SCHEDULE 14A
Information Required in Proxy Statement
Reg. ss. 240.14a-101
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |x|
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Check the appropriate box:
|_| Preliminary Proxy Statement
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14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.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):
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[LOGO]
ENHANCE FINANCIAL SERVICES GROUP INC.
335 Madison Avenue
New York, New York 10017
April 29, 1999
Dear Shareholder:
You are cordially invited to attend the 1999 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 Thursday, June 3, 1999. 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 Thursday, June 3, 1999, at 9:00 a.m., local time,
for the following purposes:
(1) To elect 11 directors;
(2) To consider and approve an amendment to Enhance Group's restated
certificate of incorporation, as amended, to delete therefrom
certain restrictions on the permitted scope of its activities;
(3) To consider and approve an amendment to the 1997 Long-Term Incentive
Plan for Key Employees to increase the number of shares of common
stock, par value $.10 per share, reserved for grants thereunder;
(4) To ratify the appointment of Deloitte & Touche LLP as the
independent auditor of Enhance Group and its consolidated
subsidiaries for 1999; 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 26, 1999 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
April 29, 1999
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, 1999 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 April 29, 1999.
Only shareholders of record at the close of business on April 26, 1999,
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
37,974,669 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
"Incentive Plan Amendment") to the 1997 Long-Term Incentive Plan for Key
Employees (the "1997 Incentive Plan") of Enhance Group and the ratification of
the appointment of the auditor for 1999, 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
Incentive Plan Amendment and the ratification of the appointment of the auditor
for 1999 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
<PAGE>
withheld, and, where a choice is specified as to the proposal, they will be
voted in accordance with such specification. If no instructions are given, the
persons named in the proxy solicited by the board of directors of Enhance Group
intend to vote for the nominees for election as directors of Enhance Group
listed herein beneath the caption "Election of Directors" and for the other
matters listed above in this paragraph expected to be presented for
consideration at the meeting.
The Company will bear the cost of the meeting and of soliciting proxies,
including the cost of mailing the proxy material. The Company has retained
ChaseMellon Shareholder Services, LLC as its solicitation agent. In addition to
soliciting by mail, directors, officers and regular employees of the Company
(who will not be specifically compensated for such services) may solicit proxies
by telephone or otherwise.
All share amounts set forth in this proxy statement give effect to the
two-for-one split of shares of Common Stock effected in June 1998 (the "Stock
Split").
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of April 12, 1999 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 and nominee for 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.
Name and Address Number of Shares (1) Percent of Class
- ---------------- -------------------- ----------------
Swiss Reinsurance Company 3,400,000(2) 9.0
Mythenquai 50/60
8022 Zurich, Switzerland
Morgan Stanley Dean Witter & Co 2,773,160(3) 7.3
1585 Broadway
New York, New York 10036
Legg Mason, Inc. 2,213,235(4) 5.8
100 Light Street
Baltimore, Maryland 21202
Allan R. Tessler ..................... 498,500(5)(6) 1.3
Wallace O. Sellers ................... 835,800(5)(6) 2.2
Daniel Gross ......................... 1,147,500(5) 3.0
Samuel Bergman ....................... 179,700(5) *
Elaine J. Eisenman ................... 9,200(5) *
Tony M. Ettinger ..................... 64,200(5) *
Paul C. Kwiatkoski ................... 160,490(5) *
Brenton W. Harries ................... 29,500(6) *
David R. Markin ...................... 238,477(6)(7) *
Jay A. Novik ......................... 28,000 *
Robert P. Saltzman ................... 127,500(6)(8) *
Richard J. Shima ..................... 25,839(6) *
Spencer R. Stuart .................... 30,606(6)(9) *
2
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Name and Address Number of Shares (1) Percent of Class
- ---------------- -------------------- ----------------
Adrian U. Sulzer (10) .. ............. 7,500(6) *
Frieda K. Wallison ................... 33,772(6) *
Jerry Wind ........................... 18,252(6) *
All executive officers and
directors as a group ................. 3,834,686(11) 9.6
- ----------
* Less than 1%
(1) The table in this section is based upon information supplied by directors,
officers, and principal shareholders and Schedules 13D and 13G, if any,
filed with the Securities and Exchange Commission. Unless otherwise
indicated in the footnotes to the table and subject to the community
property laws where applicable, each of the shareholders named in this
table has sole voting and investment power with respect to the shares
shown as beneficially owned by him or her.
(2) See "Certain Relationships and Related Transactions" for information
regarding an agreement between Enhance Group and Swiss Reinsurance Company
("Swiss Re") regarding future sales and purchases by Swiss Re of voting
shares of Enhance Group.
(3) On February 10, 1999, Morgan Stanley Dean Witter & Co. ("MSDW&Co") and its
wholly-owned subsidiary, Morgan Stanley Dean Witter Investment Management
Limited ("DWIM") jointly filed a Schedule 13G describing their respective
ownership of shares of Common Stock at December 31, 1998 as follows:
MSDW&Co has shared voting power over 2,428,177 shares of Common Stock and
shared dispositive power over 2,773,160 shares of Common Stock, and DWIM
has shared voting power over 1,767,632 shares of Common Stock and shared
dispositive power over 2,097,532 shares of Common Stock. Accounts managed
on a discretionary basis by DWIM, are known to have the right to receive
or the power to direct the receipt of proceeds for the dividends from the
sale of such shares of Common Stock. No such account holds more than 5% of
outstanding shares of the Common Stock.
(4) On February 16, 1999, Legg Mason, Inc. filed a Schedule 13G describing its
ownership of shares of Common Stock at December 31, 1998 as follows: Legg
Mason, Inc. has sole voting and dispositive power over 2,126,500 shares of
Common Stock and shared voting and dispositive power over 86,735 shares of
Common Stock. Such shares of Common Stock are held by various identified
subsidiaries of Legg Mason, Inc. and by various of their clients, all of
which have the power to dispose of the shares held by them.
(5) Includes the shares set forth in: (a) Column A below issuable to the named
officer upon the exercise of currently exercisable stock options granted
under Enhance Group's employee stock option programs, 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).
3
<PAGE>
Name A B
---- - -
Allan R. Tessler 43,000 4,000
Wallace O. Sellers 307,300 517,000
Daniel Gross 727,500 204,000
Samuel Bergman 171,000 8,700
Elaine J. Eisenman 8,000 -0-
Tony M. Ettinger 64,000 -0-
Paul C. Kwiatkoski 121,750 400
(6) Includes shares issuable upon the exercise of the presently exercisable
portion of options granted to such director under Enhance Group's
Non-Employee-Director Stock Option Plan (the "Directors' Option Plan"), as
follows: Allan R. Tessler -- 11,500 shares; Wallace O. Sellers -- 7,500
shares; Brenton W. Harries -- 27,500 shares; David R. Markin -- 27,500
shares; Robert P. Saltzman -- 7,500 shares; Richard J. Shima -- 19,500
shares; Spencer R. Stuart -- 27,500 shares; Adrian U. Sulzer -- 7,500
shares; Frieda K. Wallison -- 27,500 shares; and Jerry Wind -- 7,500
shares.
(7) Includes 200,000 shares held in a limited partnership in which Mr. Markin
and his wife are the limited partners and a trust controlled by Mr. Markin
is the general partner.
(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) Mr. Sulzer will not stand for re-election to the board.
(11) Includes 263,666 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; 1,732,300 shares issuable to the executive officers upon the
exercise of presently exercisable options granted to them under Enhance
Group's employee stock option programs; and 734,100 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, 1999.
Name Age Position with Enhance Group
- ---- --- ---------------------------
Allan R. Tessler 62 Chairman of the Board
Wallace O. Sellers 69 Vice Chairman of the Board
Daniel Gross 56 President, Chief Executive Officer
and director
Brenton W. Harries 71 Director
David R. Markin 68 Director
Jay A. Novik 54 Nominee for Director
Robert P. Saltzman 56 Director
Richard J. Shima 59 Director
Spencer R. Stuart 76 Director
Frieda K. Wallison 56 Director
Jerry Wind 61 Director
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., Allis-Chalmers Corporation and Marketwatch.com.
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 of Danielson Holding Corporation.
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.
Previously, he held various insurance industry positions, including serving as
co-founder and Chairman of F.G. Holding Company, President of Kramer Capital
Consultants and various
5
<PAGE>
senior executive capacities for Colonial Penn Group. Mr. Gross also serves as a
director of Mortgage Guaranty Investment Corporation.
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. Novik has been nominated to serve as a director of Enhance Group to
replace Mr. Sulzer who served as a director of Enhance Group since 1996. He is
currently a private investor and serves as a director and vice chairman of
several U.S. subsidiaries of Swiss Reinsurance. From 1997 to January 1999, Mr.
