SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(AMENDMENT NO. 4)
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
GRYPHON HOLDINGS INC.
(Name of Subject Company)
GRYPHON HOLDINGS INC.
(Name of Person(s) Filing Statement)
Common Stock, $.01 par value
(Title of Class of Securities)
400515 10 2
(CUSIP Number of Class of Securities)
Stephen A. Crane
Chief Executive Officer and President
Gryphon Holdings Inc.
30 Wall Street
New York, New York 10005-2201
(212) 825-1200
(Name,address and telephone number of person authorized to receive notice
and communications on behalf of the person(s) filing statement)
Copies to:
Robert M. Coffee John T. O'Connor, Esq.
Senior Vice President, Milbank, Tweed, Hadley & McCloy
General Counsel and Secretary One Chase Manhattan Plaza
Gryphon Holdings Inc. New York, New York 10005-2201
30 Wall Street (212) 530-5000
New York, New York 10005-2201
(212) 825-1200
This Amendment No. 4 amends and supplements the
Solicitation/Recommendation Statement on Schedule 14D-9, dated November 3, 1998,
as amended (the "Schedule 14D-9"), filed by Gryphon Holdings Inc., a Delaware
corporation (the "Company"), relating to the tender offer disclosed in the
Schedule 14D-1, dated October 20, 1998, as amended (the "Schedule 14D-1") of
Markel Corporation, a Virginia corporation ("Markel"), and its wholly-owned
subsidiary, MG Acquisition Corp., a Delaware corporation ("MG" and, together
with Markel, the "Bidder"), to purchase all the outstanding shares of common
stock, $.01 par value, of the Company, including the associated Rights.
Capitalized terms used and not defined herein shall have the meanings set forth
in the Schedule 14D-9.
Item 2. Tender Offer of the Bidder.
Item 2 is hereby amended and supplemented by inserting the following at
the end thereof:
On November 25, 1998, the Bidder announced that it is continuing its
$19.00 per Share all-cash Offer for the outstanding Shares. Thereafter, the
Bidder filed with the Securities and Exchange Commission a supplement to the
Offer to Purchase, dated December 3, 1998 (the "Supplement"). In connection
therewith, the Company, Markel and MG have entered into an Agreement and Plan of
Merger, dated as of November 25, 1998 (the "Merger Agreement"), as described in
Item 3(b) below.
Item 3. Identity and Background
Item 3(b) is hereby amended and supplemented by inserting the following
prior to the last paragraph therein:
The Merger Agreement provides that, following the consummation of the
Offer and the satisfaction or waiver of certain conditions, MG will be merged
with and into the Company (the "Merger"), with the Company continuing as the
surviving corporation. In the Merger, each outstanding Share (other than Shares
held by the Company or any subsidiary of the Company, Markel or any wholly-owned
subsidiary of Markel, which Shares will be cancelled, and other than Shares, if
any, held by shareholders who perfect any appraisal rights they may have under
the Delaware General Corporation Law) will, by virtue of the Merger and without
any action by the holder thereof, be converted into the right to receive $19.00
per Share. The description of the terms of the Merger Agreement contained in the
Supplement under the heading "Purpose of the Offer and the Merger; Plans for the
Company; Certain Considerations--The Merger Agreement" are incorporated herein
by reference.
Item 4. The Recommendation.
Item 4 is hereby amended by deleting the text thereunder and inserting
in its place the following:
(a) Recommendation of the Board of Directors.
At a meeting held on November 24, 1998, the Board, by unanimous vote
(i) determined that the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, are fair to, and in the best
interests of, the holders of Shares, (ii) approved and adopted the Merger
Agreement, the Offer and the transactions contemplated thereby, (iii)
recommended that the shareholders of the Company accept the Offer and, if
required by the Delaware General Corporation Law, vote in favor of the Merger,
(iv) approved an amendment to the Rights Agreement, which is described under
Item 8(b) below, and (v) exempted the Offer, the Merger, the Merger Agreement
and the transactions contemplated thereby from the provisions of Section 203 of
the Delaware General Corporation Law. ACCORDINGLY, THE BOARD RECOMMENDS THAT THE
SHAREHOLDERS OF THE COMPANY TENDER THEIR SHARES PURSUANT TO THE OFFER. A copy of
a letter to the shareholders of the Company communicating the Board's
recommendation is filed herewith as Exhibit 13.
(b) Reasons for the Recommendation.
In reaching the determination and recommendation set forth in paragraph
(a) above, the Board considered numerous factors including, without limitation,
the following:
(i) The historical and recent market prices of the Common Stock and the
fact that the cash offer price of $19.00 per Share provided for in the Offer
represents a premium of 24% over the average trading prices of the Common Stock
for the 60-day period prior to Markel's first public announcement of an offer to
acquire the Company on September 1, 1998.
(ii) Presentations by the Company's management relating to the
Company's financial condition and future prospects.
(iii) Presentations by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and the written opinion of DLJ delivered on November 24,
1998 that, as of such date and based upon its review and analysis and subject to
the limitations set forth therein, the $19.00 per Share cash consideration to be
received by the holders of Shares in the Offer and the Merger, taken together,
is fair to such holders from a financial point of view. A copy of the written
opinion of DLJ, which sets forth the procedures followed, matters considered,
assumptions made and limitations of the review undertaken by DLJ in rendering
its opinion, is attached as Exhibit 14 hereto and is incorporated herein by
reference. Shareholders are urged to read carefully the opinion of DLJ in its
entirety.
(iv) The terms and conditions of the Merger Agreement and, in
particular, the fact that the Company retained the ability to accept a superior
offer, subject to paying a $5 million termination fee plus expenses, and that
Markel has the ability to terminate the Offer and the Merger Agreement only in a
limited number of customary circumstances.
(v) The fact that the Offer and the Merger are structured as a cash
tender offer for all of the outstanding Shares, which permits all the holders of
Shares to participate on the same basis.
