SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
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/X/ Preliminary Proxy Statement
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Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to ss.240.14a-12
ARCH CAPITAL GROUP LTD.
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(Name of Registrant as Specified in Its Charter)
Not Applicable
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[Arch Capital Group Ltd. Letterhead]
May [ ], 2002
Dear Shareholder:
I am pleased to invite you to the annual general meeting of the
shareholders of Arch Capital Group Ltd. to be held on June 27, 2002, at 9:00
a.m. (local time), at The Fairmont Hamilton Princess, 76 Pitts Bay Road,
Pembroke HM 08 Bermuda. The enclosed proxy statement provides you with detailed
information regarding the business to be considered at the meeting.
Your vote is very important. Whether or not you plan to attend the meeting,
please sign the enclosed proxy card and mail it promptly in the enclosed
envelope.
Sincerely,
[signature logo]
Robert Clements
Chairman of the Board
ARCH CAPITAL GROUP LTD.
NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
Notice is hereby given that the annual general meeting of the shareholders
of Arch Capital Group Ltd. will be held on June 27, 2002, at 9:00 a.m. (local
time), at The Fairmont Hamilton Princess, 76 Pitts Bay Road, Pembroke HM 08
Bermuda, for the following purposes:
o PROPOSAL 1: To re-elect four directors to serve for a term of three
years or until their respective successors are elected and qualified.
o PROPOSAL 2: To adopt an amendment to our Bye-Law 20 as set forth in
Appendix B of, and as more fully described in, this proxy statement,
which would provide that a special meeting of the Board of Directors
may be called by three directors or a majority of the total number of
directors (whichever is fewer), in addition to the chairman of the
Board and the president of the Company.
o PROPOSAL 3: To approve the share-based awards made to the chairman and
the vice chairman of our Board of Directors in connection with the
capital infusion in November 2001, all as more fully described in this
proxy statement.
o PROPOSAL 4: To approve our 2002 Long Term Incentive and Share Award
Plan.
o PROPOSAL 5: To elect certain individuals as Designated Company
Directors of certain of our non-U.S. subsidiaries.
o PROPOSAL 6: To ratify the selection of PricewaterhouseCoopers as our
independent auditors for the year ending December 31, 2002.
o PROPOSAL 7: To conduct other business if properly raised.
Only shareholders of record as of the close of business on May 21, 2002 may
vote at the meeting.
Persons holding shares representing an aggregate of 60% of the votes
entitled to be cast at the meeting have agreed, in connection with the capital
infusion, to vote in favor of Proposal 3. These people are: HFCP IV(Bermuda),
L.P., H&F International Partners IV-A (Bermuda), L.P., H&F International
Partners IV-B (Bermuda), L.P., H&F Executive Fund IV (Bermuda), L.P., Warburg
Pincus Netherlands International Partners I, CV., Warburg Pincus Netherlands
International Partners II, CV., Warburg Pincus (Bermuda) International Partners,
L.P., Warburg Pincus (Bermuda), Private Equity VIII, L.P., Trident II, L.P.,
Marsh & McLennan Capital Professionals Fund, L.P., Marsh & McLennan Employees'
Securities Company, L.P., Farallon Capital Partners, L.P., Farallon Capital
Institutional Partners II, L.P., Farallon Capital Institutional Partners III,
L.P., RR Capital Partners, L.P., Insurance Private Equity Investors, L.L.C.,
Orbital Holdings, Ltd., Sound View Partners, L.P., Otter Capital LLC, Peter A.
Appel, Paul B. Ingrey, Dwight R. Evans and Marc Grandisson. Therefore, it is
likely that Proposal 3 will receive the requisite vote for approval.
Our audited financial statements for the year ended December 31, 2001, as
approved by our Board of Directors, will be presented at this annual general
meeting.
Your vote is very important. Please complete, sign, date and return your
proxy card in the enclosed envelope promptly.
This proxy statement and accompanying form of proxy are dated May [ ], 2002
and are first being mailed to shareholders on or about May [ ], 2002.
[signature logo]
Dawna Ferguson
Assistant Secretary
Hamilton, Bermuda
May [ ], 2002
TABLE OF CONTENTS
Page
THE ANNUAL GENERAL MEETING....................................................1
Time and Place...........................................................1
Record Date; Voting at the Annual General Meeting........................1
Limitation on Voting.....................................................1
Quorum; Votes Required for Approval......................................2
Voting and Revocation of Proxies.........................................2
Solicitation of Proxies..................................................3
Other Matters............................................................3
Principal Executive Offices..............................................3
THE CAPITAL INFUSION..........................................................3
Shareholders Agreement...................................................8
PROPOSAL 1-- ELECTION OF DIRECTORS...........................................15
Nominees................................................................15
Required Vote...........................................................16
Continuing Directors and Executive Officers.............................16
Board of Directors Composition..........................................18
Section 16(a) Beneficial Ownership Reporting Compliance.................19
Board of Directors' Meetings and Committees.............................19
Report of the Audit Committee of the Board of Directors.................21
Compensation Committee Interlocks and Insider Participation.............22
Summary Compensation Table..............................................22
Option Grants in Last Fiscal Year.......................................23
Aggregated 2001 Fiscal Year-End Option Values...........................24
Employment Arrangements.................................................25
Change in Control Arrangements..........................................32
Director Compensation...................................................32
Report of the Compensation Committee of the Board of Directors..........33
Performance Graph.......................................................36
Security Ownership of Certain Beneficial Owners and Management..........36
Certain Relationships and Related Transactions..........................43
PROPOSAL 2-- AMENDMENT TO BYE-LAW 20.........................................45
Current Bye-Law 20......................................................45
Purpose and Effect of the Amendment.....................................45
Required Vote...........................................................45
PROPOSAL 3-- APPROVAL OF SHARE-BASED AWARDS MADE TO THE CHAIRMAN
AND THE VICE CHAIRMAN OF OUR BOARD OF DIRECTORS
IN CONNECTION WITH THE CAPITAL INFUSION...................................45
Purpose of Shareholder Approval.........................................45
Description of Awards...................................................46
Required Vote...........................................................46
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Page
PROPOSAL 4-- APPROVAL OF 2002 LONG TERM INCENTIVE AND SHARE AWARD PLAN.......47
Introduction............................................................47
Description of 2002 Plan................................................47
Required Vote...........................................................53
PROPOSAL 5-- ELECTION OF SUBSIDIARY DIRECTORS................................53
Required Vote...........................................................55
PROPOSAL 6-- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS...............55
Audit Fees..............................................................56
Required Vote...........................................................56
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THE ANNUAL GENERAL MEETING
We are furnishing this proxy statement to holders of our common shares in
connection with the solicitation of proxies by our Board of Directors at the
annual general meeting, and at any adjournments and postponements of the
meeting.
Time and Place
The annual general meeting will be held at 9:00 a.m. (local time) on June
27, 2002 at The Fairmont Hamilton Princess, 76 Pitts Bay Road, Pembroke HM 08
Bermuda.
Record Date; Voting at the Annual General Meeting
Our Board of Directors has fixed the close of business on May 21, 2002 as
the record date for determination of the shareholders entitled to notice of and
to vote at the annual general meeting and any and all postponements or
adjournments of the meeting. On the record date, there were 23,667,093 common
shares outstanding and entitled to vote, subject to the limitations in our
bye-laws described below. At that date, there were an estimated 57 holders of
record and 1,663 beneficial holders of the common shares. On the record date,
there were 35,687,735 preference shares outstanding and entitled to vote,
subject to the limitations in the certificate of designations and our bye-laws
described below. There were 23 holders of record and beneficial holders of the
preference shares. Each holder of record of shares on the record date is
entitled to cast one vote per share, subject to the limitations described below.
A shareholder may vote in person or by a properly executed proxy on each
proposal put forth at the annual general meeting.
Limitation on Voting Under Our Bye-Laws
Under our bye-laws, if the votes conferred by shares of Arch Capital Group
Ltd., directly or indirectly or constructively owned (within the meaning of
section 958 of the Internal Revenue Code of 1986, as amended (the "Code")) by
any U.S. person (as defined in section 7701(a)(30) of the Code) would otherwise
represent more than 9.9% of the voting power of all shares entitled to vote
generally at an election of directors, the votes conferred by such shares or
such U.S. person will be reduced by whatever amount is necessary so that after
any such reduction the votes conferred by the shares of such person will
constitute 9.9% of the total voting power of all shares entitled to vote
generally at an election of directors.
There may be circumstances in which the votes conferred on a U.S. person
are reduced to less than 9.9% as a result of the operation of bye-law 45 because
of shares, including shares held by the Warburg Pincus LLC private equity funds
("Warburg Pincus funds") and the Hellman & Friedman LLC private equity funds
("Hellman & Friedman funds"), that may be attributed to that person under the
Code.
Notwithstanding the provisions of our bye-laws described above, after
having applied such provisions as best as they consider reasonably practicable,
the Board may make such final adjustments to the aggregate number of votes
conferred by the shares of any U.S. person that they consider fair and
reasonable in all the circumstances to ensure that such votes represent 9.9% of
the aggregate voting power of the votes conferred by all shares of Arch Capital
Group Ltd. entitled to vote generally at an election of directors.
In order to implement bye-law 45, we will assume that all shareholders
(other than the Warburg Pincus funds and the Hellman & Friedman funds) are U.S.
persons unless we receive assurance satisfactory to us that they are not U.S.
persons.
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Quorum; Votes Required for Approval
The presence of two or more persons representing, in person or by properly
executed proxy, not less than a majority of the voting power of our shares
outstanding and entitled to vote at the annual general meeting is necessary to
constitute a quorum. If a quorum is not present, the annual general meeting may
be adjourned from time to time until a quorum is obtained.
The affirmative vote of a majority of the voting power of the shares
represented at the annual general meeting will be required for approval of each
of the proposals, except that Proposal 1 will be determined by a plurality of
the votes cast. Persons holding shares representing an aggregate of 60% of the
votes entitled to be cast at the meeting have agreed, in connection with the
capital infusion, to vote in favor of Proposal 3. These people are: HFCP
IV(Bermuda), L.P., H&F International Partners IV-A (Bermuda), L.P., H&F
International Partners IV-B (Bermuda), L.P., H&F Executive Fund IV (Bermuda),
L.P., Warburg Pincus Netherlands International Partners I, CV., Warburg Pincus
Netherlands International Partners II, CV., Warburg Pincus (Bermuda)
International Partners, L.P., Warburg Pincus (Bermuda), Private Equity VIII,
L.P., Trident II, L.P., Marsh & McLennan Capital Professionals Fund, L.P., Marsh
& McLennan Employees' Securities Company, L.P., Farallon Capital Partners, L.P.,
Farallon Capital Institutional Partners II, L.P., Farallon Capital Institutional
Partners III, L.P., RR Capital Partners, L.P., Insurance Private Equity
Investors, L.L.C., Orbital Holdings, Ltd., Sound View Partners, L.P., Otter
Capital LLC, Peter A. Appel, Paul B. Ingrey, Dwight R. Evans and Marc
Grandisson. Therefore, it is likely that Proposal 3 will receive the requisite
vote for approval.
Several of our officers and directors will be present at the annual general
meeting and available to respond to questions. Our independent auditors are
expected to be present at the annual general meeting, will have an opportunity
to make a statement if they desire to do so and are expected to be available to
respond to appropriate questions.
An automated system administered by our transfer agent will tabulate votes
cast by proxy at the annual general meeting, and our transfer agent will
tabulate votes cast in person.
Abstentions and broker non-votes (i.e., shares held by a broker which are
represented at the meeting but with respect to which such broker does not have
discretionary authority to vote on a particular proposal) will be counted for
purposes of determining whether or not a quorum exists. Abstentions and broker
non-votes will generally not be counted for any other purpose.
Voting and Revocation of Proxies
All shareholders should complete, sign and return the enclosed proxy card.
All shares represented at the annual general meeting by properly executed
proxies received before or at the annual general meeting, unless those proxies
have been revoked, will be voted at the annual general meeting, including any
postponement or adjournment of the annual general meeting. If no instructions
are indicated on a properly executed proxy, the proxies will be deemed to be FOR
approval of each of the proposals described in this proxy statement.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by either:
o filing, including by facsimile, with the Secretary of the Company,
before the vote at the annual general meeting is taken, a written
notice of revocation bearing a later date than the date of the proxy
or a later-dated proxy relating to the same shares, or
o attending the annual general meeting and voting in person.
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In order to vote in person at the annual general meeting, shareholders must
attend the annual general meeting and cast their vote in accordance with the
voting procedures established for the annual general meeting. Attendance at the
annual general meeting will not in and of itself constitute a revocation of a
proxy. Any written notice of revocation or subsequent proxy must be sent so as
to be delivered at or before the taking of the vote at the annual general
meeting to Arch Capital Group Ltd., Wessex House, 3rd Floor, 45 Reid Street,
Hamilton HM 12 Bermuda, Facsimile: (441) 278-9255, Attention: Secretary.
Solicitation of Proxies
Proxies are being solicited by and on behalf of the Board of Directors. In
addition to the use of the mails, proxies may be solicited by personal
interview, telephone, telegram, facsimile and advertisement in periodicals and
postings, in each case by our directors, officers and employees.
We have retained MacKenzie Partners, Inc. to aid in the solicitation of
proxies and to verify records related to the solicitation. We will pay MacKenzie
Partners, Inc. fees of not more than $4,500 plus expense reimbursement for its
services. Brokerage houses, nominees, fiduciaries and other custodians will be
requested to forward solicitation materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in so doing. We may request by
telephone, facsimile, mail, electronic mail or other means of communication the
return of the proxy cards.
Other Matters
Our audited financial statements for the year ended December 31, 2001, as
approved by our Board of Directors, will be presented at this annual general
meeting.
As of the date of this proxy statement, our Board of Directors knows of no
matters that will be presented for consideration at the annual general meeting,
other than as described in this proxy statement. If any other matters shall
properly come before the annual general meeting or any adjournments or
postponements of the annual general meeting and shall be voted on, the enclosed
proxies will be deemed to confer discretionary authority on the individuals
named as proxies therein to vote the shares represented by such proxies as to
any of those matters. The persons named as proxies intend to vote or not vote in
accordance with the recommendation of our Board of Directors and management.
Principal Executive Offices
Our registered office is located at Clarendon House, 2 Church Street,
Hamilton HM 11 Bermuda (telephone number: (441) 295-1422), and our principal
executive offices are located at Wessex House, 3rd Floor, 45 Reid Street,
Hamilton HM 12 Bermuda (telephone number: (441) 278-9250).
THE CAPITAL INFUSION
On November 20, 2001, investors led by the Warburg Pincus funds and the
Hellman & Friedman funds purchased from us, for $750.0 million in cash,
35,072,795 series A convertible preference shares and 3,710,959 class A
warrants. At the same time, we also entered into a management subscription
agreement whereby certain members of our management (or entities affiliated with
them) agreed to purchase, for an aggregate of $13.2 million, 614,940 preference
shares and 65,066 class A warrants. The purpose of this capital infusion was to
provide a significant infusion of capital to launch our new underwriting
initiative to meet current and future demand in the global insurance and
reinsurance markets. On March 7, 2002, certain matters relating to the capital
infusion required to be approved by our shareholders were approved.
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Prior to the closing on November 20, 2001, the Warburg Pincus funds and the
Hellman & Friedman funds assigned portions of their commitments to third
parties. At closing, we issued the following numbers of preference shares and
class A warrants for the aggregate dollar amounts specified:
Aggregate
Preference Shares Class A Warrants Dollar Amount
----------------- ---------------- --------------
Warburg Pincus funds.......................... 18,939,311 2,003,918 $405,000,000
Hellman & Friedman funds...................... 10,521,839 1,113,289 225,000,000
Trident II, L.P. and co-investment funds(1)... 1,636,729 173,178 35,000,000
Farallon Capital investors.................... 1,169,093 123,698 25,000,000
Insurance Private Equity Investors, L.L.C.
(affiliated with GE Asset Management)...... 2,338,186 247,397 50,000,000
Orbital Holdings, Ltd. (affiliated with GE
Capital)................................... 467,637 49,479 10,000,000
Management investors.......................... 614,940 65,066 13,150,000
----------------- ---------------- --------------
Total.................................... 35,687,735 3,776,025 $763,150,000
================= ================ ==============
(1) In a related transaction, upon closing of the capital infusion, 905,397
previously existing class A warrants held by Marsh & McLennan Risk Capital
Holdings, Ltd. were canceled in exchange for 140,380 newly issued common
shares, and 1,770,601 class B warrants held by Marsh & McLennan Risk
Capital Holdings were canceled in exchange for a cash payment by us of
$7.50 per class B warrant (approximately $13.3 million in the aggregate).
See note (2) under "Security Ownership of Certain Beneficial Owners and
Management" for a description of the terms of the class B warrants. Marsh &
McLennan Risk Capital Holdings' pre-existing right to have an observer
attend meetings of our board of directors was terminated, and The Trident
Partnership, L.P's pre-existing right to designate a director for election
to our board of directors was terminated. We were released from our
remaining $11.0 million capital commitment to Trident II, L.P. for new
investments.
Subscription Agreement
Set forth below is a summary of the material terms of the subscription
agreement entered into with the investors (other than the management investors)
in connection with the capital infusion. All material agreements relating to the
capital infusion were filed as exhibits to our Annual Report on Form 10K for the
year ended December 31, 2001.
Purchase Price. The purchase price for the preference shares and class A
warrants paid at closing was based on the book value of our common shares as of
June 30, 2001. The number of preference shares issued to each investor was equal
to the total dollar amount of that investor's investment divided by the
estimated per share price as determined under the subscription agreement
(approximately $21.384), which was based on an estimate of the book value of our
assets at June 30, 2001. The number of warrants issued to each investor was
equal to the Adjusted Warrant Amount times the number of common shares issuable
upon exercise of all outstanding class A warrants (2,531,079) divided by the
number of common shares outstanding as of June 30, 2001 (12,863,079). The
`Adjusted Warrant Amount" was equal to one-half of the quotient of the total
dollar amount of that investor's investment divided by the difference of the
estimated per share price minus $1.50. There would have been an adjustment to
the purchase price if any of the transactions contemplated by the subscription
agreement or the options granted to management concurrently therewith had
triggered an anti-dilution adjustment under our existing class A warrants or
class B warrants, but all holders of those warrants waived any rights to any
anti-dilution adjustment with respect to the issuance under the subscription
agreements or the grants to management contemplated thereby. For the ten trading
days ended October 23, 2001, the last trading day prior
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to the announcement of the signing of the subscription agreements for the
capital infusion and our new underwriting initiative, the average closing price
of our common shares on the Nasdaq National Market was $16.86 per share.
Purchase Price Adjustments. The subscription agreement provides that the
estimated per share price may be adjusted as described below. All determinations
to be made by the investors in connection with the purchase price adjustments
will be made by the Warburg Pincus funds and the Hellman & Friedman funds. These
adjustments are the sole remedy for any breach of representations and warranties
of the company under the subscription agreement.
Audit Adjustment. We agreed to engage PricewaterhouseCoopers as independent
accountants to audit our consolidated balance sheet as of June 30, 2001, an
independent actuary (to be selected by us and the Warburg Pincus funds and the
Hellman & Friedman funds) to review the reserves for claims and claims expenses
on our balance sheet, and an independent pricing service selected by us and the
Warburg Pincus funds and the Hellman & Friedman funds to determine the estimated
fair value of our investments in marketable securities as of the third business
day prior to closing. The independent pricing service, the public accountants
and the independent actuary are referred to below as the independent advisors.
If the audited per share price is greater than the estimated per share
price at closing, each investor will either pay the difference to us in cash or
return the equivalent amount in preference shares. If the estimated per share
price at closing is greater than the audited per share price, we will issue an
amount of preference shares to the investors representing the difference. We
currently estimate that we will issue an additional 875,765 preference shares
during the second quarter of 2002 in connection with the audit of the book value
of our assets at June 30, 2001 discussed above.
Adjustment for Trading Price or Change of Control. In the event that on or
prior to September 19, 2005, (1) the closing price of our common shares is at
least $30.00 per share for at least 20 out of 30 consecutive trading days or (2)
a change of control occurs (either case, a "Triggering Event"), we agreed to
issue and deliver to each investor additional preference shares such that the
audited per share price is adjusted downward by $1.50 per preference share. For
this purpose "change of control" means the acquisition by any person or group
(within the meaning of section 13(d)(3) of the Exchange Act) of beneficial
ownership of 40% or more of either the voting power of our then outstanding
common shares or the combined voting power of our then outstanding voting
securities entitled to vote generally in the election of directors; provided
that if such acquisition results in whole or in part from a transfer of common
shares or other voting securities by Marsh & McLennan Companies, Inc. or any of
its subsidiaries, such acquisition will not constitute a change of control
unless such transfer is effected pursuant to an offer by such acquiror to
purchase all of our outstanding common shares.
Final Adjustments. We agreed to make another adjustment at the second
anniversary of closing (or such earlier date as the Warburg Pincus funds and the
Hellman & Friedman funds request and the Transaction Committee (described below
under "--Transaction Committee") agrees) based on an adjustment basket described
below.
The adjustment basket will be equal to:
o the difference between value realized upon sale and the book value at
closing (as adjusted based on a pre-determined growth rate) of the
agreed upon non-core businesses as described below; plus
o the difference between the GAAP net book value of all of our insurance
balances with respect to any policy or contract written or having an
effective date prior to November 20, 2001 (ie., premiums receivable,
unpaid claims and claims expenses recoverable, prepaid reinsurance
premiums,
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reinsurance balances receivable, deferred policy acquisition costs,
claims and claims expenses, unearned premiums, reinsurance balances
payable, and any other insurance balance attributable to our "core
insurance operations," as defined below) at the time of determination
of the final adjustment and those balances at the closing; minus
o reductions in book value arising from (without duplication of any
expenses included in the calculation of value realized upon sale of
the non-core businesses or any expense otherwise reflected in the
determination of the per share price) costs and expenses relating to
the investments and transactions provided for under the subscription
agreement, actual losses arising out of breach of representations
under the subscription agreement and certain other costs and expenses.
Our "core insurance operations" include:
o Arch Re (Bermuda);
o Arch Capital Group (U.S.) Inc.;
o Arch Re (US);
o Cross River (including funding for Rock River);
o ART Services (including First American Financial Corporation);
o capital held at ACGL, gross of capital to be invested in unfunded
private equity commitments; and
o $2.5 million in segregated assets and liabilities in "cell" accounts
formed by Alternative Insurance Company Limited and Alternative Re,
Ltd.
Non-core businesses are currently defined as American Independent Insurance
Holding Company, Hales & Company Inc., all nonpublic securities held by ACGL and
Arch Re (US), and all commitments to Distribution Partners, as and when funded.
The adjustment basket will be calculated by our independent auditors as
soon as practicable after the second anniversary of the closing or such earlier
date as the Warburg Pincus funds and the Hellman & Friedman funds request and
ACGL agrees. ACGL and the Warburg Pincus funds and the Hellman & Friedman funds
have the right to make a full review of the adjustment basket determination. We
agreed to cause our subsidiaries to maintain the components necessary to
calculate the adjustment basket under separate ledgers.
If the adjustment basket is less than zero, we agreed to issue additional
preference shares to the investors based on the decrease in the value of the
components of the adjustment basket. If the adjustment basket is greater than
zero, the subscription agreement allows us to use cash in an amount based on the
increase in value of the components of the adjustment basket to repurchase
common shares (other than any common shares issued upon conversion of the
preference shares or exercise of the class A warrants).
In addition, if the adjustment basket is less than zero and in the event
that a Triggering Event occurs, we agreed to issue additional preference shares
to the investors as a further adjustment.
Finally, on the fourth anniversary of the closing, there will be a
calculation of a further adjustment basket based on (1) liabilities in excess of
the Folksamerica escrow assets owed to Folksamerica under the Asset Purchase
Agreement, dated as of January 10, 2000, between ACGL, Arch Re (US),
Folksamerica Holding Com-
-6-
pany, Inc. and Folksamerica Reinsurance Company and (2) specified tax and ERISA
matters under the subscription agreement. In February 2002, we reached a
definitive settlement agreement with Folksamerica pursuant to which we satisfied
all of our obligations under the escrow agreement for an amount equal to
approximately $17.0 million of the escrowed assets, plus accrued interest on
such amount.
Restrictions on Transfer of Securities. The investors agreed not to
transfer, in one transaction, or a series of transactions, to a single person or
group, common shares or securities convertible into common shares representing
in excess of either 51% of the votes then entitled to be cast in the election of
directors, or 51% of the then outstanding common shares (taking into account
common shares issuable upon conversion of the preference shares) without giving
all shareholders the right to participate in such transaction on the same or
substantially the same terms as the investors.
The shareholders agreement between us and the holders of preference shares
also contains restrictions on the transfer of preference shares, which
terminates upon consummation of any registered public offering of our common
shares generating net proceeds to us in excess of $25.0 million.
Dispositions; PendingAcquisition. We agreed to sell, prior to the time of
the audit adjustment described above, the portion of our investment portfolio
specified in a schedule to the agreement, consisting of specified publicly
traded noninvestment grade debt securities and certain equity securities.
Information. The investors agreed to give us information regarding their
ownership of our company, ownership information concerning each of them and
other related information in connection with preparing disclosure in filings
under the United States Securities Act of 1933 (the "Securities Act") or the
Exchange Act on issues arising under the Internal Revenue Code, including the
rules applicable to "controlled foreign corporations."
Indemnification; Insurance. We and the investors agreed to maintain all
rights to indemnification in favor of our directors, officers, employees and
agents or any of our subsidiaries with respect to their activities prior to the
closing (except that with respect to the Transaction Committee this covenant
will cover activities after the closing) (as provided for in our organizational
documents in effect on October 24, 2001) in full force and effect for a period
of not less than six years from the closing. The investors agreed not to cause
us to take any action inconsistent with this agreement.
