Why was this 10-K amendment filed, and what does it contain?

The amendment supplies Part III information that the original 10-K had planned to incorporate by reference from the 2000 proxy statement. Because that proxy would not be filed by April 30, 2000, the company provided the directors, executive officers, compensation, beneficial ownership, and related-party transaction disclosures directly. It does not include financial statements or 1999 operating results.

What happens to executives and directors when the Folksamerica asset sale closes?

The sale is a change in control under the company's arrangements. Unvested options and restricted stock vest upon stockholder and regulatory approval. Executives receive estimated severance-type payments of about $2.7 million (CEO Mark Mosca), $1.5 million (Peter Appel), and $1.2 million (Paul Malvasio), along with a prorated target bonus and continued benefits. Chairman Robert Clements receives a $300,000 special bonus. Non-executive employees have tiered payments and a 60-day transition period during which they are retained and reimbursed by Folksamerica.

Why did ARCH buy back XL Capital's stake, and at what price?

XL Capital was the company's largest stockholder, holding 4,755,000 shares. ARCH repurchased them on March 2, 2000 for $12.45 per share, or $59.2 million. The price was set as the lesser of 85% of the average post-announcement closing price ($14.65 x 85%) and $15. Payment was made with ARCH's interests in LARC Holdings (valued at $25 million) and Annuity and Life Re (valued at $37.8 million), with XL paying $3.6 million in cash to balance the difference. The filing does not explicitly state the strategic rationale.

How significant are the related-party relationships with Marsh & McLennan and Trident?

They are substantial. MMCI, a Marsh & McLennan affiliate and the parent of MMRCH, manages ARCH's equity portfolio, earning about $1.5 million in fees for 1999 under an amended agreement with performance-based terms. ARCH committed $25 million to Trident II, L.P., a Marsh-managed fund, funding $6.1 million in 1999. Marsh affiliates also generated about $28.2 million in intermediary commissions and are ARCH's insurance brokers. The company states these terms are no less favorable than arm's-length arrangements, and some of these relationships are expected to change after the asset sale.

How much of ARCH's stock is held by insiders and major holders, and how might this affect investors?

Directors and executive officers as a group held 917,717 shares, or 7.2% of basic shares outstanding (8.1% fully diluted). Marsh & McLennan Risk Capital Holdings held 17.3% (22.4% fully diluted), Merrill Lynch and its affiliate held 16.4%, and The Trident Partnership held 11.9%. Large holdings by a few parties, combined with warrants at $20 per share, mean that future share sales or warrant exercises could affect the stock. The filing does not provide the 1999 financial performance needed to fully evaluate valuation.

ACGL 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed April 28, 2000. Cited figures are marked; the original filing is the authoritative source.

This filing is an amendment (Form 10-K/A) to ARCH Capital Group's 10-K for fiscal 1999.

It was filed to supply Part III information (directors, executive compensation, security ownership, and related-party transactions) that the company had planned to incorporate from its 2000 proxy statement, which would not be filed by April 30, 2000. The document contains no financial statements, so it does not report 1999 revenue, earnings, or balance sheet figures. As of April 26, 2000, there were 12,378,280 common shares outstanding, and non-affiliate market value was approximately $161.2 million^a based on the Nasdaq closing price.

The dominant theme is a pending transformation of the company. ARCH has agreed to sell its reinsurance operations to Folksamerica Holding Company and Folksamerica Reinsurance Company, subject to stockholder and regulatory approval. That sale triggers a change in control under the company's executive arrangements.

It accelerates the vesting of unvested options and restricted stock and creates large severance-type payments for senior executives, estimated at $2.7 million^b for CEO Mark Mosca, $1.5 million for Peter Appel, and $1.2 million for Paul Malvasio. Chairman Robert Clements is due a $300,000 special bonus at closing. The filing also documents a significant capital-structure and related-party change.

On March 2, 2000, ARCH repurchased all 4,755,000 shares held by XL Capital, its former largest stockholder, for $59.2 million^c ($12.45 per share). The consideration was a mix of its interests in LARC Holdings and Annuity and Life Re, plus $3.6 million in cash paid back by XL.

