SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Delaware 0-26456 06-1424716
--------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
|
Registrant's telephone number, including area code:
(203) 862-4300
ITEM 5. OTHER EVENTS
On May 5, 2000, Arch Capital Group Ltd. (the "Company") sold the reinsurance operations of Arch Reinsurance Company ("Arch Re") pursuant to an agreement entered into as of January 10, 2000 with Folksamerica Reinsurance Company and Folksamerica Holding Company (collectively, "Folksamerica"). Folksamerica Reinsurance Company assumed Arch Re's liabilities under the reinsurance agreements transferred in the asset sale and Arch Re transferred to Folksamerica Reinsurance Company assets estimated in an aggregate amount equal in book value to the book value of the liabilities assumed. In consideration for the transfer of Arch Re's book of business, Folksamerica paid $20.084 million (net of a credit equal to $251,000 granted to Folksamerica for certain tax costs) in cash at the closing, subject to post-closing adjustments based on an independent actuarial report of the claim liabilities transferred and an independent audit of the net assets sold. Following the completion of such report and audit, the parties agreed upon net post-closing adjustments in the amount of approximately $3.2 million payable by the Company, which consisted of a $4.2 million reduction in the purchase price less $1 million in net book value of the assets and liabilities actually transferred at closing.
Under the terms of the agreement, $20 million has been placed in escrow for a period of five years. These funds will be primarily used to reimburse Folksamerica to the extent that the loss reserves (which were $32.3 million at May 5, 2000) relating to business produced on behalf of Arch Re by a certain managing underwriting agency are deficient as measured at the end of such five year period. To the extent that such loss reserves are redundant, all of the escrowed funds will be returned to the Company and Folksamerica will pay the Company an amount equal to such redundancy. In connection with the escrow arrangement, the Company will record a loss in an amount equal to any probable deficiency in the related reserve that may become known during or at the end of the five year period. The agreement also provided that an additional amount of up to $5 million would be placed in escrow for a period of five years to the extent that Arch Re's reserves at closing on all business other than that covered by the $20 million escrow were less by at least a specified amount than those estimated by its independent actuaries. No such supplemental escrow was required.
Under the terms of the agreement, the Company has also purchased reinsurance protection covering the Company's aviation business to reduce the net financial loss to Folksamerica on any large commercial airline catastrophe to $5.4 million, net of reinstatement premiums. Although the Company believes that any such net financial loss will not exceed $5.4 million, the Company has agreed to reimburse Folksamerica for a net financial loss it may incur that is in excess of $5.4 million for aviation losses under certain circumstances prior to May 5, 2003.
The Company also made representations and warranties to Folksamerica about the Company and the business transferred to Folksamerica for which the Company retains exposure for certain periods.
The net book value gain resulting from the sale of the Company's reinsurance operations to Folksamerica is calculated as follows (in thousands):
Consideration received, consisting of the following:
Total liabilities transferred $514,330
Cash premium received 16,920
--------
531,250
--------
Assets transferred 478,687
Amortization of deferred policy acquisition costs 23,242
Transaction costs 21,800
--------
523,729
--------
Pre-tax gain 7,521
Income tax expense (1) 4,137
--------
Net gain 3,384
Realized (loss), net of income tax, for securities transferred at market value (2) (5,330)
--------
Net (loss) (1,946)
Change in net unrealized depreciation of investments, net of tax (2) 5,330
--------
Comprehensive income and net book value gain $3,384
========
|
(1) The income tax benefit of $1.5 million relating to post-closing adjustments of $4.2 million was offset by an equivalent deferred tax asset valuation allowance.
(2) The related income tax benefit of $1.9 million was offset by an equivalent deferred tax asset valuation allowance.
Transaction costs consist of the following (in millions):
Severance and other related costs $11.0
Reinsurance costs 4.8
Investment banking, legal and accounting fees 2.3
Write-off of furniture, equipment and leasehold improvements 1.7
Write-off of lease obligation 1.3
Other 0.7
-----------
Total $21.8
===========
|
As of June 30, 2000, accrued and unpaid transaction costs amounted to approximately $7.8 million. Of such amount, $1.9 million relates to severance and other related costs expected to be paid to employees terminated as of June 30, 2000 during the next 18 months under the Company's severance arrangements; $1.3 million relates to the write-off of the Company's lease obligation expected to be paid over the remainder of the lease term expiring in October 2002; and the balance of $4.6 million is expected to be paid by December 31, 2000.
The GAAP book value of the assets and liabilities transferred to Folksamerica recorded in the accompanying financial statements at closing are as follows (in millions):
Fixed maturities, short-term investments and accrued interest income $249.9
Premiums receivable 108.6
Reinsurance recoverable 73.2
Deferred policy acquisition costs 23.2
Deferred income tax asset 13.5
Other insurance assets 47.0
---------
Total Assets $515.4
---------
Reserve for claims and claims expenses $371.6
Net unearned premium reserve 103.4
Reinsurance premiums payable 9.5
Other insurance liabilities 29.8
---------
Total Liabilities $514.3
---------
Net book value of assets and liabilities transferred $1.1
=========
|
At the closing of the asset sale, Arch Re and Folksamerica entered into a transfer and assumption agreement, under which Folksamerica assumed Arch Re's rights and obligations under the reinsurance agreements transferred in the asset sale. The reinsureds under such agreements that were in-force were notified that Folksamerica had assumed Arch Re's obligations and that, unless the reinsureds object to the assumption, Arch Re will be released from its obligations to those reinsureds. None of such reinsureds objected to the assumption and, accordingly, the gross liabilities for such business have been removed from the accounts of Arch Re for statutory and GAAP accounting purposes. However, Arch Re will continue to be liable under those reinsurance agreements if the notice is found not to be an effective release by the reinsureds. Folksamerica has agreed to indemnify the Company for any losses arising out of the reinsurance agreements transferred to Folksamerica Reinsurance Company in the asset sale. However, in the event that Folksamerica refuses or is unable to perform its obligations to the Company, Arch Re may incur losses relating to the reinsurance agreements transferred in the asset sale.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Pro Forma Financial Information
The following unaudited pro forma statement of income and comprehensive income for the six months ended June 30, 2000 and for the year ended December 31, 1999 reflects our historical accounts for that period, adjusted to give pro forma effect to the asset sale as if it had occurred on January 1, 1999.
