REGISTRATION NO. 333-109972
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE
AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PROASSURANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 6631 63-1261433
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
100 BROOKWOOD PLACE
BIRMINGHAM, ALABAMA 35209
(205) 877-4400
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
A. DERRILL CROWE
100 BROOKWOOD PLACE
BIRMINGHAM, ALABAMA 35209
(205) 877-4400
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
COPIES TO:
JACK P. STEPHENSON, JR., ESQ. CHRISTOPHER J. CUMMINGS, ESQ.
BRUCE A. PARSONS, ESQ. SHEARMAN & STERLING LLP
BURR & FORMAN LLP COMMERCE COURT WEST
420 NORTH 20TH STREET, SUITE 3100 199 BAY STREET, SUITE 4405
BIRMINGHAM, ALABAMA 35203 TORONTO, ONTARIO M5L 1E8
(205) 458-5201 (416) 360-8484
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITY TO
THE PUBLIC: From time to time after the effective date of this Registration
Statement as determined by market conditions.
If the only securities being registered on this form are being registered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. THE SELLING SECURITYHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND THE
SELLING SECURITYHOLDERS ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED.
*SUBJECT TO COMPLETION, DATED DECEMBER 21, 2004.
PROSPECTUS
$107,600,000
(PROASSURANCE LOGO)
PROASSURANCE CORPORATION
3.9% CONVERTIBLE SENIOR DEBENTURES DUE 2023
AND THE COMMON STOCK ISSUABLE UPON
CONVERSION OF THE CONVERTIBLE SENIOR DEBENTURES
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This prospectus relates to $107,600,000 aggregate principal amount of 3.9%
Convertible Senior Debentures due 2023 of ProAssurance Corporation which
includes $100,000,000 aggregate principal amount of Debentures issued in a
private placement on July 7, 2003 and $7,600,000 aggregate principal amount of
Debentures that were issued pursuant to the exercise of an overallotment option
on July 16, 2003. The Debentures may be sold from time to time by or on behalf
of the selling security holders named in this prospectus or in supplements to
this prospectus. This prospectus also relates to 2,572,038 shares of our common
stock, par value $0.01 per share, issuable upon conversion of the Debentures
held by certain selling securityholders, plus such additional indeterminate
number of shares as may become issuable upon conversion of the Debentures by
reason of adjustment to the conversion rate in certain circumstances.
The selling securityholders may sell all or a portion of the Debentures in
market transactions, negotiated transactions or otherwise and at prices which
will be determined by the prevailing market price for the Debentures or in
negotiated transactions. The selling securityholders also may sell all or a
portion of the shares of common stock from time to time on the New York Stock
Exchange, in negotiated transactions or otherwise, and at prices which will be
determined by the prevailing market price for the shares or in negotiated
transactions. The selling securityholders will receive all of the proceeds from
the sale of the Debentures and the common stock. We will not receive any
proceeds from the sale of Debentures or common stock by the selling
securityholders.
We will pay interest on the Debentures on June 30 and December 30 of each
year, beginning December 30, 2003. In addition, we will pay contingent interest
during any six-month period from June 30 to December 29 and from December 30 to
June 29, commencing with the six-month period beginning June 30, 2008, if the
average market price of a Debenture for the five trading days ending on the
second trading day immediately preceding the relevant six-month period equals
120% or more of the principal amount of the Debentures.
The Debentures are our senior unsecured obligations and will rank equally
with our other existing and future obligations that are unsecured and
unsubordinated.
Each $1,000 principal amount of the Debentures will be convertible at your
option, into 23.9037 shares of our common stock, par value $0.01 per share
(subject to adjustment as described in this prospectus), at any time prior to
stated maturity, if (i) the sale price of our common stock reaches specified
thresholds, (ii) the Debentures are called for redemption, or (iii) specified
corporate transactions have occurred. Upon conversion, we will have the right to
deliver, in lieu of shares of our common stock, cash or a combination of cash
and shares of our common stock.
The initial conversion rate of 23.9037 shares for each $1,000 principal
amount of Debentures is equivalent to an initial conversion price of $41.83 per
share of our common stock. Shares of our common stock are listed on the New York
Stock Exchange under the symbol "PRA." The last reported sale price of our
common stock on December 20, 2004 was $39.79 per share.
The Debentures were initially sold to qualified institutional buyers and are
currently trading in the PORTAL market. The Debentures sold by means of this
prospectus will not be eligible for trading in the PORTAL market. We do not
intend to list the Debentures for trading on any national or other securities
exchange or on the Nasdaq National Market.
We may redeem some or all of the Debentures on or after July 7, 2008. You
may require us to repurchase all or a portion of your Debentures on June 30,
2008, June 30, 2013 and June 30, 2018 or, subject to specified exceptions, upon
our change of control (as described in this prospectus). In either event, we may
choose to pay the repurchase price in cash or shares of our common stock or a
combination of cash and shares of our common stock.
Under the terms of the indenture, we and each holder of the Debentures
agree, for U.S. federal income tax purposes, to treat the Debentures as
indebtedness that is subject to the regulations governing contingent payment
debt instruments. See "Certain U.S. Federal Income Tax Consequences."
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INVESTING IN THE DEBENTURES INVOLVES RISKS, SOME OF WHICH ARE DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 15 OF THIS PROSPECTUS.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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*The date of this prospectus is [ ], 2004.
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION......................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. iii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... iii
SUMMARY..................................................... 1
RISK FACTORS................................................ 15
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES............. 24
USE OF PROCEEDS............................................. 24
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY............. 25
CAPITALIZATION.............................................. 26
DESCRIPTION OF THE DEBENTURES............................... 27
DESCRIPTION OF CAPITAL STOCK................................ 48
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES................ 49
CONSEQUENCES TO U.S. HOLDERS................................ 50
CONSEQUENCES TO NON-U.S. HOLDERS............................ 54
SELLING SECURITYHOLDERS..................................... 57
PLAN OF DISTRIBUTION........................................ 63
LEGAL MATTERS............................................... 66
EXPERTS..................................................... 66
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
or any documents incorporated by reference is accurate only as of the date on
the front cover of the applicable document. Our business, financial condition,
results of operations and prospects may have changed since that date.
This prospectus is based on information provided by us and by other sources
that we believe are reliable. We cannot assure you that any information provided
by other sources is accurate or complete. This prospectus summarizes certain
documents and other information and we refer you to them for a more complete
understanding of what we discuss in this prospectus. In making an investment
decision, you must rely on your own examination of our company and the terms of
this offering and the Debentures, including the merits and risks involved.
We are not making any representation to any purchaser of the Debentures
regarding the legality of an investment in the Debentures by such purchaser
under any legal investment or similar laws or regulations. You should not
consider any information in this prospectus to be legal, business or tax advice.
You should consult your own attorney, business advisor and tax advisor for
legal, business and tax advice regarding an investment in the Debentures.
References in this prospectus to "ProAssurance," "we," "us" and "our" refer
to ProAssurance Corporation, an insurance holding company incorporated in
Delaware, and its subsidiaries, unless the context otherwise requires.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, under which we file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy this information at
ii
the Public Reference Room of the SEC, at 450 Fifth Street, N.W., Washington, DC
20549. Please call the SEC at (800) SEC-0330 for further information about the
Public Reference Room.
The SEC also maintains an internet website that contains reports, proxy
statements and other information about issuers that file electronically with the
SEC. The address of that site is www.sec.gov. We also maintain copies of our
recent SEC reports and other current information regarding ProAssurance at our
website at www.proassurance.com.
You can also inspect reports, proxy statements and other information about
ProAssurance at the offices of the New York Stock Exchange, 20 Broad Street, New
York, NY 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are "incorporating by reference" into this prospectus certain
information that we file with the SEC, which means that we are disclosing
important information to you by referring you to those documents. The
information incorporated by reference is deemed to be part of this prospectus,
except for any information superseded by information contained directly in this
prospectus and superseded by information in subsequent reports. This prospectus
incorporates by reference the documents set forth below that we have previously
filed with the SEC. These documents contain important information about us and
our finances.
PROASSURANCE SEC FILINGS (FILE NO. 001-16533) PERIOD
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Annual Report on Form 10-K................. Year Ended December 31, 2003
2004 Quarterly Reports on Form 10-Q........ Quarterly Periods Ended March 31, 2004,
June 30, 2004, and September 30, 2004
All documents that we file with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act from the date of this prospectus to
the end of the offering (other than current reports furnished to the SEC) under
this prospectus shall also be deemed to be incorporated herein by reference and
will automatically update information included in or previously incorporated by
reference in this prospectus.
You may request a copy of these filings, at no cost, by writing or calling
us at the following address or telephone number:
Frank B. O'Neil
Senior Vice President of Corporate Communications and Investor Relations
ProAssurance Corporation
100 Brookwood Place
Birmingham, Alabama 35209
Tel: (205) 877-4400
Exhibits to the filings will not be sent, however, unless those exhibits
have specifically been incorporated by reference in that filing.
Information contained on our website at www.proassurance.com is not
intended to be incorporated by reference in this prospectus and you should not
consider that information a part of this prospectus.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference herein contain
statements concerning our future results and performance and other matters that
are "forward-looking" statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. The words "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions
are intended, but are not the exclusive means, to identify these forward-looking
statements. These forward-looking statements include among other things
statements concerning: liquidity and capital requirements, return on
iii
equity, financial ratios, net income, premiums, losses and loss reserves,
premium rates and retention of current business, competition and market
conditions, the expansion of product lines, the development or acquisition of
business in new geographical areas, the availability of acceptable reinsurance,
actions by regulators and rating agencies, compliance with our credit agreement,
payment of dividends, and other matters.
These forward-looking statements are based upon our estimates and
anticipation of future events that are subject to certain risks and
uncertainties that could cause actual results to vary materially from historical
or expected results described in the forward-looking statements. These risks and
uncertainties include, but are not limited to those listed in this prospectus
under the heading "Risk Factors." Due to such risks and uncertainties, you are
urged not to place undue reliance on forward-looking statements.
Risks that could adversely affect our operations or cause actual results to
differ materially from anticipated results include, but are not limited to, the
following:
- underwriting losses on the risks we insure are higher or lower than
expected;
- unexpected changes in loss trends and reserving assumptions which might
require the reevaluation of the liability for loss and loss adjustment
expenses, thus resulting in an increase or decrease in the liability and
a corresponding adjustment to earnings;
- our ability to retain current business, acquire new business, expand
product lines and a variety of other factors affecting daily operations
such as, but not limited to, economic, legal, competitive and market
conditions which may be beyond our control and are thus difficult or
impossible to predict;
- changes in the interest rate environment and/or the securities markets
that adversely impact the fair value of our investments or our income;
- inability on our part to achieve continued growth through expansion into
other states or through acquisitions or business combinations;
- general economic conditions that are worse than anticipated;
- inability on our part to obtain regulatory approval of, or to implement,
premium rate increases;
- the effects of weather-related events;
- changes in the legal system, including retroactively applied decisions
that affect the frequency or severity of claims;
- a verdict against one of our insureds that is in excess of policy limits
could expose us to bad faith litigation by the insured;
- significantly increased competition among insurance providers and related
pricing weaknesses in some markets;
- the loss of an agent or agents who produce a significant portion of our
business;
- changes in the availability, cost, quality or collectibility of
reinsurance;
- changes to our ratings by rating agencies;
- regulatory and legislative actions or decisions that adversely affect us;
and
- our ability to utilize loss carryforwards and other deferred tax assets.
All forward-looking statements included in this document are based upon
information available to us on the date hereof, and we undertake no obligation,
other than as may be required under the federal securities laws, to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. We do not assume responsibility for the
accuracy and completeness of the forward-looking statements. All of the
forward-looking statements are qualified in their entirety by reference to the
factors discussed under "Risk Factors."
iv
We caution you that these risk factors may not be exhaustive. We operate in
a continually changing business environment, and new risk factors emerge from
time to time. We cannot predict such new risk factors, nor can we assess the
impact, if any, of such new risk factors on our businesses or the extent to
which any factor or combination of factors may cause actual results to differ
materially from those expressed or implied by any forward-looking statements. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this prospectus might not occur.
For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in Section 27A of the Securities Act.
You should carefully read this prospectus and the documents incorporated by
reference in their entirety. They contain information that you should consider
when making your investment decision.
v
SUMMARY
This summary highlights information contained in other parts of this
prospectus or incorporated by reference herein. Because this is a summary, it
may not contain all the information that may be important to you. You should
read this summary together with the more detailed information in our financial
statements and accompanying notes contained elsewhere in this prospectus and the
other information incorporated by reference herein. Figures presented in this
prospectus include the results of Professionals Group from June 27, 2001, the
date of the consolidation with Medical Assurance, and, prior to that date, of
Medical Assurance, unless otherwise expressly stated, which limits the
comparability of certain financial information. Unless otherwise indicated, all
information in this prospectus gives no effect to the exercise of outstanding
options to purchase shares of our common stock and assumes all share numbers are
as of September 30, 2004.
PROASSURANCE CORPORATION
OVERVIEW
We are a holding company for specialty property and casualty insurance
companies focused on the professional liability and the personal automobile
insurance markets. We were formed to effect the consolidation of Medical
Assurance, Inc. and Professionals Group, Inc. in June 2001, but our predecessor
company, Medical Assurance, has been in operation since 1977.
We have a regional orientation, applying a focused underwriting strategy to
local markets where we have built a strong reputation among our customers and
producers. Our professional liability business is concentrated in the southeast
and midwest and focuses on physicians, dentists, other healthcare providers and
healthcare facilities. We believe we are the fourth largest active writer of
medical professional liability insurance in the United States. Our personal
lines segment focuses on educators and their families in Michigan. We believe we
are the tenth largest writer of personal automobile insurance in Michigan.
By concentrating on specialty markets where customers have specialized
needs, we seek to provide value added solutions through our underwriting
expertise and our emphasis on strong customer service. Our regional presence
allows us to maintain active relationships with our customers and be more
responsive to their needs. We seek to maintain a strong financial position to
protect our customers. We believe these factors have allowed us to establish a
leading position in our markets, enabling us to compete on a basis other than
just price.
We conduct our business through two operating segments, each of which
maintains a strong position in its local markets:
- Our professional liability segment, which represents our commercial lines
business, primarily focuses on providing medical professional liability
insurance. We provide protection against claims arising out of the death,
injury or disablement of a person resulting from the negligence or other
misconduct of medical and other healthcare professionals.
- Our personal lines segment primarily offers personal automobile, and to a
lesser extent, homeowners, boat and umbrella insurance to teachers,
administrators, college professors and other members of the educational
community and their families in Michigan.
Our professional liability segment represented 73.4% of our gross premiums
written for the year ended December 31, 2003, while our personal lines
represented 26.6% for the same year.
Professional liability insurance is generally referred to as a "long tail"
line of business. This means there is typically a long period of time between
collecting the premium for insuring a risk and the ultimate payment of losses,
typically exceeding five years. This allows us to invest the premiums we collect
until we pay losses which results in a higher level of invested assets and
investment income as compared to other lines of property and casualty business.
This is in contrast to personal lines insurance, which is generally
1
referred to as "short tail," due to shorter time periods between insuring the
risk and the ultimate payment of claims. As a result, there is less time to
invest premiums collected.
Our overall investment strategy is to focus on maximizing current income
from our investment portfolio while maintaining safety, liquidity, duration of
liabilities and portfolio diversification. The portfolio is generally managed by
professional third party asset managers subject to investment policies and
periodical evaluation by management and its consultants.
Professional Liability. We offer professional liability insurance for
providers of medical and other healthcare services, and to a lesser extent, for
providers of legal services. Although we generate a majority of our premiums
from individual and small group practices, we also insure several major
physician groups as well as several hospitals. We generally do not target large
groups or facilities because of the difficulty in underwriting the individual
risks and because their purchasing decision is more focused on price. We
primarily write in the southeast and midwest with Ohio, Florida, Alabama,
Michigan and Missouri representing our five largest states based on 2003
premiums.
We conduct our professional liability business through our insurance
subsidiaries, The Medical Assurance Company, ProNational Insurance Company,
Medical Assurance of West Virginia, and Red Mountain Casualty Insurance Company.
We operate through our home office and local offices located throughout the
states in which we write business, allowing us to better control our
underwriting and claims process, respond to local market conditions and more
effectively serve our customers and producers. In Alabama, we rely solely on
direct marketing, and in Florida and Missouri direct marketing accounts for a
majority of our business. We use independent agents to market our professional
liability insurance products in other states. We believe our size, financial
strength and flexibility of distribution differentiates us from our competitors.
Personal Lines. We conduct our personal lines business through our
insurance subsidiary, MEEMIC Insurance Company, which primarily serves
educational employees and their families in Michigan. Private passenger
automobile insurance is our primary line of business. To provide for the other
insurance needs of our auto customers, we also offer homeowners, boat and
umbrella policies. We believe our focus on the educational community provides
better than average risk-selection, which contributes to our historically
profitable underwriting results. We distribute our products directly to insureds
through a network of captive agents who are primarily current and former
teachers, administrators and other educational employees.
Our senior management team is led by A. Derrill Crowe, M.D., our Chairman
and Chief Executive Officer, and Victor T. Adamo, Esq., our President and Chief
Operating Officer. Dr. Crowe has acted as the Chief Executive Officer of Medical
Assurance since its founding in 1977. He has applied a hands-on management style
in developing our underwriting and claims strategies and was instrumental in
establishing us as a leading professional liability specialist. Mr. Adamo has
held various positions with Professionals Group since 1985 and as its president
was largely responsible for building it into a successful regional professional
liability company. Dr. Crowe practiced medicine as his principal occupation for
more than 25 years and Mr. Adamo was in the private practice of law for 10
years, providing them with knowledge of medical and legal issues that are
critical to our insurance operations. We also have a knowledgeable and
experienced management team with established track records in building and
managing successful insurance operations. In total, our senior management team
has average experience in the insurance industry of 23 years.
ProAssurance Corporation was formed as a holding company for Medical
Assurance, Inc., in connection with its acquisition of Professionals Group, Inc.
in June 2001. Medical Assurance was founded by physicians as a mutual company in
Alabama in 1977 and demutualized into a public company in 1991. From its initial
public offering in September 1991, to June 27, 2001, Medical Assurance produced
a compounded annual return of 14.6% for its common stockholders. Professionals
Group was founded as Physicians Insurance Company of Michigan in 1980 to assume
the business of the Brown-McNeeley Fund, which was founded by the State of
Michigan in 1975. From the first date of trading on NASDAQ in June 1993 through
June 27, 2001, Professionals Group produced a compounded annual return of 15.1%
for its common stockholders. MEEMIC's insurance subsidiary was founded as a
mutual company by
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Michigan teachers in 1950. Professionals Group became affiliated with MEEMIC in
1997 and acquired majority ownership through transactions relating to MEEMIC's
demutualization in July 1999.
Our executive offices are located at 100 Brookwood Place, Birmingham,
Alabama 35209, and our telephone number is (205) 877-4400.
CORPORATE STRATEGY
Our objective is to build value for our stockholders through superior
underwriting of classes of business in which we have a comprehensive
understanding and which offer us the opportunity to generate competitive returns
on capital. We target an average return on equity of 12% to 14% over the long
term. Over the five years ending December 31, 2003, however, we achieved an
average return on equity of 6.9%, with a high of 14.4% in 1999 and a low of 2.3%
in 2002. The major elements of our strategy are:
ADHERE TO A STRICT UNDERWRITING PHILOSOPHY.
We emphasize disciplined underwriting and do not manage our business to
achieve a certain level of premium growth or market share. In our professional
liability business, we apply our local knowledge to individual risk selection
and determine the appropriate price based on our assessment of the specific
characteristics of each risk. In our personal lines business, we target the
educational community, which we believe provides a stable and predictable group
of risks.
AGGRESSIVELY MANAGE POLICYHOLDER CLAIMS.
In addition to prudent risk selection, we seek to control our underwriting
results through effective claims management. We investigate each professional
liability claim and have fostered a strong culture of aggressively defending
those claims that we believe have no merit. We manage these claims at the local
level, tailoring claims handling to the legal climate of each state, which we
believe differentiates us from national writers. In our personal lines business,
we seek to quickly and efficiently settle claims through an established network
of auto repair shops and other repair facilities, focusing on minimizing the
cost of handling each claim.
OPERATE THROUGH REGIONAL OFFICES IN LOCAL MARKETS.
By concentrating on specialty markets where customers have specialized
needs, we seek to provide value added solutions through our underwriting
expertise and our emphasis on strong customer service. Through our regional
underwriting and claims office structure, we are able to gain a strong
understanding of local market conditions and efficiently adapt our underwriting
and claims strategies to regional conditions. Our regional presence also allows
us to maintain active relationships with our customers and be more responsive to
their needs. We believe these factors have allowed us to establish a leading
position in our markets, enabling us to compete on a basis other than just
price. We also believe that our presence in local markets allows us to monitor
and understand changes in the liability climate and thus develop better business
strategies in a more timely manner than our competitors.
EXPAND OUR POSITION IN REGIONAL MARKETS.
Our goal is to build upon our position as a leading writer of professional
liability and personal lines insurance and expand within a defined geographic
area, while maintaining our commitment to disciplined underwriting and
aggressive claims management. According to A.M. Best, we are the fourth largest
active medical liability insurance writer in the nation, and we believe we are
the largest medical liability writer in our states of operation. The withdrawal
and reduced capacity of several competitors in the medical professional
liability market has provided significant new business opportunities. We believe
that our strong reputation in our regional markets, combined with our financial
strength, strong customer service and proven ability to manage claims, should
enable us to profitably expand our position in select states. In our personal
lines business, we estimate that we currently insure approximately 16% of
educational community (acting and retired teaching professionals and service
employees) in Michigan. We expect to increase our
3
penetration of the educational community by appointing additional agents and
broadening our existing relationships with educational institutions and their
employees.
PURSUE CONSOLIDATING ACQUISITIONS.
We have successfully acquired and integrated companies and books of
business in the past and believe our financial size and strength make us an
attractive acquirer. The current professional liability climate may also provide
us with the opportunity to undertake additional mergers or acquisitions of
companies or books of business within or adjacent to our states of operation. We
continually evaluate opportunities to acquire professional liability companies
or books of business that leverage our core underwriting and claims expertise.
MAINTAIN OUR FINANCIAL STRENGTH AND SECURITY.
We have sustained our financial stability during difficult market
conditions through responsible pricing and loss reserving practices. We are
committed to maintaining prudent operating and financial leverage and
conservatively investing our assets. We recognize the importance our customers
and producers place on the strong ratings of our principal insurance
subsidiaries and we intend to manage our business to protect our financial
security.
COMPETITION AND INDUSTRY TRENDS
Competition depends on several factors including pricing, size, name
recognition, service quality, market commitment, breadth and flexibility of
coverage, method of sale, financial stability and ratings assigned by A.M. Best
and Standard & Poor's. Many of these factors, such as market conditions, the
ratings assigned by rating agencies, and regulatory conditions are out of our
control. However, for those factors over which we do have control, such as
service quality, market commitment, financial strength and stability, we believe
we have competitive strengths that make us a viable competitor in those states
where we are currently writing insurance.
PROFESSIONAL LIABILITY SEGMENT
We compete with insurance companies and self-insuring entities in the
medical professional liability market. Many of the competing companies
concentrate on a single state and have an extensive knowledge of the local
markets. We also compete with large national insurers that may have greater
financial strength and resources than we do.
Self-insuring entities are emerging as an alternative to the traditional
insurance market as insureds seek greater control over the professional
liability premiums. We assist groups with the formation and administration of
self-insuring entities, and earn fee income for the management and services we
provide. We do not expect this to become a major source of revenue for us, but
we hope to produce additional income to offset some of the potential lost
business as growth in this segment of the market removes potential insureds from
the traditional insurance market.
We believe that we have a competitive advantage in the current market due
to our size, geographic scope and name recognition, as well as our heritage as a
policyholder-founded company with a long-term commitment to the professional
liability insurance industry. These advantages have been achieved through our
balance sheet strength, claims defense expertise, strong ratings and ability to
deliver a high level of service to our insureds and agents. We believe that
these competitive strengths make us a viable competitor in those states where we
are currently writing insurance.
Since 1999, insurance companies focused on medical professional liability
coverage have experienced higher claim costs on business written in prior years
than they had reserved for initially. This has resulted in significant losses,
reduced capital to support current and future business, and higher premium rates
to meet expected higher claims costs.
4
Reduced profitability, reductions in surplus and capacity constraints have
led many professional liability carriers focused on medical professional
liability coverages to withdraw from, or limit new business in, one or more
markets. For example, in 2002 The St. Paul Companies, then the leading writer of
medical professional liability insurance, withdrew from the market and in 2003
Farmers Insurance Company exited medical professional liability insurance.
In 2002 several medical liability insurance companies were forced from the
market due to financial difficulties and The Reciprocal of America and MIIX
Group were placed under regulatory supervision in 2003 and 2004, respectively.
The failure of these companies placed hundreds of physicians at personal risk in
the event of a judgment against them. We believe these events have heightened
the sensitivity of our target market to this issue.
Given the continued reduction in capacity and the uncertainty surrounding
several writers in the medical professional liability market, we believe there
will be a "flight to quality" as insurers place greater emphasis on financial
strength and stability. We believe this trend will continue through 2004 and
into at least the first half of 2005.