We and the investors also agreed that we will indemnify each of our present
and former directors or officers against liabilities arising before the closing
(including the transactions contemplated by the subscription agreement) and,
with respect to the Transaction Committee, also after the closing. We and the
investors agreed that we will maintain our current level of directors' and
officers' liability insurance coverage for a period of at least six years after
the closing.
Certain Tax Matters. With respect to each taxable year during which any of
the Warburg Pincus funds or the Hellman & Friedman funds owns our shares, we
agreed to use reasonable best efforts to cause us and each of our subsidiaries:
o not to constitute a "passive foreign investment company" within the
meaning of Section 1297 of the Code;
o not to satisfy the gross income requirement set forth in Section
542(a) of the Code;
o not to satisfy the gross income requirement set forth in Section
552(a) of the Code; and
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o not to have any related person insurance income within the meaning of
Section 953(c)(2) of the Code.
In the event that we or any of our subsidiaries constitute a personal holding
company, a foreign personal holding company, a controlled foreign corporation, a
foreign investment company or a passive foreign investment company for U.S.
federal income tax purposes with respect to any taxable year, we agreed to
provide each of the Warburg Pincus funds or the Hellman & Friedman funds with
any information it requests to satisfy its legitimate tax, accounting or other
reporting requirements.
Right to Exchange into Subsidiary Shares. We agreed to form a new, wholly
owned subsidiary to hold Arch Re (Bermuda) as well as all of the "core insurance
operations" other than Arch Re (US).
In the event that the adjustments described above under "-Purchase Price
Adjustments-Final Adjustment" are less than zero and their absolute value
exceeds $250.0 million, the Warburg Pincus funds, the Hellman & Friedman funds
and the other holders of our preference shares will have the option to exchange
their preference shares and class A warrants, in whole or in part (but not for
less than $150.0 million liquidation preference of preference shares), for
preference shares and warrants of our newly formed subsidiary bearing identical
rights and privileges, including the right to convert into, or be exercised for,
common shares of our newly formed subsidiary.
Investors' Costs and Expenses. We reimbursed the Warburg Pincus funds and
the Hellman & Friedman funds for their costs and expenses, and the GE investors
for up to $50,000 of their costs and expenses, in connection with the investment
and the related transactions.
Transaction Committee. Until the date of the final determination of the
adjustment basket at the fourth anniversary of closing, approval of the
following actions by the Transaction Committee (as defined below) is deemed to
be approval by the entire board of directors:
o an amendment, modification or waiver of rights by ACGL under the
subscription agreement, the certificate of designation for the
preference shares, the class A warrants or the shareholders agreement;
o the enforcement of obligations of the investors under the above
agreements; or
o approval of actions relating to the disposition of non-core assets.
"Transaction Committee" means a committee of the board of directors
consisting of persons who either (a) were members of our board of directors on
October 22, 2001 and/or (b) were designated as members of the Transaction
Committee by a person who was a member of our board of directors on October 22,
2001. The Transaction Committee currently consists of Robert Clements, Peter A.
Appel, James J. Meenaghan and Robert F Works.
Shareholders Agreement
On November 20, 2001 upon consummation of the capital infusion, we entered
into a shareholders agreement with the investors. Set forth below is a summary
of the material terms of the shareholders agreement.
Board Representation. Following the closing, the Warburg Pincus funds
exercised their right to designate one director to our board and the Hellman &
Friedman funds exercised their right to designate one director
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to our board. Continued representation on our board of directors by these
shareholders is based on the respective retained percentages of their equity
securities in according to the following schedules:
Warburg Pincus funds Hellman & Friedman funds
--------------------------------------------------------------- --------------------------------------------------
Percentage Minimum Number of Percentage Minimum Number of
of Original Directors To of Original Directors To Be
Investment Held Be Nominated Investment Held Nominated
----------------------------- ----------------------------- ---------------------- ----------------------
=> 75% 6 =>60% 3
60% => x <75% 5 35% <= x <60% 2
45% <= x <60% 4 20% <= x <35% 1
30% <= x <45% 3
20% <= x <30% 2
10% <= x <20% 1
Committees of the Board. As long as at least one representative of the
Warburg Pincus funds is on the board, each board committee will include at least
one representative of the Warburg Pincus funds, and as long as at least one
representative of the Hellman & Friedman funds is on the board, each board
committee will include at least one representative of the Hellman & Friedman
funds. The foregoing is subject to any Nasdaq Stock Market or SEC restrictions
applicable to the audit committee.
Special Board Meetings. We agreed to use best efforts (1) to cause a
special meeting of the board to be called upon the request of at least three
directors and (2) to cause to be submitted, at the 2002 annual general meeting
of our shareholders, a proposal to amend our bye-laws so that a special meeting
of the board may be called by three directors or a majority of the total number
of directors (whichever is fewer), in addition to the chairman of the board and
the president of ACGL.
Voting. The signatories to the shareholders agreement agreed to vote all of
their voting shares in favor of the proposal to approve a grant of restricted
shares to Mr. Clements and an option grant to Mr. Pasquesi to be submitted for
approval at our next annual general meeting.
Chairman. The Warburg Pincus funds and the Hellman & Friedman funds agreed
to take all actions necessary to cause Robert Clements to be duly elected as
chairman of our board of directors for so long as he is willing and able to
serve.
Certain Transactions. The Warburg Pincus funds and the Hellman & Friedman
funds agreed that, for a period of two years after the closing, they will not,
directly or indirectly, without the prior approval of a majority of directors
who are not affiliated with either the Warburg Pincus funds or the Hellman &
Friedman funds:
o acquire securities or assets from us or any of our subsidiaries,
except as specifically contemplated by the subscription agreements,
the preference shares and the class A warrants;
o engage in any "Rule 13e-3 transaction" (as such term is defined in
Rule 13e-3(a)(3) under the Exchange Act) involving us; or
o engage in any other transaction that would result in the compulsory
acquisition of our common shares.
We and the Warburg Pincus funds and the Hellman & Friedman funds have
agreed to endeavor to include at all times two directors on our board who are
not affiliated with either the Warburg Pincus funds or the
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Hellman & Friedman funds. The prior approval of a majority of such independent
directors is required prior to any change to or elimination of these provisions.
Registration Rights. The shareholders agreement also grants the investors
registration rights described below.
Demand Registration Rights. The Warburg Pincus funds and the Hellman &
Friedman funds have the right to request registration of their shares under the
Securities Act, at any time and on not more than five separate occasions, so
long as the request covers common shares with a market value on the date of the
request of at least $25.0 million.
Piggy-Back Registration Rights. If at any time we propose to register any
common shares under the Securities Act on our own behalf or on behalf of any of
our shareholders (including pursuant to a demand registration as discussed
above), we are required to give reasonably prompt written notice to each
investor of our intention to do so and, upon request of any investor, but
subject to limitations in some cases, include the investor's shares for
registration.
Registration Expenses. We agreed to bear all registration, filing and
related fees (excluding underwriters' discounts or commissions) in connection
with any registration and listing of any common shares pursuant the registration
provisions described above.
Indemnification; Contribution. We agreed to indemnify each investor and its
officers, directors, employees and controlling persons, and each underwriter,
its partners, officers, directors, employees and controlling persons, in any
offering or sale of common shares, against certain liabilities in connection
with these registered offerings. Each investor agreed to indemnify us and our
officers, directors, employees and controlling persons, against certain
liabilities in connection with these registered offerings. In the event that the
indemnification provisions are unavailable, we and the investors agreed to
contribute such amounts as are appropriate to reflect the relative fault of the
parties.
Tag-AlonglDrag-Along Rights. In the event that a Warburg Pincus fund, a
Hellman & Friedman fund or a GE investor proposes to transfer preference shares,
class A warrants or common shares issued upon conversion or exercise of such
securities to a third party, and the net proceeds of such sale are reasonably
expected to exceed $50.0 million, other investors may have rights under the
shareholders agreement to "tag along" in such sale. The following tag-along
rights are provided for in the shareholders agreement:
o The GE investors have tag-along rights only if (1) a Warburg Pincus
fund is the seller or (2) a Hellman & Friedman fund is the seller and
the Warburg Pincus funds also exercise their rights to tag along in
the sale.
o Farallon has tag-along rights only if (1) a Hellman & Friedman fund is
the seller or (2) a Warburg Pincus fund is the seller and the Hellman
& Friedman funds also exercise their rights to tag along in the sale.
o Trident II has tag-along rights in the event that a Warburg Pincus
fund or a Hellman & Friedman fund is the seller.
Any sale effected in the public markets (including by means of a "block
trade" effected through any registered broker-dealer) or any distribution to
partners of any partnership in which a Warburg Pincus fund or a Hellman &
Friedman fund, or any of their respective affiliates, is the general partner
will not give rise to any tag-along rights.
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In the event that a Warburg Pincus fund and/or a Hellman & Friedman fund
proposes to transfer preference shares, class A warrants or common shares issued
upon conversion or exercise of such securities representing either 51% of the
votes then entitled to be cast in the election of directors, or 51% of our then
outstanding common shares (taking into account common shares issuable upon
conversion of preference shares) in a transaction, or in a series of related
transactions, to a single person or group, the Warburg Pincus funds and the
Hellman & Friedman funds have the right to require that Trident II participate
in such transaction on a ratable basis.
Restrictions on Dividends and Share Repurchases. We agreed not to declare
any dividend or make any other distribution on our common shares, and not to
repurchase any common shares, until we have repurchased from the Warburg Pincus
funds, the Hellman & Friedman funds, and the other holders of our preference
shares, pro rata, on the basis of the amount of each of these shareholders'
retained investment in the company at the time of such repurchase, preference
shares having an aggregate value of $250.0 million, at a per share price
acceptable to these shareholders (subject to the exception described under
"-Subscription Agreement-Purchase Price Adjustments-Final Adjustments").
Termination. The shareholders agreement terminates upon the earlier to
occur of:
o November 20, 2011; or
o mutual written agreement of us and the Warburg Pincus funds and the
Hellman & Friedman funds.
Management Subscription
In connection with the capital infusion, we entered into a management
subscription agreement, pursuant to which certain members of management (or
entities affiliated with them) agreed to purchase preference shares and class A
warrants on the same economic terms as the Warburg Pincus funds and the Hellman
& Friedman funds.
On November 20, 2001, each of the persons or entities listed purchased
preference shares and class A warrants for the amount opposite his or its names
set forth in the table below:
Name Amount
---- ------
SoundView Partners LP (an entity affiliated with Robert Clements)........ $2,000,000
Otter Capital LLC (an entity affiliated with John M. Pasquesi).... 7,500,000
Peter A. Appel.................................................... 1,000,000
Paul B. Ingrey.................................................... 2,000,000
Dwight R. Evans................................................... 400,000
Marc Grandisson................................................... 250,000
-----------
Total....................................................... $13,150,000
===========
Certificate of Designations
Set forth below is a summary of the material terms of the certificate of
designations for our series A convertible preference shares.
Dividends. The holders of preference shares are entitled to receive
dividends along with holders of our common shares, on an as-converted basis.
Dividends are payable on each outstanding preference share on an as-
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converted basis. No dividends may be paid or declared on or with respect to our
common shares prior to the declaration and payment of a dividend on or with
respect to the preference shares. Dividends on the preference shares are
noncumulative.
Ranking. The preference shares rank, with respect to dividends and upon
liquidation, winding up or dissolution:
o on a parity with those shares which, by the terms of our bye-laws or
by such rights, preferences or limitations as fixed by the board of
directors, are specifically entitled to share ratably with the
preference shares, and
o senior to each other class or series of our shares.
The shareholders agreement between us and the holders of our preference shares
includes a limitation on dividends on, and repurchases of, our common shares.
Conversion
General. Each preference share is convertible at any time and from time to
time at the option of the holder, initially, into one fully paid and
nonassessable common share, subject to adjustment for certain events as
described below under "-Adjustments." In connection with the conversion of any
preference shares, no fractional shares will be issued. Instead, we will pay a
cash amount for such fractional interest based on the current market price of
the common shares.
Mandatory Conversion. The preference shares will automatically convert into
common shares 90 days following the consummation of the purchase price
adjustment to be performed at the fourth anniversary of closing (described above
under "The Capital Infusion--Purchase Price Adjustments").
Adjustments. The number of common shares into which each preference share
is convertible is subject to adjustment from time to time in the event of:
o share splits or combinations of our common shares;
o the declaration and payment of dividends on the common shares in
additional common shares;
o the distribution of indebtedness, securities or assets to holders of
our common shares;
o transactions in which our common shares are exchanged (either for
different securities of our company or securities of a different
company); or
o offerings of our common shares, or securities convertible into or
exercisable for common shares, at a price below the market value for
our common shares at the time of issuance, subject to exceptions.
Liquidation Preference. In the event of our voluntary or involuntary
liquidation, dissolution or winding-up, or a reduction or decrease in our share
capital resulting in a distribution of assets to the holders of any class or
series of our shares, each holder of preference shares is entitled to payment
out of our assets available for distribution of an amount equal to the
liquidation preference of $21.00 per preference share held by such holder, plus
all accumulated and unpaid dividends, before any distribution is made on any
common shares. If, in the event of our voluntary or involuntary liquidation,
dissolution or winding up or a reduction or decrease in our
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share capital, the amounts payable with respect to preference shares and parity
shares are not paid in full, the holders of preference shares and the parity
shares share equally and ratably in any distribution of share assets in
proportion to the full liquidation preference and all accumulated and unpaid
dividends to which each such holder is entitled.
Voting Rights. Each holder of preference shares is entitled to the number
of votes equal to the number of whole common shares into which all of such
holder's preference shares are convertible, with respect to all matters
submitted for shareholder approval. Except as required by applicable Bermuda law
or by the express terms of the preference shares, holders will vote together
with holders of the common shares as a single class.
The affirmative vote of the holders of at least a majority of the
outstanding preference shares, voting with holders of shares of all other series
of preference shares affected in the same way as a single class, is required to
amend, repeal or change any provisions of the certificate of designations in any
manner which would adversely affect, alter or change the powers, preferences or
special rights of the preference shares and any such securities affected in the
same way. However, the creation, authorization or issuance of any other class or
series of shares or the increase or decrease in the amount of authorized shares
of any such class or series or of the preference shares, or any increase,
decrease or change in the par value of any class or series of shares (including
the preference shares) do not require the consent of the holders of the
preference shares and are not deemed to affect adversely, alter or change the
powers, preferences and special rights of the preference shares. With respect to
any matter on which the holders are entitled to vote as a separate class, each
preference share is entitled to one vote.
Class A Warrants
Set forth below is a summary of the material terms of the class A warrants.
General. Each class A warrant entities the holder to purchase one common
share for $20.00. The exercise price is subject to adjustments as discussed in
greater detail below under "--Anti-Dilution and Other Adjustments." The class A
warrants will expire on September 19, 2002.
Exercise of the Class A Warrants. Holders of the class A warrants may
exercise their purchase rights under the class A warrants by making payment of
the purchase price in cash or through a cashless exercise. Holders may effect a
cashless exercise by (a) delivering common shares equivalent in value to the
exercise price or (b) accepting a reduction in the number of common shares
deliverable upon exercise of the class A warrant by an amount which would be
equivalent in value to the exercise price. See "--Shareholders
Agreement--Restrictions on Conversion/Exercise" for a description of the
limitation on exercise of the class A warrants under the shareholders agreement.
Anti-Dilution and Other Adjustments. The exercise price will be adjusted
from time to time in order to prevent dilution. In addition, certain other
adjustments will be made to the terms of the class A warrants upon extraordinary
corporate events. Such anti-dilution and other adjustments include:
o offerings of our common shares at a price below the market value of
our common shares at the time of issuance will result in an adjustment
to the exercise price under the class A warrants;
o share splits or combinations of our common shares will result in an
adjustment to the exercise price under the class A warrants;
o a reorganization, reclassification, consolidation, merger or sale of
assets may result in the substitution of other securities, cash or
property upon exercise of the class A warrants; and
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o issuance of assets or debt securities or rights or warrants to
purchase assets or securities by the company to its shareholders may
result in an adjustment to the exercise price under the class A
warrants.
In addition, our board of directors may make such additional adjustments to
the exercise price or other terms of the class A warrants in order to protect
the rights of the holders of the class A warrants.
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PROPOSAL 1 -- ELECTION OF DIRECTORS
The Board of Directors of Arch Capital Group Ltd. ("ACGL") is currently
comprised of nine members, divided into three classes, serving staggered
three-year terms. The Board of Directors intends to present for action at the
annual general meeting the election of Paul B. Ingrey, Kewsong Lee, David R.
Tunnell and Robert F. Works, whose present terms expire this year, to serve as
Class I Directors for a term of three years or until their successors are duly
elected and qualified. Such nominees were recommended for approval by the Board
of Directors by the nominating committee of the Board.
Unless authority to vote for these nominees is withheld, the enclosed proxy
will be voted for these nominees, except that the persons designated as proxies
reserve discretion to cast their votes for other persons in the unanticipated
event that any of these nominees is unable or declines to serve.
Nominees
Set forth below is information regarding the nominees for election:
Name Age Position
Paul B. Ingrey........................... 62 Chairman and Chief Executive Officer of Arch
Reinsurance Ltd. and Class I Director of ACGL
Kewsong Lee.............................. 36 Class I Director of ACGL
David R. Tunnell......................... 31 Class I Director of ACGL
Robert F. Works.......................... 54 Class I Director of ACGL
Paul B. Ingrey has served as a director of ACGL and as chief executive
officer of Arch Reinsurance Ltd. ("Arch Re (Bermuda)") since October 2001, and
was elected chairman of Arch Re (Bermuda) in March 2002. He was retired from
1996 to 2001. Mr. Ingrey was the founder of F&G Re Inc., a reinsurance
subsidiary of USF&G Corporation, and served as its chairman and chief executive
officer from 1983 to 1996. Prior to that, he was senior vice president of
Prudential Reinsurance, an underwriter of property and casualty reinsurance. He
has also served as a director of USF&G Corporation (until its sale to The St.
Paul Companies, Inc. in 1998) and E.W. Blanch Holdings, Inc., the holding
company for E.W. Blanch Co., which provides risk management and distribution
services through several subsidiaries (until its sale to Benfield Greig, the
London-based international reinsurance broker, in April 2001) and is currently
on the Board of Fairfax Financial Holdings Limited, an insurance and reinsurance
company with a focus on property and casualty insurance. He holds a B.A. degree
from Colgate University and an M.B.A. degree from the School of Risk Management,
Insurance and Actuarial Science of St. John's University (formerly the College
of Insurance).
Kewsong Lee has served as a director of ACGL since November 2001. Mr. Lee
has served as a member and managing director of Warburg Pincus LLC and a general
partner of Warburg Pincus & Co. since January 1997. He has been employed at
Warburg Pincus since 1992. Prior to joining Warburg Pincus, Mr. Lee was a
consultant at McKinsey & Company, Inc., a management consulting company, from
1990 to 1992. His present service as a director includes membership on the
Boards of Knoll, Inc., Eagle Family Foods, Inc. and several privately held
companies. He holds a B.A. degree from Harvard College and an M.B.A. degree from
Harvard Business School. Mr. Lee was appointed, and is being nominated for
election, to our Board of Directors pursuant to a shareholders agreement entered
into in connection with the capital infusion. See "The Capital
Infusion--Shareholders Agreement--Board Representation."
David R. Tunnell has served as a director of Hellman & Friedman since 2001.
Prior to joining Hellman & Friedman in 1994, Mr. Tunnell was employed by Lazard
Freres & Co. in New York from 1992 to 1994. Mr.
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Tunnell currently serves as a director of Blackbaud, Inc. and Eastern Sea Laem
Chabang Terminal Co., Ltd. He holds an A.B. degree from Harvard College and an
M.B.A. degree from Harvard Business School.
Robert F. Works has been a Director of ACGL since June 1999. Mr. Works was
a Managing Director of Jones Lang LaSalle (previously LaSalle Partners) until he
retired on December 31, 2001. He joined Jones Lang LaSalle in 1981, where he has
served in various capacities, including manager of both the Property Management
and Investment Management teams of the Eastern Region of the United States. Mr.
Works was also manager for the Times Square Development Advisory and Chelsea
Piers Lease Advisory on behalf of New York State and the President of GCT
Ventures and the Revitalization of Grand Central Terminal for the Metropolitan
Transportation Authority until he retired on December 31, 2001. He holds a B.A.
degree from the College of William and Mary.
Required Vote
A plurality of the votes cast at the annual general meeting will be
required to elect the above nominees as Class I Directors of ACGL.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF ALL
NOMINEES TO THE BOARD OF DIRECTORS.
Continuing Directors and Executive Officers
The following individuals are our continuing directors and executive
officers:
Term
Name Age Position Expires*
---- --- -------- -------
Robert Clements..................... 69 Chairman and Class III Director of ACGL 2004
Peter A. Appel...................... 40 President, Chief Executive Officer and Class II
Director of ACGL 2003
Constantine Iordanou................ 52 President and Chief Executive Officer of Arch
Capital Group (U.S.) Inc. and Class II Director of 2003
ACGL
John D. Vollaro..................... 57 Executive Vice President and Chief Financial Officer
of ACGL --
Wolfe "Bill" H. Bragin.............. 57 Class III Director of ACGL 2004
John L. Bunce, Jr................... 43 Class III Director of ACGL 2004
Robert Glanville.................... 35 Class III Director of ACGL 2004
James J. Meenaghan.................. 63 Class II Director of ACGL 2003
John M. Pasquesi.................... 42 Executive Vice Chairman and Class II Director of ACGL
2003
Dwight R. Evans 49 President of Arch Re (Bermuda) --
Debra M. O'Connor................... 42 Senior Vice President, Controller and Treasurer
Louis T. Petrillo................... 36 Senior Vice President, General Counsel and Secretary --
----------------------
* Indicates expiration of term as a director of the Company.
Robert Clements was elected chairman and director of ACGL at the time of
our formation in March 1995, and continues to serve in that capacity. From March
1996 to February 2001, he was an advisor to MMC Capital, with whom he served as
chairman and chief executive officer from January 1994 to March 1996. Prior
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thereto, he served as president of Marsh & McLennan Companies, Inc. since 1992,
having been vice chairman during 1991. He was chairman of J&H Marsh & McLennan,
Incorporated (formerly Marsh & McLennan, Incorporated), a subsidiary of Marsh &
McLennan Companies, Inc., from 1988 until March 1992. He joined Marsh &
McLennan, Ltd., a Canadian subsidiary of Marsh & McLennan Companies, Inc., in
1959. Mr. Clements was a director of XL Capital from 1986 to 2002 and was
formerly a director of Annuity and Life Re (Holdings), Ltd. and Stockton
Reinsurance Limited and ACE Ltd. He is chairman emeritus of the Board of
overseers of the School of Risk Management, Insurance and Actuarial Science of
St. John's University and a member of Rand Corp. President's Council. He holds a
B.A. degree from Dartmouth College.
Peter A. Appel has been president and chief executive officer of ACGL since
May 5, 2000 and a director of ACGL since November 1999. He was executive vice
president and chief operating officer of ACGL from November 1999 to May 5, 2000,
and general counsel and secretary of ACGL from November 1995 to May 5, 2000. Mr.
Appel previously served as a managing director of ACGL from November 1995 to
November 1999. From September 1987 to November 1995, Mr. Appel practiced law
with the New York firm of Willkie Farr & Gallagher, where he was a partner from
January 1995. Mr. Appel is currently a member of the Board of overseers and a
member of the executive committee of the School of Risk Management, Insurance
and Actuarial Science of St. John's University. He holds an A.B. degree from
Colgate University and a law degree from Harvard University.
Constantine Iordanou has served as a director of ACGL and as chief
executive officer of Arch Capital Group (U.S.) Inc. since January 1, 2002. From
March 1992 through December 2001, Mr. Iordanou served in various capacities for
Zurich Financial Services and its affiliates, including as senior executive vice
president of group operations and business development of Zurich Financial
Services, president of Zurich-American Specialties Division, chief operating
officer and chief executive officer of Zurich-American and chief executive
officer of Zurich North America. Prior to joining Zurich, he served as president
of the commercial casualty division of the Berkshire Hathaway Group and served
as senior vice president with the American Home Insurance Company, a member of
the American International Group. He holds an aerospace engineering degree from
New York University.
John D. Vollaro has been executive vice president and chief financial
officer of ACGL since January 2002. Prior to joining us, Mr. Vollaro acted as an
independent consultant in the insurance industry since March 2000. Prior to
March 2000, Mr. Vollaro was president and chief operating officer of W.R.
Berkley Corporation from January 1996 and a director from September 1995 until
March 2000. Mr. Vollaro was chief executive officer of Signet Star Holdings,
Inc., a joint venture between W.R. Berkley Corporation and General Re
Corporation, from July 1993 to December 1995. Mr. Vollaro served as executive
vice president of W.R. Berkley Corporation from 1991 until 1993, chief financial
officer and treasurer of W.R. Berkley Corporation from 1983 to 1993 and senior
vice president of W.R. Berkley Corporation from 1983 to 1991. He holds a B.S.
degree from Long Island University.
Wolfe "Bill" H. Bragin has served as Vice President of GE Asset Management
since 1985 and also currently serves as Managing Director. Mr. Bragin has been
employed by various affiliates of General Electric Company since 1974, including
GE Capital (formerly known as GE Credit Corporation), specializing in equipment
leasing and private investments, through 1984, and, thereafter, GE Asset
Management's Private Placement Group, specializing in private equity
investments. Bragin has previously served as a director of both privately-held
and publicly-traded companies. He holds a B.S. degree from the University of
Connecticut and an M.B.A. degree from Babson Institute of Business
Administration.