Novik served in various senior management capacities with Swiss Re.
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 companies.
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.
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 currently is a private investor, having retired from
the law firm of Jones, Day, Reavis & Pogue where since 1983 she had been a
member, 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 nine meetings during
1998, 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 no meetings
during 1998.
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 auditors;
and to review audit results. The committee consists of Messrs. Salzman
(Chairman), Harries and Shima. The committee held four meetings during 1998.
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 nine meetings during 1998 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 is standing for re-election to the board of
directors who served at any time during 1998 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.
7
<PAGE>
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 1998 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 1998 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 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 1998 as they affected Daniel Gross, President and
Chief Executive Officer of the Company during 1998, and the other four executive
officers of the Company who were for 1998 the Company's most highly paid
executive officers.
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 both the Company's performance relative to its financial
goals and the business/staff unit's performance in relation to its annual goals.
The stock option grants are a function of the employee's organizational
level, the employee's individual performance against goals and the Company's
performance.
In addition, the Company uses signing bonuses and stock options granted on
the date of hire as strategic tools to meet the intense competition for the
highly qualified and marketable executive officers it is recruiting.
8
<PAGE>
In 1997, the Company retained an independent compensation consulting firm
to evaluate the Company's current compensation and benefits program, which had
not been done in several years. The results of its review and recommendations
were presented to the Compensation and Nominating Committee, and several changes
were made in the compensation program to make the Company's program more
competitive with most of those companies from which it recruits new employees.
Compensation Program Components. The particular components of executive
officer compensation 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 the
high degree of comparability of their businesses and financial performance to
those of the Company, as well as for the ready availability of their
compensation structure.
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 with few exceptions 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
accounting and financial results and the achievement of strategic goals. The
bonus pool was then allocated, with allocations based on performance results
against goals, first for each of the business and staff units, and then for all
employees based on individual performance results against goals. Additionally,
the officers who participated in the successful formation and launching in 1996
of one of the Company's key new ventures, Credit-Based Asset Servicing and
Securitization LLC ("C-BASS") participated in a separate pool based on the 1998
profits of that venture.
Stock Options. The 1997 Incentive Plan was adopted for the purpose of
providing, through the grant of long-term incentives, a means to attract and
retain key personnel and to provide to participating key employees long-term
incentives for sustained high levels of performance. Stock options serve to
reinforce the alignment between individual and Company performance. As such,
they provide additional incentive for officers to work toward the Company's long
term goals and strategy as a means to build personal wealth. Stock options also
provide a significant impetus for equity ownership.
Substantially all grants under the 1997 Incentive Plan and its predecessor
plan have been in the form of stock options. As described above, the awardees of
stock options under these plans and the sizes of the grants are determined by a
subcommittee of the Compensation and Nominating Committee comprising its members
who are outside directors. In general, the amounts of annual option awards
reflect both organizational level and performance achievements. In deciding
whether to grant an awardee additional stock options, the subcommittee does not
generally consider whether the awardee had received
9
<PAGE>
a stock option grant in the previous year, it does often consider the grants
previously made to the awardee in the aggregate.
Reflecting the Company's objective of aligning the long range interests of
its employees with those of the Company and Enhance Group shareholders,
substantially all stock options granted to date under the plans vest, subject to
continuation of employment and other terms of the stock options grants, at the
rate of 25% per year during the consecutive four-year period beginning one year
after the date of grant. All such stock options expire approximately ten years
after grant, subject as to certain options to continuation of employment. The
exercise prices of all stock options granted under the plans since public
trading of the Common Stock commenced have been equal to the closing market
prices of the Common Stock on the dates of grant, or if later, the dates of
commencement of employment.
Compensation of Chief Executive Officer. In determining the compensation
of Daniel Gross, Chief Executive Officer of the Company, the Compensation and
Nominating Committee noted that, under Mr. Gross's active leadership, the
Company had enjoyed various meaningful accomplishments and successes in 1998,
including: an increase in operating return on equity from 13.1% to 13.9%; an
18.6% increase in diluted operating earnings per share; a 28.7% increase in net
premiums written; aggressive recruitment of several carefully selected employees
expected to improve the Company's competence in key areas, including a new Chief
Information Officer, a new Chief Executive Officer for Singer Asset Finance
Company, L.L.C. ("Singer") and a key executive to lead the trade credit
activities, who is in the process of opening a London office; a significant
joint venture with Mortgage Guaranty Insurance Corporation which will allow the
Company to become a significant factor in the delinquent consumer asset
industry; formation of AGS Financial LLC and acquisition of its predecessor
entity; expansion of C-BASS's business to include seller-financed mortgages; and
the expansion of the Company's Brazilian businesses.
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 1999
at $660,000 and granted him at year-end a cash incentive bonus of $1,060,000.
Mr. Gross also received a stock option award for 200,000 shares. 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 1998. Except as
described below under "Agreements with Executive Officers" and "Management
Severance Protection Program," the Company has not entered with any executive
officer into (i) an employment agreement or (ii) any compensatory plan or
arrangement which is activated upon the resignation, termination or retirement
of the executive officer or upon a change in control of the Company or change in
the executive officer's responsibilities following a change in control.
Long-Term
Compensation
Annual ------------
Compensation Securities
------------ Underlying
Name and Principal Position Year Salary Bonus Options/SARS
- --------------------------- ---- ------ ----- ------------
Daniel Gross 1998 $530,000 $1,060,000 200,000
President and Chief 1997 500,000 1,150,000 350,000
Executive Officer 1996 480,000 675,000 150,000
Tony M. Ettinger 1998 288,850 360,000 70,000
President, Credit-Based
Businesses, Alliances 1997 273,863 260,000 40,000
and Ventures 1996 261,041 132,500 33,000
Samuel Bergman 1998 331,250 210,000 30,000
Executive Vice President 1997 313,281 200,000 28,000
and Secretary 1996 301,042 145,000 28,000
Elaine J. Eisenman (1) 1998 283,550 215,000 77,000 (2)
Executive Vice President
Paul C. Kwiatkoski 1998 270,300 190,000 30,000
Executive Vice President 1997 255,000 165,000 27,000
1996 250,000 95,000 30,000
- ----------
(1) Became an officer of the Company in January 1998.
(2) Includes a stock option for 32,000 shares of Common Stock granted to Ms.
Eisenman upon commencement of her employment.
Option/SAR Grants During 1998
The following table provides information regarding stock options/SARs
granted to the named executive officers during 1998:
11
<PAGE>
Individual Grants
------------------------------------------------------------
Percent of
Total
Number of Options
Securities Granted to Exercise
Underlying Employees or Grant Date
Name and Options in Fiscal Base Expiration Present Value
Principal Position Granted (1) Year Price Date (2)
- ------------------ ----------- --------- -------- ---------- -------------
Daniel Gross 200,000 17.1 $24.94 12/31/08 $3,320,000 (3)
President and
Chief Executive
Officer
Tony M. Ettinger 70,000 6.0 24.94 12/31/08 1,162,000 (3)
President,
Credit-Based
Businesses,
Alliances and
Ventures
Samuel Bergman 30,000 2.6 24.94 12/31/08 498,000 (3)
Executive Vice
President and
Secretary
Elaine J. Eisenman 32,000 2.7 28.84 01/12/08 437,120 (4)
Executive Vice 45,000 3.8 24.94 12/31/08 747,000 (3)
President
Paul C. Kwiatkoski 30,000 2.6 24.94 12/31/08 498,000 (3)
Executive Vice
President
- ----------
(1) Stock options granted pursuant to 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 74.2, a
risk-free rate of return of 4.5%, a dividend yield of 0.69% and a discount
due to the risk of forfeiture of 3.0%.
(4) The Black-Scholes option valuation assumes a volatility of 29.7, a
risk-free rate of return of 5.4%, a dividend yield of 0.99% and a discount
due to the risk of forfeiture of 3.0%.
12
<PAGE>
Aggregated Option/SAR Exercises During 1998
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, 1998.
<TABLE>
<CAPTION>
No. of Securities
Underlying Value of Unexercised
Unexercised Stock In-the Money
Options/SARs at Options/SARs at
December 31, December 31,
1998 1998 (1)
-------------------------- --------------------------
Shares
Name and Acquired on Value
Principal Position Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel Gross -0- -0- 727,500 567,500 $13,060,66 $3,755,048
President and
Chief Executive
Officer
Tony M. Ettinger -0- -0- 64,000 127,750 953,390 807,683
President,
Credit-Based
Businesses,
Alliances and
Ventures
Samuel Bergman 5,200 $169,000 171,000 75,000 3,223,089 539,422
Executive Vice
President and
Secretary
Elaine J. Eisenman -0- -0- 8,000 69,000 9,248 255,557
Executive Vice
President
Paul C. Kwaitkoski -0- -0- 121,750 71,250 2,246,994 479,284
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,
1998 over the stock option exercise price multiplied by (b) the number of
shares of Common Stock underlying the stock option.