PERSONAL LINES SEGMENT
Personal lines insurance is highly competitive and some of these
competitors are substantially larger than we are and have much greater
financial, technical and operating resources. Competition depends on several
factors including the price and quality of insurance products, the quality and
speed of service and claims response, financial strength, sales and marketing
capability, technical expertise and ratings assigned by A.M. Best and Standard &
Poor's.
We believe we have a competitive advantage because of our peer-to-peer
sales model. Our approach of "teachers serving teachers and their families" as
well as management's emphasis on high quality customer service have contributed
to high customer loyalty with a long-term policyholder retention rate of nearly
95%.
GROWTH OPPORTUNITIES AND OUTLOOK
We expect to achieve our growth in our Professional Liability segment
primarily through (i) the withdrawal of competitors from actively writing
business in certain states, and (ii) increased prices in our professional
liability business.
We believe we are viewed as a market leader because of our financial
strength and stability, and our ability to deliver excellent service at the
local level. This reputation allows us to take advantage of marketing conditions
that are improving as price increases are implemented and earned. Our stability
also makes us an attractive insurer in light of the highly publicized
insolvencies in our industry, as well as regulatory actions taken against
several former competitors.
In 2003 and in 2002, our professional liability segment achieved average
gross price increases of approximately 28% on renewal business (weighted by
premium volume). In 2004 we expect professional liability pricing to continue to
increase, although not at the levels of 2002 and 2003. We expect to increase the
number of policies written as our competitors withdraw from markets and their
capacity becomes increasingly constrained. We also expect our balance sheet
strength to become a further differentiating factor in the market. Additionally,
we plan to appoint new agents in underserved areas in the states where we write
business and we believe that will bring us additional business as well.
We expect our future growth in professional liability will be supported by
controlled expansion in states where we are already writing business. This
includes states we recently entered such as Arkansas, Delaware, North Carolina
and Virginia, that we believe have relatively favorable medical and legal
climates. We also expect to expand into additional states within, or adjacent
to, our existing business footprint as opportunities present themselves.
5
We also believe there will be additional opportunities for profitable
expansion of our professional liability business as insurers continue
experiencing financial difficulties, requiring them to reduce their business or
completely exit the marketplace. This may also lead to opportunities to expand
through the acquisition of other companies or books of business.
In the Personal Lines segment, our strong capitalization provides
operational flexibility allowing growth and expansion capabilities for current
and new product lines in Michigan, and expansion outside of the state.
We believe we can achieve our growth in both segments while improving our
combined ratio. As with all property and casualty companies, we expect the
beneficial impact of price increases and any development of losses to be fully
reflected in our financial results over time. We recognize the effect of higher
prices as the associated premiums are earned which generally occurs over the
course of the year after the policy is written.
6
THE DEBENTURES
Issuer........................ ProAssurance Corporation
Debentures.................... $107,600,000 aggregate principal amount of
3.90% Convertible Senior Debentures Due June
30, 2023.
Maturity Date................. June 30, 2023.
Ranking....................... The Debentures are our senior unsecured
obligations and rank equally in right of
payment with all of our existing and future
unsecured and unsubordinated obligations. The
Debentures are not guaranteed by any of our
subsidiaries and, accordingly, the Debentures
are effectively subordinated to the
indebtedness and other liabilities of our
subsidiaries, including insurance
policy-related liabilities. As of September 30,
2004, our subsidiaries had no outstanding
indebtedness (excluding intercompany
indebtedness) and had other liabilities
(including insurance policy-related
liabilities) of $2.47 billion.
Interest...................... We will pay accrued and unpaid interest on the
Debentures on June 30 and December 30 of each
year, beginning December 30, 2003, at an annual
rate of 3.90% from July 7, 2003. In addition,
we may be required to pay contingent interest,
as set forth below under "Contingent Interest."
Contingent Interest........... We will also pay contingent interest to the
holders of the Debentures during any six-month
period from June 30 to December 29 and from
December 30 to June 29 commencing with the
six-month period beginning June 30, 2008, if
the average market price of a Debenture for the
five trading days ending on the second trading
day immediately preceding the relevant
six-month period equals 120% or more of the
principal amount of the Debentures. The amount
of contingent interest payable in respect of
any six-month period will equal 0.1875% of the
average market price of a Debenture for the
five trading day period referred to above.
Conversion Rights............. You may convert your Debentures at any time
prior to stated maturity from and after the
date of the following events:
- if the sale price of our common stock for
at least 20 trading days in the 30
trading-day period ending on the last
trading day of the immediately preceding
fiscal quarter exceeds 120% of the
conversion price on that 30th trading day;
- if we have called the Debentures for
redemption; or
- upon the occurrence of the specified
corporate transactions, described under
"Description of the
Debentures -- Conversion Rights."
For each $1,000 principal amount of Debentures
surrendered for conversion, you initially will
receive 23.9037 shares of our common stock.
This represents an initial conversion price of
approximately $41.83 per share of common stock.
The conversion rate may be adjusted for certain
reasons, but will not be adjusted for accrued
interest or contingent interest, if any. Upon
7
conversion, you will generally not receive any
cash payment representing accrued interest or
contingent interest, if any. Instead, accrued
interest and contingent interest will be deemed
paid by the common stock received by you on
conversion. Debentures called for redemption
may be surrendered for conversion until the
close of business two business days prior to
the redemption date.
Upon conversion, we have the right to deliver,
in lieu of our common stock, cash or a
combination of cash and shares of our common
stock.
Payment at Maturity........... Each holder of $1,000 principal amount of the
Debentures shall be entitled to receive $1,000
at maturity, plus accrued interest, including
contingent interest, if any.
Sinking Fund.................. None.
Optional Redemption........... We may not redeem the Debentures prior to July
7, 2008. We may redeem some or all of the
Debentures for cash on or after July 7, 2008,
upon at least 30 days but not more than 60 days
notice by mail to holders of Debentures at par
as described under "Description of the
Debentures -- Optional Redemption by Us."
Repurchase Right of Holders... Each holder of the Debentures may require us to
repurchase all or a portion of the holder's
Debentures on June 30, 2008, June 30, 2013 and
June 30, 2018 at a purchase price equal to the
principal amount of the Debentures plus accrued
and unpaid interest, including contingent
interest, if any, to the date of repurchase. We
may choose to pay the purchase price in cash,
shares of our common stock, or a combination of
cash and shares of our common stock. If we
elect to pay the repurchase price with shares
of our common stock or a combination of cash
and shares of our common stock, we must notify
holders not less than 20 business days prior to
the repurchase date. If we elect to pay all or
a portion of the repurchase price in common
stock, the shares of common stock will be
valued at 97.5% of the average sale price for
the 20 trading days immediately preceding and
including the third day prior to the repurchase
date. We may in the future, without your
consent, amend or supplement the indenture to
eliminate our ability to pay the purchase price
for the Debentures in common stock on any
purchase date after the date of such amendment
or supplement.
Change of Control Put......... Upon a change of control of ProAssurance, you
may require us, subject to conditions, to
repurchase all or a portion of your Debentures.
We will pay the following purchase prices
expressed as a percentage of the principal
amount of such Debentures plus
8
accrued and unpaid interest, including
contingent interest and additional amounts, if
any, to the repurchase date:
REDEMPTION
PERIOD PRICE
------ ----------
Beginning on July 7, 2003 and ending on
June 29, 2004........................... 110.0%
Beginning on June 30, 2004 and ending on
June 29, 2005........................... 108.0%
Beginning on June 30, 2005 and ending on
June 29, 2006........................... 104.0%
Beginning on June 30, 2006 and ending on
June 29, 2008........................... 102.0%
June 30, 2008 and thereafter.............. 100.0%
See "Description of the Debentures -- Change of
Control Put."
We may choose to pay the repurchase price in
cash, shares of our common stock, shares of
common stock of the surviving corporation or a
combination of cash and shares of the
applicable common stock. If we elect to pay all
or a portion of the repurchase price in shares
of common stock, the shares of the applicable
common stock will be valued at 97.5% of the
average sale price of the applicable common
stock for 20 trading days commencing after the
third trading day following notice of the
occurrence of a change of control. We may in
the future, without your consent, amend or
supplement the indenture to eliminate our
ability to pay the purchase price for the
Debentures in common stock on any purchase date
after the date of such amendment or supplement.
Events of Default............. If there is an event of default under the
Debentures, the principal amount of the
Debentures, plus accrued interest, including
contingent interest, if any, may be declared
immediately due and payable. These amounts
automatically become due and payable if an
event of default relating to certain events of
bankruptcy, insolvency or reorganization
occurs.
Use of Proceeds............... The selling securityholders will receive all of
the net proceeds from the sale of the
Debentures or the shares of common stock sold
under this prospectus. We will not receive any
of the proceeds from sales by the selling
securityholders of the Debentures or the
underlying common stock sold under this
prospectus. We received approximately $104.3
million of net proceeds from the sale of the
Debentures to the initial purchasers. We used
approximately $67.5 million of such proceeds to
repay our outstanding bank indebtedness, and
intend to use the remaining portion of such
proceeds for general corporate purposes. See
"Use of Proceeds."
Book-Entry, Delivery and
Form.......................... The Debentures were issued in fully registered
form. The Debentures were issued in
denominations of $1,000 principal amount and
integral multiples thereof. The Debentures are
represented by one or more global Debentures,
deposited with the Trustee as custodian for The
Depository Trust Company (DTC) and registered
in the name of Cede & Co., DTC's nominee.
Beneficial interests in the global Debentures
will be shown on, and any transfers will be
effected only through,
9
records maintained by DTC and its participants.
See "Description of the
Debentures -- Book-Entry Delivery and
Settlement."
Registration Rights........... We agreed to file the registration statement of
which this prospectus forms a part with respect
to the resale of the Debentures and the shares
of our common stock issuable upon conversion of
the Debentures. We have agreed to keep this
shelf registration statement effective until
the earliest of:
- two years after the last date of original
issuance of any of the Debentures;
- the date when the holders of the Debentures
and common stock issuable upon conversion
of the Debentures are able to sell all such
securities immediately pursuant to Rule 144
under the Securities Act;
- the date when all of the Debentures and
common stock issuable upon conversion of
the Debentures are registered upon the
shelf registration statement and sold in
accordance with it; or
- the date when all of the Debentures and
common stock issuable upon conversion of
the Debentures have ceased to be
outstanding.
We will be required to pay additional amounts
if we fail to comply with our obligations to
register the Debentures and the shares of our
common stock issuable upon conversion of the
Debentures within the specified time periods.
Transfer Restrictions......... All of the Debentures sold in this offering and
the shares of common stock issued upon their
conversion will be tradable without restriction
or further registration under the Securities
Act of 1933 unless these securities are
purchased by our affiliates.
Absence of a Public Market.... We do not intend to list the Debentures on any
national securities exchange. The Debentures
are new securities for which there is currently
no public market. We cannot assure you that any
active or liquid market will develop for the
Debentures.
New York Stock Exchange Symbol
for our Common Stock.......... Our common stock is listed on the New York
Stock Exchange under the symbol "PRA".
Certain U.S. Federal Income
Tax Consequences.............. We and each holder and beneficial owner of a
Debenture agree in the indenture to treat the
Debentures as contingent payment debt
instruments for U.S. federal income tax
purposes. By purchasing the Debentures, you
will agree in the indenture to accrue original
issue discount on a constant yield to maturity
basis at a rate comparable to the rate at which
we would borrow in a non-contingent,
non-convertible borrowing, which we have
determined to be 8.75%, compounded
semi-annually, even though the Debentures will
have a lower stated yield to maturity. A U.S.
holder will recognize taxable income in each
year significantly in excess of interest
payments (whether fixed or contingent) actually
received in that year. Additionally, a U.S.
holder will generally be required to recognize
ordinary income on the gain, if any, realized
on a sale, exchange, conversion, redemption or
repurchase of the Debentures. In computing such
10
gain, the amount realized by a U.S. holder will
include, in the case of a conversion, the
amount of cash and the fair market value of the
shares received. The application of the
contingent payment debt rules is uncertain, and
no ruling will be sought from the Internal
Revenue Service concerning the application of
these rules to the Debentures. You should
consult your own tax advisor concerning the tax
consequences of owning the Debentures and our
common stock issuable upon conversion of the
Debentures. See "Certain U.S. Federal Income
Tax Consequences."
Indenture and Trustee......... The Debentures were issued under an Indenture
dated as of July 7, 2003 between us and
SouthTrust Bank.
11
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The table shown below presents our selected financial data for the five
years ended December 31, 2003. We derived the GAAP statement of operations data
and balance sheet data relating to each of the years 1999 through 2003 from our
audited consolidated financial statements.
The statutory combined financial information is derived from the financial
statements included in the combined annual statements of Medical Assurance
Company and ProNational and their affiliated property and casualty insurers
filed with the Insurance Departments of the States of Alabama and Michigan for
the years ended December 31, 2003, 2002 and 2001, and from the combined annual
statements of Medical Assurance Company (formerly Mutual Assurance, Inc.) and
its affiliated property and casualty insurers filed with the Insurance
Department of the State of Alabama for the years ended December 31, 2000 and
1999. The statutory combined financial statements are prepared in accordance
with statutory accounting principles (SAP) rather than generally accepted
accounting principles (GAAP). The statutory financial information and ratios are
based on the amounts set forth in the referenced annual statements without any
adjustments or eliminations. Such amounts and ratios are not "Non-GAAP Financial
Measures" because they are financial measures required to be disclosed by a
system of regulation of a government or governmental authority that is
applicable to our insurance subsidiaries.
SAP differs from GAAP insofar as SAP focuses on an insurer's ability to pay
claims in the future, whereas GAAP stresses the measurement of a business'
emerging earnings from period to period. As a result, SAP financial analysis
tends to focus on the balance sheet, whereas GAAP financial analysis tends to
focus on income statement. The most significant specific differences between SAP
and GAAP relate the calculation of acquisition costs, the valuation of bonds and
redeemable preferred stocks, the concept of admitted and non-admitted assets,
the calculation of income taxes, goodwill and surplus and accounting treatment
for reinsurance from reinsurers that are not authorized to do business in the
state of domicile of the ceding company.
The financial data as of September 30, 2004 and 2003 and for the nine month
periods ended September 30, 2004 and 2003 are derived from our unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which we consider necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the nine
month period ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2004.
The selected financial data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and accompanying notes for
the year ended December 31, 2003 and for the nine month period ended September
30, 2004, all of which are incorporated by reference in this prospectus. Our
results for the period from January 1, 1999 through June 27, 2001 reflect the
historical results of Medical Assurance prior to the consolidation with
Professionals Group. Our results for the year ended December 31, 2001 include
the operations of Professionals Group from June 27, 2001, the date of
consolidation.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
2003 2002 2001 2000 1999 2004 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
GAAP STATEMENT OF INCOME
DATA:
Gross premiums
written.............. $ 740,110 $ 636,156 $ 388,983 $ 223,871 $ 201,593 $ 600,295 $ 557,216
Net premiums written... 668,909 537,123 310,291 194,279 156,923 538,085 497,834
Net premiums earned.... $ 623,514 $ 477,408 $ 313,345 $ 177,596 $ 164,424 $ 509,086 $ 451,310
Net investment
income............... 73,619 76,918 59,782 41,450 39,273 63,192 53,393
Net realized investment
gains (losses)....... 5,992 (5,306) 5,441 913 1,787 7,346 4,149
Other income........... 6,515 6,747 3,987 2,630 2,545 3,069 4,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues..... 709,640 555,767 382,555 222,589 208,029 582,693 513,424
---------- ---------- ---------- ---------- ---------- ---------- ----------
12
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
2003 2002 2001 2000 1999 2004 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net losses and loss
adjustment
expenses............. 551,376 448,029 298,558 155,710 104,657 422,980 402,131
Underwriting,
acquisition, and
insurance expenses... 104,216 91,253 70,437 38,579 40,212 87,695 77,094
Loss on early
extinguishment of
debt................... 305 2,875 2,591 -- -- -- 305
Interest expense....... 3,409 4,537 2,257
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses..... 659,306 542,157 371,586 194,289 144,869 515,212 481,787
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes, minority
interest and
cumulative effect.... 50,334 13,610 10,969 28,300 63,160 67,481 31,637
Provision for income
taxes................ 11,450 (188) (2,847) 4,000 16,460 16,179 6,580
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest and
cumulative effect.... 38,884 13,798 13,816 24,300 46,700 51,302 25,057
Minority interest...... (181) 3,285 1,366 -- -- 181
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
cumulative effect of
account change....... $ 38,703 $ 10,513 $ 12,450 $ 24,300 $ 46,700 $ 51,302 $ 24,876
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income(1).......... $ 38,703 $ 12,207 $ 12,450 $ 24,300 $ 46,700 $ 51,302 $ 24,876
========== ========== ========== ========== ========== ========== ==========
Income per share before
cumulative effect of
accounting
change(1)(2)
Basic................ $ 1.34 $ 0.40 $ 0.51 $ 1.04 $ 1.95 $ 1.76 $ 0.86
Diluted.............. 1.33 0.39 0.51 1.04 1.95 1.75 0.85
Net income per
share(1)(2)
Basic................ $ 1.34 $ 0.47 $ 0.51 $ 1.04 $ 1.95 $ 1.76 $ 0.86
Diluted.............. 1.33 0.46 0.51 1.04 1.95 1.75 0.85
Weighted average number
of shares
outstanding:(2)
Basic.................. 28,956 26,231 24,263 23,291 23,992 29,153 28,935
Diluted................ 29,144 26,254 24,267 23,291 24,008 29,395 29,108
GAAP BALANCE SHEET DATA:
Total cash and
investments.......... $2,102,804 $1,822,803 $1,574,442 $ 805,076 $ 781,327 $2,406,434 $2,061,349
Total assets........... 2,879,352 2,586,650 2,238,325 1,122,836 1,117,668 3,217,171 2,897,255
Reserve for losses and
loss adjustment
expenses............. 1,814,584 1,622,468 1,442,341 659,659 665,792 2,007,116 1,823,868
Unearned premiums...... 290,134 248,371 188,630 78,495 70,925 320,936 291,389
Debt................... 104,789 72,500 82,500 -- -- 151,406 104,715
Stockholders' equity... 546,305 505,194 413,231 345,167 325,724 593,725 537,667
Total cash and
investments per
share(2)............. $ 72.24 $ 63.12 $ 60.86 $ 35.49 $ 33.39 $ 82.45 $ 71.16
Stockholders' equity
per share(2)......... $ 18.77 $ 17.49 $ 16.02 $ 15.22 $ 13.92 $ 20.34 $ 18.56
13
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
2003 2002 2001 2000 1999 2004 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Common stock
outstanding.......... 29,105 28,877 25,789 22,682 23,401 29,188 28,969
SELECTED GAAP FINANCIAL
RATIOS:
Net loss and loss
adjustment expense
ratio................ 88.4% 93.9% 95.3% 87.7% 63.7% 83.1% 89.1%
Underwriting expense
ratio................ 16.7 19.1 22.5 21.7 24.5 17.2% 17.1%
---------- ---------- ---------- ---------- ---------- ---------- ----------
Combined Ratio....... 105.1% 113.0% 117.8% 109.4% 88.2% 100.3% 106.2%
========== ========== ========== ========== ========== ========== ==========
SELECTED STATUTORY
COMBINED DATA(3):
Losses and loss
expenses incurred to
premiums earned...... 88.5% 94.2% 102.0% 87.4% 63.0%
Other underwriting
expenses to net
premiums written..... 15.9 17.7 22.2 22.3 24.0
---------- ---------- ---------- ---------- ----------
Combined ratio....... 104.4% 111.9% 124.2% 109.7% 87.0%
========== ========== ========== ========== ==========
Statutory Surplus...... $ 437,147 $ 400,288 $ 359,016 $ 216,812 $ 260,885
Ratio of cash and
invested assets to
statutory surplus.... 4.40x 4.25x 4.27x 3.42x 3.02x
Ratio of net premiums
written to statutory
surplus.............. 1.53x 1.34x 1.24x 0.89x 0.62x
---------------
(1) Net income for the year ended December 31, 2002 was increased by $1.7
million due to the adoption of SFAS 141 and 142. In accordance with SFAS
142, we wrote off the unamortized balance of deferred credits that related
to business combinations completed prior to July 1, 2001.
(2) The board of directors declared a 5% special stock dividend in December
1999. All net income per share and total capital per share data on this page
has been restated as if the dividends had been declared on January 1, 1999.
Additionally, our treasury stock is excluded from the date of acquisition
for purposes of determining the weighted average number of shares of common
stock outstanding used in the computation of net income per share of our
common stock.
(3) Combined statutory financial information is unavailable for the nine month
periods ended September 30, 2004 and 2003 because combined statutory
financial statements are prepared and published only on an annual basis.
14
RISK FACTORS
You should carefully consider the risks described below as well as the
other information contained in this prospectus, before investing in the
Debentures. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations. If
any of these risks actually occur, our business, financial condition and results
of operations could be materially adversely affected. In that case, the value of
the Debentures and our common stock could decline substantially.
RISKS RELATING TO THE DEBENTURES AND THE COMMON STOCK
THE DEBENTURES ARE EFFECTIVELY SUBORDINATED TO ALL LIABILITIES OF OUR
SUBSIDIARIES.
We operate through our subsidiaries and, as a result, the Debentures will
effectively be subordinated to the liabilities of our subsidiaries. Because we
operate through our subsidiaries and our primary assets are our equity interests
in those subsidiaries, our obligations, including the Debentures, are
effectively subordinated to all existing and future indebtedness and other
liabilities, including insurance policy-related liabilities, of our
subsidiaries. At September 30, 2004, our subsidiaries had no outstanding
indebtedness (excluding intercompany indebtedness) but have other liabilities
(including insurance policy-related liabilities) totaling approximately $2.47
billion. At the date of this filing, our subsidiaries had no indebtedness, but
may incur indebtedness in the future. The Debentures are exclusively obligations
of ProAssurance Corporation. Our subsidiaries have no obligation to pay any
amounts due on the Debentures. Our subsidiaries are not required to provide us
with funds for our payment obligations, whether by dividends, distributions,
loans or other payments. In addition, any payment of dividends, distributions,
loans or advances by our subsidiaries to us is subject to statutory or
contractual restrictions. Payments to us by our subsidiaries will also be
contingent upon our subsidiaries' earnings and business considerations. The
Debentures are unsecured.
We and our subsidiaries may incur additional indebtedness that may
adversely affect our ability to meet our financial obligations under the
Debentures. The terms of the indenture and the Debentures do not limit the
incurrence by us or our subsidiaries of indebtedness. See "Description of the
Debentures." We and our subsidiaries may incur additional indebtedness in the
future, which could have important consequences to holders of the Debentures.
For example, we may have insufficient cash to meet our financial obligations,
including our obligations under the Debentures. Furthermore, our ability to
obtain additional financing for working capital, capital expenditures or general
corporate purposes could be impaired. A significant amount of debt could make us
more vulnerable to changes in general economic conditions and also could effect
the financial strength rating of our insurance subsidiaries.
WE MAY BE UNABLE TO REPAY OR REPURCHASE THE DEBENTURES IN CASH IF OUR
SUBSIDIARIES ARE UNABLE TO PAY DIVIDENDS OR MAKE ADVANCES TO US OR IF
AGREEMENTS WE ENTER INTO IN THE FUTURE RESTRICT THESE PREPAYMENTS OR
REPURCHASES.
At maturity, the entire outstanding principal amount of the Debentures will
become due and payable by us on June 30, 2023. In addition, each holder of the
Debentures may require us to repurchase all or a portion of that holder's
Debentures on June 30, 2008, June 30, 2013, June 30, 2018 or upon our "change of
control" (as described in this prospectus under the caption "Description of the
Debentures -- Repurchase of Debentures at the Option of Holders"). Under the
terms of the indenture, we may elect, if we meet certain conditions, to pay all
or part of the repurchase price due on those dates or on a change in control in
shares of our common stock.
At maturity or upon a repurchase request, we may not have sufficient funds
to pay the principal amount or the repurchase price due. If we do not have
sufficient funds on hand or available through existing borrowing facilities or
through the declaration and payment of dividends by our subsidiaries and, in the
case of a repurchase, if we are unable to pay the repurchase price in shares of
our common stock, we will need to seek additional financing. Additional
financing may not be available to us in the amounts
15
necessary. We, as a holding company, are dependent upon dividends from our
subsidiaries to enable us to service our outstanding debt, including the
Debentures.
We have paid all of our outstanding indebtedness under our current credit
facility with a portion of the proceeds we received from the initial sale of the
Debentures to the initial purchasers. However, in the future we may renew or
replace this credit facility with a new bank facility. Any future borrowing,
arrangements or agreements, to which we become a party may contain restrictions
on our repayment or repurchase of the Debentures under certain conditions. Such
restrictions may limit our ability to call the Debentures prior to maturity.
OUR STOCK PRICE, AND THEREFORE THE PRICE OF THE DEBENTURES, MAY BE SUBJECT TO
SIGNIFICANT FLUCTUATIONS AND VOLATILITY.