The pro forma financial data and accompanying notes should be read in conjunction with the description of the asset sale contained in this report and the unaudited consolidated financial statements and related notes for the six months ended June 30, 2000 included in our June 30, 2000 Quarterly Report on Form 10-Q as well as our audited consolidated financial statements and related notes and the description of the asset sale included in our 1999 Annual Report on Form 10-K and the proxy statement relating to our special meeting held on April 17, 2000. We believe that the assumptions used in the following statements, which are set forth in the
accompanying notes, provide a reasonable basis on which to present the pro forma financial data. The pro forma financial data is provided for informational purposes only and should not be construed to be indicative of our financial condition or results of operations had the asset sale been consummated on the dates assumed and are not intended to project our financial condition on any future date or results of operations for any future period.
Arch Capital Group Ltd.
Pro Forma Condensed Consolidated Statement of Income
and Comprehensive Income
For The Six Months Ended June 30, 2000
(Dollars in thousands, except per share data)
Folksamerica
Historical Transaction(1) Pro Forma
---------------- -------------------- -----------------
Revenues
Net premiums written ($10,604) $10,604 -
(Increase) decrease in unearned premiums 98,134 (98,134) -
---------------- -------------------- -----------------
Net premiums earned 87,530 (87,530) -
Net investment income 9,547 (4,099) $5,448
Gain on sale of reinsurance operations 2,191 (2,191) -
Net realized investment gains (losses) 28,933 28,933
---------------- -------------------- -----------------
Total revenues 128,201 (93,820) 34,381
Operating Costs and Expenses
Claims and claims expenses 76,263 (76,263)
Commissions and brokerage 26,756 (26,756)
Other operating expenses 4,246 (846) 3,400
Foreign exchange (gain) loss 1,159 (1,159)
---------------- -------------------- -----------------
Total operating costs and expenses 108,424 (105,024) 3,400
Income (Loss)
Income before income taxes and equity in net income of
investees 19,777 11,204 30,981
Federal income taxes expense (benefit) 17,160 (6,856) 10,304
---------------- -------------------- -----------------
Income before equity in net income of investees 2,617 18,060 20,677
Equity in net income of investees 639 639
---------------- -------------------- -----------------
Net income 3,256 18,060 21,316
Other Comprehensive Income (Loss), Net of Tax
Change in net unrealized depreciation of investments, net of
tax (36,046) (5,330) (41,376)
---------------- -------------------- -----------------
---------------- -------------------- -----------------
Comprehensive Income (Loss) ($32,790) $12,730 ($20,060)
================ ==================== =================
Average shares outstanding
Basic 13,948,267 13,948,267
Diluted 13,949,503 13,949,503
Per Share Data
Net Income (Loss) - Basic and diluted $0.23 $1.53
Comprehensive Income (Loss) - Basic and diluted ($2.35) ($1.44)
|
Arch Capital Group Ltd.
Pro Forma Condensed Consolidated Statement of Income and
Comprehensive Income
For The Year Ended December 31, 1999
(Dollars in thousands, except per share data)
Folksamerica
Historical Transaction(1) Pro Forma
---------------- -------------------- -----------------
Revenues
Net premiums written $306,726 ($306,726) -
(Increase) decrease in unearned premiums 4,642 (4,642) -
---------------- -------------------- -----------------
Net premiums earned 311,368 (311,368) -
Net investment income 20,173 (10,253) $9,920
Net realized investment gains (losses) 17,227 1,192 18,419
---------------- -------------------- -----------------
Total revenues 348,768 (320,429) 28,339
Operating Costs and Expenses
Claims and claims expenses 305,841 (305,841)
Commissions and brokerage 80,540 (80,540)
Other operating expenses 14,816 (10,666) 4,150
Foreign exchange (gain) loss (198) 198
---------------- -------------------- -----------------
Total operating costs and expenses 400,999 (396,849) 4,150
Income (Loss)
Income (loss) before income taxes, equity in net income of investees and
cumulative effect of accounting change
(52,231) 76,420 24,189
Federal income taxes expense (benefit) (19,557) 27,171 7,614
---------------- -------------------- -----------------
Income (loss) before equity in net income of investees and
cumulative effect of accounting change (32,674) 49,249 16,575
Equity in net income of investees 621 621
---------------- -------------------- -----------------
Income (loss) before cumulative effect of accounting change
(32,053) 49,249 17,196
Cumulative effect of accounting change (383) (383)
---------------- -------------------- -----------------
Net income (loss) (32,436) 49,249 16,813
Other Comprehensive Income (Loss), Net of Tax
Change in net unrealized depreciation of investments, net of
tax (19,850) 4,553 (15,297)
---------------- -------------------- -----------------
Comprehensive Income (Loss) ($52,286) $53,802 $1,516
================ ==================== =================
Average shares outstanding
Basic 17,086,732 17,086,732
Diluted 17,086,808 17,086,808
Per Share Data
Net Income (Loss) - Basic and diluted ($1.90) $0.98
Comprehensive Income (Loss) - Basic and diluted ($3.06) $0.09
|
Notes to Pro Forma Statement of Income and Comprehensive Income
1. Represents all revenue and expense and other comprehensive income items recorded during the six months ended June 30, 2000 and the year ended December 31, 1999 related to our reinsurance business sold to Folksamerica Reinsurance Company on May 5, 2000. Net investment income, net realized investment gains (losses) and unrealized appreciation (depreciation) of investments have been allocated based on the proportion of the average amount of fixed maturities and short term investments related to the business transferred to the average total fixed maturities and short term investments in the six months ended June 30, 2000 and the year ended December 31, 1999.
All other revenue and expense items were allocated based on specific identification.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. may include forward-looking statements which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this report and include:
o the availability of investments on attractive terms;
o competition, including increased competition;
o changes in the performance of the insurance sector of the public equity markets or market professionals' views as to such sector;
o general economic conditions;
o regulatory changes and conditions;
o claims development and losses, including as to the frequency of severity of claims and losses and the timing of claim reports, on aviation business and certain business produced by a certain managing underwriting agency for which the Company has retained exposure under certain indemnity obligations to Folksamerica in connection with the asset sale;
o our future business operations and strategy; and
o loss of key personnel.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
(c) Exhibits
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned.
ARCH CAPITAL GROUP LTD.
Date: September 8, 2000 By: /s/ Peter A. Appel
-------------------------------------
Name: Peter A. Appel
Title: President & Chief
Executive Officer
|
EXHIBIT INDEX
Exhibit
Number Description
10.1 Asset Purchase Agreement, dated as of January 10, 2000, among Arch Capital Group Ltd. ("ACGL"), Arch Reinsurance Company ("Arch Re"), Folksamerica Holding Company, Inc. ("FHC") and Folksamerica Reinsurance Company ("FRC") (filed as an exhibit to ACGL's Report on Form 8-K as filed with the SEC on January 18, 2000, and incorporated by reference)
10.2 Transfer and Assumption Agreement, dated May 5, 2000, between Arch Re and FRC (filed as an exhibit to ACGL's Report on Form 8-K as filed with the SEC on May 19, 2000, and incorporated by reference)
10.3 Escrow Agreement, dated May 5, 2000, among Arch Re, FHC, FRC and the Escrow Agent (filed as an exhibit to ACGL's Report on Form 8-K as filed with the SEC on May 19, 2000, and incorporated by reference)
10.4 Agreement, dated May 5, 2000, among ACGL, Arch Re, FHC and FRC regarding Aviation Business (filed as an exhibit to ACGL's Report on Form 8-K as filed with the SEC on May 19, 2000, and incorporated by reference)
10.5 Change in Control Agreement dated as of May 5, 2000 between Arch Capital Group Ltd. and Peter A. Appel.
10.6 Retention and Change in Control Agreement dated as of May 5, 2000 between Arch Capital Group Ltd. and Robert Clements.