13
<PAGE>
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 Enhance Group or either Insurance
Subsidiary 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 or completed five years of
participation or (b) has attained age 62 or 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
eligible for a benefit at the normal retirement date based on the participant's
compensation and years of service at the date of termination multiplied by the
vested percentage. 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
Highest
Average
Earnings Years of Service
---------- ------------------------------------------------------------------
15 20 25 30 35*
------------------------------------------------------------------
$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 85,000 102,500 112,500 112,500
225,000(2) 75,938 95,625 115,313 126,563 126,563
250,000(2) 84,375 106,250 128,125 140,625(1) 140,625(1)
300,000(2) 101,250 127,500 153,750(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)
- ----------
* Plan limits service to 30 years for benefit purposes.
14
<PAGE>
(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 1998 and 1999 is $130,000.
(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 (as such may change from
time to time in the future, the "Code 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, 1993, decreasing to $150,000 for plan
years beginning November 1, 1994, November 1, 1995 and November 1, 1996
and has increased to $160,000 for plan years beginning thereafter.)
In addition, Enhance Group has adopted, effective July 1, 1999, a
non-qualified restoration pension plan (the "Restoration Plan"). All employees
of the Company eligible to participate in the Pension Plan and who receive total
annual compensation in excess of the Code Maximum are eligible to participate in
the Restoration Plan. The Restoration Plan provides a retirement benefit
supplemental to benefits provided by the Pension Plan equal to 1.75% of the
participant's compensation above the Code Maximum multiplied by his or her years
of service up to the first 25 years, plus 1.0% of the participant's compensation
in excess of the Code Maximum multiplied by his or her years of service for up
to the next five years. Compensation is defined as the average of the
participant's three highest consecutive years of earnings. The vested percentage
of a participant will be the lower of (a) 20% per year of service beginning
after two years of service such that his or her vested percentage is 100% after
six years, and (b) such other rate per year as will cause a given participant to
be fully vested at age 60. 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. Also, for purposes of the
Restoration Plan, in addition to each such executive officer's actual years of
service, upon becoming fully vested under the terms of the Pension Plan, Mr.
Ettinger will be credited with five additional years of service and each other
participant in the Restoration Plan who is or subsequently becomes an executive
officer of Enhance Group at the level of Executive Vice President and above will
be credited with additional years of employment service under the Restoration
Plan equal to the excess of five over the actual years of employment service, if
any, credited to that officer under the Restoration Plan prior to its effective
date.
As of December 31, 1998, Messrs. Gross, Ettinger, Bergman and Kwiatkoski
and Ms. Eisenman had eleven, three, six, fourteen and zero years of service,
respectively, under the Pension Plan and the Restoration Plan and eleven, three,
six, eleven and zero years of participation, respectively, under the Pension
Plan.
Agreements with Executive Officers
Enhance Group and Arthur Dubroff, Executive Vice President and Chief
Financial Officer, are parties to an employment agreement which provides for the
payment of an annual base salary to Mr. Dubroff of not less than $275,000 plus
an annual target bonus of 45% of such base salary. Under the employment
agreement, Mr. Dubroff was granted in 1996, 1997 and 1998 options to purchase
150,000, 40,000 and 40,000 shares of Common Stock, respectively. If Mr.
Dubroff's employment is terminated by Enhance Group within a 12-month period
following a change of control (as defined), Enhance Group 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.
15
<PAGE>
Enhance Group and Brian C. Kleinberg, Executive Vice President of Enhance
Group and Chief Executive Officer of Singer, are parties to an agreement which
provides for the payment of an annual base salary of $300,000 per year, plus an
annual target bonus of not less than 50% of his then base salary (or such higher
rate consistent with Enhance Group's senior executive compensation programs);
provided that his bonus for 1999 will equal or exceed $250,000 (to be prorated
should his employment be terminated prior to the expiration of twelve months by
Enhance Group other than for cause or by Mr. Kleinberg for cause). Under the
employment agreement, Mr. Kleinberg was granted options to purchase 85,000
shares of Common Stock. Also, in connection with the Management Severance
Protection Program described below, for 1999 Mr. Kleinberg's prior year's annual
bonus is to equal the average of the bonuses awarded to Enhance Group's
Executive Vice Presidents for 1998. In addition, in March 1999, Enhance Group
granted Mr. Kleinberg a stock option under the 1997 Incentive Plan for 25,000
shares in lieu of establishing at the start of 1999 a cash incentive
compensation program for Mr. Kleinberg based on the performance of the Singer
businesses in 1999 and in order to compensate Mr. Kleinberg for a portion of the
anticipated 1999 income which he forewent by having departed his prior
employment to become an employee of the Company.
Management Severance Protection Program
In 1998, the Company established a management severance protection program
(the "Management Severance Protection Program") which provides for the payments
and benefits to be accorded to officers in the event of the termination of their
employment by the Company under certain circumstances. The program has been
designed to attract new, highly qualified officers by establishing a competitive
level of severance, to reduce uncertainty and to retain officers who may
otherwise depart upon a potential change in ownership, to maintain the
objectivity of Enhance Financial's senior officers in the face of potential job
loss in a "change of control" (as defined below) transaction and to minimize the
need for negotiation of individual severance arrangements upon the termination
of an officer's employment with the Company.
Under the Management Severance Protection Program, an officer of Enhance
Group with a title of at least Vice President who is terminated by the Company
without cause or who departs with good reason (an "Involuntary Termination
Event") is entitled to cash severance equal to a number of months (up to one
year) of base salary plus, in the case of senior officers with a title of at
least Senior Vice President, a prorated bonus based on such officers' prior
year's annual bonus, such number of months of salary and proration of bonus to
be based on such officers' tenure with the Company. In addition, covered
officers will receive outplacement assistance and remain covered under the
Company's welfare benefit programs for a period of time after such termination.
Senior executive officers of Enhance Group undergoing an Involuntary
Termination Event within a specified time after a change of control are entitled
to cash severance in a lump sum equal to two or three times pay (depending on
level of seniority) and a bonus for the year of termination prorated through the
date of such termination. In addition, such senior officers are entitled to
receive outplacement assistance, will remain covered under the Company's welfare
benefit and perquisite programs and will be entitled to continue to participate
in the Company's 401(k) program (including the receipt of Company matching
contributions) for a period of time following termination.
As used in the Management Severance Protection Program, a "change of
control" means (a) the acquisition by one person or entity of at least 35% of
Enhance Group's outstanding voting stock, (b) a
16
<PAGE>
change in the majority of the board of directors of Enhance Group, (c) the
consummation of a merger, consolidation or reorganization unless more than 65%
of the continuing interest in the surviving entity is retained by Enhance
Group's shareholders immediately prior to such transaction or (d) a liquidation,
dissolution or sale of all or substantially all of the assets of the Company.
In addition, pursuant to the Management Severance Protection Program, all
options and other long-term incentives previously granted to employees and
directors of the Company become immediately vested upon a change in control,
without regard to the termination of such employee or director.
Other Senior Executive Officer Compensation
The Company has established a flexible perquisite allowance program to
encourage senior executive officers of the Company to avail themselves of a
range of business-related benefits for which they are not otherwise eligible for
reimbursement by the Company, including but not limited to, club memberships,
parking at the Company's offices, automobile transportation service to and from
the Company's offices, personal development and individual financial services.
Beginning in 1999, in January of each year, the President of Enhance Group is to
be paid $30,000 and each President of a business unit and Executive Vice
President of Enhance Group is to be paid $15,000 pursuant to this program on a
non-accountable basis.
In addition, the Company has arranged and will pay the premium for
supplemental long-term disability insurance for the President, each President of
a business unit and each Executive Vice President, in addition to the $7,500
maximum monthly benefit available to all employees of the Company. The amount of
such additional coverage for each executive officer which will be paid by the
Company will vary depending on the premium for such executive officer's coverage
as set by the insurance provider. In addition, this insurance provides benefits
for partial disability and cost of living increases in payments under the
policy.
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
1998, 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 1998 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, as amended, allows each outside director to elect to receive up to
100% of the aforesaid fees in the form of shares of Common Stock valued at the
closing price of the Common Stock on the New York Stock Exchange on that date.
Each outside director is entitled to make a new election annually for the coming
year's fees.
