<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:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ 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):
/ / 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:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(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):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / 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:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<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 to
105,000,000 shares;
(3) To approve an amendment to the Non-Employee-Director Stock Option Plan
of Enhance Group to increase the annual grants thereunder to stock
options for 3,500 shares;
(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 18,805,505
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 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.
<PAGE>
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 March 27, 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>
- ------------------------
* Less than 1%
2
<PAGE>
(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 spouse
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>
3
<PAGE>
(6) Includes shares issuable upon the exercise of the presently exercisable
portion of options granted to such director under the Directors' Option
Plan, as follows: Brenton W. Harries--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 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
over 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 1991 he served
as head of Swiss Re's Credit and Bonding Department. Mr. Sulzer also serves 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.
6
<PAGE>
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.
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 auditor to be nominated for approval by
the board of directors and ratification by the shareholders; to review the
independence of such auditor and monitor the professional services it provides;
to approve the scope of the annual audit activities of the independent auditor;
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 plus an
additional separate meeting of its Stock Option Subcommittee.
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. 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, (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
8
<PAGE>
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 building personal wealth. Stock options also provide a significant
impetus for equity ownership. No further grants were permitted 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 personal
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, although 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 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
effective 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 in 1997 enjoyed numerous meaningful accomplishments and successes,
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;
- 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 coordinated acquisition by each of them of a 25%
interest in Seguradora Brasileira de Fiancas S.A., one of Brazil's largest
surety companies;
- the acquisition by the Company of the 50% interest in Singer not
previously owned it;
9
<PAGE>
- 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 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>
LONG-TERM
COMPENSATION
ANNUAL -------------------
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 and Secretary 1996 301,042 145,000 14,000
1995 293,125 100,000 20,000
Arthur Dubroff (1) 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
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PERCENT OF
SHARES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES EXERCISE OR EXPIRATION PRESENT VALUE
NAME AND PRINCIPAL POSITION GRANTED (1) IN 1997 BASE PRICE DATE (2)
- ---------------------------------------------- ----------- ------------- ----------- ----------- ----------------
Daniel Gross 75,000 12.3 $ 41.63 5/31/07 $ 1,352,070(3)
President and Chief 100,000 16.4 57.44 12/31/07 2,495,530(4)
Executive 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
and Chief Financial Officer
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%.
(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%.
12
<PAGE>
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
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
ACQUIRED VALUE -------------------------- ----------------------------
NAME AND PRINCIPAL POSITION ON 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 71,100 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 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
13
<PAGE>
until normal retirement. The actuarial equivalent of such vested benefit may
be distributed in a lump sum prior to normal retirement age. The vested
percentage of a participant increases 20% per year beginning after two years
of service, such that his or her vested percentage is 100% after six years.
For purposes of determining a participant's retirement benefit and vested
percentage, "years of service" and "years of participation," while not
synonymous, include service with the Company and certain service with
predecessor employers.
The following table illustrates annual pension benefits payable under the
Pension Plan assuming retirement at normal retirement age at various levels of
compensation and years of service. Such benefits are based on a straight life
annuity and are not subject to any deduction for Social Security or other offset
amounts.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
HIGHEST YEARS OF SERVICE
AVERAGE ----------------------------------------------------------------------------
EARNINGS 15 20 25 30 35*
- ------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$100,000.................................. $ 33,750 $ 42,500 $ 51,250 $ 56,250 $ 56,250
125,000.................................. 42,188 53,125 64,063 70,313 70,313
150,000.................................. 50,625 63,750 76,875 84,375 84,375
175,000(2)............................... 59,063 74,375 89,688 98,438 98,438
200,000(2)............................... 67,500 85,000 102,500(1) 112,500(1) 112,500(1)
225,000(2)............................... 75,938 95,625 115,313(1) 126,563(1) 126,563(1)
250,000(2)............................... 84,375 106,250(1) 128,125(1) 140,625(1) 140,625(1)
300,000(2)............................... 101,250(1) 127,500(1) 153,750(1) 168,750(1) 168,750(1)
400,000(2)............................... 135,000(1) 170,000(1) 205,000(1) 225,000(1) 225,000(1)
450,000(2)............................... 151,875(1) 191,250(1) 230,625(1) 253,125(1) 253,125(1)
500,000(2)............................... 168,750(1) 212,500(1) 256,250(1) 281,250(1) 281,250(1)
</TABLE>
- ------------------------
* Plan limits service to 30 years for benefit purposes.
(1) These are hypothetical benefits based upon the Pension Plan's normal
retirement benefit formula. The maximum annual benefit permitted under
Section 415 of the Code in 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 increased to $160,000 for plan
years beginning thereafter.)
As of December 31, 1997, Messrs. Gross, Ettinger, Bergman, Dubroff and
Davidow had ten, two, five, one and thirteen years of service, respectively, and
ten, two, five, one and ten years of participation, respectively, under the
Pension Plan.
14
<PAGE>
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 a grant of a
stock option 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 during the term of the agreement within 12 months
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 if her employment
is terminated by the Company or a material diminution occurs in her title,
authority, management responsibilities or compensation for any reason other than
for "Cause," as therein defined, leading to her resignation as an employee of
the Company: 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.
NON-EMPLOYEE-DIRECTOR STOCK OPTION PLAN. Pursuant to the Directors'
Option Plan, on each December 31 during the period in which the plan has been
in effect until 1997, 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 the 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 in December 1997.
