<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NOS. 333-49271 AND
333-49271-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHILADELPHIA CONSOLIDATED HOLDING CORP.
PCHC FINANCING I
(EXACT NAME OF EACH REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2202671 - PHILADELPHIA CONSOLIDATED HOLDING CORP.
DELAWARE TO BE APPLIED FOR - PCHC FINANCING I
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OF EACH REGISTRANT)
</TABLE>
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PA 19004
(610) 617-7900
FAX: (610) 617-7600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF EACH
OF THE REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. JAMES J. MAGUIRE, PRESIDENT
OR
MR. CRAIG P. KELLER, SECRETARY
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(610) 617-7900
FAX: (610) 617-7600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JASON M. SHARGEL, ESQUIRE JOHN W. OSBORN, ESQUIRE
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
TWELFTH FLOOR, PACKARD BUILDING 919 THIRD AVENUE
111 SOUTH 15TH STREET NEW YORK, NY 10022
PHILADELPHIA, PENNSYLVANIA 19102-2678 (212) 735-3000
(215) 977-2216 FAX: (212) 735-2000
FAX: (215) 977-2334
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: from time
to time after the effective date of this registration statement as determined by
market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 24, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL , 1998)
9,000,000 FELINE PRIDES(SM)
(CONSISTING OF INCOME PRIDES(SM) AND GROWTH PRIDES(SM))
PHILADELPHIA CONSOLIDATED
HOLDING CORP. [BELL LOGO]
[PHILADELPHIA INSURANCE COMPANIES]
,000,000 TRUST PREFERRED SECURITIES(SM)
PCHC FINANCING I
% TRUST ORIGINATED PREFERRED SECURITIES(SM)("TOPRS"(SM))
(LIQUIDATION AMOUNT $10 PER TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED TO
THE EXTENT SET FORTH HEREIN BY
PHILADELPHIA CONSOLIDATED HOLDING CORP.
------------------------
The securities offered hereby are 9,000,000 FELINE PRIDES(SM) ("FELINE
PRIDES") of Philadelphia Consolidated Holding Corp., a Pennsylvania corporation
("Philadelphia Consolidated" or the "Company"), and at least 1,000,000 %
Trust Originated Preferred Securities (the "Trust Preferred Securities" and,
together with the FELINE PRIDES, the "Securities") of PCHC Financing I, a
statutory business trust formed under the laws of the State of Delaware (the
"Trust"), having a stated liquidation amount per Trust Preferred Security equal
to $10. Initially, up to 8,000,000 Trust Preferred Securities will be issued
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE S-26 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE SECURITIES.
Prior to the offering made hereby there has been no public market for the
Securities. Application will be made to have the Income PRIDES and the Growth
PRIDES listed on the Nasdaq National Market (the "NNM") of The Nasdaq Stock
Market Inc., subject to official notice of issuance. If the Trust Preferred
Securities are separately traded to a sufficient extent that the applicable
market listing requirements are met, the Company will endeavor to cause such
securities to be listed on the market on which the Income PRIDES and the Growth
PRIDES are then listed including, if applicable, the NNM. On April 23, 1998, the
last reported sale price of the Common Stock on the NNM was $21 11/16 per share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO PUBLIC(1)
--------------------
$ per Income PRIDES
$ per Growth PRIDES
$ per Trust Preferred Security
<TABLE>
<CAPTION>
=====================================================================================================================
UNDERWRITING PROCEEDS TO
COMMISSION(2) COMPANY(3)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total(4)................................................ $ $
=====================================================================================================================
</TABLE>
(1) Plus, as applicable, accrued distributions, interest and Contract Adjustment
Payments, if any, from April , 1998. The purchase price of each Income
PRIDES and Growth PRIDES will be allocated between the related Purchase
Contract and the related Trust Preferred Security, in the case of Income
PRIDES, and interest in a Treasury Security, in the case of Growth PRIDES,
as applicable, in proportion to their respective fair market values at the
time of purchase. See "Certain Federal Income Tax Consequences -- FELINE
PRIDES -- Allocation of Purchase Price."
(2) Philadelphia Consolidated and the Trust have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by Philadelphia Consolidated estimated at
$ ; such amount does not include $ used to purchase the
Treasury Securities component of the 1,000,000 Growth PRIDES.
(4) Philadelphia Consolidated and the Trust have granted to the Underwriter
30-day options to purchase up to an additional Income PRIDES,
Growth PRIDES and Trust Preferred Securities, to cover
over-allotments, if any; provided, however, that the Underwriter must
purchase at least as many Trust Preferred Securities as Growth PRIDES. If
such options are exercised in full, the total Underwriting Commission and
Proceeds to Philadelphia Consolidated will be $ and $ (such
amount does not include $ used to purchase the Treasury Securities
component of the Growth PRIDES), respectively. See "Underwriting."
------------------------
The Securities are offered by the Underwriter, subject to prior sale, when,
as and if issued to and accepted by it, and subject to approval of certain legal
matters by counsel for the Underwriter and certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the
Securities offered hereby will be made in New York, New York on or about April
, 1998.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus Supplement is April , 1998.
- ---------------
(SM) Service Mark of Merrill Lynch & Co., Inc.
<PAGE> 3
(cover continued from previous page)
and held as a component of the FELINE PRIDES. The FELINE PRIDES offered hereby
will initially consist of (A) up to 8,000,000 units (referred to as "Income
PRIDES(SM)") with a Stated Amount, per Income PRIDES, of $10 (the "Stated
Amount") and (B) at least 1,000,000 units (referred to as "Growth PRIDES(SM)")
with a face amount, per Growth PRIDES, equal to the Stated Amount; to the extent
the number of Growth PRIDES offered hereby is increased, the number of separate
Trust Preferred Securities offered hereby will be increased by at least that
number. Each Income PRIDES will initially consist of a unit comprised of (a) a
stock purchase contract (a "Purchase Contract") under which (i) the holder will
purchase from Philadelphia Consolidated not later than , 2001 (the
"Purchase Contract Settlement Date"), for $10, a number of newly issued shares
of common stock, no par value per share (the "Common Stock"), of Philadelphia
Consolidated equal to the Settlement Rate described herein, and (ii)
Philadelphia Consolidated will pay the holder unsecured contract adjustment
payments ("Contract Adjustment Payments"), if any, at the rate of % of the
Stated Amount per annum and (b) either beneficial ownership of a Trust Preferred
Security or, upon the occurrence of a Tax Event Redemption (as defined herein)
prior to the Purchase Contract Settlement Date, the Applicable Ownership
Interest (as defined herein). Each Growth PRIDES will initially consist of a
unit comprised of (a) a Purchase Contract under which (i) the holder will
purchase from Philadelphia Consolidated on the Purchase Contract Settlement
Date, for $10, a number of newly issued shares of Common Stock of Philadelphia
Consolidated, equal to the Settlement Rate, and (ii) Philadelphia Consolidated
will pay the holder Contract Adjustment Payments, if any, at the rate of %
of the Stated Amount per annum, and (b) a 1/100 undivided beneficial ownership
interest in a % zero-coupon U.S. Treasury Security (CUSIP No. ) having
a principal amount equal to $1,000 and maturing on , 2001 (the
"Treasury Securities"). Philadelphia Consolidated will, directly or indirectly,
own all the common securities (the "Common Securities" and, together with the
Trust Preferred Securities, the "Trust Securities") representing undivided
beneficial ownership interests in the assets of the Trust. The Trust exists for
the sole purpose of issuing the Trust Securities and investing the proceeds
thereof in an equivalent amount of Debentures of Philadelphia Consolidated, due
, 2003 and initially bearing interest at % per annum (the
"Debentures"). As long as the FELINE PRIDES are in the form of Income PRIDES or
Growth PRIDES, the related Trust Preferred Securities or Treasury Securities or
the Treasury Portfolio (as defined herein), as applicable, will be pledged to
the Collateral Agent (as defined herein), to secure the holder's obligation to
purchase Common Stock under the related Purchase Contracts.
The number of shares of Common Stock issuable upon settlement of each
Purchase Contract on the Purchase Contract Settlement Date (the "Settlement
Rate") will be calculated as follows: (a) if the Applicable Market Value (as
defined herein) is equal to or greater than $ (the "Threshold Appreciation
Price," which is approximately % above the last reported sale price of the
Common Stock set forth on the cover page of the final Prospectus Supplement (the
"Reference Price")), the Settlement Rate will be ; (b) if the Applicable
Market Value is less than the Threshold Appreciation Price but greater than the
Reference Price, the Settlement Rate will be equal to the Stated Amount divided
by the Applicable Market Value; and (c) if the Applicable Market Value is less
than or equal to the Reference Price, the Settlement Rate will be .
Aggregate payments of % of the Stated Amount per annum will be made or
accrue on each Income PRIDES quarterly in arrears on February 16, May 16, August
16 and November 16 of each year, commencing , 1998, until the Purchase
Contract Settlement Date. These payments will consist of cumulative cash
distributions on the related Trust Preferred Securities or Treasury Portfolio,
as applicable, payable at the rate of % of the stated liquidation amount
per annum, and Contract Adjustment Payments, if any, payable by Philadelphia
Consolidated at the rate of % of the stated liquidation amount per annum,
subject in the case of Trust Preferred Securities and Contract Adjustment
Payments, if any, to Philadelphia Consolidated's right to defer payment of such
amounts. Contract Adjustment Payments, if any, payable by Philadelphia
Consolidated at the rate of % of the Stated Amount per annum, will be made
or accrue on each Growth PRIDES quarterly in arrears on February 16, May 16,
August 16 and November 16 of each year, commencing , 1998, until the
Purchase Contract Settlement Date, subject to Philadelphia Consolidated's right
to defer such payments. In addition, original issue discount ("OID") will accrue
on the related Treasury
S-2
<PAGE> 4
Security. Subject to Philadelphia Consolidated's right to defer such payments,
holders of each Trust Preferred Security will receive cumulative cash
distributions, payable quarterly in arrears, on February 16, May 16, August 16
and November 16 of each year, commencing , 1998 at the rate of %
of the stated liquidation amount per annum. Such quarterly distributions on the
Trust Preferred Securities will constitute a portion of the quarterly
distribution on the related Income PRIDES. The ability of the Trust to make the
quarterly distributions on the Trust Preferred Securities will be solely
dependent upon the receipt of corresponding interest payments from Philadelphia
Consolidated on the Debentures. Philadelphia Consolidated will have the right at
any time, and from time to time, limited to a period not extending beyond the
maturity date of the Debentures, to defer the interest payments due on the
Debentures. As a consequence of such deferral, quarterly distributions on the
Trust Preferred Securities and the Income PRIDES (to the extent that all or a
portion of the quarterly distribution on the Income PRIDES is comprised of the
quarterly distributions on the Trust Preferred Securities) would be deferred,
but would continue to accrue with interest, at the rate of % of the Stated
Amount per annum, compounded quarterly. Philadelphia Consolidated will have the
right at any time, and from time to time, limited to a period not extending
beyond the Purchase Contract Settlement Date, to defer Contract Adjustment
Payments, if any. As a consequence of such deferral, such portion of the
cumulative quarterly distributions on the Income PRIDES that is comprised of the
Contract Adjustment Payments, if any, and the quarterly cash distributions on
the Growth PRIDES would be deferred; however, such deferred Contract Adjustment
Payments, if any, would continue to accrue at the rate of % per annum,
compounded quarterly at the higher of (i) the rate that would accrue on Income
PRIDES for such payments and (ii) the rate that would accrue on Growth PRIDES
for such payments.
The distribution rate on the Trust Preferred Securities and the interest
rate on the related Debentures outstanding on and after the Purchase Contract
Settlement Date will be reset on the third Business Day (as defined herein)
immediately preceding the Purchase Contract Settlement Date to a rate per annum
(the "Reset Rate") to be determined by the reset agent (the "Reset Agent") equal
to the sum of (x) a spread amount (the "Reset Spread") and (y) the rate of
interest on the Two-Year Benchmark Treasury (as defined herein).
The payment of distributions and certain redemptions out of monies held by
the Trust and payments on liquidation of the Trust will be guaranteed by
Philadelphia Consolidated (the "Guarantee") to the extent described herein and
under "Description of the Guarantee."
Philadelphia Consolidated's obligations in respect of the Debentures will
be senior unsecured obligations of Philadelphia Consolidated. Philadelphia
Consolidated's obligations in respect of the Guarantee and the Contract
Adjustment Payments, if any, will be subordinated and junior in right of payment
only to Philadelphia Consolidated's obligations under the Senior Indebtedness
(as defined herein). "Senior Indebtedness" means indebtedness of any kind of
Philadelphia Consolidated unless the instrument under which such indebtedness is
incurred expressly provides that it is in parity or subordinate in right of
payment to the Contract Adjustment Payments, if any, and the Guarantee.
If the holder of an Income PRIDES has not notified the Purchase Contract
Agent (as defined herein), in the manner described herein, of its intention to
settle the related Purchase Contract with separate cash, the Remarketing Agent
(as defined herein), pursuant to the terms of the Remarketing Agreement (as
defined herein), will use its reasonable efforts to remarket the related Trust
Preferred Security (bearing the Reset Rate) on the third Business Day
immediately preceding the Purchase Contract Settlement Date for settlement on
the Purchase Contract Settlement Date at a price of approximately 100.5% of such
Trust Preferred Security's stated liquidation amount plus accrued and unpaid
distributions (including deferred distributions, if any) thereon. The proceeds
from such remarketing, in an amount equal to the aggregate stated liquidation
amount of such Trust Preferred Securities, will automatically be applied to
satisfy in full such holder's obligation to purchase Common Stock under the
related Purchase Contract. In addition, after deducting as a remarketing fee
(the "Remarketing Fee") an amount not exceeding 25 basis points (.25%) of the
aggregate stated liquidation amount of the remarketed securities from any amount
received in connection with such remarketing in excess of the aggregate stated
liquidation amount of such Trust Preferred Securities plus any accrued and
unpaid distributions (including deferred distributions, if any), the Remarketing
Agent will remit the remaining portion of the proceeds, if any, to the Purchase
Contract Agent for the benefit of such
S-3
<PAGE> 5
holder. If, despite using its reasonable efforts, the Remarketing Agent fails to
remarket the Trust Preferred Securities (other than to Philadelphia
Consolidated) at a price not less than 100% of their aggregate stated
liquidation amount plus accrued and unpaid distributions (including deferred
distributions, if any), the remarketing will be deemed to have failed (a "Failed
Remarketing") and Philadelphia Consolidated will exercise its rights as a
secured party to dispose of the Trust Preferred Securities in accordance with
applicable law and satisfy in full, from the proceeds of such disposition, such
holder's obligation to purchase Common Stock under the related Purchase
Contracts; provided that, if Philadelphia Consolidated exercises such rights as
a secured party with respect to such Trust Preferred Securities, any accrued and
unpaid distributions (including any deferred distributions, if any) on such
Trust Preferred Securities will be paid in cash by Philadelphia Consolidated to
the holder of record of such Trust Preferred Securities. Holders of Trust
Preferred Securities that are not components of Income PRIDES may elect, in the
manner described below, to have their Trust Preferred Securities remarketed by
the Remarketing Agent.
On or prior to the fifth Business Day immediately preceding the Purchase
Contract Settlement Date, each holder (including an Underwriter) of an Income
PRIDES may substitute for the related Trust Preferred Securities held by the
Collateral Agent zero-coupon U.S. Treasury Securities (CUSIP No. ), which
are principal strips of the % U.S. Treasury Securities that mature on the
Business Day immediately preceding the Purchase Contract Settlement Date (the
"Treasury Securities"), thereby creating Growth PRIDES. Such Treasury Securities
will be pledged with the Collateral Agent to secure the holder's obligation to
purchase Common Stock under the related Purchase Contracts. In the event that
Contract Adjustment Payments, if any, are at a higher rate for Growth PRIDES
than for Income PRIDES, holders of Income PRIDES wishing to create Growth PRIDES
will also be required to deliver cash in an amount equal to the excess of the
Contract Adjustment Payments, if any, that would have accrued since the last
Payment Date through the date of substitution on the Growth PRIDES being created
by such holders, over the Contract Adjustment Payments, if any, that have
accrued over the same time period on the related Income PRIDES.
On or prior to the fifth Business Day immediately preceding the Purchase
Contract Settlement Date, each holder (including an Underwriter) of a Growth
PRIDES may substitute for the related Treasury Securities held by the Collateral
Agent Trust Preferred Securities, thereby creating Income PRIDES. Such Trust
Preferred Securities will be pledged with the Collateral Agent to secure the
holder's obligation to purchase Common Stock under the related Purchase
Contracts. Upon the substitution of Trust Preferred Securities for the related
Treasury Securities as collateral, such Treasury Securities will be released to
the Growth PRIDES holder as described herein.
If a Failed Remarketing has occurred, each holder of Trust Securities (or,
following the distribution of the Debentures upon a dissolution of the Trust as
described herein, the holders of such Debentures) holding such Trust Securities
(or Debentures, as the case may be) following the Purchase Contract Settlement
Date will have the right, in the case of the Trust Securities, to require the
Trust to distribute their pro rata share of the Debentures to The First National
Bank of Chicago (the "Exchange Agent") and the Exchange Agent will put such
Debentures to Philadelphia Consolidated on behalf of such holders (or in the
case of the persons who hold the Debentures directly, such persons will have the
right to put their Debentures directly to Philadelphia Consolidated) on
, 2001, upon at least three Business Days' prior notice, at a price
equal to the principal amount thereof, plus accrued and unpaid interest
(including deferred interest), if any, thereon.
On the Business Day immediately preceding the Purchase Contract Settlement
Date, unless a holder of Income PRIDES or Growth PRIDES (i) has settled the
related Purchase Contracts through the early delivery of cash to the Purchase
Contract Agent in the manner described herein, (ii) in the case of Income
PRIDES, has settled the related Purchase Contracts with separate cash on the
Business Day immediately preceding the Purchase Contract Settlement Date
pursuant to prior notification to the Purchase Contract Agent, (iii) has had the
Trust Preferred Securities related to such holder's Purchase Contract remarketed
in the manner described herein in connection with settling such Purchase
Contracts, or (iv) an event described under "Description of the Purchase
Contracts -- Termination" has occurred, then (A) in the case of Income PRIDES
(unless a Tax Event Redemption has occurred) Philadelphia Consolidated will
exercise its rights as a secured party to dispose of the Trust Preferred
Securities in accordance with applicable law and (B) in the case of Growth
PRIDES or Income PRIDES (in the event that a Tax Event Redemption has occurred),
the
S-4
<PAGE> 6
principal amount of the related Treasury Securities or the appropriate
Applicable Ownership Interest of the Treasury Portfolio, as applicable, when
paid at maturity, will automatically be applied, pursuant to the exercise of
such rights by Philadelphia Consolidated to satisfy in full such holder's
obligation to purchase Common Stock under the related Purchase Contracts.
In the event that a holder of either Income PRIDES or Growth PRIDES effects
the early settlement of the related Purchase Contracts through the delivery of
cash or settles (in the case of Income PRIDES) such Purchase Contracts with cash
on the Business Day immediately preceding the Purchase Contract Settlement Date,
the related Trust Preferred Securities or the appropriate Applicable Ownership
Interest of the Treasury Portfolio or Treasury Securities, as the case may be,
will be released to the holder as described herein.
Philadelphia Consolidated will have the right at any time to dissolve the
Trust and, after satisfaction of liabilities to creditors, cause the Debentures
to be distributed to the holders of the Trust Securities.
The Debentures (and, thus, the Trust Securities) are redeemable at the
option of Philadelphia Consolidated, in whole but not in part, upon the
occurrence and continuation of a Tax Event (as defined herein) under the
circumstances described herein (a "Tax Event Redemption"). If Philadelphia
Consolidated so redeems all of the Debentures, the Trust must redeem all of the
Trust Securities at a redemption price (the "Redemption Price") per Trust
Security equal to the Redemption Amount (as defined herein) plus accrued and
unpaid distributions including deferred distributions, if any, thereon to the
date fixed for redemptions and pay in cash such Redemption Price to the holders
of such Trust Securities. If such Tax Event Redemption occurs prior to the
Purchase Contract Settlement Date, the Redemption Price payable in liquidation
of the Income PRIDES holders' interests in the Trust or in the Debentures will
be distributed to the Collateral Agent, who in turn will apply an amount equal
to the Redemption Amount of such Redemption Price to purchase, on behalf of the
holders of Income PRIDES, the Treasury Portfolio and remit the remaining
portion, if any, of such Redemption Price to the Purchase Contract Agent for
payment to the holder of such Income PRIDES. See "Description of the
Debentures -- Tax Event Redemption." Such Treasury Portfolio will be substituted
for the Trust Preferred Securities and will be pledged to the Collateral Agent
to secure such Income PRIDES holders' obligations to purchase the Common Stock
under their Purchase Contracts.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES AND
THE COMMON STOCK OF PHILADELPHIA CONSOLIDATED. SUCH TRANSACTIONS MAY INCLUDE
STABILIZING TRANSACTIONS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
S-5
<PAGE> 7
PROSPECTUS SUPPLEMENT SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and
consolidated financial statements (including the notes thereto) of the Company
appearing elsewhere in the accompanying Prospectus, this Prospectus Supplement
or in the documents incorporated herein or in the accompanying Prospectus by
reference. All financial information in this Prospectus Supplement is presented
in conformity with generally accepted accounting principles ("GAAP") unless
otherwise specified. A listing of the pages on which certain definitions of
capitalized terms used in this Prospectus Supplement Summary and elsewhere in
this Prospectus Supplement are defined is set forth in the "Index of Terms for
Prospectus Supplement" herein. Except as otherwise noted, all information in
this Prospectus Supplement assumes no exercise of the Underwriters'
over-allotment option. Unless the context otherwise requires, (i) "Philadelphia
Consolidated" or the "Company" refers to Philadelphia Consolidated Holding Corp.
and its subsidiaries, (ii) the "Insurance Subsidiaries" refers to Philadelphia
Indemnity Insurance Company ("PIIC") and Philadelphia Insurance Company ("PIC"),
collectively, and (iii) "MIA" refers to Maguire Insurance Agency, Inc., an
underwriting manager.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Prospectus Supplement and the
accompanying Prospectus, and certain information filed or to be filed with the
Securities and Exchange Commission (the "Commission") and incorporated by
reference in the accompanying Prospectus, contain or will contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's
actual results could differ materially from those set forth in the
forward-looking statements. See "Risk Factors" in this Prospectus Supplement for
a discussion of certain factors that might cause such a difference.
THE COMPANY
The Company designs, underwrites, and markets (i) specialized property and
casualty insurance products for select markets, primarily targeting the auto
rental and leasing industries, non-profit organizations, assisted living and
nursing home facilities, homeowners associations, the health, fitness and
wellness industry and private schools and (ii) select classes of professional
liability products.
The Company seeks to achieve underwriting profits through conservative
underwriting and pricing discipline and differentiates itself through the
development of value-added coverage and service enhancements. The Company's
strategy consists of (i) a "mixed" marketing approach wherein its direct sales
production underwriting organization also markets through "preferred agents" and
a network of independent insurance brokers, (ii) value-added coverage
enhancements which strengthen its niche position and (iii) delivery of quality
service to policyholders.
The Insurance Subsidiaries are rated "A+" (Superior) by A.M. Best Company
and have also been assigned an "A" claims-paying ability rating by Standard &
Poor's. Over the five years ended December 31, 1997, the Company has achieved
(i) an 87.7% average statutory combined ratio versus an industry average (as
reported by A.M. Best Company) of 105.7%; (ii) a 33.7% compound annual growth
rate in gross written premiums, from $37.2 million at December 31, 1992 to
$159.1 million at December 31, 1997; (iii) a 75.7% compound annual growth rate
in net operating income; and (iv) an average return on average adjusted equity
of 16.6%. For the year ended December 31, 1997, the Company achieved an average
policy renewal rate of approximately 85%. For the three month period ended March
31, 1998, gross written premiums and net operating income were $40.3 million and
$4.5 million, respectively, as compared to $34.6 million and $3.6 million,
respectively, for the three month period ended March 31, 1997. As of March 31,
1998, the Company had total assets of $311.1 million and shareholders' equity of
$119.7 million.
The Company's principal products include (i) primary liability automobile
policies for rental car companies and their customers, as well as excess
liability and primary physical damage policies protecting the
S-6
<PAGE> 8
rental car company only, (ii) excess bodily injury and property damage liability
policies for rental car customers, (iii) a full range of liability and physical
damage policies for automobile leasing companies and their customers, (iv)
package policies and directors' and officers liability ("D&O") policies for
non-profit organizations, (v) specialty professional liability policies for
independent insurance agents, (vi) a miscellaneous professional liability
program offered to an array of professional groups and (vii) a proprietary
package of professional liability coverages for public and private companies.
The following table sets forth, for the years ended December 31, 1997 and
1996, the gross written premiums for the Company's insurance product lines and
the relative percentages that such premiums represented.
<TABLE>
<CAPTION>
GROSS WRITTEN PREMIUMS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996
---------------------- ----------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial Automobile........................... $ 18,415 11.6% $ 18,506 13.5%
Excess Liability................................ 59,296 37.3 56,411 41.2
Commercial Package.............................. 60,012 37.7 43,707 32.0
Specialty Lines................................. 20,748 13.0 16,558 12.1
Involuntary..................................... 620 .4 1,673 1.2
-------- ----- -------- -----
Total........................................... $159,091 100.0% $136,855 100.0%
======== ===== ======== =====
</TABLE>
The Company distributes its products (i) directly through its production
underwriting organization, (ii) through its "preferred agent" program and (iii)
through a network of independent brokers. At year-end 1997, the production
underwriting organization consisted of 100 employees located in 38 proprietary
field offices in major markets across the U.S. The production underwriting
organization includes telemarketing staffs at the Company's regional offices and
its home office.
The Company has formed strong business relationships with "preferred
agents," brokers selected by the Company on the basis of their specialization in
certain of the Company's business niches. At year-end 1997, the Company had 35
preferred agent relationships. In addition, the Company has relationships with
approximately 4,000 brokers either as a result of customers' existing
relationships with such brokers or through brokers actively seeking the
Company's expertise in one of its specialty products. Approximately 47% of total
1997 gross premium was produced directly by the production underwriting
organization. The remaining 53% was produced indirectly through the Company's 35
preferred agents (11%) and its independent broker relationships (42%). The
Company supplements its marketing efforts through trade shows, direct mailings,
and advertisements placed in select national trade magazines.
The Company continually seeks out and evaluates new product opportunities,
consistent with its focus on select market niches. Using market intelligence
gathered by its production underwriting organization and home office staff, the
Company believes it is positioned to create products which are responsive to
customer needs. In the product development process, the Company incorporates
features which differentiate its policies and services from those of its
competitors on non-price terms. The Company thoroughly trains its production
underwriting organization to promote these distinctive features.
The Company seeks acquisition opportunities, which may include books of
business, to complement its niche markets or parallel its conservative
underwriting and pricing discipline. The Company has had discussions relating to
possible acquisitions with a number of parties, but has not reached agreement
with respect to the terms of any such acquisition and, accordingly, there is no
assurance that any such transaction will be completed.
PIIC is a Pennsylvania-domiciled property and casualty insurance company.
PIIC is licensed as a property and casualty insurer in 48 states. PIC, also
domiciled in Pennsylvania, writes surplus lines property and casualty policies
in 37 states. MIA acts as underwriting manager for the Insurance Subsidiaries,
providing marketing, underwriting, claims management, investment and general
administration services.
The Company is listed on the NNM under the symbol "PHLY."
S-7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following summary consolidated financial data have been derived from
the consolidated financial statements of Philadelphia Consolidated and should be
read in conjunction with the consolidated financial statements of Philadelphia
Consolidated and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus Supplement.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Gross Written Premiums................... $159,091 $136,855 $104,180 $ 89,099 $ 57,085
Net Written Premiums..................... $111,797 $ 83,994 $ 62,072 $ 55,398 $ 40,645
Net Earned Premiums...................... $100,555 $ 72,050 $ 58,188 $ 52,085 $ 37,484
Net Investment Income.................... 9,703 7,910 6,506 4,902 3,269
Net Realized Investment Gain (Loss)...... (16) 260 181 (1,697) 1,327
Other Income............................. 228 282 309 314 1,169
-------- -------- -------- -------- --------
Total Revenue.................. $110,470 $ 80,502 $ 65,184 $ 55,604 $ 43,249
======== ======== ======== ======== ========
Net Income............................... $ 16,870 $ 13,374 $ 9,830 $ 5,973 $ 4,232
======== ======== ======== ======== ========
PER SHARE DATA:
Basic Earnings Per Share(1)(2)........... $1.38 $1.13 $0.85 $0.51 $0.60
Diluted Earnings Per Share(1)(2)......... $1.13 $0.94 $0.72 $0.45 $0.48
OTHER DATA:
Combined Ratio (GAAP basis)(3)........... 85.9% 86.5% 86.5% 89.4% 91.1%
Return on Shareholders' Equity(4)........ 19.5% 18.8% 16.8% 14.3% 13.4%
BALANCE SHEET DATA:
Total Investments........................ $217,666 $168,578 $134,406 $ 89,256 $ 73,628
Total Assets............................. 288,126 225,938 174,148 140,718 116,135
Total Shareholders' Equity............... 111,284 85,642 68,316 52,600 49,018
SELECTED STATUTORY DATA FOR INSURANCE
SUBSIDIARIES:
Policyholders' Surplus................... $105,985 $ 81,906 $ 67,500 $ 56,027 $ 51,197
Combined Ratio........................... 84.4% 86.8% 86.7% 89.4% 91.0%
</TABLE>
- ---------------
(1) 1996, 1995, 1994 and 1993 restated to reflect a two for one split of
Philadelphia Consolidated's common stock distributed in November 1997.
(2) 1996, 1995, 1994, 1993 earnings per share amounts restated in accordance
with the provisions of SFAS No. 128 adopted as of December 31, 1997.
(3) The sum of the net loss and loss adjustment expenses and acquisition costs
and other underwriting expenses divided by net earned premiums.
(4) Based on net operating income (net income less after tax net realized
investment gain or losses) for the twelve month period divided by average
shareholders' equity for the twelve month period (excluding any unrealized
investment gains or losses and goodwill).
S-8
<PAGE> 10
THE TRUST
PCHC Financing I is a statutory business trust created under Delaware law
pursuant to (i) a declaration of trust, dated as of April 2, 1998, executed by
Philadelphia Consolidated, as sponsor (the "Sponsor"), and certain of the
trustees of the Trust (the "Philadelphia Consolidated Trustees") and (ii) the
filing of a certificate of trust with the Secretary of State of the State of
Delaware on April 2, 1998. Such declaration will be amended and restated in its
entirety (as so amended and restated, the "Declaration") substantially in the
form filed as an exhibit to the Registration Statement of which this Prospectus
Supplement forms a part. The Declaration will be qualified as an indenture under
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Trust exists for the exclusive purposes of (i) issuing the Trust Securities
representing undivided beneficial ownership interests in the assets of the
Trust, (ii) investing the gross proceeds of the Trust Securities in the
Debentures and (iii) engaging in only those other activities necessary,
appropriate, convenient or incidental thereto. See "The Trust."
THE OFFERING
Securities Offered......... 9,000,000 FELINE PRIDES, consisting of up to
8,000,000 Income PRIDES and at least 1,000,000
Growth PRIDES and 1,000,000 separate Trust
Preferred Securities. Up to 8,000,000 Trust
Preferred Securities will be initially issued and
held as a component of the Income PRIDES. To the
extent that the number of Growth PRIDES offered
hereby is increased, the number of separate Trust
Preferred Securities offered hereby will be
increased by at least that number.
Issuers.................... Philadelphia Consolidated Holding Corp. and PCHC
Financing I.
Stated Amount.............. $10 per FELINE PRIDES.
Listing of the Income
PRIDES, Growth PRIDES and
Trust Preferred
Securities............... Application will be made to have the Income PRIDES
and the Growth PRIDES listed on the NNM, subject to
official notice of issuance. If the Trust Preferred
Securities are separately traded to a sufficient
extent that the applicable market listing
requirements are met, the Company will endeavor to
cause such securities to be listed on the market on
which the Income PRIDES and the Growth PRIDES are
then listed including, if applicable, the NNM. See
"Underwriting."
NNM Symbol of Common
Stock...................... "PHLY"
Use of Proceeds............ All or substantially all of the proceeds from the
sale of the Growth PRIDES will be used to purchase
the underlying Treasury Securities to be
transferred to holders of the Growth PRIDES
pursuant to the terms thereof and the remainder, if
any, will be paid to the Company. All of the
proceeds from the sale of the Trust Preferred
Securities that are not components of Income PRIDES
and from the sale of the Common Securities and all
or substantially all of the proceeds from the sale
of the Income PRIDES will be invested by the Trust
in Debentures of Philadelphia Consolidated, and the
remainder of the proceeds from the sale of the
Income PRIDES, if any, will be paid to the Company.
Philadelphia Consolidated currently anticipates
using all of the net proceeds from the sale of the
Debentures, the Income PRIDES and the Growth
PRIDES, estimated to be approximately $
million, for general corporate purposes, which may
include acquisitions (including, without
limitation, acquisitions of programs or books of
business),
S-9
<PAGE> 11
capital expenditures, capital contributions to its
subsidiaries and the repurchase by Philadelphia
Consolidated of its Common Stock.
Components of FELINE
PRIDES................... The 9,000,000 FELINE PRIDES offered hereby will
initially consist of (A) up to 8,000,000 units
referred to as Income PRIDES and (B) at least
1,000,000 units referred to as Growth PRIDES; to
the extent that the number of Growth PRIDES offered
hereby is increased, the number of separate Trust
Preferred Securities offered hereby will be
increased by at least that number. Each Income
PRIDES will initially consist of a unit comprised
of (a) a Purchase Contract under which (i) the
holder will purchase from Philadelphia Consolidated
on the Purchase Contract Settlement Date, for an
amount of cash equal to the Stated Amount, a number
of newly issued shares of Common Stock of
Philadelphia Consolidated equal to the Settlement
Rate, and (ii) Philadelphia Consolidated will pay
Contract Adjustment Payments, if any, at the rate
of % of the Stated Amount per annum to the
holder, subject to the right of Philadelphia
Consolidated to defer such payments, and (b) either
beneficial ownership of a % Trust Originated
Preferred Security, having a stated liquidation
amount equal to $10, representing an undivided
beneficial ownership interest in the assets of the
Trust or, upon the occurrence of a Tax Event
Redemption prior to the Purchase Contract
Settlement Date, the appropriate Applicable
Ownership Interest in the Treasury Portfolio. The
purchase price of each Income PRIDES will be
allocated between the related Purchase Contract and
the related Trust Preferred Security in proportion
to their respective fair market values at the time
of purchase. See "Certain Federal Income Tax
Consequences -- FELINE PRIDES -- Allocation of
Purchase Price."
Philadelphia Consolidated may at any time dissolve
the Trust and, after satisfaction of liabilities to
creditors of the Trust, if any, to cause the
Debentures to be distributed to the holders of the
Trust Preferred Securities. References herein to
Trust Preferred Securities, unless the context
otherwise requires, mean (i) the Trust Preferred
Securities or (ii) the Debentures which have been
delivered to the holders of the Trust Preferred
Securities upon dissolution of the Trust. In
addition, as described below, upon the occurrence
of a Tax Event (as defined herein) prior to the
Purchase Contract Settlement Date, Philadelphia
Consolidated may at its option cause the Debentures
(and, thus, the Trust Preferred Securities) to be
redeemed at the Redemption Price and the Treasury
Portfolio will be substituted for the redeemed
Trust Preferred Securities in the manner described
herein to secure the Income PRIDES holders'
obligations under their related Purchase Contracts.
The distribution rate and the payment dates for the
Trust Preferred Securities will be the same as the
interest rate and the payment dates for the
Debentures, which will be the sole assets of the
Trust. As long as a FELINE PRIDES is in the form of
an Income PRIDES or Growth PRIDES, the related
Trust Preferred Securities, Treasury Securities or
the Treasury Portfolio, as applicable, will be
pledged pursuant to a pledge agreement, to be dated
as of April , 1998 (the "Pledge Agreement"),
between Philadelphia Consolidated, The Chase
Manhattan Bank, as collateral agent for
Philadelphia Consolidated (together with any
successor thereto in such capacity, the "Collateral
Agent"), and the Purchase Contract Agent (as
defined
S-10
<PAGE> 12
herein) to secure the holder's obligation to
purchase Common Stock under the related Purchase
Contract.
Each Growth PRIDES will initially consist of a unit
with a face amount of $10 comprised of (a) a
Purchase Contract under which (i) the holder will
purchase from Philadelphia Consolidated on the
Purchase Contract Settlement Date, for an amount in
cash equal to the Stated Amount, a number of newly
issued shares of Common Stock of Philadelphia
Consolidated, equal to the Settlement Rate, and
(ii) Philadelphia Consolidated will pay the holder
Contract Adjustment Payments, if any, at the rate
of % of the Stated Amount per annum, subject
to the right of Philadelphia Consolidated to defer
such payments, and (b) a 1/100 undivided beneficial
ownership interest in a % Treasury Security
having a principal amount at maturity equal to
$1,000 and maturing on , 2001. The
purchase price of each Growth PRIDES will be
allocated between the related Purchase Contract and
the related interest in a Treasury Security in
proportion to their respective fair market values
at the time of purchase. See "Certain Federal
Income Tax Consequences -- FELINE
PRIDES -- Allocation of Purchase Price."
Purchase Contract
Agreement.................. The FELINE PRIDES will be issued under a Purchase
Contract Agreement, to be dated as of April ,
1998 (the "Purchase Contract Agreement"), between
Philadelphia Consolidated and The First National
Bank of Chicago, as agent for the holders of the
FELINE PRIDES (together with any successor thereto
in such capacity, the "Purchase Contract Agent").
Creating Growth PRIDES..... Each holder of an Income PRIDES may substitute for
the related Trust Preferred Securities or the
Applicable Ownership Interest of the Treasury
Portfolio held by the Collateral Agent zero-coupon
U.S. Treasury Securities in an amount per Income
PRIDES equal to the stated liquidation amount per
Trust Preferred Security. Such Treasury Securities
will be pledged with the Collateral Agent to secure
the holder's obligation to purchase Common Stock
under the related Purchase Contracts. Such
substitutions may be made only in integral
multiples of 100 Income PRIDES; provided, however,
that, if the Treasury Portfolio has become a
component of the Income PRIDES, holders of Income
PRIDES may make such substitutions only in integral
multiples of 4,000,000 Income PRIDES at any time on
or prior to the second Business Day immediately
preceding the Purchase Contract Settlement Date. In
the event that Contract Adjustment Payments, if
any, are at a higher rate for Growth PRIDES than
for Income PRIDES, holders of Income PRIDES wishing
to create Growth PRIDES also will be required to
deliver cash in an amount equal to the excess of
the Contract Adjustment Payments, if any, that
would have accrued since the last Payment Date
through the date of substitution on the Growth
PRIDES being created by such holders, over the
Contract Adjustment Payments, if any, that have
accrued over the same time period on the related
Income PRIDES.
Creating Income PRIDES..... Each holder of Growth PRIDES may, on or prior to
the fifth Business Day immediately preceding the
Purchase Contract Settlement Date, create Income
PRIDES by delivering 100 Growth PRIDES to the
Purchase Contract Agent plus 100 Trust Preferred
Securities to the
S-11
<PAGE> 13
Collateral Agent in exchange for 100 Income PRIDES
and the release of the related Treasury Security to
such holder; provided, however, if a Tax Event
Redemption has occurred prior to the Purchase
Contract Settlement Date and the Treasury Portfolio
has become a component of the Income PRIDES,
holders of Growth PRIDES may make such substitution
(but using the Applicable Ownership Interest of the
Treasury Portfolio rather than Trust Preferred
Securities) only in integral multiples of 4,000,000
Growth PRIDES at any time on or prior to the second
Business Day immediately preceding the Purchase
Contract Settlement Date. Such Trust Preferred
Securities or the appropriate Applicable Ownership
Interest of the Treasury Portfolio, as the case may
be, will be pledged with the Collateral Agent to
secure the holder's obligation to purchase Common
Stock under the related Purchase Contracts.
Current Payments........... Holders of Income PRIDES will be entitled to
receive aggregate cash distributions at a rate of
% of the Stated Amount per annum from and
after , 1998, payable quarterly in
arrears, consisting of cumulative cash
distributions on the related Trust Preferred
Securities payable at the rate of % of the
stated liquidation amount per annum, or on the
Treasury Portfolio, payable at the rate of %
of the Stated Amount per annum, as applicable, and
Contract Adjustment Payments, if any, payable by
Philadelphia Consolidated at the rate of % of
the Stated Amount per annum, subject (in the case
of both the distributions on the Trust Preferred
Securities and of the Contract Adjustment Payments,
if any,) to Philadelphia Consolidated's right to
defer the payment of such amounts. The ability of
the Trust to make the quarterly distributions on
the related Trust Preferred Securities will be
solely dependent upon the receipt of corresponding
interest payments from Philadelphia Consolidated on
the Debentures. Philadelphia Consolidated's
obligations with respect to the Debentures will be
senior and unsecured and will rank on a parity in
right of payment with all other senior unsecured
obligations of Philadelphia Consolidated.
If a Tax Event Redemption has occurred, quarterly
distributions on the appropriate Applicable
Ownership Interest will not be deferred.
Holders of Growth PRIDES will be entitled to
receive quarterly cash distributions of Contract
Adjustment Payments, if any, payable by
Philadelphia Consolidated at the rate of % of
the Stated Amount per annum, subject to
Philadelphia Consolidated's rights of deferral
described herein. In addition, OID would continue
to accrue on the related Treasury Securities. See
"Risk Factors -- Right to Defer Current Payments."
Contract Adjustment
Payments................... Contract Adjustment Payments, if any, will be fixed
at a rate per annum of % of the Stated Amount
per Purchase Contract in the case of Income PRIDES,
and % of the Stated Amount per Purchase
Contract in the case of Growth PRIDES. Contract
Adjustment Payments will be specified as a
component of the distributions on the Income PRIDES
or Growth PRIDES only if and to the extent that the
distribution rate on the Trust Preferred Securities
or the yield on the Treasury Securities, as
determined on the date on which the Income PRIDES
or Growth PRIDES are priced for sale, is less than
the aggregate distribution rate or yield required
on such date for the offer and sale of the Income
PRIDES or Growth PRIDES at the price to public
S-12
<PAGE> 14
specified on the cover page of this Prospectus
Supplement. Accordingly, the final Prospectus
Supplement will indicate whether and to what extent
Contract Adjustment Payments will be required to be
made by the Company. See "Description of the
Purchase Contracts -- Contract Adjustment
Payments." The Contract Adjustment Payments, if
any, will be subordinated and junior in right of
payment to the Senior Indebtedness. See
"Description of the Purchase Contracts -- Contract
Adjustment Payments."
Option to Defer Current
Payments................. Philadelphia Consolidated has the right at any
time, and from time to time, limited to a period
not extending beyond the maturity date of the
Debentures, to defer the interest payments due on
the Debentures. As a consequence of such deferral,
the corresponding quarterly distributions to
holders of Trust Preferred Securities and Income
PRIDES would be deferred (but despite such
deferral, would continue to accumulate quarterly
and would accrue interest thereon compounded
quarterly at the rate of % per annum through
and including , 2001, and at the Reset
Rate thereafter). Philadelphia Consolidated also
has the right to defer the payment of Contract
Adjustment Payments, if any, on the related
Purchase Contracts until no later than the Purchase
Contract Settlement Date; however, such deferred
Contract Adjustment Payments, if any, will bear
additional Contract Adjustment Payments, if any, at
the rate of % per annum (the higher of (i) the
rate that would accrue on Income PRIDES for such
payments and (ii) the rate that would accrue on
Growth PRIDES for such payments) (such deferred
Contract Adjustment Payments together with such
additional Contract Adjustment Payments shall be
referred to as the "Deferred Contract Adjustment
Payments"). See "Description of the Purchase
Contracts -- Contract Adjustment Payments." If
interest payments on the Debentures or the Contract
Adjustment Payments, if any, are deferred,
Philadelphia Consolidated has agreed, among other
things, not to declare or pay any dividend on or
repurchase its capital stock (subject to certain
exceptions) during the period of such deferral. If
a Tax Event Redemption has occurred, quarterly
distributions on the appropriate Applicable
Ownership Interest of the Treasury Portfolio will
not be deferred.
In the event that Philadelphia Consolidated elects
to defer the payment of Contract Adjustment
Payments, if any, on the related Purchase Contracts
until the Purchase Contract Settlement Date, each
holder of the related Income PRIDES or Growth
PRIDES will receive on the Purchase Contract
Settlement Date in respect of such Deferred
Contract Adjustment Payments, in lieu of a cash
payment, a number of shares of Common Stock equal
to (x) the aggregate amount of Deferred Contract
Adjustment Payments payable to such holder divided
by (y) the Applicable Market Value (as defined
herein). See "Description of the Purchase
Contracts -- Option to Defer Contract Adjustment
Payments."
Payment Dates.............. Subject to the deferral provisions described
herein, the current payments described above in
respect of the Income PRIDES and Growth PRIDES will
be payable quarterly in arrears on February 16, May
16, August 16 and November 16 of each year,
commencing , 1998, through and including
(i) in the case of the Contract Adjustment
Payments, if
S-13
<PAGE> 15
any, the earlier of the Purchase Contract
Settlement Date or the most recent such quarterly
date on or prior to any early settlement of the
related Purchase Contracts and (ii) in the case of
Trust Preferred Securities that are components of
Income PRIDES, the most recent such quarterly date
on or prior to the earlier of the Purchase Contract
Settlement Date and the date the liquidation amount
of a Trust Preferred Security, together with all
accumulated and unpaid distributions thereon (each,
a "Payment Date") is paid in full.
Remarketing................ Unless a Tax Event Redemption has occurred,
pursuant to a remarketing agreement (the
"Remarketing Agreement") dated as of April ,
1998, among Philadelphia Consolidated, the Trust,
the Purchase Contract Agent and a nationally
recognized investment banking firm chosen by
Philadelphia Consolidated (the "Remarketing
Agent"), and subject to the terms of a Remarketing
Underwriting Agreement to be dated as of the third
Business Day immediately preceding the Purchase
Contract Settlement Date among such parties (the
"Remarketing Underwriting Agreement"), the Trust
Preferred Securities of such Income PRIDES holders
who have failed to notify the Purchase Contract
Agent, on or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date, of their intention to settle the
related Purchase Contracts with separate cash, will
be remarketed on the third Business Day immediately
preceding the Purchase Contract Settlement Date.
The Remarketing Agent will use its reasonable
efforts to remarket such Trust Preferred Securities
(bearing the Reset Rate) on such date for
settlement on the Purchase Contract Settlement Date
at a price of approximately 100.5% of the aggregate
stated liquidation amount of such Trust Preferred
Security, plus accrued and unpaid distributions
(including any deferred distributions), if any,
thereon. The portion of the proceeds from such
remarketing equal to the aggregate stated
liquidation amount of such Trust Preferred
Securities will be automatically applied to satisfy
in full such Income PRIDES holders' obligations to
purchase Common Stock under the related Purchase
Contracts. In addition, after deducting as the
Remarketing Fee an amount not exceeding 25 basis
points (.25%) of the aggregate stated liquidation
amount of the remarketed securities from any amount
of such proceeds in excess of the aggregate stated
liquidation amount of the remarketed Trust
Preferred Securities plus any accrued and unpaid
distributions (including any deferred
distributions), the Remarketing Agent will remit
the remaining portion of the proceeds, if any, for
the benefit of such holder. Income PRIDES holders
whose Trust Preferred Securities are so remarketed
will not otherwise be responsible for any
Remarketing Fee in connection therewith. If,
despite using its reasonable efforts, the
Remarketing Agent cannot remarket the related Trust
Preferred Securities (other than to Philadelphia
Consolidated) of such holders of Income PRIDES at a
price not less than 100% of the aggregate stated
liquidation amount of such Trust Preferred
Securities plus accrued and unpaid distributions,
including deferred distributions, if any, resulting
in a Failed Remarketing, Philadelphia Consolidated
will exercise its rights as a secured party to
dispose of the Trust Preferred Securities in
accordance with applicable law and to satisfy in
full, from the proceeds of such disposition, such
holder's obligation to purchase Common Stock under
the related Purchase Contracts, provided, that if
Philadelphia Consolidated exer-
S-14
<PAGE> 16
cises such rights as a secured party with respect
to such Trust Preferred Securities, any accrued and
unpaid distributions (including any deferred
distributions) on such Trust Preferred Securities
will be paid in cash by Philadelphia Consolidated
to the holder of record of such Trust Preferred
Securities. Philadelphia Consolidated will cause a
notice of such Failed Remarketing to be published
on the second Business Day immediately preceding
the Purchase Contract Settlement Date. It is
currently anticipated that Merrill Lynch, Pierce,
Fenner & Smith Incorporated will be the Remarketing
Agent. See "Description of the Purchase
Contracts -- Remarketing."
Purchase Contract
Settlement Date............ , 2001.
Settlement of Purchase
Contracts.................. On the Business Day immediately preceding the
Purchase Contract Settlement Date, unless a holder
of Income PRIDES or Growth PRIDES (i) has settled
the related Purchase Contracts through the early
delivery of cash to the Purchase Contract Agent in
the manner described herein, (ii) in the case of
Income PRIDES, has settled the related Purchase
Contracts with separate cash on the Business Day
prior to the Purchase Contract Settlement Date
pursuant to prior notification to the Purchase
Contract Agent, (iii) in the case of Income PRIDES,
has had the Trust Preferred Securities related to
such holder's Purchase Contracts remarketed in the
manner described herein in connection with settling
such Purchase Contracts, or (iv) an event described
under "Description of the Purchase
Contracts -- Termination" has occurred, (A) in the
case of Income PRIDES (unless a Tax Event
Redemption has occurred), Philadelphia Consolidated
will exercise its rights as a secured party to
dispose of the related Trust Preferred Securities
in accordance with the applicable law and will
satisfy in full, from the proceeds of such
disposition, such holder's obligation to purchase
Common Stock under the related Purchase Contracts,
and (B) in the case of Growth PRIDES or Income
PRIDES (if a Tax Event Redemption has occurred) the
principal amount of the related Treasury Securities
or the appropriate Applicable Ownership Interest of
the Treasury Portfolio, as applicable, when paid at
maturity, will automatically be applied, pursuant
to the exercise of such rights by Philadelphia
Consolidated to satisfy in full such holder's
obligation to purchase Common Stock under the
related Purchase Contracts.
In the event that a holder of either Income PRIDES
or Growth PRIDES effects the early settlement of
the related Purchase Contracts through the delivery
of cash or, in the case of an Income PRIDES,
settles such Purchase Contracts with cash on the
Business Day immediately preceding the Purchase
Contract Settlement Date, the related Trust
Preferred Securities, the appropriate Applicable
Ownership Interest of the Treasury Portfolio or the
Treasury Securities, as the case may be, will be
released to such holder as described herein.
Settlement Rate............ The number of newly issued shares of Common Stock
issuable upon settlement of each Purchase Contract
on the Purchase Contract Settlement Date (the
"Settlement Rate") will be calculated as follows
(subject to adjustment under certain
circumstances): (a) if the Applicable Market Value
is equal to or greater than $ (the
"Threshold
S-15
<PAGE> 17
Appreciation Price," which is approximately %
above the last reported sale price of the Common
Stock set forth on the cover page of the final
Prospectus Supplement (the "Reference Price")), the
Settlement Rate will be equal to the Stated Amount
divided by the Threshold Appreciation Price, which
is ; accordingly, if, between the date of
the final Prospectus Supplement and the period
during which the Applicable Market Value is
measured, the market price for the Common Stock
increases to an amount that is higher than the
Threshold Appreciation Price, the aggregate market
value of the shares of Common Stock issued upon
settlement of each Purchase Contract (assuming that
such market value is the same as the Applicable
Market Value of such Common Stock) will be higher
than the Stated Amount, and if such market price is
the same as the Threshold Appreciation Price, the
aggregate market value of such shares (assuming
that such market value is the same as the
Applicable Market Value of such Common Stock) will
be equal to the Stated Amount; (b) if the
Applicable Market Value is less than the Threshold
Appreciation Price but greater than the Reference
Price, the Settlement Rate will be equal to the
Stated Amount divided by the Applicable Market
Value; accordingly, if the market price for the
Common Stock increases between the date of the
final Prospectus Supplement and the period during
which the Applicable Market Value is measured but
such market price is less than the Threshold
Appreciation Price, the aggregate market value of
the shares of Common Stock issued upon settlement
of each Purchase Contract (assuming that such
market value is the same as the Applicable Market
Value of such Common Stock) will be equal to the
Stated Amount; and (c) if the Applicable Market
Value is less than or equal to the Reference Price,
the Settlement Rate will be equal to the Stated
Amount divided by the Reference Price, which is
; accordingly, if the market price for
the Common Stock decreases between the date of the
final Prospectus Supplement and the period during
which the Applicable Market Value is measured, the
aggregate market value of the shares of Common
Stock issued upon settlement of each Purchase
Contract (assuming that such market value is the
same as the Applicable Market Value of such Common
Stock) will be less than the Stated Amount, and if
such market price stays the same, the aggregate
market value of such shares (assuming that such
market value is the same as the Applicable Market
Value of such Common Stock) will be equal to the
Stated Amount. "Applicable Market Value" means the
average of the Closing Price (as defined herein)
per share of Common Stock on each of the twenty
consecutive Trading Days (as defined herein) ending
on the third Trading Day immediately preceding the
Purchase Contract Settlement Date. See "Description
of the Purchase Contracts -- General."
Early Settlement........... A holder of Income PRIDES may settle the related
Purchase Contracts on or prior to the fifth
Business Day immediately preceding the Purchase
Contract Settlement Date in the manner described
herein, but only in integral multiples of 100
Income PRIDES; provided, however, if a Tax Event
Redemption has occurred prior to the Purchase
Contract Settlement Date and the Treasury Portfolio
has become a component of the Income PRIDES,
holders of Income PRIDES may settle early only in
integral multiples of 4,000,000 Income PRIDES at
any time on or prior to the second Business Day
immediately preceding the Purchase Con-
S-16
<PAGE> 18
tract Settlement Date. A holder of Growth PRIDES
may settle the related Purchase Contracts on or
prior to the second Business Day immediately
preceding the Purchase Contract Settlement Date in
the manner described herein (in either case, an
"Early Settlement"). Upon Early Settlement, (i) the
holder's rights to receive Deferred Contract
Adjustment Payments, if any, on the Purchase
Contracts being settled will be forfeited, (ii) the
holder's right to receive additional Contract
Adjustment Payments, if any, in respect of such
Purchase Contracts will terminate and (iii) no
adjustment will be made to or for the holder on
account of Deferred Contract Adjustment Payments,
or any amount accrued in respect of Contract
Adjustment Payments, if any. See "Description of
the Purchase Contracts -- Early Settlement."
Termination................ The Purchase Contracts and the rights and
obligations of Philadelphia Consolidated and the
holders of the FELINE PRIDES thereunder (including
the right thereunder to receive accrued or Deferred
Contract Adjustment Payments, if any, and the
obligation to purchase Common Stock) will
automatically terminate upon the occurrence of
certain events of bankruptcy, insolvency or
reorganization with respect to Philadelphia
Consolidated. Upon such termination, the Collateral
Agent will release the related Trust Preferred
Securities, the appropriate Applicable Ownership
Interest of the Treasury Portfolio or Treasury
Securities, as the case may be, held by it to the
Purchase Contract Agent for distribution to the
holders, subject in the case of the Treasury
Portfolio to the Purchase Contract Agent's
disposition of the subject securities for cash, and
the payment of such cash to the holders, to the
extent that the holder would otherwise have been
entitled to receive less than $1,000 of any such
security. Upon such termination, there may be a
delay before such release and distribution. In the
event that Philadelphia Consolidated becomes the
subject of a case under the United States
Bankruptcy Code of 1978, as amended (the
"Bankruptcy Code"), such delay may occur as a
result of the automatic stay under the Bankruptcy
Code and continue until such automatic stay has
been lifted. Philadelphia Consolidated expects any
such delay to be limited. See "Description of the
Purchase Contracts -- Termination."
Voting and Certain Other
Rights..................... Holders of Trust Preferred Securities will not be
entitled to vote to appoint, remove or replace, or
to increase or decrease the number of Regular
Trustees (as defined herein) and will generally
have no voting rights except in the limited
circumstances described under "Description of Trust
Preferred Securities -- Voting Rights." Holders of
Purchase Contracts forming part of the Income
PRIDES or Growth PRIDES in their capacities as such
holders will have no voting or other rights in
respect of the Common Stock.
TRUST PREFERRED SECURITIES
The Trust.................. The Trust is a Delaware statutory business trust.
The sole assets of the Trust will consist of the
Debentures. Philadelphia Consolidated will directly
or indirectly own all of the Common Securities
representing common undivided beneficial ownership
interests in the assets of the Trust.
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<PAGE> 19
Trust Preferred
Securities................. % Trust Preferred Securities (liquidation
amount $10 per Trust Preferred Security),
representing preferred, undivided beneficial
ownership interests in the assets of the Trust.
Distributions.............. Distributions on the Trust Preferred Securities
that are components of Income PRIDES will
constitute all or a portion of the distributions on
the Income PRIDES, will be cumulative, will accrue
from the first date of issuance of the Trust
Preferred Securities and will be payable initially
at the annual rate of % of the liquidation
amount of $10 per Trust Preferred Security to but
excluding the Purchase Contract Settlement Date,
and in the case of Trust Preferred Securities that
remain outstanding on and after the Purchase
Contract Settlement Date, from the Purchase
Contract Settlement Date to but excluding
, 2003, at the Reset Rate, in each case, when, as
and if funds are available for payment. Subject to
the distribution deferral provisions, distributions
will be payable quarterly in arrears on each
February 16, May 16, August 16 and November 16,
commencing , 1998.
Market Rate Reset.......... The applicable quarterly distribution rate on the
Trust Securities and the interest rate on the
Debentures on and after the Purchase Contract
Settlement Date, will be reset on the third
Business Day immediately preceding the Purchase
Contract Settlement Date to the Reset Rate,
determined by the Reset Agent as the rate the Trust
Securities should bear in order for a Trust
Security to have an approximate market value of
100.5% of the Stated Amount on the third Business
Day immediately preceding the Purchase Contract
Settlement Date, provided, that Philadelphia
Consolidated may limit such Reset Rate to be no
higher than the rate on the Two-Year Benchmark
Treasury plus 200 basis points (2%). Such market
value may be less than 100.5% if the Reset Spread
is limited to a maximum of 2%. It is currently
anticipated that Merrill Lynch, Pierce, Fenner &
Smith Incorporated will be the Reset Agent. See
"Description of the Trust Preferred
Securities -- Market Rate Reset."
Optional Remarketing....... Pursuant to the Remarketing Agreement and subject
to the terms of Remarketing Underwriting Agreement,
on or prior to the fifth Business Day immediately
preceding the Purchase Contract Settlement Date,
but no earlier than the Payment Date immediately
preceding the Purchase Contract Settlement Date,
holders of separate Trust Preferred Securities that
are not components of Income PRIDES may elect to
have their Trust Preferred Securities remarketed,
by delivering their Trust Preferred Securities
along with a notice of such election to The Chase
Manhattan Bank as custodial agent (the "Custodial
Agent"). Holders of Trust Preferred Securities
electing to have their Trust Preferred Securities
remarketed will also have the right to withdraw
such election on or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date. See "Description of the Trust
Preferred Securities -- Optional Remarketing."
Distribution Deferral
Provisions................. The ability of the Trust to pay distributions on
the Trust Preferred Securities will be solely
dependent on the receipt of interest payments from
Philadelphia Consolidated on the Debentures.
Philadelphia Consolidated will have the right at
any time, and from time to time, to defer the
interest payments due on the Debentures for
successive extension periods (the "Extension
Periods") limited, in the aggregate, to a period
not
S-18
<PAGE> 20
extending beyond the maturity date of the
Debentures. The corresponding quarterly
distributions on the Trust Preferred Securities
would be deferred by the Trust (but would continue
to accumulate quarterly and would accrue interest,
compounded quarterly, at the rate of % per
annum through and including , 2001, and
at the Reset Rate thereafter) until the end of any
such Extension Period. If a deferral of an interest
payment occurs, the holders of the Trust Preferred
Securities will be required to accrue interest
income for United States federal income tax
purposes in advance of the receipt of any
corresponding cash distribution with respect to
such deferred interest payment. See "Risk
Factors -- Right to Defer Current Payments,"
"Description of the Trust Preferred
Securities -- Distributions" and "Certain Federal
Income Tax Consequences -- Trust Preferred
Securities -- Interest Income and Original Issue
Discount."
Rights Upon Deferral of
Distribution............. During any period in which interest payments on the
Debentures are deferred, interest will accrue on
the Debentures (compounded quarterly) and the
corresponding quarterly distributions on the Trust
Preferred Securities will continue to accumulate
with interest thereon at the rate of % per
annum through and including , 2001, and
at the Reset Rate thereafter, compounded quarterly.
Liquidation Preference..... In the event of any liquidation of the Trust, and
after satisfaction of liabilities to creditors of
the Trust, if any, holders will be entitled to
receive Debentures in an aggregate principal amount
equal to the aggregate stated liquidation amount of
the Trust Preferred Securities.
Put Option Upon a Failed
Remarketing.............. If a Failed Remarketing has occurred, holders of
Trust Securities (or, following the distribution of
the Debentures upon a dissolution of the Trust as
described herein, the holders of such Debentures)
holding such Trust Securities (or Debentures, as
the case may be) following the Purchase Contract
Settlement Date will have the right, in the case of
Trust Securities, to require the Trust to
distribute their pro rata share of the Debentures
to the Exchange Agent who will put such Debenture
to Philadelphia Consolidated on behalf of such
holders (or, in the case of persons who hold the
Debentures directly, such persons shall have the
right to put such Debentures directly to
Philadelphia Consolidated) on , 2001,
upon at least three Business Days' prior notice, at
a price equal to the principal amount, plus accrued
and unpaid interest (including deferred interest),
if any, thereon. See "Description of the
Debentures -- Put Option."
Distribution of
Debentures................. In certain circumstances involving an Investment
Company Event, or upon the determination by
Philadelphia Consolidated, at any time, to do so,
the Trust would be dissolved, with the result that,
after satisfaction of liabilities to creditors of
the Trust, if any, Debentures with an aggregate
principal amount equal to the aggregate stated
liquidation amount of the Trust Preferred
Securities would be distributed to the holders of
the Trust Preferred Securities, including the
Collateral Agent, on a pro rata basis. In such
event an Income PRIDES would thereafter consist of
beneficial ownership of a Debenture with a
principal amount equal to the Stated Amount of such
Income PRIDES and the related Purchase Contract,
and such Debenture would be otherwise treated as if
it were a
S-19
<PAGE> 21
Trust Preferred Security. See "Description of the
Trust Preferred Securities -- Distribution of
Debentures."
Tax Event Redemption....... The Debentures (and, thus, the Trust Securities)
are redeemable, at the option of Philadelphia
Consolidated, on not less than 30 days or more than
60 days prior written notice in whole but not in
part upon the occurrence and continuation of a Tax
Event under the circumstances described herein at a
Redemption Price equal to, for each Debenture, the
Redemption Amount together with accrued and unpaid
distributions (including deferred distributions).
See "Description of the Debentures -- Tax Event
Redemption." If Philadelphia Consolidated so
redeems all of the Debentures, the Trust must
redeem all of the Trust Securities and pay in cash
such Redemption Price to the holders of such Trust
Securities. If such Tax Event Redemption occurs
prior to the Purchase Contract Settlement Date, the
Redemption Price payable in liquidation of any
Income PRIDES holders' interest in the Trust, will
be distributed to the Collateral Agent, which in
turn will apply an amount equal to the Redemption
Amount of such Redemption Price to purchase the
Treasury Portfolio on behalf of the holders of
Income PRIDES and remit the remaining portion, if
any, of such Redemption Price to the Purchase
Contract Agent for payment to holders of such
Income PRIDES. The Treasury Portfolio will be
substituted for the Trust Preferred Security and
will be pledged with the Collateral Agent to secure
such Income PRIDES holders' obligations to purchase
the Common Stock under their Purchase Contracts.
Other than in the event of a Tax Event Redemption,
Philadelphia Consolidated will not have the ability
to redeem the Debentures prior to their stated
maturity date. See "Description of the
Debentures -- Tax Event Redemption of Trust
Preferred Securities."
Guarantee.................. Philadelphia Consolidated will irrevocably and
unconditionally guarantee, on a subordinated
unsecured basis, the payment in full of (i)
distributions on the Trust Preferred Securities to
the extent the Trust has funds available therefor,
(ii) the redemption price of Trust Preferred
Securities in respect of which the related
Debentures have been repurchased by Philadelphia
Consolidated on the Purchase Contract Settlement
Date, to the extent the Trust has funds available
therefor, and (iii) the liquidation amount of the
Trust Preferred Securities or the Redemption Price
upon a Tax Event Redemption, to the extent the
Trust has assets available for distribution to
holders of Trust Preferred Securities in the event
of a dissolution of the Trust. Philadelphia
Consolidated's obligations under the Guarantee will
be subordinated and junior in right of payment to
Philadelphia Consolidated's obligations under any
Senior Indebtedness. See "Description of the
Guarantee."
Debentures................. Unless a Tax Event Redemption has occurred, the
Debentures will mature on , 2003, and
will bear interest initially at the rate of %
per annum, payable quarterly in arrears on each
February 16, May 16, August 16 and November 16,
commencing , 1998. The interest rate on
the Debentures, and the distribution rate on the
Trust Preferred Securities, that remain outstanding
after the Purchase Contract Settlement Date will be
reset on the third Business Day immediately
preceding the Purchase Contract Settlement Date to
the Reset Rate determined by the Reset Agent. See
"Description of Debentures -- Interest." Interest
payments on the Debentures may be deferred
S-20
<PAGE> 22
from time to time by Philadelphia Consolidated for
successive Extension Periods not extending, in the
aggregate, beyond the stated maturity date of the
Debentures. During any Extension Period, interest
at the rate of % per annum through and
including , 2001, and at the Reset Rate
thereafter would continue to accrue and compound
quarterly. Upon the termination of any Extension
Period and the payment of all amounts then due,
Philadelphia Consolidated may commence a new
Extension Period, provided such new Extension
Period does not extend beyond the stated maturity
date of the Debentures. No interest shall be due
during an Extension Period until the end of such
period. During an Extension Period, Philadelphia
Consolidated will be prohibited (subject to certain
exceptions) from paying dividends on or purchasing
any of its capital stock and making certain other
restricted payments until quarterly interest
payments are resumed and all amounts then due on
the Debentures are paid. The Debentures will be
senior unsecured obligations of Philadelphia
Consolidated and will rank on a parity with all of
Philadelphia Consolidated's other senior unsecured
obligations. See "Description of the Debentures."
Federal Income Tax
Consequences Related to
the Income PRIDES, Growth
PRIDES and Trust
Preferred Securities..... The Debentures may be issued with OID, in which
case a beneficial owner of Income PRIDES or Trust
Preferred Securities will be required to include
its pro rata share of such OID in income on a
constant yield to maturity basis. In addition, a
beneficial owner of Income PRIDES and Trust
Preferred Securities will include in gross income
its pro rata share of the stated interest on the
Debentures when such interest income is paid or
accrued in accordance with its regular method of
tax accounting. Philadelphia Consolidated intends
to report the Contract Adjustment Payments, if any,
as income to holders of Income PRIDES and Growth
PRIDES, but holders should consult their tax
advisors concerning the possibility that the
Contract Adjustment Payments, if any, may be
treated as loans, purchase price adjustments,
rebates or option premiums rather than being
includible in income on a current basis. A
beneficial owner of Growth PRIDES will be required
to include in gross income its allocable share of
any OID with respect to the Treasury Securities as
it accrues on a constant yield to maturity basis.
If a Tax Event Redemption has occurred, a
beneficial owner of Income PRIDES will be required
to include in gross income its allocable share of
OID on the Treasury Portfolio as it accrues on a
constant yield to maturity basis. See "Certain
Federal Income Tax Consequences."
S-21
<PAGE> 23
EXPLANATORY DIAGRAMS
For illustrative purposes only, the following diagrams demonstrate some of
the key features of Purchase Contracts, Income PRIDES and Growth PRIDES and the
transformation of Income PRIDES into Growth PRIDES and Trust Preferred
Securities. The hypothetical percentages, coupon rates and time periods below
are for illustration only. There can be no assurance that the actual percentage
of shares delivered will be limited by the range of hypothetical percentages
shown. In addition, there can be no assurance that payment rates on the FELINE
PRIDES will be at the levels set forth below or that Contract Adjustment
Payments will constitute a component of the Income PRIDES or Growth PRIDES.
The following diagrams and the related text are not complete, are general
in nature and are qualified in their entirety by more detailed information
appearing elsewhere in the accompanying Prospectus, this Prospectus Supplement
and in documents which are on file with the Commission.
FELINE PRIDES PURCHASE CONTRACT
- Income PRIDES and Growth PRIDES both include a Purchase Contract under
which the investor agrees to purchase shares of Common Stock of
Philadelphia Consolidated at the end of three years. In addition, such
Purchase contracts include specified Contract Adjustment Payments, if
any, shown in the diagrams on the following pages.
[GRAPH]
PURCHASE CONTRACT
<TABLE>
<CAPTION>
VALUE OF DELIVERED SHARES QUANTITY OF DELIVERED SHARES
AT MATURITY AT MATURITY
- ------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C>
DELIVER
BETWEEN
DELIVER 83% AND DELIVER
100% OF 100% OF 83% OF
SHARES* SHARES** SHARES***
100% 121%
REFERENCE THRESHOLD REFERENCE THRESHOLD
PRICE APPRECIATION PRICE PRICE APPRECIATION PRICE
COMMON STOCK PRICE COMMON STOCK PRICE
[RIGHT ARROW] [RIGHT ARROW]
</TABLE>
- ---------------
* The number of shares to be delivered will be calculated by dividing the
Stated Amount by the Reference Price.
** The number of shares to be delivered will be calculated by dividing the
Stated Amount by the Applicable Market Value.
*** The number of shares to be delivered will be calculated by dividing the
Stated Amount by the Threshold Appreciation Price.
S-22
<PAGE> 24
INCOME PRIDES
- Income PRIDES consist of two components as described below:
[GRAPH]
<TABLE>
<CAPTION>
TRUST PREFERRED
PURCHASE CONTRACT SECURITY
------------------------------- -------------------------------
<S> <C> <C>
(OWED TO INVESTOR) (OWED TO INVESTOR)
SHARES % PER ANNUM
+ + PAID QUARTERLY
CONTRACT ADJUSTMENT
PAYMENT (IF ANY) (RESET AT END OF YEAR 3)
% PER ANNUM
PAID QUARTERLY
$10 AT MATURITY $10 AT MATURITY
(END OF YEAR 3) (END OF YEAR 5)
(OWED TO COMPANY) (OWED TO INVESTOR)
</TABLE>
- The investor owns the Trust Preferred Security, but will pledge it to
Philadelphia Consolidated to secure its obligations under the Purchase
Contract.
GROWTH PRIDES
- Growth PRIDES consist of two components as described below:
[GRAPH]
<TABLE>
<CAPTION>
ZERO-COUPON
PURCHASE CONTRACT TREASURY SECURITY
------------------------------- -------------------------------
<S> <C> <C>
(OWED TO INVESTOR) (OWED TO INVESTOR)
SHARES
+
CONTRACT ADJUSTMENT
PAYMENT (IF ANY)
% PER ANNUM
PAID QUARTERLY
$10 AT MATURITY $10 AT MATURITY
(END OF YEAR 3) (END OF YEAR 3)
(OWED TO COMPANY) (OWED TO INVESTOR)
</TABLE>
- The investor owns the Zero-Coupon Treasury Security, but will pledge it
to Philadelphia Consolidated to secure its obligations under the Purchase
Contract.
S-23
<PAGE> 25
TRUST PREFERRED SECURITIES
- Trust Preferred Securities have the terms described below:
[GRAPH]
<TABLE>
<S> <C>
(OWED TO INVESTOR)
% PER ANNUM
PAID QUARTERLY
(RESET AT END OF YEAR 3)
$10 AT MATURITY
(END OF YEAR 5) >
</TABLE>
- The holder of Trust Preferred Securities that are a component of Income
PRIDES has an option at the end of year 3 to either:
- Cash settle each Purchase Contract for $10 and receive Trust Preferred
Securities whose rate has been reset at the end of year 3, or
- Cash settle each Purchase Contract by allowing the Trust Preferred
Securities to be included in the remarketing process.
- The holder of Trust Preferred Securities that are separate and not a
component of Income PRIDES has the option at the end of year 3 to either:
- Continue to hold the Trust Preferred Securities whose rate has been
reset at the end of year 3, or
- Deliver the Trust Preferred Securities to the Custodial Agent to be
included in the remarketing process.
S-24
<PAGE> 26
TRANSFORMING INCOME PRIDES INTO GROWTH PRIDES AND TRUST PREFERRED SECURITIES
- To create a Growth PRIDES, the investor separates an Income PRIDES into
its components -- the Purchase Contract and the Trust Preferred
Security -- and then combines the Purchase Contract with a specific
Zero-Coupon Treasury Security which matures concurrently with the
maturity of the Purchase Contract.
- The investor owns the Zero-Coupon Treasury Security but will pledge it to
Philadelphia Consolidated to secure its obligations under the Purchase
Contract.
- The Zero-Coupon Treasury Security together with the Purchase Contract
constitute a Growth PRIDES. The Trust Preferred Security which is no
longer a component of the Income PRIDES is tradeable as a separate
security.
[GRAPH]
<TABLE>
<CAPTION>
TRUST PREFERRED ZERO-COUPON TRUST PREFERRED
PURCHASE CONTRACT SECURITY PURCHASE CONTRACT TREASURY SECURITY SECURITY
- ----------------- ---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(OWED TO (OWED TO (OWED TO (OWED TO
INVESTOR) INVESTOR) INVESTOR) INVESTOR)
SHARES PER ANNUM SHARES PER ANNUM
[RIGHT
+ + PAID QUARTERLY ARROW] + + +
CONTRACT CONTRACT
ADJUSTMENT (RESET AT END OF ADJUSTMENT
PAYMENT (IF ANY) YEAR 3) PAYMENT (IF ANY)
PER ANNUM PER ANNUM (RESET AN END OF
PAID QUARTERLY PAID QUARTERLY YEAR 3)
$10 AT MATURITY $10 AT MATURITY $10 AT MATURITY $10 AT MATURITY $10 AT MATURITY
(END OF YEAR 3) (END OF YEAR 5) (END OF YEAR 3) (END OF YEAR 5) (END OF YEAR 5)
(OWED TO (OWED TO (OWED TO
(OWED TO COMPANY) INVESTOR) (OWED TO COMPANY) INVESTOR) INVESTOR)
INCOME PRIDES GROWTH PRIDES
</TABLE>
- The investor can also transform Growth PRIDES and Trust Preferred
Securities into Income PRIDES.
- The transformation of Income PRIDES into Growth PRIDES and Trust
Preferred Securities, and the transformation of Growth PRIDES and Trust
Preferred Securities into Income PRIDES, require certain minimum amounts
of securities, as more fully described herein.
S-25
<PAGE> 27
RISK FACTORS
Potential purchasers of the FELINE PRIDES offered hereby should carefully
consider the risk factors set forth herein under "Risk Factors" as well as other
information contained in this Prospectus Supplement, the accompanying Prospectus
and the documents incorporated by reference therein.
