-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VuyZ6KFfFUoQIB9SzOv/HBzo+JzQzz2WzfDTQt1m0UeSUqtqAaSZGgb7XhiccoeK x7lpcQsZalmH4yCtJDCb6w== 0000898080-08-000054.txt : 20080417 0000898080-08-000054.hdr.sgml : 20080417 20080417155935 ACCESSION NUMBER: 0000898080-08-000054 CONFORMED SUBMISSION TYPE: PREM14A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20080417 DATE AS OF CHANGE: 20080417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL ATLANTIC HOLDINGS CORP CENTRAL INDEX KEY: 0000946492 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: NJ FILING VALUES: FORM TYPE: PREM14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-51127 FILM NUMBER: 08762198 BUSINESS ADDRESS: STREET 1: 4 PARAGON WAY CITY: FREEHOLD STATE: NJ ZIP: 07728 BUSINESS PHONE: 9087800700 MAIL ADDRESS: STREET 1: 4 PARAGON WAY CITY: FREEHOLD STATE: NJ ZIP: 07728 PREM14A 1 formprem14a.txt PROXY STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant |X| Filed by a Party other than the Registrant |_| Check the appropriate box: |X| Preliminary Proxy Statement |_| Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |_| Definitive Proxy Statement |_| Definitive Additional Materials |_| Soliciting Material Pursuant to s.240.14a-12 National Atlantic Holdings Corporation (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): |_| No fee required. |X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: Common Stock, no par value, of National Atlantic Holdings Corporation ("National Atlantic Common Stock") (2) Aggregate number of securities to which transaction applies: 11,007,487 shares of National Atlantic Common Stock Options to purchase 174,150 shares of National Atlantic Common Stock Stock appreciation rights with respect to 542,002 shares of National Atlantic Common Stock (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): The filing fee was determined based upon the sum of (A) 11,007,487 shares of National Atlantic Common Stock multiplied by $6.25 per share; (B) options to purchase 174,150 shares of National Atlantic Common Stock with exercise prices less than $6.25 multiplied by $3.06 (which is the difference between $6.25 and the weighted average exercise price of such options of $3.19 per share); and (C) stock appreciation rights with respect to 60,000 shares of National Atlantic Common Stock with exercise prices less than $6.25 multiplied by $2.32 (which is the difference between $6.25 and the average exercise price of such stock appreciation rights of $3.93 per share). (4) Proposed maximum aggregate value of transaction: $69,468,892.75 (5) Total fee paid: $13,894 |_| Fee paid previously with preliminary materials. |_| Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: National Atlantic Holdings Corporation 4 Paragon Way Freehold, New Jersey 07728 [ ], 2008 Dear Shareholder: On behalf of the Board of Directors of National Atlantic Holdings Corporation, I am pleased to invite you to a special meeting of the Shareholders of National Atlantic to be held on [ ], 2008 at [ ].m. [East Windsor, New Jersey] time. The special meeting will take place at [the National Conference Center at the Holiday Inn, located at 399 Monmouth Street, East Windsor, New Jersey]. At the special meeting, we will ask you to approve (i) the Agreement and Plan of Merger ("Merger Agreement") dated as of March 13, 2008 and subsequently amended and restated, among Palisades Safety and Insurance Association, Apollo Holdings, Inc., and National Atlantic and the merger contemplated thereby (the "Merger") and (ii) any adjournment or postponement of the special meeting, if deemed necessary or appropriate, to solicit additional proxies in the event there are not sufficient votes represented in person or by proxy at the time of the special meeting to approve the Merger Agreement. If the Merger is completed, each share of common stock of National Atlantic issued and outstanding immediately prior to the Merger will be converted into the right to receive $6.25 in cash, without interest and less any applicable withholding taxes, as more fully described in the accompanying proxy statement. The National Atlantic Board of Directors has approved the Merger Agreement and the Merger, and has declared the Merger Agreement, the Merger and other transactions contemplated by the Merger Agreement advisable and in the best interests of National Atlantic and its shareholders. The National Atlantic Board of Directors recommends that you vote "FOR" the proposal to approve the Merger Agreement and the Merger and "FOR" the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes in favor of the approval of the Merger Agreement and Merger at the time of the special meeting. The Merger may not be completed unless it is approved by the affirmative vote of the majority of the votes cast by holders of shares of Company common stock at the special meeting. The proxy statement accompanying this letter provides you with more specific information concerning the special meeting, the Merger Agreement and the transactions contemplated by the Merger Agreement. We encourage you to carefully read the accompanying proxy statement, including the appendices. Your vote is very important. If you fail to vote by proxy or in person, or fail to instruct your broker or other nominee on how to vote, it will have no effect on the vote to approve the Merger Agreement and Merger. Whether or not you plan to attend the special meeting, please take time to vote by completing and mailing to us the enclosed proxy card as soon as possible. If your shares are held in an account at a brokerage firm, bank or other nominee, you should instruct your broker, bank or other nominee how to vote your shares using the separate voting instruction form furnished by your broker, bank or other nominee. The enclosed proxy card contains instructions regarding voting. Thank you for your cooperation and support. Sincerely, James V. Gorman Chief Executive Officer of National Atlantic Holdings Corporation This proxy statement is dated [ ], 2008 and is first being mailed to shareholders on or about [ ], 2008. National Atlantic Holdings Corporation 4 Paragon Way Freehold, New Jersey 07728 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To be Held [ ], 2008 To the Shareholders: Notice is hereby given that the special meeting of shareholders of National Atlantic Holdings Corporation (the "Company") will be held at [ ]:00 a.m. [East Windsor, New Jersey] time, on [ ], 2008, at [the National Conference Center at the Holiday Inn, located at 399 Monmouth Street, East Windsor, New Jersey]. The purposes of the special meeting will be to consider and vote upon: o a proposal to approve the Agreement and Plan of Merger (the "Merger Agreement") dated as of March 13, 2008 and subsequently amended and restated, among Palisades Safety and Insurance Association, Apollo Holdings, Inc., and the Company and the Merger; o a proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes represented in person or by proxy to approve the Merger Agreement at the time of the special meeting; and o the transaction of such other business as may properly come before the special meeting or any adjournment or postponement thereof. Only those persons who were holders of record of shares of Company common stock at the close of business on [ ], 2008 will be entitled to notice of, and to attend and to vote, at the special meeting or any adjournment or postponement thereof. As of the record date, there were [ ] shares of Company common stock outstanding. Each shareholder is entitled to one vote for each common share owned on the record date. If you own shares through a broker or other nominee and you want to have your vote counted, you must instruct your broker or nominee to vote. The affirmative vote of a majority of the votes cast by holders of shares of Company common stock at the special meeting is required to approve the Merger Agreement. Our Board of Directors has approved the Merger Agreement and the Merger and has determined that the Merger Agreement, the Merger and other transactions contemplated by the Merger Agreement are in the best interests of the Company and its shareholders. The Company's Board of Directors recommends that shareholders vote "FOR" the proposal to approve the Merger Agreement and the Merger and "FOR" the proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies. By Order of the Board of Directors, Douglas A. Wheeler, Esq. Secretary Dated [ ], 2008 EVERY SHAREHOLDER'S VOTE IS IMPORTANT. IF YOU ARE UNABLE TO BE PRESENT AT THE SPECIAL MEETING, YOU ARE REQUESTED TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD SO THAT YOUR SHARES OF COMMON STOCK WILL BE REPRESENTED. A POSTAGE PAID, ADDRESSED ENVELOPE FOR MAILING IS ENCLOSED FOR YOUR CONVENIENCE. INSTRUCTIONS FOR DOING SO ARE PROVIDED IN THE PROXY STATEMENT AND ON THE PROXY CARD. TABLE OF CONTENTS PAGE SUMMARY........................................................................1 QUESTIONS AND ANSWERS..........................................................6 RISK FACTORS...................................................................9 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.....................11 THE SPECIAL MEETING...........................................................12 Time, Place and Purpose of the Special Meeting...........................12 Record Date, Quorum and Required Vote....................................12 How Shares Will Be Voted at the Special Meeting..........................12 How to Vote Your Shares..................................................13 Vote by Proxy..................................................13 Vote at the Special Meeting....................................13 How to Change or Revoke Your Vote........................................13 Solicitation of Proxies..................................................13 Adjournments and Postponements...........................................14 THE MERGER....................................................................15 Background of the Merger.................................................15 Reasons for the Merger...................................................21 Opinion of Financial Advisor.............................................24 Interests of National Atlantic's Directors and Executive Officers in the Merger...............................................30 Treatment of Options and Other Awards....................................30 Options........................................................30 Stock Appreciation Rights......................................31 Indemnification and Benefits Provisions in the Merger Agreement..........32 Change of Control Transactions...........................................32 Recommendation of Our Board of Directors.................................33 Certain U.S. Federal Income Tax Consequences.............................33 Certain Effects of the Merger............................................35 Effects on the Company and Our Shareholders If the Merger Is Not Completed..............................................................35 Regulatory Matters.......................................................36 Voting Agreement.........................................................37 Delisting and Deregistration of Common Stock.............................37 Litigation Relating to the Merger........................................37 THE MERGER AGREEMENT..........................................................38 Structure and Effective Time.............................................38 Merger Consideration.....................................................38 Treatment of Company Equity Awards.......................................38 Options........................................................38 Stock Appreciation Rights......................................38 Exchange of Share Certificates...........................................39 Representations and Warranties...........................................39 Conduct of Business Pending Merger.......................................41 Preparation of Proxy Statement; Shareholders Meetings....................42 Access to Information; Confidentiality...................................43 Reasonable Best Efforts..................................................43 i Acquisition Proposals....................................................44 Fees and Expenses........................................................46 Certain Actions..........................................................46 Indemnification..........................................................46 Benefit Plans............................................................47 Non-Compete..............................................................47 Other Covenants and Agreements...........................................48 Conditions Precedent.....................................................48 Termination..............................................................50 Termination Fee..........................................................51 Termination Damages......................................................51 Governing Law............................................................52 Amendment, Extension and Waiver..........................................52 THE VOTING AGREEMENT..........................................................53 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS...............................54 SHAREHOLDINGS OF DIRECTORS AND MANAGEMENT.....................................54 MARKET PRICE OF NATIONAL ATLANTIC HOLDINGS CORPORATION COMMON STOCK...........56 MULTIPLE SHAREHOLDERS SHARING ONE ADDRESS.....................................57 FUTURE SHAREHOLDERS PROPOSALS.................................................57 OTHER MATTERS.................................................................57 WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION...................................57 EXHIBITS Exhibit A -- Agreement and Plan of Merger, dated March 13, 2008 and subsequently amended and restated A-1 Exhibit B -- Voting Agreement B-1 Exhibit C -- Opinion of Banc of America Securities LLC, dated March 9, 2008 C-1 Exhibit D -- Form of Amended and Restated Certificate of Incorporation and Bylaws D-1 ii SUMMARY This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you as a Company shareholder or that you should consider before voting on the Merger. To understand the Merger more fully, you should carefully read this entire proxy statement and all of its Exhibits, including the Merger Agreement, which is attached as Exhibit A, before voting on whether to approve the Merger Agreement. We prepared and supplied all information in this proxy statement, except for the descriptions of Palisades Safety and Insurance Association and Apollo Holdings, Inc., which were supplied by Palisades. We encourage you to carefully read this entire document and the documents to which we have referred you. In this proxy statement, the terms "National Atlantic", "Company," "we", "our", "ours", and "us" refer to National Atlantic Holdings Corporation. Capitalized terms used in this section are defined elsewhere in this proxy statement or in the Merger Agreement, which is attached hereto as Exhibit A. The Parties to the Merger (page ) National Atlantic Holdings Corporation 4 Paragon Way Freehold, New Jersey 07728 National Atlantic Holdings Corporation (the "Company"), based in Freehold, New Jersey, was established in 1994. National Atlantic Holdings Corporation and its subsidiaries provide property and casualty insurance and insurance-related services to individuals, families and businesses in the State of New Jersey. The Company's flagship insurance product to personal insurance customers is the "High Proformance Policy." This product is designed to attract a broad spectrum of New Jersey residents for their private passenger automobile, homeowners, and personal excess and specialty property liability coverage. For businesses, the Company offers a range of commercial insurance products, including commercial property, commercial general liability, and business auto, as well as claims administrative services to self-insured corporations. The Company distributes its products exclusively through independent insurance agents, known as "Partner Agents," who are required to become shareholders in the Company in order to represent the Company as an agent. The Company offers insurance products through its subsidiary, Proformance Insurance Company, and insurance-related services through Riverview Professional Services and the National Atlantic Insurance Agency. As of December 31, 2007, Proformance Insurance Company was the twelfth largest provider of private passenger auto insurance in New Jersey, based on direct written premiums of companies writing more than $5 million of premiums annually over the past three years, according to A.M. Best Company. Palisades Safety and Insurance Association Connell Corporate Center II 2 Connell Drive Berkeley Heights, New Jersey 07922 Palisades Safety and Insurance Association ("Palisades"), based in New Jersey, is an independent agency company that is committed to providing competitive rates for safe drivers and exceptional customer service to New Jersey drivers. Insurance is underwritten by Palisades Safety and Insurance Association and Palisades Insurance Company. Apollo Holdings, Inc. c/o Palisades Safety and Insurance Association Connell Corporate Center II 2 Connell Drive Berkeley Heights, New Jersey 07922 Apollo Holdings, Inc. (the "Merger Sub"), a New Jersey corporation, is a direct, wholly owned subsidiary of Palisades and was formed solely for the purpose of consummating the Merger. The Merger Sub is not engaged in any business except as contemplated by the Merger Agreement. It is anticipated that, subject to the terms and conditions of the Merger Agreement, the Merger Sub will be merged with and into the Company resulting in the 1 Company becoming a wholly owned subsidiary of Palisades. The Merger Sub's separate existence will end upon the consummation of the Merger. The Special Meeting (page ) Date, Time and Place This proxy statement is being furnished to Company shareholders as part of the solicitation of proxies by the Company's Board of Directors for use at the special meeting to be held on [ ], 2008 at [ ].m., [East Windsor, New Jersey], at the [the National Conference Center at the Holiday Inn, located at 399 Monmouth Street, East Windsor, New Jersey]. Matters to be Considered You will be asked to consider and vote upon the approval of the Merger Agreement and the Merger. In addition, we are also asking for you to approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes represented in person or by proxy to approve the Merger Agreement and the Merger at the time of the special meeting. Record Date and Quorum If you own shares of Company common stock at the close of business on [ ], 2008, the record date for the special meeting, you will be entitled to vote at the special meeting. You have one vote for each share of Company common stock owned on the record date. As of [ ], 2008, there were [ ] shares of Company common stock outstanding. Required Vote Approval of the Merger Agreement and the Merger requires the affirmative vote of a majority of the votes cast by the holders of shares of Company common stock at the special meeting. As a condition to the execution of the Merger Agreement, James V. Gorman executed a voting agreement pursuant to which he agreed, among other things, to vote his shares in favor of the recommendation of the Board of Directors to the holders of shares of common stock. As of the record date, Mr. Gorman is entitled to vote 1,512,140 shares of Company common stock, representing [] percent of shares of Company common stock outstanding and entitled to vote as of the record date. Abstentions and broker non-votes will be counted as present for determining the presence or absence of a quorum for the transaction of business at the special meeting. Abstentions and broker non-votes will have no effect on the vote to approve the Merger Agreement and the Merger. The proposal to adjourn or postpone the special meeting, if necessary or appropriate, requires the affirmative vote of a majority of the votes cast by the holders of shares of Company common stock represented in person or by proxy at the special meeting. Abstentions and broker non-votes will have no effect on the vote to adjourn or postpone the special meeting. Voting by Proxy You may submit your proxies by mail. Instructions for submitting your proxies are included on the proxy card. If you hold your shares through a broker or other nominee, you should follow the separate voting instructions, if any, provided by the broker or other nominee with the proxy statement. Please contact your broker or nominee to determine how to vote. If you intend to submit your proxy by mail it must be received by the Company prior to the commencement of voting at the special meeting. Revocability of Proxy If your shares of Company common stock are in your name as a shareholder of record, you may change or revoke your proxy at any time so long as the change or revocation is received by the Company before the vote is taken at the special meeting. You may change or revoke your vote by: 2 o Submitting a later-dated proxy card; o Notifying in writing our Secretary, Douglas A. Wheeler, Esq., at 4 Paragon Way, Freehold, New Jersey 07728; or o Voting in person at the special meeting (your attendance alone will not, by itself, revoke your proxy). If your shares of Company common stock are held in street name by a broker or nominee, you should follow the instructions of your broker or nominee regarding the change or revocation of proxies. Contact your broker or nominee to determine how to change or revoke your proxy. Adjournment and Postponement Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies if there are not sufficient votes to approve the Merger Agreement and the Merger at the time of the special meeting. To adjourn the special meeting for this purpose, the affirmative vote of a majority of the votes cast by the holders of shares of Company common stock represented at the meeting, whether in person or by proxy, is required to approve the proposal to adjourn the special meeting. The adjournment or postponement proposal only relates to an adjournment of the special meeting for the purpose of soliciting additional proxies for the approval of the proposal to approve the Merger Agreement and to approve of the Merger. Shares Owned by Company Directors and Executive Officers As of [ ], 2008, our Directors and Executive Officers owned approximately [ ] of the outstanding shares of Company common stock. Background of the Merger (page ) A description of the process we undertook, which led to the proposed Merger, including our discussions with Palisades, is included in the proxy statement under "THE MERGER--Background of the Merger." The Merger Agreement (Exhibit A) (page ) Structure and Effective Time The Merger Agreement provides for the acquisition of the Company by Palisades through a Merger of the Merger Sub with and into the Company with the Company continuing as the surviving entity. Immediately following the Merger, the Company will be a wholly-owned subsidiary of Palisades. We sometimes refer to National Atlantic after the completion of the Merger as the surviving corporation. The effective time of the Merger shall occur at the time of filing of the Certificate of Merger with the Secretary of State of the State of New Jersey, in such form as required by, and executed in accordance with the relevant provisions of, the New Jersey Business Corporation Act, or at such time thereafter as is provided in the Certificate of Merger (the "Effective Time"). We expect to complete the Merger during the third quarter of 2008. Merger Consideration Each common share of the Company, which we refer to as the "shares of Company common stock," issued and outstanding immediately prior to the Effective Time (other than shares of Company common stock owned by us and our subsidiaries) will be converted into the right to receive $6.25 in cash, without interest. The cash into which the shares of Company common stock and outstanding awards are to be exchanged, subject to adjustment as provided in the Merger Agreement, is referred to herein as the "Merger Consideration." Payment Procedures Promptly after the Effective Time of the Merger, Palisades shall cause the exchange agent to mail a letter of transmittal and instructions to each holder of shares of Company common stock. The letter of transmittal and instructions will tell you how to surrender your Company share certificates or shares you may hold represented by book entry in exchange for the Merger Consideration. You will not be entitled to receive the Merger Consideration 3 until you surrender your stock certificate or certificates (or book-entry shares) to the Exchange Agent, together with a duly completed and executed letter of transmittal and any other documents as may be required by the letter of transmittal. Any portion of the Merger Consideration remaining unclaimed by holders of the Company common stock as of a date that is immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity shall, to the extent permitted by applicable law, become the property of the surviving corporation free and clear of any claims or interest of any person previously entitled thereto. Conditions to Completion of the Merger The Merger is subject to approval by the New Jersey Department of Banking and Insurance. Our obligations and the obligations of Palisades to complete the Merger are subject to the satisfaction or waiver of other specified conditions set forth in the Merger Agreement, including a minimum level of shareholders equity of the Company and total capital and surplus of Proformance Insurance Company, and an A.M. Best Financial Strength Rating of Proformance Insurance Company of at least "B-" or better. See "THE MERGER AGREEMENT-Conditions Precedent" beginning on page [ ]. Acquisition Proposals We have agreed not to take certain actions that would solicit or encourage an alternative proposal to the Merger. However, under certain circumstances, and in furtherance of our fiduciary duties under New Jersey law, we may respond to an unsolicited alternative proposal. We have also agreed to recommend to our shareholders the approval of the Merger, unless our Board of Directors determines in good faith, after consultation with outside legal counsel, that taking such action would violate its fiduciary duties to shareholders of National Atlantic under applicable law. We describe these provisions in more detail under "THE MERGER AGREEMENT-Acquisition Proposals" beginning on page [ ]. Termination of the Merger Agreement The Merger Agreement will terminate upon mutual written consent by us and Palisades. In addition, we or Palisades may terminate the Merger Agreement under specified circumstances set forth in the Merger Agreement. Termination Fees if the Merger Is Not Completed We must pay Palisades a termination fee of $2,100,000 if the Merger Agreement is terminated under certain circumstances (and reimbursement of expenses of up to $1,500,000 in certain circumstances). For more information on the termination fee, please see the section entitled "THE MERGER AGREEMENT--Termination Fee." Furthermore, if the Company's shareholders fail to approve the Merger, we must reimburse the expenses incurred by Palisades in connection with the Merger Agreement and the Merger, subject to a $1,500,000 cap. Palisades has agreed to pay the Company termination damages in various amounts ranging from $8,000,000 to $1,000,000 in the event that the Merger is not completed for various reasons. The payment of any such fees is the Company's sole and exclusive remedy against Palisades and the Merger Sub for failure to complete the Merger. See "THE MERGER AGREEMENT--Termination Damages." Recommendation of Our Board of Directors (page ) Our Board of Directors has approved and adopted the Merger Agreement and the Merger and recommends that our shareholders vote "FOR" the approval of the Merger Agreement and the Merger. In reaching that recommendation, our Board considered a variety of business, financial, and market factors, and consulted with our financial advisor and legal counsel. See "THE MERGER--Recommendation of Our Board of Directors." 4 Opinion of Financial Advisor In connection with the Merger, Banc of America Securities LLC, the Company's financial advisor, delivered to our Board of Directors a written opinion, dated March 9, 2008, as to the fairness, from a financial point of view and as of the date of the opinion, of the consideration to be received by holders of Company common stock. The full text of the written opinion, dated March 9, 2008, of Banc of America Securities, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Exhibit C to this document and is incorporated by reference herein in its entirety. Banc of America Securities provided its opinion to our Board of Directors for the benefit and use of our Board of Directors in connection with and for purposes of its evaluation of the consideration from a financial point of view. Banc of America Securities' opinion does not address any other term or aspect of the Merger and does not constitute a recommendation to any shareholder as to how to vote or act in connection with the proposed Merger. See "THE MERGER--Opinion of Financial Advisor." Interests of the Company's Directors and Executive Officers in the Merger (page ) In considering the recommendation of the Board of Directors, you should be aware that our Directors and executive officers may have interests in the Merger that are different from, or in addition to, your interests as a shareholder and that may present actual or potential conflicts of interest. See "THE MERGER--Interest of National Atlantic's Directors and Executive Officers in the Merger." Effects on the Company and our Shareholders if the Merger is not Completed (page ) If the Merger is not approved by our shareholders or if the Merger is not completed for any other reason, our shareholders will not receive any payment for their shares in connection with the Merger. Instead, the Company will remain an independent public company. In addition, if the Merger Agreement is terminated under certain circumstances, the Company may be obligated to pay a $2,100,000 termination fee to Palisades. Furthermore, if the Company's shareholders fail to approve the Merger, we must reimburse the expenses incurred by Palisades in connection with the Merger Agreement and the Merger, subject to a $1,500,000 cap. Certain U.S. Federal Income Tax Consequences (page ) The Merger will be considered a taxable transaction for U.S. federal income tax purposes, and may also be a taxable transaction under applicable state, local and other tax laws. You should consult your own tax advisor for a full understanding of the tax consequences of the Merger to you in light of your particular circumstances. See "THE MERGER--Certain U.S. Federal Income Tax Consequences." Regulatory Matters (page ) Under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Merger may not be completed until we and Palisades have made certain filings with the United States Federal Trade Commission and the United States Department of Justice and the applicable waiting period has expired or been terminated. On March 27, 2008, we and Palisades filed notification reports under the HSR Act with the Federal Trade Commission and the Department of Justice. On April 4, 2008, the Federal Trade Commission granted early termination of the waiting period under the HSR Act with respect to the Merger. The Merger is also subject to state statutes and regulations regarding the insurance industry. Because the Company is domiciled in New Jersey, New Jersey law requires that, prior to the acquisition of an insurance company, the acquiring party must obtain approval from the insurance commissioner of the New Jersey Department of Banking and Insurance. Accordingly, on April 3, 2008, Palisades filed a draft of the necessary application with the New Jersey Department of Banking and Insurance. The Merger is conditioned upon obtaining approval from the New Jersey Department of Banking and Insurance. 5 QUESTIONS AND ANSWERS The following questions and answers are intended to address briefly some commonly asked questions regarding the special meeting and the proposed Merger. These questions and answers may not address all questions that may be important to you as a shareholder. You should read the more detailed information contained elsewhere in this proxy statement, the appendices to this proxy statement and the documents referred to in this proxy statement. Except as otherwise specifically noted in this proxy statement, "Company," "we," "our," "us" and similar words in this proxy statement refer to National Atlantic Holdings Corporation. In addition, we refer to Palisades Safety and Insurance Association as "Palisades" and to Apollo Holdings, Inc. as "Merger Sub." Capitalized terms used in this section are defined elsewhere in this proxy statement or in the Merger Agreement, which is attached hereto as Exhibit A. Q. Why did I receive this proxy statement and proxy card? A. You received this proxy statement and proxy card because you are being asked to vote in connection with a special meeting of the Company's shareholders and because you owned shares of Company common stock as of [ ], 2008. We refer to this date as the record date. This proxy statement contains important information about the special meeting and the business to be transacted at the special meeting. You should carefully read this proxy statement, including its appendices and the other documents we refer to in this proxy statement, because they contain important information about the Merger, the Merger Agreement and the special meeting of the shareholders of the Company. The enclosed voting materials allow you to vote your shares without attending the special meeting. Your vote is very important. We encourage you to vote as soon as possible. Q. When and where is the special meeting? A. The special meeting will be held on [], 2008, at []:00 a.m. [East Windsor, New Jersey] time, at the National Conference Center at the Holiday Inn, located at 399 Monmouth Street, East Windsor, New Jersey. Q. What is the purpose of the special meeting and what am I being asked to vote on? A. At the special meeting, you are being asked to vote on a proposal to approve the Merger Agreement and the Merger. Pursuant to the terms and conditions of the Merger Agreement, the Merger Sub, a direct and wholly- owned subsidiary of Palisades, will merge with and into the Company. Upon the consummation of the Merger, the Merger Sub's separate corporate existence will cease and the Company shall continue its corporate existence under New Jersey law as the surviving corporation in the Merger and a wholly-owned subsidiary of Palisades. A copy of the Merger Agreement is attached to this proxy statement as Exhibit A. In addition, you are being asked to vote on a proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies in the event there are not sufficient votes represented in person or by proxy at the time of the special meeting to approve the Merger Agreement. Q. When is the Merger expected to be completed? A. We are working toward completing the Merger and currently expect that the Merger will be completed in the third quarter of 2008. However, the exact timing of the completion of the Merger cannot be predicted. Either party to the Merger Agreement may terminate the Merger Agreement if the Merger is not completed by September 5, 2008. To complete the Merger, shareholder approval and approval of the New Jersey Department of Banking and Insurance must be obtained, in addition to other conditions that must be satisfied or waived. 6 Q. If the Merger is completed, what will I receive for my shares of Company common stock? A. If the Merger is completed, you will be entitled to $6.25 in cash, without interest and less any applicable withholding tax for each share of our common stock you own. Q. How does the Company's Board recommend I vote? A. Our Board of Directors recommends that you vote "FOR" the proposal to approve the Merger Agreement and the Merger and "FOR" the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the Merger Agreement. See THE MERGER - Reasons for the Merger; Recommendation of the Board of Directors, beginning on page [] for a discussion of the factors that our Board of Directors considered in deciding to recommend the approval of the Merger Agreement to our shareholders. Q. How many votes do I have? A. You have one vote for each share of our common stock you own as of [], 2008, the record date for the special meeting. Q. What is the quorum requirement and required vote to approve the Merger Agreement and the Merger? A. The presence, in person or by proxy, of the holders of a majority of the issued and outstanding shares of the capital stock of the Company entitled to vote is necessary to constitute a quorum for the transaction of business of the special meeting. Approval of the Merger Agreement and the Merger requires the affirmative vote of a majority of the votes cast by the holders of shares of Company common stock at the special meeting. Q. What do I need to do now? A. Even if you plan to attend the special meeting in person, after carefully reading and considering the information presented in the proxy statement, if you hold your shares in your own name as shareholder of record, please vote your shares by completing, signing, dating and returning the enclosed proxy card. If you return your signed proxy card without marking the boxes showing how you wish to vote, your shares will be voted "FOR" the proposal to approve the Merger Agreement and the Merger and "FOR" the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies. You can also attend the special meeting and vote. Q. What does it mean if I receive more than one proxy card? A. If you have shares of our common stock that are registered differently or in more than one account, you may receive more than one proxy card. Please follow the direction for voting on each of the proxy cards you receive to ensure that all of these shares are voted. Each proxy card should be voted and returned separately to ensure all of these shares are voted. Q. If my broker or bank holds my shares in "street name," will my broker or bank vote my shares for me? A. Your broker, bank or other nominee will vote your shares only if you provide instructions to your broker, bank or other nominee on how to vote. You should follow the procedures provided by your broker, bank or other nominee regarding the voting of your shares. If you do not instruct your broker, bank or other nominee on how to vote your shares, your shares will not be voted and will have no effect on the vote to approve the Merger Agreement and the Merger. 7 Q. May I change my vote after I have voted? A. Yes, so long as the change is received by the Company before the vote is taken at the special meeting. You may change your vote for shares of Company common stock you hold in your own name as shareholder of record by o Submitting a later-dated proxy card; o Notifying in writing our Secretary, Douglas A. Wheeler, Esq., at 4 Paragon Way, Freehold, New Jersey 07728; or o Voting in person at the special meeting (your attendance alone will not, by itself, revoke your proxy). Q. Should I send in my share certificates now? A. No. After the Merger is completed, you will be sent a letter of transmittal with detailed written instructions for exchanging your common share certificates for the merger consideration. If your shares are held in street name with a broker or other nominee, you will receive instructions from your broker or other nominee as to how to effect the surrender of your shares in exchange for the merger consideration. PLEASE DO NOT SEND ANY SHARE CERTIFICATES WITH YOUR PROXY. Q. May I attend the special meeting in person? A. Yes. All holders of shares of Company common stock, including shareholders of record and shareholders who hold their shares through banks, brokers or other nominees, as of the close of business on [], 2008, the record date for the special meeting, may attend the special meeting in person. Valid identification materials are required, however, to attend the special meeting. See THE SPECIAL MEETING - How to Vote Your Shares for additional information. Q. Will I owe taxes as a result of the Merger? A. The Merger will be a taxable transaction for U.S. federal income tax purposes, and may also be a taxable transaction under applicable state, local and other tax laws. You should consult your own tax advisor for a full understanding of the tax consequences of the Merger to you in light of your particular circumstances. See "THE MERGER--Certain U.S. Federal Income Tax Consequences." See THE MERGER - Material U.S. Income Tax Consequences of the Transaction, beginning on page []. Q. Who can help answer my other questions? A. If you need assistance in submitting your proxy or voting your shares of common stock, or if you have additional questions about the Merger, please call Douglas A. Wheeler, Esq., our Secretary, at (732) 665-1318. If your broker holds your shares, you should also call your broker for additional information. Q. Where can I find more information about the Company? A. We submit filings to the Securities and Exchange Commission, which we refer to in this proxy statement as the SEC. You may obtain a free copy of this proxy statement, as well as other documents filed by National Atlantic Holdings Corporation with the SEC, at the SEC's free internet site, http://www.sec.gov. Free copies of our SEC filings are also available on our internet site at http://www.national-atlantic.com. You may also obtain such documents by request to Investor Relations, National Atlantic Holdings Corporation, 4 Paragon Way, Freehold, New Jersey 07728, telephone: 732-665-1145. 8 RISK FACTORS You should carefully consider the following factors and other information contained in this proxy statement before approving the Merger. If the Merger is not completed, our business could be materially and adversely affected and the value of your shares of the Company could decline. The Merger is subject to closing conditions, including customary closing conditions such as approval by the affirmative vote of a majority of the votes cast by the holders of shares of Company common stock at the special meeting and the New Jersey Department of Banking and Insurance. Because of these closing conditions, the Merger may not be completed or may not be completed in the expected time period, and the Merger Agreement may be terminated. As a consequence of the failure of the Merger to be completed, as well as of some or all of these potential effects of the termination of the Merger Agreement, our business could be materially and adversely affected, making it more difficult to retain employees and existing customers and to generate new business. The fact that there is a Merger pending could have an adverse effect on our business, revenue and results of operations. While the Merger proposal is pending, we are subject to a number of risks that may adversely affect our business, revenue and results of operations, including: o the diversion of management and employee attention and the unavoidable disruption to our relationships with our partners and customers may detract from our ability to operate our business; o significant restrictions in the Merger Agreement on the conduct of our business prior to completion of the Merger, including requiring us to conduct our business only in the ordinary course, may delay or prevent us from undertaking business opportunities that may arise pending completion of the Merger; o potential downgrade of the Company's financial strength rating by the A.M. Best Company; o some of our employees may choose to terminate their employment with us during this period of uncertainty, thereby disrupting the quality of our service; o we may be unable to respond effectively to competitive pressures, industry developments and future opportunities; and o we have and will continue to incur significant expenses related to the Merger prior to its closing. If the Merger is completed, you will no longer be a Company shareholder. Upon completion of the Merger, you will no longer be a Company shareholder and will not participate in any of our future earnings or growth and will not benefit from any appreciation in our value. In addition, you will no longer be entitled to or receive any dividends from the Company. If the Merger is not completed, we may not be able to negotiate an equal or higher price for the Company in the future. The Merger contemplated by the Merger Agreement and this proxy statement was the product of a long process to obtain the highest possible aggregate consideration for the purchase of the Company and its subsidiaries. For a more detailed discussion of the process the Company engaged in to ascertain the highest possible price for its shareholders, see "THE MERGER--Background of the Merger." If the Merger is not completed, we may not be able to negotiate an equal or higher price for the Company in the future. 9 The "no solicitation" restriction in the Merger Agreement and the termination fee and reimbursement expenses may discourage other companies from trying to acquire us. While the Merger Agreement is in effect, we are prohibited from soliciting, initiating or encouraging any inquiries or proposals that may lead to a proposal or offer for a merger or other business combination transaction with any person other than Palisades. This provision does not prevent unsolicited superior offers, of which the Board of Directors has a fiduciary responsibility to consider. The possibility that the $2.1 million termination fee and reimbursement of Palisades' out-of-pocket expenses of up to $1.5 million payable by the Company under specified circumstances if the Company enters into an alternative transaction may discourage a competing proposal to acquire the Company. 10 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this proxy statement may include forward-looking statements that reflect our current views with respect to future events and performance. These forward-looking statements may apply to us specifically or the insurance industry generally. Statements that include the words "expect," "intend," "believe," "may," "should," "anticipate," "will" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to those described under "Risk Factors" and the following: o risks that the Merger will not be completed; o risks that regulatory approval may not be obtained for the Merger; o legislative, regulatory or other legal developments that could have the effect of delaying or preventing the Merger; o uncertainty as to the timing of obtaining regulatory approvals and clearance; o the reaction of our customers, partners and employees to the proposed Merger and the consequent effect on our business; o risks associated with the industry in which we operate, including competitive and other factors; and o costs and other effects associated with ongoing or future litigation. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee completion of the Merger, future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Other factors and assumptions not identified above could also cause the actual results to differ materially from those set forth in the forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All information contained in this proxy statement specifically relating to Palisades and the Merger Sub has been supplied by Palisades. 11 THE SPECIAL MEETING Time, Place and Purpose of the Special Meeting This proxy statement is being furnished to our shareholders as part of a solicitation by our Board of Directors for use at the special meeting to be held on [], 2008, at []:00 a.m. [East Windsor, New Jersey] time, at the [the National Conference Center at the Holiday Inn, located at 399 Monmouth Street, East Windsor, New Jersey], unless it is postponed or adjourned. The purpose of the special meeting is for our shareholders to consider and vote upon the approval of the Merger Agreement and the Merger. In addition, we are also asking for you to approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes represented in person or by proxy to approve the Merger Agreement and the Merger at the time of the special meeting. A copy of the Merger Agreement is attached to this proxy statement as Exhibit A. Record Date, Quorum and Required Vote The holders of record of shares of Company common stock as of the close of business on [], 2008, the record date set by our Board of Directors for the special meeting, are entitled to receive notice of and to vote at the special meeting or any adjournment or postponement thereof. As of the record date, there were [] shares outstanding of our common stock. A quorum of shareholders is necessary to take action at the special meeting. The inspectors will determine whether a quorum is present at the special meeting. The presence in person or by proxy of the holders of shares of Company common stock having a majority of the voting power of the outstanding shares of Company common stock as of the record date shall constitute a quorum for the purpose of considering proposals. Shares of common stock represented at the special meeting but not voted, including proxies that have been received but for which shareholders have abstained and "broker-non votes," as defined in "THE SPECIAL MEETING - How Shares Will Be Voted at the Special Meeting," will be treated as present at the special meeting for purposes of determining the presence of a quorum. In the event a quorum is not present at the special meeting, we expect that the meeting will be adjourned or postponed to solicit additional proxies. Each holder of record shares of Company common stock as of the close of business on the record date of the special meeting is entitled to cast one vote per share at the special meeting on each proposal. Approval of the Merger Agreement and the Merger requires the affirmative vote of a majority of the votes cast by the holders of shares of Company common stock at the special meeting. As a condition to the execution of the Merger Agreement, James V. Gorman executed a voting agreement pursuant to which he agreed, among other things, to vote his shares in favor of the recommendation of the Board of Directors to the holders of shares of Company common stock. The Board of Directors recommended that the holders of shares of Company common stock approve the Merger Agreement and the Merger. As of the record date, Mr. Gorman is entitled to vote 1,512,140 shares of Company common stock, representing [ ] percent of shares of Company common stock outstanding and entitled to vote as of the record date. As of [ ], 2008, our Directors and Executive Officers owned approximately [ ] of the outstanding shares of Company common stock. How Shares Will Be Voted at the Special Meeting All shares of Company common stock represented by properly executed proxies received before or at the special meeting and not properly revoked will be voted as specified in the proxies. Properly executed proxies that do not contain voting instructions will be voted "FOR" the approval of the Merger Agreement and the Merger and "FOR" any adjournment or postponement of the special meeting, if necessary. An abstention will have no effect on the vote to approve the Merger Agreement and the Merger. Any vote "AGAINST" approval of the Merger Agreement and the Merger will not be voted "FOR" any adjournment or postponement of the special meeting for the purpose of soliciting additional votes in favor of approval of the Merger Agreement or approval of the Merger. If shares of common stock are held in street name through a broker, bank or other nominee, then the broker, bank or other nominee may only vote your share in accordance with your instructions. If you do not give specific instructions to your nominee on how to vote on the proposal, the nominee will not have the authority to vote on the proposal, which 12 is called a "broker non-vote." Broker non-votes will have no effect on the vote to approve the Merger Agreement and the Merger. How to Vote Your Shares You must either submit your proxy by returning the enclosed proxy card or vote in person at the special meeting for your shares of common stock to be included in the vote. Vote by Proxy If your shares of Company common stock are in your name as a shareholder of record, mark your vote on the enclosed proxy card, sign it correctly, and return it in the envelope provided. If you receive multiple proxy cards because your shares are registered in different names or at different addresses, you should vote each proxy card to ensure all your shares will be counted. To be counted, the proxy must be received by the Company before the vote is taken at the special meeting. PLEASE DO NOT SEND IN SHARE CERTIFICATES WITH THE PROXY CARD. If the Merger is completed, shareholders of record will receive a letter of transmittal with instructions on receiving payment. If your shares of Company common stock are held in street name by a broker or nominee, you should follow the separate voting instructions, if any, of your broker or nominee that are provided by the broker or other nominee with the proxy statement. Contact your broker or nominee to determine how to vote. Vote at the Special Meeting Only shareholders of the Company as of the record date of the special meeting may attend the special meeting. If your shares of Company common stock are in your name as a shareholder of record, you must bring valid photo identification, such as a driver's license or passport, with you to the special meeting to be admitted. If your shares of Company common stock are held in street name by a broker or nominee, you must provide proof of common share ownership, such as a recent brokerage statement or a letter from the nominee that holds your shares, in addition to valid photo identification to be admitted. Properly admitted common shareholders will be entitled to vote at the special meeting. How to Change or Revoke Your Vote If your shares of Company common stock are in your name as a shareholder of record, you may change or revoke your proxy at any time so long as the change or revocation is received by the Company before the vote is taken at the special meeting. You may change or revoke your vote by o Submitting a later-dated proxy card; o Notifying in writing our Secretary, Douglas A. Wheeler, Esq., at 4 Paragon Way, Freehold, New Jersey 07728; or o Voting in person at the special meeting (your attendance alone will not, by itself, revoke your proxy). If your common stock of the Company is held in street name by a broker or nominee, you should follow the instructions of your broker or other nominee regarding the change or revocation of proxies. Contact your broker or nominee to determine how to change or revoke your proxy. Solicitation of Proxies This proxy solicitation is being made and paid by us on behalf of the Board of Directors. Our Directors, Officers and employees may solicit proxies by personal contact, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional compensation for their efforts. Brokers and other nominees may be requested to forward soliciting material to the beneficial owners of shares of Company common stock, and will be reimbursed for their reasonable out-of-pocket expenses if such nominees request to be reimbursed. 