10.7 Employment and Change in Control Agreement dated as of May 5, 2000 between Arch Capital Group Ltd. and Louis Petrillo.
10.8 Employment Agreement dated as of June 9, 2000 between Arch Capital Group Ltd. and Debra M. O'Connor.
CHANGE IN CONTROL AGREEMENT
Agreement, made as of the 5th day of May 2000, by and between Arch Capital Group Ltd., a Delaware corporation (the "Company"), and Peter A. Appel (the "Executive").
WHEREAS, the Executive is a key employee of the Company or one of its subsidiaries; and
WHEREAS, the Board of Directors of the Company (the "Board") considers the maintenance of a sound management to be essential to protecting and enhancing the best interests of the Company and its stockholders and recognizes that the possibility of a change in control raises uncertainty and questions among key employees and may result in the departure or distraction of such key employees to the detriment of the Company and its stockholders; and
WHEREAS, the Board wishes to assure that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company; and
WHEREAS, the Executive is willing to continue to serve the Company or one of its subsidiaries taking into account the provisions of this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and the respective covenants and agreements of the parties herein contained, the parties agree as follows:
1. Definitions.
(i) "Change in Control" means any of the following occurring after the date hereof:
(A) any person (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a Permitted Person or an Initial Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 35% or more of the total voting power of all the then outstanding Voting Securities; or
(B) any Initial Investor is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power of all the then outstanding Voting Securities; or
(C) the individuals who, as of the date hereof, constitute the Board together with those who become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or
(D) the consummation of a merger, consolidation, recapitalization,
liquidation, sale or disposition by the Company of all or substantially all
of the Company's assets, or reorganization of the Company, other than any
such transaction which would (x) result in at least 60% of the total voting
power represented by the voting securities of the surviving entity or, in
the case of an asset sale, the successor entity, outstanding immediately
after such transaction being beneficially owned, directly or indirectly, by
the stockholders of the Company immediately preceding the transaction and
(y) not otherwise be deemed a Change in Control under clause (A), (B), (C)
or (E) of this subsection (i); or
(E) the Board adopts a resolution to the effect that, for purposes hereof, a Change in Control has occurred.
(ii) "Change in Control Date" means any date during the term of this Agreement on which a Change in Control occurs.
(iii) "Initial Investors" means (A) The Trident Partnership, L.P.; (B) Marsh & McLennan Risk Capital Holdings, Ltd.; or (C) any majority-owned subsidiary or parent (or equivalent in the case of a non-corporate entity) of the foregoing.
(iv) "Permitted Persons" means (A) the Company; (B) any Related Party; or
(C) any group (as defined in Rule 13d-3 under the Exchange Act) comprised of any
or all of the foregoing.
(v) "Protection Period" means the period beginning on the Change in Control Date and ending on the second anniversary of the Change in Control Date.
(vi) "Related Party" means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities.
(vii) "Voting Security" means any security of the Company which carries the right to vote generally in the election of directors.
2. Acceleration of Vesting Upon Change in Control. All stock options and restricted stock issued under the Company's 1995 and 1999 Long Term Incentive and Share Award Plans (or any successor plan) shall become immediately vested in full and, in the case of stock options, immediately exercisable in full, upon a Change in Control in accordance with the applicable restricted stock agreements and stock option agreements.
3. Termination Following Change in Control. The Executive shall be entitled to the benefits provided in Section 4 hereof upon any termination of his employment with the Company and its subsidiaries within a Protection Period, except a termination of employment (a) because of his death, (b) because of a "Disability," (c) by the Company or any of its subsidiaries for "Cause," or (d)
by the Executive other than due to "Constructive Termination." No benefits shall be paid under Section 4 of this Agreement if the Executive's employment terminates outside of a Protection Period, whether or not a Change in Control is then contemplated.
(i) Disability. The Executive's employment shall be deemed to have terminated because of a "Disability" if the Executive applies for and is determined to be eligible to receive disability benefits under the Company's Long-Term Disability Plan.
(ii) Cause. Termination of the Executive's employment by the Company or any of its subsidiaries for "Cause" shall mean termination by reason of the Executive's willful engagement in conduct which involves dishonesty or moral turpitude in connection with his employment and which is demonstrably and materially injurious to the financial condition or reputation of the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a written notice of termination from the compensation committee of the Board after reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before such committee.
(iii) Without Cause. The Company or any of its subsidiaries may terminate the employment of the Executive without Cause during a Protection Period only by giving the Executive written notice of termination to that effect. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 4 hereof shall be provided to the Executive.
(iv) Constructive Termination. Termination of employment by the Executive due to "Constructive Termination" shall mean termination by the Executive subsequent to any of the following:
(A) the assignment of duties and responsibilities inconsistent in any material and adverse respect with the Executive's position or a significant diminution in his duties or responsibilities; provided, however, that Constructive Termination shall not be deemed to occur upon a change in duties or responsibilities that is solely and directly a result of the Company no longer being a publicly traded entity, and does not involve any other event set forth in this definition;
(B) a reduction in the Executive's base salary or bonus opportunity;
(C) the requirement that the Executive work at a location outside of Fairfield County, Connecticut, or Westchester County, New York;
(D) the failure to provide the Executive with benefits and incentive compensation opportunities at least as favorable, in the aggregate, as the benefits and in-
centive compensation opportunities available to the Executive immediately prior to a Change in Control; or
(E) if the Company has failed to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 9(c) hereof.
The Executive shall exercise his right to terminate employment due to Constructive Termination by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Constructive Termination. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given unless an earlier date is specified in writing by the Executive. A termination of employment by the Executive shall be due to Constructive Termination if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the Executive may have other reasons for terminating employment, including employment by another employer which the Executive desires to accept.