INVESTMENT IN FELINE PRIDES REQUIRES HOLDERS TO PURCHASE COMMON STOCK; RISK OF
DECLINE IN EQUITY VALUE
Although holders of the FELINE PRIDES will be the beneficial owners of the
related Trust Preferred Securities, Treasury Portfolio or Treasury Securities,
as the case may be, prior to the Purchase Contract Settlement Date, unless a
holder of FELINE PRIDES settles the related Purchase Contracts through the
delivery of cash to the Purchase Contract Agent in the manner described below or
the Purchase Contracts are terminated (upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to Philadelphia
Consolidated), the proceeds derived from the remarketing of the Trust Preferred
Securities or the principal of the related Treasury Securities, or the
Applicable Ownership Interest of the Treasury Portfolio, when paid at maturity,
as the case may be, will automatically be applied to the purchase of a specified
number of shares of Common Stock on behalf of such holder. Thus, unless a holder
of Income PRIDES has cash settled, following the Purchase Contract Settlement
Date the holder will own shares of Common Stock rather than a beneficial
ownership interest in Trust Preferred Securities or the Treasury Portfolio, as
the case may be. See "Description of the Purchase Contracts -- General." There
can be no assurance that the market value of the Common Stock receivable by the
holder on the Purchase Contract Settlement Date will be equal to or greater than
the Stated Amount of the FELINE PRIDES held by such holder. If the Applicable
Market Value of the Common Stock is less than the Reference Price, then the
aggregate market value of the Common Stock issued to the holder in settlement of
each Purchase Contract on the Purchase Contract Settlement Date (assuming that
such market value is the same as the Applicable Market Value of such Common
Stock) will be less than the Stated Amount paid for the FELINE PRIDES and the
market value per share of such Common Stock will be less than the effective
price per share paid by each holder for such Common Stock on the date hereof, in
which case an investment in the Securities will result in an economic loss as of
the Purchase Contract Settlement Date. Accordingly, a holder of the FELINE
PRIDES assumes the risk that the market value of the Common Stock may decline,
and that such decline could be substantial.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION
The opportunity for equity appreciation afforded by an investment in the
FELINE PRIDES is less than the opportunity for equity appreciation afforded by a
direct investment in the Common Stock because the market value of the Common
Stock to be received by a holder of Purchase Contracts on the Purchase Contract
Settlement Date (assuming that such market value is the same as the Applicable
Market Value of such Common Stock) will only exceed the Stated Amount if the
Applicable Market Value of the Common Stock exceeds the Threshold Appreciation
Price (which represents an appreciation of % over the Reference Price).
Moreover, in such event, holders of FELINE PRIDES would receive on the Purchase
Contract Settlement Date only % (the percentage equal to the Reference Price
divided by the Threshold Appreciation Price) of the shares of Common Stock that
such holders would have received if they had made a direct investment in the
Common Stock on the date hereof, and therefore would receive on the Purchase
Contract Settlement Date only % of the appreciation in the value of the Common
Stock in excess of the Threshold Appreciation Price through such date.
FACTORS AFFECTING TRADING PRICES
The trading prices of Income PRIDES and Growth PRIDES in the secondary
market will be directly affected by the trading prices of the Common Stock in
the secondary market, the general level of interest rates and the credit quality
of the Company. It is impossible to determine whether the price of the Common
Stock or interest rates will rise or fall. Trading prices of the Common Stock
will be influenced by the Company's operating results and prospects and by
economic, financial and other factors and market conditions that can
S-26
<PAGE> 28
affect the capital markets generally, including the level of, and fluctuations
in, the trading prices of stocks generally and sales of substantial amounts of
Common Stock in the market subsequent to the offering of the Securities or the
perception that such sales could occur. Fluctuations in interest rates may give
rise to opportunities of arbitrage based upon changes in the relative value of
the Common Stock underlying the Purchase Contracts and of the other components
of the FELINE PRIDES. Any such arbitrage could, in turn, affect the trading
prices of the Income PRIDES, Growth PRIDES, Trust Preferred Securities and
Common Stock.
LIMITED VOTING AND CERTAIN OTHER RIGHTS
Holders of Trust Preferred Securities will not be entitled to vote to
appoint, remove or replace or to increase or decrease the number of Philadelphia
Consolidated Trustees, and generally will have no voting rights except in the
limited circumstances described under "Description of the Trust Preferred
Securities -- Voting Rights." Holders of FELINE PRIDES will not be entitled to
any rights with respect to the Common Stock (including, without limitation,
voting rights and rights to receive any dividends or other distributions in
respect thereof) unless and until such time as Philadelphia Consolidated shall
have delivered shares of Common Stock for FELINE PRIDES on the Purchase Contract
Settlement date or as a result of Early Settlement, as the case may be, and
unless the applicable record date, if any, for the exercise of such rights
occurs after such date. For example, in the event of an annual or special
meeting of the shareholders of Philadelphia Consolidated for which the record
date for determining the shareholders of record entitled to vote on matters
presented to such meeting occurs prior to such delivery, holders of FELINE
PRIDES will not be entitled to vote on the election of directors or any other
matter presented to such meeting for a vote thereon by the shareholders.
DILUTION OF COMMON STOCK
The number of shares of Common Stock that holders of the FELINE PRIDES are
entitled to receive on the Purchase Contract Settlement Date or as a result of
Early Settlement is subject to adjustment for certain events arising from stock
splits and combinations, stock dividends and certain other actions of
Philadelphia Consolidated that modify its capital structure. See "Description of
the Purchase Contracts -- Anti-Dilution Adjustments." Such number of shares of
Common Stock to be received by such holders on the Purchase Contract Settlement
Date or as a result of Early Settlement will not be adjusted for other events,
such as offerings of Common Stock for cash or in connection with acquisitions.
Philadelphia Consolidated is not restricted from issuing additional Common Stock
during the term of either the Purchase Contracts or the Trust Preferred
Securities and has no obligation to consider the interests of the holders of
FELINE PRIDES for any reason. Additional issuances may materially and adversely
affect the price of the Common Stock and, because of the relationship of the
number of shares to be received on the Purchase Contract Settlement Date to the
price of the Common Stock, such other events may adversely affect the trading
price of Income PRIDES or Growth PRIDES.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to determine how Income PRIDES, Growth PRIDES or Trust
Preferred Securities will trade in the secondary market or whether such market
will be liquid or illiquid. Income PRIDES and Growth PRIDES are novel securities
and there is currently no secondary market for either Income PRIDES or Growth
PRIDES. Application will be made to list the Income PRIDES and the Growth PRIDES
on the NNM. If Trust Preferred Securities are separately traded to a sufficient
extent that the applicable market listing requirements are met, the Company will
endeavor to cause such securities to be listed on the market on which the Income
PRIDES and the Growth PRIDES are then listed including, if applicable, the NNM.
There can be no assurance as to the liquidity of any market that may develop for
the Income PRIDES, the Growth PRIDES or the Trust Preferred Securities, the
ability of holders to sell such securities or whether a trading market, if it
develops, will continue. In addition, in the event that holders of Income PRIDES
or Growth PRIDES were to substitute Treasury Securities or Trust Preferred
Securities for Trust Preferred Securities or Treasury Securities, thereby
converting their Income PRIDES to Growth PRIDES or their
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Growth PRIDES to Income PRIDES, as the case may be, the liquidity of Income
PRIDES, Growth PRIDES and Trust Preferred Securities could be adversely
affected. There can be no assurance that the Income PRIDES or the Growth PRIDES
will not be delisted from the NNM or that trading in the Income PRIDES or the
Growth PRIDES will not be suspended as a result of the election by holders to
create Income PRIDES or Growth PRIDES through the substitution of collateral,
which could cause the number of Income PRIDES or Growth PRIDES to fall below the
current requirement for listing securities on the NNM that at least 1,000,000 of
each of the Income PRIDES or Growth PRIDES be outstanding at any time.
PLEDGED SECURITIES ENCUMBERED
Although the beneficial owners of FELINE PRIDES will be the beneficial
owners of the related Trust Preferred Securities, Treasury Portfolio or Treasury
Securities (together, the "Pledged Securities"), as applicable, those Pledged
Securities will be pledged with the Collateral Agent to secure the obligations
of the holders under the related Purchase Contracts. Thus, rights of the holders
to their Pledged Securities will be subject to Philadelphia Consolidated's
security interest. Additionally, notwithstanding the automatic termination of
the Purchase Contracts, in the event that Philadelphia Consolidated becomes the
subject of a case under the Bankruptcy Code, the delivery of the Pledged
Securities to holders of the FELINE PRIDES may be delayed by the imposition of
the automatic stay under Section 362 of the Bankruptcy Code.
INVESTMENT COMPANY EVENT DISTRIBUTION
Upon the occurrence of an Investment Company Event, the Trust will be
dissolved (except in the limited circumstances described in the following
sentence) with the result that Debentures with an aggregate principal amount
equal to the aggregate stated liquidation amount of the Trust Preferred
Securities would be distributed to the holders of the Trust Preferred Securities
on a pro rata basis. Such dissolution and distribution shall be conditioned on
Philadelphia Consolidated being unable to avoid such Investment Company Event
within a 90-day period by taking some ministerial action or pursuing some other
reasonable measure that will have no adverse effect on the Trust, Philadelphia
Consolidated or the holders of the Trust Preferred Securities, and will involve
no material cost. In addition, Philadelphia Consolidated will have the right at
any time to dissolve the Trust. See "Description of the Trust Preferred
Securities -- Distribution of the Debentures."
There can be no assurance as to the impact on the market prices for Income
PRIDES of a distribution of the Debentures in exchange for Trust Preferred
Securities upon a dissolution of the Trust. Because Income PRIDES will consist
of Debentures and related Purchase Contracts upon the occurrence of the
dissolution of the Trust as a result of an Investment Company Event or
otherwise, prospective purchasers of Income PRIDES are also making an investment
decision with regard to the Debentures and should carefully review all the
information regarding the Debentures contained herein. See "Description of the
Trust Preferred Securities -- Distribution of the Debentures" and "Description
of the Debentures -- General."
TAX EVENT REDEMPTION
The Debentures (and, thus, the Trust Securities) are redeemable, at the
option of Philadelphia Consolidated, on not less than 30 days or more than 60
days prior written notice, in whole but not in part, at any time prior to the
Purchase Contract Settlement Date upon the occurrence and continuation of a Tax
Event under the circumstances described herein at a Redemption Price equal to,
for each Debenture, the Redemption Amount plus accrued and unpaid distributions
(including deferred distributions). See "Description of the Debentures -- Tax
Event Redemption." If Philadelphia Consolidated so redeems all of the
Debentures, the Trust must redeem all of the Trust Securities and pay in cash
such Redemption Price to the holder of such Trust Securities. If the Tax Event
Redemption has occurred prior the Purchase Contract Settlement Date, the
Redemption Price payable in liquidation of the Income PRIDES holders' interest
in the Trust will be distributed to the Collateral Agent, which in turn will
apply an amount equal to the Redemption Amount of such Redemption Price to
purchase the Treasury Portfolio on behalf of the holders of Income PRIDES.
Holders of Trust Preferred Securities, not held in the form of Income PRIDES,
will receive redemption payments directly. The Treasury Portfolio will be
substituted for the Trust Preferred Securities and will be pledged with the
Collateral Agent to secure such Income PRIDES holders' obligations to purchase
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Philadelphia Consolidated's Common Stock under their Purchase Contracts. There
can be no assurance as to the impact on the market prices for the Income PRIDES
of the substitution of the Treasury Portfolio as collateral in replacement of
any Trust Preferred Securities so redeemed. See "Description of the Trust
Preferred Securities -- Optional Redemption." A Tax Event Redemption will be a
taxable event to the beneficial owners of the Trust Preferred Securities. See
"Certain Federal Income Tax Consequences -- Tax Event Redemption of Trust
Preferred Securities."
RIGHT TO DEFER CURRENT PAYMENTS
Philadelphia Consolidated may, at its option, defer the payment of Contract
Adjustment Payments, if any, on the Purchase Contracts until the Purchase
Contract Settlement Date. However, deferred installments of Contract Adjustment
Payments, if any, will bear Deferred Contract Adjustment Payments at the rate of
% per annum (compounding on each succeeding Payment Date) until paid (the
higher of (i) the rate that would accrue on Income PRIDES for such Payments and
(ii) the rate that would accrue on Growth PRIDES for such payments). If the
Purchase Contracts are settled early or terminated (upon the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to
Philadelphia Consolidated), the right to receive Contract Adjustment Payments,
if any, and Deferred Contract Adjustment Payments, if any, will also terminate.
In the event that Philadelphia Consolidated elects to defer the payment of
Contract Adjustment Payments, if any, on the Purchase Contracts until the
Purchase Contract Settlement Date, each holder of Purchase Contracts will
receive on the Purchase Contract Settlement Date in respect of the Deferred
Contract Adjustment Payments, in lieu of a cash payment, a number of shares of
Common Stock equal to (x) the aggregate amount of Deferred Contract Adjustment
Payments payable to such holder divided by (y) the Applicable Market Value. See
"Description of the Purchase Contracts -- Contract Adjustment Payments."
Philadelphia Consolidated also will have the right under the Indenture to
defer payments of interest on the Debentures by extending the interest payment
period at any time, and from time to time, on the Debentures. As a consequence
of such an extension, quarterly distributions on the Trust Preferred Securities,
held either as a component of the Income PRIDES or held separately, would be
deferred (but despite such deferrals would accrue interest at a rate of % per
annum through and including , 2001, and at the Reset Rate
thereafter, compounded on a quarterly basis) by the Trust during any such
Extension Period. Such right to extend the interest payment period for the
Debentures will be limited such that an Extension Period may not extend beyond
the stated maturity of the Debentures. During any such Extension Period, (a)
Philadelphia Consolidated shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of capital stock of Philadelphia Consolidated in
connection with the satisfaction by Philadelphia Consolidated of its obligations
under any employee or agent benefit plans or the satisfaction by Philadelphia
Consolidated of its obligations pursuant to any contract or security outstanding
on the date of such event requiring Philadelphia Consolidated to purchase
capital stock of Philadelphia Consolidated, (ii) as a result of a
reclassification of Philadelphia Consolidated's capital stock or the exchange or
conversion of one class or series of Philadelphia Consolidated's capital stock
for another class or series of Philadelphia Consolidated's capital stock, (iii)
the purchase of fractional interests in shares of Philadelphia Consolidated's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, (iv) dividends or
distributions in capital stock of Philadelphia Consolidated (or rights to
acquire capital stock) or repurchases or redemptions of capital stock solely
from the issuance or exchange of capital stock or (v) redemptions or repurchases
of any rights outstanding under a shareholder rights plan), (b) Philadelphia
Consolidated shall not make any payment of interest, principal or premium, if
any, on or repay, repurchase or redeem any debt securities issued by
Philadelphia Consolidated that rank junior to the Debentures and (c)
Philadelphia Consolidated shall not make any guarantee payments with respect to
the foregoing (other than payments pursuant to the Guarantee). Prior to the
termination of any such Extension Period, Philadelphia Consolidated may further
extend the interest payment period; provided, that such Extension Period may not
extend beyond the stated maturity of the Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, Philadelphia
Consolidated may
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commence a new Extension Period, subject to the above requirements. See
"Description of the Trust Preferred Securities -- Distributions" and
"Description of the Debentures -- Option to Extend Interest Payment Period."
Philadelphia Consolidated believes, and intends to take the position, that
as of the issue date of the Debentures, the likelihood that it will exercise its
right to defer payments of stated interest on the Debentures is remote and that,
therefore, the Debentures should not be considered to be issued with OID as a
result of Philadelphia Consolidated's right to defer payments of stated interest
on the Debentures unless it actually exercises such deferral right. There is no
assurance that the Internal Revenue Service will agree with such position. See
"Certain Federal Income Tax Consequences -- Trust Preferred
Securities -- Interest Income and Original Issue Discount."
Should Philadelphia Consolidated exercise its right to defer payments of
interest by extending the interest payment period, each beneficial owner of
Trust Preferred Securities held either as a component of the Income PRIDES or
held separately would be required to include such beneficial owner's share of
the stated interest on the Trust Preferred Securities in gross income, as OID,
on daily economic accrual basis, regardless of such owner's method of tax
accounting and in advance of receipt of the cash attributable to such income. As
a result, each such beneficial owner of Trust Preferred Securities would
recognize income for United States federal income tax purposes in advance of the
receipt of cash attributable to such income, and would not receive the cash from
the Trust related to such income if such holder disposes of its Trust Preferred
Securities prior to the record date for the date on which distributions of such
amounts are made. See "Certain Federal Income Tax Consequences -- Trust
Preferred Securities -- Interest Income and Original Issue Discount."
Philadelphia Consolidated has no current intention of exercising its right to
defer payments of interest by extending the interest payment period on the
Debentures. However, should Philadelphia Consolidated determine to exercise such
right in the future, the market price of the Trust Preferred Securities is
likely to be affected. A holder that disposes of its Trust Preferred Securities
during an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Trust Preferred Securities. In
addition, as a result of the existence of Philadelphia Consolidated's right to
defer interest payments, the market price of the Trust Preferred Securities
(which represent a preferred, undivided beneficial ownership interest in the
assets of the Trust) may be more volatile than the market price of other
securities that are not subject to such deferral. See "Certain Federal Income
Tax Consequences -- Trust Preferred Securities -- Interest Income and Original
Issue Discount."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
No statutory, judicial or administrative authority directly addresses the
treatment of the FELINE PRIDES or instruments similar to the FELINE PRIDES for
United States federal income tax purposes. As a result, certain United States
federal income tax consequences of the purchase, ownership and disposition of
FELINE PRIDES are not entirely clear. See "Certain Federal Income Tax
Consequences."
PURCHASE CONTRACT AGREEMENT NOT QUALIFIED UNDER TRUST INDENTURE ACT; LIMITED
OBLIGATIONS OF PURCHASE CONTRACT AGENT
Although the Trust Preferred Securities constituting a part of the Income
PRIDES will be issued pursuant to the Declaration, which will be qualified under
the Trust Indenture Act, the Purchase Contract Agreement will not be qualified
as an indenture under the Trust Indenture Act and the Purchase Contract Agent
will not be required to qualify as a trustee thereunder. Accordingly, holders of
FELINE PRIDES will not have the benefit of the protections of the Trust
Indenture Act. The protections generally afforded the holder of the security
issued under an indenture that has been qualified under the Trust Indenture Act
include disqualification of the indenture trustee for "conflicting interests" as
defined under the Trust Indenture Act, provisions preventing a trustee that is
also a creditor of the issuer from improving its own credit position at the
expense of the security holders immediately prior to or after a default under
such indenture and the requirement that the indenture trustee deliver reports at
least annually with respect to certain matters concerning the indenture trustee
and the securities. Under the terms of the Purchase Contract Agreement, the
Purchase Contract Agent will have only limited obligations to the holders of
FELINE PRIDES. See "Certain
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Provisions of the Purchase Contract Agreement and the Pledge
Agreement -- Information Concerning the Purchase Contract Agent."
RIGHTS UNDER THE GUARANTEE
The Guarantee will be qualified as an indenture under the Trust Indenture
Act. The Guarantee Trustee will act as indenture trustee under the Guarantee for
the purposes of compliance with the provisions of the Trust Indenture Act. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Trust Preferred Securities. The Guarantee guarantees to the holders of the Trust
Preferred Securities, on a subordinated unsecured basis, the payment of (i) any
accrued and unpaid distributions that are required to be paid on the Trust
Preferred Securities, to the extent the Trust has funds available therefor, (ii)
the redemption price, including all accumulated and unpaid distributions to the
date of redemption, of Trust Preferred Securities in respect of which the
related Debentures have been repurchased by Philadelphia Consolidated on the
Purchase Contract Settlement Date, to the extent the Trust has funds available
therefor, and (iii) upon a voluntary or involuntary dissolution of the Trust
(other than in connection with the distribution of Debentures to the holders of
Trust Preferred Securities), the lesser of (a) the aggregate of the liquidation
amount and all accrued and unpaid distributions on the Trust Preferred
Securities to the date of payment to the extent the Trust has funds available
therefor or (b) the amount of assets of the Trust remaining available for
distribution to holders of the Trust Preferred Securities in liquidation of the
Trust. The majority in liquidation amount of the Trust Preferred Securities will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Guarantee Trustee or to direct the exercise of
any trust or power conferred upon the Guarantee Trustee under the Guarantee.
Notwithstanding the foregoing, any holder of the Trust Preferred Securities may
institute a legal proceeding directly against Philadelphia Consolidated to
enforce such holder's rights under the Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. If Philadelphia Consolidated were to default on its obligation to pay
amounts payable on the Debentures or otherwise, the Trust would lack funds for
the payment of distributions or amounts payable on redemption of the Trust
Preferred Securities or otherwise, and, in such event, holders of the Trust
Preferred Securities would not be able to rely upon the Guarantee for payment of
such amounts. Instead, holders of the Trust Preferred Securities would rely on
the enforcement (1) by the Institutional Trustee of its rights as registered
holder of the Debentures against Philadelphia Consolidated pursuant to the terms
of the Indenture and the Debentures or (2) by such holder of the Institutional
Trustee's or such holder's own rights against Philadelphia Consolidated to
enforce payments on the Debentures. See "-- Enforcement of Certain Rights by
Holders of Trust Preferred Securities," "Description of the Debentures" and
"Description of the Guarantee." The Declaration provides that each holder of
Trust Preferred Securities, by acceptance thereof, agrees to the provisions of
the Guarantee and the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Declaration Event of Default (as defined herein) occurs and is
continuing, the holders of Trust Preferred Securities would rely on the
enforcement by the Institutional Trustee of its rights as registered holder of
the Debentures against Philadelphia Consolidated. In addition, the holders of a
majority in liquidation amount of the Trust Preferred Securities will have the
right to direct the time, method, and place of conducting any proceeding for any
remedy available to the Institutional Trustee or to direct the exercise of any
trust or power conferred upon the Institutional Trustee under the Declaration,
including the right to direct the Institutional Trustee to exercise the remedies
available to it as the holder of the Debentures. The Indenture provides that the
Debt Trustee (as defined herein) shall give holders of Debentures notice of all
defaults or events of default within 30 days after occurrence. However, except
in the cases of a default or an event of default in payment on the Debentures,
the Debt Trustee will be protected in withholding such notice if its officers or
directors in good faith determine that withholding of such notice is in the
interest of such holders.
If the Institutional Trustee fails to enforce its rights under the
Debentures in respect of an Indenture Event of Default (as defined herein) after
a holder of record of Trust Preferred Securities has made a written request,
such holder of record of Trust Preferred Securities may, to the extent permitted
by applicable law,
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institute a legal proceeding against Philadelphia Consolidated to enforce the
Institutional Trustee's rights under the Debentures. In addition, if
Philadelphia Consolidated fails to pay interest or principal on the Debentures
on the date such interest or principal is otherwise payable, and such failure to
pay is continuing, a holder of Trust Preferred Securities may directly institute
a proceeding for enforcement of payment to such holder of the principal of or
interest on the Debentures having a principal amount equal to the aggregate
stated liquidation amount of the Trust Preferred Securities of such holder (a
"Direct Action") after the respective due date specified in the Debentures. In
connection with such a Direct Action, Philadelphia Consolidated shall have the
right under the Indenture to set off any payment made to such holder by
Philadelphia Consolidated. The holders of Trust Preferred Securities will not be
able to exercise directly any other remedy available to the holders of the
Debentures. See "Description of the Trust Preferred Securities -- Declaration
Events of Default."
LIMITED RIGHTS OF ACCELERATION
The Institutional Trustee, as holder of the Debentures, may accelerate
payment of the principal and accrued and unpaid interest on the Debentures only
upon the occurrence and continuation of a Declaration Event of Default or
Indenture Event of Default, which generally are limited to payment defaults,
breach of certain covenants, certain events of bankruptcy, insolvency and
reorganization of Philadelphia Consolidated and certain events of dissolution of
the Trust. See "Description of the Trust Preferred Securities -- Declaration
Events of Default." Accordingly, there is no right to acceleration upon default
by Philadelphia Consolidated of its payment obligations under the Guarantee.
TRADING PRICE OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Debentures. A holder who disposes of his Trust Preferred Securities between
record dates for payments of distributions thereon will be required to include
accrued but unpaid interest on the Debentures through the date of disposition in
income as ordinary income (i.e., interest or, possibly, OID), and to add such
amount to his adjusted tax basis in his pro rata share of the underlying
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis, a holder will recognize a loss for tax purposes.
See "Certain Federal Income Consequences -- Trust Preferred
Securities -- Interest Income and Original Issue Discount" and "-- Sales,
Exchanges or Other Dispositions of Trust Preferred Securities."
EFFECTS OF HOLDING COMPANY STRUCTURE
Philadelphia Consolidated is a holding company the principal assets of
which currently consist of substantially all of the capital stock of its
subsidiaries, (i) Philadelphia Indemnity Insurance Company ("PIIC") and
Philadelphia Insurance Company ("PIC" and, together with PIIC, the "Insurance
Subsidiaries"); and (ii) Maguire Insurance Agency, Inc. ("MIA" and, together
with the Insurance Subsidiaries, the "Subsidiaries"). The ability of the Trust
to pay amounts due on the Trust Preferred Securities is dependent upon the
ability of Philadelphia Consolidated to make payments on the Debentures as and
when required.
Philadelphia Consolidated's primary sources of funds are dividends from its
Subsidiaries and payments to it pursuant to certain tax allocation agreements
with the Insurance Subsidiaries. The Insurance Subsidiaries are insurance
companies that are subject to significant government regulation and the ability
of Philadelphia Consolidated to receive dividends and loans from the Insurance
Subsidiaries is restricted by such regulations. Accumulated statutory profits of
the Insurance Subsidiaries from which dividends may be paid totaled $59.7
million at December 31, 1997. Of this amount, the Insurance Subsidiaries are
entitled to pay a total of approximately $14.3 million of dividends in 1998
without obtaining prior approval from the Pennsylvania Department of Insurance.
Further, the right of Philadelphia Consolidated to participate in any
distribution of assets of any Subsidiary upon such Subsidiary's liquidation or
reorganization or otherwise (and thus the ability of holders of the Trust
Preferred Securities to benefit indirectly from such distribution) is subject to
the prior claims of creditors of that Subsidiary, except to the extent, if any,
that Philadelphia Consolidated may itself be recognized as a creditor of that
Subsidiary. Accordingly, Philadelphia Consolidated's obligations in respect of
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the Debentures, the Guarantee and the Contract Adjustment Payments effectively
will be subordinated to all existing and future liabilities of the Subsidiaries.
At December 31, 1997, the Subsidiaries had total liabilities (excluding
liabilities owed to Philadelphia Consolidated) of approximately $176.7 million.
REGULATION
The Insurance Subsidiaries are subject to a substantial degree of
regulatory oversight, which generally is designed to protect the interests of
policyholders as opposed to investors. Such regulation relates to authorized
lines of business, capital and surplus requirements, investment parameters,
underwriting limitations, required participation in shared property-casualty
insurance markets or pooling arrangements, transactions with affiliates,
dividend limitations, changes in control and a variety of other financial and
non-financial components of an insurance company's business.
New regulations and legislation have been (and are being) proposed from
time to time to limit damage awards; to bring the industry under regulation by
the federal government; to control premiums, policy terminations and other
policy terms; and to impose new taxes and assessments. It is not possible to
determine whether any of these proposals will be adopted in any jurisdictions
and, if so, in what form or in what jurisdictions. Accordingly, the impact of
these initiatives on Philadelphia Consolidated is impossible to determine.
INDUSTRY FACTORS
The Insurance Subsidiaries write (i) specialized commercial property and
casualty insurance products for non-profit organizations, the auto rental and
leasing industries, assisted living and nursing home facilities, homeowners
associations, the health fitness and wellness industry and private schools and
(ii) select classes of professional liability insurance. Historically, the
financial performance of the commercial property and casualty insurance industry
has tended to fluctuate in cyclical patterns of soft markets followed by hard
markets. Although an individual company's financial performance is dependent on
its own specific business characteristics, the profitability of most commercial
property and casualty insurance companies tends to follow this cyclical market
pattern. At present, the property and casualty insurance industry is
experiencing a prolonged soft market; further deterioration of the market could
have an adverse effect on the financial condition and operations of the Company.
There can be no assurance that a hard market will emerge or that the current
market will not worsen.
COMPETITION
The commercial property and casualty insurance industry is highly
competitive. Many of the Company's existing and potential competitors are
larger, have considerably greater financial and other resources, have greater
experience in the insurance industry and offer a broader line of insurance
products than the Company. Not only does the Company compete with other
insurers, it also competes with other forms of insurance organizations such as
self-insurance mechanisms.
A.M. BEST AND STANDARD & POOR'S RATINGS
The Insurance Subsidiaries are rated "A+" (Superior) by A.M. Best Company.
According to A.M. Best Company, the "A+" (Superior) rating is assigned to
companies that have, on balance, superior financial strength, operating
performance and market profile when compared to the standards established by the
A.M. Best Company and have a very strong ability to meet their ongoing
obligations to policyholders. A.M. Best Company ratings are based upon factors
relevant to policyholders and are not directed toward the protection of
investors, such as holders of the Securities. The Insurance Subsidiaries also
possess an "A" claims paying ability rating by Standard & Poor's. According to
Standard & Poor's, insurers rated "A" offer good financial security for
policyholders. The Company believes that the ratings assigned by A.M. Best
Company and Standard & Poor's are important factors in marketing its products.
If these ratings were to be downgraded in the future, it is likely that the
Company's competitive position, and hence its financial condition and results of
operations, would be adversely affected.
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ADEQUACY OF RESERVES
The Company establishes reserves for losses and loss adjustment expenses
("LAE") representing the Company's best estimate of the losses and LAE it will
incur on existing insurance policies. The Company obtains annual certifications
of reserves by independent actuaries. While management believes that the
Company's reserves for losses and LAE are adequate, loss and LAE reserves
necessarily are based on assumptions as to future events. Accordingly, ultimate
losses and LAE may vary from established reserves. If the Company's reserves are
subsequently determined to be understated, the Company will be required to
increase reserves with a corresponding reduction in net income in the period in
which the deficiency is identified. Furthermore, changes in inflation, claim
settlement patterns, legislative activity and litigation trends may have a
substantial impact on the Company's future loss experience. Accordingly, there
can be no assurance that the Company's reserves will be adequate to cover
ultimate loss development. In the event the Company is required to strengthen
reserves, such action could result in a reduction in policyholders' surplus, a
downgrading of the Insurance Subsidiaries' A.M. Best pooled rating and/or
adverse regulatory consequences.
REINSURANCE
The Company cedes to reinsurers a portion of the risk on policies it writes
directly. Limiting its insurance risks through reinsurance will continue to be
important to the Company. The maintenance of reinsurance does not affect the
Company's direct liability to its policyholders on the business it writes
directly. Although the Company's reinsurance is currently maintained primarily
with one large reinsurer, rated "A" (Excellent) by A.M. Best, the reinsurer's
insolvency or inability to make payments under the terms of a reinsurance treaty
with the Company could have a material adverse effect on the Company. Moreover,
there can be no assurance that reinsurance will remain continuously available to
the Company to the same extent and on the same terms as are currently available.
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business is dependent on the efforts and
abilities of its principal executive officers, particularly James J. Maguire,
the Company's founder, principal shareholder, Chairman of the Board, President
and Chief Executive Officer. The Company maintains $5.0 million of "key man"
insurance on Mr. Maguire's life. However, Mr. Maguire does not have an
employment contract with the Company and there can be no assurance that he will
remain in his present positions for any period of time. If the Company were to
lose the services of Mr. Maguire or other principal executive officers, there
could be a material adverse effect on the Company's business.
CONTROLLING SHAREHOLDERS; ANTI-TAKEOVER EFFECT
James J. Maguire and his wife, Frances Maguire, beneficially own 44.1% of
the Common Stock. Accordingly, Mr. and Mrs. Maguire have a substantial level of
control over the Company and over matters submitted to its shareholders. Mr.
James J. and Mrs. Frances Maguire are likely to have the practical ability to
elect all of the directors of the Company and prevent a potential change of
control of the Company (even if advantageous to the public investors).
S-34
<PAGE> 36
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a declaration of trust, dated as of April 2, 1998, executed by the
Sponsor and certain of the Philadelphia Consolidated Trustees and (ii) the
filing of a certificate of trust with the Secretary of State of the State of
Delaware on April 2, 1998. Such trust declaration will be amended and restated
in its entirety substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus Supplement forms a part. The
Declaration will be qualified as an indenture under the Trust Indenture Act.
Although, upon issuance of the Trust Preferred Securities, the holders of Income
PRIDES will be the beneficial owners of the related Trust Preferred Securities,
such Trust Preferred Securities will be pledged with the Collateral Agent to
secure the obligations of the holders under the related Purchase Contracts. See
"Description of the Purchase Contracts -- Pledged Securities and Pledge
Agreement" and "Description of the Trust Preferred Securities -- Book-Entry Only
Issuance -- The Depository Trust Company." Philadelphia Consolidated will
directly or indirectly acquire Common Securities in an aggregate liquidation
amount equal to three percent of the total capital of the Trust. The Trust
exists for the exclusive purposes of (i) issuing the Trust Securities
representing undivided beneficial ownership interests in the assets of the
Trust, (ii) investing the proceeds of the Trust Securities in the Debentures and
(iii) engaging in only those other activities necessary, appropriate, convenient
or incidental thereto. The Trust has a term of approximately seven years, but
may dissolve earlier as provided in the Declaration.
The number of Philadelphia Consolidated Trustees initially is five. Three
of the Philadelphia Consolidated Trustees are persons who are employees or
officers of or who are affiliated with Philadelphia Consolidated (the "Regular
Trustees"). Pursuant to the Declaration, the fourth trustee will be a financial
institution that is unaffiliated with Philadelphia Consolidated, which trustee
serves as institutional trustee under the Declaration and as indenture trustee
for the purposes of compliance with the provisions of the Trust Indenture Act
(the "Institutional Trustee"). The fifth trustee, First Chicago Delaware Inc., a
financial institution that is unaffiliated with Philadelphia Consolidated, will
serve as the Delaware Trustee, until removed or replaced by the holder of the
Common Securities. For purposes of compliance with the provisions of the Trust
Indenture Act, The First National Bank of Chicago will act as the trustee (the
"Guarantee Trustee") under the Guarantee. See "Description of the Guarantee" and
"Description of the Trust Preferred Securities -- Voting Rights."
The Institutional Trustee will hold title to the Debentures for the benefit
of the holders of the Trust Securities and the Institutional Trustee will have
the power to exercise all rights, powers and privileges under the Indenture as
the holder of the Debentures. In addition, the Institutional Trustee will
maintain exclusive control of a segregated noninterest bearing bank account (the
"Property Account") to hold all payments made in respect of the Debentures for
the benefit of the holders of the Trust Securities. The Institutional Trustee
will make payments of distributions and payments on liquidation, redemption and
otherwise to the holders of the Trust Securities out of funds from the Property
Account. The Guarantee Trustee will hold the Guarantee for the benefit of the
holders of the Trust Preferred Securities. Philadelphia Consolidated, as the
direct or indirect holder of all the Common Securities, will have the right to
appoint, remove or replace any Philadelphia Consolidated Trustee and to increase
or decrease the number of Philadelphia Consolidated Trustees; provided, however,
that the number of Philadelphia Consolidated Trustees shall be at least two, at
least one of which shall be a Regular Trustee. Philadelphia Consolidated will
pay all fees and expenses related to the Trust and the offering of the Trust
Securities. See "Description of the Debentures -- Miscellaneous."
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Declaration, the Trust Act and the Trust Indenture Act. See "Description of the
Trust Preferred Securities."
The Delaware Trustee currently is First Chicago Delaware Inc. and its
telephone number is (212)373-1191.
S-35
<PAGE> 37
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The high and low closing prices of the Common Stock, as reported by the
National Association of Securities Dealers (NNM ticker symbol: "PHLY"), for the
periods indicated, are presented below:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996:
First Quarter*............................................ $10 1/2 $ 8 1/8
Second Quarter*........................................... 11 1/4 9 1/8
Third Quarter*............................................ 10 5/8 8 3/8
Fourth Quarter*........................................... 12 1/8 10 5/8
1997:
First Quarter*............................................ $15 $11 1/4
Second Quarter*........................................... 17 9/16 14
Third Quarter*............................................ 23 1/4 16 1/2
Fourth Quarter............................................ 23 15 11/16
1998:
First Quarter............................................. $21 3/4 $16 3/4
Second Quarter (through April 23, 1998)................... $22 1/2 $20 23/32
</TABLE>
- ---------------
* Restated to reflect a two-for-one split of the Common Stock distributed in
November 1997.
Philadelphia Consolidated did not declare cash dividends on the Common
Stock in 1996 or 1997, and currently intends to retain its earnings to enhance
future growth. The payment of dividends will be determined by Philadelphia
Consolidated's Board of Directors and will be based on general business
conditions as well as legal and regulatory restrictions. As a holding company,
Philadelphia Consolidated is dependent upon dividends and other permitted
payments from its subsidiaries to pay cash dividends to its shareholders. The
ability of the Insurance Subsidiaries to pay dividends to Philadelphia
Consolidated is subject to regulatory limitations. See "Risk Factors -- Effects
of Holding Company Structure."
USE OF PROCEEDS
All or substantially all of the proceeds from the sale of the Growth PRIDES
will be used to purchase the underlying Treasury Securities to be transferred to
holders of the Growth PRIDES pursuant to the terms thereof, and the remainder,
if any, will be paid to the Company. All of the proceeds from the sale of the
Trust Preferred Securities that are not components of Income PRIDES and from the
sale of the Common Securities and all or substantially all of the proceeds from
the sale of the Income PRIDES will be invested by the Trust in Debentures of
Philadelphia Consolidated, and the remainder of the proceeds from the sale of
the Income PRIDES, if any, will be paid to the Company. Philadelphia
Consolidated currently anticipates using all of the net proceeds from the sale
of the Debentures, the Income PRIDES and the Growth PRIDES, estimated to be
approximately $ million, for general corporate purposes, which may include
acquisitions (including, without limitation, acquisitions of programs or books
of business), capital expenditures, capital contributions to its subsidiaries
and the repurchase by Philadelphia Consolidated of its Common Stock.
Philadelphia Consolidated has had discussions relating to possible acquisitions
with a number of parties, but has not reached agreement with respect to the
terms of any such acquisition and, accordingly, there is no assurance that any
such transaction will be completed.
S-36
<PAGE> 38
CONDENSED CONSOLIDATED CAPITALIZATION
The following table summarizes the actual consolidated capitalization of
Philadelphia Consolidated at December 31, 1997, and such capitalization adjusted
on a pro forma basis to reflect the sale of the FELINE PRIDES offered hereby and
the concurrent purchase by the Trust from Philadelphia Consolidated of $
million principal amount of Debentures. The table should be read in conjunction
with Philadelphia Consolidated's Annual Report on Form 10-K for the year ended
December 31, 1997 which is incorporated by reference herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
PRO FORMA
ADJUSTMENTS
FOR THE
ISSUANCE OF PRO FORMA
ACTUAL FELINE PRIDES(2)(3) AS ADJUSTED
-------- ------------------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Minority Interest in Consolidated Subsidiaries:
Company-obligated Mandatorily-redeemable
Preferred Securities of Subsidiary
Trust(1)..................................... $ -- $ 87,150 $
-------- -------- --------
Shareholders' Equity:
Preferred Stock, $.01 Par Value, 10,000,000
Shares Authorized, None Issued and
Outstanding..................................
Common Stock, No Par Value, 50,000,000 Shares
Authorized; 12,242,431 Shares Issued and
Outstanding(3)............................... 42,788
Notes Receivable from Shareholders.............. (1,422)
Unrealized Investment Appreciation
(Depreciation), Net of Deferred Income
Taxes........................................ 15,023
Retained Earnings............................... 54,895
-------- -------- --------
Total Shareholders' Equity.............. 111,284
-------- -------- --------
Total Capitalization.................... $111,284 $ $
======== ======== ========
</TABLE>
- ---------------
(1) Subsequent to the completion of the Offering, the assets of the Trust will
consist solely of approximately $ million in aggregate principal amount
of the Debentures with an interest rate of % and a maturity date of
, 2001. The assets described in the previous sentence may not be
adequate to meet the obligations of the Trust.
(2) The pro forma adjustments assume the Underwriters' over allotment is not
exercised.
(3) The present value of the Contract Adjustment Payments, if any, are charged
to Common Stock.
S-37
<PAGE> 39
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in Philadelphia
Consolidated's consolidated financial statements, with the Trust Preferred
Securities shown on Philadelphia Consolidated's balance sheet under the caption
"Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust." The financial statement footnotes to Philadelphia Consolidated's
consolidated financial statements will reflect that the sole asset of the Trust
will be the Debentures. Distributions on the Trust Preferred Securities will be
reflected as a charge to Philadelphia Consolidated's consolidated income,
identified as Minority Interest in Net Income of Consolidated Subsidiaries,
whether paid or accrued.
The Purchase Contracts are forward transactions in the Common Stock. Upon
settlement of a Purchase Contract, Philadelphia Consolidated will receive the
Stated Amount on such Purchase Contract and will issue the requisite number of
shares of Common Stock. The Stated Amount thus received will be credited to the
Common Stock account in shareholders' equity. The present value of the Contract
Adjustment Payments will initially be charged to equity, with an offsetting
credit to liabilities. Subsequent Contract Adjustment Payments will be allocated
between this liability account and interest expense based on a constant rate
calculation over the life of the transaction.
Prior to the issuance of shares of Common Stock, upon settlement of the
Purchase Contracts, it is anticipated that the FELINE PRIDES will be reflected
in Philadelphia Consolidated's earnings per share calculations using the
treasury stock method. Under this method, the number of shares of Common Stock
used in calculating earnings per share is deemed to be increased by the excess,
if any, of the number of shares issuable upon settlement of the Purchase
Contracts over the number of shares that could be purchased by Philadelphia
Consolidated in the market (at the average market price during the period) using
the proceeds receivable upon settlement. Consequently, it is anticipated there
will be no dilutive effect on Philadelphia Consolidated's earnings per share
except during periods when the average market price of Common Stock is above the
Threshold Appreciation Price.
S-38
<PAGE> 40
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information as of and for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 has been derived from
previously published audited consolidated financial statements of Philadelphia
Consolidated, prepared in accordance with generally accepted accounting
principles, which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The consolidated financial information should be read in
conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements from which it has been derived and the
accompanying notes thereto incorporated by reference herein. See also,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of Philadelphia
Consolidated and accompanying notes included herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Gross Written Premiums.......................... $ 159,091 $ 136,855 $ 104,180 $ 89,099 $ 57,085
Gross Earned Premiums........................... $ 150,128 $ 121,820 $ 99,507 $ 84,657 $ 53,506
Net Written Premiums............................ $ 111,797 $ 83,994 $ 62,072 $ 55,398 $ 40,645
Net Earned Premiums............................. $ 100,555 $ 72,050 $ 58,188 $ 52,085 $ 37,484
Net Investment Income........................... 9,703 7,910 6,506 4,902 3,269
Net Realized Investment Gain (Loss)............. (16) 260 181 (1,697) 1,327
Other Income.................................... 228 282 309 314 1,169
---------- ---------- ---------- ---------- ----------
Total Revenue.......................... 110,470 80,502 65,184 55,604 43,249
---------- ---------- ---------- ---------- ----------
Net Loss and Loss Adjustment Expenses........... 55,009 40,118 33,227 31,009 21,165
Acquisition Costs and Other Underwriting
Expenses...................................... 31,344 22,210 17,105 15,541 12,991
Other Operating Expenses........................ 1,909 1,386 2,564 1,347 3,038
Interest Expense................................ -- -- -- -- 459
---------- ---------- ---------- ---------- ----------
Total Losses and Expenses.............. 88,262 63,714 52,896 47,897 37,653
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes...................... 22,208 16,788 12,288 7,707 5,596
Total Income Tax Expense............... 5,338 3,414 2,458 1,734 1,364
---------- ---------- ---------- ---------- ----------
Net Income............................. $ 16,870 $ 13,374 $ 9,830 $ 5,973 $ 4,232
---------- ---------- ---------- ---------- ----------
Weighted Average Common Shares Outstanding(1)... 12,193,659 11,879,506 11,627,702 11,627,702 7,046,442
Weighted Average Share Equivalents
Outstanding(1)................................ 2,736,039 2,373,742 2,049,004 1,647,902 1,771,252
---------- ---------- ---------- ---------- ----------
Weighted Average Share and Share Equivalents
Outstanding(1)................................ 14,929,698 14,253,248 13,676,706 13,275,604 8,817,694
========== ========== ========== ========== ==========
Basic Earnings Per Share(1)(2).................. $1.38 $1.13 $0.85 $0.51 $0.60
===== ===== ===== ===== =====
Diluted Earnings Per Share(1)(2)................ $1.13 $0.94 $0.72 $0.45 $0.48
===== ===== ===== ===== =====
YEAR END FINANCIAL POSITION:
Total Investments and Cash and Cash
Equivalents................................. $ 229,599 $ 180,061 $ 140,086 $ 105,720 $ 90,441
Total Assets.................................. 288,126 225,938 174,148 140,718 116,135
Unpaid Loss and Loss Adjustment Expenses...... 122,430 96,642 77,686 59,175 44,253
Total Shareholders' Equity.................... 111,284 85,642 68,316 52,600 49,018
Common Shares Outstanding(1).................. 12,242,431 12,079,612 11,627,702 11,627,702 11,627,702
INSURANCE OPERATING RATIOS (STATUTORY BASIS):
Net Loss and Loss Adjustment Expenses to Net
Earned Premiums............................. 55.3% 55.7% 57.1% 59.5% 56.5%
Underwriting Expenses to Net Written
Premiums.................................... 29.1% 31.1% 29.6% 29.9% 34.5%
--- --- --- --- ---
Combined Ratio.................................. 84.4% 86.8% 86.7% 89.4% 91.0%
=== === === === ===
A.M. Best Rating................................ A A A A A-
(Excellent) (Excellent) (Excellent) (Excellent) (Excellent)
</TABLE>
- ---------------
(1) 1996, 1995, 1994 and 1993 restated to reflect a two for one split of
Philadelphia Consolidated's common stock distributed in November 1997.
(2) 1996, 1995, 1994 and 1993 earnings per share amounts restated in accordance
with the provisions of SFAS No. 128 adopted as of December 31, 1997.
S-39
<PAGE> 41
BUSINESS
GENERAL
1997 represented the fourth consecutive year since its 1993 initial public
offering that the Company has reported growth in gross written premiums and net
income while experiencing a combined ratio substantially lower than the
commercial property and casualty insurance industry as a whole. The Company's
four year compound annual growth rate for gross written premiums and net income
was 29.2% and 41.3%, respectively, while the four year weighted average combined
ratio (GAAP basis) was 86.8%. The GAAP basis combined ratio is the sum of the
net loss and loss adjustment expenses and acquisition costs and other
underwriting expenses divided by net earned premiums. The Company believes its
profitable growth is attributable to adhering to conservative underwriting
guidelines and pricing discipline while supplementing historically profitable
product lines with growth in certain excess liability products, commercial
multi-peril products, and selected professional liability coverages.
The Insurance Subsidiaries are rated "A+" (Superior) by A.M. Best Company.
According to A.M. Best Company, the "A+" (Superior) rating is assigned to
companies that have, on balance, superior financial strength, operating
performance and market profile when compared to the standards established by the
A.M. Best Company and have a very strong ability to meet their ongoing
obligations to policyholders. A.M. Best Company ratings are based upon factors
relevant to policyholders and are not directed toward the protection of
investors. The Insurance Subsidiaries also possess an "A" claims paying ability
rating by Standard & Poor's. According to Standard & Poor's, insurers rated "A"
offer good financial security for policyholders. The Company believes that the
ratings assigned by A.M. Best Company and Standard & Poor's are important
factors in marketing its products.
BUSINESS STRATEGY
The Company designs property and casualty insurance products incorporating
value-added coverages and services for select target industries or niches. A
"mixed" marketing strategy is utilized wherein the Company's production
underwriting organization markets the Company's insurance products directly to
the insured or through the Company's 35 preferred agents, or also accepts
business from independent insurance brokers. The Company's production
underwriting organization, consisting of 100 professionals at year 1997,
operates from 38 proprietary field offices located across the United States and
includes telemarketing staffs at its regional offices and the Philadelphia Home
Office. Approximately 53% of the total 1997 gross premium was produced
indirectly through the Company's 35 preferred agents (11%) and its approximately
4,000 broker relationships (42%).
PRODUCT LINES
The following table sets forth, for the years ended December 31, 1997, 1996
and 1995, the gross written premiums for the Company's insurance product lines
and the relative percentages that such premiums represented.
<TABLE>
<CAPTION>
GROSS WRITTEN PREMIUMS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial Automobile.... $ 18,415 11.6% $ 18,506 13.5% $ 17,294 16.6%
Excess Liability......... 59,296 37.3 56,411 41.2 51,907 49.8
Commercial Package....... 60,012 37.7 43,707 32.0 25,064 24.1
Specialty Lines.......... 20,748 13.0 16,558 12.1 8,505 8.2
Involuntary.............. 620 .4 1,673 1.2 1,410 1.3
-------- ----- -------- ----- -------- -----
Total.................... $159,091 100.0% $136,855 100.0% $104,180 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
S-40
<PAGE> 42
Commercial Automobile and Excess Liability. The Company has provided
Commercial Automobile Products to the leasing and rent-a-car industries for over
35 years. Products offered to the rent-a-car industry include coverage for the
business owner's property, dual interest liability, and physical damage on the
rental vehicle.
Additionally, through arrangements with a number of the largest rent-a-car
companies, the Company also offers its excess liability product at the rental
car counter to rent-a-car customers protecting them against liability for bodily
injury and property damage, which is in excess of the statutory coverage
provided with the rental vehicle and provides primary coverage over the renter's
personal automobile insurance coverage.
In keeping with its marketing philosophy, the Company includes a number of
special features in its rental car products and services in an attempt to
differentiate them from the competition. Such features include: catastrophic
comprehensive coverage for losses due to fire, lightening, windstorm, hail,
flood, earthquake and other specified causes; subrogation services on
self-insured physical damage; liability deductibles; and self-insured retention
programs.
The Company also offers a full range of liability and physical damage
coverages to automobile leasing companies and their customers. For the driver
(the lessee), coverages include both primary liability and physical damage
coverage on the vehicle. For the owner (the lessor), coverages include
contingent and excess liability over the primary liability layer which (i)
protects lessors in the event of a loss when the primary coverage is absent or
inadequate and (ii) provides contingent physical damage coverage. Additional
products offered to leasing companies include interim primary liability and
physical damage coverage, which protects the lessor of the vehicle before and
after it is delivered to the lessee; residual value coverage which guarantees
the value of the leased vehicle at the termination of the lease; and guaranteed
asset protection coverage which protects the lessor and lessee for the
difference between the leased vehicle's actual cash value and the lease or loan
net value in instances where the vehicle is stolen or damaged beyond repair.
Commercial Package. The Company has been providing Commercial Multi Peril
Package Policies ("Package Programs") to specific targeted niche markets for
over 10 years. Among the organizations to which the Company offers its specialty
niche Package Programs are non-profit social service agencies, introduced in
1988, health and fitness organizations, assisted living facilities, nursing
homes, private and specialty training schools, and condominium/homeowner
association facilities. The Package Programs policies provide a combination of
comprehensive liability, property and automobile coverages with limits up to
$1.0 million and umbrella limits on an optional basis up to $5.0 million. These
policies are further tailored to include special value-added features addressing
the unique aspects of each of the above niche markets differentiating the
Company's product offerings from those of its competitors.
Specialty Lines. The Company has been providing specialty professional
liability products for approximately ten years, initially offering Directors &
Officers Liability coverage to Nonprofit 501(c)(3) tax exempt organizations. The
Company's recent efforts have been focused on broadening the target market for
its specialty lines product offerings through the expansion of its field
production underwriting staff along with introducing new products. The Company
has significantly expanded its errors and omissions product offered to the
independent insurance agent along with its miscellaneous professional liability
program which is currently offered to an array of professionals including:
mortgage bankers, claims adjusters, lawyers, title abstractors, and financial
advisors. During 1996, the Company introduced a proprietary package of coverages
in its Executive Safeguard policy offered to public and private companies. The
coverages offered in the Executive Safeguard policy include: directors and
officers liability, employment practices liability, fiduciary liability, and
kidnap ransom insurance.
S-41
<PAGE> 43
The following table provides the geographic distribution of the Company's
risks insured as represented by direct earned premiums for all product lines for
the year ended December 31, 1997. No other state accounted for more than 2% of
total direct earned premiums for all product lines for the year ended December
31, 1997.
<TABLE>
<CAPTION>
PERCENT OF
STATE DIRECT EARNED PREMIUMS TOTAL
- ---------------------------------------------------------- ---------------------- ----------------
<S> <C> <C>
California................................................ $ 31,549,372 21.9%
Florida................................................... 18,177,954 12.6
New York.................................................. 8,103,169 5.6
Illinois.................................................. 7,191,090 5.0
New Jersey................................................ 7,044,649 4.9
Massachusetts............................................. 6,495,937 4.5
Pennsylvania.............................................. 5,513,663 3.8
Ohio...................................................... 4,971,008 3.4
Hawaii.................................................... 4,510,938 3.1
North Carolina............................................ 3,370,045 2.3
Oklahoma.................................................. 3,309,100 2.3
Minnesota................................................. 3,258,377 2.3
Wisconsin................................................. 2,979,051 2.1
Alabama................................................... 2,895,981 2.0
Other..................................................... 34,821,033 24.2
------------ ------
Total Direct Earned Premiums.............................. $144,191,367 100.0%
============ ======
</TABLE>
UNDERWRITING AND PRICING
The Company's underwriting function is segregated into three independent
groups: Commercial Lines, Specialty Lines, and Regional Underwriting. Commercial
and Specialty Lines responsibilities include: pricing all business, managing the
risk selection process, and monitoring loss ratios by product and insured. The
Regional Underwriting group primarily performs preliminary underwriting and
processing functions along with providing customer service.
The Commercial Lines group, which has underwriting responsibility for the
Company's commercial automobile and commercial package products, currently
consists of home office underwriters that are supported by underwriting
assistants, raters, and other policy administration personnel. The Commercial
Lines underwriters and support staff are organized into geographic underwriting
teams responsible for underwriting and servicing specific commercial automobile
and commercial package products. Each underwriting team is under the direction
of a Senior Underwriter who reports to the Vice President of Commercial Lines
Underwriting.
The Specialty Lines group, which has underwriting responsibility for the
Company's professional liability products, consists of home office underwriters
who report to the Vice President of Specialty Lines Underwriting, and are
supported by underwriting assistants. The Specialty Lines underwriters have
responsibility for underwriting specific professional liability products within
designated Company marketing regions.
During 1997, the Company established a pilot commercial lines underwriting
function in its Southeast regional marketing office to strengthen local market
intelligence, further develop relationships with agents and insureds and enhance
overall customer service. This pilot underwriting function operates under
well-defined underwriting and pricing guidelines developed by the home office
Commercial Lines Underwriting department and has quoting and binding authority
on all risks falling within these guidelines. Risks not failing within the
guidelines are referred to the home office for underwriting decisions.
As a result of the success of this pilot office, the Company plans to
establish commercial lines underwriting functions in its Western and Northeast
regional marketing offices during 1998 under the currently established
structure. In addition, the Specialty Lines division has also identified key
regional offices
S-42
<PAGE> 44
in which Specialty Lines underwriters will be placed. During the fourth quarter
of 1997, a pilot Specialty Lines Underwriting unit was established in the
Company's Western region. The Specialty Lines underwriters will also operate
under a matrix organization structure similar to that of Commercial Lines
underwriting where final underwriting decisions falling outside of established
guidelines will be referred to the home office. Production and service decisions
will reside with the regional marketing vice president. The Company anticipates
placing Specialty Lines underwriters into approximately four other of the
Company's seven regional marketing offices during 1998.
The Company uses a combination of Insurance Services Office, Inc. ("ISO")
coverage forms and rates and independently filed forms and rates. Coverage forms
and rates are independently developed in situations where the line of business
is not supported by ISO or where management believes the ISO forms and rates do
not adequately address the risk. Departures from ISO forms are also used to
differentiate the Company's products from its competitor's products and are
independently filed.
The Company attempts to follow conservative underwriting and pricing
practices. When necessary, the Company is willing to reunderwrite, sharply
curtail or discontinue a product deemed to present unacceptable risks. Written
underwriting guidelines are maintained, and updated regularly, for all classes
of business underwritten. Adherence to underwriting guidelines is maintained
through underwriting audits. Product price levels are measured utilizing a price
monitoring system which measures the aggregate price level of the book of
business. This system is intended to assist management and underwriters in
recognizing and correcting price deterioration before it results in underwriting
losses.
REINSURANCE
The Company's reinsurance program is principally placed with Swiss Re
America, an "A" (Excellent) rated company by A.M. Best Company, with which the
Company has maintained a reinsurance relationship since 1989.
During the first quarter of 1998, effective as of January 1, 1998, the
Company's casualty reinsurance agreement was modified to provide that the
Company bears (i) the first $250,000 layer of liability on each occurrence for
its assisted living, nursing home, insurance agents errors and omissions and
corporate directors and officers liability products, (ii) the first $1,000,000
layer of liability on each occurrence for its non-profit directors and officers
liability products and all of its commercial lines products excluding the
assisted living and nursing home products, and (iii) the first $500,000 layer of
liability on each occurrence for all other products, with the reinsurer bearing
the remaining contracted liability under all policies up to $1,000,000. Casualty
risks in excess of $1.0 million up to $10.0 million are reinsured under a
casualty treaty. Facultative reinsurance is placed for each casualty risk in
excess of $10.0 million.
The Company has an errors and omissions insurance policy which provides
$5.0 million of coverage for protection from exposures such as extra-contractual
obligations and judgments in excess of policy limits. The Company also has an
excess casualty reinsurance agreement with the Reinsurer providing an additional
$5.0 million of coverage with respect to these exposures.
The Company's property reinsurance agreement provides that the Company
bears the first $500,000 layer of loss on each risk with the Reinsurer bearing
the next $1.5 million layer of loss on each risk subject to a maximum of $3.5
million recoverable from a single occurrence. The Company has an automatic
facultative arrangement for each property risk in excess of $2.0 million up to
$20.0 million. The Company seeks to limit the risk of a reinsurer's default in a
number of ways. First, the Company principally contracts with large reinsurers
that are rated at least "A-" (Excellent) by A.M. Best Company. Second, the
Company seeks to collect the obligations of its reinsurers on a timely basis.
This collection effort is supported by a reinsurance recoverable system that is
regularly monitored. Finally, the Company typically does not write casualty
policies in excess of $10.0 million nor property policies in excess of $20.0
million.
The Company regularly assesses its reinsurance needs and seeks to improve
the terms of its reinsurance arrangements as market conditions permit. Such
improvements may involve increases in retentions, modifications in premium
rates, changes in reinsurers and other matters.
S-43
<PAGE> 45
MARKETING AND DISTRIBUTION
Proactive risk selection based on sound underwriting criteria and
relationship selling in clearly defined commercial markets continues to be the
foundation of the Company's marketing plan. Within this framework, the Company's
marketing effort is designed to assure a systematic and disciplined approach to
developing business which is anticipated to be profitable. The Company's most
important distribution channel is its production underwriting organization. The
production underwriting organization is currently comprised of 100 employees
located in 38 field offices in major markets across the country. The field
offices are focused daily on interacting with prospective and existing insureds.
In addition to this direct marketing, relationships with approximately 4,000
brokers have been formed either as a result of the broker having a relationship
with the insured, or through seeking the Company's expertise in one of its
specialty products.
During 1996, the Company introduced its preferred agent program wherein
business relationships were formed with brokers specializing in certain of the
Company's business niches. At year end 1997, the Company had 35 preferred agent
relationships, representing approximately $16.2 million in gross written
premium. The Company anticipates increasing the number of these relationships by
approximately 35% in 1998 thereby further increasing the distribution of the
Company's niche products. This mixed marketing concept not only provides the
flexibility to work with the broker and/or policyholder but also provides the
flexibility to seize emerging market opportunities.
The Company supplements its marketing efforts through trade shows, direct
mailings and national advertisements placed in trade magazines serving
industries in which the Company specializes.
In 1997, approximately 85% of the Company's expiring insurance premiums
were renewed. Management attributes this renewal rate in large part to
continuing personal contacts between the Company's production underwriters,
value-added coverage enhancements which differentiates the Company's products,
and servicing its policyholders.
PRODUCT DEVELOPMENT
The Company continually evaluates new product opportunities, consistent
with its strategic focus on selected market niches. Direct contacts between the
Company's field and home office personnel and its customers have produced a
number of new product ideas. All new product ideas are presented to the Product
Development Committee (the "Committee") for consideration. The Committee,
currently composed of the Company's two most senior executives, as well as
officers from the underwriting and claims departments, meets regularly to review
the feasibility of products from a variety of perspectives, including
underwriting risk, marketing and distribution, reinsurance, long-term viability
and consistency with the Company's culture and philosophy. For each new product,
an individualized test market plan is prepared, addressing such matters as the
appropriate distribution channel (e.g., a limited number of selected production
underwriters), an appropriate cap on premiums to be generated during the test
market phase and reinsurance requirements for the test market phase. Test market
products may involve lower retentions than customarily utilized. After a new
product is approved for test marketing, the Company monitors its success based
on specified criteria (e.g., underwriting results, sales success, product demand
and competitive pressures). If expectations are not realized, the Company either
moves to improve results by initiating adjustments or abandons the product.
CLAIMS MANAGEMENT AND ADMINISTRATION
In accordance with its emphasis on underwriting profitability, the Company
actively manages claims under its policies in an effort to investigate reported
incidents at the earliest juncture, service insureds and minimize fraud. Claim
files are regularly audited by claims supervisors and the Company's reinsurers
in an attempt to ensure that claims are being processed properly and that
reserves are being set at appropriate levels. Claims examiners are expected to
set conservative reserves, an important factor in the Company's reserve
development over the years. See "The Company -- Loss and Loss Adjustment
Expenses."
The Company maintains a Special Investigations Unit to investigate
suspicious claims and to serve as a clearinghouse for information concerning
fraudulent practices primarily within the rental car industry.
S-44
<PAGE> 46
Working closely with a variety of industry contacts, including attorneys,
investigators and rental car company fraud units, this unit has uncovered a
number of fraudulent claims.
LOSS AND LOSS ADJUSTMENT EXPENSES
The Company is liable for losses and loss adjustment expenses under its
insurance policies and reinsurance treaties. While the Company's professional
liability policies are written on claims-made forms and while claims on its
other policies are generally reported promptly after the occurrence of an
insured loss, in many cases several years may elapse between the occurrence of
an insured loss, the reporting of the loss to the Company and the Company's
payment of the loss. The Company reflects its liability for the ultimate payment
of all incurred losses and loss adjustment expenses by establishing loss and
loss adjustment expense reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred.
When a claim involving a probable loss is reported, the Company establishes
a case reserve for the estimated amount of the Company's ultimate loss and loss
adjustment expense. This estimate reflects an informed judgment, based on the
Company's reserving practices and the experience of the Company's claims staff.
Management also establishes reserves on an aggregate basis to provide for losses
incurred but not reported ("IBNR"), as well as future development on claims
reported to the Company.
As part of the reserving process, historical data are reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, changes in societal attitudes,
inflation and economic conditions. Reserve amounts are necessarily based on
management's estimates and judgments; as new data become available and are
reviewed, these estimates and judgments are revised, resulting in increases or
decreases to existing reserves. To verify the adequacy of its reserves, the
Company engages independent actuarial consultants to perform interim loss
reserve analyses and annual certifications.
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid loss and loss adjustment expenses, net of amounts for
reinsured losses and loss adjustment expenses, for the years indicated. As a
result of changes in estimates of insured events of prior years, the Company
reduced losses and loss adjustment expenses incurred by $1,716,000, $965,000 and
$925,000 in 1997, 1996 and 1995, respectively. Such favorable development was
due to losses emerging at a lesser rate than had been originally anticipated
when the initial reserves for the applicable accident years were estimated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid loss and loss adjustment expenses at beginning of
year(1)................................................... $ 85,723 $68,246 $53,595
-------- ------- -------
Provision for losses and loss adjustment expenses for
current year claims....................................... 56,725 41,083 34,152
Decrease in estimated ultimate losses and loss adjustment
expenses for prior year claims............................ (1,716) (965) (925)
-------- ------- -------
Total incurred losses and loss adjustment expenses.......... 55,009 40,118 33,227
-------- ------- -------
Loss and loss adjustment expense payments for claims
attributable to:
Current year.............................................. 9,512 7,427 6,186
Prior years............................................... 22,292 15,214 12,390
-------- ------- -------
Total payments.............................................. 31,804 22,641 18,576
-------- ------- -------
Unpaid loss and loss adjustment expenses at end of
year(1)................................................... $108,928 $85,723 $68,246
======== ======= =======
</TABLE>
- ---------------
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported in
the consolidated financial statements of Philadelphia Consolidated because
of the inclusion therein of reinsurance receivables of $13,502, $10,919 and
$9,440 at December 31, 1997, 1996 and 1995, respectively.
S-45
<PAGE> 47
The following table presents the development of unpaid loss and loss
adjustment expenses, net of amounts for reinsured losses and loss adjustment
expenses, from 1987 through 1997. The top line of the table shows the estimated
reserve for unpaid loss and loss adjustment expenses at the balance sheet date
for each of the indicated years. These figures represent the estimated amount of
unpaid loss and loss adjustment expenses for claims arising in the current year
and all prior years that were unpaid at the balance sheet date, including IBNR
losses. The table also shows the re-estimated amount of the previously recorded
unpaid loss and loss adjustment expenses based on experience as of the end of
each succeeding year. The estimate changes as more information becomes known
about the frequency and severity of claims for individual years.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1987 1988 1989 1990 1991 1992
------ ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Unpaid Loss and Loss
Adjustment Expenses, As
Stated $4,940 $10,615 $12,198 $15,930 $22,248 $31,981
Cumulative Paid as of:
1 year later 1,375 2,955 3,354 4,286 6,698 9,865
2 years later 2,481 4,832 6,249 8,084 12,485 16,290
3 years later 3,025 6,584 8,807 10,838 16,288 21,253
4 years later 3,582 7,813 10,155 12,907 17,780 24,299
5 years later 3,771 8,341 11,217 13,211 19,406 25,793
6 years later 3,881 8,748 11,497 13,792 19,898
7 years later 3,922 8,704 11,760 14,074
8 years later 3,911 8,696 11,902
9 years later 3,916 8,746
10 years later 3,918
Unpaid Loss and Loss
Adjustment Expenses
re-estimated as of End
of Year:
1 year later 4,472 9,535 12,628 15,953 22,056 30,538
2 years later 4,056 9,825 12,644 15,712 21,327 30,428
3 years later 3,932 9,645 12,424 14,822 21,198 29,648
4 years later 3,924 9,437 11,947 14,811 21,118 29,306
5 years later 3,970 9,053 11,836 14,841 21,399 28,553
6 years later 4,010 8,859 12,060 14,593 21,106
7 years later 3,952 8,770 12,008 14,606
8 years later 3,926 8,783 12,039
9 years later 3,947 8,804
10 years later 3,959
Cumulative Redundancy
Dollars $ 981 $ 1,811 $ 159 $ 1,324 $ 1,142 $ 3,428
Percentage 19.9% 17.1% 1.3% 8.3% 5.1% 10.7%
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unpaid Loss and Loss
Adjustment Expenses, As
Stated $38,714 $53,595 $68,246 $85,723 $108,928
Cumulative Paid as of:
1 year later 10,792 12,391 15,214 22,292
2 years later 19,297 23,139 31,410
3 years later 24,991 33,511
4 years later 28,903
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Unpaid Loss and Loss
Adjustment Expenses
re-estimated as of End
of Year:
1 year later 38,603 52,670 67,281 84,007
2 years later 38,016 52,062 66,061
3 years later 37,184 51,149
4 years later 36,272
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Cumulative Redundancy
Dollars $ 2,442 $ 2,446 $ 2,185 $ 1,716
Percentage 6.3% 4.6% 3.2% 2.0%
</TABLE>
- ---------------
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported in
the consolidated financial statements of Philadelphia Consolidated because
of the inclusion therein of reinsurance receivables of $13,502, $10,919,
$9,440, $5,580, $5,539, $1,770, $1,267, $1,672 and $1,591 at December 31,
1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990 and 1989, respectively.
(2) The Company maintains its historical loss records net of reinsurance and
therefore is unable to conform the presentation of this table to the
financial statements.
The cumulative redundancy represents the aggregate change in the reserve
estimated over all prior years, and does not present accident year loss
development. Therefore, each amount in the table includes the effects of changes
in reserves for all prior years.
The unpaid loss and loss adjustment expense of PIIC and PIC, as reported in
their Annual Statements prepared in accordance with statutory accounting
practices and filed with state insurance departments, differ from those
reflected in the Company's financial statements prepared in accordance with GAAP
with respect to recording the effects of reinsurance. Unpaid loss and loss
adjustment expenses under statutory accounting practices are reported net of the
effects of reinsurance whereas under GAAP these amounts are reported without
giving effect to reinsurance in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 113. Under GAAP, reinsurance receivables, with
a corresponding increase in unpaid loss and loss adjustment expense, have been
recorded. (See footnote (1) to the immediately preceding table for
S-46
<PAGE> 48
amounts). There is no effect on net income or shareholders' equity due to the
difference in reporting the effects of reinsurance between statutory accounting
practices and GAAP as discussed above.
OPERATING RATIOS
Statutory Combined Ratio. The statutory combined ratio, which is the sum
of (a) the ratio of loss and loss adjustment expenses incurred to net earned
premiums (loss ratio) and (b) the ratio of policy acquisition costs and other
underwriting expenses to net written premiums (expense ratio), is the
traditional measure of underwriting experience for insurance companies.
Generally, if the combined ratio is below 100%, an insurance company has an
underwriting profit and if it is above 100%, the insurer has an underwriting
loss.
The following table reflects the consolidated loss, expense and combined
ratios of the Insurance Subsidiaries together with the property and casualty
industry-wide combined ratios after policyholders' dividends.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Loss Ratio............................. 55.3% 55.7% 57.1% 59.5% 56.5%
Expense Ratio.......................... 29.1% 31.1% 29.6% 29.9% 34.5%
----- ----- ----- ----- -----
Combined Ratio......................... 84.4% 86.8% 86.7% 89.4% 91.0%
===== ===== ===== ===== =====
Industry Combined Ratio after
Policyholders' Dividends............. 101.1%(1) 105.8%(2) 106.3%(2) 108.3%(2) 106.8%(2)
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Source: Best's Week, December 29, 1997 Issue (Actual September 30, 1997).
(2) Source: Best's Aggregates & Averages, 1997 Edition.
Premium-to-Surplus Ratio. While there are no statutory provisions
governing premium-to-surplus ratios, regulatory authorities regard this ratio as
an important indicator as to an insurer's ability to withstand abnormal loss
experience. Guidelines established by the National Association of Insurance
Commissioners (the "NAIC") provide that an insurer's net premium-to-surplus
ratio is satisfactory if it is below 3 to 1.
The following table sets forth, for the periods indicated, net written
premiums to policyholders' surplus for the Insurance Subsidiaries (statutory
basis):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Written Premiums................ $110,790 $83,994 $62,072 $55,398 $40,645
Policyholders' Surplus.............. $105,985 $81,906 $67,500 $56,027 $51,197
Premium to Surplus Ratio............ 1.0 to 1.0 1.0 to 1.0 .9 to 1.0 1.0 to 1.0 .8 to 1.0
</TABLE>
INVESTMENTS
At December 31, 1997, the Company had total investments with a carrying
value of $217.7 million, substantially all of which were held by the Insurance
Subsidiaries. At December 31, 1997, 78.4% of the Company's total investments
were investment grade fixed maturity securities, including U.S. treasury
securities and obligations of U.S. government corporations and agencies,
obligations of states and political subdivisions and corporate debt securities
including collateralized mortgage and asset backed securities totaling $18.6
million. The collateralized mortgage and asset backed securities consist of
short tranche securities possessing favorable pre-payment risk profiles. The
remaining 21.6% of the Company's total investments consisted primarily of
publicly-traded common stock securities.
S-47
<PAGE> 49
The following table sets forth information concerning the composition of
the Company's total investments at December 31, 1997:
<TABLE>
<CAPTION>
ESTIMATED CARRYING PERCENT OF
AMORTIZED COST MARKET VALUE VALUE CARRYING VALUE
-------------- ------------ -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed Maturities:
Obligations of States and Political
Subdivisions...................... $105,117 $109,696 $109,696 50.4%
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies......... 15,391 15,655 15,655 7.2%
Corporate Debt Securities............ 44,544 45,327 45,327 20.8%
Equity Securities...................... 29,501 46,988 46,988 21.6%
-------- -------- -------- -----
Total Investments................. $194,553 $217,666 $217,666 100.0%
======== ======== ======== =====
</TABLE>
At December 31, 1997, 100% of the Company's fixed maturity securities
consisted of U.S. government securities or securities rated "1" or "2" by the
NAIC; 96.4% of the fixed maturity securities were rated "A" or better (with no
security rated lower than "BBB-") by Standard & Poor's Corporation.
The cost and estimated market value of fixed maturity securities at
December 31, 1997, by remaining original contractual maturity, are set forth
below. Expected maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations, with or without
call or prepayment penalties:
<TABLE>
<CAPTION>
AMORTIZED COST ESTIMATED MARKET VALUE
-------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due in one year or less................................... $ 4,075 $ 4,079
Due after one year through five years..................... 40,460 41,267
Due after five years through ten years.................... 92,935 96,509
Due after ten years....................................... 27,582 28,823
-------- --------
Total................................................ $165,052 $170,678
======== ========
</TABLE>
Investments of the Insurance Subsidiaries must comply with applicable laws
and regulations which prescribe the type, quality and diversification of
investments. In general, these laws and regulations permit investments, with
specified limits and subject to certain qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common equity securities,
real estate mortgages and real estate.
The Company's investment objective is to realize relatively high levels of
investment income while generating competitive after-tax total rates of return
within a prudent level of risk and within the constraints of maintaining
adequate securities in amount and duration to meet cash requirements of current
operations and long-term liabilities, as well as maintaining and improving the
Company's A.M. Best Company and Standard & Poor's ratings. The Company utilizes
professional investment managers for its fixed maturity and equity investment
portfolios. The portfolio consists of diversified issuers and issues and, as of
December 31, 1997, approximately 76% of the total invested assets (total
investments plus cash equivalents) consisted of investments in fixed maturity
securities.
The Company increased its existing portfolio of fixed maturity securities
by investing in investment grade corporate debt during 1997 due to more
favorable after-tax yields. At the end of 1997, investment grade corporate debt
represented 19.6% of the total invested assets, compared to 6.0% as of the end
of 1996. The Company has also continued to increase its total investments in
common stock of quality growth oriented mid-and large-cap companies seeking to
achieve diversification and capital appreciation in the portfolio. At December
31, 1997, common stocks comprised 20.9% of the invested assets, compared to
15.8% as of the end of 1996.