13 Adjournments and Postponements Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies if there are not sufficient votes to approve the Merger Agreement or approve the Merger at the time of the special meeting. To adjourn the special meeting for this purpose, the affirmative vote of a majority of the votes cast by the holders of Company common stock at the meeting, whether in person or by proxy, is required to approve the proposal to adjourn the special meeting. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow Company shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed, provided that such revocation is in compliance with the instructions on the enclosed proxy card. The adjournment or postponement proposal only relates to an adjournment of the special meeting for the purpose of soliciting additional proxies for the approval of the proposal to approve of the Merger Agreement and to approve of the Merger. The Board of Directors retains full authority to adjourn or postpone the meeting for any other purpose allowable by law. 14 THE MERGER The following discussion contains material information pertaining to the Merger. This discussion is subject and qualified in its entirety by reference to the Merger Agreement and the related documents attached as Exhibits to this proxy statement. We urge you to read the entirety of those documents as well as the discussion in this proxy statement. Background of the Merger As part of their ongoing evaluation of the Company's business, the Company's Board of Directors and senior management regularly review and assess opportunities to achieve long-term strategic goals and to maximize shareholder value. As part of this review process, senior management reviewed, beginning in August 2007, a variety of strategic alternatives for the Company, including the acquisition of complementary businesses, the sale of the Company, capital raising initiatives, the entrance into a run-off transaction, and stock repurchase programs. Senior management further contemplated as part of its review process the alternative of continuing to operate the Company as an independent publicly-traded company, and the risks and uncertainties associated with such alternative, including the Company's ability to meet its projections for the future results of operations. This final alternative was considered in light of the current and historical condition and results of operations of National Atlantic. During August of 2007, the Company decided to explore various strategic alternatives because of several factors, including continued adverse claims development and earnings results, which were often significantly below plan and analyst consensus estimates, as well as the difficulty of writing new and renewal policies in the competitive New Jersey market. On August 28, 2007, Banc of America Securities LLC met with the Company's senior management to discuss strategic alternatives including acquisitions, mergers, and change of control transactions. In addition, the Company and Banc of America Securities discussed potential partners for each of these alternatives. As a result of this discussion, the Company's senior management concluded that the Company should engage Banc of America Securities to explore various strategic alternatives. Shortly thereafter, the Company, with the assistance of its financial advisor, began drafting a Confidential Information Memorandum (the "CIM") to be shared with prospective partners/buyers of the Company. Throughout September 2007, Banc of America Securities met with various members of the Company's senior management on numerous occasions, and the Company and its advisors continued to work on the CIM. On October 2, 2007, the Board held a special meeting to review and discuss a financial condition report presented by senior management. Members of the Company's senior management discussed various recent events, including actuarial and claims issues as well as updated management financial guidance. These issues included adverse actuarial and claims development in the third quarter and the ramifications on the Company's business prospects, including but not limited to the potential downgrade of the Company's A.M. Best rating and the effect thereof on the Company's ability to compete in the competitive New Jersey marketplace. Banc of America Securities then reviewed with the Board certain strategic alternatives available to the Company, including the possibility of a financial run-off of the Company. Banc of America Securities also reviewed the process and projected timeline for the various actions in connection with the search for a potential merger partner/buyer (both financial and strategic) and the Company and Banc of America Securities discussed potential partners/buyers for the Company. At the conclusion of the meeting, the Board unanimously passed a resolution to proceed with the efforts to pursue strategic alternatives available to the Company to enhance shareholder value. Throughout October, the Company's senior management continued to work on the CIM with the assistance of its financial advisor. At the Company's request, Banc of America Securities began contacting potential partners/buyers on October 18, 2007, and continued to do so throughout the remainder of October and November. In total, on behalf and at the direction of the Company, Banc of America Securities contacted over 60 parties to determine whether there was interest in acquiring or partnering with the Company, and the Company entered into confidentiality agreements with 25 of these parties. On November 7, 2007, the Company released third quarter 2007 financial results and held an earnings conference call with investors on November 8, 2007. 15 On November 13, 2007, the Company Board of Directors held a regularly-scheduled meeting. At this meeting, Banc of America Securities provided an update on the process undertaken to evaluate strategic alternatives. The Board discussed the impact of a potential A.M. Best downgrade. Senior management discussed the impact that a downgrade would have on the Company's ability to continue writing new and renewal policies, particularly in light of the very competitive property and casualty marketplace in New Jersey. Senior management also discussed the impact of such developments on the Company's shareholders. Based on this discussion, the Company's Board of Directors asked Banc of America Securities to expedite the search for potential partners/buyers in order to increase the probability of completing a deal. The Board further indicated that it wanted to proceed in a fashion that encouraged multiple bidders and maximized shareholder value. After the Board meeting, the Company publicly announced that it had engaged Banc of America Securities to assist the Company in its review of strategic alternatives and that these alternatives could include, but would not be limited to, capital structure review, strategic partnerships, and business combination transactions. On November 19, 2007, Dewey & LeBoeuf LLP ("Dewey & LeBoeuf"), counsel to the Company, reviewed the CIM and provided revisions to the Company. On November 20, 2007, A.M. Best announced that it had placed Proformance Insurance Company's financial strength rating of B++ (Good) and its issuer credit rating ("ICR") of "bbb" under review with negative implications. Concurrently, A.M. Best placed the Company's ICR of "bb" under review with negative implications. On November 20, 2007, on behalf and at the direction of the Company, Banc of America Securities began distributing the CIM to parties that had signed confidentiality agreements, including a process letter that stated that indications of interest were to be submitted by December 11, 2007. On November 28, 2007, the Company provided potential buyers (and their respective advisors) that had signed confidentiality agreements access to an online data room containing information regarding the Company and its operations. At this stage, potential bidders began conducting due diligence on the Company. On December 7, 2007, the Company's senior management met with Private Equity Bidder A in New York to discuss a potential transaction and various due diligence items. Later that day, the Company held a telephonic update call with the Company's Audit Committee, and during that call Banc of America Securities provided a brief status update of the process. On December 7, 2007, representatives of two potential strategic bidders, referred to in this proxy statement as Strategic Bidder C and Strategic Bidder D, expressed interest in participating in the sale process. On December 11, 2007, the Company received preliminary indications of interest valuing the equity of the Company from Palisades, Strategic Bidder A, Strategic Bidder B and Private Equity Bidder A. On December 12, 2007, a preliminary indication of interest was received from Private Equity Bidder B. These preliminary indications of interest were as follows: o Palisades: $6.00-$7.00 per share (equivalent to $66 million-$70 million) o Strategic Bidder A: Up to $80 million (equivalent to up to $7.25 per share) o Strategic Bidder B: $6.25-$7.25 per share (equivalent to $69 million-$80 million) o Private Equity Bidder A: $55 million-$70 million (equivalent to $4.98-$6.34 per share) o Private Equity Bidder B: $5.00-$7.00 per share (equivalent to $55 million-$77 million) On December 12, 2007, the Company's senior management held a telephonic meeting with its financial advisor to discuss the preliminary indications of interest. On December 18, 2007, Strategic Bidder C submitted a preliminary indication of interest valuing the equity of the Company at $76.2 million (equivalent to $6.91 per share) On December 19, 2007, Strategic Bidder D submitted a preliminary indication of interest valuing the equity of the Company at $6.50-$8.00 per share (equivalent to $72 million-$88 million). 16 On December 20, 2007, the senior management of the Company and its financial advisor discussed these preliminary indications of interest telephonically. After further evaluation of the indications of interest, including the values and terms of such indications, Banc of America Securities, at the direction of the Board and Company senior management, invited Palisades, Strategic Bidder A, Strategic Bidder B, Private Equity Bidder A and Private Equity Bidder B to participate in management presentations and on-site due diligence. Strategic Bidders C and D were not invited due to the length of time needed by those bidders to be in a position to submit a definitive proposal and certain other unfavorable terms and conditions of the preliminary indication of interest. On January 3, 2008, Dewey & LeBoeuf and the Company's senior management held a meeting to discuss the preliminary indications of interest. On January 7, 2008 and January 11, 2008, the Company and Palisades, along with Palisades' financial advisor and Banc of America Securities, held telephonic meetings to discuss due diligence matters as well as logistics and requests for upcoming management due diligence meetings. Senior management, together with representatives of Banc of America Securities, held separate management due diligence meetings in New Jersey as follows: o Private Equity Bidder B: January 8, 2008 o Strategic Bidder A: January 15, 2008 o Strategic Bidder B: January 16, 2008 o Palisades: January 17-18, 2008 On January 16, 2008, representatives of a potential strategic bidder, referred to in this proxy statement as Strategic Bidder E, expressed interest in participating in the sale process. Between January 21 and January 25, 2008, Palisades conducted on-site due diligence of claims files. From January 22 through January 24, 2008, the Company's senior management held telephonic meetings with Strategic Bidder A, Strategic Bidder B and Private Equity Bidder B, along with their respective legal and financial advisors, to discuss various due diligence topics. On January 22, 2008, the Company's senior management and Palisades also held a telephonic meeting to discuss various due diligence topics. Private Equity Bidder A did not express an interest in continuing discussions. On January 23, 2008, at the direction of the Company, Banc of America Securities distributed a process letter to Private Equity Bidder B, Strategic Bidder A, Strategic Bidder B and Palisades requesting that definitive indications of interest be submitted by February 8, 2008. Between January 29 and January 31, 2008, Private Equity Bidder B conducted on-site due diligence of claims files. On January 30, 2008, the Company's senior management, Dewey & LeBoeuf, Banc of America Securities, representatives of Huggins Actuarial Services, Inc. and Private Equity Bidder B held a telephonic meeting to discuss loss reserve due diligence items. On January 30, 2008, the Company's senior management, Dewey & LeBoeuf, Banc of America Securities and Palisades held a telephonic meeting to discuss reserves. On January 31, 2008, Strategic Bidder E submitted a preliminary indication of interest valuing the Company at 75%-85% of book value (equivalent to $9.90-$11.23 per share or $109-$124 million). Strategic Bidder E was then invited to participate in management presentations and on-site due diligence. On February 6, 2008, the Company's senior management and Strategic Bidder E, along with Banc of America Securities, held a meeting to discuss a possible transaction and various due diligence topics. On February 7, 2008, the Company's senior management held management due 17 diligence meetings in New Jersey with Strategic Bidder E, along with Banc of America Securities. On February 13, 2008, Palisades and Strategic Bidder E submitted the following "second round" indications of interest valuing the equity of the Company: o Palisades: "Slightly higher than $7.00 per share" (equivalent to approximately $70 million) and indicated it was a definitive proposal not subject to further due diligence o Strategic Bidder E: $8.50 per share (equivalent to $94 million and 65% of book value) and indicated that the definitive terms remained subject to further due diligence None of the other bidders that had participated previously submitted "second round" bids after conducting significant due diligence into the Company. Also on February 13, 2008, following receipt of Palisades' proposal, at the request of the Company, Banc of America Securities had a telephonic meeting with Palisades to discuss the proposal. Palisades clarified its proposal, indicating that the proposal consisted of an initial payment due at close with an amount equal to the balance paid post-closing based on certain financial metrics; Palisades also requested the right to negotiate exclusively with the Company until March 7, 2007. Pursuant to such exclusivity, the Company could only negotiate with Palisades during the exclusivity period and thus would have to close off access to the data room and communications with Strategic Bidder E. On February 14, 2008, the Company's Board held a special meeting to discuss the proposals received from Palisades and Strategic Bidder E. Banc of America Securities reviewed with the Board the status of the process and the various alternatives, including proceeding with a transaction, operating the Company on a stand-alone basis, or putting the Company into run-off. The Board discussed the run-off scenario and considered whether it was favorable to Company shareholders in light of the significant risk associated with such scenario as well as the fact that the ranges of expected per share value from a run-off were lower than the offered price by Palisades and Strategic Bidder E. Dewey & LeBoeuf discussed with the Board its fiduciary obligations in connection with evaluating these alternatives. The Board discussed with its legal and financial advisors the factors that were driving the need for this process, such as below plan earnings results, and the potential downgrade of the Company's A.M. Best rating. The Board then reviewed the details of each of the two proposals and discussed the fact that both bidders continued to have concerns about possible adverse development with the Company's reserves, and discussed the appropriate next steps in the process with its legal and financial advisors. At the conclusion of the meeting, the Board approved unanimously a resolution directing Banc of America Securities to obtain firm bids by February 18, 2008 from Palisades and Strategic Bidder E. The Board requested an update on February 19, 2008. On February 18, 2008, the Company received a revised definitive proposal from Palisades of $5.75 per share (equivalent to $63 million), payable at closing. Palisades also requested exclusivity until March 7, 2007. In addition to the proposal, Palisades provided a mark-up of the draft Agreement and Plan of Merger that had been circulated by Banc of America Securities on January 22, 2008. The Board held an informational telephone call on February 19, 2008, during which Banc of America Securities provided an update regarding Palisades and Strategic Bidder E: o Palisades: Discussed receipt of revised proposal from February 18, 2008 of $5.75 per share and exclusivity request. The Board directed Banc of America Securities to inform Palisades that it would not grant exclusivity for a $5.75 per share offer, but would consider exclusivity if the offer were raised to $6.75 per share. o Strategic Bidder E: Discussed that Strategic Bidder E was still in a "discussion" phase without sufficient information to make a firm offer and had indicated there were four key due diligence steps remaining - actuarial work; audit; on-site visit to review certain corporate records and IT systems; and potential effect of A.M. Best ratings. Also during the February 19, 2008 update call, the Board discussed and approved a unanimous written consent resolution creating the Special Purpose Committee to aid in the flow of information from the Company's legal and financial advisors to the Board of Directors. The Board of Directors decided the following Directors would serve on 18 the Special Purpose Committee: Mr. Thomas M. Mulhare, Mr. Cornelius E. Golding, Ms. Candace L. Straight and Mr. James V. Gorman. On February 20, 2008, the unanimous written consent resolution was circulated to and executed by all of the Directors. Also on February 19, 2008, at the direction of the Board, Banc of America Securities informed Palisades that the Company would not grant exclusivity in respect of the $5.75 per share offer, that the Board was considering the various strategic alternatives available to the Company and that Board believed an offer of $6.75 per share would be appropriate for exclusivity. On February 21, 2008, Strategic Bidder E orally lowered its proposal to $6.50 per share, which was still subject to further due diligence and discussions with A.M. Best. Strategic Bidder E also indicated that its interest in the Company had evolved from interest in a strategic deal to interest in a financial run-off. A Special Purpose Committee update call was held on February 21, 2008, including the Company's legal and financial advisors. The parameters of exclusivity with Palisades were discussed. Banc of America Securities informed the Special Purpose Committee of Banc of America Securities' conversation with Strategic Bidder E on February 21, 2008. The Committee and its advisors discussed the best course of action to keep Strategic Bidder E part of the process while exclusivity with Palisades was explored. After the update call, at the request of the Committee, Banc of America Securities held a telephonic meeting with Palisades in which Palisades informed Banc of America Securities of its willingness to increase its proposal to $6.25 per share. Immediately following the Palisades call, the Special Purpose Committee reconvened by telephone and Banc of America Securities provided an update of its conversation with Palisades. On February 22, 2008, the Company received a written revised definitive proposal from Palisades of $6.25 per share (equivalent to $69 million). Later that day, the Special Purpose Committee met by telephone and agreed to counter with a $6.50 per share proposal for exclusivity. Palisades indicated that it would not agree to a price higher than the $6.25 per share proposal but agreed that in connection with an exclusivity agreement it would pay certain fees should it determine to offer a lower price during the negotiation period. Throughout that afternoon and night, telephonic exchanges occurred among Palisades, including internal counsel to Palisades; Banc of America Securities; and Dewey & LeBoeuf. An exclusivity agreement was signed on February 23, 2008. On February 24, 2008, Dewey & LeBoeuf provided Palisades with a mark-up of the Merger Agreement along with a draft of the Disclosure Schedules. This action triggered the beginning of an eight-day exclusivity period. A Special Purpose Committee update call was held on February 25, 2008. Dewey & LeBoeuf and Banc of America Securities updated the Special Purpose Committee on the status of the exclusivity agreement and period, as well as the intention to commence negotiations of a definitive merger agreement on February 26, 2007 at the offices of Dewey & LeBoeuf. On February 26 and 27, 2008, the Company's senior management, Dewey & LeBoeuf; Banc of America Securities; Palisades; Ropes & Gray, LLP ("Ropes & Gray"), Palisades' outside legal counsel; and Keefe, Bruyette & Woods, Inc., Palisades' financial advisor ("KBW"), held meetings to negotiate and draft a definitive merger agreement. Also on February 26 and 27, 2008, telephonic meetings of the Special Purpose Committee were held to summarize the status of the negotiations. The Special Purpose Committee was informed that Palisades provided a list of open issues to which the Special Purpose Committee formulated responses. Palisades indicated they would provide the Company with a response to the Special Purpose Committee's position. The Committee also decided that a Board member would call the President and CEO of Palisades, Mr. Fernandez, late Thursday or Friday morning. Also on February 27, 2008, a special meeting of the Board was held. Banc of America Securities reviewed with the Board a progress report since the February 14, 2008 Special Board Meeting. Dewey & LeBoeuf then updated the Board on the legal aspects of Palisades' proposal and the status of the negotiations. The Board also received an update on the Strategic Bidder E proposal, which had changed from a strategic deal to a financial transaction. The Board viewed such a change as not favorable to shareholders in light of the risk associated with a run-off transaction as well as the fact that the run-off transaction offered a lower value to shareholders than the Palisades proposal. The Special Purpose Committee then provided an update to the Board on the Committee's progress. A motion was considered and passed unanimously to enhance the power of the Special Purpose Committee to negotiate terms on behalf of the Board. 19 A telephonic meeting of the Special Purpose Committee was held on February 28, 2008, including Dewey & LeBoeuf and Banc of America Securities. Banc of America Securities informed the Committee that it had held discussions with KBW and KBW had indicated that Palisades was unwilling to accept the change proposed by the Board to resolve certain open issues. The Committee discussed and decided that a Board member should call Mr. Fernandez to discuss issues so that negotiations would continue, which call was made the next morning. The Committee agreed to have an update call on February 29, 2008 to discuss the outcome of the call with Mr. Fernandez. On February 29, 2008, an update call was held with the Special Purpose Committee, during which a summary of the conversation with Mr. Fernandez was provided and discussed. The Board Member indicated that Mr. Fernandez, while unwilling to make changes proposed by the Board, expressed his general support for completing the transaction. They discussed the open issues and potential solutions. Mr. Fernandez agreed to continue negotiations. On March 1, 2008, the Special Purpose Committee met by telephone to discuss: (1) updates regarding the Palisades proposal; (2) a summary of how discussions progressed between Palisades and the Company; (3) actions/steps/questions on each issue in the proposal; and (4) recommendations as to how to proceed. The Committee discussed its various positions on the proposal. An extensive discussion ensued on how to proceed and Banc of America Securities and Dewey & LeBoeuf were given direction as to the Company's positions on the remaining issues for further negotiation with Palisades. On March 2 and 3, 2008, update calls were held among the Special Purpose Committee, the Company's senior management, Banc of America Securities, and Dewey & LeBoeuf. On March 5 and 6, 2008, negotiations took place at Dewey & LeBoeuf offices between the Company's senior management, Dewey & LeBoeuf, Banc of America Securities, Palisades, Ropes & Gray, and KBW. On March 7, 2008, the Special Purpose Committee met by telephone and decided that a Special Board Meeting should take place on March 9, 2008, possibly to vote on the transaction. Also on March 7, 2008, a three-day extension to the Exclusivity Agreement with Palisades was executed by Palisades and the Company. On March 9, 2008, a special meeting of the Board was held by telephone with representatives from the Company's senior management, Banc of America Securities, and Dewey & LeBoeuf for the purpose of considering the Merger Agreement for the Board's approval and adoption. Banc of America Securities reviewed the process and financial aspects of the Palisades proposal. Dewey & LeBoeuf reviewed the fiduciary duties of the Board. The Board also discussed the specifics of the Strategic Bidder E proposal and concluded that it would not maximize shareholder value. Banc of America Securities and Dewey & LeBoeuf then reviewed the terms of the Merger Agreement, the negotiation of which had been substantially completed, and the remaining unresolved issues. Also at this meeting, Banc of America Securities reviewed with the Board its financial analysis of the consideration and delivered to the Board an oral opinion, which was confirmed by delivery of a written opinion dated March 9, 2008, to the effect that, as of that date and based on and subject to various assumptions and limitations described in its opinion, the consideration to be received by holders of Company common stock, was fair, from a financial point of view, to such holders. The Special Purpose Committee then presented its recommendation that the Board approve the Merger Agreement with Palisades. After considering the proposed price of $6.25 per share, the terms of the Merger Agreement and the various presentations by Banc of America Securities and Dewey & LeBoeuf, the Board resolved to adopt and approve the Merger and recommend that the Company's stockholders approve the Merger Agreement. The Board resolution also authorized senior management to complete negotiation of the Merger Agreement. On March 10, 2008, Palisades informed Banc of America Securities of concerns with the transaction's potential negative impact on Palisades' A.M. Best rating. On March 10 and March 11, 2008, several discussions were held with A.M. Best by Palisades, the Company's senior management, and the Company's legal and financial advisors. On March 11, 2008, a telephonic meeting of the Special Purpose Committee was held to update the Special Purpose Committee and the Company's senior management on the discussions with A.M. Best. Dewey & LeBoeuf and Banc of America Securities reviewed with the Committee a revision to provisions of the Merger Agreement that had been requested by Palisades that would lower termination damages should Proformance's financial strength ratings be downgraded by A.M. Best. The Special Committee determined that such changes were within the scope of the 20 March 9, 2008 Board authorization and agreed that senior management should agree to the revision in order to complete negotiations of the Merger Agreement. Early on March 13, 2008, the Company, Palisades, and a subsidiary of Palisades formed to consummate the merger executed the Merger Agreement. On March 13, 2008, the Company and Palisades issued separate press releases announcing the Merger Agreement. On April 17, 2008, the Company, Palisades and the Merger Sub amended and restated the Merger Agreement to provide that the required vote for approval of the Merger Agreement be a majority of the votes cast on such proposal, which standard is allowed under both New Jersey law and the Company's Certificate of Incorporation. Reasons for the Merger In evaluating the Merger Agreement and the Merger, the Board of Directors consulted with the Company's senior management, financial advisor and legal counsel. In concluding that the Merger is advisable and in the best interests of the Company and its stockholders, the Board of Directors considered, among other things, the following factors and potential benefits of the Merger, each of which it believed supported its decision: o The current and historical financial condition and results of operations of National Atlantic. o The possible alternatives to the Merger, including continuing to operate the Company as an independent publicly-traded company, and the risks and uncertainties associated with such alternatives, including possible adverse developments in the Company's loss reserves and the difficulty of the Company meeting its projections for future results of operations, compared to the certainty provided to stockholders by the Merger that allows shareholders to realize in cash a fair value for their investment. o The fact that the Company had explored a variety of strategic alternatives over an extended period of time (including but not limited to, raising additional capital, making an acquisition, entering into a change of control transaction or run-off transaction), the thoroughness of the process for exploring and reviewing these alternatives, and the Board of Directors' view that the Merger provided a more attractive and more certain value to stockholders compared to the other alternatives considered. o The November 20, 2007 A.M. Best announcement that it placed Proformance Insurance Company's financial strength rating of B++ (Good) and its issuer credit rating of "bbb" under review with negative implications, the November 20, 2007 A.M. Best announcement that it placed the Company's ICR of "bb" under review with negative implications, and the real possibility of a downgrade in those ratings and the negative impact that such a downgrade would have on the Company's ability to continue to write new and renewal policies in the competitive New Jersey insurance market. o The current and historical market prices of National Atlantic's common shares, including the fact that the $6.25 per share cash consideration represents: o a 14.5% premium over the closing price of National Atlantic's common shares on March 12, 2008, the last trading day prior to the execution of the merger agreement; and o a 18.4% and 27.5% premium over the average share price for the 30-day and 60-day periods preceding the last trading day prior to announcing the transaction, respectively. o The comprehensive and thorough sale process conducted by the Company, with the assistance of the Company's financial and legal advisors, which involved publicly announcing the exploration of strategic alternatives, contacting over 60 parties to determine whether there was interest in 21 acquiring National Atlantic, entering into confidentiality agreements with 25 of these parties, all of who were provided access to an online data room to conduct significant due diligence, and receiving one written definitive proposal to acquire the Company. o The fact that the price proposed by Palisades reflected extensive negotiations between the parties and represented the highest definitive price that the Company had received for the acquisition of the Company. o The fact that the consideration to be received by the Company's shareholders in the Merger will consist entirely of cash, which will not be subject to a financing condition, and which will provide liquidity and certainty of value to shareholders. o The opinion of Banc of America Securities, dated March 9, 2008, to the Company's Board of Directors as to the fairness, from a financial point of view and as of the date of the opinion, of the consideration to be received by holders of the Company common stock, as more fully described below in the section entitled "Opinion of Financial Advisor." o The terms and conditions of the Merger Agreement including: o The closing conditions to the Merger Agreement, which the Board of Directors viewed as providing a reasonable level of assurance that the Merger could be completed, including the absence of any financing condition. o The other terms of the Merger Agreement, including the fact that the Merger Agreement does not preclude unsolicited superior offers from other parties, and permits National Atlantic to terminate the Merger Agreement to accept a superior proposal prior to receipt of shareholder approval at the Special Meeting, subject to payment by National Atlantic of a $2.1 million termination fee plus reimbursement of Palisades' out-of-pocket expenses of up to $1.5 million. o The fact that the material terms of the Merger Agreement were developed for consideration by the Company's Board of Directors, by the Special Purpose Committee of the Board with the assistance of its advisors, and, as appropriate, the Company's senior management, as well as the belief of the members of the National Atlantic Board of Directors, after reviewing the matter with the members of the Special Purpose Committee and the Board's financial advisor, that National Atlantic would likely not be able to obtain more favorable terms from Buyer. o The provisions of the Merger Agreement pertaining to termination damages which provide certain fees and expense reimbursement in the event the transaction is terminated. The Board of Directors also considered and balanced against the potential benefits of the Merger a variety of risks and other potentially negative factors concerning the Merger, including the following: o The risk that the conditions to the Merger will not be met, including the conditions requiring shareholder and regulatory approvals, the risk that the Merger Agreement could be terminated, and the potential adverse impact on the Company if the Merger does not close, including the diversion of management and employee attention, potential employee attrition and the effect on business and customer relationships. o The fact that Company shareholders will not participate in any future earnings or growth of the Company and will not benefit from any future appreciation in the value of the Company. o The fact that the Merger and the Merger Agreement are subject to the affirmative vote of a majority of the votes cast by the holders of shares of the Company common stock at the special meeting. 22 o The fact that completion of the Merger is subject to regulatory approvals and there can be no assurance that these approvals will be received prior to the outside date under the merger agreement, or at all, or that the regulatory approvals will not contain conditions that may cause the parties not to complete the merger. o The fact that, for U.S. federal income tax purposes, the cash merger consideration will be taxable to the shareholders of the Company being paid the consideration. o The possibility of disruption to National Atlantic's operations following the announcement of the merger, and the resulting effect on the Company if the Merger is not completed. o The fact that the Company may be required to pay Palisades certain fees up to $2.1 million and, in certain circumstances, reimburse expenses up to $1.5 million in the event that the Company terminates the Merger Agreement to accept another unsolicited superior proposal. o The interests of the Company's Directors and Executive Officers that may be different from, or in addition to, the interests of our shareholders generally. o The fact that the merger consideration of $6.25 per share was below the book value per share of $13.10 as of December 31, 2007. o The Board of Directors also considered, among other things, the following potentially adverse terms of the Merger Agreement: o The Merger Agreement's limitations on the Company's ability to solicit other offers. o The right of Palisades to receive: o information with respect to any alternative proposals; o notice of National Atlantic's receipt of a superior proposal within 24 hours; and o 24-hours notice before the Board of Directors may terminate the Merger Agreement to enter into a superior proposal. o The possibility that the $2.1 million termination fee and reimbursement of Palisades' out-of-pocket expenses of up to $1.5 million payable by the Company under specified circumstances if the Company enters into an alternative transaction may discourage a competing proposal to acquire the Company. The view of the National Atlantic Board of Directors, after consultation with financial and legal advisors, is that as a percentage of the merger consideration to be paid in the merger, the termination fee and expense reimbursement provisions were within the range of fees and expenses provided for in similar size transactions. o The restrictions on the conduct of the Company's business prior to the completion of the Merger, which requires the Company to conduct its business only in the ordinary course and subject to specific limitations. o The termination damages provisions within the Merger Agreement which provide the triggers and amounts of damages to be paid upon certain circumstances and which limit recourse to pre-defined amounts. After considering all of the factors set forth above, our Board of Directors determined that the potentially favorable factors outweighed the potentially adverse factors. Furthermore, our Board of Directors determined that the Merger is advisable and in the best interests of the Company and its shareholders. 23 The foregoing discussion of the material information and factors considered by the Board of Directors is not exhaustive. In view of the wide variety of factors considered by the Board of Directors, and the complexity of these matters, the Board of Directors did not assign relative weights to the above factors or the other factors considered by it. In addition, the Board of Directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of the Board of Directors may have considered different factors. Opinion of Financial Advisor National Atlantic has retained Banc of America Securities to act as National Atlantic's financial advisor in connection with the Merger. Banc of America Securities is an internationally recognized investment banking firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. National Atlantic selected Banc of America Securities to act as National Atlantic's financial advisor in connection with the Merger on the basis of Banc of America Securities' experience in transactions similar to the Merger, its reputation in the investment community and its familiarity with National Atlantic and its business. On March 9, 2008, at a meeting of National Atlantic's Board of Directors held to evaluate the Merger, Banc of America Securities delivered to National Atlantic's Board of Directors an oral opinion, which was confirmed by delivery of a written opinion dated March 9, 2008, to the effect that, as of the date of the opinion and based on and subject to various assumptions and limitations described in its opinion, the Consideration to be received by holders of National Atlantic common stock was fair, from a financial point of view, to such holders. The full text of Banc of America Securities' written opinion to National Atlantic's Board of Directors, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Exhibit C to this document and is incorporated by reference herein in its entirety. The following summary of Banc of America Securities' opinion is qualified in its entirety by reference to the full text of the opinion. Banc of America Securities delivered its opinion to National Atlantic's Board of Directors for the benefit and use of National Atlantic's Board of Directors in connection with and for purposes of its evaluation of the Consideration from a financial point of view. Banc of America Securities' opinion does not address any other term or aspect of the Merger and does not constitute a recommendation to any shareholder as to how to vote or act in connection with the proposed Merger. In connection with rendering its opinion, Banc of America Securities: (i) reviewed certain publicly available business and financial information relating to National Atlantic; (ii) reviewed certain internal financial and operating information with respect to the business, operations and prospects of National Atlantic furnished to or discussed with Banc of America Securities by the management of National Atlantic, including certain financial forecasts relating to National Atlantic prepared by the management of National Atlantic, referred to herein as National Atlantic management forecasts; (iii) discussed with members of senior management of National Atlantic the past and current business, operations, financial condition and prospects of National Atlantic, including the following: o assessments of the management of National Atlantic as to the liquidity needs of, and financing alternatives and other capital resources available to, National Atlantic, o National Atlantic's procedures related to bodily injury claims handling and reserving which National Atlantic's management determined were not applied consistently as "best practices" throughout the National Atlantic's organization and resulted in a significant increase in loss reserves for 2007, and 24 o the fact that A.M. Best had placed the financial strength ratings of National Atlantic under review for a possible downgrade and management's assessment of the likelihood that, if the Merger were not consummated, A.M. Best would downgrade such ratings and the potential adverse effects such a downgrade would have on National Atlantic's ability to raise capital and continue to operate at current levels; (iv) reviewed the trading history for National Atlantic common stock and a comparison of that trading history with the trading histories of other companies Banc of America Securities deemed relevant; (v) compared certain financial and stock market information of National Atlantic with similar information of other companies Banc of America Securities deemed relevant; (vi) compared certain financial terms of the Merger to financial terms, to the extent publicly available, of other transactions Banc of America Securities deemed relevant; (vii) considered the fact that National Atlantic publicly announced that it would explore its strategic alternatives and the results of Banc of America Securities' efforts to solicit, at the direction of National Atlantic, indications of interest and definitive proposals from third parties with respect to a possible acquisition of National Atlantic; (viii) reviewed a draft, dated March 9, 2008, of the Merger Agreement, referred to herein as the Draft Merger Agreement, including the provisions set forth therein for the payment by Palisades of a reverse break-up fee in certain events, referred to herein, collectively, as the reverse break-up fee; and (ix) performed such other analyses and studies and considered such other information and factors as Banc of America Securities deemed appropriate. In arriving at its opinion, Banc of America Securities assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with it and relied upon the assurances of the management of National Atlantic that they were not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the National Atlantic management forecasts, Banc of America Securities was advised by National Atlantic, and assumed, that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of National Atlantic as to the future financial performance of National Atlantic. Banc of America Securities is not an actuarial firm and its services did not include actuarial determinations or evaluations by it or any attempt by it to evaluate any actuarial assumptions. In that regard, Banc of America Securities expressed no opinion with respect to the adequacy of National Atlantic's liability reserve policies or levels and relied upon the estimates and judgments of the management of National Atlantic with respect to the adequacy of reserves established in respect of contingent liabilities or losses of National Atlantic and assumed such adequacy for purposes of its opinion. Banc of America Securities did not make or was not provided with any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of National Atlantic, nor did it make any physical inspection of the properties or assets of National Atlantic. Banc of America Securities did not evaluate the solvency of National Atlantic or Palisades under any state or federal laws relating to bankruptcy, insolvency or similar matters. Banc of America Securities assumed, at National Atlantic's direction, that the Merger would be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the Merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on National Atlantic or the contemplated benefits of the Merger. Banc of America Securities also assumed, at National Atlantic's direction, that the final executed Agreement would not differ in any material respect from the Draft Merger Agreement it reviewed. Banc of America Securities expressed no view or opinion as to any terms or other aspects of the Merger (other than the Consideration to the extent expressly specified in its opinion), including, without limitation, the form or structure of the Merger, including the reverse break-up fee, the amounts thereof and the decision of National Atlantic to agree to such terms. Banc of America Securities' opinion was limited to the fairness, from a financial point of view, of the Consideration to be received by the holders of National Atlantic common stock and no opinion or view was expressed with respect to any consideration received in connection with the Merger by the holders of any other class of securities, creditors or other constituencies of National Atlantic. In addition, no opinion or view was expressed with respect to the fairness of the amount, nature or any other aspect of the compensation to any of the officers, directors or employees of any party to the Merger, or class of such persons, relative to the 25 Consideration. Furthermore, no opinion or view was expressed as to the relative merits of the Merger in comparison to other strategies or transactions that might be available to National Atlantic or in which National Atlantic might engage or as to the underlying business decision of National Atlantic to proceed with or effect the Merger. In addition, Banc of America Securities expressed no opinion or recommendation as to how any shareholder should vote or act in connection with the Merger. Except as described above, National Atlantic imposed no other limitations on the investigations made or procedures followed by Banc of America Securities in rendering its opinion. Banc of America Securities' opinion was necessarily based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and the information made available to Banc of America Securities as of, the date of its opinion. It should be understood that subsequent developments may affect its opinion, and Banc of America Securities does not have any obligation to update, revise or reaffirm its opinion. The issuance of Banc of America Securities' opinion was approved by Banc of America Securities' Fairness Opinion Review Committee. The following represents a brief summary of the material financial analyses presented by Banc of America Securities to National Atlantic's Board of Directors in connection with its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by Banc of America Securities, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses performed by Banc of America Securities. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Banc of America Securities. National Atlantic Financial Analyses Selected Publicly Traded Companies Analysis. Banc of America Securities reviewed publicly available financial and stock market information for National Atlantic and the following seven publicly traded personal lines property and casualty insurance companies with a market capitalization below $2.5 billion: o Mercury General Corporation o State Auto Financial Corporation o Horace Mann Educators Corporation o Infinity Property & Casualty Corporation o Safety Insurance Group, Inc. o Donegal Group, Inc. o Affirmative Insurance Holdings, Inc. Banc of America Securities reviewed, among other things, per share equity values, based on closing stock prices on March 7, 2008, of the selected publicly traded companies as a multiple of calendar years 2008 and 2009 estimated earnings per share, commonly referred to as EPS, and as a multiple of book value per share as of December 31, 2007 (in the case of Safety Insurance Group and Affirmative Insurance Holdings, as of September 30, 2007). Banc of America Securities also reviewed estimates of the return on average equity, commonly referred to as ROAE, of National Atlantic and the selected publicly traded companies for 2008 and 2009. Banc of America Securities also performed a regression analysis on National Atlantic and the seven selected publicly traded companies to assess the relationship between the multiples of price to book value and 2008 estimated ROAE. Banc of America Securities then applied a range of selected multiples of calendar year 2008 estimated EPS derived from the selected publicly traded companies to corresponding data of National Atlantic and applied a range of selected multiples of 2007 year-end book value derived from the selected publicly traded companies to corresponding data of National Atlantic. Estimated financial data of the selected publicly traded companies were based on public filings and publicly available research analysts' estimates. Estimated financial data of National Atlantic were based on the National Atlantic management forecasts. This analysis indicated the following implied per share equity value reference ranges for National Atlantic, as compared to the Consideration: 26
Implied Per Share Equity Value Reference Ranges for National Atlantic Consideration --------------------------------------------------------------------- ------------- 2008E EPS 2007 Book Value --------------- ------------------- $3.27 - $4.20 $5.24 - $7.85 $6.25
No company used in this analysis is identical or directly comparable to National Atlantic. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the companies to which National Atlantic was compared. Selected Precedent Transactions Analysis. Banc of America Securities reviewed, to the extent publicly available, financial information relating to the following twenty selected transactions involving property and casualty insurance companies with a transaction value below $500 million:
Announcement Date Acquiror Target - --------------- -------------------------------------------------- ----------------------------------------- 2/20/08 o Meadowbrook Insurance Group, Inc. o ProCentury Corp. 1/3/08 o QBE Insurance Group Ltd. o North Pointe Holdings Corp. 4/4/07 o Fortress Investment Group LLC o Alea Group Holdings Ltd. 3/14/07 o Argonaut Group, Inc. o PXRE Group Ltd. 12/4/06 o Elara Holdings Inc. o Direct General Corp. 11/22/06 o Clal Insurance Enterprises Holdings Ltd. o GUARD Financial Group Inc. 11/13/06 o Tower Group Inc. o Preserver Group Inc. 10/31/06 o American European Group, Inc. o Merchant's Group Inc. 10/6/06 o Affordable Residential Communities Inc. o NLASCO, Inc. 10/3/06 o Affirmative Insurance Holdings, Inc. o USAgencies, L.L.C. 9/28/06 o Arrowpoint Capital Corp. o Royal & Sun Alliance Insurance 8/16/06 o QBE Insurance Group Ltd. o One Beacon Insurance Group, Ltd. 8/4/06 o Delek Group, Ltd. o Republic Companies Group, Inc. 7/19/06 o Inverness Management L.L.C. o Omni Insurance Group Inc. 11/4/05 o General Motors Acceptance Corp. o MEEMIC Insurance Company 5/22/03 o Liberty Mutual Holding Company Inc. o Prudential Financial Inc. 5/22/03 o The Palisades Group o Prudential Financial Inc. 3/26/03 o Nationwide Mutual Insurance Co. o Prudential Financial Inc. 11/1/00 o American National Insurance Company o Farm Family Holdings, Inc. 10/25/00 o State Automobile Mutual Insurance Company o Meridian Insurance Group, Inc.