Non-Employee-Director Stock Option Plan. Pursuant to the Directors' Option
Plan, on each December 31, each outside director of Enhance Group or either
Insurance Subsidiary is granted a non-
17
<PAGE>
qualified stock option to purchase 7,000 shares of Common Stock at an exercise
price equal to the closing price of the Common Stock on the New York Stock
Exchange on that date. There are reserved for issuance upon the exercise of
stock options under the Directors' Option Plan 800,000 shares of Common Stock
(subject to anti-dilutive adjustment), of which stock options for 442,666 shares
were subject to outstanding stock options after the option grants made on
December 31, 1998.
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 1998 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.
18
<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 (excluding dividends) 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, 1994 and
that all dividends were reinvested.
Cumulative Returns
1/1/94 to 12/31/98
[GRAPHIC OMITTED]
EFS S&P 500 S&P Financial
--- ------- -------------
1/1/94 100.00 100.00 100.00
1/31/94 100.00 103.40 107.91
2/28/94 97.47 100.59 100.13
3/31/94 92.18 96.22 94.60
4/29/94 95.99 97.45 99.25
5/31/94 95.99 99.04 101.74
6/30/94 89.41 96.62 98.77
7/29/94 98.98 99.79 100.79
8/31/94 99.62 103.87 106.54
9/30/94 98.12 101.34 97.40
10/31/94 92.34 103.61 99.50
11/30/94 87.21 99.84 93.44
12/30/94 88.27 101.32 93.94
1/31/95 90.20 103.94 99.14
2/28/95 91.49 107.99 105.33
3/31/95 88.09 111.17 110.11
4/28/95 88.09 114.44 115.20
5/31/95 92.62 119.00 120.75
6/30/95 100.86 121.77 120.73
7/31/95 99.56 125.80 124.07
8/31/95 105.41 126.12 126.30
9/29/95 107.18 131.44 137.51
10/31/95 106.53 130.97 131.93
11/30/95 126.14 136.71 140.24
12/29/95 139.68 139.34 147.12
1/31/96 127.22 144.08 160.37
2/29/96 127.87 145.42 153.93
3/29/96 145.45 146.82 157.51
4/30/96 142.82 148.98 153.81
5/31/96 152.69 152.82 153.16
6/28/96 147.95 153.40 156.93
7/31/96 153.89 146.63 149.23
8/30/96 151.91 149.73 150.28
9/30/96 174.90 158.15 164.36
10/31/96 176.88 162.51 174.67
11/29/96 181.52 174.78 191.23
12/31/96 193.98 171.32 185.48
1/31/97 195.31 182.01 198.77
2/28/97 183.35 183.44 203.21
3/31/97 210.50 175.92 185.74
4/30/97 205.18 186.41 208.28
5/31/97 222.50 197.75 219.94
6/30/97 234.41 206.61 228.65
7/31/97 267.13 223.04 253.83
8/31/97 247.10 210.56 234.11
9/30/97 293.09 222.08 253.14
10/31/97 282.72 214.68 250.02
11/30/97 299.12 224.60 267.42
12/31/97 319.11 228.46 288.06
1/31/98 298.33 230.98 293.40
2/28/98 332.86 247.63 317.27
3/31/98 373.00 260.30 322.80
4/30/98 368.63 262.92 325.66
5/31/98 349.83 258.41 324.13
6/30/98 363.18 268.90 347.57
7/31/98 337.62 266.04 342.50
8/31/98 270.37 227.62 274.84
9/30/98 318.77 242.20 282.17
10/31/98 264.85 261.88 339.89
11/30/98 316.74 277.75 365.16
12/31/98 324.13 293.74 372.69
19
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with Shareholders
See "PROPOSAL NO.2 AMENDMENT OF CERTIFICATE OF INCORPORATION" for a
description of the provision for the benefit of U S WEST, Inc., a former
shareholder of Enhance Group, currently contained in the certificate of
incorporation of Enhance Group, the elimination of which is to be presented to
the shareholders for their approval at the annual meeting.
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.
In addition Enhance Group and Swiss Re are parties to a registration
rights agreement pursuant to which Swiss Re has two demand registration rights
and unlimited piggyback registration rights, subject to certain limitations.
Substantially all the expenses of any future registration pursuant thereto are
to be borne by Enhance Group. The registration rights agreement contains
cross-indemnification covenants by Enhance Group and Swiss Re for damages
sustained and expenses incurred resulting from material misstatements or
omissions in connection with any such offering.
Seguradora Brasileira de Fiancas S.A.
Since 1997, Enhance Group and Swiss Re have each owned 25% equity
interests in Seguradora Brasileira de Fiancas which they purchased for
respective initial investments of $3.3 million.
20
<PAGE>
PROPOSAL NO. 2
AMENDMENT OF CERTIFICATE OF INCORPORATION
The board of directors has approved the Charter Amendment and submits it
to the shareholders for their approval.
Enhance Group is prohibited by its certificate of incorporation from
providing information services or long-distance telephone service or
manufacturing telecommunications equipment (collectively, the "Restricted
Activities") unless U S WEST, Inc. has reviewed the proposed Restricted Activity
and has provided Enhance Group with written notice that, in the opinion of legal
counsel to U S WEST, Inc., the Restricted Activity is not prohibited to U S
WEST, Inc. and its subsidiaries under the Modification of Final Judgment entered
in 1984 in settlement of the legal action entitled United States v. Western
Electric Company, Inc. Enhance Group is similarly prohibited from owning any
equity interest in any entity which engages in any Restricted Activity.
Paragraph 3(a) of article SECOND of the certificate of incorporation of Enhance
Group, setting forth the Restricted Activities, is annexed to this proxy
statement as Appendix A. These restrictions were added to the Enhance Group
certificate of incorporation in 1988 to induce U S WEST, Inc. to make a
substantial equity investment in Enhance Group. Enhance Group has been advised
by MediaOne Group, Inc., the successor-in-interest to the Common Stock held by U
S WEST, Inc., that neither it nor any of its subsidiaries or affiliates owns of
record or beneficially any shares of capital stock of Enhance Group. Therefore,
the board of directors deems it advisable that these provisions be deleted from
the Enhance Group certificate of incorporation.
Upon approval of the Charter Amendment and the filing thereof in
accordance with the BCL, the Company will be permitted to engage in the
Restricted Activities or own equity interests in entities that engage in the
Restricted Activities without further authorization by shareholders except as
otherwise required by applicable law or the rules of the New York Stock Exchange
governing corporate transactions generally. The Company has no current plans,
agreements or understandings to engage in the Restricted Activities or to
acquire an equity interest in any entity that engages in or has a plan,
agreement or understanding to engage in the Restricted Activities.
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
1997 LONG-TERM INCENTIVE PLAN FOR KEY EMPLOYEES
Background
In 1997, the board of directors and the shareholders of Enhance Group
adopted and approved the 1997 Incentive Plan. Subject to the approval of the
shareholders, the board of directors amended the 1997 Incentive Plan on March
25, 1999 to increase from 1,900,000 to 5,000,000 the maximum number of shares of
Common Stock available for grants under the plan. The following description of
the 1997 Incentive Plan is intended only as a summary and is qualified in its
entirety by reference to the text of the 1997 Incentive Plan, a copy of which is
annexed as Appendix B to this proxy statement. The description and text of the
1997 Incentive Plan give effect to the Stock Split.
Purpose of 1997 Incentive Plan
The purposes of the 1997 Incentive Plan are to provide through the grant
of stock options and restricted stock awards (collectively, "Long-Term
Incentives") a means to attract and retain key personnel and to provide to
participating officers and other key employees long-term incentives for
sustained high levels of performance and for unusual efforts to improve the
financial performance of the Company.
Need for Incentive Plan Amendment
Since the adoption of the 1997 Incentive Plan, the committee of the board
of directors administering the plan has found it appropriate and in the best
interests of the Company to grant stock options exceeding both in number and
size the expectation of the board of directors when it approved the plan in
1997. These grants were the result of a number of factors. As the Company has
grown, it has increased its hiring, leading to an unanticipated growth in the
number of employees eligible to receive Long-Term Incentives under the plan.
Moreover, Enhance Group has also found it necessary to grant significant
Long-Term Incentives to attract and retain highly qualified executive officers
from major financial services companies and other sources due to the intense
competitive conditions in the marketplace for recruiting such exceptional
executive officers. Finally, Enhance Group has rewarded certain key employees
with relatively large grants both in recognition of their contributions to the
Company's extremely successful financial performance and significant growth in
1997 and 1998 and to provide incentives for continuing outstanding performance.
Enhance Group believes that granting Long-Term Incentives, such as stock
options, to key employees is beneficial to the Company because this type of
compensation provides a strong incentive to increase shareholder value, since
stock options have value only if the stock price increases over time. By
creating and enhancing significant ownership of Common Stock by key officers and
employees and by aligning their interests with the interests of shareholders,
these incentives encourage key employees to focus on the achievement of future
long-term results.
