any other amount then due
and owing by Executive to the Company and Executive shall not be required to
mitigate the amount of any such payment by seeking employment or otherwise, nor
shall any such payment be off-set by any amounts paid to Executive in connection
with any future employment of Executive.
4.5 Upon Termination by the Company Following a Change of Control. If
within a twelve (12) month period following a Change of Control the Employment
Period is terminated by the Company with or without Cause, the Company shall
make the payments and provide to Executive the benefits under Section 4.4.
Nothing contained in this Section 4.5 shall limit Executive's rights under
Sections 4.1, 4.2, and 4.4 herein before or after a Change of Control.
4.6 Notice of Termination. Any termination of the Employment Period by the
Company for Cause or by Executive for Good Reason shall be communicated by
Notice of Termination to the other party hereto. Executive's date of termination
(the "Termination
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<PAGE>
Date") shall be the date specified in the Notice of Termination or in any other
case the date upon which Executive ceases to perform services for the Company.
It is understood that a notice that the Employment Period will not be extended
shall not constitute termination of the Employment Period under Article III
hereof.
ARTICLE V
RESTRICTIVE COVENANTS
5.1 Confidentiality.
(a) Executive shall hold in strictest confidence, and not disclose
to any Person or use without the prior written consent of the Company, any and
all of the Company's "Proprietary Information," as defined in subparagraph (c)
below, except to the extent Executive acting in good faith deems such disclosure
advisable in connection with his employment hereunder or such disclosure is
required pursuant to legal process, provided, however, that in the case of legal
process, Executive shall give the Company prompt written notice thereof so that
the Company, if it desires, can seek a protective order. This covenant and
agreement shall survive the Employment Period, so long as such information and
data shall remain "Proprietary Information."
(b) Upon expiration or termination of the Employment Period for any
reason, Executive shall immediately deliver to the Company any "Proprietary
Information." Executive shall have no right to retain any copies of any material
qualifying as "Proprietary Information" for any reason whatsoever after
expiration or termination of the Employment Period without the prior written
consent of the Company.
(c) For purposes of this Agreement, "Proprietary Information" means
the information, observations, know-how and data obtained by Executive during
his service as a director of the Company or during the Employment Period
concerning the business or affairs of the Company or any subsidiary, including,
but not limited to, the following: the type of services being provided or
offered by the Company to clients or customers or potential clients or customers
of the Company or its affiliates; the identity of the clients or customers of
the Company or its affiliates; any financial or other information supplied by
clients or customers of the Company or its affiliates; any and all data or
information involving the Company, its affiliates, programs, methods, or
contacts employed by the Company or its affiliates in the conduct of their
business; any lists, documents, manuals, records, forms, or other materials used
by the Company or its affiliates in the conduct of their business; any
descriptive materials describing the methods and procedures employed by the
Company or its affiliates in the conduct of their business; and any other secret
or confidential information concerning the Company's or its affiliates' business
or affairs. The terms "list," "document" or their equivalents, as used in this
subparagraph (c), are not limited to a physical writing or compilation but also
include any and all information whatsoever regarding the subject matter
-9-
<PAGE>
of the "list" or "document," whether or not such compilation is for computer-use
format or has been reduced to writing. The foregoing notwithstanding,
"Proprietary Information" shall not include any information which (i) is or
becomes publicly available through no act or omission of Executive in violation
of this Agreement or any other duty which Executive owes to the Company or (ii)
becomes independently available to Executive as a matter of right from a third
party. If only a portion of the "Proprietary Information" is or becomes publicly
available, then only that portion shall not be "Proprietary Information"
hereunder.
