<PAGE> 1
Filed pursuant to Rule 424 (b) (1)
Registration No. 333-40657
Prospectus
LOGO
$75,000,000
7 1/8% SENIOR NOTES DUE 2007
Executive Risk Inc. ("ERI" or the "Company") is offering $75,000,000 aggregate
principal amount of 7 1/8% Senior Notes due 2007 (the "Senior Notes"). Interest
on the Senior Notes is payable on June 15 and December 15 of each year,
commencing June 15, 1998. The Senior Notes will mature on December 15, 2007. The
Senior Notes may not be redeemed prior to maturity and are not subject to any
sinking fund.
The Senior Notes will be represented by one or more permanent global Senior
Notes registered in the name of The Depository Trust Company (the "Depositary")
or its nominee. Beneficial interests in the permanent global Senior Notes will
be shown on records maintained by participants, and transfers thereof will be
effected only through the Depositary or any participant. See "Description of
Notes--Book-Entry System." Except as described herein, Senior Notes in
definitive form will not be issued. Settlement for the Senior Notes will be made
in immediately available funds. The Senior Notes will trade in the Depositary's
Same-Day Funds Settlement System, and secondary trading activity in the Senior
Notes will therefore settle in immediately available funds.
The Senior Notes will be general unsecured obligations of the Company and will
rank senior in right of payment to all of the Company's existing or future
indebtedness that is by its terms expressly subordinated in right of payment to
the Senior Notes and will rank pari passu with all other existing or future
unsecured senior indebtedness of the Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SENIOR NOTE 99.611% .650% 98.961%
TOTAL $74,708,250 $487,500 $74,220,750
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from December 12, 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $212,000.
- --------------------------------------------------------------------------------
The Senior Notes are being offered by Chase Securities Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation (collectively, the "Underwriters"),
subject to prior sale, when, as and if issued by the Company and accepted by the
Underwriters, and subject to certain other conditions. The Underwriters reserve
the right to withdraw, cancel or modify such offers and to reject orders in
whole or in part. It is expected that delivery of the Senior Notes will be made
in book-entry form through the facilities of the Depositary on or about December
12, 1997.
CHASE SECURITIES INC. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus is December 9, 1997.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES,
INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR
BY ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE SENIOR NOTES OR
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO
WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE SENIOR NOTES AND THE DISTRIBUTION OF THIS PROSPECTUS.
------------------------
AVAILABLE INFORMATION
The Company 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 statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549, and at the following regional offices of the Commission: 7 World Trade
Center, Suite 1300, New York, NY 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661-2511. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates. The Commission
maintains a Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. In addition, copies of
the above reports, proxy statements and other information also may be inspected
at the offices of the NYSE, 20 Broad Street, New York, NY 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Senior Notes offered hereby, reference is hereby made to the
Registration Statement and the exhibits and schedules filed therewith, which may
be obtained from the principal office of the Commission in Washington, DC, upon
payment of the fees prescribed by the Commission.
2
<PAGE> 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference:
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(ii) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997; and
(iii) Current Reports on Form 8-K filed on February 18, 1997 and June 5,
1997.
All documents filed by the Company with the Commission 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 this offering shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
their respective dates of filing. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein 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.
The Company will provide without charge to each person (including any
beneficial owner of Senior Notes purchased in this offering) to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the foregoing documents incorporated herein by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
into such documents). Written or telephone requests should be directed to the
Company at 82 Hopmeadow Street, Simsbury, CT 06070, Attention: Mr. Robert V.
Deutsch, Executive Vice President, telephone number (860) 408-2000.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Prospectus and the documents
incorporated by reference herein, or any other written or oral statements made
by or on behalf of the Company, may include forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors (which are described in more
detail in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, which is incorporated herein by reference) include, but are not
limited to, uncertainties relating to cyclical industry conditions,
uncertainties relating to government and regulatory policies, the legal
environment, the uncertainties of the reserving process, the competitive
environment in which the Company operates, the uncertainties inherent in
international operations, interest rate fluctuations and uncertainties related
to the Company's possible entrance into new insurance lines and new geographic
markets. The words "believe," "expect," "anticipate," "project," and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
their dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements appearing elsewhere, or incorporated by reference, in this
Prospectus. Except where otherwise indicated, (i) the "Company" or "ERI" refers
to Executive Risk Inc., with respect to any period subsequent to December 31,
1993, and to its wholly-owned subsidiary, Executive Re Inc. ("Executive Re"),
with respect to any period prior to January 1, 1994; (ii) "ERII" refers to
Executive Risk Indemnity Inc. and "ERSIC" refers to Executive Risk Specialty
Insurance Company (ERII and ERSIC are wholly-owned insurance company
subsidiaries of the Company and are sometimes collectively referred to as the
"Insurance Subsidiaries"); (iii) "ERMA" refers to Executive Risk Management
Associates, the Company's wholly-owned underwriting agency which offers
insurance policies issued by ERII and ERSIC, as well as by certain other
insurance companies; (iv) "ERNV" refers to Executive Risk N.V., a Dutch
insurance company which is a wholly-owned subsidiary of Executive Re; and (v)
all financial information in this Prospectus is presented in accordance with
generally accepted accounting principles ("GAAP"), unless specified as being in
accordance with statutory accounting practices ("SAP").
THE COMPANY
ERI is a specialty insurance holding company which, through its
subsidiaries, develops, markets and underwrites directors and officers liability
insurance ("D&O") and errors and omissions liability insurance ("E&O") for
lawyers and other professionals. Based on the most recently available survey of
the domestic D&O market by Watson Wyatt Worldwide, the Company is a leading D&O
underwriter and is the leading underwriter of D&O for not-for-profit health care
organizations based on policy count. The Company's subsidiaries also offer
fiduciary liability insurance and fidelity bonds for corporations, employment
practices liability insurance for corporations and their employees, technology
maintenance and repair coverage for hospitals and clinics, stop-loss
arrangements for providers of medical services and medical malpractice liability
coverage for hospitals and other health care institutions. The Company markets
its products primarily through independent agents and brokers throughout the
United States. In recent years, the Company also has been marketing insurance
outside the United States, particularly in Europe. The Company intends to
continue the expansion of its international business. The Company and Union des
Assurances de Paris -- Incendie-Accidents have agreed to terminate, effective
December 31, 1997, their joint venture with respect to the marketing of D&O to
European insureds. Thereafter, the Company's operations in Europe will be
conducted through ERNV.
Both D&O and E&O are designed to protect insureds against lawsuits and
associated legal defense expenses. In connection with D&O coverage of for-profit
corporations, such liabilities can arise from claims by customers, vendors,
competitors and former employees, although the most severe liabilities have
historically arisen from lawsuits by stockholders alleging director or officer
failure to discharge duties to the corporation or violations of federal
securities laws. In the case of not-for-profit organizations, the Company's
coverage is often implicated in employment practices litigation. E&O is most
often sold to professionals, such as attorneys, psychologists and insurance
agents, among others, where the principal sources of potential claims are
dissatisfied clients alleging breaches of professional standards or ethical
violations. Fiduciary liability coverages are intended primarily to protect
those who invest and administer benefit plan trusts, and fidelity insurance
coverages insure against losses associated with employee theft and other types
of employee dishonesty. Employment practices liability insurance, which is
available to cover both the employing organization and its supervisors, insures
against losses associated with employee claims such as sexual harassment,
wrongful termination and discriminatory treatment. The Company's non-liability
related products include a service contract and cost management product for
owners of high-tech diagnostic equipment and related health care technology, and
a stop-loss policy for providers of medical services that receive revenues for
their services under the capitation method.
The Company is in the process of exploring entry into certain new insurance
lines. Such entry could be by means of the establishment of new businesses or
the acquisition of existing businesses. Such new insurance lines may or may not
be related to the Company's core D&O and E&O lines.
4
<PAGE> 5
There can be no assurance as to whether the Company will in fact enter into any
such new insurance lines or, if it does, as to the timing thereof, or as to the
results of operations of such new insurance lines.
