SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 1-9371
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF COMMON STOCK, AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT:
ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(dollars in thousands, except share and per share amounts)
(unaudited)
2002 2001
----------- -----------
REVENUES
Net fastener sales $ 28,150 $ 29,721
Interest, dividend and other income 12,947 15,904
Net insurance premiums earned 32,700 0
Net mineral and filtration sales 55,686 55,725
Net (loss) on sale of subsidiary 0 (253,408)
Net gain on investment transactions 4,617 11,359
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Total revenues 134,100 (140,699)
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COSTS AND EXPENSES
Commissions and brokerage expenses 6,867 0
Salaries, administrative and other operating expenses 23,937 17,418
Loss and loss adjustment expenses 30,192 0
Cost of goods sold-fasteners 21,084 23,881
Cost of mineral and filtration sales 38,136 39,500
Interest expense 1,845 3,482
Corporate administration 6,940 7,536
----------- -----------
Total costs and expenses 129,001 91,817
----------- -----------
Earnings from continuing operations, before income taxes 5,099 (232,516)
Income taxes (16,621) (195,708)
----------- -----------
Earnings from continuing operations 21,720 (36,808)
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, net of tax 0 (184,010)
----------- -----------
Net earnings $ 21,720 ($ 220,818)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $ 2.99 ($ 4.99)
Discontinued operations 0.00 (24.94)
----------- -----------
Basic net earnings per share $ 2.99 ($ 29.93)
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $ 2.98 ($ 4.99)
Discontinued operations 0.00 (24.94)
----------- -----------
Diluted net earnings per share $ 2.98 ($ 29.93)
=========== ===========
Dividends per share of common stock * *
=========== ===========
Average number of outstanding shares of common stock ** 7,264,620 7,378,109
=========== ===========
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* In March 2002, Alleghany declared a dividend consisting of one share of Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect the common stock dividend declared in March 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(dollars in thousands, except share and per share amounts)
(unaudited)
2002 2001
----------- -----------
REVENUES
Net fastener sales $ 85,035 $ 94,149
Interest, dividend and other income 32,924 45,735
Net insurance premiums earned 92,370 0
Net mineral and filtration sales 162,170 163,906
Net gain on sale of subsidiaries 0 522,402
Net gain on investment transactions 43,564 12,672
----------- -----------
Total revenues 416,063 838,864
----------- -----------
COSTS AND EXPENSES
Commissions and brokerage expenses 18,423 0
Salaries, administrative and other operating expenses 68,452 58,859
Loss and loss adjustment expenses 73,419 0
Cost of good sold-fasteners 64,171 77,014
Cost of mineral and filtration sales 112,710 118,329
Interest expense 5,141 11,427
Corporate administration 15,954 40,243
----------- -----------
Total costs and expenses 358,270 305,872
----------- -----------
Earnings from continuing operations, before income taxes 57,793 532,992
Income tax expense 1,369 101,056
----------- -----------
Earnings from continuing operations 56,424 431,936
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, net of tax 0 (206,663)
----------- -----------
Net earnings $ 56,424 $ 225,273
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK**
Continuing operations $ 7.72 $ 58.55
Discontinued operations 0.00 (28.01)
----------- -----------
Basic net earnings per share $ 7.72 $ 30.54
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK**
Continuing operations $ 7.60 $ 57.87
Discontinued operations 0.00 (27.56)
----------- -----------
Diluted net earnings per share $ 7.60 $ 30.31
=========== ===========
Dividends per share of common stock * *
=========== ===========
Average number of outstanding shares of common stock** 7,313,423 7,377,249
=========== ===========
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** Adjusted to reflect the common stock dividend declared in March 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(dollars in thousands, except share and per share amounts)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Available for sale securities: 9/30/2002 12/31/2001
--------- ----------
Fixed maturities (cost $457,984 $0) $ 465,741 $ 0
Equity securities (cost $274,752 $226,226) 469,483 550,826
Short-term investments 306,847 796,511
---------- ----------
1,242,071 1,347,337
Cash 32,788 15,717
Notes receivable 92,410 91,536
Accounts receivables 95,842 57,161
Reinsurance receivable 139,951 0
Property and equipment - at cost, less accumulated depreciation and amortization 170,160 169,622
Inventory 71,878 71,169
Goodwill and other intangibles, net of amortization 112,071 49,708
Other assets 105,515 72,755
---------- ----------
$2,062,686 $1,875,005
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current taxes payable $ 12,110 $ 90,209
Losses and loss adjustment expenses 244,098 0
Other liabilities 127,502 103,595
Unearned premiums 66,458 0
Subsidiaries' debt 170,461 181,856
Net deferred tax liability 91,193 108,763
---------- ----------
Total liabilities 711,822 484,423
Common stockholders' equity 1,350,864 1,390,582
---------- ----------
$2,062,686 $1,875,005
========== ==========
Shares of common stock outstanding 7,234,502 7,350,006*
========== ==========
Common stockholders' equity per share $ 186.73 $ 189.20*
========== ==========
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ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(dollars in thousands)
(unaudited)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from continuing operations $ 56,424 $ 431,936
Adjustments to reconcile net earnings to cash (used in) provided by operations:
Depreciation and amortization 14,170 12,560
Net gain on investment transactions (43,564) (233,975)
Tax benefit on stock options exercised 1,176 816
Other charges, net 18,256 (8,128)
(Increase) decrease in other receivables (37,046) 1,076
Decrease in other assets 19,649 24,680
Decrease in other liabilities and income taxes payable (67,708) (5,618)
Increase in unearned premium reserve 8,484 0
Decrease in losses and loss adjustment expenses (22,588) 0
Decrease in reinsurance receivable 42,255 0
--------- ---------
Net adjustments (66,916) (208,589)
--------- ---------
Cash (used in) provided by operations (10,492) 223,347
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (729,472) (77,193)
Sales of investments 503,039 90,796
Purchases of property and equipment (8,270) (8,660)
Net change in short-term investments 512,166 (740,600)
Other, net 8,353 1,438
Acquisition of insurance companies, net of cash acquired (221,056) 0
Proceeds from sale of subsidiaries, net of cash disposed 0 531,477
--------- ---------
Net cash provided by (used in) investing activities 64,760 (202,742)
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (2,994) (30,727)
Proceeds of debt 2,456 13,957
Net change in revolving credit loans (10,857) (5,312)
Treasury stock acquisitions (28,640) (11,234)
Other, net 2,838 10,401
--------- ---------
Net cash (used in) financing activities (37,197) (22,915)
--------- ---------
Net increase (decrease) in cash 17,071 (2,310)
Cash at beginning of period 15,717 10,247
--------- ---------
Cash at end of period $ 32,788 $ 7,937
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 3,311 $ 11,831
Income taxes $ 51,991 $ 5,737
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Notes to the Consolidated Financial Statements
This report should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K"), the Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (the "2002 First Quarter Form 10-Q") and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "2002 Second Quarter Form 10-Q") of Alleghany Corporation (the "Company").
The information included in this report is unaudited but reflects all adjustments which, in the opinion of management, are necessary to a fair statement of the results of the interim periods covered thereby. All adjustments are of a normal and recurring nature except as described herein.
On January 4, 2002, the Company completed the acquisition of Capitol Transamerica Corporation ("CATA") for a total purchase price of approximately $182 million, of which $62.8 million was allocated to goodwill and intangibles. Contemporaneous with the acquisition of CATA, the Company purchased a Nebraska-domiciled insurance company for a total purchase price of approximately $40 million, of which $8.3 million was allocated to goodwill and intangibles. The Company applies the following significant accounting policies to its insurance operations:
a. DEFERRED ACQUISITION COSTS
Acquisition costs that vary with, and are directly related to, the production of premiums (principally commissions, premium taxes, compensation and certain underwriting expenses) are deferred. Deferred acquisition costs are amortized to expense as the related premiums are earned. Deferred acquisition costs are periodically reviewed to determine their recoverability from future income, including investment income, and if any such costs are determined not recoverable they are charged to expense.
b. PREMIUMS
Premiums are recognized as revenue on a pro-rata basis over the term of a contract. Unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of insurance policies in force.
c. INVESTMENTS
The investment portfolio consists of fixed maturity instruments, equity securities and short-term investments. The portfolio is classified as available for sale and carried at its fair market value. Unrealized gains or losses, net of the related tax effect, are excluded from earnings and reported in comprehensive income as a separate component of
stockholders' equity until realized. A decline in the fair value of available for sale investments that is deemed other than temporary is charged to earnings. The cost basis of fixed maturity instruments is adjusted for the amortization of premiums and the accretion of discounts to maturity. Realized gains and losses are determined on the specific identification method.
d. LOSS RESERVES
The reserves for losses and loss adjustment expenses represent management's best estimate of the ultimate cost of all reported and unreported losses incurred through the balance sheet date and include: (i) the accumulation of individual estimates for claims reported on direct business prior to the close of the accounting period; (ii) estimates received from other insurers with respect to reinsurance assumed; (iii) estimates for incurred but not reported claims based on past experience modified for current trends and (iv) estimates of expenses for investigating and settling claims based on past experience. The liabilities recorded are based on estimates resulting from the continuing review process, and differences between estimates and ultimate payments are reflected as an expense in the statement of earnings in the period in which the estimates are revised.
e. REINSURANCE
The Company follows the customary practice of reinsuring with other companies the loss exposures on business it has written. This practice allows the Company to diversify its business and write larger policies, while limiting the extent of its primary maximum net loss. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to losses from reinsurer insolvencies, the Company continually evaluates the financial condition of its reinsurers.
