SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
| (Mark One) | |||
| [X] |
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
||
For the fiscal year ended December 31, 2002
OR
| [ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 0-7849
W. R. BERKLEY CORPORATION
Delaware
(State or other jurisdiction
of incorporation or organization)
22-1867895
(I.R.S. Employer
Identification Number)
475 Steamboat Road, Greenwich, CT
(Address of principal executive offices)
06830
(Zip Code)
Registrant’s telephone number, including area code:
(203) 629-3000
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $.20 per share
Rights to purchase Series A Junior Participating Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common stock held by non-affiliates (computed by reference to the price at which the common stock was last sold) as of the last business day of the Registrant’s most recently completed second fiscal quarter was $1,797,979,869.
Number of shares of common stock, $.20 par value, outstanding as of March 25, 2003: 55,277,226.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s 2002 Annual Report to Stockholders for the year ended December 31, 2002 are incorporated herein by reference in Part II, and portions of the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002, are incorporated herein by reference in Part III.
W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 2002
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SAFE HARBOR STATEMENT
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PART I | |||||||||||
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ITEM
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1. | BUSINESS | 4 | |||||||||
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ITEM
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2. | PROPERTIES | 24 | |||||||||
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ITEM
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3. | LEGAL PROCEEDINGS | 24 | |||||||||
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ITEM
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4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 24 | |||||||||
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PART II | |||||||||||
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ITEM
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5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 25 | |||||||||
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ITEM
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6. | SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2002 | 26 | |||||||||
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ITEM
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7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 27 | |||||||||
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ITEM
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7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 27 | |||||||||
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ITEM
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8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 27 | |||||||||
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ITEM
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9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 27 | |||||||||
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PART III | |||||||||||
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ITEM
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10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 28 | |||||||||
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ITEM
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11. | EXECUTIVE COMPENSATION | 30 | |||||||||
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ITEM
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12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 30 | |||||||||
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ITEM
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13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 30 | |||||||||
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PART IV | |||||||||||
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ITEM
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14. | CONTROLS AND PROCEDURES | 30 | |||||||||
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ITEM
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15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K | 31 | |||||||||
2
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2003 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to, the cyclical nature of the property casualty industry, the long-tail and potentially volatile nature of the reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, the ultimate results of the various pending arbitration and legal proceedings, the increased level of our retention, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of competition, the availability of reinsurance, the ability of our reinsurers to pay reinsurance recoverables owed to us, investment results and potential impairment of invested assets, exchange rate and political risks, legislative and regulatory developments, changes in the ratings assigned to us by ratings agencies, uncertainty as to our reinsurance coverage for terrorist acts, the availability of dividends from our insurance company subsidiaries, our successful integration of acquired companies or investment in new insurance ventures, our ability to attract and retain qualified employees, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These risks could cause actual results of the industry or our actual results for the year 2003 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Forward-looking statements speak only as of the date on which they are made.
3
PART I
ITEM 1. BUSINESS
W. R. Berkley Corporation, a Delaware corporation, is an insurance holding company which, through its subsidiaries, operates in five segments of the property casualty insurance business:
| • | Specialty lines of insurance, including excess and surplus lines and commercial transportation | ||
| • | Alternative markets, including the management of alternative insurance market mechanisms | ||
| • | Reinsurance | ||
| • | Regional commercial property casualty insurance | ||
| • | International |
Our holding company structure provides us with the flexibility to respond to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. Our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment and reinsurance management and actuarial, financial and legal staff support.
Unless otherwise indicated, all references in this Form 10-K to “W. R. Berkley,” “we,” “us,” “our,” the “Company” or similar terms refer to W. R. Berkley Corporation together with its subsidiaries.
Our specialty insurance, alternative markets and reinsurance operations are conducted nationwide. Regional insurance operations are conducted primarily in the Midwest, New England, Southern (excluding Florida) and Mid Atlantic regions of the United States. International operations are conducted primarily in Argentina and the Philippines.
During 2001, the Company discontinued its regional personal lines and alternative markets reinsurance business. These discontinued businesses, which were previously reported in the regional and reinsurance segments, are now reported as a separate discontinued business segment. Segment information for the prior period has been restated to reflect these changes.
Net premiums written as reported, based on accounting principles generally
accepted in the United States of America (“GAAP”), for each of the past five
years were as follows:
Year Ended December 31,
2002
2001
2000
1999
1998
(Amounts in thousands)
$
861,693
$
527,502
$
285,525
$
260,380
$
253,472
305,357
151,942
98,001
73,089
66,418
680,205
236,784
276,640
309,180
269,635
776,577
598,149
499,526
497,041
486,213
79,313
150,090
118,981
86,172
75,106
7,345
193,629
227,571
201,857
195,410
$
2,710,490
$
1,858,096
$
1,506,244
$
1,427,719
$
1,346,254
31.7
%
28.4
%
19.0
%
18.2
%
18.8
%
11.3
8.2
6.5
5.1
4.9
25.1
12.7
18.4
21.7
20.0
28.7
32.2
33.1
34.9
36.2
2.9
8.1
7.9
6.0
5.6
0.3
10.4
15.1
14.1
14.5
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
4
The following sections briefly describe our insurance segments. All of the domestic insurance subsidiaries have an A.M. Best Company, Inc. (“A.M. Best”) rating of “A (Excellent)”, other than Admiral Insurance Company, which has a rating of “A+ (Superior).” A.M. Best’s ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: “Best’s Ratings reflect [its] opinion based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile. Ratings may be changed, suspended or withdrawn at any time for any reason at the discretion of A.M. Best Company. These ratings are not a warranty of an insurer’s current or future ability to meet its contractual obligations, nor are they a recommendation to buy, sell or hold any security.” A.M. Best reviews its ratings on a periodic basis, and ratings of the Company’s subsidiaries are therefore subject to change.
SPECIALTY INSURANCE
Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus (“E&S”) lines, professional liability, commercial transportation and surety markets. The specialty business is conducted through seven operating units. The companies within the segment are divided along the different customer bases and product lines which they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse.
Admiral Insurance Company (“Admiral”) provides E&S coverages to medium and large-sized commercial risks that generally involve moderate to high degrees of risk. Admiral concentrates on commercial casualty, professional liability and commercial property lines of business produced by wholesale brokers.
Carolina Casualty Insurance Company (“Carolina”) specializes in transportation insurance for long-haul trucking and public automobile risks, operating as an admitted carrier in all states.
Nautilus Insurance Company (“Nautilus”) insures E&S risks which involve a lower degree of expected severity than those covered by Admiral. A substantial portion of Nautilus’ business is written on a binding authority basis, subject to certain contractual limitations.
Monitor Liability Managers, Inc. (“Monitor”) specializes in professional liability insurance, including directors’ and officers’ liability, employment practices liability lawyers’ professional liability, management liability, and non-profit directors’ and officers’ liability coverages.
Clermont Specialty Managers, Ltd. (“Clermont”) writes package insurance programs for luxury condominium, cooperative and rental apartment buildings and restaurants in the New York City metropolitan area.
Monitor Surety Managers, Inc. (“Surety”) writes contract bonds, court and fiduciary bonds, license and permit bonds, and public official bonds, with a primary focus on providing surety bonds to mid-sized contractors.
Berkley Medical Excess Underwriters, LLC (“Medical Excess”) was established at the end of 2001 to provide medical malpractice excess insurance and reinsurance coverage and services to hospitals and hospital associations.
5
The following table sets forth the percentage of direct premiums written
by each specialty unit:
Year Ended December 31,
2002
2001
2000
1999
1998
39.8
%
40.7
%
39.5
%
36.6
%
37.7
%
18.9
19.5
10.9
18.1
20.5
18.7
17.9
24.8
24.7
23.0
16.1
16.4
17.8
14.2
12.9
4.4
3.7
4.5
4.2
4.0
1.2
1.8
2.5
2.2
1.9
0.9
—
—
—
—
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
The following table sets forth the percentages of direct premiums written,
by line, by our specialty insurance operations:
Year Ended December 31,
2002
2001
2000
1999
1998
39.5
%
42.4
%
40.5
%
30.5
%
28.2
%
13.6
15.2
10.6
18.3
19.0
16.0
11.3
14.5
16.5
16.9
10.1
9.1
9.2
7.7
7.1
7.0
6.6
7.0
6.6
7.7
3.4
4.4
4.6
3.3
3.1
2.8
3.8
4.3
6.4
6.1
4.0
2.9
3.7
6.0
6.1
1.2
1.6
2.5
2.1
2.0
1.8
2.0
1.6
1.9
1.8
0.5
0.5
0.7
0.6
1.9
0.1
0.2
0.8
0.1
0.1
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
ALTERNATIVE MARKETS
Our alternative markets operations specialize in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include employers, employer groups, insurers, and alternative market funds seeking less costly, more efficient ways to manage exposure to risks. In addition to providing insurance, the alternative markets segment also provides a wide variety of fee-based services, including consulting and administrative services.
Each of our alternative markets operating units is involved in risk management and is organized according to one of the following product areas: insuring excess workers’ compensation risks; insuring primary workers’ compensation risks; and providing non-risk bearing administrative services nationwide.
Midwest Employers Casualty Company (“MECC”) provides excess workers’ compensation coverage to self-insured employers and groups above their self-insured or retained limits.
Key Risk Insurance Company (“Key Risk”) offers primary workers’ compensation insurance in North Carolina. Insurance services are also provided through its affiliate, Key Risk Management Services.
Preferred Employers Insurance Company (“Preferred Employers”) offers primary workers’ compensation insurance in California. Insurance coverage is provided primarily to owner-managed small employers.
Berkley Risk Administrators Company (“BRAC”) implements and manages
alternative risk management programs and self-insurance pools for business,
governments, educational institutions, tribal nations and non-profit entities.
BRAC also provides administrative and claims services to insurance companies.
BRAC’s services include third-party administration,
6
Table of Contents
claims adjustment and management, employee benefit consulting, accounting services, insurance and reinsurance risk transfer, loss control and safety consulting, management information systems, regulatory compliance and relations, risk management consulting, alternative markets plan management, statistical analysis, underwriting and rating, and policy issuance.
The following table sets forth the percentage gross premiums written by
each alternative markets unit:
Year Ended December 31,
2002
2001
2000
1999
1998
51.6
%
53.6
%
63.4
%
68.7
%
86.2
%
19.6
24.3
26.4
27.4
13.8
24.3
20.6
9.7
3.9
—
4.5
1.5
0.5
—
—
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
The following table sets forth the percentage of revenues from the risk
bearing and insurance services business:
Year Ended December 31,
2002
2001
2000
1999
1998
76.2
%
68.1
%
65.1
%
60.7
%
58.4
%
23.8
31.9
34.9
39.3
41.6
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
REINSURANCE OPERATIONS
Our reinsurance operations consist of seven operating units, which specialize in underwriting property casualty reinsurance on both a treaty and a facultative basis.
Signet Star Re, LLC (“Signet Star”) functions as a traditional reinsurer that focuses on specialty lines of business where knowledge and expertise in a specific area is valued over the capital scale of the reinsurance provider. Signet Star emphasizes casualty excess of loss treaties and prefers to take significant participations in order to have greater influence over the terms and conditions of coverage. Signet Star is committed exclusively to the broker market segment of the treaty reinsurance industry.
Lloyd’s Reinsurance represents quota share reinsurance contracts with MAP Capital Limited, a Lloyd’s corporate member, and two Lloyd’s syndicates managed by Kiln plc. Map Capital Limited and the Lloyd’s syndicates underwrite a broad range of mainly short-tail classes of business on a worldwide basis.
Facultative ReSources, Inc. (“Fac Re”) specializes in individual certificate and program facultative business developed through brokers. Its highly experienced underwriters seek to offset the underwriting and pricing cycles in the underlying insurance business by developing risk management solutions and through superior risk selection. Casualty facultative business is written on a direct basis by Fac Re’s affiliate, BF Re Underwriting, LLC.
Vela Insurance Services, LLC (“Vela”) is an excess and surplus lines underwriting manager that specializes in providing general liability and product liability coverages to small and medium size accounts.
Berkley Underwriting Partners, LLC (“Berkley Underwriting Partners”) oversees managing general underwriting (MGU) program business.
Berkley Capital Underwriters, LLC (“Berkley Capital Underwriters”) offers quota share reinsurance to insurance companies where capital constraint is the primary obstacle to increasing their underwriting activities.
Fidelity & Surety Reinsurance Managers, LLC (“Fidelity and Surety”) offers reinsurance coverage to a limited number of small fidelity and surety accounts.
7
The following table sets forth the percentages of gross premiums written
by each reinsurance unit:
Year Ended December 31,
2002
2001
2000
1999
1998
28.0
%
46.5
%
63.8
%
73.2
%
78.4
%
24.9
—
—
—
—
21.8
23.9
14.4
12.4
12.8
10.3
14.6
5.1
2.5
2.0
9.8
9.1
9.2
4.2
—
3.8
—
—
—
—
1.4
5.9
7.5
7.7
6.8
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
The following table sets forth the percentage of gross premiums written,
by property versus casualty business, by our reinsurance operations:
Year Ended December 31,
2002
2001
2000
1999
1998
24.8
%
8.4
%
14.4
%
20.6
%
31.4
%
75.2
91.6
85.6
79.4
68.6
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
REGIONAL INSURANCE OPERATIONS
Our regional subsidiaries provide commercial insurance products to customers primarily in 32 states. Key clients of this segment are small-to-mid-sized businesses and governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of W. R. Berkley. The regional operations are conducted through four geographic regions based on markets served: Midwest, New England, Southern (excluding Florida) and Mid Atlantic.
The regional subsidiaries primarily sell our insurance products through a network of non-exclusive independent agents who are compensated on a commission basis. Our regional companies underwrite all major commercial lines.
The following table sets forth the percentage of direct premiums written
by each region:
Year Ended December 31,
2002
2001
2000
1999
1998
39.8
%
42.3
%
42.9
%
45.1
%
45.9
%
28.7
26.7
24.7
21.5
20.3
16.7
15.8
16.4
14.4
14.3
14.8
15.2
16.0
19.0
19.5
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
8
The following table sets forth the percentages of direct premiums written,
by line, by our regional insurance operations:
Year Ended December 31,
2002
2001
2000
1999
1998
36.2
%
29.9
%
28.9
%
28.1
%
26.9
%
24.9
24.3
22.7
22.8
24.2
17.4
17.9
18.9
18.7
18.6
7.9
8.3
9.0
9.0
8.5
6.1
8.3
8.7
8.7
8.8
2.2
4.3
4.3
4.9
5.2
2.6
3.9
4.1
4.4
4.2
0.8
1.0
1.0
0.9
0.9
0.7
0.9
1.0
0.9
0.8
1.2
1.2
1.4
1.6
1.9
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
The following table sets forth the percentages of direct premiums written,
by state, by our regional insurance operations:
Year Ended December 31,
2002
2001
2000
1999
1998
8.3
%
7.9
%
5.0
%
4.8
%
5.0
%
7.5
7.9
8.0
6.8
8.0
6.9
7.8
7.2
6.5
6.3
7.2
7.2
5.8
4.6
2.9
6.2
6.3
6.0
5.3
5.3
4.6
5.5
6.5
6.4
6.8
4.8
5.4
5.3
5.1
4.8
4.0
4.9
5.4
6.0
6.1
3.5
3.7
4.1
5.5
6.2
4.1
3.7
3.2
3.0
3.2
3.3
3.6
4.4
3.7
3.5
3.2
3.5
3.7
4.4
4.4
3.6
3.4
2.9
3.0
3.1
2.7
3.4
3.5
3.6
4.1
2.7
2.9
2.7
3.0
3.0
2.1
2.5
3.1
3.1
4.0
3.9
2.4
2.1
3.7
3.3
1.9
2.3
2.7
2.2
2.3
2.2
2.3
2.7
3.0
3.4
1.3
1.6
2.0
1.9
2.0
1.8
1.6
2.0
2.0
1.7
1.5
1.5
1.3
1.0
0.8
1.5
1.3
1.2
1.5
1.9
11.2
7.4
9.2
9.9
7.9
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
9
INTERNATIONAL OPERATIONS
In 1995, the Company and Northwestern Mutual Life International, Inc. (“NML”), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company, entered into a joint venture to form Berkley International, LLC (“Berkley International”), a limited liability company. We agreed to contribute up to $65 million to Berkley International in exchange for a 65% membership interest and NML agreed to contribute up to $35 million to Berkley International in exchange for a 35% membership interest.
Applying the same approach that we take for our domestic businesses, we believe that decentralized control is key to the success of our international effort. For example, we hire local insurance executives who have specialized knowledge of their customers, markets and products, and we link their compensation to meeting performance objectives.
International operations are conducted in Argentina and the Philippines. In Argentina, we currently offer commercial and personal property casualty insurance. Our Argentine subsidiary ceased writing life insurance business in 2002 and began a process of liquidating its life insurance in-force. In the Philippines, we provide savings and life products to customers, including endowment policies to pre-fund education costs and retirement income.
The following table set forth the percentages of direct premiums for our
international operations:
Year Ended December 31,
2002
2001
2000
1999
1998
72.3
%
77.9
%
72.3
%
72.3
%
85.5
%
10.0
12.4
14.7
16.5
10.9
82.3
90.3
87.0
88.8
96.4
17.7
9.7
13.0
11.2
3.6
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
DISCONTINUED BUSINESS
In the third quarter of 2001, the Company discontinued its personal lines business, both homeowners and private passenger automobile, and the alternative markets division of its reinsurance segment, by not renewing existing policies or treaties and ceasing to write new business.
The following table set forth the percentages of premiums for our
discontinued business:
Year Ended December 31,
2002
2001
2000
1999
1998
68.3
%
61.8
%
61.8
%
74.3
%
77.7
%
31.7
38.2
38.2
25.7
22.3
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
RECENT DEVELOPMENTS
In March 2003, the Company announced that it intends to form a United Kingdom authorized insurance company. It is expected that the enterprise will be London-based and will specialize in principally U.K. domestic casualty risks. It is anticipated that the company will commence operation in the third quarter of 2003, subject to regulatory and other approvals.
During the first quarter of 2003, the Company issued $200 million (face amount) of ten year 5.875% senior notes and repaid $61 million of maturing debt.
10
Results by Industry Segment
Summary financial information about our operating segments is presented on
a GAAP basis in the following table (all amounts include realized capital gains
and losses):
Year Ended December 31,
2002
2001
2000
1999
1998
(Amounts in thousands)
$
773,187
$
440,650
$
324,859
$
309,068
$
311,955
130,477
28,806
31,836
39,261
85,889
362,147
234,121
189,795
169,221
162,682
65,612
32,971
35,315
20,593
34,241
514,253
281,490
349,164
341,940
297,144
39,299
(54,502
)
27,760
14,091
33,858
757,473
614,924
565,327
541,368
526,099
111,807
44,403
8,761
(78,895
)
(3,736
)
104,076
137,683
118,234
93,878
80,287
7,710
(6,082
)
6,853
3,535
(7,017
)
55,774
232,403
232,392
213,816
199,673
(10,682
)
(133,480
)
(9,936
)
(14,141
)
(18,528
)
11
The table below represents summary underwriting ratios, on a GAAP
accounting basis for our insurance companies and the insurance industry. The
combined ratio represents a measure of underwriting profitability, excluding
investment income. A number in excess of 100 indicates an underwriting loss; a
number below 100 indicates an underwriting profit:
Year Ended December 31,
2002
2001
2000
1999
1998
64.0
%
71.4
%
73.2
%
68.0
%
61.9
%
26.3
31.1
33.6
35.2
31.5
90.3
%
102.5
%
106.8
%
103.2
%
93.4
%
66.7
%
76.5
%
70.2
%
65.8
%
61.4
%
29.6
32.9
38.7
41.5
43.4
96.3
%
109.4
%
108.9
%
107.3
%
104.8
%
73.0
%
104.4
%
73.2
%
76.0
%
74.3
%
29.9
36.8
33.2
33.4
31.6
102.9
%
141.2
%
106.4
%
109.4
%
105.9
%
59.1
%
67.2
%
75.5
%
87.1
%
76.4
%
32.4
%
35.0
35.1
37.5
36.7
91.5
%
102.2
%
110.6
%
124.6
%
113.1
%
54.2
%
61.4
%
62.1
%
55.4
%
59.7
%
51.3
40.6
41.7
47.5
59.9
105.5
%
102.0
%
103.8
%
102.9
%
119.6
%
98.7
%
131.4
%
75.9
%
77.0
%
76.0
%
30.8
33.0
32.8
34.0
37.4
129.5
%
164.4
%
108.7
%
111.0
%
113.4
%
65.0
%
82.1
%
73.4
%
76.8
%
71.6
%
30.4
34.4
34.8
36.5
36.5
95.4
%
116.5
%
108.2
%
113.3
%
108.1
%
12
Investments
Investment results before income tax effects were as follows:
Year Ended December 31,
2002
2001
2000
1999
1998
(Amounts in thousands)
$
3,881,121
$
3,279,830
$
3,046,364
$
3,068,324
$
3,013,612
$
210,900
$
206,656
$
219,955
$
198,556
$
206,065
5.4
%
6.3
%
7.2
%
6.5
%
6.8
%
$
15,214
$
(12,252
)
$
7,535
$
(5,683
)
$
23,857
$
124,188
$
31,277
$
109,273
$
(167,020
)
$
(3,253
)
| (1) | The change in unrealized investment gains (losses) represents the difference between fair value and cost of investments at the beginning and end of the calendar year, including investments carried at cost. |
The percentages of the fixed maturity portfolio categorized by
contractual maturity, based on fair value, on the dates indicated, are set
forth below. Actual maturities may differ from contractual maturities because
certain issuers have the right to call or prepay obligations.
2002
2001
2000
1999
1998
3.1
%
3.2
%
3.5
%
3.0
%
1.7
%
16.9
20.5
22.1
16.4
16.0
25.4
23.2
21.8
26.0
24.4
27.8
26.2
27.7
34.6
37.2
26.8
26.9
24.9
20.0
20.7
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Loss and Loss Adjustment Expense Reserves
In the property casualty insurance industry, it is not unusual for significant periods of time to elapse between the occurrence of an insured loss, the report of the loss to the insurer and the insurer’s payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Our loss reserves reflect current estimates of the ultimate cost of closing outstanding claims. Other than our excess workers’ compensation business and the workers’ compensation portion of our reinsurance business, as discussed below, we do not discount our reserves for financial reporting purposes.
In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis which provide for losses incurred but not yet reported to the insurer, potential inadequacy of case reserves, the estimated expenses of settling claims, including legal and other fees and general expenses of administering the claims adjustment process (“LAE”), and a provision for potentially uncollectible reinsurance.
In examining reserve adequacy, several factors are considered, including historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management’s informed estimates and judgments using data currently available. As additional experience and other data become available and are reviewed, these estimates and judgments are revised. This may result in increases or decreases to reserves for insured
13
events of prior years. The reserving process implicitly recognizes the impact of inflation and other factors affecting loss costs by taking into account changes in historical claim patterns and perceived trends. There is no precise method to evaluate the impact of any specific factor on the adequacy of reserves, because the ultimate cost of closing claims is influenced by numerous factors.
While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to fluctuation. In particular, high levels of jury verdicts against insurers, as well as judicial decisions which “re-formulate” policies to expand coverage to include previously unforeseen theories of liability, e.g., those regarding pollution, other environmental exposures or man-made catastrophes, have produced unanticipated claims and increased the difficulty of estimating the loss and loss adjustment expense reserves.
We discount our liabilities for excess workers’ compensation business and the workers’ compensation portion of our reinsurance business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience and is supplemented with data compiled from insurance companies writing similar business. The liabilities for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve for non-proportional business, and at the statutory rate for proportional business. The discount rates range from 3.9% to 6.5% with a weighted average rate of 5.3%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $293,000,000, $243,000,000 and $223,000,000 at December 31, 2002, 2001 and 2000, respectively.
To date, known asbestos and environmental claims at our insurance company subsidiaries have not had a material impact on our operations. Environmental claims have not materially impacted us because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures.
Our net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $28,509,000 and $24,794,000 at December 31, 2002 and 2001, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $47,637,000 and $43,405,000 at December 31, 2002 and 2001, respectively. Net incurred losses and loss expenses (recoveries) for reported asbestos and environmental claims were approximately $6,652,000, ($4,503,000) and $1,602,000 in 2002, 2001 and 2000, respectively. Net paid losses and loss expenses (receivables) for reported asbestos and environmental claims were approximately $2,938,000, $125,000 and $3,123,000 in 2002, 2001 and 2000, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential affect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.
The following table sets forth the components of our gross loss reserves
and net provision for losses and loss expense (amounts in thousands):
2002
2001
2000
$
3,167,925
$
2,763,850
$
2,475,805
42,707
53,832
58,112
$
3,210,632
$
2,817,682
$
2,533,917
$
1,457,254
$
1,360,683
$
1,072,632
6,717
19,817
21,779
$
1,463,971
$
1,380,500
$
1,094,411
14
The table below provides a reconciliation of the beginning and ending
property casualty reserves, on a gross of reinsurance basis (amounts in
thousands) (1):
2002
2001
2000
$
2,033,293
$
1,818,049
$
1,723,865
1,288,071
1,140,622
1,047,060
173,732
211,344
14,042
(4,549
)
8,717
11,530
1,457,254
1,360,683
1,072,632
373,541
443,802
394,401
793,765
701,637
584,047
1,167,306
1,145,439
978,448
2,323,241
2,033,293
1,818,049
844,684
730,557
657,756
$
3,167,925
$
2,763,850
$
2,475,805
A reconciliation, as of December 31, 2002, between the reserves reported
in the accompanying consolidated financial statements which have been prepared
in accordance with GAAP and those reported on the basis of statutory accounting
principles (“SAP”) is as follows (amounts in thousands):
$
2,353,263
19,538
(49,560
)
2,323,241
844,684
$
3,167,925
| (1) | Claims occurring during the current year is net of discount of $38,939,000, $24,781,000 and $39,990,000 for the years ended December 31, 2002, 2001 and 2000, respectively. | ||
| (2) | For statutory purposes, we use a discount rate of 3.9% as permitted by the Department of Insurance of the State of Delaware. |
The following table presents the development of net reserves for 1992 through 2002. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to us. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years.
The “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 1992 reserves have developed a $162 million redundancy over ten years. That amount has been reflected in income over the ten years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a “run off” of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 1992 is reserved for $2,000 as of December 31, 1992. Assuming this claim estimate was changed in 2002 to $2,300, and was settled for $2,300 in 2002, the $300 deficiency would appear as a deficiency in each year from 1992 through 2001.
15
(Amounts in millions)
Year Ended December 31,
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
$
710
$
783
$
895
$
1,209
$
1,333
$
1,433
$
1,583
$
1,724
$
1,818
$
2,033
$
2,323
—
—
—
152
172
190
187
196
223
243
293
710
783
895
1,361
1,505
1,623
1,770
1,920
2,041
2,276
2,616
704
776
885
1,346
1,481
1,580
1,798
1,934
2,252
2,450
694
755
872
1,305
1,406
1,566
1,735
2,082
2,397
665
744
833
1,236
1,356
1,446
1,805
2,203
655
708
789
1,195
1,239
1,463
1,856
630
672
764
1,112
1,248
1,494
600
649
706
1,118
1,271
579
599
712
1,135
541
605
723
547
610
548
$
162
$
173
$
172
$
226
$
234
$
129
$
(86
)
$
(283
)
$
(356
)
$
(174
)
$
169
$
186
$
221
$
265
$
332
$
365
496
584
702
794
275
221
355
434
523
574
795
1,011
1,255
306
291
445
550
635
737
1,032
1,426
344
334
501
616
714
852
1,306
362
363
528
655
782
1,033
375
373
543
701
903
376
373
577
785
370
393
634
384
421
397
783
895
1,209
1,333
1,433
1,583
1,724
1,818
2,033
2,323
1,233
1,176
451
450
477
538
617
658
731
845
2,016
2,071
1,660
1,783
1,910
2,121
2,341
2,476
2,764
3,168
—
—
192
216
241
248
250
286
324
384
$
2,016
$
2,071
$
1,852
$
1,999
$
2,151
$
2,369
$
2,591
$
2,762
$
3,088
$
3,552
2,010
2,043
1,827
1,965
2,132
2,390
2,653
2,827
3,153
1,966
2,026
1,789
1,959
2,096
2,389
2,556
2,730
1,955
1,983
1,754
1,909
2,010
2,218
2,385
1,913
1,951
1,733
1,823
1,871
2,079
1,855
1,928
1,681
1,739
1,787
1,815
1,899
1,630
1,688
1,788
1,858
1,589
1,757
1,827
1,737
$
279
$
244
$
263
$
311
$
364
$
290
$
206
$
32
$
(65
)
16
Reinsurance
We follow the customary industry practice of reinsuring a portion of our exposures and paying to reinsurers a part of the premiums received on the policies that we write. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance coverage. We monitor the financial condition of our reinsurers and attempt to place our coverages only with substantial, financially sound carriers. As a result, generally the reinsurers who reinsure our casualty insurance must have an A.M. Best rating of “A (Excellent)” or better with $500 million in policyholder surplus and the reinsurers who cover our property insurance must have an A.M. Best rating of “A-(Excellent)” or better with $250 million in policyholder surplus. As a result of the attacks of September 11, many reinsurers have significantly changed their underwriting guidelines, and limit or no longer provide terrorism coverage. See “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and Note 10 of “Notes to Consolidated Financial Statements.”
Regulation
Our insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business. They are subject to statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. Our property casualty subsidiaries, other than E&S and reinsurance subsidiaries, must file all rates for personal and commercial insurance with the insurance department of each state in which they operate. Our E&S and reinsurance subsidiaries generally operate free of rate and form regulation.
In addition to regulatory supervision of our insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with the state insurance commissioner, including information concerning our capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of our outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to us due to our ownership of Carolina Casualty Insurance Company, a Florida domiciled insurer, the acquisition of more than 5% of our capital stock must receive regulatory approval. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Various state and federal organizations, including Congressional committees and the National Association of Insurance Commissioners (“NAIC”), have been conducting reviews into various aspects of the insurance business. The NAIC codified statutory accounting practices for certain insurance enterprises effective January 1, 2001. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect our insurance subsidiaries.
The NAIC utilizes a Risk Based Capital (RBC) formula which is designed to measure the adequacy of an insurer’s statutory surplus in relation to the risks inherent in its business. The RBC formula develops a risk adjusted target level of adjusted statutory capital by applying certain factors to various asset, premium and reserve items. The RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The RBC of each of our domestic insurance subsidiaries was above the authorized control level RBC as of December 31, 2002.
17
The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of 1999 (the “Act”), was enacted in 1999 and significantly affects the financial services industry, including insurance companies, banks and securities firms. The Act modifies federal law to permit the creation of financial holding companies (“FHCs”), which, as regulated by the Act, can maintain cross-holdings in insurance companies, banks and securities firms to an extent not previously allowed. The Act also permits or facilitates certain types of combinations or affiliations for FHCs. The Act establishes a functional regulatory scheme under which state insurance departments will maintain primary regulation over insurance activities, subject to provisions for certain federal preemptions. It is not anticipated that the insurance regulatory aspects of the Act will have a material effect on our operations.
Our insurance subsidiaries are also subject to assessment by state guaranty funds when an insurer in that jurisdiction has been judicially declared insolvent and insufficient funds are available from the liquidated company to pay policyholders and claimants. The protection afforded under a state’s guaranty fund to policyholders of the insolvent insurer varies from state to state. Generally, all licensed property casualty insurers are considered to be members of the fund, and assessments are based upon their pro rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty Fund Act, which many states have adopted, limits assessments to an insurer to 2% of its subject premium and permits recoupment of assessments through rate setting. Likewise, several states (or underwriting organizations of which our insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business.
We receive funds from our insurance subsidiaries in the form of dividends and fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled.
The Terrorism Risk Insurance Act of 2002 (“TRIA”) became effective November 26, 2002. TRIA establishes a temporary Federal program that provides for a system of shared public and private compensation for insured losses resulting from acts of terrorism. The program terminates on December 31, 2005. TRIA is applicable to almost all commercial lines of property and casualty insurance. Insurers with direct commercial property and casualty insurance exposure in the United States are required to participate in the program and make available coverage for certified acts of terrorism. Federal participation will be triggered under TRIA when the Secretary of Treasury certifies an act of terrorism. Under the program the federal government will pay 90% of an insurer’s losses in excess of the insurer’s applicable deductible. The insurer’s deductible is based on a percent of earned premium for covered lines of commercial property and casualty insurance: for 2003 the deductible is 7% of 2002 premium, for 2004 it is 10% of 2003 premium and for 2005 it is 15% of 2004 premium. TRIA limits the federal governments share of losses at $100 billion for a program year. In addition, an insurer that has satisfied its deductible is not liable for the payment of losses in excess of the $100 billion cap.
Competition
The property casualty insurance and reinsurance businesses are competitive, with over 2,000 insurance companies transacting business in the United States. We compete directly with a large number of these companies. Our strategy in this highly fragmented industry is to seek specialized areas or geographic regions where our insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Each of our subsidiaries establishes its own pricing practices. Such practices are based upon a Company-wide philosophy to price products with the general intent of making an underwriting profit. Competition in the industry generally changes with profitability.
Competition for specialty and alternative markets business comes from other specialty insurers, regional carriers, large national multi-line companies and reinsurers. Under certain market conditions, standard carriers also compete for E&S business.
Competition for the reinsurance business comes from domestic and foreign reinsurers, which produce their business either on a direct basis or through the broker market. These competitors include Berkshire Hathaway, Employers Reinsurance, Transatlantic Reinsurance and
18
Everest Reinsurance, which collectively comprise a majority of the property casualty reinsurance market in the United States.
The regional property casualty subsidiaries compete with mutual and other regional stock companies as well as national carriers. Direct writers of property casualty insurance compete with the regional subsidiaries by writing insurance through their salaried employees, generally at a lower cost than through independent agents such as those used by the Company.
The international operations compete with native insurance operations both large and small, which may be related to government entities, as well as with branch or local subsidiaries of multinational companies.
Employees
As of March 8, 2003, we employed 4,359 persons. Of this number, our subsidiaries employed 4,305 persons, of whom 2,012 were executive and administrative personnel and 2,293 were clerical personnel. We employed the remaining 54 persons at the parent company and in investment operations, of whom 42 were executive and administrative personnel and 12 were clerical personnel.
Other Information about the Company’s business
We maintain an interest in the acquisition or start up of complementary businesses and continue to evaluate possible acquisitions and new ventures on an ongoing basis. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds.
Seasonal weather variations and other events affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on our business of such catastrophes as tornadoes, hurricanes, hailstorms, earthquakes and terrorist acts may be mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods.
We have no customer which accounts for 10 percent or more of our consolidated revenues.
Compliance by W. R. Berkley and its subsidiaries with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to protection of the environment has not had a material effect upon our capital expenditures, earnings or competitive position.
The Company’s internet address is www.wrberkley.com. The information on our website is not incorporated by reference in this annual report on Form 10-K. The Corporation’s annual report on Form 10-K, annual reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are accessible free of charge through this website as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission.
19
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business faces significant risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described as risks below actually occurs, our business, results of operations or financial condition could be materially and adversely affected.
Our results may fluctuate as a result of many factors, including cyclical changes in the insurance and reinsurance industry.
The results of companies in the property casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The demand for insurance is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity. The adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. In addition, investment rates of return may impact policy rates. These factors can have a significant impact on ultimate profitability because a property casualty insurance policy is priced before its costs are known, as premiums usually are determined long before claims are reported. These factors could produce results that would have a negative impact on our results of operations and financial condition.
Our actual claims losses may exceed our reserves for claims, which may require us to establish additional reserves.
We maintain loss reserves to cover our estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees as well as a portion of our general expenses, for reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our assessment of facts and circumstances then known, as well as estimates of future trends in claims severity, frequency, judicial theories of liability and other factors. In some cases, long-tail lines of business such as excess workers’ compensation and the workers’ compensation portion of our reinsurance business are reserved on a discounted basis. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, inflation, judicial and litigation trends and legislative changes.
The risk of the occurrence of such events is especially present in our specialty and reinsurance businesses as well as our discontinued alternative markets reinsurance business. Many of these items are not directly quantifiable in advance. In some areas of our business, the level of reserves we establish is dependent in part upon the actions of third parties that are beyond our control. In our reinsurance and excess workers’ compensation businesses, we may not establish sufficient reserves if third parties do not give us advance notice or provide us with appropriate information regarding certain matters. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us.
The inherent uncertainties of estimating reserves are greater for certain types of liabilities, where the various considerations affecting these types of claims are subject to change and long periods of time may elapse before a definitive determination of liability is made. For example, there are greater uncertainties involved with establishing reserves relating to the World Trade Center attack, the Enron bankruptcy and asbestos and environmental claims. Reserve estimates are continually refined in an ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure you that our current reserves will prove adequate in light of subsequent events. Should we need to increase our reserves, our net income for the period will decrease by a corresponding amount.
Our earnings could be more volatile, especially since we have increased and may further increase our level of retention in our business.
We increased our retention levels in 2001 and 2002 due to changes in market conditions and the pricing environment. We purchased less reinsurance, the process by which we transfer, or cede, part of the risk we have assumed to a reinsurance company, thereby retaining more risk. We may further increase our retention levels in the future. As a result, our earnings
20
could be more volatile and increased severities are more likely to have a material adverse effect on our results of operations and financial condition. A significant change in our retention levels could also cause our historical financial results, including compound annual growth rates, to be inaccurate indicators of our future performance on a segment or consolidated basis.
As a property casualty insurer, we face losses from natural and man-made catastrophes.
Property casualty insurers are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophe losses have had a significant impact on our results. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires, as well as terrorist activities. The incidence and severity of catastrophes are inherently unpredictable. For example, during the five years ended December 31, 2002, our losses from natural and man-made catastrophes ranged from $xx million to $xx million. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. Catastrophes can cause losses in a variety of our property casualty lines, and most of our past catastrophe-related claims have resulted from severe storms. Seasonal weather variations may affect the severity and frequency of our losses. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. It is therefore possible that a catastrophic event or multiple catastrophic events could produce unforeseen losses and have a material adverse effect on our results of operations and financial condition.