The following table sets forth the Company's gross premiums written by line
of business for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 GROSS 1995 GROSS 1994 GROSS
PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT
WRITTEN OF TOTAL WRITTEN OF TOTAL WRITTEN OF TOTAL
---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Domestic D&O....................... $240,680 72% $159,491 76% $104,871 81%
Lawyers E&O........................ 35,679 11 28,744 14 17,964 14
Miscellaneous E&O.................. 32,329 10 11,649 5 5,153 4
International D&O.................. 11,046 3 9,934 5 1,620 1
Other.............................. 12,351 4 822 -- 591 --
-------- --- -------- --- -------- ---
Total............................ $332,085 100% $210,640 100% $130,199 100%
======== === ======== === ======== ===
</TABLE>
The table below sets forth statutory combined ratios for the periods
indicated for the Insurance Subsidiaries and the property/casualty industry as a
whole. The Insurance Subsidiaries' specialty products business is not directly
comparable to the business of the property/casualty industry as a whole.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SAP DATA:
Insurance Subsidiaries' Combined
Ratio.............................. 92.7% 90.7% 97.6% 102.1% 102.8%
Industry Combined Ratio(1)........... 105.9% 106.4% 108.4% 106.9% 115.7%
</TABLE>
- ---------------
(1) Source: Best's Aggregates & Averages -- Property-Casualty.
Approximately 92% of the Company's investment portfolio at September 30,
1997, on a fair value basis, consisted of cash and investment grade fixed
maturity securities. At that date, the Company's investment portfolio had an
amortized cost and fair value of $912.0 million and $956.0 million,
respectively, and the tax equivalent yield on the fixed maturity portfolio was
7.8%. The Company's investment philosophy is to seek optimum total return in a
manner consistent with what the Company believes is a generally conservative
investment approach. At September 30, 1997, the Company's total assets were $1.3
billion and stockholders' equity was $257.9 million.
The Insurance Subsidiaries' current pooled rating from A.M. Best Company,
Inc. ("A.M. Best") is "A (Excellent)" and their current pooled claims-paying
ability rating from Standard & Poor's Corporation ("S&P") is "A+ (Good)." These
ratings are based upon factors of concern to policyholders, including financial
condition and solvency, and are not directed to the protection of investors.
There can be no assurance that such ratings will not change in the future.
ERI employs approximately 480 people, most of whom are located at the
Company-owned headquarters building at 82 Hopmeadow Street, Simsbury,
Connecticut 06070.
5
<PAGE> 6
THE OFFERING
Securities Offered.............. $75,000,000 aggregate principal amount of
7 1/8% Senior Notes due 2007.
Maturity Date................... December 15, 2007.
Interest Payment Dates.......... Interest on the Senior Notes will be payable
in cash semi-annually on June 15 and December
15 of each year, commencing June 15, 1998.
Redemption...................... The Senior Notes will not be redeemable prior
to maturity.
Ranking......................... The Senior Notes will be general unsecured
obligations of the Company and will rank
senior in right of payment to all of the
Company's existing or future indebtedness
that is by its terms expressly subordinated
in right of payment to the Senior Notes and
will rank pari passu with all other existing
or future unsecured senior indebtedness of
the Company. The Senior Notes will be
effectively subordinated to all existing and
future liabilities of the Company's
subsidiaries. At September 30, 1997, the
liabilities of the Company's subsidiaries,
including obligations to the policyholders of
the Company's Insurance Subsidiaries,
amounted to $932.5 million.
Same-Day Settlement............. Initial settlement for the Senior Notes will
be made in immediately available funds. While
held in global form, the Senior Notes will
trade in the Depositary's Same-Day Funds
Settlement System, and settlement for any
secondary market trades and all payments of
principal and interest will be made in
immediately available funds.
Book-Entry System and Form and
Denomination of Senior Notes.... The Senior Notes will be issued in
denominations of $1,000 or any integral
multiple thereof. Payment of principal of,
and interest on, Senior Notes represented by
one or more permanent global Senior Notes
registered in the name of or held by the
Depositary or its nominee will be made in
immediately available funds to the Depositary
or its nominee as the registered owner and
holder of such permanent global Senior Note
or Senior Notes. Senior Notes will not be
issued in definitive form except under
certain limited circumstances described
herein. See "Description of Senior
Notes -- Book-Entry System."
Principal Covenants............. The indenture under which the Senior Notes
will be issued (the "Indenture") contains
covenants limiting, among other things, (i)
the creation and existence of liens by the
Company and its subsidiaries, (ii) the
issuance and disposition of capital stock of
the Company's subsidiaries and (iii) the
ability of the Company to effect a
consolidation, merger or sale of
substantially all of its assets as an
entirety.
Use of Proceeds................. The net proceeds from the issuance of the
Senior Notes offered hereby will be used by
the Company to make a contribution to the
capital and surplus of ERNV, in order to
support the development of its international
business, and for general corporate purposes.
See "Use of Proceeds."
6
<PAGE> 7
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected consolidated historical financial data as of
September 30, 1997 and 1996 and for each of the nine-month periods ended
September 30, 1997 and 1996 have been derived from unaudited consolidated
financial statements and include all adjustments (consisting only of normal
recurring accruals) that the Company considers necessary for a fair presentation
of such financial information for those periods. The results of operations for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for any other interim period or for the full year
ended December 31, 1997. The selected consolidated historical financial data as
of December 31, 1996, 1995, 1994, 1993 and 1992 and for each of the years in the
five-year period ended December 31, 1996 have been derived from the audited
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with the financial and other information included
in the Company's Annual Report on Form 10-K for the year ended December 31, 1996
and its Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross premiums written.................... $308,480 $229,511 $332,085 $210,640 $130,199 $84,255 $82,667
Net premiums written...................... 191,064 148,847 210,376 145,121 108,285 70,519 74,605
Net premiums earned....................... 151,222 111,404 155,784 116,434 94,961 69,014 71,926
Net investment income..................... 33,042 23,214 32,646 26,706 22,497 20,475 19,702
Net realized capital gains (losses)....... 1,928 (572) 1,047 1,588 (455) 1,964 869
Equity in earnings of ERMA................ -- -- -- -- -- 2,707 2,736
Other income (loss)....................... 150 135 166 83 82 (364) --
-------- -------- -------- -------- -------- -------- --------
Total revenues.......................... 186,342 134,181 189,643 144,811 117,085 93,796 95,233
Loss and loss adjustment expenses......... 101,543 75,279 105,335 78,530 64,171 46,640 51,427
Policy acquisition costs.................. 24,527 20,231 27,803 21,931 18,723 18,613 18,535
General and administrative costs.......... 20,334 11,704 17,068 10,730 8,890 8,749 6,409
Long-term incentive compensation.......... -- 187 187 1,458 1,009 1,100 --
Interest expense.......................... 1,446 3,192 4,511 2,022 1,519 1,421 1,420
Minority interest in Executive Risk
Capital Trust........................... 7,109 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total expenses.......................... 154,959 110,593 154,904 114,671 94,312 76,523 77,791
-------- -------- -------- -------- -------- -------- --------
Income before income taxes................ 31,383 23,588 34,739 30,140 22,773 17,273 17,442
Income tax expense........................ 5,486 4,059 6,634 4,854 3,533 2,360 2,870
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting for income taxes.......... 25,897 19,529 28,105 25,286 19,240 14,913 14,572
Cumulative effect of change in accounting
for income taxes........................ -- -- -- -- -- -- 1,387
-------- -------- -------- -------- -------- -------- --------
Net income................................ $ 25,897 $ 19,529 $ 28,105 $ 25,286 $ 19,240 $14,913 $15,959
======== ======== ======== ======== ======== ======== ========
Earnings per common and common equivalent
share(1)................................ $ 2.50 $ 1.84 $ 2.67 $ 2.11 $ 1.80 $ 3.53 $ 3.44
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding....... 10,377 10,624 10,509 11,956 10,108 3,128 3,120
Earnings per common share--assuming full
dilution(1)............................. $ 2.49 $ 1.83 $ 2.67 $ 2.11 $ 1.69 $ 1.69 $ 1.66
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding--
assuming full dilution.................. 10,410 10,668 10,542 11,978 11,365 9,238 9,230
</TABLE>
- ---------------
(1) Per share information is based on income before cumulative effect of change
in accounting for income taxes. Earnings per common and common equivalent
share and earnings per common share assuming full dilution based on net
income were $3.88 and $1.81, respectively, for the year ended December 31,
1992.
