As Filed Pursuant to Rule 424(b)(2)
Registration No. 333-74912;
333-101460
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED APRIL 3, 2002
[CHUBB CORP. LOGO]
THE CHUBB CORPORATION
21,000,000 COMMON STOCK PURCHASE WARRANTS
$525,000,000 4.00% SENIOR NOTES DUE 2007
IN THE FORM OF
7.00% EQUITY UNITS
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We will issue 21,000,000 mandatorily exercisable warrants to purchase our
common stock (24,000,000 mandatorily exercisable warrants if the underwriters
exercise their over-allotment option in full) and $525,000,000 aggregate
principal amount of 4.00% senior notes due November 16, 2007 ($600,000,000
aggregate principal amount of 4.00% senior notes if the underwriters exercise
their over-allotment option in full). The warrants and senior notes will be
issued together in the form of Equity Units, each of which will represent one
warrant and $25 principal amount of senior notes. After issuance, warrants and
senior notes may be separated as described in this prospectus supplement.
- Each warrant will obligate you to purchase from us, no later than November
16, 2005, for a settlement price of $25 in cash, a number of shares of our
common stock as described in this prospectus supplement.
- We will also pay you quarterly warrant fees at a rate of 3.00% per year on
the stated amount of $25 per warrant, or $0.75 per year, as described in
this prospectus supplement.
- The senior notes will initially bear interest at a rate of 4.00% per year,
payable quarterly. The senior notes will be remarketed as described in
this prospectus supplement. Following a successful remarketing, the
interest rate on the senior notes may be reset.
- All of the Equity Units will be issued as Corporate Units. Unless you
separate your senior note from your warrant by substituting Treasury
securities for your senior note, your Equity Unit will remain a Corporate
Unit.
- If the senior notes are remarketed successfully before the third business
day immediately preceding November 16, 2005, or if a special event
redemption described in this prospectus supplement occurs before November
16, 2005, the senior notes represented by the Corporate Units will be
replaced by the Treasury portfolio described in this prospectus
supplement.
- You can create Treasury Units from Corporate Units by substituting
Treasury securities for the senior notes or your applicable ownership
interest in the Treasury portfolio represented by the Corporate Units, and
you can recreate Corporate Units by substituting senior notes or your
applicable ownership interest in the Treasury portfolio for the Treasury
securities represented by the Treasury Units.
- The senior notes or, if substituted for the senior notes, the Treasury
securities or your applicable ownership interest in the Treasury
portfolio, as the case may be, will be pledged to us to secure your
obligation under the related warrant.
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We will apply to list the Corporate Units on the New York Stock Exchange,
but no assurances can be given that the application for listing will be
approved. Our common stock is traded on the New York Stock Exchange under the
symbol "CB." On November 25, 2002, the reported last sale price of our common
stock on the New York Stock Exchange was $56.64 per share.
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INVESTING IN THE EQUITY UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-15 OF THIS PROSPECTUS SUPPLEMENT.
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PER
CORPORATE UNIT TOTAL
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Public offering price....................................... $25.00 $525,000,000
Underwriting discounts and commissions...................... $ 0.75 $ 15,750,000
Proceeds, before expenses, to Chubb......................... $24.25 $509,250,000
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The underwriters may also purchase up to an additional 3,000,000 Corporate
Units at the public offering price less the underwriting discounts and
commissions within a 13 day period beginning on the date of first issuance of
the Corporate Units in order to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Corporate Units will be ready for delivery on or about December 2, 2002.
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JOINT BOOK-RUNNING MANAGERS
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
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CREDIT SUISSE FIRST BOSTON DEUTSCHE BANK SECURITIES MERRILL LYNCH & CO.
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The date of this prospectus supplement is November 25, 2002
SUMMARY
This summary highlights certain information incorporated by reference or
appearing elsewhere in this prospectus supplement or the accompanying
prospectus. As a result, it is not complete and does not contain all of the
information that you should consider before purchasing our warrants and senior
notes. You should read the following summary in conjunction with the more
detailed information contained in this prospectus supplement. References to
"Chubb" are to The Chubb Corporation. Unless the context otherwise requires,
references to "we," "us" and "our" refer to The Chubb Corporation and its
consolidated subsidiaries.
THE CHUBB CORPORATION
Chubb was incorporated as a business corporation under the laws of the
State of New Jersey in June 1967. The Chubb Corporation is a holding company for
a family of property and casualty insurance companies known informally as the
Chubb Group of Insurance Companies ("Chubb Group"). Since 1882, the Chubb Group
has provided property and casualty insurance to businesses and individuals
around the world. At December 31, 2001, we had total assets of $29.4 billion and
shareholders' equity of $6.5 billion. A.M. Best ranks the Chubb Group 13th among
U.S. property/casualty operations based on 2001 net written premiums. With more
than 12,000 employees in 134 offices in 31 countries, the Chubb Group serves
commercial and personal customers through 5,000 independent agents and brokers
worldwide.
Our property and casualty operations are divided into three strategic
business units. Chubb Commercial Insurance offers a full range of commercial
customer insurance products, including coverage for multiple peril, casualty,
workers' compensation and property and marine. Chubb Commercial Insurance is
known for writing niche business, where our expertise can add value for our
agents, brokers and policyholders. Chubb Specialty Insurance offers a wide
variety of specialized executive protection and professional liability products
for privately and publicly owned companies, financial institutions, professional
firms and healthcare organizations. Chubb Personal Insurance offers products for
individuals with fine homes and possessions who require more coverage choices
and higher limits than standard insurance policies.
In addition to our three strategic insurance business units, in 2000 we
organized Chubb Financial Solutions to engage in developing and providing
risk-financing services through the capital and insurance markets.
Our principal executive offices are located at 15 Mountain View Road,
Warren, New Jersey 07061-1615, and our telephone number is (908) 903-2000.
RECENT DEVELOPMENTS
Asbestos-Related Loss Reserves. In the third quarter of 2002, our
actuaries and outside actuarial consultants commenced their periodic ground-up
exposure based analysis of our asbestos-related liabilities. As part of this
analysis, they considered the significant increase in the number of peripheral
defendants in recent years; the increase in the volume of claims and size of
awards, particularly for plaintiffs who claim exposure but who have no symptoms
of asbestos related disease; and the increase in claims filed under the
non-aggregate premises or operations section of general liability policies. Upon
completion of the analysis and assessment of the results, our loss reserves were
increased by $625 million.
Rating Agency Actions. Several of the principal credit rating agencies
have recently taken the following actions with respect to our credit ratings:
- On October 16, 2002, A. M. Best reaffirmed our ratings with stable
outlook;
- On October 30, 2002, Fitch lowered our financial strength, senior
unsecured debt and commercial paper ratings with stable outlook;
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- On November 6, 2002, Standard & Poor's Ratings Services ("S&P"), while
reaffirming our financial strength rating, lowered our senior debt,
counterparty credit, preferred stock and commercial paper ratings with
negative outlook; and
- On November 21, 2002, Moody's Investors Services ("Moody's") lowered our
financial strength, senior unsecured debt and preferred stock ratings
with stable outlook.
The following table summarizes The Chubb Corporation's credit ratings from
the major independent rating organizations as of November 22, 2002:
A.M. BEST STANDARD & POOR'S MOODY'S FITCH
--------- ----------------- ------- -----
Senior unsecured debt rating............. aa A+ A1 A+
Preferred stock rating................... a+ A- (P)A3
Commercial paper......................... AMB-1+ A-1 P-1 F-1
Counterparty credit rating............... A+
The following table summarizes the Chubb insurance group's financial
strength ratings from the major independent rating organizations as of November
22, 2002:
A.M. BEST STANDARD & POOR'S MOODY'S FITCH
--------- ----------------- ------- -----
Financial Strength....................... A++ AA+ Aa2 AA
Credit ratings are not a recommendation to buy, sell or hold securities and
may be revised or withdrawn at any time.
Management Changes. On November 4, 2002, we announced that John D.
Finnegan, Executive Vice President of General Motors Corporation and Chairman
and President of General Motors Acceptance Corporation, has been elected
President, Chief Executive Officer and a Director of Chubb and will succeed Dean
R. O'Hare effective December 1, 2002. In addition, we announced on that date
that, as of December 1, 2002:
- Our Lead Director, Joel J. Cohen, has been elected non-executive Chairman
of the Board;
- Executive Vice President and Chief Operations Officer Thomas F. Motamed
has been promoted to Vice Chairman and Chief Operating Officer; and
- President John Degnan and Executive Vice President and interim Chief
Financial Officer Michael O'Reilly have been promoted to Vice Chairmen
and will retain their current responsibilities.
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SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical financial data for, and as of the end of,
each of the five years in the period ended December 31, 2001 have been derived
from Chubb's consolidated financial statements, which have been audited by Ernst
& Young LLP, Chubb's independent auditors. The data as of September 30, 2002 and
2001 and for the nine months ended September 30, 2002 and 2001 have been derived
from Chubb's unaudited consolidated financial statements, which include, in the
opinion of Chubb's management, all adjustments, consisting of normal recurring
accruals, necessary to present fairly Chubb's results of operations and
financial position for the periods and dates presented. The summary financial
data should be read in conjunction with Chubb's financial statements and the
notes to the financial statements that are incorporated in this prospectus
supplement and the accompanying prospectus by reference. Results for the nine
months ended September 30, 2002 are not necessarily indicative of results for
the full year.
AS OF OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
--------- ---------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues.................. $ 6,693.1 $ 5,762.3 $ 7,754.0 $ 7,251.5 $ 6,729.6 $ 6,349.8 $ 6,664.0
Net Income................ 166.3(1) 82.8(2) 111.5(3) 714.6 621.1 707.0(4) 769.5
Net Income Per Share
(diluted)............... $ .96 $ .47 $ .63 $ 4.01 $ 3.66 $ 4.19 $ 4.39
Cash Dividends Declared
per Common Share........ $ 1.05 $ 1.02 $ 1.36 $ 1.32 $ 1.28 $ 1.24 $ 1.16
Total Assets.............. $32,533.5 $ 28,226.7 $29,449.0 $25,026.7 $23,537.0 $20,746.0 $19,615.6
Invested Assets........... 19,909.7 17,559.7 17,783.9 17,000.6 16,019.4 14,755.3 14,049.6
Unpaid Claims and Claim
Expenses................ 16,752.6 15,094.4 15,514.9 11,904.6 11,434.7 10,356.5 9,772.5
Long-term Debt............ 1,353.8 755.3 1,351.0 753.8 759.2 607.5 398.6
Shareholders' Equity...... 6,901.4 6,645.5 6,525.3 6,981.7 6,271.8 5,644.1 5,657.1
Shareholders' Equity per
Common Share............ $ 40.35 $ 39.23 $ 38.37 $ 39.91 $ 35.74 $ 34.78 $ 33.53
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(1) Net income has been reduced by net losses of $625.0 million ($406.3 million
after-tax or $2.34 per share) related to asbestos claims recognized in the
third quarter.
(2) Net income has been reduced by net costs of $645.0 million ($420.0 million
after-tax or $2.37 per share) related to the September 11 attack.
(3) Net income has been reduced by net costs of $645.0 million ($420.0 million
after-tax or $2.39 per share) related to the September 11 attack and by net
surety bond losses of $220.0 million ($143.0 million after-tax or $0.81 per
share) arising from the bankruptcy of Enron Corp.
(4) Net income has been reduced by a restructuring charge of $40.0 million
($26.0 million after-tax or $0.15 per share).
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THE OFFERING
WHAT ARE WE OFFERING?
We are offering 21,000,000 mandatorily exercisable warrants to purchase our
common stock (24,000,000 mandatorily exercisable warrants if the underwriters
exercise their over-allotment option in full) and $525,000,000 aggregate
principal amount of 4.00% senior notes due November 16, 2007 ($600,000,000
aggregate principal amount of 4.00% senior notes if the underwriters exercise
their over-allotment option in full). We are issuing them together as 21,000,000
Corporate Units (24,000,000 Corporate Units if the underwriters exercise their
over-allotment option in full). After they are issued, you can separate the
senior notes from the warrants by creating Treasury Units as we describe below
under "How can I create Treasury Units from Corporate Units?" Corporate Units
and Treasury Units are both referred to in this prospectus supplement as Equity
Units. All references in this prospectus supplement to our common stock include
the rights evidenced by such common stock to the extent provided in the Rights
Agreement dated as of March 12, 1999 between Chubb and First Chicago Trust
Company of New York.
WHAT DOES A CORPORATE UNIT REPRESENT?
Each Corporate Unit has a stated amount of $25 and will represent one
warrant and, initially, $25 principal amount of our senior notes due November
16, 2007. You will own the senior note that is represented by a Corporate Unit,
but it will be held by the collateral agent and pledged to us to secure your
obligation under the warrant that is also represented by that Corporate Unit. If
the senior notes are successfully remarketed prior to the third business day
preceding November 16, 2005, or if a special event redemption occurs prior to
November 16, 2005, in each case as described in this prospectus supplement, the
applicable ownership interest in the Treasury portfolio described below under
"What is the Treasury Portfolio?" will replace your senior notes as a component
of each Corporate Unit you own and will be held by the collateral agent and
pledged to us to secure your obligations under the warrant. The senior notes
will not trade separately from the Corporate Units unless and until Treasury
Units are created by substituting Treasury securities for senior notes, the
warrants are settled early or the senior notes are remarketed.
WHAT ARE THE TERMS OF THE WARRANTS?
Each warrant represented by an Equity Unit obligates the holder of the
warrant to purchase, and obligates us to sell, on November 16, 2005, which we
refer to as the warrant settlement date, for a settlement price of $25 in cash,
a number of newly issued shares of our common stock equal to the "settlement
rate." The settlement rate will be calculated, subject to adjustment under the
circumstances set forth in "Description of the Warrants -- Anti-Dilution
Adjustments," as follows:
- if the applicable market value of our common stock is equal to or greater
than $69.10, which we refer to as the threshold appreciation price, the
settlement rate will be 0.3618 shares of our common stock per warrant;
- if the applicable market value of our common stock is less than the
threshold appreciation price but greater than $56.64, which we refer to
as the reference price, the settlement rate will be a number of shares of
our common stock per warrant equal to $25 divided by the applicable
market value; and
- if the applicable market value of our common stock is less than or equal
to the reference price, the settlement rate will be 0.4414 shares of our
common stock per warrant.
"Applicable market value" means the average of the closing price per share
of our common stock on each of the twenty consecutive trading days ending on the
third trading day immediately preceding the warrant settlement date, subject to
adjustment under the circumstances set forth in "Description of the
Warrants -- Anti-Dilution Adjustments." The reference price is the reported last
sale price of our common
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stock on the New York Stock Exchange on the date of this prospectus supplement.
The threshold appreciation price represents a 22.0% appreciation over the
reference price.
CAN I SETTLE A WARRANT EARLY?
You can settle a warrant at any time on or prior to the fifth business day
immediately preceding the warrant settlement date by paying $25 cash, in which
case we will issue to you 0.3618 shares of our common stock pursuant to the
warrant, subject to anti-dilution adjustments. This is the minimum number of
shares deliverable per warrant on the warrant settlement date. As a result, the
market price of our common stock on or before the early settlement date will not
affect the number of shares received upon early settlement. In addition, if we
are involved in a merger in which at least 30% of the consideration for our
common stock consists of cash or cash equivalents, you will have the right to
accelerate and settle the warrant early at the settlement rate in effect
immediately prior to the closing of that merger.
Your early settlement right is subject to the condition that, if required
under the U.S. federal securities laws, we have a registration statement under
the Securities Act of 1933 in effect covering the shares of common stock and
other securities, if any, deliverable upon settlement of a warrant. We have
agreed that, if required by U.S. federal securities laws, we will use our
commercially reasonable efforts to have a registration statement in effect
covering those shares of common stock and other securities to be delivered in
respect of the warrants being settled.
WHAT ARE TREASURY UNITS?
Treasury Units are units created from Corporate Units. Each Treasury Unit
represents one warrant and a 2.5% undivided beneficial interest in a zero-coupon
U.S. Treasury security with a principal amount of $1,000 that matures on
November 15, 2005 (CUSIP No. 912820BQ9) which we refer to as a Treasury
security. You will own the interest in the Treasury security that is represented
by a Treasury Unit, but it will be held by the collateral agent and pledged to
us to secure your obligation under the warrant that is represented by that
Treasury Unit.
HOW CAN I CREATE TREASURY UNITS FROM CORPORATE UNITS?
Unless the Treasury portfolio has replaced the senior notes as a component
of the Corporate Units, each holder of Corporate Units will have the right, at
any time on or prior to the fifth business day immediately preceding the warrant
settlement date, to substitute for the related senior notes held by the
collateral agent Treasury securities in a total principal amount at maturity
equal to the aggregate principal amount of the senior notes for which
substitution is being made. Because Treasury securities are issued in integral
multiples of $1,000, holders of Corporate Units may make this substitution only
in integral multiples of 40 Corporate Units. If the Treasury portfolio has
replaced the senior notes as a component of the Corporate Units, holders of
Corporate Units will have the right, at any time on or prior to the second
business day immediately preceding the warrant settlement date, to substitute
Treasury securities for the applicable ownership interest in the Treasury
portfolio as a component of the Corporate Units, but holders of Corporate Units
can only make this substitution in integral multiples of 4,000 Corporate Units.
Each of these substitutions will create Treasury Units, and the applicable
senior notes or applicable ownership interest in the Treasury portfolio will be
released to the holder and be separately tradable from the Treasury Units.
HOW CAN I RECREATE CORPORATE UNITS FROM TREASURY UNITS?
Unless the Treasury portfolio has replaced the senior notes as a component
of the Corporate Units, each holder of Treasury Units will have the right, at
any time on or prior to the fifth business day immediately preceding the warrant
settlement date, to substitute for the related Treasury securities held by the
collateral agent, senior notes having a principal amount equal to the aggregate
principal amount at stated maturity of the Treasury securities for which
substitution is being made. Because Treasury securities are issued in integral
multiples of $1,000, holders of Treasury Units may make these substitutions only
in
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integral multiples of 40 Treasury Units. If the Treasury portfolio has replaced
the senior notes as a component of the Corporate Units, holders of Treasury
Units will have the right, at any time on or prior to the second business day
immediately preceding the warrant settlement date, to substitute the applicable
ownership interest in the Treasury portfolio for the Treasury securities as a
component of the Treasury Units, but holders of Treasury Units can only make
this substitution in integral multiples of 4,000 Treasury Units. Each of these
substitutions will recreate Corporate Units and the applicable Treasury
securities will be released to the holder and be separately tradable from the
Corporate Units.
WHAT PAYMENTS AM I ENTITLED TO AS A HOLDER OF CORPORATE UNITS?
A holder of a Corporate Unit will be entitled to receive quarterly cash
distributions consisting of interest payments calculated at the rate of 4.00%
per year on the $25 senior note represented by that Corporate Unit (or
distributions on the applicable ownership interest in the Treasury portfolio if
the senior notes have been replaced by the Treasury portfolio) and warrant fees
payable by us at the rate of 3.00% per year on the stated amount of $25 per
warrant until the earlier of the warrant settlement date and the most recent
quarterly payment date on or before any early settlement of the related
warrants.
WHAT PAYMENTS AM I ENTITLED TO AS A HOLDER OF TREASURY UNITS?
Holders of Treasury Units will be entitled to receive quarterly warrant
fees payable by us at the rate of 3.00% per year on the stated amount of $25 per
warrant. In addition, original issue discount will accrue on each related
Treasury security. When a Treasury Unit is created, the holder of the Treasury
Unit will receive the senior note that was represented by the Corporate Unit
used to create the Treasury Unit. As a holder of that senior note, the Treasury
Unit holder will also be entitled to receive the interest payments on that
senior note, as specified below.
DOES CHUBB HAVE THE OPTION TO DEFER CURRENT PAYMENTS?
We do not have the right to defer the payment of interest on the senior
notes. We have the right to defer the payment of warrant fees until no later
than the date on which your warrant is settled. Any deferred warrant fees will
accrue additional warrant fees at a rate of 7.00% per year, compounded
quarterly, until paid.
WHAT ARE THE PAYMENT DATES FOR THE EQUITY UNITS?
The payments described above in respect of the warrants and senior notes
represented by Equity Units will be payable quarterly in arrears on February 16,
May 16, August 16 and November 16 of each year, commencing February 16, 2003.
WHAT IS REMARKETING?
Except as described below, the senior notes held by Corporate Unit holders
as part of a Corporate Unit will be remarketed on the third business day
immediately preceding August 16, 2005 (the date three months prior to the
warrant settlement date), which we refer to as the initial remarketing date. The
remarketing agent will use its reasonable efforts to obtain a price for the
remarketed senior notes approximately equal to (but not less than) 100.50% of
the purchase price for the Treasury portfolio described below under "What is the
Treasury Portfolio?" To obtain that price, the remarketing agent may increase or
decrease the interest rate on the senior notes, as described below.
If the remarketing of the senior notes on the initial remarketing date
fails or does not occur because a condition precedent, such as the registration
requirement described below, is not satisfied, the senior notes will continue to
be represented by Corporate Units and the remarketing agent will use its
reasonable efforts to remarket the senior notes on the third business day
immediately preceding September 16, 2005, which we call the second remarketing
date, and on the third business day immediately preceding October 16, 2005,
which we call the third remarketing date, in each case at a price approximately
equal to (but not less than) 100.50% of the purchase price of the Treasury
portfolio.
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Following a successful remarketing of the senior notes on any of these
remarketing dates, the portion of the proceeds from the remarketing equal to the
Treasury portfolio purchase price will be applied to purchase the Treasury
portfolio. The Corporate Unit holder's applicable ownership interest in the
Treasury portfolio will be substituted for the senior notes as a component of
the Corporate Units and will be held by the collateral agent and pledged to
secure the Corporate Unit holder's obligation under the warrants. On the warrant
settlement date, a portion of the proceeds from the Treasury portfolio equal to
the principal amount of the senior notes will automatically be applied to
satisfy the Corporate Unit holder's obligation to purchase common stock and
proceeds from the Treasury portfolio equal to the interest payment (assuming no
reset of the interest rate) that would have been due on the senior notes on
November 16, 2005 will be paid to the holders of the Corporate Units.
The remarketing agent will deduct, as a remarketing fee, an amount not
exceeding 25 basis points (.25%) of the Treasury portfolio purchase price from
any proceeds of the remarketing of the senior notes in excess of the Treasury
portfolio purchase price. The remarketing agent will then remit any remaining
portion of the proceeds for the benefit of the holders.
If a successful remarketing of the senior notes has not occurred on or
prior to the third remarketing date, the remarketing agent will use its
reasonable efforts to remarket the senior notes on the third business day
immediately preceding the warrant settlement date, which we refer to as the
final remarketing date, at a price of approximately 100.50% of the principal
amount of the senior notes remarketed, but the remarketing on the final
remarketing date will be considered successful if the resulting proceeds (net of
fees and commissions, if any) are at least 100% of the aggregate principal
amount of the senior notes.
