SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material under Rule 14a-12
CNA Surety Corporation
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(Name of Registrant as Specified in Its Charter)
[COMPANY NAME]
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
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CNA SURETY CORPORATION
CNA CENTER
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
ON APRIL 26, 2005
To: The Shareholders of CNA Surety Corporation
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of CNA
Surety Corporation (the "Company") will be held at the Company's business
offices located at CNA Center, 41-South, 333 S. Wabash, Chicago, IL 60685, on
Tuesday, April 26, 2005 , at 9:00 A.M. CDT, for the following purposes:
1. To elect seven directors to serve one-year terms, commencing immediately
upon their election, or to serve until their respective successors are
duly elected and qualified;
2. To ratify the Audit Committee's appointment of the Company's independent
registered public accounting firm, Deloitte & Touche LLP, for fiscal
year 2005; and
3. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on March 1, 2005, as
the record date for the determination of shareholders entitled to notice of, and
to vote at, the Annual Meeting. You are cordially invited to attend the meeting.
In the event you will be unable to attend, you are respectfully requested to
fill in, date, sign and return the enclosed proxy card at your earliest
convenience in the enclosed return envelope.
By Order of the Board of Directors
ENID TANENHAUS
Senior Vice President, General Counsel
and Secretary
March 16, 2005
Chicago, Illinois
IMPORTANT:
PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD IN THE
POSTPAID ENVELOPE PROVIDED TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE
MEETING. IF YOU ATTEND THE MEETING YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO
EVEN THOUGH YOU HAVE SENT IN YOUR PROXY.
CNA SURETY CORPORATION
CNA CENTER
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being mailed or otherwise furnished to shareholders
of CNA Surety Corporation, a Delaware Corporation (the "Company"), on or about
March 16, 2005 , in connection with the solicitation by the Board of Directors
of the Company (the "Board") of proxies to be voted at the Annual Meeting of
Shareholders ("the Annual Meeting") of the Company to be held at the Company's
business offices located at CNA Center, 41-South, 333 S. Wabash, Chicago,
Illinois 60685, at 9:00 A.M. CDT, on Tuesday, April 26, 2005 , and at any
adjournment thereof. Shareholders who, after reading this Proxy Statement, have
any questions should contact Enid Tanenhaus, Secretary of the Company, in
Chicago at (312) 822-3895.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the Annual Meeting, shareholders of the Company will consider and vote
upon:
(i) To elect seven directors to serve one-year terms, commencing
immediately upon their election, or to serve until their respective
successors are duly elected and qualified;
(ii) The ratification of the Board's appointment of the Company's
independent registered public accounting firm, Deloitte & Touche LLP,
for fiscal year 2005; and
(iii) The transaction of such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
The date of this Proxy Statement is March 16, 2005.
PROXY SOLICITATION
The enclosed proxy is solicited by the Board. The cost of this proxy
solicitation is anticipated to be nominal and will be borne by the Company,
including charges and expenses of brokerage firms and others for forwarding
solicitation material to beneficial owners of the Company's Common Stock. The
solicitation generally will be effected by mail and such cost will include the
cost of preparing and mailing the proxy materials. In addition to the use of the
mails, proxies also may be solicited by personal interview, telephone,
telegraph, telecopy, or other similar means. Although solicitation will be made
primarily through the use of the mail, officers, directors, or employees of the
Company may solicit proxies personally or by the above described means without
additional remuneration for such activity. The Company will arrange for
brokerage houses, nominees and other custodians holding common stock of the
Company of record to forward proxy-soliciting material to the beneficial owners
of such shares, and will reimburse such record owners for the reasonable
out-of-pocket expenses incurred by them.
2004 ANNUAL REPORTS
Shareholders are concurrently being furnished with a copy of the Company's
2004 Annual Report to Shareholders, which contains its audited financial
statements for the year ended December 31, 2004. Additional copies of the
Company's Annual Report and Form 10-K for the year ended December 31, 2004, as
filed with the Securities and Exchange Commission (the "SEC"), may be obtained
through links on the Company's web site, cnasurety.com or by contacting Ruth
Jantz, representative of the Company, at CNA Center, Chicago, Illinois 60685,
(312) 822-5326, and such copies will be furnished promptly at no expense.
VOTING SECURITIES AND PROXIES
Only shareholders of record at the close of business on March 1, 2005 (the
"Record Date"), have the right to receive notice of and to vote at the Annual
Meeting and any adjournment thereof. As of the Record Date, 43,114,170 shares of
the Company's Common Stock, $.01 par value, per share, were issued and
outstanding. Each share outstanding on the Record Date for the Annual Meeting
entitles the holder thereof to one vote upon each matter to be voted upon at the
Annual Meeting. The shareholders of a majority of the Company's issued and
outstanding Common Stock, present in person or represented by proxy, shall
constitute a quorum at the Annual Meeting. Abstentions and broker non-votes are
counted as present for purposes of determining the presence or absence of a
quorum for the transaction of business. If, however, a quorum is not present or
represented at the Annual Meeting, the shareholders entitled to vote at the
Annual Meeting, whether present in person or represented by proxy, shall only
have the power to adjourn the Annual Meeting until such time as a quorum is
present or represented. At such time as a quorum is present or represented by
proxy, the Annual Meeting will reconvene without notice to shareholders, other
than an announcement at the prior adjournment of the Annual Meeting, unless the
adjournment is for more than thirty (30) days or a new record date has been set.
If a proxy in the form enclosed is duly executed and returned, the shares
of the Company's Common Stock represented thereby will be voted in accordance
with the specifications made thereon by the shareholder. If no such
specifications are made, such proxy will be voted (i) for election of the
Management Nominees (as hereinafter defined) for directors; (ii) for
ratification of Deloitte & Touche LLP as the Company's Independent registered
public accounting firm for fiscal year 2005; and (iii) at the discretion of
Proxy Agents (as hereinafter defined) with respect to such other business as may
properly come before the Annual Meeting or any adjournment thereof. Abstentions
are counted in tabulations of the votes cast on proposals presented to
shareholders, as to the materials specifically proposed herein, broker non-votes
are not counted for purposes of determining whether a proposal has been
approved. Under applicable Delaware law, a broker non-vote will have no effect
on the outcome of the election of directors. A proxy is revocable at any time
prior to its exercise by either a subsequently dated, properly executed proxy
appointment which is received by the Company prior to the time votes are counted
at the Annual Meeting, or by a shareholder giving notice of revocation to the
Company in writing prior to the Annual Meeting or during the Annual Meeting
prior to the time votes are counted. The mere presence at the Annual Meeting of
a shareholder who appointed a proxy does not itself revoke the appointment.
ELECTION OF DIRECTORS (PROPOSAL I)
VOTING AND THE MANAGEMENT NOMINEES
At the Annual Meeting seven directors will be elected to serve one-year
terms commencing immediately upon their election, or to serve until their
respective successors are duly elected and qualified. In accordance with the
Company's by-laws, the Board has the authority to decrease the size of the
Board. Ken Miller resigned from Board effective August 10, 2004 and Thomas
Pontarelli resigned from Board effective November 9, 2004.
Philip H. Britt
Lori S. Komstadius
James R. Lewis
Roy E. Posner
Robert Tinstman
Adrian M. Tocklin
John F. Welch
Mr. Britt, Ms. Komstadius, Mr. Lewis, Mr. Posner, Mr. Tinstman, Ms. Tocklin
and Mr. Welch are currently serving as directors of the Company. For information
regarding the Management Nominees, see "Directors and Executive Officers of the
Registrant."
2
At the Annual Meeting, if a quorum is present, the vote of holders of a
majority of the Company's Common Stock having the power to vote present in
person or represented by proxy shall elect the directors. It is the present
intention of John Corcoran and Enid Tanenhaus, who will serve as the Company's
proxy agents at the Annual Meeting (the "Proxy Agents"), to vote the proxies
which have been duly executed, dated and delivered and which have not been
revoked in accordance with the instructions set forth thereon or if no
instruction had been given or indicated, for the election of the Management
Nominees as directors. The Board does not believe that any of the Management
Nominees will be unwilling or unable to serve as a director. However, if prior
to the election of directors any of the Management Nominees becomes unavailable
or unable to serve, the Board reserves the right to name a substitute nominee or
nominees and the Proxy Agents expect to vote the proxies for the election of
such substituted nominee or nominees.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF THE MANAGEMENT NOMINEES. IF A
CHOICE IS SPECIFIED ON THE PROXY BY A SHAREHOLDER, THE SHARES WILL BE VOTED AS
SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED "FOR" THE
MANAGEMENT NOMINEES.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name, age, position and offices with the
Company, present principal occupation or employment and material occupations and
employment for the past five years of each person who is presently a director, a
nominee for director, or an executive officer of the Company.
PHILIP H. BRITT, age 58; Director of the Company since March 3, 1998.
