SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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/ / Preliminary Proxy Statement
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14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
ENHANCE FINANCIAL SERVICES GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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ENHANCE FINANCIAL SERVICES GROUP INC.
335 Madison Avenue
New York, New York 10017
May 5, 1997
Dear Shareholder:
You are cordially invited to attend the 1997 annual meeting of
shareholders of Enhance Financial Services Group Inc. The meeting will be held
at the offices of Enhance Group, 335 Madison Avenue, 25th Floor, New York, New
York, at 9:00 a.m., local time, on Thursday, June 5, 1997. The accompanying
notice and proxy statement describe the proposals to be submitted to
shareholders at the meeting. We urge you to read this information carefully.
I look forward to welcoming you personally at the annual meeting.
However, whether or not you expect to attend, please complete, sign, date and
return the accompanying proxy card in the enclosed envelope in order to ensure
that your shares will be represented at the meeting. This will not limit your
rights to attend or to change your vote at the meeting.
We appreciate your cooperation and interest in Enhance Group.
Sincerely,
Daniel Gross
President and
Chief Executive Officer
ENHANCE FINANCIAL SERVICES GROUP INC.
335 Madison Avenue
New York, New York 10017
__________________________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
__________________________________________________
The annual meeting of shareholders of Enhance Financial Services Group
Inc. will be held at the offices of Enhance Group, 335 Madison Avenue, 25th
Floor, New York, New York, on Thursday, June 5, 1997, at 9:00 a.m., local time,
for the following purposes:
(1) To elect 11 directors;
(2) To approve the 1997 Long-Term Incentive Plan for Key
Employees of Enhance Group;
(3) To ratify the appointment of Deloitte & Touche LLP as the
independent auditor of Enhance Group and its consolidated
subsidiaries for 1997; and
(4) To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
The close of business on April 28, 1997 has been fixed as the record
date for determining shareholders entitled to notice of and to vote at the
meeting.
By Order of the Board of Directors,
Samuel Bergman
Secretary
May 5, 1997
IMPORTANT: Whether or not you plan to attend the meeting, a return envelope
requiring no postage if mailed in the United States is enclosed
for your convenience in mailing the enclosed proxy.
ENHANCE FINANCIAL SERVICES GROUP INC.
335 Madison Avenue
New York, New York 10017
________________________________________________
PROXY STATEMENT
________________________________________________
This proxy statement is furnished to the holders of common stock, par
value $.10 per share (the "Common Stock"), of Enhance Financial Services Group
Inc., a New York corporation ("Enhance Group" and, together with its
consolidated subsidiaries, the "Company"), in connection with the solicitation
of proxies by the board of directors for use at the annual meeting of
shareholders of Enhance Group to be held on June 5, 1997 and any adjournment or
adjournments thereof. A copy of the notice of meeting accompanies this proxy
statement. It is anticipated that the mailing of this proxy statement will
commence on or about May 5, 1997.
Only shareholders of record at the close of business on April 28,
1997, the record date for the meeting, will be entitled to notice of and to vote
at the meeting. On the record date, Enhance Group had issued and outstanding
18,741,554 shares of Common Stock, which are the only securities of Enhance
Group entitled to vote at the meeting, each share being entitled to one vote.
Under the New York Business Corporation Law (the "BCL") and Enhance
Group's by-laws, the presence, in person or by proxy, of a majority of the
outstanding shares of Common Stock is necessary to constitute a quorum of the
shareholders to take action at the annual meeting. For this purpose, shares
which are present, or represented by a proxy, at the annual meeting will be
counted for quorum purposes regardless of whether the holder of the shares or
proxy fails to vote on any particular matter or whether a broker with
discretionary authority fails to exercise its discretionary voting authority
with respect to any particular matter. Once a quorum of the shareholders is
established, under the BCL and Enhance Group's by-laws, the directors standing
for election must be elected by a plurality of the votes cast, and any other
action to be taken, including the approval of the 1997 Long-Term Incentive Plan
for Key Employees (the "1997 Incentive Plan") of Enhance Group and the
ratification of the appointment of the auditor for 1997, must be approved by a
majority of the votes cast. For voting purposes, abstentions and broker
non-votes will not be counted in determining whether the directors standing for
election have been elected or whether any other action has been approved.
Shareholders who execute proxies may revoke them by giving written
notice to the secretary of the meeting at any time before such proxies are
voted. Attendance at the meeting will not have the effect of revoking a proxy
unless the shareholder so attending so notifies the secretary of the meeting in
writing at any time prior to the voting of the proxy.
The board of directors does not know of any matter other than the
election of directors, the approval of the 1997 Incentive Plan and the
ratification of the appointment of the auditor for 1997 that is expected to be
presented for consideration at the meeting. However, if other matters properly
come before the meeting, the persons named in the accompanying proxy intend to
vote thereon in accordance with their judgment. All proxies received pursuant
to this solicitation will be voted except as to matters where authority to vote
is specifically withheld, and, where a choice is specified as to the proposal,
they will be voted in accordance with such specification. If no instructions
are given, the persons named in the proxy solicited by the board of directors of
Enhance Group intend to vote for the nominees for election as directors of
Enhance Group listed herein beneath the caption "Election of Directors" and for
the other matters listed above in this paragraph expected to be presented for
consideration at the meeting.
The Company will bear the cost of the meeting and of soliciting
proxies, including the cost of mailing the proxy material. The Company has
retained ChaseMellon Shareholder Services as its solicitation agent. In
addition to soliciting by mail, directors, officers and regular employees of the
Company (who will not be specifically compensated for such services) may solicit
proxies by telephone or otherwise.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of April 22, 1997 by (a) each
shareholder known to Enhance Group to be the beneficial owner, within the
meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of more than 5% of the outstanding shares of Common Stock; (b)
each director of Enhance Group; (c) each of the five most highly compensated
executive officers of Enhance Group; and (d) all executive officers and
directors of Enhance Group as a group. Unless otherwise indicated, the address
of each such person is c/o Enhance Financial Services Group Inc., 335 Madison
Avenue, New York, New York 10017.
Number of Percent
Name and Address Shares (1) of Class
- ---------------- ---------- --------
U S WEST, Inc. ................. 5,430,800 (2)(3) 29.0
7800 East Orchard Road
Suite 200
Englewood, Colorado 80111
Franklin Resources, Inc. 945,100 5.0
777 Mariners Island Blvd.
San Mateo, California 94404
FMR Corp. 974,000 5.2
82 Devonshire St.
Boston, Massachusetts 02109
Swiss Reinsurance Company ...... 1,700,000 (3) 9.1
Mythenquai 50/60
8022 Zurich
Switzerland
Allan R. Tessler................ 260,000 (4)(5) 1.4
Wallace O. Sellers.............. 412,125 (4) 2.2
Daniel Gross................... 426,675 (4) 2.3
Samuel Bergman.................. 69,475 (4) *
Ronald M. Davidow............... 105,475 (4) *
Robert M. Rosenberg............. 137,350 (4) *
Tony M. Ettinger................ --0-- --
Brenton W. Harries.............. 8,000 (5) *
David R. Markin................. 109,000 (5) *
Robert P. Saltzman.............. 60,000 (6) *
Richard J. Shima................ 6,000 (5) *
Spencer R. Stuart............... 10,000 (5) *
Adrian U. Sulzer................ --0-- --
Frieda K. Wallison.............. 13,400 (5) *
Jerry Wind...................... 5,000 *
All executive officers and
directors as a group........... 1,685,370 (7) 8.7
________________
* Less than 1%
2
(1) The table in this section is based upon information supplied by directors,
officers and principal shareholders and Schedules 13D and 13G, if any,
filed with the Securities and Exchange Commission. Unless otherwise
indicated in the footnotes to the table and subject to the community
property laws where applicable, each of the shareholders named in this
table has sole voting and investment power with respect to the shares shown
as beneficially owned by him or her.