(vi) The Board's familiarity with the business, assets, financial
condition, results of operations and current business strategy and future
prospects of the Company, the nature of the industry in which the Company
operates and the Company's competitive position in such industry, and its belief
that the price per Share offered in the Offer and the Merger reflects the values
inherent in the Company.
(vii) The fact that no satisfactory indications of interest to acquire
the Company on more attractive terms were forthcoming at this time after the
Company contacted several potential purchasers.
(viii) Markel's ability to finance the acquisition and the absence of
any financing condition in the Offer and the Merger Agreement.
In view of the variety of factors considered in connection with its
evaluation of the Merger Agreement, the Board did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. In addition, individual
members of the Board may have given different weights to different factors.
Item 6. Recent Transactions and Intent with Respect to Securities.
Item 6(b) hereby amended by deleting the paragraph thereunder and
inserting in its place the following:
To the best of the Company's knowledge, each of the Company's directors
and executive officers currently intends to tender to the Bidder all Shares
which are held of record or beneficially owned by such persons.
Item 8. Additional Information to be Furnished.
Reference is hereby made to the Offer to Purchase and the related
Letter of Transmittal, which are attached as Exhibits 15 and 16 hereto,
respectively, and are incorporated herein by reference.
See the Information Statement pursuant to Section 14(f) of the Exchange
Act and Rule 14f-1 thereunder, a copy of which is attached as Annex A to this
Schedule 14D-9.
Item 8(a) (Delaware Litigation) is hereby amended and supplemented by
inserting at the end thereof:
On November 25, 1998, the Delaware Litigation was dismissed with
prejudice.
Item 8(b) (The Rights Agreement) is hereby amended and supplemented by
inserting at the end thereof:
On November 25, 1998, in connection with the execution of the Merger
Agreement, the Company and the Rights Agent entered into the Third Amendment
(the "Third Amendment") to the Rights Agreement. The Third Amendment provides,
among other things, that (a) neither the Merger Agreement nor the consummation
of the transactions contemplated thereby, will cause (i) Markel, MG or any of
their affiliates or associates to have beneficial ownership of any Shares solely
as a result of any such event, (ii) Markel, MG or any of their affiliates or
associates to be deemed an "Acquiring Person" under the Rights Agreement or
(iii) the Shares Acquisition Date or the Distribution Date under the Rights
Agreement to occur upon any such event, and (b) the Rights will expire
immediately prior to (i) the acceptance for payment of and payment for Shares
pursuant to the Offer or (ii) the Effective Time (as defined in the Merger
Agreement) of the Merger.
Item 8(c) (Delaware Takeover Statute) is hereby amended and
supplemented by inserting at the end thereof:
At the November 24, 1998 Board meeting, the Board adopted a resolution
approving, solely for the purposes of Section 203, and exempting from the
provisions of Section 203, each of the Offer, the Merger and the Merger
Agreement.
Item 8(d)(i) (Hart-Scott-Rodino Antitrust Improvements Act of 1976) is
hereby amended and supplemented by inserting at the end thereof:
On November 3, 1998, the Company received notice from the Federal Trade
Commission (the "FTC") that the FTC had granted early termination of the waiting
period under the HSR Act.
Item 8(d)(ii)(Insurance Commission Filings) is hereby amended and
supplemented by inserting at the end thereof:
The Company and Markel have agreed to cooperate with each other and use
all commercially reasonable efforts to obtain as promptly as practicable the
required approvals by the relevant Insurance Commissions in California,
Connecticut and Pennsylvania.
Item 9. Material to be Filed as Exhibits.
Item 9 is hereby amended and supplemented by inserting the following at
the end thereof:
Exhibit 13 Letter to Shareholders, dated December 3, 1998.*
Exhibit 14 Opinion of Donaldson, Lufkin & Jenrette Securities Corporation,
dated November 24, 1998.*
Exhibit 15 Supplement to the Offer to Purchase dated December 3, 1998.*
Exhibit 16 Revised Letter of Transmittal.*
Exhibit 17 Third Amendment to the Rights Agreement, dated as of November 25,
1988 between the Company and State Street Bank and Trust Company,
as Rights Agent.
- ------------------------
* Included in copies of the Schedule 14D-9 mailed to shareholders.
SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
Dated: December 3, 1998
GRYPHON HOLDINGS INC.
By: /s/ Stephen A. Crane
-------------------------------------
Name: Stephen A. Crane
Title: President and Chief Executive Officer
ANNEX A
GRYPHON HOLDINGS INC.
30 Wall Street
New York, New York 10005-2201
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about
December 3, 1998 as part of the Solicitation/Recommendation Statement on the
Schedule 14D-9 ("Schedule 14D-9") of Gryphon Holidngs Inc. (the "Company") to
the holders of record of shares of Common Stock, par value $.01 per share, of
the Company (the "Common Stock", and together with the associated Junior
Participating Cumulative Preferred Stock Purchase Rights, the "Shares"). You are
receiving this Information Statement in connection with the possible election of
persons designated by Markel Corporation, a Virginia corporation ("Markel"), to
at least a majority of the seats on the Board of Directors of the Company (the
"Board").
On November 25, 1998, the Company, Markel and MG Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Markel ("MG" and,
together with Markel, the "Bidder"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") in accordance with the terms and subject to the
conditions of which (i) Bidder will continue its tender offer (the "Offer") for
all of the issued and outstanding Shares at a price of $19.00 per Share, net to
the seller in cash and (ii) following the consummation of the Offer and the
satisfaction or waiver of other conditions set forth in the Merger Agreement, MG
will be merged with and into the Company (the "Merger"), with MG as the
surviving corporation.
The Merger Agreement requires that the Company use its best
efforts, at the Bidder's request, to take all lawful action necessary to cause
the Bidder's designees to be elected to the Board of Directors of the Company
under the circumstances described in the Merger Agreement. See "Board of
Directors and Executive Officers--Right to Designate Directors; the Bidder's
Designees" below.
You are urged to read this Information Statement carefully.
You are not, however, required to take any action. Capitalized terms used herein
and not otherwise defined herein shall have the meaning set forth in the
Schedule 14D-9.