If the remarketing of the senior notes on the final remarketing date is
successful, a portion of the proceeds from this remarketing equal to the
aggregate principal amount of the senior notes sold in the remarketing that are
represented by the Corporate Units will automatically be applied to satisfy in
full each Corporate Unit holder's obligations to purchase common stock under the
related warrants on the warrant settlement date. The remarketing agent will
deduct, as a remarketing fee, an amount not exceeding 25 basis points (.25%) of
the aggregate principal amount of the remarketed senior notes from any proceeds
of the remarketing in excess of the aggregate principal amount of the senior
notes remarketed. The remarketing agent will then remit any remaining portion of
the proceeds for the benefit of the holders.
WHAT HAPPENS IF THE SENIOR NOTES ARE NOT SUCCESSFULLY REMARKETED?
If a successful remarketing of the senior notes represented by your
Corporate Units has not occurred on or prior to the final remarketing date, you
will have the right to put your senior notes to us for par, plus accrued and
unpaid interest (whether or not the senior notes are represented by Corporate
Units). In that event, unless you have delivered the settlement price in respect
of the warrants represented by your Corporate Units to us in cash before the
final remarketing date, you will be deemed to have exercised that put right in
respect of the corresponding senior notes held as part of your Corporate Units
and to have elected to apply a portion of the proceeds of the put equal to the
principal amount of the senior notes against your obligations to us under the
warrants, thereby satisfying such obligations in full, and we will deliver our
common stock to you pursuant to the warrants.
DO I HAVE TO PARTICIPATE IN THE REMARKETING?
If you hold Corporate Units, you may elect not to participate in any
remarketing and to retain the senior notes represented by your Corporate Units
by (1) creating Treasury Units at any time on or prior to the second business
day prior to any of the remarketing dates or (2) if the first three remarketing
attempts have failed, notifying the warrant agent of your intention to pay cash
to satisfy your obligation under the related warrants on or prior to the fifth
business day before the warrant settlement date and delivering the cash payment
required under the warrants to the collateral agent on or prior to the fourth
business day before the warrant settlement date. Following a successful
remarketing prior to the third business day immediately preceding the warrant
settlement date, holders of Treasury Units can recreate a Corporate
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Unit, at any time prior to the second business day immediately preceding the
warrant settlement date, as described under "How can I recreate Corporate Units
from Treasury Units?"
WHAT IS THE TREASURY PORTFOLIO?
If there is a successful remarketing prior to the third business day
preceding the warrant settlement date or if a special event redemption described
under "Description of the Senior Notes -- Optional Redemption -- Special Event"
occurs prior to the warrant settlement date, the senior notes will be replaced
by the Treasury portfolio. The Treasury portfolio is a portfolio of U.S.
Treasury securities consisting of:
- U.S. Treasury securities (or principal or interest strips thereof) that
mature on or prior to November 16, 2005 in an aggregate amount equal to
the principal amount of the senior notes represented by the Corporate
Units, and
- either:
(1) in the case of a successful remarketing prior to the third
business day preceding the warrant settlement date, U.S. Treasury
securities (or principal or interest strips thereof) that mature on or
prior to November 16, 2005 in an aggregate amount equal to the aggregate
interest payment (assuming no reset of the interest rate) that would have
been due on November 16, 2005 on the principal amount of the senior notes
represented by the Corporate Units, or
(2) in the case of a special event redemption, U.S. Treasury
securities (or principal or interest strips thereof) that mature on or
prior to the business day immediately preceding each scheduled interest
payment after the date of the special event redemption and on or prior to
the warrant settlement date in an aggregate amount at maturity equal to the
aggregate interest payment (assuming no reset of the interest rate) that
would have been due on such interest payment date on the principal amount
of the senior notes represented by the Corporate Units.
IF I AM HOLDING A SENIOR NOTE AS A SEPARATE SECURITY FROM THE CORPORATE UNITS,
CAN I STILL PARTICIPATE IN A REMARKETING OF THE SENIOR NOTES?
Holders of senior notes that are not represented by the Corporate Units may
elect, in the manner described in this prospectus supplement, to have their
senior notes remarketed by the remarketing agent along with the senior notes
represented by the Corporate Units. See "Description of the Senior Notes --
Optional Remarketing." Such holders may also participate in any remarketing by
recreating Corporate Units from their Treasury Units at any time on or prior to
the second business day immediately prior to any of the remarketing dates.
BESIDES PARTICIPATING IN A REMARKETING, HOW ELSE CAN I SATISFY MY OBLIGATION
UNDER THE WARRANTS?
Holders of Corporate Units or Treasury Units may also satisfy their
obligations, or their obligations will be terminated, under the warrants as
follows:
- through early settlement as described under "Can I settle a warrant
early?" above;
- through the automatic application of the proceeds of the Treasury
securities in the case of the Treasury Units or the Treasury portfolio in
the case of Corporate Units if the Treasury portfolio has replaced the
senior notes as a component of the Corporate Units;
- if the first three remarketing attempts have failed, through cash
settlement prior to the final remarketing date in the case of holders of
Corporate Units, by notifying the warrant agent on or prior to the fifth
business day prior to November 16, 2005 and delivering the cash payment
required under the related warrants on or prior to the fourth business
day immediately prior to November 16, 2005;
S-8
- through the exercise of your right to put the senior notes to us at par,
plus accrued and unpaid interest, and the application of a portion of the
proceeds of the put equal to the principal amount of the senior notes
against your obligation to us under the warrants; or
- without any further action, upon the termination of the warrants as a
result of our bankruptcy, insolvency or reorganization.
If the holder of a Corporate Unit or Treasury Unit settles the related
warrant early, or if the holder's warrant is terminated as a result of our
bankruptcy, insolvency or reorganization, such holder will have no right to
receive any accrued warrant fees. See "Description of the Warrants -- Early
Settlement upon Cash Merger."
WHAT INTEREST PAYMENTS WILL I RECEIVE ON THE SENIOR NOTES?
Interest on the senior notes will be payable quarterly in arrears initially
at the annual rate of 4.00% per annum to, but excluding, the reset effective
date, which will be the third business day following the date on which a
remarketing of the senior notes is successfully completed. Following a reset of
the interest rate, interest will be payable on the senior notes at the reset
rate from and including the reset effective date to, but excluding, November 16,
2007. If there is not a successful remarketing of the senior notes, the interest
rate will not be reset and the senior notes will continue to bear interest at
the initial interest rate.
WHAT ARE THE INTEREST PAYMENT DATES ON THE SENIOR NOTES?
The interest payment dates on the senior notes are February 16, May 16,
August 16 and November 16 of each year, commencing February 16, 2003 and ending
on the maturity date of the senior notes.
WHEN WILL THE INTEREST RATE ON THE SENIOR NOTES BE RESET AND WHAT IS THE RESET
RATE?
Unless a special event redemption has occurred, the interest rate on the
senior notes may be reset on the date of a successful remarketing and the reset
rate will become effective three business days thereafter. The reset rate will
be the interest rate determined by the remarketing agent as the rate the senior
notes should bear in order for the senior notes represented by the Corporate
Units to have an approximate aggregate market value on the remarketing date of
approximately (but not less than) 100.50% of the Treasury portfolio purchase
price, in the case of a remarketing prior to the final remarketing date, or
approximately 100.50% of the aggregate principal amount of the senior notes (but
not less than 100% of that amount plus fees and commissions, if any), in the
case of the final remarketing. The interest rate on the senior notes will not be
reset if there is not a successful remarketing. The reset rate may not exceed
the maximum rate, if any, permitted by applicable law.
WHEN MAY THE SENIOR NOTES BE REDEEMED?
The senior notes are redeemable at our option, in whole but not in part,
upon the occurrence and continuation of a tax event or an accounting event at
any time prior to the earlier of the date of a successful remarketing and the
warrant settlement date, as described in this prospectus supplement under
"Description of the Senior Notes -- Optional Redemption -- Special Event."
Following any such redemption of the senior notes, which we refer to as a
special event redemption, the redemption price for the senior notes that are
represented by Corporate Units will be paid to the collateral agent, which will
purchase the Treasury portfolio and remit any remaining proceeds to the holders.
Thereafter, the applicable ownership interest in the Treasury portfolio will
replace the senior notes as a component of the Corporate Units and will be held
by the collateral agent and pledged to secure your obligations under the related
warrants. Holders of senior notes that are not represented by Corporate Units
will receive the redemption price paid in such special event redemption.
S-9
WHAT IS THE RANKING OF THE SENIOR NOTES?
The senior notes will rank equally with all of our other unsecured and
unsubordinated obligations. The indenture under which the senior notes will be
issued will not limit our ability to issue or incur other debt or issue
preferred stock. See "Description of Debt Securities" in the accompanying
prospectus.
WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES RELATED TO OWNERSHIP OF THE
EQUITY UNITS AND SENIOR NOTES?
By purchasing Corporate Units in this offering, you will agree for U.S.
Federal income tax purposes to treat each Corporate Unit as a unit consisting of
a senior note and a warrant. In addition, you will agree to treat the senior
notes as our indebtedness for all tax purposes, and to treat the warrants as
forward contracts in respect of our common stock for all tax purposes. You must
allocate the purchase price of the Corporate Units between the senior notes and
the warrants in proportion to their respective fair market values, which will
establish your initial tax basis in each of those securities. We expect to
report the fair market value of each senior note as $25 and the fair market
value of each warrant as $0.00.
For U.S. federal income tax purposes, we intend to take the position that
the senior notes are contingent payment debt instruments subject to the
"noncontingent bond method" of accruing original issue discount, and, under the
senior notes indenture, you will agree to take that position. As discussed more
fully under "United States Federal Income Tax -- Senior Notes -- Original issue
discount," the effects of this method will be (1) to require you for all accrual
periods through August 16, 2005 (and possibly thereafter) to accrue interest in
excess of distributions actually received by you regardless of your method of
accounting and (2) generally to result in ordinary rather than capital treatment
of any gain or loss on the sale, exchange or disposition of the Equity Units to
the extent attributable to the senior notes, with the result that such ordinary
income may not be offset against capital loss, if any, attributable to a
warrant.
Because there is no statutory, judicial or administrative authority
directly addressing the tax treatment of Equity Units or instruments similar to
Equity Units, you are urged to consult your own tax advisor concerning the tax
consequences of an investment in Equity Units. For additional information, see
"United States Federal Income Tax."
WILL THE EQUITY UNITS BE LISTED ON A STOCK EXCHANGE?
We will apply to list the Corporate Units on the New York Stock Exchange,
but no assurances can be given that the application for listing will be
approved. Neither the Treasury Units nor the senior notes will initially be
listed; however, in the event that either of those securities is separately
traded to a sufficient extent that applicable exchange listing requirements are
met, we also will attempt to cause those securities to be listed.
WHAT ARE THE RIGHTS AND PRIVILEGES OF THE HOLDERS OF COMMON STOCK?
The shares of our common stock that you will be obligated to purchase under
the warrants have one vote per share. For more information, please see the
discussion of our common stock in the accompanying prospectus under the heading
"Description of Capital Stock."
WHAT ARE THE USES OF PROCEEDS FROM THE OFFERING?
We intend to use the net proceeds from the sale of the Corporate Units for
general corporate purposes, including capital contributions to our subsidiaries.
See "Use of Proceeds" in this prospectus supplement.
S-10
THE OFFERING -- EXPLANATORY DIAGRAMS
The following diagrams demonstrate some of the key features of the
warrants, senior notes, Corporate Units and Treasury Units, and the
transformation of Corporate Units into Treasury Units and senior notes.
The following diagrams assume that the senior notes are successfully
remarketed, the interest rate on the senior notes is reset on the date that is
three months before the warrant settlement date, the settlement rate is not
adjusted and early settlement does not apply.
WARRANTS
Corporate Units and Treasury Units both represent in part a warrant under
which the holder agrees to purchase shares of our common stock on the warrant
settlement date. In addition, these warrants include unsecured warrant fees as
shown in the diagrams on the following pages.
[VALUE OF SHARES GRAPHIC] [NUMBER OF SHARES GRAPHIC]
---------------
Notes:
(1) The reference price is the reported last sale price of our common stock on
the New York Stock Exchange on the date of this prospectus supplement.
(2) The threshold appreciation price represents a 22.0% appreciation over the
reference price.
(3) The "applicable market value" means the average of the closing price per
share of our common stock on each of the twenty consecutive trading days
ending on the third trading day immediately preceding the warrant settlement
date.
(4) If the applicable market value of our common stock is less than or equal to
the reference price of $56.64, the number of shares of our common stock to
be delivered to a holder of a warrant will be calculated by dividing the
stated amount of $25 by the reference price.
(5) If the applicable market value of our common stock is between the reference
price and the threshold appreciation price of $69.10, the number of shares
of our common stock to be delivered to a holder of a warrant will be
calculated by dividing the stated amount by the applicable market value.
(6) If the applicable market value of our common stock is greater than or equal
to the threshold appreciation price, the number of shares of our common
stock to be delivered to a holder of a warrant will be calculated by
dividing the stated amount by the threshold appreciation price.
S-11
CORPORATE UNITS
A Corporate Unit represents two components as described below:
[WARRANT & SENIOR NOTE GRAPHIC]
- The holder of a Corporate Unit owns the senior note that is represented
by the Corporate Unit but will pledge the senior note to us to secure its
obligation under the related warrant.
- The foregoing analysis assumes that the senior notes are successfully
remarketed on the third business day immediately preceding August 16,
2005. Following such a remarketing of the senior notes, the applicable
ownership interest in the Treasury portfolio would replace the senior
notes as a component of the Corporate Units, and holders of the Corporate
Units would receive a quarterly payment on November 16, 2005 at the same
annual rate as was paid on the senior notes prior to the remarketing.
- If the Treasury portfolio has replaced the senior notes as a result of a
special event redemption prior to November 16, 2005, the applicable
ownership interest in the Treasury portfolio would also replace the
senior note as a component of the Corporate Unit.
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TREASURY UNITS
A Treasury Unit represents two components as described below:
[WARRANT AND TREASURY SECURITY GRAPHICS]
- The holder owns the Treasury security that is represented by the Treasury
Unit but will pledge the Treasury security to us through the collateral
agent to secure its obligations under the related warrant. Unless the
warrant is terminated as a result of our bankruptcy, insolvency or
reorganization or the holder recreates a Corporate Unit, the Treasury
security will be used to satisfy the holder's obligation under the
related warrant.
- Treasury Units can only be created with integral multiples of 40
Corporate Units.
SENIOR NOTES
Senior notes have the terms described below:
[SENIOR NOTE GRAPHIC]
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TRANSFORMING CORPORATE UNITS INTO TREASURY UNITS AND SENIOR NOTES
- To create a Treasury Unit, a holder separates a Corporate Unit into its
components -- the warrant and the senior note, and then combines the
warrant with a Treasury security that matures on the day immediately
preceding the warrant settlement date.
- The Treasury security together with the warrant constitutes a Treasury
Unit. The senior note, which is no longer represented by the Corporate
Unit, is released to the holder and is tradable as a separate security.
- A holder owns the Treasury security that is represented by the Treasury
Unit but will pledge the Treasury security to us through the collateral
agent to secure its obligation under the related warrant.
[GRAPHIC]
- Following the successful remarketing of the senior notes or a special
event redemption, the applicable ownership interest in the Treasury
portfolio, rather than the senior note, will be released to the holder
upon the transformation of a Corporate Unit into a Treasury Unit and will
be tradable separately.
- The holder can also transform Treasury Units and senior notes (or,
following a successful remarketing of the senior notes or a special event
redemption, the applicable ownership interest in the Treasury portfolio)
into Corporate Units. Following that transformation, the Treasury
security, which will no longer be represented by the Treasury Unit, will
be released to the holder and will be tradable as a separate security.
- Unless the Treasury portfolio has replaced the senior notes as a
component of the Corporate Units, the transformation of Corporate Units
into Treasury Units requires integral multiples of 40 Corporate Units,
and the transformation of Treasury Units into Corporate Units also
requires multiples of 40 Treasury Units. If the Treasury portfolio has
replaced the senior notes as a component of the Corporate Units, the
transformation of Corporate Units into Treasury Units requires integral
multiples of 4,000 Corporate Units, and the transformation of Treasury
Units into Corporate Units requires integral multiples of 4,000 Treasury
Units.
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RISK FACTORS
In considering whether to purchase the warrants and senior notes, you
should carefully consider all of the information that we have included in or
incorporated by reference into this prospectus supplement and the accompanying
prospectus. In particular, you should carefully consider the risk factors
described below. Because the warrants and senior notes are being offered
together as Corporate Units, you are making an investment decision with regard
to our common stock and our senior notes. You should carefully review the
information in this prospectus supplement and the accompanying prospectus about
both of these securities.
RISKS RELATING TO OUR BUSINESS
PAYMENT OF OBLIGATIONS UNDER GAS FORWARD PURCHASE SURETY BONDS WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
We have in force several gas forward purchase surety bonds. The total
amount of bonds with one principal, Aquila, Inc., is $550 million. These bonds
are uncollateralized. The combined amount of all other gas forward surety bonds
is approximately $250 million. Approximately $140 million of these bonds are
uncollateralized. There is currently no reinsurance in place covering our
obligations under any of these bonds.
These bonds are similar to some of the bonds that we issued on behalf of
Enron Corp. on which payment was triggered by Enron's bankruptcy in December
2001. Under the gas forward purchase surety bond structure, gas suppliers
entered into long-term gas purchase agreements pursuant to which they agreed to
supply specified quantities of gas to the beneficiaries under our surety bonds.
In exchange for the gas purchase agreement, the beneficiaries under our surety
bonds made an agreed upon advance payment for the gas. Our surety bonds secure
the suppliers' obligation to supply gas. Under the terms of these bonds, our
entire obligation to pay could be triggered if the related supplier failed to
provide gas under its forward purchase contracts or was the subject of a
bankruptcy filing.
Certain of these suppliers, including Aquila, Inc., have suffered ratings
downgrades. Although each of the suppliers continues to perform its obligations
under the related gas forward purchase agreements, if payment under the Aquila
surety bonds were triggered or if payment under all of the other gas forward
surety bonds were triggered, such payments would have a material adverse effect
on our results of operations.
OUR LOSS RESERVES RELATING TO THE SEPTEMBER 11 TERRORIST ATTACK ARE SUBJECT TO
CONSIDERABLE UNCERTAINTY.
We estimate that our gross claims and claim expenses from the September 11
attack were about $3 billion. Our net claims and claim expenses were about $665
million due to various reinsurance agreements. Business interruption claims from
the September 11 attack will take some time to resolve, while potential
liability claims could take years to settle. In addition, certain of our
reinsurers are questioning our interpretation and/or application of some
provisions of our property per risk reinsurance agreements. The questions that
have been raised generally involve the applicable limit of reinsurance coverage
available to us, the definition of what constitutes one risk, our accumulation
of exposure in the various buildings destroyed or damaged and our adherence to
our underwriting guidelines. Our loss reserves related to the September 11
attack are subject to considerable uncertainty. It is possible that our estimate
of ultimate gross losses related to the September 11 attack, as well as our
estimate of the collectibility of reinsurance recoverables related to the
attack, may change in the future and that the change in estimate could have a
material effect on our results of operations.
RESULTS OF CHUBB FINANCIAL SOLUTIONS ARE SUBJECT TO VOLATILITY FROM PERIOD TO
PERIOD.
Since its inception in 2000, Chubb Financial Solutions' non-insurance
operations have been primarily in the credit derivatives business, principally
as a counterparty in portfolio credit default swap contracts.
S-15
These contracts generally require Chubb Financial Solutions to make payment to a
counterparty to the extent cumulative losses on a portfolio of securities, loans
or other debt obligations exceed a specified amount. The credit default swaps
are carried at estimated fair value in our financial statements, with changes in
fair value reflected in income in the period of the change. The fair value of
our obligations under our credit default swaps depends in part on credit spreads
and interest rate levels. The non-insurance business of Chubb Financial
Solutions produced a loss before taxes of $55.9 million in the first nine months
of 2002 and $40.4 million in the third quarter, mostly due to mark-to-market
adjustments. The increase in the fair value of our obligations related to the
credit default swaps was primarily caused by a substantial widening of market
credit spreads. Thus, income/loss from Chubb Financial Solutions is subject to
volatility from period to period and can create volatility in our reported
earnings.
WE MAY INCUR ADDITIONAL LOSSES IF OUR PROPERTY-LIABILITY LOSS RESERVES ARE
INSUFFICIENT.
The process of establishing loss reserves is complex and imprecise as it
reflects significant judgmental factors. This is true because claim settlements
to be made in the future will be impacted by changing rates of inflation and
other economic conditions, changing legislative, judicial and social
environments and any changes in our claim handling procedures.
We use a variety of actuarial methods to estimate loss reserves. These
methods generally utilize analyses of historical patterns of the development of
paid and reported losses by accident year for each class of business. This
process relies on the basic assumption that past experience, adjusted for the
effects of current developments and likely trends, is an appropriate basis for
predicting future outcomes.
Our loss reserves include amounts related to short tail and long tail
classes of business. Short tail classes consist principally of homeowners,
personal valuables and commercial property business. For these classes, the
estimation of loss reserves is less complex because claims are generally
reported and settled quickly and the claims relate to tangible property.
Long tail classes include directors and officers liability and other
executive protection coverages, commercial excess liability and other liability
classes. Most of our loss reserves relate to long tail liability classes of
business. For many liability claims significant periods of time, ranging up to
several years or more, may elapse between the occurrence of the loss, the
reporting of the loss and the settlement of the claim. The longer the time span
between the incidence of a loss and the settlement of the claim, the more the
ultimate settlement amount can vary. For the long tail liability classes, a
relatively small proportion of net losses in the more recent accident years are
reported claims and an even smaller proportion are paid losses. Therefore, a
relatively large proportion of our net losses for these classes are reserves for
incurred but not reported losses -- claims that had not yet been reported to us,
some of which were not yet known to the insured, and future development on
reported claims. In fact, approximately 60% of our aggregate net loss reserves
at September 30, 2002 were for incurred but not reported losses.
In spite of the inherent imprecision in the loss reserving process,
financial reporting requirements dictate that we and other insurance companies
report a single amount as the estimate of loss reserves at each balance sheet
date.
Judicial decisions and legislative actions continue to broaden liability
and policy definitions and to increase the severity of claim payments. As a
result of this and other societal and economic developments, the uncertainties
inherent in estimating ultimate claim costs on the basis of past experience have
been exacerbated, further complicating the already complex loss reserving
process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by inconsistent court decisions
and judicial and legislative interpretations of coverage that in some cases have
tended to erode the clear and express intent of such policies and in others have
expanded theories of liability. The insurance industry as a whole is engaged in
extensive litigation over these coverage and liability issues and is thus
confronted with a continuing uncertainty in its efforts to quantify these
exposures.
S-16
Given the factors described above, it is not possible to quantify precisely
the ultimate exposure or range of exposures represented by claims and related
litigation. We have established reserves that represent our best estimate of
ultimate claims and claim adjustment expenses at September 30, 2002 based upon
facts currently known and the present state of the law and coverage litigation.
However, given the expansion of coverage and liability by the courts and the
legislatures in the past and the possibility of similar actions in the future,
additional increases in loss reserves may emerge in future periods in an amount
that could be material to our financial condition and results of operations.
THE EFFECTS OF EMERGING CLAIM AND COVERAGE ISSUES ON OUR BUSINESS ARE UNCERTAIN.
