<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
ENHANCE FINANCIAL SERVICES GROUP, INC.
- -----------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
ENHANCE FINANCIAL SERVICES GROUP INC.
335 Madison Avenue
New York, New York 10017
May 4, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 annual meeting of
shareholders of Enhance Financial Services Group Inc. The meeting will be held
at the offices of Enhance Group, 335 Madison Avenue, 25th Floor, New York, New
York, at 9:00 a.m., local time, on Wednesday, June 3, 1998. The accompanying
notice and proxy statement describe the proposals to be submitted to
shareholders at the meeting. We urge you to read this information carefully.
I look forward to welcoming you personally at the annual meeting.
However, whether or not you expect to attend, please complete, sign, date and
return the accompanying proxy card in the enclosed envelope in order to ensure
that your shares will be represented at the meeting. This will not limit your
rights to attend or to change your vote at the meeting.
We appreciate your cooperation and interest in Enhance Group.
Sincerely,
/s/ Daniel Gross
Daniel Gross
President and
Chief Executive Officer
<PAGE>
[LOGO]
ENHANCE FINANCIAL SERVICES GROUP INC.
335 Madison Avenue
New York, New York 10017
--------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
--------------------------------------------------
The annual meeting of shareholders of Enhance Financial Services Group
Inc. will be held at the offices of Enhance Group, 335 Madison Avenue, 25th
Floor, New York, New York, on Wednesday, June 3, 1998, at 9:00 a.m., local time,
for the following purposes:
(1) To elect 11 directors;
(2) To approve an amendment to the restated certificate of
incorporation, as amended, of Enhance Group to increase the
authorized capital from 35,000,000 shares to 105,000,000
shares;
(3) To approve amendments to the Non-Employee-Director Stock
Option Plan of Enhance Group;
(4) To ratify the appointment of Deloitte & Touche LLP as the
independent auditor of Enhance Group and its consolidated
subsidiaries for 1998; and
(5) To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
The close of business on April 29, 1998 has been fixed as the record
date for determining shareholders entitled to notice of and to vote at the
meeting.
By Order of the Board of Directors,
Samuel Bergman
Secretary
May 4, 1998
IMPORTANT: Whether or not you plan to attend the meeting, a return envelope
requiring no postage if mailed in the United States is enclosed for
your convenience in mailing the enclosed proxy.
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
335 Madison Avenue
New York, New York 10017
------------------------------------------------
PROXY STATEMENT
------------------------------------------------
This proxy statement is furnished to the holders of common stock, par
value $.10 per share (the "Common Stock"), of Enhance Financial Services Group
Inc., a New York corporation ("Enhance Group" and, together with its
consolidated subsidiaries, the "Company"), in connection with the solicitation
of proxies by the board of directors for use at the annual meeting of
shareholders of Enhance Group to be held on June 3, 1998 and any adjournment or
adjournments thereof. A copy of the notice of meeting accompanies this proxy
statement. It is anticipated that the mailing of this proxy statement will
commence on or about May 4, 1998.
Only shareholders of record at the close of business on April 29, 1998,
the record date for the meeting, will be entitled to notice of and to vote at
the meeting. On the record date, Enhance Group had issued and outstanding
___________ shares of Common Stock, which are the only securities of Enhance
Group entitled to vote at the meeting, each share being entitled to one vote.
Under the New York Business Corporation Law (the "BCL") and Enhance
Group's by-laws, the presence, in person or by proxy, of a majority of the
outstanding shares of Common Stock is necessary to constitute a quorum of the
shareholders to take action at the annual meeting. For this purpose, shares
which are present, or represented by a proxy, at the annual meeting will be
counted for quorum purposes regardless of whether the holder of the shares or
proxy fails to vote on any particular matter or whether a broker with
discretionary authority fails to exercise its discretionary voting authority
with respect to any particular matter. Once a quorum of the shareholders is
established, under the BCL and Enhance Group's by-laws, the directors standing
for election must be elected by a plurality of the votes cast, the amendment
(the "Charter Amendment") to the certificate of incorporation must be approved
by the holders of a majority of the shares of Common Stock outstanding, and any
other action to be taken, including the approval of the amendment (the "Plan
Amendment") to the Non-Employee-Director Stock Option Plan (the "Directors'
Option Plan") of Enhance Group and the ratification of the appointment of the
auditor for 1998, must be approved by a majority of the votes cast. For voting
purposes, abstentions and broker non-votes will not be counted in determining
whether the directors standing for election have been elected or whether any
other action has been approved.
Shareholders who execute proxies may revoke them by giving written
notice to the secretary of the meeting at any time before such proxies are
voted. Attendance at the meeting will not have the effect of revoking a proxy
unless the shareholder so attending so notifies the secretary of the meeting in
writing at any time prior to the voting of the proxy.
The board of directors does not know of any matter other than the
election of directors, the approval of the Charter Amendment, the approval of
the Plan Amendment and the ratification of the appointment of the auditor for
1998 that is expected to be presented for consideration at the meeting. However,
if other matters properly come before the meeting, the persons named in the
accompanying proxy intend to vote thereon in accordance with their judgment. All
proxies received pursuant to this
<PAGE>
solicitation will be voted except as to matters where authority to vote is
specifically withheld, and, where a choice is specified as to the proposal, they
will be voted in accordance with such specification. If no instructions are
given, the persons named in the proxy solicited by the board of directors of
Enhance Group intend to vote for the nominees for election as directors of
Enhance Group listed herein beneath the caption "Election of Directors" and for
the other matters listed above in this paragraph expected to be presented for
consideration at the meeting.
The Company will bear the cost of the meeting and of soliciting
proxies, including the cost of mailing the proxy material. The Company has
retained ChaseMellon Shareholder Services, LLC as its solicitation agent. In
addition to soliciting by mail, directors, officers and regular employees of the
Company (who will not be specifically compensated for such services) may solicit
proxies by telephone or otherwise.
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 April __, 1998 by (a) each
shareholder known to Enhance Group 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 Group; (c) each of the five most highly compensated
executive officers of Enhance Group; and (d) all executive officers and
directors of Enhance Group as a group. Unless otherwise indicated, the address
of each such person is c/o Enhance Financial Services Group Inc., 335 Madison
Avenue, New York, New York 10017.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES (1) PERCENT OF CLASS
<S> <C> <C>
U S WEST, Inc. 5,430,800 (2)(3) 28.9%
7800 East Orchard Road, Suite 200
Englewood, Colorado 80111
Swiss Reinsurance Company 1,700,000 (3) 9.1
Mythenquai 50/60
8022 Zurich, Switzerland
FMR Corp. 1,327,200 (4) 7.1
82 Devonshire St.
Boston, Massachusetts 02109
Allan R. Tessler..................... 243,500 (5)(6) 1.3
Wallace O. Sellers................... 417,500 (5)(6) 2.2
Daniel Gross......................... 481,250 (5) 2.5
Samuel Bergman....................... 72,350 (5) *
Ronald M. Davidow.................... 115,525 (5) *
Arthur Dubroff....................... 26,750 (5)(7) *
Tony M. Ettinger..................... 13,600(5) *
Brenton W. Harries................... 12,000 (6) *
David R. Markin...................... 111,000 (6) *
Robert P. Saltzman................... 61,000 (6)(8) *
Richard J. Shima..................... 9,000 (6) *
Spencer R. Stuart.................... 12,000 (6)(9) *
Adrian U. Sulzer..................... 1,000 (6) *
Frieda K. Wallison................... 14,224 (6) *
Jerry Wind........................... 6,000 (6) *
All executive officers and directors as a group 1,664,069 (10) 8.5
</TABLE>
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* Less than 1%
2
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(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, Inc. ("U S WEST") sold its 7.625% Exchangeable Notes due
December 15, 1998 ("Debt Exchangeable for Common Stock" or "DECS"). At
maturity (including 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 "Certain Relationships and Related Transactions" for information
regarding (a) special powers of U S WEST under Enhance Group's certificate
of incorporation and the manner in which U S WEST has announced its
intention to vote the shares owned by it and (b) an agreement with Swiss
Reinsurance Company ("Swiss Re") regarding future sales and purchases by it
of voting shares of Enhance Group.