John L. (Jack) Bunce, Jr. has served as director of ACGL since November
2001. Mr. Bunce has served as a managing director at Hellman & Friedman since
1988. Before joining Hellman & Friedman, Mr. Bunce was vice president of TA
Associates. Previously, he was employed in the Mergers & Acquisitions and
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Corporate Finance Departments of Lehman Brothers Kuhn Loeb. He is currently also
a director of Digitas, Inc., National Information Consortium, Inc., and Western
Wireless Corporation. He has also served as a director of Duhamel Falcon Cable
Mexico, Eller Media Company, Falcon Cable TV, National Radio Partners,
VoiceStream Wireless Corporation, and Young & Rubicam, Inc. Mr. Bunce also was
an advisor to American Capital Corporation and Post Oak Bank. He holds an A.B.
degree from Stanford University and an M.B.A. degree from Harvard Business
School. Mr. Bunce was appointed to our Board of Directors pursuant to our
shareholders agreement. See "The Capital Infusion--Shareholders Agreement--Board
Representation."
Robert Glanville has been a Vice President of Warburg Pincus LLC since
January 2000 and has been employed by Warburg Pincus since January 1999. From
April 1997 through December 1998, Mr. Glanville served as Chief Financial
Officer of the APP Group (Prague, Czech Republic), a Warburg Pincus portfolio
company focused on information technology and systems integration. He was
founder and managing partner of F.A. Services, LLC, a boutique financial
advisory firm that raised capital for businesses in Central and Eastern Europe,
from 1993 to 1997, and was employed by Morgan Stanley & Co from 1988 to 1992. He
is a director of several privately-held financial services companies. He holds a
B.A. degree from Princeton University.
James J. Meenaghan has been a director of the Company since October 2001.
From October 1986 to 1993, Mr. Meenaghan was chairman, president and chief
executive officer of Home Insurance Companies. He also served as President and
Chief Executive Officer of John F. Sullivan Co. from 1983 to 1986. Prior
thereto, Mr. Meenaghan held various positions over 20 years with the Fireman's
Fund Insurance Company, including President and Chief Operating Officer and Vice
Chairman of its parent company, American Express Insurance Services Inc. He
holds a B.S. degree from Fordham University.
John M. Pasquesi has been our executive vice chairman and a director since
November 2001. Mr. Pasquesi has been the managing member of Otter Capital LLC, a
private equity investment firm founded by him in January 2001. Prior to January
2001, Mr. Pasquesi was a managing director of Hellman & Friedman LLC since 1988.
He holds an A.B. degree from Dartmouth College and an M.B.A. degree from
Stanford Graduate School of Business.
Dwight R. Evans has served as president of Arch Re (Bermuda) since October
2001. From 1998 until October 2001, Mr. Evans was executive vice president of
St. Paul Re. From 1983 until 1998, Mr. Evans was employed as executive vice
president for F&G Re Inc. Prior to that, Mr. Evans served as assistant vice
president at Skandia Reinsurance Company and as a reinsurance underwriter at
Prudential Reinsurance Company (now Everest Re Company). He holds a B.A. degree
from Ohio University.
Debra M. O'Connor has been senior vice president, controller and treasurer
of ACGL since June 2000. From 1995 to June 9, 2000, Ms. O'Connor was senior vice
president and controller of Arch Re (US). From 1986 until 1995, Ms. O'Connor
served at NAC Re Corp. in various capacities, including vice president and
controller. Prior to that, Ms. O'Connor was employed by General Re Corp. and the
accounting firm of Coopers & Lybrand. Ms. O'Connor is a certified public
accountant. She holds a B.S. degree from Manhattan College.
Louis T. Petrillo has been senior vice president, general counsel and
secretary of ACGL since May 2000. From 1996 until May 5, 2000, Mr. Petrillo was
vice president and associate general counsel of ACGL's reinsurance subsidiary.
Prior to that time, Mr. Petrillo practiced law at the New York firm of Willkie
Farr & Gallagher. He holds a B.A. degree from Tufts University and a law degree
from Columbia University.
Board of Directors Composition
Pursuant to the shareholders agreement entered into in connection with the
capital infusion in November 2001, we have agreed to restrictions on the
composition of our Board of Directors. Pursuant to this agree-
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ment, the Warburg Pincus funds and the Hellman & Friedman funds are entitled to
nominate a prescribed number of directors based on the respective retained
percentages of their preference shares purchased in November 2001. Currently,
our Board consists of 12 members, including three directors nominated by the
Warburg Pincus funds and two directors nominated by the Hellman & Friedman
funds. As long as the Warburg Pincus funds retain at least 75% of their original
investment and Hellman & Friedman funds retain at least 60% of their original
investment, these shareholders together will be entitled to nominate a majority
of directors to our Board.
Messrs. Bragin, Glanville and Lee are the designees of the Warburg Pincus
funds, and Messrs. Tunnell and Bunce are the designees of the Hellman & Friedman
funds.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
own more than 10% of our common shares, to file with the SEC initial reports of
beneficial ownership and reports of changes in beneficial ownership of our
common shares. Such persons are also required by SEC regulation to furnish us
with copies of all Section 16(a) reports they file. To our knowledge, based
solely on a review of the copies of such reports furnished to us and
representations that no other reports were required, we believe that all persons
subject to the reporting requirements of Section 16(a) filed the required
reports on a timely basis during the year ended December 31, 2001.
Board of Directors' Meetings and Committees
The Board of Directors met six times and took action by unanimous written
consent five times during 2001. The Board of Directors has established standing
audit, compensation, executive, finance and investment, and nominating
committees. Each director attended 75% or more of all meetings of the Board and
any committees on which the director served during fiscal year 2001. As long as
at least one representative of the Warburg Pincus funds is on the Board of
Directors, each board committee will include at least one representative of the
Warburg Pincus funds, and as long as at least one representative of the Hellman
& Friedman funds is on the Board, each board committee will include at least one
representative of the Hellman & Friedman funds. The foregoing is subject to
4350(d)(2) of the rules of the National Association of Securities Dealers Inc.
(the "NASD"), which requires three independent directors on the audit committee.
Audit Committee
The audit committee of the Board of Directors assists the Board in
overseeing management and the independent auditors in fulfilling their
responsibilities in the financial reporting process of ACGL. The audit committee
reviews with management and the independent auditors the proposed overall scope
of ACGL's annual audit, the adequacy and integrity of ACGL's system of internal
controls, and the Company's audited financial statements and related
disclosures. Each year, the audit committee recommends to the Board an
independent auditor to audit the financial statements of ACGL. The audit
committee currently consists of James J. Meenaghan (chairman), Kewsong Lee and
Robert F. Works. The audit committee met five times during 2001.
Immediately following the capital infusion in November 2001, the audit
committee consisted of Messrs. Meenaghan, Works and Michael P. Esposito. In
March 2002, Mr. Esposito resigned from the Board of Directors. Immediately
following Mr. Esposito's resignation, the Board of Directors consisted of nine
persons: three were employees of ACGL or one of its subsidiaries; two were
independent (Messrs. Meenaghan and Works, who were already members of the audit
committee); two had received compensation (in addition to compensation for Board
service) in excess of $60,000 in 2001 (Messrs. Clements and Pasquesi) and
therefore would not qualify as independent directors under the Nasdaq rules; and
two were employees of shareholders who may have been
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viewed as, and after certain shareholder and regulatory approvals would be,
affiliates of ACGL, but otherwise met the requirements of an independent
director (Messrs. Bunce and Lee).
The Board therefore determined to appoint Mr. Lee, who serves on the Board
as a representative of the Warburg Pincus funds under the shareholders agreement
entered into in connection with the capital infusion, to the audit committee.
4350(d)(2)(B) of the rules of the NASD provides that one director who is not
independent as defined in Rule 4200 and is not a current employee or an
immediate family member of such employee, may be appointed to the audit
committee, if the board determines that membership on the committee by the
individual is required by the best interests of the corporation and its
shareholders. The Board viewed the interests of the Warburg Pincus funds with
respect to the purposes and function of the audit committee as generally aligned
with those of the other shareholders of ACGL. The Board noted that purchase
price adjustments under the subscription agreement with the investors are
subject to the approval of the transaction committee of the Board, as described
below. In view of the foregoing, the Board determined that exceptional and
limited circumstances exist to warrant the appointment of Mr. Lee to the audit
committee.
Compensation Committee
The compensation committee of the Board of Directors approves the
compensation of our senior executives, reviews the general compensation policies
and practices followed by us and our subsidiaries and administers our benefit
plans. The compensation committee is required to report to the Board of
Directors at least annually and whenever the Board may require. The compensation
committee currently consists of John L. Bunce, Jr. (chairman), Kewsong Lee,
James J. Meenaghan and Robert F. Works. The compensation committee met three
times during 2001.
Executive Committee
The executive committee of the Board of Directors may generally exercise
all the powers and authority of the Board of Directors, when it is not in
session, in the management of our business and affairs, unless the Board of
Directors otherwise determines. The executive committee reports periodically to
the Board of Directors as to actions it has taken. The executive committee
currently consists of Robert Clements (chairman), John L. Bunce, Jr. and Kewsong
Lee. The executive committee did not meet during 2001.
Finance and Investment Committee
The finance and investment committee of the Board of Directors establishes
and recommends the ACGL's investment policies and reviews ACGL's capital
management practices and overall investment policy performance. The finance and
investment committee currently consists of John M. Pasquesi (chairman), Peter A.
Appel, John L. Bunce, Jr. and Kewsong Lee. The finance and investment committee,
which was established in December 2001, did not meet during 2001.
Nominating Committee
The nominating committee of the Board of Directors is responsible for
recommending to the Board candidates for nomination to the Board. The nominating
committee will consider nominations for directors from shareholders to the
extent the nominations are made in accordance with our bye-laws, as described on
page 43. The nominating committee consists of the non-employee members of our
Board of Directors, including Robert Clements (chairman), John L. Bunce, Jr.,
Kewsong Lee, James J. Meenaghan and Robert F. Works. The nominating committee,
which was established in March 2002, did not meet during 2001. Transaction
Committee
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The transaction committee of the Board of Directors was formed under the
subscription agreement entered into in connection with the capital infusion in
November 2001. Until the date of the final determination of the purchase price
adjustment at the fourth anniversary of closing of the capital infusion (i.e.,
November 20, 2005), approval of the following actions by the transaction
committee is deemed to be approval by the entire Board:
o an amendment, modification or waiver of rights by ACGL under the
agreements relating to the capital infusion, including the
subscription agreement, the certificate of designation for the
preference shares, the class A warrants or the shareholders agreement;
o the enforcement of obligations of the investors under the above
agreements; or
o approval of actions relating to the disposition of non-core assets.
The transaction committee consists of persons who either (1) were members
of our Board of Directors on October 22, 2001 and/or (2) were designated as
members of the transaction committee by a person who was a member of our Board
on October 22, 2001. The transaction committee currently consists of Robert
Clements, Peter A. Appel, James J. Meenaghan and Robert F. Works. The
transaction committee met one time during 2001.
Report of the Audit Committee of the Board of Directors
The primary purpose of the audit committee of our Board of Directors is to
assist the Board in overseeing management and the independent auditors in
fulfilling their responsibilities in the financial reporting process of ACGL.
The audit committee operates under a charter of responsibilities which is
included as Appendix A of this proxy statement.
It is not the responsibility of the audit committee to plan or conduct
audits or to determine that ACGL's financial statements are in all material
respects complete and accurate and in accordance with generally accepted
accounting principles. This is the responsibility of management and the
independent auditors. It is also not the responsibility of the audit committee
to assure compliance with laws and regulations or with any codes or standards of
conduct or related policies adopted by ACGL from time to time which seek to
ensure that the business of ACGL is conducted in an ethical and legal manner.
The audit committee has reviewed and discussed the consolidated financial
statements of ACGL and its subsidiaries set forth in Item 8 of ACGL's Annual
Report on Form 10-K for the year ended December 31, 2001 with management of ACGL
and PricewaterhouseCoopers, independent auditors for ACGL.
The audit committee has discussed with PricewaterhouseCoopers the matters
required to be discussed by Statement on Auditing Standards No. 61,
"Communication with Audit Committees," as amended, which includes, among other
items, matters relating to the conduct of an audit of ACGL's financial
statements.
The audit committee has received the written disclosures and the letter
from PricewaterhouseCoopers required by Independence Standards Board Standard
No. 1 and has discussed with PricewaterhouseCoopers their independence from
ACGL.
Based on the review and discussions with management of ACGL and
PricewaterhouseCoopers referred to above and other matters the audit committee
deemed relevant and appropriate, the audit committee has rec-
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ommended to the Board of Directors that ACGL publish the consolidated financial
statements of ACGL and subsidiaries for the year ended December 31, 2001 in
ACGL's Annual Report on Form 10-K for the year ended December 31, 2001.
AUDIT COMMITTEE
James J. Meenaghan (Chairman)
Kewsong Lee
Robert F. Works
Compensation Committee Interlocks and Insider Participation
The compensation committee of our Board of Directors currently consists of
John L. Bunce, Jr. (chairman), Kewsong Lee, James Meenaghan and Robert Works.
None of the members of the committees are or have been officers or employees of
the Company. In addition, no executive officer of the Company served on any
Board of Directors or compensation committee of any entity (other than ACGL)
with which any member of our Board serves as an executive officer.
Summary Compensation Table
The following table sets forth information regarding compensation paid to
our executive officers for services rendered during fiscal years 2001, 2000 and
1999.
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
----------------------------------- ------------------------ ----------
Restricted
Other Share Securities All Other
Annual Com- Award(s) Underlying LTIP Compensation
Name and Principal Position Year Salary($) Bonus($) pensation($) ($)(1) Options($) Payouts($) ($)(2)
---------------------------- ------- ---------- -------- ------------ ----------- ---------- ---------- ------------
Peter A. Appel............ 2001 375,000 -- -- 750,000 422,407 50,841
President, Chief 2000 375,000 500,000 -- 756,250 100,000 -- 49,711(5)
Executive
Officer and a Director of 1999 375,000 250,000 -- -- -- -- 51,339
ACGL
Paul B. Ingrey............ 2001 143,200 -- -- 7,366,778 422,407 -- --
Chairman and Chief
Executive Officer of
Arch Re (Bermuda) and a
Director of ACGL(3)
Dwight R. Evans........... 2001 95,500 -- -- 872,000 100,000 -- --
President of Arch Re
(Bermuda)(3)
Debra M. O'Connor......... 2001 188,300 175,000 -- -- 20,000 -- 21,170
Senior Vice President, 2000 170,000 118,000 -- -- 10,000 -- 19,800(5)
Controller and
Treasurer(4)
Louis T. Petrillo......... 2001 206,200 400,000 -- 75,000 50,000 -- 21,116
Senior Vice President, 2000 174,000 120,000 -- -- 10,000 -- 19,932(5)
General Counsel and
Secretary(4)
----------
(1) The value of each restricted share award is based upon the closing price of
the common shares as reported on the Nasdaq National Market as of the grant
date of such award. As of December 31, 2001, 422,407 unvested restricted
shares, with a value of $10,876,980, were held by Mr. Ingrey. Subject to
the applicable award agreement, such restricted shares will vest on October
23, 2004. An aggregate of 145,000 re-
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stricted shares vested to the named executive officers from 1996 through
2001. During the vesting period, cash dividends (if any) would be paid on
outstanding shares of restricted stock. Stock dividends issued with respect
to such shares (if any) would be subject to the same restrictions and other
terms and conditions that apply to restricted shares with respect to which
such dividends are issued.
(2) Includes: (1) matching contributions under an employee 401(k) plan in the
amounts of (A) $7,650, $6,310 and $7,200 to Mr. Appel for 2001, 2000 and
1999, respectively; (B) $7,650 and $6,070 to Ms. O'Connor for 2001 and
2000, respectively; and (C) $7,650 and $6,310 to Mr. Petrillo for 2001 and
2000, respectively; (2) pension contributions under a money purchase
pension plan in the amounts of (A) $12,980, $13,190 and $12,370 to Mr.
Appel for 2001, 2000 and 1999, respectively; and (B) $12,980 and $13,190 to
each of Ms. O'Connor and Mr. Petrillo, respectively, for 2001 and 2000; (3)
contributions to Mr. Appel under an executive supplemental non-qualified
savings and retirement plan in the amounts $29,725, $29,725 and $31,175 for
2001, 2000 and 1999, respectively; and (4) term life insurance premiums in
the amounts of (A) $486, $486 and $594 to Mr. Appel for 2001, 2000 and
1999, respectively; (B) $540 to Ms. O'Connor for 2001 and 2000; and (C)
$486 and $432 to Mr. Petrillo for 2001 and 2000, respectively.
(3) Mr. Evans was appointed president of Arch Re (Bermuda), and Mr. Ingrey was
appointed to the Board of Directors of ACGL and as chief executive officer
of Arch Re (Bermuda) on October 23, 2001. See "--Employment Arrangements"
below for a description of their respective employment arrangements.
(4) On June 9, 2000, Ms. O'Connor, formerly senior vice president and
controller of our reinsurance subsidiary, became our senior vice president,
controller and treasurer. On May 5, 2000, Mr. Petrillo, formerly vice
president and associate general counsel of our reinsurance subsidiary,
became our senior vice president, general counsel and secretary.
(5) See "--Change in Control Arrangements" for a description of certain
payments made upon the closing of the sale of our prior reinsurance
operations in May 2000.
The following table provides information regarding grants of stock options
made during fiscal year 2001 to each of the named executive officers.
Option Grants in Last Fiscal Year
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation For
Individual Grants Option Term(3)
------------------------------------------------------- ------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price
Granted Fiscal Expiration
Name (#)(1) Year(2) ($/Sh) Date 5% 10%
-------------------------- ------------ ------------ ----------- ----------- ---------- -------------
Peter A. Appel............ 422,407 22.1% $20.00 10/23/11 $5,312,990 $13,464,159
Paul B. Ingrey............ 422,407 22.1% 20.00 10/23/11 5,312,990 13,464,159
Dwight R. Evans........... 100,000 5.2% 20.00 10/23/11 1,257,789 3,187,485
Debra M. O'Connor......... 10,000 0.5% 20.00 10/23/11 125,779 318,748
10,000 0.5% 15.00 01/30/11 82,699 203,692
Louis T. Petrillo......... 40,000 2.1% 20.00 10/23/11 503,116 1,274,994
10,000 0.5% 15.00 01/30/11 82,699 203,692
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----------
(1) The terms for the options, including vesting schedules, are described below
under the caption "--Incentive Compensation for Management and Directors."
(2) Pursuant to applicable SEC rules, percentages listed are based on options
to purchase a total of 1,915,690 common shares granted to employees during
fiscal year 2001.
(3) Potential realizable value is calculated based on an assumption that the
fair market value of our common shares appreciates at the annual rates
shown (5% and 10%), compounded annually, from the date of grant until the
end of the option term. The 5% and 10% assumed rates are mandated by the
SEC for purposes of calculating realizable value and do not represent our
estimates or projections of future share prices.
The following table provides information regarding the number and value of
options held by each of our named executive officers as of December 31, 2001. No
options were exercised by any executive officer during 2001.
Aggregated 2001 Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options at Money Options at
December 31, 2001 December 31, 2001(1)
------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------- ----------- ------------- -------------- ----------------
Peter A. Appel.......................... 315,800 372,407 $2,103,556 $2,141,340
Paul B. Ingrey.......................... 140,802 281,605 809,613 1,619,229
Dwight R. Evans......................... 33,333 66,667 191,665 383,335
Debra M. O'Connor....................... 57,332 6,668 354,203 38,341
Louis T. Petrillo....................... 61,126 26,674 396,170 153,376
----------
(1) For purposes of the above table, options are "in-the-money" if the market
price of the common shares on December 31, 2001 (i.e., $25.75) exceeded the
exercise price of such options. The value of such options is calculated by
determining the difference between the aggregate market price of the common
shares subject to the options on December 31, 2001 and the aggregate
exercise price of such options.
The following table sets forth the equity compensation plan information for
the Company as of December 31, 2001.
Equity Compensation Plan Information
Number of securities
remaining available for
future issuance under
equity compensation plans
Number of Securities to be Weighted-average exercise (excluding securities
issued upon exercise of price of outstanding reflected in column
outstanding options, options, warrants and (a))
warrants and rights rights
Plan Category (a) (b) (c)
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 2,044,485 $19.67 10,113 (2)
approved by security holders
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Equity compensation plans 1,257,880 $21.38 2,847,213 (2)
not approved by security
holders (1)
Total 3,302,365 -- 2,857,326
-----------
(1) Includes options issued under the 2001 Long Term Incentive Plan for New
Employees, which is described in Note 10 of our Annual Report on Form 10-K
for the year ended December 31, 2001 and is incorporated herein by
reference.
(2) Excludes restricted stock issued under the plans.
Employment Arrangements
New Management
Simultaneously with the execution of the documents relating to the capital
infusion in October 2001, Arch Re (Bermuda) appointed a new management team,
consisting of Paul B. Ingrey and Dwight R. Evans. In addition, we appointed John
M. Pasquesi as our executive vice chairman. We also appointed Constantine
Iordanou as chief executive officer of Arch Capital Group (U.S.) Inc. We further
appointed John D. Vollaro as our executive vice president and chief financial
officer. Set forth below is a summary of the material terms of the employment,
restricted share and option agreements with each of Messrs. Ingrey, Evans,
Pasquesi, Iordanou and Vollaro.
Paul B. Ingrey and Dwight R. Evans
Mr. Ingrey has been appointed to our Board of Directors and as chief
executive officer of Arch Re (Bermuda). His employment agreement provides for an
annual base salary of $750,000.
Mr. Evans has been appointed president of Arch Re (Bermuda). His employment
agreement provides for an annual base salary of $500,000.
The annual base salary is subject to review annually for increase at the
discretion of the Board. The target rate for the annual cash bonus is 100% of
the annual base salary. Messrs. Ingrey and Evans are eligible to receive annual
cash bonuses and stock-based awards at the discretion of our Board and to
participate in our employee benefit programs. The initial term of each
employment agreement ends on October 23, 2004, but we or the executive may
terminate his employment at any time. The agreement will be automatically
extended for additional one-year periods, unless we or the executive gives
notice at least 60 days prior to the expiration of the original term or any
extended term. The agreement provides that if the employment of Mr. Ingrey or
Mr. Evans is terminated without cause or for good reason before October 23,
2004, he will be entitled to receive an amount equal to his annual base salary.
Each of Messrs. Ingrey and Evans agreed that, during the employment period
and for the period of two years after termination of employment, he will not
compete with the businesses of the Company or any of its subsidiaries as such
businesses exist or are in process or being planned as of the date of
termination. The noncompetition period will be one year following termination if
we terminate his employment without cause, he
-25-
terminates for good reason or he gives notice of his intent not to extend his
employment term in accordance with the employment agreement. In such case, we
may extend the noncompetition period to up to an additional six months following
this one-year period if we pay his base salary for the additional six-month
period. Each of Messrs. Ingrey and Evans also agreed that he will not, for a
period of two years following termination, induce or attempt to induce any of
our employees to leave his or her position with the Company or induce any
customer to cease doing business with us.
On October 23, 2001, as inducements essential to their entering into
employment agreements, we granted Messrs. Ingrey and Evans restricted shares and
options under our incentive plan as set forth in the table below.
Name Options Restricted Shares
---- ------- -----------------
Paul B. Ingrey................. 422,407 422,407
Dwight R. Evans................ 100,000 50,000
The options are exercisable at $20.00 per share and expire on October 23,
2011. For each of Messrs. Ingrey and Evans, one-third of his options vested and
became exercisable at the closing of the capital infusion, one-third will become
exercisable on October 23, 2002 and the remaining one-third will become
exercisable on October 23, 2003. If we terminate Mr. Evans without cause, his
options will remain exercisable (to the extent then exercisable) for 90 days
following termination of employment (but not beyond the term of the option). In
the event that Mr. Evans ceases to be an employee due to death or permanent
disability, all of his options will vest in full and remain exercisable for the
remainder of the term of the option.
In the event that Mr. Ingrey's employment terminates due to his death or
permanent disability, all of his options shall immediately vest and become
exercisable. In the event that Mr. Ingrey is terminated for cause, all of his
options will cease to be exercisable and will be immediately forfeited. In the
event that we terminate his employment other than for cause or he resigns for
good reason, Mr. Ingrey's options will vest according to the schedule in the
preceding paragraph and have a remaining term of three years following
termination. In the event of termination for any other reason, all vested
options held by Mr. Ingrey will remain exercisable for a period of 90 days from
termination. To the extent that any of Mr. Ingrey's options have not vested at
the time of his termination, the options will be forfeited.
The restricted shares will vest on October 23, 2004 for Messrs. Ingrey and
Evans. If Mr. Evans is terminated due to his death or permanent disability, the
restricted shares granted to him will vest based upon the following schedule:
Vested Amount
Upon
Date of Termination Termination
------------------- -----------
Prior to first anniversary of grant date.................. 1/3 of shares
Prior to second anniversary of grant date, but after
first anniversary of grant date........................ 2/3 of shares
After second anniversary of grant date.................... All shares
Any unvested shares held by Mr. Evans will be forfeited if he otherwise
terminates his service with us. Further, in the event that Mr. Evans is
terminated within two years after a change of control without cause or due to
permanent disability or he terminates his employment for good reason, all of his
restricted shares will vest immediately upon such termination.