7
<PAGE> 8
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and invested assets........... $ 956,049 $628,289 $690,975 $549,852 $431,849 $371,596 $319,773
Total assets(2).................... 1,315,371 824,306 941,247 705,920(6) 516,747 420,382 361,149
Long-term debt..................... -- 70,000 70,000 25,000 25,000 25,000 25,000
Company obligated mandatorily
redeemable preferred
securities....................... 125,000 -- -- -- -- -- --
Stockholders' equity(2)............ 257,864 126,898 144,775 177,725 130,854 114,837 92,473
OTHER DATA:
Loss ratio......................... 67.1% 67.6% 67.6% 67.4% 67.6% 67.6% 71.5%
Expense ratio...................... 29.7 28.6 28.8 28.1 29.1 39.6 34.7
---------- -------- -------- -------- -------- -------- --------
Combined ratio..................... 96.8% 96.2% 96.4% 95.5% 96.7% 107.2% 106.2%
========== ======== ======== ======== ======== ======== ========
Ratio of net premiums written to
statutory surplus(3)(4).......... 1.1 1.5 1.5 1.2 1.0 0.7 0.8
Statutory surplus (at end of
period)(3)....................... $ 225,953 $126,479 $138,405 $121,465 $107,401 $ 94,445 $ 91,689
Operating margin(5)................ 20.6% 20.3% 20.3% 21.3% 21.1% 19.3% 19.3%
Ratio of earnings to fixed
charges(7)(8).................... 4.7 8.8 9.1 17.6 15.1 12.9 12.7
Ratio of debt to total
capitalization(9)................ 17.6% 35.6% 32.6% 12.3% 16.0% 17.9% 21.3%
</TABLE>
- ---------------
(2) As of September 30, 1997 and 1996 and as of December 31, 1996, 1995, 1994
and 1993, includes $16.7 million, $8.8 million, $11.7 million, $15.4
million, ($3.3) million and $12.4 million, respectively, net of deferred
taxes, in total assets and stockholders' equity from unrealized gains
(losses) pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(3) Statutory data has been derived from the financial statements of the
Insurance Subsidiaries prepared in accordance with SAP.
(4) Ratios of net premiums written to statutory surplus are calculated on a
rolling twelve month basis.
(5) Consists of income before taxes, excluding interest expense, minority
interest in Executive Risk Capital Trust, realized capital gains (losses)
and certain non-recurring expenses, divided by total revenues, excluding
realized capital gains (losses).
(6) Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
(7) For purposes of computing ratios of earnings to fixed charges for the
Company and its subsidiaries, earnings represent income before income taxes
plus fixed charges. Fixed charges have been calculated by adding gross
interest expense, amortization of financing costs and that portion of rent
expense deemed representative of the interest factor in such rent expense.
(8) For the nine months ended September 30, 1997, the decline in ratio of
earnings to fixed charges from the prior year period reflects interest
expense associated with the February 1997 issuance by a trust affiliated
with the Company (the "Trust") of $125 million of Company obligated
mandatorily redeemable preferred securities (the "Capital Securities").
(9) Ratio of debt to total capitalization has been calculated by assigning to
the Capital Securities partial equity credit, limited to 15% of total
capital of the Company and its consolidated subsidiaries, after giving
effect to the issuance of the Capital Securities.
8
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors and risks should be considered carefully by potential purchasers in
evaluating the Company, its business and the Senior Notes offered hereby:
RANKING; HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
The Senior Notes will be general unsecured obligations of the Company and
will rank pari passu with all other senior indebtedness of the Company and
senior to all subordinated indebtedness of the Company. However, because the
Senior Notes will be unsecured, they will be effectively subordinated to all
secured indebtedness of the Company.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise is subject to the prior
claims of the creditors of such subsidiary, except to the extent the Company may
itself be recognized as a creditor of such subsidiary. Accordingly, the Senior
Notes will be effectively subordinated to all existing and future liabilities
and obligations of the Company's subsidiaries, including obligations to
policyholders of the Company's Insurance Subsidiaries, which liabilities and
obligations totalled approximately $932.5 million at September 30, 1997. The
Indenture also does not preclude the Company or its subsidiaries from issuing
indebtedness, subject to the covenant described below under "Description of
Senior Notes -- Certain Covenants of the Company -- Limitation on Liens."
Holders of Senior Notes should look only to the assets of the Company for
payments on the Senior Notes.
ERI is an insurance holding company. Dividends and other payments from the
Insurance Subsidiaries and ERMA are ERI's primary source of funds to pay
expenses, service debt (including principal and interest on the Senior Notes)
and pay dividends, if any. The payment of dividends by ERII and ERSIC is subject
to restrictions set forth in the Delaware and the Connecticut insurance laws,
respectively. In general, these restrictions limit the aggregate amount of
dividends or other distributions that the Insurance Subsidiaries may declare or
pay to ERI within any 12-month period without the permission of the applicable
regulatory authority (generally to an amount less than the greater of statutory
net income (excluding realized capital gains in the case of Delaware) for the
preceding year or 10% of statutory surplus), and require that the statutory
surplus of the applicable Insurance Subsidiary following any such dividend or
distribution be reasonable in relation to its outstanding liabilities and
adequate to its financial needs. As of December 31, 1996, the Company's
Insurance Subsidiaries had sufficient capital and earnings to pay up to $13.8
million of dividends to the Company during 1997 without prior regulatory
approval. As of the date hereof, no dividends have been paid to the Company by
the Insurance Subsidiaries during 1997.
The Company's two other insurance company subsidiaries, ERNV and Executive
Risk (Bermuda) Ltd., are domiciled in the Netherlands and Bermuda, respectively,
the laws of each of which jurisdictions impose capital requirements and dividend
restrictions on such subsidiaries.
LIMITED COVENANTS
The Indenture does not contain any provisions specifically intended to
protect holders of the Senior Notes in the event of a future highly leveraged
transaction, reorganization, restructuring, merger or similar transaction
involving the Company. The Indenture does not contain any provision which will
restrict the Company or its subsidiaries from incurring, assuming or being
liable with respect to any indebtedness or other obligations, or from paying
dividends or making other distributions on its capital stock or purchasing or
redeeming its capital stock other than the covenant described below under
"Description of Senior Notes -- Certain Covenants of the Company -- Limitation
on Liens." The Indenture does not contain any financial ratios or specified
levels of net worth or liquidity to which the Company must adhere. In addition,
the Indenture does not contain any provision which would require that the
Company repurchase or redeem or otherwise modify the terms of any of the Senior
Notes upon a change of control or other events involving the
9
<PAGE> 10
Company which may adversely affect the creditworthiness of the Senior Notes. See
"Description of Senior Notes."
CERTAIN BUSINESS CONSIDERATIONS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition and general economic
conditions, including interest rate levels, as well as legislative initiatives,
the frequency of litigation, and the size of judgments obtained against
insureds. The impact of these factors can dramatically affect demand for the
Company's products, insurance capacity, pricing and claims experience and,
consequently, the Company's results of operations. Due to the Company's
underwriting policy of pricing its insurance products primarily according to
perceived risk exposure rather than according to pricing patterns in the market,
it is possible that the Company will seek to raise prices during times of excess
insurance capacity (or, will not seek to raise prices during times of limited
insurance capacity) with an accompanying adverse impact on the Company's results
of operations, market share or both.
The professional liability insurance sectors of the property/casualty
industry have experienced a prolonged "soft market," characterized by intense
competition and strong downward pricing pressures. The Company's business
strategy for continued growth relies on finding underserved markets, primarily
in the D&O and E&O sectors, where it can create and profitably underwrite
attractive insurance products. The Company's ability to pursue such strategy
entails certain risks, due to the highly competitive nature of the insurance
industry. The Company competes with domestic and foreign insurers and
reinsurers, some of which have greater financial, marketing and management
resources and experience than the Company. The Company may also be required to
compete with new market entrants in the future. Competition is based on many
factors, including the perceived financial strength of the insurer, pricing and
other terms and conditions, levels of customer service (including the speed with
which claims are paid), ratings assigned by independent rating organizations
(including A.M. Best and S&P) and reputation and experience in the business.