(4) On February 10, 1998, FMR Corp. filed a Schedule 13G stating its ownership
of shares of Common Stock at December 31, 1997. According to such Schedule
13G, beneficial ownership of 1,107,900 of the shares is a result of
Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
Corp., acting as investment advisor to various investment companies (the
"Fidelity Funds"), including 1,019,700 shares resulting from the assumed
conversion of DECS owned by such Fidelity Funds into shares of Common
Stock. According to such Schedule 13G, beneficial ownership of the
remaining 219,300 of the shares is a result of Fidelity Management Trust
Company, a wholly-owned subsidiary of FMR Corp., serving as investment
manager of certain institutional account(s) (the "Institutional Accounts"),
including 90,800 shares resulting from the assumed conversion of DECS owned
by such Institutional Accounts into shares of Common Stock. According to
such Schedule 13G, FMR Corp., directly or through subsidiaries, has the
sole power to vote only 187,600 of the shares of Common Stock beneficially
owned by it. FMR Corp. does not have sole power to vote or direct the vote
the shares owned directly by the Fidelity Funds and 31,700 shares of Common
Stock owned by the Institutional Accounts, as such power resides with the
Fidelity Funds' board of trustees or by the institutions owning such
accounts, as the case may be.
(5) Includes the shares set forth in: (a) Column A below issuable to the named
officer upon the exercise of presently exercisable stock options granted
under the 1987 Long-Term Incentive Plan for Key Employees (the "1987
Incentive Plan") and (b) Column B 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).
<TABLE>
<CAPTION>
Name A B
--------------- -------- ---------
<S> <C> <C>
Allan R. Tessler 18,500 2,000
Wallace O. Sellers 156,000 258,500
Daniel Gross 271,250 93,500
Samuel Bergman 68,500 3,850
Ronald M. Davidow 61,500 -0-
Arthur Dubroff 18,750 -0-
Tony M. Ettinger 13,500 -0-
</TABLE>
(6) Includes shares issuable upon the exercise of the presently exercisable
portion of options granted to
3
<PAGE>
such director under the Directors' Option Plan, as follows: Brenton W.
Harries -- 11,000 shares; David R. Markin -- 11,000 shares; Robert P.
Saltzman -- 1,000 shares; Wallace O. Sellers -- 1,000 shares; Richard J.
Shima -- 7,000 shares; Spencer R. Stuart -- 11,000 shares; Adrian U. Sulzer
-- 1,000 shares; Allan R. Tessler -- 3,000 shares; Frieda K. Wallison --
11,000 shares; and Jerry Wind -- 1,000 shares.
(7) Includes 7,000 shares issuable upon the exercise of the currently
exercisable portion of options granted to Mr. Dubroff under the Directors'
Option Plan prior to the commencement of his employment by the Company.
(8) Held in a living trust account of which Mr. Saltzman and his wife are
co-trustees.
(9) Mr. Stuart's wife holds a durable power of attorney granting her joint
voting and dispositive power over the shares owned by Mr. Stuart.
(10) Includes 65,000 shares issuable to the directors who are not employees of
the Company (as of the date of grant) upon the exercise of the presently
exercisable portion of stock options granted to them under the Directors'
Option Plan; 656,250 shares issuable to the executive officers upon the
exercise of presently exercisable options granted to them under the 1987
Incentive Plan; and 358,050 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. Such persons disclaim
beneficial ownership of such shares owned by their spouses, individually or
as custodians, or by such trusts.
4
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Information Regarding Nominees
At the meeting, 11 directors are to be elected, each to hold office
(subject to Enhance Group's by-laws) until the next annual meeting of
shareholders and until his or her successor has been elected and qualified. If
any nominee listed in the table below should become unavailable for any reason
to serve as a director, which management does not anticipate, the proxy will be
voted for any substitute nominee or nominees who may be selected by management
prior to or at the meeting, or, if no substitute is selected by management prior
to or at the meeting, for a motion to adjourn the meeting until a substitute
nominee or nominees shall be selected. The information concerning the nominees
has been furnished by them to Enhance Group and is current as of April 15, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH ENHANCE GROUP
<S> <C> <C>
Allan R. Tessler 61 Chairman of the Board
Wallace O. Sellers 68 Vice Chairman of the Board
Daniel Gross 55 President, Chief Executive Officer and director
Brenton W. Harries 70 Director
David R. Markin 67 Director
Robert P. Saltzman 55 Director
Richard J. Shima 58 Director
Spencer R. Stuart 75 Director
Adrian U. Sulzer 51 Director
Frieda K. Wallison 55 Director
Jerry Wind 60 Director
</TABLE>
Mr. Tessler has held the position with Enhance Group 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. Mr. Tessler is also Chairman of the
Board of Checker Holdings Inc, and of Jackpot Enterprises Inc. ("Jackpot") and a
director of The Limited, Inc.
Mr. Sellers has held the position with Enhance Group set forth above
since 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 Group and
Chairman of the Board and Chief Executive Officer of Enhance Group's principal
insurance subsidiaries, Enhance Reinsurance Company ("Enhance Re") and Asset
Guaranty Insurance Company ("Asset Guaranty" and, together with Enhance Re, the
"Insurance Subsidiaries") from their inception. Mr. Sellers also serves as a
director and a member of the compensation committee of Danielson Holding
Corporation and as Chairman of the Board of Directors of United Oilfield
Services Inc.
Mr. Gross has held the position with Enhance Group set forth above and
has served as Chief Executive Officer of the Insurance Subsidiaries since 1995.
Prior thereto he held senior executive positions with Enhance Group and Enhance
Re from their inception and was among the founders of the Company in 1986. Mr.
Gross also serves as a director of Mortgage Guaranty Investment Corporation.
5
<PAGE>
Mr. Harries has served as a director of Enhance Group 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 Group 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 Group since 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 Group 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. Mr. Shima also serves as a
director of CTG Resources, Inc. and as a trustee of the Evergreen Mutual Funds.
Mr. Stuart has served as a director of Enhance Group 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 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 U.S. Timberlands, L.P.
Mr. Sulzer has served as a director of Enhance Group since 1996. He has
since 1991 served in various management capacities with Swiss Re, a shareholder
of Enhance Group, currently serving since July 1997 as Co-Head of Underwriting
in its New Markets Division of Swiss Re. Previously thereto, from January 1991
he served as head of Swiss Re's Credit and Bonding Department. Mr. Sulzer also
served as a director of Societa Italiana Cauzioni, Rome, Italy, and American
Credit Indemnity.
Ms. Wallison has served as a director of Enhance Group 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 Group since 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
board of and as a contributor to numerous journals on marketing.
MEETINGS OF THE BOARD AND COMMITTEES
The board of directors of Enhance Group holds regular quarterly
meetings and special meetings as and when necessary. The board held five
meetings during 1997, including a two-day, off-site meeting focusing on
long-term strategic planning.
6
<PAGE>
The Executive Committee of Enhance Group's board of directors is
authorized to exercise all powers of the board of directors except as otherwise
provided by New York law. The members of the Executive Committee are Messrs.
Gross, Harries, Sellers, Stuart and Tessler. The committee held one meeting
during 1997.
The functions of the Audit Committee are: to assist the board of
directors in fulfilling its fiduciary responsibilities as to the system of
internal controls, accounting policies and reporting practices of the Company
and the sufficiency of auditing relative thereto; to make recommendations to the
board of directors regarding the independent auditors to be nominated for
approval by the board of directors and ratification by the shareholders; to
review the independence of such auditors and monitor the professional services
they provide; to approve the scope of the annual audit activities of the
independent auditors; and to review audit results. The committee consists of
Messrs. Salzman (Chairman), Harries and Shima. The committee held four
meetings during 1997.
The functions and composition of the Compensation and Nominating
Committee are set forth below under "Executive Compensation - Report of
Compensation and Nominating Committee." The committee held four meetings
during 1997.
The board of directors has three additional standing advisory
committees, and it may from time to time form additional committees to render
advice with respect to certain of its operations.