We face significant competitive pressures in our businesses, which may reduce premium rates and prevent us from pricing our products at attractive rates.
We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with major U.S. and non-U.S. insurers and reinsurers, other regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. Competition in our businesses is based on many factors, including the perceived financial strength of the company, premium charges, other terms and conditions offered, services provided, ratings assigned by independent rating agencies, speed of claims payment and reputation and experience in the lines to be written.
Some of our competitors, particularly in the reinsurance business, have greater financial and marketing resources than we do. These competitors within the reinsurance segment include Employers Reinsurance, Berkshire Hathaway and American Reinsurance, which collectively comprise a majority of the property casualty reinsurance market. We expect that perceived financial strength, in particular, will become more important as customers seek high quality reinsurers.
New competition could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our products at attractive rates and thereby adversely affect our underwriting results.
If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear increased risks or reduce the level of our underwriting commitments.
As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk underwritten by our insurance company subsidiaries, especially catastrophe risks. We also purchase reinsurance on risks underwritten by others which we reinsure. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase, which may affect the level of our business and profitability. Our reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or to obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments, especially catastrophe exposed risks.
We, as a primary insurer, may have significant exposure for terrorist acts.
To the extent that reinsurers have excluded coverage for terrorist acts or
have priced such coverage at rates that we believe are not practical, we, in
our capacity as a primary insurer, do not have reinsurance protection and are
exposed for potential losses as a result
21
Table of Contents
of any terrorist acts. To the extent an act of terrorism certified by the Secretary of the Treasury under The Terrorism Risk Insurance Act of 2002(“TRIA”), our mandatory deductible under TRIA could be a material amount.
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all, and, as a result, we could experience losses.
We purchase reinsurance by transferring part of the risk that we have assumed, known as ceding, to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us, the reinsured, of our liability to our policyholders or, in cases where we are a reinsurer, to our reinsureds. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. Accordingly, we bear credit risk with respect to our reinsurers, and if our reinsurers fail to pay us, our financial results would be adversely affected. Underwriting results and investment returns of some of our reinsurers may affect their future ability to pay claims.
We invest some of our assets in alternative investments, which is subject to certain risks.
We invest a portion of our investment portfolio in alternative investments which is primarily merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Merger arbitrage differs from other types of investments in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period, usually four months or less. While our merger arbitrage positions are generally hedged against market declines, these equity investments are exposed primarily to the risk associated with the completion of announced deals, which are subject to regulatory as well as political and other risks. As a result of the reduced activity in the merger and acquisitions area, we may not be able achieve the returns that we have enjoyed in the past. Alternative investments also include investments in high-yield bonds and real estate investment trusts.
A significant amount of our assets is invested in fixed income securities and is subject to market fluctuations.
Our investment portfolio consists substantially of fixed income securities. The fair market value of these assets and the investment income from these assets fluctuate depending on general economic and market conditions. With respect to our investments in fixed income securities, the fair market value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease with interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. Further, the value of any particular fixed income security is subject to impairment based on the credit worthiness of a given issuer. Because substantially all of our fixed income securities are classified as available for sale, changes in the market value of our securities are reflected in our balance sheet. Similar treatment is not available for liabilities. Therefore, interest rate fluctuations affect the value of our investments and could adversely affect our results of operations and financial condition.
Our operations in Argentina and the Philippines expose us to investment, political and economic risks.
Our operations in Argentina and the Philippines expose us to investment, political and economic risks, including foreign currency and credit risk. Changes in the exchange rate between the U.S. dollar and either the Argentine or Philippine peso could have an adverse effect on our results of operations and financial condition. Argentina has experienced substantial political and economic problems it is likely that there will be further changes to Argentine economic and monetary policies in the future. These changes may result in further impairment in value of Argentine bonds and a decline in investment income as a result of lower interest on bonds
We are subject to extensive governmental regulation, which increases our costs and could restrict the conduct of our business.
We are subject to extensive governmental regulation and supervision. Most
insurance regulations are designed to protect the interests of policyholders
rather than stockholders
22
Table of Contents
and other investors. This system of regulation, generally administered by a department of insurance in each state in which we do business, relates to, among other things:
| • | standards of solvency, including risk-based capital measurements; | ||
| • | restrictions on the nature, quality and concentration of investments; | ||
| • | requiring certain methods of accounting; | ||
| • | requiring reserves for unearned premium, losses and other purposes; and | ||
| • | potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. |
State insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Recently adopted federal financial services modernization legislation is expected to lead to additional federal regulation of the insurance industry in the coming years. Also, foreign governments regulate our international operations.
We may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. Also, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. Also, changes in the level of regulation of the insurance industry, whether federal, state or foreign, or changes in laws or regulations themselves or interpretations by regulatory authorities, restrict the conduct of our business. The growing number of insolvencies in the insurance industry increases the possibility that we will be assessed pursuant to various state guaranty fund requirements.
We are rated by A.M. Best and Standard & Poor’s, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease.
Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by A.M. Best, and certain of our insurance company subsidiaries are rated for their claims-paying ability by Standard & Poor’s Corporation, or Standard & Poor’s. A.M. Best and Standard & Poor’s ratings reflect their opinions of an insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders, are not evaluations directed to investors and are not recommendations to buy, sell or hold our securities. Our ratings are subject to periodic review by A.M. Best and Standard & Poor’s, and we cannot assure you that we will be able to retain those ratings. Our A.M. Best rating is A+ (Superior) for Admiral Insurance Company and A (Excellent) for our other insurance companies rated by A. M. Best. The Standard & Poor’s financial strength rating for our insurance subsidiaries is A+/negative. If our ratings are reduced from their current levels by A.M. Best and/or Standard & Poor’s, our competitive position in the insurance industry could suffer and it would be more difficult for us to market our products. A significant downgrade could result in a substantial loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings.
We are an insurance holding company and, therefore, may not be able to receive dividends in needed amounts.
Our principal assets are the shares of capital stock of our insurance company subsidiaries. We have to rely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations and for paying dividends to stockholders and corporate expenses. The payment of dividends by our insurance company subsidiaries is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as the regulatory restrictions. As a result, we may not be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our obligations or pay dividends.
23
We may not find suitable acquisition candidates or new insurance ventures and even if we do, we may not successfully integrate any such acquired companies or successfully invest in such ventures.
As part of our present strategy, we continue to evaluate possible acquisition transactions and the start-up of complementary businesses on an ongoing basis, and at any given time, we may be engaged in discussions with respect to possible acquisitions and new ventures. We cannot assure you that we will be able to identify suitable acquisition transactions or insurance ventures, that such transactions will be financed and completed on acceptable terms or that our future acquisitions or ventures will be successful. The process of integrating any companies we do acquire or investing in new ventures may have a material adverse effect on our results of operations and financial condition.
We may be unable to attract and retain qualified employees.
We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who are knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate, and be unable to expand our operations into new markets.
ITEM 2. PROPERTIES
W. R. Berkley and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. At December 31, 2002, the Company had aggregate office space of 1,072,093 square feet, of which 394,410 was owned and 677,682 was leased.
Rental expense was approximately $17,586,000, $18,021,000 and $16,580,000 for 2002, 2001 and 2000, respectively. Future minimum lease payments (without provision for sublease income) are $13,797,000 in 2003; $9,984,000 in 2004; $7,693,000 in 2005; and $21,956,000 thereafter.
ITEM 3. LEGAL PROCEEDINGS
The Company’s subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. The Company does not believe that such litigation, individually or in the aggregate, will have a material effect on its financial condition or results of operations.
A subsidiary of the Company has a pending arbitration proceeding pertaining to the interpretation of the contract terms in two reinsurance agreements. The arbitration was demanded in April 2002, and a hearing is presently scheduled for the third quarter of 2003. Each party is seeking to have its interpretation of the contract terms prevail. As of December 31, 2002, the reinsurer’s interpretation of the contract terms would reduce the Company’s recoverable from the reinsurer by $4 million for paid losses and $46 million for unpaid losses. Although the ultimate outcome of this matter cannot be determined, management believes that the Company’s interpretation of this contract is correct and intends to vigorously pursue this matter in arbitration.
There are two pending arbitrations pertaining to reinsurance contract coverage issues where a subsidiary of the Company is the assuming reinsurer. One such arbitration was demanded by the ceding company in January 2002, and the other was demanded by the ceding company in April 2002. Hearings in both arbitrations are presently scheduled during the second quarter of 2003. In each instance, the relief sought is a determination of the coverage issue involved. The Company’s estimates of the cost of settling its insurance and reinsurance claims, including claims in arbitrations and litigation, are reflected in its aggregate reserves for losses and loss expenses. Accordingly, based on currently available information, the Company believes that the resolution of these two pending arbitrations will not have a material effect on its financial condition or results of operations. However, if these two arbitrations are decided adversely to the Company, the Company’s potential exposure, in excess of the amounts reserved, is up to $16 million, after tax.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2002 to a vote of holders of the Company’s Common Stock.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the New York Stock Exchange under the symbol
“BER”. All amounts have been adjusted to reflect the 3-for-2 common stock split
on July 7, 2002.
Price Range
Common
Dividends Paid
High
Low
Per Share
$
40.27
$
31.14
$.09 cash
37.39
29.90
$.09 cash
40.80
35.97
$.09 cash
38.70
32.03
$.09 cash
$
38.93
$
31.02
$.09 cash
33.07
25.40
$.09 cash
30.25
24.60
$.09 cash
32.50
23.29
$.09 cash
The closing price of the Common Stock on March 26, 2003, as reported on the New York Stock Exchange, was $42.06 per share. The approximate number of record holders of the Common Stock on March 14, 2003 was 602.
25
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2002
Year Ended December 31,
2002
2001
2000
1999
1998
(Amounts in thousands, except per share data)
$
2,710,490
$
1,858,096
$
1,506,244
$
1,427,719
$
1,346,254
2,252,527
1,680,469
1,491,014
1,414,384
1,278,399
187,875
195,021
210,448
190,316
202,420
86,095
75,771
68,049
72,344
70,727
15,214
(12,252
)
7,535
(5,683
)
23,857
21,856
758
829
(381
)
1,543
2,566,084
1,941,797
1,781,287
1,673,668
1,582,517
45,475
45,719
47,596
50,801
48,819
259,433
(151,394
)
40,851
(79,248
)
62,781
(84,139
)
56,661
(2,451
)
45,766
(5,465
)
(249
)
3,187
(2,162
)
(566
)
1,444
—
—
—
(497
)
(7,548
)
175,045
(91,546
)
36,238
(34,545
)
51,212
—
—
—
(3,250
)
—
—
—
—
735
(5,017
)
175,045
(91,546
)
36,238
(37,060
)
46,195
3.44
(2.09
)
.94
(.90
)
1.21
3.44
(2.09
)
.94
(.96
)
1.09
3.31
(2.09
)
.93
(.90
)
1.17
3.31
(2.09
)
.93
(.96
)
1.06
24.18
18.68
17.69
15.40
19.20
$
.36
$
.36
$
.36
$
.36
$
.32
50,885
43,708
38,448
38,735
42,291
52,923
45,833
38,987
38,891
43,673
$
4,663,100
$
3,607,586
$
3,112,540
$
2,995,980
$
3,249,581
7,031,323
5,633,509
5,022,070
4,784,791
4,983,431
$
3,210,632
2,817,682
2,533,917
2,361,238
2,126,566
362,985
370,554
370,158
394,792
394,444
198,251
198,210
198,169
198,126
207,988
1,335,199
931,595
680,896
591,778
861,281
| (1) | Adjusted to reflect the 3-for-2 common stock slip effective on July 2, 2002. | |
| (2) | Including trading account receivable from brokers and clearing organizations and trading account securities sold but not yet purchased. |
26
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Reference is made to the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained on pages 26 through 33 of the registrant’s 2002 Annual Report to Stockholders, which information is incorporated herein by reference. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| Reference is made to the information under “Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained on pages 32 and 33 of the registrant’s 2002 Annual Report to Stockholders, which information is incorporated herein by reference. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| The consolidated financial statements of the registrant are contained on pages 34 through 54 of registrant’s 2002 Annual Report to Stockholders and are incorporated herein by reference. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
| None. |
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided as to the directors and executive
officers of the Company as of March 20, 2003:
Name
Age
Position
William R. Berkley
57
Chairman of the Board, Chief Executive Officer, President
and Chief Operating Officer
Eugene G. Ballard
50
Senior Vice President - Chief Financial Officer and Treasurer
William R. Berkley, Jr.
30
Senior Vice President - Specialty Operations, Director
Robert P. Cole
52
Senior Vice President - Regional Operations
Paul J. Hancock
41
Senior Vice President - Chief Corporate Actuary
Robert C. Hewitt
42
Senior Vice President - Risk Management
H. Raymond Lankford
60
Senior Vice President - Alternative Markets Operations
Ira S. Lederman
49
Senior Vice President - General Counsel and Corporate
Secretary
James W. McCleary
56
Senior Vice President - Reinsurance Operations
James G. Shiel
43
Senior Vice President - Investments
Clement P. Patafio
38
Vice President - Corporate Controller
Philip J. Ablove
62
Director
Ronald E. Blaylock
43
Director
Mark E. Brockbank
50
Director
George G. Daly
62
Director
Richard G. Merrill
72
Director
Jack H. Nusbaum
62
Director
Mark L. Shapiro
58
Director
As permitted by Delaware law, the Board of Directors of the Company is divided into three classes, the classes being divided as equally as possible and each class having a term of three years. Directors generally serve until their respective successors are elected at the annual meeting of stockholders which ends their term. None of the Company’s directors has any family relationship with any other director or executive officer, except William R. Berkley, Jr. is the son of William R. Berkley. Each year the term of office of one class expires. In May 2002, the term of a class consisting of three directors expired. Richard G. Merrill, Jack H. Nusbaum and Mark L. Shapiro were elected as directors to hold office for a term of three years until the Annual Meeting of Stockholders in 2005 and until their successors are duly elected and qualify. Robert B. Hodes, a director whose term was to expire in 2003, resigned during 2002.
William R. Berkley has been Chairman of the Board and Chief Executive Officer of the Company since its formation in 1967. He also currently serves as President and Chief Operating Officer, a position which he has held since March 1, 2000 and has held at various times from 1967 to 1995. Mr. Berkley also serves as Chairman of the Board or director of a number of public and private companies. These include Associated Community Bancorp, Inc. and its subsidiaries, The Greenwich Bank & Trust Company and Westport National Bank; The First Marblehead Corporation; FLOORgraphics, Inc.; Interlaken Capital, Inc.; Strategic Distribution, Inc. and W. R. Berkley Corporation Charitable Foundation. Mr. Berkley’s current term as a director expires in 2003.
Eugene G. Ballard has been Senior Vice President - Chief Financial Officer and Treasurer of the Company since June 1, 1999. Before joining the Company, Mr. Ballard was Executive Vice President and Chief Financial Officer of GRE Insurance Group, New York, New York since 1995.
William R. Berkley, Jr. has been a Director of the Company since 2001, a Senior Vice President - Specialty Operations since January 2003 and Vice Chairman of Berkley International, LLC since May 2002. He was Senior Vice President of the Company from January 2002 to January 2003 and Vice President from May 2000 to January 2002. Mr. Berkley joined the Company in September 1997. Mr. Berkley was President of Berkley International, LLC from January 2001 to May 2002, and Executive Vice President from March 2000 to January 2001. From July 1995 to August 1997, he served in the Corporate Finance Department of Merrill Lynch Investment Company. Mr. Berkley is also a director of Associated Community Bancorp, Inc. and its subsidiary Westport National Bank; Interlaken Capital, Inc.; Strategic Distribution, Inc.; and W. R. Berkley Corporation Charitable Foundation. Mr. Berkley’s current term as director expires in 2004.
Robert P. Cole has been Senior Vice President of the Company since January 1998. Prior thereto, he was Vice President since October 1996. Before joining the Company, Mr. Cole was,
28
since 1992, a senior Officer of Christania General Insurance Corp. of New York, which was purchased by Folksamerica Reinsurance Company in 1996. He has been in the insurance/reinsurance business for more than 25 years.
Paul J. Hancock has been Senior Vice President - Chief Corporate Actuary of the Company since January 2002. He joined the Company in 1997 and most recently served as a Vice President in the actuarial department. Mr. Hancock came to the Company from Berkley Insurance Company, a subsidiary of the Company, where he was Vice President - Actuarial Manager.
Robert C. Hewitt has been Senior Vice President - Risk Management of the Company since January 2002. He was most recently a Senior Vice President for Benfield Blanch Inc. (and its predecessor, E. W. Blanch Co., Inc.), where he served from 1986 - 2002 and managed its New York City office since 1995. Mr. Hewitt has over 20 years of experience in the reinsurance and insurance industries.
H. Raymond Lankford has been Senior Vice President - Alternative Markets Operations of the Company since May 1996. Prior thereto, he was President of All American Agency Facilities, Inc., a subsidiary of the Company, from October 1991, having joined All American in 1990. Mr. Lankford has been in the insurance business in various capacities for more than 30 years.
Ira S. Lederman has been Senior Vice President since January 1997 and General Counsel and Corporate Secretary of the Company since November 2001. Additionally, he has been General Counsel of Berkley International, LLC since January 1998. Previously, Mr. Lederman was General Counsel - Insurance Operations from August 2000, Assistant Secretary from May 1986, Assistant General Counsel from July 1989 until August 2000 and Vice President from May 1986 until January 1997. Prior thereto, Mr. Lederman was Insurance Counsel of the Company since May 1986 and Associate Counsel from April 1983.
James W. McCleary has been Senior Vice President - Reinsurance Operations of the Company since August 2001. Mr. McCleary has served as President of Facultative ReSources, Inc., a Berkley subsidiary, since 1990 and chief underwriting officer since its inception. Mr. McCleary has over 29 years of experience in the reinsurance sector.
James G. Shiel has been Senior Vice President - Investments of the Company since January 1997. Prior thereto, he was Vice President - Investments of the Company since January 1992. Since February 1994, Mr. Shiel has been President of Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in 1987.
Clement P. Patafio has been Vice President - Corporate Controller of the Company since January 1997. Prior thereto, he was Assistant Vice President - Corporate Controller since July 1994 and Assistant Controller since May 1993. Before joining the Company, Mr. Patafio was with KPMG LLP from 1986 to 1993.
Philip J. Ablove has been a director of the Company since August 2002. Mr. Ablove was Executive Vice President and Chief Financial Officer of Pioneer Companies, Inc. from March 1996 to December 2002 when he retired. He was Senior Vice President and Chief Financial Officer of W. R. Berkley Corporation from July 1973 until April 1983. Mr. Ablove’s current term as a director expires in 2003.
Ronald E. Blaylock has been a director of the Company since 2001. Mr. Blaylock is the Founder, Chairman and Chief Executive Officer of Blaylock & Partners, L.P., an investment banking firm. He held senior management positions with PaineWebber Group and Citicorp before launching Blaylock & Partners in 1993. Mr. Blaylock’s current term as director expires in 2004.
Mark E. Brockbank, retired, has been a director of the Company since 2001. Mr. Brockbank served from 1995 to 2000 as Chief Executive of XL Brockbank LTD, an underwriting management agency at Lloyd’s of London. He was a founder of the predecessor firm of XL Brockbank LTD and was a director of XL Brockbank LTD from 1983 to 2000. Mr. Brockbank’s current term as a director expires in 2004.
George G. Daly has been a director of the Company since 1998. Dr. Daly is Fingerhut Professor and Dean Emeritus Stern School of Business, New York University since August 2002. Previously, he was Dean of Stern School of Business, and Dean Richard R. West Professor of Business, New York University for more than five years. In addition to his academic career, Dr. Daly served as Chief Economist at the U.S. Office of Energy Research and Development in 1974. Dr. Daly’s current term as a director expires in 2003.
29
Richard G. Merrill has been a director of the Company since 1994. Mr. Merrill was Executive Vice President of Prudential Insurance Company of America from August 1987 to March 1991 when he retired. Prior thereto, he served as Chairman and President of Prudential Asset Management Company since 1985. Mr. Merrill is also a director of Associated Community Bancorp, Inc. and Sysco Corporation. Mr. Merrill’s current term as a director expires in 2005.
Jack H. Nusbaum has been a director of the Company since 1967. Mr. Nusbaum is the Chairman of the New York law firm of Willkie Farr & Gallagher where he has been a partner for more than the last five years. He is a director of Associated Community Bankcorp, Inc., Neuberger Berman Inc., Prime Hospitality Corp., Strategic Distribution, Inc. and The Topps Company, Inc. Mr. Nusbaum’s current term as a director expires in 2005.
Mark L. Shapiro has been a director of the Company since 1974. Since September 1998, Mr. Shapiro has been a private investor. From July 1997 through August 1998, Mr. Shapiro was a Senior Consultant to the Export-Import Bank of the United States. Previously, he was a Managing Director in the investment banking firm of Schroder & Co. Inc. for more than the past five years. Mr. Shapiro’s current term as a director expires in 2005.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002, and which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
| (a) | Security ownership of certain beneficial owners |
Reference is made to the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002, and which is incorporated herein by reference.
| (b) | Security ownership of management |
Reference is made to the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002, and which is incorporated herein by reference.
| (c) | Changes in control |
Reference is made to the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002, and which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002, and which is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 within the 90 days prior to the date of the filing of this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place appropriate controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
| (a) | Index to Financial Statements |
The Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Company’s financial statements, together with the report thereon of KPMG LLP, appearing on pages 26 through 54 of the Company’s 2002 Annual Report to Stockholders, are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, the 2002 Annual Report to Stockholders is not deemed to be filed as part of this report. The schedules to the financial statements listed below should be read in conjunction with the financial statements in such 2002 Annual Report to Stockholders. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or required information is shown in the financial statements or notes thereto.
| Index to Financial Statement Schedules | Page | |||
| Independent Auditors’ Report on Schedules and Consent | 39 | |||
| Schedule II - Condensed Financial Information of Registrant | 40 | |||
| Schedule III - Supplementary Insurance Information | 44 | |||
| Schedule IV - Reinsurance | 45 | |||
| Schedule VI - Supplementary Information concerning Property & Casualty Insurance Operations | 46 | |||
| (b) | Reports on Form 8-K |
Report dated October 29, 2002 with respect to a press release relating to the Company’s results of operations for the third quarter of 2002 (under Item 5 of Form 8-K).
Report dated November 14, 2002 with respect to a press release relating to the Company’s commencement of a public offering of 4,100,000 shares of its common stock (under Item 5 of Form 8-K).
Report dated November 19, 2002 with respect to the Company entering into an Underwriting Agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, and Salomon Smith Barney Inc., as representatives of the several underwriters named therein, with respect to the issue and sale by the Company, and the purchase by the underwriters, of an aggregate of 4,100,000 shares of the Company’s common stock, $.20 par value per share, plus up to an additional 615,000 shares subject to the underwriters’ over-allotment option (collectively, the “Securities”), under a Registration Statement on Form S-3 (Registration No. 333-88920) and Willkie Farr & Gallagher, as counsel to the Company, issuing its opinion as to the legality of the Securities, as well as the Company’s press release relating to the pricing of the offering of the Securities (under Item 5 of Form 8-K).
Report dated November 22, 2002 with respect to a press release relating to the Company’s announcement of the closing of the public offering of 4,715,000 shares of its common stock, from which the Company received net proceeds of $167 million. The Company also announced that effective November 1, 2002, the Company’s transfer agent and registrar for its common stock and associated preferred stock purchase rights was Wells Fargo Bank Minnesota, N.A. (under Item 5 of Form 8-K).
| (c) | Exhibits |
The exhibits filed as part of this report are listed on pages 35 and 36 hereof.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| W. R. BERKLEY CORPORATION | ||
| By | /s/ William R. Berkley | |
|
|
||
|
William R. Berkley, Chairman of the Board and
President |
||
March 31, 2003
32
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
|
|
|
|
||
|
/s/ William R. Berkley
|
Chairman of the Board and President | March 31, 2003 | ||
|
William R. Berkley
Principal executive officer |
||||
|
/s/ William R. Berkley, Jr.
|
Director | March 31, 2003 | ||
| William R. Berkley, Jr. | ||||
|
/s/ Philip J. Ablove
|
Director | March 31, 2003 | ||
| Philip J. Ablove | ||||
|
/s/ Ronald E. Blaylock
|
Director | March 31, 2003 | ||
| Ronald E. Blaylock | ||||
|
/s/ Mark E. Brockbank
|
Director | March 31, 2003 | ||
| Mark E. Brockbank | ||||
|
/s/ George G. Daly
|
Director | March 31, 2003 | ||
| George G. Daly | ||||
|
/s/ Richard G. Merrill
|
Director | March 31, 2003 | ||
| Richard G. Merrill | ||||
|
/s/ Jack H. Nusbaum
|
Director | March 31, 2003 | ||
| Jack H. Nusbaum | ||||
|
/s/ Mark L. Shapiro
|
Director | March 31, 2003 | ||
| Mark L. Shapiro | ||||
|
/s/ Eugene G. Ballard
|
Senior Vice President,
Chief Financial Officer and Treasurer |
March 31, 2003 | ||
|
Eugene G. Ballard
Principal accounting officer |
||||
|
/s/ Clement P. Patafio
|
Vice President,
Corporate Controller |
March 31, 2003 | ||
| Clement P. Patafio |
33
CERTIFICATIONS
I, William R. Berkley, Chairman of the Board and Chief Executive Officer of W.
R. Berkley Corporation (the “registrant”), certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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:
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):
6. The registrant’s other certifying officers and I have indicated in this
annual 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: March 31, 2003
34
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 annual 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
annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
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
/s/ William R. Berkley
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Table of Contents
CERTIFICATIONS
I, Eugene G. Ballard, Senior Vice President, Chief Financial Officer and
Treasurer of W. R. Berkley Corporation (the “registrant”), certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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:
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):
6. The registrant’s other certifying officers and I have indicated in this
annual 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: March 31, 2003
35
ITEM 14. (c) EXHIBITS
36
37
38
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 annual 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
annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
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
/s/ Eugene G. Ballard
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer and
Treasurer
Table of Contents
Number
(2.1)
Agreement and Plan of Merger between the Company, Berkley Newco Corp.
and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s
Current Report on Form 8-K (File No. 0-7849) filed with the Commission on
September 28, 1995).
(2.2)
Agreement and Plan of Restructuring, dated July 20, 1995, by and among
the Company, Signet Star Holdings, Inc., Signet Star Reinsurance Company,
Signet Reinsurance Company and General Re Corporation (incorporated by
reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K
(File No. 0-7849) filed with the Commission on September 28, 1995).
(3.1)
Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K
(File No. 0-7849) filed with the Commission on March 30, 1994).
(3.2)
Amendment, dated May 12, 1998, to the Company’s Restated Certificate
of Incorporation, as amended (incorporated by reference to Exhibit 3.2 of
the Company’s Annual Report on Form 10-K (File No. 0-7849) filed with the
Commission on March 23, 1999).
(3.3)
Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock (incorporated by reference to Exhibit 3.1
of the Company’s Annual Report on Form 10-Q (File No. 0-7849) filed with
the Commission on August 11, 1999).
(3.4)
Amended and Restated By-Laws (incorporated by reference to Exhibit
3(ii) of the Company’s Current Report on Form 8-K (File No. 0-7849) filed
with the Commission on May 11, 1999).
(4.1)
Indenture, dated as of February 14, 2003, between the Company and The
Bank of New York, as trustee, relating to $200,000,000 principle amount
of the Company’s 5.875% Senior Notes due 2013.
(4.2)
First Supplemental Indenture, dated February 14, 2003, between the
Company and The Bank of New York, as trustees, relating to $200,000,000
principle amount of the Company’s 5.875% Senior Notes due 2013, including
form of the Notes as Exhibit A.
(4.3)
The instruments defining the rights of holders of the other long term
debt securities of the Company are omitted pursuant to Section
(b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to
furnish supplementally copies of these instruments to the Commission upon
request.
(10.1)
Loan Agreement, dated as of January 5, 2001, between the Company and
William R. Berkley (incorporated by reference to Exhibit 10.1 of the
Company’s Annual Report on Form 10-K (File No. 0-7849) filed with the
Commission on March 22, 2001).
(10.2)
First Amended and Restated W. R. Berkley Corporation 1992 Stock Option
Plan (incorporated by reference to Exhibit 10.2 of the Company’s Annual
Report on Form 10-K (File No. 0-7849) filed with the Commission on March
23, 1999).
(10.3)
The Company’s lease dated June 3, 1983 with the Ahneman, Devaul and
Devaul Partnership, incorporated by reference to Exhibit 10.3 of the
Company’s Registration Statement on Form S-1 (File No. 2-98396) filed
with the Commission on June 14, 1985.
(10.4)
W. R. Berkley Corporation Deferred Compensation Plan for Officers as
amended January 1, 1991 (incorporated by reference to Exhibit 10.4 of the
Company’s Annual Report on Form 10-K (File No. 0-7849) filed with the
Commission on March 26, 1996).
(10.5)
W. R. Berkley Corporation Deferred Compensation Plan for Directors as
adopted March 7, 1996 (incorporated by reference to Exhibit 10.5 of the
Company’s Annual Report on Form 10-K (File No. 0-7849) filed with the
Commission on March 26, 1996).
(10.6)
W. R. Berkley Corporation Annual Incentive Compensation Plan
(incorporated by reference to Annex A of the Company’s 2002 Proxy
Statement (File No. 0-7849) filed with the Commission on April 5, 2002).
Table of Contents
(10.7)
W. R. Berkley Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K
(File No. 0-7849) filed with the Commission on March 27, 1998).
(10.8)
1997 Directors Stock Plan, as Amended and Restated as of May 11, 1999
(incorporated by reference to Exhibit 10.2 of the Company’s Annual Report
on Form 10-Q (File No. 0-7849) filed with the Commission on August 11,
1999).
(13)
2002 Annual Report to Stockholders of W. R. Berkley Corporation (only
those portions of such Annual Report that are incorporated by reference
in this Report on Form 10-K are deemed filed) (filed herewith).
Table of Contents
(21)
Following is a list of the Company’s significant subsidiaries and other
operating entities. Subsidiaries of subsidiaries are indented and the
parent of each such corporation owns 100% of the outstanding voting
securities of such corporation except as noted below.
Jurisdiction of
Percentage
Incorporation
owned
New York
65
%
Florida
100
%
New Jersey
100
%
Delaware
100
%
Delaware
100
%
Delaware
100
%
Minnesota
100
%
Arizona
100
%
North Dakota
100
%
North Carolina
100
%
Delaware
100
%
Delaware
100
%
Delaware
100
%
Delaware
100
%
Delaware
100
%
Maine
100
%
Maine
100
%
North Carolina
100
%
Iowa
100
%
Delaware
100
%
Mississippi
100
%
Minnesota
100
%
Nebraska
100
%
Oklahoma
100
%
North Carolina
100
%
Delaware
100
%
California
100
%
Connecticut
100
%
Delaware
100
%
Minnesota
100
%
California
100
%
Delaware
100
%
(23)
Independent Auditors’ Report on Schedules and Consent
(99.1)
Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(99.2)
Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Table of Contents
INDEPENDENT AUDITORS’ REPORT ON SCHEDULES AND CONSENT
Board of Directors and Stockholders
The audits referred to in our report dated February 10, 2003, incorporated by
reference in the Form 10-K, included the related financial statement schedules
as of December 31, 2002, and for each of the years in the three-year period
ended December 31, 2002. These financial statement schedules are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
has changed its method of accounting for goodwill in 2002.
We consent to the use of our reports incorporated by reference in the
Registration Statements, (No. 333-00459) and (No. 333-88920) on Form S-3 and
(No. 333-33935), (No. 33-88640) and (No. 33-55726) on Form S-8 of W. R. Berkley
Corporation.
KPMG LLP
New York, New York
39
Schedule II
W. R. Berkley Corporation
See note to condensed financial statements.
40
Schedule II, Continued
W. R. Berkley Corporation
See note to condensed financial statements.
41
W. R. Berkley Corporation
March 31, 2003
Table of Contents
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
December 31,
2002
2001
$
30,349
$
109,950
—
4,935
26,016
27,585
763
235
909
903
1,810,572
1,268,553
85,276
57,455
—
17,126
28,557
101,088
7,979
2,592
2,080
15,165
$
1,992,501
$
1,605,587
$
84,586
$
123,572
47,273
25,449
327,192
326,802
459,051
475,823
198,251
198,169
—
—
13,934
12,991
823,190
654,936
623,651
467,185
104,603
37,340
(230,179
)
(240,857
)
1,335,199
931,595
$
1,992,501
$
1,605,587
Table of Contents
Condensed Financial Information of Registrant, Continued
Statements of Operations (Parent Company)
(Amounts in thousands)
Years ended December 31,
2002
2001
2000
$
5,470
$
12,550
$
49,585
(867
)
(221
)
(558
)
2,924
4,678
4,051
7,527
17,007
53,078
39,349
21,607
18,871
—
—
—
44,546
44,690
46,521
(76,368
)
(49,290
)
(12,314
)
106,145
(42,357
)
24,858
(77,438
)
58,884
(630
)
28,707
16,527
24,228
(47,661
)
(32,763
)
11,914
222,706
(58,783
)
24,324
$
175,045
$
(91,546
)
$
36,238
Table of Contents
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statement of Cash Flows (Parent Company)
(Amounts in thousands)
Years ended December 31,
2002
2001
2000
$
175,045
$
(91,546
)
$
36,238
(222,706
)
58,783
(24,324
)
33,085
(9,668
)
28,389
(106,145
)
42,357
(24,859
)
59,082
(71,459
)
1,411
867
221
558
28,415
(9,960
)
643
(32,357
)
(81,272
)
18,056
(6
)
(39
)
(91
)
(32,363
)
(81,311
)
17,965
32,695
11,221
—
—
—
—
3,473
4,114
365
(28,811
)
(42,744
)
(558
)
(621
)
—
—
(3,730
)
—
—
—
—
107,391
(206,277
)
(112,805
)
(70,049
)
(6,597
)
(1,469
)
(290
)
628
(1
)
500
(209,240
)
(141,684
)
37,359
166,960
315,840
—
—
(10,000
)
(25,000
)
—
(1,002
)
(7,020
)
(17,872
)
(14,707
)
(12,701
)
—
—
—
—
—
—
—
—
(25,000
)
12,914
26,195
8,935
162,002
316,326
(60,786
)
(79,601
)
93,331
(5,462
)
109,950
16,619
22,081
$
30,349
$
109,950
$
16,619
See note to condensed financial statements.
42
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 2002
Note to Condensed Financial Statements (Parent Company)
The accompanying condensed financial statements should be read in conjunction with the notes to consolidated financial statements included elsewhere herein. Reclassifications have been made in the 2001 and 2000 financial statements as originally reported to conform them to the presentation of the 2002 financial statements.
The Company files a consolidated federal tax return with the results of its domestic insurance subsidiaries included on a statutory basis. Under present Company policy, Federal income taxes payable by (or refundable to) subsidiary companies on a separate-return basis are paid to (or refunded by) W. R. Berkley Corporation, and the Company pays the tax due on a consolidated return basis.