Comprehensive (Loss)/Income
The Company's total comprehensive (loss)/income for the three and nine months ended September 30, 2002 and 2001 was $ (48.1) million and $(275.1) million, and $(16.4) million and $205.2 million, respectively. Comprehensive income includes the Company's net earnings adjusted for changes in unrealized depreciation of investments, which was $(69.4) million and $(55.8) million, and $(74.8) million and $(18.5) million, and cumulative translation adjustments, which were $(0.5) million and $1.5 million, and $1.9 million and $(1.6) million, for the three and nine months ended September 30, 2002 and 2001, respectively.
Segment Information
Information concerning the Company's continuing operations by industry segment is summarized below (in thousands):
For the three months ended For the nine months ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
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REVENUES
Property and casualty
insurance $ 32,534 $(237,711) $ 96,429 $(230,348)
Mining and filtration 56,299 56,062 162,300 163,947
Industrial fasteners 28,150 29,721 85,035 94,149
Corporate activities 17,117 11,229 72,299 811,116
--------- --------- --------- ---------
Total $ 134,100 $(140,699) $ 416,063 $ 838,864
========= ========= ========= =========
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
Property and casualty
insurance $ (10,442) $(237,711) $ (11,369) $(230,348)
Mining and filtration 7,336 5,369 18,001 13,468
Industrial fasteners 389 (1,481) 1,469 (14,150)
Corporate activities 7,816 1,307 49,692 764,022
--------- --------- --------- ---------
Total 5,099 (232,516) 57,793 532,992
Income taxes (16,621) (195,708) 1,369 101,056
--------- --------- --------- ---------
Earnings from continuing
operations $ 21,720 $ (36,808) $ 56,424 $ 431,936
========= ========= ========= =========
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September 30, December 31,
2002 2001
-------------- -------------
IDENTIFIABLE ASSETS
Property and casualty
insurance $ 631,586 $ 142,956
Mining and filtration 323,356 310,129
Industrial fasteners 75,365 78,053
Corporate activities 1,032,379 1,343,867
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Total $2,062,686 $1,875,005
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Contingencies
The Company's subsidiaries are parties to pending claims and litigation in the ordinary course of their businesses. Each such operating unit makes provisions on its books in accordance with generally accepted accounting principles for estimated losses to be incurred as a result of such claims and litigation, including related legal costs. In the opinion of management, such provisions are adequate as of September 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The Company reported net earnings from continuing operations in the third quarter of 2002 of $21.7 million on revenues of $134.1 million, compared with net losses of $36.8 million on revenues of $140.7 million in the third quarter of 2001. Net earnings include a net credit of $18.1 million in the provision for income taxes reflecting an adjustment of the Company's estimated state and federal tax liabilities. The Company periodically reviews and reconciles the provisions for taxes on its books with the tax returns it files with various taxing authorities. Adjustments are recognized in the income statement in the period in which they are identified, along with a corresponding balance sheet adjustment to current taxes payable. The 2002 third quarter results also include net gains on investment transactions after taxes of $3.0 million compared with $7.4 million in the 2001 period.
Net earnings including discontinued operations were $21.7 million in the third quarter of 2002, compared with net losses of $220.8 million in the 2001 third quarter. Discontinued operations for the 2001 third quarter consist of the operations of Alleghany Underwriting prior to its disposition in November 2001.
In the first nine months of 2002, the Company's net earnings from continuing operations were $56.4 million on revenues of $416.1 million, compared with $431.9 million on revenues of $838.9 million in the first nine months of 2001. Net earnings including discontinued operations were $56.4 million in the first nine months of 2002, compared with $225.3 million in the 2001 period. Such discontinued operations for the first nine months of 2001 consist of the operations of Alleghany Asset Management prior to its disposition in February 2001 and the operations of Alleghany Underwriting prior to its disposition in November 2001.
The 2002 nine-month results also include net gains on investment transactions after taxes of $28.3 million, or approximately $3.88 per share, compared with net gains on investment transactions after taxes of $8.2 million, or approximately $1.12 per share in the 2001 period.
The 2001 nine-month results include an after-tax gain from the disposition of Alleghany Asset Management of approximately $474.8 million, excluding certain expenses relating to the closing of the transaction and an after-tax loss of $50.5 million on the disposition of Alleghany Underwriting.
Effective January 1, 2002, the Company adopted Financial Accounting Standards Board Statement 142, "Goodwill and Other Intangible Assets." In general, SFAS 142 provides that goodwill and other intangible assets with indefinite lives are no longer amortized, but are regularly tested for impairment. At September 30, 2002, the Company had on its books $94.5 million of goodwill and other intangible assets that may no longer be amortized pursuant to provisions of SFAS 142.
World Minerals Inc. ("World Minerals") recorded pre-tax earnings of $7.3 million on revenues of $56.3 million in the 2002 third quarter, compared with pre-tax earnings of $5.4 million on revenues of $56.1 million in the 2001 third quarter, and pre-tax earnings of $18.0 million on revenues of $162.3 million in the first nine months of 2002, compared with pre-tax earnings of $13.5 million on revenues of $163.9 million in the first nine months of 2001. The 2002 nine month results reflect the results of businesses acquired in April 2001 and January 2002, net reductions of approximately $3.2 million in energy costs, primarily natural gas, at U.S. and Latin American plants, $1.5 million in interest expense and $1.2 million in amortization expense (primarily due to requirements of SFAS 142) and cost controls. Such factors more than offset a decline in net sales due to continued sluggish demand and competitive pressures in the U.S. and in the European and Asian export markets for World Minerals' U.S.-produced products. The 2001 revenues include energy surcharges on certain of World Minerals' sales due to higher energy costs in the first nine months of 2001.
World Minerals is currently in the midst of a periodic strategic review of its business processes, overhead costs, sales strategies and plant operations. As part of such review, which commenced in the 2002 third quarter and will continue through the fourth quarter of 2002, World Minerals will consider, among other things, the possibility of reallocating certain production among its various plants.
World Minerals exports a significant amount of products produced at its Lompoc, California and Quincy, Washington plants to European and Asian markets from West Coast ports served by union-represented dockworkers. In recent months, the union and operators at these ports have been involved in an ongoing labor dispute which included alleged work slowdowns and a management lock-out lasting approximately ten days. In response to a request from President Bush, a federal court in early October issued a preliminary injunction in accordance with the Taft-Hartley Act that ended the management lock-out, required West Coast port terminals to re-open and dockworkers to return to work and mandated an 80-day "cooling off" period ending December 27, 2002.
The lock-out and alleged work slowdowns did not have a material adverse effect on World Mineral's 2002 third quarter results and World Minerals does not expect a significant impact on its 2002 fourth quarter results due to the cooling off period currently in effect. However, the resumption of any lock-out or work slowdown or stoppage upon the expiration of the cooling off period may, depending on the duration of any such work disruptions, negatively impact World Minerals' results in 2003.
Alleghany Insurance Holdings ("AIHL"), a holding company for CATA and other insurance operations of the Company, recorded a pre-tax loss of $10.4 million on revenues of $32.5 million in the third quarter of 2002, and a pre-tax loss of $11.4 million on revenues of $96.4 million in the first nine months of 2002. AIHL recorded a pre-tax loss of $237.7 million from continuing operations in the third quarter of 2001, and pre-tax losses of $230.3 million from continuing operations in the nine months of 2001, primarily reflecting the disposition of Alleghany Underwriting in November 2001. The 2002 third quarter losses primarily reflect $9.1 million of strengthening of CATA's loss reserves for 2001 and prior years following an independent actuarial review, and $3.8 million realized investment loss recognized as part of CATA's efforts to restructure its investment portfolio.
Following the Company's acquisition of CATA in January, under the Company's direction, CATA commenced a review of its insurance products, underwriting guidelines and controls, investment policies and reserving methodology. With respect to its reserving methodology, CATA immediately implemented the practice of establishing loss and loss adjustment expense reserves ("case reserves") for newly reported claims on the basis of its estimate of such costs through the expected resolution of the claim. CATA also commenced a review of each of the claim files that was open as of December 31, 2001 to increase, where appropriate, the case reserves for such claim to the claim's estimated ultimate cost of resolution. Completion of the review during the 2002 third quarter resulted in the reserve strengthening of $9.1 million as mentioned above.
As part of CATA's review of its insurance products and underwriting guidelines, CATA has exited or re-underwritten certain product and casualty product lines and continues to consider whether to exit or re-underwrite additional property and casualty product lines. CATA expects that, as a result, there will be a decline in gross premiums written in the property and casualty product lines in the fourth quarter of 2002, but such decline is expected to be offset in part by increases in gross premium written in the fidelity and surety lines.
In connection with the acquisition by the Company of AIHL's Nebraska-domiciled insurance company subsidiary, the seller, an A+ insurer, contractually retained through a reinsurance agreement all of the liabilities in existence at the time of such acquisition. At September 30, 2002, AIHL's loss reserves reflected $136.5 million of such liabilities, compared with $151.0 million at June 30, 2002, and AIHL's reinsurance
receivables included a corresponding obligation of the seller. Such loss reserves and reinsurance receivable amounts are expected to continue to decline over time as losses are paid.
Heads & Threads International LLC ("Heads & Threads") recorded pre-tax earnings of $0.4 million on revenues of $28.2 million in the 2002 third quarter, compared with a pre-tax loss of $1.5 million on revenues of $29.7 million in the 2001 third quarter, and pre-tax earnings of $1.5 million on revenues of $85.0 million in the first nine months of 2002, compared with a pre-tax loss of $14.2 million on revenues of $94.1 million in the first nine months of 2001. The 2002 nine month results reflect net reductions of $3.9 million in operating expenses (primarily due to lower salary expenses as a result of its restructuring efforts), $2.4 million in interest expense and $0.4 million in amortization expense (pursuant to requirements of SFAS 142) and higher profit margins, which offset a decline in net sales due to reduced demand in the U.S. economy, as well as reduced sales of certain product lines as a result of the application of minimum profit margin pricing requirements for such products. The 2001 nine months results include $2.5 million of pre-tax charges for write-offs relating to Heads & Threads' computer system and the closure of certain branches and sales offices, expenses relating to changes in its senior management and the strengthening of its inventory reserves.