S-48
<PAGE> 50
REGULATION
General. Insurance companies are subject to supervision and regulation in
the states in which they transact business. Such supervision and regulation,
designed primarily for the protection of policyholders and not shareholders,
relates to most aspects of an insurance company's business and includes such
matters as authorized lines of business; underwriting standards; financial
condition standards; licensing of insurers; investment standards; premium
levels; policy provisions; the filing of annual and other financial reports
prepared on the basis of Statutory Accounting Practices ("SAP"); the filing and
form of actuarial reports; the establishment and maintenance of reserves for
unearned premiums; losses and loss adjustment expenses; transactions with
affiliates; dividends; changes in control; and a variety of other financial and
nonfinancial matters. Because the Insurance Subsidiaries are domiciled in
Pennsylvania, the Pennsylvania Department of Insurance (the "Department") has
primary authority over the Company.
Regulation of Insurance Holding Companies. Pennsylvania, like many other
states, has laws governing insurance holding companies (such as Philadelphia
Consolidated). Under Pennsylvania law, a person generally must obtain the
Department's approval to acquire, directly or indirectly, 10% or more of the
outstanding voting securities of Philadelphia Consolidated or either Insurance
Subsidiary. The Department's determination of whether to approve any such
acquisition is based on a variety of factors, including an evaluation of the
acquisitions financial stability, the competence of its management and whether
competition in Pennsylvania would be reduced.
The Pennsylvania statute requires every Pennsylvania-domiciled insurer
which is a member of an insurance holding company system to register with the
Department by filing and keeping current a registration statement on a form
prescribed by the NAIC.
The Pennsylvania statute also specifies that at least one-third of the
board of directors and each committee thereof, of either the domestic insurer or
its publicly owned holding company (if any), must be comprised of outsiders
(i.e., persons who are neither officers, employees nor controlling shareholders
of the insurer or any affiliate). In addition, the domestic insurer or its
publicly held holding company must establish one or more committees comprised
solely of outside directors, with responsibility for recommending the selection
of independent certified public accountants; reviewing the insurer's financial
condition, the scope and results of the independent audit and any internal
audit; nominating candidates for director; evaluating the performance of
principal officers; and recommending to the board the selection and compensation
of principal officers.
Dividend Restrictions. As an insurance holding company, Philadelphia
Consolidated will be largely dependent on dividends and other permitted payments
from the Insurance Subsidiaries to pay any cash dividends to its shareholders.
The ability of the Insurance Subsidiaries to pay dividends to the Company is
subject to Pennsylvania insurance laws, which currently require that dividends
be paid from profits and afford the Department 30 days to disapprove the payment
of "extraordinary dividends" from a domestic property and casualty insurer to
its shareholders (i.e., dividends over a twelve-month period that exceed the
greater of (a) 10% of policyholders' surplus shown on the latest Annual
Statement filed with the Department, or (b) the net income for the period
covered by such statement but in no event to exceed the amount of unassigned
funds (i.e., retained earnings plus or minus net unrealized gains or losses). In
addition, the law specifies factors to be considered by the Department to allow
it to determine that policyholders' surplus after the payment of dividends is
reasonable in relation to an insurance company's outstanding liabilities and
adequate to its financial needs. Such factors include, for example, the size of
the company, the extent to which its business is diversified among several lines
of insurance, the number and size of risks insured, the nature and extent of the
company's reinsurance, and the adequacy of the company's reserves. Accumulated
statutory profits of the Insurance Subsidiaries from which dividends may be paid
totaled $59.7 million at December 31, 1997. Of this amount, the Insurance
Subsidiaries are entitled to pay a total of approximately $14.3 million of
dividends in 1998 without obtaining prior approval from the Department.
The National Association of Insurance Commissioners. In addition to
state-imposed insurance laws and regulations, the Insurance Subsidiaries are
subject to the general SAP and reporting formats established by the NAIC. The
NAIC also promulgates model insurance laws and regulations relating to the
financial and
S-49
<PAGE> 51
operational regulation of insurance companies. These model laws and regulations
generally are not directly applicable to an insurance company unless and until
they are adopted by applicable state legislatures or departments of insurance.
However, NAIC model laws and regulations have become increasingly important in
recent years, due primarily to the NAIC's state regulatory accreditation
program. Under this program, states which have adopted certain required model
laws and regulations and meet various staffing and other requirements are
"accredited" by the NAIC. Such accreditation is the cornerstone of an eventual
nationwide regulatory network and there is a certain degree of political
pressure on individual states to become accredited by the NAIC. Because the
adoption of certain model laws and regulations is a prerequisite to
accreditation, the NAIC's initiatives have taken on a greater level of practical
importance in recent years. The NAIC accredited Pennsylvania under the NAIC
Financial Regulation Standards in March 1994.
All the states have adopted the NAIC's financial reporting form, which is
typically referred to as the NAIC "Annual Statement" and most states, including
Pennsylvania, generally defer to the NAIC with respect to SAP. In this regard,
the NAIC has a substantial degree of practical influence and is able to
accomplish certain quasi legislative initiatives through amendments to the NAIC
annual statement and applicable accounting practices and procedures. For
instance, in recent years the NAIC has required all insurance companies to have
an annual statutory financial audit and an annual actuarial certification as to
loss reserves by including such requirements within the annual statement
instructions.
Capital and Surplus Requirements. PIC's eligibility to write insurance on
a surplus lines basis in most jurisdictions is dependent on its compliance with
certain financial standards, including the maintenance of a requisite level of
capital and surplus and the establishment of certain statutory deposits. In
recent years, many jurisdictions have increased the minimum financial standards
applicable to surplus lines eligibility. For example, California and certain
other states have adopted regulations which require surplus lines companies
operating therein to maintain minimum capital of $15 million, calculated as set
forth in the regulations. PIC maintains capital to meet these requirements.
Risk-Based Capital. Risk-based capital is designed to measure the
acceptable amount of capital an insurer should have based on the inherent
specific risks of each insurer. Insurers failing to meet this benchmark capital
level may be subject to scrutiny by the insurer's domiciliary insurance
department and ultimately rehabilitation or liquidation. Based on the standards
currently adopted, the policyholders' surplus at December 31, 1997 is in excess
of the prescribed risk-based capital requirements.
Insurance Guaranty Funds. The Insurance Subsidiaries are subject to
guaranty fund laws which can result in assessments, up to prescribed limits, for
losses incurred by policyholders as a result of the impairment or insolvency of
unaffiliated insurance companies. Typically, an insurance company is subject to
the guaranty fund laws of the states in which it conducts insurance business;
however, companies which conduct business on a surplus lines basis in a
particular state are generally exempt from that state's guaranty fund laws.
During the five years ended December 31, 1997, the amount of such guaranty from
assessments paid by the Company was not material.
Shared Markets. As a condition of its license to do business in various
states, PIIC is required to participate in mandatory property-liability shared
market mechanisms or pooling arrangements which provide various insurance
coverages to individuals or other entities that otherwise are unable to purchase
coverage voluntarily provided by private insurers. In addition, some states
require automobile insurers to participate in reinsurance pools for claims that
exceed a certain amount. PIIC's participation in such shared markets or pooling
mechanisms is generally in amounts related to the amount of PIIC's direct
writings for the type of coverage written by the specific pooling mechanism in
the applicable state.
Possible New Legislation, Regulations or Interpretations. New regulations
and legislation have been (and are being) proposed from time to time to limit
damage awards; to bring the industry under regulation by the federal government;
to control premiums, policy terminations and other policy terms; and to impose
new taxes and assessments. It is not possible to determine whether any of these
proposals will be adopted in any jurisdictions and, if so, in what form or in
what jurisdictions. In addition, the Company could be affected by
interpretations of state insurance regulators with respect to licensing
requirements applicable to the product
S-50
<PAGE> 52
distribution method currently utilized by the rent-a-car companies that are
customers of the Company. The impact of these initiatives on the Company cannot
be determined.
COMPETITION
The commercial property and casualty insurance industry is highly
competitive. Many of the Company's existing and potential competitors are
larger, have considerably greater financial and other resources, have greater
experience in the insurance industry and offer a broader line of insurance
products than the Company. Not only does the Company compete with other
insurers, it also competes with new forms of insurance organizations such as
risk retention groups and self-insurance mechanisms.
Overall, due to the abundance of capital in the insurance industry, the
current business climate remains competitive from a solicitation and pricing
standpoint. In the context of the current environment, the Company will not
sacrifice pricing guidelines for premium volume and will "walk away" from
writing business that does not meet underwriting or pricing guidelines.
Management believes, though, that the Company's marketing strategy is a strength
in this market environment, in that it provides the flexibility to quickly
deploy the marketing efforts of the Company's direct production underwriters
from soft market segments to market segments with emerging opportunities.
Additionally, through the mixed marketing strategy, the Company's production
underwriters have established relationships with approximately 4,000 brokers,
thus increasing distribution and facilitating a regular flow of submissions.
EMPLOYEES
As of February 26, 1998, the Company had 276 full-time employees and 15
part-time employees. The Company actively encourages its employees to continue
their educational efforts and aids in defraying their educational costs
(including 100% of education costs related to the insurance industry).
Management believes that the Company's relations with its employees are
generally excellent.
S-51
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Operations. The Company reported record net income of $16.9 million for
1997, which is a 26.1% increase over its net income of $13.4 million for 1996.
This increase is principally due to a 16.2% increase in gross written premiums,
a 22.7% increase in net investment income and profitable underwriting which
resulted in a 85.9% (GAAP basis) combined ratio (the sum of the net loss and
loss adjustment expenses and acquisition costs and other underwriting expenses
divided by net earned premiums). 1997 represented the fourth consecutive year
since its 1993 initial public offering that the Company has reported growth in
gross written premiums and net income while experiencing a combined ratio under
90%, which is substantially lower than the commercial property and casualty
insurance industry as a whole. The Company believes that its continued
profitable growth is attributable to the adherence to the Company's core
philosophy of conservative underwriting guidelines and pricing discipline.
The growth in gross written premiums primarily resulted from: the Company's
recent new product offerings; strengthening of the proprietary field marketing
organization to 100 professionals at year end 1997; and increasing product
distribution through the preferred agent program.
The Insurance Subsidiaries are rated "A+" (Superior) by A.M. Best Company
and have been assigned an "A" claims paying ability rating by Standard & Poors.
Investments
The Company's investment objective is to realize relatively high levels of
investment income while generating competitive after-tax total rates of return
within a prudent level of risk and within the constraints of maintaining
adequate securities in amount and duration to meet cash requirements of current
operations and long-term liabilities, as well as maintaining and improving the
Company's A.M. Best Company and Standard & Poors ratings. The Company utilizes
professional investment managers for its fixed maturity and equity investments.
These investments consist of diversified issuers and issues, and as of December
31, 1997 approximately 76% of the total invested assets (total investments plus
cash equivalents) consisted of investments in fixed maturity securities.
The Company increased its existing portfolio of fixed maturity securities
by investing in investment grade corporate debt during 1997 due to more
favorable after-tax yields. At the end of 1997 investment grade corporate debt
represented 19.6% of total invested assets, compared to 6.0% as of the end of
1996. The Company has also continued to increase its investments in common stock
of quality growth oriented mid-and large-cap companies seeking to achieve
diversification and capital appreciation in its invested assets. At December 31,
1997, common stocks comprised 20.9% of invested assets, compared to 15.8% as of
the end of 1996.
During 1997, the Company purchased certain collateralized mortgage and
asset backed securities, totaling $18.6 million in market value at year end.
These securities are short tranche securities possessing favorable prepayment
risk profiles. The Company had no other derivative financial instruments in its
total investments as of December 31, 1997.
RESULTS OF OPERATIONS
(1997 VERSUS 1996)
Premiums. Gross written premiums grew $22.2 million (16.2%) to $159.1
million in 1997 from $136.9 million in 1996; gross earned premiums grew $28.3
million (23.2%) to $150.1 million in 1997 from $121.8 million in 1996; net
written premiums increased $27.8 million (33.1%) to $111.8 million in 1997 from
$84.0 million in 1996; and net earned premiums grew $28.5 million (39.5%) to
$100.6 million in 1997 from $72.1 million in 1996. The overall growth in
premiums and the varying growth rates for gross written
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premiums, gross earned premiums, net written premiums and net earned premiums
are attributable to a number of factors including:
- Overall premium growth is primarily attributable to: continued marketing
efforts relating to commercial auto, commercial package, and specialty
lines products; the continued development of the Company's Preferred
Agent Program, initiated in 1996, wherein business relationships are
formed with brokers specializing in certain of the Company's business
niches thereby increasing the distribution of the Company's niche
products; and the increase of the Company's proprietary field
organization to a total of 100 professionals, production underwriters and
customer service representatives.
- Net written and net earned premiums grew at higher rates than gross
written and gross earned premiums primarily due to the renegotiation of
the Company's reinsurance program effective January 1, 1997 whereby more
favorable reinsurance rates were realized while substantially the same
retentions and coverages were maintained.
Net Investment Income. Net investment income approximated $9.7 million in
1997 and $7.9 million in 1996. The increase of $1.8 million (22.8%) is due
primarily to the increase in total investments as a result of cash flows
provided from operating activities and the additional investment income as a
result of the relative percentage increase in corporate taxable securities
versus tax exempt municipal securities.
Net Loss and Loss Adjustment Expenses. Net loss and loss adjustment
expenses increased $14.9 million (37.2%) to $55.0 million in 1997 from $40.1
million in 1996 and the loss ratio decreased to 54.7% in 1997 from 55.7% in
1996. The increase in net loss and loss adjustment expenses was due primarily to
the 39.5% growth in net earned premiums. Additionally, since more earned premium
was retained from the lower cost of reinsurance (see "Premiums", above), there
was relatively higher net earned premium growth on products with low loss
experience, the 37.2% increase in net loss and loss adjustment expenses was
lower than the 39.5% net earned premium growth.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and
other underwriting expenses increased $9.1 million (41.0%), to $31.3 million in
1997 from $22.2 million in 1996. This increase was due primarily to the 39.5%
growth in net earned premiums.
Income Tax Expense. The Company's effective tax rates for 1997 and 1996
were 24.0% and 20.3%, respectively. The effective rates differed from the 35%
statutory rate principally due to investment income earned on tax-exempt
securities. The increase in the effective tax rate is principally due to a
greater investment in taxable securities relative to tax-exempt securities
during 1997.
RESULTS OF OPERATIONS
(1996 VERSUS 1995)
Premiums. Gross written premiums grew $32.7 million (31.4%) to $136.9
million in 1996 from $104.2 million in 1995; gross earned premiums grew $22.3
million (22.4%) to $121.8 million in 1996 from $99.5 million in 1995; net
written premiums increased $21.9 million (35.3%) to $84.0 million in 1996 from
$62.1 million in 1995; and net earned premiums grew $13.9 million (23.9%) to
$72.1 million in 1996 from $58.2 million in 1995. The overall growth in premiums
and the varying growth rates for gross written premiums, gross earned premiums,
net written premiums and net earned premiums are attributable to a number of
factors:
- Overall premium growth is primarily attributable to the following
factors:
- The prior year's growth in the field production underwriting
organization enabling expansion of the Company's marketing efforts to
non profit organizations, the health and fitness industry and selected
professional liability products.
- The introduction of the Company's Preferred Agent Plan, wherein
business relationships were formed with brokers specializing in
certain of the Company's business niches, thereby increasing the
distribution of the Company's niche products.
- Continued favorable market conditions for certain leasing products.
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- Overall premium growth has been offset in part by designed reductions in
premiums from certain rental products due primarily to inadequate pricing
levels which are currently being experienced as a result of market
competition. However, the Company anticipates an improvement in these
market conditions in the near future. Additionally, there have been
recent consolidations in the car rental industry the effect of which on
the rental car insurance market, if any, are not known at this time.
Net Investment Income. Net investment income approximated $7.9 million in
1996 and $6.5 million in 1995. The increase of $1.4 million (21.5%) is due
primarily to the increase in total investments as a result of cash flows
provided from operating activities.
Net Realized Investment Gain (Loss). Net realized investment gains were
$.3 million in 1996 compared to $.2 million in 1995.
Net Loss and Loss Adjustment Expenses. Net loss and loss adjustment
expenses increased $6.9 million (20.8%) to $40.1 million in 1996 from $33.2
million in 1995 and the loss ratio decreased to 55.7% in 1996 from 57.1% in
1995. The increase in net loss and loss adjustment expenses was due primarily to
the 23.9% growth in net earned premiums. Additionally, since there was
relatively higher net earned premium growth on products with low loss
experience, the percentage increase in net loss and loss adjustment expenses
(20.8%) was lower than the 23.9% net earned premium growth.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and
other underwriting expenses increased $5.1 million (29.8%), to $22.2 million in
1996 from $17.1 million in 1995. The increase in acquisition costs and other
underwriting expenses exceeds the 23.9% growth in net earned premiums, due
primarily to increased commission expense as a result of the Company beginning
to market its niche products through preferred brokers.
Other Operating Expenses. Other operating expenses decreased $1.2 million
(46.2%), to $1.4 million in 1996 compared to $2.6 million in 1995 principally
due to additional expenses related to the opening of new field offices in 1995.
Income Tax Expense. The Company's effective tax rates for 1996 and 1995
were 20.3% and 20.0%, respectively. The effective rates differed from the 34%
statutory rate principally due to investment income earned on tax-exempt
securities.
GROWTH OPPORTUNITIES
The attainment of profitable new business continues to be a primary focus
of the Company. For 1998, the Company anticipates substantially growing its
Preferred Agent Program, thereby further increasing the distribution of the
Company's niche products. In addition, the Company has grown its proprietary
field organization during 1997 to 100 professionals, including production
underwriters and customer service representatives, and plans to further expand
this organization in 1998, thereby further strengthening its resources to
prospect the Company's existing niches for profitable new business. The Company
also seeks acquisition opportunities to purchase programs or books of business
which complement its niche markets or parallel its conservative underwriting and
pricing discipline. The Company is also exploring financing opportunities in
this regard; however, there is no assurance that an acquisition or financing
will occur.
Overall, due to the abundance of capital in the insurance industry, the
current business climate remains very competitive from a solicitation and
pricing standpoint. In the context of the current environment, the Company will
not sacrifice underwriting standards or pricing guidelines solely for premium
volume and will "walk away," if necessary, from writing business that does not
meet established underwriting standards and pricing guidelines as has occurred
in the commercial auto niche over the past three years. Additionally, in
response to the competitive market, the Company re-underwrote its errors and
omissions product during 1997 by increasing deductible requirements and
modifying underwriting guidelines in certain markets to reduce the size and risk
profile of the product. Management believes, though, that the Company's mixed
marketing strategy is a strength in this market environment, in that, it
provides the flexibility to quickly deploy the
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marketing efforts of the Company's direct production underwriters from soft
market segments to market segments with emerging opportunities. Additionally,
through the mixed marketing strategy, the Company's production underwriters have
established relationships with approximately 4,000 brokers, thus facilitating a
regular flow of submissions.
LIQUIDITY AND CAPITAL RESOURCES
Philadelphia Insurance is a holding company whose principal assets
currently consist of substantially all of the capital stock of the Insurance
Subsidiaries and Maguire Insurance Agency, Inc. Philadelphia Insurance's primary
sources of funds are dividends from its subsidiaries and payments to it pursuant
to tax allocation agreements with the Insurance Subsidiaries. For the year ended
December 31, 1997, payments to Philadelphia Insurance pursuant to such tax
allocation agreements totaled $7.3 million. The payment of dividends to
Philadelphia Insurance from the Insurance Subsidiaries is subject to certain
limitations imposed by the insurance laws of the Commonwealth of Pennsylvania.
Statutory profits of the Insurance Subsidiaries from which dividends may be paid
totaled $59.7 million at December 31, 1997. Of this amount, the Insurance
Subsidiaries are entitled to pay a total of approximately $14.3 million of
dividends in 1998 without obtaining prior approval from the Insurance
Commissioner of the Commonwealth of Pennsylvania.
Under certain reinsurance agreements, the Company is required to maintain
investments in trust accounts to secure its reinsurance obligations (primarily
the payment of losses and loss adjustment expenses on business it does not write
directly). At December 31, 1997, the investment and cash balances in such trust
accounts totaled approximately $14.6 million. In addition, various insurance
departments of states in which the Company operates require the deposit of funds
to protect policyholders within those states. At December 31, 1997, the balance
on deposit for the benefit of such policyholders totaled approximately $10.9
million.
The Company has reviewed all computer systems in operation within the
Company and determined them to be Year 2000 compliant except for its mainframe
policy administration computer system. The Company will begin the process of
preparing this computer system and related applications for the Year 2000 in the
second quarter 1998. The process involves modifying certain hardware and
software. Management expects to have substantially all hardware and software
upgraded as necessary, for compliance by year-end 1998. Management believes that
its level of preparedness is appropriate. The Company estimates the cumulative
costs of the process, which includes costs of modifying hardware and software,
will not have a material effect on its business, operations or financial
condition. The costs of the project and expected completion dates are based on
management's best estimates.
The Company has produced net cash from operations of $38.0 million in 1997,
$37.6 million in 1996 and $25.2 million in 1995. Management believes that the
Company has adequate liquidity to pay all claims and meet all other cash needs.
The Insurance Subsidiaries, which operate under a pooling agreement,
require policyholders' surplus to support premium writings. Guidelines of the
National Association of Insurance Commissioners (the "NAIC") suggest that a
property and casualty insurer's ratio of annual statutory net premium written to
policyholders' surplus should not exceed 3 to 1. The ratio of combined annual
statutory net premium written by the Insurance Subsidiaries to their combined
policyholders' surplus was 1.0 to 1.0 for both 1997 and 1996. Management
believes that the policyholders' surplus, which was $106.0 million at December
31, 1997, will be sufficient to support current and anticipated premium
writings. Risk-based capital is designed to measure the acceptable amount of
capital and surplus an insurer should have based on the inherent specific risks
of each insurer. Insurers failing to meet this benchmark level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently contained in the
applicable Pennsylvania Insurance Company statutes, the Company's capital and
surplus is in excess of the prescribed risk-based capital requirements.
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INFLATION
Property and casualty insurance premiums are established before the amount
of losses and loss adjustment expenses, or the extent to which inflation may
affect such amounts, is known. The Company attempts to anticipate the potential
impact of inflation in establishing its premiums and reserves. Substantial
future increases in inflation could result in future increases in interest rates
which in turn are likely to result in a decline in the market value of the
Company's investment portfolio and resulting unrealized losses and/or reductions
in shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share",
specifying the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock. Under SFAS No.
128, basic and diluted per share amounts shall be presented for net income on
the face of the statement of operations. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The Company adopted the provisions of SFAS No.
128 as of December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which is effective for years beginning after
December 15, 1997. This statement establishes standards for the reporting and
display of comprehensive income and its components. Comprehensive income is
defined to include all changes in equity during a period except those resulting
from investments by owners and distributions to owners. The Company will adopt
SFAS No. 130 and begin reporting comprehensive income in the first quarter of
1998.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for the disclosure of segment results. It
requires that segments be determined using the "management approach", which
means the way management organizes the segments within the enterprise for making
operating decisions and assessing performance. The Company will adopt SFAS No.
131 in the fourth quarter of 1998, and is still evaluating its impact on the
Company's segment disclosures.
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MANAGEMENT
The names and ages of the Company's Directors, executive officers and other
key personnel, their principal occupations, lengths of service and certain other
biographical information are set forth below:
JAMES J. MAGUIRE, age 64, has served as Chief Executive Officer and
Chairman of the Board of Directors of the Company, since its formation in 1981,
and its subsidiaries, since their formation. Mr. Maguire also serves as
President of the Company. He has worked in the insurance industry for 40 years
with experience in insurance accounting, underwriting, sales and marketing,
claims management and administration.
SEAN S. SWEENEY, CPCU, RPLU, age 40, joined the Company in 1979 and has
served on the Board of Directors of the Company since 1996. He has served as
Senior Vice president, Director of Marketing for the Company since 1987. Mr.
Sweeney previously was employed by the Company as a Regional Vice President,
Regional Sales Manager and sales representative. His current responsibilities
include management of all marketing and sales for the Company. Mr. Sweeney
received an MBA degree in marketing from St. Joseph's University in 1994. Mr.
Sweeney is the nephew of Mr. James J. Maguire.
JAMES J. MAGUIRE, JR., RPLU, age 37, joined the Company as Vice President
of Underwriting in June 1996 and was elected to serve as a member of the Board
of Directors of the Company in May of 1997. Mr. Maguire, Jr. was previously
employed as Assistant Vice President of Underwriting with American International
Group, Inc., an insurance and financial services company. He received a BS
degree in Finance from St. Joseph's University in 1984 and an MBA degree from
Notre Dame University in 1986. Mr. Maguire, Jr. is the son of Mr. James J.
Maguire.
WILLIAM J. HENRICH, JR., age 69, has served on the Board of Directors since
1996. Mr. Henrich is a senior partner with the law firm of Dilworth, Paxson,
Kalish & Kaufman.
PAUL R. HERTEL, JR., age 70, has served on the Board of Directors of the
Company since 1987. Mr. Hertel has been an insurance broker with Paul Hertel &
Company, Inc. for over 40 years and serves as Chairman of the Executive
Committee of that company.
ROGER L. LARSON, age 76, has served on the Board of Directors of the
Company since 1986. Mr. Larson served in various merchandising capacities for
Sears Roebuck & Co., including Regional Manager, prior to his retirement in
1980.
THOMAS J. MCHUGH, age 66, has served on the Board of Directors of the
Company since 1986. Mr. McHugh has been President, Chairman of the Board of
Directors and Chief Executive Officer of McHugh Associates, Inc., a registered
investment advisor, since 1986 and has served as a director of The Rouse
Company, a real estate development company, since 1980.
MICHAEL J. MORRIS, age 63, has served on the Board of Directors of the
Company since 1993. Mr. Morris served as Chairman and Chief Executive Officer of
Transport International Pool Corporation, a multinational corporation that
principally provides transport services, from 1975 to his retirement in 1992.
J. EUSTACE WOLFINGTON, age 65, has served on the Board of Directors of the
Company since 1986. Since 1981, Mr. Wolfington has been the President of H.A.C.
Group of Companies, an international automobile leasing consulting firm.
CRAIG P. KELLER, age 47, joined the Company as Vice President and Chief
Financial Officer in December 1992 and was appointed Secretary in July 1993 and
Treasurer in April 1997. Mr. Keller was previously employed by Reliance
Insurance Group, Inc., a subsidiary of Reliance Group Holdings, where he served
in various financial capacities from 1985 through 1992, including Assistant Vice
President from June 1991 to December 1992. Mr. Keller, formerly with Coopers &
Lybrand L.L.P., is a Certified Public Accountant and has a BS degree and MBA
from Drexel University.
WILLIAM J. BENECKE, age 34, has been Vice President of Claims since 1994.
He previously served in the capacity of Claims Manager from 1992 to 1994. From
1990 through 1992, he served the Company as a Senior Claims Examiner and Senior
Litigation Examiner. Mr. Benecke was previously employed by Ohio
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Casualty Insurance Company as a claims representative from 1986 to 1990. He
graduated from Rutgers University with a BA degree in 1985 and is a licensed
property appraiser and a CPCU candidate.
CHARLES E. BROGAN, JR., age 33, joined the Company as corporate sales
representative in 1988. In 1989, he was promoted to Outside Sales; in 1993, he
was promoted to Regional Manger; and in 1996, he was named Regional Vice
President of the MidAtlantic Region. Mr. Brogan formerly was employed with
Liberty Mutual Insurance Company. He graduated with a BS degree in Criminal
Justice and Pre-Law from Scranton University in 1986 and is a CPCU candidate.
JACK T. CARBALLO, CPCU, RPLU, age 43, has been Vice President since 1985.
In addition, he served as Claims Manager from 1984 to 1985 and as a Claims
Examiner from 1983 to 1984. Prior to joining the Company, Mr. Carballo was an
insurance adjuster with an independent adjusting firm. He graduated with a BS
degree from LaSalle University in 1976 and is a licensed Pennsylvania Automobile
Appraiser. He holds the Associate in Risk Management, Associate in Claims and
Associate in Reinsurance designations from the Insurance Institute of America.
PHILIP D. ELDRIDGE, CPCU, age 43, has been a Regional Vice President of the
Company since 1988. Mr. Eldridge was employed by the Company from 1983 to 1987
as a Regional Manager and Vice President. Prior to joining the Company, Mr.
Eldridge was an insurance agent with Farm Bureau Insurance. He received a BS
degree from University of Tennessee at Chattanooga in 1976.
CHRISTOPHER J. MAGUIRE, age 33, joined the Company as an underwriting
trainee in 1987. He was promoted to Assistant Vice President for Commercial
Lines Products in 1996 and to Vice President in November 1997. He is a CPCU
candidate. Mr. Maguire received a BA degree in English from Villanova University
in 1987. Mr. Maguire is the son of James J. Maguire.
PATRICK J. McKEON, age 38, joined the Company in 1987 and served in various
marketing and underwriting positions until being promoted to Vice President of
Marketing in 1992. In 1996, he was instrumental in initiating the Preferred
Agent Plan which is part of the Company's mixed marketing strategy today. Mr.
McKeon is a BS degree candidate at St. Joseph's University and is the son-in-law
of Mr. James J. Maguire.
ROBERT D. O'LEARY, JR., CPCU, age 42, has been a Regional Vice President of
the Company since 1986. From 1982, when he joined the Company, until 1986, he
was the New England Regional Manager. Mr. O'Leary graduated from Trinity College
in 1977 with a BA degree in Economics.
CHARLES E. PEDONE, age 39, has been a Regional Vice President of the
Company since 1988. He joined the Company in 1985 as a sales representative, and
was promoted to Regional Sales Manager in 1986. Mr. Pedone received a BA degree
in Communications from East Stroudsberg State College in 1983.
ROBERT M. POTTLE, CPCU, RPLU, age 33, has been a Regional Vice President of
the Company since 1996. He joined the Company in June 1986 and was promoted to
Regional Manger in 1990. Mr. Pottle received a BA degree in Business Management
from North Central College in Naperville, IL in 1986.
DAVID A. RAMPSON, age 40, joined the Company in December 1997 as Vice
President of Information Technology. Prior to joining the Company, he served as
Vice President, Systems and Programming for PNC Bank. He received a BS degree in
Accounting from Temple University in 1979.
LAWRENCE G. SOLO, age 37, has been a Regional Vice President of the Company
since 1996. He joined the Company in 1990 as a sales representative and was
promoted to Regional Manager and Vice President in the Company's Southwest
Region in 1993. Prior to joining the Company, he was a territorial manager for
American General Insurance Company. Mr. Solo received a BBA degree from Baylor
University in 1982.
STEPHEN E. WESTHEAD, age 34, joined the Company as a Corporate Sales
Representative in 1988. He was promoted to Outside Sales in the Company's Kansas
City, MO office in 1992, and in 1996 was promoted to Vice President and Regional
Manager of the Company's Central Region. Mr. Westhead received a BS degree from
Cabrini College in 1987 and is a CPCU candidate.
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DESCRIPTION OF THE FELINE PRIDES
The following descriptions of certain terms of the FELINE PRIDES offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Securities set forth in
the accompanying Prospectus, to which reference is hereby made. The summaries of
certain provisions of documents described below are not necessarily complete,
and in each instance reference is hereby made to the copies of such documents
(including the definitions therein of certain terms) which are on file with the
Commission. Wherever particular sections of, or terms defined in, such documents
are referred to herein, such sections or defined terms are incorporated by
reference herein. Capitalized terms not defined herein have the meanings
assigned to such terms in the accompanying Prospectus.
Each FELINE PRIDES will be issued under the Purchase Contract Agreement
between Philadelphia Consolidated and the Purchase Contract Agent. The FELINE
PRIDES offered hereby initially will consist of (A) up to 8,000,000 units
referred to as Income PRIDES and (B) at least 1,000,000 units referred to as
Growth PRIDES. Each Income PRIDES will initially consist of a unit comprised of
(a) a Purchase Contract under which (i) the holder (including, initially, an
Underwriter) will purchase from Philadelphia Consolidated on the Purchase
Contract Settlement Date, for an amount of cash equal to the Stated Amount, a
number of newly issued shares of Common Stock equal to the Settlement Rate
described below under "Description of the Purchase Contracts -- General," and
(ii) Philadelphia Consolidated will pay Contract Adjustment Payments, if any, to
the holder at the rate of % of the Stated Amount per amount, and (b)(i)
beneficial ownership of a related % Trust Originated Preferred Security,
having a stated liquidation amount per Trust Preferred Security equal to the
Stated Amount, representing an undivided beneficial ownership interest in the
assets of the Trust, which will consist solely of the Debentures, (ii) in the
case of a distribution of the Debentures upon the dissolution of the Trust as a
result of an Investment Company Event, as described below, or otherwise,
Debentures having a principal amount equal to the Stated Amount or (iii) upon
the occurrence of a Tax Event Redemption prior to the Purchase Contract
Settlement Date, the appropriate Applicable Ownership Interest in the Treasury
Portfolio. "Applicable Ownership Interest" means, with respect to an Income
PRIDES and the U.S. Treasury Securities in the Treasury Portfolio, (A) a 1/100,
or 1%, undivided beneficial ownership interest in a $1,000 principal or interest
amount of a principal or interest strip in a U.S. Treasury Security included in
such Treasury Portfolio which matures on or prior to , 2001 and
(B) for each scheduled interest payment date on the Debentures that occurs after
the Tax Event Redemption Date, a % undivided beneficial ownership interest
in a $1,000 face amount of such U.S. Treasury Security which is a principal or
interest strip maturing on such date.
Each Growth PRIDES will initially consist of a unit comprised of (a) a
Purchase Contract under which (i) the holder will purchase from Philadelphia
Consolidated on the Purchase Contract Settlement Date, for an amount in cash
equal to the Stated Amount, a number of newly issued shares of Common Stock of
Philadelphia Consolidated, equal to the Settlement Rate, and (ii) Philadelphia
Consolidated will pay the holder Contract Adjustment Payments, if any, at the
rate of % of the Stated Amount, and (b) a 1/100 undivided beneficial
ownership interest in a % Treasury Security.
The purchase price of each Income PRIDES and Growth PRIDES will be
allocated between the related Purchase Contract and the related Trust Preferred
Security, in the case of Income PRIDES, and interest in a Treasury Security, in
the case of Growth PRIDES, as applicable, in proportion to their respective fair
market values. Such position generally will be binding on each beneficial owner
of each Income PRIDES (but not on the IRS (as defined herein)). See "Certain
Federal Income Tax Consequences -- FELINE PRIDES -- Allocation of Purchase
Price." As long as a FELINE PRIDES is in the form of an Income PRIDES or Growth
PRIDES, the related Trust Preferred Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio or the Treasury Securities, as
applicable, will be pledged to the Collateral Agent, to secure the holder's
obligation to purchase Common Stock under the related Purchase Contracts.
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CREATING GROWTH PRIDES
Each holder of an Income PRIDES (unless a Tax Event Redemption has
occurred) will have the right, at any time on or prior to the fifth Business Day
immediately preceding the Purchase Contract Settlement Date, to substitute for
the related Trust Preferred Securities held by the Collateral Agent Treasury
Securities in an aggregate principal amount equal to the aggregate stated
liquidation amount of such Trust Preferred Securities. Because Treasury
Securities are issued in integral multiples of $1,000, holders of Income PRIDES
may make such substitution only in integral multiples of 100 Income PRIDES;
provided, however, if a Tax Event Redemption has occurred prior to the Purchase
Contract Settlement Date and the Treasury Portfolio has become a component of
the Income PRIDES, holders of such Income PRIDES may make such substitutions
only in integral multiples of 4,000,000 Income PRIDES (but obtaining the release
of the Treasury Portfolio rather than the Trust Preferred Securities), at any
time on or prior to the second Business Day immediately preceding the Purchase
Contract Settlement Date. FELINE PRIDES with respect to which Treasury
Securities have been substituted for the related Trust Preferred Securities or
the appropriate Applicable Ownership Interest of the Treasury Portfolio, as the
case may be, as collateral to secure such holder's obligation under the related
Purchase Contracts will be referred to as Growth PRIDES. To create 100 Growth
PRIDES (unless a Tax Event Redemption has occurred), the Income PRIDES holder
will (a) deposit with the Collateral Agent a Treasury Security having a
principal amount at maturity of $1,000 and (b) transfer 100 Income PRIDES to the
Purchase Contract Agent accompanied by a notice stating that the Income PRIDES
holder has deposited a Treasury Security with the Collateral Agent and
requesting that the Purchase Contract Agent instruct the Collateral Agent to
release to such holder the 100 Trust Preferred Securities relating to such 100
Income PRIDES. In the event that Contract Adjustment Payments, if any, are at a
higher rate for Growth PRIDES than for Income PRIDES, holders of Income PRIDES
wishing to create Growth PRIDES will also be required to deliver cash in an
amount equal to the excess of the Contract Adjustment Payments, if any, that
would have accrued since the last Payment Date through the date of substitution
on the Growth PRIDES being created by such holders, over the Contract Adjustment
Payments, if any, that have accrued over the same period on the related Income
PRIDES. Upon such deposit and receipt of an instruction from the Purchase
Contract Agent, the Collateral Agent will effect the release of the related 100
Trust Preferred Securities from the pledge under the Pledge Agreement free and
clear of Philadelphia Consolidated's security interest therein to the Purchase
Contract Agent, which will (i) cancel the 100 Income PRIDES, (ii) transfer the
100 related Trust Preferred Securities to such holder and (iii) deliver 100
Growth PRIDES to the holder. The Treasury Security will be substituted for the
Trust Preferred Securities and will be pledged with the Collateral Agent to
secure the holder's obligation to purchase Common Stock under the related
Purchase Contracts. The related Trust Preferred Securities released to the
holder thereafter will trade separately from the resulting Growth PRIDES.
Contract Adjustment Payments, if any, will be payable by Philadelphia
Consolidated on such Growth PRIDES on each Payment Date from the later of
, 1998 and the last Payment Date on which Contract Adjustment
Payments, if any, were paid. In addition, OID will accrue on the related
Treasury Securities.
CREATING INCOME PRIDES
Each holder of a Growth PRIDES (unless a Tax Event Redemption has occurred)
will have the right, at any time on or prior to the fifth Business Day
immediately preceding the Purchase Contract Settlement Date, to substitute for
the related Treasury Securities held by the Collateral Agent Trust Preferred
Securities in an aggregate principal amount equal to the aggregate stated
liquidation amount of such Trust Preferred Securities, thereby creating Income
PRIDES. Because Treasury Securities are issued in integral multiples of $1,000,
holders of Growth PRIDES may make such substitutions only in integral multiples
of 100 Growth PRIDES; provided, however, if a Tax Event Redemption has occurred
and the Treasury Portfolio has become a component of the Income PRIDES, holders
of the Growth PRIDES may make such substitution only in integral multiples of
4,000,000 Growth PRIDES, at any time, on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date. To create 100
Income PRIDES (unless a Tax Event Redemption has occurred) the Growth PRIDES
holder will (a) deposit with the Collateral Agent 100 Trust Preferred Securities
and (b) transfer 100 Growth PRIDES certificates to the Purchase Contract Agent
accompanied by a notice stating that the Growth PRIDES holder has deposited 100
Trust Preferred Securities
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with the Collateral Agent and requesting that the Purchase Contract Agent
instruct the Collateral Agent to release to such Growth PRIDES holder the
Treasury Security relating to such Growth PRIDES. Upon such deposit and receipt
of an instruction from the Purchase Contract Agent, the Collateral Agent will
effect the release of the related Treasury Security from the pledge under the
Pledge Agreement free and clear of Philadelphia Consolidated's security interest
therein to the Purchase Contract Agent, which will (i) cancel the 100 Growth
PRIDES, (ii) transfer the related Treasury Security to such holder of Growth
PRIDES and (iii) deliver 100 Income PRIDES to such holder of Growth PRIDES. The
substituted Trust Preferred Securities will be pledged with the Collateral Agent
to secure such Income PRIDES holder's obligation to purchase Common Stock under
the related Purchase Contacts. Cumulative cash distributions, payable quarterly
at a rate of % of the Stated Amount per annum (subject to Philadelphia
Consolidated's deferral rights), on such Income PRIDES will be payable on such
Income PRIDES by Philadelphia Consolidated on each Payment Date from the later
of , 1998 and the last Payment Date on which such cumulative
cash distributions, if any, were paid.
Holders who elect to substitute Pledged Securities, thereby creating Growth
PRIDES or Income PRIDES or recreating Income PRIDES or Growth PRIDES (as
discussed below), shall be responsible for any fees or expenses payable in
connection with such substitution. See "Certain Provisions of the Purchase
Contract Agreement and the Pledge Agreement -- Miscellaneous."
CURRENT PAYMENTS
Holders of Income PRIDES are entitled to receive aggregate cash
distributions at a rate of % of the Stated Amount per annum from and after
, 1998, payable quarterly in arrears. The quarterly payments on
the Income PRIDES will consist of (i) cumulative cash distributions on the
related Trust Preferred Securities or the Treasury Portfolio, as applicable,
payable at the rate of % of the Stated Amount per annum and (ii) Contract
Adjustment Payments, if any, payable by Philadelphia Consolidated at the rate of
% of the Stated Amount per annum, subject (in the case of distributions on
the Trust Preferred Securities and the Contract Adjustment Payments, if any) to
Philadelphia Consolidated's right of deferral as described herein.
Each holder of Growth PRIDES will be entitled to receive quarterly Contract
Adjustment Payments, if any, payable by Philadelphia Consolidated at the rate of
% of the Stated Amount per annum, subject to Philadelphia Consolidated's
rights of deferral. In addition, OID will accrue on the related Treasury
Securities.
The ability of the Trust to make the quarterly distributions on the Trust
Preferred Securities is solely dependent upon the receipt of corresponding
interest payments from Philadelphia Consolidated on the Debentures. Philadelphia
Consolidated has the right at any time, and from time to time, limited to a
period not extending beyond the maturity of the Debentures, to defer the
interest payments on the Debentures. As a consequence of such deferral,
quarterly distributions (unless a Tax Event Redemption has occurred) to holders
of Income PRIDES (or any Trust Preferred Securities outstanding after the
Purchase Contract Settlement Date or after a substitution of collateral
resulting in the creation of Growth PRIDES) would be deferred (but despite such
deferral, would continue to accumulate quarterly and would accrue interest
thereon compounded quarterly at the rate of % per annum through and
including 15, 2001, and at the Reset Rate thereafter).
Philadelphia Consolidated also has the right to defer the payment of Contract
Adjustment Payments, if any, on the related Purchase Contracts until the
Purchase Contract Settlement Date; however, deferred Contract Adjustment
Payments will bear additional Contract Adjustment Payments at the rate of %
per annum (the higher of (i) the rate that would accrue on Income PRIDES for
such payments and (ii) the rate that would accrue on Growth PRIDES for such
payments) (such deferred installments of Contract Adjustment Payments, if any,
together with the additional Contract Adjustment Payments, shall be referred to
as the "Deferred Contract Adjustment Payments"). See "Description of the
Purchase Contracts -- Contract Adjustment Payments" and "Description of the
Trust Preferred Securities -- Distributions." If a Tax Event Redemption has
occurred and the Treasury Portfolio has become a component of the Income PRIDES,
quarterly distributions on the Treasury Portfolio, as a portion of the
cumulative quarterly distributions to the holders of Income PRIDES, will not be
deferred.
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Philadelphia Consolidated's obligations with respect to the Debentures will
be senior and unsecured and will rank on a parity in right of payment with all
other senior unsecured obligations of Philadelphia Consolidated. Philadelphia
Consolidated's obligations with respect to the Contract Adjustment Payments, if
any, will be subordinated and junior in right of payment to Philadelphia
Consolidated's Senior Indebtedness.
VOTING AND CERTAIN OTHER RIGHTS
Holders of Trust Preferred Securities, in their capacities as such holders,
will not be entitled to vote to appoint, remove or replace, or to increase or
decrease the number of Trustees and will generally have no voting rights except
in the limited circumstances described under "Description of the Trust Preferred
Securities -- Voting Rights." Holders of Purchase Contracts relating to the
Income PRIDES or Growth PRIDES, in their capacities as such holders, will have
no voting or other rights in respect of the Common Stock.
LISTING OF THE SECURITIES
Application will be made to have the Income PRIDES and the Growth PRIDES
listed on the NNM, subject to official notice of issuance. If Trust Preferred
Securities are separately traded to a sufficient extent that the applicable
market listing requirements are met, the Company will endeavor to cause such
securities to be listed on the market on which the Income PRIDES and the Growth
PRIDES are then listed including, if applicable, the NNM. See "Underwriting."
NNM SYMBOL OF COMMON STOCK
The Common Stock is quoted on the NNM under the symbol "PHLY."
MISCELLANEOUS
Philadelphia Consolidated or its affiliates may from time to time purchase
any of the Securities offered hereby which are then outstanding by tender, in
the open market or by private agreement.
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
Each Purchase Contract that is a part of a FELINE PRIDES (unless earlier
terminated, or earlier settled at the holder's option) will obligate the holder
of such Purchase Contract to purchase, and Philadelphia Consolidated to sell, on
the Purchase Contract Settlement Date, for an amount in cash equal to the Stated
Amount of such FELINE PRIDES, a number of newly issued shares of Common Stock
equal to the Settlement Rate. The Settlement Rate will be calculated as follows
(subject to adjustment under certain circumstances): (a) if the Applicable
Market Value is equal to or greater than $ (the Threshold
Appreciation Price, which is approximately % above the Reference Price),
the Settlement Rate will be equal to the Stated Amount divided by the Threshold
Appreciation Price, which is ; accordingly, if, between the date of
the final Prospectus Supplement and the period during which the Applicable
Market Value is measured, the market price for the Common Stock increases to an
amount that is higher than the Threshold Appreciation Price, the aggregate
market value of the shares of Common Stock issued upon settlement of each
Purchase Contract (assuming that such market value is the same as the Applicable
Market Value of such Common Stock) will be higher than the Stated Amount, and if
such market price is the same as the Threshold Appreciation Price, the aggregate
market value of such shares (assuming that such market value is the same as the
Applicable Market Value of such Common Stock) will be equal to the Stated
Amount; (b) if the Applicable Market Value is less than the Threshold
Appreciation price but greater than the Reference Price, the Settlement Rate
will be equal to the Stated Amount divided by the Applicable Market Value;
accordingly, if the market price for the Common Stock increases between the date
of the final Prospectus Supplement and the period during which the Applicable
Market Value is measured, but such market price is less than the Threshold
Appreciation Price, the aggregate market value of the shares of Common Stock
issued upon settlement of each Purchase Contract (assuming that such market
value is the
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same as the Applicable Market Value of such Common Stock) will be equal to the
Stated Amount; and (c) if the Applicable Market Value is less than or equal to
the Reference Price, the Settlement Rate will be equal to the Stated Amount
divided by the Reference Price, which is ; accordingly, if the
market price for the Common Stock decreases between the date of the final
Prospectus Supplement and the period during which the Applicable Market Value is
measured, the aggregate market value of the shares of Common Stock issued upon
settlement of each Purchase Contract (assuming that such market value is the
same as the Applicable Market Value of such Common Stock) will be less than the
Stated Amount and, if such market price stays the same, the aggregate market
value of such shares (assuming that such market value is the same as the
Applicable Market Value of such Common Stock) will be equal to the Stated
Amount. "Closing Price" of the Common Stock on any date of determination means
the closing sale price (or, if no closing price is reported, the last reported
sale price) of the Common Stock on the NNM on such date or, if the Common Stock
is not listed for trading on the NNM on any such date, as reported in the
composite transactions for the principal United States securities exchange on
which the Common Stock is so listed, or if the Common Stock is not so listed on
a United States national or regional securities exchange, the last quoted bid
price for the Common Stock in the over-the-counter market as reported by the
National Quotation Bureau or similar organization, or, if such bid price is not
available, the market value of the Common Stock on such date as determined by a
nationally recognized independent investment banking firm retained for this
purpose by Philadelphia Consolidated. A "Trading Day" means a day on which the
Common Stock (a) is not suspended from trading on any national or regional
securities exchange or association or over-the-counter market at the close of
business and (b) has traded at least once on the national or regional securities
exchange or association or over-the-counter market that is the primary market
for the trading of the Common Stock.
No fractional shares of Common Stock will be issued by Philadelphia
Consolidated pursuant to the Purchase Contracts. In lieu of fractional shares
otherwise issuable (calculated on an aggregate basis) in respect of Purchase
Contracts being settled by a holder of Income PRIDES or Growth PRIDES, the
holder will be entitled to receive an amount of cash equal to such fraction of a
share times the Applicable Market Value.
On the Business Day immediately preceding the Purchase Contract Settlement
Date, unless a holder of Income PRIDES or Growth PRIDES (i) has settled the
related Purchase Contracts prior to the Purchase Contract Settlement Date
through the early delivery of cash to the Purchase Contract Agent in the manner
described under "-- Early Settlement," (ii) in the case of Income PRIDES, has
settled the related Purchase Contracts with separate cash on the Business Day
immediately preceding the Purchase Contract Settlement Date pursuant to prior
notice in the manner described under "-- Notice to Settle with Cash", (iii) has
had the Trust Preferred Securities related to such holder's Purchase Contracts
remarketed in the manner described herein in connection with settling such
Purchase Contracts, or (iv) an event described under "-- Termination" below has
occurred, then (a) in the case of Income PRIDES (unless a Tax Event Redemption
has occurred), Philadelphia Consolidated will exercise its rights as a secured
party to dispose of the Trust Preferred Securities in accordance with applicable
law and (B) in the case of Growth PRIDES or Income PRIDES (in the event that a
Tax Event Redemption has occurred), the principal amount of the related Treasury
Securities or the appropriate Applicable Ownership Interest of the Treasury
Portfolio, as applicable, when paid at maturity, will automatically be applied
to satisfy in full the holder's obligation to purchase Common Stock under the
related Purchase Contracts. Such Common Stock will then be issued and delivered
to such holder or such holder's designee, upon presentation and surrender of the
certificate evidencing such FELINE PRIDES (a "FELINE PRIDES Certificate") and
payment by the holder of any transfer or similar taxes payable in connection
with the issuance of the Common Stock to any person other than such holder. In
the event that a holder of either Income PRIDES or Growth PRIDES effects the
early settlement of the related Purchase Contracts through the delivery of cash
or, in the case of Income PRIDES, settles the related Purchase Contracts with
cash on the Business Day immediately preceding the Purchase Contract Settlement
Date, the related Trust Preferred Securities or Treasury Securities, as the case
may be, will be released to the holder as described herein. The funds received
by the Collateral Agent on the Business Day immediately preceding the Purchase
Contract Settlement Date, upon cash settlement of a Purchase Contract, will be
promptly invested in overnight permitted investments and paid to Philadelphia
Consolidated on the Purchase Contract Settlement Date. Any funds received by the
Collateral Agent in respect of the interest earned from
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the overnight investment in permitted investments will be distributed to the
Purchase Contract Agent for payment to the holders.
Each holder of Income PRIDES or Growth PRIDES, by acceptance thereof, will
under the terms of the Purchase Contract Agreement and the related Purchase
Contracts be deemed to have (a) irrevocably agreed to be bound by the terms of
the related Purchase Contracts and the Pledge Agreement for so long as such
holder remains a holder of such FELINE PRIDES, and (b) duly appointed the
Purchase Contract Agent as such holder's attorney-in-fact to enter into and
perform the related Purchase Contracts on behalf of and in the name of such
holder. In addition, each beneficial owner of Income PRIDES or Growth PRIDES, by
acceptance of such interest, will be deemed to have agreed to treat (i) itself
as the owner of the related Trust Preferred Securities, the appropriate
Applicable Ownership Interest of the Treasury Portfolio or Treasury Securities,
as the case may be, and (ii) the Debentures as indebtedness of Philadelphia
Consolidated, in each case, for United States federal, state and local income
and franchise tax purposes.
REMARKETING
Pursuant to the Remarketing Agreement and subject to the terms of the
Remarketing Underwriting Agreement between the Remarketing Agent, the Purchase
Contract Agent, Philadelphia Consolidated and the Trust, the Trust Preferred
Securities of Income PRIDES holders who have failed to notify the Purchase
Contract Agent, on or prior to the fifth Business Day immediately preceding the
Purchase Contract Settlement Date in the manner described under "-- Notice to
Settle with Cash" of their intention to settle the related Purchase Contracts
with separate cash on the Business Day immediately preceding the Purchase
Contract Settlement Date, will be remarketed on the third Business Day
immediately preceding the Purchase Contract Settlement Date. The Remarketing
Agent will use its reasonable efforts to remarket such Trust Preferred
Securities on such date at a price of approximately 100.5% of the aggregate
stated liquidation amount of such Trust Preferred Securities, plus accrued and
unpaid distributions (including deferred distributions), if any, thereon. The
portion of the proceeds from such remarketing equal to the aggregate stated
liquidation amount of such Trust Preferred Securities will automatically be
applied to satisfy in full such Income PRIDES holders' obligations to purchase
Common Stock under the related Purchase Contracts. In addition, after deducting
as the Remarketing Fee an amount not exceeding 25 basis points (.25%) of the
aggregate stated liquidation amount of the remarketed securities, from any
amount of such proceeds in excess of the aggregate stated liquidation amount of
the remarketed Trust Preferred Securities plus any accrued and unpaid
distributions (including deferred distributions, if any), the Remarketing Agent
will remit the remaining portion of the proceeds, if any, for the benefit of
such holder. Income PRIDES holders whose Trust Preferred Securities are so
remarketed will not otherwise be responsible for the payment of any Remarketing
Fee in connection therewith. If, in spite of using its reasonable efforts, the
Remarketing Agent cannot remarket the related Trust Preferred Securities of such
holders of Income PRIDES at a price not less than 100% of the aggregate stated
liquidation amount of such Trust Preferred Securities plus accrued and unpaid
distributions (including deferred distributions) and thus resulting in a Failed
Remarketing, Philadelphia Consolidated will exercise its rights as a secured
party to dispose of the Trust Preferred Securities in accordance with the
applicable law and satisfy in full, from the proceeds of such disposition, such
holder's obligation to purchase Common Stock under the related Purchase
Contracts; provided that, if Philadelphia Consolidated exercises such rights as
a secured creditor, any accrued and unpaid distributions (including any deferred
distributions) on such Trust Preferred Securities will be paid in cash by
Philadelphia Consolidated to the holders of record of such Trust Preferred
Securities. Philadelphia Consolidated will cause a notice of such Failed
Remarketing to be published on the second Business Day immediately preceding the
Purchase Contract Settlement Date by publication in a daily newspaper in the
English language of general circulation in The City of New York, which is
expected to be The Wall Street Journal. In addition, Philadelphia Consolidated
will request, not later than seven nor more than 15 calendar days prior to the
remarketing date, that the Depository notify its participants holding Trust
Preferred Securities, Income PRIDES and Growth PRIDES of such remarketing,
including, in the case of a Failed Remarketing, the procedures that must be
followed if a Trust Preferred Security holder wishes to exercise its right to
put its Trust Preferred Security to Philadelphia Consolidated as described
herein. Philadelphia Consolidated will endeavor to ensure that a registration
statement with regard to the full amount of the Trust Preferred Securities to be
remarketed shall
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be effective in such form as will enable the Remarketing Agent to rely on it in
connection with the remarketing process. It is currently anticipated that
Merrill Lynch, Pierce, Fenner & Smith Incorporated will be the Remarketing
Agent. The Remarketing Agreement will contain provisions under which the
Remarketing Agent may resign or be replaced.
EARLY SETTLEMENT
A holder of Income PRIDES may settle the related Purchase Contracts on or
prior to the fifth Business Day immediately preceding the Purchase Contract
Settlement Date by presenting and surrendering the FELINE PRIDES Certificate
evidencing such Income PRIDES at the offices of the Purchase Contract Agent with
the form of "Election to Settle Early" on the reverse side of such certificate
completed and executed as indicated, accompanied by payment (payable to
Philadelphia Consolidated in immediately available funds) of an amount equal to
the Stated Amount times the number of Purchase Contracts being settled;
provided, however, if a Tax Event Redemption has occurred prior to the Purchase
Contract Settlement Date and the Treasury portfolio has become a component of
the Income PRIDES, holders of such Income PRIDES may settle early only in
integral multiples of 4,000,000 Income PRIDES (and the related appropriate
Applicable Ownership Interest of the Treasury Portfolio) at any time on or prior
to the second Business Day immediately preceding the Purchase Contract
Settlement Date. A holder of Growth PRIDES may settle the related Purchase
Contracts on or prior to the second Business Day immediately preceding the
Purchase Contract Settlement Date by presenting and surrendering the FELINE
PRIDES Certificate evidencing such Growth PRIDES at the offices of the Purchase
Contract Agent with the form of "Election to Settle Early" on the reverse side
of such certificate completed and executed as indicated, accompanied by payment
in immediately available funds of an amount equal to the Stated Amount times the
number of Purchase Contracts being settled. So long as the FELINE PRIDES are
evidenced by one or more global security certificates deposited with the
Depositary (as defined herein), procedures for early settlement will also be
governed by standing arrangements between the Depositary and the Purchase
Contract Agent.
Upon Early Settlement of the Purchase Contracts related to any Income
PRIDES or Growth PRIDES, (a) the holder will receive a number of newly issued
shares of Common Stock per Income PRIDES or Growth PRIDES equal to the
Settlement Rate for a purchase price of $10 (regardless of the market price of
the Common Stock on the date of such Early Settlement), subject to adjustment
under the circumstances described in "-- Anti-Dilution Adjustments" below, (b)
the Trust Preferred Securities, the appropriate Applicable Ownership Interest of
the Treasury Portfolio or Treasury Securities, as the case may be, related to
such Income PRIDES or Growth PRIDES will thereupon be transferred to the holder
free and clear of Philadelphia Consolidated's security interest therein, (c) the
holder's right to receive Deferred Contract Adjustment Payments, if any, on the
Purchase Contracts being settled will be forfeited, (d) the holder's right to
receive future Contract Adjustment Payments, if any, will terminate and (e) no
adjustment will be made to or for the holder on account of Deferred Contract
Adjustment Payments, if any, or any amounts accrued in respect of Contract
Adjustment Payments, if any.
If the Purchase Contract Agent receives a FELINE PRIDES Certificate,
accompanied by the completed "Election to Settle Early" and requisite
immediately available funds, from a holder of FELINE PRIDES by 5:00 p.m., New
York City time, on a Business Day, that day will be considered the settlement
date. If the Purchase Contract Agent receives the foregoing after 5:00 p.m., New
York City time, on a Business Day or at any time on a day that is not a Business
Day (other than from Income PRIDES holders after the occurrence of a Tax Event
Redemption), the next Business Day will be considered the settlement date.
Upon Early Settlement of Purchase Contracts in the manner described above,
presentation and surrender of the FELINE PRIDES Certificate evidencing the
related Income PRIDES or Growth PRIDES and payment of any transfer or similar
taxes payable by the holder in connection with the issuance of the related
Common Stock to any person other than the holder of such Income PRIDES or Growth
PRIDES, Philadelphia Consolidated will cause the shares of Common Stock being
purchased to be issued, and the related Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or Treasury
Securities, as the case may be, securing such Purchase Contracts to be released
from the pledge
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under the Pledge Agreement (described in "-- Pledged Securities and Pledge
Agreement") and transferred, within three Business Days following the settlement
date, to the purchasing holder or such holder's designee.
NOTICE TO SETTLE WITH CASH
A holder of an Income PRIDES or Growth PRIDES wishing to settle the related
Purchase Contract with separate cash on the Business Day immediately preceding
the Purchase Contract Settlement Date must notify the Purchase Contract Agent by
presenting and surrendering the FELINE PRIDES Certificate evidencing such Income
PRIDES or Growth PRIDES at the offices of the Purchase Contract Agent with the
form of "Notice to Settle by Separate Cash" on the reverse side of the
certificate completed and executed as indicated on or prior to 5:00 p.m., New
York City time, on the second Business Day immediately preceding the Purchase
Contract Settlement Date in the case of a Growth PRIDES holder or an Income
PRIDES holder (if a Tax Event Redemption has occurred) and on the fifth Business
Day immediately preceding the Purchase Contract Settlement Date in the case of
an Income PRIDES holder (if a Tax Event Redemption has not occurred). If a
holder that has given notice of such holder's intention to settle the related
Purchase Contract with separate cash fails to deliver such cash on the Business
Day immediately preceding the Purchase Contract Settlement Date, then
Philadelphia Consolidated will exercise its right as a secured party to dispose
of, in accordance with the applicable law, the related Trust Preferred
Securities or Treasury Securities, as the case may be, to satisfy in full, from
the disposition of such Trust Preferred Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio, such holder's obligation to
purchase Common Stock under the related Purchase Contracts.
CONTRACT ADJUSTMENT PAYMENTS
Contract Adjustment Payments, if any, will be fixed at a rate per annum of
% of the Stated Amount per Purchase Contract in the case of Income PRIDES,
and at a rate per annum of % of the Stated Amount per Purchase Contract in
the case of Growth Prides. Contract Adjustment Payments, if any, that are not
paid when due (after giving effect to any permitted deferral thereof) will bear
interest thereon at the rate per annum of % thereof (the higher of (i) the
rate that would accrue on Income PRIDES for such payments and (ii) the rate that
would accrue on Growth PRIDES for such payments), compounded quarterly, until
paid. Contract Adjustment Payments, if any, payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months. Contract
Adjustment Payments, if any, will accrue from , 1998 and will be
payable quarterly in arrears on February 16, May 16, August 16 and November 16
of each year, commencing , 1998. Contract Adjustment Payments will
be specified as a component of the distributions on the Income PRIDES or Growth
PRIDES only if and to the extent that the rate of distribution on the Trust
Preferred Securities or the yield on the Treasury Securities, as determined on
the date on which the Income PRIDES or Growth PRIDES are priced for sale, is
less than the aggregate distribution rate or yield required on such date for the
offer and sale of the Income PRIDES or Growth PRIDES at the price to public
specified on the cover page of this Prospectus Supplement. Accordingly, the
final Prospectus Supplement will indicate whether and to what extent Contract
Adjustment Payments will be required to be made by the Company.
Contract Adjustment Payments, if any, will be payable to the holders of
Purchase Contracts as they appear on the books and records of the Purchase
Contract Agent on the relevant record dates, which, as long as the Income PRIDES
or Growth PRIDES remain in book-entry only form, will be one Business Day prior
to the relevant payment dates. Such distributions will be paid through the
Purchase Contract Agent who will hold amounts received in respect of the
Contract Adjustment Payments, if any, for the benefit of the holders of the
Purchase Contracts relating to such Income PRIDES or Growth PRIDES. Subject to
any applicable laws and regulations, each such payment will be made as described
under "-- Book-Entry System." In the event that the Income PRIDES or Growth
PRIDES do not continue to remain in book-entry only form, Philadelphia
Consolidated shall have the right to select relevant record dates, which shall
be more than one Business Day but less than 60 Business Days prior to the
relevant payment dates. In the event that any date on which Contract Adjustment
Payments, if any, are to be made on the Purchase Contracts related to the Income
PRIDES or Growth PRIDES is not a Business Day, then payment of the Contract
Adjustment Payments, if
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any, payable on such date will be made on the next succeeding day which is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on such payment date. A
"Business Day" shall mean any day other than Saturday, Sunday or any other day
on which banking institutions in New York City (in the State of New York) are
permitted or required by any applicable law to close.
Philadelphia Consolidated's obligations with respect to Contract Adjustment
Payments, if any, will be subordinated and junior in right of payment to
Philadelphia Consolidated's obligations under any Senior Indebtedness.
OPTION TO DEFER CONTRACT ADJUSTMENT PAYMENTS
Philadelphia Consolidated may, at its option and upon prior written notice
to the holders of the FELINE PRIDES and the Purchase Contract Agent, defer the
payment of Contract Adjustment Payments, if any, on the Purchase Contracts until
no later than the Purchase Contract Settlement Date. However, Deferred Contract
Adjustment Payments, if any, will bear additional Contract Adjustment Payments
at the rate of % per annum (the higher of (i) the rate that would accrue on
Income PRIDES for such payments and (ii) the rate that would accrue on Growth
PRIDES for such payments) (compounding on each succeeding Payment Date) until
paid. If the Purchase Contracts are terminated (upon the occurrence of certain
events of bankruptcy, insolvency or reorganization with respect to Philadelphia
Consolidated), the right to receive Contract Adjustment Payments, if any, and
Deferred Contract Adjustment Payments, if any, will also terminate.
In the event that Philadelphia Consolidated elects to defer the payment of
Contract Adjustment Payments on the Purchase Contracts until the Purchase
Contract Settlement Date, each holder of FELINE PRIDES will receive on the
Purchase Contract Settlement Date in respect of the Deferred Contract Adjustment
Payments, if any, in lieu of a cash payment, a number of shares of Common Stock
equal to (x) the aggregate amount of Deferred Contract Adjustment Payments
payable to such holder divided by (y) the Applicable Market Value.
In the event Philadelphia Consolidated exercises its option to defer the
payment of Contract Adjustment Payments, if any, until the Deferred Contract
Adjustment Payments have been paid, Philadelphia Consolidated shall not declare
or pay dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital stock
or make guarantee payments with respect to the foregoing (other than (i)
purchases or acquisitions of capital stock of Philadelphia Consolidated in
connection with the satisfaction by Philadelphia Consolidated of its obligations
under any employee or agent benefit plans or the satisfaction by Philadelphia
Consolidated of its obligations pursuant to any contract or security outstanding
on the date of such event requiring Philadelphia Consolidated to purchase
capital stock of Philadelphia Consolidated, (ii) as a result of a
reclassification of Philadelphia Consolidated's capital stock or the exchange or
conversion of one class or series of Philadelphia Consolidated's capital stock
for another class or series of Philadelphia Consolidated capital stock, (iii)
the purchase of fractional interests in shares of Philadelphia Consolidated's
capital stock pursuant to the conversion or exchange provisions of Philadelphia
Consolidated capital stock or the security being converted or exchanged, (iv)
dividends or distributions in capital stock of Philadelphia Consolidated (or
rights to acquire capital stock) or repurchases or redemptions of capital stock
solely from the issuance or exchange of capital stock or (v) redemptions or
repurchases of any rights outstanding under a shareholder rights plan).
ANTI-DILUTION ADJUSTMENTS
The formula for determining the Settlement Rate will be subject to
adjustment (without duplication) upon the occurrence of certain events,
including: (a) the payment of dividends (and other distributions) of Common
Stock on Common Stock; (b) the issuance to all holders of Common Stock of
rights, warrants or options entitling them, for a period of up to 45 days, to
subscribe for or purchase Common Stock at less than the Current Market Price (as
defined herein) thereof; (c) subdivisions, splits and combinations of Common
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Stock; (d) distributions to all holders of Common Stock of evidences of
indebtedness of Philadelphia Consolidated, shares of capital stock, securities,
cash or property (excluding any dividend or distribution covered by clause (a)
or (b) above and any dividend or distribution paid exclusively in cash); (e)
distributions consisting exclusively of cash to all holders of Common Stock in
an aggregate amount that, together with (i) other all-cash distributions made
within the preceding 12 months and (ii) any cash and the fair market value, as
of the expiration of the tender or exchange offer referred to below, of
consideration payable in respect of any tender or exchange offer by Philadelphia
Consolidated or a subsidiary thereof for the Common Stock concluded within the
preceding 12 months, exceeds 15% of Philadelphia Consolidated's aggregate market
capitalization (such aggregate market capitalization being the product of the
Current Market Price of the Common Stock multiplied by the number of shares of
Common Stock then outstanding) on the date of such distribution; and (f) the
successful completion of a tender or exchange offer made by Philadelphia
Consolidated or any subsidiary thereof for the Common Stock which involves an
aggregate consideration that, together with (i) any cash and the fair market
value of other consideration payable in respect of any tender or exchange offer
by Philadelphia Consolidated or a subsidiary thereof for the Common Stock
concluded within the preceding 12 months and (ii) the aggregate amount of any
all-cash distributions to all holders of Philadelphia Consolidated's Common
Stock made within the preceding 12 months, exceeds 15% of Philadelphia
Consolidated's aggregate market capitalization on the expiration of such tender
or exchange offer. The "Current Market Price" per share of Common Stock on any
day means the average of the daily Closing Prices for the five consecutive
Trading Days selected by Philadelphia Consolidated commencing not more than 30
Trading Days before, and ending not later than, the earlier of the day in
question and the day before the "ex date" with respect to the issuance or
distribution requiring such computation. For purposes of this paragraph, the
term "ex date," when used with respect to any issuance or distribution, shall
mean the first date on which the Common Stock trades regular way on such
exchange or in such market without the right to receive such issuance or
distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or property, each
Purchase Contract then outstanding would, without the consent of the holders of
the related Income PRIDES or Growth PRIDES, as the case may be, become a
contract to purchase only the kind and amount of securities, cash and other
property receivable upon consummation of the transaction by a holder of the
number of shares of Common Stock which would have been received by the holder of
the related Income PRIDES or Growth PRIDES immediately prior to the date of
consummation of such transaction if such holder had then settled such Purchase
Contract.
If at any time Philadelphia Consolidated makes a distribution of property
to its shareholders which would be taxable to such shareholders as a dividend
for United States federal income tax purposes (i.e., distributions of evidences
of indebtedness or assets of Philadelphia Consolidated, but generally not stock
dividends or rights to subscribe to capital stock) and, pursuant to the
Settlement Rate adjustment provisions of the Purchase Contract Agreement, the
Settlement Rate is increased, such increase may give rise to a taxable dividend
to holders of FELINE PRIDES. See "Certain Federal Income Tax
Consequences -- Purchase Contracts -- Adjustment to Settlement Rate."
In addition, Philadelphia Consolidated may make such increases in the
Settlement Rate as the Board of Directors of Philadelphia Consolidated deems
advisable to avoid or diminish any income tax to holders of its capital stock
resulting from any dividend or distribution of capital stock (or rights to
acquire capital stock) or from any event treated as such for income tax purposes
or for any other reasons.
Adjustments to the Settlement Rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the Settlement Rate shall be required
unless such adjustment would require an increase or decrease of at least one
percent in the Settlement Rate; provided, however, that any adjustments which by
reason of the foregoing are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
Philadelphia Consolidated will be required, within ten Business Days
following the adjustment of the Settlement Rate, to provide written notice to
the Purchase Contract Agent of the occurrence of such event
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and a statement in reasonable detail setting forth the method by which the
adjustment to the Settlement Rate was determined and setting forth the revised
Settlement Rate.
Each adjustment to the Settlement Rate will result in a corresponding
adjustment to the number of shares of Common Stock issuable upon early
settlement of a Purchase Contract.
TERMINATION
The Purchase Contracts, and the rights and obligations of Philadelphia
Consolidated and of the holders of the FELINE PRIDES thereunder (including the
right thereunder to receive accrued Contract Adjustment Payments, if any, or
Deferred Contract Adjustment Payments and the right and obligation to purchase
Common Stock), will automatically terminate upon the occurrence of certain
events of bankruptcy, insolvency or reorganization with respect to Philadelphia
Consolidated. Upon such termination, the Collateral Agent will release the
related Trust Preferred Securities, the appropriate Applicable Ownership
Interest of the Treasury Portfolio or Treasury Securities, as the case may be,
held by it to the Purchase Contract Agent for distribution to the holders,
subject in the case of the Treasury Portfolio to the Purchase Contract Agent's
disposition of the subject securities for cash and the payment of such cash to
the holders to the extent that the holders would otherwise have been entitled to
receive less than $1,000 of any such security. Upon such termination, however,
such release and distribution may be subject to a delay. In the event that
Philadelphia Consolidated becomes the subject of a case under the Bankruptcy
Code, such delay may occur as a result of the automatic stay under the
Bankruptcy Code and continue until such automatic stay has been lifted.
Philadelphia Consolidated expects any such delay to be limited.
PLEDGED SECURITIES AND PLEDGE AGREEMENT
The Pledged Securities will be pledged to the Collateral Agent, for the
benefit of Philadelphia Consolidated, pursuant to the Pledge Agreement to secure
the obligations of holders of FELINE PRIDES to purchase Common Stock under the
related Purchase Contracts. The rights of holders of FELINE PRIDES to the
related Pledged Securities will be subject to Philadelphia Consolidated's
security interest therein created by the Pledge Agreement. No holder of Income
PRIDES or Growth PRIDES will be permitted to withdraw the Pledged Securities
related to such Income PRIDES or Growth PRIDES from the pledge arrangement
except (i) to substitute Treasury Securities for the related Trust Preferred
Securities or the appropriate Applicable Ownership Interest of the Treasury
Portfolio, as the case may be, (ii) to substitute Trust Preferred Securities or
the appropriate Applicable Ownership Interest of the Treasury Portfolio, as the
case may be, for the related Treasury Securities (for both (i) and (ii), as
provided for under "Description of the FELINE PRIDES -- Substitution of Pledged
Securities" and "-- Recreating Income PRIDES or Growth PRIDES") or (iii) upon
the termination or Early Settlement of the related Purchase Contracts. Subject
to such security interest and the terms of the Purchase Contract Agreement and
the Pledge Agreement, each holder of Income PRIDES (unless a Tax Event
Redemption has occurred) will be entitled through the Purchase Contract Agent
and the Collateral Agent to all of the proportional rights and preferences of
the related Trust Preferred Securities (including distribution, voting,
redemption, repayment and liquidation rights), and each holder of Growth PRIDES
or Income PRIDES (if a Tax Event Redemption has occurred) will retain beneficial
ownership of the related Treasury Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio, as applicable, pledged in respect
of the related Purchase Contracts. Philadelphia Consolidated will have no
interest in the Pledged Securities other than its security interest.
Except as described in "Description of the Purchase Contracts -- General,"
the Collateral Agent will, upon receipt of distributions on the Pledged
Securities, distribute such payments to the Purchase Contract Agent, which will
in turn distribute those payments, together with Contract Adjustment Payments,
if any, received from Philadelphia Consolidated, to the persons in whose names
the related Income PRIDES or Growth PRIDES are registered at the close of
business on the Record Date immediately preceding the date of such distribution.
BOOK-ENTRY SYSTEM
The Depository Trust Company (the "Depositary") will act as securities
depositary for the FELINE PRIDES. The FELINE PRIDES will be issued only as
fully-registered securities registered in the name of
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Cede & Co. (the Depositary's nominee). One or more fully-registered global
security certificates ("Global Security Certificates"), representing the total
aggregate number of FELINE PRIDES, will be issued and will be deposited with the
Depositary and will bear a legend regarding the restrictions on exchanges and
registration of transfer thereof referred to below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial ownership interests in the FELINE
PRIDES so long as such FELINE PRIDES are represented by Global Security
Certificates.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its participants ("Participants")
deposit with the Depositary. The Depositary also facilitates the settlement
among Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). The Depositary is owned by a number of
its Direct Participants and by the New York Stock Exchange, the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the Depositary system is also available to others, such as securities brokers
and dealers, banks and trust companies that clear transactions through or
maintain a direct or indirect custodial relationship with a Direct Participant
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Commission.
No FELINE PRIDES represented by Global Security Certificates may be
exchanged in whole or in part for FELINE PRIDES registered, and no transfer of
Global Security Certificates in whole or in part may be registered, in the name
of any person other than the Depositary or any nominee of the Depositary unless
the Depositary has notified Philadelphia Consolidated that it is unwilling or
unable to continue as depositary for such Global Security Certificates or has
ceased to be qualified to act as such as required by the Purchase Contract
Agreement or there shall have occurred and be continuing a default by
Philadelphia Consolidated in respect of its obligations under one or more
Purchase Contracts. All FELINE PRIDES represented by one or more Global Security
Certificates or any portion thereof will be registered in such names as the
Depositary may direct.