43
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 2002, 2001 and 2000
(Amounts in thousands)
Reserve for
Deferred policy
losses and
Net
acquisition
loss
Unearned
Premiums
investment
cost
expenses
premiums
earned
income
$
97,507
$
928,666
$
447,384
$
711,577
$
50,550
24,720
634,620
184,800
235,558
37,641
70,639
826,835
351,743
459,406
47,224
100,422
610,329
401,703
705,385
44,365
14,912
64,614
4,359
89,284
5,325
—
145,568
257
51,317
4,457
—
—
—
—
(1,687
)
$
308,200
$
3,210,632
$
1,390,246
$
2,252,527
$
187,875
$
69,558
$
776,483
$
289,557
$
401,611
$
39,390
9,763
448,762
61,146
123,173
37,765
21,552
659,363
116,376
236,385
42,536
78,708
613,805
327,006
555,750
51,640
29,477
89,499
23,765
140,909
13,993
15,052
229,770
61,790
222,641
9,762
—
—
—
—
(65
)
$
224,110
$
2,817,682
$
879,640
$
1,680,469
$
195,021
$
40,060
$
753,238
$
184,160
$
270,896
$
48,706
3,976
393,282
28,730
88,872
37,722
27,761
518,554
109,824
298,102
50,471
68,398
591,417
263,693
503,029
56,955
30,867
106,878
30,956
107,285
9,636
25,169
170,548
95,876
222,830
9,562
—
—
—
—
(2,604
)
$
196,231
$
2,533,917
$
713,239
$
1,491,014
$
210,448
[Additional columns below]
[Continued from above table, first column(s) repeated]
Amortization of
Loss and
deferred policy
Other
Loss
acquisition
operating
Net premiums
expenses
costs
cost and expenses
written
$
455,682
$
148,179
$
38,849
$
861,693
157,186
57,668
81,737
305,357
335,197
133,811
3,619
680,205
416,815
201,382
27,469
776,577
48,419
41,220
6,727
79,313
50,672
7,733
8,051
7,345
—
—
40,760
—
$
1,463,971
$
589,993
207,212
$
2,710,490
$
286,865
$
89,232
$
35,747
$
527,502
94,258
30,653
74,785
151,942
246,706
84,036
2,894
236,784
373,647
167,681
26,955
598,149
86,582
52,853
4,328
150,090
292,442
67,610
5,831
193,629
—
—
21,171
—
$
1,380,500
$
492,065
$
171,711
$
1,858,096
$
198,237
$
79,101
$
15,685
$
285,525
62,416
26,808
65,257
98,001
218,116
95,146
3,964
276,640
379,789
150,884
25,893
499,526
66,643
37,533
7,204
118,981
169,210
65,257
7,861
227,571
—
—
15,986
—
$
1,094,411
$
454,729
$
141,850
$
1,506,244
44
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 2002, 2001 and 2000
(Amounts in thousands)
Assumed
Percentage
Ceded
from
of amount
Direct
to other
other
Net
assumed to
amount
companies
companies
amount
net
$
915,387
$
77,631
$
23,937
$
861,693
2.8
309,437
43,597
39,517
305,357
12.9
185,392
177,975
672,788
680,205
98.9
939,927
178,573
15,223
776,577
2.0
87,265
7,952
—
79,313
0.0
13,229
12,010
6,126
7,345
83.4
$
2,450,637
$
497,738
$
757,591
$
2,710,490
28.0
%
$
598,225
$
83,862
$
13,139
$
527,502
2.5
144,687
17,497
24,752
151,942
16.3
88,183
95,598
244,199
236,784
103.1
698,114
106,852
6,887
598,149
1.2
170,600
20,510
—
150,090
—
135,702
26,051
83,978
193,629
43.4
$
1,835,511
$
350,370
$
372,955
$
1,858,096
20.1
%
$
403,149
$
122,020
$
4,396
$
285,525
1.5
84,917
10,801
23,885
98,001
24.4
57,210
47,206
266,636
276,640
96.4
574,079
80,364
5,811
499,526
1.2
143,523
24,542
—
118,981
—
156,467
25,578
96,682
227,571
42.5
$
1,419,345
$
310,511
$
397,410
$
1,506,244
26.4
%
45
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 2002, 2001 and 2000
(Amounts in thousands)
2002
2001
2000
$
308,200
$
224,110
$
196,231
3,210,632
2,817,682
2,533,917
1,390,246
879,640
713,239
2,252,527
1,680,469
1,491,014
187,875
195,021
210,448
1,288,071
1,140,622
1,047,060
173,732
211,344
14,042
(4,549
)
8,717
11,530
589,993
492,065
454,729
1,167,306
1,145,439
978,448
2,710,490
1,858,096
1,506,244
46
SENIOR INDENTURE
W. R. BERKLEY CORPORATION, Issuer
To
THE BANK OF NEW YORK, Trustee
_______________
INDENTURE
_______________
Dated as of February 14, 2003
Senior Debt Securities
Reconciliation and tie between
Trust Indenture Act of 1939 (the “Trust Indenture Act”)
and Indenture
Trust Indenture
Act Section
Indenture Section
6.8
6.8
6.9
7.1
7.2
7.2
7.3
7.3
7.3
7.3
7.4
10.2
10.2
10.2
10.2
10.1
5.2, 5.12
5.13
5.8
5.3
5.4
10.3
10.6
| Note: This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture. |
TABLE OF CONTENTS
| Page | |||||
|
|
|||||
|
Article 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
|
1 | ||||
|
Section 1.1. Definitions
|
1 | ||||
|
Section 1.2. Compliance Certificates and Opinions
|
10 | ||||
|
Section 1.3. Form of Documents Delivered to Trustee
|
11 | ||||
|
Section 1.4. Acts of Holders
|
11 | ||||
|
Section 1.5. Notices, etc. to Trustee and Company
|
14 | ||||
|
Section 1.6. Notice to Holders of Securities; Waiver
|
14 | ||||
|
Section 1.7. Language of Notices
|
15 | ||||
|
Section 1.8. Conflict with Trust Indenture Act
|
15 | ||||
|
Section 1.9. Effect of Headings and Table of Contents
|
15 | ||||
|
Section 1.10. Successors and Assigns
|
15 | ||||
|
Section 1.11. Separability Clause
|
15 | ||||
|
Section 1.12. Benefits of Indenture
|
16 | ||||
|
Section 1.13. Governing Law
|
16 | ||||
|
Section 1.14. Legal Holidays
|
16 | ||||
|
Section 1.15. Counterparts
|
16 | ||||
|
Section 1.16. Judgment Currency
|
16 | ||||
|
Section 1.17. No Security Interest Created
|
17 | ||||
|
Section 1.18. Limitation on Individual Liability
|
17 | ||||
|
Section 1.19. Submission to Jurisdiction
|
17 | ||||
|
Article 2 SECURITIES FORMS
|
18 | ||||
|
Section 2.1. Forms Generally
|
18 | ||||
|
Section 2.2. Form of Trustee’s Certificate of Authentication
|
18 | ||||
|
Section 2.3. Securities in Global Form
|
19 | ||||
|
Article 3 THE SECURITIES
|
19 | ||||
|
Section 3.1. Amount Unlimited; Issuable in Series
|
19 | ||||
|
Section 3.2. Currency; Denominations
|
23 | ||||
|
Section 3.3. Execution, Authentication, Delivery and Dating
|
24 | ||||
i
TABLE OF CONTENTS
(continued)
| Page | |||||
|
|
|||||
|
Section 3.4.
|
Temporary Securities | 26 | |||
|
Section 3.5.
|
Registration, Transfer and Exchange | 26 | |||
|
Section 3.6.
|
Mutilated, Destroyed, Lost and Stolen Securities | 30 | |||
|
Section 3.7.
|
Payment of Interest and Certain Additional Amounts; Rights to
Interest and Certain Additional Amounts Preserved
|
31 | |||
|
Section 3.8.
|
Persons Deemed Owners | 33 | |||
|
Section 3.9.
|
Cancellation | 33 | |||
|
Section 3.10.
|
Computation of Interest | 33 | |||
|
Article 4 SATISFACTION AND DISCHARGE OF INDENTURE
|
34 | ||||
|
Section 4.1.
|
Satisfaction and Discharge | 34 | |||
|
Section 4.2.
|
Defeasance and Covenant Defeasance | 35 | |||
|
Section 4.3.
|
Application of Trust Money | 39 | |||
|
Article 5 REMEDIES
|
40 | ||||
|
Section 5.1.
|
Events of Default | 40 | |||
|
Section 5.2.
|
Acceleration of Maturity; Rescission and Annulment | 42 | |||
|
Section 5.3.
|
Collection of Indebtedness and Suits for Enforcement by Trustee | 43 | |||
|
Section 5.4.
|
Trustee May File Proofs of Claim | 44 | |||
|
Section 5.5.
|
Trustee May Enforce Claims without Possession of Securities or Coupons | 44 | |||
|
Section 5.6.
|
Application of Money Collected | 45 | |||
|
Section 5.7.
|
Limitations on Suits | 45 | |||
|
Section 5.8.
|
Unconditional Right of Holders to Receive Principal and any
Premium, Interest and Additional Amounts
|
46 | |||
|
Section 5.9.
|
Restoration of Rights and Remedies; | 46 | |||
|
Section 5.10.
|
Rights and Remedies Cumulative | 46 | |||
|
Section 5.11.
|
Delay or Omission Not Waiver | 47 | |||
|
Section 5.12.
|
Control by Holders of Securities | 47 | |||
ii
TABLE OF CONTENTS
(continued)
| Page | |||||
|
|
|||||
|
Section 5.13. Waiver of Past Defaults
|
47 | ||||
|
Section 5.14. Waiver of Usury, Stay or Extension Laws
|
48 | ||||
|
Section 5.15. Undertaking for Costs
|
48 | ||||
|
Article 6 THE TRUSTEE
|
48 | ||||
|
Section 6.1. Certain Duties and Responsibilities
|
48 | ||||
|
Section 6.2. Certain Rights of Trustee
|
49 | ||||
|
Section 6.3. Notice of Defaults
|
51 | ||||
|
Section 6.4. Not Responsible for Recitals or Issuance of Securities
|
51 | ||||
|
Section 6.5. May Hold Securities
|
52 | ||||
|
Section 6.6. Money Held in Trust
|
52 | ||||
|
Section 6.7. Compensation and Reimbursement
|
52 | ||||
|
Section 6.8. Corporate Trustee Required; Eligibility
|
53 | ||||
|
Section 6.9. Resignation and Removal; Appointment of Successor
|
53 | ||||
|
Section 6.10. Acceptance of Appointment by Successor
|
55 | ||||
|
Section 6.11. Merger, Conversion, Consolidation or Succession to Business
|
56 | ||||
|
Section 6.12. Appointment of Authenticating Agent
|
56 | ||||
|
Article 7 HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
|
58 | ||||
|
Section 7.1. Company to Furnish Trustee Names and Addresses of Holders
|
58 | ||||
|
Section 7.2. Preservation of Information; Communications to Holders
|
59 | ||||
|
Section 7.3. Reports by Trustee
|
59 | ||||
|
Section 7.4. Reports by Company
|
59 | ||||
|
Article 8 CONSOLIDATION, AMALGAMATIONS, MERGER AND SALES
|
60 | ||||
|
Section 8.1. Company May Consolidate, Etc., Only on Certain Terms
|
60 | ||||
|
Section 8.2. Successor Person Substituted for Company
|
61 | ||||
|
Article 9 SUPPLEMENTAL INDENTURES
|
61 | ||||
|
Section 9.1. Supplemental Indentures without Consent of Holders
|
61 | ||||
iii
TABLE OF CONTENTS
(continued)
| Page | |||||
|
|
|||||
|
Section 9.2. Supplemental Indentures with Consent of Holders
|
63 | ||||
|
Section 9.3. Execution of Supplemental Indentures
|
64 | ||||
|
Section 9.4. Effect of Supplemental Indentures
|
64 | ||||
|
Section 9.5. Reference in Securities to Supplemental Indentures
|
64 | ||||
|
Section 9.6. Conformity with Trust Indenture Act
|
65 | ||||
|
Section 9.7. Notice of Supplemental Indenture
|
65 | ||||
|
Article 10 COVENANTS
|
65 | ||||
|
Section 10.1. Payment of Principal, any Premium, Interest and Additional Amounts
|
65 | ||||
|
Section 10.2. Maintenance of Office or Agency
|
65 | ||||
|
Section 10.3. Money for Securities Payments to Be Held in Trust
|
66 | ||||
|
Section 10.4. Additional Amounts
|
68 | ||||
|
Section 10.5. Corporate Existence
|
70 | ||||
|
Section 10.6. Waiver of Certain Covenants
|
70 | ||||
|
Section 10.7. Company Statement as to Compliance; Notice of Certain Defaults
|
70 | ||||
|
Article 11 REDEMPTION OF SECURITIES
|
71 | ||||
|
Section 11.1. Applicability of Article
|
71 | ||||
|
Section 11.2. Election to Redeem; Notice to Trustee
|
71 | ||||
|
Section 11.3. Selection by Trustee of Securities to be Redeemed
|
71 | ||||
|
Section 11.4. Notice of Redemption
|
72 | ||||
|
Section 11.5. Deposit of Redemption Price
|
73 | ||||
|
Section 11.6. Securities Payable on Redemption Date
|
74 | ||||
|
Section 11.7. Securities Redeemed in Part
|
74 | ||||
|
Article 12 SINKING FUNDS
|
75 | ||||
|
Section 12.1. Applicability of Article
|
75 | ||||
|
Section 12.2. Satisfaction of Sinking Fund Payments with Securities
|
75 | ||||
|
Section 12.3. Redemption of Securities for Sinking Fund
|
76 | ||||
iv
TABLE OF CONTENTS
(continued)
| Page | |||||
|
|
|||||
|
Article 13 REPAYMENT AT THE OPTION OF HOLDERS
|
76 | ||||
|
Section 13.1. Applicability of Article
|
76 | ||||
|
Article 14 SECURITIES IN FOREIGN CURRENCIES
|
77 | ||||
|
Section 14.1. Applicability of Article
|
77 | ||||
|
Article 15 MEETINGS OF HOLDERS OF SECURITIES
|
77 | ||||
|
Section 15.1. Purposes for Which Meetings May Be Called
|
77 | ||||
|
Section 15.2. Call, Notice and Place of Meetings
|
77 | ||||
|
Section 15.3. Persons Entitled to Vote at Meetings
|
78 | ||||
|
Section 15.4. Quorum; Action
|
78 | ||||
|
Section 15.5. Determination of Voting Rights; Conduct and Adjournment of Meetings
|
79 | ||||
|
Section 15.6. Counting Votes and Recording Action of Meetings
|
80 | ||||
v
INDENTURE, dated as of February 14, 2003 (the “Indenture”), between W. R. BERKLEY CORPORATION , a company duly organized and existing under the laws of Delaware (hereinafter called the “Company”), having its principal executive office located at 475 Steamboat Road, Greenwich, Connecticut 06830, and THE BANK OF NEW YORK , a national banking association duly organized and existing under the laws of the United States of America (hereinafter called the “Trustee”), having its Corporate Trust Office located at 101 Barclay Street, Floor 21 West, New York, New York 10286.
RECITALS
The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its senior unsecured debentures, notes or other evidences of indebtedness (hereinafter called the “Securities”), unlimited as to principal amount, to bear such rates of interest, to mature at such time or times, to be issued in one or more series and to have such other provisions as shall be fixed as hereinafter provided.
The Company has duly authorized the execution and delivery of this Indenture. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.
This Indenture is subject to the provisions of the Trust Indenture Act of 1939, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder that are required to be part of this Indenture and, to the extent applicable, shall be governed by such provisions.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities by the Holders (as herein defined) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of any series thereof and any Coupons (as herein defined) as follows:
Article 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1. Definitions.
Except as otherwise expressly provided in or pursuant to this Indenture or unless the context otherwise requires, for all purposes of this Indenture:
| (1) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; | |
| (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; |
| (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles in the United States of America and, except as otherwise herein expressly provided, the terms “generally accepted accounting principles” or “GAAP” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States of America at the date or time of such computation; | |
| (4) the words “herein,” “hereof,” “hereto” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and | |
| (5) the word “or” is always used inclusively (for example, the phrase “A or B” means “A or B or both,” not “either A or B but not both”). |
Certain terms used principally in certain Articles hereof are defined in those Articles.
“Act,” when used with respect to any Holders, has the meaning specified in Section 1.4.
“Additional Amounts” means any additional amounts which are required hereby or by any Security, under circumstances specified herein or therein, to be paid by the Company in respect of certain taxes, assessments or other governmental charges imposed on Holders specified therein and which are owing to such Holders.
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control,” when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have the meanings correlative to the foregoing.
“Authenticating Agent” means any Person authorized by the Trustee pursuant to Section 6.12 to act on behalf of the Trustee to authenticate Securities of one or more series.
“Authorized Newspaper” means a newspaper, in an official language of the place of publication or in the English language, customarily published on each day that is a Business Day in the place of publication, whether or not published on days that are Legal Holidays in the place of publication, and of general circulation in each place in connection with which the term is used or in the financial community of each such place. Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any day that is a Business Day in the place of publication.
“Authorized Officer” means, when used with respect to the Company, the Chairman of the Board of Directors, a Vice Chairman, the President, the Chief Financial Officer, the Chief Investment Officer, the Chief Accounting Officer, the General Counsel, the Secretary, or any Vice President of the Company.
-2-
“Bearer Security” means any Security in the form established pursuant to Section 2.1 which is payable to bearer.
“Board of Directors” means the board of directors of the Company or any committee of that board duly authorized to act generally or in any particular respect for the Company hereunder.
“Board Resolution” means a copy of one or more resolutions, certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, delivered to the Trustee.
“Business Day,” with respect to any Place of Payment or other location, means, unless otherwise specified with respect to any Securities pursuant to Section 3.1, any day other than a Saturday, Sunday or other day on which banking institutions in such Place of Payment or other location are authorized or obligated by law, regulation or executive order to close.
“Capital Stock” of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including Preferred Stock, but excluding any debt securities convertible into such equity.
“Capitalized Lease Obligation” means an obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with generally accepted accounting principles, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with such principles.
“Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.
“Common Stock” in respect of any Corporation means Capital Stock of any class or classes (however designated) which has no preference as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Corporation, and which is not subject to redemption by such Corporation.
“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor Person, and any other obligor upon the Securities.
“Company Request” and “Company Order” mean, respectively, a written request or order, as the case may be, signed in the name of the Company by an Authorized Officer, and delivered to the Trustee.
-3-
“Conversion Event” means the cessation of use of (i) a Foreign Currency both by the government of the country or the confederation which issued such Foreign Currency and for the settlement of transactions by a central bank or other public institutions of or within the international banking community or (ii) any currency unit or composite currency for the purposes for which it was established.
“Corporate Trust Office” means the principal corporate trust office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of original execution of this Indenture is located at 101 Barclay Street, Floor 21 West, New York, New York 10286.
“Corporation” includes corporations and limited liability companies and, except for purposes of Article 8, associations, companies and business trusts.
“Coupon” means any interest coupon appertaining to a Bearer Security.
“Currency,” with respect to any payment, deposit or other transfer in respect of the principal of or any premium or interest on or any Additional Amounts with respect to any Security, means Dollars or the Foreign Currency, as the case may be, in which such payment, deposit or other transfer is required to be made by or pursuant to the terms hereof or such Security and, with respect to any other payment, deposit or transfer pursuant to or contemplated by the terms hereof or such Security, means Dollars.
“CUSIP number” means the alphanumeric designation assigned to a Security by Standard & Poor’s Ratings Service, CUSIP Service Bureau.
“Defaulted Interest” has the meaning specified in Section 3.7.
“Depository” means, with respect to any Security issuable or issued in the form of one or more global Securities, the Person designated as Depository by the Company in or pursuant to this Indenture, which Person must be, to the extent required by applicable law or regulation, a clearing agency registered under the Securities Exchange Act of 1934, as amended, and, if so provided with respect to any Security, any successor to such Person. If at any time there is more than one such Person, “Depository” shall mean, with respect to any Securities, the qualifying entity which has been appointed with respect to such Securities.
“Dollars” or “$” means a dollar or other equivalent unit of legal tender for payment of public or private debts in the United States of America.
“Event of Default” has the meaning specified in Section 5.1.
“Foreign Currency” means any currency, currency unit or composite currency, including, without limitation, the euro, issued by the government of one or more countries other than the United States of America or by any recognized confederation or association of such governments.
-4-
“Government Obligations” means securities which are (i) direct obligations of the United States of America or the other government or governments which issued the Foreign Currency in which the principal of or any premium or interest on such Security or any Additional Amounts in respect thereof shall be payable, in each case where the payment or payments thereunder are supported by the full faith and credit of such government or governments or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such other government or governments, in each case where the timely payment or payments thereunder are unconditionally guaranteed as a full faith and credit obligation by the United States of America or such other government or governments, and which, in the case of (i) or (ii), are not callable or redeemable at the option of the issuer or issuers thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of or other amount with respect to any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of or other amount with respect to the Government Obligation evidenced by such depository receipt.
“Holder,” in the case of any Registered Security, means the Person in whose name such Security is registered in the Security Register and, in the case of any Bearer Security, means the bearer thereof and, in the case of any Coupon, means the bearer thereof.
“Indebtedness” means, with respect to any Person, (i) the principal of and any premium and interest on (a) indebtedness of such Person for money borrowed and (b) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all Capitalized Lease Obligations of such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (v) all obligations of the type referred to in clauses (i) through (iv) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable as obligor, guarantor or otherwise, (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured; and (vii) any amendments, modifications, refundings, renewals or extensions of any indebtedness or obligation described as Indebtedness in clauses (i) through (vi) above.
-5-
“Indenture” means this instrument as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and, with respect to any Security, by the terms and provisions of such Security and any Coupon appertaining thereto established pursuant to Section 3.1 (as such terms and provisions may be amended pursuant to the applicable provisions hereof).
“Independent Public Accountants” means accountants or a firm of accountants that, with respect to the Company and any other obligor under the Securities or the Coupons, are independent public accountants within the meaning of the Securities Act of 1933, as amended, and the rules and regulations promulgated by the Commission thereunder, who may be the independent public accountants regularly retained by the Company or who may be other independent public accountants. Such accountants or firm shall be entitled to rely upon any Opinion of Counsel as to the interpretation of any legal matters relating to this Indenture or certificates required to be provided hereunder.
“Indexed Security” means a Security the terms of which provide that the principal amount thereof payable at Stated Maturity may be more or less than the principal face amount thereof at original issuance.
“Interest,” with respect to any Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity and, when used with respect to a Security which provides for the payment of Additional Amounts pursuant to Section 10.4, includes such Additional Amounts.
“Interest Payment Date,” with respect to any Security, means the Stated Maturity of an installment of interest on such Security.
“Judgment Currency” has the meaning specified in Section 1.16.
“Legal Holidays” has the meaning specified in Section 1.14.
“Lien” means any mortgage, pledge, lien, security interest or other encumbrance.
“Maturity,” with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as provided in or pursuant to this Indenture, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or repurchase, notice of option to elect repayment or otherwise, and includes the Redemption Date.
“New York Banking Day” has the meaning specified in Section 1.16.
“Office” or “Agency,” with respect to any Securities, means an office or agency of the Company maintained or designated in a Place of Payment for such Securities pursuant to Section 10.2 or any other office or agency of the Company maintained or designated for such Securities pursuant to Section 10.2 or, to the extent designated or required by Section 10.2 in lieu of such office or agency, the Corporate Trust Office of the Trustee.
-6-
“Officer’s Certificate” means a certificate signed by an Authorized Officer that complies with the requirements of Section 314(e) of the Trust Indenture Act and is delivered to the Trustee.
“Opinion of Counsel” means a written opinion of counsel, who may be an employee of or counsel for the Company or other counsel who shall be reasonably acceptable to the Trustee, that, if required by the Trust Indenture Act, complies with the requirements of Section 314(e) of the Trust Indenture Act.
“Original Issue Discount Security” means a Security issued pursuant to this Indenture which provides for declaration of an amount less than the principal face amount thereof to be due and payable upon acceleration pursuant to Section 5.2.
“Outstanding,” when used with respect to any Securities, means, as of the date of determination, all such Securities theretofore authenticated and delivered under this Indenture, except:
| (a) any such Security theretofore cancelled by the Trustee or the Security Registrar or delivered to the Trustee or the Security Registrar for cancellation; | |
| (b) any such Security for whose payment at the Maturity thereof money in the necessary amount has been theretofore deposited pursuant hereto (other than pursuant to Section 4.2) with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities and any Coupons appertaining thereto, provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; | |
| (c) any such Security with respect to which the Company has effected defeasance pursuant to the terms hereof, except to the extent provided in Section 4.2; | |
| (d) any such Security which has been paid pursuant to Section 3.6 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, unless there shall have been presented to the Trustee proof satisfactory to it that such Security is held by a bona fide purchaser in whose hands such Security is a valid obligation of the Company; and | |
| (e) any such Security converted or exchanged as contemplated by this Indenture into Common Stock of the Company or other securities, if the terms of such Security provide for such conversion or exchange pursuant to Section 3.1; |
provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or are present at a meeting of Holders of Securities for quorum purposes, (i) the principal amount of an Original Issue Discount Security that may be counted in making
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such determination and that shall be deemed to be Outstanding for such purposes shall be equal to the amount of the principal thereof that pursuant to the terms of such Original Issue Discount Security would be declared (or shall have been declared to be) due and payable upon a declaration of acceleration thereof pursuant to Section 5.2 at the time of such determination, and (ii) the principal amount of any Indexed Security that may be counted in making such determination and that shall be deemed Outstanding for such purposes shall be equal to the principal face amount of such Indexed Security at original issuance, unless otherwise provided in or pursuant to this Indenture, and (iii) the principal amount of a Security denominated in a Foreign Currency shall be the Dollar equivalent, determined on the date of original issuance of such Security, of the principal amount (or, in the case of an Original Issue Discount Security, the Dollar equivalent on the date of original issuance of such Security of the amount determined as provided in (i) above) of such Security, and (iv) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor, shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making any such determination or relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which shall have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee (A) the pledgee’s right so to act with respect to such Securities and (B) that the pledgee is not the Company or any other obligor upon the Securities or any Coupons appertaining thereto or an Affiliate of the Company or such other obligor.
“Paying Agent” means any Person authorized by the Company to pay the principal of, or any premium or interest on, or any Additional Amounts with respect to, any Security or any Coupon on behalf of the Company.
“Person” means any individual, Corporation, partnership, joint venture, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
“Place of Payment,” with respect to any Security, means the place or places where the principal of, or any premium or interest on, or any Additional Amounts with respect to such Security are payable as provided in or pursuant to this Indenture or such Security.
“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same Indebtedness as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.6 in exchange for or in lieu of a lost, destroyed, mutilated or stolen Security or any Security to which a mutilated, destroyed, lost or stolen Coupon appertains shall be deemed to evidence the same Indebtedness as the lost, destroyed, mutilated or stolen Security or the Security to which a mutilated, destroyed, lost or stolen Coupon appertains.
“Preferred Stock” in respect of any Corporation means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Corporation, over shares of Capital Stock of any other class of such Corporation.
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“Principal Subsidiary” means a Subsidiary of the Company that, as of the end of the Company’s most recent fiscal quarter ending at least 45 days prior to the date of determination, is a “significant subsidiary” of the Company within the meaning of Rule 405 under the Securities Act of 1933, as amended, or any successor provision.
“Redemption Date,” with respect to any Security or portion thereof to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture or such Security.
“Redemption Price,” with respect to any Security or portion thereof to be redeemed, means the price at which it is to be redeemed as determined by or pursuant to this Indenture or such Security.
“Registered Security” means any Security established pursuant to Section 2.1 which is registered in a Security Register.
“Regular Record Date” for the interest payable on any Registered Security on any Interest Payment Date therefor means the date, if any, specified in or pursuant to this Indenture or such Security as the “Regular Record Date”.
“Required Currency” has the meaning specified in Section 1.16.
“Responsible Officer” means any officer within the corporate trust department of the Trustee, including vice president, any assistant vice president, any assistant secretary, assistant treasurer, any trust officer or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture.
“Security” or “Securities” means any note or notes, bond or bonds, debenture or debentures, or any other evidences of Indebtedness, as the case may be, authenticated and delivered under this Indenture; provided, however, that, if at any time there is more than one Person acting as Trustee under this Indenture, “Securities,” with respect to any such Person, shall mean Securities authenticated and delivered under this Indenture, exclusive, however, of Securities of any series as to which such Person is not Trustee.
“Security Register” and “Security Registrar” have the respective meanings specified in Section 3.5.
“Special Record Date” for the payment of any Defaulted Interest on any Registered Security means a date fixed by the Company pursuant to Section 3.7.
“Stated Maturity,” with respect to any Security or any installment of principal thereof or interest thereon or any Additional Amounts with respect thereto, means the date established by or pursuant to this Indenture or such Security as the fixed date on which the principal of such Security or such installment of principal or interest is, or such Additional Amounts are, due and payable.
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“Subsidiary” means, in respect of any Person, any Corporation, limited or general partnership or other business entity of which at the time of determination more than 50% of the voting power of the shares of its Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended, and any reference herein to the Trust Indenture Act or a particular provision thereof shall mean such Act or provision, as the case may be, as amended or replaced from time to time or as supplemented from time to time by rules or regulations adopted by the Commission under or in furtherance of the purposes of such Act or provision, as the case may be.
“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such with respect to one or more series of Securities pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean each Person who is then a Trustee hereunder; provided, however, that if at any time there is more than one such Person, “Trustee” shall mean each such Person and as used with respect to the Securities of any series shall mean the Trustee with respect to the Securities of such series.
“United States,” except as otherwise provided in or pursuant to this Indenture or any Security, means the United States of America (including the states thereof and the District of Columbia), its territories and possessions and other areas subject to its jurisdiction.
“Vice President,” when used with respect to the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title “Vice President”.
Section 1.2. Compliance Certificates and Opinions.
Except as otherwise expressly provided in this Indenture, upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officer’s Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents or any of them is specifically required by any provision of this Indenture relating to such particular application or request, the certificate or opinion may be combined with the certificate or opinion described above in this Section 1.2.
Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include:
| (1) a statement that the individual signing such certificate or opinion has read such condition or covenant and the definitions herein relating thereto; |
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| (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; | |
| (3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such condition or covenant has been complied with; and | |
| (4) a statement as to whether, in the opinion of such individual, such condition or covenant has been complied with. |
Section 1.3. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, provided that such officer, after reasonable inquiry, has no reason to believe and does not believe that the Opinion of Counsel with respect to the matters upon which his certificate or opinion is based is erroneous. Any such Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, provided that such counsel, after reasonable inquiry, has no reason to believe and does not believe that the certificate or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture or any Security, they may, but need not, be consolidated and form one instrument.
Section 1.4. Acts of Holders.
| (1) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by or pursuant to this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing. If, but only if, Securities of a series are issuable as Bearer Securities, any request, demand, authorization, direction, notice, consent, waiver or other action provided in or pursuant to this Indenture to be given or taken by Holders of Securities of such series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities of such series duly called and held in accordance with the provisions of Article 15, or a combination of such instruments and |
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| any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments or so voting at any such meeting. Proof of execution of any such instrument or of a writing appointing any such agent, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and (subject to Section 315 of the Trust Indenture Act) conclusive in favor of the Trustee, the Company and any agent of the Trustee or the Company, if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 15.6. |
Without limiting the generality of this Section 1.4, unless otherwise provided in or pursuant to this Indenture, a Holder, including a Depository that is a Holder of a global Security, may make, give or take, by a proxy or proxies duly appointed in writing, any request, demand, authorization, direction, notice, consent, waiver or other Act provided in or pursuant to this Indenture to be made, given or taken by Holders, and a Depository that is a Holder of a global Security may provide its proxy or proxies to the beneficial owners of interests in any such global Security through such Depository’s standing instructions and customary practices.
The Company shall fix a record date for the purpose of determining the Persons who are beneficial owners of interest in any permanent global Security held by a Depository entitled under the procedures of such Depository to make, give or take, by a proxy or proxies duly appointed in writing, any request, demand, authorization, direction, notice, consent, waiver or other Act provided in or pursuant to this Indenture to be made, given or taken by Holders. If such a record date is fixed, the Holders on such record date or their duly appointed proxy or proxies, and only such Persons, shall be entitled to make, give or take such request, demand, authorization, direction, notice, consent, waiver or other Act, whether or not such Holders remain Holders after such record date. No such request, demand, authorization, direction, notice, consent, waiver or other Act shall be valid or effective if made, given or taken more than 90 days after such record date.
| (2) The fact and date of the execution by any Person of any such instrument or writing referred to in this Section 1.4 may be proved in any reasonable manner; and the Trustee may in any instance require further proof with respect to any of the matters referred to in this Section. | |
| (3) The ownership, principal amount and serial numbers of Registered Securities held by any Person, and the date of the commencement and the date of the termination of holding the same, shall be proved solely and conclusively by the Security Register. Where such execution by a signer acting in a capacity other than such signer’s individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer’s authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. |
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| (4) The ownership, principal amount and serial numbers of Bearer Securities held by any Person, and the date of the commencement and the date of the termination of holding the same, may be proved by the production of such Bearer Securities or by a certificate executed, as depositary, by any trust company, bank, banker or other depositary reasonably acceptable to the Company, wherever situated, if such certificate shall be deemed by the Company and the Trustee to be satisfactory, showing that at the date therein mentioned such Person had on deposit with such depositary, or exhibited to it, the Bearer Securities therein described; or such facts may be proved by the certificate or affidavit of the Person holding such Bearer Securities, if such certificate or affidavit is deemed by the Trustee to be satisfactory. The Trustee and the Company may assume that such ownership of any Bearer Security continues until (i) another certificate or affidavit bearing a later date issued in respect of the same Bearer Security is produced, or (ii) such Bearer Security is produced to the Trustee by some other Person, or (iii) such Bearer Security is surrendered in exchange for a Registered Security, or (iv) such Bearer Security is no longer Outstanding. The ownership, principal amount and serial numbers of Bearer Securities held by the Person so executing such instrument or writing and the date of the commencement and the date of the termination of holding the same may also be proved in any other manner which the Company and the Trustee deem sufficient. | |
| (5) If the Company shall solicit from the Holders of any Registered Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may at its option (but is not obligated to), by Board Resolution, fix in advance a record date for the determination of Holders of Registered Securities entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of Registered Securities of record at the close of business on such record date shall be deemed to be Holders for the purpose of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders of Registered Securities shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. | |
| (6) Any request, demand, authorization, direction, notice, consent, waiver or other Act by the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or suffered to be done by the Trustee, any Security Registrar, any Paying Agent or the Company in reliance thereon, whether or not notation of such Act is made upon such Security. |
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Section 1.5. Notices, etc. to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver, service of process or other Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,
| (1) the Trustee by any Holder or the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, or | |
| (2) the Company by the Trustee or any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to the attention of its Treasurer, with a copy to the attention of its General Counsel, at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. |
Section 1.6. Notice to Holders of Securities; Waiver.
Except as otherwise expressly provided in or pursuant to this Indenture, where this Indenture provides for notice to Holders of Securities of any event,
| (1) such notice shall be sufficiently given to Holders of Registered Securities if in writing and mailed, first-class postage prepaid, to each Holder of a Registered Security affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice; and | |
| (2) such notice shall be sufficiently given to Holders of Bearer Securities, if any, if published in an Authorized Newspaper in The City of New York and, if such Securities are then listed on any stock exchange outside the United States, in an Authorized Newspaper in such city as the Company shall advise the Trustee that such stock exchange so requires, on a Business Day at least twice, the first such publication to be not earlier than the earliest date and the second such publication not later than the latest date prescribed for the giving of such notice. |
In any case where notice to Holders of Registered Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder of a Registered Security shall affect the sufficiency of such notice with respect to other Holders of Registered Securities or the sufficiency of any notice to Holders of Bearer Securities given as provided herein. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given or provided. In the case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.
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In case by reason of the suspension of publication of any Authorized Newspaper or Authorized Newspapers or by reason of any other cause it shall be impracticable to publish any notice to Holders of Bearers Securities as provided above, then such notification to Holders of Bearer Securities as shall be given with the approval of the Trustee shall constitute sufficient notice to such Holders for every purpose hereunder. Neither failure to give notice by publication to Holders of Bearer Securities as provided above, nor any defect in any notice so published, shall affect the sufficiency of any notice mailed to Holders of Registered Securities as provided above.
Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders of Securities shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.
Section 1.7. Language of Notices.
Any request, demand, authorization, direction, notice, consent, election or waiver required or permitted under this Indenture shall be in the English language, except that, if the Company so elects, any published notice may be in an official language of the country of publication.
Section 1.8. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with any duties under any required provision of the Trust Indenture Act imposed hereon by Section 318(c) thereof, such required provision shall control.
Section 1.9. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.
Section 1.10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.
Section 1.11. Separability Clause.
In case any provision in this Indenture, any Security or any Coupon shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
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Section 1.12. Benefits of Indenture.
Nothing in this Indenture, any Security or any Coupon, express or implied, shall give to any Person, other than the parties hereto, any Security Registrar, any Paying Agent, any Authenticating Agent and their successors hereunder and the Holders of Securities or Coupons, any benefit or any legal or equitable right, remedy or claim under this Indenture.
Section 1.13. Governing Law.
This Indenture, the Securities and any Coupons shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made or instruments entered into and, in each case, performed wholly in said state.
Section 1.14. Legal Holidays.
Unless otherwise specified in or pursuant to this Indenture or any Securities, in any case where any Interest Payment Date, Stated Maturity or Maturity of any Security, or the last date on which a Holder has the right to convert or exchange Securities of a series that are convertible or exchangeable, shall be a Legal Holiday at any Place of Payment, then (notwithstanding any other provision of this Indenture, any Security or any Coupon other than a provision in any Security or Coupon that specifically states that such provision shall apply in lieu hereof) payment need not be made at such Place of Payment on such date, and such Securities need not be converted or exchanged on such date but such payment may be made, and such Securities may be converted or exchanged, on the next succeeding day that is a Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or at the Stated Maturity or Maturity or on such last day for conversion or exchange, and no interest shall accrue on the amount payable on such date or at such time for the period from and after such Interest Payment Date, Stated Maturity, Maturity or last day for conversion or exchange, as the case may be, to such next succeeding Business Day.
Section 1.15. Counterparts.
This Indenture may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.
Section 1.16. Judgment Currency.
The Company agrees, to the fullest extent that it may effectively do so under applicable law, that (a) if for the purpose of obtaining judgment in any court it is necessary to convert the sum due in respect of the principal of, or premium or interest, if any, or Additional Amounts on the Securities of any series (the “Required Currency”) into a currency in which a judgment will be rendered (the “Judgment Currency”), the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the requisite amount of the Required Currency with the Judgment Currency on the New York Banking Day preceding the day on which a final unappealable judgment is given and (b) its obligations under this Indenture to make payments in the Required Currency (i) shall not be discharged or satisfied by any tender, or any recovery pursuant to any judgment (whether or not
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entered in accordance with clause (a)), in any currency other than the Required Currency, except to the extent that such tender or recovery shall result in the actual receipt, by the payee, of the full amount of the Required Currency expressed to be payable in respect of such payments, (ii) shall be enforceable as an alternative or additional cause of action for the purpose of recovering in the Required Currency the amount, if any, by which such actual receipt shall fall short of the full amount of the Required Currency so expressed to be payable and (iii) shall not be affected by judgment being obtained for any other sum due under this Indenture. For purposes of the foregoing, “New York Banking Day” means any day except a Saturday, Sunday or a legal holiday in The City of New York or a day on which banking institutions in The City of New York are authorized or obligated by law, regulation or executive order to be closed.
Section 1.17. No Security Interest Created.
Nothing in this Indenture or in any Securities, express or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect in any jurisdiction where property of the Company or its Subsidiaries is or may be located.
Section 1.18. Limitation on Individual Liability.
No recourse under or upon any obligation, covenant or agreement contained in this Indenture or in any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, shareholders, officers or directors, as such, of the Company, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, shareholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Security.
Section 1.19. Submission to Jurisdiction.
The Company agrees that any judicial proceedings instituted in relation to any matter arising under this Indenture, the Securities or any Coupons appertaining thereto may be brought in any United States Federal or New York State court sitting in the Borough of Manhattan, The City of New York, New York to the extent that such court has subject matter jurisdiction over the controversy, and, by execution and delivery of this Indenture, the Company hereby irrevocably accepts, generally and unconditionally, the jurisdiction of the aforesaid courts,
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acknowledges their competence and irrevocably agrees to be bound by any judgment rendered in such proceeding. The Company also irrevocably and unconditionally waives for the benefit of the Trustee and the Holders of the Securities and Coupons any immunity from jurisdiction and any immunity from legal process (whether through service or notice, attachment prior to judgment, attachment in the aid of execution, execution or otherwise) in respect of this Indenture. Nothing herein shall affect the right to serve process in any other manner permitted by any law or limit the right of the Trustee or any Holder to institute proceedings against the Company in the courts of any other jurisdiction or jurisdictions.