Heads and Threads receives a significant amount of the products it distributes to its customers through West Coast ports subject to the work disruptions and other events described above. In response to the possibility of work disruptions, Heads and Threads began accelerating inventory purchases during the 2002 second quarter and began making plans to use available East Coast ports as necessary. To date, the impact of the work disruptions on the results of Heads and Threads has not been material. Any resumption of work disruptions upon the expiration of the cooling off period may have some impact, among other things, on Heads and Threads' inventory levels during 2003, but the ultimate impact on Heads & Threads will depend on the duration of any further work disruptions.
As of September 30, 2002, the Company beneficially owned approximately 16.0 million shares, or 4.2 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of approximately $382.7 million, or $23.92 per share, compared with a market value on June 30, 2002 of $480.0 million, or $30.00 per share. The aggregate cost of such shares is approximately $181.8 million, or $11.36 per share.
The Company has previously announced that it may purchase shares of its common stock in open market transactions from time to time. In the third quarter of 2002, the Company purchased an aggregate of 55,800 shares of its common stock for approximately $10.3 million, at an average cost of about $184.25 per share. As of
September 30, 2002, the Company had 7,234,502 shares of common stock outstanding (which includes the stock dividend declared in March 2002).
The Company's common stockholders' equity per share at September 30, 2002 was $186.73 per share, a 1.3 percent decrease from common stockholders' equity per share of $189.20 as of December 31, 2001 (both as adjusted for the stock dividend declared in March 2002).
The Company's results in the first nine months of 2002 are not indicative of operating results in future periods. The Company and its subsidiaries have adequate internally generated funds and unused credit facilities to provide for the currently foreseeable needs of its and their businesses.
The Company believes that the accounting policies it applies to the loss and loss adjustment expense reserves of its insurance operations are critical to an investor's understanding of the Company's consolidated financial results and condition. In applying such policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain.
The Company establishes reserves for losses and loss adjustment expenses for unpaid claims and claims expenses arising out of its insurance operations. Pricing of such operations' insurance products takes into account the expected frequency and severity of losses, the costs of providing coverage, competitive factors, characteristics of the property covered and the insured and profit considerations. Liabilities for property and casualty insurance are dependent on estimates of amounts payable for claims reported but not settled and actuarial estimates of claims incurred but not reported. These estimates are influenced by historical experience and actuarial assumptions of current developments, anticipated trends and risk management strategies. The Company continually evaluates the potential for changes in loss estimates, both positive and negative, and uses the results of these evaluations both to adjust recorded provisions and to adjust underwriting criteria. Additionally, the Company has engaged an outside actuary to evaluate on a quarterly basis the adequacy of CATA's loss reserves. Because setting reserves is inherently uncertain, the Company cannot assure that its insurance operations' current reserves will prove adequate in light of subsequent events. Should such reserves need to be adjusted in any future period, such adjustments will be reflected as an expense in the statement of earnings in the period they are adjusted.
Information regarding the Company's other accounting policies is included in the Company's 2001 Form 10-K and the Notes to the Consolidated Financial Statements included in this report on Form 10-Q, the Company's 2002 First Quarter Form 10-Q and 2002 Second Quarter Form 10-Q, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss from adverse changes in market prices and rates, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to the Company's non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. In connection with its acquisition of CATA on January 4, 2002 and the Company's purchase of securities with fixed maturities of one to five years during the 2002 second and third quarters, the Company acquired fixed maturity securities that expose it to risk related to adverse changes in interest rates as set forth in the table below.
For fixed maturity securities, the change in fair value is determined by calculating a hypothetical September 30, 2002 ending price based on yields adjusted to reflect a +/-300 basis point range of change in interest rates, comparing such hypothetical ending price to actual ending price and multiplying the difference by the par outstanding.
SENSITIVITY ANALYSIS
At September 30, 2002
(dollars in millions)
Interest Rate Shifts -300 -200 -100 0 100 200 300 FIXED MATURITY SECURITIES ------ ------ ------ ------ ------ ------ ------ Estimated Portfolio Value $499.1 $489.4 $480.0 $465.7 $460.0 $448.1 $436.5 Projected Change in Portfolio Value $ 33.4 $ 23.7 $ 14.3 $ 0 $ (5.7) $(17.6) $(29.2) |
The Company's 2001 Form 10-K provides a more detailed discussion of the market risks affecting its operations. Based on the Company's estimates as of September 30, 2002, no material change has occurred in its long-term debt obligations, as compared with amounts disclosed in its 2001 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision, and with the participation, of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company required to be included in its periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date.
Forward-Looking Statements
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk" contain disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based upon the Company's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. The uncertainties and risks include, but are not limited to, those relating to conducting operations in a competitive environment, conducting operations in foreign countries, effects of acquisition and disposition activities, general economic and political conditions, including the effects of a prolonged U.S. or global economic downturn or recession, changes in costs, including changes in labor costs, extended labor disruptions, energy costs and raw material prices, variations in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, tax changes, legal and regulatory changes, significant weather-related or other natural or human-made disasters, civil unrest or other external factors over which the Company has no control, and changes in the Company's plans, strategies, objectives, expectations or intentions, which may happen at any time at the Company's discretion. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the Company.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities.
On August 16, 2002, the Company issued an aggregate of 77 shares of the Company's common stock to seven non-employee directors of the Company pursuant to the Alleghany Corporation Directors' Equity Compensation Plan representing one-half of the value of an increase in each director's retainer for the following twelve months' service as a director, exclusive of any per meeting fees, committee fees or expense reimbursements. The sale of common stock was exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof, as a transaction not involving a public offering.
On July 17, 2002, the Company issued 488 shares of common stock to Paul F.
Woodberry, director of Alleghany Properties, Inc., a wholly owned subsidiary of
the Company, pursuant to a long-term incentive arrangement with the Company in
respect of sales of real estate assets by Alleghany Properties, Inc. The sale of
common stock was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof, as a transaction not involving a public offering.
The above does not include unregistered issuances of the Company's common stock that did not involve a sale, consisting of issuances of common stock and other securities pursuant to employee incentive plans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
-------------- -----------
3.1 By-laws of Alleghany Corporation, as amended September
17, 2002
10.1 Employment Agreement, dated October 7, 2002, between
Alleghany Corporation and Weston M. Hicks
10.2 Restricted Stock Award Agreement, dated October 7, 2002,
between Alleghany Corporation and Weston M. Hicks
|
10.3 Restricted Stock Unit Matching Grant Agreement, dated
October 7, 2002, between Alleghany Corporation and
Weston M. Hicks
|
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated August 8, 2002 to report in Item 9 that the Company's principal executive officer and principal financial officer, respectively, had submitted to the SEC sworn statements pursuant to Securities and Exchange Commission Order 4-460.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 12, 2002 /s/ David B. Cuming
-------------------
David B. Cuming
Senior Vice President
(and chief financial officer)
|
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, John J. Burns, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alleghany Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ JOHN J. BURNS, JR.
-----------------------
John J. Burns, Jr.
President and chief executive officer
|
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David B. Cuming, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alleghany Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ DAVID B. CUMING
---------------------
David B. Cuming
Senior Vice President and chief financial
officer
|
Exhibit 3.1
BY-LAWS
OF
ALLEGHANY CORPORATION
DELAWARE
ARTICLE I.
STOCKHOLDERS
SECTION 1. ANNUAL MEETING
The annual meeting of stockholders for the election of directors and for the transaction of any other business that may properly come before the meeting shall be held at such hour and at such place or places within or without the State of Delaware as may from time to time be determined by the Board of Directors, on the fourth Friday of April in each year or such other date as may be set by the Board of Directors not more than 15 days before, nor 15 days after, the fourth Friday of April.
SECTION 2. SPECIAL MEETINGS
At any time in the interval between regular meetings, special meetings of stockholders may be called by the Chairman, or by a majority of the Board of Directors, to be held at such times and at such places within or without the State of Delaware as may be specified in the notices of such meetings. The notice of any special meeting shall state the purpose of the meeting and specify the action to be taken at said meeting and no business shall be transacted thereat except that specifically named in the notice.
SECTION 3. NOTICE OF MEETING
Notice of the time and place of every meeting of stockholders shall be delivered personally or mailed at least ten days and not more than sixty days prior thereto to each stockholder of record entitled to vote at his address as it appears on the records of the Corporation. Such further notice shall be given as may be required by law. Business transacted at any special meeting shall be confined to the purpose or purposes stated in the notice of such special meeting. Meetings may be held without notice if all stockholders entitled to vote are present or if notice is waived by those not present.
SECTION 4. VOTING
At all meetings of stockholders any stockholder entitled to vote may vote in person or by proxy. Such proxy or any revocation or amendment thereof, shall be in writing, but need not be sealed, witnessed or acknowledged, and shall be filed with the Secretary at or before the meeting. The Corporation may require that such proxy indicate whether such stock is beneficially owned by a Substantial Stockholder, as defined in Article NINTH of the Certificate of Incorporation.