4. Benefits Upon Termination Within Protection Period. If, within a Protection Period, the Executive's employment by the Company and its subsidiaries shall be terminated (a) by the Company or any of its subsidiaries other than for Cause and other than because of a Disability or death, or (b) by the Executive due to Constructive Termination, the Executive shall be entitled to the benefits provided for below:
(i) The Company shall pay to the Executive, through the date of the Executive's termination of employment, salary at the rate then in effect, together with salary in lieu of vacation accrued to the date on which his employment terminates, in accordance with the standard payroll practices of the Company;
(ii) The Company shall pay to the Executive an amount equal to the product of (A) the amount of the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher), multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year through the date of termination of the Executive's employment, and the denominator of which is 365; and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment;
(iii) The Company shall pay to the Executive an amount equal to 2.99 times the sum of (A) the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher), and (B) the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher); and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; and
(iv) The Company shall continue to cover the Executive and his dependents under, or provide the Executive and his dependents with insurance coverage no less favorable than, the Company's life, disability, health and dental benefit plans or programs (as in effect
on the day immediately preceding the Protection Period or, at the option of the Executive, on the date of termination of employment) for a period equal to the lesser of (x) 36 months following the date of termination or (y) until the Executive is provided by another employer with benefits substantially comparable (with no preexisting condition limitations) to the benefits provided by such plans or programs. To the extent any such benefits cannot be provided under the benefit plans or programs of the Company or any of its subsidiaries, the Executive will be entitled to receive, on a monthly basis following termination, cash payments in an amount equal to the monthly cost of such benefits. The statutory health care continuation coverage period under Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), ---- will commence at the end of such 36-month period.
5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, policies or programs provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any of its subsidiaries; provided, however, that amounts payable hereunder are in lieu of any severance benefit payable under any other severance plan or agreement of the Company or its subsidiaries in effect on the date hereof. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of the Executive's employment shall be payable in accordance with such plan, practice, policy or program.
6. Full Settlement; Legal Expenses. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its subsidiaries may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and amounts payable hereunder will not be reduced by compensation the Executive receives from other employment. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment hereunder), plus in each case interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, unless the Company prevails on all causes of action in the dispute or contest. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in the Executive's sole discretion.
7. Limitation on Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the acceleration of exercisability of any stock option) by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) would
be subject to the excise tax imposed by Section 4999 of the Code as an "excess parachute payment" (within the meaning of Section 280G of the Code), the payment set forth in Section 4(iii) hereof shall be reduced to the smallest extent possible such that no amount payable hereunder constitutes an "excess parachute payment" (within the meaning of Section 280G of the Code).
8. Confidential Information; Nonsolicitation of Employees and Customers. The Executive shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its subsidiaries (except for information, knowledge or data which shall be or subsequently become known or generally available to the public other than by acts of the Executive or his representatives in violation of this Agreement). After the date of termination of the Executive's employment with the Company or any of its subsidiaries, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by the Company. The Executive shall return to the Company at the time of the termination of the Executive's employment with the Company or any of its subsidiaries all tangible property of the Company or any its subsidiaries in the Executive's possession, including, but not limited to, confidential information relating to the Company or any of its subsidiaries. The Executive shall not, during the term of his employment by the Company or any of its subsidiaries and for one year thereafter, directly or indirectly, on behalf of the Executive or any other person or entity, (i) induce, or seek to induce, any employee of the Company or any of its subsidiaries to terminate employment with the Company or any of its subsidiaries or (ii) solicit business from any person, firm or company which is (during the period the Executive is employed by the Company or any of its subsidiaries), or at the time of the termination of the Executive was, a customer of the Company or any of its subsidiaries, or induce, or seek to induce, any such customer of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries. In the event of a breach or threatened breach by the Executive of any provision of this Section 8, the Executive acknowledges that the Company and its subsidiaries shall be entitled to an injunction restraining the Executive from such act or threatened act, in addition to monetary damages and any other available remedies. The Executive hereby expressly consents and agrees that, for any breach or threatened breach of any provision of this Section 8, a restraining order and/or an injunction may be issued against the Executive in addition to any other rights the Company or any of its subsidiaries may have with respect to such violation or breach. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. The provisions of this Section 8 shall apply to the Executive whether or not there has been a Change in Control.
9. Successors.
(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives or successors in interest.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. For this
purpose, any company that becomes directly owned by stockholders of the Company
pursuant to a merger or consolidation in which the Company becomes a wholly
owned subsidiary of such company shall be deemed to be a successor of the
Company. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees (or is required hereunder to assume and
agree) to perform this Agreement by operation of law or otherwise. A subsequent
Change in Control of a successor shall be considered a Change in Control under
Section 1 hereof upon termination of Executive's employment with the successor
within a Protection Period.
10. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Peter A. Appel
2 Lounsbery Road
Bedford Corners, NY 10549
If to the Company:
Arch Capital Group Ltd.
20 Horseneck Lane
Greenwich, CT 06830
Attention: General Counsel
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company or any of its subsidiaries may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof.
(f) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof and replaces the letter agreement dated October 25, 1995 between the Company and the Executive but, except as otherwise expressly stated herein, does not supersede or override the provisions of any stock option, employee benefit or other plan, program, policy or practice in which the Executive is a participant or under which the Executive is a beneficiary.
(g) The parties expressly agree that if prior to a Change in Control the Board determines to terminate the Executive's employment, this Agreement shall terminate and the Executive shall not be entitled to any benefits hereunder (other than under Section 4(i) of this Agreement), whether or not a Change in Control is then contemplated.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed as of the date first above written.
ARCH CAPITAL GROUP LTD.
By: /s/ Robert Clements
--------------------------------------------
Name: Robert Clements
Title: Chairman of the Board of Directors
|
EXECUTIVE:
/s/ Peter A. Appel ------------------------------------------------ Peter A. Appel |
RETENTION AND
CHANGE IN CONTROL AGREEMENT
Agreement, made as of the 5th day of May 2000, by and between Arch Capital Group Ltd., a Delaware corporation (the "Company"), and Robert Clements (the "Executive").
WHEREAS, the board of directors of the Company (the "Board") wishes to assure that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the service of the Company; and
WHEREAS, the Executive is willing to continue to serve the Company or one of its subsidiaries taking into account the provisions of this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and the respective covenants and agreements of the parties herein contained, the parties agree as follows:
1. Position & Responsibilities: The Board retains the Executive to serve as Chairman of the Board, and in such capacity the Executive shall report to the Board, and the Executive shall accept said retention. The term of the Executive's retention shall terminate upon notice by either the Company to the Executive or by the Executive to the Company.