5.2 Competition.
(a) Executive acknowledges that (i) he is being engaged to serve as
Executive Vice President and Chief Financial Officer of the Company and in such
capacity he will be a representative of the Company with respect to clients and
potential clients of the Company; (ii) he has had and will continue to have
access to confidential information about the Company, its affiliates, and their
clients and that "Proprietary Information" acquired by him at the expense of the
Company is for use in its business; and (iii) he has substantial experience in
the financial products and services industry and possesses special, unique,
extraordinary skills, and knowledge in this field. Accordingly, during the
Employment Period and the Non-Competition Period, Executive shall not:
(i) directly or materially indirectly, be employed in, consult
to, have an interest in or otherwise be involved with any business
competing with any Business of the Company, provided the foregoing shall
not prevent Executive from (x) having passive investments in companies
representing not in excess of two percent (2%) of the outstanding equity
securities of each such company (including without limitation under
compensatory equity programs of employing entities), (y) being employed
by, consulting to or otherwise being involved with any portion of an
entity that is not the portion competing with the Business of the Company,
or (z) providing banking or investment banking services to any entity
whatsoever; or
(ii) directly or indirectly solicit any business of a nature
that is competitive with any Business from any Person that obtained
products or services from the Company or any subsidiary or affiliate of
the Company at any time during the last three (3) years of his employment
with the Company, or in any way interfere with the relationship between
any such Person and the Company or any subsidiary or affiliate thereof; or
(iii) directly or indirectly employ or offer to employ,
directly or indirectly solicit, or cause the solicitation of, any
employees of the Company or any subsidiary or affiliate thereof who are in
the employ of the Company or any subsidiary or affiliate thereof on the
Termination Date of his employment hereunder for employment by others, or
in any way interfere with the relationship of the Company or any
subsidiary or affiliate thereof, provided the foregoing shall not prevent
Executive from providing references upon request so long as he is not
-10-
<PAGE>
associated with the entity to which he is providing the reference.
(b) Executive expressly agrees and acknowledges that:
(i) the Company has protected business interests and that
competition with and against such business interests would be harmful to
the Company;
(ii) this covenant not to compete is reasonable as to time and
geographical area and does not place any unreasonable burden upon him;
(iii) the general public will not be harmed as a result of
enforcement of this covenant not to compete;
(iv) his personal legal counsel has reviewed this covenant not
to compete;
(v) he understands and hereby agrees to each and every term
and condition of this covenant not to compete (including, without
limitation, the provisions of Section 5.3); and
(vi) the covenant not to compete shall be in addition to, and
not in substitution for, any obligations created or imposed by common or
statutory law.
5.3 Remedies. Executive expressly agrees and acknowledges that this
covenant not to compete is necessary for the protection of the Company and its
subsidiaries and affiliates because of the nature and scope of their business
and his position with the Company. Further, Executive acknowledges that any
breach of this covenant not to compete would result in irreparable damage to the
Company, and in the event of a breach or threatened breach of this covenant not
to compete, money damages will not sufficiently compensate the Company for its
injury caused thereby, and that the remedy at law for any breach or threatened
breach of Sections 5.1 or 5.2 will be inadequate and, accordingly agrees, that
(i) the Company may, in addition and supplementary to all other available rights
and remedies (including, without limitation, seeking such damages as it can show
it has sustained by reason of such breach), apply to any court of law or equity
of competent jurisdiction for specific performance, a temporary, preliminary and
final injunction or other relief in order to enforce or prevent any violation of
this covenant not to compete, and (ii) in addition to such money damages,
Executive may be restrained and enjoined from any continuing breach of this
covenant not to compete without any bond or other security being required of any
court.
-11-
<PAGE>
5.4 Representations and Warranties.
(a) By Executive. Executive hereby represents and warrants to the
Company that (i) the execution, delivery and performance of this Agreement by
Executive does not and will not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree to
which Executive is a party or by which he is bound; (ii) except as set forth in
the letter from Executive dated and delivered to the Company on or prior to the
date first set forth above (the "Letter"), Executive is not a party to or bound
by any employment agreement, noncompete agreement or confidentiality agreement;
and (iii) upon the execution and delivery of this Agreement by the Company, this
Agreement shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms.
(b) By the Company. The Company hereby represents and warrants to
Executive that (i) the execution, delivery and performance of this Agreement by
the Company does not and will not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree to
which the Company is a party or by which it is bound; (ii) the Company will not
cause Executive to breach any employment agreement, noncompete agreement or
confidentiality agreement set forth in the Letter; (iii) upon the execution of
this Agreement by Executive, this Agreement shall be valid and binding
obligation of the Company, enforceable in accordance with its terms.