As a result of the foregoing, as of April 15, 1999, 365,646 shares remain
available for grant under the 1997 Incentive Plan. The board of directors has
determined that it is in the best interest of the Company and its shareholders
to be able to continue to make grants under the 1997 Incentive Plan in such
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amounts and to such key employees as may be necessary to carry out the purposes
of the plan. Accordingly, Enhance Group is seeking shareholder approval for the
increase in the number of shares reserved for issuance under the 1997 Incentive
Plan.
Administration
The 1997 Incentive Plan is administered by a committee of the board of
directors, consisting of three or more directors who are non-employee directors
(as defined under Section 16(b) of the Exchange Act) and outside directors (as
defined under Section 162(m) of the Code) (the "Committee"). The members of the
Committee are Messrs. Stuart (chairman), Harries, Markin and Shima. The
Committee determines the individuals who receive Long-Term Incentives and the
terms of the Long-Term Incentives, which are reflected in certificates issued to
awardees.
Eligibility
All employees of Enhance Group or its subsidiaries who are regularly
employed on a full-time basis, including full-time employees serving as
directors, and officers of Enhance Group or its subsidiaries who are not so
employed, who in the opinion of the Committee are in a position to make
significant contributions to the success of Enhance Group or a subsidiary, are
eligible to receive Long-Term Incentives under the 1997 Incentive Plan. As of
December 31, 1998, approximately 110 officers and employees of Enhance Group and
its subsidiaries were eligible to receive awards under the 1997 Incentive Plan.
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 Long-Term
Incentives, has been increased, subject to shareholder approval, from 1,900,000
to 5,000,000. For each calendar year during the ten-year term of the 1997
Incentive Plan, the maximum number of shares of Common Stock which may be (a)
subject to any stock option granted to any 1997 Incentive Plan participant may
not exceed 300,000, and (b) issued or transferred pursuant to a restricted stock
award granted to any plan participant may not exceed 75,000. To the extent that
the maximum number of shares of Common Stock with respect to which stock options
or restricted stock awards may be granted are not granted in any particular
year, such ungranted stock options or restricted stock awards are available in
subsequent years until used. These amounts are subject to adjustment to reflect
changes in the capital structure of Enhance Group, further stock splits,
recapitalizations, mergers, reorganizations and similar transactions. If a
Long-Term Incentive expires, terminates, is canceled or is reacquired by Enhance
Group or a subsidiary, the unissued shares of Common Stock subject to the
Long-Term Incentive will again be available under the 1997 Incentive Plan.
Terms of Stock Options
Under the 1997 Incentive Plan, the purchase price per share of Common
Stock subject to a stock option is 100% of the fair market value of a share of
Common Stock on the date the stock option is granted (or in the case of an
incentive stock option granted to a participant who is a 10% Shareholder (as
defined in the 1997 Incentive Plan), 110% of the fair market value of a share of
Common Stock on the date the incentive stock option is granted). The purchase
price must be paid in cash or, if so provided in the stock option (and subject
to such terms and conditions as are specified in the stock option), in shares of
Common Stock surrendered to Enhance Group or in a combination of cash and such
shares. Shares of Common Stock thus surrendered are valued at their fair market
value on the date of exercise.
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Each stock option may become exercisable in one or more installments and
at such time or times and subject to such terms and conditions as the Committee
may determine. Unless otherwise provided in the terms of grant, stock options
are not assignable and are exercisable during the life of the optionee only by
the optionee or by his or her guardian or legal representative, and after death
only by his or her beneficiary. No stock option is exercisable after the
expiration of a period of ten years from the date the stock option is granted
(and in the case of an incentive stock option granted to a 10% Shareholder, five
years from the date such stock option is granted).
Terms of Restricted Stock Awards
Restricted stock awards are subject to such terms and conditions,
including, without limitation, restrictions on the sale or other disposition of
the restricted stock award or of the shares issued or transferred pursuant to
such restricted stock award, and conditions calling for forfeiture of the
restricted stock award or the shares issued or transferred pursuant to the
restricted stock award in designated circumstances, as determined by the
Committee. Upon the issuance or transfer of shares pursuant to any restricted
stock award, the participant, with respect to such shares, becomes a shareholder
of Enhance Group fully entitled to receive dividends, to vote and to exercise
all other rights of a shareholder except to the extent otherwise provided in the
restricted stock award. The Committee may require the participant to pay the par
value of the shares to be issued or transferred pursuant to a restricted stock
award.
Amendments
The 1997 Incentive Plan may be amended or terminated by the board of
directors at any time and in any respect, provided that, without the approval of
the shareholders of Enhance Group, no amendment may be adopted which (i)
increases the maximum number of shares of Common Stock that may be issued or
transferred pursuant to Long-Term Incentives or increases the maximum number of
shares of Common Stock that may be granted during any calendar year as stock
options or restricted stock awards to any individual, (ii) except as may be
required or desirable to conform the 1997 Incentive Plan to the federal or state
securities laws and regulations that may apply to it from time to time,
withdraws the administration of the 1997 Incentive Plan from the Committee,
(iii) transfers the administration of the 1997 Incentive Plan to any person who
is not a "non-employee director" under Rule 16b-3, if Enhance Group is then a
reporting company under the Exchange Act, (iv) changes the classification of
employees eligible to receive awards under the 1997 Incentive Plan, (v) changes
the minimum exercise price of any stock option or extends the maximum exercise
term of any stock option or otherwise materially increases the benefits accruing
to participants in the 1997 Incentive Plan or (vi) requires shareholder approval
in order for the 1997 Incentive Plan to continue to comply with the exception
for performance based compensation under Section 162(m) of the Code.
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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.
General. The following discussion of the principal U.S. federal income tax
consequences with respect to options under the 1997 Incentive 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) any may vary in individual circumstances. Therefore,
the following is designed to provide a general understanding of the federal
income tax consequences. State and local income tax and estate tax consequences
are not addressed below.
Incentive Stock Options. Under current federal income tax laws, the grant
of an incentive stock option can be made solely to employees and generally has
no income tax consequences for the optionee or Enhance Group. In general, no
taxable income results to the optionee upon the grant or exercise of an
incentive stock option. However, the amount by which the fair market value of
the stock acquired pursuant to the incentive stock option exceeds the exercise
price is an adjustment item for purposes of alternative minimum tax. If no
disposition of the shares is made within either two years from the date the
incentive stock option was granted or one year from the date of exercise of the
incentive stock option, any gain or loss realized upon disposition of the shares
will be treated as a long-term capital gain or loss to the optionee. Enhance
Group is not entitled to a tax deduction upon the exercise of an incentive stock
option, nor upon a subsequent disposition of the shares, unless the disposition
occurs prior to the expiration of the holding period described above. In
general, if the optionee does not satisfy these holding period requirements, any
gain equal to the difference between the exercise price and the fair market
value of the stock at exercise (or, if a lesser amount, the amount realized on
disposition over the exercise price) constitutes ordinary income. In the event
of such a disposition before the expiration of that holding period, Enhance
Group is entitled to a deduction at that time equal to the amount of ordinary
income recognized by the optionee. Any gain in excess of the amount recognized
by the optionee as ordinary income would be taxed to the optionee as short-term
or long-term capital gain (depending on the applicable holding period).
Non-qualified Stock Options. In general, an optionee realizes no taxable
income upon the grant of a non-qualified stock option, and Enhance Group
generally does not receive a deduction at the time of grant. Upon exercise of a
non-qualified stock option, an optionee generally recognizes 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 recognizes 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. Enhance Group will generally be allowed a deduction equal to the amount
recognized by the optionee as ordinary income.
Miscellaneous. Officers and directors of the Company subject to Section
16(b) of the Exchange Act and the rules and regulations promulgated thereunder
should consult with their tax advisors as to whether 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
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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 of the recipient could in
certain circumstances be deferred under the expiration of the Deferral Period.
In addition, any entitlement to a tax deduction on the part of Enhance Group is
subject to 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 Enhance Group.
The 1997 Incentive Plan is not subject to any of the requirements of the
Employee Retirement Income Security Act of 1974, as amended. The 1997 Incentive
Plan is not, nor is intended to be, qualified under Section 401(a) or Section
421 of the Code.
Incentive Plan Amendment Recommendation; Vote Required
The board of directors of Enhance Group believes that Enhance Group's
ability to make additional incentive grants in the form of stock options or
restricted stock is important to its ability to attract and retain qualified
personnel and to motivate such personnel by aligning their long-term interests
with those of the shareholders. The board further believes the 1997 Incentive
Plan, by virtue of its simplicity and flexibility, is the most suitable vehicle
for achieving this objective.