The Offer is scheduled to expire at 12:00 midnight, New York
City time, on December 18, 1998, unless the Offer is extended or is terminated
under the terms of the Merger Agreement.
The information contained in this Information Statement
concerning Markel, MG and the Bidder's Designees (as hereinafter defined) has
been furnished to the Company by Markel and MG, and the Company assumes no
responsibility for the accuracy or completeness of such information.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
General
As of September 30, 1998, 6,740,229 shares of Common Stock and 14,444
shares of Series A 4.0% Cumulative Convertible Preferred Stock (the "Convertible
Preferred Stock") were outstanding. Each share of Common Stock that is
outstanding on any applicable record date for any matter to be acted on by
Shareholders is entitled to one vote. Each share of Convertible Preferred Stock
that is outstanding on any applicable record date for any matter to be acted on
by Shareholders is entitled to one vote for each share of Common Stock that
would be issuable upon conversion of such share of Convertible Preferred Stock.
As of December 3, 1998, each share of Convertible Preferred Stock would be
entitled to approximately 45 votes.
The Company's By-Laws provide for a Board of Directors that shall not
be less than 3 nor more than 15 in number as determined from time to time by the
Board of Directors. The By-Laws provide that the Board of Directors shall be
divided into three classes, as nearly equal in number as the total number of
Directors constituting the entire Board of Directors permits, with the term of
office of one class expiring each year. The number of Directors is presently set
at ten.
Right to Designate Directors; the Bidder's Designees
The Merger Agreement provides that, subject to compliance with
applicable law, promptly upon the purchase by the Bidder of Shares pursuant to
the Offer, and from time to time thereafter, the Bidder shall be entitled to
designate such number of directors ("Bidder Designees"), rounded up to the next
whole number, on the Board as shall give the Bidder representation on the Board
equal to the product of the total number of directors on the Board (giving
effect to the directors elected pursuant to this sentence) multiplied by the
percentage that the aggregate number of Shares beneficially owned by the Bidder
or any affiliate of the Bidder following such purchase bears to the total number
of Shares then outstanding, and the Company shall, at such time, promptly take
all actions necessary to cause Bidder's designees to be elected as directors of
the Company, including increasing the size of the Board or securing the
resignations of incumbent directors or both. At such times, the Company shall
use its best efforts to cause persons designated by the Bidder to constitute the
same percentage as is on the Board of Directors of each committee of the Board,
to the extent permitted by applicable law.
It is expected that the Bidder Designees may assume office at
any time following the purchase by the Bidder of Shares pursuant to the Offer,
which purchase may not be earlier than December 18, 1998, and that, upon
assuming office, the Bidder Designees will thereafter constitute at least a
majority of the Board.
Bidder Designees
Any director or executive officer of Markel or MG listed in Schedule I
to the Schedule 14D-1, dated October 20, 1998, of the Bidder (the "Schedule
14D-1") may be designated by the Bidder as a Bidder Designee and such Schedule I
is incorporated herein by reference. The information with respect to the Bidder
Designees has been designated by the Bidder for inclusion herein.
Directors and Executive Officers of the Company
The following table provides information regarding the Directors and
Executive Officers of the Company as of December 3, 1998.
Name Age Position
Stephen A. Crane 53 President, Chief Executive Officer and Director
Hadley C. Ford 63 Chairman of the Board and Director
Robert M. Coffee 53 Senior Vice President, General Counsel & Secretary
Robert P. Cuthbert 51 Senior Vice President & Chief Financial Officer
Robert M. Baylis 60 Director
John K. Castle 57 Director
Franklin L. Damon 54 Director
John A. Dore 47 Director
Robert R. Douglass 67 Director
David H. Elliott 57 Director
Richard W. Hanselman 71 Director
George L. Yeager 65 Director
The Class I Directors, Messrs. Baylis, Castle and Ford, were last elected
for a term that expires at the Annual Meeting of Shareholders in 2000; the Class
II Directors, Messrs. Elliott, Crane and Yeager, were last elected for a term
that expires at the Annual Meeting of Shareholders in 2001; and the Class III
Directors, Messrs. Hanselman, Damon, Dore and Douglass, were last elected for a
term that expires at the Annual Meeting of Shareholders in 1999. At each Annual
Meeting of Shareholders, successors to the Directors whose term expires at that
Annual Meeting will be elected for a three-year term.
Biographical Information for Directors and Executive Officers
Set forth below are the names, positions and offices held with the
Company, and a brief account of the business experience during the past five
years, of each executive officer and member of the Board of Directors of the
Company.
Mr. Crane has served as President, Chief Executive Officer and a Director
of the Company since September 1993. From April 1993 until December 1993, Mr.
Crane served as Chairman, Strategic Development Group -- North America of Willis
Corroon Corporation, a subsidiary of Willis Corroon Group plc. From November
1989 until March 1993, Mr. Crane was President and Chief Executive Officer of G.
L. Hodson & Son, Inc., a reinsurance intermediary and a subsidiary of Willis
Corroon Corporation.
Mr. Coffee has served as Senior Vice President, General Counsel and
Secretary of the Company since November 1994. From July 1990 until November
1994, Mr. Coffee served as Vice President, Secretary and Assistant General
Counsel of Willis Corroon Corporation.
Mr. Cuthbert, a certified public accountant, has served as Senior Vice
President and Chief Financial Officer of the Company since March 1994. From
April 1993 to March 1994, Mr. Cuthbert served as Senior Vice President and Chief
Financial Officer of Coregis Group, Inc., a specialty commercial insurer, and as
a Director of Mt. Airy Insurance Company, California Insurance Company and
Coregis Indemnity Company, all of which are subsidiaries of Coregis Group, Inc.
From January 1992 to May 1992, Mr. Cuthbert served as Senior Vice President and
Chief Financial Officer of Poe & Associates, Inc., an insurance intermediary.
From November 1989 to December 1991, Mr. Cuthbert served as First Vice
President, Chief Financial Officer and Investor Relations Officer of Willis
Corroon Corporation.