This competition could have an adverse effect on the Company's results of
operations. In addition, with respect to the Company's ratings, A.M. Best and
S&P each reviews its ratings of insurance companies from time to time. There can
be no assurance that any particular rating will continue for any given period of
time or that it will not be changed or withdrawn entirely if, in the judgment of
the rating agency, circumstances so warrant. If either the Company's A.M. Best
rating or its claims-paying ability rating from S&P were downgraded from its
current level, the Company's results of operations could be materially and
adversely affected.
The Company offers liability coverage on a program basis, that is, through
wholesale brokers who control regional or national books of business. These
"program administrators" function similarly to managing general agents. They are
authorized to receive insurance applications and issue Insurance Subsidiary
policies, all in accordance with underwriting criteria specified by the Company.
Program administrators generally are not authorized to handle or pay claims or
to bind reinsurance. Distribution through program administrators entails certain
fidelity, credit and underwriting risks not ordinarily encountered in connection
with the Company's other distribution methods.
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 stockholders. Such regulation relates to authorized
lines of business, policy rates and forms, capital and surplus requirements,
investment parameters, underwriting limitations, transactions with affiliates,
dividend limitations, changes in control and a variety of other financial and
nonfinancial components of an insurance company's business. The Company believes
that more, rather than less, regulation is likely in the future. The National
Association of Insurance Commissioners (the "NAIC") has adopted a system of
assessing the financial condition and stability of insurance companies, known
10
<PAGE> 11
as "IRIS ratios," and a system to test the adequacy of statutory capital, known
as "risk-based capital," each of which applies to the Insurance Subsidiaries.
IRIS ratios consist of 11 ratios that are compiled annually from each insurance
company's statutory financial reports and then compared against the
NAIC-established "usual range" for each ratio. The Insurance Subsidiaries, which
are experiencing premium growth, have fallen outside the usual range for certain
IRIS ratios from time to time. The risk-based capital rules, required for the
first time in regulatory filings for 1994, establish statutory capital
requirements based on levels of risk assumed by an insurance company. The
formulas for determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of the insurance company's regulatory total adjusted
capital to its authorized control level risk-based capital, both as defined by
the NAIC, calculated as of the end of each fiscal year. At December 31, 1996,
the total adjusted capital (as defined by the NAIC) of ERII and ERSIC was in
excess of the risk-based capital regulatory action level. The application of the
proceeds from the February 1997 offering of the Capital Securities caused the
total adjusted capital of ERII and ERSIC to exceed the risk-based capital
company action level, which is a higher standard. See Note 16 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K incorporated herein by reference. Failure to maintain risk-based
capital at the required levels, or generation of IRIS ratios far outside the
NAIC's usual range, could adversely affect the Insurance Subsidiaries' ability
to secure regulatory approvals as necessary or appropriate in connection with
their insurance businesses.
ADEQUACY OF LOSS RESERVES
The reserves for losses and loss adjustment expenses represent the
Company's estimates of liability on outstanding claims. These estimates involve
actuarial and statistical projections of the expected ultimate cost of
administering and settling these claims based on facts and circumstances then
known, predictions of future events, estimates of future trends in claims
severity and other variable factors such as inflation and new theories of
liability. As estimates, reserves may not accurately reflect amounts that are
ultimately incurred in administering and settling insured losses, particularly
in the instance of companies with relatively short operating histories or
companies that have a heavy reliance on relatively newer product lines, such as
the Company. If the reserve estimates prove to be inadequate, the Company would
be required to augment its reserves, resulting in a charge to earnings in the
period in which such action occurs. Although the Company believes that its
reserves are adequate, there can be no assurance that ultimate loss experience
will not exceed the Company's reserves, resulting in a material adverse effect
on the Company's financial condition and results of operations. Since 1988, the
Company has retained the services of an independent actuarial consulting firm to
provide opinions regarding reserves as required for state regulatory filings.
The Company intends to utilize such services in the future. In addition,
although the Company seeks to spread risk through the use of reinsurance
programs, like other insurance companies, it is subject to the risk of severe or
multiple losses, which could materially and adversely affect its financial
position and results of operations.
REINSURANCE
The Company has historically utilized reinsurance arrangements to limit the
amount of risk retained under policies written or reinsured by the Insurance
Subsidiaries. The Company currently has in place a number of reinsurance
programs pursuant to which it cedes risks. The ceding of risk to reinsurers does
not relieve the Company of liability to its insureds and reinsureds, and
consequently the Company is subject to credit risk with respect to its
reinsurers. While the Company endeavors to reinsure only with financially sound
reinsurers, there can be no assurance that the Company will not experience
difficulties in the future in collecting reinsurance recoverables under these
arrangements should one or more of its reinsurers suffer financial detriment. In
addition, the availability and cost of reinsurance arrangements are subject to
prevailing market conditions, which are beyond the Company's control. The
Company may in the future choose to revise further its reinsurance practices to
increase, decrease or eliminate entirely the amount of risk it cedes to
reinsurers.
11
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the issuance of the Senior Notes
(after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company in connection therewith) are estimated to be
$74.0 million. The Company expects to use the net proceeds from the issuance of
the Senior Notes to make a contribution to the capital and surplus of ERNV, in
order to support the development of its international business, and for general
corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges of the Company for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges....................... 4.7 8.8 9.1 17.6 15.1 12.9 12.7
Ratio of Earnings to Fixed
Charges, Excluding Net
Realized Capital Gains
(Losses)...................... 4.5 9.0 8.9 16.7 15.4 11.5 12.1
</TABLE>
For purposes of computing the ratios of earnings to fixed charges for the
Company and its subsidiaries, earnings represent income before income taxes plus
fixed charges. Fixed charges have been calculated by adding gross interest
expense, amortization of financing costs and that portion of rent expense deemed
representative of the interest factor in such rent expense.
For the nine months ended September 30, 1997, the decline in ratio of
earnings to fixed charges from the prior year period reflects interest expense
associated with the February 1997 issuance of the Capital Securities.
12
<PAGE> 13
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997 and as adjusted to give effect to the issuance
and sale of the Senior Notes offered hereby and the application of the net
proceeds as described in "Use of Proceeds." The data set forth below should be
read in conjunction with the financial and other information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 and
its Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
incorporated herein by reference.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes offered hereby........................................... $ -- $ 75,000
Company obligated mandatorily redeemable preferred securities of
subsidiary Executive Risk Capital Trust holding solely $125,000,000
aggregate principal amount of 8.675% Series B Junior Subordinated
Deferrable Interest Debentures of the Company due February 1, 2027
and $3,866,000 aggregate principal amount of 8.675% Series A Junior
Subordinated Deferrable Interest Debentures of the Company due
February 1, 2027.................................................... 125,000 125,000
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized;
11,854,564 shares issued, 10,740,143 shares outstanding(1)....... 119 119
Additional paid-in capital.......................................... 171,558 171,558
Unrealized gains on investments, net of tax......................... 28,636 28,636
Currency translation adjustments.................................... (578) (578)
Retained earnings................................................... 90,689 90,689
Cost of shares in treasury, at cost--1,114,421 shares............... (32,560) (32,560)
-------- --------
Total stockholders' equity....................................... 257,864 257,864
-------- --------
Total capitalization........................................... $382,864 $ 457,864
======== ========
</TABLE>
- ---------------
(1) Does not include (i) 1,649,484 shares of Common Stock issuable upon exercise
of employee stock options, (ii) 100,000 shares of Common Stock issuable upon
exercise of an option held by Aetna Inc., (iii) 42,642 shares of Common
Stock issuable upon exercise of options granted to directors under the
Company's Nonemployee Directors Stock Option Plan, (iv) 35,780 shares of
Common Stock issuable upon exercise of options granted to former directors
of Executive Re and (v) any shares of Common Stock issuable pursuant to the
Company's Stock Incentive Plan and Performance Share Plan.
13
<PAGE> 14
DESCRIPTION OF SENIOR NOTES
SENIOR NOTES
The statements herein relating to the Senior Notes and the following
summary of certain general provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indenture (as it may be amended or supplemented
from time to time), including the definitions therein of certain terms
capitalized in this Prospectus. All article and section references appearing
herein are to articles and sections of the Indenture. A copy of the form of the
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
The Senior Notes will be issued under an indenture to be dated as of
December 12, 1997 (the "Indenture"), between the Company and The Chase Manhattan
Bank as trustee (the "Trustee").