Retired. Senior Vice President, Insurance Industry Division of Bank One, NA
(formerly First Chicago NBD) from April 1988 through February 2002; various
other positions with First Chicago NBD and its predecessor from 1982 through
April 1988.
JOHN CORCORAN, age 41; Senior Vice President and Chief Financial Officer of
the Company since January 1, 2004; Group Vice President & Senior Financial
Officer and Chief Information Officer CNA Insurance companies Specialty Lines
from January, 2002; from October, 1998 to July, 2002 Group Vice President and
Senior Financial Officer, Specialty Lines CNA insurance companies. (Affiliates
of CNA Financial Corp. "CNAF" owns 63.8% of the company's stock.)
MICHAEL A. DOUGHERTY, age 46; Senior Vice President Field Management and
Marketing since September 2001, Senior Vice President and Chief Marketing
Officer of the Company since November 1997. Senior Vice President Aon Risk
Services of Illinois from April 1992 until November 1997. Midwest Regional Bond
Manager, AIG from August 1988 to April 1992. Various management positions within
the bond division of the St. Paul Companies from June 1980 to August 1988.
DOUGLAS W. HINKLE, age 52; Chief Underwriting Officer of the Company since
March 2004,. Western Division Director, St. Paul Surety from January, 2003 until
March, 2004; AVP Western Territory Practice Leader, from December 2001 until
2004, St. Paul American from 2000 until 2001; VP Western Territorial Executive,
Fireman's Fund; from 1999 until December 2001; AVP Surety reinsurance Executive,
Fireman's Fund; from 1996 until 1999; Surety Manager & Acting Officer Manager,
Fireman's Fund, from 1986 until 1996 Surety Manager, Fireman's Fund.
LORI S. KOMSTADIUS, age 46; Executive Vice President Human Resources, CNA
Insurance Companies, before joining CNA Insurance Companies in 2001, Assistant
Vice President St. Paul Companies; various leadership positions in the
underwriting, claims, administrative service and corporate quality
organizations. Prior to that held associated positions at A.T. Kearney, Inc and
Heidrick & Struggles, Inc. Lori is on the boards of The Children's Hospital and
United Service Organizations.
JAMES R. LEWIS, age 56; Director and Chairman of the Board of the Company
since May 2003; President and Chief Executive Officer, Property and Casualty
Operations of the CNA Insurance companies since August 2002; Executive Officer
of CNA Financial Corporation ("CNAF") since 2002; from August 2001 to August
2002, Executive Vice President, U.S. Insurance Operations, Property and Casualty
Operations of the
3
CNA Insurance companies; from November 1992 to August 2001, Senior Vice
President of USF&G Corporation.
ROY E. POSNER, age 71; Retired. Director of the Company since September 30,
1997. Chief Financial Officer and Senior Vice President of Loews Corporation,
the parent corporation of CNAF, from 1973 until February 1997.
THOMAS A. POTTLE, age 45; Senior Vice President of the Company since March
1999; Vice President of the Company from September 30, 1997 until March 1999;
Secretary of the Company from September 30, 1997 to May 1998; and Assistant
Secretary since May 1998; Assistant Vice President and Surety Controller of CNA
Insurance companies from 1996 until September 30, 1997; Surety Controller of CNA
Insurance companies from September 1994 until 1996; and various positions with
CCC from 1986 until September 1994.
ENID TANENHAUS, age 47; Senior Vice President, General Counsel and
Secretary of the Company since January 2, 2001; Senior Vice President, Secretary
and General Counsel, Coregis Group, Inc. until December 2000; Vice President,
Secretary and General Counsel CNA UniSource of America from December 1997 until
June 1999; and various legal positions with CNA Insurance companies from 1988
until December 1997.
ROBERT A. TINSTMAN -- Age 58; Director of the Company since August 2004;
Executive Chairman of Angelo Iafrate Construction Company since May, 2002. Prior
to that he was President & CEO of Morrison Knudsen Corporation ("MK") since
March 1995 to February 1999. Mr. Tinstman currently serves on Idacorp/Idaho
Power Board of Directors and is Chairman of the Investment and Compensation
Committee since 1999; he also has served on Idacorp Technologies Board of
Directors since January 2000; and serves on Home Federal Savings Board of
Directors serving as Chairman of the Audit Committee since December 1999.
ADRIAN M. TOCKLIN, age 53; Retired; Director since September 30, 1997 and
Chairman of the Board from September 30, 1997, until March 3, 1998. President
and Chief Executive Officer of Tocklin & Associates from January 1999 to
December 2003. President, CNA Diversified Operations unit of the CNA Insurance
Companies from May 1995 until April 1998. President and Chief Operating Officer
of Continental Insurance Company and its property and casualty affiliates
("CIC") and all of its insurance subsidiaries from June 1994 until May 1995;
Executive Vice President of Continental Insurance Company from September 1992
until June 1994; various other positions with CIC since December 1974. Ms
Tocklin is also a Director of Thrivent Financial for Lutherans, which is the
largest Fraternal organization in the U.S. She serves on the Audit Committee as
well as Finance and Investment Committee. She is a Director and Treasurer of
Lutheran Services Florida, where she serves on the Audit Committee.
JOHN F. WELCH, age 50; Director of the Company since August 2003; President
& Chief Executive Officer of the Company since August 2003; Chief Underwriting
Officer, St. Paul Surety from May, 2002 until June 2003; from August 2000 until
May 2002, President Afianzadora Insurgentes SA CV Mexico City; from March, 1997
until August 2000, Chief Operating Officer, Afianzadora Insurgentes SA CV,
Mexico City; from August, 1989 to March, 1997, Vice President Underwriting,
USF&G Corporation; from August 1979 until November 1989 held various surety
management positions, Continental Insurance.
BOARD AND COMMITTEE MEETINGS
In excess of 50% of the Company's shares are held by CNAF and its
subsidiaries. Pursuant to the listing standards of the New York Stock Exchange
("Exchange") the Company is a "Controlled Company" and consequently is exempt
from the Exchange's requirements relating to maintenance of a majority of
independent directors and independent nominating/corporate governance and
compensation committees. The Board of Directors will consider shareholder
director nominees under the same criteria utilized by the Board of Directors to
evaluate nominees proposed by management or members of the Board of Directors.
These criteria include a potential nominee's character, judgment, business
experience and areas of expertise, among other relevant considerations, such as
the requirements of stock exchange rules and applicable laws and regulations.
4
DIRECTOR INDEPENDENCE
However, the Board of Directors annually reviews its independence and
performance. For 2004, the Board and the Audit Committee completed anonymous
self evaluation forms. The Board of Directors and Audit Committee discussed
these evaluations at February 24, 2005 and March 8, 2005 telephonic meetings.
Both the self evaluations of the Audit Committee and the Board of Directors
indicated that the Board and the Audit Committee believe that they are
functioning well and receive adequate access to and information from management.
At the March 8, 2005 meeting, the Board of Directors determined that a majority
of the Board as currently constituted and the current nominees listed above
qualify as independent directors pursuant to the applicable rules of the
Exchange and the Securities and Exchange Commission ("SEC"). The independent
directors are Philip Britt, Roy Posner, Robert Tinstman and Adrian Tocklin. In
determining independence, the Board affirmatively determined whether or not each
director or nominee has any material relationship with the Company. In assessing
materiality, the Board considered all relevant facts and circumstances, not
merely from the standpoint of the director or nominee, but from that of any
person or organization with which the director or nominee, but from that of any
person or organization with which the director or nominee has an affiliation.
The Board considers the frequency and regularity of any services provided by or
to, or other transactions between, the Company and the director or nominee or
affiliated organization, whether they are being carried out at arm's length in
the ordinary course of business and whether they are being provided or conducted
substantially on the same terms as those prevailing at the time from unrelated
parties for comparable transactions. Material relationships can include
commercial banking, industrial, legal, accounting, charitable and familial
relationships. Independence means (i) not being a present or former employee of
the Company; (ii) not personally receiving or having an immediate family member
who receives more than $100,000 per year in direct compensation from the Company
other than director and committee fees and pension or other forms of deferred
compensation; (iii) not being an employee, or having an immediate family member
employed as an executive officer of another company where any current executive
officer of the Company serves on that company's compensation committee; (iv) not
being employed by or affiliated with or having an immediate family member
employed by or affiliated with a present or former internal or external auditor
of the Company within the three previous years; or (v) not being a director who
is an executive officer or employee, or whose immediate family member is an
executive officer of a company that makes payments to, or receives payments from
the Company for property or services in an amount which does not exceed the
greater of $1 million or 2% of the other company's consolidated gross revenues.
CORPORATE GOVERNANCE AND ETHICS
The Board has adopted Corporate Governance Guidelines and a Code of
Business Ethics both of which are attached as Appendices to this proxy
statement, and are available on the Company's website at cnasurety.com, and will
be provided to any shareholder upon request by contacting Ruth Jantz,
representative of the Company, at CNA Center ,Chicago, Illinois, (312) 822-5326.