Each incumbent director who served at any time during 1997 except
for Mr. Sulzer attended during that year at least 75% of the total number of
meetings held during the year by the board of directors and by all committees
of the board of directors on which such director served.
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION AND NOMINATING COMMITTEE
GENERAL. The Compensation and Nominating Committee of the board of
directors of Enhance Group consists and throughout 1997 consisted exclusively of
directors of the Company who are neither employees nor, with the exception of
Allan R. Tessler, the Chairman of the Board of Enhance Group, officers of the
Company. The committee reviews and makes recommendations to the board of
directors with respect to the remuneration of the Company's executive and senior
officers and the terms and conditions of all employee benefit plans or changes
thereto, all of which recommendations with respect to 1997 compensation were
accepted. The sole exception to the foregoing with respect to the scope of
authority of the Compensation and Nominating Committee relates to decisions
about awards of stock options under the 1987 Incentive Plan and the 1997
Long-Term Incentive Plan for Key Employees (the "1997 Incentive Plan"), which
are made solely by a subcommittee comprising the members of the Compensation and
Nominating Committee excluding Mr. Tessler.
Set forth below is a report submitted by the members of the
Compensation and Nominating Committee in their capacity as such addressing the
Company's compensation policies for 1997 as they affected Daniel Gross,
President and Chief Executive Officer of the Company during 1997, and the other
four executive officers of the Company who were for 1997 the Company's most
highly paid executive officers.
7
<PAGE>
COMPENSATION PROGRAM PRINCIPLES. The Company's compensation
philosophy reflects the belief that to be meaningful, compensation must be
closely aligned with the overall performance of the Company. To that end, the
Company establishes annual goals on both a Company-wide business-performance
level and on an individual performance level. Improved return on equity and
earnings per share relative to a comparator group comprising other financial
guarantors were the principal financial measures for Company performance. For
executive officers, individual performance measures reflected the results of
their business or functional unit against key goals. The Company's
total-compensation program is based on a mix of fixed compensation (base
salary), compensation-at-risk (incentive bonus) and stock option awards. The
proportion of a given employee's at-risk-to-fixed compensation increases with
the increase in the individual's level of responsibility within the Company,
reflecting, in turn, the greater impact of that individual's contribution on
the Company's overall performance. As a result, at lower levels the fixed
portion of total compensation represents a far greater proportion of total
compensation than at the more senior levels.
Each employee in the organization has an identified target bonus
that correlates to a performance level which "meets expectations."
Performance which does not meet expectations merits an actual bonus award, if
any, below the target, while exceptional performance typically translates
into a bonus award which exceeds the target. The amount of the cash pool from
which bonuses are drawn is a function of the Company's performance relative
to its financial goals.
The stock option grants are a function of the employee's organizational
level, the employee's individual performance against goals and Company
performance.
The Company has retained an independent compensation consulting firm
to evaluate the Company's current compensation and benefits program, which
has not been done in several years. The Company is conducting such an
evaluation at this time in an attempt to insure that its compensation
practices are market competitive in order to promote its goal of continuing
to attract, motivate and retain its critical executive resources.
COMPENSATION PROGRAM COMPONENTS. The particular components of the
compensation for executive officers are as follows:
FIXED SALARY. Salary levels are determined largely through comparisons
with other financial services firms, including financial guaranty insurers. Many
of those publicly held companies in the comparison group are included in the
larger group of financial services and insurance companies listed in the
Standard & Poor's Financial Index, which has been used for purposes of the stock
performance graph contained below in this proxy statement. However, certain of
the financial guaranty companies in the group used for compensation comparison
purposes are not publicly held and are therefore not included in the stock
performance index. The companies in the comparison group were chosen for their
high degree of business comparability to the Company as well as for the ready
availability of their compensation structure. This selection did not distinguish
between privately and publicly held companies.
Actual salaries are based on job evaluations, which reflect
responsibility level, experience and individual performance expectations.
Thus far they have been reflective of competitive salary ranges and market
comparisons. Salary levels for executive officers are regarded by the Company
as competitive within a range that the Compensation and Nominating Committee
deems reasonable and necessary.
8
<PAGE>
The increases in executive officer salaries have been relatively modest
and within a narrow band, with greater compensation differentiation being
effected through the cash bonuses and stock options grants.
COMPENSATION-AT-RISK (INCENTIVE BONUSES). The Compensation and
Nominating Committee established a bonus pool at the conclusion of the year
based on (a) the increase in the Company's operating return on equity for the
year and (b) the "value added, " i.e., the return anticipated on capital the
Company invested in various businesses during the year, and (c) its evaluation
of the achievement of previously defined strategic goals. The bonus pool was
allocated in part among the executive officers based on an assessment of their
individual contributions to the Company's performance measured against the
foregoing criteria. Additionally, the officers who participated in the
successful formation and launching in 1996 of one of the Company's key new
ventures, Credit-Based Asset Servicing and Securitization LLC ("C-BASS")
participated in a separate pool based on the 1997 profits of that venture.
STOCK OPTIONS. The 1987 Incentive Plan and the 1997 Incentive Plan
were adopted in those years, respectively, for the purpose of providing,
through the grant of long-term incentives, a means to attract and retain key
personnel and to provide to participating key employees long-term incentives
for sustained high levels of performance. Stock options serve to reinforce
the alignment between individual and Company performance. As such, they
provide additional incentive for officers to work toward the Company's long
term goals and strategy as a means to build personal wealth. Stock options
also provide a significant impetus for equity ownership. No further grants
were permitted to be made under the 1987 Incentive Plan after December 10,
1997.
Since 1991, substantially all grants under the 1987 Incentive Plan
and the 1997 Incentive Plan have been in the form of stock options. As
described above, the awardees of stock options under these plans and the
sizes of the grants are determined by a subcommittee of the Compensation and
Nominating Committee comprising its members who are outside directors. In
general, the amounts of annual option awards reflect both organizational
level and performance achievements. In deciding whether to grant an awardee
additional stock options, the subcommittee does not generally consider
whether the awardee had received a stock option grant in the previous year,
it does often consider the grants previously made to the awardee in the
aggregate.
Reflecting the Company's objective of aligning the long range
interests of its employees with those of the Company and the Enhance Group
shareholders, all stock options granted to date under the plans vest, subject
to continuation of employment and other terms of the stock options grants, at
the rate of 25% per year during the consecutive four-year period beginning
one year after the date of grant. All such stock options expire approximately
ten years after grant, subject as to certain options to continuation of
employment. The exercise prices of all stock options granted under the plans
since public trading of the Common Stock commenced have been equal to the
closing market prices of the Common Stock on the dates of grant, or if later,
the dates of commencement of employment.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. In determining the
compensation of Daniel Gross, Chief Executive Officer of the Company, the
Compensation and Nominating Committee noted that, under Mr. Gross's active
leadership, the Company had enjoyed various meaningful accomplishments and
successes in 1997, including:
- the expected achievement of a record year in 1997 with
anticipated significant increases with respect to virtually
all performance criteria, including over 20% growth in earnings
per share and all other earnings measurements and an increase of
over 100 basis points in return on equity;
9
<PAGE>
- significant progress in its diversification program through
C-BASS and Singer Asset Finance Company, L.L.C. ("Singer"), with
the committee according particular credit to the fact that both
produced significant profits in 1997, their first full year of
profitable operations;
- the continued development of the Company's strategic alliance with
Swiss Re, which included the acquisition by each of them of a
25% interest in Seguraduro Brasilieras de Fiancas, one of
Brazil's largest surety companies;
- the acquisition of the 50% interest in Singer not previously owned
by the Company;
- the benefit to shareholders of the continued significant rise in
the market price of the Common Stock at a rate that outpaced that
of all other publicly held financial guaranty companies;
- the continued augmentation and upgrading of the staff of the
Company in several respects, especially with respect to the
personnel instrumental to the continued diversification
activities, and including the recruitment of a senior level
human resources executive and the continued development and
encouragement of a more creative and growth-oriented culture;
and
- the continued development and expansion of the Company's other
insurance and non-insurance products.