ARTICLE VI
MISCELLANEOUS
6.1 Definitions. For purposes of this Agreement, the following terms shall
have the following meanings:
(a) "AAA" - as defined in Section 2.3;
(b) "Accrued Base Salary" - as defined in Section 4.1(a);
(c) "Accrued Benefits" - as defined in Section 4.1(d);
(d) "Accrued Reimbursable Expenses" - as defined in Section
4.1(c);
(e) "Accrued Vacation Payment" - as defined in Section 4.1(b);
(f) "Base Salary" - as defined in Section 2.1;
(g) "Board" shall mean the Board of Directors of the Company;
-12-
<PAGE>
(h) "Business" shall mean any line of business from which the
Company and its subsidiaries taken as a whole (i) derived ten percent
(10%) or more of consolidated revenues for the immediately preceding four
fiscal quarters prior to the termination of the Employment Period or (ii)
reasonably anticipate, based on significant prior effort and marketing
analysis, deriving ten percent (10%) or more of consolidated revenues for
the four fiscal quarters following the termination of the Employment
Period, and of which, in the case of (ii), the Company gives Executive
written notice within ten (10) days after such termination.
Notwithstanding the foregoing, Business shall not include any Business of
the Company and its subsidiaries which becomes part of the Company, a
subsidiary or a new subsidiary primarily as a result of a Change of
Control (other than in connection with the commencement of any new
business).
(i) "Cause" shall mean the occurrence of any of the following:
(i) Executive's gross negligence which is materially injurious
to the Company and its subsidiaries taken as a whole or willful misconduct
which is injurious to the Company or any of its subsidiaries;
(ii) Executive's commission of any act involving dishonesty,
breach of fiduciary duty or fraud with respect to the Company or any of
its subsidiaries; provided, however, that any disputes arising out of
Section 2.5 of this Agreement resulting from actions taken by Executive in
good faith shall not constitute Cause;
(iii) Executive's conviction for, or plea of nolo contendere
to, a felony (other than a traffic violation not involving third-party
personal injury); or
(iv) the material failure or refusal by Executive to perform
the duties required of him by this Agreement which failure or refusal is
not cured within twenty (20) days after written notice thereof from the
Company is received by Executive.
(j) "Change of Control" shall be deemed to have occurred if, (i) any
Person becomes the beneficial owner, directly or indirectly of fifty percent
(50%) or more of the combined voting power of the then outstanding securities of
the Company, (ii) there shall occur the sale or other transfer of all or
substantially all of the assets of the Company to a Person who is not an
affiliate of the Company as defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), (iii) there occurs a merger,
consolidation, reorganization or other business combination of the Company in
which the Company is not the surviving entity other than one intended to
reincorporate the Company in another jurisdiction, and (iv) the persons who were
directors of the Company prior to any cash tender offer or exchange offer,
merger reorganization or other business combination, sale of assets, contested
or other election of directors of the Company, or any combination of the
foregoing transactions cease to constitute at least two-thirds of the Board
following any of such transactions.
-13-
<PAGE>
(k) "Common Stock" shall mean shares of the common stock, par value
$.10 per share, of the Company;
(l) "Compensation Committee" - as defined in Section 2.3;
(m) "Employment Period" - as defined in Section 1.1;
(n) "Expiration" shall mean the expiration of the Employment Period
in accordance with Section 1.3;
(o) "Good Reason" shall mean the occurrence of any of the following:
(i) Executive's Base Salary is reduced by the Company or there
is a material reduction in the benefits that are in effect for Executive
in accordance with Section 2.4 (unless such reduction is pursuant to a
uniform reduction in benefits for Senior Executives) or a material
diminution of Executive's title, authority or management responsibilities;
(ii) Except with Executive's prior written consent, relocation
of Executive's principal place of employment to a location outside of the
New York City metropolitan area or to an office other than the Company's
primary office; or
(iii) Other material breach of this Agreement by the Company
which breach is not cured within twenty (20) days after written notice
thereof from Executive is received by the Company.
(p) "Incentive Plan" - as defined in Section 2.3.
(q) "Letter" - as defined in Section 5.4(a).
(r) "Non-Competition Period" shall mean that period which shall
commence on the termination of the Employment Period and shall expire at the end
of the Original Term or, if in a Renewal Term, the end of the Renewal Term,
provided that if the termination shall have occurred pursuant to Section 4.4 or
4.5, the "Non-Competition Period" shall continue to the end of the period for
which the Base Salary is paid pursuant to Section 4.4(f); provided that the
otherwise applicable date referred to in the preceding clause shall be
automatically extended by such number of days, if any, as Executive shall be in
breach of Section 5.2. In the event that the Original Term or any Renewal Term
expires while Executive is employed without being renewed, there shall
thereafter be no Non-Competition Period.