Mr. Baylis has served as a Class I Director of the Company since March
1996. Mr. Baylis retired as Vice Chairman of CS First Boston Corporation in
January 1996 after 33 years of service. Mr. Baylis served as Chairman and Chief
Executive Officer of CS First Boston Pacific from March 1993 until August 1994,
and as Vice Chairman of The First Boston Corporation ("First Boston") from March
1992 until March 1993. Prior to March 1992, Mr. Baylis was responsible for all
investment banking and merger and acquisition activities for First Boston's
financial institution clients. Mr. Baylis has served as a Director of New York
Life Insurance Company since January 1997, as a Director of Host Marriott Corp.,
a hotel real estate company, since May 1996, and as a Director of Covance Inc.,
a contract research organization, since January 1997.
Mr. Castle has served as a Class I Director of the Company since August
1998. Since 1987, Mr. Castle has been Chairman of Castle Harlan, Inc., a private
merchant bank in New York City. Immediatley prior to forming Castle Harlan,
Inc., Mr. Castle was President and Chief Executive Officer and a Director of
Donaldson Lufkin & Jenrette, Inc., one of the nation's leading investment
banking firms. Mr. Castle is a Director of Sealed Air Corporation, Morton's
Restaurant Group, Inc., Commemorative Brands, Inc., Universal Compression, Inc.
and a Managing Director of Statia Terminals Group, N.V.
Mr. Damon has served as a Class III Director of the Company since
September 1993. Mr. Damon has been engaged in the practice of law in the
insurance regulatory field for more than twenty years. From March 1991 to
January 1994 he served as of counsel to the law firm of Sullivan, Roche &
Johnson. Since 1986, Mr. Damon has served as Chairman of the Lawyers
Professional Liability Insurance Committee of the Los Angeles County Bar
Association, and he is presently Special Counsel to the Los Angeles County Bar
Association.
Mr. Dore has served as Executive Vice President and a Class III Director
of the Company since August 1998. From October 1990 to July 1998, Mr. Dore
served as President, Chief Executive Officer and Director of Financial
Institutions Insurance Group, Ltd. and its successor, Dearborn Risk Management,
Inc. Mr. Dore continues to serve as a Director of Dearborn Risk Management, Inc.
and its principal subsidiary.
Mr. Douglass has served as a Class III Director of the Company since
September 1993. Since December 1993, Mr. Douglass has served as of counsel to
the law firm of Milbank, Tweed, Hadley & McCloy. From 1985 until 1993, Mr.
Douglass served as Vice Chairman and as a Director of The Chase Manhattan
Corporation and its principal subsidiary, The Chase Manhattan Bank, N.A.
(collectively, "Chase Manhattan"), which he joined in 1976. Mr. Douglass served
as Senior Customer Planning and Development Officer of Chase Manhattan from 1990
until 1993. Mr. Douglass served as a Director of Home Holdings Inc. from 1993 to
1995. Mr. Douglass has served as a Director of HRE Properties, a real estate
investment trust, since January 1992 and as Chairman of the Board of Cedel since
May 1994.
Mr. Elliott has served as a Class II Director of the Company since April
1994. Mr. Elliott has served as Chairman of MBIA, Inc. and its operating
company, MBIA Insurance Corporation, (collectively, "MBIA") since January 1994,
as Chief Executive Officer of MBIA since January 1992 and as a Director of MBIA
since March 1988. Mr. Elliott served as President of MBIA from January 1987
through December 1994 and as Chief Operating Officer of MBIA from January 1987
to December 1991. Mr. Elliott has served as a Director of Orion Capital
Corporation since March 1998.
Mr. Ford has served as the Chairman of the Board and as a Class I Director
of the Company since September 1993. Mr. Ford is an independent management
consultant who has also served as a Senior Advisor to the insurance industry
practice of Andersen Consulting since October 1992. From 1965 to 1992, Mr. Ford
was employed by BoozAllen & Hamilton, most recently as a Director and Senior
Vice President in charge of the firm's insurance industry practice. Mr. Ford has
served as a Director of U.S. Homecare Inc. since 1994.
Mr. Hanselman has served as a Director of the Company since September
1993. Mr. Hanselman has served as a Director of Arvin Industries, Inc., an
automotive supplier, since 1983, as a Director of Becton Dickenson & Co., a
medical and diagnostic equipment manufacturer, since 1981, as a Director of
Bradford Funds Inc., a money market fund, since 1987, and as a Director of the
Foundation Health Systems Inc., a health maintenance organization, since 1990.
Mr. Yeager has served as a Class II Director of the Company since October
1993. Mr. Yeager was Senior Vice President and Chief Underwriting Officer for
the Crum and Forster Insurance Companies from 1986 to 1992. Mr. Yeager was a
Director of United States Fire Insurance Company, North River Insurance Company,
Westchester Fire Insurance Company, International Insurance Company and
Constitution Reinsurance Company, all of which were subsidiaries of Crum and
Forster Insurance Companies. Mr. Yeager served from 1994 to 1997 as a Director
of American E&S, a subsidiary of Acordia, Inc. Mr. Yeager also served on the
Board of Governors for the National Council of Compensation Insurance from 1988
to 1992. He served as a Director of Insurance Services Office from 1990 to 1992,
as a Director of American Nuclear Institute from 1990 to 1992, and as a Director
of Industrial Risk Insurance from 1991 to 1992.
Except for certain severance agreements and indemnification agreements,
none of the executive officers has an agreement relating to the terms of his
employment with the Company. See "Certain Relationships and Related
Transactions."
Mr. Damon represents the Company from time to time in connection with
certain insurance regulatory matters, primarily in the State of California. For
such services, Mr. Damon received $37,226 and $51,875 for 1997 and 1996,
respectively.
Mr Douglass currently serves as of counsel to the law firm of Milbank,
Tweed, Hadley & McCloy. Milbank, Tweed, Hadley & McCloy currently represents the
Company in connection with certain legal matters, including in connection with
the Offer and the Merger.