(2) In 1995, U S WEST, Inc. ("U S WEST") consummated the sale of U S WEST's
7.625% Exchangeable Notes due December 15, 1998 ("DECS"). At maturity
(including as a result of acceleration or otherwise), the principal amount
of the DECS will be mandatorily exchanged by U S WEST for up to 5,430,800
shares of Common Stock (or, at U S WEST's option under certain
circumstances, the cash equivalent thereof). Said number of shares
includes 700,000 shares as to which U S West has granted to a third party a
call option exercisable in December 1998.
(3) See "Certain Relationships and Related Transactions" for information
regarding (a) special powers of U S WEST under Enhance Group's certificate
of incorporation and the manner in which U S WEST has announced its
intention to vote the shares owned by it and (b) an agreement with Swiss Re
regarding future sales and purchases by it of voting shares of Enhance
Group.
(4) Includes the shares set forth in: (a) Column A below issued to the named
officer under the 1987 Long-Term Incentive Plan for Key Employees (the
"1987 Incentive Plan") which have not vested, (b) Column B below issuable
to the named officer upon the exercise of presently exercisable stock
options granted under the 1987 Incentive Plan and (c) Column C below owned
by the named officer's wife and children or in trusts of which such officer
is a trustee (as to which shares such officer disclaims beneficial
ownership).
NAME A B C
----------------------------------------------------
Allan R. Tessler 0 29,000 2,000
Wallace O. Sellers 5,625 145,500 259,000
Daniel Gross 3,550 211,875 93,500
Samuel Bergman 0 65,625 3,850
Ronald M. Davidow 1,375 44,375 0
Robert M. Rosenberg 1,375 83,750 200
(5) Includes shares issuable upon the exercise of the presently exercisable
portion of stock options granted to such director under the Non-Employee
Director Stock Option Plan (the "Directors' Option Plan"), as follows:
Brenton W. Harries -- 9,000 shares; David R. Markin -- 9,000 shares;
Richard J. Shima -- 5,000 shares; Spencer R. Stuart -- 9,000 shares; Allan
R. Tessler -- 9,000 shares; and Frieda K. Wallison -- 9,000 shares.
(6) Held in a living trust account of which Mr. Saltzman and his wife are
co-trustees.
(7) Includes 57,000 shares issuable to the directors who are not employees of
the Company upon the exercise of the presently exercisable portion of stock
options granted to them under the Directors' Option Plan; 620,875 shares
issuable to the executive officers upon the exercise of presently
exercisable options granted to them under the 1987 Incentive Plan; 358,750
shares owned by spouses of executive officers in trusts of which such
officers are trustees or by executive officers or their spouses as
custodians for their children; and 11,925 shares issued under the 1987
Incentive Plan which have not vested. Such persons disclaim beneficial
ownership of such shares owned by their spouses, individually or as
custodians, or by such trusts.
3
PROPOSAL NO. 1
ELECTION OF DIRECTORS
INFORMATION REGARDING NOMINEES
At the meeting, 11 directors are to be elected, each to hold office
(subject to Enhance Group's by-laws) until the next annual meeting of
shareholders and until his or her successor has been elected and qualified. If
any nominee listed in the table below should become unavailable for any reason
to serve as a director, which management does not anticipate, the proxy will be
voted for any substitute nominee or nominees who may be selected by management
prior to or at the meeting, or, if no substitute is selected by management prior
to or at the meeting, for a motion to adjourn the meeting until a substitute
nominee or nominees shall be selected. The information concerning the nominees
has been furnished by them to Enhance Group and is current as of April 15, 1997.
NAME AGE POSITION WITH ENHANCE GROUP
- ---- --- ---------------------------
Allan R. Tessler 60 Chairman of the Board
Wallace O. Sellers 67 Vice Chairman of the Board
Daniel Gross 54 President, Chief Executive Officer and director
Brenton W. Harries 69 Director
David R. Markin 66 Director
Robert P. Saltzman 54 Director
Richard J. Shima 57 Director
Spencer R. Stuart 74 Director
Adrian U. Sulzer 50 Director
Frieda K. Wallison 54 Director
Jerry Wind 59 Director
Mr. Tessler has held the position with Enhance Group set forth above
since its inception. He has also since 1987 been Chairman of the Board and
Chief Executive Officer of International Financial Group, Inc., a merchant
banking concern, and since 1992 served as Co-Chairman of the Board and Co-Chief
Executive Officer of Data Broadcasting Corporation ("DBC"), a provider of market
data services to the investment community. He also serves as Chairman of the
Board and Chief Executive Officer of Ameriscribe Corporation, a provider of
reprographic and related facilities management services, from 1988 to 1993. Mr.
Tessler is also Chairman of the Board of Jackpot Enterprises Inc. ("Jackpot")
and a director of The Limited, Inc.
Mr. Sellers has held the position with Enhance Group set forth above
since January 1, 1995 and he also serves as a consultant to the Company. Prior
thereto, he served as President, Chief Executive Officer and a director of
Enhance Group and Chairman of the Board and Chief Executive Officer of Enhance
Group's principal insurance subsidiaries, Enhance Reinsurance Company ("Enhance
Re") and Asset Guaranty Insurance Company ("Asset Guaranty" and, together with
Enhance Re, the "Insurance Subsidiaries") from their inception. Mr. Sellers
serves as a director of Danielson Holding Corporation.
Mr. Gross has held the position with Enhance Group set forth above and
has served as Chief Executive Officer of the Insurance Subsidiaries since
January 1, 1995. Prior thereto he held senior executive positions with Enhance
Group and Enhance Re from their inception and was among the founders of the
Company in 1986. Previously, he was President of Daniel J. Gross & Associates
and was a co-founder and Chairman of F.G. Holding Company. Mr. Gross also was
President of Kramer Capital Consultants and worked for Colonial Penn Group as
President of Colonial Penn Insurance Company and Vice President of Marketing for
Colonial Penn Group and Vice President and Actuary of Colonial Penn Life.
4
Mr. Harries has served as a director of Enhance Group since 1991,
having previously served as a director of the Insurance Subsidiaries since 1986.
He has been retired since 1986, having previously served from 1985 as President
of Global Electronic Markets Company, a joint venture of McGraw-Hill and
Citicorp dealing in electronic trading of commodities. Mr. Harries also serves
as a trustee of the Alliance Funds, Inc. and the Hudson River Trust.
Mr. Markin has served as a director of Enhance Group since 1986. He
has served as President of Checker Motors Corporation for more than five years.
From 1989 to December 1996, he also served as President and Chief Executive
Officer of International Controls Corp. and its successor corporation, Great
Dane Holdings Inc. ("Great Dane"). Mr. Markin serves as a director of Jackpot
and DBC.
Mr. Saltzman has served as a director of Enhance Group since September
1996. He has been President and Chief Executive Officer of Jackson Life
Insurance Company since 1994. He previously served from 1983 as Executive Vice
President of SunAmerica Inc. and as President of its subsidiary life insurance
company.