The board of directors recommends that the shareholders of Enhance Group
vote their shares FOR approval of the Incentive 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 1999. 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 1999.
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 year 2000
annual meeting of shareholders must submit their proposals to the Secretary of
Enhance Group on or before January 4, 2000. 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
April 29, 1999
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Appendix A
Article SECOND
...
"(3)(a) Notwithstanding paragraphs (1) and (2) of this article SECOND, the
Corporation shall not engage in any activity involving the providing of
information services or long distance telephone service or the manufacturing of
telecommunications equipment unless such activity has been reviewed by US West,
Inc. and US West, Inc. has provided the Corporation with written notice that, in
the opinion of legal counsel to US West, Inc., such activity is not prohibited
to US West, Inc. and its subsidiaries under the Modification of Final Judgment
(the "Judgment") entered in United States v. Western Electric Company, Inc. nor
shall the Corporation own any equity interest in any entity which engages in
such an activity. US West, Inc. shall be entitled to obtain injunctive relief
and specific performance in the event of a breach, or threatened breach, of the
provisions of this paragraph 3(a)."
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Appendix B
ENHANCE FINANCIAL SERVICES GROUP INC.
1997 Long-Term Incentive Plan For Key Employees as amended and
restated as of March 25, 1999
1. Purposes
The purposes of the Plan are to provide through the grant of Long-Term
Incentives under the Plan a means to attract and retain key personnel and to
provide to participating officers and other key employees long-term incentives
for sustained high levels of performance and for unusual efforts to improve the
financial performance of the Company.
2. Definitions
Unless otherwise required by the context, the following terms, when used
in this Plan, shall have the meanings set forth in this Section 2.
BENEFICIARY: A person or entity (including a trust or estate), designated
in writing by a Participant on such forms and in accordance with such terms and
conditions as the Committee may prescribe, to whom the Participant's rights
under the Plan shall pass in the event of the death of the Participant or, if
there be no such person or entity so designated, or if such person or entity is
not alive or in existence at the time of the Participant's death, such other
person to whom such Participant's rights under the Plan shall pass by will or by
the laws of descent or distribution.
BOARD OF DIRECTORS or BOARD: The Board of Directors of Enhance. The terms
"Board" and "Board of Directors" shall include the 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: The committee of the Board of Directors 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,
its successors and assigns.
FAIR MARKET VALUE: The fair market value of a share of Common Stock
determined
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in accordance with any reasonable method approved by the Board of Directors;
provided that in the case of a Non-Statutory Stock Option intended to be
performance-based for purposes of Section 162(m) of the Code or an Incentive
Stock Option, such method shall comply with, and be subject to, any applicable
requirements of the Code and the Treasury Regulations thereunder.
INCENTIVE STOCK OPTION: An option, including an Option as the context may
require, intended to meet the requirements of Section 422 of the code and the
regulations thereunder applicable to incentive stock options, or intended to
meet the requirements of a successor provision of the Code.
KEY EMPLOYEE: An employee of Enhance or of a Subsidiary regularly employed
on a full-time basis, including a director if he is such an employee, or an
officer of Enhance or a Subsidiary not so employed, in either event, who, in the
opinion of the Committee, is in a position to make significant contributions to
the success of Enhance or of a Subsidiary.
LONG-TERM INCENTIVE: A long-term incentive granted under this Plan in one
of the forms provided for in Section 3.
NON-STATUTORY STOCK OPTION: An option, including an Option as the context
may require, which is not intended to be an Incentive Stock Option.
OPTION: An option granted under this Plan to purchase shares of Common
Stock.
PARTICIPANT: A Key Employee elected to receive one or more Long-Term
Incentives.
PLAN: The Enhance Financial Services Group Inc. 1997 Long-Term Incentive
Plan for Key Employees herein set forth as the same may from time to time be
amended.
RESTRICTED STOCK AWARD: Shares of Common Stock which are issued or
transferred to a Key Employee subject to restrictions precluding a sale or other
disposition for a period of time and requiring as a condition to retention
compliance with any other terms and conditions (relating to continued employment
and/or achievement of pre-established performance objectives and/or other
matters) that may be imposed by the Committee.
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 which
shares (or other ownership interests) having more than 50% of the voting power,
or representing more than 50% of the net shareholders' equity interest
determined in accordance with generally accepted accounting principles, are
owned or controller, directly or indirectly, by Enhance; provided, however, that
in the case of an Incentive Stock Option, the term "Subsidiary" shall mean a
Subsidiary (as defined by the preceding clause) which is a "subsidiary
corporation" as defined in
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Section 424(f) of the Code and the regulations thereunder, or any provisions
that may be adopted to amend or replace such Section or regulation or both.
3. Grants of Long-Term Incentives
(a) Subject to the provisions of this Plan, the Committee may at any time
or from time to time grant Long-Term Incentives to Key Employees.
(b) Long-Term Incentives maybe granted in either of the following forms:
(i) a Restricted Stock Award, or
(ii) an Option.
(c) The Committee may amend a Long-Term Incentive at any time or from time
to time after the date on which it is granted, provided that no such amendment
shall affect such Long Term Incentive adversely without the consent of the
holder thereof.
4. Stock Subject to this Plan
(a) (1) GENERAL LIMITATIONS Subject to the provisions below of paragraph
4(c) and of Section 7 the maximum number of shares of Common Stock which
may be issued or transferred, and are hereby reserved for issuance or
transfer pursuant to Long-Term Incentives shall not exceed 5,000,000
shares of Common Stock provided that no more than 25% of such shares of
Common Stock shall be issued in the form of Restricted Stock Awards.
(2) INDIVIDUAL LIMITATIONS The maximum number of shares of Common
Stock which may be subject to any Option that may be granted to any Key
Employees elected to participate hereunder shall not exceed 300,000 shares
of Common Stock (subject to any increase or decrease pursuant to Section
7) for each calendar year during the entire term of the Plan. The maximum
number of shares to Common Stock which may be issued or transferred
pursuant to a Restricted Stock Award that may be granted to any Key
Employee selected to participate hereunder shall not exceed 75,000
(subject to any increase or decrease pursuant to Section 7) for each
calendar year during the entire term of the Plan. To the extent that the
maximum number of shares of Common Stock with respect to which Options or
Restricted Stock Awards may be granted are not granted in a particular
year to a Key Employee, such ungranted Options or Restricted Stock Awards
for any year shall increase the maximum number of shares of Common Stock
available to be granted to such Key Employee in subsequent calendar years
during the term of the Plan until used.
(b) Authorized but unissued shares of Common Stock and shares of Common
Stock held in the treasury, whether acquired by Enhance specifically for use
under this Plan or otherwise, may be used, as the Board of Directors may from
time to time determine, for purposes
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of this Plan, provided, however, that any shares acquired or held by Enhance for
the purposes of this Plan shall, unless and until transferred to a Participant
in accordance with the terms and conditions of a Long Term Incentive, be and at
all times remain treasury shares of Enhance, irrespective of whether such shares
are entered in a special account for purposes of this Plan, and shall be
available for any corporate purpose.
(c) If any shares of Common Stock subject to a Long-Term Incentive shall
not be issued or transferred and shall cease to be issuable or transferable
because of the termination, in whole or in part, of such Long-Term Incentive or
for any other reason, or if any such shares shall, after issuance or transfer,
be reacquired by Enhance or a Subsidiary because of the Participant's failure to
comply with the terms and conditions of the Long-Term Incentive granted to him,
the shares not so issued or transferred, or the shares so reacquired by Enhance
or a Subsidiary, shall no longer be charged against the limitations provided for
in paragraph (a)(1) above of this Section 4 and shall again be available for
grant in the form of or pursuant to Long-Term Incentives.
(d) Any Long-Term Incentive granted under this Plan may contain such
provisions requiring or permitting the Participant (or his successor in
interest) to resell to the Company any shares issued or transferred under such
Long-Term Incentive at such time or times, under such circumstances and for such
consideration as the Committee may prescribe.
5. Restricted Stock Awards
Long-Term Incentives in the form of Restricted Stock Awards shall be
subject to such terms and conditions, including, without limitation,
restrictions on the sale or other disposition of the Restricted Stock Award or
of the shares issued or transferred pursuant to such Restricted Stock Award, and
conditions calling for forfeiture of the Restricted Stock Award or the shares
issued or transferred pursuant thereto in designated circumstances, as the
Committee shall determine; provided, however, that upon the issuance or transfer
of shares pursuant to any such Restricted Stock Award, the Participant shall,
with respect to such shares, be and become a shareholder of Enhance fully
entitled to receive dividends, to vote and to exercise all other rights of a
shareholder except to the extent otherwise provided in the Restricted Stock
Award. The Committee may but need not require the Participant to pay the par
value of the shares to be issued or transferred pursuant to a Restricted Stock
Award. Each Restricted Stock Award shall be evidenced by a written instrument in
such form as the Committee shall determine and shall be deemed to incorporate
this Plan by reference, provided that such instrument is consistent with this
Plan.