Article 2
SECURITIES FORMS
Section 2.1. Forms Generally.
Each Registered Security, Bearer Security, Coupon and temporary or permanent global Security issued pursuant to this Indenture shall be in the form established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, shall have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by or pursuant to this Indenture or any indenture supplemental hereto and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may, consistently herewith, be determined by the officers executing such Security or Coupon as evidenced by their execution of such Security or Coupon.
Unless otherwise provided in or pursuant to this Indenture or any Securities, the Securities shall be issuable in registered form without Coupons and shall not be issuable upon the exercise of warrants.
Definitive Securities and definitive Coupons shall be printed, lithographed or engraved or produced by any combination of these methods on a steel engraved border or steel engraved borders or may be produced in any other manner, all as determined by the officers of the Company executing such Securities or Coupons, as evidenced by their execution of such Securities or Coupons.
Section 2.2. Form of Trustee’s Certificate of Authentication.
Subject to Section 6.12, the Trustee’s certificate of authentication shall be in substantially the following form:
| This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. |
THE BANK OF NEW YORK, as Trustee
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| By:__________________________________ | ||
| Authorized Signatory | ||
Section 2.3. Securities in Global Form.
If Securities of a series shall be issuable in global form, any such Security may provide that it or any number of such Securities shall represent the aggregate amount of all Outstanding Securities of such series (or such lesser amount as is permitted by the terms thereof) from time to time endorsed thereon and may also provide that the aggregate amount of Outstanding Securities represented thereby may from time to time be increased or reduced to reflect exchanges. Any endorsement of any Security in global form to reflect the amount, or any increase or decrease in the amount, or changes in the rights of Holders, of Outstanding Securities represented thereby shall be made in such manner and by such Person or Persons as shall be specified therein or in the Company Order to be delivered pursuant to Section 3.3 or Section 3.4 with respect thereto. Subject to the provisions of Section 3.3 and, if applicable, Section 3.4, the Trustee shall deliver and redeliver, in each case at the Company’s expense, any Security in permanent global form in the manner and upon instructions given by the Person or Persons specified therein or in the applicable Company Order. If a Company Order pursuant to Section 3.3 or Section 3.4 has been, or simultaneously is, delivered, any instructions by the Company with respect to a Security in global form shall be in writing but need not be accompanied by or contained in an Officer’s Certificate and need not be accompanied by an Opinion of Counsel.
Notwithstanding the provisions of Section 3.7, unless otherwise specified in or pursuant to this Indenture or any Securities, payment of principal of, any premium and interest on, and any Additional Amounts in respect of, any Security in temporary or permanent global form shall be made to the Person or Persons specified therein.
Notwithstanding the provisions of Section 3.8 and except as provided in the preceding paragraph, the Company, the Trustee and any agent of the Company or the Trustee shall treat as the Holder of such principal amount of Outstanding Securities represented by a global Security (i) in the case of a global Security in registered form, the Holder of such global Security in registered form, or (ii) in the case of a global Security in bearer form, the Person or Persons specified pursuant to Section 3.1.
Article 3
THE SECURITIES
Section 3.1. Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series.
With respect to any Securities to be authenticated and delivered hereunder, there shall be established in or pursuant to a Board Resolution and set forth in an Officer’s Certificate, or established in one or more indentures supplemental hereto,
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| (1) the title of such Securities and the series in which such Securities shall be included; | |
| (2) any limit upon the aggregate principal amount of the Securities of such title or the Securities of such series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of such series pursuant to Section 3.4, Section 3.5, Section 3.6, Section 9.5 or Section 11.7, upon repayment in part of any Registered Security of such series pursuant to Article 13, upon surrender in part of any Registered Security for conversion into Common Stock of the Company or exchange for other securities pursuant to its terms, or pursuant to or as contemplated by the terms of such Securities); | |
| (3) if such Securities are to be issuable as Registered Securities, as Bearer Securities or alternatively as Bearer Securities and Registered Securities, and whether the Bearer Securities are to be issuable with Coupons, without Coupons or both, and any restrictions applicable to the offer, sale or delivery of the Bearer Securities and the terms, if any, upon which Bearer Securities may be exchanged for Registered Securities and vice versa; | |
| (4) if any of such Securities are to be issuable in global form, when any of such Securities are to be issuable in global form and (i) whether such Securities are to be issued in temporary or permanent global form or both, (ii) whether beneficial owners of interests in any such global Security may exchange such interests for Securities of the same series and of like tenor and of any authorized form and denomination, and the circumstances under which any such exchanges may occur, if other than in the manner specified in Section 3.5, and (iii) the name of the Depository with respect to any such global Security; | |
| (5) if any of such Securities are to be issuable as Bearer Securities or in global form, the date as of which any such Bearer Security or global Security shall be dated (if other than the date of original issuance of the first of such Securities to be issued); | |
| (6) if any of such Securities are to be issuable as Bearer Securities, whether interest in respect of any portion of a temporary Bearer Security in global form payable in respect of an Interest Payment Date therefor prior to the exchange, if any, of such temporary Bearer Security for definitive Securities shall be paid to any clearing organization with respect to the portion of such temporary Bearer Security held for its account and, in such event, the terms and conditions (including any certification requirements) upon which any such interest payment received by a clearing organization will be credited to the Persons entitled to interest payable on such Interest Payment Date; | |
| (7) the date or dates, or the method or methods, if any, by which such date or dates shall be determined, on which the principal of such Securities is payable; | |
| (8) the rate or rates at which such Securities shall bear interest, if any, or the method or methods, if any, by which such rate or rates are to be determined, the date or |
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| dates, if any, from which such interest shall accrue or the method or methods, if any, by which such date or dates are to be determined, the Interest Payment Dates, if any, on which such interest shall be payable and the Regular Record Date, if any, for the interest payable on Registered Securities on any Interest Payment Date, whether and under what circumstances Additional Amounts on such Securities or any of them shall be payable, the notice, if any, to Holders regarding the determination of interest on a floating rate Security and the manner of giving such notice, and the basis upon which interest shall be calculated if other than that of a 360-day year of twelve 30-day months; |
| (9) if in addition to or other than the Borough of Manhattan, The City of New York, the place or places where the principal of, any premium and interest on or any Additional Amounts with respect to such Securities shall be payable, any of such Securities that are Registered Securities may be surrendered for registration of transfer or exchange, any of such Securities may be surrendered for conversion or exchange and notices or demands to or upon the Company in respect of such Securities and this Indenture may be served; | |
| (10) the extent to which, or the manner in which, any interest payment or Additional Amounts on a global Security on an Interest Payment Date, will be paid and the manner in which any principal of or premium, if any, on any global Security will be paid; | |
| (11) whether any of such Securities are to be redeemable at the option of the Company and, if so, the date or dates on which, the period or periods within which, the price or prices at which and the other terms and conditions upon which such Securities may be redeemed, in whole or in part, at the option of the Company; | |
| (12) whether the Company is obligated to redeem or purchase any of such Securities pursuant to any sinking fund or analogous provision or at the option of any Holder thereof and, if so, the date or dates on which, the period or periods within which, the price or prices at which and the other terms and conditions upon which such Securities shall be redeemed or purchased, in whole or in part, pursuant to such obligation, and any provisions for the remarketing of such Securities so redeemed or purchased; | |
| (13) the denominations in which any of such Securities that are Registered Securities shall be issuable if other than denominations of $1,000 and any integral multiple thereof, and the denominations in which any of such Securities that are Bearer Securities shall be issuable if other than the denomination of $5,000; | |
| (14) whether the Securities of the series will be convertible into shares of Common Stock of the Company and/or exchangeable for other securities, whether or not issued by the Company, and, if so, the terms and conditions upon which such Securities will be so convertible or exchangeable, and any deletions from or modifications or additions to this Indenture to permit or to facilitate the issuance of such convertible or exchangeable Securities or the administration thereof; |
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| (15) if other than the principal amount thereof, the portion of the principal amount of any of such Securities that shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 5.2 or the method by which such portion is to be determined; | |
| (16) if other than Dollars, the Foreign Currency in which payment of the principal of, any premium or interest on or any Additional Amounts with respect to any of such Securities shall be payable; | |
| (17) if the principal of, any premium or interest on or any Additional Amounts with respect to any of such Securities are to be payable, at the election of the Company or a Holder thereof or otherwise, in Dollars or in a Foreign Currency other than that in which such Securities are stated to be payable, the date or dates on which, the period or periods within which, and the other terms and conditions upon which, such election may be made, and the time and manner of determining the exchange rate between the Currency in which such Securities are stated to be payable and the Currency in which such Securities or any of them are to be paid pursuant to such election, and any deletions from or modifications of or additions to the terms of this Indenture to provide for or to facilitate the issuance of Securities denominated or payable, at the election of the Company or a Holder thereof or otherwise, in a Foreign Currency; | |
| (18) whether the amount of payments of principal of, any premium or interest on or any Additional Amounts with respect to such Securities may be determined with reference to an index, formula or other method or methods (which index, formula or method or methods may be based, without limitation, on one or more Currencies, commodities, equity securities, equity indices or other indices), and, if so, the terms and conditions upon which and the manner in which such amounts shall be determined and paid or payable; | |
| (19) any deletions from, modifications of or additions to the Events of Default or covenants of the Company with respect to any of such Securities, whether or not such Events of Default or covenants are consistent with the Events of Default or covenants set forth herein; | |
| (20) whether either or both of Section 4.2(2) relating to defeasance or Section 4.2(3) relating to covenant defeasance shall not be applicable to the Securities of such series, or any covenants in addition to those specified in Section 4.2(3) relating to the Securities of such series which shall be subject to covenant defeasance, and any deletions from, or modifications or additions to, the provisions of Article 4 in respect of the Securities of such series; | |
| (21) whether any of such Securities are to be issuable upon the exercise of warrants, and the time, manner and place for such Securities to be authenticated and delivered; | |
| (22) if any of such Securities are to be issuable in global form and are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary |
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| Security) only upon receipt of certain certificates or other documents or satisfaction of other conditions, then the form and terms of such certificates, documents or conditions; | |
| (23) if there is more than one Trustee, the identity of the Trustee and, if not the Trustee, the identity of each Security Registrar, Paying Agent or Authenticating Agent with respect to such Securities; | |
| (24) any additional covenants of the Company applicable in respect of or in connection with such Securities; and | |
| (25) any other terms of such Securities and any other deletions from or modifications or additions to this Indenture in respect of such Securities. |
All Securities of any one series and all Coupons, if any, appertaining to Bearer Securities of such series shall be substantially identical except as to Currency of payments due thereunder, denomination and the rate of interest thereon, or method of determining the rate of interest, if any, Maturity, and the date from which interest, if any, shall accrue and except as may otherwise be provided by the Company in or pursuant to the Board Resolution and set forth in the Officer’s Certificate or in any indenture or indentures supplemental hereto pertaining to such series of Securities. The terms of the Securities of any series may provide, without limitation, that the Securities shall be authenticated and delivered by the Trustee on original issue from time to time upon written order of persons designated in the Officer’s Certificate or supplemental indenture and that such persons are authorized to determine, consistent with such Officer’s Certificate or any applicable supplemental indenture, such terms and conditions of the Securities of such series as are specified in such Officer’s Certificate or supplemental indenture. All Securities of any one series need not be issued at the same time and, unless otherwise so provided, a series may be reopened for issuances of additional Securities of such series or to establish additional terms of such series of Securities.
If any of the terms of the Securities of any series shall be established by action taken by or pursuant to a Board Resolution, the Board Resolution shall be delivered to the Trustee at or prior to the delivery of the Officer’s Certificate setting forth the terms of such series.
Section 3.2. Currency; Denominations.
Unless otherwise provided in or pursuant to this Indenture, the principal of, any premium and interest on and any Additional Amounts with respect to the Securities shall be payable in Dollars. Unless otherwise provided in or pursuant to this Indenture, Registered Securities denominated in Dollars shall be issuable in registered form without Coupons in denominations of $1,000 and any integral multiple thereof, and the Bearer Securities denominated in Dollars shall be issuable in the denomination of $5,000. Securities not denominated in Dollars shall be issuable in such denominations as are established with respect to such Securities in or pursuant to this Indenture.
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Section 3.3. Execution, Authentication, Delivery and Dating.
Securities shall be executed on behalf of the Company by its Chairman of the Board, a Vice Chairman, its President, Chief Financial Officer, Chief Investment Officer, Chief Accounting Officer, Secretary or any Vice President. Coupons shall be executed on behalf of the Company by the Chairman of the Board, a Vice Chairman, its President, Chief Financial Officer, Chief Investment Officer, Chief Accounting Officer, Secretary or any Vice President of the Company. The signature of any of these officers on the Securities or any Coupons appertaining thereto may be manual or facsimile.
Securities and any Coupons appertaining thereto bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities and Coupons or did not hold such offices at the date of original issuance of such Securities or Coupons.
At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities, together with any Coupons appertaining thereto, executed by the Company, to the Trustee for authentication and, provided that the Board Resolution and Officer’s Certificate or supplemental indenture or indentures with respect to such Securities referred to in Section 3.1 and a Company Order for the authentication and delivery of such Securities have been delivered to the Trustee, the Trustee in accordance with the Company Order and subject to the provisions hereof and of such Securities shall authenticate and deliver such Securities. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities and any Coupons appertaining thereto, the Trustee shall be entitled to receive, and (subject to Sections 315(a) through 315(d) of the Trust Indenture Act) shall be fully protected in relying upon,
| (1) A copy of the resolution or resolutions of the Board of Directors in or pursuant to which the terms and form of the Securities were established, certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect as of the date of such certificate, and if the terms and form of such Securities are established by an Officer’s Certificate pursuant to general authorization of the Board of Directors, such Officer’s Certificate; | |
| (2) an executed supplemental indenture, if any; | |
| (3) an Officer’s Certificate delivered in accordance with Section 1.2; and | |
| (4) an Opinion of Counsel to the effect that: |
| (a) the form or forms and terms of such Securities and Coupons, if any, have been established in conformity with the provisions of this Indenture; | |
| (b) all conditions precedent to the authentication and delivery of such Securities and Coupons, if any, appertaining thereto, have been complied with and that such Securities and Coupons, when completed by appropriate insertions, |
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| executed and delivered by duly authorized officers of the Company to the Trustee for authentication pursuant to this Indenture, and authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforcement thereof may be subject to or limited by bankruptcy, insolvency, reorganization, moratorium, arrangement, fraudulent conveyance, fraudulent transfer or other similar laws relating to or affecting creditors’ rights generally, and subject to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and will entitle the Holders thereof to the benefits of this Indenture; such Opinion of Counsel need express no opinion as to the availability of equitable remedies; | |
| (c) all laws and requirements in respect of the execution and delivery by the Company of such Securities and Coupons, if any, have been complied with; and |
| (d) this Indenture has been qualified under the Trust Indenture Act; and |
| (5) an Officer’s Certificate stating that all conditions precedent to the execution, authentication and delivery of such Securities and Coupons, if any, appertaining thereto, have been complied with and that, to the best knowledge of the Persons executing such certificate, no event which is, or after notice or lapse of time would become, an Event of Default with respect to any of the Securities shall have occurred and be continuing. |
If all the Securities of any series are not to be issued at one time, it shall not be necessary to deliver an Opinion of Counsel and an Officer’s Certificate at the time of issuance of each Security, but such opinion and certificate, with appropriate modifications, shall be delivered at or before the time of issuance of the first Security of such series. After any such first delivery, any separate written request by an Authorized Officer of the Company or any person designated in writing by an Authorized Officer that the Trustee authenticate and deliver Securities of such series for original issue will be deemed to be a certification by the Company that all conditions precedent provided for in this Indenture relating to authentication and delivery of such Securities continue to have been complied with.
The Trustee shall not be required to authenticate or to cause an Authenticating Agent to authenticate any Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee’s own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee or if the Trustee, being advised by counsel, determines that such action may not lawfully be taken.
Each Registered Security shall be dated the date of its authentication. Each Bearer Security and any Bearer Security in global form shall be dated as of the date specified in or pursuant to this Indenture.
No Security or Coupon appertaining thereto shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Security a
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certificate of authentication substantially in the form provided for in Section 2.2 or Section 6.12 executed by or on behalf of the Trustee or by the Authenticating Agent by the manual signature of one of its authorized officers. Such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Except as permitted by Section 3.6 or Section 3.7, the Trustee shall not authenticate and deliver any Bearer Security unless all Coupons appertaining thereto then matured have been detached and cancelled.
Section 3.4. Temporary Securities.
Pending the preparation of definitive Securities, the Company may execute and deliver to the Trustee and, upon Company Order, the Trustee shall authenticate and deliver, in the manner provided in Section 3.3, temporary Securities in lieu thereof which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued, in registered form or, if authorized in or pursuant to this Indenture, in bearer form with one or more Coupons or without Coupons and with such appropriate insertions, omissions, substitutions and other variations as the officers of the Company executing such Securities may determine, as conclusively evidenced by their execution of such Securities. Such temporary Securities may be in global form.
Except in the case of temporary Securities in global form, which shall be exchanged in accordance with the provisions thereof, if temporary Securities are issued, the Company shall cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities of the same series and containing terms and provisions that are identical to those of any temporary Securities, such temporary Securities shall be exchangeable for such definitive Securities upon surrender of such temporary Securities at an Office or Agency for such Securities, without charge to any Holder thereof. Upon surrender for cancellation of any one or more temporary Securities (accompanied by any unmatured Coupons appertaining thereto), the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations of the same series and containing identical terms and provisions; provided, however, that no definitive Bearer Security, except as provided in or pursuant to this Indenture, shall be delivered in exchange for a temporary Registered Security; and provided, further, that a definitive Bearer Security shall be delivered in exchange for a temporary Bearer Security only in compliance with the conditions set forth in or pursuant to this Indenture. Unless otherwise provided in or pursuant to this Indenture with respect to a temporary global Security, until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series.
Section 3.5. Registration, Transfer and Exchange.
With respect to the Registered Securities of each series, if any, the Company shall cause to be kept a register (each such register being herein sometimes referred to as the “Security Register”) at an Office or Agency for such series in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of the Registered Securities of such series and of transfers of the Registered Securities of such series. Such Office or Agency
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shall be the “Security Registrar” for that series of Securities. Unless otherwise specified in or pursuant to this Indenture or the Securities, the Trustee shall be the initial Security Registrar for each series of Securities. The Company shall have the right to remove and replace from time to time the Security Registrar for any series of Securities; provided that no such removal or replacement shall be effective until a successor Security Registrar with respect to such series of Securities shall have been appointed by the Company and shall have accepted such appointment by the Company. In the event that the Trustee shall not be or shall cease to be Security Registrar with respect to a series of Securities, it shall have the right to examine the Security Register for such series at all reasonable times. There shall be only one Security Register for each series of Securities.
Upon surrender for registration of transfer of any Registered Security of any series at any Office or Agency for such series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Registered Securities of the same series denominated as authorized in or pursuant to this Indenture, of a like aggregate principal amount bearing a number not contemporaneously outstanding and containing identical terms and provisions.
At the option of the Holder, Registered Securities of any series may be exchanged for other Registered Securities of the same series containing identical terms and provisions, in any authorized denominations, and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at any Office or Agency for such series. Whenever any Registered Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Registered Securities which the Holder making the exchange is entitled to receive.
If provided in or pursuant to this Indenture, with respect to Securities of any series, at the option of the Holder, Bearer Securities of such series may be exchanged for Registered Securities of such series containing identical terms, denominated as authorized in or pursuant to this Indenture and in the same aggregate principal amount, upon surrender of the Bearer Securities to be exchanged at any Office or Agency for such series, with all unmatured Coupons and all matured Coupons in default thereto appertaining. If the Holder of a Bearer Security is unable to produce any such unmatured Coupon or Coupons or matured Coupon or Coupons in default, such exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Company and the Trustee in an amount equal to the face amount of such missing Coupon or Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Company and the Trustee if there is furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Bearer Security shall surrender to any Paying Agent any such missing Coupon in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment; provided, however, that, except as otherwise provided in Section 10.2, interest represented by Coupons shall be payable only upon presentation and surrender of those Coupons at an Office or Agency for such series located outside the United States. Notwithstanding the foregoing, in case a Bearer Security of any series is surrendered at any such Office or Agency for such series in exchange for a Registered Security of such series and like tenor after the close of business at such Office or Agency on (i) any Regular Record Date and
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before the opening of business at such Office or Agency on the next succeeding Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such Office or Agency on the related date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the Coupon relating to such Interest Payment Date or proposed date of payment, as the case may be (or, if such Coupon is so surrendered with such Bearer Security, such Coupon shall be returned to the Person so surrendering the Bearer Security), and interest or Defaulted Interest, as the case may be, shall not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of the Registered Security issued in exchange for such Bearer Security, but shall be payable only to the Holder of such Coupon when due in accordance with the provisions of this Indenture.
If provided in or pursuant to this Indenture with respect to Securities of any series, at the option of the Holder, Registered Securities of such series may be exchanged for Bearer Securities upon such terms and conditions as may be provided in or pursuant to this Indenture with respect to such series.
Whenever any Securities are surrendered for exchange as contemplated by the immediately preceding two paragraphs, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.
Notwithstanding the foregoing, except as otherwise provided in or pursuant to this Indenture, any global Security shall be exchangeable for definitive Securities only if (i) the Depository is at any time unwilling, unable or ineligible to continue as depository and a successor depository is not appointed by the Company within 90 days of the date the Company is so informed in writing, (ii) the Company executes and delivers to the Trustee a Company Order to the effect that such global Security shall be so exchangeable, or (iii) an Event of Default has occurred and is continuing with respect to the Securities. If the beneficial owners of interests in a global Security are entitled to exchange such interests for definitive Securities as the result of an event described in clause (i), (ii) or (iii) of the preceding sentence, then without unnecessary delay but in any event not later than the earliest date on which such interests may be so exchanged, the Company shall deliver to the Trustee definitive Securities in such form and denominations as are required by or pursuant to this Indenture, and of the same series, containing identical terms and in aggregate principal amount equal to the principal amount of such global Security, executed by the Company. On or after the earliest date on which such interests may be so exchanged, such global Security shall be surrendered from time to time by such Depository as shall be specified in the Company Order with respect thereto, and in accordance with instructions given to the Trustee and the Depository, (which instructions shall be in writing), as shall be specified in the Company Order with respect thereto to the Trustee, as the Company’s agent for such purpose, to be exchanged, in whole or in part, for definitive Securities as described above without charge. The Trustee shall authenticate and make available for delivery, in exchange for each portion of such surrendered global Security, a like aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such global Security to be exchanged, which (unless such Securities are not issuable both as Bearer Securities and as Registered Securities, in which case the definitive Securities exchanged for the global Security shall be issuable only in the form in which the Securities are issuable, as
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provided in or pursuant to this Indenture) shall be in the form of Bearer Securities or Registered Securities, or any combination thereof, as shall be specified by the beneficial owner thereof, but subject to the satisfaction of any certification or other requirements to the issuance of Bearer Securities; provided, however, that no such exchanges may occur during a period beginning at the opening of business 15 days before any selection of Securities of the same series to be redeemed and ending on the relevant Redemption Date; and provided, further, that (unless otherwise provided in or pursuant to this Indenture) no Bearer Security delivered in exchange for a portion of a global Security shall be mailed or otherwise delivered to any location in the United States. Promptly following any such exchange in part, such global Security shall be returned by the Trustee to such Depository, or such other Depository referred to above in accordance with the instructions of the Company referred to above. If a Registered Security is issued in exchange for any portion of a global Security after the close of business at the Office or Agency for such Security where such exchange occurs on or after (i) any Regular Record Date for such Security and before the opening of business at such Office or Agency on the next succeeding Interest Payment Date, or (ii) any Special Record Date for such Security and before the opening of business at such Office or Agency on the related proposed date for payment of interest or Defaulted Interest, as the case may be, interest shall not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of such Registered Security, but shall be payable on such Interest Payment Date or proposed date for payment, as the case may be, only to the Person to whom interest in respect of such portion of such global Security shall be payable in accordance with the provisions of this Indenture.
All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company evidencing the same debt and entitling the Holders thereof to the same benefits under this Indenture as the Securities surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of transfer or for exchange or redemption shall (if so required by the Company or the Security Registrar for such Security) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar for such Security duly executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or exchange, or redemption of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge and any other expenses (including fees and expenses of the Trustee) that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.4, Section 9.5 or Section 11.7 not involving any transfer.
Except as otherwise provided in or pursuant to this Indenture, the Company shall not be required (i) to issue, register the transfer of or exchange any Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption of Securities of like tenor and the same series under Section 11.3 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Registered Security selected for redemption in whole or in part, except in the case of any Security to be redeemed in
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part, the portion thereof not to be redeemed, or (iii) to exchange any Bearer Security selected for redemption except, to the extent provided with respect to such Bearer Security, that such Bearer Security may be exchanged for a Registered Security of like tenor and the same series, provided that such Registered Security shall be immediately surrendered for redemption with written instruction for payment consistent with the provisions of this Indenture or (iv) to issue, register the transfer of or exchange any Security which, in accordance with its terms, has been surrendered for repayment at the option of the Holder, except the portion, if any, of such Security not to be so repaid.
Section 3.6. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security or a Security with a mutilated Coupon appertaining to it is surrendered to the Trustee, subject to the provisions of this Section 3.6, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series containing identical terms and of like principal amount and bearing a number not contemporaneously outstanding, with Coupons appertaining thereto corresponding to the Coupons, if any, appertaining to the surrendered Security.
If there be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security or Coupon, and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security or Coupon has been acquired by a bona fide purchaser, the Company shall execute and, upon the Company’s request the Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Security or in exchange for the Security to which a destroyed, lost or stolen Coupon appertains with all appurtenant Coupons not destroyed, lost or stolen, a new Security of the same series containing identical terms and of like principal amount and bearing a number not contemporaneously outstanding, with Coupons appertaining thereto corresponding to the Coupons, if any, appertaining to such destroyed, lost or stolen Security or to the Security to which such destroyed, lost or stolen Coupon appertains.
Notwithstanding the foregoing provisions of this Section 3.6, in case any mutilated, destroyed, lost or stolen Security or Coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security or Coupon; provided, however, that payment of principal of, any premium or interest on or any Additional Amounts with respect to any Bearer Securities shall, except as otherwise provided in Section 10.2, be payable only at an Office or Agency for such Securities located outside the United States and, unless otherwise provided in or pursuant to this Indenture, any interest on Bearer Securities and any Additional Amounts with respect to such interest shall be payable only upon presentation and surrender of the Coupons appertaining thereto.
Upon the issuance of any new Security under this Section 3.6, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.
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Every new Security, with any Coupons appertaining thereto issued pursuant to this Section 3.6 in lieu of any destroyed, lost or stolen Security, or in exchange for a Security to which a destroyed, lost or stolen Coupon appertains shall constitute a separate obligation of the Company, whether or not the destroyed, lost or stolen Security and Coupons appertaining thereto or the destroyed, lost or stolen Coupon shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of such series and any Coupons, if any, duly issued hereunder.
The provisions of this Section 3.6, as amended or supplemented pursuant to this Indenture with respect to particular Securities or generally, shall be exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or Coupons.
Section 3.7. Payment of Interest and Certain Additional Amounts; Rights to Interest and Certain Additional Amounts Preserved.
Unless otherwise provided in or pursuant to this Indenture, any interest on and any Additional Amounts with respect to any Registered Security which shall be payable, and are punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Security (or one or more Predecessor Securities) is registered as of the close of business on the Regular Record Date for such interest.
Unless otherwise provided in or pursuant to this Indenture, any interest on and any Additional Amounts with respect to any Registered Security which shall be payable, but shall not be punctually paid or duly provided for, on any Interest Payment Date for such Registered Security (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder thereof on the relevant Regular Record Date by virtue of having been such Holder; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below:
| (1) The Company may elect to make payment of any Defaulted Interest to the Person in whose name such Registered Security (or a Predecessor Security thereof) shall be registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed by the Company in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on such Registered Security, the Special Record Date therefor and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when so deposited to be held in trust for the benefit of the Person entitled to such Defaulted Interest as in this Clause provided. The Special Record Date for the payment of such Defaulted Interest shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 12 days after notification to the Trustee of the proposed payment. The Trustee shall, in the name and at the expense of the Company, cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be |
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| mailed, first-class postage prepaid, to the Holder of such Registered Security (or a Predecessor Security thereof) at his address as it appears in the Security Register not less than 10 days prior to such Special Record Date. The Trustee may, in its discretion, in the name and at the expense of the Company cause a similar notice to be published at least once in an Authorized Newspaper of general circulation in the Borough of Manhattan, The City of New York, but such publication shall not be a condition precedent to the establishment of such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Person in whose name such Registered Security (or a Predecessor Security thereof) shall be registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). | |
| (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Security may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such payment shall be deemed practicable by the Trustee. |
Unless otherwise provided in or pursuant to this Indenture or the Securities of any particular series pursuant to the provisions of this Indenture, at the option of the Company, interest on Registered Securities that bear interest may be paid by mailing a check to the address of the Person entitled thereto as such address shall appear in the Security Register or by transfer to an account maintained by the payee with a bank located in the United States.
Subject to the foregoing provisions of this Section and Section 3.5, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.
In the case of any Registered Security of any series that is convertible into shares of Common Stock of the Company or exchangeable for other securities, which Registered Security is converted or exchanged after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Registered Security with respect to which the Stated Maturity is prior to such Interest Payment Date), interest with respect to which the Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion or exchange, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Registered Security (or one or more predecessor Registered Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Registered Security which is converted or exchanged, interest with respect to which the Stated Maturity is after the date of conversion or exchange of such Registered Security shall not be payable.
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Section 3.8. Persons Deemed Owners.
Prior to due presentment of a Registered Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Registered Security is registered in the Security Register as the owner of such Registered Security for the purpose of receiving payment of principal of, any premium and (subject to Section 3.5 and Section 3.7) interest on and any Additional Amounts with respect to such Registered Security and for all other purposes whatsoever, whether or not any payment with respect to such Registered Security shall be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary.
The Company, the Trustee and any agent of the Company or the Trustee may treat the bearer of any Bearer Security or the bearer of any Coupon as the absolute owner of such Security or Coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes whatsoever, whether or not any payment with respect to such Security or Coupon shall be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary.
No Holder of any beneficial interest in any global Security held on its behalf by a Depository shall have any rights under this Indenture with respect to such global Security, and such Depository may be treated by the Company, the Trustee, and any agent of the Company or the Trustee as the owner of such global Security for all purposes whatsoever. None of the Company, the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
Section 3.9. Cancellation.
All Securities and Coupons surrendered for payment, redemption, registration of transfer, exchange or conversion or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Securities and Coupons, as well as Securities and Coupons surrendered directly to the Trustee for any such purpose, shall be cancelled promptly by the Trustee. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be cancelled promptly by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by or pursuant to this Indenture. All cancelled Securities and Coupons held by the Trustee shall be disposed of by the Trustee in accordance with its normal operating procedures, unless by a Company Order the Company directs their return to it.
Section 3.10. Computation of Interest.
Except as otherwise provided in or pursuant to this Indenture or in any Security, interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months.
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Article 4
SATISFACTION AND DISCHARGE OF INDENTURE
Section 4.1. Satisfaction and Discharge.
Upon the direction of the Company by a Company Order, this Indenture shall cease to be of further effect with respect to any series of Securities specified in such Company Order and any Coupons appertaining thereto, and the Trustee, on receipt of a Company Order, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture as to such series, when
| (1) either |
| (a) all Securities of such series theretofore authenticated and delivered and all Coupons appertaining thereto (other than (i) Coupons appertaining to Bearer Securities of such series surrendered in exchange for Registered Securities of such series and maturing after such exchange whose surrender is not required or has been waived as provided in Section 3.5, (ii) Securities and Coupons of such series which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.6, (iii) Coupons appertaining to Securities of such series called for redemption and maturing after the relevant Redemption Date whose surrender has been waived as provided in Section 11.7, and (iv) Securities and Coupons of such series for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.3) have been delivered to the Trustee for cancellation; or | |
| (b) all Securities of such series and, in the case of (i) or (ii) below, any Coupons appertaining thereto not theretofore delivered to the Trustee for cancellation |
| (i) have become due and payable, or | |
| (ii) will become due and payable at their Stated Maturity within one year, or | |
| (iii) if redeemable at the option of the Company, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, |
and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose, money in the Currency in which such Securities are payable in an amount sufficient to pay and discharge the entire indebtedness on such Securities and any Coupons appertaining thereto not theretofore delivered to the Trustee for cancellation, including the principal of, any premium and interest on, and any Additional
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Amounts with respect to such Securities and any Coupons appertaining thereto, to the date of such deposit (in the case of Securities which have become due and payable) or to the Maturity thereof, as the case may be;
| (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company with respect to the Outstanding Securities of such series and any Coupons appertaining thereto; and | |
| (3) the Company has delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series have been complied with. |
In the event there are Securities of two or more series hereunder, the Trustee shall be required to execute an instrument acknowledging satisfaction and discharge of this Indenture only if requested to do so with respect to Securities of such series as to which it is Trustee and if the other conditions thereto are met.
Notwithstanding the satisfaction and discharge of this Indenture with respect to any series of Securities, the obligations of the Company to the Trustee under Section 6.7 and, if money shall have been deposited with the Trustee pursuant to subclause (b) of clause (1) of this Section, the obligations of the Company and the Trustee with respect to the Securities of such series under Section 3.5, Section 3.6, Section 4.3, Section 10.2 and Section 10.3, with respect to the payment of Additional Amounts, if any, with respect to such Securities as contemplated by Section 10.4 (but only to the extent that the Additional Amounts payable with respect to such Securities exceed the amount deposited in respect of such Additional Amounts pursuant to Section 4.1(1)(b)), and with respect to any rights to convert or exchange such Securities into Common Stock of the Company or other securities shall survive.
Section 4.2. Defeasance and Covenant Defeasance.
| (1) Unless pursuant to Section 3.1, either or both of (i) defeasance of the Securities of or within a series under clause (2) of this Section 4.2 shall not be applicable with respect to the Securities of such series or (ii) covenant defeasance of the Securities of or within a series under clause (3) of this Section 4.2 shall not be applicable with respect to the Securities of such series, then such provisions, together with the other provisions of this Section 4.2 (with such modifications thereto as may be specified pursuant to Section 3.1 with respect to any Securities), shall be applicable to such Securities and any Coupons appertaining thereto, and the Company may at its option by Board Resolution, at any time, with respect to such Securities and any Coupons appertaining thereto, elect to have Section 4.2(2) or Section 4.2(3) be applied to such Outstanding Securities and any Coupons appertaining thereto upon compliance with the conditions set forth below in this Section 4.2. | |
| (2) Upon the Company’s exercise of the above option applicable to this Section 4.2(2) with respect to any Securities of or within a series, the Company shall be deemed to have been discharged from its obligations with respect to such Outstanding Securities |
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| and any Coupons appertaining thereto on the date the conditions set forth in clause (4) of this Section 4.2 are satisfied (hereinafter, “defeasance”). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by such Outstanding Securities and any Coupons appertaining thereto, which shall thereafter be deemed to be “Outstanding” only for the purposes of clause (5) of this Section 4.2 and the other Sections of this Indenture referred to in clauses (i) and (ii) below, and to have satisfied all of its other obligations under such Securities and any Coupons appertaining thereto and this Indenture insofar as such Securities and any Coupons appertaining thereto are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of such Outstanding Securities and any Coupons appertaining thereto to receive, solely from the trust fund described in clause (4) of this Section 4.2 and as more fully set forth in such clause, payments in respect of the principal of (and premium, if any) and interest, if any, on, and Additional Amounts, if any, with respect to, such Securities and any Coupons appertaining thereto when such payments are due, and any rights of such Holder to convert such Securities into Common Stock of the Company or exchange such Securities for other securities, (ii) the obligations of the Company and the Trustee with respect to such Securities under Section 3.5, Section 3.6, Section 10.2 and Section 10.3 and with respect to the payment of Additional Amounts, if any, on such Securities as contemplated by Section 10.4 (but only to the extent that the Additional Amounts payable with respect to such Securities exceed the amount deposited in respect of such Additional Amounts pursuant to Section 4.2(4)(a) below), and with respect to any rights to convert such Securities into Common Stock of the Company or exchange such Securities for other securities, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (iv) this Section 4.2. The Company may exercise its option under this Section 4.2(2) notwithstanding the prior exercise of its option under clause (3) of this Section 4.2 with respect to such Securities and any Coupons appertaining thereto. | |
| (3) Upon the Company’s exercise of the option to have this Section 4.2(3) apply with respect to any Securities of or within a series, the Company shall be released from its obligations under any covenant applicable to such Securities specified pursuant to Section 3.1(20), with respect to such Outstanding Securities and any Coupons appertaining thereto on and after the date the conditions set forth in clause (4) of this Section 4.2 are satisfied (hereinafter, “covenant defeasance”), and such Securities and any Coupons appertaining thereto shall thereafter be deemed to be not “Outstanding” for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with any such covenant, but shall continue to be deemed “Outstanding” for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to such Outstanding Securities and any Coupons appertaining thereto, the Company may omit to comply with, and shall have no liability in respect of, any term, condition or limitation set forth in any such Section or such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document |
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| and such omission to comply shall not constitute a default or an Event of Default under Section 5.1(4) or Section 5.1(9) or otherwise, as the case may be, but, except as specified above, the remainder of this Indenture and such Securities and Coupons appertaining thereto shall be unaffected thereby. | |
| (4) The following shall be the conditions to application of clause (2) or (3) of this Section 4.2 to any Outstanding Securities of or within a series and any Coupons appertaining thereto: |
| (a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.8 who shall agree to comply with the provisions of this Section 4.2 applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities and any Coupons appertaining thereto, (1) an amount in Dollars or in such Foreign Currency in which such Securities and any Coupons appertaining thereto are then specified as payable at Stated Maturity, or (2) Government Obligations applicable to such Securities and Coupons appertaining thereto (determined on the basis of the Currency in which such Securities and Coupons appertaining thereto are then specified as payable at Stated Maturity) which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment of principal of (and premium, if any) and interest, if any, on such Securities and any Coupons appertaining thereto, money in an amount, or (3) a combination thereof, in any case, in an amount, sufficient, without consideration of any reinvestment of such principal and interest, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (y) the principal of (and premium, if any) and interest, if any, on such Outstanding Securities and any Coupons appertaining thereto at the Stated Maturity of such principal or installment of principal or premium or interest and (z) any mandatory sinking fund payments or analogous payments applicable to such Outstanding Securities and any Coupons appertaining thereto on the days on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities and any Coupons appertaining thereto. | |
| (b) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound. | |
| (c) No Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to such Securities and any Coupons appertaining thereto shall have occurred and be continuing on the date of such deposit and, with respect to defeasance only, at any time during the period |
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| ending on the 123rd day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). | |
| (d) In the case of an election under clause (2) of this Section 4.2, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from the Internal Revenue Service a letter ruling, or there has been published by the Internal Revenue Service a Revenue Ruling, or (ii) since the date of execution of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of such Outstanding Securities and any Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. | |
| (e) In the case of an election under clause (3) of this Section 4.2, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Outstanding Securities and any Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. | |
| (f) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, after the 123rd day after the date of deposit, all money and Government Obligations (or other property as may be provided pursuant to Section 3.1) (including the proceeds thereof) deposited or caused to be deposited with the Trustee (or other qualifying trustee) pursuant to this clause (4) to be held in trust will not be subject to any case or proceeding (whether voluntary or involuntary) in respect of the Company under any Federal or State bankruptcy, insolvency, reorganization or other similar law, or any decree or order for relief in respect of the Company issued in connection therewith. | |
| (g) The Company shall have delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance or covenant defeasance under clause (2) or (3) of this Section 4.2 (as the case may be) have been complied with. | |
| (h) Notwithstanding any other provisions of this Section 4.2(4), such defeasance or covenant defeasance shall be effected in compliance with any additional or substitute terms, conditions or limitations which may be imposed on the Company in connection therewith pursuant to Section 3.1. |
| (5) Unless otherwise specified in or pursuant to this Indenture or any Security, if, after a deposit referred to in Section 4.2(4)(a) has been made, (a) the Holder of a Security in respect of which such deposit was made is entitled to, and does, elect pursuant to |
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| Section 3.1 or the terms of such Security to receive payment in a Currency other than that in which the deposit pursuant to Section 4.2(4)(a) has been made in respect of such Security, or (b) a Conversion Event occurs in respect of the Foreign Currency in which the deposit pursuant to Section 4.2(4)(a) has been made, the indebtedness represented by such Security and any Coupons appertaining thereto shall be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal of (and premium, if any), and interest, if any, on, and Additional Amounts, if any, with respect to, such Security as the same becomes due out of the proceeds yielded by converting (from time to time as specified below in the case of any such election) the amount or other property deposited in respect of such Security into the Currency in which such Security becomes payable as a result of such election or Conversion Event based on (x) in the case of payments made pursuant to clause (a) above, the applicable market exchange rate for such Currency in effect on the second Business Day prior to each payment date, or (y) with respect to a Conversion Event, the applicable market exchange rate for such Foreign Currency in effect (as nearly as feasible) at the time of the Conversion Event. |
The Company shall pay and indemnify the Trustee (or other qualifying trustee, collectively for purposes of this Section 4.2(5) and Section 4.3, the “Trustee”) against any tax, fee or other charge, imposed on or assessed against the Government Obligations deposited pursuant to this Section 4.2 or the principal or interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of such Outstanding Securities and any Coupons appertaining thereto.