Fluctuations in the market price of our common stock could cause
fluctuations in the price of the Debentures. Among the factors that could affect
our common stock price are those discussed above and beginning on page 18 of
this prospectus under "Risk Factors -- Risks Related to Our Business" as well
as:
- interest rate volatility;
- actual or anticipated quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
- speculation in the press or investment community;
- strategic actions by us or our competitors, including the introduction of
new innovations, new services or products or significant price
reductions;
- general market conditions; and
- domestic and international economic factors unrelated to our performance,
such as the occurrence of catastrophic events.
The financial markets have experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock
and of the Debentures.
YOU SHOULD CONSIDER THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF OWNING THE
DEBENTURES AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE DEBENTURES.
We and each holder and beneficial owner of a Debenture agree in the
indenture to treat the Debentures as contingent payment debt instruments for
U.S. federal income tax purposes. The following discussion assumes that the
Debentures will be so treated even though we cannot assure you that the Internal
Revenue Service will not assert that the Debentures should be treated
differently. Under the contingent payment debt regulations, a holder or
beneficial owner of a Debenture will be required to accrue income, as original
issue discount, in advance of cash it receives on a Debenture, on a constant
yield to maturity basis, at a rate comparable to the rate at which we would
borrow in a non-contingent, non-convertible borrowing, which we determine to be
8.75% compounded semi-annually, even though the Debentures will have a
significantly lower stated yield to maturity. A U.S. holder will recognize
taxable income in each year significantly in excess of interest payments
(whether fixed or contingent) actually received in that year while the
Debentures are outstanding. Additionally, a U.S. holder will generally be
required to recognize ordinary income on the gain, if any, realized on a sale,
exchange, conversion, redemption or repurchase of the Debentures. In computing
such gain, the amount realized by a U.S. holder will include, in the case of a
conversion, the amount of cash and the fair market value of the common stock
received. A U.S. holder may be deemed to have received a distribution subject to
U.S. federal income tax if we make a taxable distribution to holders of common
stock that results in an adjustment to the conversion rate. A U.S. holder would
be subject to U.S. federal income tax on such a deemed distribution even though
a U.S. holder would not receive any cash or property as a result of the
16
adjustment to the conversion rate. Holders and beneficial owners of the
Debentures are urged to consult their own tax advisors concerning the tax
consequences of owning the Debentures and our common stock issuable upon
conversion of the Debentures. For more information, see "Certain U.S. Federal
Income Tax Consequences."
A DOWNGRADE, SUSPENSION OR WITHDRAWAL OF THE RATING ASSIGNED BY A RATING
AGENCY TO THE DEBENTURES, IF ANY, WOULD CAUSE THE LIQUIDITY OR MARKET VALUE OF
THE DEBENTURES TO DECLINE SIGNIFICANTLY.
The Debentures were rated BBB- by Standard & Poor's at the time of their
issuance. There can be no assurance that this rating will remain for any given
period of time or that this rating will not be lowered or withdrawn entirely if
in Standard & Poor's judgment future circumstances relating to the basis of the
rating, such as adverse changes in our company, so warrant.
THERE MAY BE NO PUBLIC MARKET FOR THE DEBENTURES.
We do not intend to apply for listing of the Debentures on any securities
exchange or any automated quotation system. We cannot be sure that any market
for the Debentures will develop, or if one does develop, that it will be
maintained. If an active market for the Debentures fails to develop or be
sustained, the trading price and liquidity of the Debentures could be adversely
affected. We have made only limited covenants in the indenture, which may not
protect your investment if we experience significant adverse changes in our
financial condition or results of operations.
THE INDENTURE GOVERNING THE DEBENTURES DOES NOT:
- require us to maintain any financial ratios or specified levels of net
worth, revenues, income, cash flow or liquidity, and therefore, does not
protect holders of the Debentures in the event that we experience
significant adverse changes in our financial condition or results of
operations;
- limit our ability or the ability of any of our subsidiaries to incur
additional indebtedness that is senior to or equal in right of payment to
the Debentures;
- restrict our ability or that of our subsidiaries to issue securities that
would be senior to the common stock of such subsidiary held by us;
- restrict our ability to pledge our assets or those of our subsidiaries;
or
- restrict our ability to contribute our assets to our insurance
subsidiaries.
Therefore, you should consider the absence of these provisions in
evaluating whether we will be able to comply with our obligations under the
Debentures.
WE MAY NOT HAVE THE ABILITY TO REPURCHASE THE DEBENTURES IN CASH IF A HOLDER
EXERCISES ITS REPURCHASE RIGHT ON THE DATES SPECIFIED HEREIN OR UPON THE
OCCURRENCE OF A CHANGE OF CONTROL.
Holders of the Debentures have the right to require us to repurchase the
Debentures on specified dates or upon the occurrence of a change of control
prior to maturity as described under the heading "Description of the
Debentures -- Repurchase of Debentures at the Option of Holders." We may not
have sufficient funds to make the required repurchase in cash at such time or
the ability to arrange necessary financing on acceptable terms. In addition, our
ability to repurchase the Debentures in cash may be limited by law or the terms
of other agreements relating to our indebtedness outstanding at the time. We
have the ability under the terms of the Debentures to pay the repurchase price
in shares of our common stock, regardless of whether we have cash available.
THE CONDITIONAL CONVERSION FEATURE OF THE DEBENTURES COULD RESULT IN YOU
RECEIVING LESS THAN THE VALUE OF THE COMMON STOCK INTO WHICH A DEBENTURE IS
CONVERTIBLE.
The Debentures are convertible into shares of our common stock only if
specified conditions are met. If the specific conditions for conversion are not
met, you will not be able to convert your Debentures, and
17
you may not be able to receive the value of the common stock into which the
Debentures would otherwise be convertible.
RISKS RELATING TO OUR BUSINESS
OUR RESULTS MAY BE AFFECTED IF ACTUAL INSURED LOSSES DIFFER FROM OUR LOSS
RESERVES.
Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to us and our payment of that loss. To
recognize liabilities for unpaid losses, we establish reserves as balance sheet
liabilities representing estimates of amounts needed to pay reported and
unreported losses and the related loss adjustment expense. The process of
estimating loss reserves is a difficult and complex exercise involving many
variables and subjective judgments. As part of the reserving process, we review
historical data and consider the impact of various factors such as:
- trends in claim frequency and severity;
- changes in operations;
- emerging economic and social trends;
- inflation; and
- changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate, but not
necessarily accurate, basis for predicting future events. There is no precise
method for evaluating the impact of any specific factor on the adequacy of
reserves, and actual results are likely to differ from original estimates.
The loss reserves of our insurance subsidiaries also may be affected by
court decisions that expand liability on our policies after they have been
issued and priced. In addition, a significant jury award, or series of awards,
against one or more of our insureds could require us to pay large sums of money
in excess of our reserved amounts. Our policy to aggressively litigate claims
against our insureds may increase the risk that we may be required to make such
payments.
To the extent loss reserves prove to be inadequate in the future, we would
need to increase our loss reserves and incur a charge to earnings in the period
the reserves are increased, which could have a material adverse impact on our
financial condition and results of operation.
IF WE ARE UNABLE TO MAINTAIN A FAVORABLE FINANCIAL STRENGTH RATING, IT MAY BE
MORE DIFFICULT FOR US TO WRITE NEW BUSINESS OR RENEW OUR EXISTING BUSINESS.
Third party rating agencies assess and rate the claims-paying ability of
insurers based upon criteria established by the agencies. Periodically, the
rating agencies evaluate us to confirm that we continue to meet the criteria of
the ratings previously assigned to us. The financial strength ratings assigned
by rating agencies to insurance companies represent independent opinions of
financial strength and ability to meet policyholder obligations and are not
directed toward the protection of investors. Ratings by rating agencies are not
ratings of securities or recommendations to buy, hold or sell any security and
are not applicable to the securities being offered by this prospectus.
A.M. Best assigns a rating of "A-" (Excellent) to ProAssurance and its
principal subsidiaries, Standard & Poor's assigns the Company's principal
professional liability carriers a rating of "A-" (Strong) with a stable outlook.
Fitch assigns a rating of "A-" to subsidiaries The Medical Assurance Company,
ProNational Insurance Company and MEEMIC Insurance Company. Financial strength
ratings are used by agents and customers as an important means of assessing the
financial strength and quality of insurers. If our financial position
deteriorates, we may not maintain our favorable financial strength ratings from
the rating agencies. A downgrade or withdrawal of any such rating could severely
limit or prevent us from writing desirable business.
18
WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT.
The property and casualty insurance business is highly competitive. We
compete with large national property and casualty insurance companies as well as
specialty insurers and self-insurance entities whose activities are limited to
regional and local markets. Our competitors include companies with substantially
greater financial resources than we have as well as companies that may have
lower return on equity objectives than we have, particularly competitors that
are mutual and not owned by stockholders.
Competition in the property and casualty insurance business is based on
many factors, including premiums charged and other terms and conditions of
coverage, services provided, financial ratings assigned by independent rating
agencies, claims services, reputation, perceived financial strength and the
experience of the insurance company in the line of insurance to be written.
Increased competition could cause us to charge lower premium rates, adversely
affect our ability to attract and retain business and reduce the profits that
would otherwise arise from operations.
OUR REVENUES MAY FLUCTUATE WITH INSURANCE BUSINESS CYCLES.
The supply of property and casualty insurance and reinsurance, or the
industry's underwriting capacity, is determined principally by the industry's
level of capitalization, historical underwriting results, returns on investment
and perceived premium rate adequacy. Historically, the financial performance of
the property and casualty insurance industry has tended to fluctuate in cyclical
patterns characterized by periods of greater competition in pricing and
underwriting terms and conditions (a soft insurance market) followed by periods
of capital shortage and lesser competition (a hard insurance market). In a soft
insurance market, competitive conditions could result in premium rates and
underwriting terms and conditions which may have an adverse effect on our
operating profitability.
We derive a significant portion of our insurance premium revenue from
medical malpractice risks. For several years, the medical malpractice insurance
industry has faced a soft insurance market that has generally resulted in lower
premiums. More recently, loss costs have begun to rise beyond normal
inflationary levels. We are endeavoring to compete in this market through
premium rate increases and more selective underwriting practices, but these
practices may not be successful. Moreover, we cannot predict whether, when or
how market conditions will change, or the manner in which, or the extent to
which any such changes may adversely impact our results and operations.
OUR REVENUES MAY FLUCTUATE WITH INTEREST RATES AND INVESTMENT RESULTS.
We generally rely on the positive performance of our investment portfolio
to offset insurance losses and to contribute to our profitability. As our
investment portfolio is primarily comprised of interest-earning assets,
prevailing economic conditions, particularly changes in market interest rates,
may significantly affect our operating results. Changes in interest rates also
can affect the value of our interest-earning assets, which are principally
comprised of fixed and adjustable-rate investment securities. Generally, the
value of fixed-rate investment securities fluctuate inversely with changes in
interest rates. Interest rate fluctuations could adversely affect our GAAP
stockholders' equity, total comprehensive income and/or our cash flows. Our
total investments at September 30, 2004 were $2.38 billion, of which $2.12
billion was invested in fixed maturities.
Our investment portfolio is subject to prepayment risk primarily due to our
investments in mortgage-backed and other asset-backed securities. An investment
has prepayment risk when there is a risk that the timing of cash flows that
result from the repayment of principal might occur earlier than anticipated
because of declining interest rates or later than anticipated because of rising
interest rates. We are subject to reinvestment risk to the extent that we are
not able to reinvest prepayments at rates comparable to the rates on the
maturing investments.
At September 30, 2004 we held equity investments having a fair value of
$34.3 million in an available-for-sale portfolio and held additional equity
securities having a fair value of $1.3 million in a trading portfolio. The fair
value of these securities fluctuates depending upon company specific and general
19
market conditions. Any decline in the fair value of available-for-sale
securities that we determine to be other-than-temporary will reduce our net
income. Any changes in the fair values of trading securities, whether gains or
losses, will be included in net income in the period changed.
CHANGES IN HEALTHCARE COULD HAVE A MATERIAL IMPACT ON OUR OPERATIONS.
We derive substantially all of our medical professional liability insurance
premiums from physicians and other individual healthcare providers, physician
groups and smaller healthcare facilities. Significant attention has recently
been focused on reforming the healthcare industry at both the federal and state
levels. A broad range of healthcare reform measures have been suggested, and
public discussion of such measures will likely continue in the future. Proposals
have included, among others, spending limits, price controls, limiting increases
in insurance premiums, limiting the liability of doctors and hospitals for tort
claims, imposing liability on institutions rather than physicians and
restructuring the healthcare insurance system. We cannot predict which, if any,
reform proposals will be adopted, when they may be adopted or what impact they
may have on us. The adoption of certain of these proposals could materially
adversely affect our financial condition or results of operations.
In addition to regulatory and legislative efforts, there have been
significant market driven changes in the healthcare environment. In recent
years, a number of factors related to the emergence of managed care have
negatively impacted or threatened to impact the medical practice and economic
independence of medical professionals. Medical professionals have found it more
difficult to conduct a traditional fee-for-service practice and many have been
driven to join or contractually affiliate with provider-supported organizations.
Such change and consolidation may result in the elimination of, or a significant
decrease in, the role of the physician in the medical malpractice insurance
purchasing decision. It could also result in greater emphasis on the role of
professional managers, who may seek to purchase insurance on a price competitive
basis, and who may favor insurance companies that are larger and more highly
rated than we are. In addition, such changes and consolidations could reduce the
amount of our medical professional liability premiums since group purchases are
more likely than individual purchases to retain a portion of their risk through
the use of deductibles, self-insured retentions, captive insurance entities or
other self-insurance mechanisms.
The movement from traditional fee-for-service practice to the managed care
environment may also result in an increase in the liability profile of our
insureds. The majority of our insured physicians practice in primary care
specialties such as internal medicine, family practice, general practice and
pediatrics. In the managed care environment, these primary care physicians are
being required to take on the role of "gatekeeper" and restrain the use of
specialty care by controlling access to specialists and by performing certain
procedures that would customarily be performed by specialists in a
fee-for-service setting. These practice changes are resulting in an increase in
the claims frequency and severity experienced by primary care physicians and by
us as their insurance carrier.
WE ARE A HOLDING COMPANY AND ARE DEPENDENT ON DIVIDENDS AND OTHER PAYMENTS
FROM OUR OPERATING SUBSIDIARIES, WHICH ARE SUBJECT TO DIVIDEND RESTRICTIONS.
We are a holding company whose principal source of funds is cash dividends
and other permitted payments from our operating subsidiaries, principally The
Medical Assurance Company and ProNational. If our subsidiaries are unable to
make payments to us, or are able to pay only limited amounts, we may be unable
to pay dividends or make payments on our indebtedness, including our
indebtedness under the Debentures. The payment of dividends by these operating
subsidiaries is subject to restrictions set forth in the insurance laws and
regulations of Alabama and Michigan, their respective states of domicile.
REGULATORY CHANGES COULD HAVE A MATERIAL IMPACT ON OUR OPERATIONS.
Our insurance businesses are subject to extensive regulation by state
insurance authorities in each state in which we operate. Regulation is intended
for the benefit of policyholders rather than stockholders.
20
In addition to the amount of dividends and other payments that can be made by
our insurance subsidiaries, these regulatory authorities have broad
administrative and supervisory power relating to:
- licensing requirements;
- trade practices;
- capital and surplus requirements;
- investment practices; and
- rates charged to insurance customers.
These regulations may impede or impose burdensome conditions on rate
increases or other actions that we may want to take to enhance our operating
results, and could affect the ability of our subsidiaries to pay dividends. In
addition, we may incur significant costs in the course of complying with
regulatory requirements. Most states also regulate insurance holding companies
like us in a variety of matters such as acquisitions, changes of control and the
terms of affiliated transactions. Future legislative or regulatory changes may
adversely affect our business operations.
THE UNPREDICTABILITY OF COURT DECISIONS COULD HAVE A MATERIAL IMPACT ON OUR
OPERATIONS.
The financial position of our insurance subsidiaries may also be affected
by court decisions that expand insurance coverage beyond the intention of the
insurer at the time it originally issued an insurance policy. In addition, a
significant jury award, or series of awards, against one or more of our insureds
could require us to pay large sums of money in excess of our reserve amount.
THE POSSIBLE PASSAGE OF TORT REFORM, AND THE SUBSEQUENT REVIEW OF SUCH LAWS BY
THE COURTS COULD HAVE A MATERIAL IMPACT ON OUR OPERATIONS.
Tort reforms generally restrict the ability of a plaintiff to recover
damages by, among other limitations, eliminating certain claims that may be
heard in a court, limiting the amount or types of damages, changing statutes of
limitation or the period of time to make a claim, and limiting venue or court
selection. A number of states in which we do business have enacted, or are
considering, tort reform legislation. Federal tort reform legislation has been
proposed by President Bush, and passed several times by the House of
Representatives. However, the Senate has either voted down or refused to
consider federal tort reform proposals.
While the effects of tort reform would appear to be beneficial to our
business generally, there can be no assurance that such reforms will be
effective or ultimately upheld by the courts in the various states. Further, if
tort reforms are effective, the business of providing professional and other
liability insurance may become more attractive, thereby causing an increase in
competition for our business. In addition, there can be no assurance that the
benefits of tort reform will not be accompanied by regulatory actions by state
insurance authorities that may be detrimental to our business such as expanded
coverage requirements and premium rate limitations and rollbacks.
OUR GEOGRAPHIC CONCENTRATION TIES OUR PERFORMANCE TO THE ECONOMIC, REGULATORY
AND DEMOGRAPHIC CONDITIONS OF THE MIDWESTERN AND SOUTHERN STATES.
Our revenues and profitability are subject to prevailing economic,
regulatory, demographic and other conditions in the states in which we write
insurance. We write our professional liability insurance primarily in states
located in the midwestern and southern United States, with approximately 74% of
gross premiums written in five states, Alabama, Ohio, Florida, Missouri and
Michigan in 2003, and we write our personal lines insurance only in Michigan.
Because our business is concentrated in a limited number of markets, adverse
developments that are limited to a geographic area in which we do business may
have a disproportionately greater affect on us than they would have if we did
business in markets outside that particular geographic area.
21
Our personal lines of property and casualty insurance business provide
coverage for personal auto, homeowners, boat and umbrella insurance for
residents of Michigan. Property and casualty insurance companies frequently
experience losses from both man-made and natural catastrophes. Catastrophes may
have a material adverse effect on our operations. Catastrophes include
windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather,
fires and may include terrorist and other unforeseen events. The extent of
losses from catastrophes is a function of the total amount of losses incurred,
the number of insureds affected, the frequency of the events, the severity of
the particular catastrophe and the amount of available reinsurance. Most
catastrophes occur in small geographic areas. The concentration of our personal
lines business in Michigan leaves us vulnerable to catastrophes and severe
weather specific to that state.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE LOSS OF INDEPENDENT AGENTS.
We depend in part on the services of independent agents and brokers in the
marketing of our insurance products. We face competition from other insurance
companies for the services and allegiance of independent agents and brokers.
These agents and brokers may choose to direct business to competing insurance
companies or may direct less desirable risks to us.
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. Market conditions beyond our control determine the
availability and cost of the reinsurance we purchase, which may affect the level
of our business and profitability. We may be unable to maintain our current
reinsurance coverage or to obtain other reinsurance coverage in adequate amounts
and at favorable rates. If we are unable to renew our expiring coverage or to
obtain new reinsurance coverage, either our net exposure to risk would increase
or, if we are unwilling to bear an increase in net risk exposures, we would have
to reduce the amount of risk we underwrite.
WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT
ALL, AND, AS A RESULT, WE COULD EXPERIENCE LOSSES.
We transfer some of the risk we have assumed to reinsurance companies 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, it does not relieve us of our liability to our policyholders. If
our reinsurers fail to pay us or fail to pay us on a timely basis, our financial
results would be adversely affected. At December 31, 2003, we had reinsurance
recoverables on paid and unpaid losses and loss adjustment expenses of
approximately $444.8 million. Of that amount, a total of approximately $294
million was due from ten reinsurers. We do not believe that we have any
reinsurance recoverables that are uncollectible. Should future events lead us to
believe that any reinsurer is unable to meet its obligations to us, adjustments
to the amounts recoverable would be reflected in the results of then current
operations.
THE GUARANTY FUND ASSESSMENTS THAT WE ARE REQUIRED TO PAY TO STATE GUARANTEE
ASSOCIATIONS MAY INCREASE AND OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION COULD SUFFER AS A RESULT.
Each state in which we operate has separate insurance guaranty fund laws
requiring property and casualty insurance companies doing business within their
respective jurisdictions to be members of their guaranty associations. These
associations are organized to pay covered claims (as defined and limited by the
various guaranty association statutes) under insurance policies issued by
insolvent insurance companies. Most guaranty association laws enable the
associations to make assessments against member insurers to obtain funds to pay
covered claims after a member insurer becomes insolvent. These associations levy
assessments (up to prescribed limits) on all member insurers in a particular
state on the basis of the proportionate share of the premiums written by member
insurers in the covered lines of business in that state. Maximum assessments
permitted by law in any one year generally vary between 1% and 2% of
22
annual premiums written by a member in that state. Some states permit member
insurers to recover assessments paid through surcharges on policyholders or
through full or partial premium tax offsets, while other states permit recovery
of assessments through the rate filing process.
Property and casualty guaranty fund assessments incurred by us totaled
$320,000 and $2.2 million for 2003 and 2002, respectively. Our policy is to
accrue the insurance insolvencies when notified of assessments. We are not able
to reasonably estimate the insolvent insurer's liabilities or develop a
meaningful range of the insolvent insurer's liabilities because of inadequate
financial data with respect to the estate of the insolvent company as supplied
by the guaranty funds.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE LOSS OF ONE OR MORE EMPLOYEES.
We are heavily dependent upon our senior management and the loss of
services of our senior executives could adversely affect our business. Our
success has been, and will continue to be, dependent on our ability to retain
the services of our existing key employees and to attract and retain additional
qualified personnel in the future. The loss of the services of any of our senior
management or any other key employee, or the inability to identify, hire and
retain other highly qualified personnel in the future, could adversely affect
the quality and profitability of our business operations.
Our board of directors is in the process of considering succession planning
relating to our Chief Executive Officer. Dr. Crowe, our current Chairman and
Chief Executive Officer, has indicated to us that he is committed to remaining
with ProAssurance for three to five years.
PROVISIONS IN OUR CHARTER DOCUMENTS, DELAWARE LAW AND STATE INSURANCE LAW MAY
IMPEDE ATTEMPTS TO REPLACE OR REMOVE OUR MANAGEMENT OR IMPEDE A TAKEOVER,
WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK.
Our certificate of incorporation and by-laws and Delaware law contain
provisions that may have the effect of inhibiting a non-negotiated merger or
other business combination. Additionally, the board of directors may issue
preferred stock, which could be used as an anti-takeover device, without a
further vote of our stockholders. No shares of our preferred stock are currently
outstanding, and we have no present intention to issue any shares of preferred
stock. However, because the rights and preferences of any series of preferred
stock may be set by our board of directors in its sole discretion, the rights
and preferences of any such preferred stock may be superior to those of our
common stock and thus may adversely affect the rights of the holders of our
common stock.
The voting structure of our common stock and other provisions of the
certificate of incorporation are intended to encourage a person interested in
acquiring us to negotiate with, and to obtain the approval of, our board of
directors in connection with a transaction. However, certain of these provisions
may discourage our future acquisition, including an acquisition in which
stockholders might otherwise receive a premium for their shares. As a result,
stockholders who might desire to participate in such a transaction may not have
the opportunity to do so.
In addition, state insurance laws provide that no person or entity may
directly or indirectly acquire control of an insurance company unless that
person or entity has received approval from the insurance regulator. An
acquisition of control of our insurance operating subsidiaries generally would
be presumed if any person or entity acquires 10% (5% in Alabama) or more of our
outstanding common stock, unless the applicable insurance regulator determines
otherwise. These provisions apply even if the offer may be considered beneficial
by some of our stockholders. If a change in management or a change of control is
delayed or prevented, the market price of our common stock could decline.
IF WE ARE UNABLE TO ACCESS DOCUMENTS STORED ON OUR COMPUTER SYSTEMS, OUR
ABILITY TO PROCESS NEW POLICIES, REVISE EXISTING POLICIES AND HANDLE REPORTED
CLAIMS COULD BE IMPEDED.
We use computer-based retention methods to store certain of our information
and documentation relating to coverage, policyholder information and the
processing of claims. Our computer systems enable
23
us to update and review this information efficiently in order to maintain our
records and respond to the needs of our agents and policyholders. Our computer
systems are located in our offices in Okemos and Auburn Hills, Michigan and
Birmingham, Alabama and can be accessed from certain remote sites via telephone
or internet connections. Our ability to access information stored on our
computer systems could be negatively affected by numerous factors, including
disruptions in electric power, telephone service or the computer systems in each
of our main offices. Less than full and immediate access to this information
could prevent us from issuing new policies and maintaining an up to date record
of existing policies, in addition to hindering our ability to respond to claims.
This could damage our reputation for efficiency and could cause us to lose the
business of present and future customers.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for each of the periods indicated is
as follows:
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------
2004 2003 2002 2001 2000 1999
------------- ---- ---- ------ ------ ------
Earnings to fixed charges........ 13.19 11.5 4.17 4.04 100.94 191.19
For purposes of determining this ratio, earnings represent pre-tax income
(loss), which consists of income (loss) before income taxes and minority
interest, plus fixed charges. Fixed charges include interest expense and the
interest portion of rent expense. The ratio for the nine month period ended
September 30, 2004 includes $46 million additional indebtedness evidenced by our
Trust Preferred Subordinated Debentures due 2034 that were issued in April and
May, 2004 in connection with the sale of trust preferred securities issued by
two business trusts in which we own all of the voting securities.