All of the executive officers and Directors of the Company are citizens of
the United States of America. There are no material proceedings to which any
Director or executive officer or any associate of any such Director or executive
officer is a party adverse to the Company or any of its subsidiaries or has a
material interest adverse to the Company or any of its subsidiaries.
Board of Directors
The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall affairs of the Company. Members of the
Board are kept informed of the Company's business by various reports provided to
them by management, as well as by operating and financial reports made at Board
and Committee meetings by the President and other executive officers of the
Company.
Committees of the Board
The Board has established an Audit Committee, a Compensation Committee,
an Executive Committee, a Governance Committee and an Investment Committee. The
Audit Committee reviews the services provided by the Company's independent
public accountants, consults with such accountants on audits and proposed audits
and reviews the need for internal auditing procedures and the adequacy of
internal controls. The Compensation Committee establishes and reviews the
overall compensation policy of the Company, determines the specific terms and
conditions of employment of senior executives of the Company and oversees the
employee benefit programs of the Company. See "Report of the Compensation
Committee." The Executive Committee, during the interim between meetings of the
Board, has been delegated certain authority of the Board. The Governance
Committee reviews and makes recommendations to the Board regarding: (i) the role
and effectiveness of the Board and its Committees, (ii) criteria for membership
on the Board and (iii) individual candidates for membership on the Board. The
Governance Committee also seeks potential nominees for Board membership in
various ways and will consider suggestions submitted by Shareholders. Such
suggestions, together with appropriate biographical information, should be
submitted to the Secretary of the Company. The Investment Committee determines
the Company's investment policy and reviews the performance of the Company's
investment managers. In addition to the foregoing committees, the Board has
established from time to time additional committees to assist it with special
projects. During 1997, the Board established an Ad Hoc Committee in connection
with the negotiation of the pending acquisition of First Re and certain other
subsidiaries of Dearborn. During 1998, the Board established a Special Committee
in connection with the Offer and the Merger.
The Audit Committee consists of Messrs. Damon, Douglass, Elliott
(Chairman) and Yeager. The Compensation Committee consists of Messrs. Douglass
(Chairman), Ford, Hanselman and Castle. The Executive Committee consists of
Messrs. Crane (Chairman) and Ford. The Governance Committee consists of Messrs.
Crane, Douglass, Ford (Chairman) and Hanselman. The Investment Committee
consists of Messrs. Baylis, Crane, Elliott and Hanselman (Chairman). The Ad Hoc
Committee consisted of Messrs. Baylis (Chairman), Douglass, Ford and Elliott.
The Special Committee consisted of Messrs. Baylis (Chairman), Douglass and
Elliott.
Attendance of Directors
During 1997, the Board of Directors held five meetings; the Ad Hoc
Committee held one meeting; the Audit Committee held four meetings; the
Compensation Committee held five meetings; the Executive Committee held no
meetings; the Governance Committee held no meetings and the Investment Committee
held four meetings. All directors attended 100% of the meetings of the Board and
the committees on which they served.
COMPENSATION OF DIRECTORS
Directors of the Company who are employees of the Company or its
affiliates receive no directors' fees. Non-employee Directors are paid an annual
retainer of $20,000, plus $1,000 per day for attendance at each Board of
Directors meeting and for attendance at meetings of committees of the Board of
Directors occurring on days other than days of Board meetings. The Chairmen of
the Audit Committee, the Compensation Committee and the Investment Committee
receive an annual fee of $3,000 for serving in such capacity. The Chairman of
the Board receives, effective as of January 1, 1996, an additional annual
retainer of $20,000 for services rendered in such capacity. The chairman of the
Special Committee, Mr. Baylis, received a one-time fee of $20,000 and the other
members of the Ad Hoc Committee, Messrs. Douglass and Elliott, received a
one-time fee of $10,000 each, in November 1998, for serving in such capacities.
Non-employee Directors receive $500 for each meeting of the Board of Directors,
and each meeting of its committees occurring on days other than days of Board
meetings, in which they participate by telephone. In addition, all Directors are
reimbursed for their reasonable travel expenses incurred in attending these
meetings.
Under the terms of the 1995 Non-Employee Director Stock Option Plan
(the "Directors' Plan"), each Director of the Company who is not an employee of
the Company or its affiliates is entitled to the grant, on the later of (i) May
12, 1995 or (ii) the date on which such Director is first elected to the Board,
of an initial option to purchase 10,000 shares of Common Stock. Options under
the Directors' Plan are granted at the fair market value of such shares on the
date of grant and become exercisable in four equal annual installments
commencing on the day immediately preceding the second anniversary of the date
of grant. Options remain outstanding for ten years from the date of grant,
unless terminated earlier in the event of death, disability, retirement or other
circumstances detailed in the Directors' Plan. On the fifth anniversary of the
date of the initial grant, and continuing on each subsequent anniversary of such
date during a Director's tenure on the Board, such Director will be granted an
option to purchase an additional 2,000 shares of Common Stock or such lesser
proportionate amount as then remains available for grant. An aggregate of
100,000 shares of Common Stock have been authorized for issuance upon the
exercise of options under the terms of the Directors' Plan.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is responsible for the establishment and
review of the overall compensation policy of the Company, the general oversight
of the employee benefits plans maintained by the Company and the specific terms
and conditions of employment of senior executives of the Company.
It is the overall policy of the Compensation Committee to align the
interests of management with those of the Shareholders by making a significant
portion of executive compensation depend upon the Company's performance. The
Company's compensation programs emphasize the following basic principles:
Compensation should be linked to the creation of value for
Shareholders, and executives should be encouraged to acquire ownership in the
Company;
Compensation programs should be designed to attract, motivate and
retain executives with the requisite skills to effectively pursue the Company's
strategic objectives; and Compensation programs should reward individual
performance through an appropriate balance of base salary, annual bonus awards
and long-term equity incentives.
Compensation Program
The Company's executive compensation program consists of three major
components: base salary, annual bonus awards and long- term equity incentives.