6. Options
Long-Term Incentives in the form of Options shall be subject to the
following provisions:
(a) Subject to the provisions of Section 7, the purchase price per share
shall be, in the case of an Incentive Stock Option, not less than 100% of the
Fair Market Value of a share of Common Stock on the date the Incentive Stock
Option is granted (or in the case of a Participant
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who, at the time such Incentive Stock Option is granted, owns (after applying
the constructive ownership rules of Section 424(d) of the Code) stock possessing
more than ten percent of the total combined voting power of all classes of stock
of his employer corporation or of its parent or subsidiary corporation (as those
terms are defined in Sections 424(e) and (f) of the Code) (a "10% Shareholder"),
not less than 110% of the Fair Market Value of a share of Common Stock on the
date the Incentive Stock Option is granted) and, in the case of a non-statutory
stock option, not less than 100% of the Fair Market Value of a share of Common
Stock on the date the Non-Statutory Stock Option is granted. The purchase price
shall be paid in cash or, if so provided in the Option (and subject to such
terms and conditions as are specified in the Option), in shares of Common Stock
surrendered to Enhance or in a combination of cash and such shares. Shares of
Common Stock thus surrendered shall be valued at their Fair Market Value on the
date of exercise.
(b) Each Option may become exercisable in one or more installments and at
such time or times and subject to such terms and conditions, as the Committee
shall determine. Unless otherwise provided in the Option, an Option, to the
extent it is or becomes exercisable, may be exercised at any time in whole or in
part until the expiration or termination of the Option. No fractional shares
shall be issued pursuant to the exercise of an Option, and no cash payment shall
be made in lieu of fractional shares.
(c) Each Option shall be exercisable during the life of the optionee only
by him or his guardian or legal representative, and after death only by his
Beneficiary. Notwithstanding the foregoing provisions of this paragraph (c) or
any other provision of this Plan, (i) no Option shall be exercisable after the
expiration of a period of ten years from the date the Option is granted,
provided that no Incentive Stock Option which is granted to a 10% shareholder
shall be exercisable after the expiration of five years from the date such
Option is granted.
(d) Options shall be granted for such lawful consideration as may be
provided in the Option or as the Committee may determine.
(e) Unless otherwise provided in the Option (and subject to such terms and
conditions as are specified in the Option), no Option or any right thereunder
may be assigned or transferred except to a Beneficiary of the Participant.
(f) To the extent that the aggregate Fair Market Value (determined as of
the time a particular Option is granted) of the stock with respect to which
Incentive Stock Options are exercisable for the first time by any individual
during any calendar year (under all plans, including this Plan, of his employer
corporation and its parent and subsidiary corporations (as those terms are
defined in Section 424(e) or (f) of the Code)) exceeds $100,000, such Incentive
Stock Options shall be treated as Non-Statutory Stock Options, notwithstanding
any provision thereof to the contrary. The next preceding sentence shall be
applied by taking options into account in the order in which they were granted.
(g) Each Option shall be evidenced by a written instrument, which shall
contain such terms and conditions, and shall be in such form, as the Committee
shall determine and shall be
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deemed to incorporate this Plan by reference, provided the instrument is
consistent with this Plan. An Option, if so approved by the Committee, may
include terms, conditions, restrictions and limitation in addition to those
provided for in this Plan including, without limitation, terms and conditions
providing for the transfer or issuance of shares on exercise of an Option, which
may be non-transferable and forfeitable to Enhance in designated circumstances,
or providing for the transfer or issuance of shares on a date subsequent to the
date of exercise of the Option.
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 be effected, or the outstanding shares of Common
Stock shall, in connection with a merger or consolidation of Enhance or a sale
by Enhance of all or a part of its assets, be exchanged for a different number
or class of shares of stock or other securities or property of Enhance or any
other entity or person, or a record date for determination of holders of Common
Stock entitled to receive a dividend payable in Common Stock shall occur, (a)
the number and class of shares or other securities or property that may be
issued or transferred pursuant to Long-Term Incentives thereafter granted, (b)
the number and class of shares or other securities or property that may be
issued or transferred under outstanding Long-Term Incentives, (c ) the purchase
price (if any) to be paid per share under outstanding and future Long-Term
Incentives, and (d) the price (if any) to be paid per share by Enhance or a
Subsidiary for shares or other securities or property issued or transferred
pursuant to Long-Term Incentives which are subject to a right of Enhance or a
Subsidiary to reacquire such shares or other securities or property, shall in
each case be equitably adjusted.
(b) Upon any merger or consolidation in which Enhance is not the surviving
corporation or a dissolution or liquidation of Enhance, all outstanding Options
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 and stock appreciation rights
covering the shares of the successor corporation, or a parent or subsidiary
thereof, with appropriate adjustments, in which event the Plan and the Options
theretofore granted or the 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 therefore, shall continue in the manner and under the terms so
provided.
(c) At the discretion of the Committee, any Long-Term Incentive may
provide that, upon the occurrence of any of certain specified events determined
by the Committee, including a change in control of the Company (as such may be
defined by the Committee in its discretion in any agreement granting a Long-Term
Incentive, which definition need not be identical for all such agreements), such
Long-Term Incentive shall, to the extent not theretofore exercisable,
B-6
<PAGE>
payable or free from restrictions, as the case may be, become immediately
exercisable, payable, or free from restrictions, as the case may be, in its
entirety and any shares of Common Stock acquired pursuant to a Long-Term
Incentive which are not fully vested shall immediately become fully vested,
notwithstanding any other provision of the Long-Term Incentive or the Plan.
(d) Each Long-Term Incentive shall provide that, in the event of a merger
or consolidation of Enhance with a third party which is proposed to be accounted
for as a pooling of interests, the Participant shall, if so requested by the
Company and notwithstanding any other provision of such Long-Term Incentive,
agree, as a condition to the exercisability, payment, or lapsing of
restrictions, as the case may be, of such Long-Term Incentive, not to sell,
assign, or gift or in any other way reduce his or her risk relative to the share
of Common Stock issuable pursuant to such Long-Term Incentive and all other
shares of Common Stock owned by such Participant for such period after the
consummation of such merger or consolidation as the Company shall, upon the
advice of its outside accountants, conclusively determine as necessary to ensure
that such merger or consolidation may be validly accounted for as a pooling of
interests.
(e) Adjustments under paragraphs 7(a) and 7(b) shall be made by the
Committee, 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
Committee shall give prompt notice to each Participant affected thereby of the
occurrence of any event giving rise to any adjustment, which notice shall set
forth the new purchase price after giving effect to the adjustment, provided
that such adjustment shall be effective whether or not such notice is given.
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 authorize the granting of Long-Term Incentives,
including 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 Long-Term Incentive granted hereunder shall be automatically
canceled and any shares of Common Stock or cash previously issued or paid under
all Long-Term Incentives shall promptly be returned to the Company in return for
any money or properly it received therefore. The Plan shall terminated at the
close of business on the last day of the ten-year period commencing on the date
the Plan is adopted by the Board, and no Long-Term Incentives may thereafter be
granted, but such termination shall not affect any Long-Term Incentives
theretofore granted. No Long-Term Incentive shall be granted under this Plan
after the number of shares authorized for issuance or transfer hereunder have
been exhausted, but the Plan shall continue in effect thereafter with respect to
Long-Term Incentives theretofore granted.
9. Administration
B-7
<PAGE>
(a) The Plan shall be administered by a Committee of three or more persons
selected by the Board from its own membership. Each member of such Committee
shall qualify (i) during such time as Enhance is a reporting company under the
Securities Exchange Act of 1934, as a "non-employee director" as defined in Rule
16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934 to
the extent then required and (ii) as an "outside director" as defined under
Section 162(m) of the Code.
(b) The Committee 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 Committee shall, subject to the provisions of the
Plan, have full power to interpret and administer the Plan and full authority to
select the Participants in the Plan and determine the number of shares (if any)
to be made subject to each Long-Term Incentive, the type of Long-Term Incentive
to be granted and the terms and conditions of each Long-Term Incentive (which
need not be identical). The interpretation by the Committee of the terms and
provisions of the Plan and the administration thereof, and all action taken by
the Committee, shall be final, binding and conclusive on Enhance, its
stockholders, Subsidiaries, all Participants and employees, and upon their
respective Beneficiaries, successors and assigns, and upon all other persons
claiming under or through any of them.