Banc of America Securities reviewed transaction values, calculated as the equity value implied for the target company based on the consideration payable in the selected transaction, as a multiple of the target company's book value and next twelve months, commonly referred to as NTM, estimated EPS. Banc of America Securities then applied a range of selected multiples of NTM EPS and book value derived from the selected transactions to National Atlantic's calendar year 2008 estimated EPS and its year-end 2007 book value. Estimated financial data of the selected transactions were based on publicly available information. Estimated financial data of National Atlantic were based on the National Atlantic management forecasts. This analysis indicated the following implied per share equity value reference ranges for National Atlantic, as compared to the Consideration: Implied Per Share Equity Value Reference Ranges for National Atlantic Consideration ------------------------------------------ ------------------ 2008E EPS 2007 Book Value ---------------- ------------------- $5.36 - $6.30 $8.51 - $9.82 $6.25 27 No company, business or transaction used in this analysis is identical or directly comparable to National Atlantic or the Merger. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition or other values of the companies, business segments or transactions to which National Atlantic and the Merger were compared. Discounted Cash Flow Analysis. Banc of America Securities performed a discounted cash flow analysis of National Atlantic to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that National Atlantic could generate during National Atlantic's fiscal years 2008 through 2012 based on the National Atlantic management forecasts. Banc of America Securities calculated terminal values for National Atlantic by applying terminal forward multiples of 7.0x to 9.0x to National Atlantic's fiscal year 2013 estimated GAAP earnings and of 0.40x to 0.70x to National Atlantic's estimated 2012 year-end book value. The cash flows and terminal values were then discounted to present value as of March 7, 2008 using discount rates ranging from 15% to 17%. This analysis indicated the following implied per share equity value reference ranges for National Atlantic as compared to the Consideration: Implied Per Share Equity Value Reference Range for National Atlantic Consideration ----------------------------------------------- -------------------------- $5.42 - $7.42 $6.25 Run-off Analysis. Banc of America Securities also performed a run-off analysis of National Atlantic to calculate the net present value of dividends that would be paid to shareholders over the remaining life of the company assuming that it serviced its existing policies without writing any additional policies or renewing any existing policies. Based on the assessment of National Atlantic management that the company would not be permitted to pay annual dividends by the New Jersey regulators, this analysis calculated the net present value of the final dividend available for distribution to shareholders after all payouts on loss reserves and losses on unearned premium reserves, estimated to be approximately $88.0 million payable in 2016. Banc of America Securities applied a sensitivity analysis to assess a range of values if the loss reserves were inadequate by up to 10% or were overstated, showing a redundancy of up to 10%. The range of final dividend distributions were then discounted to present value as of March 7, 2008 using discount rates ranging from 13% to 17%. This analysis indicated the following implied per share equity value reference ranges for National Atlantic as compared to the Consideration: Implied Per Share Equity Value Reference Range for National Atlantic Consideration ----------------------------------------------- -------------------------- $1.36 - $3.60 $6.25 Other Factors In rendering its opinion, Banc of America Securities also reviewed and considered other factors, including: o historical trading prices of National Atlantic common stock during the period from the initial public offering of the National Atlantic common stock on April 21, 2005 until March 7, 2008, including historical trading prices as a multiple of book value and NTM earnings for the same period; o the relationship between movements in the trading prices of National Atlantic common stock, including as a multiple of book value and NTM earnings, to movements in an index of the historical trading prices, including as a multiple of book value and NTM earnings, for the seven selected companies described above, during the period from the initial public offering of the National Atlantic common stock on April 21, 2005 until March 7, 2008; and 28 o the calculated quarterly earnings per share during the period from the initial public offering of National Atlantic common stock and as compared with then current publicly available research analysts' estimates. Miscellaneous As noted above, the discussion set forth above is a summary of the material financial analyses presented by Banc of America Securities to National Atlantic's Board of Directors in connection with its opinion and is not a comprehensive description of all analyses undertaken by Banc of America Securities in connection with its opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to partial analysis or summary description. Banc of America Securities believes that its analyses summarized above must be considered as a whole. Banc of America Securities further believes that selecting portions of its analyses and the factors considered or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Banc of America Securities' analyses and opinion. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis referred to in the summary. In performing its analyses, Banc of America Securities considered industry performance, general business and economic conditions and other matters, many of which are beyond the control of National Atlantic and Palisades. The estimates of the future performance of National Atlantic in or underlying Banc of America Securities' analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those estimates or those suggested by Banc of America Securities' analyses. These analyses were prepared solely as part of Banc of America Securities' analysis of the fairness, from a financial point of view, of the Consideration and were provided to National Atlantic's Board of Directors in connection with the delivery of Banc of America Securities' opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, the estimates used in, and the ranges of valuations resulting from, any particular analysis described above are inherently subject to substantial uncertainty and should not be taken to be Banc of America Securities' view of the actual value of National Atlantic. The type and amount of consideration payable in the Merger was determined through negotiations between National Atlantic and Palisades, rather than by any financial advisor, and was approved by National Atlantic's Board of Directors. The decision to enter into the Merger agreement was solely that of National Atlantic's Board of Directors. As described above, Banc of America Securities' opinion and analyses were only one of many factors considered by National Atlantic's Board of Directors in its evaluation of the proposed Merger and should not be viewed as determinative of the views of National Atlantic's Board of Directors or management with respect to the Merger or the Consideration. National Atlantic has agreed to pay Banc of America Securities for its services in connection with the Merger an aggregate fee of $3.85 million, a portion of which was payable in connection with its opinion and a significant portion of which is contingent upon the completion of the Merger. National Atlantic also has agreed to reimburse Banc of America Securities for its expenses incurred in connection with Banc of America Securities' engagement and to indemnify Banc of America Securities, any controlling person of Banc of America Securities and each of their respective directors, officers, employees, agents and affiliates against specified liabilities, including liabilities under the federal securities laws. Banc of America Securities and its affiliates comprise a full service securities firm and commercial bank engaged in securities trading and brokerage activities and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of corporations and individuals. In the ordinary course of their businesses, Banc of America Securities and its affiliates may actively trade the debt, equity or other securities or financial instruments (including bank loans or other obligations) of National Atlantic, Palisades and certain of 29 their respective affiliates for their own accounts or for the accounts of customers, and accordingly, Banc of America Securities or its affiliates may at any time hold long or short positions in such securities or financial instruments. Banc of America Securities and its affiliates in the past have provided, currently are providing, and in the future may provide certain investment banking, commercial banking and other financial services to Palisades or its affiliates and have received or in the future may receive compensation for the rendering of these services, including providing certain cash management and trading services to one such affiliate. Interests of National Atlantic's Directors and Executive Officers in the Merger Our Executive Officers and Directors may be deemed to have interests in the Merger that are in addition to, or different from, their interests as shareholders of the Company. Our Board of Directors and the special committee were aware of these interests and considered them, among other matters, in approving the Merger and the Merger Agreement. Treatment of Options and Other Awards Options Certain Executive Officers and Directors hold stock options. Each stock option to purchase shares of Company common stock outstanding immediately prior to the Effective Time that was issued under a Company stock plan, whether or not vested, will be cancelled and converted into the right to receive a cash payment in an amount equal to the product of (i) the number of common shares underlying the unexercised stock option and (ii) the excess, if any, of $6.25 over the per share exercise price of such option, less any required withholding taxes. As of [], there were approximately [] options and held by the Executive Officers and our Directors.
Weighted No. of Shares Average Exercise No. of Shares Underlying Vested Price of Vested Underlying and Unvested and Unvested Resulting Unvested Options Options Options Consideration ($) - -------------------------------------------------------------------------------------------------------------------------------- Executive Officers and Directors James V. Gorman 60,200 2.39 232,093 Chairman of the Board of Directors and Chief Executive Officer of NAHC and Proformance Frank J. Prudente 43,000 6.14 4,730 Executive Vice President, Treasurer and Chief Financial Officer of NAHC John E. Scanlan 12,900 0.98 67,983 Executive Vice President and Chief Underwriting Officer of NAHC and Proformance Peter A. Capello, Jr. 21,500 2.35 83,936 Director of NAHC and Chief Financial Officer of Proformance Steven Stallone 21,500 2.35 83,936 Director of NAHC and Proformance Daniel Taylor 15,050 2.23 60,523 Director of NAHC and Proformance 30 TOTAL 174,150 533,201
Stock Appreciation Rights Key employees (including our Executive Officers) hold stock appreciation rights granted pursuant to the Company's incentive plans. Each stock appreciation right to receive cash that was issued under a Company stock plan outstanding immediately prior to the Effective Time, whether or not vested, will be cancelled and converted into the right to receive a cash payment in an amount equal to the product of (i) the number of common shares underlying the unexercised stock appreciation right and (ii) the excess, if any, of $6.25 over the per share base price of such stock appreciation right, less any required withholding taxes. The following table summarizes the number of stock appreciation rights held by our Executive Officers and Directors as of [], including the cash amounts to which the executives are entitled based on the cashing out of their outstanding stock appreciation rights: 31
No. of Stock Appreciation Rights Resulting Consideration Executive Officers and Directors: James V. Gorman 125,000 - Chairman of the Board of Directors Chief Executive Officer of NAHC and Proformance Frank J. Prudente 95,000 46,400 Executive Vice President, Treasurer and Chief Financial Officer of NAHL John E. Scanlan 83,334 - Executive Vice President and Chief Underwriting Officer of NAHC and Proformance Bruce C. Bassman 103,334 46,400 Senior Vice President, Chief Operating Officer and Chief Actuarial Officer of NAHC Peter A. Cappello, Jr. 83,334 - Director of NAHC and Chief Financial Officer of Proformance Douglas A. Wheeler, Esq. 25,000 46,400 Vice President and General Counsel of NAHC TOTAL 515,002 139,200
If no amount of cash is payable to an Executive Officer or Director under the cashout provisions described above because none of the options or stock appreciation rights have a positive spread triggering the cash payment specified above, then there will be a Five Hundred U.S. Dollars ($500) payment to the Executive Officer or Director. Indemnification and Benefits Provisions in the Merger Agreement The Merger Agreement provides for director and officer indemnification and insurance and for the continuation of certain employee benefits for specified time periods. For a description of these provisions, see "MERGER AGREEMENT--Indemnification" beginning on page [ ] and "MERGER AGREEMENT--Benefit Plans" beginning on page []. Change of Control Transactions Certain of the Company's Executive Officers are parties to change in control agreements. Under the Employment Agreements entered into by and between National Atlantic Holdings Corporation and each of James V. Gorman, Frank J. Prudente, John E. Scanlan, Douglas Wheeler and Bruce C. Bassman, and the Employment Agreement entered into by and between Proformance Insurance Company and Peter A. Cappello, Jr. (each of the parties to the agreements other than the Company and Proformance Insurance Company, the "Identified Executive"), if the employment of the Identified Executive is terminated within the one year period following the consummation of the Merger contemplated by the Agreement (a) by the Company or Proformance Insurance Company other than for cause or (b) by the Identified Executive for good reason (each as defined in the agreement), then the Identified Executive shall be entitled to cash severance equal to three times the sum of (A) the Identified Executive's then-current base salary plus (B) the Identified Executive's average annual bonus for the three years preceding the date of 32 termination. The Identified Executive will also be entitled to a continuance of health care coverage and a tax gross up for any 280G excise taxes. The following table summarizes the cash payments, as described above, that would be received if the Identified Executive's change in control agreement were triggered by certain terminations by Palisades or the Identified Executive following the Merger:
Welfare Benefits and Out- Current Base Current Target placement Severance Salary ($) Bonus ($) Value $(B) Payments ($)(C) - ------------------------------------------------------------- ----------------------------- Executive Officers: James V. Gorman 338,905 (A) 27, 737 1,304,000 Bruce C. Bassman 295,000 (A) 18,533 1,737,998 Frank J. Prudente 282,420 (A) 27,239 1,677,998 John E. Scanlan 270,000 (A) 28,997 1,544,000 Peter A. Cappello 230,120 (A) 25,997 1,322,000 Douglas A. Wheeler 180,000 (A) 29,528 976,998
(A) The Employment Agreements of each of the Identified Executives provides for an Annual Bonus Plan. The Plan as established by the Board of Directors consists of an objective formula which is predicated on the Company meeting certain criteria. Under the formula, the Identified Executives are entitled to receive up to 50% of salary as a bonus if all of the criteria are met. Conversely, the bonus can be reduced based on the Company's failure to meet certain criteria. (B) Amounts represent the estimated cost to continue the Identified Executive's health care coverage for a period of three years as provided in such Identified Executive's Employment Agreement with the Company. (C) Amounts represent the estimated amount of cash severance that the Identified Executive is entitled to as defined above, including payments by the Company in respect of 280G tax indemnity amounts. All outstanding equity awards granted under the Company's equity plans (including to the Executives), to the extent such awards are not fully vested and exercisable by their terms, shall become fully vested and immediately exercisable upon a change in control. Under the National Atlantic Holdings Corporation Annual Bonus Plan, in the event of a "change in control," each participant shall receive a prorated award based on the period of service and the performance levels achieved by the Company through the date of the change in control as determined by the plan administrator prior to the change in control in its sole discretion. Recommendation of Our Board of Directors At a meeting on March 9, 2008, our Board of Directors approved the Merger Agreement and recommended that our shareholders vote "FOR" the approval of the Merger Agreement and the Merger after determining that the Merger is advisable and fair to, and in the best interest of, our shareholders, that the consideration to be paid for each share of Company common stock in the Merger is fair to the shareholders of the Company and that the Merger is in the best interest of the Company and its shareholders. Certain U.S. Federal Income Tax Consequences The following is a general summary of certain U.S. federal income tax consequences of the Merger to U.S. holders (as defined below) of Company common stock whose shares of common stock are converted into the right to receive cash in the Merger. This summary does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our stockholders. For purposes of this discussion, we use the term "U.S. holder" to mean a beneficial owner of Company common stock that is, for U.S. federal income tax purposes: 33 o a citizen or resident of the United States; o a corporation (including any entity or arrangement treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any of its political subdivisions; o a trust that (i) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or o an estate that is subject to U.S. federal income tax on its income regardless of its source. If a partnership (including any entity or arrangement treated as partnership for U.S. federal income tax purposes) holds Company common stock, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. A partner of a partnership holding Company common stock should consult its tax advisor. This discussion is based on current law, which is subject to change, possibly with retroactive effect. It applies only to beneficial owners that hold shares of Company common stock as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and may not apply to beneficial owners that hold shares of Company common stock received in connection with the exercise of employee stock options or otherwise as compensation, beneficial owners that hold an equity interest, directly or indirectly, in National Atlantic after the Merger, or certain types of beneficial owners that may be subject to special rules (such as insurance companies, banks or other financial institutions, tax-exempt organizations, broker-dealers, partnerships, S corporations or other pass-through entities, persons holding Company common stock indirectly through a partnership, S corporation or other entity, mutual funds, traders in securities who elect the mark-to-market method of accounting, persons subject to the alternative minimum tax, persons that have a functional currency other than the U.S. dollar, persons whose Company common stock is "qualified small-business stock" for purposes of section 1202 of the Code, foreign persons, expatriates and certain former citizens or long-term residents of the United States, or persons that hold Company common stock as part of a hedge, straddle or a constructive sale or conversion transaction). This discussion also does not address any aspect of state, local or foreign tax laws, or any tax consequences to persons who are not U.S. holders, such holders of the Company common stock should consult their own tax advisors regarding the U.S. and non-U.S. tax consequences to them as a result of the Merger. The Merger The Merger will be a taxable transaction to U.S. holders for U.S. federal income tax purposes. In general, a U.S. holder whose shares of Company common stock are converted into the right to receive cash in the Merger generally will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares and the holder's adjusted tax basis in such shares. Gain or loss will be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction). Such gain or loss will be long-term capital gain or loss if a holder's holding period for such shares is more than one year at the time of the consummation of the Merger. Long-term capital gains of U.S. holders who are individuals are eligible for reduced rates of taxation. Capital gain of corporate stockholders is generally taxable at the regular tax rates applicable to corporations. There are limitations on the deductibility of capital losses, if any, which may be recognized by a U.S. holder as a result of the Merger. Under the Code, U.S. holders of our common stock may be subject, under certain circumstances, to information reporting on the cash received in the Merger unless such U.S. holder is a corporation or other exempt recipient. Backup Withholding Certain holders may be subject to backup withholding of tax on cash payments received by them as a result of the Merger, unless the holder or other payee provides a taxpayer identification number or otherwise establishes an exemption from backup withholding, and otherwise complies with the backup withholding rules. Backup withholding will not apply to a stockholder who (a) in the case of a U.S. holder, furnishes a correct taxpayer identification number and certifies that it is not subject to backup withholding on the IRS Form W-9 or substitute successor form, or is otherwise exempt from backup withholding, and (b) in the case of a stockholder who is not a U.S. holder, furnishes an applicable IRS Form W-8 or successor form. 34 Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowable as a refund or a credit against a U.S. holder's U.S. federal income tax liability if the required information is timely furnished to the Internal Revenue Service. The summary above is not intended to constitute a complete description of all tax consequences relating to the Merger. Because individual circumstances may differ, each stockholder is urged to consult its own tax advisor regarding the specific tax consequences of the Merger to such stockholder in light of its particular circumstances, including the application of state, local and other tax laws and any changes in applicable tax laws. Certain Effects of the Merger If the Merger Agreement is approved by the Company's shareholders and certain other conditions to the closing of the Merger are either satisfied or waived, the Merger Sub will be merged with and into the Company. As a result of the Merger, the separate corporate existence of the Merger Sub will cease, and the Company will continue as the surviving entity. Following the Merger, all outstanding shares of the Company will be directly owned by Palisades. When the Merger is completed, each share of Company common stock (other than shares of common stock owned by the Company and its subsidiaries) issued and outstanding immediately prior to the Effective Time of the Merger will be converted into the right to receive $6.25 in cash, without interest and less any applicable withholding taxes. At the Effective Time of the Merger, the Company's shareholders will cease to have ownership interests in the Company or rights as shareholders of the Company. Therefore, the current shareholders of the Company will not participate in any future earnings or growth of the Company and will not benefit from any appreciation in value of the Company. The shares of Company common stock are currently registered under the Exchange Act and are listed on the Nasdaq Stock Market under the symbol "NAHC". As a result of the Merger, the shares of Company common stock will cease to be listed on the Nasdaq Stock Market and there will be no public market for the shares of Company common stock. In addition, the registration of the shares of Company common stock under the Exchange Act will be terminated, and the Company will no longer be required to file periodic and other reports with the SEC. The benefit of the Merger to our shareholders is the right to receive $6.25 in cash, without interest and less any applicable withholding taxes, for each share of Company common stock. This represents a premium of approximately 14.5% over the closing price of $5.46 per share of Company common stock on March 12, 2008, the last trading day prior to the announcement of the Merger. The principal detriments are that our shareholders will cease to participate in our future earnings and growth, if any, and that their receipt of payment for their shares generally will be a taxable transaction for federal income tax purposes. See "THE MERGER--Certain U.S. Federal Income Tax Consequences." Effects on the Company and Our Shareholders If the Merger Is Not Completed In the event that the Merger Agreement is not approved by the Company's shareholders or if the Merger is not completed for any other reason, the Company's shareholders will not receive any payment for their shares in connection with the Merger. Instead, the Company will remain an independent public company, and the shares of Company common stock will continue to be listed and traded on the Nasdaq Stock Market and registered under the Exchange Act. In that event, we expect that management will operate the business generally in a manner similar to that in which it is being operated today and that the Company's shareholders will continue to be subject to the same general risks and opportunities as they currently are, including, among other things, those arising from economic and market conditions. Also, the potential A.M. Best downgrade of Proformance's financial strength rating could have a negative effect on the Company's book of business. 35 Finally, if the Merger Agreement is terminated under certain circumstances, the Company may be obligated to pay a $2,100,000 termination fee to Palisades and reimburse Palisades for its out-of-pocket expenses up to $1,500,000. For a description of the circumstances obligating payment of the termination fee and expenses, see "THE MERGER AGREEMENT--Termination Fee." Regulatory Matters U.S. Antitrust Filing Transactions such as the Merger frequently are reviewed and scrutinized by the United States Department of Justice and the United States Federal Trade Commission to determine whether they comply with applicable antitrust laws. Under the provisions of the HSR Act, the Merger may not be completed until the expiration of a 30-day waiting period following the filing of completed notification reports with the Department of Justice and the Federal Trade Commission by Palisades and the Company, unless a request for additional information or documentary material is received from the Federal Trade Commission or the Department of Justice, or unless early termination of the waiting period is granted by the reviewing agencies. Palisades and the Company filed notification reports with the Department of Justice and Federal Trade Commission under the HSR Act on March 27, 2008. On April 4, 2008, the Federal Trade Commission granted early termination of the waiting period under the HSR Act with respect to the Merger. At any time before or after the Merger, the Department of Justice or the Federal Trade Commission could take action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the Merger or seeking divestiture of substantial assets of Palisades or the Company or their subsidiaries. Private parties, foreign competition authorities, and state attorneys general also may bring an action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Merger on antitrust grounds will not be made or, if a challenge is made, of the result. Insurance Regulations The Merger is subject to state statutes and regulations regarding the insurance industry. The insurance laws and regulations of the State of New Jersey, where the Company is domiciled, require that, prior to the acquisition of a New Jersey-domiciled insurance company, either through the acquisition of or merger with the insurance company or a holding company of that insurance company, the acquiring company must obtain approval from the New Jersey Department of Banking and Insurance. Accordingly, on April 3, 2008, Palisades made the necessary application with the New Jersey Department of Banking and Insurance. Obtaining Regulatory Approval While we expect Palisades to obtain regulatory approval, there can be no assurance that Palisades will obtain the regulatory approval necessary or that the granting of regulatory approval will not involve the imposition of conditions on the completion of the Merger or require changes to the terms of the Merger. Other than the filing described above, neither we or Palisades is aware of any regulatory approvals required to be obtained to complete the Merger. If we or Palisades discover that other regulatory approvals are necessary, we or Palisades will seek to comply with them. If any additional approvals or actions are needed, however, we or Palisades may not be able to obtain them, as is the case with the other necessary approvals. Even if we and Palisades do obtain all necessary approvals, conditions may be placed on any such approval that could cause either us or Palisades to abandon the Merger. Such conditions could include any condition, restriction or requirement: o that would require material changes in the business or operations of the Company as currently conducted; o that would have or would be reasonably expected to have a material adverse effect on business or operations of the Company or Palisades and its affiliates, taken as a whole; or o that would restrict in any material respect the license or certificate of authority of the Company issued by the New Jersey Department of Banking and Insurance. 36 Voting Agreement As a condition to the execution of the Merger Agreement, James V. Gorman executed a voting agreement pursuant to which he agreed, among other things, to vote his shares in favor of the recommendation of the Board of Directors to the holders of shares of Company common stock and against any acquisition proposal, subject to certain exceptions. Mr. Gorman is entitled to vote 1,512,140 shares of the Company's outstanding shares of common stock, representing [ ] percent of Company common stock outstanding and entitled to vote as of the record date. Delisting and Deregistration of Common Stock If the Merger is completed, our common stock will be delisted from the Nasdaq Stock Market and deregistered under the Securities Exchange Act of 1934, as amended, which we refer to in this proxy statement as the Exchange Act, and we will no longer file periodic reports with the SEC on account of our common stock. Litigation Relating to the Merger The Company's Directors, the Company, Palisades, and the Merger Sub have been named as defendants in a purported class action on behalf of the public shareholders of the Company challenging the proposed Merger. On or about March 19, 2008, plaintiff filed the Class Action Complaint, which is pending in the Equity Division of the Superior Court of New Jersey, Monmouth County, New Jersey, styled NSL Capital Management v. Gorman et al., Docket No. C-48-082. Among other things, plaintiff alleges that the Director defendants have breached their fiduciary duties to the Company's shareholders in pursuing the proposed Merger "by failing to engage in an honest and fair sale process" and by adopting deal protections that had the effect of ensuring that no competing bids would emerge for the Company after the proposed Merger was announced; plaintiff also asserts a claim against Palisades and the Merger Sub for aiding and abetting the Directors' alleged breach of fiduciary duties. The complaint alleges that the plaintiff is entitled, among other things, to an unspecified amount of money damages as well as injunctive relief to prevent consummation of the Merger. The defendants believe that the lawsuit is without merit and intend to vigorously defend the action. Form A Filing with the New Jersey Department of Banking and Insurance to Acquire Control of a Domestic Insurer by shareholder Hovde Capital Advisors, LLC, et al. On February 12, 2008, Hovde Capital Advisors, LLC, Hovde Private Equity Advisors, LLC, Financial Institution Partners, L.P., Financial Institution Partners, Ltd., Financial Institution Partners III, L.P., Financial Institution Partners IV, L.P., Financial Services Partners Fund I, LLC, Eric D. Hovde, Steven D. Hovde, Richard J. Perry, Jr. and Joseph J. Thomas (collectively referred to as "Hovde") filed a Form A with the New Jersey Department of Banking and Insurance (the "Department") seeking control of a domestic insurer as described in N.J.S.A. 17:27A-2. Pursuant to this filing, Hovde indicated that they are seeking to acquire additional voting securities in excess of the 14.666 percent of the issued and outstanding voting securities owned as of the date the Form A was filed as well as to cause one of their nominees, Joseph J. Thomas, to serve as a member of the Board of Directors of the Company. 37 THE MERGER AGREEMENT The following summary of the terms of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached to this proxy statement as Exhibit A and which we incorporate by reference into this document. We encourage you to read carefully the Merger Agreement in its entirety. The Merger Agreement and related documents have been described in and included with this proxy statement to provide you with information regarding their terms. They are not intended to provide any factual, business or operational information about us or our subsidiaries. Additional information about Palisades and the Company may be found elsewhere in this proxy statement and in the other public filings that the Company makes with the SEC. See "Where You Can Find Additional Information" beginning on page [ ]. Structure and Effective Time Under the Merger Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity. The Effective Time of the Merger shall occur at the time of filing of the Certificate of Merger with the Secretary of State of the State of New Jersey, in such form as required by, and executed in accordance with the relevant provisions of, the New Jersey Business Corporation Act, or at such time thereafter as is provided in the Certificate of Merger. The officers of the Merger Sub immediately prior to the Effective Time of the Merger will remain as the initial officers of the surviving entity after the Effective Time of the Merger until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. The Directors of the Merger Sub immediately prior to the Merger will be the initial Directors of the Company after the Effective Time, with each director holding office until the next annual meeting (or the earlier of their resignation or removal) and until their successors are duly elected and qualified, as the case may be. The certificate of incorporation of the Company as in effect immediately prior to the Effective Time shall be the certificate of incorporation of the surviving corporation. The bylaws of the Merger Sub as in effect immediately prior to the Effective Time shall be the bylaws of the surviving corporation. Merger Consideration Each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than shares of Company common stock owned by us and our subsidiaries) will be converted into the right to receive $6.25 in cash, without interest and less any applicable withholding taxes. Treatment of Company Equity Awards Options Each stock option to purchase shares of Company common stock outstanding immediately prior to the Effective Time that was issued under a Company stock plan, whether or not vested, will be cancelled and converted into the right to receive a cash payment in an amount equal to the product of (i) the number of common shares underlying the unexercised stock option and (ii) the excess, if any, of $6.25 over the per share exercise price of such option, less any required withholding taxes. Stock Appreciation Rights Each stock appreciation right to receive cash that was issued under a Company stock plan outstanding immediately prior to the Effective Time, whether or not vested, will be cancelled and converted into the right to receive a cash payment in an amount equal to the product of (i) the number of common shares underlying the unexercised stock appreciation right and (ii) the excess, if any, of $6.25 over the per share base price of such stock appreciation right, less any required withholding taxes. 38 Exchange of Share Certificates At or prior to the Effective Time, Palisades must deposit with a bank or trust company, reasonably acceptable to the Company to act as exchange agent (the "Exchange Agent"), cash in an aggregate amount sufficient to pay the Merger Consideration for all shares of Company common stock (other than shares of common stock owned by us and our subsidiaries). Promptly after the Effective Time of the Merger, the Exchange Agent will mail appropriate materials, including a letter of transmittal, to you and the other Company shareholders of record as of the Effective Time. The appropriate materials, including the letter of transmittal, will tell you how to surrender your Company share certificates or shares you may hold represented by book entry in exchange for the Merger Consideration. You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the Exchange Agent without a letter of transmittal. You will not be entitled to receive the Merger Consideration until you surrender your stock certificate or certificates (or book-entry shares) to the Exchange Agent, together with a duly completed and executed letter of transmittal and any other documents as may be required by the letter of transmittal. The Merger Consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer. The person requesting such payment must pay any transfer or other taxes required by reason of such certificate or establish to the satisfaction of Palisades that such tax has been paid or is not applicable. No interest will be paid or will accrue on the cash payable upon surrender of the certificates (or book-entry shares). Each of the Exchange Agent, Palisades and the surviving corporation will be entitled to deduct and withhold from the Merger Consideration such amounts as it is required to deduct and withhold with respect to the payment of such consideration under applicable tax laws and pay the withheld amounts to the appropriate taxing authorities. To the extent such withheld amounts are so withheld, such withheld amounts will be treated for all purposes under the Merger Agreement as having been paid to the holder of shares of Company common stock. At the consummation of the Merger, our stock transfer books will be closed, and there will be no further registration of transfers of outstanding shares of Company common stock. None of the Exchange Agent, Palisades, the Company, Merger Sub or the surviving corporation will be liable to any holder of shares of Company common stock for any cash or interest delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. Any portion of the Merger Consideration remaining unclaimed by holders of the Company common stock as of a date that is immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity shall, to the extent permitted by applicable law, become the property of the surviving corporation free and clear of any claims or interest of any person previously entitled thereto. Representations and Warranties The Merger Agreement contains representations and warranties made by us to Palisades and the Merger Sub and representations and warranties made by Palisades and the Merger Sub to us. The statements embodied in those representations and warranties were made for purposes of that contract between the parties and are subject to qualifications and limitations agreed to by the parties in connection with negotiating the terms of that contract. In addition, certain representations and warranties were made only as of March 13, 2008 or such other date as is specified in the Merger Agreement, may be subject to contractual standards of materiality different from those generally applicable to shareholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters of fact. In addition, the representations and warranties (1) have been qualified by disclosures made to the other parties in connection with the Merger Agreement, (2) will not survive consummation of the Merger, and (3) at closing, must only be true and correct subject to the standards contained in the Merger Agreement, which may differ from what may be viewed as material by shareholders. For the foregoing reasons, you should not rely on the representations and warranties contained in the Merger Agreement as statements of factual information. Our representations and warranties in the Merger Agreement relate to, among other things: o our and our subsidiaries' organization, good standing and legal power; o our and our subsidiaries' capital structure; o our authority to enter into the Merger Agreement; o the taking of all necessary board action; 39 o the required vote for shareholder approval; o consents and approvals that need to be obtained in connection with the transactions contemplated by the Merger Agreement, and the absence of violations of law or breaches of contract in connection with the transactions contemplated by the Merger Agreement; o filings with the SEC; o Sarbanes Oxley Act of 2002 compliance; o our financial statements and the absence of undisclosed liabilities; o the absence of certain changes or events since December 31, 2007; o matters relating to our and our subsidiaries' employee benefit plans; o tax matters; o compliance with applicable laws; o litigation; o insurance regulatory matters; o reserves; o intellectual property; o real property; o labor matters; o this proxy statement; o operations insurance; o brokers; o state takeover statutes; o title to assets; o affiliate transactions; o material contracts; o opinion of our financial advisor; and o draft audited financial statements. Many of the representations in the Merger Agreement carve out circumstances that would not reasonably be expected to have a material adverse effect on the Company. A "material adverse effect" on the Company means an event (including without limitation a natural catastrophe), change, circumstance, state of facts or effect that has had or is reasonably likely to have a material adverse effect on (i) the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of the Company and its subsidiaries taken as a whole, or (ii) the ability of the Company to perform its obligations under the Merger Agreement on a timely basis; provided, however, that in the case of clause (i) only, an event, change, circumstance, state of facts or effect shall not be deemed a "material adverse effect" to the extent that it results from (1) changes in the economy in general in the United States, to the extent that such changes do not have a disproportionate effect on the Company and its subsidiaries taken as a whole relative to other participants in the industry in which the Company and its subsidiaries conduct business; (2) changes in United States or global financial or securities markets or conditions, including those caused by acts of war, hostility or terrorism, to the extent such changes do not have a disproportionate effect on the Company and its subsidiaries taken as a whole relative to other participants in the industry in which the Company and its subsidiaries conduct business; (3) changes or events affecting the insurance industry generally so long as such changes or events do not have a materially disproportionate effect on the Company and its Subsidiaries taken as a whole relative to other participants in the industry in which the Company and its Subsidiaries conduct business (it being agreed that such changes or events shall not include any named hurricane that is identified as a Category 3 or higher hurricane, but shall otherwise include natural catastrophes); (4) changes in United States generally accepted accounting principles or in statutory accounting practices prescribed by the applicable domiciliary state regulation after the date of the Merger Agreement, including accounting pronouncements by the Securities and Exchange Commission, the National Association of Insurance Commissioners and the Financial Accounting Standards Board; or (5) the announcement of the Merger Agreement or the consummation of the Merger. Representations and warranties of Palisades and the Merger Sub relate to, among other things: o the organization, good standing and legal power of Palisades and the Merger Sub; 40 o the authority of Palisades and the Merger Sub to enter into and consummate the transactions contemplated by the Merger Agreement; o consents and approvals that need to be obtained in connection with the transactions contemplated by the Merger Agreement; o the absence of violations of law or breaches of contract in connection with the transactions contemplated by the Merger Agreement; o compliance with applicable laws; o litigation; o accuracy of information supplied by Palisades or the Merger Sub for inclusion in this proxy statement; o financing of the transaction; o brokers; o the formation of the Merger Sub solely to engage in transactions contemplated by the Merger Agreement; and o lack of ownership of shares of Company common stock. The representations and warranties of each of the parties to the Merger Agreement will expire at the consummation of the Merger. Conduct of Business Pending Merger We have agreed to covenants in the Merger Agreement that affect the conduct of our business between the date the Merger Agreement was signed and the consummation of the Merger. Prior to the consummation of the Merger, subject to specified exceptions, we and our subsidiaries are required to carry on our business in the ordinary course and, to the extent consistent therewith, use reasonable best efforts to preserve intact our business organizations and our relationships with agents, insureds and others having business dealings with us. In addition, absent the written consent of Palisades and subject to specified exceptions, we will not, and will not permit any of our subsidiaries to, among other things: o declare or pay dividends on, or make any other distributions (whether in cash, stock, property or other thing of value) in respect of, any of our outstanding capital stock or any subsidiary's capital stock; o split, combine, subdivide or reclassify any of our outstanding capital stock or issue or authorize the issuance of any securities in respect of or in substitution for shares of our outstanding capital stock; o purchase, redeem, retire or otherwise acquire any shares of our outstanding capital stock or any rights, warrants or options to acquire such shares; o issue, sell, grant, pledge or otherwise encumber any shares of our capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, such shares, voting securities or convertible securities; o sell, lease, license or otherwise dispose of (including by way of reinsurance), or pledge, subject to a lien or otherwise encumber, any of our assets, except in the ordinary course of business consistent with past practice (it being understood that any such actions taken regarding investment assets which comply with our investment guidelines or any subsidiary's investment guidelines in effect on the date the Merger Agreement shall be deemed to be taken in the ordinary course of business); o amend or change our certificate of incorporation, bylaws or other comparable organizational documents, or merge with or into or consolidate with any other person or entity; o acquire any person or entity or division thereof, or a material portion of the assets of any of the foregoing, liquidate, dissolve or wind up our business or organize any new subsidiary; o (i) incur any indebtedness for borrowed money or guarantee or otherwise become responsible for any such indebtedness of another person or entity, except in the ordinary course of business consistent with past practice or (ii) make any loans or make or receive any capital contributions or other equity investment other than as to such matters related to our investment portfolio or any subsidiary's investment portfolio in the ordinary course of business consistent with past practice; o abandon, modify, waive, terminate or otherwise change any material Company permit or any insurance subsidiary permit except as in the ordinary course of business consistent with past practice or may be required by applicable laws; o except for terminations or amendments in the ordinary course of business consistent with past practice or renewals on substantially the same terms, terminate or materially amend any material contract as described 41 in the Merger Agreement, or enter into or amend any material contract if entered into on the date of the Merger Agreement; o unless required by applicable laws or to comply with changes in GAAP or SAP, change in any material respect any of our methods, policies, practices or principles with respect to financial or statutory accounting, reserving, hedging or investing or otherwise engaging in derivatives transactions, underwriting or claims administration or reinsurance; o pay, discharge, settle or satisfy any claims, litigation, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than (i) payment, discharge, settlement or satisfaction fully reserved against in our most recent consolidated financial statements included in the Company SEC Documents or (ii) on liabilities incurred since the date of such financial statements, payment, discharge, settlement or satisfaction in the ordinary course of business consistent with past practice; o amend or terminate any Company Employee Benefit Plan, except as may be required by applicable laws; or with respect to any employee, enter into or amend any employment or consulting contract or agreement, or increase compensation, wages or bonuses other than in the ordinary course of business consistent with past practice (provided there will be no increase in compensation, wages or bonuses paid to any of our Officers or Directors or our subsidiaries' Officers and Directors), or commit or agree to any changes in our severance terms or policies; or change in any material respect the terms for, or policies with respect to, the payment of commissions to any of our agents; o except as required by applicable laws (i) settle or compromise any our material Tax liability or any material Tax liability of our subsidiaries that has not been fully accrued for in accordance with GAAP on the most recent financial statements that are included in the Company SEC Documents (ii) file any amended Tax Returns with respect to any material Taxes; (iii) make or change any material Tax election; (iv) change any annual Tax accounting period; (v) surrender any right to claim a material Tax refund; or (vi) waive or extend the statute of limitations in respect of material Taxes (other than pursuant to extensions of time to file Tax Returns obtained in the ordinary course of business); o enter into, amend or modify any reinsurance agreement or treaty or amend, modify or otherwise revise any forms of insurance policy other than facultative reinsurance; o make or agree to make any capital expenditure or expenditures in an amount that, in the aggregate, exceeds the aggregate amount of capital expenditures set forth for the period between March 13, 2008 and the Closing Date in the Company Disclosure Letter; or o agree or commit in writing or otherwise to take any of the actions prohibited by these covenants. Preparation of Proxy Statement; Shareholders Meeting The Merger Agreement requires us, as promptly as practicable, and in any event by June 11, 2008, to prepare and file with the SEC this proxy statement. Palisades, the Merger Sub and their counsel were given an opportunity to review and comment on this proxy statement prior to its filing with the SEC. The Merger Agreement requires us to include in this proxy statement (i) the recommendation of the Board of Directors that the shareholders of the Company vote in favor of the approval of the Merger Agreement and (ii) the Opinion of Banc of America Securities. The Merger Agreement requires us, as promptly as reasonably practicable within 60 days following the SEC's approval of the filing of this proxy statement, to duly call, give notice of, convene and hold an annual or special meeting of our shareholders for the purpose of voting upon the Merger and the Merger Agreement. We agreed to mail this proxy statement to our shareholders in advance of such meeting in a timely manner in compliance with all applicable laws and with our organizational documents. We have agreed to take all lawful action to (i) solicit from our shareholders proxies in favor of the approval of the Merger Agreement and approval of the Merger and the other transactions contemplated by the Merger Agreement and (ii) take all other actions necessary or advisable to secure the vote or consent of our shareholders required by applicable law to obtain such approval, including confirming our Board's approval and recommendation of the terms of the Merger Agreement upon request; provided that we may (and at the request of Palisades will) extend the date of the shareholders meeting to the extent (A) necessary to obtain a quorum of our shareholders or (B) we reasonably determine that such delay is required by applicable law. At the Company shareholders meeting, Palisades and its affiliates have agreed to vote all shares of Company common stock owned by them, if any, in favor of approval of the Merger Agreement and approval of the Merger. As of this filing, Palisades and its affiliates did not own of record or beneficially any common stock of the Company, preferred stock of the Company or any options, warrants or other rights to acquire 42 the common stock or preferred stock of the Company, except rights granted pursuant to the Merger Agreement. We will not be required to hold the shareholders meeting if the Merger Agreement is terminated before that meeting is held. Access to Information; Confidentiality We have agreed, subject to restrictions of applicable law (including antitrust laws), to, and to cause each of our subsidiaries to, afford to the officers, employees, accountants, counsel, financial advisors and other representatives of Palisades, upon reasonable notice, reasonable access during normal business hours during the period prior to the Effective Time to all of our and our subsidiaries' properties, personnel, books, contracts, records, commitments, officers and employees and, during such period, we have agreed to, and to cause each of our subsidiaries to, make available to Palisades: o a copy of each report, schedule, registration statement and other document filed or received by us and our subsidiaries during such period pursuant to the requirements of federal or state securities laws, or the HSR Act, state insurance laws or the rules and regulations of self regulatory organizations and o all other information concerning our and our subsidiaries' business, properties and personnel as Palisades may reasonably request. However, neither we nor our subsidiaries are required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of our customers, jeopardize the attorney-client privilege of the institution in possession or control of such information or contravene any applicable law. Further, we may withhold any information which is nonpublic in confidence to the extent required by, and in accordance with, the provisions of the Confidentiality Agreement dated November 2, 2007 between Palisades and us, which Confidentiality Agreement will remain in effect. Reasonable Best Efforts Each of the parties has agreed to use, and to cause its respective subsidiaries to use, all reasonable best efforts to: o take, or cause to be taken, all actions necessary, proper or advisable to comply promptly with all legal requirements which may be imposed on such party or its subsidiaries with respect to the Merger and to consummate the transactions contemplated by the Merger Agreement as promptly as practicable, and o obtain, and to cooperate with the other party to obtain, any consent, authorization, order or approval of, or any exemption by, any governmental entity and/or any other public or private third party that is required to be obtained by such party or any of its subsidiaries in connection with the Merger and the transactions contemplated by the Merger Agreement, including without limitation, the necessary approvals from the New Jersey Department of Banking and Insurance ("DOBI") with respect to the acquisition of control of the Company by Palisades; provided, however, that neither Palisades nor any of its affiliates shall be obligated (i) to accept any approval of the acquisition of control by DOBI which does not also include (as part of such approval or pursuant to a separate approval) authorization by DOBI that that the surviving corporation and its subsidiaries may non-renew at least 7,000 of the homeowners policies in the DOBI New Jersey Wind Map zip codes as in effect on March 13, 2008 that we had in effect on December 31, 2007 (plus a number at least equal to the number of any additional such policies written by us since that date), (ii) to divest any of their respective assets or any of the assets being acquired under the Merger Agreement, or (iii) to accept any condition imposed by any governmental entity that in Palisades' reasonable judgment would materially effect the respective businesses of Palisades, any of its affiliates or the surviving corporation, or otherwise materially reduce the benefits to Palisades, any of its affiliates or the surviving corporation resulting from the consummation of the transactions contemplated by the Merger Agreement. Palisades had agreed to use its reasonable best efforts to enlist unaffiliated third parties to provide coastal capacity for the affected non-renewed customers in the DOBI New Jersey Wind Map zip codes contemplated above. We have agreed that our Directors and Officers will cooperate and participate in Palisades' efforts to obtain a rating confirmation. 