-26-
In the event that Mr. Ingrey's employment terminates due to his death or
permanent disability or his employment is terminated by us without cause or he
resigns for good reason, all of his restricted shares will immediately vest. In
the event that Mr. Ingrey's employment is terminated by us without cause or he
resigns for good reason, his restricted shares will become fully transferable
pursuant to the normal vesting schedule (except that, following such
termination, he may sell an amount of shares to fund any income and employment
taxes relating to the award). In the event of termination for any other reason,
all restricted shares held by Mr. Ingrey will be forfeited.
John M. Pasquesi
Mr. Pasquesi has been appointed our executive vice chairman. Mr. Pasquesi's
employment agreement provides for an annual base salary of $30,000. The term of
the employment agreement ends on October 24, 2003, but we or Mr. Pasquesi may
terminate his employment at any time. The agreement provides that if Mr.
Pasquesi's employment is terminated without cause or for good reason before
October 24, 2003, he will be entitled to receive an amount equal to six months
of his monthly base salary, reduced by amounts he receives from other employment
or self employment during such period. As one of our executive officers, he is
not entitled to any additional compensation for his service as a director. Mr.
Pasquesi agreed that he will not, for a period of two years following
termination of employment, induce or attempt to induce any of our employees to
leave his or her position with us.
On October 23, 2001, as an inducement essential to his entering into the
employment agreement, we granted Mr. Pasquesi options under our incentive plan
to purchase 375,473 common shares at an exercise price of $20.00 per share.
These options will vest on October 23, 2003 and expire on October 23, 2011. If
Mr. Pasquesi's employment is terminated without cause or for good reason or due
to his death or permanent disability, these options will vest and be exercisable
for the remainder of the option period. If he terminates his employment without
good reason or his employment is terminated by us with cause, his unvested
options will be forfeited, and his vested options, to the extent then
exercisable, may be exercised for the remainder of the option period.
In addition, on October 23, 2001, in consideration for his providing
structuring and advisory services to us in connection with the capital infusion,
we granted Mr. Pasquesi options to purchase 750,946 common shares at an exercise
price of $20.00 per share. These options vested upon grant and expire on October
23, 2011. This grant of options to purchase 750,946 common shares will be
rescinded if it is not approved by our shareholders prior to October 23, 2002.
We are seeking shareholder approval of this grant at this annual general
meeting.
Constantine Iordanou
In January 2002, Mr. Iordanou was appointed to our Board of Directors and
as chief executive officer of Arch Capital Group (U.S.) Inc. As chief executive
officer of Arch Capital Group (U.S.) Inc., Mr. Iordanou is responsible for the
general management and oversight of the U.S. insurance operations of Arch
Capital Group (U.S.) Inc. and its affiliates.
His employment agreement provides for an annual base salary of $1,000,000.
His base salary is subject to review annually for increase at the discretion of
the Board. Mr. Iordanou is eligible to participate in an annual bonus plan on
terms established from time to time and to participate in our employee benefit
programs. The target rate for the annual cash bonus is 100% of his annual base
salary.
The initial term of Mr. Iordanou's employment agreement ends on January 1,
2007, but we or Mr. Iordanou may terminate his employment at any time. The
agreement provides that it will be automatically ex-
-27-
tended for successive one-year periods after the initial five-year term unless
either we or Mr. Iordanou gives at least 12 months notice of the intention not
to renew.
The agreement provides that if Mr. Iordanou's employment is terminated by
his death, he will receive a prorated portion of his bonus that would have been
paid for the year of his death and an amount equal to two times the sum of his
base salary and target annual bonus payable in a lump sum. His agreement also
provides that if his employment is terminated by permanent disability, he will
receive a prorated portion of his bonus that would have been paid for the year
in which he becomes disabled, as determined by the Board, and an amount equal to
40% of his base salary payable in monthly installments during the period of his
disability extending through the time period provided for in the Company's
disability plan. The agreement further provides that if we terminate Mr.
Iordanou's employment without cause or he resigns for good reason, he will
receive a prorated portion of his bonus that would have been paid for the year
of his termination and an amount equal to two times the sum of his base salary
and target annual bonus payable over an 18-month period in equal monthly
installments. Mr. Iordanou's major medical insurance coverage benefits pursuant
to his employment agreement shall continue for 18 months after the date of
termination in the event that (1) his employment ends due to death or permanent
disability, (2) he is terminated other than for cause or (3) he resigns for good
reason (or until such time as he has major medical insurance coverage under the
plan of another employer). The agreement also provides that if Mr. Iordanou's
employment is terminated by the Company for cause or he resigns other than for
good reason, he will receive his base salary through the date of termination.
Mr. Iordanou has agreed that, during the employment period and for the
period of 18 months after termination of employment, he will not compete with
the businesses of the Company or any of its subsidiaries as such businesses
exist or are in process or being planned as of the date of termination. If we
terminate Mr. Iordanou's employment without cause or he terminates for good
reason, the term of his non-competition period will extend only as long as he is
receiving benefits under the Company's major medical insurance coverage.
Further, Mr. Iordanou has agreed to extend the non-competition period for a
period of 18 months in the event of termination due to the expiration of the
five-year term of his agreement if he is paid an amount equal to two times his
base salary and annual target bonus (payable in equal monthly installments over
that period) and he remains covered by the Company's major medical insurance
plan. Mr. Iordanou also agreed that he will not, for an 18-month period
following his date of termination, induce or attempt to induce any of our
employees to leave his or her position with the Company or induce any customer
to cease doing business with us.
As inducements essential to his entering into his employment agreement, as
of January 1, 2002, we granted Mr. Iordanou, under our incentive plan, 106,383
restricted shares as a signing bonus, 325,000 additional restricted shares and
options to purchase 425,000 common shares at an exercise price equal to $23.50
per share.
Mr. Iordanou's options expire on January 1, 2012. One-third of his options
vested and became exercisable on the date of grant; one-third will become
exercisable on January 1, 2003; and the remaining one-third will become
exercisable on January 1, 2004. In the event that his employment terminates due
to his death or permanent disability, all of Mr. Iordanou's options shall
immediately vest and become exercisable. In the event that Mr. Iordanou is
terminated for cause, all of his options will cease to be exercisable and will
be immediately forfeited. In the event that we terminate his employment other
than for cause or he resigns for good reason, Mr. Iordanou's options will vest
according to the schedule described above and have a remaining term of three
years following termination. In the event of termination for any other reason,
all vested options held by Mr. Iordanou will remain exercisable for a period of
90 days from termination. To the extent that any of Mr. Iordanou's options have
not vested at the time of his termination, the options will be forfeited.
The restricted shares Mr. Iordanou received as a signing bonus will vest on
December 31, 2002, and the remainder of his restricted shares will vest on
December 31, 2006. In the event that his employment terminates due to his death
or permanent disability or his employment is terminated by the Company without
cause or he
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resigns for good reason, all of his restricted shares will immediately vest. In
the case of termination by the Company without cause or resignation for good
reason, however, the newly vested shares may not be transferred (1) in the case
of restricted shares granted as a signing bonus, until December 31, 2002 and (2)
in the case of all other restricted shares, until December 31, 2006 (except
that, following such termination, he may sell an amount of shares to fund any
income and employment taxes relating to the award). In the event of termination
for any other reason, all restricted shares held by Mr. Iordanou will be
forfeited.
John D. Vollaro
Mr. Vollaro has been appointed as our executive vice president and chief
financial officer. Mr. Vollaro's employment agreement provides for an annual
base salary of $400,000. Mr. Vollaro is eligible to participate in an annual
bonus plan on terms established from time to time by our Board and to
participate in our employee benefit programs. The target rate for the annual
bonus is 100% of his annual base salary.
The term of his employment agreement ends on January 18, 2005, but we or
Mr. Vollaro may terminate his employment at any time. The agreement provides
that it will be automatically extended for successive one-year periods after the
initial three-year term unless either we or Mr. Vollaro gives at least 60 days
notice of the intention not to renew.
The agreement provides that if Mr. Vollaro's employment is terminated
without cause or for good reason before January 18, 2005, he will be entitled to
receive an amount equal to the greater of (1) 18 months of his base salary and
(2) the total remaining base salary which would have been paid for the remainder
of his employment term (payable in equal monthly installments commencing on the
first month anniversary of the date of termination). The agreement also provides
that if Mr. Vollaro's employment is terminated for cause, as a result of his
resignation or leaving employment other than for good reason, as a result of
death or permanent disability, or by written notice of the intention not to
renew the agreement by us or Mr. Vollaro, he will be entitled to receive solely
his base salary through the date of termination. The agreement further provides
that if Mr. Vollaro's employment is terminated by reason of death or permanent
disability, he will also be entitled to receive his annual bonus prorated
through the date of termination, provided that such bonus will not be less than
the average annual bonus received for the preceding three years; and, if he has
not received bonuses for three years, he will receive a prorated portion of the
average of the bonuses received, if any, but not less than a prorated portion of
90% of his base salary.
Mr. Vollaro has agreed that, during the employment period and for a period
of two years after termination of employment for cause or as a result of his
resignation or leaving employment other than for good reason, he will not
compete with the businesses of ACGL or any of its subsidiaries as such
businesses exist or are in process or being planned as of the date of
termination. If we terminate Mr. Vollaro's employment without cause or he
terminates for good reason, the term of his non-competition period will extend
only as long as he is receiving his severance payments and benefits under our
major medical insurance coverage. Further, Mr. Vollaro has agreed to a
non-competition period of two years if his termination results from notice of
the intent not to renew the agreement by us or Mr. Vollaro, and we agree in
writing to pay him the sum of his annual base salary and target annual bonus for
such period, payable in monthly installments over such period. Mr. Vollaro also
agreed that he will not, for a period of two years following his date of
termination, induce or attempt to induce any of our employees to leave his or
her position with us or induce any customer to cease doing business with us.
As inducements essential to his entering into his employment agreement, on
January 18, 2002 we granted Mr. Vollaro, under our incentive plan, 50,000
restricted shares and options to purchase 85,000 common shares at an exercise
price of $25.30 per share.
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Mr. Vollaro's options expire on January 18, 2012. One-third of his options
vested and became exercisable on the date of grant; one-third will become
exercisable on January 18, 2003; and the remaining one-third will become
exercisable on January 18, 2004. In the event that his employment terminates due
to his death or permanent disability, all of Mr. Vollaro's options will
immediately vest and become exercisable. In the event that Mr. Vollaro is
terminated for cause, all of his options will cease to be exercisable and will
be immediately forfeited. In the event of termination for any other reason, all
vested options held by Mr. Vollaro will remain exercisable for a period of 90
days from termination. To the extent that any of Mr. Vollaro's options have not
vested at the time of his termination, the options will be forfeited.
Mr. Vollaro's restricted shares will vest on January 18, 2007. In the event
that his employment terminates due to his death or permanent disability or his
employment is terminated by the Company without cause or he resigns for good
reason, or if his employment terminates due to written notice by us of the
intent not to extend his employment contract, a pro rata number of restricted
shares subject to the award will vest in full on the date of termination,
determined by multiplying the total number of restricted shares subject to the
award by a fraction, the numerator of which is the number of months or part of a
month elapsed since January 18, 2002 and the denominator of which is 60. In the
case of termination by us without cause or resignation by Mr. Vollaro for good
reason, however, the newly vested shares may not be transferred until January
18, 2007 (except that, following such termination, he may sell an amount of
shares to fund any income and employment taxes relating to the award). In the
event of termination for any other reason, all restricted shares held by Mr.
Vollaro will be forfeited. In the event that, within two years following a
change of control of ACGL, Mr. Vollaro's employment terminates due to his death
or permanent disability or his employment is terminated by us without cause or
he resigns for good reason, all of his restricted shares will immediately vest.
Incentive Compensation for Management and Directors
Also simultaneously with the execution of the documents relating to the
capital infusion in October 2001, certain directors and members of management
were granted stock-based awards under our existing incentive compensation plans
or otherwise, as described below.
Robert Clements. Mr. Clements, our chairman, was granted a total of
1,689,629 restricted shares. Of this total, 1,668,157 restricted shares were
granted on October 23, 2001 and 21,472 restricted shares were granted on
November 19, 2001. The restricted shares will vest in five equal annual
installments commencing on October 23, 2002. However, if Mr. Clements' service
as chairman is terminated by us or is not continued by us for any reason, or his
service terminates due to his death or permanent disability, the restricted
shares will vest in full upon such termination of service. Any unvested shares
will be forfeited if Mr. Clements otherwise terminates his service with us. In
addition, Mr. Clements has agreed that, in the event his service is terminated
by us prior to the fifth anniversary of the date of grant, he will not compete
with us during the period ending on the later of such fifth anniversary or one
year following such termination of service. These grants to Mr. Clements will be
rescinded if they are not approved by our shareholders prior to October 23,
2002. We are seeking shareholder approval of these grants to Mr. Clements at
this annual general meeting.
In connection with these transactions, we entered into a retention
agreement with Mr. Clements, which replaced our existing retention and change in
control agreement with Mr. Clements. Under the retention agreement, he will
continue to receive compensation at an annual rate equal to one-half of the
salary of ACGL's chief executive officer, payable in restricted shares that vest
on January 1 of the following year. For 2001, under this formula, he received
7,282 restricted shares ($187,500 divided by $25.75, the closing market price of
our common shares on January 1, 2001), which will vest on January 1, 2002. Mr.
Clements will continue to be eligible to receive a cash bonus at the discretion
of the compensation committee. If Mr. Clements's service as chairman of our
Board is terminated for any reason, he will be entitled to receive an amount
equal to a prorated portion of his compensation for that year. In addition, a
subsidiary of ACGL has agreed to make a loan of $13,530,000 to
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Mr. Clements, which will be used to pay income and self employment taxes,
payable in April 2002, on the restricted shares granted to him on October 23,
2001. The loan will bear interest at the applicable federal rate and mature on
the fifth anniversary of borrowing and will be secured by the restricted shares
granted to Mr. Clements on October 23, 2001. If we terminate Mr. Clements'
service as chairman of the Board for cause, the loan will become immediately
payable. Mr. Clements will receive additional compensation in cash in an amount
sufficient to defray the interest cost. In addition, we have agreed to make
gross-up payments to him in the event of certain tax liabilities. Mr. Clements
agreed that, for a period of one year after termination of service, he will not
induce or attempt to induce any of our employees to leave his or her position
with the Company. In connection with these arrangements, Mr. Clements waived his
right to receive any non-employee director compensation. Mr. Clements' previous
retention and change in control agreement provided that upon involuntary
termination (other than for cause) or constructive termination within 24 months
following a change in control, Mr. Clements would be entitled to a payment equal
to 2.99 times the sum of his annual compensation plus his bonus for the previous
year. This provision is no longer in effect.
Peter Appel. Mr. Appel, our president and chief executive officer, was
granted options to purchase a total of 422,407 common shares at an exercise
price of $20.00 per share. Of these options, 50,000 vested and became
exercisable upon grant; 172,407 will become vested and exercisable on the
Vesting Date, and 200,000 will become vested on the Vesting Date and become
exercisable on the later of (x) the Vesting Date and (y) the earliest of (i) our
common shares trading at or above $30.00 per share for 20 out of 30 consecutive
trading days, (ii) the occurrence of a change of control and (iii) the date on
which no class B warrants are outstanding. "Vesting Date" means the earlier of
(1) the date we have consummated the sale or other disposition or settlement of
at least 50% of certain of our non-core assets and (2) October 23, 2002. If we
terminate Mr. Appel's service as chief executive officer for any reason, his
service terminates due to his death or permanent disability, or he terminates
his service for good reason, any unvested options granted to Mr. Appel will vest
in full upon such termination of service and continue to be exercisable for the
remainder of the option period. In the event that Mr. Appel terminates his
service without good reason, any vested options will continue to be, or become,
exercisable for the remainder of the option period, but any unvested options
will be forfeited. In addition, Mr. Appel has agreed that during the term of his
employment and, in the event his service with us is terminated for any reason,
for a period ending two years after his termination, (1) he will not compete
with any of our or our subsidiaries' insurance or reinsurance businesses as they
exist on the date of his termination and (2) he will not induce or attempt to
induce any of our employees to leave his or her position with us.
Debra O'Connor and Louis Petrillo. Mr. Petrillo was granted options to
purchase 40,000 common shares and Ms. O'Connor was granted options to purchase
10,000 common shares. These options are exercisable at an exercise price of
$20.00 per share. One-third of these options became exercisable at the closing,
one-third will become exercisable on October 23, 2002 and the remaining
one-third will become exercisable on October 23, 2003. If we terminate Mr.
Petrillo or Ms. O'Connor without cause, the terminated employee's options will
remain exercisable (to the extent then exercisable) for 90 days following
termination of employment (but not beyond the option period). In the event that
any such employee ceases to be an employee due to death or permanent disability,
all such employee's options will vest in full and remain exercisable for the
remainder of the option period.
Ms. O'Connor's terms of employment provide for an annual base salary of
$225,000. The salary is subject to review annually for increase at the
discretion of the Board. The target rate for the annual cash bonus for Ms.
O'Connor is 50% of her annual base salary. Ms. O'Connor is eligible to receive
an annual cash bonus and stock-based awards at the discretion of the Board and
to participate in our employee benefit programs. We or Ms. O'Connor may
terminate her employment at any time.
Mr. Petrillo's terms of employment provide for an annual base salary of
$275,000. The salary is subject to review annually for increase at the
discretion of the Board. The target rate for the annual cash bonus for
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Mr. Petrillo is 75% of his annual base salary. Mr. Petrillo is eligible to
receive an annual cash bonus and stock-based awards at the discretion of the
Board and to participate in our employee benefit programs. We or Mr. Petrillo
may terminate his employment at any time.
Change in Control Arrangements
In May 2000 we sold our prior reinsurance operations to Folksamerica
Reinsurance Company. That sale constituted a change in control for purposes of
our prior change in control arrangements. Under these arrangements, all unvested
stock options and restricted shares held by our employees and the members of our
Board of Directors (other than Mr. Clements) held in May 2000 vested in
connection with the asset sale. In addition, the following payments were made to
our executive officers upon closing of the asset sale: Mark D. Mosca,
$2,716,714; Peter A. Appel, $1,476,563; Paul J. Malvasio, $1,220,625; and Debra
M. O'Connor, $475,440. These amounts were equal to a specified multiple of the
sum of such executive officer's annual base salary and target annual bonus (or,
in the case of Mr. Mosca, a notional target amount equal to 100% of his annual
base salary). The specified multiple was 2.99 for Mr. Mosca, 2.25 for Messrs.
Appel and Malvasio, and 2.0 for Ms. O'Connor. Such payments did not exceed an
amount that would trigger the payment of excise taxes, and were not subject to
mitigation in the event that such officer receives any compensation from other
employment following his termination. In addition, a prorated portion of the
following executive officer's target annual bonus (or, in the case of Mr. Mosca,
a prorated portion of a notional target amount equal to 100% of his annual base
salary) was paid to such officers at the closing of the asset sale, as follows:
Mr. Mosca: $156,398; Mr. Appel: $96,823; Mr. Malvasio: $80,040; Ms. O'Connor:
$30,457; and Mr. Petrillo: $30,446. Each executive officer is also entitled to
continuance of his health care, dental, disability and group-term and life
insurance benefits for prescribed periods. In addition, Robert Clements,
chairman of our Board, received a special bonus of $300,000 upon the
consummation of the asset sale.
The capital infusion did not constitute a change in control, and there are
no continuing change in control arrangements with our present officers and
employees, except that in connection with his employment as general counsel and
secretary, we entered into a change in control arrangement with Mr. Petrillo
which provides that upon involuntary termination (other than for cause) or
constructive termination within 24 months following a change in control, Mr.
Petrillo would be entitled to a payment equal to 2.0 times the sum of his annual
base salary and target annual bonus. In addition, upon termination of his
employment following a change in control, we will pay him a prorated portion of
his target annual bonus for such year and continue health care, dental,
disability and group-term and life insurance benefits for 24 months.
Director Compensation
Each non-employee member of our Board of Directors is entitled to receive
an annual cash retainer fee in the amount of $25,000. Each such director is
entitled, at his option, to receive this retainer fee in the form of common
shares instead of cash. If so elected, the number of shares distributed to the
non-employee director would be equal to 120% of the amount of the annual
retainer fee otherwise payable divided by the fair market value of our common
shares. Each non-employee director also receives a meeting fee of $1,000 for
each Board or committee meeting attended. In addition, each non-employee
director serving as chairman of the (1) executive committee or compensation
committee received an annual fee of $3,000 and (2) audit committee received an
annual fee of $5,000. All non-employee directors are entitled to reimbursement
for their reasonable out-of-pocket expenses in connection with their travel to
and attendance at meetings of the Board or committees. Directors who are also
employees of ACGL or its subsidiaries receive no cash compensation for serving
as directors or as members of Board committees.
In 2001, pursuant to our long-term incentive and share award plans, upon
joining the Board, each non-employee director received an option to purchase 300
common shares at an exercise price per share equal to the
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then market price of a common share. In 2001, our plans also provided for
automatic annual grants to non-employee directors of options to purchase common
shares on January 1 of each year. Commencing January 1, 2000, the amount of
shares covered by this annual grant was increased from 500 to 1,500 shares.
In addition, in connection with the capital infusion, each current director
of the Company (other than Messrs. Clements and Appel), and Mr. Ian Heap, who
resigned from the Board in 2001, were granted options to purchase 15,000 common
shares at an exercise price of $20.00 per share. These options vested upon grant
and expire on October 23, 2011.
See "Proposal 4 -- Approval of 2002 Long Term Incentive and Share Award
Plan--Description of 2002 Plan--Automatic Grants to Non-Employee Directors" and
"--Payment of Board Retainer Fees in Stock or Cash."
Report of the Compensation Committee of the Board of Directors
The compensation committee of our Board of Directors is responsible for
developing and making recommendations to the Board with respect to all matters
related to the compensation of our executive officers and establishing overall
compensation policies for our employees. The following report summarizes our
compensation policies for 2001.
Compensation Philosophy
Our compensation program is designed to attract and retain executives who
will contribute to the Company's long-term success, to reward executives for
achieving both our short and long-term strategic goals, to link executive and
shareholder interests through equity-based plans, and to provide a compensation
package that recognizes individual contributions and our performance.
The principal components of our compensation program are base salary,
annual performance bonus and stock-related incentives. In determining the amount
and form of executive compensation, the compensation committee considers the
competitive market for senior executives, the executive's role in the Company
achieving its business objectives and our overall performance. As the
executive's level of responsibility increases, a greater portion of potential
total compensation opportunity may be based on corporate performance.
Base Salary
Base salaries reflect individual positions, responsibilities, experience
and potential contribution to our success. Actual salaries vary according to the
compensation committee's subjective assessment of a number of factors in its
review of base salaries of executives. The compensation committee will
periodically evaluate each individual's job responsibilities and related
compensation, and compare cash compensation practices to peer groups and other
relevant compensation data to ensure that our compensation structure is
consistent with its compensation philosophy. Base salary increases are based on
individual and corporate performance and may reflect market and cost-of-living
increases.
Annual Performance Bonus
Annual bonuses are based on corporate performance for the prior year and an
evaluation of each employee's respective contribution to our performance. As an
employee's responsibilities increase, the portion of his or her bonus that is
dependent on corporate performance increases.
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Target performance bonus opportunities are generally established for all
employees (other than the president of ACGL) upon the commencement of employment
and are periodically reviewed by the compensation committee. An individual's
target performance bonus opportunity is expressed as a percentage of base
salary. For each employee, his or her target is an approximation of the bonus
payment that may be paid if performance goals and other expectations are
attained by both the employee and the Company as a whole. For 2001, there was no
predetermined weight given to specific performance criteria. Rather, the
compensation committee's evaluation involved a subjective balancing of the
various measures of performance.
Long-Term Incentive Compensation
Our stock-based compensation is designed to align the interests of
executives and shareholders by providing value to the executive as the stock
price increases. Due to the variability of the stock price, stock options,
restricted shares and other share-based awards, which comprise a significant
portion of executive compensation, are dependent upon our overall results and
how the Company is perceived by its shareholders and the marketplace. Generally,
options awarded to executives are granted at 100% of the market value of the
shares on the date of grant and become exercisable or vest over a prescribed
period, motivating executives to remain with the Company and sustain high
corporate performance in order to increase the value of such awards.
Stock-based compensation grant levels and awards are reviewed and
determined by the compensation committee periodically. Grants of stock-based
compensation are determined on the basis of a number of factors, including (1)
both corporate and individual performance, (2) competitive total compensation
and long-term incentive grant levels as determined in the market, and (3) the
Company's stock ownership objectives.
Stock-based awards granted to the named executive officers during 2001 are
summarized above under the captions "--Summary Compensation Table," "--Option
Grants in Last Fiscal Year" and "--CEO Compensation." See also "--Employment
Arrangements."
CEO Compensation
During 2001, the compensation committee and the Board of Directors
determined that a significant portion of the compensation of Peter Appel, the
president and chief executive officer of ACGL, would consist of stock-based
compensation. Accordingly, he was granted an option to purchase a total of
422,407 of our common shares at an exercise price of $20 per share, which option
is subject to vesting. Mr. Appel's base salary during 2001 remained at the same
level as in 2000, and he did not receive a cash bonus. See "--Summary
Compensation Table," "--Option Grants in Last Fiscal Year," and "--Employment
Arrangements--Incentive Compensation for Management and Directors." In
determining Mr. Appel's total compensation, the quantitative and qualitative
criteria described above were applied.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Code generally limits the deductible amount of annual
compensation paid to the chief executive officer and four other most highly
compensated executive officers to no more than $1,000,000 each. Since the
Company will not generally be subject to United States income tax, the
limitation on deductibility will not directly apply to it. However, the
limitation would apply to a United States subsidiary of the Company if it
employs the chief executive officer or one of the four other most highly
compensated executive officers. Qualified performance-based compensation will be
excluded from the $1,000,000 limitation on deductibility. The Company's policy
is to qualify, to the extent reasonable, its executive officers' compensation
for deductibility under applicable tax laws. However, the compensation committee
believes that its primary responsibility is to provide a compensation program
that will attract, retain and reward the executive talent necessary to the
Company's success. Consequently, the compensation committee recognizes that the
loss of a tax deduction
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could be necessary in some circumstances due to the restrictions of Section
162(m). The compensation committee will review tax consequences as well as other
relevant considerations in connection with compensation decisions.