Each of these components supports the Company's overall compensation policy,
which relates pay to performance.
Base Salary
Amounts paid in base salary, including periodic increases, are
determined primarily by the scope of the executive's responsibilities, his
performance and the salaries offered within the industry for comparable
positions. In connection with its overall evaluation of the foregoing factors,
the Compensation Committee draws upon its members' general knowledge of
compensation practices within the insurance and financial services industries
and periodically reviews compensation data regarding other insurance companies,
including a peer group of comparably sized property and casualty insurance
companies established by the Compensation Committee specifically for this
purpose.
Annual Bonus Awards
Annual bonus awards earned by executives are based upon their
achievement of performance objectives established by the Compensation Committee
at the beginning of each fiscal year that link potential bonus awards to the
enhancement of Company earnings and overall profitability. The Compensation
Committee believes that the use of predetermined performance objectives provides
an excellent link between the value created for Shareholders and the incentives
paid to executives.
Long-Term Equity Incentives
Certain executives of the Company may earn equity-based incentive
awards, the ultimate value of which is related to the long-term performance of
the Company's Common Stock. Long-term equity incentives may take the form of
stock options or restricted stock.
Stock options have been the principal vehicle of the Company for the
payment of long-term incentive compensation. Stock options granted to executives
under the Company's 1993 Stock Option Plan provide incentives to executives by
giving them a strong economic interest in building value for Shareholders. Stock
options become exercisable in annual installments commencing two years after the
date of grant, and the exercise price of each option is the fair market value of
the Company's Common Stock on the date of grant. As a result, executives benefit
from options only through a rise over time in the market value of the underlying
shares.
Restricted stock also motivates executives by providing incentives tied
to Shareholder value. Restricted stock granted to executives under the Company's
Restricted Stock Plan is subject to restrictions on its transfer that lapse in
annual installments commencing two years following the date of grant.
Accordingly, the ultimate value of restricted stock awards is linked to the
performance of the Company's Common Stock over an extended period.
Long-term equity incentives are granted by the Compensation Committee
based upon an executive's position and his or her ability to contribute to the
future performance of the Company. The Compensation Committee is responsible for
determining the form and terms of all such awards.
Compensation of the Chief Executive Officer
The overall compensation of the Chief Executive Officer (the "CEO")
reflects the Compensation Committee's evaluation of (i) the Company's
performance as measured by operating, financial and strategic objectives, viewed
from both a short-term and a long- term perspective, (ii) the CEO's individual
performance in pursuing the foregoing objectives and (iii) the compensation paid
to chief executive officers of other companies of similar size and complexity in
the insurance and financial services industries.
Mr. Crane's base salary for 1997 was $330,000. The Compensation
Committee determined this figure based upon a review of the compensation paid to
CEOs of other insurance companies, including a peer group of comparably sized
property and casualty insurance companies established by the Compensation
Committee specifically for this purpose. The Compensation Committee considered
the Company's overall performance as measured by operating, financial and
strategic objectives established in connection with annual bonus awards for 1997
and determined that no such awards would be granted to any of the executive
officers of the Company for 1997. The Committee also determined that no
additional long-term incentive awards would be granted during 1997 to the
executive officers of the Company.
Internal Revenue Code Section 162(m)
Section 162 (m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally disallows a tax deduction to public companies for
compensation over $1 million paid to the CEO or to any of the other highly
compensated executive officers named in the Company's annual proxy statement.
Qualifying "performance-based compensation" and compensation paid pursuant to
plans or agreements adopted or entered into prior to a company's initial public
offering of securities or subsequently approved by its shareholders will not be
subject to the foregoing deduction limitation, if certain requirements are met.
The Compensation Committee believes that the compensation to be paid in 1998 to
any of the Company's executive officers will not exceed the foregoing deduction
limitation.
The Company has established and maintains compensation programs that
align the interests of management with those of the Shareholders and that comply
with the principles set forth in this report. The Compensation Committee intends
to take appropriate actions consistent with such principles to avoid the
unnecessary loss of future deductions under Section 162(m) of the Code.
COMPENSATION COMMITTEE
John K. Castle
Robert R. Douglass, Chairman
Hadley C. Ford
Richard W. Hanselman
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is a former or current
executive officer or employee of the Company or any of its subsidiaries, nor
does any executive officer of the Company serve as an officer, director or
member of a compensation committee of any entity, one of whose executive
officers or directors is a director of the Company.
EXECUTIVE COMPENSATION
The following information relates to the annual and long- term
compensation paid by the Company and its subsidiaries in connection with the
three fiscal years ending December 31, 1997, 1996 and 1995 to the Chief
Executive Officer of the Company and the three other executive officers of the
Company whose earnings exceeded $100,000 for the fiscal year ended December 31,
1997.
Long-Term
Annual Compensation Compensation Awards
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(3)
Stephen A. Crane 1997 $330,000 $ 0 0 $18,768
President &
Chief Executive Officer 1996 330,000 0 25,000 18,794
1995 300,000 300,000 0 18,880
John F. Iannucci (1) 1997 257,500 0 0 19,932
Executive Vice President 1996 245,000 0 20,000 19,890
1995 235,000 263,313(2) 0 19,440
Robert M. Coffee 1997 148,750 0 0 14,948
Senior Vice President & 1996 140,000 0 5,000 14,077
General Counsel 1995 132,500 32,500 0 10,263
Robert P. Cuthbert 1997 193,833 0 0 14,831
Senior Vice President & 1996 188,000 0 5,000 14,940
Chief Financial Officer 1995 180,000 108,000 0 11,686
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(1) Mr. Iannucci resigned on December 31, 1997 as an officer
and Director of the Company and its subsidiaries.
(2) In accordance with the terms of the Annual Incentive Plan
for Key Employees of Gryphon Holdings Inc. and its
Subsidiaries, the portion of the bonus payable to Mr.
Iannucci for 1995 that exceeded his base salary for 1995 was
paid to him in shares of Common Stock. Accordingly, Mr.