As long as the Depositary or its nominee is the registered owner of the
Global Security Certificates, such Depositary or such nominee, as the case may
be, will be considered the sole owner and holder of the Global Security
Certificates and all FELINE PRIDES represented thereby for all purposes under
the FELINE PRIDES and the Purchase Contract Agreement. Except in the limited
circumstances referred to above, owners of beneficial ownership interests in
Global Security Certificates will not be entitled to have such Global Security
Certificates or the FELINE PRIDES represented thereby registered in their names,
will not receive or be entitled to receive physical delivery of FELINE PRIDES
Certificates in exchange therefor and will not be considered to be owners or
holders of such Global Security Certificates or any FELINE PRIDES represented
thereby for any purpose under the FELINE PRIDES or the Purchase Contract
Agreement. All payments on the FELINE PRIDES represented by the Global Security
Certificates and all transfers and deliveries of Trust Preferred Securities,
Treasury Portfolio, Treasury Securities and Common Stock with respect thereto
will be made to the Depositary or its nominee, as the case may be, as the holder
thereof.
Ownership of beneficial ownership interests in the Global Security
Certificates will be limited to Participants or persons that may hold beneficial
ownership interests through institutions that have accounts with the Depositary
or its nominee. Ownership of beneficial ownership interests in Global Security
Certificates will be shown only on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depositary or
its nominee (with respect to Participants' interests) or any such Participant
(with respect to interests of persons held by such Participants on their
behalf). Procedures for settlement of Purchase Contracts on the Purchase
Contract Settlement Date or upon Early Settlement will be governed by
arrangements among the Depositary, Participants and persons that may hold
beneficial ownership interests
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through Participants designed to permit such settlement without the physical
movement of certificates. Payments, transfers, deliveries, exchanges and other
matters relating to beneficial ownership interests in Global Security
Certificates may be subject to various policies and procedures adopted by the
Depositary from time to time. None of Philadelphia Consolidated, the Purchase
Contract Agent or any agent of Philadelphia Consolidated or the Purchase
Contract Agent will have any responsibility or liability for any aspect of the
Depositary's or any Participant's records relating to, or for payments made on
account of, beneficial ownership interests in Global Security Certificates, or
for maintaining, supervising or reviewing any of the Depositary's records or any
Participant's records relating to such beneficial ownership interests.
The information in this section concerning the Depositary and its
book-entry system has been obtained from sources that Philadelphia Consolidated
and the Trust believe to be reliable, but neither Philadelphia Consolidated nor
the Trust takes responsibility for the accuracy thereof.
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CERTAIN PROVISIONS OF THE PURCHASE CONTRACT
AGREEMENT AND THE PLEDGE AGREEMENT
GENERAL
Distributions on the FELINE PRIDES will be payable, Purchase Contracts (and
documents related thereto) will be settled and transfers of the FELINE PRIDES
will be registrable at the office of the Purchase Contract Agent in the Borough
of Manhattan, The City of New York. In addition, in the event that the FELINE
PRIDES do not remain in book-entry form, payment of distributions on the FELINE
PRIDES may be made, at the option of Philadelphia Consolidated, by check mailed
to the address of the person entitled thereto as shown on the Security Register.
Shares of Common Stock will be delivered on the Purchase Contract
Settlement Date (or earlier upon Early Settlement), or, if the Purchase
Contracts have terminated, the related Pledged Securities will be delivered
potentially after a delay as a result of the imposition of the automatic stay
under the Bankruptcy Code (see "Description of the Purchase
Contracts -- Termination"), in each case upon presentation and surrender of the
FELINE PRIDES Certificate at the office of the Purchase Contract Agent.
Philadelphia Consolidated expects any such delay to be limited.
If a holder of outstanding Income PRIDES or Growth PRIDES fails to present
and surrender the FELINE PRIDES Certificate evidencing such Income PRIDES or
Growth PRIDES to the Purchase Contract Agent on the Purchase Contract Settlement
Date, the shares of Common Stock issuable in settlement of the related Purchase
Contract and in payment of any Deferred Contract Adjustment Payments will be
registered in the name of the Purchase Contract Agent and, together with any
distributions thereon, shall be held by the Purchase Contract Agent as agent for
the benefit of such holder, until such FELINE PRIDES Certificate is presented
and surrendered or the holder provides satisfactory evidence that such
certificate has been destroyed, lost or stolen, together with any indemnity that
may be required by the Purchase Contract Agent and Philadelphia Consolidated.
If the Purchase Contracts have terminated prior to the Purchase Contract
Settlement Date, the related Pledged Securities have been transferred to the
Purchase Contract Agent for distribution to the holders entitled thereto and a
holder fails to present and surrender the FELINE PRIDES Certificate evidencing
such holder's Income PRIDES or Growth PRIDES to the Purchase Contract Agent, the
related Pledged Securities delivered to the Purchase Contract Agent and payments
thereon shall be held by the Purchase Contract Agent as agent for the benefit of
such holder, until such FELINE PRIDES Certificate is presented or the holder
provides the evidence and indemnity described above.
The Purchase Contract Agent will have no obligation to invest or to pay
interest on any amounts held by the Purchase Contract Agent pending
distribution, as described above.
No service charge will be made for any registration of transfer or exchange
of the FELINE PRIDES, except for any tax or other governmental charge that may
be imposed in connection therewith.
MODIFICATION
The Purchase Contract Agreement and the Pledge Agreement will contain
provisions permitting Philadelphia Consolidated and the Purchase Contract Agent
or Collateral Agent, as the case may be, with the consent of the holders of not
less than a majority of the Purchase Contracts at the time outstanding, to
modify the terms of the Purchase Contracts, the Purchase Contract Agreement and
the Pledge Agreement, except that no such modification may, without the consent
of the holder of each outstanding Purchase Contract affected thereby, (a) change
any Payment Date, (b) change the amount or type of Pledged Securities related to
such Purchase Contract, impair the right of the holder of any Pledged Securities
to receive distributions on such Pledged Securities (except for the rights of
holders of Income PRIDES to substitute Treasury Securities for the related Trust
Preferred Securities or Treasury Portfolio, as the case may be, or the rights of
holders of Growth PRIDES to substitute Trust Preferred Securities or Treasury
Portfolio, as the case may be, for the related Treasury Securities) or otherwise
adversely affect the holder's rights in or to such Pledged Securities,
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(c) change the place or currency of payment or reduce any Contract Adjustment
Payments, if any, or any Deferred Contract Adjustment Payments, (d) impair the
right to institute suit for the enforcement of such Purchase Contract, (e)
reduce the amount of Common Stock purchasable under such Purchase Contract,
increase the price to purchase Common Stock on settlement of such Purchase
Contract, change the Purchase Contract Settlement Date or otherwise adversely
affect the holder's rights under such Purchase Contract or (f) reduce the
above-stated percentage of outstanding Purchase Contracts the consent of whose
holders is required for the modification or amendment of the provisions of the
Purchase Contracts, the Purchase Contract Agreement or the Pledge Agreement;
provided, that if any amendment or proposal referred to above would adversely
affect only the Income PRIDES or the Growth PRIDES, then only the affected class
of holder will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the consent of the
holders of not less than a majority of such class.
NO CONSENT TO ASSUMPTION
Each holder of Income PRIDES or Growth PRIDES, by acceptance thereof, will
under the terms of the Purchase Contract Agreement and the Income PRIDES or
Growth PRIDES, as applicable, be deemed expressly to have withheld any consent
to the assumption (i.e., affirmance) of the related Purchase Contracts by
Philadelphia Consolidated or its trustee in the event that Philadelphia
Consolidated becomes the subject of a case under the Bankruptcy Code.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Philadelphia Consolidated will covenant in the Purchase Contract Agreement
that it will not merge or consolidate with any other entity or sell, assign,
transfer, lease or convey all or substantially all of its properties and assets
to any person, firm or corporation unless Philadelphia Consolidated is the
continuing corporation or the successor corporation is a corporation organized
under the laws of the United States of America or a state thereof and such
corporation expressly assumes the obligations of Philadelphia Consolidated under
the Purchase Contracts, the Debentures, the Purchase Contract Agreement and the
Pledge Agreement, and Philadelphia Consolidated or such successor corporation is
not, immediately after such merger, consolidation, sale, assignment, transfer,
lease or conveyance, in default of its payment obligations or material default
in the performance of any of its other obligations thereunder.
TITLE
Philadelphia Consolidated, the Purchase Contract Agent and the Collateral
Agent may treat the registered owner of any FELINE PRIDES as the absolute owner
thereof for the purpose of making payment and settling the related Purchase
Contracts and for all other purposes.
REPLACEMENT OF FELINE PRIDES CERTIFICATES
In the event that physical certificates have been issued, any mutilated
FELINE PRIDES Certificate will be replaced by Philadelphia Consolidated at the
expense of the holder upon surrender of such certificate to the Purchase
Contract Agent. FELINE PRIDES Certificates that become destroyed, lost or stolen
will be replaced by Philadelphia Consolidated at the expense of the holder upon
delivery to Philadelphia Consolidated and the Purchase Contract Agent of
evidence of the destruction, loss or theft thereof satisfactory to Philadelphia
Consolidated and the Purchase Contract Agent. In the case of a destroyed, lost
or stolen FELINE PRIDES Certificate, an indemnity satisfactory to the Purchase
Contract Agent and Philadelphia Consolidated may be required at the expense of
the holder of the FELINE PRIDES evidenced by such certificate before a
replacement will be issued.
Notwithstanding the foregoing, Philadelphia Consolidated will not be
obligated to issue any Income PRIDES or Growth PRIDES on or after the Purchase
Contract Settlement Date (or after Early Settlement) or after the Purchase
Contracts have terminated. The Purchase Contract Agreement will provide that, in
lieu of the delivery of a replacement FELINE PRIDES Certificate following the
Purchase Contract Settlement Date, the Purchase Contract Agent, upon delivery of
the evidence and indemnity described above, will deliver
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the Common Stock issuable pursuant to the Purchase Contracts included in the
Income PRIDES or Growth PRIDES evidenced by such certificate, or, if the
Purchase Contracts have terminated prior to the Purchase Contract Settlement
Date, transfer the principal amount of the Pledged Securities included in the
Income PRIDES or Growth PRIDES evidenced by such certificate.
GOVERNING LAW
The Purchase Contract Agreement, the Pledge Agreement and the Purchase
Contracts will be governed by, and construed in accordance with, the laws of the
State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
The First National Bank of Chicago will be the Purchase Contract Agent. The
Purchase Contract Agent will act as the agent for the holders of Income PRIDES
and Growth PRIDES from time to time. The Purchase Contract Agreement will not
obligate the Purchase Contract Agent to exercise any discretionary actions in
connection with a default under the terms of the Income PRIDES and Growth PRIDES
or the Purchase Contract Agreement.
The Purchase Contract will contain provisions limiting the liability of the
Purchase Contract Agent. The Purchase Contract Agreement will contain provisions
under which the Purchase Contract Agent may resign or be replaced. Such
resignation or replacement would be effective upon the appointment of a
successor.
The First National Bank of Chicago may in the future establish commercial
banking relationships with Philadelphia Consolidated.
INFORMATION CONCERNING THE COLLATERAL AGENT
The Chase Manhattan Bank will be the Collateral Agent. The Collateral Agent
will act solely as the agent of Philadelphia Consolidated and will not assume
any obligation or relationship of agency or trust for or with any of the holders
of the Income PRIDES and Growth PRIDES except for the obligations owed by a
pledgee of property to the owner thereof under the Pledge Agreement and
applicable law.
The Pledge Agreement will contain provisions limiting the liability of the
Collateral Agent. The Pledge Agreement will contain provisions under which the
Collateral Agent may resign or be replaced. Such resignation or replacement
would be effective upon the appointment of a successor.
The Chase Manhattan Bank may in the future establish commercial banking
relationships with Philadelphia Consolidated.
MISCELLANEOUS
The Purchase Contract Agreement will provide that Philadelphia Consolidated
will pay all fees and expenses related to (i) the offering of the FELINE PRIDES,
(ii) the retention of the Collateral Agent and (iii) the enforcement by the
Purchase Contract Agent of the rights of the holders of the FELINE PRIDES;
provided, however, that holders who elect to substitute the related Pledged
Securities, thereby creating Growth PRIDES or Income PRIDES or recreating Income
PRIDES or Growth PRIDES, shall be responsible for any fees or expenses payable
in connection with such substitution, as well as any commissions, fees or other
expenses incurred in acquiring the Pledged Securities to be substituted, and
Philadelphia Consolidated shall not be responsible for any such fees or
expenses.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities, a certain portion of which form a component
of the Income PRIDES, and a certain portion of which will trade separately, will
be issued pursuant to the terms of the Declaration. See "Description of the
FELINE PRIDES -- Substitution of Pledged Securities." The Declaration will be
qualified as an indenture under the Trust Indenture Act. The Institutional
Trustee, The First National Bank of Chicago, an independent trustee, will act as
indenture trustee for the Trust Preferred Securities under the Declaration for
purposes of compliance with the provisions of the Trust Indenture Act. The terms
of the Trust Preferred Securities will include those stated in the Declaration
and those made part of the Declaration by the Trust Indenture Act. The following
summary of certain provisions of the Trust Preferred Securities and the
Declaration is not necessarily complete, and reference is hereby made to the
copy of the Declaration (including the definitions therein of certain terms)
which is filed as an exhibit to the Registration Statement relating to this
Prospectus Supplement, the Trust Act and the Trust Indenture Act. Whenever
particular defined terms are referred to in this Prospectus Supplement, such
defined terms are incorporated herein by reference. The following descriptions
of certain terms of the Trust Preferred Securities offered hereby supplements
and, to the extent inconsistent with, replaces the description of the general
terms and provisions of the Trust Preferred Securities set forth in the
accompanying Prospectus, to which reference is hereby made.
GENERAL
The Declaration authorizes the Regular Trustees to issue on behalf of the
Trust the Trust Securities, which represent undivided beneficial ownership
interests in the assets of the Trust. All of the Common Securities will be
owned, directly or indirectly, by Philadelphia Consolidated. The Common
Securities rank on a parity, and payments will be made thereon on a pro rata
basis, with the Trust Preferred Securities, except that upon the occurrence and
during the continuance of an Indenture Event of Default, the rights of the
holders of the Common Securities to receive payment of periodic distributions
and payments upon liquidation, redemption and otherwise will be subordinated to
the rights of the holders of the Trust Preferred Securities. The Declaration
does not permit the issuance by the Trust of any securities other than the Trust
Securities or the incurrence of any indebtedness by the Trust. Pursuant to the
Declaration, the Institutional Trustee will own the Debentures purchased by the
Trust for the benefit of the holders of the Trust Securities. The payment of
distributions out of money held by the Trust, and payments upon redemption of
the Trust Preferred Securities or liquidation of the Trust, are guaranteed by
Philadelphia Consolidated to the extent described under "Description of the
Guarantee." The Guarantee, when taken together with Philadelphia Consolidated's
obligations under the Debentures and the Indenture and its obligations under the
Declaration, including the obligations to pay costs, expenses, debts and
liabilities of the Trust (other than with respect to the Trust Preferred
Securities), provides a full and unconditional guarantee of amounts due on the
Trust Preferred Securities. The Guarantee will be held by The First National
Bank of Chicago, the Guarantee Trustee, for the benefit of the holders of the
Trust Preferred Securities. The Guarantee does not cover payment of
distributions when the Trust does not have sufficient available funds to pay
such distributions. In such event, the remedy of a holder of Trust Preferred
Securities is to vote to direct the Institutional Trustee to enforce the
Institutional Trustee's rights under the Debentures (except in the limited
circumstances in which the holder may take direct action). See "-- Declaration
Events of Default" and " -- Voting Rights."
DISTRIBUTIONS
Distributions on the Trust Preferred Securities will be fixed initially at
a rate per annum of % of the stated liquidation amount of $10 per Trust
Preferred Security. Distributions applicable on the Trust Preferred Securities
that remain outstanding on and after the Purchase Contract Settlement Date will
be reset on the third Business Day immediately preceding the Purchase Contract
Settlement Date. See "-- Market Rate Reset." Distributions in arrears for more
than one quarter will accumulate at the rate of % per annum through and
including , 2001 and at the Reset Rate thereafter, compounded
quarterly. The term "distribution" as used herein includes any such accumulated
distributions payable unless otherwise stated. The amount of distributions
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months.
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Distributions on the Trust Preferred Securities will be cumulative and will
accrue from , 1998 and will be payable quarterly in arrears on
February 16, May 16, August 16, and November 16 of each year, commencing
, 1998, when, as and if funds are available for payment.
Distributions will be made by the Institutional Trustee, except as otherwise
described below.
Philadelphia Consolidated has the right under the Indenture to defer
payments of interest on the Debentures by extending the interest payment period
from time to time on the Debentures, which right, if exercised, would defer
quarterly distributions on the Trust Preferred Securities (though such
distributions would continue to accrue with interest at the rate of % per
annum through and including 15, 2001, and at the Reset Rate
thereafter) during any such extended interest payment period. Such right to
extend the interest payment period for the Debentures is limited to a period, in
the aggregate, not extending beyond the maturity date of the Debentures. In the
event that Philadelphia Consolidated exercises this right, then (a) Philadelphia
Consolidated shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a liquidation payment with
respect to, any of its capital stock (other than (i) purchases or acquisitions
of capital stock of Philadelphia Consolidated in connection with the
satisfaction by Philadelphia Consolidated of its obligations under any employee
or agent benefit plans or the satisfaction by Philadelphia Consolidated of its
obligations pursuant to any contract or security outstanding on the date of such
event requiring Philadelphia Consolidated to purchase capital stock of
Philadelphia Consolidated, (ii) as a result of a reclassification of
Philadelphia Consolidated's capital stock or the exchange or conversion of one
class or series of Philadelphia Consolidated's capital stock for another class
or series of Philadelphia Consolidated's capital stock, (iii) the purchase of
fractional interests in shares of Philadelphia Consolidated's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, (iv) dividends or distributions in
capital stock of Philadelphia Consolidated (or rights to acquire capital stock)
or repurchases or redemptions of capital stock solely from the issuance or
exchange of capital stock or (v) redemptions or repurchases of any rights
outstanding under a shareholder rights plan), (b) Philadelphia Consolidated
shall not make any payment of interest, principal or premium, if any, on or
repay, repurchase or redeem any debt securities issued by Philadelphia
Consolidated that rank junior to such Debentures, and (c) Philadelphia
Consolidated shall not make any guarantee payments with respect to the foregoing
other than pursuant to the Guarantee or the Common Securities Guarantee. Prior
to the termination of any such Extension Period, Philadelphia Consolidated may
further extend the interest payment period; provided, that such Extension
Period, together with all such previous and further extensions thereof, may not
extend beyond the maturity date of the Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, Philadelphia
Consolidated may select a new Extension Period, subject to the above
requirements. See "Description of the Debentures -- Interest" and "-- Option to
Extend Interest Payment Period." If distributions are deferred, the deferred
distributions and accrued interest thereon shall be paid to holders of record of
the Trust Preferred Securities as they appear on the books and records of the
Trust on the record date next following the termination of such Extension
Period.
Distributions on the Trust Preferred Securities must be paid on the dates
payable to the extent that the Trust has funds available in the Property Account
for the payment of such distributions. The Trust's funds available for
distribution to the holders of the Trust Preferred Securities will be limited to
payments received from Philadelphia Consolidated on the Debentures. See
"Description of the Debentures." The payment of distributions out of moneys held
by the Trust is guaranteed by Philadelphia Consolidated to the extent set forth
under "Description of the Guarantee." Distributions on the Trust Preferred
Securities will be payable to the holders thereof, including the Collateral
Agent, as they appear on the books and records of the Trust on the relevant
record dates, which, as long as the Trust Preferred Securities remain in
book-entry only form, will be one Business Day prior to the relevant payment
dates. Such distributions will be paid through the Institutional Trustee who
will hold amounts received in respect of the Debentures in the Property Account
for the benefit of the holders of the Trust Preferred Securities. Subject to any
applicable laws and regulations and the provisions of the Declaration, each such
payment will be made as described under "-- Book-Entry Only Issuance -- The
Depository Trust Company" below. With respect to Trust Preferred Securities not
in book-entry form, the Regular Trustees shall have the right to select relevant
record dates, which shall be more than one Business Day but less than 60
Business Days prior to the relevant payment dates. In the event that any date on
which distributions are to be made on the Trust Preferred Securities is not a
Business Day, then
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payment of the distributions payable on such date will be made on the next
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such record date.
MARKET RATE RESET
The applicable quarterly distribution rate on the Trust Preferred
Securities and the interest rate on the related Debentures that remain
outstanding on and after the Purchase Contract Settlement Date will be reset on
the third Business Day immediately preceding the Purchase Contract Settlement
Date to the Reset Rate, which will be equal to the sum of the Reset Spread and
the rate on the Two-Year Benchmark Treasury in effect on the third Business Day
immediately preceding the Purchase Contract Settlement Date and will be
determined by the Reset Agent as the rate the Trust Preferred Securities should
bear in order for a Trust Preferred Security to have an approximate market value
on the third Business Day immediately preceding the Purchase Contract Settlement
Date of 100.5% of the Stated Amount; provided that Philadelphia Consolidated may
limit such Reset Rate to be no higher than the rate on the Two-Year Benchmark
Treasury on such Business Day plus 200 basis points (2%). Such market value may
be less than 100.5% if the Reset Spread is limited to a maximum of 2%. The
"Two-Year Benchmark Treasury" shall mean direct obligations of the United States
(which may be obligations traded on a when-issued basis only) having a maturity
comparable to the remaining term to maturity of the Trust Preferred Securities,
as agreed upon by Philadelphia Consolidated and the Reset Agent. The rate for
the Two-Year Benchmark Treasury will be the bid side rate displayed at 10:00
A.M., New York City time, on the third Business Day immediately preceding the
Purchase Contract Settlement Date in the Telerate system (or if the Telerate
system is (a) no longer available on the third Business Day immediately
preceding the Purchase Contract Settlement Date or (b) in the opinion of the
Reset Agent (after consultation with Philadelphia Consolidated) no longer an
appropriate system from which to obtain such rate, such other nationally
recognized quotation system as, in the opinion of the Reset Agent (after
consultation with Philadelphia Consolidated) is appropriate). If such rate is
not so displayed, the rate for the Two-Year Benchmark Treasury shall be, as
calculated by the Reset Agent, the yield to maturity for the Two-Year Benchmark
Treasury, expressed as a bond equivalent on the basis of a year of 365 or 366
days, as applicable, and applied on a daily basis, and computed by taking the
arithmetic mean of the secondary market bid rates, as of 10:30 A.M., New York
City time, on the third Business Day immediately preceding the Purchase Contract
Settlement Date of three leading United States government securities dealers
selected by the Reset Agent (after consultation with Philadelphia Consolidated)
(which may include the Reset Agent or an affiliate thereof). Philadelphia
Consolidated may limit the Reset Rate to be no higher than the rate on the
Two-Year Benchmark Treasury on the third Business Day immediately preceding the
Purchase Contract Settlement Date plus 200 basis points (2%). It is currently
anticipated that Merrill Lynch, Pierce, Fenner & Smith Incorporated will be the
investment banking firm acting as the Reset Agent.
On the tenth Business Day immediately preceding the Purchase Contract
Settlement Date, the Two-Year Benchmark Treasury to be used to determine the
Reset Rate on the Purchase Contract Settlement Date will be selected and the
Reset Spread to be added to the rate on the Two-Year Benchmark Treasury in
effect on the third Business Day immediately preceding the Purchase Contract
Settlement Date will be established by the Reset Agent, and the Reset Spread and
the Two-Year Benchmark Treasury will be announced by Philadelphia Consolidated
(the "Reset Announcement Date"). Philadelphia Consolidated will cause a notice
of the Reset Spread and such Two-Year Benchmark Treasury to be published on the
Business Day following the Reset Announcement Date by publication in a daily
newspaper in the English language of general circulation in The City of New
York, which is expected to be The Wall Street Journal. Philadelphia Consolidated
will request, not later than seven nor more than 15 calendar days prior to the
Reset Announcement Date, that the Depositary notify its participants holding
Trust Preferred Securities, Income PRIDES or Growth PRIDES of such Reset
Announcement Date and of the procedures that must be followed if any owner of
FELINE PRIDES wishes to settle the related Purchase Contract with cash on the
Business Day immediately preceding the Purchase Contract Settlement Date.
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OPTIONAL REMARKETING
Pursuant to the Remarketing Agreement and subject to the terms of the
Remarketing Underwriting Agreement, on or prior to the fifth Business Day
immediately preceding the Purchase Contract Settlement Date, but no earlier than
the Payment Business Day immediately preceding the Purchase Contract Settlement
Date, holders of separate Trust Preferred Securities which are not components of
Income PRIDES may elect to have their Trust Preferred Securities remarketed in
the same manner as the Trust Preferred Securities that are components of Income
PRIDES by delivering their Trust Preferred Securities along with a notice of
such election to the Custodial Agent. The Custodial Agent will hold such Trust
Preferred Securities in an account separate from the collateral account in which
the Pledged Securities will be held. Holders of Trust Preferred Securities
electing to have their Trust Preferred Securities remarketed will also have the
right to withdraw such election on or prior to the fifth Business Day
immediately preceding the Purchase Contract Settlement Date. The portion of the
proceeds from such remarketing equal to the aggregate stated liquidation amount
of such Trust Preferred Securities will automatically be remitted by the
Remarketing Agent to the Custodial Agent for the benefit of such Trust Preferred
Securities holders. In addition, after deducting as the Remarketing Fee an
amount not exceeding 25 basis points (.25%) of the aggregate stated liquidation
amount of the remarketed securities, from any amount of such proceeds in excess
of the aggregate stated liquidation amount of the remarketed Trust Preferred
Securities plus any accrued and unpaid distributions (including deferred
distributions, if any), the Remarketing Agent will remit to the Custodial Agent
the remaining portion of the proceeds, if any, for the benefit of such holder.
If, despite using its reasonable efforts, the Remarketing results in a Failed
Remarketing, the Remarketing Agent will promptly return such Trust Preferred
Securities to the Custodial Agent to release to such holders.
OPTIONAL REDEMPTION
The Debentures are redeemable at the option of Philadelphia Consolidated,
in whole but not in part, on not less than 30 days nor more than 60 days notice,
upon the occurrence and continuation of a Tax Event under the circumstances
described under "Description of the Debentures -- Tax Event Redemption." If
Philadelphia Consolidated redeems the Debentures upon the occurrence and
continuation of a Tax Event, the proceeds from such repayment shall
simultaneously be applied on a pro rata basis to redeem Trust Preferred
Securities having an aggregate stated liquidation amount equal to the aggregate
principal amount of the Debentures so redeemed at a Redemption Price, per Trust
Preferred Security, equal to the Redemption Amount plus accrued and unpaid
interest thereon to the date of such redemption. Such proceeds will be payable
in cash to the holders of such Trust Preferred Securities. If the Tax Event
Redemption occurs prior to the Purchase Contract Settlement Date, the Redemption
Price payable to the Collateral Agent, in liquidation of the Income PRIDES
holders' interests in the Trust, will be simultaneously applied by the
Collateral Agent to purchase on behalf of the holders' of the Income PRIDES the
Treasury Portfolio. The Treasury Portfolio will be pledged with the Collateral
Agent to secure the obligation of Income PRIDES holders to purchase Common Stock
under the related Purchase Contracts.
PUT OPTION UPON FAILED REMARKETING
If a Failed Remarketing has occurred, holders of Trust Securities (or,
following the distribution of the Debentures upon a dissolution of the Trust as
described herein, holders of such Debentures) holding such Trust Securities (or
Debentures, as the case may be) following the Purchase Contract Settlement Date
will have the right, in the case of Trust Securities, to require the Trust to
distribute their pro rata share of the Debentures to the Exchange Agent, who
will put such Debentures to Philadelphia Consolidated on behalf of such holders
(or in the case of Debentures held directly, the holders of such Debentures will
have the right to put such Debentures directly to Philadelphia Consolidated) on
, 2001, upon at least three Business Days prior notice, at a
price per Debenture equal to $10, plus accrued and unpaid interest (including
deferred interest), if any, thereon.
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REDEMPTION PROCEDURES
If the Trust gives a notice of redemption (which notice will be
irrevocable) in respect of all of the Trust Preferred Securities, then, by 12:00
noon, New York City time, on the redemption date, provided that Philadelphia
Consolidated has paid to the Institutional Trustee sufficient amount of cash in
connection with the related redemption or maturity of the Debentures, the Trust
will irrevocably deposit with the Depositary, the Purchase Contract Agent or the
Collateral Agent, as applicable, funds sufficient to pay the applicable
Redemption Price and will give the Depositary, the Purchase Contract Agent or
the Collateral Agent, as applicable, irrevocable instructions and authority to
pay the Redemption Price to the holders of the Trust Preferred Securities so
called for redemption. If notice of redemption shall have been given and funds
deposited as required, then, immediately prior to the close of business on the
date of such deposit, distributions will cease to accrue and all rights of
holders of such Trust Preferred Securities so called for redemption will cease,
except the right of the holders of such Trust Preferred Securities to receive
the Redemption Price but without interest on such Redemption Price. In the event
that any date fixed for redemption of Trust Preferred Securities is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day that is a Business Day (without any interest or
other payment in respect of any such delay), except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day.
DISTRIBUTION OF THE DEBENTURES
"Investment Company Event" means that the Regular Trustees shall have
received an opinion from independent counsel to the Trust or the Regular
Trustees experienced in practice under the 1940 Act (as defined below) to the
effect that, as a result of the occurrence of a change in law or regulation or a
written change in interpretation or application of law or regulation by any
legislative body, court, governmental agency or regulatory authority (a "Change
in 1940 Act Law"), which Change in 1940 Act Law becomes effective on or after
the date of this Prospectus Supplement, there is more than an insubstantial risk
that the Trust is or will be considered an "investment company" which is
required to be registered under the Investment Company Act of 1940, as amended
(the "1940 Act").
If, at any time, an Investment Company Event shall occur and be continuing,
the Trust shall be dissolved, with the result that Debentures with an aggregate
principal amount equal to the aggregate stated liquidation amount of, with an
interest rate identical to the distribution rate of, and accrued and unpaid
interest equal to accrued and unpaid distributions on, the Trust Securities,
would be distributed to the holders of the Trust Securities in liquidation of
such holders' interests in the Trust on a pro rata basis within 90 days
following the occurrence of such Investment Company Event; provided, however,
that such dissolution and distribution shall be conditioned on Philadelphia
Consolidated being unable to avoid such Investment Company Event within such
90-day period by taking some ministerial action or pursuing some other similar
reasonable measure that will have no adverse effect on the Trust, Philadelphia
Consolidated or the holders of the Trust Securities and will involve no material
cost. If an Investment Company Event occurs, Debentures distributed to the
Collateral Agent in liquidation of such holder's interest in the Trust would be
pledged (in lieu of the Trust Preferred Securities) to secure Income PRIDES
holders' obligations to purchase Common Stock under the Purchase Contracts.
Philadelphia Consolidated will have the right at any time to dissolve the
Trust and, after satisfaction of liabilities of creditors of the Trust as
provided by applicable law, cause the Debentures to be distributed to the
holders of the Trust Securities. As of the date of any distribution of
Debentures upon dissolution of the Trust, (i) the Trust Preferred Securities
will no longer be deemed to be outstanding, (ii) the Depositary or its nominee,
as the record holder of the Trust Preferred Securities, will receive a
registered global certificate or certificates representing the Debentures to be
delivered upon such distribution, and (iii) any certificates representing Trust
Preferred Securities not held by the Depositary or its nominee will be deemed to
represent Debentures having an aggregate principal amount equal to the aggregate
stated liquidation amount of, with an interest rate identical to the
distribution rate of, and accrued and unpaid interest equal to accrued and
unpaid distributions on, such Trust Preferred Securities until such certificates
are presented to Philadelphia Consolidated or its agent for transfer or
reissuance. Debentures distributed to the Collateral Agent in
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liquidation of the interest of the holders of the Trust Preferred Securities in
the Trust would be substituted for the Trust Preferred Securities and pledged to
secure Income PRIDES holders' obligations to purchase Common Stock under the
Purchase Contracts.
There can be no assurance as to the market prices for either the Trust
Preferred Securities or the Debentures that may be distributed in exchange for
the Trust Preferred Securities if a dissolution of the Trust were to occur.
Accordingly, the Trust Preferred Securities or such Debentures that an investor
may receive if a dissolution of the Trust were to occur may trade at a discount
to the price that the investor paid to purchase the Trust Preferred Securities
forming a part of the Income PRIDES offered hereby.
LIQUIDATING DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution of the Trust
(unless a Tax Event Redemption has occurred), the then holders of the Trust
Preferred Securities will be entitled to receive out of the assets of the Trust,
after satisfaction of liabilities to creditors, Debentures in an aggregate
principal amount equal to the aggregate stated liquidation amount of, with an
interest rate identical to the distribution rate of, and accrued and unpaid
interest equal to accrued and unpaid distributions on, the Trust Preferred
Securities on a pro rata basis in exchange for such Trust Preferred Securities.
The holders of the Common Securities will be entitled to receive
distributions upon any such dissolution pro rata with the holders of the Trust
Preferred Securities, except that, if a Declaration Event of Default has
occurred and is continuing, the Trust Preferred Securities shall have a
preference over the Common Securities with regard to such distributions.
Pursuant to the Declaration, the Trust shall dissolve (i) on
, 2005, the expiration of the term of the Trust, (ii) upon the
bankruptcy of Philadelphia Consolidated or the holder of the Common Securities,
(iii) upon the filing of a certificate of dissolution or its equivalent with
respect to Philadelphia Consolidated or the revocation of the charter of
Philadelphia Consolidated and the expiration of 90 days after the date of
revocation without a reinstatement thereof, (iv) after the receipt by the
Institutional Trustee of written direction from Philadelphia Consolidated to
dissolve the Trust or the filing of a certificate of dissolution or its
equivalent with respect to the Trust, (v) upon the distribution of Debentures,
(vi) upon the occurrence and continuation of a Tax Event Redemption or (vii)
upon the entry of a decree of a judicial dissolution of the holder of the Common
Securities, Philadelphia Consolidated or the Trust.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the Trust
Securities (a "Declaration Event of Default"); provided that, pursuant to the
Declaration, the holder of the Common Securities will be deemed to have waived
any Declaration Event of Default with respect to the Common Securities until all
Declaration Events of Default with respect to the Trust Preferred Securities
have been cured, waived or otherwise eliminated. Until such Declaration Events
of Default with respect to the Trust Preferred Securities have been so cured,
waived or otherwise eliminated, the Institutional Trustee will be deemed to be
acting solely on behalf of the holders of the Trust Preferred Securities and
only the holders of the Trust Preferred Securities will have the right to direct
the Institutional Trustee with respect to certain matters under the Declaration
and, therefore, the Indenture. If a Declaration Event of Default with respect to
the Trust Preferred Securities is waived by holders of Trust Preferred
Securities, such waiver will also constitute the waiver of such Declaration
Event of Default with respect to the Common Securities without any further act,
vote or consent of the holders of the Common Securities. If the Institutional
Trustee fails to enforce its rights under the Debentures in respect of an
Indenture Event of Default after a holder of record of Trust Preferred
Securities has made a written request, such holder of record of Trust Preferred
Securities may, to the fullest extent permitted by applicable law, institute a
legal proceeding against Philadelphia Consolidated to enforce the Institutional
Trustee's rights under the Debentures without first proceeding against the
Institutional Trustee or any other person or entity. Notwithstanding the
foregoing, if a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of Philadelphia Consolidated to pay
interest or principal on the Debentures
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on the date such interest or principal is otherwise payable (after giving effect
to any right of deferral), then a holder of Trust Preferred Securities may
directly institute a Direct Action to such holder directly of the principal of
or interest on the Debentures having a principal amount equal to the aggregate
liquidation amount of the Trust Preferred Securities of such holder. In
connection with such Direct Action, Philadelphia Consolidated shall have the
right under the Indenture to set off any payment made to such holder of
Philadelphia Consolidated. The holders of Trust Preferred Securities will not be
able to exercise directly any other remedy available to the holders of the
Debentures. See "Effect of Obligations under the Debentures and the Guarantee."
Upon the occurrence of a Declaration Event of Default, the Institutional
Trustee as the sole holder of the Debentures will have the right under the
Indenture to declare the principal of and interest on the Debentures to be
immediately due and payable. Philadelphia Consolidated and the Trust are each
required to file annually with the Institutional Trustee an officer's
certificate as to its compliance with all conditions and covenants under the
Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act and the Trust Indenture Act
and under "Description of the Guarantee -- Modification of the Guarantee;
Assignment," and as otherwise required by law and the Declaration, the holders
of the Trust Preferred Securities will have no voting rights.
Subject to the requirement of the Institutional Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of this
paragraph, the holders of a majority in aggregate stated liquidation amount of
the Trust Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Institutional
Trustee, or direct the exercise of any trust or power conferred upon the
Institutional Trustee under the Declaration, including the right to direct the
Institutional Trustee, as holder of the Debentures, to (i) exercise the remedies
available under the Indenture with respect to the Debentures, (ii) waive any
past Indenture Event of Default that is waivable under Section of the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture or the Debentures where
such consent shall be required; provided, however, that, where a consent or
action under the Indenture would require the consent or act of holders of more
than a majority in principal amount of the Debentures (a "Super-Majority")
affected thereby, only the holders of at least such Super-Majority in aggregate
stated liquidation amount of the Trust Preferred Securities may direct the
Institutional Trustee to give such consent or take such action. The
Institutional Trustee shall notify all holders of the Trust Preferred Securities
of any notice of default received from the Debt Trustee (as defined herein) with
respect to the Debentures. Such notice shall state that such Indenture Event of
Default also constitutes a Declaration Event of Default. Except with respect to
directing the time, method and place of conducting a proceeding for a remedy,
the Institutional Trustee shall not take any of the actions described in clauses
(i), (ii) or (iii) above unless the Institutional Trustee has obtained an
opinion of tax counsel experienced in such matters to the effect that, as a
result of such action, the Trust will not fail to be classified as a grantor
trust for federal income tax purposes.
In the event the consent of the Institutional Trustee, as the holder of the
Debentures, is required under the Indenture with respect to any amendment,
modification or termination of the Indenture or the Debentures, the
Institutional Trustee shall request the direction of the holders of the Trust
Preferred Securities and the Common Securities with respect to such amendment,
modification or termination and shall vote with respect to such amendment,
modification or termination as directed by a majority in stated liquidation
amount of the Trust Preferred Securities and the Common Securities voting
together as a single class; provided, however, that, where a consent under the
Indenture would require the consent of a Super-Majority, the Institutional
Trustee may only give such consent at the direction of the holders of at least
the proportion in stated liquidation amount of the Trust Preferred Securities
and the Common Securities which the relevant Super-Majority represents of the
aggregate principal amount of the Debentures outstanding. The Institutional
Trustee shall not take any such action in accordance with the directions of the
holders of the Trust Preferred Securities and the Common Securities unless the
Institutional Trustee has obtained an opinion of tax counsel
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experienced in such matters to the effect that, as a result of such action, the
Trust will not fail to be classified as a grantor trust for United States
federal income tax purposes.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Trust Preferred Securities
may be given at a separate meeting of holders of Trust Preferred Securities
convened for such purpose, at a meeting of all of the holders of Trust
Securities or pursuant to written consent. The Regular Trustees will cause a
notice of any meeting at which holders of Trust Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be mailed to each holder of record of Trust Preferred
Securities. Each such notice will include a statement setting forth the
following information: (i) the date of such meeting or the date by which such
action is to be taken; (ii) a description of any resolution proposed for
adoption at such meeting on which such holders are entitled to vote or of such
matter upon which written consent is sought; and (iii) instructions for the
delivery of proxies or consents. No vote or consent of the holders of Trust
Preferred Securities will be required for the Trust to cancel Trust Preferred
Securities or distribute Debentures in accordance with the Declaration.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the Trust
Preferred Securities that are owned at such time by Philadelphia Consolidated or
any entity directly or indirectly controlling or controlled by, or under direct
or indirect common control with, Philadelphia Consolidated, shall not be
entitled to vote or consent and shall, for purposes of such vote or consent, be
treated as if such Trust Preferred Securities were not outstanding.
The procedures by which holders of Trust Preferred Securities may exercise
their voting rights are described below. See "-- Book-Entry Only Issuance -- The
Depository Trust Company."
Holders of the Trust Preferred Securities will have no rights to appoint or
remove the Philadelphia Consolidated Trustees, who may be appointed, removed or
replaced solely by Philadelphia Consolidated as the indirect or direct holder of
all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Regular
Trustees (and in certain circumstances the Institutional Trustee or the Delaware
Trustee); provided that, if any proposed amendment provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Trust Securities, whether by
way of amendment to the Declaration or otherwise or (ii) the dissolution of the
Trust other than pursuant to the terms of the Declaration, then the holders of
the Trust Securities voting together as a single class will be entitled to vote
on such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of at least a majority in such stated
liquidation amount of the Trust Securities affected thereby; provided further
that, if any amendment or proposal referred to in clause (i) above would
adversely affect only the Trust Preferred Securities or the Common Securities,
then only the affected class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of a majority in stated liquidation amount of such class of securities.
In addition, the Declaration may be amended without the consent of the holders
of the Trust Securities to, among other things, cause the Trust to continue to
be classified for United States federal income tax purposes as a grantor trust.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified as other than a grantor trust for purposes of United States
federal income taxation, (ii) reduce or otherwise adversely affect the powers of
the Institutional Trustee or (iii) cause the Trust to be deemed an "investment
company" which is required to be registered under the 1940 Act.
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MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other body, except as
described below or as described in "Liquidating Distribution Upon Dissolution."
The Trust may, with the consent of the Regular Trustees and without the consent
of the holders of the Trust Securities, consolidate, amalgamate, merge with or
into, or be replaced by a trust organized as such under the laws of any State;
provided, that (i) if the Trust is not the surviving entity, such successor
entity either (x) expressly assumes all of the obligations of the Trust under
the Trust Securities or (y) substitutes for the Trust Securities other
securities having substantially the same terms as the Trust Securities (the
"Successor Securities"), so long as the Successor Securities rank the same as
the Trust Securities with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) Philadelphia Consolidated expressly
acknowledges a trustee of such successor entity possessing the same powers and
duties as the Institutional Trustee as the holder of the Debentures, (iii) if
the Trust Preferred Securities are listed, any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
with another organization on which the Trust Preferred Securities are then
listed or quoted, (iv) such merger, consolidation, amalgamation or replacement
does not cause the Trust Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation or replacement does
not adversely affect the rights, preferences and privileges of the holders of
the Trust Securities (including any Successor Securities) in any material
respect (other than with respect to any dilution of the holders' interest in the
new entity), (vi) such successor entity has a purpose substantially identical to
that of the Trust, (vii) prior to such merger, consolidation, amalgamation or
replacement, Philadelphia Consolidated has received an opinion of a nationally
recognized independent counsel to the Trust experienced in such matters to the
effect that, (a) such merger, consolidation, amalgamation or replacement does
not adversely affect the rights, preferences and privileges of the holders of
the Trust Securities (including any Successor Securities) in any material
respect (other than with respect to any dilution of the holders' interest in the
new entity), (b) following such merger, consolidation, amalgamation or
replacement, neither the Trust nor such successor entity will be required to
register as an investment company under the 1940 Act and (c) following such
merger, consolidation, amalgamation or replacement, the Trust (or the successor
entity) will continue to be classified as a grantor trust for federal income tax
purposes, and (viii) Philadelphia Consolidated guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee and the Common Securities Guarantee (as defined
herein). Notwithstanding the foregoing the Trust shall not, except with the
consent of holders of 100% in stated liquidation amount of the Trust Securities,
consolidate, amalgamate, merge with or into, or be replaced by any other entity
or permit any other entity to consolidate, amalgamate, merge with or into, or
replace it, if such consolidation, amalgamation, merger or replacement would
cause the Trust or the successor entity to be classified as other than a grantor
trust for federal income tax purposes.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Trust Preferred Securities will be issued as one or more
fully-registered global Trust Preferred Securities certificates representing the
total aggregate number of Trust Preferred Securities. The Depositary will act as
securities depositary for any Trust Preferred Securities that are held
separately from the Income PRIDES. In such event, the Trust Preferred Securities
will be issued only as fully-registered securities registered in the name of
Cede & Co. (the Depositary's nominee). However, under certain circumstances, the
Regular Trustees with the consent of Philadelphia Consolidated may decide not to
use the system of book-entry transfers through the DTC with respect to the Trust
Preferred Securities. In that event, certificates of the Trust Preferred
Securities will be printed and delivered to the holders.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial ownership interests in the global
Trust Preferred Securities as represented by a global certificate.
Purchases of Trust Preferred Securities within the Depositary's system must
be made by or through Direct Participants, which will receive a credit for the
Trust Preferred Securities on the Depositary's records.
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The ownership interest of each actual purchaser of each Trust Preferred Security
(a "Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from the Depositary of their purchases, but Beneficial Owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the Direct or Indirect Participants
through which the Beneficial Owners purchased Trust Preferred Securities.
Transfers of ownership interests in the Trust Preferred Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in the Trust Preferred Securities, except in the event
that use of the book-entry system for the Trust Preferred Securities is
discontinued.
To facilitate subsequent transfers, all the Trust Preferred Securities
deposited by Participants with the Depositary will be registered in the name of
the Depositary's nominee, Cede & Co. The deposit of Trust Preferred Securities
with the Depositary and their registration in the name of Cede & Co. effect no
change in beneficial ownership. The Depositary has no knowledge of the actual
Beneficial Owners of the Trust Preferred Securities. The Depositary's records
reflect only the identity of the Direct Participants to whose accounts such
Trust Preferred Securities are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
So long as the Depositary or its nominee is the registered owner or holder
of a global certificate, the Depositary or such nominee, as the case may be,
will be considered the sole owner or holder of the Trust Preferred Securities
represented thereby for all purposes under the Declaration and the Trust
Preferred Securities. No beneficial owner of an interest in a global certificate
will be able to transfer that interest except in accordance with the
Depositary's applicable procedures, in addition to those provided for under the
Declaration.
The Depositary has advised Philadelphia Consolidated that it will take any
action permitted to be taken by a holder of Trust Preferred Securities
(including the presentation of Trust Preferred Securities for exchange as
described below) only at the direction of one or more Participants to whose
account the Depositary's interests in the global certificates are credited and
only in respect of such portion of the stated liquidation amount of Trust
Preferred Securities as to which such Participant or Participants has or have
given such directions. However, if there is a Declaration Event of Default under
the Trust Preferred Securities, the Depositary will exchange the global
certificates for certificated securities, which it will distribute to its
Participants.
Conveyance of notices and other communications by the Depositary to Direct
Participants and Indirect Participants and by Direct Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time.
Although voting with respect to the Trust Preferred Securities is limited,
in those cases where a vote is required, neither the Depositary nor Cede & Co.
will itself consent or vote with respect to Trust Preferred Securities. Under
its usual procedures, the Depositary would mail an omnibus proxy to the Trust as
soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Trust Preferred Securities are credited on the record date (identified in a
listing attached to the omnibus proxy). Philadelphia Consolidated and the Trust
believe that the arrangements among the Depositary, Direct and Indirect
Participants, and Beneficial Owners will enable the Beneficial Owners to
exercise rights equivalent in substance to the rights that can be directly
exercised by a record holder of a beneficial ownership interest in the Trust.
Distribution payments on the Trust Preferred Securities issued in the form
of one or more global certificates will be made to the Depositary in immediately
available funds. The Depositary's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on the Depositary's records unless the Depositary has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name," and such payments will
be the responsibility of such Participant and not of
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the Depositary, the Trust or Philadelphia Consolidated, subject to any statutory
or regulatory requirements to the contrary that may be in effect from time to
time. Payment of distributions to the Depositary is the responsibility of the
Trust, disbursement of such payments to Direct Participants is the
responsibility of the Depositary, and disbursement of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a global Trust Preferred
Security certificate will not be entitled to receive physical delivery of Trust
Preferred Securities. Accordingly, each Beneficial Owner must rely on the
procedures of the Depositary to exercise any rights under the Trust Preferred
Securities.
Although the Depositary has agreed to the foregoing procedure in order to
facilitate transfer of interests in the global certificates among Participants,
the Depositary is under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time. None of
Philadelphia Consolidated, the Trust or any Philadelphia Consolidated Trustee
will have any responsibility for the performance by the Depositary or its
Participants or Indirect Participants under the rules and procedures governing
the Depositary. The Depositary may discontinue providing its services as
securities depositary with respect to the Trust Preferred Securities at any time
by giving reasonable notice to the Trust. Under such circumstances, in the event
that a successor securities depositary is not obtained, Trust Preferred
Securities certificates are required to be printed and delivered to holders.
Additionally, the Regular Trustees (with the consent of Philadelphia
Consolidated) may decide to discontinue use of the system of book-entry
transfers through the Depositary (or any successor depositary) with respect to
the Trust Preferred Securities. In that event, certificates for the Trust
Preferred Securities will be printed and delivered to holders. In each of the
above circumstances, Philadelphia Consolidated will appoint a paying agent with
respect to the Trust Preferred Securities.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that Philadelphia
Consolidated and the Trust believe to be reliable, but neither Philadelphia
Consolidated nor the Trust takes responsibility for the accuracy hereof.
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
Payments in respect of the Trust Preferred Securities represented by the
global certificates shall be made to the Depositary, which shall credit the
relevant accounts at the Depositary on the applicable distribution dates, or, in
the case of certificated securities, such payments shall be made by check mailed
to the address of the holder entitled thereto as such address shall appear on
the Register. The Paying Agent shall be permitted to resign as Paying Agent upon
30 days' written notice to the Philadelphia Consolidated Trustees. In the event
that The First National Bank of Chicago shall no longer be the Paying Agent, the
Regular Trustees shall appoint a successor to act as Paying Agent (which shall
be a bank or trust company).
The First National Bank of Chicago will act as registrar, transfer agent
and paying agent for the Trust Preferred Securities. Registration of transfers
of Trust Preferred Securities will be effected without charge by or on behalf of
the Trust, but upon payment (and the giving of such indemnity as the Trust or
Philadelphia Consolidated may require) in respect of any tax or other government
charge which may be imposed in relation to it.
INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
The Institutional Trustee prior to the occurrence of a default with respect
to the Trust Securities and after the curing of any defaults that may have
occurred, undertakes to perform only such duties as are specifically set forth
in the Declaration and, after default, shall exercise the same degree of care as
a prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provisions, the Institutional Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of any
holder of Trust Preferred Securities, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The holders of Trust Preferred Securities will not be required to offer
such indemnity in the event such holders, by exercising their voting rights,
direct the Institutional
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Trustee to take any action it is empowered to take under the Declaration
following a Declaration Event of Default. The Institutional Trustee also serves
as trustee under the Guarantee.
The Institutional Trustee may in the future establish commercial banking
relationships with Philadelphia Consolidated.
GOVERNING LAW
The Declaration and the Trust Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to operate the Trust in
such a way so that the Trust will not be required to register as an "investment
company" under the 1940 Act or be characterized as other than a grantor trust
for federal income tax purposes. Philadelphia Consolidated is authorized and
directed to conduct its affairs so that the Debentures will be treated as
indebtedness of Philadelphia Consolidated for federal income tax purposes. In
this connection, Philadelphia Consolidated and the Regular Trustees are
authorized to take any action not inconsistent with applicable law, the
Declaration of Trust, the certificate of trust of the Trust or the certificate
of incorporation of Philadelphia Consolidated, that each of Philadelphia
Consolidated and the Regular Trustees determines in its discretion to be
necessary or desirable to achieve such end, as long as such action does not
adversely affect the interests of the holders of the Trust Preferred Securities
or vary the terms thereof.
Holders of the Trust Preferred Securities have no preemptive or similar
rights.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
will be executed and delivered by Philadelphia Consolidated for the benefit of
the holders from time to time of Trust Securities. The Guarantee will be
qualified as an indenture under the Trust Indenture Act. The First National Bank
of Chicago will act as the Guarantee Trustee for the purposes of compliance with
the provisions of the Trust Indenture Act. The terms of the Guarantee will be
those set forth in the Guarantee and those made part of the Guarantee by the
Trust Indenture Act. The following summary is not necessarily complete, and
reference is hereby made to the copy of the form of Guarantee (including the
definitions therein of certain terms) which is filed as an exhibit to the
Registration Statement relating to this Prospectus Supplement, and to the Trust
Indenture Act. Whenever particular defined terms of the Guarantee are referred
to in this Prospectus Supplement, such defined terms are incorporated herein by
reference. The Guarantee will be held by the Guarantee Trustee for the benefit
of the holders of the Trust Securities. The following descriptions of certain
terms of the Guarantee supplements and, to the extent inconsistent with,
replaces the description of the general terms and provisions of the Guarantee
set forth in the accompanying Prospectus, to which reference is hereby made.
GENERAL
Pursuant to the Guarantee, Philadelphia Consolidated will irrevocably and
unconditionally agree, to the extent set forth therein, to pay in full on a
subordinated unsecured basis, to the holders of the Trust Securities issued by
the Trust, the Guarantee Payments (as defined herein) (except to the extent paid
by the Trust), as and when due, regardless of any defense, right of set-off or
counterclaim which the Trust may have or assert. The following payments or
distributions with respect to Trust Securities issued by the Trust to the extent
not paid by or on behalf of the Trust (the "Guarantee Payments"), will be
subject to the Guarantee thereon (without duplication): (i) any accrued and
unpaid distributions which are required to be paid on the Trust Securities, to
the extent the Trust shall have funds available therefor; (ii) the redemption
price, including all accumulated and unpaid distributions to the date of
redemption, of Trust Securities in respect of which the related Debentures have
been redeemed by Philadelphia Consolidated upon the occurrence of a Tax Event
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Redemption, to the extent the Trust shall have funds available therefor; and
(iii) upon a voluntary or involuntary dissolution of the Trust (other than in
connection with the distribution of Debentures to the holders of Trust
Securities), the lesser of (a) the aggregate of the stated liquidation amount
and all accrued and unpaid distributions on such Trust Securities to the date of
payment, to the extent the Trust has funds available therefor, and (b) the
amount of assets of the Trust remaining available for distribution to holders of
the Trust Securities in liquidation of the Trust. Philadelphia Consolidated's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by Philadelphia Consolidated to the holders of Trust Securities
or by causing the Trust to pay such amounts to such holders.
The Guarantee will be a full and unconditional guarantee on a subordinated
unsecured basis with respect to the Trust Securities issued by the Trust, but
will not apply to any payment of distributions except to the extent the Trust
shall have funds available therefor. If Philadelphia Consolidated does not make
interest payments on the Debentures purchased by the Trust, the Trust will not
pay distributions on the Trust Securities and will not have funds available
therefor. See "Effect of Obligations under the Debentures and the Guarantee."
The Guarantee, when taken together with Philadelphia Consolidated's
obligations under the Debentures, the Indenture, and the Declaration, will have
the effect of providing a full and unconditional guarantee by Philadelphia
Consolidated of payments due on the Trust Securities.
The Guarantee is for the benefit of all of the holders of the Trust
Securities, provided, however, that upon an Indenture Event of Default, holders
of Trust Preferred Securities shall have priority over holders of Common
Securities with respect to distributions and payments on liquidation, redemption
or otherwise.
CERTAIN COVENANTS OF PHILADELPHIA CONSOLIDATED
In the Guarantee, Philadelphia Consolidated will covenant that, so long as
any Trust Securities issued by the Trust remain outstanding, if there shall have
occurred any event that would constitute an event of default under the Guarantee
or the Declaration and such event of default is continuing, then (a)
Philadelphia Consolidated shall not declare or pay any dividend on, make any
distributions with respect to, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of capital stock of Philadelphia Consolidated in
connection with the satisfaction by Philadelphia Consolidated of its obligations
under any employee or agent benefit plans or the satisfaction by Philadelphia
Consolidated of its obligations pursuant to any contract or security outstanding
on the date of such event requiring Philadelphia Consolidated to purchase
capital stock of Philadelphia Consolidated, (ii) as a result of a
reclassification of Philadelphia Consolidated's capital stock or the exchange or
conversion of one class or series of Philadelphia Consolidated's capital stock
for another class or series of Philadelphia Consolidated's capital stock, (iii)
the purchase of fractional interests in shares of Philadelphia Consolidated's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, (iv) dividends or
distributions in capital stock of Philadelphia Consolidated (or rights to
acquire capital stock) or repurchases or redemptions of capital stock solely
from the issuance or exchange of capital stock or (v) redemptions or repurchases
of any rights outstanding under a shareholder rights plan), (b) Philadelphia
Consolidated shall not make any payment of interest, principal or premium, if
any, on or repay, repurchase or redeem any debt securities issued by
Philadelphia Consolidated which rank junior to the Debentures and (c)
Philadelphia Consolidated shall not make any guarantee payments with respect to
the foregoing (other than payments pursuant to the Guarantee).
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of Trust Securities (in which case no vote will be required), the
Guarantee may be amended only with the prior approval of the holders of not less
than a majority in stated liquidation amount of the outstanding Trust Securities
issued by the Trust. All guarantees and agreements contained in the Guarantee
shall bind the successors, assigns, receivers, trustees and representatives of
Philadelphia Consolidated and shall inure to the benefit of the holders of the
Trust Securities then outstanding.
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TERMINATION
The Guarantee will terminate (a) upon distribution of the Debentures held
by the Trust to the holders of the Trust Securities, (b) upon full payment of
the redemption price of all the Trust Securities in the event that all of the
Debentures are repurchased by Philadelphia Consolidated upon the occurrence of a
Tax Event Redemption or (c) upon full payment of the amounts payable in
accordance with the Declaration upon liquidation of the Trust. The Guarantee
will continue to be effective or will be reinstated, as the case may be, if at
any time any holder of Trust Securities must return payment of any sums paid
under the Trust Securities or the Guarantee.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of
Philadelphia Consolidated to perform any of its payment or other obligations
thereunder.
The holders of a majority in stated liquidation amount of the Trust
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee. If the Guarantee Trustee fails to enforce
such Guarantee, any holder of Trust Securities may institute a legal proceeding
directly against Philadelphia Consolidated to enforce such holder's rights under
the Guarantee, without first instituting a legal proceeding against the Trust,
the Guarantee Trustee or any other person or entity. Philadelphia Consolidated
waives any right or remedy to require that any action be brought first against
the Trust or any other person or entity before proceeding directly against
Philadelphia Consolidated.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of Philadelphia
Consolidated and will rank on a parity with all of Philadelphia Consolidated's
other subordinated unsecured obligations.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, undertakes to perform only such duties as are specifically set
forth in the Guarantee and, after default, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Trust Securities, unless offered reasonable indemnity
against the costs, expenses and liabilities which might be incurred thereby; but
the foregoing shall not relieve the Guarantee Trustee, upon the occurrence of an
event of default under the Guarantee, from exercising the rights and powers
vested in it by the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
internal laws of the State of New York.
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DESCRIPTION OF THE DEBENTURES
Set forth below is a description of the specific terms of the Debentures in
which the Trust will invest the proceeds from the issuance and sale of the Trust
Securities. The following description is not necessarily complete, and reference
is hereby made to the copy of the form of the Indenture to be entered into
between Philadelphia Consolidated and The First National Bank of Chicago, as
trustee (the "Debt Trustee"), as supplemented or amended from time to time (as
so supplemented and amended, the "Indenture") which is filed as an exhibit to
the Registration Statement relating to this Prospectus Supplement, and to the
Trust Indenture Act. Certain capitalized terms used herein are defined in the
Indenture.
Under certain circumstances involving the dissolution of the Trust,
Debentures may be distributed to the holders of the Trust Securities in
liquidation of the Trust. See "Description of the Trust Preferred Securities --
Distribution of the Debentures." The following descriptions of certain terms of
the Debentures supplement and, to the extent inconsistent with, replaces the
description of the general terms and provisions of the Debt Securities set forth
in the accompanying Prospectus, to which reference is hereby made.
GENERAL
The Debentures will be issued as senior unsecured debt under the Indenture
and will rank on a parity in right of payment with all of Philadelphia
Consolidated's other senior unsecured debt obligations. The Debentures will be
limited in aggregate principal amount to $ million.
The Debentures will not be subject to a sinking fund provision. Unless a
Tax Event Redemption has occurred prior to the Purchase Contract Settlement
Date, the entire principal amount of the Debentures will mature and become due
and payable, together with any accrued and unpaid interest thereon including
Compound Interest (as defined herein), if any, on , 2003.
Philadelphia Consolidated will have the right at any time to dissolve the
Trust and cause the Debentures to be distributed to the holders of the Trust
Securities. If Debentures are distributed to holders of Trust Securities in
liquidation of such holders' interests in the Trust, such Debentures will
initially be issued as a Global Security (as defined herein). As described
herein, under certain limited circumstances, Debentures may be issued in
certificated form in exchange for a Global Security. See "-- Book-Entry and
Settlement" below. In the event that Debentures are issued in certificated form,
such Debentures will be in denominations of $10 and integral multiples thereof
and may be transferred or exchanged at the offices described below. Payments on
Debentures issued as a Global Security will be made to the Depositary, a
successor depositary or, in the event that no depositary is used, to a Paying
Agent for the Debentures. In the event Debentures are issued in certificated
form, principal and interest will be payable, the transfer of the Debentures
will be registrable and Debentures will be exchangeable for Debentures of other
denominations of a like aggregate principal amount, at the corporate trust
office or agency of the Institutional Trustee in Chicago, Illinois; provided
that, at the option of Philadelphia Consolidated, payment of interest may be
made by check mailed to the address of the holder entitled thereto or by wire
transfer to an account appropriately designated by the holder entitled thereto.
Notwithstanding the foregoing, so long as the holder of any Debentures is the
Institutional Trustee, the payment of principal and interest on the Debentures
held by the Institutional Trustee will be made at such place and to such account
as may be designated by the Institutional Trustee.
The Indenture does not contain provisions that afford holders of the
Debentures protection in the event of a highly leveraged transaction or other
similar transaction involving Philadelphia Consolidated that may adversely
affect such holders.
INTEREST
Each Debenture shall bear interest initially at the rate of % per
annum from the original date of issuance, payable quarterly in arrears on
February 16, May 16, August 16 and November 16 of each year (each an "Interest
Payment Date"), commencing , 1998, to the person in whose name such
Debenture is registered, subject to certain exceptions, at the close of business
on the Business Day next preceding such Interest Payment Date. The applicable
interest rate on the Debentures and the distribution
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rate on the related Trust Preferred Securities outstanding on and after the
Purchase Contract Settlement Date will be reset on the third Business Day
immediately preceding the Purchase Contract Settlement Date to the Reset Rate,
which will be equal to the sum of the Reset Spread and the rate on the Two-Year
Benchmark Treasury in effect on the third Business Day immediately preceding the
Purchase Contract Settlement Date, and will be determined by the Reset Agent as
the rate the Trust Preferred Securities should bear in order for a Trust
Preferred Security to have an approximate market value on the third Business Day
immediately preceding the Purchase Contract Settlement Date of 100.5% of the
Stated Amount; provided that Philadelphia Consolidated may limit such Reset Rate
to be no higher than the rate on the Two-Year Benchmark Treasury on the third
Business Day immediately preceding the Purchase Contract Settlement Date plus
200 basis points (2%). Such market value may be less than 100.5% if the Reset
Spread is limited to a maximum of 2%.
On the Reset Announcement Date, the Two-Year Benchmark Treasury will be
selected and the Reset Spread to be added to the rate on the Two-Year Benchmark
Treasury in effect on the third Business Day immediately preceding the Purchase
Contract Settlement Date will be established by the Reset Agent, and the Reset
Spread and the Two-Year Benchmark Treasury will be announced by Philadelphia
Consolidated. Philadelphia Consolidated will cause a notice of the Reset Spread
and such Two-Year Benchmark Treasury to be published on the Business Day
following the Reset Announcement Date by publication in a daily newspaper in the
English language of general circulation in The City of New York, which is
expected to be The Wall Street Journal. In the event the Debentures shall not
continue to remain in book-entry only form, Philadelphia Consolidated shall have
the right to select record dates, which shall be more than 15 Business Days but
less than 60 Business Days prior to the Interest Payment Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year consisting of twelve 30-day months. The amount of interest
payable for any period shorter than a full quarterly period for which interest
is computed will be computed on the basis of the actual number of days elapsed
in such 90-day period. In the event that any date on which interest is payable
on the Debentures is not a Business Day, then payment of the interest payable on
such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, then such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date.
TAX EVENT REDEMPTION
If a Tax Event shall occur and be continuing, Philadelphia Consolidated
may, at its option, redeem Debentures in whole (but not in part) at any time at
a Redemption Price equal to, for each Debenture, the Redemption Amount plus
accrued and unpaid interest thereon, including Compound Interest and expenses
and taxes of the Trust, if any, to the date of redemption (the "Tax Event
Redemption Date"). If, following the occurrence of a Tax Event, Philadelphia
Consolidated exercises its option to redeem the Debentures, then the proceeds of
such redemption will be applied to redeem Trust Securities having a liquidation
amount equal to the principal amount of Debentures to be paid in accordance with
their terms, at the Redemption Price. Such Redemption Price will be payable in
cash to the holders of such Trust Securities. If such Tax Event Redemption
occurs prior to the Purchase Contract Settlement Date, the Redemption Price
payable in liquidation of the Income PRIDES holders' interest in the Trust will
be distributed to the Collateral Agent, who in turn will apply an amount equal
to the Redemption Amount of such Redemption Price to purchase the Treasury
Portfolio on behalf of the holders of Income PRIDES and remit the remaining
portion, if any, of such Redemption Price to the Purchase Contract Agent for
payment to the holders of such Income PRIDES. Such Treasury Portfolio will be
substituted for the Trust Preferred Securities and will be pledged with the
Collateral Agent to secure such Income PRIDES holders' obligation to purchase
Philadelphia Consolidated's Common Stock under the Purchase Contracts; provided
that, if the Tax Event Redemption occurs after the Purchase Contract Settlement
Date, such Treasury Portfolio will not be purchased.
"Tax Event" means the receipt by the Trust of an opinion of a nationally
recognized independent tax counsel experienced in such matters to the effect
that, as a result of (a) any amendment to, change in, or announced proposed
change in, the laws (or any regulations thereunder) of the United States or any
political
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subdivision or taxing authority thereof or therein affecting taxation, (b) any
amendment to or change in an interpretation or application of such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority or (c) any interpretation or pronouncement that provides for a
position with respect to such laws or regulations that differs from the
generally accepted position on the date the Trust Securities are issued, which
amendment, change or proposed change is effective or which interpretation or
pronouncement is announced on or after the date of issuance of the Trust
Securities under the Declaration, there is more than an insubstantial risk that
(i) interest payable by Philadelphia Consolidated on the Debentures would not be
deductible, in whole or in part, by Philadelphia Consolidated for federal income
tax purposes, (ii) the income of the Trust would be subject to United States
federal income tax or (iii) the Trust would be subject to more than a de minimis
amount of other taxes, duties or other governmental charges.
"Treasury Portfolio" means, with respect to the Applicable Principal Amount
of Debentures (a) if the Tax Event Redemption Date occurs prior to the Purchase
Contract Settlement Date, a portfolio of zero-coupon U.S. Treasury Securities
consisting of (i) interest or principal strips of U.S. Treasury Securities which
mature on or prior to 15, 2001 in an aggregate amount equal to the Applicable
Principal Amount and (ii) with respect to each scheduled interest payment date
on the Debentures that occurs after the Tax Event Redemption Date interest or
principal strips of U.S. Treasury Securities which mature on or prior to such
date in an aggregate amount equal to the aggregate interest payment that would
be due on the Applicable Principal Amount of the Debentures on such date, and
(b) if the Tax Event Redemption Date occurs after the Purchase Contract
Settlement Date, a portfolio of zero-coupon U.S. Treasury Securities consisting
of (i) principal or interest strips of U.S. Treasury Securities which mature on
or prior to 15, 2003 in an aggregate amount equal to the Applicable Principal
Amount and (ii) with respect to each scheduled interest payment date on the
Debentures that occurs after the Tax Event Redemption Date interest or principal
strips of such U.S. Treasury Securities which mature on or prior to such date in
an aggregate amount equal to the aggregate interest payment that would be due on
the Applicable Principal Amount of the Debentures on such date.
"Applicable Principal Amount" means either (i) if the Tax Event Redemption
Date occurs prior to the Purchase Contract Settlement Date, the aggregate
principal amount of the Debentures corresponding to the aggregate stated
liquidation amount of the Trust Preferred Securities which are components of
Income PRIDES on the Tax Event Redemption Date or (ii) if the Tax Event
Redemption occurs on or after the Purchase Contract Settlement Date, the
aggregate principal amount of the Debentures corresponding to the aggregate
stated liquidation amount of the Trust Preferred Securities outstanding on such
Tax Event Redemption Date.
"Redemption Amount" means for each Debenture, the product of (i) the
principal amount of such Debenture and (ii) a fraction whose numerator is the
Treasury Portfolio Purchase Price and whose denominator is the Applicable
Principal Amount.
"Treasury Portfolio Purchase Price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City (a "Primary
Treasury Dealer") to the Quotation Agent on the third Business Day immediately
preceding the Tax Event Redemption Date for the purchase of the Treasury
Portfolio for settlement on the Tax Event Redemption Date.
"Quotation Agent" means (i) Merrill Lynch Government Securities, Inc. and
its respective successors, provided, however, that, if the foregoing shall cease
to be a Primary Treasury Dealer, Philadelphia Consolidated shall substitute
therefor another Primary Treasury Dealer, and (ii) any other Primary Treasury
Dealer selected by Philadelphia Consolidated.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each registered holder of Debentures to be
prepaid at its registered address. Unless Philadelphia Consolidated defaults in
payment of the Redemption Price, on and after the redemption date interest shall
cease to accrue on such Debentures.
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PUT OPTION UPON A FAILED REMARKETING
If a Failed Remarketing has occurred, holders of Debentures (including the
Exchange Agent) will have the right to put their Debentures to Philadelphia
Consolidated on , 2001, upon at least three Business Days' prior
notice, at a price per Debenture equal to the principal amount of such
Debenture, plus accrued and unpaid interest, if any, thereon.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Philadelphia Consolidated shall have the right at any time, and from time
to time, during the term of the Debentures, to defer payments of interest by
extending the interest payment period for a period not extending beyond the
maturity date of the Debentures, at the end of which Extension Period,
Philadelphia Consolidated shall pay all interest then accrued and unpaid
(including any expenses and taxes of the Trust, as herein defined) together with
interest thereon compounded quarterly at the rate of % per annum through
and including 15, 2001, and at the Reset Rate thereafter, to the extent
permitted by applicable law ("Compound Interest"); provided that, during any
such Extension Period, (a) Philadelphia Consolidated shall not declare or pay
dividends or make any distribution with respect to, or redeem, purchase, acquire
or make a liquidation payment with respect to, any of its capital stock (other
than (i) purchases or acquisitions of capital stock of Philadelphia Consolidated
in connection with the satisfaction by Philadelphia Consolidated of its
obligations under any employee or agent benefit plans or the satisfaction by
Philadelphia Consolidated of its obligations pursuant to any contract or
security outstanding on the date of such event requiring Philadelphia
Consolidated to purchase capital stock of Philadelphia Consolidated, (ii) as a
result of a reclassification of Philadelphia Consolidated's capital stock or the
exchange or conversion of one class or series of Philadelphia Consolidated's
capital stock for another class or series of Philadelphia Consolidated capital
stock, (iii) the purchase of fractional interests in shares of Philadelphia
Consolidated's capital stock pursuant to the conversion or exchange provisions
of such capital stock or the security being converted or exchanged, (iv)
dividends or distributions in capital stock of Philadelphia Consolidated (or
rights to acquire capital stock) or repurchases or redemptions of capital stock
solely from the issuance or exchange of capital stock or (v) redemptions or
repurchases of any rights outstanding under a shareholder rights plan), (b)
Philadelphia Consolidated shall not make any payment of interest, principal or
premium, if any, on or repay, repurchase or redeem any debt securities issued by
Philadelphia Consolidated that rank junior to the Debentures, and (c)
Philadelphia Consolidated shall not make any guarantee payments with respect to
the foregoing (other than payments pursuant to the Guarantee or the Common
Securities Guarantee). Prior to the termination of any such Extension Period,
Philadelphia Consolidated may further defer payments of interest by extending
the interest payment period; provided, however, that such Extension Period,
including all such previous and further extensions, may not extend beyond the
maturity of the Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, Philadelphia Consolidated may commence a new
Extension Period, subject to the terms set forth in this section. No interest
during an Extension Period, except at the end thereof, shall be due and payable,
but Philadelphia Consolidated, at its option, may prepay on any Interest Payment
Date all of the interest accrued during the then elapsed portion of an Extension
Period. Philadelphia Consolidated has no present intention of exercising its
right to defer payments of interest by extending the interest payment period on
the Debentures. If the Institutional Trustee shall be the sole holder of the
Debentures, Philadelphia Consolidated shall give the Regular Trustees and the
Institutional Trustee notice of its selection of such Extension Period one
Business Day prior to the earlier of (i) the date distributions on the Trust
Preferred Securities are payable or (ii) the date the Regular Trustees are
required to give notice, if applicable, to the NNM (or other applicable
self-regulatory organization) or to holders of the Trust Preferred Securities of
the record or payment date of such distribution. The Regular Trustees shall give
notice of Philadelphia Consolidated's selection of such Extension Period to the
holders of the Trust Preferred Securities. If the Institutional Trustee shall
not be the sole holder of the Debentures, Philadelphia Consolidated shall give
the holders of the Debentures notice of its selection of such Extension Period
ten Business Days prior to the earlier of (i) the Interest Payment Date or (ii)
the date upon which Philadelphia Consolidated is required to give notice, if
applicable, to the NNM (or other applicable self-regulatory organization) or to
holders of the Debentures of the record or payment date of such related interest
payment.
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EXPENSES AND TAXES OF THE TRUST
In the Indenture, Philadelphia Consolidated, as borrower, has agreed to pay
all debts and other obligations (other than with respect to the Trust
Securities) and all costs and expenses of the Trust (including the costs and
expenses relating to the organization of the Trust, the fees and expenses of the
Trustees and the costs and expenses relating to the operation of the Trust) and
to pay any and all taxes and all costs and expenses with respect thereto (other
than United States withholding taxes) to which the Trust might become subject.
Philadelphia Consolidated also has agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give full effect to
the foregoing.
INDENTURE EVENTS OF DEFAULT
If any Indenture Event of Default shall occur and be continuing, the
Institutional Trustee, as the holder of the Debentures, will have the right to
declare the principal of and the interest on the Debentures (including any
Compound Interest and expenses and taxes of the Trust, if any) and any other
amounts payable under the Indenture to be forthwith due and payable and to
enforce its other rights as a creditor with respect to the Debentures.
The following are Events of Default under the Indenture with respect to the
Debentures: (1) failure to pay interest on the Debentures when due, continued
for 30 days; provided, however, that, if Philadelphia Consolidated is permitted
by the terms of the Debentures to defer the payment in question, then the date
on which such payment is due and payable shall be the date on which Philadelphia
Consolidated is required to make payment following such deferral, if such
deferral has been elected pursuant to the terms of the Debentures; (2) failure
to pay the principal of (or premium, if any, on) the Debentures when due and
payable at the stated maturity date, upon redemption or otherwise; provided,
however, if Philadelphia Consolidated is permitted by the terms of the
Debentures to defer the payment in question, the date on which such payment is
due and payable shall be the date on which Philadelphia Consolidated is required
to make payment following such deferral, if such deferral has been elected
pursuant to the terms of the Debentures; (3) failure to observe or perform in
any material respect certain other covenants contained in the Indenture,
continued for a period of 90 days after written notice has been given to
Philadelphia Consolidated by the Debt Trustee or holders of at least 25% in
aggregate principal amount of the outstanding Debentures; and (4) certain events
of bankruptcy, insolvency or reorganization relating to Philadelphia
Consolidated.