SECTION 5. QUORUM
Unless otherwise required by statute or the Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), at any annual or special meeting
of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting (after giving effect to the provisions of Article NINTH of the Certificate of Incorporation) shall constitute a quorum, but if at any meeting of the stockholders there be less than a quorum present, the stockholders present at such meeting may, without further notice, adjourn, the same from time to time until a quorum shall attend, but no business shall be transacted at any such adjournment except such as might have been lawfully transacted had the meeting not been adjourned.
SECTION 6. ACTION AT MEETINGS
Except as otherwise required by law, the Certificate of Incorporation or these By-Laws, a majority of the votes (after giving effect to the provisions of Article NINTH of the Certificate of Incorporation) cast at a meeting at which a quorum is present shall be sufficient to take or authorize action upon any matter which may properly come before the meeting, and the stockholders shall not be entitled to cumulate their votes upon the election of directors, or upon any other matter. Any action required or permitted to be taken by the stockholders must be effected at an annual or special meeting of stockholders and may not be effected by any consent in writing by such stockholders.
SECTION 7. PROCEDURE AT MEETINGS
The Board of Directors may appoint two or more persons to serve as inspectors of election at any meeting of stockholders. In the absence of such appointment, the Chairman of the Meeting may make such appointment. The inspectors of election shall receive, examine and tabulate all ballots, and proxies, including proxies filed with the Secretary, shall determine the presence or absence of a quorum and shall report to the officer of the Corporation or other person presiding over the meeting the result of all voting taken at the meeting by ballot.
The order of business and all other matters of procedure at every meeting of the stockholders may be determined by the officer of the Corporation or other person presiding over the meeting.
SECTION 8. BUSINESS OF THE MEETING
At any annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 8. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed to and received at the principal executive offices of the Corporation not less than 30 days prior to the date of the annual meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting(i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder and (iv) any material interest of such stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be brought before or conducted at the annual meeting except in accordance with the provisions of this Section 8. The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 8 and, if he shall so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be so transacted.
At any special meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors.
SECTION 9. NOMINATION OF DIRECTORS
Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 9. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than 30 days prior to the date of the meeting, provided, however, that in the event that less than 40 days' notice or prior disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice (x) the name and address, as they appear on the Corporation's books, of such
stockholder and (y) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder. At the request of the
Board of Directors any person nominated by the Board of Directors for election
as a director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the provisions of this Section
9. The officer of the Corporation or other person presiding at the meeting
shall, if the facts so warrant, determine and declare to the meeting that a
nomination was not made in accordance with such provisions and, if he shall so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
SECTION 10. ADJOURNMENTS
Any meeting of stockholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of the votes present and entitled to be cast at the meeting, or by the officer of the Corporation presiding over the meeting, or by the Board of Directors.
ARTICLE II.
DIRECTORS
SECTION 1. NUMBER AND ELECTION
Directors (other than such directors, if any, as are elected by holders of preferred stock of the Corporation voting as a separate class) shall be divided into three classes, which shall be as nearly equal in number as practicable. Unless changed by the Board of Directors pursuant hereto the number of directors shall be nine and each class shall consist of three directors. The number of directors and the number of which each class is to consist may be increased or decreased from time to time by a resolution adopted by the vote of in excess of three-quarters (75%) of the Whole Board (as defined in the Certificate of Incorporation); and provided that no decrease in the number of directors shall affect the tenure of office of any existing director. The term of office of the first class shall expire at the 1987 annual meeting of stockholders, the term of office of the second class shall expire at the 1988 annual meeting of stockholders and the term of office of the third class shall expire at the 1989 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the 1987 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified.
SECTION 2. VACANCIES
Subject to the rights of the holders of any series of Preferred Stock, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increases in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which such director has been elected expires and until such director's successor shall have been duly elected and qualified.
SECTION 3. REGULAR MEETINGS
Regular meetings of the Board of Directors shall be held at such times and places as the Board of Directors may from time to time determine.
SECTION 4. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called at any time, at any place and for any purpose by the Chairman of the Board or by any three directors.
SECTION 5. NOTICE OF MEETING
Notice of regular meetings of the Board of Directors need not be given.
Notice of every special meeting of the Board of Directors shall be given to each director, by (a) deposit in the mail at least seventy-two hours before the meeting, or (b) telephone communication directly with such person, the dispatch of a telegraphic communication to his address, or actual delivery to his address, at least forty-eight hours before the meeting. If given to a director by mail, telegraph or actual delivery to his address, such notice shall be sent or delivered to his business or residential address as shown on the records of the Secretary or an Assistant Secretary of the Corporation, or to such other address as shall have been furnished to the Secretary or an Assistant Secretary of the Corporation by him for the purpose. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting.
SECTION 6. QUORUM; ACTION AT MEETINGS
A majority of the Board of Directors shall constitute a quorum for the transaction of business, but if, at any meeting of the Board, there be less than a quorum present, the members at the meeting may, without further notice, adjourn the same from time to time until a quorum shall attend. Except as herein or in the Certificate of Incorporation provided or as required by law, a majority of such quorum shall decide any questions that may come before the meeting.
SECTION 7. PARTICIPATING IN MEETING BY CONFERENCE TELEPHONE
Members of the Board of Directors, or any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar equipment by means of which all persons participating in the meeting can hear each other at the same time and such participation shall constitute presence in person at such meeting.
SECTION 8. DIVIDENDS
Anything in these By-Laws to the contrary notwithstanding, the declaration of dividends or other distributions on the capital stock of the Corporation, whether in cash or property (other than the dividend preference payable on any preferred stock of the Corporation outstanding from time to time), may be authorized only by vote of in excess of three-quarters (75%) of the directors present at a meeting duly called at which a quorum is present.
ARTICLE III.
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. ELECTION
The Board of Directors may appoint an Executive Committee and other committees composed of two or more of its members, and may appoint one of the members of each such committee to the office of chairman thereof. Members of the committees of the Board of Directors shall hold office for a term of one year and until their successors are appointed and qualify or until they shall cease to be directors.
SECTION 2. POWERS
Subject to such limitations as may from time to time be established by resolution of the Board of Directors, the Executive Committee shall have any and may exercise all of the powers of the Board of Directors when the Board of Directors is not in session except that it shall have no power to (a) declare dividends, (b) issue stock of the Corporation, (c) recommend to the stockholders any action which requires stockholder approval, (d) alter, amend or repeal any resolution of the Board of Directors relating to the Executive Committee, or (e) take any other action which legally may be taken only by the Board of Directors. Other committees of the Board of Directors shall have such powers as shall be properly delegated to them by the Board of Directors.
SECTION 3. VACANCIES
If the office of any member of any committee becomes vacant by death, resignation, or otherwise, such vacancy may be filled from the members of the Board by the Board of Directors.
SECTION 4. SUBSTITUTE MEMBERS
In the event that a member of any committee is absent from a meeting of the committee, the members of the committee present at the meeting whether or not they constitute a quorum may appoint another director to act in place of the absent member.
SECTION 5. MEETINGS AND NOTICE OF MEETINGS
The Executive Committee shall meet from time to time on call of the Chairman of the Board, or on call of any three or more members of the Executive Committee, for the transaction of any business.
Notice of every meeting of the Executive Committee shall be given to each member, by (a) deposit in the mail at least seventy-two hours before the meeting, or (b) telephonic communication directly with such person, the dispatch of a telegraphic communication to his address, or actual delivery to his address, at least forty-eight hours before the meeting. If given to a member by mail, telegraph or actual delivery to his address, such notice shall be sent or delivered to his business or residential address as shown on the records of the Secretary or an Assistant Secretary of the Corporation, or to such other address as shall have been furnished to the Secretary or an Assistant Secretary of the Corporation by him for this purpose. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting.
All other committees of the Board of Directors shall meet at such times and upon such notice as they may determine.
SECTION 6. QUORUM; ACTION AT MEETINGS
At any meeting of any committee, however called, a majority of the members shall constitute a quorum for the transaction of business. A majority of such quorum shall decide any questions that may come before the meeting.
ARTICLE IV.
OFFICERS
SECTION 1. ELECTION AND NUMBER
The Board of Directors may appoint one of its number as Chairman of the Board. The Board of Directors shall appoint a President from among the directors, and a Secretary and a Treasurer, who need not be directors. The Board of Directors may also appoint an Executive Vice President and one or more Senior Vice Presidents and/or Vice Presidents, who need not be directors. All officers of the Corporation shall hold office at the pleasure of the Board of Directors. Any two or more offices, except those of President and Vice President, may, at the discretion of the Board of Directors, be held by the same person. The Board of Directors may from time to time appoint such other officers and agents with such powers and duties as the Board may prescribe.
SECTION 2. CHAIRMAN OF THE BOARD
The Chairman of the Board shall preside at all meetings of the Board of Directors and shall perform such other duties and exercise such other powers as may be assigned to him from time to time by the Board of Directors.
SECTION 3. PRESIDENT
The President shall be the chief executive officer and the chief operating officer of the Corporation. He shall preside at all meetings of stockholders and, in the absence of the Chairman of the Board, he shall preside at all meetings of the Board of Directors. Subject to the control of the Board of Directors, he shall have direct power and authority over the business and affairs of the Corporation. The President shall perform such other duties and exercise such other powers as may be assigned to him from time to time by the Board of Directors.
SECTION 4. EXECUTIVE VICE PRESIDENT
The Executive Vice President shall perform the duties of President in his absence or during his disability to act. In addition, the Executive Vice President shall perform the duties and exercise the powers usually incident to such office and/or such other duties and powers as may be properly assigned thereto from time to time by the Board of Directors, the Chairman of the Board or the President.