Iannucci received 1,500 shares of Common Stock based upon
the fair market value of the shares on March 4, 1996, the
date of the award. These shares, which are not subject to
forfeiture, may not be sold or otherwise transferred by Mr.
Iannucci pending the lapse of a restriction on their
transfer. This restriction will lapse with respect to 25%
of the shares on the second anniversary of the date of the
award and with respect to an additional 25% of the shares on
each of the next three anniversaries of such date. Pending
the lapse of this restriction, Mr. Iannucci enjoys all other
rights of a Shareholder of the Company with respect to such
shares.
(3) These amounts for 1997, 1996 and 1995, respectively,
represent (i) premiums paid by the Company for term life
insurance policies as follows: Mr. Crane $1,440, $1,440 and
$1,440; Mr. Coffee $991, $1,207 and $881; Mr. Cuthbert
$839, $870 and $766; Mr. Iannucci $1,440, $1,320 and $864;
(ii) contributions by the Company under the Gryphon Holdings
401(k) & Profit Sharing Plan as follows: Mr. Crane $13,992,
$14,070 and $14,076; Mr. Coffee $13,957, $12,870 and
$9,382; Mr. Cuthbert $13,992, $14,070 and $10,920; and Mr.
Iannucci $13,992, $14,070 and $14,076; and (iii) the value
attributed to the use of a Company automobile as follows:
Mr. Crane $3,336, $3,364 and $3,364; and, Mr. Iannucci
$4,500, $4,500 and $4,500.
During the Company's last fiscal year ending December 31, 1997, no
options, stock appreciation rights or other long term incentive awards were
granted to, or exercised by, any of the persons named in the Summary
Compensation Table. The following table sets forth for each person named in the
Summary Compensation Table the specified information with respect to all options
outstanding on December 31, 1997.
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Options at Fiscal
Year-End Year-End(1)
Name Exercisable Unexercisable Exercisable Unexercisable
Stephen A. Crane 56,250 43,750 $210,938 $70,313
John F. Iannucci 37,500 32,500 140,625 46,875
Robert M. Coffee 7,500 7,500 24,825 24,825
Robert P. Cuthbert 15,000 15,000 34,650 34,650
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(1) Based on $16.75 per share, which was the closing price of the Common Stock
on NASDAQ on December 31, 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Ownership of Common Stock by Management
The following table sets forth as of December 2, 1998 information
concerning the ownership of Common Stock by each Director, by each executive
officer named in the Summary Compensation Table and by all executive officers
and Directors of the Company as a group, together with their respective
percentage ownership of the outstanding Common Stock.
MANAGEMENT OWNERSHIP OF COMMON STOCK
Shares of Shares upon exercise Percent of
Name of Beneficial Owner Common Stock of Stock Options(1) Total(2) Class
Stephen A. Crane 82,664 81,250 163,914 2.4%
Robert M. Coffee 6,403 12,500 18,903 *
Robert P. Cuthbert 20,909 23,750 44,659 *
Robert M. Baylis 10,000 2,500 12,500 *
John K. Castle (3) 643,672 0 643,672 8.72%
Franklin L. Damon 3,500 5,000 8,500 *
John A. Dore 9,000 0 9,000 *
Robert R. Douglass 5,000 5,000 10,000 *
David H. Elliott 2,000 5,000 7,000 *
Hadley C. Ford 12,000 5,000 17,000 *
Richard W. Hanselman 3,000 5,000 8,000 *
George L. Yeager 1,000 5,000 6,000 *
All Directors and
Executive Officers as
a Group (12 persons) 799,148 150,000 949,148 13.78%
* less than 1%.
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(1) Represents beneficial ownership of shares that may be acquired by the
exercise of stock options which are currently exercisable or exercisable
within sixty days.
(2) The amounts of Common Stock and stock options beneficially owned are
reported on the basis of regulations of the Securities and Exchange
Commission governing the determination of beneficial ownership of
securities.
(3) Represents beneficial ownership of shares of Common Stock that may be
acquired upon conversion of 14,444 shares of Convertible Preferred
Stock owned by Mr. Castle and affiliates of Mr.Castle, which shares
of Convertible Preferred Stock represent 100% of the outstanding
Convertible Preferred Stock.
Except as otherwise noted above, the Company believes the beneficial
holders listed above have sole voting and investment power regarding the shares
of Common Stock shown as being beneficially owned by them.
Principal Holders of Common Stock
The following table indicates the only persons known by the Company to be
beneficial owners of more than five percent of the outstanding Common Stock as
of December 2, 1998. In addition, 14,444 shares of Convertible Preferred
Stock are currently outstanding, all of which are held by affiliates of Castle
Harlan, Inc. The Company has no other class of equity securities outstanding.
BENEFICIAL OWNERS OF GREATER THAN
FIVE PERCENT OF COMMON STOCK
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership of Class
Markel Corporation 791,250 (1) 11.74%
4551 Cox Road
Glen Allen, VA 23060-3382
Pioneering Management Corporation 660,000 (2) 9.79%
60 State Street
Boston, MA 02109
John K. Castle 643,672 (3) 8.72%
Dearborn Risk Management, Inc.
Castle Harlan Partners II, L.P.
Castle Harlan, Inc.
150 East 58th Street 37th Floor
New York, New York 10155
Dimensional Fund Advisors Inc. 437,200 (4) 6.49%
1299 Ocean Avenue
Santa Monica, CA 90401
Oppenheimer Capital 429,100 (5) 6.37%
Oppenheimer Tower
World Financial Center
New York, NY 10281
Capital Guardian Trust Company 407,100 (6) 6.04%
333 South Hope Street
Los Angeles, CA 90071
Royce & Associates, Inc. 401,500 (7) 5.96%
1414 Avenue of the Americas
New York, NY 10019
(1) Based upon information obtained from a Schedule 13D, dated October 1, 1998,
which was filed with the Securities and Exchange Commission by Markel
Corporation ("Markel"). The Schedule 13D reported that Markel beneficially owned
791,250 shares of Common Stock. Markel had sole dispositive and voting power
with respect to such shares.