Anything in this Section 4.2 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Obligations (or other property and any proceeds therefrom) held by it as provided in clause (4) of this Section 4.2 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect a defeasance or covenant defeasance, as applicable, in accordance with this Section 4.2.
Section 4.3. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.3, all money and Government Obligations (or other property as may be provided pursuant to Section 3.1) (including the proceeds thereof) deposited with the Trustee pursuant to Section 4.1 or Section 4.2 in respect of any Outstanding Securities of any series and any Coupons appertaining thereto shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and any Coupons appertaining thereto and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities and any Coupons appertaining thereto of all sums due and to become due thereon in respect of principal (and premium, if any) and interest and Additional Amounts, if any; but such money and Government Obligations need not be segregated from other funds except to the extent required by law.
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Article 5
REMEDIES
Section 5.1. Events of Default.
“Event of Default,” wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), unless such event is specifically deleted or modified in or pursuant to the supplemental indenture, Board Resolution or Officer’s Certificate establishing the terms of such Series pursuant to this Indenture:
| (1) default in the payment of any interest on any Security of such series, or any Additional Amounts payable with respect thereto, when such interest becomes or such Additional Amounts become due and payable, and continuance of such default for a period of 30 days; or | |
| (2) default in the payment of the principal of or any premium on any Security of such series, or any Additional Amounts payable with respect thereto, when such principal or premium becomes or such Additional Amounts become due and payable at their Maturity; or | |
| (3) default in the deposit of any sinking fund payment when and as due by the terms of a Security of such series; or | |
| (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture or the Securities (other than a covenant or warranty a default in the performance or the breach of which is elsewhere in this Section specifically dealt with or which has been expressly included in this Indenture solely for the benefit of a series of Securities other than such series), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of such series, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or | |
| (5) if any event of default as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Company (including an Event of Default under any other series of Securities), whether such Indebtedness now exists or shall hereafter be created or incurred, shall happen and shall consist of default in the payment of more than $50,000,000 in principal amount of such Indebtedness at the maturity thereof (after giving effect to any applicable grace period) or shall result in such Indebtedness in principal amount in excess of $50,000,000 becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, and such default |
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| shall not be cured or such acceleration shall not be rescinded or annulled within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of such series, a written notice specifying such event of default and requiring the Company to cause such default to be cured or to cause such acceleration to be rescinded or annulled or to cause such Indebtedness to be discharged and stating that such notice is a “Notice of Default” hereunder; or | |
| (6) the Company shall fail within 60 days to pay, bond or otherwise discharge any uninsured judgment or court order for the payment of money in excess of $50,000,000, which is not stayed on appeal or is not otherwise being appropriately contested in good faith; or | |
| (7) the entry by a court having competent jurisdiction of: |
| (a) a decree or order for relief in respect of the Company or any Principal Subsidiary in an involuntary proceeding under any applicable bankruptcy, insolvency, reorganization (other than a reorganization under a foreign law that does not relate to insolvency) or other similar law and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or | |
| (b) a decree or order adjudging the Company or any Principal Subsidiary to be insolvent, or approving a petition seeking reorganization (other than a reorganization under a foreign law that does not relate to insolvency), arrangement, adjustment or composition of the Company or any Principal Subsidiary and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or | |
| (c) a final and non-appealable order appointing a custodian, receiver, liquidator, assignee, trustee or other similar official of the Company or any Principal Subsidiary or of any substantial part of the property of the Company or any Principal Subsidiary or ordering the winding up or liquidation of the affairs of the Company or any Principal Subsidiary; or |
| (8) the commencement by the Company or any Principal Subsidiary of a voluntary proceeding under any applicable bankruptcy, insolvency, reorganization (other than a reorganization under a foreign law that does not relate to insolvency) or other similar law or of a voluntary proceeding seeking to be adjudicated insolvent or the consent by the Company or any Principal Subsidiary to the entry of a decree or order for relief in an involuntary proceeding under any applicable bankruptcy, insolvency, reorganization or other similar law or to the commencement of any insolvency proceedings against it, or the filing by the Company or any Principal Subsidiary of a petition or answer or consent seeking reorganization, arrangement, adjustment or composition of the Company or relief under any applicable law, or the consent by the Company or any Principal Subsidiary to the filing of such petition or to the appointment |
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| of or taking possession by a custodian, receiver, liquidator, assignee, trustee or similar official of the Company or any Principal Subsidiary or any substantial part of the property of the Company or any Principal Subsidiary or the making by the Company or any Principal Subsidiary of an assignment for the benefit of creditors, or the taking of corporate action by the Company or any Principal Subsidiary in furtherance of any such action; or | |
| (9) any other Event of Default provided in or pursuant to this Indenture with respect to Securities of such series. |
Section 5.2. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the time Outstanding (other than an Event of Default specified in clause (7) or (8) of Section 5.1) occurs and is continuing, then the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of such series may declare the principal of all the Securities of such series, or such lesser amount as may be provided for in the Securities of such series, to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the Holders), and upon any such declaration such principal or such lesser amount shall become immediately due and payable.
If an Event of Default specified in clause (7) or (8) of Section 5.1 occurs, all unpaid principal of and accrued interest on the Outstanding Securities of that series (or such lesser amount as may be provided for in the Securities of such series) shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder of any Security of that series.
At any time after a declaration of acceleration with respect to the Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of not less than a majority in principal amount of the Outstanding Securities of such series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if
| (1) the Company has paid or deposited with the Trustee a sum of money sufficient to pay |
| (a) all overdue installments of any interest on and Additional Amounts with respect to all Securities of such series and any Coupon appertaining thereto, | |
| (b) the principal of and any premium on any Securities of such series which have become due otherwise than by such declaration of acceleration and interest thereon and any Additional Amounts with respect thereto at the rate or rates borne by or provided for in such Securities, | |
| (c) to the extent that payment of such interest or Additional Amounts is lawful, interest upon overdue installments of any interest and Additional Amounts at the rate or rates borne by or provided for in such Securities, and |
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| (d) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 6.7; and |
| (2) all Events of Default with respect to Securities of such series, other than the non-payment of the principal of, any premium and interest on, and any Additional Amounts with respect to Securities of such series which shall have become due solely by such declaration of acceleration, shall have been cured or waived as provided in Section 5.13. |
No such rescission shall affect any subsequent default or impair any right consequent thereon.
Section 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
| (1) default is made in the payment of any installment of interest on or any Additional Amounts with respect to any Security or any Coupon appertaining thereto when such interest or Additional Amounts shall have become due and payable and such default continues for a period of 30 days, or | |
| (2) default is made in the payment of the principal of or any premium on any Security or any Additional Amounts with respect thereto at their Maturity, |
the Company shall, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities and any Coupons appertaining thereto, the whole amount of money then due and payable with respect to such Securities and any Coupons appertaining thereto, with interest upon the overdue principal, any premium and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installments of interest and Additional Amounts at the rate or rates borne by or provided for in such Securities, and, in addition thereto, such further amount of money as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due to the Trustee under Section 6.7.
If the Company fails to pay the money it is required to pay the Trustee pursuant to the preceding paragraph forthwith upon the demand of the Trustee, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the money so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon such Securities and any Coupons appertaining thereto and collect the monies adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities and any Coupons appertaining thereto, wherever situated.
If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series and any Coupons appertaining thereto by such appropriate
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judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or such Securities or in aid of the exercise of any power granted herein or therein, or to enforce any other proper remedy.
Section 5.4. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities of any series or the property of the Company or such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of any overdue principal, premium, interest or Additional Amounts) shall be entitled and empowered, by intervention in such proceeding or otherwise,
| (1) to file and prove a claim for the whole amount, or such lesser amount as may be provided for in the Securities of any applicable series, of the principal and any premium, interest and Additional Amounts owing and unpaid in respect of the Securities and any Coupons appertaining thereto and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents or counsel) and of the Holders of Securities or any Coupons appertaining thereto allowed in such judicial proceeding, and | |
| (2) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; |
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder of Securities or any Coupons to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders of Securities or any Coupons, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and any other amounts due the Trustee under Section 6.7.
Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of a Security or any Coupon any plan of reorganization, arrangement, adjustment or composition affecting the Securities or Coupons or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder of a Security or any Coupon in any such proceeding.
Section 5.5. Trustee May Enforce Claims without Possession of Securities or Coupons.
All rights of action and claims under this Indenture or any of the Securities or Coupons may be prosecuted and enforced by the Trustee without the possession of any of the Securities or Coupons or the production thereof in any proceeding relating thereto, and any such proceeding
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instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery or judgment, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, shall be for the ratable benefit of each and every Holder of the Securities or Coupons in respect of which such judgment has been recovered.
Section 5.6. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, or any premium, interest or Additional Amounts, upon presentation of the Securities or Coupons, or both, as the case may be, and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:
| First: To the payment of all amounts due the Trustee and any predecessor Trustee under Section 6.7; | |
| Second: To the payment of the amounts then due and unpaid upon the Securities and any Coupons for principal and any premium, interest and Additional Amounts in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the aggregate amounts due and payable on such Securities and Coupons for principal and any premium, interest and Additional Amounts, respectively; |
| Third: The balance, if any, to the Person or Persons entitled thereto. |
Section 5.7. Limitations on Suits.
No Holder of any Security of any series or any Coupons appertaining thereto shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless
| (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of such series; | |
| (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of such series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; | |
| (3) such Holder or Holders have offered to the Trustee such indemnity as is reasonably satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; | |
| (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and |
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| (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of such series; |
it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture or any Security to affect, disturb or prejudice the rights of any other such Holders or Holders of Securities of any other series, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders.
Section 5.8. Unconditional Right of Holders to Receive Principal and any Premium, Interest and Additional Amounts.
Notwithstanding any other provision in this Indenture, the Holder of any Security or Coupon shall have the right, which is absolute and unconditional, to receive payment of the principal of, any premium and (subject to Section 3.5 and Section 3.7) interest on, and any Additional Amounts with respect to such Security or payment of such Coupon, as the case may be, on the respective Stated Maturity or Maturities therefor specified in such Security or Coupon (or, in the case of redemption, on the Redemption Date or, in the case of repayment at the option of such Holder if provided in or pursuant to this Indenture, on the date such repayment is due) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder.
Section 5.9. Restoration of Rights and Remedies.
If the Trustee or any Holder of a Security or a Coupon has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and each such Holder shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and each such Holder shall continue as though no such proceeding had been instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or Coupons in the last paragraph of Section 3.6, no right or remedy herein conferred upon or reserved to the Trustee or to each and every Holder of a Security or a Coupon is intended to be exclusive of any other right or remedy, and every right and remedy, to the extent permitted by law, shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not, to the extent permitted by law, prevent the concurrent assertion or employment of any other appropriate right or remedy.
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Section 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security or Coupon to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to any Holder of a Security or a Coupon may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by such Holder, as the case may be.
Section 5.12. Control by Holders of Securities.
The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Securities of such series and any Coupons appertaining thereto, provided that
| (1) such direction shall not be in conflict with any rule of law or with this Indenture or with the Securities of such series, | |
| (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and | |
| (3) such direction is not unduly prejudicial to the rights of the other Holders of Securities of such series not joining in such action. |
Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the Outstanding Securities of any series on behalf of the Holders of all the Securities of such series and any Coupons appertaining thereto may waive any past default hereunder with respect to such series and its consequences, except a default
| (1) in the payment of the principal of, any premium or interest on, or any Additional Amounts with respect to, any Security of such series or any Coupons appertaining thereto, or | |
| (2) in respect of a covenant or provision hereof which under Article 9 cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. |
Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.
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Section 5.14. Waiver of Usury, Stay or Extension Laws.
The Company covenants that (to the extent that it may lawfully do so) it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company expressly waives (to the extent that it may lawfully do so) all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
Section 5.15. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of any undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in such suit having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.15 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of Outstanding Securities of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest, if any, on or Additional Amounts, if any, with respect to any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date, and, in the case of repayment, on or after the date for repayment) or for the enforcement of the right, if any, to convert or exchange any Security into Common Stock or other securities in accordance with its terms.
Article 6
THE TRUSTEE
Section 6.1. Certain Duties and Responsibilities.
| (a) Except during the continuance of an Event of Default, |
| (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and | |
| (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall |
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| be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). |
| (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. | |
| (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that |
| (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; | |
| (2) the Trustee shall not be liable for any error of judgement made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; | |
| (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities of any series, determined as provided in Sections 1.1, 1.4 and 5.12, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities of such series; and | |
| (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. |
| (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. |
Section 6.2. Certain Rights of Trustee.
Subject to Sections 315(a) through 315(d) of the Trust Indenture Act:
| (1) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other |
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| paper or document reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties; |
| (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or a Company Order (in each case, other than delivery of any Security, together with any Coupons appertaining thereto, to the Trustee for authentication and delivery pursuant to Section 3.3 which shall be sufficiently evidenced as provided therein except in the case of an exchange) and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; | |
| (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence shall be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officer’s Certificate; | |
| (4) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; | |
| (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by or pursuant to this Indenture at the request or direction of any of the Holders of Securities of any series or any Coupons appertaining thereto pursuant to this Indenture, unless such Holders shall have offered to the Trustee such security or indemnity as is reasonably satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; | |
| (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, coupon or other paper or document, but the Trustee, in its discretion, may but shall not be obligated to make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine, during business hours and upon reasonable notice, the books, records and premises of the Company, personally or by agent or attorney; | |
| (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; | |
| (8) the Trustee shall not be liable for any action taken or error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent, acted in bad faith or engaged in willful misconduct; |
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| (9) the Authenticating Agent, Paying Agent, and Security Registrar shall have the same rights, privileges, protections, immunities, benefits, protections and rights to indemnification as the Trustee set forth hereunder; | |
| (10) the Trustee may request that the Company deliver an Officer’s Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officer’s Certificate may be signed by any person authorized to sign an Officer’s Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded; and | |
| (11) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with an Act of the Holders hereunder, and, to the extent not so provided herein, with respect to any act requiring the Trustee to exercise its own discretion, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture or any Securities, unless it shall be proved that, in connection with any such action taken, suffered or omitted or any such act, the Trustee was negligent, acted in bad faith or engaged in willful misconduct. |
Section 6.3. Notice of Defaults.
Within 90 days after the occurrence of any default hereunder with respect to the Securities of any series, the Trustee shall transmit by mail to all Holders of Securities of such series entitled to receive reports pursuant to Section 7.3(3), notice of such default hereunder actually known to a Responsible Officer of the Trustee, unless such default shall have been cured or waived; provided, however, that the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the best interest of the Holders of Securities and Coupons of such series; and provided, further, that in the case of any default of the character specified in Section 5.1(5) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series.
Section 6.4. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee’s certificate of authentication, and in any Coupons shall be taken as the statements of the Company and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities or the Coupons, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. Neither the Trustee nor any
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Authenticating Agent shall be accountable for the use or application by the Company of the Securities or the proceeds thereof.
Section 6.5. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other Person that may be an agent of the Trustee or the Company, in its individual or any other capacity, may become the owner or pledgee of Securities or Coupons and, subject to Sections 310(b) and 311 of the Trust Indenture Act, may otherwise deal with the Company with the same rights it would have if it were not the Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other Person.
Section 6.6. Money Held in Trust.
Except as provided in Section 4.3 and Section 10.3, money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law and shall be held uninvested. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed to in writing with the Company.
Section 6.7. Compensation and Reimbursement.
The Company agrees:
| (1) to pay to the Trustee from time to time such compensation as the Company and the Trustee shall from time to time agree in writing for all services rendered by the Trustee hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); | |
| (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture or arising out of or in connection with the acceptance or administration of the trust or trusts hereunder (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to the Trustee’s negligence or bad faith; and | |
| (3) to indemnify the Trustee and its agents, officers, directors and employees for, and to hold them harmless against, any loss, damage, claims, liability or expense including taxes (other than taxes based upon, measured or determined by the income of the Trustee), incurred without negligence or bad faith on their part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending themselves against any claim or liability in connection with the exercise or performance of any of their powers or duties hereunder, except to the extent that any such loss, damage, claims, liability or expense was due to the Trustee’s negligence or bad faith. |
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As security for the performance of the obligations of the Company under this Section, the Trustee shall have a lien prior to the Securities of any series upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of, and premium or interest on or any Additional Amounts with respect to Securities or any Coupons appertaining thereto.
To the extent permitted by law, any compensation or expense incurred by the Trustee after a default specified in or pursuant to Section 5.1 is intended to constitute an expense of administration under any then applicable bankruptcy or insolvency law. “Trustee” for purposes of this Section 6.7 shall include any predecessor Trustee but the negligence or bad faith of any Trustee shall not affect the rights of any other Trustee under this Section 6.7.
The provisions of this Section 6.7 shall survive the satisfaction and discharge of this Indenture or the earlier resignation or removal of the Trustee and shall apply with equal force and effect to the Trustee in its capacity as Authenticating Agent, Paying Agent or Security Registrar.
Section 6.8. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder that is a Corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia, that is eligible under Section 310(a)(1) of the Trust Indenture Act to act as trustee under an indenture qualified under the Trust Indenture Act and that has a combined capital and surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture Act) of at least $50,000,000, and that is subject to supervision or examination by Federal or state authority. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.
Section 6.9. Resignation and Removal; Appointment of Successor.
| (1) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee pursuant to Section 6.10. | |
| (2) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.10 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to such series. | |
| (3) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and the Company. |
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| (4) If at any time: |
| (a) the Trustee shall fail to comply with the obligations imposed upon it under Section 310(b) of the Trust Indenture Act with respect to Securities of any series after written request therefor by the Company or any Holder of a Security of such series who has been a bona fide Holder of a Security of such series for at least six months, or | |
| (b) the Trustee shall cease to be eligible under Section 6.8 and shall fail to resign after written request therefor by the Company or any such Holder, or | |
| (c) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, |
then, in any such case, (i) the Company, by or pursuant to a Board Resolution, may remove the Trustee with respect to all Securities or the Securities of such series, or (ii) subject to Section 315(e) of the Trust Indenture Act, any Holder of a Security who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities of such series and the appointment of a successor Trustee or Trustees.
| (5) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of such series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 6.10. If, within one year after such resignation, removal or incapacity, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 6.10, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders of Securities and accepted appointment in the manner required by Section 6.10, any Holder of a Security who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. |
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| (6) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Registered Securities, if any, of such series as their names and addresses appear in the Security Register and, if Securities of such series are issued as Bearer Securities, by publishing notice of such event once in an Authorized Newspaper in each Place of Payment located outside the United States. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. | |
| (7) In no event shall any retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder. |
Section 6.10. Acceptance of Appointment by Successor.
| (1) Upon the appointment hereunder of any successor Trustee with respect to all Securities, such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties hereunder of the retiring Trustee; but, on the request of the Company or such successor Trustee, such retiring Trustee, upon payment of its charges, shall execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and, subject to Section 10.3, shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject nevertheless to its claim, if any, provided for in Section 6.7. | |
| (2) Upon the appointment hereunder of any successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and such successor Trustee shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, such successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust, that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee and that no Trustee shall be responsible for any notice given to, or received |
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| by, or any act or failure to act on the part of any other Trustee hereunder, and, upon the execution and delivery of such supplemental indenture, the resignation or removal of the retiring Trustee shall become effective to the extent provided therein, such retiring Trustee shall have no further responsibility for the exercise of rights and powers or for the performance of the duties and obligations vested in the Trustee under this Indenture with respect to the Securities of that or those series to which the appointment of such successor Trustee relates other than as hereinafter expressly set forth, and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or such successor Trustee, such retiring Trustee, upon payment of its charges with respect to the Securities of that or those series to which the appointment of such successor Trustee relates and subject to Section 10.3 shall duly assign, transfer and deliver to such successor Trustee, to the extent contemplated by such supplemental indenture, the property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, subject to its claim, if any, provided for in Section 6.7. | |
| (3) Upon request of any Person appointed hereunder as a successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (1) or (2) of this Section, as the case may be. | |
| (4) No Person shall accept its appointment hereunder as a successor Trustee unless at the time of such acceptance such successor Person shall be qualified and eligible under this Article. |
Section 6.11. Merger, Conversion, Consolidation or Succession to Business.
Any Corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any Corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Corporation acquiring all or substantially all of the corporate trust business of the Trustee shall be the successor of the Trustee hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated but not delivered by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.
Section 6.12. Appointment of Authenticating Agent.
The Trustee may appoint one or more Authenticating Agents acceptable to the Company with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of that or those series issued upon original issue, exchange, registration of transfer, partial redemption or partial repayment or pursuant to Section 3.6, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and
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obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent.
Each Authenticating Agent must be acceptable to the Company and, except as provided in or pursuant to this Indenture, shall at all times be a corporation that would be permitted by the Trust Indenture Act to act as trustee under an indenture qualified under the Trust Indenture Act, is authorized under applicable law and by its charter to act as an Authenticating Agent and has a combined capital and surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture Act) of at least $50,000,000. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect specified in this Section.
Any Corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Corporation succeeding to all or substantially all of the corporate agency or corporate trust business of an Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, provided such Corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall (i) mail written notice of such appointment by first-class mail, postage prepaid, to all Holders of Registered Securities, if any, of the series with respect to which such Authenticating Agent shall serve, as their names and addresses appear in the Security Register, and (ii) if Securities of the series are issued as Bearer Securities, publish notice of such appointment at least once in an Authorized Newspaper in the place where such successor Authenticating Agent has its principal office if such office is located outside the United States. Any successor Authenticating Agent, upon acceptance of its appointment hereunder, shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.
The Company agrees to pay each Authenticating Agent from time to time reasonable compensation for its services under this Section. If the Trustee makes such payments, it shall be entitled to be reimbursed for such payments, subject to the provisions of Section 6.7.
The provisions of Section 3.8, Section 6.4 and Section 6.5 shall be applicable to each Authenticating Agent.
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If an Authenticating Agent is appointed with respect to one or more series of Securities pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to or in lieu of the Trustee’s certificate of authentication, an alternate certificate of authentication in substantially the following form:
This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture.
| THE BANK OF NEW YORK, as Trustee | ||
| By: | ||
|
|
||
| as Authenticating Agent | ||
| By: | ||
|
|
||
| Authorized Signatory | ||
If all of the Securities of any series may not be originally issued at one time, and if the Trustee does not have an office capable of authenticating Securities upon original issuance located in a Place of Payment where the Company wishes to have Securities of such series authenticated upon original issuance, the Trustee, if so requested in writing (which writing need not be accompanied by or contained in an Officer’s Certificate by the Company), shall appoint in accordance with this Section an Authenticating Agent having an office in a Place of Payment designated by the Company with respect to such series of Securities.
Article 7
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.1. Company to Furnish Trustee Names and Addresses of Holders.
In accordance with Section 312(a) of the Trust Indenture Act, the Company shall furnish or cause to be furnished to the Trustee
| (1) semi-annually with respect to Securities of each series not later than May 1 and November 1 of the year or upon such other dates as are set forth in or pursuant to the Board Resolution or indenture supplemental hereto authorizing such series, a list, in each case in such form as the Trustee may reasonably require, of the names and addresses of Holders as of the applicable date, and | |
| (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, |
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| provided, however, that so long as the Trustee is the Security Registrar no such list shall be required to be furnished. | |
Section 7.2. Preservation of Information; Communications to Holders.
The Trustee shall comply with the obligations imposed upon it pursuant to Section 312 of the Trust Indenture Act.
Every Holder of Securities or Coupons, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company, the Trustee, any Paying Agent or any Security Registrar shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders of Securities in accordance with Section 312(c) of the Trust Indenture Act, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 312(b) of the Trust Indenture Act.
Section 7.3. Reports by Trustee.
| (1) Within 60 days after September 15 of each year commencing with the first September 15 following the first issuance of Securities pursuant to Section 3.1, if required by Section 313(a) of the Trust Indenture Act, the Trustee shall transmit, pursuant to Section 313(c) of the Trust Indenture Act, a brief report dated as of such September 15 with respect to any of the events specified in said Section 313(a) which may have occurred since the later of the immediately preceding September 15 and the date of this Indenture. | |
| (2) The Trustee shall transmit the reports required by Section 313(a) of the Trust Indenture Act at the times specified therein. | |
| (3) Reports pursuant to this Section shall be transmitted in the manner and to the Persons required by Sections 313(c) and 313(d) of the Trust Indenture Act. |
Section 7.4. Reports by Company.
The Company, pursuant to Section 314(a) of the Trust Indenture Act, shall:
| (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, in respect of a security |
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| listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; |
| (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company, with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and | |
| (3) transmit within 30 days after the filing thereof with the Trustee, in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. | |
| (4) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officer’s Certificates), other than with respect to Section 6.2. |
Article 8
CONSOLIDATION, AMALGAMATIONS, MERGER AND SALES
Section 8.1. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate or amalgamate with or merge into any other Person (whether or not affiliated with the Company), or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any other Person (whether or not affiliated with the Company), and the Company shall not permit any other Person (whether or not affiliated with the Company) to consolidate or amalgamate with or merge into the Company or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to the Company, unless:
| (1) in case the Company shall consolidate or amalgamate with or merge into another Person or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any Person, the Person formed by such consolidation or amalgamation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company as an entirety or substantially as an entirety shall be a Corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia, or any other country which is on the date of this Indenture a member of the Organization of Economic Cooperation and Development, and shall expressly assume, by an indenture (or indentures, if at such time there is more than one Trustee) supplemental hereto, executed by the successor Person and delivered to the Trustee the due and punctual |
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| payment of the principal of, any premium and interest on and any Additional Amounts with respect to all the Securities and the performance of every obligation in this Indenture and the Outstanding Securities on the part of the Company to be performed or observed and shall provide for conversion or exchange rights in accordance with the provisions of the Securities of any series that are convertible or exchangeable into Common Stock or other securities; |
| (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default or event which, after notice or lapse of time, or both, would become an Event of Default, shall have occurred and be continuing; and | |
| (3) either the Company or the successor Person shall have delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. |
Section 8.2. Successor Person Substituted for Company.
Upon any consolidation or amalgamation by the Company with or merger of the Company into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 8.1, the successor Person formed by such consolidation or amalgamation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; and thereafter, except in the case of a lease, the predecessor Person shall be released from all obligations and covenants under this Indenture, the Securities and the Coupons.
Article 9
SUPPLEMENTAL INDENTURES
Section 9.1. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders of Securities or Coupons, the Company (when authorized by or pursuant to a Board Resolution) and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, for any of the following purposes:
| (1) to evidence the succession of another Person to the Company, and the assumption by any such successor of the covenants of the Company contained herein and in the Securities; or |
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| (2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (as shall be specified in such supplemental indenture or indentures) or to surrender any right or power herein conferred upon the Company; or | |
| (3) to add to or change any of the provisions of this Indenture to provide that Bearer Securities may be registrable as to principal, to change or eliminate any restrictions on the payment of principal of, any premium or interest on or any Additional Amounts with respect to Securities, to permit Bearer Securities to be issued in exchange for Registered Securities, to permit Bearer Securities to be exchanged for Bearer Securities of other authorized denominations or to permit or facilitate the issuance of Securities in uncertificated form, provided any such action shall not adversely affect the interests of the Holders of Outstanding Securities of any series or any Coupons appertaining thereto in any material respect; or | |
| (4) to establish the form or terms of Securities of any series and any Coupons appertaining thereto as permitted by Section 2.1 and Section 3.1; or | |
| (5) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.10; or | |
| (6) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not adversely affect the interests of the Holders of Securities of any series then Outstanding or any Coupons appertaining thereto in any material respect; or | |
| (7) to add to, delete from or revise the conditions, limitations and restrictions on the authorized amount, terms or purposes of issue, authentication and delivery of Securities, as herein set forth; or | |
| (8) to add any additional Events of Default with respect to all or any series of Securities (as shall be specified in such supplemental indenture); or | |
| (9) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Article 4, provided that any such action shall not adversely affect the interests of any Holder of an Outstanding Security of such series and any Coupons appertaining thereto or any other Outstanding Security or Coupon in any material respect; or | |
| (10) to secure the Securities; or | |
| (11) to make provisions with respect to conversion or exchange rights of Holders of Securities of any series; or |
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| (12) to amend or supplement any provision contained herein or in any supplemental indenture, provided that no such amendment or supplement shall materially adversely affect the interests of the Holders of any Securities then Outstanding. |
Section 9.2. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company (when authorized by or pursuant to a Board Resolution) and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture or of the Securities of such series; provided, however, that no such supplemental indenture, without the consent of the Holder of each Outstanding Security affected thereby, shall
| (1) change the Stated Maturity of the principal of, or any premium or installment of interest on or any Additional Amounts with respect to, any Security, or reduce the principal amount thereof or the rate (or modify the calculation of such rate) of interest thereon or any Additional Amounts with respect thereto, or any premium payable upon the redemption thereof or otherwise, or change the obligation of the Company to pay Additional Amounts pursuant to Section 10.4 (except as contemplated by Section 8.1(1) and permitted by Section 9.1(1)), or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 5.2 or the amount thereof provable in bankruptcy pursuant to Section 5.4, change the redemption provisions or adversely affect the right of repayment at the option of any Holder as contemplated by Article 13, or change the Place of Payment, Currency in which the principal of, any premium or interest on, or any Additional Amounts with respect to any Security is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date or, in the case of repayment at the option of the Holder, on or after the date for repayment), or | |
| (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or reduce the requirements of Section 15.4 for quorum or voting, or | |
| (3) modify any of the provisions of this Indenture relating to the subordination of the Securities in respect thereof in a manner adverse to Holders of Securities, or to Holders of Securities, or | |
| (4) modify any of the provisions of this Section, Section 5.13 or Section 10.6, except to increase any such percentage or to provide that certain other provisions of this |
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| Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, or | |
| (5) make any change that adversely affects the right to convert or exchange any Security into or for Common Stock of the Company or other securities (whether or not issued by the Company), cash or property in accordance with its terms. |
A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which shall have been included expressly and solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders of Securities under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.
Section 9.3. Execution of Supplemental Indentures.
As a condition to executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trust created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 315 of the Trust Indenture Act) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and an Officer’s Certificate stating that all conditions precedent to the execution of such supplemental indenture have been fulfilled. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.
Section 9.4. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of a Security theretofore or thereafter authenticated and delivered hereunder and of any Coupon appertaining thereto shall be bound thereby.
Section 9.5. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.
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Section 9.6. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.7. Notice of Supplemental Indenture.
Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to Section 9.2, the Company shall transmit to the Holders of Outstanding Securities of any series affected thereby a notice setting forth the substance of such supplemental indenture.
Article 10
COVENANTS
Section 10.1. Payment of Principal, any Premium, Interest and Additional Amounts.
The Company covenants and agrees for the benefit of the Holders of the Securities of each series that it will duly and punctually pay the principal of, any premium and interest on and any Additional Amounts with respect to the Securities of such series in accordance with the terms thereof, any Coupons appertaining thereto and this Indenture. Any interest due on any Bearer Security on or before the Maturity thereof, and any Additional Amounts payable with respect to such interest, shall be payable only upon presentation and surrender of the Coupons appertaining thereto for such interest as they severally mature.
Section 10.2. Maintenance of Office or Agency.
The Company shall maintain in each Place of Payment for any series of Securities an Office or Agency where Securities of such series (but not Bearer Securities, except as otherwise provided below, unless such Place of Payment is located outside the United States) may be presented or surrendered for payment, where Securities of such series may be surrendered for registration of transfer or exchange, where Securities of such series that are convertible or exchangeable may be surrendered for conversion or exchange, and where notices and demands to or upon the Company in respect of the Securities of such series relating thereto and this Indenture may be served. If Securities of a series are issuable as Bearer Securities, the Company shall maintain, subject to any laws or regulations applicable thereto, an Office or Agency in a Place of Payment for such series which is located outside the United States where Securities of such series and any Coupons appertaining thereto may be presented and surrendered for payment; provided, however, that if the Securities of such series are listed on The Stock Exchange of the United Kingdom and the Republic of Ireland or the Luxembourg Stock Exchange or any other stock exchange located outside the United States and such stock exchange shall so require, the Company shall maintain a Paying Agent in London, Luxembourg or any other required city located outside the United States, as the case may be, so long as the Securities of such series are listed on such exchange. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such Office or Agency. If at any time the Company shall fail to maintain any such required Office or Agency or shall fail to furnish the
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Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, except that Bearer Securities of such series and any Coupons appertaining thereto may be presented and surrendered for payment at the place specified for the purpose with respect to such Securities as provided in or pursuant to this Indenture, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.
Except as otherwise provided in or pursuant to this Indenture, no payment of principal, premium, interest or Additional Amounts with respect to Bearer Securities shall be made at any Office or Agency in the United States or by check mailed to any address in the United States or by transfer to an account maintained with a bank located in the United States; provided, however, if amounts owing with respect to any Bearer Securities shall be payable in Dollars, payment of principal of, any premium or interest on and any Additional Amounts with respect to any such Security may be made at the Corporate Trust Office of the Trustee or any Office or Agency designated by the Company in the Borough of Manhattan, The City of New York, if (but only if) payment of the full amount of such principal, premium, interest or Additional Amounts at all offices outside the United States maintained for such purpose by the Company in accordance with this Indenture is illegal or effectively precluded by exchange controls or other similar restrictions.
The Company may also from time to time designate one or more other Offices or Agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an Office or Agency in each Place of Payment for Securities of any series for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other Office or Agency. Unless otherwise provided in or pursuant to this Indenture, the Company hereby designates as the Place of Payment for each series of Securities the Borough of Manhattan, The City of New York, and initially appoints the Corporate Trust Office of the Trustee as the Office or Agency of the Company in the Borough of Manhattan, The City of New York for such purpose. The Company may subsequently appoint a different Office or Agency in the Borough of Manhattan, The City of New York for the Securities of any series.
Unless otherwise specified with respect to any Securities pursuant to Section 3.1, if and so long as the Securities of any series (i) are denominated in a Foreign Currency or (ii) may be payable in a Foreign Currency, or so long as it is required under any other provision of this Indenture, then the Company will maintain with respect to each such series of Securities, or as so required, at least one exchange rate agent.