2. Compensation: Compensation for the Executive's services shall be at an annual base salary rate equal to 50% of the then annual base salary of the President and Chief Executive Officer of the Company. The Executive may also receive an annual cash bonus to be determined by the Board. The annual salary for each year shall be payable in shares of restricted common stock of the Company based on the fair market value of the shares of common stock of the Company on January 1 of that year, except in the case of the salary for 2000, which shall be based on the fair market value of the shares of common stock of the Company on May 5, 2000. The shares of restricted stock granted as salary for any year shall fully vest on January 1 of the following year. If the Executive's service as chairman is terminated for any reason, he shall receive an amount equal to a prorated portion of his salary for that year.
3. Additional Terms: The Executive is eligible to participate in the Company's 1995 and 1999 Long Term Incentive and Share Award Plans under which annual awards of options and/or other stock-based awards may be granted by the Board or its duly authorized committee.
4. Definitions.
(i) "Change in Control" means any of the following occurring after the date hereof:
(A) any person (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a Permitted Person or an Initial Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of Voting Securities representing 35% or more of the total voting power of all the then outstanding Voting Securities; or
(B) any Initial Investor is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power of all the then outstanding Voting Securities; or
(C) the individuals who, as of the date hereof, constitute the Board together with those who become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or
(D) the consummation of a merger, consolidation, recapitalization,
liquidation, sale or disposition by the Company of all or substantially all
of the Company's assets, or reorganization of the Company, other than any
such transaction which would (x) result in at least 60% of the total voting
power represented by the voting securities of the surviving entity or, in
the case of an asset sale, the successor entity, outstanding immediately
after such transaction being beneficially owned, directly or indirectly, by
the stockholders of the Company immediately preceding the transaction and
(y) not otherwise be deemed a Change in Control under clause (A), (B), (C)
or (E) of this subsection (i); or
(E) the Board adopts a resolution to the effect that, for purposes hereof, a Change in Control has occurred.
(ii) "Change in Control Date" means any date during the term of this Agreement on which a Change in Control occurs.
(iii) "Initial Investors" means (A) The Trident Partnership, L.P.; (B) Marsh & McLennan Risk Capital Holdings, Ltd.; or (C) any majority-owned subsidiary or parent (or equivalent in the case of a non-corporate entity) of the foregoing.
(iv) "Permitted Persons" means (A) the Company; (B) any Related Party; or
(C) any group (as defined in Rule 13d-3 under the Exchange Act) comprised of any
or all of the foregoing.
(v) "Protection Period" means the period beginning on the Change in Control Date and ending on the second anniversary of the Change in Control Date.
(vi) "Related Party" means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities.
(vii) "Voting Security" means any security of the Company which carries the right to vote generally in the election of directors.
5. Acceleration of Vesting Upon Change in Control. All stock options and restricted stock issued under the Company's 1995 and 1999 Long Term Incentive and Share Award Plans (or any successor plan) shall become immediately vested in full and, in the case of stock options, immediately exercisable in full, upon a Change in Control in accordance with the applicable restricted stock agreements and stock option agreements.
6. Termination Following Change in Control. The Executive shall be entitled to the benefits provided in Section 7 hereof upon any termination of his service as Chairman of the Board within a Protection Period, except a termination of such service (a) because of his death, (b) because of a "Disability," (c) by the Company or any of its subsidiaries for "Cause," or (d) by the Executive other than due to "Constructive Termination." No benefits shall be paid under Section 7 of this Agreement if the Executive's service terminates outside of a Protection Period, whether or not a Change in Control is then contemplated.
(i) Disability. The Executive's services shall be deemed to have terminated because of a "Disability" if, for a period of twelve consecutive months, the Executive is incapable of substantially fulfilling his responsibilities with the Company because of physical or mental incapacity resulting from injury, sickness or disease. Any question as to the existence, extent or potentiality of the Executive's Disability upon which the Executive and the Company cannot agree shall be determined by a qualified, independent physician selected by the Company and approved by the Executive (which approval shall not be unreasonably withheld). The determination of any such physician shall be final and conclusive for all purposes of this Agreement. The Executive or his legal representative or any adult member of his immediate family shall have the right to present to such physician such information and arguments as to the Executive's Disability as he, she or they deem appropriate, including the opinion of the Executive's personal physician.
(ii) Cause. Termination of the Executive's service by the Company or any of its subsidiaries for "Cause" shall mean termination by reason of the Executive's willful engagement in conduct which involves dishonesty or moral turpitude in connection with his service and which is demonstrably and materially injurious to the financial condition or reputation of the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a written notice of termination from the compensation committee of the Board after reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before such committee.
(iii) Without Cause. The Company or any of its subsidiaries may terminate the service of the Executive without Cause during a Protection Period only by giving the Executive written notice of termination to that effect. In that event, the Executive's service shall
terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 7 hereof shall be provided to the Executive.
(iv) Constructive Termination. Termination of service by the Executive due to "Constructive Termination" shall mean termination by the Executive subsequent to any of the following:
(A) the assignment of duties and responsibilities inconsistent in any material and adverse respect with the Executive's position or a significant diminution in his duties or responsibilities; provided, however, that Constructive Termination shall not be deemed to occur upon a change in duties or responsibilities that is solely and directly a result of the Company no longer being a publicly traded entity, and does not involve any other event set forth in this definition;
(B) a reduction in the Executive's base salary or bonus opportunity;
(C) the requirement that the Executive work at a location outside of Fairfield County, Connecticut, or Westchester County, New York;
(D) the failure to provide the Executive with benefits and incentive compensation opportunities at least as favorable, in the aggregate, as the benefits and incentive compensation opportunities available to the Executive immediately prior to a Change in Control; or
(E) if the Company has failed to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 12(c) hereof.
The Executive shall exercise his right to terminate his services due to Constructive Termination by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Constructive Termination. In that event, the Executive's services shall terminate on the last day of the month in which such notice is given unless an earlier date is specified in writing by the Executive. A termination of services by the Executive shall be due to Constructive Termination if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the Executive may have other reasons for terminating service, including employment by another company which the Executive desires to accept.
7. Benefits Upon Termination Within Protection Period. If, within a Protection Period, the Executive's services with the Company and its subsidiaries shall be terminated (a) by the Company or any of its subsidiaries other than for Cause and other than because of a Disability or death, or (b) by the Executive due to Constructive Termination, the Executive shall be entitled to the benefits provided for below:
(i) The Company shall pay to the Executive, through the date of the Executive's termination of services, salary at the rate then in effect;
(ii) The Company shall pay to the Executive an amount equal to the product of (A) the amount of the Executive's annual bonus for the year preceding the year that includes the Change in Control Date (or the year that includes the termination date, if higher), multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year through the date of termination of the Executive's services, and the denominator of which is 365; and such payment shall be made in a lump sum within 10 business days after the date of such termination of services; and
(iii) The Company shall pay to the Executive an amount equal to 2.99 times the sum of (A) the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher), and (B) the Executive's annual bonus for the year preceding the year that includes the Change in Control Date (or the year that includes the termination date, if higher); and such payment shall be made in a lump sum within 10 business days after the date of such termination of services.
8. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, policies or programs provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any of its subsidiaries; provided, however, that amounts payable hereunder are in lieu of any severance benefit payable under any other severance plan or agreement of the Company or its subsidiaries in effect on the date hereof. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of the Executive's services shall be payable in accordance with such plan, practice, policy or program.
9. Full Settlement; Legal Expenses. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its subsidiaries may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and amounts payable hereunder will not be reduced by compensation the Executive receives from other employment. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment hereunder), plus in each case interest at the applicable federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), unless the Company prevails on all causes of action in the dispute or contest. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and eq-
uitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in the Executive's sole discretion.
10. Limitation on Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the acceleration of exercisability of any stock option) by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) would be subject to the excise tax imposed by Section 4999 of the Code as an "excess parachute payment" (within the meaning of Section 280G of the Code), the payment set forth in Section 7(iii) hereof shall be reduced to the smallest extent possible such that no amount payable hereunder constitutes an "excess parachute payment" (within the meaning of Section 280G of the Code).
11. Confidential Information; Nonsolicitation of Employees and Customers. The Executive shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Executive during the Executive's services with the Company or any of its subsidiaries (except for information, knowledge or data which shall be or subsequently become known or generally available to the public other than by acts of the Executive or his representatives in violation of this Agreement). After the date of termination of the Executive's services with the Company or any of its subsidiaries, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by the Company. The Executive shall return to the Company at the time of the termination of the Executive's services with the Company or any of its subsidiaries all tangible property of the Company or any its subsidiaries in the Executive's possession, including, but not limited to, confidential information relating to the Company or any of its subsidiaries. The Executive shall not, during the term of his retention by the Company or any of its subsidiaries and for one year thereafter, directly or indirectly, on behalf of the Executive or any other person or entity, (i) induce, or seek to induce, any employee of the Company or any of its subsidiaries to terminate services with the Company or any of its subsidiaries or (ii) solicit business from any person, firm or company which is (during the period the Executive is employed by the Company or any of its subsidiaries), or at the time of the termination of the Executive was, a customer of the Company or any of its subsidiaries, or induce, or seek to induce, any such customer of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries. In the event of a breach or threatened breach by the Executive of any provision of this Section 11, the Executive acknowledges that the Company and its subsidiaries shall be entitled to an injunction restraining the Executive from such act or threatened act, in addition to monetary damages and any other available remedies. The Executive hereby expressly consents and agrees that, for any breach or threatened breach of any provision of this Section 11, a restraining order and/or an injunction may be issued against the Executive in addition to any other rights the Company or any of its subsidiaries may have with respect to such violation or breach. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. The provisions of this Section 11 shall apply to the Executive whether or not there has been a Change in Control.
12. Successors.
(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives or successors in interest.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. For this
purpose, any company that becomes directly owned by stockholders of the Company
pursuant to a merger or consolidation in which the Company becomes a wholly
owned subsidiary of such company shall be deemed to be a successor of the
Company. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees (or is required hereunder to assume and
agree) to perform this Agreement by operation of law or otherwise. A subsequent
Change in Control of a successor shall be considered a Change in Control under
Section 4 hereof upon termination of Executive's employment with the successor
within a Protection Period.
13. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Robert Clements
104 Wallachs Point Drive
Stamford, CT 06902
If to the Company:
Arch Capital Group Ltd.
20 Horseneck Lane
Greenwich, CT 06830
Attention: General Counsel
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company or any of its subsidiaries may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof.
(f) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof but, except as otherwise expressly stated herein, does not supersede or override the provisions of any stock option, employee benefit or other plan, program, policy or practice in which the Executive is a participant or under which the Executive is a beneficiary.
(g) The parties expressly agree that if prior to a Change in Control the Board determines to terminate the Executive's services, this Agreement shall terminate and the Executive shall not be entitled to any benefits hereunder (other than under Section 7(i) of this Agreement), whether or not a Change in Control is then contemplated.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed as of the date first above written.
ARCH CAPITAL GROUP LTD.
By: /s/ Peter A. Appel
----------------------------------------------
Name: Peter A. Appel
Title: President and Chief Executive Officer
|
EXECUTIVE:
/s/ Robert Clements -------------------------------------------------- Robert Clements |
EMPLOYMENT AND
CHANGE IN CONTROL AGREEMENT
Agreement, made as of the 5th day of May 2000, by and between Arch Capital Group Ltd., a Delaware corporation (the "Company"), and Louis T. Petrillo (the "Executive").
WHEREAS, the Executive is a key employee of the Company or one of its subsidiaries; and
WHEREAS, the Board of Directors of the Company (the "Board") considers the maintenance of a sound management to be essential to protecting and enhancing the best interests of the Company and its stockholders and recognizes that the possibility of a change in control raises uncertainty and questions among key employees and may result in the departure or distraction of such key employees to the detriment of the Company and its stockholders; and
WHEREAS, the Board wishes to assure that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company; and
WHEREAS, the Executive is willing to continue to serve the Company or one of its subsidiaries taking into account the provisions of this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and the respective covenants and agreements of the parties herein contained, the parties agree as follows:
1. Position & Responsibilities: The Company employs the Executive to serve as Senior Vice President, General Counsel and Secretary of the Company, and in such capacity the Executive shall report to the President of the Company, and the Executive shall accept said employment. The term of the Executive's employment shall terminate upon notice by either the Company to the Executive or by you to the Company.
2. Compensation: Compensation for the Executive's services shall be at an annual base salary rate of $180,000 (subject to upward adjustments by the Board) and an annual bonus to be determined by the Board. The target rate for the annual bonus is 40% of the base rate salary. All awards of annual bonuses are subject to approval by the Board.
3. Additional Terms: The Executive is eligible to participate in the Company's 1995 and 1999 Long Term Incentive and Share Award Plans under which annual awards of options and/or other stock-based awards may be granted by the Board or its duly authorized committee. The Executive is also eligible to participate in employee benefit programs of the Company as are in effect from time to time.
4. Definitions.
(i) "Change in Control" means any of the following occurring after the date hereof:
(A) any person (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a Permitted Person or an Initial Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 35% or more of the total voting power of all the then outstanding Voting Securities; or
(B) any Initial Investor is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power of all the then outstanding Voting Securities; or
(C) the individuals who, as of the date hereof, constitute the Board together with those who become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or
(D) the consummation of a merger, consolidation, recapitalization,
liquidation, sale or disposition by the Company of all or substantially all
of the Company's assets, or reorganization of the Company, other than any
such transaction which would (x) result in at least 60% of the total voting
power represented by the voting securities of the surviving entity or, in
the case of an asset sale, the successor entity, outstanding immediately
after such transaction being beneficially owned, directly or indirectly, by
the stockholders of the Company immediately preceding the transaction and
(y) not otherwise be deemed a Change in Control under clause (A), (B), (C)
or (E) of this subsection (i); or
(E) the Board adopts a resolution to the effect that, for purposes hereof, a Change in Control has occurred.