In July, 2003 we used $67.5 million of the net proceeds from the sale of
the Convertible Senior Debentures to repay an existing bank term loan. We have
estimated the earnings to fixed charge ratio on a pro forma basis for the
periods shown below, assuming:
- both the Convertible Senior Debentures and the Trust Preferred
Subordinated Debentures were issued on January 1, 2003
- the existing bank term loan was repaid as of January 1, 2003
- the only effect of the transactions was to increase interest expense.
PRO FORMA RATIO
----------------------------
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Earnings to fixed charges................................... 11.3 6.4
USE OF PROCEEDS
The selling securityholders will receive all of the net proceeds from the
sale of the Debentures or the shares of common stock sold under this prospectus.
We will not receive any of the proceeds from sales by the selling
securityholders of the Debentures or the underlying common stock. We received
approximately $104.6 million from the original sale of the Debentures. We used
approximately $67.5 million of the proceeds we received from the initial sale of
the Debentures to the initial purchasers to repay our outstanding indebtedness
and currently intend to use the balance of such proceeds for general corporate
purposes, which may include contributions to the capital and surplus of our
insurance subsidiaries to support expected growth in our insurance operations.
24
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the New York Stock Exchange under the symbol
"PRA." The following table sets forth the per share high and low closing sale
prices for our common stock as reported on the New York Stock Exchange for the
periods presented. Our stock began trading on the New York Stock Exchange on
June 28, 2001. Prior to that date, the quotations reflect prices for Medical
Assurance (NYSE: MAI) common stock because the New York Stock Exchange treated
the consolidation of Professionals Group with Medical Assurance as a name change
by Medical Assurance.
HIGH LOW
------ ------
2004:
Fourth Quarter(1)......................................... $40.57 $33.48
Third Quarter............................................. 35.20 30.20
Second Quarter............................................ 37.42 32.83
First Quarter............................................. 35.00 30.33
2003:
Fourth Quarter............................................ $32.97 $26.86
Third Quarter............................................. 28.90 24.50
Second Quarter............................................ 30.50 23.40
First Quarter............................................. 23.92 20.69
2002:
Fourth Quarter............................................ $21.11 $15.78
Third Quarter............................................. 18.00 14.20
Second Quarter............................................ 19.70 16.01
First Quarter............................................. 18.22 15.99
2001:
Fourth Quarter............................................ $17.99 $13.49
Third Quarter............................................. 19.13 14.50
Second Quarter............................................ 16.49 12.30
First Quarter............................................. 18.06 12.00
---------------
(1) For the period October 1, 2004 through December 20, 2004. The closing price
of our common stock on December 20, 2004, as reported on the New York Stock
Exchange was $39.79 per share.
As of December 14, 2004, there were 3,551 stockholders of record of our
common stock.
Neither Medical Assurance nor ProAssurance paid any cash dividends on its
common stock in any of the periods reflected in the table.
We do not currently pay dividends on our common stock and do not intend to
pay any dividends in the foreseeable future. We intend to retain earnings to
support the future growth of our business. If our board of directors elects at
some point in the future to pay dividends on our common stock, subject to the
dividend preference of any of our preferred stock that may be outstanding, none
of which is currently outstanding, the holders of our common stock will be
entitled to receive any dividends declared by our board of directors from funds
legally available for the payment of dividends. As a holding company with no
direct operations, our ability to pay dividends is dependent upon, among other
things, the availability of cash dividends and other permitted payments from our
insurance company subsidiaries.
State insurance laws limit the amounts that may be paid to us by our
insurance subsidiaries.
25
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2004.
You should read this table in conjunction with our unaudited condensed
consolidated financial statements and related notes for the nine months ended
September 30, 2004 included herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operation" incorporated by reference in this
prospectus.
AT SEPTEMBER 30, 2004
---------------------
($ IN THOUSANDS,
EXCEPT
PER SHARE DATA
AND RATIOS)
DEBT:
Convertible Senior Debentures(1).......................... $105,011
Trust Preferred Subordinated Debentures................... 46,395
--------
Total debt............................................. 151,406
--------
STOCKHOLDERS' EQUITY:
Preferred stock, 50,000,000 shares authorized and none
issued and outstanding (actual and as adjusted)........ --
Common stock, par value $0.01 per share, 100,000,000
shares authorized; 29,309,594 issued(2)................ 293
Additional paid-in capital................................ 313,793
Accumulated other comprehensive gain (loss), net of
deferred
tax expense of $15,497................................. 28,776
Retained earnings...................................... 250,919
Less treasury stock, at cost, 121,765 shares........... (56)
--------
Total Stockholders' Equity............................. 593,725
--------
Total Capitalization................................. $745,131
========
RATIOS:
Book value per common share............................... $ 20.34
========
Ratio of debt to total capitalization..................... 20.32%
========
---------------
(1) Net of unamortized original issuers discount of $2.6 million.
(2) Excludes 1,135,680 shares issuable upon the exercise of options granted by
us, of which approximately 678,560 shares were exercisable at September 30,
2004, and an additional 416,835 shares which are reserved for future
issuance of options under our equity incentive compensation plan.
26
DESCRIPTION OF THE DEBENTURES
We have summarized provisions of the Debentures below. It is important for
you to consider all of the information contained in this prospectus before
making your decision to invest in the Debentures.
We issued the Debentures under an indenture, dated as of July 7, 2003,
between us and SouthTrust Bank, as trustee. The Debentures mature on June 30,
2023. Currently, the trustee will also act as paying agent, conversion agent,
transfer agent, and bid solicitation agent for the Debentures.
The following description is only a summary of the material provisions of
the Debentures. We urge you to read the indenture and the Debenture in their
entirety because they, and not this description, define the rights of holders of
the Debentures. A copy of the indenture has been filed with the SEC and has been
filed as an exhibit to the registration statement of which this prospectus is a
part. See "Where You Can Find More Information" for information on how to obtain
a copy of the indenture or the Debenture. When we refer to "ProAssurance," "we,"
"our," or "us" in this section, we refer only to ProAssurance Corporation, a
Delaware corporation, and not its subsidiaries.
BRIEF DESCRIPTION OF THE DEBENTURES
The Debentures offered hereby:
- bear interest at a per annum rate of 3.90% payable semi-annually on each
June 30 and December 30, beginning December 30, 2003;
- accrue contingent cash interest, which may be payable as set forth below
under "Contingent Interest;"
- are issued only in denominations of $1,000 principal amount and integral
multiples thereof;
- are senior unsecured obligations of ProAssurance, and rank equally with
all of our other existing and future unsecured and unsubordinated
indebtedness and senior to any of our subordinated indebtedness; as our
indebtedness, the Debentures are effectively subordinated to all
indebtedness and liabilities of our subsidiaries; as of September 30,
2004, our subsidiaries had no outstanding indebtedness (excluding
intercompany indebtedness) and had other liabilities (including insurance
policy-related liabilities) of $2.47 billion.
- are convertible into shares of our common stock initially at a conversion
rate of 23.9037 shares per $1,000 principal amount of Debentures
(equivalent to an initial conversion price of $41.83 per share), or, in
lieu of shares of our common stock, cash or a combination of cash and
shares of our common stock, in each case under the conditions and subject
to such adjustments as are described under "Conversion Rights;"
- are redeemable by us for cash at our option in whole or in part beginning
on July 7, 2008 at the redemption price equal to the principal amount of
the Debentures as described under "Optional Redemption by Us;"
- are subject to repurchase by us at the option of the holders on June 30,
2008, June 30, 2013, and June 30, 2018, or upon a change of control of
ProAssurance, upon the terms and at the repurchase prices set forth below
under "Repurchase of Debentures at the Option of Holders -- Optional
Put;" and
- are due on June 30, 2023, unless earlier converted, redeemed by us at our
option or repurchased by us at the option of the holders.
The indenture does not contain any financial covenants and does not
prohibit us from paying dividends, incurring additional indebtedness or issuing
or repurchasing our other securities. The indenture also does not protect the
holders in the event of a highly leveraged transaction or a change of control of
ProAssurance, except to the extent described under "Repurchase of Debentures at
the Option of Holders -- Change of Control Put" below.
27
No sinking fund is provided for the Debentures and the Debentures are not
subject to defeasance. The Debentures are issued only in registered form,
without coupons, in denominations of $1,000 principal amount and integral
multiples thereof.
Holders may present definitive Debentures for conversion, registration of
transfer and exchange at our office or agency in Birmingham, Alabama, which is
currently the office of the trustee currently located at SouthTrust Bank,
Corporate Trust Department, Mail Code: A-001-0B-0201, 110 Office Park Drive,
Second Floor, Birmingham, Alabama 35223. For information regarding conversion,
registration of transfer and exchange of global Debentures, see "Book-Entry
Delivery and Settlement." No service charge is required for any registration of
transfer or exchange of Debentures, but we may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
INTEREST
The Debentures bear interest at a rate of 3.90% per annum from July 7,
2003. We also will pay contingent interest on the Debentures in the
circumstances described under "Contingent Interest." We will pay interest
semi-annually on June 30 and December 30 of each year beginning December 30,
2003, to the holders of record at the close of business on the preceding June 15
and December 15, respectively. There are two exceptions to the preceding
sentence:
- in general, we will not pay accrued interest on any Debentures that are
converted into shares of our common stock. See "Conversion Rights." If a
holder of Debentures converts after a record date for an interest payment
but prior to the corresponding interest payment date, the holder on the
record date will receive on that interest payment date accrued interest
on those Debentures, notwithstanding the conversion of those Debentures
prior to that interest payment date, because that holder will have been
the holder of record on the corresponding record date. However, at the
time that the holder surrenders Debentures for conversion, the holder
must pay to us an amount equal to the interest that has accrued and that
will be paid on the related interest payment date. The preceding sentence
does not apply, however, to a holder that converts Debentures that are
called by us for redemption after a record date for an interest payment
but prior to the corresponding interest payment date. Accordingly, if we
elect to redeem Debentures on a date that is after a record date for the
payment of interest on Debentures of any holder, and such holder chooses
to convert those Debentures, the holder will not be required to pay us,
at the time that holder surrenders those Debentures for conversion, the
amount of interest it will receive on the interest payment date; and
- we will pay interest to a person other than the holder of record on the
record date if we elect to redeem the Debentures on a date that is after
a record date but on, or prior to, the corresponding interest payment
date. In this instance, we will pay accrued interest on the Debentures
being redeemed to, but not including, the redemption date to the same
person to whom we will pay the principal of those Debentures.
Except as provided below, we will pay interest on:
- the global Debenture to The Depository Trust Company (which we refer to
as DTC) in immediately available funds; and
- any definitive Debentures by check mailed to the holders of those
Debentures.
At maturity, interest on the definitive Debentures will be payable at the
office of the trustee (currently located at SouthTrust Bank, Corporate Trust,
110 Office Park Drive, Second Floor, Mail Code: A-001-OB-0201, Birmingham,
Alabama 35223).
Interest generally will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
28
CONVERSION RIGHTS
GENERAL
Holders may convert any outstanding Debentures into shares of our common
stock, subject to the conditions described below, initially at a conversion rate
of 23.9037 shares per $1,000 principal amount of the Debentures (equal to an
initial conversion price of $41.83 per share). The conversion rate is subject to
adjustment as described below. We will not issue fractional shares of common
stock upon conversion of the Debentures. Instead, we will pay the cash value of
such fractional shares based upon the sale price of our common stock on the
business day immediately preceding the conversion date. Holders may convert
Debentures only in denominations of $1,000 principal amount and integral
multiples thereof.
Holders may surrender Debentures for conversion into shares of our common
stock prior to the stated maturity from and after the date of the following
events:
- during any fiscal quarter if the sale price of our common stock for at
least 20 trading days in the 30 trading-day period ending on the last
trading day of the immediately preceding fiscal quarter exceeds 120% of
the conversion price on that 30th trading day;
- if we have called the Debentures for redemption; or
- upon the occurrence of the specified corporate transactions discussed
below.
As used herein, the "sale price" of our common stock on any date means the
closing per share sale price (or if no closing sale price is reported, the
average of the bid and ask prices or, if there is more than one bid or ask
price, the average of the average bid and the average ask prices) as reported in
composite transactions for the principal U.S. securities exchange on which the
common stock is traded or, if the common stock is not listed on a U.S. national
or regional securities exchange, as reported by the National Association of
Securities Dealers Automated Quotation system or by the National Quotation
Bureau Incorporated. In the absence of such a quotation, our board of directors
will make a good faith determination of the sale price. The "conversion price"
of a Debenture as of any day will equal $1,000, the principal amount of the
Debenture, divided by the number of shares of common stock issuable upon
conversion of $1,000 principal amount of Debentures on that day. If a holder
exercises its right to require us to repurchase its Debentures as described
under "Repurchase of Debentures at the Option of Holders," such holder may
convert its Debentures into shares of our common stock only if it withdraws its
repurchase or change of control repurchase notice and converts its Debentures
prior to the close of business on the business day immediately preceding the
applicable repurchase date.
CONVERSION UPON SATISFACTION OF MARKET PRICE CONDITIONS
A holder may surrender any of its Debentures for conversion into shares of
our common stock during any fiscal quarter if the sale price of our common stock
for at least 20 trading days in the 30 trading-day period ending on the last
trading day of the immediately preceding fiscal quarter exceeds 120% of the
conversion price on that 30th trading day.
CONVERSION UPON NOTICE OF REDEMPTION
A holder may surrender for conversion any Debentures we call for redemption
at any time prior to the close of business on the day that is two business days
prior to the redemption date, even if the Debentures are not otherwise
convertible at that time. However, if a holder already has delivered a
repurchase notice or a change of control repurchase notice with respect to a
Debenture, the holder may not surrender that Debenture for conversion until the
holder has withdrawn the notice in accordance with the indenture.
29
CONVERSION UPON SPECIFIED CORPORATE TRANSACTIONS
In the event:
- we distribute to all holders of our common stock certain rights entitling
them to purchase, for a period expiring within 60 days, common stock at
less than the average sale price of the common stock for the 10 trading
days preceding the declaration date for such distribution;
- we elect to distribute to all holders of our common stock, cash or other
assets, debt securities or certain rights to purchase our securities,
which distribution has a per share value exceeding 15% of the sale price
of the common stock on the business day preceding the declaration date
for the distribution; or
- a change of control as described under "Repurchase of Debentures at the
Option of Holders -- Change of Control Put" occurs but holders of
Debentures do not have the right to require us to repurchase their
Debentures as a result of such change of control because the
consideration received in such change of control consists of freely
tradeable stock and the Debentures become convertible into that stock
(each as more fully described under "Repurchase of Debentures at the
Option of Holders -- Change of Control Put"); then
at least 20 days prior to the ex-dividend date for the distribution or within 30
days of the occurrence of the change of control, as the case may be, we must
notify the holders of the Debentures in writing of the occurrence of such event.
Once we have given that notice, holders may surrender their Debentures for
conversion at any time (1) until the earlier of close of business on the
business day immediately prior to the ex-dividend date or the date of our
announcement that the distribution will not take place, in the case of a
distribution, or (2) within 30 days of the change of control notice or the date
of our announcement that change of control will not take place, in the case of a
change of control. In the case of a distribution, no adjustment to the
conversion price or the ability of a holder of Debentures to convert will be
made if the holder will otherwise participate in the distribution without
conversion or in certain other cases.
In addition, if we are party to a consolidation, merger or binding share
exchange pursuant to which our common stock would be converted into cash,
securities or other property, a holder may surrender Debentures for conversion
at any time from and after the date which is 15 days prior to the anticipated
effective date of the transaction until 15 days after the actual date of the
transaction. If we are a party to a consolidation, merger or binding share
exchange pursuant to which our common stock is converted into cash, securities
or other property, then at the effective time of the transaction, the right to
convert a Debenture into common stock will be changed into a right to convert a
Debenture into the kind and amount of cash, securities or other property which
the holder would have received if the holder had converted such Debentures
immediately prior to the transaction. If the transaction also constitutes a
"change of control," as defined below, the holder may require us to repurchase
all or a portion of its Debentures as described under "Repurchase of Debentures
at the Option of Holders -- Change of Control Put."
PAYMENT UPON CONVERSION
Upon conversion, we may choose to deliver, in lieu of shares of our common
stock, cash or a combination of cash and shares of our common stock as described
below.
CONVERSION ON OR PRIOR TO THE FINAL NOTICE DATE
In the event that we receive a notice of conversion from a holder of the
Debentures on or prior to the day that is 20 days prior to the redemption date,
if any, or maturity (the "final notice date"), and we choose to satisfy all or
any portion of our obligation upon conversion (the "conversion obligation") in
cash, we will notify the holder electing to convert through the trustee of the
dollar amount to be satisfied in cash (which must be expressed either as 100% of
the conversion obligation or as a fixed dollar amount) at any time on or before
the date that is two business days following receipt of the holder's notice of
conversion ("cash settlement notice period"). If we timely elect to pay cash for
any portion of the shares of common
30
stock otherwise issuable to the holder, the holder may retract the conversion
notice at any time during the two business day period beginning on the day after
the final day of the cash settlement notice period ("conversion retraction
period"); no such retraction can be made (and a conversion notice shall be
irrevocable) if we do not elect to deliver cash in lieu of shares of our common
stock (other than cash in lieu of fractional shares). If the conversion notice
has not been retracted, then settlement (in cash and/or shares) will occur on
the business day following the final trading day of the 20 trading-day period
beginning on the first trading day after the final day of the conversion
retraction period (the "cash settlement averaging period"). Settlement amounts
will be computed as follows:
- if we elect to satisfy the entire conversion obligation in shares of
common stock, we will deliver to the holder a number of shares of common
stock equal to (i) the aggregate principal amount of Debentures to be
converted divided by 1,000 multiplied by (ii) the conversion rate.
- if we elect to satisfy the entire conversion obligation in cash, we will
deliver to the holder cash in an amount equal to the product of:
- a number equal to (i) the aggregate principal amount of Debentures to be
converted divided by 1,000, multiplied by (ii) the conversion rate, and
- the average sale price of our shares of common stock during the cash
settlement averaging period.
- if we elect to satisfy a fixed portion (other than 100%) of the
conversion obligation in cash, we will deliver to the holder such cash
amount ("cash amount") and a number of shares equal to the greater of
(1) zero and (2) the excess, if any, of the number of shares of common
stock calculated as set forth in the first bullet of this paragraph
minus the number of shares equal to the sum, for each trading day of the
cash settlement averaging period, of (a) the pro-rated portion of the
cash amount for such day (e.g., 1/20 based on 20 trading days in the
period) divided by (b) the sale price of our common stock on such
trading day. In addition, we will pay cash for all fractional shares of
common stock.
If a holder exercises its right to require us to repurchase its Debentures
as described under "Repurchase of Debentures at the Option of Holders," such
holder may convert its Debentures as provided above only if it withdraws its
repurchase or change of control repurchase notice and converts its Debentures
prior to the close of business on the business day immediately preceding the
applicable repurchase date.
CONVERSION AFTER THE FINAL NOTICE DATE
In the event that we receive a holder's notice of conversion after the
final notice date, and we choose to satisfy all or any portion of the conversion
obligation in cash, we will notify the holder electing to convert through the
trustee of the dollar amount to be satisfied in cash (which must be expressed
either as 100% of the conversion obligation or as a fixed dollar amount) at any
time on or before the final notice date. Settlement amounts will be computed and
settlement dates will be determined in the same manner as set forth above under
"Conversion On or Prior to the Final Notice Date" except that the "cash
settlement averaging period" shall be the 20 trading-day period beginning on the
first trading day after the maturity date or redemption date as the case may be.
Settlement, in cash or shares, will occur on the business day following the
final day of such cash settlement averaging period.
CONVERSION PROCEDURES
By delivering to the holder the number of shares issuable upon conversion,
together with a cash payment in lieu of any fractional shares, we will satisfy
our obligation with respect to the Debentures. That is, accrued interest will be
deemed to be paid in full rather than canceled, extinguished or forfeited. We
will not adjust the conversion rate to account for any accrued interest or,
except as described below, any contingent interest.
31
If the holder converts after a record date for an interest payment but
prior to the corresponding interest payment date, such holder will receive on
the interest payment date interest accrued on those Debentures, notwithstanding
the conversion of Debentures prior to the interest payment date, assuming the
holder was the holder of record on the corresponding record date. However, each
holder agrees, by accepting a Debenture, that at the time the holder surrenders
any Debentures for conversion, such holder must pay us an amount equal to the
interest that has accrued and that will be paid on the Debentures being
converted on the interest payment date. The preceding sentence does not apply to
Debentures that are converted after being called by us for redemption after a
record date for an interest payment date. If in such case prior to the
redemption date the holder chooses to convert its Debentures, such holder will
not be required to pay us at the time it surrenders its Debentures for
conversion the amount of interest on the Debentures it will receive on the date
that has been fixed for redemption.
Holders of the Debentures are not required to pay any taxes or duties
relating to the issuance or delivery of our common stock upon exercise of
conversion rights, but they are required to pay any tax or duty which may be
payable relating to any transfer involved in the issuance or delivery of the
common stock in a name other than the name of the holder of the Debenture.
Certificates representing shares of our common stock will be issued or delivered
only after all applicable taxes and duties, if any, payable by the holder have
been paid. We and each holder of a Debenture also agree that delivery to the
holder of the full number of shares of common stock into which the Debenture is
convertible, together with any cash payment for such holder's fractional shares,
will be treated as a payment (in an amount equal to the sum of the then fair
market value of such shares and such cash payment, if any) on the Debenture for
purposes of the regulations governing contingent payment debt instruments. See
"Certain U.S. Federal Income Tax Consequences."
To convert interests in a global Debenture, the holder must deliver to DTC
the appropriate instruction form for conversion pursuant to DTC's conversion
program. To convert a definitive Debenture, the holder must:
- complete and manually sign the conversion notice on the back of the
Debenture (or a facsimile thereof);
- deliver the completed conversion notice and the Debenture to be converted
to the specified office of the conversion agent;
- pay all funds required, if any, relating to interest including contingent
interest, on the Debenture to be converted to which the holder is not
entitled, as described in the second preceding paragraph and below in
"Contingent Interest;" and
- pay all taxes or duties, if any, as described in the preceding paragraph.
The conversion date will be the date on which all of the foregoing
requirements have been satisfied. The Debentures will be deemed to have been
converted immediately prior to the close of business on the conversion date.
Settlement of our obligation to deliver shares and cash (if any) with respect to
a conversion will occur on the dates described above. Delivery of shares will be
accomplished by delivery to the conversion agent of certificates for the
relevant number of shares, other than in the case of holders of Debentures in
book-entry form with DTC, which shares shall be delivered in accordance with DTC
customary practices. In addition, we will make any cash payment, including in
lieu of any fractional shares, as described above. A holder will not be entitled
to any rights as a holder of our common stock, including, among other things,
the right to vote and receive dividends and notices of stockholder meetings,
until the conversion date.
32
CONVERSION RATE ADJUSTMENTS
We will adjust the conversion rate if any of the following events occur:
(1) we issue common stock as a dividend or distribution to all holders
of our common stock.
(2) we issue to all holders of our common stock rights or warrants to
purchase our common stock or securities convertible into or exchangeable or
exercisable for our common stock, which rights or warrants are exercisable
for not more than 60 days, at less than the sale price of our common stock
on the business day immediately preceding the time of announcement of such
issuance.
(3) we subdivide or combine our common stock.
(4) we distribute to all holders of our common stock shares of our
capital stock, evidences of our indebtedness or assets, including
securities, but excluding:
- rights or warrants listed in (2) above;
- dividends or distributions listed in (1) above;
- dividends and distributions in connection with any reclassification,
consolidation, merger, exchange, combination, sale or conveyance
resulting in a change in the conversion consideration pursuant to the
third succeeding paragraph; and
- any dividends or distributions paid exclusively in cash (except as
provided below).
(5) we make distributions or pay dividends consisting exclusively of
cash to all holders of our common stock to the extent that the aggregate
amount of any such cash distributions and dividends exceed:
- during the period from the date of initial issuance of the Debentures
to June 30, 2008, $0.025 per share of our common stock for any fiscal
quarter or $0.10 per share of our common stock for any fiscal year;
and
- at any time subsequent to June 30, 2008, 0.625% of our market
capitalization for any fiscal quarter or 2.5% of our market
capitalization for any fiscal year, in each case as determined on the
record date for such distribution or dividend; our "market
capitalization", as of any date, is the product of the sale price of
our common stock on such date multiplied by the number of shares of
our common stock then outstanding.
If an adjustment is required in respect of a distribution or dividend of
cash, then the conversion rate shall be increased so that it equals the
rate determined by multiplying the conversion rate in effect on the
applicable record date by a fraction, (1) the numerator of which shall
be the current market price (as defined below) of a share of common
stock on the record date and (2) the denominator of which shall be such
current market price less the amount of the excess distribution or
dividend as defined above. "Current market price" shall mean the average
of the daily closing sale prices per share of common stock for the three
consecutive trading days ending on the earlier of the date of
determination and the day before the "ex" date with respect to the
distribution or dividend requiring such computation. For purposes of
this paragraph, the term "ex" date, when used with respect to any
distribution or dividend, means the first date on which the common stock
trades, regular way, on the relevant exchange or in the relevant market
from which the closing sale price was obtained without the right to
receive such distribution or dividend.