Section 10.3. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it shall, on or before each due date of the principal of, any premium or interest on or Additional Amounts with respect to any of the Securities of such series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum in the currency or currencies, currency
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unit or units or composite currency or currencies in which the Securities of such series are payable (except as otherwise specified pursuant to Section 3.1 for the Securities of such series) sufficient to pay the principal or any premium, interest or Additional Amounts so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and shall promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for any series of Securities, it shall, on or prior to each due date of the principal of, any premium or interest on or any Additional Amounts with respect to any Securities of such series, deposit with any Paying Agent a sum (in the currency or currencies, currency unit or units or composite currency or currencies described in the preceding paragraph) sufficient to pay the principal or any premium, interest or Additional Amounts so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.
The Company shall cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent shall:
| (1) hold all sums held by it for the payment of the principal of, any premium or interest on or any Additional Amounts with respect to Securities of such series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as provided in or pursuant to this Indenture; | |
| (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities of such series) in the making of any payment of principal, any premium or interest on or any Additional Amounts with respect to the Securities of such series; and | |
| (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. |
The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums.
Except as otherwise provided herein or pursuant hereto, any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, any premium or interest on or any Additional Amounts with respect to any Security of any series or any Coupon appertaining thereto and remaining unclaimed for two years after such principal or any such premium or interest or any such Additional Amounts shall have become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security or any
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Coupon appertaining thereto shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper in each Place of Payment for such series or to be mailed to Holders of Registered Securities of such series, or both, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing nor shall it be later than two years after such principal and any premium or interest or Additional Amounts shall have become due and payable, any unclaimed balance of such money then remaining will be repaid to the Company.
Section 10.4. Additional Amounts.
All payments of principal of and premium, if any, interest and any other amounts on, or in respect of, the Securities of any series or any Coupon appertaining thereto shall be made without withholding or deduction at source for, or on account of, any present or future taxes, fees, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of a jurisdiction (a “taxing jurisdiction”) or any political subdivision or taxing authority thereof or therein, unless such taxes, fees, duties, assessments or governmental charges are required to be withheld or deducted by (i) the laws (or any regulations or ruling promulgated thereunder) of a taxing jurisdiction or any political subdivision or taxing authority thereof or therein or (ii) an official position regarding the application, administration, interpretation or enforcement of any such laws, regulations or rulings (including, without limitation, a holding by a court of competent jurisdiction or by a taxing authority in a taxing jurisdiction or any political subdivision thereof). If a withholding or deduction at source is required, the Company shall, subject to certain limitations and exceptions set forth below, pay to the Holder of any such Security or any Coupon appertaining thereto such Additional Amounts as may be necessary so that every net payment of principal, premium, if any, interest or any other amount made to such Holder, after such withholding or deduction, shall not be less than the amount provided for in such Security, any Coupons appertaining thereto and this Indenture to be then due and payable; provided, however, that the Company shall not be required to make payment of such Additional Amounts for or on account of:
| (1) any tax, fee, duty, assessment or governmental charge of whatever nature which would not have been imposed but for the fact that such Holder: (A) was a resident, domiciliary or national of, or engaged in business or maintained a permanent establishment or was physically present in, the relevant taxing jurisdiction or any political subdivision thereof or otherwise had some connection with the relevant taxing jurisdiction other than by reason of the mere ownership of, or receipt of payment under, such Security; (B) presented such Security for payment in the relevant taxing jurisdiction or any political subdivision thereof, unless such Security could not have been presented for payment elsewhere; or (C) presented such Security more than thirty (30) days after the date on which the payment in respect of such Security first became due and payable or provided for, whichever is later, except to the extent that the Holder would have been |
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| entitled to such Additional Amounts if it had presented such Security for payment on any day within such period of thirty (30) days; | |
| (2) any estate, inheritance, gift, sale, transfer, personal property or similar tax, assessment or other governmental charge; | |
| (3) any tax, assessment or other governmental charge that is imposed or withheld by reason of the failure by the Holder or the beneficial owner of such Security to comply with any reasonable request by the Company addressed to the Holder within 90 days of such request (A) to provide information concerning the nationality, residence or identity of the Holder or such beneficial owner or (B) to make any declaration or other similar claim or satisfy any information or reporting requirement, which, in the case of (A) or (B), is required or imposed by statute, treaty, regulation or administrative practice of the relevant taxing jurisdiction or any political subdivision thereof as a precondition to exemption from all or part of such tax, assessment or other governmental charge; or | |
| (4) any combination of items (1), (2) and (3); |
nor shall Additional Amounts be paid with respect to any payment of the principal of, or premium, if any, interest or any other amounts on, any such Security to any Holder who is a fiduciary or partnership or other than the sole beneficial owner of such Security to the extent such payment would be required by the laws of the relevant taxing jurisdiction (or any political subdivision or relevant taxing authority thereof or therein) to be included in the income for tax purposes of a beneficiary or partner or settlor with respect to such fiduciary or a member of such partnership or a beneficial owner who would not have been entitled to such Additional Amounts had it been the Holder of the Security.
Whenever in this Indenture there is mentioned, in any context, the payment of the principal of or any premium, interest or any other amounts on, or in respect of, any Security of any series or any Coupon or the net proceeds received on the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of Additional Amounts provided by the terms of such series established hereby or pursuant hereto to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to such terms, and express mention of the payment of Additional Amounts (if applicable) in any provision hereof shall not be construed as excluding the payment of Additional Amounts in those provisions hereof where such express mention is not made.
Except as otherwise provided in or pursuant to this Indenture or the Securities of the applicable series, at least 10 days prior to the first Interest Payment Date with respect to a series of Securities (or if the Securities of such series shall not bear interest prior to Maturity, the first day on which a payment of principal is made), and at least 10 days prior to each date of payment of principal or interest if there has been any change with respect to the matters set forth in the below-mentioned Officer’s Certificate, the Company shall furnish to the Trustee and the principal Paying Agent or Paying Agents, if other than the Trustee, an Officer’s Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal of and premium, if any, interest or any other amounts on the Securities of such series shall be made to
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Holders of Securities of such series or the Coupons appertaining thereto without withholding for or on account of any tax, fee, duty, assessment or other governmental charge described in this Section 10.4. If any such withholding shall be required, then such Officer’s Certificate shall specify by taxing jurisdiction the amount, if any, required to be withheld on such payments to such Holders of Securities or Coupons, and the Company agrees to pay to the Trustee or such Paying Agent the Additional Amounts required by this Section 10.4. The Company covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officer’s Certificate furnished pursuant to this Section 10.4.
Section 10.5. Corporate Existence.
Subject to Article 8, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, and its material rights (charter and statutory) and franchises; provided, however, that the foregoing shall not obligate the Company to preserve any such right or franchise if the Company shall determine that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to any Holder.
Section 10.6. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 10.5 with respect to the Securities of any series if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities of such series, by Act of such Holders, either shall waive such compliance in such instance or generally shall have waived compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.
Section 10.7. Company Statement as to Compliance; Notice of Certain Defaults.
| (1) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year, commencing December 31, 2003 a written statement (which need not be contained in or accompanied by an Officer’s Certificate) signed by the principal executive officer, the principal financial officer or the principal accounting officer of the Company, stating that |
| (a) a review of the activities of the Company during such year and of its performance under this Indenture has been made under his or her supervision, and | |
| (b) to the best of his or her knowledge, based on such review, (a) the Company has complied with all the conditions and covenants imposed on it under this Indenture throughout such year, or, if there has been a default in the fulfillment of any such condition or covenant, specifying each such default known |
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| to him or her and the nature and status thereof, and (b) no event has occurred and is continuing which is, or after notice or lapse of time or both would become, an Event of Default, or, if such an event has occurred and is continuing, specifying each such event known to him and the nature and status thereof. |
| (2) The Company shall deliver to the Trustee, within five days after the occurrence thereof, written notice of any Event of Default or any event which after notice or lapse of time or both would become an Event of Default pursuant to clause (4) of Section 5.1. | |
| (3) The Trustee shall have no duty to monitor the Company’s compliance with the covenants contained in this Article 10 other than as specifically set forth in this Section 10.7. |
Article 11
REDEMPTION OF SECURITIES
Section 11.1. Applicability of Article.
Redemption of Securities of any series at the option of the Company as permitted or required by the terms of such Securities shall be made in accordance with the terms of such Securities and (except as otherwise provided herein or pursuant hereto) this Article.
Section 11.2. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Company of (a) less than all of the Securities of any series or (b) all of the Securities of any series, with the same issue date, interest rate or formula, Stated Maturity and other terms, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities of such series to be redeemed.
Section 11.3. Selection by Trustee of Securities to be Redeemed.
If less than all of the Securities of any series with the same issue date, interest rate or formula, Stated Maturity and other terms are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal amount of Registered Securities of such series; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Registered Security of such series not redeemed to less than the minimum denomination for a Security of such series established herein or pursuant hereto.
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The Trustee shall promptly notify the Company and the Security Registrar (if other than itself) in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal of such Securities which has been or is to be redeemed.
Unless otherwise specified in or pursuant to this Indenture or the Securities of any series, if any Security selected for partial redemption is converted into Common Stock of the Company or exchanged for other securities in part before termination of the conversion or exchange right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted or exchanged during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection.
Section 11.4. Notice of Redemption.
Notice of redemption shall be given in the manner provided in Section 1.6, not less than 30 nor more than 60 days prior to the Redemption Date, unless a shorter period is specified in the Securities to be redeemed, to the Holders of Securities to be redeemed. Failure to give notice by mailing in the manner herein provided to the Holder of any Registered Securities designated for redemption as a whole or in part, or any defect in the notice to any such Holder, shall not affect the validity of the proceedings for the redemption of any other Securities or portion thereof.
Any notice that is mailed to the Holder of any Registered Securities in the manner herein provided shall be conclusively presumed to have been duly given, whether or not such Holder receives the notice.
All notices of redemption shall state:
| (1) the Redemption Date, | |
| (2) the Redemption Price, | |
| (3) if less than all Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amount) of the particular Security or Securities to be redeemed, | |
| (4) in case any Security is to be redeemed in part only, the notice which relates to such Security shall state that on and after the Redemption Date, upon surrender of such Security, the Holder of such Security will receive, without charge, a new Security or Securities of authorized denominations for the principal amount thereof remaining unredeemed, |
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| (5) that, on the Redemption Date, the Redemption Price shall become due and payable upon each such Security or portion thereof to be redeemed, and, if applicable, that interest thereon shall cease to accrue on and after said date, | |
| (6) the place or places where such Securities, together (in the case of Bearer Securities) with all Coupons appertaining thereto, if any, maturing after the Redemption Date, are to be surrendered for payment of the Redemption Price and any accrued interest and Additional Amounts pertaining thereto, | |
| (7) that the redemption is for a sinking fund, if such is the case, | |
| (8) that, unless otherwise specified in such notice, Bearer Securities of any series, if any, surrendered for redemption must be accompanied by all Coupons maturing subsequent to the date fixed for redemption or the amount of any such missing Coupon or Coupons will be deducted from the Redemption Price, unless security or indemnity satisfactory to the Company, the Trustee and any Paying Agent is furnished, | |
| (9) if Bearer Securities of any series are to be redeemed and no Registered Securities of such series are to be redeemed, and if such Bearer Securities may be exchanged for Registered Securities not subject to redemption on the Redemption Date pursuant to Section 3.5 or otherwise, the last date, as determined by the Company, on which such exchanges may be made, | |
| (10) in the case of Securities of any series that are convertible into Common Stock of the Company or exchangeable for other securities, the conversion or exchange price or rate, the date or dates on which the right to convert or exchange the principal of the Securities of such series to be redeemed will commence or terminate and the place or places where such Securities may be surrendered for conversion or exchange, and | |
| (11) the CUSIP number or the Euroclear or the Cedel reference numbers of such Securities, if any (or any other numbers used by a Depository to identify such Securities). |
A notice of redemption published as contemplated by Section 1.6 need not identify particular Registered Securities to be redeemed.
Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company.
Section 11.5. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit, with respect to the Securities of any series called for redemption pursuant to Section 11.4, with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.3) an amount of money in the applicable Currency sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date, unless otherwise specified pursuant to Section 3.1 or in the Securities of such series) any accrued
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interest on and Additional Amounts with respect thereto, all such Securities or portions thereof which are to be redeemed on that date.
Section 11.6. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest and the Coupons for such interest appertaining to any Bearer Securities so to be redeemed, except to the extent provided below, shall be void. Upon surrender of any such Security for redemption in accordance with said notice, together with all Coupons, if any, appertaining thereto maturing after the Redemption Date, such Security shall be paid by the Company at the Redemption Price, together with any accrued interest and Additional Amounts to the Redemption Date; provided, however, that, except as otherwise provided in or pursuant to this Indenture or the Bearer Securities of such series, installments of interest on Bearer Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable only upon presentation and surrender of Coupons for such interest (at an Office or Agency located outside the United States except as otherwise provided in Section 10.2), and provided, further, that, except as otherwise specified in or pursuant to this Indenture or the Registered Securities of such series, installments of interest on Registered Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the Regular Record Dates therefor according to their terms and the provisions of Section 3.7.
If any Bearer Security surrendered for redemption shall not be accompanied by all appurtenant Coupons maturing after the Redemption Date, such Security may be paid after deducting from the Redemption Price an amount equal to the face amount of all such missing Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Company and the Trustee if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to the Trustee or any Paying Agent any such missing Coupon in respect of which a deduction shall have been made from the Redemption Price, such Holder shall be entitled to receive the amount so deducted; provided, however, that any interest or Additional Amounts represented by Coupons shall be payable only upon presentation and surrender of those Coupons at an Office or Agency for such Security located outside of the United States except as otherwise provided in Section 10.2.
If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium, until paid, shall bear interest from the Redemption Date at the rate prescribed therefor in the Security.
Section 11.7. Securities Redeemed in Part.
Any Registered Security which is to be redeemed only in part shall be surrendered at any Office or Agency for such Security (with, if the Company or the Trustee so requires, due
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endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Registered Security or Securities of the same series, containing identical terms and provisions, of any authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. If a Security in global form is so surrendered, the Company shall execute, and the Trustee shall authenticate and deliver to the Depository for such Security in global form as shall be specified in the Company Order with respect thereto to the Trustee, without service charge, a new Security in global form in a denomination equal to and in exchange for the unredeemed portion of the principal of the Security in global form so surrendered.
Article 12
SINKING FUNDS
Section 12.1. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series, except as otherwise permitted or required in or pursuant to this Indenture or any Security of such series issued pursuant to this Indenture.
The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a “mandatory sinking fund payment,” and any payment in excess of such minimum amount provided for by the terms of Securities of such series is herein referred to as an “optional sinking fund payment”. If provided for by the terms of Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 12.2. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series and this Indenture.
Section 12.2. Satisfaction of Sinking Fund Payments with Securities.
The Company may, in satisfaction of all or any part of any sinking fund payment with respect to the Securities of any series to be made pursuant to the terms of such Securities (1) deliver Outstanding Securities of such series (other than any of such Securities previously called for redemption or any of such Securities in respect of which cash shall have been released to the Company), together in the case of any Bearer Securities of such series with all unmatured Coupons appertaining thereto, and (2) apply as a credit Securities of such series which have been redeemed either at the election of the Company pursuant to the terms of such series of Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, provided that such series of Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. If, as a result of the delivery
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or credit of Securities of any series in lieu of cash payments pursuant to this Section 12.2, the principal amount of Securities of such series to be redeemed in order to satisfy the remaining sinking fund payment shall be less than $100,000, the Trustee need not call Securities of such series for redemption, except upon Company Request, and such cash payment shall be held by the Trustee or a Paying Agent and applied to the next succeeding sinking fund payment, provided, however, that the Trustee or such Paying Agent shall at the request of the Company from time to time pay over and deliver to the Company any cash payment so being held by the Trustee or such Paying Agent upon delivery by the Company to the Trustee of Securities of that series purchased by the Company having an unpaid principal amount equal to the cash payment requested to be released to the Company.
Section 12.3. Redemption of Securities for Sinking Fund.
Not less than 75 days prior to each sinking fund payment date for any series of Securities, the Company shall deliver to the Trustee an Officer’s Certificate specifying the amount of the next ensuing mandatory sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting of Securities of that series pursuant to Section 12.2, and the optional amount, if any, to be added in cash to the next ensuing mandatory sinking fund payment, and will also deliver to the Trustee any Securities to be so credited and not theretofore delivered. If such Officer’s Certificate shall specify an optional amount to be added in cash to the next ensuing mandatory sinking fund payment, the Company shall thereupon be obligated to pay the amount therein specified. Not less than 60 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 11.3 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 11.4. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Section 11.6 and Section 11.7.
Article 13
REPAYMENT AT THE OPTION OF HOLDERS
Section 13.1. Applicability of Article.
Securities of any series which are repayable at the option of the Holders thereof before their Stated Maturity shall be repaid in accordance with the terms of the Securities of such series. The repayment of any principal amount of Securities pursuant to such option of the Holder to require repayment of Securities before their Stated Maturity, for purposes of Section 3.9, shall not operate as a payment, redemption or satisfaction of the Indebtedness represented by such Securities unless and until the Company, at its option, shall deliver or surrender the same to the Trustee with a directive that such Securities be cancelled. Notwithstanding anything to the contrary contained in this Section 13.1, in connection with any repayment of Securities, the Company may arrange for the purchase of any Securities by an agreement with one or more investment bankers or other purchasers to purchase such Securities by paying to the Holders of such Securities on or before the close of business on the repayment date an amount not less than
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the repayment price payable by the Company on repayment of such Securities, and the obligation of the Company to pay the repayment price of such Securities shall be satisfied and discharged to the extent such payment is so paid by such purchasers.
Article 14
SECURITIES IN FOREIGN CURRENCIES
Section 14.1. Applicability of Article.
Whenever this Indenture provides for (i) any action by, or the determination of any of the rights of, Holders of Securities of any series in which not all of such Securities are denominated in the same Currency, or (ii) any distribution to Holders of Securities, in the absence of any provision to the contrary in the form of Security of any particular series or pursuant to this Indenture or the Securities, any amount in respect of any Security denominated in a Currency other than Dollars shall be treated for any such action or distribution as that amount of Dollars that could be obtained for such amount on such reasonable basis of exchange and as of the record date with respect to Registered Securities of such series (if any) for such action, determination of rights or distribution (or, if there shall be no applicable record date, such other date reasonably proximate to the date of such action, determination of rights or distribution) as the Company may specify in a written notice to the Trustee.
Article 15
MEETINGS OF HOLDERS OF SECURITIES
Section 15.1. Purposes for Which Meetings May Be Called.
A meeting of Holders of Securities of any series may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other Act provided by this Indenture to be made, given or taken by Holders of Securities of such series.
Section 15.2. Call, Notice and Place of Meetings.
| (1) The Trustee may at any time call a meeting of Holders of Securities of any series for any purpose specified in Section 15.1, to be held at such time and at such place in the Borough of Manhattan, The City of New York, or, if Securities of such series have been issued in whole or in part as Bearer Securities, in London or in such place outside the United States as the Trustee shall determine. Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 1.6, not less than 21 nor more than 180 days prior to the date fixed for the meeting. | |
| (2) In case at any time the Company (by or pursuant to a Board Resolution) or the Holders of at least 10% in principal amount of the Outstanding Securities of any |
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| series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 15.1, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed notice of or made the first publication of the notice of such meeting within 21 days after receipt of such request (whichever shall be required pursuant to Section 1.6) or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York, or, if Securities of such series are to be issued as Bearer Securities, in London for such meeting and may call such meeting for such purposes by giving notice thereof as provided in clause (1) of this Section. |
Section 15.3. Persons Entitled to Vote at Meetings.
To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (1) a Holder of one or more Outstanding Securities of such series, or (2) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of such series by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any series shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.
Section 15.4. Quorum; Action.
The Persons entitled to vote a majority in principal amount of the Outstanding Securities of a series shall constitute a quorum for any meeting of Holders of Securities of such series. In the absence of a quorum within 30 minutes after the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any reconvened meeting, such reconvened meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such reconvened meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 15.2(1), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Outstanding Securities of such series which shall constitute a quorum.
Except as limited by the proviso to Section 9.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted only by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Securities of that series; provided, however, that, except as limited by the proviso to Section 9.2, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other Act which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the
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Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Securities of such series.
Any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of such series and the Coupons appertaining thereto, whether or not such Holders were present or represented at the meeting.
Section 15.5. Determination of Voting Rights; Conduct and Adjournment of Meetings.
| (1) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities of such series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 1.4 and the appointment of any proxy shall be proved in the manner specified in Section 1.4 or by having the signature of the person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 1.4 to certify to the holding of Bearer Securities. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 1.4 or other proof. | |
| (2) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 15.2(1), in which case the Company or the Holders of Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting. | |
| (3) At any meeting, each Holder of a Security of such series or proxy shall be entitled to one vote for each $1,000 principal amount of Securities of such series held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy. | |
| (4) Any meeting of Holders of Securities of any series duly called pursuant to Section 15.2 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting; and the meeting may be held as so adjourned without further notice. |
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Section 15.6. Counting Votes and Recording Action of Meetings.
The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record, at least in triplicate, of the proceedings of each meeting of Holders of Securities of any series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 15.2 and, if applicable, Section 15.4. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company, and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written.
| W. R. BERKLEY CORPORATION | ||
| By: /s/ Eugene G. Ballard | ||
| Name: Eugene G. Ballard | ||
| Title: Senior Vice President | ||
| THE BANK OF NEW YORK, as Trustee | ||
| By: /s/ Geovanni Barris | ||
| Name: Geovanni Barris | ||
| Title: Vice President | ||
W. R. BERKLEY CORPORATION
TO
THE BANK OF NEW YORK, as Trustee
FIRST SUPPLEMENTAL INDENTURE TO
INDENTURE DATED FEBRUARY 14, 2003
(SENIOR DEBT SECURITIES)
Dated as of February 14, 2003
5.875% Senior Notes due 2013
TABLE OF CONTENTS
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ARTICLE I | |||||||
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Relation to Indenture; Definitions | |||||||
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Section 1.1.
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RELATION TO INDENTURE | 1 | ||||||
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Section 1.2.
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DEFINITIONS | 1 | ||||||
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ARTICLE II | |||||||
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The Series of Securities | |||||||
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Section 2.1.
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TITLE OF THE SECURITIES | 2 | ||||||
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Section 2.2.
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LIMITATION ON AGGREGATE PRINCIPAL AMOUNT | 2 | ||||||
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Section 2.3.
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PRINCIPAL PAYMENT DATE | 2 | ||||||
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Section 2.4.
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INTEREST AND INTEREST RATES | 2 | ||||||
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Section 2.5.
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PLACE OF PAYMENT | 3 | ||||||
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Section 2.6.
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REDEMPTION | 3 | ||||||
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Section 2.7.
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DENOMINATION | 5 | ||||||
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Section 2.8.
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CURRENCY | 5 | ||||||
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Section 2.9.
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FORM OF NOTES | 5 | ||||||
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Section 2.10.
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REGISTRAR AND PAYING AGENT FOR THE NOTES | 5 | ||||||
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Section 2.11.
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SINKING FUND OBLIGATIONS | 5 | ||||||
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Section 2.12.
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DEFEASANCE AND COVENANT DEFEASANCE | 5 | ||||||
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Section 2.13.
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PAYMENT OF TAXES | 5 | ||||||
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Section 2.14.
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LIMITATION ON LIENS ON STOCK OF PRINCIPAL SUBSIDIARIES | 5 | ||||||
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Section 2.15.
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LIMITATIONS ON ISSUE
OR DISPOSITION OF COMMON STOCK OF PRINCIPAL SUBSIDIARIES
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Section 2.16.
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IMMEDIATELY AVAILABLE FUNDS | 6 | ||||||
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ARTICLE III | |||||||
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Miscellaneous Provisions | |||||||
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Section 3.1.
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TRUSTEE NOT RESPONSIBLE FOR RECITALS | 6 | ||||||
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Section 3.2.
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PAYMENT OF EXPENSES UPON RESIGNATION OR REMOVAL | 7 | ||||||
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Section 3.3.
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ADOPTION, RATIFICATION AND CONFIRMATION | 7 | ||||||
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Section 3.4.
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COUNTERPARTS | 7 | ||||||
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Section 3.5.
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GOVERNING LAW | 7 | ||||||
W. R. BERKLEY CORPORATION
FIRST SUPPLEMENTAL INDENTURE TO
INDENTURE DATED FEBRUARY 14, 2003
(SENIOR DEBT SECURITIES)
$200,000,000
5.875% Senior Notes due 2013
FIRST SUPPLEMENTAL INDENTURE, dated as of February 14, 2003 between W. R. BERKLEY CORPORATION, a Delaware corporation (the “Company”), and THE BANK OF NEW YORK, a trust company organized under the laws of the State of New York, as Trustee (the “Trustee”).
RECITALS
The Company has heretofore executed and delivered to the Trustee an indenture for senior debt securities, dated as of February 14, 2003 (the “Indenture”), providing for the issuance from time to time of series of the Company’s Securities.
Section 3.1 of the Indenture provides for various matters with respect to any series of Securities issued under the Indenture to be established in an indenture supplemental to the Indenture.
Section 9.1(4) of the Indenture provides for the Company and the Trustee to enter into an indenture supplemental to the Indenture to establish the form or terms of Securities of any series as provided by Sections 2.1 and 3.1 of the Indenture.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the issuance of the series of Securities provided for herein, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities of such series, as follows:
ARTICLE I
RELATION TO INDENTURE; DEFINITIONS
Section 1.1. RELATION TO INDENTURE. This First Supplemental Indenture constitutes an integral part of the Indenture.
Section 1.2. DEFINITIONS. For all purposes of this First Supplemental Indenture:
1
(a) Capitalized terms used herein without definition shall have the meanings specified in the Indenture;
(b) All references herein to Articles and Sections, unless otherwise specified, refer to the corresponding Articles and Sections of this First Supplemental Indenture; and
(c) The terms “herein,” “hereof,” “hereunder” and other words of similar import refer to this First Supplemental Indenture.
(d) “Fair Value,” when used with respect to Common Stock, means the fair value thereof as determined in good faith by the Board of Directors.
ARTICLE II
THE SERIES OF SECURITIES
Section 2.1. TITLE OF THE SECURITIES. There shall be a series of Securities designated the “5.875% Senior Notes due 2013” (the “Notes”).
Section 2.2. LIMITATION ON AGGREGATE PRINCIPAL AMOUNT. The aggregate principal amount of the Notes shall initially be limited to $200,000,000. The Company may, without the consent of the Holders of the Notes, issue additional Securities having the same interest rate, maturity date and other terms as described in the related prospectus supplement and prospectus. Any additional Securities, together with the Notes offered by the related prospectus supplement, will constitute a single series of Securities under the Indenture. No additional Securities may be issued if an Event of Default under the Indenture has occurred and is continuing with respect to the Securities.
Section 2.3. PRINCIPAL PAYMENT DATE. The principal amount of the Notes outstanding (together with any accrued and unpaid interest) shall be payable in a single installment on February 15, 2013, which date shall be the Stated Maturity of the Notes Outstanding.
Section 2.4. INTEREST AND INTEREST RATES. The rate of interest on each Note shall be 5.875% per annum, accruing from February 14, 2003, or from the most recent interest payment date (each such date, an “Interest Payment Date”) to which interest has been paid or duly provided for, payable semiannually in arrears on February 15 and August 15 of each year commencing August 15, 2003 until the principal thereof shall have become due and payable, and until the principal thereof is paid or duly provided for or made available for payment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any partial period shall be computed on the basis of the actual number of days elapsed in a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on any Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay). The interest installment so payable in respect of any Note, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to
2
the person in whose name such Note (or one or more Predecessor Securities) is registered at the close of business on February 1 or August 1 prior to such Interest Payment Date. Any such interest installment not punctually paid or duly provided for in respect of any Note shall forthwith cease to be payable to the registered Holder on such Regular Record Date and may either be paid to the Person in whose name such Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof shall be given to the Holders of the Notes not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
Section 2.5. PLACE OF PAYMENT. The Place of Payment where the Notes may be presented or surrendered for payment, where the Notes may be surrendered for registration of transfer or exchange and where notices and demand to or upon the Company in respect of the Notes and the Indenture may be served shall be the Corporate Trust Office of the Trustee.
Section 2.6. REDEMPTION.
(a) The Company may redeem the Notes, in whole or in part, at any time at a Redemption Price equal to the greater of (i) 100% of the principal amount of such Securities to be redeemed or (ii) an amount, as determined by an Independent Investment Banker, equal to the sum of the present values of the remaining scheduled payments of principal of and interest on the securities to be redeemed (not including any portion of such payments of interest accrued as of the date of redemption) discounted to the Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus 25 basis points, plus, in either of the above cases, accrued and unpaid interest thereon to, but not including, the Redemption Date.
(b) For the purposes of this Section 2.6,
“Adjusted Treasury Rate” means, with respect to any Redemption Date:
| – | the yield, under the heading which represents the average for the immediately preceding week, appearing in the most recently published statistical release designated “H.15(519)” published by the Board of Governors of the Federal Reserve System (or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity) under the caption “Treasury Constant Maturities,” for the maturity corresponding to the Comparable Treasury Issue. If no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the Adjusted Treasury Rate shall be interpolated or |
3
| extrapolated from such yields on a straight line basis, rounding to the nearest month; or | |||
| – | if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. |
The Adjusted Treasury Rate shall be calculated on the third Business Day preceding the Redemption Date.
“Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such securities (“Remaining Life”).
“Comparable Treasury Price” means (i) the average of three Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest Reference Treasury Dealer Quotations, or (ii) if the Independent Investment Banker obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such quotations.
“Independent Investment Banker” means one of the Reference Treasury Dealers appointed by us.
“Reference Treasury Dealer” means:
| – | each of Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated and their respective successors; provided that, if any of the foregoing ceases to be a primary U.S. Government securities dealer in the United States (a “Primary Treasury Dealer”), the Company shall substitute therefor another Primary Treasury Dealer; and | ||
| – | any other Primary Treasury Dealer selected by the Company. |
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker at 5:00 p.m., New York City Time, on the third Business Day preceding such Redemption Date.
The Company will mail a notice of redemption at least 30 days but not more than 60 days before the Redemption Date to each holder of the notes to be redeemed. If less than all
4
of the notes are to be redeemed, the trustee will select, by such method as it will deem fair and appropriate, including pro rata or by lot, the notes to be redeemed in whole or in part.
Unless the Company defaults in payment of the Redemption Price, on and after the Redemption Date, interest will cease to accrue on the notes or portions thereof called for redemption.
Section 2.7. DENOMINATION. The Notes shall be issuable only in registered form without coupons and in denominations of $1,000 and integral multiples thereof.
Section 2.8. CURRENCY. Principal and interest on the Notes shall be payable in such coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts.
Section 2.9. FORM OF NOTES. The Notes shall be substantially in the form attached as EXHIBIT A hereto.
Section 2.10. REGISTRAR AND PAYING AGENT FOR THE NOTES. The Trustee shall serve initially as Registrar and Paying Agent for the Notes.
Section 2.11. SINKING FUND OBLIGATIONS. The Company has no obligation to redeem or purchase any Notes pursuant to any sinking fund or analogous requirement or upon the happening of a specified event or at the option of a Holder thereof.
Section 2.12. DEFEASANCE AND COVENANT DEFEASANCE. The Company has elected to have both Section 4.2(2) of the Indenture (relating to defeasance) and Section 4.2(3) (relating to covenant defeasance) applied to the Notes.
Section 2.13. PAYMENT OF TAXES. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment or governmental charge whose amount, applicability or validity is being contested in good faith by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Notes.
Section 2.14. LIMITATION ON LIENS ON STOCK OF PRINCIPAL SUBSIDIARIES. The Company will not, and it will not permit any Subsidiary of the Company to, at any time directly or indirectly create, assume, incur or permit to exist any Indebtedness secured by a pledge, lien or other encumbrance (any pledge, lien or other encumbrance being hereinafter in this Section referred to as a “lien”) on the voting securities of Principal Subsidiaries, or the voting securities of a Subsidiary that owns, directly or indirectly, the voting securities of any of the Principal Subsidiaries without making effective provision whereby the Notes then Outstanding (and, if the Company so elects, any other Indebtedness of the Company
5
that is not subordinate to the Notes and with respect to which the governing instruments require, or pursuant to which the Company is otherwise obligated or required, to provide such security) shall be equally and ratably secured with such secured Indebtedness so long as such other Indebtedness shall be secured. For purposes of this Section 2.14 only, “Indebtedness”, in addition to those items specified in Section 1.1 of the Indenture, shall include any obligation of, or any such obligation guaranteed by, any Person for the payment of amounts due under a swap agreement or other similar instrument or agreement or foreign currency hedge exchange or similar instrument or agreement.
If the Company shall hereafter be required to secure the Notes equally and ratably with any other Indebtedness pursuant to this Section, (i) the Company will promptly deliver to the Trustee an Officer’s Certificate stating that the foregoing covenant has been complied with, and an Opinion of Counsel stating that in the opinion of such counsel the foregoing covenant has been complied with and that any instruments executed by the Company or any Subsidiary of the Company in the performance of the foregoing covenant comply with the requirements of the foregoing covenant and (ii) the Trustee is hereby authorized to enter into an indenture or agreement supplemental hereto and to take such action, if any, as it may deem advisable to enable it to enforce the rights of the holders of the Notes so secured.
Section 2.15. LIMITATIONS ON ISSUE OR DISPOSITION OF COMMON STOCK OF PRINCIPAL SUBSIDIARIES. As long as any of the Notes remain outstanding, the Company will not, and will not permit any Subsidiary to, issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, any of the Common Stock of any Principal Subsidiary (except to the Company or to one or more Subsidiaries or for the purpose of qualifying directors); provided, however, that this covenant shall not apply if (i) the issuance, sale, assignment, transfer or other disposition is required to comply with the order of a court or regulatory authority of competent jurisdiction, other than an order issued at the request of the Company or of one of its Subsidiaries; (ii) the entire Common Stock of a Principal Subsidiary then owned by the Company or by its Subsidiaries is disposed of in a single transaction or in a series of related transactions, for consideration consisting of cash or other property which is at least equal to the Fair Value of such Common Stock; or (iii) after giving effect to the issuance, sale, assignment, transfer or other disposition, the Company and its Subsidiaries would own directly or indirectly at least 80% of the issued and outstanding Common Stock of such Principal Subsidiary and such issuance, sale, assignment, transfer or other disposition is made for consideration consisting of cash or other property which is at least equal to the Fair Value of such Common Stock.
Section 2.16. IMMEDIATELY AVAILABLE FUNDS. All payments of principal and interest shall be made in immediately available funds.
ARTICLE III
MISCELLANEOUS PROVISIONS
Section 3.1. TRUSTEE NOT RESPONSIBLE FOR RECITALS. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no
6
responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this First Supplemental Indenture.
Section 3.2. PAYMENT OF EXPENSES UPON RESIGNATION OR REMOVAL. Upon termination of this First Supplemental Indenture or the Indenture or the removal or resignation of the Trustee, unless otherwise stated, the Company shall pay to the Trustee all amounts accrued to the date of such termination, removal or resignation.
Section 3.3. ADOPTION, RATIFICATION AND CONFIRMATION. The Indenture, as supplemented and amended by this First Supplemental Indenture, is in all respects hereby adopted, ratified and confirmed.
Section 3.4. COUNTERPARTS. This First Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.
Section 3.5. GOVERNING LAW. THIS FIRST SUPPLEMENTAL INDENTURE AND EACH NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.
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IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed on the day and year first above written.
| W. R. BERKLEY CORPORATION | ||||
| By: | /s/Eugene G. Ballard | |||
|
Name: Eugene G. Ballard
|
||||
| Title: Senior Vice President | ||||
| THE BANK OF NEW YORK, as Trustee | ||||
| By: |
/s/ Geovanni Barris
Name: Geovanni Barris Title: Vice President |
|||
8
EXHIBIT A
(FORM OF FACE OF NOTE)
This Note is a global Note within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depository or a nominee of a Depository. This Note is exchangeable for Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Note (other than a transfer of this Note as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in limited circumstances.
Unless this Note is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any Note issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.
| Certificate No. 1 | $200,000,000 | |||
| Dated: February 14, 2003 | CUSIP No. 084423AJ1 | |||
W. R. BERKLEY CORPORATION
5.875% Senior Notes due 2013
W. R. BERKLEY CORPORATION, a Delaware corporation (the “Company,” which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO. or registered assigns, the principal sum of TWO HUNDRED MILLION DOLLARS AND NO CENTS ($200,000,000.00) on February 15, 2013. The Company further promises to pay interest on said principal sum outstanding from February 14, 2003, or from the most recent interest payment date (each such date, an “Interest Payment Date”) to which interest has been paid or duly provided for, semiannually (subject to deferral as set forth herein) in arrears on February 15 and August 15 of each year commencing August 15, 2003 at the rate of 5.875% per annum, until the principal hereof shall have become due and payable and, until the principal hereof is paid or duly provided for or made available for payment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any partial period shall be computed on the basis of the number of actual days elapsed in a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay). A “Business Day,” with respect to any Place of Payment or other location, shall mean any day other than a Saturday, Sunday or other day on which banking institutions in such Place of Payment or other location are authorized or obligated by law, regulation or executive
A-1
order to close. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on February 1 or August 1 prior to such Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered Holder on such Regular Record Date and may either be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof shall be given to the Holder of this Note not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which this Note may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
The principal of (and premium, if any) and the interest on this Note shall be payable at the office or agency of the Company maintained for that purpose in the United States in such coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; PROVIDED, HOWEVER, that payment of interest may be made at the option of the Company by check mailed to the registered Holder at such address as shall appear in the Security Register. Notwithstanding the foregoing, so long as the Holder of this Note is Cede & Co., the payment of the principal of (and premium, if any) and interest on this Note will be made at such place and to such account as may be designated by Cede & Co. All payments of principal and interest hereunder shall be made in immediately available funds.
Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid for any purpose.
A-2
IN WITNESS WHEREOF, the Company has caused this instrument to be executed.
| W. R. BERKLEY CORPORATION | ||
| By:________________________ | ||
| Name: | ||
| Title: | ||
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture.