(ii) "Change in Control Date" means any date during the term of this Agreement on which a Change in Control occurs.
(iii) "Initial Investors" means (A) The Trident Partnership, L.P.; (B) Marsh & McLennan Risk Capital Holdings, Ltd.; or (C) any majority-owned subsidiary or parent (or equivalent in the case of a non-corporate entity) of the foregoing.
(iv) "Permitted Persons" means (A) the Company; (B) any Related Party; or
(C) any group (as defined in Rule 13d-3 under the Exchange Act) comprised of any
or all of the foregoing.
(v) "Protection Period" means (i) the period beginning on the date hereof and ending on the first anniversary hereof or (ii) the period beginning on the Change in Control Date and ending on the second anniversary of the Change in Control Date.
(vi) "Related Party" means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities.
(vii) "Voting Security" means any security of the Company which carries the right to vote generally in the election of directors.
5. Acceleration of Vesting Upon Change in Control. All stock options and restricted stock issued under the Company's 1995 and 1999 Long Term Incentive and Share Award Plans (or any successor plan) shall become immediately vested in full and, in the case of stock options, immediately exercisable in full, upon a Change in Control in accordance with the applicable restricted stock agreements and stock option agreements.
6. Termination Following Change in Control. The Executive shall be entitled to the benefits provided in Section 7 hereof upon any termination of his employment with the Company and its subsidiaries within a Protection Period, except a termination of employment (a) because of his death, (b) because of a "Disability," (c) by the Company or any of its subsidiaries for "Cause," or (d) by the Executive other than due to "Constructive Termination." No benefits shall be paid under Section 7 of this Agreement if the Executive's employment terminates outside of a Protection Period.
(i) Disability. The Executive's employment shall be deemed to have terminated because of a "Disability" if the Executive applies for and is determined to be eligible to receive disability benefits under the Company's Long-Term Disability Plan.
(ii) Cause. Termination of the Executive's employment by the Company or any of its subsidiaries for "Cause" shall mean termination by reason of the Executive's willful engagement in conduct which involves dishonesty or moral turpitude in connection with his employment and which is demonstrably and materially injurious to the financial condition or reputation of the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a written notice of termination from the compensation committee of the Board after reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before such committee.
(iii) Without Cause. The Company or any of its subsidiaries may terminate the employment of the Executive without Cause during a Protection Period only by giving the Executive written notice of termination to that effect. In that event, the Executive's employ-
ment shall terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 7 hereof shall be provided to the Executive.
(iv) Constructive Termination. Termination of employment by the Executive due to "Constructive Termination" shall mean termination by the Executive subsequent to any of the following:
(A) the assignment of duties and responsibilities inconsistent in any material and adverse respect with the Executive's position or a significant diminution in his duties or responsibilities; provided, however, that Constructive Termination shall not be deemed to occur upon a change in duties or responsibilities that is solely and directly a result of the Company no longer being a publicly traded entity, and does not involve any other event set forth in this definition;
(B) a reduction in the Executive's base salary or bonus opportunity;
(C) the requirement that the Executive work at a location outside of Fairfield County, Connecticut, or Westchester County, New York;
(D) the failure to provide the Executive with benefits and incentive compensation opportunities at least as favorable, in the aggregate, as the benefits and incentive compensation opportunities available to the Executive immediately prior to a Change in Control; or
(E) if the Company has failed to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 12(c) hereof.
The Executive shall exercise his right to terminate employment due to Constructive Termination by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Constructive Termination. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given unless an earlier date is specified in writing by the Executive. A termination of employment by the Executive shall be due to Constructive Termination if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the Executive may have other reasons for terminating employment, including employment by another employer which the Executive desires to accept.
7. Benefits Upon Termination Within Protection Period. If, within a Protection Period, the Executive's employment by the Company and its subsidiaries shall be terminated (a) by the Company or any of its subsidiaries other than for Cause and other than because of a Disability or death, or (b) by the Executive due to Constructive Termination, the Executive shall be entitled to the benefits provided for below:
(i) The Company shall pay to the Executive, through the date of the Executive's termination of employment, salary at the rate then in effect, together with salary in lieu of vacation accrued to the date on which his employment terminates, in accordance with the standard payroll practices of the Company;
(ii) The Company shall pay to the Executive an amount equal to the product of (A) the amount of the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher), multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year through the date of termination of the Executive's employment, and the denominator of which is 365; and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment;
(iii) The Company shall pay to the Executive an amount equal to the Applicable Multiple times the sum of (A) the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher), and (B) the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher); and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; and
(iv) The Company shall continue to cover the Executive and his dependents under, or provide the Executive and his dependents with insurance coverage no less favorable than, the Company's life, disability, health and dental benefit plans or programs (as in effect on the day immediately preceding the Protection Period or, at the option of the Executive, on the date of termination of employment) for a period equal to the lesser of (x) 24 months following the date of termination or (y) until the Executive is provided by another employer with benefits substantially comparable (with no preexisting condition limitations) to the benefits provided by such plans or programs. To the extent any such benefits cannot be provided under the benefit plans or programs of the Company or any of its subsidiaries, the Executive will be entitled to receive, on a monthly basis following termination, cash payments in an amount equal to the monthly cost of such benefits. The statutory health care continuation coverage period under Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), will commence at the end of such 24-month period.
For purposes hereof, "Applicable Multiple" means (a) in the case of a termination during the Protection Period described in clause (i) of the definition thereof, 1.5, and (b) in the case of a termination during the Protection Period described in clause (ii) of the definition thereof, 2.0. In no event shall the Executive be entitled to receive more than one Applicable Multiple of the amount specified in clause (iii) of this Section 7.
8. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, policies or programs provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any of its subsidiaries; provided, however, that amounts payable
hereunder are in lieu of any severance benefit payable under any other severance plan or agreement of the Company or its subsidiaries in effect on the date hereof. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of the Executive's employment shall be payable in accordance with such plan, practice, policy or program.
9. Full Settlement; Legal Expenses. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its subsidiaries may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and amounts payable hereunder will not be reduced by compensation the Executive receives from other employment. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment hereunder), plus in each case interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, unless the Company prevails on all causes of action in the dispute or contest. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in the Executive's sole discretion.