As industry practices and legal, judicial, social and other environmental
conditions change, unexpected and unintended issues related to claim and
coverage may emerge. These issues may adversely affect our business by either
extending coverage beyond our underwriting intent or by increasing the number or
size of claims. Recent examples of emerging claims and coverage issues include:
- increases in the number and size of water damage claims related to
expenses for testing and remediation of mold conditions;
- the effects of disclosures by and investigations of public companies
relating to possible accounting irregularities, practices in the energy
and securities industries and other corporate governance issues, which
have caused increases in the frequency and severity of claims;
- changes in interpretation of the named insured provision with respect to
the uninsured/underinsured motorist coverage in commercial automobile
policies; and
- a growing trend of plaintiffs targeting property and casualty insurers in
purported class action litigation relating to claim-handling and other
practices.
The effects of these and other unforeseen emerging claim and coverage issues are
extremely hard to predict and could harm our business.
CATASTROPHE LOSSES COULD MATERIALLY REDUCE OUR PROFITABILITY.
As a property-liability insurance holding company, our insurance operations
expose us to claims arising out of catastrophes. We have experienced, and will
in the future experience, catastrophe losses which may materially reduce our
profitability or harm our financial condition. Catastrophes can be caused by
various natural events, including hurricanes, windstorms, earthquakes, hail,
severe winter weather and fires. Catastrophes can also be man-made, such as the
terrorist attack of September 11, 2001. Our estimated net costs incurred as a
result of the terrorist attack of September 11, 2001 totaled $645 million. The
frequency and severity of catastrophes are inherently unpredictable. It is
possible that both the frequency and severity of man-made catastrophic events
will increase.
The extent of losses from a catastrophe is a function of both the total
amount of insured exposure in the area affected by the event and the severity of
the event. Most catastrophes are restricted to small geographic areas; however,
hurricanes and earthquakes may produce significant damage in larger areas,
especially those that are heavily populated. Claims resulting from natural or
man-made catastrophic events could cause substantial volatility in our financial
results for any fiscal quarter or year and could materially reduce our
profitability or harm our financial condition. Our ability to write new business
could also be affected. We believe that increases in the value and geographic
concentration of insured property and the effects of inflation could increase
the severity of claims from catastrophic events in the future. In addition,
states have from time to time passed legislation that has the effect of limiting
the ability of insurers to manage catastrophe risk, such as legislation
prohibiting insurers from withdrawing from catastrophe-prone areas.
S-17
RECENT MANAGEMENT CHANGES CAUSE UNCERTAINTY.
Dean R. O'Hare, who has been our Chief Executive Officer for 14 years, will
retire as Chairman and Chief Executive Officer on November 30, 2002. John D.
Finnegan, Executive Vice President of General Motors Corporation and Chairman
and President of General Motors Acceptance Corporation, will become our
President and Chief Executive Officer and a Director on December 1, 2002.
In addition, since September 26, 2002, Michael O'Reilly, who has been our
Chief Investment Officer since 1988, has been our interim Chief Financial
Officer.
During the transition of the Chief Executive Officer position and until our
permanent Chief Financial Officer is identified, there may be uncertainty among
investors, rating agencies and others concerning our future direction and
operating philosophy. This uncertainty may increase the volatility of our market
price, and may adversely affect (or delay favorable actions with respect to) our
credit ratings.
IF OUR REAL ESTATE ASSETS ARE NOT SOLD OR DEVELOPED AS PRESENTLY CONTEMPLATED,
IMPAIRMENT LOSSES MAY BE RECOGNIZED.
At September 30, 2002, we owned land with a carrying value of $300 million
that we expect will be developed in the future and commercial properties and
land parcels under lease with a carrying value of approximately $180 million.
The recoverability of the carrying value of our real estate assets is
assessed based on our ability to fully recover costs through a future revenue
stream. The assumptions used reflect future improvement in demand for office
space, an increase in rental rates and the ability and intent to obtain
financing in order to hold and develop such remaining properties and protect our
interests over the long term. If the assets are not sold or developed or if
leased properties do not perform as presently contemplated, it is possible that
impairment losses may be recognized.
WE MAY NOT BE ABLE TO RECOVER ALL OF OUR DEFERRED TAX ASSETS RELATING TO LOSSES
AND FOREIGN TAXES INCURRED BY CHUBB EUROPE.
At September 30, 2002, we recorded a deferred income tax asset of $115
million related to the expected future U.S. tax benefit of losses and foreign
taxes incurred by Chubb Insurance Company of Europe (Chubb Europe). The losses
in Chubb Europe were the result of underwriting losses in the last three years
due to inadequate prices and adverse claim trends, particularly for directors
and officers liability and errors and omissions liability coverages. Although
realization is not assured, in management's judgment, it is more likely than not
that Chubb Europe will generate sufficient taxable income to realize the future
tax benefit of the losses and foreign taxes. If our estimates of future taxable
income in Chubb Europe were revised, and it was no longer more likely than not
that the future tax benefits would be realized, we would need to provide a
valuation allowance against some or all of the above deferred income tax asset.
The effect on our results of operations could be significant.
CYCLICALITY OF THE PROPERTY-LIABILITY INSURANCE INDUSTRY MAY CAUSE FLUCTUATIONS
IN OUR RESULTS.
The property-liability insurance business, especially the commercial lines
business, historically has been characterized by periods of intense price
competition due to excess underwriting capacity, which has in the past had, and
could in the future have, an adverse effect on our results. Periods of intense
price competition historically have alternated with periods when shortages of
underwriting capacity have permitted attractive premium levels. We expect this
cyclicality to continue. The periods of intense price competition in the cycle
could harm our financial condition, profitability or cash flows.
S-18
A number of factors, including many that are volatile and unpredictable,
can have a significant impact on cyclical trends in the property-liability
insurance industry and the industry's profitability. These factors include:
- an apparent trend of courts to grant increasingly larger awards for
certain damages;
- catastrophic hurricanes, windstorms, earthquakes and other natural
disasters, as well as the occurrence of man-made disasters (e.g., the
September 11, 2001 terrorist attack);
- availability, price and terms of reinsurance;
- fluctuations in interest rates;
- changes in the investment environment that affect market prices of and
income and returns on investments; and
- inflationary pressures that may tend to affect the size of losses
experienced by insurance companies.
We cannot predict whether or when market conditions will improve, remain
constant or deteriorate. Negative market conditions may impair our ability to
write insurance at rates that we consider appropriate relative to the risk
assumed. If we cannot write insurance at appropriate rates, our ability to
transact business would be significantly and adversely affected.
A DOWNGRADE IN OUR RATINGS COULD ADVERSELY IMPACT THE COMPETITIVE POSITIONS OF
OUR OPERATING BUSINESSES.
Several of the principal credit rating agencies have recently taken the
following actions with respect to our credit ratings:
- On October 16, 2002, A.M. Best reaffirmed our ratings with stable
outlook;
- On October 30, 2002, Fitch lowered our financial strength, senior
unsecured debt and commercial paper ratings with stable outlook;
- On November 6, 2002, S&P, while reaffirming our financial strength
rating, lowered our senior debt, counterparty credit, preferred stock and
commercial paper ratings with negative outlook; and
- On November 21, 2002, Moody's lowered our financial strength, senior
unsecured debt and preferred stock ratings with stable outlook.
Reasons given by S&P and Moody's for their recent ratings actions included
concerns about possible prospective capital strains due to a high premium growth
rate, current loss experience in certain specialty and personal lines, pending
management changes, volatility of our recent operating performance, our
continued exposure to catastrophe-related losses and Moody's continuing concern
about property/casualty insurers' exposure to asbestos liabilities. Although we
believe that the capital to be raised in this offering will be sufficient to
support our current capital needs, substantial premium growth rates, any
substantial catastrophic loss (whether natural or man-made), payments under
outstanding gas forward purchase surety bonds or other emerging claim or
coverage issues could create future capital strains.
The lower credit ratings for The Chubb Corporation can increase our cost of
borrowing and adversely affect the competitive position of our Chubb Financial
Solutions' non-insurance operations, which is dependent on the strength of
Chubb's parental guarantee. Financial strength ratings can be an important
factor in establishing the competitive position of our insurance subsidiaries.
There can be no assurance that our ratings will continue for any given period of
time or that they will not be changed. Further reductions in our ratings could
adversely affect the competitive positions of our operating businesses.
THE INABILITY OF OUR SUBSIDIARIES TO PAY DIVIDENDS IN SUFFICIENT AMOUNTS WOULD
HARM OUR ABILITY TO MEET OUR OBLIGATIONS AND PAY FUTURE DIVIDENDS.
We are a holding company and rely primarily on dividends from our
subsidiaries to meet our obligations for payment of interest and principal on
outstanding debt obligations, dividends to shareholders and corporate expenses.
The ability of our insurance subsidiaries to pay dividends to us in the future
will depend on their statutory surplus, on earnings and on regulatory
restrictions. We and our insurance subsidiaries are subject to regulation by
some states as an insurance holding company system. Such regulation generally
provides that transactions between companies within the holding company system
S-19
must be fair and equitable. Transfers of assets among affiliated companies,
certain dividend payments from insurance subsidiaries and certain material
transactions between companies within the system may be subject to prior notice
to, or prior approval by, state regulatory authorities. Our insurance
subsidiaries are also subject to licensing and supervision by government
regulatory agencies in the jurisdictions in which they do business. These
regulations may set standards of solvency that must be met and maintained, the
nature of and limitation on investments and the nature of and limitations on
dividends to policyholders and shareholders. These regulations may affect our
subsidiaries' ability to provide us with dividends.
OUR BUSINESSES ARE HEAVILY REGULATED, AND CHANGES IN REGULATION MAY REDUCE OUR
PROFITABILITY AND LIMIT OUR GROWTH.
Our insurance subsidiaries are subject to extensive regulation and
supervision in the jurisdictions in which they conduct business. This regulation
is generally designed to protect the interests of policyholders, as opposed to
insurers and their shareholders and other investors, and relates to
authorization for lines of business, capital and surplus requirements,
investment limitations, underwriting limitations, transactions with affiliates,
dividend limitations, changes in control, premium rates and a variety of other
financial and nonfinancial components of an insurance company's business.
Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by some insureds as the result of
impaired or insolvent insurance companies. In addition, in various states, our
insurance subsidiaries must participate in mandatory arrangements to provide
various types of insurance coverage to individuals or other entities that
otherwise are unable to purchase that coverage from private insurers. The effect
of these and similar arrangements could reduce our profitability in any given
period or limit our ability to grow our business.
In recent years, the state insurance regulatory framework has come under
increased federal scrutiny, and some state legislatures have considered or
enacted laws that may alter or increase state authority to regulate insurance
companies and insurance holding companies. Further, the National Association of
Insurance Commissioners, or NAIC, and state insurance regulators are reexamining
existing laws and regulations, specifically focusing on modifications to holding
company regulations, interpretations of existing laws and the development of new
laws. Any proposed or future legislation or NAIC initiatives may be more
restrictive than current regulatory requirements or may result in higher costs.
In response to the terrorist attack on September 11, 2001, the United
States Congress has enacted legislation designed to ensure, among other things,
the availability of insurance coverage for terrorist acts, including by
requiring insurers to provide such coverage. This legislation and any further
governmental intervention could materially and adversely affect us by, among
other things, requiring coverage for terrorist acts to be offered by insurers,
benefiting our competitors or reducing the demand for our products.
INTENSE COMPETITION FOR OUR PRODUCTS COULD HARM OUR ABILITY TO MAINTAIN OR
INCREASE OUR PROFITABILITY AND PREMIUM VOLUME.
The property and casualty insurance industry is highly competitive. We
compete not only with other stock companies but also with mutual companies,
other underwriting organizations and alternative risk sharing mechanisms. We
compete for business not only on the basis of price, but also on the basis of
availability of coverage desired by customers and quality of service, including
claim adjustment service. We may have difficulty in continuing to compete
successfully on any of these bases in the future.
If competition limits our ability to write new business at adequate rates,
our ability to transact business would be materially and adversely affected and
our results of operations would be adversely affected.
OUR STOCK PRICE MAY BE VOLATILE.
Factors such as quarterly variations in our financial results,
announcements by us or our competitors, developments affecting us and general
market volatility could cause the market price of our common stock to fluctuate
significantly.
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RISKS RELATING TO THE SECURITIES
YOU ASSUME THE RISK THAT THE MARKET VALUE OF OUR COMMON STOCK MAY DECLINE.
As a holder of Corporate Units or Treasury Units, you will have an
obligation to buy shares of our common stock pursuant to the warrant that is
represented by the Corporate Units or Treasury Units. On November 16, 2005,
unless you pay cash to satisfy your obligation under the warrant or the warrants
are terminated due to our bankruptcy, insolvency or reorganization, (i) in the
case of Corporate Units, either (x) the principal of the appropriate applicable
ownership interest in the Treasury portfolio when paid at maturity or (y) either
the proceeds derived from the successful remarketing of the senior notes or, if
no successful remarketing has occurred, the foreclosure of the senior notes, or
(ii) in the case of Treasury Units, the principal of the related Treasury
securities when paid at maturity, will automatically be used to purchase a
specified number of shares of our common stock on your behalf.
The number of shares of our common stock that you will receive upon the
settlement of a warrant is not fixed but instead will depend on the average of
the closing price per share of our common stock on the 20 consecutive trading
days ending on the third trading day immediately preceding November 16, 2005,
which we refer to as the applicable market value. There can be no assurance that
the market value of common stock received by you on the warrant settlement date
will be equal to or greater than the price per share paid by you for our common
stock. If the applicable market value of the common stock is less than $56.64,
the market value of the common stock issued to you pursuant to each warrant on
November 16, 2005 (assuming that the market value is the same as the applicable
market value of the common stock) will be less than the price per share paid by
you for the common stock on the warrant settlement date. Accordingly, you assume
the risk that the market value of the common stock may decline, and that the
decline could be substantial.
THE OPPORTUNITY FOR EQUITY APPRECIATION PROVIDED BY AN INVESTMENT IN THE EQUITY
UNITS IS LESS THAN THAT PROVIDED BY A DIRECT INVESTMENT IN OUR COMMON STOCK.
Your opportunity for equity appreciation afforded by investing in the
Equity Units is less than your opportunity for equity appreciation if you
directly invested in our common stock. This opportunity is less because the
market value of the common stock to be received by you pursuant to the warrant
on November 16, 2005 (assuming that the market value is the same as the
applicable market value of the common stock) will only exceed the price per
share paid by you for our common stock on the warrant settlement date if the
applicable market value of the common stock exceeds the threshold appreciation
price (which represents an appreciation of 22.0% over $56.64). If the applicable
market value of our common stock exceeds the reference price but does not exceed
the threshold appreciation price, you will realize no equity appreciation of the
common stock for the period during which you own the warrant. Furthermore, if
the applicable market value of our common stock exceeds the threshold
appreciation price, you would receive on November 16, 2005 only approximately
82% of the value of the shares of common stock you could have purchased with $25
at the reported last sale price of our common stock on the date of issuance of
the Equity Units.
THE TRADING PRICES FOR THE CORPORATE UNITS AND TREASURY UNITS WILL BE DIRECTLY
AFFECTED BY THE TRADING PRICES OF OUR COMMON STOCK.
The trading prices of Corporate Units and Treasury Units in the secondary
market will be directly affected by the trading prices of our common stock, the
general level of interest rates and our credit quality. It is impossible to
predict whether the price of the common stock or interest rates will rise or
fall. Trading prices of the common stock will be influenced by our operating
results and prospects and by economic, financial and other factors. In addition,
general market conditions, including the level of, and fluctuations in the
trading prices of stocks generally, and sales of substantial amounts of common
stock by us in the market after the offering of the Equity Units, or the
perception that such sales could occur, could affect the price of our common
stock. Fluctuations in interest rates may give rise to arbitrage opportunities
based upon changes in the relative value of the common stock represented by the
warrants and of the
S-21
other components of the Equity Units. Any such arbitrage could, in turn, affect
the trading prices of the Corporate Units, Treasury Units, senior notes and our
common stock.
IF YOU HOLD CORPORATE UNITS OR TREASURY UNITS, YOU WILL NOT BE ENTITLED TO ANY
RIGHTS WITH RESPECT TO OUR COMMON STOCK, BUT YOU WILL BE SUBJECT TO ALL CHANGES
MADE WITH RESPECT TO OUR COMMON STOCK.
If you hold Corporate Units or Treasury Units, you will not be entitled to
any rights with respect to our common stock (including, without limitation,
voting rights and rights to receive any dividends or other distributions on the
common stock), but you will be subject to all changes affecting the common
stock. You will only be entitled to rights on the common stock if and when we
deliver shares of common stock in exchange for Corporate Units or Treasury Units
on November 16, 2005, or as a result of early settlement, as the case may be,
and the applicable record date, if any, for the exercise of rights occurs after
that date. For example, in the event that an amendment is proposed to our
articles of incorporation or by-laws requiring stockholder approval and the
record date for determining the stockholders of record entitled to vote on the
amendment occurs prior to delivery of the common stock, you will not be entitled
to vote on the amendment, although you will nevertheless be subject to any
changes in the powers, preferences or special rights of our common stock.
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK AND THEREBY MATERIALLY AND
ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
The number of shares of common stock that you are entitled to receive on
November 16, 2005, or as a result of early settlement of a warrant, is subject
to adjustment for certain events arising from stock splits and combinations,
stock dividends and certain other actions by us that modify our capital
structure. We will not adjust the number of shares of common stock that you are
to receive on November 16, 2005, or as a result of early settlement of a warrant
for other events, including offerings of common stock for cash by us or in
connection with acquisitions. We are not restricted from issuing additional
common stock during the term of the warrants and have no obligation to consider
your interests for any reason. If we issue additional shares of common stock, it
may materially and adversely affect the price of our common stock and, because
of the relationship of the number of shares to be received on November 16, 2005
to the price of the common stock, such other events may adversely affect the
trading price of the Corporate Units or Treasury Units.
THE SECONDARY MARKET FOR THE CORPORATE UNITS, TREASURY UNITS OR SENIOR NOTES MAY
BE ILLIQUID.
It is not possible to predict how Corporate Units, Treasury Units or senior
notes will trade in the secondary market or whether the market will be liquid or
illiquid. There is currently no secondary market for our Corporate Units,
Treasury Units or senior notes. We will apply to list the Corporate Units on the
New York Stock Exchange, but no assurances can be given that the application for
listing will be approved. If the Treasury Units or the senior notes are
separately traded to a sufficient extent that applicable exchange listing
requirements are met, we will also try to list the Treasury Units or the senior
notes. There can be no assurance as to the liquidity of any market that may
develop for the Corporate Units, the Treasury Units or the senior notes, your
ability to sell these securities or whether a trading market, if it develops,
will continue. In addition, in the event you were to substitute Treasury
securities for senior notes or senior notes for Treasury securities, thereby
converting your Corporate Units to Treasury Units or your Treasury Units to
Corporate Units, as the case may be, the liquidity of Corporate Units or
Treasury Units could be adversely affected. There can be no assurance that the
Corporate Units, if listed, will not be delisted from the New York Stock
Exchange or that trading in the Corporate Units will not be suspended as a
result of holders electing to create Treasury Units by substituting collateral,
which could cause the number of Corporate Units to fall below the requirement
for listing securities on the New York Stock Exchange.
S-22
YOUR RIGHTS TO THE PLEDGED SECURITIES WILL BE SUBJECT TO OUR SECURITY INTEREST.
Although you will be the beneficial owner of the related senior notes,
Treasury securities or applicable ownership interest in the Treasury portfolio,
as applicable, those securities will be held by the collateral agent and pledged
to secure your obligations under the related warrants. Thus, your rights to the
pledged securities will be subject to our security interest. Additionally,
notwithstanding the automatic termination of the warrants, in the event that we
become the subject of a case under the U.S. Bankruptcy Code, the delivery of the
pledged securities to you may be delayed by the imposition of the automatic stay
under Section 362 of the Bankruptcy Code and claims arising out of the senior
notes, like all other claims in bankruptcy proceedings, will be subject to the
equitable jurisdiction and powers of the bankruptcy court.
THE SENIOR NOTES MAY BE REDEEMED UPON THE OCCURRENCE OF A SPECIAL EVENT.
We may redeem the senior notes, on not less than 30 days' nor more than 60
days' prior written notice, in whole but not in part, at any time before the
earlier of the date of a successful remarketing of the senior notes represented
by the Corporate Units and the warrant settlement date if a special event occurs
and continues under the circumstances described in this prospectus supplement.
If we exercise this option, we will redeem the senior notes for cash at the
redemption amount plus accrued and unpaid interest, if any, which we refer to as
the redemption price. Unless the senior notes have been successfully remarketed,
if the special event redemption occurs before November 16, 2005, the redemption
price payable to you as a holder of the Corporate Units will be distributed to
the collateral agent, who in turn will purchase the Treasury portfolio on your
behalf, and will remit the remainder of the redemption price, if any, to you,
and the Treasury portfolio will be substituted for the senior notes as
collateral to secure your obligations under the warrants represented by the
Corporate Units. If your senior notes are not represented by Corporate Units,
you will receive redemption payments directly. There can be no assurance as to
the impact on the market prices for the Corporate Units if the Treasury
portfolio is substituted as collateral in place of any senior notes redeemed. A
special event redemption will be a taxable event to the holders of the senior
notes.
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE EQUITY UNITS ARE UNCLEAR, AND THE SENIOR NOTES ARE SUBJECT TO
CERTAIN UNFAVORABLE TAX RULES.
No statutory, judicial or administrative authority directly addresses the
treatment of Equity Units or instruments similar to Equity Units for U.S.
federal income tax purposes. As a result, the U.S. federal income tax
consequences of the purchase, ownership and disposition of the Equity Units are
unclear. Under the senior notes indenture, we and each holder will agree to
treat the senior notes as contingent payment debt instruments for U.S. federal
income tax purposes. As a result, you will be required, subject to some
adjustments, to include interest in income based on our comparable yield, which
is generally the rate at which we would borrow if we issued non-contingent debt
instruments with terms substantially the same as the senior notes, and which we
have determined to be 4.80%. Additionally, any gain on the disposition of the
senior notes before the interest rate reset (or before November 16, 2005, if
there is no successful remarketing) generally will be treated as ordinary
interest income; thus, the ability to offset that interest income with a loss,
if any, on a warrant may be limited. For additional information, see "United
States Federal Income Tax -- Senior Notes -- Original issue discount."
THE WARRANT AGREEMENT WILL NOT BE QUALIFIED UNDER THE TRUST INDENTURE ACT AND
THE OBLIGATIONS OF THE WARRANT AGENT ARE LIMITED.
The warrant agreement between us and the warrant agent will not be
qualified as an indenture under the Trust Indenture Act of 1939, and the warrant
agent will not be required to qualify as a trustee under the Trust Indenture
Act. Thus, you will not have the benefit of the protection of the Trust
Indenture Act with respect to the warrant agreement or the warrant agent. The
senior notes that are represented by the Corporate Units will be issued pursuant
to an indenture, which will be qualified under the Trust Indenture Act.