SECTION 5. SENIOR VICE PRESIDENTS
The Senior Vice President or Senior Vice Presidents shall perform the duties of the Executive Vice President in his absence or during his disability to act. In addition, the Senior Vice President or Senior Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them from time to time by the Board of Directors, the Chairman of the Board, the President or the Executive Vice President having supervisory authority over them.
SECTION 6. VICE PRESIDENTS
The Vice President or Vice Presidents shall perform the duties of the Senior Vice President or Senior Vice Presidents in his or their absence or during his or their disability to act. In addition, the Vice President or Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and such other duties and powers as may be properly assigned to them from time to time by the Board of Directors, the Chairman of the Board, the President, the Executive Vice President or any Senior Vice President having supervisory authority over them.
SECTION 7. SECRETARY
The Secretary shall issue notices of meetings, keep the minutes of the Board of Directors and its committees, have charge of the corporate seal, and perform such other
duties and exercise such other powers as are usually incident to such office or are properly assigned thereto by the Board of Directors, the Chairman of the Board, the President, the Executive Vice President or any Senior Vice President or Vice President having supervisory authority over him.
SECTION 8. TREASURER
The Treasurer shall have charge of all monies and securities of the Corporation, other than monies and securities of any division of the Corporation which has a treasurer or financial officer appointed by the Board of Directors, and shall keep regular books of account. The funds of the Corporation shall be deposited in the name of the Corporation by the Treasurer with such banks or trust companies as the Board of Directors or the Executive Committee from time to time shall designate. He shall sign or countersign such instruments as require his signature, shall perform all such duties and have all such powers as are usually incident to such office or are properly assigned to him by the Board of Directors, the Chairman of the Board, the President, the Executive Vice President or any Senior Vice President or Vice President having supervisory authority over him, and may be required to give bond for the faithful performance of his duties in such sum and with such surety as may be required by the Board of Directors.
SECTION 9. CONTROLLER
The Controller shall be responsible for the accounting policies and practices of the Corporation, maintain its financial records, collect and consolidate the financial results of its subsidiaries and other operating units, prepare its financial reports, determine the amount and source of the funds required to meet its financial obligations, and perform such other duties and exercise such other powers as are usually incident to such office or are properly assigned thereto by the Board of Directors, the Chairman of the Board, the President, the Executive Vice President or any Senior Vice President or Vice President having supervisory authority over him.
SECTION 10. ASSISTANT SECRETARY; ASSISTANT TREASURER
The Board of Directors may appoint one or more assistant secretaries and one or more assistant treasurers, or one appointee to both such positions, which officers shall have such powers and shall perform such duties as are provided in these By-Laws to the Secretary or Treasurer, as the case may be, or as are properly assigned thereto by the Board of Directors, the Chairman of the Board, the President, the Secretary or Treasurer as the case may be, or any other officer having supervisory authority over them.
ARTICLE V.
FISCAL YEAR
The fiscal year of the Corporation shall end on the thirty-first day of December in each year, or on such other day as may be fixed from time to time by the Board of Directors.
ARTICLE VI.
SEAL
The Board of Directors shall provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary or an Assistant Secretary.
ARTICLE VII.
STOCK
SECTION 1. CERTIFICATES OF STOCK
Certificates of stock shall be issued in such form as may be approved by the Board of Directors and shall be signed, manually or by facsimile, by the Chairman of the Board, President, Executive Vice President, a Senior Vice President or a Vice President, and by the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, and sealed with the seal of Corporation or a facsimile thereof.
SECTION 2. TRANSFERS
The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock. The Board of Directors may appoint Transfer Agents and Registrars thereof.
SECTION 3. RECORD DATE; CLOSING OF TRANSFER BOOKS
The Board of Directors may fix a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of or to vote at a meeting or any adjournment thereof, receive payment of any dividend or other distribution, or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock. The record date may not be more than sixty (60) nor less than ten (10) days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than twenty (20) days; and, in the case of a meeting of stockholders, the closing of the transfer books shall be at least ten (10) days before the date of the meeting.
SECTION 4. LOST CERTIFICATES
The Board of Directors may determine the conditions upon which a new certificate of stock will be issued to replace a certificate which is alleged to have been
lost, stolen, mutilated or destroyed, and the Board of Directors may delegate to any officer of the Corporation the power to make such determinations and to cause such replacement certificates to be issued.
SECTION 5. WARRANTS
The foregoing provisions relative to certificates of stock shall also apply to allotment certificates or other certificates or warrants representing rights with respect to stock in the Corporation, which certificates or warrants may be issued from time to time by a vote of the Board of Directors in such form as they may approve.
SECTION 6. STOCK LEDGER
The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original stock ledger shall be kept at the office of the Corporation's Transfer Agent.
ARTICLE VIII.
SIGNATURES
SECTION 1. NEGOTIABLE INSTRUMENTS
All checks, drafts, notes, or other obligations of the Corporation shall be signed (a) by any two officers of the Corporation of the rank of Chairman of the Board, President, Executive Vice President, Senior Vice President or Vice President, (b) by the Chairman of the Board, President, Executive Vice President, any Senior Vice President or any Vice President, and by the Treasurer or Assistant Treasurer or Secretary or Assistant Secretary, or (c) as otherwise authorized by the Board of Directors or the Executive Committee; provided, however, that bonds, debentures or notes issued under a mortgage indenture or trust agreement with a bank or trust company as trustee and coupons attached or pertaining to any such bonds, debentures or notes may be executed manually or by facsimile.
SECTION 2. STOCK TRANSFERS
All endorsements, assignments, transfers, stock powers or other instruments of transfer of securities standing in the name of the Corporation shall be executed for and in the name of the Corporation (a) by any two officers of the Corporation of the rank of Chairman of the Board, President, Executive Vice President, Senior Vice President or Vice President, or (b) by the Chairman of the Board, President, Executive Vice President, any Senior Vice President or any Vice President, and by the Secretary or any Assistant Secretary, or (c) as otherwise authorized by the Board of Directors.
ARTICLE IX
WAIVER OF NOTICE OF MEETINGS
SECTION 1. STOCKHOLDERS
Notice of the time, place and/or purpose of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy; and if any stockholder shall, in a writing filed with the records of the meeting, either before or after the holding thereof, waive notice of any stockholders' meeting, notice thereof need not be given to him.
SECTION 2. DIRECTORS
Notice of any meeting of the Board of Directors or of any committee thereof need not be given to any director if he shall attend such meeting in person, or shall in a writing filed with the records of the meeting, either before or after the holding thereof, waive such notice; and any meeting of the Board of Directors or of any committee thereof shall be a legal meeting without any notice thereof having been given if all such directors shall be present at such meeting.
ARTICLE X.
VOTING OF STOCKS
Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President, the Executive Vice President, any Senior Vice President or any Vice President of this Corporation shall have full power and authority, on behalf of the Corporation, to attend, act and vote at any meeting of the stockholders of any corporation in which this Corporation may hold stock and at such meeting may exercise any or all rights and powers incident to the ownership of such stock and which as owner thereof the Corporation might exercise if present, and to execute on behalf of the Corporation a proxy or proxies empowering others to act as aforesaid. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons.
ARTICLE XI.
CHECKS, NOTES, ETC.
All checks on the Corporation's bank accounts and all drafts, bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be signed by such person or persons as shall be authorized to do so from time to time by the Board of Directors or by the committee or officer or officers of the Corporation to whom the Board shall have delegated the power to authorize such signing; provided, however, that the signature of any person so authorized on checks and drafts drawn on the Corporation's dividend and special accounts may be in facsimile if
the Board of Directors or such committee or officer or officers, whichever shall have authorized such person to sign such checks or drafts, shall have authorized such person to sign in facsimile, and provided further that in case notes or other instruments for the payment of money (other than notes, bonds or debentures issued under a trust instrument of the Corporation) are required to be signed by two persons, the signature thereon of only one of the persons signing any such note or other instrument may be in facsimile, and that in the case of notes, bonds or debentures issued under a trust instrument of the Corporation and required to be signed by two officers of the Corporation, the signatures of both such officers may be in facsimile if specifically authorized and directed by the Board of Directors of the Corporation and if such notes, bonds or debentures are required to be authenticated by a corporate trustee which is a party to the trust instrument and provided further that in case any person or persons who shall have signed any such note or other instrument, either manually or in facsimile, shall have ceased to be a person or persons so authorized to sign any such note or other instrument, whether because of death or by reason of any other fact or circumstance, before such note or other instrument shall have been delivered by the Corporation, such note or other instrument may, nevertheless, be adopted by the Corporation and be issued and delivered as though the person or persons who so signed such note or other instrument had not ceased to be such a person or persons.
ARTICLE XII.
OFFICES
The Corporation may have offices outside the State of Delaware at such places as shall be determined from time to time by the Board of Directors.
ARTICLE XIII.
AMENDMENTS
Subject to the provisions of the Certificate of Incorporation, (1) these By-Laws may be amended, altered or repealed by the stockholders at any annual or special meeting by the affirmative vote of at least 75% of the voting power of the outstanding shares of Voting Stock (after giving effect to the provisions of Article NINTH of the Certificate of Incorporation) and (2) these By-Laws may be amended, altered or repealed by the Board of Directors by the affirmative vote of a majority of the Whole Board.
As amended September 17, 2002
Exhibit 10.1
October 7, 2002
Mr. Weston M. Hicks
56 Twin Oak Road
Short Hills, New Jersey 07078
Dear Wes:
This will confirm the terms of your employment with Alleghany Corporation, a Delaware corporation ("Alleghany"), commencing October 7, 2002.