Such copies will be furnished promptly at no charge. The Corporate Governance
Guidelines provide that shareholders and other interested parties may
communicate with the non-management members of the Board by sending such
communications in care of the Company's General Counsel, CNA Center -- 41 South,
Chicago, Illinois 60685. It is the Company's policy to forward all such
communications to the Board.
COMMITTEES AND MEETINGS
The Board intends to meet without management in Executive Session at its
regularly scheduled meetings. The members have decided that a presiding director
is not necessary and that the independent directors will rotate the task of
presiding over executive sessions.
The Board has an Executive Committee, an Audit Committee, a Compensation
Committee and Investment Committee. The Audit Committee and the Compensation
Committee consist solely of independent directors. The Company does not have a
nominating/corporate governance committee. The Board relies on the Exchange
exemption for controlled companies in not having a nominating/corporate
governance committee, but the Board's current policy is that all directors
participate in the consideration of director nominees.
5
The Executive Committee currently consists of Messrs. Lewis, Posner and
Welch. The Executive Committee did not meet during 2004. The Executive Committee
possesses and may exercise the full and complete authority of the Board in the
management and business affairs of the Company during the intervals between the
meetings of the Board. Any action by the Executive Committee is reported to the
Board at its next meeting and such action is subject to revision and alteration
by the Board, provided that no rights of third persons can be prejudicially
affected by the subsequent action of the Board. Vacancies on the Executive
Committee are filled by the Board. However, during the temporary absence of a
member of the Executive Committee, due to illness or inability to attend a
meeting or for other cause, the remaining member(s) of the Executive Committee
may appoint a member of the Board to act in the place and with all the authority
of such absent member. The current members of the Executive Committee will
continue in office until the Committee is dissolved, terminated or reorganized,
or if such members are replaced.
The Company's Audit Committee currently consists of Messrs. Tocklin, Brit,
Tinstman and Posner (Chair). During 2004, the Audit Committee held thirteen
meetings. The Board determined at its February 15, 2005 meeting that all Audit
Committee members are financially literate. In addition, the Board determined
that pursuant to the standards set forth in statutes and regulations, Roy
Posner, qualifies as an audit committee financial expert and is "independent" as
that term is used in Exchange Act Section 10A(m)(3). The Board adopted an Audit
Committee Charter in March 2000 and amended and restated the Audit Committee
Charter on February 11, 2003, which governs the Audit Committee. As described in
the Audit Committee Charter, the Audit Committee is authorized and (a) has the
power to review the financial reports and other financial information provided
by the Corporation to governmental entities and the public, including the
certifications made by the principal executive officer and principal financial
officer with respect to the Company's reports filed with the Securities and
Exchange Commission; the Corporation's systems of internal controls regarding
finance, accounting, internal audit, legal compliance and ethics that the
Corporation's management and the Board have established; and the Corporation's
auditing, accounting and financial reporting processes generally including the
review of critical accounting policies and financial statement presentation, (b)
has the sole authority to retain, compensate and evaluate the Company's
independent public auditors, and the scope of and fees for their audits, and (c)
any and all related party agreements and arrangements between the Corporation
and its affiliates and any disputes that may arise hereunder. However, the
Company's management is responsible for its financial statements and reporting
process, including its system of internal controls. The Company's independent
auditors are responsible for expressing an opinion on the conformity of the
Company's audited financial statements with accounting principles generally
accepted in the United States. A copy of the Audit Committee Charter as amended
and restated is available on the Company website at cnasurety.com and will be
provided to any shareholder upon request by contacting Ruth Jantz,
representative of the Company, at CNA Plaza, Chicago, Illinois, (312) 822-5326.
Copies will be furnished promptly at no charge. The Company Compensation
Committee currently consists of Messrs. Britt, Posner, Tinstman and Ms. Tocklin
(Chair). During 2004, the Compensation Committee held four meetings. The
Compensation Committee generally sets compensation policy, and reviews and
administers all compensation matters for the five most highly compensated
executive officers of the Company as well administering the Company's stock
option plan.
The Company also has an Investment Committee, which currently consists of
Ms. Tocklin and Messrs. Posner and Britt (Chair). During 2004, the Investment
Committee held four meetings. The Investment Committee establishes investment
policies and oversees the management of the Company's investment portfolio.
During 2004, four meetings of the Board of Directors were held.
In fiscal year 2004, each of the directors attended in excess of 75% of the
aggregate of the total meetings of the Board and the total number of meetings of
committees on which he or she served. The Company encourages directors to attend
its annual meeting. In 2004 board members, Philip Britt, Roy Posner, Ken Miller,
Adrian Tocklin and John Welch attended the Company's annual meeting.
6
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's outstanding Common Stock ("Reporting Persons"), file reports of
ownership and changes in ownership of such securities with the SEC. Reporting
Persons are required to deliver copies of all Section 16(a) forms to the Company
simultaneously with filing with the SEC. Based solely upon review of the copies
of the forms furnished to the Company, and written representations from certain
Reporting Persons that no other reports were required. The Company believes that
for 2004 all reports required by Section 16(a) of the Exchange Act have been
timely filed.
EXECUTIVE COMPENSATION
The following tables show information with respect to the annual
compensation (including option grants) for services rendered to the Company (or
its predecessors) for the year ended December 31, 2004 by the chief executive
officer and those persons who were, at December 31, 2004, the four other most
highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM INCENTIVE
OTHER ANNUAL ------------------------ ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) LONG TERM CASH ($)
--------------------------- ---- ------- ------- ------------ ------- -------------- ---------------
John F. Welch.............. 2004 400,000 452,000 4,792 29,700 66,000 64,019
President and Chief 2003 192,308 376,111 8,113 68,600 3,039
Executive
Michael A. Dougherty....... 2004 207,000 139,400 -- 6,200 13,662 31,344
Senior Vice President 2003 207,000 153,820 -- 7,700 33,248
of the Company 2002 195,000 54,600 3,300 7,800 5,940 19,902
Enid Tanenhaus............. 2004 210,000 134,000 4,000 6,200 13,860 31,466
Senior Vice President of 2003 210,000 150,400 2,200 5,900 34,038
the Company 2002 200,000 56,000 2,750 6,000 22,305
Thomas A. Pottle........... 2004 205,000 132,000 -- 6,100 13,530 25,492
Senior Vice President of 2003 205,000 149,200 -- 7,600 29,862
the Company 2002 190,000 53,200 -- 7,600 7,480 18,257
Douglas W. Hinkle.......... 2004 176,538 162,452 1,843 10,600 12,000 17,895
Senior Vice President of
the Company
DEFERRED DEFERRED DEFERRED
401(K) PLAN 401(K) PLAN 401(K) PLAN COMPENSATION COMPENSATION COMPENSATION
MATCHING BASIC DISCRETIONARY MATCHING BASIC DISCRETIONARY
CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTION CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS
------------- ------------- ------------- ------------- ------------- -------------
John F. Welch......... 2004 9,225 10,250 4,100 8,775 22,250 8,900
2003 2,769 -- -- -- -- --
Michael A.
Dougherty............ 2004 3,104 10,250 4,100 6,211 5,291 2,116
2003 9,000 -- 6,000 12,939 -- 5,026
2002 9,000 -- 3,000 6,808 -- 920
Enid Tanenhaus........ 2004 2,925 10,250 4,100 6,525 5,270 2,108
2003 9,000 -- 6,000 13,770 -- 4,980
2002 9,000 -- 3,000 9,225 -- 900
Thomas A. Pottle...... 2004 7,313 6,150 4,100 1,913 3,764 1,984
2003 9,000 -- 6,000 9,706 -- 4,970
2002 9,000 -- 3,000 5,270 -- 819
Douglas W. Hinkle..... 2004 6,620 7,788 3,115 -- -- --
LIFE INSURANCE
--------------
John F. Welch......... 519 64,019
270 3,039
Michael A.