Accordingly, if you hold Corporate Units, you will have the benefit of the
protections of the Trust Indenture Act only to the extent applicable to the
senior notes represented by the Corporate Units. The
S-23
protections generally afforded the holder of a security issued under an
indenture that has been qualified under the Trust Indenture Act include:
- disqualification of the indenture trustee for "conflicting interests," as
defined under the Trust Indenture Act;
- provisions preventing a trustee that is also a creditor of the issuer
from improving its own credit position at the expense of the security
holders immediately prior to or after a default under such indenture; and
- the requirement that the indenture trustee deliver reports at least
annually with respect to certain matters concerning the indenture trustee
and the securities.
THE TRADING PRICE OF THE SENIOR NOTES MAY NOT FULLY REFLECT THE VALUE OF THEIR
ACCRUED BUT UNPAID INTEREST.
The senior notes may trade at a price that does not fully reflect the value
of their accrued but unpaid interest. If you dispose of your senior notes
between record dates for interest payments, you will be required to include in
gross income the daily portions of original issue discount through the date of
disposition in income as ordinary income, and to add this amount to your
adjusted tax basis in the senior notes disposed of. To the extent the selling
price is less than your adjusted tax basis, you will recognize a loss.
S-24
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
The accompanying prospectus, as supplemented by this prospectus supplement,
contains and incorporates by reference "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve risks and uncertainties and are identified by
their use of terms and phrases such as "believe," "anticipate," "could,"
"estimate," "intend," "may," "plan," "expect" and similar expressions, including
references to assumptions. Such forward-looking statements may be included in,
but are not limited to, various filings made by us with the Securities and
Exchange Commission, which we refer to as the "SEC." These statements relate to
analyses and other information that are based on forecasts of future results and
estimates of amounts not yet determinable. These statements also relate to our
future prospects, developments and business strategies. You should not place
undue reliance on these forward-looking statements, which reflect our
management's analysis, judgment, belief or expectation only as of the date of
this prospectus supplement.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for these forward-looking statements. In order to comply with the terms
of the safe harbor, we note that a variety of factors could cause our actual
results to differ significantly from the results discussed in the
forward-looking statements. The factors that could cause actual results to
differ materially from those suggested by any such statements include but are
not limited to those discussed or identified from time to time in the our public
filings with the SEC and specifically include risks or uncertainties associated
with any one or more of the following:
- the availability of primary and reinsurance coverage, including the
implications relating to terrorism legislation and regulation;
- global political conditions and the occurrence of any terrorist attacks,
including any nuclear, biological or chemical events;
- the outbreak of war with Iraq;
- premium price increases and profitability or growth estimates overall or
by lines of business or geographic area, and related expectations with
respect to the timing and terms of any required regulatory approvals;
- our expectations with respect to cash flow projections and investment
income and with respect to other income;
- the adequacy of loss reserves including:
- our expectations relating to insurance losses from the September 11
attack and related reinsurance recoverables;
- any impact from the bankruptcy protection sought by various asbestos
producers and other related businesses;
- developments in judicial decisions or legislative actions relating to
coverage and liability for asbestos and toxic waste claims;
- developments in judicial decisions or regulatory actions relating to
coverage and liability for mold claims;
- the effects of disclosures by and investigations of public companies
relating to possible accounting irregularities, practices in the energy
and securities industries and other corporate governance issues,
including:
- the effects on the energy markets and the companies that participate
in them, and in particular as they may relate to concentrations of
risk in our surety business;
- the effects on the capital markets and the markets for directors and
officers and errors and omissions insurance;
S-25
- claims and litigation arising out of accounting and other corporate
governance disclosures by other companies;
- claims and litigation arising out of investment banking practices;
- legislative or regulatory proposals or changes, including the
certifications required by SEC Order 4-460 and the changes in law and
regulation required under the Sarbanes-Oxley Act of 2002;
- our ability to generate taxable income in Europe;
- our assumptions with respect to future demand for office space and with
respect to rental rates;
- changes in management;
- any downgrade in our claims-paying, financial strength or credit ratings;
and
- general economic conditions including:
- changes in interest rates, market credit spreads and the performance
of the financial markets, generally and as they relate to credit risks
assumed by the Chubb Financial Solutions unit in particular;
- changes in domestic and foreign laws, regulations and taxes;
- changes in competition and pricing environments;
- regional or general changes in asset valuations;
- the occurrence of significant weather-related or other natural or
man-made disasters;
- the inability to reinsure certain risks economically;
- changes in the litigation environment; and
- general market conditions.
We assume no obligation to update any forward-looking statements set forth
in this document or any forward-looking statements incorporated by reference
herein, all of which speak as of the respective dates thereof.
ACCOUNTING TREATMENT
GENERAL
The proceeds from the sale of the Corporate Units will be allocated between
the warrants and the senior notes based on the fair value of each at the date of
the offering. We expect the fair value of each warrant to be $0.00.
We will recognize the present value of the quarterly warrant fee payments
as a liability with an offsetting reduction in shareholders' equity. The
quarterly warrant fee payments will be allocated between the liability
recognized at the date of issuance and interest expense based on a constant rate
calculation over the term of the warrant.
The quarterly interest payments on the senior notes will be recognized as
interest expense.
Fees and expenses incurred in connection with this offering will be
allocated between the senior notes and the warrants. The amount allocated to the
senior notes will be deferred and recognized as interest expense over the term
of the senior notes. The amount allocated to the warrants will be charged to
shareholders' equity.
S-26
When we settle the warrants, we will issue the requisite number of shares
of our common stock, and the amount we receive will be added to shareholders'
equity and allocated between common stock and paid-in surplus.
EARNINGS PER SHARE
Before the settlement of the warrants, we will consider the shares to be
issued under the warrants in our calculation of diluted earnings per share using
the treasury stock method. Under this method, we will increase the number of
shares of our common stock used in calculating diluted earnings per share by the
excess, if any, of the number of shares we would be required to issue to settle
the warrants over the number of shares that we could purchase using the proceeds
from the settlement of the warrants. We anticipate that there will be no
dilution of our earnings per share except during the periods when the average
price of our common stock is above $69.10 per share.
OTHER MATTERS
Both the Financial Accounting Standards Board and its Emerging Issues Task
Force continue to study the accounting for financial instruments and derivative
instruments including instruments such as the warrants. It is possible that our
accounting for the warrants and the senior notes could be affected by any new
accounting rules that might be issued by these groups.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of warrants and senior
notes in this offering, after deducting underwriting discounts and commissions
and the estimated expenses of this offering payable by us, will be $508,750,000,
or $581,500,000 if the underwriters exercise their over-allotment option in full
to purchase additional warrants and senior notes. Chubb expects to use the
aggregate net proceeds from this offering for general corporate purposes,
including capital contributions to its subsidiaries.
RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of consolidated earnings to fixed
charges for the nine months ended September 30, 2002. For our consolidated
ratios of earnings to fixed charges for each of the five years in the period
ended December 31, 2001, see "Ratio of Consolidated Earnings to Fixed Charges"
in the accompanying prospectus.
NINE MONTHS ENDED
SEPTEMBER 30, 2002(1)
---------------------
Ratio of consolidated earnings to fixed charges............. 1.78
---------------
(1) Consolidated earnings, as defined, for the nine months ended September 30,
2002 reflect net losses of $625 million before income taxes related to
asbestos claims.
S-27
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
September 30, 2002, on both an actual basis and an as adjusted basis that gives
effect to this offering and the anticipated application of the net proceeds of
this offering as described under "Use of Proceeds." This table should be read in
conjunction with our historical financial statements and the notes to those
financial statements, which are incorporated by reference into the accompanying
prospectus.
SEPTEMBER 30, 2002
-------------------------
AS ADJUSTED
FOR THIS
ACTUAL OFFERING
-------- -------------
(IN MILLIONS)
Long-term debt other than the 4.00% Senior Notes issued in
this offering............................................. $1,353.8 $1,353.8
4.00% Senior Notes issued in this offering(1)............... -- 525.0
Shareholders' equity(2)(3).................................. 6,901.4 6,857.1
-------- -------
Total capitalization.............................. $8,255.2 $8,735.9
======== =======
---------------
(1) Assumes the sale of 21,000,000 Corporate Units in this offering and no
exercise of the underwriters' over-allotment option to purchase up to an
additional 3,000,000 Corporate Units.
(2) The as adjusted amount reflects an adjustment of $44.3 million representing
the approximate present value of the warrant fees payable in connection with
the Corporate Units and assumes a fair market value of $0 for the warrants.
(3) The as adjusted amount excludes the effect of issuance costs allocated to
the warrants issued in connection with this offering.
S-28
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York Stock Exchange under the symbol
"CB."
The following table sets forth, for the periods indicated, the range of
high and low sale prices of the common stock reported on the New York Stock
Exchange, based on published financial sources, as well as dividends declared.
COMMON STOCK
-----------------------------
HIGH LOW DIVIDENDS
------ ------ ---------
2000:
First Quarter........................................... $67.56 $44.75 $0.33
Second Quarter.......................................... 72.38 59.63 0.33
Third Quarter........................................... 82.00 62.75 0.33
Fourth Quarter.......................................... 90.00 72.25 0.33
2001:
First Quarter........................................... 83.44 65.27 0.34
Second Quarter.......................................... 79.00 64.32 0.34
Third Quarter........................................... 76.89 58.59 0.34
Fourth Quarter.......................................... 77.66 66.02 0.34
2002:
First Quarter........................................... 75.32 65.20 0.35
Second Quarter.......................................... 78.20 69.35 0.35
Third Quarter........................................... 70.51 53.91 0.35
Fourth Quarter (through November 25, 2002).............. 62.23 52.30 --
SHAREHOLDERS
As of November 18, 2002, approximately 7,100 holders of record held our
common stock.
DIVIDEND POLICY
As indicated above, Chubb declared quarterly dividends during each of the
two most recent fiscal years in the amounts shown. The Board of Directors will
review its dividend policy periodically, and the declaration of dividends will
necessarily depend upon Chubb's earnings and financial requirements and other
factors within the discretion of the Board of Directors.
The operations of our subsidiaries are subject, in varying degrees, to
regulatory rules and restrictions on the payment of dividends. Consequently, our
ability to receive dividends from our subsidiaries may be affected from time to
time as a result of these rules and restrictions. For further information, see
"Risk Factors -- The inability of our subsidiaries to pay dividends to us in
sufficient amounts would harm our ability to meet our obligations and pay future
dividends."
S-29
DESCRIPTION OF THE EQUITY UNITS
The following is a summary of the terms of the Equity Units. This summary,
together with the summary of some of the provisions of the related documents
described below, contains a description of all of the material terms of the
Equity Units but is not necessarily complete. We refer you to the copies of
those documents which have been or will be filed and incorporated by reference
in the registration statement of which this prospectus supplement and the
accompanying prospectus form a part. This summary supplements the description of
the warrants in the accompanying prospectus, and, to the extent it is
inconsistent, replaces the description in the accompanying prospectus. All
references in this prospectus supplement to our common stock include the rights
evidenced by such common stock to the extent provided in the Rights Agreement
dated as of March 12, 1999 between Chubb and First Chicago Trust Company of New
York.
We will issue the Equity Units under the warrant agreement between us and
Bank One Trust Company, N.A., which we refer to as the warrant agent. Equity
Units may be either Corporate Units or Treasury Units. The Equity Units will
initially consist of 21,000,000 Corporate Units (or 24,000,000 Corporate Units
if the underwriters exercise their over-allotment option in full), each with a
stated amount of $25.
CORPORATE UNITS
Each Corporate Unit will represent:
(a) a warrant under which
(1) the holder will agree to purchase from us, and we will agree to
sell to the holder, not later than November 16, 2005, which we refer to
as the warrant settlement date, for a settlement price of $25 in cash, a
number of newly issued shares of our common stock equal to the
settlement rate described below under "Description of the
Warrants -- Purchase of Common Stock," subject to anti-dilution
adjustments, and
(2) we will pay the holder quarterly warrant fees at the rate of
3.00% per year on the stated amount of $25 per warrant, or $0.75 per
year, and
(b) either:
(1) a senior note issued by us having a $25 principal amount on
which we will pay quarterly interest payments at a rate of 4.00% per
year, or
(2) following a successful remarketing of the senior notes prior to
the third business day immediately preceding the warrant settlement
date, or the occurrence of a special event redemption, the applicable
ownership interest in a portfolio of U.S. Treasury securities, which we
refer to as the Treasury portfolio.
"Applicable ownership interest" means, with respect to a Corporate Unit and
the U.S. Treasury securities in the Treasury portfolio,
(1) a 2.5% undivided beneficial ownership interest in $1,000 face
amount of U.S. Treasury securities (or principal or interest strips
thereof) included in the Treasury portfolio that matures on or prior to
November 16, 2005, and
(2) for the scheduled interest payment date on the senior notes that
occurs on November 16, 2005, in the case of a successful remarketing of the
senior note represented by that Corporate Unit prior to the third business
day immediately preceding the warrant settlement date, or for each
scheduled interest payment date on the senior notes after the date of a
special event redemption and on or before the warrant settlement date, in
the case of a special event redemption, a 0.025% undivided beneficial
ownership interest in $1,000 face amount of U.S. Treasury securities (or
principal or interest strips thereof) included in the Treasury portfolio
that mature on or prior to the business day immediately preceding such
payment date.
S-30
The purchase price of each Equity Unit will be allocated between the
related warrant and the related senior note in proportion to their respective
fair market values at the time of issuance. We expect that, at the time of
issuance, the fair market value of each senior note will be $25 and the fair
market value of each warrant will be $0.00. This position generally will be
binding on each beneficial owner of each Equity Unit but not on the IRS.
As long as a unit is in the form of a Corporate Unit, your senior note or
the appropriate applicable ownership interest in the Treasury portfolio, as
applicable, represented by the Corporate Unit will be held by the collateral
agent and pledged to secure your obligation to purchase common stock under the
related warrant.
CREATING TREASURY UNITS
Unless the Treasury portfolio has replaced the senior notes as a component
of the Corporate Units as a result of a successful remarketing prior to the
third business day preceding November 16, 2005 or a special event redemption
prior to November 16, 2005, each holder of Corporate Units will have the right,
at any time on or prior to the fifth business day immediately preceding the
warrant settlement date, to substitute for the related senior notes held by the
collateral agent, zero-coupon Treasury securities that mature on November 15,
2005 (CUSIP No. 912820BQ9), which we refer to as a Treasury security, in a total
principal amount at maturity equal to the aggregate principal amount of the
senior notes for which substitution is being made.
Because Treasury securities are issued in integral multiples of $1,000,
holders of Corporate Units may make this substitution only in integral multiples
of 40 Corporate Units.
If the Treasury portfolio has replaced the senior notes as a component of
the Corporate Units, holders of Corporate Units will have the right, at any time
on or prior to the second business day immediately preceding the warrant
settlement date, to substitute Treasury securities for the applicable ownership
interest in the Treasury portfolio as a component of the Corporate Unit, but
holders of Corporate Units can only make this substitution in integral multiples
of 4,000 Corporate Units. Each of these substitutions will create Treasury
Units, and the applicable senior notes or applicable ownership interest in the
Treasury portfolio will be released to the holder and be separately tradable
from the Treasury Units.
Each Treasury Unit will represent:
(a) a warrant under which
(1) the holder will agree to purchase from us, and we will agree to
sell to the holder, not later than the warrant settlement date, for the
settlement price, a number of newly issued shares of our common stock
equal to the settlement rate, subject to anti-dilution adjustments, and
(2) we will pay the holder quarterly warrant fees at the rate of
3.00% per year on the stated amount of $25 per warrant, or $0.75 per
year and
(b) a 2.5% undivided beneficial interest in a Treasury security with a
principal amount of $1,000.
To create 40 Treasury Units, unless the Treasury portfolio has replaced the
senior notes as a component of the Corporate Units, the Corporate Unit holder
will:
- deposit with the collateral agent a Treasury security that has a
principal amount at maturity of $1,000 which must be purchased in the
open market at the Corporate Unit holder's expense, and
- transfer 40 Corporate Units to the warrant agent accompanied by a
notice stating that the holder has deposited a Treasury security with
the collateral agent and requesting the release to the holder of the
senior notes relating to the 40 Corporate Units.
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Upon the deposit and receipt of an instruction from the warrant agent, the
collateral agent will release the related senior notes from the pledge under the
pledge agreement, free and clear of our security interest, to the warrant agent.
The warrant agent then will:
- cancel the 40 Corporate Units,
- transfer the related senior notes to the holder, and
- deliver 40 Treasury Units to the holder.
The Treasury security will be substituted for the senior notes and will be
held by the collateral agent and pledged to secure the holder's obligation to
purchase common stock under the related warrants. The related senior notes
released to the holder thereafter will trade separately from the resulting
Treasury Units.
If the Treasury portfolio has replaced the senior notes as a component of
the Corporate Units, the Corporate Unit holder will follow the same procedure to
create a Treasury Unit, except the holder will have to deposit integral
multiples of 4,000 Corporate Units.
RECREATING CORPORATE UNITS
Unless the Treasury portfolio has replaced the senior notes as a component
of the Corporate Units, each holder of Treasury Units will have the right at any
time on or prior to the fifth business day immediately preceding the warrant
settlement date, to substitute for the related Treasury securities held by the
collateral agent, senior notes having a principal amount equal to the aggregate
principal amount at stated maturity of the Treasury securities for which
substitution is being made.
Because Treasury securities are issued in integral multiples of $1,000,
holders of Treasury Units may make these substitutions only in integral
multiples of 40 Treasury Units.
If the Treasury portfolio has replaced the senior notes as a component of
the Corporate Units, holders of Treasury Units will have the right, at any time
on or prior to the second business day immediately preceding the warrant
settlement date, to substitute the applicable ownership interests in the
Treasury portfolio for the Treasury securities that were represented by the
Treasury Units, but holders of Treasury Units can only make this substitution in
integral multiples of 4,000 Treasury Units.
Each of these substitutions will recreate Corporate Units, and the
applicable Treasury securities will be released to the holder and be separately
tradable from the Corporate Units.
To create 40 Corporate Units, unless the Treasury portfolio has replaced
the senior notes as a component of the Corporate Units, the Treasury Unit holder
will:
- deposit with the collateral agent 40 senior notes, which must be
purchased in the open market at the holder's expense unless otherwise
owned by the holder, and
- transfer 40 Treasury Unit certificates to the warrant agent accompanied
by a notice stating that the Treasury Unit holder has deposited 40 senior
notes with the collateral agent and requesting the release to the holder
of the Treasury security relating to the Treasury Units.
Upon the deposit and receipt of an instruction from the warrant agent, the
collateral agent will release the related Treasury securities from the pledge
under the pledge agreement, free and clear of our security interest, to the
warrant agent. The warrant agent will then
- cancel the 40 Treasury Units,
- transfer the related Treasury security to the holder, and
- deliver 40 Corporate Units to the holder.
The substituted senior notes or the applicable ownership interests in the
Treasury portfolio will be held by the collateral agent and pledged to secure
the Corporate Unit holder's obligation to purchase common stock under the
related warrants.
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If the Treasury portfolio has replaced the senior notes as a component of
the Corporate Units, the Treasury Unit holder will follow the same procedure to
create a Corporate Unit, except the holder will have to deposit integral
multiples of 4,000 Treasury Units.
Holders that elect to substitute pledged securities, thereby creating
Treasury Units or recreating Corporate Units, will be responsible for any fees
or expenses payable in connection with the substitution.
CURRENT PAYMENTS
Holders of Corporate Units will be entitled to receive quarterly cash
distributions consisting of interest payments calculated at the rate of 4.00%
per year on senior notes (or distributions on the applicable ownership interest
in the Treasury portfolio if the senior notes have been replaced by the Treasury
portfolio) and, subject to our right to defer warrant fees until the date on
which the warrants are settled, warrant fees payable by us at the rate of 3.00%
per year on the stated amount of $25 per warrant until the earlier of the
warrant settlement date and the most recent quarterly payment date on or before
any early settlement of the related warrants. Subject to our right to defer
warrant fee payments until the date on which the warrants are settled, holders
of Treasury Units will be entitled to receive quarterly warrant fees payable by
us at the rate of 3.00% per year on the stated amount of $25 per warrant until
the earlier of the warrant settlement date and the most recent quarterly payment
date on or before any early settlement of the related warrants. There will be no
distributions in respect of the Treasury securities that are represented by the
Treasury Units, but the holders of the Treasury Units will continue to receive
the scheduled quarterly interest payments on the senior notes that were released
to them when the Treasury Units were created for as long as they hold the senior
notes.
RANKING
Our obligations with respect to the senior notes will be senior and
unsecured and will rank equally with all of our other unsecured and
unsubordinated obligations. The indenture under which the senior notes will be
issued will not limit our ability to issue or incur other debt or issue
preferred stock. See "Description of the Senior Notes" in the accompanying
prospectus.
Our obligations with respect to the warrant fees will be subordinate in
right of payment to our indebtedness.
VOTING AND CERTAIN OTHER RIGHTS
Holders of warrants represented by Corporate Units or Treasury Units, in
their capacities as such holders, will have no voting or other rights in respect
of the common stock.
LISTING OF THE SECURITIES
We will apply to list the Corporate Units on the New York Stock Exchange,
but no assurances can be given that the application for listing will be
approved. Unless and until substitution has been made as described in
"-- Creating Treasury Units" or "-- Recreating Corporate Units," neither the
senior notes nor the applicable ownership interest in the Treasury portfolio
component of a Corporate Unit will trade separately from the Corporate Units.
The senior notes or the applicable ownership interest in the Treasury portfolio
component will trade as a unit with the warrant component of the Corporate
Units. If the Treasury Units or the senior notes are separately traded to a
sufficient extent that applicable exchange listing requirements are met, we will
try to list the Treasury Units or the senior notes on the New York Stock
Exchange or any other applicable exchange or market.
MISCELLANEOUS
We or our affiliates may from time to time purchase Corporate Units,
Treasury Units or senior notes outstanding by tender, in the open market or by
private agreement.
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DESCRIPTION OF THE WARRANTS
This section summarizes some of the terms of the warrant agreement,
warrants, pledge agreement, remarketing agreement and indenture. The summary
should be read together with the warrant agreement, pledge agreement,
remarketing agreement and indenture, forms of which have been or will be filed
and incorporated by reference as exhibits to the registration statement of which
this prospectus supplement and the accompanying prospectus form a part.
BASIC TERMS OF THE WARRANTS
The basic terms of the warrants may be described as follows:
- the premium for each warrant ($25) is not payable on the issue date but
is deferred and payable as the settlement price of the warrant on
November 16, 2005, the date the warrant expires;
- the exercise price of the warrants is $0.00;
- we will not be required to deliver any shares of our common stock under
the warrants unless the settlement price is paid in the manner described
herein;
- upon exercise and payment of the settlement price, each warrant requires
us to deliver a variable number of shares of our common stock, depending
on the applicable market value; and
- the warrants are subject to automatic exercise upon expiration, subject
to specified exceptions.
PURCHASE OF COMMON STOCK
Each warrant represented by a Corporate Unit or Treasury Unit will obligate
the holder of the warrant to purchase, and us to sell, on the warrant settlement
date, for an amount in cash equal to the settlement price, a number of newly
issued shares of our common stock equal to the "settlement rate." The settlement
rate will be calculated, subject to adjustment under the circumstances described
in "-- Anti-Dilution Adjustments," as follows:
- If the applicable market value of our common stock is greater than the
threshold appreciation price of $69.10, the settlement rate will be
0.3618 shares of our common stock per warrant, which is equal to the
stated amount divided by the threshold appreciation price.