(s) "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision of this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances, if any, claimed to
provide a basis for termination of the
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<PAGE>
Employment Period under the provision so indicated. Any Notice of Termination
shall be delivered at least three (3) days prior to the effective Termination
Date;
(t) "Original Term" - as defined in Section 1.3;
(u) "Person" shall mean an individual, corporation, partnership,
limited liability company, association, joint venture, joint stock company,
trust, unincorporated organization, governmental entity (or any department,
agency or political subdivision thereof) or other entity;
(v) "Proprietary Information" - as defined in Section 5.1(c);
(w) "Renewal Term" - as defined in Section 1.3;
(x) "Representative" shall mean Executive's designated beneficiaries
as set forth by Executive in accordance with, or as provided under the terms of,
any applicable Company plan or arrangement (or, if there is no such provision in
a plan or arrangement, as designated by Executive in writing), or if no such
designation exists, Executive's estate.
(y) "Senior Executives" shall mean the five most highly compensated
executive officers of the Company determined in accordance with the rules and
regulations of the Securities and Exchange Commission under the Exchange Act;
(z) "Termination" shall mean the termination of Executive's
employment hereunder other than upon expiration of the Original Term or a
Renewal Term;
(aa) "Termination Date" - as defined in Section 4.5.
(bb) "Total Disability" shall mean Executive's inability, due to
illness, accident, injury, physical or mental capacity or other disability, to
carry out effectively his duties and obligations to the Company hereunder or to
participate effectively and actively in the management of the Company for a
period of 90 consecutive days or 120 days within 240 consecutive days or he
shall be certified as permanently disabled (in a manner that he will not be able
to effectively perform his duties and obligations to the Company) by a qualified
physician jointly selected by Executive and the Company acting in good faith who
shall have conducted such examination of Executive as he deems necessary.
(cc) "Valuator" - as defined in Section 2.3.
6.2 Dispute Resolution.
(a) Except in the event of a breach or threatened breach of Article
V hereof, the parties shall resolve through negotiation and then arbitration any
dispute arising under the terms of this Agreement.
-15-
<PAGE>
(b) Any dispute described in Section 6.2(a) which cannot be resolved
by Executive and the Company by negotiation conducted in good faith shall be
submitted to binding arbitration in New York City in accordance with New York
law and the rules and procedures of the American Arbitration Association, except
for an action for temporary, preliminary or final injunctive relief. The
determination of the arbitrator shall be conclusive and binding on the parties
and judgment shall be entered on the award as determined by the arbitrator in
any court of competent jurisdiction. The Arbitrator may include in this award an
order for injunctive relief; provided however, that the arbitrator may not
include in this award any punitive, exemplary, incidental, consequential or
special damages or fashion any remedy except as expressly provided in this
Agreement. The Company and Executive shall each bear their own costs and
expenses incurred in connection with any arbitration under this Agreement
(including but not limited to their own attorneys' fees and expenses), and the
parties shall split evenly the cost of the arbitrator; provided, however, that
if the arbitrator finds that the Company breached the Agreement by withholding
payments to Executive required thereunder in bad faith, Executive shall be
entitled to be reimbursed by the Company for the cost of the arbitrator and
reasonable attorney's fees and costs incurred by Executive.
6.3 Assignment. Neither this Agreement nor any of the rights of the
parties hereunder may be assigned or transferred by either party hereto without
the prior written consent of the other party, except that if the Company shall
merge or consolidate with or into, or sell or otherwise transfer substantially
all of its assets to, another partnership, corporation or other Person which
assumes the Company's obligations under this Agreement, may assign its rights
and obligations hereunder to such transferee; provided, however, that such
assignment is in writing and a copy of such is delivered to Executive. Any
attempted assignment or transfer of this Agreement in violation of this Section
6.3 shall be void.
6.4 Successors; Binding Ageement. Except as otherwise provided herein,
this Agreement shall be binding upon and shall inure to the benefit of and be
enforceable by Executive and his personal or legal representatives,
beneficiaries, designees, executors, administrators, heirs, distributees,
devisees and legatees and by the Company and its successors and assigns.