Much of the company's relationship with the Marsh & McLennan and Trident network runs through its equity advisor, Marsh & McLennan Capital, Inc., which received fees of roughly $1.5 million^d in 1999 under an amended agreement. Investors should weigh the pending asset sale, the executive payouts, and the extensive related-party dealings, and should consult the separate proxy materials and the original 10-K for financial results.

02—Key points

Key Highlights

Form 10-K/A amendment filed to provide Part III items (directors, executive compensation, ownership, related transactions) originally to be incorporated from the 2000 proxy statement, which was delayed beyond April 30, 2000.
Pending sale of the company's reinsurance operations to Folksamerica Holding Company and Folksamerica Reinsurance Company, subject to stockholder and regulatory approval; the sale constitutes a change in control.
Repurchased all 4,755,000 shares held by XL Capital on March 2, 2000 at $12.45 per share, totaling $59.2 million, paid largely with LARC Holdings and Annuity and Life Re interests plus $3.6 million in cash.
Change-in-control arrangements estimated at $2.72M (Mosca), $1.48M (Appel), and $1.22M (Malvasio), plus a $300,000 special bonus to Chairman Robert Clements upon closing.
Unvested options and restricted stock for executives and directors vest upon approval of the Folksamerica sale; roughly 1.35 million options were outstanding at April 26, 2000 in addition to 2.53 million Class A and 1.92 million Class B warrants.
Marsh & McLennan Risk Capital Holdings is the largest remaining holder at 17.3% of basic shares (22.4% fully diluted), and Marsh-affiliated entities provided extensive investment advisory, brokerage, and reinsurance business.
The filing contains no financial statements; 12,378,280 shares outstanding and about $161.2 million non-affiliate market value as of April 26, 2000 are the only capitalization figures disclosed.

03—Questions

Frequently Asked Questions

Why was this 10-K amendment filed, and what does it contain?
The amendment supplies Part III information that the original 10-K had planned to incorporate by reference from the 2000 proxy statement. Because that proxy would not be filed by April 30, 2000, the company provided the directors, executive officers, compensation, beneficial ownership, and related-party transaction disclosures directly. It does not include financial statements or 1999 operating results.
What happens to executives and directors when the Folksamerica asset sale closes?
The sale is a change in control under the company's arrangements. Unvested options and restricted stock vest upon stockholder and regulatory approval. Executives receive estimated severance-type payments of about $2.7 million (CEO Mark Mosca), $1.5 million (Peter Appel), and $1.2 million (Paul Malvasio), along with a prorated target bonus and continued benefits. Chairman Robert Clements receives a $300,000 special bonus. Non-executive employees have tiered payments and a 60-day transition period during which they are retained and reimbursed by Folksamerica.
Why did ARCH buy back XL Capital's stake, and at what price?
XL Capital was the company's largest stockholder, holding 4,755,000 shares. ARCH repurchased them on March 2, 2000 for $12.45 per share, or $59.2 million. The price was set as the lesser of 85% of the average post-announcement closing price ($14.65 x 85%) and $15. Payment was made with ARCH's interests in LARC Holdings (valued at $25 million) and Annuity and Life Re (valued at $37.8 million), with XL paying $3.6 million in cash to balance the difference. The filing does not explicitly state the strategic rationale.
How significant are the related-party relationships with Marsh & McLennan and Trident?
They are substantial. MMCI, a Marsh & McLennan affiliate and the parent of MMRCH, manages ARCH's equity portfolio, earning about $1.5 million in fees for 1999 under an amended agreement with performance-based terms. ARCH committed $25 million to Trident II, L.P., a Marsh-managed fund, funding $6.1 million in 1999. Marsh affiliates also generated about $28.2 million in intermediary commissions and are ARCH's insurance brokers. The company states these terms are no less favorable than arm's-length arrangements, and some of these relationships are expected to change after the asset sale.
How much of ARCH's stock is held by insiders and major holders, and how might this affect investors?
Directors and executive officers as a group held 917,717 shares, or 7.2% of basic shares outstanding (8.1% fully diluted). Marsh & McLennan Risk Capital Holdings held 17.3% (22.4% fully diluted), Merrill Lynch and its affiliate held 16.4%, and The Trident Partnership held 11.9%. Large holdings by a few parties, combined with warrants at $20 per share, mean that future share sales or warrant exercises could affect the stock. The filing does not provide the 1999 financial performance needed to fully evaluate valuation.

04—Continue

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