43 On April 3, 2008, Palisades submitted a draft Form A to be made to DOBI with respect to its acquisition of control of the Company. Palisades has agreed to respond to all comments to such draft application, and requests for additional information in connection with such draft application, made by DOBI within 10 days and has agreed to keep us apprised of the status of all applications to, and proceedings before, governmental entities in connection with the transactions contemplated by the Merger Agreement and we have agreed to cooperate in the preparation of the Form A application. Acquisition Proposals We have agreed that following the execution of the Merger Agreement we will not, and will (x) cause our and our subsidiaries' Officers, Directors and employees not to, and (y) direct, and use our reasonable best efforts to cause, our and our subsidiaries' agents and representatives not to, directly or indirectly: o initiate, solicit, encourage or knowingly facilitate any inquiries or the making of any acquisition proposal, o have any discussions with, or provide any confidential information or data to, any person relating to an acquisition proposal, or engage in any negotiations concerning an acquisition proposal, or knowingly facilitate any effort or attempt to make or implement an acquisition proposal, o waive, terminate, modify or fail to enforce any provision of any contractual "standstill" or similar obligation of any person or entity other than Palisades or its affiliates, or o approve, adopt or recommend, or propose to approve, adopt or recommend, or execute or enter into, any letter of intent, agreement in principle, merger agreement, asset purchase or share exchange agreement, option agreement or other similar agreement related to any acquisition proposal or propose or agree to do any of the foregoing. An "acquisition proposal" means: o any proposal or offer with respect to, or a transaction or series of transactions to effect, (x) a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction or (y) any acquisition in any manner of 20% or more of our consolidated assets (including stock of our subsidiaries), or o any purchase or sale of, or tender or exchange offer for, our equity securities that, if consummated, would result in any person or group of persons (or the shareholders of such person or group) beneficially owning securities representing 20% or more of our total voting power. Notwithstanding anything to the contrary in the Merger Agreement, our Board of Directors may, prior to the special meeting to approve the Merger, and subject to compliance with the other terms of the Merger Agreement and to first entering into a confidentiality agreement with such initiating person that contains provisions no less favorable to us than those in the confidentiality agreement with Palisades, engage in discussions and negotiations with, and provide nonpublic information or data to, or waive any "standstill" agreement with, any person that has made a bona fide unsolicited written acquisition proposal that our Board of Directors has determined in good faith, after consultation with its financial advisor and outside legal counsel, (A) is, or is reasonably likely to lead to, a superior proposal and (B) for which the failure to take such action in connection therewith would reasonably be expected to result in a violation of its fiduciary duties under applicable laws; provided, that contemporaneously with furnishing any non-public information to such initiating person, we furnish such non-public information to Palisades to the extent such information has not been previously furnished to Palisades. A "superior proposal" means a bona fide written acquisition proposal which our Board of Directors concludes in good faith, after consultation with its financial advisors and outside legal advisor, taking into account all legal, financial, regulatory and other aspects of the proposal and the person making the proposal (including any break-up fees, expense reimbursement provisions and conditions to consummation): 44 o is more favorable to our shareholders from a financial point of view than the Merger and the other transactions contemplated by the Merger Agreement, and o is fully financed or reasonably capable of being fully financed; o provided, however, that, for purposes of this definition, the reference to "20% or more of its total voting power" in the definition of "acquisition proposal" shall be deemed to be a reference to "80% or more of its total voting power" and the reference to "20% or more of its consolidated assets" shall be deemed to be a reference to "80% or more of its consolidated assets"; and provided, further, that no acquisition proposal shall be deemed a superior proposal unless and until (x) we have given Palisades at least five business days' prior written notice of the current terms and conditions of any such acquisition proposal and have contemporaneously provided a copy of the relevant proposed transaction agreement and other material documents (and in the event of any material change to the financial or other material terms of such acquisition proposal, we will, in each case, have delivered to Palisades an additional notice and the notice period shall recommence), (y) we have negotiated in good faith with Palisades during such notice period, to the extent, if at all, Palisades wishes to negotiate, to enable Palisades to propose changes to the terms of the Merger Agreement that would cause such acquisition proposal to no longer constitute a superior proposal, and (z) our Board of Directors will have considered in good faith (after consultation with independent financial advisors and outside legal counsel) any changes to the Merger Agreement proposed in writing by Palisades and will have determined that the acquisition proposal would continue to constitute a superior proposal if such changes were to be given effect. We have agreed to promptly (and in any event within 24 hours) notify Palisades after receipt of any acquisition proposal, or any request for nonpublic information relating to us or any of our subsidiaries by any third party that informs us or any of our subsidiaries that such third party is considering making, or has made, an acquisition proposal, or any inquiry from any third party seeking to have discussions or negotiations with us relating to a possible acquisition proposal, and to provide Palisades a copy of any such acquisition proposal (or a written summary of the material terms of any such acquisition proposal not made in writing). We have agreed to also promptly (and in any event within 24 hours) notify Palisades in writing if we enter into discussions or negotiations concerning any acquisition proposal with, or provide nonpublic information or data to, any third party in accordance with the Merger Agreement, including the identity of such third party, and keep Palisades informed of the status and terms of any such proposals, offers, discussions or negotiations on a current basis. We have agreed that we and our subsidiaries shall not enter into any confidentiality agreement with any person subsequent to the execution of the Merger Agreement that prohibits us from providing the information contemplated in the Merger Agreement to Palisades. We have agreed that our Board of Directors will not (i) withhold, withdraw, amend, change, qualify or modify in a manner adverse to Palisades, or publicly propose to withhold, withdraw, amend, change, qualify or modify in a manner adverse to Palisades, its recommendation to our shareholders in favor of the Merger; (ii) take any action or make any recommendation or public statement in connection with a tender offer or exchange offer other than a recommendation against such offer; or (iii) approve, adopt or recommend or publicly propose to approve or recommend to our shareholders or enter into any letter of intent, memorandum of understanding, agreement, option agreement or similar agreement or arrangement with respect to any acquisition proposal. Notwithstanding anything to the contrary in the Merger Agreement, prior to obtaining the approval required by the Company's shareholders: (A) in response to an acquisition proposal that did not arise directly or indirectly from a material breach of the Merger Agreement, our Board of Directors may, if it determines in good faith, after consultation with its independent legal and financial advisors, that the failure to take such action would be reasonably likely to result in a breach of its fiduciary duties to shareholders under applicable law, make a change in recommendation; provided, that our Board of Directors has determined in good faith that such acquisition proposal constitutes a superior proposal; or (B) in circumstances other than those described in (A) above, our Board of Directors may, if it determines in good faith, after consulting with its independent legal and financial advisors, that the failure to take such action would be reasonably likely to result in a breach of the its fiduciary duties to shareholders under applicable law, take any of the actions described in clause (i) of this paragraph and shall not be required to solicit proxies in favor of approval of the Merger and shall not be required to mail this Proxy Statement or hold the special meeting; provided, that (1) we have notified Palisades in writing that our Board of Directors is prepared to make the determination set forth in clause (B) setting forth the reasons therefor in reasonable detail, and (2) at least five days following effective delivery of such notice to Palisades, our Board of Directors, after the 45 conclusion of the negotiations and five-day notice period provided for in the Merger Agreement, if applicable, remains prepared to make the determination described in clause (B) after taking into account adjustments, if any, proposed by Palisades to the terms and conditions of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. If the Board of Directors changes its recommendation in accordance with these guidelines, it must terminate the Merger Agreement and pay a termination fee to Palisades. We have agreed (i) to, and to cause our subsidiaries, and our and our subsidiaries' Officers, Directors, agents, representatives and advisors to, cease immediately and terminate any and all existing activities, discussions or negotiations with any third parties conducted with respect to any acquisition proposal, and (ii) to not release any third party from, or waive any provisions of, any confidentiality or standstill agreement to which we or any of our subsidiaries are a party with respect to any acquisition proposal. Nothing contained in the Merger Agreement will prohibit us or our Board of Directors from (i) taking and disclosing to shareholders a position with respect to a tender or exchange offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or (ii) making any disclosure to shareholders if, in the good faith judgment of our Board of Directors, after consultation with its independent legal advisors, failing to make such disclosure would be inconsistent with applicable law; provided that any such disclosure shall be deemed to be a change of recommendation unless such disclosure contains a recommendation against any acquisition proposal and a reaffirmation of our Board's recommendation in favor of the Merger, or our Board of Directors publicly reaffirms its recommendation in favor of the Merger within two (2) business days of a request by Palisades to do so. Fees and Expenses Subject to limited exceptions relating to termination of the Merger Agreement, we and Palisades have agreed that, whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated by the Merger Agreement will be paid by the party incurring such expense. One exception involves the failure of the Company's shareholders to approve the Merger, in which case the expenses incurred by Palisades in connection with the Merger Agreement and the Merger will be reimbursed by the Company, subject to a $1,500,000 cap. Certain Actions Palisades had agreed that for a period of not less than 12 months (i) to use its reasonable best efforts to provide homeowners new business capacity to our partner agents, appointed or already appointed by Palisades subject to underwriting guidelines established and on file by Palisades, and (ii) to cause homeowners customers of appointed agents who are eligible for renewal, except certain coastal policies non-renewed as set forth in the Merger Agreement, to be offered renewals subject to underwriting guidelines established by Palisades. Indemnification We and Palisades have agreed that from and after the Effective Time, Palisades will, or will cause the surviving corporation, to the fullest extent permitted by applicable laws, to indemnify, defend and hold harmless, and provide advancement of expenses to, each person who is now, or has been at any time prior to March 13, 2008 or who becomes prior to the Effective Time, any of our Officers or Directors or any Officer or Director of our subsidiaries, only in their capacity as such against all losses, claims, damages, costs, expenses, liabilities or judgments or amounts that are paid in settlement of or in connection with any claim, action, suit, proceeding or investigation based in whole or in part on, or arising in whole or in part out of, the fact that such person is or was an Officer or Director of ours or any of our subsidiaries, and pertaining to any matter existing or occurring, or any acts or omissions occurring, at or prior to the Effective Time, whether asserted or claimed prior to, or at or after, the Effective Time to the same extent such persons are indemnified or have the right to advancement of expenses as of March 13, 2008 pursuant to our Certificate of Incorporation and Bylaws, as in effect on March 13, 2008. For a period of six years after the Effective Time, Palisades has agreed to cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by us (provided that Palisades may substitute policies with a substantially comparable insurer of at least the same coverage and amounts containing terms and conditions which are no less advantageous to the insured) with respect to claims arising from facts or events which occurred at or before the Effective Time; provided, however, that prior to the consummation of the 46 Merger we will arrange for the provision of, and as of the date of the consummation of the Merger, we will have in effect, and will have prepaid any annual premiums applicable to, policies of directors' and officers' liability insurance in effect for a period of six years following the Closing Date with aggregate coverage limits no less than $50,000,000 and at a total cost at or below $4,000,000 and which are otherwise substantially similar to, or better, in the coverages and exclusions from coverages and the terms and conditions provided for or contained in the directors' and officers' policies currently maintained by us (the "Tail Coverage"). We have agreed that we may not act as our own insurer for the Tail Coverage. Palisades has agreed to, within one day of notice of the purchase of the Tail Coverage by us, or upon the purchase of substantially comparable, or better, directors' and officers' liability insurance coverage that will go into effect prior to the Effective Time that provides a commitment by the insurer to continue such coverage through the tail period, reimburse us for up to $1,000,000 of the amount paid by us for the Tail Coverage or the amplified coverage (but not both). Benefit Plans Palisades has agreed that, for a period of 18 months immediately following the consummation of the Merger, the compensation, benefits and coverage provided to those individuals who are employed by us or any of our subsidiaries immediately prior to the consummation of the Merger and continue to be employees of the surviving corporation or its subsidiaries as of the date of the consummation of the Merger pursuant to employee benefit or compensation plans or arrangements maintained by Palisades or the surviving corporation and its subsidiaries will be, in the aggregate, substantially comparable (determined without regard to equity-based plans and programs) to those provided to such affected employees immediately prior to the consummation of the Merger. Palisades has agreed to cause the surviving corporation and its subsidiaries to use reasonable best efforts to, give the affected employees full credit for purposes of eligibility and vesting (and for purposes of determining the amount of vacation and paid time off) for such affected employees' service with us or any of our subsidiaries under employee benefit plans (other than equity-based plans) of Palisades, the surviving corporation or its subsidiaries to the same extent recognized by us or such subsidiary immediately prior to the consummation of the Merger except to the extent that recognition of such service results in the duplication of benefits. Palisades has agreed to, or to cause the surviving corporation and its subsidiaries to use reasonable best efforts to, (i) waive all limitations as to preexisting conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the affected employees under any welfare benefit plan established by such affected employees, in which such affected employees may be eligible to participate after the consummation of the Merger, other than limitations or waiting periods that are already in effect with respect to such affected employees and that have not been satisfied as of the date of such establishment under any welfare plan maintained for the affected employees immediately prior to the Effective Time, and (ii) provide each affected employee with credit for any co-payments and deductibles paid prior to the date of such establishment and paid within the same plan year as the year in which the consummation of the Merger occurs in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that such affected employees are eligible to participate in after the consummation of the Merger for such year. Palisades has agreed to cause the surviving corporation and its subsidiaries to honor all employment, severance, consulting and retention agreements or arrangements and all our employee benefit plans; provided, however, that Palisades or the surviving corporation is not prevented from exercising its respective rights with respect to such agreements or arrangements and all our employee benefit plans in accordance with their terms, including, but not limited to, the right to alter, terminate or otherwise amend all such agreements and arrangements and our employee benefit plans. Non-Compete Palisades has agreed that if Palisades shall at any time be required to pay the termination damages set forth in the Merger Agreement, from such date until the second anniversary thereof, neither Palisades nor its affiliates will solicit any holder of a Company Policy, other than by way of general solicitations not specifically targeted to a holder of a Company Policy, nor shall Palisades or its affiliates utilize any agents or brokers appointed by both us and Palisades to solicit any Company Policy. "Company Policy" means any of our policies in effect on date that any termination damage payment is required to be paid under the Merger Agreement. 47 Other Covenants and Agreements The Merger Agreement contains other covenants and agreements, including covenants and agreements relating to delisting our common stock from the Nasdaq Stock Market, public announcements regarding the Merger, taking all necessary action to carry out the Merger Agreement and the exemption of company insiders pursuant to Rule 16b-3. Conditions Precedent The obligation of each party to effect the Merger is subject to satisfaction or waiver on or prior to the closing date of the Merger of the following conditions: o Shareholder Approval. We will have obtained the affirmative vote of a majority of the votes cast by the holders of shares of Company common stock at the special meeting to approve the Merger Agreement and the Merger. o HSR Approval. The applicable waiting periods under the HSR Act shall have expired or been terminated. o Regulatory Matters. Other than the filing of the Certificate of Merger with the Secretary of State of the State of New Jersey, all material authorizations, consents, orders, approvals of or declarations or filings with, and all expirations of waiting periods required from, any governmental entity that is required to be obtained in connection with the consummation of the Merger and the transactions contemplated thereby will have been filed, have occurred or been obtained. All requisite regulatory approvals will be in full force and effect without any unsatisfied conditions, restrictions or requirements and any conditions imposed in connection with the foregoing, individually or in the aggregate, shall not obligate Palisades or any of its affiliates (i) to accept any approval of the acquisition of control by DOBI which does not also include (as part of such approval or pursuant to a separate approval) authorization by DOBI that that the surviving corporation and its subsidiaries may non-renew at least 7,000 of the homeowners policies in the DOBI New Jersey Wind Map zip codes that we had in effect on December 31, 2007 (plus a number at least equal to the number of any additional such policies written by us since that date), (ii) to divest any of their respective assets or any of the assets being acquired under the Merger Agreement, or (iii) to accept any condition imposed by any governmental entity that in Palisades' reasonable judgment would materially affect the respective businesses of Palisades, any of its affiliates or the surviving corporation, or otherwise materially reduce the benefits to Palisades, any of its affiliates or the surviving corporation resulting from the consummation of the transactions contemplated by the Merger Agreement. o No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect and there shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, by any governmental entity of competent jurisdiction that makes the consummation of the Merger illegal or otherwise prevents or prohibits the Merger. The obligation of Palisades and the Merger Sub to effect the Merger is subject to satisfaction or waiver on or prior to the closing date of the Merger of the following additional conditions: o Representations and Warranties. Our representations and warranties set forth in the Merger Agreement, disregarding all qualifications and exceptions therein relating to materiality or Material Adverse Effect, must be true and correct as of March 13, 2008 and, except to the extent such representations and warranties speak as of an earlier date, as of the closing date of the Merger as though made on and as such date, subject to such exceptions as do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, except for certain representations, including those relating to capital structure and absence of certain changes which must be true and correct as of March 13, 2008 and as of the closing date of the Merger as though made on and as such date. Palisades must have received a certificate signed on behalf of us by our Chief Executive Officer and our Chief Financial Officer to such effect. 48 o Performance of Obligations of the Company. We must have performed or complied with the agreements and covenants required to be performed by us under the Merger Agreement at or prior to the closing date of the Merger that are qualified as to materiality or Material Adverse Effect and we must have performed or complied in all material respects with all other obligations required to be performed by us under the Merger Agreement at or prior to the closing date of the Merger, except for certain agreement and covenants relating to the conduct of our business between March 13, 2008 and the closing date of the Merger which we must have performed or complied with such in all respects at or prior to the closing date of the Merger. Palisades must have received a certificate signed on behalf of us by our Chief Executive Officer and our Chief Financial Officer to such effect. o Other Conditions. o The Tail Coverage must be in effect and must have been procured at a total cost at or below $4,000,000. o As of the end of our most recent fiscal quarter or fiscal year, as applicable, for which financial statements have been filed with the SEC or statutory statements with DOBI, as applicable, our total shareholders' equity, as determined on a consolidated basis and in accordance with GAAP applied on a consistent basis, must not be less than $129,600,000, and the total capital and surplus of Proformance Insurance Company, as determined in accordance with SAP applied on a consistent basis and set forth in the statutory statements of admitted assets, liabilities, and capital and surplus, must not be less than $113,400,000; provided, that, the net reserves reflected in such statements must be not less than the amount equal to the sum of (A) the minimum amount in the range of net reserves recommended in the most recent Actuary report at or prior to the time of closing, plus (B) 45% of the difference between the maximum amount of such range and the minimum amount of such range. In the case of each of the foregoing, the determination of such amounts shall not give effect to (i) any costs of the financial advisor which have been disclosed pursuant to the Merger Agreement and (ii) premiums paid by us for the purchase of the Tail Coverage or the amplified coverage (less any reimbursement thereof by Palisades). o No investigation or proceeding by any governmental entity, in each case involving matters that give rise to allegations of criminal activity or fraud, involving us, any of our Subsidiaries or any of the respective Directors or Officers in their capacity as such, will be pending which could reasonably be likely to have a Material Adverse Effect. o The A.M. Best Financial Strength Rating of Proformance Insurance Company shall be at least "B-" (B-minus), or better. Our obligation to effect the Merger is subject to satisfaction or waiver on or prior to the closing date of the Merger of the following additional conditions: o Representations and Warranties. The representations and warranties of Palisades and the Merger Sub set forth in the Merger Agreement, disregarding all qualifications and exceptions therein relating to materiality or Material Adverse Effect, must be true and correct as of March 13, 2008 and, except to the extent such representations and warranties speak as of an earlier date, as of the closing date of the Merger as though made on and as of such closing date, subject to such exceptions as do not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Palisades. We must have received a certificate signed on behalf of Palisades by the Chairman and Chief Executive Officer and the Chief Financial Officer of Palisades to such effect. o Performance of Obligations of Palisades and the Merger Sub. Palisades and Merger Sub must have performed or complied with all agreements and covenants required to be performed by it under the Merger Agreement at or prior to the closing date of the Merger that are qualified as to materiality or Material Adverse Effect and must have performed or complied in all material respects with all other obligations required to be performed by it under the Merger Agreement at or prior to such closing date. We must have 49 received a certificate signed on behalf of Palisades by the Chairman and Chief Executive Officer and the Chief Financial Officer of Palisades to such effect. Termination The Merger Agreement may be terminated at any time prior to the Effective Time: o by mutual written consent of Palisades and the Company; o by either Palisades or the Company, upon written notice to the other party, if a governmental entity of competent jurisdiction which must grant a requisite regulatory approval has denied approval of the Merger and such denial has become final and unappealable; or any governmental entity of competent jurisdiction shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger, and such order, decree, ruling or other action has become final and unappealable; provided that such right to terminate the Merger Agreement must not be available to any party whose failure to comply with any provision of the Merger Agreement has been the cause of such action; o by either Palisades or the Company, upon written notice to the other party, if the Merger shall not have been consummated on or before September 5, 2008; provided that such right to terminate the Merger Agreement must not be available to any party whose failure to comply with any provision of the Merger Agreement has been the cause of the failure of the Effective Time to occur on or before such date if such failure to comply constitutes a breach of the Merger Agreement; o by Palisades, upon written notice to the Company that (A) our Board of Directors or any committee thereof shall have for any reason effected a change in recommendation; (B) we fail to include the recommendation of our Board of Directors in favor of the Merger Agreement in this Proxy Statement; (C) we fail to convene and hold our shareholders meeting within 60 days following the SEC's approval of the filing of this Proxy Statement as required by the Merger Agreement; or (D) our Board of Directors will have failed to publicly reconfirm its approval and recommendation of the terms of the Merger Agreement, at any time prior to the approval required by the Company's shareholders within two (2) business days of a written request from Palisades to do so provided that, except as otherwise provided in the Merger Agreement, Palisades will only be entitled to two such requests; o by the Company in certain circumstances when our Board makes a change in recommendation pursuant to Merger Agreement; o by either Palisades or the Company, upon written notice to the other party, if there shall have been a breach by the other party of any of the covenants or agreements or any of the representations or warranties set forth in the Merger Agreement on the part of such other party, which breach, either individually or in the aggregate, would result in, if occurring or continuing on the closing date of the Merger, the failure of certain conditions set forth in the Merger Agreement relating to representation and warranties or performance of obligations, and which breach has not been cured within 60 days following written notice thereof to the breaching party or, by its nature, cannot be cured within such time period; provided, that such right to terminate the Merger Agreement must not be available to any party that is then in material breach of the Merger Agreement and that such material breach would result in the closing conditions set forth in Merger Agreement relating to representation and warranties or performance of obligations not being satisfied; o by either Palisades or the Company, if the approval required by the Company's shareholders will not have been obtained upon a vote taken on the Merger Agreement and the transactions contemplated by the Merger Agreement at our duly convened shareholders meeting; or o by Palisades, upon written notice to the Company, if the A.M. Best Financial Strength Rating of Proformance Insurance Company is lower than a "B-" (B-minus) at any time following March 13, 2008 and prior to the closing date of the Merger. 50 Termination Fee We must pay Palisades as promptly as reasonably practicable (and, in any event, within two business days following such termination described below) and Palisades must accept as its exclusive remedy, by wire transfer of immediately available funds, the sum of $2,100,000 as the termination fee if the Merger Agreement is terminated as follows: o if we terminate the Merger Agreement pursuant to termination rights set forth in the Merger Agreement regarding certain circumstances when our Board makes a change in recommendation; o if Palisades shall terminate the Merger Agreement pursuant to termination rights set forth in the Merger Agreement regarding our breach of any of the covenants or agreements or any of the representations or warranties on our part, which breach, either individually or in the aggregate, would result in, if occurring or continuing on the closing date of the Merger, the failure of certain conditions set forth in the Merger Agreement relating to representation and warranties or performance of obligations, and which breach has not been cured within 60 days following written notice thereof to us or, by its nature, cannot be cured within such time period; or o if (A) we or Palisades terminate the Merger Agreement pursuant to the Merger Agreement because the approval required by the Company's shareholders shall not have been received, (B) at any time after March 13, 2008 and at or before the date of the Company shareholders' meeting an acquisition proposal with respect to us is publicly announced, and (C) within twelve months after the date of such termination of the Merger Agreement, we or any of our subsidiaries enter into any definitive agreement with respect to, or consummate, any acquisition proposal. The Company shall reimburse, up to $1,500,000, all costs and expenses incurred by Palisades and the Merger Sub in connection with the Merger Agreement and the transactions contemplated thereby in certain circumstances, including in the event that the Company or Palisades terminates the Merger Agreement because the approval required by the Company's shareholders shall not have been obtained at the Company's shareholder meeting, subject to certain restrictions. Termination Damages o In the event that (i) the Company and Palisades have each satisfied the conditions to closing required to be performed under the Merger Agreement prior to September 5, 2008, unless waived by the Company and Palisades, (ii) no Material Event has occurred and is continuing and (iii) Palisades fails to close the Merger within the period provided for in the Merger Agreement, Palisades is obligated to pay to the Company termination damages of $8,000,000 upon termination of the Merger Agreement by us; provided, such amount shall be reduced to $6,000,000 following the date upon which a completed submission of a draft Form A is made to DOBI. o In the event that (i) the Company and Palisades have each satisfied the conditions to closing required to be performed under the Merger Agreement prior to September 5, 2008, unless waived by the Company and Palisades, (ii) a Material Event has occurred and is continuing and (iii) Palisades fails to close the Merger within the period provided for in the Merger Agreement, Palisades is obligated to pay to the Company termination damages of $5,000,000 upon termination of the Merger Agreement by us; provided, such amount shall be reduced to $3,000,000 following the date upon which a completed submission of a draft Form A is made to DOBI. o The amount of any of the above described termination damages payable to us pursuant to the Merger Agreement will be reduced (or, following the date upon which a completed submission of a draft Form A is made to DOBI, further reduced) by $2,000,000 if, at any time subsequent to the date of the Merger Agreement but prior to the date the Merger Agreement is terminated, the A.M. Best Financial Strength Rating of Proformance Insurance Company is "B" or "B-" (B-minus). "Material Event" means (i) any representation or warranty of the Company, made as of March 13, 2008 or as of the date that all other conditions to closing required to be performed by us under the Merger Agreement have been met, not having been true and correct in all respects as of either such date, disregarding all qualifications and exceptions therein relating to materiality or Material Adverse Effect; provided that the effect from all such breaches 51 would be reasonably expected to result in liabilities, expenses, losses and damages to Palisades and/or us which in aggregate exceed $5,000,000; and provided, further, that no liability, expense, loss or damage in an individual amount reasonably expected to be less than $10,000 shall be included in the aggregate $5,000,000 calculation set forth in the preceding proviso; (ii) the failure of the condition, that as of the end of our most recent fiscal quarter or fiscal year our total shareholders' equity must not be less than $129,600,000 and the total capital and surplus of Proformance Insurance Company must not be less than $113,400,000, to be met had the reference to "$129,600,000" been replaced with a reference to "$136,800,000" or had the reference to "$113,400,000" been replaced with a reference to "$119,700,000" or (iii) any pending action, suit, litigation, investigation, inquiry or proceeding by any governmental entity, in each case involving matters that give rise to allegations of criminal activity or fraud involving us, any of our subsidiaries or any of our respective Directors or Officers in their capacity as such. Palisades payment of the termination damages described above is the sole and exclusive remedy of the Company and its subsidiaries against Palisades, the Merger Sub and any of their respective former, current or future Directors, officers, employees, and other related parties for any loss or damage suffered by the Company, its subsidiaries or any other person or entity resulting from the failure of Palisades and the Merger Sub to consummate the Merger. Governing Law The Merger Agreement is governed by, and construed in accordance with (a) the laws of the State of New Jersey with respect to matters, issues and questions relating to the fiduciary duties of the Board of Directors and officers of each of the Company, Palisades and the Merger Sub and other matters to which the laws of the State of New Jersey are mandatorily applicable, and (b) the laws of the State of New York with respect to all other matters, issues and questions regardless of the laws that might otherwise govern under applicable principles of conflicts of laws. Amendment, Extension and Waiver The Merger Agreement may be amended by the parties to the Merger Agreement at any time before or after shareholder approval of the matters presented in connection with the Merger, but, after any such approval, no amendment shall be made which by law requires further approval by such shareholders without such further approval. The Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties to the Merger Agreement. At any time prior to the Effective Time, the parties to the Merger Agreement may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other party, (ii) waive any inaccuracies in the representations and warranties contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement and (iii) waive compliance with any of the agreements or conditions contained in the Merger Agreement. Any agreement on the part of a party to the Merger Agreement to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. 52 THE VOTING AGREEMENT This section describes the voting agreement among Palisades Safety and Insurance Association, Apollo Holdings, Inc. and James V. Gorman. The description is not complete, and you should read the voting agreement for a more complete understanding of its terms. The complete text of the voting agreement is attached to this proxy statement as Exhibit B and is incorporated by reference into this proxy statement. Concurrently with the execution of the Merger Agreement, James V. Gorman, on behalf of himself, entered into a voting agreement with Palisades Safety and Insurance Association and Apollo Holdings, Inc. He agreed, among other things and subject to certain exceptions, from and after March 13, 2008 until the expiration date to: o appear at any meeting of our shareholders and cause all of his common shares and any other common shares which he acquires beneficial ownership of after March 13, 2008 to be counted as present for purposes of calculating the quorum; and o vote all of his common shares and any other common shares which he acquires beneficial ownership of after March 13, 2008 (i) in favor of the recommendation of our Board of Directors to our shareholders; (ii) against any acquisition proposal, or any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or similar agreement providing for the consummation of a transaction contemplated by any acquisition proposal (other than the Merger and other than following any change in recommendation and termination of the Merger Agreement made by our Board of Directors pursuant to the requirements of the Merger Agreement), and (iii) in favor of any proposal to adjourn a shareholders' meeting which we, the Merger Sub and Palisades support. "Expiration date" means the earliest to occur of (i) the Effective Time; (ii) such date as the Merger Agreement is terminated pursuant to Article VIII of the Merger Agreement; or (iii) upon mutual written agreement of the parties to terminate the voting agreement. From and after March 13, 2008 until, (A) in the case of clause (i) below, the Expiration Date, and (B) in the case of clause (ii) below, immediately after the vote is taken at a meeting of our shareholders (taking into account any postponements or adjournments thereof) for the purpose of approving the adoption and approval of the Merger Agreement and the transactions contemplated thereby, Mr. Gorman must not, except as contemplated by the voting agreement or the Merger Agreement, directly or indirectly, (i) grant any proxies or enter into any voting trust or other agreement or arrangement with respect to the voting of any of his common shares and any other common shares which he acquires beneficial ownership of after March 13, 2008 or (ii) sell, transfer, assign, dispose of, or enter into any contract, option, commitment or other arrangement or understanding with respect to the sale, transfer, assignment or other disposition of, the beneficial ownership of any of his common shares. From and after March 13, 2008 until the Expiration Date, neither Mr. Gorman nor his affiliates will solicit proxies or become a participant in any solicitation in opposition to the solicitation of proxies by us and Palisades for the Merger Agreement. From and after March 13, 2008 until the Expiration Date, in all public statements and public filings made with respect to the voting of his common shares, Mr. Gorman and his affiliates will indicate that they are voting in favor of the Merger Agreement and otherwise in accordance with the voting agreement. 53 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The table below identifies the only persons known to the Company to own beneficially (within the meaning of Rule 13d-3 under the Exchange Act) more than 5% of the Company's outstanding shares as of March 31, 2008:
- -------------------------- -------------------------------------------------------- --------------------------------- -------------- Title of Class Name of Beneficial Owner Amount and Percent Nature of Class of Beneficial Ownership - -------------------------- -------------------------------------------------------- --------------------------------- -------------- Common Stock Hovde Capital Advisors LLC 1,642,218 (1) 14.8% 1826 Jefferson Place, N.W. Washington, D.C. 20016 Common Stock James V. Gorman 1,572,340 (2) 14.1% National Atlantic Holdings Corp. 4 Paragon Way Freehold, NJ 07728 Common Stock Goldman Sachs Asset Management, L.P. 622,109 (3) 5.6% 32 Old Slip New York, NY 10005
(1) Hovde Capital Advisors LLC reported in Schedule 13D filed on February 8, 2008, that a total of 1,642,218 shares are beneficially owned by the following individuals and entities: Eric D. Hovde, a resident of the District of Columbia ("EDH"); Richard J. Perry, Jr., a resident of the State of Maryland (" RJP "); Hovde Capital Advisors LLC, a Delaware limited liability company (" HCA "); Financial Institution Partners, L.P., a Delaware limited partnership (" FIP LP "); Financial Institution Partners, Ltd, a Cayman Islands exempted company (" FIP LTD "); Financial Institution Partners III, L.P., a Delaware limited partnership (" FIP III "); Financial Institution Partners IV, L.P., a Delaware limited partnership (" FIP IV "); The Eric D. and Steven D. Hovde Foundation, an irrevocable trust (the " Foundation "); The Hovde Financial, Inc. Profit Sharing Plan and Trust, an employee retirement plan (the " Plan "); The Britta Ann Hovde Trust, an irrevocable trust (the " BAH Trust "); and The Carlin Christine Tucker Trust, an irrevocable trust (the " CCT Trust "). (2) Includes options to purchase 60,200 shares of our common stock, all of which are fully vested and exercisable. (3) Based solely on information contained in Schedule 13G filed by Goldman Sachs Asset Management. L.P on February 1, 2008 SHAREHOLDINGS OF DIRECTORS AND MANAGEMENT As of March 31, 2008, the directors of the Company, the named executive officers and all executive officers and directors of the Company as a group, beneficially owned common shares of the Company as set forth in the table below: 54
- -------------------------- ------------------------------------------------- ---------------------------------- ---------------- Title of Class Name Amount and Percent of Beneficial Owner Nature of Class of Beneficial Ownership - -------------------------- ------------------------------------------------- ---------------------------------- ---------------- Common Stock James V. Gorman 1,572,340 (1) 14.13% Chairman of the Board of Directors and Chief Executive Officer of NAHC and Proformance Common Stock Bruce C. Bassman 1,350 * Senior Vice President and Chief Actuarial Officer of NAHC Common Stock Peter A. Cappello, Jr. 49,316 (2) * Director of NAHC and Chief Financial Officer of Proformance Common Stock Cornelius E. Golding 3,700 * Director of NAHC Common Stock Dr. Martin I. Krupnick, Psy.D. 800 (3) * Director of NAHC Common Stock Thomas M. Mulhare _ _ Director of NAHC Common Stock Frank J. Prudente 43,000 (4) * Executive Vice President, Treasurer and Chief Accounting Officer of NAHC Common Stock John E. Scanlan 12,900 (5) * Executive Vice President and Chief Underwriting Officer of NAHC and Proformance Common Stock Thomas J. Sharkey, Sr. 47,365 * Director of NAHC and Proformance Common Stock Steven V. Stallone 70,219 (6) * Director of NAHC and Proformance Common Stock Candace L. Straight 2,000 * Director of NAHC and Proformance Common Stock Directors and executive officers as a group (11 1,802,990 16.2% persons)
* Less than 1%. (1) Includes options to purchase 60,200 shares of our common stock, all of which are fully vested and exercisable. (2) Includes options to purchase 21,500 shares of our common stock, all of which are fully vested and exercisable. (3) Sole voting and sole investment power with respect to 200 of the 800 shares of common stock. (4) Includes options to purchase 43,000 shares of our common stock, all of which are fully vested and exercisable. (5) Includes options to purchase 12,900 shares of our common stock, all of which are fully vested and exercisable. (6) Includes options to purchase 21,500 shares of our common stock, all of which are fully vested and exercisable. 55 MARKET PRICE OF NATIONAL ATLANTIC HOLDINGS CORPORATION COMMON STOCK National Atlantic Holdings Corporation Common Stock is traded on the Nasdaq Stock Market under the symbol "NAHC." The following table sets forth the high and low sales prices per share of Company common stock on the Nasdaq Stock Market for the periods indicated. Market Information Common Stock ---------------- High Low ------- ------- Fiscal Year Ended December 31, 2005 2nd Quarter (beginning April 21, 2005) $12.15 $ 9.75 3rd Quarter $13.40 $10.25 4th Quarter $12.00 $ 9.92 Fiscal Year Ended December 31, 2006 1st Quarter $12.00 $10.25 2nd Quarter $11.70 $ 9.35 3rd Quarter $10.90 $ 8.02 4th Quarter $13.70 $ 9.93 Fiscal Year Ending December 31, 2007 1st Quarter $13.25 $10.75 2nd Quarter $13.25 $11.51 3rd Quarter $14.45 $ 9.36 4th Quarter $10.34 $ 3.66 Fiscal Year Ending December 31, 2008 1st Quarter (through March 12, 2008) $ 5.99 $ 3.85 The closing sale price of a share of Company common stock on the Nasdaq Stock Market on March 12, 2008, which was the last full trading day before our Board of Directors met to consider approval of the Merger and the Merger Agreement, was $5.46 per share. On [ ], the last trading day before the date of this proxy statement, the closing price for a share of Company common stock on the Nasdaq Stock Market was $[ ]. You are encouraged to obtain current market quotations for a share of Company common stock in connection with voting your shares. As of [ ], the last trading day before the date of this proxy statement, there were [ ] registered holders of shares of Company common stock. 56 MULTIPLE SHAREHOLDERS SHARING ONE ADDRESS In accordance with Rule 14a-3(e)(1) under the Exchange Act, one proxy statement will be delivered to two or more shareholders who share an address, unless we have received contrary instructions from one or more of the shareholders. We will deliver promptly upon written or oral request a separate copy of this proxy statement to a shareholder at a shared address to which a single copy of this proxy statement was delivered. Requests for additional copies of this proxy statement, and requests that in the future separate proxy statements be sent to shareholders who share an address, should be directed to National Atlantic Holdings Corporation, 4 Paragon Way, Freehold, New Jersey 07728, Attention: Investor Relations, telephone: 732-665-1145. In addition, shareholders who share a single address but receive multiple copies of this proxy statement may request that in the future they receive a single copy by contacting us at the address and phone number set forth in the prior sentence. FUTURE SHAREHOLDERS PROPOSALS If the Merger is completed, we will have no public shareholders and no public participation in any future shareholder meetings. If the Merger is not completed, you will continue to be entitled to attend and participate in our shareholder meetings and we will hold an annual meeting of shareholders in 2008, in which case shareholder proposals will be eligible for consideration for inclusion in the proxy statement and form of proxy for our 2008 annual shareholders meeting in accordance with Rule 14a-8 under the Exchange Act. Proposals of shareholders intended to be presented at the 2008 Annual Meeting of Shareholders must be received by the Company no later than May 15, 2008 for inclusion in the Company's proxy statement and proxy relating to that meeting. Upon receipt of any such proposal, the Company will determine whether or not to include such proposal in the proxy statement and proxy in accordance with applicable rules and regulations promulgated by the SEC. The SEC has promulgated rules relating to the exercise of discretionary voting authority pursuant to proxies solicited by the Company's Board of Directors. If a shareholder intends to present a proposal at the 2008 annual meeting and does not notify the Company of such proposal by May 15, 2008, or if a shareholder intends to nominate a Director at the 2008 annual meeting and does not comply with the notification requirements described in the preceding paragraph, the proxies solicited by the Company's Board of Directors for use at the annual meeting may be voted on such proposal or such nominee, as the case may be, without discussion of the proposal or nominee in the proxy statement for that annual meeting. In each case written notice must be given to the Secretary of the Company, whose name and address are: Douglas A. Wheeler, Esq., 4 Paragon Way, Freehold, New Jersey 07728. OTHER MATTERS As of the date of this proxy statement, our Board of Directors is not aware of any matter to be presented for action at the special meeting, other than the matters set forth in this proxy statement. Should any other matter requiring a vote of shareholders arise, the proxies in the enclosed form of proxy confer upon the person or persons entitled to vote the shares represented by such proxies discretionary authority to vote the same in accordance with their discretion. WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION You should rely only on the information contained in this proxy statement. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement. This proxy statement is dated [ ]. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date. The mailing of this proxy statement to shareholders does not create any implication to the contrary. If you have questions about the special meeting or the Merger after reading this proxy statement, or if you would like additional copies of this proxy statement or the proxy card, you should contact National Atlantic Holdings Corporation, 4 Paragon Way, Freehold, New Jersey 07728, Attention: Investor Relations, telephone: 732-665-1145. 57 REVOCABLE PROXY NATIONAL ATLANTIC HOLDINGS CORPORATION Proxy Solicited on Behalf of the Board of Directors of National Atlantic Holdings Corporation for the Special Meeting to be held on [ ], 2008 The undersigned hereby constitutes and appoints each of [ ] and [ ], his or her true and lawful agents and proxies, with full power of substitution in each, to represent the undersigned, with all the powers which the undersigned would possess if personally present, and to vote the common stock of National Atlantic Holdings Corporation (the "Company") held of record by the undersigned on the record date at the special meeting of shareholders of the Company to be held on [ ], 2008 at [ ], [East Windsor, New Jersey], at [the National Conference Center at the Holiday Inn, located at 399 Monmouth Street, East Windsor, New Jersey], and at any adjournment or postponement thereof on all matters coming before said meeting. You are encouraged to specify your vote by marking the appropriate box but you need not mark any box if you wish to vote in accordance with the Board of Directors' recommendation, which is "FOR" (i) the approval of the Merger Agreement and the Merger and (ii) the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Agreement and the Merger, if such adjournment or postponement is proposed by the Board of Directors. The proxies cannot vote your shares unless you sign and return this card. Any proxy may be revoked in writing at any time prior to the voting thereof. Any proxy, when properly granted, will be voted in the manner directed and will authorize the proxies to take any action in their discretion upon other matters that may properly come before the meeting. If no direction is made, your proxy will be voted in accordance with the recommendations of the Board of Directors. Proxies are authorized to vote upon matters incident to the conduct of the meeting such as approval of one or more adjournments of the meeting for the purpose of obtaining additional shareholder votes. - -------------------------------------------------------------------------------- /\ FOLD AND DETACH HERE /\ YOUR VOTE IS IMPORTANT! PLEASE VOTE THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1 AND 2. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE |X| - -------------------------------------------------------------------------------- PROPOSAL 1. To approve the Agreement and Plan of Merger, FOR AGAINST ABSTAIN dated as of March 13, 2008 and subsequently amended [ ] [ ] [ ] and restated, by and among National Atlantic, Holdings Corporation, Palisades Safety and Insurance Association and Apollo Holdings, Inc. and approve the Merger contemplated thereby as more fully described in the Proxy Statement relating thereto. PROPOSAL 2. To adjourn or postpone the Special Meeting, FOR AGAINST ABSTAIN if necessary or appropriate, to solicit additional [ ] [ ] [ ] proxies if there are such insufficient votes at the time of the Special Meeting to approve the Merger Agreement and the Merger, if such adjournment or postponement is proposed by the Board of Directors. Name: _______________________ Title: _________________ Number of Company shares held: _______________________ 58 Signature: _______________________ Date: _________________ Please sign this Proxy exactly as your name appears on your stock certificates. If you are signing as a representative of the named shareholder (e.g., as a trustee, corporate officer or other agent on behalf of a trust, corporation or other entity) you should indicate your title or the capacity in which you sign. Please mark, sign and date your proxy card and return it in the enclosed postage-paid envelope. 59 EX-99 2 exhibit_a.txt EXHIBIT A - MERGER AGREEMENT EXHIBIT A - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Dated as of March 13, 2008 among PALISADES SAFETY AND INSURANCE ASSOCIATION APOLLO HOLDINGS, INC. and NATIONAL ATLANTIC HOLDINGS CORPORATION - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE I THE MERGER..................................................A-1 1.1. The Merger..................................................A-1 1.2. Effective Time of the Merger................................A-1 1.3. Closing.....................................................A-1 1.4. Effects of the Merger.......................................A-2 1.5. Articles of Incorporation and Bylaws of Surviving Corporation.................................................A-2 1.6. Directors and Officers of the Surviving Corporation.........A-2 1.7. Subsequent Actions..........................................A-2 ARTICLE II TREATMENT OF SHARES.........................................A-2 2.1. Conversion of Securities....................................A-2 2.2. Surrender of Capital Stock; Stock Transfer Books............A-3 2.3. Company Stock Awards........................................A-5 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............A-6 3.1. Organization, Standing and Corporate Power..................A-6 3.2. Capital Structure...........................................A-7 3.3. Subsidiaries................................................A-7 3.4. Authority...................................................A-8 3.5. Board Approval..............................................A-8 3.6. Vote Required...............................................A-8 3.7. Noncontravention; Consents..................................A-8 3.8. SEC Filings.................................................A-9 3.9. Sarbanes-Oxley Act of 2002.................................A-10 3.10. Statutory Financial Statements.............................A-11 3.11. No Undisclosed Liabilities.................................A-11 3.12. Absence of Certain Changes or Events.......................A-12 3.13. Benefit Plans..............................................A-12 3.14. Taxes......................................................A-14 3.15. Compliance with Applicable Laws............................A-16 3.16. Litigation.................................................A-16 3.17. Insurance Regulatory Matters...............................A-16 3.18. Reserves...................................................A-18 3.19. Intellectual Property......................................A-18 3.20. Real Property..............................................A-19 3.21. Labor Matters..............................................A-19 3.22. Proxy Statement............................................A-19 3.23. Operations Insurance.......................................A-20 3.24. Brokers....................................................A-20 3.25. Takeover Laws..............................................A-20 3.26. Title to Assets............................................A-20 A-i 3.27. Affiliate Transactions.....................................A-20 3.28. Contracts..................................................A-21 3.29. Opinion of Financial Advisor...............................A-21 3.30. Draft Audited Financial Statements.........................A-21 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB....A-21 4.1. Organization, Standing and Corporate Power.................A-21 4.2. Authority..................................................A-22 4.3. Noncontravention; Consents.................................A-22 4.4. Compliance with Applicable Laws............................A-23 4.5. Litigation.................................................A-23 4.6. Information Supplied.......................................A-23 4.7. Financing..................................................A-24 4.8. Brokers....................................................A-24 4.9. Merger Sub.................................................A-24 4.10. Parent Ownership of Company Securities.....................A-24 ARTICLE V COVENANTS RELATING TO THE CONDUCT OF BUSINESS..............A-24 5.1. Conduct of Business of the Company.........................A-24 ARTICLE VI ADDITIONAL AGREEMENTS......................................A-27 6.1. Preparation of Proxy Statement; Shareholders Meetings......A-27 6.2. Access to Information......................................A-28 6.3. Reasonable Best Efforts....................................A-28 6.4. Acquisition Proposals......................................A-29 6.5. Fees and Expenses..........................................A-32 6.6. Certain Actions............................................A-32 6.7. Indemnification; Directors' and Officers' Insurance........A-33 6.8. Delisting..................................................A-34 6.9. Public Announcements.......................................A-34 6.10. Additional Agreements......................................A-34 6.11. Rule 16b-3.................................................A-34 6.12. Employee Benefit Matters...................................A-34 6.13. Non-Compete................................................A-35 ARTICLE VII CONDITIONS PRECEDENT.......................................A-36 7.1. Conditions to Each Party's Obligation To Effect the Merger.....................................................A-36 7.2. Conditions to Obligations of Parent and Merger Sub.........A-36 7.3. Conditions to Obligations of the Company...................A-37 ARTICLE VIII TERMINATION AND AMENDMENT..................................A-38 8.1. Termination................................................A-38 8.2. Effect of Termination......................................A-39 8.3. Amendment..................................................A-40 A-ii 8.4. Extension; Waiver..........................................A-40 ARTICLE IX GENERAL PROVISIONS.........................................A-40 9.1. Nonsurvival of Representations and Warranties..............A-40 9.2. Notices....................................................A-41 9.3. Interpretation.............................................A-42 9.4. Counterparts...............................................A-42 9.5. Entire Agreement; No Other Representations; No Third Party Beneficiaries........................................A-42 9.6. Governing Law..............................................A-43 9.7. Assignment.................................................A-43 9.8. Termination Damages; Enforcement...........................A-43 9.9. Consent to Jurisdiction ...................................A-44 9.10. WAIVER OF JURY TRIAL.......................................A-45 9.11. Severability...............................................A-45 A-iii INDEX OF DEFINED TERMS Section Acquisition Proposal....................................................6.4(a) Actuarial Report..........................................................3.18 Actuary...................................................................3.18 Affected Employee......................................................6.12(a) Agreement.............................................................Preamble Amplified Coverage......................................................6.7(b) Applicable Laws.........................................................2.2(f) Award Consideration........................................................2.3 Awards.....................................................................2.3 Certificate of Merger......................................................1.2 Change in Recommendation................................................6.4(d) Closing....................................................................1.3 Closing Date...............................................................1.3 Code....................................................................2.2(g) Commercial Court...........................................................9.9 Company...............................................................Preamble Company Common Stock....................................................2.1(a) Company Disclosure Letter..........................................Article III Company Employee Benefit Plan..........................................3.13(a) Company Insiders..........................................................6.11 Company Insurance Subsidiary...........................................3.17(a) Company Policy............................................................6.13 Company SAP Balance Sheets................................................3.10 Company SAP Financial Statements..........................................3.10 Company SEC Documents......................................................3.8 Company Shareholders Meeting............................................6.1(d) Company Stock Plans.....................................................3.2(a) Company Termination Fee.................................................8.2(b) Confidentiality Agreement...............................................6.2(b) DOBI....................................................................6.3(a) Effective Time.............................................................1.2 ERISA..................................................................3.13(c) Exchange Act...............................................................3.7 Exchange Agent..........................................................2.2(a) Exchange Period.........................................................2.2(b) Fairness Opinion..........................................................3.29 Form A Submission Date..................................................6.3(b) GAAP....................................................................3.1(b) Governmental Entity........................................................3.7 HSR Act....................................................................3.7 Indemnified Liabilities.................................................6.7(a) Indemnified Parties.....................................................6.7(a) Insurance Laws.............................................................3.7 Intellectual Property.....................................................3.19 Liens......................................................................3.3 Material Adverse Effect.................................................3.1(b) Material Contract.........................................................3.28 Material Event..........................................................9.8(d) Merger................................................................Preamble Merger Consideration....................................................2.1(a) Merger Sub............................................................Preamble New York Court.............................................................9.8 NJBCA......................................................................1.1 Option.....................................................................2.3 Option Consideration.......................................................2.3 A-iv Outside Date............................................................8.1(c) Parent................................................................Preamble Parent Disclosure Letter............................................Article IV Per Share Amount........................................................2.1(a) Permits................................................................3.15(a) Post Closing Plans.....................................................6.12(b) Proxy Statement.........................................................6.1(a) Required Company Vote......................................................3.6 Requisite Regulatory Approvals..........................................7.1(c) SAP.....................................................................3.1(b) SAR........................................................................2.3 SAR Consideration..........................................................2.3 SEC.....................................................................3.1(b) Securities Act.............................................................3.8 Specified Person........................................................9.8(e) Subsidiary..............................................................3.1(b) Superior Proposal.......................................................6.4(f) Surviving Corporation......................................................1.1 Tax....................................................................3.14(h) Tax Return.............................................................3.14(h) Taxing Authority.......................................................3.14(h) Tail Coverage...........................................................6.7(b) Tail Period.............................................................6.7(b) Voting Debt.............................................................3.2(b) A-v AGREEMENT AND PLAN OF MERGER dated as of March 13, 2008 (as amended and restated as of April 17, 2008, this "Agreement") among PALISADES SAFETY AND INSURANCE ASSOCIATION, an insurance exchange organized under NJSA 17:50-1 et seq. ("Parent"), APOLLO HOLDINGS, INC., a New Jersey corporation wholly owned by Parent ("Merger Sub") and NATIONAL ATLANTIC HOLDINGS CORPORATION, a New Jersey corporation (the "Company"). WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have approved, and deem it advisable and in the best interests of their respective shareholders or member policyholders to consummate, a business combination transaction upon the terms and subject to the conditions set forth herein (the "Merger"); WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have each determined that the Merger and the other transactions contemplated hereby are consistent with, and in furtherance of, their respective business strategies and goals; and WHEREAS, Parent, Merger Sub and the Company desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe various conditions to the Merger. WHEREAS, this Agreement is being amended and restated on April 17, 2008, provided, however, that all references herein to the "date of this Agreement" or the "date hereof" shall mean March 13, 2008. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1. The Merger. At the Effective Time and upon the terms and subject to the conditions set forth herein and in the New Jersey Business Corporation Act (the "NJBCA"), the Merger Sub shall be merged with and into Company, the separate legal existence of the Merger Sub shall cease and Company will continue as the surviving corporation (the "Surviving Corporation") in the Merger. 1.2. Effective Time of the Merger. Subject to the provisions of this Agreement, a certificate of merger (the "Certificate of Merger") shall be duly prepared, executed and acknowledged by Merger Sub and the Company in accordance with the NJBCA and thereafter filed with the office of the Secretary of State of the State of New Jersey pursuant to the NJBCA. The Merger shall become effective upon the filing of the Certificate of Merger, or at such time thereafter as is provided in the Certificate of Merger (the "Effective Time"). 1.3. Closing. The consummation of the Merger (the "Closing") will take place at a time and date (the "Closing Date") to be agreed by Parent and the Company that is within 1 business day following the satisfaction or waiver of the conditions set forth in Article VII (excluding conditions that, by their terms, are to be satisfied on the Closing Date), unless another date is agreed to in writing by the parties hereto. The Closing shall be held at the offices of Dewey & LeBoeuf, LLP, 1301 Avenue of the Americas, New York, NY 10019, unless another place is agreed to in writing by the parties hereto. A-1 1.4. Effects of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of the NJBCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, the Surviving Corporation will succeed to and assume all of the rights, privileges, immunities, properties, powers and franchises of the Company and Merger Sub. 1.5. Articles of Incorporation and Bylaws of Surviving Corporation. The Amended and Restated Certificate of Incorporation of the Company as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation. The Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. 1.6. Directors and Officers of the Surviving Corporation. The directors of Merger Sub immediately prior to the Effective Time will be the directors of the Surviving Corporation, with each director holding office until the next annual meeting (or the earlier of their resignation or removal) and until their respective successors are duly elected and qualified, as the case may be. The officers of Merger Sub immediately prior to the Effective Time will be the officers of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. 1.7. Subsequent Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of either of the Company or Merger Sub acquired or to be acquired by the Surviving Corporation as result of, or in connection with, the Merger or otherwise to carry out the terms of this Agreement, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of either the Company or Merger Sub, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of such corporation, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or otherwise to carry out the terms of this Agreement. ARTICLE II TREATMENT OF SHARES 2.1. Conversion of Securities. As of the Effective Time, by virtue of the Merger and without any action on the part of the Merger Sub, the Company or the holder of any of the following securities: (a) Conversion of the Company Capital Stock. Each share of the common stock, no par value of the Company (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time (other than any shares of Common Stock to be canceled or to remain outstanding pursuant to Section 2.1(b)) shall be cancelled and extinguished and be converted into the right to receive $6.25 (the "Per Share Amount") in cash payable to the holder thereof, without A-2 interest, upon surrender of the certificate or certificates representing such Company Common Stock. The cash into which the shares of Company Common Stock and outstanding Awards, as set forth in Section 2.3, are to be exchanged, subject to adjustment as provided in Section 2.2(h) or as otherwise provided in this Agreement, is referred to herein as the "Merger Consideration." (b) Cancellation of Treasury Stock; Continuation of Indirectly-Owned Shares. Each share of Company Common Stock held in the treasury of the Company immediately prior to the Effective Time shall be canceled and extinguished, and no payment or other consideration shall be made with respect thereto. Each share of Company Common Stock owned by any direct or indirect Subsidiary of the Company immediately prior to the Effective Time shall remain as outstanding stock of the Company, and no payment or other consideration shall be made with respect thereto. (c) Conversion of Merger Sub Capital Stock. Each share of common stock, no par value, of Merger Sub issued and outstanding immediately prior to the Effective Time shall thereafter represent one validly issued, fully paid and nonassessable share of common stock, no par value, of the Surviving Corporation with the same rights, powers and privileges as the share so converted, and the shares so converted shall constitute the only outstanding shares of capital stock of the Surviving Corporation. 2.2. Surrender of Capital Stock; Stock Transfer Books. (a) Exchange Agent. Prior to the Effective Time, Parent shall designate at its own cost and expense a bank or trust company (reasonably acceptable to the Company) to act as agent for the holders of the Company Common Stock (the "Exchange Agent") to receive the funds necessary to make the payments contemplated by Sections 2.1 and 2.3. At or prior to the Effective Time, Parent shall deposit, or cause to be deposited, in trust with the Exchange Agent for the benefit of holders of the Company Common Stock, the Merger Consideration. (b) Exchange Period. Each holder of a certificate or certificates representing any shares of the Company Common Stock canceled upon the Merger pursuant to Section 2.1(a) may thereafter surrender such certificates or certificates to the Exchange Agent as agent for such holder, to effect the surrender of such certificate or certificates on such holder's behalf for a period ending one year after the Effective Time (the "Exchange Period"). Parent agrees that promptly after the Effective Time it shall cause the distribution to holders of record of shares of the Company Common Stock as of the Effective Time of appropriate materials, including a letter of transmittal, to facilitate such surrender, which materials shall be reasonably acceptable to Parent. Upon the surrender of certificates representing the Company Common Stock, Parent shall cause the Exchange Agent to pay the holder of such certificates in exchange therefor cash in an amount equal to the Per Share Amount multiplied by the number of shares of the Company Common Stock represented by such certificate immediately prior to the Effective Time. Until so surrendered, each such certificate (other than certificates representing the Company Common Stock canceled pursuant to Section 2.1(b)) shall represent solely the right to receive the aggregate Per Share Amount relating thereto. (c) Payment to Other Persons. If payment of cash in respect of canceled shares of the Company Common Stock is to be made to a person other than the person in whose name a A-3 surrendered certificate or instrument is registered, it shall be a condition to such payment that the certificate or instrument so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other Taxes required by reason of such payment in a name other than that of the registered holder of the certificate or instrument surrendered or shall have established to the satisfaction of Parent or the Exchange Agent that such Tax is not payable. (d) Transfer Books. At the Effective Time, the stock transfer books of Parent shall be closed and there shall not be any further registration or transfer of any shares of the Company Common Stock thereafter on the records of Parent. If, after the Effective Time, certificates for shares of the Company Common Stock are presented to the Surviving Corporation they shall be cancelled and exchanged for cash as provided in Section 2.1(a). No interest shall accrue or be paid on any cash payable upon the surrender of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of the Company Common Stock. (e) Lost, Stolen or Destroyed Certificates. In the event any certificates representing the Company Common Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, the Per Share Amount in respect of the shares of the Company Common Stock represented by such lost, stolen or destroyed certificates; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to enter into an indemnity agreement with respect to any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. (f) Conclusion of Exchange Period. Promptly following the expiration of the Exchange Period, subject to all orders, laws, statutes, regulations, rules, ordinances, writs, injunctions, directives, judgments, decrees, principles of common law, constitutions or treaties enacted, promulgated, issued, enforced or entered by any Governmental Entity (as defined below) applicable to a party hereto or to any of the Subsidiaries of the Company or Parent, or any of their respective businesses, properties or assets, as may be amended from time to time ("Applicable Laws"), the Exchange Agent shall deliver to Parent all cash (including any interest received with respect thereto), certificates and other documents in its possession relating to the transactions contemplated hereby, and the Exchange Agent's duties shall terminate. Thereafter, each holder of (i) a certificate representing the Company Common Stock (other than certificates representing the Company Common Stock canceled pursuant to Section 2.1(b)), or (ii) an Award shall be entitled to look to the Surviving Corporation with respect to the aggregate Per Share Amount or the aggregate Award Consideration, as applicable, payable upon due surrender of their certificates by holders of certificates, and payable as soon as practicable to holders of Awards, without any interest thereon. Notwithstanding the foregoing, subject to Applicable Law, neither Parent nor the Surviving Corporation nor the Exchange Agent shall be liable to any holder of a certificate representing the Company Common Stock or any holder of an Award for any amount delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. Any portion of the Merger Consideration remaining unclaimed by holders of the Company Common Stock or Award as of a date that is immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity shall, to the A-4 extent permitted by Applicable Law, become the property of the Surviving Corporation free and clear of any claims or interest of any person previously entitled thereto. (g) Withholdings. The Company, its Subsidiaries, the Surviving Corporation, the Exchange Agent and Parent will be entitled to deduct and withhold from any amounts payable under this Agreement any withholding Taxes or other amounts required to be deducted and withheld under the Internal Revenue Code of 1986, as amended (including all rules and regulations promulgated thereunder, the "Code"), or any other Applicable Laws. To the extent that amounts are so withheld or deducted by Parent, the Company, any of its Subsidiaries, the Surviving Corporation or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the beneficial holder of the relevant shares. (h) Certain Adjustments. If, between the date of this Agreement and the Effective Time, the outstanding Company Common Stock shall have been changed into a different number of shares or different class by reason of any reclassification, recapitalization, stock split, split-up, combination or exchange of shares or a stock dividend or dividend payable in any other securities shall be declared with a record date within such period, or any similar event shall have occurred, the Merger Consideration shall be equitably adjusted to eliminate the effects of such event. 2.3. Company Stock Awards. The right to receive shares of the Company Common Stock pursuant to the exercise of each vested and unvested option for the Company Common Stock (each, an "Option") that is outstanding immediately prior to the Effective Time shall be canceled and exchanged for the right to receive an amount of cash equal to the product obtained by multiplying (x) the total number of shares of the Company Common Stock issuable upon the exercise of the unexercised portion of such Option by (y) the excess, if any, of the Per Share Amount over the exercise price per share of the Company Common Stock under such Option (with the aggregate amount of such payment rounded up to the nearest cent), less any required withholding taxes (in the aggregate, the "Option Consideration"). The right to receive cash pursuant to the exercise of each vested and unvested stock appreciation right (each, a "SAR") that is outstanding immediately prior to the Effective Time shall be canceled and exchanged for the right to receive an amount of cash equal to the product obtained by multiplying (x) the total number of shares of the Company Common Stock to which the unexercised portion of the SAR relates by (y) the excess, if any, of the Per Share Amount over the applicable per share base price of the SAR (with the aggregate amount of the payment for all such SAR stock units rounded up to the nearest cent), less any required withholding taxes (in the aggregate, the "SAR Consideration," and together with the Option Consideration, the "Award Consideration"). As of the Effective Time, all such Options and SARs (together, "Awards") shall no longer be outstanding and shall automatically be canceled and retired and shall expire and cease to exist and each holder of such Awards shall cease to have any rights with respect thereto, except the right to receive such holder's pro rata portion of the Award Consideration. Parent agrees that the Company may amend the Company Stock Plans (as defined below) as necessary for the sole purpose of implementing the foregoing provisions of this Section 2.3; provided, however, prior to any amendment the Company consults with Parent as to, and provides Parent with a copy of, the terms of any such proposed amendment. The cash amounts resulting from the conversions pursuant to this Section 2.3 shall be paid as soon as practicable after the Effective Time, but no later than five (5) business days thereafter. A-5 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in (x) the written disclosure letter delivered by the Company to Parent in connection with the execution and delivery of this Agreement (the "Company Disclosure Letter") or (y) any Company SEC Documents (as defined below) filed on or after January 27, 2005 and before January 1, 2007 (excluding any exhibits thereto, any disclosure as to risk factors, any forward-looking statements and other similarly cautionary or generic disclosure contained or incorporated by reference therein, and provided that the relevance to this Article III of any item contained therein is apparent on its face), the Company represents and warrants to Parent and Merger Sub as follows: 3.1. Organization, Standing and Corporate Power. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey and has the requisite corporate power and authority to carry on its business as now being conducted. Each of the Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified and in good standing (individually or in the aggregate) would not have a Material Adverse Effect on the Company. The Company has previously delivered or made available to Parent accurate and complete copies of the certificates of incorporation, bylaws and other comparable documents of the Company and each of its Subsidiaries. (b) As used in this Agreement, (x) the word "Subsidiary" means any entity of which 50% or more of the effective voting power or equity or other ownership interest of such entity is directly or indirectly owned by such party, and (y) the term "Material Adverse Effect" means, an event (including without limitation a natural catastrophe), change, circumstance, state of facts or effect that has had or is reasonably likely to have a material adverse effect on (A) the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of the Company and its Subsidiaries taken as a whole, or Parent and its Subsidiaries taken as a whole, as the case may be, except to the extent that any such material adverse effect results from (1) changes in the economy in general in the United States, to the extent that such changes do not have a disproportionate effect on the Company and its Subsidiaries taken as a whole relative to other participants in the industry in which the Company and its Subsidiaries conduct business, or Parent and its Subsidiaries taken as a whole, as the case may be; (2) changes in United States or global financial or securities markets or conditions, including those caused by acts of war, hostility or terrorism, to the extent such changes do not have a disproportionate effect on the Company and its Subsidiaries taken as a whole relative to other participants in the industry in which the Company and its Subsidiaries conduct business, or Parent and its Subsidiaries taken as a whole, as the case may be; (3) changes or events affecting the insurance industry generally so long as such changes or events do not have a materially disproportionate A-6 effect on the Company and its Subsidiaries taken as a whole relative to other participants in the industry in which the Company and its Subsidiaries conduct business, or Parent and its Subsidiaries taken as a whole, as the case may be (it being agreed that such changes or events shall not include any named hurricane that is identified as a Category 3 or higher hurricane, but shall otherwise include natural catastrophes); (4) changes in United States generally accepted accounting principles or in statutory accounting practices ("GAAP" or "SAP" respectively) after the date of this Agreement prescribed by the applicable domiciliary state regulation, including accounting pronouncements by the Securities and Exchange Commission (the "SEC"), the National Association of Insurance Commissioners and the Financial Accounting Standards Board; or (5) the announcement of this Agreement or the consummation of the transactions contemplated hereby, or (B) the ability of the Company or Parent, as the case may be, to perform its obligations hereunder on a timely basis. 3.2. Capital Structure. (a) The authorized capital stock of the Company consists of 50,000,000 shares of the Company Common Stock, and 10,000,000 shares of preferred stock, no par value per share. As of December 31, 2007, (i) 11,425,790 shares of the Company Common Stock are issued and 11,007,487 outstanding, (ii) 1,000,000 shares of the Company Common Stock are reserved for issuance under The National Atlantic Holdings Corporation 2004 Stock and Incentive Plan and The National Atlantic Holdings Corporation Nonstatutory Stock Option Plan (collectively, the "Company Stock Plans"), and (iii) no shares of preferred stock are issued and outstanding. Section 3.2(a) of the Company Disclosure Letter contains a complete and accurate list of all award recipients under the Company Stock Plans and the number of shares subject to such award, the date of grant and the price per share at which any option may be exercised. All outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid, nonassessable and free of any preemptive rights. There are no restrictions upon the voting or transfer of any shares of the Company Common Stock pursuant to the Company's certificate of incorporation or bylaws and neither the Company nor any of its Subsidiaries is a party to any voting trust, proxy, or other agreement or understanding with respect to the securities of the Company. Except for awards issued or to be issued under the Company Stock Plans and listed on Section 3.2(a) of the Company Disclosure Letter, there is no outstanding option, warrant, right, subscription, call, unsatisfied preemptive right or other agreement or right of any kind to purchase or otherwise acquire from the Company any capital stock of the Company. There is no outstanding security of any kind convertible into such capital stock, and there is no outstanding contract or other agreement of the Company or any other party to purchase, redeem or otherwise acquire any outstanding shares of capital stock or any other equity security of the Company. (b) No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which shareholders may vote ("Voting Debt") of the Company or any of its Subsidiaries are issued or outstanding. 3.3. Subsidiaries. Section 3.3 of the Company Disclosure Letter lists each Subsidiary of the Company. All the outstanding shares of capital stock of each Subsidiary of the Company have been duly authorized, validly issued and are fully paid, nonassessable, free of any preemptive rights and are owned by the Company either directly or through a Subsidiary of the Company free and clear of all pledges, claims, liens, charges, encumbrances and security A-7 interests of any kind (collectively, "Liens"). None of the outstanding shares of capital stock of any Subsidiary of the Company was issued in violation of preemptive or other similar rights of any security holder of such Subsidiary. There are no outstanding subscriptions, options, warrants, convertible or exchangeable securities or other rights granted to or by the Company or any Subsidiary to purchase shares of common stock or other securities of any Subsidiary. Other than the capital stock of the Subsidiaries, the Company neither directly nor indirectly owns equity securities, or securities that are or might become convertible into or exchangeable for equity security, representing 5% or more of the effective voting power or equity or other ownership interest of any person or entity. 3.4. Authority. The Company has the requisite corporate power and authority to enter into this Agreement and, subject to the approval of this Agreement by the holders of a majority of the Company Common Stock, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company and, subject to the approval of this Agreement by the holders of a majority of the Company Common Stock, the consummation by the Company of the transactions contemplated hereby have been duly authorized and approved by all necessary corporate action on the part of the Company and no other acts or proceedings on its part are necessary to authorize the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Company and, assuming this Agreement constitutes the valid and binding agreement of Parent, constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, receivership, moratorium, conservatorship, reorganization, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 3.5. Board Approval. The Board of Directors of the Company, by resolutions duly adopted by vote (with no dissenting votes) at a meeting duly called and held, has (i) determined that this Agreement and the Merger and other transactions contemplated hereby are fair to and in the best interests of the Company and its shareholders, (ii) approved and adopted this Agreement and the plan of merger contained herein and (iii) recommended that shareholders of the Company approve this Agreement and the transactions contemplated hereby (including the Merger). 3.6. Vote Required. The affirmative vote of a majority of the votes cast by holders of the Company Common Stock entitled to vote on the plan of merger ("Required Company Vote") is the only vote of the holders of any class or series of the Company's capital stock necessary to approve this Agreement and the transactions contemplated hereby (including the Merger). 3.7. Noncontravention; Consents. The execution, delivery and performance of this Agreement by the Company, the consummation of the transactions contemplated hereby and the compliance by the Company with any of the provisions hereof do not and will not (i) conflict with, or result in a breach or default (with or without notice or lapse of time, or both) under, any of the provisions of the certificate of incorporation or bylaws of the Company or the comparable A-8 documents of any Subsidiary of the Company, (ii) violate, conflict with or result in the breach of any of the terms of, result in any modification of, accelerate or permit the acceleration of the performance required by, otherwise give any other contracting party the right to terminate, or constitute (with or without notice or lapse of time, or both) a default under, give rise to any requirement to obtain any authorization, consent or approval under, or create any lien, pledge, security interest or other encumbrance on any assets pursuant to, any contract applicable to the Company or any of its Subsidiaries or (iii) violate any statute, law, regulation or order, judgment, injunction, award or decree of any federal, state, local or foreign government, court, administrative, regulatory or other governmental agency, commission, or authority or any non-governmental United States or foreign self-regulatory agency, commission or authority or any arbitral tribunal ("Governmental Entity") against, or binding upon, or any agreement with, or condition imposed by, any Governmental Entity, foreign or domestic, with respect to the Company or any of its Subsidiaries, which, in the case of clauses (ii) and (iii) of this Section 3.7 would, individually or in the aggregate, have a Material Adverse Effect on the Company. No consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity, is required by or with respect to the Company or any of its Subsidiaries in connection with the execution, delivery and performance of this Agreement, the consummation of the transactions contemplated hereby or the compliance by the Company with any of the provisions hereof except for (i) the filing with the SEC of a proxy statement relating to the approval of this Agreement and the transactions contemplated hereby by the Company's shareholders and such reports, filings and statements under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as may be required in connection with this Agreement and the transactions contemplated hereby, (ii) the filing of the certificate of merger with the office of the Secretary of State of the State of New Jersey, (iii) the filing of premerger notification and report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (iv) compliance with any applicable requirements of the Nasdaq National Market, (v) the approvals, filings and notices required under the applicable insurance statutes and laws, rules, regulations, directives, orders or decrees of the Governmental Entity charged with supervision of insurance companies of such jurisdiction and court decisions relating to the foregoing (the "Insurance Laws") of the jurisdictions set forth in Section 3.7 of the Company Disclosure Letter, (vi) such other consents, approvals, authorizations, declarations, filings or notices as are set forth in Section 3.7 of the Company Disclosure Letter and (vii) such other consents, approvals, authorizations, declarations, filings or notices which if not obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on the Company. 3.8. SEC Filings. The Company and its Subsidiaries have filed or furnished, as applicable, on a timely basis, all required forms, reports, schedules, registration statements, certificates and other documents and exhibits thereto with or to the SEC since January 27, 2005 and through the business day prior to the date of this Agreement (the "Company SEC Documents"). As of their respective dates of filing with or publicly furnishing to the SEC (or, if amended or supplemented by a filing prior to the date hereof, as of the date of such latest filing), the Company SEC Documents, and the financial statements of the Company and its Subsidiaries included in or incorporated by reference into the Company SEC Documents filed or furnished to the SEC after the date of this Agreement, complied or will comply, as the case may be, in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder, and none of the Company SEC Documents or the financial statements of the A-9 Company and its Subsidiaries included in or incorporated by reference into the Company SEC Documents filed or furnished to the SEC after the date of this Agreement, when filed with or publicly furnished to the SEC (or, if amended or supplemented by a filing prior to the date hereof, as of the date of such latest filing) contained or will contain, as the case may be, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company and its Subsidiaries included in the Company SEC Documents and the financial statements of the Company and its Subsidiaries included in or incorporated by reference into the Company SEC Documents filed or furnished to the SEC after the date of this Agreement complied or will comply, as the case may be, as of their respective dates of filing with the SEC (or, if amended or supplemented by a filing prior to the date hereof, as of the date of such latest filing), in all material respects with all applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been or will be, as the case may be, prepared in accordance with GAAP and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries and the consolidated results of operations, changes in shareholders' equity and cash flows of such companies or entities as of the dates and for the periods shown (subject, in the case of any unaudited interim financial statements, to normal and recurring year-end adjustments that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company). 3.9. Sarbanes-Oxley Act of 2002. The Company has been and is in compliance in all material respects with (A) the applicable provisions of the Sarbanes Oxley Act and the rules and regulations promulgated thereunder and (B) the applicable listing and corporate governance rules and regulations of NASDAQ. Without limitation to Section 3.11 below, the Company and its Subsidiaries have designed and maintain a system of internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company has designed and maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) and such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure. The Company's principal executive officer and principal financial officer have disclosed, based on its most recent evaluation of such disclosure controls and procedures prior to the date hereof, to the Company's auditors and the audit committee of the Company (A) any significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls over financial reporting and the Company has provided Parent with copies of any material written materials relating to the foregoing and a written summary thereof. Since December 31, 2006, any change in internal controls over financial reporting required to be disclosed in any Company SEC Document has been so disclosed, and (i) the Company has no knowledge of any complaint, whether written or oral, regarding the accounting or auditing practices, procedures, A-10 methodologies or methods of the Company or any of its Subsidiaries or their respective internal accounting controls and (ii) no attorney representing the Company or any of its Subsidiaries, whether or not employed by the Company or its Subsidiaries, has reported evidence of a violation of the securities laws, breach of fiduciary duty or similar violation, by the Company or its Subsidiaries or any of their respective officers, directors, employees or other representatives, in each case, relating to periods after December 31, 2006. Neither the Company nor any of its Subsidiaries is a party to, or has any commitment to become a party to, any joint venture, partnership agreement or any similar contract or agreement (including any contract or agreement relating to any transaction, arrangement or relationship between or among the Company or any of its Subsidiaries, on the one hand, and any unconsolidated affiliate, including any structured finance, special purpose or limited purpose entity or person, on the other hand (such as any arrangement described in Section 303(a)(4) of Regulation S-K of the SEC)) not reflected in or disclosed on the Company's consolidated financial statements. 3.10. Statutory Financial Statements. The Company has previously delivered to Parent copies of (i) the audited statutory-basis balance sheet of each Company Insurance Subsidiary (as defined in Section 3.17) as of December 31, 2006, and the unaudited statutory-basis balance sheets of each Company Insurance Subsidiary (as defined in Section 3.17) as of (ii) March 31, 2007, (iii) June 30, 2007 and (iv) September 30, 2007 ((i), (ii), (iii) and (iv) collectively, the "Company SAP Balance Sheets") and the related statements of income, stockholders' equity and cash flows for the periods then ended, together with the notes to such financial statements (together with the Company SAP Balance Sheets, the "Company SAP Financial Statements"). The Company SAP Financial Statements, and the statutory-basis balance sheets of each Company Insurance Subsidiary and the related statements of income, stockholders' equity and cash flows for the periods then ended, together with the notes to such financial statements, filed after the date of this Agreement, have been or will be, as the case may be, prepared in conformity with SAP and, together with the notes, exhibits or schedules thereto, and presented or will present fairly, as the case may be, in accordance with SAP, in all material respects the admitted assets, liabilities, capital and surplus of such Company Insurance Subsidiary at their respective dates and the results of operations and cash flows of such Company Insurance Subsidiary for the periods then ended (subject, in the case of the quarterly statement, to year-end adjustments made in the ordinary course of business). 3.11. No Undisclosed Liabilities. Except as disclosed in Section 3.11 of the Company Disclosure Letter and except for (A) those liabilities that are fully reflected or reserved for in the consolidated financial statements of the Company included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, as filed with the SEC prior to the date of this Agreement, (B) liabilities incurred since September 30, 2007 in the ordinary course of business consistent with past practice and which individually or in the aggregate have not had and would not reasonably be expected to have a Material Adverse Effect on the Company, and (C) liabilities incurred pursuant to this Agreement and the transactions expressly contemplated hereby, the Company and its Subsidiaries do not have, and since September 30, 2007, the Company and its Subsidiaries have not incurred, any liabilities or obligations of any nature whatsoever (whether accrued, absolute, contingent or otherwise and whether or not required to be reflected in the Company's financial statements in accordance with GAAP). A-11 3.12. Absence of Certain Changes or Events. Except as otherwise contemplated by this Agreement, since December 31, 2007, the Company and its Subsidiaries have conducted their business in the ordinary course, and there has not occurred: (a) any event or change that has had or would reasonably be expected to have a Material Adverse Effect on the Company or its Subsidiaries; (b) any material damage or destruction to, or loss of, any material assets or property owned, leased or used by the Company or its Subsidiaries (whether or not covered by insurance); (c) any sale of property of the Company or its Subsidiaries except in the ordinary course of business; (d) except in the ordinary course of business consistent with past practice, any increase in compensation payable by the Company or its Subsidiaries to any director or executive officer of the Company or its Subsidiaries; (e) a settlement or agreement by the Company or its Subsidiaries to settle any action except in the ordinary course of business; (f) a declaration or payment of any dividend by the Company or its Subsidiaries on any shares of its capital stock (other than any dividend between or among the Company and its Subsidiaries); (g) except in the ordinary course of business, the entrance into any reinsurance or retrocessional agreement, either as a ceding company or reinsurer; (h) except in the ordinary course of business, any change in material underwriting, reinsurance, marketing, pricing or claim processing procedures or practices of the Company or any Subsidiaries; or (i) any agreement by the Company or any of the Subsidiaries to do any of the matters set forth in clauses (a) through (h) above. 3.13. Benefit Plans. (a) Section 3.13 of the Company Disclosure Letter lists each "employee benefit plan" (as defined in Section 3(3) of ERISA (as defined below)), each equity-based plan, and each material bonus, deferred compensation, severance, employment, consulting or other plan or agreement relating to compensation, retirement benefits, employee benefits or fringe benefits maintained by the Company or any of its Subsidiaries or to which the Company or any of its Subsidiaries is a party, or under which the Company or any of its Subsidiaries is obligated to pay premiums or benefits ("Company Employee Benefit Plan"). The Company has delivered or made available to Parent copies of (i) each Company Employee Benefit Plan reduced to writing and a summary of material terms for each Company Employee Benefit Plan not reduced to writing, (ii) the most recent summary plan description for each Company Employee Benefit Plan for which such a summary plan description is required, (iii) the most recent favorable determination letters from the Internal Revenue Service with respect to each Company Employee Benefit Plan intended to qualify under Section 401(a) of the Code, and (iv) the three most recent Forms 5500 for each Company Employee Benefit Plan for which such forms are required to be filed. (b) Each Company Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter covering all current terms of the Plan from the Internal Revenue Service (or the deadline for seeking such a letter has not yet passed) and, to the knowledge of the Company, no event has occurred and no condition exists that is reasonably likely to result in the revocation of any such determination. (c) Each Company Employee Benefit Plan is and has been maintained, operated and administered in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code, all Applicable Laws and the operative documents for each such plan. All required contributions to, A-12 and premium payments on account of, each Company Employee Benefit Plan for all periods ending on or before the Closing Date have been made on a timely basis and, to the extent not due, have been appropriately accrued. (d) No Company Employee Benefit Plan is a "multiemployer plan" (as defined in Section 3(37) of ERISA) and neither the Company nor any of its Subsidiaries nor any other entity that would be treated as a single employer with the Company under Section 414(b), (c), (m) or (n) of the Code or Section 4001(b) of ERISA ("ERISA Affiliate") has been obligated to contribute or has any liability to any multiemployer plan as so defined within the last six years. (e) No liability under Title IV of ERISA has been incurred by the Company or its Subsidiaries or any ERISA Affiliate that has not been satisfied in full when due, and no condition exists that could result in liability to the Company or any ERISA Affiliate under Title IV of ERISA (other than for the payment of insurance premiums to the Pension Benefit Guaranty Corporation). No Employee Benefit Plan maintained by the Company or any ERISA Affiliate subject to the minimum funding requirements of Section 412 of the Code or Section 302 of ERISA or any trust established thereunder has incurred any "accumulated funding deficiency" (as defined in Section 412 or Section 4971 of the Code). (f) Except as disclosed in Section 3.13 of the Company Disclosure Letter, neither the execution and delivery of the Agreement nor the consummation of the transactions contemplated by this Agreement (whether alone or together with any other event or agreement) will (i) entitle any employee to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any employee. (g) Except as disclosed in Section 3.13 of the Company Disclosure Letter, and except as required under Sections 601 through 609 of ERISA, no Company Employee Benefit Plan provides or has any liability to provide health, life, severance or disability benefit coverage upon or following retirement or other termination of employment. (h) Each Company Employee Benefit Plan which is subject to the requirements of Section 409A of the Code has been adopted and administered including with respect to tax reporting and withholding obligations in good faith compliance with such Section and the guidance issued by the Department of the Treasury thereunder from January 1, 2005 to date. (i) There are no pending or, to the knowledge of the Company, threatened claims by or on behalf of any Company Employee Benefit Plan, by any employee, beneficiary, or other person covered or claiming coverage under any Company Employee Benefit Plan or otherwise involving any Company Employee Benefit Plan (other than routine claims for benefits). No Company Employee Benefit Plan is or, within the last six years has been, the subject of an examination, audit, inquiry, review, proceeding, claim, or demand by a Governmental Entity, or is the subject of an application or filing under, or is a participant in, a government-sponsored amnesty, voluntary compliance, self-correction or similar program. (j) Except as disclosed in Section 3.13 of the Company Disclosure Letter, no Material Contract and no Company Employee Benefit Plan provides, conditionally or otherwise, A-13 for any payment or benefit that could constitute, in whole or in part, an "excess parachute payment" (as that term is defined in Code Section 280G) with respect to the transactions contemplated by this Agreement, or that could reasonably be expected to be nondeductible by reason of Code Sections 162 or Code Section 404. (k) Each holder of an Award has entered into a Stock Option and Stock Appreciation Rights Cancellation Agreement in the form previously provided to Parent. 