Mr. Shima has served as a director of Enhance Group since 1993. He
has been an independent consultant since 1993, having previously thereto from
1992 served as Managing Director of Russell Miller, Inc., an investment banking
concern specializing in the insurance industry. He previously served from 1963
as an officer of The Travelers Corporation, most recently, from 1985 to 1991, as
Vice Chairman and Chief Investment Officer. Mr. Shima serves as a director of
Connecticut Natural Gas Corporation and the Keystone Mutual Funds.
Mr. Stuart has served as a director of Enhance Group since 1992,
having also served as a director of Asset Guaranty from its inception until
1995. He has for the last 10 years served as an independent consultant
regarding organizational and personnel matters. He served from 1990 to 1992 as
Chairman of the Council of Management Advisors of Dean Witter Reynolds Inc. He
is the founder and honorary chairman of Spencer Stuart Executive Recruiting
Consultants and serves as a director of UST Inc.
Mr. Sulzer has served as a director of Enhance Group since March 1996.
He has served in various management capacities with Swiss Reinsurance Company
("Swiss Re"), a principal shareholder of Enhance Group, since January 1991 as
head of its credit and bonding department.
Ms. Wallison has served as a director of Enhance Group since 1992,
having also served as a director of each of the Insurance Subsidiaries since its
inception until 1995. She has since 1983 been a member of the law firm of
Jones, Day, Reavis & Pogue, resident in its Washington, D.C. office.
Mr. Wind has served as a director of Enhance Group since September
1996. He has been on the faculty of the Wharton School of the University of
Pennsylvania since 1967, currently serving as The Lauder Professor and Professor
of Marketing. He also serves as a business consultant to several publicly and
privately held, U.S. and non-U.S. corporations and has served on the editorial
board of and as a contributor to numerous journals on marketing.
5
MEETINGS OF THE BOARD AND COMMITTEES
The board of directors of Enhance Group holds regular quarterly
meetings and special meetings as and when necessary. The board held nine
meetings during 1996, including a two-day, off-site meeting focusing on
long-term strategic planning.
The Executive Committee of the Enhance Group board of directors is
authorized to exercise all powers of the board of directors except as otherwise
provided by New York law. The members of the Executive Committee are Messrs.
Gross, Harries, Sellers, Stuart and Tessler. The committee held one meeting
during 1996.
The functions of the Audit Committee are: to assist the board of
directors in fulfilling its fiduciary responsibilities as to the system of
internal controls, accounting policies and reporting practices of the Company
and the sufficiency of auditing relative thereto; to make recommendations to the
board of directors regarding the independent auditors to be nominated for
approval by the board of directors and ratification by the shareholders; to
review the independence of such auditors and monitor the professional services
they provide; to approve the scope of the annual audit activities of the
independent auditors; and to review audit results. The committee consists of
Messrs. Salzman (Chairman), Harries and Shima. The committee held four meetings
during 1996.
The functions and composition of the Compensation and Nominating
Committee are set forth below under "Executive Compensation - Report of
Compensation and Nominating Committee." The committee held four meetings during
1996.
The board of directors has formed three additional standing advisory
committees to date, and it may from time to time form additional committees to
render advice with respect to certain of its operations.
Each incumbent director who served at any time during 1996 attended
during that year at least 75% of the total number of meetings held during the
year by the board of directors and by all committees of the board of directors
on which such director served.
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION AND NOMINATING COMMITTEE
GENERAL. The Compensation and Nominating Committee of the board of
directors of Enhance Group consists and throughout 1996 consisted exclusively of
directors of the Company who are neither employees nor, with the exception of
Allan R. Tessler, the Chairman of the Board of Enhance Group, officers of the
Company. The committee reviews and makes recommendations to the board of
directors with respect to the remuneration of the Company's executive and senior
officers and the terms and conditions of all employee benefit plans or changes
thereto, all of which recommendations with respect to 1996 compensation were
accepted. The sole exception to the foregoing with respect to the scope of
authority of the Compensation and Nominating Committee relates to decisions
about awards of stock options under the 1987 Incentive Plan, which are made
solely by a subcommittee comprising the members of the Compensation and
Nominating Committee excluding Mr. Tessler.
Set forth below is a report submitted by the members of the
Compensation and Nominating Committee in their capacity as such addressing the
Company's compensation policies for 1996 as they affected Daniel Gross,
President and Chief Executive Officer of the Company during 1996, and the other
four executive officers of the Company who were for 1996 the Company's most
highly paid executive officers.
COMPENSATION PROGRAM PRINCIPLES. The Company's executive compensation
program is designed to help the Company attract, motivate and retain the
executive resources requisite to the Company's long-term success and to the
maximization of returns to shareholders.
6
To that end, the Company attempts to align executive compensation with
the Company's values and objectives, business strategy, management initiatives
and financial performance. In applying these principles, the Company's
executive compensation program attempts to provide:
- levels of compensation that are competitive with those provided
in the various markets in which the Company competes for
executive resources;
- incentive compensation that rewards executives for individual
initiatives and achievements;
- incentive compensation that varies in a consistent and
predictable manner with the financial performance of the Company
and/or its various business units.
As an executive's level of responsibility increases, a greater portion
of his or her potential total compensation opportunity is based on long-term
incentives and less on cash compensation and employee benefits, causing
potentially greater variations in the individual's total compensation level from
year-to-year. Thus, at the senior executive levels, cash compensation is below
the median range of cash compensation of comparable companies. Instead, the
focus is on total compensation, which consists of current compensation,
comprising salary and cash bonus, and long-term incentive compensation,
comprising stock-based awards. While the foregoing general principles are
applicable to the Company's executive personnel as a group, the compensation
components are not fixed in a mechanical or formulaic manner. Rather the mix of
compensation for each employee is determined on an individual basis, resulting
in significant variations among employees.
The Company is in the process of revising its executive compensation
policies to link more closely the aggregate incentive compensation paid to each
of its employees to the earnings of the Company and other measures of financial
performance and the portion thereof attributable to the employee's operating
unit within the Company. In that effort, it is working closely with an outside
management consulting firm which it has retained to assist in developing
alternative approaches to incentive compensation.
COMPENSATION PROGRAM COMPONENTS. The particular components of the
compensation for executive officers are as follows:
SALARY. Salary levels are determined largely through comparisons with
other financial services firms, including financial guaranty insurers. Many of
those companies in the comparison group which are publicly held are included in
the larger group of financial services and insurance companies included in the
Standard & Poor's Financial Index, which has been used for purposes of the stock
performance graph contained below in this proxy statement. However, certain of
the financial guaranty companies in the group used for compensation comparison
purposes are not publicly held and therefore not included in any stock
performance index. Despite the overlap of financial companies in the Company's
compensation comparison group with the companies in the Standard & Poor's
Financial Index, the Company has used these companies in the compensation
comparison group because of their high degree of business comparability to the
Company, regardless of their ownership structure, and the ready availability of
reliable and valid compensation data.
Actual salaries are based on responsibility level, experience and
individual performance contributions and are within a competitive salary range
for each position that is established through job evaluation and market
comparisons. Salary levels for executive officers are regarded by the Company
as competitive within a range that the Compensation Committee deems reasonable
and necessary, albeit modest by industry standards.
The increases in executive officer salaries were relatively modest and
within a narrow band, with greater compensation differentiation being effected
through the cash bonuses and stock options grants.