Accordingly, if the market value for the common stock increases between the date
of this prospectus supplement and the period during which the applicable market
value is measured and the applicable market value is greater than the threshold
appreciation price, the aggregate market value of the shares of common stock
issued upon settlement of each warrant will be higher than the settlement price,
assuming that the market price of the common stock on the warrant settlement
date is the same as the applicable market value of the common stock.
- If the applicable market value of our common stock is less than or equal
to the threshold appreciation price but greater than or equal to the
reference price of $56.64, the settlement rate will be a number of shares
of our common stock per warrant equal to $25 divided by the applicable
market value.
Accordingly, if the market value for the common stock increases between the date
of this prospectus supplement and the period during which the applicable market
value is measured, but the applicable market value does not exceed the threshold
appreciation price, the aggregate market value of the shares of common stock
issued upon settlement of each warrant will be equal to the stated amount,
assuming that the market price of the common stock on the warrant settlement
date is the same as the applicable market value of the common stock.
- If the applicable market value of our common stock is less than the
reference price, the settlement rate will be 0.4414 shares of our common
stock per warrant, which is equal to the settlement price divided by the
reference price.
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Accordingly, if the market value for the common stock decreases between the date
of this prospectus supplement and the period during which the applicable market
value is measured and the applicable market value is less than the reference
price, the aggregate market value of the shares of common stock issued upon
settlement of each warrant will be less than the settlement price, assuming that
the market price on the warrant settlement date is the same as the applicable
market value of the common stock.
"Applicable market value" means the average of the closing price per share
of our common stock on each of the twenty consecutive trading days ending on the
third trading day immediately preceding the warrant settlement date. The
reference price is the reported last sale price of our common stock on the New
York Stock Exchange on the date of this prospectus supplement. The threshold
appreciation price represents a 22.0% appreciation over the reference price.
"Closing price" of the common stock on any date of determination means the
closing sale price (or, if no closing price is reported, the last reported sale
price) of the common stock on the New York Stock Exchange on that date or, if
the common stock is not listed for trading on the New York Stock Exchange on any
such date, as reported in the composite transactions for the principal United
States securities exchange on which the common stock is so listed. If the common
stock is not so listed on a United States national or regional securities
exchange, the closing price means the last reported sale price of the common
stock as reported by the Nasdaq National Market, or, if the common stock is not
so reported, the last quoted bid price for the common stock in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization. If the bid price is not available, the closing price means the
market value of the common stock on the date of determination as determined by a
nationally recognized independent investment banking firm retained by us for
this purpose.
A "trading day" means a day on which the common stock
- is not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of
business, and
- has traded at least once on the national or regional securities exchange
or association or over-the-counter market that is the primary market for
the trading of the common stock.
We will not issue any fractional shares of common stock pursuant to the
warrants. In lieu of fractional shares otherwise issuable (calculated on an
aggregate basis) in respect of warrants being settled by a holder of Corporate
Units or Treasury Units, the holder will be entitled to receive an amount of
cash equal to the fraction of a share times the applicable market value.
PROCEDURES FOR WARRANT SETTLEMENT
On the business day immediately preceding November 16, 2005, unless:
- a holder of Corporate Units or Treasury Units has settled the related
warrants prior to November 16, 2005 through the early delivery of cash to
the warrant agent in the manner described under "-- Early Settlement," or
"-- Early Settlement Upon Cash Merger,"
- a holder of Corporate Units that include senior notes has settled the
related warrants with separate cash on the fourth business day
immediately preceding November 16, 2005 pursuant to prior notice given in
the manner described under "-- Notice to Settle with Cash," or
- an event described under "-- Termination" has occurred,
then,
- in the case of Corporate Units where the Treasury portfolio has replaced
the senior notes, proceeds equal to the stated amount of $25 per warrant
when paid at maturity, of the appropriate applicable ownership interest
of the Treasury portfolio will automatically be applied to satisfy in
full the holder's obligation to purchase common stock under the related
warrants,
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- in the case of Corporate Units where the Treasury portfolio has not
replaced the senior notes as a component of the Corporate Units and there
has been a successful final remarketing of the senior notes, the portion
of the proceeds from the remarketing equal to the principal amount of the
senior notes remarketed will automatically be applied to satisfy in full
the holder's obligation to purchase shares of our common stock under the
related warrants,
- in the case of Corporate Units where the Treasury portfolio has not
replaced the senior notes as a component of the Corporate Units and there
has not been a successful remarketing of the senior notes, you will have
the right to put your senior notes to us for par, plus accrued and unpaid
interest, and you will be deemed to have elected to exercise that put
right in respect of the corresponding senior notes held as part of such
Corporate Units and to have elected to apply a portion of the proceeds of
the put equal to the principal amount of the senior notes against your
obligation to us under the warrants, thereby satisfying such obligation
in full, and
- in the case of Treasury Units, the principal amount of the related
Treasury securities, when paid at maturity, will automatically be applied
to satisfy in full the holder's obligation to purchase common stock under
the related warrants.
The common stock will then be issued and delivered to the holder or the
holder's designee, upon presentation and surrender of the certificate evidencing
the Corporate Units or Treasury Units and payment by the holder of any transfer
or similar taxes payable in connection with the issuance of the common stock to
any person other than the holder.
Each holder of Corporate Units or Treasury Units, by acceptance of those
securities, will be deemed to have:
- irrevocably agreed to be bound by the terms and provisions of the related
warrants and the pledge agreement and to have agreed to perform its
obligations thereunder for so long as the holder remains a holder of the
Corporate Units or Treasury Units, and
- duly appointed the warrant agent as the holder's attorney-in-fact to
enter into and perform the related warrants and pledge agreement on
behalf of and in the name of the holder.
In addition, each beneficial owner of Corporate Units or Treasury Units, by
acceptance of the beneficial interest therein, will be deemed to have agreed to
treat
- itself as the owner of the related senior notes, applicable ownership
interests in the Treasury portfolio or the Treasury securities, as the
case may be, and
- the senior notes as our indebtedness for all United States federal income
tax purposes.
REMARKETING
Pursuant to the remarketing agreement that we will enter into with the
warrant agent and the remarketing agent, and subject to the terms of the
remarketing agreement among the remarketing agent, the warrant agent and us,
unless a special event redemption has occurred, the senior notes held by
Corporate Unit holders as part of a Corporate Unit will be remarketed on the
third business day immediately preceding August 16, 2005 (the date three months
prior to the warrant settlement date), which we refer to as the initial
remarketing date. We will appoint as remarketing agent a nationally recognized
investment bank with experience in such matters.
The remarketing agent will use its reasonable efforts to obtain a price for
the remarketed senior notes of approximately (but not less than) 100.50% of the
purchase price for the Treasury portfolio described below. To obtain that price,
the remarketing agent may reset the interest rate on the senior notes, as
described under "Description of Notes."
If the remarketing of the senior notes on the initial remarketing date
fails or does not occur because a condition precedent, such as the registration
requirement referred to below, has not been satisfied, the senior notes will
continue to be represented by Corporate Units and the remarketing agent will use
its
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reasonable efforts to remarket the senior notes on the third business day
immediately preceding September 16, 2005, which we call the second remarketing
date, and on the third business day immediately preceding October 16, 2005,
which we call the third remarketing date, in each case at a price of
approximately (but not less than) 100.50% of the purchase price of the Treasury
portfolio.
Following a successful remarketing of the senior notes on any of these
remarketing dates, the portion of the proceeds from the remarketing equal to the
Treasury portfolio purchase price will be applied to purchase the Treasury
portfolio consisting of:
- U.S. Treasury securities (or principal or interest strips thereof) that
mature on or prior to November 16, 2005 in an aggregate amount equal to
the principal amount of the senior notes represented by Corporate Units,
and
- U.S. Treasury securities (or principal or interest strips thereof) that
mature on or prior to November 16, 2005 in an aggregate amount equal to
the aggregate interest payment (assuming no reset of the interest rate)
that would have been paid to the holders of Corporate Units on the
warrant settlement date on the aggregate principal amount of the senior
notes represented by the Corporate Units.
The Treasury portfolio will be substituted for the senior notes as a
component of the Corporate Units and will be held by the collateral agent and
pledged to secure the Corporate Unit holders' obligations under the warrants. On
the warrant settlement date, a portion of the proceeds from the Treasury
portfolio equal to the principal amount of the senior notes represented by the
Corporate Units at the time of remarketing will automatically be applied to
satisfy the Corporate Unit holders' obligation to purchase common stock under
the warrants and proceeds from the Treasury portfolio equal to the interest
payment (assuming no reset of the interest rate) that would have been paid to
the holders of Corporate Units on the senior notes represented by the Corporate
Units at the time of remarketing on the warrant settlement date will be paid to
the holders of the Corporate Units.
The remarketing agent will deduct, as a remarketing fee, an amount not
exceeding 25 basis points (.25%) of the Treasury portfolio purchase price from
any proceeds from the remarketing of the senior notes in excess of the Treasury
portfolio purchase price. The remarketing agent will then remit any remaining
portion of the proceeds for the benefit of the holders of the senior notes
included in the remarketing.
As used in this context, "Treasury portfolio purchase price" means the
lowest aggregate ask-side price quoted by a primary U.S. government securities
dealer to the quotation agent between 9:00 a.m. and 11:00 a.m., New York City
time, on the date of a successful remarketing for the purchase of the Treasury
portfolio described above for settlement the third business day immediately
following such date. "Quotation agent" means any primary U.S. government
securities dealer in New York City selected by us.
If a successful remarketing of the senior notes has not occurred on or
prior to the third remarketing date, the remarketing agent will use its
reasonable efforts to remarket the senior notes on the third business day
immediately preceding the warrant settlement date, which we refer to as the
final remarketing date, at a price of approximately 100.50% of the principal
amount of the senior notes remarketed, but remarketing on the final remarketing
date will be considered successful and no further attempts will be made if the
resulting proceeds (net of fees and commissions, if any) are at least 100% of
the aggregate principal amount of the senior notes.
If the remarketing of the senior notes on the final remarketing date is
successful, a portion of the proceeds from this remarketing equal to the
aggregate principal amount of the senior notes represented by the Corporate
Units at the time of remarketing will automatically be applied to satisfy in
full the Corporate Unit holders' obligations to purchase common stock under the
related warrants on the warrant settlement date. The remarketing agent will
deduct, as a remarketing fee, an amount not exceeding 25 basis points (.25%) of
the aggregate principal amount of the remarketed senior notes from any proceeds
from the remarketing in excess of the aggregate principal amount of the senior
notes remarketed. The
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remarketing agent will then remit any remaining portion of the proceeds for the
benefit of the holders of the senior notes included in the remarketing.
Following a successful remarketing prior to the third business day
immediately preceding the warrant settlement date, holders of Treasury Units can
recreate a Corporate Unit at any time prior to the second business day
immediately preceding the warrant settlement date as described under "Recreating
Corporate Units."
We will cause a notice of any failed remarketing to be published on the
business day immediately following the applicable remarketing date, by
publication in a daily newspaper in the English language of general circulation
in The City of New York, which is expected to be The Wall Street Journal. In
addition, we will request, not later than seven nor more than 15 calendar days
prior to the applicable remarketing date, that the depositary notify its
participants holding senior notes, Corporate Units and Treasury Units of the
remarketing, including, in the case of a failed remarketing on the final
remarketing date, the procedures that must be followed if a senior note holder
wishes to exercise its right to put its senior note to us as described in this
prospectus supplement. If required, we will use commercially reasonable efforts
to ensure that a registration statement covering the full amount of the senior
notes to be remarketed will be effective in a form that will enable the
remarketing agent to rely on it in connection with the remarketing process.
If a successful remarketing of the senior notes represented by your
Corporate Units has not occurred on or prior to the final remarketing date, you
will have the right to put your senior notes to us for par, plus accrued and
unpaid interest, and unless you have delivered the purchase price in cash to us
before the final remarketing date, you will be deemed to have exercised that put
right and to have elected to apply a portion of the proceeds of the put equal to
the principal amount of the senior notes against your obligations to us under
the warrants, thereby satisfying those obligations in full, and we will deliver
our common stock to you pursuant to the warrants. In addition, holders of senior
notes that are not represented by Corporate Units will have the right to put
those senior notes to us for par, plus accrued and unpaid interest, on or after
November 16, 2005 by notifying the indenture trustee on or prior to the fifth
business day before the date on which the holder puts those senior notes to us.
If you hold Corporate Units, you may elect not to participate in any
remarketing and to retain the senior notes represented by your Corporate Units
by (1) creating Treasury Units at any time on or prior to the second business
day prior to any of the remarketing dates or (2) if the first three remarketing
attempts have failed, notifying the warrant agent of your intention to pay cash
to satisfy your obligation under the related warrants on or prior to the fifth
business day before the warrant settlement date and delivering the cash payment
required under the warrants to the collateral agent on or prior to the fourth
business day before the warrant settlement date.
EARLY SETTLEMENT
Subject to the conditions described below, a holder of Corporate Units or
Treasury Units may settle the related warrants in cash at any time on or prior
to the fifth business day immediately preceding the warrant settlement date by
presenting and surrendering the related Corporate Unit or Treasury Units
certificate, if they are in certificated form, at the offices of the warrant
agent with the form of "Election to Settle Early" on the reverse side of such
certificate completed and executed as indicated, accompanied by payment to us in
immediately available funds of an amount equal to
- the stated amount times the number of warrants being settled, plus
- if the delivery is made with respect to any warrant during the period
from the close of business on any record date next preceding any payment
date to the opening of business on such payment date, an amount equal to
the warrant fees payable on the payment date with respect to the warrant.
If the Treasury portfolio has replaced the senior notes as a component of
Corporate Units, holders of the Corporate Units may settle early only in
integral multiples of 4,000 Corporate Units. Holders of Treasury Units may
settle early only in integral multiples of 40 Treasury Units.
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So long as the Equity Units are evidenced by one or more global security
certificates deposited with the depositary, procedures for early settlement will
also be governed by standing arrangements between the depositary and the warrant
agent. The early settlement right is also subject to the condition that, if
required under the U.S. federal securities laws, we have a registration
statement under the Securities Act of 1933 in effect covering the shares of
common stock and other securities, if any, deliverable upon settlement of a
warrant. We have agreed that, if required under the U.S. federal securities
laws, we will (1) use commercially reasonable efforts to have a registration
statement in effect covering those shares of common stock and other securities
to be delivered in respect of the warrants being settled and (2) provide a
prospectus in connection therewith, in each case in a form that may be used in
connection with the early settlement right.
Upon early settlement of the warrants represented by any Corporate Units or
Treasury Units:
- except as described below in "-- Early Settlement Upon Cash Merger," the
holder will receive newly issued shares of common stock per Corporate
Unit or Treasury Unit, subject to adjustment under the circumstances
described under "-- Anti-Dilution Adjustments," accompanied by an
appropriate prospectus if required by law,
- the senior notes, the applicable ownership interest in the Treasury
portfolio or the Treasury securities, as the case may be, related to the
Corporate Units or Treasury Units will be transferred to the holder free
and clear of our security interest,
- the holder's right to receive future warrant fees will terminate, and
- no adjustment will be made to or for the holder on account of any amounts
accrued in respect of warrant fees.
If the warrant agent receives a Corporate Unit certificate, or Treasury
Unit certificate if they are in certificated form accompanied by the completed
"Election to Settle Early" and required immediately available funds, from a
holder of Corporate Units or Treasury Units by 5:00 p.m., New York City time, on
a business day and all conditions to early settlement have been satisfied, that
day will be considered the settlement date.
If the warrant agent receives the above after 5:00 p.m., New York City
time, on a business day or at any time on a day that is not a business day, the
next business day will be considered the settlement date. Upon early settlement
of warrants in the manner described above, presentation and surrender of the
certificate evidencing the related Corporate Units or Treasury Units if they are
in certificated form and payment of any transfer or similar taxes payable by the
holder in connection with the issuance of the related common stock to any person
other than the holder of the Corporate Units or Treasury Units, we will cause
the shares of common stock being purchased to be issued, and the related senior
notes, the applicable ownership interest in the Treasury portfolio or the
Treasury securities, as the case may be, securing the warrants to be released
from the pledge under the pledge agreement described in "-- Pledged Securities
and Pledge Agreement" and transferred, within three business days following the
settlement date, to the purchasing holder or the holder's designee.
NOTICE TO SETTLE WITH CASH
Unless the Treasury portfolio has replaced the senior notes as a component
of Corporate Units, a holder of Corporate Units may settle the related warrant
with separate cash. A holder of a Corporate Unit wishing to settle the related
warrant with separate cash must notify the warrant agent by presenting and
surrendering the Corporate Unit certificate evidencing the Corporate Unit at the
offices of the warrant agent with the form of "Notice to Settle by Separate
Cash" on the reverse side of the certificate completed and executed as indicated
on or prior to 5:00 p.m., New York City time, on the fifth business day
immediately preceding the warrant settlement date and delivering the required
cash payment to the collateral agent on or prior to 5:00 p.m., New York City
time, on the fourth business day immediately preceding the warrant settlement
date.
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If a holder that has given notice of its intention to settle the related
warrant with separate cash fails to deliver the cash to the collateral agent on
the fourth business day immediately preceding the warrant settlement date, such
holder's senior notes will be included in the final remarketing of senior notes
occurring on the third business day immediately preceding the warrant settlement
date. If such final remarketing is unsuccessful, the holder will be deemed to
have exercised its right to put the senior notes to us for par, plus accrued and
unpaid interest, and to have elected to apply a portion of the proceeds of the
put equal to the principal amount of the senior notes against the holder's
obligation under the warrant, which will be deemed to be satisfied in full.
EARLY SETTLEMENT UPON CASH MERGER
Prior to the warrant settlement date, if we are involved in a merger in
which at least 30% of the consideration for our common stock consists of cash or
cash equivalents, which we refer to as a cash merger, then following the cash
merger, each holder of a warrant will have the right to accelerate and settle
such warrant early at the settlement rate in effect immediately prior to the
closing of the cash merger, provided that at such time, if so required under the
U.S. federal securities laws, there is in effect a registration statement
covering the common stock and other securities, if any, to be delivered in
respect of the warrants being settled. We refer to this right as the "merger
early settlement right."
We will provide each of the holders with a notice of the completion of a
cash merger within five business days thereof. The notice will specify a date,
which shall be 10 days after the date of the notice but no later than five
business days prior to the warrant settlement date by which each holder's merger
early settlement right must be exercised. The notice will set forth, among other
things, the applicable settlement rate and the amount of the cash, securities
and other consideration receivable by the holder upon settlement. To exercise
the merger early settlement right, you must deliver to the warrant agent, three
business days before the early settlement date, the certificate evidencing your
Corporate Units or Treasury Units if they are held in certificated form, and
payment of the applicable purchase price in immediately available funds.
If you exercise the merger early settlement right, we will deliver to you
on the early settlement date the kind and amount of securities, cash or other
property that you would have been entitled to receive if you had settled the
warrant immediately before the cash merger at the settlement rate in effect at
such time. You will also receive the senior notes, applicable ownership
interests in the Treasury portfolio or Treasury securities represented by the
Corporate Units or Treasury Units, as the case may be. If you do not elect to
exercise your merger early settlement right, your Corporate Units or Treasury
Units will remain outstanding and subject to normal settlement on the settlement
date. We have agreed that, if required under the U.S. federal securities laws,
we will use commercially reasonable efforts to (1) have in effect a registration
statement covering the common stock and other securities, if any, to be
delivered in respect of the warrants being settled and (2) provide a prospectus
in connection therewith, in each case in a form that may be used in connection
with the early settlement upon a cash merger.
If the Treasury portfolio has replaced the senior notes as a component of
Corporate Units, holders of the Corporate Units may exercise the merger early
settlement right only in integral multiples of Corporate Units. A holder of
Treasury Units may exercise the merger early settlement right only in integral
multiples of 40 Treasury Units.
WARRANT FEES
Warrant fees will be fixed at a rate per year of 3.00% of the stated amount
of $25 per warrant. Warrant fees payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. Warrant fees will accrue from
December 2, 2002 and will be payable quarterly in arrears on February 16, May
16, August 16 and November 16 of each year, commencing February 16, 2003. We
have the right to defer the payment of these warrant fees as described below
under "-- Option to Defer Warrant Fees."
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Warrant fees will be payable to the holders of warrants as they appear on
the books and records of the warrant agent at the close of business on the
relevant record dates, which will be on the first day of the month in which the
relevant payment date falls. These distributions will be paid through the
warrant agent, who will hold amounts received in respect of the warrant fees for
the benefit of the holders of the warrants relating to the Equity Units. Subject
to any applicable laws and regulations, each such payment will be made as
described under "-- Book-Entry System."
If any date on which warrant fees are to be made on the warrants
represented by the Equity Units is not a business day, then payment of the
warrant fees payable on that date will be made on the next succeeding day which
is a business day, and no interest or payment will be paid in respect of the
delay. However, if that business day is in the next succeeding calendar year,
that payment will be made on the immediately preceding business day, in each
case with the same force and effect as if made on that payment date. A business
day means any day other than a Saturday, Sunday or any other day on which
banking institutions and trust companies in the City of New York are permitted
or required by any applicable law to close.
Our obligations with respect to warrant fees will be subordinated and
junior in right of payment to our obligations under any of our indebtedness.
OPTION TO DEFER WARRANT FEES
We may, at our option and upon prior written notice to the holders of
Equity Units and the warrant agent, defer the payment of warrant fees on each
related warrant forming a part of an Equity Unit until no later than the warrant
settlement date or, if applicable, the date of any earlier settlement of the
warrant. However, deferred warrant fees will bear additional warrant fees at the
rate of 7.00% per year (compounding on each succeeding payment date) until paid.
If the warrants are terminated (upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to us), the right to
receive future warrant fees will also terminate.
In the event that we elect to defer the payment of warrant fees on the
warrants, each holder of Equity Units will receive, on the earlier of the
warrant settlement date and the date of any earlier settlement of the warrant,
the aggregate amount of deferred warrant fees on the related warrant in cash to
the extent such amounts are not deducted from the settlement price payable to
us.