The committee took special note of the expected positive longer term
impact on the Company of several of the foregoing achievements.
The committee also took into account best practices in executive
compensation based on compensation reviews by several independent consulting
firms as well as prevailing compensation levels for chief executive officers
of comparable companies in the diversified financial services and financial
guaranty industry.
Based on the foregoing, and at the recommendation of the
Compensation and Nominating Committee, the board of directors fixed Mr.
Gross's salary for 1998 at $530,000 and granted him at year-end 1997 a cash
incentive bonus of $1,150,000. Mr. Gross also received stock option awards at
mid-year pursuant to the 1987 Incentive Plan for 75,000 shares and at
year-end pursuant to the 1997 Incentive Plan for 100,000 shares. Fixed salary
represents only 13% of total compensation, leaving an unusually high
percentage as compensation-at-risk. The Compensation and Nominating Committee
believes that the strong alignment between the long-term pay-out of
compensation rewards and the continued growth of the Company will provide
increased incentive for the continuing superior performance of the Chief
Executive Officer.
COMPENSATION AND NOMINATING COMMITTEE
Spencer R. Stuart - Chairman
Brenton W. Harries
David R. Markin
Richard J. Shima
Allan R. Tessler
10
<PAGE>
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
1997. Except as described below under "Agreements with Executive Officers," 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.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS
- --------------------------- ---- ------ ------- ---------------------
<S> <C> <C> <C> <C>
Daniel Gross 1997 $500,000 $1,150,000 175,000
President and Chief 1996 480,000 675,000 75,000
Executive Officer 1995 450,000 420,000 60,000
Tony M. Ettinger 1997 273,863 260,000 20,000
Executive Vice President 1996 261,041 132,500 14,000
1995 211,718 100,000 15,000
Samuel Bergman 1997 313,281 200,000 14,000
Executive Vice President 1996 301,042 145,000 14,000
and Secretary 1995 293,125 100,000 20,000
Arthur Dubroff 1997 281,400 220,000 20,000
Executive Vice President and 1996 123,462 175,000 (2) 75,000(2)
Chief Financial Officer
Ronald M. Davidow 1997 268,838 180,000 13,500
Executive Vice President 1996 260,625 127,500 13,500
1995 250,833 87,000 20,000
</TABLE>
- ------------------
(1) Became an officer of the Company in 1996.
(2) Includes a bonus of $100,000 and a stock option for 55,000 shares of Common
Stock granted to Mr. Dubroff upon commencement of his employment. See
"Agreements with Executive Officers."
11
<PAGE>
OPTION/SAR GRANTS DURING 1997
The following table provides information regarding stock options/SARs
granted to the named executive officers during 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
NAME AND OPTIONS IN FISCAL EXERCISE OR EXPIRATION GRANT DATE PRESENT
PRINCIPAL POSITION GRANTED (1) YEAR BASE PRICE DATE VALUE (2)
- ------------------ ----------- ----------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Daniel Gross 75,000 12.3 $41.63 5/31/07 $1,352,070(3)
President and Chief Executive 100,000 16.4 57.44 12/31/07 2,495,530(4)
Officer
Tony M. Ettinger 20,000 3.3 57.63 12/31/07 509,834(5)
Executive Vice President
Arthur Dubroff 20,000 3.3 57.63 12/31/07 509,834(5)
Executive Vice President
Samuel Bergman 14,000 2.3 57.63 12/31/07 356,884(5)
Executive Vice President and
Secretary
Ronald M. Davidow 13,500 2.2 57.63 12/31/07 344,138(5)
Executive Vice President
</TABLE>
- -------------------
(1) Stock options granted pursuant to the 1987 Incentive Plan and the 1997
Incentive Plan. Such stock options vest, subject to continuation of
employment, in 25% increments during the consecutive four-year period
commencing on the last date of the month of grant. The stock 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. 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.
(3) The Black-Scholes option valuation assumes a volatility of 19.3, a
risk-free rate of return of 6.667%, a dividend yield of 1.1% and a discount
due to the risk of forfeiture of 3%.
(4) The Black-Scholes option valuation assumes a volatility of 28.2, a
risk-free rate of return of 5.80%, a dividend yield of 0.76% and a discount
due to the risk of forfeiture of 3%.
12
<PAGE>
(5) The Black-Scholes option valuation assumes a volatility of 29.1, a
risk-free rate of return of 5.88%, a dividend yield of 0.76% and a discount
due to the risk of forfeiture of 3%.
AGGREGATED OPTION/SAR EXERCISES DURING 1997
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, 1997.
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING
UNEXERCISED STOCK VALUE OF UNEXERCISED IN-THE
OPTIONS/SARS AT MONEY OPTIONS/SARS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
SHARES
NAME AND ACQUIRED ON VALUE
PRINCIPAL POSITION EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Daniel Gross -0- -0- 271,250 276,250 $10,827,188 $4,702,500
President and Chief
Executive Officer
Tony M. Ettinger 13,125 $208,828 13,500 47,375 464,016 912,281
Executive Vice President
Samuel Bergman 12,400 282,600 71,000 39,500 2,796,188 867,750
Executive Vice President
and Secretary
Arthur Dubroff -0- -0- 18,750 76,250 576,094 1,765,781
Executive Vice President and
Chief Financial Officer
Ronald M. Davidow -0- -0- 61,500 38,000 2,397,938 830,063
Executive Vice President
</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,
1997 over the stock option exercise price multiplied by (b) the number of
shares of Common Stock underlying the stock 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 Internal Revenue Code of 1986, as
amended (the "Code"). All employees of the Company (other than Singer and
Van-American Companies, Inc.) 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 10 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 10 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 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
13
<PAGE>
to the determination of compensation for purposes of the Summary Compensation
Table above.) 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.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
HIGHEST
AVERAGE
EARNINGS YEARS OF SERVICE
------------------------------------------------------------------------------------------------
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 1997 is $100,000, which will be increased in
1998 to $104,000.
(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) was $235,840 for the plan
year beginning November 1, 1994, decreasing to $150,000 for plan years
beginning November 1, 1995 and November 1, 1996 and has increased to
$160,000 for plan years beginning thereafter.)
14
<PAGE>
As of December 31, 1997, Messrs. Gross, Bergman, Dubroff, Davidow and
Ettinger had ten, five, one, thirteen and two years of service, respectively,
and ten, five, one, ten and two years of participation, respectively, under the
Pension Plan.
AGREEMENTS WITH EXECUTIVE OFFICERS
Enhance Group 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 target bonus of 45% of such base salary. Under the employment
agreement, Mr. Dubroff was granted in 1996 and 1997 options to purchase 75,000
and 20,000 shares of Common Stock, respectively, and is entitled to annual
grants of stock options to purchase 20,000 shares of Common Stock in 1998 (or,
at the Company's election, the cash value thereof). If Mr. Dubroff's employment
is terminated by the Company within a 12-month period following a change of
control (as defined), the Company 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.
Enhance Group and Elaine J. Eisenman, Executive Vice President, are
parties to an agreement which entitles Ms. Eisenman to the following in the
event of her discharge by the Company or a material diminution in her title,
authority, management responsibilities or compensation for any reason leading
to her resignation as an employee of the Company in either case other than
for "Cause," as therein defined: one year's severance payment equal to her
then salary plus that year's target bonus (equal to 50% of her then salary);
continued vesting during the one-year severance payment period of outstanding
stock options previously granted to her under any Company employee
compensation plan; and continuation at the Company's expense during the
one-year severance payment period of employee medical and other benefits.
DIRECTORS' COMPENSATION
FEE 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 Group. Mr. Tessler received a basic fee of $105,000 in
1997, and each other director of Enhance Group 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 1997 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.
In March 1998, the board of directors adopted the Director Stock
Ownership Plan, which provides each director who is not an employee of the
Company with the opportunity to receive, at such director's election, up to 100%
of the aforesaid fees in the form of shares of Common Stock. The shares will be
issued to electing directors on or as of the date of any payment by Enhance
Group of director fees. The "purchase price" at which the shares will be issued
will be based on the closing price of the Common Stock on the New York Stock
Exchange on that date. Each eligible director is entitled to make a new election
annually for that year's fees. The plan will take effect with respect to fees
payable from and after the regular meeting of directors scheduled to take place
the same day as and following the 1998 annual meeting of shareholders.