10. Limitation on Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the acceleration of exercisability of any stock option) by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) would be subject to the excise tax imposed by Section 4999 of the Code as an "excess parachute payment" (within the meaning of Section 280G of the Code), the payment set forth in Section 7(iii) hereof shall be reduced to the smallest extent possible such that no amount payable hereunder constitutes an "excess parachute payment" (within the meaning of Section 280G of the Code).
11. Confidential Information; Nonsolicitation of Employees and Customers. The Executive shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its subsidiaries (except for information, knowledge or data which shall be or subsequently become known or generally available to the public other than by acts of the Executive or his representatives in violation of this Agreement). After the date of termination of the Executive's employment with the Company or any of its subsidiaries, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by the Company. The Executive shall return to the Company at the time of the termination of the Executive's employment with
the Company or any of its subsidiaries all tangible property of the Company or any its subsidiaries in the Executive's possession, including, but not limited to, confidential information relating to the Company or any of its subsidiaries. The Executive shall not, during the term of his employment by the Company or any of its subsidiaries and for one year thereafter, directly or indirectly, on behalf of the Executive or any other person or entity, (i) induce, or seek to induce, any employee of the Company or any of its subsidiaries to terminate employment with the Company or any of its subsidiaries or (ii) solicit business from any person, firm or company which is (during the period the Executive is employed by the Company or any of its subsidiaries), or at the time of the termination of the Executive was, a customer of the Company or any of its subsidiaries, or induce, or seek to induce, any such customer of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries. In the event of a breach or threatened breach by the Executive of any provision of this Section 11, the Executive acknowledges that the Company and its subsidiaries shall be entitled to an injunction restraining the Executive from such act or threatened act, in addition to monetary damages and any other available remedies. The Executive hereby expressly consents and agrees that, for any breach or threatened breach of any provision of this Section 11, a restraining order and/or an injunction may be issued against the Executive in addition to any other rights the Company or any of its subsidiaries may have with respect to such violation or breach. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. The provisions of this Section 11 shall apply to the Executive whether or not there has been a Change in Control.
12. Successors.
(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives or successors in interest.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. For this
purpose, any company that becomes directly owned by stockholders of the Company
pursuant to a merger or consolidation in which the Company becomes a wholly
owned subsidiary of such company shall be deemed to be a successor of the
Company. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees (or is required hereunder to assume and
agree) to perform this Agreement by operation of law or otherwise. A subsequent
Change in Control of a successor shall be considered a Change in Control under
Section 4 hereof upon termination of Executive's employment with the successor
within a Protection Period.
13. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Louis T. Petrillo
124 West 60 Street, Apt. 43F
New York, New York 10023
If to the Company:
Arch Capital Group Ltd.
20 Horseneck Lane
Greenwich, CT 06830
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company or any of its subsidiaries may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof.
(f) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof and replaces the letter agreements dated January 2, 1996 and September 24, 1999 between the Company and the Executive but, except as otherwise expressly stated herein, does not supersede or override the provisions of any stock option, employee benefit or other plan, program, policy or practice in which the Executive is a participant or under which the Executive is a beneficiary (it being expressly agreed that the Risk Capital Holdings Inc. Control in Control Severance Plan has been terminated and the Executive is not entitled to any benefits or rights thereunder).
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed as of the date first above written.
ARCH CAPITAL GROUP LTD.
By: /s/ Peter A. Appel --------------------------------------------- Name: Peter A. Appel Title: Chief Executive Officer |
EXECUTIVE:
/s/ Louis T. Petrillo ------------------------------------------------ Louis T. Petrillo |
ARCH CAPITAL GROUP LTD.
20 Horseneck Lane
Greenwich, Connecticut 06830
June 9, 2000
Ms. Debra M. O'Connor
Debra O'Connor
14 Revere Road
Riverside, CT 06880
Dear Debra:
This letter confirms your and our agreement on the following terms:
1. Position & Responsibilities: Arch Capital Group Ltd. ("ACGL") shall employ you to serve as a Senior Vice President, Controller and Treasurer, and that in such capacity you shall report to the President and Chief Executive Officer of ACGL. The term of your employment shall terminate upon notice by either ACGL to you or by you to ACGL.
2. Compensation: Compensation for your services shall be at an annual base salary rate of $169,800 (subject to upward adjustments by the Board of Directors (the "Board") of ACGL), and an annual performance bonus opportunity to be determined by the Board. The target rate for the annual bonus for 2000 and thereafter shall be 40% of the base salary rate.
3. Additional Terms: You will be eligible to participate in employee benefit programs of ACGL as are in effect from time to time, including medical, dental, life insurance, short and long-term disability, 401(k), defined contribution retirement, stock incentive plans and stock purchase plans, subject to the respective terms and conditions of such plans.
You also will be entitled to certain vacation pay and paid holidays, as outlined in and subject to ACGL's Employee Handbook.
Notwithstanding anything to the contrary in paragraph 2 above, if your employment continues to (or ACGL terminates your employment other than for cause before) the later of (1) March 1, 2001 or (2) the filing of ACGL's Annual Report on Form 10-K for 2000, you shall receive your target annual bonus for 2000 and, if applicable, 2001 (in each case, pro
rated based on the number of days you are employed during the year) plus $50,000. Any amount payable under this paragraph shall be made within 10 business days after the determination thereof. "Cause" shall have the meaning set forth in Section 3(ii) of the Change in Control Agreement referred to in the next paragraph.
Following the sale of ACGL's reinsurance operations to Folksamerica
Reinsurance Company, you acknowledge receipt from ACGL of $505,897.30 under the
Change in Control Agreement, dated as of February 25, 1999 (the "Change in
Control Agreement"), between you and ACGL. Upon the execution of this letter,
and in consideration of such payment and the above, you acknowledge and agree
that all of ACGL's obligations under the Change in Control Agreement are
terminated in their entirety, and hereby release ACGL from such obligations,
except for those specified in Section 4(iv) and, solely in respect of such
Section 4(iv), Section 6 of the Change in Control Agreement. It is understood
that your obligations under Section 8 of the Change in Control Agreement shall
remain in full force and effect.
4. This letter supersedes all prior discussions and agreements between ACGL and you with respect to the subject matter hereof and constitutes the entire agreement among the parties relating thereto, shall be governed by the laws of the State of Connecticut without regard to choice of law rules, and may be executed in one or more counterparts.
Please confirm your agreement to the above by signing and returning the enclosed duplicate of this letter.
Sincerely,
ARCH CAPITAL GROUP LTD.
By: /s/ Peter A. Appel
---------------------------------------
Peter A. Appel
President and Chief Executive Officer
|
AGREED AND ACCEPTED
as of the date hereof:
/s/ Debra O'Connor ---------------------------------- Debra O'Connor |