The Senior Notes will be issued only in fully registered form, without
coupons, in minimum denominations of $1,000 or any integral multiple thereof. As
discussed below, payment of principal of, and interest on, Senior Notes
represented by one or more permanent global Senior Notes registered in the name
of or held by the Depositary or its nominee will be made in immediately
available funds to the Depositary or its nominee as the registered owner and
holder of such permanent global Senior Note or Senior Notes ("Global Notes").
The Senior Notes will be general unsecured obligations of the Company
limited to $75,000,000 aggregate principal amount and will rank senior in right
of payment to all existing or future indebtedness of the Company which is by its
terms expressly subordinated in right of payment to the Senior Notes and will
rank pari passu with all other existing or future unsecured senior indebtedness
of the Company. See "-- Ranking."
The Company will from time to time execute and deliver Senior Notes to the
Trustee for authentication and delivery, and the Trustee will authenticate and
deliver such Senior Notes upon written order of the Company. No service charge
will be made for any transfer or exchange of the Senior Notes, but the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
TERMS OF THE NOTES
Interest on the Senior Notes will be payable semi-annually in arrears on
June 15 and December 15 of each year, commencing June 15, 1998, to Holders of
record on the preceding June 1 and December 1, respectively, at the per annum
rate set forth on the cover page of this Prospectus, with respect to interest
accrued (based on a 360-day year of twelve 30-day months) from the preceding
Interest Payment Date (or from the date of issuance in the case of the first
interest payment) to but excluding the current interest payment date.
The Senior Notes are not redeemable prior to maturity and no sinking fund
will be established with respect to the Senior Notes.
RANKING
The Senior Notes offered hereby will rank equally with the Company's other
general unsecured and unsubordinated indebtedness, including indebtedness from
time to time outstanding to banks and other unaffiliated lenders. The Senior
Notes will be effectively subordinated to any and all existing and future
secured indebtedness of the Company (to the extent of the value of the related
collateral). In addition, because the Company is a holding company whose
operations are conducted through the Subsidiaries, the Senior Notes will be
structurally subordinated to any and all existing and future liabilities
(whether or not secured) of any Subsidiary of the Company, including
14
<PAGE> 15
obligations to policyholders of the Company's Insurance Subsidiaries, which
liabilities totalled approximately $932.5 million at September 30, 1997. The
rights of the Company to participate in any distribution of earnings or assets
of any of its Subsidiaries (and thus the ability of the Company to use earnings
and assets of its Subsidiaries to pay principal and interest on the Senior
Notes) are subject to insurance regulatory and other statutory restrictions,
including limitations on the amount of dividends that may be paid by the
Company's Insurance Subsidiaries in any year without the prior approval of the
regulatory authorities, as more fully described in "Risk Factors -- Ranking;
Holding Company Structure; Dividend Restrictions." As of September 30, 1997, the
Company had outstanding no Senior Indebtedness and $125 million of Junior
Subordinated Debentures. See "Capitalization." The Indenture does not prohibit
the Company or its Subsidiaries from issuing additional debt securities or
incurring bank or other loans that may rank pari passu in right of payment to
the Senior Notes offered hereby, nor does it prohibit Subsidiaries of the
Company from issuing additional debt securities or incurring bank or other loans
that may be structurally senior in right of payment to the Senior Notes offered
hereby.
CERTAIN COVENANTS OF THE COMPANY
Limitations on Liens. The Indenture contains a covenant providing that
neither the Company nor any Subsidiary may incur, issue, assume or guarantee any
Indebtedness secured by a Lien on any property or assets of the Company or any
Subsidiary, or any shares of Capital Stock of any Subsidiary, without
effectively providing that the Senior Notes (together with, if the Company shall
so determine, any other Indebtedness which is not subordinated to the Senior
Notes) shall be secured equally and ratably with (or prior to) such
Indebtedness, so long as such Indebtedness shall be so secured; provided,
however, that this covenant shall not apply to Indebtedness secured by (i) Liens
existing on the date of the Indenture; (ii) Liens on property or assets of, or
on any shares of stock of, any entity existing at the time such entity becomes a
Subsidiary or merges into or consolidates with the Company or a Subsidiary;
(iii) Liens on property or assets or on shares of stock existing at the time of
acquisition thereof by the Company or any Subsidiary (including acquisition
through merger or consolidation or by a sale, lease or other disposition of the
properties of a corporation as an entirety or substantially as an entirety to
the Company or a Subsidiary); (iv) Liens to secure the financing of the
acquisition, construction or improvement of property, or the acquisition of
shares of stock by the Company or any Subsidiary, provided that such Liens cover
only the property or shares so acquired, constructed or improved and are created
not later than one year after such acquisition or, in the case of property, not
later than one year after completion of construction, improvement or
commencement of commercial operation, whichever is later; (v) Liens in favor of
the Company or any Subsidiary; (vi) Liens in favor of, or required by,
governmental authorities; (vii) Liens in favor of the Trustee for the benefit of
the Holders of the Senior Notes; (viii) Liens securing Indebtedness in an
aggregate principal amount not in excess of 10% of the Company's Total
Capitalization; and (ix) any extension, renewal or replacement, as a whole or in
part, of any Lien referred to in the foregoing clauses (i) to (viii) inclusive;
provided, however, that (a) such extension, renewal or replacement Lien shall be
limited to the same property, assets or shares of stock that secured the Lien
extended, renewed or replaced and (b) in the case of clauses (i), (ii), (iii)
and (iv) above, the Indebtedness secured by such Lien at such time is not so
increased (other than an increase in such Indebtedness equal to the amount of
any premium required to be paid in connection with, or reasonably determined by
the Company to be necessary to accomplish, any extension, renewal or replacement
of such Indebtedness and the expenses of the Company and its Subsidiaries
incurred in any such extension, renewal or replacement of such Indebtedness)
and, in the case of clause (viii) above, any increases will be subject to the
limit contained therein (collectively, the "Excluded Liens"). (Section 9.9)
Consolidation, Merger or Sale of Assets. The Indenture provides that the
Company shall not consolidate with or merge into any other Person or transfer,
sell, convey or lease its properties and assets substantially as an entirety,
nor may the Company permit any Person to consolidate with or merge into the
Company or transfer, sell, convey or lease its properties and assets
substantially as
15
<PAGE> 16
an entirety to the Company, unless: (i) the Person formed by such consolidation
or into which the Company is merged or the Person which acquires its properties
and assets is organized in the United States; (ii) the Person formed by such
consolidation or into which the Company is merged expressly assumes all of the
obligations of the Company under the Senior Notes and under the Indenture; (iii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have happened and be continuing; (iv) if, as a result of such
consolidation or merger or such conveyance, transfer or lease, properties or
assets of the Company would become subject to a Lien which is not an Excluded
Lien, the Company shall secure the Senior notes equally and ratably with the
indebtedness secured by such Lien; and (v) the Company shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel to the effect
that all conditions in the Indenture have been complied with. Upon any such
consolidation or merger into any other Person or any transfer, sale, conveyance
or lease of the Company's properties and assets substantially as an entirety to
any Person, the successor Person formed by such consolidation, or into which the
Company is merged or to which such transfer, sale, conveyance or lease is made,
shall succeed to, and be substituted for the Company under the Senior Notes and
the Indenture, and the Company, except in the case of a lease, shall be relieved
of all obligations and covenants under the Indenture and the Senior Notes it was
subject to as the predecessor corporation. (Section 7.1.)
Under the laws of New York, which govern the Indenture, there is no
established meaning of the phrase "substantially as an entirety" with regard to
a company's assets or property, and the interpretation of such phrase is very
fact-intensive. Due to such uncertainty, it may be difficult for Holders of the
Senior Notes to ascertain whether a viable claim exists under the Indenture with
respect to any given transaction.
Limitation on Disposition of Stock of Restricted Subsidiaries. The
Indenture provides that the Company will not, and will not permit any Subsidiary
to, issue, sell, transfer or otherwise dispose of, directly or indirectly, any
shares of Capital Stock (other than preferred stock having no voting rights of
any kind) of any Restricted Subsidiary (or of any Subsidiary having direct or
indirect control of any Restricted Subsidiary) except for, subject to the
covenant relating to mergers and sales of assets described in "-- Consolidation,
Merger or Sale of Assets", (i) directors' qualifying shares, (ii) any issuance,
sale, transfer or other disposition of any Capital Stock of any Restricted
Subsidiary (or of any Subsidiary having direct or indirect control of any
Restricted Subsidiary) to the Company or to a wholly-owned Subsidiary of the
Company or (iii) any issuance, sale, transfer or other disposition of any
Capital Stock of any Restricted Subsidiary (or of any Subsidiary having direct
or indirect control of any Restricted Subsidiary) made for at least a fair value
consideration as determined by the Board of Directors of the Company pursuant to
a Board Resolution adopted in good faith. (Section 9.10.)