3.14. Taxes. (a) All income Tax Returns and other material Tax Returns filed or required by Applicable Laws to be filed with any Taxing Authority by, or on behalf of, the Company or any of its Subsidiaries have been filed properly when due (after taking into account all extensions to file applicable thereto) in accordance with all Applicable Laws, and all such filed Tax Returns are true, correct and complete in all material respects; (b) The Company and each of its Subsidiaries has timely paid or caused to be paid all material amounts of Taxes (whether or not shown as due on such filed Tax Returns) to the extent such Taxes were due and payable; (c) There are no Liens for any material amount of Taxes upon the assets or property of the Company or any of its Subsidiaries, other than (i) statutory Liens for Taxes not yet due and payable, and (ii) Liens for Taxes that (1) are being contested in good faith and (2) have been accrued for on the most recent financial statements included in the Company SEC Documents in accordance with GAAP; (d) There is no claim, audit, examination, action, suit, proceeding, or investigation now pending or in process or, to the Company's knowledge, threatened in writing against or with respect to the Company or its Subsidiaries in respect of any material Tax; (e) Neither the Company nor any of its Subsidiaries has entered into a "listed transaction" within the meaning of Treasury Regulation Section 1.6011-4(b)(2); (f) There are no outstanding written requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any material amount of Taxes or deficiencies (other than pursuant to extensions of time to file Tax Returns obtained in the ordinary course of business); (g) Neither the Company nor any of its Subsidiaries is a party to any contractual obligation relating to Tax sharing or Tax allocation with a third party (i.e. other than the Company and its Subsidiaries), and neither the Company nor any of its Subsidiaries has executed any power of attorney with respect to any Tax, other than powers of attorney that are no longer in force; (h) The Company has made adequate provision in the consolidated financial statements of the Company and each of its Subsidiaries (in accordance with GAAP) included in the Company's SEC Documents for all material amounts of Taxes not yet due of the Company and each of its Subsidiaries; A-14 (i) The Company has and each of its Subsidiaries has in all material respects complied with all Applicable Laws relating to the payment and withholding of Taxes (including all reporting and record keeping requirements) and has, within the time and manner prescribed by law, withheld and paid over to the proper Taxing Authority all material amounts of Taxes required to be withheld and paid over by them; (j) Neither the Company nor any of its Subsidiaries will be required to include any material item of income in, or exclude any material item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change in method of accounting for a taxable period ending on or prior to the Closing Date that was initiated or requested by the Company or a Subsidiary, or (ii) "closing agreement," as described in Section 7121 of the Code (or any corresponding provision of state, local or foreign law), entered into on or prior to the Closing Date, or (iii) any ruling received from the Internal Revenue Service; (k) Since December 31, 2006, there has not occurred: (i) any material change in any Tax elections made by the Company or by any of its Subsidiaries; (ii) any settlement or compromise of any material Tax liability by the Company or by any of its Subsidiaries; (iii) the filing of any amended Tax Return with respect to any material Tax; or (iv) any material change in any method of Tax accounting or of any annual Tax accounting period by the Company or by any of its Subsidiaries, except insofar as may be required by Applicable Laws; (l) Neither the Company nor any of its Subsidiaries (i) has been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company) or (ii) has any liability for a material amount of Taxes of any person (other than the Company or one of its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee, successor, by contract or otherwise; (m) To the knowledge of the Company (i) Parent has been provided with all work and other papers of the Company and of its Subsidiaries relating to FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and (ii) the Company has and each of its Subsidiaries has made available to Parent complete and correct copies of all income Tax Returns, examination reports and statements of deficiency, closing agreements and letter rulings filed or received by the Company or by any of its Subsidiaries since December 31, 2002; and (n) Since January 1, 2005, neither the Company nor any of its Subsidiaries has been a "distributing corporation" or a "controlled corporation" within the meaning of Code Section 355(a)(1)(A). "Tax" means any and all federal, state, county, provincial, local, foreign and other taxes, including, without limitation, all net income, gross income, gross receipts, premium, estimated, sales, use, ad valorem, property, transfer, franchise, profits, license, single business, withholding, payroll, employment, excise, severance, VAT, GST, consumption, stamp, occupation, customs duties, capital stock, social security (or similar, including FICA), unemployment, disability, real property, personal property, registration, value added, alternative or add-on minimum, or other contributions or similar tax of any kind or any charge of any kind in the nature of (or similar to) A-15 taxes whatsoever together with any interest, additions to tax or interest, and penalties with respect thereto imposed by any Taxing Authority (including any liability for the payment of any such amounts as a result of being a member of an affiliated, consolidated, combined, or unitary group for any period). "Tax Return" means any return, report or statement filed or required to be filed with respect to any Tax (including any attached schedules) including any information return, claim for refund or declaration of estimated Tax, and including, where permitted or required, combined, consolidated or unitary returns for any group of entities that includes the Company or any Subsidiaries thereof, as well as any amendments thereof. "Taxing Authority" means the Internal Revenue Service or any other Governmental Entity responsible for the administration of any Tax. 3.15. Compliance with Applicable Laws. (a) The Company and each of its Subsidiaries have in full force and effect all material approvals, authorizations, consents, variances, exemptions, orders, registrations, licenses and permits of all Governmental Entities (collectively, "Permits") necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted. The Company and each of its Subsidiaries are in compliance in all material respects with all such Permits and are in compliance with all terms required for the continued effectiveness thereof. No investigation or proceeding is pending or, to the knowledge of the Company, threatened, which would reasonably be expected to result in the amendment, failure to renew, limitation, modification, suspension or revocation of any such Permit, where such amendment, failure to renew, limitation, modification, suspension or revocation would be material to the Company or any Subsidiary. (b) The Company and its Subsidiaries are (i) in compliance with the terms of their respective certificate or articles of incorporation, bylaws or other charter or organizational documents and (ii) in compliance in all material respects with all Applicable Laws. 3.16. Litigation. Except as may be disclosed in Section 3.16 of the Company Disclosure Letter, no action, suit, investigation, inquiry or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries or its or their properties or assets is pending or, to the best knowledge of the Company, threatened, other than any insurance claims incurred in the ordinary course of business of any Company Insurance Subsidiary. With respect to those actions, suits or proceedings that are insurance claims incurred in the ordinary course of business of any Company Insurance Subsidiary, none contains any allegation of bad faith on the part of the Company or any of its Subsidiaries, seeks extra-contractual or punitive damages from the Company or any of its Subsidiaries, or seeks class action status on behalf of any claimants, except as disclosed in Section 3.16 of the Company Disclosure Letter. 3.17. Insurance Regulatory Matters. A-16 (a) Section 3.17 of the Company Disclosure Letter lists all Subsidiaries of the Company that are licensed to write insurance business (each, a "Company Insurance Subsidiary") and lists all jurisdictions in which each such Subsidiary is licensed to write insurance business. (b) The Company has made available to Parent copies of all financial examination reports of state insurance departments with respect to any Company Insurance Subsidiary which have been completed and reports issued since January 1, 2005. Since January 1, 2005, no material violations of Applicable Laws of any Company Insurance Subsidiary have been asserted in writing by any Governmental Entity, other than any violation which has been cured or otherwise resolved to the satisfaction of such Governmental Entity. (c) Since January 1, 2005, the Company and its Subsidiaries have filed all material reports, statements, documents, registrations, filings or submissions required to be filed by such entity with any Governmental Entity, and all such reports, registrations, filings and submissions are in compliance (and complied at the relevant time) in all material respects with Applicable Laws and no material deficiencies have been asserted in writing by any such Governmental Entity since January 1, 2005 with respect to any material reports, statements, documents, registrations, filings or submissions required to be filed with respect to the Company or its Subsidiaries with any Governmental Entity that have not been remedied. Neither the Company nor any of its Subsidiaries is or has been since 2005 a "commercially domiciled insurer" under the laws of any jurisdiction or is or since 2005 has otherwise been treated as domiciled in a jurisdiction other than its jurisdiction of organization. (d) Neither the Company nor any of its Subsidiaries is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has adopted any resolutions at the request of, any Governmental Entity that by its terms restricts in any material respect the conduct of the business of the Company or its Subsidiaries nor has the Company been advised in writing by any Governmental Entity since January 1, 2005 that it is considering issuing or requesting any such agreement. There are no insurance policies issued, reinsured or assumed by the Company or any of its Subsidiaries that are currently in force under which the Company or any of its Subsidiaries may be required to pay dividends to the holders thereof. (e) To the extent required under Applicable Laws, all policies, binders, slips or other agreements of insurance and other agreements and materials that are issued or used in connection with the Company Insurance Subsidiaries' business, including applications, brochures and marketing materials, premium rates and reinsurance agreements, (i) are in all material respects, on forms approved by applicable insurance regulatory authorities or filed and not objected to by such authorities within the period provided for objection, and, in either case, not subsequently disapproved or required to be withdrawn or retired from issuance or use which have not been so withdrawn or retired and (ii) (A) all homeowners and dwelling and fire policies in place as of December 31, 2007 contain an exclusion for oil tank/environmental liability, (B) the exclusion is effective on all policies beginning with the first renewal on or after September 1, 2007 unless the policy holder has purchased any endorsement to buy-back oil tank/environmental coverage, (C) no renewal policies will be able to purchase the buy-back endorsement after September 1, 2008, and (D) for homeowners and dwelling and fire policies renewing between September 31, 2007 A-17 and December 31, 2007 less than 1% have purchased the buy-back endorsement. Any rates of the Company Insurance Subsidiaries required to be filed with or approved by any applicable Governmental Entity have in all material respects been so filed or approved and the rates applied by each of the Company or any of its Subsidiaries conform in all material respects to the relevant filed or approved rates. (f) No Company Insurance Subsidiary is in default under or violation of any material order, stipulation, decree, award or judgment entered into with or issued by any Governmental Entity charged with enforcement of Insurance Laws, nor has any Company Insurance Subsidiary received any notice of any such default or violation which remains uncorrected. 3.18. Reserves. The Company has delivered to Parent true and complete copies of all actuarial reports prepared since December 31, 2005 with respect to and on behalf of any Company Insurance Subsidiary that are in the possession of the Company or any of its Subsidiaries relating to the loss and loss adjustment expense reserves of any of the Company Insurance Subsidiaries. All reserves for losses and loss adjustment expenses reflected in the Company SAP Balance Sheets (i) met the requirements of the Insurance Laws of Bermuda and the State of New Jersey, (ii) were computed in accordance with generally accepted loss reserving standards and principles and (iii) as of the date of such Company SAP Balance Sheets, made a reasonable provision in the aggregate for all unpaid losses and loss adjustment expense obligations of the Company Insurance Subsidiaries under the terms of their respective insurance policies (it being understood that no representation or warranty is made herein to the effect that such reserves will in fact be adequate to cover the actual amount of such liabilities that are eventually paid after the date thereof). The Company has delivered to Parent a true and complete copy of the most recent report (the "Actuarial Report"), prepared by Huggins Actuarial Services, Inc. (the "Actuary"). The Actuary has not issued any further adjustment or errata with respect to the Actuarial Report. Any historical information and data furnished to the Actuary by the Company and the Company Insurance Subsidiaries in connection with the preparation of the Actuarial Report was true and complete in all material respects and was not inconsistent in any material respect with the Company SAP Financial Statements. 3.19. Intellectual Property. To the knowledge of the Company, the Company and its Subsidiaries own, possess, license or have other rights to use, on reasonable terms, all material Intellectual Property. Intellectual property means all patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, technology, know-how and other intellectual property (collectively, the "Intellectual Property") necessary for the conduct of the Company's business as now conducted. Except as set forth in Section 3.19 of the Company Disclosure Letter, (a) there are no rights of third parties to any Intellectual Property owned by the Company or its Subsidiaries; (b) there is no material infringement by third parties of any Intellectual Property owned by the Company or its Subsidiaries; (c) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the Company's rights in or to any such Intellectual Property, and to the knowledge of the Company, there are no facts which would form a reasonable basis for any such claim; (d) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the validity or scope of any Intellectual Property owned by the Company or its Subsidiaries, and, to the knowledge of the Company, there are no facts which would form a reasonable basis for any such claim; (e) A-18 there is no pending or threatened action, suit, proceeding or claim by others that the Company infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and, to the knowledge of the Company, there is no other fact which would form a reasonable basis for any such claim; (f) to the knowledge of the Company there is no U.S. patent or published U.S. patent application which contains claims that dominate or may dominate any Intellectual Property owned by to the Company or that interferes with the issued or pending claims of any such Intellectual Property; and (g) the Company does not hold any U.S. patent issued by the U.S. Patent and Trademark Office. 3.20. Real Property. Each of the Company and its Subsidiaries owns or leases all such properties as are necessary to the conduct of its operations as presently conducted. The Company has heretofore made available to Parent true and complete copies of the real property leases and all amendments thereto. Subject to such exceptions as would not be material to the Company's business, (i) each lease is valid, binding and in full force and effect and neither the Company nor any of its Subsidiaries is in breach of or default under, or has received written notice of any breach of or default under, any such lease, and (ii) to the knowledge of the Company, no event has occurred that with notice or lapse of time or both would constitute a breach or default thereunder by the Company or any of its Subsidiaries or any other party thereto. 3.21. Labor Matters. (a) Neither the Company nor any of its Subsidiaries is a party to or bound by any collective bargaining agreement. (b) As of the date hereof, there is no labor strike or similar dispute, slowdown or stoppage pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries. As of the date hereof, there is no unfair labor practice complaint, grievance or charge against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened before the National Labor Relations Board or any other Governmental Entity involving current or former employees of the Company or any of its Subsidiaries. (c) As of the date hereof, neither the Company nor any of its Subsidiaries has implemented any plant closing or layoff of employees that would reasonably be expected to require notification under the WARN Act or any similar state, local or foreign law or regulation. 3.22. Proxy Statement. Subject to the accuracy of the representations and warranties of Parent and Merger Sub set forth in Section 4.6, the Proxy Statement (as defined in Section 6.1), and any amendments or supplements thereto, will not, on the date they are first mailed to the holders of Company Common Stock, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, and will not, at the time of the Company Shareholders Meeting (as defined in Section 6.1), omit to state any material fact necessary to correct any statement in any earlier communication from the Company with respect to the Company Shareholders Meeting which shall have become false or misleading in any material respect. The Proxy Statement will comply as to form in all material respects with the applicable requirements of the Exchange Act. Notwithstanding the foregoing, the Company A-19 makes no representation or warranty with respect to information supplied by or on behalf of Parent or Merger Sub that is included or incorporated by reference in the Proxy Statement. 3.23. Operations Insurance. Section 3.23 of the Company Disclosure Letter contains a true and complete list and description of all liability, property, workers compensation and other similar insurance policies or agreements that insure the business, operations, or affairs of the Company and each of its Subsidiaries. Excluding insurance policies that have expired and been replaced by the Company or any of its Subsidiaries in the ordinary course of business, no insurance policy has been canceled within the last three years, and, to the knowledge of the Company, no written threat has been made to cancel any such insurance policy of the Company or any of its Subsidiaries during such period. All such insurance policies will remain in full force and effect with respect to periods before and through the Closing Date. 3.24. Brokers. No broker, investment banker, financial advisor or other person, other than Banc of America Securities LLC, the fees and expenses of which will be paid by the Company, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission, or reimbursement of expenses, in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or its Subsidiaries. The Company has previously provided to Parent a good faith estimate of the amount of costs and expenses incurred by the Company to date in connection with the transactions contemplated by this Agreement and of the amount of such costs and expenses that the Company expects to incur by the Closing, including the fees and expenses of the Company's financial advisors and the Company's legal and other advisors. 3.25. Takeover Laws. None of the business combination provisions of the NJBCA, Amended and Restated Certificate of Incorporation or the Amended and Restated Bylaws of the Company are applicable to the transactions contemplated by this Agreement because such provisions do not apply by their terms or because any required approvals of the Board of Directors of the Company have been obtained. 3.26. Title to Assets. The Company and its Subsidiaries have good title to, or a valid leasehold interest in, the material tangible assets they use regularly in the conduct of their business. 3.27. Affiliate Transactions. Except for compensation or other employment arrangements in the ordinary course and arrangements contemplated by this Agreement, there are no, and since September 30, 2007, there have not been any, transactions, agreements, arrangements or understandings or series of related transactions, agreements, arrangements or understandings nor are there currently proposed any such transactions, agreements, arrangements or understandings between the Company or any of its Subsidiaries, on the one hand, and any affiliate (including any director or officer) thereof, but not including any wholly-owned Subsidiary of the Company, on the other hand, that would be required to be disclosed pursuant to Item 404 of Regulation S-K under the Securities Act in the Company's Form 10-K or proxy statement pertaining to an annual meeting of stockholders, and there will have been no additional disclosure required to be included in connection with any such transactions, agreements, arrangements or understandings in the Company's Annual Report on Form 10K when filed or amended, or incorporated therein after such filing or amendment. A-20 3.28. Contracts. Each of the Material Contracts (defined below) is valid and binding on the Company (and each such Subsidiary of the Company party thereto) and, to the knowledge of the Company, each other party thereto, and is in full force and effect, and enforceable in accordance with its terms and neither the Company nor any of its Subsidiaries that is a party thereto, nor, to the knowledge of the Company, any other party thereto, is in breach of, or default under, any such Material Contract, and no event has occurred that with notice or lapse of time or both would constitute such a breach or default thereunder by the Company or any of its Subsidiaries, or, to the knowledge of the Company, any other party thereto. The Company has not received any notice from any counterparty that such counterparty intends to terminate, or not renew, any Material Contract, or is seeking the renegotiation thereof in any material respect or substitute performance thereunder in any material respect. As of the date hereof, true and complete copies of all Material Contracts (including all exhibits and schedules thereto) have been (i) publicly filed with the SEC or (ii) made available to Parent. "Material Contract" means (i) each contract that involves performance of services or delivery of products by the Company and/or its Subsidiaries of an amount or value in excess of or equal to $100,000, (ii) each contract that involves performance of services or delivery of products to the Company and/or its Subsidiaries of an amount or value in excess of or equal to $100,000 and (iii) each contract that could reasonably be expected to result in the payment of an amount or value in excess of or equal to $100,000 by the Company and/or any Subsidiary other than commercial arrangements entered into in the ordinary course of business and containing customary and usual indemnification or expense reimbursement provisions. 3.29. Opinion of Financial Advisor. The Board of Directors of the Company has received the opinion of Banc of America Securities LLC, financial advisor to the Company, to the effect that, as of March 9, 2008 and based upon various qualifications and assumptions, the Per Share Amount to be received by the holders of shares of Company Common Stock in the Merger is fair from a financial point of view to such holders (the "Fairness Opinion"). 3.30. Draft Audited Financial Statements. Parent has been provided with draft audited financial statements of the Company and its Subsidiaries for the fiscal year ended December 31, 2007 as intended to be included in the Company's Annual Report on Form 10-K to be filed with the SEC, and such draft financial statements will not differ in any non-trivial respect from the Form 10-K that will be filed with the SEC in respect of the fiscal year then ended. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Except as set forth in the written disclosure letter delivered by Parent to the Company in connection with the execution and delivery of this Agreement (the "Parent Disclosure Letter"), Parent and Merger Sub represent and warrant to the Company as follows: 4.1. Organization, Standing and Corporate Power. Parent is an insurance exchange duly organized, validly existing and in good standing under the laws of the State of New Jersey and has the requisite legal power and authority to carry on its business as now being conducted. Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New Jersey and has the requisite corporate power and authority to carry on A-21 its business as now being conducted. Each of Parent and Merger Sub is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified and in good standing (individually or in the aggregate) would not have a Material Adverse Effect on Parent. 4.2. Authority. Each of Parent and Merger Sub has the requisite legal power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by each of Parent and Merger Sub and the consummation by Parent and Merger Sub of the transactions contemplated hereby have been duly authorized and approved by all necessary action on the part of Parent and Merger Sub and no other acts or proceedings on the part of Parent or Merger Sub are necessary to authorize the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. No action by the member policyholders of Parent is necessary to authorize the execution and delivery by Parent of this Agreement and the consummation by Parent of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Parent and Merger Sub and, assuming this Agreement constitutes the valid and binding agreement of the Company, constitutes a valid and binding obligation of each of Parent and Merger Sub, enforceable against each of them in accordance with its terms except that (i) such enforcement may be subject to applicable bankruptcy, receivership, moratorium, conservatorship, reorganization, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 4.3. Noncontravention; Consents. The execution, delivery or performance of this Agreement by Parent and Merger Sub, the consummation of the transactions contemplated hereby by Parent and Merger Sub and the compliance by Parent and Merger Sub with any provisions hereof do not and will not (i) conflict with, or result in a breach or default (with or without notice or lapse of time, or both) under, any of the provisions of the certificate of incorporation, bylaws or other organizational documents of Parent or any Subsidiaries of Parent (including Merger Sub), (ii) violate, conflict with or result in the breach of any of the terms of, result in any modification of, accelerate or permit the acceleration of the performance required by, otherwise give any other contracting party the right to terminate, or constitute (with or without notice or lapse of time, or both) a default under, give rise to any requirement to obtain any authorization, consent or approval under, or create any lien, pledge, security interest or other encumbrance on any assets pursuant to, any contract applicable to Parent or any of its Subsidiaries including Merger Sub or (iii) violate any statute, law, regulation or order, judgment, injunction, award or decree of any Governmental Entity against, or binding upon, or any agreement with, or condition imposed by, any Governmental Entity, foreign or domestic, with respect to Parent or any of its Subsidiaries including Merger Sub, which, in the case of clauses (ii) and (iii) above, would, individually or in the aggregate, have a Material Adverse Effect on Parent. No consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity, is required by or with respect to Parent, Merger Sub or any of the Affiliates of Parent in connection with the execution, delivery and performance of this Agreement by each of Parent and Merger Sub or the consummation by each of them of any of the transactions contemplated hereby, except for (i) the filing with the SEC of such reports, A-22 filings and statements under the Exchange Act as may be required in connection with this Agreement and the transactions contemplated hereby, (ii) the filing of the certificate of merger with the office of the Secretary of State of the State of New Jersey, (iii) the filing of premerger notification and report forms under the HSR Act, (iv) compliance with any applicable requirements of the Nasdaq National Market, (v) the approvals, filings and notices required under the Insurance Laws of the jurisdictions set forth in Section 4.3 of the Parent Disclosure Letter, (vi) such other consents, approvals, authorizations, declarations, filings or notices as are set forth in Section 4.3 of the Parent Disclosure Letter and (vii) such other consents, approvals, authorizations, declarations, filings or notices which if not obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on Parent. 4.4. Compliance with Applicable Laws. (a) Parent and each of its Subsidiaries have in full force and effect all material Permits necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, except in any case in which the failure so to have in full force and effect all material Permits would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent. Parent and each of its Subsidiaries are in compliance in all material respects with all such Permits and all terms required for the continued effectiveness thereof. No investigation or proceeding is pending or, to the knowledge of Parent, threatened, which would reasonably be expected to result in the amendment, failure to renew, limitation, modification, suspension or revocation of any such Permit, where such amendment, failure to renew, limitation, modification, suspension or revocation would be material to Parent or any Subsidiary. (b) Parent and its Subsidiaries are (i) in compliance with the terms of their respective certificate or articles of incorporation, bylaws or other charter or organizational documents and (ii) in compliance in all material respects with all Applicable Laws. 4.5. Litigation. No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving Parent or any of its Subsidiaries or its or their property is pending or, to the best knowledge of Parent, threatened that (a) would reasonably be expected to have a Material Adverse Effect on the consummation of any of the transactions contemplated by this Agreement or (b) would reasonably be expected to have a Material Adverse Effect on Parent. 4.6. Information Supplied. The information supplied in writing by Parent that is included or incorporated by reference in the Proxy Statement will not, on the date it is first mailed to the holders of Company Common Stock or at the time of any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, and will not, at the time of the Company Shareholders Meeting, omit to state any material fact necessary to correct any statement in any earlier communication with respect to the Company Shareholders Meeting which shall have become false or misleading in any material respect. A-23 4.7. Financing. Parent has or will have, prior to the Effective Time, sufficient cash in immediately available funds to pay or cause Merger Sub to pay the Merger Consideration pursuant to Article II hereof and to consummate the Merger and other transactions contemplated hereby. 4.8. Brokers. No broker, investment banker, financial advisor or other person, other than Keefe, Bruyette & Woods, Inc., the fees and expenses of which will be paid by Parent, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission, or reimbursement of expenses, in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Merger Sub. 4.9. Merger Sub. (a) True and complete copies of the organizational documents of Merger Sub, each as in effect as of the date of this Agreement, have previously been made available to the Company. (b) Merger Sub was formed by Parent solely for the purpose of effecting the Merger and the other transactions contemplated by this Agreement. Except as contemplated by this Agreement, Merger Sub does not hold and has not held any material assets or incurred any material liabilities, and has not carried on any business activities other than in connection with the Merger and the other transactions contemplated by this Agreement. (c) The authorized capital stock of Merger Sub consists of ten (10) shares of common stock, par value $100.00 per share, all of which have been validly issued, are fully paid and nonassessable and are owned by Parent free and clear of any Lien. (d) Parent, as sole shareholder of Merger Sub, has approved this Agreement and the transactions contemplated hereby, and no other vote or other action of the shareholder of Merger Sub is required by the Applicable Laws, the organizational documents of Merger Sub or otherwise in order for Merger Sub to consummate the Merger and the transactions contemplated hereby. 4.10. Parent Ownership of Company Securities. Parent and its affiliates do not own of record or beneficially any shares of the Company Common Stock, preferred stock of the Company or any options, warrants or other rights to acquire the Company Common Stock or preferred stock of the Company. ARTICLE V COVENANTS RELATING TO THE CONDUCT OF BUSINESS 5.1. Conduct of Business of the Company. Except as provided for in this Agreement or as set forth in Section 5.1 of the Company Disclosure Letter, from the date of this Agreement to the Closing Date, the Company shall, and shall cause its Subsidiaries to, carry on their respective businesses only in the ordinary course of business and, to the extent consistent therewith, use reasonable best efforts to preserve intact their current business organizations and their relationships with agents, insureds and others having business dealings with them. Without limiting the generality of the foregoing, from the date of this Agreement to the Closing Date, A-24 except as contemplated by this Agreement, the Company shall not, and shall not permit any of its Subsidiaries to, without the prior consent of Parent: (a) (i) declare, issue, make, set aside or pay any dividends on, or make any other distributions (whether in cash, stock, property or other thing of value) in respect of, any of the Company's or any Subsidiary's outstanding capital stock, (ii) split, combine, subdivide or reclassify any of its outstanding capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its outstanding capital stock or (iii) purchase, redeem, retire or otherwise acquire any shares of outstanding capital stock of the Company or any of its Subsidiaries or any rights, warrants or options to acquire any such shares; (b) issue, sell, grant, pledge or otherwise encumber any shares of its capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities; (c) sell, lease, license or otherwise dispose of (including by way of reinsurance), or pledge, subject to a lien or otherwise encumber, any of its assets, except in the ordinary course of business consistent with past practice (it being understood that any such actions taken regarding investment assets which comply with the Company's investment guidelines currently in effect, or those of its respective Subsidiaries, as the case may be, shall be deemed to be taken in the ordinary course of business); (d) (i) amend or change its certificate of incorporation, bylaws or other comparable organizational documents or (ii) merge with or into or consolidate with any other person or entity; (e) (i) acquire (including by way of portfolio reinsurance, merger, consolidation or acquisition of stock or assets) any person or entity or division thereof, or a material portion of the assets of any of the foregoing, (ii) liquidate, dissolve or wind up its business or (iii) organize any new subsidiary; (f) (i) incur any indebtedness for borrowed money or guarantee or otherwise become responsible for any such indebtedness of another person or entity, except in the ordinary course of business consistent with past practice or (ii) make any loans or make or receive any capital contributions or other equity investment other than as to such matters related to the investment portfolio of the Company or any Subsidiary in the ordinary course of business consistent with past practice; (g) abandon, modify, waive, terminate or otherwise change any material Permit of the Company or any Company Insurance Subsidiary except (i) as may be required in order to comply with Applicable Laws or (ii) in the ordinary course of business consistent with past practice; (h) terminate or materially amend any Material Contract, other than (i) terminations or amendments in the ordinary course of business consistent with past practice and (ii) renewals on substantially the same terms; or enter into or amend any contract of a type that would meet the definition of Material Contract if entered into on the date hereof other than in the ordinary course of business consistent with past practice or as otherwise provided under this Agreement; A-25 (i) unless required by Applicable Laws or to comply with changes in GAAP or SAP, change in any material respect any of its methods, policies, practices or principles with respect to financial or statutory accounting, reserving, hedging or investing or otherwise engaging in derivatives transactions, underwriting or claims administration or reinsurance; (j) pay, discharge, settle or satisfy any claims, litigation, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than (i) payment, discharge, settlement or satisfaction fully reserved against in the most recent consolidated financial statements of the Company included in the Company SEC Documents or (ii) on liabilities incurred since the date of such financial statements, payment, discharge, settlement or satisfaction in the ordinary course of business consistent with past practice; (k) amend or terminate any Company Employee Benefit Plan, except as may be required by Applicable Laws; or with respect to any employee, enter into or amend any employment or consulting contract or agreement, or increase compensation, wages or bonuses other than in the ordinary course of business consistent with past practice (provided there will be no increase in compensation, wages or bonuses paid to any officers or directors of the Company or its Subsidiaries), or commit or agree to any changes in its severance terms or policies; or change in any material respect the terms for, or policies with respect to, the payment of commissions to any of its agents; (l) except as required by Applicable Laws (i) settle or compromise any material Tax liability of the Company or its Subsidiaries that has not been fully accrued for in accordance with GAAP on the most recent financial statements that are included in the Company SEC Documents (ii) file any amended Tax Returns with respect to any material Taxes; (iii) make or change any material Tax election; (iv) change any annual Tax accounting period; (v) surrender any right to claim a material Tax refund; or (vi) waive or extend the statute of limitations in respect of material Taxes (other than pursuant to extensions of time to file Tax Returns obtained in the ordinary course of business); (m) enter into, amend or modify any reinsurance agreement or treaty or amend, modify or otherwise revise any forms of insurance policy other than facultative reinsurance; (n) make or agree to make any capital expenditure or expenditures in an amount that, in the aggregate, exceeds the aggregate amount of capital expenditures set forth for the period between the date of this Agreement and the Closing Date on Section 5.1(n) of the Company Disclosure Letter; or (o) agree or commit in writing or otherwise to take any of the actions prohibited by this Section 5.1. Notwithstanding the foregoing, nothing in this Agreement is intended to give the Parent or Merger Sub, directly or indirectly, the right to control or direct the business or operations of the Company or its Subsidiaries at any time prior to the Effective Time. Prior to the Effective Time, the Company and its Subsidiaries shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over their own business and operations. A-26 ARTICLE VI ADDITIONAL AGREEMENTS 6.1. Preparation of Proxy Statement; Shareholders Meetings. (a) As promptly as practicable after the date hereof, and in any event within 90 days following the date hereof, the Company shall prepare and file with the SEC a preliminary proxy statement relating to the Company Shareholders Meeting (together with any amendments thereof or supplements thereto, the "Proxy Statement") in compliance with the applicable provisions of the Exchange Act. The Company will use its reasonable best efforts to respond promptly to (and in any event within 14 days of receiving) any comments made by the SEC with respect to the Proxy Statement. The Company will include in the Proxy Statement (i) the recommendation of the Board of Directors that the stockholders of the Company vote in favor of the adoption of this Agreement and (ii) the Fairness Opinion. Parent shall cooperate with the Company in connection with the preparation of the Proxy Statement, and shall furnish all information concerning Parent and Merger Sub as the Company may reasonably request in connection with the preparation of the Proxy Statement. The Company will provide Parent with a reasonable opportunity to review and comment on the Proxy Statement, any amendment or supplement to the Proxy Statement and any written response to any comments or inquiry from the SEC prior to filing or providing such to the SEC, shall include in such document or response any comments reasonably proposed by Parent and will provide Parent with a copy of all such filings made with the SEC. (b) The Company will advise Parent as promptly as practicable after it receives notice of any request by the SEC for amendment of the Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. (c) The Company agrees that none of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Proxy Statement or any supplemental proxy, at the time of mailing thereof and at the time of the Company Shareholders Meeting, will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Parent agrees that none of the information supplied or to be supplied by Parent for inclusion or incorporation by reference in the Proxy Statement or any supplemental proxy, at the time of mailing thereof and at the time of the Company Shareholders Meeting, will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) The Company shall duly call, give notice of, convene and hold an annual or special meeting of the Company's shareholders (the "Company Shareholders Meeting") as promptly as reasonably practicable within 60 days following the SEC's approval of the filing of the Proxy Statement for the purpose of obtaining the Required Company Vote with respect to the Merger and the transactions contemplated by this Agreement and, in connection therewith, the Company shall mail the Proxy Statement to the holders of Company Common Stock in advance of such meeting in a timely manner in compliance with all Applicable Laws and with the Company's organizational documents. The Company shall take all lawful action to (i) solicit from the holders of Company Common Stock proxies in favor of the adoption of this Agreement and approval of the Merger and the other transactions contemplated by this Agreement and (ii) A-27 take all other actions necessary or advisable to secure the vote or consent of the holders of Company Common Stock required by Applicable Law to obtain such approval, including confirming its approval and recommendation of the terms of this Agreement upon request; provided that the Company may (and at the request of the Parent shall) extend the date of the Company Shareholders Meeting to the extent (A) necessary in order to obtain a quorum of its shareholders or (B) the Company reasonably determines that such delay is required by Applicable Law. At the Company Shareholders Meeting, Parent and its Affiliates will vote all Shares owned by them, if any, in favor of adoption of this Agreement and approval of the Merger. The Company shall not be required to hold the Company Shareholders Meeting if this Agreement is terminated before that meeting is held. 6.2. Access to Information. (a) Upon reasonable notice, the Company shall, and shall cause its Subsidiaries to, afford to the officers, employees, accountants, counsel, financial advisors and other representatives of Parent (including representatives of a nationally recognized rating agency, if requested by Parent), access, during normal business hours during the period prior to the Effective Time, to all properties, books, contracts, records, commitments, officers and employees of the Company and its Subsidiaries and, during such period, the Company shall, and shall cause its Subsidiaries to, make available to Parent (i) a copy of each report, schedule, registration statement and other document filed or received by the Company and its Subsidiaries during such period pursuant to the requirements of federal or state securities laws, or the HSR Act, state insurance laws or the rules and regulations of self regulatory organizations (other than reports or documents which it is not permitted to disclose under Applicable Laws) and (ii) all other information concerning the Company's and its Subsidiaries' business, properties and personnel as Parent may reasonably request. Notwithstanding the foregoing, neither the Company nor its Subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of its customers, jeopardize the attorney-client privilege of the institution in possession or control of such information or contravene any Applicable Law. (b) The parties will hold any such information which is nonpublic in confidence to the extent required by, and in accordance with, the provisions of the Confidentiality Agreement dated November 2, 2007 between the Company and Parent (the "Confidentiality Agreement"), which Confidentiality Agreement will remain in effect. 6.3. Reasonable Best Efforts. (a) Each of the Company and Parent shall, and shall cause its respective Subsidiaries to, use all reasonable best efforts (i) to take, or cause to be taken, all actions necessary, proper or advisable to comply promptly with all legal requirements which may be imposed on such party or its Subsidiaries with respect to the Merger and to consummate the transactions contemplated by this Agreement as promptly as practicable and (ii) to obtain, and to cooperate with the other party to obtain, any consent, authorization, order or approval of, or any exemption by, any Governmental Entity and/or any other public or private third party that is required to be obtained by such party or any of its Subsidiaries in connection with the Merger and the transactions contemplated by this Agreement, including without limitation, the necessary approvals from the New Jersey Department of Banking and Insurance ("DOBI") with respect to the acquisition of control of the Company by Parent and the other consents and approvals required under Sections A-28 3.7 and 4.3; provided, however, that neither Parent nor any of its affiliates shall be obligated (i) to accept any approval of the acquisition of control by DOBI which does not also include (as part of such approval or pursuant to a separate approval) authorization by DOBI that that the Surviving Corporation and its Subsidiaries may non-renew at least 7,000 of the homeowners policies in the DOBI New Jersey Wind Map zip codes as in effect on the date of this Agreement that the Company had in effect on December 31, 2007 (plus a number at least equal to the number of any additional such policies written by the Company since that date), (ii) to divest any of their respective assets or any of the assets being acquired under this Agreement, or (iii) to accept any condition imposed by any Governmental Entity that in Parent's reasonable judgment would materially effect the respective businesses of the Parent, any of its affiliates or the Surviving Corporation, or otherwise materially reduce the benefits to Parent, any of its affiliates or the Surviving Corporation resulting from the consummation of the transactions contemplated by this Agreement. In connection with the foregoing, Parent will use its reasonable best efforts to enlist unaffiliated third parties to provide coastal capacity for the affected non-renewed customers in the DOBI New Jersey Wind Map zip codes contemplated above. In addition, the Company's directors and officers will cooperate and participate in Parent's efforts to obtain a rating confirmation; provided, however, that this shall not be deemed to be a requirement that an actual rating confirmation be obtained by Parent or the Surviving Corporation. (b) Without limiting the generality of the foregoing, Parent agrees that within 21 days from the date hereof, it will cause a completed submission of a draft Form A to be made to DOBI with respect to its acquisition of control of the Company (such date of filing, the "Form A Submission Date"). Parent agrees that it shall respond to all comments to such draft application, and requests for additional information in connection with such draft application, made by DOBI within 10 days after receipt thereof. Parent shall keep the Company apprised of the status of all applications to, and proceedings before, Governmental Entities in connection with the transactions contemplated by this Agreement and the Company shall reasonably cooperate in the preparation of the Form A application. Parent shall provide to the Company copies of all filings to Governmental Entities in connection with the transactions contemplated by this Agreement and Parent shall keep the Company apprised of all discussions and the outcomes thereof between Parent and any Governmental Entity in connection with the transactions contemplated by this Agreement. 