15
<PAGE>
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 and that all dividends were
reinvested.
CUMULATIVE RETURNS
01/01/93 TO 12/31/97
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EFS S&P 500 S&P FINANCIAL
<S> <C> <C> <C>
1/29/93 96.15 100.84 102.18
2/26/93 116.67 102.21 103.08
3/31/93 121.51 104.37 109.60
4/30/93 108.01 101.84 107.90
5/31/93 114.44 104.56 109.25
6/30/93 100.66 104.86 119.74
7/30/93 98.08 104.44 121.22
8/31/93 112.27 108.40 126.02
9/30/93 113.28 107.54 128.03
10/29/93 110.04 109.76 122.38
11/30/93 101.63 108.72 116.25
12/31/93 102.64 110.04 116.68
1/31/94 102.64 113.78 125.91
2/28/94 100.04 110.69 116.84
3/31/94 94.61 105.87 110.38
4/29/94 98.52 107.23 115.81
5/31/94 98.52 108.98 118.71
6/30/94 91.76 106.32 115.25
7/29/94 101.59 109.80 117.60
8/31/94 102.25 114.30 124.32
9/30/94 100.70 111.51 113.65
10/31/94 94.78 114.00 116.10
11/30/94 89.51 109.86 109.03
12/30/94 90.59 111.49 109.62
1/31/95 92.58 114.37 115.68
2/28/95 93.90 118.83 122.90
3/31/95 90.41 122.33 128.48
4/28/95 90.41 125.93 134.42
5/31/95 95.06 130.95 140.89
6/30/95 103.52 133.99 140.87
7/31/95 102.18 138.43 144.78
8/31/95 108.19 138.78 147.37
9/29/95 110.01 144.63 160.46
10/31/95 109.34 144.11 153.94
11/30/95 129.46 150.43 163.64
12/29/95 143.36 153.33 171.67
1/31/96 130.57 158.54 187.13
2/29/96 131.24 160.02 179.61
3/29/96 149.28 161.56 183.79
4/30/96 146.58 163.94 179.48
5/31/96 156.71 168.16 178.71
6/28/96 151.85 168.80 183.12
7/31/96 157.95 161.35 174.13
8/30/96 155.92 164.76 175.35
9/30/96 179.51 174.02 191.78
10/31/96 181.55 178.82 203.82
11/29/96 186.31 192.32 223.14
12/31/96 199.09 188.51 216.42
1/31/97 200.45 200.28 231.93
2/28/97 188.18 201.86 237.12
3/31/97 216.05 193.58 216.73
4/30/97 210.58 205.12 243.03
5/31/97 228.36 217.61 256.64
6/30/97 240.58 227.35 266.80
7/31/97 274.17 245.43 296.18
8/31/97 253.61 231.69 273.17
9/30/97 300.82 244.38 295.38
10/31/97 290.17 236.22 291.73
11/30/97 307.00 247.15 312.04
12/31/97 327.52 251.39 336.12
</TABLE>
17
<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 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.
18
<PAGE>
SEGURADORA BRASILEIRA DE FIANCAS S.A.
In November 1997, Enhance Group and Swiss Re each purchased 25% equity
interests in Seguradora Brasileira de Fiancas S.A. for 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, 19,714,679 shares of Common
Stock were issued (of which 18,805,505 shares were outstanding and 909,174
shares were held in Enhance Group's treasury) and 2,607,794 shares were reserved
for issuance under Enhance Group's existing compensation and incentive plans,
leaving a balance of 7,677,527 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, which will change 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."
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
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effective as soon as practicable thereafter, expected to be later in 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 Charter Amendment is advisable
because 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.
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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 Eligible Director (as defined below) 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.
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 Eligible Directors, a means to
attract and retain qualified persons to serve as non-employee-directors of
Enhance Group and its wholly owned insurance subsidiaries 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
non-employee-directors of Enhance Group (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 insurance subsidiaries
("Eligible Directors") 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 or 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.
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GRANT OF STOCK OPTIONS AND THE PLAN AMENDMENT
The Directors' Option Plan currently provides for an automatic grant,
effective each December 31, to each Eligible 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, the stock option grant to each Eligible
Director will be automatically increased to 3,500 shares. If the Plan Amendment
is not approved by the shareholders at the annual meeting, the Eligible
Directors will, effective with the December 1997 grant, continue to receive
annual stock option grants for 2,000 shares.
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.
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.
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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.
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 or her 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 a stock 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 Eligible
Directors is important to its ability to attract and retain qualified
non-employee-directors and to motivate such directors 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.
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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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ANNEX A
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.
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.
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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.
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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(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 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.
(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.
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(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.
(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.
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
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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 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.
A-5
<PAGE>
(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 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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<PAGE>
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>
<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.)
FOR AGAINST ABSTAIN
/ / / / / /
2. Approval of amendment to the restated FOR AGAINST ABSTAIN
certificate of incorporation. / / / / / /
3. Approval of amendment to the FOR AGAINST ABSTAIN
Non-Employee-Director Stock Option Plan. / / / / / /
4. Ratification of appointment of Deloitte & Touche FOR AGAINST ABSTAIN
LLP to serve as outside auditor for 1998. / / / / / /
5. In their discretion upon such other matters as may properly come before
the meeting.
I will be attending the I will not be attending
meeting 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,
administrator, 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.
PLEASE SIGN, DATE, AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
FOLD AND DETACH HERE
Signature____________________Signature_______________________Date_________,1998