Dougherty............ 272 31,344
283 33,248
174 19,902
Enid Tanenhaus........ 288 31,466
288 34,038
180 22,305
Thomas A. Pottle...... 268 25,492
186 29,862
168 18,257
Douglas W. Hinkle..... 372 17,895
7
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM
OPTIONS DURING FISCAL BASE PRICE EXPIRATION -----------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- ------------- ----------- ---------- ---------- ----------
John F. Welch............... 29,700 8.3% 12.06 11/9/14 225,126 571,725
Michael A. Dougherty........ 6,200 1.7% 12.06 11/9/14 46,996 119,350
Enid Tanenhaus.............. 6,200 1.7% 12.06 11/9/14 46,996 119,350
Thomas A. Pottle............ 6,100 1.7% 12.06 11/9/14 46,238 117,425
Douglas W. Hinkle........... 5,600 1.6% 12.06 11/9/14 42,448 107,800
Douglas W. Hinkle........... 5,000 1.4% 10.58 8/11/14 33,250 84,250
John F. Corcoran............ 6,700 1.9% 12.06 11/9/14 50,786 128,975
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
VALUE OF UNEXERCISED
SHARES ACQUIRED NUMBER OR UNEXERCISED IN-THE-MONEY OPTIONS AT
ON EXERCISE VALUE OPTIONS AT FY-END (#) FY-END ($)
NAME (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- ------------ ------------------------- -------------------------
John F. Welch........... 0 0 17,150/81,150 62,025/224,387
Michael A. Dougherty.... 0 0 61,729/18,721 74,874/38,550
Enid Tanenhaus.......... 0 0 13,475/16,625 17,797/37,388
Thomas A. Pottle........ 0 0 63,750/18,550 82,562/45,770
Douglas W. Hinkle....... 0 0 0/10,600 0/21,074
John. F. Corcoran....... 0 0 3,025/15,775 11,888/44,308
LONG TERM INCENTIVE PLAN
The following table includes information regarding future estimated
long-term incentive cash awards to the Named Executive Officers:
ESTIMATED FUTURE PAYOUTS(A)
-------------------------------
NAME PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM
---- ------------------ --------- -------- --------
John F. Welch................................ 2004 - 2006 $50,000 $200,000 $400,000
Michael A. Dougherty......................... 2004 - 2006 $10,350 $ 41,400 $ 82,800
Enid Tanenhaus............................... 2004 - 2006 $10,500 $ 42,000 $ 84,000
Thomas A. Pottle............................. 2004 - 2006 $10,250 $ 41,000 $ 82,000
Douglas W. Hinkle............................ 2004 - 2006 $11,250 $ 45,000 $ 90,000
---------------
(a) The long-term incentive cash awards are made under the Long-Term Incentive
Plan which is administered by the Compensation Committee. The long-term
incentive cash awards are generally granted annually and are earned based on
return on equity targets for three-year performance periods and will become
payable only to the extent that performance goals are achieved. Payments, if
any, would occur the first quarter of the year following the end of the
performance cycle and can vary 0% to 200% of target based on the attainment
of performance goals.
COMPENSATION OF DIRECTORS
Directors, except for employees of the Company or its affiliates, for 2004
were compensated at the annual rate of $30,000, paid in quarterly installments,
and except for Audit Committee meetings, received $1,500 for each meeting of the
Board and committee meeting which they attended. Audit Committee members receive
8
$2,500 for each meeting attended. In addition, Mr. Posner is paid an additional
retainer of $7,500 for his service as 2004 chairperson of the Audit and
Compensation Committee for his 2004 service in view of the workload of the Audit
Committee chairperson. On November 9, 2004 the Company's Board of Directors
voted to eliminate the CNA Surety Corporation Non-Employee Directors Deferred
Compensation Plan (the "Directors Stock Plan") as of December 31, 2004.
EMPLOYMENT CONTRACTS
The Company entered into employment agreements with Mr. Mark C. Vonnahme,
its former Chief Executive Officer and with two other former executive officers.
The agreement with Mr. Vonnahme was to run from January 1, 2002 through December
31, 2003, with automatic one-year renewals unless the Company or Mr. Vonnahme
provided the other party with thirty (30) day written notice of intent not to
renew. The agreement provided for a minimum annual base salary of $400,000. Mr.
Vonnahme was also entitled to an annual incentive bonus (up to 150% of his base
salary) contingent on achievement of performance criteria approved by the
Compensation Committee, and participation in long-term incentive compensation
programs for key executives adopted by the Compensation Committee of the Board
equivalent to 100% of his base salary. In addition, Mr. Vonnahme was eligible to
participate in the Company's stock option plan and to participate in Company
benefit programs. The agreement provided for a severance benefit if his
employment was terminated without cause by the Company, by Mr. Vonnahme for good
reason, for non-renewal of the agreement at the end of the initial two year
term, or within one year after of a change in control of the Company contingent
upon Mr. Vonnahme's continuing compliance with the non-competition,
non-solicitation and confidentiality provisions of the agreement. Mr. Vonnahme
informed the Board of his intention to retire from the Company on or before
December 31, 2003. The Board and Mr. Vonnahme agreed that based on the terms of
the contract, he would be paid the severance benefit if he continued his duties
as CEO until the Board retained a successor and for a transition period after
the successor was retained. The Board chose John F. Welch as the Company's new
CEO. Mr. Welch began his employment as a senior officer of the Company on June
30, 2003 and became CEO after the August 31, 2003 effective date of Mr.
Vonnahme's retirement. Consequently, Mr. Vonnahme is entitled to the severance
benefit set forth in the employment contract. The severance benefit consists of
payment of two years of Mr. Vonnahme's annual base salary ($400,000),
continuation in all of the Company's health benefit plans for up to two years,
receipt of amounts in which he is vested or otherwise entitled to receive
pursuant to any plan maintained by the Company, plus payment of certain bonuses
and long term compensation awards held by him at the date of termination. As
part of the agreement, Mr. Vonnahme agreed to certain confidentiality,
non-competition, and non-solicitation provisions.
The Company also entered into two-year employment agreements with Messrs.
John S. Heneghan, and David F. Paul as executive officers, commencing January 1,
2001, and ending December 31, 2003. The agreements were to renew automatically
for one additional one-year term unless the Company or the Executive provides
the other thirty days written notice that the agreements would not be renewed.
Both Mr. Heneghan and Mr. Paul provided the Company notice of their intents not
to renew their contract prior to December 1, 2003. The employment agreements
provided for an annual base salary of $200,000 for Mr. Heneghan, and $195,000
for Mr. Paul which amounts were subject to either the Compensation Committee's
or the Board of Directors' annual review, and provided for additional
compensation in the form of an annual incentive bonus contingent on achievement
of performance criteria approved by the Compensation Committee, a long-term
incentive compensation program which includes participation in the Company's
stock option plan, and participation in Company benefit programs. The agreements
also provided for a severance benefit if the officer's employment was terminated
without cause by the Company, with cause by the officer for good reason, for
non-renewal of the agreement at the end of the initial two-year term, or within
one year after a Change in Control. In as much as Mr. Heneghan and Mr. Paul
provided the Company with the requisite notice of their intents not to renew
their contracts, they are entitled to the severance benefit. The severance
benefit consists of payment of two years of the officer's then base salary,
continuation in all of the Company's health benefit plans for up to two years,
receipt of amounts in which the officer is vested or otherwise entitled to
receive pursuant to any plan maintained by the Company, plus payment of certain
bonuses and long term compensation awards held by the officer at the date of
termination. As part of the
9
agreements, Mr. Heneghan and Mr. Paul agreed to certain confidentiality,
non-competition, and non-solicitation provisions.
In January 2003, the Company entered into deferred bonus agreements with
Mr. Dougherty, Mr. Pottle, Ms. Tanenhaus and Mr. Waters that proved 2 payments
of $50,000 in January and August 2003 and a third payment of $50,000 in August
2004. If the Company terminates Mr. Dougherty, Mr. Pottle, Ms. Tanenhaus and Mr.
Waters without cause prior to August 2005, any remaining portion of the bonus
will be payable immediately. The deferred bonus agreements obligate Mr.
Dougherty, Mr. Pottle, Ms. Tanenhaus and Mr. Waters to certain confidentiality,
non-competition and non-solicitation provisions and to repay portions of the
bonus if they voluntarily terminate employment with the Company prior to August
1, 2005.
The Company entered into an employment agreement with Mr. John F. Welch
that runs from June 30, 2003 date of hire until December 31, 2005. The agreement
provides for a minimum annual base salary of $400,000. Mr. Welch received a
signing bonus of $200,000 payable in three installments, assuming he remains
employed with the Company: $100,000 was paid on August 1, 2003, $50,000 was paid
on June 20, 2004, the first anniversary of the contract and $50,000 will be
payable on June 30, 2005, the second anniversary of the contract. In addition
Mr. Welch was paid an additional bonus of $200,000 on March 5, 2004. Mr. Welch
also is entitled to an annual incentive bonus (up to 150% of his base salary)
contingent on achievement of performance criteria approved by the Compensation
Committee, and participation in long term incentive programs for key executives
adopted by the Compensation Committee of the Board equivalent to 50 to 100
percent of his base salary. In recognition of the additional bonus payment, Mr.
Welch was not paid an annual incentive bonus for 2003. In addition, under the
agreement, Mr. Welch is eligible to participate in the Company's stock option
plan and received 50,000 stock options on June 30, 2003 and 18,600 on November
11, 2003. These options vest in equal amounts over a four-year period commencing
on June 30, 2004 and on November 11, 2004 respectively. Mr. Welch also is
eligible to participate in the Company's benefit programs. The agreement
provides for a severance benefit if his employment is terminated without cause
by the Company or by Mr. Welch for good reason contingent upon Mr. Welch's
continuing compliance with the non competition, non-solicitation and
confidentiality provisions of the agreement. The severance benefit for
termination for good reason or without cause consists of an amount equal to Mr.