(2) Based upon information obtained from a Schedule 13G, dated January 21, 1998,
which was filed with the Securities and Exchange Commission by Pioneering
Management Corporation ("Pioneering"). The Schedule 13G reported that Pioneering
owned 660,000 shares of Common Stock. Pioneering had sole voting power and
shared dispositive power with respect to these shares.
(3) Based upon information obtained from a Schedule 13G, dated July 13, 1998,
which was filed with the Securities and Exchange Commission by John K. Castle,
Dearborn Risk Management, Inc., Castle Harlan Partners II, L.P., and Castle
Harlan, Inc (together, the "Castle Affiliates"). The Schedule 13G reported that
the Castle Affiliates beneficially owned 643,672 shares of Common Stock
(representing 14,444 shares of Convertible Preferred Stock, each of which is
convertible into 44.563278 shares of Common Stock). The Castle Affiliates had
shared dispositive and voting power with respect to such shares.
(4) Based upon information obtained from a Schedule 13G, dated February 9, 1998,
which was filed with the Securities and Exchange Commission by Dimensional Fund
Advisors Inc. ("Dimensional"). The Schedule 13G reported that Dimensional, a
registered investment adviser, beneficially owned 473,200 shares of Common Stock
which were held in portfolios of DFA Investment Dimensions Group Inc., a
registered open-end investment company, or in various other investment vehicles
managed by Dimensional. Dimensional had sole dispositive and voting power with
respect to such shares.
(5) Based upon information obtained from a Schedule 13G, dated February 27,1998,
which was filed with the Securities and Exchange Commission by Oppenheimer
Capital ("Oppenheimer"). The Schedule 13G reported that Oppenheimer, a
registered investment adviser, beneficially owned 429,100 shares of Common
Stock. Oppenheimer had sole dispositive and voting power with respect to such
shares.
(6) Based upon information obtained from a Schedule 13G, dated July 9, 1998,
which was filed with the Securities and Exchange Commission by Capital Guardian
Trust Company. The Schedule 13G reported that Capital Guardian Trust Company
beneficially owned 407,100 shares of Common Stock in connection with its serving
as the investment manager of various institutional accounts. Capital Guardian
Trust Company had sole dispositive and voting power with respect to such shares.
(7) Based upon information obtained from a Schedule 13G, dated February 14,
1998, which was filed with the Securities and Exchange Commission by Royce &
Associates, Inc. and Charles M. Royce, the controlling person of Royce &
Associates, Inc. The Schedule 13G reported that Royce & Associates, Inc.
beneficially owned 401,500 shares of Common Stock. Charles M. Royce owned no
shares of Common Stock independent of Royce & Associates, Inc. Royce &
Associates, Inc. held sole voting and dispositive power with respect to such
shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Severance Agreements
The Company has entered into severance agreements with each of Messrs.
Crane, Cuthbert and Dore, under which each is entitled to between 6 months
and 12 months of salary continuation payments, as determined by the Board, in
the event that he is terminated without "cause" or for disability, or resigns as
a result of constructive termination. Under the terms of these agreements, as
well as a similar severance agreement between the Company and Mr. Coffee, in the
event that a person acquires more than 20% of the Company's outstanding voting
securities, and within 24 months thereafter the executive is terminated without
"cause" or for disability or the executive suffers a constructive termination,
as defined in such agreements, the executive is entitled to a lump sum payment
equal to 36 months of his then current salary.
Indemnification Agreements
The Company's Certificate of Incorporation provides for the
indemnification of the Company's officers and Directors to the fullest extent
permitted by the Delaware General Corporation Law (the "DGCL") in connection
with services provided by such individuals to or on behalf of the Company. As
permitted by the Certificate of Incorporation and the DGCL, the Company has
entered into indemnification agreements with each of its executive officers and
Directors that detail the procedures by which such individuals will be entitled
to indemnification in the event they become involved in any proceeding in
connection with such services.
Acquisition of First Re
On February 9,1998, the Company entered into a stock purchase agreement
with Dearborn to buy all of the issued and outstanding shares (the "Dearborn
Shares") of capital stock of certain subsidiaries of Dearborn, including First
Re. In connection with the purchase of the Dearborn Shares, the Company agreed
to elect John K. Castle, the Chairman of Castle Harlan, Inc., as a Class I
Director of the Company to serve until the Annual Meeting of the Shareholders in
2000, at which time the Board of Directors has agreed to recommend a person
nominated by Castle Harlan, Inc. (the "Castle Harlan Nominee") to the
Shareholders of the Company for election as a Class I Director. At each
subsequent Annual Meeting of Shareholders of the Company at which the term of
the Castle Harlan Nominee is to expire or a vacancy caused by the cessation of
service of the Castle Harlan Nominee is to be filled, the Board of Directors has
agreed to recommend a replacement Castle Harlan Nominee to Shareholders of the
Company for election as a Class I Director and has agreed to use all reasonable
efforts to cause the election of such nominee to the Board of Directors. The
foregoing arrangement is subject to termination in various circumstances
outlined in an agreement between the Company, Dearborn and Castle Harlan
Partners II, L.P., a shareholder of Dearborn. In a separate agreement with John
A. Dore, the President and Chief Executive Officer of First Re, the Company has
agreed to elect Mr. Dore to the Board of Directors of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, Directors and persons who own more than ten
percent of a registered class of the Company's equity securities (collectively,
the "Reporting Persons") to file reports of ownership and changes in ownership
on Forms 3, 4 and 5 (collectively, the "Forms") with the Securities and Exchange
Commission (the "SEC"). These Reporting Persons are required pursuant to SEC
regulations to furnish the Company with copies of all Forms they file with the
SEC. Based solely on the Company's review of the copies of the Forms it has
received and written representations from certain Reporting Persons, the Company
believes that all transactions by Reporting Persons relating to ownership and
changes in ownership of equity securities of the Company during the fiscal year
1997 have been duly reported to the SEC pursuant to the aforementioned Forms.