The Indenture provides that the Debt Trustee shall, within 30 days after
the occurrence of any Default or Event of Default with respect to the
Debentures, give the holders of the Debentures notice of all uncured Defaults or
Events of Default known to it (the term "Default" includes any event which after
notice or passage of time or both would be an Event of Default); provided,
however, that, except in the case of a Default in the payment of the principal
of (or premium, if any, on) or interest on the Debentures, the Debt Trustee
shall be protected in withholding such notice so long as the board of directors,
the executive committee or directors or responsible officers of the Debt Trustee
in good faith determine that the withholding of such notice is in the interest
of the holders of the Debentures.
If an Event of Default with respect to the Debentures occurs and is
continuing, the Debt Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Debentures, by notice in writing to
Philadelphia Consolidated (and to the Debt Trustee if given by the holders of at
least 25% in aggregate principal amount of the Debentures), may declare the
unpaid principal of and accrued interest to the date of acceleration on all the
outstanding Debentures to be due and payable immediately and, upon any such
declaration, the Debentures shall become immediately due and payable.
In addition, in the case of the Debentures held by the Trust, if an Event
of Default has occurred and is continuing and such event is attributable to the
failure of Philadelphia Consolidated to pay interest or principal, then a holder
of Trust Preferred Securities may directly institute a proceeding against
Philadelphia Consolidated for payment.
Any such declaration with respect to the Debentures may be annulled and
past Events of Default and Defaults (except, unless theretofore cured, an Event
of Default or a Default in payment of principal of or
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interest on the Debentures) may be waived by the holders of a majority of the
principal amount of the outstanding Debentures, upon the conditions provided in
the Indenture.
The Indenture provides that Philadelphia Consolidated shall file annually
statements with the Debt Trustee regarding compliance by Philadelphia
Consolidated with certain of the respective covenants thereof and shall specify
any Event of Default or Defaults with respect to the Debentures, in performing
such covenants, of which the signers may have knowledge.
An Indenture Event of Default also constitutes a Declaration Event of
Default. The holders of Trust Preferred Securities in certain circumstances have
the right to direct the Institutional Trustee to exercise its rights as the
holder of the Debentures. See "Description of the Trust Preferred
Securities -- Declaration Events of Default" and "-- Voting Rights."
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of Philadelphia
Consolidated to pay interest or principal on the Debentures on the date such
interest or principal is otherwise payable, Philadelphia Consolidated
acknowledges that a holder of Trust Preferred Securities may directly institute
a proceeding for enforcement of payment to such holder directly of the principal
of and interest on the Debentures having a principal amount equal to the
aggregate stated liquidation amount of the Trust Preferred Securities of such
holder after the respective due date specified in the Debentures. In connection
with such action, Philadelphia Consolidated shall have the right under the
Indenture to set-off any payment made to such holder by Philadelphia
Consolidated. The holders of Trust Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Debentures.
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of Trust Preferred Securities in connection with
the involuntary or voluntary dissolution of the Trust, the Debentures will be
issued in the form of one or more global certificates (each a "Global Security")
registered in the name of the Depositary or its nominee. Except under the
limited circumstances described below, Debentures represented by the Global
Security will not be exchangeable for, and will not otherwise be issuable as,
Debentures in certificated form. The Global Securities described above may not
be transferred except by the Depositary to a nominee of the Depositary or by a
nominee of the Depositary to the Depositary or another nominee of the Depositary
or to a successor depositary or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in certificated form. Such
laws may impair the ability to transfer beneficial ownership interests in such a
Global Security.
Except as provided herein, owners of beneficial ownership interests in such
a Global Security will not be entitled to receive physical delivery of
Debentures in certificated form and will not be considered the holders (as
defined in the Indenture) thereof for any purpose under the Indenture, and no
Global Security representing Debentures shall be exchangeable, except for
another Global Security of like denomination and tenor to be registered in the
name of the Depositary or its nominee or to a successor Depositary or its
nominee. Accordingly, each Beneficial Owner must rely on the procedures of the
Depositary or if such person is not a Participant, on the procedures of the
Participant through which such person owns its interest to exercise any rights
of a holder under the Indenture.
THE DEPOSITARY
If Debentures are distributed to holders of Trust Preferred Securities in
liquidation of such holders' interests in the Trust, the Depositary will act as
securities depositary for the Debentures. For a description of the Depositary
and the specific terms of the depositary arrangements, see "Description of the
Trust Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust
Company." As of the date of this Prospectus Supplement, the description therein
of the Depositary's book-entry system and the Depositary's practices as they
relate to purchases, transfers, notices and payments with respect to the Trust
Preferred Securities apply in all material respects to any debt obligations
represented by one or more Global Securities held by the Depositary.
Philadelphia Consolidated may appoint a successor to the Depositary or any
successor depositary
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in the event the Depositary or such successor depositary is unable or unwilling
to continue as a depositary for the Global Securities.
None of Philadelphia Consolidated, the Trust, the Institutional Trustee,
any paying agent and any other agent of Philadelphia Consolidated or the Debt
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in a
Global Security for such Debentures or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
A Global Security shall be exchangeable for Debentures registered in the
names of persons other than the Depositary or its nominee only if (i) the
Depositary notifies Philadelphia Consolidated that it is unwilling or unable to
continue as a depositary for such Global Security and no successor depositary
shall have been appointed, (ii) the Depositary at any time, ceases to be a
clearing agency registered under the Exchange Act at which time the depositary
is required to be so registered to act as such depositary and no successor
depositary shall have been appointed, (iii) Philadelphia Consolidated, in its
sole discretion, determines that such Global Security shall be so exchangeable
or (iv) there shall have occurred an Indenture Event of Default with respect to
such Debentures. Any Global Security that is exchangeable pursuant to the
preceding sentence shall be exchangeable for Debentures registered in such names
as the Depositary shall direct. It is expected that such instructions will be
based upon directions received by the Depositary from its Participants with
respect to ownership of beneficial ownership interests in such Global Security.
GOVERNING LAW
The Indenture and the Debentures will be governed by, and construed in
accordance with, the internal laws of the State of New York.
MISCELLANEOUS
Philadelphia Consolidated will pay all fees and expenses related to (i) the
offering of the Trust Securities and the Debentures, (ii) the organization,
maintenance and dissolution of the Trust, (iii) the retention of the
Philadelphia Consolidated Trustees and (iv) the enforcement by the Institutional
Trustee of the rights of the holders of the Trust Preferred Securities.
EFFECT OF OBLIGATIONS UNDER THE
DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial ownership interests in the
assets of the Trust, and to invest the proceeds from such issuance and sale in
the Debentures and engage in only those other activities necessary or incidental
thereto.
As long as payments of interest and other payments are made when due on the
Debentures, such payments will be sufficient to cover distributions and payments
due on the Trust Securities because of the following factors: (i) the aggregate
principal amount of Debentures will be equal to the sum of the aggregate stated
liquidation amount of the Trust Securities; (ii) the interest rate and the
interest and other payment dates on the Debentures will match the distribution
rate and distribution and other payment dates for the Trust Securities; (iii)
Philadelphia Consolidated shall pay, and the Trust shall not be obligated to
pay, directly or indirectly, all costs, expenses, debts, and obligations of the
Trust (other than with respect to the Trust Securities); and (iv) the
Declaration further provides that the Philadelphia Consolidated Trustees shall
not take or cause or permit the Trust to, among other things, engage in any
activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Trust Preferred Securities (to the extent funds
therefor are available) are guaranteed by Philadelphia Consolidated as and to
the extent set forth under "Description of the Guarantee." If Philadelphia
Consolidated does not make interest payments on the Debentures purchased by the
Trust, the Trust will not have sufficient funds to pay distributions on the
Trust Preferred Securities. The Guarantee does not apply to
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any payment of distributions unless and until the Trust has sufficient funds for
the payment of such distributions.
If Philadelphia Consolidated fails to make interest or other payments on
the Debentures when due (taking account of any Extension Period), the
Declaration provides a mechanism whereby the holders of the Trust Preferred
Securities, using the procedures described in "Description of the Trust
Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust
Company" and "-- Voting Rights," may direct the Institutional Trustee to enforce
its rights under the Indenture. If the Institutional Trustee fails to enforce
its rights under the Indenture in respect of an Indenture Event of Default, such
holder of record of Trust Preferred Securities may, to the fullest extent
permitted by applicable law, institute a legal proceeding against Philadelphia
Consolidated to enforce the Institutional Trustee's rights under the Indenture
without first instituting any legal proceeding against the Institutional Trustee
or any other person or entity. Notwithstanding the foregoing, if a Declaration
Event of Default has occurred and is continuing and such event is attributable
to the failure of Philadelphia Consolidated to pay interest or principal on the
Debentures on the date such interest or principal is otherwise payable, then a
holder of Trust Preferred Securities may directly institute a proceeding against
Philadelphia Consolidated for payment. Philadelphia Consolidated, under the
Guarantee, acknowledges that the Guarantee Trustee shall enforce the Guarantee
on behalf of the holders of the Trust Preferred Securities. If Philadelphia
Consolidated fails to make payments under the Guarantee, the Guarantee provides
a mechanism whereby the holders of the Trust Preferred Securities may direct the
Guarantee Trustee to enforce its rights thereunder. Notwithstanding the
foregoing, if Philadelphia Consolidated has failed to make a payment under the
Guarantee, any holder of Trust Preferred Securities may institute a legal
proceeding directly against Philadelphia Consolidated to enforce its rights
under the Guarantee without first instituting a legal proceeding against the
Trust, the Guarantee Trustee, or any other person or entity.
The Guarantee, when taken together with Philadelphia Consolidated's
obligations under the Debentures and the Indenture and its obligations under the
Declaration, including its obligations to pay costs, expenses, debts and
liabilities of the Trust (other than with respect to the Trust Securities), has
the effect of providing a full and unconditional guarantee of amounts due on the
Trust Preferred Securities. See "Description of the Guarantee."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the material United States federal
income tax consequences of the purchase, ownership and disposition of FELINE
PRIDES, Trust Preferred Securities and Common Stock acquired under a Purchase
Contract. Unless otherwise stated, this summary applies only to "U.S. Holders"
who purchase Income PRIDES, Growth PRIDES or Trust Preferred Securities upon
original issuance for an amount equal to the initial offering price thereof. The
term "U.S. Holder" means the beneficial owner of an Income PRIDES, Growth PRIDES
or Trust Preferred Security who is (i) a person who is a citizen or resident of
the United States, (ii) a corporation or partnership created or organized in or
under the laws of the United States or any state thereof or the District of
Columbia, (iii) an estate the income of which is subject to United States
federal income taxation, regardless of its source, or (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of such trust and one or more United States persons have the
authority to control all substantial decisions of such trust. The tax treatment
of a U.S. Holder may vary depending on such U.S. Holder's particular situation.
This summary does not deal with special classes of U.S. Holders such as banks,
thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
certain U.S. expatriates, or U.S. Holders that will hold FELINE PRIDES, Trust
Preferred Securities or Common Stock acquired under a Purchase Contract as a
position in a "straddle," as part of a "synthetic security" or "hedge," as part
of a "conversion transaction" or other integrated investment, or as other than a
capital asset. This summary does not address the tax consequences to U.S.
Holders that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a U.S. Holder of
FELINE PRIDES, Trust Preferred Securities or Common Stock acquired pursuant to a
Purchase Contract. Further, it does not include any description of any
alternative minimum tax consequences or the tax laws of
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any state, local or foreign government that may be applicable. PROSPECTIVE
INVESTORS THAT ARE NOT UNITED STATES PERSONS (WITHIN THE MEANING OF SECTION
7701(a)(30) OF THE CODE) ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN FELINE PRIDES
OR TRUST PREFERRED SECURITIES, INCLUDING THE POTENTIAL APPLICATION OF UNITED
STATES WITHHOLDING TAXES.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations (including proposed Treasury regulations)
issued thereunder, Internal Revenue Service ("IRS") rulings and pronouncements
and judicial decisions now in effect, all of which are subject to change,
possibly on a retroactive basis. Any such changes may be applied retroactively
in a manner that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a U.S. Holder.
No statutory, administrative or judicial authority directly addresses the
treatment of FELINE PRIDES or instruments similar to FELINE PRIDES for United
States federal income tax purposes. As a result, no assurance can be given that
the IRS will agree with the tax consequences described herein. PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE FELINE
PRIDES OR TRUST PREFERRED SECURITIES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
FELINE PRIDES
Allocation of Purchase Price. A U.S. Holder's acquisition of FELINE PRIDES
will be treated as an acquisition of a unit consisting of two components -- in
the case of an Income PRIDES, the Trust Preferred Security and the Purchase
Contract constituting such Income PRIDES and, in the case of a Growth PRIDES,
the interest in the Treasury Security and the Purchase Contract comprising such
Growth PRIDES. The purchase price of each FELINE PRIDES will be allocated
between the two components in proportion to their respective fair market values
at the time of purchase. Such allocation will establish the U.S. Holder's
initial tax basis in the Trust Preferred Security or interest in the Treasury
Security and the Purchase Contract. Philadelphia Consolidated will report the
fair market value of each Trust Preferred Security and each interest in a
Treasury Security as $ and $ , respectively, and the fair
market value of each Purchase Contract as $ . This position will be
binding upon each U.S. Holder (but not on the IRS) unless such U.S. Holder
explicitly discloses a contrary position on a statement attached to such U.S.
Holder's timely filed United States federal income tax return for the taxable
year in which a FELINE PRIDES is acquired. Thus, absent such disclosure, a U.S.
Holder should allocate the purchase price for a FELINE PRIDES in accordance with
the foregoing. The remainder of this discussion assumes that this allocation of
purchase price will be respected for United States federal income tax purposes.
A different allocation could affect the timing or character of income to a U.S.
Holder.
Ownership of Trust Preferred Securities or Treasury Securities. A U.S.
Holder will be treated as owning the Trust Preferred Securities or Treasury
Securities constituting a part of the Income PRIDES or Growth PRIDES,
respectively. Philadelphia Consolidated and, by acquiring FELINE PRIDES, each
U.S. Holder agree to treat such U.S. Holder as the owner, for United States
federal, state and local income and franchise tax purposes, of the Trust
Preferred Securities or Treasury Securities constituting a part of the FELINE
PRIDES beneficially owned by such U.S. Holder. Based upon such agreement,
Philadelphia Consolidated intends to take the position, and the remainder of
this summary assumes, that U.S. Holders of FELINE PRIDES will be treated as the
owners of the Trust Preferred Securities or Treasury Securities constituting a
part of such FELINE PRIDES for United States federal, state and local income and
franchise tax purposes. The United States federal income tax consequences of
owning the Trust Preferred Securities or Treasury Securities are discussed below
(see "-- Trust Preferred Securities," "-- Treasury Securities" and "-- Tax Event
Redemption of Trust Preferred Securities.").
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Sale or Disposition of FELINE PRIDES. Upon a sale, exchange or other
taxable disposition (collectively, a "disposition") of FELINE PRIDES, a U.S.
Holder will be treated as having sold, exchanged or disposed of the Purchase
Contract and the Trust Preferred Securities, Treasury Portfolio or, in the case
of Growth PRIDES, the Treasury Securities, that constitute such FELINE PRIDES
and generally will have gain or loss equal to the difference between the portion
of the proceeds to such U.S. Holder allocable to the Purchase Contract and the
Trust Preferred Securities, Treasury Portfolio or Treasury Securities, as the
case may be, and such U.S. Holder's respective adjusted tax bases in the
Purchase Contract and the Trust Preferred Securities, Treasury Portfolio or
Treasury Securities. Such gain or loss generally will be capital gain or loss,
except to the extent that such U.S. Holder is treated as having received an
amount with respect to accrued but unpaid interest on the Trust Preferred
Securities or Treasury Portfolio, which amount will be treated as ordinary
interest income, or to the extent such U.S. Holder is treated as having received
an amount with respect to accrued Contract Adjustment Payments, if any, or
Deferred Contract Adjustment Payments, which amount may be treated as ordinary
income, in each case to the extent not previously included in income. Such
capital gain or loss generally will be long-term capital gain or loss if the
U.S. Holder held such FELINE PRIDES for more than one year immediately prior to
such disposition. Long-term capital gains of individuals are eligible for
reduced rates of taxation depending upon the holding period of such capital
assets. The deductibility of capital losses is subject to limitations. If the
disposition of FELINE PRIDES occurs when the Purchase Contract has negative
value, the U.S. Holder should be considered to have received additional
consideration for the Trust Preferred Securities, Treasury Portfolio or Treasury
Securities in an amount equal to such negative value and to have paid such
amount to be released from the U.S. Holder's obligation under the Purchase
Contract. U.S. Holders should consult their tax advisors regarding a disposition
of the FELINE PRIDES at a time when the Purchase Contract has negative value.
In determining gain or loss, payments to a U.S. Holder of Contract
Adjustment Payments, if any, or Deferred Contract Adjustment Payments that have
not previously been included in the income of such U.S. Holder should either
reduce such U.S. Holder's tax basis in the Purchase Contract or result in an
increase in the amount realized on the disposition of the Purchase Contract. Any
Contract Adjustment Payments, if any, or Deferred Contract Adjustment Payments
included in a U.S. Holder's income but not paid should increase such U.S.
Holder's tax basis in the Purchase Contract. Payments in cash that have been
made by a U.S. Holder to create Growth PRIDES but not offset against payments of
Contract Adjustment Payments, if any, or Deferred Contract Adjustment Payments
may increase such U.S. Holder's tax basis in the Purchase Contract or result in
a decrease in the amount realized on the disposition of the Purchase Contract
(see "-- Income from Contract Adjustment Payments and Deferred Contract
Adjustment Payments; Delivery of Cash" above).
TRUST PREFERRED SECURITIES
Classification of the Trust. In connection with the issuance of the FELINE
PRIDES, Wolf, Block, Schorr and Solis-Cohen LLP ("Tax Counsel"), will deliver an
opinion that, under current law and assuming compliance with the terms of the
Declaration, and based on certain facts and assumptions contained in such
opinion, the Trust will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each U.S. Holder of Trust Preferred Securities will be
treated as owning an undivided beneficial ownership interest in the Debentures.
Accordingly, each U.S. Holder of Trust Preferred Securities will be required to
include in its gross income its pro rata share of the interest income or OID
that is paid or accrued on the Debentures. See "-- Interest Income and Original
Issue Discount."
Classification of the Debentures. Philadelphia Consolidated, the Trust
and, by acquiring Income PRIDES or Trust Preferred Securities, each U.S. Holder
agree to treat the Debentures as indebtedness of Philadelphia Consolidated for
all United States tax purposes. In connection with the issuance of the
Debentures, Tax Counsel will deliver an opinion that, under current law, and
based on certain representations, facts and assumptions set forth in such
opinion, the Debentures will be classified as indebtedness for United States
federal income tax purposes.
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Interest Income and Original Issue Discount. Under applicable Treasury
Regulations and subject to the discussion below regarding Philadelphia
Consolidated's right to defer payments of interest on the Debentures, the
Debentures would be treated as having been issued with OID equal to the excess
of 100.5% of the Stated Amount over the amount of the initial purchase price for
the FELINE PRIDES allocated to the Trust Preferred Security if such excess is
not de minimis (less than three-fourths of one-percent of 100.5% of the Stated
Amount). If the Debentures were treated as issued with OID, a U.S. Holder would
be required to include such OID in income on a daily economic accrual basis
(using the constant yield-to-maturity method of accrual set forth in Section
1272 of the Code) over the period between the issue date of the Debentures, and
the day immediately preceding the Purchase Contract Settlement Date regardless
of such U.S. Holder's method of tax accounting. Consequently, each U.S. Holder
(including those using the cash basis of tax accounting) would be required to
include OID in its gross income even though Philadelphia Consolidated will not
actually make current cash payments with respect to such OID. In addition,
stated interest on the Debentures will be included in income by a U.S. Holder as
ordinary income when paid or accrued, in accordance with such U.S. Holder's
regular method of tax accounting.
If Philadelphia Consolidated were to exercise its right to defer payments
of interest on the Debentures, all of a U.S. Holder's taxable interest income
with respect to the Debentures would thereafter be accounted for on a daily
economic accrual basis regardless of such U.S. Holder's method of tax
accounting, and actual distributions of stated interest would not be reported as
taxable income. Consequently, each U.S. Holder (including those using the cash
basis of tax accounting) would be required to include OID in its gross income
even though Philadelphia Consolidated would not make actual cash payments during
an Extension Period.
The Treasury regulations described above have not yet been addressed in any
rulings or other interpretations by the IRS, and it is possible that the IRS
could take a contrary position. If the IRS were to assert successfully that the
stated interest on the Debentures was OID regardless of whether Philadelphia
Consolidated exercises its right to defer payments of interest on such
Debentures, all U.S. Holders would be required to include such stated interest
in income on a daily economic accrual basis as described above.
U.S. Holders that are corporations will not be entitled to a dividends
received deduction with respect to any income recognized with respect to the
Trust Preferred Securities.
Distribution of Debentures to U.S. Holders of Trust Preferred
Securities. A distribution by the Trust of the Debentures as described under
the caption "Description of the Trust Preferred Securities -- Liquidating
Distribution Upon Dissolution" would be non-taxable to U.S. Holders. In such
event, a U.S. Holder would have an aggregate tax basis in the Debentures
received in the liquidation equal to the aggregate tax basis such U.S. Holder
had in its Trust Preferred Securities surrendered therefor, and the holding
period of such Debentures would include the period during which such U.S. Holder
had held the Trust Preferred Securities. In addition, a U.S. Holder would
continue to include interest (or OID) in respect of Debentures received from the
Trust in the manner described under "-- Interest Income and Original Issue
Discount."
Sales, Exchanges or Other Dispositions of Trust Preferred Securities. Gain
or loss will be recognized by a U.S. Holder on a disposition of a Trust
Preferred Security (including a redemption for cash or the remarketing thereof)
in an amount equal to the difference between the amount realized by the U.S.
Holder on the disposition of the Trust Preferred Securities (except to the
extent that such amount realized is characterized as a payment in respect of
accrued but unpaid interest on such U.S. Holder's allocable share of the
Debentures that such U.S. Holder has not included in gross income previously,
which amount will be taxable as ordinary interest income) and the U.S. Holder's
adjusted tax basis in the Trust Preferred Security. Selling expenses incurred by
a U.S. Holder, including the remarketing fee, will reduce the amount of gain or
increase the amount of loss recognized by such U.S. Holder upon a disposition of
a Trust Preferred Security. Gain or loss realized by a U.S. Holder on a
disposition of a Trust Preferred Security generally will be capital gain or loss
and generally will be long-term capital gain or loss if the U.S. Holder held
such Trust Preferred Security for more than one year immediately prior to such
disposition. Long-term capital gains of individuals are eligible for reduced
rates of taxation depending upon the holding period of such capital assets. The
deductibility of capital losses is subject to limitations.
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TREASURY SECURITIES
Original Issue Discount. A U.S. Holder of Growth PRIDES will be required
to treat its ownership interest in the Treasury Security comprising a Growth
PRIDES as an interest in a bond originally issued on the date such Growth PRIDES
is purchased and having OID equal to the excess of the Stated Amount of the
Growth PRIDES over the purchase price of the Growth PRIDES. A U.S. Holder will
be required to include such OID in income on a daily economic accrual basis over
the period between the issue date of the Growth PRIDES and the day immediately
preceding the Purchase Contract Settlement Date, regardless of such U.S.
Holder's method of tax accounting. Amounts of OID included in a U.S. Holder's
gross income will increase such U.S. Holder's tax basis in its ownership
interest in the Treasury Security.
Sales, Exchanges or Other Dispositions of Treasury Securities. In the
event that a U.S. Holder obtains the release of Treasury Securities by
delivering Trust Preferred Securities to the Collateral Agent, gain or loss will
be recognized by the U.S. Holder on a subsequent disposition of the Treasury
Securities in an amount equal to the difference between the amount realized by
the U.S. Holder on such disposition and the U.S. Holder's adjusted tax basis in
the Treasury Securities. Such gain or loss generally will be capital gain or
loss and generally will be long-term capital gain or loss if the U.S. Holder
held such Treasury Securities for more than one year immediately prior to such
disposition. Long-term capital gains of individuals are eligible for reduced
rates of taxation depending upon the holding period of such capital assets. The
deductibility of capital losses is subject to limitations.
PURCHASE CONTRACTS
Contract Adjustment Payments and Deferred Contract Adjustment Payments;
Delivery of Cash. There is no direct authority addressing the treatment, under
current law, of the Contract Adjustment Payments, if any, and Deferred Contract
Adjustment Payments, if any, or the delivery of cash in respect of excess
accrued Contract Adjustment Payments, if any, by a U.S. Holder of Income PRIDES
upon the creation of Growth PRIDES, and such treatment is unclear. Contract
Adjustment Payments, if any, and Deferred Contract Adjustment Payments, if any,
may constitute taxable income to a U.S. Holder of FELINE PRIDES when received or
accrued, in accordance with the U.S. Holder's method of tax accounting. To the
extent Philadelphia Consolidated is required to file information returns with
respect to Contract Adjustment Payments, if any, or Deferred Contract Adjustment
Payments, it intends to report such payments as taxable income to each U.S.
Holder. U.S. Holders should consult their own tax advisors concerning the
treatment of Contract Adjustment Payments, if any, and Deferred Contract
Adjustment Payments and the delivery of cash upon the creation of Growth PRIDES,
including the possibility that any Contract Adjustment Payment, if any, or
Deferred Contract Adjustment Payment may be treated as a loan, purchase price
adjustment, rebate or payment analogous to an option premium, rather than being
includible in income on a current basis, and that the delivery of cash upon the
creation of Growth PRIDES may be treated as an offset to Contract Adjustment
Payments, if any, or Deferred Contract Adjustment Payments or as a purchase
price adjustment. The treatment of Contract Adjustment Payments, if any,
Deferred Contract Adjustment Payments and the delivery of cash upon the creation
of Growth PRIDES could affect a U.S. Holder's tax basis in a Purchase Contract
or Common Stock received under a Purchase Contract or the amount realized by a
U.S. Holder upon the sale or disposition of a FELINE PRIDES or the termination
of a Purchase Contract. See "-- Acquisition of Common Stock under a Purchase
Contract," "-- Sale or Disposition of FELINE PRIDES" and "-- Termination of
Purchase Contract."
Acquisition of Common Stock Under a Purchase Contract. A U.S. Holder of
FELINE PRIDES generally will not recognize gain or loss on the purchase of
Common Stock under a Purchase Contract, except with respect to any cash paid in
lieu of a fractional share of Common Stock. Subject to the following discussion,
a U.S. Holder's aggregate initial tax basis in the Common Stock received under a
Purchase Contract generally should equal the purchase price paid for such Common
Stock plus such U.S. Holder's tax basis in the Purchase Contract (if any), less
the portion of such purchase price and tax basis allocable to the fractional
share. Payments of Contract Adjustment Payments, if any, or Deferred Contract
Adjustment Payments that have been received in cash by a U.S. Holder but not
included in income by such U.S. Holder should reduce such U.S. Holder's tax
basis in the Purchase Contract or the Common Stock to be received
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thereunder; payments in cash that have been made by a U.S. Holder to create
Growth PRIDES but not offset against payments of Contract Adjustment Payments,
if any, or Deferred Contract Adjustment Payments may increase such U.S. Holder's
tax basis in the Purchase Contract or the Common Stock to be received thereunder
(see "-- Income from Contract Adjustment Payments and Deferred Contract
Adjustment Payments" above). The holding period for Common Stock received under
a Purchase Contract will commence on the day after the acquisition of such
Common Stock.
Ownership of Common Stock Acquired Under the Purchase Contract. Any
dividend on Common Stock paid by Philadelphia Consolidated out of its current or
accumulated earnings and profits (as determined for United States federal income
tax purposes) will be includible in income by a U.S. Holder when received. Any
such dividend will be eligible for the dividends received deduction if received
by an otherwise qualifying corporate U.S. Holder that meets the holding period
and other requirements for the dividends received deduction.
Upon a disposition of Common Stock, a U.S. Holder generally will recognize
capital gain or loss equal to the difference between the amount realized and
such U.S. Holder's adjusted tax basis in the Common Stock. Such gain or loss
generally will be capital gain or loss and generally will be long-term capital
gain or loss if the U.S. Holder held such Common Stock for more than one year
immediately prior to such disposition. Long-term capital gains of individuals
are eligible for reduced rates of taxation depending upon the holding period of
such capital assets. The deductibility of capital losses is subject to
limitations.
Early Settlement of Purchase Contract. A U.S. Holder of FELINE PRIDES will
not recognize gain or loss on the receipt of such U.S. Holder's proportionate
share of Trust Preferred Securities, Treasury Securities or Treasury Portfolio
upon Early Settlement of a Purchase Contract and will have the same tax basis in
such Trust Preferred Securities, Treasury Securities or Treasury Portfolio as
before such Early Settlement.
Termination of Purchase Contract. If a Purchase Contract terminates, a
U.S. Holder of FELINE PRIDES will recognize gain or loss equal to the difference
between the amount realized (if any) upon such termination and such U.S.
Holder's adjusted tax basis (if any) in the Purchase Contract at the time of
such termination. Payments of Contract Adjustment Payments, if any, or Deferred
Contract Adjustment Payments, if any, received by a U.S. Holder but not included
in income by such U.S. Holder should either reduce such U.S. Holder's tax basis
in the Purchase Contract or result in an amount realized on the termination of
the Purchase Contract. Any Contract Adjustment Payments, if any, or Deferred
Contract Adjustment Payments included in a U.S. Holder's income but not paid
should increase such U.S. Holder's tax basis in the Purchase Contract; payments
in cash that have been made by a U.S. Holder to create Growth PRIDES but not
offset against payments of Contract Adjustment Payments, if any, or Deferred
Contract Adjustment Payments may increase such U.S. Holder's tax basis in the
Purchase Contract or result in a deduction on the termination of the Purchase
Contract (see "-- Income from Contract Adjustment Payments and Deferred Contract
Adjustment Payments" above). Such gain or loss generally will be capital gain or
loss and generally will be long-term capital gain or loss if the U.S. Holder
held such Purchase Contract for more than one year immediately prior to such
disposition. Long-term capital gains of individuals are eligible for reduced
rates of taxation depending upon the holding period of such capital assets. The
deductibility of capital losses is subject to limitations. A U.S. Holder will
not recognize gain or loss on the receipt of such U.S. Holder's proportionate
share of the Trust Preferred Securities, Treasury Securities or Treasury
Portfolio upon termination of the Purchase Contract and will have the same tax
basis in such Trust Preferred Securities, Treasury Securities or Treasury
Portfolio as before such distribution.
Adjustment to Settlement Rate. U.S. Holders of FELINE PRIDES might be
treated as receiving a constructive distribution from Philadelphia Consolidated
if (i) the Settlement Rate is adjusted and as a result of such adjustment the
proportionate interest of U.S. Holders of FELINE PRIDES in the assets or
earnings and profits of Philadelphia Consolidated is increased and (ii) the
adjustment is not made pursuant to a bona fide, reasonable anti-dilution
formula. An adjustment in the Settlement Rate would not be considered made
pursuant to such a formula if the adjustment were made to compensate a U.S.
Holder for certain taxable distributions with respect to the Common Stock. Thus,
under certain circumstances, an increase in the
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Settlement Rate might give rise to a taxable dividend to U.S. Holders of FELINE
PRIDES even though such U.S. Holders would not receive any cash related thereto.
SUBSTITUTION OF TREASURY SECURITIES TO CREATE OR RECREATE GROWTH PRIDES
A U.S. Holder of an Income PRIDES that delivers Treasury Securities to the
Collateral Agent in substitution for Trust Preferred Securities generally will
not recognize gain or loss upon the delivery of such Treasury Securities or the
release of the Trust Preferred Securities to such U.S. Holder. Such U.S. Holder
will continue to take into account items of income or deduction otherwise
includible or deductible, respectively, by such U.S. Holder with respect to such
Treasury Securities and Trust Preferred Securities, and such U.S. Holder's tax
basis in the Treasury Securities, the Trust Preferred Securities and the
Purchase Contract will not be affected by such delivery and release.
SUBSTITUTION OF TRUST PREFERRED SECURITIES TO CREATE OR RECREATE INCOME PRIDES
A U.S. Holder of a Growth PRIDES that delivers Trust Preferred Securities
to the Collateral Agent in substitution for Treasury Securities generally will
not recognize gain or loss upon the delivery of such Trust Preferred Securities
or the release of the Treasury Securities to the U.S. Holder. Such U.S. Holder
will continue to take into account items of income or deduction otherwise
includible or deductible, respectively, by such U.S. Holder with respect to such
Treasury Securities and Trust Preferred Securities, and such U.S. Holder's tax
basis in the Treasury Securities, the Trust Preferred Securities and the
Purchase Contract will not be affected by such delivery and release.
TAX EVENT REDEMPTION OF TRUST PREFERRED SECURITIES
A Tax Event Redemption will be a taxable event for U.S. Holders of Trust
Preferred Securities. Gain or loss will be recognized by a U.S. Holder in an
amount equal to the difference between the Redemption Price (whether paid
directly to such U.S. Holder or applied by the Collateral Agent to the purchase
of the Treasury Portfolio on behalf of holders of Income PRIDES), except to the
extent of amounts paid in respect of accrued but unpaid interest not previously
included in income, which will be taxable as ordinary interest income, and the
U.S. Holder's adjusted tax basis in the Trust Preferred Securities. Gain or loss
realized by a U.S. Holder upon a Tax Event Redemption will be capital gain or
loss and will be long-term capital gain or loss if the U.S. Holder held such
Trust Preferred Securities for more than one year immediately prior to such
disposition. Long-term capital gains of individuals are eligible for reduced
rates of taxation depending upon the holding period of such capital assets. The
deductibility of capital losses is subject to limitations.
Ownership of Treasury Portfolio. Philadelphia Consolidated, the Trust and,
by acquiring Income PRIDES, each U.S. Holder agree to treat such U.S. Holder as
the owner, for United States federal, state and local income and franchise tax
purposes, of the Applicable Ownership Interest of the Treasury Portfolio
constituting a part of the Income PRIDES beneficially owned by such U.S. Holder
in the event of a Tax Redemption prior to the Purchase Contract Settlement Date.
Based on such agreement, each U.S. Holder will include in income any amount
earned on such pro rata portion of the Treasury Portfolio for all United States
federal, state and local income and franchise tax purposes. The remainder of
this summary assumes that U.S. Holders of Income PRIDES will be treated as the
owners of the Applicable Ownership Interest of the Treasury Portfolio
constituting a part of such Income PRIDES for United States federal, state and
local income and franchise tax purposes.
Interest Income and Original Issue Discount. The Treasury Portfolio will
consist of stripped U.S. Treasury Securities. Following a Tax Event Redemption
prior to the Purchase Contract Settlement Date, a U.S. Holder of Income PRIDES
will be required to treat its pro rata portion of each U.S. Treasury Security in
the Treasury Portfolio as a bond that was originally issued on the date the
Collateral Agent acquired the relevant U.S. Treasury Securities and will include
OID in income over the life of the U.S. Treasury Securities in an amount equal
to the U.S. Holder's pro rata portion of the excess of the amounts payable on
such U.S. Treasury Securities over the value of the U.S. Treasury Securities at
the time the Collateral Agent acquires them on behalf of holders of Income
PRIDES. The amount of such excess will constitute only a
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portion of the total amounts payable in respect of the Treasury Portfolio.
Consequently, a portion of each scheduled interest payment to U.S. Holders will
be treated as a tax-free return of the U.S. Holder's investment in the Treasury
Portfolio and will not be considered current income for United States federal
income tax purposes.
A U.S. Holder, whether on the cash or accrual method of tax accounting,
will be required to include OID (other than OID on short-term U.S. Treasury
Securities as defined below) in income for United States federal income tax
purposes as it accrues on a constant yield to maturity basis. See "-- Interest
Income and Original Issue Discount" above. In the case of any U.S. Treasury
Security with a maturity of one year or less from the date it is purchased (a
"short-term U.S. Treasury Security"), in general only accrual basis taxpayers
will be required to include OID in income as it is accrued. Unless such an
accrual basis U.S. Holder elects to accrue the OID on a short-term U.S. Treasury
Security according to the constant-yield-to-maturity method, such OID will be
accrued on a straight-line basis.
Tax Basis of the Treasury Portfolio. A U.S. Holder's initial tax basis in
such U.S. Holder's Applicable Ownership Interest of the Treasury Portfolio will
equal such U.S. Holder's pro rata portion of the amount paid by the Collateral
Agent for the Treasury Portfolio. A U.S. Holder's tax basis in the Treasury
Portfolio will be increased by the amount of OID included in income with respect
thereto and decreased by the amount of cash received in respect of the Treasury
Portfolio.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Payments under the FELINE PRIDES, Trust Preferred Securities or Common
Stock acquired under a Purchase Contract, the proceeds received with respect to
a fractional share of Common Stock upon the settlement of a Purchase Contract,
and the sale of FELINE PRIDES, Trust Preferred Securities or Common Stock
acquired under a Purchase Contract, may be subject to information reporting and
United States federal backup withholding tax at the rate of 31% if the U.S.
Holder thereof fails to supply an accurate taxpayer identification number or
otherwise fails to comply with applicable United States information reporting or
certification requirements. Any amounts so withheld will be allowed as a credit
against such U.S. Holder's United States federal income tax liability.
ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to ERISA, plans and
individual retirement accounts that are subject to Section 4975 of the Code and
entities whose assets are considered assets of such plans ("Plans") may purchase
the Securities subject to the investing fiduciary's determination that the
investment in the Securities satisfies ERISA's fiduciary standards and other
requirements applicable to investments by Plans. Accordingly, among other
factors, the investing fiduciary should consider whether the investment would
satisfy the prudence and diversification requirements of ERISA and would be
consistent with the documents and instruments governing the Plans.
Under regulations issued by the U.S. Department of Labor (the "DOL"), a
Plan that owns the Securities may be deemed to own a portion of the assets held
in the Trust, including a portion of the Debentures held in the Trust. In
addition, Philadelphia Consolidated and its affiliates may be "parties in
interest" (within the meaning of ERISA) or "disqualified persons" (within the
meaning of Section 4975 of the Code) with respect to certain Plans (generally,
Plans maintained or sponsored by, or contributed to by, any such persons or
Plans with respect to which any such persons are fiduciaries or service
providers). The acquisition and ownership of the Securities and a deemed
acquisition and ownership of an interest in the Debentures by a Plan with
respect to which Philadelphia Consolidated or any of its affiliates is
considered a party in interest or a disqualified person may constitute or result
in a prohibited transaction under ERISA or Section 4975 of the Code, unless such
Securities are acquired and are held pursuant to and in accordance with an
applicable exemption. In this regard, the DOL has issued prohibited transaction
class exemptions ("PTCEs") that may apply to the acquisition and holding of the
Securities. These class exemptions are PTCE 84-14 (respecting transactions
determined by independent qualified professional asset managers), PTCE 90-1
(respecting insurance company separate accounts), PTCE 91-38 (respecting bank
collective trust funds), PTCE 95-60 (respecting
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insurance company general accounts) and PTCE 96-23 (respecting transactions
determined by in-house asset managers).
Any fiduciary proposing to acquire the Securities on behalf of a Plan
should consult with ERISA counsel for the Plan and should not acquire the
Securities unless it is determined that such acquisition and holding does not
and will not constitute a prohibited transaction and will satisfy the applicable
fiduciary requirements imposed under ERISA. Any such acquisition by a Plan shall
be deemed a representation by the Plan and the fiduciary effecting the
investment on behalf of the Plan that such acquisition and holding satisfies the
applicable fiduciary requirements of ERISA, and is either (i) not a prohibited
transaction under ERISA and the Code and is otherwise permissible under
applicable law or (ii) qualified to exemptive relief from the prohibited
transaction provisions of ERISA and the Code in accordance with one or more of
the foregoing PTCEs or another available prohibited transaction exemption.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement") among Philadelphia Consolidated, the Trust and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, (the "Underwriter"),
Philadelphia Consolidated and the Trust have agreed to sell to the Underwriter,
and the Underwriter has agreed to purchase from Philadelphia Consolidated and
the Trust, up to 8,000,000 Income PRIDES and at least 1,000,000 Growth PRIDES
and 1,000,000 Trust Preferred Securities. In the Underwriting Agreement, the
Underwriter has agreed, subject to the terms and conditions set forth therein,
to purchase all of the Income PRIDES, Growth PRIDES and Trust Preferred
Securities offered hereby if any of the Income PRIDES, Growth PRIDES or Trust
Preferred Securities are purchased.
The Underwriter has advised Philadelphia Consolidated and the Trust that it
proposes initially to offer the Income PRIDES, Growth PRIDES and Trust Preferred
Securities to the public at the public offering price set forth on the cover
page of this Prospectus Supplement and to certain dealers at such price less a
concession not in excess of $ per Income PRIDES, $ per Growth
PRIDES and $ per Trust Preferred Security. The Underwriter may allow,
and such dealers may reallow, a discount not in excess of $ per Income
PRIDES, $ per Growth PRIDES and $ per Trust Preferred Security
on sales to certain other dealers. After the initial public offering, the public
offering prices, concessions and discounts may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriter and any selling group
members to bid for and purchase the Securities or shares of Common Stock. As an
exception to these rules, the Underwriter is permitted to engage in certain
transactions that stabilize the price of the Securities or the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Securities or the Common Stock.
If the Underwriter creates a short position in the Securities in connection
with the Offering, i.e., if it sells more Securities than are set forth on the
cover page of this Prospectus Supplement, the Underwriter may reduce that short
position by purchasing Securities in the open market. The Underwriter may also
elect to reduce any short position by exercising all or part of the
over-allotment options described below.
The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases Securities in the open
market to reduce the Underwriter's short position or to stabilize the price of
the Securities, it may reclaim the amount of the selling concession from any
selling group members who sold those Securities as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security and the Common
Stock of Philadelphia Consolidated to be higher than it might be in the absence
of such purchases. The imposition of a penalty bid might also have an effect on
the price of a security to the extent that it were to discourage resales of the
security.
Neither Philadelphia Consolidated, the Trust nor the Underwriter makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of
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the Securities or the Common Stock. In addition, neither Philadelphia
Consolidated nor the Underwriter makes any representation that the Underwriter
will engage in such transaction or that such transactions, once commenced, will
not be discontinued without notice.
Philadelphia Consolidated and the Trust have granted to the Underwriter
options, exercisable for 30 days following the date of this Prospectus
Supplement, to purchase up to an additional Income PRIDES,
Growth PRIDES and Trust Preferred Securities from Philadelphia
Consolidated and the Trust at the Price to Public set forth on the cover page of
this Prospectus Supplement less the underwriting discount; provided, however,
that, the Underwriter must purchase at least as many Trust Preferred Securities
as Growth PRIDES. The Underwriter may exercise these options only to cover
over-allotments, if any, made on the sale of the Income PRIDES, Growth PRIDES
and Trust Preferred Securities offered hereby.
Philadelphia Consolidated and the Trust have agreed, for a period of
days after the date of this Prospectus Supplement, to not, without the prior
written consent of the Underwriter, directly or indirectly, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, or enter into any
agreement to sell, any Income PRIDES, Growth PRIDES, Purchase Contracts, Trust
Preferred Securities or Common Stock, as the case may be, or any securities of
Philadelphia Consolidated similar to the Income PRIDES, Growth PRIDES, Purchase
Contracts, Trust Preferred Securities or Common Stock or any security
convertible into or exchangeable or exercisable for Income PRIDES, Growth
PRIDES, Purchase Contracts, Trust Preferred Securities or Common Stock other
than shares of Common Stock or options for shares of Common Stock issued
pursuant to or sold in connection with any employee benefit, dividend
reinvestment and stock option and stock purchase plans of Philadelphia
Consolidated and its subsidiaries and other than the Growth PRIDES or Income
PRIDES to be created or recreated upon substitution of Pledged Securities, or
shares of Common Stock issuable upon early settlement of the Income PRIDES or
Growth PRIDES or upon exercise of stock options.
Prior to this offering, there has been no public market for the Income
PRIDES, Growth PRIDES and the Trust Preferred Securities. The public offering
price for the Income PRIDES, Growth PRIDES and the Trust Preferred Securities
was determined in negotiations between Philadelphia Consolidated, the Trust and
the Underwriters. In determining the terms of the Income PRIDES, Growth PRIDES
and the Trust Preferred Securities including the public offering price,
Philadelphia Consolidated, the Trust and the Underwriters considered the market
price of the Common Stock and also considered Philadelphia Consolidated's recent
results of operations, the future prospects of Philadelphia Consolidated and the
industry in general, market prices and terms of, and yields on, securities of
other companies considered to be comparable to Philadelphia Consolidated and
prevailing conditions in the securities markets. Application will be made to
have the Income PRIDES and the Growth PRIDES listed on the NNM. If Trust
Preferred Securities are separately traded to a sufficient extent that the
applicable market listing requirements are met, the Company will endeavor to
cause such securities to be listed on the market on which the Income PRIDES and
the Growth PRIDES are then listed including, if applicable, the NNM. See
"Underwriting." There can be no assurance that an active trading market will
develop for the Income PRIDES, the Growth PRIDES or the Trust Preferred
Securities or that the Income PRIDES, Growth PRIDES or Trust Preferred
Securities will trade in the public market subsequent to the offering at or
above the initial public offering price.
Philadelphia Consolidated and the Trust have agreed to indemnify the
Underwriter against, or to contribute to payments that the Underwriters may be
required to make in respect of, certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
This Prospectus Supplement, as amended or stickered, may be used by the
Remarketing Agent for remarketing the Trust Preferred Securities at such time as
is necessary.
In the ordinary course of their respective businesses, the Underwriter and
its affiliates have performed, and may in the future perform, investment banking
and/or commercial banking services for Philadelphia Consolidated.
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LEGAL OPINIONS
The validity of the Purchase Contracts, the Common Stock issuable upon
settlement thereof and the Debentures, and certain matters of Delaware law with
respect to the validity of the Trust Preferred Securities offered hereby, will
be passed upon for Philadelphia Consolidated and Trust by Wolf, Block, Schorr
and Solis-Cohen LLP. The validity of the Purchase Contracts, the Common Stock
issuable upon settlement thereof, the Debentures and the Trust Preferred
Securities will be passed upon for the Underwriter by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York.
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INDEX OF PRINCIPAL TERMS FOR PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
1940 Act.................................................... S-79
Applicable Market Value..................................... S-16
Applicable Ownership Interest............................... S-59
Applicable Principal Amount................................. S-91
Bankruptcy Code............................................. S-17
Beneficial Owner............................................ S-84
Business Day................................................ S-67
Change in 1940 Act Law...................................... S-79
Closing Price............................................... S-63
Code........................................................ S-97
Collateral Agent............................................ S-10
Commission.................................................. S-6
Common Securities........................................... S-2
Common Stock................................................ S-2
Compound Interest........................................... S-92
Contract Adjustment Payments................................ S-2
Current Market Price........................................ S-68
Custodial Agent............................................. S-18
Debentures.................................................. S-2
Debt Trustee................................................ S-89
Declaration................................................. S-9
Declaration Event of Default................................ S-80
Default..................................................... S-93
Deferred Contract Adjustment Payments....................... S-61
Delaware Trustee............................................ S-35
Depositary.................................................. S-69
Direct Action............................................... S-32
Direct Participants......................................... S-70
DOL......................................................... S-103
Early Settlement............................................ S-17
Exchange Act................................................ S-6
Exchange Agent.............................................. S-4
Extension Periods........................................... S-18
Failed Remarketing.......................................... S-4
FELINE PRIDES............................................... S-1
FELINE PRIDES Certificate................................... S-63
GAAP........................................................ S-6
Global Security............................................. S-94
Global Security Certificates................................ S-70
Growth PRIDES............................................... S-2
Guarantee................................................... S-3
Guarantee Payments.......................................... S-86
Income PRIDES............................................... S-2
Indenture................................................... S-88
Indenture Event of Default.................................. S-80
Indirect Participants....................................... S-70
Institutional Trustee....................................... S-35
</TABLE>
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<TABLE>
<S> <C>
Interest Payment Date..................................................................................... S-88
Investment Company Event.................................................................................. S-79
IRS....................................................................................................... S-97
NNM....................................................................................................... S-1
OID....................................................................................................... S-2
Participants.............................................................................................. S-70
Payment Date.............................................................................................. S-14
Philadelphia Consolidated Trustees........................................................................ S-9
Plans..................................................................................................... S-103
Pledge Agreement.......................................................................................... S-10
Pledged Securities........................................................................................ S-28
Primary Treasury Dealer................................................................................... S-91
Property Account.......................................................................................... S-35
PTCEs..................................................................................................... S-103
Purchase Contract......................................................................................... S-2
Purchase Contract Agent................................................................................... S-11
Purchase Contract Agreement............................................................................... S-11
Purchase Contract Settlement Date......................................................................... S-2
Quotation Agent........................................................................................... S-91
Redemption Amount......................................................................................... S-91
Redemption Price.......................................................................................... S-5
Reference Price........................................................................................... S-2
Regular Trustees.......................................................................................... S-35
Remarketing Agent......................................................................................... S-14
Remarketing Agreement..................................................................................... S-14
Remarketing Fee........................................................................................... S-3
Remarketing Underwriting Agreement........................................................................ S-14
Reset Agent............................................................................................... S-3
Reset Announcement Date................................................................................... S-77
Reset Rate................................................................................................ S-3
Reset Spread.............................................................................................. S-3
Securities................................................................................................ S-1
Securities Act............................................................................................ S-6
Senior Indebtedness....................................................................................... S-3
Settlement Rate........................................................................................... S-2
Sponsor................................................................................................... S-9
Stated Amount............................................................................................. S-2
Successor Securities...................................................................................... S-83
Super-Majority............................................................................................ S-81
Tax Counsel............................................................................................... S-98
Tax Event................................................................................................. S-90
Tax Event Redemption...................................................................................... S-5
Tax Event Redemption Date................................................................................. S-90
Threshold Appreciation Price.............................................................................. S-2
Trading Day............................................................................................... S-63
Treasury Portfolio........................................................................................ S-91
Treasury Portfolio Purchase Price......................................................................... S-91
Treasury Securities....................................................................................... S-2
Trust..................................................................................................... S-1
</TABLE>
S-108
<PAGE> 110
<TABLE>
<S> <C>
Trust Indenture Act....................................................................................... S-9
Trust Preferred Securities................................................................................ S-1
Trust Securities.......................................................................................... S-2
U.S. Holders.............................................................................................. S-96
Underwriter............................................................................................... S-104
Underwriting Agreement.................................................................................... S-104
</TABLE>
S-109
<PAGE> 111
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Accountants..................................... F-2
Consolidated Balance Sheets -- As of December 31, 1997 and 1996....... F-3
Consolidated Statements of Operations -- For the Years Ended December
31, 1997, 1996 and 1995............................................. F-4
Consolidated Statements of Changes in Shareholders' Equity -- For the
Years Ended December 31, 1997, 1996 and 1995........................ F-5
Consolidated Statements of Cash Flows -- For the Years Ended December
31, 1997, 1996 and 1995............................................. F-6
Notes to Consolidated Financial Statements............................ F-7 - F-18
</TABLE>
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
I Summary of Investments -- Other Than Investments in Related
Parties As of December 31, 1997.................................. F-19
II Condensed Financial Information of Registrant As of December 31,
1997 and 1996 and For Each of the Three Years in the Period Ended
December 31, 1997................................................ F-20 - F-22
IV Reinsurance For the Years ended December 31, 1997, 1996 and
1995............................................................. F-23
VI Supplemental Information Concerning Property Casualty Insurance
Operations As of and For the Years Ended December 31, 1997, 1996
and 1995......................................................... F-24
</TABLE>
F-1
<PAGE> 112
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PHILADELPHIA CONSOLIDATED HOLDING
CORP.:
We have audited the accompanying consolidated balance sheets of
Philadelphia Consolidated Holding Corp. and Subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Philadelphia Consolidated Holding Corp. and Subsidiaries as of December 31, 1997
and 1996 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/S/ COOPERS & LYBRAND L.L.P.
--------------------------------------
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 6, 1998
F-2
<PAGE> 113
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities Available for Sale at Market (Amortized
Cost $165,052 and $137,757)............................ $170,678 $141,236
Equity Securities at Market (Cost $29,501 And $19,648).... 46,988 27,342
-------- --------
Total Investments................................. 217,666 168,578
Cash and Cash Equivalents................................... 11,933 11,483
Accrued Investment Income................................... 2,786 2,626
Premiums Receivable......................................... 15,269 8,112
Prepaid Reinsurance Premiums and Reinsurance Receivables.... 18,573 18,078
Deferred Acquisition Costs.................................. 10,970 9,033
Property and Equipment...................................... 5,797 5,226
Other Assets................................................ 5,132 2,802
-------- --------
Total Assets...................................... $288,126 $225,938
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities and Accruals:
Unpaid Loss and Loss Adjustment Expenses.................. $122,430 $ 96,642
Unearned Premiums......................................... 42,116 33,154
-------- --------
Total Policy Liabilities and Accruals............. 164,546 129,796
Other Liabilities........................................... 7,948 8,312
Deferred Income Taxes....................................... 4,348 1,240
Income Taxes Payable........................................ -- 948
-------- --------
Total Liabilities................................. 176,842 140,296
-------- --------
Commitments and Contingencies
Shareholders' Equity (1):
Preferred Stock, $.01 Par Value, 10,000,000 Shares
Authorized, None Issued and Outstanding................
Common Stock, No Par Value, 50,000,000 Shares Authorized,
12,242,431 and 12,079,612 Shares Issued and
Outstanding............................................ 42,788 41,167
Notes Receivable from Shareholders........................ (1,422) (924)
Unrealized Investment Appreciation (Depreciation), Net of
Deferred Income Taxes.................................. 15,023 7,374
Retained Earnings......................................... 54,895 38,025
-------- --------
Total Shareholders' Equity........................ 111,284 85,642
-------- --------
Total Liabilities and Shareholders' Equity........ $288,126 $225,938
======== ========
</TABLE>
- ---------------
(1) 1996 share information restated to reflect a two for one split of the
Company's common stock distributed in November 1997, see Note 11.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 114
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Gross Earned Premiums................................ $ 150,128 $ 121,820 $ 99,507
Ceded Earned Premiums................................ (49,573) (49,770) (41,319)
---------- ---------- ----------
Net Earned Premiums.................................. 100,555 72,050 58,188
Net Investment Income................................ 9,703 7,910 6,506
Net Realized Investment Gain (Loss).................. (16) 260 181
Other Income......................................... 228 282 309
---------- ---------- ----------
Total Revenue................................ 110,470 80,502 65,184
---------- ---------- ----------
Losses and Expenses:
Loss and Loss Adjustment Expenses.................... 61,839 44,720 40,661
Net Reinsurance Recoveries........................... (6,830) (4,602) (7,434)
---------- ---------- ----------
Net Loss and Loss Adjustment Expenses................ 55,009 40,118 33,227
Acquisition Costs and Other Underwriting Expenses.... 31,344 22,210 17,105
Other Operating Expenses............................. 1,909 1,386 2,564
---------- ---------- ----------
Total Losses and Expenses.................... 88,262 63,714 52,896
---------- ---------- ----------
Income Before Income Taxes............................. 22,208 16,788 12,288
---------- ---------- ----------
Income Tax Expense (Benefit):
Current.............................................. 6,521 3,596 2,760
Deferred............................................. (1,183) (182) (302)
---------- ---------- ----------
Total Income Tax Expense..................... 5,338 3,414 2,458
---------- ---------- ----------
Net Income................................... $ 16,870 $ 13,374 $ 9,830
========== ========== ==========
Per Average Share Data:
Basic Earnings Per Share(1).......................... $ 1.38 $ 1.13 $ 0.85
========== ========== ==========
Diluted Earnings Per Share(1)........................ $ 1.13 $ 0.94 $ 0.72
========== ========== ==========
Weighted Average Common Shares Outstanding(1).......... 12,193,659 11,879,506 11,627,702
Weighted Average Share Equivalents Outstanding(1)...... 2,736,039 2,373,742 2,049,004
---------- ---------- ----------
Weighted Average Shares and Share Equivalents
Outstanding(1)....................................... 14,929,698 14,253,248 13,676,706
========== ========== ==========
</TABLE>
- ---------------
(1) 1996 and 1995 share information restated to reflect a two for one split of
the Company's common stock distributed in November 1997, see Note 11.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 115
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Common Shares(1):
Balance at Beginning of Year......................... 12,079,612 11,627,702 11,627,702
Issuance of Shares
Pursuant to Employee Stock Purchase Plan.......... 78,569 156,910 --
Pursuant to Employee Stock Option Plan............ 84,250 295,000 --
---------- ---------- ----------
Balance at End of Year....................... 12,242,431 12,079,612 11,627,702
========== ========== ==========
Common Stock:
Balance at Beginning of Year......................... $ 41,167 $39,057 $39,096
Issuance of Shares
Pursuant to Employee Stock Purchase Plan.......... 898 1,131 --
Exercise of Employee Stock Options, Net of Tax
Benefit........................................... 723 979 --
Other................................................ -- -- (39)
---------- ---------- ----------
Balance at End of Year....................... 42,788 41,167 39,057
---------- ---------- ----------
Notes Receivable from Shareholders:
Balance at Beginning of Year......................... (924) -- --
Notes Receivable Issued Pursuant to Employee Stock
Purchase Plan..................................... (873) (1,131) --
Collection of Notes Receivable....................... 375 207 --
---------- ---------- ----------
Balance at End of Year....................... (1,422) (924) --
---------- ---------- ----------
Unrealized Investment Appreciation (Depreciation), Net
of Deferred Income Taxes:
Balance at Beginning of Year......................... 7,374 4,608 (1,317)
Change in Unrealized Investment Appreciation
(Depreciation), Net of Deferred Income Taxes...... 7,649 2,766 5,925
---------- ---------- ----------
Balance at End of Year....................... 15,023 7,374 4,608
---------- ---------- ----------
Retained Earnings:
Balance at Beginning of Year......................... 38,025 24,651 14,821
Net Income........................................... 16,870 13,374 9,830
---------- ---------- ----------
Balance at End of Year....................... 54,895 38,025 24,651
---------- ---------- ----------
Total Shareholders' Equity................... $111,284 $85,642 $68,316
========== ========== ==========
</TABLE>
- ---------------
(1) 1996 and 1995 share information restated to reflect a two for one split of
the Company's common stock distributed in November 1997, see Note 11.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 116
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income................................................ $ 16,870 $ 13,374 $ 9,830
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Net Realized Investment (Gain) Loss.................... 16 (260) (181)
Depreciation and Amortization Expense.................. 1,232 930 951
Deferred Income Tax Benefit............................ (1,183) (182) (302)
Change in Premiums Receivable.......................... (7,157) (214) 860
Change in Other Receivables............................ (655) (5,747) (5,748)
Change in Deferred Acquisition Costs................... (1,937) (3,876) (1,246)
Change in Other Assets................................. (2,511) (817) (363)
Change in Unpaid Loss and Loss Adjustment Expenses..... 25,788 18,956 18,511
Change in Unearned Premiums............................ 8,962 15,035 4,673
Change in Other Liabilities............................ (575) (184) (1,696)
Change in Income Taxes Payable......................... (834) 548 (53)
-------- -------- --------
Net Cash Provided by Operating Activities............ 38,016 37,563 25,236
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from Sales of Investments in Fixed Maturities
Available for Sale..................................... 5,564 2,594 12,543
Proceeds from Maturity of Investments in Fixed Maturities
Available for Sale..................................... 9,305 9,476 1,272
Proceeds from Sale of Investments in Fixed Maturities Held
to Maturity............................................ -- -- 915
Proceeds from Maturity of Investments in Fixed Maturities
Held to Maturity....................................... -- -- 932
Proceeds from Sales of Investments in Equity Securities... 5,896 2,168 5,655
Cost of Fixed Maturities Available for Sale Acquired...... (42,309) (32,783) (47,101)
Cost of Fixed Maturities Held to Maturity Acquired........ -- -- (301)
Cost of Equity Securities Acquired........................ (15,536) (12,412) (5,616)
Other -- Net.............................................. -- -- (3,000)
Purchase of Property and Equipment, net................... (1,609) (1,989) (1,319)
-------- -------- --------
Net Cash Used for Investing Activities............... (38,689) (32,946) (36,020)
-------- -------- --------
Cash Flows from Financing Activities:
Exercise of Employee Stock Options, net of Tax Benefit.... 723 979 --
Collection of Notes Receivable............................ 375 207 --
Proceeds from Shares Pursuant to Employee Stock Purchase
Plan................................................... 25 -- --
-------- -------- --------
Net Cash Provided by Financing Activities............ 1,123 1,186 --
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ 450 5,803 (10,784)
Cash and Cash Equivalents at Beginning of Year.............. 11,483 5,680 16,464
-------- -------- --------
Cash and Cash Equivalents at End of Year.................... $ 11,933 $ 11,483 $ 5,680
======== ======== ========
Cash Paid During the Year for:
Income Taxes.............................................. $ 7,158 $ 3,024 $ 3,323
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase
Plan in exchange for Notes Receivable.................. $ 873 $ 1,131 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 117
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
Philadelphia Consolidated Holding Corp. ("Philadelphia Insurance"), and its
subsidiaries (collectively the "Company") doing business as Philadelphia
Insurance Companies, include two Pennsylvania domiciled property and casualty
insurance companies, Philadelphia Indemnity Insurance Company and Philadelphia
Insurance Company ("Insurance Subsidiaries"), and an underwriting manager
Maguire Insurance Agency, Inc. The Company designs, markets, and underwrites
specialty commercial property and casualty insurance products for the rent a car
industry, automobile leasing industry, non-profit organizations, the health,
fitness and wellness industry, and selected classes of professional liability.
All marketing, underwriting, claims management, investment, and general
administration is provided by the underwriting manager.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
prepared in conformity with generally accepted accounting principles. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements requires making estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
prior years' amounts have been reclassified for comparative purposes.
(a) Investments
Investments classified as Available for Sale are carried at market value
with the change in unrealized appreciation (depreciation) credited or charged
directly to shareholders' equity, net of applicable deferred income taxes.
Income on fixed maturities is recognized on the accrual basis.
The decision to purchase or sell investments is based on management's
assessment of various factors such as foreseeable economic conditions, including
current interest rates and the interest rate risk, and the liquidity and capital
positions of the Company.
Investments in fixed maturities are adjusted for amortization of premiums
and accretion of discounts to maturity date, except for collaterized mortgage
and asset backed securities which are adjusted for amortization of premiums and
accretion of discounts over their estimated lives. Certain collaterized mortgage
and asset backed securities repayment patterns will change based on interest
rate movements and, accordingly, could impact future investment income if the
reinvestment of the repayment amounts are at lower interest rates than the
underlying securities. Collaterized mortgage and asset backed securities
amounted to $18,630,800 and $0 at December 31, 1997 and December 31, 1996,
respectively. The collaterized mortgage and asset back securities held as of
December 31, 1997 are short tranche securities possessing favorable prepayment
risk profiles.
Equity securities are carried at market value with the change in unrealized
appreciation (depreciation) credited or charged directly to shareholders'
equity, net of applicable deferred income taxes.
Realized investment gains and losses are calculated on the specific
identification basis and recorded as income when the securities are sold.
(b) Cash and Cash Equivalents
Cash equivalents, consisting of fixed maturity investments with maturities
of three months or less when purchased and money market funds, are stated at
cost which approximates market value.
F-7
<PAGE> 118
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Deferred Acquisition Costs
Policy acquisition costs, which include commissions, premium taxes, fees
and other costs of underwriting policies, are deferred and amortized over the
same period in which the related premiums are earned. Deferred acquisition costs
are limited to the estimated amounts recoverable after providing for losses and
expenses that are expected to be incurred, based upon historical and current
experience, as the premiums are earned. Amortization of policy acquisition costs
in the accompanying consolidated statements of operations was $25,034,000,
$17,739,000 and $13,662,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
(d) Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Costs incurred in developing information systems technology are capitalized and
included in property and equipment. These costs are amortized over their useful
lives from the dates the systems technology became operational. Upon disposal of
assets, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in earnings.
(e) Reserves for Unpaid Loss and Loss Adjustment Expenses
The liability for unpaid loss and loss adjustment expenses includes an
amount determined on the basis of claims adjusters' evaluations and an amount,
based on past experience, for losses incurred but not reported. Such liabilities
are necessarily based on estimates, and while management believes that the
amount is adequate, the ultimate liability may be in excess of, or less than,
the amount provided. The methods of making such estimates and establishing the
resulting liabilities are continually reviewed and updated and any adjustments
resulting therefrom are reflected in operations currently.
(f) Unearned Premiums
Premiums are generally earned on a pro rata basis over the terms of the
policies. Premiums applicable to the unexpired terms of the policies in-force
are reported as unearned premiums.
(g) Reinsurance Ceded
In the normal course of business, the Company seeks to reduce the loss that
may arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
reinsured policy. Amounts for reinsurance assets and liabilities are reported
gross.
(h) Income Taxes
The Company files a consolidated federal income tax return. Deferred income
taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to the differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date (see Note
8).
(i) Earnings Per Share
Earnings per share and common stock equivalents outstanding have been
retroactively restated to reflect the increased number of common shares
resulting from a two for one stock split that was announced in October 1997 and
distributed to shareholders on November 5, 1997. A total of 6,119,716 additional
shares were issued as a result of the stock split. The par value of the
Company's stock remained unchanged.
F-8
<PAGE> 119
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share,"
specifying the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock. Under SFAS No.
128, basic and diluted per share amounts shall be presented for net income on
the face of the statement of operations. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The Company adopted the provisions of SFAS No.
128 as of December 31, 1997 and restated all prior period earnings per share
data to conform with the provisions of this Statement.
2. STATUTORY INFORMATION
Accounting Principles. The Philadelphia Indemnity Insurance Company
("PIIC") and the Philadelphia Insurance Company ("PIC") are domiciled in the
Commonwealth of Pennsylvania. PIIC and PIC are required to report to certain
regulatory agencies on the basis of Statutory Accounting Practices ("SAP"). The
statutory financial statements are prepared in accordance with accounting
practices prescribed or permitted by the Insurance Department of the
Commonwealth of Pennsylvania. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as Commonwealth laws, regulations and general administrative
rules. Permitted Statutory Accounting Practices encompass all accounting
practices not so prescribed.
Generally accepted accounting principles ("GAAP") differ in certain
respects from SAP prescribed or permitted by the Insurance Department of the
Commonwealth of Pennsylvania. The principal differences between SAP and GAAP are
as follows:
Under SAP, investments in debt securities are carried at amortized
cost, while under GAAP, investments in debt securities classified as
Available for Sale are carried at fair value;
Under SAP, policy acquisition costs, such as commissions, premium
taxes, fees, and other costs of underwriting policies are charged to
current operations as incurred, while under GAAP, such costs are deferred
and amortized on a pro rata basis over the period covered by the policy;
Under SAP, certain assets, designated as "Non-admitted Assets" (such
as prepaid expenses) are charged against surplus;
Under SAP, federal income taxes are only provided on taxable income
for which income taxes are currently payable, while under GAAP, deferred
income taxes are provided with respect to temporary differences;
Under SAP, certain reserves are established in amounts which differ
from amounts which would be provided in conformity with GAAP.
Financial Information: The statutory capital and surplus of PIIC as of
December 31, 1997 and 1996 was $75,894,000 and $60,175,000, respectively.
Statutory net income of PIIC for the years ended December 31, 1997, 1996 and
1995 was $8,839,000, $5,626,000, and $5,416,000, respectively.
The statutory capital and surplus of PIC as of December 31, 1997 and 1996
was $30,091,000 and $21,732,000, respectively. Statutory net income of PIC for
the years ended December 31, 1997, 1996 and 1995 was $5,494,000, $3,629,000, and
$3,587,000, respectively.
Dividend Restrictions: The Insurance Subsidiaries are subject to various
regulatory restrictions which limit the maximum amount of annual shareholder
dividends allowed to be paid. The maximum dividend which PIIC may pay to
Philadelphia Insurance during 1998 without prior approval is $8,839,000 and the
maximum dividend which PIC may pay to Philadelphia Insurance during 1998 without
prior approval is $5,494,000.
F-9
<PAGE> 120
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Risk-Based Capital: Risk-based capital is designed to measure the
acceptable amount of capital an insurer should have based on the inherent
specific risks of each insurer. Insurers failing to meet this benchmark capital
level may be subject to scrutiny by the insurer's domiciliary insurance
department and ultimately rehabilitation or liquidation. Based on the standards,
PIIC's and PIC's capital and surplus at December 31, 1997 is in excess of the
prescribed risk-based capital requirements.
3. INVESTMENTS
The Company invests primarily in investment grade fixed maturities, the
majority of which are rated "A" or better by Standard and Poor's. The cost,
gross unrealized gains and losses, estimated market value and carrying value of
investments as of December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET CARRYING
COST(1) GAINS LOSSES VALUE(2) VALUE
-------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies.......... $ 15,391 $ 273 $ 9 $ 15,655 $ 15,655
Obligations of States and Political
Subdivisions.................................. 105,117 4,670 91 109,696 109,696
Corporate Debt Securities....................... 44,544 801 18 45,327 45,327
-------- ------- ---- -------- --------
Total Fixed Maturities Available for Sale....... 165,052 5,744 118 170,678 170,678
Equity Securities................................. 29,501 17,800 313 46,988 46,988
-------- ------- ---- -------- --------
Total Investments........................ $194,553 $23,544 $431 $217,666 $217,666
======== ======= ==== ======== ========
DECEMBER 31, 1996
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies.......... $ 20,450 $ 159 $ 52 $ 20,557 $ 20,557
Obligations of States and Political
Subdivisions.................................. 105,682 3,369 164 108,887 108,887
Corporate Debt Securities....................... 11,625 236 69 11,792 11,792
-------- ------- ---- -------- --------
Total Fixed Maturities Available for Sale....... 137,757 3,764 285 141,236 141,236
Equity Securities................................. 19,648 7,930 236 27,342 27,342
-------- ------- ---- -------- --------
Total Investments........................ $157,405 $11,694 $521 $168,578 $168,578
======== ======= ==== ======== ========
</TABLE>
- ---------------
(1) Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts.
(2) Estimated market values have been based on quoted market prices.
The Company had no debt or equity investments in a single issuer totaling
in excess of 10% of shareholders' equity at December 31, 1997.
F-10
<PAGE> 121
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost and estimated market value of fixed maturity securities at
December 31, 1997, by remaining contractual maturity, are shown below (in
thousands). Expected maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
MARKET
COST(1) VALUE(2)
-------- ---------
<S> <C> <C>
Due in One Year or Less..................................... $ 4,075 $ 4,079
Due After One Year Through Five Years....................... 40,460 41,267
Due After Five Years through Ten Years...................... 92,935 96,509
Due After Ten Years......................................... 27,582 28,823
-------- --------
$165,052 $170,678
======== ========
</TABLE>
- ---------------
(1) Original cost adjusted for amortization of premiums and accretion of
discounts.
(2) Estimated market values have been based on quoted market prices.
The sources of net investment income for the years ended December 31, 1997,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Fixed Maturities:
Available for Sale..................................... $8,978 $7,377 $4,583
Held to Maturity....................................... -- -- 1,366
Equity Securities........................................ 480 257 217
Cash and Cash Equivalents................................ 602 422 479
------ ------ ------
Total Investment Income.................................. 10,060 8,056 6,645
Investment Expense....................................... (357) (146) (139)
------ ------ ------
Net Investment Income.......................... $9,703 $7,910 $6,506
====== ====== ======
</TABLE>
There are no investments in fixed maturity securities that were non-income
producing during the years ended December 31, 1997, 1996 and 1995. Investment
expense includes $164,000, $60,000, and $84,000 in advisory fees paid to a
related party in 1997, 1996 and 1995, respectively.
Realized pre-tax gains (losses) on the sale of investments for the years
ended December 31, 1997, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ------
<S> <C> <C> <C>
Fixed Maturities:
Available for Sale
Gross Realized Gains.................................. $ 22 $ 47 $ 403
Gross Realized Losses................................. (52) (28) (43)
------ ---- ------
Net Gain (Loss)............................................ (30) 19 360
------ ---- ------
Held to Maturity
Gross Realized Losses................................. -- -- (57)
------ ---- ------
Net Loss................................................... -- -- (57)
------ ---- ------
Equity Securities
Gross Realized Gains..................................... 628 280 223
Gross Realized Losses.................................... (614) (39) (345)
------ ---- ------
Net Gain (Loss)............................................ 14 241 (122)
------ ---- ------
Total Net Realized Investment Gain (Loss)........ $ (16) $260 $ 181
====== ==== ======
</TABLE>
F-11
<PAGE> 122
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RESTRICTED ASSETS
PIIC and PIC have investments, principally U.S. Treasury securities on
deposit with the various states in which they are licensed insurers. At December
31, 1997 and 1996 the carrying value on deposit totaled $10,912,000 and
$7,070,000, respectively.
5. TRUST ACCOUNTS
The Company is required to maintain certain investments in trust accounts
under reinsurance agreements with unrelated insurance companies that cede
insurance risks to the Company. At December 31, 1997 and 1996 the Company had
investments with a carrying value of $2,403,000 and $2,868,000, respectively, in
trust accounts pursuant to a terminated quota share reinsurance agreement. Under
the terms of this agreement, net premiums received by the Company were invested
and held in a trust account to pay future claims. Interest income on these
investments is distributed to the parties to the quota share agreement on a
quarterly basis. The Company receives its interest in net trust investments in
accordance with a formula that specifies certain percentages of funds to be
released over a five-year period as losses are settled.
The Company also maintains investments in trust accounts under current
reinsurance agreements with unrelated insurance companies. These investments
collateralize the Company's obligations under the reinsurance agreements. The
Company possesses sole responsibility for investment and reinvestment of the
trust account assets. All dividends, interest, and other income resulting from
investment of these assets are owned by the Company, and are distributed on a
monthly basis. At December 31, 1997 and 1996 the carrying value of these trust
fund investments were $12,205,000 and $23,223,000, respectively.
The Company's share of the investments in the trust accounts is included in
investments and cash equivalents, as applicable, in the accompanying
consolidated balance sheets.