---------------------------
COMPENSATION COMMITTEE
John L. Bunce, Jr. (chairman)
Kewsong Lee
James J. Meenaghan
Robert F. Works
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Performance Graph
The following graph compares the cumulative total shareholder return on our
common shares for each of the last five years through December 31, 2001 to the
cumulative total return, assuming reinvestment of dividends, of (1) Standard &
Poor's ("S&P") 500 Composite Stock Index ("S&P 500 Index"), (2) the Nasdaq
Insurance Index, and (3) the S&P Property and Casualty Insurance Index. The
share price performance presented below is not necessarily indicative of future
results.
As a result of the capital infusion and our underwriting initiative, we
believe that the Nasdaq Insurance Index, which appeared in our 2001 annual
general meeting proxy statement, should be replaced by the S&P Property and
Casualty Insurance Index in order to reflect a more appropriate basis on which
to compare shareholder return in the future.
CUMULATIVE TOTAL SHAREHOLDER RETURN (1)(2)
(DESCRIPTION OF CHART)
Base
Period
Company Name/Index 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
--------------------------------------------- ------------ ---------- ----------- ---------- ---------- ----------
o Arch Capital Group Ltd. $100.00 $114.84 $112.26 $65.15 $77.42 $132.90
|X| S&P 500 Index $100.00 $133.36 $171.48 $207.56 $188.66 $166.24
- Nasdaq Insurance Index $100.00 $146.73 $130.73 $101.41 $127.35 $136.51
X S&P Property and Casualty Insurance $100.00 $145.46 $135.82 $101.19 $157.70 $145.06
(1) Stock price appreciation plus dividends.
(2) The above graph assumes that the value of the investment was $100 on
December 31, 1996. The closing price for our common shares on December
31, 2001 (i.e., the last trading day in 2001) was $25.75.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information available to us as of April
22, 2002 with respect to the ownership of our voting shares by (1) each person
known to us to be the beneficial owner of more than 5% of any class of our
outstanding voting shares, (2) each director and executive officer of ACGL, and
(3) all of the directors and executive officers of ACGL as a group. Except as
otherwise indicated, each person named below has sole investment and voting
power with respect to the securities shown.
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Please note that this table addresses ownership of voting shares; it
does not address the voting power of those shares, which, in some cases, is
different than the percentage set forth below.
Common Shares
----------------------------------------------------------------------------------------------------------------------
(A) (B)
Number of Rule 13d-3 (C)
Common Shares Percentage Ownership Fully-Diluted
Beneficially Owned (1) Percentage
Name and Address of Beneficial Owner (1) (2)
------------------------------------------ ------------------ -------------------- ---------------
Warburg Pincus (3)........................ 20,944,592 46.9% 30.6%
c/o 466 Lexington Avenue
New York, New York 10017
H&F Corporate Investors IV................ 11,636,491 32.9 17.0
(Bermuda), Ltd. (4)
c/o A.S.&K. Services Ltd.
41 Cedar Avenue
Hamilton HM 12 Bermuda
EQSF Advisers, Inc. and
M.J. Whitman Advisers, Inc. (5)....... 2,426,905 10.2 3.5
767 Third Avenue
New York, New York 10017
Insurance Private Equity Investors,
L.L.C. (6)............................ 2,585,583 9.8 3.8
3003 Summer Street
Stamford, CT 06905
Marsh & McLennan Risk Capital Holdings,
Ltd. (7).............................. 1,625,940 6.8 2.4
1166 Avenue of the Americas
New York, New York 10036
Trident II, L.P. (8)...................... 1,601,641 6.3 2.3
Craig Appin House
8 Wesley Street
Hamilton HM 11 Bermuda
Steinberg Priest Capital Management Co.,
Inc. (9).............................. 1,438,147 6.1 2.1
12 East 49th Street
New York, New York 10017
Farallon Partners, L.L.C. (10)............ 1,567,791 6.3 1.9
One Maritime Plaza
Suite 1325
San Francisco, CA 94111
Robert Clements (11)...................... 2,315,751 9.6 3.5
Peter A. Appel (12)....................... 502,406 2.1 1.3
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Common Shares
----------------------------------------------------------------------------------------------------------------------
(A) (B)
Number of Rule 13d-3 (C)
Common Shares Percentage Ownership Fully-Diluted
Beneficially Owned (1) Percentage
Name and Address of Beneficial Owner (1) (2)
------------------------------------------ ------------------ -------------------- ---------------
John L. Bunce, Jr. (13)................... 11,636,491 32.9 17.0
Paul B. Ingrey (14)....................... 666,632 2.8 1.4
Constantine Iordanou (15)................. 573,050 2.4 1.3
Kewsong Lee (16).......................... 20,944,592 46.9 30.6
James J. Meenaghan (17)................... 17,113 * *
John M. Pasquesi (18)..................... 1,138,784 4.6 2.2
Robert F. Works (19)...................... 23,972 * *
Dwight R. Evans (20)...................... 104,017 * *
John D. Vollaro (21)...................... 78,333 * *
Debra M. O'Connor (22).................... 72,319 * *
Louis T. Petrillo (23).................... 70,131 * *
All directors and executive officers
(13 persons).......................... 38,143,591 65.5% 58%
Series A Convertible Preference Shares
----------------------------------------------------------------------------------------------------------------
Number of Preference Shares
Name and Address of Beneficially Owned (24) Rule 13d-3
Beneficial Owner Percentage Ownership (24)
---------------------------------------------- --------------------------- ---------------------------
Warburg Pincus (3).......................... 18,939,311 53.1%
H&F Corporate Investors IV (Bermuda),
Ltd. (4).................................. 10,521,839 29.5
Insurance Private Equity Investors,
L.L.C. (5)................................ 2,338,186 6.6
Robert Clements (11)........................ 93,527 *
Peter A. Appel (12)......................... 46,763 *
John L. Bunce, Jr. (13)..................... 10,521,839 29.5
John D. Vollaro............................. 0 *
Paul B. Ingrey (14)......................... 93,527 *
Constantine Iordanou........................ 0 0
Kewsong Lee (16)............................ 18,939,311 53.1
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Series A Convertible Preference Shares
----------------------------------------------------------------------------------------------------------------
Number of Preference Shares
Name and Address of Beneficially Owned (24) Rule 13d-3
Beneficial Owner Percentage Ownership (24)
---------------------------------------------- --------------------------- ---------------------------
James J. Meenaghan.......................... 0 0
John M. Pasquesi (18)....................... 350,728 1.0
Robert F. Works............................. 0 0
Dwight R. Evans (20)........................ 18,705 *
Debra M. O'Connor........................... 0 0
Louis T. Petrillo........................... 0 0
All directors and executive officers
(13 persons)............................ 30,064,400 84.2%
---------
* Denotes beneficial ownership of less than 1.0%.
(1) Pursuant to Rule 13d-3 promulgated under the Exchange Act, amounts shown
include common shares that may be acquired by a person within 60 days of
April 22, 2002. Therefore, column (B) has been computed based on (a)
23,730,940 common shares actually outstanding as of April 22, 2002 and (b)
common shares that may be acquired within 60 days of April 22, 2002 upon
the exercise of options and warrants and conversion of preference shares
held only by the person whose Rule 13d-3 Percentage Ownership of Common
Shares is being computed. Each preference share is convertible into one
common share, subject to adjustments. The preference shares are mandatorily
convertible under certain circumstances. Under the subscription agreements,
the purchase price for the preference shares is subject to certain
adjustments, which may result in the issuance of additional preference
shares and class A warrants to the purchasers. For a description of the
adjustments, please refer the section of our Annual Report on Form 10-K for
the year ended December 31, 2001 entitled "The Capital
Infusion--Subscription Agreement--Purchase Price Adjustments," which is
incorporated herein by reference.
(2) Amounts shown under column (C) in the above table have been computed based
on (a) 23,730,940 common shares actually outstanding as of April 22, 2002
and, (b) common shares that may be acquired upon the exercise of all
outstanding options and warrants and conversion of all preference shares,
whether or not such options and warrants are exercisable within 60 days
held by all persons, and as of April 22, 2002, there were outstanding (i)
class A warrants to purchase an aggregate of 3,842,450 common shares, (ii)
class B warrants to purchase an aggregate of 150,000 common shares, (iii)
options to purchase an aggregate of 5,091,311 common shares and (iv)
35,687,735 preference shares. The class A warrants are currently
exercisable at $20 per share and expire on September 19, 2002. The class B
warrants are exercisable at $20 per share at any time after our common
shares have traded at or above $30 per share for 20 out of 30 consecutive
trading days or a change of control has occurred and expire on September
19, 2005. See note (1) for a description of the preference shares.
(3) The security holders are Warburg Pincus (Bermuda) Private Equity VIII, L.P.
("WP VIII Bermuda"), Warburg Pincus (Bermuda) International Partners, L.P.
("WPIP Bermuda"), Warburg Pincus Netherlands International Partners I, C.V.
("WPIP Netherlands I") and Warburg Pincus Netherlands International
Partners II, C.V. ("WPIP Netherlands II"). Warburg Pincus (Bermuda) Private
Equity Ltd. ("WP VIII Bermuda Ltd.") is the sole general partner of WP VIII
Bermuda. Warburg Pincus (Bermuda) Interna-
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tional Ltd. ("WPIP Bermuda Ltd.") is the sole general partner of WPIP
Bermuda. Warburg, Pincus & Co. ("WP") is the sole general partner of WPIP
Netherlands I and WPIP Netherlands II. WP VIII Bermuda, WPIP Bermuda, WPIP
Netherlands I and WPIP Netherlands II are managed by Warburg Pincus LLC
("WP LLC"). The foregoing is based on a Schedule 13D and a Form 3 dated
November 30, 2001 filed with the SEC by these entities. Amounts in columns
(A), (B) and (C) reflect (a) common shares issuable upon conversion of
preference shares or exercise of class A warrants issued under the
subscription agreements, (b) 1,263 common shares owned by Mr. Lee for the
benefit of these entities and (c) 100 common shares issuable upon exercise
of currently exercisable options held by Mr. Lee for the benefit of these
entities.
(4) The security holders are HFCP IV (Bermuda), L.P. ("HFCP IV Bermuda"), H&F
International Partners IV-A (Bermuda), L.P. ("HFIP IV-A Bermuda"), H&F
International Partners IV-B (Bermuda), L.P. ("HFIP IV-B Bermuda") and H&F
Executive Fund IV (Bermuda), L.P. ("HFEF Bermuda," and together with HFCP
IV Bermuda, HFIP IV-A Bermuda and HFIP IV-B Bermuda, the "H&F Funds"). H&F
Investors IV (Bermuda), L.P. ("HFI IV Bermuda") is the sole general partner
of the H&F Funds. H&F Corporate Investors IV (Bermuda) Ltd. ("HFCI
Bermuda") is the sole general partner of HFI IV Bermuda. HFI IV Bermuda may
be deemed to control the H&F Funds. The foregoing is based on a Schedule
13D and a Form 3 dated November 30, 2001 filed with the SEC by these
entities. Amounts in columns (A), (B) and (C) reflect (a) common shares
issuable upon conversion of preference shares or exercise of class A
warrants issued under the subscription agreements, (b) 1,263 common shares
owned by Mr. Bunce for the benefit of these entities and (c) 100 common
shares issuable upon exercise of currently exercisable options held by Mr.
Bunce for the benefit of these entities.
(5) Based upon a Schedule 13G/A dated February 5, 2002, filed with the SEC
jointly by EQSF Advisers, Inc. and M.J. Whitman Advisers, Inc. ("MJWA"),
each an investment advisor, and Martin J. Whitman. In the Schedule 13G/A,
EQSF ("EQSF") reported that it has sole voting power and sole dispositive
power with respect to 1,203,500 common shares and MJWA reported that it has
sole dispositive power with respect to 1,223,405 common shares and sole
voting power with respect to 1,144,355 common shares. The Schedule 13G/A
also reports that Martin J. Whitman is the controlling person of ESQF and
MJWA.
(6) Insurance Private Equity Investors, L.L.C. ("Insurance") is a wholly owned
subsidiary of General Electric Pension Trust ("GEPT"), which is an employee
benefit plan for the benefit of employees of General Electric Company
("GE"). GE Asset Management Incorporated ("GEAM"), a wholly owned
subsidiary of GE, acts as manager of Insurance and as investment manager of
GEPT. Insurance, GEPT and GEAM may be deemed to share beneficial ownership.
Excludes securities held by Orbital Holdings, Ltd., which is an indirect
wholly owned subsidiary of GE, as to which Insurance, GEPT and GEAM
disclaim beneficial ownership. Based on a Schedule 13D filed on November
30, 2001 by these entities. Amounts in columns (A), (B) and (C) reflect
common shares issuable upon conversion of preference shares or exercise of
class A warrants issued under the subscription agreements.
(7) Amounts in columns (A), (B) and (C) reflect common shares issuable upon
conversion of preference shares issued under the subscription agreements
and 1,536,005 common shares owned directly by Marsh & McLennan Risk Capital
Holdings, Ltd. The preference shares and class A warrants are held by Marsh
& McLennan Capital Professionals Fund, L.P. and Marsh & McLennan Employees'
Securities Company, L.P., which are beneficially owned by employees of
Marsh & McLennan, Inc. A subsidiary of MMRCH is the sole general partner of
these funds, as well as the sole general partner of Trident II L.P. and The
Trident Partnership L.P.
(8) Amounts in columns (A), (B) and (C) reflect common shares issuable upon
conversion of preference shares or exercise of class A warrants issued
under the subscription agreements.
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(9) Based upon a Schedule 13G dated January 28, 2002, filed with the SEC
jointly by Steinberg Priest Capital Management Co., Inc. ("SPCM"), an
investment advisor, and Michael A. Steinberg & Co., Inc., a broker-dealer.
In the Schedule 13G, SPCM reported that it has sole voting power with
respect to 659,450 common shares and sole dispositive power with respect to
1,416,277 common shares, and Steinberg & Co. reported that it has sole
dispositive power with respect to 21,870 common shares. The Schedule 13G
also reports that Michael A. Steinberg is the beneficial owner of all of
the shares.
(10) Based upon a Schedule 13D dated April 12, 2002, filed with the SEC jointly
by Andrew B. Fremder, David I. Cohen, Enrique H. Boilini, Farallon Capital
Institutional Partners II, L.P., Farallon Capital Institutional Partners
III, L.P., Farallon Capital Partners, L.P., Farallon Partners, L.P., Joseph
F. Downes, Mark C. Wehrly, Meridee A. Moore, Monica R. Landry, Richard B.
Fried, RR Capital Partners, L.P., Stephen L.Millham, Thomas F. Steyer,
Tinicum Partners, L.P., William F. Duhamel, and William F. Mellin. Farallon
Partners, L.L.C. is the sole general partner of each of Farallon Capital
Partners, L.P., Farallon Capital Institutional Partners II, L.P., Farallon
Capital Institutional Partners III, L.P., Tinicum Partners, L.P. and RR
Capital Partners, L.P. Amounts in columns (A), (B) and (C) reflect common
shares issuable upon conversion of preference shares or exercise of class A
warrants issued under the subscription agreements. The Schedule 13D also
reports that the managing members of Farallon Partners, L.L.C. are Andrew
B. Fremder, David I. Cohen, Enrique H. Boilini, Joseph F. Downes, Mark C.
Wehrly, Meridee A. Moore, Monica R. Landry, Richard B. Fried, Stephen L.
Millham, Thomas F. Steyer, William F. Duhamel and William F. Mellin.
(11) Amounts in columns (A) and (B) reflect (a) 1,810,600 common shares owned
directly by Mr. Clements (including 1,696,911 restricted shares, which are
subject to vesting), (b) 200,000 common shares issuable upon exercise of
class A warrants owned directly by Mr. Clements, (c) 107,125 common shares
issuable upon exercise of currently exercisable options owned directly by
Mr. Clements, (d) 55,000 common shares owned by Taracay Investors, (e)
39,603 common shares issuable upon exercise of class A warrants owned by
Taracay Investors and (f) common shares issuable upon conversion of
preference shares or exercise of class A warrants owned by SoundView
Partners, L.P. The amount in column (C) includes 107,198 common shares
issuable upon exercise of class B warrants, which are not currently
exercisable within 60 days of the date hereof. Taracay Investors is a
general partnership, the general partners of which consist of Mr. Clements
and members of his family and the managing partner of which is Mr.
Clements. Mr. Clements is the general partner of SoundView.
(12) Amounts in columns (A) and (B) reflect (a) 134,895 common shares owned
directly by Mr. Appel, (b) 315,800 common shares issuable upon exercise of
currently exercisable options and (c) common shares issuable upon
conversion of preference shares or exercise of class A warrants. The amount
in column (C) includes 372,407 common shares issuable upon exercise of
stock options that are not likely to become exercisable within 60 days of
the date hereof.
(13) Amounts in all columns reflect securities held by or the benefit of the
entities listed in note (4). Mr. Bunce is a member of an investment
committee of HFCI Bermuda which has investment discretion over the
securities held by the H&F Funds. Mr. Bunce is a 9.9% shareholder of HFCI
Bermuda. All shares indicated as owned by Mr. Bunce are included because he
is a member of our Board and is affiliated with HFCI Bermuda. Mr. Bunce may
be deemed to have an indirect pecuniary interest (within the meaning of
Rule 16a-1 under the Exchange Act) in an indeterminate portion of the
shares beneficially owned by the H&F Funds. Mr. Bunce disclaims beneficial
ownership of all shares owned by the H&F Funds, except to the extent of his
indirect pecuniary interest in the issuer held through the H&F Funds. Based
on a Form 3 dated November 30, 2001 filed with the SEC by Mr. Bunce.
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(14) Amounts in columns (A) and (B) reflect (a) 422,407 restricted shares (all
of which are subject to vesting), (b) 140,802 common shares issuable upon
exercise of currently exercisable options and (c) common shares issuable
upon conversion of preference shares or exercise of class A warrants. The
amount in column (C) includes 281,605 common shares issuable upon exercise
of stock options that are not currently exercisable within 60 days of the
date hereof.
(15) Amounts in columns (A) and (B) reflect (a) 431,383 restricted shares (all
of which are subject to vesting) and (b) 141,667 common shares issuable
upon exercise of currently exercisable options. The amount in column (C)
includes 283,333 common shares issuable upon exercise of stock options that
are not currently exercisable within 60 days of the date hereof.
(16) Amounts reflect securities held by or for the benefit of the entities
listed in note (3). Mr. Lee is a general partner of WP, a managing director
and member of WP LLC and a beneficial owner of certain shares of capital
stock of WP VIII Bermuda Ltd. and WPIP Bermuda Ltd. All shares indicated as
owned by Mr. Lee are included because he is a member of our Board and is
affiliated with these Warburg Pincus entities. Mr. Lee may be deemed to
have an indirect pecuniary interest (within the meaning of Rule 16a-1 under
the Exchange Act) in an indeterminate portion of the shares owned by WP
VIII Bermuda, WPIP Bermuda, WPIP Netherlands I and WPIP Netherlands II. Mr.
Lee disclaims beneficial ownership of all shares owned by these Warburg
Pincus entities. Based on a Form 3 dated November 30, 2001 filed with the
SEC by Mr. Lee.
(17) Amounts in columns (A) and (B) reflect 1,813 common shares owned directly
by Mr. Meenaghan and 15,300 common shares issuable upon exercise of
currently exercisable options. The amount in column (C) includes 1,500
common shares issuable upon exercise of stock options that are not
currently exercisable within 60 days of the date hereof.
(18) Amounts in columns (A) and (B) reflect (a) 750,946 common shares issuable
upon exercise of currently exercisable options and (b) common shares
issuable upon conversion of preference shares or exercise of class A
warrants. The amount in column (C) includes 375,473 common shares issuable
upon exercise of stock options that are not currently exercisable within 60
days of the date hereof.
(19) Amounts in columns (A) and (B) reflect 5,672 common shares owned directly
by Mr. Works and 18,300 common shares issuable upon exercise of currently
exercisable options. The amount in column (C) includes 1,500 common shares
issuable upon exercise of stock options that are not currently exercisable
within 60 days hereof.
(20) Amounts in columns (A) and (B) reflect (a) 50,000 restricted shares (all of
which are subject to vesting), (b) 33,333 common shares issuable upon
exercise of currently exercisable options and (c) common shares issuable
upon conversion of preference shares or exercise of class A warrants. The
amount in column (C) includes 66,667 common shares issuable upon exercise
of stock options that are not currently exercisable within 60 days of the
date hereof.
(21) Amounts in columns (A) and (B) reflect (a) 50,000 restricted shares (all of
which are subject to vesting) and (b) 28,333 common shares issuable upon
exercise of currently exercisable options. The amount in column (C)
includes 56,667 common shares issuable upon exercise of stock options that
are not currently exercisable within 60 days hereof.
(22) Amounts in columns (A) and (B) reflect (a) 14,986 common shares owned
directly by Ms. O'Connor and (b) 57,333 common shares issuable upon
exercise of currently exercisable options. The amount in col-
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umn (C) includes 6,667 common shares issuable upon exercise of stock
options that are not currently exercisable within 60 days hereof.
(23) Amounts in columns (A) and (B) reflect (a) 8,998 common shares owned
directly by Mr. Petrillo and (b) 61,133 common shares issuable upon
exercise of currently exercisable options. The amount in column (C)
includes 26,667 common shares issuable upon exercise of stock options that
are not currently exercisable within 60 days hereof.
(24) Under the subscription agreements, the purchase price for the preference
shares is subject to certain adjustments, which may result in the issuance
of additional preference shares to the purchasers. For a description of the
adjustments, please refer to "The Capital Infusion--Subscription
Agreement--Purchase Price Adjustments".
Certain Relationships and Related Transactions
The Capital Infusion and Transactions with New Investors
In October 2001, we launched our underwriting initiative to meet recent
demand in the global insurance and reinsurance marketplaces. On November 20,
2001, a group of investors led by the Warburg Pincus funds and the Hellman &
Friedman funds invested an aggregate of $750.0 million in cash in our equity
securities. Certain members of our management (or entities affiliated with them)
also invested an aggregate of $13.2 million in cash in our equity securities.
Detailed information regarding the capital infusion and our entry into various
agreements with those investors, including as to the composition of our Board of
Directors and our ability to enter into various transactions without their
consent, and as to the payment of dividends on our common shares, can be found
in "The Capital Infusion".
In addition, prior to the capital infusion, we had entered into certain
non-binding letters of intent to acquire three fee-based businesses, including
Tri-City Brokerage, Inc. ("Tri-City"), each of which would have been considered
a non-core business under the subscription agreement with the new investors. In
connection with our decision to concentrate our attention exclusively on
building our insurance and reinsurance business, our Board of Directors
determined not to proceed with any of these acquisitions. Our Board of Directors
was informed that if ACGL were not to pursue the acquisition of Tri-City,
certain members of our management, including Peter Appel, our president and
chief executive officer, and Robert Clements, our chairman, may participate, as
investors, in an acquisition of Tri-City. Since the Board of Directors
determined not to proceed with these acquisitions (primarily because the letters
of intent to acquire these companies predated the capital infusion and these
companies no longer fit within the Company's ongoing business strategy), the
Board unanimously determined that it would not be inappropriate for Messrs.
Appel and Clements to invest in Tri-City. Subsequently, Messrs. Appel and
Clements, together with members of Tri-City management and certain other
investors, including Distribution Investors LLC, a private equity fund
affiliated with Hales & Company Inc. described below, acquired Tri-City. No
member of our management has any management responsibilities with respect to
Tri-City.
Transactions Involving Affiliates of Marsh & McLennan
On November 8, 2001, ACGL, funds affiliated with Warburg Pincus and Hellman
& Friedman, The Trident Partnership, L.P. ("Trident I"), Trident II, L.P., Marsh
& McLennan Risk Capital Holdings, Ltd. ("MMRCH") and employee co-investment
funds affiliated with MMRCH entered into an agreement. Trident I and Trident II,
L.P. are affiliates of MMRCH and MMRCH and MMC Capital are affiliates of each
other. Under this agreement, the Warburg Pincus investors assigned their right
and commitment to purchase $35.0 million of the preference shares and Class A
warrants to Trident II and the co-investment funds. MMRCH agreed to exchange all
of its existing Class A warrants for newly issued common shares (assuming that
they had been ex-
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ercised pursuant to a cashless exercise) and to exchange all of its Class B
warrants for cash at a price equal to $7.50 per Class B warrant.
In addition, the board observer and board nomination rights of MMRCH and
Trident I were terminated, and the Company was also released from its remaining
$11.0 million capital commitment to Trident II for new investments. During 1999,
the Company had committed to invest $25 million as a limited partner in Trident
II, a partnership managed by MMC Capital.
Pursuant to an investment advisory agreement, which terminates in 2003
(subject to renewal or early termination under certain circumstances), MMC
Capital provides the Company with certain services. Fees incurred under the
agreements during fiscal years 2001, 2000 and 1999 were approximately $262,000,
$298,000 and $1.5 million, respectively. In connection with its amended
investment advisory agreement with MMC Capital, the Company receives from MMC
Capital $1.25 million per annum during the initial four-year term, subject to
certain conditions.