The Company is not required pursuant to the Indenture to repurchase the
Senior Notes, in whole or in part, with the proceeds of any sale, transfer or
other disposition of any shares of Capital Stock of any Subsidiary (or of any
Subsidiary having direct or indirect control of any other Subsidiary).
Furthermore, the Indenture does not provide for any restrictions on the
Company's use of any such proceeds.
The Indenture does not contain any provisions specifically intended to
protect Holders of the Senior Notes in the event of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction
involving the Company. The Indenture does not contain any provisions which will
restrict the Company from incurring, assuming or becoming liable with respect to
any indebtedness or other obligations, or from paying dividends or making other
distributions on its Capital Stock or purchasing or redeeming its Capital Stock
other than the covenant described above in "-- Limitation on Liens." The
Indenture does not contain any financial ratios or specified levels of net worth
or liquidity to which the Company must adhere. In addition, the Indenture does
not contain any provision which would require that the Company repurchase or
redeem or otherwise modify the terms of any of the Senior Notes upon a change in
control or other events involving the Company which may adversely affect the
creditworthiness of the Senior Notes.
16
<PAGE> 17
CERTAIN DEFINITIONS
"Capital Stock" is defined in the Indenture to mean any and all shares,
interests, rights to purchase, warrants, options, participations, or other
equivalents of or interests in (however designated) corporate stock, including
any class or classes of corporate stock which is preferred as to the payment of
dividends, or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of corporate stock
of any other class of such corporation. (Section 1.1.)
"Indebtedness" is defined in the Indenture to mean, with respect to any
Person, (i) every obligation of such Person for money borrowed, or under any
reimbursement obligation relating to a letter of credit (other than letters of
credit obtained in the ordinary course of business), (ii) every obligation
evidenced by a bond, note, debenture or similar instrument (including a purchase
money obligation) given in connection with the acquisition of any businesses,
properties or assets of any kind or with services incurred in connection with
capital expenditures (other than indebtedness to trade creditors arising in the
ordinary course of business) (provided, however, that the deferred purchase
price of any business, property or assets shall not be considered Indebtedness
if the purchase price thereof is payable in full within 90 days from the date on
which such indebtedness was incurred), (iii) every obligation of such Person in
respect of lease rentals which, under GAAP would be shown on a balance sheet of
such Person as a liability (other than a current liability or a deferred item),
(iv) every guarantee, direct or indirect, or any obligation described in clauses
(i) through (iii) above and (v) any amendment, supplement, modification,
deferral, renewal, extension or refunding of any obligation described in clauses
(i) through (iii) above. For purposes of the Indenture, Indebtedness also
includes any obligation of, or any obligation guaranteed by, any Person for the
payment of amounts due under a swap agreement or similar instrument or
agreement, or under a foreign currency hedge exchange or similar instrument or
agreement. (Sections 1.1 and 9.9.)
"Restricted Subsidiary" is defined in the Indenture to mean a Subsidiary,
including its Subsidiaries, which meets any of the following conditions (in each
case determined in accordance with generally accepted accounting principles):
(i) the Company's and its other Subsidiaries' investments in and advances to
such Subsidiary exceed ten percent (10%) of the Total Assets of the Company and
its Subsidiaries on a consolidated basis as of the end of the most recently
completed fiscal quarter; (ii) the Company's and its other Subsidiaries'
proportionate share of the total assets (after intercompany eliminations) of
such Subsidiary exceeds ten percent (10%) of the total assets of the Company and
its Subsidiaries on a consolidated basis as of the end of the most recently
completed fiscal quarter; or (iii) the Company's and its other Subsidiaries'
equity interest in the income from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in accounting principles
of such Subsidiary exceeds ten percent (10%) of such income of the Company and
its Subsidiaries on a consolidated basis for the most recently completed fiscal
quarter. (Section 1.1.)
"Subsidiary" is defined in the Indenture to mean, with respect to any
Person, (a) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or other equity
interests entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof) and (b) any
partnership (i) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (ii) the only general
partners of which are such Person or one or more Subsidiaries of such Person (or
any combination thereof).
"Total Capitalization" is defined in the Indenture to mean, as of the date
of determination, the Company's consolidated stockholders' equity, plus Company
obligated mandatorily redeemable preferred securities, plus outstanding
indebtedness for borrowed money of the Company all as of
17
<PAGE> 18
the end of the most recently completed fiscal quarter of the Company and as set
forth in the Company's balance sheet as of the last day of such fiscal quarter,
plus any equity securities or Company obligated mandatorily redeemable preferred
securities issued or indebtedness for borrowed money incurred (net of any such
securities or indebtedness retired, redeemed or repaid) since the end of such
quarter and prior to such date of determination, and including any indebtedness
for borrowed money proposed to be incurred at such date of determination.
Additional covenants with respect to the Senior Notes may be added to the
Indenture by supplemental indenture.
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
The Indenture provides that, if any Event of Default specified therein
occurs with respect to the Senior Notes and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of all of the outstanding
Senior Notes, by written notice to the Company (and to the Trustee, if notice is
given by such Holders of Senior Notes), may declare the principal of and accrued
interest on all the Senior Notes to be due and payable. (Section 5.2.)
Events of Default with respect to the Senior Notes are defined in the
Indenture as being any one of the following events: (a) a default for 30 days in
payment of interest on any Senior Note when due; (b) a default in payment of
principal, or premium, if any, at maturity or otherwise when due on any Senior
Note; (c) a default for 60 days after notice to the Company by the Trustee, or
by the Holders of at least 25% in aggregate principal amount of the Senior Notes
then Outstanding, in the performance of any other agreement in the Senior Notes
or in the Indenture; (d) (i) failure by the Company or any Subsidiary to pay any
portion of the principal of any Indebtedness having an aggregate principal
amount of $15 million or more when due and payable after the expiration of any
applicable grace period with respect thereto or (ii) acceleration of the
maturity of any Indebtedness of the Company or any Subsidiary in excess of $15
million and such acceleration is not rescinded or annulled or such Indebtedness
is not paid in full within 10 days after written notice thereof to the Company
by the Trustee or to the Company and the Trustee by the holders of at least 25%
in aggregate principal amount of the Senior Notes then Outstanding, provided
that any such Event of Default will be deemed to be remedied or waived if the
default that resulted in the acceleration of such other indebtedness is
remedied, cured or waived; and (e) certain events of bankruptcy, insolvency or
reorganization of the Company. (Section 5.1.)
The Trustee will, within 90 days after the occurrence of a Default with
respect to the Senior Notes, give to the Holders of the Senior Notes notice of
all Defaults known to it unless such Default shall have been cured or waived;
provided that except in the case of a Default in payment on the Senior Notes,
the Trustee may withhold the notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding such notice is in
the interests of the Holders of the Senior Notes. (Section 6.6.) "Default" means
any event which is, or after notice or passage of time or both, would be, an
Event of Default. (Section 1.1.)
The Indenture provides that the Holders of a majority in aggregate
principal amount of the Senior Notes may, subject to certain limited conditions,
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 such
Trustee. (Section 5.8.)
The Indenture includes a covenant that the Company will file annually with
the Trustee a certificate as to the Company's compliance with all conditions and
covenants of the Indenture. (Section 9.7.)
The Holders of a majority in aggregate principal amount of the Senior Notes
by notice to the Trustee for such series may waive, on behalf of the Holders of
all Senior Notes, any past Default or Event of Default and its consequences
except a Default or Event of Default in the payment of the
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<PAGE> 19
principal of or interest on any Senior Note, and except in respect of any Event
of Default resulting from the breach of a covenant or provision of the Indenture
which cannot be amended or modified without the consent of the Holders of each
Outstanding Senior Note. (Section 5.7.)