Welch's then base compensation prorated through the end of the contract term,
December 31, 2005, but in no event less than twelve months and certain bonuses
and long term compensation awards held by him at the date of termination as well
as continuation in the Company's health benefit plans through December 31, 2005.
In addition, the agreement also contains a severance benefit consisting of
payment of one year of Mr. Welch's then annual base salary, continuation in the
Company's health benefit plans for one year and certain bonuses and long term
compensation awards held by him at the date of termination if the Company fails
to extend the agreement.
AUDIT COMMITTEE REPORT
The Audit Committee serves as an independent and objective party to:
- monitor the Company's financial reporting process and internal control
system;
- retain and review and appraise the audit efforts of the Company's
independent registered public accounting firm and internal auditors;
- facilitate communications between the party's involved in the audit
process; and
- review and appraise the fairness of related party transactions.
- monitor and review corporate governance and adherence to NYSE listing
standards.
The Audit Committee is composed of four non-employee directors, each of
whom is "independent" as required by applicable listing standards of the New
York Stock Exchange. The Audit Committee also anonymously completed a self
evaluation of its performance and discussed the responses at a February 24, 2005
telephonic committee meeting.
10
The Audit Committee met thirteen times in 2004. The meetings were designed,
among other things, to facilitate and encourage communication among the Audit
Committee, management, the internal auditors and Deloitte & Touche LLP
("Deloitte & Touche"), the Company's independent registered public accounting
firm. The Audit Committee discussed with the Company's internal and independent
registered public accounting firm the overall scope and plans for their
respective audits. The Audit Committee met with the internal and independent
registered public accounting firm, with and without management present, to
discuss the results of their examination and their evaluations of the Company's
internal controls and consolidated financial statements. The Committee reviewed
the Company's internal controls and, consistent with Section 302 of the
Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, met with management
and the auditors prior to the filing of officers' certifications required by
that statute to receive any information concerning (a) significant deficiencies
in the design or operation of internal controls which could adversely affect the
Company's ability to record, process, summarize and report financial data and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls. The
Audit Committee also met separately with management and internal auditors to
discuss the performance of Deloitte & Touche.
In the performance of its oversight function, the Committee has considered
and discussed the audited financial statements with management and the
independent registered public accounting firm. The Committee has also discussed
with the independent registered public accounting firm the matters required to
be discussed by the standard adopted or referenced by the Public Company
Accounting Oversight Board ("PCAOB") including the Statement on Auditing
Standards No. 61, Communication with Audit Committees, as currently in effect.
Finally, the Committee has received the written disclosures and the letter from
the independent auditors required by PCAOB and/or Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees, as currently in
effect. The Committee has discussed with the independent registered public
accounting firm the registered public accounting firm independence.
Based upon the reports and discussions described in this report, and
subject to the limitations on the role and responsibilities of the Audit
Committee referred to above and in the Charter, the Audit Committee recommended
to the Board that the audited financial statements be included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 to be filed with
the Securities and Exchange Commission and determined that the provision of
non-audit services by Deloitte & Touche LLP to the Company in 2004 was
compatible with maintaining the independence of Deloitte & Touche LLP in its
audit of the Company.
SUBMITTED BY THE AUDIT COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS
Philip H. Britt
Robert Tinstman
Adrian Tocklin
Roy E. Posner (Chairperson)
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
During the fiscal year ended December 31, 2004:
None of the members of the Compensation Committee was an officer (or former
officer) or employee of the Company or any of its subsidiaries;
None of the members of the Compensation Committee entered into (or agreed
to enter into) any transaction or series of transactions with the Company or any
of its subsidiaries in which the amount involved exceeds $60,000;
All of the members of the Compensation Committee are independent as
required by the applicable listing standard of the New York Stock Exchange.
11
None of the executive officers of the Company served as a director,
generally, or was a member of the Compensation Committee (or another Board
committee with similar functions) of any entity where one of that entity's
executive officers served on the Company's Compensation Committee or otherwise
served as a director on the Board;
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee met 4 times in 2004.
The compensation policy of the Company for its executive officers
(including those named in the Summary Compensation Table) has been to pay base
salaries, annual bonuses, and long term incentives that are both competitive and
recognize the accomplishment of the Company's stated goals of building a
financial services business focusing on surety, fidelity and other related
products.
With respect to Mr. Welch's compensation as reported for the year ended
December 31, 2004, in addition to base salary compensation he was paid an
additional bonus of $200,000 on March 5, 2004, as stipulated by his employment
contract. He also was granted stock options as part of his employment agreement
on his first day of employment and as part of the Company's Long Term Incentive
Program, At December 31, 2004, granted options were as follows: received 50,000
stock options (at $9.85 per share) on June 30, 2003 (the "Start-up Grant"),
18,600 (at $9.42 per share) on November 11, 2003 (the "November 2003 Grant"),
and 29,700 (at $12.06 per share) on November 9, 2004 (the "November 2004
Grant"). These options vest in equal amounts over a four-year period commencing
on June 30, 2004,, November 11, 2004, and November 9, 2005 respectively. 12,500
stock options of the Start-up Grant vested on June 30, 2004 and 4,650 of the
options from November 2003 Grant vested on November 11, 2004. The Committee
evaluated and then established Mr. Welch's salary, signing bonus and other
benefits based upon industry data, information on other public companies, Mr.
Welch's industry experience and expertise as well as the expected performance of
the Company. Compensation payable to other executive officers included a mix of
base salary, incentive bonuses and stock option grants.
Annual incentive bonuses for other executive officers are also based, in
part, on attainment of certain enterprise-wide financial goals (including the
Company's GAAP combined ratio and amount of gross written premium), as well as,
personal goals and shared goals related to that portion of the Company's
business for which such executive officer is primarily responsible.
It is the policy of the Company to structure its compensation in a manner
which will avoid the limitations imposed by the Omnibus Budget Reconciliation
Act of 1993 on the deductibility of executive compensation under Section 162 (m)
of the Internal Revenue Code of 1986, as amended, to the extent it can
reasonably do so consistent with its goal of retaining and motivating its
executives in a cost effective manner.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS
Philip H. Britt
Roy Posner
Robert Tinstman
Adrian M. Tocklin
12
PERFORMANCE GRAPH
Below is a graph comparing total shareholder return on the Company's Common
Stock over the period from December 31, 1999 through December 31, 2004 with a
broad equity market index, the S&P 500, and a published industry index, the S&P
Property and Casualty Insurance Index, as required by the rules of the SEC.
(LINE GRAPH)
-------------------------------------------------------------------------------------------------------
12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004
-------------------------------------------------------------------------------------------------------
CNA SURETY
CORPORATION 100.00 109.62 119.23 60.38 73.15 102.69
-------------------------------------------------------------------------------------------------------
S&P 500 INDEX 100.00 89.86 78.14 59.88 75.68 82.49
-------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY
INSURANCE 100.00 152.55 137.98 120.69 149.60 162.11
-------------------------------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, except as noted, certain information with
respect to each person or entity who is known by the management of the Company
to be the beneficial owner of more than 5% of the outstanding shares of the
Company's Common Stock as well as each director of the Company, each executive
officer named in the Summary Compensation Table and all directors and executive
officers as a group. Information in the table of security ownership of certain
beneficial owners and the table of security ownership of management below is
based upon reports filed with the SEC on or before March 2, 2005 pursuant to
Section 13(d) and 16(a) under the Securities Exchange Act of 1934 and other
written representations received by the Company with respect to the persons and
entities named in those tables. Beneficial ownership is defined for this
purpose, as the sole or shared power to vote, or to direct the disposition of
the Common Stock. Unless otherwise noted the persons in the following table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them:
CERTAIN BENEFICIAL OWNERS
NAME AND ADDRESS OF AMOUNT OF NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------- -------------------------- ----------------
Continental Casualty Company and Affiliates.............. 27,425,147 63.8%
CNA Center
Chicago, IL 60685
Citigroup Global Markets Holdings, Inc. ................. 2,376,173 5.5%
---------------
(1) The number of shares of the Company's Common Stock indicated as beneficially
owned is reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities.