On June 22, 2001, the Company completed the acquisition of all of the
remaining ownership interests in one of its investee companies, Arch Risk
Transfer Services Ltd., for a purchase price of approximately $38.8 million. Of
such amount, $38.4 million was paid in cash to MMRCH and Trident I in return for
their interests in ART Services, and the balance was paid in the form of our
common shares to certain management shareholders of ART Services. See Note 3,
"Acquisition of Subsidiaries and Disposition of Prior Reinsurance Operations,"
of the notes accompanying our consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2001, which is
incorporated herein by reference. In addition, the Company has made investments
in entities in which affiliates of Marsh and Trident have invested.
Commencing in 1996, MMC Capital subleased office space from the Company for
a term expiring in October 2002. Future minimum rental income, exclusive of
escalation clauses and maintenance costs, under the remaining term of the
sublease will be approximately $832,000. Rental income was $1,032,000, $636,000
and $430,000 in 2001, 2000 and 1999, respectively.
Affiliates of MMC Capital's ultimate parent, Marsh & McLennan Companies,
Inc. ("Marsh"), may act as reinsurance intermediaries or brokers for our
reinsurance and insurance operations (see Note 15, "Segment Information," of the
notes accompanying our consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2001, which is incorporated
herein by reference). The Company has also utilized affiliates of Marsh as
insurance brokers for the Company's insurance needs.
Distributions Investors, LLC
As of December 31, 2001, the Company has committed to invest approximately
$1.5 million as a member of Distribution Investors, LLC, the general partner of
a fund affiliated with our subsidiary, Hales & Company. With $50 million of
committed capital, such fund focuses on equity investments in insurance
distribution and distribution-related service companies, and its target
investment amount is $3 million to $5 million.
Other
We have agreed to make a non-recourse loan of up to $13.5 million to our
chairman, which will be used to pay income and self employment taxes, payable in
April 2002, on restricted shares granted to him on October 23, 2001. The loan
will be secured by the 1,668,157 restricted shares granted to Mr. Clements on
October 23, 2001.
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Graham B. Collis, a director of certain of our non-U.S. subsidiaries, is
partner in the law firm of Conyers Dill & Pearman, which provides legal services
to the Company and its subsidiaries.
In April 1996, we acquired a 33% economic interest (9.75% voting interest)
in Island Heritage Insurance Company, Ltd., a Cayman Islands insurer, for an
aggregate purchase price of $4.5 million. Certain of our directors and other
investors invested in the securities of Island Heritage at the same per share
price paid by us. In February 1999, we made an additional investment in Island
Heritage in the amount of approximately $1.0 million.
Investors affiliated with certain of our directors have certain rights to
require us to register under the Securities Act of 1933 the securities they
hold, and to "piggy-back" on registrations that we make. In connection with all
such registrations, we are required to bear all registration and selling
expenses (other than underwriting fees and commissions and the fees of any
counsel for the holders participating in such registrations).
PROPOSAL 2 -- AMENDMENT TO BYE-LAW 20
Current Bye-Law 20
Under bye-law 20 of our current bye-laws, special meetings of our Board of
Directors may be called by the chairman of the Board or by the president, or by
a majority of the total number of directors of ACGL.
Purpose and Effect of the Amendment
The proposed amendments to bye-law 20 would provide that a special meeting
of the Board of Directors may be called by three directors or a majority of the
total number of directors (whichever is fewer), in addition to the chairman of
the Board and the president of ACGL. This would allow less than a majority of
the Board to call a special meeting.
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the annual general meeting, voting together as a single class,
will be required to approve the proposed amendments to bye-law 20.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENTS TO
BYE-LAW 20.
The full text of the amended and restated bye-law 20 is attached hereto as
Appendix B of this proxy statement.
PROPOSAL 3 -- APPROVAL OF SHARE-BASED AWARDS MADE TO
THE CHAIRMAN AND THE VICE CHAIRMAN OF OUR BOARD OF DIRECTORS
IN CONNECTION WITH THE CAPITAL INFUSION
Purpose of Shareholder Approval
Our common shares are traded on the Nasdaq Stock Market. The rules of the
National Association of Securities Dealers Inc. require that companies whose
securities are traded on the Nasdaq Stock Market obtain shareholder approval for
the issuance of securities to officers and directors under certain
circumstances. Under this rule, we are required to obtain shareholder approval
of the awards made to Mr. Clements, the chairman of
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our Board of Directors, and Mr. Pasquesi, the executive vice chairman of the
Board, in connection with the capital infusion in November 2001, as described
below. Shareholder approval of these awards is not required as a matter of
Bermuda law or other applicable law or rules or by our bye-laws.
On March 7, 2002 at a special meeting of our shareholders, the shareholders
approved both (i) the issuance of common shares upon conversion or exercise of
the preference shares and warrants purchased by the investors in the capital
infusion in excess of the maximum amount of common shares that would otherwise
have been permitted under Nasdaq Stock Market rules to be issued without such
shareholder approval, and (ii) the provision for voting power of the preference
shares in excess of the maximum amount that is permitted under Nasdaq Stock
Market rules without such shareholder approval. The shareholders also approved
amendments to our bye-law limiting voting power of specified shareholders to
9.9% of the voting power of our shares and our bye-law concerning election of
subsidiary directors.
Description of Awards
Robert Clements
In connection with the capital infusion, Mr. Clements, our chairman, was
granted a total of 1,689,629 restricted shares. Of this total, 1,668,157
restricted shares were granted on October 23, 2001 and 21,472 restricted shares
were granted on November 19, 2001. The restricted shares will vest in five equal
annual installments commencing on October 23, 2002. However, if Mr. Clements'
service as chairman is terminated by us or is not continued by us for any
reason, or his service terminates due to his death or permanent disability, the
restricted shares will vest in full upon such termination of service. Any
unvested shares will be forfeited if Mr. Clements otherwise terminates his
service with us. In addition, Mr. Clements has agreed that, in the event his
service is terminated by us prior to the fifth anniversary of the date of grant,
he will not compete with us during the period ending on the later of such fifth
anniversary or one year following such termination of service. These grants to
Mr. Clements will be rescinded if they are not approved by our shareholders
prior to October 23, 2002.
John M. Pasquesi
On October 23, 2001, in consideration for his providing structuring and
advisory services to us in connection with the investment, we granted Mr.
Pasquesi nonqualified options to purchase 750,946 common shares at an exercise
price of $20.00 per share. These nonqualified options vested upon grant and
expire on October 23, 2011. This grant of nonqualified options to purchase
750,946 common shares will be rescinded if it is not approved by our
shareholders prior to October 23, 2002.
See "The Capital Infusion" for a description of the making of the above
grants. For a description of federal income tax consequences relating to the
above awards, see "Proposal 4 -- 2002 Long Term Incentive and Share Award
Plan--Description of Plan--Federal Income Tax Consequences."
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the annual general meeting, voting together as a single class,
will be required to approve the above share-based awards. Persons holding shares
representing an aggregate of 60% of the votes entitled to be cast at the meeting
have agreed, in connection with the capital infusion, to vote in favor of
Proposal 3. These people are: HFCP IV(Bermuda), L.P., H&F International Partners
IV-A (Bermuda), L.P., H&F International Partners IV-B (Bermuda), L.P., H&F
Executive Fund IV (Bermuda), L.P., Warburg Pincus Netherlands International
Partners I, CV., Warburg Pincus Netherlands International Partners II, CV.,
Warburg Pincus (Bermuda) International Partners, L.P., Warburg Pincus (Bermuda),
Private Equity VIII, L.P., Trident II, L.P., Marsh & McLennan
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Capital Professionals Fund, L.P., Marsh & McLennan Employees' Securities
Company, L.P., Farallon Capital Partners, L.P., Farallon Capital Institutional
Partners II, L.P., Farallon Capital Institutional Partners III, L.P., RR Capital
Partners, L.P., Insurance Private Equity Investors, L.L.C., Orbital Holdings,
Ltd., Sound View Partners, L.P., Otter Capital LLC, Peter A. Appel, Paul B.
Ingrey, Dwight R. Evans and Marc Grandisson. Therefore, it is likely that
Proposal 3 will receive the requisite vote for approval.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE
ABOVE SHARE-BASED AWARDS.
PROPOSAL 4-- APPROVAL OF 2002 LONG TERM INCENTIVE AND SHARE AWARD PLAN
Introduction
Simultaneously with the execution of the documents relating to the capital
infusion, in October 2001, the Company adopted the Long Term Incentive Plan for
New Employees (the "New Employee Plan") in order to provide incentives to
attract and motivate new hires in connection with the launch of our new
underwriting initiative. Recent events have provided a significant market
opportunity for well capitalized insurance companies that are not burdened by
the uncertainties resulting from prior years' underwriting losses and material
reinsurance recoverable balances. As a result, we recently launched an
underwriting initiative that included the recruitment of new insurance and
reinsurance management teams and the capital infusion. A total of 4,600,000
shares have been reserved for issuance under the New Employee Plan. Of such
amount, 3,295,170 of such shares have been awarded under the New Employee Plan.
As eligibility under the New Employee Plan is restricted to new hires, none of
the shares under the New Employee Plan are available for grants to directors or
existing employees. In addition, all of the Company's predecessor stock plans
for existing employees and directors have been previously depleted. Therefore,
in order to be in a position to provide long-term incentive compensation for the
Company's employees and directors, our Board of Directors adopted the 2002 Long
Term Incentive and Share Award Plan (the "2002 Plan"), subject to approval by
the shareholders at this annual general meeting.
If the 2002 Plan is approved by shareholders, the New Employee Plan will
terminate. By including unused shares from the New Employee Plan under the 2002
Plan, the Company will be provided with the flexibility to grant such shares as
incentive compensation to existing employees and directors as well as to new
hires. In addition, under the 2002 Plan, grants may be structured to comply with
an exception to nondeductibility under Section 162(m) of the Code, which
alternative is unavailable for grants made under the New Employee Plan (see
"--Description of 2002 Plan--Limitations on Deductibility" below). If the 2002
Plan is approved by shareholders, the total number of common shares that will be
reserved under the 2002 Plan will equal the sum of 2,200,000 and the number of
remaining shares reserved for issuance under the New Employee Plan as of the
date of such approval. The maximum number of common shares that will be reserved
under the 2002 plan is 3,504,830 based on the number of remaining shares
reserved for issuance under the New Employee Plan as of April 10, 2002.
The following summary is qualified in its entirety by reference to the 2002
Plan, which is attached as Appendix C of this proxy statement.
Description of 2002 Plan
General
The 2002 Plan is intended to provide incentives to attract, retain and
motivate employees and directors in order to achieve our long-term growth and
profitability objectives. The 2002 Plan will provide for the grant
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to eligible employees and directors of stock options, stock appreciation rights,
restricted shares, restricted share units payable in common shares or cash,
share awards in lieu of cash awards, dividend equivalents and other share-based
awards (the "Awards"). The 2002 Plan, like its predecessor, also will provide
our non-employee directors with the opportunity to receive the annual retainer
fee for Board service in common shares. A maximum of up to 3,504,830 common
shares will be reserved for issuance under the 2002 Plan, subject to
anti-dilution adjustments in the event of certain changes in the Company's
capital structure. See "--Capital Structure Changes."
Eligibility and Administration
Officers, other employees and directors of ACGL and its subsidiaries and
affiliates who are responsible for, or contribute to, the management and
profitability of the business of the Company will be eligible to be granted
Awards under the 2002 Plan. The 2002 Plan will be administered by the
compensation committee or such other committee of the Board of Directors (or the
entire Board) as may be designated by the Board (the "Committee"). The Committee
will determine which eligible employees and directors receive Awards, the types
of Awards to be received and the terms and conditions thereof. The Committee
will have authority to waive conditions relating to an Award or accelerate
vesting of Awards. The 2002 Plan, like its predecessor, will also provide for
certain non-discretionary grants to non-employee directors. In addition, the
2002 Plan will provide for the payment of all or a portion of the annual
retainer fee for non-employee directors in our common shares or cash.
Approximately 120 employees and four non-employee directors are currently
eligible to participate in the 2002 Plan.
The Committee will be permitted to delegate to officers of the Company the
authority to perform administrative functions for the 2002 Plan and, with
respect to Awards granted to persons not subject to Section 16 of the Exchange
Act, to perform such other functions as the Committee may determine to the
extent permitted under Rule 16b-3 of the Exchange Act and applicable law.
Awards
Incentive stock options intended to qualify for special tax treatment in
accordance with the Code and non-qualified stock options not intended to qualify
for special tax treatment under the Code may be granted for such number of
common shares as the Committee determines. The Committee will be authorized to
set the terms relating to an option, including exercise price and the time and
method of exercise. The terms of incentive stock options will comply with the
provisions of Section 422 of the Code. Awards may be granted alone, in tandem
with or in exchange for any other Award. The 2002 Plan specifically provides
that outstanding options cannot be repriced.
A share appreciation right ("SAR") will entitle the holder thereof to
receive with respect to each share subject thereto, an amount equal to the
excess of the fair market value of one common share on the date of exercise (or,
if the Committee so determines, at any time during a specified period before or
after the date of exercise) over the exercise price of the SAR set by the
Committee as of the date of grant. Payment with respect to SARs may be made in
cash or common shares as determined by the Committee.
During a calendar year, the maximum number of common shares with respect to
which options and SARs may be granted to an eligible participant under the 2002
Plan will be 1,000,000 shares.
Awards of restricted shares will be subject to such restrictions on
transferability and other restrictions, if any, as the Committee may impose.
Such restrictions will lapse under circumstances as the Committee may determine,
including upon the achievement of performance criteria referred to below. Except
as otherwise determined by the Committee, eligible employees granted restricted
shares will have all of the rights of a share-
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holder, including the right to vote restricted shares and receive dividends
thereon, and unvested restricted shares will be forfeited upon termination of
employment during any applicable restriction period.
A restricted share unit will entitle the holder thereof to receive common
shares or cash at the end of a specified deferral period. Restricted share units
also will be subject to such restrictions as the Committee may impose. Such
restrictions will lapse under circumstances as the Committee may determine,
including upon the achievement of performance criteria referred to below. Except
as otherwise determined by the Committee, restricted share units subject to
deferral or restriction will be forfeited upon termination of employment during
any applicable deferral or restriction period.
Performance shares and performance units will provide for future issuance
of shares or payment of cash, respectively, to the recipient upon the attainment
of corporate performance goals established by the Committee over specified
performance periods. Except as otherwise determined by the Committee,
performance shares and performance units will be forfeited upon termination of
employment during any applicable performance period.
Performance objectives may vary from employee to employee and will be based
upon such one or more performance criteria as the Committee may deem
appropriate, including: growth in book, economic book and/or intrinsic book
value; appreciation in value of the common shares; total shareholder return;
earnings per share; comprehensive income; operating income; net income; pre-tax
earnings, pre-tax earnings before interest, depreciation and amortization; pro
forma net income; return on equity; return on designated assets; return on
capital; economic value added; earnings; revenues; expenses; operating profit
margin; operating cash flow; free cash flow; cash flow return on investment;
operating margin; net profit margin; or any of the above criteria as compared to
the performance of a published or special index deemed applicable by the
Committee, including, but not limited to, the Standard & Poor's 500 Stock Index.
The Committee may revise performance objectives if significant events occur
during the performance period which the Committee expects to have a substantial
effect on such objectives.
During a calendar year, the maximum number of common shares with respect to
which restricted shares, restricted share units, performance shares and
performance units intended to qualify as performance-based compensation within
the meaning of Section 162(m)(4)(C) of the Code to an eligible participant under
the 2002 Plan will be the equivalent of 500,000 shares.
Dividend equivalents granted under the 2002 Plan will entitle the holder
thereof to receive cash, common shares or other property equal in value to
dividends paid with respect to a specified number of common shares. Dividend
equivalents may be awarded on a free-standing basis or in connection with
another Award, and may be paid currently or on a deferred basis. The Committee
is also authorized, subject to limitations under applicable law, to grant such
other Awards that may be denominated in, valued in, or otherwise based on,
common shares, as deemed by the Committee to be consistent with the purposes of
the 2002 Plan.
Automatic Grants of Options to Non-Employee Directors
In addition to permitting discretionary grants to directors, the 2002 Plan
also will provide for certain automatic grants of stock options to non-employee
members of our Board of Directors. On the date any individual first becomes a
non-employee director, such individual will automatically be granted an option
to purchase 300 common shares with an exercise price per share equal to the
market price per share on the date of grant. Each such option will become
exercisable in three equal installments, commencing on the date of grant and
annually thereafter, and will expire on the tenth anniversary of the date of
grant. In addition, as of January 1 of each year, each non-employee director
then in office will automatically be granted an option to purchase 1,500 common
shares with an exercise price per share equal to the market price per share on
the date of grant.
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Each such option will become fully exercisable on the first anniversary of the
date of grant and will expire on the tenth anniversary of the date of grant. The
exercise price of a non-employee director's option may be paid to the Company at
the time of exercise either in cash, or in shares already owned by the director
and having a total market value equal to the exercise price, or in a combination
of cash and such shares.
If an individual ceases to be a non-employee director (i) due to retirement
after attainment of age 65 or (ii) due to death or disability, all of his or her
outstanding options, to the extent not already exercisable in full, will become
immediately and fully exercisable at the time of termination of service, and all
of such director's options may be exercised at any time prior to the expiration
dates of such options. If such director's service terminates for any other
reason, all options which are not then exercisable will be canceled on the date
service terminates, and options which are then exercisable may be exercised at
any time within six months after the date of such termination, but not later
than the expiration date of the options.
Payment of Board Retainer Fees in Stock or Cash
Under the 2002 Plan, each non-employee director will have the option to
receive his annual retainer fee in the form of common shares instead of cash.
Any shares so elected will be payable at the time cash retainer fees are
otherwise payable to non-employee directors, and the number of shares
distributed will be equal to 120% of the amount of the annual retainer fee
otherwise payable on such payment date divided by the fair market value of a
common share on such date. See "Proposal 1 -- Election of Directors--Directors
and Executive Officers--Compensation of Directors."
Nontransferability
Awards (except for vested shares) will generally not be transferable by the
participant other than by will or the laws of descent and distribution and will
be exercisable during the lifetime of the participant only by such participant
or his or her guardian or legal representative, provided that, if the Committee
expressly so provides, an Award (other than incentive stock options) may be
transferred by a participant to members of his or her immediate family or to a
trust established for the exclusive benefit of solely one or more members of the
participant's immediate family.
Capital Structure Changes
With respect to non-employee director options, in the event that any
dividend in shares, recapitalization, share split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other such change (a "Capital Structure Change"), affects our
common shares such that outstanding shares are increased or decreased or changed
into or exchanged for a different number or kind of shares, other securities of
ACGL or another corporation or other consideration, then in order to maintain
the proportionate interest of the non-employee directors and preserve the value
of such directors' options, (i) there will automatically be substituted for each
share subject to an unexercised non-employee director's option and each share to
be issued to such directors under the 2002 Plan subsequent to such event, the
number and kind of shares, other securities or other consideration into which
each outstanding share will be changed or for which each such share will be
exchanged, and (ii) the exercise price will be increased or decreased
proportionately so that the aggregate purchase price for the shares subject to
any unexercised non-employee director's option will remain the same as
immediately prior to such event.
If the Committee determines that any Capital Structure Change or other
similar corporate transaction or event affects our common shares such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of eligible employees under the 2002 Plan, then the Committee is
authorized to make such equitable changes or adjustments as it deems
appropriate, including adjustments to (i) the number and kind of
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shares which may thereafter be issued under the 2002 Plan, (ii) the number and
kind of shares, other securities or other consideration issued or issuable in
respect of outstanding Awards and (iii) the exercise price, grant price or
purchase price relating to any Award.
Amendment and Termination
The 2002 Plan may be amended, altered, suspended, discontinued or
terminated by the Board of Directors at any time, in whole or in part. However,
any amendment for which shareholder approval is required by Section 422 of the
Code will not be effective until such approval has been attained. In addition,
no amendment, alteration, suspension, discontinuation or termination of the 2002
Plan may impair the rights or, in any other manner, adversely affect the rights
of a participant under any Award theretofore granted to him or her without the
consent of the affected participant. Unless earlier terminated, the 2002 Plan
will expire in January 2012, and no further awards may be granted thereunder
after such date.
Market Value
The per share closing price of our common shares on May 20, 2002 was
$30.17.
Federal Income Tax Consequences
The following is a summary of the federal income tax consequences of the
2002 Plan, based upon current provisions of the Code, the Treasury regulations
promulgated thereunder and administrative and judicial interpretation thereof,
and does not address the consequences under any other applicable tax laws. The
provisions of the Code, regulations thereunder and related interpretations are
complicated and their impact in any one case may depend upon the particular
circumstances relating thereto.
Stock Options. In general, the grant of an option will not be a taxable
event to the recipient and it will not result in a deduction to ACGL or any of
its subsidiaries. The tax consequences associated with the exercise of an option
and the subsequent disposition of common shares acquired on the exercise of such
option depend on whether the option is a non-qualified stock option or an
incentive stock option.
Upon the exercise of a non-qualified stock option, the participant will
recognize ordinary taxable income equal to the excess of the fair market value
of the common shares received upon exercise over the exercise price. If the
participant is employed by a United States subsidiary, the subsidiary will
generally be able to claim a deduction in an equivalent amount. Any gain or loss
upon a subsequent sale or exchange of the common shares will be capital gain or
loss. If the holding period for the shares is not more than one year, the gain
or loss will be short-term capital gain or loss. Short-term capital gain is
taxable at the same rates as ordinary income. If the holding period is more than
one year, the gain or loss will be long-term capital gain or loss. In general,
long-term capital gain is subject to lower maximum federal income tax rates than
ordinary income.
Generally, upon the exercise of an incentive stock option, a participant
will not recognize ordinary taxable income and no deduction will be available to
ACGL, provided the option is exercised while the participant is an employee or
within three months following termination of employment (longer, in the case of
termination of employment by reason of disability or death). If an incentive
stock option granted under the 2002 Plan is exercised after these periods, the
exercise will be treated for U.S. federal income tax purposes as the exercise of
a non-qualified stock option. Also, an incentive stock option granted under the
2002 Plan will be treated as a non-qualified stock option to the extent it
(together with any other incentive stock options granted under other plans of
ACGL and its subsidiaries) first becomes exercisable in any calendar year for
common shares having a fair market value, determined as of the date of grant, in
excess of $100,000.
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If common shares acquired upon exercise of an incentive stock option are
sold or exchanged more than one year after the date of exercise and more than
two years from the date of grant of the option, any gain or loss will be
long-term capital gain or loss. If common shares acquired upon exercise of an
incentive stock option are disposed of prior to the expiration of these one-year
or two-year holding periods (a "Disqualifying Disposition"), the participant
will recognize ordinary income at the time of disposition, and, if the
participant is employed by a United States subsidiary, the subsidiary will
generally be able to claim a deduction, in an amount equal to the excess of the
fair market value of the common shares at the date of exercise over the exercise
price (or, in certain circumstances, the gain on sale, if less). Any additional
gain will be treated as capital gain, long-term or short-term, depending on how
long the common shares have been held. Where common shares are sold or exchanged
in a Disqualifying Disposition (other than certain related party transactions)
for an amount less than their fair market value at the date of exercise, any
ordinary income recognized in connection with the Disqualifying Disposition will
be limited to the amount of gain, if any, recognized in the sale or exchange,
and any loss will be a long-term or short-term capital loss, depending on how
long the common shares have been held.
Although the exercise of an incentive stock option as described above would
not produce ordinary taxable income to the participant, it would result in an
increase in the participant's alternative minimum taxable income and may result
in an alternative minimum tax liability for the year of exercise.
Restricted Shares. A participant who receives restricted shares will
generally recognize ordinary income at the time they vest. The amount of
ordinary income so recognized will be the fair market value of the common shares
at the time the income is recognized, determined without regard to any
restrictions other than restrictions which by their terms will never lapse. If
the participant is employed by a United States subsidiary, this amount will
generally be deductible for United States federal income tax purposes by the
subsidiary. Dividends paid with respect to common shares that are
nontransferable will be ordinary compensation income to the participant (and
generally deductible by an employer that is a United States subsidiary). Any
gain or loss upon a subsequent sale or exchange of the common shares, measured
by the difference between the sale price and the fair market value on the date
the shares vest, will be capital gain or loss, long-term or short-term,
depending on the holding period for the common shares. The holding period for
this purpose will begin on the date following the date the shares vest.
In lieu of the treatment described above, a participant may elect immediate
recognition of income under Section 83(b) of the Code. In such event, the
participant will recognize as income the fair market value of the restricted
stock at the time of grant (determined without regard to any restrictions other
than restrictions which by their terms will never lapse), and if the participant
is employed by a United States subsidiary, the subsidiary will generally be
entitled to a corresponding deduction. Dividends paid with respect to shares as
to which a proper Section 83(b) election has been made will not be deductible to
ACGL or any of its subsidiaries. If a Section 83(b) election is made and the
restricted shares are subsequently forfeited, the participant will not be
entitled to any offsetting tax deduction.
SARs and Other Awards. With respect to SARs, restricted share units,
performance shares, performance units, dividend equivalents and other Awards
under the 2002 Plan not described above, generally, when a participant receives
payment with respect to any such Award granted to him or her under the 2002
Plan, the amount of cash and the fair market value of any other property
received will be ordinary income to such participant and will be allowed as a
deduction for United States federal income tax purposes to an employer that is a
United States subsidiary.