In the event we exercise our option to defer the payment of warrant fees,
then until the deferred warrant fees have been paid, we will not, and will not
permit our subsidiaries to, declare or pay dividends on, make other
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of our capital shares or their shares;
provided that the foregoing will not restrict any of our subsidiaries from
declaring or paying such dividends, or making such distributions, to us or any
of our other subsidiaries.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the settlement rate will be subject to
adjustment, without duplication, upon the occurrence of certain events,
including:
(a) the payment of stock dividends and distributions of shares of
common stock on the outstanding shares of common stock;
(b) the issuance to all holders of outstanding shares of common stock
of rights, warrants or options (other than pursuant to any dividend
reinvestment or share purchase plans) entitling them, for a period of up to
45 days, to subscribe for or purchase shares of common stock at less than
the current market price thereof;
(c) subdivisions, splits and combinations of shares of common stock;
(d) distributions to all holders of outstanding shares of common stock
of evidences of our indebtedness, shares of capital stock, securities, cash
or property (excluding any dividend or
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distribution covered by clause (a) or (b) above and any dividend or
distribution paid exclusively in cash);
(e) distributions (other than regular quarterly cash distributions)
consisting exclusively of cash to all holders of outstanding shares of
common stock in an aggregate amount that, together with (1) other all-cash
distributions (other than regular quarterly cash distributions) made within
the preceding 12 months and (2) any cash and the fair market value, as of
the expiration of the tender or exchange offer referred to below, of
consideration payable in respect of any tender or exchange offer (other
than consideration payable in respect of any odd-lot tender offer) by us or
any of our subsidiaries for shares of common stock concluded within the
preceding 12 months, exceeds 10% of our aggregate market capitalization
(aggregate market capitalization being the product of the current market
price of shares of common stock multiplied by the number of shares of
common stock then outstanding) on the record date for such distribution;
and
(f) the successful completion of a tender or exchange offer made by us
or any of our subsidiaries for shares of common stock which involves an
aggregate consideration that, together with (1) any cash and the fair
market value of other consideration payable in respect of any tender or
exchange offer (other than consideration payable in respect of any odd-lot
tender offer) by us or any of our subsidiaries for the common stock
concluded within the preceding 12 months and (2) the aggregate amount of
any all-cash distributions (other than regular quarterly cash
distributions) to all holders of shares of common stock within the
preceding 12 months, exceeds 10% of our aggregate market capitalization on
the expiration of the tender or exchange offer.
If the rights provided for in our rights agreement dated as of March 12,
1999 have separated from our common stock in accordance with the provisions of
the rights agreement so that the holders of the warrants would not be entitled
to receive any rights in respect of the common stock issuable on the warrant
settlement date, the settlement rate will be adjusted as if we distributed to
all holders of our common stock, evidences of indebtedness, shares of capital
stock, securities, cash or property as described under clause (d) above, subject
to readjustment in the event of the expiration, termination or redemption of the
rights. In lieu of any such adjustment, we may amend our rights agreement to
provide that on the warrant settlement date the holders will receive, in
addition to the common stock issuable on such date, the rights which would have
attached to such shares of common stock if the rights had not become separated
from the common stock under our rights agreement. To the extent that we adopt
any future rights plan, on the warrant settlement date, you will receive, in
addition to the common stock, the rights under the future rights plan whether or
not the rights have separated from the common stock on the warrant settlement
date and no adjustment to the settlement rate shall be made in accordance with
clause (d) above.
The "current market price" per share of common stock on any day means the
average of the daily closing prices on each of the 20 consecutive trading days
ending on the earlier of the day in question and the day before the "ex date"
with respect to the issuance or distribution requiring the computation. For
purposes of this paragraph, the term "ex date," when used with respect to any
issuance or distribution, will mean the first date on which the common stock
trades regular way on the applicable exchange or in the applicable market
without the right to receive the issuance or distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions that cause our common stock to be
converted into the right to receive other securities, cash or property, each
warrant then outstanding would, without the consent of the holders of the
related Corporate Units or Treasury Units, as the case may be, become a warrant
with respect to such other securities, cash and property instead of our common
stock. Upon the occurrence of any such transaction, on the warrant settlement
date the settlement rate then in effect will be applied to the value, on the
warrant settlement date, of the securities, cash or property a holder would have
received had it held shares covered by the warrant when such transaction
occurred.
If at any time we make a distribution of property to our stockholders which
would be taxable to the stockholders as a dividend for United States federal
income tax purposes (i.e., distributions out of our
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current or accumulated earnings and profits or distributions of evidences of
indebtedness or assets, but generally not stock dividends or rights to subscribe
for capital stock) and, pursuant to the settlement rate adjustment provisions of
the warrant agreement, the settlement rate is increased, this increase may give
rise to a taxable dividend to holders of Corporate Units.
In addition, we may make increases in the settlement rate as our board of
directors deems advisable to avoid or diminish any income tax to holders of our
capital stock resulting from any dividend or distribution of capital stock (or
rights to acquire capital stock) or from any event treated as such for income
tax purposes or for any other reasons.
Adjustments to the settlement rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the settlement rate will be required
unless the adjustment would require an increase or decrease of at least one
percent in the settlement rate. However, any adjustments which are not required
to be made because they would have required an increase or decrease of less than
one percent will be carried forward and taken into account in any subsequent
adjustment.
We will be required, within ten business days following the adjustment to
the settlement rate, to provide written notice to the warrant agent of the
occurrence of the adjustment and a statement in reasonable detail setting forth
the method by which the adjustment to the settlement rate was determined and
setting forth the revised settlement rate.
Each adjustment to the settlement rate will result in a corresponding
adjustment to the number of shares of common stock issuable upon early
settlement of a warrant. Each adjustment to the settlement rate will also result
in an adjustment to the applicable market value solely to determine which of the
three clauses in the definition of settlement rate will be applicable on
November 16, 2005.
TERMINATION
The warrants, and our rights and obligations and the rights and obligations
of the holders of the Corporate Units and Treasury Units under the warrants,
including the right and obligation to purchase shares of common stock and the
right to receive accrued warrant fees, will immediately and automatically
terminate, without any further action, upon the termination of the warrants as a
result of our bankruptcy, insolvency or reorganization.
Upon a termination of the warrants, the collateral agent will release the
securities held by it to the warrant agent for distribution to the holders. If a
holder would otherwise have been entitled to receive less than $1,000 principal
amount at maturity of any Treasury security upon termination of the warrant, the
warrant agent will dispose of the security for cash and pay the cash to the
holder. Upon termination, however, the release and distribution may be subject
to a delay. If we become the subject of a case under the federal bankruptcy
code, a delay in the release of the pledged senior notes or Treasury securities
may occur as a result of the automatic stay under the bankruptcy code and
continue until the automatic stay has been lifted. The automatic stay will not
be lifted until such time as the bankruptcy court agrees to lift it and permit
the return of your collateral to you. In such a case under the federal
bankruptcy code, claims arising out of the senior notes, like all other claims
in bankruptcy proceedings, will be subject to the jurisdiction and equitable
powers of the bankruptcy court.
If the holder's warrant is terminated as a result of our bankruptcy,
insolvency or reorganization, such holder will have no right to receive any
accrued warrant fees.
PLEDGED SECURITIES AND PLEDGE AGREEMENT
Pledged securities will be held by the collateral agent, for our benefit,
pursuant to the pledge agreement and pledged to secure the obligations of
holders of Corporate Units and Treasury Units to purchase shares of common stock
under the related warrants. The rights of holders of Corporate Units and
Treasury Units to the pledged securities represented by such Corporate Units or
Treasury Units will be subject to our security interest created by the pledge
agreement. The pledge agreement provides that if the senior notes are not
successfully remarketed by November 16, 2005, then the holder of a Corporate
Unit
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has the right to satisfy its obligation to us under the warrants in full using a
portion of the proceeds from the holder's right to put the senior notes to us at
par, plus accrued and unpaid interest.
No holder of Corporate Units or Treasury Units will be permitted to
withdraw the pledged securities related to the Corporate Units or Treasury Units
from the pledge arrangement except:
- to substitute Treasury securities for the related senior notes or the
applicable ownership interest in the Treasury portfolio, as the case may
be, as provided for under "Description of the Equity Units -- Creating
Treasury Units,"
- to substitute senior notes or the applicable ownership interest of the
Treasury portfolio, as the case may be, for the related Treasury
securities, as provided for under "Description of the Equity
Units -- Recreating Corporate Units," or
- upon the termination or early settlement of the related warrants.
Subject to the security interest and the terms of the warrant agreement and
the pledge agreement, each holder of Corporate Units, unless the Treasury
portfolio has replaced the senior notes as a component of Corporate Units, will
be entitled through the warrant agent and the collateral agent to all of the
proportional rights of the related senior notes, including voting and redemption
rights. Each holder of Treasury Units and each holder of Corporate Units, if the
Treasury portfolio has replaced the senior notes as a component of Corporate
Units, will retain beneficial ownership of the related Treasury securities or
the applicable ownership interest of the Treasury portfolio, as applicable,
pledged in respect of the related warrants. We will have no interest in the
pledged securities other than our security interest.
Except as described in "Certain Provisions of the Warrants, Warrant
Agreement and the Pledge Agreement -- General," the collateral agent will, upon
receipt, if any, of payments on the pledged securities, distribute the payments
to the warrant agent, which will in turn distribute those payments, together
with warrant fees received from us, to the persons in whose names the related
Corporate Units or Treasury Units are registered at the close of business on the
record date immediately preceding the date of payment.
BOOK-ENTRY SYSTEM
The Depository Trust Company, which we refer to along with its successors
in this capacity as the depositary, will act as securities depositary for the
Corporate Units and Treasury Units. The Corporate Units and Treasury Units will
be issued only as fully registered securities registered in the name of Cede &
Co., the depositary's nominee. One or more fully registered global security
certificates, representing the total aggregate number of Corporate Units and
Treasury Units, will be issued and will be deposited with the depositary and
will bear a legend regarding the restrictions on exchanges and registration of
transfer referred to below.
The laws of some jurisdictions may require that some purchasers of
securities take physical delivery of securities in definitive form. These laws
may impair the ability to transfer beneficial interests in the Corporate Units
or the Treasury Units so long as the Corporate Units or the Treasury Units are
represented by global security certificates.
The depositary 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 pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934. The depositary holds securities that its participants
deposit with the depositary. The depositary also facilitates the settlement
among participants of securities transactions, including 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, banks, trust companies, clearing corporations and certain other
organizations. The depositary is owned by a number of its direct participants
and by the New York Stock
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Exchange, the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the depositary's system is also available to
others, including securities brokers and dealers, banks and trust companies that
clear transactions through or maintain a direct or indirect custodial
relationship with a direct participant either directly, or indirectly. The rules
applicable to the depositary and its participants are on file with the SEC.
In the event that
- the depositary notifies us that it is unwilling or unable to continue as
a depositary for the global security certificates and no successor
depositary has been appointed within 90 days after this notice,
- the depositary at any time ceases to be a clearing agency registered
under the Securities Exchange Act of 1934 when the depositary is required
to be so registered to act as the depositary and no successor depositary
has been appointed within 90 days after we learn that the depositary has
ceased to be so registered, or
- we, in our sole discretion, determine that the global security
certificates shall be so exchangeable,
certificates for the Corporate Units or Treasury Units will be printed and
delivered in exchange for beneficial interests in the global security
certificates. Any global Corporate Unit or Treasury Unit that is exchangeable
pursuant to the preceding sentence will be exchangeable for Corporate Unit or
Treasury Unit certificates registered in the names directed by the depositary.
We expect that these instructions will be based upon directions received by the
depositary from its participants with respect to ownership of beneficial
interests in the global security certificates.
As long as the depositary or its nominee is the registered owner of the
global security certificates, the depositary or its nominee, as the case may be,
will be considered the sole owner and holder of the global security certificates
and all Corporate Units or Treasury Units represented by these certificates for
all purposes under the Corporate Units or Treasury Units and the warrant
agreement. Except in the limited circumstances referred to above, owners of
beneficial interests in global security certificates
- will not be entitled to have such global security certificates or the
Corporate Units or Treasury Units represented by these certificates
registered in their names,
- will not receive or be entitled to receive physical delivery of Corporate
Unit or Treasury Unit certificates in exchange for beneficial interests
in global security certificates, and
- will not be considered to be owners or holders of the global security
certificates or any Corporate Units or Treasury Units represented by
these certificates for any purpose under the Corporate Units or Treasury
Units or the warrant agreement.
All payments on the Corporate Units or Treasury Units represented by the
global security certificates and all transfers and deliveries of related senior
notes, Treasury portfolio, Treasury securities and shares of common stock will
be made to you via the depositary or its nominee, as the case may be.
Ownership of beneficial interests in the global security certificates will
be limited to participants or persons that may hold beneficial interests through
institutions that have accounts with the depositary or its nominee. Ownership of
beneficial interests in global security certificates will be shown only on, and
the transfer of those ownership interests will be effected only through, records
maintained by the depositary or its nominee, with respect to participants'
interests, or any participant, with respect to interests of persons held by the
participant on their behalf. Procedures for settlement of warrants on November
16, 2005 or upon early settlement will be governed by arrangements among the
depositary, participants and persons that may hold beneficial interests through
participants designed to permit settlement without the physical movement of
certificates. Payments, transfers, deliveries, exchanges and other matters
relating to beneficial interests in global security certificates may be subject
to various policies and procedures adopted by the depositary from time to time.
None of us, the warrant agent or any agent of ours, or the warrant agent will
have any responsibility or liability for any aspect of the depositary's or any
participant's records relating to, or for payments made on account of,
beneficial interests in global security certificates, or for maintaining,
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supervising or reviewing any of the depositary's records or any participant's
records relating to these beneficial ownership interests.
Although the depositary has agreed to the foregoing procedures in order to
facilitate transfer of interests in the global security certificates among
participants, the depositary is under no obligation to perform or continue to
perform these procedures, and these procedures may be discontinued at any time.
We will not have any responsibility for the performance by the depositary or its
direct participants or indirect participants under the rules and procedures
governing the depositary.
The information in this section concerning the depositary and its
book-entry system has been obtained from sources that we believe to be reliable,
but we have not attempted to verify the accuracy of this information.
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CERTAIN PROVISIONS OF THE WARRANTS, THE WARRANT AGREEMENT AND
THE PLEDGE AGREEMENT
This summary summarizes some of the other provisions of the warrant
agreement and the pledge agreement. This summary should be read together with
the warrant agreement and pledge agreement, forms of which have been or will be
filed and incorporated by reference as exhibits to the registration statement of
which this prospectus supplement and the accompanying prospectus form a part.
GENERAL
Except as described in "Description of the Warrants -- Book-Entry System,"
payments on the warrants and senior notes represented by the Equity Units will
be made, warrants (and documents relating to the Corporate Units, Treasury Units
and warrants) will be settled, and transfers of the Corporate Units and Treasury
Units will be registrable, at the office of the warrant agent in the Borough of
Manhattan, The City of New York. In addition, if the Corporate Units and
Treasury Units do not remain in book-entry form, payment on the warrants and the
senior notes represented by the Equity Units may be made, at our option, by
check mailed to the address of the holder entitled to payment as shown on the
security register or by a wire transfer to the account designated by the holder
by a prior written notice.
Shares of common stock will be delivered on November 16, 2005 (or earlier
upon early settlement), or, if the warrants have terminated, the related pledged
securities will be delivered (potentially after a delay as a result of the
imposition of the automatic stay under the Bankruptcy Code, see "Description of
the Warrants -- Termination") at the office of the warrant agent upon
presentation and surrender of the applicable certificate.
If you fail to present and surrender the certificate evidencing the
Corporate Units or Treasury Units to the warrant agent on or prior to the
warrant settlement date, the shares of common stock issuable upon settlement of
the related warrant will be registered in the name of the warrant agent. The
shares, together with any distributions, will be held by the warrant agent as
agent for your benefit until the certificate is presented and surrendered or you
provide satisfactory evidence that the certificate has been destroyed, lost or
stolen, together with any indemnity that may be required by the warrant agent
and us.
If the warrants terminate prior to the warrant settlement date, the related
pledged securities are transferred to the warrant agent for distribution to the
holders, and a holder fails to present and surrender the certificate evidencing
the holder's Corporate Units or Treasury Units to the warrant agent, the related
pledged securities delivered to the warrant agent and payments on the pledged
securities will be held by the warrant agent as agent for the benefit of the
holder until the applicable certificate is presented or the holder provides the
evidence and indemnity described above.
The warrant agent will have no obligation to invest or to pay interest on
any amounts held by the warrant agent pending payment to any holder.
No service charge will be made for any registration of transfer or exchange
of the Corporate Units or Treasury Units, except for any tax or other
governmental charge that may be imposed in connection with a transfer or
exchange.
MODIFICATION
The warrant agreement and the pledge agreement will contain provisions
permitting us and the warrant agent, and in the case of the pledge agreement,
the collateral agent, to modify the warrant agreement or the pledge agreement
without the consent of the holders for any of the following purposes:
- to evidence the succession of another person to our obligations;
- to add to the covenants for the benefit of holders or to surrender any of
our rights or powers under those agreements;
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- to evidence and provide for the acceptance of appointment of a successor
warrant agent or a successor collateral agent or securities intermediary;
- to make provision with respect to the rights of holders pursuant to
adjustments in the settlement rate due to consolidations, mergers or
other reorganization events;
- to cure any ambiguity, to correct any error or to correct or supplement
any provision that may be inconsistent with any other provision; and
- to make any other provisions with respect to such matters or questions,
provided that such action shall not materially adversely affect the
interest of the holders.
The warrant agreement and the pledge agreement will contain provisions
permitting us and the warrant agent, and in the case of the pledge agreement,
the collateral agent, with the consent of the holders of not less than a
majority of the warrants at the time outstanding to modify the terms of the
warrants, the warrant agreement or the pledge agreement. However, no such
modification may, without the consent of the holder of each outstanding warrant
affected by the modification,
- change any payment date,
- change the amount or type of pledged securities related to the warrant,
impair the right of the holder of any pledged securities to receive
distributions on the pledged securities or otherwise adversely affect the
holder's rights in or to the pledged securities,
- change the place or currency of payment or reduce any warrant fees,
- impair the right to institute suit for the enforcement of the warrant or
payment of any warrant fees,
- reduce the number of shares of common stock purchasable under the
warrant, increase the price to purchase shares of common stock upon
settlement of the warrant, change the warrant settlement date or the
right to early settlement or otherwise adversely affect the holder's
rights under the warrant, or
- reduce the above-stated percentage of outstanding warrants the consent of
the holders of which is required for the modification or amendment of the
provisions of the warrants, the warrant agreement or the pledge
agreement.
If any amendment or proposal referred to above would adversely affect only
the Corporate Units or the Treasury Units, then only the affected class of
holders will be entitled to vote on the amendment or proposal, and the amendment
or proposal will not be effective except with the consent of the holders of not
less than a majority of the affected class or of all of the holders of the
affected classes, as applicable.
NO CONSENT TO ASSUMPTION
Each holder of Equity Units, will under the terms of the warrant agreement
and the Corporate Units or Treasury Units, as applicable, be deemed expressly to
have withheld any consent to the assumption (i.e., affirmance) by us or our
trustee of the warrants represented by such Equity Units if we become the
subject of a case under the Bankruptcy Code or other similar state or federal
law provision for reorganization or liquidation.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
We will covenant in the warrant agreement that we will not merge with and
into, consolidate with or convert into any other entity or sell, assign,
transfer, lease or convey all or substantially all of our properties and assets
to any person or entity, unless (1) the successor entity is an entity organized
and existing under the laws of the United States of America or a U.S. state or
the District of Columbia and that entity expressly assumes our obligations under
the warrants, the warrant agreement, the pledge agreement and the remarketing
agreement and (2) the successor entity is not, immediately after the merger,
consolidation, conversion, sale, assignment, transfer, lease or conveyance, in
default of its payment
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obligations under the warrants, the warrant agreement, the pledge agreement and
the remarketing agreement or in material default in the performance of any other
covenants under these agreements.
TITLE
We, the warrant agent and the collateral agent may treat the registered
owner of any Corporate Units or Treasury Units as the absolute owner of the
Corporate Units or Treasury Units for the purpose of making payment and settling
the related warrants and for all other purposes.
REPLACEMENT OF EQUITY UNIT CERTIFICATES
In the event that physical certificates have been issued, any mutilated
Corporate Unit or Treasury Unit certificate will be replaced by us at the
expense of the holder upon surrender of the certificate to the warrant agent.
Corporate Unit or Treasury Unit certificates that become destroyed, lost or
stolen will be replaced by us at the expense of the holder upon delivery to us
and the warrant agent of evidence of their destruction, loss or theft
satisfactory to us and the warrant agent. In the case of a destroyed, lost or
stolen Corporate Unit or Treasury Unit certificate, an indemnity satisfactory to
the warrant agent and us may be required at the expense of the holder of the
Corporate Units or Treasury Units evidenced by the certificate before a
replacement will be issued.
Notwithstanding the foregoing, we will not be obligated to issue any
Corporate Unit or Treasury Unit certificates on or after the business day
immediately preceding the warrant settlement date (or after early settlement) or
after the warrants have terminated. The warrant agreement will provide that, in
lieu of the delivery of a replacement Corporate Unit or Treasury Unit
certificate following the warrant settlement date, the warrant agent, upon
delivery of the evidence and indemnity described above, will deliver the shares
of common stock issuable pursuant to the warrants represented by the Corporate
Units or Treasury Units evidenced by the certificate, or, if the warrants have
terminated prior to the warrant settlement date, transfer the pledged securities
represented by the Corporate Units or Treasury Units evidenced by the
certificate.
GOVERNING LAW
The warrant agreement, the pledge agreement and the warrants will be
governed by, and construed in accordance with, the laws of the State of New
York.
INFORMATION CONCERNING THE WARRANT AGENT
Bank One Trust Company, N.A. will be the warrant agent. The warrant agent
will act as the agent for the holders from time to time of the warrants
represented by Corporate Units and Treasury Units from time to time. The warrant
agreement will not obligate the warrant agent to exercise any discretionary
actions in connection with a default under the terms of the warrants or the
warrant agreement.
The warrant agreement will contain provisions limiting the liability of the
warrant agent. The warrant agreement will contain provisions under which the
warrant agent may resign or be replaced. This resignation or replacement would
be effective upon the acceptance of appointment by a successor.
Bank One Trust Company, N.A. maintains commercial banking relationships
with us.
INFORMATION CONCERNING THE COLLATERAL AGENT
BNY Midwest Trust Company will be the collateral agent. The collateral
agent will act solely as our agent and will not assume any obligation or
relationship of agency or trust for or with any of the holders of the Corporate
Units or Treasury Units except for the obligations owed by a pledgee of property
to the owner of the property under the pledge agreement and applicable law.
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The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement will contain provisions under which the
collateral agent may resign or be replaced. This resignation or replacement
would be effective upon the acceptance of appointment by a successor.
MISCELLANEOUS
The warrant agreement will provide that we will pay all fees and expenses
other than underwriters' expenses (including counsel) related to the offering of
the warrants, the retention of the collateral agent and the enforcement by the
warrant agent of the rights of the holders of the warrants.
Should you elect to substitute the related pledged securities, create
Treasury Units or recreate Corporate Units, you will be responsible for any fees
or expenses payable in connection with that substitution, as well as any
commissions, fees or other expenses incurred in acquiring the pledged securities
to be substituted, and we will not be responsible for any of those fees or
expenses.
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DESCRIPTION OF THE SENIOR NOTES
The following description is a summary of the terms of our senior notes.
The descriptions in this prospectus supplement and the accompanying prospectus
contain a description of certain terms of the senior notes and the indenture but
do not purport to be complete, and reference is hereby made to the indenture,
which is incorporated by reference into the registration statement, and to the
Trust Indenture Act. This summary supplements the description of the senior debt
securities in the accompanying prospectus and, to the extent it is inconsistent,
replaces the description in the accompanying prospectus.