(6) we or one of our subsidiaries makes a payment in respect of a
tender offer or exchange offer for our common stock to the extent that the
cash and value of any other consideration included in the payment per share
of common stock exceeds the closing sale price per share of common stock on
the trading day before the date such tender offer or exchange offer is
publicly announced.
33
To the extent that we have a rights plan in effect upon conversion of the
Debentures into common stock, the holder will receive, in addition to the common
stock, the rights under the rights plan whether or not the rights have separated
from the common stock at the time of conversion, subject to limited exceptions,
and no adjustments to the conversion price will be made, except in limited
circumstances.
We will not make any adjustment if holders of Debentures may participate in
the transactions described above.
In the event of:
- any reclassification of our common stock;
- a consolidation, merger, binding share exchange or combination involving
us; or
- a sale or conveyance to another person or entity of all or substantially
all of our property or assets;
in which holders of our common stock would be entitled to receive stock, other
securities, other property, assets or cash for their common stock upon
conversion of Debentures, the holder will be entitled to receive the same type
of consideration which it would have been entitled to receive if it had
converted the Debentures into our common stock immediately prior to any of these
events.
In the event that we distribute shares of capital stock of a subsidiary of
ours, the conversion rate will be adjusted, if at all, based on the market value
of the subsidiary stock so distributed relative to the market value of our
common stock, in each case over a measurement period following the distribution.
In the event we elect to make a distribution described in (2) or (4) above,
which, in the case of (4) above, has a per share value equal to more than 15% of
the sale price of our shares of common stock on the business day preceding the
declaration date for the distribution, then, if the distribution would also
trigger a conversion right under "Conversion Upon Specified Corporate
Transactions," or if the Debentures are otherwise convertible, we will be
required to give notice to the holders of Debentures at least 20 days prior to
the ex-dividend date for the distribution and, upon the giving of notice, the
Debentures may be surrendered for conversion at any time until the close of
business on the business day immediately prior to the ex-dividend date or until
we announce that the distribution will not take place. No adjustment to the
conversion price or the ability of a holder of a Debenture to convert will be
made if the holder will otherwise participate in the distribution without
conversion or in certain other cases.
Holders may in certain situations be deemed to have received a distribution
subject to U.S. federal income tax as a dividend in the event of any taxable
distribution to holders of common stock or in certain other situations requiring
a conversion rate adjustment. See "Certain U.S. Federal Income Tax
Consequences -- Constructive Dividends."
To the extent permitted by law, we may, from time to time, increase the
conversion rate for a period of at least 20 days if our board of directors has
made a determination that this increase would be in our best interests. Any such
determination by our board will be conclusive. We would give holders at least 15
days notice of any increase in the conversion rate. In addition, we may increase
the conversion rate if our board of directors deems it advisable to avoid or
diminish any income tax to holders of common stock resulting from any stock
distribution.
We will not be required to make an adjustment in the conversion rate unless
the adjustment would require a change of at least one percent in the conversion
rate. However, we will carry forward any adjustments that are less than one
percent of the conversion rate. Except as described above in this section, we
will not adjust the conversion rate for any issuance of our common stock or
convertible or exchangeable securities or rights to purchase our common stock or
convertible or exchangeable securities.
CONTINGENT INTEREST
Subject to the accrual and record date provisions described below, we will
pay contingent cash interest to the holders of Debentures during any six-month
period from June 30 to December 29 and from December 30 to June 29, commencing
with the six-month period beginning on June 30, 2008 if the
34
average market price of a Debenture for the five consecutive trading days ending
on the second trading day immediately preceding the relevant six-month period
equals 120% or more of the principal amount of the Debenture.
The amount of contingent cash interest payable per Debenture in respect of
any six-month period will equal 0.1875% of the average market price of a
Debenture for the five trading day period referred to above.
We will pay contingent interest, if any, in the same manner as we will pay
interest described above under "Interest."
The market price of a Debenture on any date of determination means the
average of the secondary market bid quotations per $1,000 principal amount of
Debenture obtained by the bid solicitation agent for $5.0 million principal
amount of Debentures at approximately 4:00 p.m., New York City time, on such
determination date from three unaffiliated securities dealers we select, which
may include any of the initial purchasers, provided that if:
- the bid solicitation agent, through the exercise of reasonable efforts,
is unable to obtain a bid from the securities dealers, or
- in our reasonable judgment, the bid quotations are not indicative of the
secondary market value of the Debentures,
then the market price of the Debentures will equal (a) the then applicable
conversion rate of the Debentures multiplied by (b) the average sale prices of
our common stock on the five trading days ending on such determination date,
appropriately adjusted. The bid solicitation agent shall not be required to
determine the market price of the Debentures unless requested in writing by us.
The bid solicitation agent will initially be SouthTrust Bank. We may change
the bid solicitation agent, but the bid solicitation agent will not be our
affiliate. The bid solicitation agent will solicit bids from securities dealers
that are believed by us to be willing to bid for the Debentures.
Upon determination that holders of Debentures will be entitled to receive
contingent interest which may become payable during a relevant six-month period,
on or prior to the start of such six-month period, we will provide notice to the
trustee setting forth the amount of contingent interest per $1,000 principal
amount of Debentures and disseminate a press release through a public medium
that is customary for such press release.
PAYMENT AT MATURITY
Each holder of $1,000 principal amount of the Debentures shall be entitled
to receive $1,000, and accrued and unpaid interest, including contingent
interest and additional amounts, if any, at maturity.
OPTIONAL REDEMPTION BY US
Prior to July 7, 2008, the Debentures will not be redeemable at our option.
Beginning on July 7, 2008, we may redeem the Debentures for cash at any time as
a whole, or from time to time in part, at a redemption price equal to 100% of
the principal amount of the Debentures being redeemed, plus accrued and unpaid
interest, including contingent interest and additional amounts, if any, to the
redemption date.
We will give at least 30 days but not more than 60 days notice of
redemption by mail to holders of Debentures. Debentures or portions of
Debentures called for redemption are convertible by the holder until the close
of business on the second business day prior to the redemption date.
If we do not redeem all of the Debentures, the trustee will select the
Debentures to be redeemed in principal amounts of $1,000 or integral multiples
thereof, by lot or on a pro rata basis. If any Debentures are to be redeemed in
part only, we will issue a new Debenture or Debentures with a principal amount
equal to the unredeemed principal portion thereof. If a portion of a holder's
Debentures is selected for
35
partial redemption and the holder converts a portion of its Debentures, the
converted portion will be deemed to be taken from the portion selected for
redemption.
REPURCHASE OF DEBENTURES AT THE OPTION OF HOLDERS
OPTIONAL PUT
On each of June 30, 2008, June 30, 2013 and June 30, 2018, a holder may
require us to repurchase any outstanding Debentures for which the holder has
properly delivered and not withdrawn a written repurchase notice, subject to
certain additional conditions, at a purchase price equal to 100% of the
principal amount of those Debentures plus accrued and unpaid interest, including
contingent interest and additional amounts, if any, to the repurchase date.
Holders may submit their Debentures for repurchase to the paying agent at any
time from the opening of business on the date that is 20 business days prior to
the repurchase date until the close of business on the business day immediately
preceding the repurchase date.
Instead of paying the purchase price in cash, we may elect to pay the
purchase price in shares of our common stock or a combination of shares of our
common stock and cash, at our option. The number of shares of common stock a
holder will receive will equal the relevant amount of the purchase price divided
by 97.5% of the average of the sale price of our common stock for the 20 trading
days immediately preceding and including the third business day immediately
preceding the repurchase date. However, we may not pay the purchase price in
shares of our common stock or a combination of shares of our common stock and
cash, unless we satisfy certain conditions prior to the repurchase date as
provided in the indenture, including:
- registration of the shares of our common stock to be issued upon
repurchase under the Securities Act and the Exchange Act, if required;
- qualification of the shares of our common stock to be issued upon
repurchase under applicable state securities laws, if necessary, or the
availability of an exemption therefrom; and
- listing of our common stock on a U.S. national securities exchange or
quotation thereof in an inter-dealer quotation system of any registered
U.S. national securities association.
We are required to give notice at least 20 business days prior to each
repurchase date to all holders at their addresses shown in the register of the
registrar and to beneficial owners as required by applicable law stating, among
other things, the procedures that holders must follow to require us to
repurchase their Debentures as described below and whether the purchase price
will be paid in cash or shares of our common stock, or a combination with a
portion payable in cash or shares of our common stock.
Because the sale price of our common stock will be determined prior to the
applicable repurchase date, holders of Debentures bear the market risk that our
common stock will decline in value between the date the sale price is calculated
and the repurchase date.
The repurchase notice given by each holder electing to require us to
repurchase Debentures shall be given so as to be received by the paying agent no
later than the close of business on the business day immediately preceding the
repurchase date and must state:
- the certificate numbers of the holder's Debentures to be delivered for
repurchase;
- the portion of the principal amount of Debentures to be repurchased,
which must be $1,000 or an integral multiple thereof; and
- that the Debentures are to be repurchased by us pursuant to the
applicable provisions of the Debentures.
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A holder may withdraw any repurchase notice by delivering a written notice
of withdrawal to the paying agent prior to the close of business on the business
day immediately preceding the repurchase date. The notice of withdrawal shall
state:
- the principal amount of Debentures being withdrawn;
- the certificate numbers of the Debentures being withdrawn; and
- the principal amount, if any, of the Debentures that remain subject to
the repurchase notice.
In connection with any repurchase, we will, to the extent applicable:
- comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender
offer rules under the Exchange Act which may then be applicable; and
- file Schedule TO or any other required schedule under the Exchange Act.
Our obligation to pay the purchase price for Debentures for which a
repurchase notice has been delivered and not validly withdrawn is conditioned
upon the holder delivering the Debentures, together with necessary endorsements,
to the paying agent at any time after delivery of the repurchase notice. We will
cause the purchase price for the Debentures to be paid promptly following the
later of the repurchase date or the time of delivery of the Debentures, together
with such endorsements.
If the paying agent holds money or shares of our common stock sufficient to
pay the purchase price of the Debentures for which a repurchase notice has been
given on the business day immediately following the repurchase date in
accordance with the terms of the indenture, then, immediately after the
repurchase date, the Debentures will cease to be outstanding and interest,
including contingent interest, if any, on the Debentures will cease to accrue,
whether or not the Debentures are delivered to the paying agent. Thereafter, all
other rights of the holder shall terminate, other than the right to receive the
purchase price upon delivery of the Debentures.
Our ability to repurchase Debentures for cash may be limited by
restrictions on the ability of ProAssurance to obtain funds for such repurchase
through dividends from our subsidiaries and the terms of our then existing
borrowing agreements. We cannot assure you that we would have the financial
resources, or would be able to arrange financing, to pay the purchase price in
cash for all the Debentures that might be delivered by holders of Debentures
seeking to exercise the repurchase right.
We may in the future, without your consent amend or supplement the
indenture to eliminate our ability to pay the purchase price for the Debentures
in common stock on any purchase date after the date of such amendment or
supplement.
CHANGE OF CONTROL PUT
If a change of control, as described below on pages 38 and 39, occurs, each
holder will have the right (subject to certain exceptions set forth below) to
require us to repurchase all of its Debentures not previously called for
redemption, or any portion of those Debentures that is equal to $1,000 in
principal amount or integral multiples thereof, at the following purchase prices
expressed as a percentage of the principal amount of all Debentures it requires
us to repurchase plus accrued and unpaid interest, including contingent interest
and additional amounts, if any, on those Debentures to the repurchase date.
REDEMPTION
PERIOD PRICE
------ ----------
Beginning on July 7, 2003 and ending on June 29, 2004....... 110.0%
Beginning on June 30, 2004 and ending on June 29, 2005...... 108.0%
Beginning on June 30, 2005 and ending on June 29, 2006...... 104.0%
Beginning on June 30, 2006 and ending on June 29, 2008...... 102.0%
June 30, 2008 and thereafter................................ 100.0%
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Notwithstanding the foregoing, we may be required to offer to repurchase
any of our other senior debt on a pro rata basis with the Debentures, upon a
change of control, if similar change of control offers are or will be required
by our other senior debt.
Instead of paying the purchase price in cash, we may elect to pay the
purchase price in shares of our common stock or, in the case of a merger in
which we are not the surviving corporation, common stock, ordinary shares or
American Depositary Shares of the surviving corporation or its direct or
indirect parent corporation, cash or a combination of the applicable securities
and cash, at our option. The number of shares of the applicable common stock or
securities a holder will receive will equal the relevant amount of the purchase
price divided by 97.5% of the average of the sale prices of the applicable
common stock or securities for the 20 trading days commencing after the third
trading day following notice of the change of control. However, we may not pay
the purchase price in the applicable common stock or securities or a combination
of the applicable common stock or securities and cash, unless we satisfy certain
conditions prior to the repurchase date as provided in the indenture, including:
- registration of the shares of the applicable common stock or securities
to be issued upon repurchase under the Securities Act and the Exchange
Act, if required;
- qualification of the shares of the applicable common stock or securities
to be issued upon repurchase under applicable state securities laws, if
necessary, or the availability of an exemption therefrom; and
- listing of the applicable common stock or securities on a U.S. national
securities exchange or quotation thereof in an inter-dealer quotation
system of any registered U.S. national securities association.
Within 30 days after the occurrence of a change of control, we are required
to give each holder notice of the occurrence of the change of control and of its
resulting repurchase right and whether the purchase price will be paid in cash,
the applicable common stock or securities, or a combination with a portion
payable in cash or the applicable common stock or securities. The repurchase
date will be within 30 days after the date on which we give notice of a change
of control. To exercise the repurchase right, the holder must deliver prior to
the close of business on the business day immediately preceding the repurchase
date, written notice to the trustee of its exercise of its repurchase right,
together with the Debentures with respect to which the right is being exercised.
The holder may withdraw this notice by delivering to the paying agent a notice
of withdrawal prior to the close of business on the business day immediately
preceding the repurchase date.
Because the sale price of the applicable common stock or securities is
determined prior to the applicable repurchase date, holders of Debentures bear
the market risk that the applicable common stock or securities will decline in
value between the date the sale price is calculated and the repurchase date.
A "change of control" will be deemed to have occurred at such time after
the original issuance of the Debentures when any of the following has occurred:
- the acquisition by any person, including any syndicate or group deemed to
be a "person" under Section 13(d)(3) of the Exchange Act, of beneficial
ownership, directly or indirectly, through a purchase, merger or other
acquisition transaction or series of purchase, merger or other
acquisition transactions, of shares of our capital stock entitling that
person to exercise 50% or more of the total voting power of all shares of
our capital stock entitled to vote generally in elections of directors,
other than any such acquisition by any of our subsidiaries or any of our
employee benefit plans; or
- the acquisition by any person of beneficial ownership, directly or
indirectly, through a purchase, merger or other acquisition transaction
or series of purchase, merger or other acquisition transactions, of
shares of our capital stock as a result of which (1) our common stock
ceases (or, upon consummation of or immediately following such
transaction or event, will cease) to be listed on a United States
national securities exchange or approved for quotation on the NASDAQ
National Market or any similar United States system for automated
dissemination of quotations of
38
securities prices or (2) less than 20% of the outstanding shares of our
common stock remain beneficially owned by persons other than affiliates;
or
- during any period of two consecutive years, individuals who at the
beginning of such period constituted the board of directors (together
with any new directors whose election by such board of directors or whose
nomination for election by the shareholders of ProAssurance was approved
pursuant to a vote of a majority of the directors then still in office
who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the board of directors then in
office; or
- our consolidation or merger with or into any other person, any merger of
another person into us, or any conveyance, transfer, sale, lease or other
disposition of all or substantially all of our properties and assets to
another person, other than:
- any transaction:
(1) that does not result in any reclassification, conversion, exchange
or cancellation of outstanding shares of our capital stock; and
(2) pursuant to which holders of our capital stock immediately prior to
the transaction have the entitlement to exercise, directly or indirectly,
50% or more of the total voting power of all shares of capital stock
entitled to vote generally in elections of directors of the continuing or
surviving person immediately after giving effect to such issuance; and
- any merger, share exchange, transfer of assets or similar transaction
solely for the purpose of changing our jurisdiction of incorporation and
resulting in a reclassification, conversion or exchange of outstanding
shares of our common stock, if at all, solely into shares of common
stock, ordinary shares or American Depositary Shares of the surviving
entity or a direct or indirect parent of the surviving corporation.
However, notwithstanding the foregoing, a holder will not have the right to
require us to repurchase its Debentures if 100% of the consideration in the
transaction or transactions (other than cash payments for fractional shares and
cash payments made in respect of dissenters' appraisal rights) constituting a
change of control consists of shares of common stock, ordinary shares or
American Depositary Shares traded or to be traded immediately following a change
of control on a national securities exchange or the NASDAQ Stock Market's
National Market, and, as a result of the transaction or transactions, the
Debentures become convertible into that common stock, ordinary shares or
American Depositary Shares (and any rights attached thereto).
For the purposes of the foregoing, "affiliate" shall mean any person
beneficially owning shares of our capital stock entitling that person to
exercise 10% or more of the total voting power of all shares of our capital
stock entitled to vote generally in elections of directors.
Beneficial ownership shall be determined in accordance with Rule 13d-3
promulgated by the SEC under the Exchange Act. The term "person" includes any
syndicate or group that would be deemed to be a "person" under Section 13(d)(3)
of the Exchange Act.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders if an issuer tender offer occurs and may apply
if the repurchase option becomes available to holders of the Debentures. We will
comply with this rule and file Schedule TO (or any similar schedule) to the
extent applicable at that time.
The definition of change of control includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our assets. There is no precise, established definition of the phrase
"substantially all" under applicable law. Accordingly, a holder's ability to
require us to repurchase Debentures as a result of a conveyance, transfer, sale,
lease or other disposition of less than all our assets may be uncertain.
39
If the paying agent holds money or common stock sufficient to pay the
purchase price of the Debentures which holders have elected to require us to
repurchase on the business day following the repurchase date in accordance with
the terms of the indenture, then, immediately after the repurchase date, those
Debentures will cease to be outstanding and interest, including contingent
interest, if any, on the Debentures will cease to accrue, whether or not the
Debentures are delivered to the paying agent. Thereafter, all other rights of
the holder shall terminate, other than the right to receive the purchase price
upon delivery of the Debentures.
The foregoing provisions would not necessarily protect holders of the
Debentures if highly leveraged or other transactions involving us occur that may
affect holders adversely. We could, in the future, enter into certain
transactions, including certain recapitalizations, that would not constitute a
change of control with respect to the change of control purchase feature of the
Debentures but that would increase the amount of our (or our subsidiaries')
outstanding indebtedness.
Our ability to repurchase Debentures for cash upon the occurrence of a
change of control is subject to important limitations. Our ability to repurchase
the Debentures for cash may be limited by restrictions on the ability of
ProAssurance to obtain funds for such repurchase through dividends from our
subsidiaries and the terms of our then existing borrowing agreements. In
addition, the occurrence of a change of control could cause an event of default
under, or be prohibited or limited by, the terms of our other senior debt. We
cannot assure you that we would have the financial resources, or would be able
to arrange financing, to pay the purchase price in cash for all the Debentures
that might be delivered by holders of Debentures seeking to exercise the
repurchase right.
The change of control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of our company. The
change of control purchase feature, however, is not the result of our knowledge
of any specific effort:
- to accumulate shares of our common stock;
- to obtain control of us by means of a merger, tender offer solicitation
or otherwise; or
- by management to adopt a series of anti-takeover provisions.
Instead, the change of control purchase feature is a standard term
contained in securities similar to the Debentures.
We may in the future, without your consent amend or supplement the
indenture to eliminate our ability to pay the purchase price for the Debentures
in common stock on any purchase date after the date of such amendment or
supplement.
EVENTS OF DEFAULT
Each of the following constitutes an event of default with respect to the
Debentures:
- default in the payment of any principal amount (or premium, if any),
redemption price, purchase price, or change in control purchase price due
with respect to the Debentures, when the same become due and payable;
- default in payment of any interest (including contingent interest and
additional amounts, if any) under the Debentures, which default continues
for 30 days;
- default in our obligation to satisfy our conversion obligation upon
exercise of a holder's conversion right, unless such default is cured
within five days after written notice of default is given to us by the
trustee or the holder of such Debenture;
- our failure to comply with any of our other agreements in the Debentures
or the indenture upon our receipt of notice to us of such default from
the trustee or to us and the trustee from holders of not less than 25% of
aggregate principal amount at maturity of the Debentures, and our failure
to cure (or obtain a wavier of) such default within 60 days after we
receive such notice;
40
- default in the payment of principal when due or resulting in acceleration
of other indebtedness of ours or any significant subsidiary of ours for
borrowed money where the aggregate principal amount with respect to which
the default or acceleration has occurred exceeds $10 million, and such
acceleration has not been rescinded or annulled within a period of 30
days after written notice to us by the trustee or to us and the trustee
by the holders of at least 25% in aggregate principal amount at maturity
of the Debentures; and
- certain events of bankruptcy, insolvency or reorganization affecting us
or any of our significant subsidiaries.
"Significant subsidiary" shall mean any subsidiary of ProAssurance whose
assets constitute 10% or more of our total assets on a consolidated basis or as
otherwise defined in Rule 1-02(w) of Regulations S-X.
If an event of default shall have happened and be continuing, either the
trustee or the holders of not less than 25% in aggregate principal amount at
maturity of the Debentures then outstanding may declare the principal amount of
the Debentures then outstanding plus any interest (including contingent interest
and additional amounts, if any) on the Debentures accrued and unpaid through the
date of such declaration to be immediately due and payable. At any time after a
declaration of acceleration has been made, but before a judgment or decree for
payment of money has been obtained by the trustee, and subject to applicable law
and certain other provisions of the indenture, the holders of a majority in
aggregate principal amount of the Debentures then outstanding may, under certain
circumstances, rescind and annul such acceleration. In the case of certain
events of bankruptcy or insolvency, the principal amount of the Debentures then
outstanding together with any accrued and unpaid cash interest (including
contingent interest and additional amounts, if any) through the occurrence of
such event shall automatically become and be immediately due and payable.
The indenture provides that, if any event occurs which is, or after notice
or lapse of time or both would become, an event of default with respect to the
Debentures, the trustee will transmit, within 90 days of the occurrence of a
default known to the trustee, notice of such default to the holders of the
Debentures unless such default has been cured or waived; provided, however,
that, except in the case of a default in the payment of the principal of or any
premium on or interest on (including contingent interest and additional amounts,
if any) a Debenture, the trustee may withhold 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 the
Debentures; and provided, further, that in the case of any default of the
character described in the fourth bullet above of the first paragraph of this
section, no such notice to holders will be given until at least 30 days after
the default occurs.
If an event of default occurs and is continuing with respect to the
Debentures, the trustee may in its discretion proceed to protect and enforce its
rights and the rights of the holders of the Debentures by all appropriate
judicial proceedings. The indenture provides that, subject to the duty of the
trustee during any default to act with the required standard of care, the
trustee will be under no obligation to exercise any of its rights or power under
the indenture at the request or direction of any of the holders of the
Debentures, unless such holders shall have offered to the trustee indemnity
reasonably satisfactory to the trustee. Subject to such provision for the
indemnification of the trustee, and subject to applicable law and certain other
provisions of the indenture, the holders of a majority in aggregate principal
amount of the outstanding Debentures will 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 Debentures.
Our obligations under the indenture are not intended to provide creditor
rights for amounts in excess of par plus accrued and unpaid interest, including,
contingent interest and additional amounts, if any.
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MERGERS AND SALES OF ASSETS
The indenture provides that we may not consolidate with or merge into any
person or convey, transfer or lease all or substantially all of our assets as an
entity to another person as an entity unless:
- the resulting, surviving or transferee person is organized and existing
under the laws of the United States, any state thereof or the District of
Columbia, and such person (if other than us) assumes all our obligations
under the Debentures and the indentures;
- after giving effect to the transaction no event of default, and no event
that, after notice or passage of time, would become an event of default,
has occurred and is continuing; and
- other conditions described in the indenture are met.
Upon the assumption of our obligations by such corporation in such
circumstances, subject to certain exceptions, we shall be discharged from all
obligations under the Debentures and the indenture. Although such transactions
are permitted under the indenture, certain of the foregoing transactions
occurring could constitute a change in control of ProAssurance, permitting each
holder to require us to purchase the Debentures of such holder as described
above.