Payment of Withholding Taxes. ACGL may withhold, or require a participant
to remit to ACGL or a subsidiary, an amount sufficient to satisfy any federal,
state or local withholding tax requirements associated with Awards under the
2002 Plan.
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Limitation on Deductibility
Section 162(m) of the Code generally limits the deductible amount of annual
compensation paid (including, unless an exception applies, compensation
otherwise deductible in connection with Awards granted under the 2002 Plan) by a
public company to a "covered employee" (i.e., the chief executive officer and
four other most highly compensated executive officers of the Company) to no more
than $1,000,000 each. See "Report of the Compensation Committee of the Board of
Directors--Compliance with Internal Revenue Code Section 162(m)."
New Plan Benefits
No benefits have been received or allocated to any employee or non-employee
director under the 2002 Plan (except grants made to Robert Clements, our
chairman, as compensation under his retention agreement as described above under
"Employment Arrangements" and pursuant to the provisions authorizing automatic
annual grants of stock options to non-employee directors as described above
under "--Automatic Grants of Options to Non-Employee Directors"), and therefore
a "New Plan Benefits" table has not been included.
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the annual general meeting, voting together as a single class,
will be required for approval of the 2002 Long Term Incentive and Share Award
Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE 2002
LONG TERM INCENTIVE AND SHARE AWARD PLAN.
PROPOSAL 5 -- ELECTION OF SUBSIDIARY DIRECTORS
Under our bye-laws, the boards of directors of any of our subsidiaries that
is incorporated in Bermuda, Barbados or the Cayman Islands, and any other
subsidiary designated by our Board of Directors, must consist of persons who
have been elected by our shareholders as Designated Company Directors.
The persons named below have been nominated to serve as Designated Company
Directors of our non-United States subsidiaries indicated below. Unless
authority to vote for this nominee is withheld, the enclosed proxy will be voted
for this nominee, except that the persons designated as proxies reserve
discretion to cast their votes for other persons in the unanticipated event that
this nominee is unable or declines to serve.
Arch Reinsurance Ltd. and Other
Non-U.S. Subsidiaries (except as
otherwise indicated in this Proposal 5) Arch Capital Holdings Ltd.
--------------------------------------- --------------------------
Dwight R. Evans Peter A. Appel
Marc Grandisson Graham B. Collis
Paul B. Ingrey John D. Vollaro
Constantine Iordanou
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Arch Risk Transfer Services Ltd.
Alternative Re Holdings Limited
Alternative Re Limited
Alternative Insurance Company Limited
Barbados Subsidiaries Alternative Underwriting Services, Ltd.
--------------------- ---------------------------------------
Debra M. O'Connor Graham B. Collis
Steven K. Parker Debra M. O'Connor
Robert C. Worme
Mr. Appel, 40, has been president and chief executive officer of ACGL since
May 5, 2000 and a director of ACGL since November 1999. He was executive vice
president and chief operating officer of ACGL from November 1999 to May 5, 2000,
and general counsel and secretary of ACGL from November 1995 to May 5, 2000. Mr.
Appel previously served as a managing director of ACGL from November 1995 to
November 1999. From September 1987 to November 1995, Mr. Appel practiced law
with the New York firm of Willkie Farr & Gallagher, where he was a partner from
January 1995. Mr. Appel is currently a member of the Board of overseers and a
member of the executive committee of the School of Risk Management, Insurance
and Actuarial Science of St. John's University. He holds an A.B. degree from
Colgate University and a law degree from Harvard University.
Mr. Collis, 42, has practiced law at Conyers Dill & Pearman in Bermuda
since 1992, where he has been a partner since 1995. He is a director of Coastal
Caribbean Oils & Minerals Limited and Zambia Copper Investments Limited.
Mr. Evans, 49, has served as president of Arch Reinsurance Ltd. since
October 2001. From 1998 until October 2001, Mr. Evans was executive vice
president of St. Paul Re. From 1983 until 1998, Mr. Evans was employed as
executive vice president for F&G Re Inc., a reinsurance subsidiary of USF&G
Corporation. Prior to that, Mr. Evans served as assistant vice president at
Skandia Reinsurance Company and as a reinsurance underwriter as Prudential
Reinsurance Company (now Everest Re Company). He holds a B.A. from Ohio
University.
Mr. Grandisson, 34, has served as senior vice president and chief actuary
of Arch Reinsurance Ltd. since October 2001. From March 1999 until October 2001,
Mr. Grandisson was employed as vice president and actuary of the reinsurance
division of Berkshire Hathaway. From July 1996 until February 1999, Mr.
Grandisson was employed as vice president-director of F&G Re Inc. From July 1994
until July 1996, Mr. Grandisson was employed as an actuary for F&G Re. Prior to
that, Mr. Grandisson was employed as an actuarial assistant of Tillinghast, a
Towers Perrin Co.
Mr. Ingrey, 62, has served as a director of Arch Capital Group Ltd. and as
chief executive officer of Arch Reinsurance Ltd. since October 2001. He was the
founder of F&G Re, Inc. and served as its chairman and chief executive officer
from 1983 to 1996. Prior to that, he was senior vice president of Prudential
Reinsurance, an underwriter of property/casualty reinsurance. He has also served
as a director of USF&G Corporation (until its sale to The St. Paul Companies,
Inc. in 1998) and E.W. Blanch Holdings, Inc., the holding company for E.W.
Blanch Co., which provides risk management and distribution services through
several subsidiaries (until its sale to Benefield Greig, the London-based
international reinsurance broker, in April 2001) and is currently on the Board
of Fairfax Financial Holdings Limited, an insurance and reinsurance company with
a focus on property/casualty insurance. He holds a B.A. from Colgate University
and an M.B.A. from The College of Insurance.
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Mr. Iordanou, 52, has served as a director of the Company and as chief
executive officer of Arch Capital Group (U.S.) Inc. since January 1, 2002. From
March 1992 through December 2001, Mr. Iordanou served in various capacities for
Zurich Financial Services and its affiliates, including as senior vice president
of group operations and business development worldwide of Zurich Financial
Services and CEO of Zurich North America. Prior to joining Zurich, he had senior
executive responsibilities with Berkshire Hathaway Group and American
International Group. He holds an aerospace engineering degree from New York
University.
Ms. O'Connor, 42, has been senior vice president, controller and treasurer
of the Company since June 9, 2000. From 1995 to June 9, 2000, Ms. O'Connor was
senior vice president and controller of the Company's reinsurance subsidiary.
From 1986 until 1995, Ms. O'Connor served at NAC Re Corp. in various capacities,
including vice president and controller. Prior to that, Ms. O'Connor was
employed by General Re and the accounting firm of Coopers & Lybrand. She holds a
B.S. degree from Manhattan College.
Mr. Parker, 44, has been a managing director of VCC (Barbados) Limited,
which provides operational and management services to Barbados-based companies,
since 1996. He previously served as a vice president and a director of various
Barbados and Cayman Islands-based subsidiaries of Cott Corporation from 1995
through 2000.
Mr. Vollaro, 57, has been executive vice president and chief financial
officer since January 2002. Prior to joining us, Mr. Vollaro acted as an
independent consultant in the insurance industry since March 2000. Prior to
March 2000, Mr. Vollaro was president and chief operating officer of W.R.
Berkley Corporation from January 1996 and a director from September 1995 until
March 2000. Mr. Vollaro was chief executive officer of Signet Star Holdings,
Inc., a joint venture between W.R. Berkley Corporation and General Re
Corporation, from July 1993 to December 1995. Mr. Vollaro served as executive
vice president of W.R. Berkley Corporation from 1991 until 1993, chief financial
officer and treasurer of W.R. Berkley Corporation from 1983 to 1993 and senior
vice president of W.R. Berkley Corporation from 1983 to 1991. He holds a B.S.
degree from Long Island University.
Mr. Worme, 50, has practiced law at the Barbados-based law firm of
Fitzwilliam, Stone & Alcazar since 1978, where he has been a partner since 1980.
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the annual general meeting, voting together as a single class,
will be required for the election of Designated Company Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF THE
DESIGNATED COMPANY DIRECTORS INDICATED ABOVE.
PROPOSAL 6 -- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors proposes and recommends that the shareholders ratify
the selection of the firm of PricewaterhouseCoopers to serve as independent
auditors of ACGL for the year ending December 31, 2002. PricewaterhouseCoopers
served as ACGL's independent auditors from our inception in June 1995 to the
present. Unless otherwise directed by the shareholders, proxies will be voted
for approval of the selection of PricewaterhouseCoopers to audit our
consolidated financial statements for the year ending December 31, 2002. A
representative of PricewaterhouseCoopers will attend the annual general meeting
and will have an opportunity to make a statement and respond to appropriate
questions.
-55-
Audit Fees
The aggregate fees billed to the Company for the fiscal year ended December
31, 2001 by the Company's principal independent accounting firm,
PricewaterhouseCoopers, are as follows:
Audit fees $255,500
Financial information systems design and
implementation fees 0
All other fees 645,206(1)(2)(2)(3)
Total $900,706
------------------------
(1) All other fees consist of (i) $324,900 for audit related services,
including due diligence services and non-recurring services in connection
with the capital infusion, and (ii) $320,306 for tax services in connection
with acquisitions, the capital infusion and tax compliance matters.
(2) The audit committee has considered whether the provision of these services
is compatible with maintaining PricewaterhouseCoopers' independence.
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the annual general meeting, voting together as a single class,
will be required for the ratification of the selection of PricewaterhouseCoopers
as the Company's independent auditors for the year ending December 31, 2002.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF
THE SELECTION OF PRICEWATERHOUSECOOPERS AS THE COMPANY'S INDEPENDENT AUDITORS
FOR THE YEAR ENDING DECEMBER 31, 2002.
SHAREHOLDER PROPOSALS FOR THE 2003 ANNUAL GENERAL MEETING
All proposals of securityholders intended to be presented at the 2003
annual general meeting of shareholders must be received by the Company not later
than December 31, 2002 for inclusion in our 2003 proxy statement and form of
proxy relating to the 2003 annual general meeting. Upon timely receipt of any
such proposal, we will determine whether or not to include such proposal in the
proxy statement and proxy in accordance with applicable regulations and
provisions governing the solicitation of proxies. Proposals should be addressed
to Corporate Secretary, Arch Capital Group Ltd., Wessex House, 3rd Floor, 45
Reid Street, Hamilton HM 12 Bermuda.
For any proposal that is not submitted for inclusion in next year's proxy
statement (as described in the preceding paragraph) but is instead sought to be
presented directly at next year's annual general meeting, the rules of the
Securities and Exchange Commission permit management to vote proxies in its
discretion if we do not receive notice of the proposal on or before March 15,
2003. Notices of intention to present proposals at next year's annual general
meeting should be addressed to Corporate Secretary, Arch Capital Group Ltd.,
Wessex House, 3rd Floor, 45 Reid Street, Hamilton HM 12 Bermuda.
In addition, our bye-laws provide that any shareholder desiring to make a
proposal or nominate a director at an annual general meeting must provide
written notice of such proposal or nomination to the secretary of the Company at
least 50 days prior to the date of the meeting at which such proposal or
nomination is proposed to be voted upon (or, if less than 55 days' notice of an
annual general meeting is given, shareholder pro-
-56-
posals and nominations must be delivered no later than the close of business of
the seventh day following the day notice was mailed). Our bye-laws require that
notices of shareholder proposals or nominations set forth certain information
with respect to each proposal or nomination and the shareholder making such
proposal or nomination.
A shareholder proponent must be a shareholder of the Company who was a
shareholder of record both at the time of giving of notice and at the time of
the meeting and who is entitled to vote at the meeting.
Shareholders are entitled to receive, upon written request and without
charge, a copy of our Annual Report on Form 10-K for the year ended December 31,
2001. Please direct such requests to Corporate Secretary, Arch Capital Group
Ltd., Wessex House, 3rd Floor, 45 Reid Street, Hamilton HM 12 Bermuda.
-57-
Appendix A
ARCH CAPITAL GROUP LTD.
Audit Committee Charter
I. Organization
The Audit Committee of the Board of Directors of Arch Capital Group Ltd.
(the "Company") shall be composed of three or more Directors, each of whom is
independent of management and the Company and free of any relationship which, in
the opinion of the Board of Directors, would interfere with the Director's
exercise of independent judgment as a Committee member. The Audit Committee
shall comply with the rules and regulations of The Nasdaq Stock Market, Inc.
("Nasdaq") applicable to the composition and responsibilities of audit
committees generally.
II. Purpose
The primary purpose of the Audit Committee is to assist the Board of
Directors in overseeing management and the independent auditors in fulfilling
their responsibilities in the financial reporting process of the Company. It is
not the responsibility of the Audit Committee to plan or conduct audits or to
determine that the Company's financial statements are in all material respects
complete and accurate and in accordance with generally accepted accounting
principles. This is the responsibility of management and the independent
auditors. It is also not the responsibility of the Audit Committee to assure
compliance with laws and regulations or with any codes or standards of conduct
or related policies adopted by the Company from time to time which seek to
ensure that the business of the Company is conducted in an ethical and legal
manner.
III. Meetings
The Committee shall meet on a regular basis and is empowered to hold
special meetings as circumstances require, and shall make regular reports to the
Board of Directors. In order to foster open communications, the Committee shall
meet regularly with management and the independent auditors in separate
executive sessions to discuss any matters that the Committee or each of these
groups believes should be discussed privately.
IV. Relationship With Independent AUditors
The Company's independent auditors are ultimately accountable to the Board
of Directors and the Audit Committee, and the Board of Directors and the Audit
Committee have the ultimate authority and responsibility to select, evaluate,
and, where appropriate, replace the independent auditors. Additionally, the
Audit Committee shall:
o Obtain from the independent auditors each year a formal written
statement delineating all relationships between the auditors and the
Company;
o Periodically engage in a dialogue with the independent auditors
regarding any disclosed relationships or services which may impact the
objectivity and independence of the auditors; and
o Based on a review of the independent auditor's formal statement and
the Committee's dialogue with the independent auditors, make a
determination regarding the independence of the independ-
A-1
ent auditors and take other appropriate action, or recommend that the
Board of Directors take such action.
V. Responsibilities
The Audit Committee shall:
1. Review with Company management and the independent auditors the
proposed overall scope of the Company's annual audit, the adequacy and
integrity of the Company's system of internal controls, and the
Company's audited financial statements and related disclosures.
2. Discuss with the independent auditors their judgments about the
quality, not just the acceptability, of the Company's accounting
principles as applied in its financial reporting.
3. Review periodically with management and independent auditors any
codes, programs, standards or policies adopted by the Company from
time to time which seek to ensure that the business of the Company is
conducted in an ethical and legal manner, as well as the systems
established by the Company to monitor compliance with such codes,
programs, standards or policies. Such reviews will be undertaken in
the manner and not less frequently than required by the terms of the
applicable code, program, standard or policy.
4. Review with the Company's counsel any legal and regulatory matters
that may have a material impact on the Company's financial statements.
5. Review with the independent auditors significant changes in accounting
principles and practices.
6. Review and assess the adequacy of the Audit Committee Charter on an
annual basis.
7. Review and assess compliance with all applicable rules and regulations
of the Securities and Exchange Commission and Nasdaq specifically
applicable to the composition and responsibilities of the Audit
Committee.
8. Perform such other activities as the Committee or the Board of
Directors may from time to time deem necessary or appropriate.
* * * * *
A-2
Appendix B
Proposed Amended and Restated Bye-law 20
20. Special Board meetings
Special meetings of the Board may be called by the Chairman of the Board,
or by the President, or by three Directors or a majority of the total number of
Directors (whichever is fewer), upon the notice specified in Bye-law 16(1).
B-1
Appendix C
ARCH CAPITAL GROUP LTD.
--------------------------------------------------------------------------------
2002 LONG TERM INCENTIVE AND SHARE AWARD PLAN
ARCH CAPITAL GROUP LTD.
2002 LONG TERM INCENTIVE AND SHARE AWARD PLAN
1. Purposes. The purposes of the 2002 Long Term Incentive and Share Award
Plan are to advance the interests of Arch Capital Group Ltd. and its
shareholders by providing a means to attract, retain, and motivate employees and
directors of the Company upon whose judgment, initiative and efforts the
continued success, growth and development of the Company is dependent.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below:
"Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board or the Committee as a
participating employer under the Plan, provided that the Company directly
or indirectly owns at least 20% of the combined voting power of all classes
of stock of such entity or at least 20% of the ownership interests in such
entity.
"Award" means any Option, SAR, Restricted Share, Restricted Share
Unit, Performance Share, Performance Unit, Dividend Equivalent, Other
Share-Based Award, Director's Option or Director's Share granted to an
Eligible Employee under the Plan.
"Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
"Beneficiary" means the person, persons, trust or trusts which have
been designated by such Eligible Employee in his or her most recent written
beneficiary designation filed with the Company to receive the benefits
specified under this Plan upon the death of the Eligible Employee, or, if
there is no designated Beneficiary or surviving designated Beneficiary,
then the person, persons, trust or trusts entitled by will or the laws of
descent and distribution to receive such benefits.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time. References to any provision of the Code shall be deemed to include
successor provisions thereto and regulations thereunder.
"Committee" means the Compensation Committee of the Board, or such
other Board committee or subcommittee (or the entire Board) as may be
designated by the Board to administer the Plan.
"Company" means Arch Capital Group Ltd., a corporation organized under
the laws of Bermuda, or any successor corporation.
"Director" means a non-employee member of the Board.
"Director's Option" means a NQSO granted to a Director under Section
7.
"Director's Shares" means Shares granted to a Director as payment of
the Director's annual retainer fee pursuant to the Director's election
under Section 8 of the Plan.
"Dividend Equivalent" means a right, granted under Section 5(g), to
receive cash, Shares, or other property equal in value to dividends paid
with respect to a specified number of Shares. Dividend
C-1
Equivalents may be awarded on a free-standing basis or in connection with
another Award, and may be paid currently or on a deferred basis.
"Eligible Employee" means (i) an employee of the Company or its
Subsidiaries and Affiliates, including any director who is an employee, who
is responsible for or contributes to the management, growth and/or
profitability of the business of the Company, its Subsidiaries or
Affiliates, and (ii) any Director. Notwithstanding any provisions of this
Plan to the contrary, an Award may be granted to an employee or consultant,
in connection with his or her hiring or retention prior to the date the
employee or consultant first performs services for the Company, a
Subsidiary or an Affiliate; provided, however, that any such Award shall
not become vested prior to the date the employee or consultant first
performs such services.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time. References to any provision of the Exchange Act shall be
deemed to include successor provisions thereto and regulations thereunder.
"Fair Market Value" means, with respect to Shares or other property,
the fair market value of such Shares or other property determined by such
methods or procedures as shall be established from time to time by the
Committee. Unless otherwise determined by the Committee in good faith, the
Fair Market Value of Shares as of any given date prior to the existence of
a public market for the Company's Shares shall mean the Company's book
value. Thereafter, unless otherwise determined by the Committee in good
faith, the Fair Market Value of Shares shall mean the mean between the high
and low selling prices per Share on the immediately preceding date (or, if
the Shares were not traded on that day, the next preceding day that the
Shares were traded) on the principal exchange on which the Shares are
traded, as such prices are officially quoted on such exchange.
"ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
"NQSO" means any Option that is not an ISO.
"Option" means a right, granted under Section 5(b) or Section 7, to
purchase Shares.
"Other Share-Based Award" means a right, granted under Section 5(h),
that relates to or is valued by reference to Shares.
"Participant" means an Eligible Employee or Director who has been
granted an Award or Director's Option under the Plan.
"Performance Share" means a performance share granted under Section
5(f).
"Performance Unit" means a performance unit granted under Section
5(f).
"Plan" means this 2002 Long Term Incentive and Share Award Plan.
"Restricted Shares" means an Award of Shares under Section 5(d) that
may be subject to certain restrictions and to a risk of forfeiture.
"Restricted Share Unit" means a right, granted under Section 5(e), to
receive Shares or cash at the end of a specified deferral period.
C-2
"Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
"SAR" or "Share Appreciation Right" means the right, granted under
Section 5(c), to be paid an amount measured by the difference between the
exercise price of the right and the Fair Market Value of Shares on the date
of exercise of the right, with payment to be made in cash, Shares, or
property as specified in the Award or determined by the Committee.
"Shares" means common shares, $.01 par value per share, of the
Company.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns
shares possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee, and the Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to select Eligible Employees to whom Awards may be granted;
(ii) to designate Affiliates;
(iii) to determine the type or types of Awards to be granted to each
Eligible Employee;
(iv) to determine the type and number of Awards to be granted, the
number of Shares to which an Award may relate, the terms and conditions of
any Award granted under the Plan (including, but not limited to, any
exercise price, grant price, or purchase price, and any bases for adjusting
such exercise, grant or purchase price, any restriction or condition, any
schedule for lapse of restrictions or conditions relating to
transferability or forfeiture, exercisability, or settlement of an Award,
and waiver or accelerations thereof, and waivers of performance conditions
relating to an Award, based in each case on such considerations as the
Committee shall determine), and all other matters to be determined in
connection with an Award;
(v) to determine whether, to what extent, and under what circumstances
an Award may be settled, or the exercise price of an Award may be paid, in
cash, Shares, other Awards, or other property, or an Award may be
cancelled, forfeited, exchanged, or surrendered;
(vi) to determine whether, to what extent, and under what
circumstances cash, Shares, other Awards, or other property payable with
respect to an Award will be deferred either automatically, at the election
of the Committee, or at the election of the Eligible Employee;
(vii) to prescribe the form of each Award Agreement, which need not be
identical for each Eligible Employee;
(viii) to adopt, amend, suspend, waive, and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
C-3
(ix) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, rules and regulations, Award Agreement, or other instrument
hereunder;
(x) to accelerate the exercisability or vesting of all or any portion
of any Award or to extend the period during which an Award is exercisable;
and
(xi) to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or
advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. The Committee shall have
sole discretion in exercising its authority under the Plan. Any action of the
Committee with respect to the Plan shall be final, conclusive, and binding on
all persons, including the Company, Subsidiaries, Affiliates, Eligible
Employees, any person claiming any rights under the Plan from or through any
Eligible Employee, and shareholders. The express grant of any specific power to
the Committee, and the taking of any action by the Committee, shall not be
construed as limiting any power or authority of the Committee. The Committee may
delegate to officers or managers of the Company or any Subsidiary or Affiliate
the authority, subject to such terms as the Committee shall determine, to
perform administrative functions and, with respect to Awards granted to persons
not subject to Section 16 of the Exchange Act, to perform such other functions
as the Committee may determine, to the extent permitted under Rule 16b-3 (if
applicable) and applicable law. Notwithstanding any provision of this Plan to
the contrary, the Committee may grant Awards which are subject to the approval
of the Board; provided that an Award shall be subject to Board approval only if
the Committee expressly so states.
(c) Limitation of Liability. Each member of the Committee shall be entitled
to, in good faith, rely or act upon any report or other information furnished to
him or her by any officer or other employee of the Company or any Subsidiary or
Affiliate, the Company's independent certified public accountants, or other
professional retained by the Company to assist in the administration of the
Plan. No member of the Committee, nor any officer or employee of the Company
acting on behalf of the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Committee and any officer or employee of the
Company acting on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company with respect to any such action,
determination, or interpretation.
(d) Limitation on Committee's Discretion. Anything in this Plan to the
contrary notwithstanding, in the case of any Award which is intended to qualify
as "performance-based compensation" within the meaning of Section 162(m)(4)(C)
of the Code, if the Award Agreement so provides, the Committee shall have no
discretion to increase the amount of compensation payable under the Award to the
extent such an increase would cause the Award to lose its qualification as such
performance-based compensation.
4. Shares Subject to the Plan.
(a) Subject to adjustment as provided in Section 4(c) hereof, the total
number of Shares reserved for issuance under the Plan shall be ____________(1).
No Award may be granted if the number of
----------
1 If the Plan is approved by shareholders, the number that will be inserted
above in Section 4(a) will equal the sum of 2,200,000 and the number of
remaining shares reserved for issuance under the Long Term Incentive Plan
for New Employees (the "New Employee Plan") as of the date of such
approval.
Footnote continued on next page.
C-4
Shares to which such Award relates, when added to the number of Shares
previously issued under the Plan, exceeds the number of Shares reserved under
the preceding sentence. If any Awards are forfeited, cancelled, terminated,
exchanged or surrendered or such Award is settled in cash or otherwise
terminates without a distribution of Shares to the Participant, any Shares
counted against the number of Shares reserved and available under the Plan with
respect to such Award shall, to the extent of any such forfeiture, settlement,
termination, cancellation, exchange or surrender, again be available for Awards
under the Plan. Upon the exercise of any Award granted in tandem with any other
Awards, such related Awards shall be cancelled to the extent of the number of
Shares as to which the Award is exercised. Subject to adjustment as provided in
Section 4(c) hereof, the maximum number of Shares (i) with respect to which
Options and SARs may be granted during a calendar year to any Eligible Employee
under this Plan shall be 1,000,000 Shares and (ii) with respect to Performance
Shares, Performance Units, Restricted Shares and Restricted Share Units intended
to qualify as performance-based compensation within the meaning of Section
162(m)(4)(C) of the Code shall be the equivalent of 500,000 Shares during a
calendar year to any Eligible Employee under this Plan.
(b) Any Shares distributed pursuant to an Award may consist, in whole or in
part, of authorized and unissued Shares or treasury Shares including Shares
acquired by purchase in the open market or in private transactions.