Dated: February 14, 2003
THE BANK OF NEW YORK,
as Trustee
By:_____________________________
Authorized Signatory
A-3
(FORM OF REVERSE OF NOTE)
This Note is one of a duly authorized issue of securities of the Company, designated as its 5.875% Senior Notes due 2013 (herein referred to as the “Securities”), issued under and pursuant to an Indenture, dated as of February 14, 2003 between the Company and The Bank of New York, as Trustee (herein called the “Trustee,” which term includes any successor trustee under the Indenture), as supplemented by the First Supplemental Indenture dated as of February 14, 2003, between the Company and the Trustee (the Indenture as so supplemented, the “Indenture”), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered.
All terms used in this Note that are defined in the Indenture shall have the meanings assigned to them in the Indenture.
The Company may redeem the Securities, in whole or in part, at any time at a Redemption Price equal to the greater of (i) 100% of the principal amount of such Securities to be redeemed or (ii) an amount, as determined by an Independent Investment Banker, the sum of the present values of the remaining scheduled payments of principal of and interest thereon on the securities to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the Redemption Date on a semiannual basis assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus 25 basis points, plus, in either of the above cases, accrued and unpaid interest thereon to the Redemption Date.
“Adjusted Treasury Rate” means, with respect to any Redemption Date:
| – | the yield, under the heading which represents the average for the immediately preceding week, appearing in the most recently published statistical release designated “H.15(519)” published by the Board of Governors of the Federal Reserve System (or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity) under the caption “Treasury Constant Maturities,” for the maturity corresponding to the Comparable Treasury Issue. If no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the Adjusted Treasury Rate shall be interpolated or extrapolated from such yields on a straight line basis, rounding to the nearest month; or | ||
| – | if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semiannual equivalent yield to maturity of the |
A-4
| Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. |
The Adjusted Treasury Rate shall be calculated on the third Business Day preceding the Redemption Date.
“Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the securities to be redeemed that would be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such securities (“Remaining Life”).
“Comparable Treasury Price” means (i) the average of three Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest Reference Treasury Dealer Quotations, or (ii) if the Independent Investment Banker obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such quotations.
“Independent Investment Banker” means one of the Reference Treasury Dealers appointed by us.
“Reference Treasury Dealer” means:
| – | each of Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated, and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in the United States (a “Primary Treasury Dealer”), the Company shall substitute therefor another Primary Treasury Dealer; and | ||
| – | any other Primary Treasury Dealer selected by the Company. |
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker at 5:00 p.m., New York City Time, on the third Business Day preceding such Redemption Date.
The Company will mail a notice of redemption at least 30 days but not more than 60 days before the Redemption Date to each holder of the securities to be redeemed. If less than all of the securities are to be redeemed, the Trustee will select, by such method as it will deem fair and appropriate, including pro rata or by lot, the securities to be redeemed in whole or in part.
A-5
Unless we default in payment of the Redemption Price, on and after the Redemption Date, interest will cease to accrue on the securities or portions thereof called for redemption.
If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions for satisfaction, discharge and defeasance at any time of the entire indebtedness of this Note upon compliance by the Company with certain conditions set forth in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities of each series at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture (other than Section 4.2 of the Indenture) shall alter or impair the obligation of the Company to pay the principal and interest on the Note at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable in the Security Register, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained under Section 10.2 of the Indenture duly endorsed by, or accompanied by a written instrument of transfer, in form satisfactory to the Company and the Security Registrar, duly executed by the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
A-6
This global Note is exchangeable for Securities in definitive form only under certain limited circumstances set forth in the Indenture. Securities of this series so issued are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations herein and therein set forth, Securities of this series so issued are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same.
The Company and, by its acceptance of this Note or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, this Note agree that for United States federal, state and local tax purposes it is intended that this Note constitute indebtedness.
THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THE SECURITIES WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF.
A-7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Industry Overview
The demand for insurance is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity, i.e., the level of policyholders’ surplus employed in the industry and the willingness of insurance management to risk that capital. The adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. In addition, investment rates of return may impact policy rates. These factors can have a significant impact on ultimate profitability because a property casualty insurance policy is priced before its costs are known, as premiums usually are determined long before claims are reported.
Critical Accounting Policies
The notes to the Company’s financial statements discuss its significant accounting policies. Management considers certain of these policies, including assumptions and estimates relating to loss reserves, to be critical to the portrayal of the Company’s financial condition and results since they require management to establish estimates based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting measurements.
Reserves for losses and loss expenses The Company maintains reserves for losses and loss expenses to cover our estimated liability for unpaid claims, including legal and other fees as well as a portion of our general expenses, for reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors including the actions of third parties which are beyond our control. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, inflation, judicial and litigation trends and legislative changes. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us.
The inherent uncertainties of estimating reserves are greater for certain types
of liabilities, where the various considerations affecting these types of
claims are subject to change and long periods of time may elapse before a
definitive determination of liability is made. Reserve estimates are
continually refined in an ongoing process as experience develops and further
claims are reported and settled. Adjustments to reserves are reflected in the
results of the periods in which such estimates are changed. Because setting
reserves is inherently uncertain, we cannot assure you that our current
reserves will prove adequate in light of subsequent events. Should we need to
increase our reserves, our pre-tax income for the period will decrease by a
corresponding amount.
Results of Operations
The Company reported net income of $175 million, or $3.31 per share, for 2002
compared with a net loss of $92 million, or $2.09 per share, for 2001.
Following are the components of net income (loss) for the past three years
(amounts in thousands):
2002
2001
2000
$
103,974
$
(277,687
)
$
(122,585
)
16,380
9,964
6,326
187,875
195,021
210,448
(85,866
)
(64,002
)
(59,852
)
—
(3,196
)
(1,850
)
222,363
(139,900
)
32,487
15,214
(12,252
)
7,535
21,856
758
829
(84,388
)
59,848
(4,613
)
$
175,045
$
(91,546
)
$
36,238
26 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Underwriting
Following is a summary of underwriting results for the past three
years (dollars in thousands):
2002
% Change
2001
% Change
2000
$
3,208,227
45.3
%
$
2,208,466
21.6
%
$
1,816,755
2,710,490
45.9
%
1,858,096
23.4
%
1,506,244
2,252,527
34.0
%
1,680,469
12.7
%
1,491,014
103,974
(277,687
)
(122,585
)
65.0
%
82.1
%
73.4
%
30.4
%
34.4
%
34.8
%
95.4
%
116.5
%
108.2
%
| (1) | Represents losses and loss expenses incurred expressed as a percentage of premiums earned. | |
| (2) | Represents underwriting expenses expressed as a percentage of premiums earned. |
The Company’s underwriting operations are presently conducted through five segments: specialty lines of insurance, alternative markets, reinsurance, regional property casualty insurance, and international. In addition, the Company reports the run-off of its discontinued personal lines and alternative markets reinsurance business as a separate business segment. Additional information for the business segments follows.
Specialty
The specialty segment provides insurance products and services
principally to the excess and surplus lines, professional liability, commercial
transportation and surety markets. Following is a summary of underwriting
results for the specialty segment for the past three years (dollars in
thousands):
2002
% Change
2001
% Change
2000
$
939,324
53.6
%
$
611,364
50.0
%
$
407,545
861,693
63.4
%
527,502
84.7
%
285,525
711,577
77.2
%
401,611
48.3
%
270,896
68,867
(10,233
)
(18,425
)
64.0
%
71.4
%
73.2
%
26.3
%
31.1
%
33.6
%
90.3
%
102.5
%
106.8
%
Gross premiums written in 2002 increased by 53.6% compared with 2001. The increase reflects higher prices, principally for the excess and surplus lines and professional liability business, as well as a modest increase in policies. The increase in net premiums written of 63.4% compared with 2001 also reflects an increase in net retained lines.
The 2002 loss ratio decreased by 7.4 percentage points to 64.0% as a result of higher prices and more favorable terms and conditions for business written in 2001 and 2002. These improvements were partially offset by prior year reserve development, primarily for professional liability business (including nursing homes and directors and officers business) written in the 1999 through 2001 underwriting years. The 2002 underwriting results also reflect the benefit of approximately $19 million return premiums received under the profit sharing provisions of certain reinsurance agreements. The 2002 expense ratio decreased by 4.8 percentage points to 26.3% as a result of a 77.2% increase in earned premiums with no significant increase in expenses other than commissions and premium taxes. The 2001 underwriting loss included losses of $9 million related to the World Trade Center.
27
Alternative Markets
The alternative markets segment offers workers’
compensation insurance on an excess and primary basis and provides fee-based
services to help clients develop and administer self-insurance programs.
Following is a summary of underwriting results for the alternative markets
segment for the past three years (dollars in thousands):
2002
% Change
2001
% Change
2000
$
348,954
105.9
%
$
169,439
55.7
%
$
108,802
305,357
101.0
%
151,942
55.0
%
98,001
235,558
91.2
%
123,173
38.6
%
88,872
8,682
(11,574
)
(7,907
)
66.7
%
76.5
%
70.2
%
29.6
%
32.9
%
38.7
%
96.3
%
109.4
%
108.9
%
Gross premiums written in 2002 increased by 105.9% compared with 2001. The increase reflects higher prices as well as an increase in policies-in-force for both primary and excess workers’ compensation business. The 2002 loss ratio decreased by 9.8 percentage points to 66.7% due primarily to better loss experience for the excess workers’ compensation business.
Following is a summary of insurance services results for the alternative
markets segment for the past three years (dollars in thousands):
2002
% Change
2001
% Change
2000
$
86,095
14.9
%
$
74,913
18.1
%
$
63,434
(69,715
)
(64,949
)
(57,108
)
16,380
64.4
%
9,964
57.5
%
6,326
Service revenues increased 14.9% compared with 2001 primarily as a result of new business. Service income before taxes increased 64.4% compared with 2001 due to increased revenues and higher margins on new and existing accounts.
Reinsurance
The Company’s reinsurance segment specializes in underwriting
property, casualty and surety reinsurance on both a treaty and facultative
basis. Following is a summary of underwriting results for the reinsurance
segment for the past three years (dollars in thousands):
2002
% Change
2001
% Change
2000
$
858,179
158.2
%
$
332,382
2.6
%
$
323,846
680,205
187.3
%
236,784
(14.4
%)
276,640
459,406
94.3
%
236,385
(20.7
%)
298,102
(13,221
)
(97,251
)
(19,123
)
73.0
%
104.4
%
73.2
%
29.9
%
36.8
%
33.2
%
102.9
%
141.2
%
106.4
%
Gross premiums written in 2002 increased by 158.2% compared with 2001. The increase reflects significantly higher prices, principally for facultative reinsurance, as well as $247 million of business from new underwriting units. The new business includes $171 million of net premiums written under quota share agreements with three Lloyd’s syndicates.
The 2002 loss ratio decreased 31.4 percentage points to 73.0% as a result of a shift in the mix of business towards more profitable lines and of higher prices for both treaty and facultative risks. The 2002 underwriting results were impacted by prior year reserve development, primarily for workers’ compensation and fidelity and surety business written in underwriting years 1998 through 2000. The 2002 underwriting results also reflect loss recoveries under the Company’s aggregate reinsurance agreement. (See Note 10 of “Notes to Consolidated Financial Statements.”) The 2002 expense ratio decreased 6.9 percentage points to 29.9% primarily as a result of a shift in the mix of business and increased volume. The 2001 underwriting loss included charges of $32 million to strengthen treaty reinsurance loss reserves, $26 million related to the World Trade Center and $18 million for the Enron bankruptcy.
28 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Regional
The regional property casualty insurance segment provides
commercial property casualty insurance products. Following is a summary of
underwriting results for the regional segment for the past three years (dollars
in thousands):
2002
% Change
2001
% Change
2000
$
955,150
35.5
%
$
705,001
21.6
%
$
579,890
776,577
29.8
%
598,149
19.7
%
499,526
705,385
26.9
%
555,750
10.5
%
503,029
59,720
(12,533
)
(53,537
)
59.1
%
67.2
%
75.5
%
32.4
%
35.0
%
35.1
%
91.5
%
102.2
%
110.6
%
Gross premiums written in 2002 increased by 35.5% compared with 2001. The increase reflects higher prices across all four regional units. The 2002 loss ratio decreased by 8.1 percentage points to 59.1% primarily as a result of higher prices and improved underwriting for the regional operations in the Midwest and New England. Weather-related losses for the regional segment were $29 million in 2002 compared with $31 million in 2001.
International
The international segment offers personal and commercial
property casualty insurance in Argentina and savings and life products in the
Philippines. Following is a summary of underwriting results for the
international segment for the past three years (dollars in thousands):
2002
% Change
2001
% Change
2000
$
87,265
(48.8
%)
$
170,600
18.9
%
$
143,523
79,313
(47.2
%)
150,090
26.1
%
118,981
89,284
(36.6
%)
140,909
31.3
%
107,285
(4,935
)
(2,854
)
(4,095
)
54.2
%
61.4
%
62.1
%
51.3
%
40.6
%
41.7
%
105.5
%
102.0
%
103.8
%
Gross premiums written in 2002 decreased by 48.8% compared with 2001. The decrease was a result of the devaluation of the Argentine peso and the discontinuance of life insurance business in Argentina. The expense ratio increased 10.7 percentage points to 51.3% as a result of costs relating to the withdrawal from the life insurance business in Argentina. (See Foreign Currency Gains and International Operations).
Discontinued
The discontinued segment consists of regional personal lines and
the alternative markets reinsurance, which were discontinued in 2001. Following
is a summary of underwriting results for the discontinued segment for the past
three years (dollars in thousands):
2002
% Change
2001
% Change
2000
$
19,355
(91.2
%)
$
219,680
(13.2
%)
$
253,149
7,345
(96.2
%)
193,629
(14.9
%)
227,571
51,317
(77.0
%)
222,641
(0.1
%)
222,830
(15,139
)
(143,242
)
(19,498
)
98.7
%
131.4
%
75.9
%
30.8
%
33.0
%
32.8
%
129.5
%
164.4
%
108.7
%
Gross premiums written in 2002 decreased by 91.2% compared with 2001. At December 31, 2002, all remaining policies had expired. The 2002 loss ratio decreased 32.7 points to 98.7%. The 2001 underwriting results were impacted by a charge of $103 million to strengthen loss reserves.
29
Investments
Following is a summary of investment activity for the past three
years (dollars in thousands):
2002
% Change
2001
% Change
2000
$
187,875
(3.7
%)
$
195,021
(7.3
%)
$
210,448
3,881,121
18.3
%
3,279,830
7.7
%
3,046,364
5.4
%
6.3
%
7.2
%
15,214
(12,252
)
7,535
124,188
31,277
109,273
| (1) | Represents net investment income (before interest on funds held) expressed as a percentage of average invested assets. |
Net investment income in 2002 decreased 3.7% compared with 2001. Average invested assets increased 18.3% compared with 2001 as a result of cash flow from operations and the proceeds from secondary stock offerings in 2001 and 2002. The average yield on investments was 5.4% in 2002 compared with 6.3% in 2001. The lower yield in 2002 reflects the decrease in general interest rate levels as well as lower returns on the arbitrage trading account.
Realized investment gains and losses result from sales of securities and for provisions for other than temporary impairment in securities. In 2002, the Company recorded a charge of $19 million to reflect the impairment of certain securities, including $10 million related to Argentine sovereign bonds held by our subsidiary in Argentina. In 2001, the Company recorded a charge of $27 million to reflect the impairment of certain securities, including $18 million for Argentine sovereign bonds held by our subsidiary in Argentina. (See Foreign Currency Gains and International Operations).
Interest and other expenses Interest and other expenses represents interest expense, corporate expenses and other miscellaneous income and expenses. Interest and other expenses were $86 million in 2002 compared with $64 million in 2001. The increase reflects higher general and administrative expenses, including occupancy costs and accruals for incentive compensation.
Restructuring charge The restructuring charge of $3.2 million for 2001 was related to severance and other costs incurred in connection with the withdrawal from the regional personal lines business and the reorganization of certain other operations. The restructuring charge of $1.9 million for 2000 was related to severance and other costs incurred in connection with the reorganization of the reinsurance business.
Foreign currency gains and international operations
The Company owns 65% of Berkley International, LLC, which conducts insurance operations in Argentina and the Philippines. The international activities are reported in the Company’s financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements. During 2001 and 2002, Argentina experienced substantial economic disruption, including default on its sovereign bonds, severe currency devaluation, high unemployment and inflation, increasing fiscal deficits and declining central bank reserves.
As a result of these events, the Company ceased writing life insurance business in Argentina in early 2002 and began a process of liquidating its life insurance in-force. As of the balance sheet date, approximately three-quarters of such policies had been extinguished.
The International segment reported lower premiums and investment income in 2002 as a result of lower exchange rates for the Argentine peso. In addition, the Company’s Argentine subsidiary reported net gains of $21.7 million in 2002 relating to foreign currency transactions and the settlement of life insurance contracts referred to above. The foreign currency transaction gain represents the net increase in the local currency value of assets (primarily cash and investments) and liabilities (primarily life insurance contracts) denominated in U.S. dollars following the devaluation of the Argentine peso. The gain on surrender of life insurance contracts represents the effect of the negotiated settlement of U.S. dollar life insurance contracts following the enactment of and in accordance with the Economic Emergency and Exchange Reform Law, which required that dollars contracts be converted to pesos.
The Company also reported an unrealized foreign exchange loss of $23.4 million ($15.2 million net of minority interest) in 2002 as a result of the translation of the net assets of its Argentine subsidiary to U.S. dollars. These unrealized foreign exchange losses are reported in other comprehensive income.
30 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Following is a summary of international results for the past three years
(dollars in thousands):
2002
2001
2000
$
(4,935
)
$
(2,854
)
$
(4,095
)
5,325
13,993
9,636
(2,147
)
1,010
1,050
(12,389
)
(18,989
)
(567
)
21,856
758
829
$
7,710
$
(6,082
)
$
6,853
Income taxes and minority interest
The effective income tax rate was 32% in 2002, 37% in 2001 and 6% in 2000. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. Tax-exempt investment income decreased the tax expense in 2002 and 2000 and increased the tax benefit in 2001. Minority interest represents the portion of the Company’s international operations held by outside investors.
Liquidity and Capital Resources
Cash Flow Cash flow provided from operating activities (before increase in trading account securities) was $771 million in 2002, $210 million in 2001 and $76 million in 2000. The increase in cash flow in 2002 was primarily due to a higher level of premium collections and a lower paid loss ratio (paid losses expressed as a percentage of premium earned).
As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company uses cash to pay debt service, Federal income taxes, operating expenses and dividends. The Company also provides capital to its subsidiaries. Tax payments and management fees from the insurance subsidiaries are made under agreements which generally are subject to approval by state insurance departments. Maximum amounts of dividends that can be paid without regulatory approval are prescribed by statute. (See Note 14 of “Notes to Consolidated Financial Statements.”)
The Company’s subsidiaries are highly liquid, receiving substantial cash from premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, operating expenses and dividends.
Financing Activity In November 2002, the Company completed a secondary stock offering of 4.7 million shares of its common stock for which it received net proceeds of $167 million. During 2001, the Company completed two secondary stock offerings under which it issued 10.4 million shares of common stock and received net proceeds of $316 million.
In February 2002, the Company entered into a one year unsecured bank credit facility which provided for borrowing up to $25 million. The credit facility was not drawn upon and expired on February 27, 2003.
At December 31, 2002, the Company’s outstanding debt was $366 million (face amount). The maturities of the debt are $61 million in 2003, $40 million in 2005, $100 million in 2006, $89 million in 2008 and $76 million in 2022. The Company also has $200 million (face amount) of trust preferred securities that mature in 2045.
At December 31, 2002, stockholders’ equity was $1,335 million and total capitalization (stockholders’ equity, long-term debt and trust preferred securities) was $1,896 million. The percentage of the Company’s capital attributable to long-term debt decreased to 19% at December 31, 2002 from 25% at December 31, 2001.
During the first quarter of 2003, the Company issued $200 million (face amount) of ten year 5.875% senior notes and repaid $61 million of maturing debt.
Investments As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations.
31
The carrying value of the Company’s investment portfolio as of December 31,
2002 and 2001 is as follows (amounts in millions):
2002
2001
$
594,183
$
534,087
3,511,522
2,455,790
205,372
105,789
306,836
506,008
45,187
5,912
$
4,663,100
$
3,607,586
| (a) | Represents trading account equity securities plus trading account receivables from brokers and clearing organizations less trading account equity securities sold but not yet purchased. |
Fixed maturities The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, active management of the portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At December 31, 2002, the fixed maturities portfolio mix was as follows: U.S. Government securities and cash equivalents were 32% (35% in 2001); state and municipal securities were 25% (20% in 2001); corporate securities were 16% (19% in 2001); mortgage- backed securities were 23% (22% in 2001); and foreign bonds were 4% in 2002 and 2001.
Equity securities available for sale Equity securities available for sale represent primarily investments in common and preferred stocks of publicly traded real estate investment trusts (REITs).
Trading account The trading account is comprised of direct investments in merger arbitrage securities and investments in limited partnerships that specialize in merger arbitrage and convertible arbitrage strategies. Merger arbitrage, is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differentials between these securities and their underlying equities. The Company reduced its trading account investment to $307 million at December 31, 2002 from $506 million at December 31, 2001.
Other investments Other investments primarily include the Company’s 20.1% interest in Kiln plc, which was acquired in 2002 for approximately $29 million. Kiln plc is based in the U.K. and conducts international insurance and reinsurance underwriting through Lloyd’s syndicates.
Market Risk The Company’s market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the Company’s investment portfolio as a result of fluctuations in prices and interest rates. In addition, the Company’s inter- national businesses and foreign securities are subject to currency exchange rate risk. As discussed above, the Company attempts to manage its interest rate risk by maintaining an appropriate relation- ship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations.
The principal market risk for the Company’s fixed maturity securities is
interest rate risk. The Company uses various models and stress test scenarios
to monitor and manage interest rate risk. The following table outlines the
groups of fixed maturity securities and the components of the interest rate
risk at December 31, 2002:
Market
Effective
FairValue
Group
Yield
Duration
(000’s)
Cash and cash equivalents
1.00
%
0.22
$
594,183
U. S. Government securities
2.95
5.01
725,653
State and municipal
3.84
6.77
1,025,818
Corporate
6.41
5.25
674,904
Foreign
5.77
4.38
159,846
Mortgage-backed securities
5.19
4.99
947,055
4.06
4.77
$
4,127,459
Duration is a common gauge of the price sensitivity of a fixed income portfolio
to a change in interest rates. Based upon a pricing model, the Company
determines the estimated change in fair value of the fixed maturity securities,
assuming immediate parallel shifts in the treasury yield curve while keeping
spreads between individual securities and treasury securities static. The fair
value at specified levels at December 31, 2002 would be as follows:
Estimated Fair
Estimated
Value of Financial
Change in
Instruments
Fair Value
Change in interest rates
(000’s)
(000’s)
300 basis point rise
$
3,628,110
$
(499,439
)
200 basis point rise
3,803,416
(324,133
)
100 basis point rise
3,972,007
(155,542
)
Base scenario
4,127,549
—
100 basis point decline
4,293,710
166,161
200 basis point decline
4,499,913
372,364
300 basis point decline
4,709,043
581,494
32 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
The estimated changes in fair value, based upon the above table, would be partially offset by the Company’s liabilities if they were marked to market.
Arbitrage investing differs from other types of investments in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general stock market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales. Additionally, the arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. The Company’s merger arbitrage securities are primarily exposed to the completion of announced deals, which are subject to regulatory as well as political and other risks.
The Company’s international businesses and foreign securities are subject to foreign currency risk. In order to mitigate foreign currency risks, the foreign subsidiaries maintain a portion of their investments in U. S. Dollar-denominated securities.
Federal and Foreign Income Taxes
The Company files a consolidated income tax return in the U.S. and foreign tax returns in the countries of its overseas operations. At December 31, 2002, the Company had a deferred tax asset of $213 million (which primarily relates to loss reserves and unearned premium reserves) and a deferred tax liability of $192 million (which primarily relates to deferred policy acquisition costs, unrealized investment gains and intangible assets). The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset.
Reinsurance
The Company follows the customary industry practice of reinsuring a portion of its exposures, paying to reinsurers a part of the premiums received on the policies it writes. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance coverage. The Company monitors the financial condition of its reinsurers and attempts to place its coverages only with substantial, financially sound carriers.
The largest net amount retained on any one risk is $12 million for excess workers’ compensation risks and $5 million for all other primary property casualty risks. The Company also maintains group catastrophe reinsurance that provides protection for losses above $6 million up to $55 million and contingency clash reinsurance that provides protection for losses above $2 million up to $20 million. In addition, the Company generally purchases facultative coverage for exposures or limits falling outside its treaty protection.
Effective January 1, 2001, the Company entered into a multi-year aggregate reinsurance agreement that provides two types of reinsurance coverage. The first type of coverage provides protection for individual losses on an excess of loss or quota share basis, as specified for each class of business covered by the agreement. The second type of coverage provides aggregate accident year protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level. Loss recoveries are subject to annual limits and an aggregate limit over the contract period. The agreement contains a profit sharing provision under which the Company can recover a portion of premiums paid to the reinsurer if certain profit conditions are met.
Recent Developments
In March 2003, the Company announced that it intends to form a United Kingdom authorized insurance company. It is expected that the enterprise will be London-based and will specialize in principally U.K. domestic casualty risks. It is anticipated that the company will commence operations in the third quarter of 2003, subject to regulatory approval.
33
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Years ended December 31,
2002
2001
2000
$
2,710,490
$
1,858,096
$
1,506,244
(457,963
)
(177,627
)
(15,230
)
2,252,527
1,680,469
1,491,014
187,875
195,021
210,448
86,095
75,771
68,049
15,214
(12,252
)
7,535
21,856
758
829
2,517
2,030
3,412
2,566,084
1,941,797
1,781,287
1,463,971
1,380,500
1,094,411
797,205
663,776
596,579
45,475
45,719
47,596
—
3,196
1,850
2,306,651
2,093,191
1,740,436
259,433
(151,394
)
40,851
(84,139
)
56,661
(2,451
)
175,294
(94,733
)
38,400
(249
)
3,187
(2,162
)
$
175,045
$
(91,546
)
$
36,238
$
3.44
$
(2.09
)
$
.94
$
3.31
$
(2.09
)
$
.93
See accompanying notes to consolidated financial statements.
34 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31,
2002
2001
$
594,183
$
534,087
3,511,522
2,455,790
205,372
105,789
165,642
211,291
45,187
5,912
4,521,906
3,312,869
822,060
537,814
734,687
716,398
46,334
35,926
164,284
103,667
308,200
224,110
135,488
118,344
20,585
99,921
59,021
59,021
177,309
351,707
41,449
73,732
$
7,031,323
$
5,633,509
$
3,210,632
$
2,817,682
1,390,246
879,640
184,912
139,322
36,115
56,990
294,334
215,220
362,985
370,554
5,479,224
4,479,408
198,251
198,210
18,649
24,296
—
—
13,934
12,991
823,190
654,936
623,651
467,185
104,603
37,340
(230,179
)
(240,857
)
1,335,199
931,595
$
7,031,323
$
5,633,509
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2002, 2001 and 2000
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share data)
Preferred
and common
Accumulated
Total
stock and
other
stockholders’
additional
Retained
comprehensive
Treasury
equity
paid-in capital
earnings
income (loss)
stock
$
591,778
$
338,921
$
551,401
$
(44,500
)
$
(254,044
)
36,238
—
36,238
—
—
63,871
—
—
63,871
—
9,323
2,421
—
—
6,902
(7,020
)
—
—
—
(7,020
)
(13,294
)
—
(13,294
)
—
—
680,896
341,342
574,345
19,371
(254,162
)
(91,546
)
—
(91,546
)
—
—
17,969
—
—
17,969
—
340,892
326,585
—
—
14,307
(1,002
)
—
—
—
(1,002
)
(15,614
)
—
(15,614
)
—
—
931,595
667,927
467,185
37,340
(240,857
)
175,045
—
175,045
—
—
67,263
—
—
67,263
—
179,946
169,197
—
—
10,749
(71
)
—
—
—
(71
)
(18,579
)
—
(18,579
)
—
—
$
1,335,199
$
837,124
$
623,651
$
104,603
$
(230,179
)
(Dollars in thousands)
2002
2001
2000
$
175,045
$
(91,546
)
$
36,238
94,266
15,299
70,129
(21,333
)
2,887
(5,436
)
(5,670
)
(217
)
(822
)
67,263
17,969
63,871
$
242,308
$
(73,577
)
$
100,109
See accompanying notes to consolidated financial statements.
36 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31,
2002
2001
2000
$
175,294
$
(94,733
)
$
38,400
410,612
336,141
69,417
17,254
17,625
21,700
448,221
178,505
14,974
(278,372
)
(153,175
)
(35,356
)
67,219
(71,142
)
2,138
(84,090
)
(40,882
)
(13,883
)
(37,070
)
11,494
(8,364
)
51,974
26,084
(12,692
)
771,042
209,917
76,334
188,068
(57,973
)
(89,609
)
959,110
151,944
(13,275
)
662,144
532,861
725,961
71,688
64,038
48,079
291,031
189,961
142,636
(1,837,114
)
(933,084
)
(773,804
)
(206,238
)
(82,509
)
(70,988
)
(2,053
)
3,215
2,187
(36,570
)
(22,076
)
(7,529
)
26,722
11,303
1,176
(1,030,390
)
(236,291
)
67,718
166,960
315,840
—
12,986
25,052
9,324
(8,000
)
—
(25,000
)
—
(10,000
)
(25,000
)
(17,872
)
(14,707
)
(12,701
)
(71
)
(1,002
)
(7,020
)
(22,627
)
(5,880
)
(389
)
131,376
309,303
(60,786
)
60,096
224,956
(6,343
)
534,087
309,131
315,474
$
594,183
$
534,087
$
309,131
$
45,447
$
45,241
$
48,053
$
19,381
$
10,644
$
(1,079
)
See accompanying notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(A) Principles of consolidation and basis of presentation
The consolidated financial statements, which include the accounts of W. R.
Berkley Corporation and its subsidiaries (the “Company”), have been prepared on
the basis of accounting principles generally accepted in the United States of
America (“GAAP”). All significant intercompany transactions and balances have
been eliminated. Reclassifications have been made in the 2001 and 2000
financial statements to conform them to the presentation of the 2002 financial
statements. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the revenues and
expenses reflected during the reporting period. Actual results could differ
from those estimates. The international segment’s activities are reported in
the Company’s financial statements on a one quarter lag to facilitate the
timely completion of the consolidated financial statements.
(B) Revenue recognition
Premiums written are recorded at the inception of the policy. Reinsurance
premiums written are estimated based upon information received from ceding
companies and subsequent differences arising on such estimates are recorded in
the period they are determined. Insurance premiums are earned ratably over the
term of the policy. Fees for service are earned over the contract period.
(C) Cash equivalents
Cash equivalents consist of funds invested in money market accounts and
investments with a maturity of three months or less when purchased.
(D) Investments
The Company has classified its investments into three categories. Securities
that the Company has the positive intent and ability to hold to maturity are
classified as “held to maturity” and reported at amortized cost. Securities
which the Company purchased with the intent to sell in the near-term are
classified as “trading” and are reported at estimated fair value, with
unrealized gains and losses reflected in the statement of operations. The
remaining securities are classified as “available for sale” and carried at
estimated fair value, with unrealized gains and losses, net of applicable
income taxes, excluded from earnings and reported as a component of
comprehensive income (loss) and a separate component of stockholders’ equity.
Fair value is generally determined using published market values.
Realized gains or losses represent the difference between the cost of
securities sold and the proceeds realized upon sale. The cost of securities is
adjusted where appropriate to include a provision for significant decline in
value which is considered to be other than temporary. An other than temporary
decline is considered to occur in investments where there has been a sustained
reduction in market value and there are no mitigating circumstances. The
Company uses the specific identification method where possible, and the
first-in, first-out method in other instances, to determine the cost of
securities sold. Realized gains or losses, including any provision for decline
in value, are included in the statement of operations.
Other investments consist of the Company’s 20.1% interest in Kiln plc and
its interests in certain investment funds and limited partnerships. Other
investments are carried under the equity method of accounting. Under this
method, the Company reports its share of the income or loss from such
investments in its result for the period.
(E) Trading account
Assets and liabilities related to direct investments in arbitrage securities
and investments in arbitrage-related limited partnerships are classified as
trading account securities. Long portfolio positions and partnership interests
are presented in the balance sheet as equity securities trading account. Short
sales and short call options are presented as trading securities sold but not
yet purchased. Unsettled trades and the net margin balances held by the
clearing broker are presented as trading account receivable from brokers and
clearing organizations. The Company’s trading account portfolio is recorded at
fair value. Realized and unrealized gains and losses from trading activity are
reported as net investment income.
(F) Per share data
All share data have been retroactively adjusted to reflect a three-for-two
common stock split which was effected on July, 2, 2002. Basic per share data is
based upon the weighted average number of shares outstanding during the year.
Diluted per share data reflects the potential dilution that would occur if
employee stock-based compensation plans were exercised. Shares issued in
connection with loans to shareholders are excluded from basic per share data.
There were no such loans as of December 31, 2002.
38 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(G) Deferred policy acquisition costs
Acquisition costs (primarily commissions and premium
taxes) incurred in writing insurance and reinsurance
business are deferred and amortized ratably over the
terms of the related contracts. Deferred policy
acquisition costs are limited to the amounts
estimated to be recoverable from the applicable
unearned premiums and the related anticipated
investment income by giving effect to anticipated
losses, loss expenses and other expenses necessary
to maintain the contracts in force.
(H) Reserves for losses and loss expenses
Reserves for losses and loss expenses are an
accumulation of amounts determined on the basis of
(1) evaluation of claims for business written
directly by the Company; (2) estimates received from
other companies for reinsurance assumed; and (3)
estimates for losses incurred but not reported (based
on Company and industry experience). These estimates
are periodically reviewed and, as experience develops
and new information becomes known, the reserves are
adjusted as necessary. Such adjustments are reflected
in results of operations in the period in which they
are determined. The Company discounts its reserves
for excess and assumed workers’ compensation claims
using a risk-free or statutory rate. (See Note 9 of
Notes to Consolidated Financial Statements.)
(I) Reinsurance ceded
Ceded unearned premiums are reported as prepaid
reinsurance premiums and estimated amounts of
reinsurance recoverable on unpaid losses are included
in due from reinsurers. To the extent any reinsurer
does not meet its obligations under reinsurance
agreements, the Company must discharge the liability.
Amounts due from reinsurers are reflected net of
funds held where the right of offset is present. The
Company has provided reserves for estimated
uncollectible reinsurance.
(J) Federal and foreign income taxes
The Company files a consolidated income tax return
in the U.S. and foreign tax returns in each of the
countries in which it has overseas operations.
The Company’s method of accounting for income
taxes is the asset and liability method. Under the
asset and liability method, deferred tax assets and
liabilities are measured using tax rates currently in
effect or expected to apply in the years in which
those temporary differences are expected to reverse.
(K) Stock options
The Company has a stock-based employee compensation
plan, which is described more fully in Note 19. The
Company accounts for this plan under the recognition
and measurement principles of APB Opinion No. 25,
Accounting for Stock issued to Employees, and related
Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options
granted under this plan had an exercise price equal
to the market value of the underlying common stock on
the date of grant. The following table illustrates
the effect on net income and earnings per share if
the Company had applied the fair value recognition
provisions of FASB Statement No. 123, “Accounting for
Stock-Based Compensation,” to stock-based employee
compensation.
The fair value of the options granted is
estimated on the date of grant using the
Black-Scholes option pricing model with the following
weighted average assumptions for 2002 and 2001,
respectively: (a) dividend yield of 1%, (b) expected
volatility of 26.8%, (c) risk-free interest rates of
4.89% and 5.01% and (d) expected life of 7.16 years.
Effective January 1, 2003, the Company adopted
the fair value recognition provisions of Statement
123. These provisions will be applied prospectively
to all employee awards granted, modified, or settled
on or after January 1, 2003.
39
(L) Foreign currency
Gains and losses resulting from foreign currency
transactions (transactions denominated in a currency
other than the entity’s functional currency) are
included in the statement of operations. Unrealized
gains or losses (losses of $10,061,000 and $4,391,000
as of December 31, 2002 and 2001, respectively)
resulting from translating the results of non-U.S.
dollar denominated operations and investment
securities are reported as accumulated other
comprehensive income. Revenues and expenses
denominated in currencies other than U.S. dollars are
translated at the weighted average exchange rate
during the year. Assets and liabilities are
translated at the rate of exchange in effect at the
balance sheet date.
(M) Real estate, furniture and equipment
Real estate, furniture and equipment are carried at
cost less accumulated depreciation. Depreciation is
calculated using the estimated useful lives of the
respective assets. Depreciation expense was
$19,426,000, $16,349,000 and $17,704,000 for 2002,
2001 and 2000, respectively.
(N) Comprehensive Income (loss)
Comprehensive income (loss) encompasses all changes
in stockholders’ equity (except those arising from
transactions with stockholders) and includes net
income, net unrealized gains or losses on
available-for-sale securities and unrealized foreign
currency translation adjustments.
(O) Goodwill and other intangible assets
The Company adopted FASB Statement No. 142, “Goodwill
and Other Intangible Assets,” effective January 1,
2002. Under Statement 142, goodwill is no longer
amortized and is evaluated periodically for other
than temporary declines in value. The Company also
adopted FASB Statement No. 141, “Business
Combinations,” effective January 1, 2002. In
accordance with Statement 141, the Company
reclassified $5 million of intangible assets, net of
accumulated amortization, from goodwill to other
assets as of January 1, 2002. The December 31, 2001
consolidated balance sheet was changed to reflect
this reclassification. A reconciliation of the
reported net income (loss) to adjusted net income
(loss) had Statement 142 and Statement 141 been
applied as of January 1, 2000 follows (amount in
thousands, except per share data):
(P) Recent accounting pronouncements
In June 2002, the FASB issued Statement No. 146,
“Accounting for Cost Associated with Exit or
Disposal Activities”, which is effective for exit
and disposal activities that are initiated after
December 31, 2002. The adoption of Statement 146
will not have a material impact on the Company’s
results of operations or financial condition.