15
<PAGE>
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 Group or either Insurance Subsidiary who is not
an employee of the Company was 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. Pursuant to an
amendment to the plan adopted by the directors in December 1997, annual stock
option grants for 1997 and thereafter were increased to 3,500 shares. The
amendment and the additional 1,500 share grants in December 1997 are subject to
the approval of Enhance Group shareholders, to be sought at their 1998 annual
meeting. There are reserved for issuance upon the exercise of options under the
Directors' Option Plan an aggregate of 400,000 shares of Common Stock (subject
to anti-dilutive adjustment), of which options for 183,833 shares were subject
to outstanding options after the option grants made on December 31, 1997.
Stock 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 stock option grants; expire on the tenth
anniversary of the date of grant; 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. The unvested portion of an outstanding stock option lapses upon the
resignation or removal of the optionee from the boards of directors of Enhance
Group and the Insurance Subsidiaries.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The persons who served as members of the Compensation and Nominating
Committee during 1997 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 Group.
NON-COMPETITION AGREEMENTS
Messrs. Tessler, Sellers and Gross are parties to non-competition
agreements with Enhance Group 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.
16
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return
to shareholders on the Common Stock with the cumulative total returns of
companies included in the Standard & Poor's 500 Index and the Standard & Poor's
Financial Index. The graph assumes that the value of the investment in the
Common Stock and each index was $100 at January 1, 1993, the day on which public
trading in the Common Stock commenced and that all dividends were reinvested.
Cumulative Returns
1/1/93 to 12/31/97
[PERFORMANCE GRAPH]
Cumulative EFS S&P 500 S&P Financial
100.00 100.00 100
96.15 100.84 102.18
116.67 102.21 103.08
121.51 104.37 109.60
108.01 101.84 107.90
114.44 104.56 109.25
100.66 104.86 119.74
98.08 104.44 121.22
112.27 108.40 126.02
113.28 107.54 128.03
110.04 109.76 122.38
101.63 108.72 116.25
102.64 110.04 116.68
102.64 113.78 125.91
100.04 110.69 116.84
94.61 105.87 110.38
98.52 107.23 115.81
98.52 108.98 118.71
91.76 106.32 115.25
101.59 109.80 117.60
102.25 114.30 124.32
100.70 111.51 113.65
94.78 114.00 116.10
89.51 109.86 109.03
90.59 111.49 109.62
92.58 114.37 115.68
93.90 118.83 122.90
90.41 122.33 128.48
90.41 125.93 134.42
95.06 130.95 140.89
103.52 133.99 140.87
102.18 138.43 144.78
108.19 138.78 147.37
110.01 144.63 160.46
109.34 144.11 153.94
17
<PAGE>
129.46 150.43 163.64
143.36 153.33 171.67
130.57 158.54 187.13
131.24 160.02 179.61
149.28 161.56 183.79
146.58 163.94 179.48
156.71 168.16 178.71
151.85 168.80 183.12
157.95 161.35 174.13
155.92 164.76 175.35
179.51 174.02 191.78
181.55 178.82 203.82
186.31 192.32 223.14
199.09 188.51 216.42
200.45 200.28 231.93
188.18 201.86 237.12
216.05 193.58 216.73
210.58 205.12 243.03
228.36 217.61 256.64
240.58 227.35 266.80
274.17 245.43 296.18
253.61 231.69 273.17
300.82 244.38 295.38
290.17 236.22 291.73
307.00 247.15 312.04
327.52 251.39 336.12
18
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH SHAREHOLDERS
The certificate of incorporation of Enhance Group 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 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
Group 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 Group 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 Enhance Group board of directors, it has
retained the right to nominate directors.
The shares of Common Stock offered in connection with the sale by U S
WEST of the DECS were registered pursuant to a registration rights agreement
among Enhance Group, U S WEST and Swiss Re. U S WEST has one and Swiss Re has
two demand registration rights, and each has 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 Group. The
registration rights agreement contains cross-indemnification covenants by
Enhance Group 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.
Enhance Group and Swiss Re are parties to an agreement pursuant to
which Swiss Re has agreed that, subject to certain exceptions, neither Swiss Re
nor any of its affiliates will until the year 2006 (a) acquire, alone or as part
of a group, any voting securities of Enhance Group (or securities convertible
into such voting securities) which would result in Swiss Re (together with its
affiliates) or such group owning beneficially more than 15% of Enhance Group
voting securities outstanding or (b) dispose of Enhance Group voting securities
to any person or group which disposition would give such person or group
beneficial ownership of or the right to acquire more than 15% of Enhance Group
voting securities outstanding.
REINSURANCE OF BUSINESS OF FINANCIAL SECURITY ASSURANCE INC.
U S WEST owns a substantial interest in Financial Security Assurance
Inc. ("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
19
<PAGE>
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.
SEGURADORES BRASILIERAS DE FIANCAS
In November 1997, Enhance Group and Swiss Re each purchased 25% equity
interests in Seguradores Brasilieras de Fiancas for a respective initial
investments of $3.3 million. It is anticipated that the Company and Swiss Re
will from time to time make additional investments in such company as its
capital needs may require.
JONES, DAY, REAVIS & POGUE
Frieda K. Wallison, a director of Enhance Group, is a member of Jones,
Day, Reavis & Pogue, a law firm retained by the Company during 1997.
PROPOSAL 2
AMENDMENT OF CERTIFICATE OF INCORPORATION TO APPROVE
INCREASE IN COMMON SHARES AUTHORIZED
Enhance Group's restated certificate of incorporation, as amended,
currently authorizes the issuance of 35,000,000 shares of stock, consisting of
5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"), and 30,000,000 shares of Common Stock. As of April 29, 1998, no shares
of Preferred Stock were issued and outstanding. As of that date, _____________
shares of Common Stock were issued (of which __________ shares were outstanding
and ____________ shares were held in Enhance Group's treasury) and _________
shares were reserved for issuance under Enhance Group's existing compensation
and incentive plans, leaving a balance of ___________ authorized, unissued and
unreserved shares of Common Stock.
The board of directors deems it advisable that the certificate of
incorporation be further amended to increase the authorized Common Stock from
30,000,000 to 100,000,000 shares. To that end, it has unanimously approved and
recommends that the shareholders of Enhance Group also approve the proposed
Charter Amendment to Article FOURTH of the certificate of incorporation to read
as follows:
"FOURTH. The total number of shares which the
Corporation shall have authority to issue is 105,000,000 of
which 5,000,000 shares of the par value of $.01 per share
shall be designated "Preferred Stock" and 100,000,000 shares
of the par value $.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 the creation of such series, to fix by the
resolution or resolutions providing for the issue of series
thereof, the number of shares of such series and the
designation and 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."
20
<PAGE>
The additional shares of Common Stock would become part of the existing
class of Common Stock, and the additional shares, when issued, would have the
same rights and privileges as the shares of Common Stock now issued. There are
no pre-emptive rights relating to the Common Stock. If the proposed amendment is
approved by the shareholders, it will become effective upon the filing and
recording of a certificate of amendment as required by the New York Business
Corporation Law.
As previously announced by the Company, on April 8, 1998, the board
of directors of Enhance Group authorized a two-for-one split of the Common
Stock, to be contingent upon the approval by the shareholders of the Charter
Amendment at the annual meeting. Assuming such approval is forthcoming, the
stock split will be effective on June ___, 1998 for holders of shares of
Common Stock at the close of business on June ___, 1998. Enhance Group has no
present plans, agreements or understandings regarding the issuance of the
remaining proposed additional shares. The board of directors believes that
adoption of the amendment is advisable because, in addition to allowing for
the stock split, it will provide the Company with greater flexibility in
connection with possible future financing transactions, acquisitions of other
companies or business properties, stock dividends or splits, employee benefit
plans and other proper corporate purposes. Moreover, having such additional
authorized shares available will enable Enhance Group to issue shares without
the expense and delay of a special meeting of shareholders. Such a delay
could deprive the Company of the flexibility the board or directors views as
important in facilitating the effective use of Enhance Group's shares. Except
as otherwise required by applicable law or stock exchange rules, authorized
but unissued shares of Common Stock may be issued at such time, for such
purposes, and for such consideration as the board of directors may determine
to be appropriate, without further authorization by shareholders.