CASH BONUSES. Pending finalization and institution of a revised
incentive compensation program, the Compensation and Nominating Committee
established a bonus pool at the conclusion of the year based on its
7
assessment of the staff's contribution to (a) the increase in the Company's
operating return on equity for the year and (b) the "value added," i.e., the
anticipated return on capital the Company invested in various businesses during
the year, as well as its evaluation of qualitative performance looking to the
achievement of defined strategic goals. The bonus pool was allocated in part
among the executive officers based on an assessment of their individual
contributions to the Company's performance measured against the foregoing
criteria. Additionally, the officers who participated in the successful
formation and launching in 1996 of one of the Company's key new ventures,
Credit-Based Asset Servicing and Securitization LLC ("C-BASS"), will participate
in a pool based on the profits of that venture in future years.
It is anticipated that the new incentive compensation program, when
put into operation, will entail the Company's measuring the staff's performance
in the foregoing and possibly other respects against quantitative criteria
established at the start of each year and fixing the actual bonus pool
accordingly.
STOCK OPTIONS. The 1987 Incentive Plan was adopted in 1987 for the
purpose of providing, through the grant of long-term incentives, a means to
attract and retain key personnel and to provide to participating executive
officers and other key employees long-term incentives for sustained high levels
of performance.
Since 1991, all grants under the 1987 Incentive Plan have been in the
form of stock options. As described above, the awardees of stock options under
the Incentive Plan and the size of the grants which are made annually are
determined by a subcommittee of the Compensation and Nominating Committee
comprising its outside directors. The amount of each grant is intended to
result in the awardee receiving overall compensation which is deemed competitive
within the financial guaranty industry and also takes into account the awardee's
position within the Company and individual performance. The committee does not
generally consider previous stock option grants to an officer when deciding
whether to grant the officer a stock option and, if so, the size of the grant,
although newly appointed officers generally receive larger first-time grants.
Reflecting the Company's objective of aligning the long range
interests of its employees with those of the Company and the Enhance Group
shareholders, all stock options granted to date under the plan vest, subject to
continuation of employment and other terms of the stock options grants, at the
rate of 25% per year during the consecutive four-year period beginning one year
after the date of grant. All such stock options expire approximately ten years
after grant, subject to continuation of employment. The stock options may also
vest in part if employment is terminated under certain circumstances. The
exercise prices of all stock options granted under the plan since public trading
of the Common Stock commenced have been equal to the closing market prices of
the Common Stock on the dates of grant.
The grant sizes for 1996 at all employee levels (other than the CEO)
represented significant reductions from those of prior years to take into
account the increase in the value of the individual stock option grants
concomitant with the significant increase in the market price of the Common
Stock in recent years.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. In determining the
compensation of Daniel Gross, Chief Executive Officer of the Company, the
Compensation and Nominating Committee noted that the Company had enjoyed various
accomplishments and successes in 1996, including significant progress in its
diversification program through the creation and launching in July of C-BASS,
which became profitable in the fourth quarter, and the growth and expansion of
Singer Asset Finance Company, L.L.C.; the attraction of Swiss Re as an active
major shareholder and its joining in a strategic alliance with the Company; the
successful public offering by The Manufacturers Life Insurance Company of its
entire holding of Common Stock; the expected achievement of a record year in
1996 with respect to virtually all financial performance criteria, including
return on equity; the continued significant rise in the market price of the
Common Stock; and the continued development and expansion of the Company's other
insurance products. In addition to the foregoing, the committee accorded the
President significant credit for having upgraded the staff in several respects
and having instilled a more creative and aggressive culture than had previously
prevailed at the Company. The committee also took into account prevailing
compensation levels for chief executive officers of other companies in the
industry.
8
Based on the foregoing, and at the recommendation of the Compensation
and Nominating Committee, the board of directors fixed Mr. Gross's salary for
1997 at $500,000 and granted him for 1996 a cash bonus of $675,000 and stock
options pursuant to the 1987 Incentive Plan to purchase 75,000 shares of Common
Stock.
COMPENSATION AND NOMINATING COMMITTEE
-------------------------------------
Spencer R. Stuart - Chairman
Brenton W. Harries
David R. Markin
Richard J. Shima
Allan R. Tessler
9
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers, based on salary and bonus earned during
1996. Except as described below under "Employment Agreement," the Company has
not entered with any executive officer into (i) an employment agreement or (ii)
any compensatory plan or arrangement which is activated upon the resignation,
termination or retirement of the executive officer or upon a change in control
of the Company or change in the executive officer's responsibilities following a
change in control.
Long-Term
Annual Compensation Compensation (1)
------------------- ----------------
Securities
Underlying
Name and Principal Position Year Salary Bonus Options/SARS
- --------------------------- ---- -------- -------- ----------------
Daniel Gross 1996 $480,000 $675,000 75,000
President and Chief 1995 450,000 420,000 60,000
Executive Officer 1994 422,500 172,000 60,000
Samuel Bergman 1996 301,042 145,000 14,000
Executive Vice President 1995 293,125 100,000 20,000
and Secretary 1994 276,458 82,500 20,000
Ronald M. Davidow 1996 260,625 127,500 13,500
Executive Vice President 1995 250,833 87,000 20,000
1994 236,250 70,500 17,500
Robert M. Rosenberg 1996 272,460 100,000 13,500
Executive Vice President 1995 258,708 97,000 22,500
1994 236,874 70,500 20,000
Tony M. Ettinger(2) 1996 261,041 132,500 14,000
Executive Vice President 1995 211,718 100,000 15,000
__________________
(1) Does not reflect the aggregate number and market value (based on the
closing price of the Common Stock on the New York Stock Exchange),
respectively, of the unvested restricted shares of Common Stock issued in
prior years pursuant to the Incentive Plan and held as of December 31, 1996
as follows: Mr. Gross, 3,550 shares, $130,000; Mr. Rosenberg, 1,375
shares, $50,000 ; and Mr. Davidow, 1,375 shares, $50,000. No restricted
shares have been issued since 1989.
(2) Became an officer of the Company in 1995.
10
OPTION/SAR GRANTS DURING 1996
The following table provides information regarding stock options/SARs
granted to the named executive officers during 1996:
Individual Grants
---------------------------------------------------------------------------
Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Grant Date
Name and Options Fiscal Exercise or Expiration Present Value
Principal Position Granted (1) Year Base Price Date (2)
- -------------------- ------------- --------------- ------------- ------------ ---------------
Daniel Gross
President and Chief
Executive Officer 75,000 21.9 $34.00 12/31/06 $810,750
Samuel Bergman
Executive Vice President
and Secretary 14,000 4.1 34.00 12/31/06 151,340
Ronald M. Davidow
Executive Vice President 13,500 3.9 34.00 12/31/06 145,935
Robert M. Rosenberg
Executive Vice President 13,500 3.9 34.00 12/31/06 145,935
Tony M. Ettinger
Executive Vice President 14,000 4.1 34.00 12/31/06 151,340
___________________
(1) Stock options granted pursuant to the 1987 Incentive Plan. Such stock
options vest, subject to continuation of employment, in 25% increments
during the consecutive four-year period commencing December 31, 1997. The
stock options are not transferable except by the laws of descent and
distribution and, accordingly, may be exercised during the life of the
optionee only by the optionee or the optionee's legal representative and
after the optionee's death only by the beneficiary previously designated by
the optionee.
(2) The present value is, in each case, based upon the Black-Scholes option
valuation model. Such valuation assumes a volatility of 20.5%, a risk-free
rate of return of 6.2%, a dividend yield of 1.15% and a discount due to the
risk of forfeiture of 3.0%. The valuation assumes no specific time of
exercise since this is viewed by the Company as entirely indeterminate, but
takes into account the term of the stock option, 10 years in each case.