(c) In the event that the Committee shall determine that any dividend in
Shares, recapitalization, Share split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Shares such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Eligible Employees under the Plan, then the Committee shall make such
equitable changes or adjustments as it deems appropriate and, in such manner as
it may deem equitable, adjust any or all of (i) the number and kind of shares
which may thereafter be issued under the Plan, (ii) the number and kind of
shares, other securities or other consideration issued or issuable in respect of
outstanding Awards, and (iii) the exercise price, grant price, or purchase price
relating to any Award; provided, however, in each case that, with respect to
ISOs, such adjustment shall be made in accordance with Section 424(a) of the
Code, unless the Committee determines otherwise. In addition, the Committee is
authorized to make adjustments in the terms and conditions of, and the criteria
and performance objectives included in, Awards in recognition of unusual or
non-recurring events (including, without limitation, events described in the
preceding sentence) affecting the Company or any Subsidiary or Affiliate or the
financial statements of the Company or any Subsidiary or Affiliate, or in
response to changes in applicable laws, regulations, or accounting principles;
provided, however, that, if an Award Agreement specifically so provides, the
Committee shall not have discretion to increase the amount of compensation
payable under the Award to the extent such an increase would cause the Award to
lose its qualification as performance-based compensation for purposes of Section
162(m)(4)(C) of the Code and the regulations thereunder.
5. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth in
this Section 5. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 9(d)),
such additional terms and conditions, not inconsistent with the provisions of
----------
Footnote continued from previous page.
The maximum number of Shares that will be reserved under the Plan is
3,504,830 based on the number of remaining shares reserved for issuance
under the New Employee Plan as of April 10, 2002.
C-5
the Plan, as the Committee shall determine, including terms regarding forfeiture
of Awards or continued exercisability of Awards in the event of termination of
employment by the Eligible Employee.
(b) Options. The Committee is authorized to grant Options, which may be
NQSOs or ISOs, to Eligible Employees on the following terms and conditions:
(i) Exercise Price. The exercise price per Share purchasable under an
Option shall be determined by the Committee, and the Committee may, without
limitation, set an exercise price that is based upon achievement of
performance criteria if deemed appropriate by the Committee.
(ii) Option Term. The term of each Option shall be determined by the
Committee, but such term shall not exceed ten years.
(iii) Time and Method of Exercise. The Committee shall determine at
the date of grant or thereafter the time or times at which an Option may be
exercised in whole or in part (including, without limitation, upon
achievement of performance criteria if deemed appropriate by the
Committee), the methods by which such exercise price may be paid or deemed
to be paid (including, without limitation, broker-assisted exercise
arrangements), the form of such payment (including, without limitation,
cash, Shares, notes or other property), and the methods by which Shares
will be delivered or deemed to be delivered to Eligible Employees;
provided, however, that in no event may any portion of the exercise price
be paid with Shares acquired either under an Award granted pursuant to this
Plan, upon exercise of a stock option granted under another Company plan or
as a stock bonus or other stock award granted under another Company plan
unless, in any such case, the Shares were acquired and vested more than six
months in advance of the date of exercise.
(iv) ISOs. The terms of any ISO granted under the Plan shall comply in
all respects with the provisions of Section 422 of the Code, including but
not limited to the requirement that no ISO shall be granted more than ten
years after the earlier of the date of adoption or shareholder approval of
the Plan. ISOs may only be granted to employees of the Company or a
Subsidiary.
(c) SARs. The Committee is authorized to grant SARs (Share Appreciation
Rights) to Eligible Employees on the following terms and conditions:
(i) Right to Payment. A SAR shall confer on the Eligible Employee to
whom it is granted a right to receive with respect to each Share subject
thereto, upon exercise thereof, the excess of (1) the Fair Market Value of
one Share on the date of exercise (or, if the Committee shall so determine
in the case of any such right, the Fair Market Value of one Share at any
time during a specified period before or after the date of exercise) over
(2) the exercise price of the SAR as determined by the Committee as of the
date of grant of the SAR (which, in the case of a SAR granted in tandem
with an Option, shall be equal to the exercise price of the underlying
Option).
(ii) Other Terms. The Committee shall determine, at the time of grant
or thereafter, the time or times at which a SAR may be exercised in whole
or in part (which shall not be more than ten years after the date of grant
of the SAR), the method of exercise, method of settlement, form of
consideration payable in settlement, method by which Shares will be
delivered or deemed to be delivered to Eligible Employees, whether or not a
SAR shall be in tandem with any other Award, and any other terms and
conditions of any SAR. Unless the Committee determines otherwise, a SAR (1)
granted in tandem with a NQSO may be granted at the time of grant of the
related NQSO or at any time thereafter or (2) granted in tandem with an ISO
may only be granted at the time of grant of the related ISO.
C-6
(d) Restricted Shares. The Committee is authorized to grant Restricted
Shares to Eligible Employees on the following terms and conditions:
(i) Issuance and Restrictions. Restricted Shares shall be subject to
such restrictions on transferability and other restrictions, if any, as the
Committee may impose at the date of grant or thereafter, which
restrictions, if any, may lapse separately or in combination at such times,
under such circumstances (including, without limitation, upon achievement
of performance criteria if deemed appropriate by the Committee), in such
installments or otherwise, as the Committee may determine. Except to the
extent restricted under the Award Agreement relating to the Restricted
Shares, an Eligible Employee granted Restricted Shares shall have all of
the rights of a shareholder including, without limitation, the right to
vote Restricted Shares and the right to receive dividends thereon. If the
lapse of restrictions is conditioned on the achievement of performance
criteria, the Committee shall select the criterion or criteria from the
list of criteria set forth in Section 5(f)(i). The Committee must certify
in writing prior to the lapse of restrictions conditioned on the
achievement of performance criteria that such performance criteria were in
fact satisfied.
(ii) Forfeiture. Except as otherwise determined by the Committee, at
the date of grant or thereafter, upon termination of employment during any
applicable restriction period, Restricted Shares and any accrued but unpaid
dividends or Dividend Equivalents that are at that time subject to
restrictions shall be forfeited; provided, however, that the Committee may
provide, by rule or regulation or in any Award Agreement, or may determine
in any individual case, that restrictions or forfeiture conditions relating
to Restricted Shares will be waived in whole or in part in the event of
terminations resulting from specified causes, and the Committee may in
other cases waive in whole or in part the forfeiture of Restricted Shares.
(iii) Certificates for Shares. Restricted Shares granted under the
Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Shares are registered in the name of
the Eligible Employee, such certificates shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Shares, and the Company shall retain physical possession of the
certificate.
(iv) Dividends. Dividends paid on Restricted Shares shall be either
paid at the dividend payment date, or deferred for payment to such date as
determined by the Committee, in cash or in unrestricted Shares having a
Fair Market Value equal to the amount of such dividends. Shares distributed
in connection with a Share split or dividend in Shares, and other property
distributed as a dividend, shall be subject to restrictions and a risk of
forfeiture to the same extent as the Restricted Shares with respect to
which such Shares or other property has been distributed.
(e) Restricted Share Units. The Committee is authorized to grant Restricted
Share Units to Eligible Employees, subject to the following terms and
conditions:
(i) Award and Restrictions. Delivery of Shares or cash, as the case
may be, will occur upon expiration of the deferral period specified for
Restricted Share Units by the Committee (or, if permitted by the Committee,
as elected by the Eligible Employee). In addition, Restricted Share Units
shall be subject to such restrictions as the Committee may impose, if any
(including, without limitation, the achievement of performance criteria if
deemed appropriate by the Committee), at the date of grant or thereafter,
which restrictions may lapse at the expiration of the deferral period or at
earlier or later specified times, separately or in combination, in
installments or otherwise, as the Committee may determine. If the lapse of
restrictions is conditioned on the achievement of performance criteria, the
Committee shall select the criterion or criteria from the list of criteria
set forth in Section 5(f)(i). The
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Committee must certify in writing prior to the lapse of restrictions
conditioned on the achievement of performance criteria that such criteria
were in fact satisfied.
(ii) Forfeiture. Except as otherwise determined by the Committee at
date of grant or thereafter, upon termination of employment (as determined
under criteria established by the Committee) during the applicable deferral
period or portion thereof to which forfeiture conditions apply (as provided
in the Award Agreement evidencing the Restricted Share Units), or upon
failure to satisfy any other conditions precedent to the delivery of Shares
or cash to which such Restricted Share Units relate, all Restricted Share
Units that are at that time subject to deferral or restriction shall be
forfeited; provided, however, that the Committee may provide, by rule or
regulation or in any Award Agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to Restricted
Share Units will be waived in whole or in part in the event of termination
resulting from specified causes, and the Committee may in other cases waive
in whole or in part the forfeiture of Restricted Share Units.
(f) Performance Shares and Performance Units. The Committee is authorized
to grant Performance Shares or Performance Units or both to Eligible Employees
on the following terms and conditions:
(i) Performance Period. The Committee shall determine a performance
period (the "Performance Period") of one or more years and shall determine
the performance objectives for grants of Performance Shares and Performance
Units. Performance objectives may vary from Eligible Employee to Eligible
Employee and shall be based upon such one or more of the following
performance criteria as the Committee may deem appropriate: growth in book,
economic book and/or intrinsic book value; appreciation in value of the
Shares; total shareholder return; earnings per share; comprehensive income;
operating income; net income; pretax earnings; pretax earnings before
interest, depreciation and amortization; pro forma net income; return on
equity; return on designated assets; return on capital; economic value
added; earnings; revenues; expenses; operating profit margin; operating
cash flow; free cash flow; cash flow return on investment; operating
margin; net profit margin; or any of the above criteria as compared to the
performance of a published or special index deemed applicable by the
Committee, including, but not limited to, the Standard & Poor's 500 Stock
Index. The performance objectives may be determined by reference to the
performance of the Company, or of a Subsidiary or Affiliate, or of a
division or unit of any of the foregoing. Performance Periods may overlap
and Eligible Employees may participate simultaneously with respect to
Performance Shares and Performance Units for which different Performance
Periods are prescribed.
(ii) Award Value. At the beginning of a Performance Period, the
Committee shall determine for each Eligible Employee or group of Eligible
Employees with respect to that Performance Period the range of number of
Shares, if any, in the case of Performance Shares, and the range of dollar
values, if any, in the case of Performance Units, which may be fixed or may
vary in accordance with such performance or other criteria specified by the
Committee, which shall be paid to an Eligible Employee as an Award if the
relevant measure of Company performance for the Performance Period is met.
The Committee must certify in writing that the applicable performance
criteria were satisfied prior to payment under any Performance Shares or
Performance Units.
(iii) Significant Events. If during the course of a Performance Period
there shall occur significant events as determined by the Committee which
the Committee expects to have a substantial effect on a performance
objective during such period, the Committee may revise such objective;
provided, however, that, if an Award Agreement so provides, the Committee
shall not have any discretion to increase the amount of compensation
payable under the Award to the extent such an increase would
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cause the Award to lose its qualification as performance-based compensation
for purposes of Section 162(m)(4)(C) of the Code and the regulations
thereunder.
(iv) Forfeiture. Except as otherwise determined by the Committee, at
the date of grant or thereafter, upon termination of employment during the
applicable Performance Period, Performance Shares and Performance Units for
which the Performance Period was prescribed shall be forfeited; provided,
however, that the Committee may provide, by rule or regulation or in any
Award Agreement, or may determine in an individual case, that restrictions
or forfeiture conditions relating to Performance Shares and Performance
Units will be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases waive
in whole or in part the forfeiture of Performance Shares and Performance
Units.
(v) Payment. Each Performance Share or Performance Unit may be paid in
whole Shares, or cash, or a combination of Shares and cash either as a lump
sum payment or in installments, all as the Committee shall determine, at
the time of grant of the Performance Share or Performance Unit or
otherwise, commencing as soon as practicable after the end of the relevant
Performance Period. The Committee must certify in writing prior to the
payment of any Performance Share or Performance Unit that the performance
objectives and any other material terms were in fact satisfied.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to Eligible Employees. The Committee may provide, at the date of
grant or thereafter, that Dividend Equivalents shall be paid or distributed when
accrued or shall be deemed to have been reinvested in additional Shares, or
other investment vehicles as the Committee may specify, provided that Dividend
Equivalents (other than freestanding Dividend Equivalents) shall be subject to
all conditions and restrictions of the underlying Awards to which they relate.
(h) Other Share-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Eligible Employees such other
Awards that may be denominated or payable in, valued in whole or in part by
reference to, or otherwise based on, or related to, Shares, as deemed by the
Committee to be consistent with the purposes of the Plan, including, without
limitation, unrestricted shares awarded purely as a "bonus" and not subject to
any restrictions or conditions, other rights convertible or exchangeable into
Shares, purchase rights for Shares, Awards with value and payment contingent
upon performance of the Company or any other factors designated by the
Committee, and Awards valued by reference to the performance of specified
Subsidiaries or Affiliates. The Committee shall determine the terms and
conditions of such Awards at date of grant or thereafter. Shares delivered
pursuant to an Award in the nature of a purchase right granted under this
Section 5(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Shares,
notes or other property, as the Committee shall determine. Cash awards, as an
element of or supplement to any other Award under the Plan, shall also be
authorized pursuant to this Section 5(h).
6. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted to Eligible
Employees either alone or in addition to, in tandem with, or in exchange or
substitution for, any other Award granted under the Plan or any award granted
under any other plan or agreement of the Company, any Subsidiary or Affiliate,
or any business entity to be acquired by the Company or a Subsidiary or
Affiliate, or any other right of an Eligible Employee to receive payment from
the Company or any Subsidiary or Affiliate. Awards may be granted in addition to
or in tandem with such other Awards or awards, and may be granted either as of
the same time as or a different time from the grant of such other Awards or
awards. The per Share exercise price of any Option, grant price of any SAR, or
pur-
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chase price of any other Award conferring a right to purchase Shares which is
granted, in connection with the substitution of awards granted under any other
plan or agreement of the Company or any Subsidiary or Affiliate or any business
entity to be acquired by the Company or any Subsidiary or Affiliate, shall be
determined by the Committee, in its discretion. Notwithstanding the foregoing,
the exercise price of any Option, grant price of any SAR or purchase price of
any other Award conferring a right to purchase Shares which is granted in
exchange or substitution for an option, SAR or other award granted by the
Company (other than in connection with a transaction described in Section 4(c)
hereof) shall not be less than the exercise price, grant price or purchase price
of the exchanged or substituted option, SAR or other award, and outstanding
Awards shall not be amended (other than in connection with a transaction
described in Section 4(c) hereof) to reduce the exercise price, grant price or
purchase price of any such Award.
(b) Terms of Awards. The term of each Award granted to an Eligible Employee
shall be for such period as may be determined by the Committee; provided,
however, that in no event shall the term of any ISO or a SAR granted in tandem
therewith exceed a period of ten years from the date of its grant (or such
shorter period as may be applicable under Section 422 of the Code).
(c) Form of Payment Under Awards. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a Subsidiary
or Affiliate upon the grant, maturation, or exercise of an Award may be made in
such forms as the Committee shall determine at the date of grant or thereafter,
including, without limitation, cash, Shares, or other property, and may be made
in a single payment or transfer, in installments, or on a deferred basis. The
Committee may make rules relating to installment or deferred payments with
respect to Awards, including the rate of interest to be credited with respect to
such payments.
(d) Nontransferability. Except as set forth below and except for vested
Shares, Awards shall not be transferable by an Eligible Employee except by will
or the laws of descent and distribution (except pursuant to a Beneficiary
designation) and shall be exercisable during the lifetime of an Eligible
Employee only by such Eligible Employee or his guardian or legal representative.
Notwithstanding the foregoing, if the Committee expressly so provides in the
applicable Award agreement (at the time of grant or at any time thereafter), an
Award (other than an ISO) granted hereunder may be transferred by a Participant
to members of his or her "immediate family" or to a trust established for the
exclusive benefit of solely one or more members of the Participant's "immediate
family." Any Award held by the transferee will continue to be subject to the
same terms and conditions that were applicable to the Award immediately prior to
the transfer, except that the Award will be transferable by the transferee only
by will or the laws of descent and distribution. For purposes hereof, "immediate
family." means the Participant's children, stepchildren, grandchildren, parents,
stepparents, grandparents, spouse, siblings (including half brothers and
sisters), in-laws, and relationships arising because of legal adoption. An
Eligible Employee's rights under the Plan may not be pledged, mortgaged,
hypothecated, or otherwise encumbered, and shall not be subject to claims of the
Eligible Employee's creditors.
(e) Noncompetition. The Committee may, by way of the Award Agreements or
otherwise, establish such other terms, conditions, restrictions and/or
limitations, if any, of any Award, provided they are not inconsistent with the
Plan, including, without limitation, the requirement that the Participant not
engage in competition with the Company.
7. Director's Options.
(a) Annual Grant. On January 1 of each year, each Director in office on
such date shall automatically be granted a NQSO to purchase 1500 Shares with an
exercise price per Share equal to 100% of the Market Value of one Share on the
date of grant; provided, however, that such price shall be at least equal to the
par value of a Share. Each Option granted to a Director under this paragraph (a)
shall become fully exercisable
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on the first anniversary of the date the Option is granted, and shall expire
(unless terminated earlier under paragraph (d) below) on the tenth anniversary
of the date of grant.
(b) Initial Grants. Each Director will automatically be granted a NQSO on
the date he or she is first elected to the Board to purchase 300 Shares with an
exercise price per Share equal to 100% of the Market Value of one Share on the
date of grant; provided, however, that such price shall be at least equal to the
par value of a Share. Each Option granted to a Director under this paragraph (b)
shall become exercisable in three equal installments, commencing on the date of
grant and annually thereafter. Each Option granted under this paragraph (b)
shall expire (unless terminated earlier under paragraph (d) below) on the tenth
anniversary of the date of grant.
(c) Market Value. For purposes of this Section 7, Market Value shall mean
the mean between the high and low selling prices per Share on the immediately
preceding date (or, if the Shares were not traded on that day, the next
preceding day that the Shares were traded) on the principal exchange on which
the Shares are traded, as such prices are officially quoted on such exchange.
(d) Termination of Service. If a person ceases to be a Director, (i) due to
retirement after attainment of age 65, or (ii) due to death or disability, all
of his or her outstanding Options, to the extent not already exercisable in
full, shall become immediately and fully exercisable at the time of termination
of service, and all of such Director's Options may be exercised at any time
prior to the expiration dates of such Options. If the Director's service
terminates for any other reason, all Options which are not then exercisable
shall be cancelled on the date service terminates, and Options which are then
exercisable may be exercised at any time within six months after the date of
such termination, but not later than the expiration date of the Options.
(e) Time and Method of Exercise. The exercise price of a Director's Option
shall be paid to the Company (including, without limitation, through
broker-assisted exercise arrangements) at the time of exercise either in cash,
or in Shares already owned by the optionee and having a total Market Value equal
to the exercise price, or in a combination of cash and such Shares.
(f) Nontransferability. No Director's Option granted under the Plan shall
be transferable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, a Director's Option shall be exercisable
only by him or her or by his or her guardian or legal representative.
Notwithstanding the foregoing, if the Committee expressly so provides in the
applicable Award agreement (at the time of grant or at any time thereafter), a
Director's Option granted hereunder may be transferred by an optionee to members
of his or her "immediate family" or to a trust established for the exclusive
benefit of solely one or more members of his or her "immediate family." Any
Director's Option held by the transferee will continue to be subject to the same
terms and conditions that were applicable to the Director's Option immediately
prior to the transfer, except that the Director's Option will be transferable by
the transferee only by will or the laws of descent and distribution. For
purposes hereof, "immediate family" means the Director's children, stepchildren,
grandchildren, parents, stepparents, grandparents, spouse, siblings (including
half brothers and sisters), in-laws, and relationships arising because of legal
adoption.
(g) Adjustments. In the event that subsequent to the Effective Date any
dividend in Shares, recapitalization, Share split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other such change, affects the Shares such that they are
increased or decreased or changed into or exchanged for a different number or
kind of shares, other securities of the Company or of another corporation or
other consideration, then in order to maintain the proportionate interest of the
Director and preserve the value of the Director's Option, (i) there shall
automatically be substituted for each Share subject to an unexercised Director's
Option and each Share to be issued under Section 7(a) or 7(b) subsequent to such
event the number and kind of shares, other securities or other consideration
into which each outstanding Share
C-11
shall be changed or for which each such Share shall be exchanged, and (ii) the
exercise price shall be increased or decreased proportionately so that the
aggregate purchase price for the Shares subject to any unexercised Director's
Option shall remain the same as immediately prior to such event.
(h) Exclusive Source of Formula Grants. Unless otherwise determined by the
Board, automatic grants of stock options shall be made to Directors only
pursuant to this Plan, and the automatic stock option grant provisions of any
plan of the Company adopted prior to the Effective Date shall be terminated upon
approval of this Plan by the shareholders of the Company.
8. Director's Shares. Each Director may make an election in writing on or
prior to each August 1 to receive the Director's annual retainer fees payable
thereafter in the form of Shares instead of cash. Any Shares elected shall be
payable at the time cash retainer fees are otherwise payable, and the number of
Shares distributed shall be equal to 120 percent of the amount of the annual
retainer fee otherwise payable on such payment date divided by the Fair Market
Value of a Share on such date. Notwithstanding the foregoing, a Director who is
first elected or appointed to the Board may make an election under this Section
8 within 30 days of such election or appointment in respect of annual retainer
fees payable after the date of the election. Any election made under this
Section 8 shall remain in effect unless and until a new election is made in
accordance with the provisions of this Section 8.
9. General Provisions.
(a) Compliance with Legal and Trading Requirements. The Plan, the granting
and exercising of Awards thereunder, and the other obligations of the Company
under the Plan and any Award Agreement, shall be subject to all applicable
federal, state and foreign laws, rules and regulations, and to such approvals by
any regulatory or governmental agency as may be required. The Company, in its
discretion, may postpone the issuance or delivery of Shares under any Award
until completion of such stock exchange or market system listing or registration
or qualification of such Shares or other required action under any state or
federal law, rule or regulation as the Company may consider appropriate, and may
require any Participant to make such representations and furnish such
information as it may consider appropriate in connection with the issuance or
delivery of Shares in compliance with applicable laws, rules and regulations. No
provisions of the Plan shall be interpreted or construed to obligate the Company
to register any Shares under federal, state or foreign law.
(b) No Right to Continued Employment or Service. Neither the Plan nor any
action taken thereunder shall be construed as giving any employee or director
the right to be retained in the employ or service of the Company or any of its
Subsidiaries or Affiliates, nor shall it interfere in any way with the right of
the Company or any of its Subsidiaries or Affiliates to terminate any employee's
or director's employment or service at any time.
(c) Taxes. The Company or any Subsidiary or Affiliate is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Shares, or any payroll or other payment
to an Eligible Employee, amounts of withholding and other taxes due in
connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Company and Eligible
Employees to satisfy obligations for the payment of withholding taxes and other
tax obligations relating to any Award. This authority shall include authority to
withhold or receive Shares or other property and to make cash payments in
respect thereof in satisfaction of an Eligible Employee's tax obligations;
provided, however, that the amount of tax withholding to be satisfied by
withholding Shares shall be limited to the minimum amount of taxes, including
employment taxes, required to be withheld under applicable Federal, state and
local law.
C-12
(d) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of shareholders of the Company or
Participants, except that any such amendment, alteration, suspension,
discontinuation, or termination shall be subject to the approval of the
Company's shareholders to the extent such shareholder approval is required under
Section 422 of the Code; provided, however, that, without the consent of an
affected Participant, no amendment, alteration, suspension, discontinuation, or
termination of the Plan may impair the rights or, in any other manner, adversely
affect the rights of such Participant under any Award theretofore granted to him
or her. The Committee may waive any conditions or rights under, amend any terms
of, or amend, alter, suspend, discontinue or terminate, any Award theretofore
granted, prospectively or retrospectively; provided, however, that, without the
consent of a Participant, no amendment, alteration, suspension, discontinuation
or termination of any Award may materially and adversely affect the rights of
such Participant under any Award theretofore granted to him or her. (e) No
Rights to Awards; No Shareholder Rights. No Eligible Employee or employee shall
have any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Eligible Employees and employees. No
Award shall confer on any Eligible Employee any of the rights of a shareholder
of the Company unless and until Shares are duly issued or transferred to the
Eligible Employee in accordance with the terms of the Award.
(f) Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments not yet
made to a Participant pursuant to an Award, nothing contained in the Plan or any
Award shall give any such Participant any rights that are greater than those of
a general creditor of the Company; provided, however, that the Committee may
authorize the creation of trusts or make other arrangements to meet the
Company's obligations under the Plan to deliver cash, Shares, other Awards, or
other property pursuant to any Award, which trusts or other arrangements shall
be consistent with the "unfunded" status of the Plan unless the Committee
otherwise determines with the consent of each affected Participant.
(g) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the shareholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other incentive arrangements as it may deem desirable, including, without
limitation, the granting of options and other awards otherwise than under the
Plan, and such arrangements may be either applicable generally or only in
specific cases.
(h) Not Compensation for Benefit Plans. No Award payable under this Plan
shall be deemed salary or compensation for the purpose of computing benefits
under any benefit plan or other arrangement of the Company for the benefit of
its employees or directors unless the Company shall determine otherwise.
(i) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award. In the case of Awards to Eligible Employees,
the Committee shall determine whether cash, other Awards, or other property
shall be issued or paid in lieu of such fractional Shares or whether such
fractional Shares or any rights thereto shall be forfeited or otherwise
eliminated. In the case of Director's Options, cash shall be paid in lieu of
such fractional shares.
(j) Governing Law. The validity, construction, and effect of the Plan, any
rules and regulations relating to the Plan, and any Award Agreement shall be
determined in accordance with the laws of New York without giving effect to
principles of conflict of laws.
C-13
(k) Effective Date; Plan Termination. The Plan, as amended and restated,
shall become effective as of January 1, 2002 (the "Effective Date"), subject to
approval by the shareholders of the Company. The Plan shall terminate as to
future awards on the date which is 10 years after the Effective Date.
(l) Titles and Headings. The titles and headings of the sections in the
Plan are for convenience of reference only. In the event of any conflict, the
text of the Plan, rather than such titles or headings, shall control.
C-14