In January 2003, the FASB issued Interpretation
No. 46, “Consolidation of Variable Interest
Entities.” Interpretation 46 requires variable
interest entities to be consolidated by their
primary beneficiaries. The adoption of
Interpretation 46 will not have a material impact on
the Company’s financial condition or results of
operations.
(2) Acquisitions and Asset Sales
During 2002, 2001 and 2000, business acquisitions
were completed for an aggregate consideration of
approximately $3,730,000, $3,780,000 and $338,000,
respectively. The acquisitions were accounted for as
purchases and, accordingly, the results of operations
of the companies have been included from the
respective dates of acquisition. Pro forma results of
operations have been omitted as such effects are not
significant.
Net assets of the acquired companies for 2002,
2001 and 2000 were as follows: goodwill of $44,000,
$1,151,000 and $47,000; and other net assets of
$3,774,000, $4,931,000 and $385,000, respectively.
During 2001, the Company reported a realized
gain of $554,000 from the sale of inactive
companies. During 2000, the Company sold the assets
of All American Agency Facilities Inc. (“All
American”), a managing general agency, and reported
a realized gain of $3,179,000. All American’s
revenues and operating profits (losses) were
$1,819,000 and ($638,000) in 2000, and $7,480,000
and $381,000 in 1999.
40 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(3) Investments in fixed maturity securities
At December 31, 2002 and 2001, investments in fixed maturity securities were as
follows:
The amortized cost and fair value of fixed maturity
securities at December 31, 2002, by contractual
maturity, are shown below. Actual maturities may
differ from contractual maturities because certain
issuers may have the right to call or prepay
obligations:
(Dollars in thousands)
At December 31, 2002 and 2001, there were no
investments, other than investments in United States
government securities, which exceeded 10% of
stockholders’ equity. At December 31, 2002,
investments with a carrying value of $218 million
were on deposit with state insurance departments as
required by state laws; investments with a carrying
value of $22 million were held in trust for
policyholders; and investments with a carrying value
of $31 million were deposited at Lloyd’s in support
of underwriting activities. The Company had contingent liabilities regarding
irrevocable undrawn letters of credit supporting
reinsurance business of $22 million at December 31,
2002. The Company has pledged investments with a
carrying value of $31 million as collateral to
support this commitment.
41
(4) Investments in Equity Securities Available for Sale
At December 31, 2002 and 2001, investments in equity securities were as follows:
(5) Trading Account
At December 31, 2002 and 2001, the arbitrage trading account was as follows:
The primary focus of the trading account is merger
and convertible arbitrage. Merger arbitrage is the
business of convertible investing in the securities
of publicly held companies that are the targets in
announced tender offers and mergers. Convertible
arbitrage is the business of investing in convertible
securities with the goal of capitalizing on price
differences between their securities and their
underlying equities. Arbitrage investing differs from
other types of investments in its focus on
transactions and events believed likely to bring
about a change in value over a relatively short time
period (usually four months or less). The Company
believes that this makes arbitrage investments less
vulnerable to changes in general financial market
conditions. Potential changes in market conditions
are also mitigated by the implementation of hedging
strategies, including short sales.
The arbitrage positions are generally hedged
against market declines by purchasing put options,
selling call options or entering into swap
contracts. Therefore, just as long portfolio
positions may incur losses during market declines,
hedge positions may also incur losses during market
advances. As of December 31, 2002, the notional
amount of long option contracts outstanding was
$17,230,000 and of short option contracts
outstanding was $17,806,000.
42 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(6) Other Investments
Other investments include the Company’s 20.1%
interest in Kiln plc, which was acquired in 2002 for
approximately $29 million. Kiln plc is based in the
U.K. and conducts international insurance and
reinsurance underwriting through Lloyd’s syndicates.
The Company’s investment in Kiln plc is reported
under the equity method of accounting. The Company’s
share of the earnings of Kiln plc is reported on a
one quarter lag in order to facilitate the timely
completion of the consolidated financial statements.
The equity in earnings of Kiln plc was $687,000 for
the year ended December 31, 2002. The Company also
entered into qualifying quota share reinsurance
agreements with two Lloyd’s syndicates managed by
Kiln plc. Net premiums written under these quota
share agreements were $121 million in 2002.
(7) Investment Income
Investment income consists of the following:
(8) Realized gains and losses
Realized gains (losses) and the change in difference between fair value
and cost of investments, before applicable income taxes, are as follows:
43
(9) Reserves for Losses and Loss Expenses
The table below provides a reconciliation of the beginning and ending reserve
balances on a gross of reinsurance basis:
Net losses and loss expenses for 2002 were
impacted by $173,732,000 of prior year reserve
increases principally in the reinsurance and
specialty segments. The increase in prior year
reinsurance reserves related to the 1998 to 2000
underwriting years, primarily for workers’
compensation and fidelity and surety lines. The
increase in prior year specialty reserves was due
primarily to professional liability business written
in the 1999 to 2000 underwriting years, including
nursing homes, directors and officers and lawyers
liability. Loss and loss adjustment expenses for 2001
were impacted by $211,344,000 of prior year reserve
development primarily as a result of reserve
increases for the discontinued alternative markets
reinsurance division and the treaty reinsurance
business.
The Company discounts its liabilities for excess
and assumed workers’ compensation business because of
the long period of time over which losses are paid.
Discounting is intended to appropriately match losses
and loss expenses to income earned on investment
securities supporting the liabilities. The expected
losses and loss expense payout pattern subject to
discounting was derived from the Company’s loss
payout experience and is supplemented with data
compiled from insurance companies writing similar
business. Changes in the expected loss and loss
expense payout pattern are recorded in the period
they are determined. The liabilities for losses and
loss expenses have been discounted using risk-free
discount rates determined by reference to the U.S.
Treasury yield curve for non-proportional business,
and at the statutory rate for proportional business.
The discount rates range from 3.9% to 6.5% with a
weighted average discount rate of 5.3%. The aggregate
net discount, after reflecting the effects of ceded
reinsurance, is $293,000,000, $243,000,000 and
$223,000,000 at December 31, 2002, 2001 and 2000,
respectively. For statutory purposes, the Company
uses a discount rate of 3.9% as permitted by the
Department of Insurance of the State of Delaware.
To date, known asbestos and environmental claims
at the insurance company subsidiaries have not had a
material impact on the Company’s operations.
Environmental claims have not materially impacted the
Company because its subsidiaries generally did not
insure larger industrial companies which are subject
to significant environmental exposures.
The Company’s net reserves for losses and loss
adjustment expenses relating to asbestos and
environmental claims were $28,509,000 and $24,794,000
at December 31, 2002 and 2001, respectively. The
Company’s gross reserves for losses and loss
adjustment expenses relating to asbestos and
environmental claims were $47,637,000 and $43,405,000
at December 31, 2002 and 2001, respectively. Net
incurred losses and loss expenses
(recoveries) for reported asbestos and
environmental claims were approximately $6,652,000,
$(4,503,000) and $1,602,000 in 2002, 2001 and 2000,
respectively. Net paid losses and loss expenses were
approximately $2,938,000, $125,000, and $3,123,000 in
2002, 2001 and 2000, respectively. The estimation of
these liabilities is subject to significantly greater
than normal variation and uncertainty because it is
difficult to make an actuarial estimate of these
liabilities due to the absence of a generally
accepted actuarial methodology for these exposures
and the potential effect of significant unresolved
legal matters, including coverage issues as well as
the cost of litigating the legal issues.
Additionally, the determination of ultimate damages
and the final allocation of such damages to
financially responsible parties are highly uncertain.
44 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(10) Reinsurance Ceded
The Company reinsures a portion of its exposures
principally to reduce net liability on individual
risks and to protect against catastrophic losses. The
following amounts arising under reinsurance ceded
contracts have been deducted in arriving at the
amounts reflected in the statement of operations:
Effective January 1, 2001, the Company entered
into a multi-year aggregate reinsurance agreement
that provides two types of reinsurance coverage.
The first type of coverage provides protection for
individual losses on an excess of loss or quota
share basis, as specified for each class of
business covered by the agreement. The second type
of coverage provides aggregate accident year
protection for our reinsurance segment for loss and
loss adjustment expenses incurred above a certain
level. Loss recoveries are subject to annual limits
and an aggregate limit over the contract period.
The agreement contains a profit sharing provision
under which the Company can recover a portion of
premiums paid to the reinsurer if certain profit
conditions are met. Based on its estimate of
expected profits under the contract, the Company
accrued return premiums of $20 million in 2002
(none in 2001). As of December 31, 2002, funds held
by the Company under the aggregate reinsurance
agreement exceeded the amount recoverable from the
reinsurer for losses and loss adjustment expenses.
Certain of the Company’s reinsurance agreements,
including the aggregate reinsurance agreement, are
structured on a funds held basis, whereby the Company
retains some or all of the ceded premiums in a
separate account that is used to fund ceded losses as
they become due from the reinsurance company.
Interest is credited to reinsurers for funds held on
their behalf at rates ranging from 7.0% to 8.9% of
the account balances, as defined under the
agreements. Interest credited to reinsurers, which is
reported as a reduction of net investment income, was
$21 million in 2002, $12 million in 2001 and $10
million in 2000.
(11) Debt
Debt consists of the following:
The difference between the face value of debt and the carrying value is
unamortized discount. All of this outstanding debt is not redeemable until maturity.
During the first quarter of 2003 , the Company issued $200 million (face
amount) of ten year 5.875% senior notes and repaid $61 million of maturing
debt.
45
(12) Trust Preferred Securities
The Company-obligated mandatorily redeemable
preferred securities of a subsidiary trust holding
solely junior subordinated debentures (“Trust
Preferred Securities”) were issued by the W.R.
Berkley Capital Trust (“the Trust”) in 1996. All of
the common securities of the Trust are owned by the
Company. The sole assets of the Trust are
$210,000,000 aggregate principal amount of 8.197%
Junior Subordinated Debentures due December 15, 2045,
issued by the Company (the “Junior Subordinated
Debentures”). The Company’s guarantee of payments of
cash distributions and payments on liquidation of the
Trust and redemption of the Trust Preferred
Securities, when taken together with the Company’s
obligations under the Trust Agreement under which the
Trust Preferred Securities were issued, the Junior
Subordinated Debentures and the Indenture under which
the Junior Subordinated Debentures were issued,
including its obligations to pay costs, expenses,
debts and liabilities of the Trust (other than with
respect to the Trust Preferred Securities), provide a
full and unconditional guarantee of the Trust’s
obligations under the Trust Preferred Securities. The
Company records the preferential cumulative cash
dividends arising from the payments of interest on
the Junior Subordinated Debentures as interest
expense in its consolidated statement of operations.
The Trust Preferred Securities are subject to
mandatory redemption in a like amount (i) in whole
but not in part, on the stated maturity date, upon
repayment of the Junior Subordinated Debentures,
(ii) in whole but not in part, at any time
contemporaneously with the optional prepayment of
the Junior Subordinated Debentures by the Company
upon the occurrence and continuation of a certain
event and (iii) in whole or in part, on or after
December 15, 2006, contemporaneously with the
optional prepayment by the Company of Junior
Subordinated Debentures. The liability for Trust
Preferred Securities is reported net of $10 million
(face amount) of Trust Preferred Securities owned by
a subsidiary of the Company.
(13) Federal and Foreign Income Taxes
Federal and foreign income tax expense (benefit) consists of:
A reconciliation of Federal and foreign income tax
expense (benefit) and the amounts computed by
applying the Federal and foreign income tax rate of
35% to pre-tax income are as follows:
At December 31, 2002 and 2001, the tax effects of differences that
give rise to significant portions of the deferred tax asset and deferred
tax liability are as follows:
Federal income tax expense (benefit) applicable to
realized investment gains (losses) was $13,817,000,
$(2,478,000), $2,928,000 in 2002, 2001 and 2000,
respectively. The Company had a current income tax
payable of $8,314,000 at December 31, 2002 and a
current income tax receivable of $16,179,000 at
December 31, 2001. At December 31, 2002, the Company
had foreign net operating loss carryforwards of
$5,066,000, which expire from 2002 and 2006. The net
change in the valuation allowance is primarily
related to the foreign net operating loss
carryforwards. The Company’s tax returns through
December 31, 2000 have been reviewed by the Internal
Revenue Service.
The realization of the deferred tax asset is
dependent upon the Company’s ability to generate
sufficient taxable income in future periods. Based on
historical results and the prospects for future
current operations, management anticipates that it is
more likely than not that future taxable income will
be sufficient for the realization of this net asset.
46 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(14) Dividends from Subsidiaries and Statutory Financial Information
The Company’s insurance subsidiaries are restricted
by law as to the amount of dividends they may pay
without the approval of regulatory authorities.
During 2002, the maximum amount of dividends which
can be paid without such approval is approximately
$120 million.
Combined net income (loss) and policyholders’
surplus of the Company’s consolidated insurance
subsidiaries, as determined in accordance with
statutory accounting practices, are as follows:
In 2001, the The National Association of Insurance
Commissioners (“NAIC”) codified statutory accounting
practices. The impact of these changes was an
increase of $58 million to our policyholders’
surplus. The significant variances between statutory
accounting practices and GAAP are that for statutory
purposes, bonds are carried at amortized cost,
acquisition costs are charged to operations as
incurred, deferred Federal income taxes are subject
to limitations, excess and assumed workers
compensation reserves are discounted at a 3.9% rate
and certain assets designated as “non-admitted
assets” are charged against surplus.
The NAIC has risk-based capital (“RBC”)
requirements that require insurance companies to
calculate and report information under a risk-based
formula which measures statutory capital and surplus
needs based on a regulatory definition of risk in a
company’s mix of products and its balance sheet. All
of the Company’s insurance subsidiaries have an RBC
amount above the authorized control level RBC, as
defined by the NAIC.. The Company has guaranteed
that RBC levels of certain subsidiaries will remain
above their authorized control levels.
(15) Stockholders’ Equity
Common equity
The weighted average number of shares
used in the computation of basic earnings per share
was 50,885,000, 43,708,000 and 38,448,000 for 2002,
2001 and 2000, respectively. The weighted average
number of shares used in the computations of diluted
earnings per share was 52,923,000, 45,833,000, and
38,987,000 for 2002, 2001 and 2000, respectively.
Treasury shares have been excluded from average
outstanding shares from the date of acquisition. The
difference in calculating basic and diluted earnings
per share is attributable entirely to the dilutive
effect of stock-based compensation plans.
Changes in shares of common stock
outstanding, net of treasury shares, are as
follows:
On May 11, 1999, the Company declared a dividend
distribution of one Right for each outstanding share
of common stock. Each Right entitles the holder to
purchase a unit consisting of one one-thousandth of
a share of Series A Junior Participating Preferred
Stock at a purchase price of $120 per unit (subject to
adjustment) upon the occurrence of certain events
relating to potential changes in control of the
Company. The Rights expire on May 11, 2009, unless
earlier redeemed by the Company as provided in the
Rights Agreement.
47
(16) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Company’s financial instruments as of December 31, 2002 and 2001:
The estimated fair value of investments is based on quoted market prices as of
the respective reporting dates. The fair value of the long-term debt and the
trust preferred securities are based on rates available for borrowings similar
to the Company’s outstanding debt as of the respective reporting dates.
(17) Lease Obligations
The Company and its subsidiaries use office space and
equipment under leases expiring at various dates
through September 1, 2004. These leases are
considered operating leases for financial reporting
purposes. Some of these leases have options to extend
the length of the leases and contain clauses for cost
of living, operating expense and real estate tax
adjustments. Rental expense was approximately:
$17,586,000, $18,021,000 and $16,580,000 for 2002,
2001 and 2000, respectively. Future minimum lease
payments (without provision for sublease income) are
$13,797,000 in 2003; $9,984,000 in 2004; $7,693,000
in 2005; and $21,956,000 thereafter.
(18) Commitments, Litigation and Contingent Liabilities
The Company’s subsidiaries are regularly engaged in
the defense of claims arising out of the conduct of
the insurance business. The Company does not
believe that such litigation, individually or in
the aggregate, will have a material effect on its
financial condition or results of operations.
A subsidiary of the Company has a pending
arbitration proceeding pertaining to the
interpretation of the contract terms in two
reinsurance agreements. As of December 31, 2002, the
reinsurer’s interpretation of the contract terms
would reduce the recoverable from the reinsurer by $4
million for paid losses and $46 million for unpaid
losses. Although the ultimate outcome of this matter
cannot be determined, management believes that the
Company’s interpretation of this contract is correct
and intends to vigorously pursue this matter in
arbitration.
There are two pending arbitrations pertaining to
reinsurance contract coverage issues where
subsidiaries of the Company are the assuming
reinsurers. The Company’s estimates of the
cost of settling its insurance and reinsurance
claims, including claims in arbitrations and
litigation, are reflected in its aggregate reserves
for losses and loss expenses. Accordingly, based on
currently available information, the Company believes
that the resolution of the two pending arbitrations
will not have a material effect on its financial
condition or results of operations. However, if these
two arbitrations are decided adversely to the
Company, the Company’s potential exposure, in excess
of the amounts reserved, is up to $16 milion, after
tax.
48 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(19) Stock Option Plan
The Company has a stock option plan (the “Stock Option Plan”) under which
10,687,500 shares of Common Stock were reserved for issuance. Pursuant to the
Stock Option Plan, options may be granted at prices determined by the Board of
Directors but not less than fair market value on the date of grant. The
following table summarizes option information:
The following table summarizes information about stock options outstanding at
December 31, 2002 and 2001:
(20) Compensation Plan
The Company and its subsidiaries have profit sharing
retirement plans in which substantially all employees
participate. The plans provide for minimum annual
contributions of 5% of eligible compensation;
contributions above the minimum are discretionary and
vary with each participating subsidiary’s
profitability. Employees become eligible to
participate in the Retirement Plans on the first day
of the month following the first full three months in
which they are employed. Profit sharing expense
amounted to $12,821,000, $9,287,000 and $7,672,000
for 2002, 2001 and 2000, respectively.
The Company has a Long-Term Incentive
Compensation Plan (“LTIP”) that provides for
incentive compensation to key executives based on
the Company’s earnings, as defined under the LTIP,
for each year from 2001 through 2005. Key employees
are awarded participation units (“Units”) which
vest and become exercisable over a maximum term of
five years from the date of their award. The units
are payable in cash or up to 50% in shares of
common stock. At December 31, 2002, there were
119,250 units outstanding and the maximum value
that can be earned for those units over the
five-year period ending on December 31, 2005 is
$19,875,000. During 2002, the Company expensed $8,400,000
for the LTIP. There was no LTIP expense in 2001 or
2000.
49
(21) International Operations
The Company owns 65% of Berkley International, LLC,
which conducts insurance operations in Argentina and
the Philippines. The international activities are
reported in the Company’s financial statements on a
one quarter lag to facilitate the timely completion
of the consolidated financial statements. During 2001
and 2002, Argentina experienced substantial economic
disruption, including default on its sovereign bonds,
severe currency devaluation, high unemployment and
inflation, increasing fiscal deficits and declining
central bank reserves. The impact of these events on
the Company’s financial statements are described
below.
Life insurance business — The Company ceased
writing life insurance business in early 2002 and
began a process of liquidating its life insurance
in-force. As of the balance sheet date,
approximately three-quarters of such policies had
been extinguished.
Bond Impairment — The Company wrote down the
carrying value of its Argentine sovereign bonds by
$18 million in 2001 and $10 million in 2002. The
write-downs are reported as realized investment
losses on the accompanying consolidated statements of
operation. At December 31, 2002, the cost and market
value of the Company’s remaining Argentine bonds was
$13.6 and $13.9 respectively.
Foreign currency gain — In 2002, the Company’s
Argentine subsidiary reported net gains of $21.7
million relating to foreign currency transactions and
the related settlement of life insurance contracts.
The foreign currency transaction gain represents the
net increase in the local currency value of assets
(primarily cash and investments) and liabilities
(primarily life insurance contracts) denominated in
U.S. dollars following the devaluation of the
Argentine peso. The gain on surrender of life
insurance contracts represents the effect of the
negotiated settlement of certain U.S. dollar life
insurance contracts following the enactment of and in accordance
with the Economic Emergency and Exchange Reform Law,
which required that dollar contracts be converted to
pesos.
Unrealized foreign exchange losses — In 2002,
the Company reported an unrealized foreign exchange
loss of $23.4 million ($15.2 million net of minority
interest) as a result of the translation of the net
assets of its Argentine subsidiary to U.S. dollars.
These unrealized foreign exchange losses are reported
in other comprehensive income.
(22) Supplemental Financial Statement Data
Other operating costs and expenses consist of the following:
50 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(23) Restructuring
In 2001, the Company reported a restructuring charge
of $3,196,000 in connection with its withdrawal from
regional personal lines business and the
reorganization of certain other operations. The
Company reduced its permanent workforce by
approximately 304 employees in connection with the
plan. The charge consisted mainly of severance
payments of $2,462,000 and contractual lease
payments related to abandoned facilities. The
activities under the plan were substantially
completed in 2001.
In 2000, the Company implemented a plan to
reorganize its reinsurance business. Under the plan,
the reinsurance segment withdrew from the Latin
American and Caribbean market, and the domestic
reinsurance operations focused on specialty
reinsurance lines while de-emphasizing certain
commodity-type lines. The Company reduced its
permanent workforce by approximately 37 employees in
connection with the plan. The Company reported a
restructuring charge of $1,850,000 to reflect costs
related to the plan. This charge consisted mainly of
severance payments of $1,439,000 and contractual
lease payments related to abandoned facilities. The
activities under the plan were substantially
completed in 2000.
The Company has paid $5,046,000 related to the
restructuring charges. The remaining restructuring
accrual is $207,000 at December 31, 2002, of which
certain payments extend through 2003.
(24) Industry Segments
The Company’s operations are presently conducted
through five segments of the insurance business:
specialty lines of insurance (including excess and
surplus lines and commercial transportation);
alternative markets (including the management of
alternative insurance market mechanisms);
reinsurance; regional property casualty insurance;
and international. The specialty segment’s business
is principally within the excess and surplus lines,
professional liability, commercial transportation and
surety markets. The Company’s alternative markets
segment offers workers’ compensation insurance on an
excess and primary basis and provides fee-based
services to help clients develop and administer
self-insurance programs. The Company’s reinsurance
segment specializes in underwriting property,
casualty and surety reinsurance on both a treaty and
facultative basis. The regional property casualty
insurance segment provides commercial property
casualty insurance products. The international
segment offers personal and commercial property
casualty insurance in Argentina and savings and life
products in the Philippines. For the years ended
December 31, 2002, 2001 and 2000, the international
segment wrote life insurance premiums of
$21,734,000, $31,490,000, and $33,183,000,
respectively. During 2001, the Company discontinued
its regional personal lines business and the
alternative markets division of its reinsurance
segment. These discontinued businesses are reported
collectively as a separate business segment. Prior
period segment information has been restated to
reflect these changes.
The accounting policies of the segments are the
same as those described in the summary of significant
accounting policies. Income tax expense and benefits
are calculated based upon the Company’s overall
effective tax rate. Summary financial information
about the Company’s operating segments is presented
in the table on the following page. Income (loss)
before income taxes by segment consists of revenues
less expenses related to the respective segment’s
operations, including allocated investment income.
Intersegment revenues consist primarily of dividends
and interest on inter-company debt. Identifiable assets by segment are
those assets used in or allocated to the operation of
each segment.
51
Interest expense for the alternative markets and reinsurance segments was
$2,327,000, $2,806,000 and $2,921,000 for the years ended December 31, 2002,
2001 and 2000, respectively. Additionally, corporate interest expense (net of
intercompany amounts) was $43,148,000, $42,913,000, and $44,675,000 for the
corresponding periods. Identifiable assets by segment are as follows (amounts
in thousands):
52 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
(25) Quarterly Financial Information (unaudited)
The following is a summary of quarterly financial data (Dollars in thousands
except per share data):
53
For the years ended December 31, 2002, 2001 and 2000
2002
2001
2000
$
175,045
$
(91,546
)
$
36,238
(4,534
)
(3,008
)
(2,907
)
170,511
(94,554
)
33,331
3.44
(2.09
)
.94
3.35
(2.16
)
.87
3.31
(2.09
)
.93
3.22
(2.16
)
.85
2001
2000
$
(91,546
)
$
36,238
3,686
2,816
(87,860
)
39,054
(2.09
)
0.94
(2.01
)
1.02
(2.09
)
0.93
(2.01
)
1.00
(Dollars in thousands)
Gross
Gross
Amortized
unrealized
unrealized
Fair
Carrying
Type of investment
Cost
gains
losses
value
value
$
54,600
$
9,018
$
(101
)
$
63,517
$
54,600
6,384
875
—
7,259
6,384
144,872
11,968
(6
)
156,834
144,872
205,856
21,861
(107
)
227,610
205,856
679,323
46,330
—
725,653
725,653
918,534
44,498
(731
)
962,301
962,301
629,639
43,804
(5,798
)
667,645
667,645
752,148
40,240
(2,167
)
790,221
790,221
150,349
9,879
(382
)
159,846
159,846
3,129,993
184,751
(9,078
)
3,305,666
3,305,666
$
3,335,849
$
206,612
$
(9,185
)
$
3,533,276
$
3,511,522
$
48,618
$
4,438
$
(155
)
$
52,901
$
48,618
11,331
790
—
12,121
11,331
96,515
6,022
—
102,537
96,515
156,464
11,250
(155
)
167,559
156,464
506,067
22,282
(1,726
)
526,623
526,623
540,081
12,936
(5,358
)
547,659
547,659
537,680
18,604
(4,472
)
551,812
551,812
551,082
13,843
(3,240
)
561,685
561,685
106,411
5,617
(481
)
111,547
111,547
2,241,321
73,282
(15,277
)
2,299,326
2,299,326
$
2,397,785
$
84,532
$
(15,432
)
$
2,466,885
$
2,455,790
Cost
Fair value
$
107,770
$
109,117
556,988
595,627
849,023
897,647
925,048
983,829
897,020
947,056
$
3,335,849
$
3,533,276
(Dollars in thousands)
Gross
Gross
Amortized
unrealized
unrealized
Fair
Carrying
Type of investment
Cost
gains
losses
value
value
$
103,576
$
3,606
$
(5,570
)
$
101,612
$
101,612
99,812
4,626
(678
)
103,760
103,760
203,388
8,232
(6,248
)
205,372
205,372
25,819
3,587
(502
)
28,904
28,904
73,867
3,485
(467
)
76,885
76,885
$
99,686
$
7,072
$
(969
)
$
105,789
$
105,789
(Dollars in thousands)
Gross
Gross
Amortized
unrealized
unrealized
Fair
Carrying
Type of investment
Cost
gains
losses
value
value
$
72,217
$
890
$
(3,373
)
$
69,734
$
69,734
95,908
—
—
95,908
95,908
168,125
890
(3,373
)
165,642
165,642
177,309
—
—
177,309
177,309
(38,347
)
2,870
(638
)
(36,115
)
(36,115
)
$
307,087
$
3,760
$
(4,011
)
$
306,836
$
306,836
$
117,891
$
2,951
$
(4,881
)
$
115,961
$
115,961
95,330
—
—
95,330
95,330
213,221
2,951
(4,881
)
211,291
211,291
351,707
—
—
351,707
351,707
(58,331
)
3,482
(2,141
)
(56,990
)
(56,990
)
$
506,597
$
6,433
$
(7,022
)
$
506,008
$
506,008
(Dollars in thousands)
2002
2001
2000
$
182,762
$
162,751
$
152,765
12,552
6,754
6,448
3,425
16,604
40,131
4,409
2,952
2,651
5,899
14,715
14,771
1,853
2,880
3,189
210,900
206,656
219,955
(23,025
)
(11,635
)
(9,507
)
$
187,875
$
195,021
$
210,448
(a)
Investment income earned from net trading
account activity includes realized and unrealized
gains and losses. Unrealized trading losses were
$1,155,000 and $2,519,000 for 2002 and 2001,
respectively, and unrealized trading gains were
$1,899,000 for 2000.
(Dollars in thousands)
2002
2001
2000
$
27,446
$
6,706
$
(2,573
)
6,603
7,755
9,420
(16,155
)
(26,511
)
(3,299
)
(2,680
)
(109
)
—
—
(93
)
3,987
15,214
(12,252
)
7,535
128,327
32,452
108,938
(4,139
)
(1,175
)
335
124,188
31,277
109,273
$
139,402
$
19,025
$
116,808
(a)
During 2002, 2001 and 2000, gross gains of
$39,494,000, $13,033,000 and $11,586,000,
respectively, and gross losses of $12,048,000,
$6,327,000 and $14,159,000, respectively, were
realized.
(b)
The 2002 provision for other than temporary
impairment reflected a second quarter charge of $10
million for Argentine sovereign bonds (see note 21)
and a fourth quarter charge of $9 million for other
investments, including $6 million of securities
issued by Dynegy Inc. The 2001 provision for other
then temporary impairment reflected the write-down of
Argentine sovereign bonds and other securities.
(Dollars in thousands)
2002
2001
2000
$
2,033,293
$
1,818,049
$
1,723,865
1,288,071
1,140,622
1,047,060
173,732
211,344
14,042
(4,549
)
8,717
11,530
1,457,254
1,360,683
1,072,632
373,541
443,802
394,401
793,765
701,637
584,047
1,167,306
1,145,439
978,448
2,323,241
2,033,293
1,818,049
844,684
730,557
657,756
3,167,925
2,763,850
2,475,805
42,707
53,832
58,112
$
3,210,632
$
2,817,682
$
2,533,917
(a)
The net provision for loss and loss expenses excludes changes in reserves
for policyholder benefits on life insurance contracts of $6,717,000,
$19,817,000 and $21,779,000 as of December 31, 2002, 2001 and
2000,respectively.
(Dollars in thousands)
2002
2001
2000
$
84,238
$
16,585
$
—
25,000
30,000
—
109,238
46,585
—
346,023
299,574
301,835
$
455,261
$
346,159
$
301,835
$
49,164
$
5,441
$
—
45,000
54,000
—
94,164
59,441
—
241,162
274,470
267,804
$
335,326
$
333,911
$
267,804
(Dollars in thousands)
2002
2001
Description
Rate
Maturity
Face Value
Carrying Value
Carrying Value
6.50
%
January 1, 2003
$
35,793
$
35,793
$
35,793
6.71
%
March 4, 2003
25,000
24,997
24,976
(1
)
January 1, 2002
—
—
8,000
60,793
60,790
68,769
6.375
%
April 15, 2005
40,000
39,919
39,885
6.25
%
January 15, 2006
100,000
99,566
99,442
9.875
%
May 15, 2008
88,800
87,010
86,774
8.70
%
January 1, 2022
76,503
75,700
75,684
$
366,096
$
362,985
$
370,554
(1)
Floating rate equal to Libor plus 50 basis points.
(Dollars in thousands)
2002
2001
2000
$
44,694
$
2,068
$
2,574
39,445
(58,729
)
(123
)
$
84,139
$
(56,661
)
$
2,451
(Dollars in thousands)
2002
2001
2000
$
90,802
$
(52,988
)
$
14,298
(9,051
)
(8,045
)
(13,543
)
(3,275
)
3,100
—
5,663
1,272
1,696
$
84,139
$
(56,661
)
$
2,451
(Dollars in thousands)
2002
2001
$
97,522
$
74,952
85,535
52,844
1,773
53,005
11,510
28,420
23,104
18,362
219,444
227,583
(6,825
)
(10,100
)
212,619
217,483
7,844
7,766
107,135
76,090
59,898
18,238
8,318
7,790
8,839
7,678
192,034
117,562
$
20,585
$
99,921
(Dollars in thousands)
2002
2001
2000
$
192,845
$
(130,630
)
$
56,694
$
1,275,302
$
928,367
$
862,994
(in thousands)
2002
2001
2000
49,861
38,484
38,426
5,365
11,404
508
(3
)
(27
)
(450
)
55,223
49,861
38,484
2002
2001
(Dollars in thousands)
Carrying amount
Fair value
Carrying amount
Fair value
$
4,663,100
$
4,684,854
$
3,607,586
$
3,618,681
362,985
397,849
370,554
384,431
198,251
187,036
198,210
180,146
2002
2001
2000
Shares
Price
(a)
Shares
Price
(a)
Shares
Price
(a)
5,458,619
$
22.82
5,979,119
$
21.05
5,494,178
$
22.75
1,264,675
36.61
811,425
31.38
1,308,000
12.89
387,700
20.12
1,039,350
19.85
513,399
16.24
197,949
25.76
292,575
21.82
309,660
24.71
6,137,645
$
25.73
5,458,619
$
22.82
5,979,119
$
21.05
2,406,527
$
23.42
2,479,379
$
22.09
1,429,089
$
18.29
2,385,834
3,453,287
3,971,874
(a)
Weighted average exercise price.
Options Outstanding
Options Exercisable
Weighted
Weighted
Range of
Remaining
Weighted
Average
Exercise
Number
Contractual
Average
Number
Exercise
Prices
Outstanding
Life
Price
Exercisable
Price
1,367,876
6.5
$
13.32
197,010
$
16.66
434,516
3.4
19.25
434,516
19.25
4,335,253
6.8
30.29
1,775,001
25.19
6,137,645
6.5
$
25.73
2,406,527
$
23.42
1,557,072
7.0
$
13.56
310,647
$
16.55
639,995
4.3
19.27
639,995
19.27
3,261,552
6.7
27.93
1,528,737
24.39
5,458,619
6.5
$
22.82
2,479,379
$
22.09
(Dollars in thousands)
2002
2001
2000
$
589,993
$
492,065
$
454,729
94,590
85,593
68,756
69,715
64,949
57,108
42,907
21,169
15,986
$
797,205
$
663,776
$
596,579
Revenues
Income
Income Tax
Investment
Unaffiliated
Inter-
(loss) before
Expense
(Dollars in thousands)
Income
Customers
Segment
Total
income taxes
(Benefit)
$
50,550
$
771,134
$
2,053
$
773,187
$
130,477
$
41,003
37,641
361,035
1,112
362,147
65,612
20,530
47,224
512,415
1,838
514,253
39,299
9,506
44,365
756,023
1,450
757,473
111,807
30,834
5,325
104,076
—
104,076
7,710
6,701
4,457
55,774
—
55,774
(10,682
)
3,739
(1,687
)
5,627
(6,453
)
(826
)
(84,790
)
(28,174
)
$
187,875
$
2,566,084
—
$
2,566,084
$
259,433
$
84,139
$
39,390
$
438,534
$
2,116
$
440,650
$
28,806
$
7,760
37,765
232,671
1,450
234,121
32,971
9,271
42,536
278,831
2,659
281,490
(54,502
)
(20,907
)
51,640
613,640
1,284
614,924
44,403
7,647
13,993
137,676
7
137,683
(6,082
)
2,224
9,762
232,403
—
232,403
(133,480
)
(46,718
)
(65
)
8,042
(7,516
)
526
(63,510
)
(15,938
)
$
195,021
$
1,941,797
—
$
1,941,797
$
(151,394
)
$
(56,661
)
$
48,706
$
322,618
$
2,241
$
324,859
$
31,836
$
9,058
37,722
189,658
137
189,795
35,315
9,978
50,471
348,707
457
349,164
27,760
7,387
56,955
564,125
1,202
565,327
8,761
2,483
9,636
118,234
—
118,234
6,853
1,820
9,562
232,392
—
232,392
(9,936
)
(3,478
)
(2,604
)
5,553
(4,037
)
1,516
(59,738
)
(24,797
)
$
210,448
$
1,781,287
—
$
1,781,287
$
40,851
$
2,451
December 31,
2002
2001
2000
$
2,229,685
$
1,580,155
$
1,425,123
1,197,977
859,502
755,248
2,547,857
1,751,428
1,258,155
1,590,913
1,462,861
1,289,823
126,528
209,473
248,243
162,754
289,313
377,893
(824,391
)
(519,223
)
(332,415
)
$
7,031,323
$
5,633,509
$
5,022,070
Three months ended
March 31,
June 30,
September 30,
December 31,
2002
2001
2002
2001
2002
2001
2002
2001
$
547,886
$
449,153
$
569,935
$
490,997
$
640,071
$
500,072
$
808,192
$
501,575
34,396
10,266
27,374
9,598
40,544
(47,246
)
72,731
(64,164
)
.69
.25
.55
.22
.81
(1.08
)
1.37
(1.36
)
.66
.24
.52
.21
.78
(1.08
)
1.32
(1.36
)
(a)
During the fourth quarter of 2002, the Company modified the presentation of
reinsurance assumed from Lloyd’s syndicates to reflect the Company’s share of
the reinsurance and brokerage costs paid by the syndicates. These amounts were
previously netted against assumed premiums. Premiums and expenses for the first
three quarters of 2002 were reclassified to conform with this presentation.
There was no effect from this change on net income or net income per share.
(b)
Earnings per share (EPS) in each quarter is computed using the
weighted-average number of shares outstanding during that quarter while EPS for
the full year is computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the four quarters EPS does not
equal the full-year EPS.
(c)
For periods with a net loss, diluted per share amounts are equal to basic
per share amounts so as not to be anti-dilutive.
Independent Auditors’ Report
Board of Directors and Stockholders
We have audited the consolidated balance sheets of W. R. Berkley Corporation
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders’ equity, comprehensive income and cash
flows for each of the years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of W. R. Berkley
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
has changed its method of accounting for goodwill in 2002.
54 W. R. BERKLEY CORPORATION AND SUBSIDIARIES
W. R. Berkley Corporation
New York, New York
February 10, 2003
KPMG LLP
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of W. R. Berkley Corporation (the “Company”) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William R. Berkley, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ William R. Berkley
William R. Berkley
Chairman of the Board and Chief Executive Officer
March 31, 2003
A signed original of this written statement required by Section 906 has been provided to W.R. Berkley Corporation (the “Company”) and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
47
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of W. R. Berkley Corporation (the “Company”) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eugene G. Ballard, Senior Vice President - Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Eugene G. Ballard
Eugene G. Ballard
Senior Vice President - Chief Financial Officer and Treasurer
March 31, 2003
A signed original of this written statement required by Section 906 has been provided to W.R. Berkley Corporation (the “Company”) and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
48