Since the issuance of additional shares of Common Stock other than on a
pro rata basis to all current shareholders would dilute the ownership interest
of a person seeking control of the Company, such issuance could be used to
discourage a change in control of the Company by making it more difficult or
costly. The Company is not aware of anyone seeking to accumulate Common Stock or
obtain control of the Company, and it has no present intention to use the
additional authorized shares to deter a change in control.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF ENHANCE
GROUP VOTE THEIR SHARES FOR APPROVAL OF THE CHARTER AMENDMENT.
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO
THE NON-EMPLOYEE-DIRECTOR STOCK OPTION PLAN
BACKGROUND
The Directors' Option Plan was adopted by the board of directors and
approved by the shareholders of Enhance Group in 1992. On December 11, 1997, the
board of directors of Enhance Group amended the Directors' Option Plan, subject
to shareholder approval but effective with the December 31, 1997 grant, to
increase the number of shares of Common Stock composing the annual stock option
grant to each non-employee-director from 2,000 shares to 3,500 shares.
The following description of the Directors' Option Plan is intended
only as a summary and is qualified in its entirety by reference to the text of
the Directors' Option Plan, a copy of which is annexed as an exhibit to this
proxy statement.
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<PAGE>
PURPOSE OF THE PLAN
The purpose of the Directors' Option Plan is to provide through the
grant of options to purchase shares of Common Stock to non-employee-directors, a
means to attract and retain qualified persons and to serve as
non-employee-directors of Enhance Group and to provide to such persons long-term
incentives for sustained high levels of performance and for unusual efforts to
improve the financial performance of the Company.
ADMINISTRATION
The Directors' Option Plan is administered by the board of directors of
Enhance Group, which may delegate its powers and functions to a committee of the
board of directors (the "Committee"), consisting of three or more directors who
are non-employee-directors (as defined in Rule Section 16b-3 under Section 16(b)
of the Securities Exchange Act of 1934, as amended (the "1934 Act"). The board
of directors of Enhance Group has full authority to interpret the Directors'
Option Plan and to establish rules and regulations not inconsistent with the
terms of the Directors' Option Plan for its proper administration.
ELIGIBILITY
All non-employee-directors of Enhance Group or its subsidiaries are
eligible to be granted stock options under the Directors' Option Plan. A
non-employee-director is a director serving on the board of directors of Enhance
Group or an insurance subsidiary who is not an officer or employee of Enhance
Group of any of its subsidiaries; provided, that the Chairman of the Board of
Enhance Group is not, solely by virtue of such position, considered an officer
of Enhance Group.
AVAILABLE SHARES
The maximum number of shares of Common Stock which may be issued or
transferred, and are reserved for issuance or transfer, pursuant to stock
options under the Directors' Option Plan may not exceed 400,000 shares of Common
Stock (subject to the plan's anti-dilutive adjustment provisions). If any stock
option granted under the Directors' Option Plan expires, terminates, is canceled
or is reacquired by Enhance Group or a subsidiary, the unissued shares of Common
Stock subject to the stock option will again be available for the grant of stock
options under the Directors' Option Plan.
GRANT OF STOCK OPTIONS AND THE PLAN AMENDMENT
The Directors' Option Plan currently provides for an automatic
grant, effective each December 31, to each non-employee-director of a stock
option to purchase for ten years 2,000 shares of Common Stock (subject to
adjustment). The Plan Amendment provides that, subject to shareholder
approval, on each December 31 with effect as of December 31, 1997, each
non-employee-director will automatically be granted an option to purchase for
ten years 1,500 shares of Common Stock (subject to adjustment) in addition to
the 2,000 shares currently provided for.
The exercise price per share of Common Stock upon the exercise of a
stock option is equal to the closing price of the Common Stock on the New York
Stock Exchange at the time of the grant of the stock option, or, if such date is
not a business day, on the business day immediately preceding the date of grant.
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VESTING AND EXERCISE OF STOCK OPTIONS
The Directors' Option Plan allows for the exercise price of a stock
option to be paid in cash; or if provided in the stock option grant, in
shares of Common Stock or other property or a combination thereof; or, if
provided in the stock option grant and subject to certain conditions, in the
form of a full-recourse promissory note. Stock 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 the grant (i.e.,
currently 1,000 shares at each vesting; effective with the December 31, 1997
grant, 1,750 shares if the Plan Amendment is approved by shareholders). The
vesting of such stock options is subject to continuation of service on the
board of directors and other terms of the stock option grants. Stock 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. The
unvested portion of an outstanding stock option lapses upon the resignation
or removal of the optionee from the boards of directors of the Company,
except under certain circumstances.
The board of directors of Enhance Group is authorized to provide that a
given grant may, upon the occurrence of any of certain specified events,
including a change of control of the Company, become immediately exercisable,
payable or free from restrictions. In addition, in the event of a
recapitalization, consolidation or similar event affecting the Common Stock, or
in the event of certain other transactions, such as a merger or consolidation,
to which Enhance Group is party, the number and class of shares or other
securities or property issuable pursuant to the Directors' Option Plan and the
purchase price payable per share under outstanding and future grants are to be
equitably adjusted. In the case of a merger or consolidation in which Enhance
Group is not to be the survivor, or upon a proposed dissolution or liquidation
of Enhance Group, all outstanding stock options under the Directors' Option Plan
will terminate, provided the holders thereof are given appropriate notice of
such proposed event. The foregoing does not apply in the case of a merger or
consolidation in which provision is made for the continuation of the Directors'
Option Plan and the assumption by the surviving entity of stock options
theretofore issued.
TERMINATION AND AMENDMENT
The Directors' Option Plan will terminate on March 26, 2002, after
which date no further awards may be granted. The board of directors of Enhance
Group is authorized to terminate the Directors' Option Plan prior to that date
or to amend the plan, provided that no such amendment may, in general, (a)
increase the maximum number of shares which may be issued in grants under the
Directors' Option Plan, (b) withdraw the administration of the Directors' Option
Plan from the board of directors or a qualified committee thereof, (c) permit
anyone who is not an eligible director to be granted an award thereunder, or (d)
change the minimum exercise price of any stock option or extend the maximum
exercise term thereof or otherwise materially increase the benefits accruing to
participants in the Directors' Option Plan.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY
AND DOES NOT PURPORT TO ADDRESS ALL THE TAX CONSIDERATIONS THAT MAY BE RELEVANT.
EACH RECIPIENT OF A GRANT IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES TO SUCH GRANTEE OF THE GRANT.
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<PAGE>
The following discussion of the principal U.S. federal income tax
consequences with respect to options under the Directors' Option Plan is based
on statutory authority and judicial and administrative interpretations as of the
date of this proxy statement, which are subject to change at any time (possibly
with retroactive effect) and may vary in individual circumstances. Therefore,
the following is designed to provide only a general understanding of the federal
income tax consequences. State and local income tax and estate tax consequences
are not addressed below.
In general, an optionee will realize no taxable income upon the grant
of a non-qualified stock option, and the Company generally will not receive a
deduction at the time of grant. Upon exercise of a non-qualified stock option,
an optionee generally will recognize ordinary income in an amount equal to the
excess of the fair market value of the stock on the date of exercise over the
exercise price, but such amount will not be subject to federal wage withholding
or employment taxes. Upon a subsequent sale of the stock by the optionee, the
optionee will recognize short-term or long-term capital gain or loss, depending
upon his holding period for the stock. If the Common Stock is held for more than
18 months after the date of exercise, the holder will be taxed at the lowest
rate applicable to capital gains for such holder. The Company will generally be
allowed a deduction equal to the amount recognized by the optionee as ordinary
income.