The actual value, if any, an executive may realize will depend on the
excess of the stock price over the exercise price on the date the stock
option is exercised, so that there is no assurance the value realized will
be at or near the value estimated by the Black-Scholes model.
AGGREGATED OPTION/SAR EXERCISES DURING 1996
AND FISCAL YEAR-END OPTION VALUES
The following table provides information as to the named executive
officers regarding stock option exercises and the number and value of stock
options/SARs held by them at December 31, 1996.
11
No. of Securities Underlying Value of Unexercised In-The-Money
Shares Unexercised Stock Options/ Options/SARS at
Acquired SARs at December 31, 1996 December 31, 1996 (1)
Name and on Value ------------------------------------------------------------------
Principal Position Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------- -------- -------- ------------- --------------- ------------- ---------------
Daniel Gross
President and Chief
Executive Officer -0- -0- 211,875 160,625 $3,865,391 $1,549,922
Samuel Bergman
Executive Vice President
and Secretary 2,000 42,500 65,625 43,375 1,138,984 503,204
Robert M. Rosenberg
Executive Vice President -0- -0- 83,750 44,750 1,541,250 525,625
Ronald M. Davidow
Executive Vice President 37,500 580,000 44,375 41,625 748,359 476,329
Tony M. Ettinger
Executive Vice President -0- -0- 13,125 40,875 215,391 183,281
_______________________
(1) Calculated on the basis of (a) the excess of the closing price of the
Common Stock as reported by the New York Stock Exchange on December 31,
1996 over the stock option exercise price multiplied by (b) the number of
shares of Common Stock underlying the stock option.
ENHANCE REINSURANCE PENSION PLAN
The Company maintains a defined benefit pension plan named the
"Enhance Reinsurance Pension Plan" (the "Pension Plan") which is intended to be
a tax-qualified plan under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). All employees of the Company (other than Vantage
American, Inc.) who have attained age 21 and who have completed at least one
year of service are eligible to participate in the Pension Plan. The Pension
Plan provides a normal retirement benefit at normal retirement (the earlier of
the date on which a participant (a) has attained age 65 and completed five years
of participation or (b) has attained age 62 and completed 10 years of
participation) equal to 2.25% of the participant's compensation multiplied by
his or her years of service up to his or her first 15 years, plus 1.75% of the
participant's compensation multiplied by his or her years of service for his or
her next 10 years, plus 1% of the participant's compensation multiplied by his
or her years of service for his or her next five years. Compensation is defined
as the average of the participant's three highest consecutive years of earnings.
(See Note 2 to the table below regarding the maximum compensation considered
"earnings" for the foregoing purposes. No such maximum applies with respect to
the determination of compensation for purposes of the Summary Compensation Table
above.) A participant whose service terminates prior to normal retirement is
also eligible for percentage of his or her normal retirement benefit at normal
retirement date multiplied by a retirement benefit, payable at normal retirement
age, in an amount equal to the vested fraction, the numerator of which is the
number of years of plan participation by him or her as of the date of his or her
termination and the denominator of which is the number of years of participation
he or she would have had under the Pension Plan had he or she remained a
participant until normal retirement. The actuarial equivalent of such vested
benefit may be distributed in a lump sum prior to normal retirement age. The
vested percentage of a participant increases 20% per year beginning after two
years of service, such that his or her vested percentage is 100% after six
years. For purposes of determining a participant's retirement benefit and
vested percentage, "years of service" and "years of participation," while not
synonymous, include service with the Company and certain service with
predecessor employers.
12
The following table illustrates annual pension benefits payable under
the Pension Plan assuming retirement at normal retirement age at various levels
of compensation and years of service. Such benefits are based on a straight
life annuity and are not subject to any deduction for Social Security or other
offset amounts.
PENSION PLAN TABLE
Highest
Average
Earnings Years of Service
-------- ----------------------------------------------------------------
15 20 25 30 35*
----------------------------------------------------------------
$100,000 $33,750 $42,500 $51,250 $56,250 $56,250
125,000 42,188 53,125 64,063 70,313 70,313
150,000 50,625 63,750 76,875 84,375 84,375
175,000(2) 59,063 74,375 89,688 98,438 98,438
200,000(2) 67,500 85,000 102,500(1) 112,500(1) 112,500(1)
225,000(2) 75,938 95,625 115,313(1) 126,563(1) 126,563(1)
250,000(2) 84,375 106,250(1) 128,125(1) 140,625(1) 140,625(1)
300,000(2) 101,250(1) 127,500(1) 153,750(1) 168,750(1) 168,750(1)
400,000(2) 135,000(1) 170,000(1) 205,000(1) 225,000(1) 225,000(1)
450,000(2) 151,875(1) 191,250(1) 230,625(1) 253,125(1) 253,125(1)
500,000(2) 168,750(1) 212,500(1) 256,250(1) 281,250(1) 281,250(1)
________________________
* Plan limits service to 30 years for benefit purposes.
(1) These are hypothetical benefits based upon the Pension Plan's normal
retirement benefit formula. The maximum annual benefit permitted under
Section 415 of the Code in 1996 is $96,000, which will be increased in 1997
to $100,000.
(2) The benefits shown corresponding to these compensation ranges are
hypothetical benefits based upon the Pension Plan's normal retirement
benefit formula. Under Section 401(a)(17) of the Code, a participant's
compensation in excess of a specified maximum is disregarded for purposes
of determining highest average earnings. (Such specified maximum amount
(as adjusted to reflect cost of living increases) November 1, 1994 and
decreased to $150,000 for plan years beginning thereafter.)
As of December 31, 1996, Messrs. Gross, Bergman, Rosenberg, Davidow
and Ettinger had nine, four, fifteen, twelve and one year of service,
respectively, and nine, four, nine, nine and one year of participation,
respectively, under the Pension Plan.
EMPLOYMENT AGREEMENT
Enhance Group and Arthur Dubroff, Executive Vice President and Chief
Financial Officer, are parties to an employment agreement which provides for the
payment of an annual base salary to Mr. Dubroff of not less than $275,000 plus
an annual bonus of not less than 45% of such base salary. Under the employment
agreement, Mr. Dubroff was granted in 1996 options to purchase 75,000 shares of
Common Stock and is entitled to annual grants of stock options to purchase
20,000 shares of Common Stock in each of 1997 and 1998 (or, at Enhance Group's
election, the cash value thereof). If Mr. Dubroff's employment is terminated by
Enhance Group within a 12-month period following a change of control (as
defined), Enhance Group is required to pay Mr. Dubroff a prorated portion of his
annual bonus and, for the greater of the remainder of the term of his employment
agreement and 12 months
13
from the date of termination of his employment, his base salary. The employment
agreement terminates on December 31, 1999, unless renewed by the parties.
DIRECTORS' COMPENSATION
CASH COMPENSATION. Directors who are employees of the Company receive
no fees or other compensation for services rendered as members of the board of
directors of Enhance Group. Mr. Tessler received a basic fee of $105,000 in
1996, and each other director of Enhance Group who is not employed by the
Company received a basic fee of $16,000. In addition, each such outside
director who also served as chair of any committee of the board received in 1996
an additional $5,000 for all committees chaired by such director. Each outside
director also received an additional $2,000 for each regular meeting of the
board of directors attended plus $1,250 for each committee meeting attended
which was held on a day other than a day on which the board met. No directors'
fees were payable to corporate shareholders in respect of directorships occupied
by their designees. All directors are reimbursed for travel and related
expenses incurred in attending meetings of the board or committees.