13
MANAGEMENT
SHARES UPON
NAME OF SHARES OF DEFERRED EXERCISE OF PERCENT OF
BENEFICIAL OWNER COMMON STOCK(3) STOCK UNITS(1) STOCK OPTIONS(2)(3) TOTAL(2)(3) CLASS
---------------- --------------- -------------- ------------------- ----------- ----------
Philip H. Britt............. 3,097 9,919 -- 13,016 *
Roy E. Posner............... 250 1,458 -- 1,708 *
Adrian M. Tocklin........... 1,000 -- -- 1,000 *
Ken Miller.................. -- 3,702 -- 3,702 *
Michael A. Dougherty........ 3,900 -- 61,729 65,629 *
John F. Welch............... -- -- 17,150 17,150 *
Enid Tanenhaus.............. 200 -- 14,925 15,125 *
John F. Corcoran............ -- -- 3,025 3,025 *
Thomas A. Pottle............ 1,300 -- 63,750 65,050 *
Douglas W. Hinkle........... 0 0 0 0 *
Lori S. Komstadius.......... 0 0 0 0 *
James R. Lewis.............. 0 0 0 0 *
Robert A. Tinstman.......... 0 0 0 0 *
All directors and executive
officers as a group (13
persons) including the
above-named persons....... 9,747 15,079 160,579 185,405 0.4%
---------------
* Less than 1%
(1) In January, 1998, the Company established the CNA Surety Corporation
Non-Employee Directors' Deferred Compensation Plan. Under this plan, each
director who is not a full-time employee of the Company or any of its
affiliates may defer all or a portion of the annual retainer fee that would
otherwise be paid to such director. The deferral amount will be deemed
vested in Common Stock Units equal to the deferred fees divided by the fair
market value of the Company's Common Stock as of each quarterly meeting. The
Committee voted to eliminate the Non-Employee Director Compensation Plan
effective January 1, 2005.
(2) Represents beneficial ownership of shares that may be acquired by the
exercise of stock options, which are currently exercisable or exercisable
within sixty days of the date of this table.
(3) The amounts of the Company's Common Stock and stock options beneficially
owned are reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE NUMBER OF SECURITIES
EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS FUTURE ISSUANCE UNDER
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
------------- -------------------- ------------------- -------------------------
Equity compensation plans approved
by security holders............... 1,699,241 $12.09 741,502
Equity compensation plans not
approved by security holders......
--------- ------ ---------
Total............................... 1,699,241 $12.09 741,502
========= ====== =========
14
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY REINSURANCE
Intercompany reinsurance agreements together with the Services and
Indemnity Agreement that are described below provide for the transfer of the
surety business written by Continental Casualty Company ("CCC") and CIC to
Western Surety Company ("Western Surety"). All these Agreements originally were
entered into on September 30, 1997 (the "Merger Date"): (i) the Surety Quota
Share Treaty (the "Quota Share Treaty"); (ii) the Aggregate Stop Loss
Reinsurance Contract (the "Stop Loss Contract"); and (iii) the Surety Excess of
Loss Reinsurance Contract (the "Excess of Loss Contract"). All have expired;
some have been renewed on different terms as described below.
Reinsurance agreements together with the Services and Indemnity Agreement
that are described below provide for the transfer of the surety business written
by CCC and CIC to Western Surety. All of these agreements originally were
entered into on September 30, 1997 (the "Merger Date"): (i) the Surety Quota
Share Treaty (the "Quota Share Treaty"); (ii) the Aggregate Stop Loss
Reinsurance Contract (the "Stop Loss Contract"); and (iii) the Surety Excess of
Loss Reinsurance Contract (the "Excess of Loss Contract"). All of these
contracts have expired. Some have been renewed on different terms as described
below.
The Services and Indemnity Agreement provides the Company's insurance
subsidiaries with the authority to perform various administrative, management,
underwriting and claim functions in order to conduct the business of CCC and CIC
and to be reimbursed by CCC for services rendered. In consideration for
providing the foregoing services, CCC has agreed to pay Western Surety a
quarterly fee of $50,000. This agreement was renewed on January 1, 2004 and is
annually renewable thereafter. There was no amount due to the CNA Surety
insurance subsidiaries as of December 31, 2004.
Through the Quota Share Treaty, CCC and CIC transfer to Western Surety all
surety business written or renewed by CCC and CIC after the Merger Date. CCC and
CIC transfer the related liabilities of such business and pay to Western Surety
an amount in cash equal to CCC's and CIC's net written premiums written on all
such business, minus a quarterly ceding commission to be retained by CCC and CIC
equal to $50,000 plus 28% of net written premiums written on such business.
Under the terms of the Quota Share Treaty, CCC has guaranteed the loss and
loss adjustment expense reserves transferred to Western Surety as of September
30, 1997 by agreeing to pay Western Surety, within 30 days following the end of
each calendar quarter, the amount of any adverse development on such reserves,
as re-estimated as of the end of such calendar quarter. There has been no
adverse reserve development for the period from September 30, 1997 (date of
inception) through December 31, 2004. The Quota Share Treaty had an original
term of five years from the Merger Date and was renewed on October 1, 2002 on
substantially the same terms with an expiration date of December 31, 2003. The
Quota Share Treaty was again renewed on January 1, 2004 on substantially the
same terms with an expiration date of December 31, 2004; and is annually
renewable thereafter. The ceding commission paid to CCC and CIC by Western
Surety remained at 28% of net written premiums and contemplates an approximate
4% override commission for fronting fees to CCC and CIC on their actual direct
acquisition costs.
The Stop Loss Contract terminated on December 31, 2000 and was not renewed.
The Stop Loss Contract protected the insurance subsidiaries from adverse loss
experience on certain business underwritten after the Merger Date. The Stop Loss
Contract between the insurance subsidiaries and CCC limited the insurance
subsidiaries' prospective net loss ratios with respect to certain accounts and
lines of insured business for three full accident years following the Merger
Date.
In the event the insurance subsidiaries' accident year net loss ratio
exceeded 24% in any of the accident years 1997 through 2000 on certain insured
accounts (the "Loss Ratio Cap"), the Stop Loss Contract requires CCC at the end
of each calendar quarter following the Merger Date, to pay to the insurance
subsidiaries a dollar amount equal to (i) the amount, if any, by which their
actual accident year net loss ratio exceeds the applicable Loss Ratio Cap,
multiplied by (ii) the applicable net earned premiums. In consideration for the
coverage provided by the Stop Loss Contract, the insurance subsidiaries paid to
CCC an annual premium of
15
$20,000. The CNA Surety insurance subsidiaries have paid CCC all required annual
premiums. As of December 31, 2004, the Company had billed and received $54.9
million under the Stop Loss Contract, of which $29.9 million was received in
2004.
The Excess of Loss Contract provided the insurance subsidiaries of CNA
Surety with the capacity to underwrite large surety bond exposures by providing
reinsurance support from CCC. The Excess of Loss Contract provided $75 million
of coverage for losses in excess of the $60 million per principal. Subsequent to
the Merger Date, the Company entered into a second excess of loss contract with
CCC ("Second Excess of Loss Contract"). The Second Excess of Loss Contract
provided unlimited coverage for principal losses that exceed the foregoing
coverage of $75 million per principal provided by the Excess of Loss Contract,
or aggregate losses per principal in excess of $135 million. In consideration
for the reinsurance coverage provided by the Excess of Loss Contracts, the
insurance subsidiaries paid to CCC, on a quarterly basis, a premium equal to 1%
of the net written premiums applicable to the Excess of Loss Contract, subject
to a minimum premium of $20,000 and $5,000 per quarter under the Excess of Loss
Contract and Second Excess of Loss Contract, respectively. The two Excess of
Loss Contracts collectively provided coverage for losses discovered on surety
bonds in force as of the Merger Date and for losses discovered on new and
renewal business written during the term of the Excess of Loss Contracts. Both
Excess of Loss Contracts commenced following the Merger Date and continued until
September 30, 2002. The discovery period for losses covered by the Excess of
Loss Contracts extends until September 30, 2006.
Effective October 1, 2002, the Company secured replacement excess of loss
protection from CCC for per principal losses that exceed $60 million in two
parts -- a) $40 million excess of $60 million and b) $50 million excess of $100
million. In addition to the foregoing structural changes in its high layer
excess of loss reinsurance programs, the cost for these protections increased
significantly as compared to the cost of the two previous Excess of Loss
Contracts. The $40 million excess of $60 million contract is for a three year
term beginning October 1, 2002 and provides annual aggregate coverage of $80
million and $120 million aggregate coverage for the entire three year term.
Effective October 1, 2003, the Company entered into a $3 million excess of
$12 million contract with CCC. The reinsurance premium for the coverage provided
by the $3 million excess of $12 million contract was $0.3 million plus, if
applicable, additional premiums based on paid losses. The contract provided for
aggregate coverage of $12 million. This contract effectively lowered the
Company's net retention per principal for the remainder of 2003 to $12 million
plus a 5% co-participation in the $45 million layer of excess reinsurance with
third party reinsurers. This contract was to expire on December 31, 2004.