(c) Members of the Board of Directors and members of the Committee acting
under this Plan shall be fully protected in relying in good faith upon the
advice of counsel and shall incur no liability except for gross or willful
misconduct in the performance of their duties.
(d) The Plan is intended to comply with the exception for performance
based compensation under Section 162(m) of the Code and the regulations
thereunder with respect to Options, and grants of Options shall be limited,
construed and interpreted in a manner so as to comply therewith unless
determined otherwise by the Committee with respect to a particular grant of an
Option.
10. General Provisions
(a) Nothing in this Plan or in any instrument executed pursuant hereto
shall confer upon any person any right to continue in the employment of Enhance
or a Subsidiary, or shall affect the right of Enhance or a Subsidiary to
terminate the employment of any person at any time with or without cause.
(b) No shares of Common Stock shall be issued or transferred pursuant to a
Long-Term Incentive unless and until all legal requirement applicable to the
issuance or transfer, of such shares have, in the opinion of counsel to Enhance,
been complied with. In connection with any such issuance or transfer, the person
acquiring the shares shall if requested by Enhance and whether or not otherwise
required by the terms of the Participant's Long-Term Incentive, give assurances
satisfactory to counsel to Enhance, in respect of such matters as Enhance or a
Subsidiary may deem desirable to assure compliance with all applicable legal
requirements and take any reasonable action to comply with such requirements.
B-8
<PAGE>
(c) No provision of this Plan shall be interpreted or construed to
obligate Enhance to register the shares issuable or transferable hereunder under
the Securities Act of 1933 or disposition of shares of Common Stock issued or
transferred under any Long-Term Incentive may be made unless and until Enhance's
counsel is satisfied that the shares have been registered under the Securities
Act of 1933 and any other applicable federal or state securities laws or that an
exemption from such registration is available. Certificates evidencing any
shares of Common Stock issued or transferred under any Long-Term Incentive shall
be legended in such manner as Enhance's counsel may deem to be necessary or
appropriate to reflect the provisions of this paragraph 10(c).
(d) No person (individually or as a member of a group) and no Beneficiary
or other person claiming under or through him, shall have any right, title or
interest in or to any shares of Common Stock allocated or reserved for the
purposes of this Plan or subject to any Long-Term Incentive except as to such
shares of Common Stock, if any, as shall have been issued or transferred to him.
(e) In the case of a grant of a Long-Term Incentive to a Key Employee of a
Subsidiary, such grant may, if the Board of Directors so approves, be
implemented by Enhance entering into an agreement with the Subsidiary containing
such terms and provisions as the Board of Directors may authorize, including,
without limitation, a provision for the issuance or transfer of the shares
covered by the Long-Term Incentive to the Subsidiary, for such consideration as
the Board of Directors may approve, upon the condition or understanding that the
Subsidiary will transfer the shares to the Key Employee in accordance with the
terms of the Long-Term Incentive.
(f) Enhance or a Subsidiary may make such provisions as it may deem
appropriate for the withholding of any taxes which Enhance or a Subsidiary
determines it is required to withhold in connection with any Long-Term
Incentive. The Committee may, in its sole discretion and subject to such rules
as it may adopt, permit a Participant to elect to satisfy any such withholding
obligation, in whole or in part, by having the Company withhold shares of Common
Stock that are otherwise issuable in connection with such Long-Term Incentive
and have a Fair Market Value equal to the amount required to be withheld, or by
surrendering to the Company previously-acquired shares of Common Stock that have
such a Fair Market Value. Each holder of an Incentive Stock Option shall give
prompt notice to the Company in the event of the disposition by him of any
shares where such disposition occurs within two years after the date of the
grant of such Option or within one year after the date of the such exercise.
(g) Nothing in this Plan is intended to be a substitute for, or shall
preclude or limit the establishment or continuation of, any other plan, practice
or arrangement for the payment of compensation or fringe benefits to directors,
officers, employees or consultants generally, or to any class or group of such
persons, which Enhance or any Subsidiary now has or may hereafter lawfully put
into effect, including, without limitation, any incentive compensation,
retirement, pension, group insurance, stock purchase, stock bonus or stock
option plan.
B-9
<PAGE>
(h) In no event shall Long-Term Incentives be considered compensation to a
Participant for purposes of any other plan of the Company (including any
pension, profit-sharing, severance pay or other employee benefit plans) in
determining benefits to which such Participant may be entitled under such plan.
(i) By accepting any benefits under the Plan, each Participant, and each
person claiming under or through him, shall be conclusively deemed to have
indicated his acceptance and ratification of, and consent to, all provision of
the Plan and any action or decision under the Plan by Enhance, its agents and
employees, the Committee, and the Board.
(j) The validity, construction, interpretation and administration of the
Plan and of any determinations or decisions made thereunder, and the rights of
all persons having or claiming to have any interest therein or thereunder, shall
be governed by, and determined exclusively in accordance with, the laws of the
State of New York, the state in which Enhance is incorporated, but without
giving effect to the principles of conflicts of laws theretofore. 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 conflicted of laws thereof, irrespective of the place where the
act or omission complained of took place and of the residence of any party to
such action and irrespective of the place where the action may be brought.
(k) The use of the masculine gender shall also include with it a meaning
the feminine. The use of the singular shall include within its meaning the
plural and vice versa.
11. Amendment and Termination
(a) This Plan may be amended or terminated by the Board of Directors at
any time and in any respect, including without limitation to permit or
facilitate qualification of Options theretofore or thereafter granted as
Incentive Stock Options under the Code, provided that, without the approval of
the shareholders of the Company, no amendment shall be made which (i) increases
the maximum number of shares of Common Stock that may be issued or transferred
pursuant to Long-Term Incentives, as provided in paragraph (a)(1) of Section 4
or increase the maximum number of shares of Common Stock that may be granted as
Options or Restricted Stock Awards to any Key Employee selected to participate
in the Plan as provided in paragraph (a)(2) of Section 4, (ii) except as may be
required or desirable to conform this Plan to the federal or state securities
laws and regulations that may apply to it from time to time, withdraws the
administration of this Plan from the Committee, (iii) transfers the
administration of this Plan to any person who is not a "non-employee director"
under Rule 16b-3, if Enhance is then a reporting company under the Securities
Exchange Act of 1934, (iv) permits any person who is not a Key Employee to be
granted a Long-Term Incentive, (v) changes the minimum exercise price of any
Option or extends the maximum exercise term of any Option or otherwise
materially increases the benefits accruing to participants in the Plan, (vi)
amends this Section 11, or (v) requires shareholder approval in order for the
Plan to continue to comply with the exception for performance-based compensation
under Section 162(m) of the Code.
B-10
<PAGE>
(b) No amendment or termination of this Plan by the Board of Directors or
the shareholders of Enhance shall affect adversely any Long-Term Incentive
theretofore granted without the consent of the holder thereof.
B-11
<PAGE>
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PROXY
ENHANCE FINANCIAL SERVICES GROUP INC.
ANNUAL MEETING OF SHAREHOLDERS -- JUNE 3, 1999
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, 1999, 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 PROPOSALS 1, 2, 3 AND 4.
-----------
SEE REVERSE
SIDE
-----------
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^FOLD AND DETACH HERE^
<PAGE>
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|X| Please mark your votes as in this example. |_
The board of directors recommends a vote FOR Proposals 1, 2, 3 and 4.
FOR WITHHOLD
All nominees AUTHORITY
listed (except as to vote for all
marked exceptions) nominees listed)
1. Election of Directors. |_| |_|
For, except vote withheld from the following nominee(s):
- -------------------------------------------------------------------------
Nominee(s):
Daniel Gross, Brenton W. Harries, David R. Markin, Jay A. Novik, Robert P.
Saltzman, Wallace O. Sellers, Richard J. Shima, Spencer R. Stuart, Allan R.
Tessler, Freida K. Wallison, Jerry Wind.
FOR AGAINST ABSTAIN
2. Approval of amendment to the restated certificate
of incorporation. |_| |_| |_|
3. Approval of amendment to the 1997 Long-Term Incentive
Plan for Key Employees. |_| |_| |_|
4. Ratification of appointment of Deloitte & Touche LLP
to serve as outside auditor for 1999. |_| |_| |_|
5. In their discretion to vote on such other matters as may properly come before
the meeting.
I will be attending the meeting. |_| I will not be attending the meeting. |_|
Please sign, date, and return this proxy card promptly using the enclosed
envelope.
SIGNATURE(S) DATE , 1999.
------------------------------------- ----------------
Please sign exactly as names 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 persons.
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^FOLD AND DETACH HERE^