6. PROPERTY AND EQUIPMENT
The following table summarizes property and equipment at December 31, 1997
and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ ESTIMATED USEFUL
1997 1996 LIVES (YEARS)
---- ---- ----------------
<S> <C> <C> <C>
Furniture, Fixtures and Automobiles.............. $ 2,473 $ 2,256 5
Computer and Telephone Equipment................. 7,176 6,004 3 - 7
Land and Building................................ 2,277 2,272 40
Leasehold Improvements........................... 974 812 12
------- -------
12,900 11,344
Accumulated Depreciation and Amortization........ (7,103) (6,118)
------- -------
Property and Equipment........................... $ 5,797 $ 5,226
======= =======
</TABLE>
Included in property and equipment are costs incurred in developing or
purchasing information systems technology of $2,516,500 and $2,447,600 in 1997
and 1996, respectively. Amortization of these costs was $180,200, $100,100, and
$115,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Depreciation expense excluding amortization of capitalized information systems
technology costs was $858,200, $530,000, and $395,000, for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-12
<PAGE> 123
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at January 1................................. $ 96,642 $77,686 $59,175
Less Reinsurance Receivables....................... 10,919 9,440 5,580
-------- ------- -------
Net Balance at January 1........................... 85,723 68,246 53,595
-------- ------- -------
Incurred related to:
Current Year....................................... 56,725 41,083 34,152
Prior Years........................................ (1,716) (965) (925)
-------- ------- -------
Total Incurred....................................... 55,009 40,118 33,227
-------- ------- -------
Paid related to:
Current Year....................................... 9,512 7,427 6,186
Prior Years........................................ 22,292 15,214 12,390
-------- ------- -------
Total Paid........................................... 31,804 22,641 18,576
-------- ------- -------
Net Balance at December 31........................... 108,928 85,723 68,246
Plus Reinsurance Receivables....................... 13,502 10,919 9,440
-------- ------- -------
Balance at December 31............................... $122,430 $96,642 $77,686
======== ======= =======
</TABLE>
As a result of changes in estimates of insured events of prior years, the
Company reduced losses and loss adjustment expenses incurred by $1,716,000,
$965,000 and $925,000 in 1997, 1996 and 1995, respectively. Such favorable
development was due to losses emerging at a lesser rate than had been originally
anticipated when the initial reserves for the applicable accident years were
estimated.
8. INCOME TAXES
The composition of deferred tax assets and liabilities and the related tax
effects as of December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
---- ----
<S> <C> <C>
Assets:
Effect of Loss Reserve Discounting........................ $ 5,735 $4,725
Excess of Tax Over Financial Reporting Earned Premium..... 2,709 1,922
Other Assets.............................................. 128 127
------- ------
Total Assets...................................... 8,572 6,774
------- ------
Liabilities:
Deferred Policy Acquisition Costs, Deductible for Tax..... 3,752 3,074
Property and Equipment Basis.............................. 494 416
Tax Effect of Unrealized Appreciation of Securities....... 8,089 3,798
Other Liabilities......................................... 585 726
------- ------
Total Liabilities................................. 12,920 8,014
------- ------
Net Deferred Income Tax Liability................. $ 4,348 $1,240
======= ======
</TABLE>
F-13
<PAGE> 124
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the differences between the Company's
effective tax rate for financial statement purposes and the Federal statutory
rate (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT OF TAX PERCENT
------------- -------
<S> <C> <C>
For the year ended December 31, 1997:
Federal Tax at Statutory Rate............................... $ 7,773 35%
Nontaxable Municipal Bond Interest and Dividends Received
Exclusion................................................. (1,812) (8)
Other, Net.................................................. (623) (3)
------- ---
Income Tax Expense................................ $ 5,338 24%
======= ===
For the year ended December 31, 1996:
Federal Tax at Statutory Rate............................... $ 5,708 34%
Nontaxable Municipal Bond Interest and Dividends Received
Exclusion................................................. (1,670) (10)
Other, Net.................................................. (624) (4)
------- ---
Income Tax Expense................................ $ 3,414 20%
======= ===
For the year ended December 31, 1995:
Federal Tax at Statutory Rate............................... $ 4,178 34%
Nontaxable Municipal Bond Interest and Dividends Received
Exclusion................................................. (1,303) (11)
Other, Net.................................................. (417) (3)
------- ---
Income Tax Expense................................ $ 2,458 20%
======= ===
</TABLE>
As of December 31, 1997, the Company has approximately $0.9 million in net
operating loss carryforwards, which expire in 2000 and 2001, available to offset
future taxable income. Utilization of the loss carryfowards is limited to an
annual amount of $336,000. For financial reporting purposes, the tax benefit of
any utilization of these operating loss carryfowards is applied to reduce
goodwill ($114,000 in 1997) and does not reduce income tax expense.
Philadelphia Insurance has entered into tax sharing agreements with each of
its subsidiaries. Under the terms of these agreements, the income tax provision
is computed as if each subsidiary were filing a separate federal income tax
return including adjustments for the income tax effects of net operating losses
and other special tax attributes regardless of whether those attributes are
utilized in the Company's consolidated federal income tax return.
9. REINSURANCE
In the normal course of business, the Company has entered into various
reinsurance contracts with unrelated reinsurers. The Company participates in
such agreements for the purpose of limiting loss exposure and diversifying
business. Reinsurance contracts do not relieve the Company from its obligation
to policyholders.
The loss and loss adjustment expense reserves ceded under such arrangements
were $13,502,000 and $10,919,000 at December 31, 1997 and 1996, respectively.
The Company evaluates the financial condition of its reinsurers to minimize its
exposure to losses from reinsurer insolvencies. The percentage of ceded
reinsurance reserves that are with companies rated "A" (Excellent) or better by
A.M. Best Company is 100% and 97% as of December 31, 1997 and 1996,
respectively. Additionally, approximately 2%, 4%, and 11% of the Company's net
written premiums for the years ended December 31, 1997, 1996 and 1995,
respectively, were assumed from an unrelated reinsurance company.
F-14
<PAGE> 125
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of reinsurance on premiums written and earned is as follows (in
thousands):
<TABLE>
<CAPTION>
WRITTEN EARNED
-------- --------
<S> <C> <C>
For the Year Ended December 31, 1997:
Direct Business............................................. $157,060 $147,514
Reinsurance Assumed......................................... 2,031 2,614
Reinsurance Ceded........................................... 47,294 49,573
-------- --------
Net Premiums...................................... $111,797 $100,555
======== ========
Percentage Assumed of Net................................... 2.6%
========
For the Year Ended December 31, 1996:
Direct Business............................................. $132,611 $117,354
Reinsurance Assumed......................................... 4,244 4,466
Reinsurance Ceded........................................... 52,861 49,770
-------- --------
Net Premiums...................................... $ 83,994 $ 72,050
======== ========
Percentage Assumed of Net................................... 6.2%
========
For the Year Ended December 31, 1995:
Direct Business............................................. $ 97,519 $ 92,046
Reinsurance Assumed......................................... 6,661 7,461
Reinsurance Ceded........................................... 42,108 41,319
-------- --------
Net Premiums...................................... $ 62,072 $ 58,188
======== ========
Percentage Assumed of Net................................... 12.8%
========
</TABLE>
\ 10. SHAREHOLDERS' EQUITY
The Company has established non-qualified stock bonus and stock option
plans. Under the stock bonus plan, the Company has granted a total of 137,500
shares to certain officers of the Company, of which all such shares have been
issued and are vested.
Under the Company's stock option plan, stock options may be granted for the
purchase of common stock at a price not less than the fair market value on the
date of grant. Options outstanding as of December 31, 1994 are exercisable over
a four to five year vesting period. Options issued in 1997, 1996 and 1995 are
exercisable after the expiration of five years following the grant date. Under
this plan, the Company has reserved 2,475,000 shares of common stock for
issuance pursuant to options granted under the plan.
In addition to stock options granted pursuant to the Company's stock option
plan, the Company's Board of Directors have granted previous awards of 2,613,492
stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at a fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for the
Company's compensation instruments is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
F-15
<PAGE> 126
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the Company's option activity, including
weighted average option information:
<TABLE>
<CAPTION>
1997 1996(2) 1995(2)
--------------------- --------------------- ---------------------
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
PER PER PER
OPTIONS OPTION(1) OPTIONS OPTION(1) OPTIONS OPTION(1)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 3,572,292 $ 3.86 3,200,642 $2.84 3,184,742 $2.81
Granted............................ 5,000 $16.38 917,900 $8.39 43,400 $6.11
Exercised.......................... (84,250) $ 4.42 (292,500) $3.33 (20,000) $4.47
Canceled........................... (20,000) $ 6.00 (253,750) $8.05 (7,500) $4.94
--------- --------- ---------
Outstanding at end of year......... 3,473,042 $ 3.85 3,572,292 $3.86 3,200,642 $2.84
========= ========= =========
Exercisable at end of year......... 2,768,792 2,819,218 3,097,392
Weighted-average fair value of
options granted during the
year............................. $6.38 $2.87 $2.14
</TABLE>
<TABLE>
<CAPTION>
EXERCISE REMAINING EXERCISE
OUTSTANDING AT PRICE CONTRACTUAL EXERCISABLE AT PRICE
DECEMBER 31, PER LIFE DECEMBER 31, PER
RANGE OF EXERCISE PRICES 1997 OPTION(1) (YEARS) 1997 OPTION(1)
- ------------------------ ----------------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
2.61.......................... 2,691,742 $ 2.61 5.1 2,689,192 $2.61
4.75 to $7.31................. 108,400 $ 5.52 3.9 79,600 $5.37
8.13 to $9.31................. 667,900 $ 8.48 8.2 -- --
16.38......................... 5,000 $16.38 9.9 -- --
--------- ---------
3,473,042 $ 3.85 2,768,792 $2.69
========= =========
</TABLE>
- ---------------
(1) Weighted Average Exercise Price Per Option.
(2) Restated to reflect a two for one split of the Company's common stock
distributed in November 1997, see Note 11.
The Company has established a non-qualified Employee Stock Purchase Plan
(the "Stock Purchase Plan"). The aggregate maximum number of shares that may be
issued pursuant to the Stock Purchase Plan is 500,000. Shares may be purchased
under the Stock Purchase Plan by eligible employees during designated one-month
offering periods established by the Compensation Committee of the Board of
Directors at a purchase price of the lesser of 85% of the fair market value of
the shares on the first business day of the offering period or the date the
shares are purchased. The purchase price of shares may be paid by the employee
over six years pursuant to the execution of a promissory note. The promissory
note(s) are collateralized by such shares purchased under the Stock Purchase
Plan and are interest free. Under the Stock Purchase Plan, the Company issued
78,569 and 52,144 shares in 1997 and 1996, respectively. The weighted average
fair value of those purchase rights granted in 1997 and 1996 was $1.94 and
$1.51, respectively.
In addition, the Company has also established a non-qualified Directors
Stock Purchase Plan ("Directors Plan") for the benefit of non-employee
Directors. The aggregate maximum number of shares that may be issued pursuant to
the Directors Plan is 50,000. Non-employee Directors, during monthly offering
periods, may designate a portion of his or her fees to be used for the purchase
of shares under the terms of the Directors Plan at a purchase price of the
lesser of 85% of the fair market value of the shares on the first business day
of the offering period or the last business day of the offering period. No
shares have been issued pursuant to the Directors Plan as of December 31, 1997.
F-16
<PAGE> 127
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the Company has adopted the disclosure-only provisions of SFAS No.
123, no compensation cost has been recognized for the Company's compensation
instruments. The following represents pro forma information as if the Company
recorded compensation costs using the fair value of the issued compensation
instruments (the results may not be indicative of the actual effect on net
income in future years) (in thousands, except per average common share data):
<TABLE>
<CAPTION>
1997 1996(1) 1995(1)
------- ------- -------
<S> <C> <C> <C>
Net Income As Reported................................. $16,870 $13,374 $9,830
Assumed Stock Compensation Cost........................ 354 281 22
------- ------- ------
Pro Forma Net Income................................... $16,516 $13,093 $9,808
======= ======= ======
Diluted Earnings Per Average Common Share as
Reported............................................. $1.13 $0.94 $0.72
======= ======= ======
Pro Forma Diluted Earnings Per Average Common Share.... $1.11 $0.92 $0.72
======= ======= ======
</TABLE>
- ---------------
(1) Per share information restated to reflect a two for one split of the
Company's common stock distributed in November 1997, see Note 11.
The fair value of options at date of grant was estimated using the
Black-Scholes valuation model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected Stock Volatility................................... 25.9% 20.0% 19.3%
Risk Free Interest Rate..................................... 5.8% 5.8% 6.4%
Expected Option Life-Years.................................. 6.0 6.0 6.0
Expected Dividends.......................................... 0.0% 0.0% 0.0%
</TABLE>
11. COMMON STOCK SPLIT
On October 16, 1997, the Board of Directors approved a two for one split of
the Company's common stock payable to shareholders of record on October 27, 1997
for distribution on November 5, 1997. Weighted average common shares
outstanding, common stock equivalents, and earnings per share have been restated
to reflect this stock split.
12. PROFIT SHARING
The Company has a defined contribution Profit Sharing Plan, which includes
a 401K feature, covering substantially all employees. Under the plan, employees
may contribute up to an annual maximum of the lesser of 15% of eligible
compensation or the applicable Internal Revenue Code limit in a calendar year.
The Company makes a matching contribution in an amount equal to 50% of the
participant's pretax contribution, subject to a maximum of 6% of the
participant's eligible compensation. The Company may also make annual
discretionary profit sharing contributions at each plan year end. Participants
are fully vested in the Company's contribution upon completion of 7 years of
service. The Company's contributions to the plan were $474,300, $322,400, and
$267,500 in 1997, 1996 and 1995, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to routine legal proceedings in connection with its
property and casualty insurance business. The Company is not involved in any
pending or threatened legal or administrative proceedings which management
believes can reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations.
F-17
<PAGE> 128
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company currently leases office space to serve as its headquarters
location and 38 field offices for its production underwriters. Rental expense
for these operating leases was $916,700, $736,700, and $187,800 for the years
ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, the future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998........................................................ $1,256,000
1999........................................................ 1,067,000
2000........................................................ 837,000
2001........................................................ 704,000
2002 and Thereafter......................................... 756,000
----------
Total Minimum Payments Required................... $4,620,000
==========
</TABLE>
14. SUMMARY OF QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
The following quarterly financial information for each of the three months
ended March 31, June 30, September 30 and December 31, 1997 and 1996 is
unaudited. However, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the results of
operations for such periods, have been made for a fair presentation of the
results shown (in thousands, except share and per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1) THREE MONTHS ENDED(1)
------------------------------------------------------ -----------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1996 1996
---------- ---------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Earned Premiums.... $22,388 $25,163 $26,492 $26,512 $15,817 $17,190
Net Investment
Income............... $ 2,211 $ 2,404 $ 2,535 $2,553 $ 1,846 $ 1,885
Net Loss and Loss
Adjustment
Expenses............. $12,481 $13,832 $14,429 $14,267 $ 8,674 $ 9,089
Acquisition Costs and
Other Underwriting
Expenses............. $ 6,946 $ 7,858 $ 8,429 $ 8,111 $ 5,107 $ 5,836
Net Income............. $ 3,622 $ 3,992 $ 4,468 $ 4,788 $ 2,715 $ 3,057
Basic Earnings Per
Share................ $0.30 $0.33 $0.37 $0.39 $0.23 $0.26
Diluted Earnings Per
Share................ $0.25 $0.27 $0.30 $0.32 $0.19 $0.22
Weighted Average Common
Shares Outstanding... 12,133,216 12,175,688 12,223,940 12,240,286 11,627,702 11,754,382
Weighted Average Share
Equivalents
Outstanding.......... 2,570,174 2,674,217 2,815,533 2,792,963 2,372,724 2,394,441
---------- ---------- ---------- ---------- ---------- ----------
Weighted Average Shares
and Share Equivalents
Outstanding.......... 14,703,390 14,849,905 15,039,473 15,033,249 14,000,426 14,148,823
========== ========== ========== ========== ========== ==========
<CAPTION>
THREE MONTHS ENDED(1)
----------------------------
SEPTEMBER 30, DECEMBER 31,
1996 1996
------------- ------------
<S> <C> <C>
Net Earned Premiums.... $20,323 $18,720
Net Investment
Income............... $ 2,041 $ 2,138
Net Loss and Loss
Adjustment
Expenses............. $12,120 $10,235
Acquisition Costs and
Other Underwriting
Expenses............. $ 5,920 $ 5,347
Net Income............. $ 3,462 $ 4,140
Basic Earnings Per
Share................ $0.29 $0.34
Diluted Earnings Per
Share................ $0.24 $0.29
Weighted Average Common
Shares Outstanding... 12,055,068 12,081,944
Weighted Average Share
Equivalents
Outstanding.......... 2,128,804 2,387,123
---------- ----------
Weighted Average Shares
and Share Equivalents
Outstanding.......... 14,183,872 14,469,067
========== ==========
</TABLE>
- ---------------
(1) All periods, except for the three months ended December 31, 1997, were
restated to reflect a two for one split of the Company's common stock
distributed in November 1997, see Note 11.
F-18
<PAGE> 129
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D
COLUMN C AMOUNT AT WHICH
COLUMN A COLUMN B ESTIMATED SHOWN IN THE
TYPE OF INVESTMENT COST * MARKET VALUE BALANCE SHEET
------------------ -------- ------------ ---------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and Government Agencies
and Authorities............................... $ 15,391 $ 15,655 $ 15,655
States, Municipalities and Political
Subdivisions.................................. 105,117 109,696 109,696
Public Utilities................................ 3,367 3,456 3,456
All Other Corporate Bonds....................... 39,775 40,483 40,483
Redeemable Preferred Stock......................... 1,402 1,388 1,388
-------- -------- --------
Total Fixed Maturities..................... 165,052 170,678 170,678
-------- -------- --------
Equity Securities:
Common Stocks:
Banks, Trust and Insurance Companies............ 15,202 12,485 12,485
Industrial, Miscellaneous and all other......... 14,299 34,503 34,503
-------- -------- --------
Total Equity Securities.................... 29,501 46,988 46,988
-------- -------- --------
Total Investments.......................... $194,553 $217,666 $217,666
======== ======== ========
</TABLE>
- ---------------
* Original cost of equity securities; original cost of fixed maturities adjusted
for amortization of premiums and accretion of discounts.
F-19
<PAGE> 130
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT ONLY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities Available for Sale at Market............. $ 30 $ 30
Equity Securities at Market............................... -- --
-------- -------
Total Investments................................. 30 30
Cash and Cash Equivalents................................... (3) 345
Mortgage Loans (a).......................................... 1,125 1,125
Equity in and Advances to Unconsolidated Subsidiaries (a)... 109,540 84,072
Goodwill less Accumulated Amortization of $1,495 and
$1,313.................................................... 589 771
Other Assets................................................ -- 10
-------- -------
Total Assets...................................... $111,281 $86,353
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Income Taxes Payable (Recoverable).......................... $ (162) $ 536
Other Liabilities........................................... 159 175
-------- -------
Total Liabilities................................. (3) 711
-------- -------
Commitments and Contingencies
Shareholders' Equity (b):
Preferred Stock, $.01 Par Value, 10,000,000 Shares
Authorized, None Issued and Outstanding................
Common Stock, No Par Value, 50,000,000 Shares Authorized;
12,242,431 and 12,079,612 Shares Issued and
Outstanding............................................ 42,788 41,167
Notes Receivable from Shareholders.......................... (1,422) (924)
Unrealized Investment Appreciation (Depreciation), Net of
Deferred Income Taxes..................................... 15,023 7,374
Retained Earnings........................................... 54,895 38,025
-------- -------
Total Shareholders' Equity........................ 111,284 85,642
-------- -------
Total Liabilities and Shareholders' Equity........ $111,281 $86,353
======== =======
</TABLE>
- ---------------
(a) These items have been eliminated in the Company's Consolidated Financial
Statements.
(b) 1996 share information restated to reflect a two for one split of the
Company's common stock distributed in November 1997.
See Notes to Consolidated Financial Statements.
F-20
<PAGE> 131
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II, CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT ONLY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Revenue:
Dividends from Subsidiaries (a)........................... $ -- $ -- $6,000
Net Investment Income..................................... 10 11 63
Net Realized Investment Gain, (Loss) (b).................. -- 672 (10)
------- ------- ------
Total Revenue..................................... 10 683 6,053
------- ------- ------
Expenses:
Goodwill Amortization..................................... 68 79 89
Other..................................................... 472 417 291
------- ------- ------
Total Expenses.................................... 540 496 380
------- ------- ------
Income, (Loss) Before Income Taxes and Equity in Earnings of
Unconsolidated Subsidiaries............................... (530) 187 5,673
Income Tax Expense (Benefit)................................ (162) 74 (125)
------- ------- ------
Income, (Loss) Before Equity in Earnings of Unconsolidated
Subsidiaries.............................................. (368) 113 5,798
Equity in Earnings of Unconsolidated Subsidiaries........... 17,238 13,261 4,032
------- ------- ------
Net Income................................................ $16,870 $13,374 $9,830
======= ======= ======
</TABLE>
- ---------------
(a) This item has been eliminated in the Company's Consolidated Financial
Statements.
(b) $665 of this amount has been eliminated in the Company's Consolidated
Financial Statements for 1996.
See Notes to Consolidated Financial Statements.
F-21
<PAGE> 132
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
SCHEDULE II, CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income................................................ $ 16,870 $ 13,374 $ 9,830
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Net Realized Investment (Gain), Loss................... -- (672) 10
Equity in Earnings of Unconsolidated Subsidiaries...... (17,238) (13,261) (4,032)
Goodwill Amortization.................................. 68 79 89
Change in Other Liabilities............................ (16) 25 150
Change in Other Assets................................. 10 (9) (38)
Change in Income Taxes Payable......................... (584) (88) (343)
-------- -------- -------
Net Cash Provided (Used) by Operating Activities..... (890) (552) 5,666
-------- -------- -------
Cash Flows From Investing Activities:
Proceeds From Sales of Investments in Equity Securities... -- 2,335 2,139
Cost of Fixed Maturities Available for Sale Acquired...... -- -- (30)
Cost of Equity Securities Acquired........................ -- (119) (509)
Net Transfers to Subsidiaries (a)......................... (581) (2,678) (7,118)
-------- -------- -------
Net Cash Used by Investing Activities................ (581) (462) (5,518)
-------- -------- -------
Cash Flows From Financing Activities:
Exercise of Employee Stock Options, Net of Tax Benefit.... 723 979 --
Collection of Notes Receivable............................ 375 207 --
Proceeds from Shares Pursuant to Employee Stock Purchase
Plan................................................... 25 -- --
-------- -------- -------
Net Cash Provided by Financing Activities............ 1,123 1,186 --
-------- -------- -------
Net Increase (Decrease) in Cash and Equivalents............. (348) 172 148
Cash and Cash Equivalents at Beginning of Year.............. 345 173 25
-------- -------- -------
Cash and Cash Equivalents at End of Year.................... $ (3) 345 $ 173
======== ======== =======
Cash Dividends Received From Unconsolidated Subsidiaries.... $ -- $ -- $ 6,000
======== ======== =======
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase
Plan in exchange for Notes Receivable.................. $ 873 $ 1,131 $ --
</TABLE>
- ---------------
(a) These items have been eliminated in the Company's Consolidated Financial
Statements.
See Notes to Consolidated Financial Statements.
F-22
<PAGE> 133
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
EARNED PREMIUMS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C COLUMN D COLUMN F
--------- ------------ COLUMN E -----------------
COLUMN B CEDED TO ASSUMED -------- PERCENTAGE OF
------------ OTHER FROM OTHER NET AMOUNT ASSUMED
COLUMN A GROSS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- ------------ --------- ------------ -------- -----------------
<S> <C> <C> <C> <C> <C>
1997
Property and Casualty
Insurance................... $147,514 $49,573 $2,614 $100,555 2.6%
======== ======= ====== ======== ====
1996
Property and Casualty
Insurance................... $117,354 $49,770 $4,466 $ 72,050 6.2%
======== ======= ====== ======== ====
1995
Property and Casualty
Insurance................... $ 92,046 $41,319 $7,461 $ 58,188 12.8%
======== ======= ====== ======== ====
</TABLE>
F-23
<PAGE> 134
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING PROPERTY --
CASUALTY INSURANCE OPERATIONS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLAIMS AND CLAIMS
RESERVE FOR ADJUSTMENT EXPENSES
UNPAID INCURRED RELATED TO
DEFERRED CLAIMS DISCOUNT -------------------
POLICY AND CLAIM IF ANY NET NET (1) (2)
ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
AFFILIATION WITH REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEAR
- --------------------------- ----------- ----------- ------------ -------- -------- ---------- -------- --------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Property -
Casualty Entities
December 31, 1997..... $10,970 $122,430 $0 $42,116 $100,555 $9,703 $56,725 $(1,716)
December 31, 1996..... $ 9,033 $ 96,642 $0 $33,154 $ 72,050 $7,910 $41,083 $ (965)
December 31, 1995..... $ 5,157 $ 77,686 $0 $18,119 $ 58,188 $6,506 $34,152 $ (925)
<CAPTION>
AMORTIZATION
OF DEFERRED PAID CLAIMS
POLICY AND CLAIM
ACQUISITION ADJUSTMENT NET WRITTEN
AFFILIATION WITH REGISTRANT COSTS EXPENSES PREMIUMS
- --------------------------- ------------ ----------- -----------
COLUMN A COLUMN I COLUMN J COLUMN K
<S> <C> <C> <C>
Consolidated Property -
Casualty Entities
December 31, 1997..... $25,034 $31,804 $111,797
December 31, 1996..... $17,739 $22,641 $ 83,994
December 31, 1995..... $13,662 $18,576 $ 62,072
</TABLE>
F-24
<PAGE> 135
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 24, 1998
PROSPECTUS
$207,000,000
PHILADELPHIA CONSOLIDATED
HOLDING CORP. [BELL LOGO]
[PHILADELPHIA INSURANCE COMPANIES]
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK,
STOCK PURCHASE CONTRACTS, STOCK PURCHASE UNITS AND WARRANTS
PCHC FINANCING I
PREFERRED SECURITIES FULLY AND UNCONDITIONALLY
GUARANTEED BY PHILADELPHIA CONSOLIDATED HOLDING CORP.
Philadelphia Consolidated Holding Corp. ("Philadelphia Consolidated" or the
"Company"), directly or through such agents, dealers or underwriters as may be
designated from time to time, may offer, issue and sell, together or separately,
its (i) debt securities (the "Debt Securities"), which may be senior debt
securities (the "Senior Debt Securities") or subordinated debt securities (the
"Subordinated Debt Securities"), (ii) shares of its preferred stock, $0.01 par
value per share (the "Preferred Stock"), (iii) shares of its common stock, no
par value (the "Common Stock"), (iv) Stock Purchase Contracts ("Stock Purchase
Contracts") to purchase shares of Common Stock, (v) Stock Purchase Units, each
representing ownership of a Stock Purchase Contract and Preferred Securities (as
defined herein) or debt obligations of third parties, including U.S. Treasury
securities, securing the holder's obligation to purchase Common Stock under the
Stock Purchase Contracts ("Stock Purchase Units") and (vi) warrants to purchase
Debt Securities, Preferred Stock, Common Stock or other securities or rights
("Warrants").
PCHC Financing I (the "Trust"), a statutory business trust formed under the
laws of the State of Delaware, may offer, from time to time, preferred
securities, representing preferred undivided beneficial interests in the assets
of the Trust ("Preferred Securities"). The payment of periodic cash
distributions ("Distributions") with respect to Preferred Securities out of
moneys held by the Trust, and payments on liquidation, redemption or otherwise
with respect to such Preferred Securities, will be guaranteed by Philadelphia
Consolidated to the extent described herein (each, a "Trust Guarantee"). See
"Description of Preferred Securities" and "Description of Trust Guarantee." The
obligations of Philadelphia Consolidated under the Trust Guarantee will
constitute subordinated unsecured obligations of Philadelphia Consolidated and
will rank on a parity with all of Philadelphia Consolidated's other subordinated
unsecured obligations. See "Description of Trust Guarantee -- Status of the
Trust Guarantee." Debt Securities may be issued and sold by Philadelphia
Consolidated in one or more series to the Trust or a trustee of the Trust in
connection with the investment of the proceeds from the offering of Preferred
Securities and Common Securities (as defined herein) of the Trust. The Debt
Securities purchased by the Trust may be subsequently distributed pro rata to
holders of Preferred Securities and Common Securities in connection with the
dissolution of the Trust. The Debt Securities, Preferred Stock, Common Stock,
Stock Purchase Contracts, Stock Purchase Units, Warrants and Preferred
Securities are herein collectively referred to as the "Securities," with an
aggregate public offering price of up to $207,000,000 (or its equivalent in
foreign currencies or foreign currency units based on the applicable exchange
rate at the time of offering) in amounts, at prices and on terms to be
determined at the time of sale.
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Securities may be sold directly by Philadelphia Consolidated, through
agents designated from time to time or to or through underwriters or dealers.
Philadelphia Consolidated reserves the sole right to accept, and together with
its agents, from time to time, to reject in whole or in part any proposed
purchase of Securities to be made directly or through agents. If any agents or
underwriters are involved in the sale of any Securities, the names of such
agents or underwriters and any applicable fees, commissions or discounts will be
set forth in the applicable Prospectus Supplement. See "Plan of Distribution."
This Prospectus may not be used to consummate any sale of Securities unless
accompanied by a Prospectus Supplement.
The date of this Prospectus is April , 1998
<PAGE> 136
(cover continued from previous page)
The form in which the Securities are to be issued, their specific
designation, aggregate principal amount or aggregate initial offering price,
maturity, if any, rate and times of payment of interest or dividends, if any,
redemption, conversion, and sinking fund terms, if any, voting or other rights,
if any, exercise price and detachability, if any, and other specific terms will
be set forth in a Prospectus Supplement (the "Prospectus Supplement"), together
with the terms of offering of such Securities. Any such Prospectus Supplement
will also contain information, as applicable, about certain material United
States Federal income tax considerations relating to the particular Securities
offered thereby.
The declaration of trust for the Trust also provides that, to the full
extent permitted by law, Philadelphia Consolidated shall indemnify any
Philadelphia Consolidated Indemnified Person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Trust) by reason of the fact
that he is or was a Philadelphia Consolidated Indemnified Person against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Trust, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe such person's conduct was unlawful. The
declaration of trust also provides that, to the full extent permitted by law,
Philadelphia Consolidated shall indemnify any Philadelphia Consolidated
Indemnified Person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
Trust to procure a judgment in its favor by reason of the fact that such person
is or was a Philadelphia Consolidated Indemnified Person against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Trust and except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such Philadelphia Consolidated Indemnified Person shall have been adjudged
to be liable to the Trust unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such Court of Chancery or such
other court shall deem proper. The declaration of trust further provides that
expenses (including attorneys' fees) incurred by a Philadelphia Consolidated
Indemnified Person in defending a civil, criminal, administrative or
investigative action, suit or proceeding referred to in the immediately
preceding two sentences shall be paid by Philadelphia Consolidated in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Philadelphia Consolidated Indemnified Person
to repay such amount if it shall ultimately be determined that such person is
not entitled to be indemnified by Philadelphia Consolidated as authorized in any
such declaration.
The declaration of trust for the Trust also provides that Philadelphia
Consolidated shall indemnify each Fiduciary Indemnified Person against any loss,
liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of the
Trust or trusts under the Trust, including the costs and expenses (including
reasonable legal fees and expenses) of defending itself against or investigating
any claim or liability in connection with the exercise or performance of any of
its powers or duties thereunder.
The Common Stock of Philadelphia Consolidated is listed on the Nasdaq
National Market (the "NNM") of the Nasdaq Stock Market, Inc. under the symbol
"PHLY". Any Prospectus Supplement will also contain information, where
applicable, as to any other listing on a securities exchange of the Securities
covered by such Prospectus Supplement.
<PAGE> 137
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER, DEALER OR AGENT INVOLVED IN THE OFFERING DESCRIBED HEREIN. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a combined Registration Statement on
Form S-3 (together with all the amendments and exhibits thereto, the
"Registration Statement") filed by Philadelphia Consolidated and the Trust with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the Securities.
This Prospectus does not contain all of the information set forth in such
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, although it does include a summary
of the material terms of the Indenture and the Declaration (each as defined
herein). Reference is made to such Registration Statement and to the exhibits
relating thereto for further information with respect to Philadelphia
Consolidated and its consolidated Subsidiaries, the Trust and the Securities.
Any statements contained herein concerning the provisions of any document filed
as an exhibit to the Registration Statement or otherwise filed with the
Commission or incorporated by reference herein are not necessarily complete,
and, in each instance, reference is made to the copy of such document so filed
for a more complete description of the matter involved. Each such statement is
qualified in its entirety by such reference.
Philadelphia Consolidated is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Office of
the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048. The
Commission also maintains a website that contains reports, proxy and information
statements and other information. The website address is http.//www.sec.gov.
No separate financial statements of the Trust have been included or
incorporated by reference herein. Philadelphia Consolidated does not consider
that such financial statements would be material to holders of the Preferred
Securities because (i) all of the voting securities of the Trust will be owned,
directly or indirectly, by Philadelphia Consolidated, a reporting company under
the Exchange Act, (ii) the Trust has and will have no independent operations but
exists for the sole purpose of issuing securities representing undivided
beneficial interests in its assets and investing the proceeds thereof in
Subordinated Debt Securities issued by Philadelphia Consolidated, and (iii) the
obligations of Philadelphia Consolidated described herein and in any
accompanying Prospectus Supplement, under the Declaration (as defined herein)
(including the obligation to pay expenses of the Trust), the Subordinated
Indenture and any supplemental indentures thereto, the Subordinated Debt
Securities issued to the Trust and the Trust Guarantee taken together,
constitute a full and unconditional guarantee by Philadelphia Consolidated of
payments due on the Preferred Securities. See "Description of Preferred
Securities of the Trust" and "Description of Trust Guarantee."
The Trust is not currently subject to the information reporting
requirements of the Exchange Act. The Trust will become subject to such
requirements upon the effectiveness of the Registration Statement, although it
intends to seek and expects to receive exemption therefrom.
2
<PAGE> 138
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by Philadelphia Consolidated with
the Commission pursuant to the Exchange Act are incorporated herein by
reference: (i) Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (the "Form 10-K"); (ii) description of the Common Stock which is contained
in the Registration Statement on Form 8-A/A of Philadelphia Consolidated dated
September 13, 1993, registering the common stock of Philadelphia Consolidated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
including any amendments or reports filed for the purpose of updating such
description; and (iii) the Current Report on Form 8-K dated April 16, 1998.
All documents filed by Philadelphia Consolidated pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Securities shall
be deemed to be incorporated herein by reference and to be a part hereof from
the date of filing of such documents. Any statement contained in this Prospectus
or in a document incorporated or deemed to be incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated herein by reference or in
any Prospectus Supplement modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Philadelphia Consolidated will provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person, a copy of any or all of the documents referred to above
which have been or may be incorporated herein by reference (other than exhibits
to such documents unless such exhibits are specifically incorporated by
reference in such documents). Requests for such copies should be directed to
Craig P. Keller, Vice President, Secretary and Chief Financial Officer,
Philadelphia Consolidated Holding Corp., One Bala Plaza, Suite 100, Bala Cynwyd,
Pennsylvania 19004, (610) 617-7900.
3
<PAGE> 139
PHILADELPHIA CONSOLIDATED
As used in this Section, unless the context otherwise requires, (i)
"Philadelphia Consolidated" or the "Company" refers to Philadelphia Consolidated
and its subsidiaries; (ii) the "Insurance Subsidiaries" refers to Philadelphia
Indemnity Insurance Company ("PIIC") and Philadelphia Insurance Company ("PIC"),
collectively; and (iii) "MIA" refers to Maguire Insurance Agency, Inc., an
underwriting manager. Philadelphia Consolidated was incorporated in Pennsylvania
in 1984, to serve as a holding company for its three wholly owned subsidiaries
(PIIC, PIC and MIA).
The Company designs property and casualty insurance products incorporating
value-added coverages and services for select target industries or niches. A
"mixed" marketing strategy is utilized whereby the Company's production
underwriting organization markets the Company's insurance products to the
insured, directly or through the Company's preferred agents, and also accepts
business from independent insurance brokers. The Company's production
underwriting organization operates from proprietary field offices located across
the United States and includes telemarketing staffs at its regional offices and
the Philadelphia home office.
The Company offers the following product lines:
Commercial Automobile and Excess Liability. The Company has provided
Commercial Automobile Products to the leasing and rent-a-car industries for over
35 years. Products offered to the rent-a-car industry include coverage for the
business owner's property, dual interest liability, and physical damage on the
rental vehicle.
Additionally, through arrangements with a number of the largest rent-a-car
companies, the Company offers its excess liability product at the rental car
counter to rent-a-car customers protecting them against liability for bodily
injury and property damage, which is in excess of the statutory coverage
provided with the rental vehicle and provides primary coverage over the renter's
personal automobile insurance coverage.
The Company also offers a full range of liability and physical damage
coverages to automobile leasing companies and their customers. For the driver
(the lessee), coverages include both primary liability and physical damage
coverage on the vehicle. For the owner (the lessor), coverages include
contingent and excess liability over the primary liability layer which (i)
protects lessors in the event of a loss when the primary coverage is absent or
inadequate and (ii) provides contingent physical damage coverage. Additional
products offered to leasing companies include interim primary liability and
physical damage coverage, which protects the lessor of the vehicle before and
after it is delivered to the lessee; residual value coverage which guarantees
the value of the leased vehicle at the termination of the lease; and guaranteed
asset protection coverage which protects the lessor and lessee for the
difference between the leased vehicle's actual cash value and the lease or loan
net value in instances where the vehicle is stolen or damaged beyond repair.
Commercial Package. The Company has been providing Commercial Multi Peril
Package Policies ("Package Programs") to specific targeted niche markets for
over 10 years. Among the organizations to which the Company offers its specialty
niche Package Programs are non-profit social service agencies, health and
fitness organizations, assisted living facilities, nursing homes, private and
specialty training schools and condominium/homeowner association facilities. The
Package Programs policies are tailored to include special value-added features
addressing the unique aspects of each of the above niche markets differentiating
the Company's product offerings from those of its competitors.
Specialty Lines. The Company has been providing specialty professional
liability products for approximately 10 years, initially offering Directors &
Officers Liability coverage to Nonprofit 501(c)(3) tax exempt organizations. The
Company's recent efforts have been focused on broadening the target market for
its specialty lines product offerings through the expansion of its field
production underwriting staff and the introduction of new products. The Company
has significantly expanded its errors and omissions product offered to the
independent insurance agent along with its miscellaneous professional liability
program which is currently offered to an array of professionals including:
mortgage bankers, claims adjusters, lawyers, title abstractors, and financial
advisors. During 1996, the Company introduced a proprietary package of coverages
in its Executive Safeguard policy offered to public and private companies. The
coverages offered in the
4
<PAGE> 140
Executive Safeguard policy include: directors and officers liability, employment
practices liability, fiduciary liability, and kidnap ransom insurance.
The Company's principal executive offices are located at One Bala Plaza,
Suite 100, Bala Cynwyd, Pennsylvania, 19004 (telephone number: (610) 617-7900).
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a declaration of trust (the "Declaration") executed by the Company as
sponsor for such trust (the "Sponsor"), and the Trustee (as defined herein) of
such trust and (ii) the filing of a certificate of trust with the Secretary of
State of the State of Delaware on April 2, 1998. The Trust exists for the
exclusive purposes of (i) issuing and selling the Preferred Securities and
common securities representing common undivided beneficial interests in the
assets of such Trust (the "Common Securities" and, together with the Preferred
Securities, the "Trust Securities"), (ii) using the gross proceeds from the sale
of the Trust Securities to acquire the Debt Securities and (iii) engaging in
only those other activities necessary, appropriate, convenient or incidental
thereto. All of the Common Securities will be directly or indirectly owned by
Philadelphia Consolidated. The Common Securities will rank pari passu, and
payments will be made thereon pro rata, with the Preferred Securities, except
that, if an event of default under the Declaration has occurred and is
continuing, the rights of the holders of the Common Securities to payment in
respect of distributions and payments upon liquidation, redemption and otherwise
will be subordinated to the rights of the holders of the Preferred Securities.
Philadelphia Consolidated will directly or indirectly acquire Common Securities
in an aggregate liquidation amount equal to at least three percent of the total
capital of the Trust.
Unless otherwise specified in the applicable Prospectus Supplement, the
Trust has a term of up to seven years but may terminate earlier, as provided in
the Declaration. The Trust's business and affairs will be conducted by the
trustees (the "Trustee") appointed by Philadelphia Consolidated as the direct or
indirect holder of all of the Common Securities. The holder of the Common
Securities will be entitled to appoint, remove or replace any of, or increase or
reduce the number of, the Trustees of the Trust. The duties and obligations of
the Trustee shall be governed by the Declaration. A majority of the Trustees
(the "Regular Trustees") of the Trust will be persons who are employees or
officers of or who are affiliated with Philadelphia Consolidated. One Trustee of
the Trust will be a financial institution (the "Institutional Trustee") that is
not affiliated with Philadelphia Consolidated and has a minimum amount of
combined capital and surplus of not less than $50,000,000, which shall act as
property trustee and as indenture trustee for the purposes of compliance with
the provisions of Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), pursuant to the terms set forth in the applicable Prospectus Supplement.
In addition, unless the Institutional Trustee maintains a principal place of
business in the State of Delaware and otherwise meets the requirements of
applicable law, one Trustee of the Trust will be an entity having a principal
place of business in, or a natural person resident of, the State of Delaware
(the "Delaware Trustee"). Philadelphia Consolidated will pay all fees and
expenses related to the Trust and the offering of the Trust Securities.
Unless otherwise specified in the applicable Prospectus Supplement, (i) the
Institutional Trustee for the Trust shall be The First National Bank of Chicago,
and its address is One First National Plaza, Suite 0286, Chicago, Illinois and
(ii) the Delaware Trustee for the Trust shall be First Chicago Delaware Inc.,
and its address in the State of Delaware is 300 King Street, Wilmington,
Delaware. The principal place of business of the Trust shall be c/o
, telephone .
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USE OF PROCEEDS
Unless otherwise set forth in a Prospectus Supplement, the net proceeds
from the offering of the Securities will be used for general corporate purposes,
which may include acquisitions (including, without limitation, acquisitions of
programs or books of business), capital expenditures, capital contributions to
its subsidiaries and the repurchase by Philadelphia Consolidated of its Common
Stock. When a particular series of Securities is offered, the Prospectus
Supplement relating thereto will set forth Philadelphia Consolidated's intended
use for the net proceeds received from the sale of such Securities. Pending
application for specific purposes, the net proceeds may be invested in
marketable securities.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the unaudited consolidated ratio of earnings
to fixed charges of the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
----- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges(1)......... 73.6x 69.2x 196.0x 189.0x 12.3x
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges is computed by dividing income before
income taxes plus fixed charges by fixed charges. Fixed charges consist of
interest expense on all indebtedness and the portion of operating lease
rental expense that is representative of the interest factor (deemed to be
one-third of operating lease rental expense).
The ratio of earnings to fixed charges and preferred stock dividends is not
separately presented; the calculation is equivalent to the ratio of earnings
to fixed charges since there was no preferred stock outstanding for any of
the periods presented above and, accordingly, there were no preferred stock
dividends for any of those periods.
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DESCRIPTION OF THE DEBT SECURITIES
The Debt Securities may be offered from time to time by Philadelphia
Consolidated as Senior Debt Securities and/or as Subordinated Debt Securities.
The Senior Debt Securities will be issued under an Indenture, as it may be
supplemented from time to time (the "Senior Indenture"), between Philadelphia
Consolidated and The First National Bank of Chicago, as trustee (the "Senior
Trustee"). The Subordinated Debt Securities will be issued under an Indenture,
as it may be supplemented from time to time (the "Subordinated Indenture"),
between Philadelphia Consolidated and The First National Bank of Chicago, as
trustee (the "Subordinated Trustee"). The term "Trustee," as used herein, refers
to either the Senior Trustee or the Subordinated Trustee, as appropriate. The
forms of the Senior Indenture and the Subordinated Indenture (being sometimes
referred to herein collectively as the "Indentures" and individually as an
"Indenture") have been filed as exhibits to the Registration Statement. The
terms of the Indentures are also governed by certain provisions of the Trust
Indenture Act. The following summary of certain material provisions of the Debt
Securities does not purport to be complete and is qualified in its entirety by
reference to the Indentures. All capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to such terms in the Indentures. For a
summary of certain definitions used in this section, see "Certain Definitions"
below.
GENERAL
The Indentures will provide for the issuance of Debt Securities in series
up to the aggregate amount from time to time authorized by Philadelphia
Consolidated for each series. A Prospectus Supplement will set forth the
following terms (to the extent such terms are applicable to such Debt
Securities) of and information relating to the Debt Securities in respect of
which this Prospectus is delivered: (1) the designation of such Debt Securities;
(2) classification as Senior or Subordinated Debt Securities; (3) the aggregate
principal amount of such Debt Securities; (4) the percentage of their principal
amount at which such Debt Securities will be issued; (5) the date or dates on
which such Debt Securities will mature; (6) the rate or rates, if any, per
annum, at which such Debt Securities will bear interest, or the method of
determination of such rate or rates; (7) the times and places at which such
interest, if any, will be payable; (8) provisions for sinking, purchase or other
analogous fund, if any; (9) the date or dates, if any, after which such Debt
Securities may be redeemed at the option of Philadelphia Consolidated or of the
holder and the redemption price or prices; (10) the date or the dates, if any,
after which such Debt Securities may be converted or exchanged at the option of
the holder into or for shares of Common Stock or Preferred Stock of Philadelphia
Consolidated and the terms for any such conversion or exchange; and (11) any
other specific terms of the Debt Securities. Principal, premium, if any, and
interest, if any, will be payable and the Debt Securities offered hereby will be
transferable, at the corporate trust office of the Trustee's agent in the
borough of Manhattan, City of New York, provided that payment of interest, if
any, may be made at the option of Philadelphia Consolidated by check mailed to
the address of the person entitled thereto as it appears in the Security
Register. (Section 301 of each Indenture)
If a Prospectus Supplement specifies that a series of Debt Securities is
denominated in a currency or currency unit other than United States dollars,
such Prospectus Supplement will also specify the denomination in which such Debt
Securities will be issued and the coin or currency in which the principal,
premium, if any, and interest, if any, on such Debt Securities will be payable,
which may be United States dollars based upon the exchange rate for such other
currency or currency unit existing on or about the time a payment is due.
Special United States federal income tax considerations applicable to any Debt
Securities so denominated will also be described in the applicable Prospectus
Supplement.
The Debt Securities may be issued in registered or bearer form and, unless
otherwise specified in a Prospectus Supplement, in denominations of $1,000 and
integral multiples thereof. Debt Securities may be issued in book-entry form,
without certificates. Any such issue will be described in the Prospectus
Supplement relating to such Debt Securities. No service charge will be made for
any transfer or exchange of the Debt Securities, but Philadelphia Consolidated
or the Trustee may require payment of a sum sufficient to cover any tax or other
government charge payable in connection therewith.
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Debt Securities may be issued under the Indentures as Original Issue
Discount Securities to be sold at a substantial discount from their stated
principal amount. United States Federal income tax consequences and other
considerations applicable thereto will be described in the Prospectus Supplement
relating to such Debt Securities.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indentures will provide that Philadelphia Consolidated shall not
consolidate with or merge into any other corporation or convey, transfer or
lease its properties and assets substantially as an entirety to any Person,
unless: (1) the corporation formed by such consolidation or into which
Philadelphia Consolidated is merged or the Person which acquires by conveyance
or transfer, or which leases, the properties and assets of Philadelphia
Consolidated substantially as an entirety (A) shall be a corporation,
partnership, limited liability company or trust organized and validly existing
under the laws of the United States of America, any state thereof or the
District of Columbia and (B) shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form satisfactory
to the Trustee, Philadelphia Consolidated's obligation for the due and punctual
payment of the principal of (and premium, if any, on) and interest on all the
Debt Securities and the performance and observance of every covenant of the
Indentures on the part of Philadelphia Consolidated to be performed or observed;
(2) immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (3) Philadelphia Consolidated
or such Person shall have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease and such supplemental indenture comply with the provisions of
the Indentures described in this "Merger, Consolidation and Sale of Assets"
section and that all conditions precedent therein provided for relating to such
transaction have been complied with. The provisions of the Indentures described
in this paragraph shall apply only to a merger or consolidation in which
Philadelphia Consolidated is not the surviving corporation and to conveyances,
leases and transfers by Philadelphia Consolidated as transferor or lessor.
(Section 801 of each Indenture)
The Indentures will further provide that upon any consolidation by
Philadelphia Consolidated with or merger by Philadelphia Consolidated into any
other corporation or any conveyance, transfer or lease of the properties and
assets of Philadelphia Consolidated substantially as an entirety to any Person
in accordance with the preceding paragraph, the successor Person formed by such
consolidation or into which Philadelphia Consolidated is merged or to which such
conveyance, transfer or lease is made shall succeed to, and be substituted for,
and may exercise every right and power of, Philadelphia Consolidated under the
Indentures with the same effect as if such successor Person had been named as
Philadelphia Consolidated therein, and in the event of any such conveyance or
transfer, Philadelphia Consolidated (which term shall for this purpose mean
Philadelphia Consolidated Holding Corp. or any successor Person which shall
theretofore become such in the manner described in the preceding paragraph),
except in the case of a lease, shall be discharged of all obligations and
covenants under the Indentures and the Debt Securities and the coupons and may
be dissolved and liquidated. (Section 802 of each Indenture)
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indentures with respect
to Debt Securities of any series:
(1) default in the payment of any interest on any Debt Securities of
that series or any related coupon, when such interest or coupon becomes due
and payable, and continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any,
on) any Debt Securities of that series at its Maturity; or
(3) default in the deposit of any sinking fund payment when and as due
pursuant to the terms of the Debt Securities of that series and Article
Twelve of the Indentures; or
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<PAGE> 144
(4) default in the performance, or breach, of any covenant or warranty
of Philadelphia Consolidated in the Indentures (other than a default in the
performance, or breach, of a covenant or warranty which is specifically
dealt with elsewhere under this "Events of Default" section), and
continuance of such default or breach for a period of 90 days after there
has been given, by registered or certified mail, to Philadelphia
Consolidated by the Trustee or to Philadelphia Consolidated and the Trustee
by the Holders of at least 25% in principal amount of all Outstanding Debt
Securities, a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice of
Default" thereunder; or
(5) the entry of a decree or order by a court having jurisdiction in
the premises adjudging Philadelphia Consolidated bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of Philadelphia Consolidated
under the Federal Bankruptcy Code or any other applicable federal or state
law, or appointing a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of Philadelphia Consolidated or of any
substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree or order unstayed
and in effect for a period of 90 consecutive days; or
(6) the institution by Philadelphia Consolidated of proceedings to be
adjudicated bankrupt or insolvent, or the consent by it to the institution
of bankruptcy or insolvency proceedings against it, or the filing by it of
a petition or answer or consent seeking reorganization or relief under the
Federal Bankruptcy Code or any other applicable federal or state law, or
the consent by it to the filing of any such petition or to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of Philadelphia Consolidated or of any substantial part
of its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its
debts generally as they become due; or
(7) (A) there shall have occurred one or more defaults by Philadelphia
Consolidated in the payment of the principal of (or premium, if any, on)
Debt aggregating $50 million or more, when the same becomes due and payable
at the stated maturity thereof, and such default or defaults shall have
continued after any applicable grace period and shall not have been cured
or waived, or (B) Debt of Philadelphia Consolidated aggregating $50 million
or more shall have been accelerated or otherwise declared due and payable,
or required to be prepaid or repurchased (other than by regularly scheduled
required prepayment), prior to the stated maturity thereof; or
(8) any other Event of Default provided with respect to Debt
Securities of that series.
If an Event of Default described in clause (1), (2), (3), (4), (7) or (8)
above with respect to Debt Securities of any series at the time Outstanding
occurs and is continuing, then in every such case the Trustee or the Holders of
not less than 25% in principal amount of the Outstanding Debt Securities of that
series may declare the principal amount (or, if the Debt Securities of that
series are Original Issue Discount Securities or Indexed Securities, such
portion of the principal amount as may be specified in the terms of that series)
of all of the Debt Securities of that series to be due and payable immediately,
by a notice in writing to Philadelphia Consolidated (and to the Trustee if given
by Holders), and upon any such declaration such principal amount (or specified
portion thereof) shall become immediately due and payable. If an Event of
Default described in clause (5) or (6) above occurs and is continuing, then the
principal amount of all the Debt Securities shall become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder, subject, however, to all rights, powers and limitations provided for
by the Federal Bankruptcy Code or any other applicable Federal or State Law.
At any time after a declaration of acceleration with respect to Debt
Securities of any series (or of all series, as the case may be) has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee as provided in Article Five of the Indentures, the Holders of a
majority in principal amount of the Outstanding Debt Securities of that series
(or of all series, as the case may be), by
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written notice to Philadelphia Consolidated and the Trustee, may rescind and
annul such declaration and its consequences if:
(1) Philadelphia Consolidated has paid or deposited with the Trustee a
sum sufficient to pay in the Currency in which the Debt Securities of such
series are payable (except as otherwise specified pursuant to Section 301
of the Indentures for the Debt Securities of such series and except, if
applicable, as provided in certain provisions of Section 312 of the
Indentures):
(A) all overdue interest on all Outstanding Debt Securities of that
series (or of all series, as the case may be) and any related coupons;
(B) all unpaid principal of (and premium, if any, on) any
Outstanding Debt Securities of that series (or of all series, as the
case may be) which has become due otherwise than by such declaration of
acceleration, and interest on such unpaid principal at the rate or rates
prescribed therefor in such Debt Securities;
(C) to the extent that payment of such interest is lawful, interest
on overdue interest at the rate or rates prescribed therefor in such
Debt Securities; and
(D) all sums paid or advanced by the Trustee thereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default with respect to Debt Securities of that
series (or of all series, as the case may be), other than the non-payment
of amounts of principal of (or premium, if any, on) or interest on Debt
Securities of that series (or of all series, as the case may be) which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in Section 513 of the Indentures.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the Debt Securities because of an Event of Default
specified in clause (7) of the first paragraph of this section shall have
occurred and be continuing, such declaration of acceleration shall be
automatically annulled if the Debt that is the subject of such Event of Default
has been discharged or the holders thereof have rescinded their declaration of
acceleration in respect of such Debt, and written notice of such discharge or
rescission, as the case may be, shall have been given to the Trustee by
Philadelphia Consolidated and countersigned by the holders of such Debt or a
trustee, fiduciary or agent for such holders, within 30 days after such
declaration of acceleration in respect of the Debt Securities, and no other
Event of Default has occurred during such 30-day period which has not been cured
or waived during such period. (Section 502 of each Indenture)
Subject to Section 502 of each Indenture, the Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
may on behalf of the Holders of all the Debt Securities of such series waive any
past default described in clause (1), (2), (3), (4), (7), or (8) of the first
paragraph of this section (or, in the case of a default described in clause (5)
or (6) of the first paragraph of this section, the Holders of not less than a
majority in principal amount of all Outstanding Debt Securities may waive any
such past default), and its consequences, except a default (i) in respect of the
payment of the principal of (or premium, if any, on) or interest on any Debt
Security or any related coupon, or (ii) in respect of a covenant or provision
which under the Indentures cannot be modified or amended without the consent of
the Holder of each Outstanding Debt Security of such series affected. (Section
513 of each Indenture)
Upon any such waiver, any such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of the Indentures; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
(Section 513 of each Indenture)
No Holder of any Debt Security of any series or any related coupons shall
have any right to institute any proceeding, judicial or otherwise, with respect
to the Indentures, or for the appointment of a receiver or trustee, or for any
other remedy thereunder, unless (i) such Holder has previously given written
notice to the Trustee of a continuing Event of Default with respect to the Debt
Securities of that series; (ii) the Holders of
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not less than 25% in principal amount of the Outstanding Debt Securities of that
series in the case of any Event of Default under clause (1), (2), (3), (4), (7)
or (8) of the first paragraph of this section, or, in the case of any Event of
Default described in clause (5) or (6) of the first paragraph of this section,
the Holders of not less than 25% in principal amount of all Outstanding Debt
Securities, shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as Trustee under
each of the Indentures; (iii) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be incurred
in compliance with such request; (iv) the Trustee for 60 days after its receipt
of such notice, request and offer of indemnity has failed to institute any such
proceeding; and (v) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority or
more in principal amount of the Outstanding Debt Securities of that series in
the case of any Event of Default described in clause (1), (2), (3), (4), (7) or
(8) of the first paragraph of this section, or, in the case of any Event of
Default described in clause (5) or (6) of the first paragraph of this section,
by the Holders of a majority or more in principal amount of all Outstanding Debt
Securities. (Section 507 of each Indenture)
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under either Indenture in good
faith. Subject to the provisions of the Indentures relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
under the Indentures is not under any obligation to exercise any of its rights
or powers under the Indentures at the request or direction of any of the Holders
unless such Holders shall have offered to the Trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the Trustee,
with respect to the Debt Securities of any series, the Holders of not less than
a majority in principal amount of the Outstanding Debt Securities of such series
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee under the Indentures.
Within 90 days after the occurrence of any Default with respect to Debt
Securities of any series, the Trustee shall transmit in the manner and to the
extent provided in TIA Section 313(c), notice of such Default known to the
Trustee, unless such Default shall have been cured or waived; provided, however,
that, except in the case of a Default in the payment of the principal of (or
premium, if any, on) or interest on any Debt Securities of such series, or in
the payment of any sinking fund installment with respect to Debt Securities of
such series, the Trustee shall be protected in withholding such notice if and so
long as the board of directors, the executive committee or a trust committee of
directors and/or Responsible Officers of the Trustee in good faith determines
that the withholding of such notice is in the interest of the Holders of Debt
Securities of such series and any related coupons; and provided further that, in
the case of any Default of the character specified in clause (7) of the first
paragraph of this section with respect to Debt Securities of such series, no
such notice to Holders shall be given until at least 30 days after the
occurrence thereof.
Philadelphia Consolidated is required to deliver to the Trustee, within 120
days after the end of each fiscal year, a brief certificate of Philadelphia
Consolidated's compliance with all of the conditions and covenants under the
Indentures.
DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURES
The Indentures will provide that Philadelphia Consolidated may, at its
option and at any time, terminate the obligations of Philadelphia Consolidated
with respect to the Outstanding Debt Securities of any series ("defeasance").
Such defeasance means that Philadelphia Consolidated shall be deemed to have
paid and discharged the entire indebtedness represented by the Outstanding Debt
Securities and any related coupons, except for the following which shall survive
until otherwise terminated or discharged under the Indentures: (A) the rights of
Holders of such Outstanding Debt Securities and any related coupons (i) to
receive, solely from the trust fund described in the Indentures, payments in
respect of the principal of (and premium, if any, on) and interest on such Debt
Securities and any related coupons when such payments are due, and (ii) to
receive shares of common stock or other Securities from Philadelphia
Consolidated upon conversion of any convertible Debt Securities issued
thereunder, (B) Philadelphia Consolidated's obligations to issue temporary Debt
Securities, register the transfer or exchange of any Debt Securities, replace
mutilated, destroyed, lost or
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stolen Debt Securities, maintain an office or agency for payments in respect of
the Debt Securities and, if Philadelphia Consolidated acts as its own Paying
Agent, hold in trust, money to be paid to such Persons entitled to payment, and
with respect to Additional Amounts, if any, on such Debt Securities as
contemplated in the Indentures, (C) the rights, powers, trusts, duties and
immunities of the Trustee under the Indentures and (D) the defeasance provisions
of the Indentures. With respect to Subordinated Debt Securities, money and
securities held in trust pursuant to the defeasance and covenant defeasance
provisions described herein, shall not be subject to the subordination
provisions of the Subordinated Indenture. In addition, Philadelphia Consolidated
may, at its option and at any time, elect to terminate the obligations of
Philadelphia Consolidated with respect to certain covenants that are set forth
in the Indentures, some of which are described in the "Certain Covenants"
section above, and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Debt Securities
("covenant defeasance"). (Section 1403 of each Indenture)
In order to exercise either defeasance or covenant defeasance:
(1) Philadelphia Consolidated shall irrevocably have deposited or
caused to be deposited with the Trustee, in trust, for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Debt Securities and
any related coupons, (A) money in an amount (in such Currency in which such
Debt Securities and any related coupons are then specified as payable at
Stated Maturity), or (B) Government Obligations applicable to such Debt
Securities (determined on the basis of the Currency in which such Debt
Securities are then specified as payable at Stated Maturity) which through
the scheduled payment of principal and interest in respect thereof in
accordance with their terms will provide, not later than one day before the
due date of any payment of principal (including any premium) and interest,
if any, under such Debt Securities and any related coupons, money in an
amount or (C) a combination thereof, sufficient, in the opinion of a
nationally recognized firm of independent public accountants to pay and
discharge (i) the principal of (and premium, if any, on) and interest on
the Outstanding Debt Securities and any related coupons on the Stated
Maturity (or Redemption Date, if applicable) of such principal (and
premium, if any) or installment or interest and (ii) any mandatory sinking
fund payments or analogous payments applicable to the Outstanding Debt
Securities and any related coupons on the day on which such payments are
due and payable in accordance with the terms of the Indentures and of such
Debt Securities and any related coupons; provided that the Trustee shall
have been irrevocably instructed to apply such money or the proceeds of
such Government Obligations to said payments with respect to such Debt
Securities and any related coupons. Before such a deposit, Philadelphia
Consolidated may give to the Trustee, in accordance with certain redemption
provisions in the Indentures, a notice of its election to redeem all or any
portion of such Outstanding Debt Securities at a future date in accordance
with the terms of the Debt Securities of such series and the redemption
provisions of the Indentures, which notice shall be irrevocable. Such
irrevocable redemption notice, if given, shall be given effect in applying
the foregoing; and
(2) no Default or Event of Default with respect to the Debt Securities
and any related coupons shall have occurred and be continuing on the date
of such deposit or, insofar as the Event of Default described in clauses
(5) and (6) of the Events of Default section above are concerned, at any
time during the period ending on the 91st day after the date of such
deposit (it being understood that this condition shall not be deemed
satisfied until the expiration of such period); (3) such defeasance or
covenant defeasance shall not result in a breach or violation of, or
constitute a default under, the Indentures or any other material agreement
or instrument to which Philadelphia Consolidated is a party or by which it
is bound; (4) in the case of a defeasance, Philadelphia Consolidated shall
have delivered to the Trustee an Opinion of Counsel stating that (x)
Philadelphia Consolidated has received from, or there has been published
by, the Internal Revenue Service a ruling or (y) since the Issue Date,
there has been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such opinion shall confirm that,
the Holders of the Outstanding Debt Securities and any related coupons will
not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred; (5) in the case of a covenant
defeasance, Philadelphia
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Consolidated shall have delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the Outstanding Debt Securities and any
related coupons will not recognize income, gain or loss for federal income
tax purposes as a result of such covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; (6) notwithstanding any other provisions of the defeasance and
covenant defeasance provisions of the Indentures, such defeasance or
covenant defeasance shall be effected in compliance with any additional or
substitute terms, conditions or limitations in connection therewith
pursuant to Section 301 of the Indentures; and (7) Philadelphia
Consolidated shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent under
the Indentures to either defeasance or covenant defeasance, as the case may
be, have been complied with. (Section 1404 of each Indenture)
SATISFACTION AND DISCHARGE
The Indentures shall upon Company Request cease to be of further effect
with respect to any series of Debt Securities (except as to any surviving rights
of registration of transfer or exchange of Debt Securities of such series herein
expressly provided for and the obligation of Philadelphia Consolidated to pay
any Additional Amounts as contemplated by Section 1005 of each Indenture) and
the Trustee, at the expense of Philadelphia Consolidated, shall execute proper
instruments acknowledging satisfaction and discharge of such Indenture as to
such series when (1) either (A) all Debt Securities of such series theretofore
authenticated and delivered and all coupons, if any, appertaining thereto (other
than (i) coupons appertaining to Bearer Securities surrendered for exchange for
Registered Securities and maturing after such exchange, whose surrender is not
required or has been waived as provided in Section 305 of the Indentures, (ii)
Debt Securities and coupons of such series which have been destroyed, lost or
stolen and which have been replaced or paid as provided in Section 306 of the
Indentures, (iii) coupons appertaining to Debt Securities called for redemption
and maturing after the relevant Redemption Date, whose surrender has been waived
as provided in Section 1106 of the Indentures, and (iv) Debt Securities and
coupons of such series for whose payment money has theretofore been deposited in
trust with the Trustee or any Paying Agent or segregated and held in trust by
Philadelphia Consolidated and thereafter repaid to Philadelphia Consolidated, as
provided in Section 1003 of the Indentures) have been delivered to the Trustee
for cancellation; or (B) all Debt Securities of such series and, in the case of
(i) or (ii) below, any coupons appertaining thereto not theretofore delivered to
the Trustee for cancellation (i) have become due and payable, or (ii) will
become due and payable at their Stated Maturity within one year, or (iii) if
redeemable at the option of Philadelphia Consolidated, are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of Philadelphia Consolidated, and Philadelphia Consolidated, in the
case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose an amount, in
the Currency in which the Debt Securities of such series are payable, sufficient
to pay and discharge the entire indebtedness on such Debt Securities not
theretofore delivered to the Trustee for cancellation, for principal (and
premium, if any) and interest to the date of such deposit (in the case of Debt
Securities which have become due and payable) or to the Stated Maturity or
Redemption Date, as the case may be; (2) Philadelphia Consolidated has paid or
caused to be paid all other sums payable hereunder by Philadelphia Consolidated;
and (3) Philadelphia Consolidated has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent described herein relating to the satisfaction and discharge of the
Indentures as to such series have been complied with. (Section 401 of each
Indenture)
AMENDMENTS AND WAIVERS
The Indentures will provide that at any time and from time to time,
Philadelphia Consolidated and the Trustee may, without the consent of any holder
of Debt Securities, enter into one or more indentures supplemental thereto for
certain specified purposes, including, among other things, (i) to cure
ambiguities, defects or inconsistencies, or to make any other provisions with
respect to questions or matters arising under the Indentures (provided that such
action shall not adversely affect the interests of the Holders in any material
respect), (ii) to effect or maintain the qualification of the Indentures under
the Trust Indenture Act, or
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(iii) to evidence the succession of another person to Philadelphia Consolidated
and the assumption by any such successor of the obligations of Philadelphia
Consolidated in accordance with the Indentures and the Debt Securities. (Section
901 of each Indenture). Other amendments and modifications of the Indentures or
the Debt Securities may be made by Philadelphia Consolidated and the Trustee
with the consent of the holders of not less than a majority of the aggregate
principal amount of all of the then Outstanding Debt Securities of any Series;
provided, however, that no such modification or amendment may, without the
consent of the holder of each Outstanding Debt Security affected thereby, (1)
change the Stated Maturity of the principal of, or any installment of interest
on, any Debt Security or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
any obligation of Philadelphia Consolidated to pay Additional Amounts
contemplated by Section 1005 of each Indenture (except as contemplated and
permitted by certain provisions of the Indentures), or reduce the amount of the
principal of an Original Issue Discount Security that would be due and payable
upon a declaration of acceleration of the Maturity thereof pursuant to Section
502 of the Indentures of the amount thereof provable in bankruptcy pursuant to
Section 504 of the Indentures, or adversely affect any right of repayment at the
option of any Holder of any Debt Security, or change any Place of Payment where,
or the Currency in which, any Debt Security or any premium or the interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof (or, in the case of
redemption or repayment at the option of the Holder, on or after the Redemption
Date or Repayment Date, as the case may be), or adversely affect any right to
convert or manage any Debt Securities as may be provided pursuant to Section 301
of the Indentures, or (2) reduce the percent in principal amount of the
Outstanding Debt Securities of any series, the consent of whose Holders is
required for any such supplemental indenture, for any waiver of compliance with
certain provisions of the Indentures or certain defaults thereunder and their
consequences provided for in the Indentures, or reduce the requirements for
quorum or voting.
GOVERNING LAW
The Indentures and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York. The Indentures are subject to
the provisions of the Trust Indenture Act that are required to be a part thereof
and shall, to the extent applicable, be governed by such provisions.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Capital Stock" means any and all shares, interests, participations, rights
or equivalents (however designated) of corporate stock of Philadelphia
Consolidated or any Principal Subsidiary.
"Company Order" or "Company Request" means a written request or order
signed in the name of Philadelphia Consolidated by its Chairman, its President,
any Vice President, its Treasurer or an Assistant Treasurer, and delivered to
the Trustee.
"Debt" means notes, bonds, debentures or other similar evidences of
indebtedness for money borrowed.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Fair Market Value" means the fair market value of the item in question as
determined by the Board of Directors acting in good faith and in exercise of its
fiduciary duties.
"Holder" means a Person in whose name a Debt Security is registered in the
Security Register.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Debt Securities.
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"Issue Date" means the date of first issuance of the Debt Securities under
either Indenture.
"Maturity," when used with respect to any Debt Securities, means the date
on which the principal of such Debt Security or an installment of principal
becomes due and payable as therein or herein provided, whether at the Stated
Maturity or by declaration of acceleration, notice of redemption, notice of
option to elect repayment or otherwise.
"Officers' Certificate" means a certificate signed by the Chairman, the
President or a Vice President, and by the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary of Philadelphia Consolidated, and delivered
to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for Philadelphia Consolidated, including an employee of Philadelphia
Consolidated, and who shall be acceptable to the Trustee.
"Original Issue Discount Security" means any Debt Security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the Maturity thereof pursuant to Section 502 of
the Indentures.
"Outstanding," when used with respect to Debt Securities, means, as of the
date of determination, all Debt Securities theretofore authenticated and
delivered under the Indentures, except:
(i) Debt Securities theretofore canceled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Debt Securities, or portions thereof, for whose payment, money in
the necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than Philadelphia Consolidated) in trust or set aside
and segregated in trust by Philadelphia Consolidated (if Philadelphia
Consolidated shall act as its own Paying Agent) for the Holders of such
Debt Securities;
(iii) Debt Securities, except to the extent provided in the
"Defeasance or Covenant Defeasance of the Indentures" section, with respect
to which Philadelphia Consolidated has effected defeasance and/or covenant
defeasance as provided in the Indenture; and
(iv) Mutilated, destroyed, lost or stolen Debt Securities which have
become or are about to become due and payable which have been paid pursuant
to Section 306 of the Indentures or in exchange for or in lieu of which
other Debt Securities have been authenticated and delivered pursuant to the
Indenture, other than any such Debt Securities in respect of which there
shall have been presented to the Trustee proof satisfactory to it that such
Debt Securities are held by a bona fide purchaser in whose hands the Debt
Securities are valid obligations of Philadelphia Consolidated; provided,
however, that in determining whether the Holders of the requisite principal
amount of Outstanding Debt Securities have given any request, demand,
authorization, direction, notice, consent or waiver under the Indentures,
and for the purpose of making the calculations required by TIA Section 313,
Debt Securities owned by Philadelphia Consolidated or any other obligor
upon the Debt Securities or any Affiliate of Philadelphia Consolidated or
such other obligor shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Trustee shall be protected in
making such calculation or in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Debt Securities
which the Trustee knows to be so owned shall be so disregarded. Debt
Securities so owned which have been pledged in good faith may be regarded
as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Debt Securities
and that the pledgee is not Philadelphia Consolidated or any other obligor
upon the Debt Securities or any Affiliate of Philadelphia Consolidated or
such other obligor.
"Paying Agent" means any Person (including Philadelphia Consolidated acting
as Paying Agent) authorized by Philadelphia Consolidated to pay the principal of
(and premium, if any, on) or interest on any Debt Securities on behalf of
Philadelphia Consolidated.
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"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Responsible Officer," when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above-designated
officers, and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Rolling Period" shall mean with respect to any fiscal quarter, such fiscal
quarter and the three immediately preceding fiscal quarters considered as a
single accounting period.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 305 of the Indenture.
"Stated Maturity," when used with respect to any Debt Security or any
installment of principal thereof or interest thereon, means the date specified
in such Debt Security as the fixed date on which the principal of such Debt
Security or such installment of principal or interest is due and payable.
"Subsidiary" means any corporation of which at the time of determination
Philadelphia Consolidated, directly and/or indirectly through one or more
Subsidiaries, owns more than 50% of the Voting Stock.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in
force at the date as of which the Indentures were executed, except that any
supplemental indenture executed pursuant to the Indentures shall conform to the
requirements of the Trust Indenture Act as in effect on the date of execution
thereof.
"Trustee" means The First National Bank of Chicago until a successor
Trustee shall have become such pursuant to the applicable provisions of the
Indentures, and thereafter "Trustee" shall mean such successor Trustee.
"Vice President," when used with respect to Philadelphia Consolidated or
the Trustee, means any vice president, whether or not designated by a number or
a word or words added before or after the title "vice president."
"Voting Stock" means stock of the class or classes having general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of a corporation (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
GENERAL DESCRIPTION OF CAPITAL STOCK
The following description of Philadelphia Consolidated's capital stock does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the more complete descriptions thereof set forth in Philadelphia
Consolidated's Articles of Incorporation, as amended (the "Articles"), and
By-laws, as amended (the "By-laws"), which documents are exhibits to this
Registration Statement.
Philadelphia Consolidated is authorized to issue up to 50,000,000 shares of
Common Stock, no par value, and up to 10,000,000 shares of Preferred Stock, $.01
par value per share. As of March 9, 1998, there were 12,282,370 shares of Common
Stock and no shares of Preferred Stock outstanding.
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DESCRIPTION OF PREFERRED STOCK
General. The following summary contains a description of certain general
terms of Philadelphia Consolidated's Preferred Stock. The particular terms of
any series of Preferred Stock that may be offered will be described in the
applicable Prospectus Supplement. If so indicated in a Prospectus Supplement,
the terms of any such series may differ from the terms set forth below. The
summary of terms of the Preferred Stock does not purport to be complete and is
subject to and qualified in its entirety by reference to the provisions of the
Articles and any amendment(s) thereto relating to a particular series of offered
Preferred Stock which is or will be in the form filed or incorporated by
reference as an exhibit to the Registration Statement of which this Prospectus
is a part at or prior to the time of the issuance of such series of Preferred
Stock.
The Board of Directors of Philadelphia Consolidated has the power, without
further action by the shareholders, to issue in one or more classes on series,
shares of Preferred Stock with full, limited, multiple, fractional or no voting
rights, and with such designations, preferences, qualifications, privileges,
limitations, restrictions, options, conversion rights or other special or
relative rights as shall be fixed from time to time by the Board of Directors.
The shares of any series of Preferred Stock will be, when issued, fully paid and
non-assessable and holders thereof will have no preemptive rights in connection
therewith.
Rank. Unless otherwise specified in the Prospectus Supplement relating to
a particular series of Preferred Stock, each series of Preferred Stock will rank
on parity as to dividends and liquidation rights in all respects with each other
series of Preferred Stock.
Dividend Rights. Holders of the Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Board of Directors of
Philadelphia Consolidated, out of funds legally available therefor, cash
dividends at such rates and on such dates as are set forth in the Prospectus
Supplement relating to such series of Preferred Stock. Different series of the
Preferred Stock may be entitled to dividends at different rates or based upon
different methods of determination. Such rates may be fixed or variable or both.
Each such dividend will be payable to the holders of record as they appear on
the stock books of Philadelphia Consolidated on such record dates as will be
fixed by the Board of Directors of Philadelphia Consolidated or a duly
authorized committee thereof. Dividends on any series of the Preferred Stock may
be cumulative or noncumulative, as provided in the Prospectus Supplement
relating thereto.
Rights upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Philadelphia Consolidated, the holders
of each series of Preferred Stock will be entitled to receive out of assets of
Philadelphia Consolidated available for distribution to shareholders, before any
distribution of assets is made to holders of Common Stock or any other class of
stock ranking junior to such series of the Preferred Stock upon liquidation,
liquidating distributions in the amount set forth in the Prospectus Supplement
relating to such series of Preferred Stock plus an amount equal to accrued and
unpaid dividends for the then current dividend period and, if such series of the
Preferred Stock is cumulative, for all dividend periods prior thereto, all as
set forth in the Prospectus Supplement with respect to such series of Preferred
Stock.