6.5 Modification; No Waiver. This Agreement may not be modified or amended
except by an instrument in writing signed by the parties hereto. No course of
conduct or failure or delay in enforcing the provisions of this Agreement shall
affect the validity, binding effect or enforceability of this Agreement. No term
or condition of this Agreement shall be deemed to have been waived, nor shall
there be any estoppel against the enforcement of any provision of this
Agreement, except by written instrument by the party charged with such waiver or
estoppel. No such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any other term or condition.
-16-
<PAGE>
6.6 Complete Agreement. This Agreement (together with any exhibits or
schedules incorporated as a part hereof and any other documents expressly
referred to herein) constitutes the complete agreement and understanding between
the parties hereto, and no agreement, representation, warranty or covenant has
been made by either party except as expressly set forth herein.
6.7 Severability. The covenants and agreements contained herein are
separate and severable and the invalidity or unenforceability of any one or more
of such covenants or agreements, if not material to the employment arrangement
that is the basis for this Agreement, shall not affect the validity or
enforceability of any other covenant or agreement contained herein. In addition,
if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, (i) this Agreement will be reformed, construed and enforced in
such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein and (ii) such invalidity, illegality or
unenforceability not affect any other provision or any other jurisdiction.
6.8 Blue-Pencilling. If any court determines that any covenant contained
in this Agreement, including, without limitation, the non-compete covenants, or
any part thereof, is unenforceable because of the duration or geographical scope
of such provisions, the duration or scope of such provision, as the case may be,
shall be reduced so that such provision becomes enforceable and, in the reduced
form, such provision shall then be enforceable and shall be enforced.
6.9 Withholding. This Company may withhold from any payments or benefits
payable under this Agreement all federal, state, city and other taxes as shall
be required pursuant to any applicable law or governmental rule or regulation.
6.10 Counterparts. This Agreement may be executed in separate
counterparts, none of which needs to contain the signature of more than one
party, each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
6.11 Indemnification. The Company shall, and it hereby does, indemnify
Executive and hold Executive free and harmless, to the maximum extent provided
for in the Company's By-Laws. Executive shall be entitled to be covered by any
liability insurance policy, in accordance with its terms, to the maximum extent
of coverage provided for any officer, director or employee which may be
maintained by the Company during the period of his employment and, thereafter,
with regard to matters occurring during his Employment Period.
6.12 Governing Law. All questions concerning the construction, validity
and interpretation of this Agreement and the exhibits hereto will be governed by
the laws of the State of New York, without giving effect to conflict of laws.
6.13 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, sent by
registered or certified mail
-17-
<PAGE>
(return receipt requested) or sent by reputable overnight courier service
(charges prepaid) to the recipient party thereof at the following addresses:
If to the Company, to it at;
Enhance Financial Services Group Inc.
335 Madison Avenue
25th Floor
New York, New York 10017-4605
Attn: Chief Executive Officer
If to Executive, to him at:
Arthur Dubroff
8 Devore Drive
West Orange, NJ 07052-3411
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when personally
delivered or, if mailed, three (3) days after deposit in the U.S. mail or, if
sent by reputable overnight courier, one day after delivery to such overnight
courier.
Company:
ENHANCE FINANCIAL SERVICES GROUP
INC.
By: /s/ Daniel Gross
--------------------------------
Daniel Gross
President and Chief Executive
Officer
Executive:
ARTHUR DUBROFF
/s/ Arthur Dubroff
------------------------------------
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
financial statements of Enhance Financial Services Group Inc. as of and for the
year ended December 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5385
<SECURITIES> 791701
<RECEIVABLES> 22205
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 983443
<CURRENT-LIABILITIES> 0
<BONDS> 75000
0
0
<COMMON> 1853
<OTHER-SE> 486496
<TOTAL-LIABILITY-AND-EQUITY> 983443
<SALES> 0
<TOTAL-REVENUES> 132301
<CGS> 0
<TOTAL-COSTS> 49934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6182
<INCOME-PRETAX> 76390
<INCOME-TAX> 20686
<INCOME-CONTINUING> 55704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55704
<EPS-PRIMARY> 3.12
<EPS-DILUTED> 3.00
</TABLE>