An optionee should consult with his or her tax advisor as to whether,
as a result of Section 16(b) of the Exchange Act and the rules and regulations
promulgated thereunder, the timing of income recognition is deferred for any
period following the exercise of an option (the "Deferral Period"). If there is
a Deferral Period, then, absent a written election (pursuant to Section 83(b) of
the Code) filed with the Internal Revenue Service within 30 days after the date
of transfer of the shares of Common Stock pursuant to the exercise of the
non-qualified stock option to include in income, as of the transfer date, the
excess (on such date) of the fair market value of such shares over their
exercise price, recognition of income by the recipient could, in certain
circumstances, be deferred until the expiration of the Deferral Period.
In addition, any entitlement to a tax deduction on the part of the
Company is subject to the applicable federal tax rules, and if the
exercisability of a stock option is accelerated because of a change of control,
payment relating to the stock options, either alone or together with certain
other payments, may constitute "parachute payments" under Section 280G of the
Code, which excess amounts may be subject to excise taxes and be nondeductible
by the Company.
The Directors' Option Plan is not subject to any of the requirements of
the Employee Retirement Income Security Act of 1974, as amended. The Directors'
Option Plan is not, nor is intended to be, qualified under Section 401(a) or
Section 421 of the Code.
RECOMMENDATION
The board of directors of Enhance Group believes that Enhance Group's
ability to make increased grants in the form of stock options to
non-employee-directors is important to its ability to attract and retain
qualified personnel and to motivate such personnel by aligning their long-term
interests with those of the shareholders. The board further believes the
Directors' Option Plan, as amended by the Plan Amendment, by virtue of its
simplicity and flexibility, is the most suitable vehicle for achieving this
objective.
THE BOARD OF DIRECTORS OF ENHANCE GROUP RECOMMENDS THAT THE
SHAREHOLDERS OF ENHANCE GROUP VOTE THEIR SHARES FOR APPROVAL OF THE PLAN
AMENDMENT.
24
<PAGE>
PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF AUDITOR
The firm of Deloitte & Touche LLP (including its predecessor firm),
independent certified public accountants, has audited the books and accounts of
the Company since its inception, and the board of directors desires to continue
the services of this firm for 1998. Accordingly, the board recommends that the
shareholders ratify the appointment by the board of directors of the firm of
Deloitte & Touche LLP as the independent auditor of the Company for 1998.
Representatives of Deloitte & Touche LLP are expected to be available
at the annual meeting to respond to appropriate questions and will be given the
opportunity to make a statement if they desire to do so.
Shareholder ratification of the selection of Deloitte & Touche LLP as
the Company's independent auditor is not required by Enhance Group's by-laws or
otherwise. However, the board of directors is submitting the selection of
Deloitte & Touche LLP to the shareholders for ratification as a matter of good
corporate practice. If the shareholders fail to ratify the selection of Deloitte
& Touche LLP, the board will reconsider whether or not to retain the firm. Even
if the selection is ratified, the board in its discretion may direct the
appointment of a different auditing firm at any time during the year if the
board of determines that such a change would be in the best interests of Enhance
Group and its shareholders.
SHAREHOLDER PROPOSALS
Shareholders who intend to present proposals at Enhance Group's 1999
annual meeting of shareholders must submit their proposals to the Secretary of
Enhance Group on or before January 4, 1999. Such proposals must also meet the
other requirements of the rules of the Securities and Exchange Commission
relating to shareholders' proposals.
By Order of the Board of Directors,
Samuel Bergman
Secretary
May 4, 1998
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ENHANCE FINANCIAL SERVICES GROUP INC.
ANNUAL MEETING OF SHAREHOLDERS
JUNE 3, 1998
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ENHANCE FINANCIAL
SERVICES GROUP INC. ("ENHANCE GROUP").
The undersigned hereby appoints Daniel Gross and Samuel Bergman, and each
of them, with full power of substitution, to represent and vote on behalf of
the undersigned all of the shares of Enhance Group common stock, par value $.10
per share, which the undersigned is entitled to vote at the Annual Meeting of
Shareholders to be held on June 3, 1998, and at any adjournment or adjournments
thereof, hereby revoking all proxies heretofore given with respect to such
shares, upon the following proposals more fully described in the notice of and
proxy statement for the meeting (receipt of which is hereby acknowledged).
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL NOS. 1, 2, 3 AND 4.
(CONTINUED ON REVERSE SIDE)
FOLD AND DETACH HERE
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4 PLEASE MARK
YOUR VOTES AS
INDICATED IN /X/
THIS EXAMPLE
FOR all nominees listed (except WITHHOLD AUTHORITY
as marked to the contrary) to vote for all nominees listed
</TABLE>
1. ELECTION OF DIRECTORS
Daniel Gross, Brenton W. Harries, David R. Markin Robert P. Saltzman, Wallace O.
Sellers, Richard J. Shima, Spencer R. Stuart, Adrian U. Sulzer, Allan R.
Tessler, Frieda K. Wallison, Jerry Wind.
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
2. Approval of amendment to the restated
certificate of incorporation.
3. Approval of amendments to the
Non-Employee-Director Stock Option Plan
4. Ratification of appointment of Deloitte & Touche
LLP to serve as outside auditor for 1998
5. In their discretion upon such other matters as may properly come before the
meeting
</TABLE>
- -----------------------------------------------------
I will be attending the meeting
I will not be attending the meeting
Please sign exactly as your name appears to the left. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administratior, trustee, or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, Please sign in partnership name by
authorized person.
Signature Signature Date 1998
- ------------------------------------------- ----------------
PLEASE SIGN, DATE, AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
FOLD AND DETACH HERE
<PAGE>
EXHIBIT 99.1
ENHANCE FINANCIAL SERVICES GROUP INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
(AS AMENDED DECEMBER 11, 1997)
1. PURPOSE
The purpose of this Plan is to provide, through the grant under the Plan of
options to purchase shares of Common Stock to Non-Employee-Directors, a means to
attract and retain qualified persons to serve as Non-Employee Directors and to
provide to such persons 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
the Plan, shall have the meanings set forth in this Section 2.
BENEFICIARY: A person or entity (including a trust or estate), designated
in writing by an optionee on such forms and in accordance with such terms and
conditions as the Board may prescribe, to whom the optionee's rights under the
Plan shall pass in the event of the death of the optionee 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 optionee's death, such other person to whom such
optionee'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
paragraph 9(a) below, the terms "Board" and "Board of Directors" shall include
such committee, except for purposes of paragraph 9(a) and Section 11.
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 9(a) below.
<PAGE>
COMMON STOCK: The common stock of Enhance, par value $.10 per share, or
such other class of shares or other securities or property as may be applicable
pursuant to the provisions of Section 7.
COMPANY: Enhance and its present and future Subsidiaries.
ENHANCE: Enhance Financial Services Group Inc., a New York corporation, and
its successors and assigns.
FAIR MARKET VALUE: The fair market value of a share of Common Stock, which
shall be equal to the closing sales price of the Common Stock, as reported in
the NYSE consolidated transaction reporting system, on the date of determination
of Fair Market Value or, if such date is not a business day, on the business day
immediately prior to the date of such determination.
INSURANCE SUBSIDIARY: A corporation or other form of business association
engaged solely or primarily in the writing of insurance 100% of the capital
stock (or other ownership interest) of which is owned directly by Enhance.
NYSE: The New York Stock Exchange, Inc.
NON-EMPLOYEE-DIRECTOR: A member of the Board of Directors of Enhance or any
Insurance Subsidiary who is not an officer or employee of Enhance or any
Subsidiary; provided, that for purposes hereof, the Chairman of the Board of
Enhance shall not, solely by virtue of such position, be considered an officer
of Enhance.
OPTION: An option granted under the Plan to purchase shares of Common
Stock.
PLAN: The Enhance Financial Services Group Inc. Non-Employee-Director Stock
Option Plan herein set forth as the same may from time to time be amended.
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.
SUBSIDIARY: A corporation or other form of business association of whose
capital stock (or other ownership interests) having more than 50% of the voting
power is owned or controlled, directly or indirectly, by Enhance.