Redemption. The terms, if any, on which shares of a series of Preferred
Stock may be subject to optional or mandatory redemption, in whole or in part,
will be set forth in the Prospectus Supplement relating to such series.
Conversion and Exchange. The terms, if any, on which shares of a series of
Preferred Stock are convertible into another series of Preferred Stock or Common
Stock or exchangeable for another series of Preferred Stock or Common Stock will
be set forth in the Prospectus Supplement relating thereto. Such terms may
include provisions for conversion, either mandatory, at the option of the
holder, or at the option of Philadelphia Consolidated, in which case the number
of shares of another series of Preferred Stock or Common Stock to be received by
the holders of such series of Preferred Stock would be calculated as of a time
and in the manner stated in such Prospectus Supplement.
Transfer Agent and Registrar. The transfer agent, registrar and dividend
disbursement agent for each series of Preferred Stock will be designated in the
applicable Prospectus Supplement. The registrar for shares of each series of
Preferred Stock will send notices to shareholders of any meetings at which
holders of the Preferred Stock have the right to elect directors of Philadelphia
Consolidated or to vote on any other matter.
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Voting Rights. The holders of Preferred Stock of a series offered hereby
will not be entitled to vote except as indicated in the Prospectus Supplement
relating to such series of Preferred Stock or as required by applicable law.
DESCRIPTION OF COMMON STOCK
General. The holders of Common Stock are entitled to receive dividends,
when and as declared by the Board of Directors, out of funds legally available
therefor, and to receive pro rata the assets of Philadelphia Consolidated
legally available for distribution upon liquidation, after payment to any
holders of Preferred Stock having a liquidation preference over the Common
Stock. In addition, holders of Common Stock are entitled to one vote per share
on all matters voted on by shareholders generally, including the election of
directors. Shareholders do not have cumulative voting rights. There are no
preemptive, conversion or redemption rights applicable to the shares of the
Common Stock. The currently outstanding shares of Common Stock are fully paid
and non-assessable. The shares of Common Stock sold hereunder will be fully paid
and nonassessable when the shares are issued by Philadelphia Consolidated
against receipt of the purchase price therefor. The Common Stock is listed on
the NNM under the symbol "PHLY."
The issuance of or the ability of the Board of Directors to issue Preferred
Stock could adversely affect the voting power and other rights of the holders of
Common Stock or have the effect of decreasing the market price of the Common
Stock or of discouraging or hampering any attempt by a person or group to obtain
control of Philadelphia Consolidated including any attempt involving a bid for
the Common Stock at a premium over the then market price.
PENNSYLVANIA LAW AND CERTAIN CORPORATE PROVISIONS
The provisions of Pennsylvania Law and of the Articles and By-Laws which
are summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a shareholder
might consider in such stockholder's best interest, including those attempts
that might result in a premium over the market price for the shares held by
shareholders.
Pennsylvania Business Combination Statute. The Pennsylvania Business
Corporation Law of 1988 (the "PA BCL") contains several sections designed to
provide certain Pennsylvania-domiciled corporations and their shareholders with
protection against hostile takeovers and abusive takeover techniques. However,
these provisions do not apply to a corporation that has, in accordance with
certain procedures set forth in the PA BCL, opted out of such sections.
Philadelphia Consolidated has opted out of all such sections except Subchapter F
of Chapter 25 of the PA BCL (the "Business Combination Statute"). Philadelphia
Consolidated could subsequently elect not to be subject to the Business
Combination Statute by appropriate amendment of its Articles. However, such an
amendment must be approved by the vote of disinterested shareholders holding a
majority of Philadelphia Consolidated's shares entitled to vote in the election
of directors. In addition, such amendment would not become effective until 18
months from such vote and would not apply to a business combination with persons
who were interested shareholders prior to the vote.
The Business Combination Statute is designed to regulate certain "business
combinations" between corporations, such as Philadelphia Consolidated, which
have a class of voting shares registered under the Exchange Act, and their
"interested shareholders." In general, the Business Combination Statute
prohibits the consummation of certain enumerated "business combinations" during
a five-year moratorium period commencing on the date the interested shareholder
first acquires beneficial ownership of 20% or more of the voting shares of the
target corporation. After the moratorium period, the corporation can undertake a
business combination with the interested shareholder only upon receipt of
certain shareholder approvals.
The Business Combination Statute defines the term "interested shareholder"
as any person that, directly or indirectly, is the beneficial owner of 20% or
more of the shares entitled to be voted in an election of directors. Beneficial
ownership is broadly defined to include a person who, individually or through or
with affiliates or associates, directly or indirectly owns shares or has the
right to acquire or vote shares by virtue of written or oral agreements,
arrangements or understandings.
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The statute contains a detailed list of transactions that constitute
"business combinations," including, among others, (i) a merger or consolidation
of the corporation with the interested shareholder or the corporate affiliates
or associates of the interested shareholder; (ii) a sale, lease, exchange,
mortgage, pledge, transfer or other disposition to the interested shareholder of
assets of the corporation or a subsidiary of the corporation having an aggregate
market value of at least 10% of the aggregate market value (as defined) of the
consolidated assets or outstanding stock of the corporation or representing ten
percent or more of the consolidated earning power or net income of the
corporation; (iii) the issuance or transfer by the corporation or a subsidiary
to the interested shareholder of stock having an aggregate market value equal to
five percent or more of the aggregate market value of all outstanding stock of
the corporation; (iv) adoption of a plan or proposal of liquidation or
dissolution of the corporation proposed by or pursuant to any oral or written
agreement, arrangement or understanding with the interested shareholder; (v) a
reclassification, recapitalization, merger or consolidation of the corporation
with any subsidiary or other transaction which is proposed by or pursuant to any
oral or written agreement, arrangement or understanding with the interested
shareholder and which has the effect of increasing the proportionate ownership
of shares by the interested shareholder; and (vi) receipt by the interested
shareholder of any disproportionate benefit from any loans, advances,
guarantees, pledges or other financial assistance, tax credits or other tax
advantages from the corporation.
The Business Combination Statute sets forth certain exceptions to the
restrictions contained therein. First, a proposed business combination can be
effected during the five-year moratorium period if the combination is approved
by a corporation's board of directors prior to the date on which the person
became an interested shareholder, or if the board approves the transaction in
which the person became an interested shareholder prior to the consummation of
such transaction. Second, a combination may be consummated during the five-year
moratorium period if at least 80% of the corporation's voting stock is owned by
the interested shareholder, the holders of a majority of the shares not held by
the interested shareholder or its affiliates approve the combination, and there
is compliance with certain fair price provisions that specify the minimum
consideration to be received by the corporation's shareholders in the
combination (the "Fair Price Provisions") or, alternatively, if the combination
is unanimously approved by all of the holders of the outstanding common shares
of the corporation. Finally, after the expiration of the five-year moratorium
period, a combination can occur upon approval of either (i) the holders of a
majority or the voting shares not held by the interested shareholder or its
affiliates, or (ii) the holders of a corporation's shares present or represented
at a duly called meeting. However, in the case of clause (ii), the business
combination may only be consummated if the consideration received by each
disinterested shareholder complies with the Fair Price Provisions.
Preferred Stock. The Board of Directors is authorized (without shareholder
approval) to issue one or more classes or series of Preferred Stock, with full,
limited, multiple, fractional or no voting rights, and with such designations,
preferences, qualifications, privileges. limitations, restrictions, options,
conversion rights or other special or relative rights as may be fixed from time
to time by the Board of Directors. These rights and privileges could adversely
affect the voting power of holders of Common Stock, and the authority of the
Board of Directors to issue Preferred Stock without further shareholder approval
could have the effect of delaying, deterring, or preventing a change in control
of Philadelphia Consolidated.
Special Meetings of Shareholders. Except as expressly required by law,
special meetings of shareholders may be called at any time only by: (i) the
Chief Executive Officer or Chief Operating Officer of Philadelphia Consolidated;
or (ii) a majority of the entire Board of Directors.
No Shareholder Action by Written Consent. The Articles provide that at any
time Philadelphia Consolidated has more than 75 shareholders, as it currently
has, no shareholder action shall be effective unless taken at a shareholder
meeting. This prevents the holders of a majority of the outstanding voting stock
of Philadelphia Consolidated from using procedures for shareholder action by
written consent to take shareholder action without giving all the shareholders
of Philadelphia Consolidated entitled to vote on a proposed action the
opportunity to participate in determining the proposed action.
Advance Notice Requirements for Shareholder Proposals and Director
Nominees. The By-laws establish an advance notice procedure with regard to
business proposed to be submitted by shareholders at any annual
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or special meeting of shareholders of Philadelphia Consolidated, including the
nomination of candidates for election as directors. The procedure provides that
a notice of proposed shareholder business or a shareholder nomination for
director must be timely given in writing to Philadelphia Consolidated prior to
the meeting. Generally, to be timely, notice relating to an annual meeting must
be received at the principal executive offices of Philadelphia Consolidated not
less than 50 days nor more than 75 days before such meeting. Notice to
Philadelphia Consolidated from a shareholder who proposes to nominate a person
at a meeting for election as a director must contain: (a) the name and address
of the shareholder intending to make the nomination and of the person or persons
to be nominated; (b) a representation that the shareholder intends to appear in
person or by proxy at the meeting to nominate the person or persons specified in
the notice; (c) the address and principal occupation for the past five years of
the nominee; and (d) the written consent of the nominee to serve as a director
of Philadelphia Consolidated if so elected.
The chairperson of a meeting of shareholders may determine that a person is
not nominated in accordance with the nomination procedure, in which case such
person's nomination will be disregarded. If the chairperson of a meeting of
shareholders determines that other business was not properly brought before such
meeting in accordance with the By-law procedures, such business may or may not
be conducted at the meeting, in the chairperson's sole discretion. Nothing in
the nomination procedure or the business procedure will preclude discussion by
any shareholder of any nomination or business properly made or brought before
the annual or any other meeting in accordance with the above-mentioned
procedures.
Amendment of the By-laws. The By-laws provide that By-law provisions may
be adopted, altered, amended or repealed only by the affirmative vote of a
majority of the members of the Board of Directors or holders of at least 75% of
the outstanding shares of capital stock of Philadelphia Consolidated.
DESCRIPTION OF WARRANTS
GENERAL
Philadelphia Consolidated may issue Warrants to purchase Debt Securities,
Preferred Stock, Common Stock or any combination thereof, and such Warrants may
be issued independently or together with any such Securities and may be attached
to or separate from such Securities. Each series of Warrants will be issued
under a separate warrant agreement (each a "Warrant Agreement") to be entered
into between Philadelphia Consolidated and a warrant agent ("Warrant Agent").
The Warrant Agent will act solely as an agent of Philadelphia Consolidated in
connection with the Warrants of each such series and will not assume any
obligation or relationship of agency for or with holders or beneficial owners of
Warrants. The following sets forth certain general terms and provisions of the
Warrants offered hereby. Further terms of the Warrants and the applicable
Warrant Agreement will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of any
Warrants in respect of which this Prospectus is being delivered, including the
following: (i) the title of such Warrants; (ii) the aggregate number of such
Warrants; (iii) the price or prices at which such Warrants will be issued; (iv)
the currency or currencies, including composite currencies, in which the price
of such Warrants may be payable; (v) the designation and terms of the Securities
(other than Preferred Securities and Common Securities) purchasable upon
exercise of such Warrants; (vi) the price at which and the currency or
currencies, including composite currencies, in which the Securities (other than
Preferred Securities and Common Securities) purchasable upon exercise of such
Warrants may be purchased; (vii) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire; (viii)
whether such Warrants will be issued in registered form or bearer form; (ix) if
applicable, the minimum or maximum amount of such Warrants which may be
exercised at any one time; (x) if applicable, the designation and terms of the
Securities (other than Preferred Securities and Common Securities) with which
such Warrants are issued and the number of such Warrants issued with each such
Security; (xi) if applicable, the date on and after which such Warrants and the
related Securities (other than Preferred Securities and Common Securities) will
be separately transferable; (xii) information with respect to book-entry
procedures, if any; (xiii) if applicable, a discussion of certain
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United States Federal income tax considerations; and (xiv) any other terms of
such Warrants, including terms, procedures and limitations relating to the
exchange and exercise of such Warrants.
DESCRIPTION OF PREFERRED SECURITIES OF THE TRUST
GENERAL
The Trust may issue, from time to time, only one series of Preferred
Securities having terms described in the Prospectus Supplement relating thereto.
The Declaration authorizes the Regular Trustees of the Trust to issue on behalf
of the Trust one series of Preferred Securities. The Declaration will be
qualified as an indenture under the Trust Indenture Act. The Institutional
Trustee, an independent trustee, will act as indenture trustee for the Preferred
Securities for purposes of compliance with the provisions of the Trust Indenture
Act. The Preferred Securities will have such terms, including distributions,
redemption, voting, liquidation rights and such other preferred, deferred or
other special rights or such restrictions as shall be established by the Regular
Trustees in accordance with the Declaration or as shall be set forth in the
Declaration or made part of the Declaration by the Trust Indenture Act.
Reference is made to any Prospectus Supplement relating to the Preferred
Securities of the Trust for specific terms of the Preferred Securities,
including, to the extent applicable, (i) the distinctive designation of such
Preferred Securities; (ii) the number of Preferred Securities issued by the
Trust; (iii) the annual distribution rate (or method of determining such rate)
for Preferred Securities issued by the Trust and the date or dates upon which
such distributions shall be payable (provided, however, that distributions on
such Preferred Securities shall, subject to any deferral provisions, and any
provisions for payment of defaulted distributions, be payable on a quarterly
basis to holders of such Preferred Securities as of a record date in each
quarter during which such Preferred Securities are outstanding); (iv) any right
of the Trust to defer quarterly distributions on the Preferred Securities as a
result of an interest deferral right exercised by Philadelphia Consolidated on
the Subordinated Debt Securities held by the Trust; (v) whether distributions on
Preferred Securities shall be cumulative, and, in the case of Preferred
Securities having such cumulative distribution rights, the date or dates or
method of determining the date or dates from which distributions on Preferred
Securities shall be cumulative; (vi) the amount or amounts which shall be paid
out of the assets of the Trust to the holders of Preferred Securities upon
voluntary or involuntary dissolution, winding-up or termination of the Trust;
(vii) the obligation or option, if any, of the Trust to purchase or redeem
Preferred Securities and the price or prices at which, the period or periods
within which and the terms and conditions upon which Preferred Securities shall
be purchased or redeemed, in whole or in part, pursuant to such obligation or
option with such redemption price to be specified in the applicable Prospectus
Supplement; (viii) the voting rights, if any, of Preferred Securities in
addition to those required by law, including the number of votes per Preferred
Security and any requirement for the approval by the holders of Preferred
Securities as a condition to specified action or amendments to the Declaration;
(ix) the terms and conditions, if any, upon which Subordinated Debt Securities
held by the Trust may be distributed to holders of Preferred Securities; and (x)
any other relevant rights, preferences, privileges, limitations or restrictions
of Preferred Securities consistent with the Declaration or with applicable law.
All Preferred Securities offered hereby will be guaranteed by Philadelphia
Consolidated to the extent set forth below under "Description of Trust
Guarantee." The Trust Guarantee issued to the Trust, when taken together with
Philadelphia Consolidated's back-up undertakings, consisting of its obligations
under the Declaration (including the obligation to pay expenses of the Trust),
the applicable Indenture and any applicable supplemental indentures thereto and
the Subordinated Debt Securities issued to the Trust will provide a full and
unconditional guarantee by Philadelphia Consolidated of amounts due on the
Preferred Securities issued by the Trust. The payment terms of the Preferred
Securities will be the same as the Subordinated Debt Securities issued to the
Trust by Philadelphia Consolidated.
The Declaration authorizes the Regular Trustees to issue on behalf of the
Trust one series of Common Securities having such terms including distributions,
redemption, voting, liquidation rights or such restrictions as shall be
established by the Regular Trustees in accordance with the Declaration or as
shall otherwise be set forth therein. The terms of the Common Securities issued
by the Trust will be substantially identical to the terms of the Preferred
Securities issued by the Trust, and the Common Securities will rank pari passu,
and
21
<PAGE> 157
payments will be made thereon pro rata, with the Preferred Securities except
that, if an event of default under the Declaration has occurred and is
continuing, the rights of the holders of the Common Securities to payment in
respect of distributions and payments upon liquidation, redemption and otherwise
will be subordinated to the rights of the holders of the Preferred Securities.
The Common Securities will also carry the right to vote and to appoint, remove
or replace any of the Trustees of the Trust. All of the Common Securities of the
Trust will be directly or indirectly owned by Philadelphia Consolidated.
The financial statements of the Trust that issues Preferred Securities will
be reflected in Philadelphia Consolidated's consolidated financial statements
with the Preferred Securities shown as Philadelphia Consolidated-obligated
mandatorily-redeemable preferred securities of a subsidiary trust under minority
interest in consolidated subsidiaries. In a footnote to Philadelphia
Consolidated's audited financial statements there will be included statements
that the Trust is wholly-owned by Philadelphia Consolidated and that the sole
asset of the Trust is the Subordinated Debt Securities (indicating the principal
amount, interest rate and maturity date thereof).
DESCRIPTION OF TRUST GUARANTEE
Set forth below is a summary of information concerning the Trust Guarantee
that will be executed and delivered by Philadelphia Consolidated for the benefit
of the holders, from time to time, of Preferred Securities. The Trust Guarantee
will be qualified as an indenture under the Trust Indenture Act. Unless
otherwise specified in the applicable Prospectus Supplement, The First National
Bank of Chicago will act as independent indenture trustee for Trust Indenture
Act purposes under the Trust Guarantee (the "Preferred Securities Guarantee
Trustee"). The terms of the Trust Guarantee will be those set forth in the Trust
Guarantee and those made part of the Trust Guarantee by the Trust Indenture Act.
The following summary does not purport to be complete and is subject to and
qualified in its entirety by reference to the provisions of the form of Trust
Guarantee, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part, and the Trust Indenture Act. The
Trust Guarantee will be held by the Preferred Securities Guarantee Trustee for
the benefit of the holders of the Preferred Securities of the Trust.
GENERAL
Unless otherwise specified in the applicable Prospectus Supplement,
pursuant to the Trust Guarantee, Philadelphia Consolidated will agree, to the
extent set forth therein, to pay in full to the holders of the Preferred
Securities, the Guarantee Payments (as defined below) (except to the extent paid
by the Trust), as and when due, regardless of any defense, right of set-off or
counterclaim which the Trust may have or assert. The following payments or
distributions with respect to the Preferred Securities (the "Guarantee
Payments"), to the extent not paid by the Trust, will be subject to the Trust
Guarantee (without duplication): (i) any accrued and unpaid distributions that
are required to be paid on such Preferred Securities, to the extent the Trust
shall have funds available therefor; (ii) the redemption price, including all
accrued and unpaid distributions to the date of redemption (the "Redemption
Price"), to the extent the Trust has funds available therefor, with respect to
any Preferred Securities called for redemption by the Trust; and (iii) upon a
voluntary or involuntary dissolution, winding-up or termination of the Trust
(other than in connection with such distribution of Debt Securities to the
holders of Preferred Securities or the redemption of all of the Preferred
Securities upon maturity or redemption of the Subordinated Debt Securities) the
lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on such Preferred Securities to the date of payment, to the extent
the Trust has funds available therefor or (b) the amount of assets of the Trust
remaining for distribution to holders of such Preferred Securities in
liquidation of the Trust. Philadelphia Consolidated's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
Philadelphia Consolidated to the holders of Preferred Securities or by causing
the Trust to pay such amounts to such holders.
The Trust Guarantee will not apply to any payment of distributions except
to the extent the Trust shall have funds available therefor. If Philadelphia
Consolidated does not make interest or principal payments on
22
<PAGE> 158
the Subordinated Debt Securities purchased by the Trust, the Trust will not pay
distributions on the Preferred Securities issued by the Trust and will not have
funds available therefore.
Philadelphia Consolidated has also agreed to guarantee the obligations of
the Trust with respect to the Common Securities (the "Common Guarantee") issued
by the Trust to the same extent as the Trust Guarantee, except that, if an Event
of Default under the Subordinated Indenture has occurred and is continuing,
holders of Preferred Securities under the Trust Guarantee shall have priority
over holders of the Common Securities under the Common Guarantee with respect to
distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF PHILADELPHIA CONSOLIDATED
Unless otherwise specified in the applicable Prospectus Supplement, in the
Trust Guarantee, Philadelphia Consolidated will covenant that, so long as any
Preferred Securities issued by the Trust remain outstanding, if there shall have
occurred any event of default under the Trust Guarantee or under the Declaration
of the Trust, then (a) Philadelphia Consolidated will not declare or pay any
dividend on, make any distributions with respect to, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of its capital stock
(other than (i) purchases or acquisitions of capital stock of Philadelphia
Consolidated in connection with the satisfaction by Philadelphia Consolidated of
its obligations under any employee or agent benefit plans or the satisfaction by
Philadelphia Consolidated of its obligations pursuant to any contract or
security outstanding on the date of such event requiring Philadelphia
Consolidated to purchase capital stock of Philadelphia Consolidated, (ii) as a
result of a reclassification of Philadelphia Consolidated's capital stock (other
than into cash or other property) or the exchange or conversion of one class or
series of Philadelphia Consolidated's capital stock for another class or series
of Philadelphia Consolidated's capital stock, (iii) the purchase of fractional
interests in shares of Philadelphia Consolidated's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged, (iv) dividends or distributions in capital stock of
Philadelphia Consolidated (or rights to acquire capital stock) or repurchases or
redemptions of capital stock solely from the issuance or exchange of capital
stock or (v) redemptions or repurchases of any rights outstanding under a
shareholder rights plan); (b) Philadelphia Consolidated shall not make any
payment of interest, principal or premium, if any, on or repay, repurchase or
redeem any debt securities issued by Philadelphia Consolidated which rank junior
to the Subordinated Debt Securities issued to the Trust and (c) Philadelphia
Consolidated shall not make any guarantee payments with respect to the foregoing
(other than pursuant to a Trust Guarantee).
MODIFICATION OF THE TRUST GUARANTEES; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights
of holders of Preferred Securities (in which case no consent of such holders
will be required), the Trust Guarantee may be amended only with the prior
approval of the holders of not less than a majority in liquidation amount of the
outstanding Preferred Securities of the Trust. The manner of obtaining any such
approval of holders of such Preferred Securities will be set forth in
accompanying Prospectus Supplement. All guarantees and agreements contained in
the Trust Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of Philadelphia Consolidated and shall inure to the benefit of
the holders of the Preferred Securities of the Trust then outstanding.
EVENTS OF DEFAULT
An event of default under the Trust Guarantee will occur upon the failure
of Philadelphia Consolidated to perform any of its payment or other obligations
thereunder. The holders of a majority in liquidation amount of the Preferred
Securities to which the Trust Guarantee relates have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Preferred Securities Guarantee Trustee in respect of the Trust Guarantee or
to direct the exercise of any trust or power conferred upon the Preferred
Securities Guarantee Trustee under the Trust Guarantee.
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<PAGE> 159
If the Preferred Securities Guarantee Trustee fails to enforce the Trust
Guarantee, any record holder of Preferred Securities to which the Trust
Guarantee relates may institute a legal proceeding directly against Philadelphia
Consolidated to enforce the Preferred Securities Guarantee Trustee's rights
under the Trust Guarantee without first instituting a legal proceeding against
the Trust, the Preferred Securities Guarantee Trustee or any other person or
entity. Notwithstanding the foregoing, if Philadelphia Consolidated has failed
to make a Guarantee Payment under the Trust Guarantee, a record holder of
Preferred Securities to which the Trust Guarantee relates may directly institute
a proceeding against Philadelphia Consolidated for enforcement of the Trust
Guarantee for such payment to the record holder of the Preferred Securities to
which the Trust Guarantee relates of the principal of or interest on the
applicable Debt Securities on or after the respective due dates specified in the
Debt Securities, and the amount of the payment will be based on the holder's pro
rata share of the amount due and owing on all of the Preferred Securities to
which the Trust Guarantee relates. Philadelphia Consolidated has waived any
right or remedy to require that any action be brought first against the Trust or
any other person or entity before proceeding directly against Philadelphia
Consolidated. The record holder in the case of the issuance of one or more
global Preferred Securities certificates will be The Depository Trust Company
acting at the direction of the beneficial owners of the Preferred Securities.
Philadelphia Consolidated will be required to provide annually to the
Preferred Securities Guarantee Trustee a statement as to the performance by
Philadelphia Consolidated of certain of its obligations under, the outstanding
Trust Guarantee and as to any default in such performance.
INFORMATION CONCERNING THE PREFERRED SECURITIES GUARANTEE TRUSTEE
The Preferred Securities Guarantee Trustee, prior to the occurrence of a
default to the Trust Guarantee, undertakes to perform only such duties as are
specifically set forth in the Trust Guarantee and, after default with respect to
the Trust Guarantee, shall exercise the same degree of care as a prudent
individual would exercise in the conduct of his or her own affairs. Subject to
such provision, the Preferred Securities Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Guarantee at
the request of any holder of Preferred Securities to which the Trust Guarantee
relates unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby.
TERMINATION
The Trust Guarantee will terminate as to the Preferred Securities issued by
the Trust upon full payment of the Redemption Price of all Preferred Securities
of the Trust, upon distribution of the Debt Securities held by the Trust to the
holders of all of the Preferred Securities of the Trust or upon full payment of
the amounts payable in accordance with the Declaration of the Trust upon
liquidation of the Trust. The Trust Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of Preferred
Securities issued by the Trust must restore payment of any sums paid under such
Preferred Securities or the Trust Guarantee.
STATUS OF THE TRUST GUARANTEE
The Trust Guarantee will constitute a subordinated unsecured obligation of
Philadelphia Consolidated and will rank on a parity with all of Philadelphia
Consolidated's other subordinated unsecured obligations.
The Trust Guarantee will constitute a guarantee of payment and not of
collection (that is, the guaranteed party may institute a legal proceeding
directly against Philadelphia Consolidated to enforce its rights under the Trust
Guarantee without instituting a legal proceeding against any other person or
entity).
GOVERNING LAW
The Trust Guarantee will be governed by and construed in accordance with
the law of the State of New York.
24
<PAGE> 160
DESCRIPTION OF STOCK PURCHASE
CONTRACTS AND STOCK PURCHASE UNITS
Philadelphia Consolidated may issue Stock Purchase Contracts, including
contracts obligating holders to purchase from Philadelphia Consolidated, and
Philadelphia Consolidated to sell to the holders, a specified number of shares
of Common Stock or Preferred Stock at a future date or dates. The consideration
per share of Common Stock or Preferred Stock may be fixed at the time the Stock
Purchase Contracts are issued or may be determined by reference to a specific
formula set forth in the Stock Purchase Contracts. The Stock Purchase Contracts
may be issued separately or as a part of units ("Stock Purchase Units")
consisting of a Stock Purchase Contract and Debt Securities, Preferred
Securities or debt obligations of third parties, including U.S. Treasury
securities, securing the holders' obligations to purchase the Common Stock or
Preferred Stock under the Stock Purchase Contracts. The Stock Purchase Contracts
may require Philadelphia Consolidated to make periodic payments to the holders
of the Stock Purchase Units or vice versa, and such payments may be unsecured or
prefunded on some basis. The Stock Purchase Contracts may require holders to
secure their obligations thereunder in a specified manner.
The applicable Prospectus Supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the Prospectus
Supplement will not necessarily be complete, and reference will be made to the
Stock Purchase Contracts, and, if applicable, collateral arrangements and
depositary arrangements, relating to such Stock Purchase Contracts or Stock
Purchase Units.
PLAN OF DISTRIBUTION
Any of the Securities being offered hereby may be sold in any one or more
of the following ways from time to time: (i) through agents; (ii) to or through
underwriters; (iii) through dealers; and (iv) directly by Philadelphia
Consolidated or, in the case of Trust Preferred Securities, by the Trust to
purchasers.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
Offers to purchase Securities may be solicited by agents designated by
Philadelphia Consolidated from time to time. Any such agent involved in the
offer or sale of the Securities in respect of which this Prospectus is delivered
will be named, and any commissions payable by Philadelphia Consolidated or the
Trust to such agent will be set forth, in the applicable Prospectus Supplement.
Unless otherwise indicated in such Prospectus Supplement, any such agent will be
acting on a reasonable best efforts basis for the period of its appointment. Any
such agent may be deemed to be an underwriter, as that term is defined in the
Securities Act, of the Securities so offered and sold.
If Securities are sold by means of an underwritten offering, Philadelphia
Consolidated and, in the case of an offering of Trust Preferred Securities, the
Trust will execute an underwriting agreement with an underwriter or underwriters
at the time an agreement for such sale is reached, and the names of the specific
managing underwriter or underwriters, as well as any other underwriters, the
respective amounts underwritten and the terms of the transaction, including
commissions, discounts and any other compensation of the underwriters and
dealers, if any, will be set forth in the applicable Prospectus Supplement which
will be used by the underwriters to make resales of the Securities in respect of
which this Prospectus is being delivered to the public. If underwriters are
utilized in the sale of any Securities in respect of which this Prospectus is
being delivered, such Securities will be acquired by the underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at varying
prices determined by the underwriters at the time of the sale. Securities may be
offered to the public either through underwriting syndicates represented by
managing underwriters or directly by one or more underwriters. If any
underwriter or underwriters are utilized in the sale of Securities, unless
otherwise indicated in the applicable Prospectus Supplement, the underwriting
agreement will provide that the obligations of the underwriters are subject to
certain conditions precedent and that the underwriters with respect to a sale of
such Securities will be obligated to purchase all such Securities if any are
purchased.
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<PAGE> 161
Philadelphia Consolidated or the Trust, as applicable, may grant to the
underwriters options to purchase additional Securities, to cover
over-allotments, if any, at the initial public offering price (with additional
underwriting commissions or discounts), as may be set forth in the Prospectus
Supplement relating thereto. If Philadelphia Consolidated or the Trust, as
applicable, grants any over-allotment option, the terms of such over-allotment
option will be set forth in the Prospectus Supplement for such Securities.
If a dealer is utilized in the sale of Securities in respect of which this
Prospectus is delivered, Philadelphia Consolidated or the Trust, as applicable,
will sell such Securities to the dealer as principal. The dealer may then resell
such Securities to the public at varying prices to be determined by such dealer
at the time of resale. Any such dealer may be deemed to be an underwriter, as
such item is defined in Securities Act, of the Securities so offered and sold.
The name of the dealer and the terms of the transaction will be set forth in the
Prospectus Supplement relating thereto.
Offers to purchase Securities may be solicited directly by Philadelphia
Consolidated or the Trust, as applicable, and the sale thereof may be made by
Philadelphia Consolidated or the Trust directly to institutional investors or
others, who may be deemed to be underwriters within the meaning of the
Securities Act with respect to any resale thereof. The terms of any such sales
will be described in the Prospectus Supplement relating thereto.
Securities may also be offered and sold, if so indicated in the applicable
Prospectus Supplement, in connection with a remarketing upon their purchase, in
accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("remarketing firms"), acting as principals for their own
accounts or as agents for Philadelphia Consolidated or the Trust, as applicable.
Any remarketing firm will be identified and the terms of its agreement, if any,
with Philadelphia Consolidated or the Trust and its compensation will be
described in the applicable Prospectus Supplement. Remarketing firms may be
deemed to be underwriters, as that term is defined in the Securities Act, in
connection with the Securities remarketed thereby.
If so indicated in the applicable Prospectus Supplement, Philadelphia
Consolidated or the Trust, as applicable, may authorize agents and underwriters
to solicit offers by certain institutions to purchase Securities from
Philadelphia Consolidated or the Trust at the public offering price set forth in
the applicable Prospectus Supplement pursuant to delayed delivered contracts
providing for payment and delivery on the date or dates stated in the applicable
Prospectus Supplement. Such delayed delivery contracts will be subject to only
those conditions set forth in the applicable Prospectus Supplement. A commission
indicated in the applicable Prospectus Supplement will be paid to underwriters
and agents soliciting purchase of Securities pursuant to delayed delivery
contracts accepted by Philadelphia Consolidated or the Trust, as applicable.
Agents, underwriters, dealers and remarketing firms may be entitled under
relevant agreements with Philadelphia Consolidated or the Trust, as applicable,
to indemnification by Philadelphia Consolidated or the Trust against certain
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which such agents, underwriters, dealers and
remarketing firms may be required to make in respect thereof.
Each series of Securities will be a new issue and, other than the Common
Stock, which is listed on the NNM, will have no established trading market.
Philadelphia Consolidated may elect to list any series of Securities on an
exchange, and in the case of the Common Stock, on any additional exchange, but,
unless otherwise specified in the applicable Prospectus Supplement, Philadelphia
Consolidated shall not be obligated to do so. No assurance can be given as to
the liquidity of the trading market for any of the Securities.
Agents, underwriters, dealers and remarketing firms may be customers of,
engage in transactions with, or perform services for, Philadelphia Consolidated
and its Subsidiaries in the ordinary course of business.
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LEGAL OPINIONS
The validity of the Securities of offered hereby by Philadelphia
Consolidated and certain matters of Delaware law relating to the validity of the
Preferred Securities offered hereby by the Trust will be passed on for the Trust
and Philadelphia Consolidated by Wolf, Block, Schorr and Solis-Cohen LLP.
EXPERTS
The consolidated financial statements of Philadelphia Consolidated and its
subsidiaries as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 incorporated by reference in this Prospectus
have been incorporated herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
27
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============================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST OR ANY UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, NOR ANY
SALE MADE HEREUNDER AND THEREUNDER, SHALL UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE
TRUST SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OF SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
-----
<S> <C>
Prospectus Supplement Summary............... S-6
Explanatory Diagrams...................... S-22
Risk Factors................................ S-26
The Trust................................... S-35
Price Range of Common Stock and Dividends... S-36
Use of Proceeds............................. S-36
Condensed Consolidated Capitalization....... S-37
Accounting Treatment........................ S-38
Selected Consolidated Financial Data........ S-39
Business.................................... S-40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ S-52
Management.................................. S-57
Description of the FELINE PRIDES............ S-59
Description of the Purchase Contracts....... S-62
Certain Provisions of the Purchase Contract
Agreement and the Pledge Agreement........ S-72
Description of the Trust Preferred
Securities................................ S-75
Description of the Guarantee................ S-86
Description of the Debentures............... S-89
Effect of Obligations Under the Debentures
and the Guarantee......................... S-95
Certain Federal Income Tax Consequences..... S-96
ERISA Considerations........................ S-103
Underwriting................................ S-104
Legal Opinions.............................. S-106
Index of Principal Terms for Prospectus
Supplement................................ S-107
Index to Financial Statements and
Schedules................................. F-1
PROSPECTUS
Available Information....................... 2
Incorporation of Certain Documents by
Reference................................. 3
Philadelphia Consolidated................... 4
The Trust................................... 5
Use of Proceeds............................. 6
Consolidated Ratio of Earnings to Fixed
Charges................................... 6
Description of the Debt Securities.......... 7
General Description of Capital Stock........ 16
Description of Warrants..................... 20
Description of Preferred Securities of the
Trust..................................... 21
Description of Trust Guarantee.............. 22
Description of Stock Purchase Contracts and
Stock Purchase Units...................... 25
Plan of Distribution........................ 25
Legal Opinions.............................. 27
Experts..................................... 27
</TABLE>
============================================================
============================================================
9,000,000 FELINE PRIDES(SM)
% TRUST ORIGINATED
PREFERRED SECURITIES(SM)
("TOPrS"(SM))
PHILADELPHIA CONSOLIDATED
HOLDING CORP.
[BELL LOGO]
LOGO
PCHC
FINANCING I
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
APRIL , 1998
(SM)Service Mark of Merrill Lynch & Co., Inc.
============================================================
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission
Registration Fee............................................ $ 61,065
*Nasdaq National Market Listing Fee......................... 70,000
*Trustees' and Agents' Expenses............................. 92,000
Rating Agency Fee........................................... 38,000
*Accounting Fees and Expenses............................... 30,000
*Legal Fees and Expenses.................................... 125,000
*Printing and Mailing Costs................................. 175,000
*Miscellaneous.............................................. 8,935
--------
Total Expenses.............................................. $600,000
========
</TABLE>
- ---------------
* Estimated for purposes of completing the information required pursuant to this
Item 14.
Philadelphia Consolidated will pay all fees and expenses associated with
filing the Registration Statement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subchapter D (Sections 1741 through 1750) of Chapter 17 the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contains provisions
for mandatory and discretionary indemnification of a corporation's directors,
officers, employees and agents (collectively "Representatives"), and related
matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify Representatives under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with a threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party or threatened
to be made a party by reason of his or her being a Representative of the
corporation or serving at the request of the corporation as a Representative of
another corporation, partnership, joint venture, trust or other enterprise, if
he or she acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation and, with
respect to any criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful.
Section 1742 provides for indemnification with respect to derivative and
corporate actions similar to that provided by Section 1741. However,
indemnification is not provided under Section 1742 in respect of any claim,
issue or matter as to which a Representative has been adjudged to be liable to
the corporation unless and only to the extent that the proper court determines
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, a Representative is fairly and reasonably
entitled to indemnity for the expenses that the court deems proper.
Section 1743 provides that indemnification against expenses is mandatory to
the extent that a Representative has been successful on the merits or otherwise
in defense of any such action or proceeding referred to in Section 1741 or 1742.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of a
Representative is proper because the Representative met the applicable standard
of conduct. Section 1744 further provides that such determination will be made
by the board of directors by a majority vote of a quorum consisting of directors
not parties to the action or proceeding; if a quorum is not
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<PAGE> 165
obtainable or if obtainable and a majority vote of a quorum of disinterested
directors so directs, by independent legal counsel; or by the shareholders.
Section 1745 provides that expenses incurred by a Representative in
defending any action or proceeding referred to in Subchapter D of Chapter 17 of
the BCL may be paid by the corporation in advance of the final disposition of
such action or proceeding upon receipt of an undertaking by or on behalf of the
Representative to repay such amount if it shall ultimately be determined that
such Representative is not entitled to be indemnified by the corporation.
Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter D of Chapter
17 of the BCL shall not be deemed exclusive of any other rights to which a
Representative seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in such Representative's official
capacity and as to action in another capacity while holding that office.
Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any Representative against any liability incurred by such
Representative in his or her capacity as a Representative, whether or not the
corporation would have the power to indemnify such Representative against that
liability under Subchapter D of Chapter 17 of the BCL.
Sections 1748 and 1749 apply the indemnification and advancement of
expenses provisions contained in Subchapter D of Chapter 17 of the BCL to all
constituent corporations absorbed in a consolidation, merger or division, as
well as the surviving or new corporations surviving or resulting therefrom, and
to service as a representative of a corporation or an employee benefit plan.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter D of Chapter 17 of the BCL
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a Representative and shall inure to the benefit of
the heirs and personal representative of such person.
Section 9 of Article IV of Philadelphia Consolidated's By-Laws provides
indemnification to directors for all actions taken by them and for all failures
to take action to the fullest extent permitted by Pennsylvania law against all
expense, liability and loss reasonably incurred or suffered by them in
connection with any threatened, pending or completed action, suit or proceeding
(including, without limitation, an action, suit or proceeding by or in the right
of Philadelphia Consolidated), whether civil, criminal, administrative,
investigative or through arbitration. Section 9 of Article IV of Philadelphia
Consolidated's By-Laws also permits Philadelphia Consolidated, by action of its
board of directors, to indemnify officers, employees and other persons to the
same extent as directors. The provisions of Section 9 of Article IV of the
By-Laws relating to the limitation of directors' liability, to indemnification
and to the advancement of expenses constitute a contract between Philadelphia
Consolidated and each of its directors which may be modified as to any director
only with that director's consent or as otherwise specifically provided in
Section 9. Any repeal or amendment of Section 9 of Article IV of the By-Laws
which is adverse to any director will apply to such director only on a
prospective basis, and will not reduce any limitation on the personal liability
of a director of Philadelphia Consolidated, or limit the rights of an indemnitee
to indemnification or to the advancement of expenses with respect to any action
or failure to act occurring prior to the time of such repeal or amendment. No
repeal or amendment of the By-Laws will affect any or all of Section 9 of
Article IV so as either to reduce the limitation of directors' liability or
limit indemnification or the advancement of expenses in any manner unless
adopted by the unanimous vote of the directors of Philadelphia Consolidated then
serving or the affirmative vote of shareholders entitled to cast not less than a
majority of the votes that all shareholders are entitled to cast in the election
of directors.
Section 9 of Article IV further permits Philadelphia Consolidated to
maintain insurance, at its expense, for the benefit of any person on behalf of
whom insurance is permitted to be purchased by Pennsylvania law against any such
expenses, liability or loss, whether or not Philadelphia Consolidated would have
the power to
II-2
<PAGE> 166
indemnify such person against such expense, liability or loss under Pennsylvania
or other law. Philadelphia Consolidated has purchased directors' and officers'
liability insurance.
Article of the Declaration of Trust limits the liability to the Trust and
certain other persons and provides for the indemnification by the Trust or
Philadelphia Consolidated of Trustees, the Officers, other employees and certain
other persons.
ITEM 17. UNDERTAKINGS.
(a) The Undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include
any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change
to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities registered which remain unsold at the termination of
the offering.
(b) The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of each
such Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrants of expenses
incurred or paid by a director, officer or controlling person of such Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, such Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(i) The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 167
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement (Standard Provisions).***
3.1 Articles of Incorporation of Philadelphia Consolidated, as
amended (incorporated by reference to Exhibit 3.1 filed with
Philadelphia Consolidated's Form S-1 Registration Statement
under the Securities Act of 1933 (Registration No.
33-65958)).
3.2 By-Laws of Philadelphia Consolidated, as amended
(incorporated by reference to Exhibit 3.2 filed with
Philadelphia Consolidated's Form S-1 Registration Statement
under the Securities Act of 1933 (Registration No.
33-65958)).
4.1 Form of Senior Indenture to be entered into by Philadelphia
Consolidated and The First National Bank of Chicago, as
Trustee.****
4.2 Form of Supplemental Indenture to be entered into by
Philadelphia Consolidated and The First National Bank of
Chicago, as Trustee.****
4.3 Certificate of Trust of PCHC Financing I.****
4.4 Declaration of Trust of PCHC Financing I.****
4.5 Form of Amended and Restated Declaration of Trust of PCHC
Financing I.****
4.6 Form of Guarantee Agreement by Philadelphia Consolidated
Holding Corp. with respect to PCHC Financing I.****
4.7 Form of Warrant Agreement.*
4.8 Form of Trust Preferred Security (included in Exhibit
4.5).****
4.9 Form of Warrant.*
4.10 Form of Debenture (included in Exhibit 4.2).****
4.11 Form of Purchase Contract Agreement between Philadelphia
Consolidated and The First National Bank of Chicago, as
Purchase Contract Agent (including as Exhibit A the form of
the Security Certificate).****
4.12 Form of Pledge Agreement among Philadelphia Consolidated,
The Chase Manhattan Bank, as Collateral Agent, and The First
National Bank of Chicago, as Purchase Contract Agent.****
4.13 Form of Remarketing Agreement.****
5.1 Opinion of Wolf, Block Schorr and Solis-Cohen LLP regarding
the legality of the Securities being registered by
Philadelphia Consolidated and the Trust hereby.***
8.1 Tax Opinion of Wolf, Block, Schorr and Solis-Cohen LLP.***
12.1 Statement re: Computation of Consolidated Ratio of Earnings
to Fixed Charges.****
23.1 Consent of Coopers & Lybrand L.L.P. related to the financial
statements of Philadelphia Consolidated Holding Corp.****
23.2 Consent of Wolf, Block Schorr and Solis-Cohen LLP (included
in Exhibit 5.1).***
24.1 Powers of attorney (included on signature pages of this
Registration Statement).
25.1 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of The First National Bank of Chicago, as
Trustee for the Senior Debt Securities.****
25.2 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of The First National Bank of Chicago, as
Trustee under the Declaration of Trust and Preferred
Securities Guarantee of Philadelphia Consolidated Holding
Corp.****
</TABLE>
- ---------------
* To be filed by amendment.
** To be filed under subsequent Form 8-K.
*** Filed electronically herewith.
**** Previously filed.
II-4
<PAGE> 168
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Philadelphia
Consolidated Holding Corp. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly caused
this Amendment to its Registration Statement, to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Bala Cynwyd, Pennsylvania on
April 24, 1998.
PHILADELPHIA CONSOLIDATED HOLDING CORP.
By: /s/ CRAIG P. KELLER
----------------------------------------
Craig P. Keller
Vice President, Secretary
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed by the following persons in the
capacities indicated on April 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
JAMES J. MAGUIRE* Chairman of the Board of Directors,
- ----------------------------------------------------- President, Chief Executive Officer
James J. Maguire and Director (Principal Executive
Officer)
/s/ CRAIG P. KELLER Vice President, Secretary and Chief
- ----------------------------------------------------- Financial Officer (Principal
Craig P. Keller Financial and Accounting Officer)
SEAN P. SWEENEY* Senior Vice President and Director
- -----------------------------------------------------
Sean P. Sweeney
JAMES J. MAGUIRE, JR.* Vice President and Director
- -----------------------------------------------------
James J. Maguire, Jr.
WILLIAM J. HENRICH, JR.* Director
- -----------------------------------------------------
William J. Henrich, Jr.
ROGER R. LARSON* Director
- -----------------------------------------------------
Roger R. Larson
PAUL R. HERTEL, JR.* Director
- -----------------------------------------------------
Paul R. Hertel, Jr.
THOMAS J. MCHUGH* Director
- -----------------------------------------------------
Thomas J. McHugh
MICHAEL J. MORRIS* Director
- -----------------------------------------------------
Michael J. Morris
J. EUSTACE WOLFINGTON* Director
- -----------------------------------------------------
J. Eustace Wolfington
*By: /s/ CRAIG P. KELLER
------------------------------------------------
Craig P. Keller
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, PCHC Financing
I certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and that it has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Wilmington, Delaware on April 24, 1998.
PCHC FINANCING I
By: /s/ CRAIG P. KELLER
------------------------------------
Craig P. Keller, Trustee
Pursuant to the requirements of the Securities Act, this amended
Registration Statement has been signed by the following persons in the
capacities indicated on April 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ CRAIG P. KELLER Trustee
- -----------------------------------------------------
Craig P. Keller
JAMES J. MAGUIRE, JR.* Trustee
- -----------------------------------------------------
James J. Maguire, Jr.
JACK T. CARBALLO* Trustee
- -----------------------------------------------------
Jack T. Carballo
</TABLE>
*By: /s/ CRAIG P. KELLER
---------------------------------------------------------
Craig P. Keller
Attorney-in-Fact
II-6
<PAGE> 170
EXHIBIT INDEX
<TABLE>
<CAPTION>
METHOD OF
EXHIBIT NO. DESCRIPTION FILING
- ----------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement (Standard Provisions). ***
3.1 Articles of Incorporation of Philadelphia Consolidated, as
amended (incorporated by reference to Exhibit 3.1 filed with
Philadelphia Consolidated's Form S-1 Registration Statement
under the Securities Act of 1933 (Registration No.
33-65958)).
3.2 By-Laws of Philadelphia Consolidated, as amended
(incorporated by reference to Exhibit 3.2 filed with
Philadelphia Consolidated's Form S-1 Registration Statement
under the Securities Act of 1933 (Registration No.
33-65958)).
4.1 Form of Senior Indenture to be entered into by Philadelphia ****
Consolidated and The First National Bank of Chicago, as
Trustee.
4.2 Form of Supplemental Indenture to be entered into by ****
Philadelphia Consolidated and The First National Bank of
Chicago, as Trustee.
4.3 Certificate of Trust of PCHC Financing I. ****
4.4 Declaration of Trust of PCHC Financing I. ****
4.5 Form of Amended and Restated Declaration of Trust of PCHC ****
Financing I.
4.6 Form of Guarantee Agreement by Philadelphia Consolidated ****
Holding Corp. with respect to PCHC Financing I.
4.7 Form of Warrant Agreement. *
4.8 Form of Trust Preferred Security (included in Exhibit 4.5). ****
4.9 Form of Warrant. *
4.10 Form of Debenture (included in Exhibit 4.2). ****
4.11 Form of Purchase Contract Agreement between Philadelphia ****
Consolidated and The First National Bank of Chicago, as
Purchase Contract Agent (including as Exhibit A the form of
the Security Certificate).
4.12 Form of Pledge Agreement among Philadelphia Consolidated, ****
The Chase Manhattan Bank, as Collateral Agent, and The First
National Bank of Chicago, as Purchase Contract Agent.
4.13 Form of Remarketing Agreement. ****
5.1 Opinion of Wolf, Block Schorr and Solis-Cohen LLP regarding ***
the legality of the Securities being registered by
Philadelphia Consolidated and the Trust hereby.
8.1 Tax Opinion of Wolf, Block Schorr and Solis-Cohen LLP. ***
12.1 Statement re: Computation of Consolidated Ratio of Earnings ****
to Fixed Charges.
23.1 Consent of Coopers & Lybrand L.L.P. related to the financial ****
statements of Philadelphia Consolidated Holding Corp.
23.2 Consent of Wolf, Block Schorr and Solis-Cohen LLP (included ***
in Exhibit 5.1).
24.1 Powers of attorney (included on signature pages of this
Registration Statement).
25.1 Form T-1 Statement of Eligibility under the Trust Indenture ****
Act of 1939 of The First National Bank of Chicago, as
Trustee for the Senior Debt Securities.
25.2 Form T-1 Statement of Eligibility under the Trust Indenture ****
Act of 1939 of The First National Bank of Chicago, as
Trustee under the Declaration of Trust and Preferred
Securities Guarantee of Philadelphia Consolidated Holding
Corp.
</TABLE>
- ---------------
* To be filed by amendment.
** To be filed under subsequent Form 8-K.
*** Filed electronically herewith.
**** Previously filed.
<PAGE> 1
EXHIBIT 1.1
FORM OF UNDERWRITING AGREEMENT
April , 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1209(1) Ladies and Gentlemen:
Philadelphia Consolidated Holding Corp., a Pennsylvania corporation
(the "Company"), and PCHC Financing I, a Delaware statutory business trust (the
"Trust" and, together with the Company, the "Offerors"), confirm their
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Underwriter"), with respect to the sale to the Underwriter
of FELINE PRIDES and % Trust Originated Preferred
Securities (the "Trust Preferred Securities" and, together with the FELINE
PRIDES, the "Initial Securities") of the Trust. The FELINE PRIDES will
initially consist of (A) 12,600,000 units (referred to as "Income PRIDES") with
a Stated Amount, per Income PRIDES, of $10 (the "Stated Amount") and (B) at
least units (referred to as "Growth PRIDES") with a face amount, per
Growth PRIDES, equal to the Stated Amount. Each Income PRIDES will initially
consist of a unit comprised of (a) a stock purchase contract (a "Purchase
Contract") under which (i) the holder will purchase from the Company on
16, 2001 (the "Purchase Contract Settlement Date"), for an amount of cash
equal to the Stated Amount, a number of newly issued shares of common stock, no
par value per share (the "Shares"), of the Company equal to the Settlement Rate
described herein, and (ii) the Company will pay the holder unsecured contract
adjustment payments ("Contract Adjustment Payments"), if any, at the rate of
% of the Stated Amount per annum and (b) beneficial ownership of a Trust
Preferred Security. Each Growth PRIDES will initially consist of a unit
comprised of (a) a Purchase Contract under which (i) the holder will purchase
from the Company on the Purchase Contract Settlement Date, for an amount in
cash equal to
____________________
(1) "FELINE PRIDES," "INCOME PRIDES," AND "GROWTH PRIDES" ARE SERVICE MARKS
OF MERRILL LYNCH & CO., INC.
<PAGE> 2
the Stated Amount, the number of Shares of Common Stock of the Company, equal
to the Settlement Rate, and (ii) the Company will pay the holder Contract
Adjustment Payments, if any, at the rate of % of the Stated Amount per
annum, and (b) a 1/100 undivided beneficial interest in a zero-coupon U.S.
Treasury Security (CUSIP No. ) in an amount equal to $1,000 payable on
, 2001 (the "Treasury Securities"). The Company and the Trust also
propose to grant to the Underwriter options to purchase up to
additional Income PRIDES additional Growth PRIDES and
additional Trust Preferred Securities (the "Option Securities" and together with
the Initial Securities, the "Securities") as described in Section 2(b) hereof.
In accordance with the terms of the Purchase Contract Agreement, to be dated as
of , 1998, between the Company and The First National Bank of Chicago, as
Purchase Contract Agent (the "Purchase Contract Agent"), the Trust Preferred
Securities constituting a part of the Income PRIDES, and the Treasury Securities
constituting a part of the Growth PRIDES, will be pledged by the Purchase
Contract Agent, on behalf of the holders of the Securities, to the Chase
Manhattan Bank, as Collateral Agent, pursuant to the Pledge Agreement, to be
dated as of , 1998 (the "Pledge Agreement"), among the Company, the
Purchase Contract Agent and the Collateral Agent, to secure the holders'
obligation to purchase Common Stock under the Purchase Contracts. The rights
and obligations of a holder of Securities in respect of Trust Preferred
Securities, subject to the pledge thereof, and Purchase Contracts will be
evidenced by Security Certificates (the "Security Certificates") to be issued
pursuant to the Purchase Contract Agreement.
The Trust Preferred Securities and Common Securities (as defined
below) will be guaranteed by the Company with respect to distributions and
payments upon liquidation, redemption and otherwise (the "Guarantee") pursuant
to the Guarantee Agreement, to be dated as of , 1998 (the "Guarantee
Agreement"), executed and delivered by the Company and The First National Bank
of Chicago, as trustee (the "Guarantee Trustee"), for the benefit of the
holders from time to time of the Trust Preferred Securities and the Common
Securities, and certain back-up undertakings of the Company. All of the net
proceeds from the sale of the Trust Preferred Securities will be combined with
the entire net proceeds from the sale by the Trust to the Company of its common
securities (the "Common Securities" and, together with the Trust Preferred
Securities, the "Trust Securities") will be used by the Trust to purchase the
% Debentures due , 2003 (the "Debentures") of the Company. The
Trust Securities will be issued pursuant to the amended and restated declaration
of trust of the Trust, dated as of , 1998 (the "Declaration"), among
2
<PAGE> 3
the Company, as Sponsor, , and (the "Regular
Trustees"), and The First National Bank of Chicago, as the institutional
trustee (the "Institutional Trustee") and First Chicago Delaware, Inc., as the
Delaware trustee (the "Delaware Trustee" and, together with the Institutional
Trustee and the Regular Trustees, the "Trustees"), and the holders from time to
time of undivided beneficial interests in the assets of the Trust. The
Debentures will be issued pursuant to the Indenture, dated as of , 1998
(the "Base Indenture"), between the Company and The First National Bank of
Chicago, as Trustee (the "Debt Trustee"), as supplemented by the First
Supplemental Indenture, dated , 1998 (the Base Indenture, as supplemented
and amended, being referred to as the "Indenture"). Capitalized terms used
herein without definition shall be used as defined in the Prospectus.
Prior to the purchase and public offering of the Securities by the
Underwriter, the Offerors and the Underwriter shall enter into an agreement
substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The
Pricing Agreement may take the form of an exchange of any standard form of
written communication between the Offerors and the Underwriter and shall
specify such applicable information as is indicated in Exhibit A hereto. The
offering of the Securities will be governed by this Agreement, as supplemented
by the Pricing Agreement. From and after the date of the execution and
delivery of the Pricing Agreement, this Agreement shall be deemed to
incorporate the Pricing Agreement.
Pursuant to a remarketing agreement (the "Remarketing Agreement") to
be dated as of , 1998, among the Company, the Trust, the Purchase
Contract Agent and a nationally recognized investment banking firm chosen by
the Company, the Trust Preferred Securities may be remarketed, subject to
certain terms and conditions.
The Company and the Trust have filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (No. 333-
) and pre-effective amendment no. 1 thereto covering the registration of
securities of the Company and the Trust, including the Securities and the
Purchase Contracts and Trust Preferred Securities included in, and Shares
underlying, the Securities, under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses, and
the offering thereof from time to time in accordance with the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and the Company has filed such post-effective amendments thereto as may be
required prior to the execution of the Pricing Agreement.
3
<PAGE> 4
Such registration statement, as so amended, has been declared effective by the
Commission. Such registration statement, as so amended, including the exhibits
and schedules thereto, if any, and the information, if any, deemed to be a part
thereof pursuant to Rule 430A(b) of the 1933 Act Regulations (the "Rule 430A
Information") or Rule 434(d) of the 1933 Act Regulations (the "Rule 434
Information"), is referred to herein as the "Registration Statement"; and the
final prospectus relating to the offering of the Securities, in the form first
furnished to the Underwriter by the Company for use in connection with the
offering of the Securities, are collectively referred to herein as the
"Prospectus"; provided, however, that all references to the "Registration
Statement" and the "Prospectus" shall be deemed to include all documents
incorporated therein by reference pursuant to the Securities Exchange Act of
1934, as amended (the "1934 Act"), prior to the execution of the applicable
Pricing Agreement; provided, further, that if the Offerors file a registration
statement with the Commission pursuant to Section 462(b) of the 1933 Act
Regulations (the "Rule 462(b) Registration Statement"), then after such filing,
all references to "Registration Statement" shall be deemed to include the Rule
462(b) Registration Statement; and provided, further, that if the Offerors
elect to rely upon Rule 434 of the 1933 Act Regulations, then all references to
"Prospectus" shall be deemed to include the final or preliminary prospectus and
the applicable term sheet or abbreviated term sheet (the "Term Sheet"), as the
case may be, in the form first furnished to the Underwriter by the Company in
reliance upon Rule 434 of the 1933 Act Regulations, and all references in this
Underwriting Agreement to the date of the Prospectus shall mean the date of the
Term Sheet. A "preliminary prospectus" shall be deemed to refer to any
prospectus used before the registration statement became effective and any
prospectus that omitted, as applicable, the Rule 430A Information, the Rule 434
Information or other information to be included upon pricing in a form of
prospectus filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations, that was used after such effectiveness and prior to the execution
and delivery of the applicable Pricing Agreement. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the electronically transmitted
copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary
4
<PAGE> 5
prospectus or the Prospectus (or other references of like import) shall be
deemed to mean and include all such financial statements and schedules and
other information which is incorporated by reference in the Registration
Statement, any preliminary prospectus or the Prospectus, as the case may be;
and all references in this Agreement to amendments or supplements to the
Registration Statement, any preliminary prospectus or the Prospectus shall be
deemed to mean and include the filing of any document under the 1934 Act which
is incorporated by reference in the Registration Statement, such preliminary
prospectus or the Prospectus, as the case may be.
The Offerors understand that the Underwriter proposes to make a public
offering of the Securities as soon as the Underwriter deems advisable after the
Pricing Agreement has been executed and delivered and the Declaration, the
Indenture and the Guarantee Agreement have been qualified under the Trust
Indenture Act of 1939, as amended (the "1939 Act").
SECTION 1. Representations and Warranties.
a. The Offerors represent and warrant to each Underwriter as of
the date hereof, as of the date of the Pricing Agreement and as of each Date of
Delivery (as defined) (such later date being hereinafter referred to as the
"Representation Date") that:
i. No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that purpose has
been initiated or, to the knowledge of the Offerors, threatened by the
Commission.
ii. The Company and the Trust meet, and at the respective
times of the commencement and consummation of the offering of the Securities
will meet, the requirements for the use of Form S-3 under the 1933 Act. Each
of the Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act. At the respective times the Registration
Statement, any Rule 462(b) Registration Statement and any post-effective
amendments thereto became effective and at each Representation Date, the
Registration Statement, any Rule 462 Registration Statement and any amendments
or supplements thereto complied and will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and the 1939 Act
and the rules and regulations of the Commission under the 1939 Act (the "1939
Act Regulations") and did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the date of the
Prospectus
5
<PAGE> 6
and at the Closing Time (as defined herein), the Prospectus and any amendments
and supplements thereto did not and will not include an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. If the Offerors elect to rely upon Rule 434 of the 1933
Act Regulations, the Offerors will comply with the requirements of Rule 434.
Notwithstanding the foregoing, the representations and warranties in this
subsection shall not apply to (A) statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Offerors in writing by the
Underwriter expressly for use in the Registration Statement or the Prospectus
or (B) the part of the Registration Statement which shall constitute the
Statement of Eligibility (Form T-1) under the 1939 Act.
Each preliminary prospectus and prospectus filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied as so filed
in all material respects with the 1933 Act Regulations and, if applicable, each
preliminary prospectus and the Prospectus delivered to the Underwriter for use
in connection with the offering of the Securities will, at the time of such
delivery, be identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
iii. The documents incorporated or deemed to be
incorporated by reference in the Registration Statement or the Prospectus, at
the time they were or hereafter are filed or last amended, as the case may be,
with the Commission, complied and will comply in all material respects with the
requirements of the 1934 Act, and the rules and regulations of the Commission
thereunder (the "1934 Act Regulations"), and at the time of filing or as of the
time of any subsequent amendment, did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were or are made, not misleading; and any additional documents
deemed to be incorporated by reference in the Registration Statement or the
Prospectus will, if and when such documents are filed with the Commission, or
when amended, as appropriate, comply in all material respects to the
requirements of the 1934 Act and the 1934 Act Regulations and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty shall not
apply to any statements or omissions
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made in reliance upon and in conformity with information furnished in writing
to the Offerors by the Underwriter expressly for use in the Registration
Statement or the Prospectus.
iv. The accountants who certified the financial
statements and supporting schedules included or incorporated by reference in
the Registration Statement and the Prospectus are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
v. The financial statements of the Company included or
incorporated by reference in the Registration Statement and the Prospectus,
together with the related schedules and notes, present fairly the financial
position of the Company and its consolidated subsidiaries as at the dates
indicated and the results of their operations for the periods specified. Such
financial statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules, if any, included or incorporated
by reference in the Registration Statement and the Prospectus present fairly in
accordance with GAAP the information required to be stated therein. The ratio
of earnings to fixed charges included in the Prospectus has been calculated in
compliance with Item 503(d) of Regulation S-K of the Commission. The selected
financial information and the summary financial data included in the Prospectus
present fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement and the Prospectus. The pro forma financial statements
and the related notes thereto included in the Registration Statement and the
Prospectus present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly compiled on the bases described
therein, and the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
vi. The statutory financial statements of each of the
Company's Insurance Subsidiaries (defined herein), from which certain ratios
and other statistical data contained in the Registration Statement have been
derived, have for each relevant period been prepared in accordance with
accounting practices prescribed or permitted by the National Association of
Insurance Commissioners, and with respect to each insurance subsidiary, the
appropriate Insurance Department of the state of domicile of such
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<PAGE> 8
insurance subsidiary, and such accounting practices have been applied on a
consistent basis throughout the periods involved.
vi. Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except as
otherwise stated therein, (A) there has been no material adverse change and no
development which could reasonably be expected to result in a material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries, considered
as one enterprise whether or not arising in the ordinary course of business (a
"Material Adverse Effect"), (B) there have been no transactions entered into by
the Company or any of its subsidiaries, other than those arising in the
ordinary course of business, which are material with respect to the Company and
its subsidiaries, considered as one enterprise, (C) except for regular
dividends on the Common Stock in amounts per share that are consistent with
past practice or the applicable charter document or supplement thereto,
respectively, there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.
vii. The Company has been incorporated, is validly
existing as a corporation and is in good standing under the laws of the State
of Pennsylvania, has the corporate power and authority to own, lease and
operate its properties and to conduct its business as presently conducted and
as described in the Prospectus and to enter into and perform its obligations
under, or as contemplated under, this Agreement, the Pricing Agreement, the
Remarketing Agreement, the Purchase Contract Agreement, the Pledge Agreement
and the Guarantee Agreement. The Company is qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify or
be in good standing would not have a Material Adverse Effect.
viii. Other than the Trust, each subsidiary of the
Company has been incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as presently conducted and as described in the Prospectus,
and is qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure to
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<PAGE> 9
so qualify or be in good standing would not have a Material Adverse Effect.
Except as otherwise stated in the Registration Statement and the Prospectus,
all of the issued and outstanding shares of capital stock of each subsidiary of
the Company have been authorized and validly issued, are fully paid and
non-assessable and all such shares are owned by the Company, directly or
through its subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity. None of the outstanding shares of
capital stock of the subsidiaries was issued in violation of preemptive or
other similar rights arising by operation of law, under the charter or by-laws
of any subsidiary or under any agreement to which the Company or any subsidiary
is a party, or otherwise.
ix. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus; since the date
indicated in the Prospectus there has been no change in the consolidated
capitalization of the Company and its subsidiaries (other than changes in
outstanding Common Stock resulting from employee benefit plan or dividend
reinvestment and stock purchase plan transactions); and all of the issued and
outstanding capital stock of the Company has been authorized and validly
issued, is fully paid and non-assessable and conforms to the descriptions
thereof contained in the Prospectus.
x. The Trust has been created and is validly existing
in good standing as a business trust under the Delaware Business Trust Act (the
"Delaware Act") with the power and authority to own property and to conduct its
business as described in the Registration Statement and Prospectus and to enter
into and perform its obligations under this Agreement, the Pricing Agreement,
the Remarketing Agreement, the Trust Preferred Securities and the Declaration;
the Trust is qualified to transact business as a foreign company and is in good
standing in each jurisdiction in which such qualification is necessary, except
where the failure to so qualify or be in good standing would not have a
Material Adverse Effect on the Trust; the Trust is not a party to or otherwise
bound by any agreement other than those described in the Prospectus; the Trust
is and will, under current law, be classified for United States federal income
tax purposes as a grantor trust and not as an association taxable as a
corporation.
xi. The Purchase Contract Agreement has been authorized
by the Company and, at the Closing Time, when validly executed and delivered by
the Company and assuming due authorization, execution and delivery of the
Purchase Contract Agreement by the Purchase Contract Agent, will constitute a
legal, valid and binding obligation of the Company, enforceable against the
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<PAGE> 10
Company in accordance with its terms except to the extent that enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally, or by
general equitable principles (whether considered in a proceeding in equity or
at law) (the "Bankruptcy Exceptions"), and will conform in all material
respects to the description thereof contained in the Prospectus.
xii. The Pledge Agreement has been authorized by the
Company and, at the Closing Time, when validly executed and delivered by the
Company and assuming due authorization, execution and delivery of the Pledge
Agreement by the Collateral Agent and the Purchase Contract Agent, will
constitute a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms except to the extent that
enforcement thereof may be limited by the Bankruptcy Exceptions, and will
conform in all material respects to the description thereof contained in the
Prospectus.
xiii. The Common Securities have been authorized by the
Declaration and, when issued and delivered by the Trust to the Company against
payment therefor as described in the Registration Statement and Prospectus,
will be validly issued, will represent undivided beneficial interests in the
assets of the Trust and will conform in all material respects to the
description thereof contained in the Prospectus; the issuance of the Common
Securities is not subject to preemptive or other similar rights; and at the
Closing Time all of the issued and outstanding Common Securities of the Trust
will be directly owned by the Company free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equitable right.
xiv. The Declaration has been authorized by the Company
and, at the Closing Time, will have been executed and delivered by the Company
and the Trustees, and assuming due authorization, execution and delivery of the
Declaration by the Institutional Trustee and the Delaware Trustee, the
Declaration will, at the Closing Time, be a legal, valid and binding obligation
of the Company and the Regular Trustees, enforceable against the Company and
the Regular Trustees in accordance with its terms, except to the extent that
enforcement thereof may be limited by the Bankruptcy Exceptions, and will
conform in all material respects to the description thereof contained in the
Prospectus; and at the Closing Time, the Declaration will have been duly
qualified under the 1939 Act.
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xv. The Guarantee Agreement has been authorized by the
Company and, when validly executed and delivered by the Company, and, assuming
due authorization, execution and delivery by the Guarantee Trustee, will
constitute a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms except to the extent that
enforcement thereof may be limited by the Bankruptcy Exceptions, and the
Guarantee and the Guarantee Agreement will conform in all material respects to
the description thereof contained in the Prospectus; and at the Closing Time,
the Guarantee Agreement will have been duly qualified under the 1939 Act.
xvi. The Securities have been authorized for issuance
and sale to the Underwriter and, when issued and delivered against payment
therefor as provided herein, will be validly issued and fully paid and
non-assessable and will conform in all material respects to the description
thereof contained in the Prospectus; the issuance of the Securities is not
subject to preemptive or other similar rights.
xvii. The Shares, when issued and delivered in accordance
with the provisions of the Purchase Contract Agreement and the Pledge
Agreement, will be authorized, validly issued and fully paid and non-assessable
and will conform in all material respects to the description thereof contained
in the Prospectus; and the issuance of such Shares will not be subject to
preemptive or other similar rights.
xviii. The Indenture has been authorized by the Company
and qualified under the 1939 Act and, at the Closing Time, will have been
executed and delivered and will constitute a legal, valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms
except to the extent that enforcement thereof may be limited by the Bankruptcy
Exceptions; the Indenture will conform in all material respects to the
description thereof contained in the Prospectus.
xix. The Debentures have been authorized by the Company
and, at the Closing Time, will have been executed by the Company and, when
authenticated in the manner provided for in the Indenture and delivered against
payment therefor as described in the Prospectus, will constitute legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms except to the extent that enforcement thereof may
be limited by the Bankruptcy Exceptions, and will be in the form contemplated
by, and entitled to the benefits of, the Indenture and will conform in all
material respects to the description thereof contained in the Prospectus.
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xx. Each of the Regular Trustees of the Trust is an
employee of the Company and has been authorized by the Company to execute and
deliver the Declaration.
xxi. Neither the Company nor any of its subsidiaries is
in violation of its articles of incorporation or by-laws. The Trust is not in
violation of the Declaration or its certificate of trust filed with the State
of Delaware on August 18, 1997 (the "Certificate of Trust"); none of the
Company, any of its subsidiaries or the Trust is in default in the performance
or observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, note, lease, loan or credit agreement or any
other agreement or instrument to which the Company, any of its subsidiaries or
the Trust is a party or by which any of them may be bound, or to which any of
the property or assets of the Company, any subsidiary or the Trust is subject,
or in violation of any applicable law, rule or regulation or any judgment,
order or decree of any government, governmental instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets, which violation
or default would, singly or in the aggregate, have a Material Adverse Effect.
xxii. The entry into the Purchase Contracts underlying
the Securities by the Company, the offer of the Securities as contemplated
herein and in the Prospectus, the issue of the Shares and the sale of the
Shares by the Company pursuant to the Purchase Contracts, the execution,
delivery and performance of this Agreement, the Pricing Agreement, the
Remarketing Agreement, the Purchase Contracts, the Purchase Contract Agreement,
the Pledge Agreement, the Declaration, the Trust Preferred Securities, the
Common Securities, the Indenture, the Debentures, the Guarantee Agreement and
the Guarantees, and the consummation of the transactions contemplated herein,
therein and the Registration Statement (including the issuance and sale of the
Securities and the use of proceeds from the sale of the Securities as described
in the prospectus under the caption "Use of Proceeds") and compliance by the
Offerors with their obligations hereunder and thereunder have been authorized
by all necessary action (corporate or otherwise) and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of any of the terms or provisions of, or
constitute a default or Repayment Event (as defined below) under, or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company, any subsidiary or the Trust pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
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<PAGE> 13
any other agreement or instrument to which the Company, the Trust or any
subsidiary is a party or by which any of them may be bound, or to which any of
the Property of any of them is subject (the "Agreements and Instruments")
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter or by-laws of
the Company or any subsidiary or the Declaration or Certificate of Trust or any
applicable law, statute, rule, regulation, judgment, order, writ or decree of
any government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company, any subsidiary or the Trust or any of
their assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or a
portion of such indebtedness by the Company, any subsidiary or the Trust.
xxiii. No labor dispute with the employees of the Company
or any of its subsidiaries exists or, to the knowledge of the Company, is
imminent.
xxiv. There is no action, suit, proceeding, inquiry or
investigation before or by any court or governmental agency or body, domestic
or foreign (including, without limitation any proceeding to revoke or deny
renewal of any Insurance Licenses (as defined below)), now pending or to the
knowledge of the Company threatened against or affecting the Trust, the Company
or any of its subsidiaries which is required to be disclosed in the
Registration Statement and the Prospectus (other than as stated therein), or
which might reasonably be expected to result in a Material Adverse Effect, or
which might be reasonably expected to have a Material Adverse Effect on the
assets, properties or operations thereof or the consummation of this Agreement,
the Pricing Agreement, the Remarketing Agreement, the Purchase Contracts, the
Purchase Contract Agreement, the Pledge Agreement, the Guarantee Agreement, the
Indenture or the transactions contemplated herein or therein.
xxv. The aggregate of all pending legal or governmental
proceedings to which the Trust, the Company or any subsidiary thereof is a
party or of which any of their respective properties or operations is the
subject which are not described in the Registration Statement and the
Prospectus, including ordinary routine litigation incidental to the
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<PAGE> 14
business, could not reasonably be expected to result in a Material Adverse
Effect.
xxvi. The Company and its subsidiaries have good and
indefeasable title to all material real and personal property owned by them, in
each case free and clear of all liens, encumbrances and defects except such as
are described in the Registration Statement or the Prospectus or such as do not
materially affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries; and any material real property and buildings held under lease
by the Company and its subsidiaries are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries; the Company and its
subsidiaries possess all licenses, franchises, permits, certificates,
authorizations, approvals, consents and orders of all governmental authorities
or agencies (including, without limitation, insurance licenses from the
insurance departments of the various states where the subsidiaries write
insurance business (the "Insurance Licenses")) which are necessary for the
ownership or lease of the material properties owned or leased by each of them
and for the operation of the business now operated by each of them with such
exceptions which, singly or in the aggregate, are not material and do not
materially interfere with the conduct of the business of the Company and its
subsidiaries, considered as one enterprise; the Company, on behalf of its
subsidiaries, has made all required filings under applicable insurance holding
company statutes (except for failures to file that, individually or in the
aggregate, would not have a Material Adverse Effect), including without
limitation, all insurance holding company system registration statements
required to be filed, in all jurisdictions in which such registrations are
required; the insurance subsidiaries of the Company have fulfilled and
performed all material obligations necessary to maintain their respective
Insurance Licenses, and no event or events have occurred which may result in
the impairment, modification, termination or revocation of such Insurance
Licenses; all such licenses, franchises, permits, certificates, orders,
authorizations, approvals and consents are in full force and effect and contain
no unduly burdensome provisions that would interfere with the conduct of the
business of the Company and its subsidiaries, considered as one enterprise and,
except as otherwise set forth in the Registration Statement or the Prospectus,
there are no legal or governmental proceedings pending or threatened that would
result in a material modification, suspension or revocation thereof.
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xxvii. No authorization, approval, consent, order,
registration or qualification of or with any court or governmental authority or
(including, without limitation, any insurance regulatory agency or body) agency
is required for the entry into the Purchase Contracts underlying the
Securities, in connection with the issuance and sale of the Common Securities,
the offering of the Securities and the issuance and sale of the Shares by the
Company pursuant to such Purchase Contracts, except such as have been obtained
and made under the federal securities laws or state insurance laws and such as
may be required under state or foreign securities or Blue Sky laws.
xxviii. This Agreement, the Remarketing Agreement and the
Pricing Agreement have been authorized, executed and delivered by each of the
Offerors.
xxix. The Company has complied with, and is and will be
in compliance with, the provisions of that certain Florida act relating to
disclosure of doing business in Cuba, codified as Section 517.075 of the
Florida statutes, and the rules and regulations thereunder (collectively, the
"Cuba Act") or is exempt therefrom.
xxx. None of the Trust nor the Company or any of its
subsidiaries is, and upon the issuance and sale of the Securities as herein
contemplated and the application of the net proceeds therefrom as described in
the Prospectus will not be, an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
xxxi. The Company and its subsidiaries have each filed
all federal, state and foreign income tax returns which have been required to
be filed and have paid all taxes indicated by said returns and all assessments
received by any of them to the extent that such taxes have become due and are
not being contested in good faith.
xxxii. None of the Company, its subsidiaries or any of
their respective directors, officers or controlling persons, has taken,
directly or indirectly, any action resulting in a violation of Regulation M
under the 1934 Act, or designed to cause or result in, or that has constituted
or that reasonably might be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or the Common Stock.