Position: Commencing October 7, 2002, you will serve as Executive Vice President of Alleghany and will report directly to the President. As Executive Vice President, you will perform the duties and exercise the powers usually incident to such office and/or such other duties and powers as may be assigned to you from time to time by the Board of Directors, the Chairman of the Board or the President of Alleghany.
Base Salary: Alleghany will pay you an initial base salary at an annual rate of $600,000, subject to normal withholding and other taxes, to be paid in accordance with Alleghany's normal payroll practices. Your base salary will be reviewed annually commencing December 2002 and for calendar year 2004 shall be at an annual rate of not less than $700,000.
Short-Term Incentive: Your annual bonus for 2002 will be $450,000 payable in March 2003, provided that you have not theretofore terminated your employment with Alleghany. For 2003, you will participate in Alleghany's Management Incentive Plan, with a target bonus opportunity of 50% of your annual base salary.
Long Term Incentive: In December 2002, you will receive a grant of performance shares under the Alleghany Corporation 2002 Long-Term Incentive Plan (the "Plan") for a four-year award period ending December 31, 2006, which will have a market value, as of the date or dates used by the Alleghany Compensation Committee to set performance share awards to other officers, equal to 150% of your 2003 annual base salary. These performance shares will have the same terms as those granted to other officers for the four-year award period ending December 31, 2006.
Additional Long-Term Incentive: The Compensation Committee has granted you an award of 3,168.3 performance shares under the Plan for the three-year award period ending December 31, 2005 (the "EVP Performance Shares") effective
October 7, 2002, representing a number of performance shares equal to $600,000 divided by $189.375, being the fair market value (mean of high and low sales price on NYSE) of one share of Alleghany common stock on such date. The EVP Performance Shares will entitle you to payouts upon achievement of performance measures comparable to those assigned to performance shares granted to other officers for the award period ending December 31, 2005, as set forth on Exhibit A hereto.
Challenge Grant: The Compensation Committee has awarded you, effective October 7, 2002, a challenge grant of 30,000 performance-based restricted shares of Alleghany common stock under the Plan pursuant to a restricted stock award agreement in the form of Exhibit B hereto. In the event that you are elected chief executive officer of Alleghany, you will receive at the time of such election a second challenge grant of 25,000 performance-based restricted shares of Alleghany common stock under the Plan, which will have comparable terms and conditions as the first challenge grant, except that performance measurement periods will commence at the time of the second challenge grant.
Matching Grant: The Compensation Committee has awarded you, effective October 7, 2002, a restricted stock unit matching grant under the Plan pursuant to a restricted stock unit matching grant agreement in the form of Exhibit C hereto.
Severance Protection: If your employment is terminated by Alleghany other than for Cause or other than in the case of your Total Disability, or if you are not elected chief executive officer of Alleghany by December 31, 2005 and a decision is made by you or Alleghany to terminate your employment with Alleghany, Alleghany will continue to pay your base salary after such termination until such payments aggregate $1,000,000 on a gross basis. Such payments will be subject to normal withholding and other taxes, and will be paid in accordance with Alleghany's normal payroll practices. For purposes of this letter agreement, "Cause" shall mean conviction of a felony; willful failure to implement reasonable directives of the President, Chairman or the Board of Directors of Alleghany after written notice, which failure is not corrected within ten days following notice thereof; or gross misconduct in connection with the performance of any of your duties; and "Total Disability" shall mean your inability to discharge your duties hereunder due to physical or mental illness or accident for one or more periods totaling six months during any consecutive twelve-month period.
Other Benefits: You will be eligible to participate in Alleghany's Executive Retirement Plan and, effective January 1, 2003, Alleghany's Deferred Compensation Plan, as well as all other employee benefit plans, programs, practices or other arrangements in which other senior executives of Alleghany are generally eligible to participate from time to time. In addition, you will be entitled to all fringe benefits and perquisites which are generally made available by Alleghany to its senior executives.
This letter agreement and the exhibits hereto contain the entire understanding of you and Alleghany with respect to the subject matter hereof and thereof and, except as specifically provided herein or therein, cancel and supersede any and all
other agreements between you and Alleghany with respect to the subject matter hereof and thereof. Any amendment or modification of this letter agreement shall not be binding unless in writing and signed by you and Alleghany.
This letter agreement shall be governed by and enforceable in accordance with the laws of the State of New York, without giving effect to the principles of conflict of laws thereof.
If the foregoing accurately expresses our mutual understanding, please execute the enclosed copy of this letter in the space provided below, and return it to me.
Sincerely yours,
ALLEGHANY CORPORATION
By: /s/John J. Burns, Jr.
---------------------
John J. Burns, Jr.
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Attachments
AGREED AND ACCEPTED:
/s/Weston M. Hicks ------------------ Weston M. Hicks |
Exhibit A
TERMS AND PROVISIONS GOVERNING
EVP PERFORMANCE SHARES AWARDED TO MR. WESTON HICKS
1. AWARDS
Award will be paid out in full or in part, on the basis of the Earnings Per Share of Alleghany Corporation, a Delaware corporation (the "Company"), over the three-year period 2003-05 (the "Award Period").
2. RIGHT TO PAYMENTS ON ACCOUNT OF AWARDS
The percentage of the EVP Performance Shares awarded to Mr. Weston Hicks with respect to which he shall be entitled to payment shall be dependent upon the average annual compound growth in Earnings Per Share achieved by the Company during the Award Period, measured from a base of $10.45, and taking into consideration the Earnings Per Share in each year of the Award Period, as follows (with appropriate interpolation):
Average Annual
Compound Growth
in the Company's Percentage
Earnings Per Share Payment
------------------ -------
8% or less 0
9% 25
10% 50
11% 75
12% or more 100
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3. FORM AND TIMING OF PAYMENT
(a) Provided that the requirements set forth herein and in any applicable rules and regulations adopted by the Compensation Committee (the "Committee") of the Company's Board of Directors have been met, Mr. Hicks shall be entitled to payment on account of the EVP Performance Shares in an amount equal to the Fair Market Value on the payment date of a number of shares of the Company's common stock, par value $1.00 per share (the "Common Stock"), equal to the
percentage of the EVP Performance Shares (rounded to the nearest whole Performance Share) with respect to which Mr. Hicks is entitled to payment.
(b) Payments to Mr. Hicks in respect of the EVP Performance Shares shall be made in such combination of cash and shares of the Company's Common Stock (valued at their Fair Market Value on the payment date), or all in cash or all in stock, as the Committee shall determine. Notwithstanding the foregoing, if Mr. Hicks has elected to defer any payments with respect to EVP Performance Shares under the Alleghany Corporation Deferred Compensation Plan, he shall as of the payment date only be entitled to receive cash with respect thereto. Payments with respect to EVP Performance Shares shall be made by the Company as soon as practicable after the completion of its audited financial statements for the last year of the Award Period. Shares of Common Stock delivered on account of EVP Performance Shares may be treasury shares, authorized and unissued shares, or both.
(c) Except as the Committee may otherwise determine, payment of Mr. Hicks' EVP Performance Shares in full shall be conditional upon Mr. Hicks' remaining continuously in the employ of the Company, or a successor, subsidiary or controlled company thereof, throughout the Award Period. In the event of service in such capacity or capacities for less than the entire Award Period, Mr. Hicks' payment (i) shall be reduced on a pro rata basis to reflect the portion of the Award Period in which his service continued, (ii) shall be based upon the average annual compound growth in Earnings Per Share during such portion of the Award Period, as determined in good faith by the Committee (which determination shall be conclusive and binding upon Mr. Hicks), and (iii) shall be made as promptly as practicable after the termination of such service.
4. DILUTION AND OTHER ADJUSTMENTS
(a) In the event of any subdivision or combination of the outstanding shares of Common Stock, stock dividend, capital reorganization, liquidation, reclassification of shares, merger, consolidation or sale, lease or transfer of substantially all the assets of the Company, the Committee shall make such equitable adjustments as it may deem appropriate in the number of EVP Performance Shares, the base from which growth in Earnings Per Share is to be measured, the Earnings Per Share growth requirements, the length of the Award Period, and the making of payment on account of the EVP Performance Shares.
(b) The Committee may provide for such increases or reductions in the cash and/or stock to be paid with respect to the EVP Performance Shares as it may deem advisable in order to adjust for the effect upon Earnings Per Share of
transactions of an extraordinary, unusual or nonrecurring nature, capital gains, or any purchase, pooling of interests, disposal or discontinuance of any operations, change in accounting rules or practices, retroactive restatement of earnings, or the like. Such increases or reductions may be provided for by the Committee at any time or times prior to the payment date.
5. MISCELLANEOUS PROVISIONS
(a) As used herein, the following terms shall have the following meanings:
(i) "Earnings Per Share" shall mean the net earnings per share of the Company and its consolidated subsidiaries, determined, except as otherwise herein provided, on the basis of the same accounting principles used in the preparation of the Company's consolidated statement of earnings for the fiscal year in question which is included in the Company's Annual Report to Stockholders for such fiscal year; provided that net gains and losses on transactions in investment securities (other than strategic investments) shall be included only to the extent of 20 percent thereof, 100 percent of net gains and losses on transactions in investment securities which constitute strategic investments shall be included, 100 percent of unrealized gains and losses as at the end of the relevant measurement period on investment securities which constitute strategic investments shall be included, subject to the right of the Compensation Committee, in its sole discretion, to exclude all or any part of such unrealized gains, and all costs resulting from awards under the Company's 1993 Long-Term Incentive Plan and 2002 Long-Term Incentive Plan (including the EVP Performance Shares) shall be excluded.
Except as provided in section 3(c) hereof, Earnings Per Share and average annual compound growth in Earnings Per Share shall be determined by the Committee, on the basis of the Company's statements of earnings included in its Annual Reports to Stockholders, with such adjustments as the Committee may deem to be required or permitted by the provisions hereof; and the determination of the Committee with respect thereto shall be final and binding.