NON-EMPLOYEE-DIRECTOR STOCK OPTION PLAN. Pursuant to the Directors'
Option Plan, on each December 31 during the period in which the plan is in
effect, each director of Enhance Group or either Insurance Subsidiary who is not
an employee of the Company (an "Eligible Director") is granted a non-qualified
stock option to purchase 2,000 shares of Common Stock at an exercise price equal
to the closing price of the Common Stock on the New York Stock Exchange on such
date. There are reserved for issuance upon the exercise of stock options under
the Directors' Option Plan an aggregate of 400,000 shares of Common Stock
(subject to anti-dilutive adjustments), of which stock options for 178,333
shares were subject to outstanding stock options after the option grants made on
December 31, 1996.
Stock options granted under the Directors' Option Plan become
exercisable as to one half the shares subject thereto on each of the first and
second anniversaries of grant, subject to continuation of service on the board
of directors and other terms of the stock option grants; expire on the tenth
anniversary of the date of grant; are not transferrable except by the laws of
descent and distribution; and, accordingly, may be exercised during the life of
the optionee only by the optionee or the optionee's legal representative and
after the optionee's death only by the beneficiary previously designated by the
optionee. The unvested portion of an outstanding stock option lapses upon the
resignation or removal of the optionee from the boards of directors of Enhance
Group and the Insurance Subsidiaries.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The persons who served as members of the Compensation and Nominating
Committee during 1996 are Spencer R. Stuart (Chairman), Brenton W. Harries,
David R. Markin, Richard J. Shima and Allan R. Tessler. The only person of the
foregoing who is currently or has at any time been an officer or employee of the
Company is Mr. Tessler, who serves as Chairman of the Board of Enhance Group.
The Manufacturers Life Insurance Company ("Manufacturers Life"), a
major shareholder of Enhance Group until April 1996, and American Country
Insurance Company ("American Country"), a majority-owned subsidiary of Great
Dane, of which Messrs. Markin and Tessler serve as directors, were,
respectively, holders of two of a series of three senior notes of Enhance Group
(the "1991 Notes"), all of which 1991 Notes were prepaid in November 1996. The
1991 Notes held by Manufacturers Life and American Country bore interest at the
rate of 7% per annum and, upon payment, were in the remaining respective
principal amounts of $1.2 million and $300,000. Based on its experience in
connection with their placement, the Company believes that the terms of the 1991
Notes were no less favorable to the Company than would obtain were they all
issued to purchasers unaffiliated with the Company.
14
NON-COMPETITION AGREEMENTS
Messrs. Tessler, Sellers and Gross are parties to non-competition
agreements with Enhance Group prohibiting them from, among other things,
competing with the Company for a period of two years following their respective
cessation of employment by or service to the Company.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return
to shareholders on the Common Stock with the cumulative total returns of
companies included in the Standard & Poor's 500 Index and the Standard & Poor's
Financial Index. The graph assumes that the value of the investment in the
Common Stock and each index was $100 at February 13, 1992, the day on which
public trading in the Common Stock commenced, and that all dividends were
reinvested.
[PERFORMANCE GRAPH]
Cumulative
EFS S&P 500 S&P Financial
100.00 100.00 100
105.52 99.87 101.52
97.70 97.93 99.90
84.03 100.80 101.11
93.80 101.30 103.10
88.90 99.79 105.45
96.74 103.86 108.32
86.28 101.74 103.42
87.25 102.94 107.14
91.84 103.29 109.81
104.62 106.80 117.28
102.65 108.11 122.45
98.70 109.01 126.78
119.75 110.50 129.48
124.72 112.82 134.76
110.87 110.10 130.33
117.48 113.03 130.06
103.33 113.36 136.88
100.68 112.91 139.57
115.24 117.19 143.34
116.27 116.26 146.14
112.95 118.67 137.63
104.32 117.54 132.99
105.35 118.96 135.58
105.35 123.00 142.89
102.68 119.66 135.08
97.11 114.45 129.52
101.13 115.92 134.03
101.13 117.82 141.28
94.19 114.93 137.12
104.29 118.71 140.36
104.96 123.56 145.36
103.37 120.54 134.84
97.29 123.25 137.15
91.89 118.77 129.10
92.99 120.52 130.63
95.03 123.65 139.01
95.38 128.46 146.71
92.80 132.25 147.20
92.80 136.13 152.58
97.57 141.57 164.45
106.26 144.85 165.34
104.89 149.66 170.18
111.06 150.02 179.81
112.92 158.36 191.21
112.23 155.80 185.69
132.89 162.63 199.11
147.16 165.76 201.11
134.03 171.40 211.66
134.72 172.99 215.69
153.24 174.65 218.14
150.46 177.23 214.28
160.87 181.79 218.93
155.86 182.48 221.32
162.13 174.42 216.83
160.04 178.11 224.15
184.26 188.13 239.43
186.25 193.32 257.33
191.23 207.91 282.08
204.36 203.79 271.88
15
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH SHAREHOLDERS
The certificate of incorporation of Enhance Group grants to U S WEST
the right to preclude the Company from entering into certain activities or
owning an equity interest in any entity that engages in any such activity unless
they are determined by U S WEST's legal counsel not to be prohibited to U S
WEST and its subsidiaries under the Modification of Final Judgment entered in
1984 in connection with the settlement of the legal action entitled UNITED
STATES V. WESTERN ELECTRIC COMPANY, INC. These activities consist of providing
information services or long distance telephone service or manufacturing
telecommunications equipment. The Company has not entered, and does not intend
to enter, into any of the specified activities, and, accordingly, the aforesaid
provision has not had, and is not expected to have, any material effect on the
business of the Company. At such time as U S WEST ceases to own shares of
Common Stock, Enhance Group intends to propose at the next following meeting of
shareholders the elimination of the aforesaid provision from the certificate of
incorporation, which will require the vote of the holders of a majority of
shares of Common Stock outstanding.
U S WEST has advised Enhance Group that it intends, but is not legally
obligated, to vote its shares of Common Stock proportionately to the votes cast
by non-U S WEST shareholders; provided, however, that if (i) a person or group
of persons other than U S WEST is deemed to own more than 15% of the Common
Stock within the meaning of Section 13(d) of the Exchange Act and (ii) there
occurs a contested proxy solicitation within the meaning of Rule 14a-11(a)
promulgated under the Exchange Act, U S WEST intends to vote its shares of
Common Stock in a manner U S WEST deems appropriate. In addition, although U S
WEST currently has no designees on the Enhance Group board of directors, it has
retained the right to nominate directors.
The shares of Common Stock offered in connection with the sale by U S
WEST of the DECS were registered pursuant to a registration rights agreement,
dated October 31, 1986, as amended, among Enhance Group, U S WEST and Swiss Re.
U S WEST has one and Swiss Re has two demand registration rights, and each has
unlimited piggyback registration rights, subject to certain limitations.
Substantially all the expenses of any future demand or piggyback registration
are to be borne by Enhance Group. The registration rights agreement contains
cross-indemnification covenants by Enhance Group on the one hand and U S WEST
and Swiss Re on the other for damages sustained and expenses incurred resulting
from material misstatements or omissions in connection with any such offering.
Enhance Group and Swiss Re are parties to an agreement pursuant to
which Swiss Re has agreed that, subject to certain exceptions,, neither Swiss Re
nor any of its affiliates will until the year 2006 (a) acquire, alone or as part
of a group, any voting securities of Enhance Group (or securities convertible
into such voting securities) which would result in Swiss Re (together with its
affiliates) or such group owning beneficially more than 15% of Enhance Group
voting securities outstanding or (b) dispose of Enhance Group voting securities
to any person or group which disposition would give such person or group
beneficial ownership of or the right to acquire more than 15% of Enhance Group
voting securities outstanding.