MODIFICATION OF THE INDENTURE
The Indenture permits the Company and the Trustee to enter into one or more
supplemental indentures without the consent of the Holders of any of the Senior
Notes in order, among other things, (i) to evidence the succession of another
corporation to the Company and the assumption of the covenants of the Company by
a successor to the Company; (ii) to add to the covenants of the Company or
surrender any right or power of the Company; (iii) to add additional Events of
Default with respect to the Senior Notes; (iv) to evidence and provide for
successor Trustees; (v) to secure the Senior Notes; (vi) to correct any defect
or supplement any inconsistent provisions or to make any other provisions with
respect to matters or questions arising under the Indenture, provided that such
action does not materially adversely affect the interests of any Holder of
Senior Notes; or (vii) to cure any ambiguity or correct any mistake, provided,
such action shall not materially adversely affect the interests of any Holder of
Senior Notes. (Section 8.1.)
The Indenture also permits the Company and the Trustee, with the consent of
the Holders of a majority in aggregate principal amount of the Outstanding
Senior Notes, to execute supplemental indentures adding any provisions to or
changing or eliminating any of the provisions of the Indenture or any
supplemental indenture or modifying the rights of the Holders of Senior Notes,
except that, without the consent of the Holder of each Senior Note so affected,
no such supplemental indenture may: (i) change the Stated Maturity of the
principal or interest on any Senior Note; (ii) reduce the principal of or
interest on any Senior Note, or change the manner in which the amount of any of
the foregoing is determined; (iii) change the currency in which any Senior Note
or any premium or interest thereon is payable; (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Senior Note; (v) reduce the percentage in principal amount of the Outstanding
Senior Notes the consent of whose Holders is required for modification or
amendment of the Indenture or for waiver of compliance with certain provisions
of the Indenture or for waiver of certain defaults; (vi) change the obligation
of the Company to maintain an office or agency in the places and for the
purposes specified in the Indenture; or (vii) modify the provisions relating to
waiver of certain defaults or any of the foregoing provisions. (Section 8.2.)
DEFEASANCE AND COVENANT DEFEASANCE
The Company may elect either (i) to defease and be discharged from any and
all obligations with respect to the Senior Notes ("defeasance") or (ii) to be
released from its obligations with respect to certain covenants applicable to
the Senior Notes ("covenant defeasance"), upon the deposit with the Trustee (or
other qualifying trustee), in trust for such purpose, of money and/or Government
Obligations which through the payment of principal and interest in accordance
with their terms will provide money in an amount sufficient, without
reinvestment, to pay the principal of and interest on the Senior Notes to
Maturity. The conditions to defeasance or covenant defeasance include the
following: (i) that such action will not result in a breach or violation of the
Indenture or a default under any other material agreement to which the Company
is a party and (ii) such defeasance or covenant defeasance will not result in
the Trustee having a conflicting interest for purposes of the Trust Indenture
Act or in the trust arising from such deposit to constitute an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
In addition, as a condition to covenant defeasance, the Company must deliver to
the Trustee an Opinion of Counsel to the effect that the Holders of the Senior
Notes 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. Under current United
States federal income tax laws, defeasance of the sort contemplated in the
Indenture would be treated as
19
<PAGE> 20
an exchange of the relevant Senior Notes in which Holders of the Senior Notes
might recognize gain or loss. In addition, thereafter, the amount, timing and
character of amounts that Holders would be required to include in income might
be different from that which would be includable in the absence of such
defeasance. Prospective investors are urged to consult their own tax advisors as
to the specific consequences of a defeasance, including the applicability and
effect of tax laws other than the United States federal income tax laws.
The Company may exercise its defeasance option with respect to the Senior
Notes notwithstanding its prior exercise of its covenant defeasance option. If
the Company exercises its defeasance option, payment of the Senior Notes may not
be accelerated because of a Default or an Event of Default. (Section 4.4.) If
the Company exercises its covenant defeasance option, payment of the Senior
Notes may not be accelerated by reason of a Default or an Event of Default with
respect to the covenants to which such covenant defeasance is applicable.
However, if such acceleration were to occur by reason of another Event of
Default, the realizable value at the acceleration date of the money and
Government Obligations in the defeasance trust could be less than the principal
and interest then due on the Senior Notes, in that the required deposit in the
defeasance trust is based upon scheduled cash flow rather than market value,
which will vary depending upon interest rates and other factors.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Payments in respect of the Senior Notes will be made at the office or
agency of the Company maintained for that purpose in The City of New York,
except that, at the option of the Company, interest payments may be made (i) by
check mailed to the Holders of Senior Notes entitled thereto at their registered
addresses or (ii) by wire transfer to an account maintained by the Person
entitled thereto as specified in the Register. (Section 3.7.) Payment of any
installment of interest on the Senior Notes will be made to the Person in whose
name such Senior Note is registered at the close of business on the regular
record date for such interest. (Section 3.7.) Senior Notes in registered form
will be transferable or exchangeable at the agency of the Company maintained for
such purpose as designated by the Company from time to time. Senior Notes may be
transferred or exchanged without service charge, other than any tax or other
governmental charge imposed in connection therewith. (Section 3.5.)
BOOK-ENTRY SYSTEM
Upon issuance, the Senior Notes will be represented by one or more Global
Notes. Each Global Note will be deposited with, or on behalf of, the Depositary
and registered in the name of a nominee of the Depositary. Except under the
limited circumstances described below, Global Notes will not be exchangeable for
definitive certificated Senior Notes.
Ownership of beneficial interests in Global Notes will be limited to
institutions that have accounts with the Depositary or its nominee
("participants") or Persons that may hold interests through participants. In
addition, ownership of beneficial interests by participants in such Global Notes
will be evidenced only by, and the transfer of that ownership will be effected
only through, records maintained by the Depositary or its nominee for such
Global Notes. Ownership of beneficial interests in such Global Notes by Persons
that hold through participants will be evidenced only by, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant. The Depositary will have no knowledge of
the actual beneficial owners of the Senior Notes. Beneficial owners will not
receive written confirmation from the Depositary of their purchase, but
beneficial owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the participants through which the beneficial owners entered the
transaction. The laws of some jurisdictions may require that certain purchasers
of securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in such Global
Notes.
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<PAGE> 21
The Company has been advised by the Depositary that upon the issuance of
Global Notes and the deposit of such Global Notes with the Depositary, the
Depositary will immediately credit, on its book-entry registration and transfer
system, the respective principal amounts represented by such Global Notes to the
accounts of participants.
Payment of principal of, and interest on, Senior Notes represented by
Global Notes registered in the name of or held by the Depositary or its nominee
will be made to the Depositary or its nominee, as the case may be, as the
registered owner and holder of the Global Notes representing such Senior Notes.
The Company has been advised by the Depositary that upon receipt of any payment
of principal of, or interest on, a Global Note, the Depositary will immediately
credit, on its book-entry registration and transfer system, accounts of
participants with payments in amounts proportionate to their respective
beneficial interests in the principal amount of such Global Note as shown in the
records of the Depositary. Payments by participants to owners of beneficial
interests in a Global Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name" and will be the sole responsibility of such participants subject
to any statutory or regulatory requirements as may be in effect from time to
time.
None of the Company, the Trustee or any other agent of the Company or the
Trustee will have any responsibility or liability for any aspect of the records
of the Depositary, any nominee or any participant relating to, or payments made
on account of, beneficial interests in a Global Note or for maintaining,
supervising or reviewing any of the records of the Depositary, any nominee or
any participant relating to such beneficial interests.
A Global Note shall be exchangeable for definitive Senior Notes registered
in the name of, and a transfer of a Global Note may be registered to, any Person
other than the Depositary or its nominee, only if:
(a) the Depositary notifies the Company that it is unwilling or unable
to continue as Depositary for such Global Note or if at any time the
Depositary ceases to be registered or in good standing under the Exchange
Act;
(b) the Company in its sole discretion determines that such Global
Note shall be exchangeable for definitive Senior Notes in registered form;
or
(c) there shall have occurred and be continuing an Event of Default or
an event which, with the giving of notice or lapse of time or both, would
constitute an Event of Default under the Senior Notes.