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<PAGE>
3. STOCK SUBJECT TO THIS PLAN
(a) Subject to the provisions below of paragraph 3(c) and of Section 7,
the maximum number of shares of Common Stock which may be issued and sold under
the Plan, and are hereby reserved for issuance and sale pursuant to the Plan
shall not exceed 400,000 shares of Common Stock, subject to adjustment to allow
for anti-dilution pursuant to paragraph 7(a).
(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 the Plan or otherwise, may be used for purposes of the Plan, provided,
however, that any shares acquired or held by Enhance shall, unless and until
transferred to an optionee in accordance with the terms and conditions of an
Option, be and at all times remain treasury shares of Enhance, irrespective of
whether such shares are entered in a special account for purposes of the Plan,
and shall be available for any corporate purpose.
(c) If any shares of Common Stock subject to an Option shall not be issued
and shall cease to be issuable because of the expiration or termination, in
whole or in part, of such Option or for any other reason, the shares not so
issued shall no longer be charged against the limitations provided for in
paragraph (a) above of this Section 3 and shall again be available for issuance
pursuant to Options.
4. ELIGIBILITY
Each Non-Employee-Director shall be eligible to receive Options in
accordance with Section 5. Each Option granted under the Plan shall be
evidenced by an agreement or certificate in such form as the Board shall
prescribe from time to time in accordance with the Plan and shall comply with
the terms and conditions set forth in Sections 5 and 6.
5. GRANT OF OPTIONS
(a) Each Non-Employee-Director as of March 26, 1992 shall receive an Option
(a "March 1992 Option") to purchase for 10 years 2,000 shares of Common Stock,
subject to adjustment as provided in Section 7.
(b) On December 31 of each year commencing December 31, 1992, each Non-
Employee-Director shall automatically receive an Option to purchase for ten
years 2,000 shares of Common Stock, subject to adjustment as provided in Section
7.
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<PAGE>
(c) On December 31 of each year commencing December 31, 1997 each
Non-Employee-Director shall automatically receive an Option to purchase for ten
years an additional 1,500 shares of Common Stock for an aggregate total of 3,500
shares of Common Stock, subject to
adjustment as provided in Section 7.
6. OPTIONS
Options shall be subject to the following provisions:
(a) Subject to the provisions of Section 7, the purchase price per share
shall be 100% of the Fair Market Value of a share of Common Stock on the date
the Option is awarded. 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 optionee 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 property, such other property shall be valued at its
fair market value on any reasonable basis established or approved by the Board.
(b) One-half of the number of shares subject to an Option other than a
March 1992 Option shall become exercisable on a cumulative basis, on each of the
first two anniversaries of the date of the award. One half of each March 1992
Option shall become exercisable on the later to occur of (i) the day following
the date on which the shareholders of Enhance shall have approved the Plan as
contemplated by Section 8 and (ii) December 31, 1992, and the other half shall
become exercisable on December 31, 1993. 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.
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<PAGE>
(c) Each Option shall be exercisable during the life of the optionee only
by the optionee, or the optionee's guardian or legal representative, and after
death only by the optionee's Beneficiary.
Notwithstanding the foregoing provisions of this paragraph (c) or any other
provision of this Plan, no Option shall be exercisable after the expiration of a
period of ten years and one month from the date the Option is 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 optionee.
7. 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, 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 that may be issued pursuant to
Options thereafter granted, (b) the number and class of shares that may be
issued under outstanding Options, and (c) the purchase price to be paid per
share under outstanding and future Options, 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
shall terminate provided that all holders of outstanding Options 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 theretofore granted or
the substitution for such Options of new options covering the shares of the
successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments, in which event the Plan and the Options theretofore granted or the
new options substituted therefor, shall continue in the manner and under the
terms so provided.
A-5
<PAGE>
(c) At the discretion of the Board, any Option may provide that, upon
the occurrence of any of 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 an Option, which definition
need not be identical for all such agreements), such Option shall, to the
extent not theretofore exercisable, become immediately exercisable in its
entirety notwithstanding any other provision of the Option or the Plan.
(d) 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 optionee as
to each outstanding Option shall, if so requested by Enhance and notwithstanding
any other provision of such Option, agree, as a condition to the exercisability
of such Option, not to sell, assign, or gift or in any other way reduce his or
her risk relative to the shares of Common Stock issuable pursuant to such Option
and all other shares of Common Stock owned by such optionee for such period
after the consummation of such merger or consolidation as Enhance 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 7(a) and 7(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 optionee 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.
8. 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 Options 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 Options granted
hereunder shall be automatically cancelled. The Plan shall terminate at the
close of business on March 26, 2002, and no Option may thereafter be granted,
but such termination shall not affect any Options theretofore granted. No
Option shall be granted under this Plan after the number of shares authorized
for issuance hereunder have been exhausted, but the Plan shall continue in
effect thereafter with respect to Options theretofore granted.
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<PAGE>
9. 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.
(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 to prescribe the form of the
agreement embodying awards of Options made hereunder. 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 shareholders, the Subsidiaries, all optionees 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.
10. GENERAL PROVISIONS
(a) No shares of Common Stock shall be issued or transferred pursuant to an
Option unless and until all legal requirements 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 optionee's Option, give assurances satisfactory to
counsel to Enhance, in respect of such matters as Enhance or an Insurance
Subsidiary may deem desirable to assure compliance with all applicable legal
requirements and take any reasonable action to comply with such requirements.
(b) 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 any other federal or state securities law. No sale or
other disposition of shares of Common Stock issued upon the exercise of any
Option 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 upon the exercise of any Option shall be legended in such manner as
Enhance's counsel may deem to be necessary or appropriate to
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reflect the provisions of this paragraph 10(b).
(c) No person (individually or as a member of a group) and no Beneficiary
or other person claiming under or through such person, 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 Option except as to such shares of
Common Stock, if any, as shall have been issued to such person upon the exercise
of any Option.
(d) Enhance may make such provisions as it may deem appropriate for the
withholding of any taxes which Enhance determines it is required to withhold in
connection with any Option. The Board may, in its sole discretion and subject
to such rules as it may adopt, permit an optionee to elect to satisfy any such
withholding obligation, in whole or in part, by having Enhance withhold shares
of Common Stock that are otherwise issuable upon the exercise of such Option and
have a Fair Market Value equal to the amount required to be withheld, or by
surrendering to Enhance previously - acquired shares of Common Stock that have
such a Fair Market Value.
(e) 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 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.
(f) In no event shall Options be considered compensation to an optionee 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 optionee may be entitled under such plan.
(g) By accepting any benefits under the Plan, each optionee, and each
person claiming under or through each optionee, shall be conclusively deemed to
have indicated his or her acceptance and ratification of, and consent to, all
provisions of the Plan and any action or decision under the Plan by Enhance, its
agents and employees, and the Board.
(h) 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
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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.
(i) The use of the singular shall include within its meaning the plural and
vice versa.
11. AMENDMENT AND TERMINATION
(a) This Plan may be amended or terminated by the Board at any time and in
any respect, provided that, without the approval of the shareholders of Enhance,
no amendment shall be made which (i) increases the maximum number of shares of
Common Stock that may be issued or transferred pursuant to Options, as provided
in paragraph 3(a), (ii) except as may be required or desirable to conform the
Plan to the federal or state securities laws and regulations that may apply to
it from time to time, withdraws the administration of the Plan from the Board or
Committee, (iii) permits any person who is not a Non-Employee-Director to be
granted an Option, (iv) changes the minimum exercise price of any Option or
extends the maximum exercise term of any Option or otherwise materially
increases the benefits accruing to participants in the Plan, or (v) amends this
Section 11.
(b) No amendment or termination of the Plan by the Board of Directors or
the shareholders of Enhance shall affect adversely any Option theretofore
granted without the consent of the holder thereof.
(c) The provisions of Section 4,5 and 6 of the Plan shall not be amended
more than once in any six-month period, other than to comport with changes in
the Code, the Employee Retirement Income Security Act of 1974, as amended, or
the respective rules promulgated thereunder.
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