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xxxiii. No "forward looking statement" (as defined in Rule
175 under the 1933 Act) contained in the Registration Statement, any
preliminary prospectus or the Prospectus was made or reaffirmed without a
reasonable basis or was disclosed other than in good faith.
b. Any certificate signed by any officer of the Company or a
Trustee of the Trust and delivered to the Underwriter or to counsel for the
Underwriter shall be deemed a representation and warranty by the Company or the
Trust, as the case may be, to the Underwriter as to the matters covered
thereby.
SECTION 2. Sale and Delivery to Underwriter; Closing.
a. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the
Offerors agree to sell to the Underwriter, and the Underwriter agrees to
purchase from the Offerors, at the price per security set forth in the Pricing
Agreement, Initial Securities.
(1) If the Offerors have elected not to rely
upon Rule 430A of the 1933 Act Regulations, the initial public offering price
per Security and the purchase price per Security to be paid by the Underwriter
for the Securities have each been determined and set forth in the Pricing
Agreement, dated the date hereof, and any necessary amendments to the
Registration Statement and the Prospectus will be filed before the Registration
Statement becomes effective.
(2) If the Offerors have elected to rely upon
Rule 430A of the 1933 Act Regulations, the purchase price per Security to be
paid by the Underwriter shall be an amount equal to the initial public offering
price per Security, less an amount per Security to be determined by agreement
between the Underwriter and the Offerors. The initial public offering price
per Security shall be a fixed price to be determined by agreement between the
Underwriter and the Offerors. The initial public offering price and the
purchase price, when so determined, shall be set forth in the Pricing
Agreement. In the event that such prices have not been agreed upon and the
Pricing Agreement has not been executed and delivered by all parties thereto by
the close of business on the fourth business day following the date of this
Agreement, this Agreement shall terminate forthwith, without liability of any
party to any other party, unless otherwise agreed to by the Offerors and the
Underwriter.
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b. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Offerors hereby grant to the Underwriter the right to purchase at
its election up to Income PRIDES, Growth PRIDES and
Trust Preferred Securities at the price per share set forth in the Pricing
Agreement; provided, that, pursuant to such options, the Underwriter shall
purchase at least as many Trust Preferred Securities as Growth PRIDES. The
option hereby granted will expire automatically at the close of business on the
30th calendar day after the later of the date the Registration Statement and
any Rule 462(b) Registration Statement becomes effective, if the Offerors have
elected not to rely upon Rule 430A under the 1933 Act Regulations, or the
Representation Date, if the Offerors have elected to rely upon Rule 430A under
the 1933 Act Regulations, and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial Securities upon
notice by the Underwriter to the Offerors setting forth the aggregate number of
additional Optional Securities to be purchased and the time and date of
delivery for the related Option Securities. Any such time and date of delivery
(a "Date of Delivery") shall be determined by the Underwriter but shall not be
later than seven full business days after the exercise of such option, nor in
any event before the Closing Time, unless otherwise agreed upon by the
Underwriter and the Offerors.
c. The Trust Preferred Securities and Treasury Securities
underlying the Securities will be pledged with the Collateral Agent to secure
the holders' obligations to purchase Common Stock under the Purchase Contracts.
Such pledge shall be effected by the transfer to the Collateral Agent of the
Trust Preferred Securities and Treasury Securities to be pledged at the Closing
Time and appropriate Date of Delivery, if any, in accordance with the Pledge
Agreement.
d. Delivery of certificates for the Initial Securities and the
Option Securities (if the option provided for in Section 2(b) hereof shall have
been exercised on or before the first business day prior to the Closing Time)
shall be made at the offices of the Underwriter in New York, against the
delivery to the Collateral Agent of the Trust Preferred Securities and Treasury
Securities relating to such Securities by such Underwriter or on its behalf,
and payment of the purchase price for such Securities shall be made at the
offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New
York, New York 10022 or at such other place as shall be agreed upon by the
Underwriter and the Offerors, at 9:00 a.m. (New York time) on the third
business day
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after the date the Registration Statement becomes effective (or, if the
Offerors have elected to rely upon Rule 430A, the third full business day after
execution of the Pricing Agreement (or, if pricing of the Securities occurs
after 4:30 p.m., Eastern time, on the fourth full business day thereafter)), or
such other time not later than ten business days after such date as shall be
agreed upon by the Underwriter and the Offerors (such time and date of payment
and delivery being referred to herein as the "Closing Time"). Payment for the
Securities purchased by the Underwriter shall be made by wire transfer of
immediately available funds, payable to the Company, against delivery to the
account of the Underwriter of the Securities to be purchased by it. Delivery
of, and payment for, the Securities shall be made through the facilities of The
Depository Trust Company. In addition, if the Underwriter purchase any or all
of the Option Securities, payment of the purchase price and delivery of
certificates for such Option Securities shall be made at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP set forth above, or at such other
place as shall be agreed upon by the Underwriter and the Offerors, on each Date
of Delivery as specified in the relevant notice from the Underwriter to the
Offerors.
Certificates for the Initial Securities and the Option Securities, if
any, shall be in such denominations and registered in such names as the
Underwriter may request in writing at least two full business days before the
Closing Time or any Date of Delivery, as the case may be. The certificates for
the Initial Securities and the Option Securities, if any, will be made
available for examination by the Underwriter no later than 10:00 a.m. (New York
City time) on the last business day prior to the Closing Time or the Date of
Delivery, as the case may be.
e. If settlement for the Option Securities occurs after the
Closing Time, the Offerors will deliver to the Underwriter on the relevant Date
of Delivery, and the obligations of the Underwriter to purchase the Option
Securities shall be conditioned upon the receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered at the Closing Time pursuant to Section 5(k) hereof.
SECTION 3. Covenants of the Offerors. The Offerors agree with
the Underwriter as follows:
a. Promptly following the execution of this Agreement, the
Offerors will cause the Prospectus to be filed with the Commission pursuant to
Rule 424 of the 1933 Act Regulations and the Offerors will promptly advise the
Underwriter when such filing has been made. Prior to the filing, the Offerors
will cooperate
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with the Underwriter in the preparation of such Prospectus to assure that the
Underwriter has no reasonable objection to the form or content thereof when
filed or mailed.
b. The Offerors will comply with the requirements of Rule 430A
of the 1933 Act Regulations and/or Rule 434 of the 1933 Act Regulations if and
as applicable, and will notify the Underwriter immediately, and confirm the
notice in writing, (i) of the effectiveness of any post-effective amendment to
the Registration Statement or the filing of any supplement or amendment to the
Prospectus, (ii) the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectus or for additional information,
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose and (v) of the issuance by any state securities
commission or other regulatory authority of any order suspending the
qualification or the exemption from qualification of the Securities or the
Shares under state securities or Blue Sky laws or the initiation or threatening
of any proceeding for such purpose. The Offerors will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
c. The Offerors will give the Underwriter notice of their
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment and any filing under Rule 462(b) of the
1933 Act Regulations), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the time it
became effective or to the Prospectus, whether pursuant to the 1933 Act, the
1934 Act or otherwise; will furnish the Underwriter with copies of any such
Rule 462(b) Registration Statement, Term Sheet, amendment, supplement or
revision a reasonable amount of time prior to such proposed filing or use, as
the case may be; and will not file any such Rule 462(b) Registration Statement,
Term Sheet, amendment, supplement or revision to which the Underwriter or
counsel for the Underwriter shall object.
d. The Company will deliver to the Underwriter and counsel for
the Underwriter, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein and documents incorporated or
deemed to be incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to
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the Underwriter, without charge, a conformed copy of the Registration Statement
as originally filed and of each amendment thereto (without exhibits). If
applicable, the copies of the Registration Statement and each amendment thereto
furnished to the Underwriter will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
e. The Company has delivered to the Underwriter, without
charge, as many copies of each preliminary prospectus as the Underwriter
reasonably requested, and the Company hereby consents to the use of such copies
for purposes permitted by the 1933 Act. The Company will furnish to the
Underwriter, without charge, during the period when the Prospectus is required
to be delivered under the 1933 Act or the 1934 Act, such number of copies of
the Prospectus (as amended or supplemented) as the Underwriter may reasonably
request. If applicable, the Prospectus and any amendments or supplements
thereto furnished to the Underwriter will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
f. The Offerors will comply with the 1933 Act and the 1933 Act
Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Registration Statement and the Prospectus. If at any time
when the Prospectus is required by the 1933 Act or the 1934 Act to be delivered
in connection with sales of the Securities, any event shall occur or condition
shall exist as a result of which it is necessary, in the opinion of counsel for
the Underwriter or for the Offerors, to amend the Registration Statement in
order that the Registration Statement will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or to amend or
supplement the Prospectus in order that the Prospectus will not include an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement the Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Offerors will promptly prepare and file with the Commission, subject to Section
3(c), such amendment or supplement as may be necessary to correct such
statement or omission or to make the Registration Statement or the Prospectus
comply with such requirements, and the Offerors
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will furnish to the Underwriter, without charge, such number of copies of such
amendment or supplement as the Underwriter may reasonably request.
g. The Offerors will use their best efforts, in cooperation
with the Underwriter, to qualify the Securities for offering and sale under the
applicable securities laws of such states and other jurisdictions (domestic or
foreign) as the Underwriter may designate; provided, however, that the Company
shall not be obligated to qualify as a foreign corporation in any jurisdiction
in which it is not so qualified or subject itself to taxation in respect of
doing business in any jurisdiction in which it is not otherwise so subject. In
each jurisdiction in which the Securities have been so qualified, the Offerors
will file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for so long as may be
required in connection with distribution of the Securities and the Shares.
h. The Company will make generally available to its
securityholders as soon as practicable, but not later than 45 days (or 90 days,
in the case of a period that is also the Company's fiscal year) after the close
of the period covered thereby, an earnings statement of the Company and its
subsidiaries (in form complying with the provisions of Rule 158 of the 1933 Act
Regulations) covering a twelve-month period beginning not later than the first
day of the Company's fiscal quarter next following the "effective date" (as
defined in said Rule 158) of the Registration Statement.
i. The Company will use the net proceeds received by it from
the sale of the Securities in the manner specified in the Prospectus under "Use
of Proceeds".
j. If, at the time that the Registration Statement became (or
in the case of a post-effective amendment becomes) effective, any information
shall have been omitted therefrom in reliance upon Rule 430A or Rule 434 of the
1933 Act Regulations, then immediately following the execution of the Pricing
Agreement, the Offerors will prepare, and file or transmit for filing with the
Commission in accordance with such Rule 430A or Rule 434 and Rule 424(b) of the
1933 Act Regulations, copies of an amended Prospectus, or Term Sheet, or, if
required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
k. If the Offerors elect to rely upon Rule 462(b), the Offerors
shall file a Rule 462(b) Registration Statement with the
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<PAGE> 22
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 of the 1933 Act Regulations by the earlier of (i)
10:00 p.m. Eastern time on the date of the Pricing Agreement and (ii) the time
confirmations are sent or given, as specified by Rule 462(b)(2).
l. The Offerors, during the period when the Prospectus is
required to be delivered under the 1933 Act, will file all documents required
to be filed with the Commission pursuant to Section 13, 14 or 15 of the 1934
Act within the time periods required by the 1934 Act and the 1934 Act
Regulations.
m. The Offerors will use their best efforts to effect the
listing of the Income PRIDES and the Growth PRIDES on the NASDAQ National
Market and to cause the Securities to be registered under the 1934 Act.
n. During a period of 90 days from the date of the Pricing
Agreement, neither the Trust nor the Company will, without the prior written
consent of the Underwriter, directly or indirectly, sell, offer to sell, grant
any option for the sale of, or otherwise dispose of, or enter into any
agreement to sell, any Income PRIDES, Growth PRIDES, Purchase Contracts, Trust
Preferred Securities or Common Stock, as the case may be, or any securities of
the Company similar to the Income PRIDES, Growth PRIDES, Purchase Contracts,
Trust Preferred Securities or Common Stock or any security convertible into or
exchangeable or exercisable for Income PRIDES, Growth PRIDES, Purchase
Contracts, Trust Preferred Securities or Common Stock other than shares of
Common Stock or options for shares of Common Stock issued pursuant to or sold
in connection with any employee benefit, dividend reinvestment and stock option
and stock purchase plans of the Company and its subsidiaries and other than the
Growth PRIDES or Income PRIDES to be created or recreated upon substitution of
Pledged Securities, or shares of Common Stock issuable upon early settlement of
the Income PRIDES or Growth PRIDES or upon exercise of stock options, or (B)
enter into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of the Securities, any security convertible into or exchangeable into
or exercisable for the Securities substantially similar to equity securities
substantially similar to the Securities, whether any such swap or transaction
is to be settled by delivery of Securities, or other securities, in cash or
otherwise.
o. The Company, during a period of three years from the Closing
Time, will make generally available to the Underwriter copies of all reports
and other communications (financial or
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other) mailed to stockholders, and deliver to the Underwriter promptly after
they are available, copies of any reports and financial statements furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed; and shall furnish such additional
information concerning the business and financial condition of the Company as
the Underwriter may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders).
p. The Company will reserve and keep available at all times,
free of preemptive or other similar rights and liens and adverse claims,
sufficient shares of Common Stock to satisfy any obligations to issue Shares
upon settlement of the Purchase Contracts and shall take all actions necessary
to keep effective the Registration Statement with respect to the Shares.
q. None of the Company, its subsidiaries or any of their
respective directors, officers or controlling persons, will take, directly or
indirectly, any action resulting in a violation of Regulation M under the 1934
Act, or designed to cause or result in, or that reasonably might be expected to
constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or the Common
Stock.
SECTION 4. Payment of Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
the Pricing Agreement, the Purchase Contracts, the Purchase Contract Agreement
and the Pledge Agreement, including, without limitation, expenses related to
the following, if incurred: (i) the preparation, delivery, printing and filing
of the Registration Statement and Prospectus as originally filed (including
financial statements and exhibits) and of each amendment thereto; (ii) the
printing and delivery to the Underwriter of this Agreement, the Pricing
Agreement, any Agreement among Underwriter and such other documents as may be
required in connection with the offering, purchase, sale and delivery of the
Securities; (iii) the preparation, issuance and delivery of the certificates
for the Securities and the Shares; (iv) the fees and disbursements of the
Company's counsel, accountants and other advisors or agents (including the
transfer agents and registrars), as well as fees and disbursements of the
Trustees, the Purchase Contract Agent, the Collateral Agent and any Depositary,
and their respective counsel (except as provided for in the Prospectus); (v)
the qualification of the Securities and the Shares under securities laws in
accordance with the provisions of
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<PAGE> 24
Section 3(g), including filing fees and the fees and disbursements of counsel
for the Underwriter in connection therewith and in connection with the
preparation of the Blue Sky Survey; (vi) the printing and delivery to the
Underwriter of copies of the Registration Statement as originally filed and of
each amendment thereto, of each preliminary prospectus, any Term Sheet and of
the Prospectus and any amendments or supplements thereto; (vii) any fees
payable in connection with the rating of the Securities by nationally
recognized statistical rating organizations; (viii) any fees payable or
expenses incurred pursuant to any Uniform Commercial Code related filings; and
(ix) the fees and expenses incurred in connection with the listing of the
Income PRIDES, the Growth PRIDES and the Shares on the NASDAQ National Market.
If this Agreement is terminated by the Underwriter in accordance with
the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall
reimburse the Underwriter for all of its out-of-pocket expenses, including the
fees and disbursements of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for
the Underwriter.
SECTION 5. Conditions of Underwriter's Obligations. The
obligations of the Underwriter to purchase and pay for the Securities pursuant
to this Agreement are subject to the accuracy of the representations and
warranties of the Offerors herein contained or in certificates of any officer
of the Company or any subsidiary or the trustees of the Trust delivered
pursuant to the provisions hereof, to the performance by the Offerors of their
obligations hereunder, and to the following further conditions:
a. The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective under the 1933 Act not
later than 5:30 p.m., New York City time, on the date hereof, and on the date
hereof and at the Closing Time and any Date of Delivery, no stop order
suspending the effectiveness of the Registration Statement or any part thereof
shall have been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the satisfaction of
counsel to the Underwriter. A prospectus containing information relating to
the description of the Securities, the specific method of distribution and
similar matters shall have been filed with the Commission in accordance with
Rule 424(b)(1), (2), (3), (4) or (5), as applicable (or any required
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A), or, if
the Company has elected to
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rely upon Rule 434 of the 1933 Act Regulations, a Term Sheet including the Rule
434 Information shall have been filed with the Commission in accordance with
Rule 424(b)(7).
b. At the Closing Time the Underwriter shall have received:
(1) The favorable opinion, dated as of the
Closing Time, of Wolff, Block Schorr & Solis- Cohen LLP, special counsel to the
Offerors, in form and substance satisfactory to counsel for the Underwriter and
subject to the qualifications and assumptions stated therein, to the effect
that:
(i) The Company has been incorporated,
is validly existing as a corporation and is in good standing under the
laws of the State of Pennsylvania.
(ii) The Company has corporate power
and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus.
(iii) The Company is qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, except
where such failure to qualify or be in good standing would not have a
Material Adverse Effect.
(iv) The authorized, issued and
outstanding capital stock of the Company is as set forth in the
Prospectus (except for subsequent issuances, if any, pursuant to
incentive compensation plan, employee benefit plan or dividend
reinvestment and stock purchase plan transactions), and the shares of
issued and outstanding capital stock of the Company have been
authorized and validly issued and are fully paid and non-assessable.
(v) Except for the Trust, each
subsidiary of the Company has been incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation; each subsidiary of the Company has
the corporate power and authority to own, lease and operate its
properties and to conduct its business as presently conducted and as
described in the Prospectus, and is qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure to so qualify or be in good standing would not have
a Material Adverse Effect; and all of the
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<PAGE> 26
issued and outstanding capital stock of each subsidiary of the Company
has been authorized and validly issued, is fully paid and
non-assessable and all shares owned by the Company, directly or
through its subsidiaries, are owned free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity.
(vi) The Trust is not required to be
qualified and in good standing as a foreign company in Pennsylvania,
except to the extent that the failure to so qualify or be in good
standing would not have a Material Adverse Effect on the Trust; and
the Trust is not a party to or otherwise bound by any agreement other
than those described in the Prospectus.
(vii) The Declaration has been
authorized, executed and delivered by the Company and the Trustees and
is a legal, valid and binding obligation of the Company, enforceable
against the Company and each of the Regular Trustees in accordance
with its terms, except as enforcement thereof may be limited by the
Bankruptcy Exceptions; and the Declaration has been duly qualified
under the 1939 Act.
(viii) All legally required proceedings
in connection with the authorization, issuance and validity of the
Securities and the sale of the Securities in accordance with this
Agreement have been taken and all legally required orders, consents or
other authorizations or approvals of any other public boards or bodies
(including, without limitation, any insurance regulatory agency or
body) in connection with the authorization, issuance and validity of
the Securities and the sale of the Securities in accordance with this
Agreement (other than in connection with or in compliance with the
provisions of the securities or Blue Sky laws of any jurisdictions, as
to which no opinion need be expressed) have been obtained and are in
full force and effect; and except as otherwise specifically described
in the Prospectus, neither the Company nor any of its subsidiaries
engaged in the business of insurance (each, an "Insurance Subsidiary")
has received any notification from any insurance regulatory authority
to the effect that any additional authorization, approval, order,
consent, license, certificate, permit, registration or qualification
from such insurance regulatory authority is needed to be obtained by
either of the Company or any of its Insurance Subsidiaries in any case
where it would be reasonably expected that the failure to obtain any
such additional authorization, approval,
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order, consent, license, certificate, permit, registration or
qualification would have a Material Adverse Effect.
(ix) Each of the documents incorporated
by reference in the Registration Statement or the Prospectus at the
time they were filed or last amended (other than the financial
statements and the notes thereto, the financial schedules, and any
other financial data included or incorporated by reference therein, as
to which such counsel need express no belief), complied as to form in
all material respects with the requirements of the 1934 Act and the
1934 Act Regulations, as applicable; and such counsel has no reason to
believe that any of such documents, when such documents became
effective or were so filed, as the case may be, contained, in the case
of a registration statement which became effective under the 1933 Act,
an untrue statement of a material fact, or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and, in the case of other documents which were
filed under the 1934 Act with the Commission, an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein not misleading.
(x) The Company and the Trust meet the
registrant requirements for use of Form S-3 under the 1933 Act
Regulations.
(xi) The Income PRIDES and Growth
PRIDES have been duly authorized, executed and delivered by the
Company, and (assuming due execution by the Purchase Contract Agent as
attorney-in-fact of the holders thereof and due authentication by the
Purchase Contract Agent) and upon payment therefor as set forth
herein, will be duly and validly issued and outstanding, and will
constitute valid and binding obligations of the Company entitled to
the benefits of the Purchase Contract Agreement and enforceable
against the Company in accordance with its terms, except to the extent
that enforcement thereof may be limited by the Bankruptcy Exceptions.
The Shares and the Securities are each registered under the 1934 Act,
and the Income PRIDES issuable at the Closing Time and the Shares
issuable by the Company pursuant to the Purchase Contracts have been
authorized for listing on the NASDAQ National Market, upon official
notice of issuance.
(xii) The Shares subject to the Purchase
Contract Agreement have been validly authorized and reserved for
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issuance and, when issued and delivered by the Company in accordance
with the provisions of the Purchase Contract Agreement, the Purchase
Contracts and the Pledge Agreement, will be fully paid and
non-assessable; the issuance of such Shares will not be subject to
preemptive or other similar rights arising by law or, to the best of
such counsel's knowledge, otherwise.
(xiii) The issuance of the Securities is
not subject to preemptive or other similar rights arising by law or,
to the best of such counsel's knowledge, otherwise.
(xiv) All of the issued and outstanding
Common Securities of the Trust are directly owned by the Company free
and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equitable right.
(xv) This Agreement, the Remarketing
Agreement and the Pricing Agreement have been duly authorized,
executed and delivered by each of the Company and the Trust.
(xvi) The Purchase Contract Agreement
has been duly authorized, executed and delivered by the Company and,
assuming due authorization, execution and delivery by the Purchase
Contract Agent, constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms
except to the extent that enforcement thereof may be limited by the
Bankruptcy Exceptions.
(xvii) The Pledge Agreement has been duly
authorized, executed and delivered by the Company and, assuming due
authorization, execution and delivery by the Collateral Agent and the
Purchase Contract Agent, constitutes a legal, valid and binding
agreement of the Company, enforceable against the Company in
accordance with its terms except to the extent that enforcement
thereof may be limited by the Bankruptcy Exceptions.
(xviii) The Guarantee Agreement has been
duly authorized, executed and delivered by the Company; the Guarantee
Agreement, assuming it is duly authorized, executed, and delivered by
the Guarantee Trustee, constitutes a valid and binding agreement of
the Company, enforceable against the Company in accordance with its
terms, except to the extent that enforcement thereof may be limited by
Bankruptcy Exceptions.
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(xix) The Indenture has been executed
and delivered by the Company and, assuming authorization, execution,
and delivery thereof by the Debt Trustee, is a valid and binding
agreement of the Company, enforceable against the Company in
accordance with its terms, except to the extent that enforcement
thereof may be limited by the Bankruptcy Exceptions.
(xx) The Debentures are in the form
contemplated by the Indenture, have been duly authorized, executed and
delivered by the Company and, when authenticated by the Debt Trustee
in the manner provided for in the Indenture and delivered against
payment therefor by the Trust, will constitute valid and binding
obligations of the Company, enforceable against the Company in
accordance with their terms, except to the extent that enforcement
thereof may be limited by the Bankruptcy Exceptions.
(xxi) The entry into the Purchase
Contracts underlying the Securities by the Company, the offer of the
Securities as contemplated herein and in the Prospectus, the issuance
of the Shares and the sale of the Shares by the Company pursuant to
the Purchase Contracts, the execution, delivery and performance of
this Agreement, the Pricing Agreement, the Remarketing Agreement, the
Purchase Contracts, the Purchase Contract Agreement, the Pledge
Agreement, the Declaration, the Trust Preferred Securities, the Common
Securities, the Indenture, the Debentures, the Guarantee Agreement and
the Guarantees, and the consummation of the transactions contemplated
herein, therein and the Registration Statement (including the issuance
and sale of the Securities and the use of proceeds from the sale of
the Securities as described in the prospectus under the caption "Use
of Proceeds") and compliance by the Offerors with their obligations
hereunder and thereunder have been authorized by all necessary action
(corporate or otherwise) and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with
or constitute a breach of any of the terms or provisions of, or
constitute a default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, any subsidiary
or the Trust pursuant to, the Agreements and Instruments (except for
such conflicts, breaches or defaults or liens, charges or encumbrances
that would not result in a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter or
by-laws of the Company or any Significant Subsidiary or the
Declaration or
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Certificate of Trust or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction
over the Company, any subsidiary or the Trust or any of their assets,
properties or operations. As used herein, a "Repayment Event" means
any event or condition which gives the holder of any note, debenture
or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company, any
subsidiary or the Trust.
(xxii) All conditions precedent provided
for in the Purchase Contract Agreement relating to the authentication
and delivery of the Security Certificates have been complied with and
the Company is duly entitled to the authentication and delivery of the
Security Certificates in accordance with the terms of the Purchase
Contract Agreement; the Security Certificates are in a form
contemplated by the Purchase Contract Agreement and comply with all
applicable statutory requirements and with the requirements of the
NASDAQ National Market.
(xxiii) There are no actions, suits or
proceedings before or by any court or governmental agency or body,
domestic or foreign (including, without limitation, any insurance
regulatory agency or body), now pending or threatened, which are
required to be disclosed in the Registration Statement or the
Prospectus, other than those disclosed therein, and all pending legal
or governmental proceedings to which the Company or any of its
subsidiaries is a party or to which any of their property is subject
which are not described in the Registration Statement and the
Prospectus, including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material.
(xxiv) To the best of such counsel's
knowledge and information, there are no contracts, indentures,
mortgages, agreements, notes, leases or other instruments required to
be described or referred to or incorporated by reference in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to or incorporated by reference therein or
filed as exhibits thereto; the descriptions thereof or references
thereto are true and correct in all material respects, and no default
exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in
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any contract, indenture, mortgage, agreement, note, lease or other
instrument so described, referred to, filed or incorporated by
reference which would result in a Material Adverse Effect.
(xxv) No authorization, approval,
consent, order, registration or qualification of or with any court or
federal or state governmental authority or agency (including, without
limitation, any insurance regulatory agency or body) is required for
the issuance and sale of the Securities by the Offerors to the
Underwriter or the performance by the Trust and the Company of their
respective obligations in this Agreement, the Remarketing Agreement,
the Pricing Agreement, the Purchase Contract Agreement, the Purchase
Contracts, the Pledge Agreement, the Indenture, the Debentures, the
Guarantee Agreement, the Declaration and the Securities except such as
has been obtained and made under the federal securities laws or such
as may be required under state or foreign securities or Blue Sky laws.
(xxvi) The Company, on behalf of its
subsidiaries, has made all required filings under applicable insurance
holding company statutes, including without limitation insurance
holding company system registration statements, in each jurisdiction
where such filings are required to conduct its business as described
in the Prospectus, except where the failure to make such filings would
not, individually or in the aggregate, have a Material Adverse Effect.
(xxvii) Each subsidiary that is required
to be organized and licensed as an insurance company in its
jurisdiction of incorporation is so organized and licensed and each
such subsidiary is authorized or qualified as an insurer in each other
jurisdiction where it is required to be so authorized or qualified to
conduct its business as described in the Prospectus, except where the
failure to be so authorized or qualified in such jurisdiction would
not, singly or in the aggregate, have a Material Adverse Effect; the
Company and its subsidiaries possess all licenses, franchises,
permits, certificates, authorizations, approvals, consents and orders
of all governmental authorities or agencies (including, without
limitation, the Insurance Licenses) necessary for the ownership or
lease of the material properties owned or leased by each of them and
for the operation of the business carried on by each of them as
described in the Registration Statement and the Prospectus with such
exceptions as are not material and do not materially interfere with
the conduct of the business of the
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Company and its subsidiaries, considered as one enterprise; all such
licenses, franchises, permits, certificates, authorizations,
approvals, consents and orders are in full force and effect and
contain no unduly burdensome provisions that would interfere with the
conduct of the business of the Company and its subsidiaries,
considered as one enterprise and, except as otherwise set forth in the
Registration Statement or the Prospectus, there are no legal or
governmental proceedings pending or threatened that would result in a
material modification, suspension or revocation thereof.
(xxviii) The Registration Statement,
including any Rule 462(b) Registration Statement, is effective under
the 1933 Act; any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and within the time period required
by Rule 424(b); and no stop order suspending the effectiveness of the
Registration Statement has been issued under the 1933 Act or
proceedings therefor initiated, to the best of such counsel's
knowledge, or threatened by the Commission.
(xxix) The Registration Statement,
including any Rule 462(b) Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the financial
statements and the notes thereto, the financial schedules and any
other financial data included or incorporated by reference therein, as
of their respective effective or issue dates, or when amended, as
appropriate, complied as to form in all material respects with the
requirements of the 1933 Act, the 1933 Act Regulations and the 1939
Act.
(xxx) The statements in the Prospectus
under the captions "The Company," "The Trust," "Use of Proceeds,"
"Capitalization," "Description of the FELINE PRIDES," "Description of
the Purchase Contracts," "Certain Provisions of the Purchase Contract
Agreement and the Pledge Agreement," "Description of the Trust
Preferred Securities," "Description of the Guarantee," "Description of
the Debentures," "Effect of Obligations Under the Debentures and the
Guarantee,""Description of the Common Stock," and "ERISA
Considerations" to the extent that they involve matters of law,
summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and is correct in all
material respects.
(xxxi) Each Purchase Contract underlying
the Securities being delivered at the Closing Time and at any
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Date of Delivery is a valid and legally binding agreement of the
Company enforceable against the Company in accordance with its terms,
except as may be limited by the Bankruptcy Exceptions; provided,
however, that based on a review of applicable case law, the occurrence
of a Termination Event, Section 365(e)(1) of the Bankruptcy Code (11
U.S.C. Sections 101-1330, as amended) should not substantively limit
the provisions of Sections 3.15 and 5.8 of the Purchase Contract
Agreement and Section 4.3 of the Pledge Agreement that require
termination of the Purchase Contracts and release of the Collateral
Agent's security interest in the Trust Preferred Securities, the
Treasury Portfolio or the Treasury Securities; provided, however, that
procedural restrictions respecting relief from the automatic stay
under Section 362 of the Code may affect the timing of the exercise of
such rights and remedies.
(xxxii) The Income PRIDES and the Growth
PRIDES have each been duly authorized, executed and delivered by the
Company and (assuming due execution by the Purchase Contract Agent as
attorney-in-fact of the holders thereof and due authentication by the
Purchase Contract Agent) and upon payment therefor as set forth in the
Underwriting Agreement, will be duly and validly issued and
outstanding, and will constitute valid and binding obligations of the
Company entitled to the benefits of the Purchase Contract Agreement
and enforceable against the Company in accordance with their terms,
except to the extent that enforcement thereof may be limited by the
Bankruptcy Exceptions.
(xxxiii) The provisions of the Pledge
Agreement are effective to create in favor of the Collateral Agent for
the benefit of the Company, a valid and perfected security interest
under the Uniform Commercial Code as in effect on the date of such
opinion in the State of New York in the Pledged Trust Preferred
Securities, Pledged Debentures, Applicable Ownership Interests (as
specified in clause (A) of the definition thereof in the Declaration)
of the Treasury Portfolio and the Pledged Treasury Securities from
time to time credited to the Collateral Account.
(xxxiv) The Guarantee Agreement has been
duly authorized, executed and delivered by the Company and duly
qualified under the Trust Indenture Act and (assuming due execution
and delivery by the Guarantee Trustee) constitutes a valid and binding
agreement of the Company enforceable against the Company in accordance
with its terms, except to
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the extent that enforcement thereof may be limited by the Bankruptcy
Exceptions.
(xxxv) The Indenture has been duly
authorized, executed and delivered by the Company and duly qualified
under the Trust Indenture Act, and (assuming due authentication,
execution and delivery by the Debt Trustee) constitutes a valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, except to the extent that enforcement
thereof may be limited by the Bankruptcy Exceptions.
(xxxvi) The Debentures have been duly
authorized, executed and delivered by the Company and (assuming due
authentication by the Debt Trustee) and upon payment therefor as set
forth herein, will constitute valid and binding obligations of the
Company entitled to the benefits of the Indenture and enforceable in
accordance with their terms, except to the extent that enforcement
thereof may be limited by the Bankruptcy Exceptions.
(xxxvii) The Remarketing Agreement has been
duly authorized, executed and delivered by the Company and the Trust
and constitutes a valid and binding agreement of the Company and the
Trust, enforceable against the Company and the Trust in accordance
with its terms.
(xxxviii) The Securities, the Shares, the
Common Securities, the Debentures, the Declaration and the Guarantee
Agreement conform in all material respects to the description thereof
contained in the Prospectus.
(xxxix) No authorization, approval,
consent, order, registration or qualification of or with any court or
federal, New York or Pennsylvania governmental authority or agency
(including, without limitation, any insurance regulator) is required
for the entry into the Purchase Contracts underlying the Securities,
the issuance and sale of the Securities by the Offerors to the
Underwriters, or the issuance and sale of the Shares by the Company
pursuant to such Purchase Contracts, or the performance by the Company
and the Trust of their respective obligations under this Agreement,
the Pricing Agreement, the Purchase Contracts, the Remarketing
Agreement, the Purchase Contract Agreement,
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the Pledge Agreement, the Indenture, the Debentures, the Guarantee
Agreement, the Declaration and the Securities, except such as has been
obtained and made under the federal securities laws or such as may be
required under state or foreign securities or Blue Sky laws.
(xi) The issuance and sale of the
Income PRIDES and Growth PRIDES in accordance with this Agreement do
not contravene the Commodity Exchange Act or the regulations of the
Commodity Futures Trading Commission.
(xii) None of the Trust nor the Company
is, and upon the issuance and sale of the Income PRIDES and Growth
PRIDES as herein contemplated and the application of the net proceeds
therefrom as described in the Prospectus, will not be, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined within the meaning of and subject to registration
under the Investment Company Act of 1940, as amended.
(xiii) Based upon current law and the
assumptions stated or referred to therein, under current United States
Federal income tax law: (i) the Trust will be classified as a grantor
trust and not as an association taxable as a corporation; (ii) the
Debentures will be classified as indebtedness of the Company and (iii)
the discussion in the Prospectus under the caption "Certain Federal
Income Tax Consequences" is a fair and accurate summary of the matters
addressed therein.
Moreover, such counsel shall confirm that based upon their
examination of the Registration Statement and the Prospectus and their
investigations made in connection with the preparation of the
Registration Statement and the Prospectus (excluding any documents
incorporated therein) and their participations in conferences with
certain officers and employees of the Company, with representatives of
Coopers & Lybrand LLP and counsel to the Company such counsel has no
reason to believe that the Registration Statement, as of its effective
date (including any documents incorporated therein on file with
Commission on such effective date), contained any untrue statement of
a material fact or omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein
not misleading or that the Prospectus as of its date or as of the Date
of Delivery (including the documents incorporated therein by
reference) contains any untrue statement of a material fact or omits
to state any material fact necessary
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in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
in each case such counsel need express no belief with respect to the
financial statements or other financial data contained or incorporated
by reference in the Registration Statement, the Prospectus or the
documents incorporated therein.
(2) The favorable opinion, dated as of the
Closing of Wolf, Block, Schorr & Solis-Cohen, LLP special Delaware counsel to
the Offerors, in form and substance satisfactory to counsel for the
Underwriter, to the effect that:
(i) The Trust has been created and is
validly existing in good standing as a business trust under the
Delaware Act, and has the trust power and authority to conduct its
business as described in the Prospectus.
(ii) The Declaration constitutes a
legal, valid and binding obligation of the Company and is enforceable
against the Company in accordance with its terms, except that to the
extent enforceability thereof may be limited by the Bankruptcy
Exceptions.
(iii) Under the Delaware Act and the
Declaration, the Trust has the power and authority to (i) execute and
deliver, and to perform its obligations under, this Agreement and the
Pricing Agreement and (ii) issue, and perform its obligations under,
the Trust Securities.
(iv) Under the Delaware Act and the
Declaration, the execution and delivery by the Trust of this
Agreement, the Remarketing Agreement and the Pricing Agreement, and
the performance by the Trust of its obligations hereunder and
thereunder, have been authorized by all necessary action on the part
of the Trust.
(v) The Trust Preferred Securities
have been authorized by the Declaration and, when executed by the
Trust and authenticated by the Institutional Trustee in accordance
with the Declaration and delivered against payment therefor in
accordance with the terms of this Agreement, will be validly issued
and, subject to qualifications hereinafter expressed, fully paid and
nonassessable undivided beneficial interests in the assets of the
Trust; the Holders of the Trust Preferred Securities, as beneficial
owners of the Trust, will be entitled to the same limitation of
personal liability extended to stockholders of private
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corporations for profit organized under the General Corporation Law of
the State of Delaware; said counsel may note that the holders of the
Trust Preferred Securities may be obligated to make payments as set
forth in the Declaration.
(vi) The Common Securities have been
authorized by the Declaration and, when issued, executed and
authenticated in accordance with the terms of the Declaration, and
delivered and paid for as set forth in the Prospectus, will be validly
issued, undivided beneficial interests in the assets of the Trust.
(vii) Under the Delaware Act and the
Declaration, the issuance of the Trust Securities is not subject to
preemptive or other similar rights.
(viii) None of the execution and delivery
by the Trust of, or the performance by the Trust of its obligations
under, this Agreement, the issuance and sale of the Trust Preferred
Securities by the Trust in accordance with the terms of this Agreement
and the Pricing Agreement, or the consummation by the Trust of the
other transactions contemplated thereby, will contravene any
provisions of applicable Delaware law or Delaware administrative
regulations or the Certificate of Trust or the Declaration.
(ix) This Agreement, the Pricing
Agreement and the Remarketing Agreement have been duly authorized,
executed and delivered by the Trust.
(x) No authorization, approval,
consent, order, registration or qualification of or with any Delaware
state governmental authority or Delaware state agency is required for
the entry into the Purchase Contracts underlying the Securities, the
issuance and sale by the Trust of the Trust Preferred Securities to
the Underwriter, or the performance by the Company and the Trust of
their respective obligations under this Agreement, the Pricing
Agreement, the Purchase Contracts, the Purchase Contract Agreement,
the Pledge Agreement, the Indenture, the Debentures, the Guarantee
Agreement, the Declaration and the Trust Securities, except such as
has been obtained and made under the federal securities laws of such
as may be required under state or foreign securities or Blue Sky laws.
(3) The favorable opinion, dated as of the
Closing of Pepper Hamilton LLP, counsel to First National Bank of Chicago, as
Institutional Trustee under the Declaration, and Guarantee
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Trustee under the Guarantee Agreement, and to First Chicago Delaware Inc., as
Delaware Trustee, in form and substance satisfactory to counsel for the
Underwriter, to the effect that:
(i) The Institutional Trustee is a
national banking association with trust powers, duly organized,
validly existing and in good standing under the laws of the United
States with all necessary corporate power and authority to execute,
deliver, and to carry out and perform its obligations under the terms
of, the Declaration and the Guarantee.
(ii) The Delaware Trustee is a Delaware
corporation, duly organized, validly existing and in good standing,
with full corporate power and authority to execute and deliver, and to
carry out and perform its obligations under the terms of, the
Declaration.
(iii) The execution, delivery and
performance by each of the Institutional Trustee and the Delaware
Trustee of the Declaration, and the execution, delivery and
performance by Guarantee Trustee of the Guarantee, have been duly
authorized by all necessary corporate action on the part of the
Institutional Trustee and the Delaware Trustee, respectively, in the
case of the Declaration, and by the Guarantee Trustee, in the case of
the Guarantee. The Declaration and the Guarantee have been duly
executed and delivered by the Institutional Trustee and the Delaware
Trustee, respectively, in the case of the Declaration, and by the
Guarantee Trustee, in the case of the Guarantee, and constitute the
legal, valid and binding obligation of the Institutional Trustee and
the Delaware Trustee, in the case of the Declaration, and of the
Guarantee Trustee, in the case of the Guarantee, enforceable against
the Institutional Trustee and the Delaware Trustee in the case of the
Declaration, and against the Guarantee Trustee, in the case of the
Guarantee, in accordance with their terms except to the extent
enforcement thereof may be limited by the Bankruptcy Exceptions.
(iv) The execution, delivery and
performance by each of the Institutional Trustee and the Delaware
Trustee of the Declaration, and the execution, delivery and
performance by the Guarantee Trustee of the Guarantee, do not conflict
with, or constitute a breach of, the Institutional Trustee's, the
Delaware Trustee's or the Guarantee Trustee's respective charter or
bylaws.
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(v) No consent, approval or
authorization of, or registration with or notice to, any Delaware or
federal banking authority is required for the execution, delivery or
performance by the Institutional Trustee and the Guarantee Trustee of
the Declaration and the Preferred Securities Guarantee Agreement.
(4) The favorable opinion, dated as of the
Closing Time, of the Law Department of The First National Bank of Chicago, as
Purchase Contract Agent, in form and substance satisfactory to counsel for the
Underwriter, to the effect that:
(i) The First National Bank of
Chicago, is duly incorporated and is validly existing as a banking
corporation with trust powers under the laws of the United States with
all necessary power and authority to execute, deliver and perform its
obligations under the Purchase Contract Agreement and the Pledge
Agreement.
(ii) The execution, delivery and
performance by the Purchase Contract Agent of the Purchase Contract
Agreement and the Pledge Agreement, and the authentication and
delivery of the Securities have been duly authorized by all necessary
corporate action on the part of the Purchase Contract Agent. The
Purchase Contract Agreement and the Pledge Agreement have been duly
executed and delivered by the Purchase Contract Agent, and constitute
the legal, valid and binding obligations of the Purchase Contract
Agent, enforceable against the Purchase
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Contract Agent in accordance with its terms, except to the extent that
enforcement thereof may be limited by the Bankruptcy Exceptions.
(iii) the execution, delivery and
performance of the Purchase Contract Agreement and the Pledge
Agreement by the Purchase Contract Agent does not conflict with or
constitute a breach of the charter or by-laws of the Purchase Contract
Agent.
(iv) No consent, approval or
authorization of, or registration with or notice to, any Illinois or
federal governmental authority or agency is required for the
execution, delivery or performance by the Purchase Contract Agent of
the Purchase Contract Agreement and the Pledge Agreement.
(5) The opinion of Wolf, Block, Schorr &
Solis-Cohen LLP, special tax counsel to the Offerors, generally to the effect
that based upon current law and the assumptions stated or referred to therein,
under current U.S. federal income tax law: (i) the Trust will be classified as
a grantor trust and not as an association taxable as a corporation; (ii) the
Debentures will be classified as indebtedness of the Company and (iii) the
discussion in the Prospectus under the caption "Certain Federal Income Tax
Consequences" is a fair and accurate summary of the matters addressed therein,
based upon current law and the assumptions stated or referred to therein.
(6) The favorable opinion, dated as of the
Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the
Underwriter, in form and substance satisfactory to the Underwriter, with
respect to the issuance and sale of the Securities, and other related matters
as the Underwriter may reasonably require, and the Company shall have furnished
to such counsel such documents as they request for the purpose of enabling them
to pass upon such matters. In giving its opinion, such counsel may rely as to
certain matters of Pennsylvania law upon the
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opinion of Wolf, Block, Schorr & Solis-Cohen LLP, special counsel for the
Offerors, which shall be delivered in accordance with Section 5(b)(1) hereof.
a. Between the date of this Agreement and prior to the Closing
Time, no material adverse change shall have occurred in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Trust or the Company and its subsidiaries, considered as one
enterprise, whether or not in the ordinary course of business.
b. At the Closing Time, the Underwriter shall have received a
certificate of the President or a Vice-President of the Company and of the
Chief Financial Officer or Chief Accounting Officer of the Company and a
certificate of a Regular Trustee of the Trust, and dated as of the Closing
Time, to the effect that (i) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Trust or the Company and its subsidiaries considered
as one enterprise, whether or not in the ordinary course of business, (ii) the
representations and warranties in Section 1 hereof are true and correct as
though expressly made at and as of the Closing Time, (iii) the Company and the
Trust have complied with all agreements and satisfied all conditions on their
part to be performed or satisfied at or prior to the Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been initiated or threatened by
the Commission.
c. At the time of the execution of this Agreement, the
Underwriter shall have received from Coopers & Lybrand LLP a letter dated such
date in form and substance satisfactory to the Underwriter, to the effect set
forth below and as to such other matters as the Underwriter may reasonably
request, that: [TO BE SUPPLIED]
d. At the Closing Time, the Underwriter shall have received from
Coopers & Lybrand LLP a letter, dated as of the Closing Time, to the effect
that they reaffirm the statements made in the letter furnished pursuant to
subsection (e) of this Section, except that the specified
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date referred to shall be a date not more than five days prior to the Closing
Time.
e. At the Closing Time, and at each Date of Delivery, if any,
counsel for the Underwriter shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated and related
proceedings, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions herein contained;
and all proceedings taken by the Offerors in connection with the issuance and
sale of the Securities as herein contemplated shall be satisfactory in form and
substance to the Underwriter and counsel for the Underwriter.
f. At the Closing Time, (i) the Securities shall be rated in one
of the four highest rating categories for preferred stock ("Investment Grade")
by any nationally recognized statistical rating agency, and the Offerors shall
have delivered to the Underwriter a letter, from such nationally recognized
statistical rating agency, or other evidence satisfactory to the Underwriter,
confirming that the Securities have Investment Grade ratings; (ii) there shall
not have occurred any decrease in the rating assigned to the Securities or any
other securities of the Company or of the financial condition of the Company by
any "nationally recognized statistical rating organization," as defined for
purposes of Rule 436(g)(2) under the 1933 Act Regulations, and (iii) no
downgrading shall have occurred in the "A" claims-paying ability rating
assigned to the Company by Standard & Poor's Corporation ("S&P"), the "A"
(Excellent) financial strength rating assigned to the Company by A.M. Best
Company ("Best") or the "A" claims-paying ability rating assigned to the
Insurance Subsidiaries by S&P and (iv) no such organization shall have publicly
announced that it has under surveillance or review its rating of the Securities
or any other securities of the Company or of the financial condition or
claims-paying ability of the Company.
g. At the Closing Time, the Income PRIDES, the Growth PRIDES and
the Shares shall have been approved for listing on the NASDAQ National Market
upon notice of issuance.
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h. In the event that the Underwriter exercises the options
provided in Section 2(b) hereof to purchase all or any portion of the Option
Securities, the representations and warranties of the Offerors contained herein
and the statements in any certificates furnished by the Offerors hereunder
shall be true and correct as of, and as if made on, each Date of Delivery, and
at the relevant Date of Delivery, the Underwriter shall have received:
(1) A certificate, dated such Date of Delivery,
of the President or a Vice-President of the Company and the Chief Financial
Officer or Chief Accounting Officer of the Company and a certificate of a
Regular Trustee of the Trust confirming that the certificate delivered at the
Closing Time pursuant to Section 5(d) hereof is true and correct as of, and as
if made on, such Date of Delivery.
(2) The favorable opinion of Wolf, Block,
Schorr & Solis-Cohen LLP, special counsel and special tax counsel for the
Offerors, in form and substance satisfactory to counsel for the Underwriter,
dated such Date of Delivery, relating to the Option Securities and otherwise to
the same effect as the opinion required by Sections 5(b)(1) and 5(b)(5) hereof.
(3) The favorable opinion of Wolf, Block,
Schorr & Solis-Cohen LLP, special Delaware counsel for the Offerors, in form
and substance satisfactory to counsel for the Underwriter, dated such Date of
Delivery, relating to the Option Securities and otherwise to the same effect as
the opinion required by Section 5(b)(2) hereof.
(4) The favorable opinion of Pepper Hamilton
LLP, counsel to The First National Bank of Chicago and First Chicago Delaware,
Inc. in form and substance satisfactory to counsel for the Underwriter, dated
such Date of Delivery, relating to the Option Securities and otherwise to the
same effect as the opinion required by Section 5(b)(3) hereof.
(5) The favorable opinion of the Law Department
of The First National Bank of Chicago, as Purchase Contract Agent, in form and
substance satisfactory to counsel for the Underwriter, dated such Date of
Delivery, relating to the Option Securities and otherwise to the same effect as
the opinion required by Section 5(b)(4) hereof.
(6) The favorable opinion of Skadden, Arps,
Slate, Meagher & Flom LLP, counsel for the Underwriter, dated such Date
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of Delivery, relating to the Option Securities and otherwise to the same effect
as the opinion required by Section 5(b)(6) hereof.
(7) A letter from Coopers & Lybrand L.L.P. in
form and substance satisfactory to the Underwriter and dated such Date of
Delivery, substantially the same in form and substance as the letter furnished
to the Underwriter pursuant to Section 5(e) hereof, except that the "specified
date" in the letter furnished pursuant to this Section shall be a date not more
than five days prior to such Date of Delivery.
(8) At such Date of Delivery, (i) the
Securities shall be rated Investment Grade by any nationally recognized
statistical rating agency, and the Offerors shall have delivered to the
Underwriter a letter from such nationally recognized statistical rating agency,
or other evidence satisfactory to the Underwriter, confirming that the
Securities have Investment Grade ratings; (ii) there shall not have occurred
any decrease in the rating assigned to the Securities or any other securities
of the Company or of the financial condition of the Company by any "nationally
recognized statistical rating organization," as defined for purposes of Rule
436(g)(2) under the 1933 Act Regulations, and (iii) no downgrading shall have
occurred in the "A" claims-paying ability rating assigned to the Company by
S&P, the "A" (Excellent) financial strength rating assigned to the Company by
Best or the "A" claims-paying ability rating assigned to the Insurance
Subsidiaries by S&P and (iv) no such organization shall have publicly announced
that it has under surveillance or review its rating of the Securities or any
other securities of the Company or of the financial condition of the Company.
If any condition specified in this Section 5 shall not have been
fulfilled when and as required to be fulfilled, this Agreement, or, in the case
of any condition to the purchase of Option Securities on a Date of Delivery
which is after the Closing Time, the obligations of the Underwriter to purchase
the relevant Option Securities may be terminated by the Underwriter by notice
to the Company at any time at or prior to the Closing Time, or such Date of
Delivery, as the case may be, and such termination shall be without liability
of any party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7 and 8 shall survive any such termination and remain in full
force and effect.
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Section 6. Indemnification.
a. The Offerors agree to jointly and severally indemnify and
hold harmless the Underwriter and each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, arising
out of any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434
Information deemed to be part thereof, if applicable, or the omission
or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, to the
extent of the aggregate amount paid in settlement of any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever
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based upon any such untrue statement or omission, or any such alleged
untrue statement or omission, provided, that (subject to Section 6(d)
below) any such settlement is effected with the written consent of the
Offerors; and
(iii) against any and all expense
whatsoever, as incurred (including the fees and disbursements of
counsel chosen by the Underwriter), reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
provided, however, that the foregoing indemnity agreement shall not apply to
any loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Offerors by the Underwriter expressly for use in the Registration Statement (or
any amendment thereto), including the Rule 430A Information and the Rule 434
Information deemed to be a part thereof, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
b. The Underwriter agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, the Trust and each of its Trustees who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section,
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as incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in the Registration Statement (or
any amendment thereto), including the Rule 430A Information and the Rule 434
Information deemed to be a part thereof, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Offerors by the Underwriter expressly for use in the Registration Statement (or
any amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
c. Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
to so notify an indemnifying party shall not relieve such indemnifying party
from any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which
it may have otherwise than on account of this indemnity agreement. In the case
of parties indemnified pursuant to Section 6(a) above, counsel to the
indemnified parties shall be selected by the Underwriter, and, in the case of
parties indemnified pursuant to section 6(b) above, counsel to the indemnified
parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7
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hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
d. If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement
at least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for
in Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Offerors on the one hand, and the Underwriter, on the other hand, from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Offerors on the one hand,
and the Underwriter, on the other hand, in connection with the statements or
omissions which resulted in
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such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations.
The relative benefits received by Offerors on the one hand, and the
Underwriter, on the other hand, in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of such
Securities (before deducting expenses) received by the Offerors and the total
underwriting discount received by the Underwriter, in each case as set forth on
the cover of the Prospectus, or, if Rule 434 is used, the corresponding
location on the Term Sheet bear to the aggregate initial public offering price
of such Securities as set forth on such cover.
The relative fault of the Offerors, on the one hand, and the
Underwriter, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Offerors or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Offerors and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
the Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.
49
<PAGE> 50
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as the Underwriter, and
each director of the Company, each officer of the Company and each Trustee of
the Trust who signed the Registration Statement, and each person, if any, who
controls the Company and the Trust within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act shall have the same rights to contribution as
the Offerors.
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery. All representations, warranties and agreements contained in
this Agreement and the Pricing Agreement, or contained in certificates of
officers of the Company or trustees of the Trust submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter or controlling person, or
by or on behalf of the Company, and shall survive delivery of and payment for
the Securities to the Underwriter.
SECTION 9. Termination of Agreement.
a. The Underwriter may terminate this Agreement, by notice to
the Company at any time at or prior to the Closing Time, if (i) there has been,
since the date of this Agreement or since the respective dates as of which
information is given in the Prospectus, any material adverse change or any
development which could reasonably be expected to result in a prospective
material adverse change, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise, whether or not arising in the ordinary course of business, or
(ii) there has occurred any material adverse change in the financial markets in
the United States or any outbreak of hostilities or escalation of hostilities
or other calamity or crisis, or any change or development involving a
prospective change in national or international political, financial or
50
<PAGE> 51
economic conditions the effect of which is such as to make it, in the judgment
of the Underwriter impracticable to market the Securities or to enforce
contracts for the sale of the Securities, or (iii) if trading in the Common
Stock or any other security of the Company has been suspended or limited by the
Commission, NASD or the NASDAQ National Market, or if trading generally on
either the American Stock Exchange, the NASDAQ National Market or in the
over-the-counter market has been suspended or limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for securities
have been required, by either of said exchanges or by such system or by order
of the Commission, NASD or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal, New York or New Jersey
authorities.
b. If this Agreement and the Pricing Agreement are terminated
pursuant to this Section 9, such termination shall be without liability of any
party to any other party except as provided in Section 4, and provided,
further, that Sections 1, 6, 7 and 8 shall survive such termination and remain
in full force and effect.
SECTION 10. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriter shall be directed to the Underwriter c/o Merrill Lynch at
Merrill Lynch World Headquarters, World Financial Center, North Tower, New
York, New York 10281, Attention of Tony Ursano, Director, with a copy to
Skadden, Arps, Slate, Meagher & Flom LLP, Attention of John Osborn, Esq.;
notices to the Offerors shall be directed to it at Philadelphia Consolidated
Holding Corp., One Bala Plaza, Suite 100, Bala Cynwyd, Pennsylvania 19004,
Attention of Mr. Craig P. Keller, Secretary.
SECTION 11. Parties. This Agreement and the Pricing Agreement
shall each inure to the benefit of and be binding upon the Offerors and the
Underwriter and their respective successors. Nothing expressed or mentioned in
this Agreement or the Pricing Agreement is intended or
51
<PAGE> 52
shall be construed to give any person, firm or corporation, other than the
Underwriter and the Offerors and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or the Pricing Agreement or any
provision herein or therein contained. This Agreement and the Pricing
Agreement and all conditions and provisions hereof and thereof are intended to
be for the sole and exclusive benefit of the parties hereto and thereto and
their respective successors and legal representatives, and said controlling
persons and officers and directors and their heirs and legal representatives,
and for the benefit of no other person, firm or corporation. No purchaser of
Securities from the Underwriter shall be deemed to be a successor by reason
merely of such purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT AND THE
PRICING AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME UNLESS OTHERWISE INDICATED.
SECTION 13. Effect of Headings. The Article and Section
headings herein are for convenience only and shall not affect the construction
hereof.
52
<PAGE> 53
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, shall become a binding
agreement among the Company, the Trust and the Underwriter in accordance with
its terms.
Very truly yours,
PHILADELPHIA CONSOLIDATED HOLDING CORP.
By:
-----------------------------------
Name:
Title:
PCHC FINANCING I
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
---------------------------------------
Name:
Authorized Signatory:
53
<PAGE> 54
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(A PENNSYLVANIA CORPORATION)
PCHC FINANCING I
(A DELAWARE BUSINESS TRUST)
FELINE PRIDES
AND
% TRUST ORIGINATED PREFERRED SECURITIES (TOPRS(SM))
PRICING AGREEMENT
DATED: APRIL , 1998
<PAGE> 55
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(A PENNSYLVANIA CORPORATION)
PCHC FINANCING I
(A DELAWARE BUSINESS TRUST)
FELINE PRIDES(SM)
(STATED AMOUNT OF $10 PER FELINE PRIDES),
CONSISTING OF
INCOME PRIDES(SM)
EACH CONSISTING OF
A PURCHASE CONTRACT OF PHILADELPHIA CONSOLIDATED HOLDING CORP.
REQUIRING THE
PURCHASE ON , 2001 (OR EARLIER) OF CERTAIN SHARES
OF COMMON STOCK OF PHILADELPHIA CONSOLIDATED HOLDING CORP.
AND
A % TRUST ORIGINATED PREFERRED SECURITY(SM)
(TOPRS(SM))
OF PCHC FINANCING I
AND
GROWTH PRIDES(SM)
EACH CONSISTING OF
A PURCHASE CONTRACT OF PHILADELPHIA CONSOLIDATED HOLDING CORP.
REQUIRING THE
PURCHASE ON , 2001 (OR EARLIER) OF CERTAIN SHARES
OF COMMON STOCK OF PHILADELPHIA CONSOLIDATED HOLDING CORP.
AND
A 1/100 UNDIVIDED BENEFICIAL INTEREST IN A ZERO-COUPON U.S.
TREASURY SECURITY HAVING A PRINCIPAL AMOUNT EQUAL
TO $1,000 AND MATURING ON 15, 2001;
AND
% TRUST PREFERRED SECURITIES OF
PCHC FINANCING I (LIQUIDATION AMOUNT $10 PER
TRUST PREFERRED SECURITY)
<PAGE> 56
April , 1998
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED,
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), relating to the purchase by the
Underwriter named therein of the above Income PRIDES (the "Income PRIDES"),
Growth PRIDES (The "Growth PRIDES") and Trust Preferred Securities (the "Trust
Preferred Securities" and, together with the Income PRIDES and Growth PRIDES,
the "Securities") of Philadelphia Consolidated Holding Corp. (the "Company"),
and PCHC Financing I (the "Trust"). The Securities are being issued and sold
by the Company and the Trust to the Underwriter on the terms and conditions set
forth in the Underwriting Agreement.
Pursuant to Section 2 of the Underwriting Agreement, the
Company and the Trust agree with the Underwriter as follows:
1. The initial public offering price, and the aggregate
interest rate to be paid by the Offerors, per security for the Securities,
determined as provided in said Section 2, shall be (a) in the case of each
Income PRIDES, $10.00 and %, (b) in the case of each Growth PRIDES, $ and
% and (c) in the case of each separately offered Trust Preferred Security,
$10.00 and %.
2. The respective purchase prices per security for the
Securities to be paid by the several Underwriters shall be equal to the initial
public offering prices set forth in paragraph 1. above. The Company shall pay
a commission to the Underwriters equal, in the case of the Initial Securities,
to $ and, with respect to the Option Securities, $ per security in
the case of Income PRIDES, $ per security in the case of Growth PRIDES and $
per security in the case of separately offered Trust Preferred Securities.
<PAGE> 57
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, shall become a binding
agreement among the Company, the Trust and the Underwriter in accordance with
its terms.
Very truly yours,
PHILADELPHIA CONSOLIDATED HOLDING CORP.
By:
------------------------------------
Name:
Title:
PCHC FINANCING I
By:
------------------------------------
Name:
Title: Regular Trustee
By:
------------------------------------
Name:
Title: Regular Trustee
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
---------------------------------------
Name:
Authorized Signatory:
<PAGE> 1
Exhibit 5.1
LAW OFFICES
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP
TWELFTH FLOOR PACKARD BUILDING
111 SOUTH 15TH STREET
PHILADELPHIA, PA 19102-2678
(215) 977-2000
FACSIMILE: (215) 977-2334
(215) 977-2000
April 24, 1998
Philadelphia Consolidated Holding Corp.
One Bala Plaza, Suite 100
Bala Cynwyd, PA 19004
PCHC Financing I
103 Springer Building, First Floor
Concord Plaza
3411 Silverside Road
Wilmington, DE 19810
Re: Offering of Trust Preferred Securities and FELINE PRIDES(sm)
(Registration Statement Nos. 333-49271 and 333-49271-01)
Ladies and Gentlemen:
As counsel for Philadelphia Consolidated Holding Corp. (the
"Company") and PCHC Financing I (the "Trust"), we have assisted in the
preparation of a Registration Statement on Form S-3 (File Nos. 333-49271 and
333-49271-01), filed by the Company and the Trust with the Securities and
Exchange Commission (the "Commission") on April 2, 1998 under the Securities Act
of 1933, as amended (the "Act"), Amendment No. 1 thereto filed with the
Commission on April 16, 1998 and Amendment No. 2 thereto filed with the
Commission on April 24, 1998, such Registration Statement, as so amended, being
hereinafter referred to as the "Registration Statement") in connection with the
public offering of (i) debentures of the Company (the "Trust Debentures") to be
purchased by the Trust with the proceeds from the sale of preferred securities
representing undivided beneficial ownership interests in the Trust (the
"Preferred Securities"); (ii) shares of common stock, no par value per share
(collectively, the "Common Stock"); (iii) stock purchase contracts of the
Company to purchase the Common Stock (the "Stock Purchase Contracts"); (iv)
stock purchase units of the Company, each representing ownership of (x) a Stock
Purchase Contract and (y) a beneficial interest in the Preferred Securities or
debt obligations of third parties, including U.S. Treasury Securities, securing
the holder's obligation to purchase the Common Stock under the Stock Purchase
<PAGE> 2
Philadelphia Consolidated Holding Corp.
PCHC Financing I
April 24, 1998
Page 2
Contract ("Stock Purchase Units"); (v) guarantees of certain payment obligations
with respect to the Preferred Securities by the Company (the "Guarantees") and
(vi) the Preferred Securities of the Trust, each of (i) through (vi) to be
issued and sold by the Company or the Trust, as applicable, from time to time
pursuant to Rule 415 under the Act for an aggregate initial offering price not
to exceed $207,000,000. Capitalized terms used but not defined herein are used
as defined in the Registration Statement.
This opinion is being delivered in accordance with the
requirements of Item 601(b)(5) of Regulation S-K promulgated under the Act.
In connection with the opinions expressed herein, we have
examined, among other things, the originals or copies, certified or otherwise
identified to our satisfaction, of (i) the Articles of Incorporation and Bylaws
of the Company, each as amended; (ii) the Certificate of Trust, the Declaration
of Trust and the Form of Amended and the Restated Declaration of Trust of the
Trust filed as an exhibit to the Registration Statement; (iv) the Registration
Statement; (v) the form of Indenture to be executed by the Company and The First
National Bank of Chicago, as trustee (the "Trust Debenture Indenture"); and (vi)
the form of Guarantee Agreement to be executed by the Company and The First
National Bank of Chicago, as guarantee trustee (the "Guarantee Agreement"). In
addition, we have examined, and have relied as to matters of fact upon, the
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, documents and other instruments and such
certificates or comparable documents of public officials and of officers and
representatives of the Company and the Trust, and have made such other and
further investigations, as we have deemed relevant and necessary as a basis for
the opinions hereinafter set forth.
In our examination, we have assumed without independent
verification (i) the legal capacity of all natural persons, (ii) the genuineness
of all signatures, (iii) the authenticity of all documents submitted to us as
originals, (iv) the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such documents and (v) the power and authority of all persons other
than the Company and the Trust signing such documents to execute, deliver and
perform such documents, and the valid authorization, execution and delivery of
such documents by such other persons. As to any facts material to the opinions
expressed herein which were not independently established or verified, we have
relied upon oral or written statements and representations of officers or other
representatives of the Company, the Trust and others.
We have also assumed that (i) the Registration Statement, and any
amendments thereto (including post-effective amendments), including the form of
prospectus included therein (as supplemented, the "Prospectus"), will have
become effective under the Act, (iii) all Trust
<PAGE> 3
Philadelphia Consolidated Holding Corp.
PCHC Financing I
April 24, 1998
Page 3
Debentures, Stock Purchase Contracts, Stock Purchase Units, Guarantees and
Preferred Securities issued will be issued and sold in compliance with
applicable federal and state securities laws and solely in the manner stated in
the Registration Statement and the Prospectus, and (iv) a definitive purchase,
underwriting or similar agreement or stock purchase contract with respect to any
Trust Debentures, Stock Purchase Contracts, Stock Purchase Units, Guarantees or
Preferred Securities offered will have been duly authorized and validly executed
and delivered by the Company and/or the Trust, as applicable, and the other
parties thereto.
We are admitted to practice in the Commonwealth of Pennsylvania and
the State of Delaware and we do not express any opinion as to the laws of any
other jurisdiction other than the federal laws of the United States of America
to the extent referred to specifically herein. The Securities may be issued from
time to time on a delayed or continuous basis, and this opinion is limited to
the laws, including applicable rules and regulations, in effect on the date
hereof. We assume no obligation to update such opinion.
Based upon and subject to the foregoing, and such examinations of
law and such other matters as we have deemed relevant under the circumstances,
it is our opinion that:
1. With respect to the Trust Debentures to be issued under the
Trust Debenture Indenture, when (i) the Trust Debenture Indenture has been duly
authorized, executed and delivered by the Company to the trustee in accordance
with applicable law, (ii) the Trust Debenture Indenture has been duly qualified
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"),
(iii) the Board of Directors of the Company, a duly constituted and acting
committee of such Board or duly authorized officer of the Company (such Board of
Directors, committee or authorized officer being hereinafter referred to as the
"Board"), has taken all necessary corporate action to approve the issuance and
terms of such Trust Debentures, the terms of the offering thereof and related
matters in accordance with applicable law and (iv) such Trust Debentures have
been duly executed, authenticated, issued and delivered in accordance with the
provisions of the Trust Debenture Indenture and applicable law and upon payment
of the consideration therefor provided for in the applicable definitive
purchase, underwriting or similar agreement approved by the Board, such Trust
Debentures will constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their terms.
2. With respect to shares of Common Stock, when certificates
representing the shares of Common Stock have been duly executed, countersigned,
registered and delivered either (a) in accordance with the applicable definitive
purchase underwriting or similar agreement approved by the Board of Directors of
the Company (the "Board") upon payment of the consideration therefor (not less
than the par value of the Common Stock) provided for therein, or
<PAGE> 4
Philadelphia Consolidated Holding Corp.
PCHC Financing I
April 24, 1998
Page 4
(b) upon conversion or exercise of any other security, in accordance with the
terms of such security or the instrument governing such security providing for
such conversion or exercise as approved by the Board, for the consideration
approved by the Board (not less than the par value of the Common Stock), the
shares of Common Stock will be duly authorized, validly issued, fully paid and
nonassessable.
3. With respect to the Stock Purchase Contracts, when (i) the Board
has taken all necessary corporate action to approve the issuance and terms of
such Stock Purchase Contracts, the terms of the offering thereof and related
matters in accordance with applicable law and (ii) such Stock Purchase Contracts
have been duly executed, issued and delivered in accordance with applicable law
and upon payment of the consideration therefor provided for in the applicable
definitive purchase, underwriting or similar agreement approved by the Board,
such Stock Purchase Contracts will constitute valid and legally binding
obligations of the Company, enforceable against the Company in accordance with
their terms.
4. With respect to the Stock Purchase Units, when such Stock
Purchase Units have been duly issued and delivered in accordance with the
provisions of the Registration Statement and the Prospectus approved by the
Board upon payment of the consideration therefor provided for therein, assuming
that the terms of such Stock Purchase Units are in compliance with then
applicable law, such Stock Purchase Units will be duly authorized, validly
issued, fully paid and nonassessable. We note that payments may be required by
holders of the Stock Purchase Contracts that are part of the Stock Purchase
Units in accordance with the terms of the Stock Purchase Contracts.
5. With respect to the Guarantees, when (i) the Guarantee Agreement
has been duly authorized, executed and delivered by the Company to the guarantee
trustee in accordance with applicable law, (ii) the Guarantee Agreement has been
duly qualified under the Trust Indenture Act in accordance with applicable law,
(iii) the Board has taken all necessary corporate action to approve the issuance
and terms of such Guarantees, the terms of the offering thereof and related
matters in accordance with applicable law and (iv) such Guarantees have been
duly executed, issued and delivered in accordance with applicable law and in
accordance with the provisions of the Guarantee Agreement and the applicable
definitive purchase, underwriting or similar agreement approved by the Board
upon payment of the consideration therefore provided for therein, such
Guarantees will constitute valid and legally binding obligations of the Company
enforceable against the Company in accordance with their terms.
6. With respect to the Preferred Securities, when (i) the Amended
and Restated Declaration of Trust has been duly authorized and executed and
delivered by the trustees of the Trust and the Company, as sponsor, in
accordance with applicable law, (ii) the trustees of the Trust have taken all
necessary action to approve the issuance and terms of the Preferred Securities,
the terms of the offering thereof and related matters in accordance with
applicable
<PAGE> 5
Philadelphia Consolidated Holding Corp.
PCHC Financing I
April 24, 1998
Page 5
law and (iii) such Preferred Securities have been duly executed and
authenticated in accordance with the terms of the Declaration and delivered and
paid for as contemplated by the prospectus supplement included in the
Registration Statement, such Preferred Securities will be validly issued, fully
paid and nonassessable, representing undivided beneficial interests in the
assets of the Trust. We note that the Preferred Security holders may be
obligated to make payments as set forth in the Declaration.
Our opinions set forth above are subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
We hereby consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement. We also consent to the references
to our firm under the headings "Legal Opinions" in the Registration Statement.
In giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP
<PAGE> 1
Exhibit 8.1
LAW OFFICES
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP
TWELFTH FLOOR PACKARD BUILDING
111 SOUTH 15TH STREET
PHILADELPHIA, PA 19102-2678
(215) 977-2000
FACSIMILE: (215) 977-2334
April 24, 1998
Philadelphia Consolidated Holding Corp.
One Bala Plaza
Suite 100
Bala Cynwyd, PA 19004
PCHC Financing I
103 Springer Building, First Floor
Concord Plaza
3411 Silverside Road
Wilmington, DE 19810
RE: Offering of Trust Preferred Securities and FELINE
PRIDES(sm) (Registration Statement Nos. 333-49271
and 333-49271-01)
Ladies and Gentlemen:
We have acted as tax counsel to Philadelphia Consolidated
Holdings Corp., a corporation organized under the laws of the Commonwealth of
Pennsylvania (the "Company"), and PCHC Financing I, a statutory business trust
formed under the Business Trust Act of the State of Delaware (the "Trust"), in
connection with above-captioned registration statement on Form S-3, as
subsequently amended (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") for the purposes of registering (i)
Trust Originated Preferred Securities representing undivided beneficial
interests in the assets of the Trust (the "Preferred Securities"), (ii)
Debentures issued by the Company to the Trust in connection with the sale of the
Preferred Securities (the "Debentures"), and (iii) FELINE PRIDES(sm) consisting
of (A) units (referred to as Income PRIDES(sm)) initially comprised of stock
purchase contracts (the "Purchase Contracts") and beneficial ownership of
Preferred Securities and (B) units (referred to as Growth PRIDES(sm)) initially
comprised of Purchase Contracts and beneficial ownership of zero-coupon U.S.
Treasury Securities, as described in the Prospectus Supplement dated April 24,
1998, forming a part of such Registration Statement (the "Prospectus
Supplement").
<PAGE> 2
Philadelphia Consolidated Holding Corp.
PCHC Financing I
April 24, 1998
Page 2
In rendering our opinion, we have participated in the
preparation of the Registration Statement and the Prospectus Supplement. Our
opinion is conditioned on, among other things, the initial and continuing
accuracy of the facts, information, covenants and representations set forth in
the Registration Statement, the Prospectus Supplement and certain other
documents and the statements and representations made by officers of the
Company. In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such documents. We also have assumed that the transactions related
to the issuance of the Preferred Securities, the Debentures, and the FELINE
PRIDES will be consummated in the manner contemplated by the Registration
Statement and the Prospectus Supplement.
In rendering our opinion, we have considered the current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury regulations promulgated thereunder, judicial decisions and Internal
Revenue Service rulings, all of which are subject to change, which change may be
retroactively applied. A change in the authorities upon which our opinion is
based could affect our conclusions. There can be no assurance, moreover, that
any of the opinions expressed herein will be accepted by the Internal Revenue
Service or, if challenged, by a court.
Based solely upon the foregoing, we are of the opinion that,
under current United States federal income tax law:
(1) The Trust will be classified as a grantor trust and
not as an association taxable as a corporation for
United States federal income tax purposes;
(2) The Debentures will be classified as indebtedness of
the Company for United States federal income tax
purposes, and the Company will be entitled to deduct
interest and original issue discount (if any) with
respect to the Debentures; and
(3) Although the discussion set forth in the Prospectus
Supplement under the heading "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES" does not purport to discuss all
possible United States federal income tax
consequences of the purchase, ownership, and
disposition of Preferred Securities and FELINE
PRIDES, such discussion constitutes, in all material
respects, a fair and accurate summary of the United
States federal income tax consequences of the
purchase, ownership, and disposition of Preferred
Securities and FELINE PRIDES.
<PAGE> 3
Philadelphia Consolidated Holding Corp.
PCHC Financing I
April 24, 1998
Page 3
Except as set forth above, we express no opinion to any party
as to the tax consequences, whether federal, state, local or foreign, of the
issuance of the Preferred Securities, the Debentures, or the FELINE PRIDES or of
any transaction related to or contemplated by such issuance. This opinion is
furnished to you solely for your benefit in connection with the offering of the
Preferred Securities and the FELINE PRIDES and is not to be used, circulated,
quoted or otherwise referred to for any other purpose or relied upon by any
other person without our prior written consent. We consent to the use of our
name under the heading "Legal Opinions" in the Prospectus Supplement. We hereby
consent to the filing of this opinion with the Commission as Exhibit 8 to the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the rules and regulations of the Commission
promulgated thereunder. This opinion is expressed as of the date hereof, unless
otherwise expressly stated, and we disclaim any undertaking to advise you of any
subsequent changes of the facts stated or assumed herein or any subsequent
changes in applicable law.
Very truly yours,
/s/ Wolf, Block, Schorr and Solis-Cohen LLP
WOLF, BLOCK, SCHORR and SOLIS-COHEN LLP