(ii) "Strategic investments" shall include the Company's and its subsidiaries' investment in Burlington Northern Santa Fe Corporation, and such other investments approved by the Board of
Directors as having been made by the Company and its subsidiaries for long-term strategic investment purposes and not for short-term trading purposes.
(iii) "Fair Market Value" of a share of Common Stock of the Company on a payment date shall mean the mean between the high and low prices of such stock on that date as reported on the New York Stock Exchange Composite Tape.
(b) The terms, construction and performance of the foregoing provisions, and the rights conferred thereby, shall be governed in all respects by the provisions of the Company's 2002 Long-Term Incentive Plan and, in the event of any inconsistency, the provisions of such Plan shall be controlling.
Exhibit 10.2
ALLEGHANY CORPORATION
Restricted Stock Award Agreement
Restricted Stock Award Agreement (this "Agreement"), dated as of October 7, 2002, between Alleghany Corporation, a Delaware corporation ("Alleghany"), and Weston M. Hicks (the "Participant").
Section 1. Restricted Stock Award. Alleghany hereby grants to the Participant, on the terms and conditions hereinafter set forth, a restricted stock award of 30,000 shares of the common stock, par value $1.00 per share (the "Common Stock") of Alleghany (the "Restricted Shares"). This grant has been made by the Compensation Committee of the Board of Directors of Alleghany (the "Committee") pursuant to the terms of the Alleghany Corporation 2002 Long-Term Incentive Plan (the "Plan") and is intended to qualify as "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. The applicable terms of the Plan are incorporated herein by reference. Any terms used but not defined herein shall have the meanings ascribed thereto in the Plan. Any ambiguity between any term used in this Agreement and a term used in the Plan shall be resolved in favor of and in accordance with the term used in the Plan. Any interpretation, determination or decision made or taken by the Committee regarding the Plan or this Agreement shall be final and binding upon Alleghany and the Participant.
Section 2. Vesting of Restricted Shares. Subject to Section 3 hereof, the Restricted Shares shall vest and become nonforfeitable as follows:
(a) If Alleghany achieves average annual compound growth in Stockholders' Equity Per Share equal to 10% or more as measured over a calendar year period commencing January 1, 2003 and ending on December 31, 2006, 2007, 2008 or 2009, the Restricted Shares will vest and become nonforfeitable upon the certification by the Committee that such performance goal has been met.
(b) If the performance goal set forth in (a) above has not been achieved as of December 31, 2009, the Restricted Shares will vest and become nonforfeitable when Alleghany achieves average annual compound growth in Stockholders' Equity Per Share equal to 7% or more as measured over a calendar year period commencing January 1, 2003 and ending on December 31, 2010, 2011 or 2012 and upon the certification by the Committee that such performance goal has been met.
(c) If the performance goals provided above are not achieved as of December 31, 2012, the Participant will forfeit all of the Restricted Shares.
(d) "Stockholders' Equity Per Share" shall mean the stockholders' equity per share of Common Stock of Alleghany, determined, except
as otherwise herein provided, on the basis of the same accounting principles used in the preparation of Alleghany's consolidated balance sheet for the calendar year in question which is included in Alleghany's Annual Report to Stockholders for such calendar year. Stockholders' Equity Per Share shall be determined and certified in writing by the Committee, with such adjustments as the Committee shall deem to be required to take account of the effects on Stockholders' Equity Per Share of any stock dividend, unusual cash distributions, spin-off, stock split, recapitalization, merger, consolidation or other similar event and will also be automatically adjusted to reflect reinvestment of the value of dividends and distributions other than stock dividends. The Committee's determination with respect to any such adjustments shall be final and binding.
Section 3. Custody and Delivery of Shares. Alleghany shall hold the certificate or certificates representing the Restricted Shares subject to this Award until such Restricted Shares have vested pursuant to Section 2 hereof. Contemporaneous with the execution of this Agreement, the Participant shall execute and deliver to Alleghany one or more irrevocable stock powers related thereto to facilitate the transfer of the Restricted Shares subject to this Award to Alleghany (or its assignee or nominee) if such Restricted Shares are forfeited pursuant hereto. Upon the vesting of the Restricted Shares subject to this Award pursuant to Section 2 hereof, Alleghany shall deliver or cause to be delivered the certificate or certificates representing such Restricted Shares to the Participant, shall destroy the related stock power or powers, and shall pay all original issue or transfer taxes and all fees and expenses incident to such delivery.
Section 4. Termination of Employment. If the Participant's employment with Alleghany is terminated for any reason prior to the occurrence of any otherwise applicable vesting date provided in Section 2 hereof, the Participant shall (i) forfeit his interest in any Restricted Shares that have not yet become vested, (ii) assign, transfer, and deliver any certificates evidencing ownership of such Restricted Shares to Alleghany, and (iii) cease for all purposes to be a stockholder with respect to such Restricted Shares; provided, however, that if, subsequent to December 31, 2004, Alleghany terminates the Participant's employment other than for Cause or other than in the case of Total Disability, and, as of the calendar year end immediately preceding such termination, the performance goal set forth in Section 2(b) has been satisfied in all respects except for the passage of the required period of time, the following number of Restricted Shares shall vest and become nonforfeitable upon written certification by the Committee that such pro rated performance goal has been achieved: 30,000 multiplied by a fraction the numerator of which is the number of full calendar years beginning January 1, 2003 and ending on or before the date of such termination, and the denominator of which is ten. For purposes hereof, "Cause" shall mean conviction of a felony; willful failure to implement reasonable directives of the President, Chairman or the Board of Directors of Alleghany after written notice, which failure is not corrected within ten days following notice thereof; or gross misconduct in connection with the performance of any of Participant's duties; and "Total Disability" shall mean Participant's inability to discharge his duties due to physical or
mental illness or accident for one or more periods totaling six months during any consecutive twelve-month period.
Section 5. Rights as a Stockholder. Subject to the otherwise applicable provisions of the Plan and this Agreement, the Participant will have all rights of a stockholder of the shares of Common Stock in respect of which the Restricted Shares are granted to the Participant hereunder, including the right to vote the shares and receive all dividends and other distributions paid in respect thereof; provided, however, that Alleghany shall retain all cash dividends or other cash distributions on the Restricted Shares until they vest, using such cash to purchase shares of Common Stock at the Fair Market Value thereof on the date paid, and the Participant shall deliver any stock dividends or other non-cash distributions on the Restricted Shares until they vest (including, without limitation, shares of any corporation distributed in a spin-off), together with appropriate stock transfer or other assignment documents, to Alleghany. The Common Stock acquired with the cash dividends or other cash distributions on the Restricted Shares or distributed as a stock dividend and any other non-cash distributions on the Restricted Shares (the "Distribution Amounts") shall be held by Alleghany until the Restricted Shares in respect of which such Distribution Amounts were paid vest and become nonforfeitable, at which time such Distribution Amounts shall also vest and become nonforfeitable, and the certificates or other evidence of the Distribution Amounts shall be delivered, or caused to be delivered, by Alleghany. Alleghany shall also destroy the related stock power or powers, and shall pay all original issue or transfer taxes and all fees and expenses incident to such delivery. To the extent that any Restricted Shares are forfeited pursuant to the terms of this Agreement, the Distribution Amounts paid in respect thereof shall also be forfeited.
Section 6. Restrictions on Transfer. Neither this Agreement nor any Restricted Shares covered hereby or dividends or other distributions paid in respect thereof may be sold, assigned, transferred, encumbered, hypothecated or pledged by the Participant, other than to Alleghany as a result of forfeiture of the Restricted Shares and dividends or other distributions as provided herein, or unless such Restricted Shares and dividends or other distributions have vested and become nonforfeitable in accordance herewith. Any such disposition by the Participant shall be made in compliance with all applicable securities laws. The Participant hereby represents and warrants to Alleghany that the Restricted Shares are being acquired for investment and not with a view to the distribution thereof, and not with any present intention of distributing the same.
Section 7. Tax Withholding. Alleghany's obligation to deliver the Restricted Shares to the Participant pursuant to Section 3 hereof and any Distribution Amount is subject to the Participant's making provision for the payment or withholding of any taxes required to be paid or withheld pursuant to any applicable law in respect of the receipt of, or lapse of forfeiture restrictions with respect to, such Restricted Shares and the payment or delivery of any Distribution Amounts. At the written election of Participant, and upon the approval of the Committee, any such required withholding payments may be made in Restricted Shares or Distribution Amounts, in each case valued at Fair Market Value on the date of payment.
Section 8. No Right of Employment. Nothing in this Agreement shall confer upon the Participant any right to continue as an employee of Alleghany or to interfere in any way with the right of Alleghany to terminate the Participant's employment at any time.
Section 9. Entire Agreement. This Agreement, the letter agreement dated as of October 7, 2002 and the Restricted Stock Unit Matching Grant Agreement dated as of October 7, 2002 contain the entire understanding of Alleghany and the Participant with respect to the subject matter hereof and thereof and, except as specifically provided herein or therein, cancel and supersede any and all other agreements between Alleghany and the Participant with respect to the subject matter hereof and thereof. Any amendment or modification of this Agreement shall not be binding unless in writing and signed by Alleghany and the Participant.
Section 10. Governing Law. This Agreement shall be governed by and enforceable in accordance with the laws of the State of New York, without giving effect to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, the Participant has duly executed this Agreement and Alleghany has duly caused this Agreement to be executed in its name and on its behalf, all as of October 7, 2002.