Any Global Note that is exchangeable pursuant to the preceding sentence
will be exchangeable in whole for definitive Senior Notes in registered form, of
like tenor and of an equal aggregate principal amount as the Global Note, in
denominations of $1,000 and integral multiples thereof. Such definitive Senior
Notes will be registered in the name or names of such Persons as the Depositary
shall instruct the Trustee. It is expected that such instructions may be based
upon directions received by the Depositary from its participants with respect to
ownership of beneficial interests in such Global Note. Any principal and
interest will be payable, the transfer of the definitive Senior Notes will be
registerable and the definitive Senior Notes will be exchangeable at the office
or agency of the Company in the Borough of Manhattan, The City of New York
(which will initially be the office of the Trustee), except that, at the option
of the Company, interest may be paid by mailing a check to the address of the
Person entitled thereto as it appears in the Register or by wire transfer to an
account maintained by such Person as specified in the Register.
Except as provided above, owners of beneficial interests in such Global
Notes will not be entitled to receive physical delivery of Senior Notes in
definitive form and will not be considered the Holders thereof for any purpose
under the Indenture, and no Global Note shall be exchangeable except for another
Global Note of like denomination and tenor to be registered in the name of the
Depositary or its nominee. Accordingly, each Person owning a beneficial interest
in such Global
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<PAGE> 22
Note must rely on the procedures of the Depositary and, 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 Global Note or the
Indenture.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of Holders, or an owner of a
beneficial interest in such Global Notes desires to give or take any action that
a Holder is entitled to give or take under the Indenture, the Depositary would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instructions of beneficial owners owning through them.
The Depositary has advised the Company that the Depositary is a limited
purpose trust company organized under the laws of the State of New York, 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 under
the Exchange Act. The Depositary was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. The Depositary is owned by a
number of its participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly. The rules applicable to the Depositary and its participants are on
file with the Commission.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Senior Notes will be made in immediately available
funds. So long as the Senior Notes are represented by one or more permanent
Global Notes, all payments of principal and interest will be made by the Company
in immediately available funds.
So long as the Senior Notes are represented by one or more Global Notes
registered in the name of the Depositary or its nominee, the Senior Notes will
trade in the Depositary's Same-Day Funds Settlement System, and secondary market
trading activity in the Senior Notes will therefore be required by the
Depositary to settle in immediately available funds. No assurance can be given
as to the effect, if any, of settlement in immediately available funds on the
trading activity in the Senior Notes.
CERTIFICATES AND OPINIONS TO BE FURNISHED TO TRUSTEE
The Indenture provides that, in addition to such other certificates or
opinions as may be specifically required by other provisions of the Indenture,
every application by the Company for action by the Trustee thereunder shall be
accompanied by a certificate of certain officers of the Company and an Opinion
of Counsel for the Company stating that, in the opinion of the signers, all
conditions precedent to such action have been complied with.
REPORT TO HOLDERS OF SENIOR NOTES
The Trustee is required to submit an annual report to the Holders of the
Senior Notes regarding, among other things, the Trustee's eligibility to serve
as such, the priority of the Trustee's claims regarding certain advances made by
it, and any action taken by the Trustee materially affecting the Senior Notes.
22
<PAGE> 23
THE TRUSTEE
The Chase Manhattan Bank, whose Corporate Trust Office is currently located
at 450 West 33rd Street, New York, New York, will be the Trustee under the
Indenture.
The Company and its affiliates maintain banking and other commercial
relationships with the Trustee and its affiliates in the ordinary course of
business. The Trustee is an affiliate of Chase Securities Inc., one of the
Underwriters. See "Underwriting."
The Trustee may resign or be removed by the Company and a successor trustee
may be appointed. The Holders of a majority in aggregate principal amount of the
Senior Notes then outstanding may remove the Trustee.
The Indenture contains certain limitations on the rights of the Trustee
thereunder, in the event that it becomes a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise.
23
<PAGE> 24
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") dated December 9, 1997 among the Company and the
several Underwriters named below, the Company has agreed to sell to the
Underwriters, and the Underwriters have severally agreed to purchase from the
Company, the following respective principal amounts of the Senior Notes:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER SENIOR NOTES
-------------------------------------------------------------- ------------
<S> <C>
Chase Securities Inc. ........................................ $ 37,500,000
Donaldson, Lufkin & Jenrette Securities Corporation........... 37,500,000
------------
Total............................................... $ 75,000,000
============
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Senior Notes
offered hereby if any of the Notes are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Senior Notes to the public initially at the respective
public offering price set forth on the cover page of this Prospectus, and to
certain dealers initially at such price less a discount not in excess of 0.40%
of the principal amount of the Senior Notes. The Underwriters may allow, and
such dealers may reallow, a concession to certain other dealers not in excess of
0.25% of the principal amount on sales to certain other dealers. After the
public offering, the public offering price and such concessions may be changed.
Chase Securities Inc. is an affiliate of The Chase Manhattan Bank, which is
the Trustee under the Indenture and the administrative agent for and a lender to
the Company under its revolving credit facility, and which participates on a
regular basis in various general financing and banking transactions with the
Company. Affiliates of Chase Securities Inc. are serving as trustees under the
Amended and Restated Declaration of Trust pursuant to which the Capital
Securities were issued. In addition, the Underwriters have engaged, and may in
the future engage, in investment banking transactions with the Company.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the Underwriters might be required to make in respect thereof.
In connection with the offering and sale of the Senior Notes, Chase
Securities Inc., on behalf of the Underwriters, may engage in overallotment,
stabilizing transactions and syndicate covering transactions in accordance with
Regulation M under the Exchange Act. Overallotment involves sales in excess of
the offering size, which creates a short position for the Underwriters.
Stabilizing transactions permit bids to purchase the Senior Notes in the open
market for the purpose of pegging, fixing or maintaining the price of the Senior
Notes. Syndicate covering transactions involve purchases of the Senior Notes in
the open market after the distribution has been completed in order to cover
short positions. Such stabilizing transactions and syndicate covering
transactions may cause the price of the Senior Notes to be higher than it would
otherwise be in the absence of such transactions. Such activities, if commenced,
may be discontinued at any time.
The Senior Notes are a new series of securities with no established trading
market and will not be listed on any securities exchange. The Underwriters have
advised the Company that they intend to make a market in the Senior Notes, but
are under no obligations to do so and such market making may be terminated at
any time. Therefore, no assurance can be given as to the liquidity of, or the
trading market for, the Senior Notes.
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<PAGE> 25
LEGAL OPINIONS
The validity of the Senior Notes offered hereby will be passed upon for the
Company by Dewey Ballantine LLP, New York, New York. James A. FitzPatrick, Jr.,
Secretary of the Company, is a member of Dewey Ballantine LLP. Certain legal
matters will be passed upon for the Underwriters by LeBoeuf, Lamb, Greene &
MacRae, L.L.P., a limited liability partnership including professional
corporations, New York, New York.
EXPERTS
The consolidated financial statements and schedules of the Company
incorporated by reference or appearing in the Company's Annual Report (Form
10-K) for the year ended December 31, 1996, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon incorporated by
reference or appearing therein and incorporated herein by reference. Such
consolidated financial statements and schedules are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
With respect to the unaudited consolidated interim financial information
for the three-month periods ended March 31, 1997 and March 31, 1996, the
six-month periods ended June 30, 1997 and June 30, 1996, and the nine-month
periods ended September 30, 1997 and September 30, 1996, incorporated by
reference in this Prospectus, Ernst & Young LLP have reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate reports, included in the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997, and September 30, 1997, and incorporated herein by reference,
state that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted considering the limited nature of the
review procedures applied. The independent auditors are not subject to the
liability provisions of Section 11 of the Securities Act for their reports on
the unaudited interim financial information because those reports are not
"reports"' or "parts" of the Registration Statement prepared or certified by the
auditors within the meaning of Sections 7 and 11 of the Securities Act.
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<PAGE> 27
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER
OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information..................... 2
Incorporation of Certain Information by
Reference............................... 3
Prospectus Summary........................ 4
The Offering.............................. 6
Selected Consolidated Historical Financial
Data.................................... 7
Risk Factors.............................. 9
Use of Proceeds........................... 12
Ratio of Earnings to Fixed Charges........ 12
Capitalization............................ 13
Description of Senior Notes............... 14
Underwriting.............................. 24
Legal Opinions............................ 25
Experts................................... 25
</TABLE>
Prospectus
LOGO
$75,000,000
7 1/8% SENIOR NOTES DUE 2007
CHASE SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
Dated December 9, 1997