MODIFICATION AND WAIVER
We and the trustee may modify or amend the indenture with the consent of
the holders of not less than a majority of aggregate principal amount of the
outstanding Debentures; provided, however, that no such modification or
amendment may, without the written consent or the affirmative vote of the holder
of each Debenture affected thereby:
- change the stated maturity of the principal of, or any premium due on, or
any installment of interest, including contingent interest, if any, on or
with respect to the Debentures;
- reduce the principal amount, premium amount, redemption price or purchase
price (including the change of control purchase price and the price
payable upon exercise by a holder of its option to require us to
repurchase such holder's Debentures), of, or the rate of interest,
including contingent interest, if any, on, any Debenture;
- adversely affect the right of holders to convert or require us to
repurchase any of the Debentures;
- alter the manner of calculation or rate of accrual of contingent interest
on any Debenture;
- impair the right to institute suit for the enforcement of any repurchase
of, payment on or with respect to, or conversion of any Debenture,
including any payment on or after the stated maturity of the Debentures,
in the case of redemption, on or after the redemption date or, in the
case of repayment at the option of any holder, on or after the repayment
date;
- modify the optional redemption provisions in a manner that adversely
affects the holders;
- change the place of payment or the coin or currency in which the
principal of or any premium or interest with respect to the Debentures is
payable;
- reduce the percentage in principal amount of the outstanding Debentures,
the consent of whose holders is required in order to take specific
actions including, but not limited to, the waiver of past defaults; or
- modify any of the above provisions.
We and the trustee may modify or amend the indenture and the Debentures
without the consent of any holder in order to, among other things:
- provide for our successor pursuant to a consolidation, merger or sale of
assets;
- add to our covenants for the benefit of the holders of all or any of the
Debentures or to surrender any right or power conferred upon us by the
indenture;
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- provide for a successor trustee with respect to the Debentures;
- cure any ambiguity or correct or supplement any provision in the
indenture which may be defective or inconsistent with any other
provision, or to make any other provisions with respect to matters or
questions arising under the indenture which, in each case, will not
adversely affect the interests of the holders of the Debentures;
- add any additional events of default with respect to all or any of the
Debentures;
- secure the Debentures;
- reduce the conversion price, provided that the reduction is in accordance
with the terms of the indenture or will not adversely affect the
interests of the holders of the Debentures;
- supplement any of the provisions of the indenture to such extent as shall
be necessary to permit or facilitate the discharge of the Debentures,
provided that such change or modification does not adversely affect the
interest of the holders of the Debentures in any material respect;
- make any changes or modifications necessary in connection with the
registration of the Debentures under the Securities Act as contemplated
in the registration rights agreement; provided that such change or
modification does not adversely affect the interests of the holders of
the Debenture in any material respect; or
- add or modify any other provisions with respect to matters or questions
arising under the indenture which we and the trustee may deem necessary
or desirable and which will not adversely affect the interests of the
holders of Debentures in any material respect.
The holders of not less than a majority in aggregate principal amount of
the outstanding Debentures may, on behalf of the holders of all of the
Debentures, waive any past default and its consequences under the indenture,
except a default (1) in the payment of the principal of or any premium or
interest on or with respect to the Debentures or (2) in the respect of a
covenant or provision that cannot be modified without the consent of the holder
of each Debenture affected thereby.
CALCULATIONS IN RESPECT OF DEBENTURES
We or our agents will be responsible for making all calculations called for
under the Debentures. These calculations include, but are not limited to,
determination of the market price of the Debentures and our common stock, and
amounts of contingent interest and additional amount payments, if any, on the
Debentures, and the projected payment schedule. See "Certain U.S. Federal Income
Tax Consequences." We or our agents will make all these calculations in good
faith and, absent manifest error, our and their calculations will be final and
binding on holders of Debentures. We or our agents will provide a schedule of
these calculations to the trustee, and the trustee is entitled to conclusively
rely upon the accuracy of these calculations without independent verification.
RANKING
The Debentures will be senior unsecured obligations of ProAssurance
Corporation and will rank equally in right of payment with all of our other
senior unsecured and unsubordinated indebtedness. The Debentures will rank
senior to any of our subordinated indebtedness.
We are a holding company and will primarily depend on the receipt of
dividends from our insurance company subsidiaries to meet our obligations under
the Debentures and our other outstanding obligations, including debt
obligations. Because the creditors of our subsidiaries, including our insurance
subsidiaries' policyholders, generally would have a right to receive payment
superior to our right to receive payment from the assets of our subsidiaries,
the holders of our Debentures will effectively be subordinated to the creditors
of our subsidiaries. If we were to liquidate or reorganize, your right to
participate in any distribution of our subsidiaries' assets is necessarily
subject to the claims of the subsidiaries' creditors, including their
policyholders. As of September 30, 2004, the aggregate amount of liabilities and
obligations
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of our subsidiaries (including insurance policy-related liabilities) that would
have effectively ranked senior to the Debentures was approximately $2.47
billion. "Risk Factors -- Risks Relating to our Business -- We are a holding
company and are dependent on dividends and other payments from our operating
subsidiaries, which are subject to dividend restrictions" and "Risk
Factors -- Risks Relating to the Debentures and the Common Stock -- The
Debentures are effectively subordinated to all liabilities of our subsidiaries."
NOTICES
We will mail notices and communications to the holder's address shown on
the register of the Debentures.
THE TRUSTEE; PAYING AGENTS, TRANSFER AGENTS AND BID SOLICITATION AGENT
SouthTrust Bank is the trustee under the indenture. The trustee was the
lead arranger, administrative agent and syndication agent for our credit
facility that included the term loan which was repaid from a portion of the
proceeds we received from the sale of the Debentures to the initial purchasers
and the revolving credit facility which recently expired but may be renewed or
replaced by a new facility in which the trustee may be a participant. The
trustee and its affiliates also performs certain other commercial banking
services for us, including providing cash management accounts, checking
services, and serving as custodian for our investment securities for which it
receives customary fees. The trustee will be the paying agent, conversion agent,
transfer agent, and bid solicitation agent for the Debentures.
BOOK-ENTRY DELIVERY AND SETTLEMENT
We issued the Debentures in the form of one or more permanent global
Debentures in definitive, fully registered, book-entry form. The global
Debentures were deposited with or on behalf of DTC and registered in the name of
Cede & Co., as nominee of DTC.
DTC has advised us as follows:
- DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code
and a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934.
- DTC holds securities that its participants deposit with DTC and
facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities, through
electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities
certificates.
- Direct participants include securities brokers and dealers, trust
companies, clearing corporations and other organizations.
- DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange LLC and the National
Association of Securities Dealers, Inc.
- Access to the DTC system is also available to others, such as securities
brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either
directly or indirectly.
- The rules applicable to DTC and its participants are on file with the
SEC.
We have provided the following descriptions of the operations and
procedures of DTC solely as a matter of convenience. These operations and
procedures are solely within the control of DTC and are subject to change by
them from time to time. None of ProAssurance, the initial purchasers nor the
trustee takes any responsibility for these operations or procedures, and you are
urged to contact DTC or its participants directly to discuss these matters.
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We expect that under procedures established by DTC, ownership of the
Debentures will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC or its nominee, with respect to
interests of direct participants, and the records of direct and indirect
participants, with respect to interests of persons other than participants.
The laws of some jurisdictions require that purchasers of securities take
physical delivery of those securities in definitive form. Accordingly, the
ability to transfer interests in the Debentures represented by a global
Debenture to those persons may be limited. In addition, because DTC can act only
on behalf of its participants, who in turn act on behalf of persons who hold
interests through participants, the ability of a person having an interest in
Debentures represented by a global Debenture to pledge or transfer those
interests to persons or entities that do not participate in DTC's system, or
otherwise to take actions in respect of such interest, may be affected by the
lack of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a global
Debenture, DTC or that nominee will be considered the sole owner or holder of
the Debentures represented by that global Debenture for all purposes under the
indenture and under the Debentures. Except as provided below, owners of
beneficial interests in a global Debenture will not be entitled to have
Debentures represented by that global Debenture registered in their names, will
not receive or be entitled to receive physical delivery of certificated
Debentures and will not be considered the owners or holders thereof under the
indenture or under the Debentures for any purpose, including with respect to the
giving of any direction, instruction or approval to the trustee. Accordingly,
each holder owning a beneficial interest in a global Debenture must rely on the
procedures of DTC and, if that holder is not a direct or indirect participant,
on the procedures of the participant through which that holder owns its
interest, to exercise any rights of a holder of Debenture under the indenture or
the global Debenture.
Debentures represented by a global security will be exchangeable for
registered certificated securities with the same terms only if: (1) DTC is
unwilling or unable to continue as depositary or if DTC ceases to be clearing
agency registered under the Exchange Act and a successor depositary is not
appointed by us within 90 days; (2) we decide to discontinue use of the system
of book-entry transfer through DTC (or any successor depositary); or (3) a
default under the indenture occurs and is continuing.
Neither ProAssurance nor the trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Debentures by DTC, or for maintaining, supervising or reviewing any records
of DTC relating to the Debentures.
Payments on the Debentures represented by the global Debenture will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. We
expect that DTC or its nominee, upon receipt of any payment on the Debentures
represented by a global Debenture, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the global Debenture as shown in the records of DTC or its nominee. We also
expect that payments by participants to owners of beneficial interests in the
global Debenture held through such participants will be governed by standing
instructions and customary practice as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. The participants will be responsible for those payments. Payments on
the Debenture represented by the global Debenture will be made in immediately
available funds. Transfers between participants in DTC will be effected in
accordance with DTC rules and will be settled in immediately available funds.
REGISTRATION RIGHTS
At the time of the initial issuance of the Debentures we entered into a
registration rights agreement with the initial purchasers for the benefit of the
holders of the Debentures. As required under that agreement, we have filed with
the SEC, at our expense, a shelf registration statement, of which this
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prospectus forms a part, covering the resale of the Debentures and the shares of
common stock issuable upon conversion of the Debentures. Under the terms of the
agreement, we will, at our expense:
- use our reasonable best efforts to cause such registration statement to
become effective as promptly as is practicable, but in no event later
than 180 days after the first date of original issuance of the
Debentures; and
- use our reasonable best efforts to keep the registration statement
effective until the earliest of:
- two years after the last date of original issuance of any of the
Debentures;
- the date when the holders of the Debentures and the shares of our common
stock issuable upon conversion of the Debentures are able to sell all
such securities immediately without restriction pursuant to the volume
limitation provisions of Rule 144 under the Securities Act;
- the date when all of the Debentures and the shares of common stock
issuable upon conversion of the Debentures are registered under the
shelf registration statement and disposed of in accordance with the
shelf registration statement; and
- the date when all of the Debentures and the shares of our common stock
issuable upon conversion of the Debentures have ceased to be outstanding
(whether as a result of redemption, repurchase and cancellation,
conversion or otherwise).
Subsequent to our filing of a shelf registration statement, we will:
- provide to each holder named in the shelf registration statement copies
of the prospectus that is a part of the shelf registration statement;
- notify each such holder when the shelf registration statement has become
effective; and
- take certain other actions as are required to permit unrestricted resales
of the Debentures and the shares of our common stock issuable upon
conversion of the Debentures.
Each holder who sells securities pursuant to the shelf registrations
statement generally will be:
- required to be named as a selling holder in the related prospectus;
- required to deliver a prospectus to the purchaser;
- subject to certain of the civil liability provisions under the Securities
Act in connection with the holder's sales; and
- bound by the provisions of the registration rights agreement which are
applicable to the holder (including certain indemnification rights and
obligations).
We may suspend the holder's use of the prospectus for a period not to
exceed 45 days in any 90-day period, and not to exceed an aggregate of 120 days
in any 360-day period under specified circumstances relating to pending
corporate developments, public filings with the SEC and similar events.
Notwithstanding the foregoing, we may extend the suspension period from 45
days to 60 days under specified circumstances relating to possible acquisitions,
financings or other material business transactions. We need not specify the
nature of the event giving rise to a suspension in any notice to holders of the
Debentures of the existence of such a suspension. Each holder, by its acceptance
of the Debentures, agrees to hold any communication by us in response to a
notice of a proposed sale in confidence.
If,
- on or prior to the 120th day after the first date of original issuance of
the Debentures, the shelf registration statement has not been filed; or
- on or prior to the 180th day after the first date of original issuance of
the Debentures, the shelf registration statement has not been declared
effective; or
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- after the shelf registration statement has been declared effective, such
shelf registration statement ceases to be effective or fails to be usable
in connection with resales of the Debentures and shares of our common
stock issuable upon the conversion of the Debentures in accordance with
and during the periods specified in the registration rights agreement and
we do not cure the shelf registration statement within five business days
by filing a post-effective amendment, prospectus supplement or report
pursuant to the Exchange Act or, if applicable, we do not terminate the
suspension period, described in the preceding paragraph, by the 45th or
60th day, as the case may be, or a suspension period exceeds an aggregate
of 120 days in any 360-day period;
each such event referred to in the prior bullet points, a "registration
default," then additional amounts will accrue on the Debentures, from and
including the day following the registration default to but excluding the
earlier of (1) the day on which the registration default has been cured and (2)
the date the shelf registration statement is no longer required to be kept
effective. Additional amounts will be paid semiannually in arrears, with the
first semiannual payment due on the first interest payment date following the
date on which such additional amounts begin to accrue, and will accrue at a rate
per year equal to:
- 0.25% of the principal amount of a Debenture to and including the 90th
day following such registration default; and
- 0.50% of the principal amount of a Debenture from and after the 91st day
following such registration default.
In no event will additional amounts accrue at a rate per year exceeding
0.50%. If a holder has converted some or all of its Debentures into shares of
our common stock, the holder will be entitled to receive equivalent amounts
based on the principal amount to the date of calculation of each Debenture
converted. We will have no other liabilities for monetary damages with respect
to our registration obligations. A holder will not be entitled to these
additional amounts unless it has provided all information requested by the
questionnaire prior to the deadline.
If a shelf registration statement covering the resales of the Debentures
and common stock into which the Debentures are convertible is not effective,
these securities may not be sold or otherwise transferred except in accordance
with the provisions set forth under "Notice to Investors."
This summary of certain provisions of the registration rights agreement is
subject to, and is qualified in its entirety by reference to, all the provisions
of the registration rights agreement, a copy of which has been incorporated by
reference as an exhibit to the registration statement of which this prospectus
forms a part.
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DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation authorizes the issuance of up to
100,000,000 shares of common stock, par value $0.01 per share, and 50,000,000
shares of preferred stock, par value $0.01 per share, the rights and preferences
of which may be established from time to time by our board of directors. On
September 30, 2004, 29,187,829 shares of our common stock and no shares of
preferred stock were outstanding.
COMMON STOCK
Holders of record of common stock are entitled to one vote per share on all
matters upon which stockholders have the right to vote. The rights attached to
the shares of common stock do not provide for cumulative voting rights or
preemptive rights. Therefore, holders of more than 50% of the shares of common
stock are able to elect all our directors eligible for election each year. All
issued and outstanding shares of our common stock are, and the common stock
issuable upon conversion of the Debentures will be, validly issued, fully paid
and non-assessable. Holders of our common stock are entitled to such dividends
as may be declared from time to time by our board of directors out of funds
legally available for that purpose. Upon dissolution, holders of our common
stock are entitled to share pro rata in the assets of our company remaining
after payment in full of all of our liabilities and obligations, including
payment of the liquidation preference, if any, of any preferred stock then
outstanding. There are no redemption or sinking fund provisions applicable to
the common stock.
PREFERRED STOCK
Our board may, from time to time, issue up to an aggregate 50,000,000
shares of preferred stock in one or more series without shareholder approval.
The board of directors can fix the designation powers, rights, preferences and
privileges of the shares of each series and any qualifications, limitations or
restrictions. Issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our
outstanding voting stock. No shares of preferred stock are currently
outstanding. We have no present plans to issue any shares of preferred stock.
DELAWARE ANTI-TAKEOVER STATUTE AND CHARTER PROVISIONS
Under Delaware law, we may not engage in a "business combination," which
includes a merger or sale of more than 10% of our assets, with any "interested
stockholder," namely, a stockholder who owns 15% or more of our outstanding
voting stock, as well as affiliates and associates of any of these persons, for
three years following the time that stockholder became an interested stockholder
unless:
- the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding those shares owned by persons who are directors and
also officers; or
- at or after the time the stockholder became an interested stockholder the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder.
The authorization of undesignated preferred stock in our charter makes it
possible for our board of directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of us. These and other provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of us.
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LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, the certificates of
incorporation and bylaws of our companies provide that we will indemnify our
directors and officers to the fullest extent permitted by Delaware law. We
believe that the provisions in our certificates of incorporation and bylaws are
necessary to attract and retain qualified persons as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon Investor
Services LLC. Its address is 44 Wall Street, New York, NY 10005.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Ernst & Young LLP
regarding the material U.S. federal income tax consequences (and to the extent
set forth below, certain U.S. federal estate tax consequences for non-U.S.
holders, as defined below) relevant to the purchase, ownership and disposition
of the Debentures and common stock into which the Debentures are convertible,
but is not a complete analysis of all potential tax considerations relating
thereto that may be relevant to a holder based on its particular situation. This
discussion is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder,
administrative rulings and judicial decisions, all as of the date hereof. These
authorities may be changed or revoked, possibly retroactively, so as to result
in U.S. federal income tax consequences different from those set forth below. We
have not sought any ruling from the Internal Revenue Service (the "IRS") with
respect to the statements made and the conclusions reached in the following
summary, and there can be no assurance that the IRS will agree with such
statements and conclusions.
This discussion is limited to beneficial owners of Debentures who purchased
Debentures upon their initial issuance at their initial issue price (as defined
below under "Consequences to U.S. Holders -- Accrual of Interest") and who hold
the Debentures and the common stock into which such Debentures are convertible
as capital assets. This discussion also does not address the tax considerations
arising under the laws of any foreign, state or local jurisdiction. In addition,
this discussion does not address tax considerations applicable to an investor's
particular circumstances or to investors that may be subject to special tax
rules, including, without limitation:
- banks, insurance companies or other financial institutions;
- persons subject to U.S. federal estate, gift or alternative minimum tax
arising from the purchase, ownership or disposition of the Debentures
(except to the extent specifically set forth below);
- tax-exempt organizations;
- dealers in securities or currencies;
- traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
- foreign persons or entities (except to the extent specifically set forth
below);
- persons that own, or are deemed to own, more than 5% of our stock (except
to the extent specifically set forth below);
- certain former citizens or long-term residents of the United States;
- U.S. holders (as defined below) whose functional currency is not the U.S.
dollar;
49
- persons who hold the Debentures or common stock as a position in a
hedging transaction, "straddle," "conversion transaction" or other risk
reduction transaction; or
- persons deemed to sell the Debentures or common stock under the
constructive sale provisions of the Code.
In addition, if a beneficial owner of Debentures is an entity treated as a
partnership for U.S. federal income tax purposes, the tax treatment of each
partner of such partnership will generally depend upon the status of the partner
and upon the activities of the partnership. A beneficial owner of Debentures
that is a partnership, and partners in such partnerships, should consult their
own tax advisors regarding the tax consequences of the purchase, ownership and
disposition of the Debentures and common stock.
THIS SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL
INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE URGED TO CONSULT YOUR TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO
YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE DEBENTURES AND COMMON STOCK ARISING UNDER THE
FEDERAL ESTATE AND GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN
OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
CLASSIFICATION OF THE DEBENTURES
Under the indenture governing the Debentures, we and each holder and
beneficial owner of the Debentures agree (in the absence of a change in
applicable law requiring a contrary treatment), for U.S. federal income tax
purposes, to treat the Debentures as indebtedness that is subject to the
Treasury Regulations governing contingent payment debt instruments (the
"Contingent Debt Regulations"). The remainder of this discussion assumes that
the Debentures will be so treated and does not address any possible differing
treatment of the Debentures. In June 2002, the IRS issued a revenue ruling with
respect to instruments similar to the Debentures and this ruling supports
certain aspects of the treatment described below. However, the application of
the Contingent Debt Regulations to instruments such as the Debentures remains
uncertain in several other respects, and we have sought no rulings from the IRS
with respect to any of the tax consequences discussed below. Accordingly, no
assurance can be given that the IRS or a court will agree with the treatment
described herein. Any differing treatment could affect the amount, timing and
character of income, gain or loss in respect of an investment in the Debentures
or with respect to our common stock received on conversion of a Debenture. In
particular, a beneficial owner might be required to accrue original issue
discount at a higher rate or a lower rate, might not recognize income, gain or
loss upon conversion of the Debentures to common stock, and might recognize
capital gain or loss upon a taxable disposition of the Debentures. You should
consult your tax advisor concerning the tax treatment of ownership and
disposition of the Debentures or common stock.
CONSEQUENCES TO U.S. HOLDERS
The following is a summary of certain material U.S. federal income tax
consequences that will apply to you if you are a U.S. holder of the Debentures
or common stock. Certain consequences to "non-U.S. holders" of the Debentures or
common stock are described under "-- Consequences to Non-U.S. Holders" below.
The term "U.S. holder" means a beneficial owner of a Debenture or common stock
who or that is:
- an individual citizen or resident of the United States;
- a corporation or other entity taxable as a corporation for U.S. federal
income tax purposes created or organized in the United States or under
the laws of the United States, any state thereof, or the District of
Columbia;
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- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust that (1) is subject to the primary supervision of a U.S. court
and one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) has a valid election in effect
under applicable Treasury Regulations to be treated as a U.S. person.
ACCRUAL OF INTEREST
Under the Contingent Debt Regulations, actual cash payments on the
Debentures, if any, will not be reported separately as taxable income, but will
be taken into account under such regulations. As discussed more fully below, the
effect of the Contingent Debt Regulations will be to:
- require you, regardless of your usual method of tax accounting, to use
the accrual method with respect to the Debentures;
- require you to accrue and include in taxable income each year original
issue discount at the comparable yield (as described below) which will be
substantially in excess of interest payments actually received by you;
and
- generally result in ordinary rather than capital treatment of any gain,
and to some extent loss, on the sale, exchange, repurchase or redemption
of the Debentures.
You will be required to accrue an amount of ordinary interest income as
original issue discount for U.S. federal income tax purposes, for each accrual
period prior to and including the maturity date of the Debenture, that equals:
- the product of (i) the adjusted issue price (as defined below) of the
Debentures as of the beginning of the accrual period and (ii) the
comparable yield (as defined below) of the Debentures, adjusted for the
length of the accrual period;
- divided by the number of days in the accrual period; and
- multiplied by the number of days during the accrual period that you held
the Debentures.
The initial issue price of a Debenture was the first price at which a
substantial amount of the Debentures were sold to the public, excluding sales to
bond houses, brokers or similar persons or organizations acting in the capacity
of underwriters, placement agents or wholesalers. The adjusted issue price of a
Debenture will be its issue price increased by any original issue discount
previously accrued, determined without regard to any adjustments to original
issue discount accruals described below, and decreased by the amount of any
noncontingent payment previously made with respect to the Debenture and the
projected amount of any contingent payment previously scheduled to be made with
respect to the Debentures under the projected payment schedule described below.
Under the Contingent Debt Regulations, you will be required to include
original issue discount in income each year, regardless of your usual method of
tax accounting, based on the comparable yield of the Debentures. We have
determined the comparable yield of the Debentures based on the rate, as of the
initial issue date, at which we would have issued a fixed rate nonconvertible
debt instrument with no contingent payments but with terms and conditions
similar to those of the Debentures. Accordingly, we have determined that the
comparable yield is an annual rate of 8.75%, compounded semi-annually. There can
be no assurance that the IRS will not challenge our determination of the
comparable yield or that any such challenge would not be successful.
We are required to furnish to you the comparable yield and, solely for U.S.
federal income tax purposes, a projected payment schedule that includes the
noncontingent interest payments on the Debentures and estimates of the amount
and timing of contingent interest payments and the amount of the payment upon
maturity of the Debentures taking into account the fair market value of the
common stock that might be paid upon a conversion of the Debentures. You may
obtain the projected payment schedule by submitting a written request for it to
us at the address set forth on page iii of this prospectus. By purchasing the
Debentures, you agree in the indenture to be bound by our determination of the
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comparable yield and projected payment schedule. For U.S. federal income tax
purposes, you must use the comparable yield and the projected payment schedule
in determining your original issue discount accruals, and the adjustments
thereto described below, in respect of the Debentures.
The comparable yield and the projected payment schedule are not provided
for any purpose other than the determination of your original issue discount and
adjustments thereof in respect of the Debentures for U.S. federal income tax
purposes and do not constitute a projection or representation regarding the
actual amount or timing of the payments on a Debenture.
ADJUSTMENTS TO INTEREST ACCRUALS ON THE DEBENTURES
If the actual contingent payments made on the Debentures differ from the
projected contingent payments, adjustments will be made for the difference. If,
during any taxable year, you receive actual contingent payments with respect to
the Debentures for that taxable year that in the aggregate exceed the total
amount of projected contingent payments for the taxable year, you will incur a
positive adjustment equal to the amount of such excess. Such positive adjustment
will be treated as additional original issue discount in such taxable year. For
these purposes, the actual contingent payments in a taxable year include the
fair market value of property received in that year. If you receive in a taxable
year actual contingent payments that in the aggregate are less than the amount
of projected contingent payments for the taxable year, you will incur a negative
adjustment equal to the amount of such deficit. A negative adjustment will be
treated as follows:
- first, a negative adjustment will reduce the amount of original issue
discount required to be accrued in the current year;
- second, any negative adjustments that exceed the amount of original issue
discount accrued in the current year will be treated as ordinary loss to
the extent of your total prior original issue discount inclusions with
respect to the Debentures, reduced to the extent such prior original
issue discount inclusions were previously offset by prior negative
adjustments; and
- third, any excess negative adjustments will be carried forward and will
be treated as a regular negative adjustment in the succeeding taxable
year or will reduce the amount realized on a sale, exchange, repurchase,
redemption or conversion of your Debentures.