Effective January 1, 2004, the Company obtained replacement coverage from
third party reinsurers as part of the 2004 Excess of Loss Treaty. Accordingly,
the $40 million excess of $60 million contract with CCC was commuted effective
January 1, 2004. As part of this commutation, the Company has received a
commutation payment of $10.9 million from CCC. As of December 31, 2003 the full
amount of the commutation payment had been recognized as a receivable.
The Company and CCC entered into a new $40 million excess of $60 million
reinsurance contract providing coverage exclusively for the one large national
contractor that is excluded from the Company's third party reinsurance. This
contract is effective from January 1, 2004 to December 31, 2004. The premium for
this contract is $3.0 million plus an additional premium of $6 million if a loss
is ceded under this contract. The reinsurance premium for the coverage provided
by the $50 million excess of $100 million contract was $6.0 million. This
contract expired on December 31, 2003.
The Company and CCC entered into a new $50 million excess of $100 million
contract for the period of January 1, 2004 to December 31, 2004. The premium for
this contract is $6.0 million plus an additional premium of $14 million if a
loss is ceded under this contract.
As of December 31, 2004 and December 31, 2003, CNA Surety had an insurance
receivable balance from CCC and CIC of $16.4 million and $71.1 million. CNA
Surety had reinsurance payables to CCC and CIC of $0.3 million as of December
31, 2004. CNA Surety had no reinsurance payables to CCC and CIC as of December
31, 2003.
16
LARGE NATIONAL CONTRACTOR
The Company has provided significant surety bond protection guaranteeing
projects undertaken by the large national contract principal that is excluded
from the Company's third party insurance. The related party reinsurance
available to the Company for this principal and the credit extended to the
principal by affiliates of the Company are described below.
REINSURANCE
If the Company should suffer any losses that are discovered prior to
September 30, 2006 arising from bonds issued to the large national contractor
with effective dates of September 30, 2002 and prior, the Company would retain
the first $60 million of losses on bonds written, and CCC would incur 100% of
losses above $60 million pursuant to the extended discovery provisions of the
two Excess of Loss treaties that expired on September 30, 2002. Any losses
discovered after September 30, 2006 on bonds with effective dates of September
30, 2002 and prior would be covered up to $150 million pursuant to the $50
million excess of $100 million contract with CCC described above and a twelve
month contract with CCC effective January 1, 2005 that provides $40 million
excess of $60 million reinsurance coverage exclusively for the large national
contractor.
For bonds that the Company has written after September 30, 2002, in
addition to the coverage provided by excess of loss reinsurance treaties
described above ($40 million excess of $60 million and $50 million excess of
$100 million) the Company and CCC have entered into facultative reinsurance in
connection with larger bonds. The Company's exposure on bonds written from
October 1, 2002 through October 31, 2003 was limited to $20 million per bond.
For bonds written subsequent to November 1, 2003 through December 31, 2004, the
Company's exposure is limited to $14.7 million per bond. For bonds the Company
may write in 2005, the Company's exposure will be limited to 10% of its
statutory surplus.
CNAF CREDIT FACILITY
Commencing in 2003, CNAF has provided loans through a credit facility in
order to help the large national contractor meet its liquidity needs and
complete projects which had been bonded by CNA Surety. In December of 2004, the
credit facility was amended to increase the maximum available loans to $106
million from $86 million at December 31, 2003. The amendment also provides that
CNAF may in its sole discretion further increase the amounts available for loans
under the credit facility, up to an aggregate maximum of $126 million. As of
December 31, 2004 and 2003, $99 million and $80 million had been advanced under
the credit facility. Loews, through a participation agreement with CNAF,
provided funds for and owned a participation of $29 million and $26 million of
the loans outstanding as of December 31, 2004 and 2003, respectively, and has
agreed to a participation of one-third of any additional loans which may be made
above the original $86 million credit facility limit up to the $126 million
maximum available line. Loans under the credit facility are secured by a pledge
of substantially all of the assets of the contractor and certain of its
affiliates. In connection with the credit facility, CNAF has also guaranteed or
provided collateral for letters of credit which are charged against the maximum
available line and, if drawn upon, would be treated as loans under the credit
facility. As of December 31, 2004 and 2003, these guarantees and collateral
obligations aggregated $13 million and $7 million.
The contractor implemented a restructuring plan intended to reduce costs
and improve cash flow, and appointed a chief restructuring officer to manage
execution of the plan. In the course of addressing various expense, operational
and strategic issues, however, the contractor has decided to substantially
reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow,
and in turn the capacity to service debt, has been reduced below previous
levels. Restructuring plans have also been extended to accommodate these
circumstances. In light of these developments, CNAF recorded an impairment
charge of $56 million pretax ($36 million after-tax) for the fourth quarter of
2004, net of the participation by Loews, with respect to amounts loaned under
the credit facility. Any draws under the credit facility beyond $106 million or
further changes in the large national contractor's business plan or projections
may necessitate further impairment charges. The Company intends to
17
continue to provide surety bonds on behalf of the contractor during the
restructuring period, subject to the contractor's initial and ongoing compliance
with the Company's underwriting standards. Indemnification and subrogation
rights, including rights to contract proceeds on construction projects in the
event of default, exist that reduce CNA Surety's exposure to loss. While the
Company believes that the contractor's restructuring efforts will be successful
and provide sufficient cash flow for its operations, the contractor's failure to
achieve its extended restructuring plan or perform its contractual obligations
under the Company's surety bonds could have a material adverse effect on CNA
Surety's results of operations, cash flow and equity. If such failures occur,
the Company estimates that possible losses, net of indemnification and
subrogation recoveries, but before recoveries under reinsurance contracts, to be
approximately $200 million pretax. However, the related party reinsurance
treaties discussed above should limit the Company's per principal loss exposure
to approximately $60 million. After consideration of the additional premium due
in the event of losses under the reinsurance treaties discussed above, the
Company estimates that the financial statement impact of a failure by this
contractor would be approximately $52 million after tax. The Company has had
discussions with its insurance regulatory authorities regarding the level of
bonds provided for this principal and will continue to keep the insurance
regulators informed of its ongoing exposure to this account.
OTHER RELATED PARTY TRANSACTIONS
Effective January 1, 2001, CNA Surety renewed an Administrative Services
Agreement with CCC. The agreement allows the Company to purchase and/or have
access to certain services provided by CNAF. The Company will also pay CNAF a
management fee for its proportionate share of administrative and overhead costs
incurred in supporting the services provided pursuant to this agreement. The
management fee for the year 2005 is $1.9 million that shall be paid by CNA
Surety to CNAF in equal monthly installments by the last day of each month. The
amounts paid were $1.8 million, $1.7 million, and $1.6 million for 2004, 2003,
and 2002, respectively. The management fee shall be increased as of January 1,
the "adjustment date", of each year this Administrative Services Agreement is in
force by the greater of 5% or the amount of the increase in the Consumer Price
Index for All Urban Consumers for the Chicago, Illinois area as reported by the
Bureau of Labor Statistics for the 12 month period immediately preceding the
adjustment date. The agreement was amended in 2003 to allow CCC to purchase
services from the Company. In 2004 and 2003, CCC paid the Company $0.5 million
for services in connection with licensing and appointing CCC's insurance
producers as required by state insurance laws. This agreement shall be effective
so long as CNAF or their affiliates or shareholders shall continue to own a
majority interest in CNA Surety. This agreement may be terminated by either
party upon the provision of 30 days prior notice of such termination to the
other party. The Company was charged $7.4 million, $6.1 million, and $5.2
million for the years ended December 31, 2004, 2003 and 2002, respectively, for
rents and services provided under the Administrative Services Agreement. In
addition, the Company was charged $0.8 million, $1.4 million and $1.0 million
for direct costs incurred by CCC on the Company's behalf during 2004, 2003 and
2002, respectively. The Company had no payable balance to CCC related to the
Administrative Services Agreement as of December 31, 2004.
Western Surety has entered into a series of business transactions with
entities in which an affiliate of CCC has an interest. The first series involves
five separate real estate residual value insurance policies issued by R.V.I.
America Insurance Company ("RVI I America") reinsured by Western Surety through
the Quota Share Treaty. RVI America is a wholly owned subsidiary of R.V.I.
America Corporation, which is a wholly owned subsidiary of R.V.I. Guaranty
Company Ltd. of Bermuda ("RVI Bermuda"), an unconsolidated affiliate of CCC. The
transactions involve policies with limits totaling approximately $11.5 million.
CCC is reinsuring the full extent of RVI America's exposure on the policies.
Pursuant to the Quota Share Treaty, Western Surety is, in turn, reinsuring all
of CCC's exposures on the policies. Western Surety is reinsuring all of its
exposure on the policies with RVI-Bermuda, a non-admitted reinsurer. The policy
limits range from $1,665,077 to $2,954,164 with an average policy limit of
approximately $2.3 million and total limits of all policies of $11,539,510. Net
premium amounts retained in 2000 relative to these reinsurance transactions
totaled $519,278 as follows: RVI America, $51,928; CCC, $130,858; Western
Surety, $67,298; and RVI Bermuda, $269,194.