REINSURANCE OF FSA BUSINESS
U S WEST owns a substantial interest in FSA, a financial guaranty
insurer which reinsures a portion of its business with the Company, all on terms
and provisions equivalent to those in comparable transactions currently in
effect with unaffiliated entities. FSA accounted for 14.2% of the Company's
total gross premiums written in 1996. The Company believes that it and FSA
conduct their business with each other on an arms'-length basis and with terms
no more favorable to the other than would be the case absent the aforesaid
relationship. However, no assurance can be given that conflicts of interest may
not develop in the future or that the business conducted with FSA may not
diminish in future periods regardless of whether payment of the DECS is made in
the form of shares of Common Stock.
16
PROPOSAL NO. 2
APPROVAL OF THE 1997 LONG-TERM INCENTIVE PLAN FOR KEY EMPLOYEES
BACKGROUND
On March 13, 1997, the board of directors of the Enhance Group adopted
(subject to shareholder approval) the 1997 Incentive Plan. The following
description of the 1997 Incentive Plan is intended only as a summary and is
qualified in its entirety by reference to the text of the 1997 Incentive Plan,
which is annexed as an exhibit to this proxy statement. The 1997 Incentive Plan
will replace the 1987 Incentive Plan, which will expire December 10, 1997.
PURPOSE
The purposes of the 1997 Incentive Plan are to provide through the
grant of Long-Term Incentives (as defined below) under the 1997 Incentive Plan a
means to attract and retain key personnel and to provide to participating
officers and other key employees long-term incentives for sustained high levels
of performance and for unusual efforts to improve the financial performance of
the Company.
ELIGIBILITY
All employees of the Enhance Group or its subsidiaries who are
regularly employed on a full-time basis, including full-time employees serving
as directors, and officers of the Enhance Group or its subsidiaries who are not
so employed, who in the opinion of the Committee (as defined below) are in a
position to make significant contributions to the success of the Enhance Group
or a subsidiary, are eligible to receive Long-Term Incentives under the 1997
Incentive Plan.
AVAILABLE SHARES
The maximum number of shares of Common Stock which may be issued or
transferred, and are reserved for issuance or transfer pursuant to stock options
and restricted stock awards (collectively, "Long-Term Incentives"), may not
exceed 950,000 shares of Common Stock. For each calendar year during the entire
term of the 1997 Incentive Plan, the maximum number of shares of Common Stock
which may be (a) subject to any stock option granted to any 1997 Incentive Plan
participant may not exceed 150,000, and (b) issued or transferred pursuant to a
restricted stock award granted to any 1997 Incentive Plan participant may not
exceed 37,500. To the extent that the maximum number of shares of Common Stock
with respect to which stock options or restricted stock may be granted are not
granted in any particular year, such ungranted stock options or restricted stock
awards are available in subsequent years until used. These amounts are subject
to adjustment to reflect changes in the capital structure of the Enhance Group,
stock splits, recapitalizations, mergers, reorganizations and similar
transactions. If a Long-Term Incentive expires, terminates, is canceled or is
reacquired by the Enhance Group or a subsidiary, the unissued shares of Common
Stock subject to the Long-Term Incentive will again be available under the 1997
Incentive Plan.
TERMS OF STOCK OPTIONS
Under the 1997 Incentive Plan, the purchase price per share of Common
Stock subject to a stock option will be 100% of the fair market value of a
share of Common Stock on the date the stock option is granted (or in the case of
an incentive stock option granted to a participant who is a 10% Shareholder (as
defined in the 1997 Incentive Plan), 110% of the fair market value of a share of
Common Stock on the date the incentive stock option is granted). The purchase
price must be paid in cash or, if so provided in the stock option (and subject
to such terms and conditions as are specified in the stock option), in shares of
Common Stock surrendered to the Enhance Group or in
17
a combination of cash and such shares. Shares of Common Stock thus surrendered
will be valued at their fair market value on the date of exercise.
Each stock option may become exercisable in one or more installments
and at such time or times and subject to such terms and conditions as the
Committee may determine. Unless otherwise provided in the terms of grant, stock
options are not assignable and are exercisable during the life of the optionee
only by the optionee or by his or her guardian or legal representative, and
after death only by his or her beneficiary. No stock option is exercisable
after the expiration of a period of ten years from the date the stock option is
granted (and in the case of an incentive stock option granted to a 10%
Shareholder, five years from the date such stock option is granted).
TERMS OF RESTRICTED STOCK AWARDS
Restricted stock awards will be subject to such terms and conditions,
including, without limitation, restrictions on the sale or other disposition of
the restricted stock award or of the shares issued or transferred pursuant to
such restricted stock award, and conditions calling for forfeiture of the
restricted stock award or the shares issued or transferred pursuant to the
restricted stock award in designated circumstances, as determined by the
Committee. Upon the issuance or transfer of shares pursuant to any restricted
stock award, the participant will, with respect to such shares, be and become a
shareholder of the Enhance Group fully entitled to receive dividends, to vote
and to exercise all other rights of a shareholder except to the extent otherwise
provided in the restricted stock award. The Committee may require the
participant to pay the par value of the shares to be issued or transferred
pursuant to a restricted stock award.
AMENDMENTS
The 1997 Incentive Plan may be amended or terminated by the board of
directors at any time and in any respect, provided that, without the approval of
the shareholders of the Company, no amendment may be adopted which (i) increases
the maximum number of shares of Common Stock that may be issued or transferred
pursuant to Long-Term Incentives or increases the maximum number of shares of
Common Stock that may be granted during any calendar year as stock options or
restricted stock awards to any individual, (ii) except as may be required or
desirable to conform the 1997 Incentive Plan to the federal or state securities
laws and regulations that may apply to it from time to time, withdraws the
administration of the 1997 Incentive Plan from the Committee, (iii) transfers
the administration of the 1997 Incentive Plan to any person who is not a
"non-employee director" under Rule 16b-3, if the Enhance Group is then a
reporting company under the Exchange Act, (iv) changes the classification of
employees eligible to receive awards under the 1997 Incentive Plan, (v) changes
the minimum exercise price of any stock option or extends the maximum exercise
term of any stock option or otherwise materially increases the benefits accruing
to participants in the 1997 Incentive Plan or (vi) requires shareholder approval
in order for the 1997 Incentive Plan to continue to comply with the exception
for performance based compensation under Section 162(m) of the Code.
ADMINISTRATION
The 1997 Incentive Plan will be administered by a committee of the
Board of Directors, consisting of three or more directors who are non-employee
directors (as defined under Section 16(b) of the Exchange Act) and outside
directors (as defined under Section 162(m) of the Code) (the "Committee"). The
Committee will determine the individuals who will receive Long-Term Incentives
and the terms of the Long-Term Incentives, which will be reflected in written
agreements with the holders.
18
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY
AND DOES NOT PURPORT TO ADDRESS ALL THE TAX CONSIDERATIONS THAT MAY BE RELEVANT.
EACH RECIPIENT OF A GRANT IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES TO SUCH GRANTEE OF THE GRANT.