SALE, EXCHANGE, CONVERSION OR REDEMPTION OF THE DEBENTURES
Upon the sale, exchange, repurchase or redemption of a Debenture, as well
as upon a conversion of a Debenture, you generally will recognize gain or loss
equal to the difference between your amount realized and your adjusted tax basis
in the Debenture. By purchasing a Debenture, you agree in the indenture that
under the Contingent Debt Regulations, the amount realized would include the
fair market value of our common stock that you receive on the conversion or
repurchase as a contingent payment. Such gain on a Debenture generally will be
treated as interest income. Loss from the disposition of a Debenture will be
treated as ordinary loss to the extent of your prior net original issue discount
inclusions with respect to the Debentures. Any loss in excess of that amount
will be treated as capital loss, which will be long-term if the Debentures were
held for more than one year. The deductibility of capital losses is subject to
limitations.
Special rules apply in determining the tax basis of a Debenture. Your
adjusted tax basis in a Debenture is generally equal to your original purchase
price for the Debenture, increased by original issue discount (determined
without regard to any adjustments to original issue discount accruals described
above) you previously accrued on the Debenture, and reduced by the amount of any
noncontingent payment previously made with respect to the Debenture and the
projected amount of any contingent payment previously scheduled to be made on
the Debenture under the projected payment schedule described above.
52
Under this treatment, your tax basis in common stock received upon
conversion or repurchase of a Debenture will equal the then current fair market
value of such common stock. Your holding period for our common stock will
commence on the day after conversion or repurchase.
If you convert your Debentures between the record date for an interest
payment and the next interest payment date and, as a result, receive a payment
of cash interest or contingent cash interest, as described in "Description of
Debentures -- Conversion Rights," you should consult your tax advisors
concerning the appropriate tax treatment of such payments.
CONSTRUCTIVE DIVIDENDS
Holders of convertible debt instruments such as the Debentures may, in
certain circumstances, be deemed to have received taxable distributions of stock
if the conversion price of such instruments is adjusted (for example, an
increase in the conversion rate on account of certain cash dividends). However,
adjustments to the conversion price made pursuant to a bona fide reasonable
adjustment formula, which has the effect of preventing the dilution of the
interest of the holders of the debt instruments, will generally not be deemed to
result in a constructive taxable distribution of stock. Certain of the possible
adjustments provided in the Debentures may not qualify as being pursuant to a
bona fide reasonable adjustment formula. If such adjustments are made, you will
be deemed to have received constructive distributions includible in your income
in the manner described under "-- Dividends" below even though you have not
received any cash or property as a result of such adjustments. In certain
circumstances, the failure to provide for such an adjustment may also result in
a constructive taxable distribution to you.
DIVIDENDS
If you convert your Debenture into common stock, distributions, if any,
made on our common stock generally will be included in your income as ordinary
dividend income to the extent of our current and accumulated earnings and
profits. Distributions in excess of our current and accumulated earnings and
profits will be treated as a return of capital to the extent of your adjusted
tax basis in the common stock and thereafter as capital gain from the sale or
exchange of such common stock. Dividends received by a corporate U.S. holder may
be eligible for a dividend received deduction.
Pursuant to recently enacted legislation, dividends on our common stock
received by certain non-corporate U.S. holders, including individuals, may
qualify for a reduced rate of U.S. federal income tax.
SALE, EXCHANGE OR REDEMPTION OF COMMON STOCK
Upon the sale, exchange or redemption of our common stock, you generally
will recognize capital gain or loss equal to the difference between (i) the
amount of cash and the fair market value of any property received upon the sale,
exchange or redemption and (ii) your adjusted tax basis in the common stock.
Such capital gain or loss will be long-term capital gain or loss if your holding
period in the common stock is more than one year at the time of the sale,
exchange or redemption. Long-term capital gains recognized by certain
noncorporate U.S. holders, including individuals, will generally be subject to a
reduced rate of U.S. federal income tax. Your adjusted tax basis and holding
period in common stock received upon conversion or repurchase of a Debenture are
determined as discussed above under "-- Sale, Exchange, Conversion or Redemption
of the Debentures." The deductibility of capital losses is subject to
limitations.
ADDITIONAL PAYMENTS
We may be required to pay additional amounts to you if we do not file or
cause to be declared effective a registration statement, as described above
under "Registration Rights." We intend to take the position for U.S. federal
income tax purposes that any such additional amounts should be taxable to you as
additional ordinary income when received or accrued, in accordance with your
method of tax accounting. This position is based in part on our determination
that as of the date of issuance of the Debentures, the possibility that such
additional amounts would have to be paid is a "remote" or "incidental"
contingency within the meaning of applicable Treasury Regulations. Our
determination that such possibility is a remote
53
or incidental contingency is binding on you under the indenture. However, the
IRS may take a contrary position from that described above, which could affect
the timing and character of your income with respect to such additional amounts.
If we do fail to file or cause to be declared effective a registration
statement, you should consult your tax advisors concerning the appropriate tax
treatment of the payment of such additional amounts to you.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We are required to furnish to the record holders of the Debentures and
common stock, other than corporations and other exempt holders, and to the IRS,
information with respect to interest paid or original issue discount accrued on
the Debentures and dividends paid on the common stock.
You may be subject to backup withholding with respect to interest paid on
the Debentures, dividends paid on the common stock or with respect to proceeds
received from a disposition of the Debentures or shares of common stock. Certain
holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to backup withholding. You will be
subject to backup withholding if you are not otherwise exempt and you:
- fail to furnish your taxpayer identification number ("TIN"), which, for
an individual, is ordinarily his or her social security number;
- furnish an incorrect TIN;
- are notified by the IRS that you have failed to properly report payments
of interest or dividends; or
- fail to certify, under penalties of perjury, that you have furnished a
correct TIN and that the IRS has not notified you that you are subject to
backup withholding.
Backup withholding is not an additional tax but, rather, is a method of tax
collection. You generally will be entitled to credit any amounts withheld under
the backup withholding rules against your U.S. federal income tax liability
provided that the required information is furnished to the IRS in a timely
manner.
CONSEQUENCES TO NON-U.S. HOLDERS
The following is a summary of certain material U.S. federal income tax
consequences and estate tax consequences that will apply to you if you are a
non-U.S. holder of the Debentures or common stock. For purposes of this
discussion, a "non-U.S. holder" means a beneficial owner of Debentures or common
stock who or that is not a U.S. holder (as defined below).
PAYMENTS OF INTEREST
In general, subject to the discussion below concerning backup withholding,
you will not be subject to the U.S. federal withholding tax with respect to
payments of interest on the Debentures (including amounts taken into income as
interest under the accrual rules described above under "-- Consequences to U.S.
Holders" and amounts attributable to the shares of our common stock received
upon a conversion of the Debentures) provided that:
- you do not own, actually or constructively, 10% or more of the total
combined voting power of all classes of our stock entitled to vote within
the meaning of Section 871(h)(3) of the Code;
- you are not a "controlled foreign corporation" with respect to which we
are, directly or indirectly, a "related person" as defined in the Code;
- our Debentures and common stock are actively traded within the meaning of
Section 871(h)(4)(C)(v)(l) and we are not a "United States real property
holding corporation;" and
54
- you are not a bank whose receipt of interest (including original issue
discount) on a Debenture is described in Section 881(c)(3)(A) of the
Code; and
- you provide your name and address, and certify, under penalties of
perjury, that you are not a U.S. person (which certification may be made
on an IRS Form W-8BEN (or successor form)), or you hold your Debentures
through certain intermediaries, and you and the intermediaries satisfy
the certification requirements of applicable Treasury Regulations.
Special certification rules apply to non-U.S. holders that are pass-through
entities rather than corporations or individuals. Prospective investors should
consult their tax advisors regarding the certification requirements for non-U.S.
holders.
If you cannot satisfy the requirements described above, you will be subject
to the 30% U.S. federal withholding tax with respect to payments of interest on
a Debenture, unless you provide us with a properly executed (1) IRS Form W-8BEN
(or successor form) claiming an exemption from or reduction in withholding under
an applicable U.S. income tax treaty or (2) IRS Form W-8ECI (or successor form)
stating that interest paid on the Debenture is not subject to withholding tax
because it is effectively connected with the conduct of a U.S. trade or
business.
If you are engaged in a trade or business in the United States and interest
on a Debenture is effectively connected with your conduct of that trade or
business, you will be subject to U.S. federal income tax on that interest on a
net income basis (although you will be exempt from the 30% withholding tax,
provided the certification requirements described above are satisfied) in the
same manner as if you were a U.S. person as defined under the Code. In addition,
if you are a foreign corporation, you may be subject to a branch profits tax
equal to 30% (or such lower rate as may be prescribed under an applicable U.S.
income tax treaty) of your earnings and profits for the taxable year, subject to
adjustments, that are effectively connected with your conduct of a trade or
business in the United States. For this purpose, interest (including original
issue discount) will be included in your earnings and profits.
Absent further relevant guidance from the IRS, in the event that we do not
file or cause to be declared effective a registration statement, as described
under "Registration Rights," and we pay additional amounts to you as described
therein, we intend to treat such additional payments as subject to U.S. federal
withholding tax. Therefore, we intend to withhold on any such payments at a rate
of 30% unless we receive an IRS Form W-8BEN or an IRS Form W-8ECI from you
claiming, respectively, that such payments are subject to reduction or
elimination of withholding under an applicable U.S. income tax treaty or that
such payments are effectively connected with the conduct of a U.S. trade or
business. You should consult your own tax advisers as to whether you can obtain
a refund for the withholding tax imposed on such additional amounts because such
amounts represent interest qualifying for an exemption or based on some other
rationale.
SALE, EXCHANGE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF THE DEBENTURES OR
COMMON STOCK
Any gain realized by you on the sale, exchange, redemption, conversion or
other taxable disposition of a Debenture will generally be treated as interest
income generally subject to the rules described above under "-- Payments of
Interest."
Any gain realized by you on the sale, exchange or other taxable disposition
of our common stock generally will not be subject to U.S. federal income tax
unless:
- the gain is effectively connected with your conduct of a U.S. trade or
business;
- you are an individual who is present in the United States for 183 days or
more in the taxable year of disposition, and certain conditions are met;
- you are subject to Code provisions applicable to certain U.S.
expatriates; or
55
- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time during the shorter of
the five-year period ending on the date of disposition or the period that
you held our common stock.
If your gain is described in the first bullet point above, you generally
will be subject to U.S. federal income tax on the net gain derived from the sale
in the same manner as if you were a U.S. person as defined under the Code, and
if you are a corporation, then any such effectively connected gain received by
you may also, under certain circumstances, be subject to the branch profits tax
at a 30% rate (or such lower rate as may be prescribed under an applicable U.S.
income tax treaty). If you are an individual described in the second bullet
point above, you will be subject to a flat 30% U.S. federal income tax on the
gain derived from the sale, which may be offset by U.S. source capital losses,
even though you are not considered a resident of the United States. Such holders
are urged to consult their tax advisors regarding the tax consequences of the
acquisition, ownership and disposition of the common stock.
We do not believe that we are currently, and we do not anticipate becoming,
a United States real property holding corporation. Even if we were, or were to
become, a United States real property holding corporation, no adverse tax
consequences would apply to you if you hold, directly or indirectly, at all
times during the applicable period, five percent or less of our common stock,
provided that our common stock was regularly traded on an established securities
market.
DIVIDENDS
In general, dividends, if any, received by you with respect to our common
stock (and any deemed distributions resulting from certain adjustments, or
failures to make certain adjustments, to the conversion price of the Debentures,
see "-- Consequences to U.S. Holders -- Constructive Dividends" above) will be
subject to withholding of U.S. federal income tax at a 30% rate (which in the
case of any deemed distributions generally would be satisfied by withholding
from subsequent payments on the Debentures), unless such rate is reduced by an
applicable U.S. income tax treaty. Dividends that are effectively connected with
your conduct of a trade or business in the United States are generally subject
to U.S. federal income tax on a net income basis and are exempt from the 30%
withholding tax (assuming compliance with certain certification requirements).
Any such effectively connected dividends received by a non-U.S. holder that is a
corporation may also, under certain circumstances, be subject to the branch
profits tax at a 30% rate or such lower rate as may be prescribed under an
applicable U.S. income tax treaty.
In order to claim the benefit of a U.S. income tax treaty or to claim
exemption from withholding because dividends paid to you on our common stock are
effectively connected with your conduct of a trade or business in the United
States, you must provide a properly executed IRS Form W-8BEN for treaty benefits
or W-8ECI for effectively connected income (or such successor form as the IRS
designates), prior to the payment of dividends. These forms must be periodically
updated. You may obtain a refund of any excess amounts withheld by timely filing
an appropriate claim for refund.
U.S. FEDERAL ESTATE TAX
If you are an individual and are not a citizen or resident of the United
States (as specially defined for U.S. federal estate tax purposes) at the time
of your death, your Debentures will generally not be subject to the U.S. federal
estate tax, unless, at the time of your death:
- you own, actually or constructively, 10% or more of the total combined
voting power of all classes of our stock entitled to vote within the
meaning of section 871(h)(3) of the Code; or
- payments with respect to your Debentures are effectively connected with
your conduct of a trade or business in the United States.
If you are an individual who at the time of death is not a citizen or
resident of the United States (as specially defined for U.S. federal estate tax
purposes), your common stock will be subject to U.S. federal estate tax, unless
an applicable estate tax treaty provides otherwise.
56
BACKUP WITHHOLDING AND INFORMATION REPORTING
If you are a non-U.S. holder, in general, you will not be subject to backup
withholding and information reporting with respect to payments that we make to
you provided that we do not have actual knowledge or reason to know that you are
a U.S. person and you have given us the statement described above under
"-- Consequences to Non-U.S. Holders -- Payments of Interest." In addition, you
will not be subject to backup withholding or information reporting with respect
to the proceeds of the sale of a Debenture or a share of common stock within the
United States or conducted through certain U.S.-related financial
intermediaries, if the payor receives the statement described above and does not
have actual knowledge or reason to know that you are a U.S. person, as defined
under the Code, or you otherwise establish an exemption. However, we may be
required to report annually to the IRS and to you the amount of, and the tax
withheld with respect to, any interest or dividends paid to you, regardless of
whether any tax was actually withheld. Copies of these information returns may
also be made available under the provisions of a specific treaty or agreement to
the tax authorities of the country in which you reside.
You generally will be entitled to credit any amounts withheld under the
backup withholding rules against your U.S. federal income tax liability provided
that the required information is furnished to the IRS in a timely manner.
SELLING SECURITYHOLDERS
The Debentures originally were issued by us and sold by Banc of America
Securities LLC and Cochran, Caronia Securities LLC, as the initial purchasers,
in transactions exempt from the registration requirements of the Securities Act
of 1933 to persons reasonably believed by the initial purchasers to be qualified
institutional buyers. Selling securityholders, including their transferees,
pledgees or donees or their successors, may from time to time offer and sell any
or all of the Debentures and the common stock into which the Debentures are
convertible pursuant to this prospectus. The selling securityholders may offer
all, some or none of the Debentures and the common stock.
The table below sets forth the name of each selling securityholder, the
principal amounts of Debentures that may be offered by each selling
securityholder under this prospectus and the number of shares of common stock
into which the Debentures are convertible. The information is based on
information provided to us by or on behalf of the selling securityholders on or
prior to December 16, 2004. The selling securityholders identified below may
have sold, transferred or otherwise disposed of all or a portion of their
Debentures or common stock since the date on which they provided this
information in transactions exempt from the registration requirements of the
Securities Act. Information about the selling securityholders may change from
time to time. Any changed information will be set forth in prospectus
supplements or post-effective amendments, as required.
Because the selling securityholders may offer all or some portion of the
Debentures or the common stock into which the Debentures are convertible, we
cannot estimate the amount of Debentures or common stock that may be held by the
selling securityholders upon the completion of any sales. For information on the
procedure for sales by selling securityholders, read the disclosure under the
heading "Plan of Distribution" below.
NUMBER OF NUMBER OF
SHARES OF SHARES
PRINCIPAL AMOUNT OF COMMON OF COMMON
DEBENTURES PERCENTAGE OF STOCK STOCK PERCENTAGE OF
BENEFICIALLY OWNED DEBENTURES BENEFICIALLY UNDERLYING THE COMMON STOCK
NAME OF SELLING SECURITYHOLDER(1) THAT MAY BE SOLD OUTSTANDING OWNED(2) DEBENTURES(3)(4) OUTSTANDING(5)
--------------------------------- ------------------- ------------- ------------ ---------------- --------------
Akela Capital Master Fund,
Ltd. ........................... 7,500,000 6.97 0 179,277 *
Alexandra Global Master Fund,
Ltd. ........................... 15,000,000 13.94 0 358,555 1.22
AM International E MAC 63 Ltd. ... 240,000 * 0 5,736 *
AM Master Fund I LP............... 2,100,000 1.95 0 50,197 *
Banc of America Securities
LLC(7).......................... 3,425,000 3.18 0 81,870 *
57
NUMBER OF NUMBER OF
SHARES OF SHARES
PRINCIPAL AMOUNT OF COMMON OF COMMON
DEBENTURES PERCENTAGE OF STOCK STOCK PERCENTAGE OF
BENEFICIALLY OWNED DEBENTURES BENEFICIALLY UNDERLYING THE COMMON STOCK
NAME OF SELLING SECURITYHOLDER(1) THAT MAY BE SOLD OUTSTANDING OWNED(2) DEBENTURES(3)(4) OUTSTANDING(5)
--------------------------------- ------------------- ------------- ------------ ---------------- --------------
BNP Paribas Equity Strategies,
SNC(8).......................... 3,583,000 3.33 844 85,646 *
CNH CA Master Account, L.P. ...... 3,000,000 2.79 0 71,711 *
Cooper Neff Convertible Strategies
(Cayman) Master Fund, LP........ 3,462,000 3.22 0 82,754 *
CSS, LLC(7)....................... 1,000,000 * 0 23,903 *
DBAG London(8).................... 6,225,000 5.78 0 148,800 *
Deephaven Domestic Convertible
Trading Ltd.(8)................. 4,874,000 4.53 0 116,506 *
Excelsior Master Fund L.P. ....... 1,000,000 * 0 23,903 *
Family Service Life Insurance
Company(8)...................... 200,000 * 0 4,780 *
Geode U.S. Convertible Arbitrage
Fund, a series of Geode
Investors, LLC.................. 3,000,000 2.79 0 71,711 *
Guardian Life High Delta
Convertibles(8)................. 1,875,000 1.74 0 44,819 *
Guardian Life Insurance Co.(8).... 6,000,000 5.57 0 143,422 *
Guardian Pension Trust(8)......... 300,000 * 0 7,171 *
HFR CA Select Fund................ 1,000,000 * 0 23,903 *
Highbridge International LLC(8)... 2,500,000 2.32 0 59,759 *
Jeffries & Company, Inc.(7)....... 400,000 * 0 9,561 *
Lyxor/AM Investment Fund Ltd. .... 300,000 * 0 7,171 *
Lyxor/Convertible Arbitrage Fund
Limited......................... 660,000 * 0 15,776 *
Man Convertible Bond Master Fund,
Ltd. (c/o Marin Capital
Partners, LP)................... 2,760,000 2.56 0 65,974 *
McMahan Securities Co. L.P.(7).... 250,000 * 0 5,975 *
National Bank of Canada........... 360,000 0 8,605 *
Newport Alternative Income Fund... 1,115,000 1.03 0 26,652 *
RBC Alternative Assets L.P.(8).... 250,000 * 2,800 5,975 *
Sage Capital...................... 4,250,000 3.95 0 101,590 *
San Diego County Employee
Retirement Association.......... 2,000,000 1.86 0 47,807 *
Silvercreek II Limited............ 2,904,000 2.69 0 69,416 *
Silvercreek Limited Partnership... 3,981,000 3.69 0 95,160 *
Singlehedge U.S. Convertible
Arbitrage Fund.................. 814,000 * 0 19,457 *
Sphinx Convertible Arbitrage Fund
SPC............................. 126,000 * 0 3,011 *
St. Thomas Trading, Ltd. (c/o
Marin Capital Partners,
LP)(8).......................... 2,740,000 2.54 0 65,496 *
Sturgeon Limited.................. 731,000 * 0 17,473 *
Sunrise Partners Limited
Partnership(8).................. 3,000,000 2.79 0 71,711 *
Van Eck WW Absolute Return Fund... 80,000 * 0 1,912 *
Xavex Convertible Arbitrage 9
Fund............................ 750,000 * 0 17,927 *
58
NUMBER OF NUMBER OF
SHARES OF SHARES
PRINCIPAL AMOUNT OF COMMON OF COMMON
DEBENTURES PERCENTAGE OF STOCK STOCK PERCENTAGE OF
BENEFICIALLY OWNED DEBENTURES BENEFICIALLY UNDERLYING THE COMMON STOCK
NAME OF SELLING SECURITYHOLDER(1) THAT MAY BE SOLD OUTSTANDING OWNED(2) DEBENTURES(3)(4) OUTSTANDING(5)
--------------------------------- ------------------- ------------- ------------ ---------------- --------------
Zazove Convertible Arbitrage Fund,
L.P. ........................... 7,000,000 6.51 0 167,325 *
Zazove Hedged Convertible Fund,
L.P. ........................... 3,000,000 2.79 0 71,711 *
Zazove Income Fund, L.P. ......... 1,000,000 * 0 23,903 *
Zurich Institutional Benchmarks
Master Fund Ltd. c/o Zazove
Associates, LLC................. 1,000,000 * 0 23,903 *
----------- ----- ----- --------- ----
TOTAL............................. 105,755,000 98.28 3,644 2,527,914(6) 8.65
=========== ===== ===== ========= ====
---------------
* Less than 1%
(1) Also includes any sale of the Debentures and the underlying common stock by
pledgees, donees, transferees or other successors in interest that receive
such securities by pledge, gift, distribution or other non-sale related
transfer from the named selling securityholders. Information about other
selling securityholders will be set forth in prospectus supplements or in
other documents that we file from time to time with the Securities and
Exchange Commission that are incorporated by reference in this prospectus,
if required. See "Where You Can Find More Information."
(2) Excludes common stock issuable upon conversion of the selling
securityholder's Debentures.
(3) Assumes conversion of all of the selling securityholder's Debentures at a
conversion rate of 23.9037 shares of common stock per Debenture and a cash
payment in lieu of the issuance of any fractional share interest. However,
this conversion rate is subject to adjustment as described under
"Description of the Debentures -- Conversion Rights." As a result, the
number of shares of common stock issuable upon conversion of the Debentures
may increase or decrease in the future.
(4) Reflects rounding down of fractional common stock issuable to each selling
securityholder upon conversion of the Debentures.
(5) Calculated using 29,201,327 shares of common stock outstanding as of
December 13, 2004, which excludes shares issuable upon exercise of options
granted by us as described in note 3 under "Capitalization." In calculating
this amount, we did not treat as outstanding the common stock issuable upon
conversion of Debentures.
(6) Column does not add up correctly because the fractional shares to which the
holders would be entitled have been disregarded.
(7) Selling securityholder is a broker-dealer registered pursuant to Section 15
of the Exchange Act.
(8) Selling securityholder is an affiliate of a broker-dealer registered
pursuant to Section 15 of the Exchange Act. An "affiliate" of a registered
broker-dealer includes any company that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, such broker-dealer, but does not include any individuals
employed by such broker-dealer or its affiliates.
None of the selling securityholders listed above has, or within the past
three years had, any position, office or any material relationship with us or
any of our affiliates.
To the extent that any of the selling securityholders identified above are
broker-dealers, they are deemed to be, under interpretations of the Securities
and Exchange Commission, "underwriters" within the meaning of the Securities
Act.
59
With respect to selling securityholders that are affiliates of
broker-dealers, each such selling securityholder has represented to us that they
acquired their Debentures or underlying common stock in the ordinary course of
business and, at the time of the purchase of the Debentures or the underlying
common stock, such selling securityholders had no agreements or understandings,
directly or indirectly, with any person to distribute the Debentures or
underlying common stock. To the extent that we become aware that such entities
did not acquire their Debentures or underlying common stock in the ordinary
course of business or did have such an agreement or understanding, we will file
a post-effective amendment to the registration statement of which this
prospectus forms a part to designate such affiliate as an "underwriter" within
the meaning of the Securities Act.
Only selling securityholders identified above who beneficially own the
Debentures set forth opposite each such selling securityholder's name in the
foregoing table on the effective date of the registration statement, of which
this prospectus forms a part, may sell such securities pursuant to the
registration statement. Prior to any use of this prospectus in connection with
an offering of the Debentures or the underlying common stock by any holder not
identified above, the registration statement of which this prospectus forms a
part will be amended by a post-effective amendment to set forth the name and
aggregate amount of Debentures beneficially owned by the selling securityholder
intending to sell such Debentures or the underlying common stock and the
aggregate amount of Debentures or the number of shares of the underlying common
stock to be offered. The prospectus, which will be a part of such a post-
effective amendment, will also disclose whether any selling securityholder
selling in connection with such prospectus has held any position or office with,
has been employed by or otherwise has had a material relationship with us during
the three years prior to the date of the prospectus if such information has not
been disclosed herein.