18
In addition from time to time Western Surety provided surety bonds
guaranteeing insurance payments of certain companies to CCC and its affiliates
under retrospectively rated insurance policies underwritten by CCC and its
affiliates. Under the terms of these bonds, referred to as insurance program
bonds, if the principal, the insured company, failed to make required a required
premium payment, CCC and its affiliates would have a claim against the Company
under the bond. The Company now has a policy not to issue such bonds to
companies insured by CCC and its affiliates. The last such bond was written in
2001 and currently bonds with $13.9 million of total penal sums remain as of
December 31, 2004.
Western Surety from time to time provides license and permit bonds and
appeal bonds to CCC and its affiliates and to clients of CCC and its affiliates.
Under procedures established by the Audit Committee, the Company may issue
appeal bonds for CCC and its affiliates and their clients with penal sums of $10
million or less without prior Audit Committee approval as long as those bonds
meet the Company's normal underwriting standards, the rates charged are market
rates and that the Company has received the indemnity of CCC. Bonds greater than
$10 million require the prior approval of the Audit Committee. As of December
31, 2004, the total amount of the outstanding appeal and license and permit
bonds written on behalf of CCC and its affiliates was approximately $65.3
million, which was comprised of 42 bonds. Western Surety has entered into
indemnity agreements with CCC and its affiliates indemnifying Western Surety for
any loss arising from the issuance of appeal bonds for CCC and its affiliates.
The premium for these bonds was approximately $503,000 in 2004 and $440,000 in
2003.
RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
(PROPOSAL 2)
The Audit Committee has selected Deloitte & Touche LLP, independent
registered public accounting firm, to audit the financial statements of the
Company for the 2005 fiscal year. Deloitte & Touche LLP has audited the
Company's financial statements as of and for the years ended December 31, 1999,
2000, 2001, 2002, 2003 and 2004. A representative of Deloitte & Touche LLP will
be present at the meeting and be available to respond to appropriate questions.
A description of the fees paid to Deloitte & Touche LLP in fiscal 2004 is
described below.
At the Annual Meeting, if a quorum is present, the vote of holders of a
majority of the Company's Common Stock having the power to vote held by
shareholders present in person or represented by proxy shall ratify the
appointment, by the Board of Directors, of Deloitte & Touche LLP as the
Company's independent registered public accounting firm. It is the present
intention of the Company's Proxy Agents to vote at the Annual Meeting the
proxies which have been duly executed, dated and delivered and which have not
been revoked in accordance with the instructions set forth thereon or if no
instruction had been given or indicated, for the ratification the appointment of
Deloitte & Touche LLP as the Company's independent registered public accounting
firm.
For the years ended December 31, 2004 and 2003, professional services were
performed by Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, "Deloitte"), which
includes Deloitte Consulting.
AUDIT FEES
The aggregate fees billed for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2004 and 2003 and for the
reviews of the financial statements included in the Company's Quarterly Reports
on Form 10-Q were $1,076,934 and $942,234, respectively.
AUDIT-RELATED FEES
The aggregate fees billed for Audit-Related services for the fiscal years
ended December 31, 2004 and 2003 were $79,044 and $141,193, respectively. These
fees generally include fees for consents and comfort
19
letters, audits of the Company's employee benefit plans, accounting
consultations, Sarbanes Oxley Act Section 404 advisory services, and SEC related
matters.
TAX FEES
None.
ALL OTHER FEES
None.
The Audit Committee has established a pre-approval policy with regard to
audit, audit-related and certain non-audit engagements by the Company of its
independent registered public accounting firm. Under this policy, the Audit
Committee annually pre-approves certain limited, specified recurring services
which may be provided by Deloitte, subject to maximum dollar limitations. All
other engagements for services to be performed by Deloitte must be separately
pre-approved by the Audit Committee. The Audit Committee has also designated the
Chairperson of the Committee as having authority to pre-approve such engagements
as allowed by the policy, subject to reporting on such pre-approvals to the
Committee at its next scheduled meeting.
THE BOARD RECOMMENDS A VOTE "FOR" THE RATIFICATION OF DELOITTE & TOUCHE LLP
AS THE COMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. IF A CHOICE IS
SPECIFIED ON THE PROXY BY THE SHAREHOLDER, THE SHARES WILL BE VOTED AS
SPECIFIED. IF NO CHOICE SPECIFICATION IS MADE, SHARES WILL BE VOTED "FOR"
RATIFICATION OF DELOITTE & TOUCHE LLP AS THE COMPANY'S INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM.
SHAREHOLDERS' PROPOSALS FOR 2006 ANNUAL MEETING
Under the rules of the SEC, the Company is required to disclose the
deadline for submitting shareholder proposals for inclusion in the Company's
proxy statement and form of proxy for the Company's next annual meeting,
calculated in the manner provided by the rule of the SEC and the date after
which notice of a proposal submitted outside the processes of the rule of the
SEC is considered untimely. Under the calculation provided by the rule of the
SEC, a proposal submitted by a shareholder for the 2006 Annual Meeting of
Shareholders of the Company must be received by the Secretary of the Company,
CNA Center, Chicago, Illinois 60685, by November 11, 2005, in order to be
eligible to be included in the Company's proxy statement for that meeting. Under
the Company's By-Laws, to be timely, a shareholder's notice of a shareholder
proposal submitted outside the process for inclusion in the proxy statement must
be delivered to, or mailed and received at, the principal executive offices of
the Company, not less than fifty (50) days nor more than seventy-five (75) days
prior to the meeting; provided, however, that in the event that less than
sixty-five (65) days notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be so received not later than the close of business on the fifteenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made.
20
OTHER MATTERS
The Company knows of no business, which will be presented at the Annual
Meeting other than the election of Directors to the Board, and the ratification
of the Company's independent auditors. However, if other matters properly come
before the meeting, it is the intention of the Proxy Agents to vote upon such
matters in accordance with their good judgment in such matters.
By Order of the Board of Directors
ENID TANENHAUS
Secretary
21
DETACH HERE ZCNU42
PROXY
CNA SURETY CORPORATION
CNA PLAZA
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
ON APRIL 26, 2005
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of CNA
Surety Corporation (the "Company") will be held at CNA Plaza, 13 South, 333
S. Wabash, Chicago, IL 60685 on Tuesday, April 26, 2005, at 9:00 a.m. CDT.
The Board of Directors has fixed the close of business on March 1, 2005, as
the record date (the "Record Date") for the determination of shareholders
entitled to notice of, and to vote at, the Annual Meeting. You are cordially
invited to attend the meeting. In the event you will be unable to attend, you
are respectfully requested to fill in, date, sign and return the enclosed proxy
at your earliest convenience in the enclosed envelope.
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
CNA SURETY CORPORATION
C/O EQUISERVE TRUST COMPANY N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
THIS IS YOUR PROXY.
YOUR VOTE IS IMPORTANT.
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE ANNUAL MEETING OF SHAREHOLDERS, YOU
CAN BE SURE YOUR SHARES ARE REPRESENTED AT THE MEETING BY PROMPTLY RETURNING
YOUR PROXY (ATTACHED BELOW) IN THE ENCLOSED ENVELOPE. THANK YOU FOR YOUR
ATTENTION TO THIS IMPORTANT MATTER.
DETACH HERE ZCNU41
| CNU
|
------
PLEASE MARK
/X/ VOTES AS IN
THIS EXAMPLE.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH YOUR SPECIFIC DIRECTIONS BELOW.
IF THE PROXY IS SIGNED AND RETURNED WITHOUT SUCH DIRECTIONS, IT WILL BE VOTED
FOR ALL PROPOSALS.
1. Election of Directors.
NOMINEES: (01) Philip H. Britt, (02) Roy E. Posner, (03) Adrian M. Tocklin,
(04) James R. Lewis (05) Lori Komstadius, (06) Robert Tinstman,
(07) John F. Welch.
FOR / / WITHHELD / /
ALL / / FROM ALL / /
NOMINEES / / NOMINEES / /
/ / ___________________________________
For all nominees except as written above
FOR AGAINST ABSTAIN
2. To ratify the Board of Directors' appointment of the / / / / / /
Company's independent auditors, Deloitte & Touche LLP
for fiscal year 2005.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
IMPORTANT: PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD
IN THE POSTPAID ENVELOPE PROVIDED TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT
THE MEETING. IF YOU ATTEND THE MEETING YOU MAY VOTE IN PERSON IF YOU WISH TO DO
SO EVEN THOUGH YOU HAVE SENT IN YOUR PROXY.
Please sign exactly as name appears hereon. Executors, Administrators,
Trustees, etc. should so indicate when signing. Joint owners should each sign.
Signature: _______________ Date:_______ Signature: _______________ Date:_______