GENERAL
The senior notes will be issued under an indenture dated as of October 25,
1989 between us and Bank One Trust Company, N.A. (formerly The First National
Bank of Chicago), as indenture trustee (the "indenture").
The senior notes will be senior debt securities that will be our direct,
unsecured obligations and will rank without preference or priority among
themselves and equally with all of our existing and future unsecured senior
indebtedness. The senior notes initially will be issued in an aggregate
principal amount equal to $525,000,000. If the over-allotment option is
exercised in full by the underwriters an additional $75,000,000 of the senior
notes will be issued.
We are a holding company that derives all our income from our subsidiaries.
Accordingly, our ability to service our debt, including our obligations under
the senior notes, and other obligations are primarily dependent on the earnings
of our respective subsidiaries and the payment of those earnings to us, in the
form of dividends, loans or advances and through repayment of loans or advances
from us. In addition, any payment of dividends, loans or advances by those
subsidiaries could be subject to statutory or contractual restrictions. Our
subsidiaries have no obligation to pay any amounts due on the senior notes.
The senior notes will not be subject to a sinking fund provision and will
not be subject to defeasance. Unless a special event redemption occurs prior to
November 16, 2005, the entire principal amount of the senior notes will mature
and become due and payable, together with any accrued and unpaid interest
thereon, on November 16, 2007.
The indenture trustee will initially be the security registrar and the
paying agent for the senior notes. Senior notes represented by the Corporate
Units will be issued in certificated form, will be in denominations of $25 and
integral multiples of $25, without coupons, and may be transferred or exchanged,
without service charge but upon payment of any taxes or other governmental
charges payable in connection with the transfer or exchange, at the office
described below. Payments on senior notes issued as a global security will be
made to the depositary or a successor depositary. Principal and interest with
respect to certificated notes will be payable, the transfer of the senior notes
will be registrable and senior notes will be exchangeable for notes of a like
aggregate principal amount in denominations of $25 and integral multiples of
$25, at the office or agency maintained by us for this purpose in The City of
New York. We have initially designated the corporate trust office of the
indenture trustee as that office. However, at our option, payment of interest
may be made by check mailed to the address of the holder entitled to payment or
by wire transfer to an account appropriately designated by the holder entitled
to payment.
The indenture does not contain provisions that afford holders of the senior
notes protection in the event we are involved in a highly leveraged transaction
or other similar transaction that may adversely affect such holders. The
indenture does not limit our ability to issue or incur other debt or issue
preferred stock.
INTEREST
Each senior note will bear interest initially at the rate of 4.00% per year
from the original issuance date, payable quarterly in arrears on February 16,
May 16, August 16 and November 16 of each year,
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commencing February 16, 2003 to the person in whose name the senior note is
registered at the close of business on the first day of the month in which the
interest payment date falls.
The applicable interest rate on the senior notes may be reset to the reset
rate upon successful remarketing as described above under "Description of the
Warrants -- Remarketing." The reset rate will become effective on the reset
effective date, which is three business days immediately following a successful
remarketing. If the senior notes are not successfully remarketed, the interest
rate on the senior notes will not be reset.
The amount of interest payable on the senior notes for any period will be
computed (1) for any full quarterly period on the basis of a 360-day year of
twelve 30-day months and (2) for any period shorter than a full quarterly
period, on the basis of a 30-day month and, for any period less than a month, on
the basis of the actual number of days elapsed per 30-day month. In the event
that any date on which interest is payable on the senior notes is not a business
day, then payment of the interest payable on such date will be made on the next
day that is a business day (and without any interest or other payment in respect
of any such delay), except that, if such business day is in the next calendar
year, then such payment will be made on the preceding business day.
MARKET RESET RATE
The reset rate will be equal to the rate that is sufficient to allow a
successful remarketing of the senior notes and will be determined by the
remarketing agent. In the case of a reset prior to the third business day
immediately preceding the warrant settlement date, which rate would be effective
on the third business day following the date of such successful remarketing, the
reset rate will be the rate determined by the remarketing agent as the rate the
senior notes should bear in order for the senior notes represented by Corporate
Units to have an aggregate market value on the reset date of approximately (but
not less than) 100.50% of the Treasury portfolio purchase price described under
"Description of the Warrants -- Remarketing." In the case of a reset on the
third business day immediately preceding the warrant settlement date, the reset
rate will be the rate determined by the remarketing agent as the rate the senior
notes should bear in order for each senior note to have an approximate market
value of 100.50% of the principal amount of the senior notes, except that the
remarketing on the final remarketing date will be considered successful if the
resulting proceeds (net of fees and commissions, if any) are at least 100% of
the aggregate principal amount of the senior notes.
OPTIONAL REMARKETING
On or prior to the fifth business day immediately preceding any remarketing
date, but no earlier than the payment date immediately preceding such date,
holders of senior notes that are not represented by Corporate Units may elect to
have their senior notes remarketed in the same manner and at the same price as
senior notes that are represented by Corporate Units by delivering their senior
notes along with a notice of this election to the custodial agent. The custodial
agent will hold the senior notes in an account separate from the collateral
account in which the pledged securities will be held. Holders of senior notes
electing to have their senior notes remarketed will also have the right to
withdraw the election on or prior to the fifth business day immediately
preceding the applicable remarketing date. Holders of Treasury Units that are
also holders of senior notes that are not represented by the Corporate Units may
also participate in any remarketing by recreating Corporate Units from their
Treasury Units at any time on or prior to the second business day immediately
prior to any of the remarketing dates.
PUT OPTION UPON A FAILED FINAL REMARKETING
If the senior notes have not been successfully remarketed by the warrant
settlement date, the holders of senior notes will have the right to put their
senior notes to us for par, plus accrued and unpaid interest. Holders of senior
notes that are represented by Corporate Units will be deemed to have exercised
that put right on the warrant settlement date. Holders of senior notes that are
not represented by Corporate Units
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may put their senior notes to us on or after November 16, 2005 by notifying the
indenture trustee on or prior to the fifth business day before the date on which
the holder puts those senior notes to us.
EVENTS OF DEFAULT
In addition to the events of default described in the accompanying
prospectus under "Description of the Debt Securities -- Events of Default," it
shall be an event of default under the senior notes if we fail on the date
payment is due to pay the put price of any senior notes following the exercise
of the put right by any holder of senior notes.
OPTIONAL REDEMPTION -- SPECIAL EVENT
If a special event, as defined below, occurs and is continuing, prior to
the earlier of (1) the date of a successful remarketing or (2) the warrant
settlement date, we may redeem, at our option on any interest payment date, the
senior notes in whole, but not in part, at a price equal to, for each senior
note, the redemption amount, as defined below, plus accrued and unpaid interest
thereon, which we refer collectively to as the redemption price, to the date of
redemption, which we refer to as the "special event redemption date." The
redemption price payable in respect of all senior notes represented by Corporate
Units will be distributed to the collateral agent, which in turn will apply an
amount equal to the redemption amount of such redemption price to purchase the
Treasury portfolio on behalf of the holders of the Corporate Units and remit the
remaining portion (net of fees and expenses, if any), if any, of such redemption
price to the warrant agent for payment to the holders of the Corporate Units.
Thereafter, the applicable ownership interest of the Treasury portfolio will be
substituted for the senior notes and will be held by the collateral agent and
pledged to secure the Corporate Unit holders' obligations to purchase our shares
of common stock, under the related warrant. Holders of senior notes that are not
represented by Corporate Units will directly receive proceeds from the
redemption of the senior notes.
"Special event" means either a tax event or an accounting event, each as
defined below.
"Accounting event" means the receipt by the audit committee of our Board of
Directors of a written report in accordance with Statement on Auditing Standards
("SAS") No. 97, "Amendment to SAS No. 50 -- Reports on the Application of
Accounting Principles", from our independent auditors, provided at the request
of management, to the effect that, as a result of a change in accounting rules
after the date of original issuance of the senior notes, we must either (a)
account for the warrants as derivatives under SFAS 133 (or any successor
accounting standard) or (b) account for the Equity Units using the if-converted
method under SFAS 128 (or any successor accounting standard), and that such
accounting treatment will cease to apply upon redemption of the senior notes.
"Tax event" means the receipt by us of an opinion of counsel, rendered by a
law firm having a recognized national tax practice, to the effect that, as a
result of any amendment to, change in or announced proposed change in the laws
(or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative decision, pronouncement, judicial decision or action
interpreting or applying such laws or regulations, which amendment or change is
effective or which proposed change, pronouncement, action or decision is
announced on or after the date of original issuance of the senior notes, there
is more than an insubstantial increase in the risk that interest payable by us
on the senior notes is not, or within 90 days of the date of such opinion, will
not be, deductible by us, in whole or in part, for United States federal income
tax purposes.
"Redemption amount" means, for each senior note, the product of the
principal amount of such senior note and a fraction, the numerator of which is
the Treasury portfolio purchase price, as defined below, and the denominator of
which is the applicable principal amount, as defined below.
"Treasury portfolio purchase price" means the lowest aggregate ask-side
price quoted by a primary U.S. government securities dealer to the quotation
agent between 9:00 a.m. and 11:00 a.m., New York City time, as defined below, on
the third business day immediately preceding the special event redemption
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date for the purchase of the Treasury portfolio described below for settlement
on the special event redemption date.
"Applicable principal amount" means the aggregate principal amount of the
senior notes that are represented by Corporate Units on the special event
redemption date.
"Treasury portfolio" means a portfolio of U.S. Treasury securities (or
principal or interest strips thereof) that mature on or prior to November 16,
2005 in an aggregate amount at maturity equal to the applicable principal amount
and with respect to each scheduled interest payment date on the senior notes
that occurs after the special event redemption date, to and including the
warrant settlement date, U.S. Treasury securities (or principal or interest
strips thereof) that mature on or prior to the business day immediately
preceding such scheduled interest payment date in an aggregate amount at
maturity equal to the aggregate interest payment (assuming no reset of the
interest rate) that would be due on the applicable principal amount of the
senior notes on such date.
"Quotation agent" means any primary U.S. government securities dealer
selected by us.
AGREEMENT BY PURCHASERS OF CERTAIN TAX TREATMENT
Each senior note will provide that, by acceptance of the senior note or a
beneficial interest therein, you intend that the senior note constitutes debt
and you agree to treat it as debt for United States federal, state and local tax
purposes.
BOOK-ENTRY SYSTEM
Senior notes that are released from the pledge following substitution or
settlement of the warrants will be issued in the form of one or more global
certificates, which are referred to as global securities, registered in the name
of the depositary or its nominee. Except under the limited circumstances
described below or except upon recreation of Corporate Units, senior notes
represented by the global securities will not be exchangeable for, and will not
otherwise be issuable as, senior notes in certificated form. The global
securities described above may not be transferred except by the depositary to a
nominee of the depositary or by a nominee of the depositary to the depositary or
another nominee of the depositary or to a successor depositary or its nominee.
The laws of some jurisdictions may require that some purchasers of
securities take physical delivery of the securities in certificated form. These
laws may impair the ability to transfer beneficial interests in such a global
security.
Except as provided below, owners of beneficial interests in such a global
security will not be entitled to receive physical delivery of senior notes in
certificated form and will not be considered the holders (as defined in the
indenture) thereof for any purpose under the indenture, and no global security
representing senior notes shall be exchangeable, except for another global
security of like denomination and tenor to be registered in the name of the
depositary or its nominee or a successor depositary or its nominee. Accordingly,
each beneficial owner must rely on the procedures of the depositary or if such
person is not a participant, on the procedures of the participant through which
such person owns its interest to exercise any rights of a holder under the
indenture.
In the event that
- the depositary notifies us that it is unwilling or unable to continue as
a depositary for the global security certificates and no successor
depositary has been appointed within 90 days after this notice,
- an event of default occurs and is continuing with respect to the senior
notes; or
- we determine in our sole discretion that we will no longer have senior
notes represented by global securities,
certificates for the senior notes will be printed and delivered in exchange for
beneficial interests in the global security certificates. Any global note that
is exchangeable pursuant to the preceding sentence shall
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be exchangeable for senior note certificates registered in the names directed by
the depositary. We expect that these instructions will be based upon directions
received by the depositary from its participants with respect to ownership of
beneficial interests in the global security certificates.
UNITED STATES FEDERAL INCOME TAX
The following is a discussion of the principal U.S. federal income tax
consequences of the purchase, ownership and disposition of Equity Units and the
senior notes, Treasury securities (including an applicable ownership interest in
the Treasury portfolio) and warrants that are or may be the components of Equity
Units, and shares of our common stock acquired through a warrant. This
discussion is addressed only to holders of Equity Units who purchase Equity
Units in the initial offering at their original offering price and hold the
Equity Units, senior notes, Treasury securities, warrants and shares of our
common stock as capital assets. This discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations and proposed
Treasury regulations issued under the Code, Internal Revenue Service ("IRS")
rulings and pronouncements and judicial decisions now in effect, all of which
may change, possibly with retroactive effect.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to holders in light of their particular
circumstances, such as holders to whom special tax treatment applies, including
(1) banks, regulated investment companies, real estate investment trusts,
insurance companies, dealers in securities or currencies or tax-exempt
organizations, (2) persons holding Equity Units, senior notes or shares of our
common stock as part of a straddle, hedge, conversion transaction or other
integrated investment, (3) U.S. holders (as defined below) whose functional
currency is not the U.S. dollar, or (4) traders in securities that elect to use
a mark to market method of accounting for their securities holdings. In
addition, this discussion does not address alternative minimum taxes or state,
local or foreign taxes.
No statutory, administrative or judicial authority directly addresses the
treatment of Equity Units or instruments similar to Equity Units for U.S.
federal income tax purposes. As a result, no assurance can be given that the IRS
or a court will agree with the tax consequences described in this discussion. A
differing treatment from that assumed below could adversely affect the amount,
timing and character of income, gain or loss in respect of an investment in the
Equity Units. Prospective investors are urged to consult their own tax advisors
with respect to the U.S. federal income tax consequences of the purchase,
ownership and disposition of Equity Units, senior notes, Treasury securities and
shares of our common stock acquired under a warrant in light of their own
particular circumstances, as well as the effect of any state, local or foreign
tax laws.
CONSEQUENCES TO U.S. HOLDERS
The following is a discussion of U.S. federal income tax considerations
relevant to a "U.S. holder" of Equity Units. For purposes of this discussion,
the term U.S. holder means an individual who is a citizen or resident of the
United States, a U.S. domestic corporation or any other entity or person
generally subject to U.S. federal income tax on a net income basis.
CLASSIFICATION OF SENIOR NOTES AND WARRANTS
Classification of the senior notes. In connection with the issuance of the
senior notes, our counsel, Cleary, Gottlieb, Steen & Hamilton, has advised us
that the senior notes will be classified as indebtedness for U.S. federal income
tax purposes. We agree, under the terms of the senior notes, and each U.S.
holder, by acquiring senior notes, agrees to treat the senior notes as our
indebtedness for all tax purposes.
Classification of warrants. Although described as "warrants," for U.S.
federal income tax purposes, the warrants should be treated as forward contracts
for the purchase of our common stock on November 16, 2005 for $25 purchase
price, and by purchasing an Equity Unit, each U.S. holder agrees to treat the
warrants as such for U.S. federal income tax purposes. This discussion assumes
such treatment.
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EQUITY UNITS
Ownership of senior notes or Treasury securities. For U.S. federal income
tax purposes, a U.S. holder will be treated as owning the senior notes (or
Treasury securities) constituting a part of the holder's Equity Units. We, under
the terms of the Equity Units, and each U.S. holder, by acquiring Equity Units,
agree to treat the senior notes (or Treasury securities) constituting a part of
the Equity Units as owned by that U.S. holder for all tax purposes, and the
remainder of this summary assumes this treatment. The U.S. federal income tax
consequences of owning the senior notes or Treasury securities are discussed
below under "Senior Notes" and "Treasury Securities Purchased in Connection with
Equity Units."
Allocation of purchase price. A U.S. holder's acquisition of a Corporate
Unit will be treated as an acquisition of the senior note and the warrant
constituting the Corporate Unit for U.S. federal income tax purposes and, by
purchasing a Corporate Unit, you will be deemed to have agreed to that
treatment. The remainder of this discussion assumes that the acquisition of a
Corporate Unit will be so treated. The purchase price of a Corporate Unit will
be allocated between the senior note and the warrant constituting the Corporate
Unit, in proportion to their respective fair market values at the time of
purchase. This allocation will establish the U.S. holder's initial tax basis in
the senior note and the warrant. Upon issuance of the Corporate Units, we expect
to report the fair market value of each senior note as $25 and the fair market
value of each warrant as $0.00. This position will be binding on each U.S.
holder unless a U.S. holder explicitly discloses a contrary position on a
statement attached to that U.S. holder's timely filed U.S. federal income tax
returns for the taxable year in which that U.S. holder acquires a Corporate
Unit, but this position will not be binding on the IRS. Thus, absent disclosure
of that kind, a U.S. holder should allocate the purchase price for a Corporate
Unit in accordance with the values reported by us. The remainder of this
discussion assumes that this allocation of the purchase price of a Corporate
Unit will be respected for U.S. federal income tax purposes.
Sales, exchanges or other taxable dispositions of Equity Units. If a U.S.
holder sells, exchanges or otherwise disposes of Equity Units in a taxable
disposition, the U.S. holder will be treated as having sold, exchanged or
disposed of each of the warrant and the senior note or Treasury securities that
constitute the Equity Units. The proceeds realized on this disposition will be
allocated between the warrant and the senior note or Treasury securities in
proportion to their respective fair market values at the time of disposition. As
a result, as to each of the warrant and the senior note or Treasury securities,
a U.S. holder generally will recognize gain or loss equal to the difference
between the portion of the proceeds received by the U.S. holder that is
allocable to the warrant and the senior note or Treasury securities,
respectively, and the U.S. holder's adjusted tax basis in the warrant and the
senior note or Treasury securities, respectively, except that amounts received
by a taxpayer who uses a cash method of tax accounting with respect to accrued
but unpaid interest on Treasury securities will be treated as ordinary interest
income to the extent not previously taken into income.
In the case of the warrant and the Treasury securities, the gain or loss
generally will be capital gain or loss. The gain or loss generally will be
long-term capital gain or loss if the U.S. holder held the Equity Unit or, in
the case of the Treasury securities, the Treasury security for more than one
year immediately before the disposition. Long-term capital gains of individuals
are eligible for reduced rates of taxation. The deductibility of capital losses
is subject to limitations. We summarize the rules governing the determination of
the character of gain or loss on the disposition of a senior note under "Senior
notes -- Sales, exchanges, remarketing or other taxable dispositions of senior
notes." Because gain or loss on disposition of a senior note may be treated as
ordinary income or loss, disposition of a Corporate Unit consisting of a warrant
and a senior note may give rise to capital gain or loss on the warrant and
ordinary income or loss on the senior note, which must be reported separately
for U.S. federal income tax purposes.
If the sale, exchange or other disposition of an Equity Unit occurs when
the warrant has a negative value, a U.S. holder should be considered to have
received additional consideration for the senior note or Treasury securities in
an amount equal to that negative value and to have paid that amount to be
released from the U.S. holder's obligations under the related warrant. Because,
as discussed below, any gain on the disposition of a senior note before the
interest rate reset generally will be treated as ordinary interest
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income for U.S. federal income tax purposes, the ability to off-set that
interest income with a loss on the warrant may be limited. U.S. holders should
consult their tax advisors regarding a disposition of an Equity Unit at a time
when the warrant has a negative value.
SENIOR NOTES
Original issue discount. Because of the manner in which the interest rates
on the senior notes are reset, we intend to take the position that the senior
notes are contingent payment debt instruments subject to the "noncontingent bond
method" for accruing original issue discount, as established in the applicable
Treasury Regulations and, under the senior indenture, each holder agrees to
treat the senior notes as indebtedness subject to the regulations governing
contingent payment debt instruments. The remainder of this disclosure assumes
that the senior notes are contingent payment debt instruments for U.S. federal
income tax purposes.
As discussed more fully below, the effects of applying this method will be
(1) to require each U.S. holder, regardless of the holder's usual method of tax
accounting, to use an accrual method with respect to the interest income on
senior notes, (2) to require each U.S. holder to accrue interest income in
excess of interest payments actually received for all accrual periods through
August 16, 2005 and possibly for accrual periods after that date, and (3)
generally to result in ordinary, rather than capital, treatment of any gain or
loss on the sale, exchange or other disposition of senior notes. (See "Sales,
exchanges, remarketing or other taxable dispositions of senior notes" below).
A U.S. holder will be required to accrue original issue discount on a
constant yield to maturity basis based on the "comparable yield" of the senior
notes. The comparable yield of the senior notes generally will be the rate at
which we would issue a fixed rate noncontingent debt instrument with terms and
conditions similar to the senior notes. We have determined that the comparable
yield on the senior notes is 4.80%.
The amount of original issue discount on a senior note for each accrual
period will be determined by multiplying the comparable yield of the senior
note, adjusted for the length of the accrual period, by the senior note's
adjusted issue price at the beginning of the accrual period. Based on the
allocation of the purchase price of each Equity Unit described above under
"-- Equity Units -- Allocation of purchase price," the adjusted issue price of
each senior note, per $25 of principal amount, at the beginning of the first
accrual period will be $25, and the adjusted issue price of each senior note at
the beginning of each subsequent accrual period will be equal to $25, increased
by any original issue discount previously accrued by the U.S. holder on the
senior note and decreased by the amount of projected payments (as described
below) on the senior note through that date. The amount of original issue
discount so determined will then be allocated on a ratable basis to each day in
the accrual period that the U.S. holder holds the senior note.
If, after the date on which the interest rate on the senior notes is reset
(or after November 16, 2005, if there is no successful remarketing), the
remaining amounts of principal and interest payable differ from the payments
stated on the applicable projected payment schedule, as described below,
negative or positive adjustments reflecting this difference should generally be
taken into account by the U.S. holder as adjustments to interest income in a
reasonable manner over the period to which they relate.
A projected payment schedule for a senior note subject to the noncontingent
bond method must include stated interest and principal payments on the senior
note and additional projected payments on the senior note in amounts such that
all projected payments produce a yield to maturity on the senior note equal to
the senior note's comparable yield, computed by taking into account the issue
price of the senior note. We have determined that the projected payments for the
senior notes, per $25 of principal amount, are $0.21 for the quarter ending on
February 16, 2003, $0.25 for each quarter ending thereafter on or before August
16, 2005 and $0.37 for each quarter ending after August 16, 2005 and that the
projected payment for the senior notes, per $25 of principal amount, at the
maturity date is $25.37, which includes the stated principal amount of the
senior notes as well as the final projected interest payment.
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A U.S. holder is generally bound by the comparable yield and projected
payment schedule provided by us under the terms of the Equity Units. We supply
the comparable yield and projected payment schedules solely for computing income
under the noncontingent bond method for U.S. federal income tax purposes. These
schedules do not constitute projections or representations as to the amounts
that a U.S. holder will actually receive as a result of owning senior notes or
Equity Units.
Tax basis in senior notes. A U.S. holder's tax basis in a senior note will
be equal to the portion of the purchase price for a Corporate Unit allocated to
the senior notes as described above under "-- Equity Units -- Allocation of
purchase price," increased by the amount of original issue discount included in
income with respect to the senior note and decreased by the amount of projected
payments with respect to the senior note through the computation date.