6.4. Acquisition Proposals. (a) The Company agrees that after the date hereof it shall not, and it shall, (x) cause it and its Subsidiaries' officers, directors and employees not to, and (y) direct, and use its reasonable best efforts to cause, its and its Subsidiaries' agents and representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, (i) initiate, solicit, encourage or knowingly facilitate any inquiries or the making of any Acquisition Proposal (as defined below), (ii) have any discussions with, or provide any confidential information or data to, any person relating to an Acquisition Proposal, or engage in any negotiations concerning an Acquisition Proposal, or knowingly facilitate any effort or attempt to make or implement an Acquisition Proposal, (iii) waive, terminate, modify or fail to enforce any provision of any contractual "standstill" or similar obligation of any person or entity other than Parent or its affiliates, or (iv) approve, adopt or recommend, or propose to approve, adopt or recommend, or execute or enter into, any letter of intent, agreement in principle, merger A-29 agreement, asset purchase or share exchange agreement, option agreement or other similar agreement related to any Acquisition Proposal or propose or agree to do any of the foregoing. As used in this Agreement, the term "Acquisition Proposal" when used with respect to any party means (1) any proposal or offer with respect to, or a transaction or series of transactions to effect, (x) a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction or (y) any acquisition in any manner of 20% or more of the Company's consolidated assets (including stock of its Subsidiaries), or (2) any purchase or sale of, or tender or exchange offer for, the Company's equity securities that, if consummated, would result in any person or group of persons (or the shareholders of such person or group) beneficially owning securities representing 20% or more of its total voting power. (b) Notwithstanding the foregoing or any other provisions of this Agreement, the Board of Directors of the Company shall be permitted, prior to the Company Shareholders Meeting, and subject to compliance with the other terms of this Section 6.4 and to first entering into a confidentiality agreement with such initiating person that contains provisions no less favorable to the Company than those in the Confidentiality Agreement, to engage in discussions and negotiations with, and provide nonpublic information or data to, or waive any "standstill" agreement with, any person that has made a bona fide unsolicited written Acquisition Proposal that the Board of Directors of the Company has determined in good faith, after consultation with its financial advisor and outside legal counsel, (A) is, or is reasonably likely to lead to, a Superior Proposal and (B) for which the failure to take such action in connection therewith would reasonably be expected to result in a violation of its fiduciary duties under Applicable Laws; provided, that contemporaneously with furnishing any non-public information to such initiating person, the Company furnishes such non-public information to Parent to the extent such information has not been previously furnished to Parent. (c) The Company shall promptly (and in any event within 24 hours) notify Parent after receipt of any Acquisition Proposal, or any request for nonpublic information relating to the Company or any of its Subsidiaries by any third party that informs the Company or any of its Subsidiaries that such third party is considering making, or has made, an Acquisition Proposal, or any inquiry from any third party seeking to have discussions or negotiations with the Company relating to a possible Acquisition Proposal, and shall provide Parent a copy of any such Acquisition Proposal (or a written summary of the material terms of any such Acquisition Proposal not made in writing). The Company shall also promptly (and in any event within 24 hours) notify Parent in writing if it enters into discussions or negotiations concerning any Acquisition Proposal with, or provides nonpublic information or data to, any third party in accordance with Section 6.4(b), including the identity of such third party, and keep Parent informed of the status and terms of any such proposals, offers, discussions or negotiations on a current basis. The Company agrees that it and its Subsidiaries shall not enter into any confidentiality agreement with any person subsequent to the date hereof which prohibits the Company from providing the information contemplated in this Section 6.4(c) to Parent. (d) The Board of Directors of the Company shall not (i) withhold, withdraw, amend, change, qualify or modify in a manner adverse to Parent, or publicly propose to withhold, withdraw, amend, change, qualify or modify in a manner adverse to Parent, its recommendation to the holders of shares of the Company Common Stock in favor of the Merger; (ii) take any A-30 action or make any recommendation or public statement in connection with a tender offer or exchange offer other than a recommendation against such offer; or (iii) approve, adopt or recommend or publicly propose to approve or recommend to the stockholders of the Company or enter into any letter of intent, memorandum of understanding, agreement, option agreement or similar agreement or arrangement with respect to any Acquisition Proposal (any of the actions described in clauses (i), (ii) or (iii), a "Change in Recommendation"). Notwithstanding the foregoing, prior to obtaining the Required Company Vote: (A) in response to an Acquisition Proposal that did not arise directly or indirectly from a material breach of this Section 6.4, the Company's Board of Directors may, if it determines in good faith, after consultation with its independent legal and financial advisors, that the failure to take such action would be reasonably likely to result in a breach of the Company's Board of Directors' fiduciary duties to the Company's stockholders under Applicable Law, make a Change in Recommendation; provided, that the Company's Board of Directors has determined in good faith that such Acquisition Proposal constitutes a Superior Proposal; or (B) in circumstances other than those described in (A) above, the Company's Board of Directors may, if it determines in good faith, after consulting with its independent legal and financial advisors, that the failure to take such action would be reasonably likely to result in a breach of the Company's Board of Directors' fiduciary duties to the Company stockholders under Applicable Law, take any of the actions described in clause (i) of the definition of "Change in Recommendation" and shall not be required to solicit proxies in favor of approval of the Merger and shall not be required to mail the Proxy Statement or hold the Company Shareholders Meeting; provided, that (1) the Company has notified Parent in writing that the Company's Board of Directors is prepared to make the determination set forth in this clause (B) setting forth the reasons therefor in reasonable detail, and (2) at least five days following effective delivery of such notice to Parent, the Company's Board of Directors, after the conclusion of the negotiations and five-day notice period provided for by Section 6.4(f) below, if applicable, remains prepared to make the determination described in this clause (B) after taking into account adjustments, if any, proposed by Parent to the terms and conditions of this Agreement, the Merger and the other transactions contemplated hereby. Notwithstanding anything herein to the contrary and to the extent allowed under Applicable Law, any such withdrawal, modification or change of the recommendation of the Company's Board of Directors, or recommendation or proposed recommendation of any Superior Proposal shall not change the approval of the Company's Board of Directors for purposes of causing any state takeover statute or other state Law to be inapplicable to the transactions contemplated by this Agreement, including the Merger; and, provided further, that, prior to making any Change in Recommendation, the Board of Directors of the Company shall cause the Company to terminate this Agreement pursuant to Article VIII hereof, and any purported termination of this Agreement pursuant to this sentence shall be void and of no force or effect, unless the Company pays the Parent the Company Termination Fee in accordance with Section 8.2(b) concurrently with such termination. (e) The Company agrees that (i) it will, and will cause its Subsidiaries, and its and their officers, directors, agents, representatives and advisors to, cease immediately and terminate any and all existing activities, discussions or negotiations with any third parties conducted heretofore with respect to any Acquisition Proposal, and (ii) it will not release any third party from, or waive any provisions of, any confidentiality or standstill agreement to which it or any of its Subsidiaries is a party with respect to any Acquisition Proposal. A-31 (f) For purposes of this Agreement, "Superior Proposal" means a bona fide written Acquisition Proposal which the Board of Directors of the Company concludes in good faith, after consultation with its financial advisors and outside legal advisor, taking into account all legal, financial, regulatory and other aspects of the proposal and the person making the proposal (including any break-up fees, expense reimbursement provisions and conditions to consummation), (i) is more favorable to the shareholders of the Company from a financial point of view than the Merger and the other transactions contemplated by this Agreement and (ii) is fully financed or reasonably capable of being fully financed; provided, however, that, for purposes of this definition of "Superior Proposal," the term "Acquisition Proposal" shall have the meaning assigned to such term in Section 6.4(a), except that the reference to "20% or more of its total voting power" in the definition of "Acquisition Proposal" shall be deemed to be a reference to "80% or more of its total voting power" and the reference to "20% or more of its consolidated assets" shall be deemed to be a reference to "80% or more of its consolidated assets"; and provided, further, that no Acquisition Proposal shall be deemed a Superior Proposal unless and until (x) the Company has given Parent at least five (5) business days' prior written notice of the current terms and conditions of any such Acquisition Proposal and have contemporaneously provided a copy of the relevant proposed transaction agreement and other material documents (and in the event of any material change to the financial or other material terms of such Acquisition Proposal, the Company shall, in each case, have delivered to Parent an additional notice and the notice period shall recommence), (y) the Company has negotiated in good faith with Parent during such notice period, to the extent, if at all, Parent wishes to negotiate, to enable Parent to propose changes to the terms of this Agreement that would cause such Acquisition Proposal to no longer constitute a Superior Proposal, and (z) the Board of Directors of the Company shall have considered in good faith (after consultation with independent financial advisors and outside legal counsel) any changes to this Agreement proposed in writing by Parent and shall have determined that the Acquisition Proposal would continue to constitute a Superior Proposal if such changes were to be given effect. (g) Nothing contained in this Section 6.4 shall prohibit the Company or the Board of Directors of the Company from (i) taking and disclosing to the holders of the Company Common Stock a position with respect to a tender or exchange offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or (ii) making any disclosure to the holders of the Company Common Stock if, in the good faith judgment of the Board of Directors of the Company, after consultation with its independent legal advisors, failing to make such disclosure would be inconsistent with Applicable Law, including the federal securities laws; provided that any such disclosure shall be deemed to be a Change of Recommendation unless such disclosure contains a recommendation against any Acquisition Proposal and a reaffirmation of the Board's recommendation in favor of the Merger, or the Company Board publicly reaffirms its recommendation in favor of the Merger within two (2) business days of a request by Parent to do so. 6.5. Fees and Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense, except as otherwise provided in Section 8.2. 6.6. Certain Actions. Parent (i) for a period of not less than 12 months, will use its reasonable best efforts to provide homeowners new business capacity to Company partner A-32 agents, appointed or already appointed by Parent subject to underwriting guidelines established and on file by the Parent, and (ii) for a period of not less than 12 months, homeowners customers of appointed agents who are eligible for renewal, except those coastal policies non-renewed as set forth in Section 6.3(a), will be offered renewals subject to underwriting guidelines established by the Parent. 6.7. Indemnification; Directors' and Officers' Insurance. (a) From and after the Effective Time, Parent shall, or shall cause the Surviving Corporation to, to the fullest extent permitted by Applicable Laws, indemnify, defend and hold harmless, and provide advancement of expenses to, each person who is now, or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer or director of the Company or any of its Subsidiaries, in their capacity as such and not as stockholders or option holders of the Company or its Subsidiaries (the "Indemnified Parties") against all losses, claims, damages, costs, expenses, liabilities or judgments or amounts that are paid in settlement of or in connection with any claim, action, suit, proceeding or investigation based in whole or in part on, or arising in whole or in part out of, the fact that such person is or was a director or officer of the Company or any Subsidiary of the Company, and pertaining to any matter existing or occurring, or any acts or omissions occurring, at or prior to the Effective Time, whether asserted or claimed prior to, or at or after, the Effective Time (including matters, acts or omissions occurring in connection with the approval of this Agreement and the consummation of the transactions contemplated hereby) ("Indemnified Liabilities") to the same extent such persons are indemnified or have the right to advancement of expenses as of the date of this Agreement by the Company pursuant to the Company's Articles of Incorporation and Bylaws, as in effect on the date hereof. (b) For a period of six years after the Effective Time, Parent shall cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by the Company (provided that Parent may substitute therefor policies with a substantially comparable insurer of at least the same coverage and amounts containing terms and conditions which are no less advantageous to the insured) with respect to claims arising from facts or events which occurred at or before the Effective Time; provided, however, that prior to the Closing Date the Company will arrange for the provision of, and as of the Closing Date the Company will have in effect, and will have prepaid any annual premiums applicable to, policies of directors' and officers' liability insurance in effect for a period of six years following the Closing Date (the "Tail Period") with aggregate coverage limits no less than $50,000,000 and at a total cost at or below $4,000,000 and which are otherwise substantially similar to, or better, in the coverages and exclusions from coverages and the terms and conditions provided for or contained in the directors' and officers' policies currently maintained by the Company (the "Tail Coverage"). The Company may not act as its own insurer for the Tail Coverage. Parent shall, within one day of notice of the purchase of the Tail Coverage by the Company, or upon the purchase of substantially comparable, or better, directors' and officers' liability insurance coverage that will go into effect prior to the Effective Time that provides a commitment by the insurer to continue such coverage through the Tail Period (the "Amplified Coverage"), reimburse the Company for up to $1,000,000 of the amount paid by the Company for the Tail Coverage or the Amplified Coverage (but not both). The parties acknowledge that such reimbursement shall be non-refundable to Parent, except that the Company shall promptly return to Parent 100% of any amount in which Parent reimbursed the Company for its purchase of the Tail Coverage or the Amplified Coverage if (i) the Company shall terminate this Agreement pursuant to Section A-33 8.1(b), Section 8.1(c), Section 8.1(e) or Section 8.1(g) or (ii) Parent shall terminate this agreement pursuant to Section 8.1(b), Section 8.1(c), Section 8.1(d), Section 8.1(f), Section 8.1(g) or Section 8.1(h). (c) The provisions of this Section 6.7 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and representatives and are in addition to, and not in substitution for, any other rights to indemnification or contribution that any such person may have by contract or otherwise. 6.8. Delisting. The parties agree to cooperate with each other in taking, or causing to be taken, all actions necessary to delist the Company Common Stock from the Nasdaq National Market and to terminate registration under the Exchange Act; provided, however, that such delisting and termination shall not be effective until after the Effective Time. 6.9. Public Announcements. Parent and the Company shall use reasonable best efforts (i) to develop a joint communications plan regarding this Agreement and the Merger, (ii) to ensure that all press releases and other public statements with respect to the transactions contemplated hereby shall be consistent with such joint communications plan, and (iii) to consult with each other before issuing any press release or, to the extent practical, otherwise making any public statement with respect to this Agreement or the transactions contemplated hereby. In addition to the foregoing, except to the extent disclosed in or consistent with the Proxy Statement in accordance with the provisions of Section 6.1, no party shall issue any press release or otherwise make any public statement or disclosure concerning the other party or the other party's business, financial condition or results of operations without the consent of such other party, which consent shall not be unreasonably withheld or delayed. 6.10. Additional Agreements. In case any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of the Company, the proper officers and directors of each party to this Agreement shall take all such necessary action. 6.11. Rule 16b-3. The Board of Directors of the Company may adopt a resolution in advance of the Effective Time providing that the disposition by Company Insiders (as defined below) of equity securities of the Company (including derivative securities with respect to the equity securities of the Company), in each case in connection with the transactions contemplated hereby, is intended to be exempt pursuant to Rule 16b-3 under the Exchange Act. For purposes of this Agreement, "Company Insiders" means those officers and directors of the Company and its subsidiaries who immediately prior to the Closing are subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to equity securities of the Company. 6.12. Employee Benefit Matters. (a) For a period of 18 months immediately following the Closing Date, the compensation, benefits and coverage provided to those individuals who are employed by the Company or any of its Subsidiaries immediately prior to the Closing Date and continue to be employees of the Surviving Corporation or its Subsidiaries as of the Closing Date (each such employee, an "Affected Employee") pursuant to employee benefit or compensation plans or A-34 arrangements maintained by Parent or the Surviving Corporation and its Subsidiaries shall be, in the aggregate, substantially comparable (determined without regard to equity-based plans and programs) to those provided to such Affected Employees immediately prior to the Closing Date. Nothing in this Section 6.12(a) shall be construed to require the continuation of the employment of any Affected Employee for any period of time, or to change the at-will employment status of any Affected Employee. (b) Parent shall, or shall cause the Surviving Corporation and its Subsidiaries to, use reasonable best efforts to, give the Affected Employees full credit for purposes of eligibility and vesting (and for purposes of determining the amount of vacation and paid time off) for such Affected Employees' service with the Company or any Subsidiary of the Company under employee benefit plans (other than equity-based plans) of Parent, the Surviving Corporation or its Subsidiaries to the same extent recognized by the Company or such Subsidiary of the Company immediately prior to the Closing Date except to the extent that recognition of such service results in the duplication of benefits. With respect to any employee benefit plan or arrangement established by Parent or the Surviving Corporation after the Closing Date (the "Post Closing Plans") for the benefit of the Affected Employees, service shall be credited in accordance with the terms of such Post Closing Plans subject to the preceding sentence. (c) Parent shall, or shall cause the Surviving Corporation and its Subsidiaries to use reasonable best efforts to, (i) waive all limitations as to preexisting conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the Affected Employees under any welfare benefit plan established by such Affected Employees, in which such Affected Employees may be eligible to participate after the Closing Date, other than limitations or waiting periods that are already in effect with respect to such Affected Employees and that have not been satisfied as of the date of such establishment under any welfare plan maintained for the Affected Employees immediately prior to the Effective Time, and (ii) provide each Affected Employee with credit for any co-payments and deductibles paid prior to the date of such establishment and paid within the same plan year as the year in which the Closing Date occurs in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that such Affected Employees are eligible to participate in after the Closing Date for such year. (d) Parent shall cause the Surviving Corporation and its Subsidiaries to honor all employment, severance, consulting and retention agreements or arrangements and all Company Employee Benefit Plans; provided, however, that this Section 6.12 is not intended to prevent Parent or the Surviving Corporation from exercising its respective rights with respect to such agreements or arrangements and all Company Employee Benefit Plans in accordance with their terms, including, but not limited to, the right to alter, terminate or otherwise amend all such agreements and arrangements and Company Employee Benefit Plans. 6.13. Non-Compete. If Parent shall at any time be required to pay the termination damages set forth in Section 9.8(a), from such date until the second anniversary thereof, neither Parent nor its Affiliates shall solicit any holder of a Company Policy, other than by way of general solicitations not specifically targeted to a holder of a Company Policy, nor shall Parent or its Affiliates utilize any agents or brokers appointed by both the Company and Parent to solicit A-35 any Company Policy. "Company Policy" means any policy of the Company in effect on date that any termination damage payment is required to be paid under Section 9.8(a). ARTICLE VII CONDITIONS PRECEDENT 7.1. Conditions to Each Party's Obligation To Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions, unless waived by both Parent and the Company: (a) Shareholder Approval. The Company shall have obtained the Required Company Vote. (b) HSR Approval. The applicable waiting periods (and any extension thereof) under the HSR Act shall have expired or been terminated. (c) Regulatory Matters. Other than the filing provided for by Section 1.2, all material authorizations, consents, orders, approvals of or declarations or filings with, and all expirations of waiting periods required from, any Governmental Entity that is required to be obtained in connection with the consummation of the Merger and the transactions contemplated hereby (all of the foregoing, the "Requisite Regulatory Approvals") shall have been filed, have occurred or been obtained. All Requisite Regulatory Approvals shall be in full force and effect without any unsatisfied conditions, restrictions or requirements and any conditions imposed in connection with the foregoing, individually or in the aggregate, shall not be inconsistent with the proviso of Section 6.3(a). (d) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect and there shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, by any Governmental Entity of competent jurisdiction that makes the consummation of the Merger illegal or otherwise prevents or prohibits the Merger. 7.2. Conditions to Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to effect the Merger is subject to the satisfaction of the following conditions unless waived by Parent: (a) Representations and Warranties. The representations and warranties of the Company set forth in (A) Sections 3.2 and 3.12(a) shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, and (B) all other Sections of this Agreement, disregarding all qualifications and exceptions therein relating to materiality or Material Adverse Effect, shall be true and correct as of the date of this Agreement and, except to the extent such representations and warranties speak as of an earlier date, as of the Closing Date as though made on and as of the Closing Date, subject to such exceptions as do not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, and Parent shall have received a A-36 certificate signed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company to such effect. (b) Performance of Obligations of the Company. The Company shall have (A) performed or complied with all agreements and covenants required to be performed by it under Sections 5.1(a), 5.1(b) and 5.1(d) in all respects, and (B) performed or complied with the agreements and covenants required to be performed by it under all other Sections of this Agreement at or prior to the Closing Date that are qualified as to materiality or Material Adverse Effect and shall have performed or complied in all material respects with all other obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company to such effect. (c) Other Conditions. (i) The Tail Coverage shall be in effect and shall have been procured for less than the amount specified in Section 6.7(b). (ii) As of the end of the Company's most recent fiscal quarter or fiscal year, as applicable, for which financial statements have been filed with the SEC or statutory statements with DOBI, as applicable, the total stockholders' equity of the Company, as determined on a consolidated basis and in accordance with GAAP applied on a consistent basis, shall not be less than $129,600,000, and the total capital and surplus of Proformance Insurance Company, as determined in accordance with SAP applied on a consistent basis and set forth in the statutory statements of admitted assets, liabilities, and capital and surplus, shall not be less than $113,400,000; provided, that, the net reserves reflected in such statements shall be not less than the amount equal to the sum of (A) the minimum amount in the range of net reserves recommended in the most recent Actuary report at or prior to the time of Closing, plus (B) 45% of the difference between the maximum amount of such range and the minimum amount of such range. In the case of each of the foregoing, the determination of such amounts shall not give effect to (i) any costs of the financial advisor which have been disclosed pursuant to Section 3.24 and (ii) premiums paid by the Company for the purchase of the Tail Coverage or the Amplified Coverage (less any reimbursement thereof by Parent). (iii) No investigation or proceeding by any Governmental Entity, in each case involving matters that give rise to allegations of criminal activity or fraud, involving the Company, any of its Subsidiaries or any of their respective directors or officers in their capacity as such, shall be pending which could reasonably be likely to have a Material Adverse Effect. (iv) The A.M. Best Financial Strength Rating of Proformance Insurance Company shall be at least "B-" (B-minus), or better. 7.3. Conditions to Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction of the following conditions unless waived by the Company: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub set forth in this Agreement, disregarding all qualifications and exceptions A-37 therein relating to materiality or Material Adverse Effect, shall be true and correct as of the date of this Agreement and, except to the extent such representations and warranties speak as of an earlier date, as of the Closing Date as though made on and as of the Closing Date, subject to such exceptions as do not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Parent, and the Company shall have received a certificate signed on behalf of Parent by the Chairman and Chief Executive Officer and the Chief Financial Officer of Parent to such effect. (b) Performance of Obligations of Parent and Merger Sub. Parent and Merger Sub shall have performed or complied with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are qualified as to materiality or Material Adverse Effect and shall have performed or complied in all material respects with all other obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Parent by the Chairman and Chief Executive Officer and the Chief Financial Officer of Parent to such effect. ARTICLE VIII TERMINATION AND AMENDMENT 8.1. Termination. This Agreement may be terminated at any time prior to the Effective Time: (a) by mutual consent of Parent and the Company in a written instrument; (b) by either Parent or the Company, upon written notice to the other party, if a Governmental Entity of competent jurisdiction which must grant a Requisite Regulatory Approval has denied approval of the Merger and such denial has become final and unappealable; or any Governmental Entity of competent jurisdiction shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger, and such order, decree, ruling or other action has become final and unappealable; provided, however, that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose failure to comply with Section 6.3 or any other provision of this Agreement has been the cause of, or resulted in, such action; (c) by either Parent or the Company, upon written notice to the other party, if the Merger shall not have been consummated on or before September 5, 2008 (the "Outside Date"); provided, however, that the right to terminate this Agreement under this Section 8.1(c) shall not be available to any party whose failure to comply with any provision of this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date if such failure to comply constitutes a breach of this Agreement; (d) by Parent, upon written notice to the Company that (A) the Board of Directors of the Company or any committee thereof shall have for any reason effected a Change in Recommendation; (B) the Company fails to include the recommendation of the Board of Directors of the Company in favor of this Agreement in the Proxy Statement; (C) the Company fails to convene and hold the Company Shareholders Meeting within 60 days following the A-38 SEC's approval of the filing of the Proxy Statement as required by Section 6.1(d); or (D) the Board of Directors of the Company shall have failed to publicly reconfirm its approval and recommendation of the terms of this Agreement prior to the Required Company Vote within two (2) business days of a written request from Parent to do so provided that, except as otherwise provided herein, Parent shall only be entitled to two such requests; (e) by the Company pursuant to Section 6.4(d); (f) by either Parent or the Company, upon written notice to the other party, if there shall have been a breach by the other party of any of the covenants or agreements or any of the representations or warranties set forth in this Agreement on the part of such other party, which breach, either individually or in the aggregate, would result in, if occurring or continuing on the Closing Date, the failure of the condition set forth in Section 7.2(a) or (b) or Section 7.3(a) or (b), as the case may be, and which breach has not been cured within 60 days following written notice thereof to the breaching party or, by its nature, cannot be cured within such time period; provided, that the right to terminate this Agreement under this Section 8.1(f) shall not be available to any party that is then in material breach of this Agreement and that such material breach would result in the closing conditions set forth in Sections 7.1, 7.2 or 7.3 not being satisfied; (g) by either Parent or the Company, if the Required Company Vote shall not have been obtained upon a vote taken on this Agreement and the transactions contemplated by this Agreement at the duly convened Company Shareholders Meeting; or (h) by Parent, upon written notice to the Company, if there shall have been a failure of the condition set forth in Section 7.2(c)(iv) at any time following the date of this Agreement and prior to the Closing Date. 8.2. Effect of Termination. (a) In the event of termination of this Agreement by either the Company or Parent as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent or the Company or their respective officers or directors, except with respect to Section 6.9, this Section 8.2 and Article IX, which shall survive such termination and except that, other than as set forth in Section 8.2(b), no party shall be relieved or released from any liabilities or damages arising out of any fraud in connection with or any material breach of this Agreement. (b) The Company shall pay Parent as promptly as reasonably practicable (and, in any event, within two (2) business days following such termination described below) and Parent shall accept as its exclusive remedy, by wire transfer of immediately available funds, the sum of $2,100,000 of Merger Consideration (the "Company Termination Fee") if this Agreement is terminated as follows: (i) if Company shall terminate this Agreement pursuant to Section 8.1(e) or Parent shall terminate this Agreement pursuant to Section 8.1(d); or (ii) if (A) either party shall terminate this Agreement pursuant to Section 8.1(g) because the Required Company Vote shall not have been received, (B) at any time after the date of this Agreement and at or before the date of the Company Shareholders Meeting an A-39 Acquisition Proposal with respect to the Company shall have been publicly announced, and (C) within twelve months after the date of such termination of this Agreement, the Company or any of its Subsidiaries enters into any definitive agreement with respect to, or consummates, any Acquisition Proposal, then the Company shall pay the Company Termination Fee upon the earlier of the date of such execution or consummation. (iii) If the Company fails to pay all amounts due to Parent on the dates specified, then the Company shall pay all costs and expenses (including legal fees and expenses) incurred by Parent in connection with any action or proceeding (including the filing of any lawsuit) taken by it to collect such unpaid amounts, together with interest on such unpaid amounts at the prime lending rate prevailing at such time, as published in The Wall Street Journal, from the date such amounts were required to be paid until the date actually received by Parent. (c) Subject to subsection (b)(ii) of this Section 8.2, if either party shall terminate this Agreement pursuant to Section 8.1(g) because the Required Company Vote shall not have been obtained, all costs and expenses incurred by Parent and Merger Sub in connection with this Agreement and the transactions contemplated hereby shall be reimbursed by the Company (up to an amount not to exceed $1,500,000). 8.3. Amendment. This Agreement may be amended by the parties hereto at any time before or after approval of the matters presented in connection with the Merger by the shareholders of the Company or of Parent, but, after any such approval, no amendment shall be made which by law requires further approval by such shareholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 8.4. Extension; Waiver. At any time prior to the Effective Time, the parties hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other party hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of a party to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. No single or partial exercise of any right, remedy, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. Any waiver shall be effective only in the specific instance and for the specific purpose for which given and shall not constitute a waiver to any subsequent or other exercise of any right, remedy, power or privilege hereunder. ARTICLE IX GENERAL PROVISIONS 9.1. Nonsurvival of Representations and Warranties. None of the representations and warranties set forth in this Agreement or in any schedule, instrument or other document A-40 delivered pursuant to this Agreement shall survive the Effective Time, except for those covenants and agreements contained herein and therein which by their terms apply or are to be performed in whole or in part after the Effective Time. 9.2. Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally, sent by facsimile (which is confirmed) or sent by overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent, to: Palisades Safety and Insurance Association Connell Corporate Center II 2 Connell Drive Berkeley Heights, NJ 07922 Attention: Edward J. Fernandez, President Facsimile: 908-790-7849 with a copy to: Palisades/High Point Corporate Law 331 Newman Springs Road, Building 3 Red Bank, NJ 07701 Attention: Carl Peterson, SPHR Chief Legal Officer Facsimile: (732) 978-6105 and Ropes & Gray LLP One International Place Boston, MA 02110-2624 Attention: David A. Fine Facsimile: (617) 235-0030 A-41 (b) if to the Company, to: National Atlantic Holdings Corporation 4 Paragon Way Freehold, NJ 07728 Attention: James V. Gorman Facsimile: (732) 761-0243 with a copy to: Dewey & LeBoeuf LLP 1301 Avenue of the Americas New York, NY 10019 Attention: Michael Groll Sheri E. Bloomberg Facsimile: (212) 424-8500 9.3. Interpretation. When a reference is made in this Agreement to an Article, Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The words "hereof," "herein" and "hereunder" and words or similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes. References to a person shall include both natural persons and legal entities, and are also references to such person's permitted successors and assigns. 9.4. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. 9.5. Entire Agreement; No Other Representations; No Third Party Beneficiaries. This Agreement (including any exhibits and schedules hereto) and the Confidentiality Agreement constitute the entire agreement, and supersede all prior agreements, understandings, A-42 representations and warranties, both written and oral, among the parties with respect to the subject matter of this Agreement. Parent acknowledges that neither the Company nor any of its Subsidiaries or officer, director, employee, representative or advisor of any of them makes or has made any representation or warranty, express or implied, to Parent except as specifically made in this Agreement or in any certificate or other document delivered pursuant hereto. Except for the provisions of Article II (which shall be for the benefit of the holders of the Company Common Stock), Section 6.7 (which shall be for the benefit of the Indemnified Parties), this Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 9.6. Governing Law. This Agreement shall be governed by, and construed in accordance with (a) the laws of the State of New Jersey with respect to matters, issues and questions relating to the fiduciary duties of the Board of Directors and officers of each of the Company, Parent and Merger Sub and other matters to which the laws of the State of New Jersey are mandatorily applicable, and (b) the laws of the State of New York with respect to all other matters, issues and questions regardless of the laws that might otherwise govern under applicable principles of conflicts of laws. 9.7. Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either of the parties hereto without the prior written consent of the other party. Any assignment in violation of the preceding sentence shall be void. Subject to the preceding two sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. 9.8. Termination Damages; Enforcement. (a) In the event that (i) the conditions to Closing are satisfied under Section 7.1 and Section 7.2 hereof prior to the Outside Date, (ii) no Material Event has occurred and is continuing and (iii) Parent fails to close the Merger within the period provided for in Section 1.3 hereof, Parent shall pay to the Company termination damages of $8,000,000 upon termination of this Agreement by the Company; provided, such amount shall be reduced to $6,000,000 following the Form A Submission Date. (b) In the event that (i) the conditions to Closing are satisfied under Section 7.1 and Section 7.2 hereof prior to the Outside Date, (ii) a Material Event has occurred and is continuing and (iii) Parent fails to close the Merger within the period provided for in Section 1.3 hereof, Parent shall pay to the Company termination damages of $5,000,000 upon termination of this Agreement by the Company; provided, such amount shall be reduced to $3,000,000 following the Form A Submission Date. (c) The amount of any termination damages payable to the Company pursuant to Section 9.8(a) or Section 9.8(b) shall be reduced (or, following the Form A Submission Date, further reduced) by $2,000,000 if, at any time subsequent to the date of this Agreement but prior to the date this Agreement is terminated, the A.M. Best Financial Strength Rating of Proformance Insurance Company shall be "B" or "B-" (B-minus). A-43 (d) "Material Event" shall mean (i) any representation or warranty of the Company, made as of the date of this Agreement or as of the date that all other conditions in Section 7.1 or Section 7.2 have been met, not having been true and correct in all respects as of either such date, disregarding all qualifications and exceptions therein relating to materiality or Material Adverse Effect; provided that the effect from all such breaches would be reasonably expected to result in liabilities, expenses, losses and damages to Parent and/or Company which in aggregate exceed $5,000,000; and provided, further, that no liability, expense, loss or damage in an individual amount reasonably expected to be less than $10,000 shall be included in the aggregate $5,000,000 calculation set forth in the preceding proviso; (ii) the failure of the condition in Section 7.2(c)(ii) to be met had the reference to "$129,600,000" been replaced with a reference to "$136,800,000" or had the reference to "$113,400,000" been replaced with a reference to "$119,700,000" or (iii) any pending action, suit, litigation, investigation, inquiry or proceeding by any Governmental Entity, in each case involving matters that give rise to allegations of criminal activity or fraud involving the Company, any of its Subsidiaries or any of their respective directors or officers in their capacity as such. (e) Any payment made pursuant to Section 9.8(a), Section 9.8(b) or Section 9.8(c) shall be deemed to be termination damages for any and all losses or damages suffered or incurred by the Company in connection with the matter forming the basis for such termination. The parties agree that the Parent's payment of the foregoing termination damages shall be the sole and exclusive remedy of the Company and its Subsidiaries against Parent, Merger Sub and any of their respective former, current or future directors, officers, employees, agents, partners, managers, members, affiliates, stockholders, assignees or representatives of any of the foregoing (each a "Specified Person") for any loss or damage suffered by the Company, its Subsidiaries or any other person or entity as a result of such failure of Parent and Merger Sub to consummate the Merger, and upon the termination of this Agreement and Parent's payment of the foregoing termination damages, none of Parent, Merger Sub or any of their respective Specified Persons shall have any further liability or obligation relating to or arising out of this Agreement or the transactions contemplated by this Agreement except as set forth in Section 6.13. (f) The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by the Company in accordance with their specific terms or were otherwise breached and that, prior to termination pursuant to Section 8.1, Parent and Merger Sub shall be entitled to specific performance of the terms hereof. Accordingly, the parties acknowledge and agree that in the event of any breach or threatened breach by the Company of any of its covenants or obligations set forth in this Agreement, Parent and Merger Sub shall be entitled to an injunction or injunctions to prevent or restrain breaches or threatened breaches of this Agreement by the Company and to specifically enforce the terms and provisions of this Agreement to prevent breaches or threatened breaches of, or to enforce compliance with, the covenants and obligations of the Company under this Agreement, in addition to any other remedy that may be available at law or in equity. 9.9. Consent to Jurisdiction . Each of the parties hereto (a) consents to submit itself to the exclusive personal jurisdiction of the Commercial Division of the New York Supreme Court, County of New York (the "Commercial Court") in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction or venue by motion or other request for A-44 leave from the Commercial Court, and (c) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than the Commercial Court. 9.10. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 9.11. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory or public policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Upon any determination that any term, provision, covenant or restriction is invalid, void, unenforceable or against its regulatory or public policy, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by Applicable Laws in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. [Remainder of page is intentionally blank. Signatures follow.] A-45 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by a duly authorized officer of Parent, Merger Sub, and Company as of April 17, 2008. PALISADES SAFETY AND INSURANCE ASSOCIATION By: /s/ Edward J. Fernandez ---------------------------------------- Name: Edward J. Fernandez Title: President APOLLO HOLDINGS, INC. By: /s/ Edward J. Fernandez ---------------------------------------- Name: Edward J. Fernandez Title: President NATIONAL ATLANTIC HOLDINGS CORPORATION By: /s/ James V. Gorman ---------------------------------------- Name: James V. Gorman Title: Chief Executive Officer EX-99 3 exhibit_b.txt EXHIBIT B - VOTING AGREEMENT EXHIBIT B VOTING AGREEMENT VOTING AGREEMENT ("Agreement"), dated as of March 13, 2008, by and among Palisades Safety and Insurance Association, an insurance exchange organized under NJSA 17:50-1 et seq. ("Parent"), Apollo Holdings, Inc., a New Jersey corporation wholly owned by Parent ("Merger Sub"), and James V. Gorman ("Gorman"), WHEREAS, Parent, Merger Sub and National Atlantic Holdings Corporation, a New Jersey corporation (the "Company"), have entered into an Agreement and Plan of Merger, dated of even date herewith (the "Merger Agreement"), which provides for the business combination transaction (the "Merger") upon the terms and subject to the conditions set forth therein, and in connection with which each outstanding share of common stock, no par value, of the Company (each, a "Common Share") will be canceled and converted into the right to receive $6.25 in cash per share; WHEREAS, Gorman in the aggregate beneficially owns and has sole voting power with respect to 1,512,140 Common Shares (such Common Shares, together with any securities issued or exchanged with respect to such shares of common stock upon any recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up or combination of the securities of the Company or any other change in the Company's capital structure, and any options, warrants or other rights to acquire any additional Common Shares, the "Covered Shares"); WHEREAS, in connection with the execution of the Merger Agreement, Parent has requested that Gorman execute and deliver this Agreement on a date even herewith; and WHEREAS, all capitalized terms used in this Agreement without definition herein shall have the meanings ascribed to them in the Merger Agreement. NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt of which are hereby acknowledged, Gorman, Parent and Merger Sub agree as follows: 1. Agreement to Vote. Gorman agrees that, prior to the Expiration Date (as defined below), at any meeting of the stockholders of the Company, or in connection with any written consent of the stockholders of the Company, with respect to the Merger, the Merger Agreement or any Acquisition Proposal or any adjournment or postponement thereof, Gorman shall: (a) appear at such meeting or otherwise cause the Covered Shares and any other Common Shares which he acquires beneficial ownership of after the date hereof ("After Acquired Shares") to be counted as present thereat for purposes of calculating a quorum; and B-1 (b) from and after the date hereof until the Expiration Date, vote (or cause to be voted) in person or by proxy, or deliver a written consent (or cause a consent to be delivered) covering all of the Covered Shares and any After Acquired Shares that Gorman shall be entitled to so vote, whether such Common Shares are beneficially owned by Gorman on the date of this Agreement or are subsequently acquired, (i) in favor of the recommendation of the Board of Directors of the Company to the holders of Common Shares; (ii) against any Acquisition Proposal, or any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or similar agreement providing for the consummation of a transaction contemplated by any Acquisition Proposal (other than the Merger and other than following any Change in Recommendation and termination of the Merger Agreement made by the Board of Directors pursuant to the requirements of the Merger Agreement), and (iii) in favor of any proposal to adjourn a shareholders' meeting which the Company, Merger Sub and Parent support. 2. Expiration Date. As used in this Agreement, the term "Expiration Date" shall mean the earliest to occur of (i) the Effective Time; (ii) such date as the Merger Agreement is terminated pursuant to Article VIII thereof; or (iii) upon mutual written agreement of the parties to terminate this Agreement. Upon termination or expiration of this Agreement, no party shall have any further obligations or liabilities under this Agreement; provided however, (i) Sections 8 through 18 shall survive any such expiration if the Effective Time shall have occurred, and (ii) such termination or expiration shall not relieve any party from liability for any willful breach of this Agreement prior to termination hereof. 3. Agreement to Retain Covered Shares. From and after the date hereof until, (A) in the case of clause (i) below, the Expiration Date, and (B) in the case of clause (ii) below, immediately after the vote is taken at a meting of shareholders of the Company (taking into account any postponements or adjournments thereof) for the purpose of approving the adoption and approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, Gorman shall not, except as contemplated by this Agreement or the Merger Agreement, directly or indirectly, (i) grant any proxies or enter into any voting trust or other agreement or arrangement with respect to the voting of any Covered Shares and any After Acquired Shares or (ii) sell, transfer, assign, dispose of, or enter into any contract, option, commitment or other arrangement or understanding with respect to the sale, transfer, assignment or other disposition of, the beneficial ownership of any Covered Shares. 4. Representations and Warranties of Gorman. Gorman hereby represents and warrants to Parent and Merger Sub as follows: (a) Gorman has the power and the right to enter into, deliver and perform the terms of this Agreement; (b) this Agreement has been duly and validly executed and delivered by Gorman and (assuming this Agreement constitutes a valid and binding B-2 agreement of Parent and Merger Sub) is a legal, valid and binding agreement with respect to Gorman, enforceable against Gorman in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors' rights or by general equity principles); (c) Gorman beneficially owns in the aggregate at least 1,512,140 Common Shares and has sole or shared, and otherwise unrestricted, voting power with respect to such Common Shares; (d) no proceedings are pending which, if adversely determined, will have a material adverse effect on any ability to vote or dispose of any of the Covered Shares; (e) the execution and delivery of this Agreement by Gorman do not, and the performance by Gorman of his obligations hereunder and the consummation by Gorman of the transactions contemplated hereby will not, violate or conflict with, or constitute a breach or default under, any agreement, instrument, contract or other obligation or any order, arbitration award, judgment or decree to which Gorman is a party or by which Gorman is bound, or any statute, rule or regulation to which Gorman is subject. Except as expressly contemplated hereby, Gorman is not a party to any voting agreement or voting trust relating to the Covered Shares or After Acquired Shares; (f) Gorman confirms that he is not relying on any non-public information concerning the Covered Shares obtained from, or provided by, Parent or Merger Sub, in determining to vote in favor of the recommendation of the Board of Directors, nor shall there be any obligation of the Parent or Merger Sub to provide any non-public information concerning the Covered Shares; and (g) Gorman acknowledges and confirms that he has reviewed this Agreement and the Merger Agreement and has had the opportunity to review both such agreements with counsel and other advisors. 5. Representations and Warranties of Parent and Merger Sub. Each of Parent and Merger Sub hereby represents and warrants to Gorman as follows: (a) each of Parent and Merger Sub has the power and the right to enter into, deliver and perform the terms of this Agreement; and (b) this Agreement has been duly and validly executed and delivered by Parent and Merger Sub and (assuming this Agreement constitutes a valid and binding agreement of Gorman) is a legal, valid and binding agreement with respect to Parent and Merger Sub, enforceable against each in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors' rights or by general equity principles). 6. No Solicitation. From and after the date hereof until the Expiration Date, neither Gorman nor his affiliates will solicit proxies or become a "participant" in any solicitation (as such terms are defined in Regulation 14A under the Securities Exchange Act of 1934) in opposition to the solicitation of proxies by the Company and Parent for the Merger Agreement. B-3 From and after the date hereof until the Expiration Date, in all public statements and public filings made with respect to the voting of the Covered Shares, Gorman and his affiliates will indicate that they are voting in favor of the Merger Agreement and otherwise in accordance with Section 1 above. 7. Survival of Representations and Warranties. The representations and warranties contained herein shall not be deemed waived or otherwise affected by any investigation made by the other parties hereto. The representations and warranties contained herein shall expire with, and be terminated and extinguished upon, consummation of the Merger or termination of this Agreement in accordance with the terms hereof, but no party shall be relieved for prior breach thereof. 8. Specific Enforcement. Gorman has signed this Agreement intending to be legally bound thereby. Gorman expressly agrees that this Agreement shall be specifically enforceable against Gorman in any court of competent jurisdiction within the State of New Jersey in accordance with its terms. 9. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitute one and the same instrument. 10. No waivers. No waivers of any breach of this Agreement extended by Parent or Merger Sub to Gorman shall be construed as a waiver of any rights or remedies of Parent or Merger Sub with respect to any other stockholder of the Company who has executed an agreement substantially in the form of this Agreement with respect to shares of the Company held or subsequently held by such stockholder or with respect to any subsequent breach of Gorman or any other such stockholder of the Company. No waiver of any provisions hereof by either party shall be deemed a waiver of any other provisions hereof by any such party, nor shall any such waiver be deemed a continuing waiver of any provision hereof by such party. 11. Entire Agreement. This Agreement supersedes all prior agreements, written or oral, among the parties hereto with respect to the subject matter hereof and contains the entire agreement among the parties with respect to the subject matter hereof. This Agreement may not be amended, supplemented or modified, and no provisions hereof may be modified or waived, except by an instrument in writing signed by each party hereto. 12. Notices. All notices and other communications hereunder shall be in writing and shall be sufficient if sent by facsimile transmission (provided that any notice received by facsimile transmission or otherwise at the addressee's location on any business day after 5:00 p.m. (addressee's local time) shall be deemed to have been received at 9:00 a.m. (addressee's local time) on the next business day), by reliable overnight delivery service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows (or at such other address for a party as shall be specified in a notice given in accordance with this Section): (i) if to Gorman: B-4 National Atlantic Holdings Corporation 4 Paragon Way Freehold, NJ 07728 Attention: James V. Gorman with a copy to: Dewey & LeBoeuf LLP 1301 Avenue of the Americas New York, NY 10019 Attention: Michael Groll Sheri E. Bloomberg Facsimile: (212) 424-8500 (ii) if to Parent or Merger Sub to: Palisades Safety and Insurance Association Connell Corporate Center II 2 Connell Drive Berkeley Heights, NJ 07922 Attention: Edward J. Fernandez, President Facsimile:(908) 790-7849 with a copy to: Palisades/High Point Corporate Law 331 Newman Springs Road, Building 3 Red Bank, NJ 07701 Attention: Carl Peterson, SPHR Chief Legal Officer Facsimile: (732) 978-6105 and Ropes & Gray LLP One International Place Boston, MA 02110-2624 Attention: David A. Fine Facsimile: (617) 235-0030 Any party to this Agreement may give any notice or other communication hereunder using any other means (including personal delivery, messenger service, telex, ordinary mail or electronic mail), but no such notice of other communication shall be deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any party to this B-5 Agreement may change the address to which notices and other communications hereunder are to be delivered by giving the other parties to this Agreement notice in the manner herein set forth. 13. No Third Party Beneficiaries. This Agreement is not intended, and shall not be deemed, to confer any rights or remedies upon any person other than the parties hereto and their respective successors and permitted assigns or to otherwise create any third-party beneficiary hereto. 14. Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise by any of the parties hereto without the prior written consent of the other parties, and any such assignment without such prior written consent shall be null and void. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns, heirs, executors, administrators and other legal representatives, as the case may be. 15. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 16. Interpretation. When reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement, unless otherwise indicated. The headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." No summary of this Agreement prepared by the parties shall affect in any way the meaning or interpretation of this Agreement. 17. Governing Law. This Agreement, and all claims or causes of action (whether in contract or tort) that may be based upon, arise out or relate to this Agreement or the negotiation, execution or performance of this Agreement (including any claim or cause of action based upon, arising out of or related to any representation or warranty made in or in B-6 connection with this Agreement or as an inducement to enter into this Agreement), shall be governed by the internal laws of the State of New Jersey without giving effect to any choice or conflict of laws provision or rule. 18. Waiver of Jury Trial. Each of the parties hereto hereby waives to the fullest extent permitted by applicable Law any right it may have to a trial by jury with respect to any litigation directly or indirectly arising out of, under or in connection with this Agreement. Each of the parties hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce that foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 18. 19. Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. [SIGNATURE PAGE FOLLOWS] B-7 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed individually or by its respective duly authorized officer as of the date first written above. PALISADES SAFETY AND INSURANCE ASSOCIATION By: /s/ Edward J. Fernandez ---------------------------------------- Name: Edward J. Fernandez Title: President APOLLO HOLDINGS, INC. By: /s/ Edward J. Fernandez ---------------------------------------- Name: Edward J. Fernandez Title: President JAMES V. GORMAN By: /s/ James V. Gorman ---------------------------------------- EX-99 4 exhibit_c.txt EXHIBIT C - FAIRNESS OPINION EXHIBIT C March 9, 2008 The Board of Directors National Atlantic Holdings Corporation 4 Paragon Way Freehold, New Jersey 07728 Members of the Board of Directors: We understand that National Atlantic Holdings Corporation ("NAHC") proposes to enter into an Agreement and Plan of Merger (the "Agreement") among NAHC, Palisades Safety and Insurance Association ("Palisades") and Apollo Holdings, Inc., a wholly owned subsidiary of Palisades ("Merger Sub"), pursuant to which, among other things, Merger Sub will merge with and into NAHC (the "Merger") and each outstanding share of the common stock, no par value, of NAHC ("NAHC Common Stock") will be converted into the right to receive $6.25 in cash (the "Consideration"). The terms and conditions of the Merger are more fully set forth in the Agreement. You have requested our opinion as to the fairness, from a financial point of view, to the holders of NAHC Common Stock of the Consideration to be received by such holders in the Merger. In connection with this opinion, we have, among other things: (i) reviewed certain publicly available business and financial information relating to NAHC; (ii) reviewed certain internal financial and operating information with respect to the business, operations and prospects of NAHC furnished to or discussed with us by the management of NAHC, including certain financial forecasts relating to NAHC prepared by the management of NAHC (such forecasts, "NAHC Forecasts"); (iii) discussed with members of senior management of NAHC the past and current business, operations, financial condition and prospects of NAHC, including the following: o assessments of the management of NAHC as to the liquidity needs of, and financing alternatives and other capital resources available to, NAHC, o NAHC's procedures related to bodily injury claims handling and reserving which NAHC's management determined were not applied consistently as "best practices" throughout the NAHC's organization and resulted in a significant increase in loss reserves for 2007, and o the fact that A.M. Best had placed the financial strength ratings of NAHC under review for a possible downgrade and management's assessment of the likelihood that, if the Merger were not consummated, A.M. Best would downgrade such ratings and the potential adverse effects such a downgrade would have on NAHC's ability to raise capital and continue to operate at current levels; (iv) reviewed the trading history for NAHC Common Stock and a comparison of that trading history with the trading histories of other companies we deemed relevant; C-1 The Board of Directors National Atlantic Holdings Corporation Page 2 (v) compared certain financial and stock market information of NAHC with similar information of other companies we deemed relevant; (vi) compared certain financial terms of the Merger to financial terms, to the extent publicly available, of other transactions we deemed relevant; (vii) considered the fact that NAHC publicly announced that it would explore its strategic alternatives and the results of our efforts to solicit, at the direction of NAHC, indications of interest and definitive proposals from third parties with respect to a possible acquisition of NAHC; (viii) reviewed a draft, dated March 9, 2008, of the Agreement (the "Draft Agreement"), including the provisions set forth therein for the payment by Palisades of a reverse break-up fee in certain events (collectively, the "Reverse Break-Up Fee"); and (ix) performed such other analyses and studies and considered such other information and factors as we deemed appropriate. In arriving at our opinion, we have assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with us and have relied upon the assurances of the management of NAHC that they are not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the NAHC Forecasts, we have been advised by NAHC, and have assumed, that such forecasts have been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of NAHC as to the future financial performance of NAHC. We are not actuaries and our services did not include actuarial determinations or evaluations by us or any attempt by us to evaluate any actuarial assumptions. In that regard, we express no opinion with respect to the adequacy of NAHC's liability reserve policies or levels and have relied upon the estimates and judgments of the management of NAHC with respect to the adequacy of the reserves established in respect of contingent liabilities or losses of NAHC and have assumed such adequacy for purposes of our opinion. We have not made or been provided with any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of NAHC, nor have we made any physical inspection of the properties or assets of NAHC. We have not evaluated the solvency of NAHC or Palisades under any state or federal laws relating to bankruptcy, insolvency or similar matters. We have assumed, at NAHC's direction, that the Merger will be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the Merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on NAHC or the contemplated benefits of the Merger. We have also assumed, at NAHC's direction, that the final executed Agreement will not differ in any material respect from the Draft Agreement reviewed by us. We express no view or opinion as to any terms or other aspects of the Merger (other than the Consideration to the extent expressly specified herein), including, without limitation, the form or structure of the Merger, including the Reverse Break-Up Fee, the amounts thereof and the decision of NAHC to agree to such terms. Our opinion is limited to the fairness, from a financial point of view, of the C-2 The Board of Directors National Atlantic Holdings Corporation Page 3 Consideration to be received by the holders of NAHC Common Stock and no opinion or view is expressed with respect to any consideration received in connection with the Merger by the holders of any other class of securities, creditors or other constituencies of NAHC. In addition, no opinion or view is expressed with respect to the fairness of the amount, nature or any other aspect of the compensation to any of the officers, directors or employees of any party to the Merger, or class of such persons, relative to the Consideration. Furthermore, no opinion or view is expressed as to the relative merits of the Merger in comparison to other strategies or transactions that might be available to NAHC or in which NAHC might engage or as to the underlying business decision of NAHC to proceed with or effect the Merger. In addition, we express no opinion or recommendation as to how any shareholder should vote or act in connection with the Merger. We have acted as financial advisor to NAHC in connection with the Merger and will receive a fee for our services, a portion of which is payable in connection with the rendering of this opinion and a significant portion of which is contingent upon consummation of the Merger. In addition, NAHC has agreed to reimburse our expenses and indemnify us against certain liabilities arising out of our engagement. We and our affiliates comprise a full service securities firm and commercial bank engaged in securities trading and brokerage activities and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of corporations and individuals. In the ordinary course of our businesses, we and our affiliates may actively trade the debt, equity or other securities or financial instruments (including bank loans or other obligations) of NAHC, Palisades and certain of their respective affiliates for our own account or for the accounts of customers, and accordingly, we or our affiliates may at any time hold long or short positions in such securities or financial instruments. We and our affiliates in the past have provided, currently are providing, and in the future may provide certain investment banking, commercial banking and other financial services to Palisades or its affiliates and have received or in the future may receive compensation for the rendering of these services, including providing certain cash management and trading services to one such affiliate. It is understood that this letter is for the benefit and use of the Board of Directors of NAHC in connection with and for purposes of its evaluation of the Merger. Our opinion is necessarily based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and the information made available to us as of, the date hereof. It should be understood that subsequent developments may affect this opinion, and we do not have any obligation to update, revise, or reaffirm this opinion. The issuance of this opinion was approved by our Fairness Opinion Review Committee. Based upon and subject to the foregoing, including the various assumptions and limitations set forth herein, we are of the opinion on the date hereof that the Consideration to be received in the Merger by holders of NAHC Common Stock is fair, from a financial point of view, to such holders. C-3 The Board of Directors National Atlantic Holdings Corporation Page 4 Very truly yours, /s/ Banc of America Securities LLC - ---------------------------------- BANC OF AMERICA SECURITIES LLC C-4 EX-99 5 exhibit_d.txt ARTICLES OF INCORPORATION AND BYLAWS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NATIONAL ATLANTIC HOLDINGS CORPORATION THIS IS TO CERTIFY that NATIONAL ATLANTIC HOLDINGS CORPORATION., a New Jersey corporation under and by virtue of the provisions of Title 14A of the Revised Statutes of New Jersey and the several amendments thereof and supplements thereto, amends, restates and integrates the provisions of the Corporation's Certificate of Incorporation, pursuant to Section 14A:9-5 of the New Jersey Business Corporation Act, as follows (this "Amended and Restated Certificate"): ARTICLE I NAME The name of the Corporation is NATIONAL ATLANTIC HOLDINGS CORPORATION ARTICLE II REGISTERED OFFICE AND AGENT As of filing of this Amended and Restated Certificate, the address of the Corporation's registered office in the State of New Jersey is 4 Paragon Way, Freehold, New Jersey 07728, and the name of the Corporation's registered agent at such address is Cynthia L. Codella, Corporate Secretary. ARTICLE III PURPOSE The purpose for which the Corporation is organized is to engage in any activity within the purposes for which corporations may be organized under the New Jersey Business Corporation Act. ARTICLE IV CAPITAL STOCK The aggregate number of shares of capital stock which the Corporation shall have authority to issue is sixty million shares (60,000,000) shares, of which ten million (10,000,000) shares shall be Preferred Stock, with no par value, and fifty million (50,000,000) shares shall be Common Stock, with no par value. (a) Preferred Stock. The Board of Directors of the Corporation is expressly authorized to provide for the issuance of shares of Preferred Stock, which may be issued from time to time in one or more series; to fix or alter the designations, powers, D-1 preferences and limitations and relative rights, including dividend rights, dividend rate, voting rights, terms of redemption, redemption price or prices, conversion rights and liquidate preferences or other rights, if any, and the qualifications, limitations, restrictions thereof, of any wholly unissued series of Preferred Stock; to fix the number of shares constituting any such series and the designation thereof; and to increase or decrease the number of shares of any series of Preferred Stock (but not below the number of shares then outstanding), which shall be accomplished by an amendment to this Amended and Restated Certificate adopted by a majority of the Board of Directors then in office. (b) Common Stock. The Common Stock shall have the rights, preferences, privileges and limitations as set forth below. (i) Voting. The holders of Common Stock are entitled to one vote for each share held. There shall be no cumulative voting. (ii) Dividends. Subject to the provisions of law, dividends may be paid on the Common Stock of the Corporation out of the assets legally available therefor at such time and in such amounts as the Board of Directors may deem advisable. Whenever the Board of Directors of the Corporation declares a dividend, such dividend shall be payable on such date as may be determined by the Board of Directors. The discretion of the Board of Directors in declaring dividends shall be unlimited. The holders of Common Stock shall have no right to receive dividends (or any sums on account of dividends upon any liquidation, dissolution, winding up or redemption) unless actually declared and made payable by the Board of Directors. Such dividends shall not be cumulative. (iii) Liquidation, Dissolution, Winding-Up. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive ratably all assets of the Corporation available for distribution to its shareholders, subject, however, to the liquidation rights of the holders of Preferred Stock authorized hereunder. (c) No Preemptive Rights. No holder of any stock or other security of the Corporation of any class now or hereafter authorized shall, as such holder, be entitled as of right or have any preemptive right to purchase any shares of capital stock of the Corporation now or hereafter authorized, or any securities or other instruments evidencing the right to acquire any shares of capital stock of the Corporation, whether such shares or securities or instruments be unissued, or issued and thereafter acquired by the Corporation. ARTICLE V SHAREHOLDERS (a) Action by Shareholders. Any action taken by shareholders must be taken at an annual meeting or special meeting of shareholders of the Corporation. Shareholder action by written consent in lieu of a meeting is not permitted. D-2 (b) Calling of Special Meetings. Except as otherwise required by law, special meetings of shareholders may only be called by a majority the Board of Directors then in office or by the Chief Executive Officer. Special meetings of the shareholders of the Corporation may not be called by any other person or persons, except as may be required by law. (c) Shareholder Nomination of Director Candidates and Introduction of Business. Advance notice of shareholder nominations for the election of directors and of business to be brought by shareholders before any meeting of the shareholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. ARTICLE VI BOARD OF DIRECTORS (a) Number of Directors. As of the date of filing of this Amended and Restated Certificate, the number of directors constituting the Board of Directors of the Corporation is eight the address of each director is 4 Paragon Way, Freehold, New Jersey 07728, and the name of each director is set forth below: James V. Gorman F.P. "Skip" Campion Peter A. Cappello, Jr. Andrew C. Harris Thomas M. Mulhare Thomas J. Sharkey, Sr. Steven V. Stallone Candace L. Straight The number of directors constituting the Board of Directors of the Corporation from time to time shall be determined in the manner provided in the Bylaws of the Corporation. (b) Classification of Board. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the members of the Board of Directors shall be divided into three classes, each of which shall be as nearly equal in number of directors as possible. At each annual meeting of shareholders, the directors of only one class shall be elected (unless vacancies are being filled or as otherwise required by law), and the directors in such class shall be elected to hold office until the third successive annual meeting of shareholders after their election and until their successors have been duly elected and qualified. (c) The initial Class I directors, whose term expires at the Annual Meeting in 2005 are Steven V. Stallone and Thomas J. Sharkey, Sr. The initial Class II directors, whose term expires at the Annual meeting in 2006 are Peter A. Cappello, Jr., Andrew C. Harris and Candace L. Straight. The initial Class III directors whose term expires at the Annual Meeting in 2007 are James V. Gorman, F.P. "Skip" Campion and Thomas M. Mulhare. D-3 (d) Removal of Directors. The shareholders may remove a director from the Board of Directors during the director's term of office only for cause. Removal of a director for cause requires the affirmative vote of the holders of a majority of all outstanding shares entitled to vote for the election of directors. (e) Vacancies. Vacancies or newly created directorships resulting from any increase in the authorized number of Directors may be filled by the affirmative vote of a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director, and the Directors so chosen shall hold office until the next succeeding annual meeting of shareholders and until their successors are duly elected and shall qualify, unless sooner displaced. Except as provided by applicable law, the Board of Directors shall have the exclusive power and authority to fill any vacancies or any newly created directorships on the Board of Directors and the stockholders shall have no right to fill such vacancies. If there are no Directors in office, then an election of Directors may be held in the manner provided by statute. ARTICLE VII INDEMNIFICATION (a) Limitation on Personal Liability of Directors and Officers. No director shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (2) for acts or omissions not in good faith or which involve a knowing violation of law, (3) under Section 14A:6-12 of the New Jersey Business Corporation Act, or (4) for acts or omissions which result in receipt by the director of an improper personal benefit or as otherwise required by law. If the New Jersey Business Corporation Act is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the New Jersey Business Corporation Act, as so amended. Any repeal or modification of this Section (a) of Article VII by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. (b) The Corporation shall indemnify a corporate agent of the Corporation against his or her expenses and liabilities in connection with any proceeding involving the corporate agent by reason of his being or having been such a corporate agent, other than a proceeding by or in the right of the corporation, if (i) such corporate agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation; and (ii) with respect to any criminal proceeding, such corporate agent had no reasonable cause to believe his conduct was unlawful. D-4 The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that such corporate agent did not meet the foregoing standards of conduct. (c) The Corporation shall indemnify a corporate agent against his expenses in connection with any proceeding by or in the right of the Corporation to procure a judgment in its favor which involves the corporate agent by reason of his being or having been such corporate agent, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation. However, in such proceeding no indemnification shall be provided in respect of any claim, issue or matter as to which such corporate agent shall have been adjudged to be liable to the Corporation, unless and only to the extent that the Superior Court or the court in which such proceeding was brought shall determine upon application that despite the adjudication of liability, but in view of all circumstances of the case, such corporate agent is fairly and reasonably entitled to indemnity for such expenses as the Superior Court or such other court shall deem proper. (d) The Corporation shall indemnify a corporate agent against expenses to the extent that such corporate agent has been successful on the merits or otherwise in any proceeding referred to in Sections (b) and (c) of this Article VII or in defense of any claim, issue or matter therein. (e) A determination that indemnification is proper in the circumstances because the corporate agent met the applicable standard of conduct set forth in Sections (b) or (c) of this Article VII: (i) by the Board of Directors or a committee thereof, acting by a majority vote of a quorum consisting of directors who were not parties to or otherwise involved in the proceeding; or (ii) if such a quorum is not obtainable, or, even if obtainable and such quorum of the Board of Directors or committee by a majority vote of the disinterested directors so directs, by independent legal counsel, in a written opinion, such counsel to be designated by the Board of Directors; or (iii) by the shareholders if a resolution of the Board of Directors or of the shareholders so directs. (f) Expenses incurred by a corporate agent in connection with a proceeding may be paid by the Corporation in advance of the final disposition of the proceeding as authorized by the Board of Directors upon receipt of an undertaking by or on behalf of the corporate agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified as provided in this Article VII. (g) The indemnification and advancement of expenses provided by this Article VII shall not exclude any other rights, including the right to be indemnified against liabilities and expenses incurred in proceedings by or in the right of the Corporation, to which a corporate agent may be entitled by agreement, vote of D-5 shareholders, or otherwise; provided that no indemnification shall be made to or on behalf of a corporate agent if a judgment or other final adjudication adverse to the corporate agent establishes that his acts or omissions (a) which the corporate agent knows or believes to be contrary to the best interests of the Corporation or its shareholders in connection with a matter in which the corporate agent had a material conflict of interest, (b) were not in good faith or involved a knowing violation of law or (c) resulted in receipt by the corporate agent of an improper personal benefit. (h) The Corporation may purchase and maintain insurance on behalf of any corporate agent against any expenses incurred in any proceeding and any liabilities asserted against him by reason of his being or having been a corporate agent, whether or not the Corporation would have the power to indemnify him against such expenses and liabilities under the provisions of this Article VII. The Corporation may purchase such insurance from, or such insurance may be reinsured in whole or in part by, an insurer owned by or otherwise affiliated with the Corporation, whether or not such insurer does business with other insureds. (i) Savings Clause. If this Article VII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify a corporate agent to the full extent permitted by any applicable portion of this Article VII that shall not have been invalidated if the New Jersey Business Corporation Act is amended to authorize corporate action providing additional indemnification rights, then the Corporation shall indemnify a corporate agent to the full extent permitted by applicable law. Any repeal or modification of this Article VII shall not adversely affect any right of a corporate agent existing at the time of such repeal or modification. (j) "Corporate agent" means any person who is or was a director, officer, employee or agent of the indemnifying corporation or of any constituent corporation absorbed by the indemnifying corporation in a consolidation or merger and any person who is or was a director, officer, trustee, employee or agent of any other enterprise, serving as such at the request of the indemnifying corporation, or of any such constituent corporation, or the legal representative of any such director, officer, trustee, employee or agent. (k) "Expenses" means reasonable costs, disbursements and counsel fees. (l) "Liabilities" means amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties. ARTICLE VIII DURATION The duration of the Corporation shall be perpetual. D-6 ARTICLE IX AMENDMENT This Amended and Restated Certificate of Incorporation may be amended by the affirmative vote of a majority of the Board of Directors then in office, and by the affirmative vote of the holders of at least a majority of the votes entitled to vote thereon; provided, however, Article IV(a), Article V(a), Article V(b), Article VI(b), Article VI(d) and this Article IX may only be amended by the affirmative vote of two-thirds of the Board of Directors then in office, and by the affirmative vote of the holders of at least two-thirds of the votes entitled to vote thereon. D-7 IN WITNESS WHEREOF, National Atlantic Holdings Corporation has caused this Amended and Restated Certificate to be duly executed by its Chairman, and attested by its Secretary, on this 14 day of January, 2005. NATIONAL ATLANTIC HOLDINGS CORPORATION By: /s/ James V. Gorman --------------------- James V. Gorman Chairman Attest: /s/ Cynthia L. Codella - ----------------------- Cynthia L. Codella Secretary D-8 NATIONAL ATLANTIC HOLDINGS CORPORATION AMENDED AND RESTATED BY-LAWS ARTICLE I OFFICES 1.1 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Corporation is located at 4 Paragon Way, Freehold, New Jersey 07728. 1.2 OTHER PLACES OF BUSINESS. The Corporation may also have offices at such other places within and without the State of New Jersey as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 ANNUAL MEETING. The Annual Meeting of the shareholders of the Corporation shall be held on such date and at such time as shall be designated by the Board of Directors and as stated in the Notice of Meeting, for the election of directors and for the transaction of only such other business as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who complies with the procedures set forth in this Article II. 2.2 SPECIAL MEETINGS. Special meetings of shareholders may only be called by a majority of the Board of Directors then in office or by the Chief Executive Officer. Special meetings of the shareholders of the Corporation may not be called by any other person or persons, except as may be required by law. 2.3 PLACE OF MEETINGS. Meetings of shareholders of the Corporation shall be held at the Corporation's registered office, or at such places within or without the State of New Jersey as may be designated by the Board of Directors and stated in the Notice of the Meeting. 2.4 NOTICE OF MEETINGS. Written notice of the time, place and purpose of all meetings of the shareholders shall be mailed to or delivered personally to each shareholder by the Corporation, not less than ten (10) nor more than sixty (60) days prior to the meeting to each shareholder of record entitled to vote, at his or her address appearing upon the records of the Corporation or at such other address as shall be furnished in writing by the shareholder to the Corporation for such purpose. Such further notice shall be given as may be required by law or these By-Laws. Any meeting may be held without notice if all shareholders entitled to vote either are present in person or by proxy, or waive notice in writing, either before or after the meeting. 2.5 QUORUM. The holders of a majority of the issued and outstanding shares of the capital stock of the Corporation entitled to vote, present in person or by proxy, shall constitute a quorum D-9 for the transaction of business at all meetings of the shareholders; but, if there be less than a quorum, the chairman of the meeting or the holders of a majority of the stock so present or represented may adjourn the meeting until a quorum shall be present. 2.6 VOTING; PROXIES. At all meetings of the shareholders, each registered owner of shares entitled to vote may vote in person or proxy and shall have one vote for each such share standing in such shareholder's name on the books of the Corporation. Elections of directors need not be by ballot. Every proxy shall be executed in writing by the shareholder or his agent. No proxy shall be valid after eleven months from the date of its execution, unless a longer time is expressly provided therein, but in no event shall a proxy be valid after three years from the date of execution. Unless it is coupled with an interest, a proxy shall be revocable at will. A proxy shall not be revoked by the death or incapacity of the shareholder, but such proxy shall continue in force until revoked by the personal representative or guardian of the shareholder. The presence at any meeting of any shareholder who has given a proxy shall not revoke such proxy unless the shareholder shall file written notice of such revocation with the secretary of the meeting prior to the voting of such proxy. 2.7 ORGANIZATION. The Chairman of the Board, or in the absence of the Chairman of the Board, the person designated by the Board of Directors shall preside at all meetings of the shareholders. The person presiding at any meeting of shareholders shall have the power to appoint two or more persons to act as inspectors to receive, canvass and report the votes cast by the shareholders at such meeting; but no candidate for the office of director shall be appointed as inspector at any meeting for the election of directors. The Secretary of the Corporation, or in the absence of the Secretary, an Assistant Secretary shall act as secretary of all meetings of the shareholders; and in the absence of both, the person presiding at the meeting shall appoint a person to act as secretary of the meeting. 2.8 FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. In order that the Corporation may determine the shareholders entitled: (a) to notice of or to vote at any meeting of shareholders or adjournment thereof; or (b) to receive payment of any dividend or other distribution or allotment of any rights, the Board of Directors may fix a record date and, in such case, only shareholders of record on the date so fixed shall be entitled to such notice of and to vote at such meetings, or to receive payment of such dividends or other distribution or allotment of any rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date as fixed as aforesaid. The record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and shall not be more than sixty nor less than ten days before the date of a meeting of shareholders or other action requiring a determination of shareholders entitled to participate in such actions. 2.9 NOTICE OF SHAREHOLDER PROPOSALS AND SHAREHOLDER NOMINATIONS AND BUSINESS. (a) (i) The proposal of business by a shareholder to be considered at an Annual Meeting of Shareholders, which proposal is not in the form of a proposal requested by such shareholder to D-10 be included pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (the "Exchange Act") in the Corporation's proxy statement for such Annual Meeting, and/or nominations of persons for election to the Board of Directors of the Corporation at an Annual Meeting of Shareholders may be made by a shareholder who was a shareholder of record at the time of giving of notice provided for in this Section 2.9 of Article II, who is entitled to vote at such Annual Meeting and who has complied with the notice procedures set forth in this Section 2.9 of Article II. (ii) For any such business and/or nominations to be properly brought before an Annual Meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and such business must be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not less than ninety nor more than one hundred twenty days prior to the first anniversary of the preceding year's Annual Meeting; provided, however, that in the event that the date of the Annual Meeting is more than thirty days before or more than sixty days after such anniversary date, notice by the shareholder to be timely shall be so delivered not less than ninety days nor more than one hundred twenty days prior to such Annual Meeting or ten days following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an Annual Meeting commence a new time period for the giving of a shareholder's notice as described above. To be properly submitted, such shareholder's notice shall set forth (A) as to any such business that the shareholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting, any material interest of such shareholder in such business and the beneficial owner, if any, on whose behalf the proposal is made; (B) as to each person whom the shareholder proposes to nominate for election as a director, all information relating to such person that would be required to be disclosed in a solicitation of proxies for the election of such person as a director pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if so elected); and (C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf of the proposal or nomination is made (1) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner, and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (b) Except as otherwise provided by applicable law, the person presiding at the meeting shall have the authority to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed (as the case may be) in compliance with the procedures set forth in this Section 2.9, of Article II, and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded and, in such event, any such defective proposal or nomination shall be disregarded. (c) In addition to the requirements of the foregoing provisions of this Section 2.9 of Article II, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 2.9 of Article II shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the D-11 Exchange Act or (ii) of holders of any series of preferred stock to elect directors under an applicable preferred stock designation as set forth in the Corporation's Certificate of Incorporation, as it may be amended and/or restated from time to time. ARTICLE III BOARD OF DIRECTORS 3.1 ELECTION AND NUMBER OF DIRECTORS. The number of Directors which shall constitute the whole board shall be not less than seven (7) nor more than twenty (20). Within such limits, the number of Directors shall be determined by resolution of the Board of Directors. Subject to the right of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly equal in number as possible. At each annual meeting of shareholders, the directors of only one class shall be elected (unless vacancies are being filled or as otherwise required by law), and the directors in such class shall be elected to hold office until the third successive annual meeting of shareholders after their election and until their successors have been duly elected and qualified. Directors need not be shareholders nor residents of New Jersey. A Chairman of the Board of Directors shall be elected by the affirmative vote of a majority of the Directors then in office. 3.2 VACANCIES. Vacancies or newly created directorships resulting from any increase in the authorized number of Directors may be filled by the affirmative vote of a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director, and the Directors so chosen shall hold office until the next succeeding annual meeting of shareholders and until their successors are duly elected and shall qualify, unless sooner displaced. Except as provided by applicable law, the Board of Directors shall have the exclusive power and authority to fill any vacancies or any newly created directorships on the Board of Directors and the stockholders shall have no right to fill such vacancies. If there are no Directors in office, then an election of Directors may be held in the manner provided by statute. 3.3 CORPORATE POWERS OF DIRECTORS. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders. 3.4 PLACE AND TIME OF MEETINGS. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of New Jersey, at such time and at such place as shall from time to time be determined by the Board. No notice is required for regular meetings. 3.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chief Executive Officer on ten (10) days' notice to each Director, either personally or by mail; special meetings shall be called by the Chief Executive Officer or Secretary in like manner and on like notice on the written request of two Directors. D-12 3.6 QUORUM. At all meetings of the Board, a majority of the Directors shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum present shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. A Director who abstains from participation in a particular course of business shall nonetheless be counted for purposes of determining a quorum. If a quorum shall not be present at any meeting of the Board of Directors, the Directors so present may adjourn the meeting, without notice other than the announcement at the meeting, until a quorum shall be present. 3.7 WRITTEN CONSENT. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 3.8 TELEPHONIC COMMUNICATIONS. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in a meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.9 DIRECTOR COMPENSATION. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, the Board of Directors shall have the authority to fix the compensation of Directors, including the reimbursement of their expenses for attendance at meetings. Members of special or standing committees may be allowed like compensation for attending committee meetings or stated salary. No such payments shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Any member of the Board of Directors who is at the time of service an employee of the Corporation or any of its subsidiaries, will not receive any compensation 3.10 REMOVAL FOR CAUSE. The shareholders may remove a Director from the Board of Directors during the Director's term of office only for cause. Removal of a Director for cause requires the affirmative vote of the holders of a majority of all outstanding shares entitled to vote thereon. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by resolution adopted by a majority of the entire Board, shall appoint Committees from time to time pursuant to this Article IV. D-13 4.2 Any Committee established pursuant to Section 4.1 shall have and may exercise all of the authority of the Board, to the extent granted to each such Committee, except that no such Committee shall: a. make, alter or repeal any By-Law of the Corporation; b. elect or appoint any Director, or remove any officer or Director; c. submit to shareholders any action that requires shareholders' approval; or d. amend or repeal any resolution theretofore adopted by the Board. ARTICLE V OFFICERS 5.1 TITLES AND ELECTION. The Principal Officers of the Corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents, a Treasurer and a Secretary. The Board of Directors from time to time may elect a Chairman of the Board, one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and such other officers and agents as its shall deem necessary, and may define their powers and duties. Any number of offices may be held by the same person. 5.2 TERMS OF OFFICE. The Officers shall hold office until their successors are chosen and qualify. 5.3 REMOVAL. Any officer elected by the Board of Directors may be removed, either with or without cause, at any time, by the affirmative vote of a majority of the Board of Directors then in office. 5.4 CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors, if one be elected, shall preside at all meetings of the Board of Directors and of the shareholders, and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. 5.5 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be the chief executive officer of the Corporation and, in the absence of the Chairman, shall preside at all meetings of the Board of Directors and of the shareholders. He shall exercise the powers and perform the duties usual to the chief executive officer and, subject to the control of the Board of Directors, shall have general management and control of the affairs and business of the Corporation; he shall appoint and discharge employees and agents of the Corporation (other than officers elected by the Board of Directors) and fix their compensation; and he shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall have the power to execute bonds, mortgages and other contracts, agreements and instruments of the Corporation, and shall do and perform such other duties as from time to time may be assigned to him by the Board of Directors. D-14 5.6 PRESIDENT. A President, who shall perform such duties and have such powers and authority as is declared to him or her from time to time by the Board of Directors. If no person shall be elected President, the duties of the President shall be performed by the Chief Executive Officer. 5.7 VICE PRESIDENTS. If chosen, the Vice Presidents, in the order of their seniority, shall, in the absence or disability of the President, exercise all of the powers and duties of the President. Such Vice Presidents shall have the power to execute bonds, notes, mortgages and other contracts, agreements and instruments of the Corporation, and shall do and perform such other duties incident to the office of Vice President and as the Board of Directors, or the President, shall direct. Vice Presidents can be designated as Executive or Senior Vice Presidents. 5.8 SECRETARY. The Secretary shall attend all sessions of the Board and all meetings of the shareholders and record the minutes of proceedings in a book to be kept for that purpose. He shall give, or cause to be given, notice of all meetings of the shareholders and of the special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer. The Secretary shall affix the corporate seal to any instrument requiring it, and when so affixed, it shall be attested by the signature of the Secretary or an Assistant Secretary. The Secretary shall have and be the custodian of the stock records and all other books, records and papers of the Corporation (other than financial) and shall see that all books, reports, statements, certificates and other documents and records, required by law are properly kept and filed. 5.9 TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation, in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Directors whenever they may require it an account of all his transactions as Treasurer and of the financial condition of the Corporation. 5.10 SUBORDINATE OFFICERS. The Chief Executive Officer may appoint such other subordinate officers and agents and prescribe their respective rights, terms of office, authority and duties. The Chief Executive Officer may remove any such subordinate officer or agent appointed by him or her, for or without cause. 5.11 DUTIES OF OFFICERS MAY BE DELEGATED. In case of the absence or disability of any principal officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board may delegate, for the time being, the powers or duties, or any of them, of such officer to any other officer, or to any Director. ARTICLE VI CAPITAL STOCK 6.1 STOCK CERTIFICATES. Certificates for stock of the Corporation shall be in such form as the Board of Directors may from time to time prescribe and as may be required by New Jersey law. D-15 Certificates for stock of the Corporation shall be signed by the Chief Executive Officer or a Vice President (including any Executive or Senior Vice Presidents) and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. The shares of the Corporation shall be represented by certificates unless the Board of Directors shall by resolution provide that some or all of any class or series of stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the Corporation. Notwithstanding the adoption of any resolution providing for uncertificated shares, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate representing the number of shares registered in certificate form. 6.2 TRANSFER OF SHARES. The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock 6.3 RECORD HOLDERS. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 6.4 TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer agents and one or more registrars of transfers and may require all stock certificates to bear the signatures of such transfer agent and registrar. 6.5 LOST, STOLEN OR DESTROYED CERTIFICATES. (a) Where a certificate for shares has been lost, apparently destroyed, or wrongfully taken and the owner thereof fails to so notify the Corporation or the transfer agent of that fact within a reasonable time after he or she has notice of it and the transfer agent or the Corporation registers a transfer of the shares before receiving such a notification, the owner shall be precluded from asserting against the Corporation any claim for registering the transfer of such shares or any claim to a new certificate. (b) Subject to the foregoing, where the owner of shares claims that the certificate representing shares has been lost, destroyed or wrongfully taken, the Corporation shall issue a new certificate in place of the original certificate if the owner thereof requests the issue of a new certificate before the Corporation has notice that the certificate has been acquired by a bona fide purchaser, makes proof in affidavit form, satisfactory to the Secretary or Assistant Secretary of the Corporation and to its transfer agent, of his or her ownership of the shares represented by the certificate and that the certificate has been lost, destroyed or wrongfully taken; files an indemnity bond for an open or unspecified amount or if authorized in a specific case by the Corporation, for such fixed amount as the Chief Executive Officer, or a Vice President (including any Executive or Senior Vice President), or the Secretary of the Corporation may specify, in such form and with such surety as may be approved by the transfer agent and the Secretary or Assistant Secretary of the Corporation, indemnifying the Corporation and the transfer agent and registrar of the Corporation against all loss, cost and damage which may arise from issuance of a new certificate in place of the original certificate; and satisfies any other reasonable requirements imposed by the Corporation or transfer agent. In case of the surrender of the original certificate, in lieu of which a new certificate has been issued, or the surrender of such new certificate, for cancellation, D-16 the bond of indemnity given as a condition of the issuance of such new certificate may be surrendered. ARTICLE VII INVESTMENTS AND MONEYS 7.1 AUTHORITY TO INVEST. Investment of the funds of the Corporation and the purchase and sale of investment securities by the Corporation shall be made only as authorized or approved by the Board of Directors or a committee appointed by the Board of Directors and charged with the duty of supervising or making such investments, purchases and sales. 7.2 SAFEKEEPING OF INVESTMENT SECURITIES. Securities representing the invested funds of the Corporation shall be placed for safekeeping in safe deposit vaults in the name of the Corporation, or pursuant to a custodian account, in such banks or trust or safe deposit companies as shall be approved by the Board of Directors. Access to the vaults shall be in accordance with procedure approved by resolution of the Board of Directors and such resolution shall be effective upon a copy thereof being lodged with the bank or trust or safe deposit company in which the securities are lodged. In the event that the Board of Directors shall determine to establish a custodian account with a bank or trust or safe deposit company and shall provide that all or any part of the securities now or hereafter representing the invested funds of the Corporation shall be delivered to such bank or trust or safe deposit company approved by the Board of Directors, then and in that event such bank or trust or safe deposit company shall hold such securities so delivered in the custodian account in accordance with the procedure and under the authority of the resolution approved by the Board of Directors. 7.3 SIGNATORY AUTHORITY. Any two of the following: the Chief Executive Officer and any Vice President (including Executive and Senior Vice Presidents) acting jointly, or any one of them acting jointly with any Vice President or the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer, is authorized and empowered to sell, assign, exchange and transfer any and all shares of stock, bonds and other securities owned by or standing in the name of the Corporation, and to make, execute and deliver in the name and as the act of the Corporation under its corporate seal any and all instruments in writing necessary or proper to carry such sales, assignments, exchanges and transfers into effect. 7.4 DEPOSIT OF MONEYS. Moneys received by the Corporation may be deposited to its credit in such banks or trust companies as the Board of Directors may designate. 7.5 EXERCISE OF VOTING RIGHTS ON INVESTMENT SECURITIES. The Chief Executive Officer, or any Vice President (including Executive and Senior Vice Presidents) shall have authority to vote in person or by proxy any of the stock of any other corporation which the Corporation may hold and to execute any and all consents or other documents relating to such stocks. The authority herein granted may be exercised by those officers either in person or by proxy or by power of attorney duly executed by the officer. D-17 ARTICLE VIII MISCELLANEOUS 8.1 FISCAL YEAR. The Board of Directors shall have power to fix, and from time to time change, the fiscal year of the Corporation. Unless otherwise fixed by the Board of Directors, the fiscal year shall end on December 31 of each calendar year. 8.2 NOTICES. Any notice required to be given to any shareholder, Director or officer under the provisions of these By-Laws or otherwise shall (subject to the provisions of law and of the Certificate of Incorporation) be deemed to be sufficiently given if such notice be written or printed and be deposited in the post office addressed to such shareholder, Director or officer at his or her address appearing on the books or records of the Corporation, or such notice may be sent by facsimile or delivered in person to such shareholder, Director or officer and the mailing of such notice or transmitting of such facsimile or delivery of such notice, as the case may be, shall constitute due and sufficient notice. 8.3 LOANS. To the extent permitted by the Sarbanes-Oxley Act of 2002 and any other applicable law or regulation, the Board of Directors may authorize the Corporation to lend money to, guarantee any obligation of, or otherwise assist, any non-executive officer or other employee of the Corporation or of any subsidiary, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the Corporation. The loan, guarantee, or other assistance may be made with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, and may be made upon such other terms and conditions as the Board of Directors may determine. The Corporation may not, directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any Director or executive officer. 8.4 SEAL. The seal of the Corporation shall have inscribed thereon the name of the Corporation and the year and state of incorporation. The seal may be used by causing it or a facsimile thereof to be impressed or reproduced on a document or instrument, or affixed thereto. Such seal may be altered from time to time in the discretion of the Board of Directors. 8.5 INSPECTION OF CORPORATE RECORDS. The share register, or duplicate share register, and minutes of proceedings of the shareholders shall be open to inspection for any proper purpose upon the written demand of any person who has been a shareholder of record or holder of a voting trust certificate for at least six months immediately preceding that person's demand, or any person holding, or so authorized in writing by the holders of, at least 5 percent of the outstanding shares of any class. The inspection may be made at any reasonable time not less than five days after the person has given written notice of the demand to the Corporation. The inspection may be made in person or by an agent or attorney and shall include the right to make extracts. Demand for inspection shall be made in writing upon the Chief Executive Officer or Secretary of the Corporation. 8.6 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed manually or by facsimile signature by the Chief Executive Officer, or any D-18 Vice President (including any Executive or Senior Vice President) and may also be signed by such officer or officers, agent or agents, as shall be thereunto authorized from time to time by the Board of Directors. 8.7 EXECUTION OF CONTRACTS. The board may authorize any officer, employee or agent to enter into any contract or execute any instrument in the name of and on behalf of the Corporation. The authority may be general or confined to specific instances. No officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount unless so authorized by the Board or these By-Laws. 8.8 FORCE AND EFFECT OF BY-LAWS. These By-Laws are subject to the provisions of the New Jersey Business Corporation Act and the Certificate of Incorporation, as it may be amended from time to time. If any provision in these By-Laws is inconsistent with a provision in that Act or the Certificate of Incorporation, the provision of the Act or the Certificate of Incorporation shall govern to the extent of such inconsistency. ARTICLE IX EMERGENCY BY-LAWS 9.1 OPERATIVE EVENT. These Emergency By-Laws, notwithstanding any different provision in the Certificate of Incorporation or By-Laws, shall be operative during any emergency in the conduct of the business of the Corporation resulting from an attack on the United States or any nuclear or atomic disaster. These Emergency By-Laws shall cease to be operative upon termination of such emergency. 9.2 NOTICE OF MEETING. During any such emergency, a meeting of the Board of Directors or a committee thereof may be called by any person designated by the Board of Directors as an Executive Officer or by any Director. Notice of the time and place of the meeting shall be given by the person calling the meeting to only such of the Directors as it may be feasible to reach at the time and by such means as may be feasible at the time. Such notice shall be given at such time in advance of the meeting as circumstances permit in the judgment of the person calling the meeting. 9.3 QUORUM. During any such emergency, any two Directors in attendance at the meeting shall constitute a quorum, and officers or other persons designated on a list approved by the Board of Directors before the emergency, all in such order or priority and subject to such conditions and for such period of time (not longer than reasonably necessary after the termination of the emergency) as may be provided in the resolution approving the list, shall, to the extent required to constitute a quorum at any meeting of the Board of Directors during the emergency, be deemed Directors for such meeting. If at the time of the emergency the Board of Directors has not approved such a list of persons, then to the extent required to constitute a quorum at any meeting of the Board of Directors during the emergency, the persons designated by the Board of Directors as executive officers of the Corporation who are present shall be deemed, in order of rank and within the same rank in order of seniority, Directors for such meeting. D-19 9.4 LINES OF MANAGEMENT SUCCESSION. During any such emergency, the Board of Directors, either before or during any such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties. 9.5 OFFICE RELOCATION. The Board of Directors, either before or during any such emergency, may, effective in the emergency, change the principal offices or designate several alternative principal offices or regional offices, or authorize an officer or officers so to do. 9.6 LIABILITY. No officer, director or employee acting in accordance with these Emergency By-Laws shall be liable except for willful misconduct. 9.7 REPEAL OR AMENDMENT. These Emergency By-Laws shall be subject to repeal or change by further action of the Board of Directors or by action of the shareholders, but no such repeal or change shall modify the provisions of Section 9.6 of this Article IX with regard to action taken prior to the time of such repeal or change. Any amendment of these Emergency By-Laws may make any further or different provision that may be practical and necessary for the circumstances of the emergency. ARTICLE X AMENDMENTS These By-Laws may be altered, amended or repealed, in whole or in part or new By-Laws may be adopted by approval of a majority of the Board of Directors then in office or the vote, at a regular or special shareholders' meeting, of the holders of a majority of the votes entitled to be cast by the holders of all our capital stock then entitled to vote.; provided, however, Section 2.2, Section 2.9, Section 3.1, and this Article X may be altered, amended or repealed only with the approval of two-thirds of the Board of Directors then in office or by the vote, at a regular or special shareholders' meeting, of the holders of at least two-thirds of the votes entitled to be cast by the holders of all of our capital stock entitled to vote thereon. D-20 Certified to be a true copy. Date Secretary D-21 -----END PRIVACY-ENHANCED MESSAGE-----