ALLEGHANY CORPORATION
By: /s/ John J. Burns, Jr.
------------------------------
John J. Burns, Jr.
President
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PARTICIPANT
/s/ Weston M. Hicks ------------------------------ Weston M. Hicks |
Exhibit 10.3
ALLEGHANY CORPORATION
Restricted Stock Unit Matching Grant Agreement
Restricted Stock Unit Matching Grant Agreement ("Agreement"), dated as of October 7, 2002, between Alleghany Corporation, a Delaware corporation ("Alleghany"), and Weston M. Hicks (the "Participant").
Section 1. Restricted Stock Matching Grant. Alleghany hereby grants to the Participant, on the terms and conditions hereinafter set forth and subject thereto, a restricted stock unit matching grant of two restricted stock units (each a "Restricted Stock Unit") for every share of common stock, par value $1.00 per share (the "Common Stock"), of Alleghany purchased by the Participant on or before September 30, 2003 (each an "Owned Share"), up to a maximum of 30,000 Restricted Stock Units (subject to increase to reflect any stock dividend paid in 2003) in respect of up to a maximum of 15,000 Owned Shares. This grant has been made by the Compensation Committee of the Board of Directors of Alleghany (the "Committee") pursuant to the terms of the Alleghany Corporation 2002 Long-Term Incentive Plan (the "Plan"). The applicable terms of the Plan are incorporated herein by reference. Any terms used but not defined herein shall have the meanings ascribed thereto in the Plan. Any ambiguity between any term used in this Agreement and a term used in the Plan shall be resolved in favor of and in accordance with the term used in the Plan. Any interpretation, determination or decision made or taken by the Committee regarding the Plan or this Agreement shall be final and binding upon Alleghany and the Participant.
Section 2. Restricted Stock Units. The Restricted Stock Units are notional units of measurement denominated in shares of Common Stock and, subject to the terms and conditions of this Agreement and the Plan, entitle the Participant to payment on account of such Restricted Stock Units in an amount equal to the Fair Market Value on the payment date of a number of shares of Common Stock equal to the number of Restricted Stock Units to which the Participant is entitled to payment. Alleghany shall establish on its books a Restricted Stock Unit Account for the Participant and shall credit two Restricted Stock Units to such Restricted Stock Unit Account for each Owned Share, upon submission to Alleghany of appropriate evidence thereof. The Restricted Stock Account shall be debited in respect of any disposition of Owned Shares as provided in Section 3 hereof. The Restricted Stock Unit Account shall reflect the investment experience which the account would have had if such account held whole or fractional shares of Common Stock equal to the number of credited Restricted Stock Units. The Restricted Stock Unit Account shall be adjusted as appropriate to reflect cash and stock dividends, stock splits, and other similar distributions which may, from time to time, occur with respect to Common Stock during the relevant period. Dividends and other distributions shall be automatically credited to the Restricted Stock Account at their cash value or the fair market value of any non-cash dividend or other distribution and shall be deemed to purchase Restricted Stock Units at a price equal to the Fair Market Value of Common Stock on the date of payment thereof.
Section 3. Owned Shares. It is a condition to payment in respect of
the Restricted Stock Units that the Participant shall have maintained
unencumbered beneficial ownership of the Owned Shares in respect of which such
Restricted Stock Units were credited, and any stock dividends or stock splits
paid in respect thereof, continuously throughout the period commencing with the
initial purchase of Owned Shares and ending October 7, 2012, or the earlier date
of payment in respect of a pro rata payout as provided in Section 4(b) hereof
(the "Ownership Period"), and that the Participant shall not (i) have sold,
assigned, transferred, pledged, or hypothecated the Owned Shares, including any
stock dividends paid in respect thereof, or (ii) have engaged in any short sale
or other transaction that would have the effect of decreasing his economic risk
with regard to the Owned Shares, including any stock dividends paid in respect
thereof, at any time during the Ownership Period (any such action in subsection
(i) or (ii) being hereinafter referred to as a "disposition"). In the event of a
disposition of any of the Owned Shares, or related stock dividend shares, during
the Ownership Period, the Participant's Restricted Stock Unit Account shall be
debited in an amount equal to two Restricted Stock Units for each Owned Share so
disposed (the "Disposed Owned Share"), together with the investment experience
and dividends and distributions theretofore credited from the date of purchase
of the Disposed Owned Share. The Participant shall provide such evidence and
certification of continued satisfaction of such continuous ownership requirement
(including certification that he has not effected a disposition of any Owned
Shares) from time to time as requested by Alleghany. Evidence of continued
satisfaction of the continuous ownership requirement requested by Alleghany may
include certification of ownership by a brokerage or other financial
institution. Notwithstanding the requirements set forth in this Section 3, the
Owned Shares, and related stock dividend shares, shall at all times throughout
the Ownership Period remain the property of the Participant and be subject to
his exclusive control and, with respect thereto, Participant shall have all
rights of a stockholder of Alleghany.
Section 4. Vesting of Restricted Stock Units. The Restricted Stock Units shall vest and become nonforfeitable and be paid, as follows:
(a) All of the Restricted Stock Units included in the Restricted Stock Unit Account on October 7, 2012 shall vest and become nonforfeitable on such date, and all Restricted Stock Units thereafter credited to the Restricted Stock Unit Account pursuant to Section 2 hereof shall be fully vested and nonforfeitable as and when credited thereto; all Restricted Stock Units included in the Restricted Stock Unit Account on the date of the filing of Alleghany's Annual Report on Form 10-K in respect of the year in which Participant's employment is terminated for any reason shall be paid to Participant on such date.
(b) In the event of the termination of the Participant's employment, in any case prior to October 7, 2012, by Alleghany without Cause or in the case of termination of employment by reason of Participant's death or Total Disability, in any case prior to October 7, 2012, a pro rata portion of the Restricted Stock Units included in the Restricted Stock Unit Account on the date of such termination shall vest and become nonforfeitable on the basis of 10% of such Account for each full year of employment with Alleghany
measured from the date hereof and will be paid to the Participant upon the filing of Alleghany's Annual Report on Form 10-K in respect of the year in which such employment was terminated, and the balance of the Restricted Stock Units included in such Account shall be forfeited and the Participant shall be entitled to no payments in respect thereof.
(c) If the Participant voluntarily terminates his employment with Alleghany prior to October 7, 2012, or if Alleghany terminates the Participant's employment for Cause prior to October 7, 2012, all of the Restricted Stock Units included in Participant's Restricted Stock Unit Account shall be forfeited and the Participant shall be entitled to no payments in respect thereof.
(d) "Cause" shall mean conviction of a felony; willful failure to implement reasonable directives of the President, Chairman or the Board of Directors of Alleghany after written notice, which failure is not corrected within ten days following notice thereof; or gross misconduct in connection with the performance of any of Participant's duties; and "Total Disability" shall mean Participant's inability to discharge his duties due to physical or mental illness or accident for one or more periods totaling six months during any consecutive twelve-month period.
Section 5. Payment; Tax Withholding. Payment in respect of Restricted Stock Units which have vested and become nonforfeitable pursuant hereto shall be made in such combination of cash and shares of Common Stock (valued at Fair Market Value on the payment date) or all in cash or all in Common Stock, as the Committee may determine. Shares of Common Stock delivered on payment of Restricted Stock Units may be treasury shares, authorized but unissued shares, or both. Payments in respect of, or upon the vesting of, Restricted Stock Units shall be subject to applicable tax withholding as provided in the Plan.
Section 6. Restrictions on Transfer; Beneficiaries. Neither this Agreement nor any Restricted Stock Units covered hereby may be sold, assigned, transferred, encumbered, hypothecated or pledged by the Participant. The Participant shall be entitled to select (and change) a beneficiary or beneficiaries to receive any payment in respect of Restricted Stock Units which have vested and become non-forfeitable pursuant hereto following the Participant's death by giving Alleghany written notice thereof. In the event of the Participant's death, all references in the Agreement to the Participant shall be deemed, where appropriate, to refer to his beneficiary or estate. Any shares of Common Stock received by the Participant in payment of Restricted Stock Units may only be disposed of in compliance with all applicable securities laws.
Section 7. Treatment of Restricted Stock Units; No Rights as a Stockholder. Until paid, the amounts credited to the Restricted Stock Unit Account shall be a part of the general assets of Alleghany, and the Participant's right to receive payment in respect thereof shall be no greater than the right of any other unsecured general creditor. The Restricted Stock Units, whether or not vested, will not confer upon the Participant any voting or other rights of a stockholder.
Section 8. No Right of Employment. Nothing in this Agreement shall confer upon the Participant any right to continue as an employee of Alleghany or to interfere in any way with the right of Alleghany to terminate the Participant's employment at any time.
Section 9. Entire Agreement. This Agreement, the letter agreement dated October 7, 2002 and the Restricted Stock Award Agreement dated as of October 7, 2002 contain the entire understanding of Alleghany and the Participant with respect to the subject matter hereof and thereof and, except as specifically provided herein or therein, cancel and supersede any and all other agreements between Alleghany and the Participant with respect to the subject matter hereof and thereof. Any amendment or modification of this Agreement shall not be binding unless in writing and signed by Alleghany and the Participant.
Section 10. Governing Law. This Agreement shall be governed by and enforceable in accordance with the laws of the State of New York, without giving effect to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, the Participant has duly executed this Agreement and Alleghany has duly caused this Agreement to be executed in its name and on its behalf, all as of October 7, 2002.
ALLEGHANY CORPORATION
By: /s/ John J. Burns, Jr.
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John J. Burns, Jr.
President
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PARTICIPANT
/s/ Weston M. Hicks ------------------------------ Weston M. Hicks |