VOTING AND DISPOSITIVE POWER
For each selling securityholder that is not a publicly-held corporation or
a subsidiary of a publicly held corporation, the table below identifies the
natural persons having voting or dispositive power over the Debentures for such
selling securityholder. This information is based on information provided to us
by or on behalf of the selling securityholders on or prior to December 16, 2004.
SELLING SECURITYHOLDER NATURAL PERSONS HOLDING VOTING OR DISPOSITIVE POWER FOR THE DEBENTURES
---------------------- ----------------------------------------------------------------------
Akela Capital Master Fund, Ltd. Anthony B. Bosco is the controlling shareholder of Akela Capital
Master Fund, Ltd. Anthony B. Bosco disclaims beneficial ownership.
Alexandra Global Master Fund Ltd. ("Master Alexandra Investment Management, LLC, a Delaware limited liability
Fund") company ("Alexandra"), serves as investment adviser to Master Fund. By
reason of such relationship, Alexandra may be deemed to share
dispositive power or investment control over the shares of common
stock stated as beneficially owned by Master Fund. Alexandra disclaims
beneficial ownership of such shares of common stock. Messrs. Mikhail
A. Filimonov ("Filimonov") and Dimitri Sogoloff ("Sogoloff") are
managing members of Alexandra. By reason of such relationships,
Filimonov and Sogoloff may be deemed to share dispositive power or
investment control over the shares of common stock stated as
beneficially owned by Master Fund. Filimonov and Sogoloff disclaim
beneficial ownership of such shares of common stock.
AM International E MAC 63 Ltd. ("AM AM Investment Partners LLC ("AM Investment") has the authority to vote
International") over AM International's securities as investment advisor. Mark
Friedman and Adam Stern are partners of AM Investment.
60
SELLING SECURITYHOLDER NATURAL PERSONS HOLDING VOTING OR DISPOSITIVE POWER FOR THE DEBENTURES
---------------------- ----------------------------------------------------------------------
AM Master Fund I, LP AM Investment Partners LLC ("AM Investment") has the authority to vote
over AM Master Fund I, LP's securities as investment advisor. Mark
Friedman and Adam Stern are partners of AM Investment.
BNP Paribas Equity Strategies, SNC ("BNP") CooperNeff Advisors, Inc. ("CooperNeff") is investment advisor to BNP.
Christian Menestrier is the controlling shareholder of CooperNeff.
CooperNeff Convertible Strategies (Cayman) CooperNeff (Cayman) Ltd. ("Cayman") is the general partner of Master
Master Fund, LP ("Master Fund") Fund. CooperNeff Advisors, Inc. ("CooperNeff") is investment advisor
to Master Fund and has sole voting and dispositive power over the
securities. Christian Menestrier is the controlling shareholder of
CooperNeff.
CNH CA Master Account, L.P. ("CNH Master") AQR Principal Global Asset Allocation LLC, CNH CA, LTD, CNH, CA II,
LTD are the general partners of CNH Master. CNH Partners, LLC
("Advisor") is the investment advisor of CNH Master and has sole
voting and dispositive power over the securities. Investment
principals for the Advisor are Robert Krail, Mark Mitchell and Todd
Pulvino.
CSS, LLC Michael J. Carusillo, Clayton A. Struve and Nicholas D. Schoewe are
controlling members of CSS, LLC.
Deephaven Domestic Convertible Trading Ltd Colin Smith is the controlling shareholder of Deephaven.
("Deephaven")
Excelsior Master Fund, L.P. Excelsior G.P. Limited ("Excelsior Limited") is the general partner of
Excelsior Master Fund, L.P. Excelsior Capital Management, L.L.C.
("Excelsior LLC") holds Excelsior Limited; Edward Lees and James White
are controlling members of Excelsior LLC.
Family Service Life Insurance Co. ("Family John Murphy is a managing director of Family Service and acts as the
Service") portfolio manager and has dispositive and voting authority over the
securities. John Murphy disclaims any personal beneficial ownership as
this is an account of The Guardian Life Insurance Co.
Geode U.S. Convertible Arbitrage Fund, a Geode Capital Management LP ("GCM LP") is the registered investment
segregated account of Geode Capital advisor to Geode. GCM LP is a wholly-owned subsidiary of Geode Capital
Master Fund Ltd. ("Geode") Management, LLC ("Geode LLC"). Geode LLC is a wholly-owned subsidiary
of Geode Capital Holdings LLC ("Geode Capital"). Edward Johnson, III,
Abigail Johnson and members of their families indirectly own a
majority of the shares of Geode Capital through an irrevocable voting
trust for their benefit administered by a trustee.
Guardian Life High Delta Convertibles John Murphy is a managing director of Guardian Life and acts as the
("Guardian Life") portfolio manager and has dispositive and voting authority over the
securities. John Murphy disclaims any personal beneficial ownership as
this is an account of The Guardian Life Insurance Co.
61
SELLING SECURITYHOLDER NATURAL PERSONS HOLDING VOTING OR DISPOSITIVE POWER FOR THE DEBENTURES
---------------------- ----------------------------------------------------------------------
Guardian Life Insurance Co. ("Guardian John Murphy is a managing director of Guardian Life and acts as the
Life") portfolio manager and has dispositive and voting authority over the
securities. John Murphy disclaims any personal beneficial ownership as
this is an account of The Guardian Life Insurance Co.
Guardian Pension Trust John Murphy is a managing director of Guardian Pension Trust and acts
as the portfolio manager and has dispositive and voting authority over
the securities. John Murphy disclaims any personal beneficial
ownership as this is an account of The Guardian Life Insurance Co.
Highbridge International LLC Highbridge Capital Management is trading advisor to Highbridge
International LLC. Glenn Dubin and Hewey Swieca are principals of
Highbridge Capital Management.
Lyxor/AM Investment Fund Ltd ("Lyxor/AM") AM Investment Partners LLC ("AM Investment") has the authority to vote
over Lyxor/AM's securities as investment advisor. Mark Friedman and
Adam Stern are partners of AM Investment.
Lyxor/Convertible Arbitrage Fund Limited CooperNeff Advisors, Inc. ("CooperNeff") is investment advisor to
("Lyxor/Convertible") Lyxor/Convertible. Christian Menestrier is the controlling shareholder
of CooperNeff.
Man Convertible Bond Master Fund, Ltd. Marin Capital Partners, LP ("LP") is investment advisor to Man
("Man Convertible") Convertible. John Null and J.T. Hansen are principals of LP. John Null
and J.T. Hansen disclaim beneficial ownership.
McMahan Securities Co. L.P. ("McMahan") D. Bruce McMahan is general partner of McMahan.
National Bank of Canada AM Investment Partners LLC ("AM Investment") has the authority to vote
over National Bank of Canada's securities as investment advisor. Mark
Friedman and Adam Stern are partners of AM Investment.
Newport Alternative Income Fund Louise Morwick and Bryn Joynt are general partners of Newport.
("Newport")
RBC Alternative Assets L.P. ("RBC") Sage Capital Management, LLC ("Sage") has sole dispositive power to
vote the securities owned by RBC. Peter Delisser is the controlling
member of Sage.
Sage Capital Management, LLC ("Sage") Peter Delisser is the controlling member of Sage.
Silvercreek II Limited Louise Morwick and Bryn Joynt are general partners of Silvercreek II
Limited.
Silvercreek Limited Partnership Louise Morwick and Bryn Joynt are general partners of Silvercreek
Limited Partnership.
Singlehedge US Convertible Arbitrage Fund CooperNeff Advisors, Inc. ("CooperNeff") is investment advisor to
("Singlehedge") Singlehedge. Christian Menestrier is the controlling shareholder of
CooperNeff.
Sphinx Convertible Arbitrage Fund SPC Colin Smith has sole dispositive power over the securities held by
("Sphinx") Sphinx.
St. Thomas Trading, Ltd. ("St Thomas") Marin Capital Partners, LP ("LP") is investment advisor to St. Thomas.
John Null and J.T. Hansen are principals of LP. John Null and J.T.
Hansen disclaim beneficial ownership.
62
SELLING SECURITYHOLDER NATURAL PERSONS HOLDING VOTING OR DISPOSITIVE POWER FOR THE DEBENTURES
---------------------- ----------------------------------------------------------------------
Sturgeon Limited CooperNeff Advisors, Inc. ("CooperNeff") has sole investment control
and shared voting control. Christian Menestrier is the controlling
shareholder of CooperNeff.
Sunrise Partners Limited Partnership Dawn General Partner Corp. ("Dawn") is the general partner of Sunrise.
("Sunrise") S. Donald Sussman is the controlling shareholder of Dawn. S. Donald
Sussman disclaims beneficial ownership.
Van Eck WW Absolute Return Portfolio ("Van Richard C. Cowell, David J. Olderman, Ralph F. Peters, R. Allastair
Eck") Short and Richard D. Stamberger (the "Trustees") are trustees for Van
Eck. The Trustees disclaim any beneficial ownership.
Xavex Convertible Arbitrage 9 Fund Alexandra Investment Management, LLC, a Delaware limited liability
("Xavex") company ("Alexandra"), serves as investment adviser to Xavex. By
reason of such relationship, Alexandra may be deemed to share
dispositive power or investment control over the shares of common
stock stated as beneficially owned by Master Fund. Alexandra disclaims
beneficial ownership of such shares of common stock. Messrs. Mikhail
A. Filimonov ("Filimonov") and Dimitri Sogoloff ("Sogoloff") are
managing members of Alexandra. By reason of such relationships,
Filimonov and Sogoloff may be deemed to share dispositive power or
investment control over the shares of common stock stated as
beneficially owned by Master Fund. Filimonov and Sogoloff disclaim
beneficial ownership of such shares of common stock.
Zazove Convertible Arbitrage Fund L.P. Zazove Associates LLC ("LLC") is the general partner of Fund. Gene T.
("Fund") Pretti is the controlling member of LLC.
Zazove Hedged Convertible Fund L.P. Zazove Associates LLC ("LLC") is the general partner of Fund. Gene T.
("Fund") Pretti is the controlling member of LLC.
Zazove Income Fund L.P. ("Fund") Zazove Associates LLC ("LLC") is the general partner of Fund. Gene T.
Pretti is the controlling member of LLC.
PLAN OF DISTRIBUTION
The Debentures and the underlying common stock are being registered to
permit the resale of such securities by the holders of them from time to time
after the date of this prospectus. We will not receive any of the proceeds from
the sale by the selling securityholders of the Debentures and common stock. We
will bear the fees and expenses incurred in connection with our obligation to
register the Debentures and the underlying common stock. These fees and expenses
include registration and filing fees, printing and duplication expenses, fees
and disbursements of our counsel, reasonable fees and disbursements of the
trustee and its counsel and of the registrar and transfer agent for the common
stock, and fees and disbursements of one firm of legal counsel for the
securityholders. However, the selling securityholders will pay all underwriting
discounts, commissions and agent's commissions, if any.
The selling securityholders may offer and sell the Debentures and the
common stock into which the Debentures are convertible from time to time in one
or more transactions at fixed prices, at prevailing market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
Such sales may be effected by a variety of methods, including the following:
- in market transactions;
- in privately negotiated transactions;
- through the writing of options;
63
- in a block trade in which a broker-dealer will attempt to sell a block of
securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- if we agree to it prior to the distribution, through one or more
underwriters on a firm commitment or best-efforts basis;
- through broker-dealers, which may act as agents or principals;
- directly to one or more purchasers;
- through agents; or
- in any combination of the above or by any other legally available means.
In connection with the sales of the Debentures and the common stock into
which the Debentures are convertible or otherwise, the selling securityholders
may enter into hedging transactions with broker-dealers, which may in turn
engage in short sales of the offered securities, short and deliver the
Debentures and the common stock into which the Debentures are convertible to
close out such short positions, or loan or pledge the Debentures and the common
stock into which the Debentures are convertible to broker-dealers that in turn
may sell such securities.
If a material arrangement with any underwriter, broker, dealer or other
agent is entered into for the sale of any Debentures and the common stock into
which the Debentures are convertible through a secondary distribution or a
purchase by a broker or dealer, or if other material changes are made in the
plan of distribution of the Debentures and the common stock into which the
Debentures are convertible, a prospectus supplement will be filed, if necessary,
under the Securities Act disclosing the material terms and conditions of such
arrangement. The underwriter or underwriters with respect to an underwritten
offering of Debentures and the common stock into which the Debentures are
convertible and the other material terms and conditions of the underwriting will
be set forth in a prospectus supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of the prospectus supplement. In connection with the sale
of the Debentures and the common stock into which the Debentures are
convertible, underwriters will receive compensation in the form of underwriting
discounts or commissions and may also receive commissions from purchasers of
Debentures and underlying common stock for whom they may act as agent.
Underwriters may sell to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters or commissions from the purchasers for whom they may act as agent.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the Debentures or the underlying
common stock by the selling securityholders. Selling securityholders may decide
not to sell all or a portion of the Debentures or the underlying common stock
offered by them pursuant to this prospectus or may decide not to sell Debentures
or the underlying common stock under this prospectus. In addition, any selling
securityholder may transfer, devise or give the Debentures or the underlying
common stock by other means not described in this prospectus. Any Debentures or
underlying common stock covered by this prospectus that qualify for sale
pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under Rule
144 or Rule 144A rather than pursuant to this prospectus.
The selling securityholders and any underwriters, broker-dealers or agents
participating in the distribution of the Debentures and the common stock into
which the Debentures are convertible may be deemed to be "underwriters" within
the meaning of the Securities Act, and any profit on the sale of the Debentures
or common stock by the selling securityholders and any commissions received by
any such underwriters, broker-dealers or agents may be deemed to be underwriting
commissions under the Securities Act. If the selling securityholders were deemed
to be underwriters, the selling securityholders may be subject to statutory and
implied liabilities including, but not limited to, those of Sections 11, 12 and
17 of the Securities Act and Rule 10b-5 under the Exchange Act.
The selling securityholders and any other person participating in the
distribution will be subject to the applicable provisions of the Exchange Act
and the rules and regulations under the Exchange Act,
64
including, without limitation, Regulation M, which may limit the timing of
purchases and sales of any of the Debentures and the common stock into which the
Debentures are convertible by the selling securityholders and any other relevant
person. Furthermore, Regulation M may restrict the ability of any person engaged
in the distribution of the Debentures and the common stock into which the
Debentures are convertible to engage in market-making activities with respect to
the particular Debentures and the common stock into which the Debentures are
convertible being distributed. All of the above may affect the marketability of
the Debentures and the common stock into which the Debentures are convertible
and the ability of any person or entity to engage in market-making activities
with respect to the Debentures and the common stock into which the Debentures
are convertible.
Under the securities laws of certain states, the Debentures and the common
stock into which the Debentures are convertible may be sold in those states only
through registered or licensed brokers or dealers. In addition, in certain
states the Debentures and the common stock into which the Debentures are
convertible may not be sold unless the Debentures and the common stock into
which the Debentures are convertible have been registered or qualified for sale
in the state or an exemption from registration or qualification is available and
complied with.
We have agreed to indemnify the selling securityholders against certain
civil liabilities, including certain liabilities arising under the Securities
Act, and the selling securityholders will be entitled to contribution from us in
connection with those liabilities. The selling securityholders will indemnify us
against certain civil liabilities, including liabilities arising under the
Securities Act, and will be entitled to contribution from the selling
securityholders in connection with those liabilities.
We are permitted to suspend the use of this prospectus under certain
circumstances relating to corporate developments, public filings with the SEC
and similar events for a period not to exceed 45 days in any three-month period
and not to exceed an aggregate of 120 days in any 12-month period. If the
duration of such suspension exceeds any of the periods above-mentioned, we have
agreed to pay liquidated damages. Please refer to the section entitled
"Description of Debentures -- Registration Rights."
NEW ISSUE OF DEBENTURES
The Debentures are a new issue of securities with no established trading
market. We do not intend to apply for listing of the Debentures on any national
securities exchange or for quotation of the Debentures on any automated dealer
quotation system.
A liquid or active public trading market for the Debentures may never
develop. If an active trading market for the Debentures does not develop, the
market price and liquidity of the Debentures may be adversely affected. If the
Debentures are traded, they may trade at a discount from their initial offering
price, depending on prevailing interest rates, the market for similar
securities, our performance and other factors.
CERTAIN RELATIONSHIPS
SouthTrust Bank is the trustee under the indenture. The trustee was the
lead arranger, administrative agent and syndication agent for our credit
facility that included the term loan that was repaid from a portion of the
proceeds we received from the initial sale of the Debentures and the revolving
credit facility which recently expired but may be renewed or replaced by a new
facility in which the trustee may be a participant. The trustee and its
affiliates also perform certain other commercial banking services for us,
including providing cash management accounts, checking services, and serving as
custodian for our investment securities for which it receives customary fees.
The trustee will be the paying agent, conversion agent, transfer agent, and bid
solicitation agent for the Debentures.
65
LEGAL MATTERS
Unless otherwise specified in a prospectus supplement, certain legal
matters regarding the Debentures and the shares of our common stock issuable
upon conversion of the Debentures have been passed upon for ProAssurance by Burr
& Forman LLP.
EXPERTS
The consolidated financial statements of ProAssurance Corporation appearing
in ProAssurance Corporation's Annual Report (Form 10-K) for the year ended
December 31, 2003, have been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
statements and schedules are incorporated herein by reference in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
66
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$107,600,000
(PROASSURANCE LOGO)
PROASSURANCE CORPORATION
3.90% CONVERTIBLE SENIOR DEBENTURES DUE 2023
------------------------------------------------------------
PROSPECTUS
DECEMBER [ ], 2004
------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
registrant in connection with the issuance and distribution of the Debentures
and shares of underlying common stock being registered hereby, other than
underwriting discounts and commissions. All the amounts shown are estimates,
except the SEC registration fee.
Securities and Exchange Commission registration fee......... $ 9,000
Accounting Fees and Expenses................................ $278,000
Legal fees and expenses..................................... $270,000
Printing fees and expenses.................................. $116,000
Trustee's fees and expenses................................. $ 15,000
Miscellaneous............................................... $ 71,000
--------
Total.................................................. $759,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, the Registrant's certificate of incorporation
provides that the directors of the Registrant will not be held personally liable
for a breach of fiduciary duty as a director, except that a director may be
liable for (1) a breach of the director's duty of loyalty to the corporation or
its shareholders, (2) acts made in bad faith or which involve intentional
misconduct or a knowing violation of the law, (3) illegal payment of dividends
under Section 174 of the Delaware General Corporation Law; or (4) for any
transaction from which the director derives an improper personal benefit. The
Registrant's certificate of incorporation further provides that if Delaware law
is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Registrant shall be eliminated or limited to the fullest extent permitted by
Delaware law, as so amended.
The by-laws of the Registrant provide that the Registrant will indemnify
any person involved in litigation brought by a third party or by or in the right
of the Registrant by reason of the fact that he or she is or was a director,
officer, employee or agent of the Registrant or is or was serving at the request
of the Registrant as a director, officer, employee or agent of another entity.
The Registrant will only indemnify such a person if that person acted in good
faith and in a manner he or she reasonably believed to be lawful and in the best
interests of the Registrant, except that the person will not be entitled to
indemnification in an action in which he or she is found to be liable to the
corporation unless the Delaware Court of Chancery deems indemnification under
these circumstances proper.
The Registrant maintains in effect directors' and officers' liability
insurance which provides coverage against certain liabilities. The Registrant
has entered into indemnification agreements with each of its directors and
executive officers which requires the Registrant to use reasonable efforts to
maintain such insurance during the term of the agreement so long as the Board of
Directors in the exercise of its business judgment determines that the cost is
not excessive and is reasonably related to the amount of coverage and that the
coverage provides a reasonable benefit for such cost. The indemnity agreements
have terms that will automatically renew for successive one year terms on
November 30 each year unless sooner terminated by Registrant on 60 days notice
or upon the indemnitee's termination as an officer, director or employee of
Registrant or its subsidiaries.
The indemnity agreement requires the Registrant to indemnify the executive
officers and directors to the fullest extent permitted under Delaware law to the
extent not covered by liability insurance, including advances of expenses in the
defense of claims against the executive officer or director while acting in such
capacity. It is a condition to such indemnification that the indemnitee acted in
good faith and in a manner
II-1
that he or she believed to be in or not opposed to the interest of the
Registrant or its shareholders, and with respect to a criminal action had no
reasonable cause to believe his or her conduct was unlawful. Indemnification is
not available from the Registrant:
(a) in respect to remuneration that is determined to be in violation of
law;
(b) on account of any liability arising from a suit for an accounting of
profits for the purchase and sale of Registrant's common stock pursuant to
Section 16(b) of the Securities Exchange Act of 1934, as amended;
(c) on account of conduct that is determined to have been knowingly
fraudulent, deliberately dishonest or willful misconduct;
(d) if indemnification is prohibited by the applicable laws of the State of
Delaware;
(e) if the indemnitee is found to be liable to the Registrant or its
subsidiaries unless the Delaware Court of Chancery determines that the
indemnitee is fairly and reasonably entitled to indemnification for expenses
that the court deems proper; or
(f) if a court should determine that such indemnification is not lawful.
The indemnity agreement requires the indemnitee to reimburse the Registrant
for all reasonable expenses incurred or advanced in defending any criminal or
civil suit or proceedings against the indemnitee if the Registrant determines
that indemnity is not available.
The form of the indemnity agreement is included is an exhibit to this
Registration Statement. This summary of the indemnity agreement is qualified in
its entirety by reference to the terms and provisions of the form of the
indemnity agreement included herein as an exhibit.
ITEM 16. EXHIBITS
The exhibits to this registration statement are listed in the Exhibit Index
to this registration statement, which Exhibit Index is hereby incorporated by
reference.
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; provided, however, that notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that the undertakings set forth in clauses (i) and (ii) above
do not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic
II-2
reports filed by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The registrant undertakes that for purposes of determining any liability
under the Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Homewood, State of
Alabama, on this the 16th day of December, 2004.
PROASSURANCE CORPORATION
By: /s/ A. DERRILL CROWE
------------------------------------
A. Derrill Crowe
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ A. DERRILL CROWE Chairman of the Board and Chief December 16, 2004
-------------------------------------- Executive Officer (Principal
A. Derrill Crowe Executive Officer) and Director
/s/ HOWARD H. FRIEDMAN Senior Vice President, Chief December 16, 2004
-------------------------------------- Financial Officer and Secretary
Howard H. Friedman
/s/ VICTOR T. ADAMO Director December 16, 2004
--------------------------------------
Victor T. Adamo
/s/ LUCIAN F. BLOODWORTH* Director December 16, 2004
--------------------------------------
Lucian F. Bloodworth
/s/ PAUL R. BUTRUS Director December 16, 2004
--------------------------------------
Paul R. Butrus
/s/ ROBERT E. FLOWERS* Director December 16, 2004
--------------------------------------
Robert E. Flowers
/s/ JOHN J. MCMAHON, JR.* Director December 16, 2004
--------------------------------------
John J. McMahon, Jr.
/s/ JOHN P. NORTH, JR.* Director December 16, 2004
--------------------------------------
John P. North, Jr.
/s/ ANN F. PUTALLAZ* Director December 16, 2004
--------------------------------------
Ann F. Putallaz
II-4
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM H. WOODHAMS* Director December 16, 2004
--------------------------------------
William H. Woodhams
/s/ WILFRED W. YEARGAN, JR.* Director December 16, 2004
--------------------------------------
Wilfred W. Yeargan, Jr.
/s/ VICTOR T. ADAMO December 16, 2004
--------------------------------------
* Victor T. Adamo, as Attorney-in-Fact
/s/ WILLIAM H. WOODHAMS* Director October 19, 2004
--------------------------------------
William H. Woodhams
/s/ WILFRED W. YEARGAN, JR.* Director October 19, 2004
--------------------------------------
Wilfred W. Yeargan, Jr.
/s/ VICTOR T. ADAMO October 19, 2004
--------------------------------------
Victor T. Adamo
* as attorney-in-fact
II-5
EXHIBIT INDEX
4.1 Purchase Agreement, dated July 1, 2003, between Registrant
and the representatives of the initial purchasers of the
Debentures (without exhibits)*
4.2 Indenture dated July 7, 2003, between Registrant and
SouthTrust Bank as Trustee(1)
4.3 Registration Rights Agreement, dated July 7, 2003, between
and among Registrant and the initial purchasers of the
Debentures(1)
4.4 Specimen of Common Stock Certificate of ProAssurance
Corporation(2)
5.1 Opinion of Burr & Forman LLP as to legality of the Debenture
and common stock covered by the Registration Statement*
5.2 Opinion of Ernst & Young LLP as to certain federal income
tax matters*
12.1 Statement re: Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst & Young LLP -- Report on Consolidated
Financial Statements of Registrant and Subsidiaries
23.2 Consent of Ernst & Young LLP -- Tax Opinion (included in
Exhibit 5.2)*
23.3 Consent of Burr & Forman LLP (included in Exhibit 5.1)*
24.1 Powers of Attorney*
25.1 Statement of Eligibility of SouthTrust Bank as Trustee on
Form T-1*
---------------
* Previously filed.
Footnotes:
(1) Filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the
period ended June 30, 2003 (File No. 001-16533) and incorporated herein by
reference.
(2) Filed as an Exhibit to ProAssurance's Registration Statement on Form S-3
(Commission File No. 333-100526), as amended and incorporated herein by
reference.
II-6