Sales, exchanges, remarketing or other taxable dispositions of senior
notes. A U.S. holder will recognize gain or loss on a disposition of senior
notes, including a redemption for cash or upon the remarketing of the senior
notes, in an amount equal to the difference between the amount realized by the
U.S. holder on the disposition of the senior notes and the U.S. holder's
adjusted tax basis in the senior notes. Selling expenses incurred by the U.S.
holder, including the remarketing fee, will reduce the amount of gain or
increase the amount of loss recognized by the U.S. holder upon a disposition of
senior notes. Gain recognized on the disposition of a senior note before the
date on which the interest rate on the senior notes is reset (or November 16,
2005, if there is no successful remarketing) will be treated as ordinary
interest income. Loss recognized on the disposition of a senior note before the
interest rate reset date (or November 16, 2005, if there is no successful
remarketing) will be treated as ordinary loss to the extent of the U.S. holder's
prior inclusions of original issue discount on the senior note reduced by coupon
payments received. Any loss in excess of this amount will be treated as a
capital loss. In general, gain recognized on the disposition of a senior note on
or after the interest rate reset date (or November 16, 2005, if there is no
successful remarketing) will be ordinary interest income to the extent
attributable to the excess, if any, of the total remaining principal and
interest payments due on the senior note over the total remaining payments
stated on the projected payment schedule for the senior note. Any gain
recognized in excess of this amount and any loss recognized on a disposition of
this kind will generally be treated as a capital gain or loss. Long-term capital
gains of individuals are eligible for reduced rates of taxation. There are
limitations on deductibility of capital losses.
WARRANTS
Acquisition of our common stock under a warrant. A U.S. holder generally
will not recognize gain or loss on the purchase of our common stock under a
warrant, except with respect to any cash paid to a U.S. holder in lieu of a
fractional share of our common stock, which should be treated as paid in
exchange for the fractional share. A U.S. holder's aggregate initial tax basis
in our common stock received under a warrant should generally equal the $25
payment made to us by the U.S. holder in respect of the warrant on the warrant
settlement date, plus the properly allocable portion of the U.S. holder's
adjusted tax basis, if any, in the warrant as described under " -- Equity
Units -- Allocation of purchase price," less the portion of the purchase price
and adjusted tax basis allocable to any fractional shares. The holding period
for our common stock received under a warrant will commence on the day of the
acquisition of the common stock.
Early settlement of a warrant. The purchase of our common stock on early
settlement of a warrant will be taxed as described above. A U.S. holder of
Equity Units will not recognize gain or loss on the return of the senior notes
or Treasury securities that are a component of the U.S. holder's Equity Units
upon early settlement of a warrant and will have the same adjusted tax basis and
holding period in the senior notes or Treasury securities as before the early
settlement.
Termination of a warrant. If a warrant terminates, a U.S. holder of Equity
Units will recognize a loss equal to the U.S. holder's adjusted tax basis, if
any, in the warrant at the time of the termination. Any loss of this kind will
be a capital loss. There are limitations on deductibility of capital losses. A
U.S. holder will not recognize gain or loss on the return of the senior notes or
Treasury securities that are
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represented by a U.S. holder's Equity Units upon termination of the warrant, and
the U.S. holder will have the same adjusted tax basis and holding period in the
senior notes or Treasury securities as before the termination.
Adjustment to settlement rate. A U.S. holder of Equity Units might be
treated as receiving a constructive dividend distribution from us if (1) the
settlement rate is adjusted and as a result of the adjustment the U.S. holder's
proportionate interest in our assets or earnings and profits is increased and
(2) the adjustment is not made under a bona fide, reasonable anti-dilution
formula. An adjustment in the settlement rate would not be considered made under
a formula of this kind if the adjustment were made to compensate a U.S. holder
for certain taxable distributions with respect to the common stock. Thus, under
certain circumstances, an increase in the settlement rate might give rise to a
taxable dividend to a U.S. holder of Equity Units even though the U.S. holder
would not receive any cash related to the increase in the settlement rate.
Warrant fees and deferred warrant fees. There is no direct authority
addressing the treatment, under current law, of the warrant fees or deferred
warrant fees, and such treatment is therefore unclear. Warrant fees and deferred
warrant fees may constitute taxable ordinary income to a U.S. holder when
received or accrued, in accordance with the U.S. holder's regular method of tax
accounting. We intend to file information returns that report warrant fees and
deferred warrant fees as taxable ordinary income to U.S. holders. U.S. holders
should consult their tax advisors concerning the treatment of warrant fee
payments and deferred warrant fee payments, including the possibility that any
warrant fees or deferred warrant fees may be treated as a loan, purchase price
adjustment, rebate or payment analogous to an option premium, rather than being
includible in income on a current basis.
The treatment of warrant fees and deferred warrant fees could affect a U.S.
holder's adjusted tax basis in a warrant or shares of our common stock received
under a warrant or the amount realized by a U.S. holder upon the sale of
disposition of an Equity Unit or the termination of a warrant. In particular,
- amounts received on sale or disposition of an Equity Unit or on
termination of a warrant with respect to any accrued but unpaid warrant
fees or deferred warrant fees that have not been included in a U.S.
holder's income may be treated as ordinary income;
- any warrant fees or deferred warrant fees that have been included in a
U.S. holder's income, but that have not been paid to the U.S. holder,
should increase the U.S. holder's adjusted tax basis in the warrant; and
- any warrant fees or deferred warrant fees that have been paid to a U.S.
holder, but that have not been included in the U.S. holder's income,
should either reduce the U.S. holder's adjusted tax basis in the warrant
or result in an increase in the amount realized on termination or
disposition of the warrant.
COMMON STOCK
Any taxable distribution on our common stock paid by us out of our current
or accumulated earnings and profits as determined for U.S. federal income tax
purposes will constitute a dividend and will be includible in income by a U.S.
holder when received. Any dividend of this kind will be eligible for the
dividends received deduction generally allowed to U.S. corporations in respect
of dividends received from other U.S. corporations if the U.S. holder is an
otherwise qualifying corporate holder that meets the holding period and other
requirements for the dividends received deduction. Upon a disposition of our
common stock, a U.S. holder will recognize capital gain or loss in an amount
equal to the difference between the amount realized and the U.S. holder's
adjusted tax basis in our common stock as described under
"Warrants -- Acquisition of our common stock under a warrant." Long-term capital
gains of individuals are eligible for reduced rates of taxation.
S-59
CREATION OF TREASURY UNITS AND RECREATION OF CORPORATE UNITS
Substitution of Treasury securities to create Treasury Units. A U.S.
holder of Corporate Units who delivers Treasury securities to the collateral
agent in substitution for senior notes or other pledged securities generally
will not recognize gain or loss upon the delivery of the Treasury securities or
the release of the senior notes or other pledged securities to the U.S. holder.
The U.S. holder will continue to take into account items of income otherwise
includible or deductions otherwise deductible by the U.S. holder with respect to
the Treasury securities and senior notes or other pledged securities, and the
warrant will not be affected by the delivery and release. For a discussion of
the tax consequences of holding Treasury securities, see "Treasury securities
purchased in connection with Equity Units," below.
Substitution of senior notes to recreate Corporate Units. A U.S. holder of
Treasury Units who delivers senior notes to the collateral agent in substitution
for pledged Treasury securities generally will not recognize gain or loss upon
the delivery of the senior notes or the release of the pledged Treasury
securities to the U.S. holder. The U.S. holder will continue to take into
account items of income otherwise includible or deductions otherwise deductible
by the holder with respect to the pledged Treasury securities and the senior
notes. The U.S. holder's tax basis in the senior notes, the pledged Treasury
securities and the warrant will not be affected by the delivery and release.
U.S. holders should consult their own advisors concerning the tax consequences
of purchasing, owning and disposing of the Treasury securities so released to
them.
TREASURY SECURITIES PURCHASED IN CONNECTION WITH EQUITY UNITS
A U.S. holder's initial basis in the Treasury securities purchased in
connection with an Equity Unit will be equal to the amount paid for the Treasury
securities.
In general, a U.S. holder will be required for U.S. federal income tax
purposes to recognize original issue discount on Treasury securities (other than
short-term Treasury securities, as defined below), on a constant yield basis,
regardless of the U.S. holder's method of tax accounting, and to recognize
acquisition discount on Treasury securities when it is paid or accrues generally
in accordance with the U.S. holder's normal method of tax accounting. U.S.
holders should consult their own tax advisors concerning the tax consequences of
purchasing, owning and disposing of the Treasury securities delivered to the
collateral agent.
For purposes of this discussion, a short-term Treasury security is any
Treasury security with a maturity of one year or less from the date of its issue
(or in the case of a Treasury strip, from the date of its purchase by the U.S.
holder). If a U.S. holder is on the cash method of accounting, it will generally
not include income on short-term Treasury securities until payment is received
on them. If a U.S. holder is on the accrual method of accounting, it will be
required to include acquisition discount in income over the remaining term of
the short-term Treasury securities and will increase its basis in the short-term
Treasury securities by the amount of acquisition discount included in income.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Unless a U.S. holder is an exempt recipient, such as a corporation,
payments under Equity Units, senior notes, warrants, Treasury securities or our
common stock, the proceeds received with respect to a fractional share of our
common stock upon the settlement of a warrants, and the proceeds received from
the sale of Equity Units, senior notes, warrant, Treasury securities or our
common stock, will be subject to information reporting and may also be subject
to U.S. federal backup withholding tax if the U.S. holder fails to supply
accurate taxpayer identification numbers or otherwise fails to comply with
applicable U.S. information reporting or certification requirements. Any amounts
withheld under the backup withholding rules will be allowed as a credit against
a U.S. holder's U.S. federal income tax liability provided the U.S. holder
provides the required information to the IRS.
S-60
CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion is a summary of the principal U.S. federal income
tax consequences resulting from the purchase, acquisition and ownership of
Equity Units by "non-U.S. holders." For purposes of this discussion, a "non-U.S.
holder" is a holder of an Equity Unit that is not a U.S. person. A "U.S. person"
is a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision of the United States, an estate to whom income U.S.
federal income taxation applies regardless of its source or a trust if (a) a
U.S. court is able to exercise primary supervision over the trust's
administration and (b) one or more U.S. persons have the authority to control
all of the trust's substantial decisions.
Current payments and dividends. The payment of interest, including gain on
the disposition of a senior note that is treated as interest, and amounts
attributable to original issue discount on the senior notes or Treasury
securities to a non-U.S. holder will not be subject to U.S. federal withholding
tax if: (1) in the case of senior notes, the non-U.S. holder does not actually
or constructively own 10% or more of the total voting power of all of our voting
stock and is not a controlled foreign corporation that is related to us within
the meaning of the Code, and (2) the beneficial owner of the senior note or
Treasury securities provides a statement signed under penalties of perjury that
includes its name and address and certifies that it is a non-U.S. holder in
compliance with applicable requirements or satisfies certain documentary
evidence requirements for establishing that it is a non-U.S. holder. If the
foregoing exceptions do not apply, payments on the senior notes or Treasury
securities with an original term longer than 183 days may be subject to gross
withholding at the rate of 30% or such lower rate as may be available to a
non-U.S. holder under an applicable treaty.
Dividend payments to non-U.S. holders in respect of our common stock will
be subject to U.S. withholding tax at a rate of 30% or such lower rate as may be
available to a non-U.S. holder under an applicable treaty.
Warrant Fees. Although the U.S. federal income tax treatment of payments
of warrant fees is unclear, we intend to take the position that warrant fees
paid to a non-U.S. holder constitute fixed or determinable annual or periodic
income, subject to withholding tax at a rate of 30%. A non-U.S. holder should,
however, consult its tax advisor concerning the treatment of warrant fees,
including the possibility that any warrant fees may be treated as a loan,
purchase price adjustment, rebate or payment analogous to an option premium.
Gain or loss on disposition. A non-U.S. holder will not be subject to U.S.
federal income tax on gain (other than gain on the disposition of a senior note
that is treated as interest) realized on the sale, exchange, maturity or
redemption of either a Corporate Unit, a Treasury Unit, a senior note, a
warrant, any Treasury securities, or any shares of our common stock unless (1)
the gain is effectively connected with the conduct by the holder of a trade or
business in the United States or (2) in the case of gain realized by an
individual holder, the holder is present in the United States for 183 days or
more in the taxable year of the sale and either (A) the gain or income is
attributable to an office or other fixed place of business maintained in the
United States by the holder or (B) the holder has a tax home in the United
States.
Information reporting and backup withholding. In general, backup
withholding and information reporting will not apply to payments made by us or
our paying agents, in their capacities as our paying agents, to a non-U.S.
holder as long as the income associated with the payments is otherwise exempt
from U.S. federal income tax and the holder has provided the required
certification that it is a non-U.S. holder, unless either we or our paying agent
has actual knowledge that the holder is a U.S. person.
S-61
UNDERWRITING
Chubb and the underwriters named below have entered into an underwriting
agreement with respect to the warrants and senior notes represented by the
Corporate Units. Subject to certain conditions, each underwriter has severally
agreed to purchase the number of warrants and the aggregate principal amount of
senior notes represented by the number of Corporate Units set forth in the
following table.
NUMBER OF
NAME CORPORATE UNITS
---- ---------------
Goldman, Sachs & Co. ....................................... 8,400,000
Salomon Smith Barney Inc. .................................. 8,400,000
Credit Suisse First Boston Corporation...................... 1,400,000
Deutsche Bank Securities Inc. .............................. 1,400,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 1,400,000
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Total................................................. 21,000,000
==========
If the underwriters sell more warrants and senior notes represented by
Corporate Units than the total number set forth in the table above, the
underwriters have an option to buy warrants and senior notes represented by up
to an additional 3,000,000 Corporate Units from us to cover such sales. They may
purchase those additional warrants and senior notes within a 13 day period
beginning on the date of first issuance of the Corporate Units. If any warrants
and senior notes represented by Corporate Units are purchased pursuant to this
option, the underwriters will severally purchase Corporate Units in
approximately the same proportion as set forth above.
The following table summarizes the underwriting discounts and commissions
we will pay.
NO EXERCISE FULL EXERCISE
----------- -------------
Per Corporate Unit......................................... $ 0.75 $ 0.75
Total...................................................... $15,750,000 $18,000,000
Corporate Units sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the cover of this
prospectus supplement. Any Corporate Units sold by the underwriters to
securities dealers may be sold at a discount from the initial public offering
price of up to $0.45 per Corporate Unit. Any such securities dealers may resell
any Corporate Units purchased from the underwriters to certain other brokers or
dealers at a discount from the initial public offering price of up to $0.10 per
Corporate Unit. If all the Corporate Units are not sold at the initial offering
price, the underwriters may change the offering price and the other selling
terms.
The warrants and the senior notes are new issues of securities with no
established trading market. We have been advised by the underwriters that the
underwriters intend to make a market in the Corporate Units but are not
obligated to do so and may discontinue market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for the
Corporate Units.
In connection with this offering, the underwriters may purchase and sell
the Corporate Units in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of Corporate Units than they are required to purchase in this offering.
"Covered" short sales are sales made in an amount not greater than the
underwriters' option to purchase additional Corporate Units from us in the
offering. The underwriters may close out any covered short position by either
exercising their option to purchase additional Corporate Units or purchasing
Corporate Units in the open market. In determining the source of Corporate Units
to close out the covered short position, the underwriters will consider, among
other things, the price of Corporate Units available for purchase in the open
market as compared to the price at which they may purchase Corporate Units
through the overallotment option. "Naked" short sales are any sales in excess of
such option. The underwriters must close out any naked short position by
S-62
purchasing Corporate Units in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the Corporate Units in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the
Corporate Units while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased the
Corporate Units sold by or for the account of such underwriter in stabilizing or
short-covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Corporate Units. As a result, the price of the
Corporate Units may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected in the
over-the-counter market or otherwise.
Each underwriter has represented, warranted and agreed that:
- it has not offered or sold and, prior to the expiry of a period of six
months from the closing date, will not offer or sell any Corporate Units
included in this offering to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations
1995;
- it has only communicated and caused to be communicated and will only
communicate or cause to be communicated any invitation or inducement to
engage in investment activity (within the meaning of section 21 of the
Financial Services and Markets Act 2000 ("FSMA")) received by it in
connection with the issue or sale of any Corporate Units included in this
offering in circumstances in which section 21(1) of the FSMA does not
apply to us;
- it has complied and will comply with all applicable provisions of the
FSMA with respect to anything done by it in relation to the Corporate
Units included in this offering in, from or otherwise involving the
United Kingdom; and
- the offer in The Netherlands of the Corporate Units included in this
offering is exclusively limited to persons who trade or invest in
securities in the conduct of a profession or business (which include
banks, stockbrokers, insurance companies, pension funds, other
institutional investors and finance companies and treasury departments of
large enterprises).
We estimate that our share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$500,000.
We and our executive officers and directors have agreed that, for a period
of 90 days from the date of this prospectus supplement, we and they will not,
without the prior written consent of Goldman, Sachs & Co. and Salomon Smith
Barney, dispose of, hedge or file with the SEC a registration statement under
the Securities Act with respect to, any shares of our common stock or any
securities convertible into or exchangeable for our common stock. The foregoing
sentence shall not apply to (i) the exercise of options outstanding as of the
date of this prospectus supplement, (ii) dispositions of common stock by such
executive officers or directors by gift to members of such directors' or
officers' immediate families or to trusts established for the benefit of members
of such directors' or officers' immediate families (provided that any such
recipient agrees in writing as a condition to receiving such common stock to be
bound by the foregoing restrictions), (iii) dispositions of common stock by such
executive officers or directors by bona fide gift to charitable organizations,
(iv) our issuance of stock options and restricted stock to employees, provided
that such options are not exercisable, and such restricted stock grants do not
vest, before the expiration of the 90-day period, (v) our issuance and sale of
common stock pursuant to any employee stock option plan, stock ownership plan or
dividend reinvestment plan in effect on the date of
S-63
this prospectus supplement and (vi) our issuance of common stock issuable upon
the conversion of securities or the exercise of warrants outstanding on the date
of this prospectus supplement. Goldman, Sachs & Co. and Salomon Smith Barney in
their sole discretion may release any of the securities subject to these lock-up
agreements at any time without notice.
This prospectus supplement and the accompanying prospectus, as amended or
supplemented, may be used in connection with the early settlement of the
warrants and the remarketing of the senior notes.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
From time to time, the underwriters and certain of their affiliates have
engaged, and may in the future engage, in transactions with, and perform
services for, us and our affiliates in the ordinary course of business.
Citigroup Inc., the ultimate parent of Salomon Smith Barney Inc., one of the
underwriters, holds 9,567,208 shares of our common stock (substantially all of
which are held on behalf of third parties), or approximately 5.6% of our
outstanding shares of common stock based on the number of shares outstanding at
October 31, 2002. In addition, affiliates of Salomon Smith Barney Inc. and
Deutsche Bank Securities Inc., another underwriter, are lenders under, and
perform certain other roles with respect to, certain of our credit facilities.
LEGAL MATTERS
The validity of the warrants and the senior notes will be passed upon for
Chubb by Cleary, Gottlieb, Steen & Hamilton, New York, New York and for the
underwriters by Davis Polk & Wardwell. Cleary, Gottlieb, Steen & Hamilton and
Davis Polk & Wardwell will rely as to all matters of New Jersey law upon the
opinion of Drinker Biddle & Shanley LLP, Florham Park, New Jersey, New Jersey
counsel to Chubb.
EXPERTS
The consolidated financial statements and schedules incorporated by
reference or appearing in The Chubb Corporation's Annual Report on Form 10-K for
the year ended December 31, 2001 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included or incorporated by
reference therein and incorporated herein by reference. Such consolidated
financial statements and schedules are incorporated herein by reference in
reliance upon such reports given on the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, as well as proxy statements
and other information with the SEC. You may read and copy any document we file
with the SEC, including the registration statement, at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
further information about the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public over
the Internet at the SEC's web site at http://www.sec.gov, which contains
reports, proxy statements and other information regarding registrants like us
that file electronically with the SEC.
In addition, our common stock is listed on the New York Stock Exchange, and
such reports and other information concerning us may also be inspected at their
offices at 20 Broad Street, New York, New York 10005. Our common stock's ticker
symbol is "CB."
This prospectus supplement is part of a registration statement on Form S-3
filed by us with the SEC under the Securities Act of 1933. As permitted by SEC
rules, this prospectus supplement does not contain all of the information
included in the registration statement and the accompanying exhibits filed with
the SEC. You may refer to the registration statement and its exhibits for more
information.
S-64
The SEC allows us to "incorporate by reference" into this prospectus
supplement the information we file with the SEC. This means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus supplement. If we subsequently file updating or superseding
information in a document that is incorporated by reference into this prospectus
supplement, the subsequent information will also become part of this prospectus
supplement and will supersede the earlier information.
We are incorporating by reference the following documents that we have
filed with the SEC:
- our Annual Report on Form 10-K for the year ended December 31, 2001; and
- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002,
June 30, 2002 and September 30, 2002.
The preceding list supersedes and replaces the documents listed in the
accompanying prospectus under the heading "Incorporation of Certain Documents by
Reference."
We are also incorporating by reference into this prospectus supplement all
of our future filings with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 until this offering has been completed.
You may obtain a copy of any of our filings that are incorporated by
reference, at no cost, by contacting us at:
The Chubb Corporation
15 Mountain View Road
Warren, New Jersey 07061-1615
Attention: Corporate Secretary
Telephone: (908) 903-2000
S-65
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO PRESENT ANYTHING NOT IN THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR
REPRESENTATIONS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE
AN OFFER TO SELL ONLY THE SECURITIES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS
CURRENT ONLY AS OF ITS DATE.
---------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary............................... S-1
Risk Factors.......................... S-15
Cautionary Statement About Forward-
Looking Statements.................. S-25
Accounting Treatment.................. S-26
Use of Proceeds....................... S-27
Ratio of Earnings to Fixed Charges.... S-27
Capitalization........................ S-28
Price Range of Common Stock and
Dividend Policy..................... S-29
Description of the Equity Units....... S-30
Description of the Warrants........... S-34
Certain Provisions of the Warrants.... S-47
Description of the Senior Notes....... S-51
U.S. Federal Income Tax............... S-55
Underwriting.......................... S-62
Legal Matters......................... S-64
Experts............................... S-64
Where You Can Find More Information... S-64
PROSPECTUS
The Chubb Corporation................. 3
Where You Can Find More Information... 3
Cautionary Statement Regarding
Forward-Looking Statements.......... 4
Use of Proceeds....................... 6
Ratio of Consolidated Earnings to
Fixed Charges....................... 6
Description of Debt Securities........ 7
Description of Capital Stock.......... 13
Description of the Warrants........... 19
Plan of Distribution.................. 21
Legal Matters......................... 21
Experts............................... 22
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21,000,000 COMMON STOCK
PURCHASE WARRANTS
$525,000,000
4.00% SENIOR NOTES
DUE 2007
IN THE FORM OF
7.00% EQUITY UNITS
[CHUBB CORP. LOGO]
THE CHUBB CORPORATION
---------------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
---------------------
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANK SECURITIES
MERRILL LYNCH & CO.
---------------------
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