STOCK OPTIONS. Under current federal income tax laws, the grant of an
incentive stock option can be made solely to employees and generally has no
income tax consequences for the optionee or the Enhance Group. In general, no
taxable income results to the optionee upon the grant or exercise of an
incentive stock option. However, the amount by which the fair market value of
the stock acquired pursuant to the incentive stock option exceeds the exercise
price is an adjustment item for purposes of alternative minimum tax. If no
disposition of the shares is made within either two years from the date the
incentive stock option was granted or one year from the date of exercise of the
incentive stock option, any gain or loss realized upon disposition of the shares
will be treated as a long-term capital gain or loss to the optionee. The
Company will not be entitled to a tax deduction upon the exercise of an
incentive stock option, nor upon a subsequent disposition of the shares, unless
the disposition occurs prior to the expiration of the holding period described
above. In general, if the optionee does not satisfy these holding period
requirements, any gain equal to the difference between the exercise price and
the fair market value of the stock at exercise (or, if a lesser amount, the
amount realized on disposition over the exercise price) will constitute ordinary
income. In the event of such a disposition before the expiration of that
holding period, the Enhance Group is entitled to a deduction at that time equal
to the amount of ordinary income recognized by the optionee. Any gain in excess
of the amount recognized by the optionee as ordinary income would be taxed to
the optionee as short-term or long-term capital gain (depending on the
applicable holding period).
In general, an optionee will realize no taxable income upon the grant
of a non-qualified stock option, and the Enhance Group generally will not
receive a deduction at the time of grant. Upon exercise of a non-qualified
stock option, an optionee generally will recognize ordinary income in an amount
equal to the excess of the fair market value of the stock on the date of
exercise over the exercise price. Upon a subsequent sale of the stock by the
optionee, the optionee will recognize short-term or long-term capital gain or
loss, depending upon his holding period for the stock. Subject to the possible
application of Section 162(m) of the Code (as discussed below), the Enhance
Group will generally be allowed a deduction equal to the amount recognized by
the optionee as ordinary income.
MISCELLANEOUS. Officers and directors of the Company subject to
Section 16(b) of the Exchange Act may be subject to special tax rules regarding
their stock options and/or restricted stock awards. Any entitlement to a tax
deduction on the part of the Enhance Group is subject to applicable federal tax
rules, including Section 162(m) of the Code regarding a $1 million limitation on
deductible compensation. In addition, if the exercisability of a stock option
or the lapse of Restrictions is accelerated because of a change in control,
payments relating to the stock options and restricted stock, either alone or
together with certain other payments, may constitute parachute payments under
Section 280G of the Code, which may be subject to excise tax.
The 1997 Incentive Plan is not subject to any of the requirements of
the Employee Retirement Income Security Act of 1974, as amended. The 1997
Incentive Plan is not, nor is intended to be, qualified under Section 401(a) of
the Code.
RECOMMENDATION; VOTE REQUIRED
The board of directors of Enhance Group believes that the Company's
ability to continue to make incentive grants in the form of stock options or
restricted stock is important to its ability to attract and retain qualified
personnel and to motivate such personnel by aligning their long-term interests
with those of the shareholders. The board further believes the 1997 Incentive
Plan, by virtue of its simplicity and flexibility, is the most suitable vehicle
for achieving this objective.
19
As stated above in this proxy statement, stock options granted at
substantially all employee levels in 1996 were materially smaller, in terms of
shares of Common Stock, than those granted in 1995 and prior years. This was
due principally to the increase in value of each such stock option resulting
from the significant increase in 1996 in the market price of the Common Stock.
It is anticipated that, assuming the market price of the Common Stock remains at
or above its current level and absent special circumstances in each case, future
stock options will continue at a reduced level compared to those of prior years.
A majority of the shares voted at the annual meeting is necessary to
approve the 1997 Incentive Plan.
THE BOARD OF DIRECTORS OF ENHANCE GROUP RECOMMENDS THAT THE
SHAREHOLDERS OF ENHANCE GROUP VOTE THEIR SHARES FOR APPROVAL OF THE 1997
INCENTIVE PLAN.
20
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF AUDITOR
The firm of Deloitte & Touche LLP (including its predecessor firm),
independent certified public accountants, has audited the books and accounts of
the Company since its inception, and the board of directors desires to continue
the services of this firm for 1997. Accordingly, the board recommends that the
shareholders ratify the appointment by the board of directors of the firm of
Deloitte & Touche LLP as the independent auditor of the Company for 1997.
Representatives of Deloitte & Touche LLP are expected to be available
at the annual meeting to respond to appropriate questions and will be given the
opportunity to make a statement if they desire to do so.
Shareholder ratification of the selection of Deloitte & Touche LLP as
the Company's independent auditor is not required by Enhance Group's by-laws or
otherwise. However, the board of directors is submitting the selection of
Deloitte & Touche LLP to the shareholders for ratification as a matter of good
corporate practice. If the shareholders fail to ratify the selection of
Deloitte & Touche LLP, the board will reconsider whether or not to retain the
firm. Even if the selection is ratified, the board in its discretion may direct
the appointment of a different auditing firm at any time during the year if the
board of determines that such a change would be in the best interests of the
Company and its shareholders.
SHAREHOLDER PROPOSALS
Shareholders who intend to present proposals at Enhance Group's 1998
annual meeting of shareholders must submit their proposals to the Secretary of
Enhance Group on or before January 5, 1998. Such proposals must also meet the
other requirements of the rules of the Securities and Exchange Commission
relating to shareholders' proposals.
By Order of the Board of Directors,
Samuel Bergman
Secretary
May 5, 1997
21
ENHANCE FINANCIAL SERVICES GROUP INC.
ANNUAL MEETING OF SHAREHOLDERS
JUNE 5, 1997
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ENHANCE FINANCIAL
SERVICES GROUP INC. ("ENHANCE GROUP").
The undersigned hereby appoints Daniel Gross and Samuel Bergman, and each
of them, with full power of substitution, to represent and vote on behalf of
the undersigned all of the shares of Enhance Group common stock, par value $.10
per share, which the undersigned is entitled to vote at the Annual Meeting of
Shareholders to be held on June 5, 1997, and at any adjournment or adjournments
thereof, hereby revoking all proxies heretofore given with respect to such
shares, upon the following proposals more fully described in the notice of and
proxy statement for the meeting (receipt of which is hereby acknowledged).
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL NOS. 1, 2 AND 3.
(CONTINUED ON REVERSE SIDE)
FOLD AND DETACH HERE
FOR all nominees listed (except WITHHOLD AUTHORITY
as marked to the contrary) to vote for all nominees listed FOR AGAINST ABSTAIN
1. ELECTION OF DIRECTORS
2. Approval of 1997 Long-Term Incentive Plan for
Daniel Gross, Brenton W. Harries, David R. Key Employees.
Markin, Robert P. Saltzman, Wallace O. Sellers,
Richard J. Shima, Spencer R. Stuart, Adrian 3. Ratification of appointment of Deloitte &
U. Sulzer, Allan R. Tessler, Frieda K. Wallison, Touche LLP to serve as outside auditor for 1997.
Jerry Wind.
4. In their discretion upon such other matters as
(INSTRUCTION: To withhold authority to vote for may properly come before the meeting.
any individual nominee, write that nominee's name
in the space provided below.)
I will be attending the meeting
- -----------------------------------------------------
I will not be attending the meeting
Please sign exactly as your name appears to the
left. When shares are held by joint tenants, both
should sign. When signing as attorney, executor,
administrator, trustee, or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by President or other
authorized officer. If a partnership, please
sign in partnership name by authorized person.
Signature Signature Date 1997
----------------------------------------- ------------------------------------------- ----------------
PLEASE SIGN, DATE, AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
FOLD AND DETACH HERE